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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 1-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
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State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
----------------------------- -----------------------------------------
Common Stock, $.001 Par Value Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-----------------------------
Common Stock, $.001 Par Value NASDAQ Capital Markets
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 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, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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, 2005), was
approximately $76,216,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed to
be affiliates. Capital Bank GRAWE Gruppe AG is not considered an affiliate based
on representations made to the Registrant by Capital Bank. Such determination
should not be deemed an admission that such directors or officers, are, in fact,
affiliates of the Registrant. The Company's Common Stock is listed on the NASDAQ
SmallCap market and the Boston Stock Exchange.
As of March 27, 2006, there were 44,836,926 shares of the registrant's Common
Stock, $.001 par value, outstanding, excluding 988,000 shares held as treasury
stock.
Documents incorporated by reference: none
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
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PART I
Item 1. Business............................................................................. 1
Item 1A. Risk Factors......................................................................... 13
Item 1B. Unresolved Staff Comments............................................................ 18
Item 2. Properties........................................................................... 18
Item 3. Legal Proceedings.................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 22
Item 6. Selected Financial Data.............................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations............................................................ 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 46
Special Note Regarding Forward-Looking Statements.................................... 47
Item 8. Financial Statements and Supplementary Data.......................................... 49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................. 86
Item 9A. Controls and Procedures.............................................................. 87
Item 9B. Other Information.................................................................... 89
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 90
Item 11. Executive Compensation............................................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 97
Item 13. Certain Relationships and Related Transactions....................................... 100
Item 14. Principal Accountant Fees and Services............................................... 101
PART IV
Item 15. Exhibits and Financial Statement Schedules........................................... 103
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW AND PRINCIPAL PRODUCTS AND SERVICES
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
o Environmental Services, including emergency response, vacuum services,
marine environmental and other remediation services.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o 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;
o Nuclear, low-level radioactive, and mixed waste treatment, processing
and disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Consulting services regarding broad-scope environmental issues,
including environmental management programs, regulatory permitting,
compliance and auditing, landfill design, field testing and
characterization.
We have grown through both acquisitions and internal growth. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the Nuclear and Industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear waste, mixed waste and industrial waste.
We service research institutions, commercial companies, public utilities and
governmental agencies nationwide. The distribution channels for our services are
through direct sales to customers or via intermediaries.
We were incorporated in December of 1990. Our executive offices are located at
1940 N.W. 67th Place, Gainesville, Florida 32653.
WEBSITE ACCESS TO COMPANY'S REPORTS
Our internet website address is www.perma-fix.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission ("Commission").
1
SEGMENT INFORMATION AND FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
During 2005, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
o a business activity from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president and chief
operating officer to make decisions about resources to be allocated and
assess its performance; and
o for which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments, however, exclude the Corporate headquarters, which does
not generate revenue, Perma-Fix of Michigan Inc. ("PFMI") and Perma-Fix of
Pittsburgh, Inc. ("PFP"), two discontinued operations.
Most of our activities are conducted nationwide, however, our Industrial segment
maintains a significant focus on the Eastern and Midwest portions of the United
States. We had no foreign operations or export sales during 2005.
OPERATING SEGMENTS
We have three operating segments, which represent each business line that we
operate. The Industrial segment, which operates six facilities, the Nuclear
segment, which operates three facilities, and the Consulting Engineering
Services segment as described below:
INDUSTRIAL WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services of hazardous and non-hazardous waste
(solids and liquids) through six permitted treatment and/or disposal facilities
and numerous related operations provided by our other field office locations, as
discussed below.
Perma-Fix Treatment Services, Inc. ("PFTS") is a Resource Conservation and
Recovery Act of 1976 ("RCRA") permitted treatment, storage and disposal ("TSD")
facility located in Tulsa, Oklahoma. PFTS stores and treats hazardous and
non-hazardous waste liquids, provides waste transportation and disposal of
non-hazardous liquid waste via its on-site Class I Injection Well located at the
facility. The injection well is permitted for the disposal of non-hazardous
liquids and characteristic hazardous wastes that have been treated to remove the
hazardous characteristic. PFTS operates a non-hazardous wastewater treatment
system for oil and solids removal, a corrosive treatment system for
neutralization and metals precipitation, and a container stabilization system.
The injection well is controlled by a computer system to assist in achieving
compliance with all applicable state and federal regulations. See "Permits and
Licenses" under this Item, Item 1A "Risk Factors" and Item 3 "Legal Proceedings"
for a discussion of a proposed consent order proposed by the Oklahoma Department
of Environmental Quality ("ODEQ") relating to PFTS.
Perma-Fix of Dayton, Inc. ("PFD") is a RCRA permitted treatment and storage
facility located in Dayton, Ohio. PFD has four main processing areas. The four
production areas are a RCRA permitted treatment and storage, a centralized
wastewater treatment area, a used oil recycling area, and a non-hazardous solids
solidification area. Hazardous waste accepted under the RCRA permit is typically
drum waste, which is bulked and sent off as a fuel, for incineration or
stabilization. Wastewaters accepted at the facility include hazardous and
non-hazardous wastewaters, which are treated by ultra filtration, metals
precipitation and bio-degradation, including a biological wastewater process.
Waste industrial oils and used motor oils are processed through high-speed
centrifuges to produce a high quality fuel that is sold to and burned by
industrial burners. See discussion below under "Permits and Licenses" under this
Item, Item 1A "Risk Factors" and Item 3 "Legal Proceedings" for a discussion as
to certain actions brought by the U.S. Environmental Protection Agency ("EPA")
and others alleging that PFD does not have the proper air permits under federal
and certain state Clean Air Acts.
2
Perma-Fix of Ft. Lauderdale, Inc. ("PFFL") is a permitted facility located in
Ft. Lauderdale, Florida. PFFL collects and treats wastewaters, oily wastewaters,
used oil and other off-specification petroleum-based products, some of which may
potentially be recycled into usable products. Key activities at PFFL include
process cleaning and material recovery, production and sales of on-specification
fuel oil, custom tailored waste management programs and hazardous material
disposal and recycling materials from generators such as the cruise line and
marine industries.
Perma-Fix of Orlando, Inc. ("PFO"), is a RCRA permitted treatment and storage
facility located in Orlando, Florida. PFO collects, stores and treats hazardous
and non-hazardous wastes out of two processing buildings, under one of our most
inclusive permits. PFO is also a transporter of hazardous waste and operates a
transfer facility at the site.
Perma-Fix of South Georgia, Inc. ("PFSG"), is a RCRA permitted treatment and
storage facility located in Valdosta, Georgia. PFSG provides storage, treatment
and disposal services to hazardous and non-hazardous waste generators throughout
the United States, in conjunction with the utilization of the PFO facility and
transportation services. PFSG operates a hazardous waste storage facility that
primarily blends and processes hazardous and non-hazardous waste liquids, solids
and sludges into substitute fuel or as a raw material substitute in cement kilns
that have been specially permitted for the processing of hazardous and
non-hazardous waste.
Perma-Fix of Maryland, Inc. ("PFMD") is located in Baltimore, Maryland, and
operates two near by sales and service offices. Effective March 23, 2004, we
established PFMD and through acquisition, assumed certain assets and liabilities
of USL Environmental Services, Inc. d/b/a A&A Environmental. PFMD offers
environmental services such as 24-hour emergency response, vacuum services,
hazardous and non-hazardous waste disposal, marine environmental and other
remediation services.
For 2005, the Industrial segment accounted for approximately $40,768,000 (or
44.9%) of our total revenue, as compared to approximately $36,600,000 (or 44.4%)
for 2004. See "Financial Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, low-level
radioactive, mixed (waste containing both hazardous and low-level radioactive
constituents) hazardous and non-hazardous waste treatment, processing and
disposal services through three uniquely licensed (Nuclear Regulatory
Commission) and permitted (Environmental Protection Agency) treatment and
storage facilities. The presence of nuclear and low-level radioactive
constituents within the waste streams processed by this segment create different
and unique operational, processing and permitting/licensing requirements, from
those contained within the Industrial segment, as discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, specializes
in the processing and treatment of certain types of wastes containing both
low-level radioactive and hazardous wastes, which are known in the industry as
mixed waste ("mixed waste"). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. PFF has substantially
increased the amount and type of mixed waste and low level radioactive waste
that it can store and treat. Its mixed waste services have included the
treatment and processing of waste Liquid Scintillation Vials (LSVs) since the
mid 1980's. The LSVs are generated primarily by institutional research agencies
and biotechnical companies. The business has expanded into receiving and
handling other types of mixed waste, primarily from the nuclear utilities,
commercial generators, prominent pharmaceutical companies, the Department of
Energy ("DOE") and other government facilities as well as select mixed waste
field
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remediation projects. PFF also continues to receive and process certain
hazardous and non-hazardous waste streams as a compliment to its expanded
nuclear and mixed waste processing activities.
Diversified Scientific Services, Inc. ("DSSI"), located in Kingston, Tennessee,
specializes in the processing and destruction of certain types of mixed waste.
DSSI, like PFF, is one of only a few facilities nationally to operate under both
a hazardous waste permit and a radioactive materials license. Additionally, DSSI
is the only commercial facility of its kind in the U.S. that is currently
operating and licensed to destroy liquid organic mixed waste, through such a
treatment unit. DSSI provides mixed waste disposal services for nuclear
utilities, commercial generators, prominent pharmaceutical companies, and
agencies and contractors of the U.S. government, including the DOE and the
Department of Defense ("DOD").
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is our third mixed waste facility. As with PFF and DSSI, M&EC also
operates under both a hazardous waste permit and radioactive materials license.
M&EC represents the largest of our three mixed waste facilities, covering
150,000 sq. ft., and is located in leased facilities on the DOE East Tennessee
Technology Park. In addition to providing mixed waste treatment services to
commercial generators, nuclear utilities and various agencies and contractors of
the U.S. Government, including the DOD, M&EC was awarded three contracts to
treat DOE mixed waste by Bechtel-Jacobs Company, LLC, DOE's Environmental
Program Manager, which covers the treatment of mixed waste throughout all DOE
facilities.
For 2005, the Nuclear business accounted for $47,245,000 (or 52.0%) of total
revenue, as compared to $42,679,000 (or 51.7%) of total revenue for 2004. 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.
CONSULTING ENGINEERING SERVICES, which provides environmental engineering and
regulatory compliance consulting services through one subsidiary, as discussed
below.
Schreiber, Yonley & Associates ("SYA") is located in St. Louis, Missouri. SYA
specializes in environmental management programs, permitting, compliance and
auditing, in addition to landfill design, field investigation, testing and
monitoring. SYA clients are primarily industrial, including many within the
cement manufacturing industry. SYA also provides the necessary support,
compliance and training as required by our operating facilities.
During 2005, environmental engineering and regulatory compliance consulting
services accounted for approximately $2,853,000 (or 3.1%) of our total revenue,
as compared to approximately $3,204,000 (or 3.9%) in 2004. See "Financial
Statements and Supplementary Data" for further details.
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 through the year 2006 for the service mark "Perma-Fix" by the U.S.
Patent and Trademark office.
We are active in the research and development of technologies that allow us to
address certain of our customers' environmental needs. To date, our R&D efforts
have resulted in the granting of six active patents and the filing of an
additional two pending patent applications. Our flagship technology, the
Perma-Fix Process, is a proprietary, cost effective, treatment technology that
converts hazardous waste into non-hazardous material. Subsequently, we developed
the Perma-Fix II process, a multi-step treatment process that converts hazardous
organic components into non-hazardous material. The Perma-Fix II
4
process is particularly important to our mixed waste strategy. We believe that
at least one third of DOE mixed waste contains organic components.
The Perma-Fix II process is designed to remove certain types of organic
hazardous constituents from soils or other solids and sludges ("Solids") through
a water-based system. 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 "BUSINESS--Permits and Licenses" and
"BUSINESS--Research and Development."
PFD's facility utilizes a biological wasterwater process and accepts commercial
wastewater for treatment through this process. The biological wastewater process
is a technology which we developed utilizing our variable depth biological
treatment process and several proprietary water treatment processes. The
biological wastewater process is designed to remove certain organic constituents
from highly organic, contaminated wastewaters. The biological wastewater process
enables us to treat heavily contaminated wastewater streams, such as waste oils,
phenols, and "lean" waters, at more competitive prices than traditional methods.
The biological wastewater process meets the EPA's new centralized treatment
standards that became effective in December of 2003.
PERMITS AND LICENSES
Waste management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from one to
ten years and, provided that we maintain a reasonable level of compliance, renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
During the later part of 2005, PFTS received a proposed consent order from the
ODEQ that provided, among other things, that PFTS has a limited period to ensure
that it is eligible for exemption from compliance with certain air related
issues, alleges that PFTS failed to comply with certain RCRA related issues,
including failure to make a determination as to whether it was required to
comply with certain air requirements, and a proposed penalty of $336,000
(one-half to be paid in cash and the balance based on a supplemental
environmental project to be approved by the ODEQ). If it is determined that PFTS
was and/or is required to meet the requirements as to certain air related
matters, it may also be required to have obtained a Title V air permit in order
to operate the facility. PFTS and the ODEQ are negotiating how PFTS would
determine whether it is exempt from the air issues in questions, the terms of
the proposed consent order and the penalty, if any. See "Risk Factors" and
"Legal Proceedings."
PFTS is a permitted solid and hazardous waste treatment, storage, and disposal
facility. The RCRA Part B permit to treat and store certain types of hazardous
waste was issued by the Waste Management Section of the Oklahoma Department of
Environmental Quality ("ODEQ"). Additionally, PFTS maintains an
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Injection Well Facility Operations Permit issued by the ODEQ Underground
Injection Control Section for our waste disposal injection well, and a
pre-treatment permit in order to discharge industrial wastewaters to the local
Publicly Owned Treatment Works ("POTW"). PFTS is also registered with the ODEQ
and the Department of Transportation as a hazardous waste transporter.
PFFL operates under a used oil processors license and a solid waste processing
permit issued by the Florida Department of Environmental Protection ("FDEP"), a
transporter license issued by the FDEP and a transfer facility license issued by
Broward County, Florida.
PFD operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit. PFD provides wastewater
pretreatment under a discharge permit with the local POTW and is a specification
and off-specification used oil processor under the guidelines of the Ohio EPA.
The EPA has advised PFD that it is required to operate under a Title V air
permit. In connection therewith, in January 2004, the EPA issued to PFD a
Finding of Violation and in September 2004, the EPA issued to PFD a Notice of
Administrative Compliance Order ("Order") that, as a result, since PFD was
operating without a Title V air permit and failed to install proper air
pollution control equipment, and failed to meet certain administrative burdens
relating to air pollution control equipment installed or modified at the site in
2000 and 2001, it has been operating in violation of the Clean Air Act and PFD
has six months from the effective date of the Order to develop, submit, obtain
and comply with the Order. In March 2006, EPA issued to PFD a notice of
violation alleging that for a number of years PFD has operated in violation of
the Ohio Administrative Code as a result of not having a Title V air permit. The
EPA claims it may be able to recover up to $32,500 per day per violation in
civil penalties until full compliance is achieved by PFD, plus attorney fees.
PFD does not believe, and its experts have advised PFD that they do not believe,
that PFD is required to obtain a Title V air permit. The EPA has referred this
matter to the U.S. Department of Justice ("DOJ") for enforcement. If, however,
it is determined that PFD is and was required to operate under a Title V air
permit, this determination could result in substantial fines and penalties being
asserted against PFD and could have a material adverse effect on PFD's
operations and on us. In addition, a citizens' suit has been filed against PFD
in federal court located in Dayton, Ohio, alleging, among other things, that PFD
is operating in violation of the federal and Ohio state clean air laws as a
result of operating without proper air permits. See "Risk Factors" and "Legal
Proceedings" for further discussion as to legal proceedings relating to actions
against PFD under the Clean Air Act.
PFO operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit, and a used oil processors
permit issued by the State of Florida.
PFSG operates a hazardous waste treatment and storage facility under a RCRA Part
B permit, issued by the State of Georgia.
PFMD operates under an oil operations permit issued by the Maryland Department
of Environment and has permits/licenses to transport hazardous waste in over 13
states. PFMD also has a wastewater discharge permit through the city of
Baltimore POTW.
PFF operates its hazardous and low-level radioactive waste activities under a
RCRA Part B permit and a radioactive materials license issued by the State of
Florida.
DSSI operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
M&EC operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
6
The combination of a RCRA Part B hazardous waste permit and a radioactive
materials license, as held by PFF, DSSI and M&EC, are very difficult to obtain
for a single facility and make these facilities very unique.
Although two of our subsidiaries, PFTS and PFD, are involved in certain
proceedings alleging that they have not obtained, or have not demonstrated that
they are not required to obtain, certain air permits as discussed above in order
to operate these facilities (see "Risk Factors" and "Legal Proceedings"), we
believe that all of our other facilities presently have all approvals, licenses
and permits necessary to enable them to conduct their business as presently
conducted. . The failure of our facilities to renew any of their present
approvals, licenses and permits, or the termination of any such approvals,
licenses or permits, or if it is determined that PFTS or PFD is operating
without proper air permits, such may have a material adverse effect on us, our
operations and financial condition.
SEASONALITY
We experience a seasonal slowdown within our industrial segment operations and
revenues during the winter months extending from late November through early
March. The seasonality factor is a combination of poor weather conditions in the
central plains and Midwestern geographical markets we serve for on-site and
off-site waste management services, and the impact of reduced activities during
holiday periods resulting in a decrease in revenues and earnings during such
periods. Our engineering segment also experiences reduced activities and related
billable hours throughout the November and December holiday periods. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
experiences seasonably large shipments during the third quarter, leading up to
this government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season. We have worked with the various
government customers to smooth these shipments more evenly throughout the year,
and did see some effect from these efforts during 2005.
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, 2005, our
Nuclear segment had a backlog of $16,374,000, as compared to $16,247,000, as of
December 31, 2004. 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. The first quarter of our fiscal year is typically
our slow period and the time in which we process more of our backlog.
DEPENDENCE UPON A SINGLE OR FEW CUSTOMERS
The majority of our revenues for fiscal 2005 have been derived from hazardous,
non-hazardous and mixed waste management services provided to a variety of
industrial, commercial customers, retail services, and government agencies and
contractors. Our customers are principally engaged in research, biotechnical
development, transportation, chemicals, metal processing, electronic,
automotive, petrochemical, refining and other similar industries, in addition to
government agencies that include the DOE, DOD, and other federal, state and
local agencies. We are not dependent upon a single customer, or a few customers.
However, we have and continue to enter into, contracts with (directly or
indirectly as a subcontractor) the federal government. The contracts that we are
a party to with the federal government or with others as a subcontractor to the
federal government, generally provide that the government may terminate on 30
days notice or renegotiate the contracts, at the government's election. Our
inability to continue under existing contracts that we have with the federal
government (directly or indirectly as a subcontractor) could have a material
adverse effect on our operations and financial condition.
7
Our Nuclear segment has a significant relationship with Bechtel Jacobs Company,
LLC. ("Bechtel Jacobs"). Bechtel Jacobs is the government-appointed manager of
the environmental program for Oak Ridge, Tennessee to perform certain treatment
and disposal services relating to Oak Ridge. Our initial relationship with
Bechtel Jacobs began when we acquired M&EC. Prior to our acquisition of M&EC,
Bechtel Jacobs had awarded M&EC three subcontracts for treatment services ("Oak
Ridge contracts"). These Oak Ridge contracts have been amended for pricing
modifications and have been extended through August 2007. As with most such
blanket processing agreements, the Oak Ridge contracts contain no minimum or
maximum processing guarantees, and may be terminated at any time pursuant to
federal contracting terms and conditions. As the DOE site in Oak Ridge continues
to complete certain of its clean-up milestones and moves toward completing its
closure efforts, the revenue from these contracts may decline. Since being
awarded the Oak Ridge contracts our relationship with Bechtel Jacobs has
expanded to include other services outside of these contracts. Additionally, the
Nuclear segment continues to pursue other similar or related services for
environmental programs at other DOE and government sites.
Consolidated revenues from Bechtel Jacobs for 2005, total $14,940,000 or 16.5%
of total revenues, as compared to $9,405,000 or 11.4% for the year ended
December 31, 2004, and $13,139,000 or 16.6% for the year ended December 31,
2003. Further, waste related services we performed either directly or indirectly
as a subcontractor to federal government agencies (including Bechtel Jacobs
discussed above), represented $33,899,000, or 37.4% of our consolidated revenues
during 2005, as compared to $31,791,000, or 38.5% of our consolidated revenues,
during 2004, and $34,969,000 or 44.2% of our consolidated revenues during 2003.
However, this government revenue is managed by numerous subcontractors to the
government, who operate and make decisions independent of each other. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources of the Company."
During the first quarter of 2003, M&EC filed a lawsuit against Bechtel Jacobs
seeking approximately $4.3 million in surcharges under the Oak Ridge Contracts.
Since the filing of the lawsuit, Bechtel Jacobs has continued to deliver waste
to M&EC under the Oak Ridge Contracts and M&EC has entered into an additional
contract with Bechtel Jacobs relating to DOE waste at Oak Ridge. There are no
assurances that the filing of the lawsuit will not result in Bechtel Jacobs
canceling the Oak Ridge Contracts, which can be canceled at any time by either
party.
COMPETITIVE CONDITIONS
Competition is intense within certain product lines within the Industrial
segment of our business. We compete with numerous companies both large and
small, that are able to provide one or more of the environmental services
offered by us, certain of which may have greater financial, human and other
resources than we have. However, we believe that the range of waste management
and environmental consulting, treatment, processing and remediation services we
provide affords us a competitive advantage with respect to certain of our more
specialized competitors. We believe that the treatment processes we utilize
offer a cost savings alternative to more traditional remediation and disposal
methods offered by certain of our competitors. The intense competition for
performing the services provided by us within the Industrial segment, has
resulted in reduced gross margin levels for certain of those services.
The Nuclear segment has only a few competitors and does not currently experience
such intense competitive pressures. At present we believe there are only four
other facilities in the United States with the required radioactive materials
license and hazardous waste permit that provide mixed waste processing. However,
the generators always have the option to treat their own waste onsite.
The permitting and licensing requirements, and the cost to obtain such permits,
are barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our
8
subsidiaries. We believe that there are no formidable barriers to entry into
certain of the on-site treatment businesses, and certain of the non-hazardous
waste operations, which do not require such permits. If the permit requirements
for both hazardous waste storage, treatment and disposal activities and/or the
licensing requirements for the handling of low level radioactive matters are
eliminated or if such licenses or permits were made easier to obtain, such would
allow more companies to enter into these markets and provide greater
competition.
Within our Industrial segment we solicit business on a nationwide basis.
However, we believe that we are a significant provider in the delivery of
off-site waste treatment services in the Southeast, Midwest and Southwest
portions of the United States. We compete with facilities operated by national,
regional and independent environmental services firms located within a several
hundred-mile radius of our facilities. Our Nuclear segment, with permitted
radiological activities, solicits business on a nationwide basis, including the
U.S. Territories and Antarctica.
Environmental engineering and consulting services provided by us through SYA
involve competition with larger engineering and consulting firms. We believe
that we are able to compete with these firms based on our established reputation
in these market areas and our expertise in several specific elements of
environmental engineering and consulting such as environmental applications in
the cement industry.
CAPITAL SPENDING, CERTAIN ENVIRONMENTAL EXPENDITURES AND POTENTIAL ENVIRONMENTAL
LIABILITIES
During 2005, we spent approximately $2,616,000 in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2005 capital spending total includes $517,000, which was financed. We have
budgeted approximately $6,800,000 for 2006 capital expenditures, to improve and
expand our operations into new markets, reduce the cost of waste processing and
handling, expand the range of wastes that can be accepted for treatment and
processing and to maintain permit compliance requirements. Certain of these
budgeted projects are discretionary and may either be delayed until later in the
year or deferred altogether. We have traditionally incurred actual capital
spending totals for a given year less than initial budget amount. The initiation
and timing of projects are also determined by financing alternatives or funds
available for such capital projects. We have also budgeted for 2006
approximately $1,107,000 to comply with federal, state, and local regulations in
connection with remediation activities at our facilities. See Note 10 to Notes
to Consolidated Financial Statements. However, there is no assurance that we
will have the funds available for such budgeted expenditures. The above budgeted
amounts for capital expenditures assumes that neither PFD nor PFTS is required
to have a Title V air permit in connection with its operations. If it is
determined that either PFTS or PFD is required to have a Title V air permit, we
anticipate that substantial additional capital expenditures will be required in
order to bring that facility into compliance with Title V air permit
requirements. We do not have reliable estimates of the cost of such additional
capital expenditures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources of the
Company."
In June 1994, we acquired PFD. The former owners of PFD had merged Environmental
Processing Services, Inc. ("EPS") with PFD. The party that sold PFD to us 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 is 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. We have accrued approximately $785,000, at
December 31, 2005, for the estimated, remaining costs of remediating the Leased
Property used by EPS, which will extend over the next two to seven years.
9
In conjunction with the acquisition of Perma-Fix of Memphis, Inc. ("PFM"), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $588,000, at December 31, 2005, for
the estimated, remaining costs of remediating the groundwater contamination.
In conjunction with the acquisition of PFSG during 1999, we recognized an
environmental accrual of $2,199,000 for estimated long-term costs to remove
contaminated soil and to undergo ground water remediation activities at the
acquired facility in Valdosta, Georgia. Initial valuation has been completed,
along with the selection of the remedial process, and the planning and approval
process. The remedial activities began in 2003. We have accrued approximately
$526,000, at December 31, 2005, to complete remediation of the facility, which
we anticipate spending over the next two to five years.
In conjunction with an oil spill at PFTS, we accrued approximately $69,000 to
remediate the contaminated soil and ground water at this location. As of
December 31, 2005, we have accrued approximately $50,000, for the estimated
remaining cost to remediate the area. We expect to complete spending on this
remedial project over the next two years.
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which is not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we originally recorded an
additional $2,373,000 to arrive at our best estimate of the cost of this
environmental closure and remediation liability, of $2,464,000. We are unclear
as to the extent of remediation necessary to dispose of or sell the facility and
to what extent the state will require us to remediate the contamination. We have
spent approximately $555,000 of this closure cost estimate. We have $1,909,000
accrued for the closure, as of December 31, 2005, and we anticipate spending
$193,000 in 2006 with the remainder over the next two to seven years.
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operated a
non-hazardous waste water facility on this leased property. Effective November
2005, we discontinued operations at PFP, and began the clean-up process to
remediate and restore the leased property. As of December 31, 2005, we had
$146,000 accrued for these remediation costs, and we completed and released this
property during February 2006.
10
No insurance or third party recovery was taken into account in determining our
cost estimates or reserves, nor do our cost estimates or reserves reflect any
discount for present value purposes. See Note 10 to Notes to Consolidated
Financial Statements for discussion on environmental liabilities.
The nature of our business exposes us to significant risk of liability for
damages. Such potential liability could involve, for example, claims for cleanup
costs, personal injury or damage to the environment in cases where we are held
responsible for the release of hazardous materials; claims of employees,
customers or third parties for personal injury or property damage occurring in
the course of our operations; and claims alleging negligence or professional
errors or omissions in the planning or performance of our services. In addition,
we could be deemed a responsible party for the costs of required cleanup of any
property, which may be contaminated by hazardous substances generated or
transported by us to a site we selected, including properties owned or leased by
us. We could also be subject to fines and civil penalties in connection with
violations of regulatory requirements.
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 2003, 2004, and 2005, we spent approximately $661,000,
$433,000, and $489,000, 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, 2005,
we employed approximately 481 full time persons, of which approximately 16 were
assigned to our Corporate office, approximately 37 were assigned to our
Operations Headquarters, approximately 22 to our Consulting Engineering Services
segment, approximately 210 to the Industrial segment, and approximately 196 to
the Nuclear segment. We have no union employees at any of our segments.
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.
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THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, AS AMENDED ("RCRA")
RCRA and its associated regulations establish a strict and comprehensive
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a state
agency, which has been authorized by the EPA to administer its program, and must
comply with certain operating, financial responsibility and closure
requirements. RCRA provides for the granting of interim status to facilities
that allows a facility to continue to operate by complying with certain minimum
standards pending issuance or denial of a final RCRA permit.
BOILER AND INDUSTRIAL FURNACE REGULATIONS UNDER RCRA ("BIF REGULATIONS")
BIF Regulations require boilers and industrial furnaces, such as cement kilns,
to obtain permits or to qualify for interim status under RCRA before they may
use hazardous waste as fuel. If a boiler or industrial furnace does not qualify
for interim status under RCRA, it may not burn hazardous waste as fuel or use
such as raw materials without first having obtained a final RCRA permit. In
addition, the BIF Regulations require 99.99% destruction of the hazardous
organic compounds used as fuels in a boiler or industrial furnace and impose
stringent restrictions on particulate, carbon monoxide, hydrocarbons, toxic
metals and hydrogen chloride emissions.
THE SAFE DRINKING WATER ACT, AS AMENDED (THE "SDW ACT")
SDW Act regulates, among other items, the underground injection of liquid wastes
in order to protect usable groundwater from contamination. The SDW Act
established the Underground Injection Control Program ("UIC Program") that
provides for the classification of injection wells into five classes. Class I
wells are those which inject industrial, municipal, nuclear and hazardous wastes
below all underground sources of drinking water in an area. Class I wells are
divided into non-hazardous and hazardous categories with more stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980
("CERCLA," ALSO REFERRED TO AS THE "SUPERFUND ACT")
CERCLA governs the cleanup of sites at which hazardous substances are located or
at which hazardous substances have been released or are threatened to be
released into the environment. CERCLA authorizes the EPA to compel responsible
parties to clean up sites and provides for punitive damages for noncompliance.
CERCLA imposes joint and several liability for the costs of clean up and damages
to natural resources.
HEALTH AND SAFETY REGULATIONS
The operation of our environmental activities is subject to the requirements of
the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
ATOMIC ENERGY ACT
The Atomic Energy Act of 1954 governs the safe handling and use of Source,
Special Nuclear and Byproduct materials in the U.S. and its territories. This
act authorized the Atomic Energy Commission (now the Nuclear Regulatory
Commission) to enter into "Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations." The State of Florida
(with the USNRC oversight), Office of
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Radiation Control, regulates the radiological program of the PFF facility, and
the State of Tennessee (with the USNRC oversight), Tennessee Department of
Radiological Health, regulates the radiological program of the DSSI and M&EC
facilities.
