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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, 1998
__________________________
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
of incorporation or organization) Number)
1940 N.W. 67th Place
Gainesville, FL 32653
(Address of principal (Zip Code)
executive offices)
(352)373-4200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
___________________ _____________________
Common Stock, $.001 Par Value Boston Stock Exchange
Redeemable Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Warrants
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. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of March 12, 1999, based on
the closing sale price of such stock as reported by NASDAQ on such
day, was $12,648,341. The Company's Common Stock is listed on the
NASDAQ SmallCap Market and the Boston Stock Exchange.
As of March 12, 1999, there were 12,411,080 shares of the
registrant's Common Stock, $.001 par value, outstanding, excluding
943,000 shares held as treasury stock.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
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Page No.
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . 11
Item 4A. Executive Officers of the Company. . . . . . . 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . 15
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . 17
Special Note Regarding Forward-Looking
Statements. . . . . . . . . . . . . . . . . . 27
Item 8. Financial Statements and Supplementary
Data. . . . . . . . . . . . . . . . . . . . . 28
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . 61
PART III
Item 10. Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . 62
Item 11. Executive Compensation . . . . . . . . . . . . 64
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . 69
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . 74
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . 78
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) is a Delaware corporation, engaged
through its subsidiaries, in:
* Waste Management Services, which includes:
* treatment, storage, processing, and disposal of hazardous
and non-hazardous waste and mixed waste which is
both low-level radioactive and hazardous;
* nuclear mixed and low-level radioactive waste treatment,
processing and disposal, which includes
research, development, on-and off-site waste remediation and
processing; and
* industrial waste and wastewater management services,
including the collection, treatment, processing and
disposal, and the design and construction of on-site waste-
water treatment systems.
* Consulting Engineering Services, which includes:
* broad-scope environmental issues, including environmental
management programs, regulatory permitting, compliance and
auditing, landfill design, field testing and character-
ization.
We service research institutions, commercial companies and
governmental agencies nationwide. The distribution channels for
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.
Our home page on the Internet is at www.perma-fix.com. You can
learn more about us by visiting that site.
Operating Segments
We have ten operating segments which represent each separate
facility or location that we operate. Eight of these segments
provide waste management services and two segments provide
consulting engineering services as described below:
*WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services through our four
treatment, storage and disposal ("TSD") facilities and numerous
related operations provided by our four other facilities, as
discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville,
Florida, is our most uniquely permitted and licensed TSD. PFF
specializes in the processing and treatment of certain types of
wastes containing both low-level mixed radioactive and hazardous
wastes, which are known in the industry as mixed waste. PFF is one
of only a few facilities nationally to operate under both a
hazardous waste permit and a nuclear materials license, from which
it has built its reputation based on its ability to treat difficult
waste streams using unique processing technologies and its ability
to provide related research and development services. Its primary
services include the treatment and processing of waste Liquid
Scintillation Vials (LSVs), the processing and handling of other
mixed and radioactive wastes, site remediation, storage of customer
wastes, research and development, as well as more typical services
of hazardous and non-hazardous waste management. The LSVs are
generated primarily by institutional research agencies and
biotechnical companies. These wastes contain mixed (low-level)
radioactive materials and hazardous waste (flammable) constituents.
Management believes that PFF currently processes approximately 80%
of the available LSV waste in the country. The business has
expanded into receiving and handling other types of mixed wastes
primarily from the nuclear utilities, the U.S. Department of Energy
("USDOE") and other government facilities as well as select mixed
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waste field remediation projects. PFF manages the activities at
the facility under a license from the State of Florida Office of
Radiation Control and a Resource Conservation and Recovery Act
("RCRA") Part B permit.
Perma-Fix Treatment Services, Inc. ("PFTS") is a permitted TSD
facility located in Tulsa, Oklahoma. PFTS provides waste
transportation and treatment and provides disposal 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 permitted TSD facility
located in Dayton, Ohio. PFD has four main disposal production
areas. The four production areas are a RCRA permitted TSD, a
centralized wastewater treatment area, used oil fuel recycling
area, and non-hazardous solids solidification area. Waste accepted
under the RCRA permit is typically drum waste for incineration or
stabilization. Wastewaters accepted at the facility include
hazardous and non-hazardous wastewaters, which are treated by ultra
filtration and metals precipitation 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.
PFD also designs and constructs on-site wastewater pretreatment
systems.
Perma-Fix of Ft. Lauderdale, Inc. ("PFL") is a permitted Treatment
and Storage facility located in Ft. Lauderdale, Florida. PFL
collects and treats hazardous 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 PFL 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 New Mexico, Inc. ("PFNM"), located in Albuquerque, New
Mexico, provides on-site (at the generator's site) waste treatment
services to convert certain types of characteristic hazardous
wastes into non-hazardous waste by removing those characteristics
which categorize such waste as "hazardous" and treats non-hazardous
waste as an alternative to off-site waste treatment and disposal
methods. PFI does not treat on-site waste that is specifically
listed as hazardous waste by the U.S. Environmental Protection
Agency ("EPA") under RCRA, but treats only non-hazardous waste and
characteristic waste deemed hazardous under RCRA on the generator's
site.
Perma-Fix, Inc. ("PFI") provides on-site waste treatment services
for certain low level radioactive and mixed wastes, for industrial
firms, the USDOE and other governmental facilities under licenses
granted to the generator. PFI, in partnership with PFF, continues
to expand its processing capabilities in the nuclear waste field,
utilizing its technologies and project experience, including the
successful processing of legacy waste at the USDOE Fernald Ohio
facility. In addition, PFI has recently opened an Oak Ridge,
Tennessee office to facilitate future USDOE contracts.
Industrial Waste Management, Inc. ("IWM"), located in St. Louis,
Missouri is engaged in supplying and managing non-hazardous and
hazardous waste to be used by cement plants as a substitute fuel or
as a source of raw materials used in the production of cement.
Reclamation Services, Inc. ("RSI") located in Tulsa, Oklahoma, is
a reseller of by-product materials generated at cement plants for
environmental and engineering applications.
For 1998, the Company's waste management services business
accounted for approximately 85.7% of the Company's total revenue,
as compared to approximately 83.6% for 1997, which excludes
discontinued operations. Contained within this segment is the
nuclear and mixed waste product line, which accounted for
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$4,693,000 or 15.36% of total revenue for 1998, as compared to
$5,407,000 or 19.03% of total revenue for 1997, excluding
discontinued operations.
*CONSULTING ENGINEERING SERVICES, which provides environmental
engineering and regulatory compliance consulting services through
two subsidiaries, 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.
Mintech, Inc. ("Mintech") is located in Tulsa, Oklahoma. Mintech
specializes in environmental and geotechnical consulting,
engineering, geology, hydrogeology and geophysics, including
evaluating, selecting and implementing the appropriate
environmental solutions to problems involving soil and water.
Mintech also provides remediation services. In addition, Mintech
personnel routinely provide training services involving various
environmental regulations to private industry, governmental
agencies and military installations.
The engineering firms also provide the necessary support,
compliance and training as required by our operating facilities.
During 1998 environmental engineering and regulatory compliance
consulting services accounted for approximately 14.3% of our total
revenue, as compared to 16.4% in 1997, which excludes discontinued
operations.
Segment Information and Foreign and Domestic Operations and Export
Sales
During 1998, we were engaged in ten operating segments. Pursuant
to FAS 131, we define an operating segment as:
* A business activity from which we may earn revenue and incur
expenses;
* Whose operating results are regularly reviewed by our chief
operating decision maker to make decisions about resources to
be allocated to the segment and assess its performance; and
* For which discrete financial information is available.
We therefore define our segments as each separate facility or
location that we operate. We clearly view each business as a
separate segment and make decisions based on the activity and
profitability of that particular location. These segments however,
exclude the Corporate headquarters which does not generate revenue
and Perma-Fix of Memphis, Inc. which is reported elsewhere as a
discontinued operation. See Note 4 regarding discontinued
operations.
Pursuant to FAS 131 we have aggregated our operating segments into
two reportable segments to ease in the presentation and
understanding of our business. We used the following criteria to
aggregate our segments:
* The nature of our products and services;
* The nature of the production processes;
* The type or class of customer for our products and services;
* The methods used to distribute our products or provide our
services; and
* The nature of the regulatory environment.
Most of our activities were conducted in the Southeast, Southwest
and Midwest portions of the United States. We had no foreign
operations or export sales during 1998.
3
Importance of Patents and Trademarks, or Concessions Held
We do not believe that we are dependent on any particular patent or
trademark in order to operate our business or any significant
segment thereof. We have received registration through the year
2000 for the service mark "Perma-Fix" by the U.S. Patent and
Trademark office.
We do not believe that on-site waste treatment processes for the
stabilization of certain hazardous wastes as utilized by PFI are
patentable except as described below. We do, however, believe that
our level of expertise in utilizing such processes is substantial,
and, therefore, we maintain such processes as a trade secret. We
maintain a policy whereby key employees of PFI who are involved
with the implementation of the treatment processes sign
confidentiality agreements with respect to non-disclosure of such
processes.
A new process ("New Process") designed to remove certain types of
organic hazardous constituents from soils or other solids and
sludges ("Solids") has been developed by us. This New Process is
designed to remove the organic hazardous constituents from the
solids through a water based system. We have filed a patent
application with the U.S. Patent and Trademark Office covering the
New Process. As of the date of this report, we have not received a
patent for the New Process, and there are no assurances that such
a patent will be issued. Until development of this New Process, we
were not aware of a relatively simple and inexpensive process that
would remove the organic hazardous constituents from solids without
elaborate and expensive equipment or expensive treating agents. Due
to the organic hazardous constituents involved, the disposal
options for such materials are limited, resulting in high disposal
cost when there is a disposal option available. By reducing the
organic hazardous waste constituents from the solids to a level
where the solids may be returned to the ground, the generator's
disposal options for such waste are substantially increased,
allowing the generator to dispose of such waste at substantially
less cost. As of the date of this report, we have only used the
New Process, on a limited basis, for commercial use. As a result,
there are no assurances that the New Process will perform as
presently expected. It is anticipated that we will begin more
extensive commercial use of the New Process in 1999. Patent
applications have also been filed for processes to treat radon,
selenium and other speciality materials. However, changes to
current environmental laws and regulations could limit the use of
the New Process or the disposal options available to the generator.
