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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 1-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
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State or other jurisdiction (IRS Employer
of incorporation or organization Identification Number)
8302 Dunwoody Place, #250, Atlanta, GA 30350
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(Address of principal executive offices) (Zip Code)
(770) 587-9898
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.001 Par Value Boston Stock Exchange
Common Stock, $.001 Par Value NASDAQ Capital Markets
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the Registrant's voting and non-voting common
equity held by nonaffiliates of the Registrant computed by reference to the
closing sale price of such stock as reported by NASDAQ as of the last business
day of the most recently completed second fiscal quarter (June 30, 2006), was
approximately $92,323,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed to
be affiliates. Such determination should not be deemed an admission that such
directors or officers, are, in fact, affiliates of the Registrant. The Company's
Common Stock is listed on the NASDAQ Capital Markets and the Boston Stock
Exchange.
As of March 26, 2007, there were 52,017,244 shares of the registrant's Common
Stock, $.001 par value, outstanding.
Documents incorporated by reference: none
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
PART I
Item 1. Business.......................................................................... 1
Item 1A. Risk Factors...................................................................... 13
Item 1B. Unresolved Staff Comments......................................................... 18
Item 2. Properties........................................................................ 18
Item 3. Legal Proceedings................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................... 20
Item 4A. Executive Officers of the Registrant ............................................. 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............ 22
Item 6. Selected Financial Data .......................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations......................................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 47
Special Note Regarding Forward-Looking Statements................................. 48
Item 8. Financial Statements and Supplementary Data....................................... 50
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................... 89
Item 9A. Controls and Procedures........................................................... 89
Item 9B. Other Information................................................................. 94
PART III
Item 10. Directors, Executive Officers and Corporate Governance............................ 94
Item 11. Executive Compensation............................................................ 97
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 108
Item 13. Certain Relationships and Related Transactions, and Director Independence......... 112
Item 14. Principal Accountant Fees and Services............................................ 113
PART IV
Item 15. Exhibits and Financial Statement Schedules........................................ 115
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW AND PRINCIPAL PRODUCTS AND SERVICES
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation organized in 1990, and is engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
o Environmental Services, including emergency response, vacuum services,
marine environmental and other remediation services.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (which is
waste that contains both low-level radioactive and hazardous waste)
including on and off-site waste remediation and processing;
o Nuclear, low-level radioactive, and mixed waste treatment, processing
and disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Consulting services regarding broad-scope environmental issues,
including environmental management programs, regulatory permitting,
compliance and auditing, landfill design, field testing and
characterization.
We have grown through both acquisitions and internal growth. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the Nuclear and Industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear waste, mixed waste and industrial waste.
We service research institutions, commercial companies, public utilities and
governmental agencies nationwide. The distribution channels for our services are
through direct sales to customers or via intermediaries.
We were incorporated in December of 1990. Our executive offices are located at
8302 Dunwoody Place, Suite 250, Atlanta, Georgia 30350.
WEBSITE ACCESS TO COMPANY'S REPORTS
Our internet website address is www.perma-fix.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission ("Commission").
Additionally, we make available free of charge on our internet website:
o our Code of Ethics;
o the charter of our Corporate Governance and Nominating Committee;
o our Anti-Fraud Policy;
o the charter of our Audit Committee.
1
SEGMENT INFORMATION AND FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
During 2006, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
o a business activity from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president and chief
operating officer to make decisions about resources to be allocated and
assess its performance; and
o for which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments, however, exclude the corporate headquarters, which does
not generate revenue, Perma-Fix of Michigan Inc. ("PFMI") and Perma-Fix of
Pittsburgh, Inc. ("PFP"), two discontinued operations.
Most of our activities are conducted nationwide; however, our Industrial segment
maintains a significant focus on the Eastern and Midwest portions of the United
States. We had no foreign operations or export sales during 2006.
OPERATING SEGMENTS
We have three operating segments, which represent each business line that we
operate. The Industrial segment, which operates six facilities, the Nuclear
segment, which operates three facilities, and the Consulting Engineering
Services segment as described below:
INDUSTRIAL WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services of hazardous and non-hazardous waste
(solids and liquids) through six permitted treatment and/or disposal facilities
and numerous related operations provided by our other field office locations, as
discussed below.
Perma-Fix Treatment Services, Inc. ("PFTS") is a permitted treatment, storage
and disposal ("TSD") facility located in Tulsa, Oklahoma. PFTS stores and treats
hazardous and non-hazardous waste liquids, provides waste transportation and
disposal of non-hazardous liquid waste via its on-site Class I Injection Well
located at the facility. The injection well is permitted for the disposal of
non-hazardous liquids and characteristic hazardous wastes that have been treated
to remove the hazardous characteristic. PFTS operates a non-hazardous wastewater
treatment system for oil and solids removal, a corrosive treatment system for
neutralization and metals precipitation, and a container stabilization system.
The injection well is controlled by a computer system to assist in achieving
compliance with all applicable state and federal regulations. PFTS is in the
process of applying for a Title V air permit as a synthetic minor pursuant to
the terms of a consent order recently entered into with the Oklahoma Department
of Environmental Quality. See "Permits and Licenses" under this Item 1 and
"Legal Proceedings"- Item 3.
Perma-Fix of Dayton, Inc. ("PFD") is a permitted treatment and storage facility
located in Dayton, Ohio. PFD has four main processing areas. The four production
areas are a RCRA permitted treatment and storage, a centralized wastewater
treatment area, a used oil recycling area, and a non-hazardous solids
solidification area. Hazardous waste accepted under the permit is typically drum
waste, which is bulked and sent off as a fuel, for incineration or
stabilization. Wastewaters accepted at the facility include hazardous and
non-hazardous wastewaters, which are treated by ultra filtration, metals
precipitation and bio-degradation, including a biological wastewater process.
Waste industrial oils and used motor oils are processed through high-speed
centrifuges to produce a high quality fuel that is sold to and burned by
industrial burners. See discussion under "Permits and Licenses" under this Item
1, Item 1A "Risk Factors", and Item 3 "Legal Proceedings" for a discussion as to
certain actions brought by a citizens group and the federal government alleging
that PFD does not have the proper air permits under federal and certain state
Clean Air Acts.
2
Perma-Fix of Ft. Lauderdale, Inc. ("PFFL") is a permitted facility located in
Ft. Lauderdale, Florida. PFFL collects and treats wastewaters, oily wastewaters,
used oil and other off-specification petroleum-based products, some of which may
potentially be recycled into usable products. Key activities at PFFL include
process cleaning and material recovery, production and sales of on-specification
fuel oil, custom tailored waste management programs and hazardous material
disposal and recycling materials from generators such as the cruise line and
marine industries.
Perma-Fix of Orlando, Inc. ("PFO") is a permitted treatment and storage facility
located in Orlando, Florida. PFO collects, stores and treats hazardous and
non-hazardous wastes out of two processing buildings, under one of our most
inclusive permits. PFO is also a transporter of hazardous waste and operates a
transfer facility at the site.
Perma-Fix of South Georgia, Inc. ("PFSG") is a permitted treatment and storage
facility located in Valdosta, Georgia. PFSG provides storage, treatment and
disposal services to hazardous and non-hazardous waste generators throughout the
United States, in conjunction with the utilization of the PFO facility and
transportation services. PFSG operates a hazardous waste storage facility that
primarily blends and processes hazardous and non-hazardous waste liquids, solids
and sludges into substitute fuel or as a raw material substitute in cement kilns
that have been specially permitted for the processing of hazardous and
non-hazardous waste.
Perma-Fix of Maryland, Inc. ("PFMD") is located in Baltimore, Maryland, and
operates two nearby sales and service offices. PFMD was established in March
2004 and we acquired and assumed certain assets and liabilities of USL
Environmental Services, Inc. d/b/a A&A Environmental. PFMD offers environmental
services such as 24-hour emergency response, vacuum services, hazardous and
non-hazardous waste disposal, marine environmental and other remediation
services.
For 2006, the Industrial segment accounted for approximately $35,148,000 (or
40.0%) of our total revenue, as compared to approximately $40,768,000 (or 44.9%)
for 2005. See "Financial Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, low-level
radioactive, mixed (waste containing both hazardous and low-level radioactive
constituents) hazardous and non-hazardous waste treatment, processing and
disposal services through three uniquely licensed (Nuclear Regulatory Commission
or state equivalent) and permitted (Environmental Protection Agency or state
equivalent) treatment and storage facilities. The presence of nuclear and
low-level radioactive constituents within the waste streams processed by this
segment create different and unique operational, processing and
permitting/licensing requirements, from those contained within the Industrial
segment, as discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, specializes
in the storage, processing, and treatment of certain types of wastes containing
both low-level radioactive and hazardous wastes, which are known in the industry
as mixed waste ("mixed waste"). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. PFF has substantially
increased the amount and type of mixed waste and low level radioactive waste
that it can store and treat. Its mixed waste services have included the
treatment and processing of waste Liquid Scintillation Vials (LSVs) since the
mid 1980's. The LSVs are generated primarily by institutional research agencies
and biotechnical companies. The business has expanded into receiving and
handling other types of mixed waste, primarily from the nuclear utilities,
commercial generators, prominent pharmaceutical companies, the Department of
Energy ("DOE") and other government facilities as well as select mixed waste
field remediation projects. PFF also continues to receive and process certain
hazardous and non-hazardous waste streams as a compliment to its expanded
nuclear and mixed waste processing activities.
Diversified Scientific Services, Inc. ("DSSI") located in Kingston, Tennessee,
and specializes in the storage, processing, and destruction of certain types of
mixed waste. DSSI, like PFF, is one of only a few facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license.
Additionally, DSSI is the only commercial facility of its kind in the U.S. that
is currently operating and licensed to destroy liquid organic mixed waste,
through such a treatment unit. DSSI provides mixed waste disposal services for
nuclear utilities, commercial generators, prominent pharmaceutical companies,
and agencies and contractors of the U.S. government, including the DOE and the
Department of Defense ("DOD").
3
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is our third mixed waste facility. As with PFF and DSSI, M&EC also
operates under both a hazardous waste permit and radioactive materials license.
M&EC represents the largest of our three mixed waste facilities, covering
150,000 sq. ft., and is located in leased facilities on the DOE East Tennessee
Technology Park. In addition to providing mixed waste treatment services to
commercial generators, nuclear utilities and various agencies and contractors of
the U.S. Government, including the DOD, M&EC was awarded three contracts to
treat DOE mixed waste by Bechtel-Jacobs Company, LLC, and DOE's Environmental
Program Manager, which covers the treatment of mixed waste throughout all DOE
facilities.
For 2006, the Nuclear business accounted for $49,423,000 (or 56.2%) of total
revenue, as compared to $47,245,000 (or 52.0%) of total revenue for 2005. See "
- Dependence Upon a Single or Few Customers" and "Financial Statements and
Supplementary Data" for further details and a discussion as to our Nuclear
segment's contracts with the federal government or with others as a
subcontractor to the federal government.
CONSULTING ENGINEERING SERVICES, which provides environmental engineering and
regulatory compliance consulting services through one subsidiary, as discussed
below.
Schreiber, Yonley & Associates ("SYA") is located in Ellisville, Missouri. SYA
specializes in environmental management programs, permitting, compliance and
auditing, in addition to landfill design, field investigation, testing and
monitoring. SYA clients are primarily industrial, including many within the
cement manufacturing industry. SYA also provides the necessary support,
compliance and training as required by our operating facilities.
During 2006, environmental engineering and regulatory compliance consulting
services accounted for approximately $3,358,000 (or 3.8%) of our total revenue,
as compared to approximately $2,853,000 (or 3.1%) in 2005. See "Financial
Statements and Supplementary Data" for further details.
ACQUISITION - LETTER OF INTENT
We entered into a letter of intent in the third quarter of 2006 to acquire
Nuvotec USA, Inc. ("Nuvotec") and its wholly owned subsidiary, Pacific
EcoSolutions, Inc. ("PEcoS"). PEcoS is a hazardous waste, low level radioactive
waste and mixed waste (containing both hazardous waste and low level radioactive
waste) management company based in Richard, Washington, adjacent to the DOE's
Hanford facility. This acquisition, if completed, would provide us with a number
of strategic benefits. Foremost, this acquisition will secure PEcoS' radioactive
and hazardous waste permits and licenses, which further solidifies our position
within the mixed waste industry. Additionally, the PEcoS facility is located
adjacent to the Hanford site, which represents one of the largest environmental
clean-up projects in the nation and is expected to be one of the most expensive
of DOE's nuclear weapons to remediate. In addition, the acquisition would expand
our west coast presence and increase our treatment capacity for radioactive only
waste. Overall, this acquisition, if completed, would represent a significant
growth opportunity treating both low-level mixed waste as well as higher level
radioactive wastes. See "Acquisition - Letter of Intent" under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
the terms of this proposed transaction.
IMPORTANCE OF PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
We do not believe we are dependent on any particular trademark in order to
operate our business or any significant segment thereof. We have received
registration to the year 2010 and 2012 for the service marks "Perma-Fix" and
"Perma-Fix Environmental Services," respectively, by the U.S. Patent and
Trademark Office.
4
We are active in the research and development of technologies that allow us to
address certain of our customers' environmental needs. To date, our R&D efforts
have resulted in the granting of six active patents and the filing of an
additional two pending patent applications. Our flagship technology, the
Perma-Fix Process, is a proprietary, cost effective, treatment technology that
converts hazardous waste into non-hazardous material. Subsequently, we developed
the Perma-Fix II process, a multi-step treatment process that converts hazardous
organic components into non-hazardous material. The Perma-Fix II process is
particularly important to our mixed waste strategy. We believe that at least one
third of DOE mixed waste contains organic components.
The Perma-Fix II process is designed to remove certain types of organic
hazardous constituents from soils or other solids and sludges ("Solids") through
a water-based system. Until development of this Perma-Fix II process, we were
not aware of a relatively simple and inexpensive process that would remove the
organic hazardous constituents from Solids without elaborate and expensive
equipment or expensive treating agents. Due to the organic hazardous
constituents involved, the disposal options for such materials are limited,
resulting in high disposal cost when there is a disposal option available. By
reducing the organic hazardous waste constituents in the Solids to a level where
the Solids meet Land Disposal Requirements, the generator's disposal options for
such waste are substantially increased, allowing the generator to dispose of
such waste at substantially less cost. We began commercial use of the Perma-Fix
II process in 2000. However, changes to current environmental laws and
regulations could limit the use of the Perma-Fix II process or the disposal
options available to the generator. See "--Permits and Licenses" and "--Research
and Development."
PFD's facility utilizes a biological wastewater process and accepts commercial
wastewater for treatment through this process. The biological wastewater process
is a technology which we developed utilizing our variable depth biological
treatment process and several proprietary water treatment processes. The
biological wastewater process is designed to remove certain organic constituents
from highly organic, contaminated wastewaters. The biological wastewater process
enables us to treat heavily contaminated wastewater streams, such as waste oils,
phenols, and "lean" waters, at more competitive prices than traditional methods.
The biological wastewater process meets the EPA's new centralized treatment
standards that became effective in December of 2003.
PERMITS AND LICENSES
Waste management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from one to
ten years and, provided that we maintain a reasonable level of compliance, renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
Subject to PFTS obtaining a Title V air permit pursuant to the terms of a
Consent Order recently entered into between PFTS and the ODEQ and PFD
successfully resolving allegations that it is required to obtain certain air
permits in order to operate its facility (see "Risk Factors" and "Legal
Proceedings"), we believe that our facilities presently have all licenses and
permits necessary to enable them to continue operations as presently conducted.
Termination of any required permits or licenses by the regulatory authorities or
failure of our facilities to be able to renew any required permits or licenses
or a determination that PFD is operating without all of its required permits or
licenses, may have a material adverse effect on us.
5
PFTS is a permitted solid and hazardous waste treatment, storage, and disposal
facility. The Part B permit to treat and store certain types of hazardous waste
was issued by the Oklahoma Department of Environmental Quality ("ODEQ").
Additionally, PFTS maintains an Injection Well Facility Operations Permit issued
by the ODEQ Underground Injection Control Section for our waste disposal
injection well, and a pre-treatment permit in order to discharge industrial
wastewaters to the local Publicly Owned Treatment Works ("POTW"). PFTS is also
registered with the ODEQ and the Department of Transportation as a hazardous
waste transporter. During January 2007, PFTS entered into a consent order with
the ODEQ requiring PFTS to comply with certain air related regulatory matters in
connection with its operations, including filing for and obtaining a Title V air
permit as a synthetic minor. See "Legal Proceedings".
PFFL operates under a used oil processors license and a solid waste processing
permit issued by the Florida Department of Environmental Protection ("FDEP"), a
transporter license issued by the FDEP and a transfer facility license issued by
Broward County, Florida.
PFD operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit. PFD provides wastewater
pretreatment under a discharge permit with the local POTW and is a specification
and off-specification used oil processor under the guidelines of the Ohio EPA.
The EPA has advised PFD that it is required to operate under a Title V air
permit. During December 2004, a citizen's suit was filed against PFD in federal
court located in Dayton, Ohio, alleging, among other things, that PFD was and is
operating in violation of the federal and Ohio state clean air laws as a result
of operating without proper air permits. In May 2006, the U.S. Department of
Justice ("DOJ"), on behalf of the EPA, intervened in the case seeking injunctive
relief and civil penalties against PFD for alleged violations which parallel
certain claims asserted in the citizen's suit, including claims PFD's failure to
have obtained, and to have operated its facility without, a Title V air permit,
failure to install appropriate air pollution control equipment and conduct
appropriate recordkeeping, monitoring and reporting was in violation of the
Clean Air Act and applicable regulations. The federal complaint also alleges
that PFD failed to respond to a formal request for information from the EPA in a
timely manner and requesting civil penalties. Potential civil penalties may be
up to $32,500 per day per violation until full compliance. We have retained
environmental consultants who have advised us, based on the tests that they have
performed, that they do not believe that PFD is a major source of hazardous air
pollutants. We have been further advised by counsel that if PFD is not a major
source of hazardous air pollutants, PFD would not be required to obtain a Title
V air permit and would not have violated the provisions of the Clean Air Act. We
intend to vigorously defend ourselves in connection with this matter.
Nevertheless, if it is determined that PFD is and was required to operate under
a Title V air permit, this determination could result in substantial fines and
penalties being asserted against PFD and could have a material adverse effect on
PFD's operations and on us. See "Risk Factors" and "Legal Proceedings" for
further discussion as to legal proceedings relating to actions against PFD under
the Clean Air Act.
PFO operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit, and a used oil processors
permit issued by the State of Florida.
PFSG operates a hazardous waste treatment and storage facility under a RCRA Part
B permit, issued by the State of Georgia.
PFMD operates under an oil operations permit issued by the Maryland Department
of Environment and has permits/licenses to transport hazardous waste in over 13
states. PFMD also has a wastewater discharge permit through the city of
Baltimore POTW.
PFF operates its hazardous and low-level radioactive waste activities under a
RCRA Part B permit and a radioactive materials license issued by the State of
Florida.
DSSI operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
6
M&EC operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
The combination of a RCRA Part B hazardous waste permit and a radioactive
materials license, as held by PFF, DSSI and M&EC, are very difficult to obtain
for a single facility and make these facilities very unique.
Subject to PFTS obtaining a Title V air permit pursuant to a consent order we
recently entered into with the ODEQ and PFD resolving allegations that it has
not obtained, or has not demonstrated that it is not required to obtain, certain
air permits as discussed above in order to operate its facility (see "Risk
Factors" and "Legal Proceedings"), we believe that all of our other facilities
presently have all approvals, licenses and permits necessary to enable them to
continue operations as presently conducted. The failure of our facilities to
renew required approvals, licenses and permits; the termination of any such
approvals, licenses or permits; and/or a determination that PFTS or PFD is
operating without required approvals, licenses and permits may have a material
adverse effect on us, our operations and financial condition.
SEASONALITY
We experience a seasonal slowdown within our industrial segment operations and
revenues during the winter months extending from late November through early
March. The seasonality factor is a combination of poor weather conditions in the
central plains and Midwestern geographical markets we serve for on-site and
off-site waste management services, and the impact of reduced activities during
holiday periods resulting in a decrease in revenues and earnings during such
periods. Our engineering segment also experiences reduced activities and related
billable hours throughout the November and December holiday periods. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
historically experienced seasonably large shipments during the third quarter,
leading up to this government fiscal year-end, as a result of incentives and
other quota requirements. Correspondingly for a period of approximately three
months following September 30, the Nuclear segment is generally seasonably slow,
as the governmental budgets are still being finalized, planning for the new year
is occurring and we enter the holiday season. More recently, due to our efforts
to work with the various government customers to smooth these shipment more
evenly throughout the year, we have seen much less fluctuation in the quarters,
with receipts in the fourth quarter 2006 actually higher than the third quarter.
In addition, our revenue recognition policy further reduces this impact on our
revenue. "See "Revenue Recognition Estimates" in this "Management Discussion and
Analysis of Financial Condition and Results of Operations".
BACKLOG
The Nuclear segment of our Company maintains a backlog of stored waste, which
represents waste that has not been processed. The backlog is principally a
result of the timing and complexity of the waste being brought into the
facilities and the selling price per container. As of December 31, 2006, our
Nuclear segment had a backlog of approximately $12.5 million, as compared to
approximately $16.4 million, as of December 31, 2005. Additionally the time it
takes to process mixed waste from the time it arrives may increase due to the
types and complexities of the waste we are currently receiving. The first
quarter of our fiscal year is typically our slow period and the time in which we
process more of our backlog.
DEPENDENCE UPON A SINGLE OR FEW CUSTOMERS
The majority of our revenues for fiscal 2006 have been derived from hazardous,
non-hazardous and mixed waste management services provided to a variety of
industrial, commercial customers, retail services, and government agencies and
contractors. Our customers are principally engaged in research, biotechnical
development, transportation, chemicals, metal processing, electronic,
automotive, petrochemical, refining and other similar industries, in addition to
government agencies that include the DOE, DOD, and other federal, state and
local agencies. We are not dependent upon a single customer, or a few customers.
However, we have and continue to enter into, contracts with (directly or
indirectly as a subcontractor) the federal government. The contracts that we are
a party to with the federal government or with others as a subcontractor to the
federal government, generally provide that the government may terminate on 30
days notice or renegotiate the contracts, at the government's election. Our
inability to continue under existing contracts that we have with the federal
government (directly or indirectly as a subcontractor) could have a material
adverse effect on our operations and financial condition.
7
Our Nuclear segment has a significant relationship with Bechtel Jacobs Company,
LLC. ("Bechtel Jacobs"). Bechtel Jacobs is the government-appointed manager of
the environmental program for Oak Ridge, Tennessee to perform certain treatment
and disposal services relating to Oak Ridge. Our initial relationship with
Bechtel Jacobs began when we acquired M&EC in 2001. Prior to our acquisition of
M&EC, Bechtel Jacobs had awarded M&EC three subcontracts for treatment services
("Oak Ridge contracts"). These Oak Ridge contracts have been amended for pricing
modifications and have been extended through September 2007. Based on
preliminary discussion between management of our Nuclear segment and Bechtel
Jacobs, we expect these contracts will be extended beyond September 2007;
however, there is no assurance these extensions will occur. As with most such
blanket processing agreements, the Oak Ridge contracts contain no minimum or
maximum processing guarantees, and may be terminated at any time pursuant to
federal contracting terms and conditions. As the DOE site in Oak Ridge continues
to complete certain of its clean-up milestones and moves toward completing its
closure efforts, the revenue from these contracts may decline. Since being
awarded the Oak Ridge contracts, our relationship with Bechtel Jacobs has
expanded to include other services outside of these contracts. Additionally, the
Nuclear segment continues to pursue other similar or related services for
environmental programs at other DOE and government sites.
During the first quarter of 2003, M&EC filed a lawsuit against Bechtel Jacobs
seeking approximately $4.3 million in surcharges under the Oak Ridge Contracts.
Since the filing of the lawsuit, Bechtel Jacobs has continued to deliver waste
to M&EC under the Oak Ridge Contracts and M&EC has entered into an additional
contract with Bechtel Jacobs relating to DOE waste at Oak Ridge. On January 24,
2007, M&EC and Bechtel Jacobs entered into a settlement agreement to resolve
this dispute, whereby Bechtel Jacobs has paid M&EC $1.5 million in full
settlement of the litigation. Although we do not believe this lawsuit or
settlement of this lawsuit will have a material adverse effect on our
operations, Bechtel Jacobs could terminate the subcontracts with M&EC for
convenience at any time.
During 2006, LATA/Parallax assumed certain projects and contracts relating to
work for the federal government previously managed by Bechtel Jacobs under which
our Nuclear segment received various work releases to process mixed waste and
granted to our Nuclear segment certain contracts to manage mixed waste streams
at a DOE site.
Consolidated revenues from Bechtel Jacobs for 2006, total $6,705,000 or 7.6% of
total revenues, as compared to $14,940,000 or 16.5% for the year ended December
31, 2005, and $9,405,000 or 11.4% for the year ended December 31, 2004.
Consolidated revenues from LATA/Parallax for 2006 total $10,341,000 or 11.8% of
total revenues. Further, waste related services we performed either directly or
indirectly as a subcontractor to federal government agencies (including Bechtel
Jacobs and LATA/Parallax discussed above), represented $37,564,000 or 42.7% of
our consolidated revenues during 2006, as compared to $33,899,000, or 37.3% of
our consolidated revenues, during 2005, and $31,791,000 or 38.5% of our
consolidated revenues during 2004. However, this government revenue is managed
by numerous subcontractors to the government, who operate and make decisions
independent of each other. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" -- "Significant Customers" for
discussion on our relationship with Bechtel Jacobs, LATA/Parallax, and our
government contract or subcontracts involving the federal government.
COMPETITIVE CONDITIONS
Competition is intense within certain product lines within the Industrial
segment of our business. We compete with numerous companies, both large and
small, that are able to provide one or more of the environmental services
offered by us, certain of which may have greater financial, human and other
resources than we have. However, we believe that the range of waste management
and environmental consulting, treatment, processing and remediation services we
provide affords us a competitive advantage with respect to certain of our more
specialized competitors. We believe that the treatment processes we utilize
offer a cost savings alternative to more traditional remediation and disposal
methods offered by certain of our competitors. The intense competition for
performing the services provided by us within the Industrial segment, has
resulted in reduced gross margin levels for certain of those services.
8
The Nuclear segment has few competitors and does not currently experience such
intense competitive pressures. At present we believe there are only four other
facilities in the United States with the required radioactive materials license
and hazardous waste permit that provide mixed waste processing. However, the
generators have the option to treat their own waste onsite.
The permitting and licensing requirements, and the cost to obtain such permits,
are barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our subsidiaries. We believe
that there are no formidable barriers to entry into certain of the on-site
treatment businesses, and certain of the non-hazardous waste operations, which
do not require such permits. If the permit requirements for both hazardous waste
storage, treatment and disposal activities and/or the licensing requirements for
the handling of low level radioactive matters are eliminated or if such licenses
or permits were made less rigorous to obtain, such would allow companies to
enter into these markets and provide greater competition.
Within our Industrial segment we solicit business on a nationwide basis.
However, we believe that we are a significant provider in the delivery of
off-site waste treatment services in the Southeast, Midwest and Southwest
portions of the United States. We compete with facilities operated by national,
regional and independent environmental services firms located within a several
hundred-mile radius of our facilities. Our Nuclear segment solicits business on
a worldwide basis.
Environmental engineering and consulting services provided by us through SYA
involve competition with larger engineering and consulting firms. We believe
that we are able to compete with these firms based on our established reputation
in these market areas and our expertise in several specific elements of
environmental engineering and consulting such as environmental applications in
the cement industry.
CAPITAL SPENDING, CERTAIN ENVIRONMENTAL EXPENDITURES AND POTENTIAL ENVIRONMENTAL
LIABILITIES
During 2006, we spent approximately $6.4 million in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2006 capital spending total includes $94,000, which was financed. We have
budgeted approximately $4.1 million for 2007 capital expenditures, to improve
and expand our operations into new markets, reduce the cost of waste processing
and handling, expand the range of wastes that can be accepted for treatment and
processing and to maintain permit compliance requirements. Certain of these
budgeted projects are discretionary and may either be delayed until later in the
year or deferred altogether. We have traditionally incurred actual capital
spending totals for a given year less than the initial budget amount. The
initiation and timing of projects are also determined by financing alternatives
or funds available for such capital projects. We have also budgeted for 2007
approximately $1.4 million to comply with federal, state, and local regulations
in connection with remediation activities at our facilities. However, there is
no assurance that the funds will be available for such budgeted expenditures.
The above budgeted amounts for capital expenditures assume that PFD is not
required to have a Title V air permit in connection with its operations. If it
is determined that PFD is required to have a Title V air permit, we anticipate
that substantial additional capital expenditures will be required in order to
bring that facility into compliance with Title V air permit requirements. We do
not have reliable estimates of the cost of such additional capital expenditures.
The above capital expenditures also do not include approximately $251,000 which
will be required to satisfy the consent order entered into between ODEQ and PFTS
in January 2007, to comply with certain air related regulatory matters in
connection with its operations, including filing for a Title V air permit as a
synthetic minor; however, this capital expenditure was approved in February
2007. See "Liquidity and Capital Resources" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
9
In June 1994, we acquired PFD. The former owners of PFD had merged Environmental
Processing Services, Inc. ("EPS") with PFD. The party that sold PFD to us agreed
to indemnify us for costs associated with remediating the property leased by EPS
("Leased Property"). Such remediation involves soil and/or groundwater
restoration. The Leased Property used by EPS to operate its facility is separate
and apart from the property on which PFD's facility is located. The
contamination of the Leased Property occurred prior to PFD being acquired by us.
During 1995, in conjunction with the bankruptcy filing by the selling party, we
recognized an environmental liability of approximately $1.2 million for remedial
activities at the Leased Property. We have accrued approximately $730,000, at
December 31, 2006, for the estimated, remaining costs of remediating the Leased
Property used by EPS, which will extend over the next six years.
In conjunction with the acquisition of Perma-Fix of Memphis, Inc. ("PFM"), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $801,000, at December 31, 2006, for
the estimated, remaining costs of remediating the groundwater contamination.
In conjunction with the acquisition of PFSG during 1999, we recognized an
environmental accrual of $2.2 million for estimated long-term costs to remove
contaminated soil and to undergo ground water remediation activities at the
acquired facility in Valdosta, Georgia. Initial valuation has been completed,
along with the selection of the remedial process, and the planning and approval
process. The remedial activities began in 2003. We have accrued approximately
$666,000, at December 31, 2006, to complete remediation of the facility, which
we anticipate spending over the next six years.
In conjunction with an oil spill at PFTS, we accrued approximately $69,000 to
remediate the contaminated soil and ground water at this location. As of
December 31, 2006, we have accrued approximately $37,000, for the estimated
remaining cost to remediate the area. We expect to complete spending on this
remedial project over the next six years.
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit and the regulations promulgated under RCRA. Also, in order to close
and dispose of or sell the facility, we may have to complete certain additional
remediation activities related to the land, building, and equipment. The extent
and cost of the clean-up and remediation will be determined by state mandated
requirements, the extent to which is not known at this time. Also, impacting
this estimate is the level of contamination discovered, as we begin remediation,
and the related clean-up standards which must be met in order to dispose of or
sell the facility. We engaged our engineering firm, SYA, to perform an analysis
and related estimate of the cost to complete the RCRA portion of the
closure/clean-up costs and the potential long-term remediation costs. Based upon
this analysis, we originally estimated the cost of this environmental closure
and remediation liability to be approximately $2.5 million. During 2006 we
re-evaluated our estimated environmental accrual and the required activities to
close and remediate the facility, and during the quarter ended June 30, 2006, we
began implementing a modified methodology to remediate the facility. As a result
of the re-evaluation and the change in methodology, we reduced the accrual by
$1.2 million. We have spent $629,000 for closure costs since September 30, 2004,
of which approximately $74,000 has been spent during 2006, and $439,000 was
spent in 2005. We have $653,000 accrued for the closure, as of December 31,
2006, and we anticipate spending $538,000 in 2007 with the remainder over the
next five years.
10
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operated a
non-hazardous waste water facility on this leased property. Effective November
2005, we discontinued operations at PFP, and began the clean-up process to
remediate and restore the leased property. During February 2006, we completed
the remediation of the leased property and the equipment, and released the
property back to the owner.
No insurance or third party recovery was taken into account in determining our
cost estimates or reserves, nor do our cost estimates or reserves reflect any
discount for present value purposes.
The nature of our business exposes us to significant risk of liability for
damages. Such potential liability could involve, for example, claims for cleanup
costs, personal injury or damage to the environment in cases where we are held
responsible for the release of hazardous materials; claims of employees,
customers or third parties for personal injury or property damage occurring in
the course of our operations; and claims alleging negligence or professional
errors or omissions in the planning or performance of our services. In addition,
we could be deemed a responsible party for the costs of required cleanup of any
property, which may be contaminated by hazardous substances generated or
transported by us to a site we selected, including properties owned or leased by
us. We could also be subject to fines and civil penalties in connection with
violations of regulatory requirements.
RESEARCH AND DEVELOPMENT
Innovation and technical know-how by our operations is very important to the
success of our business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental needs. We
conduct research internally, and also through collaborations with other third
parties. The majority of our research activities are performed as we receive new
and unique waste to treat, as such we recognize these expenses as a part of our
processing costs. We feel that our investments in research have been rewarded by
the discovery of the Perma-Fix Process and the Perma-Fix II process. Our
competitors also devote resources to research and development and many such
competitors have greater resources at their disposal than we do. We have
estimated that during 2004, 2005, and 2006, we spent approximately $433,000,
$489,000, and $422,000 respectively, in Company-sponsored research and
development activities.
NUMBER OF EMPLOYEES
In our service-driven business, our employees are vital to our success. We
believe we have good relationships with our employees. As of December 31, 2006,
we employed approximately 459 full time persons, of which approximately 15 were
assigned to our corporate office, approximately 27 were assigned to our
Operations Headquarters, approximately 21 to our Consulting Engineering Services
segment, approximately 196 to the Industrial segment, and approximately 200 to
the Nuclear segment. We have no union employees at any of our segments.
GOVERNMENTAL REGULATION
Environmental companies and their customers are subject to extensive and
evolving environmental laws and regulations by a number of national, state and
local environmental, safety and health agencies, the principal of which being
the EPA. These laws and regulations largely contribute to the demand for our
services. Although our customers remain responsible by law for their
environmental problems, we must also comply with the requirements of those laws
applicable to our services. We cannot predict the extent to which our operations
may be affected by future enforcement policies as applied to existing laws or by
the enactment of new environmental laws and regulations. Moreover, any
predictions regarding possible liability are further complicated by the fact
that under current environmental laws we could be jointly and severally liable
for certain activities of third parties over whom we have little or no control.
Although we believe that we are currently in substantial compliance with
applicable laws and regulations, we could be subject to fines, penalties or
other liabilities or could be adversely affected by existing or subsequently
enacted laws or regulations. The principal environmental laws affecting our
customers and us are briefly discussed below.
11
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, AS AMENDED ("RCRA")
RCRA and its associated regulations establish a strict and comprehensive
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a state
agency, which has been authorized by the EPA to administer its program, and must
comply with certain operating, financial responsibility and closure
requirements. RCRA provides for the granting of interim status to facilities
that allows a facility to continue to operate by complying with certain minimum
standards pending issuance or denial of a final RCRA permit.
BOILER AND INDUSTRIAL FURNACE REGULATIONS UNDER RCRA ("BIF REGULATIONS")
BIF Regulations require boilers and industrial furnaces, such as cement kilns,
to obtain permits or to qualify for interim status under RCRA before they may
use hazardous waste as fuel. If a boiler or industrial furnace does not qualify
for interim status under RCRA, it may not burn hazardous waste as fuel or use
such as raw materials without first having obtained a final RCRA permit. In
addition, the BIF Regulations require 99.99% destruction of the hazardous
organic compounds used as fuels in a boiler or industrial furnace and impose
stringent restrictions on particulate, carbon monoxide, hydrocarbons, toxic
metals and hydrogen chloride emissions.
THE SAFE DRINKING WATER ACT, AS AMENDED (THE "SDW ACT")
SDW Act regulates, among other items, the underground injection of liquid wastes
in order to protect usable groundwater from contamination. The SDW Act
established the Underground Injection Control Program ("UIC Program") that
provides for the classification of injection wells into five classes. Class I
wells are those which inject industrial, municipal, nuclear and hazardous wastes
below all underground sources of drinking water in an area. Class I wells are
divided into non-hazardous and hazardous categories with more stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980
("CERCLA," ALSO REFERRED TO AS THE "SUPERFUND ACT")
CERCLA governs the cleanup of sites at which hazardous substances are located or
at which hazardous substances have been released or are threatened to be
released into the environment. CERCLA authorizes the EPA to compel responsible
parties to clean up sites and provides for punitive damages for noncompliance.
CERCLA imposes joint and several liabilities for the costs of clean up and
damages to natural resources.
HEALTH AND SAFETY REGULATIONS
The operation of our environmental activities is subject to the requirements of
the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
ATOMIC ENERGY ACT
The Atomic Energy Act of 1954 governs the safe handling and use of Source,
Special Nuclear and Byproduct materials in the U.S. and its territories. This
act authorized the Atomic Energy Commission (now the Nuclear Regulatory
Commission) to enter into "Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations." The State of Florida
(with the USNRC oversight), Office of Radiation Control, regulates the
radiological program of the PFF facility, and the State of Tennessee (with the
USNRC oversight), Tennessee Department of Radiological Health, regulates the
radiological program of the DSSI and M&EC facilities.
12
OTHER LAWS
Our activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act, the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment which
may affect us, including laws governing the generation, handling, transportation
and disposition of hazardous substances and laws governing the investigation and
cleanup of, and liability for, contaminated sites. Some of these state
provisions are broader and more stringent than existing federal law and
regulations. Our failure to conform our services to the requirements of any of
these other applicable federal or state laws could subject us to substantial
liabilities which could have a material adverse affect on us, our operations and
financial condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation activities are
regulated by the U.S. Department of Transportation, the Interstate Commerce
Commission and transportation regulatory bodies in the states in which we
operate. We cannot predict the extent to which we may be affected by any law or
rule that may be enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
INSURANCE
We believe we maintain insurance coverage adequate for our needs and similar to,
or greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities, which we may
incur will be covered by our insurance or that the dollar amount of such
liabilities, which are covered will not exceed our policy limits. Under our
insurance contracts, we usually accept self-insured retentions, which we believe
appropriate for our specific business risks. We are required by EPA regulations
to carry environmental impairment liability insurance providing coverage for
damages on a claims-made basis in amounts of at least $1 million per occurrence
and $2 million per year in the aggregate. To meet the requirements of customers,
we have exceeded these coverage amounts.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining, and at all
times while operating under our permits, we are required to provide financial
assurance that guarantees to the states that, in the event of closure, our
permitted facilities will be closed in accordance with the regulations. The
policy provides a maximum $35 million of financial assurance coverage, and thus
far has provided $29.2 million in financial assurance.
