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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MARCH 28, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 0-16379
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CLEAN HARBORS, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 04-2997780
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1501 WASHINGTON STREET, 02184-7535
BRAINTREE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (781) 849-1800 EXT. 4454
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
On March 15, 2000, the aggregate market value of the voting stock of the
registrant held by nonaffiliates of the registrant was $21,834,326. Reference is
made to Part III of this report for the assumptions on which this calculation is
based.
On March 15, 2000, there were outstanding 10,978,144 shares of Common Stock,
$.01 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement for its 2000
annual meeting of stockholders (which is expected to be filed with the
Commission not later than April 30, 2000) are incorporated by reference into
part III of this report.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements, which are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "plans to," "estimates,"
"projects," or similar expressions. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in the fiscal year
2000.
PART I
ITEM 1. BUSINESS
Clean Harbors, Inc., through its subsidiaries (collectively, the "Company"),
operates in one industry segment providing a wide range of hazardous waste
management services to a diversified customer base in the United States and
Puerto Rico. The Company is managed on a regional basis, with a full range of
services being offered in the Northeast, Mid-Atlantic and Midwest regions, and
has a strong presence in the Western region. The Company has a network of sales
and regional logistics offices and service centers located in 27 states and
Puerto Rico. The service centers interface with customers, and perform a variety
of environmental remediation and hazardous waste management activities. The
Company has 12 waste management facilities, which are managed separately from
the regions, that transport, store, treat and dispose of waste. The Company also
provides analytical testing, technical, and consulting and information
management services, which complement its primary services and permit it to
offer complete solutions to its customers' complex environmental requirements.
The Company is one of the largest providers of industrial waste management
services in the United States. The Company has three major competitors, namely,
ONYX-North America (the waste management subsidiary of the Paris-based Vivendi),
Philip Services Corp. and Safety-Kleen Corp. The Company also competes against
regional waste management firms and a number of smaller companies. The Company
seeks to be recognized by customers as the premier supplier of a broad range of
value-added industrial waste management services based upon quality,
responsiveness, customer service, information technologies, breadth of product
offerings and cost effectiveness. The Company's principal customers are utility,
chemical, petroleum, pharmaceutical, transportation and industrial firms,
educational institutions, other waste management companies and government
agencies.
The Company's earnings were adversely affected by continued poor conditions
in the hazardous waste disposal industry. Intense price competition, waste
minimization by industrial firms and unpredictable event business all
contributed to weakness across all segments of the hazardous waste disposal
industry. The Company responded to industry conditions by implementing business
process review programs, expanding the network of service centers and by
enhancing revenue through increasing market share.
As part of its commitment to employee safety and quality customer service,
the Company has an extensive compliance program and a trained environmental,
health and safety staff. The Company adheres to a risk management program
designed to reduce potential liabilities for the Company and its customers.
The Company was incorporated in Massachusetts in 1980. The principal offices
of the Company are located in Braintree, Massachusetts.
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BUSINESS STRATEGY
The Company's strategy is to develop and maintain an ongoing relationship
with a diversified group of customers who have recurring needs for treatment and
disposal services, site services, analytical services, and information
technologies and training in managing their overall environmental program. In
order to maintain and enhance its position in the industrial waste management
industry within the core markets in which it operates, the Company strives to
achieve internal growth through expanding the network of service centers within
the primary regions in which it operates, penetrating the industrial maintenance
services market, increasing utilization of existing facilities by increasing
volumes of waste processed, developing new waste management services, providing
consulting and information management services, capitalizing on industry
consolidation and providing e-commerce solutions. In addition, the Company has
achieved external growth through strategic acquisitions.
EXPANDED NETWORK OF SERVICE CENTERS. The Company currently has 33 service
centers, 6 of which were opened in 1999. By opening additional service centers
within or contiguous to the regions in which it operates, the Company believes
that it can, with minimal expenditure of funds, increase its market share. The
additional waste that is generated within its territory can be sent to existing
waste processing facilities.
PENETRATING THE INDUSTRIAL MAINTENANCE SERVICES MARKET. In the second
quarter of 1999, the Company added to its service offerings industrial cleaning
and maintenance. The Company expanded this business to three locations in 1999.
The Company believes that industrial maintenance services offer significant
opportunities for growth for the Company because of the multi-billion dollar
size of the market and the Company's small current penetration of this market.
The expansion in industrial maintenance services leverages the Company's
hazardous waste disposal assets because hazardous wastes are often removed in
the cleaning process.
