UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2009
or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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
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58-1954497
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State
or other jurisdiction
of
incorporation or organization
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(IRS
Employer Identification Number)
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8302
Dunwoody Place, #250, Atlanta, GA
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30350
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(Address
of principal executive offices)
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(Zip
Code)
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(770)
587-9898
(Registrant's
telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $.001 Par Value
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NASDAQ Capital Markets
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files).
Yes ¨ 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer,” “accelerated
filer" and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
Filer x Non-accelerated
Filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
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, 2009), was
approximately $122,980,000. For the purposes of this calculation, all
executive officers and directors of the Registrant (as indicated in Item 12) are
deemed to be affiliates. 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
Capital Markets.
As of
February 26, 2010, there were 54,654,410 shares of the registrant's Common
Stock, $.001 par value, outstanding.
Documents
incorporated by reference: none
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
INDEX
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Page
No.
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Reserved
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20
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Item
4A.
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Executive
Officers of the Registrant
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21
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity and Related Stockholder
Matters
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22
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Item
6.
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Selected
Financial Data
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24
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Item
7.
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Management's
Discussion and Analysis of Financial Condition And Results of
Operations
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26
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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54
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Special
Note Regarding Forward-Looking Statements
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55
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Item
8.
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Financial
Statements and Supplementary Data
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58
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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108
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Item
9A.
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Controls
and Procedures
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108
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Item
9B.
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Other
Information
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111
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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111
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Item
11.
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Executive
Compensation
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116
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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131
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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135
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Item
14.
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Principal
Accounting Fees and Services
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136
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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137
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PART
I
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 organized in 1990, and is engaged through its subsidiaries,
in:
·
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Nuclear
Waste Management Services (“Nuclear Segment”), which
includes:
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|
o
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Treatment,
storage, processing and disposal of mixed waste (which is waste that
contains both low-level radioactive and hazardous waste) including on and
off-site waste remediation and
processing;
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o
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Nuclear,
low-level radioactive, and mixed waste treatment, processing and disposal;
and
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o
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Research
and development of innovative ways to process low-level radioactive and
mixed waste.
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·
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Consulting
Engineering Services (“Engineering Segment”), which
includes:
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o
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Consulting
services regarding broad-scope environmental issues, including air, water,
and hazardous waste permitting, air, soil, and water sampling, compliance
reporting, emission reduction strategies, compliance auditing, and various
compliance and training activities to industrial and government customers,
as well as engineering and compliance support needed by our other
segments.
|
·
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Industrial
Waste Management Services (“Industrial Segment”), which
includes:
|
|
o
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Treatment,
storage, processing, and disposal of hazardous and non-hazardous waste;
and
|
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o
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Wastewater
management services, including the collection, treatment, processing and
disposal of hazardous and non-hazardous
wastewater.
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|
o
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Treatment,
processing, recycling, and sales of used oil and other off-specification
petroleum-based products.
|
We have
grown through both acquisitions and internal growth. Our goal is to
continue focus on the efficient operation of our existing facilities within our
Nuclear, Industrial, and Engineering Segments, evaluate strategic acquisitions
primarily within the Nuclear Segments, and to continue the research and
development of innovative technologies to treat nuclear waste, mixed waste, and
industrial waste. Our Nuclear Segment represents our core
business segment.
We
service research institutions, commercial companies, public utilities, and
governmental agencies nationwide, including the Department of Energy (“DOE”) and
Department of Defense (“DOD”). 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 8302
Dunwoody Place, Suite 250, Atlanta, Georgia 30350.
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”). Additionally, we make available free of charge on our
internet website:
|
·
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the
charter of our Corporate Governance and Nominating
Committee;
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·
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the
charter of our Audit Committee.
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Segment
Information and Foreign and Domestic Operations and Export Sales
During
2009, we were engaged in three operating segments. In accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 280, “Segment Reporting”, we define an operating segment
as:
·
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a
business activity from which we may earn revenue and incur
expenses;
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·
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whose
operating results are regularly reviewed by the Chief Executive Officer to
make decisions about resources to be allocated and assess its performance;
and
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·
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for
which discrete financial information is
available.
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We
therefore define our operating segments as each business line that we
operate. These segments, however, exclude the Corporate and Operation
Headquarters, which do not generate revenue, and our discontinued operations:
Perma-Fix of Michigan Inc. (“PFMI”), Perma-Fix of Pittsburgh, Inc. (“PFP”), and
Perma-Fix of Memphis, Inc. (“PFM”), three non-operational facilities within our
Industrial Segment which were approved as discontinued operations by our Board
of Director effective November 8, 2005, October 4, 2004, and March 12, 1998,
respectively. Our PFM facility was reclassed back into discontinued
operations from continuing operations during the fourth quarter of
2009. As noted above, PFM was approved as a discontinued operation by
our Board on March 12, 1998. This decision was the result of an
explosion at the facility in 1997, which significantly disrupted its operations
and the high costs required to rebuild its operations. PFM had been
reported as a discontinued operation until 2001. In 2001, the
facility was reclassified back into continuing operations as we had no other
facilities classified as discontinued operations and its impact on our financial
statements was de minimis. As of December 31, 2009, we reclassified
PFM back into discontinued operations for all periods presented in accordance
with ASC 360, “Property, Plant, and Equipment”. Our discontinued
operations also includes Perma-Fix of Maryland, Inc. (“PFMD”), Perma-Fix of
Dayton, Inc. (“PFD”), and Perma-Fix Treatment Services, Inc. (“PFTS”), three
Industrial Segment facilities which were divested in January 2008, March 2008,
and May 2008, respectively.
Most of
our activities are conducted nationwide. We do not own any foreign
operations and we had no export sales during 2009.
Operating
Segments
We have
three operating segments, which represent each business line that we operate.
The Nuclear Segment, which operates four facilities; the Industrial Segment,
which operates three facilities; and the Engineering Segment as described
below:
NUCLEAR
WASTE MANAGEMENT SERVICES (“Nuclear Segment”), 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 four uniquely licensed (Nuclear Regulatory Commission
or state equivalent) and permitted (Environmental Protection Agency (“EPA”) or
state equivalent) treatment and storage facilities. The presence of
nuclear and low-level radioactive constituents within the waste streams
processed by this segment creates different and unique operational, processing
and permitting/licensing requirements, as discussed below.
Perma-Fix
of Florida, Inc. (“PFF”), located in Gainesville, Florida, specializes in the
storage, 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. 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. LSVs are used for
the counting of certain radionuclides. 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 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 liquids, sludges, and certain solid forms
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. 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 in permitted combustion 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
DOD. On November 26, 2008, the U.S. EPA Region 4 issued an
authorization to DSSI to commercially store and dispose of radioactive
Polychlorinated Biphenyls (“PCBs”). The first shipments of
radioactive PCBs were received by DSSI in early April 2009.
East
Tennessee Materials & Energy Corporation (“M&EC”), located in Oak Ridge,
Tennessee, is another mixed waste facility. M&EC also operates
under both a hazardous waste permit and radioactive materials
license. M&EC represents the largest of our four mixed waste
facilities, covering 150,000 sq. ft., and is located in leased facilities at the
DOE East Tennessee Technology Park. In the second quarter of 2008,
M&EC was awarded a subcontract by CH Plateau Remediation Company (“CHPRC”)
to perform a portion of facility operations and waste management activities for
the DOE Hanford, Washington site. The general contract awarded by the
DOE to CHPRC and our subcontract provide for a transition period from August 11,
2008 through September 30, 2008, a base period from October 1, 2008 through
September 30, 2013, and an option period from October 1, 2013 through September
30, 2018. The subcontract is a cost-plus award fee
contract. On October 1, 2008, operations of this subcontract
commenced at the DOE Hanford Site.
Perma-Fix
Northwest Richland, Inc. (“PFNWR”), which we acquired in June 2007, is located
in Richland, Washington. PFNWR is a permitted low level radioactive
and mixed waste treatment, storage and disposal facility located at the Hanford
Site in the eastern part of the state of Washington. The DOE’s
Hanford Site is subject to one of the largest, most complex, and costliest DOE
clean up plans. The strategic addition of PFNWR facility provides the
Company with immediate access to treat some of the most complex nuclear waste
streams in the nation. PFNWR predominately provides waste treatment
services to contractors of government agencies, in addition to commercial
generators.
For 2009,
the Nuclear Segment accounted for $89,011,000 or 88.4% of total revenue from
continuing operations, as compared to $61,359,000 or 81.3% of total revenue from
continuing operations for 2008. See “ – Dependence Upon a Single or
Few Customers” and “Financial Statements and Supplementary Data” for further
details and a discussion as to our Nuclear Segment's contracts with the federal
government or with others as a subcontractor to the federal
government.
INDUSTRIAL
WASTE MANAGEMENT SERVICES (“Industrial Segment”), which includes, off-site waste
storage, treatment, processing and disposal services of hazardous and
non-hazardous waste (solids and liquids) through three permitted treatment
and/or disposal facilities, as discussed below.
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 permitted treatment and storage facility located
in Orlando, Florida. PFO collects, stores and treats hazardous and non-hazardous
wastes under one of our most inclusive permits. PFO is also a
transporter of hazardous waste and operates a transfer facility at the
site. PFO also collects oily waste waters, used oil, and other
off-specification petroleum based products and performs vacuum service work in
Florida.
Perma-Fix
of South Georgia, Inc. (“PFSG”) is a permitted treatment and storage facility
located in Valdosta, Georgia. PFSG provides storage, treatment and
disposal services to hazardous and non-hazardous waste generators primarily
throughout the Southeastern portion of 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. In April
2009, PFSG completed construction and permitting activities related to
installation of its proprietary treatment process for characteristic hazardous
wastes. Characteristic hazardous wastes are defined as wastes that exhibit one
or more of the following characteristic: ignitability, corrosivity,
reactivity, or toxicity.
For 2009,
the Industrial Segment accounted for approximately $8,283,000 or 8.2% of our
total revenue from continuing operations as compared to approximately
$10,951,000 or 14.5% for 2008. See “Financial Statements and
Supplementary Data” for further details.
CONSULTING
ENGINEERING SERVICES (“Engineering Segment”), which provides environmental
engineering and regulatory compliance consulting services through one
subsidiary, as discussed below.
Schreiber,
Yonley & Associates (“SYA”) is located in Ellisville,
Missouri. SYA specializes in air, water, and hazardous waste
permitting, air, soil, and water sampling, compliance reporting, emission
reduction strategies, compliance auditing, and various compliance and training
activities to industrial and government customers, as well as, engineering and
compliance support needed by our other segments.
During
2009, environmental engineering and regulatory compliance consulting services
accounted for approximately $3,382,000 or 3.4% of our total revenue from
continuing operations, as compared to approximately $3,194,000 or 4.2% in
2008. See “Financial Statements and Supplementary Data” for further
details.
Discontinued
Operations
As stated
previously above, our discontinued operations includes the following facilities
within our Industrial Segment: Perma-Fix of Michigan Inc. (“PFMI”),
Perma-Fix of Pittsburgh, Inc. (“PFP”), and Perma-Fix of Memphis, Inc. (“PFM”),
three non-operational facilities which were approved as discontinued operations
by our Board of Director effective October 4, 2004, and November 8, 2005, and
March 12, 1998, respectively, and PFMD, PFD, and PFTS, three Industrial Segment
facilities which were divested in January 2008, March 2008, and May 2008,
respectively.
Our
discontinued operations had no revenue in 2009 and generated $3,195,000 of
revenue in 2008.
Importance
of Patents, Trademarks and Proprietary Technology
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 to the year 2010 and 2012 for the service marks “Perma-Fix” and
“Perma-Fix Environmental Services,” respectively, by the U.S. Patent and
Trademark Office.
We are
active in the research and development (“R&D”) 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 seven active patents and the filing of
several 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.
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. Until development of this Perma-Fix II process,
we were not aware of a relatively simple and inexpensive process that would
remove the organic hazardous constituents from Solids without elaborate and
expensive equipment or expensive treating agents. Due to the organic
hazardous constituents involved, the disposal options for such materials are
limited, resulting in high disposal cost when there is a disposal option
available. By reducing the organic hazardous waste constituents in
the Solids to a level where the Solids meet Land Disposal Requirements, the
generator's disposal options for such waste are substantially increased,
allowing the generator to dispose of such waste at substantially less
cost. We began commercial use of the Perma-Fix II process in
2000. 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 “—Permits and Licenses” and
“—Research and Development.”
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 terms 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.
Nuclear
Segment:
PFF
operates its hazardous, mixed and low-level radioactive waste activities under a
RCRA (“Resource Conservation and Recovery Act”) Part B permit, Toxic Substances
Control Act (“TSCA”) authorization, and a radioactive materials
license issued by the State of Florida.
DSSI
operates hazardous, mixed and low-level radioactive waste activities under a
RCRA Part B permit and a radioactive materials license issued by the State of
Tennessee. On November 26, 2008, the U.S. EPA Region 4 issued an
authorization to DSSI to commercially store and dispose of radioactive
PCBs. DSSI began the permitting process to add Toxic Substances
Control Act (“TSCA”) regulated wastes, namely PCBs, containing radioactive
constituents to its authorization in 2004 in order to meet the demand for the
treatment of government and commercially generated radioactive PCB
wastes.
M&EC
operates hazardous and low-level radioactive waste activities under a RCRA Part
B permit, TSCA authorization, and a radioactive materials license issued by the
State of Tennessee.
PFNWR
operates its mixed and low-level radioactive waste activities under a RCRA Part
B permit, TSCA authorization, and a radioactive materials license issued by the
State of Washington and the EPA.
The
combination of a RCRA Part B hazardous waste permit, TSCA authorization, and a
radioactive materials license, as held by PFF, DSSI and M&EC, and PFNWR are
very difficult to obtain for a single facility and make these facilities
unique.
Industrial
Segment:
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.
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 various permits,
including a RCRA Part B permit, issued by the State of Georgia.
Seasonality
Historically,
we have experienced reduced activities and related billable hours throughout the
November and December holiday periods within our Engineering
Segment. Our Industrial Segment operations experience reduced
activities during the holiday periods; however, one key product line is the
servicing of cruise line business where operations are typically higher during
the winter months, thus offsetting the impact of the holiday
season. 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 historically experienced 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 generally slows down, as the
government budgets are still being finalized, planning for the new year is
occurring, and we enter the holiday season. This trend
generally continues into the first quarter of the new year as government
entities evaluate their spending priorities. Over the past years, due
to our efforts to work with the various government customers to smooth these
shipments more evenly throughout the year, we have seen smaller fluctuations in
the quarters. Although we have seen smaller fluctuation in the
quarters in recent years, nevertheless, as government spending is contingent
upon its annual budget and allocation of funding, we cannot provide assurance
that we will not have larger fluctuations in the quarters in the near
future. In addition, higher government (specifically DOE) funding
made available through the economic stimulus package (“American Recovery and
Reinvestment Act”) enacted by Congress in February 2009, could result in larger
fluctuations in 2010.
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. As of
December 31, 2009, our Nuclear Segment had a backlog of approximately
$16,898,000, as compared to approximately $10,244,000, as of December 31,
2008. 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. We typically process our backlog during
periods of low waste receipts, which historically has been in the first or
fourth quarter.
Dependence
Upon a Single or Few Customers
Our
Nuclear Segment has a significant relationship with the federal government, and
continues 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 or
renegotiate the contracts in 30 days notice, 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.
We
performed services relating to waste generated by the federal government, either
directly or indirectly as a subcontractor (including Fluor Hanford and CHPRC as
discussed below) to the federal government, representing approximately
$75,013,000 or 74.5% (within our Nuclear Segment) of our total revenue from
continuing operations during 2009, as compared to $43,464,000 or 57.6% of our
total revenue from continuing operations during 2008, and $30,000,000 or 46.5%
of our total revenue from continuing operations during 2007.
In the
second quarter of 2008, our M&EC facility was awarded a subcontract by
CHPRC, a general contractor to the DOE, to participate in the cleanup of the
central portion of the Hanford Site, which once housed certain chemical
separation building and other facilities that separated and recovered plutonium
and other materials for use in nuclear weapons. This subcontract
became effective on June 19, 2008, the date DOE awarded CHPRC the general
contract. DOE’s general contract and M&EC’s subcontract provided
a transition period from August 11, 2008 through September 30, 2008, a base
period from October 1, 2008 through September 30, 2013, and an option period
from October 1, 2013 through September 30, 2018. M&EC’s
subcontract is a cost plus award fee contract. On October 1, 2008,
operations of this subcontract commenced at the DOE Hanford Site. We
believe full operations under this subcontract will result in revenues for
on-site and off-site work of approximately $200,000,000 to $250,000,000 over the
five year base period. As provided above, M&EC’s subcontract is
terminable or subject to renegotiation, at the option of the government, on 30
days notice. Effective October 1, 2008, CHPRC also began management
of waste activities previously managed by Fluor Hanford, DOE’s general
contractor prior to CHPRC. Our Nuclear Segment had three previous
subcontracts with Fluor Hanford which have been renegotiated by CHPRC to
September 30, 2013. Revenues from CHPRC totaled $45,169,000 or 44.9%
and $8,120,000 or 10.8% of our total revenue from continuing operations for
twelve months ended December 31, 2009 and 2008, respectively. As
revenue from Fluor Hanford has been transitioned to CHPRC, revenue from Fluor
Hanford totaled $0 or 0%, $7,974,000 or 10.6%, and $6,985,000 or 10.8% of our
consolidated revenue from continuing operations for the twelve months ended
December 31, 2009, 2008, and 2007, respectively.
Competitive
Conditions
The
Nuclear Segment’s largest competitor is EnergySolutions, which provides
treatment and disposal capabilities at its Oak Ridge, Tennessee and Clive, Utah
facilities. EnergySolutions presents the largest competitive
challenge in the market. At present, EnergySolutions’ Clive, Utah
facility is one of the few radioactive disposal sites for commercially generated
wastes in the country in which our Nuclear Segment can dispose of its nuclear
waste. If EnergySolutions should refuse to accept our waste or cease
operations at its Clive, Utah facility, such would have a material adverse
effect on us for commercial wastes. However, with the recent
radioactive disposal license granted to Waste Control Specialists (“WCS”)
located in Andrews, Texas, this risk could be reduced as WCS brings its disposal
site online later in 2010 or early 2011. The Nuclear Segment treats
and disposes of DOE generated wastes largely at DOE owned
sites. Smaller competitors are also present in the market place;
however, they do not present a significant challenge at this
time. Our Nuclear Segment solicits business on a
nationwide basis with both government and commercial clients.
The
permitting and licensing requirements, and the cost to obtain such permits, are
barriers to the entry of hazardous waste treatment, storage, and disposal
(“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 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 less rigorous to obtain, such would allow companies to enter
into these markets and provide greater competition.
Engineering
Segment 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, emission reduction strategies, and Maximum Available Control
Technology (“MACT”) compliance.
Within
our Industrial Segment we solicit business primarily in the Southeastern portion
of the United States. We believe that we are a significant
provider in the delivery of off-site waste treatment services in the Southeast
portion 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.
Capital
Spending, Certain Environmental Expenditures and Potential Environmental
Liabilities
Capital
Spending
During
2009, our purchases of capital equipment totaled approximately $1,643,000 of
which $125,000 was financed, resulting in total net purchases of
$1,518,000. These expenditures were for improvements to operations
primarily within the Nuclear and Industrial Segments. These capital
expenditures were funded by the cash provided by both operations and financing
activities. We have budgeted approximately $2,000,000 for 2010 capital
expenditures for our segments to 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 the initial budget amount. The
initiation and timing of projects are also determined by financing alternatives
or funds available for such capital projects.
