UNITED STATES
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 March 31, 2007
 
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)
   
8302 Dunwoody Place, Suite 250, Atlanta, GA
(Address of principal executive offices)
30350
(Zip Code)

(770) 587-9898
(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 T           No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £         Accelerated Filer T         Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £      No T  

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 May 8, 2007
52,071,244
shares of registrant’s
Common Stock
 
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.

INDEX
 
Page No.
     
 
     
 
1
     
 
3
     
 
4
     
 
5
     
 
6
     
20
     
39
     
40
 
    
 
     
42
     
43
     
44
 
-i-
 
 
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except for Share Amounts)
  
March 31,
2007
  
December 31,
2006
  
   
(Unaudited)
      
ASSETS
          
Current assets:
          
Cash
  
$
982
  
$
1,863
  
Restricted cash
    
65
   
65
 
Accounts receivable, net of allowance for doubtful
              
accounts of $385 and $415, respectively
    
16,333
   
15,256
 
Unbilled receivables - current
    
11,578
   
12,861
 
Inventories
    
1,067
   
847
 
Prepaid expenses
    
2,686
   
3,039
 
Other receivables
    
78
   
1,622
 
Current assets of discontinued operations
    
21
   
22
 
Total current assets
    
32,810
   
35,575
 
               
Property and equipment:
              
Buildings and land
    
20,614
   
20,965
 
Equipment
    
31,436
   
31,414
 
Vehicles
    
4,780
   
4,616
 
Leasehold improvements
    
11,474
   
11,469
 
Office furniture and equipment
    
2,513
   
2,502
 
Construction-in-progress
    
6,470
   
4,896
 
     
77,287
   
75,862
 
Less accumulated depreciation and amortization
    
(30,666
)
  
(29,942
)
Net property and equipment
    
46,621
   
45,920
 
               
Property and equipment of discontinued operations
    
706
   
706
 
               
Intangibles and other assets:
              
Permits
    
13,444
   
13,395
 
Goodwill
    
1,330
   
1,330
 
Unbilled receivable – non-current
    
3,821
   
2,600
 
Finite Risk Sinking Fund
    
5,566
   
4,518
 
Other assets
    
1,825
   
1,953
 
Total assets
  
$
106,123
  
$
105,997
  
               
               
The accompanying notes are an integral part of these consolidated financial statements.
-1-
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
 
(Amounts in Thousands, Except for Share Amounts)
  
March 31,
2007
  
December 31,
2006
  
   
(Unaudited)
      
LIABILITIES AND STOCKHOLDERS' EQUITY
          
Current liabilities:
          
Accounts payable
  
$
4,995
  
$
3,922
  
Current environmental accrual
    
927
   
871
 
Accrued expenses
    
11,044
   
11,287
 
Unearned revenue
    
3,637
   
3,575
 
Current liabilities of discontinued operations
    
726
   
707
 
Current portion of long-term debt
    
2,421
   
2,403
 
Total current liabilities
    
23,750
   
22,765
 
               
Environmental accruals
    
1,686
   
1,754
 
Accrued closure costs
    
5,432
   
5,393
 
Other long-term liabilities
    
3,130
   
3,019
 
Long-term liabilities of discontinued operations
    
1,362
   
1,402
 
Long-term debt, less current portion
    
5,948
   
5,926
 
Total long-term liabilities
    
17,558
   
17,494
 
               
Total liabilities
    
41,308
   
40,259
 
               
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
    
¾
   
¾
 
Common Stock, $.001 par value; 75,000,000 shares authorized,
              
52,071,244 and 52,053,744 shares issued, including 0 share held
             
and 988,000 shares of treasury stock retired in 2006, respectively
    
52
   
52
 
Additional paid-in capital
    
93,128
   
92,980
 
Stock subscription receivable
    
(66
)
  
(79
)
Accumulated deficit
    
(29,584
)
  
(28,500
)
Total stockholders' equity
    
63,530
   
64,453
 
Total liabilities and stockholders' equity
  
$
106,123
  
$
105,997
  
               
             
The accompanying notes are an integral part of these consolidated financial statements.
-2-

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
March 31,
  
(Amounts in Thousands, Except for Per Share Amounts)
  
2007
  
2006
  
            
Net revenues
  
$
20,155
  
$
21,118
 
Cost of goods sold
    
14,265
   
14,288
 
Gross profit
    
5,890
   
6,830
 
               
Selling, general and administrative expenses
    
6,543
   
5,241
 
Loss (gain) on disposal of property and equipment
    
(20
)
  
3
 
Income (loss) from operations
    
(633
)
  
1,586
 
               
Other income (expense):
              
Interest income
    
88
   
33
 
Interest expense
    
(225
)
  
(357
)
Interest expense-financing fees
    
(48
)
  
(49
)
Other
    
(14
)
  
(13
)
Income (loss) from continuing operations before taxes
    
(832
)
  
1,200
 
Income tax expense
    
126
   
72
 
Income (loss) from continuing operations
    
(958
)
  
1,128
 
               
Loss from discontinued operations, net of taxes
    
(126
)
  
(450
)
Net income (loss)
    
(1,084
)
  
678
 
               
Preferred Stock dividends
    
¾
   
¾
 
Net income (loss) applicable to Common Stock
  
$
(1,084
)
$
678
 
               
Net income (loss) per common share – basic
              
Continuing operations
  
$
(.02
)
$
.03
 
Discontinued operations
    
¾
   
(.01
)
Net income (loss) per common share
  
$
(.02
)
$
.02
 
               
Net income (loss) per common share – diluted
              
Continuing operations
  
$
(.02
)
$
.03
 
Discontinued operations
    
¾
   
(.01
)
Net income (loss) per common share
  
$
(.02
)
$
.02
 
               
Number of shares used in computing net income (loss) per share:
              
Basic
    
52,063
   
44,831
 
Diluted
    
52,063
   
45,349
 
               
             
The accompanying notes are an integral part of these consolidated financial statements.
-3-
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Three Months Ended
March 31,
  
(Amounts in Thousands)
  
2007
  
2006
  
Cash flows from operating activities:
          
Net Income (loss)
  
$
(1,084
)
$
678
  
Adjustments to reconcile net income (loss) to cash provided by
              
operations:
              
Depreciation and amortization
    
1,217
   
1,194
 
Provision (credit) for bad debt and other reserves
    
42
   
(41
)
(Gain) loss on disposal of property and equipment
    
(20
)
  
3
 
Issuance of Common Stock for services
    
12
   
10
 
Share based compensation
    
111
   
29
 
Discontinued operations
    
(20
)
  
(291
)
Changes in operating assets and liabilities of continuing operatons:
              
Accounts receivable
    
(1,120
)
  