IMPROVED UTILIZATION OF WASTE MANAGEMENT FACILITIES. The Company currently
has 12 waste management facilities which represent a substantial investment in
permits, plants and equipment. This network of facilities provides the Company
with significant operating leverage. There are opportunities to expand waste
handling capacity at these facilities by modifying the terms of the existing
permits and by adding capital equipment and new technology. Through selected
permit modifications, the Company can expand the range of treatment services
which it offers to its customers without the large capital investment necessary
to acquire or build new waste management facilities.
NEW WASTE MANAGEMENT SERVICES. Industrial waste generators are demanding
alternatives to traditional waste disposal methods in order to increase
recycling and reclamation and to minimize the end disposal of hazardous waste.
The Company utilizes its technological expertise and innovation to improve and
expand the range of services which it offers to its customers, and to develop
less expensive methods of disposing of hazardous waste.
CONSULTING AND INFORMATION MANAGEMENT SERVICES. In 1998, the Company
created a subsidiary, Harbor Management Consultants, Inc. ("Harbor Management")
to provide consulting services and environmental information management systems
to a broad array of customers throughout the United States. The Company believes
that there is an opportunity to bring additional value to the environmental
departments of generators of hazardous waste by providing the expertise required
to streamline their environmental programs. Harbor Management provides software
development, systems integration, consulting and onsite management services.
CAPITALIZATION ON INDUSTRY CONSOLIDATION. The Company believes that its
large industrial customers are increasingly requiring a comprehensive range of
waste treatment capabilities, site services, industrial maintenance services,
emergency response services and waste consulting and information management
services to be provided by a select number of service providers. This trend
should place smaller operators at a competitive disadvantage due to their size
and limited financial resources. To respond to its customers'
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needs, the Company has increased the range of waste management services it
offers and is following a strategy of acquiring companies in existing,
contiguous and new market areas. Acquisitions within the Company's existing
areas of operation serve to capture incremental market share, while geographic
expansion creates new market opportunities. The Company continues to evaluate
other business opportunities in order to enhance service to its existing
customer base and expand its customer base.
E-COMMERCE. In 1999, the Company enhanced its internet functionality to
provide order fulfillment, waste profiling and transportation scheduling. The
Company believes that its e-commerce capabilities are superior to those of its
competitors in the hazardous waste industry and that increasing the percentage
of transactions that utilize e-commerce will result in lower costs of services.
ACQUISITIONS
The Company has completed two acquisitions since January 1, 1995.
DATE OF
ACQUISITION ACQUISITION PURCHASE PRICE
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1995 The assets of a newly constructed hazardous waste
incinerator located in Kimball, Nebraska $5.2 million
1999 The assets of the Texas Transportation and Brokerage
Divisions of American Ecology Environmental Services
Corporation $1.9 million
Prior to completing any acquisition, the Company strives to investigate the
current and contingent liabilities of the company or assets to be acquired,
including potential liabilities arising from noncompliance with environmental
laws by prior owners for which the Company, as a successor owner, might become
responsible. The Company also seeks to minimize the impact of potential
liabilities by obtaining indemnities and warranties from the sellers which may
be supported by deferring payment of or by escrowing a portion of the purchase
price. See "Legal Proceedings" below for a description of the indemnities which
the Company has received in connection with past acquisitions.
SERVICES PROVIDED BY THE COMPANY
SERVICES
The Company provides a wide range of hazardous waste management services.
The services provided can be discussed in five categories: treatment and
disposal of industrial wastes ("Treatment and Disposal"); site services provided
at customer sites ("Site Services"); specialized repackaging, treatment and
disposal services for laboratory chemicals and household hazardous wastes
("CleanPack" -Registered Trademark-); transportation for all forms of hazardous
wastes ("Transportation and Logistics Management, and Analytical Testing
Services"); and consulting, information management and training services
provided by Harbor Management Consultants ("Harbor Management"). Although they
are discussed separately to provide an understanding of the services offered,
Site Services, CleanPack-Registered Trademark-, and Transportation and Logistics
Management Services are typically provided from one service location. The
Company markets these services through its sales organizations and, in many
instances, services in one area of the business support or lead to work in other
service lines.
TREATMENT AND DISPOSAL
The Company transports, treats and disposes of industrial wastes for
commercial and industrial customers, health care providers, educational and
research organizations, other waste management companies and governmental
entities. The wastes handled include substances which are classified as
"hazardous" because of their corrosive, ignitable, infectious, reactive or toxic
properties, and other
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substances subject to federal and state environmental regulation. Waste types
processed or transferred in drums or bulk quantities include:
- flammables, combustibles and other organics;
- acids and caustics;
- cyanides and sulfides;
- solids and sludges;
- industrial wastewaters;
- items containing PCBs, such as utility transformers and electrical light
ballasts;
- medical waste;
- other regulated wastes; and
- nonhazardous industrial waste.