ITEM 1A. RISK FACTORS
The following are certain risk factors that could affect our business, financial
performance, and results of operations. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this
Form 10-K, as the forward-looking statements are based on current expectations,
and actual results and conditions could differ materially from the current
expectations. Investing in our securities involves a high degree of risk, and
before making an investment decision, you should carefully consider these risk
factors as well as other information we include or incorporate by reference in
the other reports we file with the Securities and Exchange Commission ("SEC").
RISK FACTORS REGARDING OUR BUSINESS:
OUR INDUSTRIAL SEGMENT HAS SUSTAINED LOSSES FOR THE PAST SEVEN YEARS, INCLUDING
2006.
Our Industrial segment has sustained losses in each year since 2000. The
Industrial segment represented approximately 40.0% of our consolidated net
revenues in 2006, as compared to 44.9% in 2005, and 20.1% of our total assets as
of December 31, 2006. During 2005, we restructured the management of this
segment by replacing most of its operating officers and in 2005 we appointed a
chief operating officer to oversee this segment, as well as, the Nuclear
segment, in an effort to return this segment to profitability. If our Industrial
segment fails to become profitable on an annualized basis in the foreseeable
future, this could have a material adverse effect on our results of operations,
liquidity and our potential growth. The Industrial segment's failure to become
profitable could also result in further facility closures or the sale of certain
facilities with this segment, as well as possible future impairments of permits
or fixed assets.
13
THE INABILITY TO MAINTAIN EXISTING GOVERNMENT CONTRACTS OR WIN NEW GOVERNMENT
CONTRACTS OVER AN EXTENDED PERIOD COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATIONS AND ADVERSELY AFFECT OUR FUTURE REVENUES.
A material amount of our Nuclear segment's revenues are generated through
various U.S. government contracts or subcontracts involving the U.S. government.
Our revenues from government sources were approximately $37,564,000 and
$33,899,000, representing 42.7% and 37.3%, respectively, of our consolidated
revenues for 2006 and 2005. Most of our government contracts or our subcontracts
granted under government contracts are awarded through a regulated competitive
bidding process. Some government contracts are awarded to multiple competitors,
which increase overall competition and pricing pressure and may require us to
make sustained post-award efforts to realize revenues under these government
contracts. In addition, government clients can generally terminate or modify
their contracts at their convenience. If we fail to maintain or replace these
relationships, our revenues and future operations could be adversely affected.
IF WE CANNOT MAINTAIN OUR GOVERNMENTAL PERMITS OR CANNOT OBTAIN REQUIRED
PERMITS, WE MAY NOT BE ABLE TO CONTINUE OR EXPAND OUR OPERATIONS.
We are a waste management company. Our business is subject to extensive,
evolving, and increasingly stringent federal, state, and local environmental
laws and regulations. Such federal, state, and local environmental laws and
regulations govern our activities regarding the treatment, storage, recycling,
disposal, and transportation of hazardous and non-hazardous waste and low-level
radioactive waste. We must obtain and maintain permits or licenses to conduct
these activities in compliance with such laws and regulations. Failure to obtain
and maintain the required permits or licenses would have a material adverse
effect on our operations and financial condition. If any of our facilities are
unable to maintain currently held permits or licenses or obtain any additional
permits or licenses which may be required to conduct its operations, we may not
be able to continue those operations at these facilities, which could have a
material adverse effect on us.
It has been alleged by the federal government and in a pending citizen's suit
that PFD's facility does not have, and has been operating without having, all of
its required air permits. If it is determined that PFD was and is operating its
facility without having all required air permits, we could be subjected to
substantial penalties and the failure to have all required permits could have a
material adverse effect on us and that facility's operations. See "Business -
Permits and Licenses" and "Legal Proceedings - Item 3".
LOSS OF CERTAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our success depends on the contributions of our key management, environmental
and engineering personnel, especially Dr. Louis F. Centofanti, Chairman,
President, and Chief Executive Officer. The loss of Dr. Centofanti could have a
material adverse effect on our operations, revenues, prospects, and our ability
to raise additional funds. Our future success depends on our ability to retain
and expand our staff of qualified personnel, including environmental specialists
and technicians, sales personnel, and engineers. Without qualified personnel, we
may incur delays in rendering our services or be unable to render certain
services. We cannot be certain that we will be successful in our efforts to
attract and retain qualified personnel as their availability is limited due to
the demand for hazardous waste management services and the highly competitive
nature of the hazardous waste management industry. We do not maintain key person
insurance on any of our employees, officers, or directors.
14
WE BELIEVE OUR PROPRIETARY TECHNOLOGY IS IMPORTANT TO US.
We believe that it is important that we maintain our proprietary technologies.
There can be no assurance that the steps taken by us to protect our proprietary
technologies will be adequate to prevent misappropriation of these technologies
by third parties. Misappropriation of our proprietary technology could have an
adverse effect on our operations and financial condition. Changes to current
environmental laws and regulations also could limit the use of our proprietary
technology.
CHANGES IN ENVIRONMENTAL REGULATIONS AND ENFORCEMENT POLICIES COULD SUBJECT US
TO ADDITIONAL LIABILITY AND ADVERSELY AFFECT OUR ABILITY TO CONTINUE CERTAIN
OPERATIONS.
We cannot predict the extent to which our operations may be affected by future
governmental enforcement policies as applied to existing laws, by changes to
current environmental laws and regulations, or by the enactment of new
environmental laws and regulations. Any predictions regarding possible liability
under such laws are complicated further by current environmental laws which
provide that we could be liable, jointly and severally, for certain activities
of third parties over whom we have limited or no control.
A CLOSURE OF THE END DISPOSAL SITE THAT OUR NUCLEAR SEGMENT UTILIZES TO DISPOSE
OF OUR WASTE COULD SUBJECT US TO SIGNIFICANT RISK AND LIMIT OUR OPERATIONS.
Our Nuclear segment has limited options available for disposal of its waste. If
this disposal site ceases to accept waste or closes for any reason or refuses to
accept the waste of our nuclear segment, we could have nowhere to dispose of our
Nuclear waste or have significantly increased costs from disposal alternatives.
With nowhere to dispose of our nuclear waste, we would be subject to significant
risk from the implications of storing the waste on our site, and we would have
to limit our operations to accept only waste that we can dispose of.
OUR INDUSTRIAL SEGMENT AND NUCLEAR SEGMENT SUBJECT US TO SUBSTANTIAL POTENTIAL
ENVIRONMENTAL LIABILITY.
Our business of rendering services in connection with management of waste,
including certain types of hazardous waste, low-level radioactive waste, and
mixed waste (waste containing both hazardous and low-level radioactive waste),
subjects us to risks of liability for damages. Such liability could involve,
without limitation:
o claims for clean-up costs, personal injury or damage to the environment in
cases in which we are held responsible for the release of hazardous or
radioactive materials;
o claims of employees, customers, or third parties for personal injury or
property damage occurring in the course of our operations; and
o claims alleging negligence or professional errors or omissions in the
planning or performance of our services.
Our operations are subject to numerous environmental laws and regulations. We
have in the past, and could in the future, be subject to substantial fines,
penalties, and sanctions for violations of environmental laws and substantial
expenditures as a responsible party for the cost of remediating any property
which may be contaminated by hazardous substances generated by us and disposed
at such property, or transported by us to a site selected by us, including
properties we own or lease.
AS OUR OPERATIONS EXPAND, WE MAY BE SUBJECT TO INCREASED LITIGATION, WHICH COULD
HAVE A NEGATIVE IMPACT ON OUR FUTURE FINANCIAL RESULTS.
Our operations are highly regulated and we are subject to numerous laws and
regulations regarding procedures for waste treatment, storage, recycling,
transportation, and disposal activities, all of which may provide the basis for
litigation against us. In recent years, the waste treatment industry has
experienced a significant increase in so-called "toxic-tort" litigation as those
injured by contamination seek to recover for personal injuries or property
damage. We believe that, as our operations and activities expand, there will be
a similar increase in the potential for litigation alleging that we have
violated environmental laws or regulations or are responsible for contamination
or pollution caused by our normal operations, negligence or other misconduct, or
for accidents, which occur in the course of our business activities. Such
litigation, if significant and not adequately insured against, could adversely
affect our financial condition and our ability to fund our operations.
Protracted litigation would likely cause us to spend significant amounts of our
time, effort, and money. This could prevent our management from focusing on our
operations and expansion.
15
IF WE CANNOT MAINTAIN ADEQUATE INSURANCE COVERAGE, WE WILL BE UNABLE TO CONTINUE
CERTAIN OPERATIONS.
Our business exposes us to various risks, including claims for causing damage to
property and injuries to persons that may involve allegations of negligence or
professional errors or omissions in the performance of our services. Such claims
could be substantial. We believe that our insurance coverage is presently
adequate and similar to, or greater than, the coverage maintained by other
companies in the industry of our size. If we are unable to obtain adequate or
required insurance coverage in the future, or if our insurance is not available
at affordable rates, we would violate our permit conditions and other
requirements of the environmental laws, rules, and regulations under which we
operate. Such violations would render us unable to continue certain of our
operations. These events would have a material adverse effect on our financial
condition.
OUR OPERATIONS ARE SUBJECT TO SEASONAL FACTORS, WHICH CAUSE OUR REVENUES TO
FLUCTUATE.
We have historically experienced reduced revenues and losses during the first
and fourth quarters of our fiscal years due to a seasonal slowdown in operations
from poor weather conditions and overall reduced activities during these
periods. During our second and third fiscal quarters there has historically been
an increase in revenues and operating profits. If we do not continue to have
increased revenues and profitability during the second and third fiscal
quarters, this will have a material adverse effect on our results of operations
and liquidity.
OUR INDUSTRIAL SEGMENT OPERATES IN A HIGHLY COMPETITIVE MARKET AND FACES
SIGNIFICANT COMPETITION FROM VARIOUS COMPANIES THAT MAY HAVE GREATER FINANCIAL,
HUMAN AND OTHER RESOURCES THAN WE DO, INHIBITING US FROM COMPETING EFFECTIVELY.
Certain waste services within our Industrial segment are extremely competitive,
and many of our competitors have substantially greater resources than we do. We
could experience further reduced revenues and gross margin levels, as a result
of price reductions in order to retain customers and remain competitive.
IF ENVIRONMENTAL REGULATION OR ENFORCEMENT IS RELAXED, THE DEMAND FOR OUR
SERVICES WILL DECREASE.
The demand for our services is substantially dependent upon the public's concern
with, and the continuation and proliferation of, the laws and regulations
governing the treatment, storage, recycling, and disposal of hazardous,
non-hazardous, and low-level radioactive waste. A decrease in the level of
public concern, the repeal or modification of these laws, or any significant
relaxation of regulations relating to the treatment, storage, recycling, and
disposal of hazardous waste and low-level radioactive waste would significantly
reduce the demand for our services and could have a material adverse effect on
our operations and financial condition. We are not aware of any current federal
or state government or agency efforts in which a moratorium or limitation has
been, or will be, placed upon the creation of new hazardous or radioactive waste
regulations that would have a material adverse effect on us; however, no
assurance can be made that such a moratorium or limitation will not be
implemented in the future.
OUR AMOUNT OF DEBT AND FLOATING RATES OF INTEREST COULD ADVERSELY AFFECT OUR
OPERATIONS.
At December 31, 2006, our aggregate consolidated debt was approximately $8.3
million. If our floating rates of interest experienced an upward increase of 1%,
our debt service would increase by approximately $83,290 annually. Our secured
revolving credit facility (the "Credit Facility") provides for an aggregate
commitment of $25 million, consisting of an $18 million revolving line of credit
and a term loan of $7 million. The maximum we can borrow under the revolving
part of the Credit Facility is based on a percentage of the amount of our
eligible receivables outstanding at any one time. The Credit Facility is due
May, 2008. As of December 31, 2006, we had no borrowing under the revolving part
of our Credit Facility and borrowing availability of up to an additional $14.5
million based on our outstanding eligible receivables. Although we have reduced
our overall indebtedness significantly, a lack of operating results could have
material adverse consequences on our ability to operate our business. Our
ability to make principal and interest payments, or to refinance indebtedness,
will depend on both our and our subsidiaries' future operating performance and
cash flow. Prevailing economic conditions, interest rate levels, and financial,
competitive, business, and other factors affect us. Many of these factors are
beyond our control.
16
WE MAY BE UNABLE TO UTILIZE LOSS CARRYFORWARDS IN THE FUTURE.
We have approximately $15.6 million in net operating loss carryforwards which
will expire from 2007 to 2024 if not used against future federal income tax
liabilities. Our net loss carryforwards are subject to various limitations. We
anticipate the net loss carryforwards will be used to reduce the federal income
tax payments which we would otherwise be required to make with respect to
income, if any, generated in future years.
RISK FACTORS REGARDING OUR COMMON STOCK:
THE SIGNIFICANT AMOUNT OF OUTSTANDING WARRANTS AND OPTIONS COULD AFFECT OUR
STOCK PERFORMANCE.
As of December 31, 2006, we had outstanding warrants to purchase 3,057,369
shares of Common Stock at exercise prices from $1.50 to $2.92 per share, and
outstanding options to purchase 3,116,750 shares of our Common Stock at exercise
prices of $1.25 to $3.00 per share. The existence of this quantity of rights to
purchase our Common Stock could result in a significant dilution in the
percentage ownership interest of our stockholders and the dilution in ownership
value. Future sales of the shares issuable could also depress the market price
of our Common Stock.
THE PRICE OF OUR COMMON STOCK IS VOLATILE.
The trading price of our Common Stock has historically been volatile, and
subject to large swings over short periods of time. As a result of the
volatility of our Common Stock, an investment in our stock holds significant
risk.
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK MAY ALSO RESULT IN A
CHANGE IN CONTROL.
The exercise of our currently outstanding warrants could result in a substantial
number of shares being held by one or more groups acting in concert. In that
event, such group or groups may have the ability to cause a change in control
under our Credit Agreement. Our Credit Facility provides that a change of
control will occur if (a) Dr. Louis F. Centofanti, our Chairman, President, and
Chief Executive Officer, ceases to serve as a senior executive officer in
substantially the same capacity as served on the date of the Credit Facility or
(b) the persons who were members of our Board on the closing of the Credit
Facility cease to constitute 50% of our Board. Each of these events could be an
event of default under the terms of the Credit facility. If anyone or a group
were to successfully attempt to cause any of these changes in our management or
Board, we could be in default under our loan agreement.
DELAWARE LAW, CERTAIN OF OUR CHARTER PROVISIONS, OUR STOCK OPTION PLANS AND
OUTSTANDING WARRANTS AND OUR PREFERRED STOCK MAY INHIBIT A CHANGE OF CONTROL
UNDER CIRCUMSTANCES THAT COULD GIVE YOU AN OPPORTUNITY TO REALIZE A PREMIUM OVER
PREVAILING MARKET PRICES.
We are a Delaware corporation governed, in part, by the provisions of Section
203 of the General Corporation Law of Delaware, an anti-takeover law. In
general, Section 203 prohibits a Delaware public corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business contribution is approved in a prescribed
manner. As a result of Section 203, potential acquirers may be discouraged from
attempting to effect acquisition transactions with us, thereby possibly
depriving our security holders of certain opportunities to sell, or otherwise
dispose of, such securities at above-market prices pursuant to such
transactions. Further, certain of our option plans provide for the immediate
acceleration of, and removal of restrictions from, options and other awards
under such plans upon a "change of control" (as defined in the respective
plans). Such provisions may also have the result of discouraging acquisition of
us.
17
We have authorized and unissued 22,946,256 shares of Common Stock and 2,000,000
shares of Preferred Stock as of December 31, 2006. These unissued shares could
be used by our management to make it more difficult, and thereby discourage, an
attempt to acquire control of us.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Since our inception, we have not paid cash dividends on our Common Stock, and we
do not anticipate paying any cash dividends in the foreseeable future. Our
credit facility prohibits us from paying cash dividends on our Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our principal executive office is in Atlanta, Georgia. Our Operations
headquarters is located in Oak Ridge, Tennessee, our Industrial segment
facilities are located in Orlando and Ft. Lauderdale, Florida; Dayton, Ohio;
Tulsa, Oklahoma; Valdosta, Georgia; and Baltimore, Maryland. Our Nuclear segment
facilities are located in Gainesville, Florida; Kingston, Tennessee; and Oak
Ridge, Tennessee. Our Consulting Engineering Services is located in Ellisville,
Missouri. We also maintain Field Service offices in Jacksonville, Florida;
Stafford, Virginia; and Salisbury, Maryland.
We own ten facilities, all of which are in the United States. Five of our
facilities are subject to mortgages as placed by our senior lender. In addition,
we lease properties for office space, all of which are located in the United
States as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing facilities.
ITEM 3. LEGAL PROCEEDINGS
In December 2005, TIFORP Group Holdings, LLC ("TIFORP") and others sued us, our
subsidiary, PFMI, and others in the Michigan Circuit Court for the County of
Wayne, Case No. 05-534619. Plaintiffs alleged that we and PFMI breached a
confidentiality agreement with TIFORP, and are liable in damages under legal
theories of fraud, conversion of proprietary information and breach of
confidentiality agreement. TIFORP and the other Plaintiffs asserted that there
are damages due to lost revenues in excess of $4.5 million. PESI and PFMI denied
any liability and defended the case vigorously. During the later part of 2006,
PESI and PFMI were dismissed with prejudice from this litigation.
During the later part of 2005, PFTS, one of our subsidiaries, received a
proposed consent order from the ODEQ regarding PFTS's Tulsa facility. The
proposed consent order, among other things:
o provided that PFTS has a limited period to complete all work necessary to
ensure that PFTS is eligible for exemption under various provisions of the
Oklahoma Hazardous Waste Management, the Oklahoma Clean Air Act and the
ODEQ rules promulgated thereunder relating to air issues (subparts BB, CC
and DD);
o alleged that PFTS has one or more operations that failed to properly mark
or label containers; failed to comply with the maximum containment area
volumes in its operating permit; failed to operate in a manner to prevent
degradation of the environment; failed to maintain the integrity of the cap
over a closed surface impoundment; stored hazardous waste in an area not
allowed by its permit; failed to maintain certain records; failed to comply
with certain requirements under subparts BB, CC and DD; and failed to make
a determination for exemption from the air issue requirements of subpart CC
and DD; and
18
o proposed a total penalty of $336,000, payable one-half in cash and the
balance based on a supplemental environmental project approved by the ODEQ.
During January 2007, PFTS and the ODEQ negotiated a settlement and have entered
into a revised Consent Order. Pursuant to the revised Consent Order, PFTS has
agreed to make certain improvements at the facility, meet certain air
requirements in connection with managing waste at the facility and file a Title
V air permit as a synthetic minor in connection the facility's operations. In
addition, under the executed Consent Order, the ODEQ and PFTS have agreed that
the penalty assessed against PFTS would be $100,000, with 25% to be paid to the
ODEQ and 75% to be in the form of supplemental environmental project at a local
fire department. The 25% penalty assessed was paid to the ODEQ on March 9, 2007,
with the remaining 75% to be paid by end of March 2007.
On February 24, 2003, M&EC commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. The
revenues generated by M&EC with Bechtel Jacobs represented approximately 7.6%,
16.5%, and 11.4% of our 2006, 2005, and 2004 total revenues, respectively. Since
the filing of this lawsuit, Bechtel Jacobs has continued to deliver waste to
M&EC for treatment and disposal, and M&EC continues to accept such waste, under
the subcontracts, and M&EC and Bechtel Jacobs have entered into an additional
contract for M&EC to treat DOE waste. On January 24, 2007, M&EC and Bechtel
Jacobs entered into a settlement agreement to resolve this dispute for $1.5
million. Although we do not believe settlement of this lawsuit will have a
material adverse effect on our operations, Bechtel Jacobs could terminate the
subcontracts with M&EC for convenience at any time.
In December 2004, PFD was sued under the citizen's suit provisions of the Clean
Air Act in the United States District Court for the Southern District of Ohio,
Western District, styled Barbara Fisher v. Perma-Fix of Dayton, Inc. The suit
alleges violation by PFD of a number of state and federal clean air statutes in
connection with the operation of PFD's facility, primarily due to PFD's
operating its facility without a Title V air permit. The complaint further
alleges that PFD failed to install appropriate air pollution control equipment,
conduct appropriate recordkeeping, properly monitor and report, and further
alleges that air emissions from PFD's facility injured persons, endangered the
health of the public and constituted a nuisance in violation of Ohio law. The
action seeks remediation, injunctive relief, imposition of civil penalties,
attorney fees, and costs and other forms of relief. On or about May 19, 2006,
the U.S. Department of Justice ("DOJ"), on behalf of the EPA, intervened in the
case seeking injunctive relief and civil penalties against PFD for alleged
violations which parallel certain claims asserted in the citizen's suit,
including claims PFD's failure to have obtained, and to have operated its
facility without, a Title V air permit, failure to install appropriate air
pollution control equipment and conduct appropriate recordkeeping, monitoring
and reporting was in violation of the Clean Air Act and applicable regulations.
The federal complaint also alleges that PFD failed to respond to a formal
request for information from the EPA in a timely manner and requesting civil
penalties. Potential civil penalties may be up to $32,500 per day per violation
until full compliance. We have retained environmental consultants who have
advised us, based on the tests that they have performed, that they do not
believe that PFD is a major source of hazardous air pollutants. We have been
further advised by counsel that if PFD is not a major source of hazardous air
pollutants, PFD would not be required to obtain a Title V air permit and would
not have violated the provisions of the Clean Air Act. We intend to vigorously
defend ourselves in connection with this matter. Nevertheless, a determination
that PFD was a major source of hazardous air pollutants and required to have
obtained a Title V air permit in order to operate its facility could have a
material adverse effect on us and our liquidity.
19
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigations. We are not a party to
any litigation or governmental proceeding which our management believes could
result in any judgments or fines against us that would have a material adverse
affect on our financial position, liquidity or results of future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of the date hereof, information concerning
our executive officers:
NAME AGE POSITION
----------------------- --- -------------------------------------------------
Dr. Louis F. Centofanti 63 Chairman of the Board, President and
Chief Executive Officer
Mr. Steven T. Baughman 48 Chief Financial Officer, Vice President, and
Secretary
Mr. Larry McNamara 57 Chief Operating Officer
Mr. Robert Schreiber, Jr. 56 President of SYA, Schreiber, Yonley & Associates,
a subsidiary of the Company, and
Principal Engineer
DR. LOUIS F. CENTOFANTI
Dr. Centofanti has served as Chairman of the Board since he joined the Company
in February 1991. Dr. Centofanti also served as President and Chief Executive
Officer of the Company from February 1991 until September 1995 and again in
March 1996 was elected to serve as President and Chief Executive Officer of the
Company. From 1985 until joining the Company, Dr. Centofanti served as Senior
Vice President of USPCI, Inc., a large hazardous waste management company, where
he was responsible for managing the treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
MR. STEVEN T. BAUGHMAN
Mr. Baughman was appointed as Vice President and Chief Financial Officer of the
Company by the Company's Board of Directors in May 2006. Mr. Baughman was
previously employed by Waste Management, Inc. from 1994 to 2005, serving in
various capacities, including: Vice President Finance, Control and Analysis from
2001 to 2005, and Vice President, International Controller from 1999 to 2001.
Mr. Baughman has BS degrees in Accounting and Finance from Miami University
(Ohio), and is a Certified Public Accountant.
MR. LARRY MCNAMARA
Mr. McNamara has served as Chief Operating Officer since October 2005. From
October 2000 to October 2005, he served as President of the Nuclear Waste
Management Services segment. From December 1998 to October 2000, he served as
Vice President of the Company's Nuclear Waste Management Services Segment.
Between 1997 and 1998, he served as Mixed Waste Program Manager for Waste
Control Specialists (WCS) developing plans for the WCS mixed waste processing
facilities, identifying markets and directing proposal activities. Between 1995
and 1996, Mr. McNamara was the single point of contact for the DOD to all state
and federal regulators for issues related to disposal of Low Level Radioactive
Waste and served on various National Committees and advisory groups. Mr.
McNamara served, from 1992 to 1995, as Chief of the Department of Defense Low
Level Radioactive Waste office. Between 1986 and 1992, he served as the Chief of
Planning for the Department of Army overseeing project management and program
policy for the Army program. Mr. McNamara has a B.S. from the University of
Iowa.
20
MR. ROBERT SCHREIBER, JR.
Mr. Schreiber has served as President of SYA since the Company acquired the
environmental engineering firm in 1992. Mr. Schreiber co-founded the predecessor
of SYA, Lafser & Schreiber in 1985, and served in several executive roles in the
firm until our acquisition of SYA. From 1978 to 1985, Mr. Schreiber served as
Director of Air programs and all environmental programs for the Missouri
Department of Natural Resources. Mr. Schreiber provides technical expertise in
wide range of areas including the cement industry, environmental regulations and
air pollution control. Mr. Schreiber has a B.S. in Chemical Engineering from the
University of Missouri - Columbia.
RESIGNATION OF CHIEF FINANCIAL OFFICER
On March 23, 2006, Mr. Richard T. Kelecy tendered his resignation as Chief
Financial Officer, Vice President, and Secretary of the Board of Directors of
the Company. Mr. Kelecy's resignation from his positions and as an executive
officer became effective as of April 5, 2006. Mr. Kelecy continued as a part
time employee, to assist the Company in its transition, until September 2006.
RESIGNATION OF INTERIM CHIEF FINANCIAL OFFICER
Mr. David Hansen, was appointed by the Company's Board of Directors to serve as
Interim Chief Financial Officer from May 4 to May 15 upon resignation of Mr.
Richard T. Kelecy. Mr. Hansen had been with the Company since October 1995, and
served in various capacities within the company, including Vice President
Corporate Controller/Treasurer. Mr. Hansen resigned from the Company effective
June 2, 2006 and remained as a part time employee through August 2006.
CERTAIN RELATIONSHIPS
There are no family relationships between any of our Directors or executive
officers. Dr. Centofanti is the only Director who is our employee.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock, is traded on the NASDAQ Capital Markets ("NASDAQ") and the
Boston Stock Exchange ("BSE") under the symbol "PESI" on both NASDAQ and BSE.
The following table sets forth the high and low market trade prices quoted for
the Common Stock during the periods shown. The source of such quotations and
information is the NASDAQ online trading history reports.
2006 2005
----------------- -----------------
Low High Low High
------- ------- ------- -------
Common Stock 1st Quarter $ 1.31 $ 2.15 $ 1.54 $ 1.98
2nd Quarter 1.70 2.20 1.58 2.00
3rd Quarter 2.01 2.60 1.74 3.00
4th Quarter 1.90 2.40 1.50 2.49
As of March 9, 2007, there were approximately 238 stockholders of record of our
Common Stock, including brokerage firms and/or clearing houses holding shares of
our Common Stock for their clientele (with each brokerage house and/or clearing
house being considered as one holder). However, the total number of beneficial
stockholders as of March 9, 2007, was approximately 3,793.
Since our inception, we have not paid any cash dividends on our Common Stock and
have no dividend policy. Our loan agreement prohibits paying any cash dividends
on our Common Stock without prior approval from the lender. We do not anticipate
paying cash dividends on our outstanding Common Stock in the foreseeable future.
No sales of unregistered securities, other than the securities sold by us during
2006, as reported in our Forms 10-Q for the quarters ended March 31, 2006, June
30, 2006 and September 30, 2006, which were not registered under the Securities
Act of 1933, as amended, were issued during 2006. There were no purchases made
by us or behalf of us or any of our affiliated members of shares of our Common
Stock during the last quarter of 2006.
22
COMMON STOCK PRICE PERFORMANCE GRAPH
The following Common Stock price performance graph compares the yearly change in
the Company's cumulative total stockholders' returns on the Common Stock during
the years 2002 through 2006, with the cumulative total return of the NASDAQ
Market Index and the published industry index prepared by Hemscott and known as
Hemscott Industry Group 637-Waste Management Index ("Industry Index") assuming
the investment of $100 on January 1, 2002.
The stockholder returns shown on the graph below are not necessarily indicative
of future performance, and we will not make or endorse any predications as to
future stockholder returns.
2001 2002 2003 2004 2005 2006
------ ------ ------ ------ ------ ------
PERMA-FIX ENVIRONMENTAL SERVICES, INC 100.00 96.15 119.62 69.58 64.23 89.23
HEMSCOTT GROUP INDEX 100.00 79.76 103.29 105.28 111.29 137.50
NASDAQ MARKET INDEX 100.00 69.75 104.88 113.70 116.19 128.12
Assumes $100 invested in the Company on January 1, 2002, the Industry Index and
the NASDAQ Market Index, and the reinvestment of dividends. The above five-year
Cumulative Total Return Graph shall not be deemed to be "soliciting material" or
to be filed with the Securities and Exchange Commission, nor shall such
information be incorporated by reference by any general statement incorporating
by reference this Form 10-K into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934 (collectively, the "Acts"), except to the
extent that the Company specifically incorporates this information by reference,
and shall not be deemed to be soliciting material or to be filed under such
Acts.
23
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table has been derived from our audited
consolidated financial statements, which have been audited by BDO Seidman, LLP.
Certain prior year amounts have been reclassified to conform with current year
presentations. Additionally, revenues and income (loss) from discontinued
operations have been reclassified from continuing operations. Amounts are in
thousands, except for per share amounts.
STATEMENT OF OPERATIONS DATA:
2006(1) 2005 2004(2) 2003 2002
--------- --------- --------- --------- ---------
Revenues $ 87,929 $ 90,866 $ 82,483 $ 79,153 $ 77,778
Income (loss) from continuing operations 4,362 3,069 (9,577) 3,644 2,677
Income (loss) from discontinued operations 349 670 (9,784) (526) (475)
Net income (loss) 4,711 3,739 (19,361) 3,118 2,202
Preferred Stock dividends -- (156) (190) (189) (158)
Net income (loss) applicable to
Common Stock 4,711 3,583 (19,551) 2,929 2,044
Income (loss) per common share - Basic
Continuing operations .09 .07 (.24) .10 .07
Discontinued operations .01 .01 (.24) (.02) (.01)
Net income (loss) per share .10 .08 (.48) .08 .06
Income (loss) per common share - Diluted
Continuing operations .09 .07 (.24) .09 .06
Discontinued operations .01 .01 (.24) (.01) (.01)
Net income (loss) per share .10 .08 (.48) .08 .05
Basic number of shares used in computing
net income (loss) per share 48,157 42,605 40,478 34,982 34,217
Diluted number of shares and potential
common shares used in computing
net income (loss) per share 48,768 44,804 40,478 39,436 42,618
BALANCE SHEET DATA:
December 31,
---------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
Working capital (deficit) $ 12,810 $ 5,916 $ (497) $ 4,159 $ 731
Total assets 105,997 98,525 100,455 110,215 105,825
Current and long-term debt 8,329 13,375 18,956 29,088 30,515
Total liabilities 40,259 50,087 56,922 58,488 59,955
Preferred Stock of subsidiary 1,285 1,285 1,285 1,285 1,285
Stockholders' equity 64,453 47,153 42,248 50,442 44,585
(1) Includes recognized stock option expense of $338,000 pursuant to the
adoption of SFAS 123R which became effective January 1, 2006.
(2) Includes financial data of PFMD and PFP as acquired during 2004 and
accounted for using the purchase method of accounting in which the results
of operations are reported from the date of acquisition, March 23, 2004.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained within this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). See
"Special Note regarding Forward-Looking Statements" contained in this report.
Management's discussion and analysis is based, among other things, upon our
audited consolidated financial statements and includes our accounts and the
accounts of our wholly-owned subsidiaries, after elimination of all significant
intercompany balances and transactions.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 of
this report.
OVERVIEW
We reported revenue of $87,929,000 and net income applicable to Common Stock of
$4,711,000 for the year ended December 31, 2006. The results were achieved
during a transitional year for us administratively, beginning with the
resignation of our Chief Financial Officer and followed by the relocation of our
Corporate office from Gainesville, Florida to Atlanta, Georgia. Operationally,
our Nuclear segment continued to grow and maintain profitability, while we
continued to evaluate all aspects of our Industrial segments to improve
profitability. Our Nuclear segment continues to grow year over year, improving
revenue to $49,423,000 in 2006, an increase of $2,178,000 over 2005, and
profitability, with 2006 segment profit of $12,452,000, an increase of
$2,311,000 over 2005 segment profit of $10,141,000. The backlog of stored waste
within the Nuclear segment was reduced to $12,492,000 at December 31, 2006, down
from $16,374,000 in 2005, reflecting our emphasis on improved processing and
disposal. The Industrial segment continued to sustain losses in 2006. Our
emphasis in 2006 was to review contracts and revenue streams and replace those
that were not profitable with more profitable ones. The revenue of our
Industrial segment was $35,148,000, a decrease of $5,620,000 from 2005, but our
gross profit increased by $856,000 to $7,483,000. The Industrial segment
incurred significant legal fees in 2006, as we continue our efforts to resolve
environmental and compliance issues. This had a negative impact on our
Industrial segment profit, which decreased by $201,000 from 2005 to 2006. We are
heavily dependent on the Nuclear segment for our overall profitability and
continue to evaluate and improve the operations of the Industrial segment. We
continue to strengthen our balance sheet and improve our liquidity position.
Additional paid in capital increased by $10,800,000, consisting of $12,661,000
from the exercise of warrants, options, and other stock transactions, offset by
the retirement of our treasury stock of $1,861,000. This improved our working
capital on December 31, 2006 to $12,810,000, an increase of $6,894,000 from
2005. We were also able to reduce our long term debt balance at year end by
$5,046,000 from December 31, 2005. Our revolving credit line with PNC Bank has
been reduced from $2,447,000 at December 31, 2005 to zero at December 31, 2006,
and our borrowing availability under our revolving credit facility was a record
$14,461,000 at the end of the year based on eligible receivables.
We have entered into a letter of intent to acquire Nuvotec USA, Inc. ("Nuvotec")
and its wholly owned subsidiary, Pacific EcoSolutions, Inc. ("PEcoS"). PEcoS is
a hazardous waste, low level radioactive waste and mixed waste (containing both
hazardous waste and low level radioactive waste) management company based in
Richard, Washington, adjacent to the DOE's Hanford facility. See "Acquisition -
Letter of Intent" of this Management's Discussion and Analysis for a discussion
of the proposed terms of the proposed acquisition and the revenues of PEcoS
during its fiscal year 2006.
25
RESULTS OF OPERATIONS
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services ("Industrial"),
Nuclear Waste Management Services ("Nuclear") and Consulting Engineering
Services ("Engineering").
Below are the results of operations for our years ended December 31, 2006, 2005,
and 2004 (amounts in thousands:
(Consolidated) 2006 % 2005 % 2004 %
---------------------------------------- -------- -------- -------- ---------- ------------ --------
Net Revenues $ 87,929 100.0 $ 90,866 100.0 $ 82,483 100.0
Cost of goods sold 58,719 66.8 65,470 72.1 58,770 71.3
-------- -------- -------- -------- -------- --------
Gross Profit 29,210 33.2 25,396 27.9 23,713 28.7
Selling, general and administrative 22,949 26.1 20,443 22.5 18,461 22.4
Loss (gain) on disposal/impairment of
property and equipment 28 -- (334) (.4) 994 1.2
Impairment loss on intangible assets -- -- -- -- 9,002 10.9
-------- -------- -------- -------- -------- --------
Income (loss) from operations 6,233 7.1 5,287 5.8 (4,744) (5.8)
Interest income 285 .3 133 .1 3 --
Interest expense (1,346) (1.5) (1,594) (1.8) (2,020) (2.4)
Interest expense - financing fees (193) (.2) (318) (.3) (2,191) (2.6)
Other (110) (.1) (7) -- (456) (.6)
-------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes 4,869 5.6 3,501 3.8 (9,408) (11.4)
Income taxes 507 .6 432 .5 169 .2
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations 4,362 5.0 3,069 3.3 (9,577) (11.6)
Preferred Stock dividends -- -- (156) (.2) (190) (.2)
SUMMARY - YEARS ENDED DECEMBER 31, 2006 AND 2005
------------------------------------------------
Net Revenue
Consolidated revenues decreased for the year ended December 31, 2006, compared
to the year ended December 31, 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change % Change
---------------------------------------- -------- -------- -------- -------- -------- --------
Nuclear
-------
Bechtel Jacobs $ 6,705 7.6 $ 14,940 16.5 $ (8,235) (55.1)
LATA/Parallax 10,341 11.8 -- -- 10,341 100.0
Government waste 16,180 18.4 14,615 16.1 1,565 10.7
Hazardous/non-hazardous 3,343 3.8 4,308 4.7 (965) (22.4)
Other nuclear waste 12,854 14.6 13,382 14.7 (528) (3.9)
-------- -------- -------- -------- -------- --------
Total 49,423 56.2 47,245 52.0 2,178 4.6
Industrial
----------
Commercial waste 25,534 29.0 31,768 35.0 (6,234) (19.6)
Government services 4,338 5.0 4,344 4.8 (6) (.1)
Oil Sales 5,276 6.0 4,656 5.1 620 13.3
-------- -------- -------- -------- -------- --------
Total 35,148 40.0 40,768 44.9 (5,620) (13.8)
Engineering 3,358 3.8 2,853 3.1 505 17.7
-------- -------- -------- -------- -------- --------
Total $ 87,929 100.0 $ 90,866 100.0 $ (2,937) (3.2)
======== ======== ======== ======== ======== ========
26
Nuclear segment revenue for the year ended December 31, 2006 improved over 2005
by 4.6% of consolidated revenue or $2,178,000. Revenue of our Nuclear segment
under contracts with Bechtel Jacobs is decreasing as projects at Oak Ridge are
near completion and as a result of certain other projects with the federal
government in which we have been issued subcontracts previously managed by
Bechtel Jacobs being assumed by Latax/Parallax. 2006 revenues of our Nuclear
segment include approximately $1.1 million recognized as a result of a
settlement of a lawsuit in connection with a dispute over surcharges from waste
treated in 2003. While this settlement was finalized in January 2007, it was
estimatable and probable as of December 31, 2006. This amount did not exceed
contract costs through December 31, 2006 and no contingencies existed in regards
to this matter at year-end. Waste received directly from the government
increased as government volume normally varies year over year due to funding,
volume, and other factors. Hazardous and non hazardous revenue was down
reflecting the completion of a special event soil project from existing
industrial customers in 2005 which did not repeat in 2006. See "Known Trends and
Uncertainties - Significant Customers" later in this Managements' Discussion and
Analysis for further discussion on our revenues and contracts with the
government and their contractors. The backlog of stored waste at December 31,
2006 was $12,492,000 compared to $16,374,000 at December 2005. Waste receipts
were consistent with 2005, but the backlog reflects increases in processing and
disposal for the year. Waste backlog will continue to fluctuate in 2007
depending on the complexity of waste streams and the timing of receipts and
processing of materials. The high levels of backlog material continue to
position the segment well from future processing revenue prospective. Revenue
from our Industrial Segment fell by 13.8% of consolidated revenue compared to
2005. Commercial waste revenue was down primarily due to the loss of our
contract with a national home improvement chain, which accounted for $4.4
million of this reduction, with the remaining due to our efforts to eliminate
non-profitable revenue streams and pursue more profitable ones. This lost
revenue was slightly offset by increased oil sales which accounted for 6.0% of
consolidated revenue, up from 5.1%. Revenue from government services stayed
relatively flat with 2005 though one contract expired in late 2006 and will not
likely be renewed. The impact of this will reduce revenue but improve profits.