OTHER LAWS
Our activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act, the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment which
may affect us, including laws governing the generation, handling, transportation
and disposition of hazardous substances and laws governing the investigation and
cleanup of, and liability for, contaminated sites. Some of these state
provisions are broader and more stringent than existing federal law and
regulations. Our failure to conform our services to the requirements of any of
these other applicable federal or state laws could subject us to substantial
liabilities which could have a material adverse affect on us, our operations and
financial condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation activities are
regulated by the U.S. Department of Transportation, the Interstate Commerce
Commission and transportation regulatory bodies in the states in which we
operate. We cannot predict the extent to which we may be affected by any law or
rule that may be enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
INSURANCE
We believe we maintain insurance coverage adequate for our needs and similar to,
or greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities, which we may
incur will be covered by our insurance or that the dollar amount of such
liabilities, which are covered will not exceed our policy limits. Under our
insurance contracts, we usually accept self-insured retentions, which we believe
appropriate for our specific business risks. We are required by EPA regulations
to carry environmental impairment liability insurance providing coverage for
damages on a claims-made basis in amounts of at least $1 million per occurrence
and $2 million per year in the aggregate. To meet the requirements of customers,
we have exceeded these coverage amounts.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining, and at all
times while operating under our permits, we are required to provide financial
assurance that guarantees to the states that, in the event of closure, our
permitted facilities will be closed in accordance with the regulations. The
policy provides $35 million of financial assurance coverage, and thus far have
provided $29 million in financial assurance.
ITEM 1A. RISK FACTORS
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").
OUR INDUSTRIAL SEGMENT HAS SUSTAINED LOSSES FOR THE PAST SIX YEARS, INCLUDING
2005.
Our Industrial segment has sustained losses in each year since 2000. The
Industrial segment represented approximately 44.9% of our consolidated net
revenues in 2005, as compared to 44.4% in 2004, and 24.2% of our total assets as
of December 31, 2005. During 2005, we restructured the management of this
segment by replacing most of its operating officers and in 2005 we appointed a
chief operating officer to
13
oversee this segment, as well as, the Nuclear segment, in an effort to return
this segment to profitability. If our Industrial segment fails to become
profitable on an annualized basis in the foreseeable future, this could have a
material adverse effect on our results of operations, liquidity and our
potential growth. The Industrial segment's failure to become profitable could
also result in further facility closures or the sale of certain facilities with
this segment, as well as possible future impairments of permits or fixed assets.
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.
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 increases
overall competition and pricing pressure and may require us to make sustained
post-award efforts to realize revenues under these government contracts. In
addition, government clients can generally terminate or modify their contracts
at their convenience.
Currently, 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 government sources were approximately $33,899,000
and $31,791,000, representing 37.4% and 38.5%, respectively, of our consolidated
revenues for 2005 and 2004. If we fail to maintain or replace these
relationships, our revenues and future operations could be adversely affected.
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, licenses and/or
approvals to conduct these activities in compliance with such laws and
regulations. Failure to obtain and maintain the required permits, licenses
and/or approvals would have a material adverse effect on our operations and
financial condition. If we are unable to maintain our currently held permits,
licenses, and/or approvals or obtain any additional permits, licenses and/or
approvals which may be required as we expand our operations, we may not be able
to continue certain of our operations.
THE SIGNIFICANT AMOUNT OF OUTSTANDING WARRANTS AND OPTIONS COULD AFFECT OUR
STOCK PERFORMANCE.
As of December 31, 2005, we had outstanding Warrants to purchase 10,267,780
shares of Common Stock at exercise prices from $1.44 to $2.92 per share, and
outstanding Options to purchase 2,846,750 shares of our Common Stock at exercise
prices of $1.00 to $3.00 per share. The existence of this quantity of rights to
purchase our Common Stock 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.
THE PRICE OF OUR COMMON STOCK IS VOLATILE.
The trading price of our Common Stock has historically been volatile, and
subject to large swings over short periods of time. We believe that the changes
in our stock price are affected by our lack of operating results and the failure
to meet expectations of our investors, as well as the public's perception of the
impact of economic events related to our business and other factors beyond our
control. Public perception can change quickly and without any developments or
changes in our business. As a result of the volatility of our Common Stock, an
investment in our stock holds significant risk.
14
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK MAY ALSO RESULT IN A
CHANGE IN CONTROL.
The exercise of our currently outstanding warrants could result in a substantial
number of shares being held by one or more groups acting in concert. In that
event, such group or groups may have the ability to cause a change in control
under our Credit Agreement. Our Credit Facility provides that a change of
control will occur if (a) Dr. Louis F. Centofanti, our Chairman, President, and
Chief Executive Officer, or Richard T. Kelecy, our Chief Financial Officer,
ceases to serve as a senior executive officer in substantially the same capacity
as served on the date of the Credit Facility or (b) the persons who were members
of our Board on the closing of the Credit Facility cease to constitute 50% of
our Board. Each of these events could be an event of default under the terms of
the Credit facility. If anyone or a group were to successfully attempt to cause
any of these changes in our management or Board, we could be in default under
our loan agreement. As discussed in Part III, Item 10 - Directors and Executive
Officers of the Registrant, our Chief Financial Officer, Richard T. Kelecy
resigned his executive officer positions with the Company. We have been in
contact with the holders of our credit facility, and they have informed us of
their intent to waive the technical default that was created by Mr. Kelecy's
resignation.
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.
GOVERNMENTAL AGENCIES ARE ASSERTING THAT TWO OF OUR TSD FACILITIES WERE AND ARE
REQUIRED TO HAVE OBTAINED A TITLE V AIR PERMIT TO OPERATE, WHICH, IF CORRECT,
MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
The EPA has asserted that the Dayton, Ohio TSD facility owned by one of our
subsidiaries has been for several years required to have obtained a Title V air
permit in order to operate the facility. The ODEQ is asserting that the TSD
facility located in Tulsa, Oklahoma, owned by another subsidiary of ours is
required to have complied with certain air regulations under certain
environmental laws and regulations, which, if correct, would require this
facility to have obtained a Title V air permit in order to operate. These
facilities have not obtained a Title V air permit. The EPA has referred the
matter regarding the Dayton facility to the DOJ for enforcement. If either
facility, was or is required to have obtained a Title V air permit in order to
operate, that facility would be required to perform substantial modifications in
order to comply with Title V air permit requirements and the failure to have
obtained this permit by one or both of these facilities could subject that
facility to substantial penalties and may have a material adverse effect on that
facility's operations and 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.
15
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.
A CLOSURE OF THE END DISPOSAL SITE THAT OUR NUCLEAR SEGMENT UTILIZES TO DISPOSE
OF OUR WASTE COULD SUBJECT US TO SIGNIFICANT RISK AND LIMIT OUR OPERATIONS.
Our Nuclear segment has limited options available for disposal of its waste. If
this disposal site ceases to accept waste or closes for any reason or refuses to
accept the waste of our nuclear segment, 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.
OUR INDUSTRIAL SEGMENT AND NUCLEAR SEGMENT 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:
o 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;
o claims of employees, customers, or third parties for personal injury or
property damage occurring in the course of our operations; and
o 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
16
spend significant amounts of our time, effort, and money. This could prevent our
management from focusing on our operations and expansion.
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.
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 and overall reduced activities during these
periods. 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.
OUR INDUSTRIAL SEGMENT OPERATES IN A HIGHLY COMPETITIVE MARKET AND FACES
SIGNIFICANT COMPETITION FROM VARIOUS COMPANIES THAT MAY HAVE GREATER FINANCIAL,
HUMAN AND OTHER RESOURCES THAN WE DO, INHIBITING US FROM COMPETING EFFECTIVELY.
Certain waste services within our Industrial segment are extremely competitive,
and many of our competitors have substantially greater resources than we do. We
could experience further reduced revenues and gross margin levels, as a result
of price reductions in order to retain customers and remain competitive.
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.
OUR AMOUNT OF DEBT AND FLOATING RATES OF INTEREST COULD ADVERSELY AFFECT OUR
OPERATIONS.
At December 31, 2005, our aggregate consolidated debt was approximately
$13,375,000. If our floating rates of interest experienced an upward increase of
1%, our debt service would increase by approximately $134,000 annually. Our
secured revolving credit facility (the "Credit Facility") provides for an
aggregate commitment of $25 million, consisting of an $18 million revolving line
of credit and a term loan of $7 million. 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. The Credit Facility is due
May, 2008. As of December 31, 2005, we had borrowings under the revolving part
of our Credit
17
Facility of $2,447,000 and borrowing availability of up to an
additional $12,964,000 based on our outstanding eligible receivables. Although
we have reduced our overall indebtedness significantly, 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.
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.
WE MAY BE UNABLE TO UTILIZE LOSS CARRYFORWARDS IN THE FUTURE.
We have approximately $21.0 million in net operating loss carryforwards which
will expire from 2007 to 2024 if not used against future federal income tax
liabilities. Our net loss carryforwards are subject to various limitations. We
anticipate the net loss carryforwards will be used to reduce the federal income
tax payments which we would otherwise be required to make with respect to
income, if any, generated in future years.
DELAWARE LAW, CERTAIN OF OUR CHARTER PROVISIONS, OUR STOCK OPTION PLANS AND
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 contribution 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 (including shares held in treasury) 30,174,084
shares of Common Stock and 2,000,000 shares of preferred stock as of December
31, 2005. These unissued shares could be used by our management to make it more
difficult, and thereby discourage, an attempt to acquire control of us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our principal executive office is in Gainesville, Florida. Our Operations
headquarters is located in Oak Ridge, Tennessee, our Industrial segment
facilities are located in Orlando and Ft. Lauderdale, Florida; Dayton, Ohio;
Tulsa, Oklahoma; Valdosta, Georgia; and Baltimore, Maryland. Our Nuclear segment
facilities are located in Gainesville, Florida; Kingston, Tennessee; and Oak
Ridge, Tennessee. Our Consulting Engineering Services are located in St. Louis,
Missouri. We also maintain Field Services
18
offices in Jacksonville, Florida; Honolulu, Hawaii; Memphis, Tennessee;
Stafford, Virginia; and Salisbury, Maryland.
We own ten facilities, all of which are in the United States. Six of our
facilities are subject to mortgages as placed by our senior lender. In addition,
we lease properties for office space, all of which are located in the United
States as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing facilities.
ITEM 3. LEGAL PROCEEDINGS
In December, 2005, TIFORP Group Holdings, LLC ("TIFORP") and others sued us, our
subsidiary, PFMI, and others in the Michigan Circuit Court for the County of
Wayne, Case No. 05-534619. Plaintiffs are alleging that we and PFMI breached a
confidentiality agreement with TIFORP, and are liable in damages under legal
theories of fraud, conversion of proprietary information and breach of
confidentiality agreement. The only confidentiality agreement between us and/or
PFMI and TIFORP was in the November 10, 2004 letter of intent. It provides
basically that the financial information obtained in the negotiations would be
kept in confidence. The letter of intent also provided that the letter was not
binding and did not create any legal rights or obligations in either party. The
negotiations did not culminate in a sale of the subject property. TIFORP and the
other Plaintiffs assert that there are damages due to lost revenues in excess of
$4.5 million. PESI and PFMI have denied any liability and intend to defend the
case vigorously. We are currently in the discovery phase of the lawsuit,
particularly addressing the exchange of information through written discovery
requests.
During the later part of 2005, PFTS, one of our subsidiaries, received a
proposed consent order from the ODEQ regarding PFTS's Tulsa facility. The
proposed consent order, among other things:
o provides that PFTS has a limited period to complete all work necessary to
ensure that PFTS is eligible for exemption under various provisions of the
Oklahoma Hazardous Waste Management, the Oklahoma Clean Air Act and the
ODEQ rules promulgated thereunder relating to air issues (subparts BB, CC
and DD);
o alleges that PFTS has one or more operations that failed to properly mark
or label containers; failed to comply with the maximum containment area
volumes in its operating permit; failed to operate in a manner to prevent
degradation of the environment; failed to maintain the integrity of the cap
over a closed surface impoundment; stored hazardous waste in an area not
allowed by its permit; failed to maintain certain records; failed to comply
with certain requirements under subparts BB, CC and DD; and failed to make
a determination for exemption from the air issue requirements of subpart CC
and DD; and
o proposes a total penalty of $336,000, payable one-half in cash and the
balance based on a supplemental environmental project approved by the ODEQ.
PFTS has corrected any storage and marking issues, and PFTS and the ODEQ are in
the process of negotiating the terms of the proposed consent order, including,
but not limited to, the penalty amount, if any. If it is determined that PFTS is
required to meet the requirements of subpart DD, it will also be required to
apply for and obtain a Title V air permit in order to operate the facility.
19
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. The
revenues generated by M&EC with Bechtel Jacobs represented approximately 16.5%
and 11.3% of our 2005 and 2004 total revenues, respectively. Since the filing of
this lawsuit, Bechtel Jacobs has continued to deliver waste to M&EC for
treatment and disposal, and M&EC continues to accept such waste, under the
subcontracts, and M&EC and Bechtel Jacobs have entered into an additional
contract for M&EC to treat DOE waste. Although we do not believe that this
lawsuit will have a material adverse effect on our operations, Bechtel Jacobs
could terminate the subcontracts with M&EC, as either party can terminate the
subcontracts at any time.
In January 2004, the EPA issued to PFD a Finding of Violation and in September
2004, PFD received an Administrative Compliance Order ("Order") from EPA
alleging that PFD was a "major source" of potential hazardous air pollutants
and, as a major source, PFD was required to have obtained a Title V air permit
in connection with its operations, and thereby was not in compliance with
provisions of the Clean Air Act (the "Act") and/or regulations thereunder
applicable to a major source, and, as a result, PFD also failed to install
proper air pollution equipment and failed to meet certain administrative burdens
relating to equipment that was constructed or modified at PFD's facility in 2000
and 2001. The Order further provides that PFD has six months from the effective
date of the Order, to develop, submit, obtain and comply with numerous costly
and burdensome compliance initiatives applicable to one that is a major source
of potential hazardous air pollutants and to submit an application to the State
of Ohio for a Title V air permit, which six month period expired. The Order did
not assert any penalties or fines but provided that PFD is not absolved of any
liabilities, including liability for penalties, for the alleged violations cited
in the Order, and that failure to comply with the Order may subject PFD to
penalties up to $32,500 per day for each violation, plus attorney fees. In
addition, during March 2006, EPA issued to PFD a notice of violation alleging
that for a number of years PFD has been in violation of certain provisions of
the Act as a result of expanding and operating certain of its operations without
having applied for and having obtained certain air permits required under the
Ohio Administrative Code. PFD has met with the EPA on several occasions, and the
EPA and PFD have not yet been able to resolve this matter. We have retained
environmental consultants who have advised us that, based on the tests that they
have performed, they do not believe that PFD is a major source of hazardous air
pollutants. We have been further advised by counsel that if PFD is not a major
source of hazardous air pollutants, PFD would not be required to obtain a Title
V air permit, would not have violated the provisions of the Act alleged in the
Order and would not be required to comply with the costly and burdensome
compliance initiatives contained in the Order. The EPA has referred this matter
to the U.S. Department of Justice to enforce the Order in a court of competent
jurisdiction and seek penalties for the alleged violations and failure to comply
with the Order. If the government brings an enforcement proceeding against PFD,
PFD may assert its defenses, including, but not limited to, any constitutional
arguments that it may have. A determination that PFD was a major source of
hazardous air pollutants and required to comply with the Order could have a
material adverse effect on us. We intend that PFD will vigorously defend itself
in connection with this matter.
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western District, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to the operating PFD's facility without a Title V air permit, and
further alleges that air emissions from PFD's facility endanger the health of
the public and constitutes a nuisance in violation of Ohio law. The action seeks
injunctive
20
relief, imposition of civil penalties, attorney fees and costs and other forms
of relief. We intend to vigorously defend ourselves in connection with this
matter. See above discussion as to the administrative proceedings instituted by
the EPA against PFD.
In October 2004, Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of
Orlando, Inc. ("PFO") were notified that they are PRPs at the Malone Service
Company Superfund site in Texas City, Texas ("Site"). The EPA designated both
PFSG and PFO as de minimis parties, which is determined as a generator that
contributed less than 0.6% of the total hazardous materials at the Site. The EPA
has made a settlement offer to all de minimis parties, that requires response
within 45 days of receipt of the notice. PFSG and PFO have accepted the
settlement offer and recorded a liability at December 31, 2004, in the amount of
$229,000. As of the date of this report, payment has not however been made to
satisfy this liability.
During February 2003, PFMI received a letter alleging that PFMI owed Reliance
Insurance Company, in liquidation, the sum of $515,000 as a result of
retrospective premiums under a retroactive premium agreement. In November 2003,
PFMI received a second letter alleging that PFMI owed Reliance Insurance
Company, in liquidation, the sum of $583,000, reflecting an adjustment to the
original amount of retrospective premiums under a retroactive premium agreement.
Our counsel responded and advised that PFMI had numerous defenses to the demand,
including, but not limited to, that the policy expired almost eight years ago
and failure to adjust the premiums in a timely manner violated the agreement
between the Company and Reliance and that under Michigan law it is deemed to be
an unfair and deceptive act or practice in the business of insurance for an
insurer to fail to complete a final audit within 120 days after termination of
the policy. Although we had previously accrued approximately $217,000 in
connection with this matter, during the later part of 2005, we settled this
litigation by agreeing to pay approximately $108,000 to Reliance, which was paid
in March 2006.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigation. We are not a party to any
litigation or governmental proceeding which our management believes could result
in any judgments or fines against us that would have a material adverse affect
on our financial position, liquidity or results of future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock, is traded on the NASDAQ SmallCap Market ("NASDAQ") and the
Boston Stock Exchange ("BSE") under the symbol "PESI" on both NASDAQ and BSE.
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.
2005 2004
-------------- --------------
Low High Low High
------ ------ ------ ------
Common Stock 1st Quarter $ 1.54 $ 1.98 $ 2.17 $ 3.79
2nd Quarter 1.58 2.00 1.57 2.33
3rd Quarter 1.74 3.00 1.44 1.91
4th Quarter 1.50 2.49 1.20 1.85
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markups or commissions and may not represent actual transactions.
As of March 7, 2006, there were approximately 259 stockholders of record of our
Common Stock, including brokerage firms and/or clearing houses holding shares of
our Common Stock for their clientele (with each brokerage house and/or clearing
house being considered as one holder). However, the total number of beneficial
stockholders as of March 7, 2006, was approximately 3,625.
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.
No sales of unregistered securities, other than the securities sold by us during
2005, as reported in our Forms 10-Q for the quarters ended March 31, 2005, June
30, 2005 and September 30, 2005, which were not registered under the Securities
Act of 1933, as amended, were issued during 2005.
22
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.
Certain prior year amounts have been reclassified to conform with current year
presentations. Additionally, revenues and income (loss) from discontinued
operations have been reclassified from continuing operations. Amounts are in
thousands, except for share amounts.
STATEMENT OF OPERATIONS DATA:
2005 2004(2) 2003 2002 2001(1)
------------ ------------ ------------ ------------ ------------
Revenues $ 90,866 $ 82,483 $ 79,153 $ 77,778 $ 68,890
Income (loss) from continuing operations 3,069 (9,577) 3,644 2,677 (954)
Income (loss) from discontinued operations 670 (9,784) (526) (475) 352
Net income (loss) 3,739 (19,361) 3,118 2,202 (602)
Preferred Stock dividends (156) (190) (189) (158) (145)
Net income (loss) applicable to
Common Stock 3,583 (19,551) 2,929 2,044 (747)
Income (loss) per common share - Basic
Continuing operations .07 (.24) .10 .07 (.04)
Discontinued operations .01 (.24) (.02) (.01) .01
Net income (loss) per share .08 (.48) .08 .06 (.03)
Income (loss) per common share - Diluted
Continuing operations .07 (.24) .09 .06 (.04)
Discontinued operations .01 (.24) (.01) (.01) .01
Net income (loss) per share .08 (.48) .08 .05 (.03)
Basic number of shares used in computing
net income (loss) per share 42,605 40,478 34,982 34,217 27,235
Diluted number of shares and potential
common shares used in computing
net income (loss) per share 44,804 40,478 39,436 42,618 27,235
BALANCE SHEET DATA:
December 31,
--------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Working capital (deficit) $ 5,916 $ (497) $ 4,159 $ 731 $ 134
Total assets 98,525 100,455 110,215 105,825 99,137
Current and long-term debt 13,375 18,956 29,088 30,515 31,146
Total liabilities 50,087 56,922 58,488 59,955 56,011
Preferred Stock of subsidiary 1,285 1,285 1,285 1,285 1,285
Stockholders' equity 47,153 42,248 50,442 44,585 41,841
(1) Includes financial data of M&EC as acquired during 2001 and accounted for
using the purchase method of accounting from the date of acquisition, June
25, 2001.
(2) Includes financial data of PFMD and PFP as acquired during 2004 and
accounted for using the purchase method of accounting from the date of
acquisition, March 23, 2004.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained within this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). See
"Special Note regarding Forward-Looking Statements" contained in this report.
Management's discussion and analysis is based, among other things, upon our
audited consolidated financial statements and includes our accounts and the
accounts of our wholly-owned subsidiaries, after elimination of all significant
intercompany balances and transactions.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 of
this report.
OVERVIEW
Looking back at 2005, we are very pleased with the growth and profitability that
we were able to achieve. We reported record revenue of $90,866,000 and record
net income applicable to Common Stock of $3,583,000 for the year ended December
31, 2005. This is after coming out of a difficult and challenging year in 2004,
which included the continued restructuring of our Industrial segment, and
related asset write downs, goodwill and other intangible asset impairment and
the discontinuation of our Michigan facility. Our Nuclear segment continues to
grow year over year, from $6,997,000 in revenue in 1999 to $47,245,000 in 2005
and it continues to drive our profitability, achieving $10,141,000 of segment
profit in 2005, an increase of 10% over 2004. The backlog of stored waste within
the Nuclear segment remains favorable at $16,374,000 at December 31, 2005, and
we continued our expansion into the mixed waste and Nuclear markets and to
receive new contract awards. The Industrial segment has been a challenge for us
for a number of years now. Although our Industrial segment continued to sustain
losses in 2005, it was able to achieve revenue growth in 2005, to a level of
$40,768,000, an increase of 11% over 2004. This increase was reflected within
our commercial waste market, which came principally from our expanded contract
with a national home improvement chain, which was subsequently cancelled in
November of 2005, and from the full year of revenue from the facility acquired
in March of 2004. The Industrial segment reported a significant improvement in
their segment loss from 2004 to 2005 due in large part to the charges that were
recorded in 2004 for the above discussed items. We have spent a great deal of
time evaluating each Industrial facility, their contracts, customer base and
processing capabilities / expertise in an effort to refocus their management
direction, which we are just beginning to see the benefits from. Operational and
sales related changes are being made and where near term improvements are not
identified, further actions are taken, as was demonstrated with the closure and
discontinued operations of the Pittsburgh Industrial facility in November of
2005. We are heavily dependent on the Nuclear segment for our overall
profitability and continue to evaluate and improve the operations of the
Industrial segment. We continue to strengthen our balance sheet and improve our
liquidity position. Our working capital position at December 31, 2005 improved
$6,413,000 to a balance of $5,916,000. Our long term debt balance at year end
was reduced $5,581,000 from December 31, 2004, to a balance of $13,375,000. Our
revolving credit line with PNC Bank has been reduced from $6,480,000 at December
31, 2004 to $2,447,000 at December 31, 2005 and our borrowing availability under
our revolving credit facility was a record $12,964,000 at the end of the year
based on eligible receivables.
RESULTS OF OPERATIONS
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services ("Industrial"),
Nuclear Waste Management Services ("Nuclear") and Consulting Engineering
Services ("Engineering").
24
Below are the results of operations for our years ended December 31, 2005, 2004,
and 2003 (amounts in thousands:
(Consolidated) 2005 % 2004 % 2003 %
- ---------------------------------------- ---------- ---------- --------- ---------- ---------- ----------
Net Revenues $ 90,866 100.0 $ 82,483 100.0 $ 79,153 100.0
Cost of goods sold 65,470 72.1 58,770 71.3 54,041 68.3
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 25,396 27.9 23,713 28.7 25,112 31.7
Selling, general and administrative 20,443 22.5 18,461 22.4 17,553 22.2
Loss (gain) on disposal/impairment
of property and equipment (334) (.4) 994 1.2 (4) --
Impairment loss on intangible assets -- -- 9,002 10.8 -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations 5,287 5.8 (4,744) (5.7) 7,563 9.5
Interest income 133 .1 3 -- 8 --
Interest expense (1,594) (1.8) (2,020) (2.4) (2,804) (3.5)
Interest expense - financing fees (318) (.3) (2,191) (2.6) (1,070) (1.4)
Other 7 -- (456) (.6) (32) --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before taxes 3,501 3.8 (9,408) (11.4) 3,665 4.6
Income taxes 432 .5 169 .2 21 --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations 3,069 3.4 (9,577) (11.6) 3,644 4.6
Preferred Stock dividends (156) (.2) (190) (.2) (189) (.2)
SUMMARY - YEARS ENDED DECEMBER 31, 2005 AND 2004
- ------------------------------------------------
Net Revenue
Consolidated revenues increased for the year ended December 31, 2005, compared
to the year ended December 31, 2004, as follows:
% % %
(In thousands) 2005 Revenue 2004 Revenue Change Change
- ----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Nuclear
- -------
Bechtel Jacobs 14,940 16.5 9,405 11.4 5,535 58.8
Government waste $ 14,615 16.1 $ 16,533 20.0 $ (1,918) (11.6)
Hazardous/non-hazardous 4,308 4.7 3,895 4.7 413 10.6
Other nuclear waste 13,382 14.7 12,846 15.6 536 4.2
---------- ---------- ---------- ---------- ---------- ----------
Total 47,245 52.0 42,679 51.7 4,566 10.7
Industrial
- ----------
Commercial waste 27,064 29.8 23,167 28.1 3,897 16.8
Government services 4,344 4.8 5,853 7.1 (1,509) (25.8)
Acquisition 9,360 10.3 7,580 9.2 1,780 23.5
---------- ---------- ---------- ---------- ---------- ----------
Total 40,768 44.9 36,600 44.4 4,168 11.4
Engineering 2,853 3.1 3,204 3.9 (351) (11.0)
- -----------
---------- ---------- ---------- ---------- ---------- ----------
Total $ 90,866 100.0 $ 82,483 100.0 $ 8,383 10.2
========== ========== ========== ========== ========== ==========
25
The Nuclear segment realized growth of 10.7% in consolidated revenues for the
year ended December 31, 2005, over 2004. The increase in revenues from Bechtel
Jacobs reflected a concentrated effort to process certain of their waste
streams, and assist Bechtel Jacobs attain disposal milestones for 2005. As a
result of the focus towards assisting Bechtel Jacobs, we saw a decrease in
revenue from other government customers. However, we received more waste from
other government customers in 2005, which could not be processed by year end and
is reflected in our backlog. The backlog of stored waste at December 31, 2005,
was $16,374,000 compared to $16,247,000 at December 31, 2004. We expect similar
backlog levels to continue in 2006, subject to the complexity of the waste
streams and timing of receipts and processing of materials. This level of
backlog material continues to position the Nuclear segment well, from a
processing revenue perspective, for the first quarter of 2006. We also saw an
increase in revenue from hazardous and non-hazardous waste streams from certain
existing industrial customers, due to soil projects we performed. We experienced
a small increase in revenue from other nuclear waste, and continue to pursue
growth within the mixed waste market through additional contracts. See "Known
Trends and Uncertainties - Significant Customers" of this Management's
Discussion and Analysis for discussion on our relationship with Bechtel Jacobs
and our Nuclear segment's government contract or subcontracts involving the
federal government. Revenue also increased in the Industrial segment for the
year ended December 31, 2005. The commercial revenue increase was primarily due
to expanded services with a national home improvement chain, which increased
approximately $2,937,000 to $4,424,000 of consolidated revenue for the year
ended December 31, 2005. However, our contract with the home improvement chain
was cancelled effective November 25, 2005. The Industrial segment could see a
reduction in revenue in 2006 as the segment works to replace the loss of the
retail customer with other sources of revenue. The segment also experienced an
increase in revenue of $780,000 from used oil processing and sales, as a result
of increased oil prices. Used oil sales accounted for 5% of our 2005 revenues.
The increase in revenue from the facility acquired in March of 2004, reflected
an entire year of operations in 2005. The Industrial segment increase was
partially offset by a decrease in revenue from government services due to the
expiration of one of our government contracts and the rebid and subsequent lower
revenues related to another government contract. The Engineering segment
experienced a decrease in revenue in 2005 as a result of the completion of
certain special projects in 2004 that were not replaced in 2005.
Cost of Goods Sold
Cost of goods sold increased for the year ended December 31, 2005, compared to
the year ended December 31, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- --------------- --------- --------- --------- --------- ---------
Nuclear $ 29,144 61.7 $ 25,938 60.8 $ 3,206
Industrial 34,142 83.7 30,440 83.2 3,702
Engineering 2,184 76.5 2,392 74.7 (208)
--------- --------- --------- --------- ---------
Total $ 65,470 72.1 $ 58,770 71.3 $ 6,700
========= ========= ========= ========= =========
The Nuclear segment increase principally correlates to costs associated with the
additional revenue, as well as, increases in payroll and certain other
processing costs, such as lab costs, of $857,000 as we are required to utilize
third party labs to analyze certain waste streams. Additionally, based upon the
types of waste processed, we did not gain as much benefit from internal disposal
as we have in prior years. The increase in the Industrial segment was
predominantly related to the increased revenue. Cost of goods sold as a
percentage of revenue showed a modest increase reflecting the impact of
increased fuel and utility costs, increased costs on used oil purchased for
resale. The Engineering segment experienced a decrease in cost of goods sold as
a result of lower revenue, offset partially by the higher fixed cost nature of
the business. Included within cost of goods sold is depreciation and
amortization expense of $4,408,000 and $4,291,000 for the year ended December
31, 2005, and 2004, respectively, reflecting an increase of
26
$117,000 over 2004. The facility acquired in March 2004, had a depreciation
expense increase of $124,000, reflecting the additional three months of
depreciation expense taken during 2005.
Gross Profit
Gross profit for the year ended December 31, 2005, increased over 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- --------------- --------- --------- --------- --------- ---------
Nuclear $ 18,100 38.3 $ 16,741 39.2 $ 1,359
Industrial 6,627 16.3 6,160 16.8 467
Engineering 669 23.5 812 25.3 (143)
--------- --------- --------- --------- ---------
Total $ 25,396 27.9 $ 23,713 28.7 $ 1,683
========= ========= ========= ========= =========
The resulting increase in gross profit in both the Nuclear and Industrial
segments is a result of the increased revenue for the year as compared to 2004.
However, the gross profit percentage decreased slightly for both segments as a
result of the lower margin waste streams processed in 2005. The Engineering
segment gross profit decreased slightly, as a result of their decreased revenue.
