SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
 
Or
 
o
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.     111596    
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
58-1954497
(IRS Employer Identification Number)
   
1940 N.W. 67th Place, Gainesville, FL
(Address of principal executive offices)
32653
(Zip Code)
 
(352) 373-4200
(Registrant's telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)
 
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 xNo o
 
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes xNo o
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes oNo x
 
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the close of the latest practical date.
 
Class
Common Stock, $.001 Par Value
Outstanding at November 7, 2005
44,753,537
(excluding 988,000 shares
held as treasury stock)

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

INDEX

PART I
FINANCIAL INFORMATION
Page No.
       
 
Item 1.
Financial Statements
  
       
   
Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004
2
       
   
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2005 and 2004
4
       
   
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2005 and 2004
5
       
   
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 2005
6
       
   
Notes to Consolidated Financial Statements
7
       
 
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
19
       
 
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
40
       
 
Item 4.
Controls and Procedures
41
       
PART II
OTHER INFORMATION
  
       
 
Item 1.
Legal Proceedings
43
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
44
       
 
Item 6.
Exhibits
44


PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS

PART I, ITEM 1

The consolidated financial statements included herein have been prepared by the Company (which may be referred to as we, us or our), without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated.

It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

The results of operations for the nine months ended September 30, 2005, are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2005.

1

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except for Share Amounts)
  
September 30,
2005
(Unaudited)
  
 December 31,
 2004
  
            
ASSETS
              
Current assets
              
Cash
  
$
119
  
$
215
  
Restricted cash
    
40
    
60
  
Accounts receivable, net of allowance for doubtful accounts of $438 and $570
    
14,995
    
17,674
  
Unbilled Receivables
    
14,096
    
9,518
  
Inventories
    
883
    
882
  
Prepaid expenses
    
3,731
    
2,891
  
Other receivables
    
88
    
45
  
Current assets of discontinued operations, net of allowance for doubtful accounts of $86 and $125
    
¾
    
1,609
  
Total current assets
    
33,952
    
32,894
  
               
Property and equipment:
              
Buildings and land
    
19,560
    
18,313
  
Equipment
    
30,959
    
30,281
  
Vehicles
    
4,486
    
4,187
  
Leasehold improvements
    
11,489
    
11,514
  
Office furniture and equipment
    
2,563
    
2,396
  
Construction-in-progress
    
1,307
    
1,852
  
     
70,364
    
68,543
  
Less accumulated depreciation and amortization
    
(24,837
)
  
(21,282
)
Net property and equipment
    
45,527
    
47,261
  
               
Property and equipment of discontinued operations
    
603
    
600
  
               
Intangibles and other assets:
              
Permits
    
13,186
    
12,895
  
Goodwill
    
1,330
    
1,330
  
Finite Risk Sinking Fund
    
3,216
    
2,225
  
Other assets
    
3,095
    
3,250
  
Total assets
  
$
100,909
  
$
100,455
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
2
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED

(Amounts in Thousands, Except for Share Amounts)
  
September 30,
2005
(Unaudited)
  
 December 31,
2004
  
            
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
Accounts payable
  
$
5,753
  
$
6,529
  
Current environmental accrual
    
722
    
721
  
Accrued expenses
    
12,701
    
12,100
  
Unearned revenue
    
4,386
    
5,115
  
Current liabilities of discontinued operations
    
2,119
    
2,550
  
Current portion of long-term debt
    
2,766
    
6,376
  
Total current liabilities
    
28,447
    
33,391
  
               
Environmental accruals
    
1,746
    
2,141
  
Accrued closure costs
    
5,166
    
5,062
  
Other long-term liabilities
    
2,297
    
1,944
  
Long-term liabilities of discontinued operations
    
1,574
    
1,804
  
Long-term debt, less current portion
    
13,909
    
12,580
  
Total long-term liabilities
    
24,692
    
23,531
  
               
Total liabilities
    
53,139
    
56,922
  
               
Commitments and Contingencies (see Notes 4 and 6)
    
¾
    
¾
  
               
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, 0 and 2,500 shares issued and outstanding
    
¾
    
¾
  
Common Stock, $.001 par value; 75,000,000 shares authorized, 45,673,537 and 42,749,117 shares issued, including 988,000 shares held as treasury stock, respectively
    
46
    
43
  
Additional paid-in capital
    
82,059
    
80,902
  
Accumulated deficit
    
(33,752
)
  
(36,794
)
Interest rate swap
    
(6
)
  
(41
)
     
48,347
    
44,110
  
Less: Common Stock in treasury at cost; 988,000 shares
    
(1,862
)
  
(1,862
)
               
Total stockholders' equity
    
46,485
    
42,248
  
               
Total liabilities and stockholders' equity
  
$
100,909
  
$
100,455
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
September 30,
  
 Nine Months Ended
September 30,
  
(Amounts in Thousands, Except for Per Share Amounts)
  
2005
  
 2004
  
 2005
  
 2004
  
                      
Net revenues
  
$
23,041
  
$
24,337
  
$
70,008
  
$
60,277
  
Cost of goods sold
    
16,342
    
16,808
    
50,465
    
43,195
  
Gross profit
    
6,699
    
7,529
    
19,543
    
17,082
  
                           
Selling, general and administrative expenses
    
4,965
    
4,443
    
15,342
    
12,975
  
Loss (gain) on disposal/impairment of property and equipment
    
4
    
1,014
    
(333
)
  
996
  
Impairment loss on intangible assets
    
¾
    
7,101
    
¾
    
7,101
  
Income (loss) from operations
    
1,730
    
(5,029
)
  
4,534
    
(3,990
)
                           
Other income (expense):
                          
Interest income
    
5
    
¾
    
7
    
2
  
Interest expense
    
(385
)
  
(294
)
  
(1,178
)
  
(1,535
)
Interest expense-financing fees
    
(48
)
  