The Engineering segment experienced an increase in revenue in 2006 as a result
of a special event project.
Cost of Goods Sold
Cost of goods sold decreased $6,751,000 for the year ended December 31, 2006, as
compared to the year ended December 31, 2005, as follows:
(In thousands) 2006 % Revenue 2005 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Nuclear $ 28,493 57.7 $ 29,144 61.7 $ (651)
Industrial 27,665 78.7 34,142 83.7 (6,477)
Engineering 2,561 76.3 2,184 76.6 377
--------- --------- --------- --------- ---------
Total $ 58,719 66.8 $ 65,470 72.1 $ (6,751)
========= ========= ========= ========= =========
The Nuclear segment's cost of sales for the year ending December 31, 2006 were
down slightly from 2005 despite increased revenue. Transportation and disposal
costs were down due to increased government revenue, where disposal and
transportation costs are often paid for by the customer. In addition, we
recognized all costs related to the Bechtel Jacobs surcharge settlement when
they were incurred, and therefore we did not have any costs in the current year
related to $1,119,000 in revenue in 2006. The decrease in the Industrial segment
is primarily the result of lower revenue as efforts were made during the year to
streamline operations to focus on more profitable revenue streams and to operate
more regionally, thus cutting both disposal, transportation and other related
expenses. The decrease also reflects the elimination of the adverse affect of
oil contamination to one of our waste streams in 2005. The Engineering segment
expense increases reflected increased reimbursable expenses related to the large
event project in 2006. Included within cost of goods sold is depreciation and
amortization expense of $4,529,000 and $4,408,000 for the year ended December
31, 2006 and 2005, respectively, reflecting an increase of $121,000 over 2005.
27
Gross Profit
Gross profit for the year ended December 31, 2006, increased $3,814,000 over
2005, as follows:
(In thousands) 2006 % Revenue 2005 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Nuclear $ 20,930 42.3 $ 18,100 38.3 $ 2,830
Industrial 7,483 21.3 6,627 16.3 856
Engineering 797 23.7 669 23.4 128
--------- --------- --------- --------- ---------
Total $ 29,210 33.2 $ 25,396 27.9 $ 3,814
========= ========= ========= ========= =========
The gross profit for the Nuclear segment increased $2,830,000 in 2006 over 2005
as we received more government waste, which typically does not require
transportation and disposal expense, and produces higher margins. In addition,
the surcharge settlement with Bechtel Jacobs did not have any costs of sales,
and thus increased the gross margin. Industrial segment gross profit was down
due to reduced revenue, but as a percent of revenue the gross margin improved as
we continue to eliminate lower margin revenue streams and replace with more
profitable revenue. The gross profit of the Engineering segment increased as a
result of increased revenue.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the year
ended December 31, 2006, as compared to the corresponding period for 2005, as
follows:
(In thousands) 2006 % Revenue 2005 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Administrative $ 5,627 -- $ 4,800 -- $ 827
Nuclear 7,467 15.1 6,863 14.5 604
Industrial 9,309 26.5 8,307 20.4 1,002
Engineering 546 16.3 473 16.6 73
--------- --------- --------- --------- ---------
Total $ 22,949 26.1 $ 20,443 22.5 $ 2,506
========= ========= ========= ========= =========
We experienced an increase in SG&A expenses throughout the company over 2005.
The increase in corporate administrative overhead was primarily payroll related.
We incurred corporate expenses that were higher than 2005 for management
incentives, costs related to expensing of stock options under FAS 123R (see
"Note 2 - Stock Based Compensation" of Consolidated Financial Statement), costs
related to the relocation of the corporate office and internal costs related to
the due diligence of a potential acquisition. The Nuclear segment increased its
SG&A expenses to expand its management staff to more effectively bid on new
contracts, manage its facilities and increase its efforts towards compliance
with corporate policies and regulatory agencies. The increase in the Industrial
segment was a result of increased legal fees, totaling $887,000 as we work to
resolve certain legal issues at our facilities, as well as costs, totaling
$559,000 incurred in connection with environmental compliance of the facilities.
The costs associated with environmental compliance were a result of our
reevaluation and additional provisions made to certain of our environmental
reserves. See "Environmental Contingencies" later in this Management's
Discussion and Analysis for further discussion on our environmental reserves.
The increase in SG&A costs in our Engineering segment were payroll related.
Included in SG&A expenses is depreciation and amortization expense of $329,000
and $346,000 for the years ended December 31, 2006 and 2005, respectively.
Loss (Gain) on Disposal/Impairment of Property and Equipment
The loss on fixed asset disposal/impairment for the year ended December 31,
2006, was $28,000, as compared to a gain of $334,000 for the same period in
2005. The loss for 2006 was attributed mainly to the disposal of idle equipment
at various facilities in both the Nuclear and Industrial Segments. The gain for
2005 was principally a result of the sale of property at our facility in
Maryland. The sale was for net proceeds of $695,000 for land and building with a
net book value of $332,000. The resulting gain of $363,000 was included in
income from operations, and was partially offset by losses on disposal of
equipment.
28
Interest Income
Interest income increased $152,000 for the year ended December 31, 2006, as
compared to the 2005. The increase was due to proceeds from warrants and options
exercised and employee stock purchase plan proceeds which totaled $12,079,000.
Also, an additional funding of our finite risk insurance policy resulted in
additional interest earned for the year. See later in this Management's
Discussion and Analysis - "Liquidity and Capital Resources" for further
discussion on the finite risk insurance policy.
Interest Expense
Interest expense decreased $248,000 for the year ended December 31, 2006, as
compared to the corresponding period of 2005.
(In thousands) 2006 2005 Change %
-------------- -------- -------- -------- --------
PNC interest $ 728 $ 834 $ (106) (12.7)
Other 618 760 (142) (18.7)
-------- -------- -------- --------
Total $ 1,346 $ 1,594 $ (248) (15.6)
======== ======== ======== ========
The decrease in 2006 is principally a result of the overall improvement in our
debt position accelerated by the exercise of warrants and options for purchase
of 7,106,790 shares of our Common Stock, as well as proceeds from our employee
stock purchase plan, which added $12,079,000 in cash. Reduced borrowing on the
revolver, along with diminishing principal on other equipment related loans
continues to reduce our interest expenses.
Interest Expense - Financing Fees
Interest expense-financing fees decreased $125,000 for the year ended December
31, 2006, as compared to the corresponding period of 2005. Expenses in 2006
reflect the amortization of our prepaid financing fee for our term loan which
expires in May of 2008. Expense for 2005 includes a fee paid to PNC for the
increase in the term note by approximately $4,400,000 (See "Financing
Activities" in this Management Discussion & Analysis). The remaining financing
fees are principally associated with the PNC revolving credit and term loan and
are amortized to expense over the term of the loan agreements. As of December
31, 2006, the unamortized balance of prepaid financing fees is $267,000. These
prepaid financing fees will be amortized through May 2008 at a rate of $16,000
per month which approximates the rate using the effective interest method.
Income Tax
See "Note 11" to "Notes to Consolidated Financial Statements" for a
reconciliation between taxes at the statutory rate and the provision for income
taxes as reported. We have provided a valuation allowance on substantially all
of our deferred tax assets. We will continue to monitor the realizability of
these net deferred tax assets and will reverse some or all of the valuation
allowance as appropriate. In making this determination, we considers a number of
factors including whether there is a historical pattern of consistent and
significant profitability in combination with our assessment of forecasted
profitability in the future periods. Such patterns and forecasts allow us to
determine whether our most significant deferred tax assets such as net operating
losses will more likely than not be realizable in future years, in whole or in
part. These deferred tax assets in particular will require us to generate
significant taxable income in the applicable jurisdictions in future years in
order to recognize their economic benefits. At this point, we do not believe
that we have enough positive evidence to conclude that some or all of the
valuation allowance on deferred tax assets should be reversed. However, facts
and circumstances could change in future years and at such point we will reverse
the allowance as appropriate. For the years ended December 31, 2006 and 2005, we
had approximately $83,000 and $50,000, respectively, in federal income tax
expense, as a result of a 100% valuation allowance against the deferred tax
asset and our alternative minimum tax liability at December 31, 2006, and
$424,000 and $382,000, respectively, in state income taxes primarily for our
subsidiary, M&EC, in Oak Ridge, Tennessee.
29
SUMMARY - YEARS ENDED DECEMBER 31, 2005 AND 2004
------------------------------------------------
Net Revenue
Consolidated revenues increased for the year ended December 31, 2005, compared
to the year ended December 31, 2004, as follows:
% % %
(In thousands) 2005 Revenue 2004 Revenue Change Change
---------------------------------------- -------- -------- -------- -------- -------- --------
Nuclear
-------
Bechtel Jacobs $ 14,940 16.5 $ 9,405 11.4 $ 5,535 58.9
LATA/Parallax -- -- -- -- -- --
Government waste 14,615 16.1 $ 16,533 20.0 (1,918) (11.6)
Hazardous/non-hazardous 4,308 4.7 3,895 4.7 413 10.6
Other nuclear waste 13,382 14.7 12,846 15.6 536 4.2
-------- -------- -------- -------- -------- --------
Total 47,245 52.0 42,679 51.7 4,566 10.7
Industrial
----------
Commercial waste 31,768 35.0 28,496 34.6 3,272 11.5
Government services 4,344 4.8 5,853 7.1 (1,509) (25.8)
Oil Sale 4,656 5.1 2,251 2.7 2,405 106.8
-------- -------- -------- -------- -------- --------
Total 40,768 44.9 36,600 44.4 4,168 11.4
Engineering 2,853 3.1 3,204 3.9 (351) (11.0)
-------- -------- -------- -------- -------- --------
Total $ 90,866 100.0 $ 82,483 100.0 $ 8,383 10.2
======== ======== ======== ======== ======== ========
The Nuclear segment realized growth of 10.7% in consolidated revenues for the
year ended December 31, 2005, over 2004. The increase in revenues from Bechtel
Jacobs reflected a concentrated effort to process certain of their waste
streams, and assist Bechtel Jacobs attain disposal milestones for 2005. As a
result of the focus towards assisting Bechtel Jacobs, we saw a decrease in
revenue from other government customers. However, we received more waste from
other government customers in 2005, which could not be processed by year end and
is reflected in our backlog. The backlog of stored waste at December 31, 2005,
was $16,374,000 compared to $16,247,000 at December 31, 2004. The increase in
backlog reflects the complexity of the waste streams and timing of receipts and
processing of materials. We also saw an increase in revenue from hazardous and
non-hazardous waste streams from certain existing industrial customers, due to
soil projects we performed. We experienced a small increase in revenue from
other nuclear waste, and continue to pursue growth within the mixed waste market
through additional contracts. Revenue also increased in the Industrial segment
for the year ended December 31, 2005. The commercial revenue increase was
primarily due to expanded services with a national home improvement chain, which
increased approximately $2,937,000 to $4,424,000 of consolidated revenue for the
year ended December 31, 2005. However, our contract with the home improvement
chain was cancelled effective November 25, 2005. The Industrial segment could
see a reduction in revenue in 2006 as the segment works to replace the loss of
the retail customer with other sources of revenue. The segment also experienced
an increase in revenue of $780,000 from used oil processing and sales, as a
result of increased oil prices. Used oil sales accounted for 5% of our 2005
revenues. The increase in revenue from the facility acquired in March of 2004,
reflected an entire year of operations in 2005. The Industrial segment increase
was partially offset by a decrease in revenue from government services due to
the expiration of one of our government contracts and the rebid and subsequent
lower revenues related to another government contract. The Engineering segment
experienced a decrease in revenue in 2005 as a result of the completion of
certain special projects in 2004 that were not replaced in 2005.
30
Cost of Goods Sold
Cost of goods sold increased for the year ended December 31, 2005, compared to
the year ended December 31, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Nuclear $ 29,144 61.7 $ 25,938 60.8 $ 3,206
Industrial 34,142 83.7 30,440 83.2 3,702
Engineering 2,184 76.6 2,392 74.7 (208)
--------- --------- --------- --------- ---------
Total $ 65,470 72.1 $ 58,770 71.3 $ 6,700
========= ========= ========= ========= =========
The Nuclear segment increase principally correlates to costs associated with the
additional revenue, as well as, increases in payroll and certain other
processing costs, such as lab costs, of $857,000 as we are required to utilize
third party labs to analyze certain waste streams. Additionally, based upon the
types of waste processed, we did not gain as much benefit from internal disposal
as we have in prior years. The increase in the Industrial segment was
predominantly related to the increased revenue. Cost of goods sold as a
percentage of revenue showed a modest increase reflecting the impact of
increased fuel and utility costs, increased costs on used oil purchased for
resale. The Engineering segment experienced a decrease in cost of goods sold as
a result of lower revenue, offset partially by the higher fixed cost nature of
the business. Included within cost of goods sold is depreciation and
amortization expense of $4,408,000 and $4,291,000 for the year ended December
31, 2005, and 2004, respectively, reflecting an increase of $117,000 over 2004.
The facility acquired in March 2004, had a depreciation expense increase of
$124,000, reflecting the additional three months of depreciation expense taken
during 2005.
Gross Profit
Gross profit for the year ended December 31, 2005, increased over 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Nuclear $ 18,100 38.3 $ 16,741 39.2 $ 1,359
Industrial 6,627 16.3 6,160 16.8 467
Engineering 669 23.4 812 25.3 (143)
--------- --------- --------- --------- ---------
Total $ 25,396 27.9 $ 23,713 28.7 $ 1,683
========= ========= ========= ========= =========
The resulting increase in gross profit in both the Nuclear and Industrial
segments is a result of the increased revenue for the year as compared to 2004.
However, the gross profit percentage decreased slightly for both segments as a
result of the lower margin waste streams processed in 2005. The Engineering
segment gross profit decreased slightly, as a result of their decreased revenue.
The Engineering segment gross profit percentage also decreased, which is a
reflection of their high fixed costs.
31
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the year
ended December 31, 2005, as compared to the corresponding period for 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
-------------- --------- --------- --------- --------- ---------
Administrative $ 4,800 -- $ 4,197 -- $ 603
Nuclear 6,863 14.5 6,079 14.2 784
Industrial 8,307 20.4 7,735 21.1 572
Engineering 473 16.6 450 14.0 23
--------- --------- --------- --------- ---------
Total $ 20,443 22.5 $ 18,461 22.4 $ 1,982
========= ========= ========= ========= =========
We experienced an increase in SG&A expenses throughout the Company; however,
SG&A as a consolidated percentage of revenue remained constant. The increase in
the corporate administrative overhead is due primarily to increased payroll and
benefits, as a result of our continuing focus on corporate governance and
information services, and legal and environmental consulting fees related to the
extensive internal review performed on permit compliance and the treatment of
certain waste streams. The increase in administrative overhead was also from
third party charges incurred for additional audit fees, compliance work
performed with regard to Sarbanes-Oxley, and completion of the related internal
control assessment required under Section 404 of the Act. As a result of
completing the initial year of assessment and documentation, and the
establishment of our internal audit department, during the third quarter of
2005, we saw a decline in the third party charges related to Section 404. The
increase in SG&A in the Nuclear segment was a result of increased payroll and
benefits, as the segment works to build a stronger management and support team.
The increase in the Industrial segment was also from increased payroll and
benefits, and other costs incurred in connection with environmental compliance
of the facilities. The Engineering segment increase in SG&A was the result of
hiring a business development manager to assist in expanding their customer
base. Included in SG&A expenses is depreciation and amortization expense of
$346,000 and $285,000 for the years ended December 31, 2005, and 2004,
respectively.
Loss (Gain) on Disposal/Impairment of Property and Equipment
The gain on fixed asset disposal/impairment for the year ended December 31,
2005, was $334,000, as compared to a loss of $994,000 for the same period in
2004. The gain for 2005 was principally a result of the sale of property at our
facility in Maryland. The sale was for net proceeds of $695,000 for land and
building with a net book value of $332,000. The resulting gain of $363,000 was
included in income from operations, and was partially offset by losses on
disposal of equipment. The loss in 2004 is principally a result of the
Industrial segment writing down certain fixed assets, totaling $1,026,000, which
have been determined to have no fair value. As part of the restructuring
process, management abandoned various projects at certain facilities.
Interest Income
Interest income increased $130,000 for the year ended December 31, 2005, as
compared to the previous year. The increase was due to interest income we
received on the sinking fund we maintain for our finite risk insurance policy.
See later in this Management's Discussion and Analysis - Liquidity and Capital
Resources for further discussion on the finite risk insurance policy.
32
Interest Expense
Interest expense decreased for the year ended December 31, 2005, as compared to
the corresponding period of 2004.
(In thousands) 2005 2004 Change %
-------------- -------- -------- -------- --------
PNC interest $ 834 $ 789 $ 45 5.7
AMI/BEC -- 506 (506) (100.0)
Other 760 725 35 4.8
-------- -------- -------- --------
Total $ 1,594 $ 2,020 $ (426) (21.1)
======== ======== ======== ========
This decrease principally reflects the prepayment of the AMI/BEC senior
subordinated debt in August 2004, which resulted in a decrease in expense.
Additionally, we experienced a decrease due to reduced borrowing levels on other
debt obligations as we continue to reduce our debt balances. However, the 2004
other interest total reflects a net reduced number, as a result of the favorable
impact of an adjustment to interest payable associated with the PDC and IRS
notes, in September 2004, which totaled $219,000. Offsetting the decrease was an
increase in PNC interest as a result of the increase in the Term Loan by
approximately $4.4 million effective June 29, 2005.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $1,873,000 for the year
ended December 31, 2005, as compared to the corresponding period of 2004. This
decrease was principally due to the write-off of $1,217,000, in 2004, of prepaid
financing fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004. Additionally, we
expensed an early termination fee of $190,000, in 2004, as a result of the
pre-payment. The remaining financing fees are principally associated with the
PNC revolving credit and term loan and are amortized to expense over the term of
the loan agreements. As of December 31, 2005, the unamortized balance of prepaid
financing fees is $462,000, which is comprised of $220,000 from the original
debt and $338,000 associated with Amendment No. 4 and Amendment No. 5, offset by
the monthly amortization of these fees over the past six months. These prepaid
financing fees will be amortized through May 2008 at a rate of $16,000 per month
which approximates the rate using the effective interest method.
Income Tax
See "Note 11" to "Notes to Consolidated Financial Statements" for a
reconciliation between taxes at the statutory rate and the provision for income
taxes as reported. For the years ended December 31, 2005 and 2004, we had
approximately $50,000 and $0, respectively, in federal income tax expense, as a
result of a 100% valuation allowance against the deferred tax asset resulting
from our alternative minimum tax liability at December 31, 2005, and $382,000
and $169,000, respectively, in state income taxes primarily for our subsidiary,
M&EC, in Oak Ridge, Tennessee.
Preferred Stock Dividends
Preferred Stock dividends decreased by approximately $34,000 to $156,000 for the
year ended December 31, 2005. The decrease was due to the conversion of our
Series 17 Preferred Stock in September 2005.
DISCONTINUED OPERATIONS
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The decision to discontinue
operations at PFP was due to our reevaluation of the facility and our inability
to achieve profitability at the facility in the near term. During February 2006,
we completed the remediation of the leased property and the equipment, and
released the property back to the owner. The operating results for the current
and prior periods have been reclassified to discontinued operations in our
Consolidated Statements of Operations.
33
PFP recognized a loss of $352,000 in 2006, which was partially due to early
termination costs of $200,000 associated with our early termination of our
leased property, as compared to an operating loss of $346,000 and revenues of
$721,000 for the year ended December 31, 2005. The assets and liabilities
related to PFP have been reclassified into separate categories in the
Consolidated Balance Sheets as of December 31, 2006 and 2005. The assets are
recorded at their net realizable value, and consist of equipment of $106,000.
PFP has no liabilities on the books as of December 31, 2006.
PFMI
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
PFMI was principally a result of two fires that significantly disrupted
operations at the facility in 2003, and the facility's continued drain on the
financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
PFMI recorded income of $701,000 for the year ending December 31, 2006 and
income of $1,017,000 for the year ending 2005. Our income for 2006 was a result
of a reduction of $1,182,000 in our environmental accrual due to our
re-evaluation of the accrual we have recorded for the closure and remediation
activities we are performing. Our income in 2005 was the result of the
settlement of three insurance claims we submitted relative to the two fires at
PFMI, a property claim for the first fire and a property claim and business
interruption claim for the second fire. During 2004, we recorded a receivable of
$1,585,000 based on negotiations with the insurance carrier on the business
interruption claim. The income from recording this receivable was recorded as a
reduction of "loss from discontinued operations" and reduced the operating
losses for 2004. During 2005, we received insurance proceeds and claim
settlements of $3,253,000 for settlement of all three claims. Of these proceeds,
$1,476,000 was recorded as income from discontinued operations during the third
quarter of 2005, which is net of $192,000 paid for public adjustor fees.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2006 and 2005. As of December 31, 2006, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$600,000. Liabilities as of December 31, 2006, consist of current accrued
expenses of $22,500, environmental accruals of $653,000, and a pension payable
of $1,433,000. The pension plan withdrawal liability is a result of the
termination of the union employees of PFMI. The PFMI union employees participate
in the Central States Teamsters Pension Fund ("CST"), which provides that a
partial or full termination of union employees may result in a withdrawal
liability, due from PFMI to CST. The recorded liability is based upon a demand
letter received from CST in August 2005 that provided for the payment of $22,000
per month, for principal and interest, over an eight year period. This
obligation is recorded as a long-term liability, with a current portion of
$146,000 that we expect to pay over the next year.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which is not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we estimated the cost of
this environmental closure and remediation liability to be $2,464,000. During
2006 we re-evaluated our required activities to close and remediate the
facility, and during the quarter ended June 30, 2006, we began implementing the
modified methodology to remediate the facility. As a result of the reevaluation
and the change in methodology we reduced the accrual by $1,182,000. We have
spent approximately $629,000 for closure costs since September 30, 2004, of
which $74,000 has been spent during 2006, and $439,000 was spent in 2005. We
have $653,000 accrued for the closure, as of December 31, 2006, and we
anticipate spending $538,000 in 2007 with the remainder over the next six years.
34
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At December 31, 2006, we had cash of $1,863,000. The following table reflects
the cash flow activities during 2006.
(Amounts in thousands) 2006
------------------------------------- -------
Cash provided by operations $ 1,673
Cash used in investing activities (6,842)
Cash provided by financing activities 6,938
-------
Increase in cash $ 1,769
=======
Due to the cash proceeds from the issuance of Common Stock in 2006, we are not
currently in a net borrowing position. We attempt to move all excess funds into
a Money Market Sweep account in order to maximize the interest earned. When we
are in a net borrowing position, we attempt to move all excess cash balances
immediately to the revolving credit facility, so as to reduce debt and interest
expense. We utilize a centralized cash management system, which includes
remittance lock boxes and is structured to accelerate collection activities and
reduce cash balances, as idle cash is moved without delay to the Money Market
account or the revolving credit facility if applicable. The cash balance at
December 31, 2006 is a result of cash provided by operations, as cash received
from warrants and option exercises was used to pay down revolver debt and to
finance capital for the year.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$15,256,000, a decrease of $1,353,000 over the December 31, 2005, balance of
$16,609,000. The Industrial segment experienced a decrease of $466,000 as a
result of increased collection efforts and the reduction of certain revenue
streams. The Nuclear segment also decreased by $912,000 due to improved
collection efforts and the impact of increased unbilled revenues. The
Engineering segment increased by $25,000.
Unbilled Receivables are generated by differences between invoicing timing and
the percentage of completion methodology used for revenue recognition purposes.
As major processing phases are completed and the costs incurred, we recognize
the corresponding percentage of revenue. We experience delays in processing
invoices due to the complexity of the documentation that is required for
invoicing, as well as, the difference between completion of revenue recognition
milestones and agreed upon invoicing terms, which results in unbilled
receivables. The timing differences occur for several reasons, partially from
delays in the final processing of all wastes associated with certain work orders
and partially from delays for analytical testing that is required after we have
processed waste but prior to our release of waste for disposal. The difference
also occurs due to our end disposal sites requirement of preapproval prior to
our shipping waste for disposal and our contract terms with the customer that we
dispose of the waste prior to invoicing. As of December 31, 2006, Unbilled
Receivables totaled $15,461,000, an increase of $3,513,000 from the December 31,
2005, balance of $11,948,000. This increase is principally due to the increased
revenues recognized in the Nuclear segment, and the complexity of the current
contracts, which creates delays related to additional testing, invoicing,
documentation requirements, and third party disposals. These delays usually take
several months to overcome but are normally considered collectible within twelve
months. However, as we now have historical data to review the timing of these
delays, we realize that certain issues can make collection of some of these
receivables greater than twelve months. Therefore, in 2006, we have segregated
the unbilled receivables between current and long term. The current portion of
the unbilled receivables is $12,861,000 and the long term portion is $2,600,000.
35
As of December 31, 2006, accounts payable was $3,922,000, a decrease of
$2,131,000 from the December 31, 2005, balance of $6,053,000. This decrease in
accounts payable is a result of the impact of lower costs in the Industrial
segment related to reduced revenues. Additionally, significant proceeds from the
exercise of options and warrants increased cash flow which enabled us to reduce
our accounts payable balances.
Accrued Expenses as of December 31, 2006, totaled $11,287,000, a decrease of
$379,000 over the December 31, 2005, balance of $11,666,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. The decrease in
accrued expenses was principally the result of our decision to pay our annual
insurance premium rather than to finance it. This reduced our insurance payable,
offsetting the increase of accrued disposal in our Nuclear segment which was the
result of increases in revenue earned but unbilled.
Working capital at December 31, 2006, was $12,810,000, as compared to a working
capital of $5,916,000 at December 31, 2005. The increase of $6,894,000 is
principally related to increased receivables and increased cash on hand.
Receivables were up due to increased revenues, and the settlement of a surcharge
dispute for $1,500,000. Cash on hand increased primarily due to the issuance of
Common Stock from option and warrant exercises, which resulted in proceeds of
$12,035,000. The improved cash position also allowed us to pay our vendors
quicker and eliminate certain other liabilities, resulting in a reduction in
accounts payables and accrued expenses of approximately $2,510,000.
Investing Activities
Our purchases of new capital equipment for the year ended December 31, 2006,
totaled approximately $6,441,000 of which $94,000 was financed, resulting in net
purchases of $6,347,000, funded out of cash flow. These expenditures were for
expansion and improvements to the operations principally within the Nuclear and
Industrial segments. These capital expenditures were principally funded by the
cash provided by operations, through various other lease financing sources and
through Warrant and option proceeds raised during the year. We have budgeted
capital expenditures of approximately $4,137,000 for 2007, which includes an
estimated $2,929,000 to complete certain current projects committed at December
31, 2006, as well as other identified capital and permit compliance purchases.
Certain of these budgeted projects are discretionary and may either be delayed
until later in the year or deferred altogether. We have traditionally incurred
actual capital spending totals for a given year less than initial budget amount.
The initiation and timing of projects are also determined by financing
alternatives or funds available for such capital projects. We anticipate funding
these capital expenditures by a combination of lease financing, internally
generated funds, and/or the proceeds received from Warrant exercises. See " -
Environmental Contingencies" for budgeted capital expenditures relating to
environmental contingencies such as environmental remediation expenditures.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure of our permitted facilities will be
closed in accordance with the regulations. The policy provides a maximum $35
million of financial assurance coverage of which the coverage amount totals
$29,211,000 at December 31, 2006, and has available capacity to allow for annual
inflation and other performance and surety bond requirements. This finite risk
insurance policy required an upfront payment of $4.0 million, of which
$2,766,000 represents the full premium for the 25-year term of the policy, and
the remaining $1,234,000, to be deposited in a sinking fund account representing
a restricted cash account. Additionally, in February 2004, 2005, and 2006, we
paid the first three of the nine required annual installments of $1,004,000, of
which $991,000 was deposited in the sinking fund account, the remaining $13,000
represents a terrorism premium. We recorded $188,000 of interest income during
2006 for interest earned as of December 31, 2006, on the sinking funds. As of
December 31, 2006, we have $4,518,000 in our sinking fund on the consolidated
balance sheet. On the fourth and subsequent anniversaries of the contract
inception, we may elect to terminate this contract. If we so elect, the Insurer
will pay us an amount equal to 100% of the sinking fund account balance in
return for complete releases of liability from both us and any applicable
regulatory agency using this policy as an instrument to comply with financial
assurance requirements.
36
On March 23, 2004, our subsidiary, PFMD completed it's acquisition of certain
assets of A&A and our subsidiary, PFP completed its acquisition of certain
assets of EMAX, which as of November 2005, became a discontinued operation (see
Discontinued Operations earlier in this Management's Discussion and Analysis).
We paid $2,735,000 in cash for the acquired assets and assumed liabilities of
A&A and $180,000 in cash for EMAX, using funds received in connection with a
private placement offering that was completed in March 2004. A&A and EMAX had
unaudited combined revenues of approximately $15.0 million in 2003 and a
combined loss of approximately $299,000. See - "Discontinued Operations" for a
discussion as to discontinuing PFP.
On July 28, 2006, our Board of Directors has authorized a common stock
repurchase program to purchase up to $2,000,000 of our Common Stock, through
open market and privately negotiated transactions, with the timing, the amount
of repurchase transactions and the prices paid under the program as deemed
appropriate by management and dependent on market conditions and corporate and
regulatory considerations. As of the date of this report, we have not
repurchased any of our Common Stock under the program as we continue to evaluate
this repurchase program within our internal cash flow and/or borrowings under
our line of credit.
Financing Activities
We have entered into a Revolving Credit, Term Loan and Security Agreement
("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement initially provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves the Agent reasonably deems proper and
necessary.
During March 2005, we amended the Agreement with PNC to, among other things,
extend the $25 million credit facility through May 31, 2008. The other terms of
the credit facility remain principally unchanged, as a result of the amendment,
with the exception of a 50 basis point reduction in the variable interest rate
on both loans. As of December 31, 2006, the excess availability under our
Revolving Credit was $14,461,000 based on our eligible receivables.
During June 2005, we entered into another amendment to the Agreement. Pursuant
to this amendment, PNC increased our Term Loan by approximately $4.4 million,
resulting in a Term Loan of $7 million, with the Term Loan payable in monthly
installments of approximately $83,000, plus accrued interest, with the remaining
unpaid principal balance and accrued interest, payable in May 2008, upon
termination of the amended Agreement. Under this Amendment, certain of our
subsidiaries modified or granted mortgages to PNC on their facilities, in
addition to the collateral previously granted to PNC under the Agreement. All
other terms and conditions to the Agreement remain principally unchanged. We
used the additional loan proceeds to prepay a $3.5 million unsecured promissory
note, which was due and payable in August 2005, and the balance was used for
general working capital. As a condition of the two amendments, we paid a
$140,000 fee to PNC.
37
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2007 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended (10% on December 31, 2006) and payable in one
lump sum at the end of the loan period. On December 31, 2006, the outstanding
balance was $3,202,000 including accrued interest of approximately $1,768,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2007 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On December 31,
2006, the rate was 10%. On December 31, 2006, the outstanding balance was
$776,000 including accrued interest of approximately $423,000.
During 2006, various investors exercised Warrants to purchase 6,673,290 shares
of our Common Stock, of which 73,797 shares were issued on a cashless basis and
60,000 shares were issued on a loan by the Company at an arms length basis. We
received proceeds of $11,460,000 for the issuance of the above shares of Common
Stocks. Holders of certain outstanding options exercised their options to
purchase 433,500 shares of our Common Stock for an aggregate purchase price of
approximately $575,000. The Warrants and options were exercised in accordance
with the terms of their respective documents. The proceeds of the Warrant and
option exercises were used to fund capital expenditures and for current working
capital needs.
Preferred Stock
On September 30, 2005, the Company received a notice from Capital Bank GRAWE
Gruppe, AG, dated September 26, 2005, to convert the 2,500 issued and
outstanding shares of the Company's Series 17 Class Q Convertible Preferred
Stock ("Series 17"). Pursuant to the terms of the Series 17, the conversion
resulted in the issuance of 1,666,667 shares of the Company's Common Stock to
Capital Bank, as agent for certain of its investors. The final dividend due on
the Series 17 of approximately $30,000 for the period from July 1, 2005 through
the conversion date was paid in cash in October 2005. During 2005, we paid
$92,000 for dividends on the Series 17.
After conversion of the Series 17, Capital Bank owned of record, as agent for
certain investors, 6,413,383 shares of Common Stock, or 14.3% of the Company's
issued and outstanding Common Stock as of December 31, 2005 and 2,659,807 shares
of Common Stock that Capital Bank has the right to acquire, as agent for certain
investors, under certain warrants with an exercise price of $1.75 per share. In
2006, Capital Bank exercised 2,548,084 of the 2,659,807 warrants to purchase
2,548,084 shares of Common Stock, for certain of its accredited investors, and
warrants for the remaining 111,723 expiring. As of March 9, 2007, Capital Bank
has represented to us that it owns of record, as agent for certain accredited
investors, 6,322,074 shares or 12.14% of our outstanding Common Stock. As of the
date of this report, Capital Bank has no warrants or options to acquire, as
agent for certain investors, additional shares of our Common Stock. See Item 12
- "Security Ownership of Certain Beneficial Owners and Management" regarding
Capital Bank.
38
In summary, we have continued to take steps to improve our operations and
liquidity, as discussed above. However, we continue to invest our working
capital back into our facilities to fund capital additions within both the
Nuclear and Industrial segments. We have experienced the positive impact of
improved collections of our accounts receivable and increased availability under
our Revolving Credit. Additionally, we continued to reduce our accounts payable
through the last half of the year. Also, positively impacting our liquidity
position was the issuance of 7,106,790 shares of Common Stock upon exercises of
warrants and options which resulted in proceeds of $12,035,000. The reserves
recorded on discontinued operations could be reduced or paid over a longer
period of time than initially anticipated. If, among other things, our
Industrial segment is unable to return to profitability in the foreseeable
future, or our Nuclear segment is unable to maintain existing government
contracts or win new government contracts, have unforeseen acceleration of debt
payments, have unforeseen facility closures or are required to accelerate
remediation activities, such would have a material adverse effect on our
liquidity position.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at December 31, 2006,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
Payments due by period
---------------------------------------------
Less than 1-3 4-5 After
Contractual Obligations Total 1 year years years 5 years
----------------------------------- --------- --------- --------- --------- ---------
Long-term debt $ 8,329 $ 2,403 $ 5,917 $ 9 $ --
Interest on long-term debt (1) 2,191 -- 2,191 -- --
Interest on variable rate debt (2) 644 471 173 -- --
Operating leases 4,051 1,300 2,139 609 3
Finite risk policy (3) 6,023 1,004 3,011 2,008 --
Pension withdrawal liability (4) 1,433 146 517 447 323
Environmental contingencies (5) 3,278 1,409 880 503 486
Purchase obligations (6) -- -- -- -- --
--------- --------- --------- --------- ---------
Total contractual obligations $ 25,949 $ 6,733 $ 14,828 $ 3,576 $ 812
========= ========= ========= ========= =========
(1) Our IRS Note and PDC Note agreements state that the interest on those notes
is paid at the end of the term, December 2008.
(2) We have variable interest rates on our Term Loan and Revolving Credit of 1%
and 1/2% over the prime rate of interest, respectively, and as such we have
made certain assumptions in estimating future interest payments on this
variable interest rate debt. We assume an increase in prime rate of 0.25%
in each of the years 2007 and 2008 for our term note. We anticipate a full
repayment of our Term Loan by May 2008. Our Revolver balance was zero as of
December 31, 2006.
(3) Our finite risk insurance policy provides financial assurance guarantees to
the states in the event of unforeseen closure of our permitted facilities.
See "Liquidity and Capital Resources - Investing Activities" earlier in
this Management's Discussion and Analysis for further discussion on our
finite risk policy.
(4) The pension withdrawal liability is the estimated liability to us upon
termination of substantially all of our union employees at our discontinued
operation, PFMI. See Discontinued Operation earlier in this section for
discussion on our discontinued operation.
39
(5) The environmental contingencies and related assumptions are discussed
further in the Environmental Contingencies section of this Management's
Discussion and Analysis, and are based on estimated cash flow spending for
these liabilities.
(6) We are not a party to any significant long-term service or supply contracts
with respect to our processes. We refrain from entering into any long-term
purchase commitments in the ordinary course of business.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as, the reported amounts of revenues and
expenses during the reporting period. We believe the following critical
accounting policies affect the more significant estimates used in preparation of
the consolidated financial statements:
Revenue Recognition Estimates. We utilize a percentage of completion methodology
for purposes of revenue recognition in our Nuclear Segment. As we accept more
complex waste streams in this segment, the treatment of those waste streams
becomes more complicated and time consuming. We have continued to enhance our
waste tracking capabilities and systems, which has enabled us to better match
the revenue earned to the processing phases achieved. The major processing
phases are receipt, treatment/processing and shipment/final disposition. Upon
receiving mixed waste we recognize a certain percentage (generally 33%) of
revenue as we incur costs for transportation, analytical and labor associated
with the receipt of mixed wastes. As the waste is processed, shipped and
disposed of we recognize the remaining 67% revenue and the associated costs of
transportation and burial. The waste streams in our Industrial segment are much
less complicated, and services are rendered shortly after receipt, as such we do
not use percentage of completion estimates in our Industrial segment. We review
and evaluate our revenue recognition estimates and policies on a quarterly
basis.
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that are uncollectible.