The Engineering segment gross profit percentage also decreased, which is a
reflection of their high fixed costs.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the year
ended December 31, 2005, as compared to the corresponding period for 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- --------------- --------- ---------- --------- --------- ---------
Administrative $ 4,800 -- $ 4,197 -- $ 603
Nuclear 6,863 14.5 6,079 14.2 784
Industrial 8,307 20.4 7,735 21.1 572
Engineering 473 16.6 450 14.1 23
--------- --------- --------- --------- ---------
Total $ 20,443 22.5 $ 18,461 22.4 $ 1,982
========= ========= ========= ========= =========
We experienced an increase in SG&A expenses throughout the company, however SG&A
as a consolidated percentage of revenue remained constant. The increase in the
corporate administrative overhead is due primarily to increased payroll and
benefits, as a result of our continuing focus on corporate governance and
information services, and legal and environmental consulting fees related to the
extensive internal review performed on permit compliance and the treatment of
certain waste streams. The increase in administrative overhead was also from
third party charges incurred for additional audit fees, compliance work
performed with regard to Sarbanes-Oxley, and completion of the related internal
control assessment required under Section 404 of the Act. As a result of
completing the initial year of assessment and documentation, and the
establishment of our internal audit department, during the third quarter of
2005, we saw a decline in the third party charges related to Section 404. The
increase in SG&A in the Nuclear segment was a result of increased payroll and
benefits, as the segment works to build a stronger management and support team.
The increase in the Industrial segment was also from increased payroll and
benefits, and other costs incurred in connection with environmental compliance
of the facilities. The Engineering segment increase in SG&A was the result of
hiring a business development manager to assist in expanding their customer
base. Included in SG&A expenses is depreciation and amortization expense of
$346,000 and $285,000 for the years ended December 31, 2005, and 2004,
respectively.
27
Loss (Gain) on Disposal/Impairment of Property and Equipment
The gain on fixed asset disposal/impairment for the year ended December 31,
2005, was $334,000, as compared to a loss of $994,000 for the same period in
2004. The gain for 2005 was principally a result of the sale of property at our
facility in Maryland. The sale was for net proceeds of $695,000 for land and
building with a net book value of $332,000. The resulting gain of $363,000 was
included in income from operations, and was partially offset by losses on
disposal of equipment. The loss in 2004 is principally a result of the
Industrial segment writing down certain fixed assets, totaling $1,026,000, which
have been determined to have no fair value. As part of the restructuring
process, management abandoned various projects at certain facilities.
Interest Income
Interest income increased $130,000 for the year ended December 31, 2005, as
compared to the previous year. The increase was due to interest income we
received on the sinking fund we maintain for our finite risk insurance policy.
See later in this Management's Discussion and Analysis - Liquidity and Capital
Resources for further discussion on the finite risk insurance policy.
Interest Expense
Interest expense decreased for the year ended December 31, 2005, as compared to
the corresponding period of 2004.
(In thousands) 2005 2004 Change %
- -------------------- -------- -------- -------- --------
PNC interest $ 834 $ 789 $ 45 5.7
AMI/BEC -- 506 (506) (100.0)
Other 760 725 35 4.8
-------- -------- -------- --------
Total $ 1,594 $ 2,020 $ (426) (21.1)
======== ======== ======== ========
This decrease principally reflects the prepayment of the AMI/BEC senior
subordinated debt in August 2004, which resulted in a decrease in expense.
Additionally, we experienced a decrease due to reduced borrowing levels on other
debt obligations as we continue to reduce our debt balances. However, the 2004
other interest total reflects a net reduced number, as a result of the favorable
impact of an adjustment to interest payable associated with the PDC and IRS
notes, in September 2004, which totaled $219,000. Offsetting the decrease, was
an increase in PNC interest as a result of the increase in the Term Loan by
approximately $4.4 million effective June 29, 2005.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $1,873,000 for the year
ended December 31, 2005, as compared to the corresponding period of 2004. This
decrease was principally due to the write-off of $1,217,000, in 2004, of prepaid
financing fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004. Additionally, we
expensed an early termination fee of $190,000, in 2004, as a result of the
pre-payment. The remaining financing fees are principally associated with the
PNC revolving credit and term loan and are amortized to expense over the term of
the loan agreements. As of December 31, 2005, the unamortized balance of prepaid
financing fees is $462,000, which is comprised of $220,000 from the original
debt and $338,000 associated with Amendment No. 4 and Amendment No. 5, offset by
the monthly amortization of these fees over the past six months. These prepaid
financing fees will be amortized through May 2008 at a rate of $16,000 per
month.
Income Tax
See Note 11 to Notes to Consolidated Financial Statements for a reconciliation
between taxes at the statutory rate and the provision for income taxes as
reported. For the years ended December 31, 2005 and
28
2004, we had approximately $50,000 and $0, respectively, in federal income tax
expense, as a result of a 100% valuation allowance against the deferred tax
asset resulting from our alternative minimum tax liability at December 31, 2005,
and $382,000 and $169,000, respectively, in state income taxes primarily for our
subsidiary, M&EC, in Oak Ridge, Tennessee.
Preferred Stock Dividends
Preferred Stock dividends decreased by approximately $34,000 to $156,000 for the
year ended December 31, 2005. The decrease was due to the conversion of our
Series 17 Preferred Stock in September 2005.
SUMMARY - YEARS ENDED DECEMBER 31, 2004 AND 2003
- ------------------------------------------------
Net Revenue
Consolidated revenues increased for the year ended December 31, 2004, compared
to the year ended December 31, 2003, as follows:
% % %
(In thousands) 2004 Revenue 2003 Revenue Change Change
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ---------
Nuclear
- -------
Government waste $ 16,533 20.0 $ 13,739 17.4 $ 2,794 20.3
Hazardous/Non-hazardous 3,895 4.7 3,458 4.4 437 12.6
Other nuclear waste 12,846 15.6 6,427 8.1 6,418 99.9
Bechtel Jacobs 9,405 11.4 13,794 17.4 (4,389) (31.8)
------------ ------------ ------------ ------------ ------------ ---------
Total 42,679 51.7 37,418 47.3 5,260 14.1
Industrial Revenues
- -------------------
Commercial waste 23,167 28.1 26,123 33.0 (2,956) (11.3)
Hydrolysate project -- -- 4,953 6.2 (4,953) (100.0)
Government services 5,853 7.1 7,436 9.4 (1,583) (21.3)
Acquisition 7,580 9.2 -- -- 7,580 100.0
------------ ------------ ------------ ------------ ------------ ---------
Total 36,600 44.4 38,512 48.6 (1,912) (4.9)
Engineering 3,204 3.9 3,223 4.1 (19) (0.6)
- -----------
------------ ------------ ------------ ------------ ------------ ---------
Total $ 82,483 100.0 $ 79,153 100.0 $ 3,330 4.2
============ ============ ============ ============ ============ =========
The Nuclear segment realized growth in consolidated revenues. The increase in
the Nuclear segment is primarily the result of continued expansion within the
mixed waste market as our facilities demonstrate their ability to accept and
process more complex waste streams, including new contracts, such as a contract
awarded by a Fortune 500 company in late June 2004 to treat and dispose of mixed
waste from research and development activities. Government waste for the first
two quarters of 2003 was negatively effected by the government's inability to
ship waste to our facilities due to the war in Iraq and prolonged terrorism
alerts, which was not an obstacle during 2004. We continue to service certain of
the hazardous and non-hazardous waste streams from existing industrial
customers, which increased due to special event projects in 2004. Partially
offsetting these increases was a decline in the Bechtel Jacobs revenue, as a
result of decreased waste receipts due to certain DOE projects nearing
completion, and shipment delays as they plan for new projects to begin. The
Bechtel Jacobs revenue includes shipments received under the Oak Ridge
contracts. See "Known Trends and Uncertainties - Significant Contracts" of this
Management's Discussion and Analysis. The backlog of stored waste within the
Nuclear segment at December 31, 2004, was approximately $16,247,000, compared to
$5,782,000 at December 31, 2003. This increase in backlog reflects the increased
shipments of mixed waste coming into the facilities during
29
the fourth quarter which has traditionally not been the trend, and the increased
price per container, as a result of the nature of such waste received. This
increased backlog should position the Nuclear segment well, from a processing
revenue perspective, for the first quarter of 2005. The principal offset to the
increase in Nuclear segment revenues was a decrease from the Industrial segment,
as well as, a small decrease in the Engineering segment. The primary decrease in
the Industrial segment was due to the Army's Newport Hydrolysate project, in
2003, which was not repeated in 2004. The remaining decrease is attributable to
the continued restructuring including the strategic decision to eliminate low
margin broker business and replace it with higher margin generator direct
revenue and a reduction in government business resulting from contract
expirations. Partially offsetting the decrease within the Industrial segment was
revenue contributed by the facility acquired as of March 23, 2004.
Cost of Goods Sold
Cost of goods sold increased for the year ended December 31, 2004, compared to
the year ended December 31, 2003, as follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change
- --------------- --------- --------- --------- --------- ---------
Nuclear $ 25,938 60.8 $ 22,382 59.8 $ 3,556
Industrial 30,440 83.2 29,515 76.6 925
Engineering 2,392 74.7 2,144 66.5 248
--------- --------- --------- --------- ---------
Total $ 58,770 71.3 $ 54,041 68.3 $ 4,729
========= ========= ========= ========= =========
The increase in cost of goods sold was present in all three segments. The
Nuclear segment increase principally correlates to the additional revenues, as
well as, an increase in disposal rates due to the waste mix. The increase in the
Industrial segment predominantly relates to additional costs associated with the
revenue generated from the two facilities acquired, as of March 23, 2004, and
added operating costs incurred as this segment completes its restructuring and
integration efforts. Partially offsetting this increase is the reduction in
costs from 2003 due to the Army's Newport Hydrolysate project, not repeated in
2004, which carried significantly lower costs than the replacement revenue from
the acquired facilities. The Engineering segment accounted for the remaining
increase experiencing higher payroll and other direct costs for projects
completed this year. Included within cost of goods sold is depreciation and
amortization expense of $4,291,000 and $3,969,000 for the year ended December
31, 2004 and 2003, respectively, reflecting an increase of $322,000 over 2003,
of which $211,000 was a result of the acquired facility.
Gross Profit
Gross profit for the year ended December 31, 2004, decreased over 2003, as
follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change
- --------------- --------- --------- --------- --------- ---------
Nuclear $ 16,741 39.2 $ 15,036 40.2 $ 1,705
Industrial 6,160 16.8 8,997 23.4 (2,837)
Engineering 812 25.3 1,079 33.5 (267)
--------- --------- --------- --------- ---------
Total $ 23,713 28.7 $ 25,112 31.7 $ (1,399)
========= ========= ========= ========= =========
The resulting gross profit decrease is attributable to the decline in the
Industrial segment slightly aided by the Engineering segment. However, the
decline in the gross profit percentage was experienced across all segments with
the major decrease occurring in the Industrial segment. This segment's decrease
is principally a result of the reduction in gross profit from the elimination of
the Army's Newport Hydrolysate project, a higher margin contract, in 2003, and
fixed costs of operating the facilities spread
30
over reduced revenues, due in part to the restructuring. The addition of the
March 2004, acquisition partially offset the decrease. The decrease in gross
profit percentage in the Engineering segment is a result of lower margin
projects in 2004 compared to 2003.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the year
ended December 31, 2004, as compared to the corresponding period for 2003, as
follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change
- --------------- --------- --------- --------- --------- ---------
Administrative $ 4,197 -- $ 3,085 -- $ 1,112
Nuclear 6,079 14.2 5,800 15.5 279
Industrial 7,735 21.1 8,059 20.9 (324)
Engineering 450 14.1 609 18.9 (159)
--------- --------- --------- --------- ---------
Total $ 18,461 22.4 $ 17,553 22.2 $ 908
========= ========= ========= ========= =========
The increase in SG&A expenses predominately relates to corporate administrative
expense, which include third party charges of $446,000 incurred for the
compliance work performed with regard to Sarbanes Oxley and the related internal
control assessment required under Section 404 of the Act. We anticipate the
third party consulting fees related to Section 404 to decline slightly in 2005,
as we have documented deficiencies and are focused on the successful
remediation. Also, additional payroll related expenses to build stronger
infrastructures within the Corporate office and the Nuclear segment, were
incurred during the year, a trend that is anticipated to continue into 2005.
Partially offsetting these increases were decreases realized by both the
Industrial and Engineering segments. These reductions were achieved due to lower
payroll and related expenses, with the decrease in the Industrial segment
primarily due to the restructuring of the segment. Partially offsetting the
decrease within the Industrial segment were the additional expenses related to
the facility acquired, effective March 23, 2004. Also adding to the partial
offset were expenses of $458,000 for analytical and defense fees related to the
Title V air issues at one Industrial facility and additional remediation
requirements needed at two other facilities. Included in SG&A expenses is
depreciation and amortization expense of $285,000 and $268,000 for the years
ended December 31, 2004 and 2003, respectively.
Loss (Gain) on Disposal/Impairment of Property and Equipment
The loss on fixed asset disposal/impairment for the year ended December 31,
2004, was $994,000, as compared to a gain of $4,000 for the same period in 2003.
This loss is principally a result of the Industrial segment writing down certain
fixed assets, totaling $1,026,000, which have been determined to have no fair
value. As part of the restructuring process, management abandoned various
projects at certain facilities.
Impairment Loss on Intangible Assets
In conjunction with our annual intangible asset impairment test, pursuant to
Statement of Financial Accounting Standards 142 Goodwill and Other Intangible
Assets ("SFAS 142"), and the discontinuation of our operations at our Industrial
facility in Michigan, we engaged a third party appraisal firm to test goodwill
and permits separately for impairment, as of October 1, 2004. The impairment
test showed an impairment of indefinite life intangible assets in our Industrial
segment. As such, the appraisal firm tested all assets of our Industrial segment
to determine the recognized impairment to our assets. The resulting impairment
to our goodwill and permits, of our Industrial segment is $4,886,000 and
$4,116,000, respectively. During the third quarter we recorded an estimated
impairment of $7,101,000 for both goodwill and permits, based on a preliminary
third party impairment test, with the final impairment test resulting in an
additional impairment of $1,901,000 for both goodwill and permits. The
additional
31
impairment included $972,000 due principally to increased appraised values of
our fixed assets. Additionally, the original impairment amount of $929,000
allocated to our discontinued operation, PFMI was reclassified to the impairment
loss on intangible assets in continuing operations of the Industrial segment due
to the negative value we ultimately determined PFMI to have when we refined our
estimate.
Interest Expense
Interest expense decreased for the year ended December 31, 2004, as compared to
the corresponding period of 2003.
(In thousands) 2004 2003 Change %
- -------------------- -------- -------- -------- --------
PNC interest $ 789 $ 967 $ (178) (18.4)
AMI/BEC 506 759 (253) (33.3)
Other 725 1,078 (353) (32.7)
-------- -------- -------- --------
Total $ 2,020 $ 2,804 $ (784) (27.9)
======== ======== ======== ========
This decrease reflects lower borrowing levels on our PNC revolving credit and
term loan resulting from improved cash flows from operations and scheduled
repayments on the term loan. In addition, during March 2004, we received
proceeds related to the private placement that were used to temporarily reduce
the revolver, which resulted in a further reduction in PNC interest expense.
Subsequently, in August 2004, we reborrowed certain of the private placements
funds from the revolver to prepay in full the AMI/BEC 13.5% Senior Subordinated
Debt. We also experienced a decrease in interest expense due to the final
repayment of debt associated with our 1999 acquisitions, an adjustment to the
interest payable associated with the PDC and IRS notes, which totaled $219,000,
and from the final repayment of debt to various other sources as our overall
debt position continues to improve.
Interest Expense - Financing Fees
Interest expense-financing fees increased approximately $1,121,000 for the year
ended December 31, 2004, as compared to the corresponding period of 2003. This
increase was principally due to the write-off of $1,217,000 of prepaid financing
fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004, offset by the
savings realized throughout the remainder of the year due to no longer
amortizing these costs. The acceleration of expense due to the early termination
subsequently resulted in increased Interest Expense - Financing fees associated
with the senior subordinated debt totaling $974,000. Additionally, we expensed
an early termination fee of $190,000 paid as a result of the pre-payment.
Offsetting this increase was a one-time fee associated with other short term
financing of $45,000 which was written off in March 2003. These financing fees
are principally associated with the PNC revolving credit and term loan and the
senior subordinated notes, and are amortized to expense over the term of the
loan agreements. As of December 31, 2004, the unamortized balance of prepaid
financing fees is $440,000, which will be amortized to expense at the rate of
approximately $37,000 per month during 2005.
Other Expense
Other expense increased for the year ended December 31, 2004, as compared to the
same period of 2003, as follows:
(In thousands) 2004 2003 Change
- ------------------------- -------- -------- --------
Environmental issues $ 259 $ -- $ 259
Royalty settlement 225 -- 225
Other (28) 32 (60)
-------- -------- --------
Total $ 456 $ 32 $ 424
======== ======== ========
32
The increase in other expense was primarily due to environmental issues related
to the settlement of two, potentially responsible party, ("PRP") claims against
certain of our Industrial segment facilities, regarding waste shipped to these
superfund sites prior to our acquisition of these Industrial segment facilities.
Additionally, other expense increased due to a royalty settlement related to the
method of calculation utilized in determining the monthly royalty to the
previous owner of one of the Industrial segment facilities.
Income Tax
See Note 11 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2004 and 2003, we had no federal income tax
expense, and as such no federal provision for income tax, due to utilization of
our net operating loss carry-forward and permanent and temporary book-tax timing
differences. We did however record state income tax expense for both 2004 and
2003. The state income tax was from our subsidiary in Oak Ridge, Tennessee,
M&EC.
Preferred Stock Dividends
Preferred Stock dividends remained relatively constant at approximately $190,000
and $189,000 for the years ended December 31, 2004, and December 31, 2003,
respectively.
DISCONTINUED OPERATIONS
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The decision to discontinue
operations at PFP was due to our reevaluation of the facility and our inability
to achieve profitability at the facility in the near term. During February 2006,
we completed the remediation of the leased property and the equipment, and
released the property back to the owner. The operating results for the current
and prior periods have been reclassified to discontinued operations in our
Consolidated Statements of Operations.
PFP recorded revenue of $721,000 and an operating loss of $346,000 for the year
ended December 31, 2005. Revenue for the nine months that we owned PFP in 2004,
was $890,000 with operating income of $29,000 for the same period. The assets
and liabilities related to PFP have been reclassified into separate categories
in the Consolidated Balance Sheets as of December 31, 2005 and 2004. The assets
are recorded at their net realizable value, and consist of accounts receivable
of $60,000 and equipment of $203,000.
Liabilities as of December 31, 2005, consist of accounts payable of $72,000,
accrued expenses $12,000 and environmental remediation costs of $146,000. The
environmental remediation costs represent our best estimate of the cost to
remediate the property and equipment and release the property back to the owner
and sell or dispose of the equipment. We held a five year lease on the property
that was to expire in March 2009, and consisted of monthly rent expense of
approximately $10,000. During February 2006, we finalized negotiations with the
property lessor for early termination of the lease. The agreement resulted in
the payment of approximately $200,000 to be paid in $20,000 increments over the
last ten months of 2006, following our vacating the property in February 2006.
These lease termination costs will be charged to expense during the first
quarter of 2006.
PFMI
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
PFMI was principally a result of two fires that significantly disrupted
operations at the facility in 2003, and the facility's continued drain on the
financial resources of our Industrial
33
segment. We are in the process of remediating the facility and evaluating our
available options for future use or sale of the property. The operating
activities for the current and prior periods have been reclassified to
discontinued operations in our Consolidated Statements of Operations.
PFMI recorded income of $1,016,000 for the year ended December 31, 2005, and
revenue of $1,569,000 and an operating loss of $635,000 for the year ended
December 31, 2004. Our income in 2005 was a result of the settlement of the
three insurance claims we submitted relative to the two fires at PFMI, a
property claim for the first fire and a property claim and business interruption
claim for the second fire. During 2004, we recorded a receivable of $1,585,000
based on negotiations with the insurance carrier on the business interruption
claim. The income from recording this receivable was recorded as a reduction of
"loss from discontinued operations" and reduced the operating losses for 2004.
During 2005, we received insurance proceeds and claim settlements of $3,253,000
for settlement of all three claims. Of these proceeds, $1,476,000 was recorded
as income from discontinued operations during 2005, which is net of $192,000
paid for public adjustor fees.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2005 and 2004. As of December 31, 2005, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$603,000. Liabilities as of December 31, 2005, consist of accounts payable and
current accrued expenses of $9,000, environmental accruals of $1,909,000, and a
pension payable of $1,629,000. 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, for principal and interest, over an eight year
period. This obligation is recorded as a long-term liability, with a current
portion of $196,000 that we expect to pay over the next year.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which are not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we estimated the cost of
this environmental closure and remediation liability to be $2,464,000, as of
September 30, 2004. We have spent approximately $555,000 for closure costs since
September 30, 2004, of which approximately $439,000 was spent in 2005. We have
$1,909,000 accrued for the closure, as of December 31, 2005, and we anticipate
spending $193,000 in 2006 with the remainder over the next two to five years.
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.
34
At December 31, 2005, we had cash of $94,000. The following table reflects the
cash flow activities during 2005.
(Amounts in thousands) 2005
------------------------------------------------ ----------
Cash provided by operations $ 7,394
Cash used in investing activities (2,524)
Cash used in financing activities (4,991)
----------
Decrease in cash $ (121)
==========
We are in a net borrowing position and therefore attempt to move all excess cash
balances immediately to the revolving credit facility, so as to reduce debt and
interest expense. We utilize a centralized cash management system, which
includes remittance lock boxes and is structured to accelerate collection
activities and reduced cash balances, as idle cash is moved without delay to the
revolving credit facility. The cash balance at December 31, 2005, 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
$16,609,000, a decrease of $799,000 over the December 31, 2004, balance of
$17,408,000. The Industrial segment experienced a decrease of $873,000 primarily
due to increased collection efforts, the receipt of payment associated with the
final billing on the Army's Newport Hydrolysate Project, and the reduction of
receivables from contract expirations. Additionally, the Engineering segment
also experienced a decrease of approximately $58,000. Offsetting the decreases,
was an increase in the Nuclear segment of $132,000 as a result of increased
billings from waste received in the fourth quarter of 2005, partially offset by
collection of receivables on certain Bechtel Jacobs and other remediation jobs,
performed in 2004.
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 preapproval 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, 2005, Unbilled Receivables totaled
$11,948,000, an increase of $2,430,000 from the December 31, 2004, balance of
$9,518,000. This increase is principally due to the increased revenues
recognized in the Nuclear segment, and the complexity of the current contracts,
which requires greater levels of documentation and additional testing for final
invoicing.
As of December 31, 2005, accounts payable was $6,053,000, a decrease of $308,000
from the December 31, 2004, balance of $6,361,000. This decrease in accounts
payable is a result of the impact of increased revenues and billings throughout
the year and improved profitability. Additionally, we received proceeds from the
exercise of options and warrants, the sale of property in Maryland, the
settlement of insurance claims, the net increase in the term loan, all of which
increased cash flow and enabled us to reduce our accounts payable balances.
35
Accrued Expenses as of December 31, 2005, totaled $11,666,000, a decrease of
$355,000 over the December 31, 2004, balance of $12,021,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. The decrease in
accrued expenses was principally a result of payments for analytical and legal
defense costs associated with Title V air issues at one of our Industrial
facilities and the payment on the royalty adjustment to the previous owner of
one of the Industrial segment facilities, accrued in 2004, with such royalty
terminating in third quarter of 2005. We also had decreases in insurance payable
as a result of a favorable insurance review adjustment. Offsetting these
decreases, was an increase in the accrued sales, property and other tax accruals
resulting from our increased revenue and state taxable income, an increase in
salaries and employee benefits as a result of an increase in the health benefit
claim accrual, and an increase in waste disposal and transportation costs in
conjunction with the increase in revenues.
Working capital at December 31, 2005, was $5,916,000, as compared to a working
capital deficit of $497,000 at December 31, 2004. The increase of $6,413,000 is
principally a result of improved operating results, the reduction of the current
portion of our long-term debt and the reclassification of certain liabilities
related to discontinued operations to long-term liabilities. Our improved
operating results provided us the funds to pay our vendors in a shorter time
frame, and settle some legal and consulting accrued expenses. This resulted in a
decrease in accounts payable and accrued expenses of approximately $1,337,000.
The decrease in the current portion of long-term debt is principally related to
the prepayment of the unsecured promissory note in the amount of $3,500,000 plus
related interest of $202,000. Additionally we reclassified $1,433,000 of the
pension withdrawal liability associated with discontinued operations to a
long-term obligation as the result of the negotiation of an installment
agreement completed in October 2005.
Investing Activities
Our purchases of new capital equipment for the twelve-month period ended
December 31, 2005, totaled approximately $2,616,000 of which $517,000 was
financed, resulting in net purchases of $2,099,000, funded out of cash flow.
These expenditures were for expansion and improvements to the operations
principally within the Nuclear and Industrial segments. These capital
expenditures were principally funded by the cash provided by operations, through
various other lease financing sources and through Warrant and option proceeds
raised during the year. We have budgeted capital expenditures of approximately
$6,800,000 for 2006, which includes an estimated $3,570,000 to complete certain
current projects committed at December 31, 2005, as well as other identified
capital and permit compliance purchases. Certain of these budgeted projects are
discretionary and may either be delayed until later in the year or deferred
altogether. We have traditionally incurred actual capital spending totals for a
given year less than initial budget amount. The initiation and timing of
projects are also determined by financing alternatives or funds available for
such capital projects. We anticipate funding these capital expenditures by a
combination of lease financing, internally generated funds, and/or the proceeds
received from Warrant exercises. See " - Environmental Contigencies" for
budgeted capital expenditures relating to environmental contingencies such as
environmental remediation expenditures.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure of our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage of which the coverage amount totals $28,766,000 at
December 31, 2005, and has available capacity to allow for annual inflation and
other performance and surety bond requirements. This finite risk insurance
policy required an upfront payment of $4.0 million, of which $2,766,000
represents the full premium for the 25-year term of the policy, and the
remaining $1,234,000, to be deposited in a sinking fund account representing a
restricted cash account. Additionally, in February 2004 and 2005, we paid the
first and second of nine required annual
36
installments of $1,004,000, of which $991,000 was deposited in the sinking fund
account, the remaining $13,000 represents a terrorism premium. We recorded
$123,000 of interest income during 2005 for interest earned as of December 31,
2005, on the sinking funds. As of December 31, 2005, we have $3,339,000 in our
sinking fund on the consolidated balance sheet. On the fourth and subsequent
anniversaries of the contract inception, we may elect to terminate this
contract. If we so elect, the Insurer will pay us an amount equal to 100% of the
sinking fund account balance in return for complete releases of liability from
both us and any applicable regulatory agency using this policy as an instrument
to comply with financial assurance requirements.
On March 23, 2004, our subsidiary, PFMD completed it's acquisition of certain
assets of A&A and our subsidiary, PFP completed its acquisition of certain
assets of EMAX, which as of November 2005, became a discontinued operation (see
Discontinued Operations earlier in this Management's Discussion and Analysis).
We paid $2,735,000 in cash for the acquired assets and assumed liabilities of
A&A and $180,000 in cash for EMAX, using funds received in connection with the
private placement discussed below, under financing activities. A&A and EMAX had
unaudited combined revenues of approximately $15.0 million in 2003 and a
combined loss of approximately $299,000. See - "Discontinued Operations" for a
discussion as to discontinuing PFP.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement initially 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 December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves the Agent reasonably deems proper and
necessary. As of December 31, 2005, the excess availability under our Revolving
Credit was $12,964,000 based on our eligible receivables.
Effective March 25, 2005, the Company and PNC entered into an amended agreement
("Amendment No. 4"), which, among other things, extends the $25 million credit
facility through May 31, 2008. The other terms of the credit facility remain
principally unchanged, as a result of the amendment, with the exception of a 50
basis point reduction in the variable interest rate on both loans.
On June 29, 2005, we entered into an amendment ("Amendment No. 5") to the
Agreement. Pursuant to Amendment No. 5, PNC increased our Term Loan by
approximately $4.4 million, resulting in a Term Loan of $7 million. Under
Amendment No. 5, 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 in May 2008, upon termination of
the amended Agreement. As part of Amendment No. 5, certain of our subsidiaries
have modified or granted mortgages to PNC on their facilities, in addition to
the collateral previously granted to PNC under the Agreement. All other terms
and conditions to the Agreement, remain principally unchanged. We used the
additional loan proceeds to prepay a $3.5 million unsecured promissory note,
which was due and payable in August 2005, and the balance was used for general
working capital. As a condition of Amendments No. 4 and 5, we paid a $140,000
fee to PNC.
37
The terms of the Agreement provide that a default in the Agreement could occur
upon the cessation of our Chief Financial Officer, Richard T., Kelecy to be a
senior executive officer. Mr. Kelecy's resignation, effective April 5, 2006,
caused a technical default under the Agreement. However, we have been in
discussion with PNC, and they have informed us of their intent to waive the
technical default.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was re-classed in its entirety from long
term to current in the third quarter of 2004. We utilized the proceeds of the
amended agreement with PNC, mentioned above, to repay this note in June 2005.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2006 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (9% on December 31, 2005) and payable in one
lump sum at the end of the loan period. On December 31, 2005, the outstanding
balance was $3,636,000 including accrued interest of approximately $1,402,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2006 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On December 31,
2005, the rate was 9%. On December 31, 2005, the outstanding balance was
$890,000 including accrued interest of approximately $337,000.
During 2005, various investors exercised Warrants to purchase 1,197,766 shares
of our Common Stock, of which 645,264 shares were issued on a cashless basis,
and proceeds of $937,000 were received for the remaining shares. Holders of
certain outstanding options exercised their options to purchase 55,800 shares of
our Common Stock for an aggregate purchase price of approximately $70,000. The
Warrants and options were exercised in accordance with the terms of their
respective documents. The proceeds of the Warrant and option exercises were used
to fund capital expenditures and for current working capital needs.
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees, and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently re-borrowed the private placement funds from the
revolving credit
38
facility in August 2004, and prepaid the higher interest, 13.5% Notes, as
discussed above. We also issued Warrants to purchase an aggregate of 160,000
shares of our Common Stock, exercisable at $2.92 per share and with a three year
term, for consulting services related to the private placement.
Preferred Stock
On September 30, 2005, the Company received a notice from Capital Bank GRAWE
Gruppe, AG, dated September 26, 2005, to convert the 2,500 issued and
outstanding shares of the Company's Series 17 Class Q Convertible Preferred
Stock ("Series 17"). Pursuant to the terms of the Series 17, the conversion
resulted in the issuance of 1,666,667 shares of the Company's Common Stock to
Capital Bank, as agent for certain of its investors. The final dividend due on
the Series 17 of approximately $30,000 for the period from July 1, 2005 through
the conversion date was paid in cash in October 2005. During 2005, we paid
$92,000 for dividends on the Series 17.