The Company receives a detailed waste profile sheet prepared by the customer
to document the nature of the customer's waste. A sample of the delivered waste
is tested to ensure that it conforms to the customer's waste profile record and
to select an appropriate method of treatment and disposal. Once the wastes are
characterized, compatible wastes are consolidated to achieve economies in
storage, handling, transportation and ultimate treatment and disposal. At the
time of acceptance of a customer's waste at the Company's facility, a unique
computer "bar code" identification label is assigned to each container of waste,
enabling the Company to use sophisticated computer systems to track and document
the status, location and disposition of the waste.
WASTEWATER TREATMENT. The Company's wastewater treatment operations involve
processing hazardous and nonhazardous wastes through the use of physical and
chemical treatment methods. The solid waste materials produced by these
wastewater processing operations are then disposed of off-site at facilities
owned and operated by unrelated businesses, while the treated effluent is
discharged to the local sewer system under permit.
The Company treats a broad range of industrial liquid and semi-liquid wastes
containing heavy metals, organics and suspended solids, including:
- acids and caustics;
- ammonias, sulfides and cyanides;
- heavy metals, ink wastes and plating solutions;
- landfill leachates and scrubber waters; and
- oily wastes and water soluble coolants.
Wastewater treatment can be economical as well as environmentally sound, by
combining different wastewaters in a "batching" process that reduces costs for
multiple waste stream disposal. For instance, acidic waste from one source can
be neutralized with alkaline from a second source to produce a neutral solution.
PHYSICAL TREATMENT. Physical treatment methods include distillation,
separation and stabilization. These methods are used to reduce the volume or
toxicity of waste material or to make it suitable for further treatment, reuse,
or disposal. Distillation uses either heat or vacuum to purify liquids for
resale. Separation utilizes techniques such as sedimentation, filtration,
flocculation and centrifugation to remove solid materials from liquids.
Stabilization refers to a category of waste treatment processes designed to
reduce contaminant mobility or solubility and convert waste to a more chemically
stable form. Stabilization
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technology includes many classes of immobilization systems and applications.
Stabilization is a frequent treatment method for metal-bearing wastes received
at several Company facilities, which treat the waste to meet specific federal
land disposal restrictions. After treatment, the waste is tested to confirm that
it has been rendered nonhazardous. It can then be sent to a nonhazardous waste
landfill, at significantly lower cost than disposal at a hazardous waste
landfill.
THERMAL TREATMENT. Thermal treatment refers to processes that use high
temperature combustion as the principal means of waste destruction. The
Company's state-of-the-art hazardous waste incinerator in Kimball, Nebraska,
uses a fluidized bed thermal oxidation unit for maximum destruction efficiency
of hazardous waste.
RESOURCE RECOVERY. Resource recovery involves the treatment of wastes using
various methods which effectively remove contaminants from the original material
to restore its fitness for its intended purpose and to reduce the volume of
waste requiring disposal. The Company operates treatment systems for the
reclamation and reuse of certain wastes, particularly solvent-based wastes
generated by industrial cleaning operations, metal finishing and other
manufacturing processes.
Spent solvents that can be recycled are processed through thin film
evaporators and other processing equipment and are distilled into usable
products. Upon recovery of these products, the Company either returns the
recovered solvents to the original generator or sells them to third parties.
Organic liquids and solids with sufficient heat value are blended to meet strict
specifications for use as supplemental fuels for cement kilns, industrial
furnaces and other high-efficiency boilers. The Company has installed fuels
blending equipment at its Chicago and Cincinnati plants to prepare these
supplemental fuels. The Company has established relationships with a number of
supplemental fuel users that are licensed to accept the blended fuel material.
Although the Company pays a fee to the users who accept this product, this
disposal method is substantially less costly than other disposal methods.
CLEAN EXTRACTION SYSTEM. The Clean Extraction System ("CES") is a hazardous
waste treatment system commercialized by the Company at its Baltimore facility,
which extracts organic compounds from industrial wastewater. CES removes organic
contaminants such as gasoline, acetone, methylene chloride, pesticides and other
chemicals from industrial wastewater known as "lean water." Lean water is
generated by firms such as oil companies, utilities, and manufacturers of
specialty chemicals and pharmaceuticals.