We regularly review all accounts receivable balances that exceed 60 days from
the invoice date and based on an assessment of current credit worthiness,
estimate the portion, if any, of the balances that are uncollectible. Specific
accounts that are deemed to be uncollectible are reserved at 100% of their
outstanding balance. The remaining balances aged over 60 days have a percentage
applied by aging category (5% for balances 61-90 days, 20% for balances 91-120
days and 40% for balances over 120 days aged), based on a historical valuation,
that allows us to calculate the total reserve required. This allowance was
approximately 0.5% of revenue for 2006 and 2.7%, of accounts receivable as of
December 31, 2006. Additionally, this allowance was approximately 0.6% of
revenue for 2005, and 3.1% of accounts receivable as of December 31, 2005.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. We continually reevaluate the propriety of the carrying amount of
permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value. We utilize an independent appraisal
firm to test goodwill and permits, separately, for impairment, annually as of
October 1. Our annual impairment test as of October 1, 2005 and 2006 resulted in
no impairment of goodwill and permits. The appraisers estimate the fair value of
our operating segments using a discounted cash flow valuation approach. This
approach is dependent on estimates for future sales, operating income,
depreciation and amortization, working capital changes, and capital
expenditures, as well as, expected growth rates for cash flows and long-term
interest rates, all of which are impacted by economic conditions related to our
industry as well as conditions in the U.S. capital markets.
40
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event we cease operations
in an existing facility. The accrued closure costs are estimates based on
guidelines developed by federal and/or state regulatory authorities under
Resource Conservation and Recovery Act ("RCRA"). Such costs are evaluated
annually and adjusted for inflationary factors and for approved changes or
expansions to the facilities. Increases due to inflationary factors for 2006 and
2005, have been approximately 2.7%, and 2.1%, respectively, and based on the
historical information, we do not expect future inflationary changes to differ
materially from the last three years. Increases or decreases in accrued closure
costs resulting from changes or expansions at the facilities are determined
based on specific RCRA guidelines applied to the requested change. This
calculation includes certain estimates, such as disposal pricing, external
labor, analytical costs and processing costs, which are based on current market
conditions. However, except for the Michigan and Pittsburgh facilities, we have
no current intention to close any of our facilities.
Accrued Environmental Liabilities. We have five remediation projects currently
in progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. Included in the liability are accrued long-term
environmental liabilities for our acquired facility in Maryland in March 2004,
however, as this is not a permitted facility we are currently under no
obligation to clean up the contamination.
Disposal Costs. We accrue for waste disposal based upon a physical count of the
total waste at each facility at the end of each accounting period. Current
market prices for transportation and disposal costs are applied to the end of
period waste inventories to calculate the disposal accrual. Costs are calculated
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
Share-Based Compensation. On January 1, 2006, we adopted Financial Accounting
Standards Board ("FASB") Statement No. 123 (revised) ("SFAS 123R"), Share-Based
Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation, superseding APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. This Statement establishes
accounting standards for entity exchanges of equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative upon adopting. We adopted SFAS 123R utilizing the modified
prospective method in which compensation cost is recognized beginning with the
effective date based on SFAS 123R requirements for all (a) share-based payments
granted after the effective date and (b) awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date. In
accordance with the modified prospective method, the consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123R.
Prior to our adoption of SFAS 123R, on July 28, 2005, the Compensation and Stock
Option Committee of the Board of Directors approved the acceleration of vesting
for all the outstanding and unvested options to purchase Common Stock awarded to
employees as of the approval date. The Board of Directors approved the
accelerated vesting of these options based on the belief that it was in the best
interest of our stockholders to reduce future compensation expense that would
otherwise be required in the statement of operations upon adoption of SFAS 123R,
effective beginning January 1, 2006. The accelerated vesting triggered the
re-measurement of compensation cost under current accounting standards. In the
event a holder of an accelerated vesting option terminates employment with us
prior to the end of the original vesting term of such options, we will recognize
the compensation expense at the time of termination.
41
Pursuant to the adoption of SFAS 123R, during the three-month period ended March
31, 2006, we recorded stock-based compensation expense for the director stock
options granted prior to, but not yet vested, as of January 1, 2006, as if the
fair value method required for pro forma disclosure under SFAS 123 were in
effect for expense recognition purposes. For the employee stock option grants on
March 2, 2006 and May 15, 2006, and the director stock option grant on July 27,
2006, we have estimated compensation expense based on the fair value at grant
date using the Black-Scholes valuation model and have recognized compensation
expense using a straight-line amortization method over the vesting period. As
SFAS 123R requires that stock-based compensation expense be based on options
that are ultimately expected to vest, stock-based compensation for year ended
December 31, 2006 has been reduced for estimated forfeitures at a rate of 5.7 %
for the employee stock option grants and none for the director stock option
grant. When estimating forfeitures, we considered trends of actual option
forfeitures.
We calculated a fair value of $0.868 for each March 2, 2006, option grant on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: no dividend yield; an expected life of four years; expected
volatility of 54.0%; and a risk free interest rate of 4.70%. We calculated a
fair value of $0.877 for the May 15, 2006, option grant on the date of grant
with the following assumptions: no dividend yield; an expected life of four
years; an expected volatility of 54.6%; and a risk-free interest rate of 5.03%.
No employee options were granted in the corresponding periods of 2005. We
calculated a fair value of $1.742 for each July 27, 2006, director option grant
on the date of the grant with the following assumptions: no dividend yield; an
expected life of ten years; an expected volatility of 73.31%; and a risk free
interest rate of 4.98%.
Our computations of expected volatility for 2006 are based on historical
volatility from our traded Common Stock, as was the computation of expected
volatility on grants prior to 2006. Due to our change in the contractual term
and vesting period, we utilized the simplified method, defined in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 107, to calculate the
expected term for our 2006 employee grants. We utilized contractual term for the
expected term of the director option grants in July 2006. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant. See "Note 2" to "Notes to
Consolidated Financial Statement" for impact of SFAS 123R on our financial
statement.
KNOWN TRENDS AND UNCERTAINTIES
Seasonality. Historically, we have experienced a seasonal slowdown within our
industrial segment operations and revenues during the winter months extending
from late November through early March. The seasonality factor is a combination
of poor weather conditions in the central plains and Midwestern geographical
markets we serve for on-site and off-site waste management services, and the
impact of reduced activities during holiday periods resulting in a decrease in
revenues and earnings during such periods. Our engineering segment also
experiences reduced activities and related billable hours throughout the
November and December holiday periods. The DOE and DOD represent major customers
for the Nuclear segment. In conjunction with the federal government's September
30 fiscal year-end, the Nuclear segment historically experienced seasonably
large shipments during the third quarter, leading up to this government fiscal
year-end, as a result of incentives and other quota requirements.
Correspondingly for a period of approximately three months following September
30, the Nuclear segment is generally seasonably slow, as the governmental
budgets are still being finalized, planning for the new year is occurring and we
enter the holiday season. More recently, due to our efforts to work with the
various government customers to smooth these shipment more evenly throughout the
year, we have seen much less fluctuation in the quarters, with receipts in the
fourth quarter 2006 actually higher than the third quarter. In addition, our
revenue recognition policy further reduces this impact on our revenue. See
"Revenue Recognition Estimates" in this "Management Discussion and Analysis of
Financial Condition and Results of Operations".
42
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for our services, principally within the Industrial segment.
Reductions in industrial production generally follow such economic conditions,
resulting in reduced levels of waste being generated and/or sent off for
treatment. We believe that recessionary conditions stabilized in 2005 as
evidenced by increases in commercial waste revenue and continued to improve in
the first half of 2006.
Significant Customers. Our revenues are principally derived from numerous and
varied customers. However, our Nuclear segment has a significant relationship
with Bechtel Jacobs. Bechtel Jacobs is the DOE's appointed manager of the
environmental program to perform certain treatment and disposal services in Oak
Ridge, Tennessee. Our revenues from Bechtel Jacobs contributed 7.6% of total
consolidated revenues for the year ended December 31, 2006, and 16.5% of total
consolidated revenues during the same period in 2005. Our initial relationship
with Bechtel Jacobs began when our subsidiary in Oak Ridge, Tennessee ("M&EC")
entered into certain subcontracts for treatment services, and has expanded into
other services outside these contracts. These Oak Ridge contracts have been
extended through September 2007, and as with most contracts with the federal
government, may be terminated or renegotiated at any time at the government's
election. As the DOE site in Oak Ridge continues to complete certain of its
clean-up milestones and moves toward completing its closure efforts, the revenue
from these contracts have declined. The Nuclear segment continues to pursue
other similar or related services for environmental programs at other DOE and
government sites. In February 2003, M&EC commenced legal proceedings against
Bechtel Jacobs, seeking payment from Bechtel Jacobs of approximately $4.3
million in surcharges relating to certain wastes that were treated by M&EC in
2001 and 2002. During 2001, we recognized approximately $381,000 in revenue for
these surcharges, which represented an initial offer for settlement by Bechtel
Jacobs. Bechtel Jacobs continues to deliver waste to M&EC for treatment, and
M&EC continues to accept such waste. In addition, subsequent to the filing of
the lawsuit, M&EC entered into a new contract with Bechtel Jacobs to treat DOE
waste. On January 24, 2007, M&EC and Bechtel Jacobs entered into a settlement
agreement to resolve this dispute for $1.5 million. Although we do not believe
settlement of this lawsuit will have a material adverse effect on our
operations, there is no guarantee of future business with Bechtel Jacobs, as
Bechtel Jacobs can elect to terminate the relationship for convenience at any
time. Termination of this relationship could have a material adverse effect on
us. We are working towards increasing other sources of revenues at M&EC to
reduce the risk of reliance on one major source of revenues.
We have developed a significant relationship with LATA/Parallax. LATA /Parallax
has assumed certain projects and contracts, relating to work for the federal
government, previously managed by Bechtel Jacobs, under which we have received
various work releases to process mixed waste streams and an additional contract
to treat waste generated by the federal government. Consolidated revenues from
LATA/Parallax for 2006 totaled approximately $10.3 million or 11.8% of total
revenues. All contracts relating to the federal government provide that
LATA/Parallax can terminate the contract with us at any time for convenience,
which could have a material adverse effect on our operations.
During 2006, our Nuclear segment performed services relating to waste generated
by the federal government, either directly or indirectly as a subcontractor to
the federal government, representing approximately 33 million, or approximately
37.8%, of our consolidated 2006 revenues, which includes revenues under the
contracts with Bechtel Jacobs and LATA/Parallax discussed above. Most, if not
all, contracts with the federal government or with others as a subcontractor to
the federal government provide that the government may terminate or renegotiate
the contracts at the government's option at any time.
Insurance. We maintain insurance coverage similar to, or greater than, the
coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. We evaluate
our insurance policies annually to determine adequacy, cost effectiveness and
desired deductible levels. Due to the downturn in the economy and changes within
the environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
43
Certain Legal Proceedings. Our subsidiary, PFD, is involved in certain legal
proceedings alleging, among other things, that it had not obtained certain air
permits in order to operate its facility in violation of the Clean Air Act and
applicable state statutes and regulations. If it is determined that PFD is or
was required to operate under a Title V air permit, this determination could
result in substantial fines and penalties being assessed against PFD, which
could have a material adverse effect on our financial conditions and liquidity.
In addition, a determination that either PFD is in violation of the applicable
Clean Air Act and/or applicable state statutes could have a material adverse
effect on the operation of that particular facility. If it is determined that
either PFD is required to have a Title V air permit in order to operate that
facility, we anticipate that substantial capital expenditures will be required
in order to bring that facility in compliance with the requirements of a Title V
air permit. We do not have reliable estimates of the cost of additional capital
expenditures to comply with Title V air permit.
ACQUISITION - LETTER OF INTENT
We have entered into a letter of intent to acquire Nuvotec USA, Inc. ("Nuvotec")
and its wholly owned subsidiary, Pacific EcoSolutions, Inc. ("PEcoS"). PEcoS is
a hazardous waste, low level radioactive waste and mixed waste (containing both
hazardous waste and low level radioactive waste) management company based in
Richard, Washington, adjacent to the DOE's Hanford facility. Under the letter of
intent, as consideration for the purchase, we would pay $7 million, subject to
adjustment under certain conditions, with $6 million, as may be adjusted,
payable at closing and $1 million payable in equal installments over three
years, and up to an additional $4.6 million in the form of an earn-out based on
revenues of our Nuclear segment exceeding certain based levels each year over a
four year period. At the closing of this proposed transaction, we will be
required to pay or assume approximately $9.4 million of bank and shareholder
debt, comprised of approximately $5.3 million of Nuvotec's bank debt, $375,000
of Nuvotec's debt to certain of its shareholders, and $3.8 million of PEcoS'
bank debt. The acquisition is subject to, among other things, execution of
definitive agreements, completion of due diligence and approval of lenders. If
the transaction is completed, at the closing, Nuvotec's principal asset will be
PEcoS. The PEcoS facility is permitted to treat, store, and process hazardous
waste, low level radioactive waste and mixed waste, and is located adjacent to
the DOE's Hanford site. If the transaction is completed, we intend to fund any
consideration consisting of cash payments to be paid at closing from our working
capital or from borrowings under our Revolving Credit facility. Further, at the
closing of this proposed transaction, certain shareholders of Nuvotec
immediately prior to the closing that are accredited investors would buy from us
$2 million of our common stock in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
and/or Rule 506 promulgated under the Act.
The Department of Energy's Hanford site was first utilized as part of the
Manhattan Project and throughout the Cold War to provide the plutonium and other
materials necessary for the development of nuclear weapons. Most of Hanford's
reactors were shut down in the 1970s, but vast quantities of nuclear waste still
remain at the site. Currently, the Hanford Site is engaged in one of the
nation's largest environmental cleanups, which is expected to continue until
2030.
The PEcoS facility is located on 45 acres adjacent to the Hanford site, and is
comprised of a low-level radioactive waste (LLRW) facility and a mixed waste
(MW) facility. The LLRW facility has a radioactive materials license, and
encompasses approximately 70,000 square feet. The MW facility has RCRA and TSCA
permits, a radioactive materials license, and encompasses approximately 80,000
square feet. PEcoS' revenue during its fiscal year ending September 30, 2006,
was approximately $13 million. At this time, the due diligence process is
proceeding.
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.
44
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
We have budgeted for 2007, $1,409,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at our facilities. As previously discussed
under "Business -- Capital Spending, Certain Environmental Expenditures and
Potential Environmental Liabilities," our facilities where the remediation
expenditures will be made are the Leased Property in Dayton, Ohio (EPS), a
former RCRA storage facility as operated by the former owners of PFD, PFM's
facility in Memphis, Tennessee, PFSG's facility in Valdosta, Georgia, PFTS's
facility in Tulsa, Oklahoma, PFMD's facility in Baltimore, Maryland, and PFMI's
facility in Detroit, Michigan. We expect to fund the expenses to remediate the
sites from funds generated internally; however, no assurances can be made that
we will be able to do so.
At December 31, 2006, we had total accrued environmental remediation liabilities
of $3,278,000 of which $1,409,000 is recorded as a current liability, which
reflects a decrease of $1,117,000 from the December 31, 2005, balance of
$4,395,000. The decrease represents payments on remediation projects as well as
decrease in our reserve due to reevaluation of our remediation estimates. We
have included in the accrued balance, environmental accruals of $653,000 for
PFMI, one of our two discontinued operations. We completed the remediation of
the leased property at our other discontinued operations, PFP in February 2006.
The December 31, 2006, current and long-term accrued environmental balance is
recorded as follows:
Current Long-term
Accrual Accrual Total
------------ ------------ ------------
PFD $ 277,000 $ 453,000 $ 730,000
PFM 453,000 348,000 801,000
PFSG 134,000 532,000 666,000
PFTS 7,000 30,000 37,000
PFMD -- 391,000 391,000
------------ ------------ ------------
871,000 1,754,000 2,625,000
PFMI 538,000 115,000 653,000
------------ ------------ ------------
$ 1,409,000 $ 1,869,000 $ 3,278,000
============ ============ ============
Our subsidiaries, PFD and PFTS were and are involved in certain proceedings
alleging, among other things, that they had not obtained certain air permits in
order to operate its facility in violation of the Clean Air Act and applicable
state statutes and regulations. If it is determined that PFD is or was required
to operate under a Title V air permit, this determination could result in
substantial fines and penalties being assessed against PFD, which could have a
material adverse effect on our financial conditions and liquidity. In addition,
a determination that PFD is in violation of the applicable Clean Air Act and/or
applicable state statutes could have a material adverse effect on the operation
of that particular facility. The above budgeted amounts for capital expenditures
relating to environmental contingencies assume that PFD is not required to
obtain a Title V air permit in connection with its operations. If it is
determined that PFD is required to have a Title V air permit in order to operate
that facility, we anticipate that substantial additional capital expenditures
will be required in order to bring that facility in compliance with the
requirements of a Title V air permit. We do not have reliable estimates of the
cost of additional capital expenditures to comply with Title V air permit. As
previously discussed, PFTS has resolved its administrative proceeding with the
ODEQ by entering into a consent order during January 2007, and has agreed to
file for a Title V air permit as a synthetic minor. The above capital
expenditure also does not include approximately $251,000 which will be required
to satisfy the consent order entered into between ODEQ and PFTS in January 2007,
to comply with certain air related regulatory matters in connection with its
operations, including filing for a Title V air permit as a synthetic minor;
however, this capital expenditure was approved in February 2007.
45
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the possible impact of interest rate
changes on future income. This agreement involved the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates changed and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties was included in other
assets or liabilities. During the twelve months ended December 31, 2005, we
recorded a gain on the interest rate swap of $41,000, which was included in
other comprehensive income on the Statement of Stockholders' Equity (see Note 7
to Notes to Consolidated Financial Statements). The interest rate swap agreement
expired effective December 22, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 and the provisions of FIN 48 will be applied
to all tax positions upon initial adoption of the Interpretation. The cumulative
effect of applying the provisions of this Interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. We
are currently evaluating the potential impact of FIN 48 on our financial
statements.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS 157
simplifies and codifies guidance on fair value measurements under generally
accepted accounting principles. This standard defines fair value, establishes a
framework for measuring fair value and prescribes expanded disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating
the effect, if any, the adoption of SFAS 157 will have on our financial
condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plan - an amendment of FASB Statement
No. 87, 88, 106 and 132(R)". SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an
asset or liability in its statement of financial position and recognize changes
in the funded status in the year in which the changes occur. SFAS 158 is
effective for fiscal years ending after December 15, 2006. SFAS 158 did not have
a material effect on our financial condition, result of operations, and cash
flows.
46
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities". SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting financial instruments. SFAS 159 is effective as of the
beginning of an entity's first fiscal year that begins after November, 15, 2007.
We are currently evaluating the effect, if any, the adoption of SFAS 159 will
have on our financial condition, results of operations and cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from adverse changes in interest
rates, primarily due to the potential effect of such changes on our variable
rate loan arrangements with PNC, as described under "Note 7" to "Notes to
Consolidated Financial Statements". As discussed therein, we entered into an
interest rate swap agreement in December 2000, to modify the interest
characteristics of $3.5 million of our $7.0 million term loan with PNC Bank,
from a floating rate basis to a fixed rate, thus reducing the possible impact of
interest rate changes on this portion of the debt. The interest rate swap
agreement expired in December 2005. As of December 31, 2006, we have no interest
rate swap agreement outstanding, and we were exposed to variable interest rate
under our loan agreements with PNC. The interest rates payable to PNC are based
on a spread over prime rate. If our floating rate of interest experienced an
upward increase of 1%, our debt service would have increased by approximately
$82,000 for the year ending December 31, 2006.
47
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
o ability or inability to continue and improve operations and achieve
profitability on an annualized basis;
o Changes in our Industrial segment to improve its operational and sales
related activity;
o present objective is to focus on the efficient operation of our existing
facilities, evaluate strategic acquisitions within our existing segments
and continue research and development within our Nuclear and Industrial
segments;
o our ability to develop or adopt new and existing technologies in the
conduct of our operations;
o ability to comply with our general working capital requirements;
o ability to retain or receive certain permits or patents;
o ability to renew permits with minimal effort and costs;
o ability to be able to continue to borrow under our revolving line of
credit;
o ability to generate sufficient cash flow from operations to fund all costs
of operations;
o ability to remediate certain contaminated sites for projected amounts;
o ability to fund budgeted capital expenditures during 2007;
o we believe we maintain insurance coverage adequate for our needs and
similar to, or greater than the coverage maintained by other companies of
our size in the industry;
o ability to continue under existing contracts that we have with the federal
government (directly or indirectly as a subcontractor) could have a
material adverse effect on our operation and financial condition;
o 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;
o we believe that the treatment processes we utilize offer a cost saving
alternative to more traditional remediation and disposal methods offered by
certain of our competitors;
o no further impairment to intangible assets;
o no intention to close any facilities, other than the Michigan and
Pittsburgh facility;
o our possession of all necessary approvals, licenses and permits, and our
ability to attain, renew, or receive certain approvals, licenses, permits,
or patents;
o no expectation of material future inflationary changes;
o waste backlog will continue to fluctuate in 2007 depending on the
complexity of waste streams and the timing of receipts and processing
materials;
o we do not believe we are dependent on any particular trademark in order to
operate our business or any significant segment thereof;
o ability to close and remediate facilities for the estimated amounts;
o goal to improve our balance sheet, pay down debt and improve our liquidity;
o Subject to PFTS obtaining a Title V air permit pursuant to the terms of a
consent order recently entered into between PFTS and the ODEQ and PFD
successfully resolving allegations that it is required to obtain certain
air permits in order to operate its facility, we believe that our
facilities presently have all licenses and permits necessary to enable them
to continue operations as presently conducted;
o we believe that we are a significant provider in the delivery of off-site
waste treatment services in the Southeast, Midwest, and Southeast portions
of the United States;
o we expect to complete spending on this remedial project over the next six
years;
48
o as of the date of this report, the terms of the employment agreements have
not been finalized, and none of our named executives has entered into any
employment agreement with the Company;
o we do not intend to begin remediation of PFMD in the immediate future;
o we expect these contracts will be extended beyond September 2007; however,
there is no assurance these extensions will occur;
o we expect our seasonal trends to continue.
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct of
operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at any of
the sites or facilities leased or owned by us or our subsidiaries which
would result in a material increase in remediation expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
o potential increases in equipment, maintenance, operating or labor costs;
o management retention and development;
o financial valuation of intangible assets is substantially less than
expected;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o inability to have our Industrial segment become profitable on an annualized
basis;
o the inability to maintain the listing of our Common Stock on the NASDAQ;
o the determination that PFMI and PFSG was responsible for a material amount
of remediation at certain Superfund sites;
o terminations of contracts with federal agencies or subcontracts involving
federal agencies, or reduction in amount of waste delivered to us under
these contracts or subcontracts;
o determination that PFD is required to have a Title V air permit in
connection with its operations, and
o disposal expense accrual could prove to be inadequate in the event the
waste requires retreatment;
o Risk Factors contained in Item 1A of this report.
We undertake no obligations to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS PAGE NO.
------------------------------------------------------------------------- --------
Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP 51
Consolidated Balance Sheets as of December 31, 2006 and 2005 52
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005, and 2004 54
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005, and 2004 55
Consolidated Statements of Stockholders' Equity for the years
Ended December 31, 2006, 2005, and 2004 56
Notes to Consolidated Financial Statements 57
FINANCIAL STATEMENT SCHEDULE
-------------------------------------------------------------------------
II Valuation and Qualifying Accounts for the years ended December 31, 117
2006, 2005, and 2004
SCHEDULES OMITTED
-----------------
In accordance with the rules of Regulation S-X, other schedules are not
submitted because (a) they are not applicable to or required by the Company, or
(b) the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Perma-Fix
Environmental Services, Inc. and subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006. We
have also audited the schedule listed in the accompanying index. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perma-Fix
Environmental Services, Inc. and subsidiaries at December 31, 2006 and 2005, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
As discussed in Note 12 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Standards No. 123
(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Perma-fix
Environmental Services, Inc. and subsidiaries' internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 29,
2007, expressed an unqualified opinion on management's assessment of, and an
adverse opinion on the effective operation of, internal control over financial
reporting.
/s/ BDO Seidman, LLP
Atlanta, Georgia
March 29, 2007
51
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
------------------------------------------------- ---------- ----------
ASSETS
Current assets
Cash $ 1,863 $ 94
Restricted cash 65 511
Account receivable, net of allowance for
doubtful accounts of $415 and $512 15,256 16,609
Unbilled receivables - current 12,861 11,948
Inventories 847 842
Prepaid expenses 3,039 2,777
Other receivables 1,622 37
Current assets of discontinued operations 22 60
---------- ----------
Total current assets 35,575 32,878
Property and equipment:
Buildings and land 20,965 19,922
Equipment 31,414 31,120
Vehicles 4,616 4,452
Leasehold improvements 11,469 11,489
Office furniture and equipment 2,502 2,414
Construction-in-progress 4,896 850
---------- ----------
75,862 70,247
Less accumulated depreciation and amortization (29,942) (25,767)
---------- ----------
Net property and equipment 45,920 44,480
Property and equipment of discontinued operations 706 806
Intangibles and other assets:
Permits 13,395 13,188
Goodwill 1,330 1,330
Unbilled receivables - non-current 2,600 -
Finite risk sinking fund 4,518 3,339
Other assets 1,953 2,504
---------- ----------
Total assets $ 105,997 $ 98,525
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
52
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
------------------------------------------------------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,922 $ 6,053
Current environmental accrual 871 768
Accrued expenses 11,287 11,666
Unearned revenue 3,575 5,169
Current liabilities of discontinued operations 707 628
Current portion of long-term debt 2,403 2,678
---------- ----------
Total current liabilities 22,765 26,962
Environmental accruals 1,754 1,572
Accrued closure costs 5,393 5,245
Other long-term liabilities 3,019 2,462
Long-term liabilities of discontinued operations 1,402 3,149
Long-term debt, less current portion 5,926 10,697
---------- ----------
Total long-term liabilities 17,494 23,125
---------- ----------
Total liabilities 40,259 50,087
Commitments and Contingencies
Preferred Stock of subsidiary, $1.00 par value;
1,467,396 shares authorized, 1,284,730 shares
issued and outstanding, liquidation value
$1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000
shares authorized, no shares issued and
outstanding, respectively -- --
Common Stock, $.001 par value; 75,000,000
shares authorized, 52,053,744 and 45,813,916
shares issued, including 988,000 shares
retired in 2006 and held as treasury stock as
of December 31, 2005, respectively 52 46
Additional paid-in capital 92,980 82,180
Stock subscription receivable (79) --
Accumulated deficit (28,500) (33,211)
---------- ----------
64,453 49,015
Less Common Stock in treasury at cost; 988,000 shares -- (1,862)
---------- ----------
Total stockholders' equity 64,453 47,153
---------- ----------
Total liabilities and stockholders' equity $ 105,997 $ 98,525
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
53
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(Amounts in Thousands, Except for Per Share Amounts) 2006 2005 2004
----------------------------------------------------------------- ---------- ---------- ----------
Net Revenues $ 87,929 $ 90,866 $ 82,483
Cost of goods sold 58,719 65,470 58,770
---------- ---------- ----------
Gross Profit 29,210 25,396 23,713
Selling, general and administrative expenses 22,949 20,443 18,461
Loss (gain) on disposal or impairment of fixed assets 28 (334) 994
Impairment loss on intangible assets -- -- 9,002
---------- ---------- ----------
Income (loss) from operations 6,233 5,287 (4,744)
Other income (expense):
Interest income 285 133 3
Interest expense (1,346) (1,594) (2,020)
Interest expense - financing fees (193) (318) (2,191)
Other (110) (7) (456)
---------- ---------- ----------
Income (loss) from continuing operations before income taxes 4,869 3,501 (9,408)
Income taxes 507 432 169
---------- ---------- ----------
Income (loss) from continuing operations 4,362 3,069 (9,577)
Discontinued operations:
Income (loss) from discontinued operations 349 670 (606)
Loss on disposal of discontinued operations -- -- (9,178)
---------- ---------- ----------
Total income (loss) from discontinued operations 349 670 (9,784)
---------- ---------- ----------
Net income (loss) 4,711 3,739 (19,361)
Preferred stock dividends -- (156) (190)
---------- ---------- ----------
Net income (loss) applicable to Common Stock $ 4,711 $ 3,583 $ (19,551)
========== ========== ==========
Net income (loss) per common stockholders - basic:
Continuing operations $ .09 $ .07 $ (.24)
Discontinued operations .01 $ .01 (.24)
---------- ---------- ----------
Net income (loss) per common share $ .10 $ .08 $ (.48)
========== ========== ==========
Net income (loss) per common share - diluted:
Continuing operations $ .09 $ .07 $ (.24)
Discontinued operations .01 .01 (.24)
---------- ---------- ----------
Net income (loss) per common share $ .10 $ .08 $ (.48)
========== ========== ==========
Number of shares used in computing net income (loss) per share:
Basic 48,157 42,605 40,478
========== ========== ==========
Diluted 48,768 44,804 40,478
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
54
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Amounts in Thousands) 2006 2005 2004
----------------------------------------------------------------- ---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 4,711 $ 3,739 $ (19,361)
Adjustments to reconcile net income (loss) to cash provided by
operations:
Depreciation and amortization 4,858 4,754 4,576
Debt discount amortization -- -- 838
Provision for bad debt and other reserves 82 185 117
(Gain) loss on disposal or impairment of plant,
property and equipment 28 (334) 994
Intangible asset impairment -- -- 9,002
Issuance of common stock for services and share
based compensation 510 175 192
Discontinued operations (1,669) 900 9,254
Changes in operating assets and liabilities, of continuing
operations net of effect from business acquisitions:
Accounts receivable 1,288 658 854
Unbilled receivables (3,513) (2,434) (2,215)
Prepaid expenses, inventories and other assets (1,510) 122 835
Accounts payable, accrued expenses and unearned revenue (3,112) (371) 1,811
---------- ---------- ----------
Net cash provided by operations 1,673 7,394 6,897
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net (6,347) (2,099) (2,691)
Proceeds from sale of plant, property and equipment 121 705 (3)
Change in restricted cash, net 446 (16) (2)
Change in finite risk sinking fund (1,179) (1,114) (991)
Cash used for acquisition consideration, net of cash acquired -- -- (2,903)
Cash provided by (used in) discontinued operations 117 -- (164)
---------- ---------- ----------
Net cash used in investing activities (6,842) (2,524) (6,754)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit (2,447) (4,033) (2,755)
Principal repayments of long term debt (2,694) (6,481) (8,535)
Proceeds from issuance of long-term debt -- 4,417 --
Proceeds from issuance of stock 12,079 1,106 10,951
---------- ---------- ----------
Net cash provided by (used in) financing activities 6,938 (4,991) (339)
---------- ---------- ----------
Increase (decrease) in cash 1,769 (121) (196)
Cash at beginning of period 94 215 411
---------- ---------- ----------
Cash at end of period $ 1,863 $ 94 $ 215
========== ========== ==========
Supplemental disclosure:
Interest paid $ 982 $ 1,178 $ 1,920
Non-cash investing and financing activities:
Interest rate swap valuation -- 41 89
Long-term debt incurred for purchase of property and equipment 94 517 320
The accompanying notes are an integral part of these consolidated financial
statements.
55
PERMA-FIX ENVIRONMENTAL SERVICES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Amounts in Thousands, Except for Share Amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- -------------------------- PAID-IN
STOCK AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $ 69,640
=========== =========== =========== =========== ===========
Comprehensive loss
Net loss -- -- -- -- --
Other comprehensive income:
Interest rate swap -- -- -- -- --
Comprehensive loss
Preferred stock dividends -- -- -- -- --
Issuance of Common Stock for
Preferred Stock dividends -- -- 54,581 -- 125
Issuance of Common Stock for
cash and services -- -- 172,647 -- 305
Issuance of Common Stock in
private placement -- -- 4,616,113 5 9,865
Exercise of Warrants and Options -- -- 663,895 1 967
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 2,500 $ -- 42,749,117 $ 43 $ 80,902
=========== =========== =========== =========== ===========
Comprehensive income
Net income -- -- -- -- --
Other comprehensive income:
Interest rate swap -- -- -- -- --
Comprehensive income
Preferred stock dividends -- -- -- -- --
Issuance of Common Stock for
cash and services -- -- 144,566 -- 274
Issuance of Common Stock upon
conversion of Preferred Stock (2,500) -- 1,666,667 2 (2)
Exercise of Warrants and Options -- -- 1,253,566 1 1,006
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 -- $ -- 45,813,916 $ 46 $ 82,180
=========== =========== =========== =========== ===========
Net Income -- -- -- -- --
Retirement of Treasury Stock -- -- (988,000) (1) (1,861)
Issuance of Common Stock for
cash and services -- -- 121,038 -- 216
Issue Stock Subscription
Receivable -- -- 60,000 -- --
Repayment of Stock Subscription
Receivable -- -- -- -- --
Issuance of Common Stock upon
exercise of Warrants and Options -- -- 7,046,790 7 12,107
Share Based Compensation 338
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2006 -- $ -- 52,053,744 $ 52 $ 92,980
=========== =========== =========== =========== ===========
COMMON
STOCK HELD TOTAL
LOAN FOR ACCUMULATED INTEREST IN HAND STOCKHOLDERS'
EQUITY DEFICIT RATE SWAP TREASURY EQUITY
----------- ----------- ----------- ----------- ------------
Balance at December 31, 2003 $ -- $ (17,243) $ (130) $ (1,862) $ 50,442
=========== =========== =========== =========== ===========
Comprehensive loss
Net loss -- (19,361) -- -- (19,361)
Other comprehensive income:
Interest rate swap -- -- 89 -- 89
------------
Comprehensive loss (19,272)
Preferred stock dividends -- (190) -- -- (190)
Issuance of Common Stock for
Preferred Stock dividends -- -- -- 125
Issuance of Common Stock for
cash and services -- -- -- -- 305
Issuance of Common Stock in
private placement -- -- -- -- 9,870
Exercise of Warrants and Options -- -- -- -- 968
----------- ----------- ----------- ----------- ------------
Balance at December 31, 2004 $ -- $ (36,794) $ (41) $ (1,862) $ 42,248
=========== =========== =========== =========== ============
Comprehensive income
Net income -- 3,739 -- -- 3,739
Other comprehensive income:
Interest rate swap -- -- 41 -- 41
------------
Comprehensive income 3,780
Preferred stock dividends -- (156) -- -- (156)
Issuance of Common Stock for
cash and services -- -- -- -- 274
Issuance of Common Stock upon
conversion of Preferred Stock -- -- -- -- --
Exercise of Warrants and Options -- -- -- -- 1,007
----------- ----------- ----------- ----------- ------------
Balance at December 31, 2005 $ -- $ (33,211) $ -- $ (1,862) $ 47,153
=========== =========== =========== =========== ============
Net Income -- 4,711 -- -- 4,711
Retirement of Treasury Stock -- -- -- 1,862 --
Issuance of Common Stock for
cash and services -- -- -- -- 216
Issue Stock Subscription
Receivable (105) -- -- -- (105)
Repayment of Stock Subscription
Receivable 26 -- -- -- 26
Issuance of Common Stock upon
exercise of Warrants and Options -- -- -- -- 12,114
Share Based Compensation -- -- -- -- 338
----------- ----------- ----------- ----------- ------------
Balance at December 31, 2006 $ (79) $ (28,500) $ -- $ -- $ 64,453
=========== =========== =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
56
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
NOTE 1
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
o Environmental services, including emergency response, vacuum services,
marine environmental and other remediation services.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (waste that
is both low-level radioactive and hazardous) which includes on and
off-site waste remediation and processing;
o Nuclear, low-level radioactive, hazardous and non-hazardous waste
treatment, processing and disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Broad-scope environmental issues, including environmental management
programs, regulatory permitting, compliance and auditing, landfill
design, field testing and characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the nuclear and industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear, mixed waste and industrial waste. Such research and
development expenses, although important, are not considered material.
We are subject to certain risks: (1) We are involved in the treatment, handling,
storage and transportation of hazardous and non-hazardous, mixed and industrial
wastes and wastewater. Such activities contain risks against which we believe we
are adequately insured, and (2) in general, certain product lines within the
Industrial segment, are characterized by competition among a number of larger,
more established companies with significantly greater resources.
Our consolidated financial statements include our accounts, and the accounts of
our wholly-owned subsidiaries, Schreiber, Yonley and Associates ("SYA"),
Perma-Fix Treatment Services, Inc. ("PFTS"), Perma-Fix of Florida, Inc. ("PFF"),
Perma-Fix of Dayton, Inc. ("PFD"), Perma-Fix of Ft. Lauderdale, Inc. ("PFFL"),
Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia, Inc. ("PFSG"),
Diversified Scientific Services, Inc. ("DSSI"), East Tennessee Materials &
Energy Corporation ("M&EC"), and Perma-Fix of Michigan, Inc. ("PFMI"), a
discontinued operation (see Note 5). Perma-Fix of Maryland, Inc. ("PFMD") and
Perma-Fix of Pittsburgh, Inc. ("PFP"), a discontinued operation, have been
included in our consolidated financial statements in 2004, from their date of
acquisition.
57
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include our accounts and our wholly-owned
subsidiaries after elimination of all significant intercompany accounts and
transactions.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
USE OF ESTIMATES
When we prepare financial statements in conformity with generally accepted
accounting principles in the United States of America, we make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as, the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. See Notes 5,
9, 10, and 13 for estimates of discontinued operations, closure costs,
environmental liabilities and contingencies for details on particularly
sensitive estimates.
RESTRICTED CASH
Restricted cash reflects secured collateral relative to the various bonding
requirements required for the PFFL treatment, storage and disposal facility and
the PFMD hazardous waste transporter permit in the state of Pennsylvania. Also
included in restricted cash is $35,000 held in escrow for our worker's
compensation policy.
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms
requiring payment within 30 or 60 days from the invoice date based on the
customer type (government, broker, or commercial). Account balances are stated
by invoice at the amount billed to the customer. Payments of accounts receivable
are made directly to a lockbox and are applied to the specific invoices stated
on the customer's remittance advice. The carrying amount of accounts receivable
is reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. We regularly review all accounts receivable balances that exceed 60
days from the invoice date and based on an assessment of current credit
worthiness, estimate the portion, if any, of the balance that will not be
collected. This analysis excludes government related receivables due to our
confidence in their collectibility. Specific accounts that are deemed to be
uncollectible are reserved at 100% of their outstanding balance. The remaining
balances aged over 60 days have a percentage applied by aging category (5% for
balances 61-90 days, 20% for balances 91-120 days and 40% for balances over 120
days aged), based on a historical valuation, that allows us to calculate the
total reserve required. Once we have exhausted all options in the collection of
a delinquent accounts receivable balance, which includes collection letters,
demands for payment, collection agencies and attorneys, the account is deemed
uncollectible and subsequently written off. The write off process involves
approvals, based on dollar amount, from senior management.
UNBILLED RECEIVABLES
Unbilled Receivables are generated by the percentage of completion methodology
used for revenue recognition purposes. As major processing phases are completed
and the costs incurred, we recognize the corresponding percentage of revenue.
The complexity of the documentation and the achievement of certain milestones
that are required for invoicing delay the billing process, which in turn results
in unbilled receivables. The amount of unbilled receivables is more prevalent in
the Nuclear segment due to the complexity of the current contracts, which
require greater levels of documentation for final invoicing.