After conversion of the Series 17, Capital Bank owns of record, as agent for
certain investors, 6,413,383 shares of Common Stock, or 14.3% of the Company's
issued and outstanding Common Stock as of December 31, 2005, and 2,659,807
shares that Capital Bank has the right to acquire, as agent for certain
investors, under certain Warrants that expire during July 2006. The Warrants are
exercisable at an exercise price of $1.75 per share of Common Stock. If Capital
Bank were to exercise all of the Warrants, Capital Bank would hold, as agent for
certain investors, 9,073,190 shares or 19.1% of the Company's Common Stock, as
of December 31, 2005.
In summary, we have continued to take steps to improve our operations and
liquidity, as discussed above. However, we continue to invest our working
capital back into our facilities to fund capital additions within both the
Nuclear and Industrial segments. We have experienced the positive impact of
improved collections of our accounts receivable and increased availability under
our Revolving Credit. Additionally, we continued to reduce our accounts payable
through the last half of the year. Also, positively impacting our liquidity
position was the replacement of our Unsecured Promissory Note with proceeds from
our Term Loan and the payment agreement on our pension withdrawal liability. The
reserves recorded on discontinued operations could be reduced or paid over a
longer period of time than initially anticipated. If, among other things, our
Industrial segment is unable to return to profitability in the foreseeable
future, or our Nuclear segment is unable to maintain existing government
contracts or win new government contracts, have unforeseen acceleration of debt
payments, have unforeseen facility closures or are required to accelerate
remediation activities, such would have a material adverse effect on our
liquidity position.
39
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at December 31, 2005,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
Payments due by period
-------------------------------------------------
Less than 1-3 4-5 After
Contractual Obligations Total 1 year years years 5 years
- --------------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 13,375 $ 2,678 $ 10,672 $ 25 $ --
Interest on long-term debt (1) 1,739 -- 1,739 -- --
Interest on variable rate debt (2) 1,251 637 614 -- --
Operating leases 3,367 1,643 1,488 215 21
Finite risk policy (3) 7,026 1,004 3,011 2,008 1,003
Pension withdrawal liability (4) 1,629 196 475 403 555
Environmental contingencies (5) 4,395 1,107 2,370 295 623
Purchase obligations (6) -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 32,782 $ 7,265 $ 20,369 $ 2,946 $ 2,202
========== ========== ========== ========== ==========
(1) Our IRS Note and PDC Note agreements state that the interest on those notes
is paid at the end of the term, December 2008.
(2) We have variable interest rates on our Term Loan and Revolving Credit of 1%
and 1/2% over the prime rate of interest, respectively, and as such we have
made certain assumptions in estimating future interest payments on this
variable interest rate debt. We assume an increase in prime rate of 0.25%
in each of the years 2006 through 2008. We anticipate a full repayment of
our Revolving Credit by December 2006, and full repayment of our Term Loan
by May 2008.
(3) 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.
(4) The pension withdrawal liability is the estimated liability to us upon
termination of substantially all of our union employees at our discontinued
operation, PFMI. See Discontinued Operation earlier in this section for
discussion on our discontinued operation.
(5) 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.
(6) We are not a party to any significant long-term service or supply contracts
with respect to our processes. We refrain from entering into any long-term
purchase commitments in the ordinary course of business.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as, the reported amounts of revenues and expenses during the reporting
period. We believe the following
40
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 more time consuming. We have continued to enhance
our waste tracking capabilities and systems, which has enabled us to better
match the revenue earned to the processing phases achieved. The major processing
phases are receipt, treatment/processing and shipment/final disposition. Upon
receiving mixed waste we recognize a certain percentage (generally 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
don't use percentage of completion estimates in our Industrial segment. We
review and evaluate our revenue recognition estimates and policies on a
quarterly basis.
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 0.6%, of revenue for 2005 and 3.1%, of accounts receivable as of
December 31, 2005. Additionally, this allowance was approximately 0.7% of
revenue for 2004, and 3.2% of accounts receivable as of December 31, 2004.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. 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 utilize an independent appraisal
firm to test goodwill and permits, separately, for impairment, annually as of
October 1. Our annual impairment test as of October 1, 2004, resulted in an
impairment of goodwill and permits, in our Industrial segment in the amounts of
$4,886,000 and $4,116,000, respectively, which resulted in the remaining balance
of Industrial segment intangible permits in the amount of $2,370,000. The annual
impairment test as of October 1, 2005, showed no impairment to goodwill or
permits. The appraisers estimate the fair value of our operating segments using
a discounted cash flow valuation approach. This approach is dependent on
estimates for future sales, operating income, depreciation and amortization,
working capital changes, and capital expenditures, as well as, expected growth
rates for cash flows and long-term interest rates, all of which are impacted by
economic conditions related to our industry as well as conditions in the U.S.
capital markets.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event we cease operations
in an existing facility. The accrued closure costs are estimates based on
guidelines developed by federal and/or state regulatory authorities under
Resource Conservation and Recovery Act ("RCRA"). Such costs are evaluated
annually and adjusted for inflationary factors and for approved changes or
expansions to the facilities. Increases due to inflationary factors for 2005 and
2004, have been approximately 2.1%, and 1.6%, respectively, and based on the
historical information, we do not expect future inflationary changes to differ
materially from the last two years. Increases or decreases in accrued closure
costs resulting from changes or expansions at the facilities are determined
41
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 six remediation projects currently in
progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. Included in the liability are accrued long-term
environmental liabilities for our acquired facility in Maryland, however, as
this is not a permitted facility we are currently under no obligation to clean
up the contamination.
Disposal Costs. We accrue for waste disposal based upon a physical count of the
total waste at each facility at the end of each accounting period. Current
market prices for transportation and disposal costs are applied to the end of
period waste inventories to calculate the disposal accrual. Costs are calculated
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
KNOWN TRENDS AND UNCERTAINTIES
Seasonality. Historically we have experienced reduced revenues, operating losses
or decreased operating profits during the first and fourth quarters of our
fiscal years due to a seasonal slowdown in operations from poor weather
conditions and overall reduced activities during the holiday season. During our
second and third fiscal quarters there has historically been an increase in
revenues and operating profits. Management expects this trend to continue in
future years. The U.S. Department of Energy ("DOE") and U.S. Department of
Defense ("DOD") represent major customers for the Nuclear segment. In
conjunction with the federal government's September 30 fiscal year-end, the
Nuclear segment has 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. However, we have experienced limited
success in 2005, in getting governmental customers to extend the timing of their
shipments of wastes typically received in the third quarter, over a longer
period of time, which has helped smooth revenues over the second and third
quarters. Correspondingly, for a period of approximately three months following
September 30, the Nuclear segment has historically experienced a seasonal
slowdown, as the governmental budgets are still being finalized, planning for
the new year is occurring and we enter the holiday season. However, as a result
of our efforts, to schedule shipments on a more consistent basis, we may not
experience this seasonality going forward. The maturing process of our Nuclear
segment continues to lessen the impact of seasonal fluctuations in all quarters.
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for our services, principally within the Industrial segment.
Reductions in industrial production generally follow such economic conditions,
resulting in reduced levels of waste being generated and/or sent off for
treatment. We believe that our revenues and profits were negatively affected
within this segment by the recessionary conditions in 2004. However, we feel
that these conditions stabilized in 2005 as evidenced by increases in commercial
waste revenues.
Significant Customers. Our revenues are principally derived from numerous and
varied customers. However, our Nuclear segment has a significant relationship
with Bechtel Jacobs. Bechtel Jacobs is the DOE's appointed manager of the
environmental program to perform certain treatment and disposal
42
services in Oak Ridge, Tennessee. Our revenues from Bechtel Jacobs contributed
16.5% of total consolidated revenues for the year ended December 31, 2005, and
11.4% of total consolidated revenues during the same period in 2004. Our initial
relationship with Bechtel Jacobs began when our subsidiary in Oak Ridge,
Tennessee ("M&EC") entered into certain subcontracts for treatment services, and
has expanded into other services outside these contracts. These Oak Ridge
contracts have been extended through August 2007, and as with most contracts
with the federal government, may be terminated or renegotiated at any time at
the government's election. As the DOE site in Oak Ridge continues to complete
certain of its clean-up milestones and moves toward completing its closure
efforts, the revenue from these contracts may decline. The Nuclear segment
continues to pursue other similar or related services for environmental programs
at other DOE and government sites. In February 2003, M&EC commenced legal
proceedings against Bechtel Jacobs, seeking payment from Bechtel Jacobs of
approximately $4.3 million in surcharges relating to certain wastes that were
treated by M&EC in 2001 and 2002. During 2001, we recognized approximately
$381,000 in revenue for these surcharges, which represented an initial offer for
settlement by Bechtel Jacobs. Bechtel Jacobs continues to deliver waste to M&EC
for treatment, and M&EC continues to accept such waste. In addition, subsequent
to the filing of the lawsuit, M&EC entered into a new contract with Bechtel
Jacobs to treat DOE waste. There is no guarantee of future business with Bechtel
Jacobs, and either party may terminate the relationship at any time. Termination
of this relationship could have a material adverse effect on us. We are working
towards increasing other sources of revenues at M&EC to reduce the risk of
reliance on one major source of revenues.
During 2005, our Nuclear segment performed services relating to waste generated
by the federal government, either directly or indirectly as a subcontractor to
the federal government, representing approximately $34 million, or approximately
37.4%, of our consolidated 2005 revenues, which includes revenues under the
three contracts with Bechtel Jacobs discussed above. Most, if not all, contracts
with the federal government or with others as a subcontractor to the federal
government provide that the government may terminate or renegotiate the
contracts at the government's option at any time.
Insurance. We maintain insurance coverage similar to, or greater than, the
coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. We evaluate
our insurance policies annually to determine adequacy, cost effectiveness and
desired deductible levels. Due to the downturn in the economy and changes within
the environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
ENVIRONMENTAL CONTINGENCIES
We are engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites
43
may be liable for some or all of the remedial costs. Despite our aggressive
compliance and auditing procedures for disposal of wastes, we could, in the
future, be notified that we are a PRP at a remedial action site, which could
have a material adverse effect.
We have budgeted for 2006, $1,107,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at our facilities. As previously discussed
under "Business -- Capital Spending, Certain Environmental Expenditures and
Potential Environmental Liabilities," our facilities where the remediation
expenditures will be made are the Leased Property in Dayton, Ohio (EPS), a
former RCRA storage facility as operated by the former owners of PFD, PFM's
facility in Memphis, Tennessee, PFSG's facility in Valdosta, Georgia, PFTS's
facility in Tulsa, Oklahoma, PFMD's facility in Baltimore, Maryland, PFP's
leased property in Pittsburgh, Pennsylvania, and PFMI's facility in Detroit,
Michigan. We expect to fund the expenses to remediate the sites from funds
generated internally, however, no assurances can be made that we will be able to
do so.
At December 31, 2005, we had total accrued environmental remediation liabilities
of $4,395,000, of which $1,107,000 is recorded as a current liability, which
reflects a decrease of $815,000 from the December 31, 2004, balance of
$5,210,000. The decrease represents payments on remediation projects, which was
partially offset by an increase from our reevaluation of our remediation
estimates. We have included in the accrued balance, environmental accruals for
our two discontinued operations, for a total of $1,909,000 for PFMI and $146,000
for PFP. The December 31, 2005, current and long-term accrued environmental
balance is recorded as follows:
Current Long-term
Accrual Accrual Total
-------------- -------------- --------------
PFD $ 205,000 $ 580,000 $ 785,000
PFM 350,000 238,000 588,000
PFSG 189,000 337,000 526,000
PFTS 24,000 26,000 50,000
PFMD -- 391,000 391,000
-------------- -------------- --------------
768,000 1,572,000 2,340,000
PFMI 193,000 1,716,000 1,909,000
PFP 146,000 -- 146,000
-------------- -------------- --------------
$ 1,107,000 $ 3,288,000 $ 4,395,000
============== ============== ==============
Our subsidiaries, PFD and PFTS are involved in legal proceedings alleging that
they had not obtained certain air permits in order to operate its facility in
violation of the Clean Air Act and applicable state statutes and regulations. If
it is determined that PFD is or was required to operate under a Title V air
permit, this determination could result in substantial fines and penalties being
assessed against PFD, which could have a material adverse effect on our
financial conditions and liquidity. In addition, a determination that either PFD
or PFTS is in violation of the applicable Clean Air Act and/or applicable state
statutes could have a material adverse effect on the operation of that
particular facility. The above budgeted amounts for capital expenditures
relating to environmental contingencies assumes that neither of our
subsidiaries, PFD or PFTS, is required to obtain a Title V air permit in
connection with its operations. If it is determined that either PFD or PFTS is
required to have a Title V air permit in order to operate that facility, we
anticipate that substantial additional capital expenditures will be required in
order to bring that facility in compliance with the requirements of a Title V
air permit. We do not have reliable estimates of the cost of additional capital
expenditures to comply with Title V air permit.
44
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the possible impact of interest rate
changes on future income. This agreement involved the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates changed and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties was included in other
assets or liabilities. During the twelve months ended December 31, 2005, we
recorded a gain on the interest rate swap of $41,000, which was included in
other comprehensive income on the Statement of Stockholders' Equity (see Note 7
to Notes to Consolidated Financial Statements). The interest rate swap agreement
expired effective December 22, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151 ("SFAS 151"), Inventory Costs. SFAS 151 amends ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal," as defined in ARB No. 43. In
addition, SFAS 151 introduces the concept of "normal capacity" and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. Unallocated overheads must be recognized
as an expense in the period in which they are incurred. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not believe that the adoption of SFAS 151 will have a material
effect on our financial statements.
In December 2004, FASB issued Statement No. 153 ("SFAS 153"), Exchanges of
Nonmonetary Assets. SFAS 153 amends the guidance in APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005, and would be applied prospectively. We do not expect the
impact of SFAS 153 on our financial position, results of operations and cash
flows to be material.
In May 2005, FASB issued Statement No. 154 ("SFAS 154"), Accounting Changes and
Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements, and establishes
retrospective application as the required method for reporting a change in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 applies
to all voluntary changes in accounting principles and to changes required by an
accounting pronouncement in the instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not anticipate that the adoption of SFAS 154 will have a
material impact on its consolidated results of operations.
In March 2005, FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting for
Conditional Asset Retirement Obligations -- An Interpretation of FASB Statement
No. 143. FIN 47 clarifies that the term conditional asset retirement obligation,
as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within control of the
45
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. The Interpretation is effective for fiscal
years ending after December 15, 2005. The adoption of FIN 47 did not have a
material effect on our consolidated financial position or results of operations
for the year ending December 31, 2005.
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
According to the FASB, this Statement is effective as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005.
However, during the first quarter of 2005, the Securities and Exchange
Commission approved a new rule, Staff Accounting Bulletin 107, that delays the
adoption of this standard to the beginning of the next fiscal year, instead of
the next reporting period that begins after June 15, 2005. The rule does not
change the accounting required by SFAS 123R, but recognizes that preparers will
need to use considerable judgment when valuing employee stock options under this
statement. SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative upon
adopting SFAS 123R. We adopted SFAS 123R on January 1, 2006. SFAS 123R permits
public companies to adopt its requirements using one of two methods:
o A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS
123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123R for all awards granted to employees
prior to the effective date of SFAS 123R that remain unvested on the
effective date; or
o A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123R for
purposes of pro forma disclosures either (a) all prior periods presented or
(b) prior interim periods of the year of adoption.
We will implement SFAS 123R in the first quarter of 2006 and intend to use the
modified prospective method. We expect the adoption to result in the recognition
of stock-based compensation expense of approximately $20,000 for stock options
granted prior to January 1, 2006 plus the expense related to stock options
granted during 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from adverse changes in interest
rates, primarily due to the potential effect of such changes on our variable
rate loan arrangements with PNC, as described under Note 7 to Notes to
Consolidated Financial Statements. As discussed therein, we entered into an
interest rate swap agreement in December 2000, to modify the interest
characteristics of $3.5 million of our $7.0 million term loan with PNC Bank,
from a floating rate basis to a fixed rate, thus reducing the possible impact of
interest rate changes on this portion of the debt. The interest rate swap
agreement expired in December 2005.
46
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
o Ability or inability to continue and improve operations and achieve
profitability on an annualized basis;
o Changes in our Industrial segment to improve its operational and sales
related activity;
o present objective is to focus on the efficient operation of our existing
facilities, evaluate strategic acquisitions within our existing segments
and continue research and development within our Nuclear and Industrial
segments;
o our ability to develop or adopt new and existing technologies in the
conduct of our operations;
o anticipated improvement in our financial performance;
o ability to comply with our general working capital requirements;
o ability to retain or receive certain permits or patents;
o ability to renew permits with minimal effort and costs;
o ability to be able to continue to borrow under our revolving line of
credit;
o ability to generate sufficient cash flow from operations to fund all costs
of operations;
o ability to remediate certain contaminated sites for projected amounts;
o no further impairment to intangible assets;
o no intention to close any facilities, other than the Michigan facility;
o our possession of all necessary approvals, licenses and permits, and our
ability to attain, renew, or receive certain approvals, licenses, permits,
or patents;
o no expectation of material future inflationary changes;
o ability to fund budgeted capital expenditures for 2006;
o expect our 2006 backlog to continue similar to our 2005 backlog;
o expectation that third party consulting fees related to Section 404 of
Sarbanes-Oxley, will decline slightly in 2006;
o ability to close and remediate facilities for the estimated amounts;
o goal to improve our balance sheet, pay down debt and improve our liquidity;
o we expect similar levels of backlog to continue in the future;
o the environmental remediation cost relating to the Pittsburgh facility;
o we expect our seasonal trends to continue.
47
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct of
operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at any of
the sites or facilities leased or owned by us or our subsidiaries which
would result in a material increase in remediation expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
o potential increases in equipment, maintenance, operating or labor costs;
o management retention and development;
o financial valuation of intangible assets is substantially less than
expected;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o termination of the Oak Ridge Contracts as a result of our lawsuit again
Bechtel Jacobs or otherwise;
o inability to have our Industrial segment become profitable on an annualized
basis;
o the inability to maintain the listing of our Common Stock on the NASDAQ;
o the determination that PFMI, PFSG or PFO was responsible for a material
amount of remediation at certain Superfund sites;
o terminations of contracts with federal agencies or subcontracts involving
federal agencies, or reduction in amount of waste delivered to us under
these contracts or subcontracts;
o determination that PFD or PFTS are required to have a Title V air permit in
connection with its operations, and
o Risk Factors contained in Item 1A of this report.
We undertake no obligations to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE NO.
--------
CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP 50
Consolidated Balance Sheets as of December 31, 2005 and 2004 51
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004, and 2003 53
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003 54
Consolidated Statements of Stockholders' Equity for the years
Ended December 31, 2005, 2004, and 2003 55
Notes to Consolidated Financial Statements 56
FINANCIAL STATEMENT SCHEDULE
- ---------------------------------------------------------------------------
II Valuation and Qualifying Accounts for the years ended 103
December 31, 2005, 2004, and 2003
SCHEDULES OMITTED
- -----------------
In accordance with the rules of Regulation S-X, other schedules are not
submitted because (a) they are not applicable to or required by the Company, or
(b) the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Gainesville, Florida
We have audited the accompanying consolidated balance sheets of Perma-Fix
Environmental Services, Inc. and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005. We
have also audited the schedule listed in the accompanying index. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perma-Fix
Environmental Services, Inc. and subsidiaries at December 31, 2005 and 2004, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Perma-Fix
Environmental Services, Inc.'s internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 24, 2006 expressed an
unqualified opinion thereon.
West Palm Beach, Florida BDO Seidman, LLP
March 24, 2006
50
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2005 2004
- ---------------------------------------------------------------------- ------------ ------------
ASSETS
Current assets
Cash $ 94 $ 215
Restricted cash 511 60
Accounts receivable, net of allowance for doubtful
accounts of $512 and $560 16,609 17,408
Unbilled receivables 11,948 9,518
Inventories 842 882
Prepaid expenses 2,777 2,882
Other receivables 37 46
Current assets of discontinued operations, net of allowance for
doubtful accounts of $90 and $135 60 1,883
------------ ------------
Total current assets 32,878 32,894
Property and equipment:
Buildings and land 19,922 18,313
Equipment 31,120 30,175
Vehicles 4,452 3,911
Leasehold improvements 11,489 11,514
Office furniture and equipment 2,414 2,390
Construction-in-progress 850 1,823
------------ ------------
70,247 68,126
Less accumulated depreciation and amortization (25,767) (21,228)
------------ ------------
Net property and equipment 44,480 46,898
Property and equipment of discontinued operations, net of
accumulated depreciation of $80 and $54 806 963
Intangibles and other assets:
Permits 13,188 12,895
Goodwill 1,330 1,330
Finite Risk Sinking Fund 3,339 2,225
Other assets 2,504 3,250
------------ ------------
Total assets $ 98,525 $ 100,455
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
51
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2005 2004
- ---------------------------------------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,053 $ 6,361
Current environmental accrual 768 721
Accrued expenses 11,666 12,021
Unearned revenue 5,169 5,115
Current liabilities of discontinued operations 628 2,797
Current portion of long-term debt 2,678 6,376
------------ ------------
Total current liabilities 26,962 33,391
Environmental accruals 1,572 1,991
Accrued closure costs 5,245 5,062
Other long-term liabilities 2,462 1,944
Long-term liabilities of discontinued operations 3,149 1,954
Long-term debt, less current portion 10,697 12,580
------------ ------------
Total long-term liabilities 23,125 23,531
------------ ------------
Total liabilities 50,087 56,922
Commitments and Contingencies (see Note 13) -- --
Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares
authorized, 1,284,730 shares issued and outstanding,
liquidation value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized,
0 and 2,500 shares issued and outstanding, respectively -- --
Common Stock, $.001 par value; 75,000,000 shares authorized,
45,813,916 and 42,749,117 shares issued, including 988,000 shares
held as treasury stock, respectively 46 43
Additional paid-in capital 82,180 80,902
Accumulated deficit (33,211) (36,794)
Interest rate swap -- (41)
------------ ------------
49,015 44,110
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
------------ ------------
Total stockholders' equity 47,153 42,248
------------ ------------
Total liabilities and stockholders' equity $ 98,525 $ 100,455
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
52
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(Amounts in Thousands, Except for Share Amounts) 2005 2004 2003
- ---------------------------------------------------------------------- ------------ ------------ ------------
Net Revenues $ 90,866 $ 82,483 $ 79,153
Cost of goods sold 65,470 58,770 54,041
------------ ------------ ------------
Gross Profit 25,396 23,713 25,112
Selling, general and administrative expenses 20,443 18,461 17,553
Loss (gain) on disposal or impairment of fixed assets (334) 994 (4)
Impairment loss on intangible assets -- 9,002 --
------------ ------------ ------------
Income (loss) from operations 5,287 (4,744) 7,563
Other income (expense):
Interest income 133 3 8
Interest expense (1,594) (2,020) (2,804)
Interest expense - financing fees (318) (2,191) (1,070)
Other (7) (456) (32)
------------ ------------ ------------
Income (loss) from continuing operations before taxes 3,501 (9,408) 3,665
Income taxes 432 169 21
------------ ------------ ------------
Income (loss) from continuing operations 3,069 (9,577) 3,644
Discontinued operations:
Income (loss) from discontinued operations 670 (606) (526)
Loss on disposal of discontinued operations -- (9,178) --
------------ ------------ ------------
Total income (loss) from discontinued operations 670 (9,784) (526)
------------ ------------ ------------
Net income (loss) 3,739 (19,361) 3,118
Preferred Stock dividends (156) (190) (189)
------------ ------------ ------------
Net income (loss) applicable to Common Stock $ 3,583 $ (19,551) $ 2,929
============ ============ ============
Net income (loss) per common share - basic:
Continuing operations $ .07 $ (.24) $ .10
Discontinued operations .01 (.24) (.02)
------------ ------------ ------------
Net income (loss) per common share $ .08 $ (.48) $ .08
============ ============ ============
Net income (loss) per common share - diluted:
Continuing operations $ .07 $ (.24) $ .09
Discontinued operations .01 (.24) (.01)
------------ ------------ ------------
Net income (loss) per common share $ .08 $ (.48) $ .08
============ ============ ============
Number of shares and potential common shares Used in
computing net income (loss) per share:
Basic 42,605 40,478 34,982
============ ============ ============
Diluted 44,804 40,478 39,436
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
53
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(Amounts in Thousands) 2005 2004 2003
- ---------------------------------------------------------------------- ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,739 $ (19,361) $ 3,118
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization 4,754 4,576 4,237
Debt discount amortization -- 838 324
Provision for bad debt and other reserves 185 117 236
(Gain) loss on disposal or impairment of plant, property
and equipment (334) 994 (4)
Intangible asset impairment -- 9,002 --
Issuance of Common Stock for services 175 192 34
Discontinued operation 900 9,254 (257)
Changes in assets and liabilities, of continuing operations net of
effects from business acquisitions:
Accounts receivable 658 854 (1,211)
Unbilled receivables (2,434) (2,215) (1,171)
Prepaid expenses, inventories and other assets 122 835 (741)
Accounts payable, accrued expenses and unearned revenue (371) 1,811 (606)
------------ ------------ ------------
Net cash provided by operations 7,394 6,897 3,959
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net (2,099) (2,691) (2,126)
Proceeds from sale of plant, property and equipment 705 (3) 17
Change in restricted cash, net (16) (2) (13)
Change in finite risk sinking fund (1,114) (991) (1,234)
Cash used for acquisition consideration, net of cash acquired -- (2,903) --
Cash used in discontinued operations -- (164) (52)
------------ ------------ ------------
Net cash used in investing activities (2,524) (6,754) (3,408)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit (4,033) (2,755) 494
Principal repayments of long term debt (6,481) (8,535) (3,530)
Proceeds from issuance of long-term debt 4,417 -- --
Proceeds from issuance of stock 1,106 10,951 2,684
------------ ------------ ------------
Net cash used in financing activities (4,991) (339) (352)
------------ ------------ ------------
Increase (decrease) in cash (121) (196) 199
Cash at beginning of period 215 411 212
------------ ------------ ------------
Cash at end of period $ 94 $ 215 $ 411
============ ============ ============
Supplemental disclosure:
Interest paid $ 1,178 $ 1,920 $ 2,381
Non-cash investing and financing activities:
Issuance of Common Stock for payment of dividends -- 125 125
Interest rate swap valuation 41 89 85
Long-term debt incurred for purchase of property and equipment 517 320 1,284
The accompanying notes are an integral part of these
consolidated financial statements.
54
PERMA-FIX ENVIRONMENTAL SERVICES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31
Preferred Stock Common Stock Additional
----------------------- ----------------------- Paid-In
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 2,500 $ -- 35,326,734 $ 35 $ 66,799
========== ========== ========== ========== ==========
Comprehensive income
Net income -- -- -- -- --
Other comprehensive income:
Interest Rate Swap -- -- -- -- --
Comprehensive income
Preferred Stock dividends -- -- -- -- --
Issuance of Common Stock for Preferred
Stock dividends -- -- 59,000 -- 125
Issuance of Common Stock for cash and services -- -- 102,850 -- 216
Exercise of Warrants and Options -- -- 1,753,297 2 2,500
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $ 69,640
========== ========== ========== ========== ==========
Comprehensive loss
Net loss -- -- -- -- --
Other comprehensive income:
Interest rate swap -- -- -- -- --
Comprehensive loss
Preferred stock dividends -- -- -- -- --
Issuance of Common Stock for Preferred
Stock dividends -- -- 54,581 -- 125
Issuance of Common Stock for cash and services -- -- 172,647 -- 305
Issuance of Common Stock in private placement -- -- 4,616,113 5 9,865
Exercise of Warrants and Options -- -- 663,895 1 967
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 2,500 $ -- 42,749,117 $ 43 $ 80,902
========== ========== ========== ========== ==========
Comprehensive income
Net income -- -- -- -- --
Other comprehensive income:
Interest rate swap -- -- -- -- --
Comprehensive income
Preferred stock dividends -- -- -- -- --
Issuance of Common Stock for cash and services -- -- 144,566 -- 274
Issuance of Common Stock upon conversion of
Preferred Stock (2,500) -- 1,666,667 2 (2)
Exercise of Warrants and Options -- -- 1,253,566 1 1,006
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2005 -- $ -- 45,813,916 $ 46 $ 82,180
========== ========== ========== ========== ==========
Common
Interest Stock Total
Accumulated Rate Held In Stockholders'
Deficit Swap Treasury Equity
----------- ---------- ---------- -------------
Balance at December 31, 2002 $ (20,172) $ (215) $ (1,862) $ 44,585
=========== ========== ========== =============
Comprehensive income
Net income 3,118 -- -- 3,118
Other comprehensive income:
Interest Rate Swap -- 85 -- 85
-------------
Comprehensive income 3,203
Preferred Stock dividends (189) -- -- (189)
Issuance of Common Stock for Preferred
Stock dividends -- -- -- 125
Issuance of Common Stock for cash and services -- -- -- 216
Exercise of Warrants and Options -- -- -- 2,502
----------- ---------- ---------- -------------
Balance at December 31, 2003 $ (17,243) $ (130) $ (1,862) $ 50,442
=========== ========== ========== =============
Comprehensive loss
Net loss (19,361) -- -- (19,361)
Other comprehensive income:
Interest rate swap -- 89 -- 89
-------------
Comprehensive loss (19,280)
Preferred stock dividends (190) -- -- (190)
Issuance of Common Stock for Preferred
Stock dividends -- -- -- 125
Issuance of Common Stock for cash and services -- -- -- 305
Issuance of Common Stock in private placement -- -- -- 9,870
Exercise of Warrants and Options -- -- -- 968
----------- ---------- ---------- -------------
Balance at December 31, 2004 $ (36,794) $ (41) $ (1,862) $ 42,248
=========== ========== ========== =============
Comprehensive income
Net income 3,739 -- -- 3,739
Other comprehensive income:
Interest rate swap -- 41 -- 41
-------------
Comprehensive income 3,780
Preferred stock dividends (156) -- -- (156)
Issuance of Common Stock for cash and services -- -- -- 274
Issuance of Common Stock upon conversion of
Preferred Stock -- -- -- --
Exercise of Warrants and Options -- -- -- 1,007
----------- ---------- ---------- -------------
Balance at December 31, 2005 $ (33,211) $ -- $ (1,862) $ 47,153
=========== ========== ========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
55
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
NOTE 1
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
o Environmental services, including emergency response, vacuum services,
marine environmental and other remediation services.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (waste that
is both low-level radioactive and hazardous) which includes on and
off-site waste remediation and processing;
o Nuclear, low-level radioactive, hazardous and non-hazardous waste
treatment, processing and disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Broad-scope environmental issues, including environmental management
programs, regulatory permitting, compliance and auditing, landfill
design, field testing and characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the nuclear and industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear, mixed waste and industrial waste. Such research and
development expenses, although important, are not considered material.
