Consolidated Balance Sheets - March 31, 2006 and December 31,

Transcription

1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 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, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO OR Cmmissin File N PERMA-FIX ENVIRONMENTAL SERVICES, INC. (Exact name f registrant as specified in its charter) Delaware (State r ther jurisdictin (IRS Emplyer f incrpratin r rganizatin) Identificatin Number) 1940 N.W. 67th Place, Gainesville, FL (Address f principal executive ffices) (Zip Cde) (352) (Registrant's telephne number) N/A (Frmer name, frmer address and frmer fiscal year, if changed since last reprt) Indicate by check mark whether the Registrant (1) has filed all reprts required t be filed by Sectin 13 r 15(d) f the Securities Exchange Act f 1934 during the preceding 12 mnths (r fr such shrter perid that the Registrant was required t file such reprts), and (2) has been subject t such filing requirements fr the past 90 days. Yes [X] N [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, r a nn-accelerated filer. See definitin f "accelerated filer and large accelerated filer" in Rule 12b-2 f the Exchange Act. (Check ne): Large accelerated filer [ ] Accelerated Filer [X] Nn-accelerated filer [ ] Indicate by check mark whether the registrant is a shell cmpany (as defined in Rule 12b-2 f the Exchange Act). Yes [ ] N [X] Indicate the number f shares utstanding f each f the issuer's classes f Cmmn Stck, as f the clse f the latest practical date. Class Outstanding at May 8, Cmmn Stck, $.001 Par Value 44,936,500 (excluding 988,000 shares held as treasury stck) ================================================================================ PERMA-FIX ENVIRONMENTAL SERVICES, INC. INDEX <TABLE> <CAPTION> Page N <S> <C> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements Cnslidated Balance Sheets - March 31, 2006 and December 31, Cnslidated Statements f Operatins - Three Mnths Ended March 31, 2006 and Cnslidated Statements f Cash Flws - Three Mnths Ended March 31, 2006 and Cnslidated Statement f Stckhlders' Equity - Three Mnths Ended March 31, Ntes t Cnslidated Financial Statements...7 Item 2. Management's Discussin and Analysis f Financial Cnditin and Results f Operatins...16

2 Item 3. Quantitative and Qualitative Disclsures Abut Market Risk...31 Item 4. Cntrls and Prcedures...32 PART II OTHER INFORMATION Item 1. Legal Prceedings...33 Item 5. Other Infrmatin...33 </TABLE> Item 6. Exhibits...34 PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED FINANCIAL STATEMENTS PART I, ITEM 1 The cnslidated financial statements included herein have been prepared by the Cmpany (which may be referred t as we, us r ur), withut an audit, pursuant t the rules and regulatins f the Securities and Exchange Cmmissin. Certain infrmatin and nte disclsures nrmally included in financial statements prepared in accrdance with generally accepted accunting principles have been cndensed r mitted pursuant t such rules and regulatins, althugh the Cmpany believes the disclsures which are made are adequate t make the infrmatin presented nt misleading. Further, the cnslidated financial statements reflect, in the pinin f management, all adjustments (which include nly nrmal recurring adjustments) necessary t present fairly the financial psitin and results f peratins as f and fr the perids indicated. It is suggested that these cnslidated financial statements be read in cnjunctin with the cnslidated financial statements and the ntes theret included in the Cmpany's Annual Reprt n Frm 10-K fr the year ended December 31, The results f peratins fr the three mnths ended March 31, 2006, are nt necessarily indicative f results t be expected fr the fiscal year ending December 31, PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS 1 <TABLE> <CAPTION> March 31, December 31, (Amunts in Thusands, Except fr Share Amunts) (Unaudited) <S> <C> <C> ASSETS Current assets Cash $ 68 $ 94 Restricted cash Accunts receivable, net f allwance fr dubtful accunts f $467 and $512 13,562 16,609 Unbilled receivables 13,975 11,948 Inventries Prepaid expenses 2,346 2,777 Other receivables Current assets f discntinued peratins, net f allwance fr dubtful accunts f $70 and $ Ttal current assets 31,408 32,878 Prperty and equipment: Buildings and land 20,251 19,922 Equipment 31,179 31,120 Vehicles 4,433 4,452 Leasehld imprvements 11,489 11,489 Office furniture and equipment 2,449 2,414 Cnstructin-in-prgress ,705 70,247 Less accumulated depreciatin and amrtizatin (26,927) (25,767) Net prperty and equipment 43,778 44,480 Prperty and equipment f discntinued peratins, net f accumulated depreciatin f $30 and $ Intangibles and ther assets: Permits 13,246 13,188 Gdwill 1,330 1,330 Finite Risk Sinking Fund 4,361 3,339 Other assets 2,297 2,504 Ttal assets $ 97,136 $ 98,525 ============ ============ </TABLE> The accmpanying ntes are an integral part f these cnslidated financial statements. 2

3 2 PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED <TABLE> <CAPTION> March 31, December 31, (Amunts in Thusands, Except fr Share Amunts) (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accunts payable $ 4,842 $ 6,053 Current envirnmental accrual Accrued expenses 11,472 11,666 Unearned revenue 3,629 5,169 Current liabilities f discntinued peratins Current prtin f lng-term debt 2,512 2,678 Ttal current liabilities 23,474 26,962 Envirnmental accruals 1,572 1,572 Accrued clsure csts 5,281 5,245 Other lng-term liabilities 2,599 2,462 Lng-term liabilities f discntinued peratins 3,149 3,149 Lng-term debt, less current prtin 11,906 10,697 Ttal lng-term liabilities 24,507 23,125 Ttal liabilities 47,981 50,087 Cmmitments and Cntingencies (see Nte 4) Preferred Stck f subsidiary, $1.00 par value; 1,467,396 shares authrized, 1,284,730 shares issued and utstanding, liquidatin value $1.00 per share 1,285 1,285 Stckhlders' equity: Cmmn Stck, $.001 par value; 75,000,000 shares authrized, 45,824,926 and 45,813,916 shares issued, including 988,000 shares held as treasury stck, respectively Additinal paid-in capital 82,219 82,180 Accumulated deficit (32,533) (33,211) 49,732 49,015 Less Cmmn Stck in treasury at cst; 988,000 shares (1,862) (1,862) Ttal stckhlders' equity 47,870 47,153 Ttal liabilities and stckhlders' equity $ 97,136 $ 98,525 ============ ============ </TABLE> The accmpanying ntes are an integral part f these cnslidated financial statements. 3 PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three Mnths Ended March 31, (Amunts in Thusands, Except fr Per Share Amunts) <S> <C> <C> Net revenues $ 21,118 $ 21,430 Cst f gds sld 14,288 15,893 Grss prfit 6,830 5,537 Selling, general and administrative expenses 5,241 4,665 Gain n dispsal f prperty and equipment 3 -- Incme frm peratins 1, Other incme (expense): Interest incme 33 1 Interest expense (357) (412) Interest expense-financing fees (49) (111) Other (13) (28) Incme frm cntinuing peratins befre taxes 1, Incme tax expense Incme frm cntinuing peratins 1, Lss frm discntinued peratins (450) (246)

