================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission
File No. 1-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
-------- ----------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
32653
1940 N.W. 67th Place, Gainesville, FL (Zip Code)
(Address of principal executive offices)
(352) 373-4200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 Par Value Boston Stock Exchange
NASDAQ Small Cap Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated file (as defined
in Rule 12b-2 of the Act). Yes X No [ ]
The aggregate market value of the Registrant's voting and non-voting common
equity held by nonaffiliates of the Registrant computed by reference to the
closing sale price of such stock as reported by NASDAQ as of the last business
day of the most recently completed second fiscal quarter (June 30, 2003), was
approximately $61,380,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed to
be affiliates. Capital Bank Grawe Gruppe AG is not considered an affiliate based
on representations made to the Registrant by Capital Bank. Such determination
should not be deemed an admission that such directors or officers, are, in fact,
affiliates of the Registrant. The Company's Common Stock is listed on the NASDAQ
SmallCap Market and the Boston Stock Exchange.
As of March 8, 2004, there were 36,689,937 shares of the registrant's Common
Stock, $.001 par value, outstanding, excluding 988,000 shares held as treasury
stock.
Documents incorporated by reference: none
================================================================================
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I Page No.
Item 1. Business............................................................1
Item 2. Properties.........................................................12
Item 3. Legal Proceedings..................................................12
Item 4A. Executive Officers of the Company..................................15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................16
Item 6. Selected Financial Data............................................17
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations..........................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........34
Special Note Regarding Forward-Looking Statements..................35
Item 8. Financial Statements and Supplementary Data........................37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................69
Item 9A. Controls and Procedures............................................69
PART III
Item 10. Directors and Executive Officers of the Registrant.................70
Item 11. Executive Compensation.............................................73
Item 12. Security Ownership of Certain Beneficial Owners and Management.....77
Item 13. Certain Relationships and Related Transactions.....................80
Item 14. Principal Accountant Fees and Services.............................81
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....83
PART I
ITEM 1. BUSINESS
Company Overview and Principal Products and Services
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste; and
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (which is
both low-level radioactive and hazardous waste) including on and
off-site waste remediation and processing;
o Nuclear and low-level radioactive waste treatment, processing and
disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Consulting services regarding broad-scope environmental issues,
including environmental management programs, regulatory permitting,
compliance and auditing, landfill design, field testing and
characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the Nuclear and Industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear waste, mixed waste and industrial waste.
We service research institutions, commercial companies, public utilities and
governmental agencies nationwide. The distribution channels for our services are
through direct sales to customers or via intermediaries.
We were incorporated in December of 1990. Our executive offices are located at
1940 N.W. 67th Place, Gainesville, Florida 32653.
Website access to Company's reports
Our internet website address is www.perma-fix.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission ("Commission"). We have
adopted a code of ethics applicable to our executive officers including our CEO,
CFO, principal financial officer or controller or persons performing similar
functions. Our code of ethics is also available free of charge on our website.
Segment Information and Foreign and Domestic Operations and Export Sales
During 2003, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
o a business activity from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president to make
decisions about resources to be allocated and assess its performance; and
o for which discrete financial information is available.
-1-
We therefore define our operating segments as each business line that we
operate. These segments, however, exclude the Corporate headquarters, which does
not generate revenue.
Most of our activities are conducted nationwide, however, our Industrial segment
maintains a significant role in the Southeast and Midwest portions of the United
States. We had no foreign operations or export sales during 2003.
Operating Segments
We have three operating segments, which represent each business line that we
operate. The Industrial segment, which operates six facilities, the Nuclear
segment, which operates three facilities, and the Consulting Engineering
Services segment as described below:
INDUSTRIAL WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services of hazardous and non-hazardous waste
(solids and liquids) through six permitted treatment and/or disposal facilities
and numerous related operations provided by our other location, as discussed
below.
Perma-Fix Treatment Services, Inc. ("PFTS") is a Resource Conservation and
Recovery Act of 1976 ("RCRA") permitted treatment, storage and disposal ("TSD")
facility located in Tulsa, Oklahoma. PFTS stores and treats hazardous and
non-hazardous waste liquids, provides waste transportation and disposal of
non-hazardous liquid waste via its on-site Class I Injection Well located at the
facility. The injection well is permitted for the disposal of non-hazardous
liquids and characteristic hazardous wastes that have been treated to remove the
hazardous characteristic. PFTS operates a non-hazardous wastewater treatment
system for oil and solids removal, a corrosive treatment system for
neutralization and metals precipitation, and a container stabilization system.
The injection well is controlled by a state-of-the-art computer system to assist
in achieving compliance with all applicable state and federal regulations.
Perma-Fix of Dayton, Inc. ("PFD") is a RCRA permitted TSD facility located in
Dayton, Ohio. PFD has four main processing areas. The four production areas are
a RCRA permitted TSD, a centralized wastewater treatment area, a used oil
recycling area, and a non-hazardous solids solidification area. Hazardous waste
accepted under the RCRA permit is typically drum waste for fuel bulking,
incineration or stabilization. Wastewaters accepted at the facility include
hazardous and non-hazardous wastewaters, which are treated by ultra filtration,
metals precipitation and bio-degradation, including the biological wastewater
process, to meet the requirements of PFD's Clean Water Act pretreatment permit.
Waste industrial oils and used motor oils are processed through high-speed
centrifuges to produce a high quality fuel that is burned by industrial burners.
Perma-Fix of Ft. Lauderdale, Inc. ("PFFL") is a permitted facility located in
Ft. Lauderdale, Florida. PFFL collects and treats wastewaters, oily wastewaters,
used oil and other off-specification petroleum-based products, some of which may
potentially be recycled into usable products. Key activities at PFFL include
process cleaning and material recovery, production and sales of on-specification
fuel oil, custom tailored waste management programs and hazardous material
disposal and recycling materials from generators such as the cruise line and
marine industries.
Perma-Fix of Orlando, Inc. ("PFO"), is a RCRA permitted TSD facility located in
Orlando, Florida. PFO collects, stores and treats hazardous and non-hazardous
wastes out of two processing buildings, under one of our most inclusive permits.
PFO is also a transporter of hazardous waste and operates a transfer facility at
the site.
Perma-Fix of South Georgia, Inc. ("PFSG"), is a RCRA permitted TSD facility
located in Valdosta, Georgia. PFSG provides storage, treatment and disposal
services to hazardous and non-hazardous waste generators throughout the United
States, in conjunction with the utilization of the PFO facility and
transportation services. PFSG operates a hazardous waste storage facility that
primarily blends and
-2-
processes hazardous and non-hazardous waste liquids, solids and sludges into
substitute fuel or as a raw material substitute in cement kilns that have been
specially permitted for the processing of hazardous and non-hazardous waste.
Perma-Fix of Michigan, Inc. ("PFMI"), is a permitted TSD facility located in
Detroit, Michigan. PFMI is a waste treatment and storage facility, situated on
60 acres, that treats hazardous, non-hazardous and inorganic wastes with
solidification/chemical fixation and bulks, repackages and remanifests wastes
that are determined to be unsuitable for treatment. This large bulk processing
facility utilizes a chemical fixation and stabilization process to produce a
solid non-hazardous matrix that can safely be disposed of in a solid waste
landfill. During the later half of 2003, PFMI's facility sustained a fire. As a
result of this fire, this facility is unable to perform bulking services. As of
the date of this report, we are unable to determine when or if this facility
will be able to begin performing in bulking services.
PFMI also operates under a trade name of Perma-Fix Field Services ("PFFS"),
formerly referred to as PFGS, specializes in the on-site (at the customer's
site) environmental and hazardous waste management, and transportation services.
PFFS provides services to the government under Defense Reutilization & Marketing
Service ("DRMS"), with emphasis on the management of large long-term federal
on-site field service contracts. PFFS currently manages five hazardous waste
management service contracts with the DRMS. PFFS also provides transportation
and waste management services to a number of large commercial/retail customers
across the US and Puerto Rico. PFFS also provides remedial field services to
customers for hazardous waste site cleanup and restoration. PFFS operates out of
three field service offices, located throughout the United States.
For 2003, the Industrial segment accounted for approximately $44,251,000 (or
52.1%) of our total revenue, as compared to approximately $37,641,000 (or 45.1%)
for 2002. See "Financial Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, low-level radioactive
and mixed (containing both hazardous and low-level radioactive) waste treatment,
processing and disposal services through three uniquely licensed (Nuclear
Regulatory Commission) and permitted (Environmental Protection Agency) TSD
facilities. The presence of nuclear and low-level radioactive constituents
within the waste streams processed by this segment create different and unique
operational, processing and permitting/licensing requirements, from those
contained within the Industrial segment, as discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, specializes
in the processing and treatment of certain types of wastes containing both
low-level radioactive and hazardous wastes, which are known in the industry as
mixed waste ("mixed waste"). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. With the amended permits and
licenses received during 2000 and the expansion of its mixed waste processing
equipment and capabilities, PFF has substantially increased the amount and type
of mixed waste and low level radioactive waste that it can store and treat. Its
mixed waste services have included the treatment and processing of waste Liquid
Scintillation Vials (LSVs) since the mid 1980's. The LSVs are generated
primarily by institutional research agencies and biotechnical companies. The
business has expanded into receiving and handling other types of mixed waste,
primarily from the nuclear utilities, commercial generators, prominent
pharmaceutical companies, the Department of Energy ("DOE") and other government
facilities as well as select mixed waste field remediation projects.
Diversified Scientific Services, Inc. ("DSSI"), located in Kingston, Tennessee,
specializes in the processing and destruction of certain types of (mixed waste).
