Diversified Scientific Services, Inc.
Financial Statements
as of December 31, 1997, 1998 and 1999
Together With Report of Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Diversified Scientific Services, Inc.:
We have audited the accompanying balance sheets of DIVERSIFIED
SCIENTIFIC SERVICES, INC. (a wholly-owned subsidiary of Waste
Management, Inc. and a Tennessee corporation) as of December 31,
1998 and 1999, and the related statements of operations,
stockholder's deficit and cash flows for each of the periods in
the three years ended December 31, 1999. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Diversified Scientific Services, Inc. (a wholly-owned
subsidiary of Waste Management, Inc.) as of December 31, 1998 and
1999, and the results of its operations and its cash flows for
each of the periods in the three years ended December 31, 1999 in
conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Nashville, Tennessee
August 16, 2000
DIVERSIFIED SCIENTIFIC SERVICES, INC.
(a wholly-owned subsidiary of Waste Management, Inc.)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS 1998 1999
______________________________________________ ___________ ___________
CURRENT ASSETS:
Cash $ 16,187 $ 3,848
Accounts receivable, net 2,282,100 4,603,943
Inventories and supplies 436,505 457,830
Prepaid expenses 52,275 23,224
__________ __________
Total current assets 2,787,067 5,088,845
__________ __________
PROPERTY, PLANT AND EQUIPMENT, Net 1,734,375 1,829,228
Total assets $ 4,521,442 $ 6,918,073
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
_________________________________________________
CURRENT LIABILITIES:
Accounts payable $ 680,506 $ 424,742
Accrued payroll 84,883 127,493
Accrued transportation 1,013,182 1,390,063
Other accrued liabilities 686,737 1,281,387
__________ __________
Total current liabilities 2,465,308 3,223,685
__________ __________
LONG-TERM CLOSURE RESERVE 916,000 1,100,000
PAYABLE TO PARENT 19,400,628 18,264,584
__________ __________
Total liabilities 22,781,936 22,588,269
__________ __________
STOCKHOLDER'S DEFICIT:
Common Stock, no par value; 2,000,000 shares
authorized, 1,800,000 shares issued and
outstanding - -
Paid-in capital 8,845,590 8,845,590
Accumulated deficit (27,106,084) (24,515,786)
____________ ____________
Total stockholder's deficit (18,260,494) (15,670,196)
___________ ____________
Total liabilities and stockholder's deficit $ 4,521,442 $ 6,918,073
=========== ============
The accompanying notes to financial statements are an integral
part of these statements.
DIVERSIFIED SCIENTIFIC SERVICES, INC.
(a wholly-owned subsidiary of Waste Management, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
____________ ____________ ____________
REVENUES $ 8,056,073 $ 9,503,337 $ 10,128,971
OPERATING EXPENSES 9,601,759 6,916,483 7,301,024
IMPAIRMENT CHARGE 24,472,650 - -
MANAGEMENT FEES 834,778 773,111 237,649
____________ ___________ ___________
INCOME (LOSS) BEFORE TAXES (26,853,114) 1,813,743 2,590,298
INCOME TAX PROVISION - - -
____________ ___________ ____________
NET INCOME (LOSS) $(26,853,114) $ 1,813,743 $ 2,590,298
============ =========== ============
The accompanying notes to financial statements are an integral
part of these statements.
DIVERSIFIED SCIENTIFIC SERVICES, INC.
(a wholly-owned subsidiary of Waste Management, Inc.)
STATEMENTS OF STOCKHOLDER'S DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Common Stock Total
________________________ Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Deficit
_________ __________ ___________ _____________ ____________
BALANCE, December 31, 1996 1,800,000 $ - $ 8,845,590 $ (2,066,713) $ 6,778,877
Net loss - - - (26,853,114) (26,853,114)
_________ _________ ___________ ____________ ____________
BALANCE, December 31, 1997 1,800,000 - 8,845,590 (28,919,827) (20,074,237)
Net income - - - 1,813,743 1,813,743
_________ _________ ___________ ____________ ___________
BALANCE, December 31, 1998 1,800,000 - 8,845,590 (27,106,084) (18,260,494)
Net income - - - 2,590,298 2,590,298
_________ _________ ___________ ____________ ____________
BALANCE, December 31, 1999 1,800,000 $ - $ 8,845,590 $(24,515,786) $(15,670,196)
========= ========= =========== ============= ============
The accompanying notes to financial statements are an integral
part of these statements.