(1,566
)
  
(269
)
  
(2,079
)
Other
    
(100
)
  
(31
)
  
(159
)
  
(48
)
Income (loss) from continuing operations before taxes
    
1,202
    
(6,920
)
  
2,935
    
(7,650
)
Income tax expense
    
41
    
37
    
324
    
163
  
Income (loss) from continuing operations
    
1,161
    
(6,957
)
  
2,611
    
(7,813
)
                           
Discontinued operations:
                          
Income (loss) from discontinued operations
    
860
    
(740
)
  
571
    
(1,765
)
Loss on disposals from discontinued operations
    
¾
    
(9,835
)
  
¾
    
(9,835
)
Total income (loss) from discontinued operations
    
860
    
(10,575
)
  
571
    
(11,600
)
Net income (loss)
    
2,021
    
(17,532
)
  
3,182
    
(19,413
)
                           
Preferred Stock dividends
    
46
    
48
    
140
    
142
  
Net income (loss) applicable to Common Stock
  
$
1,975
  
$
(17,580
)
$
3,042
  
$
(19,555
)
                           
Net income (loss) per common share - basic
                          
Continuing operations
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
Discontinued operations
    
.02
    
(.25
)
  
.01
    
(.29
)
Net income (loss) per common share
  
$
.05
  
$
(.42
)
$
.07
  
$
(.49
)
                           
Net income (loss) per common share - diluted
                          
Continuing operations
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
Discontinued operations
    
.02
    
(.25
)
  
.01
    
(.29
)
Net income (loss) per common share
  
$
.05
  
$
(.42
)
$
.07
  
$
(.49
)
                           
Number of shares and potential common shares used in net income (loss) per common share:
                          
Basic
    
42,055
    
41,648
    
41,881
    
40,051
  
Diluted
    
44,152
    
41,648
    
43,138
    
40,051
  
 
The accompanying notes are integral part of these consolidated financial statements.
 
4
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended
September 30,
  
(Amounts in Thousands)
  
2005
  
 2004
  
Cash flows from operating activities
              
Net income (loss)
  
$
3,182
  
$
(19,413
)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
              
Depreciation and amortization
    
3,604
    
3,540
  
Debt discount amortization
    
¾
    
838
  
Provision for bad debt and other reserves
    
30
    
123
  
(Gain) loss on disposal/impairment of property and equipment
    
(332
)
  
996
  
Intangible asset impairment
    
¾
    
7,101
  
Issuance of Common Stock for services
    
160
    
184
  
Changes in assets and liabilities:
              
Accounts receivable
    
2,649
    
(5,466
)
Unbilled Receivables
    
(4,578
)
  
(269
)
Prepaid expenses, inventories and other assets
    
(350
)
  
590
  
Accounts payable, accrued expenses, and unearned revenue
    
(1,613
)
  
1,668
  
Discontinued operations
    
947
    
10,135
  
Net cash provided by operations
    
3,699
    
27
  
               
Cash flows from investing activities:
              
Purchases of property and equipment, net
    
(1,720
)
  
(2,318
)
Proceeds from sale of property and equipment
    
702
    
31
  
Change in restricted cash, net
    
15
    
(1
)
Change in finite risk sinking fund
    
(991
)
  
(991
)
Discontinued operations
    
(3
)
  
¾
  
Funds used for acquisitions (net of cash acquired)
    
¾
    
(2,903
)
Net cash used in investing activities
    
(1,997
)
  
(6,182
)
               
Cash flows from financing activities:
              
Net (repayments) borrowings of revolving credit
    
(1,699
)
  
3,168
  
Principal repayments of long-term debt
    
(5,516
)
  
(7,866
)
Borrowings of long-term debt
    
4,417
    
¾
  
Proceeds from issuance of stock
    
1,000
    
10,900
  
Net cash (used in) provided by financing activities
    
(1,798
)
  
6,202
  
(Decrease) increase in cash
    
(96
)
  
47
  
Cash at beginning of period
    
215
    
411
  
Cash at end of period
  
$
119
  
$
458
  
               
Supplemental disclosure
              
Interest paid
  
$
971
  
$
1,629
  
               
Non-cash investing and financing activities:
              
Issuance of Common Stock for payment of dividends
    
¾
    
125
  
Gain on interest rate swap
    
35
    
68
  
Long-term debt incurred for purchase of property and equipment
    
517
    
184
  
 
The accompanying notes are integral part of these consolidated financial statements.
 
5
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, for the nine months ended September 30, 2005)
 
   
Preferred Stock
  
Common Stock
                      
(Amounts in thousands,
except for share amounts)
  
Shares
 
Amount
  
Shares
  
Amount
  
Additional
Paid-In
Capital
  
Accumulated
Deficit
  
Interest
Rate Swap
  
Common Stock
Held In
Treasury
  
Total
Stockholders'
Equity
  
Balance at December 31, 2004
    
2,500
  
$
¾
    
42,749,117
  
$
43
  
$
80,902
  
$
(36,794
)
$
(41
)
$
(1,862
)
$
42,248
  
                                                         
Comprehensive income:
    
                                                 
Net income
    
¾
    
¾
    
¾
    
¾
    
¾
    
3,182
    
¾
    
¾
    
3,182
  
Other Comprehensive income:
                                                        
Gain on interest rate swap
    
¾
    
¾
    
¾
    
¾
    
¾
    
¾
    
35
    
¾
    
35
  
Comprehensive income
                                                    
3,217
  
Preferred Stock dividends
    
¾
    
¾
    
¾
    
¾
    
¾
    
(140
)
  
¾
    
¾
    
(140
)
Issuance of Common Stock for cash and services
    
¾
    
¾
    
684,868
    
1
   
1,159
    
¾
    
¾
    
¾
    
1,160
  
Issuance of Common Stock upon cashless exercise of Warrants
   
¾
    
¾
    
572,885
    
¾
    
¾
    
¾
    
¾
    
¾
    
¾
  
Issuance of Common Stock uponconversion of Preferred Stock
    
(2,500
)
  
¾
    
1,666,667
    
2
    
(2
)
  
¾
    
¾
    
¾
    
¾
  
                                                         
Balance at September 30, 2005
    
¾
  
$
¾
    
45,673,537
  
$
46
  
$
82,059
  
$
(33,752
)
$
(6
)
$
(1,862
)
$
46,485
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005
(Unaudited)

Reference is made herein to the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

1.
Summary of Significant Accounting Policies

Our accounting policies are as set forth in the notes to consolidated financial statements referred to above.