DSSI, like PFF, is one of only a few facilities nationally to operate under both
a hazardous waste permit and a radioactive materials license.
-3-
Additionally, DSSI is the only commercial facility of its kind in the U.S. that
is currently operating and licensed to destroy liquid organic mixed waste,
through such a treatment unit. DSSI provides mixed waste disposal services for
nuclear utilities, commercial generators, prominent pharmaceutical companies,
and agencies and contractors of the U.S. government, including the DOE and the
Department of Defense ("DOD").
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is our third mixed waste facility, which was acquired effective June
25, 2001. As with PFF and DSSI, M&EC also operates under both a hazardous waste
permit and radioactive materials license. M&EC represents the largest of our
three mixed waste facilities, covering 150,000 sq.ft., and is located in leased
facilities on the DOE East Tennessee Technology Park. M&EC operates in a newly
constructed facility, whose initial construction phase was completed during the
third quarter of 2001 and became operational in September 2001. In addition to
providing mixed waste treatment services to commercial generators, nuclear
utilities and various agencies and contractors of the U.S. Government, including
the DOD, M&EC was awarded three contracts to treat DOE mixed waste by
Bechtel-Jacobs Company, LLC, DOE's Environmental Program Manager, which covers
the treatment of mixed waste throughout all DOE facilities.
For 2003, the Nuclear business accounted for $37,418,000 (or 44.1%) of total
revenue, as compared to $42,260,000 (or 50.7%) of total revenue for 2002. See
"Financial Statements and Supplementary Data" for further details.
CONSULTING ENGINEERING SERVICES, which provides environmental engineering and
regulatory compliance consulting services through one subsidiary, as discussed
below.
Schreiber, Yonley & Associates ("SYA") is located in St. Louis, Missouri. SYA
specializes in environmental management programs, permitting, compliance and
auditing, in addition to landfill design, field investigation, testing and
monitoring. SYA clients are primarily industrial, including many within the
cement manufacturing industry. SYA also provides the necessary support,
compliance and training as required by our operating facilities.
During 2003, environmental engineering and regulatory compliance consulting
services accounted for approximately $3,223,000 (or 3.8%) of our total revenue,
as compared to approximately $3,503,000 (or 4.2%) in 2002. See "Financial
Statements and Supplementary Data" for further details.
Agreement to Acquire Additional Facilities
In March 2004, we signed a letter of intent to acquire substantially all of the
assets of USL Environmental Services, Inc.. d/b/a A&A Environmental ("A&A") of
Baltimore, Maryland and US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX") of
Pittsburgh, Pennsylvania, both of which are wholly owned subsidiaries of US
Liquids Inc. A&A is a full line provider of environmental, marine and industrial
maintenance services. EMAX provides a variety of environmental services through
its field and industrial services group and its wastewater treatment group. The
unaudited combined revenues of A&A and EMAX were approximately $15,000,000 in
2003. We will pay in cash, at closing, $3,200,000, subject to a net working
capital adjustment. The closing of this acquisition is subject to the completion
of due diligence, execution of a definitive agreement, approval of our Board of
Directors, and certain other conditions, which we expect to finalize in March
2004.
Importance of Patents and Trademarks, or Concessions Held
We do not believe we are dependent on any particular trademark in order to
operate our business or any significant segment thereof. We have received
registration through the year 2006 for the service mark "Perma-Fix" by the U.S.
Patent and Trademark office.
We are active in the research and development of technologies that allow us to
address certain of our customers' environmental needs. To date, our R&D efforts
have resulted in the granting of four patents
-4-
and the filing of an additional five pending patent applications. Our flagship
technology, the Perma-Fix Process, is a proprietary, cost effective, treatment
technology that converts hazardous waste into non-hazardous material.
Subsequently, we developed the Perma-Fix II process, a multi-step treatment
process that converts hazardous organic components into non-hazardous material.
The Perma-Fix II process is particularly important to our mixed waste strategy.
We believe that at least one third of DOE mixed waste contains organic
components.
The Perma-Fix II process is designed to remove certain types of organic
hazardous constituents from soils or other solids and sludges ("Solids") through
a water-based system. We have filed a patent application with the U.S. Patent
and Trademark Office covering the Perma-Fix II process. As of the date of this
report, we have not received a patent for this process, and there are no
assurances that such a patent will be issued. Until development of this
Perma-Fix II process, we were not aware of a relatively simple and inexpensive
process that would remove the organic hazardous constituents from Solids without
elaborate and expensive equipment or expensive treating agents. Due to the
organic hazardous constituents involved, the disposal options for such materials
are limited, resulting in high disposal cost when there is a disposal option
available. By reducing the organic hazardous waste constituents in the Solids to
a level where the Solids meet Land Disposal Requirements, the generator's
disposal options for such waste are substantially increased, allowing the
generator to dispose of such waste at substantially less cost. We began
commercial use of the Perma-Fix II process in 2000. A patent application has
also been filed for processes to treat radon, and other specialty materials
utilizing variations of the Perma-Fix II process. However, changes to current
environmental laws and regulations could limit the use of the Perma-Fix II
process or the disposal options available to the generator. See
"BUSINESS--Permits and Licenses" and "BUSINESS--Research and Development."
In September 2002, we completed the construction of our new biological
wastewater process at PFD and began accepting commercial wastewater for
treatment through this process. The biological wastewater process is a new
technology which we developed utilizing our variable depth biological treatment
process and several proprietary water treatment processes. The biological
wastewater process is designed to remove certain organic constituents from
highly organic, contaminated wastewaters. The biological wastewater process
enables us to treat heavily contaminated wastewater streams, such as waste oils,
phenols, and "lean" waters, at more competitive prices than traditional methods.
The biological wastewater process meets the EPA's new centralized treatment
standards that became effective in December of 2003.
Permits and Licenses
Waste management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from five to
ten years and, provided that we maintain a reasonable level of compliance, renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
PFTS is a permitted solid and hazardous waste treatment, storage, and disposal
facility. The RCRA Part B permit to treat and store certain types of hazardous
waste was issued by the Waste Management Section of the Oklahoma Department of
Environmental Quality ("ODEQ"). Additionally, PFTS maintains an Injection
Facility Operations Permit issued by the ODEQ Underground Injection Control
Section for our waste disposal injection well, and a pre-treatment permit in
order to discharge industrial wastewaters to the local Publicly Owned Treatment
Works ("POTW"). PFTS is also registered with the ODEQ and the Department of
Transportation as a hazardous waste transporter.
-5-
PFFL operates under a general permit and used oil processors license issued by
the Florida Department of Environmental Protection ("FDEP"), a transporter
license issued by the FDEP and a transfer facility license issued by Broward
County, Florida. Broward County also issued PFFL a discharge Pre-Treatment
permit that allows discharge of treated water to the Broward County POTW.
PFD operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit. PFD provides wastewater
pretreatment under a discharge permit with the local POTW and is a specification
and off-specification used oil processor under the guidelines of the Ohio EPA.
PFMI operates under an operating license issued in 1982 as an existing facility
for the treatment and storage of certain hazardous wastes. The operating license
continues in effect in conjunction with the terms of a consent judgment as
agreed to in 1991.
PFO operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit, issued by the State of
Florida.
PFSG operates a hazardous waste treatment and storage facility under a RCRA Part
B permit, issued by the State of Georgia.
PFF operates its hazardous and low-level radioactive waste activities under a
RCRA Part B permit and a radioactive materials license issued by the State of
Florida.
DSSI operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
M&EC operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
The combination of a RCRA Part B hazardous waste permit and a radioactive
materials license, as held by PFF, DSSI and M&EC, are very difficult to obtain
for a single facility and make these facilities very unique.
We believe that our facilities presently have obtained all approvals, licenses
and permits necessary to enable them to conduct their business as they are
presently conducted. The failure of our facilities to renew any of their present
approvals, licenses and permits, or the termination of any such approvals,
licenses or permits, could have a material adverse effect on us, our operations
and financial condition.
Seasonality
We experience a seasonal slowdown within our industrial segment operations and
revenues during the winter months extending from late November through early
March. The seasonality factor is a combination of poor weather conditions in the
central plains and Midwestern geographical markets we serve for on-site and
off-site waste management services, and the impact of reduced activities during
holiday periods resulting in a decrease in revenues and earnings during such
period. Our engineering segment also experiences reduced activities and related
billable hours throughout the November and December holiday periods. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
experiences seasonably large shipments during the third quarter, leading up to
this government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season.
-6-
Dependence Upon a Single or Few Customers
The majority of our revenues for fiscal 2003 have been derived from hazardous,
non-hazardous and mixed waste management services provided to a variety of
industrial, commercial customers, and government agencies and contractors. Our
customers are principally engaged in research, biotechnical development,
transportation, chemicals, metal processing, electronic, automotive,
petrochemical, refining and other similar industries, in addition to government
agencies that include the DOE, DOD, and other federal, state and local agencies.
We are not dependent upon a single customer, or a few customers. However, we
have and continue to enter into contracts with (directly or indirectly as a
subcontractor) the federal government. The contracts that we are a party to with
the federal government or with others as a subcontractor to the federal
government, generally provide that the government may terminate on 30 days
notice or renegotiate the contracts, at the government's election. Our inability
to continue under existing contracts that we have with the federal government
(directly or indirectly as a subcontractor) could have a material adverse effect
on our operations and financial condition.