4 Net incme (lss) 678 (137) Preferred Stck dividends -- (31) Net incme (lss) applicable t Cmmn Stck $ 678 $ (168) ============ ============ Net incme (lss) per cmmn share - basic Cntinuing peratins $.03 $ -- Discntinued peratins (.01) -- Net incme per cmmn share $.02 $ -- ============ ============ Net incme (lss) per cmmn share - diluted Cntinuing peratins $.03 $ -- Discntinued peratins (.01) -- Net incme per cmmn share $.02 $ -- ============ ============ Number f shares and ptential cmmn shares used in net incme (lss) per cmmn share: Basic 44,831 41,778 ============ ============ Diluted 45,349 44,539 ============ ============ </TABLE> The accmpanying ntes are an integral part f these cnslidated financial statements. 4 PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Mnths Ended March 31, (Amunts in Thusands) <S> <C> <C> Cash flws frm perating activities Net incme (lss) $ 678 $ (137) Adjustments t recncile net incme (lss) t cash prvided by (used in) peratins: Depreciatin and amrtizatin 1,194 1,187 Prvisin fr bad debt and ther reserves (41) (71) Gain n dispsal f prperty and equipment 3 -- Issuance f Cmmn Stck fr services 10 8 Share based cmpensatin Discntinued peratins (291) (118) Changes in assets and liabilities: Accunts receivable 3, Unbilled receivables (2,026) (434) Prepaid expenses, inventries and ther assets 1,325 (538) Accunts payable, accrued expenses, and unearned revenue (3,644) 242 Net cash prvided by peratins Cash flws frm investing activities: Purchases f prperty and equipment, net (496) (466) Prceeds frm sale f plant, prperty and equipment 1 -- Change in restricted cash, net 9 (1) Change in finite risk sinking fund (1,022) (991) Discntinued peratins 104 (12) Net cash used in investing activities (1,404) (1,470) Cash flws frm financing activities: Net brrwings f revlving credit 1,573 1,484 Principal repayments f lng-term debt (531) (483) Prceeds frm issuance f stck Net cash prvided by financing activities 1,042 1,049 Decrease in cash (26) (137) Cash at beginning f perid Cash at end f perid $ 68 $ 78 ============ ============ Supplemental disclsure Interest paid $ 244 $ 239 Nn-cash investing and financing activities: Gain n interest rate swap Lng-term debt incurred fr purchase f prperty and equipment </TABLE> The accmpanying ntes are an integral part f these cnslidated financial statements. PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5

5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited, fr the three mnths ended March 31, 2006) <TABLE> <CAPTION> Cmmn Cmmn Stck Additinal Stck Ttal (Amunts in thusands, Paid-In Accumulated Held In Stckhlders' except fr share amunts) Shares Amunt Capital Deficit Treasury Equity <S> <C> <C> <C> <C> <C> <C> Balance at December 31, ,813,916 $ 46 $ 82,180 $ (33,211) $ (1,862) $ 47,153 Net incme Issuance f Cmmn Stck fr cash and services Issuance f Cmmn Stck upn cashless exercise f Warrants 11, Share based cmpensatin Balance at March 31, ,824,926 $ 46 $ 82,219 $ (32,533) $ (1,862) $ 47,870 =========== =========== =========== =========== =========== ============= </TABLE> The accmpanying ntes are an integral part f these cnslidated financial statements. PERMA-FIX ENVIRONMENTAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MARCH 31, 2006 (Unaudited) Reference is made herein t the ntes t cnslidated financial statements included in ur Annual Reprt n Frm 10-K fr the year ended December 31, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Our accunting plicies are as set frth in the ntes t cnslidated financial statements referred t abve. RECLASSIFICATIONS Certain prir perid amunts have been reclassified t cnfrm with the current perid presentatin. STOCK-BASED COMPENSATION On January 1, 2006, we adpted Financial Accunting Standards Bard ("FASB") Statement N. 123 (revised) ("SFAS 123R"), Share-Based Payment, a revisin f FASB Statement N. 123, Accunting fr Stck-Based Cmpensatin, superseding APB Opinin N. 25, Accunting fr Stck Issued t Emplyees, and its related implementatin guidance. This Statement establishes accunting standards fr entity exchanges f equity instruments fr gds r services. It als addresses transactins in which an entity incurs liabilities in exchange fr gds r services that are based n the fair value f the entity's equity instruments r that may be settled by the issuance f thse equity instruments. SFAS 123R requires all share-based payments t emplyees, including grants f emplyee stck ptins, t be recgnized in the incme statement based n their fair values. Pr frma disclsure is n lnger an alternative upn adpting SFAS 123R. We adpted SFAS 123R utilizing the mdified prspective methd in which cmpensatin cst is recgnized beginning with the effective date based n SFAS 123R requirements fr all (a) share-based payments granted after the effective date and (b) awards granted t emplyees prir t the effective date f SFAS 123R that remain unvested n the effective date. In accrdance with the mdified prspective methd, the cnslidated financial statements fr prir perids have nt been restated t reflect, and d nt include, the impact f SFAS 123R. Prir t ur adptin f SFAS 123R, n July 28, 2005, the Cmpensatin and Stck Optin Cmmittee f the Bard f Directrs apprved the acceleratin f vesting fr all the utstanding and unvested ptins t purchase Cmmn Stck awarded t emplyees as f the apprval