3,099
 
Unbilled receivables
    
62
   
(2,026
)
Prepaid expenses, inventories and other assets
    
1,932
   
1,325
 
Accounts payable, accrued expenses, and unearned revenue
    
853
   
(3,644
)
Net cash provided by operations
    
1,985
   
336
 
               
Cash flows from investing activities:
              
Purchases of property and equipment, net
    
(1,496
)
  
(496
)
Proceeds from sale of plant, property and equipment
    
28
   
1
 
Change in restricted cash, net
    
¾
   
9
 
Change in finite risk sinking fund
    
(1,048
)
  
(1,022
)
Discontinued operations
    
¾
   
104
 
Net cash used in investing activities
    
(2,516
)
  
(1,404
)
               
Cash flows from financing activities:
              
Net borrowings of revolving credit
    
¾
   
1,573
 
Principal repayments of long-term debt
    
(388
)
  
(531
)
Proceeds from issuance of stock
    
25
   
¾
 
Repayment of stock subscription receivable
    
13
   
¾
 
Net cash provided by (used in) financing activities
    
(350
)
  
1,042
 
Decrease in cash
    
(881
)
  
(26
)
Cash at beginning of period
    
1,863
   
94
 
Cash at end of period
  
$
982
  
$
68
  
               
Supplemental disclosure:
              
Interest paid
  
$
191
  
$
244
  
Non-cash investing and financing activities:
              
Long-term debt incurred for purchase of property and equipment
    
428
   
¾
 
               
             
The accompanying notes are an integral part of these consolidated financial statements.
-4-
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, for the three months ended March 31, 2007)
 
(Amounts in thousands,
  
Common Stock
  
Additional
Paid-In
  
Loan for
  
Accumulated
  
Total Stockholders'
 
except for share amounts)
  
Shares
  
Amount
  
Capital
  
Equity
  
Deficit
  
Equity
  
Balance at December 31, 2006
    
52,053,744
 
$
52
  
$
92,980
  
$
(79
)
$
(28,500
)
$
64,453
  
                                       
Net loss
    
¾
   
¾
    
¾
   
¾
   
(1,084
)
  
(1,084
)
Issuance of Common Stock for
                                     
cash and services
    
¾
    ¾    
12
   
¾
   
¾
   
12
 
Issuance of Common Stock upon
                                     
exercise of Warrants & Options
   
17,500
   
¾
   
25
   
¾
   
¾
   
25
 
Share based compensation
    
¾
   
¾
    
111
   
¾
   
¾
   
111
 
Repayment of stock subscription
receivable
    
¾
   
¾
    
¾
   
13
   
¾
   
13
 
Balance at March 31, 2007
    
52,071,244
 
$
52
  
$
93,128
  
$
(66
)
$
(29,584
)
$
63,530
  
                                       
                                     
The accompanying notes are an integral part of these consolidated financial statements.
-5-
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007
(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, 2006.

1.
Basis of Presentation

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 in the United States of America 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, 2006.

The results of operations for the three months ended March 31, 2007, are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2007.

2.
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 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 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.

Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
-6-

3.
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 March 31, 2007, we had 2,610,250 employee stock options outstanding, which included 1,677,250 that were outstanding and fully vested at December 31, 2005, 833,000 employee stock options approved and granted on March 2, 2006, of which 277,667 became vested on March 2, 2007, and 100,000 employee stock options approved and granted on May 15, 2006. The weighted average exercise price of the 1,954,917 outstanding and fully vested employee stock options is $1.95 with a weighted contractual life of 4.13 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. Additionally, we also have 489,000 outstanding and fully vested director stock options, of which 90,000 became fully vested in January 2007, with exercise price ranging from $1.2188 to $2.98 per share and expiration dates from December 8, 2007 to July 27, 2016. The 90,000 director stock options were granted on July 27, 2006, resulting from the reelection of our Board of Directors. The weighted average exercise price of the 489,000 outstanding and fully vested director stock option is $1.97 with a weighted contractual life of 6.42 years. We have not granted any employee or director stock options for the three months ended March 31, 2007.

We recognized share based compensation expense of approximately $87,000 for the three months ended March 31, 2007, for the employee stock options grants of March 2, 2006 and May 15, 2006, as compared to approximately $18,000 for the period ended March 31, 2006. For the 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
-7-
 
compensation expense be based on options that are ultimately expected to vest, approximately $30,000 of the $87,000 share based compensation expense recognized above for the three months ended March 31, 2007 was the result of the difference between our estimated forfeiture rate of 5.7% and the actual forfeiture rate of 1.7% for the first year vesting of our March 2, 2006 employee option grant. When estimating forfeitures, we consider trends of actual option forfeitures. The forfeiture rates are evaluated, and revised as necessary. We also recognized the remaining share based compensation expense of approximately $24,000 for the three months ended March 31, 2007 for the 90,000 director option grant made on July 27, 2006, which became vested in January 2007. Pursuant to the adoption of SFAS 123R, during the three month period ended March 31, 2006, we recorded share 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. As such, we recorded approximately $11,000 in share compensation expense for the period ended March 31, 2006. We have approximately $569,000 of total unrecognized compensation cost related to unvested options as of March 31, 2007, of which approximately $164,000 will be recognized in remaining 2007, $219,000 will be recognized in 2008, and the remaining $186,000 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%. 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 computation of expected volatility is based on historical volatility from our traded common stock. 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 grants. 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.
-8-
 
4.
Earnings (Loss) 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 months ended March 31, 2007, do not include potential common shares as their effect would be antidilutive.

The following is a reconciliation of basic net income (loss) per share to diluted net income (loss) per share for the three months ended March 31, 2007 and 2006:
 
   
Three Months Ended
March 31,
  
(Amounts in Thousands, Except for Per Share Amounts)
  
2007
  
2006
  
Earnings (loss) per share from continuing operations
           
Income(loss) from continuing operations
  
$
(958
)
  
1,128
 
Preferred stock dividends
    
¾
   
¾
 
Income (loss) from continuing operations applicable to Common Stock
    
(958
)
  
1,128
 
Effect of dilutive securities:
              
Preferred Stock dividends
    
¾
   
¾
 
Income (loss) – diluted
  
$
(958
)
$
1,128
 
Basic income (loss) per share
  
$
(.02
)
$
.03
 
Diluted income (loss) per share
  
$
(.02
)
$
.03
 
               
Earnings (loss) per share from discontinued operations
              
Loss – basic and diluted
  
$
(126
)
$
(450
)
Basic loss per share
  
$
¾
  
$
(.01
)
Diluted loss per share
  
$
¾
  
$
(.01
)
               
Weighted average common shares outstanding – basic
    
52,063
   
44,831
 
Potential shares exercisable under stock option plans
    
¾
   
211
 
Potential shares upon exercise of Warrants
    
¾
   
307
 
Weighted average shares outstanding – diluted
    
52,063
   
45,349
 
                            
               
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
              
Upon exercise of options
    
270
    
2,258
  
Upon exercise of Warrants
    
¾
   
1,776
  
 
-9-
 
5.
Long Term Debt

Long-term debt consists of the following at March 31, 2007 and December 31, 2006:
 
(Amounts in Thousands)
  
March 31,
2007
  
 December 31,
2006
  
 
(Unaudited)
      
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%
              
(8.75% at March 31, 2007), balance due in May 2008.
  