M&EC was awarded three subcontracts ("Oak Ridge Contracts") by Bechtel Jacobs
Company, LLC, ("Bechtel Jacobs"), the government-appointed manager of the
environmental program for Oak Ridge, to perform certain treatment and disposal
services relating to Oak Ridge. The Oak Ridge Contracts were issued to M&EC by
Bechtel Jacobs, as a contractor to the DOE. The Oak Ridge Contracts are similar
in nature to a blanket purchase order whereby the DOE specifies the approved
waste treatment process and team to be used for certain disposal, but the DOE
does not specify a schedule as to dates for disposal or quantities of disposal
material to be processed. The initial term of the contract contained a
demonstration period for the team's successful treatment of the waste and the
resulting ability of such processed waste to meet acceptance criteria for its
ultimate disposal location. All three of our mixed waste facilities (PFF, DSSI
and M&EC) successfully performed under the demonstration period. The Oak Ridge
contracts have been extended for a period of two years, through June 2005, with
standard pricing modifications. We are currently receiving and processing waste
under the Oak Ridge Contracts.
As with most such blanket processing agreements, the Oak Ridge Contracts contain
no minimum or maximum processing guarantees, and may be terminated at any time
pursuant to federal contracting terms and conditions. Each specific waste stream
processed under the Oak Ridge Contracts will require a separate work order from
DOE and will be priced separately with the intent of recognizing an acceptable
profit margin. Consolidated revenues from Bechtel Jacobs for 2003, which
includes revenues under the Oak Ridge Contracts total $13,139,000 or 15.5% of
total revenues, as compared to $9,664,000 or 11.6% for the year ended December
31, 2002. Further, we have performed waste related services under other
contracts with (directly or indirectly as a subcontractor) - federal governments
agencies. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Liquidity and Capital Resources of the Company."
During the first quarter of 2003, M&EC filed a lawsuit against Bechtel Jacobs
seeking approximately $4.3 million in surcharges under the Oak Ridge Contracts.
Since the filing of the lawsuit, Bechtel Jacobs has continued to deliver waste
to M&EC under the Oak Ridge Contracts and M&EC has entered into an additional
contract with Bechtel Jacobs relating to DOE waste at Oak Ridge. There are no
assurances that the filing of the lawsuit will not result in Bechtel Jacobs
canceling the Oak Ridge Contracts, which can be canceled at any time by either
party.
Competitive Conditions
Competition is intense within certain product lines within the Industrial
segment of our business. We compete with numerous companies both large and
small, that are able to provide one or more of the environmental services
offered by us, certain of which may have greater financial, human and other
resources than we have. However, we believe that the range of waste management
and environmental consulting, treatment, processing and remediation services we
provide affords us a competitive advantage with respect to certain of our more
specialized competitors. We believe that the treatment processes we
-7-
utilize offer a cost savings alternative to more traditional remediation and
disposal methods offered by certain of our competitors. The intense competition
for performing the services provided by us within the Industrial segment, in
conjunction with the economic downturn over the past two years, has resulted in
reduced gross margin levels for certain of those services.
The Nuclear segment however has only a few competitors and does not currently
experience such intense competitive pressures. At present we believe there are
only three other facilities in the United States with the required radioactive
materials license and hazardous waste permit that provide mixed waste
processing.
The permitting and licensing requirements, and the cost to obtain such permits,
are barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our subsidiaries. We believe
that there are no formidable barriers to entry into certain of the on-site
treatment businesses, and certain of the non-hazardous waste operations, which
do not require such permits. If the permit requirements for both hazardous waste
storage, treatment and disposal activities and/or the licensing requirements for
the handling of low level radioactive matters are eliminated or if such licenses
or permits were made easier to obtain, such would allow more companies to enter
into these markets and provide greater competition.
Within our Industrial segment we solicit business on a nationwide basis.
However, we believe that we are a significant provider in the delivery of
off-site waste treatment services in the Southeast, Midwest and Southwest
portions of the United States. We compete with facilities operated by national,
regional and independent environmental services firms located within a several
hundred-mile radius of our facilities. Our Nuclear segment, with permitted
radiological activities, solicits business on a nationwide basis, including the
U.S. Territories and Antarctica.
Environmental engineering and consulting services provided by us through SYA
involve competition with larger engineering and consulting firms. We believe
that we are able to compete with these firms based on our established reputation
in these market areas and our expertise in several specific elements of
environmental engineering and consulting such as environmental applications in
the cement industry.
Capital Spending, Certain Environmental Expenditures and Potential Environmental
Liabilities
During 2003, we spent approximately $3,462,000 in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2003 capital spending total includes $1,284,000, which was financed. We
have budgeted approximately $5,600,000 for 2004 capital expenditures, to improve
and expand our operations into new markets, reduce the cost of waste processing
and handling, expand the range of wastes that can be accepted for treatment and
processing and to maintain permit compliance requirements. We have also budgeted
for 2004 approximately $1,143,000 to comply with federal, state and local
regulations in connection with remediation activities at four locations. See
Note 9 to Notes to Consolidated Financial Statements. However, there is no
assurance that we will have the funds available for such budgeted expenditures.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company."
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three TSD companies, including
PFD. The former owners of PFD had merged Environmental Processing Services, Inc.
("EPS") with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating certain property leased by EPS from an
affiliate of EPS on which EPS operated a RCRA storage and processing facility
("Leased Property"). Such remediation involves soil and/or groundwater
restoration. The Leased Property used by EPS to operate its facility is separate
and apart from the property on which PFD's facility is located. The
contamination of the leased property occurred prior to PFD being acquired by
Quadrex or us. During 1995, in conjunction with the bankruptcy
-8-
filing by Quadrex, we recognized an environmental liability of approximately
$1,200,000 for remedial activities at the Leased Property. We have accrued
approximately $755,000 for the estimated, remaining costs of remediating the
Leased Property used by EPS, which will extend over the next two years. The
accrual includes $400,000 that was received as a settlement to a lawsuit we
filed in connection with the remediation of the EPS site against the owners of
the Leased Property and the parties that owned EPS prior to its acquisition by
Quadrex.
In conjunction with the acquisition of Perma-Fix of Memphis, Inc. ("PFM"), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $819,000 for the estimated, remaining
cost of remediating the groundwater contamination.
The PFM facility is situated in the vicinity of the Memphis Military Defense
Depot (the "Defense Facility"), which Defense Facility is listed as a Superfund
Site. The Defense Facility is located in the general up gradient direction of
ground water flow of the Allen Well Field utilized by Memphis Light, Gas &
Water, a public water supply utilized in Memphis, Tennessee. Chlorinated
compounds have previously been detected in the groundwater beneath the Defense
Facility, as well as in very limited amounts in certain production wells in the
adjacent Allen Well Field. The PFM facility is located in the down gradient
direction of ground water flow from the Allen Well Field. Based upon a study
performed by our environmental engineering group, we do not believe the PFM
facility is the source of the chlorinated compounds in the noted production
wells in the Allen Well Field.
In conjunction with the acquisition of PFSG during 1999, we recognized an
environmental accrual of $2,199,000 for estimated long-term costs to remove
contaminated soil and to undergo ground water remediation activities at the
acquired facility in Valdosta, Georgia. Initial valuation has recently been
completed, and the remedial process selected. The planning and approval process
continued throughout 2002, with remedial activities beginning in 2003. For the
year ended December 31, 2003, we have a remaining accrual of $912,000, of which
we anticipate spending $246,000 during 2004, with the remaining $666,000 to be
spent over the next five to seven years.
In conjunction with the acquisition of PFMI during 1999, we recognized a
long-term environmental accrual of $2,120,000. This amount represented our
estimate of the long-term costs to remove contaminated soil at the PFMI acquired
facility in Detroit, Michigan. The facility has pursued remedial activities over
the past four years, and principally completed such activities during 2003. We
accrued $89,000 to complete the project in 2004, which includes backfilling with
clean soil and completing certain analytical studies.
No insurance or third party recovery was taken into account in determining our
cost estimates or reserves, nor do our cost estimates or reserves reflect any
discount for present value purposes. See Note 9 to Notes to Consolidated
Financial Statements for discussion on environmental liabilities.
During the later part of 2003, PFMI's facility had a fire, which resulted in
bulking activities at the facility being halted as a result of property damage
caused by the fire. We have placed our insurance carrier on notice, which has a
$500,000 deductibility per occurrence. We are in the process of determining the
cost of repairing or replacing the damage to the facility and whether to
continue bulking activity at the facility.
In January 2004, PFD received notice of findings of violations from the U.S.
Environmental Protection Agency ("EPA") of the U.S. Clean Air Act. Although the
notice alleged that PFD committed numerous violations of the Clean Air Act, it
did not assert any fines or penalties as a result of the alleged violations. PFD
is in the process of evaluating the allegations contained in the notice, and
have scheduled a meeting with the EPA to discuss the alleged violations.
-9-
The nature of our business exposes us to significant risk of liability for
damages. Such potential liability could involve, for example, claims for cleanup
costs, personal injury or damage to the environment in cases where we are held
responsible for the release of hazardous materials; claims of employees,
customers or third parties for personal injury or property damage occurring in
the course of our operations; and claims alleging negligence or professional
errors or omissions in the planning or performance of our services. In addition,
we could be deemed a responsible party for the costs of required cleanup of any
property, which may be contaminated by hazardous substances generated or
transported by us to a site we selected, including properties owned or leased by
us. We could also be subject to fines and civil penalties in connection with
violations of regulatory requirements.