date. The Bard f Directrs apprved the accelerated vesting f these ptins based n the belief that it was in the best interest f ur stckhlders t reduce future cmpensatin expense that wuld therwise be required in the statement f peratins upn adptin f SFAS 123R, effective beginning January 1, The accelerated vesting triggered the re-measurement f cmpensatin cst under current accunting standards. In the event a hlder f an accelerated vesting ptin terminates emplyment with us prir t the end f the riginal vesting term f such ptins, we will recgnize the cmpensatin expense at the time f terminatin. As f March 31, 2006, we had 3,283,250 emplyee stck ptins utstanding, which included 2,405,250 that were utstanding and fully vested at December 31, 2005, and 878,000 emplyee stck ptins apprved and granted n March 2, The emplyee stck ptins utstanding, at December 31, 2005 are ten year ptins, issuable at exercise prices frm $1.00 t $3.00 per share, and expiratin dates frm May 24, 2006 t February 27, The emplyee stck ptin grants in March 2006 are six year ptins with a three year vesting perid, with an exercise price f $1.86 per share. Additinally, we had 434,000 directr stck ptins utstanding, f which 72,000 became fully vested in January Pursuant t the adptin f SFAS 123R, during the three-mnth perid ended March 7

6 31, 2006, we recrded stck-based cmpensatin expense fr the directr stck ptins granted prir t, but nt yet vested, as f January 1, 2006, as if the fair value methd required fr pr frma disclsure under SFAS 123 were in effect fr expense recgnitin purpses. This resulted in an expense f apprximately $11,000. Fr the stck ptin grants n March 2, 2006, we have estimated cmpensatin expense based n the fair value at grant date using the Black-Schles valuatin mdel, and will recgnize cmpensatin expense using a straight-line amrtizatin methd ver the three year vesting perid. As SFAS 123R requires that stck-based cmpensatin expense be based n ptins that are ultimately expected t vest, stck-based cmpensatin fr the three-mnth perid ended March 31, 2006 has been reduced fr estimated frfeitures at a rate f 5.7%. When estimating frfeitures, we cnsider trends f actual ptin frfeitures. Fr the three mnths ended March 31, 2006, we recrded apprximately $18,000 in emplyee cmpensatin expense frm the March 2006 grants, which included with the directr cmpensatin expense, impacted ur results f peratins by $29,000, fr stck-based cmpensatin expense fr the three-mnth perid ended March 31, We calculated a fair value f $0.868 fr each ptin grant n the date f grant using the Black-Schles ptin pricing mdel with the fllwing assumptins used fr the March 2, 2006 grants: n dividend yield; an expected life f fur years; expected vlatility f 54.0%; and a risk free interest rate f 4.70%. N ptins were granted in the crrespnding first quarter f Our cmputatin f expected vlatility fr the first quarter f 2006 is based n histrical vlatility frm ur traded cmmn stck, as was the cmputatin f expected vlatility n grants prir t Due t ur change in the cntractual term and vesting perid, we utilized the simplified methd, defined in the Securities and Exchange Cmmissin's Staff Accunting Bulletin N. 107, t calculate the expected term fr ur 2006 grants. The interest rate fr perids within the cntractual life f the award is based n the U.S. Treasury yield curve in effect at the time f grant. Prir t the adptin f SFAS 123R, we furnished the pr frma disclsures required under SFAS N. 123, as amended by SFAS N. 148, "Accunting fr Stck-Based Cmpensatin -- Transitin and Disclsures." Emplyee stck-based cmpensatin expense recgnized under SFAS 123R was nt reflected in ur results f peratins fr the three-mnth perid ended March 31, 2005 fr emplyee stck ptin grants as all ptins were granted with an exercise price equal t the market value f the underlying cmmn stck n the date f grant. Previusly reprted amunts have nt been restated. Under the accunting prvisins f SFAS 123, ur net lss and net lss per share, fr the three mnths ended March 31, 2005 wuld have been increased t the pr frma amunts indicated belw (in thusands except fr per share amunts): Three Mnths Ended (Unaudited) March 31, Net incme frm cntinuing peratins applicable t Cmmn Stck, as reprted $ 78 Deduct: Ttal Stck-based emplyee cmpensatin expense determined under fair value based methd fr all awards, net f related tax effects (91) Pr frma net lss frm cntinuing peratins applicable t Cmmn Stck $ (13) ================== Incme (lss) per share: Basic and diluted - as reprted $ -- ================== Basic and diluted - pr-frma $ -- ================== 2. EARNINGS PER SHARE Basic EPS is based n the weighted average number f shares f Cmmn Stck utstanding during the perid. Diluted EPS includes the dilutive effect f ptential cmmn shares. The fllwing is a recnciliatin f basic net incme (lss) per share t diluted net incme (lss) per share fr the three mnths ended March 31, 2006 and 2005: 8 <TABLE> <CAPTION> Three Mnths Ended March 31, (Amunts in Thusands, Except fr Per Share Amunts) <S> <C> <C> Earnings per share frm cntinuing peratins Incme frm cntinuing peratins $ 1,128 $ 109 Preferred stck dividends -- (31) Incme frm cntinuing peratins applicable t Cmmn Stck 1, Effect f dilutive securities: Preferred Stck dividends Incme - diluted $ 1,128 $ 109 ============ ============ Basic incme per share $.03 $ -- ============ ============