$
¾
  
$
¾
 
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% (9.25% at March 31, 2007).
    
5,250
   
5,500
 
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 (10.0% on March 31, 2007) and is payable in one lump
              
sum at the end of installment period.
    
1,434
   
1,434
 
Installment Agreement dated June 25, 2001, payable in semiannual IRS
             
installments on June 30 and December 31 through December 31, 2008,
              
variable interest accrues at the applicable law rate determined under the
              
Code Section (10.0% on March 31, 2007) and is payable in one
             
lump sum at the end of installment period.
    
353
   
353
 
Various capital lease and promissory note obligations, payable 2007 to
              
2012, interest at rates ranging from 5.0% to 15.7%.
    
1,332
   
1,042
 
     
8,369
   
8,329
 
Less current portion of long-term debt
    
2,421
   
2,403
 
   
$
5,948
  
$
5,926
 
 
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, as amended. The Agreement provides for a term loan ("Term Loan") in the amount of $7,000,000, which requires monthly installments of $83,000 with the remaining unpaid principal balance due on May 31, 2008. The Agreement also provides 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. As of March 31, 2007, the excess availability under our Revolving Credit was $11,395,000 based on our eligible receivables.

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 Agreement was subject to a prepayment fee of 1% until March 25, 2006, and ½% until March 25, 2007 had we elected to terminate the Agreement with PNC.
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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 March 31, 2007) and payable in one lump sum at the end of the loan period. On March 31, 2007, the outstanding balance was $3,268,000 including accrued interest of approximately $1,834,000. Pursuant to the agreement the accrued interest is to be paid at the end of the term, and as such, is recorded as a long-term liability. PDC has directed M&EC to make all payments under the promissory note directly to the Internal Revenue Service ("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 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 March 31, 2007, the rate was 10%. On March 31, 2007, the outstanding balance was $796,000 including accrued interest of approximately $443,000. The interest expense is recorded as a long-term liability, pursuant to the terms of the agreement.

6.
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 the Company's Form 10-K for the year ended December 31, 2006 other than the following material developments:

In December 2004, our Dayton, Ohio subsidiary, Perma-Fix of Dayton, Inc. (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 request civil penalties.
 
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On April 25, 2007, PFD reached an agreement in principle (“AIP”) with DOJ/USEPA representatives to settle all of the United States’ claims. In addition to taking specific actions to address relevant air pollution control regulations and permit requirements, the AIP states that PFD will pay a civil penalty of $800,000. However, at this time, PFD expects the $800,000 will consist of as many as three components: 1) cash payment to the appropriate regulatory authority; 2) supplemental environmental project(s) consisting of cash equivalent investment(s) in PFD’s facility and/or the local community; and 3) supplemental environmental project(s) consisting of one or more capital projects. The process for formalizing the details of a settlement agreement (consent decree) and meeting the DOJ/EPA official approval requirements (including public notice and comment) is expected to take between 90 and 120 days. Cost estimates associated with taking action to address air pollution control regulations and permit requirements are dependent upon the definitization of the consent decree. If agreement on all terms and format of such a final consent decree is not reached, then the AIP will be null and void and no party may seek to enforce it. The AIP does not address the citizen’s suit portion of the lawsuit, and, as a result, we expect the citizen’s suit to continue after finalization of the settlement with the federal government. PFD continues to mount a vigorous defense against, and seek an acceptable resolution of, the claims and requests for relief brought by the citizen’s group.

As of March 31, 2007, we have incurred approximately $2.7 million in costs in vigorously defending against the lawsuits above, of which approximately $1.2 million was incurred in the first quarter of 2007. On April 12, 2007, we were notified by our insurer, American International Group (“AIG”), that it has withdrawn its prior denial of coverage and has agreed to defend and indemnify us (PFD) in the above disclosed lawsuit, subject to insurer’s reservation of rights as discussed below.

Although our insurer has agreed to reimburse us for reasonable defense costs incurred in connection with the litigation prior to the insurer’s assumption of the defense, the insurer’s agreement to defend and indemnify PFD is subject to the insurer’s reservation of its rights to deny indemnity pursuant to various policy provisions and exclusions of the policy, including, without limitation, payment of any civil penalties and fines, as well as the insurer’s right to recoup any defense cost it has advanced in the event that it is determined that the policy provides no coverage. At this time, the amount of the reimbursement from our insurer of the amount of legal and out of pocket defense costs that we have incurred to date has not been determined. As such, we have not recorded any of the reimbursement.

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.

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 a maximum $35 million of financial assurance coverage of which the coverage amount totals $30,096,000 at March 31, 2007, 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 represented the full premium for the 25-year term of the policy, and the remaining $1,234,000, was deposited in a sinking fund account representing a restricted cash account. In February 2007, we paid our fourth 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 March 31, 2007, we have recorded $5,566,000 in our sinking fund on the balance sheet,
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which includes interest earned of $368,000 on the sinking fund as of March 31, 2007. Interest income for the three months ended March 31, 2007, was $57,000.
 
7.
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 recorded a loss of $500 for the three months ended March 31, 2007 and an operating loss of $342,000 the same period ended March 31, 2006. The loss in 2006 was partially due to costs of $200,000 associated with our early termination of our leased property. The assets and liabilities related to PFP have been reclassified into separate categories in the Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006. 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 March 31, 2007.

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 a loss of $126,000 for the three months ended March 31, 2007, and a loss of $108,000 for the three months ended March 31, 2006. During the last half of 2005, we settled the 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 March 31, 2007 and December 31, 2006. As of March 31, 2007, assets are recorded at their estimated net realizable values, and consist of property and equipment of $600,000 and prepaid expense of $21,000. Liabilities as of March 31, 2007, consist of current accrued expenses of $32,000, environmental accruals of $639,000, and a pension payable of $1,417,000. 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 over an eight year period. This obligation is recorded as a long-term liability, with a current portion of $158,000 that we expect to pay over the next year.
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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 $644,000 for closure costs since September 30, 2004, of which $15,000 has been spent during the first quarter of 2007 and $74,000 was spent in 2006. We have $639,000 accrued for the closure, as of March 31, 2007, and we anticipate spending $536,000 in 2007 with the remainder over the next five years.

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 operations, PFMI and PFP.

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. 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.
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The table below presents certain financial information in thousands by business segment as of and for the three months ended March 31, 2007 and 2006 (in thousands).
 