Research and Development
Innovation and technical know-how by our operations is very important to the
success of our business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental needs. We
conduct research internally, and also through collaborations with other third
parties. The majority of our research activities are performed as we receive new
and unique waste to treat, as such we recognize these expenses as a part of our
processing costs. We feel that our investments in research have been rewarded by
the discovery of the Perma-Fix Process and the Perma-Fix II process. Our
competitors also devote resources to research and development and many such
competitors have greater resources at their disposal than we do. We have
estimated that during 2001, 2002 and 2003, we spent approximately $428,000,
$388,000, and $95,000, respectively, in Company-sponsored research and
development activities.
Number of Employees
In our service-driven business, our employees are vital to our success. We
believe we have good relationships with our employees. As of December 31, 2003,
we employed approximately 420 full time persons, of which approximately 12 were
assigned to our corporate office, approximately 23 were assigned to our
Consulting Engineering Services segment, approximately 204 to the Industrial
segment of which 12 employees at one facility are represented by a collective
bargaining unit, under a contract expiring on March 31, 2006, and approximately
181 to the Nuclear segment.
Governmental Regulation
Environmental companies and their customers are subject to extensive and
evolving environmental laws and regulations by a number of national, state and
local environmental, safety and health agencies, the principal of which being
the EPA. These laws and regulations largely contribute to the demand for our
services. Although our customers remain responsible by law for their
environmental problems, we must also comply with the requirements of those laws
applicable to our services. Because the field of environmental protection is
both relatively new and rapidly developing, we cannot predict the extent to
which our operations may be affected by future enforcement policies as applied
to existing laws or by the enactment of new environmental laws and regulations.
Moreover, any predictions regarding possible liability are further complicated
by the fact that under current environmental laws we could be jointly and
severally liable for certain activities of third parties over whom we have
little or no control. Although we believe that we are currently in substantial
compliance with applicable laws and regulations, we could be subject to fines,
penalties or other liabilities or could be adversely affected by existing or
subsequently enacted laws or regulations. The principal environmental laws
affecting our customers and us are briefly discussed below.
The Resource Conservation and Recovery Act of 1976, as amended ("RCRA")
RCRA and its associated regulations establish a strict and comprehensive
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a
-10-
state agency, which has been authorized by the EPA to administer its program,
and must comply with certain operating, financial responsibility and closure
requirements. RCRA provides for the granting of interim status to facilities
that allows a facility to continue to operate by complying with certain minimum
standards pending issuance or denial of a final RCRA permit.
Boiler and Industrial Furnace Regulations under RCRA ("BIF Regulations")
BIF Regulations require boilers and industrial furnaces, such as cement kilns,
to obtain permits or to qualify for interim status under RCRA before they may
use hazardous waste as fuel. If a boiler or industrial furnace does not qualify
for interim status under RCRA, it may not burn hazardous waste as fuel or use
such as raw materials without first having obtained a final RCRA permit. In
addition, the BIF Regulations require 99.99% destruction of the hazardous
organic compounds used as fuels in a boiler or industrial furnace and impose
stringent restrictions on particulate, carbon monoxide, hydrocarbons, toxic
metals and hydrogen chloride emissions.
The Safe Drinking Water Act, as amended (the "SDW Act")
SDW Act regulates, among other items, the underground injection of liquid wastes
in order to protect usable groundwater from contamination. The SDW Act
established the Underground Injection Control Program ("UIC Program") that
provides for the classification of injection wells into five classes. Class I
wells are those which inject industrial, municipal, nuclear and hazardous wastes
below all underground sources of drinking water in an area. Class I wells are
divided into non-hazardous and hazardous categories with more stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA," also referred to as the "Superfund Act")
CERCLA governs the cleanup of sites at which hazardous substances are located or
at which hazardous substances have been released or are threatened to be
released into the environment. CERCLA authorizes the EPA to compel responsible
parties to clean up sites and provides for punitive damages for noncompliance.
CERCLA imposes joint and several liability for the costs of clean up and damages
to natural resources.
Health and Safety Regulations
The operation of our environmental activities is subject to the requirements of
the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
Atomic Energy Act
The Atomic Energy Act of 1954 governs the safe handling and use of Source,
Special Nuclear and Byproduct materials in the U.S. and its territories. This
act authorized the Atomic Energy Commission (now the Nuclear Regulatory
Commission) to enter into "Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations." The State of Florida
(with the USNRC oversight), Office of Radiation Control, regulates the
radiological program of the PFF facility, and the State of Tennessee (with the
USNRC oversight), Tennessee Department of Radiological Health, regulates the
radiological program of the DSSI and M&EC facilities.
Other Laws
Our activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act, the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment
-11-
which may affect us, including laws governing the generation, handling,
transportation and disposition of hazardous substances and laws governing the
investigation and cleanup of, and liability for, contaminated sites. Some of
these state provisions are broader and more stringent than existing federal law
and regulations. Our failure to conform our services to the requirements of any
of these other applicable federal or state laws could subject us to substantial
liabilities which could have a material adverse affect on us, our operations and
financial condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation activities are
regulated by the U.S. Department of Transportation, the Interstate Commerce
Commission and transportation regulatory bodies in the states in which we
operate. We cannot predict the extent to which we may be affected by any law or
rule that may be enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
Insurance
We believe we maintain insurance coverage adequate for our needs and similar to,
or greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities, which we may
incur will be covered by our insurance or that the dollar amount of such
liabilities, which are covered will not exceed our policy limits. Under our
insurance contracts, we usually accept self-insured retentions, which we believe
appropriate for our specific business risks. We are required by EPA regulations
to carry environmental impairment liability insurance providing coverage for
damages on a claims-made basis in amounts of at least $1 million per occurrence
and $2 million per year in the aggregate. To meet the requirements of customers,
we have exceeded these coverage amounts.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage.
ITEM 2. PROPERTIES
Our principal executive offices are in Gainesville, Florida. Our Industrial
segment maintains facilities in Orlando and Ft. Lauderdale, Florida; Dayton,
Ohio; Tulsa, Oklahoma; Valdosta, Georgia; and Detroit, Michigan. Our Nuclear
segment maintains facilities in Gainesville, Florida; Kingston, Tennessee; and
Oak Ridge, Tennessee. Our Consulting Engineering Services are located in St.
Louis, Missouri. We also maintain Field Services offices in Jacksonville,
Florida; Anniston, Alabama; and Honolulu, Hawaii.
We own nine facilities, all of which are in the United States. Five of our
facilities are subject to mortgages as placed by our senior lender. In addition,
we lease properties for office space, all of which are located in the United
States as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing facilities.
ITEM 3. LEGAL PROCEEDINGS
PFMI, which was purchased by us effective June 1, 1999, has been notified that
it is considered a potentially responsible party ("PRP") in three Superfund
sites, two of which had no relationship with PFMI according to PFMI records. As
to the third site, which PFMI has been unable to determine whether PFMI had any
relationship with this site, such relationship, if any, would appear to be de
minimus.
PFO, which was purchased by us in June, 1999, has been notified that it is a PRP
in two separate Superfund sites. At the Spectron Superfund site in Elkton,
Maryland, PFO has been notified by the EPA
-12-
that the EPA is seeking reimbursement from all PRPs at the site for the EPA's
Phase II cost and to further investigate the contamination at the facility. At
this point, we believe that PFO may have sent some waste to the site, but not a
substantial amount. At this time, we are unable to determine what exposure, if
any, PFO may have in connection with this site.
PFO has also been notified that it is a PRP at the Seaboard Chemical Corporation
Superfund Site in Jamestown, North Carolina. In October, 1991, PFO joined the
"Seaboard Group," a group of potentially responsible parties organized to clean
up the site while keeping costs at a minimum. Initially, PFO was identified as a
de minimus party under the Seaboard Group agreement which defined a de minimus
contributor as one acting as either a transporter or generator who was
responsible for less than 1% of the waste at the site. However, in June, 1992,
the Seaboard Group adopted an amendment to the Seaboard Group agreement which
allows a potentially responsible party who is a generator to participate in the
Seaboard Group without relinquishing contributions claims against its broker
and/or transporter. Based upon the amount of waste which PFO brokered to the
site, PFO's status may no longer considered de minimus under the Seaboard Group
agreement. PFO is unable to determine what exposure, if any, it may have in
connection with this site.
PFFL has been advised by the EPA that a release or threatened release of
hazardous substances has been documented by the EPA at the former facility of
Florida Petroleum Reprocessors (the "Site"), which is located approximately
3,000 feet northwest of the PFFL facility in Davie, Florida. However, studies
conducted by, or under the direction of, the EPA, together with data previously
provided to PFFL by the EPA, do not indicate that the PFFL facility in Davie,
Florida has contributed to the deep groundwater contamination associated with
the Site. As a result, we are unable to determine with any degree of certainty
what exposure, if any, PFFL may have as a result of the documented release from
the Site.
PFD is required to remediate a parcel of leased property ("Leased Property"),
which was formerly used as a Resource Conservation and Recovery Act of 1976
storage facility that was operated as a storage and solvent recycling facility
by a company that was merged with PFD prior to our acquisition of PFD. The
Leased Property contains certain contaminated waste in the soils and
groundwater. We were indemnified by Quadrex, the entity that sold us PFD, for
costs associated with remediating the Leased Property, which entails remediation
of soil and/or groundwater restoration. However, during 1995, Quadrex filed for
bankruptcy. Prior to our acquisition of PFD, Quadrex had established a trust
fund ("Remediation Trust Fund"), which it funded with Quadrex's stock to support
the remedial activity on the Leased Property pursuant to the agreement with the
Ohio Environmental Protection Agency ("Ohio EPA"). After we purchased PFD, we
were required to advance $250,000 into the Remediation Trust Fund due to the
reduction in the value of Quadrex's stock that comprised the Remediation Trust
Fund, which stock had been sold by the trustee prior to Quadrex's filing
bankruptcy. We have subsequently put an additional $200,000 into the Remediation
Trust Fund. PFD filed a lawsuit against the owners and former operators of the
Leased Property to remediate the Leased Property and/or to recover any cost
incurred by PFD in connection therewith. The lawsuit was filed in the United
States District Court, for the Southern District of Ohio, styled Perma-Fix of
Dayton, Inc. v. R.D. Baker Enterprises, Inc., case no. C-3-99-469. PFD and the
defendants finalized a settlement of the lawsuit in October 2003. The defendants
paid PFD $400,000 that PFD will use to remediate the Leased Property.