DIVERSIFIED SCIENTIFIC SERVICES, INC.
(a wholly-owned subsidiary of Waste Management, Inc.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
_____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(26,853,114) $ 1,813,743 $ 2,590,298
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,821,758 729,991 163,268
Impairment charge 24,472,650 - -
Change in assets and liabilities:
Decrease/(increase) in accounts
receivable 3,205,217 (1,020,521) (2,321,843)
Increase in inventories and supplies (61,987) (70,306) (21,325)
Increase/(decrease) in prepaid expenses 31,720 (36,237) 29,051
Increase/(decrease) in accounts payable 528,214 (323,831) (255,764)
Increase/(decrease) in accrued payroll (44,533) 38,092 42,610
Increase/(decrease) in accrued
transportation (370,841) (102,575) 376,881
Increase/(decrease) in other accrued
liabilities (599,637) 137,974 594,650
Increase in long-term closure reserve 184,000 184,000 184,000
____________ ___________ __________
Net cash provided by operating
activities 3,313,447 1,350,330 1,381,826
____________ ___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of dispositions 786,604 (466,085) (258,121)
___________ ___________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in payable to Parent (4,097,051) (871,058) (1,136,044)
____________ ___________ ___________
NET INCREASE (DECREASE) IN CASH 3,000 13,187 (12,339)
CASH, beginning of year - 3,000 16,187
____________ ___________ __________
CASH, end of year $ 3,000 $ 16,187 $ 3,848
============ =========== ==========
SUPPLEMENTARY INFORMATION:
Cash paid for interest, net of amount capitalized $ - $ - $ -
============ =========== ===========
Cash paid for income taxes $ - $ - $ -
============ =========== ===========
The accompanying notes to financial statements are an integral
part of these statements.
DIVERSIFIED SCIENTIFIC SERVICES, INC.
(a wholly-owned subsidiary of Waste Management, Inc.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Diversified Scientific Services, Inc. ("DSSI" and the
"Company") is a wholly-owned subsidiary of Waste Management,
Inc. (the "Parent") and a C Corporation. The Company has
historically been dependent on the Parent to fund its
operations and provide accounting and operations support.
The Company operates a licensed boiler facility for the
treatment of both liquid radioactive only waste and liquid
mixed waste (as defined by the Resource Conservation and
Recovery Act ("RCRA") and the Atomic Energy Act ("AEA") and
their amendments, respectively). The residue resulting from
the treatment process is considered Company generated waste
and is disposed of by the Company at an appropriately
licensed and permitted third-party disposal facility.
Revenue Recognition
Revenue, along with the related costs of treatment, disposal and
transportation, is recorded at the time of acceptance of waste at
the Company's treatment facility. The Company generally grants
credit to customers on an unsecured basis. Accounts receivable
represent receivables from customers in the ordinary course of
business. The Company is subject to losses from uncollectible
receivables in excess of its allowances. The Company's
management believes that all appropriate allowances have been
provided.
Inventories and Supplies
Inventories and supplies consist primarily of solvent, oil,
supplies and spare parts which are valued at the lower of
cost or market, determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at the lower of
estimated realizable value or cost. Depreciation is
provided using principally the straight-line method over the
estimated useful lives of the related assets as follows:
buildings and improvements, 15 to 30 years; computers and
equipment, 3 to 5 years; furniture and fixtures 3 to 5
years; and vehicles, 3 to 4 years.
Expenditures for maintenance and repairs are generally charged to
expense as incurred, whereas expenditures for improvements and
replacements are capitalized.
The cost and accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and the resulting gain
or loss is reflected in the consolidated statements of
operations.
-2-
Accrued Transportation Costs
Accrued transportation costs represent accruals for
estimated costs associated with the transportation and
disposal of waste after processing at the Company's
treatment facility. The Company's treatment process
results primarily in the accumulation of treated waste in
the form of ash which can be transported to and disposed of
at existing independent waste disposal/storage facilities.
The Company estimates the transportation and disposal costs
for ash using actual levels of unprocessed and processed
waste on hand and historical actual costs for transportation
and disposal.
The Company's treatment process also results in the
accumulation of certain legacy wastes, such as Chlorine 36,
spent carbon and vermiculite, for which no regulatory
approved treatment or storage process is currently
available. The Company's estimate of the ultimate costs
that will be incurred to transport and dispose of such
legacy wastes is based on management's estimates, and as
such, is subject to adjustment as regulatory approved
treatments and storage processes become available. As of
December 31, 1998 and 1999, approximately $544,000 and
$675,000, respectively, of the reserve for accrued
transportation costs related to management's estimates of
the costs to treat and store such legacy wastes.