The CES process enables the Company to handle a broad range of complex,
difficult to treat organic and inorganic wastewaters which would otherwise be
sent to other companies for disposal. CES offers the Company's industrial
customers, such as chemical or pharmaceutical companies, an attractive recycling
alternative to incineration or deep well injection of their waste waters.
DISPOSAL. After treatment of industrial wastes at the Company's facilities,
the hazardous waste residues (such as sludges), which remain after such
treatment, are disposed of in facilities operated by third parties. The Company
also arranges for the disposal of its customers' hazardous wastes which cannot
be treated at Company-owned facilities. Wastes which cannot be disposed of in
the Nebraska hazardous waste incinerator are sent to other incinerators,
landfills, and disposal facilities operated by third parties. On occasion, a
customer's waste may be shipped directly to another disposal company, such as a
landfill or incinerator, if the size of the waste shipment or its
characteristics are such that the waste does not need to pass through one of the
Company's own waste management facilities. The Company has negotiated favorable
commercial terms with a number of disposal companies.
SITE SERVICES
The Company provides a wide range of environmental site services to maintain
industrial facilities and process equipment, as well as clean up or contain
actual or threatened releases of hazardous materials into the environment. These
services are provided primarily to large chemical, petroleum, transportation,
utility, industrial waste management companies and governmental agencies. The
Company's strategy is to
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identify, evaluate, and solve its customers' environmental problems, on a
planned or emergency basis, by providing a comprehensive interdisciplinary
response to the specific requirements of each project.
INDUSTRIAL MAINTENANCE. Many of the Company's customers have a recurring
need to clean equipment and facilities periodically in order to continue
operations, maintain and improve operating efficiencies of their plants, and
satisfy safety requirements. Industrial maintenance involves chemical cleaning,
hydroblasting, vacuuming, and other methods to remove deposits from process
equipment, such as paint booths and plating lines, and storage facilities for
material used in the manufacturing or production process, such as feedstocks,
chemicals, fuels, paints, oils, inks, metals and many other items. The Company's
service centers are equipped with special equipment, such as high volume pumps,
pressure washers, nonsparking and chemical resistant tools, and a variety of
personal protective equipment, to perform maintenance services quickly, usually
during "off periods" to minimize the customer's production downtime.
SURFACE REMEDIATION. Surface remediation projects arise in two principal
areas: the planned cleanup of hazardous waste sites and the cleanup of
accidental spills and discharges of hazardous materials, such as those resulting
from transportation and industrial accidents. In addition, some surface
remediation projects involve the cleanup and maintenance of industrial lagoons,
ponds and other surface impoundments on a recurring basis. In all of these
cases, an extremely broad range of hazardous substances may be encountered.
Surface remediation projects generally require considerable interaction
among technical and project management services. Following the selection of the
preferred remedial alternative, the project team identifies the processes and
equipment for cleanup. Simultaneously, the Company's health and safety staff
develops a site safety plan for the project. Remedial approaches usually include
physical removal, mechanical dewatering and stabilization, or encapsulation.
GROUNDWATER RESTORATION. The Company's groundwater restoration services
typically involve response to above ground spills, leaking underground tanks and
lines, hazardous waste landfills, and leaking surface impoundments. Groundwater
restoration efforts often require complex recovery systems, including recovery
drains or wells, air strippers, biodegradation or carbon filtration systems, and
containment barriers. These systems and technologies can be used individually or
in combination to remove a full range of floating or dissolved organic compounds
from groundwater. The Company designs and fabricates mobile or fixed site
groundwater treatment systems.
SITE AND FACILITY DECONTAMINATION. Site and facility decontamination
involves the cleanup and restoration of buildings, equipment, and other sites
and facilities that have been contaminated by exposure to hazardous materials
during a manufacturing process, or by fires, process malfunctions, spills or
other accidents. The Company's projects have included decontamination of
electrical generating stations, electrical and electronics components,
transformer vaults, and commercial, educational, industrial, laboratory,
research and manufacturing facilities.
EMERGENCY RESPONSE. The Company undertakes environmental remediation
projects on both a planned and emergency basis. Emergency response actions may
develop into planned remedial action projects when soil, groundwater, buildings
or facilities are extensively contaminated. The Company has established
specially trained emergency response teams which operate on a 24-hour basis from
their service centers. The Company has also established a program called
CleanER, which is a sub-contractor network responding to emergency response
actions. Many of the Company's remediation activities result from a response to
an emergency situation by one of its response teams. These incidents can result
from transportation accidents involving chemical substances, fires at chemical
facilities or hazardous waste sites, transformer fires or explosions involving
PCBs, and other unanticipated developments when the substances involved pose an
immediate threat to public health or the environment, such as possible
groundwater contamination.