We are subject to certain risks: (1) We are involved in the treatment, handling,
storage and transportation of hazardous and non-hazardous, mixed and industrial
wastes and wastewater. Such activities contain risks against which we believe we
are adequately insured, and (2) in general, certain product lines within the
Industrial segment, are characterized by competition among a number of larger,
more established companies with significantly greater resources.
Our consolidated financial statements include our accounts, and the accounts of
our wholly-owned subsidiaries, Schreiber, Yonley and Associates ("SYA"),
Perma-Fix Treatment Services, Inc. ("PFTS"), Perma-Fix of Florida, Inc. ("PFF"),
Perma-Fix of Dayton, Inc. ("PFD"), Perma-Fix of Ft. Lauderdale, Inc. ("PFFL"),
Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia, Inc. ("PFSG"),
Diversified Scientific Services, Inc. ("DSSI"), East Tennessee Materials &
Energy Corporation ("M&EC"), and Perma-Fix of Michigan, Inc. ("PFMI"), a
discontinued operation (see Note 5 ). Perma-Fix of Maryland, Inc. ("PFMD") and
Perma-Fix of Pittsburgh, Inc. ("PFP"), a discontinued operation, have been
included in our consolidated financial statements in 2004, from their date of
acquisition.
56
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include our accounts and our wholly-owned
subsidiaries after elimination of all significant intercompany accounts and
transactions.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
USE OF ESTIMATES
When we prepare financial statements in conformity with generally accepted
accounting principles, we make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, as well as, the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. See Notes 5, 9, 10, and 13 for
estimates of discontinued operations, closure costs, environmental liabilities
and contingencies for details on particularly sensitive estimates.
RESTRICTED CASH
Restricted cash reflects secured collateral relative to the various bonding
requirements required for the PFFL treatment, storage and disposal facility, the
PFMD hazardous waste transporter permit in the state of Pennsylvania and the PFP
hazardous waste storage and transporter permit in the state of Pennsylvania.
Approximately $460,000 reflects cash held for commitments related to the RCRA
remedial action at a facility affiliated with PFD as further discussed in Note
10. The restricted cash held for the PFD commitments was previously classified
as a long term asset, but has been reclassified into current assets, as
subsequent to December 31, 2005, we replaced the restricted fund with an
assurance bond. The letter of credit secured by the current restricted cash
renews annually.
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms
requiring payment within 30 or 60 days from the invoice date based on the
customer type (government, broker, or commercial). Account balances are stated
by invoice at the amount billed to the customer. Payments of accounts receivable
are made directly to a lockbox and are applied to the specific invoices stated
on the customer's remittance advice. The carrying amount of accounts receivable
is reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. We regularly review all accounts receivable balances that exceed 60
days from the invoice date and based on an assessment of current credit
worthiness, estimate the portion, if any, of the balance that will not be
collected. This analysis excludes government related receivables due to our
confidence in their collectibility. Specific accounts that are deemed to be
uncollectible are reserved at 100% of their outstanding balance. The remaining
balances aged over 60 days have a percentage applied by aging category (5% for
balances 61-90 days, 20% for balances 91-120 days and 40% for balances over 120
days aged), based on a historical valuation, that allows us to calculate the
total reserve required. Once we have exhausted all options in the collection of
a delinquent accounts receivable balance, which includes collection letters,
demands for payment, collection agencies and attorneys, the account is deemed
uncollectible and subsequently written off. The write off process involves
approvals, based on dollar amount, from senior management.
UNBILLED RECEIVABLES
Unbilled Receivables are generated by 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.
The complexity of the documentation that is required for invoicing
57
delays the billing process, which in turn results in unbilled receivables. The
amount of unbilled receivables is more prevalent in the Nuclear segment due to
the complexity of the current contracts, which requires greater levels of
documentation for final invoicing.
INVENTORIES
Inventories consist of treatment chemicals, salable used oils, and certain
supplies. Additionally, we have replacement parts in inventory, which are deemed
critical to the operating equipment and may also have extended lead times should
the part fail and need to be replaced. Inventories are valued at the lower of
cost or market with cost determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment expenditures are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets for financial
statement purposes, while accelerated depreciation methods are principally used
for tax purposes. Generally, annual depreciation rates range from ten to fifty
years for buildings (including improvements and asset retirement costs) and
three to seven years for office furniture and equipment, vehicles, and
decontamination and processing equipment. Leasehold improvements are capitalized
and depreciated over the lesser of the life of the lease or the life of the
asset. Maintenance and repairs are charged directly to expense as incurred. The
cost and accumulated depreciation of assets sold or retired are removed from the
respective accounts, and any gain or loss from sale or retirement is recognized
in the accompanying consolidated statements of operations. Renewals and
improvements, which extend the useful lives of the assets, are capitalized.
Included within buildings is an asset retirement obligation, which represents
our best estimate of the cost to close, at some undetermined future date, our
permitted and/or licensed facilities. The asset retirement cost was originally
recorded at $4,559,000 and depreciates over the life of the property.
Long-lived assets are reviewed for impairment as events and circumstances
indicate that the assets carrying value is impaired. The impairment recognized
is the amount that carrying value exceeds fair value of the assets impaired,
less costs to sell the assets. During the third quarter of 2004, we reevaluated
certain assets of projects that had been abandoned as part of the restructuring
process of our Industrial segment. Those assets were determined to have no fair
value, and as a result, we recognized an impairment to our fixed assets of
approximately $1,026,000 in 2004.
INTANGIBLE ASSETS
Intangible assets relating to acquired businesses consist primarily of the cost
of purchased businesses in excess of the estimated fair value of net assets
acquired ("goodwill") and the recognized permit value of the business. Prior to
our adoption of SFAS 142, effective January 1, 2002, goodwill had been amortized
over 20 to 40 years and permits amortized over 10 to 20 years. Effective January
1, 2002, we discontinued amortizing our indefinite life intangible assets
(goodwill and permits). We continually reevaluate the propriety of the carrying
amount of permits and goodwill to determine whether current events and
circumstances warrant adjustments to the carrying value and estimates of useful
lives. Effective January 1, 2002, we adopted SFAS 142 and obtained an initial
financial valuation of our intangible assets, which indicated no impairment to
our indefinite life intangible assets. Our annual financial valuations performed
as of October 1, 2005, and October 1, 2003 indicated no impairments. However,
our annual impairment test performed as of October 1, 2004 resulted in an
impairment of $9,002,000 to our goodwill and permits in our Industrial segment.
For further discussion on the impairment see Note 3.
ACCRUED CLOSURE COSTS
Accrued closure costs represent our estimated environmental liability to clean
up our facilities as required by our permits, in the event of closure.
58
INCOME TAXES
We account for income taxes under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires use of the
liability method. SFAS No. 109 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets or liabilities at the
end of each period are determined using the currently enacted tax rates to apply
to taxable income in the periods in which the deferred tax assets or liabilities
are expected to be settled or realized. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive income has two components, net income and other
comprehensive income, and is included on the balance sheet in the equity
section. Our other comprehensive income consisted of the market value of the
interest rate swap. For more information see Interest Rate Swap.
REVENUE RECOGNITION
Nuclear revenues. The processing of mixed waste is complex and may take several
months to complete, as such we recognize revenues on a percentage of completion
basis. We have waste tracking capabilities, which we continue to enhance, to
allow us to better match the revenues earned to the processing phases achieved.
The revenues are recognized as each of the following three processing phases are
completed: receipt, treatment/processing and shipment/final disposal. However,
based on the processing of certain waste streams, the treatment/processing and
shipment/final disposal phases may be combined as they are completed
concurrently. As the waste moves through these processing phases and revenues
are recognized the correlating expenses are incurred.
As a significant customer, revenues with Bechtel Jacobs, accounted for
approximately $14,940,000 or 16.5%, $9,405,000 or 11.4%, and $13,139,000 or
16.6% of total revenues for the years ended December 31, 2005, December 31,
2004, and December 31, 2003, respectively. Either party may at any time
terminate the relationship. See Note 13 - Commitments and Contingencies.
Industrial waste revenues. Since industrial waste streams are much less
complicated than mixed waste streams and they require a short processing period,
we recognize revenues for industrial services at the time the services are
substantially rendered, which generally happens upon receipt of the waste, or
shortly thereafter. These large volumes of bulk waste are received and
immediately commingled with various customers' wastes, which transfers the legal
and regulatory responsibility and liability to us upon receipt. As we continue
to enhance our waste tracking systems within the segment we will continue to
review and reevaluate our revenue recognition policy.
Consulting revenues. Consulting revenues are recognized as services are
rendered, as is consistent with industry standards. The services provided are
based on billable hours and revenues are recognized in relation to incurred
labor and consulting costs. Out of pocket costs reimbursed by customers are also
included in revenues.
SELF-INSURANCE
We have a self-insurance program for certain health benefits. The cost of these
benefits is recognized as expense in the period in which the claim occurred,
including estimates of claims incurred but not reported. Claims expense for 2005
was approximately $3,474,000, as compared to $2,985,000 and $2,631,000 for 2004
and 2003, respectively.
59
STOCK-BASED COMPENSATION
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion 25, Accounting for Stock Issued to Employees, and have
furnished the pro forma disclosures required under Statement of Financial
Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, and
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if compensation cost for our employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS 123. We estimate the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model. The following assumptions were
used for grants in 2005, 2004, and 2003: no dividend yield; an expected life of
ten years; expected volatility of 41.1%, 21.72% - 37.50%; and 23.19% - 25.75%
and risk free interest rates of 4.09%, 3.34% - 3.82%, and 2.75% - 3.33%,
respectively.
On July 28, 2005, the Compensation and Stock Option Committee of the Board of
Directors approved the acceleration of vesting for all the outstanding and
unvested options to purchase Common Stock awarded to employees as of the
approval date. The Board of Directors approved the accelerated vesting of these
options based on the belief that it was in the best interest of our stockholders
to reduce future compensation expense that we would otherwise be required to
record in the statement of operations upon adoption of SFAS 123R, effective
beginning January 1, 2006. The accelerated vesting triggered the re-measurement
of compensation cost under current accounting standards. In the event a holder
of an accelerated vesting option terminates employment with us prior to the end
of the original vesting term of such options, we will recognize the compensation
expense at the time of termination.
This resulted in the accelerated vesting of options to purchase 676,850 shares
of our Common Stock, which includes 240,500 options that were "in-the-money"
options, having an exercise price less than the market price prior to the Board
of Directors' approval. Our stock-based employee compensation expense under the
fair value method presented in our pro forma amounts below includes expense of
approximately $426,000 during 2005 as a result of accelerated stock option
vesting.
Under the accounting provisions of FASB Statement 123, our net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below (in thousands except for per share amounts):
2005 2004 2003
------------ ------------ ------------
Net income (loss) from continuing operations,
applicable to Common Stock, as reported $ 2,913 $ (9,767) $ 3,455
Deduct: Total Stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (727) (380) (470)
------------ ------------ ------------
Pro forma net income (loss) from continuing
operations applicable to Common Stock $ 2,186 $ (10,147) $ 2,985
============ ============ ============
Earnings (loss) per share
Basic - as reported $ .07 $ (.24) $ .10
============ ============ ============
Basic - pro-forma $ .05 $ (.25) $ .09
============ ============ ============
Diluted - as reported $ .07 $ (.24) $ .09
============ ============ ============
Diluted - pro-forma $ .05 $ (.25) $ .08
============ ============ ============
60
NET INCOME (LOSS) PER SHARE
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the year. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the year ended December 31,
2004 does not include potential common shares, as their effect would be
anti-dilutive.
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the years ended December 31, 2005, 2004,
and 2003:
(Amounts in Thousands, Except for Per Share Amounts) 2005 2004 2003
- ------------------------------------------------------------ ------------ ------------ ------------
Earnings per share from continuing operations
- ---------------------------------------------
Income (loss) from continuing operations $ 3,069 $ (9,577) $ 3,644
Preferred stock dividends (156) (190) (189)
------------ ------------ ------------
Income (loss) from continuing operations applicable to
Common Stock 2,913 (9,767) 3,455
Effect of dilutive securities:
Preferred Stock dividends 156 190 189
------------ ------------ ------------
Income (loss) - diluted $ 3,069 $ (9,577) $ 3,644
============ ============ ============
Basic income (loss) per share $ .07 $ (.24) $ .10
============ ============ ============
Diluted income (loss) per share $ .07 $ (.24) $ .09
============ ============ ============
Earnings per share from discontinued operations
- -----------------------------------------------
Income (loss) - basic and diluted $ 670 $ (9,784) $ (526)
============ ============ ============
Basic loss per share $ .01 $ (.24) $ (.02)
============ ============ ============
Diluted loss per share $ .01 $ (.24) $ (.01)
============ ============ ============
Weighted average shares outstanding - basic 42,605 40,478 34,982
Potential shares exercisable under stock option plans 268 -- 477
Potential shares upon exercise of Warrants 689 -- 2,310
Potential shares upon conversion of Preferred Stock 1,242 -- 1,667
------------ ------------ ------------
Weighted average shares outstanding - diluted 44,804 40,478 39,436
============ ============ ============
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
Upon exercise of options 1,308 2,976 1,472
Upon exercise of Warrants 1,776 12,791 20
Upon conversion of Preferred Stock -- 1,667 --
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the possible impact of interest rate
changes on future income. This agreement involved the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates changed and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties was included in other
assets or liabilities. During the twelve months ended December 31, 2005, we
recorded a gain on the interest rate swap of $41,000, which was included in
other comprehensive income on the Statement of Stockholders' Equity (see Note
7). The interest rate swap agreement expired in December 2005.
61
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
accrued expenses and unearned revenues approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of our
long-term debt is estimated based on the current rates offered to us for debt of
similar terms and maturities. Under this method, the fair value of long-term
debt was not significantly different from the stated value at December 31, 2005
and 2004. The book value of our subsidiary's preferred stock is not
significantly different than its fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151 ("SFAS 151"), Inventory Costs. SFAS 151 amends ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal," as defined in ARB No. 43. In
addition, SFAS 151 introduces the concept of "normal capacity" and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. Unallocated overheads must be recognized
as an expense in the period in which they are incurred. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not believe that the adoption of SFAS 151 will have a material
effect on our financial statements.
In December 2004, FASB issued Statement No. 153 ("SFAS 153"), Exchanges of
Nonmonetary Assets. SFAS 153 amends the guidance in APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005, and would be applied prospectively. We do not expect the
impact of SFAS 153 on our financial position, results of operations and cash
flows to be material.
In May 2005, FASB issued Statement No. 154 ("SFAS 154"), Accounting Changes and
Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements, and establishes
retrospective application as the required method for reporting a change in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 applies
to all voluntary changes in accounting principles and to changes required by an
accounting pronouncement in the instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not anticipate that the adoption of SFAS 154 will have a
material impact on its consolidated results of operations.
In March 2005, FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting for
Conditional Asset Retirement Obligations -- An Interpretation of FASB Statement
No. 143. FIN 47 clarifies that the term conditional asset retirement obligation,
as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability when sufficient information exists. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Interpretation is
effective for fiscal years ending after December 15, 2005. The adoption of FIN
47 did not have a material
62
effect on our consolidated financial position or results of operations for the
year ending December 31, 2005.
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
According to the FASB, this Statement is effective as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005.
However, during the first quarter of 2005, the Securities and Exchange
Commission approved a new rule, Staff Accounting Bulletin 107, that delays the
adoption of this standard to the beginning of the next fiscal year, instead of
the next reporting period that begins after June 15, 2005. The rule does not
change the accounting required by SFAS 123R, but recognizes that preparers will
need to use considerable judgment when valuing employee stock options under this
statement. SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative upon
adopting SFAS 123R. We adopted SFAS 123R on January 1, 2006. SFAS 123R permits
public companies to adopt its requirements using one of two methods:
o A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS
123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123R for all awards granted to employees
prior to the effective date of SFAS 123R that remain unvested on the
effective date; or
o A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123R for
purposes of pro forma disclosures either (a) all prior periods presented or
(b) prior interim periods of the year of adoption.
We will implement SFAS 123R in the first quarter of 2006 and intend to use the
modified prospective method. We expect the adoption to result in the recognition
of stock-based compensation expense of approximately $20,000 for stock options
granted prior to January 1, 2006 plus the expense related to stock options
granted during 2006.
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS 142 January 1, 2002. SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill for impairment
at least annually. In addition, SFAS 142 requires that we identify reporting
units for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. We
discontinued amortizing our indefinite-life intangible assets (goodwill and
permits) in January 2002. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS 142.
SFAS 142 required us to complete a transitional goodwill impairment test six
months from the date of adoption. We were also required to reassess the useful
lives of other intangible assets within the first interim quarter after adoption
of SFAS 142. We utilized an independent appraisal firm to test goodwill and
permits, separately, for impairment. The appraiser's reports indicated no
impairment as of October 1, 2005 and October 1, 2003. Our annual impairment test
as of October 1, 2004, resulted in an impairment of
63
goodwill and permits, in our Industrial segment in the amounts of $4,886,000 and
$4,116,000, respectively. The aggregate impairment of $9,002,000 is recorded in
our loss from operations for the twelve months ended December 31, 2004, in our
Consolidated Statement of Operations. The annual impairment test as of October
1, 2004, indicated no impairment for our Nuclear and Engineering segments.
The following table is a summary of changes in the carrying amount of goodwill
for the years ended December 31, 2003, 2004, and 2005 (amounts in thousands).
Our Nuclear segment has been excluded as it has no goodwill recorded.
Industrial Engineering
Goodwill Segment Segment Total
- ------------------------------------------------------------ ------------ ------------ ------------
Balance as of December 31, 2002 $ 5,196 $ 1,330 $ 6,525
Reclass of goodwill to asset retirement costs
(Notes 2 and 9) (309) -- (309)
------------ ------------ ------------
Balance as of December 31, 2003 4,886 1,330 6,216
Impairment of goodwill (4,886) -- (4,886)
------------ ------------ ------------
Balance as of December 31, 2004 -- 1,330 1,330
------------ ------------ ------------
Balance as of December 31, 2005 $ -- $ 1,330 $ 1,330
============ ============ ============
The following table is a summary of changes in the carrying amount of permits
for the years ended December 31, 2003, 2004, and 2005 (amounts in thousands).
Our Engineering segment has been excluded as it has no permits recorded.
Industrial Nuclear
Permits Segment Segment Total
- ------------------------------------------------------------ ------------ ------------ ------------
Balance as of December 31, 2002 $ 6,491 $ 14,268 $ 20,759
Permits in progress 161 -- 161
Permits obtained -- 9 9
Reclass of permits to asset retirement costs
(Notes 2 and 9) (170) (4,079) (4,249)
------------ ------------ ------------
Balance as of December 31, 2003 6,482 10,198 16,680
Permits in progress 3 328 331
Impairment of permits (4,116) -- (4,116)
------------ ------------ ------------
Balance as of December 31, 2004 2,369 10,526 12,895
Permits in progress -- 293 293
------------ ------------ ------------
Balance as of December 31, 2005 $ 2,369 $ 10,819 $ 13,188
============ ============ ============
NOTE 4
ACQUISITIONS
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed its acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP
provided a variety of environmental services, however, as we re-evaluated the
business, we decided to discontinue operations at PFP. The Board of Directors
approved the closure in November 2005. See Note 5 for further discussion on the
discontinued operation.
64
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed as of this date, and the
results of operations since this date, were included in the accompanying
consolidated financial statements. Costs incurred related to the acquisitions
were $275,000 and are included in our purchase price allocation as liabilities
assumed. We obtained third party evaluations of certain assets and at December
31, 2004, finalized our purchase price allocation to the net assets acquired and
the net liabilities assumed, as follows:
PFMD PFP
------------ ------------
Assets acquired:
Current tangible assets $ 2,457 $ 24
Fixed assets 1,810 413
Liabilities assumed:
Current accounts payable and accruals (1,141) (107)
Long-term environmental reserve (391) (150)
------------ ------------
Total purchase price allocation $ 2,735 $ 180
============ ============
The third party evaluations resulted in higher fair values for property and
equipment than was allocable to those assets based upon the purchase price of
such assets and, as such, we reduced on a pro rata basis the value of the
property and equipment to their final book values, as recorded through purchase
accounting.
NOTE 5
DISCONTINUED OPERATIONS
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The decision to discontinue
operations at PFP was due to our reevaluation of the facility and our ability to
achieve profitability at the facility in the near term. During February 2006, we
completed the remediation of the leased property and the equipment, and released
the property back to the owner. The operating results for the current and prior
periods have been reclassified to discontinued operations in our Consolidated
Statements of Operations.
PFP recorded revenue of $721,000 and an operating loss of $346,000 for the year
ended December 31, 2005. Revenue for the nine months that we owned PFP in 2004,
was $890,000 with operating income of $29,000 for the same period. The assets
and liabilities related to PFP have been reclassified into separate categories
in the Consolidated Balance Sheets as of December 31, 2005 and 2004. The assets
are recorded at their net realizable value, and consist of accounts receivable
of $60,000 and equipment of $203,000.
Liabilities as of December 31, 2005, consist of accounts payable of $72,000,
accrued expenses $12,000 and environmental remediation costs of $146,000. The
environmental remediation costs represent our best estimate of the cost to
remediate the property and equipment and release the property back to the owner
and sell or dispose of the equipment. We held a five year lease on the property
that was to expire in March 2009, and consisted of monthly rent expense of
approximately $10,000. During February 2006, we finalized negotiations with the
property lessor for early termination of the lease. The agreement resulted in
the payment of approximately $200,000 to be paid in $20,000 increments over the
last ten
65
months of 2006, following our vacating the property in February 2006. These
lease termination costs will be charged to expense during the first quarter of
2006.
PFMI
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
PFMI was principally a result of two fires that significantly disrupted
operations at the facility in 2003, and the facility's continued drain on the
financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
PFMI recorded income of $1,016,000 for the year ended December 31, 2005, and
revenue of $1,569,000 and an operating loss of $635,000 for the year ended
December 31, 2004. Our income in 2005 was a result of the settlement of the
three insurance claims we submitted relative to the two fires at PFMI, a
property claim for the first fire and a property claim and business interruption
claim for the second fire. During 2004, we recorded a receivable of $1,585,000
based on negotiations with the insurance carrier on the business interruption
claim. The income from recording this receivable was recorded as a reduction of
"loss from discontinued operations" and reduced the operating losses for 2004.
During 2005, we received insurance proceeds and claim settlements of $3,253,000
for settlement of all three claims. Of these proceeds, $1,476,000 was recorded
as income from discontinued operations during 2005, which is net of $192,000
paid for public adjustor fees.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2005 and 2004. As of December 31, 2005, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$603,000. Liabilities as of December 31, 2005, consist of accounts payable and
current accrued expenses of $9,000, environmental accruals of $1,909,000, and a
pension payable of $1,629,000. 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 over an eight year period. This obligation is
recorded as a long-term liability, with a current portion of $196,000 that we
expect to pay over the next year.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which are not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we estimated the cost of
this environmental closure and remediation liability to be $2,464,000, as of
September 30, 2004. We have spent approximately $555,000 for closure costs since
September 30, 2004, of which approximately $439,000 was spent in 2005. We have
$1,909,000 accrued for the closure, as of December 31, 2005, and we anticipate
spending $193,000 in 2006 with the remainder over the next two to five years.
66
NOTE 6
PREFERRED STOCK ISSUANCE AND CONVERSION
SERIES 17 PREFERRED
As of January 1, 2002, Capital Bank held 2,500 shares of the Series 17 Preferred
record, as agent for certain of its accredited investors. The Series 17
Preferred was convertible into shares of Common Stock at any time at a
conversion price of $1.50 per share, subject to adjustment as set forth in the
Certificate of Designations relating to the Series 17 Preferred. The Series 17
Preferred had a "stated value" of $1,000 per share.
On September 30, 2005, the Company received a notice from Capital Bank GRAWE
Gruppe, AG, dated September 26, 2005, to convert the 2,500 issued and
outstanding shares of the Company's Series 17 Class Q Convertible Preferred
Stock ("Series 17"). Pursuant to the terms of the Series 17, the conversion
resulted in the issuance of 1,666,667 shares of the Company's common stock,
$.001 par value ("Common Stock") to Capital Bank, as agent for certain of its
investors. In addition to $125,000 of dividends paid in cash during 2005, the
final dividend due on the Series 17 of approximately $30,000 for the period from
July 1, 2005 through the conversion date was paid in cash in October 2005.
During the nine months ended September 30, 2005, dividends on the Series 17 were
$92,000.
SERIES B PREFERRED STOCK
As partial consideration of the M&EC Acquisition, M&EC issued shares of its
Series B Preferred Stock to stockholders of M&EC having a stated value of
approximately $1,285,000. No other shares of M&EC's Series B Preferred Stock are
outstanding. The Series B Preferred Stock is non-voting and non-convertible, has
a $1.00 liquidation preference per share and may be redeemed at the option of
M&EC at any time after one year from the date of issuance for the per share
price of $1.00. Following the first 12 months after the original issuance of the
Series B Preferred Stock, the holders of the Series B Preferred Stock will be
entitled to receive, when, as, and if declared by the Board of Directors of M&EC
out of legally available funds, dividends at the rate of 5% per year per share
applied to the amount of $1.00 per share, which shall be fully cumulative. We
began accruing dividends for the Series B Preferred Stock in July 2002, and have
accrued a total of approximately $226,000 since July 2002, of which $64,000 was
accrued in each of the years ended December 31, 2005, 2004, and 2003.
67
NOTE 7
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2005, and December 31,
2004:
(Amounts in Thousands) 2005 2004
- ---------------------------------------------------------------------------------------- ---------- ----------
Revolving Credit facility dated December 22, 2000, borrowings based upon eligible
accounts receivable, subject to monthly borrowing base calculation, variable
interest paid monthly at prime rate plus 1/2% (7.75% at December 31, 2005),
beginning in March 2005, balance due in May 2008. $ 2,447 $ 6,480
Term Loan dated December 22, 2000, payable in equal monthly installments
principal of $83, balance due in May 2008, variable interest paid monthly at
prime rate plus 1% (8.25% at December 31, 2005). 6,500 3,083
Unsecured promissory note dated August 31, 2000, paid in lump sum in August 2005,
interest paid annually at 7.0%. -- 3,500
Promissory note dated June 25, 2001, payable in semiannual installments on June
30 and December 31 through December 31, 2008, variable interest accrues at the
applicable rate determined under the IRS Code Section (9.0% on December 31,
2005) and is payable in one lump sum at the end of installment period. 2,234 3,034
Installment agreement dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest accrues
at the applicable rate determined under the IRS Code Section (9.0% on December
31, 2005) and is payable in one lump sum at the end of installment period. 553 753
Various capital lease and promissory note obligations, payable 2006 to 2010,
interest at rates ranging from 5.0% to 14.2%. 1,641 2,106
---------- ----------
13,375 18,956
Less current portion of long-term debt 2,678 6,376
---------- ----------
$ 10,697 $ 12,580
========== ==========
REVOLVING CREDIT AND TERM LOAN AGREEMENT
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement initially 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 December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves the Agent reasonably deems proper and
necessary. As of December 31, 2005, the excess availability under our Revolving
Credit was $12,964,000 based on our eligible receivables.
Effective March 25, 2005, the Company and PNC entered into an amended agreement
("Amendment No. 4"), which, among other things, extends the $25 million credit
facility through May 31, 2008. The other
68
terms of the credit facility remain principally unchanged, as a result of the
amendment, with the exception of a 50 basis point reduction in the variable
interest rate on both loans.
On June 29, 2005, we entered into an amendment ("Amendment No. 5") to the
Agreement. Pursuant to Amendment No. 5, PNC increased our Term Loan by
approximately $4.4 million, resulting in a Term Loan of $7 million. Under
Amendment No. 5, 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 in May 2008, upon termination of
the amended Agreement. As part of Amendment No. 5, certain of our subsidiaries
have modified or granted mortgages to PNC on their facilities, in addition to
the collateral previously granted to PNC under the Agreement. All other terms
and conditions to the Agreement, remain principally unchanged. We used the
additional loan proceeds to prepay a $3.5 million unsecured promissory note,
which was due and payable in August 2005, and the balance was used for general
working capital. As a condition of Amendments No. 4 and 5, we paid a $140,000
fee to PNC.
The terms of the Agreement provide that a default in the Agreement could occur
upon the cessation of our Chief Financial Officer, Richard T., Kelecy to be a
senior executive officer. Mr. Kelecy's resignation, effective April 5, 2006,
caused a technical default under the Agreement. However, we have been in
discussion with PNC, and they have informed us of their intent to waive the
technical default.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
UNSECURED PROMISSORY NOTE
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was re-classed in its entirety from long
term to current in the third quarter of 2004. We utilized the proceeds of the
amended agreement with PNC, mentioned above, to repay this note in June 2005.
PROMISSORY NOTE
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2006 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (9% on December 31, 2005) and payable in one
lump sum at the end of the loan period. On December 31, 2005, the outstanding
balance was $3,636,000 including accrued interest of approximately $1,402,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
INSTALLMENT AGREEMENT
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2006 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the
69
installment period. On December 31, 2005, the rate was 9%. On December 31, 2005,
the outstanding balance was $890,000 including accrued interest of approximately
$337,000.
The aggregate approximate amount of the maturities of long-term debt maturing in
future years as of December 31, 2005, is $2,678,000 in 2006; $2,385,000 in 2007;
$8,148,000 in 2008; $139,000 in 2009; and $25,000 in 2010.
NOTE 8
ACCRUED EXPENSES
Accrued expenses at December 31 include the following (in thousands):
2005 2004
------------ ------------
Salaries and employee benefits $ 3,536 $ 3,387
Accrued sales, property and other tax 1,171 821
Waste disposal and other processing expenses 3,712 3,436
Insurance Payable 2,045 2,091
Other 1,202 2,286
------------ ------------
Total accrued expenses $ 11,666 $ 12,021
============ ============
NOTE 9
ACCRUED CLOSURE COSTS
We accrue for the estimated closure costs as determined pursuant to RCRA
guidelines for all fixed-based regulated facilities, even though we do not
intend to or have present plans to close any of our existing facilities. The
permits and/or licenses define the waste, which may be received at the facility
in question, and the treatment or process used to handle and/or store the waste.
In addition, the permits and/or licenses specify, in detail, the process and
steps that a hazardous waste or mixed waste facility must follow should the
facility be closed or cease operating as a hazardous waste or mixed waste
facility. Closure procedures and cost calculations in connection with closure of
a facility are based on guidelines developed by the federal and/or state
regulatory authorities under RCRA and the other appropriate statutes or
regulations promulgated pursuant to the statutes. The closure procedures are
very specific to the waste accepted and processes used at each facility. We
recognize the closure cost as a contingent liability on the balance sheet. Since
all our facilities are acquired facilities, the closure cost for each facility
was recognized pursuant to a business combination and recorded as part of the
purchase price allocation to assets acquired and liabilities assumed.