See -- "Permits and Licenses."
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. Moreover, as we expand
our operations we may be required to obtain additional approvals,
licenses or permits, and there can be no assurance that we will be
able to do so.
PFTS is a permitted solid and hazardous waste treatment, storage,
and disposal facility. The RCRA part B Permit was issued by the
Waste Management Section of the Oklahoma Department of
Environmental Quality ("ODEQ"). Additionally PFTS maintains an
active Injection Facility Operations Permit issued by the ODEQ
Underground Injection Control Section for our two waste disposal
injection wells, and a Pre-Treatment permit in order to discharge
industrial wastewaters to the City of Tulsa's Publically Owned
Treatment Works. PFTS is also registered with the ODEQ and the
Department of Transportation as a hazardous waste transporter.
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.
PFL 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
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facility license issued by Broward County, Florida. Broward County
also issued PFL a discharge pretreatment permit that allows
discharge of treated water to the Broward County Publically Owned
Treatment Works.
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 Montgomery County Publically Owned Treatment Works and
is a specification and off-specification used oil processor under
the guidelines of the Ohio EPA.
We believe that our TSD 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
TSD 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.
We believe that our on-site waste treatment services do not require
federal environmental permits provided certain conditions are met,
and we have received written verification from each state in which
we are presently operating that no such permit is required provided
certain conditions are met. There can be no assurance that states
in which our waste facilities presently do business, other states
in which our waste facilities may do business in the future, or the
federal government will not change policies or regulations
requiring us to obtain permits to carry on our on-site activities.
Seasonality
We experience a seasonal slowdown in operations and revenues during
the winter months extending from late November through early March.
The seasonality factor is a combination of the inability to
generate consistent billable hours in the consulting engineering
segment, along with poor weather conditions in the central plains
and Midwestern geographical markets we serve for on-site and off-
site services, resulting in a decrease in revenues and earnings
during such period.
Dependence Upon a Single or Few Customers
The majority of our revenues for fiscal 1998 have been derived from
hazardous and non-hazardous waste management services provided to
a variety of industrial and commercial customers. 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 U.S. Department
of Energy ("USDOE"), U.S. Department of Defense ("USDOD"), and
other federal, state and local agencies. We are not dependent upon
a single customer, or a few customers, the loss of any one or more
would have a material adverse effect on us, and during 1998 we did
not make sales to any single customer that in the aggregate amount
represented more than ten percent (10%) of our consolidated
revenues.
Competitive Conditions
Competition is intense in most of our businesses, we compete with
numerous companies both large and small, that are able to provide
one or more of the environmental services offered by us and many of
which may have greater financial, human and other resources than we
have. However, we believe that the range of waste management and
environmental consulting, treatment, processing and remediation
services we provide affords us a competitive advantage with respect
to certain of our more specialized competitors. We believe that the
treatment processes we utilize offer a cost savings alternative to
more traditional remediation and disposal methods offered by our
competitors.
The intense competition for performing the services performed by us
within the waste industry has resulted in reduced gross margin
levels for certain of those services. The exception is in the low-
level radioactive and hazardous mixed waste area, which has only a
few competitors. In addition, at present we believe there is only
one other facility in the United States that provides low-level
radioactive and hazardous waste processing of scintillation vials,
which requires both a radioactive materials license and a hazardous
5
waste permit. Competition in the waste management industry is
likely to increase as the industry continues to mature, as more
companies enter the market and expand the range of services which
they offer and as we move into new geographic markets. We believe
that there are no formidable barriers to entry into certain of the
on-site treatment businesses. However, the permitting requirements,
and the cost to obtain such permits, are barriers to the entry of
hazardous waste TSD facilities and radioactive activities as
presently operated by our subsidiaries. Certain of the non-
hazardous waste operations, however, do not require such permits
and, as a result, entry into these non-hazardous waste businesses
would be easier. 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.
In the on-site waste treatment service area, we believe that the
major competition to our services is the continued utilization of
traditional off-site disposal methods such as landfilling. As the
viability of our on-site treatment process is demonstrated in the
market, we believe that the potential to reduce costs and the
ability to limit potential liability will persuade waste generators
to utilize our services. In the future, we believe that we will
face direct competition as processes such as those applied by us
are utilized by our competitors.
We believe that we are a significant participant in the delivery of
off-site waste treatment services in the Southeast, Midwest and
Southwest portions of the United States. We compete with TSD
facilities operated by national, regional and independent
environmental services firms located within a several hundred mile
radius of our facilities. Our subsidiary, PFF, with permitted
radiological activities solicits business on a nationwide basis,
including the U.S. Territories and Antarctica.
Our competitors for remediation services include national and
regional environmental services firms that may have larger
environmental remediation staffs and greater resources. We
recognize our lack of financial resources necessary to compete for
larger remediation contracts and therefore, presently concentrate
on remediation services projects within our existing customer base
or projects in our service area which are too small for companies
without a presence in the market to perform competitively.
Environmental engineering and consulting services provided by us
through Mintech and 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 1998, we spent approximately $2,554,000 in capital
expenditures, which was principally for the expansion and
improvements to our continuing operations. This 1998 capital
spending total includes $564,000 of which was financed. For 1999,
we have budgeted approximately $2,500,000 for capital expenditures
to improve our operations, 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, and approximately $437,000 to comply with federal,
state and local regulations in connection with remediation
activities at two locations. See Note 4 and 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". We do not anticipate the
ongoing environmental expenditures to be significant, with the
exception of remedial activities at the two locations discussed
below.
In June 1994, we acquired from Quadrex Corporation and/or a
subsidiary of Quadrex Corporation (collectively, "Quadrex") three
TSD companies, including the Dayton, Ohio, PFD facility. 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
6
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. During 1995, in conjunction with the
bankruptcy filing by Quadrex, we were required to advance $250,000
into a trust fund to support remedial activities at the Leased
Property used by EPS, which was subsequently increased to $365,000.
As discussed in Note 9 to the Consolidated Financial Statements, we
have accrued approximately $460,000 for the estimated costs of
remediating the Leased Property used by EPS, which will extend for
a period of three (3) to five (5) years.
Due to the acquisition of PFM, we assumed and recorded certain
liabilities to remediate gasoline contaminated groundwater and
investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to
our ownership of PFM, the owners installed monitoring and treatment
equipment to restore the groundwater to acceptable standards in
accordance with federal, state and local authorities. We have
accrued approximately $910,000 for the estimated cost of
remediating the groundwater contamination. See "BUSINESS --
Certain Environmental Expenditures".
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 and is adjacent to 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. Very low concentrations of
certain chlorinated compounds have also been detected in the
groundwater beneath the PFM facility and the possible presence of
these compounds are currently being investigated. 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 a limited number of production wells in the Allen Well Field
and, as a result, do not believe that the presence of the low
concentrations of chlorinated compounds at the PFM facility will
have a material adverse effect upon the Company. We were also
notified in January 1998 by the EPA that it is believed that PFM is
a potentially responsible party ("PRP") regarding the remediation
of a drum reconditioning facility located in Memphis. See "Legal
Proceedings" for further discussion of this environmental
liability.
The nature of our business exposes us to significant risk of
liability for damages. Such potential liability could involve, for
example, claims for clean-up costs, personal injury or damage to
the environment in cases where we are held responsible for the
release of hazardous materials; claims of employees, customers or
third parties for personal injury or property damage occurring in
the course of our operations; and claims alleging negligence or
professional errors or omissions in the planning or performance of
our services or in the providing of our products. In addition, we
could be deemed a responsible party for the costs of required
clean-up 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 by our operations is very important to the success of
our business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental
needs. We are planning for future growth of our research
operations. We conduct research internally, and also through
collaborations with universities. We feel that our investments in
research have been rewarded by the discovery of the Perma-Fix
Process and the New Process. Our competitors also devote resources
to research and development and many such competitors have greater
resources at their disposal than we do.
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, 1998, we employed approximately 226 persons, of
which approximately 52 were assigned to our engineering and
consulting industry segment and approximately 168 to the waste
management industry segment.
7
Governmental Regulation
Environmental companies and their customers are subject to
extensive and evolving environmental laws and regulations by a
number of national, state and local environmental, safety and
health agencies, the principal of which being the EPA. These laws
and regulations largely contribute to the demand for our services.
Although our customers remain responsible by law for their
environmental problems, we must also comply with the requirements
of those laws applicable to our services. Because the field of
environmental protection is both relatively new and rapidly
developing, we cannot predict the extent to which our operations
may be affected by future enforcement policies as applied to
existing laws or by the enactment of new environmental laws and
regulations. Moreover, any predictions regarding possible
liability are further complicated by the fact that under current
environmental laws we could be jointly and severally liable for
certain activities of third parties over whom we have little or no
control. Although we believe that we are currently in substantial
compliance with applicable laws and regulations, we could be
subject to fines, penalties or other liabilities or could be
adversely affected by existing or subsequently enacted laws or
regulations. The principal environmental laws affecting us and our
customers are briefly discussed below.
The Resource Conservation and Recovery Act of 1976, as amended
("RCRA"). RCRA and its associated regulations establish a strict
and comprehensive regulatory program applicable to hazardous waste.
The EPA has promulgated regulations under RCRA for new and existing
treatment, storage and disposal facilities including incinerators,
storage and treatment tanks, storage containers, storage and
treatment surface impoundments, waste piles and landfills. Every
facility that treats, stores or disposes of hazardous waste must
obtain a RCRA permit or must obtain interim status from the EPA, or
a state agency which has been authorized by the EPA to administer
its program, and must comply with certain operating, financial
responsibility and closure requirements. RCRA provides for the
granting of interim status to facilities that allows a facility to
continue to operate by complying with certain minimum standards
pending issuance or denial of a final RCRA permit.