Recent Accounting Pronouncements
 
In May 2005, FASB issued Statement No. 154 (“SFAS 154”), Accounting Changes and Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements, and establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 applies to all voluntary changes in accounting principles and to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions.   SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the adoption of SFAS 154 will have a material impact on its consolidated results of operations.

In March 2005, FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143. FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Interpretation is effective for fiscal years ending after December 15, 2005. We do not expect the adoption of FIN 47 to have a material effect on our consolidated financial position or results of operations for the year ending December 31, 2005.

In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"), Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance, and establishes standards for the accounting for transactions in which an entity exchanges its 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 a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement requires companies to recognize the fair value of stock options and other stock-based compensation to employees prospectively, beginning with awards granted, modified, repurchased or cancelled after the fiscal periods beginning after June 15, 2005. We currently measure stock-based
7
compensation in accordance with APB Opinion No. 25. The impact on our financial condition or results of operations will depend on the number and terms of stock options outstanding on the date of change, as well as future options that may be granted. See Stock-Based Compensation below for the pro forma impact that the fair value method would have had on our net income/loss for each of the three and six month periods ended June 30, 2005, and 2004. We do not expect the impact of SFAS 123R to have an impact on our cash flows or liquidity.
 
In April 2005, the Securities and Exchange Commission ("SEC") amended its Regulation S-X to amend the date of compliance with SFAS 123R to the first reporting period of the fiscal year beginning on or after June 15, 2005. We anticipate adopting SFAS 123R on January 1, 2006.

Reclassifications
 
Certain prior period amounts have been reclassified to conform with the current period presentation.

Stock-Based Compensation
 
We account for our stock-based employee compensation plans under the accounting provisions of APB Opinion 25, Accounting for Stock Issued to Employees, and have furnished the pro forma disclosures required under Statement of Financial Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, and SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure.

SFAS 123 requires pro forma information regarding net income and earnings per share as if compensation cost for our employee and director stock options had been determined in accordance with the fair market value-based method prescribed in SFAS 123. We estimate the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. The following assumptions were used for grants in 2005 and 2004: no dividend yield; an expected life of ten years; expected volatility of 41.1% and between 21.72% and 37.50%; and risk free interest rates of 4.09% and between 3.34% and 3.82%, respectively.

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 we would otherwise be required to record 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. 

This resulted in the accelerated vesting of options to purchase 676,850 shares of our Common Stock, which includes 240,500 options that were “in-the-money” options, having an exercise price less than the market price prior to the Board of Directors’ approval.  Our stock-based employee compensation expense under the fair value method presented in our pro forma amounts below includes expense of approximately $426,000 for the third quarter of 2005 as a result of accelerated stock option vesting.

8
Under the accounting provisions of SFAS 123, our net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands except for per share amounts):

   
Three Months Ended
September 30,
  
 Nine Months Ended
September 30,
  
   
2005
  
 2004
  
 2005
  
 2004
  
Net income (loss) from continuing operations applicable to Common Stock, as reported
  
$
1,115
  
$
(7,005
)
$
2,471
  
$
(7,955
)
Deduct: Total Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    
523
    
97
    
688
    
270
  
Pro forma net income (loss) from continuing operations applicable to Common Stock
  
$
592
  
$
(7,102
)
$
1,783
  
$
(8,225
)
Income (loss) per share:
                          
Basic - as reported
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
Basic - pro-forma
  
$
.01
  
$
(.17
)
$
.04
  
$
(.20
)
                           
Diluted - as reported
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
Diluted - pro-forma
  
$
.01
  
$
(.17
)
$
.04
  
$
(.20
)

2.
Earnings Per Share

Basic EPS is based on the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS includes the dilutive effect of potential common shares. Diluted loss per share for the three and nine months ended September 30, 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 three and nine months ended September 30, 2005 and 2004:

9
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
(Amounts in thousands except per share amounts)
  
2005
  
 2004
  
 2005
  
 2004
  
Earnings per share from continuing operations
                          
Income (loss) from continuing operations
  
$
1,161
  
$
(6,957
)
$
2,611
  
$
(7,813
)
Preferred stock dividends
    
(46
)
  
(48
)
  
(140
)
  
(142
)
Income (loss) from continuing operations applicable to Common Stock
    
1,115
    
(7,005
)
  
2,471
    
(7,955
)
Effect of dilutive securities:
                          
Preferred Stock dividends
    
46
    
¾
    
140
    
¾
  
Income (loss) - diluted
  
$
1,161
  
$
(7,005
)
$
2,611
  
$
(7,955
)
Basic income (loss) per share
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
Diluted income (loss) per share
  
$
.03
  
$
(.17
)
$
.06
  
$
(.20
)
                           
Earnings per share from discontinued operations
                          
Income (loss) - basic and diluted
  
$
860
  
$
(10,575
)
$
571
  
$
(11,600
)
Basic loss per share
  
$
.02
  
$
(.25
)
$
.01
  
$
(.29
)
Diluted loss per share
  
$
.02
  
$
(.25
)
$
.01
  
$
(.29
)
                           
Weighted average shares outstanding - basic
    
42,055
    
41,648
    
41,881
    
40,051
  
Potential shares exercisable under stock option plans
    
404
    
¾
    
288
    
¾
  
Potential shares upon exercise of Warrants
    
1,693
    
¾
    
969
    
¾
  
Weighted average shares outstanding - diluted
    
44,152
    
41,648
    
43,138
    
40,051
  
                           
                           
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
                          
Upon exercise of options
    
1,082
    
2,932
    
1,317
    
2,932
  
Upon exercise of Warrants
    
1,776
    
12,791
    
1,776
    
12,791
  
Upon conversion of Preferred Stock
    
¾
    
1,667
    
¾
    
1,667
  

10
3.
Long Term Debt

Long-term debt consists of the following at September 30, 2005, and December 31, 2004:
               
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 ½% (7.25% at September 30, 2005), balance due in May 2008.
  