Environmental
Liabilities
We have
four remediation projects, which are currently in progress at certain of our
continuing and discontinued facilities. These remediation projects principally
entail the removal/remediation of contaminated soil and, in some cases, the
remediation of surrounding ground water.
In June
1994, we acquired PFD, which we divested in March 2008. Prior to us
acquiring PFD in 1994, the former owners of PFD had merged Environmental
Processing Services, Inc. (“EPS”) with PFD. The party that sold PFD
to us in 1994 agreed to indemnify us for costs associated with remediating the
property leased by EPS (“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 was located. The contamination of the Leased Property
occurred prior to PFD being acquired by us. During 1995, in
conjunction with the bankruptcy filing by the selling party, we recognized an
environmental liability of approximately $1,200,000 for remedial activities at
the Leased Property. Upon the sale of PFD in March 2008 by Perma-Fix,
we retained the environmental liability of PFD as it related only to the
remediation of the EPS site. In 2008, we performed a field
investigation to gather additional information required to close certain soil
contamination issues and to support development of the final groundwater
remediation approach. During 2009, the investigation report was
submitted to and approved by the Ohio EPA and work on the revised Corrective
Action Plan, including Risk Assessment had begun. We have accrued
approximately $350,000, at December 31, 2009, for the estimated, remaining costs
of remediating the Leased Property used by EPS, which will extend over the next
six 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. In 2008, we completed all soil remediation with the
exception of that associated with the groundwater contamination. In
addition, we installed wells and equipment associated with groundwater
remediation. We have accrued approximately $439,000 at December 31,
2009, which included an addition to the reserve of approximately $300,000 made
in the fourth quarter of 2009, for the estimated, remaining costs of remediating
the groundwater contamination, which will extend over the next six
years. The increase to the reserve was the result of a reassessment
on the cost of remediation.
In
conjunction with the acquisition of PFSG, we initially recognized an
environmental accrual of $2,200,000 for estimated long-term costs to remove
contaminated soil and to undergo groundwater remediation activities at the
acquired facility in Valdosta, Georgia. The remedial activities began
in 2003. We have accrued approximately $810,000, at December 31,
2009, which included an addition to the reserve of approximately $281,000 made
in the fourth quarter of 2009, to complete remediation of the
facility. The increase to the reserve was the result of a
reassessment on the cost of remediation. We anticipate spending the
reserve over the next seven years.
As a
result of the discontinued operations at the PFMI facility in 2004, we were
required to complete certain closure and remediation activities pursuant to our
RCRA permit, which were completed in January 2006. In September 2006,
PFMI signed a Corrective Action Consent Order with the State of Michigan,
requiring performance of studies and development and execution of plans related
to the potential clean-up of soils in portions of the property. The
level and cost of the clean-up and remediation are determined by state mandated
requirements. During 2006, based on state-mandated criteria, we began
implementing the modified methodology to remediate the
facility. We
have spent approximately $854,000 for closure costs since discontinuation of
PFMI in October 2004, of which $109,000 was spent during 2009 and $26,000 was
spent during 2008. We have $128,000 accrued for the closure, as of
December 31, 2009, and we anticipate spending $102,000 in 2010 with the
remainder over the next four years. Our
accrual as of December 31, 2009 included a $300,000 reduction to the reserve
made in the fourth quarter of 2009, resulting from a field investigation and
draft Remedial Action Plan which identified substantial reductions in the
anticipated cost of the completion of the remedial site. Based on the
current status of the Corrective Action, we believe that the remaining reserve
is adequate to cover the liability.
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.
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 (see “Legal Proceedings” in Part I,
Item 3). We could also be subject to fines and civil penalties in
connection with violations of regulatory requirements.
Research
and Development
Innovation
and technical know-how by our operations is very important to the success of our
business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental
needs. We conduct research internally, and also through
collaborations with other third parties. The majority of our research
activities are performed as we receive new and unique waste to treat; as such,
we recognize these expenses as a part of our processing costs. We
feel that our investments in research have been rewarded by the discovery of the
Perma-Fix Process and the Perma-Fix II process. Our competitors also
devote resources to research and development and many such competitors have
greater resources at their disposal than we do. We have estimated
that during 2009, 2008, and 2007, we spent approximately $361,000, $1,020,000
and $715,000, 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, 2009, we employed 628 full time persons, of whom 19 were assigned to our
corporate office, 18 were assigned to our Operations Headquarters, 24 were
assigned to our Engineering Segment, 42 were assigned to our Industrial Segment,
and 525 were assigned to our Nuclear Segment. Of the 525 employees at
our Nuclear Segment, 256 employees have been hired to work under the subcontract
awarded to us by CHPRC during the second quarter of 2008. Of the 256
employees, 113 employees (representing approximately 18.0% of the Company’s
total number of employees) are unionized and are covered by a collective
bargaining agreement. The current bargaining agreement became
effective April 1, 2007 and expires on March 31, 2012 (see “- Operating Segments
– Nuclear Waste Management Services” in this section regarding our CHPRC
subcontract).
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 permitting and
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.
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 liabilities 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 “USNRC”) 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. The State of Washington (with the USNRC oversight)
Department of Health, regulates the radiological operations of the PFNWR
facility.
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 effect on us, our operations and financial condition. In
addition to various federal, state and local environmental regulations, our
hazardous waste transportation activities are regulated by the U.S. Department
of Transportation, the Interstate Commerce Commission and transportation
regulatory bodies in the states in which we operate. We cannot predict the
extent to which we may be affected by any law or rule that may be enacted or
enforced in the future, or any new or different interpretations of existing laws
or rules.
Insurance
We
believe we maintain insurance coverage adequate for our needs and similar to, or
greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities,
which we may incur will be covered by our insurance or that the dollar amount of
such liabilities, which are covered will not exceed our policy
limits. Under our insurance contracts, we usually accept self-insured
retentions, which we believe is 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 $1,000,000 per occurrence and $2,000,000 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 with Chartis, a
subsidiary of AIG (see “Part I, Item 1A. - Risk Factors” for certain potential
risk related to AIG), which provides financial assurance to the applicable
states for our permitted facilities in the event of unforeseen
closure. Prior to obtaining or renewing operating permits, we are
required to provide financial assurance that guarantees to the states that in
the event of closure, our permitted facilities will be closed in accordance with
the regulations. The policy provides a maximum $35,000,000 of
financial assurance coverage. In March 2009, we increased our maximum
policy coverage to $39,000,000 from $35,000,000 in order to secure additional
financial assurance coverage requirement for our DSSI subsidiary to commercially
store and dispose of PCB wastes under an authorization issued by the EPA on
November 26, 2008. As of December 31, 2009, our total financial
coverage under our finite risk policy totals approximately
$35,869,000.
In August
2007, we entered into a second finite risk insurance policy for our PFNWR
facility, which we acquired in June 2007, with Chartis, a subsidiary of AIG (see
“Part I, Item 1A. - Risk Factors” for certain potential risk related to
AIG). The policy provides an initial $7,800,000 of financial
assurance coverage with annual growth rate of 1.5%, which at the end of the four
year term policy, will provide maximum coverage of $8,200,000. The
policy will renew automatically on an annual basis at the end of the four year
term and will not be subject to any renewal fees.
The
following are certain risk factors that could affect our business, financial
performance, and results of operations. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this
Form 10-K, as the forward-looking statements are based on current expectations,
and actual results and conditions could differ materially from the current
expectations. Investing in our securities involves a high degree of
risk, and before making an investment decision, you should carefully consider
these risk factors as well as other information we include or incorporate by
reference in the other reports we file with the Securities and Exchange
Commission (“SEC”).
Risks
Relating to our Operations
Our
insurer that provides our financial assurance that we are required to have in
order to operate our permitted treatment, storage and disposal facility has
experienced financial difficulties.
It has
been publicly reported that American International Group, Inc. (“AIG”), has
experienced significant financial difficulties and is continuing to experience
financial difficulties. A subsidiary of AIG, Chartis, provides our
finite risk insurance policies which provide financial assurance to the
applicable states for our permitted facilities in the event of unforeseen
closure. We are required to provide and to maintain financial
assurance that guarantees to the state that in the event of closure, our
permitted facilities will be closed in accordance with the
regulations. Our initial policies provide a maximum of $39,000,000 of
financial assurance coverage of which the coverage amount totals $35,869,000 at
December 31, 2009. We also maintain a financial assurance policy for
our PFNWR facility entered into in June 2007 which will provide maximum coverage
of $8,200,000 at the end of the four year term policy. Chartis also
provides other operating insurance policies for the Company and our
subsidiaries. In the event of a failure of AIG, this could materially
impact our operations and our permits which we are required to have in order to
operate our treatment, storage, and disposal facilities.
If
we cannot maintain adequate insurance coverage, we will be unable to continue
certain operations.
Our
business exposes us to various risks, including claims for causing damage to
property and injuries to persons that may involve allegations of negligence or
professional errors or omissions in the performance of our
services. Such claims could be substantial. We believe
that our insurance coverage is presently adequate and similar to, or greater
than, the coverage maintained by other companies in the industry of our
size. If we are unable to obtain adequate or required insurance
coverage in the future, or if our insurance is not available at affordable
rates, we would violate our permit conditions and other requirements of the
environmental laws, rules, and regulations under which we
operate. Such violations would render us unable to continue certain
of our operations. These events would have a material adverse effect
on our financial condition.
The
inability to maintain existing government contracts or win new government
contracts over an extended period could have a material adverse effect on our
operations and adversely affect our future revenues.
A
material amount of our Nuclear Segment's revenues are generated through various
U.S. government contracts or subcontracts involving the U.S.
government. Our revenues from governmental contracts and subcontracts
relating to governmental facilities within our Nuclear Segment were
approximately $75,013,000 and $43,464,000, representing 74.5% and 57.6%,
respectively, of our consolidated operating revenues from continuing operations
for 2009 and 2008. Most of our government contracts or our
subcontracts granted under government contracts are awarded through a regulated
competitive bidding process. Some government contracts are awarded to multiple
competitors, which increase overall competition and pricing pressure and may
require us to make sustained post-award efforts to realize revenues under these
government contracts. All contracts with, or subcontracts involving, the federal
government are terminable, or subject to renegotiation, by the applicable
governmental agency on 30 days notice, at the option of the governmental
agency. If we fail to maintain or replace these relationships, or if
a material contract is terminated or renegotiated in a manner that is materially
adverse to us, our revenues and future operations could be materially adversely
affected.
Failure
of our Nuclear Segment to be profitable could have a material adverse
effect.
Our
Nuclear Segment has historically been profitable. With the
divestitures of certain facilities within our Industrial Segment and the
acquisition of our Perma-Fix Northwest Richland, Inc. (“PFNWR”) within our
Nuclear Segment in June 2007, the Nuclear Segment represents the Company’s
largest revenue segment. The Company’s main objectives are to continue to
increase focus on the efficient operation of our existing facilities within our
Nuclear Segment and to further evaluate strategic acquisitions within the
Nuclear Segment. If our Nuclear Segment fails to continue to be
profitable in the future, this could have a material adverse effect on the
Company’s results of operations, liquidity and our potential
growth.
Our
existing and future customers may reduce or halt their spending on nuclear
services with outside vendors, including us.
A variety
of factors may cause our existing or future customers (including the federal
government) to reduce or halt their spending on nuclear services from outside
vendors, including us. These factors include, but are not limited
to:
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accidents,
terrorism, natural disasters or other incidents occurring at nuclear
facilities or involving shipments of nuclear
materials;
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failure
of the federal government to approve necessary budgets, or to reduce the
amount of the budget necessary, to fund remediation of DOE and DOD
sites;
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civic
opposition to or changes in government policies regarding nuclear
operations; or
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a
reduction in demand for nuclear generating
capacity.
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These
events could result in or cause the federal government to terminate or cancel
its existing contracts involving us to treat, store or dispose of contaminated
waste at one or more of the federal sites since all contracts with, or
subcontracts involving, the federal government are terminable upon or subject to
renegotiation at the option of the government on 30 days
notice. These events also could adversely affect us to the extent
that they result in the reduction or elimination of contractual requirements,
lower demand for nuclear services, burdensome regulation, disruptions of
shipments or production, increased operational costs or difficulties or
increased liability for actual or threatened property damage or personal
injury.
Economic
downturns (i.e.: the current economic environment) and/or reductions in
government funding could have a material negative impact on our
businesses.
Demand
for our services has been, and we expect that demand will continue to be,
subject to significant fluctuations due to a variety of factors beyond our
control, including the current economic conditions, inability of the federal
government to adopt its budget or reductions in the budget for spending to
remediate federal sites due to numerous reasons, including, without limitation,
the substantial deficits that the federal government has and is continuing to
incur. During economic downturns, such as the current economic
condition, and large budget deficits that the federal government and many states
are experiencing, the ability of private and government entities to spend on
nuclear services may decline significantly. Although the economic
stimulus package (American Recovery and Reinvestment Act) enacted by Congress in
February 2009 provides for substantial funds to remediate federal nuclear sites,
we cannot be certain that economic or political conditions will be generally
favorable or that there will not be significant fluctuations adversely affecting
our industry as a whole. In addition, our operations depend, in large
part, upon governmental funding, particularly funding levels at the
DOE. Significant reductions in the level of governmental funding (for
example, the annual budget of the DOE) or specifically mandated levels for
different programs that are important to our business could have a material
adverse impact on our business, financial position, results of operations and
cash flows.
The
loss of one or a few customers could have an adverse effect on us.
One or a
few governmental customers or governmental related customers have in the past,
and may in the future, account for a significant portion of our revenue in any
one year or over a period of several consecutive years. Because
customers generally contract with us for specific projects, we may lose these
significant customers from year to year as their projects with us are completed.
Our inability to replace the business with other projects could have an adverse
effect on our business and results of operations.
As
a government contractor, we are subject to extensive government regulation, and
our failure to comply with applicable regulations could subject us to penalties
that may restrict our ability to conduct our business.
Our
governmental contracts, which are primarily with the DOE or subcontracts
relating to DOE sites, are a significant part of our
business. Allowable costs under U.S. government contracts are subject
to audit by the U.S. government. If these audits result in
determinations that costs claimed as reimbursable are not allowed costs or were
not allocated in accordance with applicable regulations, we could be required to
reimburse the U.S. government for amounts previously received.
Governmental
contracts or subcontracts involving governmental facilities are often subject to
specific procurement regulations, contract provisions and a variety of other
requirements relating to the formation, administration, performance and
accounting of these contracts. Many of these contracts include
express or implied certifications of compliance with applicable regulations and
contractual provisions. If we fail to comply with any regulations,
requirements or statutes, our existing governmental contracts or subcontracts
involving governmental facilities could be terminated or we could be suspended
from government contracting or subcontracting. If one or more of our
governmental contracts or subcontracts are terminated for any reason, or if we
are suspended or debarred from government work, we could suffer a significant
reduction in expected revenues and profits. Furthermore, as a result of our
governmental contracts or subcontracts involving governmental facilities, claims
for civil or criminal fraud may be brought by the government or violations of
these regulations, requirements or statutes.
Loss
of certain key personnel could have a material adverse effect on
us.
Our
success depends on the contributions of our key management, environmental and
engineering personnel, especially Dr. Louis F. Centofanti, Chairman, President,
and Chief Executive Officer. The loss of Dr. Centofanti could have a
material adverse effect on our operations, revenues, prospects, and our ability
to raise additional funds. Our future success depends on our ability
to retain and expand our staff of qualified personnel, including environmental
specialists and technicians, sales personnel, and engineers. Without qualified
personnel, we may incur delays in rendering our services or be unable to render
certain services. We cannot be certain that we will be successful in
our efforts to attract and retain qualified personnel as their availability is
limited due to the demand for hazardous waste management services and the highly
competitive nature of the hazardous waste management industry. We do
not maintain key person insurance on any of our employees, officers, or
directors.
Changes
in environmental regulations and enforcement policies could subject us to
additional liability and adversely affect our ability to continue certain
operations.
We cannot
predict the extent to which our operations may be affected by future
governmental enforcement policies as applied to existing laws, by changes to
current environmental laws and regulations, or by the enactment of new
environmental laws and regulations. Any predictions regarding
possible liability under such laws are complicated further by current
environmental laws which provide that we could be liable, jointly and severally,
for certain activities of third parties over whom we have limited or no
control.
The
refusal to accept our waste for disposal by, or a closure of, the end disposal
site that our Nuclear Segment utilizes to dispose of its waste could subject us
to significant risk and limit our operations.
Our
Nuclear Segment has limited options available for disposal of its waste. There
is only one disposal site for our low level radioactive waste we receive from
non-governmental sites. If this disposal site ceases to accept waste
or closes for any reason or refuses to accept the waste of our Nuclear Segment,
for any reason, we could have nowhere to dispose of our nuclear waste or have
significantly increased costs from disposal alternatives. With nowhere to
dispose of our nuclear waste, we would be subject to significant risk from the
implications of storing the waste on our site, and we would have to limit our
operations to accept only waste that we can dispose of. A second
low-level radioactive disposal site is scheduled to be operational during the
later part of 2010 or early 2011; and when this new disposal site becomes
operational, we do not believe that we will be as dependent on the current
disposal site.
Our
businesses subject us to substantial potential environmental
liability.
Our
business of rendering services in connection with management of waste, including
certain types of hazardous waste, low-level radioactive waste, and mixed waste
(waste containing both hazardous and low-level radioactive waste), subjects us
to risks of liability for damages. Such liability could involve, without
limitation:
|
·
|
claims
for clean-up costs, personal injury or damage to the environment in cases
in which we are held responsible for the release of hazardous or
radioactive materials; and
|
|
·
|
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.
|
Our
operations are subject to numerous environmental laws and regulations. We have
in the past, and could in the future, be subject to substantial fines,
penalties, and sanctions for violations of environmental laws and substantial
expenditures as a responsible party for the cost of remediating any property
which may be contaminated by hazardous substances generated by us and disposed
at such property, or transported by us to a site selected by us, including
properties we own or lease.
As
our operations expand, we may be subject to increased litigation, which could
have a negative impact on our future financial results.
Our
operations are highly regulated and we are subject to numerous laws and
regulations regarding procedures for waste treatment, storage, recycling,
transportation, and disposal activities, all of which may provide the basis for
litigation against us. In recent years, the waste treatment industry has
experienced a significant increase in so-called “toxic-tort” litigation as those
injured by contamination seek to recover for personal injuries or property
damage. We believe that, as our operations and activities expand,
there will be a similar increase in the potential for litigation alleging that
we have violated environmental laws or regulations or are responsible for
contamination or pollution caused by our normal operations, negligence or other
misconduct, or for accidents, which occur in the course of our business
activities. Such litigation, if significant and not adequately
insured against, could adversely affect our financial condition and our ability
to fund our operations. Protracted litigation would likely cause us
to spend significant amounts of our time, effort, and money. This could prevent
our management from focusing on our operations and expansion.
Our
operations are subject to seasonal factors, which cause our revenues to
fluctuate.
We have
historically experienced reduced revenues and losses during the first and fourth
quarters of our fiscal years due to a seasonal slowdown in operations from poor
weather conditions, overall reduced activities during these periods resulting
from holiday periods, and finalization of government budgets during the fourth
quarter of each year. During our second and third fiscal quarters
there has historically been an increase in revenues and operating
profits. If we do not continue to have increased revenues and
profitability during the second and third fiscal quarters, this will have a
material adverse effect on our results of operations and liquidity.
If
environmental regulation or enforcement is relaxed, the demand for our services
will decrease.