7 ============ ============ Diluted incme per share $.03 $ -- ============ ============ Earnings per share frm discntinued peratins Lss - basic and diluted $ (450) $ (246) ============ ============ Basic lss per share $ (.01) $ -- ============ ============ Diluted lss per share $ (.01) $ -- ============ ============ Weighted average shares utstanding - basic 44,831 41,778 Ptential shares exercisable under stck ptin plans Ptential shares upn exercise f Warrants Ptential shares upn cnversin f Preferred Stck -- 1,667 Weighted average shares utstanding - diluted 45,349 44,539 ============ ============ Ptential shares excluded frm abve weighted average share calculatins due t their anti-dilutive effect include: Upn exercise f ptins 2,258 1,339 Upn exercise f Warrants 1,776 1,776 </TABLE> 3. LONG TERM DEBT Lng-term debt cnsists f the fllwing at March 31, 2006, and December 31, 2005: 9 <TABLE> <CAPTION> March 31, December 31, (Amunts in Thusands) (Unaudited) <S> <C> <C> Revlving Credit facility dated December 22, 2000, brrwings based upn eligible accunts receivable, subject t mnthly brrwing base calculatin, variable interest paid mnthly at prime rate plus1/2% (8.25% at March 31, 2006), balance due in May $ 4,020 $ 2,447 Term Lan dated December 22, 2000, payable in equal mnthly installments f principal f $83, balance due in May 2008, variable interest paid mnthly at prime rate plus 1% (8.75% at March 31, 2006). 6,250 6,500 Prmissry Nte dated June 25, 2001, payable in semiannual installments n June 30 and December 31 thrugh December 31, 2008, variable interest accrues at the applicable law rate determined under the IRS Cde Sectin (10.0% n March 31, 2006) and is payable in ne lump sum at the end f installment perid. 2,234 2,234 Installment Agreement dated June 25, 2001, payable in semiannual installments n June 30 and December 31 thrugh December 31, 2008, variable interest accrues at the applicable law rate determined under the IRS Cde Sectin (10.0% n March 31, 2006) and is payable in ne lump sum at the end f installment perid Varius capital lease and prmissry nte bligatins, payable 2006 t 2010, interest at rates ranging frm 5.0% t 15.7%. 1,361 1, ,418 13,375 Less current prtin f lng-term debt 2,512 2, $ 11,906 $ 10,697 =========== ============ </TABLE> REVOLVING CREDIT AND TERM LOAN AGREEMENT On December 22, 2000, we entered int a Revlving Credit, Term Lan and Security Agreement ("Agreement") with PNC Bank, Natinal Assciatin, a natinal banking assciatin ("PNC") acting as agent ("Agent") fr lenders, and as issuing bank, as amended. The Agreement prvides fr a term lan ("Term Lan") in the amunt f $7,000,000, which requires mnthly installments f $83,000 with the remaining unpaid principal balance due n May 31, The Agreement als prvides fr a revlving line f credit ("Revlving Credit") with a maximum principal amunt utstanding at any ne time f $18,000,000, as amended. The Revlving Credit advances are subject t limitatins f an amunt up t the sum f (a) up t 85% f Cmmercial Receivables aged 90 days r less frm invice date, (b) up t 85% f Cmmercial Brker Receivables aged up t 120 days frm invice date, (c) up t 85% f acceptable Gvernment Agency Receivables aged up t 150 days frm invice date, and (d) up t 50% f acceptable unbilled amunts aged up t 60 days, less (e) reserves the Agent reasnably deems prper and necessary. As f March 31, 2006, the excess availability under ur Revlving Credit was $8,667,000 based n ur eligible receivables. Pursuant t the Agreement, as amended, the Term Lan bears interest at a flating rate equal t the prime rate plus 1%, and the Revlving Credit at a flating rate equal t the prime rate plus 1/2%. The lans are subject t a prepayment fee f 1% until March 25, 2006, and 1/2% until March 25, PROMISSORY NOTE In cnjunctin with ur acquisitin f M&EC, M&EC issued a prmissry nte fr a principal amunt f $3.7 millin t Perfrmance Develpment Crpratin ("PDC"), dated June 25, 2001, fr mnies 10

8 advanced t M&EC fr certain services perfrmed by PDC. The prmissry nte is payable ver eight years n a semiannual basis n June 30 and December 31. The principal repayments fr 2006 will be apprximately $400,000 semiannually. Interest is accrued at the applicable law rate ("Applicable Rate") pursuant t the prvisins f sectin 6621 f the Internal Revenue Cde f 1986 as amended (10% n March 31, 2006) and payable in ne lump sum at the end f the lan perid. On March 31, 2006, the utstanding balance was $3,718,000 including accrued interest f apprximately $1,484,000. Pursuant t the agreement the accrued interest is t be paid at the end f the term, and as such, is recrded as a lng-term liability. PDC has directed M&EC t make all payments under the prmissry nte directly t the Internal Revenue Service ("IRS") t be applied t PDC's bligatins under its installment agreement with the IRS. INSTALLMENT AGREEMENT Additinally, M&EC entered int an installment agreement with the IRS fr a principal amunt f $923,000 effective June 25, 2001, fr certain withhlding taxes wed by M&EC. The installment agreement is payable ver eight years n a semiannual basis n June 30 and December 31. The principal repayments fr 2006 will be apprximately $100,000 semiannually. Interest is accrued at the Applicable Rate, and is adjusted n a quarterly basis and payable in lump sum at the end f the installment perid. On March 31, 2006, the rate was 10%. On March 31, 2006, the utstanding balance was $910,000 including accrued interest f apprximately $357,000. The interest expense is recrded as a lng-term liability, pursuant t the terms f the agreement. 4. COMMITMENTS AND CONTINGENCIES HAZARDOUS WASTE In cnnectin with ur waste management services, we handle bth hazardus and nn-hazardus waste, which we transprt t ur wn, r ther facilities fr destructin r dispsal. As a result f dispsing f hazardus substances, in the event any cleanup is required, we culd be a ptentially respnsible party fr the csts f the cleanup ntwithstanding any absence f fault n ur part. LEGAL In the nrmal curse f cnducting ur business, we are invlved in varius litigatins. There has been n material change in legal prceedings frm thse disclsed previusly in the Cmpany's Frm 10-K fr the year ended December 31, INSURANCE We believe we maintain insurance cverage adequate fr ur needs and which is similar t, r greater than, the cverage maintained by ther cmpanies f ur size in the industry. There can be n assurances, hwever, thse liabilities, which may be incurred by us, will be cvered by ur insurance r that the dllar amunt f such liabilities, which are cvered, will nt exceed ur plicy limits. Under ur insurance cntracts, we usually accept self-insured retentins, which we believe is apprpriate fr ur specific business risks. We are required by EPA regulatins t carry envirnmental impairment liability insurance prviding cverage fr damages n a claims-made basis in amunts f at least $1,000,000 per ccurrence and $2,000,000 per year in the aggregate. T meet the requirements f