Accrued Closure Costs
Accrued closure costs represent accruals for the estimated
costs associated with the closure and remediation of its
waste processing and treatment facility. Based on the
current market and projections for the demand of future
waste processing, the Company estimates it will operate at
its facility for at least the next 18 years. Accordingly,
the Company is accruing for such costs plus an amount for
inflation over such period. Management is unable to
estimate the effects of change in technology, future
increases in treatment and burial rates and the timing of
closure and remediation activities on the estimated closure
and remediation costs. Uncertainties related to any of
these factors could have a significant impact on the
Company's estimated closure costs. Management updates the
closure costs on an annual basis. Changes in estimated
closure costs are recognized over the remaining facility
life.
Income Taxes
The Company is included in the consolidated income tax return of
its Parent. Under this intercompany tax sharing arrangement, the
Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes",
("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the fiscal years in which those
temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on the deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
-3-
Long-Lived Assets and Impairment Charge
In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets", management evaluates long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Management utilizes estimated
undiscounted future cash flows to determine when an
impairment exists. When this analysis indicates an
impairment exists, the amount of loss is determined based
upon a comparison of estimated fair value with the net book
value of the asset. Estimated fair value is based upon the
present value of estimated future cash flows or other
objective criteria.
In 1997, the Company's and its Parent's evaluation of
goodwill and other non-current assets indicated an
impairment of approximately $24,473,000 which was charged to
expense in the 1997 statement of operations. As a result of
the review, all of the Company's intangible assets (totaling
$11,244,000 and comprised primarily of goodwill and other
intangibles) were reduced to an estimated fair value of zero
and the Company's property, plant and equipment was reduced
from a net book value of $14,414,000 to an estimated fair
value of $1,998,000. The estimated fair values were
determined using future cash flow projections discounted
back using discount rates which management and the Parent
considered appropriate for the risks involved with the
specific assets.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Recent Accounting Pronouncements
Effective May 16, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements.
Comprehensive income encompasses all changes in stockholder's
equity (except those arising from transactions with owners) and
includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation
adjustments. Adoption of this pronouncement has not had a
material impact on the Company's results of operations, as
comprehensive income (loss) for 1997, 1998 and 1999 was the same
as net income (loss) for the Company.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", effective, as amended, for fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires all derivatives to be
recognized in the statement of financial position and to be
measured at fair value. The Company anticipates adopting the
provisions of SFAS No. 133 effective January 1, 2001. Such
adoption is not expected to have a material effect on the
Company's results of operations or financial position.
-4-
In December 1999, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" ("SAB 101"). SAB 101 summarizes the SEC staff's
views in applying generally accepted accounting principles to
revenue recognition in the financial statements of public
companies. The Company will be required to adopt the provisions
of SAB 101 in the quarter ending December 31, 2000. Management
is in the process of determining the impact, if any, such
adoption will have on the Company's financial statements.
2. RECEIVABLES
Receivables at December 31, 1998 and 1999 are composed of
the following:
1998 1999
___________ ___________
Trade accounts $ 752,818 $ 3,151,322
Unbilled trade 1,589,282 1,512,621
____________ ___________
2,342,100 4,663,943
Less allowance for doubtful accounts (60,000) (60,000)
____________ ___________
Net receivables $ 2,282,100 $ 4,603,943
============ ===========
3. PROPERTY, PLANT AND EQUIPMENT
1998 1999
___________ ___________
Land, buildings and improvements $ 1,879,641 $ 1,870,747
Construction in progress 250,138 425,498
Computers and equipment 246,319 246,319
Furniture and fixtures 66,248 66,248
Vehicles 32,173 32,173
___________ __________
2,474,519 2,640,985
Less accumulated depreciation (740,144) (811,757)
___________ __________
$ 1,734,375 $ 1,829,228
=========== ===========
4. INCOME TAXES
Under its tax sharing arrangement with the Parent, the Company
has recorded the following deferred tax assets and liabilities as
of December 31, 1998 and 1999:
1998 1999
___________ __________
Asset reserves $ 93,600 $ 93,600
Liabilities not yet deductible for
income tax purposes 357,240 429,000
Excess of tax over book depreciation (4,418,734) (5,122,824)
Asset basis differences 7,051,158 7,051,158
___________ ___________
3,083,264 2,450,934
Valuation allowance (3,083,264) (2,450,934)
___________ ___________
$ - $ -
=========== ===========
-5-
FAS 109 requires the Company to record a valuation allowance when
it is "more likely than not that some portion or all of the
deferred tax assets will not be realized." It further states
that "forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as
cumulative losses in recent years." On a standalone basis, the
ultimate realization of the deferred income tax asset presented
above depends on the Company's ability to generate sufficient
taxable income in the future. Through December 31, 1999, the
Company has generated cumulative net operating losses for federal
and state income tax purposes which have been utilized by the
Parent in its consolidated return. Accordingly, the Company has
provided a valuation allowance at December 31, 1998 and 1999. If
the Company achieves sufficient profitability to use all of the
deferred income tax asset, the valuation allowance will be
reduced through a credit to expense (increasing stockholder's
equity). On the other hand, if the Company is unable to generate
sufficient taxable income in the future through operating results
or tax planning opportunities, increases in the valuation
allowance will be required through a charge to expense (reducing
stockholder's equity).