The
demand for our services is substantially dependent upon the public's concern
with, and the continuation and proliferation of, the laws and regulations
governing the treatment, storage, recycling, and disposal of hazardous,
non-hazardous, and low-level radioactive waste. A decrease in the
level of public concern, the repeal or modification of these laws, or any
significant relaxation of regulations relating to the treatment, storage,
recycling, and disposal of hazardous waste and low-level radioactive waste would
significantly reduce the demand for our services and could have a material
adverse effect on our operations and financial condition. We are not aware of
any current federal or state government or agency efforts in which a moratorium
or limitation has been, or will be, placed upon the creation of new hazardous or
radioactive waste regulations that would have a material adverse effect on us;
however, no assurance can be made that such a moratorium or limitation will not
be implemented in the future.
We
and our customers operate in a politically sensitive environment, and the public
perception of nuclear power and radioactive materials can affect our customers
and us.
We and
our customers operate in a politically sensitive environment. Opposition by
third parties to particular projects can limit the handling and disposal of
radioactive materials. Adverse public reaction to developments in the
disposal of radioactive materials, including any high profile incident involving
the discharge of radioactive materials, could directly affect our customers and
indirectly affect our business. Adverse public reaction also could lead to
increased regulation or outright prohibition, limitations on the activities of
our customers, more onerous operating requirements or other conditions that
could have a material adverse impact on our customers’ and our
business.
We
may be exposed to certain regulatory and financial risks related to climate
change.
Climate
change is receiving ever increasing attention worldwide. Many scientists,
legislators and others attribute global warming to increased levels of
greenhouse gases, including carbon dioxide, which has led to significant
legislative and regulatory efforts to limit greenhouse gas
emissions.
There are
a number of pending legislative and regulatory proposals to address greenhouse
gas emissions. For example, in June 2009 the U.S. House of Representatives
passed the American Clean Energy and Security Act that would phase-in
significant reductions in greenhouse gas emissions if enacted into law. The U.S.
Senate is considering a different bill, and it is uncertain whether, when and in
what form a federal mandatory carbon dioxide emissions reduction program may be
adopted. These actions could increase costs associated with our
operations. Because it is uncertain what laws will be enacted, we
cannot predict the potential impact of such laws on our future consolidated
financial condition, results of operations or cash flows.
We
may not be successful in winning new business mandates from our government and
commercial customers.
We must
be successful in winning mandates from our government and commercial customers
to replace revenues from projects that are nearing completion and to increase
our revenues. Our business and operating results can be adversely affected by
the size and timing of a single material contract.
The
elimination or any modification of the Price-Anderson Acts indemnification
authority could have adverse consequences for our business.
The
Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates the
manufacture, use, and storage of radioactive materials. The
Price-Anderson Act supports the nuclear services industry by offering broad
indemnification to DOE contractors for liabilities arising out of nuclear
incidents at DOE nuclear facilities. That indemnification protects
DOE prime contractor, but also similar companies that work under contract or
subcontract for a DOE prime contract or transporting radioactive material to or
from a site. The indemnification authority of the DOE under the
Price-Anderson Act was extended through 2025 by the Energy Policy Act of
2005.
The
Price-Anderson Act’s indemnification provisions generally do not apply to our
processing of radioactive waste at governmental facilities, and do not apply to
liabilities that we might incur while performing services as a contractor for
the DOE and the nuclear energy industry. If an incident or evacuation
is not covered under Price-Anderson Act indemnification, we could be held liable
for damages, regardless of fault, which could have an adverse effect on our
results of operations and financial condition. If such indemnification authority
is not applicable in the future, our business could be adversely affected if the
owners and operators of new facilities fail to retain our services in the
absence of commercial adequate insurance and indemnification.
We
are engaged in highly competitive businesses and typically must bid against
other competitors to obtain major contracts.
We are
engaged in highly competitive business in which most of our government contracts
and some of our commercial contracts are awarded through competitive bidding
processes. We compete with national and regional firms with nuclear
services practices, as well as small or local contractors. Some of
our competitors have greater financial and other resources than we do, which can
give them a competitive advantage. In addition, even if we are
qualified to work on a new government contract, we might not be awarded the
contract because of existing government policies designed to protect certain
types of businesses and underrepresented minority
contractors. Competition also places downward pressure on our
contract prices and profit margins. Intense competition is expected
to continue for nuclear service contracts. If we are unable to meet
these competitive challenges, we could lose market share and experience on
overall reduction in our profits.
Our
failure to maintain our safety record could have an adverse effect on our
business.
Our
safety record is critical to our reputation. In addition, many of our government
and commercial customers require that we maintain certain specified safety
record guidelines to be eligible to bid for contracts with these
customers. Furthermore, contract terms may provide for automatic
termination in the event that our safety record fails to adhere to agreed-upon
guidelines during performance of the contract. As a result, our
failure to maintain our safety record could have a material adverse effect on
our business, financial condition and results of operations.
Failure
to maintain effective internal control over financial reporting could have a
material adverse effect on our business, operating results, and stock
price.
Maintaining
effective internal control over financial reporting is necessary for us to
produce reliable financial reports and is important in helping to prevent
financial fraud. If we are unable to maintain adequate internal
controls, our business and operating results could be harmed. We are required to
satisfy the requirements of Section 404 of Sarbanes Oxley and the related
rules of the Securities and Exchange Commission, which require, among other
things, our management to assess annually the effectiveness of our internal
control over financial reporting and our independent registered public
accounting firm to issue a report on that assessment. For several years that
ended prior to December 31, 2009, we concluded that our disclosure controls and
procedures and internal controls over financial reporting were not
effective. However, based on our assessment, we have concluded that
our disclosure controls and procedures and internal controls over financial
reporting were effective as of December 31, 2009. Failure to
remediate any future deficiencies noted by our independent registered public
accounting firm or to implement required new or improved controls or
difficulties encountered in their implementation could cause us to fail to meet
our reporting obligations or result in material misstatements in our financial
statements. If our management or our independent registered public accounting
firm were to conclude in their reports that our internal control over financial
reporting was not effective, investors could lose confidence in our reported
financial information, and the trading price of our stock could drop
significantly.
We
may be unable to utilize loss carryforwards in the future.
We have
approximately $14,532,000 and $26,310,000 in net operating loss carryforwards
which will expire from 2010 to 2028 if not used against future federal and state
income tax liabilities, respectively. Our net loss carryforwards are
subject to various limitations. Our ability to use the net loss
carryforwards depends on whether we are able to generate sufficient income in
the future years. Further, our net loss carryforwards have not been
audited or approved by the Internal Revenue Service.
Risks
Relating to our Intellectual Property
If
we cannot maintain our governmental permits or cannot obtain required permits,
we may not be able to continue or expand our operations.
We are a
waste management company. Our business is 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, recycling, disposal, and
transportation of hazardous and non-hazardous waste and low-level radioactive
waste. We must obtain and maintain permits or licenses to conduct
these activities in compliance with such laws and
regulations. Failure to obtain and maintain the required permits or
licenses would have a material adverse effect on our operations and financial
condition. If any of our facilities are unable to maintain currently
held permits or licenses or obtain any additional permits or licenses which may
be required to conduct its operations, we may not be able to continue those
operations at these facilities, which could have a material adverse effect on
us.
We
believe our proprietary technology is important to us.
We
believe that it is important that we maintain our proprietary technologies.
There can be no assurance that the steps taken by us to protect our proprietary
technologies will be adequate to prevent misappropriation of these technologies
by third parties. Misappropriation of our proprietary technology
could have an adverse effect on our operations and financial
condition. Changes to current environmental laws and regulations also
could limit the use of our proprietary technology.
Risks
Relating to our Financial Position and Need for Financing
Breach
of financial covenants in existing credit facility could result in a default,
triggering repayment of outstanding debt under the credit facility.
Our
credit facility with our bank contains financial covenants. A breach of any of
these covenants could result in a default under our credit facility triggering
our lender to immediately require the repayment of all outstanding debt under
our credit facility and terminate all commitments to extend further credit. In
the past, none of our covenants have been restrictive to our
operations. If we fail to meet our loan covenants in the future and
our lender does not waive the non-compliance or revise our covenant so that we
are in compliance, our lender could accelerate the repayment of borrowings under
our credit facility. In the event that our lender accelerates the
payment of our borrowing, we may not have sufficient liquidity to repay our debt
under our credit facility and other indebtedness.
Our
amount of debt could adversely affect our operations.
At
December 31, 2009, our aggregate consolidated debt was approximately
$12,381,000. Our secured revolving credit facility (the “Credit Facility”)
provides for an aggregate commitment of $25,000,000, consisting of an
$18,000,000 revolving line of credit and a term loan of
$7,000,000. The maximum we can borrow under the revolving part of the
Credit Facility is based on a percentage of the amount of our eligible
receivables outstanding at any one time. As of December 31, 2009, we
had borrowings under the revolving part of our Credit Facility of $2,659,000 and
borrowing availability of up to an additional $11,535,000 based on our
outstanding eligible receivables. A lack of operating results
could have material adverse consequences on our ability to operate our
business. Our ability to make principal and interest payments, or to
refinance indebtedness, will depend on both our and our subsidiaries' future
operating performance and cash flow. Prevailing economic conditions, interest
rate levels, and financial, competitive, business, and other factors affect
us. Many of these factors are beyond our control.
Risks
Relating to our Common Stock
Issuance
of substantial amounts of our Common Stock could depress our stock
price.
Any sales
of substantial amounts of our Common Stock in the public market could cause an
adverse effect on the market price of our Common Stock and could impair our
ability to raise capital through the sale of additional equity
securities. The issuance of our Common Stock will result in the
dilution in the percentage membership interest of our stockholders and the
dilution in ownership value. As of December 31, 2009, we had
54,628,904 shares of Common Stock outstanding.
In
addition, as of December 31, 2009, we had outstanding options to purchase
3,109,525 shares of Common Stock at exercise prices from $1.25 to $2.98 per
share. Further, our preferred share rights plan and the shelf
registration statement, if either is triggered, could result in the issuance of
a substantial amount of our Common Stock. The existence of this
quantity of rights to purchase our Common Stock under the preferred share rights
plan and/or the shelf registration could result in a significant dilution in the
percentage ownership interest of our stockholders and the dilution in ownership
value. Future sales of the shares issuable could also depress the
market price of our Common Stock.
We
do not intend to pay dividends on our Common Stock in the foreseeable
future.
Since our
inception, we have not paid cash dividends on our Common Stock, and we do not
anticipate paying any cash dividends in the foreseeable future. Our
Credit Facility prohibits us from paying cash dividends on our Common
Stock.
The
price of our Common Stock may fluctuate significantly, which may make it
difficult for our stockholders to resell our Common Stock when a stockholder
wants or at prices a stockholder finds attractive.
The price
of our Common Stock on the Nasdaq Capital Markets constantly changes. We expect
that the market price of our Common Stock will continue to fluctuate. This may
make it difficult for our stockholders to resell the Common Stock when a
stockholder wants or at prices a stockholder finds attractive.
Future
issuance or potential issuance of our Common Stock could adversely affect the
price of our Common Stock, our ability to raise funds in new stock offerings,
and dilute our shareholders percentage interest in our Common
Stock.
Future
sales of substantial amounts of our Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing
trading prices of our Common Stock, and impair our ability to raise capital
through future offerings of equity. No prediction can be made as to
the effect, if any, that future issuances or sales of shares of Common Stock or
the availability of shares of Common Stock for future issuance, will have on the
trading price of our Common Stock. Such future issuances could also
significantly reduce the percentage ownership and dilute the ownership value of
our existing common stockholders.
Delaware
law, certain of our charter provisions, our stock option plans, outstanding
warrants and our Preferred Stock may inhibit a change of control under
circumstances that could give you an opportunity to realize a premium over
prevailing market prices.
We are a
Delaware corporation governed, in part, by the provisions of Section 203 of the
General Corporation Law of Delaware, an anti-takeover law. In
general, Section 203 prohibits a Delaware public corporation from engaging in a
“business combination” with an “interested stockholder” for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. As a result of Section 203, potential acquirers may be
discouraged from attempting to effect acquisition transactions with us, thereby
possibly depriving our security holders of certain opportunities to sell, or
otherwise dispose of, such securities at above-market prices pursuant to such
transactions. Further, certain of our option plans provide for the immediate
acceleration of, and removal of restrictions from, options and other awards
under such plans upon a “change of control” (as defined in the respective
plans). Such provisions may also have the result of discouraging acquisition of
us.
We have
authorized and unissued 12,111,571 (which include outstanding options to
purchase 3,109,525 shares of our Common Stock, outstanding warrants to purchase
150,000 shares of our Common Stock, and up to 5,000,000 shares authorized for
resale under the shelf registration statement) shares of Common Stock and
2,000,000 shares of Preferred Stock as of December 31, 2009 (which includes
600,000 shares of our Preferred Stock reserved for issuance under our preferred
share rights plan). These unissued shares could be used by our
management to make it more difficult, and thereby discourage an attempt to
acquire control of us.
Our
Preferred Share Rights Plan may adversely affect our stockholders.
In May
2008, we adopted a preferred share rights plan (the “Rights Plan”), designed to
ensure that all of our stockholders receive fair and equal treatment in the
event of a proposed takeover or abusive tender offer. However, the
Rights Plan may also have the effect of deterring, delaying, or preventing a
change in control that might otherwise be in the best interests of our
stockholders.
In
general, under the terms of the Rights Plan, subject to certain limited
exceptions, if a person or group acquires 20% or more of our Common Stock or a
tender offer or exchange offer for 20% or more of our Common Stock is announced
or commenced, our other stockholders may receive upon exercise of the rights
(the “Rights”) issued under the Rights Plan the number of shares our Common
Stock or of one-one hundredths of a share of our Series A Junior Participating
Preferred Stock, par value $.001 per share, having a value equal to two times
the purchase price of the Right. In addition, if we are acquired in a
merger or other business combination transaction in which we are not the
survivor or more than 50% of our assets or earning power is sold or transferred,
then each holder of a Right (other than the acquirer) will thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the purchase price of the Right. The
purchase price of each Right is $13, subject to adjustment.
The
Rights will cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our board of directors. The Rights may be
redeemed by us at $0.001 per Right at any time before any person or group
acquires 20% or more of our outstanding common stock. The rights
should not interfere with any merger or other business combination approved by
our board of directors. The Rights expire on May 2, 2018.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None
Our
principal executive office is in Atlanta, Georgia. Our Operations
Headquarters is located in Oak Ridge, Tennessee. Our Nuclear Segment
facilities are located in Gainesville, Florida; Kingston, Tennessee; Oak Ridge,
Tennessee, and Richland, Washington. Our Consulting Engineering
Services is located in Ellisville, Missouri. Our Industrial Segment
facilities are located in Orlando and Ft. Lauderdale, Florida; and Valdosta,
Georgia. Our Industrial Segment also has three non-operational
facilities: Brownstown, Michigan, and Memphis, Tennessee, where we still
maintain the properties; and Pittsburgh, Pennsylvania, for which the leased
property was released back to the owner in 2006 upon final remediation of the
leased property.
We
operate eight facilities. All of the facilities are in the United
States. Five of our facilities are subject to mortgages as granted to
our senior lender (Kingston, Tennessee; Gainesville, Florida; Richland,
Washington; Fort Lauderdale, Florida; and Orlando, Florida).
We also
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
|
Perma-Fix
of Dayton (“PFD”), Perma-Fix of Florida (“PFF”), Perma-Fix of Orlando (“PFO”),
Perma-Fix of South Georgia (“PFSG”), and Perma-Fix of Memphis
(“PFM”)
In May
2007, the above facilities were named Potentially Responsible Parties (“PRPs”)
at the Marine Shale Superfund site in St. Mary Parish, Louisiana
(“Site”). Information provided by the EPA indicates that, from 1985
through 1996, the Perma-Fix facilities above were responsible for shipping 2.8%
of the total waste volume received by Marine Shale. Subject to
finalization of this estimate by the PRP group, PFF, PFO and PFD could be
considered de-minimus at .06%, .07% and .28% respectively. PFSG and
PFM would be major at 1.12% and 1.27% respectively. However, at this
time the contributions of all facilities are consolidated.
The
Louisiana Department of Environmental Quality (“LDEQ”) has collected
approximately $8,400,000 to date for the remediation of the site (Perma-Fix
subsidiaries have not been required to contribute any of the $8,400,000) and has
completed removal of above ground waste from the site, with approximately
$5,000,000 remaining in this fund held by the LDEQ. The EPA’s
unofficial estimate to complete remediation of the site is between $9,000,000
and $12,000,000, including work performed by LDEQ to date; however, based on
preliminary outside consulting work hired by the PRP group, which we are a party
to, the remediation costs could be below EPA’s estimation. During
2009, a site assessment was conducted and paid for by the PRP group, which was
exclusive of the $8,400,000. No unexpected issues were identified
during the assessment. Collections from small contributors have also
begun for remediation of this site. Remediation activities going
forward will be funded by LDEQ, until those funds are exhausted, at which time,
any additional requirements, if needed, will be funded from the small
contributors. Once funds from the small contributors are exhausted,
if additional funds are required, they will be provided by the members of the
PRP group. As part of the PRP Group, we paid an initial assessment of
$10,000 in the fourth quarter of 2007, which was allocated among the facilities.
In addition, we accrued approximately $27,000 in the third quarter of 2008 for
our estimated portion of the cost of the site assessment, which was allocated
among the facilities. As of December 31, 2009, $18,000 of the accrued
amount has been paid, of which $9,000 was paid in the fourth quarter of 2008 and
$9,000 was paid in the second quarter of 2009. We anticipate paying
the remaining $9,000 in the first quarter of 2010. As of the date of
this report, we cannot accurately access our ultimate liability. The
Company records its environmental liabilities when they are probable of payment
and can be estimated within a reasonable range. Since this
contingency currently does not meet this criteria, a liability has not been
established.
Industrial
Segment Divested Facilities/Operations
As
previously disclosed, our subsidiary, Perma-Fix Treatment Services, Inc.
(“PFTS”), sold substantially all of its assets in May 2008, pursuant to an Asset
Purchase Agreement, as amended (“Agreement”). Under the Agreement,
the buyer assumed certain debts and obligations of PFTS. We have sued
the buyer of the PFTS assets regarding certain liabilities which we believe the
buyer assumed and agreed to pay under the Agreement but which the buyer has
refused to pay. The buyer has filed a counterclaim against us and is
alleging that PFTS made certain misrepresentations and failed to disclose
certain liabilities. The pending litigation is styled American Environmental
Landfill, Inc. v. Perma-Fix Environmental Services, Inc. v. A Clean Environment,
Inc., Case No. CJ-2008-659, pending in the District Court of Osage
County, State of Oklahoma. This matter has been ordered to
arbitration.
ITEM
4A.
|
EXECUTIVE
OFFICERS OF THE
REGISTRANT
|
The
following table sets forth, as of the date hereof, information concerning our
executive officers:
NAME
|
|
AGE
|
|
POSITION
|
Dr.
Louis F. Centofanti
|
|
66
|
|
Chairman
of the Board, President and Chief Executive Officer
|
Mr.
Ben Naccarato
|
|
47
|
|
Chief
Financial Officer, Vice President, and Secretary
|
Mr.
Robert Schreiber, Jr.
|
|
59
|
|
President
of SYA, Schreiber, Yonley & Associates, a subsidiary of the Company,
and Principal Engineer
|
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.
Ben Naccarato
Mr.
Naccarato was named Chief Financial Officer by the Company’s Board of Directors
on February 26, 2009. Mr. Naccarato was appointed on October 24, 2008
by the Company’s Board of Directors as the Interim Chief Financial Officer,
effective November 1, 2008. Mr. Naccarato joined the Company in
September 2004 and served as Vice President, Finance of the Company’s Industrial
Segment until May 2006, when he was named Vice President, Corporate
Controller/Treasurer. Prior to joining the Company in September 2004,
Mr. Naccarato served as the Chief Financial Officer of Culp Petroleum Company,
Inc., a privately held company in the fuel distribution and used waste oil
industry from December 2002 to September 2004. Mr. Naccarato is a
graduate of University of Toronto having received a Bachelor of Commerce and
Finance Degree and is a Certified Management Accountant.