$
4,781
  
$
6,480
  
               
Term Loan dated December 22, 2000, payable in equal monthly installments of principal of $83, balance due in May 2008, variable interest paid monthly at prime rate plus 1% (7.75% at September 30, 2005).
    
6,750
    
3,083
  
               
Unsecured Promissory Note dated August 31, 2000, payable in August 2005, interest paid annually at 7.0%. Paid in full in June 2005.
    
¾
    
3,500
  
               
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 law rate determined under the IRS Code Section (9.0% on September 30, 2005) and is payable in one lump sum at the end of installment period.
    
2,634
    
3,034
  
               
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 law rate determined under the IRS Code Section (9.0% on September 30, 2005) and is payable in one lump sum at the end of installment period.
    
653
    
753
  
               
Various capital lease and promissory note obligations, payable 2005 to 2010, interest at rates ranging from 5.0% to 14.2%.
   
1,857
    
2,106
  
     
16,675
    
18,956
  
Less current portion of long-term debt
    
2,766
    
6,376
  
   
$
13,909
  
$
12,580
  

Revolving Credit and Term Loan
 
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 Agent reasonably deems proper and necessary. As of September 30, 2005, the excess availability under our Revolving Credit was $9,244,000 based on our eligible receivables.

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

11
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.
 
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 paid a $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 ½%. The loans are subject to a prepayment fee of 1% until March 25, 2006, and ½% until March 25, 2007.

Unsecured Promissory Note
 
On August 31, 2000, as part of the consideration for the purchase of Diversified Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a long-term unsecured promissory note (the "Unsecured Promissory Note") in the aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per annum and having a five-year term with interest to be paid annually and principal due in one lump sum at the end of the term of the Unsecured Promissory Note (August 2005). This debt balance was re-classed in its entirety from long term to current in the third quarter of 2004. We utilized the proceeds of the amended agreement with PNC, mentioned above, to repay this note in June 2005.

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 2005 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. (9% on September 30, 2005) and payable in one lump sum at the end of the loan period. On September 30, 2005, the outstanding balance was $3,933,000 including accrued interest of approximately $1,299,000. 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 2005 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 September 30, 2005, the rate was 9%. On September 30, 2005, the outstanding balance was $968,000 including accrued interest of approximately $315,000.

12
4.
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 the normal course of conducting our business, we are involved in various litigations. There has been no material change in legal proceedings from those disclosed previously in our Form 10-K for the year ended December 31, 2004, and our Forms 10-Q for the periods ended March 31, 2005 and June 30, 2005, except as stated below:

As previously reported, as part of PFD’s internal investigation PFD self reported to the Ohio EPA that from February, 2003, to November, 2003, it received 56 shipments of hazardous wastewater from a particular generator, which PFD filtered in its wastewater treatment unit and thereafter transmitted this filtered wastewater under a bill of lading to Wabash Environmental Technologies, LLC. It was determined that PFD’s compliance personnel at the time believed it appropriate to classify this material as meeting the beneficial reuse requirements pursuant to the regulations promulgated under the Resource Conservation and Recovery Act (“RCRA”), and shipped such under a straight bill of lading instead of a hazardous waste manifest. However, at that time they also recognized that the beneficial reuse regulations were a vague and unclear area of the regulations. As a result, it was decided to notify Ohio EPA of these facts. Ohio EPA has acknowledged receipt of our notification and does not anticipate further action or inquiries in connection with the above described shipments.

During the third quarter of 2005, our subsidiary, Perma-Fix Treatment Services, Inc. (“PFTS”) that has a permitted hazardous waste treatment and storage facility and non-hazardous waste disposal well in Tulsa, Oklahoma, received a proposed consent order from the Oklahoma Department of Environmental Quality (“ODEQ”) as a result of alleged violations of certain environmental rules and regulations relating to storage of hazardous waste, marking of containers that store hazardous waste and requirements that PFTS provide the ODEQ with information to justify that PFTS has not violated certain clean air regulations and is not required to obtain a Title V air permit. In addition, the proposed order provides for a proposed penalty of $336,000, one-half of which may be paid by PFTS installing certain controls to control air emissions, maintain leak detection and inspection and repair programs acceptable to the ODEQ and in compliance with applicable environmental regulations. PFTS has corrected the storage and marking issues that were the subject of alleged violations in the proposed consent order. PFTS is currently in discussions with the ODEQ regarding the proposed consent order, including the proposed penalty.

Insurance
 
We believe we maintain insurance coverage adequate for our needs and which is similar to, or greater than, the coverage maintained by other companies of our size in the industry. There can be no assurances, however, those liabilities, which may be incurred by us, will be covered by our insurance or that the dollar amount of such liabilities, which are covered, will not exceed our policy limits. Under our insurance contracts, we usually accept self-insured retentions, which we believe is 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 $1,000,000 per occurrence and $2,000,000 per year in the aggregate. To meet the requirements of customers, we have exceeded these coverage amounts.