custmers, we have exceeded these cverage amunts. In June 2003, we entered int a 25-year finite risk insurance plicy, which prvides financial assurance t the applicable states fr ur permitted facilities in the event f unfreseen clsure. Prir t btaining r renewing perating permits we are required t prvide financial assurance that guarantees t the states that in the event f clsure ur permitted facilities will be clsed in accrdance with the regulatins. The plicy prvides $35 millin f financial assurance cverage f which the cverage amunt ttals $28,766,000 at March 31, 2006, and has available capacity t allw fr annual inflatin and ther 11 perfrmance and surety bnd requirements. This finite risk insurance plicy required an upfrnt payment f $4.0 millin, f which $2,766,000 represented the full premium fr the 25-year term f the plicy, and the remaining $1,234,000, was depsited in a sinking fund accunt representing a restricted cash accunt. In February 2006, we paid ur third f nine required annual installments f $1,004,000, f which $991,000 was depsited in the sinking fund accunt, the remaining $13,000 represents a terrrism premium. As f March 31, 2006, we have recrded $4,361,000 in ur sinking fund n the balance sheet, which includes interest earned f $154,000 n the sinking fund as f March 31, Interest incme fr the three mnths ended March 31, 2006, was $31, DISCONTINUED OPERATIONS PFP Effective Nvember 8, 2005, ur Bard f Directrs apprved the discntinuatin f peratins at the facility in Pittsburgh, Pennsylvania, wned by ur subsidiary, Perma-Fix f Pittsburgh, Inc. ("PFP"). The decisin t discntinue peratins at PFP was due t ur reevaluatin f the facility and ur ability t achieve prfitability at the facility in the near term. During February 2006, we cmpleted the remediatin f the leased prperty and the equipment, and released the prperty back t the wner. The perating results fr the current and prir perids have been reclassified t discntinued peratins in ur Cnslidated Statements f Operatins. PFP recrded a lss f $342,000 fr the three mnths ended March 31, 2006, and revenue f $177,000 and an perating lss f $79,000 fr the three mnths ended March 31, The lss in 2006, was partially due t early terminatin csts f $200,000 assciated with ur early terminatin f ur leased prperty. The assets and liabilities related t PFP have been reclassified int separate categries in the Cnslidated Balance Sheets as f March 31, 2006 and December 31, The assets are recrded at their net realizable value, and cnsist f

9 31, The assets are recrded at their net realizable value, and cnsist f equipment f $116,000. Liabilities as f March 31, 2006, cnsist f accunts payable f $13,000. PFMI On Octber 4, 2004, ur Bard f Directrs apprved the discntinuatin f peratins at the facility in Detrit, Michigan, wned by ur subsidiary, Perma-Fix f Michigan, Inc. ("PFMI"). The decisin t discntinue peratins at PFMI was principally a result f tw fires that significantly disrupted peratins at the facility in 2003, and the facility's cntinued drain n the financial resurces f ur Industrial segment. We are in the prcess f remediating the facility and evaluating ur available ptins fr future use r sale f the prperty. The perating activities fr the current and prir perids have been reclassified t discntinued peratins in ur Cnslidated Statements f Operatins. PFMI recrded a lss f $108,000 fr the three mnths ended March 31, 2006, and a lss f $167,000 fr the three mnths ended March 31, During the last half f 2005 we settled the three insurance claims we submitted relative t the tw fires at PFMI, a prperty claim fr the first fire and a prperty claim and business interruptin claim fr the secnd fire. During 2004, we recrded a receivable f $1,585,000 based n negtiatins with the insurance carrier n the business interruptin claim. The incme frm recrding this receivable was recrded as a reductin f "lss frm discntinued peratins" and reduced the perating lsses fr During 2005, we received insurance prceeds and claim settlements f $3,253,000 fr settlement f all three claims. Of these prceeds, $1,476,000 was recrded as incme frm discntinued peratins during the third quarter f 2005, which is net f $192,000 paid fr public adjustr fees. Assets and liabilities related t the discntinued peratin have been reclassified t separate categries in the Cnslidated Balance Sheets as f March 31, 2006 and December 31, As f March 31, 2006, assets are recrded at their estimated net realizable values, and cnsist f prperty and equipment f 12 $600,000. Liabilities as f March 31, 2006, cnsist f accunts payable and current accrued expenses f $15,000, envirnmental accruals f $1,865,000, and a pensin payable f $1,558,000. The pensin plan withdrawal liability, is a result f the terminatin f the unin emplyees f PFMI. The PFMI unin emplyees participate in the Central States Teamsters Pensin Fund ("CST"), which prvides that a partial r full terminatin f unin emplyees may result in a withdrawal liability, due frm PFMI t CST. The recrded liability is based upn a demand letter received frm CST in August 2005, that prvided fr the payment f $22,000 per mnth ver an eight year perid. This bligatin is recrded as a lng-term liability, with a current prtin f $125,000 that we expect t pay ver the next year. As a result f the discntinuatin f peratins at the PFMI facility, we are required t cmplete certain clsure and remediatin activities pursuant t ur RCRA permit. Als, in rder t clse and dispse f the facility, we may have t cmplete certain additinal remediatin activities related t the land, building, and equipment. The level and cst f the clean-up and remediatin will be determined by state mandated requirements, the extent t which are nt knwn at this time. Als, impacting this estimate is the level f cntaminatin discvered, as we begin remediatin, and the related clean-up standards which must be met in rder t dispse f r sell the facility. We engaged ur engineering firm, SYA, t perfrm an analysis and related estimate f the cst t cmplete the RCRA prtin f the clsure/clean-up csts and the ptential lng-term remediatin csts. Based upn this analysis, we riginally estimated the cst f this envirnmental clsure and remediatin liability t be $2,464,000. We have spent apprximately $599,000 fr clsure csts since September 30, 2004, f which apprximately $44,000 has been spent during the first quarter f 2006, and $439,000 was spent in We have $1,865,000 accrued fr the clsure, as f March 31, 2006, and we anticipate spending $149,000 in 2006 with the remainder ver the next tw t five years. 