Mr.
Robert Schreiber, Jr.
Mr.
Schreiber has served as President of SYA since the Company acquired the
environmental engineering firm in 1992. Mr. Schreiber co-founded the predecessor
of SYA, Lafser & Schreiber in 1985, and served in several executive roles in
the firm until our acquisition of SYA. From 1978 to 1985, Mr.
Schreiber served as Director of Air programs and all environmental programs for
the Missouri Department of Natural Resources. Mr. Schreiber provides technical
expertise in wide range of areas including the cement industry, environmental
regulations and air pollution control. Mr. Schreiber has a B.S. in
Chemical Engineering from the University of Missouri – Columbia.
Resignation
of Chief Operating Officer
On July
29, 2009, the Company accepted the resignation of Mr. Larry McNamara, as Vice
President and Chief Operating Officer of the Company. Mr. McNamara’s
resignation as the Chief Operating Officer was effective September 1, 2009, and
as an employee of the Company effective September 30, 2009. The
duties of the Company’s Chief Operating Officer have been temporarily assumed by
Dr. Centofanti, Chairman of the Board, President and Chief Executive Officer,
until the position of Chief Operating Officer is permanently
filled.
Certain
Relationships
There are
no family relationships between any of our Directors or executive officers. Dr.
Centofanti is the only Director who is our employee.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
Common Stock is traded on the NASDAQ Capital Markets (“NASDAQ”) under the symbol
“PESI”. 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.
|
|
2009
|
|
|
2008
|
|
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
Common Stock
|
1st Quarter
|
|
$ |
1.15 |
|
|
$ |
1.95 |
|
|
$ |
1.49 |
|
|
$ |
2.48 |
|
|
2nd Quarter
|
|
|
1.64 |
|
|
|
2.72 |
|
|
|
1.50 |
|
|
|
3.18 |
|
|
3rd Quarter
|
|
|
2.24 |
|
|
|
2.72 |
|
|
|
1.75 |
|
|
|
2.99 |
|
|
4th Quarter
|
|
|
2.05 |
|
|
|
2.51 |
|
|
|
.63 |
|
|
|
2.09 |
|
As of
February 26, 2010, there were approximately 260 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 February 26, 2010, was approximately
3,728.
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 from the
lender. We do not anticipate paying cash dividends on our outstanding
Common Stock in the foreseeable future.
No sales
of unregistered securities, other than the securities sold by us during 2009, as
reported in our Forms 10-Q for the quarters ended March 31, 2009, June 30, 2008,
and September 30, 2009, which were not registered under the
Securities Act of 1933, as amended, were issued during 2009. There
were no purchases made by us or on behalf of us or any of our affiliated members
of shares of our Common Stock during the last quarter of 2009.
Shelf
Registration Statement
On April
8 2009, the Company filed a shelf registration statement on Form S-3 with the
U.S. Securities and Exchange Commission (“SEC”), which was declared effective by
the SEC on June 26, 2009. The shelf registration statement gives the
Company the ability to sell up to 5,000,000 shares of its Common Stock from time
to time and through one or more methods of distribution, subject to market
conditions and the Company’s capital needs at that time. The terms of
any offering under the registration statement will be established at the time of
the offering. The Company does not have any immediate plans or
current commitments to issue shares under the registration
statement.
Common
Stock Price Performance Graph
The
following Common Stock price performance graph compares the yearly change in the
Company’s cumulative total stockholders’ returns on the Common Stock during the
years 2005 through 2009, with the cumulative total return of the NASDAQ Market
Index and the published industry index prepared by Hemscott and known as
Hemscott Industry Group 637-Waste Management Index (“Industry Index”) assuming
the investment of $100 on January 1, 2005.
The
stockholder returns shown on the graph below are not necessarily indicative of
future performance, and we will not make or endorse any predications as to
future stockholder returns.
Assumes
$100 invested in the Company on January 1, 2005, the Industry Index and the
NASDAQ Market Index, and the reinvestment of dividends. The above five-year
Cumulative Total Return Graph shall not be deemed to be “soliciting material” or
to be filed with the Securities and Exchange Commission, nor shall such
information be incorporated by reference by any general statement incorporating
by reference this Form 10-K into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934 (collectively, the “Acts”) or be subject to
the liabilities under Section 18 of the Securities Exchange Act of 1934, except
to the extent that the Company specifically incorporates this information by
reference, and shall not be deemed to be soliciting material or to be filed
under such Acts.
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. In 2009, we reclassified our Perma-Fix of Memphis, Inc. (“PFM”)
back into discontinued operations. Our Perma-Fix of Memphis, Inc.
facility was approved as a discontinued operation by our Board on March 12,
1998. This decision was the result of an explosion at the facility in
1997, which significantly disrupted its operations and the high costs required
to rebuild its operations. PFM had been reported as a discontinued
operation until 2001. In 2001, the facility was reclassified back
into continuing operations as we had no other facilities classified as
discontinued operations and its impact on our financial statements was de
minimis. During the fourth quarter of 2009, we reclassified PFM back
into discontinued operations for all periods presented in accordance with ASC
360, “Property, Plant, and Equipment”. In addition, certain prior
year amounts have been reclassified to conform with current year
presentations. Amounts are in thousands, except for per share
amounts. The information set forth below should be read in
conjunction with “Management’s Discussion Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements of the Company
and the notes thereto included elsewhere herein.
Statement
of Operations Data:
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)(2)
|
|
|
2006(1)
|
|
|
2005
|
|
Revenues
|
|
$ |
100,676 |
|
|
$ |
75,504 |
|
|
$ |
64,544 |
|
|
$ |
68,205 |
|
|
$ |
68,833 |
|
Income
(loss) from continuing operations
|
|
|
9,572 |
|
|
|
985 |
|
|
|
(2,360 |
) |
|
|
5,620 |
|
|
|
4,088 |
|
Income
(loss) from discontinued operations, net of taxes
|
|
|
50 |
|
|
|
(1,397 |
) |
|
|
(6,850 |
) |
|
|
(909 |
) |
|
|
(349 |
) |
Gain
on disposal of discontinued operations, net of taxes
|
|
|
— |
|
|
|
2,323 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income (loss)
|
|
|
9,622 |
|
|
|
1,911 |
|
|
|
(9,210 |
) |
|
|
4,711 |
|
|
|
3,739 |
|
Preferred
stock dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(156 |
) |
Net
income (loss) applicable to Common Stockholders
|
|
|
9,622 |
|
|
|
1,911 |
|
|
|
(9,210 |
) |
|
|
4,711 |
|
|
|
3,583 |
|
Income
(loss) per common share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.18 |
|
|
|
.02 |
|
|
|
(.05 |
) |
|
|
.12 |
|
|
|
.09 |
|
Discontinued
operations
|
|
|
— |
|
|
|
(.02 |
) |
|
|
(.13 |
) |
|
|
(.02 |
) |
|
|
(.01 |
) |
Disposal
of discontinued operations
|
|
|
— |
|
|
|
.04 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income (loss) per share
|
|
|
.18 |
|
|
|
.04 |
|
|
|
(.18 |
) |
|
|
.10 |
|
|
|
.08 |
|
Income
(loss) per common share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.18 |
|
|
|
.02 |
|
|
|
(.05 |
) |
|
|
.12 |
|
|
|
.09 |
|
Discontinued
operations
|
|
|
— |
|
|
|
(.02 |
) |
|
|
(.13 |
) |
|
|
(.02 |
) |
|
|
(.01 |
) |
Disposal
of discontinued operations
|
|
|
— |
|
|
|
.04 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income (loss) per share
|
|
|
.18 |
|
|
|
.04 |
|
|
|
(.18 |
) |
|
|
.10 |
|
|
|
.08 |
|
Number
of shares used in computing net income (loss) per share -
Basic
|
|
|
54,238 |
|
|
|
53,803 |
|
|
|
52,549 |
|
|
|
48,157 |
|
|
|
42,605 |
|
Number
of shares and potential common shares used in computing net
income (loss) per share - Diluted
|
|
|
54,526 |
|
|
|
54,003 |
|
|
|
52,549 |
|
|
|
48,768 |
|
|
|
44,804 |
|
Balance
Sheet Data:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Working
capital (deficit)
|
|
$ |
1,490 |
|
|
$ |
(3,886 |
) |
|
$ |
(17,154 |
) |
|
$ |
12,810 |
|
|
$ |
5,916 |
|
Total
assets
|
|
|
126,075 |
|
|
|
123,712 |
|
|
|
126,048 |
|
|
|
106,355 |
|
|
|
98,457 |
|
Current
and long-term debt
|
|
|
12,381 |
|
|
|
16,203 |
|
|
|
18,836 |
|
|
|
8,329 |
|
|
|
13,375 |
|
Total
liabilities
|
|
|
51,271 |
|
|
|
60,791 |
|
|
|
66,035 |
|
|
|
40,617 |
|
|
|
50,019 |
|
Preferred
Stock of subsidiary
|
|
|
1,285 |
|
|
|
1,285 |
|
|
|
1,285 |
|
|
|
1,285 |
|
|
|
1,285 |
|
Stockholders'
equity
|
|
|
73,519 |
|
|
|
61,636 |
|
|
|
58,728 |
|
|
|
64,453 |
|
|
|
47,153 |
|
|
(1)
|
Includes
recognized stock-based compensation expense of $713,000, $531,000,
$457,000 and $338,000 for 2009, 2008, 2007 and 2006, respectively,
pursuant to FASB ASC 718, “Compensation – Stock
Compensation”.
|
|
(2)
|
Includes
financial data of PFNWR acquired during 2007 and accounted for using the
purchase method of accounting in which the results of operations are
reported from the date of acquisition, June 13,
2007.
|
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.
Review
The
Company experienced strong improvement in 2009 as compared to
2008. The improvement in 2009 was attributed primarily to the
subcontract that we received from CH Plateau Remediation Company (“CHPRC”), a
general contractor to the Department of Energy (“DOE”), in the second quarter of
2008 by our East Tennessee Materials and Energy Corporation (“M&EC”)
facility. Under this subcontract, M&EC is performing a portion of
facility operations and waste management activities for the DOE Hanford,
Washington Site. This subcontract officially commenced on October 1,
2008. We also believe that we have benefitted from the economic stimulus package
(American Recovery and Reinvestment Act) enacted by Congress in February 2009,
which provided additional funding for nuclear waste clean-up throughout the
Department of Energy (“DOE”) complex. This benefit was reflective
primarily starting in the third quarter of 2009 in our Nuclear Segment, with
significant improvement in revenue generated from higher priced waste
receipts. Our Industrial Segment results were negatively impacted
especially by the reduction in oil prices globally in 2009, as compared to 2008,
and the continued uncertainty in the economy. Our Engineering Segment
continues to provide us with positive results.
In 2009,
our revenue increased $25,172,000 or 33.3% to $100,676,000 from $75,504,000 in
2008. Our Nuclear Segment generated revenue of $89,011,000 in 2009,
an increase of $27,652,000 or 45.1% over the revenue of $61,359,000 in
2008. The increase in revenue within our Nuclear Segment was
primarily due to the increase in revenue of $27,131,000 from the subcontract
awarded to our M&EC facility as mentioned above. The remaining
increase in revenue in our Nuclear Segment was due to higher priced waste which
offset the impact of lower volume of waste. Our Industrial Segment
generated $8,283,000 in revenue in 2009 as compared to $10,951,000 in 2008 or a
24.4% decrease. This decrease was primarily the result of a reduction
in oil sales revenue due primarily to decreased oil prices in 2009, as compared
to 2008, and a reduction in volume. Revenue for 2009 from the
Engineering Segment increased $188,000 or 5.9% to $3,382,000 from $3,194,000 for
the same period of 2008.
Gross
profit increased $7,297,000 or 36.8% from 2008 to 2009 due primarily to an
increase in revenue from our CHPRC subcontract, receipt of higher priced waste
in our Nuclear Segment, and a reduction of approximately $787,000 in costs of
goods sold in our Nuclear Segment resulting from a change in estimate related to
accrued costs to dispose of legacy waste that were assumed as part of the
acquisition of our Perma-Fix Northwest Richland, Inc. (“PFNWR”) facility in June
2007 (see “Cost of Goods Sold” in this section for further information regarding
this reduction). Overall Selling, General, and Administrative
(SG&A) expenses were down $464,000 due to the Company’s continued efforts in
cutting costs.
Net
income applicable to Common Stockholders for 2009 was $9,622,000 or $.18 per
share as compared to net income applicable to Common Stockholders of $1,911,000
or $.04 per share for 2008. Our net income applicable to Common
Stockholders for 2009 included a reduction to our cost of goods sold of
approximately $787,000, as mentioned above, as well as a release of a portion of
valuation allowance related to our deferred tax asset of approximately
$2,426,000 recorded in the fourth quarter of 2009.
We have
improved our working capital significantly in 2009. Our working
capital position at December 31, 2009 was $1,490,000, which includes working
capital of our discontinued operations, as compared to working capital deficit
of $3,886,000 as of December 31, 2008. The improvement in our working capital
was primarily from paying down of our current liabilities from funds generated
from our operations.
Outlook
We
believe that government funding made available for DOE projects under the
government stimulus plan in February 2009 should continue to positively impact
our existing government contracts within our Nuclear Segment since the stimulus
plan provides for a substantial amount for remediation of DOE
sites. However, we expect that demand for our services will be
subject to fluctuations due to a variety of factors beyond our control,
including the current economic conditions, and the manner in which the
government will be required to spend funding to remediate federal sites. Our
operations depend, in large part, upon governmental funding, particularly
funding levels at the DOE. In addition, our governmental contracts
and subcontracts relating to activities at governmental sites are subject to
termination or renegotiation on 30 days notice at the government’s
option. Significant reductions in the level of governmental funding
or specifically mandated levels for different programs that are important to our
business could have a material adverse impact on our business, financial
position, results of operations and cash flows.
Results
of Operations
The
reporting of financial results and pertinent discussions are tailored to three
reportable segments: Nuclear Waste Management Services (“Nuclear”), Industrial
Waste Management Services (“Industrial”), and Consulting Engineering Services
(“Engineering”).
Below are
the results of continuing operations for our years ended December 31, 2009,
2008, and 2007 (amounts in thousands):
(Consolidated)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Net
Revenues
|
|
$ |
100,676 |
|
|
|
100.0 |
|
|
$ |
75,504 |
|
|
|
100.0 |
|
|
$ |
64,544 |
|
|
|
100.0 |
|
Cost
of goods sold
|
|
|
73,537 |
|
|
|
73.0 |
|
|
|
55,662 |
|
|
|
73.7 |
|
|
|
45,715 |
|
|
|
70.8 |
|
Gross
Profit
|
|
|
27,139 |
|
|
|
27.0 |
|
|
|
19,842 |
|
|
|
26.3 |
|
|
|
18,829 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
17,728 |
|
|
|
17.6 |
|
|
|
18,192 |
|
|
|
24.1 |
|
|
|
17,859 |
|
|
|
27.7 |
|
Asset
impairment (recovery) loss
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(507 |
) |
|
|
(.6 |
) |
|
|
1,836 |
|
|
|
2.8 |
|
(Gain)
loss on disposal of property and equipment
|
|
|
(15 |
) |
|
|
¾ |
|
|
|
(295 |
) |
|
|
(.4 |
) |
|
|
172 |
|
|
|
.3 |
|
Income
(loss) from operations
|
|
|
9,426 |
|
|
|
9.4 |
|
|
|
2,452 |
|
|
|
3.2 |
|
|
|
(1,038 |
) |
|
|
(1.6 |
) |
Interest
income
|
|
|
145 |
|
|
|
.1 |
|
|
|
226 |
|
|
|
.3 |
|
|
|
312 |
|
|
|
.5 |
|
Interest
expense
|
|
|
(1,657 |
) |
|
|
(1.6 |
) |
|
|
(1,540 |
) |
|
|
(2.0 |
) |
|
|
(1,353 |
) |
|
|
(2.1 |
) |
Interest
expense – financing fees
|
|
|
(283 |
) |
|
|
(.3 |
) |
|
|
(137 |
) |
|
|
(.2 |
) |
|
|
(196 |
) |
|
|
(.3 |
) |
Other
|
|
|
19 |
|
|
|
¾ |
|
|
|
(6 |
) |
|
|
¾ |
|
|
|
(85 |
) |
|
|
(.1 |
) |
Income
(loss) from continuing operations before taxes
|
|
|
7,650 |
|
|
|
7.6 |
|
|
|
995 |
|
|
|
1.3 |
|
|
|
(2,360 |
) |
|
|
(3.6 |
) |
Income
tax (benefit) expense
|
|
|
(1,922 |
) |
|
|
(1.9 |
) |
|
|
10 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Income
(loss) from continuing operations
|
|
|
9,572 |
|
|
|
9.5 |
|
|
|
985 |
|
|
|
1.3 |
|
|
|
(2,360 |
) |
|
|
(3.6 |
) |
Summary - Years Ended
December 31, 2009 and 2008
Net
Revenue
Consolidated
revenues from continuing operations increased $25,172,000 for the year ended
December 31, 2009, compared to the year ended December 31, 2008, as
follows:
(In thousands)
|
|
2009
|
|
|
%
Revenue
|
|
|
2008
|
|
|
%
Revenue
|
|
|
Change
|
|
|
%
Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
waste
|
|
$ |
29,844 |
|
|
|
29.6 |
|
|
$ |
27,370 |
|
|
|
36.2 |
|
|
$ |
2,474 |
|
|
|
9.0 |
|
Fluor
Hanford
|
|
|
— |
|
|
|
— |
|
|
|
7,974 |
|
|
|
10.6 |
|
|
|
(7,974 |
) |
|
|
(100.0 |
) |
CHPRC
|
|
|
45,169 |
|
|
|
44.9 |
|
|
|
8,120 |
|
|
|
10.8 |
|
|
|
37,049 |
|
|
|
456.3 |
|
Hazardous/non-hazardous
|
|
|
3,583 |
|
|
|
3.6 |
|
|
|
3,973 |
|
|
|
5.3 |
|
|
|
(390 |
) |
|
|
(9.8 |
) |
Other
nuclear waste
|
|
|
10,415 |
|
|
|
10.3 |
|
|
|
13,922 |
|
|
|
18.4 |
|
|
|
(3,507 |
) |
|
|
(25.2 |
) |
Total
|
|
|
89,011 |
|
|
|
88.4 |
|
|
|
61,359 |
|
|
|
81.3 |
|
|
|
27,652 |
|
|
|
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
waste
|
|
|
5,213 |
|
|
|
5.2 |
|
|
|
5,495 |
|
|
|
7.3 |
|
|
|
(282 |
) |
|
|
(5.1 |
) |
Government
services
|
|
|
559 |
|
|
|
0.5 |
|
|
|
814 |
|
|
|
1.1 |
|
|
|
(255 |
) |
|
|
(31.3 |
) |
Oil
sales
|
|
|
2,511 |
|
|
|
2.5 |
|
|
|
4,642 |
|
|
|
6.1 |
|
|
|
(2,131 |
) |
|
|
(45.9 |
) |
Total
|
|
|
8,283 |
|
|
|
8.2 |
|
|
|
10,951 |
|
|
|
14.5 |
|
|
|
(2,668 |
) |
|
|
(24.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
3,382 |
|
|
|
3.4 |
|
|
|
3,194 |
|
|
|
4.2 |
|
|
|
188 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
100,676 |
|
|
|
100.0 |
|
|
$ |
75,504 |
|
|
|
100.0 |
|
|
$ |
25,172 |
|
|
|
33.3 |
|
The
Nuclear Segment realized revenue growth of $27,652,000 or 45.1% for the year
ended December 31, 2009 over the same period in 2008, due primarily to the
increase in revenue as a result of the CHPRC subcontract awarded to M&EC
during the second quarter of 2008 as discussed above. Revenue from
CHPRC (generally under subcontract relating to remediation and/or on-site
management at DOE sites) totaled $45,169,000 or 44.9% of our total revenue from
continuing operations for the year ended December 31, 2009, which included
approximately $34,226,000 of revenue under the CHPRC subcontract at
M&EC. We had revenue of approximately $8,120,000 or 10.8% of our
total revenue from CHPRC for the year ended December 31, 2008, which included
approximately $7,095,000 of revenue under the CHPRC subcontract at
M&EC. Effective October 1, 2008, CHPRC also began management of
waste activities under previous subcontracts with Fluor Hanford, DOE’s general
contractor at the Hanford Site prior to CHPRC. Our Nuclear Segment
had three previous subcontracts with Fluor Hanford. These three
subcontracts have since been renegotiated by CHPRC to September 30,
2013. Revenue from government generators, excluding CHPRC and Fluor
Hanford as discussed above, increased $2,474,000 or 9.0% due primarily to higher
priced waste, which was partially offset by volume reduction. We saw
significantly higher priced waste received starting in the third quarter of
2009. Revenue from hazardous and non-hazardous waste was down
$390,000 or 9.8% due primarily to a reduction in volume of 4.2% and a reduction
in average pricing of 8.0%. Other revenue decreased $3,507,000 or
approximately 25.0% due primarily to a shipment of high activity and high margin
waste of approximately $2,700,000 received in the first quarter of 2008 which
did not repeat in 2009. In addition, reduced volume contributed to
this decrease in revenue. Revenue from our Industrial Segment
decreased $2,668,000 or 24.4% primarily due to a significant reduction in oil
sales revenue resulting from a decrease in average price per gallon of 39.0% and
decreased volume of 11.6%. In addition, commercial revenue was down
due to a reduction in field service revenue resulting from the slowdown in the
economy. Revenue in our Engineering Segment increased approximately
$188,000 or 5.9% due to an increase in average billing rate of 8.2%, with
billable hours remaining constant.