Boiler and Industrial Furnace Regulations under RCRA ("BIF
Regulations"). BIF Regulations require boilers and industrial
furnaces, such as cement kilns, to obtain permits or to qualify for
interim status under RCRA before they may use hazardous waste as
fuel. If a boiler or industrial furnace does not qualify for
interim status under RCRA, it may not burn hazardous waste as fuel
or use such as raw materials without first having obtained a final
RCRA permit. In addition, the BIF Regulations require 99.99%
destruction of the hazardous organic compounds used as fuels in a
boiler or industrial furnace and impose stringent restrictions on
particulate, carbon monoxide, hydrocarbons, toxic metals and
hydrogen chloride emissions.
The Safe Drinking Water Act, as amended (the "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 clean-up of sites at which hazardous
substances are located or at which hazardous substances have been
released or are threatened to be released into the environment.
CERCLA authorizes the EPA to compel responsible parties to clean up
sites and provides for punitive damages for noncompliance. CERCLA
imposes joint and several liability for the costs of clean-up and
damages to natural resources.
Health and Safety Regulations. The operation of the Company's
environmental activities is subject to the requirements of the
Occupational Safety and Health Act ("OSHA") and comparable state
laws. Regulations promulgated under OSHA by the Department of
Labor require employers of persons in the transportation and
8
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 USDOE
operations." On July 1, 1964, the state of Florida signed this
Agreement. Thus, the state of Florida (with the USNRC oversight),
Office of Radiation Control, regulates the radiological program of
the PFF facility.
Other Laws. Our activities are subject to other federal
environmental protection and similar laws, including, without
limitation, the Clean Water Act, the Clean Air Act, the Hazardous
Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the
environment which may affect us, including laws governing the
generation, handling, transportation and disposition of hazardous
substances and laws governing the investigation and clean-up of,
and liability for, contaminated sites. Some of these state
provisions are broader and more stringent than existing federal law
and regulations. Our failure to conform our services to the
requirements of any of these other applicable federal or state laws
could subject us to substantial liabilities which could have a
material adverse affect on us, our operations and financial
condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation
activities are regulated by the U.S. Department of Transportation,
the Interstate Commerce Commission and transportation regulatory
bodies in the states in which we operate. We cannot predict the
extent to which we may be affected by any law or rule that may be
enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
Insurance
We believe we maintain insurance coverage adequate for our needs
and which is similar to, or greater than, the coverage maintained
by other companies of our size in the industry. There can be no
assurances, however, that liabilities which may be incurred by us
will be covered by our insurance or that the dollar amount of such
liabilities which are covered will not exceed our policy limits.
Under our insurance contracts, we usually 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.
Year 2000 Issues
The Year 2000 problem arises because many computer systems were
designed to identify a year using only two digits, instead of four
digits, in order to conserve memory and other resources. For
instance, "1997" would be held in the memory of a computer as "97."
When the year changes from 1999 to 2000, a two digit system would
read the year as changing from "99" to "00." For a variety of
reasons, many computer systems are not designed to make such a date
change or are not designed to "understand" or react appropriately
to such a date change. Therefore, as the date changes to the year
2000, many computer systems could completely stop working or could
perform in an improper and unpredictable manner.
We have conducted a review of our computer systems to identify the
systems which we anticipated could be effected by the Year 2000
issue and we believe that all such systems were already, or have
been converted to be, Year 2000 compliant. Such conversion costs,
where required, have not been material and have been expensed as
incurred. Pursuant to our Year 2000 planning, we have requested
information regarding the computer systems of our key suppliers,
customers, creditors, and financial service organizations and have
9
been informed that they are substantially Year 2000 compliant.
There can be no assurance, however, that such key organizations are
actually Year 2000 compliant and that the Year 2000 issue will not
adversely affect the Company's financial position or results of
operations. We believe that our expenditures in addressing our
Year 2000 issues will not have a material adverse effect on our
financial position or results of operations.
Oak Ridge System Contract Award
The Company and East Tennessee Materials and Energy Corp. ("M&EC")
entered into a teaming agreement ("M&EC Contract") pursuant to which
the Company and M&EC may obtain from customers of the U. S. Department
of Energy ("DOE") regarding treatment and disposal of certain types
of radioactive, hazardous or mixed waste (waste containing both
hazardous and low level radioactive waste) at DOE facilities.
The Company anticipates that, as a member of the team with M&EC in
connection with the contracts and finalization of the scope of work
documents with M&EC relating to the work to be performed by each of
the Company and M&EC under the contracts, it will (i) provide
certain of the Company's environmental remediation technologies,
(ii) install equipment necessary to apply the Company's technology,
and (iii) supervise certain aspects of the remediation process
operations. As of the date of this Report, however, the Company
has engaged in only minimal design work in connection with the M&EC
Contract. The revenues which will be received by the Company, if
any, as a result of the M&EC Contract are subject to a variety of
factors and the Company cannot currently estimate what such amount
of revenue may be. See "Special Note Regarding Forward Looking
Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Oak Ridge System Contract
Award."
Proposed Acquisition
During March, 1999, Chemical Conservation Corporation, Chemical
Conservation of Georgia, Inc., Chem-Met Services, Inc.
(collectively "Chem-Con") and the Company entered into a definitive
agreement whereby the Company agreed to acquire Chem-Con in
exchange for $7.4 million of Perma-Fix Common Stock. In addition,
we agreed to enter into an employment agreement with the president
of Chem-Con, who is also one of the principal stockholders of Chem-
Con, pursuant to which we would pay such person a total of $1.3
million over a four (4) year period.
Chem-Con's revenues are principally generated from collection,
treatment, and recycling of industrial and hazardous waste,
including waste oils, water and miscellaneous solid waste. Chemical
Conservation Corporation operates a permitted treatment and storage
facility and transfer station that also serves as the base for a
private trucking fleet; Chemical Conservation of Georgia, Inc.
treats hazardous waste and recycles solvents; and, Chem-Met
Services, Inc. treats and stabilizes inorganic wastes and maintains
a government services division that is focused principally on the
Defense Revitalization and Marketing Services (DRMS) market.
The transaction is expected to be closed during the summer of 1999.
However, the acquisition is subject to the ability of the parties
to, among other things, qualify the acquisition of Chem-Con as a
pooling of interests transaction, which means that the merged
companies will be treated as if they had always been combined for
accounting and financial reporting purposes, the effectiveness of
a registration statement covering the shares of Perma-Fix Common
Stock to be issued in connection with the acquisition and the
approval of the acquisition by the Company's stockholders entitled
to vote thereon. See "Management Discussion and Analysis of
Financial Condition and Results of Operations" and See Note 5 to
Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Our principal executive offices are in Gainesville, Florida. Our
waste management operations are located in Gainesville and Ft.
Lauderdale, Florida; Dayton, Ohio; Tulsa, Oklahoma; Albuquerque,
New Mexico and Memphis, Tennessee. Our consulting engineering
services are located in Tulsa, Oklahoma and St. Louis, Missouri.
We also maintain sales offices in Laverne, California and Kansas
City, Missouri.
10
We own five facilities and have an option to purchase another
facility at a nominal amount at the end of the lease term, all of
which are in the United States. In addition, we lease four
properties for office space, one of which also contains a warehouse
and one additional property that is utilized strictly as warehouse
space, all of which are located in the United States as described
above.
We believe that the above facilities currently provide adequate
capacity for our operations and that additional facilities are
readily available in the regions in which we operate.
ITEM 3. LEGAL PROCEEDINGS
In May 1995, PFM, a subsidiary of the Company, became aware that
the U.S. District Attorney for the Western District of Tennessee
and the Department of Justice were investigating certain prior
activities of W. & R. Drum, Inc. ("W.R. Drum") its successor, First
Southern Container Company, and any other facility owned or
operated, in whole or in part, by Johnnie Williams. PFM used W. R.
Drum to dispose of certain of its used drums. In May 1995, PFM
received a Grand Jury Subpoena which demanded the production of any
documents in the possession of PFM pertaining to W. R. Drum, First
Southern Container Company, or any other facility owned or
operated, and holder in part, by Johnnie Williams. PFM complied
with the Grand Jury Subpoena. Thereafter, in September of 1995,
PFM received another Grand Jury Subpoena for documents from the
Grand Jury investigating W. R. Drum, First Southern Container
Company and/or Johnnie Williams. PFM complied with the Grand Jury
Subpoena. In December 1995, representatives of the Department of
Justice advised PFM that it was also currently a subject of the
investigation involving W. R. Drum, First Southern Container
Company, and/or Johnnie Williams. Since 1995, the Company has
received no new information about this matter.
During January 1998, PFM was notified by the EPA that the EPA had
conducted remediation operations at a site owned and operated by
W.R. Drum, Inc. in Memphis, Tennessee (the "Drum Site"). By
correspondence dated January 15, 1998 ("PRP Letter"), the EPA
informed PFM that it believed that PFM was a PRP regarding the
remediation of the Drum Site, primarily as a result of acts by PFM
prior to the time PFM was acquired by the Company. The PRP Letter
estimated the remediation costs incurred by the EPA for the Drum
Site to be approximately $1,400,000 as of November 30, 1997, and
the EPA has orally informed the Registrant that such remediation
has been substantially complete as of such date. During the second
quarter of 1998, PFM and certain other PRP's began negotiating with
the EPA regarding a potential settlement of the EPA's claims
regarding the Drum Site and such negotiations have been completed.
During the third quarter of 1998, the government agreed to PFM's
offer to pay $225,000 ($150,000 payable at closing and the balance
payable over a twelve month period) to settle any potential
liability regarding the Drum Site. During January 1999, the
Company executed a "Partial Consent Decree" pursuant to this
settlement, which settlement is subject to approval of the court.
There are no assurances that the settlement will be approved by the
court.
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
operations.
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:
11
NAME AGE POSITION
____ ___ _________
Dr. Louis F. Centofanti 55 Chairman of the Board, President
and Chief Executive Officer
Mr. Richard T. Kelecy 43 Chief Financial Officer, Vice
President and Secretary
Mr. Roger Randall 55 Vice President, Industrial Services
Mr. Bernhardt Warren 50 Vice President, Nuclear Services
Mr. Timothy Kimball 53 Vice President, Technical 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 and continues as Chairman of the Board. 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 Chief Financial Officer in September 1995.