Segment Reporting for the Quarter Ended March 31, 2007  
 
Industrial
  
Nuclear
    
Engineering
  
Segments Total
  
Corporate (2)
    
Consolidated Total
  
Revenue from external customers
  
$
7,234
  
$
12,344
(3)
  
 
$
577
  
$
20,155
  
$
¾
      
$
20,155
  
Intercompany revenues
    
231
   
555
       
235
   
1,021
   
¾
       
1,021
 
Gross profit
    
1,290
   
4,431
       
169
   
5,890
   
¾
       
5,890
 
Interest income
    
¾
   
¾
       
¾
   
¾
   
88
       
88
 
Interest expense
    
25
   
91
       
¾
   
116
   
109
       
225
 
Interest expense-financing fees
    
¾
   
¾
       
¾
   
¾
   
48
       
48
 
Depreciation and amortization
    
446
   
743
       
9
   
1,198
   
19
       
1,217
 
Segment profit (loss)
    
(1,683
)
  
2,153
       
49
   
519
   
(1,477
)
      
(958
)
Segment assets(1)
    
21,244
   
70,596
       
2,063
   
93,903
   
12,220
(4)
  
 
  
106,123
 
Expenditures for segment assets
    
558
   
1,353
       
10
   
1,921
   
3
       
1,924
 
Total long-term debt
    
906
   
2,200
       
13
   
3,119
   
5,250
(5)
  
 
  
8,369
 
                                               
 
Segment Reporting for the Quarter Ended March 31, 2006  
   
Industrial
  
Nuclear
    
Engineering
  
Segments Total
  
Corporate (2)
    
Consolidated Total
  
Revenue from external customers
  
$
8,222
  
$
12,158
(3)
  
 
$
738
  
$
21,118
  
$
¾
      
$
21,118
  
Intercompany revenues
    
391
   
673
       
110
   
1,174
   
¾
       
1,174
 
Gross profit
    
1,777
   
4,821
       
232
   
6,830
   
¾
       
6,830
 
Interest income
    
2
   
¾
       
¾
   
2
   
31
       
33
 
Interest expense
    
28
   
112
       
¾
   
140
   
217
       
357
 
Interest expense-financing fees
    
1
   
¾
       
¾
   
1
   
48
       
49
 
Depreciation and amortization
    
441
   
732
       
10
   
1,183
   
11
       
1,194
 
Segment profit (loss)
    
(89
)
  
2,706
       
91
   
2,708
   
(1,580
)
      
1,128
 
Segment assets(1)
    
23,350
   
62,411
       
2,183
   
87,944
   
9,192
(4)
  
 
  
97,136
 
Expenditures for segment assets
    
194
   
264
       
25
   
483
   
13
       
496
 
Total long-term debt
    
1,018
   
3,109
       
21
   
4,148
   
10,270
(5)
  
 
  
14,418
 
                                               
 
(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 LATA/Parallax revenues for the quarter ended March 31, 2007, which total $1,954,000 or (9.7%) of total revenue and $458,000 or (2.2%) for the same quarter 2006.

(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 $727,000 and $716,000 as of March 31, 2007 and 2006, respectively.

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

9.
Income Taxes

In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on how a company should measure the amount of benefit that the
-15-
 
company is to recognize in its financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 in the first quarter of 2007. As a result of the implementation of FIN 48, we have concluded that we have not taken any uncertain tax positions on any of our open tax returns filed through the period ended December 31, 2005 that would materially distort our financial statement. Our methods of accounting are based on established tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within our returns. In addition, we have filed returns in all applicable jurisdictions in which it has material nexus warranting a return filing. Furthermore, we have not experienced an ownership change as defined in IRC section 382 that would further limit our ability to utilize net operating loss carryforwards as reflected on our 2003 through 205 tax returns.
 
We have not yet filed our income tax returns for the period ended December 31, 2006 tax year; however, we expect that the actual return will mirror tax positions taken within our income tax provision for 2006. As we believe that all such positions are fully supportable by existing Federal law and related interpretations, there are no uncertain tax positions to consider in accordance with FIN 48. The impact of our reassessment of our tax positions in accordance with FIN 48 did not have any impact on our result of operations, financial condition or liquidity.

10.
Acquisition - Definitive Agreement
 
During April 2007, we entered into a definitive agreement (the “Merger Agreement”) to acquire Nuvotec USA, Inc. (Nuvotec) and its wholly owned subsidiary, Pacific EcoSolutions, Inc. (PEcoS) through a reverse subsidiary merger (the “Merger”). PEcoS is a nuclear waste management company that treats both low level and mixed waste, based in Richland, Washington. Subject and pursuant to the terms of the Merger Agreement, as consideration for the Merger, we would pay to the Nuvotec shareholders approximately $11.6 million, subject to adjustment, payable as follows: (a) $2.5 million in cash at closing of the Merger which amount the parties have orally agreed to modify to $2.1 million, subject to execution of a formal amendment to the Merger Agreement; (b) an earn-out amount not to exceed $4.6 million over a four year period (“Earn-Out Amount”), with the first $1.0 million of the Earn-Out Amount to be placed in an escrow account to satisfy certain indemnification obligations under the Merger Agreement of Nuvotec, PEcoS, and the shareholders of Nuvotec to us that we identify within two years following the Merger; and (c) subject to adjustment pursuant to the terms of the Merger Agreement and payable only to the shareholders of Nuvotec that qualify as accredited investors pursuant to Rule 501 of Regulation D promulgated under the Securities Act:
 
·
$2.5 million, payable over a four year period (subject to voluntary prepayment without penalty), unsecured and nonnegotiable and bearing an annual rate of interest of 8.25%, with (i) accrued interest only payable on June 30, 2008, (ii) $833,333.33, plus accrued and unpaid interest, payable on June 30, 2009, (iii) $833,333.33, plus accrued and unpaid interest, payable on June 30, 2010, and (iv) the remaining unpaid principal balance, plus accrued and unpaid interest, payable on June 30, 2011 (collectively, the “Installment Payments”).
 
·
$2.0 million in shares of our common stock, with the number of shares determined by dividing $2.0 million by 95% of average of the closing price of our common stock as quoted on the Nasdaq during the 20 trading days period ending five business days prior to the closing of the Merger; and
 
The Installment Payments and our common stock would be issued and paid only to the shareholders of Nuvotec that qualify as accredited investors in a private placement exempt from registration under Section 4(2) and/or Rule 506 of Regulation D.
 
The Merger Agreement requires that, upon completion of the Merger, the debt of Nuvotec and PEcoS will be limited to (a) approximately $9.1 million owing under Nuvotec’s existing credit facility, plus accrued and
-16-
 
unpaid interest thereon, (b) $375,000 owing to certain stockholders of Nuvotec immediately prior to the Merger, plus accrued and unpaid interest thereon, which we will pay at the closing of the transaction, and (c) other liabilities incurred in the ordinary course of PEcoS’ business.
 