Cost
of Goods Sold
Cost of
goods sold increased $17,875,000 for the year ended December 31, 2009, as
compared to the year ended December 31, 2008, as follows:
(In Thousands)
|
|
2009
|
|
|
% Revenue
|
|
|
2008
|
|
|
%
Revenue
|
|
|
Change
|
|
Nuclear
|
|
$ |
64,882 |
|
|
|
72.9 |
|
|
$ |
46,101 |
|
|
|
75.1 |
|
|
$ |
18,781 |
|
Industrial
|
|
|
6,286 |
|
|
|
75.9 |
|
|
|
7,439 |
|
|
|
67.9 |
|
|
|
(1,153 |
) |
Engineering
|
|
|
2,369 |
|
|
|
70.0 |
|
|
|
2,122 |
|
|
|
66.4 |
|
|
|
247 |
|
Total
|
|
$ |
73,537 |
|
|
|
73.0 |
|
|
$ |
55,662 |
|
|
|
73.7 |
|
|
$ |
17,875 |
|
The
Nuclear Segment’s cost of goods sold for the twelve months ended December 31,
2009 increased $18,781,000 or 40.7%, which included the cost of goods sold of
approximately $27,302,000 related to the CHPRC subcontract. Cost of
goods sold related to the CHPRC subcontract for the corresponding period of 2008
was approximately $5,584,000 since the subcontract did not officially commence
until October 1, 2008. The cost of goods sold for our Nuclear Segment
included a reduction of approximately $787,000 recorded in the third quarter of
2009 in disposal/transportation costs resulting from a change in estimate
related to accrued costs to dispose of legacy waste that were assumed as part of
the acquisition of our PFNWR facility in June 2007. The change in
estimate was necessary due to our accumulation of new information that resulted
in our identifying more efficient and cost effective ways to dispose of this
waste. Excluding the cost of goods sold of the CHPRC subcontract and
the legacy waste adjustment, the Nuclear Segment costs decreased approximately
$2,150,000 or 5.3% primarily in material and supplies, lab, and
disposal/transportation expenses due to revenue mix. In addition,
salaries and payroll related expenses were also down due to the segment’s
continued efforts to reduce costs. The decrease was partially offset
by higher bonus/incentive due to higher revenue. In the Industrial
Segment, the decrease of $1,153,000 or 15.5% was reflected in all areas due to
reduction in revenue, especially in oil sales revenue. This decrease
was reduced by the expense of approximately $281,000 incurred in the fourth
quarter of 2009 in connection with the environmental remediation reserve for
PFSG (see “Environmental Contingencies” in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for further
information regarding this reserve). The Engineering Segment cost of
goods sold increased approximately $247,000 or 11.6% due primarily to reduced
allocation of internal labor hours to the Company’s Nuclear Segment. In 2008,
the Engineering Segment had two large projects for our PFNWR facility, in
addition to projects on the divestitures of certain of our Industrial Segment
during the first half of 2008, which did not exist in 2009. Included
within cost of goods sold is depreciation and amortization expense of $4,445,000
and $4,612,000 for the years ended December 31, 2009 and 2008,
respectively.
Gross
Profit
Gross
profit for the year ended December 31, 2009, was $7,297,000 higher than 2008, as
follows:
(In thousands)
|
|
2009
|
|
|
%
Revenue
|
|
|
2008
|
|
|
%
Revenue
|
|
|
Change
|
|
Nuclear
|
|
$ |
24,129 |
|
|
|
27.1 |
|
|
$ |
15,258 |
|
|
|
24.9 |
|
|
$ |
8,871 |
|
Industrial
|
|
|
1,997 |
|
|
|
24.1 |
|
|
|
3,512 |
|
|
|
32.1 |
|
|
|
(1,515 |
) |
Engineering
|
|
|
1,013 |
|
|
|
30.0 |
|
|
|
1,072 |
|
|
|
33.6 |
|
|
|
(59 |
) |
Total
|
|
$ |
27,139 |
|
|
|
27.0 |
|
|
$ |
19,842 |
|
|
|
26.3 |
|
|
$ |
7,297 |
|
The
Nuclear Segment gross profit increased $8,871,000, which included gross profit
of approximately $6,924,000 on the CHPRC subcontract at our M&EC facility in
addition to a reduction of approximately $787,000 in disposal/transportation
costs recorded in the third quarter of 2009 resulting from a change in estimate
related to accrued costs to dispose of legacy waste that were assumed as part of
the acquisition of our PFNWR facility in June 2007 as mentioned
above. Gross profit related to the CHPRC subcontract for the
corresponding period of 2008 was approximately $1,511,000 since the subcontract
did not officially commence until October 1, 2008. Excluding the
gross profit from the CHPRC subcontract and the legacy disposal adjustment,
Nuclear Segment gross profit increased approximately $2,671,000 or approximately
19.4%. Gross margin also increased primarily due to revenue mix
resulting from receipt of higher margin wastes. In the Industrial
Segment, gross profit and gross margin both decreased due to reduction in
revenue, especially a 45.9% reduction in oil sales revenue which is a higher
margin revenue stream. The decrease in gross profit in the
Engineering Segment was due primarily to reduced allocation of internal labor
hours to our Nuclear Segment facilities as discussed above.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”) expenses decreased $464,000 for the year
ended December 31, 2009, as compared to the corresponding period for 2008, as
follows:
(In thousands)
|
|
2009
|
|
|
%
Revenue
|
|
|
2008
|
|
|
%
Revenue
|
|
|
Change
|
|
Administrative
|
|
$ |
6,389 |
|
|
|
¾ |
|
|
$ |
5,677 |
|
|
|
¾ |
|
|
$ |
712 |
|
Nuclear
|
|
|
8,737 |
|
|
|
9.8 |
|
|
|
9,168 |
|
|
|
14.9 |
|
|
|
(431 |
) |
Industrial
|
|
|
2,036 |
|
|
|
24.6 |
|
|
|
2,685 |
|
|
|
24.5 |
|
|
|
(649 |
) |
Engineering
|
|
|
566 |
|
|
|
16.7 |
|
|
|
662 |
|
|
|
20.7 |
|
|
|
(96 |
) |
Total
|
|
$ |
17,728 |
|
|
|
17.6 |
|
|
$ |
18,192 |
|
|
|
24.1 |
|
|
$ |
(464 |
) |
Our
SG&A for the twelve months ended December 31, 2009, decreased approximately
$464,000 or 2.6% over the corresponding period of 2008. The increase
in administrative SG&A was primarily the result of higher outside service
expense resulting from business development and corporate consulting matters,
audit and legal fees in connection with various company filings, subcontract
services for information technology matters, higher Management Incentive Plan
(“MIP”) compensation due to higher revenue and earnings, and higher stock
compensation expense in connection with the extension of 270,000 fully vested
non-qualified stock options to our Chief Operating Officer, who resigned from
the position effective September 1, 2009. Also, administrative
SG&A was higher due to higher salaries and other payroll related expenses
resulting from additional headcount at our corporate office as we centralized
certain accounting functions to our corporate office in 2009. The
increase in salaries at our corporate office was offset by decrease in payroll
expenses in certain of our other segments. Nuclear Segment
SG&A was down approximately $431,000 due mainly to lower salaries and
payroll related expenses, travel expenses, outside service expenses for legal
and consulting, and lower overall general expenses as the Segment continued its
effort to reduce costs. The decrease was partially offset by higher
bad debt expense. SG&A for the Industrial Segment decreased
$649,000 due primarily to lower bonus/incentive due to reduced revenue, certain
payroll related expense, and lower outside services expenses as we had certain
permit compliance/renewal and legal matters in 2008 which did not occur in
2009. The Engineering Segment’s SG&A expense decreased
approximately $96,000 primarily due to decrease in salaries and payroll related
expenses, travel, and outside service expenses. Included in SG&A
expenses is depreciation and amortization expense of $301,000 and $254,000 for
the years ended December 31, 2009, and 2008, respectively.
Gain
on Disposal of Property and Equipment
The gain
on disposal of property and equipment in 2009 of $15,000 was primarily related
to the sale of idle equipment at various facilities. The gain on
disposal of property and equipment in 2008 was primarily due to the sale of one
of the properties at our PFO for $900,000 which resulted in gain of
approximately $483,000. The proceeds were used for our working
capital. This gain was offset by loss from disposal of idle equipment
at our DSSI and M&EC facilities.
Asset
Impairment Recovery
The asset
impairment recovery for 2008 was the result of the re-evaluation of the fair
value of Perma-Fix of Orlando, Inc.’s assets from the reclassification of the
facility back into continuing operations during the third quarter
of 2008 from discontinued operations.
Interest
Income
Interest
income decreased $81,000 for the year ended December 31, 2009, as compared to
2008. The decrease was primarily the result of lower interest earned on
the finite risk sinking fund due to lower interest rates.
Interest
Expense
Interest
expense increased $117,000 for the year ended December 31, 2009, as compared to
the corresponding period of 2008.
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
PNC
interest
|
|
$ |
820 |
|
|
$ |
508 |
|
|
$ |
312 |
|
|
|
61.4 |
|
Other
|
|
|
837 |
|
|
|
1,032 |
|
|
|
(195 |
) |
|
|
(18.9 |
) |
Total
|
|
$ |
1,657 |
|
|
$ |
1,540 |
|
|
$ |
117 |
|
|
|
7.6 |
|
The
increase in interest expense for 2009 was due primarily to higher interest on
our revolver and term note resulting from higher balances in addition to
interest incurred on the $3,000,000 loan we entered into in May 2009 with Mr.
Lampson and Mr. Rettig. Our monthly average term loan balance was
higher in 2009 resulting from the reload of our term note in August 2008 to
$7,000,000. In 2008, our average monthly term loan balance was
significantly lower resulting from payments against the term note from proceeds
received from the sale of certain of our Industrial Segment
facilities. Our average monthly revolver balance was higher in 2009
as compared to 2008 due to funding of our finite insurance policies,
specifically for our PCB permit for our DSSI facility. Interest
expense was also higher in 2009 due to interest expense incurred on certain
vendor invoices. The increase in interest expense was partially
offset by lower interest resulting from payoff of the KeyBank note in December
2008 at our PFNWR facility and payoff of our PDC note in May 2009 at our
M&EC facility.
Interest
Expense - Financing Fees
Interest
expense-financing fees increased approximately $146,000 from 2008 to 2009 due
primarily to debt discount amortized as financing fees in connection with the
issuance of 200,000 shares of the Company’s Common Stock and two Warrants for
purchase up to 150,000 shares of the Company’s Common Stock as consideration for
the Company receiving a $3,000,000 loan from Mr. William Lampson and Mr. Diehl
Rettig in May 2009. The increase was partially offset by the
reduction of monthly amortized financing fees associated with our original
credit facility and subsequent amendments which became fully amortized in May
2008.
Income
Taxes- Valuation Allowance
In
accordance with ASC 740, “Income Taxes”, a valuation allowance is established
against a deferred tax asset if, based on the available evidence, it is more
likely than not that such assets will not be realized. The
realization of a deferred tax asset ultimately depends on the existence of
sufficient taxable income in either the carryback or carryforward periods under
the law. We periodically assess the need for valuation allowances for
deferred tax assets based on the ASC 740 more-likely than not realization
threshold criterion. In our assessment, we consider a number of
factors including whether there is a historical pattern of consistent and
significant profitability in combination with our assessment of forecasted
profitability in the future periods. Such patterns and forecasts
allow us to determine whether our most significant deferred income tax assets,
such as net operating losses, will be realizable in future years, in whole or in
part. These deferred income tax assets in particular will require us
to generate taxable income in the applicable jurisdictions in future years in
order to recognize their economic benefits. As of December 31, 2008,
we had concluded that insufficient evidence existed to support the recognition
of any of our deferred income tax assets and, as such, a full valuation
allowance was applied against our net deferred income tax asset. As
of December 31, 2009, however, facts and circumstances have changed to alter our
conclusions and we have determined that it is more likely than not that
approximately $2,192,000 of deferred income tax asset will be realized based,
primarily, on profitable historic results and projections of future taxable
income. For the years ended December 31, 2009 and 2008, we had
($1,922,000) and $10,000, respectively, in income tax expense(benefit), as a
result of a release in the valuation allowance against the deferred income tax
asset and our alternative minimum tax liability at December 31,
2009. Our net operating loss carryforwards have not been
audited or approved by the Internal Revenue Service.
Summary - Years Ended
December 31, 2008 and 2007
Net
Revenue
Consolidated
revenues from continuing operations increased $10,960,000 for the year ended
December 31, 2008, compared to the year ended December 31, 2007, as
follows:
(In thousands)
|
|
2008
|
|
|
%
Revenue
|
|
|
2007
|
|
|
%
Revenue
|
|
|
Change
|
|
|
%
Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
waste
|
|
$ |
19,050 |
|
|
|
25.3 |
|
|
$ |
20,547 |
|
|
|
31.8 |
|
|
$ |
(1,497 |
) |
|
|
(7.3 |
) |
Fluor
Hanford
|
|
|
2,814 |
(1) |
|
|
3.7 |
|
|
|
3,885 |
(2) |
|
|
6.0 |
|
|
|
(1,071 |
) |
|
|
(27.6 |
) |
CHPRC
|
|
|
7,095 |
(1) |
|
|
9.4 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
7,095 |
|
|
|
100.0 |
|
Hazardous/non-hazardous
|
|
|
3,973 |
|
|
|
5.3 |
|
|
|
5,068 |
|
|
|
7.9 |
|
|
|
(1,095 |
) |
|
|
(21.6 |
) |
Other
nuclear waste
|
|
|
11,102 |
|
|
|
14.7 |
|
|
|
13,765 |
|
|
|
21.3 |
|
|
|
(2,663 |
) |
|
|
(19.3 |
) |
Acquisition
6/07 (PFNWR)
|
|
|
17,325 |
(1) |
|
|
22.9 |
|
|
|
8,439 |
(2) |
|
|
13.1 |
|
|
|
8,886 |
|
|
|
105.3 |
|
Total
|
|
|
61,359 |
|
|
|
81.3 |
|
|
|
51,704 |
|
|
|
80.1 |
|
|
|
9,655 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
waste
|
|
|
5,495 |
|
|
|
7.3 |
|
|
|
5,699 |
|
|
|
8.8 |
|
|
|
(204 |
) |
|
|
(3.6 |
) |
Government
services
|
|
|
814 |
|
|
|
1.1 |
|
|
|
1,653 |
|
|
|
2.6 |
|
|
|
(839 |
) |
|
|
(50.8 |
) |
Oil
sales
|
|
|
4,642 |
|
|
|
6.1 |
|
|
|
3,090 |
|
|
|
4.8 |
|
|
|
1,552 |
|
|
|
50.2 |
|
Total
|
|
|
10,951 |
|
|
|
14.5 |
|
|
|
10,442 |
|
|
|
16.2 |
|
|
|
509 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
3,194 |
|
|
|
4.2 |
|
|
|
2,398 |
|
|
|
3.7 |
|
|
|
796 |
|
|
|
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
75,504 |
|
|
|
100.0 |
|
|
$ |
64,544 |
|
|
|
100.0 |
|
|
$ |
10,960 |
|
|
|
17.0 |
|
(1) Revenue
of $17,325,000 from PFNWR for 2008 includes approximately $14,505,000 relating
to wastes generated by the federal government, either directly or indirectly as
a subcontractor to the federal government. Of the $14,505,000 in
revenue, approximately $5,160,000 was from Fluor Hanford, a general contractor
to the federal government and approximately $1,025,000 was from CHPRC, a general
contractor to the federal government. Revenue in 2008 from Fluor
Hanford totaled approximately $7,974,000 or 10.6% of total consolidated
revenue. Revenue in 2008 from CHPRC totaled approximately $8,120,000
or 10.8% of total consolidated revenue.
(2) Our PFNWR was acquired in June
2007. Revenue of $8,439,000 from PFNWR for 2007 includes
approximately $5,568,000 relating to wastes generated by the federal government,
either directly or indirectly as a subcontractor to the federal
government. Of the $5,568,000 in revenue, approximately $3,100,000
was from Fluor Hanford, a general contractor to the federal
government. Revenue in 2007 from Fluor Hanford totaled approximately
$6,985,000 or 10.8 % of total consolidated revenue.