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Emergency response projects require trained personnel, equipped with
protective gear and specialized equipment, prepared to respond promptly whenever
these situations occur. To meet the staffing requirements for emergency response
projects, the Company relies in part upon a network of trained personnel who are
available on a contract basis for specific project assignments. The Company's
health and safety specialists and other skilled personnel assist field managers
in supervising these projects during and subsequent to the cleanup. The steps
performed by the Company include rapid response, containment and control
procedures, analytical testing and assessment, neutralization and treatment,
collection, and transportation of the substances to an appropriate treatment or
disposal facility.
SITE REMEDIATION. The Company provides technical capabilities and
operational expertise to manage large-scale environmental projects. The
interdisciplinary teams of managers, geologists, chemists, engineers,
scientists, technicians, and compliance experts design and implement
solution-oriented remedial programs incorporating both off-site and on-site
treatment. The areas of expertise include:
- remedial investigations;
- remediation technologies: design, in-house fabrication, installation, and
operations and maintenance;
- decontamination and decommissioning operations;
- high hazard materials handling; and
- mobile treatment services.
CLEANPACK-REGISTERED TRADEMARK- SERVICES
The Company provides specialized handling, packaging, transportation and
disposal of laboratory quantities of outdated hazardous chemicals, household
hazardous wastes, and waste pesticides and herbicides.
CleanPack-Registered Trademark- chemists utilize the Company's CHOICE-TM- waste
management software system to support the Company's packaging services and
complete the regulatory information required for every pick-up. The
CleanPack-Registered Trademark- operation services a wide variety of customers
including:
- pharmaceutical companies;
- engineering, and research and development departments of industrial
companies;
- college, university and high school laboratories;
- commercial laboratories;
- hospital and medical care laboratories and Veterans Administration
facilities;
- state and local municipalities; and
- thousands of agri-businesses and residents through household hazardous
waste and pesticide/ herbicide collection programs.
CleanPack-Registered Trademark- chemists collect, identify, label, and
package waste into Department of Transportation approved containers. Lab packed
wastes are then transported to one of the Company's facilities where the waste
is consolidated for recycling, reclamation, fuels blending, aqueous treatment,
incineration or secure chemical landfill.
Other services provided by the Company's CleanPack-Registered Trademark-
operations include:
HIGH HAZARD SERVICES. Reactive Materials Technicians utilize specialized
equipment and training to stabilize and desensitize highly reactive and
potentially explosive chemicals.
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CUSTOMPACK-REGISTERED TRADEMARK- SERVICES. The Company provides training,
technical support, and disposal services for customers with the resources and
experience to package their own waste chemicals.
LABORATORY MOVE SERVICES. CleanPack-Registered Trademark- chemists properly
and safely segregate, package, transport, and un-package hazardous chemicals
being moved from older laboratories to newer laboratories.
TRANSPORTATION AND LOGISTICS MANAGEMENT, AND ANALYTICAL TESTING SERVICES
As an integral part of the Company's services, industrial wastes are
collected from customers and transported by the Company to and between its
facilities for treatment or bulking for shipment to final disposal locations.
Customers typically accumulate waste in containers, such as 55-gallon drums,
bulk storage tanks or 20-cubic yard roll-off boxes. In providing this service,
the Company utilizes a variety of specially designed and constructed tank trucks
and semi-trailers as well as third-party transporters, including railroads.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed, roll-off boxes
or bulk dump trailers. The Company's fleet is equipped with a mobile satellite
monitoring system and communications network which allows real-time
communication with the transportation fleet.
The Company operates a state-certified analytical testing laboratory at its
waste handling facility in Braintree, Massachusetts, which tests samples
provided by customers to identify and quantify toxic pollutants. The laboratory
staff evaluates the properties of a given material, selects appropriate
analytical methods and executes a laboratory work plan that results in a
comprehensive technical report. The Company also maintains laboratories at its
other principal waste management facilities to identify and characterize waste
materials prior to acceptance for treatment and disposal.