If the Merger is completed, we have agreed to increase the number of our directors from seven to eight and to take reasonable action to nominate and recommend for election Robert L. Ferguson (“Ferguson”), the current Chairman and Chief Executive Officer of Nuvotec and PEcoS, as a member of our board of directors. Mr. Ferguson’s nomination is subject to certain conditions, including the limitation that our board of directors is not required to nominate Ferguson if doing so would breach any fiduciary duty or legal requirements of the board.

Prior to the closing of the Merger, Nuvotec is permitted to transfer certain of its assets, including the spin off to the shareholders of Nuvotec of the common stock of Nuvotec’s majority owned subsidiary, Vivid Learning Systems, Inc. (OTCBB:VVDL).

Assumption of Nuvotec’s debt of approximately $9.1 million owing under its credit facility is anticipated to be paid by us with $2.9 million at closing with the remaining balance to be financed by Nuvotec’s lender, which is to be negotiated. We intend to fund any consideration and with debt assumed by us consisting of cash payments to be paid at closing from our borrowings under our Revolving Credit facility. We anticipate the acquisition will be completed in the second quarter of 2007.

The PEcoS’ facility is located on 45 acres adjacent to the Department of Energy’s (DOE) 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. The DOE’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, while substantial 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 beyond 2030. PEcoS’ net revenue and net income during its fiscal year ended September 30, 2006, was approximately $13 million and $628,000, respectively.

11.
Capital Stock And Employee Stock Plan

During the three months ended March 31, 2007, we issued 17,500 shares of our Common Stock upon exercise of employee stock options, at exercise prices from $1.375 to $1.44 per share. We also had 1,775,638 warrants to purchase shares of our Common Stocks expiring on March 22, 2007. Total proceeds received during the three months ended March 31, 2007 related to warrant and option exercises totaled approximately $38,000, which includes $25,000 from employee stock option exercises and $13,000 from repayment of stock subscription resulting from exercise of warrant to purchase 60,000 shares of our Common Stock on a loan by the Company at an arms length basis in 2006.
 
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.
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The summary of the Company’s total Plans as of March 31, 2007 as compared to March 31, 2006 and changes during the period then ended are presented as follows:
 
   
Shares
  
Weighted Average
Exercise Price
  
Weighted Average
Remaining
Contractual Term
  
Aggregate
Intrinsic Value
  
Options outstanding Janury 1, 2007
    
2,816,750
 
$
1.86
              
Granted
   
¾
   
¾
             
Exercised
    
17,500
   
1.41
       
$
16,938
  
Forfeited
    
¾
   
¾
             
Options outstanding End of Period
    
2,799,250
   
1.86
   
5.1
 
$
1,465,613
  
Options Exercisable at March 31, 2007
    
2,143,917
 
$
1.87
    
5.2
 
$
1,123,840
  
Options Vested and expected to be vested at March 31, 2007
    
2,752,047
 
$
1.86
    
5.1
 
$
1,441,000
  
                           
 
   
Shares
  
Weighted Average
Exercise Price
  
Weighted Average
Remaining
Contractual Term
  
Aggregate
Intrinsic Value
  
Options outstanding January 1, 2006
    
2,546,750
 
$
1.79
              
Granted
   
878,000
   
1.86
             
Exercised
    
¾
   
¾
       
$
—
  
Forfeited
    
7,500
   
1.44
             
Options outstanding End of Period
    
3,417,250
   
1.81
   
5.5
 
$
634,726
  
Options Exercisable at March 31, 2006
    
2,539,250
 
$
1.79
    
5.4
 
$
590,826
  
Options Vested and expected to be vested at March 31, 2006
    
3,367,204
 
$
1.81
    
5.5
 
$
632,223
  
 
-18-
 
The following tables summarize information about options under the plans outstanding at March 31, 2007 and 2006:
 
Options Outstanding
  
Options Exercisable
  
Description and Range of Exercise Prices at March 31, 2007
  
Number
Outstanding
  
Weighted Average Remaining Contractual Life
  
Weighted Average
Exercise Price
  
Number
Outstanding
  
Weighted Average
Remaining
Contractual Life
  
Weighted Average
Exercise Price
  
                           
Performance Equity Plan
    
12,000
   
1.5
  
$
1.25
    
12,000
   
1.5
  
$
1.25
  
($1.25)
                                      
                                       
Non-Qualified Stock Option Plan
    
1,290,250
   
4.6
    
1.86
   
1,290,250
   
4.6
    
1.86
 
($1.25 - $2.19)
                                      
                                       
2004 Stock Option Plan
    
1,008,000
   
5.1
    
1.83
   
352,667
   
5.5
    
1.77
 
($1.44 - $1.86)
                                      
                                       
1992 Outside Director Stock Option Plan
    
165,000
   
3.7
    
2.05
   
165,000
   
3.7
    
2.05
 
($1.21880 - $2.98)
                                      
                                       
2003 Outside Director Stock Option Plan
    
324,000
   
7.8
    
1.94
   
324,000
   
7.8
    
1.94
 
($1.70- $2.15)
                                      
                                       
                                       
 
Options Outstanding
  
Options Exercisable
  
Description and Range of Exercise Prices at March 31, 2006
  
Number
Outstanding
  
Weighted Average
Remaining
Contractual Life
  
Weighted Average
Exercise Price
  
Number
Outstanding
  
Weighted Average
Remaining
Contractual Life
  
Weighted Average
Exercise Price
  
                           
Performance Equity Plan
    
27,000
   
1.6
  
$
1.16
    
27,000
   
1.6
  
$
1.16
  
($1.00 - $1.25)
                                      
                                       
Non-Qualified Stock Option Plan
    
1,989,250
   
5.1
    
1.79
   
1,989,250
   
5.1
    
1.79
 
($1.00- $2.19)
                                      
                                       
2004 Stock Option Plan
    
967,000
   
6.2
    
1.82
   
89,000
   
8.6
    
1.44
 
($1.44 - $1.86)
                                      
                                       
1992 Outside Director Stock Option Plan
    
200,000
   
4.0
    
2.00
   
200,000
   
4.0
    
2.00
 
($1.21880 - $2.98)
                                      
                                       
2003 Outside Director Stock Option Plan
    
234,000
   
8.2
    
1.85
   
234,000
   
8.2
    
1.85
 
($1.70- $2.15)
                                      