The
Nuclear Segment experienced a $9,655,000 increase in revenue for the year ended
December 31, 2008 over the same period in 2007. Total revenue within
the Nuclear Segment included $17,325,000 of revenue at our PFNWR facility for
the full year of 2008 as compared to $8,439,000 after the facility was acquired
on June 13, 2007. In addition, our revenue for the Nuclear Segment
included revenue of $7,095,000 for our new subcontract awarded to us from
CHPRC. In the second quarter of 2008, we were awarded a subcontract
by CHPRC to perform a portion of facility operations and waste management
activities for the DOE Hanford, Washington Site. The general contract
awarded by the DOE to CHPRC and our subcontract provide for a transition period
from August 11, 2008 through September 30, 2008, a base period from October 1,
2008 through September 30, 2013 and an option period from October 1, 2013
through September 30, 2018. On October 1, 2008, operations of this
subcontract commenced at the DOE Hanford Site. Effective October 1,
2008, CHPRC also began management of waste activities under previous
subcontracts with Fluor Hanford, DOE’s general contractor at the Hanford Site
prior to CHPRC. Excluding our revenue from PFNWR and CHPRC, revenue
within our Nuclear Segment decreased approximately $6,326,000 or 14.6% as
compared to the same period of 2007. Excluding revenue from PFNWR and
revenue from the CHPRC
subcontract, revenue from government generators (which includes our subcontracts
with Fluor Hanford) decreased $2,568,000 or 10.5% due primarily to overall lower
government receipts. For 2008, government agencies were operated
under “Continuing Resolution” without finalized budgets due in part to the
impending change in Administration, which had a negative impact on availability
of funding for services offered by our Nuclear Segment. We saw a
decrease of approximately $1,071,000 or 27.6% in revenue from Fluor Hanford due
to lower overall receipts and transition of revenue from Fluor Hanford to CHPRC
effective October 1, 2008 (see “known Trends and Uncertainties – significant
customers” in this section). Revenue from hazardous and non-hazardous
waste was down $1,095,000 or 21.6% due to lower volume of waste received offset
by higher average prices per drum which increase approximately
38.5%. The price change is primarily due to waste mix. We
also had three large event projects in 2007, while none occurred in
2008. Other nuclear waste revenue decreased $2,663,000 or 19.3% as
packaging and field service related revenue from LATA/Parallax Portsmouth
contract from 2007 did not occur in 2008. Revenue in our Industrial
Segment increased $509,000 or 4.9% due primarily to higher oil sale
revenue. We saw an increase of approximately 52.6% in average price
per gallon while volume only decreased 2.1%. The increase in average
price per gallon was attributed to the high global oil costs throughout most of
2008. This increase in oil sale revenue was partially offset by lower
government revenue resulting from termination of a government contract in July
2007. Revenue in our Engineering Segment increased approximately
$796,000 or 33.2% due
primarily to the increase of billable hours of 29.0% caused by increase in
external business, with the billability rate remaining fairly constant, a slight
decrease of .3% from 2007 to 2008.
Cost
of Goods Sold
Cost
of goods sold increased $9,747,000 for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, as follows:
(In thousands)
|
|
2008
|
|
|
%
Revenue
|
|
|
2007
|
|
|
%
Revenue
|
|
|
Change
|
|
Nuclear
|
|
$ |
35,143 |
|
|
|
79.8 |
|
|
$ |
30,261 |
|
|
|
69.9 |
|
|
$ |
4,882 |
|
Acquisition
6/07 (PFNWR)
|
|
|
10,958 |
|
|
|
63.2 |
|
|
|
5,109 |
|
|
|
60.5 |
|
|
|
5,849 |
|
Industrial
|
|
|
7,439 |
|
|
|
67.9 |
|
|
|
8,707 |
|
|
|
83.4 |
|
|
|
(1,268 |
) |
Engineering
|
|
|
2,122 |
|
|
|
66.4 |
|
|
|
1,638 |
|
|
|
68.3 |
|
|
|
484 |
|
Total
|
|
$ |
55,662 |
|
|
|
73.7 |
|
|
$ |
45,715 |
|
|
|
70.8 |
|
|
$ |
9,947 |
|
Excluding
the cost of goods sold of approximately $10,958,000 for the PFNWR facility, the
Nuclear Segment’s cost of goods sold for the year ending December 31, 2008 were
up approximately $4,882,000. The $35,143,000 in cost of good sold in
the Nuclear Segment (excluding PFNWR) includes cost of good sold of
approximately $5,584,000 related to the CHPRC subcontract. Excluding
this $5,584,000 in cost of good sold, our remaining Nuclear Segment cost of
goods sold decreased $702,000 or 2.3%. Although receipts were down
41.6% as compared to prior year, cost as a percentage of revenue (excluding the
CHPRC subcontract and PFNWR) increased to 80.0% from 69.9%. This reflects the
mix of wastes received which was costlier to dispose. In the
Industrial Segment, cost of goods sold decreased $1,268,000 or 14.6% due
primarily to reduced revenue from a government contract which terminated in July
2007. This decrease was offset by higher cost of good sold related to
material and supply purchases, especially raw oil purchases, the result of the
increase in the global cost of oil throughout 2008. Cost as a
percentage of revenue decreased from 83.4% in 2007 to 67.9% due primarily to
reduction in government receipts processed. Total cost of good sold
for the Industrial Segment decreased despite depreciation expenses of
approximately $244,000 incurred as result of the reclassification of PFFL, PFO,
and PFSG facilities as continuing operations. The Engineering Segment
costs increased $484,000 or 29.5% due primarily to increased revenue of
33.2%. Included within cost of goods sold is depreciation and
amortization expense of $4,612,000 and $3,918,000 for the year ended December
31, 2008 and 2007, respectively.
Gross
Profit
Gross
profit for the year ended December 31, 2008, was $1,013,000 higher than 2007, as
follows:
(In thousands)
|
|
2008
|
|
|
%
Revenue
|
|
|
2007
|
|
|
%
Revenue
|
|
|
Change
|
|
Nuclear
|
|
$ |
8,891 |
|
|
|
20.2 |
|
|
$ |
13,004 |
|
|
|
30.1 |
|
|
$ |
(4,113 |
) |
Acquisition
6/07 (PFNWR)
|
|
|
6,367 |
|
|
|
36.8 |
|
|
|
3,330 |
|
|
|
39.5 |
|
|
|
3,037 |
|
Industrial
|
|
|
3,512 |
|
|
|
32.1 |
|
|
|
1,735 |
|
|
|
16.6 |
|
|
|
1,777 |
|
Engineering
|
|
|
1,072 |
|
|
|
33.6 |
|
|
|
760 |
|
|
|
31.7 |
|
|
|
312 |
|
Total
|
|
$ |
19,842 |
|
|
|
26.3 |
|
|
$ |
18,829 |
|
|
|
29.2 |
|
|
$ |
1,013 |
|
The
Nuclear Segment gross profit, excluding gross profit of our PFNWR facility,
decreased $4,113,000 from 2007 to 2008. Gross profit of the Nuclear
Segment (excluding PFNWR) includes the gross profit of our CHPRC subcontract of
approximately $1,511,000. Excluding this gross profit, our Nuclear
Segment gross profit decreased $5,624,000 or 43.2% from 2007 to 2008 due
primarily to lower volume of waste received. Gross margin decreased
from 30.1% to 20.0% which reflects the receipt of lower margin waste streams in
2008. The Industrial Segment gross profit increased $1,777,000 or
102.4% due primarily to the improved revenue mix resulting from higher margin
oil revenue which displaced lower margin hazardous waste disposal
revenue. Gross margin increased to 32.1% in 2008 from 16.6% in 2007
which reflects the favorable increase in oil price throughout much of
2008. The Engineering Segment gross profit increased $312,000 or
41.1% due to increased revenue resulting from a 29.0% increase in billable hours
in 2008 as compared to 2007. Gross margin remained fairly constant,
with an increase of 1.9% in 2008 as compared to 2007.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”) expenses increased $333,000 for the year
ended December 31, 2008, as compared to the corresponding period for 2007, as
follows:
(In thousands)
|
|
2008
|
|
|
%
Revenue
|
|
|
2007
|
|
|
%
Revenue
|
|
|
Change
|
|
Administrative
|
|
$ |
5,677 |
|
|
|
¾ |
|
|
$ |
5,457 |
|
|
|
¾ |
|
|
$ |
220 |
|
Nuclear
|
|
|
6,785 |
|
|
|
15.4 |
|
|
|
7,512 |
|
|
|
17.4 |
|
|
|
(727 |
) |
Acquisition
06/07 (PFNWR)
|
|
|
2,383 |
|
|
|
13.8 |
|
|
|
1,483 |
|
|
|
17.6 |
|
|
|
900 |
|
Industrial
|
|
|
2,685 |
|
|
|
24.5 |
|
|
|
2,890 |
|
|
|
27.7 |
|
|
|
(205 |
) |
Engineering
|
|
|
662 |
|
|
|
20.7 |
|
|
|
517 |
|
|
|
21.6 |
|
|
|
145 |
|
Total
|
|
$ |
18,192 |
|
|
|
24.1 |
|
|
$ |
17,859 |
|
|
|
27.7 |
|
|
$ |
333 |
|
Excluding
the SG&A of our PFNWR facility, our Nuclear SG&A expenses decreased
$727,000 or 9.8% in 2008 as compared to 2007. The decrease within the
Nuclear Segment (excluding PFNWR) was due to lower payroll, commission, travel
related expenses, and general expenses due to headcount reduction resulting from
decreased revenue. The increase in administrative SG&A was
primarily the result of higher stock option expenses as we granted 1,083,000
options to certain company officers and employees. Such options were
not granted in 2007. In addition, legal fees were higher in 2008 due
to the Company’s daily legal corporate matters and public corporate
filings. These increases were offset by lower director fees in 2008
as we had a one time fee payment of $160,000 to a member of our Board of
Directors in 2007 as compensation for his service in negotiating the agreement
in principal to resolve a certain legal matter with the EPA against our former
PFD facility. The decrease in SG&A in our Industrial Segment is
due to lower payroll related expenses as we continue to streamline costs within
the segment. This decrease was offset by incremental depreciation
expense incurred in 2008 of approximately $128,000 as a result of the
reclassification of PFO, PFFL, and PFSG into continuing operations and higher
bonus/commission expenses at PFFL due to higher revenue in 2008 as compared to
2007. The Engineering Segment increase was the result of an increase
in payroll related expenses but this increase was offset by a significant
decrease in bad debt expense. Included in SG&A expense is
depreciation and amortization expense of $254,000 and $174,000 for the years
ended December 31, 2008 and 2007, respectively.
Loss
(Gain) on Disposal of Property and Equipment
The gain
on disposal of property and equipment in 2008 is primarily due to the sale of
one of the properties at our PFO for $900,000 which resulted in gain of
approximately $483,000. The proceeds were used for our working
capital. This gain was offset by loss on disposal of idle equipment
at our DSSI and M&EC facilities. The loss on disposal of property
and equipment for 2007 was attributed mainly to the disposal of idle equipment
at our M&EC, DSSI, and PFFL facilities.
Asset
Impairment Recovery
In May
2007, our PFSG, PFO, and PFFL facilities met the held for sale criteria under
FASB ASC 360, “Property, Plant, and Equipment”, as a result of our Board of
Directors approving the divestiture of these facilities, which resulted in
impairment losses of $1,329,000 and $507,000 for PFSG and PFO,
respectively. In September 2008, these facilities were
reclassified back into continuing operations as a result of our Board of
Directors approving the retention of these facilities. In the third
quarter of 2008, we reclassified one of the two properties at PFO as “net
property and equipment held for sale” within our continuing operations in
accordance with ASC 360. We evaluated the fair value of PFO’s assets
and as a result, recorded the $507,000 previously impairment loss as an asset
impairment recovery.
Interest
Income
Interest
income decreased $86,000 for the year ended December 31, 2008, as compared to
2007. The decrease is primarily due to interest earned from excess cash in
a sweep account which the Company had in the first six months of 2007 but did
not have in the same period of 2008. The excess cash the Company had
in 2007 was the result of warrants and option exercises from the latter part of
2006.
Interest
Expense
Interest
expense increased $187,000 for the year ended December 31, 2008, as compared to
the corresponding period of 2007.
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
PNC
interest
|
|
$ |
508 |
|
|
$ |
702 |
|
|
$ |
(194 |
) |
|
|
(27.6 |
) |
Other
|
|
|
1,032 |
|
|
|
651 |
|
|
|
381 |
|
|
|
58.5 |
|
Total
|
|
$ |
1,540 |
|
|
$ |
1,353 |
|
|
$ |
187 |
|
|
|
13.8 |
|
The
increase in 2008 was due primarily to higher interest resulting from external
debt incurred from the acquisition of our PFNWR facility in June 2007, interest
expense incurred from certain vendor invoices, and higher interest due to
capitalized interest of approximately $144,000 in 2007 resulting from the
completion of the “SouthBay” project in 2007 at our M&EC
facility. This increase was partially offset by lower interest from
the reduction in term loan balance and the payoff of our term note from proceeds
received from the sale of our three Industrial Segment facilities, PFTS, PFD,
and PFMD, in addition to lower interest rate in 2008.
Interest
Expense - Financing Fees
Interest
expense-financing fees decreased approximately $59,000 from 2007 to 2008 due
primarily to monthly amortized financing fees associated with PNC revolving
credit and term note for our original debt and subsequent amendments which
became fully amortized in May 2008. This decrease was offset by
financing fees paid to PNC for Amendment No. 12 which is being amortized over
the term of the amendment, starting from August 2008 and ending July
2012.
Income
Tax
We
provided a valuation allowance on substantially all of our deferred tax
assets. We will continue to monitor the realizability of these net
deferred tax assets and will reverse some or all of the valuation allowance as
appropriate. In making this determination, we consider a number of
factors including whether there is a historical pattern of consistent and
significant profitability in combination with our assessment of forecasted
profitability in the future periods. Such patterns and forecasts
allow us to determine whether our most significant deferred tax assets such as
net operating losses will be realizable in future years, in whole or in
part. These deferred tax assets in particular will require us to
generate taxable income in the applicable jurisdictions in future years in order
to recognize their economic benefits. We do not believe that we have
sufficient evidence to conclude that some or all of the valuation allowance on
deferred tax assets should be reversed. However, facts and
circumstances could change in future years and at such point we may reverse the
allowance as appropriate. For the years ended December 31, 2008 and
2007, we had $0 and $0, respectively, in federal income tax expense, as a result
of a 100% valuation allowance against the deferred tax asset and our alternative
minimum tax liability at December 31, 2008, and $10 and $0, respectively, in
state income taxes. Our net operating loss carryforwards have
not been audited or approved by the Internal Revenue Service.
Discontinued
Operations and Divestitures
Our
discontinued operations encompass our Perma-Fix of Maryland, Inc. (“PFMD”),
Perma-Fix of Dayton, Inc. (“PFD”), and Perma-Fix Treatment Services, Inc.
(“PFTS”) facilities within our Industrial Segment, as well as three previously
shut down locations, Perma-Fix of Pittsburgh, Inc. (“PFP”), Perma-Fix of
Michigan, Inc. (“PFMI”), and Perma-Fix of Memphis, Inc. (“PFM”), three
facilities which were approved as discontinued operations by our Board of
Directors effective November 8, 2005, October 4, 2004, and March 12, 1998,
respectively,
Our
Perma-Fix of Memphis, Inc. facility was reclassed back into discontinued
operations from continuing operations in the fourth quarter of
2009. As noted above, PFM was approved as a discontinued operation by
our Board on March 12, 1998. This decision was the result of an
explosion at the facility in 1997, which significantly disrupted its operations
and the high costs required to rebuild its operations. PFM had been
reported as a discontinued operation until 2001. In 2001, the
facility was reclassified back into continuing operations as we had no other
facilities classified as discontinued operations and its impact on our financial
statements was de minimis. As of December 31, 2009, we reclassified
PFM back into discontinued operations for all periods presented in accordance
with ASC 360, “Property, Plant, and Equipment”.
As
previously reported, we completed the sale of substantially all of the assets of
PFMD, PFD, PFTS, on January 8, 2008, March 14, 2008, and May 30, 2008,
respectively.
Our
discontinued Industrial Segment facilities generated revenues of $0, $3,195,000,
and $19,965,000, for the years ended December 31, 2009, 2008, and 2007,
respectively, and had net income of $50,000 and $926,000 for years ended
December 31, 2009 and 2008, respectively, and net loss of $6,850,000 for the
year ended December 31, 2007. Our net loss in 2007 included
impairment losses of $2,727,000 and $1,804,000 for PFD and PFTS,
respectively. Our net income for 2008 included a gain on disposal of
discontinued operations, net of taxes, of $2,323,000. Our “income from
discontinued operations” on the Consolidated Statement of Operations for the
twelve months ended December 31, 2009, included a recovery of approximately
$400,000 in closure cost for PFTS recorded in the first quarter of
2009. In connection with the divestiture of PFTS above, the buyer of
PFTS’s assets was required to replace our financial assurance bond with its own
financial assurance mechanism for facility closures. Our financial
assurance bond for PFTS was required to remain in place until the buyer has
provided replacement coverage. On March 24, 2009, the appropriate
regulatory authority authorized the release of our financial assurance bond for
PFTS which resulted in the recovery of these closure costs. Our
income from discontinued operations for the twelve months ended December 31,
2009, also included approximately $115,000 in abated interest in connection with
an excise tax audit for fiscal years 1999 to 2006 for PFTS. In the
second quarter of 2009, we recorded approximately $119,000 in interest expense
in connection with this excise tax audit. Additionally, we had a tax benefit of
approximately $76,000 primarily due to a release of a portion of valuation
allowance related to our deferred tax asset at PFMI.
Assets
related to discontinued operations total $825,000 and $761,000 as of December
31, 2009, and 2008, respectively, and liabilities related to discontinued
operations total $2,426,000 and $3,531,000 as of December 31, 2009 and 2008,
respectively.
Non
Operational Facilities
As noted
previously, the Industrial Segment includes three previously shut-down
facilities. These facilities include PFP, PFMI, and
PFM. Our decision to discontinue operations at PFP was due to our
reevaluation of the facility and our inability to achieve profitability at the
facility. During February 2006, we completed the remediation of the
leased property and the equipment at PFP, and released the property back to the
owner. Our decision to discontinue operations at PFMI was principally
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. As a result of the discontinued operations at the
PFMI facility, we were required to complete certain closure and remediation
activities pursuant to our RCRA permit, which were completed in January
2006. In September 2006, PFMI signed a Corrective Action Consent
Order with the State of Michigan, requiring performance of studies and
development and execution of plans related to the potential clean-up of soils in
portions of the property. The level and cost of the clean-up and
remediation are determined by state mandated requirements. During
2006, based on state-mandated criteria, we began implementing the modified
methodology to remediate the facility. In 2009, we incurred
remediation expenditure of $109,000. We have $128,000 accrued for
the closure, as of December 31, 2009, and we anticipate spending $102,000 in
2010 with the remainder over the next four
years. We reduced our accrual by $300,000 in the fourth
quarter of 2009, as a result of a field investigation and
draft Remedial Action Plan which identified substantial reductions in the
anticipated cost of the completion of the remedial site. Based on the
current status of the Corrective Action, we believe that the remaining reserve
is adequate to cover the liability.
As part
of our acquisition of PFM in 1993, we assumed certain liabilities relative to
the removal of contaminated soil and to undergo groundwater remediation at the
facility. 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. The groundwater
remediation at this facility has been ongoing since approximately
1990. With approval of a remediation approach in 2006, PFM began
final remediation of this facility in 2007. In 2008, we completed all
soil remediation with the exception of that associated with the groundwater
remediation. In 2009, we incurred remediation expenditure of
$137,000. In 2009, we also increased our reserve by approximately
$300,000 in the fourth quarter of 2009, a result of increase in costs associated
with delays in receipt of the Corrective Action
Permit. As of December 31, 2009, we have $439,000 accrued
for the closure, which we anticipate spending over the next six
years.
Our PFMI has a pension
payable of $947,000 as of December 31, 2009. The
pension plan withdrawal liability is a result of the termination 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. The recorded liability is based upon a demand
letter received from CST in August 2005 that provided for the payment of $22,000
per month, including interest at 8% per annum, over an eight year
period. This obligation is recorded as a long-term liability, with a
current portion of $199,000 that we expect to pay over the next
year.
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, 2009, we had cash of $141,000. The following table
reflects the cash flow activities during 2009.
(In thousands)
|
|
2009
|
|
Cash
provided by continuing operations
|
|
$ |
9,089 |
|
Cash
used in discontinued operations
|
|
|
(591 |
) |
Cash
used in investing activities of continuing operations
|
|
|
(6,367 |
) |
Cash
provided by investing activities of discontinued
operations
|
|
|
11 |
|
Cash
used in financing activities of continuing operations
|
|
|
(2,130 |
) |
Increase
in cash
|
|
$ |
12 |
|
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 a remittance lock box and is structured to accelerate collection
activities and reduce cash balances, as idle cash is moved without delay to the
revolving credit facility or the Money Market account, if
applicable. The cash balance at December 31, 2009, primarily
represents minor petty cash and local account balances used for miscellaneous
services and supplies.