5. RELATED PARTY TRANSACTIONS AND PAYABLE TO PARENT
The Parent and its subsidiaries perform certain of the Company's
accounting functions including the processing of payroll,
recording of accounts payable, processing of cash disbursements,
accounting for fixed assets, the allocating of income taxes and
financial reporting and consolidation. The Company is covered by
insurance maintained by the Parent and pays its pro rata share of
premiums to the Parent. In exchange for these financial and
support services the Parent and its subsidiaries charge a
management fee to DSSI.
The payable to Parent represents funds advanced to the Company by
the Parent to finance its operations as well as amounts charged
to the Company for administrative and support services provided
by the Parent. The Company has historically been dependent on the
Parent to fund its operations and provide accounting and
operations support. The Parent has represented that it will not
require payment of amounts due to it during 2000. Accordingly,
the payable to Parent at December 31, 1999, has been classified
as long-term in the accompanying balance sheet.
6. BENEFIT PLANS
Employees of the Company are eligible to participate in the 401k
plan of the Parent after they have been employed for 90 days.
The 401k plan is funded by elective employee contributions of up
to 15% of their eligible compensation. The Company matches 100%
of employee contributions up to 3% and matches 50% of the next 3%
of employee contributions. All contributions are immediately
vested. The Company's expense under the 401k plan consists of
Company matching contributions and totaled $42,473 for 1999.
Employees of the Company are also eligible to participate in the
Parent's employee stock purchase plan under which they may
contribute up to 10% of their compensation to purchase stock of
the Parent at a 15% discount off of market price.
-6-
7. COMMITMENTS AND CONTINGENCIES
Hazardous Waste
In connection with waste management services, the Company handles
both hazardous and non-hazardous waste which is transported to
third-party facilities for destruction or disposal. As a result
of disposing of hazardous substances, in the event any cleanup is
required, the Company could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault
on its part.
Permits
The Company is subject to various regulatory requirements,
including the procurement of requisite licenses and permits at
its facilities. These licenses and permits are subject to
periodic renewal without which the Company's operations would be
adversely affected. The Company anticipates that, once a license
or permit is issued with respect to a facility, the license or
permit will be renewed at the end of its term if the facility's
operations are in compliance with the applicable regulatory
requirements.
ACCRUED CLOSURE COSTS AND ENVIRONMENTAL LIABILITIES
In the course of owning and operating an on-site treatment,
storage and disposal facility, the Company is subject to
corrective action proceedings to restore soil and/or groundwater
to its original state. These activities are governed by federal,
state and local regulations. As discussed in Note 1, the Company
has recorded accrued liabilities for estimated closure costs and
identified remediation costs. The Company has a surety bond
guaranteed by the Parent to ensure funding for the closure
procedures.
OPERATING LEASES
The Company has a non-cancelable operating lease on a certain
building. The remaining future minimum annual rental commitments
on this operating lease for the next two years are approximately
$31,000 and $18,000. Rental expense for all operating leases
including month-to-month arrangements, was approximately $69,000,
$74,000 and $42,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
8. SUBSEQUENT EVENT
In May 2000, the Parent entered into an agreement with Perma-Fix
Environmental Services, Inc. ("Perma-Fix") under the terms of
which the Parent will sell the common stock of the Company and
extinguish the Company's liability under its Payable to Parent in
exchange for a purchase price to be paid by Perma-Fix of
approximately $8,500,000.