EX-99.1 3 0003.txt AUDITED FINANCIAL STATEMENTS 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.