Operating
Activities
Accounts
Receivable, net of allowances for doubtful accounts, totaled $13,141,000, a
decrease of $275,000 over the December 31, 2008, balance of
$13,416,000. The Nuclear Segment experienced an increase of
approximately $228,000 due primarily to increase invoicing resulting from
increase in revenue. This increase was offset by our improved
collection efforts. The Industrial Segment experienced a decrease of
approximately $616,000 due primarily to a decrease in revenue. The
Engineering Segment experienced an increase of approximately $113,000 due mainly
to increases in revenue.
Unbilled
receivables are generated by differences between invoicing timing and the
percentage of completion methodology used for revenue recognition
purposes. As major processing phases are completed and the costs
incurred, we recognize the corresponding percentage of revenue. We
experience delays in processing invoices due to the complexity of the
documentation that is required for invoicing, as well as the difference between
completion of revenue recognition milestones and agreed upon invoicing terms,
which results in unbilled receivables. The timing differences occur
for several reasons: partially from delays in the final processing of
all wastes associated with certain work orders and partially from delays for
analytical testing that is required after we have processed waste but prior to
our release of waste for disposal. The difference also occurs
due to our end disposal sites requirement of pre-approval prior to our shipping
waste for disposal and our contract terms with the customer that we dispose of
the waste prior to invoicing. These delays usually take several
months to complete. As of December 31, 2009, unbilled receivables
totaled $12,360,000, a decrease of $4,602,000 from the December 31, 2008,
balance of $16,962,000, which reflects our continued efforts to reduce this
balance. The delays in processing invoices, as mentioned above,
usually take several months to complete but are normally considered collectible
within twelve months. However, as we now have historical data to
review the timing of these delays, we realize that certain issues, including but
not limited to delays at our third party disposal site, can exacerbate
collection of some of these receivables greater than twelve
months. Therefore, we have segregated the unbilled receivables
between current and long term. The current portion of the unbilled
receivables as of December 31, 2009 is $9,858,000, a decrease of $3,246,000 from
the balance of $13,104,000 as of December 31, 2008. The long term
portion as of December 31, 2009 is $2,502,000, a decrease of $1,356,000 from the
balance of $3,858,000 as of December 31, 2008.
As of
December 31, 2009, total consolidated accounts payable was $4,927,000, a
decrease of $6,149,000 from the December 31, 2008, balance of
$11,076,000. The decrease was due primarily to improved payments of
our vendor invoices as a result of improved cash from operations and revolver
availability. We continue to negotiate and manage payment terms with
our vendors to maximize our cash position throughout all
segments.
Accrued
Expenses as of December 31, 2009, totaled $6,478,000, a decrease of $2,418,000
over the December 31, 2008, balance of $8,896,000. Accrued expenses
are made up of accrued compensation, interest payable, insurance payable,
certain tax accruals, and other miscellaneous accruals. The decrease
was primarily due payoff of approximately $2,225,000 in interest on the PDC note
in May 2009.
Disposal/transportation
accrual as of December 31, 2009, totaled $2,761,000, a decrease of $3,086,000
over the December 31, 2008 balance of $5,847,000. The decrease was
mainly attributed to the processing of legacy waste at PFNWR
facility. In addition, we reduced the disposal/transportation accrual
by approximately $787,000 in the third quarter of 2009 as a result of our
re-estimate of the cost to dispose of the legacy waste which was part of our
acquisition of PFNWR and PFNW in June 2007.
Our
working capital position at December 31, 2009 was $1,490,000, which includes
working capital of our discontinued operations, as compared to a working capital
deficit of $3,886,000 as of December 31, 2008. In 2009, we made
significant progress in improving our working capital primarily by paying down
our current liabilities from funds generated from operations.
Investing
Activities
During
2009, our purchases of capital equipment totaled approximately $1,643,000 of
which $125,000 was financed, resulting in total net purchases of
$1,518,000. These expenditures were for improvements to operations
primarily within the Nuclear and Industrial Segments. These capital
expenditures were funded by the cash provided by both operations and financing
activities. We have budgeted approximately $2,000,000 for 2010 capital
expenditures for our segments to 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 the initial budget amount. The
initiation and timing of projects are also determined by financing alternatives
or funds available for such capital projects.
In June
2003, we entered into a 25-year finite risk insurance policy with Chartis, a
subsidiary of American International Group, Inc. (“AIG”) (see “Part I, Item 1A.
– Risk Factors” for certain potential risk related to AIG), which provides
financial assurance to the applicable states for our permitted facilities in the
event of unforeseen closure. Prior to obtaining or renewing operating
permits, we are required to provide financial assurance that guarantees to the
states that in the event of closure, our permitted facilities will be closed in
accordance with the regulations. The policy provided an initial
maximum $35,000,000 of financial assurance coverage and has available capacity
to allow for annual inflation and other performance and surety bond
requirements. Our initial finite risk insurance policy required an
upfront payment of $4,000,000, of which $2,766,000 represented the full premium
for the 25-year term of the policy, and the remaining $1,234,000, was deposited
in a sinking fund account representing a restricted cash account. We
are required to make seven annual installments, as amended, of $1,004,000, of
which $991,000 is to be deposited in the sinking fund account, with the
remaining $13,000 represents a terrorism premium. In addition, we are
required to make a final payment of $2,008,000, of which $1,982,000 is to be
deposited in the sinking fund account, with the remaining $26,000 represents a
terrorism premium. In March 2009, we paid our sixth of the eight
required remaining payments. In March 2009, we secured additional
financial assurance coverage of approximately $5,421,000 with Chartis which
enabled our Diversified Scientific Services, Inc. (“DSSI”) facility to receive
and process wastes under an authorization issued by the U.S. Environment
Protection Agency (“EPA”) Region 4 on November 26, 2008 to commercially store
and dispose of Polychlorinated Biphenyls (“PCBs”). We secured this
additional financial assurance coverage requirement by increasing our initial
25-year finite risk insurance policy with Chartis from maximum policy coverage
of $35,000,000 to $39,000,000, of which our total financial coverage amounts to
$35,869,000 as December 31, 2009. Payment for this additional
financial assurance coverage requires a total payment of approximately
$5,219,000, consisting of an upfront payment of $2,000,000 made on March 6,
2009, of which approximately $1,655,000 was deposited into a sinking fund
account, with the remaining representing fee payable to Chartis. In
addition, we are required to make three yearly payments of approximately
$1,073,000 payable starting December 31, 2009, of which $888,000 will be
deposited into a sinking fund account, with the remaining to represent fee
payable to Chartis.
As of
December 31, 2009, we have recorded $9,639,000 in our sinking fund related to
the policy noted above on the balance sheet, which includes interest earned of
$805,000 on the sinking fund as of December 31, 2009. Interest income
for the twelve months ended December 31, 2009, was approximately
$75,000. On the fourth and subsequent anniversaries of the contract
inception, we may elect to terminate this contract. If we so elect,
the Insurer is obligated to 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.
In August
2007, we entered into a second finite risk insurance policy for our PFNWR
facility, which we acquired in June 2007, with Chartis, a subsidiary of
AIG. The policy provides an initial $7,800,000 of financial assurance
coverage with annual growth rate of 1.5%, which at the end of the four year term
policy, will provide maximum coverage of $8,200,000. The policy will
renew automatically on an annual basis at the end of the four year term and will
not be subject to any renewal fees. The policy requires total payment
of $7,158,000, consisting of an initial payment of $1,363,000 and two annual
payments of $1,520,000, payable by July 31, 2008 and July 31, 2009, and an
additional $2,755,000 payment to be made in five quarterly payments of $551,000
beginning September 2007. In July 2007, we paid the initial payment
of $1,363,000, of which $1,106,000 represented premium on the policy and the
remaining was deposited into a sinking fund account. We have made
both of the annual payments of $1,520,000, of which one annual payment was made
in the third quarter of 2009. For each of the $1,520,000 payments,
$1,344,000 was deposited into a sinking fund account and the remaining
represented premium. We have made all of the five quarterly
payments which were deposited into a sinking fund. As of December 31,
2009, we have recorded $5,841,000 in our sinking fund related to this policy on
the balance sheet, which includes interest earned of $141,000 on the sinking
fund as of December 31, 2009. Interest income for the twelve months
ended December 31, 2009 totaled $69,000.
Financing
Activities
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 provided 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 November 27, 2008, as amended. 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. 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 the Agent
reasonably deems proper and necessary. As of December 31, 2009, the
excess availability under our revolving credit was $11,535,000 based on our
eligible receivables.
During
2008, we entered into various Amendments to the PNC Agreement. Under
these Amendments, the due date of the credit facility with PNC was extended to
July 31, 2012, the method of calculating the fixed charge coverage ratio
covenant contained in the loan agreement in each quarter of 2008 was modified,
and our Term Loan was increased back up to $7,000,000 from the principal
outstanding balance of $0, with the revolving line of credit remaining at
$18,000,000. The Term Loan continues to be payable in monthly
installments of approximately $83,000, plus accrued interest, with the remaining
unpaid principal balance and accrued interest, payable by July 31,
2012. We agreed to pay PNC 1.0% of the total financing in the event
we pay off our obligations on or prior to August 4, 2009 and 1/2% of the total
financing if we pay off our obligations on or after August 5, 2009, but prior to
August 4, 2010. No early termination fee shall apply if we pay off
our obligation after August 5, 2010. We agreed to grant mortgages to
PNC as to certain of our facilities not previously granted to PNC under the
Agreement. The $7,000,000 in loan proceeds was used to reduce our
revolver balance and our current liabilities.
On March
5, 2009, we entered into another Amendment with PNC Bank to our
Agreement. This Amendment increased our borrowing availability by
approximately an additional $2,200,000. In addition, pursuant to the
Amendment, monthly interest due on our revolving line of credit was amended from
prime plus 1/2% to prime plus 2.0% and monthly interest due on our Term Loan was
amended from prime plus 1.0% to prime plus 2.5%. The Company also has
the option to pay monthly interest due on the revolving line of credit by using
the London Interbank Offer Rate (“LIBOR”), with the minimum floor base LIBOR
rate of 2.5%, plus 3.0% and to pay monthly interest due on the Term Loan using
the minimum floor base LIBOR rate of 2.5%, plus 3.5%. In addition,
the Amendment also allowed us to retain funds received from the sale of our PFO
property. All other terms and conditions to the credit facility
remain principally unchanged. Funds made available under this
Amendment were used to secure the additional financial assurance coverage needed
by our DSSI subsidiary to operate under an authorization issued by the EPA on
November 26, 2008 to treat and dispose of PCBs as discussed
previously.
Additionally,
on January 25, 2010, we entered into another Amendment with PNC Bank, which
amends the interest rate to be paid under the LIBOR option. Under
this Amendment, we and PNC agreed to lower the floor on the LIBOR interest rate
option by 150 basis points to 1.0% from 2.5%, allowing for minimum interest rate
floor under the LIBOR option on the outstanding balances of our term loan and
revolving line of credit of 4.5% and 4.0%, respectively. The prime
rate option of prime plus 2.5% and 2.0% in connection with our term loan and
revolving line of credit, respectively, was not changed under the
Amendment. All other terms of the Loan Agreement, as amended prior to
the Amendment, remain principally unchanged.
Our
credit facility with PNC Bank contains certain financial covenants, along with
customary representations and warranties. A breach of any of these
financial covenants, unless waived by PNC, could result in a default under our
credit facility triggering our lender to immediately require the repayment of
all outstanding debt under our credit facility and terminate all commitments to
extend further credit. We have met our financial covenants in each of
the quarters in 2009 and we expect to meet our financial covenants in 2010 and
beyond. The following table illustrates the most significant
financial covenants under our credit facility and reflects the quarterly
compliance required by the terms of our senior credit facility as of December
31, 2009:
|
|
Quarterly
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
(Dollars
in thousands)
|
|
Requirement
|
|
|
Actual
|
|
|
Actual
|
|
|
Actual
|
|
|
Actual
|
|
Senior
Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charge coverage ratio
|
|
1:25:1
|
|
|
2:01:1
|
|
|
1:63:1
|
|
|
2:11:1
|
|
|
2:79:1
|
|
Minimum
tangible adjusted net worth
|
|
$ |
30,000 |
|
|
$ |
51,065 |
|
|
$ |
51,878 |
|
|
$ |
55,229 |
|
|
$ |
61,168 |
|
In
connection with our acquisition of M&EC, M&EC issued a promissory note
in the principal amount of $3,700,000, together with interest at an annual rate
equal to the applicable law rate pursuant to Section 6621 of the Internal
Revenue Code, to Performance Development Corporation (“PDC”), dated June 25,
2001, for monies advanced to M&EC by PDC and certain services performed by
PDC on behalf of M&EC prior to our acquisition of M&EC. The
principal amount of the promissory note was payable over eight years on a
semiannual basis on June 30 and December 31, with a final principal payment to
be made by December 31, 2008. All accrued and unpaid interest on the
promissory note was payable in one lump sum on December 31, 2008. PDC
directed M&EC to make all payments under the promissory note directly to the
IRS to be applied to PDC’s obligations to the IRS. On December 29,
2008, M&EC and PDC entered into an amendment to the promissory note, whereby
the outstanding principal and accrued interest due under the promissory note
totaling approximately $3,066,000 is to be paid in the following
installments: $500,000 payment to be made by December 31, 2008 and
five monthly payment of $100,000 to be made starting January 27, 2009, with the
balance consisting of accrued and unpaid interest due on June 30,
2009. We made the $500,000 payment on December 31, 2008, with the
remaining balance consisting of interest only. On May 13,
2009, we paid the outstanding balance of approximately $2,225,000, which
consisted of interest only, on the PDC promissory note directly to the IRS which
satisfied M&EC’s obligations to PDC in full.
In
conjunction with our acquisition of PFNWR, we agreed to pay shareholders of
Nuvotec that qualified as accredited investors, pursuant to Rule 501 of
Regulation D promulgated under the Securities Act of 1933, including Robert
Ferguson, who resigned as a member of our Board of Directors effective February
27, 2010, $2,500,000, with principal payable in equal installment of $833,333 on
June 30, 2009, June 30, 2010, and June 30, 2011. Interest is accrued
on the outstanding principal balance at 8.25% starting in June 2007 and is
payable on June 30, 2008, June 30, 2009, June 30, 2010, and June 30,
2011. In June 2009, we paid the first principal installment of
$833,333, along with accrued interest. Interest paid as of December
31, 2009 totaled $422,000, of which $206,000 was paid in June
2009. Interest accrued as of December 31, 2009 totaled approximately
$69,000. See “Related Party Transactions” in this Management and
Discussion Analysis of Financial Condition and Results of Operations” regarding
Mr. Robert Ferguson.
On May 8,
2009, the Company entered into a Loan and Securities Purchase Agreement
(“Agreement”) with William N. Lampson and Diehl Rettig (collectively, the
“Lenders”). Mr. Lampson was formerly a major shareholder of Nuvotec
USA, Inc. (n/k/a Perma-Fix Northwest, Inc. (“PFNW”)) and its wholly owned
subsidiary, Pacific EcoSolutions, Inc. (n/k/a Perma-Fix Northwest Richland, Inc.
(“PFNWR”)) prior to our acquisition of PFNW and PFNWR, and Mr. Rettig was
formerly a shareholder of, and counsel for, Nuvotec USA, Inc. and its
subsidiaries at the time of our acquisition and following the acquisition has
continued to perform certain legal services for PFNWR. Both of the
Lenders are also stockholders of the Company having received shares of our
Common Stock in connection with our acquisition of PFNW and
PFNWR. Under the Agreement, we entered into a Promissory Note
(“Note”) with the Lenders in the amount of $3,000,000, which was used primarily
to pay off the promissory note, dated June 25, 2001, as amended on December 28,
2008, entered into by our M&EC subsidiary with PDC as mentioned previously,
with the remaining funds used for working capital purposes. The Note
provides for monthly principal repayment of approximately $87,000 plus accrued
interest, starting June 8, 2009, and on the 8th day of each month thereafter,
with interest payable at LIBOR plus 4.5%, with LIBOR at least
1.5%. Any unpaid principal balance along with accrued interest is due
May 8, 2011. We paid approximately $22,000 in closing costs for the
Note which is being amortized over the terms of the note. The Note
may be prepaid at anytime by the Company without penalty. As
consideration of the Company receiving this loan, we issued a Warrant to Mr.
Lampson and a Warrant to Mr. Diehl to purchase up to 135,000 and 15,000 shares,
respectively, of the Company’s Common Stock (“Warrant Shares”) at an exercise
price of $1.50 per share. The Warrants are exercisable six months
from May 8, 2009 and expire two years from May 8, 2009. We estimated
the fair value of the Warrants to be approximately $190,000 using the
Black-Scholes option pricing model with the following
assumption: 70.47% volatility, risk free interest rate of 1.0%, an
expected life of two years and no dividends. We also issued an
aggregate of 200,000 shares of the Company’s Common Stock with Mr. Lampson
receiving 180,000 shares and Mr. Rettig receiving 20,000 shares of the Company’s
Common Stock (“Shares”). We determined the fair value of the 200,000
shares of Common Stock to be $476,000 which was based on the closing price of
the stock of $2.38 per share on May 8, 2009. The fair value of the
Warrants and Common Stock was recorded as a debt discount and is being amortized
over the term of the loan as interest expense – financing fees. Debt
discount amortized as of December 31, 2009 totaled approximately
$216,000. The Principal balance outstanding as of December 31, 2009
totaled approximately $1,938,000 which is net of the debt discount recorded of
$666,000 and amortized as noted above.
Under the
terms of the Agreement and Note, if the Company defaults in payment of any
principal or interest under the Note and such default continues for 30 days, the
Lenders shall have the right to declare the Note immediately due and payable and
to have payment of the remaining unpaid principal amount and accrued interest
(“Payoff Amount”) in one of the two methods, at their option:
|
·
|
subject
to certain limitations and pursuant to an exemption from registration
under Section 4(2) of the Act and/or Rule 506 of Regulation D, in shares
of Company Common Stock, with the number of shares to be issued determined
by dividing the unpaid principal balance as of the date of default, plus
accrued interest, by a dollar amount equal to the closing bid price of the
Company’s Common Stock on the date of default as reported on the National
Association of Securities Dealers Automated Quotation System (“NASDAQ”)
(“Payoff Shares”). The Payoff Amount is to be paid as
follows: 90% to Mr. Lampson and 10% to Mr.