CONSULTING AND INFORMATION MANAGEMENT AND PERSONNEL TRAINING SERVICES
CONSULTING AND INFORMATION MANAGEMENT SERVICES. Harbor Management provides
customers with the expertise to streamline their environmental programs through
software development, systems integration, consulting and on-site management
services. The Company has developed a proprietary software product
CHOICE-Registered Trademark-, as an on-site software product that provides such
key features as: waste tracking, manifesting, waste profiling, labeling, least
cost procurement and cost allocation reporting. Customers can link their data
via the internet to the Company through CleanLink-Registered Trademark- web
enabled software. CHOICE-Registered Trademark- combined with
CleanLink-Registered Trademark- provides customers with a total information
package of inventory management, waste shipment and waste tracking information.
PERSONNEL TRAINING. The Company provides comprehensive personnel training
programs for its own employees and for its customers on a commercial basis. Such
programs are designed to promote safe work practices under potentially hazardous
conditions, whether or not toxic chemicals are present, in compliance with
stringent regulations promulgated under the Federal Resource Conservation and
Recovery Act of 1976 ("RCRA") and the Federal Occupational Safety and Health Act
("OSHA"). The Company's Technical Training Center includes confined space entry,
exit and extraction equipment, an air-system demonstration maze, respirator fit
testing room, leak and spill response equipment, and a layout of a mock
decontamination zone, all designed to fulfill the requirements of OSHA Hazardous
Waste and Emergency Response Standards.
SEASONALITY
The Company's operations may be affected by seasonal fluctuations due to
weather and budgetary cycles influencing the timing of customers' spending for
remedial activities. Typically during the first quarter of each year there is
less demand for environmental services due to the cold weather, particularly in
the Northeast and Midwest regions. In addition, factory closings for the
year-end holidays reduce the volume of industrial waste generated, which results
in lower volumes of waste handled by the Company during the first quarter of the
following year.
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CUSTOMERS
The Company's sales efforts are directed toward establishing and maintaining
relationships with businesses which have ongoing requirements for one or more of
the Company's services. The Company's customer list includes many of the largest
industrial companies in the United States. The Company's customers are primarily
chemical, pharmaceutical, petroleum, transportation, utility and industrial
firms, other waste management companies and government agencies. Management
believes that the Company's diverse customer base, in terms of number, industry
and geographic location, as well as its large presence in New England and the
Mid-Atlantic, provide it with a recurring revenue base. The Company estimates
that more than 81% of its revenues are derived from previously served customers
with recurring needs for the Company's services. For the years ended
December 31, 1999, 1998 and 1997, no single customer accounted for more than
five percent of the Company's revenues. The Company believes the loss of any
single customer would not have a material adverse effect on the Company's
financial condition or results of operations.
Although the Company's customer base is diverse, two industries each
provided over 10% of the Company's revenue in 1999. Approximately 20% of the
Company's revenues in 1999 were from the chemical, pharmaceutical and allied
products industry, while approximately 14% were from the electric, gas and
sanitary industry. In 1998, those same two industries each provided over 10% of
the Company's revenue, with approximately 23% of the Company's revenues in 1998
from the chemical and allied products industry and approximately 12% from the
electric, gas and sanitary industry. In addition to serving industrial customers
such as utilities, railroads, pipelines, pharmaceutical manufacturers, and
chemical companies, the Company serves health care and educational institutions,
federal, state and local governmental bodies, and thousands of small quantity
generators.
Under applicable environmental laws and regulations, generators of hazardous
wastes retain legal liability for the proper handling of those wastes up to and
including their ultimate disposal. In response to these potential concerns, many
large generators of industrial wastes and other purchasers of waste management
services (such as general contractors on major remediation projects) have
decreased the number of providers they use for such services. The Company has
been selected as an approved vendor by large generators because the Company
possesses comprehensive collection, recycling, treatment, transportation,
disposal, and waste tracking capabilities and has the expertise necessary to
comply with applicable environmental laws and regulations. By becoming an
approved vendor for a large waste generator or other purchaser, the Company
becomes eligible to provide waste management services to the multiple plants and
projects of each generator or purchaser located in the Company's service areas.
However, in order to obtain such approved vendor status, it may be necessary for
the Company to bid against other qualified competitors in terms of the services
and pricing to be provided. Furthermore, large generators or other purchasers of
waste management services often periodically audit the Company's facilities and
operations to ensure that the Company's waste management services are being
performed in compliance with applicable laws and regulations and other criteria
established by the Company and such customers.