6. RELATED PARTY TRANSACTION Lawrence Prperties LLC During February 2006, ur Bard f Directrs apprved and Perma-Fix Envirnmental Services, Inc. entered int a lease agreement, whereby we will lease prperty frm, Lawrence Prperties LLC, a cmpany jintly wned by the president f Schreiber, Ynley and Assciates, Rbert Schreiber, Jr. and his spuse. Mr. Schreiber is a member f ur executive management team. The lease is fr a term f five years and will begin n June 1, We will pay mnthly rent expense f $10,000, which we believe is lwer than csts charged by unrelated third party landlrds. Additinal rent wuld be assessed fr any increases ver the initial lease cmmencement year, t prperty taxes r assessments and prperty and casualty insurance premiums. Mill Creek Envirnmental Services, Inc. During 2005, we utilized the remediatin and analytical services f Mill Creek Envirnmental Services, Inc. ("Mill Creek"), which is wned principally by the sn and daughter-in-law f ur CEO, Dr. Luis Centfanti. Mill Creek prvided assistance in develping remediatin plans, cmpleting a permit renewal and mdificatin applicatin, and grundwater investigatins at ne f ur remediatin sites. During 2006, we greatly reduced ur reliance n Mill Creek's services. Our purchases frm r services prvided t us by Mill Creek fr the three mnth perid ended March 31, 2006, were $3,000, and $230,000 fr the year ended December 31, We believe that the rates we receive are cmpetitive and cmparable t rates we wuld receive frm unaffiliated third party vendrs. 7. OPERATING SEGMENTS 13

10 Pursuant t FAS 131, we define an perating segment as a business activity: frm which we may earn revenue and incur expenses; whse perating results are regularly reviewed by the segment president t make decisins abut resurces t be allcated t the segment and assess its perfrmance; and fr which discrete financial infrmatin is available. We have three perating segments, which are defined as each business line that we perate. This hwever, excludes crprate headquarters, which des nt generate revenue, and ur discntinued peratins, PFMI and PFP. Our perating segments are defined as fllws: The Industrial Waste Management Services segment prvides n-and-ff site treatment, strage, prcessing and dispsal f hazardus and nn-hazardus industrial waste, and wastewater thrugh ur six facilities; Perma-Fix Treatment Services, Inc., Perma-Fix f Daytn, Inc., Perma-Fix f Ft. Lauderdale, Inc., Perma-Fix f Orland, Inc., Perma-Fix f Suth Gergia, Inc., and Perma-Fix f Maryland, Inc. We prvide thrugh certain f ur facilities varius waste management services t certain gvernmental agencies. The Nuclear Waste Management Services segment prvides treatment, strage, prcessing and dispsal f nuclear, lw-level radiactive, mixed (waste cntaining bth hazardus and nn-hazardus cnstituents), hazardus and nn-hazardus waste thrugh ur three facilities; Perma-Fix f Flrida, Inc., Diversified Scientific Services, Inc. and East Tennessee Materials and Energy Crpratin. The Cnsulting Engineering Services segment prvides envirnmental engineering and regulatry cmpliance services thrugh Schreiber, Ynley & Assciates, Inc. which includes versight management f envirnmental restratin prjects, air and sil sampling and cmpliance and training activities t industrial and gvernment custmers, as well as, engineering and cmpliance supprt needed by ur ther segments. 14 The table belw presents certain financial infrmatin in thusands by business segment as f and fr the three mnths ended March 31, 2006 and SEGMENT REPORTING FOR THE QUARTER ENDED MARCH 31, 2006 <TABLE> <CAPTION> Segments Cnslidated Industrial Nuclear Engineering Ttal Crprate (2) Ttal - <S> <C> <C> <C> <C> <C> <C> Revenue frm external custmers $ 8,222 $ 12,158(3) $ 738 $ 21,118 $ -- $ 21,118 Intercmpany revenues , ,174 Grss prfit 1,777 4, , ,830 Interest incme Interest expense Interest expense-financing fees Depreciatin and amrtizatin , ,194 Segment prfit (lss) (89) 2, ,708 (1,580) 1,128 Segment assets(1) 23,350 62,411 2,183 87,944 9,192(4) 97,136 Expenditures fr segment assets Ttal lng-term debt 1,018 3, ,148 10,270(5) 14,418 </TABLE> SEGMENT REPORTING FOR THE QUARTER ENDED MARCH 31, 2005 <TABLE> <CAPTION> Segments Cnslidated Industrial Nuclear Engineering Ttal Crprate (2) Ttal - <S> <C> <C> <C> <C> <C> <C> Revenue frm external custmers $ 9,771 $ 10,896(3) $ 763 $ 21,430 $ -- $ 21,430 Intercmpany revenues , ,403 Grss prfit 1,836 3, , ,537 Interest incme Interest expense Interest expense-financing fees Depreciatin and amrtizatin , ,187 Segment prfit (lss) (166) 1, ,496 (1,387) 109 Segment assets(1) 25,974 61,561 2,279 89,814 11,369(4) 101,183 Expenditures fr segment assets Ttal lng-term debt 1,636 7, ,440 10,797(5) 20,237 </TABLE> (1) Segment assets have been adjusted fr intercmpany accunts t reflect actual assets fr each segment. (2) Amunts reflect the activity fr crprate headquarters nt included in the segment infrmatin. (3) The cnslidated revenues within the Nuclear segment include the Bechtel Jacbs revenues fr the quarter ended March 31, 2006, which ttal $2,013,000 r (9.5%) f ttal revenue and $1,646,000 (r 7.7%) fr the same quarter in (4) Amunt includes assets frm Perma-Fix f Michigan, Inc., and Perma-Fix f Pittsburgh, Inc. tw discntinued peratins frm the Industrial segment,

