PESI

Business Context and Reporting Period

Company: Perma-Fix Environmental Services, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 1999.
Business Overview: The Company operates in two primary segments: Waste Management Services (treatment, storage, and disposal of hazardous/non-hazardous waste) and Consulting Engineering Services. A significant event during the period was the acquisition of Chemical Conservation Corporation, Chemical Conservation of Georgia, and Chem-Met Services, Inc. (collectively "Chem-Con") on June 1, 1999.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 29.2% for the six months ended June 30, 1999, compared to the prior year. This was driven primarily by the Waste Management Services segment, which saw a $4.2 million increase, largely attributable to the Chem-Con acquisition (contributing approx. $2.3 million in June alone).
• Profitability: The Company turned a net loss of $188,000 in the first half of 1998 into a net income of $907,000 in the first half of 1999. Gross margins improved from 29.6% to 34.1% due to improved pricing structures and cost reductions.
• Debt Expansion: Total debt increased significantly from $3.0 million to $13.5 million. This reflects $5.3 million in new borrowings from the Congress Financial Corporation facility and $4.7 million in promissory notes issued to fund the Chem-Con acquisition.
• Working Capital: Working capital shifted from a surplus of $372,000 to a deficit of $1,035,000, primarily due to the cash and debt consideration paid for the Chem-Con acquisition and the acquired entity's own working capital deficit.

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Integration: The Chem-Con acquisition was accounted for using the purchase method. The Company anticipates funding future capital expenditures ($2.5 million budgeted for 1999) through lease financing and internally generated funds.
• Environmental Liabilities: The Company recorded $4.3 million in long-term environmental accruals related to the Chem-Con facilities (Valdosta, GA, and Detroit, MI) for soil removal and groundwater remediation. Additionally, a $225,000 settlement regarding the WR Drum Site in Memphis is pending court approval.
• Discontinued Operations: The Perma-Fix of Memphis (PFM) facility remains a discontinued operation following a 1997 explosion. Accrued closure and environmental costs for PFM total $1.9 million.
• Preferred Stock Restructuring: The Company restructured $9.5 million of Convertible Preferred Stock held by RBB Bank. Approximately $4.6 million was converted to common stock, while the remaining balance was subject to new redemption and conversion terms, including a 12-month lock-up period.
• Risks: Key risks include the ability to maintain permits, potential increases in remediation costs, reliance on the Congress Financial Corporation credit facility, and the ability to generate sufficient cash flow to fund operations and debt service.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the Adjusted Net Worth covenant (minimum $3.0 million) under the amended Congress Financial Corporation loan agreement.
• Acquisition Valuation: Review the preliminary purchase price allocation for Chem-Con, specifically the $2.9 million goodwill and $6.3 million intangible permits, as these are subject to final valuation adjustments.
• Environmental Reserves: Assess the adequacy of the $4.3 million environmental accrual for Chem-Con facilities and the $1.9 million for the discontinued PFM operation, given the long-term nature of remediation.
• Preferred Stock Penalties: Monitor the requirement to register common stock issuable upon conversion of remaining preferred stock by January 31, 2000, to avoid 2% monthly cash penalties.
• Working Capital: Evaluate the sustainability of the negative working capital position ($1.0 million deficit) and the reliance on the revolving credit facility for liquidity.