He previously served as Chief Accounting Officer and Treasurer of
the Company since July 1994. From 1992 until June 1994, Mr. Kelecy
was Corporate Controller and Treasurer for Quadrex Corporation.
From 1990 to 1992 Mr. Kelecy was Chief Financial Officer for
Superior Rent-a-Car, and from 1983 to 1990 held various positions
at Anchor Glass Container Corporation including Assistant
Treasurer. Mr. Kelecy holds a B.A. in Accounting and Business
Administration from Westminster College.
MR. ROGER RANDALL
Mr. Randall has served as Vice-President/General Manager of PFD
since its acquisition by the Company in June, 1994 and was elected
to the position of Vice President Industrial Services of the
Company in December 1997. From June, 1992 to June, 1994, Mr.
Randall served as General Manager of the Dayton facility under the
ownership of Quadrex Corporation. From 1982 to June, 1992, Mr.
Randall served a variety of management roles at the Dayton
facility, ranging from Operations Manager to Chairman of the Board
and Chief Executive Officer under the ownership of Clark
Processing, Inc. Previous to his involvement with the waste
management industry, Mr. Randall spent 17 years in public education
serving a variety of administrative roles. He has a B.S. from
Wittenberg University and an M.A. from Wright State University.
MR. BERNHARDT WARREN
Mr Warren has served as Vice President/General Manager of PFF since
1996 and was elected to the position of Vice President Nuclear
Services of the Company in December 1997. From 1992 to 1996, Mr.
Warren provided contractual consulting services for PFF and other
companies through Applied Environmental Consulting, Inc., of which
Mr. Warren is Owner and President. From 1982 to 1992, Mr. Warren
served a variety of management roles at the Florida facility under
the ownership of Quadrex Corporation. He was involved in
radioactive materials and radioactive waste management from 1973 to
1982, when he was Manager of Radioactive Materials Licensing
Program for the State of Florida. He has a B.S. degree in biology
from Florida Southern College, a Master of Public Administration
from Florida State University and graduated from the United States
Nuclear Regulatory Commission sponsored Oak Ridge Associated
University program. Mr. Warren has authored more than a dozen
technical papers and has achieved Master Level as a Certified
Hazardous Materials Manager.
12
MR. TIMOTHY KIMBALL
Mr. Kimball has served as Vice President of PFI and PFNM since
January, 1991 and was elected to the position of Vice President
Technical Services of the Company in December 1997. He previously
served as the Hazardous Waste Coordinator and Technical
Representative for Rinchem Company, Inc. from 1985 to 1991. He
also served a variety of management roles ranging from Planning
Director, Partner and President, as well as Technical and Research
Assistant for the University of New Mexico. He has a B.A. in
Political Science and Public Administration from the University of
Louisville, and an M.A. in Anthropology from the University of New
Mexico.
13
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 NASDAQ and "PES" on the BSE.
Effective December 1996, our Common Stock also began trading on the
Berlin Stock Exchange under the symbol "PES.BE." The following
table sets forth the high and low bid prices quoted for the Common
Stock during the periods shown. The source of such quotations and
information is the NASDAQ Stock market statistical summary reports:
1998 1997
__________________ _________________
Low High Low High
_____ _____ ____ _____
Common Stock: 1st Quarter 1 25/32 2 1/2 1 1/8 1 3/8
2nd Quarter 1 7/16 2 1/32 2 3/16 2 5/16
3rd Quarter 1 3/8 2 25/32 1 15/16 2
4th Quarter 1 1/32 2 7/32 2 1/16 2 1/4
Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-ups or commissions and may not
represent actual transactions.
As of December 31, 1998, there were approximately 191 shareholders
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
shareholders as of January 20, 1999, was approximately 1,645.
Since our inception, we have not paid any cash dividends on our
Common Stock and have no dividend policy. Our loan agreement
prohibits paying any cash dividends on our Common Stock without
prior approval.
In addition to the securities sold by us during 1998, as reported
in the Company's Forms 10-Q for the quarters ended June 30, 1998
and September 30, 1998, which were not registered under the
Securities Act of 1933, as amended ("Securities Act"), we sold or
issued during 1998 the following securities which were also not
registered under the Act:
1. During 1998, we issued RBB Bank Aktiengesellschaft,
located in Graz, Austria, 116,555 shares of the Company's
Common Stock in payment of accrued and unpaid dividends
in the Company's Series 3 Class C Convertible Preferred
Stock ("Series 3 Preferred"), in accordance with the
terms of the Series 3 Preferred. The following shares of
Common Stock were issued to RBB Bank during 1998 in
payment of the accrued and unpaid dividends in the Series
3 Preferred:
Number of
Amount Shares of Date of
of Dividend Common Stock Issuance
___________ ____________ _________
$ 121,000 54,528 1/22/98
119,000 62,027 7/24/98
The issuance of the above described shares of Common
Stock in payment of accrued and unpaid dividends in the
Series 3 Preferred, were issued pursuant to an exemption
from registration under Section 4(2) and/or Rule 506 of
Regulation D of the Securities Act. These have been
registered for resale in our Form S-3 Registration
Statement No. 333-14513.
2. During 1998, we issued RBB Bank Aktiengesellschaft,
located in Graz, Austria, 17,420 shares of the Company's
Common Stock in payment of accrued and unpaid dividends
14
in the Company's Series 8 Class H Convertible Preferred
Stock ("Series 8 Preferred"), in accordance with the
terms of the Series 8 Preferred. The shares of Common
Stock issued to RBB Bank during 1998 in payment of the
accrued and unpaid dividends in the Series 8 Preferred
are shown in the following table:
Number of
Amount Shares of Date of
of Dividend Common Stock Issuance
___________ ____________ _________
$ 33,000 17,420 7/24/98
The issuance of the above described shares of Common
Stock in payment of accrued and unpaid dividends in the
Series 8 Preferred, were issued pursuant to an exemption
from registration under Section 4(2) and/or Rule 506 of
Regulation D of the Securities Act.
3. During 1998, we issued The Infinity Fund L.P., located in
Atlanta, Georgia, 2,439 shares of the Company's Common
Stock in payment of accrued and unpaid dividends in the
Company's Series 9 Class I Convertible Preferred Stock
("Series 9 Preferred"), in accordance with the terms of
the Series 9 Preferred. The shares of Common Stock
issued to The Infinity Fund L.P. during 1998 in payment
of the accrued and unpaid dividends in the Series 9
Preferred are shown in the following table:
Number of
Amount Shares of Date of
of Dividend Common Stock Issuance
___________ ____________ _________
$ 5,000 2,439 7/24/98
The issuance of the above described shares of Common
Stock in payment of accrued and unpaid dividends in the
Series 9 Preferred, were issued pursuant to an exemption
from registration under Section 4(2) and/or Rule 506 of
Regulation D of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table has been derived
from our consolidated financial statements. Financial statements
for the year ended December 31, 1998, 1997, 1996, 1995, and 1994
have been audited by BDO Seidman, LLP.
Statement of Operations Data:
(Amounts in Thousands,
Except for Share
Amounts) December 31,
____________________________________________________
1998 1997 1996 1995 1994(2)
_______ _______ _______ _______ _______
Revenues(4) $ 30,551 $ 28,413 $ 27,041 $ 31,477 $ 23,522
Net income (loss)
from continuing
operations 462 192 27 (3,494) (1,201)
Net loss from discon-
tinued operations - (4,101) (287) (5,558)(3) (315)
Preferred Stock
dividends (1,160) (1,260)(5) (2,145)(5) - -
Net loss applicable
to Common Stock
from continuing
operations (698) (1,068)(5) (2,118)(5) (3,494) (1,201)
Net loss per common
share from contin-
uing operations(1) (.06) (.10)(5) (.24)(5) (.44) (.20)
Weighted average number
of common shares
outstanding(1) 12,028 10,650 8,761 7,872 5,988
15
Balance Sheet Data:
December 31,
______________________________________________________
1998 1997 1996 1995 1994(2)
_______ _______ _______ _______ _______
Working capital
(deficit) $ 372 $ 754 $ (773) $(9,372) $ (705)
Total assets 28,748 28,570 29,036 28,873 35,067
Long-term debt 3,042 4,981 6,360 8,478 6,041
Total liabilities 12,795 16,376 16,451 20,935 18,105
Stockholders' equity 15,953 12,194 12,585 7,938 16,962
(1) Net loss per share for the fiscal year ended December 31, 1994 has
been restated, in accordance with Accounting Principles Board
Opinion No. 15, "Earnings Per Share," to reflect the issuance of
contingent shares to Quadrex during 1995. As of December 31, 1997,
the Company applied SFAS 128, the new standard of computing and
presenting earnings per share. The adoption of SFAS 128 did not
have a material effect on the Company's EPS presentation since the
effects of potential common shares are antidilutive.
(2) Includes financial data of Perma-Fix of Florida, Inc., Perma-Fix of
Dayton, Inc. and Perma-Fix of Ft. Lauderdale, Inc., as acquired from
Quadrex Corporation and accounted for using the purchase method of
accounting, from June 30, 1994.
(3) Includes write-down of impaired intangible permit related to an
acquisition completed in December of 1993 and certain nonrecurring
charges.
(4) Excludes revenues of Perma-Fix of Memphis, Inc., shown elsewhere as
a discontinued operation.