11 Pittsburgh, Inc. tw discntinued peratins frm the Industrial segment, f apprximately $716,000 and $2,701,000 as f March 31, 2006 and 2005, respectively. (5) Includes the balance utstanding frm ur revlving line f credit and term lan, which is utilized by all f ur segments. 15 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 cntained within this reprt may be deemed "frward-lking statements" within the meaning f Sectin 27A f the Securities Act f 1933, as amended, and Sectin 21E f the Securities Exchange Act f 1934, as amended (cllectively, the "Private Securities Litigatin Refrm Act f 1995"). All statements in this reprt ther than a statement f histrical fact are frward-lking statements that are subject t knwn and unknwn risks, uncertainties and ther factrs, which culd cause actual results and perfrmance f the Cmpany t differ materially frm such statements. The wrds "believe," "expect," "anticipate," "intend," "will," and similar expressins identify frward-lking statements. Frward-lking statements cntained herein relate t, amng ther things, imprve ur peratins and liquidity; anticipated imprvement in the financial perfrmance f the Cmpany; ability t cmply with the Cmpany's general wrking capital requirements; ability t be able t cntinue t brrw under the Cmpany's revlving line f credit; ability t generate sufficient cash flw frm peratins t fund all csts f peratins and remediatin f certain frmerly leased prperty in Daytn, Ohi, and the Cmpany's facilities in Memphis, Tennessee; Detrit, Michigan; Valdsta, Gergia; and Tulsa, Oklahma; ability t remediate certain cntaminated sites fr prjected amunts; ability t fund budgeted capital expenditures during 2006; increasing ther surces f revenue at M&EC; grwth f ur Nuclear segment; ability t clse and remediate the Michigan facility fr the estimated amunts; and n expectatin t clse any facilities, ther than the Michigan and Pittsburgh facilities. While the Cmpany believes the expectatins reflected in such frward-lking statements are reasnable, it can give n assurance such expectatins will prve t have been crrect. There are a variety f factrs, which culd cause future utcmes t differ materially frm thse described in this reprt, including, but nt limited t: general ecnmic cnditins; material reductin in revenues; inability t cllect in a timely manner a material amunt f receivables; increased cmpetitive pressures; the ability t maintain and btain required permits and apprvals t cnduct peratins; the ability t develp new and existing technlgies in the cnduct f peratins; ability t retain r renew certain required permits; discvery f additinal cntaminatin r expanded cntaminatin at a certain Daytn, Ohi, prperty frmerly leased by the Cmpany r the Cmpany's facilities at Memphis, Tennessee; Valdsta, Gergia; Detrit, Michigan; and Tulsa, Oklahma, which wuld result in a material increase in remediatin expenditures; changes in federal, state and lcal laws and regulatins, especially envirnmental laws and regulatins, r in interpretatin f such; ptential increases in equipment, maintenance, perating r labr csts; management retentin and develpment; financial valuatin f intangible assets is substantially less than expected; terminatin f the Oak Ridge Cntracts as a result f ur lawsuit against Bechtel Jacbs r therwise; 16 the requirement t use internally generated funds fr purpses nt presently anticipated; inability t cntinue t be prfitable n an annualized basis; the inability f the Cmpany t maintain the listing f its Cmmn Stck n the NASDAQ; the determinatin that PFMI, PFSG, r PFO was respnsible fr a material amunt f remediatin at certain superfund sites; terminatins f cntracts with federal agencies r subcntracts invlving federal agencies, r reductin in amunt f waste delivered t the Cmpany under the cntracts r subcntracts; and determinatin that PFD is required t have a Title V air permit in cnnectin with its peratins, r is determined t have vilated envirnmental laws r regulatins in a material manner. The Cmpany undertakes n bligatins t update publicly any frward-lking statement, whether as a result f new infrmatin, future events r therwise. OVERVIEW We prvide services thrugh three reprtable perating segments. The Industrial

12 Waste Management Services segment ("Industrial segment") is engaged in n-site and ff-site treatment, strage, dispsal and prcessing f a wide variety f by-prducts and industrial, hazardus and nn-hazardus wastes, and with the recent acquisitins, added 24-hur emergency respnse, vacuum services and marine and industrial maintenance services. The segment perates and maintains facilities and businesses in the waste by-prduct brkerage, n-site treatment and stabilizatin, and ff-site blending, treatment and dispsal industries. The Nuclear Waste Management Services segment ("Nuclear segment") prvides treatment, strage, prcessing and dispsal services f mixed waste (waste cntaining bth hazardus and lw-level radiactive materials) and lw-level radiactive wastes, including research, develpment and n-site and ff-site waste remediatin. The presence f nuclear and lw-level radiactive cnstituents within the waste streams prcessed by this segment create different and unique peratinal, prcessing and permitting/licensing requirements frm thse cntained within the Industrial segment. Our Cnsulting Engineering Services segment ("Engineering segment") prvides a wide variety f envirnmental related cnsulting and engineering services t bth industry and gvernment. These services include versight management f envirnmental restratin prjects, air and sil sampling, cmpliance reprting, surface and subsurface water treatment design fr remval f pllutants, and varius cmpliance and training activities. The first quarter f 2006 reflected a revenue decrease f $312,000 r 1.5% frm the same perid f This decrease was primarily frm the Industrial segment, which saw a decrease f 15.9%. This was due t the lss f the hme imprvement chain cntract, in Nvember 2005, and the expiratin f a gvernment cntract in the spring f Hwever, due t the segment's fcus n mre prfitable waste streams and their effrt t cut csts, the Industrial segment grss prfit as a percentage f revenue increased t 21.6%, cmpared t 18.8% fr the first quarter f We cntinue t pursue beneficial cntracts and revenues, as well as, evaluating additinal cst savings. Partially ffsetting the decrease was an increase in the Nuclear segment's revenues f 11.6% ver the first quarter f We are attempting t cntinue the grwth f ur Nuclear segment by amng ther things, expansin within the mixed waste market, as well as ur receipts f mre cmplex waste. We cntinue t see grwth, as demnstrated by the cntract we received fr $9.4 millin during the first quarter f 2006 fr new mixed