13
In June 2003, we entered into a 25-year finite risk insurance policy, which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. Prior to obtaining or renewing operating permits we are required to provide financial assurance that guarantees to the states that, in the event of closure, our permitted facilities will be closed in accordance with the regulations. The policy provides $35,000,000 of financial assurance coverage and has available capacity to allow for annual inflation and other performance and surety bond requirements. On the fourth and subsequent anniversaries of the contract inception, the Company may elect to terminate this contract. During the second quarter of 2003 we made an upfront payment of $4,000,000, of which $2,766,000 represents the full premium for the 25-year term of the policy, and the remaining $1,234,000, was deposited in a sinking fund account. Additionally, in February 2004 and 2005 we paid the first and second of 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. As of September 30, 2005, we have recorded $3,216,000 in our Finite Risk Sinking Fund on the balance sheet.

5.
Acquisitions

On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD") completed it's 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 is utilizing the acquired assets of EMAX to provide a variety of environmental services such as transportation of drums and bulk loads, tank cleaning, industrial maintenance, dewatering, drum management and chemical packaging. PFP also has a wastewater treatment group, which provides for the treatment of non-hazardous wastewaters such as leachates, oily waters, industrial process waters and off-spec products.

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 of A&A and EMAX as of this date, and the results of operations since this date, are included in the accompanying consolidated financial statements.

6.
Discontinued Operations

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 the Detroit facility 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.
 
During September 2005, we recorded a net gain from insurance proceeds of $966,000, which offset expenses recorded in the third quarter of 2005, resulting in income from discontinued operations of $860,000 and $571,000 for the three and nine months ended September 30, 2005, respectively. PFMI recorded revenues of $171,000 and $1,569,000, and operating losses of $740,000 and $1,765,000 for the three and nine months ended September 30, 2004. Assets and liabilities related to the discontinued operation have been reclassified to separate categories in the Consolidated Balance Sheets as of
14
September 30, 2005 and December 31, 2004. As of September 30, 2005, assets are recorded at their net realizable value, and consist of property and equipment of $603,000. Liabilities as of September 30, 2005, consist of accounts payable and current accrued expenses of $1,719,000 and environmental accruals of $1,974,000. Included in current accruals is a pension plan withdrawal liability, which is a result of the termination of substantially all 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. At September 30, 2005, we have a recorded pension withdrawal liability of $1,694,000, based upon a demand letter received from CST in August 2005, that provided for the payment over an eight year period. This obligation is recorded as a current liability, as we are negotiating for a lower amount in exchange for a lump sum payment, which may not be paid out in the current year due to our dispute over the demand amount. We submitted three insurance claims 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 the second quarter of 2005, we received a partial payment of $1,500,000 less adjustor fees of approximately $105,000, for a net payment of $1,395,000 from the insurance carrier on the business interruption claim. During the third quarter of 2005, we received an additional insurance claim payment of $1,243,000. Of this payment, $190,000 was recorded against the outstanding receivable, $87,000 was paid for public adjustor fees and the remaining $966,000 was recorded as income from discontinued operations. This final payment effectively settles the claims on the second fire. We are currently negotiating settlement for the claim, on the first fire, but at this time we cannot estimate actual proceeds to be received. Additional proceeds, if any, will also be recorded as income from discontinued operations.

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 are 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 arrived at our best estimate of the cost of this environmental closure and remediation liability of $2,464,000. We have spent approximately $490,000 of this closure cost estimate since September 30, 2004, of which approximately $374,000 was spent in the first nine months of 2005. In the event we retain the PFMI facility, we anticipate spending an additional $400,000 within the next year and the remainder over the next two to five years.

7.
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, $.001 par value (“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 the nine months ended September 30, 2005, we paid $92,000 for dividends on the Series 17. The dividend expense on the Series 17 was $125,000 per year.

After conversion of the Series 17, Capital Bank owns of record, as agent for certain investors, 6,425,375 shares of Common Stock, or 14.4% of the Company’s issued and outstanding Common Stock as of September 30, 2005, and 2,659,807 shares that Capital Bank has the right to acquire, as agent for certain investors, under certain Warrants. The Warrants are exercisable at an exercise price of $1.75 per share of

15
Common Stock. If Capital Bank were to exercise all of the Warrants, Capital Bank would hold, as agent for certain investors, 9,085,182 shares or 19.2% of the Company’s Common Stock, as of September 30, 2005.
 
8.
Operating Segments

Pursuant to FAS 131, we define an operating segment as a business activity:

· 
from which we may earn revenue and incur expenses;
· 
whose operating results are regularly reviewed by the segment president to make decisions about resources to be allocated to the segment and assess its performance; and
· 
for which discrete financial information is available.

We have three operating segments, which are defined as each business line that we operate. This however, excludes corporate headquarters, which does not generate revenue, and our discontinued operation, PFMI.

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 seven 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., Perma-Fix of Maryland, Inc., and Perma-Fix of Pittsburgh, Inc. 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 East Tennessee Materials and Energy Corporation.

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 to industrial and government customers, as well as, engineering and compliance support needed by our other segments.

16
The table below presents certain financial information in thousands by business segment as of and for the three and nine months ended September 30, 2005 and 2004.

Segment Reporting for the Quarter Ended September 30, 2005
  
   
Industrial
  
Nuclear
  
Engineering
  
Segments
Total
  
Corporate (2)
  
Consolidated Total
  
Revenue from external customers
  
$
11,098
  
$
11,260(3)
 
$
683
  
$
23,041
  
$
¾
  
$
23,041
  
Intercompany revenues
    
560
    
572
    
131
    
1,263
    
¾
    
1,263
  
Gross profit
    
2,350
    
4,164
    
185
    
6,699
    
¾
    
6,699
  
Interest income
    
4
    
1
    
¾
    
5
    
¾
    
5
  
Interest expense
    
21
    
202
    
5
    
228
    
157
    
385
  
Interest expense-financing fees
    
¾
    
¾
    
¾
    
¾
    
48
    
48
  
Depreciation and amortization
    
479
    
701
    
10
    
1,190
    
11
    
1,201
  
Segment profit
   
361
    
2,061
    
61
    
2,483
    
(1,322
)
  