(5) In March 1997, the Securities and Exchange Commission,
("Commission") announced its position on the accounting for
Preferred Stock which is or may be convertible in Common Stock at
a discount from the market rate on the date of issuance of such
Preferred Stock. The Commission's position pursuant to Emerging
Issues Task Force ("EITF") D-60 regarding beneficial conversion
features is that a Preferred Stock dividend should be recorded for
the difference between the conversion price and quoted market price
of Common Stock as determined on the date of issuance of such
Preferred Stock. To comply with this position, we restated our 1996
consolidated financial statements to reflect a dividend of
approximately $2 million related to the fiscal 1996 sales of
Convertible Preferred Stock. As a result, the amount noted in this
table as our net loss applicable to Common Stock for 1996 reflects
the restated amount from the previously reported net loss applicable
to Common Stock of $405,000 and the amount noted in this table as
our net loss per share of Common Stock for 1996 reflects the
restated amount from the previously reported net loss per share of
Common Stock of ($.05). Pursuant to the Commission's position
regarding EITF D-60 and EITF D-42, we restated our 1997 consolidated
financial statements to reflect a dividend of approximately $908,000
($195,000 attributable to warrants) related to the fiscal 1997 sales
and subsequent exchanges of Convertible Preferred Stock, of which
approximately $111,000 was attributable to the quarter ended
June 30, 1997, and approximately $797,000 was attributable to the
quarter ended September 30, 1997. The impact of the restatement on
the second and third quarters of 1997 and the year ended
December 31, 1997, is shown as follows (amounts in thousands, except
for share amounts):
16
As Originally Reported As Amended
___________________________ ___________________________
Quarter Ended Year Ended Quarter Ended Year Ended
________________ __________ ________________ _________
6/30/97 9/30/97 12/31/97 6/30/97 9/30/97 12/31/97
_______ _______ ________ _______ _______ _________
Preferred Stock
Dividends $ 82 $ 99 $ 352 $ 193 $ 896 $1,260
Net Loss Applicable
to Common Stock (525) 58 (4,261) (636) (739) (5,169)
Net Loss Per Share (.05) .01 (.40) (.06) (.07) (.49)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained within this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of
1995"). See "Special Note regarding Forward-Looking Statements"
contained in this report.
Management's discussion and analysis is based, among other things,
upon our audited consolidated financial statements and includes the
accounts of the Company and our wholly-owned subsidiaries, after
elimination of all significant inter-company balances and
transactions.
Results of Operations
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.
The reporting of financial results and pertinent discussions are
tailored to two reportable segments: Waste Management Services and
Consulting Engineering Services.
Below are the results of operations for our years ended
December 31, 1998, 1997 and 1996 (amounts in thousands, except for
share amounts):
(Consolidated) 1998 % 1997 % 1996 %
______________ _______ _____ _______ _____ _______ _____
Net Revenue $30,551 100.0 $28,413 100.0 $27,041 100.0
Cost of goods
sold 21,064 68.9 19,827 69.8 18,912 69.9
_______ _____ _______ _____ _______ _____
Gross Profit 9,487 31.1 8,586 30.2 8,129 30.1
Selling, general
and administra-
tive 6,847 22.4 5,682 20.0 5,942 22.0
Depreciation and
amortization 2,109 6.9 1,980 7.0 2,083 7.7
Other income
(expense):
Interest income 35 .1 41 .1 43 .2
Interest expense (294) (1.0) (431) (1.5) (643) (2.4)
Other 190 .6 (342) (1.2) 523 1.9
________ ______ ________ ______ ________ ______
Net income from
continuing
operations 462 1.5 192 .6 27 -
Loss from discon-
tinued opera-
tions(2) - - (4,101) (14.4) (287) (1.1)
Preferred Stock
dividends (1,160) (3.8) (1,260)(1) (4.4) (2,145)(1) (7.9)
________ ______ ________ ______ _________ ______
Net loss applic-
able to Common
Stock $ (698) (2.3) $(5,169)(1) (18.2) $(2,405)(1) (8.9)
======== ====== ======= ====== ======== ======
Net loss per
Common share $ (.06) - $ (.49) - $ (.27) -
======== ====== ======== ====== ======== ======
17
(1) In March 1997, the Securities and Exchange Commission
("Commission") announced its position on the accounting for
Preferred Stock which is convertible into Common Stock at a
discount from the market rate on the date of issuance of such
Preferred Stock. The Commission's position pursuant to EITF D-
60 regarding beneficial conversion features is that a
Preferred Stock dividend should be recorded for the difference
between the conversion price and quoted market price of Common
Stock as determined on the date of issuance of such Preferred
Stock. To comply with this position, we restated our 1996
consolidated financial statements to reflect a dividend of
approximately $2 million related to the fiscal 1996 sales of
Convertible Preferred Stock. As a result, the amount noted in
this table as our net loss applicable to Common Stock for 1996
reflects the restated amount from the previously reported net
loss applicable to Common Stock of $405,000 and the amount
noted in this table as our net loss per share of Common Stock
for 1996 reflects the restated amount from the previously
reported net loss per share of Common Stock of ($.05).
Pursuant to the Commission's position regarding EITF D-60 and
EITF D-42, we restated our 1997 consolidated financial
statements to reflect a dividend of approximately $908,000
($195,000 attributable to warrants) related to the fiscal 1997
sales and subsequent exchanges of Convertible Preferred Stock,
of which approximately $111,000 was attributable to the
quarter ended June 30, 1997, and approximately $797,000 was
attributable to the quarter ended September 30, 1997. The
impact of the restatement on the second and third quarters of
1997 and the year ended December 31, 1997, is shown as follows
(amounts in thousands, except for share amounts):
As Originally Reported As Amended
___________________________ ___________________________
Quarter Ended Year Ended Quarter Ended Year Ended
________________ __________ ________________ _________
6/30/97 9/30/97 12/31/97 6/30/97 9/30/97 12/31/97
_______ _______ ________ _______ _______ ________
Preferred Stock
Dividends $ 82 $ 99 $ 352 $ 193 $ 896 $ 1,260
Net Loss Applicable
to Common Stock (525) 58 (4,261) (636) (739) (5,169)
Net Loss Per Share (.05) .01 (.40) (.06) (.07) (.49)
(2) On January 27, 1997, an explosion and resulting tank fire
occurred at the PFM facility located in Memphis, Tennessee,
which resulted in damage to certain hazardous waste storage
tanks located on the facility, and caused certain limited
contamination at the facility. Due to the nature of the loss,
the significant disruption and limited operating activities at
the facility, we made a strategic decision in February 1998,
to discontinue our fuel blending operations at PFM, which
comprised virtually all of the revenue producing operations of
PFM. See "Business" and Note 4 to Notes to Consolidated
Financial Statements and to "Discontinued Operations" in this
section for further discussion on PFM. Hereafter, PFM will be
referred to as a discontinued operation, and excluded from the
discussions on the operating results of the continuing
operations.
Summary -- Years Ended December 31, 1998 and 1997
Consolidated net revenues increased $2,138,000, or 7.5% for
continuing operations for the year ended December 31, 1998,
compared to the year ended December 31, 1997. This increase is
attributable to the growth in the wastewater treatment market at
PFTS, which totaled approximately $1,283,000 and the growth in the
oily wastewater and field services markets at PFFL, which totaled
approximately $1,168,000. Partially offsetting these increases was
a decrease in the consulting engineering segment of approximately
$287,000 and a decrease in on-site treatment of approximately
$357,000.
Cost of goods sold increased $1,237,000, or 6.2% for the year ended
December 31, 1998, compared to the year ended December 31, 1997.
This increase in cost of goods sold reflects principally the
increased operating, disposal, and transportation costs
corresponding to the increased revenues as discussed above.
Gross profit for the year ended December 31, 1998, increased to
$9,487,000, which as a percentage of revenue is 31.1%, reflecting
a slight improvement over 1997.
18
Selling, general and administrative expenses increased $1,165,000
or 20.5% for the year ended December 31, 1998, as compared to 1997.
As a percentage of revenue, selling, general and administrative
expenses also increased to 22.4% for the year ended December 31,
1998, compared to 20.0% for the same period of 1997. This increase
reflects an increase in costs of approximately $53,000 in the
consulting engineering segment, approximately $983,000 increase in
costs in the waste management segment, and an increase of
approximately $129,000 in corporate overhead. These increases
reflect our efforts to continue to research and develop new
markets, products and technologies that will allow us to become
more profitable.
Depreciation and amortization expense for the year ended December 31,
1998, reflects an increase of approximately $129,000 or 6.5% as
compared to the year ended December 31, 1997. This increase is
attributable to the capitalization and subsequent depreciation of
completed capital asset projects in 1998. Amortization expense
increased approximately $45,000 for the year ended December 31,
1998, as a result of new capitalized permitting costs and their
subsequent current year amortization and the additional
amortization of goodwill resulting from the 1998 acquisition of
Action Environmental.
Interest expense decreased approximately $137,000 from the year
ended December 31, 1998, as compared to the corresponding period of
1997. This decrease reflects reduced borrowing levels on the
Congress Financial revolver and term note.
The Preferred Stock dividends include the dividends recognized upon
the issuance of new series' of Preferred Stock due to the
beneficial conversion feature and dividends paid on a semi-annual
basis on outstanding Preferred Stock, which on a combined basis
decreased approximately $100,000, for the year ended December 31,
1998, as compared to the year ended December 31, 1997. Pursuant to
EITF D-60, we restated our 1997 consolidated financial statements
to record a dividend of approximately $908,000 related to the
fiscal 1997 sales of certain series of Convertible Preferred Stock.
Pursuant to EITF D-60 and D-42, we have recorded a dividend of
approximately $750,000 related to the fiscal 1998 sales of certain
series of Convertible Preferred Stock. However, Preferred Stock
dividends paid during 1998 were approximately $410,000 as compared
to approximately $352,000 during 1997. This increase of
approximately $58,000 is due to the issuance of the new Series 10
Preferred Stock issued in July 1998. See Note 6 to Notes to
Consolidated Financial Statements regarding the issuance of
Preferred Stock. See Note 3 to Notes to Consolidated Financial
Statements regarding the restatements due to the beneficial
conversion features of our various issuances of Preferred Stock.