INVENTORIES
Inventories consist of treatment chemicals, salable used oils, and certain
supplies. Additionally, we have replacement parts in inventory, which are deemed
critical to the operating equipment and may also have extended lead times should
the part fail and need to be replaced. Inventories are valued at the lower of
cost or market with cost determined by the first-in, first-out method.
58
PROPERTY AND EQUIPMENT
Property and equipment expenditures are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets for financial
statement purposes, while accelerated depreciation methods are principally used
for income tax purposes. Generally, annual depreciation rates range from ten to
fifty years for buildings (including improvements and asset retirement costs)
and three to seven years for office furniture and equipment, vehicles, and
decontamination and processing equipment. Leasehold improvements are capitalized
and amortized over the lesser of the life of the lease or the life of the asset.
Maintenance and repairs are charged directly to expense as incurred. The cost
and accumulated depreciation of assets sold or retired are removed from the
respective accounts, and any gain or loss from sale or retirement is recognized
in the accompanying consolidated statements of operations. Renewals and
improvements, which extend the useful lives of the assets, are capitalized.
Included within buildings is an asset retirement obligation, which represents
our best estimate of the cost to close, at some undetermined future date, our
permitted and/or licensed facilities. The asset retirement cost was originally
recorded at $4,559,000 and depreciates over the estimated useful life of the
property.
In accordance with Statement 144, long-lived assets, such as property, plant and
equipment, and purchased intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. During the third quarter of 2004, we reevaluated
certain assets of projects that had been abandoned as part of the restructuring
process of our Industrial segment. Those assets were determined to have no fair
value, and as a result, we recognized an impairment to our fixed assets of
approximately $1,026,000 in 2004.
INTANGIBLE ASSETS
Intangible assets relating to acquired businesses consist primarily of the cost
of purchased businesses in excess of the estimated fair value of net
identifiable assets acquired ("goodwill") and the recognized permit value of the
business. Prior to our adoption of SFAS 142, effective January 1, 2002, goodwill
had been amortized over 20 to 40 years and permits amortized over 10 to 20
years. Effective January 1, 2002, we discontinued amortizing our indefinite life
intangible assets (goodwill and permits). Goodwill and intangible assets that
have indefinite useful lives are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. For goodwill the impairment
determination is made at the reporting unit level and consists of two steps.
First, the Company determines the fair value of a reporting unit and compares it
to its carrying amount. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit's goodwill over the implied fair value of
the goodwill. The implied value of goodwill is determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation,
in accordance with FASB Statement No. 141, Business Combinations. The residual
fair value after this allocation is the impaired fair value of the reporting
unit goodwill. On January 1, 2002, upon adopting SFAS 142 we obtained an initial
financial valuation of our intangible assets, which indicated no impairment to
our indefinite life intangible assets. Our annual financial valuations performed
as of October 1, 2006 and October 1, 2005 indicated no impairments. However, our
annual impairment test performed as of October 1, 2004 resulted in an impairment
of $9,002,000 to our goodwill and permits in our Industrial segment. For further
discussion on the impairment, see "Note 3".
59
ACCRUED CLOSURE COSTS
Accrued closure costs represent our estimated environmental liability to clean
up our facilities as required by our permits, in the event of closure.
INCOME TAXES
We account for income taxes under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires use of the asset
and liability method. SFAS No. 109 provides that deferred tax assets and
liabilities are recorded based on the differences between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets or
liabilities at the end of each period are determined using the currently enacted
tax rates to apply to taxable income in the periods in which the deferred tax
assets or liabilities are expected to be settled or realized. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive income has two components, net income and other
comprehensive income, and is included on the balance sheet in the equity
section. Our other comprehensive income consisted of the market value of the
interest rate swap. For more information see Interest Rate Swap policy below.
REVENUE RECOGNITION
Nuclear revenues. The processing of mixed waste is complex and may take several
months or more to complete, as such we recognize revenues on a percentage of
completion basis with our measure of progress towards completion determined
based on output measures consisting of milestones achieved and completed. We
have waste tracking capabilities, which we continue to enhance, to allow us to
better match the revenues earned to the processing phases achieved. The revenues
are recognized as each of the following three processing phases are completed:
receipt, treatment/processing and shipment/final disposal. However, based on the
processing of certain waste streams, the treatment/processing and shipment/final
disposal phases may be combined as they are completed concurrently. As major
processing phases are completed and the costs incurred, we recognize the
corresponding percentage of revenue. We experience delays in processing invoices
due to the complexity of the documentation that is required for invoicing, as
well as the difference between completion of revenue recognition milestones and
agreed upon invoicing terms, which results in unbilled receivables. The timing
differences occur for several reasons, partially from delays in the final
processing of all wastes associated with certain work orders and partially from
delays for analytical testing that is required after we have processed waste but
prior to our release of waste for disposal. The difference also occurs due to
our end disposal sites requirement of preapproval prior to our shipping waste
for disposal and our contract terms with the customer that we dispose of the
waste prior to invoicing. As the waste moves through these processing phases and
revenues are recognized, the correlating costs are incurred. Although we use our
best estimates and all available information to accurately determine these
disposal expenses, the risk does exist that the accrual could prove to be
inadequate in the event the waste requires retreatment. Furthermore, should the
waste be returned to the generator, the related receivables could be
uncollectible; however, historical experience has not indicated this to be a
material uncertainty.
Changes to total estimated revenues, contract costs and percent complete, if
any, are recorded in the period they are first determined. Estimated losses, if
any, on uncompleted contracts are recorded in the period in which it is first
determined a loss is apparent.
As a significant customer, revenues with Bechtel Jacobs, accounted for
approximately $6,705,000 or 7.6%, $14,940,000 or 16.5%, and $9,405,000 or 11.4%
of total revenues for the years ended December 31, 2006, 2005, and 2004,
respectively. Consolidated revenues from LATA/Parallax for 2006 total
$10,341,000 or 11.8% of total revenues. Both Bechtel Jacobs and LATA/Parallax
could terminate the relationship with us at ay time for convenience. See "Note
13" - "Commitments and Contingencies".
Industrial waste revenues. Since industrial waste streams are much less
complicated than mixed waste streams and they require a short processing period,
we recognize revenues for industrial services at the time the services are
substantially rendered, which generally happens upon receipt of the waste, or
shortly thereafter. These large volumes of bulk waste are received and
immediately commingled with various customers' wastes, which transfers the legal
and regulatory responsibility and liability to us upon receipt. As we continue
to enhance our waste tracking systems within the segment we will continue to
review and reevaluate our revenue recognition policy.
60
Consulting revenues. Consulting revenues are recognized as services are
rendered, as is consistent with industry standards. The services provided are
based on billable hours and revenues are recognized in relation to incurred
labor and consulting costs. Out of pocket costs reimbursed by customers are also
included in revenues.
SELF-INSURANCE
We have a self-insurance program for certain health benefits. The cost of these
benefits is recognized as expense in the period in which the claim occurred,
including estimates of claims incurred but not reported. Claims expense for 2006
was approximately $2,868,000, as compared to $3,474,000 and $2,985,000 for 2005
and 2004, respectively.
STOCK-BASED COMPENSATION
On January 1, 2006, we adopted Financial Accounting Standards Board ("FASB")
Statement No. 123 (revised) ("SFAS 123R"), Share-Based Payment, a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation, superseding APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement establishes accounting standards for
entity exchanges of equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative upon adopting SFAS
123R.
We adopted SFAS 123R utilizing the modified prospective method in which
compensation cost is recognized beginning with the effective date based on SFAS
123R requirements for all (a) share-based payments granted after the effective
date and (b) awards granted to employees prior to the effective date of SFAS
123R that remain unvested on the effective date. In accordance with the modified
prospective method, the consolidated financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123R.
Prior to our adoption of SFAS 123R, on July 28, 2005, the Compensation and Stock
Option Committee of the Board of Directors approved the acceleration of vesting
for all the outstanding and unvested options to purchase Common Stock awarded to
employees as of the approval date. The Board of Directors approved the
accelerated vesting of these options based on the belief that it was in the best
interest of our stockholders to reduce future compensation expense that would
otherwise be required in the statement of operations upon adoption of SFAS 123R,
effective beginning January 1, 2006. The accelerated vesting triggered the
re-measurement of compensation cost under current accounting standards. In the
event a holder of an accelerated vesting option terminates employment with us
prior to the end of the original vesting term of such options, we will recognize
the compensation expense at the time of termination.
As of December 31, 2006, we have 2,627,750 employee stock options outstanding,
which included 1,694,750 that were outstanding and fully vested at December 31,
2005, 833,000 employee stock options approved and granted on March 2, 2006, and
100,000 employee stock options approved and granted on May 15, 2006. The
weighted average exercise price of the 1,694,750 outstanding and fully vested
employee stock options is $1.96 with a weighted contractual life of 4.25 years.
The employee stock options outstanding at December 31, 2005, are ten year
options, issuable at exercise prices from $1.25 to $3.00 per share, and
expiration dates from April 8, 2007 to October 28, 2014. The employee stock
option grants in March and May 2006 are six year options with a three year
vesting period, with exercise prices from $1.85 to $1.86 per share.
61
Additionally, we also have 489,000 director stock options outstanding, of which
72,000 became fully vested in January 2006, and 90,000 newly granted shares, ten
year options with an exercise price of $2.15, with vesting period of six months,
resulting from the re-election of our Board of Directors on July 27, 2006. The
weighted average exercise price of the 399,000 exercisable director stock
options outstanding as of December 31, 2006 is $1.94 with a weighted average
contractual life of 6.03 years.
Pursuant to the adoption of SFAS 123R, during the three-month period ended March
31, 2006, we recorded stock-based compensation expense for the director stock
options granted prior to, but not yet vested, as of January 1, 2006, as if the
fair value method required for pro forma disclosure under SFAS 123 were in
effect for expense recognition purposes. This resulted in an expense of
approximately $11,000. We recorded $133,000 additional stock-based compensation
expense as of December 2006 as result of the 90,000 director stock option grant.
For the employee stock option grants on March 2, 2006 and May 15, 2006, we have
estimated compensation expense based on the fair value at grant date using the
Black-Scholes valuation model and have recognized compensation expense using a
straight-line amortization method over the three year vesting period. As SFAS
123R requires that stock-based compensation expense be based on options that are
ultimately expected to vest, stock-based compensation for year ended December
31, 2006 has been reduced for estimated forfeitures at a rate of 5.7 %. When
estimating forfeitures, we consider trends of actual option forfeitures. As of
December 31, 2006, we recorded approximately $194,000 in employee compensation
expense from the 2006 grants, which included with the director compensation
expense, impacted our results of operations for year by $338,000. In total, we
have approximately $679,000 of total unrecognized compensation cost related to
unvested options as of December 31 2006, of which approximately $263,000 will be
recognized in 2007, $240,000 will be recognized in 2008, and the remaining
$176,000 in 2009.
We calculated a fair value of $0.868 for each March 2, 2006 option grant on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: no dividend yield; an expected life of four years; expected
volatility of 54.0%; and a risk free interest rate of 4.70%. We calculated a
fair value of $0.877 for the May 15, 2006 option grant on the date of grant with
the following assumptions: no dividend yield; an expected life of four years; an
expected volatility of 54.6%; and a risk-free interest rate of 5.03%. No
employee options were granted in the corresponding periods of 2005. We
calculated a fair value of $1.742 for each July 27, 2006 director option grant
on the date of the grant with the following assumptions: no dividend yield; an
expected life of ten years; an expected volatility of 73.31%; and a risk free
interest rate of 4.98%.
Our computations of expected volatility for 2006 are based on historical
volatility from our traded Common Stock, as was the computation of expected
volatility on grants prior to 2006. Due to our change in the contractual term
and vesting period, we utilized the simplified method, defined in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 107, to calculate the
expected term for our 2006 employee grants. We utilized contractual term for the
expected term of the director option grants in July 2006. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant.
Prior to the adoption of SFAS 123R, we furnished the pro forma disclosures
required under SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosures". Employee stock-based
compensation expense recognized under SFAS 123R was not reflected in our results
of operations for the year ending December 2005 for employee stock option grants
as all options were granted with an exercise price equal to the market value of
the underlying Common Stock on the date of grant. Previously reported amounts
have not been restated.
62
Under the accounting provisions of SFAS 123, our net income (loss) and net
income (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below (in thousands except for per share amounts):
2005 2004
---------- ----------
Net income (loss) from continuing operations, applicable to Common $ 2,913 $ (9,767)
Stock, as reported
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all awards, net of related tax effects (727) (380)
---------- ----------
Pro forma net income (loss) from continuing operations applicable to Common Stock $ 2,186 $ (10,147)
========== ==========
Earnings (loss) per share from continuing operations
Basic - as reported $ .07 $ (.24)
========== ==========
Basic - pro-forma $ .05 $ (.25)
========== ==========
Diluted - as reported $ .07 $ (.24)
========== ==========
Diluted - pro-forma $ .05 $ (.25)
========== ==========
63
NET INCOME (LOSS) PER SHARE
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the year. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the year ended December 31,
2004 does not include potential common shares, as their effect would be
anti-dilutive.
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the years ended December 31, 2006, 2005,
and 2004:
(Amounts in Thousands, Except for Per Share Amounts) 2006 2005 2004
--------------------------------------------------------------------- ---------- ---------- ----------
Earnings per share from continuing operations
---------------------------------------------
Income (loss) from continuing operations $ 4,362 $ 3,069 $ (9,577)
Preferred stock dividends -- (156) (190)
---------- ---------- ----------
Income (loss) from continuing operations applicable to Common Stock 4,362 2,913 (9,767)
Common Stock
Effect of dilutive securities:
Preferred Stock dividends -- 156 190
---------- ---------- ----------
Income (loss) - diluted $ 4,362 $ 3,069 $ (9,577)
========== ========== ==========
Basic income (loss) per share $ .09 $ .07 $ (.24)
========== ========== ==========
Diluted income (loss) per share $ .09 $ .07 $ (.24)
========== ========== ==========
Earnings per share from discontinued operations
-----------------------------------------------
Income (loss) - basic and diluted $ 349 $ 670 $ (9,784)
========== ========== ==========
Basic income (loss) per share $ .01 $ .01 $ (.24)
========== ========== ==========
Diluted income (loss) per share $ .01 $ .01 $ (.24)
========== ========== ==========
Weighted average common shares outstanding - basic 48,157 42,605 40,478
Potential shares exercisable under stock option plans 286 268 --
Potential shares upon exercise of Warrants 325 689 --
Potential shares upon conversion of Preferred Stock -- 1,242 --
---------- ---------- ----------
Weighted average shares outstanding - diluted 48,768 44,804 40,478
========== ========== ==========
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
Upon exercise of options 1,030 1,308 2,976
Upon exercise of Warrants 1,776 1,776 12,791
Upon conversion of Preferred Stock -- -- 1,667
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of our outstanding debt from a floating
basis to a fixed rate, thus reducing the possible impact of interest rate
changes on future income. This agreement involved the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates changed and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties was included in other
assets or liabilities. During the year ended December 31, 2005, we recorded a
gain on the interest rate swap of $41,000, which was included in other
comprehensive income on the Statement of Stockholders' Equity (see "Note 7").
The interest rate swap agreement expired in December 2005.
64
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, trade accounts receivable, trade accounts payable,
accrued expenses and unearned revenues approximate their fair values principally
because of the short-term maturities of these financial instruments. The fair
value of our long-term debt is estimated based on the current rates offered to
us for debt of similar terms and maturities. Under this method, the fair value
of long-term debt was not significantly different from the stated carrying value
at December 31, 2006 and 2005. The book value of our subsidiary's preferred
stock is not significantly different than its fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes".
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 and the provisions of FIN 48 will be applied
to all tax positions upon initial adoption of the Interpretation. The cumulative
effect of applying the provisions of this Interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. We
are currently evaluating the potential impact of FIN 48 on our financial
statements.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS 157
simplifies and codifies guidance on fair value measurements under generally
accepted accounting principles. This standard defines fair value, establishes a
framework for measuring fair value and prescribes expanded disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating
the effect, if any, the adoption of SFAS 157 will have on our financial
condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plan - an amendment of FASB Statement
No. 87, 88, 106 and 132(R)". SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an
asset or liability in its statement of financial position and recognize changes
in the funded status in the year in which the changes occur. SFAS 158 is
effective for fiscal years ending after December 15, 2006. SFAS 158 did not have
a material effect on our financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities". SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting financial instruments. SFAS 159 is effective as of the
beginning of an entity's first fiscal year that begins after November, 15, 2007.
We are currently evaluating the effect, if any, the adoption of SFAS 159 will
have on our financial condition, results of operations and cash flow.
65
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS 142 January 1, 2002. SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill for impairment
at least annually. In addition, SFAS 142 requires that we identify reporting
units for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for impairment
in accordance with the guidance in SFAS 142. We utilized an independent
appraisal firm to test goodwill and permits, separately, for impairment. The
reports indicated no impairment as of October 1, 2006 and October 1, 2005. Our
annual impairment test as of October 1, 2004, resulted in an impairment of
goodwill and permits, in our Industrial segment in the amounts of $4,886,000 and
$4,116,000, respectively. The aggregate impairment of $9,002,000 is recorded in
our loss from operations for the year ended December 31, 2004, in our
Consolidated Statement of Operations. The annual impairment test as of October
1, 2004, indicated no impairment for our Nuclear and Engineering segments.
The following table is a summary of changes in the carrying amount of goodwill
for the years ended December 31, 2004, 2005, and 2006 (amounts in thousands).
Our Nuclear segment has been excluded as it has no goodwill recorded.
INDUSTRIAL ENGINEERING
GOODWILL SEGMENT SEGMENT TOTAL
-------------------------------------------------- ---------- ---------- ----------
Balance as of December 31, 2003 $ 4,886 $ 1,330 $ 6,216
Impairment of goodwill (4,886) -- (4,886)
---------- ---------- ----------
Balance as of December 31, 2004, 2005, and 2006 $ -- $ 1,330 $ 1,330
========== ========== ==========
The following table is a summary of changes in the carrying amount of permits
for the years ended December 31, 2004, 2005, and 2006 (amounts in thousands).
Our Engineering segment has been excluded as it has no permits recorded.
INDUSTRIAL NUCLEAR
PERMITS SEGMENT SEGMENT TOTAL
-------------------------------------------------- ---------- ---------- ----------
Balance as of December 31, 2003 $ 6,482 $ 10,198 $ 16,680
Permits in progress 3 328 331
Impairment of permits (4,116) -- (4,116)
---------- ---------- ----------
Balance as of December 31, 2004 2,369 10,526 12,895
Permits in progress -- 293 293
---------- ---------- ----------
Balance as of December 31, 2005 2,369 10,819 13,188
Permits in progress -- 207 207
---------- ---------- ----------
Balance as of December 31, 2006 $ 2,369 $ 11,026 $ 13,395
========== ========== ==========
66
NOTE 4
ACQUISITIONS
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed its acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP
provided a variety of environmental services, however, as we re-evaluated the
business, we decided to discontinue operations at PFP. The Board of Directors
approved the closure in November 2005. See "Note 5" for further discussion on
the discontinued operation.
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed as of this date, and the
results of operations since this date, were included in the accompanying
consolidated financial statements. Costs incurred related to the acquisitions
were $275,000 and are included in our purchase price allocation as liabilities
assumed. We obtained third party evaluations of certain assets and at December
31, 2004, finalized our purchase price allocation to the net assets acquired and
the net liabilities assumed, as follows:
PFMD PFP
---------- ----------
Assets acquired:
Current tangible assets $ 2,457 $ 24
Fixed assets 1,810 413
Liabilities assumed:
Current accounts payable and accruals (1,141) (107)
Long-term environmental reserve (391) (150)
---------- ----------
Total purchase price allocation $ 2,735 $ 180
========== ==========
The third party evaluations resulted in higher fair values for property and
equipment than was allocable to those assets based upon the purchase price of
such assets and, as such, we reduced on a pro rata basis the value of the
property and equipment to their final book values, as recorded through purchase
accounting.
We have entered into a letter of intent to acquire Nuvotec USA, Inc. ("Nuvotec")
and its wholly owned subsidiary, Pacific EcoSolutions, Inc. ("PEcoS"). PEcoS is
a hazardous waste, low level radioactive waste and mixed waste (containing both
hazardous waste and low level radioactive waste) management company based in
Richard, Washington, adjacent to the DOE's Hanford facility. Under the letter of
intent, as consideration for the purchase, we would pay $7 million, subject to
adjustment under certain conditions, with $6 million, as may be adjusted,
payable at closing and $1 million payable in equal installments over three
years, and up to $4.6 million in the form of an earn-out based on revenues of
our Nuclear segment exceeding certain based levels each year over a four year
period. At the closing of this proposed transaction, we will be required to pay
or assume approximately $9.4 million of bank and shareholder debt, comprised of
approximately $5.3 million of Nuvotec's bank debt, $375,000 of Nuvotec's debt to
certain of its shareholders, and $3.8 million of PEcoS' bank debt. The
acquisition is subject to, among other things, execution of definitive
agreements, completion of due diligence and approval of lenders. If the
transaction is completed, at the closing, Nuvotec's principal asset will be
PEcoS. The PEcoS facility is permitted to treat, store, and process hazardous
waste, low level radioactive waste and mixed waste, and is located adjacent to
the DOE's Hanford site. If the transaction is completed, we intend to fund any
consideration consisting of cash payments to be paid at closing from our working
capital or from borrowings under our Revolving Credit facility. Further, at the
closing of this proposed transaction, certain shareholders of Nuvotec
immediately prior to the closing that are accredited investors have agreed to
buy from us $2 million of our common stock in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Act"), and/or Rule 506 promulgated under the Act.
67
The Department of Energy's Hanford site was first utilized as part of the
Manhattan Project and throughout the Cold War to provide the plutonium and other
materials necessary for the development of nuclear weapons. Most of Hanford's
reactors were shut down in the 1970s, but vast quantities of nuclear waste still
remain at the site. Currently, the Hanford Site is engaged in one of the
nation's largest environmental cleanups, which is expected to continue until
2030.
The PEcoS facility is located on 45 acres adjacent to the Hanford site, and is
comprised of a low-level radioactive waste (LLRW) facility and a mixed waste
(MW) facility. The LLRW facility has a radioactive materials license, and
encompasses approximately 70,000 square feet. The MW facility has RCRA and TSCA
permits, a radioactive materials license, and encompasses approximately 80,000
square feet. PEcoS' revenue during its fiscal year ending September 30, 2006,
was reported to be $13 million. At this time, the due diligence is proceeding.
NOTE 5
DISCONTINUED OPERATIONS
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The decision to discontinue
operations at PFP was due to our reevaluation of the facility and our ability to
achieve profitability at the facility in the near term. During February 2006, we
completed the remediation of the leased property and the equipment, and released
the property back to the owner. The operating results for the current and prior
periods have been reclassified to discontinued operations in our Consolidated
Statements of Operations.
PFP recognized a loss of $352,000 in 2006, which was partially due to early
termination costs of $200,000 associated with our early termination of our
leased property, as compared to an operating loss of $346,000 and revenues of
$721,000 for the year ended December 31, 2005. The assets and liabilities
related to PFP have been reclassified into separate categories in the
Consolidated Balance Sheets as of December 31, 2006 and 2005. The assets are
recorded at their net realizable value, and consist of equipment of $106,000.
PFP has no liabilities as of December 31, 2006.
PFMI
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
PFMI was principally a result of two fires that significantly disrupted
operations at the facility in 2003, and the facility's continued drain on the
financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
PFMI recorded income of $701,000 for the year ending December 31, 2006 and
income of $1,017,000 for the year ending 2005. Our income for 2006 was a result
of a reduction of $1,182,000 in our environmental accrual due to our
re-evaluation of the accrual we have recorded for the closure and remediation
activities we are performing. Our income in 2005 was the result of the
settlement of three insurance claims we submitted relative to the two fires at
PFMI, a property claim for the first fire and a property claim and business
interruption claim for the second fire. During 2004, we recorded a receivable of
$1,585,000 based on negotiations with the insurance carrier on the business
interruption claim. This receivable was recorded as a reduction of "loss from
discontinued operations" and reduced the operating losses for 2004. During 2005,
we received insurance proceeds and claim settlements of $3,253,000 for
settlement of all three claims. Of these proceeds, $1,476,000 was recorded as
income from discontinued operations during the third quarter of 2005, which is
net of $192,000 paid for public adjustor fees.
68
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2006 and 2005. As of December 31, 2006, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$600,000. Liabilities as of December 31, 2006, consist of current accrued
expenses of $22,500, environmental accruals of $653,000, and a pension payable
of $1,433,000. The pension plan withdrawal liability is a result of the
termination of the union employees of PFMI. The PFMI union employees participate
in the Central States Teamsters Pension Fund ("CST"), which provides that a
partial or full termination of union employees may result in a withdrawal
liability, due from PFMI to CST. The recorded liability is based upon a demand
letter received from CST in August 2005 that provided for the payment of $22,000
per month, for principal and interest, over an eight year period. This
obligation is recorded as a long-term liability, with a current portion of
$146,000 that we expect to pay over the next year.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which is not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we estimated the cost of
this environmental closure and remediation liability to be $2,464,000. During
2006, we re-evaluated our required activities to close and remediate the
facility, and during the quarter ended June 30, 2006, we began implementing the
modified methodology to remediate the facility. As a result of the reevaluation
and the change in methodology we reduced the accrual by $1,182,000. We have
spent approximately $629,000 for closure costs since September 30, 2004, of
which $74,000 has been spent during 2006, and $439,000 was spent in 2005. We
have $653,000 accrued for the closure, as of December 31, 2006, and we
anticipate spending $538,000 in 2007 with the remainder over the next six years.
NOTE 6
PREFERRED STOCK ISSUANCE AND CONVERSION
SERIES B PREFERRED STOCK
As partial consideration of the M&EC Acquisition, M&EC issued shares of its
Series B Preferred Stock to stockholders of M&EC having a stated value of
approximately $1,285,000. No other shares of M&EC's Series B Preferred Stock are
outstanding. The Series B Preferred Stock is non-voting and non-convertible, has
a $1.00 liquidation preference per share and may be redeemed at the option of
M&EC at any time after one year from the date of issuance for the per share
price of $1.00. Following the first 12 months after the original issuance of the
Series B Preferred Stock, the holders of the Series B Preferred Stock will be
entitled to receive, when, as, and if declared by the Board of Directors of M&EC
out of legally available funds, dividends at the rate of 5% per year per share
applied to the amount of $1.00 per share, which shall be fully cumulative. We
began accruing dividends for the Series B Preferred Stock in July 2002, and have
accrued a total of approximately $290,000 since July 2002, of which $64,000 was
accrued in each of the years ended December 31, 2003 to 2006.
SERIES 17 PREFERRED
As of January 1, 2002, Capital Bank held 2,500 shares of the Company's Series 17
Preferred Stock, as agent for certain of its accredited investors. The Series 17
Preferred was convertible into shares of Common Stock at any time at a
conversion price of $1.50 per share, subject to adjustment as set forth in the
Certificate of Designations relating to the Series 17 Preferred. The Series 17
Preferred had a "stated value" of $1,000 per share.
On September 30, 2005, the Company received a notice from Capital Bank GRAWE
Gruppe, AG, dated September 26, 2005, to convert the 2,500 issued and
outstanding shares of the Company's Series 17 Class Q Convertible Preferred
Stock ("Series 17"). Pursuant to the terms of the Series 17, the conversion
resulted in the issuance of 1,666,667 shares of the Company's common stock,
$.001 par value ("Common Stock") to Capital Bank, as agent for certain of its
investors. In addition to $125,000 of dividends paid in cash during 2005, the
final dividend due on the Series 17 of approximately $30,000 for the period from
July 1, 2005 through the conversion date was paid in cash in October 2005. For
the year ended December 31, 2005, dividends on the Series 17 were $92,000.
69
NOTE 7
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2006, and 2005:
(Amounts in Thousands) 2006 2005
--------------------------------------------------------------------------------------- ---------- ----------
Revolving Credit facility dated December 22, 2000, borrowings based upon eligible
accounts receivable, subject to monthly borrowing base calculation, variable
interest paid monthly at prime rate plus 1/2 % (8.75% at December 31, 2006),
beginning in March 2005, balance due in May 2008. $ -- $ 2,447
Term Loan dated December 22, 2000, payable in equal monthly installments principal
of $83, balance due in May 2008, variable interest paid monthly at prime
rate plus 1% (9.25% at December 31, 2006) 5,500 6,500
Promissory note dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable rate determined under the IRS Code Section (10.0% on
December 31, 2006) and is payable in one lump sum at the end of installment period. 1,434 2,234
Installment Agreement dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest accrues at
the applicable rate determined under the IRS Code Section (10% on December
31, 2006) and is payable in one lump sum at the end of installment period. 353 553
Various capital lease and promissory note obligations, payable 2007 to
2011, interest at rates ranging from 5.0% to 14.1% 1,042 1,641
---------- ----------
8,329 13,375
Less current portion of long-term debt 2,403 2,678
---------- ----------
$ 5,926 $ 10,697
========== ==========
REVOLVING CREDIT AND TERM LOAN AGREEMENT
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement initially provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves the Agent reasonably deems proper and
necessary.
70
Effective March 25, 2005, the Company and PNC entered into an amended agreement
("Amendment No. 4"), which, among other things, extends the $25 million credit
facility through May 31, 2008. The other terms of the credit facility remain
principally unchanged, as a result of the amendment, with the exception of a 50
basis point reduction in the variable interest rate on both loans. As of
December 31, 2006, the excess availability under our Revolving Credit was
$14,461,000 based on our eligible receivables.
On June 29, 2005, we entered into an amendment ("Amendment No. 5") to the
Agreement. Pursuant to Amendment No. 5, PNC increased our Term Loan by
approximately $4.4 million, resulting in a Term Loan of $7 million. Under
Amendment No. 5, the Term Loan continues to be payable in monthly installments
of approximately $83,000, plus accrued interest, with the remaining unpaid
principal balance and accrued interest, payable in May 2008, upon termination of
the amended Agreement. As part of Amendment No. 5, certain of our subsidiaries
have modified or granted mortgages to PNC on their facilities, in addition to
the collateral previously granted to PNC under the Agreement. All other terms
and conditions to the Agreement, remain principally unchanged. We used the
additional loan proceeds to prepay a $3.5 million unsecured promissory note,
which was due and payable in August 2005, and the balance was used for general
working capital. As a condition of Amendments No. 4 and 5, we expensed the
$140,000 fee to PNC.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. We are subject to a prepayment
fee of 1% until March 25, 2006, and 1/2% until March 25 if we elect to terminate
the Agreement with PNC.
PROMISSORY NOTE
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2007 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended (10% on December 31, 2006) and payable in one
lump sum at the end of the loan period. On December 31, 2006, the outstanding
balance was $3,202,000 including accrued interest of approximately $1,768,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
INSTALLMENT AGREEMENT
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2007 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On December 31,
2006, the rate was 10%. On December 31, 2006, the outstanding balance was
$776,000 including accrued interest of approximately $423,000.
The aggregate approximate amount of the maturities of long-term debt maturing in
future years as of December 31, 2006, is $2,403,000 in 2007; $5,712,000 in 2008;
$156,000 in 2009; $49,000 in 2010, and $9,000 in 2011.
71
CAPITAL LEASES
The following table lists components of the capital leases as of December 31,
2006 (in thousands):
CAPTIAL OPERATING
LEASES LEASES
------------ ------------
Year ending December 31:
2007 $ 403 $ 1,300
2008 424 868
2009 156 706
2010 49 565
2011 10 426
Later years beyond 186
------------ ------------
Total Minimum Lease Payments 1,042 $ 4,051
============
Less estimated executory costs --
------------
Net minimum lease payments 1,042
Less current installments of obligations under capital leases 403
------------
Obligations under capital leases excluding
current installments $ 639
============
NOTE 8
ACCRUED EXPENSES
Accrued expenses at December 31 include the following (in thousands):
2006 2005
---------- ----------
Salaries and employee benefits $ 3,987 $ 3,536
Accrued sales, property and other tax 1,340 1,171
Waste disposal and other processing expenses 4,115 3,712
Insurance Payable 71 2,045
Other 1,774 1,202
---------- ----------
Total accrued expenses $ 11,287 $ 11,666
========== ==========
NOTE 9
ACCRUED CLOSURE COSTS
We accrue for the estimated closure costs as determined pursuant to RCRA
guidelines for all fixed-based regulated facilities, even though we do not
intend to or have present plans to close any of our existing facilities. The
permits and/or licenses define the waste, which may be received at the facility
in question, and the treatment or process used to handle and/or store the waste.
In addition, the permits and/or licenses specify, in detail, the process and
steps that a hazardous waste or mixed waste facility must follow should the
facility be closed or cease operating as a hazardous waste or mixed waste
facility. Closure procedures and cost calculations in connection with closure of
a facility are based on guidelines developed by the federal and/or state
regulatory authorities under RCRA and the other appropriate statutes or
regulations promulgated pursuant to the statutes. The closure procedures are
very specific to the waste accepted and processes used at each facility. We
recognize the closure cost as a liability on the balance sheet. Since all our
facilities are acquired facilities, the closure cost for each facility was
recognized pursuant to a business combination and recorded as part of the
purchase price allocation of fair value to identifiable assets acquired and
liabilities assumed.
72
The closure calculation is increased annually for inflation based on RCRA
guidelines, and for any approved changes or expansions to the facility, which
may result in either an increase or decrease in the approved closure amount. An
increase resulting from changes or expansions is recorded to expense over the
term of such a renewed/expanded permit, generally five (5) years, and annual
inflation factor increases are expensed during the current year.
During 2006, the accrued long-term closure cost increased by $148,000 to a total
of $5,393,000 as compared to the 2005 total of $5,245,000. This increase is
principally a result of normal inflation factor increases.
Statements of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations, ("SFAS 143") requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. In conjunction with the state mandated permit and
licensing requirements, we are obligated to determine our best estimate of the
cost to close, at some undetermined future date, our permitted and/or licensed
facilities. We recorded this liability at the date of acquisition of each
facility, with its offsetting entry being to goodwill and/or permits and have
subsequently increased this liability as a result of changes to the facility
and/or for inflation. Our current accrued closure costs reflect the current fair
value of the cost of asset retirement. We adopted SFAS 143 as of January 1,
2003, and pursuant to the adoption we reclassified from goodwill and permits
approximately $4,558,000 (see "Note 3"), which represents the fair value of our
closing cost as recorded to goodwill or permits at the time each facility was
acquired, into an asset retirement obligation account. The associated asset
retirement cost is recorded as property and equipment (buildings). We are
depreciating the asset retirement cost on a straight-line basis over its
estimated useful life of 40 years.
NOTE 10
ENVIRONMENTAL LIABILITIES
We have various remediation projects, which are currently in progress at certain
of our permitted Industrial segment facilities owned and operated by our
subsidiaries. These remediation projects principally entail the removal of
contaminated soil and, in some cases, the remediation of surrounding ground
water. Five of the remedial clean-up projects in question were an issue for that
facility for years prior to our acquisition of the facility and were recognized
pursuant to a business combination and recorded as part of the purchase price
allocation to assets acquired and liabilities assumed. Three of the facilities,
(PFD, PFM, and PFSG) are RCRA permitted facilities, and as a result, the
remediation activities are closely reviewed and monitored by the applicable
state regulators. Additionally, we recorded environmental liabilities upon
acquisition of PFMD and PFP in March 2004, which are not RCRA permitted
facilities. We have recognized our best estimate of such environmental
liabilities upon the acquisition of these five facilities, as part of the
acquisition cost. In the normal course of our business, the operations will on
occasion create a minor environmental remediation issue, which will be evaluated
and a corresponding remedial liability recorded. Minor environmental remediation
liabilities were recognized and recorded for the PFTS facility during 2004. As
further discussed in the discontinued operations footnote, we accrued
environmental liabilities for PFMI, one of our two discontinued operations. See
"Note 5" - "Discontinued Operations".
At December 31, 2006, we had accrued environmental liabilities totaling
$2,625,000, at our continuing operations, which reflects an increase of $285,000
from the December 31, 2005, balance of $2,340,000. The increase is a result of
payments on the remediation projects, which was partially offset by an increase
from our reevaluation of our remediation estimates. We also have accrued
environmental liabilities of $653,000 for our discontinued operation facility,
PFMI.
73
The December 31, 2006 current and long-term accrued environmental balance is
recorded as follows:
CURRENT LONG-TERM
ACCRUAL ACCRUAL TOTAL
------------ ------------ ------------
PFD $ 277,000 $ 453,000 $ 730,000
PFM 453,000 348,000 801,000
PFSG 134,000 532,000 666,000
PFTS 7,000 30,000 37,000
PFMD -- 391,000 391,000
------------ ------------ ------------
871,000 1,754,000 2,625,000
PFMI 538,000 115,000 653,000
------------ ------------ ------------
Total Liability $ 1,409,000 $ 1,869,000 $ 3,278,000
============ ============ ============
PFD
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three treatment, storage and
disposal companies, including the PFD facility. The former owners of PFD had
merged EPS with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating this facility leased by PFD ("Leased
Property") but never used or operated by PFD, which entails remediation of soil
and/or groundwater restoration. The Leased Property used by EPS to operate its
facility is separate and apart from the property on which PFD's facility is
located. In conjunction with the subsequent bankruptcy filing by Quadrex, and
our recording of purchase accounting for the acquisition of PFD, we recognized
an environmental liability of approximately $1,200,000 for the remediation of
this leased facility. This facility has pursued remedial activities for the past
nine years and after evaluating various technologies, is seeking approval from
appropriate governmental authority for the final remedial process, through the
utilization of third party consultants. During 2006, we reduced the reserve by
approximately $13,000, a result of a reassessment on the cost of remediation,
and incurred remedial expenditures of $42,000, resulting in total decrease of
our reserve by $55,000 from December 31, 2005 to December, 31, 2006. We
anticipate spending for the remaining remedial activity over the next six years.
PFM
Pursuant to our acquisition, effective December 31, 1993, of Perma-Fix of
Memphis, Inc. (f/k/a American Resource Recovery, Inc.), we assumed certain
liabilities relative to the removal of contaminated soil and to undergo
groundwater remediation at the facility. Prior to our ownership of Perma-Fix of
Memphis, Inc., the owners installed monitoring and treatment equipment to
restore the groundwater to acceptable standards in accordance with federal,
state and local authorities. The groundwater remediation at this facility has
been ongoing since approximately 1990, and, subject to the approval of the
appropriate agency, Perma-Fix of Memphis, Inc. intends to begin final
remediation of this facility. In 2006, we increased our reserve by approximately
$322,000, a result of a reassessment on the cost of remediation, which was
partially offset by expenditures of $109,000. Our anticipated spending on the
remaining remedial activities will be over the next six years.