1,161
  
Segment assets(1)
    
25,321
    
63,671
    
2,136
    
91,128
    
9,781(4)
 
  
100,909
  
Expenditures for segment assets
    
289
    
375
    
5
    
669
    
3(4)
 
  
672
  
Total long-term debt
    
1,319
    
3,800
    
25
    
5,144
    
11,531(5)
 
  
16,675
  
 
Segment Reporting for the Quarter Ended September 30, 2004
  
   
Industrial
  
Nuclear
  
Engineering
  
Segments
Total
  
Corporate (2)
  
Consolidated Total
  
Revenue from external customers
  
$
10,606
  
$
12,886(3)
 
$
845
  
$
24,337
  
$
¾
  
$
24,337
  
Intercompany revenues
    
734
    
917
    
96
    
1,747
    
¾
    
1,747
  
Gross profit
    
1,573
    
5,749
    
207
    
7,529
    
¾
    
7,529
  
Interest income
    
¾
    
¾
    
¾
    
¾
    
¾
    
¾
  
Interest expense
    
199
    
102
    
¾
    
301
    
(7
)
  
294
  
Interest expense-financing fees
    
¾
    
191
    
¾
    
191
    
1,375
    
1,566
  
Depreciation and amortization
    
524
    
670
    
7
    
1,201
    
10
    
1,211
  
Segment profit (loss)
   
(8,648
)
  
3,904
    
113
    
(4,631
)
  
(2,326
)
  
(6,957
)
Segment assets(1)
    
29,556
    
64,760
    
2,125
    
96,441
    
9,869(4)
    
106,310
  
Expenditures for segment assets
    
189
    
254
    
¾
    
443
    
6
    
449
  
Total long-term debt
    
1,579
    
8,064
    
32
    
9,675
    
15,737(5)
 
  
25,412
  

Segment Reporting for the Nine Months Ended September 30, 2005
  
   
Industrial
  
Nuclear
  
Engineering
  
Segments
Total
  
Corporate (2)
  
Consolidated Total
  
Revenue from external customers
  
$
31,900
  
$
35,963(3)
 
$
2,145
  
$
70,008
  
$
¾
  
$
70,008
  
Intercompany revenues
    
1,799
    
2,012
    
353
    
4,164
    
¾
    
4,164
  
Gross profit
    
5,109
    
13,951
    
483
    
19,543
    
¾
    
19,543
  
Interest income
    
6
    
1
    
¾
    
7
    
¾
    
7
  
Interest expense
    
385
    
549
    
11
    
945
    
233
    
1,178
  
Interest expense-financing fees
    
¾
    
1
    
¾
    
1
    
268
    
269
  
Depreciation and amortization
    
1,452
    
2,090
    
30
    
3,572
    
32
    
3,604
  
Segment profit (loss)
    
(887
)
  
7,711
    
134
    
6,958
    
(4,347
)
  
2,611
  
Segment assets(1)
    
25,321
    
63,671
    
2,136
    
91,128
    
9,781(4)
 
  
100,909
  
Expenditures for segment assets
    
949
    
1,249
    
15
    
2,213
    
27(4)
 
  
2,240
  
Total long-term debt
    
1,319
    
3,800
    
25
    
5,144
    
11,531(5)
 
  
16,675
  
 
Segment Reporting for the Nine Months Ended September 30, 2004
  
   
Industrial
  
Nuclear
  
Engineering
  
Segments
Total
  
Corporate (2)
  
Consolidated Total
  
Revenue from external customers
  
$
27,005
  
$
30,871(3)
 
$
2,401
  
$
60,277
  
$
¾
  
$
60,277
  
Intercompany revenues
    
1,782
    
2,766
    
316
    
4,864
    
¾
    
4,864
  
Gross profit
    
4,167
    
12,272
    
643
    
17,082
    
¾
    
17,082
  
Interest income
    
2
    
¾
    
¾
    
2
    
¾
    
2
  
Interest expense
    
544
    
971
    
¾
    
1,515
    
20
    
1,535
  
Interest expense-financing fees
    
¾
    
192
    
¾
    
192
    
1,887
    
2,079
  
Depreciation and amortization
    
1,516
    
1,978
    
21
    
3,515
    
25
    
3,540
  
Segment profit (loss)
   
(9,876
)
  
6,503
    
306
    
(3,067
)
  
(4,746
)
  
(7,813
)
Segment assets(1)
    
29,556
    
64,760
    
2,125
    
96,441
    
9,869(4)
 
  
106,310
  
Expenditures for segment assets
    
644
    
1,783
    
17
    
2,444
    
58
    
2,502
  
Total long-term debt
    
1,579
    
8,064
    
32
    
9,675
    
15,737(5)
 
  
25,412
  
 
17

(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 segment include the Bechtel Jacobs revenues for the quarter and nine months ended September 30, 2005, which total $4,951,000 or 21.5% and $11,358,000 or 16.2% of total revenue and $2,627,000 or 10.8% and $6,752,000 or 11.2% for the same periods in 2004.

(4)
Segment assets include assets from Perma-Fix of Michigan, Inc., ("PFMI") a discontinued operation from the Industrial segment, of approximately $603,000 and $1,416,000 as of September 30, 2005 and 2004, respectively. Expenditures for segment assets include expenditures from PFMI of $3,000 for the three and nine months ended September 30, 2005.

(5)
Includes the balance outstanding from our revolving line of credit and term loan, which is utilized by all of our segments.