The closure calculation is increased annually for inflation based on RCRA
guidelines, and for any approved changes or expansions to the facility, which
may result in either an increase or decrease in the approved closure amount. An
increase resulting from changes or expansions is recorded to expense over the
term of such a renewed/expanded permit, generally five (5) years, and annual
inflation factor increases are expensed during the current year.
During 2005, the accrued long-term closure cost increased by $183,000 to a total
of $5,245,000 as compared to the 2004 total of $5,062,000. This increase is
principally a result of normal inflation factor increases.
Statements of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations, ("SFAS 143") requires that the fair value of a liability
for an asset retirement obligation be recognized in
70
the period in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as part of
the carrying amount of the long-lived asset. In conjunction with the state
mandated permit and licensing requirements, we are obligated to determine our
best estimate of the cost to close, at some undetermined future date, our
permitted and/or licensed facilities. We recorded this liability at the date of
acquisition of each facility, with its offsetting entry being to goodwill and/or
permits and have subsequently increased this liability as a result of changes to
the facility and/or for inflation. Our current accrued closure costs reflect the
current fair value of the cost of asset retirement. We adopted SFAS 143 as of
January 1, 2003, and pursuant to the adoption we reclassified from goodwill and
permits approximately $4,558,000 (see Note 3), which represents the fair value
of our closing cost as recorded to goodwill or permits at the time each facility
was acquired, into an asset retirement obligation account. The associated asset
retirement cost is recorded as property and equipment (buildings). We are
depreciating the asset retirement cost on a straight-line basis over a period of
50 years.
NOTE 10
ENVIRONMENTAL LIABILITIES
We have various remediation projects, which are currently in progress at certain
of our permitted Industrial segment facilities owned and operated by our
subsidiaries. These remediation projects principally entail the removal of
contaminated soil and, in some cases, the remediation of surrounding ground
water. Five of the remedial clean-up projects in question were an issue for that
facility for years prior to our acquisition of the facility and were recognized
pursuant to a business combination and recorded as part of the purchase price
allocation to assets acquired and liabilities assumed. Three of the facilities,
(PFD, PFM, and PFSG) are RCRA permitted facilities, and as a result, the
remediation activities are closely reviewed and monitored by the applicable
state regulators. Additionally, we recorded environmental liabilities upon
acquisition of PFMD and PFP in March 2004, which are not RCRA permitted
facilities. We have recognized our best estimate of such environmental
liabilities upon the acquisition of these five facilities, as part of the
acquisition cost. In the normal course of our business, the operations will on
occasion create a minor environmental remediation issue, which will be evaluated
and a corresponding remedial liability recorded. Minor environmental remediation
liabilities were recognized and recorded for the PFTS facility during 2004. As
further discussed in the discontinued operations footnote, we accrued
environmental liabilities for PFMI and PFP, our discontinued operations (see
Note 5).
71
At December 31, 2005, we had accrued environmental liabilities totaling
$2,340,000, at our continuing operations, which reflects a decrease of $372,000
from the December 31, 2004, balance of $2,712,000. The decrease is a result of
payments on the remediation projects, which was partially offset by an increase
from our reevaluation of our remediation estimates. We also have accrued
environmental liabilities of $1,909,000 for PFMI, and $146,000 for PFP, our
discontinued operations. The December 31, 2005 current and long-term accrued
environmental balance is recorded as follows:
Current Long-term
Accrual Accrual Total
------------ ------------ ------------
PFD $ 205,000 $ 580,000 $ 785,000
PFM 350,000 238,000 588,000
PFSG 189,000 337,000 526,000
PFTS 24,000 26,000 50,000
PFMD -- 391,000 391,000
------------ ------------ ------------
768,000 1,572,000 2,340,000
PFMI 193,000 1,716,000 1,909,000
PFP 146,000 -- 146,000
------------ ------------ ------------
Total Liability $ 1,107,000 $ 3,288,000 $ 4,395,000
============ ============ ============
PFD
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three treatment, storage and
disposal companies, including the PFD facility. The former owners of PFD had
merged EPS with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating this facility leased by PFD ("Leased
Property") but never used or operated by PFD, which entails remediation of soil
and/or groundwater restoration. The Leased Property used by EPS to operate its
facility is separate and apart from the property on which PFD's facility is
located. In conjunction with the subsequent bankruptcy filing by Quadrex, and
our recording of purchase accounting for the acquisition of PFD, we recognized
an environmental liability of approximately $1,200,000 for the remediation of
this leased facility. This facility has pursued remedial activities for the past
eight years and after evaluating various technologies, is seeking approval from
appropriate governmental authority for the final remedial process, through the
utilization of third party consultants. During 2005, we increased the reserve by
approximately $107,000, a result of a reassessment on the cost of remediation,
which was partially offset by expenditures of $44,000 for the year ended
December 31, 2005. We anticipate spending for the remaining remedial activity
over the next two to seven years.
PFM
Pursuant to our acquisition, effective December 31, 1993, of Perma-Fix of
Memphis, Inc. (f/k/a American Resource Recovery, Inc.), we assumed certain
liabilities relative to the removal of contaminated soil and to undergo
groundwater remediation at the facility. Prior to our ownership of Perma-Fix of
Memphis, Inc., the owners installed monitoring and treatment equipment to
restore the groundwater to acceptable standards in accordance with federal,
state and local authorities. The groundwater remediation at this facility has
been ongoing since approximately 1990, and, subject to the approval of the
appropriate agency, Perma-Fix of Memphis, Inc. intends to begin final
remediation of this facility. For the year ended December 31, 2005, we incurred
$148,000 in remedial evaluation and planning costs, which reduced the reserve.
Our anticipated spending on the remaining remedial activities will be over the
next two to five years.
PFSG
During 1999, we recognized an environmental accrual of $2,199,000, in
conjunction with the acquisition of PFSG. This amount represented our estimate
of the long- term costs to remove contaminated soil and
72
to undergo groundwater remediation activities at the PFSG acquired facility in
Valdosta, Georgia. PFSG, in conjunction with third party consultants, have over
the past four years, completed the initial valuation, selected the remedial
process to be utilized, and completed the planning and approval process.
Remedial activities began in 2003. For the year ended December 31, 2005, we
incurred $243,000 in remediation costs, which reduced the reserve. We anticipate
our spending for the remaining remedial activities to be incurred over the next
two to five years.
PFTS
In conjunction with an oil spill, we accrued approximately $69,000 to remediate
the contaminated soil and ground water at this location. For the year ended
December 31, 2005, we have incurred $19,000 in remediation costs, which reduced
the reserve. We expect to complete spending on this remedial project over the
next two years.
PFMD
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
PFMI
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which are not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we recorded our best
estimate of the cost of this environmental closure and remediation liability, of
$2,464,000, as of September 30, 2004. We are unclear as to the extent of
remediation necessary to dispose of or sell the facility and to what extent the
state will require us to remediate the contamination. However, in the event of a
sale of the facility all or part of this reserve could be reduced. During the
year ended December 31, 2005, we spent approximately $439,000 of this closure
cost estimate. We have $1,909,000 accrued for the closure, as of December 31,
2005, and we anticipate spending $193,000 in 2006 with the remainder over the
next two to seven years.
PFP
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operated a
non-hazardous waste water facility on this leased property. Upon discontinuing
operations at this facility in November 2005, we began remediating the leased
property and the equipment. For the year ended December 31, 2005, we have spent
$4,000 on remediation costs, and completed the remediation and released the
property in February 2006.
We performed, or had performed, due diligence on each of these environmental
projects, and also reviewed/utilized reports obtained from third party
engineering firms who have been either engaged by
73
the prior owners or by us to assist in our review. Based upon our expertise and
the analysis performed, we have accrued our best estimate of the cost to
complete the remedial projects. No insurance or third party recovery was taken
into account in determining our cost estimates or reserve, nor do our cost
estimates or reserves reflect any discount for present value purposes. We do not
believe that any adverse changes to our estimates would be material to us. The
circumstances that could affect the outcome range from new technologies, that
are being developed every day that reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time.
NOTE 11
INCOME TAXES
Income tax from the continuing operations for the years ended December 31,
consisted of the following (in thousands):
2005 2004 2003
---------- ---------- ----------
Current:
Federal $ 50 $ -- $ --
State 382 169 21
---------- ---------- ----------
Total income tax expense $ 432 $ 169 $ 21
========== ========== ==========
We had temporary differences and net operating loss carry forwards, which gave
rise to deferred tax assets and liabilities at December 31, as follows (in
thousands):
2005 2004
---------- ----------
Deferred tax assets:
Net operating losses $ 7,147 $ 9,962
Environmental and closure reserves 2,185 2,348
Impairment of assets 7,611 7,611
Other 1,638 1,010
Valuation allowance (12,731) (13,912)
---------- ----------
Deferred tax assets 5,850 7,019
Deferred tax liabilities
Depreciation and amortization (5,850) (7,019)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
A reconciliation between the expected tax benefit using the federal statutory
rate of 34% and the provision for income taxes as reported in the accompanying
consolidated statements of operations is as follows (in thousands):
2005 2004 2003
---------- ---------- ----------
Tax expense (benefit) at statutory rate $ 1,400 $ (6,647) $ 1,060
State taxes 252 112 14
Intangible asset impairment -- 3,061 --
Other (39) (303) (824)
Increase (decrease) in valuation allowance (1,181) 3,946 (229)
---------- ---------- ----------
Provision for income taxes $ 432 $ 169 $ 21
========== ========== ==========
We have recorded a valuation allowance to state our deferred tax assets at
estimated net realizable value due to the uncertainty related to realization of
these assets through future taxable income. Our valuation allowance increased
(decreased) by approximately $(1,181,000), $3,946,000 and $(229,000), for the
years
74
ended December 31, 2005, 2004, and 2003, respectively, which represents the
effect of changes in the temporary differences and net operating losses (NOLs),
as amended. Included in deferred tax assets is an impairment of assets for
$7,611,000, of which approximately $7,051,000 is in conjunction with our
acquisition of DSSI in August 2000. This deferred tax asset is a result of an
impairment charge related to fixed assets and goodwill of approximately $24.5
million recorded by DSSI in 1997 prior to our acquisition of DSSI. This
write-off will not be deductible for tax purposes until the assets are disposed.
We have estimated net operating loss carryforwards (NOL's) for federal income
tax purposes of approximately $21,024,000 at December 31, 2005. These net
operating losses can be carried forward and applied against future taxable
income, if any, and expire in the years 2007 through 2024. However, as a result
of various stock offerings and certain acquisitions, the use of these NOLs will
be limited under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended. According to Section 382, we have approximately $16.5 million
in total NOLs available to offset consolidated taxable income for the tax year
ended December 31, 2005. For each subsequent year that the pre-1996 NOLs remain
unused, an additional $1,049,070 will become available to offset consolidated
taxable income. Additionally, NOLs may be further limited under the provisions
of Treasury Regulation 1.1502-21 regarding Separate Return Limitation Years.
NOTE 12
CAPITAL STOCK, EMPLOYEE STOCK PLAN AND INCENTIVE COMPENSATION
PRIVATE PLACEMENT
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently utilized excess availability under our Revolving Credit,
resulting from this private placement, to repay the higher interest 13.5% Notes.
We also issued Warrants to purchase an aggregate of 160,000 shares of our Common
Stock, exercisable at $2.92 per share and with a three year term, for consulting
services related to the private placement.
EMPLOYEE STOCK PURCHASE PLAN
At our Annual Meeting of Stockholders held on July 29, 2003, our stockholders
approved the adoption of the Perma-Fix Environmental Services, Inc. 2003
Employee Stock Purchase Plan. The plan provides our eligible employees an
opportunity to become stockholders and purchase our Common Stock through payroll
deductions. The maximum number of shares issuable under this plan is 1,500,000.
The Plan authorized the purchase of shares two times per year, at an exercise
price per share of 85% of the market price of our Common Stock on the offering
date of the period or on the exercise date of the period, whichever is lower.
The first purchase period commenced July 1, 2004. The following table details
the resulting employee stock purchase totals.
Shares
Purchase Period Proceeds Purchased
- --------------------------------------------- ---------- ----------
July 1 - December 31, 2004 $ 47,000 31,287
January 1 - June 30, 2005 51,000 33,970
July 1 - December 31, 2005 46,000 32,362
---------- ----------
$ 144,000 97,619
========== ==========
75
We previously issued stock to eligible employees under the Perma-Fix
Environmental Services, Inc. 1996 Employee Stock Purchase Plan ("1996 Plan").
The 1996 Plan was adopted in December 1996, by stockholder approval, with terms
and conditions similar to the current 2003 Plan. A total of 500,000 shares under
the 1996 Plan were issued beginning with the purchase period July 1, 1997 to
December 31, 1997 and ending with the January 1, 2004 to June 30, 2004 purchase
period. Proceeds from the issuance of all shares under the 1996 Plan were
approximately $750,000. No additional shares are available to issue under this
1996 Plan.
EMPLOYMENT OPTIONS
During October 1997, Dr. Centofanti entered into an Employment Agreement, which
expired in October 2000 and provided for, the issuance of Non-qualified Stock
Options ("Non-qualified Stock Options"). The Non-qualified Stock Options provide
Dr. Centofanti with the right to purchase an aggregate of 300,000 shares of
Common Stock as follows: (i) after one year 100,000 shares of Common Stock at a
price of $2.25 per share, (ii) after two years 100,000 shares of Common Stock at
a price of $2.50 per share, and (iii) after three years 100,000 shares of Common
Stock at a price of $3.00 per share. The Non-qualified Stock Options expire in
October 2007.
STOCK OPTION PLANS
On December 16, 1991, we adopted a Performance Equity Plan (the "Plan"), under
which 500,000 shares of our Common Stock is reserved for issuance, pursuant to
which officers, directors and key employees are eligible to receive incentive or
Non-qualified stock options. Incentive awards consist of stock options,
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. Incentive stock options granted under the Plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the market price of the Common Stock on
the date of grant, except that the term of an incentive stock option granted
under the Plan to a stockholder owning more than 10% of the then-outstanding
shares of Common Stock may not exceed five years and the exercise price may not
be less than 110% of the market price of the Common Stock on the date of grant.
All grants of options under the Performance Equity Plan have been made at an
exercise price equal to the market price of the Common Stock at the date of
grant. On December 16, 2001, the Plan expired. No new options will be issued
under the Plan, but the options issued under the Plan prior to the expiration
date will remain in effect until their respective maturity dates.
Effective September 13, 1993, we adopted a Non-qualified Stock Option Plan
pursuant to which officers and key employees can receive long-term
performance-based equity interests in the Company. The maximum number of shares
of Common Stock as to which stock options may be granted in any year shall not
exceed twelve percent (12%) of the number of common shares outstanding on
December 31 of the preceding year, less the number of shares covered by the
outstanding stock options issued under our 1991 Performance Equity Plan as of
December 31 of such preceding year. The option grants under the plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price, which is not less than the market price of the Common Stock at
date of grant. On September 13, 2003, the plan expired. No new options will be
issued under this plan, but the options issued under the Plan prior to the
expiration date will remain in effect until their respective maturity dates.
Effective December 12, 1993, we adopted the 1992 Outside Directors Stock Option
Plan, pursuant to which options to purchase an aggregate of 100,000 shares of
Common Stock had been authorized. This plan provides for the grant of options to
purchase up to 5,000 shares of Common Stock for each of our outside directors
upon initial election and each re-election. The plan also provides for the grant
of additional options to purchase up to 10,000 shares of Common Stock on the
foregoing terms to each outside director upon initial election to the Board. The
options have an exercise price equal to the closing trading price, or, if not
available, the fair market value of the Common Stock on the date of grant.
During our annual meeting held on December 12, 1994, the stockholders approved
the Second Amendment to our
76
1992 Outside Directors Stock Option Plan which, among other things, (i)
increased from 100,000 to 250,000 the number of shares reserved for issuance
under the plan, and (ii) provides for automatic issuance to each of our
directors, who is not our employee, a certain number of shares of Common Stock
in lieu of 65% of the cash payment of the fee payable to each director for his
services as director. The Third Amendment to the Outside Directors Plan, as
approved at the December 1996 Annual Meeting, provided that each eligible
director shall receive, at such eligible director's option, either 65% or 100%
of the fee payable to such director for services rendered to us as a member of
the Board in Common Stock. In either case, the number of shares of our Common
Stock issuable to the eligible director shall be determined by valuing our
Common Stock at 75% of its fair market value as defined by the Outside Directors
Plan. The Fourth Amendment to the Outside Directors Plan, was approved at the
May 1998 Annual Meeting and increased the number of authorized shares from
250,000 to 500,000 reserved for issuance under the plan.
Effective July 29, 2003, we adopted the 2003 Outside Directors Stock Plan, which
was approved by our stockholders at the Annual Meeting of Stockholders on such
date. A maximum of 1,000,000 shares of our Common Stock are authorized for
issuance under this plan. The plan provides for the grant of an option to
purchase up to 30,000 shares of Common Stock for each outside director upon
initial election to the board of directors, and the grant of an option to
purchase up to 12,000 shares of Common Stock upon each reelection. The options
have an exercise price equal to the closing trade price on the date prior to
grant date. The plan also provides for the issuance to each outside director a
number of shares of Common Stock in lieu of 65% or 100% of the fee payable to
the eligible director for services rendered as a member of the board of
directors. The number of shares issued is determined at 75% of the market value
as defined in the plan.
Effective July 28, 2004, we adopted the 2004 Stock Option Plan, which was
approved by our stockholders at the Annual Meeting of Stockholders on such date.
A maximum of 2,000,000 shares of our Common Stock are authorized for issuance
under this plan in the form of either incentive or non-qualified stock options.
The option grants under the plan are exercisable for a period of up to 10 years
from the date of grant at an exercise price of not less than market price of the
Common Stock at grant date.
We applied APB Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for options issued to employees and
directors. Accordingly, no compensation cost has been recognized for options
granted to employees and directors at exercise prices, which equal or exceed the
market price of our Common Stock at the date of grant. Should options be granted
at exercise prices below market prices, compensation cost is measured and
recognized as the difference between market price and exercise price at the date
of grant. Beginning on January 1, 2006, we will account for options pursuant to
FAS 123(R), and begin recognizing compensation expense for all unvested stock
options. Pursuant to the new standards in FAS 123(R), and our belief that it is
in the best interest of our stockholders to reduce future compensation expense,
we accelerated the vesting of our unvested employee stock options in July 2005.
Currently, all outstanding employee stock options are fully vested.
77
A summary of the status of options under the plans as of December 31, 2005,
2004, and 2003 and changes during the years ending on those dates is presented
below:
2005 2004 2003
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
PERFORMANCE EQUITY PLAN:
- ------------------------
Balance at beginning of year 35,600 $ 1.18 60,600 $ 1.17 87,100 $ 1.43
Exercised (8,600) 1.25 (25,000) 1.15 -- --
Forfeited -- -- -- -- (26,500) 2.04
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 27,000 1.16 35,600 1.18 60,600 1.17
========== ========== ==========
Options exercisable at year end 27,000 1.16 35,600 1.18 60,600 1.17
NON-QUALIFIED STOCK OPTION PLAN:
- --------------------------------
Balance at beginning of year 2,151,850 $ 1.81 2,557,390 $ 1.79 2,068,900 $ 1.51
Granted -- -- -- -- 1,103,000 2.17
Exercised (37,200) 1.21 (171,940) 1.33 (294,460) 1.19
Forfeited (125,400) 2.51 (233,600) 1.93 (320,050) 1.82
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 1,989,250 1.78 2,151,850 1.81 2,557,390 1.79
========== ========== ==========
Options exercisable at year end 1,989,250 1.78 1,151,250 1.62 985,140 1.51
Weighted average fair value of options
granted during the year at exercise
prices which equal market price of
stock at date of grant -- -- -- -- 1,103,000 .85
1992 OUTSIDE DIRECTORS STOCK PLAN:
- ----------------------------------
Balance at beginning of year 220,000 $ 2.11 265,000 $ 2.27 250,000 $ 2.28
Granted -- -- -- -- 15,000 2.02
Forfeited (20,000) 3.25 (45,000) 3.08 -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 200,000 2.00 220,000 2.11 265,000 2.27
========== ========== ==========
Options exercisable at year end 200,000 2.00 220,000 2.11 265,000 2.27
Weighted average fair value of options
granted during the year at exercise
prices which equal market price of
stock at date of grant -- -- -- -- 15,000 .84
2003 OUTSIDE DIRECTORS STOCK PLAN:
- ----------------------------------
Balance at beginning of year 162,000 $ 1.86 90,000 $ 1.99 -- $ --
Granted 72,000 1.84 72,000 1.70 90,000 1.99
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 234,000 1.85 162,000 1.86 90,000 1.99
========== ========== ==========
Options exercisable at year end 162,000 1.86 90,000 1.99 -- --
Weighted average fair value of options
granted during the year at exercise
prices which equal market price of
stock at date of grant 72,000 1.08 72,000 .71 90,000 .83
2004 STOCK OPTION PLAN:
- -----------------------
Balance at beginning of year 106,500 $ 1.44 -- $ -- -- $ --
Granted -- -- 106,500 1.44 -- --
Exercised (10,000) 1.44 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 96,500 1.44 106,500 1.44 -- --
========== ========== ==========
Options exercisable at year end 96,500 1.44 -- -- -- --
Weighted average fair value of options
granted during the year at exercise
prices which equal market price of
stock at date of grant -- -- 106,500 .78 -- --
78
The following table summarizes information about options under the plans
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
At Remaining Average At Average
Dec. 31, Contractual Exercise Dec. 31, Exercise
Description and Range of Exercise Prices 2005 Life Price 2005 Price
- ------------------------------------------ ------------ ------------ ---------- ------------ ----------
PERFORMANCE EQUITY PLAN:
- ------------------------
1996 Awards ($1.00) 10,000 0.4 years $ 1.00 10,000 $ 1.00
1998 Awards ($1.25) 17,000 2.8 years 1.25 17,000 1.25
------------ ------------
27,000 1.9 years 1.16 27,000 1.16
============ ============
Non-qualified Stock Option Plan:
- --------------------------------
1996 Awards ($1.00) 120,000 0.4 years 1.00 120,000 1.00
1997 Awards ($1.375) 89,000 1.3 years 1.38 89,000 1.38
1998 Awards ($1.25) 70,000 2.8 years 1.25 70,000 1.25
2000 Awards ($1.25-$1.50) 256,000 4.3 years 1.27 256,000 1.27
2001 Awards ($1.75) 636,000 5.3 years 1.75 636,000 1.75
2003 Awards ($2.05-$2.19) 818,250 7.2 years 2.17 818,250 2.17
------------ ------------
1,989,250 5.4 years 1.78 1,989,250 1.78
============ ============
2004 STOCK OPTION PLAN:
- -----------------------
2004 Awards ($1.44) 96,500 8.8 years 1.44 96,500 1.44
1992 OUTSIDE DIRECTORS STOCK OPTION PLAN:
- -----------------------------------------
1996 Awards ($1.75) 35,000 0.9 years 1.75 35,000 1.75
1997 Awards ($2.125) 15,000 1.9 years 2.13 15,000 2.13
1998 Awards ($1.375 15,000 2.4 years 1.38 15,000 1.38
1999 Awards ($1.2188-$1.25) 35,000 3.7 years 1.24 35,000 1.24
2000 Awards ($1.688) 15,000 4.9 years 1.69 15,000 1.69
2001 Awards ($2.43-$2.75) 30,000 5.6 years 2.59 30,000 2.59
2002 Awards ($2.58-$2.98) 40,000 6.6 years 2.73 40,000 2.73
2003 Awards ($2.02) 15,000 7.3 years 2.02 15,000 2.02
------------ ------------
200,000 4.2 years 2.00 200,000 2.00
============ ============
2003 OUTSIDE DIRECTORS STOCK PLAN:
- ----------------------------------
2003 Awards ($1.99) 90,000 7.6 years 1.99 90,000 1.99
2004 Awards ($1.70) 72,000 8.6 years 1.70 72,000 1.70
2005 Awards ($1.84) 72,000 9.6 years 1.84 -- --
------------ ------------
234,000 8.5 years 1.85 162,000 1.86
============ ============
WARRANTS
We have issued various Warrants pursuant to acquisitions, private placements,
debt and debt conversion and to facilitate certain financing arrangements. The
Warrants principally are for a term of three to five years and entitle the
holder to purchase one share of Common Stock for each warrant at the stated
exercise price.
In March 2004, we issued warrants for the exercise of 1,775,638 shares of our
Common Stock as part of the private placement described earlier in this Note 12.
We issued no warrants in 2005 and 2003. During
79
2005, a total of 1,197,766 shares of Common Stock were issued upon the exercise
of 2,522,805 warrants, both on a cash and cashless basis. We received proceeds
of $937,000 for the exercises, and 25,293 warrants expired. During 2004, a total
of 618,860 warrants were exercised for proceeds in the amount of $710,000 and
20,000 warrants expired. During 2003, a total of 1,555,870 Warrants were
exercised for proceeds in the amount of $2,151,000 and 851,875 Warrants expired.
The following details the Warrants currently outstanding as of December 31,
2005:
Number of Exercise
Warrant Series Underlying Shares Price Expiration Date
- ------------------------------------------ ----------------- --------------- ---------------
Consulting Warrants 258,650 $ 1.50 - $ 1.75 6/06
BHC Financing Warrants 131,599 $ 1.44 1/06 - 3/06
Debt for Equity Exchange Warrants 2,449,974 $ 1.75 7/06
Private Placement Warrants 5,997,871 $ 1.75 - $ 2.92 7/06 - 3/07
AMI and BEC Financing Warrants 1,429,686 $ 1.44 - $ 1.50 7/06 - 7/08
-----------------
10,267,780
=================
SHARES RESERVED
At December 31, 2005, we have reserved approximately 13.1 million shares of
Common Stock for future issuance under all of the above option and warrant
arrangements.
NOTE 13
COMMITMENTS AND CONTINGENCIES
HAZARDOUS WASTE
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
LEGAL
In December, 2005, TIFORP Group Holdings, LLC ("TIFORP") and others sued us, our
subsidiary, PFMI, and others in the Michigan Circuit Court for the County of
Wayne, Case No. 05-534619. Plaintiffs are alleging that we and PFMI breached a
confidentiality agreement with TIFORP, and are liable in damages under legal
theories of fraud, conversion of proprietary information and breach of
confidentiality agreement. The only confidentiality agreement between us and/or
PFMI and TIFORP was in the November 10, 2004 letter of intent. It provides
basically that the financial information obtained in the negotiations would be
kept in confidence. The letter of intent also provided that the letter was not
binding and did not create any legal rights or obligations in either party. The
negotiations did not culminate in a sale of the subject property. TIFORP and the
other Plaintiffs assert that there are damages due to lost revenues in excess of
$4.5 million. PESI and PFMI have denied any liability and intend to defend the
case vigorously. We are currently in the discovery phase of the lawsuit,
particularly addressing the exchange of information through written discovery
requests.
During the later part of 2005, PFTS, one of our subsidiaries, received a
proposed consent order from the ODEQ regarding PFTS's Tulsa facility. The
proposed consent order, among other things:
o provides that PFTS has a limited period to complete all work necessary to
ensure that PFTS is eligible for exemption under various provisions of the
Oklahoma Hazardous Waste Management, the
80
Oklahoma Clean Air Act and the ODEQ rules promulgated thereunder relating
to air issues (subparts BB, CC and DD);
o alleges that PFTS has one or more operations that failed to properly mark
or label containers; failed to comply with the maximum containment area
volumes in its operating permit; failed to operate in a manner to prevent
degradation of the environment; failed to maintain the integrity of the cap
over a closed surface impoundment; stored hazardous waste in an area not
allowed by its permit; failed to maintain certain records; failed to comply
with certain requirements under subparts BB, CC and DD; and failed to make
a determination for exemption from the air issue requirements of subpart CC
and DD; and
o proposes a total penalty of $336,000, payable one-half in cash and the
balance based on a supplemental environmental project approved by the ODEQ.
PFTS has corrected any storage and marking issues, and PFTS and the ODEQ are in
the process of negotiating the terms of the proposed consent order, including,
but not limited to, the penalty amount, if any. If it is determined that PFTS is
required to meet the requirements of subpart DD, it will also be required to
apply for and obtain a Title V air permit in order to operate the facility.
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. The
revenues generated by M&EC with Bechtel Jacobs represented approximately 16.5%
and 11.3% of our 2005 and 2004 total revenues, respectively. Since the filing of
this lawsuit, Bechtel Jacobs has continued to deliver waste to M&EC for
treatment and disposal, and M&EC continues to accept such waste, under the
subcontracts, and M&EC and Bechtel Jacobs have entered into an additional
contract for M&EC to treat DOE waste. Although we do not believe that this
lawsuit will have a material adverse effect on our operations, Bechtel Jacobs
could terminate the subcontracts with M&EC, as either party can terminate the
subcontracts at any time.
In January 2004, the EPA issued to PFD a Finding of Violation and in September
2004, PFD received an Administrative Compliance Order ("Order") from EPA
alleging that PFD was a "major source" of potential hazardous air pollutants
and, as a major source, PFD was required to have obtained a Title V air permit
in connection with its operations, and thereby was not in compliance with
provisions of the Clean Air Act (the "Act") and/or regulations thereunder
applicable to a major source, and, as a result, PFD also failed to install
proper air pollution equipment and failed to meet certain administrative burdens
relating to equipment that was constructed or modified at PFD's facility in 2000
and 2001. The Order further provides that PFD has six months from the effective
date of the Order, to develop, submit, obtain and comply with numerous costly
and burdensome compliance initiatives applicable to one that is a major source
of potential hazardous air pollutants and to submit an application to the State
of Ohio for a Title V air permit, which six month period expired. The Order did
not assert any penalties or fines but provided that PFD is not absolved of any
liabilities, including liability for penalties, for the alleged violations cited
in the Order, and that failure to comply with the Order may subject PFD to
penalties up to $32,500 per day for each violation, plus attorney fees. In
addition, during March 2006, EPA issued to PFD a notice of violation alleging
that for a number of years PFD has been in violation of certain provisions of
the Act as a result of expanding and operating certain of its operations without
having applied for and having obtained certain air permits required under the
Ohio Administrative Code. PFD has met with the EPA on several occasions, and the
EPA and PFD have not yet been able to resolve this matter. We have retained
environmental consultants who have advised us that, based on the tests that they
have performed, they do
81
not believe that PFD is a major source of hazardous air pollutants. We have been
further advised by counsel that if PFD is not a major source of hazardous air
pollutants, PFD would not be required to obtain a Title V air permit, would not
have violated the provisions of the Act alleged in the Order and would not be
required to comply with the costly and burdensome compliance initiatives
contained in the Order. The EPA has referred this matter to the U.S. Department
of Justice to enforce the Order in a court of competent jurisdiction and seek
penalties for the alleged violations and failure to comply with the Order. If
the government brings an enforcement proceeding against PFD, PFD may assert its
defenses, including, but not limited to, any constitutional arguments that it
may have. A determination that PFD was a major source of hazardous air
pollutants and required to comply with the Order could have a material adverse
effect on us. We intend that PFD will vigorously defend itself in connection
with this matter.