During January 2004, the EPA issued to PFD a notice of Findings of Violation
alleging that PFD committed numerous violations of the Clean Air Act. The EPA
did not assert any penalties or fines but advised PFD that it had several
enforcement options including issuing administrative penalty order or bringing
judicial action against PFD. In its January 2004 notice, the EPA requested a
conference with PFD's technical and management personnel, which we have
scheduled.
Patrick Sullivan ("P. Sullivan"), the son of a former member of our Board of
Directors, Thomas P. Sullivan ("Mr. Sullivan"), was employed by one of our
subsidiaries, Perma-Fix of Orlando, Inc. ("PFO"), as an executive and/or general
manager from the date of our acquisition of PFO in June 1999 to June
-13-
2002, when he terminated his employment to go to work for a competitor of PFO in
Orlando, Florida. P. Sullivan is subject to an agreement with us that provides,
in part, that P. Sullivan would not solicit customers, suppliers or employees of
PFO or ours for a period of two years after termination of his employment. We
have been advised that P. Sullivan violated the agreement and his duties to PFO
and to us prior to and after he terminated his employment with PFO. P. Sullivan
reimbursed us for certain personal expenses charged to, and paid by, us after we
notified P. Sullivan of the claims. In December 2002, we filed a lawsuit against
P. Sullivan in the circuit court of the Ninth Judicial Circuit in Orange County,
Florida, for injunction relief and damages related to the above. P. Sullivan has
denied the allegations. Mr. Sullivan has denied committing any breach of his
fiduciary duties to us in connection with these alleged actions by his son.
During the fourth quarter of 2003, we reached a settlement agreement in
principal with P. Sullivan, which among other things provided for a payment of
$30,000 from P. Sullivan to us.
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs have been discussing these surcharges under the subcontracts for
over a year. These surcharges have not yet been billed. In 2003, the revenues
generated by M&EC with Bechtel Jacobs represented approximately 15.5% of our
2003 total revenues. Since the filing of this lawsuit, Bechtel Jacobs has
continued to deliver waste to M&EC for treatment and disposal, and M&EC
continues to accept such waste, under the subcontracts, and M&EC and Bechtel
Jacobs have entered into an additional contract for M&EC to treat DOE waste.
Although we do not believe that this lawsuit will have a material adverse effect
on our operations, Bechtel Jacobs could terminate the subcontracts with M&EC, as
either party can terminate the subcontracts at any time.
Bryson Adams, et al. v. Environmental Purification Advancement Corporation, et
al.; Civil Action No. 99-1998, United States District Court, Western District of
Louisiana. In April, 2003, the plaintiffs, hundreds of individuals residing in
or around Bayou Sorrel, Louisiana, filed their Fifth Supplemental and Amending
Complaint naming, inter alia, PFMI and PFSG as defendants, both of which are
subsidiaries we acquired in 1999. The lawsuit, which has been pending since
1999, includes as defendants hundreds of entities (and their insurers) which
allegedly disposed of hazardous and toxic substances at a hazardous waste
disposal site and hazardous waste injection well in Bayou Sorrel, Louisiana,
both of which were permitted by the appropriate governmental authorities to
treat and dispose of hazardous and toxic waste. The plaintiffs allege that the
defendant entities, other than the insurers, including PFMI and PFSG, were
negligent in their selection of the sites for the treatment and/or disposal of
hazardous and toxic substances, that the plaintiffs have suffered physical
injuries, property damage and diminished property values as a result of the
escape or migration of contaminants from the sites, and that the defendants are
liable for the damages allegedly suffered by the plaintiffs. The plaintiffs seek
unspecified amounts of compensatory and exemplary damages, interest, costs and
attorney's fees. PFMI and PFSG will defend themselves vigorously in connection
with this matter. However, at this point, we are unable to determine with any
degree of certainty what exposure, if any, PFMI and/or PFSG may have in this
regard. Our insurance carrier is currently defending PFMI and PFSG in this
matter under a reservation of rights. The case is in settlement negotiations,
with the discussions being that the insurers and non-insurer defendants
contributing to any proposed settlement.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigation. We are not a party to any
litigation or governmental proceeding which our management believes could result
in any judgments or fines against us that would have a material adverse affect
on our financial position, liquidity or results of future operations.
-14-
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth, as of the date hereof, information concerning
the Executive Officers of the Company:
NAME AGE POSITION
---- --- --------
Dr. Louis F. Centofanti 60 Chairman of the Board, President and Chief
Executive Officer
Mr. Richard T. Kelecy 48 Chief Financial Officer, Vice President and
Secretary
Mr. Larry McNamara 54 President, Nuclear Services
Mr. William Carder 54 Vice President, Sales and Marketing
Mr. Timothy Keegan 46 President, Industrial Services
DR. LOUIS F. CENTOFANTI
Dr. Centofanti has served as Chairman of the Board since he joined the Company
in February 1991. Dr. Centofanti also served as President and Chief Executive
Officer of the Company from February 1991 until September 1995 and again in
March 1996 was elected to serve as President and Chief Executive Officer of the
Company. From 1985 until joining the Company, Dr. Centofanti served as Senior
Vice President of USPCI, Inc., a large hazardous waste management company, where
he was responsible for managing the treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
MR. RICHARD T. KELECY
Mr. Kelecy was elected Vice-President and Chief Financial Officer in September
1995. He previously served as Chief Accounting Officer and Treasurer of the
Company from July 1994 until beginning his current positions. From 1992 until
June 1994, Mr. Kelecy was Corporate Controller and Treasurer for Quadrex
Corporation. From 1990 to 1992 Mr. Kelecy was Chief Financial Officer for
Superior Rent-a-Car, and from 1983 to 1990 held various positions at Anchor
Glass Container Corporation including Assistant Treasurer. Mr. Kelecy has a B.A.
in Accounting and Business Administration from Westminster College.
MR. LARRY MCNAMARA
Mr. McNamara has served as President of the Nuclear Waste Management Services
Segment since October 2000. From December 1998 to October 2000, he served as
Vice President of the Nuclear Waste Management Services Segment for the
Company's nuclear activities. Between 1997 and 1998, he served as Mixed Waste
Program Manager for Waste Control Specialists (WCS) developing plans for the WCS
mixed waste processing facilities, identifying markets and directing proposal
activities. Between 1995 and 1996, Mr. McNamara was the single point of contact
for the DOD to all state and federal regulators for issues related to disposal
of Low Level Radioactive Waste and served on various National Committees and
advisory groups. Mr. McNamara served, from 1992 to 1995, as Chief of the
Department of Defense Low Level Radioactive Waste office. Between 1986 and 1992
he served as the Chief of Planning for the Department of Army overseeing project
management and program policy for the Army program. Mr. McNamara has a B.S. from
the University of Iowa.
MR. WILLIAM CARDER
Mr. Carder joined the Company in January 2003 as Vice President of Sales and
Marketing. Previously, Mr. Carder was Regional Manager for COGEMA, Inc. from
June 1997 to July of 2002. From February 1992 to April 1997 he served in a
number of positions for Scientific Ecology Group, a division of Westinghouse,
including Vice President of Government Sales, Vice President of Business
Development,
-15-
and finally Vice President of Sales and Marketing. From 1987 through 1991, Mr.
Carder served with Quadrex Corporation as Vice President of Sales and Marketing.
Prior to joining Quadrex, he spent fifteen years (1971 to 1987) with the Nuclear
Energy Business Operation of General Electric Company as field engineer, project
engineer, service supervisor and manager, service sales engineer and manager and
finally as the Commercial Program Manager for the northeast region. Mr. Carder
has a B.S. in Nuclear Engineering from North Carolina State University.
MR. TIMOTHY KEEGAN
Mr. Keegan joined the Company in April 2003, as President of the Industrial
Waste Management Services segment. Most recently, Mr. Keegan served as Senior
Vice President of Safety-Kleen Corporation from 1999 to 2001, where he had
sales, operational, and accounting responsibility for over $300 million in
revenue. Mr. Keegan also served as Corporate Vice President for southeast
operations at Safety-Kleen from 1998 to 1999, and Vice President of PCB/remedial
services from 1995 to 1998. Prior to joining Safety-Kleen, Mr. Keegan served as
Vice President of PCB services for USPCI from 1991 to 1995. Mr. Keegan also
served as President of PPM, Inc., a PCB waste management company from 1988 to
1991. He has an M.B.A. from Syracuse University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock, with a par value of $.001 per share, is traded on the NASDAQ
SmallCap Market ("NASDAQ") and the Boston Stock Exchange ("BSE") under the
symbol "PESI" on both NASDAQ and BSE. Our Common Stock is also traded on the
Berlin Stock Exchange under the symbol "PES.BE." The following table sets forth
the high and low market trade prices quoted for the Common Stock during the
periods shown. The source of such quotations and information is the NASDAQ
online trading history reports.