18

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2

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:
 
· 
improve our operations and liquidity;
· 
anticipated improvement in the financial performance of the Company;
· 
ability to comply with the Company's general working capital requirements;
· 
ability to be able to continue to borrow under the Company's revolving line of credit;
· 
ability to generate sufficient cash flow from operations to fund all costs of operations and remediation of certain formerly leased property in Dayton, Ohio, and the Company's facilities in Memphis, Tennessee; Detroit, Michigan; Valdosta, Georgia; Ft. Lauderdale, Florida; and Tulsa, Oklahoma;
· 
ability to remediate certain contaminated sites for projected amounts;
· 
ability to fund budgeted capital expenditures during 2005;
· 
increasing other sources of revenue at M&EC;
· 
growth of our Nuclear segment;
· 
expectation that there will be a further decline in Section 404 of Sarbanes-Oxley related third party charges for the fourth quarter of 2005;
· 
ability to close and remediate the Michigan facility for the estimated amounts.
· 
fund remediation of certain sites from funds generated internally;
· 
do not expect the impact of SFAS 123R to have an impact on our cash flow or liquidity;
· 
our government contracts may not be re-awarded;
· 
reduce reserves recorded on discontinued operations or paid over longer period, and
· 
seasonality of the Nuclear segment on a going-forward basis.

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:
 
· 
general economic conditions;
· 
material reduction in revenues;
· 
inability to collect in a timely manner a material amount of receivables;
· 
increased competitive pressures;
 
19
· 
the ability to maintain and obtain required permits and approvals to conduct operations;
· 
the ability to develop new and existing technologies in the conduct of operations;
· 
ability to retain or renew certain required permits;
· 
discovery of additional contamination or expanded contamination at a certain Dayton, Ohio, property formerly leased by the Company or the Company's facilities at Memphis, Tennessee; Valdosta, Georgia; Detroit, Michigan; Ft. Lauderdale, Florida; and Tulsa, Oklahoma, which would result in a material increase in remediation expenditures;
· 
changes in federal, state and local laws and regulations, especially environmental laws and regulations, or in interpretation of such;
· 
Fluctuation of variable interest rates could materially affect our estimated future payments of interest on our variable rate debt.
· 
potential increases in equipment, maintenance, operating or labor costs;
· 
management retention and development;
· 
financial valuation of intangible assets is substantially less than expected;
· 
termination of the Oak Ridge Contracts as a result of our lawsuit against Bechtel Jacobs or otherwise;
· 
the requirement to use internally generated funds for purposes not presently anticipated;
· 
inability to continue to be profitable on an annualized basis;
· 
the inability of the Company to maintain the listing of its Common Stock on the NASDAQ;
· 
the determination that PFMI, PFSG, or PFO was responsible for a material amount of remediation at certain superfund sites;
· 
terminations of contracts with federal agencies or subcontracts involving federal agencies, or reduction in amount of waste delivered to the Company under these contracts or subcontracts;
· 
determination that PFD is required to have a Title V air permit in connection with its operations, or is determined to have violated environmental laws or regulations in a material manner; and

The Company undertakes no obligations to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview
 
We provide services through three reportable operating segments. The Industrial Waste Management Services segment ("Industrial segment") is engaged in on-site and off-site treatment, storage, disposal and processing of a wide variety of by-products and industrial, hazardous and non-hazardous wastes, and with the recent acquisitions, added 24-hour emergency response, vacuum services and marine and industrial maintenance services. The segment operates and maintains facilities and businesses in the waste by-product brokerage, on-site treatment and stabilization, and off-site blending, treatment and disposal industries. The Nuclear Waste Management Services segment ("Nuclear segment") provides treatment, storage, processing and disposal services of mixed waste (waste containing both hazardous and low-level radioactive materials) and low-level radioactive wastes, including research, development and on-site and off-site waste remediation. 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. Our Consulting Engineering Services segment ("Engineering segment") provides a wide variety of environmental related consulting and engineering services to both industry and government. These services include oversight management of environmental restoration projects, air and soil sampling, compliance reporting, surface

20
and subsurface water treatment design for removal of pollutants, and various compliance and training activities.
 
The third quarter of 2005 reflected a revenue decrease of $1.3 million or 5.3% from the same period of 2004. This decrease was principally a result of reduced revenues from the Nuclear segment, which were down $1.6 million from last year. As discussed last quarter, we have been working with the government to schedule waste shipments so that waste comes in on a more consistent basis, which should provide for much greater processing efficiencies. However, in spite of the lower third quarter revenues resulting from more consistent waste shipments, and the increased revenues in the first and second quarters, Nuclear revenues were up 16.5% for the nine months of this year. The Industrial segment revenues increased for the quarter by $492,000 or 4.6% reflecting increased commercial waste revenues. For the nine months ended September 30, 2005, both the Nuclear and Industrial segments achieved record nine month revenue totals, resulting in a record nine month total revenue of $70.0 million. We achieved income from operations for the quarter of $1.7 million, a significant improvement over the third quarter of last year, with all three segments recognizing a segment profit for the quarter. On a year to date basis, we recognized income from operations of $4.5 million, again a significant improvement over last year. As a result of the settlement of our Michigan insurance claim in the third quarter of 2005, we recognized $860,000 of income from discontinued operations, which contributed to our improvement in our net income applicable to common stock total of $1,975,000. We continue to strengthen our balance sheet and to improve our liquidity position. Our working capital position increased by $6.0 million from December 31, 2004, to a total of $5.5 million at September 30, 2005. We have reduced our current liabilities, reduced our total long term debt position and with the conversion of our Series 17 Preferred and exercise of certain warrants, improved our equity structure.

