PESI

Business Context and Reporting Period

Company: Perma-Fix Environmental Services, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: The Company operates in two primary segments: Waste Management Services (85.7% of revenue) and Consulting Engineering Services (14.3% of revenue). Operations include the treatment, storage, and disposal of hazardous, non-hazardous, and mixed radioactive waste, as well as environmental consulting. The Company operates ten segments across the Southeast, Southwest, and Midwest United States. Notably, the Perma-Fix of Memphis, Inc. (PFM) facility was classified as a discontinued operation following a 1997 explosion and subsequent strategic decision to cease fuel blending activities.

Key Financial Metrics

Note: 1997 figures include restatements related to beneficial conversion features on Preferred Stock.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net revenues increased 7.5% to $30.6 million, driven by growth in wastewater treatment at the Tulsa facility (PFTS) and oily wastewater/field services at the Ft. Lauderdale facility (PFL). This was partially offset by declines in consulting engineering and on-site treatment segments.
• Profitability: Net income from continuing operations improved to $462,000 from $192,000. Gross margin expanded slightly to 31.1%. However, Selling, General, and Administrative (SG&A) expenses increased 20.5% to $6.8 million (22.4% of revenue) due to corporate overhead and R&D efforts.
• Discontinued Operations: The 1997 period included a significant loss of $4.1 million from discontinued operations (PFM), whereas 1998 had no loss from discontinued operations, contributing to the improved net loss applicable to common stock.
• Debt Reduction: Total outstanding debt decreased by approximately $1.85 million to $3.01 million, reflecting reduced borrowing levels on the revolving credit facility and scheduled principal repayments.

Guidance, Outlook, Risks, and Unusual Items

• Capital Expenditures: The Company spent approximately $2.55 million in 1998. It has budgeted approximately $2.5 million for 1999 capital expenditures to improve operations and maintain permit compliance, plus an additional $437,000 for environmental remediation at two specific locations.
• Proposed Acquisition: In March 1999, the Company entered a definitive agreement to acquire Chemical Conservation Corporation ("Chem-Con") for $7.4 million in stock. The transaction is expected to close in the summer of 1999, subject to shareholder approval and accounting qualification as a pooling of interests.
• Oak Ridge Contract: The Company is part of a team awarded contracts by the U.S. Department of Energy for waste treatment at Oak Ridge, Tennessee. While the potential revenue is estimated up to $100 million over five years, no specific revenue amounts can be estimated at this time.
• Environmental Liabilities: The Company faces ongoing remediation costs. It has accrued approximately $460,000 for a leased property in Dayton, Ohio, and $910,000 for groundwater remediation at the Memphis facility. A settlement of $225,000 regarding the "Drum Site" in Memphis was executed in January 1999, subject to court approval.
• Liquidity Risks: The Company maintains a revolving credit facility with Congress Financial Corporation. While borrowing availability is approximately $4 million, the Company relies on cash flow and equity issuances (such as the Series 10 Preferred Stock) to fund operations and capital needs.

Investor Verification Checklist

• Preferred Stock Dilution: Verify the impact of outstanding convertible Preferred Stock (Series 3, 8, 9, and 10) and warrants held by RBB Bank, which could result in significant dilution if converted, potentially changing control of the company.
• Environmental Accruals: Confirm the sufficiency of the $2.5 million accrued liability for the discontinued Memphis operation and the $1.4 million in other environmental/closure costs, given the long-term nature of remediation.
• Acquisition Terms: Monitor the status of the Chem-Con acquisition, specifically the requirement for shareholder approval and the "pooling of interests" accounting treatment.
• Debt Covenants: Review compliance with the Adjusted Net Worth covenant ($3.0 million) under the Congress Financial loan agreement.
• Seasonality: Account for the historical seasonal slowdown in operations and revenues during the winter months (November through March).