Summary -- Years Ended December 31, 1997 and 1996
Consolidated net revenues increased $1,372,000, or 5.1% for
continuing operations for the year ended December 31, 1997,
compared to the year ended December 31, 1996. This increase is
attributable to the waste management industry segment, which
experienced an increase in revenues of approximately $2,259,000
during 1997, as compared to 1996. Our four (4) TSD's all
experienced increased revenues during 1997, which in the aggregate
totaled approximately $3,042,000 and were principally attributable
to growth in the wastewater and mixed waste markets. The most
significant TSD increase occurred at the PFF facility, which
recognized a $2,184,000 increase resulting from new mixed waste
contracts. Partially offsetting these increases within the waste
management industry segment were two (2) sale transactions
completed during 1996, whereby we sold our PermaCool Technology
which had generated $689,000 in revenue during 1996 and sold our
plastic recycling subsidiary (Re-Tech Systems, Inc.) which had
generated $129,000 in revenue during 1996. This increase in the
waste management industry segment was partially offset by a
reduction in revenues of $887,000 in the consulting engineering
industry segment. This consulting engineering reduction is
partially a result of two one-time projects for 1996, which totaled
$396,000 and were not duplicated in 1997, and a significant
reduction in the Bartlesville, Oklahoma, three year project that
reduced 1997 consulting engineering revenue by approximately
$554,000 as compared to 1996.
Cost of goods sold increased $915,000 or 4.8% to a total of
$5,682,000 for the year ended December 31, 1997, compared to the
year ended December 31, 1996. This consolidated increase in cost
of goods sold reflects principally the increased operating,
disposal, and transportation costs, corresponding to the increased
19
revenues as discussed above. The resulting gross profit for the
year ended December 31, 1997, increased to $8,586,000, which as a
percentage of revenue is 30.2%, reflecting a slight improvement
over 1996.
Selling, general and administrative expenses decreased $260,000 or
4.4% for the year ended December 31, 1997, as compared to 1996. As
a percentage of revenue, selling, general and administrative
expense also decreased to 20.0% for the year ended December 31,
1997, compared to 22.0% for the same period in 1996. This decrease
of $260,000 reflects a reduction in costs of $168,000 in the
consulting engineering industry segment and a $153,000 reduction in
costs in the waste management industry segment, which was partially
offset by an increase of approximately $61,000 in corporate
overhead, for certain outside services. The consolidated reduction
in selling, general and administrative expenses reflects our
continued efforts toward reduced cost structure throughout the
organization.
Depreciation and amortization expense for the year ended December 31,
1997, reflects a decrease of $103,000 or .7% of revenue as
compared to the year ended December 31, 1996. This decrease is
attributable to a depreciation expense reduction of 47,000 due to
the sale of certain assets as a result of our previous
restructuring programs and various other assets becoming fully
depreciated. Amortization expense reflects a total decrease of
$67,000 for the year ended December 31, 1997, as compared to the
year ended December 31, 1996, which is a direct result of the
"Covenant Not to Compete" having become fully amortized during the
first quarter of 1997.
Interest expense decreased $212,000 from year ended December 31,
1997, as compared to the corresponding period of 1996. The
decrease in interest expense reflects the reduced borrowing levels
on the Heller Financial, Inc. revolving and term note and the Ally
Capital Equipment Lease Agreements.
The Preferred Stock dividends decreased $885,000 for the year
ended December 31, 1997 as compared to the year ended December 31,
1996. Pursuant to EITF D-60, we previously restated our 1996
consolidated financial statements to record a dividend of
approximately $2,000,000 related to the fiscal 1996 sales of
certain series of Convertible Preferred Stock and have restated our
1997 consolidated financial statements to record a dividend of
approximately $908,000 ($195,000 attributable to warrants) related
to the fiscal 1997 sales of certain series of Convertible Preferred
Stock. However, dividends paid during 1997 were approximately
$352,000 as compared to approximately $145,000 during 1996. This
increase of approximately $207,000 is due to the full year of the
Series 8 and Series 9 Preferred Stock dividends during 1997. See
Note 6 to Notes to Consolidated Financial Statements regarding the
issuance of Preferred Stock. See Note 3 to Notes to Consolidated
Financial Statements regarding the restatements due to the
beneficial conversion features of our various issuances of
Preferred Stock.
Liquidity and Capital Resources of the Company
At December 31, 1998, we had cash and cash equivalents of $776,000,
including discontinued operations. This cash and cash equivalents
total reflects a increase of $450,000 from December 31, 1997, as a
result of net cash provided by continuing operations of
$3,428,000, offset by cash used by discontinued operation of
$1,594,000, cash used in investing activities of $1,749,000
(principally purchases of equipment, net totaling $1,990,000,
partially offset by the proceeds from the sale of property and
equipment of $53,000) and cash provided by financing activities of
$365,000. Accounts receivable, net of allowances for continuing
operations, totaled $5,950,000, an increase of $668,000 over the
December 31, 1997, balance of $5,282,000, which reflects the impact
of increased revenues during the fourth quarter of 1998, over the
same period of 1997.
On January 15, 1998, we, as parent and guarantor, and all of our
direct and indirect subsidiaries, as co-borrowers and cross-
guarantors, entered into a Loan and Security Agreement
("Agreement") with Congress Financial Corporation (Florida) as
lender ("Congress"). The Agreement provides for a term loan in the
amount of $2,500,000, which requires principal repayments based on
a four-year level principal amortization over a term of 36 months,
with monthly principal payments of $52,000. Payments commenced on
February 1, 1998, with a final balloon payment in the amount of
approximately $573,000 due on January 14, 2001. The Agreement also
20
provides for a revolving loan facility in the amount of $4,500,000.
At any point in time the aggregate available borrowings under the
facility are subject to the maximum credit availability as
determined through a monthly borrowing base calculation, as updated
for certain information on a weekly basis, equal to 80% of our
eligible accounts receivable accounts as defined in the Agreement.
The termination date on the revolving loan facility is also the
third anniversary of the closing date. We incurred approximately
$230,000 in financing fees relative to the solicitation and closing
of this loan agreement (principally commitment, legal and closing
fees) which are being amortized over the term of the Agreement.
Pursuant to the Agreement, the term loan and revolving loan both
bear interest at a floating rate equal to the prime rate plus 1
3/4%. The loans also contain certain closing, management and unused
line fees payable throughout the term. The loans are subject to a
3.0% prepayment fee in the first year, 1.5% in the second and 1.0%
in the third year of the Agreement.
As security for the payment and performance of the Agreement, we
granted a first security interest in all of our and our
subsidiaries' accounts receivable, inventory, general intangibles,
equipment and other assets, as well as the mortgage on two (2)
facilities owned by our subsidiaries. The Agreement contains
affirmative covenants including, but not limited to, certain
financial statement disclosures and certifications, management
reports, maintenance of insurance and collateral. The Agreement
also contains an Adjusted Net Worth financial covenant, as defined
in the Agreement, of $3,000,000. Under the Agreement, we are
limited to granting liens on our equipment, including capitalized
leases, (other than liens on the equipment to which Congress has a
security interest) in an amount not to exceed $2,500,000 in the
aggregate at any time outstanding.
The proceeds of the Agreement were utilized to repay in full on
January 15, 1998, the outstanding balance of the Heller Financial,
Inc. ("Heller") Loan and Security Agreement which was comprised of
a revolving loan and term loan, and to repay and buyout all assets
under the Ally Capital Corporation ("Ally") Equipment Financing
Agreements. The balance of the revolving and term loans on January
15, 1998, as repaid pursuant to the Congress agreement, was
$2,289,000. The outstanding balance, which was principal on the
Ally Equipment Financing Agreement was $624,000, repaid pursuant to
the Congress Agreement. In conjunction with the above debt
repayments, we also repaid a small mortgage, paid certain fees,
taxes and expenses, resulting in an initial Congress term loan of
$2,500,000 and revolving loan balance of $1,705,000 as of the date
of closing. We recorded the December 31, 1997, Heller and Ally
debt balances as though the Congress transaction had been closed as
of December 31, 1997. As a result of this transaction, and the
repayment of the Heller and Ally debt, the combined monthly debt
payments were reduced from approximately $104,000 per month to
$52,000 per month.
As of December 31, 1998, the borrowings under the Congress
revolving loan facility totaled $97,000 with borrowing availability
of approximately $4,009,000. The balance under the Congress term
loan at December 31, 1998, was $1,927,000.
During June 1998, we entered into a master security agreement and
secured promissory note in the amount of approximately $317,000 for
the purchase and financing of certain capital equipment at the
Perma-Fix of Florida, Inc. facility. The term of the promissory
note is for sixty (60) months, at a rate of 11.58% per annum and
monthly installments of approximately $7,000. We subsequently
entered into a second secured promissory note in the amount of
approximately $207,000 for the purchase and financing of certain
capital equipment. The term of the promissory note is for sixty
(60) months, at a rate of 10.54% per annum and monthly installments
of approximately $4,000.
At December 31, 1998, we had $3,014,000 in aggregate principal
amount of outstanding debt, related to continuing operations, as
compared to $4,865,000 at December 31, 1997. This decrease in
outstanding debt of $1,851,000 during 1998 reflects the reduced
borrowing levels on the revolving loan resulting from the proceeds
from issuance of Preferred Stock, positive cash flow of the
operations, and the scheduled principal repayments on other long-
term debt of $320,000, partially offset by the new debt and capital
21
lease obligations secured during the year of $564,000. As of
December 31, 1998, we had $28,000 in aggregate principal amounts of
outstanding debt related to PFM discontinued operations, of which
$24,000 is classified as current.
As of December 31, 1998, total consolidated accounts payable for
continuing operations was $2,422,000, an increase of $159,000 from
the December 31, 1997, balance of $2,263,000, which resulted from
the increased business activity at year end. This December 1998
balance does however also reflects a reduction of $205,000 in the
balance of payables in excess of sixty (60) days, to a total of
$403,000.
Our net purchases of new capital equipment for continuing
operations for the twelve month period ended December 31, 1998,
totaled approximately $2,554,000. These expenditures were for
expansion and improvements to the operations principally within
the waste management industry segment. These capital expenditures
were principally funded by the cash provided by continuing
operations, the proceeds from the issuance of Preferred Stock, as
discussed below, and $564,000 through various other lease financing
sources. We have budgeted capital expenditures of approximately
$2,500,000 for 1999, which includes completion of certain current
projects, as well as other identified capital and permit compliance
purchases. We anticipate funding these capital expenditures by a
combination of lease financing with lenders other than the
equipment financing arrangement discussed above, and/or internally
generated funds.