PFSG
During 1999, we recognized an environmental accrual of $2,199,000, in
conjunction with the acquisition of PFSG. This amount represented our estimate
of the long- term costs to remove contaminated soil and to undergo groundwater
remediation activities at the PFSG acquired facility in Valdosta, Georgia. PFSG,
in conjunction with third party consultants, have over the past four years,
completed the initial valuation, selected the remedial process to be utilized,
and completed the planning and approval process. Remedial activities began in
2003. In 2006, we increased our reserve by approximately $344,000, a result of
reassessment on the cost of remediation, which was partially offset by
expenditures of $204,000. We anticipate spending on the remedial activities will
be over the next six years.
74
PFTS
In conjunction with an oil spill, we accrued approximately $69,000 to remediate
the contaminated soil and ground water at this location. For the year ended
December 31, 2006, we have incurred $13,000 in remediation costs, which reduced
the reserve. We expect to complete spending on this remedial project over the
next six years.
PFMD
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
PFMI
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which is not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we recorded our best
estimate of the cost of this environmental closure and remediation liability, of
$2,464,000, as of September 30, 2004. During 2006 we re-evaluated the required
activities to close and remediate the facility, and during the quarter ended
June 30, 2006, we began implementing the modified methodology to remediate the
facility. As a result of the reevaluation and the change in methodology, we
reduced the accrual by $1,182,000. We have spent approximately $629,000 for
closure costs since September 30, 2004, of which $74,000 has been spent during
2006, and $439,000 was spent in 2005. We have $653,000 accrued for the closure,
as of December 31, 2006, and we anticipate spending $538,000 in 2007 with the
remainder over the next five years.
PFP
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operated a
non-hazardous waste water facility on this leased property. Upon discontinuing
operations at this facility in November 2005, we began remediating the leased
property and the equipment. In February 2006, we completed the remediation of
the leased property and the equipment, and released the property back to the
owner.
We performed, or had performed, due diligence on each of these environmental
projects, and also reviewed/utilized reports obtained from third party
engineering firms who have been either engaged by the prior owners or by us to
assist in our review. Based upon our expertise and the analysis performed, we
have accrued our best estimate of the cost to complete the remedial projects. No
insurance or third party recovery was taken into account in determining our cost
estimates or reserve, nor do our cost estimates or reserves reflect any discount
for present value purposes. We do not believe that any adverse changes to our
estimates would be material to us. The circumstances that could affect the
outcome range from new technologies, that are being developed every day that
reduce our overall costs, to increased contamination levels that could arise as
we complete remediation which could increase our costs, neither of which we
anticipate at this time.
75
NOTE 11
INCOME TAXES
Income tax from the continuing operations for the years ended December 31,
consisted of the following (in thousands):
CURRENT: 2006 2005 2004
-------------------------------------- ---------- ---------- ----------
Federal $ 83 $ 50 $ --
State 424 382 169
---------- ---------- ----------
Total income tax expense $ 507 $ 432 $ 169
========== ========== ==========
We had temporary differences and net operating loss carry forwards, which gave
rise to deferred tax assets and liabilities at December 31, as follows (in
thousands):
Deferred tax assets: 2006 2005
-------------------------------------- ---------- ----------
Net operating losses $ 5,315 $ 7,147
Environmental and closure reserves 1,896 2,185
Impairment of assets 7,611 7,611
Other 1,582 1,638
Valuation allowance (10,970) (12,731)
---------- ----------
Deferred tax assets 5,434 5,850
Deferred tax liabilities
Depreciation and amortization (5,434) (5,850)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
A reconciliation between the expected tax benefit using the federal statutory
rate of 34% and the provision for income taxes as reported in the accompanying
consolidated statements of operations is as follows (in thousands):
2006 2005 2004
---------- ---------- ----------
Tax expense (benefit) at statutory rate $ 1,831 $ 1,400 $ (6,647)
State taxes, net of federal benefit 153 252 112
Intangible asset impairment -- -- 3,061
Other 284 (39) (303)
Increase (decrease) in valuation allowance (1,761) (1,181) 3,946
---------- ---------- ----------
Provision for income taxes $ 507 $ 432 $ 169
========== ========== ==========
The Company has provided a valuation allowance on substantially all of its
deferred tax assets. The Company will continue to monitor the realizability of
these net deferred tax assets and will reverse some or all of the valuation
allowance as appropriate. In making this determination, the Company considers a
number of factors including whether there is a historical pattern of consistent
and significant profitability in combination with the Company's assessment of
forecasted profitability in the future periods. Such patterns and forecasts
allow us to determine whether our most significant deferred tax assets such as
net operating losses will more likely than not be realizable in future years, in
whole or in part. These deferred tax assets in particular will require us to
generate significant taxable income in the applicable jurisdictions in future
years in order to recognize their economic benefits. At this point, the Company
does not believe that it has enough positive evidence to conclude that some or
all of the valuation allowance on deferred tax assets should be reversed.
However, facts and circumstances could change in future years and at such point
the Company will reverse the allowance as appropriate. Our valuation allowance
increased (decreased) by approximately $(1,761,000), $(1,181,000), and
$3,946,000 for the years ended December 31, 2006, 2005, and 2004, respectively,
which represents the effect of changes in the temporary differences and net
operating losses (NOLs), as amended. Included in deferred tax assets is an
impairment of assets for $7,611,000, of which approximately $7,051,000 is in
conjunction with our acquisition of DSSI in August 2000. This deferred tax asset
is a result of an impairment charge related to fixed assets and goodwill of
approximately $24.5 million recorded by DSSI in 1997 prior to our acquisition of
DSSI. This write-off will not be deductible for tax purposes until the assets
are disposed.
76
We have estimated net operating loss carryforwards (NOL's) for federal income
tax purposes of approximately $15,633,000 at December 31, 2006. These net
operating losses can be carried forward and applied against future taxable
income, if any, and expire in the years 2007 through 2024. However, as a result
of various stock offerings and certain acquisitions, the use of these NOLs will
be limited under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended. According to Section 382, we have approximately $12.0 million
in total NOLs available to offset consolidated taxable income for the tax year
ended December 31, 2006. Additionally, NOLs may be further limited under the
provisions of Treasury Regulation 1.1502-21 regarding Separate Return Limitation
Years.
NOTE 12
CAPITAL STOCK, EMPLOYEE STOCK PLAN AND INCENTIVE COMPENSATION
EMPLOYEE STOCK PURCHASE PLAN
At our Annual Meeting of Stockholders held on July 29, 2003, our stockholders
approved the adoption of the Perma-Fix Environmental Services, Inc. 2003
Employee Stock Purchase Plan. The plan provides our eligible employees an
opportunity to become stockholders and purchase our Common Stock through payroll
deductions. The maximum number of shares issuable under this plan is 1,500,000.
The Plan authorized the purchase of shares two times per year, at an exercise
price per share of 85% of the market price of our Common Stock on the offering
date of the period or on the exercise date of the period, whichever is lower.
The first purchase period commenced July 1, 2004. The following table details
the resulting employee stock purchase totals.
SHARES
PURCHASE PERIOD PROCEEDS PURCHASED
-------------------------------------- ------------ ------------
July 1 - December 31, 2004 $ 47,000 31,287
January 1 - June 30, 2005 51,000 33,970
July 1 - December 31, 2005 44,000 31,123
------------ ------------
$ 142,000 96,380
============ ============
On May 15, 2006, the Board of Directors of the Company terminated the 2003
Employee Stock Purchase Plan due to lack of employee participation and the cost
of managing the plan. The Plan allows the Board of Directors to terminate the
Plan at anytime without prior notice to the participants and without liability
to the participants. A total of 96,380 shares had been purchased under the Plan
prior to the Plan's termination. Upon termination of the Plan, the balance, if
any, then standing to the credit of each participant in the participant stock
purchase stock purchase account was refunded to the participant.
We previously issued stock to eligible employees under the Perma-Fix
Environmental Services, Inc. 1996 Employee Stock Purchase Plan ("1996 Plan").
The 1996 Plan was adopted in December 1996, by stockholder approval, with terms
and conditions similar to the current 2003 Plan. A total of 500,000 shares under
the 1996 Plan were issued beginning with the purchase period July 1, 1997 to
December 31, 1997 and ending with the January 1, 2004 to June 30, 2004 purchase
period. Proceeds from the issuance of all shares under the 1996 Plan were
approximately $750,000. No additional shares are available to issue under this
1996 Plan.
77
EMPLOYMENT OPTIONS
During October 1997, Dr. Centofanti entered into an Employment Agreement, which
expired in October 2000 and provided for, the issuance of Non-qualified Stock
Options ("Non-qualified Stock Options"). The Non-qualified Stock Options provide
Dr. Centofanti with the right to purchase an aggregate of 300,000 shares of
Common Stock as follows: (i) after one year 100,000 shares of Common Stock at a
price of $2.25 per share, (ii) after two years 100,000 shares of Common Stock at
a price of $2.50 per share, and (iii) after three years 100,000 shares of Common
Stock at a price of $3.00 per share. The Non-qualified Stock Options expire in
October 2007.
STOCK OPTION PLANS
On December 16, 1991, we adopted a Performance Equity Plan (the "Plan"), under
which 500,000 shares of our Common Stock is reserved for issuance, pursuant to
which officers, directors and key employees are eligible to receive incentive or
Non-qualified stock options. Incentive awards consist of stock options,
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. Incentive stock options granted under the Plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the market price of the Common Stock on
the date of grant, except that the term of an incentive stock option granted
under the Plan to a stockholder owning more than 10% of the then-outstanding
shares of Common Stock may not exceed five years and the exercise price may not
be less than 110% of the market price of the Common Stock on the date of grant.
All grants of options under the Performance Equity Plan have been made at an
exercise price equal to the market price of the Common Stock at the date of
grant. On December 16, 2001, the Plan expired. No new options will be issued
under the Plan, but the options issued under the Plan prior to the expiration
date will remain in effect until their respective maturity dates.
Effective September 13, 1993, we adopted a Non-qualified Stock Option Plan
pursuant to which officers and key employees can receive long-term
performance-based equity interests in the Company. The maximum number of shares
of Common Stock as to which stock options may be granted in any year shall not
exceed twelve percent (12%) of the number of common shares outstanding on
December 31 of the preceding year, less the number of shares covered by the
outstanding stock options issued under our 1991 Performance Equity Plan as of
December 31 of such preceding year. The option grants under the plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price, which is not less than the market price of the Common Stock at
date of grant. On September 13, 2003, the plan expired. No new options will be
issued under this plan, but the options issued under the Plan prior to the
expiration date will remain in effect until their respective maturity dates.
Effective December 12, 1993, we adopted the 1992 Outside Directors Stock Option
Plan, pursuant to which options to purchase an aggregate of 100,000 shares of
Common Stock had been authorized. This plan provides for the grant of options to
purchase up to 5,000 shares of Common Stock for each of our outside directors
upon initial election and each re-election. The plan also provides for the grant
of additional options to purchase up to 10,000 shares of Common Stock on the
foregoing terms to each outside director upon initial election to the Board. The
options have an exercise price equal to the closing trading price, or, if not
available, the fair market value of the Common Stock on the date of grant.
During our annual meeting held on December 12, 1994, the stockholders approved
the Second Amendment to our 1992 Outside Directors Stock Option Plan which,
among other things, (i) increased from 100,000 to 250,000 the number of shares
reserved for issuance under the plan, and (ii) provides for automatic issuance
to each of our directors, who is not our employee, a certain number of shares of
Common Stock in lieu of 65% of the cash payment of the fee payable to each
director for his services as director. The Third Amendment to the Outside
Directors Plan, as approved at the December 1996 Annual Meeting, provided that
each eligible director shall receive, at such eligible director's option, either
65% or 100% of the fee payable to such director for services rendered to us as a
member of the Board in Common Stock. In either case, the number of shares of our
Common Stock issuable to the eligible director shall be determined by valuing
our Common Stock at 75% of its fair market value as defined by the Outside
Directors Plan. The Fourth Amendment to the Outside Directors Plan, was approved
at the May 1998 Annual Meeting and increased the number of authorized shares
from 250,000 to 500,000 reserved for issuance under the plan.
78
Effective July 29, 2003, we adopted the 2003 Outside Directors Stock Plan, which
was approved by our stockholders at the Annual Meeting of Stockholders on such
date. A maximum of 1,000,000 shares of our Common Stock are authorized for
issuance under this plan. The plan provides for the grant of an option to
purchase up to 30,000 shares of Common Stock for each outside director upon
initial election to the board of directors, and the grant of an option to
purchase up to 12,000 shares of Common Stock upon each reelection. The options
granted generally have vesting period of six months from the date of grant, with
exercise price equal to the closing trade price on the date prior to grant date.
The plan also provides for the issuance to each outside director a number of
shares of Common Stock in lieu of 65% or 100% of the fee payable to the eligible
director for services rendered as a member of the board of directors. The number
of shares issued is determined at 75% of the market value as defined in the
plan.
Effective July 28, 2004, we adopted the 2004 Stock Option Plan, which was
approved by our stockholders at the Annual Meeting of Stockholders on such date.
A maximum of 2,000,000 shares of our Common Stock are authorized for issuance
under this plan in the form of either incentive or non-qualified stock options.
The option grants under the plan are exercisable for a period of up to 10 years
from the date of grant at an exercise price of not less than market price of the
Common Stock at grant date.
Effective on January 1, 2006, we began accounting for employee and director
stock options pursuant to SFAS 123R, which requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pursuant to our adoption of SFAS
123R we began recognizing compensation expense for all unvested stock options.
Prior to adopting SFAS 123R we applied APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for options
issued to employees and directors. Accordingly, prior to 2006, no compensation
cost was recognized for options granted to employees and directors at exercise
prices, which equaled or exceeded the market price of our Common Stock at the
date of grant. Pursuant to the standards in SFAS 123R and our belief that it is
in the best interest of our stockholders to reduce future compensation expense,
in July 2005 we accelerated the vesting of all unvested employee stock options
outstanding at that date. As of December 31, 2006, we have 1,023,000 unvested
options outstanding. See "Note 2" for further discussion on our adoption of SFAS
123R.
79
Summary of the status of options under the plans as of December 31, 2006, 2005,
and 2004 and changes during the years ending on those dates is presented below:
2006 2005
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Exercise Intrinsic Exercise Intrinsic
Shares Price Value Shares Price Value
---------- ---------- ---------- ---------- ---------- ----------
PERFORMANCE EQUITY PLAN:
------------------------
Balance at beginning of year 27,000 $ 1.16 $ -- 35,600 $ 1.18 $ --
Exercised (14,000) 1.07 12,940 (8,600) 1.25 10,576
Forfeited (1,000) 1.25 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 12,000 1.25 12,940 27,000 1.16 10,576
========== ========== ========== ==========
Options exercisable at year end 12,000 1.25 -- 27,000 1.16 --
NON-QUALIFIED STOCK OPTION PLAN:
--------------------------------
Balance at beginning of year 1,989,250 $ 1.78 $ -- 2,151,850 $ 1.81 $ --
Granted -- -- -- -- -- --
Exercised (419,500) 1.34 287,328 (37,200) 1.21 43,112
Forfeited (272,000) 2.13 -- (125,400) 2.51 --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 1,297,750 1.85 287,328 1,989,250 1.78 43,112
========== ========== ========== ==========
Options exercisable at year end 1,297,750 1.85 -- 1,989,250 1.78 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant -- -- -- -- -- --
1992 OUTSIDE DIRECTORS STOCK PLAN:
----------------------------------
Balance at beginning of year 200,000 $ 2.00 $ -- 220,000 $ 2.11 $ --
Granted -- -- -- -- -- --
Forfeited (35,000) 1.75 -- (20,000) 3.25 --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 165,000 2.05 -- 200,000 2.00 --
========== ========== ========== ==========
Options exercisable at year end 165,000 2.05 -- 200,000 2.00 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant -- -- -- -- -- --
2003 OUTSIDE DIRECTORS STOCK PLAN:
----------------------------------
Balance at beginning of year 234,000 $ 1.85 $ -- 162,000 $ 1.86 $ --
Granted 90,000 2.15 -- 72,000 1.84 --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 324,000 1.94 -- 234,000 1.85 --
========== ========== ========== ==========
Options exercisable at year end 234,000 1.85 -- 162,000 1.86 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant 90,000 1.74 -- 72,000 1.08 --
2004 STOCK OPTION PLAN:
-----------------------
Balance at beginning of year 96,500 $ 1.44 $ -- 106,500 $ 1.44 $ --
Granted 978,000 1.86 -- -- -- --
Exercised -- -- -- (10,000) 1.44 11,120
Forfeited (56,500) 1.77 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 1,018,000 1.82 -- 96,500 1.44 --
========== ========== ========== ==========
Options exercisable at year end 85,000 1.44 -- 96,500 1.44 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant 978,000 .87 -- -- -- --
2004
----------------------------------
Weighted
Average
Exercise Intrinsic
Shares Price Value
---------- --------- ---------
PERFORMANCE EQUITY PLAN:
------------------------
Balance at beginning of year 60,600 $ 1.17 $ --
Exercised (25,000) 1.15 54,300
Forfeited -- -- --
---------- --------- ---------
Balance at end of year 35,600 1.18 54,300
========== =========
Options exercisable at year end 35,600 1.18 --
NON-QUALIFIED STOCK OPTION PLAN:
--------------------------------
Balance at beginning of year 2,557,390 $ 1.79 $ --
Granted -- -- --
Exercised (171,940) 1.33 391,069
Forfeited (233,600) 1.93 --
---------- --------- ---------
Balance at end of year 2,151,850 1.81 391,069
========== =========
Options exercisable at year end 1,151,250 1.62 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant -- -- --
1992 OUTSIDE DIRECTORS STOCK PLAN:
----------------------------------
Balance at beginning of year 265,000 $ 2.27 $ --
Granted -- -- --
Forfeited (45,000) 3.08 --
---------- --------- ---------
Balance at end of year 220,000 2.11 --
========== ========= =========
Options exercisable at year end 220,000 2.11 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant -- -- --
2003 OUTSIDE DIRECTORS STOCK PLAN:
----------------------------------
Balance at beginning of year 90,000 $ 1.99 $ --
Granted 72,000 1.70 --
---------- --------- ---------
Balance at end of year 162,000 1.86 --
========== =========
Options exercisable at year end 90,000 1.99 --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant 72,000 .71 --
2004 STOCK OPTION PLAN:
-----------------------
Balance at beginning of year -- $ -- $ --
Granted 106,500 1.44 --
Exercised -- -- --
Forfeited -- -- --
---------- --------- ---------
Balance at end of year 106,500 1.44 --
========== =========
Options exercisable at year end -- -- --
Weighted average fair value of
options granted during the
year at exercise prices which
equal market price of stock at
date of grant 106,500 .78 --
80
The following table summarizes information about options under the plans
outstanding at December 31, 2006:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
At Remaining Average At Average
Dec. 31, Contractual Exercise Dec. 31, Exercise
Description and Range of Exercise Prices 2006 Life Price 2006 Price
------------------------------------------ ------------ ------------ ------------ ------------ ------------
PERFORMANCE EQUITY PLAN:
------------------------
1998 Awards ($1.25) 12,000 1.8 years $ 1.25 12,000 $ 1.25
------------ ------------
12,000 1.8 years 1.25 12,000 1.25
NON-QUALIFIED STOCK OPTION PLAN:
--------------------------------
1997 Awards ($1.375) 9,500 .3 years 1.38 9,500 1.38
1998 Awards ($1.25) 20,000 1.8 years 1.25 20,000 1.25
2000 Awards ($1.25-$1.50) 191,000 3.3 years 1.28 191,000 1.28
2001 Awards ($1.75) 537,000 4.3 years 1.75 537,000 1.75
2003 Awards ($2.05-$2.19) 540,250 6.2 years 2.19 540,250 2.19
------------ ------------
1,297,750 4.8 years 1.85 1,297,750 1.85
============ ============
2004 STOCK OPTION PLAN:
-----------------------
2004 Awards ($1.44) 85,000 7.8 years 1.44 85,000 1.44
2006 Awards ($1.85-$1.86) 933,000 5.2 years 1.86 -- --
------------ ------------
1,018,000 5.4 years 1.82 85,000 1.44
============ ============
1992 OUTSIDE DIRECTORS STOCK OPTION PLAN:
-----------------------------------------
1997 Awards ($2.125) 15,000 .9 years 2.13 15,000 2.13
1998 Awards ($1.375) 15,000 1.4 years 1.38 15,000 1.38
1999 Awards ($1.2188-$1.25) 35,000 2.7 years 1.24 35,000 1.24
2000 Awards ($1.688) 15,000 3.9 years 1.69 15,000 1.69
2001 Awards ($2.43-$2.75) 30,000 4.6 years 2.59 30,000 2.59
2002 Awards ($2.58-$2.98) 40,000 5.6 years 2.73 40,000 2.73
2003 Awards ($2.02) 15,000 6.3 years 2.02 15,000 2.02
------------ ------------
165,000 3.9 years 2.05 165,000 2.05
============ ============
2003 OUTSIDE DIRECTORS STOCK PLAN:
----------------------------------
2003 Awards ($1.99) 90,000 6.6 years 1.99 90,000 1.99
2004 Awards ($1.70) 72,000 7.6 years 1.70 72,000 1.70
2005 Awards ($1.84) 72,000 8.6 years 1.84 72,000 1.84
2006 Awards ($2.15) 90,000 9.6 years 2.15 -- --
------------ ------------
324,000 8.1 years 1.94 234,000 1.85
============ ============
81
The summary of the Company's total Plans as of December 31, 2006 and changes
during the period then ended is presented as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
------------ ------------ ------------ ------------
Options outstanding January 1, 2006 2,546,750 $ 1.78
Granted 1,068,000 1.88
Exercised 433,500 1.33
Forfeited 364,500 2.03
------------ ------------
Options outstanding End of Period 2,816,750 1.86 5.4 $ 1,317,746
============
Options Exerciseable at December 31, 2006 1,793,750 $ 1.85 5.2 $ 872,266
============
Options vested and expected to be vested
at December 31, 2006 2,769,269 $ 1.86 5.4 $ 1,295,904
============
WARRANTS
We have issued various Warrants pursuant to acquisitions, private placements,
debt and debt conversion and to facilitate certain financing arrangements. The
Warrants principally are for a term of three to five years and entitle the
holder to purchase one share of Common Stock for each warrant at the stated
exercise price.
We issued no warrants in 2005 and 2006. During 2004, we issued warrants for the
exercise of 1,775,638 shares of our Common Stock as part of a private placement
offering completed in March. During 2006, a total of 6,673,290 shares of Common
Stock were issued upon the exercise of 6,904,149 warrants, both on a cash and
cashless basis and on a loan by the Company on an arms length basis. We received
proceeds of $11,460,000 for the exercises, and 306,262 warrants expired. During
2005, a total of 2,497,512 warrants were exercised for proceeds in the amount of
$937,000 and 25,293 warrants expired. During 2004, a total of 618,860 Warrants
were exercised for proceeds in the amount of $710,000 and 20,000 Warrants
expired.
The following details the Warrants currently outstanding as of December 31,
2006:
Number of
Underlying
Warrant Series Shares Exercise Price Expiration Date
--------------------------------- ---------------- ---------------- ----------------
Consulting Warrants 160,000 $ 2.92 3/07
Private Placement Warrants 1,615,638 $ 2.92 3/07
AMI and BEC Financing Warrants 1,281,731 $ 1.50 7/08
----------------
3,057,369
================
SHARES RESERVED
At December 31, 2006, we have reserved approximately 6.2 million shares of
Common Stock for future issuance under all of the above option and warrant
arrangements.
PUT OPTIONS
In 2001, we entered into an Option Agreement with AMI and BEC, dated July 31,
2001 (the "Option Agreement"). Pursuant to the Option Agreement, we granted each
purchaser an irrevocable option requiring us to purchase any of the Warrants or
the shares of Common Stock issuable under the Warrants (the "Warrant Shares")
then held by the purchaser (the "Put Option"). The Put Option may be exercised
at any time commencing July 31, 2004, and ending July 31, 2008. In addition,
each purchaser granted to us an irrevocable option to purchase all the Warrants
or the Warrant Shares then held by the purchaser (the "Call Option"). The Call
Option may be exercised at any time commencing July 31, 2005, and ending July
31, 2008. The purchase price under the Put Option and the Call Option is based
on the quotient obtained by dividing (a) the sum of six times our consolidated
EBITDA for the period of the 12 most recent consecutive months minus Net Debt
plus the Warrant Proceeds by (b) our Diluted Shares (as the terms EBITDA, Net
Debt, Warrant Proceeds, and Diluted Shares are defined in the Option Agreement).
At December 31, 2005 and 2006 and for the life of the Put Option to date, this
instrument has been measured regularly to have no value and thus no liability
has been recorded.
82
NOTE 13
COMMITMENTS AND CONTINGENCIES
HAZARDOUS WASTE
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
LEGAL
In December, 2005, TIFORP Group Holdings, LLC ("TIFORP") and others sued us, our
subsidiary, PFMI, and others in the Michigan Circuit Court for the County of
Wayne, Case No. 05-534619. Plaintiffs alleged that we and PFMI breached a
confidentiality agreement with TIFORP, and are liable in damages under legal
theories of fraud, conversion of proprietary information and breach of
confidentiality agreement. TIFORP and the other Plaintiffs asserted that there
are damages due to lost revenues in excess of $4.5 million. During the later
part of 2006, PESI and PFMI were dismissed with prejudice from this litigation.
During the later part of 2005, PFTS, one of our subsidiaries, received a
proposed consent order from the ODEQ regarding PFTS's Tulsa facility. The
proposed consent order, among other things:
o provided that PFTS has a limited period to complete all work necessary to
ensure that PFTS is eligible for exemption under various provisions of the
Oklahoma Hazardous Waste Management, the Oklahoma Clean Air Act and the
ODEQ rules promulgated thereunder relating to air issues (subparts BB, CC
and DD);
o alleged that PFTS has one or more operations that failed to properly mark
or label containers; failed to comply with the maximum containment area
volumes in its operating permit; failed to operate in a manner to prevent
degradation of the environment; failed to maintain the integrity of the cap
over a closed surface impoundment; stored hazardous waste in an area not
allowed by its permit; failed to maintain certain records; failed to comply
with certain requirements under subparts BB, CC and DD; and failed to make
a determination for exemption from the air issue requirements of subpart CC
and DD; and
o proposed a total penalty of $336,000, payable one-half in cash and the
balance based on a supplemental environmental project approved by the ODEQ.
PFTS and the ODEQ have negotiated a settlement and have entered into a revised
Consent Order. Pursuant to the revised Consent Order, PFTS has agreed to make
certain improvements at the facility, meet certain air requirements in
connection with managing waste at the facility and file a Title V air permit as
a synthetic minor in connection the facility's operations. In addition, under
the executed Consent Order, the ODEQ and PFTS have agreed that the penalty
assessed against PFTS would be $100,000, with 25% to be paid to the ODEQ and 75%
to be in the form of a supplemental environmental project at a local fire
department.
83
On February 24, 2003, M&EC commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. The
revenues generated by M&EC with Bechtel Jacobs represented approximately 7.6%,
16.5%, and 11.4% of our 2006, 2005, and 2004 total revenues, respectively. Since
the filing of this lawsuit, Bechtel Jacobs has continued to deliver waste to
M&EC for treatment and disposal, and M&EC continues to accept such waste, under
the subcontracts, and M&EC and Bechtel Jacobs have entered into an additional
contract for M&EC to treat DOE waste. On January 24, 2007, M&EC and Bechtel
Jacobs entered into a settlement agreement to resolve this litigation. Pursuant
to the settlement, Bechtel Jacobs has paid to M&EC the sum of $1.5 million.
While this settlement was finalized in January 2007, it was estimatable and
probable as of December 31, 2006. As such, in accordance with SOP 81-1, the
Company recorded surcharge revenue of approximately $1.1 million during the
fourth quarter of 2006. This amount did not exceed contract costs through
December 31, 2006 and no contingencies existed in regards to this matter at
year-end. Although we do not believe settlement of this lawsuit will have a
material adverse effect on our operations, Bechtel Jacobs could terminate the
subcontracts with M&EC for convenience at any time.
In December 2004, PFD was sued under the citizen's suit provisions of the Clean
Air Act in the United States District Court for the Southern District of Ohio,
Western District, styled Barbara Fisher v. Perma-Fix of Dayton, Inc. The suit
alleges violation by PFD of a number of state and federal clean air statutes in
connection with the operation of PFD's facility, primarily due to PFD's
operating its facility without a Title V air permit. The complaint further
alleges that PFD failed to install appropriate air pollution control equipment,
conduct appropriate recordkeeping, properly monitor and report, and further
alleges that air emissions from PFD's facility injured persons, endangered the
health of the public and constituted a nuisance in violation of Ohio law. The
action seeks remediation, injunctive relief, imposition of civil penalties,
attorney fees, and costs and other forms of relief. On or about May 19, 2006,
the U.S. Department of Justice ("DOJ"), on behalf of the EPA, intervened in the
case seeking injunctive relief and civil penalties against PFD for alleged
violations which parallel certain claims asserted in the citizen's suit,
including claims PFD's failure to have obtained, and to have operated its
facility without, a Title V air permit, failure to install appropriate air
pollution control equipment and conduct appropriate recordkeeping, monitoring
and reporting was in violation of the Clean Air Act and applicable regulations.
The federal complaint also alleges that PFD failed to respond to a formal
request for information from the EPA in a timely manner and requesting civil
penalties. Potential civil penalties may be up to $32,500 per day per violation
until full compliance. We have retained environmental consultants who have
advised us, based on the tests that they have performed, that they do not
believe that PFD is a major source of hazardous air pollutants. We have been
further advised by counsel that if PFD is not a major source of hazardous air
pollutants, PFD would not be required to obtain a Title V air permit and would
not have violated the provisions of the Clean Air Act. We intend to vigorously
defend ourselves in connection with this matter. Nevertheless, a determination
that PFD was a major source of hazardous air pollutants and required to have
obtained a Title V air permit in order to operate its facility could have a
material adverse effect on us and our liquidity.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigations. We are not a party to
any litigation or governmental proceeding which our management believes could
result in any judgments or fines against us that would have a material adverse
affect on our financial position, liquidity or results of future operations.
PENSION LIABILITY
We had a pension withdrawal liability of $1,433,000 at December 31, 2006, based
upon a withdrawal letter received from Central States Teamsters Pension Fund
("CST"), resulting from the termination of the union employees at PFMI and a
subsequent actuarial study performed. In August 2005, we received a demand
letter from CST, amending the liability to $1,629,000, and provided for the
payment of $22,000 per month over an eight year period.
84
CONSTRUCTION IN PROGRESS
As of December 31, 2005, we have recorded $4,896,000 in current construction in
progress projects. It is estimated that we will incur an additional $2,929,000
to complete the current projects by the end of 2007.
OPERATING LEASES
We lease certain facilities and equipment under operating leases. Future minimum
rental payments as of December 31, 2006, required under these leases are
$1,300,000 in 2007, $868,000 in 2008, $706,000 in 2009, $565,000 in 2010, and
$612,000 in years after 2011.
Net rent expense was $2,542,000, $3,538,000, and $3,674,000 for 2006, 2005, and
2004, respectively. These amounts include payments on operating leases of
approximately $1,750,000, $1,548,000, and $1,445,000 for 2006, 2005, and 2004,
respectively. The remaining rent expense is for non-contractual monthly and
daily rentals of specific use vehicles, machinery and equipment.
NOTE 14
PROFIT SHARING PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply under Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All full-time employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 100% of their compensation, up to a
maximum amount as limited by law. We, at our discretion, may make matching
contributions based on the employee's elective contributions. Company
contributions vest over a period of five years. We currently match up to 25% of
our employees' contributions. We contributed $378,000, $347,000, and $272,000 in
matching funds during 2006, 2005, and 2004, respectively.
NOTE 15
RELATED PARTY TRANSACTIONS
Lawrence Properties LLC
During February 2006, our Board of Directors approved and Perma-Fix
Environmental Services, Inc. entered into a lease agreement, whereby we will
lease property from, Lawrence Properties LLC, a company jointly owned by the
president of Schreiber, Yonley and Associates, Robert Schreiber, Jr. and his
spouse. Mr. Schreiber is a member of our executive management team. The lease is
for a term of five years and will begin on June 1, 2006. We will pay monthly
rent expense of $10,000, which we believe is lower than costs charged by
unrelated third party landlords. Additional rent would be assessed for any
increases over the initial lease commencement year, to property taxes or
assessments and property and casualty insurance premiums.
We utilize the remediation and analytical services of Mill Creek Environmental
Services, Inc., which is owned principally by the son and daughter-in-law of our
CEO, Dr. Louis Centofanti. Mill Creek has provided assistance in developing
remediation plans, completing a permit renewal and modification application, and
groundwater investigations at one of our remediation sites. The majority of
these services we are unable to perform ourselves. Our purchases from or
services provided to us by Mill Creek during 2006, 2005 and 2004 totaled $1,700,
$230,000, and $118,000 respectively. We believe that the rates we receive are
competitive and comparable to rates we would receive from unaffiliated third
party vendors.
85
NOTE 16
OPERATING SEGMENTS
During 2006, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as a business activity:
o from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president and
chief operating officer to make decisions about resources to be
allocated and assess its performance; and
o for which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments however, exclude the Corporate headquarters, which does
not generate revenue, Perma-Fix of Michigan, Inc. and Perma-Fix of Pittsburgh,
Inc., two discontinued operations. See "Note 5" for further information on
discontinued operations. The accounting policies of the operating segments are
summarized in "Note 2".
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste and wastewater through our six facilities; Perma-Fix Treatment
Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc.,
Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc., and Perma-Fix of
Maryland, Inc., (which acquired certain assets and assumed certain liabilities
of A&A). We provide through certain of our facilities various waste management
services to certain governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and the East Tennessee Materials and
Energy Corporation. The segment also provides research, and development
services, and on and off-site waste remediation of nuclear mixed and low-level
radioactive waste.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segment.
86
The table below shows certain financial information by business segment for
2006, 2005, and 2004 (in thousands).
SEGMENT REPORTING AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2006
Industrial Nuclear Segments Corporate Consolidated
Services Services Engineering Total And Other(2) Total
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 35,148 $ 49,423(3)$ 3,358 $ 87,929 $ -- $ 87,929
Intercompany revenues 1,548 2,433 558 4,539 -- 4,539
Gross profit 7,483 20,930 797 29,210 -- 29,210
Interest income 5 -- -- 5 280 285
Interest expense 105 475 1 581 765 1,346
Interest expense-financing fees 1 1 -- 2 191 193
Depreciation and amortization 1,812 2,931 38 4,781 77 4,858
Segment profit (loss) (1,963) 12,452 252 10,741 (6,379) 4,362
Segment assets(1) 21,358 68,523 2,182 92,063 13,934(4) 105,997
Expenditures for segment assets 993 5,329 62 6,384 57 6,441
Total long-term debt 831 1,983 15 2,829 5,500 8,329
SEGMENT REPORTING AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2005
Industrial Nuclear Segments Corporate Consolidated
Services Services Engineering Total And Other(2) Total
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 40,768 $ 47,245(3)$ 2,853 $ 90,866 $ -- $ 90,866
Intercompany revenues 2,872 2,408 480 5,760 -- 5,760
Gross profit 6,627 18,100 669 25,396 -- 25,396
Interest income 7 3 -- 10 123 133
Interest expense 422 743 18 1,183 411 1,594
Interest expense-financing fees -- 2 -- 2 316 318
Depreciation and amortization 1,854 2,817 40 4,711 43 4,754
Segment profit (loss) (1,762) 10,141 182 8,561 (5,492) 3,069
Segment assets(1) 23,869 63,404 2,162 89,435 9,090(4) 98,525
Expenditures for segment assets 1,081 1,488 14 2,583 33 2,616
Total long-term debt 1,139 3,266 23 4,428 8,947 13,375
SEGMENT REPORTING AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2004
Industrial Nuclear Segments Corporate Consolidated
Services Services Engineering Total And Other(2) Total
------------ ------------ ------------ ------------ ------------ ------------
Revenue from external customers $ 36,600 $ 42,679(3)$ 3,204 $ 82,483 $ -- $ 82,483
Intercompany revenues 2,409 3,480 444 6,333 -- 6,333
Gross profit 6,160 16,741 812 23,713 -- 23,713
Interest income 3 -- -- 3 -- 3
Interest expense 787 1,195 -- 1,982 38 2,020
Interest expense-financing fees -- 194 -- 194 1,997 2,191
Depreciation and amortization 1,854 2,657 30 4,541 35 4,576
Impairment loss on
intangible assets (9,002) -- -- (9,002) -- (9,002)
Segment profit (loss) (12,900) 9,240 376 (3,284) (6,293)(4) (9,577)
Segment assets(1) 27,240 60,642 2,261 90,143 10,312 100,455
Expenditures for segment assets 786 2,115 48 2,949 62 3,011
Total long-term debt 1,554 7,808 31 9,393 9,563 18,956
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters, not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Management Services
segment include the Bechtel Jacobs and LATA/Parallax revenue for 2006 of
$6,705,000 (or 7.6%) and $10,341,000 (or 11.8%) of total revenue,
respectively. For 2005 and 2004, Bechtel Jacobs revenue totaled $14,940,000
(or 16.5%) and $9,405,000 (or 11.4%) of total revenue, respectively.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., and Perma-Fix of
Pittsburgh, Inc., two discontinued operations from the Industrial segment,
of approximately $728,000, $866,000, and $2,885,000, as of December 31,
2006, 2005, and 2004, respectively.
87
NOTE 17
QUARTERLY OPERATING RESULTS (UNAUDITED)
Unaudited quarterly operating results are summarized as follows (in thousands,
except per share data):
Three Months Ended (unaudited)
---------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Total
------------ ------------ ------------ ------------ ------------
2006 (1)
--------
Revenues $ 21,118 $ 23,514 $ 21,266 $ 22,031(2)$ 87,929
Gross Profit 6,830 8,152 6,328 7,900 29,210
Income from continuing operations 1,128 779 462 1,993 4,362
Discontinued operations (450) 1,046 (131) (116) 349
Net income (loss) applicable to Common Stock 678 1,825 331 1,877 4,711
Basic net income (loss) per common share:
Continuing operations .03 .02 .01 .04 .09
Discontinued operations (.01) .02 -- -- .01
Net income (loss) .02 .04 .01 .04 .10
Diluted net income (loss) per common share:
Continued operations .03 .02 .01 .04 .09
Discontinued operations (.01) .02 -- -- .01
Net income (loss) .02 .04 .01 .04 .10
2005
----
Revenues $ 21,431 $ 25,144 $ 22,826 $ 21,465 $ 90,866
Gross Profit 5,537 7,354 6,720 5,785 25,396
Income from continuing operations 110 1,448 1,195 252 3,005
Discontinued operations (246) (183) 810 289 670
Net income (loss) applicable to Common Stock (168) 1,235 1,975 541 3,583
Basic net income per common share:
Continuing operations -- .03 .03 .01 .07
Discontinued operations -- -- .02 -- .01
Net income -- .03 .05 .01 .08
Diluted net income per common share:
Continued operations -- .03 .03 .01 .07
Discontinued operations -- -- .02 -- .01
Net income -- .03 .05 .01 .08
(1) Reflect quarterly recognized stock compensation expense of $29,000,
$56,000, $88,000, and $165,000, pursuant to the adoption of SFAS 123R,
effective January 1, 2006, for the quarter ending March, 31, June 31,
September 30, and December 31, 2006, respectively.