COMPLIANCE/HEALTH & SAFETY
The Company regards compliance with applicable environmental regulations,
and the health and safety of its workforce as critical components of its overall
operations. The Company strives to maintain the highest professional standards
in its compliance, and health and safety activities; its internal operating
requirements are in many instances more stringent than those imposed by
regulation. The Company's compliance program has been developed for each of its
waste management facilities and service centers under the direction of the
Company's corporate staff. The compliance, and health and safety staffs are
responsible for facilities permitting and regulatory compliance, health and
safety, field safety, compliance training, transportation compliance, and
related record keeping. The Company also performs periodic audits and
inspections of the disposal facilities of other firms utilized by the Company.
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The Company's treatment, storage and recovery facilities are frequently
inspected and audited by regulatory agencies, as well as by customers. Although
the Company's facilities have been cited on occasion for regulatory violations,
the Company believes that each facility is currently in substantial compliance
with applicable requirements. Major facilities and service centers have a
full-time compliance, or health and safety representative to oversee the
implementation of the Company's compliance program at the facility or service
center. These highly trained regulatory specialists are independent from
operations and report to the Director of Regulatory Affairs or the Director of
Health and Safety, who in turn report to the General Counsel.
ENVIRONMENTAL LIABILITIES AND CAPITAL EXPENDITURES
The Company operates facilities that treat or store hazardous waste. Such
facilities must obtain a RCRA license from the EPA or an authorized state
agency, and must comply with certain operating requirements. The EPA has
developed a system for assessing the relative environmental clean-up priority of
RCRA facilities called the National Corrective Action Prioritization System,
with a High, Medium or Low ranking for each facility. None of the Company's RCRA
facilities has been assessed a high priority. The following table summarizes
non-reimbursed environmental remediation expenditures capitalized and expenses
incurred for the year ended December 31 (in thousands):
1999 1998 1997
-------- -------- --------
Environmental expenditures capitalized.................. $274 $674 $564
Environmental expenses incurred......................... 37 95 256
---- ---- ----
$311 $769 $820
==== ==== ====
Although further investigation may cause a change in estimate, the Company
expects remediation expenditures of the magnitude incurred for the last three
years to continue for the foreseeable future. The Company believes that
environmental cleanup can be financed out of results from operations and that
compliance with environmental laws will not adversely affect its competitive
position.
MANAGEMENT OF RISKS
The Company adheres to a program of risk management policies and practices
designed to reduce potential liability, as well as to manage customers' ongoing
environmental exposures. This program includes installation of risk management
systems at the Company's facilities, such as fire suppression, employee
training, environmental auditing and policy decisions restricting the types of
wastes handled. The Company evaluates all revenue opportunities and declines
those which it believes involve unacceptable risks.
The Company disposes of its wastes at the Company's Kimball incineration
facility, or at facilities owned and operated by firms which the Company has
audited and approved. Typically, the Company applies established technologies to
the treatment, storage and recovery of hazardous wastes. The Company believes
its operations are conducted in a safe and prudent manner and in substantial
compliance with applicable laws and regulations.
INSURANCE
The Company's insurance programs cover the potential risks associated with
its multifaceted operations from two primary exposures: direct physical damage
and third-party liability. The Company maintains a casualty insurance program
providing coverage for vehicles, workers' compensation, employer's liability,
and comprehensive general liability in the aggregate amount of $30,000,000 per
year, subject to a retention of $250,000 per occurrence, except for general
liability where the retention is $500,000 per occurrence. The workers'
compensation limits are established by state statutes. Since the early 1980s,
casualty insurance
10
policies have typically excluded liability for pollution, which is covered under
a separate pollution liability program.
The Company has pollution liability insurance policies covering the
Company's potential risk in three areas: as a contractor performing services at
customer sites, as a transporter of waste and as it handles waste at the
Company's facilities. The Company has contractor's liability insurance of
$10,000,000 per occurrence and $10,000,000 in the aggregate, covering off-site
remedial activities and associated liabilities. Lloyds of London provides
pollution liability coverage for waste in-transit with single occurrence and
aggregate liability limits of $29,000,000. This Lloyds of London policy covers
liability in excess of $1,000,000 for pollution caused by sudden and accidental
occurrences during transportation of waste, from the time waste is picked up
from a customer until its delivery to the final disposal site. The Company's
$30,000,000 excess automobile liability insurance provides additional coverage
for any in-transit pollution losses from accidents for a total of $59,000,000 of
in-transit coverage.