On or about June 30, 1998, the Company issued 3,000 shares of newly
created Series 10 Class J Convertible Preferred Stock ("Series 10
Preferred"), as further discussed in Note 6 to Consolidated Financial
Statements and Item 2 "Changes in Securities and Use of Proceeds." The
Company received net proceeds of $2,653,000 (after deduction of the
payment of $210,000 for broker's commission and certain other closing
costs, but prior to the Company's legal fees and other costs in
connection with the sale of the Series 10 Preferred and the registration
of the Common Stock issuable upon conversion of such Preferred Stock) for
the sale of the Series 10 Preferred. Each share of Series 10 Preferred
sold for $1,000 per share and has a liquidation value of $1,000 per
share. The Company utilized the proceeds received on the sale of
Series 10 Preferred for working capital and/or to reduce the
outstanding balance of its revolving credit facility, subject to
the Company reborrowing under such credit facility.
With the issuance of the Series 10 Preferred, the Company has
outstanding 9,850 shares of Preferred Stock, with each share having
a liquidation preference of $1,000 ("Liquidation Value"). Annual
dividends on the Preferred Stock ranges from 4% to 6% of the
Liquidation Value, depending upon the Series. Dividends on the
Preferred Stock are cumulative, and are payable, if and when
declared by the Company's Board of Directors, on a semi-annual
basis. Dividends on the outstanding Preferred Stock may be paid at
the option of the Company, if declared by the Board of Directors,
in cash or in the shares of the Company's Common Stock as described
under Note 6 of the Consolidated Financial Statements and Item 2 of
Part II hereof.
As of December 31, 1998, there are certain events, which may have
a material impact on the Company's liquidity on a short-term basis.
The Company's Board of Directors has authorized the repurchase of
up to 500,000 shares of the Company's Common Stock from time to
time in the open market or privately negotiated transactions, in
accordance with SEC Rule 10b-18, as promulgated under the Exchange
Act, of which we repurchased 23,000 shares during 1998 and if the
remaining authorized shares were purchased as of the date of the
report such would result in the expenditure of approximately
$600,000 in cash. The Company anticipates funding these activities
from cash provided by continuing operations and borrowings under
the Company's revolving credit facility.
The working capital position at December 31, 1998, was $372,000, as
compared to $754,000 at December 31, 1997, which reflects a
decrease in this position of $382,000 during 1998. This change in
current working capital principally reflects our continued
repayment of long term debt, including the revolving loan, from the
current cash flow from operations, resulting in our overall reduced
borrowing levels, which includes a revolving loan balance of only
$97,000 at December 31, 1998 as compared to $2,652,000 at December 31,
1997. Additionally, we continue to invest current cash
proceeds into the long term capital improvements of our operating
22
facilities, with the 1998 purchases of property and equipment
totaling $1,990,000, which exceeds the 1997 total by $486,000.
During 1998, accrued dividends for the period July 1, 1997, through
December 31, 1997, in the amount of approximately $183,000 were
paid in January 1998, in the form of 85,216 shares of Common Stock.
Dividends for the period January 1, 1998, through June 30, 1998, of
approximately $176,000 were paid in the form of 90,609 shares of
Common Stock. The accrued dividends for the period July 1, 1998,
through December 31, 1998, in the amount of approximately $235,000
were paid in January 1999, in the form of $121,000 in cash and
85,802 shares of Common Stock. It is the present intention of the
Company to pay any dividends declared by the Company's Board of
Directors on its outstanding shares of Preferred Stock in Common
Stock of the Company.
During January 1998, PFM was notified by the EPA that it believed
that PFM was a PRP regarding the remediation of a site owned and
operated by W.R. Drum, Inc. ("WR Drum") in Memphis, Tennessee (the
"Drum Site"), as further discussed in Item 3 "Legal Proceedings."
During the third quarter of 1998, the government agreed to PFM's
offer to pay $225,000 ($150,000 payable at closing and the balance
payable over a twelve month period) to settle any potential
liability regarding this Drum Site. During January 1999, the
Company executed a "Partial Consent Decree" pursuant to this
settlement, which settlement is subject to approval of the court.
It is anticipated that the settlement will be approved and the
initial payment of $150,000 will be made during the second quarter
of 1999. However, there are no assurances that the settlement will
be approved by the court.
In summary, we have continued to take steps to improve our
operations and liquidity as discussed above, including the equity
raised in 1998. If we are unable to continue to improve our
operations and to become profitable in the foreseeable future, such
would have a material adverse effect on our liquidity position.
Discontinued Operations
On January 27, 1997, an explosion and resulting tank fire occurred
at the PFM facility, a hazardous waste storage, processing and
blending facility, which resulted in damage to certain hazardous
waste storage tanks located on the facility and caused certain
limited contamination at the facility. Such occurrence was caused
by welding activity performed by employees of an independent
contractor at or near the facility's hazardous waste tank farm
contrary to instructions by PFM. The facility was non-operational
from the date of this event until May 1997, at which time it began
limited operations. During the remainder of 1997, PFM continued to
accept waste for processing and disposal, but arranged for other
facilities owned by us or our subsidiaries or others not affiliated
with us to process such waste. The utilization of other facilities
to process such waste resulted in higher costs to PFM than if PFM
were able to store and process such waste at its Memphis,
Tennessee, TSD facility, along with the additional handling and
transportation costs associated with these activities. As a result
of the significant disruption and the cost to rebuild and operate
this segment, we made a strategic decision, in February 1998, to
discontinue the fuel blending operations at PFM. The fuel blending
operations represented the principal line of business for PFM prior
to this event, which included a separate class of customers, and
its discontinuance has required PFM to attempt to develop new
markets and customers, through the utilization of the facility as
a storage facility under its RCRA permit and as a transfer
facility. Accordingly, during the fourth quarter of 1997, the
Company recorded a loss on disposal of discontinued operations of
$3,053,000, which included $1,272,000 for impairment of certain
assets and $1,781,000 for the establishment of certain closure
liabilities.
The net loss from the discontinued PFM operations for the years
ended December 31, 1997 and 1996 ($1,048,000, and $287,000,
respectively) are shown separately in the Consolidated Statements
of Operations. The results of the discontinued PFM operations do
not reflect management fees charged by us, but do include interest
expense of $254,000 and $169,000 during 1997 and 1996,
respectively, specifically identified to PFM as a result of PFM's
actual incurred debt under our revolving and term loan credit
facility. The operating expenses incurred during 1998, totaling
$653,000, relate to the closure and remedial activities performed,
23
and have been recorded to the accrued environmental reserve.
During March of 1998, we received a settlement in the amount of
$1,475,000 from its insurance carrier for the business interruption
claim. This settlement was recognized as a gain in 1997 and thereby
reducing the net loss recorded for the discontinued PFM operations
in 1997. Earlier in 1997, PFM received approximately $522,000
(less its deductible of $25,000) in connection with its claim for
loss of contents as a result of the fire and explosion which was
utilized to replace certain assets and reimburse us for certain
fire related expense.
The accrued environmental and closure costs related to PFM totals
$2,501,000 as of December 31, 1998, a decrease of $1,359,000 from
the December 31, 1997, accrual balance. This reduction was
principally a result of the specific costs related to the
decomissioning and closure of the fuel blending tank farm and
related processing equipment ($428,000), general closure and
remedial activities, including groundwater remediation and agency
and investigative activities, ($278,000), and the general operating
losses, including indirect labor, materials and supplies, incurred
in conjunction with the above actions ($653,000). The remaining
liability represents the best estimate of the cost to complete the
groundwater remediation at the site of approximately $980,000 (See
Note 9 to the Notes to Consolidated Financial Statements), the
costs to complete the facility closure activities (including agency
and investigative activities) totaling approximately $946,000,
future operating losses to be incurred by PFM as it completes such
closure and remedial activities over the next five (5) to ten (10)
year period ($350,000) and the potential PRP liability of $225,000
as further discussed in Note 12 to the Notes to Consolidated
Financial Statements
Revenues of the discontinued PFM operations were $1,878,000 in 1997
and $3,996,000 in 1996. These revenues are not included in
revenues as reported in the Consolidated Statements of Operation.
See Note 4 to Notes to Consolidated Financial Statements for
further discussion on PFM.
Environmental Contingencies
We are engaged in the waste management services segment of the
pollution control industry. As a participant in the on-site
treatment, storage and disposal market and the off-site treatment
and services market, we are subject to rigorous federal, state and
local regulations. These regulations mandate strict compliance and
therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every
reasonable attempt to maintain complete compliance with these
regulations; however, even with a diligent commitment, we, along
with many of our competitors, may be required to pay fines for
violations or investigate and potentially remediate our waste
management facilities.
We routinely use third party disposal companies, who ultimately
destroy or secure landfill residual materials generated at our
facilities or at a client's site. We, compared to certain of our
competitors, dispose of significantly less hazardous or industrial
by-products from our operations due to rendering material non-
hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products.
In the past, numerous third party disposal sites have improperly
managed wastes and consequently require remedial action;
consequently, any party utilizing these sites may be liable for
some or all of the remedial costs. Despite our aggressive
compliance and auditing procedures for disposal of wastes, we
could, in the future, be notified that we are a PRP at a remedial
action site, which could have a material adverse effect.
In addition to budgeted capital expenditures of $2,500,000 for 1999
at the TSD facilities, which are necessary to maintain permit
compliance and improve operations, as discussed above under
"Business -- Capital Spending, Certain Environmental Expenditures"
and "Liquidity and Capital Resources of the Company" of this
Management's Discussion and Analysis, we have also budgeted for
1999 an additional $437,000 in environmental expenditures to comply
with federal, state and local regulations in connection with
remediation of certain contaminates at two locations. As
previously discussed under "Business -- Capital Spending, Certain
Environmental Expenditures and Potential Environmental
Liabilities," the two locations where these expenditures will be
made are the Leased Property in Dayton, Ohio (EPS), a former RCRA
storage facility as operated by the former owners of PFD, and PFM's
facility in Memphis, Tennessee. We have estimated the expenditures
24
for 1999 to be approximately $222,000 at the EPS site and $215,000
at the PFM location. Additional funds will be required for the
next five to ten years to properly investigate and remediate these
sites. We expect to fund these expenses to remediate these two
sites from funds generated internally, however, no assurances can
be made that we will be able to do so.