(2) Revenue reflects approximately $1.1 million recognized in our Nuclear
segment, resulting from a settlement of a lawsuit in connection with a
dispute over surcharges from waste treated in 2003. While this settlement
was finalized in early January 2007, the amount recognized was estimatable
and probable as of December 31, 2006. This amount did not exceed contract
costs through December 31, 2006 and no contingencies existed in regards to
this matter at year-end.
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure, controls, and procedures.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic
reports filed with the Securities and Exchange Commission (the "SEC")
is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management. Based
on their most recent evaluation, which was completed as of the end of
the period covered by this Annual Report on Form 10-K, we have
evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934, as amended). In designing and
evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and are subject to certain
limitations, including the exercise of judgment by individuals, the
difficulty in identifying unlikely future events, and the difficulty
in eliminating misconduct completely. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective as of
December 31, 2006 because of material weaknesses to internal controls
over financial reporting as set forth below.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) of the Securities Exchange Act of 1934.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United
States of America. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements or fraudulent acts. A control system, no matter how well
designed, can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit the
preparation of the consolidated financial statements in accordance
with generally accepted accounting principles in the United States of
America, and that receipts and expenditures of the Company are being
made only in accordance with appropriate authorizations of management
and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company's assets that could have a material
effect on the consolidated financial statements.
89
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements or fraudulent acts.
Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness
of internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, we concluded the Company did not maintain effective
internal control over financial reporting as of December 31, 2006.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2006, has been audited by
BDO Seidman, LLP, an independent registered public accounting firm, as
stated in their attestation report which is included herein.
An internal control significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects our
ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with generally accepted
accounting principles in the United States of America, such that there
is more than a remote likelihood that a misstatement of our annual or
interim financial statements that is more than inconsequential will
not be prevented or detected. An internal control material weakness is
a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or
detected.
As of December 31, 2006, the following material weaknesses related to
the following areas were identified:
1. The monitoring of pricing and invoicing process controls at
certain facilities within the Company's Industrial Segment
was ineffective and was not being applied consistently. This
weakness could result in sales being priced and invoiced at
amounts, which were not approved by the customer or the
appropriate level of management. Further, controls over
non-routine revenue streams in this segment, such as Bill &
Hold transactions, were ineffective and could result in
revenue being prematurely recognized. Although this material
weakness did not result in an adjustment to the quarterly or
annual financial statements, if not remediated, it has a
more than remote potential to cause a material misstatement
to be unprevented or undetected.
2. The Company lacks the technical expertise and processes to
ensure compliance with SFAS No. 109, "Accounting for Income
Taxes", and did not maintain adequate controls with respect
to accurate and timely tax account reconciliations and
analyses. This material weakness resulted in an audit
adjustment and, if not remediated, it has a more than remote
potential to cause a material misstatement to be unprevented
or undetected.
3. The Company lacks the technical expertise, controls and
policies to ensure that significant non-routine transactions
are being appropriately reviewed, analyzed, and monitored on
a timely basis. Although this material weakness did not
result in an adjustment to the quarterly or annual financial
statements, if not remediated, it has more than a remote
potential to cause a material misstatement to be unprevented
or undetected.
90
The material weaknesses identified above were partly caused
by 2006 being a transitional year for us, including the
resignation of our former Chief Financial Officer and
Director of Internal Audit in April 2006, as well as the
resignations of our former Corporate Controller/Treasurer
and Manager of Corporate Reporting and SEC due to the
relocation of our Corporate office from Gainesville, Florida
to Atlanta, Georiga. We have replaced all of these positions
and with these transitional changes behind us, we believe
these weaknesses will be corrected. Furthermore, we are in
the process of developing a formal remediation plan for the
Audit Committee's review and approval, which will then be
executed across all segments.
91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Atlanta, Georgia
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting", that
Perma-Fix Environmental Services, Inc. and subsidiaries (the "Company") did not
maintain effective internal control over financial reporting as of December 31,
2006, because of the effect of material weaknesses identified in management's
assessment, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO criteria"). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment:
o Deficiencies in the monitoring and execution of certain pricing and
invoicing process controls at certain facilities within the Company's
Industrial Segment were identified and others were not being applied
consistently. Further, design deficiencies exist over non-routine
revenue streams in this segment, such as bill & hold transactions,
resulting in an ineffective control environment which could
potentially result in revenue being prematurely recognized.
92
o The Company lacks an individual with the technical expertise and
sufficient experience to apply and develop controls and policies to
ensure compliance with SFAS No. 109, "Accounting for Income Taxes",
and does not maintain adequate controls with respect to accurate and
timely tax account reconciliations and analyses of account activity.
o Deficiencies related to the Company's financial statement close
process exist primarily due to the lack of technical expertise,
controls and policies to ensure that significant non-routine
transactions are being appropriately identified, monitored, reviewed
and analyzed on a timely basis.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2006 consolidated financial
statements, and this report does not affect our report dated March 29, 2007 on
those financial statements.
In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2006 is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, because of the effect of the material weaknesses described above on
the achievement of the objectives of the control criteria, Perma-Fix
Environmental Services, Inc. and subsidiaries has not maintained effective
internal control over financial reporting as of December 31, 2006, based on the
COSO criteria.
We do not express or take any other form of assurance on management's statements
referring to any corrective actions taken.
/s/ BDO Seidman, LLP
Atlanta, Georgia
March 29, 2007
93
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
The following table sets forth, as of the date hereof, information concerning
our Directors:
NAME AGE POSITION
--------------------------- ----- ------------------------------------------
Dr. Louis F. Centofanti 63 Chairman of the Board, President and
Chief Executive Officer
Mr. Jon Colin 51 Director
Mr. Jack Lahav 58 Director
Mr. Joe R. Reeder 59 Director
Mr. Larry M. Shelton 53 Director
Dr. Charles E. Young 75 Director
Mr. Mark A. Zwecker 56 Director
Each director is elected to serve until the next annual meeting of stockholders.
We have a separately designated standing audit committee of our Board of
Directors. The members of the Audit Committee are: Mark A. Zwecker, Jon Colin,
and Larry M. Shelton.
Our Board of Directors has determined that each of our audit committee members
is an "audit committee financial expert" as defined by Item 401(h) of Regulation
S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Board has further determined that each of our Directors, other than Dr.
Centofanti, who is our President and Chief Executive Officer, is "independent"
within the meaning of the applicable NASDAQ Rules and Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.
DR. LOUIS F. CENTOFANTI
Dr. Centofanti has served as Chairman of the Board since he joined the Company
in February 1991. Dr. Centofanti also served as President and Chief Executive
Officer of the Company from February 1991 until September 1995 and again in
March 1996 was elected to serve as President and Chief Executive Officer of the
Company. From 1985 until joining the Company, Dr. Centofanti served as Senior
Vice President of USPCI, Inc., a large hazardous waste management company, where
he was responsible for managing the treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
MR. JON COLIN
Mr. Colin has served as a Director since December 1996. Mr. Colin is currently
Chief Executive Officer of Lifestar Response Corporation, a position he has held
since April 2002. Mr. Colin served as Chief Operating Officer of Lifestar
Response Corporation from October 2000 to April 2002, and a consultant for
Lifestar Response Corporation from September 1997 to October 2000. From 1990 to
1996, Mr. Colin served as President and Chief Executive Officer for
Environmental Services of America, Inc., a publicly traded environmental
services company. Mr. Colin is also a Director at Lifestar Response Corporation
and Bamnet Inc. Mr. Colin has a B.S. in Accounting from the University of
Maryland.
94
MR. JACK LAHAV
Jack Lahav has served as a Director since September 2001. Mr. Lahav is a private
investor, specializing in launching and growing businesses. Mr. Lahav devotes
much of his time to charitable activities, serving as president, as well as,
board member of several charities. Previously, Mr. Lahav founded Remarkable
Products Inc. and served as its president from 1980 to 1993. Mr. Lahav was also
co-founder of Lamar Signal Processing, Inc.; president of Advanced Technologies,
Inc., a robotics company and director of Vocaltech Communications, Inc. Mr.
Lahav served as Chairman of Quigo Technologies from 2001 to 2004 and is
currently serving as Chairman of Phoenix Audio Technologies and and Doclix Inc.
HONORABLE JOE R. REEDER
Mr. Reeder has served as a Director since April 2003. He has served since April
1999 as Shareholder in Charge of the Mid-Atlantic Region for Greenberg Traurig
LLP, one of the nation's largest law firms, with 28 offices and over 1600
attorneys, worldwide. His clientele has included sovereign nations,
international corporations, and law firms throughout the U.S. As the 14th
Undersecretary of the U.S. Army (1993-97), Mr. Reeder also served for three
years as Chairman of the Panama Canal Commission's Board of Directors where he
oversaw a multibillion-dollar infrastructure program. He sits on the Board of
Governors of the National Defense Industry Association (NDIA), the Armed
Services YMCA, the USO, and many other corporate and charitable organizations,
and is a frequent television commentator on legal and national security issues.
A graduate of West Point who served in the 82d Airborne Division following
Ranger School, Mr. Reeder also has a J.D. from the University of Texas and an
L.L.M. from Georgetown University.
MR. LARRY M. SHELTON
Mr. Shelton was appointed by the Board of Director to fill a vacancy on the
Board, in July 2006, as a result of Mr. Alfred C. Warrington, IV's retirement
from the Board. Mr. Shelton is currently Chief Financial Officer of S K Hart
Management, LC, an investment holding company. He has held this position since
1999. Mr. Shelton was Chief Financial Officer of Envirocare of Utah, Inc., a
waste management company from 1995 until 1999. Mr. Shelton serves on the Board
of Directors of Subsurface Technologies, Inc., and Pony Express Land Development
Inc. Mr. Shelton has a B.A. in accounting from the University of Oklahoma.
DR. CHARLES E. YOUNG
Dr. Charles E. Young has served as a Director since July 2003. Dr. Young was
president of the University of Florida, a position he held from November 1999 to
January 2004. Dr. Young also served as chancellor of the University of
California at Los Angeles (UCLA) for 29 years until his retirement in 1997. Dr.
Young was formerly the chairman of the Association of American Universities and
served on numerous commissions including the American Council on Education, the
National Association of State Universities and Land-Grant Colleges, and the
Business-Higher Education Forum. Dr. Young serves on the board of directors of
I-MARK, Inc., a software and professional services company and AAFL Enterprises,
a sports development Company. He previously served on the board of directors of
Intel Corp., Nicholas-Applegate Growth Equity Fund, Inc., Fiberspace, Inc., and
Student Advantage, Inc. Dr. Young has a Ph.D. and M.A. in political science from
UCLA and a B.A. from the University of California at Riverside.
MR. MARK A. ZWECKER
Mark Zwecker has served as a Director since the Company's inception in January
1991. Mr. Zwecker has recently assumed the position of Director of Finance for
Communications Security and Compliance Technologies, Inc., a software company
developing security products for the mobile workforce and serves as an advisor
to Plum Combustion, Inc., an engineering and manufacturing company developing
high performance combustion technology. Mr. Zwecker served as president of ACI
Technology, LLC, from 1997 until 2006, and was vice president of finance and
administration for American Combustion, Inc., from 1986 until 1998. In 1983, Mr.
Zwecker participated as a founder with Dr. Centofanti in the start up of PPM,
Inc. He remained with PPM, Inc. until its acquisition in 1985 by USPCI. Mr.
Zwecker has a B.S. in Industrial and Systems Engineering from the Georgia
Institute of Technology and an M.B.A. from Harvard University.
95
RESIGNATION OF DIRECTOR
In June 2006, Mr. Alfred C. Warrington, IV notified the Company and its Board of
Directors that he would not stand for re-election as a member of the Board at
the Company's Annual Meeting of Stockholders July 27, 2006. Mr. Warrington had
been a member of the Company's Board and Chairman of the Board's Audit Committee
since 2002, and previously was a consultant to the Board. Mr. Warrington's
decision to retire from the Board was based on personal reasons and was not as a
result of any disagreement with the Company or due to any matter relating to the
Company's operations, policies, or practices.
EXECUTIVE OFFICERS
See Item 4A - "Executive Officers of the Registrant" in Part I of this report
for information concerning our executive officers, as of the date hereof.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, and the regulations promulgated thereunder
require our executive officers and directors and beneficial owners of more than
10% of our Common Stock to file reports of ownership and changes of ownership of
our Common Stock with the Securities and Exchange Commission, and to furnish us
with copies of all such reports. Based solely on a review of the copies of such
reports furnished to us and written information provided to us, we believe that
during 2006 none of our executive officers and directors failed to timely file
reports under Section 16(a), except Robert Schreiber, Jr., inadvertently failed
to timely file a Form 4 to report one transaction.
Capital Bank-Grawe Gruppe AG ("Capital Bank") has advised us that it is a
banking institution regulated by the banking regulations of Austria, which holds
shares of our Common Stock as agent on behalf of numerous investors. Capital
Bank has represented that all of its investors are accredited investors under
Rule 501 of Regulation D promulgated under the Act. In addition, Capital Bank
has advised us that none of its investors, individually or as a group,
beneficially own more than 4.9% of our Common Stock. Capital Bank has further
informed us that its clients (and not Capital Bank) maintain full voting and
dispositive power over such shares. Consequently, Capital Bank has advised us
that it believes it is not the beneficial owner, as such term is defined in Rule
13d-3 of the Exchange Act, of the shares of our Common Stock registered in the
name of Capital Bank because it has neither voting nor investment power, as such
terms are defined in Rule 13d-3, over such shares. Capital Bank has informed us
that it does not believe that it is required (a) to file, and has not filed,
reports under Section 16(a) of the Exchange Act or (b) to file either Schedule
13D or Schedule 13G in connection with the shares of our Common Stock registered
in the name of Capital Bank.
If the representations, or information provided, by Capital Bank are incorrect
or Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, then
Capital Bank and/or the investor group would have become a beneficial owner of
more than 10% of our Common Stock on February 9, 1996, as a result of the
acquisition of 1,100 shares of our Preferred Stock that were convertible into a
maximum of 1,282,798 shares of our Common Stock. If either Capital Bank or a
group of Capital Bank's investors became a beneficial owner of more than 10% of
our Common Stock on February 9, 1996, or at any time thereafter, and thereby
required to file reports under Section 16(a) of the Exchange Act, then Capital
Bank has failed to file a Form 3 or any Forms 4 or 5 for period from February 9,
1996, until the present.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all our executive officers. Our
Code of Ethics is available on our website at www.perma-fix.com. If any
amendments are made to the Code of Ethics or any grants of waivers are made to
any provision of the Code of Ethics to any of our executive officers, we will
promptly disclose the amendment or waiver and nature of such amendment of waiver
on our website.
96
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The Company's long-term success depends on our ability to efficiently operate
our facilities, evaluate strategic acquisitions within the Nuclear and
Industrial segments of our Company, and to continue to research and develop
innovative technologies in the treatment of nuclear waste, mixed waste and
industrial waste. To achieve these goals, it is important that we be able to
attract, motivate, and retain highly talented individuals who are committed to
the Company's values and goals.
The Compensation and Stock Option Committee (for purposes of this analysis, the
"Committee") of the Board has responsibility for establishing, implementing and
continually monitoring adherence with the Company's compensation philosophy. The
Committee ensures that the total compensation paid to the named executive
officers is fair, reasonable and competitive. Generally, the types of
compensation and benefits provided to members of the named executive officers
are similar to those provided to other executive officers at similar sized
companies and industries.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Committee bases its executive compensation program on the objectives of the
Company. The Committee believes that the most effective executive compensation
program is one that is designed to reward the achievement of specific annual,
long-term and strategic goals by the Company, and which aligns executives'
interests with those of the stockholders by rewarding performance above
established goals, with the ultimate objective of improving stockholder value.
The Committee evaluates both executive performance and compensation to ensure
that the Company maintains its ability to attract superior employees in key
positions and to remain competitive relative to the compensation paid to
similarly situated executives of our peer companies. The Committee believes
executive compensation packages provided by the Company to its executives,
including the named executive officers, should include both cash and
equity-based compensation that provide rewards for performance as measured
against established goals. The Committee bases it executive compensation program
on the following criteria:
o Compensation should be based on the level of job responsibility,
executive performance, and company performance. Executive officers'
pay should be more closely linked to company performance than that of
other employees because the executive officers have a greater ability
to affect results of the Company.
o Compensation should be competitive with compensation offered by other
companies that compete with us for talented individuals.
o Compensation should reward performance.
o Compensation should motivate executives to achieve the Company's
strategic and operational goals.
ROLE OF EXECUTIVE OFFICERS IN COMPENSATION DECISIONS
The Committee approves all compensation decisions for the named executive
officers and approves recommendations regarding equity awards to all officers of
the Company. Decisions regarding the non-equity compensation of other officers
are made by the Chief Executive Officer.
The Chief Executive Officer annually reviews the performance of each of the
named executive officers (other than the Chief Executive Officer whose
performance is reviewed by the Committee). Based on such reviews, the Chief
Executive Officer presents a recommendation to the Committee, which may include
salary adjustments, bonus and equity based awards, and annual award. The
Committee exercises its discretion in accepting or modifying all such
recommendations.
97
THE COMMITTEE'S PROCESSES
The Compensation Committee has established certain processes designed to achieve
the Company's executive compensation objectives. These processes include the
following:
o Company Performance Assessment. The Committee assesses the Company's
performance in order to establish compensation ranges and, as
described below, to assist the Committee in establishing specific
performance measures that determine incentive compensation under the
Company's Executive Management Incentive Plan. For this purpose, the
Company considers numerous measures of performance of both the Company
and industries with which the Company competes.
o Individual Performance Assessment. Because the Committee believes that
an individual's performance should effect an individual's
compensation, the Committee evaluates each named executive officer's
performance. With respect to the named executive officers, other than
the Chief Executive Officer, the Committee considers the
recommendations of the Chief Executive Officer. With respect to all
named executive officers, the Committee exercises its judgment based
on its interactions with the executive officer, such officer's
contribution to the Company's performance and other leadership
achievements.
o Peer Group Assessment. The Committee benchmarks the Company's
compensation program with a group of companies against which the
Committee believes the Company competes for talented individuals (the
"Peer Group"). The composition of the Peer Group is periodically
reviewed and updated by the Committee. The companies currently
comprising the Peer Group are Clean Harbors, Inc. and American Ecology
Corporation. The Committee considers the company's executive
compensation programs as a whole and the compensation of individual
officers if job responsibilities are meaningfully similar. The
Committee sets compensation for executive officers at levels paid to
similarly situated executives of the companies comprising the Peer
Group. This Committee considers individual factors such as experience
level of the individual and market conditions. The Committee believes
that the Peer Group comparison helps insure that the Company's
executive compensation program is competitive with other companies in
the industry.
2006 EXECUTIVE COMPENSATION COMPONENTS
For the fiscal year ended December 31, 2006, the principal components of
compensation for executive officers were:
o base salary;
o performance-based incentive compensation;
o long term incentive compensation;
o retirement and other benefits; and
o perquisites and other personal benefits.
BASE SALARY
The Company provides the named executive officers, other officers, and other
employees with base salary to compensate them for services rendered during the
fiscal year. Base salary ranges for executive officers are determined for each
executive based on his or her position and responsibility by using market data.
98
During its review of base salaries for executives, the Committee primarily
considers:
o market data;
o internal review of the executive's compensation, both individually and
relative to other officers; and
o individual performance of the executive.
Salary levels are typically considered annually as part of the Company's
performance review process as well as upon a promotion or other change in job
responsibility. Merit based increases to salaries of members of the executive
are based on the Committee's assessment of the individual's performance.
PERFORMANCE-BASED INCENTIVE COMPENSATION
The Committee has the latitude to design cash and equity-based incentive
compensation programs to promote high performance and achievement of the
Company's goals by Directors and the named executives, encourage the growth of
stockholder value and allow employees to participate in the long-term growth and
profitability of the Company. The Committee may grant stock options and/or
performance bonuses. In granting these awards, the Committee may establish any
conditions or restrictions it deems appropriate. In addition, the Chief
Executive Officer has discretionary authority to grant stock options to certain
high-performing executives.
All awards of shares of the Company's stock options under the aforementioned
programs are made at or above the market price at the time of the award. Newly
hired or promoted executives, other than executive officers, receive their award
of stock options following their hire or promotion. Grants of stock options to
newly hired executive officers who are eligible to receive them are made at the
next regularly scheduled Committee meeting following their hire date.
EXECUTIVE MANAGEMENT INCENTIVE PLAN
In 2005, the Board of Directors adopted the Executive Management Incentive Plan
(the "MIP"), which became effective January 1, 2006, for the Company's Chief
Executive Officer, Chief Financial Officer, and Chief Operating Officer. The MIP
is an annual cash incentive program under the management incentive plans. The
MIP provides guidelines for the calculation of annual cash incentive based
compensation, subject to Committee oversight and modification. The Committee
considers whether an MIP should be established for the next succeeding year and,
if so, approves the group of employees eligible to participate in the MIP for
that year. The MIP includes various incentive levels based on the participant's
responsibilities and impact on Company operations, with target award
opportunities that are established as a percentage of base salary. These targets
range from 26% of base salary to 50% of base salary for the Company's named
executive officers.
For fiscal 2006, 70% of a named executive officer's MIP award was based upon
achievement of corporate financial objectives relating to revenue and net income
targets, with each component accounting for 15% and 55%, respectively, of the
total corporate financial objective portion of the MIP award. The remaining 30%
of an executive's MIP award was based upon health & safety incidents and permit
& license compliance targets. Each year, the Committee sets target and maximum
levels for each component of the corporate financial objective portion of the
MIP. Payments of awards under the MIP are contingent upon the achievement of
such objectives for the current year. Executive officers participating in the
MIP receive:
o no payment for the corporate financial objective portion of the MIP
award unless the Company achieves the target performance level (as
computed for the total corporate financial objective portion);
o a payment of at least 100% but less than 175% of the target award
opportunity for the corporate financial objective portion of the MIP
award if the Company achieves or exceeds the target performance level
but does not attain the maximum performance level; and
o a payment of 175% of the target award opportunity for the corporate
financial objective portion of the MIP award if the Company achieves
or exceeds the maximum performance level.
99
Upon completion of each fiscal year, the Committee assesses the performance of
the Company for each corporate financial objective of the MIP comparing the
actual fiscal year results to the pre-determined target and maximum levels for
each objective and an overall percentage amount for the corporate financial
objectives is calculated.
Generally, the Committee sets the target level for earnings using the Company's
annually approved budget for the upcoming fiscal year. Minimum target objectives
are set between 80% - 100% of the Company's budget. Maximum earnings objectives
are set at 161% or higher of the company's budget. In making the annual
determination of the target and maximum levels, the Committee may consider the
specific circumstances facing the Company during the coming year. The Committee
generally sets the target and maximum levels such that the relative difficulty
of achieving the target level is consistent from year to year.
Each of the executive officers for the fiscal year ended December 31, 2005,
received the following payments in February 2006 under the MIP for fiscal 2005
performance.
2005 MIP
Name Bonus Award
-------------------------- -----------
Dr. Louis F. Centofanti $ --
Steven T. Baughman $ --
Larry McNamara $ 35,550
Robert Schreiber, Jr. $ 2,200
Awards made to Executive officers under the MIP for performance in 2006 are
reflected in the "Non-Equity Incentive Plan Compensation" column of the Summary
Compensation Table in this section.
LONG-TERM INCENTIVE COMPENSATION
EMPLOYEE STOCK OPTION PLAN
The 2004 Stock Option Plan (the "Option Plan") encourages participants to focus
on long-term Company performance and provides an opportunity for executive
officers and certain designated key employees to increase their stake in the
Company. Stock options succeed by delivering value to the executive only when
the value of the Company's stock increases. The Option Plan authorizes the grant
of non-qualified stock options and incentive stock options for the purchase of
Common Stock.
The Option Plan assists the Company to:
o enhance the link between the creation of stockholder value and
long-term executive incentive compensation;
o provide an opportunity for increased equity ownership by executives;
and
o maintain competitive levels of total compensation.
Stock option award levels are determined based on market data, vary among
participants based on their positions within the Company and are granted at the
Committee's regularly scheduled March meeting. Newly hired or promoted executive
officers who are eligible to receive options are awarded such options at the
next regularly scheduled Committee meeting following their hire or promotion
date.
Options are awarded with an exercise price equal to the closing price of the
Company's Common Stock on the date of the grant as reported on the NASDAQ. In
certain limited circumstances, the Committee may grant options to an executive
at an exercise price in excess of the closing price of the Company's Common
Stock on the grant date. The Committee will not grant options with an exercise
price that is less than the closing price of the Company's Common Stock on the
grant date, nor has it granted options which are priced on a date other than the
grant date.
100
The stock options granted prior to 2006 generally have a ten year term with
annual vesting of 20% over a five year period. In anticipation of the adoption
of SFAS 123R, on July 28, 2005, the Committee approved the acceleration of all
outstanding and unvested options as of the approval date. The options granted in
2006 by the Committee are for a six year term with vesting period of three years
at 33.3% increment per year. Vesting and exercise rights cease upon termination
of employment except in the case of death or retirement (subject to a six month
limitation), or disability (subject to a one year limitation). Prior to the
exercise of an option, the holder has no rights as a stockholder with respect to
the shares subject to such option.
Accounting for Stock-Based Compensation
Beginning on January 1, 2006, the Company began accounting for its Stock Option
Program in accordance with the requirements of FASB Statement 123(R). See impact
of FASB Statement 123(R) on our operating results in" Note 2 - Stock Based
Compensation" to "Notes to Consolidated Financial Statements".
RETIREMENT AND OTHER BENEFITS
401(k) PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply with Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All full-time employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 100% of their compensation, up to a
maximum amount as limited by law. We, at our discretion, may make matching
contributions based on the employee's elective contributions. Company
contributions vest over a period of five years. We currently match 25% of our
employees' contributions. We contributed $378,000 in matching funds during 2006.
PERQUISITES AND OTHER PERSONAL BENEFITS
The Company provides executive officers with perquisites and other personal
benefits that the Company and the Committee believe are reasonable and
consistent with its overall compensation program to better enable the Company to
attract and retain superior employees for key positions. The Committee
periodically reviews the levels of perquisites and other personal benefits
provided to executive officers. The executive officers are provided an auto
allowance.
EMPLOYMENT AGREEMENT
On March 1, 2007, the Board of Directors approved for the Company to enter into
employment agreements with its named executives, subject to finalization of
certain of its material terms, including, but not limited to, the formula for
paying year-end incentive bonuses. As of the date of this report, the terms of
the employment agreements have not been finalized, and none of our named
executives has entered into any employment agreement with the Company.
It is anticipated that such proposed employment agreements, if completed, would
be effective for three years, unless earlier terminated by the Company with or
without cause or by the executive officer for "good reason" or any other reason.
If the executive officer's employment is terminated due to death, disability or
for cause, it is anticipated that the Company would pay to the executive officer
or to his estate a lump sum equal to the sum of any unpaid base salary through
the date of termination, any earned or unpaid incentive bonus, and any benefits
due to the executive officer under any employee benefit plan, excluding any
severance program or policy (the "Accrued Amounts").
101
If the executive officer terminates his employment for good reason, it is
anticipated that the employment agreements will provide that the Company would
be required to pay the executive officer a sum equal to the total Accrued
Amounts and one year of full base salary. If the executive terminates his
employment for a reason other than for good reason, it is anticipated that the
Company would pay to the executive the amount equal to the Accrued Amounts. The
employment agreements would provide, when finalized, that if there is a Change
in Control (to be defined in the agreements), that all outstanding stock options
to purchase common stock held by the executive officer will immediately become
exercisable in full.
COMPENSATION COMMITTEE REPORT
The Committee of the Company has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the Committee recommended
to the Board that the Compensation Discussion and Analysis be included in this
Form 10-K.
THE COMPENSATION AND STOCK OPTION COMMITTEE
Jack Lahav, Chairman
Jon Colin
Dr. Charles E. Young
Joe Reeder
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation paid or earned by each of
the executive officers for the fiscal years ending December 31, 2004, 2005 and
2006. Currently, the Company does not have any employment agreements with any of
the executive officers. When setting total compensation for each of the
executive officers, the Committee reviews, among other things, the executive's
current compensation, including equity and non-equity based compensation.
Based on the fair value of equity awards granted to executive officers in 2006
and the base salary of the executive officers, "Salary" accounted for
approximately 53.3% of the total compensation of the executive officers while
non-equity incentive, option award, and other compensation accounted for
approximately 46.7% of the total compensation of the executive officers.
102
SUMMARY COMPENSATION TABLE
--------------------------
Change
in Pension
Value
and Non-
Non-Equity Qualified
Incentive Deferred
Stock Option Plan Compensation All other
Salary Bonus Awards Awards Compensation Earning Compensation
Name and Principal Position Year ($) ($) ($) ($)(5) ($) ($) ($)(6)
---------------------------- ----- ------- ------- ------- ------- ------------ ------------ ------------
Dr. Louis Centofanti 2006 232,269 -- -- 86,800 143,324(4) -- 13,601
Chairman of the Board, 2005 218,808 -- -- -- -- -- 12,500
President and Chief 2004 190,000 45,801 -- -- -- -- 11,695
Executive Officer
Steven Baughman (1) 2006 123,077 -- -- 87,700 63,709(4) -- 9,000
Vice President and Chief 2005 -- -- -- -- -- -- --
Financial Officer 2004 -- -- -- -- -- -- --
Larry McNamara 2006 193,558 -- -- 217,000 122,500(4) -- 12,750
Chief Operating Officer 2005 189,761 -- -- -- 35,550 -- 12,500
2004 173,000 93,913 -- -- -- -- 11,569
Robert Schreiber, Jr. 2006 158,292 -- -- 21,700 5,915 -- 14,502
President of SYA 2005 195,749 -- -- -- 2,200 -- 14,002
2004 135,394 38,800 -- -- -- -- 13,457
Richard T. Kelecy (2) 2006 123,813 -- -- -- -- -- 3,409
Vice President and Chief 2005 180,762 -- -- -- -- -- 12,500
Financial Officer 2004 175,000 35,400 -- -- -- -- 12,250
David Hansen (3) 2006 92,094 -- -- 4,340 -- -- 1,678
Chief Financial Officer 2005 135,000 8,000 -- -- -- -- 2,850
2004 135,000 10,000 -- -- -- -- 2,132
(1) Appointed as Vice President and Chief Financial Officer in May 2006
(2) Resigned as Chief Financial Officer, Vice President, and Secretary of the
Board of Director effective April 5, 2006. Mr. Kelecy continued as a part
time employee, to assist the Company in its transition until September 8,
2006.
(3) Named as Interim Chief Financial Officer from May 4 to May 15 by Board of
Director. Mr. Hansen resigned from the Company effective June 2, 2006 and
remained as a part time employee through August 31, 2006.
(4) Represents 2006 performance compensation earned in 2006 under the Company's
MIP. The amount includes $55,530, $37,693, and $47,463 earned by Dr.
Centofanti, Mr. Baughman, and Mr. McNamara, respectively, in 4th quarter of
2006, which will be paid in 2007. The MIP is described under the heading
"Executive Management Incentive Plan" in this section.
(5) This amount reflects the expense to the Company for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in
accordance with FAS 123(R) of options granted under Stock Option Program in
2006. There was no expense for options granted prior to 2006, which were
fully vested prior to 2006, and are not included in these amounts.
Assumptions used in the calculation of this amount are included in "Note 2
- Stock Based Compensation" to "Notes to Consolidated Financial Statement".
(6) Each named executive officer, with the exception of Mr. Hansen, interim
Chief Financial Officer, receives a monthly automobile allowance of $750 or
a leased vehicle. Also included, where applicable, is our 401(k) matching
contribution.
103
The compensation plan under which the awards in the following table were made
are generally described in the Compensation Discussion and Analysis beginning on
page 97, and include the Company's MIP, which is a non-equity incentive plan,
and the Company's 2004 Stock Option Plan, which provides for grant of stock
options to our employees.
GRANT OF PLAN-BASED AWARDS TABLE
--------------------------------
Estimated Future Payouts Estimated Future Payouts
Under Non-Equity Incentive Under Equity Incentive
Plan Awards Plan Awards
------------------------------- ----------------------------
Grant Threshold Target Maximum Threshold Target Maximum
Name Date $ $(1) $(1) $ $ $
--------------------- --------- --------- -------- -------- --------- ------- -------
Dr. Louis Centofanti 3/2/2006 -- -- -- -- -- --
N/A 117,000 204,748
Steven Baughman 5/15/2006 -- -- -- -- -- --
N/A 52,000 91,012
Larry McNamara 3/2/2006 -- -- -- -- -- --
N/A 100,000 175,000
Robert Schreiber, Jr 3/2/2006 -- -- -- -- -- --
Richard T. Kelecy -- -- -- -- -- -- --
David Hansen 3/2/2006 -- -- -- -- -- --
All
other
Stock
Awards: Grant
Number All other Date
of Option Fair
Shared Awards: Excerise Value
of Number of or Base of
Stock Securities Price of Stock
or Underlying Option and
Grant Units Options Awards Option
Name Date (#) (#) ($/Sh) Awards
--------------------- --------- --------- ---------- -------- ------
Dr. Louis Centofanti 3/2/2006 -- 100,000 1.86 .868
N/A
Steven Baughman 5/15/2006 -- 100,000(2) 1.85 .877
N/A
Larry McNamara 3/2/2006 -- 250,000 1.86 .868
N/A
Robert Schreiber, Jr 3/2/2006 -- 25,000 1.86 .868
Richard T. Kelecy -- -- -- -- --
David Hansen 3/2/2006 -- 5,000(3) 1.86 .868
(1) The amounts shown in column titled "Target" reflects the minimum payment
level under the Company's Executive Management Incentive Plan which is paid
with the achievement of 80% to 100% of the target amount. The amount shown
in column titled "Maximum" reflects the maximum payment level of 175% of
the target amount. These amounts are based on the individual's current
salary and position.
(2) Upon his employment with the Company, Mr. Baughman received options to
purchase 100,000 shares of the Common Stock of the Company with a grant
price equal to $1.85, which was the closing price of the Company's Common
Stock on the NASDAQ Stock Exchange on the grant date.
(3) Name as Interim Chief Financial Officer from May 4 to May 15 by Board of
Directors. Mr. Hansen resigned from the Company effective June 2, 2006 and
remained as a part-time employee through August 31, 2006. The options
granted were forfeited by Mr. Hansen upon his resignation.
During 2006, the named executive officers were granted the number of options
noted in the above Grant of Plan-Based Award Table under the Company's 2004
Stock Option Plan. The March 2 and May 15 grants are each for a term of six
years and vest over a three year period, at 33.3% increments per year, with
exercise price of $1.860 and $1.850, respectively. We calculated a fair value of
$0.868 and a fair value of $0.877 for each of the grants on the date of grant,
respectively, using the Black-Scholes option pricing model.
104
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR
The following table sets forth the fiscal year-end of unexercised options held
by the named executive officers.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
----------------------------------------------
Equity Equity
Incentive Incentive
Plan Plan
Equity Awards: Awards:
Incentive Number of Number of
Plan Unearned Unearned
Awards: Number of Market Shares, Shares,
Number of Shares or Value of Units or Units
Number of Number of Securities Units of Shares or Other or Other
underlying underlying Underlying Stock Units of Rights Rights
Unexercised Unexercised Unexercised Option That Stock That That That
Options Options Unearned Exercise Option Have Not Have Not Have Not Have Not
(#) (#)(1) Options Price Expiration Vested Vested Vested Vested
Name Exercisable Unexercisable (#) ($) Date (#) ($) (#) (#)
--------------------- ----------- ------------- ----------- -------- ---------- --------- ---------- ---------- ----------
Dr. Louis Centofanti 100,000 -- -- 2.25 10/1/2007 -- -- -- --
100,000 -- -- 2.50 10/1/2007 -- -- -- --
100,000 -- -- 3.00 10/1/2007 -- -- -- --
75,000 -- -- 1.25 4/10/2010 -- -- -- --
100,000 -- -- 1.75 4/3/2011 -- -- -- --
100,000 -- -- 2.19 2/27/2013 -- -- -- --
-- 100,000(2) -- 1.86 3/2/2012 -- -- -- --
Steven Baughman -- 100,000(3) -- 1.85 5/15/2012 -- -- -- --
Larry McNamara 50,000 -- -- 1.25 4/10/2010 -- -- -- --
120,000 -- -- 1.75 4/3/2011 -- -- -- --
100,000 -- -- 2.19 2/27/2013 -- -- -- --
-- 250,000(2) -- 1.86 3/2/2012 -- -- -- --
Robert Schreiber, Jr. 15,000 -- -- 1.25 10/14/2008 -- -- -- --
15,000 -- -- 1.25 4/10/2010 -- -- -- --
50,000 -- -- 1.75 4/3/2011 -- -- -- --
50,000 -- -- 2.19 2/27/2013 -- -- -- --
-- 25,000(2) -- 1.86 3/2/2012 -- -- -- --
(1) In the event of a change in control (as defined in the Plan) of the
Company, each outstanding option and award shall immediately become
exercisable in full notwithstanding the vesting or exercise provisions
contained in the stock option agreement.
(2) Incentive stock option granted on March 2, 2006 under the Company's 2004
Stock Option Plan. The option is for a six year period and vests over a
three year period, at 33.3% increments per year.
(3) Incentive stock option granted on May 15, 2006 under the Company's 2004
Stock Option Plan. The option is for a six year period and vests over a
three year period, at 33.3% increments per year.