2003 2002
-------------- --------------
Low High Low High
----- ----- ----- -----
Common Stock 1st Quarter $1.49 $2.62 $2.51 $3.44
2nd Quarter 1.68 2.20 2.55 3.50
3rd Quarter 1.60 2.28 1.92 3.01
4th Quarter 1.68 3.56 2.09 2.65
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markups or commissions and may not represent actual transactions.
As of March 4, 2004, there were approximately 311 stockholders of record of our
Common Stock, including brokerage firms and/or clearing houses holding shares of
our Common Stock for their clientele (with each brokerage house and/or clearing
house being considered as one holder). However, the total number of beneficial
stockholders as of March 4, 2004, was approximately 3,837.
Since our inception, we have not paid any cash dividends on our Common Stock and
have no dividend policy. Our loan agreement prohibits paying any cash dividends
on our Common Stock without prior approval.
-16-
Recent sales of unregistered securities, in addition to the securities sold by
us during 2003, as reported in our Forms 10-Q for the quarters ended March 31,
2003, June 30, 2003 and September 30, 2003, which were not registered under the
Securities Act of 1933, as amended, we sold or issued during 2003 the following
securities which were also not registered under the Act:
1. On or about October 29, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 150,000 shares of our Common Stock at a total exercise
price of $243,750, or $1.625 per share, in accordance with the terms
of the Warrant. The shares were issued under the exemption from
registration provided by Section 4(2) and/or Rule 506 of Regulation
D based on Capital Bank's representations contained in the Warrant
and prior dealings with us. The proceeds were used to fund capital
expenditures and current working capital needs.
2. On or about November 27, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 300,000 shares of our Common Stock at a total exercise
price of $562,500, or $1.875 per share, in accordance with the terms
of the Warrant. The shares were issued under the exemption from
registration provided by Section 4(2) and/or Rule 506 of Regulation
D based on Capital Bank's representations contained in the Warrant
and prior dealings with us. The proceeds were used to fund capital
expenditures and current working capital needs.
3. On or about December 22, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 105,000 shares of our Common Stock at a total exercise
price of $149,300, or $1.4219 per share, in accordance with the
terms of the Warrant. The shares were issued under the exemption
from registration provided by Section 4(2) and/or Rule 506 of
Regulation D based on Capital Bank's representations contained in
the Warrant and prior dealings with us. The proceeds were used to
fund capital expenditures and current working capital needs.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table has been derived from our audited
consolidated financial statements, which have been audited by BDO Seidman, LLP.
Statement of Operations Data:
(Amounts in Thousands, Except for Share Amounts)
December 31,
---------------------------------------------------------------------------
2003 2002 2001(3) 2000(2) 1999(1)
--------- --------- -------- -------- --------
Revenues $ 84,892 $ 83,404 $ 74,492 $ 59,139 $ 46,464
Net income (loss) 3,118 2,202 (602) (556) 1,570
Preferred Stock dividends (189) (158) (145) (206) (308)
Gain on Preferred Stock redemption -- -- -- -- 188
Net income (loss) applicable to
Common Stock 2,929 2,044 (747) (762) 1,450
Basic Net income (loss) per common
share .08 .06 (.03) (.04) .08
Diluted net income (loss) per common share .08 .05 (.03) (.04) .07
Basic number of shares used in
computing net income (loss) per share 34,982 34,217 27,235 21,558 17,488
Diluted number of shares and potential
common shares used in computing net
income (loss) per share 39,436 42,618 27,235 21,558 21,224
-17-
Balance Sheet Data:
December 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- -------- -------- --------
Working capital (deficit) $ 4,159 $ 731 $ 134 $ (3,233) $ (1,455)
Total assets 109,645 105,825 99,137 72,771 54,644
Current and long-term debt 29,088 30,515 31,146 25,490 15,306
Total liabilities 57,918 59,955 56,011 50,751 34,825
Preferred Stock of subsidiary 1,285 1,285 1,285 -- --
Stockholders' equity 50,442 44,585 41,841 22,020 19,819
(1) Includes financial data of PFO, PFSG and PFMI as acquired during 1999 and
accounted for using the purchase method of accounting from the date of
acquisition, June 1, 1999.
(2) Includes financial data of DSSI as acquired during 2000 and accounted for
using the purchase method of accounting from the date of acquisition,
August 31, 2000.
(3) Includes financial data of M&EC as acquired during 2001 and accounted for
using the purchase method of accounting from the date of acquisition, June
25, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained within this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). See
"Special Note regarding Forward-Looking Statements" contained in this report.
Management's discussion and analysis is based, among other things, upon our
audited consolidated financial statements and includes our accounts and the
accounts of our wholly-owned subsidiaries, after elimination of all significant
intercompany balances and transactions.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 of
this report.
Overview
The year 2003 was challenging for us, as our revenues were negatively impacted
by the war, terrorism alerts, and DOE's heightened security issues and resulting
lockdowns, which clearly impacted the Nuclear Waste Management Services
("Nuclear") segment. In addition, the U.S. recession negatively impacted our
Industrial Waste Management Services ("Industrial") segment and engineering
segment. During the year we initiated a restructuring and a refocus of our
Industrial segment. During 2003 we brought in a new management team for the
Industrial segment, initiated work force reductions, which should result in
annual savings of approximately $3.2 million beginning in 2004 and began
focusing our marketing efforts on higher margin accounts, eliminating
unprofitable business. We were however able to work through these issues,
achieve an increase in consolidated revenues of 1.8% over 2002 and increase our
profitability 43.3%. The Industrial segment demonstrated its processing
capabilities during the year by successfully completing the treatability portion
of the Newport hydrolysate project for the Army. However, due to public concerns
over such chemical weapon byproducts the contract to bring such waste into our
facility was terminated. We continue to identify attractive growth opportunities
for the Industrial segment, which include such areas as biological wastewater
treatment, chemical weapons byproducts and contracts such as comprehensive waste
management services for a leading home-
-18-
improvement retail chain. Our Nuclear segment has also recently received several
new contracts, which demonstrate the continued growth within this market
segment. During 2003, we continued to discuss improving our capital and
liquidity position. In connection therewith, we have entered into an arrangement
to raise additional capital as discussed below.
Results of Operations
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services, Nuclear Waste
Management Services and Consulting Engineering Services.
Below are the results of operations for our years ended December 31, 2003, 2002
and 2001 (amounts in thousands, except for share amounts):
(Consolidated) 2003 % 2002 % 2001 %
-------- ------- -------- ------- -------- -------
Net Revenues $ 84,892 100.0 $ 83,404 100.0 $ 74,492 100.0
Cost of goods sold 58,633 69.1 59,055 70.8 52,442 70.4
-------- ------- -------- ------- -------- -------
Gross Profit 26,259 30.9 24,349 29.2 22,050 29.6
Selling, general and administrative 18,637 22.0 17,909 21.5 16,631 22.3
Other income (expense):
Interest income 8 -- 16 -- 29 --
Interest expense (2,841) (3.3) (2,903) (3.5) (3,038) (4.1)
Interest expense - Warrants -- -- -- -- (234) (.3)
Interest expense - financing fees (1,070) (1.2) (1,044) (1.2) (2,732) (3.6)
Other (601) (.7) (307) (.4) (46) (.1)
-------- ------- -------- ------- -------- -------
Net income (loss) 3,118 3.7 2,202 2.6 (602) (.8)
Preferred Stock dividends (189) (.2) (158) (.2) (145) (.2)
-------- ------- -------- ------- -------- -------
Net income (loss) applicable to
Common Stock $ 2,929 3.5 $ 2,044 2.4 $ (747) (1.0)
======== ======= ======== ======= ======== =======
Basic net income (loss) per
common share $ .08 $ .06 $ (.03)
======== ======== =======
Diluted net income (loss) per
common share $ .08 $ .05 $ (.03)
======== ======== =======
Summary - Years Ended December 31, 2003 and 2002
Net Revenue
The year 2003 started out slow, as nuclear revenues were negatively impacted by
the war and terrorism alerts, and industrial revenues were negatively impacted
by the economy. However, nuclear shipments increased late in the third quarter
and we successfully completed the treatability portion of the Army's Newport
hydrolysate project. We continued with the reorganization and refocus of the
Industrial segment throughout the last half of 2003. Consolidated revenues
increased $1,488,000 or 1.8% for the year ended December 31, 2003, compared to
the year ended December 31, 2002. This increase is attributable to an increase
in the Industrial segment of approximately $6,610,000 resulting from certain new
product lines, such as lab packing, improved waste volumes and approximately
$4.9 million in revenues recognized for public outreach and treatability studies
related to the Army's Newport hydrolysate project, which was terminated in
October 2003 for convenience. Offsetting this increase was a decrease in the
Nuclear segment of approximately $4,842,000 resulting partially from a change in
accounting estimate for revenue recognition. (See Note 2 to Notes to
Consolidated Financial Statements.) The impact of this change in nuclear revenue
recognition as of December 31, 2003 is a deferral of revenues of approximately
$2,765,000. The decrease is also a result of the government's reduced shipment
of waste to our facilities during the first six months of 2003 due to the war
and ongoing campaign in Iraq and prolonged terrorism
-19-
alerts. The decrease can further be explained by the impact of increased
revenues during 2002, which included an event project of approximately $2.4
million and a surcharge of approximately $2.2 million. These decreases were
partially offset by continued expansion within the mixed waste market as our
facilities demonstrate the ability to accept and process more complex waste
streams, thus increasing sales volumes. Consolidated revenues with Bechtel
Jacobs Company, which includes the Oak Ridge contracts totaled $13,139,000 or
15.5% of total revenues for the year ending December 31, 2003, compared to
$9,664,000 or 11.6% for the year ended December 31, 2002. This increase reflects
additional revenues under the Oak Ridge Contracts and an additional contract
entered into recently with Bechtel Jacobs, due in part to the benefit of our
facility being located within the DOE K-25 site. See "Known Trends and
Uncertainties-Significant Contracts" of this Management's Discussion and
Analysis as to a lawsuit involving the Oak Ridge Contracts. The backlog of
stored waste within the Nuclear segment at December 31, 2003, was approximately
$5,782,000, compared to $9,000,000 at December 31, 2002. Additionally, the
Consulting Engineering Services segment experienced a decrease of approximately
$280,000, which reflects the impact a weaker economy has on our client's
expansion projects in 2003 and certain one-time projects completed in 2002.