 
-19-
 
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;
·  
anticipate a full repayment of our Term Loan by May 2008;
·  
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; and Tulsa, Oklahoma;
·  
ability to remediate certain contaminated sites for projected amounts;
·  
ability to fund budgeted capital expenditures of $4,137,000 during 2007;
·  
we expect backlog levels to continue to fluctuate within the same range throughout 2007, subject to the complexity of the waste streams and timing of receipts and processing of materials;
·  
LATA/Parallax can terminate the contract with us at any time for convenience, which could have a material adverse effect on our operations;
·  
growth of our Nuclear segment;
·  
we anticipate spending $536,000 in closure costs in 2007 with the remainder over the next five years;
·  
under our insurance contracts, we usually accept self-insured retentions, which we believe is appropriate for our specific business risks.
·  
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.
·  
we intend to fund any consideration consisting of cash payments to be paid at closing from our borrowing under our Revolving Credit facility;
·  
the insurer’s agreement to defend and indemnify us and our Dayton, Ohio subsidiary is subject to the insurer’s reservation of its rights to deny indemnity pursuant to various policy provisions and exclusions of the policy, including, without limitation, payment of any civil penalties and fines, as well as the insurer’s right to right to recoup any defense cost it has advanced in the event that it is determined that the policy provides no coverage;
·  
as part of the agreement, PFD will file for a Title V air permit, make certain improvement the facility and meet certain air requirements in connection with managing waste at the facility;
·  
continue to see changes in the market;
·  
we could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our part;
·  
we do not expect future inflationary changes to differ materially from the last three years;
·  
no current intention to close any facilities, other than the Michigan and Pittsburgh facilities.
·  
our ability to negotiate a final consent decree with the U.S. Department of Justice with respect to the Dayton facility or the approval of such consent decree by the appropriate assistant attorney general;
·  
the process for formalizing the details of a settlement agreement (consent decree) and meeting the DOJ/EPA official approval requirements (including public notice and comment) is expected to
 
-20-
 
  take between 90 and 120 days;
·  
the agreement in principle (“AIP”) states that PFD will pay a civil penalty of $800,000; however, at this time, PFD expects the $800,000 will consist of as many as three components;
·  
it is anticipated that the citizen’s suit would continue; and
·  
the anticipated closing of the Nuvotec Acquisition in the second quarter of 2007.

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;
·  
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; 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;
·  
potential increases in equipment, maintenance, operating or labor costs;
·  
management retention and development;
·  
financial valuation of intangible assets is substantially less than expected;
·  
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 and PFSG were 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 the contracts or subcontracts;
·  
execution of final agreement with EPA with regard to PFD lawsuit.

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, 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
-21-
 
environmental restoration projects, air and soil sampling, compliance reporting, surface and subsurface water treatment design for removal of pollutants, and various compliance and training activities.
 
The first quarter of 2007 reflected a revenue decrease of $963,000 to $20,155,000 or 4.6% from revenue of $21,118,000 for the same period of 2006.  This decrease was primarily from the Industrial segment, which saw a decrease of 12.0%.  This was primarily due to the termination of low margin waste revenue as we attempt to replace it with higher margin waste streams.  This decrease was offset by a modest increase in the Nuclear segment’s revenues of 1.5% over the first quarter of 2006 as we continue to augment the growth opportunities in our Nuclear segment by among other things, expansion within the mixed waste market, and receipt of more complex waste streams.  Gross Profit for the quarter was also down by $940,000.  This reduction was primarily due to revenue mix primarily in the Nuclear segment, as well as the reduced revenue in the Industrial and Engineering segments. We continue to pursue beneficial contracts and revenues, as well as evaluating additional cost savings.  We completed the construction on our M&EC south bay special waste processing area and will commence processing special wastes in this new area in the second quarter of 2007. In addition, we are pleased by the recent receipt of a certification to dispose of certain types of nuclear related waste at the Nevada Test Site which will assist in the growth of our Nuclear segment.  Our interest expense and interest expense - financing fees continue to decrease as our operations and cash flow improve and we are able to reduce our long term debt. 

Results of Operations
The reporting of financial results and pertinent discussions are tailored to three reportable segments: Industrial, Nuclear and Engineering. The table below should be used when reviewing management's discussion and analysis for the three months ended March 31, 2007 and 2006:
 
   
Three Months Ended March 31,
  
Consolidated (amounts in thousands)
  
2007
  
%
  
2006
  
%
  
Net Revenues
  
$
20,155
    
100.0
 
$
21,118
    
100.0
 
Cost of good sold
    
14,265
   
70.8
   
14,288
   
67.7
 
Gross Profit
    
5,890
   
29.2
   
6,830
   
32.3
 
Selling, general and administrative
    
6,543
   
32.4
   
5,241
   
24.8
 
Loss (gain) on disposal of property and equipment
    
(20
)
  
(.1
)
  
3
   
¾
 
Income (loss) from operations
  
$
(633
)
  
(3.1
)
$
1,586
    
7.5
 
Interest expense
    
(225
)
  
(1.1
)
  
(357
)
  
(1.7
)
Interest expense-financing fees
    
(48
)
  
(.2
)
  
(49
)
  
(.2
)
Other
    
(14
)
  
(.1
)
  
(13
)
  
(.1
)
Income (loss) from continuing operations
    
(958
)
  
(4.8
)
  
1,128
    
5.3
 
Preferred Stock dividends
    
¾
   
¾
   
¾
   
¾
 
 
-22-
 
Summary - Three Months Ended March 31, 2007 and 2006
Net Revenue
Consolidated revenues decreased $963,000 for the three months ended March 31, 2007, compared to the three months ended March 31, 2006, as follows:
 
(In thousands)
  
2007
  
%
Revenue
 
2006
  
%
Revenue
  
Change
  
%
Change
  
Nuclear
                          
Government waste
  
$
4,535
    
22.5
 
$
5,005
    
23.7
 
$
(470
)
  
(9.4
)
Hazardous/Non-hazardous
    
1,486
   
7.3
   
800
   
3.8
   
686
   
85.8
 
Other nuclear waste
    
3,973
   
19.7
   
3,882
   
18.4
   
91
   
2.3
 
Bechtel Jacobs
    
396
   
2.0
   
2,013
   
9.5
   
(1,617
)
  
(80.3
)
LATA/Parallax
    
1,954
   
9.7
   
458
   
2.2
   
1,496
   
326.6
 
Total
    
12,344
   
61.2
   
12,158
   
57.6
   
186
   
1.5
 
                                       
Industrial Revenues
                                      
Commercial waste
    
5,180
   
25.7
   
6,164
   
29.2
   
(984
)
  
(16.0
)
Government services
    
1,172
   
5.8
   
1,027
   
4.8
   
145
   
14.1
 
Oil Sales
    
882
   
4.4
   
1,031
   
4.9
   
(149
)
  
(14.5
)
Total
    
7,234
   
35.9
   
8,222
   
38.9
   
(988
)
  
(12.0
)
                                       
Engineering
    
577
   
2.9
   
738
   
3.5
   
(161
)
  