105
The following table sets forth the number of options exercised by the named
executive officers in 2006:
OPTION EXERCISES AND STOCK VESTED TABLE
---------------------------------------
Option Awards Stock Awards
------------------------------------------- -------------------------------------------
Number of Shares Value Realized On Number of Shares Value Realized On
Acquired on Exercises Exercise Acquired on Vesting Vesting
Name (#) ($) (3) (#) ($) (#)
-------------------------- --------------------- ------------------- -------------------- --------------------
Dr. Louis F. Centofanti -- -- -- --
Steven Baughman -- -- -- --
Larry Mcnamara -- -- -- --
Robert Schreiber, Jr 80,000 64,700 -- --
Richard T. Kelecy (1) 250,000 160,303 -- --
David Hansen (2) 40,000 27,575 -- --
(1) Resigned as Chief Financial Officer, Vice President, and Secretary of the
Board of Directors of the Company effective April 5, 2006. Mr. Kelecy
continued as a part time employee until September 8, 2006, to assist the
Company in its transition.
(2) Served as Interim Chief Financial Officer from May 4 to May 15, 2006. Mr.
Hansen resigned from the Company effective June 2, 2006 and remained as a
part time employee through August 31, 2006.
(3) Based on the difference between the closing price of our Common Stock
reported on the National Association of Securities Dealers Automated
Quotation (`NASDAQ") Capital Market on the exercise date and the exercise
price of the option.
EMPLOYEE STOCK PURCHASE PLAN
Our 2003 Employee Stock Purchase Plan ("2003 Purchase Plan") was adopted to
provide our eligible employees an opportunity to become stockholders and
purchase our Common Stock through payroll deductions. The maximum number of
shares issuable under the 2003 Purchase Plan was 1,500,000. The 2003 Purchase
Plan authorized the purchase of shares two times per year, at an exercise price
per share of 85% of the market price of our Common Stock on the offering date of
the period or on the exercise date of the period, whichever is lower.
The first purchase period commenced July 1, 2004. The following table details
the total employee stock purchase under the 2003 Purchase Plan.
Shares
Purchase Period Proceeds Purchased
----------------------------- ------------ ------------
July 1 - December 31, 2004 $ 47,000 31,287
January 1 - June 30, 2005 51,000 33,970
July 1 - December 31, 2005 44,000 31,123
------------ ------------
$ 142,000 96,380
============ ============
On May 15, 2006, the Board of Directors of the Company terminated the 2003
Purchase Plan due to lack of employee participation and the cost of managing the
plan. Upon termination of the 2003 Purchase Plan, the balance, if any, then
standing to the credit of each participant in the participant stock purchase
stock purchase account was refunded to the participant.
106
COMPENSATION OF DIRECTORS
Directors who are employees receive no additional compensation for serving on
the board of directors or its committees. In 2006, we provided the following
annual compensation to directors who are not employees: (1) Each of our
non-employee directors reelected was awarded options to purchase 12,000 shares
of our Common Stock and our newly elected director was awarded options to
purchase 30,000 shares of our Common Stock. The grant date fair value of each
option award received by our non-employee directors was $1.742 per share, based
on the date of grant, pursuant to SFAS 123R; (2) The number of shares of Common
Stock awarded under the 2003 Outside Director Plan for director fees earned is
based on 75% of the closing market price of our Common Stock as reported on
NASDAQ as determined on the business day immediately preceding the date the
quarterly director fees is due. The stock award is granted in lieu of cash
compensation and is fully vested upon grant. The table below summarizes the
director compensation expenses recognized by the Company for the director option
and stock (resulting from fees earned) awards. The terms of the 2003 Outside
Directors Plan are further described below under "2003 Outside Directors Plan".
DIRECTOR COMPENSATION TABLE
---------------------------
Change in
Pension Value
and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred
Paid Stock Option Plan Compensation All Other
In Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) (2) ($) (3) ($) ($) ($) ($)
------------------------------ --------- ------- ------- ------------- ------------- ------------- -------
Mark Zwecker 10,332 25,583 20,904 -- -- -- 56,819
Alfred C. Warrington,IV (1) -- 34,402 -- -- -- -- 34,402
Jon Colin -- 24,001 20,904 -- -- -- 44,905
Jack Lahav -- 24,001 20,904 -- -- -- 44,905
Joe R. Reeder -- 24,001 20,904 -- -- -- 44,905
Charles E. Young 1,575 21,902 20,904 -- -- -- 44,381
Larry M. Shelton (1) 2,705 6,700 52,260 -- -- -- 61,665
(1) Mr. Alfred Warrington resigned as a member of the Board, effective
July 27, 2006. Mr. Larry Shelton was subsequently elected as Board of
Director on July 27, 2006
(2) The number of shares of Common Stock comprising stock awards granted under
the 2003 Outside Directors Plan is calculated based on 75% of the closing
market value of the Common Stock as reported on the NASDAQ on the business
day immediately preceding the date that the quarterly fee is due.
(3) Option granted under the Company's 2003 Outside Director Plan resulting
from reelection of Board of Directors on July 27, 2006. Options are for a
10 year period with exercise price of $2.15 per share and are fully vested
in six months from grant date. Option Award is calculated based on the
fair value of the option per share ($1.742) on the date of grant pursuant
to SFAS 123R. In 2006, the option expense recognized for financial
statement purposes totaled $133,000. The remaining $24,000 option expense
will be recognized in January 2007, upon vesting of the stock option,
pursuant to SFAS 123R. See "Note 2" of "Notes to Consolidated Financial
Statements".
2003 OUTSIDE DIRECTORS PLAN
In 2006, we paid our outside directors fees of $1,500 for each month of service.
We compensate our Audit Committee Chairman an additional $2,250 for each month
of service as Chairman, as a result of the additional responsibilities placed on
that position. Other than the additional fees for the Chairman of the Audit
Committee, the outside directors do not receive additional compensation for
committee participation or special assignment. As a member of the Board of
Directors, each Director elects to receive either 65% or 100% of the director's
fee in shares of our Common Stock based on 75% of the fair market value of the
Common Stock determined on the business day immediately preceding the date that
the quarterly fee is due. In 2006, the fees earned by our outside directors
totaled $175,000. The balance of each director's fee, if any, is payable in
cash. The aggregate amount of accrued directors' fees at December 31, 2006, to
be paid during 2007 to the six outside directors (Colin, Lahav, Reeder, Shelton,
Young and Zwecker) was $64,000. Reimbursements of expenses for attending
meetings of the Board are paid in cash at the time of the applicable Board
meeting. Although Dr. Centofanti is not compensated for his services provided as
a director, Dr. Centofanti is compensated for his services rendered as an
officer of the Company. See "EXECUTIVE COMPENSATION -- Summary Compensation
Table."
107
We believe that it is important for our directors to have a personal interest in
our success and growth and for their interests to be aligned with those of our
stockholders. Therefore, under our 2003 Outside Directors Stock Plan ("2003
Directors Plan"), each outside director is granted a 10 year option to purchase
up to 30,000 shares of Common Stock on the date such director is initially
elected to the Board of Directors, and receives on each reelection date an
option to purchase up to another 12,000 shares of Common Stock, with the
exercise price being the fair market value of the Common Stock on the date that
the option is granted. No option granted under the 2003 Directors Plan is
exercisable until after the expiration of six months from the date the option is
granted and no option shall be exercisable after the expiration of ten years
from the date the option is granted. Options to purchase 324,000 shares of
Common Stock were granted and are outstanding under the 2003 Directors Plan.
As of the date of this report, we have issued 299,485 shares of our Common Stock
in payment of director fees under the 2003 Directors Plan, covering the period
October 1, 2002, through December 31, 2006.
In the event of a change of control (as defined in our option plans) of the
Company, each outstanding option and award granted under the plans shall
immediately become exercisable in full notwithstanding the vesting or exercise
provisions contained in the stock option agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2006, the Compensation and Stock Option Committee for our Board of
Directors was composed of Jack Lahav, Jon Colin, Joe Reeder, and Dr. Charles E.
Young. None of the members of the Compensation and Stock Option Committee has
been an officer or employee of the Company or has had any relationship with the
Company requiring disclosure under the SEC regulations.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth information as to the shares of voting securities
beneficially owned as of March 9, 2007, by each person known by us to be the
beneficial owners of more than 5% of any class of our voting securities.
AMOUNT AND PERCENT
TITLE NATURE OF OF
NAME OF BENEFICIAL OWNER OF CLASS OWNERSHIP CLASS (1)
---------------------------------- --------- ----------- -----------
Rutabaga Capital Management (2) Common 5,435,309 10.44%
Heartland Advisors, Inc. (3) Common 3,269,545 6.28%
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
52,063,744 shares of Common Stock issued and outstanding on March 9, 2007,
plus the number of shares of Common Stock which such person has the right
to acquire beneficial ownership of within 60 days. Beneficial ownership by
our stockholders has been determined in accordance with the rules
promulgated under Section 13(d) of the Exchange Act.
108
(2) This beneficial ownership amount is according to the Schedule 13G/A, filed
with the Securities and Exchange Commission ("SEC"), on January 22, 2007,
which provides that Rutabaga Capital Management, an investment advisor, has
sole voting power over 1,830,100 shares and shared voting power over
3,605,209 shares, and has sole dispositive power over all of these shares.
The address of Rutabaga Capital Management is: 64 Broad Street, 3rd Floor,
Boston, MA 02109.
(3) This beneficial ownership amount is according to the Schedule 13G, filed
with the Securities and Exchange Commission ("SEC"), on February 12, 2007,
which provides that Heartland Advisors, Inc. an investment advisor, does
not have sole voting power over any share and shared voting power over
2,985,945 shares, and does not sole dispositive power over any share and
dispositive power over 3,269,545 shares. The address of Heartland Advisors,
Inc. is: 789 North Water Street, Milwaukee, WI 53202.
Capital Bank represented to us that:
o Capital Bank holds of record as a nominee for, and as an agent
of, certain accredited investors, 6,322,074 shares of our Common
Stock.;
o All of the Capital Bank's investors are accredited investors;
o None of Capital Bank's investors beneficially own more than 4.9%
of our Common Stock and to its best knowledge, none of Capital
Bank's investors act together as a group or otherwise act in
concert for the purpose of voting on matters subject to the vote
of our stockholders or for purpose of dispositive or investment
of such stock;
o Capital Bank's investors maintain full voting and dispositive
power over the Common Stock beneficially owned by such investors;
and
o Capital Bank has neither voting nor investment power over the
shares of Common Stock owned by Capital Bank, as agent for its
investors.
o Capital Bank believes that it is not required to file reports
under Section 16(a) of the Exchange Act or to file either
Schedule 13D or Schedule 13G in connection with the shares of our
Common Stock registered in the name of Capital Bank.
o Capital Bank is not the beneficial owner, as such term is defined
in Rule 13d-3 of the Exchange Act, of the shares of Common Stock
registered in Capital Bank's name because (a) Capital Bank holds
the Common Stock as a nominee only and (b) Capital Bank has
neither voting nor investment power over such shares.
Notwithstanding the previous paragraph, if Capital Bank's representations to us
described above are incorrect or if Capital Bank's investors are acting as a
group, then Capital Bank or a group of Capital Bank's investors could be a
beneficial owner of more than 5% of our voting securities. If Capital Bank is
deemed the beneficial owner of such shares, the following table sets forth
information as to the shares of voting securities that Capital Bank may be
considered to beneficially own on March 9, 2007.
NAME OF TITLE AMOUNT AND PERCENT
RECORD OWNER OF CLASS NATURE OF OF (1)
--------------------------------- --------- ------------ -----------
Capital Bank Grawe Gruppe (2) Common 6,322,074(2) 12.14%
(1) This calculation is based upon 52,063,744 shares of Common Stock issued and
outstanding on March 9, 2007 plus the number of shares of Common Stock
which Capital Bank, as agent for certain accredited investors has the right
to acquire within 60 days.
(2) This amount is the number of shares that Capital Bank has represented to us
that it holds of record as nominee for, and as an agent of, certain of its
accredited investors. As of the date of this report, Capital Bank has no
warrants or options to acquire, as agent for certain investors, additional
shares of our Common Stocks. Although Capital Bank is the record holder of
the shares of Common Stock described in this note, Capital Bank has advised
us that it does not believe it is a beneficial owner of the Common Stock or
that it is required to file reports under Section 16(a) or Section 13(d) of
the Exchange Act. Because Capital Bank (a) has advised us that it holds the
Common Stock as a nominee only and that it does not exercise voting or
investment power over the Common Stock held in its name and that no one
investor of Capital Bank for which it holds our Common Stock holds more
than 4.9% of our issued and outstanding Common Stock and (b) has not
nominated, and has not sought to nominate, and does not intend to nominate
in the future, any person to serve as a member of our Board of Directors,
we do not believe that Capital Bank is our affiliate. Capital Bank's
address is Burgring 16, A-8010 Graz, Austria.
109
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as to the shares of voting securities
beneficially owned as of March 9, 2007, by each of our Directors and named
executive officers and by all of our directors and executive officers as a
group. Beneficial ownership has been determined in accordance with the rules
promulgated under Section 13(d) of the Exchange Act. A person is deemed to be a
beneficial owner of any voting securities for which that person has the right to
acquire beneficial ownership within 60 days.
NUMBER OF SHARES PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK (1)
---------------------------------------------------------- ---------------- ----------------
Dr. Louis F. Centofanti (2)(3) 1,450,267(3) 2.75%
Jon Colin (2)(4) 146,142(4) *
Jack Lahav (2)(5) 704,250(5) 1.35%
Joe Reeder (2)(6) 302,448(6) *
Dr. Charles E. Young (2)(7) 88,685(7) *
Mark A. Zwecker (2)(8) 319,619(8) *
Larry M. Shelton (2)(9) 30,000(9) *
Richard T. Kelecy (2)(10) 51,947(10) *
Larry McNamara (2)(11) 353,333(11) *
Robert Schreiber, Jr. (2)(12) 227,702(12) *
Steven Baughman (2)(13) 300,009(13) *
Directors and Executive Officers as a Group (10 persons) 3,922,455(14) 7.33%
*Indicates beneficial ownership of less than one percent (1%).
(1) See footnote (1) of the table under "Security Ownership of Certain
Beneficial Owners".
(2) The business address of such person, for the purposes hereof, is c/o
Perma-Fix Environmental Services, Inc., 8302 Dunwoody Place, Suite 250,
Atlanta, Georgia 30350.
(3) These shares include (i) 537,934 shares held of record by Dr. Centofanti;
(ii) options to purchase 308,333 shares which are immediately exercisable;
(iii) options to purchase 300,000 shares granted pursuant to Dr.
Centofanti's prior employment agreement, which are immediately
exercisable; and (iv) 304,000 shares held by Dr. Centofanti's wife. Dr.
Centofanti has sole voting and investment power of these shares, except
for the shares held by Dr. Centofanti's wife, over which Dr. Centofanti
shares voting and investment power.
(4) Mr. Colin has sole voting and investment power over these shares which
include: (i) 68,142 shares held of record by Mr. Colin, and (ii) options
to purchase 78,000 shares of Common Stock, which are immediately
exercisable.
(5) Mr. Lahav has sole voting and investment power over these shares which
include: (i) 636,250 shares of Common Stock held of record by Mr. Lahav;
(ii) options to purchase 68,000 shares, which are immediately exercisable.
(6) Mr. Reeder has sole voting and investment power over these shares which
include: (i) 239,448 shares of Common Stock held of record by Mr. Reeder,
and (ii) options to purchase 63,000 shares, which are immediately
exercisable.
110
(7) Dr. Young has sole voting and investment power over these shares which
include: (i) 22,685 shares held of record by Dr. Young; and (ii) options
to purchase 66,000 shares, which are immediately exercisable.
(8) Mr. Zwecker has sole voting and investment power over these shares which
include: (i) 241,619 shares of Common Stock held of record by Mr. Zwecker;
and (ii) options to purchase 78,000 shares, which are immediately
exercisable.
(9) Mr. Shelton has sole voting and investment power over these shares which
include: options to purchase 30,000 shares, which are immediately
exercisable.
(10) Mr. Kelecy has sole voting and investment power over 51,947 shares of
Common Stock held of record by Mr. Kelecy.
(11) Mr. McNamara has sole voting and investment power over these shares which
include: options to purchase 353,333 shares, which are immediately
exercisable.
(12) Mr. Schreiber has joint voting and investment power, with his spouse, over
89,369 shares of Common Stock beneficially held and sole voting and
investment power over options to purchase 138,333 shares, which are
immediately exercisable.
(13) Mr. Baughman has sole voting and investment power over 300,009 shares of
Common Stock held of record by Mr. Baughman.
(14) Shares do not reflect shares held of record by Mr. Kelecy as Mr. Kelecy
resigned as Chief Financial Officer, Vice President, and Secretary of the
Board of Director effective April 5, 2006. Mr. Kelecy continued as a part
time employee, to assist the Company in its transition until September 8,
2006.
EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2006, with respect
to our equity compensation plans.
Equity Compensation Plan
-----------------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of securities to exercise price of equity compensation
be issued upon exercise outstanding plans (excluding
of outstanding options options, warrants securities reflected in
warrants and rights and rights column (a)
Plan Category (a) (b) (c)
---------------------------------- ------------------------ ------------------------ ------------------------
Equity compensation plans
Approved by stockholders 2,816,750 $ 1.86 1,348,515
Equity compensation plans not
Approved by stockholders (1) 300,000 2.58 --
------------------------ ------------------------ ------------------------
Total 3,116,750 $ 1.93 1,348,515
(1) These shares are issuable pursuant to options granted to Dr. Centofanti
under his prior employment agreement. The options expire in October 2007.
111
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
LAWRENCE PROPERTIES LLC
During February 2006, our Board of Directors approved and Perma-Fix
Environmental Services, Inc. entered into a lease agreement, whereby we will
lease property from, Lawrence Properties LLC, a company jointly owned by the
president of Schreiber, Yonley and Associates, Robert Schreiber, Jr. and his
spouse. Mr. Schreiber is a member of our executive management team. The lease is
for a term of five years and will begin on June 1, 2006. We will pay monthly
rent expense of $10,000, which we believe is lower than costs charged by
unrelated third party landlords. Additional rent would be assessed for any
increases over the initial lease commencement year, to property taxes or
assessments and property and casualty insurance premiums.
MILL CREEK ENVIRONMENTAL SERVICES, INC.
We utilize the remediation and analytical services of Mill Creek Environmental
Services, Inc., which is owned principally by the son and daughter-in-law of our
CEO, Dr. Louis Centofanti. Mill Creek has provided assistance in developing
remediation plans, completing a permit renewal and modification application, and
groundwater investigations at one of our remediation sites. The majority of
these services we are unable to perform ourselves. Our purchases from or
services provided to us by Mill Creek during 2006, 2005 and 2004 totaled $1,700,
$230,000, and $118,000 respectively. We believe that the rates we receive are
competitive and comparable to rates we would receive from unaffiliated third
party vendors.
CAPITAL BANK GRAWE GRUPPE
As of March 9, 2007, Capital Bank represents to us that it owns of record, as
agent for certain accredited investors, 6,322,074 shares of Common Stock
representing 12.14% of our issued and outstanding Common Stock. During 2006,
Capital Bank exercised the right to acquire 2,548,084 shares of our Common
Stock, as agent for its investors. The aggregate proceeds paid to the Company
was $4,459,147, or $1.75 per share.
Capital Bank has advised us that it is a banking institution regulated by the
banking regulations of Austria, which holds shares of our Common Stock on behalf
of numerous investors. Capital Bank asserts that it is precluded by Austrian law
from disclosing the identities of its investors, unless so approved by each such
investor. Certain of its investors gave Capital Bank permission to disclose
their identities in order to be included as Selling Stockholders in our Form S-3
Registration Statement, effective November 22, 2002. Capital Bank has
represented that all of its investors are accredited investors under Rule 501 of
Regulation D promulgated under the Act. In addition, Capital Bank has advised us
that none of its investors beneficially own more than 4.9% of our Common Stock.
Capital Bank has further informed us that its clients (and not Capital Bank)
maintain full voting and dispositive power over such shares. Consequently,
Capital Bank has advised us that it believes it is not the beneficial owner, as
such term is defined in Rule 13d-3, of the shares of our Common Stock registered
in the name of Capital Bank because it has neither voting nor investment power,
as such terms are defined in Rule 13d-3, over such shares. Capital Bank has
informed us that it does not believe that it is required to file, and has not
filed, any reports under Forms 3, 4, or 5 as required by Section 16(a) of the
Exchange Act or to file either Schedule 13D or Schedule 13G in connection with
the shares of our Common Stock registered in the name of Capital Bank.
If the representations or information provided by Capital Bank are incorrect or
if Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, Capital
Bank and/or the investor group could have become a beneficial owner (as that
term is defined under Rule 13d-3 as promulgated under the Exchange Act of more
than 10% of our Common Stock.
Because Capital Bank (a) has advised us that it holds the Common Stock as a
nominee only and that it does not exercise voting or investment power over the
Common Stock held in its name and that no one investor of Capital Bank for which
it holds our Common Stock holds more than 4.9% of our issued and outstanding
Common Stock and (b) has not nominated, and has not sought to nominate, and does
not intend to nominate in the future, any person to serve as a member of our
Board of Directors, we do not believe that Capital Bank is our affiliate.
112
DIRECTOR INDEPENDENCE
See "Item 10 of Part III - Director, Executive Officers and Corporate
Governance" regarding the independence of our Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees and expenses billed by BDO Seidman, LLP ("BDO") for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2006 and 2005, for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for those fiscal years, and for review of documents filed with the
Securities and Exchange Commission for those fiscal years were approximately
$478,000 and $447,000, respectively. Audit fees for 2006 and 2005 include
approximately $195,000 and $201,000, respectively, in fees to provide internal
control audit services to the Company. Approximately 8% and 46% of the total
hours spent on audit services for the Company for the years ended December 31,
2006 and 2005, respectively, were spent by Cross, Fernandez and Riley, LLP
("CFR"), members of the BDO alliance network of firms. Such members are not full
time, permanent employees of BDO. In addition, approximately 7% of the total
hours spent on audit services for the Company for the year ended December 31,
2006, were spent by McLeod and Company, members of the BDO alliance of network
of firms. Such members are not full time, permanent employees of BDO.
AUDIT-RELATED FEES
BDO was not engaged to provide audit related services to the Company for the
fiscal years ended December 31, 2006 and 2005.
CFR audited the Company's 401(k) Plan during 2006 and 2005, and billed $11,000
and $8,000, respectively.
TAX SERVICES
BDO was not engaged to provide tax services to the Company for the fiscal years
ended December 31, 2006 and 2005.
The aggregate fees billed by CFR for tax compliance services for 2006 and 2005
were approximately $34,000 and $39,000, respectively. CFR was engaged to provide
consulting on corporate tax issues for the fiscal year ended December 31, 2006.
The aggregate fees billed by CFR for the period was approximately $4,300. CFR
was not engaged to provide any other tax services to the Company for the fiscal
year ended December 31, 2005.
ALL OTHER FEES
BDO was engaged to provide services related to our proposed acquisition of
Nuvotec USA, Inc. and its who1ly owned subsidiary, Pacific EcoSolutions, Inc.
("PEcoS") for the fiscal year ended December 31, 2006. The aggregate fees billed
by BDO for the period was $4,300. BDO was not engaged to provide any other
services to the Company for the fiscal year ended December 31, 2005.
The Audit Committee of the Company's Board of Directors has considered whether
BDO's provision of the services described above for the fiscal years ended
December 31, 2006 and 2005, is compatible with maintaining its independence. The
Audit Committee also considered services performed by CFR to determine that it
is compatible with maintaining independence.
113
Engagement of the Independent Auditor
The Audit Committee is responsible for approving all engagements with BDO and
any members of the BDO alliance network of firms to perform audit or non-audit
services for us, prior to engaging these firms to provide those services. All of
the services under the headings Audit Related Fees, Tax Services, and All Other
Fees were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X of the Exchange Act. The Audit Committee's
pre-approval policy provides as follows:
o The Audit Committee will review and pre-approve on an annual basis any
known audit, audit-related, tax and all other services, along with
acceptable cost levels, to be performed by BDO and any members of the
BDO alliance network of firms. The Audit Committee may revise the
pre-approved services during the period based on subsequent
determinations. Pre-approved services typically include: statutory
audits, quarterly reviews, regulatory filing requirements,
consultation on new accounting and disclosure standards, employee
benefit plan audits, reviews and reporting on management's internal
controls and specified tax matters.
o Any proposed service that is not pre-approved on the annual basis
requires a specific pre-approval by the Audit Committee, including
cost level approval.
o The Audit Committee may delegate pre-approval authority to one or more
of the Audit Committee members. The delegated member must report to
the Audit Committee, at the next Audit Committee meeting, any
pre-approval decisions made.
114
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
(a)(1) Consolidated Financial Statements
See Item 8 for the Index to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
See Item 8 for the Index to Consolidated Financial Statements
(which includes the Index to Financial Statement Schedules)
(a)(3) Exhibits
The Exhibits listed in the Exhibit Index are filed or incorporated by
reference as a part of this report.
115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Perma-Fix Environmental Services, Inc.
By /s/ Dr. Louis F. Centofanti Date March 29, 2007
---------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By /s/ Steven T. Baughman Date March 29, 2007
---------------------------------
Steven T. Baughman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
By /s/ Dr. Louis F. Centofanti Date March 29, 2007
---------------------------------
Dr. Louis F. Centofanti, Director
By /s/ Jon Colin Date March 29, 2007
---------------------------------
Jon Colin, Director
By /s/ Jack Lahav Date March 29, 2007
---------------------------------
Jack Lahav, Director
By /s/ Joe R. Reeder Date March 29, 2007
---------------------------------
Joe R. Reeder, Director
By /s/ Larry M. Shelton Date March 29, 2007
---------------------------------
Larry M. Shelton, Director
By /s/ Charles E. Young Date March 29, 2007
---------------------------------
Charles E. Young, Director
By /s/ Mark A. Zwecker Date March 29, 2007
---------------------------------
Mark A. Zwecker, Director
116
SCHEDULE II
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2006, 2005, and 2004
(Dollars in thousands)
Additions
Charged to
Balance at Costs, Balance
Beginning Expenses at End
Description of Year and Other Deductions of Year
--------------------------------------- ------------ ------------ ------------ ------------
Year ended December 31, 2006:
Allowance for doubtful accounts -
continuing operations $ 512 $ 81 $ 178 $ 415
Allowance for doubtful accounts -
discontinued operations 90 (17) 73 --
Year ended December 31, 2005:
Allowance for doubtful accounts -
continuing operations $ 560 $ 185 $ 233 $ 512
Allowance for doubtful accounts -
discontinued operations 135 (37) 8 90
Year ended December 31, 2004:
Allowance for doubtful accounts -
continuing operations $ 661 $ 241 $ 342 $ 560
Allowance for doubtful accounts -
discontinued operations 42 108 15 135
117
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
-------------- ----------------------------------------------------------------
3(i) Restated Certificate of Incorporation, as amended, and all
Certificates of Designations are incorporated by reference from
3.1(i) to the Company's Form 10-Q for the quarter ended
September 30, 2002.
3(ii) Bylaws are incorporated by reference from the Company's
Registration Statement, No. 33-51874.
4.1 Specimen Common Stock Certificate as incorporated by reference
from Exhibit 4.3 to the Company's Registration Statement, No.
33-51874.
4.2 Loan and Security Agreement by and between the Company,
subsidiaries of the Company as signatories thereto, and PNC
Bank, National Association, dated December 22, 2000, as
incorporated by reference from Exhibit 99.1 to the Company's
Form 8-K dated December 22, 2000.
4.3 First Amendment to Loan Agreement and Consent, dated January 30,
2001, between the Company and PNC Bank, National Association as
incorporated by reference from Exhibit 99.7 to the Company's
Form 8-K dated January 31, 2001.
4.4 Amendment No. 1 to Revolving Credit, Term Loan and Security
Agreement, dated as of June 10, 2002, between the Company and
PNC Bank is incorporated by reference from Exhibit 4.3 to the
Company's Form 10-Q for the quarter ended September 30, 2002.
4.5 Amendment No. 2 to Revolving Credit, Term Loan and Security
Agreement, dated as of May 23, 2003, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.4 to the
Company's Form 10-Q for the quarter ended June 30, 2003, and
filed on August 14, 2003.
4.6 Amendment No. 3 to Revolving Credit, Term Loan, and Security
Agreement, dated as of October 31, 2003, between the Company and
PNC Bank, as incorporated by reference from Exhibit 4.5 to the
Company's Form 10-Q for the quarter ended September 30, 2003,
and filed on November 10, 2003.
4.7 Registration Rights Agreement, dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital
AG, Baystar Capital II, L.P., Bristol Investment Fund, Ltd.,
Crescent International Ltd, Crestview Capital Master LLC, Geduld
Capital Partners LP, Gruber & McBaine International, Irwin
Geduld Revocable Trust, J Patterson McBaine, Jon D. Gruber and
Linda W. Gruber, Lagunitas Partners LP, Omicron Master Trust,
Palisades Master Fund, L.P., Stonestreet LP, is incorporated by
reference from Exhibit 4.2 of our Registration Statement No.
333-115061.
4.8 Common Stock Purchase Warrant, dated March 16, 2004, issued by
the company to Alexandra Global Master Fund, Ltd., for the
purchase of 262,500 shares of the Company's common stock, is
incorporated by reference from Exhibit 4.3 of our Registration
Statement No. 333-115061. Substantially similar warrants were
issued by the Company to the following: (1) Alpha Capital AG,
for the purchase of up to 54,444 shares; (2)Baystar Capital II,
L.P., for the purchase of up to 63,000 shares; (3) Bristol
Investment Fund, Ltd., for the purchase of up to 62,222 shares;
(4) Crescent International Ltd, for the purchase of up to
105,000 shares; (5) Crestview Capital Master LLC, for the
purchase of up to 233,334 shares; (6) Geduld Capital Partners
LP, for the purchase of up to 26,250 shares; (7) Gruber &
McBaine International, for the purchase of up to 38,889 shares;
(8) Irwin Geduld Revocable Trust, for the purchase of up to
17,500 shares; (9) J Patterson McBaine, for the purchase of up
to 15,555 shares; (10) Jon D. Gruber and Linda W. Gruber, for
the purchase of up to 38,889 shares; (11) Lagunitas Partners LP,
for the purchase of up to 93,333 shares; (12) Omicron Master
Trust, for the purchase of up to 77,778 shares; (13) Palisades
Master Fund, L.P., for the purchase of up to 472,500 shares; and
(14) Stonestreet LP, for the purchase of up to 54,444 shares.
Copies will be provided to the Commission upon request.
118
4.9 Amendment No. 4 to Revolving Credit, Term Loan, and Security
Agreement, dated as of March 25, 2005, between the Company and
PNC Bank as incorporated by reference from Exhibit 4.12 to the
Company's Form 10-K for the year ended December 31, 2004.
4.10 Letter from PNC Bank regarding intent to waive technical default
on the Loan and Security Agreement with PNC Bank due to
resignation of Chief Financial Officer.
10.1 1991 Performance Equity Plan of the Company as incorporated
herein by reference from Exhibit 10.3 to the Company's
Registration Statement, No. 33-51874.
10.2 1992 Outside Directors' Stock Option Plan of the Company as
incorporated by reference from Exhibit 10.4 to the Company's
Registration Statement, No. 33-51874.
10.3 First Amendment to 1992 Outside Directors' Stock Option Plan as
incorporated by reference from Exhibit 10.29 to the Company's
Form 10-K for the year ended December 31, 1994.
10.4 Second Amendment to the Company's 1992 Outside Directors' Stock
Option Plan, as incorporated by reference from the Company's
Proxy Statement, dated November 4, 1994.
10.5 Third Amendment to the Company's 1992 Outside Directors' Stock
Option Plan as incorporated by reference from the Company's
Proxy Statement, dated November 8, 1996.
10.6 Fourth Amendment to the Company's 1992 Outside Directors' Stock
Option Plan as incorporated by reference from the Company's
Proxy Statement, dated April 20, 1998.
10.7 1993 Non-qualified Stock Option Plan as incorporated by
reference from the Company's Proxy Statement, dated October 12,
1993.
10.8 401(K) Profit Sharing Plan and Trust of the Company as
incorporated by reference from Exhibit 10.5 to the Company's
Registration Statement, No. 33-51874.
10.9 Subcontract Change Notice between East Tennessee Materials and
Energy Corporation and Bechtel Jacobs Company, LLC, No.
BA-99446/7 and 8F, dated July 2, 2002, are incorporated by
reference from Exhibit 10.24 to the Company's Registration
Statement No. 333-70676.
10.10 Option Agreement, dated July 31, 2001, among the Company, AMI,
and BEC is incorporated by reference from Exhibit 99.8 to the
Company's Form 8-K, dated July 30, 2001.
10.11 Promissory Note, dated June 7, 2001, issued by M&EC in favor of
Performance Development Corporation is incorporated by reference
from Exhibit 10.1 to the Company's Form 8-K, dated June 15,
2001.
10.12 Form 433-D Installment Agreement, dated June 11, 2001, between
M&EC and the Internal Revenue Service is incorporated by
reference from Exhibit 10.2 to the Company's Form 8-K, dated
June 15, 2001.
10.13 Common Stock Purchase Warrant, dated July 9, 2001, granted by
the Registrant to Capital Bank-Grawe Gruppe AG for the right to
purchase up to 1,830,687 shares of the Registrant's Common Stock
at an exercise price of $1.75 per share incorporated by
reference from Exhibit 10.12 to the Company's Registration
Statement, No. 333-70676.
10.14 Common Stock Purchase Warrant, dated July 9, 2001, granted by
the Registrant to Herbert Strauss for the right to purchase up
to 625,000 shares of the Registrant's Common Stock at an
exercise price of $1.75 per share, incorporated by reference
from Exhibit 10.13 to the Company's Registration Statement, No.
333-70676.
10.15 Warrant Agreement, dated July 31, 2001, granted by the
Registrant to Paul Cronson for the right to purchase up to
43,295 shares of the Registrant's Common Stock at an exercise
price of $1.44 per share, incorporated by reference from Exhibit
10.20 to the Company's Registration Statement, No. 333-70676.
Substantially similar Warrants, dated July 31, 2001, for the
right to purchase up to an aggregate 186,851 shares of the
Registrant's Common Stock at an exercise price of $1.44 per
share were granted by the Registrant to Ryan Beck (6,836
shares), Ryan Beck (54,688), Michael Kollender (37,598 shares),
Randy Rock (37,598 shares), Robert Goodwin (43,294 shares), and
Meera Murdeshwar (6,837 shares). Copies will be provided to the
Commission upon request.
119
10.16 Warrant to Purchase Common Stock, dated July 30, 2001, granted
by the Registrant to David Avital for the purchase of up to
143,000 shares of the Registrant's Common Stock at an exercise
price of $1.75 per share, incorporated by reference from Exhibit
10.21 to the Company's Registration Statement, No. 333-70676.
Substantially similar Warrants for the purchase of an aggregate
4,249,022 were issued to Capital Bank (837,451 shares), CICI
1999 Qualified Annuity Trust (85,715 shares), Gerald D. Cramer
(85,715 shares), CRM 1999 Enterprise Fund 3 (200,000 shares),
Craig S. Eckenthal (57,143 shares), Danny Ellis Living Trust
(250,000 shares), Europa International, Inc. (571,428 shares),
Harvey Gelfenbein (28,571 shares), A. C. Israel Enterprises
(285,715 shares), Kuekenhof Partners, L.P. (40,000), Kuekenhof
Equity Fund, L.P. (60,000 shares), Jack Lahav (571,429 shares),
Joseph LaMotta (28,571 shares), Jay B. Langner (28,571 shares),
The F. M. Grandchildren Trust (42,857 shares), Peter Melhado
(115,000 shares), Pamela Equities Corp. (42,857 shares), Josef
Paradis (143,000 shares), Readington Associates (57,143 shares),
Dr. Ralph Richart (225,000 shares), Edward J. Rosenthal Profit
Sharing Plan (28,571 shares), Yariv Sapir IRA (85,714 shares),
and Bruce Wrobel (150,000 shares), respectively. Copies will be
provided to the Commission upon request.
10.17 Common Stock Purchase Warrant, dated July 30, 2001, granted by
the Registrant to Ryan, Beck & Co. for the purchase of 20,000
shares of the Registrant's Common Stock at an exercise price of
$1.75 per share, incorporated by reference from Exhibit 10.22 to
the Company's Registration Statement, No. 333-70676.
Substantially similar Warrants, dated July 30, 2001, for the
purchase of an aggregate 48,000 shares of the Registrant's
Common Stock at an exercise price of $1.75 per share were issued
to Ryan, Beck & Co., LLC (14,000 shares), and Larkspur Capital
Corporation (34,000 shares). Copies will be provided to the
Commission upon request.
10.18 Common Stock Purchase Warrant, dated July 31, 2001, granted by
the Registrant to Associated Mezzanine Investors-PESI (I), L.P.
for the purchase of up to 712,073 shares of the Registrant's
Common Stock at an exercise price of $1.50 per share,
incorporated by reference from Exhibit 10.23 to the Company's
Registration Statement, No. 333-70676. A substantially similar
Warrant was issued to Bridge East Capital L.P. for the right to
purchase of up to 569,658 shares of the Registrant's Common
Stock, and a copy will be provided to the Commission upon
request.
10.19 2003 Outside Directors' Stock Plan of the Company as
incorporated by reference from Exhibit B to the Company's 2003
Proxy Statement.
10.20 2003 Employee Stock Purchase Plan of the Company as incorporated
by reference from Exhibit C to the Company's 2003 Proxy
Statement.
10.21 2004 Stock Option Plan of the Company as incorporated by
reference from Exhibit B to the Company's 2004 Proxy Statement.
10.22 Common Stock Purchase Warrant, dated March 16, 2004, granted by
the Company to R. Keith Fetter, is incorporated by reference
from Exhibit 10.3 of our Form S-3 Registration Statement dated
April 30, 2004. Substantially similar warrants were granted to
Joe Dilustro and Chet Dubov, each for the purchase of 30,000
shares of the Company's common stock. Copies will be provided to
the Commission upon request.
10.23 Basic agreement between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC No. BA-99446F, dated
September 20, 2005, as incorporated by reference from Exhibit
10.1 to our Form 10-Q for the quarter ended September 30, 2005.
Attachments to this extended agreement will be provided to the
Commission upon request.
10.24 Basic agreement between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC No. BA-99447F, dated
September 20, 2005, as incorporated by reference from Exhibit
10.2 to our Form 10-Q for the quarter ended September 30, 2005.
Attachments to this extended agreement will be provided to the
Commission upon request.
10.25 2006 Executive Management Incentive Plan for Chairman, Chief
Executive Officer and President, effective January 1, 2006.
10.26 2006 Executive Management Incentive Plan for Chief Operating
Officer, effective January 1, 2006.
10.27 2006 Executive Management Incentive Plan for Vice President,
Chief Financial Officer, effective May 15, 2006.
120
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive
Officer of the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Steven T. Baughman, Chief Financial Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive
Officer of the Company furnished pursuant to 18 U.S.C. Section
1350.
32.2 Certification by Steven T. Baughman, Chief Financial Officer of
the Company furnished pursuant to 18 U.S.C. Section 1350.
121