Cost of Goods Sold
Cost of goods sold decreased $422,000, or 0.7% for the year ended December 31,
2003, compared to the year ended December 31, 2002. This decrease in cost of
goods sold principally reflects a decrease in the Nuclear segment of $3,975,000
indicative of a reduction in disposal and processing costs associated with the
continued refinement of our treatment processes. The initial focus within the
Nuclear segment was the demonstration of our processing capabilities, which was
followed by the refinement and enhancement of our processes throughout 2003. The
remaining decrease in this segment was due to the deferral of disposed expenses
that correlates with the deferral of revenues as a result of our change in
accounting estimate for revenue recognition. Additionally, the Consulting
Engineering Services segment experienced a decrease of $155,000, which was
primarily a result of the corresponding revenue reduction, despite a 0.9% cost
increase. Mainly offsetting these decreases was an increase in the Industrial
segment of approximately $3,708,000, primarily associated with increased labor
and material costs, which relates to the increase in revenues, including the
expenses associated with the Army's Newport hydrolysate project. Depreciation
expense of $4,441,000 and $3,934,000 for the years ended December 31, 2003 and
2002, respectively, is included in cost of goods sold, which reflects an
increase of $507,000 over 2002. During 2002, we purchased capital equipment
which totaled approximately $5.8 million, a majority of which related to our
continued expansion of the Nuclear segment. These projects were principally
completed in the fourth quarter of 2002 and resulted in additional depreciation
in 2003.
Gross Profit
Gross profit for the year ended December 31, 2003, increased to $26,259,000,
which as a percentage of revenue is 30.9%, reflecting an increase over the 2002
percent of revenue of 29.2%. This increase in gross profit percentage
principally reflects an increase in the Industrial segment from 19.2% in 2002 to
22.9% in 2003. This increase reflects the impact of margins of approximately
$2.8 million recognized on the Army's Newport hydrolysate project. During the
last half of 2003, the Industrial segment restructured its management,
implemented a cost savings initiative and made certain operational changes,
which had only a limited impact on 2003. Additionally, the increase in the gross
profit percentage was attributable to the Nuclear segment, which rose from 37.6%
in 2002 to 40.2% in 2003, reflecting mainly the favorable product mix,
surcharges and operational improvements within the mixed waste processing lines.
The 2002 margins were positively impacted by the effect of the $2.2 million
surcharge related to the Oak Ridge contracts. Without the surcharge, the gross
profit percentage for this segment for 2002 would have been 27.3%. Offsetting
these increases was a decrease in the Consulting Engineering Services segment,
which fell from 34.4% in 2002 to 33.5% in 2003, reflecting the net impact of
lower margin projects performed over the year.
-20-
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $728,000 or 4.1%
for the year ended December 31, 2003, as compared to the corresponding period
for 2002. This increase reflects the additional sales and marketing expenses
within the Industrial segment, somewhat offset by a decline in payroll and
related marketing expenses for the Nuclear segment, which combined accounted for
$396,000 of this increase. Administrative payroll and related expenses accounted
for $543,000 of this increase, mainly reflecting the management infrastructure,
relocation and severance costs within the Industrial segment as we complete our
restructuring, all of which have been expensed during the year, along with
increased administrative support within the Nuclear segment. Partially
offsetting these administrative payroll increases was a $309,000 decrease in
other administrative expenses, primarily attributable to a net decrease in
general expense of $604,000, arising mainly from the reduction in bad debt
expense and a $306,000 increase in outside services for the same period of 2002.
Depreciation and amortization expense included within selling, general and
administrative expenses was $424,000 and $310,000 for the years ended 2003 and
2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 22.0% for the year ended December 31, 2003,
compared to 21.5% for the same period of 2002.
Interest Expense
Interest expense decreased approximately $62,000 for the year ended December 31,
2003, as compared to the corresponding period of 2002. This decrease reflects
the impact of the reduction in debt associated with past acquisitions resulting
in a decrease in interest expense of $54,000 when compared to prior year.
Additionally, this decrease reflects the impact of lower interest rates on the
revolving credit and term loans with PNC and decreased borrowing levels on the
term loan with PNC partially offset by increased borrowings under the revolving
credit to fund the finite risk insurance program, which resulted in a net
decrease of $46,000. Offsetting these decreases was an increase in interest
expense of $38,000 associated with an increase in additional debt entered into
during the year, related to facility and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees increased approximately $26,000 for the year
ended December 31, 2003, as compared to the corresponding period of 2002. This
increase was principally due to a one-time charge of fees associated with other
short term financing.
Other Expense
Other expense increased by $294,000 for the year ended December 31, 2003, as
compared to the same period of 2002. This increase was primarily due to
additional remediation expenses for the Perma-Fix of Michigan, Inc. site, which
was recorded in the amount of $178,000. The additional expense is needed to
complete the remediation of soil that was contaminated prior to our acquiring
the facility. See "Environmental Contingencies" in this section for further
discussion on this reserve. Additionally, other expense increased due to a
workers compensation insurance adjustment of $217,000 related to a prior
acquisition.
Income Tax
See Note 10 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2003 and 2002, we had no federal income tax
expense, due to utilization of our net operating loss carry-forward and
permanent and temporary book-tax timing differences.
Preferred Stock Dividends
Preferred Stock dividends increased approximately $31,000 for the year ended
December 31, 2003, as compared to the year ended December 31, 2002. This
increase is due to the accrual of preferred dividends on the Series B Preferred,
issued in conjunction with the acquisition of M&EC, which began accruing in July
2002.
-21-
Summary - Years Ended December 31, 2002 and 2001
Net Revenue
Consolidated revenues increased $8,912,000 or 12.0% for the year ended December
31, 2002, compared to the year ended December 31, 2001. This increase is
principally attributable to an increase in the Nuclear segment of approximately
$13,328,000 resulting from the favorable negotiation of certain contract
changes, the completion of a large offsite mixed waste remediation project, and
from growth in mixed waste revenues driven by the continued expansion within the
new and unique mixed waste market. This increase also reflects the impact of a
full year of additional revenues resulting from the acquisition of East
Tennessee Materials & Energy Corporation (M&EC), effective June 25, 2001 and
changes in pricing under the Oak Ridge Contracts. Consolidated revenues under
the Oak Ridge Contracts for 2002 totaled $9,664,000 or 11.6% of total revenues,
as compared to $6,300,000 or 8.5% for the year ended December 31, 2001. The
backlog of stored waste within the nuclear segment at December 31, 2002, was
approximately $9,000,000 compared to $5,873,000 at the end of 2001. The segment
recognized during the second quarter of 2002 approximately $2.2 million of
revenue for work completed during the first six months of 2002, as a result of
the favorable resolution of certain contract changes under the Oak Ridge
Contracts. The pricing structure under the Oak Ridge Contracts was amended to
allow M&EC to charge additional amounts for certain waste drums received
primarily in connection with drum density and chemical content. The amended
pricing structure applies to all waste received by M&EC under the Oak Ridge
Contracts from January 1, 2002, and on all future waste received under the Oak
Ridge Contracts. We also attempted to negotiate certain other surcharges under
the Oak Ridge Contracts, which negotiations were not successful. See "Known
Trends and Uncertainties" in this section for discussion on legal proceedings.
Additionally, the Consulting Engineering Services segment experienced an
increase of approximately $297,000, which was primarily due to new projects that
were awarded by nationally known cement companies. Offsetting these increases
was a decrease in the Industrial segment of approximately $4,713,000 resulting
from the downturn in the economy, the expiration of certain government contracts
and the effect of the start-up of the new biological wastewater treatment
system, which occurred over the first five months of 2002. Partly offsetting
this decrease was an increase in revenue over the last six months of 2002
generated from the implementation of the biological wastewater treatment system.
Cost of Goods Sold
Cost of goods sold increased $6,613,000, or 12.6% for the year ended December
31, 2002, compared to the year ended December 31, 2001. This increase in cost of
goods sold reflects principally an increase in the Nuclear segment of
approximately $6,654,000 reflecting the increase in waste processing and
disposal costs which directly correlates to the increase in revenues for this
segment. Additionally, the Nuclear segment experienced increased costs as it
started up new processing lines, developed new processing techniques and added
certain fixed costs in conjunction with its build-up. The Consulting Engineering
Services segment also experienced an increase of approximately $288,000
primarily due to increased staffing associated with the new projects awarded.
Offsetting these increases, was a decrease in the Industrial segment of
approximately $329,000, which corresponds to the decrease in revenues for this
segment, partially offset by additional operating costs associated with the
development and installation of its new biological wastewater treatment
technology.