waste streams nt previusly handled by ur Nuclear segment. We recgnized apprximately $187,000 in revenue frm this cntract during March We are further hpeful that the receipt recently by ur Nuclear segment f a certificatin t dispse f certain types f nuclear related waste at the Nevada Test Site will assist in the grwth f ur Nuclear segment. Our interest expense and interest expense - financing fees cntinue t decrease as ur peratins and cash flw imprve and we are able t reduce ur lng term debt. Our cmbined effrts t imprve margins and cut csts resulted in ur experiencing recrd incme frm cntinuing peratins fr the first quarter f 2006, f $1,128,000, which is generally ur weakest perid during the year. 17 RESULTS OF OPERATIONS The reprting f financial results and pertinent discussins are tailred t three reprtable segments: Industrial, Nuclear and Engineering. The table belw shuld be used when reviewing management's discussin and analysis fr the three mnths ended March 31, 2006 and 2005: <TABLE> <CAPTION> Three Mnths Ended March 31, Cnslidated (amunts in thusands) 2006 % 2005 % <S> <C> <C> <C> <C> Net Revenues $ 21, $ 21, Cst f gd sld 14, , Grss Prfit 6, , Selling, general and administrative 5, , Gain n dispsal f prperty and equipment Incme frm peratins $ 1, $ ======== ====== ======== ====== Interest expense (357) (1.7) (412) (1.9) Interest expense-financing fees (49) (.2) (111) (.5) Other (13) (.1) (28) (.1) Incme frm cntinuing peratins 1, Preferred Stck dividends (31) (.1) </TABLE> SUMMARY - THREE MONTHS ENDED MARCH 31, 2006 AND 2005 Net Revenue Cnslidated revenues increased fr the three mnths ended March 31, 2006, cmpared t the three mnths ended March 31, 2005, as fllws: <TABLE> <CAPTION> % % (In thusands) 2006 Revenue 2005 Revenue Change % Change <S> <C> <C> <C> <C> <C> <C> Nuclear Gvernment waste $ 5, $ 5, $ (161) (3.1) Hazardus/Nn-hazardus , (751) (48.4) Other nuclear waste 4, , , Bechtel Jacbs 2, ,

13 Bechtel Jacbs 2, , Ttal 12, , , Industrial Revenues Cmmercial waste 7, , (920) (10.9) Gvernment services , (629) (47.7) Ttal 8, , (1,549) (15.9) Engineering (25) (3.3) Ttal $ 21, $ 21, $ (312) (1.5) ======== ======== ======== ======== ======== </TABLE> The Nuclear segment realized revenue grwth fr the three mnths ended March 31, 2006 ver the same perid in The increase is principally due t the segments cntinued expansin within the mixed waste market, which includes an increase in receipts f higher activity waste liquids, a mre cmplex and difficult waste stream, that requires greater technical expertise. Our revenues frm Bechtel Jacbs increased slightly as a result f ur cntinued effrts t prcess the backlg f their waste, and assist them in cmpleting their milestnes. The Nuclear segment experienced a decrease in their hazardus and nn-hazardus revenues due t the cmpletin in 2005 f a special event sil prject perfrmed fr existing industrial custmers. The segment additinally experienced a slight decrease in gvernment waste revenues, as they fcused n ther prjects. The backlg f stred waste at March 31, 2006, was 18 $13,640,000 cmpared t $16,374,000 at December 31, This decrease reflects ur effrts t prcess and dispse f the increased waste receipts during the last quarter f We expect backlg levels t cntinue t fluctuate within the same range thrughut 2006, subject t the cmplexity f the waste streams and timing f receipts and prcessing f materials. This level f backlg material cntinues t psitin the Nuclear segment well, frm a prcessing revenue perspective. The Industrial segment experienced a decrease in revenues fr the quarter partially as a result f the lss f ur cntract with a natinal hme imprvement chain in Nvember The segment culd see cntinued reductin in revenue in 2006 as the segment wrks t replace the lss f the retail custmer with ther surces f revenue. The Industrial segment als saw a decrease in revenue frm gvernment services due t the expiratin f ne f ur gvernment cntracts, in the spring f 2005, and the rebid and subsequent lwer revenues related t anther gvernment cntract. The Engineering segment experienced a small decrease in revenue during the first quarter f 2006, as a result f the cmpletin f certain special prjects during the first quarter f Cst f Gds Sld Cst f gds sld decreased fr the quarter ended March 31, 2006, cmpared t the quarter ended March 31, 2005, as fllws: % % (In thusands) 2006 Revenue 2005 Revenue Change Nuclear $ 7, $ 7, $ (13) Industrial 6, , (1,490) Engineering (102) Ttal $ 14, $ 15, $ (1,605) ======== ======== ======== ======== ======== We saw a decrease in cst f gds sld thrughut all segments, as we fcus t streamline csts. The Nuclear segment shwed a slight decrease in cst f gds sld despite the segment's increased revenue. This is a result f the segment undertaking waste streams that are mre cmplex in nature and have higher radiactivity levels which cntain greater prcessing risk and the ptential fr higher margins. This reductin is evidence f the segment's success in its effrts t prcess these mre cmplex waste streams. The decrease in the Industrial segment is partially a result f the decrease in revenue, but is als reflective f varius changes made during the quarter t streamline peratins t perate mre reginally, thus cutting transprtatin csts and ther related expenses. Additinally, we made specific effrts t reduce csts within the segment and fcus n mre prfitable waste streams. The Engineering segment saw a decrease in their cst f gds sld as a result f lwer direct bill staffing levels during the first quarter f 2006 as cmpared t the same perid in Included within cst f gds sld is depreciatin and amrtizatin expense f $1,109,000 and $1,096,000 fr the three mnths ended March 31, 2006, and 2005, respectively. Grss Prfit Grss prfit fr the quarter ended March 31, 2006, increased ver 2005, as fllws: % % (In thusands) 2006 Revenue 2005 Revenue Change Nuclear $ 4, $ 3, $ 1,275 Industrial 1, , (59) Engineering Ttal $ 6, $ 5, $ 1,293 ======== ======== ======== ======== ======== The resulting increase in grss prfit in the Nuclear segment is partially a result f the increased revenue fr the quarter as cmpared t Additinally, the grss prfit as a percentage f revenue increased,