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western District, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to the operating PFD's facility without a Title V air permit, and
further alleges that air emissions from PFD's facility endanger the health of
the public and constitutes a nuisance in violation of Ohio law. The action seeks
injunctive relief, imposition of civil penalties, attorney fees and costs and
other forms of relief. We intend to vigorously defend ourselves in connection
with this matter. See above discussion as to the administrative proceedings
instituted by the EPA against PFD.
In October 2004, Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of
Orlando, Inc. ("PFO") were notified that they are PRPs at the Malone Service
Company Superfund site in Texas City, Texas ("Site"). The EPA designated both
PFSG and PFO as de minimis parties, which is determined as a generator that
contributed less than 0.6% of the total hazardous materials at the Site. The EPA
has made a settlement offer to all de minimis parties, that requires response
within 45 days of receipt of the notice. PFSG and PFO have accepted the
settlement offer and recorded a liability at December 31, 2004, in the amount of
$229,000. As of the date of this report, payment has not however been made to
satisfy this liability.
During February 2003, PFMI received a letter alleging that PFMI owed Reliance
Insurance Company, in liquidation, the sum of $515,000 as a result of
retrospective premiums under a retroactive premium agreement. In November 2003,
PFMI received a second letter alleging that PFMI owed Reliance Insurance
Company, in liquidation, the sum of $583,000, reflecting an adjustment to the
original amount of retrospective premiums under a retroactive premium agreement.
Our counsel responded and advised that PFMI had numerous defenses to the demand,
including, but not limited to, that the policy expired almost eight years ago
and failure to adjust the premiums in a timely manner violated the agreement
between the Company and Reliance and that under Michigan law it is deemed to be
an unfair and deceptive act or practice in the business of insurance for an
insurer to fail to complete a final audit within 120 days after termination of
the policy. Although we had previously accrued approximately $217,000 in
connection with this matter, during the later part of 2005, we settled this
litigation by agreeing to pay approximately $108,000 to Reliance, which we paid
in March 2006.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigation. We are not a party to any
litigation or governmental proceeding which our management believes could result
in any judgments or fines against us that would have a material adverse affect
on our financial position, liquidity or results of future operations.
PENSION LIABILITY
We had a pension withdrawal liability of $1,680,000 at December 31, 2004, based
upon a withdrawal letter received from Central States Teamsters Pension Fund
("CST"), resulting from the termination of the
82
union employees at PFMI and a subsequent actuarial study performed. In August
2005, we received a demand letter from CST, amending the liability to
$1,629,000, and provided for the payment of $22,000 per month over an eight year
period.
CONSTRUCTION IN PROGRESS
As of December 31, 2005, we have recorded $850,000 in current construction in
progress projects. It is estimated that we will incur an additional $3,570,000
to complete the current projects by the end of 2006.
OPERATING LEASES
We lease certain facilities and equipment under operating leases. Future minimum
rental payments as of December 31, 2005, required under these leases are
$1,643,000 in 2006, $930,000 in 2007, $375,000 in 2008, $183,000 in 2009,
$112,000 in 2010, and $124,000 in years after 2010.
Net rent expense was $3,538,000, $3,674,000, and $3,006,000, for 2005, 2004, and
2003, respectively. These amounts include payments on operating leases of
approximately $1,548,000, $1,445,000, and $2,010,000, for 2005, 2004, and 2003,
respectively. The remaining rent expense is for non-contractual monthly and
daily rentals of specific use vehicles, machinery and equipment.
NOTE 14
PROFIT SHARING PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply under Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All full-time employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 100% of their compensation, up to a
maximum amount as limited by law. We, at our discretion, may make matching
contributions based on the employee's elective contributions. Company
contributions vest over a period of five years. We currently match up to 25% of
our employees' contributions. We contributed $347,000, $272,000, and $251,000,
in matching funds during 2005, 2004, and 2003, respectively.
NOTE 15
RELATED PARTY TRANSACTIONS
We utilize the remediation and analytical services of Mill Creek Environmental
Services, Inc., which is owned principally by the son and daughter-in-law of our
CEO, Dr. Louis Centofanti. Mill Creek has provided assistance in developing
remediation plans, completing a permit renewal and modification application, and
groundwater investigations at one of our remediation sites. The majority of
these services we are unable to perform ourselves. Our purchases from or
services provided to us by Mill Creek during 2005, 2004 and 2003 totaled
$230,000, $118,000 and $92,000, respectively. We believe that the rates we
receive are competitive and comparable to rates we would receive from
unaffiliated third party vendors.
NOTE 16
OPERATING SEGMENTS
During 2005, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as a business activity:
83
o from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president and
chief operating officer to make decisions about resources to be
allocated and assess its performance; and
o for which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments however, exclude the Corporate headquarters, which does
not generate revenue, Perma-Fix of Michigan, Inc. and Perma-Fix of Pittsburgh,
Inc., two discontinued operations. See Note 5 for further information on
discontinued operations. The accounting policies of the operating segments are
summarized in Note 2.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste and wastewater through our six facilities; Perma-Fix Treatment
Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc.,
Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc., and Perma-Fix of
Maryland, Inc., (which acquired certain assets and assumed certain liabilities
of A&A). We provide through certain of our facilities various waste management
services to certain governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and the East Tennessee Materials and
Energy Corporation. The segment also provides research, and development
services, and on and off-site waste remediation of nuclear mixed and low-level
radioactive waste.
The Consulting Engineering Services segment provides environmental engineering
and regulatory com-pliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segment.
84
The table below shows certain financial information by business segment for
2005, 2004, and 2003.
SEGMENT REPORTING DECEMBER 31, 2005
Industrial Nuclear Segments Corporate
Services Services Engineering Total AndOther(2) Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 40,768 $ 47,245(3) $ 2,853 $ 90,866 $ -- $ 90,866
Intercompany revenues 2,872 2,408 480 5,760 -- 5,760
Gross profit 6,627 18,100 669 25,396 -- 25,396
Interest income 7 3 -- 10 123 133
Interest expense 422 743 18 1,183 411 1,594
Interest expense-financing fees -- 2 -- 2 316 318
Depreciation and amortization 1,854 2,817 40 4,711 43 4,754
Segment profit (loss) (1,762) 10,141 182 8,561 (5,492) 3,069
Segment assets(1) 23,869 63,404 2,162 89,435 9,090(4) 98,525
Expenditures for segment assets 1,081 1,488 14 2,583 33 2,616
Total long-term debt 1,139 3,266 23 4,428 8,947 13,375
SEGMENT REPORTING DECEMBER 31, 2004
Industrial Nuclear Segments Corporate
Services Services Engineering Total AndOther(2) Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 36,600 $ 42,679(3) $ 3,204 $ 82,483 $ -- $ 82,483
Intercompany revenues 2,409 3,480 444 6,333 -- 6,333
Gross profit 6,160 16,741 812 23,713 -- 23,713
Interest income 3 -- -- 3 -- 3
Interest expense 787 1,195 -- 1,982 38 2,020
Interest expense-financing fees -- 194 -- 194 1,997 2,191
Depreciation and amortization 1,854 2,657 30 4,541 35 4,576
Impairment loss on intangible assets (9,002) -- -- (9,002) -- (9,002)
Segment profit (loss) (12,900) 9,240 376 (3,284) (6,293) (9,577)
Segment assets(1) 27,240 60,642 2,261 90,143 10,312(4) 100,455
Expenditures for segment assets 786 2,115 48 2,949 62 3,011
Total long-term debt 1,554 7,808 31 9,393 9,563 18,956
SEGMENT REPORTING DECEMBER 31, 2003
Industrial Nuclear Segments Corporate
Services Services Engineering Total AndOther(2) Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 38,512 $ 37,418(3) $ 3,223 $ 79,153 $ -- $ 79,153
Intercompany revenues 3,675 2,704 510 6,889 -- 6,889
Gross profit 8,997 15,036 1,079 25,112 -- 25,112
Interest income 6 -- -- 6 2 8
Interest expense 696 1,915 (7) 2,604 200 2,804
Interest expense-financing fees -- 3 -- 3 1,067 1,070
Depreciation and amortization 1,639 2,490 35 4,164 73 4,237
Segment profit (loss) 143 7,390 445 7,978 (4,334) 3,644
Segment assets (1) 31,852 58,992 2,189 93,033 17,182(4) 110,215
Expenditures for segment assets 1,191 1,825 50 3,066 344 3,410
Total long-term debt 2,666 8,278 38 10,982 18,106 29,088
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters, not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Management Services
segment include the Bechtel Jacobs revenues for 2005 which total
$14,940,000 (or 16.5%) of total revenue, $9,405,000 (or 11.3%) for the year
ended 2004, and $13,139,000 (or 16.6%) for the year ended 2003.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., and Perma-Fix of
Pittsburgh, Inc., two discontinued operations from the Industrial segment,
of approximately $866,000, and $2,885,000, as of December 31, 2005, and
2004, respectively. Amount includes assets from Perma-Fix of Michigan Inc.
of approximately $7,211,000 as of December 31, 2003.
85
NOTE 17
QUARTERLY OPERATING RESULTS (UNAUDITED)
Unaudited quarterly operating results are summarized as follows (in thousands,
except per share data):
Three Months Ended (unaudited)
--------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Total
---------- ---------- ---------- ---------- ----------
2005
- ----
Revenues $ 21,431 $ 25,144 $ 22,826 $ 21,465 $ 90,866
Gross Profit 5,537 7,354 6,720 5,785 25,396
Income from continuing operations 126 1,464 1,211 268 3,069
Discontinued operations (246) (183) 810 289 670
Net income (loss) applicable to Common Stock (168) 1,235 1,975 541 3,583
Basic net income (loss) per common share:
Continuing operations -- .03 .03 .01 .07
Discontinued operations -- -- .02 -- .01
Net income (loss) -- .03 .05 .01 .08
Diluted net income (loss) per common share:
Continued operations -- .03 .03 .01 .07
Discontinued operations -- -- .02 -- .01
Net income (loss) -- .03 .05 .01 .08
2004
- ----
Revenues $ 16,758 $ 18,854 $ 24,081 $ 22,790 $ 82,483
Gross Profit 3,816 5,634 7,561 6,702 23,713
Income (loss) from continuing operations (1,471) 552 (6,895) (1,763) (9,577)
Discontinued operations (526) (435) (10,637) 1,814 (9,784)
Net income (loss) applicable to Common Stock (2,045) 70 (17,580) 4 (19,551)
Basic net income (loss) per common share:
Continuing operations (.04) .01 (.17) (.04) (.24)
Discontinued operations (.02) (.01) (.25) .04 (.24)
Net income (loss) (.06) -- (.42) -- (.48)
Diluted net income (loss) per common share:
Continued operations (.04) .01 (.17) (.04) (.24)
Discontinued operations (.02) (.01) (.25) .04 (.24)
Net income (loss) (.06) -- (.42) -- (.48)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
86
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure, controls, and procedures.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic
reports filed with the Securities and Exchange Commission (the "SEC")
is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management. Based
on their most recent evaluation, which was completed as of the end of
the period covered by this Annual Report on Form 10-K, we have
evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934, as amended). In designing and
evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and are subject to certain
limitations, incuding the exercise of judgment by individuals, the
difficulty in identifying unlikely future events, and the difficulty
in eliminating misconduct completely. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of
December 31, 2005.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) of the Securities Exchange Act of 1934.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements or fraudulent acts. A control
system, no matter how well designed, can provide only reasonable
assurance with respect to financial statement preparation and
presentation.
Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit the
preparation of the consolidated financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
appropriate authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements or fraudulent acts.
Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness
of internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, we concluded that our internal control over financial
reporting were effective as of December 31, 2005.
87
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005, has been audited by
BDO Seidman LLP, an independent registered public accounting firm, as
stated in their attestation report which is included herein.
Remediation of Material Weakness in Internal Control over Financial
Reporting
We took certain steps toward remediation of the material weaknesses
described in our Form 10-K for the year ended December 31, 2004.
Significant focus was placed on corporate governance and the
responsibilities and authority surrounding the accounting function.
The internal control changes and steps are summarized as follows:
o The facility and segment accounting responsibilities were
realigned to report directly to the Chief Financial Officer.
o The Segment Controller positions were elevated to Corporate
Vice President roles, were given additional
responsibilities, and now report to the Chief Financial
Officer.
o An Internal Audit Department was established, reporting
directly to the Audit Committee of our Board of Directors.
o The establishment of this Internal Audit department has
allowed us to significantly reduce our use of external
consultants and provide our locations with a much more
granular audit of critical controls. The effect has been
more robust remediation recommendations as well as a
continuity and caliber of internal audit staff necessary to
maintain company standards. In addition to the department's
focus on Sarbanes-Oxley Section 404 compliance is the
directive to move all our internal controls over financial
reporting towards best-business practices.
o We have reviewed the staffing levels and quality of staff at
each location and segment headquarters. We have added
certain positions and realigned responsibilities in certain
areas and will continue to implement changes, as necessary.
o Significant effort has been put forth toward the review and
enhancement of existing policies and procedures, and in the
development of new policies where possible and/or necessary.
This includes continued enhancement to our payroll
processing and control procedures and purchase order systems
and procedures.
In conjunction with the above, we have strengthened our financial
statement close process, including the oversight and review of such
related results.
Changes in Internal Control
There have been no changes in our internal control over financial
reporting, other than reported above for remediation steps and as
reported below:
Effective January 1, 2005, we changed our payroll processing provider
for all of our facilities. With this change, we now utilize a
centralized payroll and human resources database which provides for
corporate oversight on a real-time basis of all payroll related
activities, and automatic benefit calculations on all employees.
88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Gainesville, Florida
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Perma-Fix
Environmental Services, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2005
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
"COSO control criteria"). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO control criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO control criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2005, and our report dated March
24, 2006 expressed an unqualified opinion on those consolidated financial
statements.
West Palm Beach, Florida BDO Seidman, LLP
March 24, 2006
ITEM 9B. OTHER INFORMATION
None.
89
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth, as of the date hereof, information concerning
our Directors:
NAME AGE POSITION
- ----------------------------- --- ----------------------------------------
Dr. Louis F. Centofanti 62 Chairman of the Board, President and
Chief Executive Officer
Mr. Jon Colin 50 Director
Mr. Jack Lahav 57 Director
Mr. Joe Reeder 58 Director
Mr. Alfred C. Warrington, IV 70 Director
Dr. Charles E. Young 73 Director
Mr. Mark A. Zwecker 55 Director
Each director is elected to serve until the next annual meeting of stockholders.
We have a separately designated standing audit committee of our Board of
Directors. The members of the Audit Committee are: Alfred C. Warrington, IV, Jon
Colin and Mark A. Zwecker.
Our Board of Directors has determined that each of our audit committee members
is an "audit committee financial expert" as defined by Item 401(h) of Regulation
S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
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. JON COLIN
Mr. Colin has served as a Director since December 1996. Mr. Colin is currently
Chief Executive Officer of Lifestar Response Corporation, a position he has held
since April 2002. Mr. Colin served as Chief Operating Officer of Lifestar
Response Corporation from October 2000 to April 2002, and a consultant for
Lifestar Response Corporation from September 1997 to October 2000. From 1990 to
1996, Mr. Colin served as President and Chief Executive Officer for
Environmental Services of America, Inc., a publicly traded environmental
services company. Mr. Colin is also a Director at Lifestar Response Corporation
and Bamnet Inc. Mr. Colin has a B.S. in Accounting from the University of
Maryland.
90
MR. JACK LAHAV
Jack Lahav has served as a Director since September 2001. Mr. Lahav is a private
investor, specializing in launching and growing businesses. Mr. Lahav devotes
much of his time to charitable activities, serving as President, as well as,
board member of several charities. Previously, Mr. Lahav founded Remarkable
Products Inc. and served as its president from 1980 to 1993. Mr. Lahav was also
co-founder of Lamar Signal Processing, Inc.; president of Advanced Technologies,
Inc., a robotics company and director of Vocaltech Communications, Inc.
HONORABLE JOE R. REEDER
Mr. Reeder, a Director since April 2003 , has served as Shareholder in Charge of
the Mid-Atlantic Region for Greenberg Traurig LLP, one of the nation's largest
law firms, with 28 offices and over 1500 attorneys, worldwide. His clientele has
included sovereign nations, international corporations, and law firms throughout
the U.S. As the 14th Undersecretary of the U.S. Army (1993-97), Mr Reeder also
served for three years as Chairman of the Panama Canal Commission's Board of
Directors where he oversaw a multibillion-dollar infrastructure program. He sits
on the Board of Governors of the Nat'l Defense Industry Association (NDIA), the
Armed Services YMCA, the USO, and many other corporate and charitable
organizations, and is a frequent television commentator on legal and national
security issues. A graduate of West Point who served in the 82d Airborne
Division following Ranger School, Mr. Reeder also has a J.D. from the University
of Texas and an L.L.M. from Georgetown University.
MR. ALFRED C. WARRINGTON, Iv
Mr. Warrington has served as a Director since March 2002. Mr. Warrington was the
founding chairman, co-chief executive officer and chief financial officer of
Sanifill, Inc., a solid waste company that was merged with Waste Management,
Inc. He currently serves as vice-chairman of HC Industries, Inc., a manufacturer
of health and beauty aids. He has also been very active in community affairs and
higher education. Mr. Warrington served as co-chairman of the MARTA referendum
that brought rapid transit to the city of Atlanta and has been a strong
supporter of the University of Florida, where he was instrumental in starting
the School of Accounting. In recognition of his efforts, and a significant
donation, the University of Florida has renamed the College of Business as the
Warrington College of Business. Most recently, Mr. Warrington was appointed to
the newly formed University of Florida Board of Trustees by Governor Jeb Bush.
Prior to joining Sanifill, Mr. Warrington was a practicing CPA and a partner
with Arthur Andersen & Co. Mr. Warrington holds a B.S.B.A. from the University
of Florida.
DR. CHARLES E. YOUNG
Dr. Charles E. Young has served as a Director since July 2003. Dr. Young was
president of the University of Florida, a position he held from November 1999 to
January 2004. Dr. Young also served as chancellor of the University of
California at Los Angeles (UCLA) for 29 years until his retirement in 1997. Dr.
Young was formerly the chairman of the Association of American Universities and
served on numerous commissions including the American Council on Education, the
National Association of State Universities and Land-Grant Colleges, and the
Business-Higher Education Forum. Dr. Young serves on the board of directors of
I-MARK, Inc., a software and professional services company. He previously served
on the board of directors of Intel Corp., Nicholas-Applegate Growth Equity Fund,
Inc., Fiberspace, Inc., and Student Advantage, Inc. Dr. Young has a Ph.D. and
M.A. in political science from UCLA and a B.A. from the University of California
at Riverside.
MR. MARK A. ZWECKER
Mark Zwecker has served as a Director since the Company's inception in January
1991. Mr. Zwecker has recently assumed the position of Chief Financial Officer
of Plum Combustion, Inc., an engineering and manufacturing company developing
high performance combustion technology. Mr. Zwecker served as president of ACI
Technology, LLC, from 1997 until 2006 and was vice president of finance and
administration for American Combustion, Inc., from 1986 until 1998. In 1983,
Mr. Zwecker participated
91
as a founder with Dr. Centofanti in the start up of PPM, Inc. He remained with
PPM, Inc. until its acquisition in 1985 by USPCI. Mr. Zwecker has a B.S. in
Industrial and Systems Engineering from the Georgia Institute of Technology and
an M.B.A. from Harvard University.
EXECUTIVE OFFICERS
The following table sets forth, as of the date hereof, information concerning
our executive officers:
NAME AGE POSITION
- ----------------------------- --- ----------------------------------------
Dr. Louis F. Centofanti 62 Chairman of the Board, President and
Chief Executive Officer
Mr. Richard Kelecy 50 Chief Financial Officer, Vice President,
and Secretary
Mr. Larry McNamara 56 Chief Operating Officer
Mr. Robert Schreiber, Jr. 55 President of SYA, Schreiber, Yonley &
Associates, a subsidiary of the Company,
and Principal Engineer
MR. RICHARD T. KELECY
Mr. Kelecy was elected Vice-President and Chief Financial Officer in September
1995. He previously served as Chief Accounting Officer and Treasurer of the
Company from July 1994 until beginning his current positions. From 1992 until
June 1994, Mr. Kelecy was Corporate Controller and Treasurer for Quadrex
Corporation. From 1990 to 1992 Mr. Kelecy was Chief Financial Officer for
Superior Rent-a-Car, and from 1983 to 1990 held various positions at Anchor
Glass Container Corporation including Assistant Treasurer. Mr. Kelecy has a B.A.
in Accounting from Westminster College.
MR. LARRY MCNAMARA
Mr. McNamara has served as Chief Operating Officer since October 2005. From
October 2000 to October 2005, he served as President of the Nuclear Waste
Management Services segment. From December 1998 to October 2000, he served as
Vice President of the Company's Nuclear Waste Management Services Segment.
Between 1997 and 1998, he served as Mixed Waste Program Manager for Waste
Control Specialists (WCS) developing plans for the WCS mixed waste processing
facilities, identifying markets and directing proposal activities. Between 1995
and 1996, Mr. McNamara was the single point of contact for the DOD to all state
and federal regulators for issues related to disposal of Low Level Radioactive
Waste and served on various National Committees and advisory groups. Mr.
McNamara served, from 1992 to 1995, as Chief of the Department of Defense Low
Level Radioactive Waste office. Between 1986 and 1992, he served as the Chief of
Planning for the Department of Army overseeing project management and program
policy for the Army program. Mr. McNamara has a B.S. from the University of
Iowa.
MR. ROBERT SCHREIBER, JR.
Mr. Schreiber has served as President of SYA since we 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.
CERTAIN RELATIONSHIPS
There are no family relationships between any of our existing Directors or
executive officers. Dr. Centofanti is the only Director who is our employee.
92
RESIGNATION OF CHIEF FINANCIAL OFFICER
On March 23, 2006, Mr. Richard T. Kelecy tendered his resignation as Chief
Financial Officer, Vice President, and Secretary of the Board of Directors of
the Company. Mr. Kelecy's resignation from his current positions and as an
executive officer will be effective as of April 5, 2006. Mr. Kelecy will
continue as a part time employee, to assist the Company in its transition, for a
period not to exceed six months.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, and the regulations promulgated thereunder
require our executive officers and directors and beneficial owners of more than
10% of our Common Stock to file reports of ownership and changes of ownership of
our Common Stock with the Securities and Exchange Commission, and to furnish us
with copies of all such reports. Based solely on a review of the copies of such
reports furnished to us and written information provided to us, we believe that
during 2004 none of our executive officers and directors failed to timely file
reports under Section 16(a), except Robert Schreiber, Jr., inadvertently failed
to timely file a Form 3.
Capital Bank-Grawe Gruppe AG ("Capital Bank") has advised us that it is a
banking institution regulated by the banking regulations of Austria, which holds
shares of our Common Stock as agent on behalf of numerous investors. Capital
Bank has represented that all of its investors are accredited investors under
Rule 501 of Regulation D promulgated under the Act. In addition, Capital Bank
has advised us that none of its investors, individually or as a group,
beneficially own more than 4.9% of our Common Stock. Capital Bank has further
informed us that its clients (and not Capital Bank) maintain full voting and
dispositive power over such shares. Consequently, Capital Bank has advised us
that it believes it is not the beneficial owner, as such term is defined in Rule
13d-3 of the Exchange Act, of the shares of our Common Stock registered in the
name of Capital Bank because it has neither voting nor investment power, as such
terms are defined in Rule 13d-3, over such shares. Capital Bank has informed us
that it does not believe that it is required (a) to file, and has not filed,
reports under Section 16(a) of the Exchange Act or (b) to file either Schedule
13D or Schedule 13G in connection with the shares of our Common Stock registered
in the name of Capital Bank.
If the representations, or information provided, by Capital Bank are incorrect
or Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, then
Capital Bank and/or the investor group would have become a beneficial owner of
more than 10% of our Common Stock on February 9, 1996, as a result of the
acquisition of 1,100 shares of our Preferred Stock that were convertible into a
maximum of 1,282,798 shares of our Common Stock. If either Capital Bank or a
group of Capital Bank's investors became a beneficial owner of more than 10% of
our Common Stock on February 9, 1996, or at any time thereafter, and thereby
required to file reports under Section 16(a) of the Exchange Act, then Capital
Bank has failed to file a Form 3 or any Forms 4 or 5 for period from February 9,
1996, until the present.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all our executive officers. Our
Code of Ethics is available on our website at www.perma-fix.com. If any
amendments are made to the Code of Ethics or any grants of waivers are made to
any provision of the Code of Ethics to any of our executive officers, we will
promptly disclose the amendment or waiver and nature of such amendment of waiver
on our website.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid to our executive
officers.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ----------------------- ALL
OTHER RESTRICTED SECURITIES OTHER
ANNUAL STOCK UNDERLYING COMPEN-
SALARY BONUS COMPEN- AWARD(S) OPTIONS/ SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) SATION ($) ($) SARS (#) ($)(2)
- ------------------------------ ---- -------- -------- ---------- ---------- ---------- ----------
Dr. Louis F. Centofanti 2005 218,808 45,801 -- -- -- 12,500
Chairman of the Board, 2004 190,000 50,000 -- -- -- 11,695
President and Chief 2003 183,069 40,000 -- -- 100,000 11,503
Executive Officer
Richard T. Kelecy (3) 2005 180,762 35,400 -- -- -- 12,500
Vice President and Chief 2004 175,000 30,000 -- -- -- 12,250
Financial Officer 2003 168,885 30,000 -- -- 75,000 10,950
Larry McNamara 2005 189,761 93,913 -- -- -- 12,500
Chief Operating Officer 2004 173,000 35,000 -- -- -- 11,569
2003 167,231 30,000 -- -- 100,000 11,457
Robert Schreiber, Jr. 2005 195,749 38,800 -- -- -- 14,002
President of SYA 2004 135,394 51,080 -- -- -- 13,457
2003 155,231 76,800 -- -- 50,000 10,356
(1) The bonuses represent amounts paid in the respective year, but accrued for
and expensed in the prior year. We have accrued for 2005, approximately
$58,000 for performance bonuses to be paid in 2006.
(2) Each named executive officer is provided either a monthly automobile
allowance in the amount of $750 or a leased vehicle. Also included, where
applicable, is our 401(k) matching contribution.
(3) Mr. Kelecy has resigned as our Vice President and Chief Financial Officer
effective April 5, 2006. See "Executive Officers - Resignation of Chief
Financial Officer."
During 2005, the Board of Directors and the Compensation Committee approved a
new compensation plan for the Company's CEO, CFO and COO. The new plan provided
that the named executive officers received an increase in their annual base
compensation and would further receive during the year incentive performance
bonuses. Under the plan, the incentive performance bonuses would be payable only
if certain thresholds and targets are met during the course of a year.
OPTION GRANTS IN 2005
During 2005, there were no individual grants of stock options made to any of the
named executive officers or other key employees named in the Summary
Compensation Table.
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AGGREGATED OPTION EXERCISES IN 2005 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the fiscal year-end value of unexercised options
held by the named executive officers. None of the named executive officers
exercised stock options during 2005.
Number of Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Options
Shares Value (#) At Fiscal Year End ($)(2)
Acquired on Realized ----------------------------- -----------------------------
Name Exercise (#)(1) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------- --------------- -------- ------------- ------------- ------------- -------------
Dr. Louis F. Centofanti -- -- 575,000 -- 31,500 --
Richard Kelecy -- -- 325,000 -- 85,600 --
Larry McNamara -- -- 270,000 -- 21,000 --
Robert Schreiber, Jr. -- -- 210,000 -- 58,700 --
(1) No options were exercised during 2005.
(2) Represents the difference between $1.67 (the closing price of our Common
Stock reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap Market on December 31, 2005), and the option
exercise price. The actual value realized by a named executive officer on the
exercise of these options depends on the market value of our Common Stock on the
date of exercise.
401(k) PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply with Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All full-time employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 100% of their compensation, up to a
maximum amount as limited by law. We, at our discretion, may make matching
contributions based on the employee's elective contributions. Company
contributions vest over a period of five years. We currently match up to 25% of
our employees' contributions. We contributed $347,000 in matching funds during
2005.
EMPLOYEE STOCK PURCHASE PLAN
Our 2003 Employee Stock Purchase Plan provides our eligible employees an
opportunity to become stockholders and purchase our Common Stock through payroll
deductions. The maximum number of shares issuable under this plan is 1,500,000.
The Plan authorized the purchase of shares two times per year, at an exercise
price per share of 85% of the market price of our Common Stock on the offering
date of the period or on the exercise date of the period, whichever is lower.
The first purchase period commenced July 1, 2004. The following table details
the resulting employee stock purchase totals.
Shares
Purchase Period Proceeds Purchased
--------------------------------- ------------ ------------
July 1 - December 31, 2004 $ 47,000 31,287
January 1 - June 30, 2005 51,000 33,970
July 1 - December 31, 2005 46,000 32,362
------------ ------------
$ 144,000 97,619
============ ============
We previously issued stock to eligible employees under the Perma-Fix
Environmental Services, Inc. 1996 Employee Stock Purchase Plan ("1996 Plan").
The 1996 Plan contained terms and conditions similar to
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the current 2003 Plan. A total of 500,000 shares under the 1996 Plan were issued
beginning with the purchase period July 1, 1997 to December 31, 1997 and ending
with the January 1, 2004 to June 30, 2004 purchase period. Proceeds from the
issuance of all shares under the 1996 Plan were approximately $750,000. No
additional shares are available to issue under this 1996 Plan.
COMPENSATION OF DIRECTORS
In 2005, we paid our outside directors fees of $1,500 for each month of service.
Beginning in May 2005, we began compensating our Audit Committee Chairman an
additional $2,250 for each month of service as Chairman, as a result of the
additional responsibilities placed on that position. This resulted in the six
outside directors earning annual director's fees in the total amount of
$126,000. As a member of the Board of Directors, each Director elects to receive
either 65% or 100% of the director's fee in shares of our Common Stock based on
75% of the fair market value of the Common Stock determined on the business day
immediately preceding the date that the fee is due. The balance of each
director's fee, if any, is payable in cash. The aggregate amount of accrued
directors' fees at December 31, 2005, to be paid during 2006 to the six outside
directors (Messrs. Colin, Lahav, Reeder, Warrington, Young and Zwecker) was
$68,000. Reimbursement of expenses for attending meetings of the Board are paid
in cash at the time of the applicable Board meeting. Other than the additional
fees for the Chairman of the Audit Committee, the outside directors do not
receive additional compensation for committee participation or special
assignments, except for reimbursement of expenses. We do not compensate the
directors that also serve as our officers or employees of our subsidiaries for
their service as directors. Although Dr. Centofanti is not compensated for his
services provided as a director, Dr. Centofanti is compensated for his services
rendered as an officer of the Company. See "EXECUTIVE COMPENSATION -- Summary
Compensation Table."