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"). The table below should be used when reviewing management's discussion and analysis for the three and nine months ended September 30, 2005 and 2004:
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Consolidated (amounts in thousands)
  
2005
  
%
  
2004
  
%
  
2005
  
%
  
2004
  
%
  
Net revenues
  
$
23,041
    
100.0
  
$
24,337
    
100.0
  
$
70,008
    
100.0
  
$
60,277
    
100.0
  
Cost of goods sold
    
16,342
    
70.9
    
16,808
    
69.1
    
50,465
    
72.1
    
43,195
    
71.7
  
Gross profit
    
6,699
    
29.1
    
7,529
    
30.9
    
19,543
    
27.9
    
17,082
    
28.3
  
Selling, general and administrative
   
4,965
    
21.5
    
4,443
    
18.3
    
15,342
    
21.9
    
12,975
    
21.5
  
Loss (gain) on disposal/impairment of property & equipment
    
4
    
¾
    
1,014
    
4.2
    
(333
)
  
(.5
)
  
996
    
1.7
  
Impairment loss on intangible assets
    
¾
    
¾
    
7,101
    
29.2
    
¾
    
¾
    
7,101
    
11.8
  
Income from operations
  
$
1,730
    
7.6
  
$
(5,029
)
  
20.8
  
$
4,534
    
6.5
  
$
(3,990
)
  
(6.7
)
Interest expense
  
$
(385
)
  
(1.7
)
$
(294
)
  
(1.2
)
$
(1,178
)
  
(1.7
)
$
(1,535
)
  
(2.5
)
Interest expense-financing fees
    
(48
)
  
(.2
)
  
(1,566
)
  
(6.4
)
  
(269
)
  
(.4
)
  
(2,079
)
  
(3.4
)
Other income (expense)
    
(100
)
  
(.4
)
  
(31
)
  
(.1
)
  
(159
)
  
(.2
)
  
(48
)
  
(.1
)
Income (loss) from continuing operations
    
1,161
    
5.0
    
(6,957
)
  
(28.6
)
  
2,611
    
3.7
    
(7,813
)
  
(13.0
)
Preferred Stock dividends
    
(46
)
  
(.2
)
  
(48
)
  
(.2
)
  
(140
)
  
(.2
)
  
(142
)
  
(.2
)

21
Summary - Three and Nine Months Ended September 30, 2005 and 2004

Net Revenue
Consolidated revenues decreased for the three months ended September 30, 2005, compared to the three months ended September 30, 2004, as follows:

(In thousands)
  
2005
  
% Revenue
 
 2004
  
% Revenue
  
 Change
  
% Change
  
Nuclear
                                      
Government waste
  
$
2,295
    
10.0
  
$
2,940
    
12.0
  
$
(645
)
  
(21.9
)
Hazardous/Non-hazardous
    
830
    
3.6
    
1,069
    
4.4
    
(239
)
  
(22.3
)
Other nuclear waste
    
3,184
    
13.8
    
6,250
    
25.7
    
(3,066
)
  
(49.1
)
Bechtel Jacobs
    
4,951
    
21.5
    
2,627
    
10.8
    
2,324
    
88.5
  
Total
    
11,260
    
48.9
    
12,886
    
52.9
    
(1,626
)
  
(12.6
)
                                       
Industrial Revenues
                                      
Commercial waste
    
7,745
    
33.6
    
6,468
    
26.6
    
1,277
    
19.7
  
Government services
    
716
    
3.1
    
1,529
    
6.3
    
(813
)
  
(53.2
)
Acquisitions
    
2,637
    
11.5
    
2,609
    
10.7
    
28
    
1.1
  
Total
    
11,098
    
48.2
    
10,606
    
43.6
    
492
    
4.6
  
                                       
Engineering
    
683
    
2.9
    
845
    
3.5
    
(162
)
  
(19.2
)
                                       
Total
  
$
23,041
    
100.0
  
$
24,337
    
100.0
  
$
(1,296
)
  
(5.3
)

The decrease was principally from the Nuclear segment, which was mainly within our other nuclear and government waste streams. This decrease was due to special event work performed during the third quarter in 2004 that was not duplicated in the same period of 2005. Additionally, the decrease in the other nuclear and government waste streams was due in part to our delay in processing those waste streams, as a result of our focus on processing Bechtel Jacobs waste. Partially offsetting the decrease was an increase in revenue with Bechtel Jacobs for the quarter. This is a reflection of our efforts to assist Bechtel Jacobs achieve certain disposal milestones by prioritizing the processing of certain of their waste streams. Partially offsetting the decrease in revenue for the quarter, was an increase in revenue in the Industrial segment. This increase was a result of increased commercial waste revenue, primarily due to expanded services with a national home improvement chain. We recently received notice that our contract with the home improvement chain is to be cancelled as of November 25, 2005. During the first nine months of 2005, we received revenues under this contract of approximately $3.6 million. We also experienced additional used oil sales due to the increase in the price of oil. The increase in the Industrial segment was partially offset by a decrease in government waste revenue, which is a result of the government’s reduction in spending on waste treatment during the third quarter, the government’s closure of a service depot and the expiration of one of our government contracts. We continually reevaluate our contracts with the government, and such contracts may not be re-awarded due in part to our goal of re-bidding to reach a more profitable level.

22
Consolidated revenues increased for the nine months ended September 30, 2005, compared to the nine months ended September 30, 2004, as follows:

(In thousands)
  
2005
  
% Revenue
 
 2004
  
% Revenue
  
 Change
  
% Change
  
Nuclear
                                      
Government waste
  
$
10,746
    
15.4
  
$
10,532
    
17.5
  
$
214
    
2.0
  
Hazardous/Non-hazardous
    
3,615
    
5.2
    
2,721
    
4.5
    
894
    
32.9
  
Other nuclear waste
    
10,244
    
14.6
    
10,866
    
18.0
    
(622
)
  
(5.7
)
Bechtel Jacobs
    
11,358
    
16.2
    
6,752
    
11.2
    
4,606
    
68.2
  
Total
    
35,963
    
51.4
    
30,871
    
51.2
    
5,092
    
16.5
  
                                       
Industrial Revenues
                                      
Commercial waste
    
20,739
    
29.6
    
16,794
    
27.9
    
3,945
    
23.5
  
Government services
    
3,513
    
5.0
    
4,405
    
7.3
    
(892
)
  
(20.2
)
Acquisitions
    
7,648