(21.8
)
Total
  
$
20,155
    
100.0
 
$
21,118
    
100.0
 
$
(963
)
  
(4.6
)
                                       
The Nuclear segment realized revenue growth of $186,000 or 1.5% for the three months ended March 31, 2007 over the same period in 2006. The increase is principally due to the segments continued expansion within the mixed waste market, which includes an increase in receipts of higher activity wastes, which are more complex and requires greater technical processing expertise. Processing revenue was down due to revenue mix as 2006 revenue included higher volumes of high priced waste streams such as mercury and lab packs. Our hazardous and non-hazardous revenue was up due to two special event soil projects completed in the quarter. Our revenue from subcontracts relating to federal/DOE contracts contributed approximately $6,885,000 of the Nuclear segment’s revenue, down from $7,476,000 in 2006. The backlog of stored waste at March 31, 2007, was $13,359,000 compared to $12,491,000 as of December 31, 2006. This increase reflects our ongoing ability to attract customer waste from both government and commercial customers. We expect backlog levels to continue to fluctuate within the same range throughout 2007, subject to the complexity of the waste streams and timing of receipts and processing of materials. This level of backlog material continues to position the nuclear segment well, from a processing revenue perspective. Revenue in the Industrial Segment was down primarily from reductions in commercial revenue due to poor weather conditions in the northeast and our continued focus on eliminating low margin revenue within the segment. Revenue from oil sales was also down as a large bulk oil purchase by an asphalt vendor in the first quarter of 2006 did not repeat in 2007. The engineering segment experienced a reduction in revenue from first quarter of 2006 due to lower billable hours from lower staffing levels and demand for more time spent on internal projects.
-23-

Cost of Goods Sold
Cost of goods sold decreased $23,000 for the quarter ended March 31, 2007, compared to the quarter ended March 31, 2006, as follows:
 
(In thousands)
  
2007
  
%
Revenue
  
2006
  
%
Revenue
  
Change
  
Nuclear
  
$
7,913
    
64.1
 
$
7,337
    
60.3
 
$
576
  
Industrial
    
5,944
   
82.2
   
6,445
   
78.4
   
(501
)
Engineering
    
408
   
70.7
   
506
   
68.6
   
(98
)
Total
  
$
14,265
    
70.8
 
$
14,288
    
67.7
 
$
(23
)
 
Nuclear segment costs of sales were higher than first quarter of 2006 primarily due to increased revenue. Our total expenses included increased costs for labor, materials and supplies used in the packaging of waste at a DOE clean up site which was being shipped to our operating facilities for treatment. Costs as a percentage of revenue were 3.8% higher in 2007 due to revenue mix. Industrial segment costs were lower than first quarter of 2006 due to lower revenue. Costs as a percentage of revenue increased by 3.8% as certain fixed costs continue despite lower revenue. Engineering segment costs were lower than prior year due to decreased revenue. Included within cost of goods sold is depreciation and amortization expense of $1,142,000 and $1,109,000 for the three months ended March 31, 2007, and 2006, respectively.

Gross Profit
Gross profit for the quarter ended March 31, 2007 decreased $940,000 over 2006, as follows:
 
(In thousands)
  
2007
  
%
Revenue
  
2006
  
%
Revenue
  
Change
  
Nuclear
  
$
4,431
    
35.9
 
$
4,821
    
39.7
 
$
(390
)
Industrial
    
1,290
   
17.8
   
1,777
   
21.6
   
(487
)
Engineering
    
169
   
29.3
   
232
   
31.4
   
(63
)
Total
  
$
5,890
    
29.2
 
$
6,830
    
32.3
   
(940
)
                                 
 
Overall gross profit in the first quarter of 2007 was down compared to the same period last year primarily due to revenue and revenue mix. Though Nuclear segment revenue increased moderately, the revenue mix produced lower margins primarily due to increased direct costs related to the packaging revenue at a DOE clean up site which did not occur in 2006. The reduction in gross profit and gross margin in the Industrial segment and the Engineering segment was due to reduced revenue.

Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $1,302,000 for the three months ended March 31, 2007, as compared to the corresponding period for 2006, as follows:
 
(In thousands)
  
2007
  
%
Revenue
  
2006
  
%
Revenue
  
Change
  
Administrative
  
$
1,346
    
¾
 
$
1,307
    
¾
 
$
39
  
Nuclear
    
2,107
   
17.1
   
1,955
   
16.1
   
152
 
Industrial
    
2,971
   
41.1
   
1,839
   
22.4
   
1,132
 
Engineering
    
119
   
20.6
   
140
   
19.0
   
(21
)
Total
  
$
6,543
    
32.5
 
$
5,241
    
24.8
 
$
1,302
  
 
Overall, our SG&A expenses in the first quarter of 2007 were higher than first quarter 2006. Nuclear segment SG&A was up as it continues to expand its management staff to more efficiently bid on new contracts, service and manage its facilities and increase its efforts towards compliance with corporate
-24-
 
policies and regulatory agencies. The increase in the Industrial segment was a result of increased legal fees as we worked to resolve certain legal issues at our facilities, specifically the Barbara Fisher and United States of America v. Perma-Fix of Dayton, Inc. litigation. (See “Commitments and Contingencies - Legal” in “Notes to Consolidated Financial Statements”). The Engineering segment had lower SG&A expense primarily due to lower labor expense. Administrative overhead was up slightly due to increased consulting fees and general administrative fees associated with our corporate office. Included in SG&A expenses is depreciation and amortization expense of $75,000 and $85,000 for the three months ended March 31, 2007, and 2006, respectively.
 
Interest Expense
Interest expense decreased $132,000 for the quarter ended March 31, 2007, as compared to the corresponding period of 2006.
 
(In thousands)
  
2007
  
2006
  
Change
  
PNC interest
  
$
108
  
$
196
  
$
(88
)
Other
    
117
   
161
   
(44
)
Total
  
$
225
  
$
357
  
$
(132
)
 
The decrease in the first quarter of 2007 as compared to the same quarter in the prior year is due to lower interest paid on diminishing balances of both our long term debt with our principle lender and our various equipment loans. In addition, the company was in a positive cash position and did not require any borrowings on the revolving credit line as it did last year.

Interest Expense - Financing Fees
Interest expense-financing fees were consistent with the corresponding period of 2006. During 2005, we entered into Amendment No. 4 and Amendment No. 5 with PNC, which extended the maturity date on the term loan and revolver agreements to May 2008. The remaining financing fees are now amortized through May 2008. As of March 31, 2007, the unamortized balance of prepaid financing fees is $219,000, which is comprised of $220,000 from the original PNC debt and $338,000 associated with Amendment No. 4 and Amendment No. 5, offset by the monthly amortization of these fees over the past twenty one months. These prepaid financing dues will be amortized through May 2008 at a rate of $16,000 per month.