Gross Profit
Gross profit for the year ended December 31, 2002, increased to $24,349,000,
which as a percentage of revenue is 29.2%, reflecting a decrease over the 2001
percent of revenue of 29.6%. This decrease in gross percentage principally
reflects a decrease in the Industrial segment from 27.5% in 2001 to 19.2% in
2002. This decrease reflects the impact of the high fixed cost nature of the
facilities in conjunction with reduced revenues in this segment, and the
additional operating costs associated with the development and
-22-
installation of the new wastewater treatment technology. Additionally, the
Consulting Engineering Services segment experienced a decrease from 37.3% in
2001 to 34.4% in 2002. This decrease reflects the impact of additional staffing
associated with the new projects, as noted above. Offsetting these decreases in
gross profit percentage was an increase in the Nuclear segment from 31.9% in
2001 to 37.6% in 2002. This increase reflects the progress of the newly expanded
mixed waste facilities, increased activities under the Oak Ridge Contracts and
the impact of the favorable negotiation of certain contract changes related to
the Oak Ridge Contracts which were recorded in the second quarter of 2002.
Furthermore, the gross profit percentage of 2001 was negatively affected by the
low margin subcontract work performed by this segment during the completion of
the M&EC facility.
Selling, General and Administrative
Selling, general and administrative expenses increased $1,278,000 or 7.7% for
the year ended December 31, 2002, as compared to the corresponding period for
2001. The increase in selling, general and administrative expense is principally
due to the acquisition of M&EC, which reflects additional expense of $1,248,000
for this facility, as compared to the year ended December 31, 2001.
Additionally, these expenses increased due to the impact of increasing the sales
and marketing efforts within the Nuclear segment in anticipation of the growth
in the mixed waste market. This increase also reflects the impact of an increase
in bad debt expense due to the need for additional reserve of $514,000
associated with certain contract changes related to the Oak Ridge Contracts.
Offsetting these increases, is an amortization expense decrease, across all
segments, of approximately $1,573,000 due to the adoption of SFAS 142, which
eliminated the amortization expense on indefinite-life intangible assets (see
"Recently Adopted Accounting Standards" later in this section). As a percentage
of revenue, selling, general and administrative expenses decreased to 21.5% for
the year ended December 31, 2002, compared to 22.3% for the same period of 2001.
Interest Expense
Interest expense decreased approximately $135,000 for the year ended December
31, 2002, as compared to the corresponding period of 2001. This decrease is a
result of lower interest rates and decreased borrowing levels on our PNC
revolving credit and term loan, which resulted in a decrease in interest expense
of $145,000. Additionally, interest expense decreased by $545,000 due to the
elimination of interim financing related to the mixed waste construction
activities and a decrease of $85,000 was due to the reduction in debt with other
creditors. These decreases were partially offset by an increase in interest
expense of $199,000 associated with new debt obligations incurred in conjunction
with the acquisition of M&EC and an increase of approximately $441,000 related
to the expansion of our mixed waste facilities.
Interest Expense - Warrants
No Warrants were issued during 2002 and therefore no interest expense-Warrants
was recorded during the twelve months ended December 31, 2002, as compared to
$234,000 for the twelve months ended December 31, 2001. This 2001 expense
reflects the Black-Scholes pricing valuation for certain Warrants issued to
Capital Bank pursuant to a promissory note ("$3,000,000 Capital Promissory
Note") and an unsecured promissory note ("$750,000 Capital Promissory Note").
The notes required that certain Warrants be issued upon the initial execution of
the note and at monthly intervals if the debt obligations to Capital Bank had
not been repaid in full. During 2001, these debt obligations were repaid in full
by a debt to equity exchange agreement and through the payment of principal and
interest with the use of Warrant proceeds.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $1,688,000 for the year
ended December 31, 2002, as compared to the corresponding period of 2001. This
decrease is principally due to a write-off of prepaid financing fees of
$1,440,000 during the third quarter of 2001 related to short-term construction
financing within the mixed waste segment, which was paid in full in July 2001.
Additionally, interest expense-financing fees decreased by $601,000 due to the
elimination of the above discussed short-term construction financing expense as
amortized for the period from January through July 2001. Partially
-23-
offsetting these decreases was an increase principally associated with our
Senior Subordinated Notes issued to Associated Mezzanine Investors - PESI, L.P.
("AMI") and Bridge East Capital, L.P. ("BEC") of $340,000 when compared to prior
year.
Other Expense
Other expense increased by $261,000 for the year ended December 31, 2002, as
compared to the same period of 2001. This increase was primarily due to an
increase in miscellaneous state income and franchise taxes recorded during the
year and from an additional remediation reserve for the Perma-fix of Michigan,
Inc. site, which was recorded in the amount of $228,000. See "Environmental
Contingencies" in this section for further discussion on this reserve. This
increase was offset by a one-time insurance settlement of $233,000, received in
the fourth quarter of 2002, related to the Perma-Fix of Memphis, Inc. facility.
Income Tax
See Note 10 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2002 and 2001, we had no federal income tax
expense, due to utilization of our net operating loss carry-forward and
permanent and temporary book-tax timing differences.
Preferred Stock Dividends
Preferred Stock dividends increased approximately $13,000 for the year ended
December 31, 2002, as compared to the year ended December 31, 2001. This
increase is due to the accrual for preferred dividends on the Series B
Preferred, issued in conjunction with the acquisition of M&EC. Partially
offsetting the increase was a decrease due to the conversion of $1,730,000
(1,730 preferred shares) of the Preferred Stock into our Common Stock in April
2001 pursuant to a conversion and exchange agreement with Capital Bank.
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At December 31, 2003, we had cash of $411,000. This cash total reflects an
increase of $199,000 from December 31, 2002, as a result of net cash provided by
operations of $3,959,000 offset by cash used in investing activities of
$3,408,000 (principally purchases of equipment, net totaling $2,178,000 and
$1,234,000 for finite risk sinking fund) and cash used in financing activities
of $352,000 (consisting of proceeds from issuance of stock of $2,684,000, offset
by net debt repayments of $3,036,000). We are in a net borrowing position and
therefore attempt to move all excess cash balances immediately to the revolving
credit facility, so as to reduce debt and interest expense. During 2002 we
implemented a centralized cash management system, which included new remittance
lock boxes and resulted in accelerated collection activities and reduced cash
balances, as idle cash can be moved without delay to the revolving credit
facility. The cash balance at December 31, 2003 represents payroll account
fundings which were not withdrawn until after year-end.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$24,052,000, an increase of $2,232,000 over the December 31, 2002, balance of
$21,820,000. This increase principally reflects the impact of increased revenues
and final billing of the Army's Newport hydrolysate project at December 31,
2003, within the Industrial segment, which resulted in an increase of
$1,552,000. Additionally, the Nuclear segment experienced an increase of
$719,000, which was also due to increased billings within the
-24-
segment. Offsetting these increases was a decrease in the Consulting Engineering
Services segment of $39,000.
As of December 31, 2003, total consolidated accounts payable was $6,359,000, a
decrease of $3,400,000 from the December 31, 2002, balance of $9,759,000. This
decrease in accounts payable is a result of proceeds received in the amount of
$2,502,000 for warrant and option exercises, the impact of increased revenues
and billings during the last half of the year, and from the improved margins and
profitability, all of which enabled us to reduce our accounts payable balances.
Accrued Expenses as of December 31, 2003, totaled $11,553,000, an increase of
$1,025,000 over the December 31, 2002, balance of $10,528,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. Pursuant to the
termination of the Parson's contract we accrued $661,000 for the continued
assistance of consultants and attorneys related to regulatory, consulting and
legal activities, which we anticipate incurring over the next year.
The working capital position at December 31, 2003, was $4,159,000, as compared
to a working capital position of $731,000 at December 31, 2002. The increase in
this position of $3,428,000 is principally a result of the increased accounts
receivable balance, associated with increased revenues and billings, along with
the decreased accounts payable balance at the end of the period. Increased
profitability, and operating cash flow, along with the proceeds that we received
from warrant and option exercises enabled us to improve this working capital
position.
Investing Activities
Our purchases of new capital equipment for the twelve-month period ended
December 31, 2003, totaled approximately $3,462,000 of which $1,284,000 was
financed, resulting in net purchases of $2,178,000, funded out of cash flow.
These expenditures were for expansion and improvements to the operations
principally within the Nuclear and Industrial segments. These capital
expenditures were principally funded by the cash provided by operations, through
various other lease financing sources and through Warrant and option proceeds
raised during the year. We have budgeted capital expenditures of approximately
$5,600,000 for 2004, which includes an estimated $1,675,000 to complete certain
current projects committed at December 31, 2003, as well as other identified
capital and permit compliance purchases. We anticipate funding these capital
expenditures by a combination of lease financing, internally generated funds,
and/or the proceeds received from Warrant exercises.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provides for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. The Revolving Credit advances shall be due and payable in full on
December 22, 2005. As of December 31, 2003, the excess availability under our
Revolving Credit was $7,465,000 based on our eligible receivables.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2%, and the Revolving Credit at a floating rate equal
to the prime rate plus 1%. The loans are subject to a
-25-
prepayment fee of 1 1/2% in the first year, 1% in the second and third years and
3/4% after the third anniversary until termination date.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $531,000 at December 31, 2003,
which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with our senior and subordinated lenders.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
On July 31, 2001, we issued approximately $5.6 million of its 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement dated July 31,
2001 (the "Purchase Agreement"), between us, Associated Mezzanine Investors -
PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes are
unsecured and are unconditionally guaranteed by our subsidiaries. Our payment
obligations under the Notes are subordinate to our payment obligations to our
primary lender and to certain other of our debts up to an aggregate amount of
$25 million. The net proceeds from t