We believe that it is important for our directors to have a personal interest in
our success and growth and for their interests to be aligned with those of our
stockholders. Therefore, under our 2003 Directors Outside Directors Stock Plan
("2003 Directors Plan"), each outside director is granted a 10 year option to
purchase up to 30,000 shares of Common Stock on the date such director is
initially elected to the Board of Directors, and receives on each reelection
date an option to purchase up to another 12,000 shares of Common Stock, with the
exercise price being the fair market value of the Common Stock on the date that
the option is granted. No option granted under the 2003 Directors Plan is
exercisable until after the expiration of six months from the date the option is
granted and no option shall be exercisable after the expiration of ten years
from the date the option is granted. Options to purchase 234,000 shares of
Common Stock were granted and are outstanding under the 2003 Directors Plan.
As of the date of this report, we have issued 224,733 shares of our Common Stock
in payment of director fees under the 2003 Directors Plan, covering the period
October 1, 2003, through December 31, 2005.
Our stock option plans provide that in the event of a change in control (as
defined in the plans) of the Company, each outstanding option and award granted
under the plans shall immediately become exercisable in full notwithstanding the
vesting or exercise provisions contained in the stock option agreement. As a
result, all outstanding stock options and awards granted under the plans to our
executive officers shall immediately become exercisable upon such a change in
control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2005, the Compensation and Stock Option Committee for our Board of
Directors was composed of Mark Zwecker, Jack Lahav, Jon Colin, Joe Reeder, and
Dr. Charles Young.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth information as to the shares of voting securities
beneficially owned as of March 7, 2006, by each person known by us to be the
beneficial owners of more than 5% of any class of our voting securities.
AMOUNT AND PERCENT
TITLE NATURE OF OF
NAME OF BENEFICIAL OWNER OF CLASS OWNERSHIP CLASS (1)
- ---------------------------------- ---------- ---------- ---------
Rutabaga Capital Management(2) Common 5,648,272 12.60%
Pictet (London) Limited (3) Common 3,181,710 7.10
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
44,836,926 shares of Common Stock issued and outstanding on March 7, 2006
(excluding 988,000 Treasury Shares), plus the number of shares of Common Stock
which such person has the right to acquire beneficial ownership of within 60
days. Beneficial ownership by our stockholders has been determined in accordance
with the rules promulgated under Section 13(d) of the Exchange Act.
(2) This beneficial ownership amount is according to the Schedule 13G/A, filed
with the Securities and Exchange Commission ("SEC"), on February 14, 2006, which
provides that Rutabaga Capital Management, an investment advisor, has sole
voting power over 2,416,700 shares and shared voting power over 3,231,572
shares, and has sole dispositive power over all of these shares. The address of
Rutabaga Capital Management is: 64 Broad Street, 3rd Floor, Boston, MA 02109.
(3) This beneficial ownership amount is according to the Schedule 13G/A filed
with the SEC, on February 7, 2006, which provides that Pictet Asset Management,
Ltd. and its parent Pictet (London) Limited, two non-U.S. investment funds have
sole voting and dispositive power over all of these shares. The address of
Pictet (London) Limited is: Tower 42 Level 37, 25 Old Broad Street, London EC2N
1HQ, United Kingdom.
Capital Bank represented to us that:
o Capital Bank owns shares of our Common Stock and rights to acquire
shares of our Common Stock only as agent for certain of Capital Bank's
investors;
o All of the Capital Bank's investors are accredited investors;
o None of Capital Bank's investors beneficially own more than 4.9% of
our Common Stock;
o Capital Bank's investors maintain full voting and dispositive power
over the Common Stock beneficially owned by such investors; and
o Capital Bank has neither voting nor investment power over the shares
of Common Stock owned by Capital Bank, as agent for its investors.
97
Notwithstanding the previous paragraph, if Capital Bank's representations to us
described above are incorrect or if Capital Bank's investors are acting as a
group, then Capital Bank or a group of Capital Bank's investors could be a
beneficial owner of more than 5% of our voting securities. If Capital Bank is
deemed the beneficial owner of such shares, the following table sets forth
information as to the shares of voting securities that Capital Bank may be
considered to beneficially own on March 7, 2006.
AMOUNT AND PERCENT
TITLE NATURE OF OF
NAME OF BENEFICIAL OWNER OF CLASS OWNERSHIP CLASS (1)
- ---------------------------------- ---------- ---------- ---------
Capital Bank Grawe Gruppe (2) Common 8,776,705(2) 18.48%
(1) This calculation is based upon 44,836,926 shares of Common Stock issued and
outstanding on March 7, 2006 (excluding 988,000 Treasury Shares), plus the
number of shares of Common Stock which Capital Bank, as agent for certain
accredited investors has the right to acquire within 60 days.
(2) This amount includes 6,116,898 shares that Capital Bank owns of record, as
agent for certain accredited investors and 2,659,807 shares that Capital Bank
has the right to acquire, as agent for certain investors, within 60 days under
certain Warrants. The Warrants are exercisable at an exercise price of $1.75 per
share of Common Stock. Capital Bank has also advised us that it is holding these
Warrants and shares on behalf of numerous clients, all of which are accredited
investors. Although Capital Bank is the record holder of the shares of Common
Stock and Warrants described in this note, Capital Bank has advised us that it
does not believe it is a beneficial owner of the Common Stock or that it is
required to file reports under Section 16(a) or Section 13(d) of the Exchange
Act. Because Capital Bank (a) has advised us that it holds the Common Stock as a
nominee only and that it does not exercise voting or investment power over the
Common Stock held in its name and that no one investor of Capital Bank for which
it holds our Common Stock holds more than 4.9% of our issued and outstanding
Common Stock; (b) has no right to, and is not believed to possess the power to,
exercise control over our management or its policies; (c) has not nominated, and
has not sought to nominate, a director to our board; and (d) has no
representative serving as an executive officer of the Company, we do not believe
that Capital Bank is our affiliate. Capital Bank's address is Burgring 16, 8010
Graz, Austria. Capital Bank has advised us that it is a banking institution.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as to the shares of voting securities
beneficially owned as of March 7, 2006, by each of our Directors and named
executive officers and by all of our directors and executive officers as a
group. Beneficial ownership has been determined in accordance with the rules
promulgated under Section 13(d) of the Exchange Act. A person is deemed to be a
beneficial owner of any voting securities for which that person has the right to
acquire beneficial ownership within 60 days.
NUMBER OF SHARES
OF COMMON STOCK PERCENTAGE OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK (1)
- -------------------------------------------------------- ------------------ ----------------
Dr. Louis F. Centofanti (2)(3) 1,414,934 (3) 3.12%
Jon Colin (2)(4) 136,864 (4) *
Jack Lahav (2)(5) 1,251,401 (5) 2.75%
Joe Reeder (2)(6) 278,170 (6) *
Alfred C. Warrington, IV (2)(7) 218,375 (7) *
Dr. Charles E. Young (2)(8) 77,891 (8) *
Mark A. Zwecker (2)(9) 314,638 (9) *
Richard T. Kelecy (2)(10) 351,947 (10) *
Larry McNamara (2)(11) 270,000 (11) *
Robert Schreiber, Jr. (2)(12) 219,369 (12) *
Directors and Executive Officers as a Group (10 persons) 4,533,589 9.61%
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*Indicates beneficial ownership of less than one percent (1%).
(1) See footnote (1) of the table under "Security Ownership of Certain
Beneficial Owners."
(2) The business address of such person, for the purposes hereof, is c/o
Perma-Fix Environmental Services, Inc., 1940 N.W. 67th Place, Gainesville,
Florida 32653.
(3) These shares include (i) 535,934 shares held of record by Dr. Centofanti;
(ii) options to purchase 275,000 shares which are immediately exercisable; (iii)
options to purchase 300,000 shares granted pursuant to Dr. Centofanti's prior
employment agreement, which are immediately exercisable; and (iv) 304,000 shares
held by Dr. Centofanti's wife. Dr. Centofanti has sole voting and investment
power of these shares, except for the shares held by Dr. Centofanti's wife, over
which Dr. Centofanti shares voting and investment power.
(4) Mr. Colin has sole voting and investment power over these shares which
include: (i) 55,864 shares held of record by Mr. Colin, and (ii) options to
purchase 81,000 shares of Common Stock, which are immediately exercisable.
(5) Mr. Lahav has sole voting and investment power over these shares which
include: (i) 623,972 shares of Common Stock held of record by Mr. Lahav; (ii)
options to purchase 56,000 shares, which are immediately exercisable, and (iii)
571,429 Warrants to purchase Common Stock, which are exercisable immediately.
(6) Mr. Reeder has sole voting and investment power over these shares which
include: (i) 227,170 shares of Common Stock held of record by Mr. Reeder, and
(ii) options to purchase 51,000 shares, which are immediately exercisable.
(7) Mr. Warrington has sole voting and investment power over these shares which
include: (i) 162,375 shares of Common Stock held of record by Mr. Warrington;
and (ii) options to purchase 56,000 shares ,which are immediately exercisable.
(8) Dr. Young has sole voting and investment power over these shares which
include: (i) 23,891 shares held of record by Dr. Young; and (ii) options to
purchase 54,000 shares, which are immediately exercisable.
(9) Mr. Zwecker has sole voting and investment power over these shares which
include: (i) 233,638 shares of Common Stock held of record by Mr. Zwecker; and
(ii) options to purchase 81,000 shares, which are immediately exercisable.
(10) Mr. Kelecy has sole voting and investment power over 26,947 shares of
Common Stock held of record by Mr. Kelecy and options to purchase 325,000
shares, which are immediately exercisable.
(11) Mr. McNamara has sole voting and investment power over these shares which
include: options to purchase 270,000 shares, which are immediately exercisable.
(12) Mr. Schreiber has joint voting and investment power, with his spouse, over
9,369 shares of Common Stock beneficially held and sole voting and investment
power over options to purchase 210,000 shares, which are immediately
exercisable.
99
EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2005, with respect
to our equity compensation plans.
Equity Compensation Plan
---------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of securities to exercise price of equity compensation
be issued upon exercise outstanding plans (excluding
of outstanding options options, warrants securities reflected in
Plan Category warrants and rights and rights column (a)
- ---------------------------------- ----------------------- ----------------- -----------------------
(a) (b) (c)
Equity compensation plans
Approved by stockholders 2,546,750 $ 1.68 2,434,767
Equity compensation plans not
Approved by stockholders (1) 300,000 2.58 --
----------------------- ----------------- -----------------------
Total 2,846,750 $ 1.78 2,434,767
(1) These shares are issuable pursuant to options granted to Dr. Centofanti
under his prior employment agreement. The options expire in October 2007.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MILL CREEK ENVIRONMENTAL SERVICES, INC.
We utilize the remediation and analytical services of Mill Creek Environmental
Services, Inc., which is owned principally by the son and daughter-in-law of our
CEO, Dr. Louis Centofanti. Mill Creek has provided assistance in developing
remediation plans, completing a permit renewal and modification application, and
groundwater investigations at one of our remediation sites. The majority of
these services we are unable to perform ourselves. Our purchases from or
services provided to us by Mill Creek during 2005, 2004 and 2003 totaled
$230,000, $118,000 and $92,000, respectively. We believe that the rates we
receive are competitive and comparable to rates we would receive from
unaffiliated third party vendors.
CAPITAL BANK GRAWE GRUPPE
As of March 7, 2006, Capital Bank owned of record, as agent for certain
accredited investors, 6,116,898 shares of Common Stock representing 13.65% of
our issued and outstanding Common Stock. As of March 7, 2006, Capital Bank also
had the right to acquire an additional 2,659,807 shares of Common Stock,
issuable under various warrants held by Capital Bank, as agent for certain
investors. During 2005, Capital Bank exercised Warrants to purchase 8,331 shares
of our Common Stock.
If Capital Bank were to acquire all of the shares of Common Stock issuable upon
exercise of the various warrants held by Capital Bank, then Capital Bank would
own of record 8,776,705 shares of Common Stock, representing 18.48% of the
issued and outstanding Common Stock. The foregoing estimates assume that we do
not issue any other shares of Common Stock; no other warrants or options are
exercised; we do not acquire additional shares of Common Stock as treasury
stock; and Capital Bank does not dispose of any shares of Common Stock.
Capital Bank has advised us that it is a banking institution regulated by the
banking regulations of Austria, which holds shares of our Common Stock on behalf
of numerous investors. Capital Bank asserts that it is precluded by Austrian law
from disclosing the identities of its investors, unless so approved by each such
investor. Certain of its investors gave Capital Bank permission to disclose
their identities in
100
order to be included as Selling Stockholders in our Form S-3 Registration
Statement, effective November 22, 2002. Capital Bank has represented that all of
its investors are accredited investors under Rule 501 of Regulation D
promulgated under the Act. In addition, Capital Bank has advised us that none of
its investors beneficially own more than 4.9% of our Common Stock. Capital Bank
has further informed us that its clients (and not Capital Bank) maintain full
voting and dispositive power over such shares. Consequently, Capital Bank has
advised us that it believes it is not the beneficial owner, as such term is
defined in Rule 13d-3, of the shares of our Common Stock registered in the name
of Capital Bank because it has neither voting nor investment power, as such
terms are defined in Rule 13d-3, over such shares. Capital Bank has informed us
that it does not believe that it is required to file, and has not filed, any
reports under Forms 3, 4, or 5 as required by Section 16(a) of the Exchange Act
or to file either Schedule 13D or Schedule 13G in connection with the shares of
our Common Stock registered in the name of Capital Bank.
If the representations or information provided by Capital Bank are incorrect or
if Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, Capital
Bank and/or the investor group could have become a beneficial owner (as that
term is defined under Rule 13d-3 as promulgated under the Exchange Act of more
than 10% of our Common Stock.
Because Capital Bank (a) has advised us that it holds the Common Stock as a
nominee only and that it does not exercise voting or investment power over our
Common Stock held in its name and that no one investor of Capital Bank for which
it holds our Common Stock holds more than 4.9% of our issued and outstanding
Common Stock; (b) has no right to, and is not believed to possess the power to,
exercise control over our management or our policies; (c) has not nominated, and
has not sought to nominate, a director to our board; and (d) has no
representative serving as an executive officer of the Company, we do not believe
that Capital Bank is our affiliate.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees and expenses billed by BDO Seidman, LLP ("BDO") for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2005 and 2004, for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for those fiscal years, and for review of documents filed with the
Securities and Exchange Commission for those fiscal years were approximately
$447,000 and $423,000, respectively. Audit fees for 2005 and 2004 include
approximately $170,000 and $241,000, respectively, in fees to provide internal
control audit services to the Company. Approximately 46% and 60% of the total
hours spent on audit services for the Company for the years ended December 31,
2005 and 2004, respectively, were spent by Cross, Fernandez and Riley, LLP
("CFR"), members of the BDO alliance network of firms. Such members are not full
time, permanent employees of BDO.
AUDIT-RELATED FEES
BDO was engaged to provide audit related services to the Company for the fiscal
year ended December 31, 2004. The aggregate fees billed by BDO for that period
was $14,600. BDO was not engaged to provide audit related services to the
Company for the fiscal year ended December 31, 2005.
CFR audited the Company's 401(k) Plan during 2005 and 2004, and billed $8,000
and $8,000, respectively.
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TAX SERVICES
BDO was not engaged to provide tax services to the Company for the fiscal years
ended December 31, 2005 and 2004.
The aggregate fees billed by CFR for tax compliance services for 2005 and 2004
were approximately $39,000 and $34,000, respectively.
ALL OTHER FEES
BDO was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2005 and 2004.
CFR was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2005 and 2004.
The Audit Committee of the Company's Board of Directors has considered whether
BDO's provision of the services described above for the fiscal years ended
December 31, 2005 and 2004, is compatible with maintaining its independence. The
Audit Committee also considered services performed by CFR to determine that it
is compatible with maintaining independence.
Engagement of the Independent Auditor
The Audit Committee is responsible for approving all engagements with BDO and
CFR to perform audit or non-audit services for us prior to us engaging BDO and
CFR to provide those services. All of the services under the headings Audit
Related Fees, Tax Services, and All Other Fees were approved by the Audit
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X of
the Exchange Act. The Audit Committee's pre-approval policy provides as follows:
o The Audit Committee will review and pre-approve on an annual basis any
known audit, audit-related, tax and all other services, along with
acceptable cost levels, to be performed by BDO and CFR. The Audit
Committee may revise the pre-approved services during the period based
on subsequent determinations. Pre-approved services typically include:
statutory audits, quarterly reviews, regulatory filing requirements,
consultation on new accounting and disclosure standards, employee
benefit plan audits, reviews and reporting on management's internal
controls and specified tax matters.
o Any proposed service that is not pre-approved on the annual basis
requires a specific pre-approval by the Audit Committee, including
cost level approval.
o The Audit Committee may delegate pre-approval authority to one or more
of the Audit Committee members. The delegated member must report to
the Audit Committee, at the next Audit Committee meeting, any
pre-approval decisions made.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
(a)(1) Consolidated Financial Statements
See Item 8 for the Index to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
See Item 8 for the Index to Consolidated Financial Statements (which
includes the Index to Financial Statement Schedules)
(a)(3) Exhibits
The Exhibits listed in the Exhibit Index are filed or incorporated by
reference as a part of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Perma-Fix Environmental Services, Inc.
By /s/ Dr. Louis F. Centofanti Date March 28, 2006
-----------------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By /s/ Richard T. Kelecy Date March 30, 2006
-----------------------------------------
Richard T. Kelecy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
By /s/ Jon Colin Date March 29, 2006
-----------------------------------------
Jon Colin, Director
By /s/ Jack Lahav Date March 31, 2006
-----------------------------------------
Jack Lahav, Director
By /s/ Alfred C. Warrington, IV Date March 31, 2006
-----------------------------------------
Alfred C. Warrington IV, Director
By /s/ Mark A. Zwecker Date March 30, 2006
-----------------------------------------
Mark A. Zwecker, Director
By /s/ Dr. Louis F. Centofanti Date March 28, 2006
-----------------------------------------
Dr. Louis F. Centofanti, Director
By /s/ Joe R. Reeder Date March 31, 2006
-----------------------------------------
Joe R. Reeder, Director
By /s/ Charles E. Young Date March 31, 2006
-----------------------------------------
Charles E. Young, Director
104
SCHEDULE II
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2005, 2004, and 2003
(Dollars in thousands)
Additions
Charged to
Balance at Costs, Balance
Beginning Expenses at End
Description of Year and Other Deductions of Year
- ---------------------------------------- ------------ ------------ ------------ ------------
Year ended December 31, 2005:
Allowance for doubtful accounts -
continuing operations $ 560 $ 185 $ 233 $ 512
Allowance for doubtful accounts -
discontinued operations 135 (37) 8 90
Year ended December 31, 2004:
Allowance for doubtful accounts -
continuing operations $ 661 $ 241 $ 342 $ 560
Allowance for doubtful accounts -
discontinued operations 42 108 15 135
Year ended December 31, 2003:
Allowance for doubtful accounts -
continuing operations $ 577 $ 236 $ 152 $ 661
Allowance for doubtful accounts -
discontinued operations 121 35 114 42
105
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------
3(i) Restated Certificate of Incorporation, as amended, and all
Certificates of Designations are incorporated by reference from 3.1(i)
to the Company's Form 10-Q for the quarter ended September 30, 2002.
3(ii) Bylaws are incorporated by reference from the Company's Registration
Statement, No. 33-51874.
4.1 Specimen Common Stock Certificate as incorporated by reference from
Exhibit 4.3 to the Company's Registration Statement, No. 33-51874.
4.2 Loan and Security Agreement by and between the Company, subsidiaries
of the Company as signatories thereto, and PNC Bank, National
Association, dated December 22, 2000, as incorporated by reference
from Exhibit 99.1 to the Company's Form 8-K dated December 22, 2000.
4.3 First Amendment to Loan Agreement and Consent, dated January 30, 2001,
between the Company and PNC Bank, National Association as incorporated
by reference from Exhibit 99.7 to the Company's Form 8-K dated January
31, 2001.
4.4 Amendment No. 1 to Revolving Credit, Term Loan and Security Agreement,
dated as of June 10, 2002, between the Company and PNC Bank is
incorporated by reference from Exhibit 4.3 to the Company's Form 10-Q
for the quarter ended September 30, 2002.
4.5 Amendment No. 2 to Revolving Credit, Term Loan and Security Agreement,
dated as of May 23, 2003, between the Company and PNC Bank, as
incorporated by reference from Exhibit 4.4 to the Company's Form 10-Q
for the quarter ended June 30, 2003, and filed on August 14, 2003.
4.6 Amendment No. 3 to Revolving Credit, Term Loan, and Security
Agreement, dated as of October 31, 2003, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.5 to the Company's
Form 10-Q for the quarter ended September 30, 2003, and filed on
November 10, 2003.
4.7 Registration Rights Agreement, dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital AG,
Baystar Capital II, L.P., Bristol Investment Fund, Ltd., Crescent
International Ltd, Crestview Capital Master LLC, Geduld Capital
Partners LP, Gruber & McBaine International, Irwin Geduld Revocable
Trust, J Patterson McBaine, Jon D. Gruber and Linda W. Gruber,
Lagunitas Partners LP, Omicron Master Trust, Palisades Master Fund,
L.P., Stonestreet LP, is incorporated by reference from Exhibit 4.2 of
our Registration Statement No. 333-115061.
4.8 Common Stock Purchase Warrant, dated March 16, 2004, issued by the
company to Alexandra Global Master Fund, Ltd., for the purchase of
262,500 shares of the Company's common stock, is incorporated by
reference from Exhibit 4.3 of our Registration Statement No.
333-115061. Substantially similar warrants were issued by the Company
to the following: (1) Alpha Capital AG, for the purchase of up to
54,444 shares; (2)Baystar Capital II, L.P., for the purchase of up to
63,000 shares; (3) Bristol Investment Fund, Ltd., for the purchase of
up to 62,222 shares; (4) Crescent International Ltd, for the purchase
of up to 105,000 shares; (5) Crestview Capital Master LLC, for the
purchase of up to 233,334 shares; (6) Geduld Capital Partners LP, for
the purchase of up to 26,250 shares; (7) Gruber & McBaine
International, for the purchase of up to 38,889 shares; (8) Irwin
Geduld Revocable Trust, for the purchase of up to 17,500 shares; (9) J
Patterson McBaine, for the purchase of up to 15,555 shares; (10) Jon
D. Gruber and Linda W. Gruber, for the purchase of up to 38,889
shares; (11) Lagunitas Partners LP, for the purchase of up to 93,333
shares; (12) Omicron Master Trust, for the purchase of up to 77,778
shares;
106
(13) Palisades Master Fund, L.P., for the purchase of up to 472,500
shares; and (14) Stonestreet LP, for the purchase of up to 54,444
shares. Copies will be provided to the Commission upon request.
4.9 Amendment No. 4 to Revolving Credit, Term Loan, and Security
Agreement, dated as of March 25, 2005, between the Company and PNC
Bank as incorporated by reference from Exhibit 4.12 to the Company's
Form 10-K for the year ended December 31, 2004.
4.10 Letter from PNC Bank regarding intent to waive technical default on
the Loan and Security Agreement with PNC Bank due to resignation of
Chief Financial Officer.
10.1 1991 Performance Equity Plan of the Company as incorporated herein by
reference from Exhibit 10.3 to the Company's Registration Statement,
No. 33-51874.
10.2 1992 Outside Directors' Stock Option Plan of the Company as
incorporated by reference from Exhibit 10.4 to the Company's
Registration Statement, No. 33-51874.
10.3 First Amendment to 1992 Outside Directors' Stock Option Plan as
incorporated by reference from Exhibit 10.29 to the Company's Form
10-K for the year ended December 31, 1994.
10.4 Second Amendment to the Company's 1992 Outside Directors' Stock Option
Plan, as incorporated by reference from the Company's Proxy Statement,
dated November 4, 1994.
10.5 Third Amendment to the Company's 1992 Outside Directors' Stock Option
Plan as incorporated by reference from the Company's Proxy Statement,
dated November 8, 1996.
10.6 Fourth Amendment to the Company's 1992 Outside Directors' Stock Option
Plan as incorporated by reference from the Company's Proxy Statement,
dated April 20, 1998.
10.7 1993 Non-qualified Stock Option Plan as incorporated by reference from
the Company's Proxy Statement, dated October 12, 1993.
10.8 401(K) Profit Sharing Plan and Trust of the Company as incorporated by
reference from Exhibit 10.5 to the Company's Registration Statement,
No. 33-51874.
10.9 Subcontract Change Notice between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC, No. BA-99446/7 and 8F,
dated July 2, 2002, are incorporated by reference from Exhibit 10.24
to the Company's Registration Statement No. 333-70676.
10.10 Option Agreement, dated July 31, 2001, among the Company, AMI, and BEC
is incorporated by reference from Exhibit 99.8 to the Company's Form
8-K, dated July 30, 2001.
10.11 Promissory Note, dated June 7, 2001, issued by M&EC in favor of
Performance Development Corporation is incorporated by reference from
Exhibit 10.1 to the Company's Form 8-K, dated June 15, 2001.
10.12 Form 433-D Installment Agreement, dated June 11, 2001, between M&EC
and the Internal Revenue Service is incorporated by reference from
Exhibit 10.2 to the Company's Form 8-K, dated June 15, 2001.
10.13 Common Stock Purchase Warrant, dated July 9, 2001, granted by the
Registrant to Capital Bank-Grawe Gruppe AG for the right to purchase
up to 1,830,687 shares of the Registrant's Common Stock at an exercise
price of $1.75 per share incorporated by reference from Exhibit 10.12
to the Company's Registration Statement, No. 333-70676.
10.14 Common Stock Purchase Warrant, dated July 9, 2001, granted by the
Registrant to Herbert Strauss for the right to purchase up to 625,000
shares of the Registrant's Common Stock at an exercise price of $1.75
per share, incorporated by reference from Exhibit 10.13 to the
Company's Registration Statement, No. 333-70676.
107
10.15 Warrant Agreement, dated July 31, 2001, granted by the Registrant to
Paul Cronson for the right to purchase up to 43,295 shares of the
Registrant's Common Stock at an exercise price of $1.44 per share,
incorporated by reference from Exhibit 10.20 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants,
dated July 31, 2001, for the right to purchase up to an aggregate
186,851 shares of the Registrant's Common Stock at an exercise price
of $1.44 per share were granted by the Registrant to Ryan Beck (6,836
shares), Ryan Beck (54,688), Michael Kollender (37,598 shares), Randy
Rock (37,598 shares), Robert Goodwin (43,294 shares), and Meera
Murdeshwar (6,837 shares). Copies will be provided to the Commission
upon request.
10.16 Warrant to Purchase Common Stock, dated July 30, 2001, granted by the
Registrant to David Avital for the purchase of up to 143,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share,
incorporated by reference from Exhibit 10.21 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants
for the purchase of an aggregate 4,249,022 were issued to Capital Bank
(837,451 shares), CICI 1999 Qualified Annuity Trust (85,715 shares),
Gerald D. Cramer (85,715 shares), CRM 1999 Enterprise Fund 3 (200,000
shares), Craig S. Eckenthal (57,143 shares), Danny Ellis Living Trust
(250,000 shares), Europa International, Inc. (571,428 shares), Harvey
Gelfenbein (28,571 shares), A. C. Israel Enterprises (285,715 shares),
Kuekenhof Partners, L.P. (40,000), Kuekenhof Equity Fund, L.P. (60,000
shares), Jack Lahav (571,429 shares), Joseph LaMotta (28,571 shares),
Jay B. Langner (28,571 shares), The F. M. Grandchildren Trust (42,857
shares), Peter Melhado (115,000 shares), Pamela Equities Corp. (42,857
shares), Josef Paradis (143,000 shares), Readington Associates (57,143
shares), Dr. Ralph Richart (225,000 shares), Edward J. Rosenthal
Profit Sharing Plan (28,571 shares), Yariv Sapir IRA (85,714 shares),
and Bruce Wrobel (150,000 shares), respectively. Copies will be
provided to the Commission upon request.
10.17 Common Stock Purchase Warrant, dated July 30, 2001, granted by the
Registrant to Ryan, Beck & Co. for the purchase of 20,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share,
incorporated by reference from Exhibit 10.22 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants,
dated July 30, 2001, for the purchase of an aggregate 48,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share
were issued to Ryan, Beck & Co., LLC (14,000 shares), and Larkspur
Capital Corporation (34,000 shares). Copies will be provided to the
Commission upon request.
10.18 Common Stock Purchase Warrant, dated July 31, 2001, granted by the
Registrant to Associated Mezzanine Investors-PESI (I), L.P. for the
purchase of up to 712,073 shares of the Registrant's Common Stock at
an exercise price of $1.50 per share, incorporated by reference from
Exhibit 10.23 to the Company's Registration Statement, No. 333-70676.
A substantially similar Warrant was issued to Bridge East Capital L.P.
for the right to purchase of up to 569,658 shares of the Registrant's
Common Stock, and a copy will be provided to the Commission upon
request.
10.19 2003 Outside Directors' Stock Plan of the Company as incorporated by
reference from Exhibit B to the Company's 2003 Proxy Statement.
10.20 2003 Employee Stock Purchase Plan of the Company as incorporated by
reference from Exhibit C to the Company's 2003 Proxy Statement.
10.21 2004 Stock Option Plan of the Company as incorporated by reference
from Exhibit B to the Company's 2004 Proxy Statement.
10.22 Common Stock Purchase Warrant, dated March 16, 2004, granted by the
Company to R. Keith Fetter, is incorporated by reference from Exhibit
10.3 of our Form S-3 Regisration Statement dated April 30, 2004.
Substantially similar warrants were granted to Joe Dilustro and Chet
Dubov, each for the purchase of 30,000 shares of the Company's common
stock. Copies will be provided to the Commission upon request.
108
10.23 Basic agreement between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC No. BA-99446F, dated
September 20, 2005, as incorporated by reference from Exhibit 10.1 to
our Form 10-Q for the quarter ended September 30, 2005. Attachments to
this extended agreement will be provided to the Commission upon
request.
10.24 Basic agreement between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC No. BA-99447F, dated
September 20, 2005, as incorporated by reference from Exhibit 10.2 to
our Form 10-Q for the quarter ended September 30, 2005. Attachments to
this extended agreement will be provided to the Commission upon
request.
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company furnished pursuant to 18 U.S.C. Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company furnished pursuant to 18 U.S.C. Section 1350.
109