Income Tax Expense
Income tax expense increased approximately $54,000 to $126,000 for the three months ended March 31, 2007, from $72,000 for the three months ended March 31, 2006. The effective income tax rate for the first quarter of 2007 was (13.2%) compared to 9.6% in the first quarter of 2006. We have modified our process for calculating the interim income tax provision, as we now are using projected full year income as a basis for determining the Company's overall estimated income tax expense. Under this method, our effective income tax rate for 2007 is project at 5.8%. Our prior methodology calculated the interim provision based on the results of the specific period of time being included within the financial statements. We believe that our new methodology is more congruent with the principles provided for in FAS 109 and APB 28.

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.
-25-

PFP recorded a loss of $500 for the three months ended March 31, 2007 and an operating loss of $342,000 the same period ended March 31, 2006. The loss in 2006 was partially due to early termination costs of $200,000 associated with our early termination of our leased property. The assets and liabilities related to PFP have been reclassified into separate categories in the Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006. 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 March 31, 2007.

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 a loss of $126,000 for the three months ended March 31, 2007, and a loss of $108,000 for the three months ended March 31, 2006. During the last half of 2005 we settled the 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 March 31, 2007 and December 31, 2006. As of March 31, 2007, assets are recorded at their estimated net realizable values, and consist of property and equipment of $600,000 and prepaid expense of $21,000. Liabilities as of March 31, 2007, consist of current accrued expenses of $32,000, environmental accruals of $639,000, and a pension payable of $1,417,000. 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 over an eight year period. This obligation is recorded as a long-term liability, with a current portion of $158,000 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 $644,000 for closure costs since September 30, 2004, of which $15,000 has been spent during the first quarter of 2007 and $74,000 was spent in 2006. We have $639,000 accrued for the closure, as of March 31, 2007, and we anticipate spending $536,000 in 2007 with the remainder over the next five years.
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Liquidity and Capital Resources of the Company
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 March 31, 2007, we had cash of $982,000. The following table reflects the cash flow activities during the first quarter of 2007.
 
(In thousands)
  
2007
  
Cash provided by operations
  
$
1,985
  
Cash used in investing activities
    
(2,516
)
Cash used in financing activities
    
(350
)
Decrease in cash
  
$
(881
)
 
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 March 31, 2007, is primarily made up of cash in the Money Market Sweep account and minor petty cash and local account balances used for miscellaneous services and supplies.

Operating Activities
Accounts receivable, net of allowances for doubtful accounts, totaled $16,333,000, an increase of $1,077,000 over the December 31, 2006, balance of $15,256,000. The Nuclear segment experienced an increase of $1,932,000 as a result of a delay in the funding at one of our large broker customers. In addition, increased efforts to reduce our unbilled receivables resulted in increased receivables at March 31, 2007. In the Industrial segment, reduced revenues and increased collections contributed to a reduction of $700,000. The Engineering segment also experienced a decrease of $155,000 as a result of reduced revenue and improved collection efforts.

Unbilled receivables are generated by differences between invoice 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 pre-approval prior to our shipping waste for disposal and our contract terms with the customer that we dispose of the waste prior to invoicing. These delays usually take several months to complete. As of March 31, 2007, unbilled receivables totaled $15,399,000, a decrease of $62,000 from the December 31, 2006, balance of $15,461,000. Though efforts to reduce this total were successful at some of our facilities, others were impacted by delays related to the final shipment of wastes to end disposal sites that are due to shipment approvals needed from generators, and the complexity of the current contracts, which requires greater levels of documentation and additional testing for final invoicing. As a result there was minimal change in total unbilled receivables. 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
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timing of these delays, we realize that certain issues can exacerbate collection of some of these receivables greater than twelve months. Therefore, we have segregated the unbilled receivables between current and long term. The current portion of the unbilled receivables as of March 31, 2007 is $11,578,000, a decrease of $1,283,000 from the balance of $12,861,000 as of December 31, 2006. The long term portion as of March 31, 2007 is $3,821,000, an increase of $1,221,000 from the balance of $2,600,000 as of December 31, 2006.
 
As of March 31, 2007, total consolidated accounts payable was $4,995,000, an increase of $1,073,000 from the December 31, 2006, balance of $3,922,000. We continue to manage payment terms with our vendors to maximize our cash position throughout all segments. Accounts payable also increased in the Nuclear segment reflecting increased cost of sales in the quarter. Industrial segment accounts payable increased primarily due to the legal fees incurred in connection the Barbara Fisher and United States of America v. Perma-Fix of Dayton, Inc. litigation. (See “Commitments and Contingencies - Legal” in “Notes to Consolidated Financial Statements”).

Accrued Expenses as of March 31, 2007, totaled $11,044,000, a decrease of $243,000 over the December 31, 2006, balance of $11,287,000. Accrued expenses are made up of disposal and processing cost accruals, accrued compensation, interest payable, insurance payable and certain tax accruals. The decrease to accrued expenses was principally a result of a decrease in disposal accruals of $455,000 and payroll related decreases of $248,000 offset by increases to legal fees of $300,000 related to Barbara Fisher and United States of America v. Perma-Fix of Dayton, Inc. litigation and increases to insurance payable related to renewal of policies of $160,000.

The working capital position at March 31, 2007, was $9,060,000, as compared to a working capital position of $12,810,000 at December 31, 2006. The decrease in this position of $3,750,000 is primarily due to capital spending of approximately $1,500,000, our annual payment to our Finite Risk Closure Fund of approximately $1,000,000, and the reclassification of certain unbilled revenue from a current asset to a long term asset of approximately $1,250,000.

Investing Activities
Our purchases of capital equipment for the three-month period ended March 31, 2007, totaled approximately $1,924,000 of which $428,000 was financed, resulting in net purchases of $1,496,000 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 funded by the cash provided by operations. We budgeted capital expenditures of approximately $4,137,000 for fiscal year 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. Our purchases during the first quarter of 2007 include approximately $1,048,000 of those projects committed at December 31, 2006. 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 anticipate funding these capital expenditures by a combination of lease financing and internally generated funds.

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 a maximum $35 million of financial assurance coverage of which the coverage amount totals $30,096,000 at March 31, 2007, 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 represented the full premium for the 25-year term of the policy, and the remaining $1,234,000, was deposited in a sinking fund account representing a restricted cash account. In February 2007, we paid our fourth of nine required annual installments of $1,004,000, of which
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$991,000 was deposited in the sinking fund account and the remaining $13,000 represents a terrorism premium. As of March 31, 2007, we have recorded $5,566,000 in our sinking fund on the balance sheet, which includes interest earned of $368,000 on the sinking fund as of March 31, 2007. Interest income for the three months ended March 31, 2007, was $57,000. 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.
 
Financing Activities