Oak Ridge System Contract Award
The Company and M&EC entered into the M&EC Contract pursuant to which
the Company and M&EC agreed to act as a team in the performance of
certain contracts that either the Company or M&EC may obtain from
customers of the DOE regarding treatment and disposal of certain
types of radioactive, hazardous or mixed waste (waste containing
both hazardous and low level radioactive waste) at DOE facilities.
In connection with proposals relating to the treatment and disposal
of mixed waste at DOE's Oak Ridge, Tennessee system ("Oak Ridge"),
M&EC and the Company made a joint proposal to DOE, with M&EC to
act as the team leader. In August 1998 M&EC, as the team leader,
was awarded three contracts ("Oak Ridge Contracts") by Bechtel
Jacobs Company, LLC, the government-appointed manager of the
environmental program for Oak Ridge, to perform certain treatment
and disposal services relating to Oak Ridge. The Oak Ridge
Contracts were issued by DOE based on proposals by M&EC and the
Company.
The Oak Ridge Contracts are similar in nature to a blanket purchase
order whereby the DOE specifies the approved waste 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 will represent 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.
As with most such blanket processing agreements, the Oak Ridge Contracts
contain no minimum or maximum processing guarantees, and may be terminated
by either party pursuant to standard DOE procurement regulation terms.
Each specific waste stream processed under the Oak Ridge Contracts will
require a separate work order from DOE and will be priced separately with
an intent of recognizing an acceptable profit margin.
The Company anticipates that, as a member of the team with M&EC in
connection with the Oak Ridge Contracts and finalization of the scope
of work documents with M&EC relating to the work to be performed by
each of the Company and M&EC under the Oak Ridge Contracts, it will (i)
provide certain of the Company's environmental remediation technologies,
(ii) install equipment necessary to apply the Company's technology,
and (iii) supervise certain aspects of the remediation process operations.
In addition, the teaming agreement provides that M&EC will purchase all
of the equipment necessary to perform the Oak Ridge Contracts. The
Company anticipates that work, if any, under the Oak Ridge Contracts
will begin during the later part of 1999. There are no assurances that
the Company and M&EC will complete the scope of work documents. The
Company also anticipates that a substantial portion of any work performed
under the Oak Ridge Contracts will be performed at M&EC's facility at
Oak Ridge currently under development as of the date of this Report. The
DOE estimates that the Oak Ridge Contracts have the potential to generate
up to $100 million in gross revenues over an estimated time span of more
than five years. As of the date of this Report, however, the Company
cannot estimate (i) the amount of work or revenues, if any, which will
be received by M&EC under the Oak Ridge Contracts, (ii) the percentage
or amount of work received by M&EC under the Oak Ridge Contracts which
will be performed by the Company, or (iii) the ultimate profitability,
or lack of profitability, of the Oak Ridge Contracts for the Company.
See "Special Note Regarding Forward Looking Statements" and "Business--
Oak Ridge System Contract Award."
Proposed Acquisition
During March 1999, the Company, Chemical Conservation Corporation
(Florida), Chemical Conservation of Georgia, Inc. and Chem-Met
Services, Inc. (Collectively "Chem-Con") entered into a definitive
agreement whereby PESI agreed to acquire all of the outstanding
shares of Common Stock of Chem-Con in exchange for $7.4 million in
the Company's Common Stock, with the number of shares of the
Company's Common Stock to be issued determined by dividing $7.4
million by the average closing price per share of the Company's
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Common Stock as quoted on the NASDAQ for the five (5) trading days
immediately preceding the date of closing. The Company would, at
the closing of the acquisition, enter into a four year employment
agreement with an executive of Chem-Con in the approximate amount
of $1.3 million. We expect that the merger will be accounted for
as a pooling of interests, which means that we will treat our
companies as if they had always been combined for accounting and
financial reporting purposes. The transaction is expected to be
closed during the second quarter of 1999, subject to the ability of
the parties to, among other things, qualify the Acquisition as a
pooling of interests transaction, which means that the merged
companies will be treated as if they had always been combined for
accounting and financial reporting purposes and to obtain approval
of the Acquisition by the Company's stockholders entitled to vote
thereon.
No assurances can be made that the Acquisition will occur, or if
such Acquisition occurs, that such Acquisition would be on the same
terms as described above.
Chem-Con reported audited combined net revenues of approximately
$21.8 million and audited combined net income of approximately
$480,000 for fiscal year ended September 30, 1998.
Upon closure of the proposed acquisition, the Company will be
required to pay approximately $900,000 for the settlement of
certain environmental contingencies and $360,000 in connection with
the settlement of another claim against Chem-Con. In addition, the
facilities of Chem-Con located in Michigan and Georgia are
contaminated in certain aspects and, as a result of such
contamination and based upon the Company's due diligence, the
Company believes such remediation costs, which will be incurred
over a ten year period, will not in the aggregate exceed $3.8
million. The Company will also be required to replace Chem-Con's
financing facility which totaled approximately $2 million at
December 31, 1998, through the utilization of the Company's current
loan and security agreement or a new credit facility as obtained by
the Company.
It is anticipated that this acquisition will result in economies of
scale on both the selling and processing activities, as well as
certain overhead related expenses, and will provide access to new
products, new customers, and the ability to offer new services. The
geographic locations, combined with expanded service capabilities,
of the merged companies will provide significant market presence
through the Midwest and Southeastern United States.
Recent Accounting Pronouncements
In June, 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure
them at fair value. FAS 133 is effective for periods beginning
after June 15, 1999. Historically, we have not entered into
derivative contracts. Accordingly, FAS 133 is not expected to
affect our financial statements.
26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained with this report may be deemed
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (collectively, the
"Private Securities Litigation Reform Act of 1995"). All
statements in this report other than an statements of historical
fact are forward-looking statements that are subject to known and
unknown risks, uncertainties and other factors which could cause
actual results and performance of the Company to differ materially
from such statements. The words "believe," "expect," "anticipate,"
"intend," "will," and similar expressions identify forward-looking
statements. Forward-looking statements contained herein relate to,
among other things, (i) ability or inability to improve operations
and become profitable on an annualized basis and continue its
operations, (ii) the Company's ability to develop or adopt new and
existing technologies in the conduct of its operations, (iii)
anticipated financial performance, (iv) ability to comply with the
Company's general working capital requirements, (v) ability to
retain or receive certain permits or patents, (vi) ability to be
able to continue to borrow under the Company's revolving line of
credit, (vii) ability to generate sufficient cash flow from
operations to fund all costs of operations and remediation of
certain formerly leased property in Dayton, Ohio, and the Company's
facility in Memphis, Tennessee, (viii) ability to remediate certain
contaminated sites for projected amounts, (ix) the government's
acceptance of the Company's offer regarding settlement of claims
involving the Drum Site (as defined), (x) ability of the Company to
remediate certain properties of Chem-Con (as defined) for projected
amounts, (xi) ability to obtain a satisfactory line of credit for
Chem-Con, (xii) ability to obtain approval of the acquisition of
Chem-Con by the stockholders of the Company, (xiii) "Year 2000"
computer issues, (xiv) the Oak Ridge Contracts (as defined), (xv)
anticipated revenues resulting from the Oak Ridge Contracts and
completion of the scope of work with M&EC (as defined), (xvi)
acquisition of Chem-Con, and all other statements which are
not statements of historical fact. While the Company believes the
expectations reflected in such forward-looking statements are
reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could
cause future outcomes to differ materially from those described in
this report, including, but not limited to, (i) general economic
conditions, (ii) material reduction in revenues, (iii) inability to
collect in a timely manner a material amount of receivables, (iv)
increased competitive pressures, (v) the ability to maintain and
obtain required permits and approvals to conduct operations, (vi)
the ability to develop new and existing technologies in the conduct
of operations, (vii) overcapacity in the environmental industry,
(viii) inability of the "New Process" (as defined) to perform as
anticipated or to develop such for commercial use, (ix) "Year 2000"
compliance of the computer system of the Company, its key suppliers,
customers, creditors, and financial service organizations, (x)
ability to receive or retain certain required permits, (xi) discovery
of additional contamination or expanded contamination at a certain
Dayton, Ohio, property formerly leased by the Company or the Company's
facility at Memphis, Tennessee, which would result in a material increase
in remediation expenditures, (xii) determination that PFM is the source of
chlorinated compounds at the Allen Well Field, (xiii) changes in federal,
state and local laws and regulations, especially environmental regulations,
or in interpretation of such, (xiv) potential increases in equipment,
maintenance, operating or labor costs, (xv) management retention and
development, (xvi) the requirement to use internally generated funds for
purposes not presently anticipated, (xvii) inability to become profitable,
or if unable to become profitable, the inability to secure additional
liquidity in the form of additional equity or debt, (xviii) the
commercial viability of our on-site treatment process, (xix) discovery
of additional contamination or expanded contamination at property owned
or used by Chem-Con, (xx) inability of the Company and M&EC to finalize
the scope of work documents relating to the Oak Ridge Contracts, (xxi)
the actual volume of waste to be received under the Oak Ridge Contracts,
(xxii) a determination that the amount of work to be performed by the
Company under the Oak Ridge Contracts is less than anticipated, (xxiii)
the inability of the Company to perform the work assigned to it under
Oak Ridge Contracts in a profitable manner, (xxiv) the inability of the
Company to obtain under certain circumstances shareholder approval of
the transaction in which the Series 10 Preferred and certain warrants
were issued, and (xxv) the inability of the Company to maintain the
listing of its Common Stock on the NASDAQ. The Company undertakes no
obligations to update publicly any forward-looking statement, whether
as a result of new information, future events or otherwise.
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ITEM 8. F