Rettig.
|
The
aggregate number of Shares, Warrant Shares, and Payoff Shares that are to be
issued to the Lenders under the Agreement and Note, together with the aggregate
shares of the Company’s Common Stock and other Company voting securities owned
by the Lenders as of the date of issuance of the Payoff Shares, if any, shall
not exceed:
|
·
|
the
number of shares equal to 19.9% of the number of shares of the Company’s
Common Stock issued and outstanding as of the date of the Agreement,
or
|
|
·
|
19.9%
of the voting power of all of the Company’s voting securities issued and
outstanding as of the date of the
Agreement.
|
Pursuant
to the merger agreement relating to our acquisition of PFNW and PFNWR in June
2007, we are required to pay to those former shareholders of PFNW immediately
prior to our acquisition, which includes Robert L. Ferguson (“Ferguson”), who
resigned as a member of our Board of Directors effective February 27,
2010, an earn-out amount upon meeting certain conditions for each
fiscal period ending June 30, 2008, June 30, 2009, June 30, 2010, and June 30,
2011, with the aggregate earn-out amount to be paid by us not to exceed the sum
of $4,552,000, as amended (See “Related Party Transaction” in this section for
information regarding Mr. Ferguson). Under the agreement, the
earn-out amount to be paid for any particular fiscal year is to be an amount
equal to 10% of the amount that the revenues of our nuclear business (as
defined) for such fiscal year exceeds the budgeted amount of revenues for our
nuclear business for that particular period, with the first $1,000,000 being
placed in an escrow account for a period of two years from the date that the
full $1,000,000 is placed in escrow for losses suffered or to be suffered by us,
PFNW, and PFNWR under the sellers’ and its shareholders’ indemnification
obligations. No earn-out was required to be paid for fiscal 2008, and
for 2009 we were required to pay an earn-out of approximately $734,000, which
was recorded as an increase to goodwill for PFNWR in the second quarter of
2009. Under the merger agreement, the former shareholders established
a liquidating trust in which Ferguson and William Lampson (“Lampson”) were
appointed trustees and were further appointed as representatives of the former
shareholders in connection with matters arising under the merger
agreement. Prior to payment of the earn-out amount of approximately
$734,000 for fiscal year 2009, we negotiated an amendment to the merger
agreement with Ferguson and Lampson (as representatives for the former
shareholders and as trustees under the liquidating trust) and the paying agent
for the former shareholders and entered into an amendment that provides as
follows:
|
·
|
The
termination of the escrow arrangement. As a result, the
earn-out amount for the fiscal period ended June 30, 2009 in the amount of
approximately $734,000 was deposited by us on September 30, 2009, with the
paying agent in full and complete satisfaction of our obligations in
connection with the earn-out for the fiscal period ended June 30,
2009.
|
|
·
|
Any
indemnification obligations payable to us under the merger agreement will
be deducted (“Offset Amount”) from any earn-out amounts payable by us for
the fiscal periods ended June 30, 2010, and June 30, 2011. The
Offset Amount for the fiscal year ended June 30, 2010, will include the
sum of approximately $93,000, of which approximately $60,000 represents
excise tax assessment issued by the State of Washington for the annual
periods 2005 to 2007, with the remaining representing a refund request
from a PEcoS customer in connection with service for waste treatment prior
to our acquisition of PFNWR and PFNW. The Offset Amount may be
revised by us by written notice to the representatives pursuant to the
merger agreement.
|
|
·
|
We
may elect to pay any future earn-out amounts payable under the merger
agreement for each of the fiscal periods ended June 30, 2010, and 2011,
less the Offset Amount, in excess of $1,000,000 by means of a three year
unsecured promissory note bearing an annual rate of 6.0%, payable in 36
equal monthly installments.
|
On July
28, 2006, our Board of Directors authorized a common stock repurchase program to
purchase up to $2,000,000 of our Common Stock, through open market and privately
negotiated transactions, with the timing, the amount of repurchase transactions
and the prices paid under the program as deemed appropriate by management and
dependent on market conditions and corporate and regulatory
considerations. We plan to fund any repurchases under this
program through our internal cash flow and/or borrowing under our line of
credit. As of the date of this report, we have not repurchased any of
our Common Stock under the program as we continue to evaluate this repurchase
program within our internal cash flow and/or borrowings under our line of
credit.
On April
8 2009, the Company filed a shelf registration statement on Form S-3 with the
U.S. Securities and Exchange Commission (“SEC”), which was declared effective by
the SEC on June 26, 2009. The shelf registration statement gives the
Company the ability to sell up to 5,000,000 shares of its Common Stock from time
to time and through one or more methods of distribution, subject to market
conditions and the Company’s capital needs at that time. The terms of
any offering under the registration statement will be established at the time of
the offering. The Company does not have any immediate plans or
current commitments to issue shares under the registration
statement.
Our 2004
Stock Option Plan (“2004 Option Plan”), which was approved by our stockholder at
our 2004 Annual Meeting of Stockholders on July 28, 2004, provides grants of
stock options to employees to enhance the Company’s ability to attract, retain,
and reward qualified employees, and to provide incentive for such employees to
render outstanding service to the Company and its stockholders. The
2004 Option Plan allows for the issuance of 2,000,000 shares of our Common
Stock. On May 1, 2009, our Board of Directors approved a First
Amendment to the 2004 Option Plan to increase from 2,000,000 to 3,000,000 the
number of shares of our Common Stock reserved for issuance under the 2004 Option
Plan, subject to the approval by our stockholders. At the time of the
approval of the First Amendment by our Board of Director, 166,502 shares of our
Common Stock had been issued under the 2004 Option Plan and 1,832,499 shares
were issuable under outstanding options. As a result, only 999 shares
of our Common Stock remained available for issuance under the 2004 Option
Plan. On July 29, 2009, our shareholders did not approve the First
Amendment to the 2004 Option Plan at our Annual Meeting of
Stockholders.
During
2009, we issued an aggregate of 357,822 shares of our Common Stock upon exercise
of 347,822 employee stock options, at exercise prices ranging from $1.25 to
$1.86 and 10,000 outside director options, at exercise price of $1.25. Total
proceeds received during 2009 related to option exercises totaled approximately
$631,000.
In
summary, funds generated primarily from our operations have positively impacted
our working capital in 2009. We continue to take steps to improve our
operations and liquidity and to invest working capital into our facilities to
fund capital additions for our Segments. Although there are no
assurances, we believe that our cash flows from operations and our available
liquidity from our line of credit are sufficient to service the Company’s
current obligations.
Contractual
Obligations
The
following table summarizes our contractual obligations at December 31, 2009, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods, (in thousands):
|
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
|
2011-
2012
|
|
|
|
2013 -
2014
|
|
|
After
2014
|
|
Long-term
debt (1)
|
|
$ |
12,831 |
|
|
$ |
3,050 |
|
|
$ |
9,726 |
|
|
$ |
55 |
|
|
$ |
¾ |
|
Interest
on fixed rate long-term debt (2)
|
|
|
206 |
|
|
|
137 |
|
|
|
69 |
|
|
|
¾ |
|
|
|
— |
|
Interest
on variable rate debt (3)
|
|
|
994 |
|
|
|
486 |
|
|
|
508 |
|
|
|
¾ |
|
|
|
¾ |
|
Operating
leases
|
|
|
1,659 |
|
|
|
652 |
|
|
|
743 |
|
|
|
264 |
|
|
|
¾ |
|
Finite
risk policy (4)
|
|
|
6,231 |
|
|
|
3,150 |
|
|
|
3,081 |
|
|
|
¾ |
|
|
|
¾ |
|
Pension
withdrawal liability (5)
|
|
|
947 |
|
|
|
199 |
|
|
|
447 |
|
|
|
301 |
|
|
|
¾ |
|
Environmental
contingencies (6)
|
|
|
1,727 |
|
|
|
526 |
|
|
|
557 |
|
|
|
282 |
|
|
|
362 |
|
Earn
Out Amount - PFNWR (7)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchase
obligations (8)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
contractual obligations
|
|
$ |
24,595 |
|
|
$ |
8,200 |
|
|
$ |
15,131 |
|
|
$ |
902 |
|
|
$ |
362 |
|
(1)
|
Amount
excludes debt discount recorded and amortized of approximately $128,000
for the two Warrants and $322,000 for the 200,000 shares of the Company
Stock issued in connection with the $3,000,000 loan between the Company
and Mr. William Lampson and Mr. Diehl Rettig. See Liquidity and
Capital Resources – Financing activities earlier in this Management’s
Discussion and Analysis for further discussion on the debt
discount.
|
(2)
|
In
conjunction with our acquisition of PFNWR and PFNW, which was completed on
June 13, 2007, we agreed to pay shareholders of Nuvotec that qualified as
accredited investors pursuant to Rule 501 of Regulation D promulgated
under the Securities Act of 1933, $2,500,000, with principal payable in
equal installment of $833,333 on June 30, 2009, June 30, 2010, and June
30, 2011. Interest is accrued on outstanding principal balance
at 8.25% starting in June 2007 and is payable on June 30, 2008, June 30,
2009, June 30, 2010, and June 30,
2011.
|
(3)
|
We
have variable interest rates on our Term Loan and Revolving Credit of 2.5%
and 2.0% over the prime rate of interest, respectively, as amended, or
variable interest rates on our Term Loan and Revolving Credit of 3.5% and
3.0%, respectively, over the minimum floor base LIBOR of 1.0%, as amended,
and as such we have made certain assumptions in estimating future interest
payments on this variable interest rate debt. Our calculation of interests
on our Term Loan and Revolving Credit was estimated using the more
favorable LIBOR option and we assumed an increase of 1/2% over the minimum
LIBOR of 1.0% in each of the years 2010 through July 2012. In
addition, we have a $3,000,000 promissory note with Mr. William Lampson
and Mr. Diehl Rettig which pays interest at LIBOR plus 4.5%, with LIBOR of
at least 1.5%. We also assumed an increase of 1/2% over the
minimum LIBOR of 1.5% in calculating interests on the
loan.
|
(4)
|
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.
|
(5)
|
The
pension withdrawal liability is the estimated liability to us upon
termination of our union employees at our discontinued operation,
PFMI. See Discontinued Operations earlier in this section for
discussion on our discontinued
operation.
|
(6)
|
The
environmental contingencies and related assumptions are discussed further
in the Environmental Contingencies section of this Management’s Discussion
and Analysis, and are based on estimated cash flow spending for these
liabilities. The environmental contingencies noted are for
PFMI, PFM, PFSG, and PFD, which are the financial obligations of the
Company. The environmental liability, as it relates to the
remediation of the EPS site assumed by the Company as a result of the
original acquisition of the PFD facility, was retained by the Company upon
the sale of PFD in March
2008.
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In
connection with the acquisition of PFNW and PFNWR in June 2007, we are
required to pay to those former shareholders of PFNW immediately prior to
our acquisition, if certain revenue targets are met, an earn-out amount
for each fiscal year ending June 30, 2008, to June 30, 2011, with the
aggregate of the full earn-out amount not to exceed $4,552,000, pursuant
to the Merger Agreement, as amended. No earn-out was required
to be paid for fiscal 2008 and we paid $734,000 in earn out for the fiscal
2009 in the third quarter of 2009. Pursuant to the amended
Merger Agreement, any indemnification obligations payable to the Company
by Nuvotec, PEcoS, and the former shareholders will be deducted (“Offset
Amount”) from any earn-out amounts payable by the Company for the fiscal
year ending June 30, 2010, and June 30, 2011. The Offset Amount
for the twelve month period ending June 30, 2010 will include the sum of
approximately $93,000, of which approximately $60,000 represents excise
tax assessment issued by the State of Washington for the annual period
2005 to 2007, with the remaining representing a refund request from a
PEcoS customer in connection with service for waste treatment prior to our
acquisition of PFNWR and PFNW. The Company may elect to pay any
future earn-out amounts in excess of $1,000,000 after the Offset Amount,
for each fiscal year ended June 30, 2010, and 2011 by means of a three
year unsecured promissory note bearing an annual rate of 6.0%, payable in
36 equal monthly installments due on the 15th
day of each months. See “Financing Activities” in this
“Management and Discussion and Analysis of Financial Condition and Results
of Operations” for further information on the earn-out
amount.
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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.
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Critical
Accounting Estimates
In
preparing the consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America, 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. We utilize a 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 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 (ranging from 20% to 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 revenue and the associated costs of
transportation and burial. The waste streams in our Industrial
Segment are much less complicated, and services are rendered shortly after
receipt, as such we do not use percentage of completion estimates in our
Industrial segment. We review and evaluate our revenue recognition
estimates and policies on a quarterly basis. Under our
subcontract awarded by CHPRC in 2008, we are reimbursed for costs incurred plus
a certain percentage markup for indirect costs, in accordance with contract
provision. Costs incurred on excess of contract funding may be
renegotiated for reimbursement. We also earn a fee based on the
approved costs to complete the contract. We recognize this fee using
the proportion of costs incurred to total estimated contract
costs.
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
uncollectible. 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 balances that are
uncollectible. 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 0.3% of revenue for
2009 and 2.2%, of accounts receivable as of December 31,
2009. Additionally, this allowance was approximately 0.4% of revenue
for 2008 and 2.4% of accounts receivable as of December 31, 2008.
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 identifiable assets acquired or goodwill and the
recognized value of the permits required to operate 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. We test each Segment’s (or
Reporting Unit’s) goodwill and permits, separately, for impairment, annually as
of October 1. Our annual impairment test as of October 1, 2009 and
2008 resulted in no impairment of goodwill and permits. The
methodology utilized in performing this test estimates the fair value of our
operating segments using a discounted cash flow valuation
approach. Those cash flow estimates incorporate assumptions that
marketplace participants would use in their estimates of fair
value. The most significant assumptions used in the discounted cash
flow valuation regarding each of the Segment’s fair value in connection with
goodwill valuations are: (1) detailed five year cash flow
projections, (2) the risk adjusted discount rate, and (3) the expected long-term
growth rate. The primary drivers of the cash flow projection in 2009
include sales revenue and projected margin which are based on our current
revenue, projected government funding as it relates to our existing government
contracts and future revenue expected as part of the government stimulus
plan. The risk adjusted discount rate represents the weighted average
cost of capital and is established based on (1) the 20 year risk-free rate,
which is impacted by events external to our business, such as investor
expectation regarding economic activity, (2) our required rate of return on
equity, and (3) the current after tax rate of return on debt. In
valuing our goodwill for 2009, risk adjusted discount rate of 19% was used for
the Nuclear and Industrial Segment and 16% for our Engineering
Segment. As of October 1, 2009, the fair value of our reporting units
exceeds carrying value by approximately $19,869,000, $887,000, and $2,584,000
for the Nuclear, Engineering, and Industrial Segment, respectively.
In the
fourth quarter of 2009, we reclassified approximately $806,000 in costs incurred
from 2005 to 2007 from our Perma-Fix of Florida’s (“PFF”) construction in
process account to permit. These costs were originally incurred in
connection with a major capital project at PFF, which has been placed on hold
indefinitely. Upon further evaluation and analysis of the costs
related to this project, we determined that the $806,000 in costs incurred were
related directly to the expansion of our operating permit at PFF, which
we included in our annual intangible asset valuation review conducted
as of October 1, 2009. We also reclassified this adjustment to our
prior period balance sheets to reflect these costs as permit in process and
permit in the appropriate years since as of December 31, 2005. We did
not amend our filings as this correction was not considered material to the
Consolidated Balance Sheet and had no impact on our Consolidated Statement of
Operations, income per share, accumulated deficit or our cash
flows. In addition, this correction would not have resulted in
impairment charges from our annual intangible asset valuation reviews conducted
since October 1, 2005.
Intangible
assets that have definite useful lives are amortized using the straight-line
method over the estimated useful lives and are excluded from our annual
intangible asset valuation review conducted as of October 1. On
November 26, 2008, the U.S. EPA Region 4 issued an authorization to DSSI to
commercially store and dispose of radioactive PCBs. DSSI began the
permitting process to add Toxic Substances Control Act (“TSCA”) regulated
wastes, namely PCBs, containing radioactive constituents to its authorization in
2004 in order to meet the demand for the treatment of government and
commercially generated radioactive PCB wastes. Waste operation under this
authorization commenced in the first quarter of 2009. Costs incurred
in connection with this authorization in the amount of approximately $545,000
were capitalized in Permits in the first quarter of 2009 and are being amortized
over a ten year period in accordance with its estimated useful
life.
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 income tax purposes. Generally, annual depreciation rates range
from ten to forty 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 amortized over the lesser of the term 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 improvement, which extend
the useful lives of the assets, are capitalized. We include within
buildings, asset retirement obligations, which represents our best estimates of
the cost to close, at some undetermined future date, our permitted and/or
licensed facilities. In 2008, due to change in estimate of the costs
to close our DSSI and PFNWR facility based on federal/state regulatory
guidelines, we increased our asset retirement obligation by $726,000 and
$373,000 for our DSSI and PFNWR facility, respectively, which has been
depreciated prospectively over the remaining life of the asset. In
the first quarter of 2009, we increased our asset retirement obligation for our
DSSI facility by $1,980,000 due to the change in estimate of the costs to close
our DSSI facility based on federal/state regulatory guidelines as result of an
authorization that we received from the U.S. EPA Region 4 in November 2008 to
treat PCB wastes. In the fourth quarter of 2009, we also increased
our asset retirement obligation for our PFSG facility by $158,000 based on
change in estimates of the costs to close this facility based federal/state
regulatory guidelines. Adjustments to the asset retirement
obligations for these facilities are being depreciated prospectively over the
remaining of the asset, in accordance with Accounting Standards Codification
(“ASC”) 410, “Asset Retirement and Environmental Obligations”.
In
accordance with ASC 360, “Property, Plant, and Equipment”, long-lived assets,
such as property, plant and equipment, and purchased intangible assets subject
to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
In 2007,
as result of the approved divestiture of our Industrial Segment by our Board of
Directors and in accordance with ASC 360, we recorded $2,727,000 and $1,804,000
in tangible asset impairment loss for PFD and PFTS, respectively, which were
included in “loss from discontinued operations, net of taxes” on our
Consolidated Statements of Operations for the year ended December 31,
2007.
In
September 2008, our Board of Directors approved retaining our Industrial Segment
facilities/operations at PFFL, PFSG, and PFO. As a result of this
decision, we reclassified these three facilities/operations back into our
continuing operations. Asset impairment losses of $1,329,000 and
$507,000 were recorded in 2007 for PFSG and PFO, respectively, and were
reclassified and included in “Asset impairment loss” in our Consolidated
Statements of Operations for the year ended December 31, 2007. During
the third quarter of 2008, we classified one of the two properties at PFO as
“net property and equipment held for sale” within our continued operations in
the Consolidated Balance Sheets in accordance to ASC 360. We
evaluated the fair value of PFO’s assets and as a result, recorded a credit of
$507,000 related to the recovery of previous impairment charges for PFO, which
was included in “Asset Impairment Recovery” on the Consolidated Statements of
Operations for the year ended December 31, 2008. On December 23,
2008, we sold the property at PFO for $900,000 in cash resulting in a gain of
$483,000.
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 Resource
Conservation and Recovery Act (“RCRA”). Such costs are evaluated
annually and adjusted for inflationary factors (for 2009, the average
inflationary factor was approximately 2.4%) and for approved changes or
expansion to the facilities. 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.
Accrued Environmental
Liabilities. We have four remediation projects currently in
progress. The current and long-term accrual amounts for the projects
are our best estimates based on proposed or approved processes for
clean-up. The circumstances that could affect the outcome range from
new technologies that are being developed every day to reduce our overall costs,
to increased contamination levels that could arise as we complete remediation
which could increase our costs, neither of which we anticipate at this
time. In addition, significant changes in regulations could adversely
or favorably affect our costs to remediate existing sites or potential future
sites, which cannot be reasonably quantified. In connection with the
sale of our PFD facility in March 2008, the Company retained the environmental
liability for the remediation of an independent site known as
EPS. This liability was assumed by the Company as a result of the
original acquisition of the PFD facility. In connection with the sale
of our PFTS facility in May 2008, the remaining environmental reserve of
approximately $35,000 was recorded as a “gain on disposal of discontinued
operation, net of taxes” in the second quarter of 2008 on our “Consolidated
Statement of Operations” as the buyer has assumed any future on-going
environmental monitoring. The environmental liabilities of PFM, PFMI,
PFSG, and PFD remain the financial obligations of the Company.
Disposal/Transportation
Costs. We accrue for waste disposal based upon a physical count of the
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.
Stock-Based Compensation. We
account for stock-based compensation in accordance with ASC 718, “Compensation –
Stock Compensation”. ASC 718 establishes accounting standards for
entity exchanges of 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. ASC 718 requires all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. The Company uses the
Black-Scholes option-pricing model to determine the fair-value of stock-based
awards which requires subjective assumptions. Assumptions used to
estimate