Federal and state regulations require liability insurance coverage for all
facilities that treat, store or dispose of hazardous waste. In 1989, the Company
established a captive insurance company pursuant to the Federal Risk Retention
Act of 1986. This company qualifies as a licensed insurance company and is
authorized to write professional liability and pollution liability insurance for
the Company and its operating subsidiaries. RCRA, the Toxic Substances Control
Act and comparable state hazardous waste regulations typically require hazardous
waste handling facilities to maintain pollution liability insurance in the
amount of $1,000,000 per occurrence and $2,000,000 in the aggregate per year for
sudden occurrences and $3,000,000 per occurrence and $6,000,000 in the aggregate
per year for non-sudden occurrences. Currently, the Company uses its captive
insurance company to provide (i) the first $1,000,000 of insurance against
liability from sudden and non-sudden occurrences at its facilities, with the
excess coverage provided by Lloyds of London for sudden occurrences, and
(ii) the full policy limits of $3,000,000 per occurrence, $6,000,000 aggregate,
of insurance for non-sudden occurrences.
Operators of hazardous waste handling facilities are also required by
federal and state regulations to provide financial assurance for closure and
post-closure care of those facilities, should the facilities cease operation.
Closure would include the cost of removing the waste stored at a facility which
ceased operating and sending the material to another company for disposal. The
Company has obtained surety bonds to provide such financial assurance for
closure of the waste management facilities it currently operates, with the
exceptions of the Kimball incinerator, and the lagoons and incinerator located
at the Chicago facility. The Kimball incinerator has closure and post-closure
insurance provided by a commercial insurer. Closure for the lagoons and
incinerator at the Chicago facility is provided by an insurance company owned by
the Company. This liability is fully funded.
The Company's ability to continue conducting its industrial waste management
operations could be adversely affected if the Company should become unable to
obtain sufficient insurance or surety bonds to meet its business and regulatory
requirements in the future. The availability of insurance may also be influenced
by developments within the insurance industry, although other businesses in the
industrial waste management industry would be similarly impacted by such
developments.
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures, as well as those risks required to be insured by law or
contract. It is the policy of the Company to retain a significant portion of
certain expected losses related primarily to workers' compensation,
comprehensive general and vehicle liability. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of the
aggregate liability for claims. The Company believes that policy cancellation
terms are similar to those of other companies in other industries.
COMPETITION
The Company competes with three major companies, namely, ONYX-North America
(the waste management subsidiary of the Paris-based Vivendi), Philip Services
Corp. and Safety-Kleen Corp. The
11
Company also competes against regional waste management firms and numerous small
companies. Each of these competitors is able to provide one or more of the
industrial waste management services offered by the Company, and some of which
have access to greater financial resources. The Company believes that it offers
a more comprehensive range of industrial waste management services than its
competitors in major portions of its service territory, that its ability to
provide comprehensive services supported by unique information technologies
capable of managing the customers' overall environmental program constitutes a
significant competitive advantage, and that its stable ownership allows the
Company to focus on building long-term relationships with its customers.
Treatment and disposal operations are conducted by a number of national and
regional waste management firms. The Company believes that the ability to
collect and transport waste products efficiently, quality of service, safety,
and pricing are the most significant factors in the market for treatment and
disposal services.
In site services, the Company's competitors include several major national
and regional environmental services firms, as well as numerous smaller local
firms. The Company believes that availability of skilled technical professional
personnel, quality of performance, diversity of services and price are the key
competitive factors in this service industry.
EMPLOYEES
As of March 15, 2000, the Company employed 1,225 people on a regular basis.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company believes that its relationship with its employees is
satisfactory.
ITEM 2. PROPERTIES
The properties of the Company consist primarily of its 12 waste management
facilities and 33 service centers, various environmental remediation equipment,
and a fleet of approximately 800 registered pieces of transportation equipment.
Most service center locations are leased, and occasionally move to other
locations as operations and space requirements change. All of the waste
management facilities are owned by the Company, except (i) the Chicago hazardous
waste management facility which is leased with terms (including extensions) that
expire September 2020, (ii) the Woburn, Massachusetts waste oil treatment and
storage facility which is leased with terms (including extensions) that expire
February 2013, and (iii) the Virginia waste oil treatment and storage facility
which is leased with terms (including extensions) that expire February 2002. In
connection with the placement of an industrial revenue bond in 1996, the Company
entered into a facilities lease with the City of Kimball, Nebraska, whereby the
City acquired a leasehold interest in the Kimball incinerator and the Company
leased the incinerator back from the City. The Company retains title to the
incinerator.
HAZARDOUS WASTE MANAGEMENT FACILITIES. The Company operates hazardous waste
management facilities at which it processes, treats and temporarily stores
hazardous wastes for later resale, reuse, or off-site treatment or disposal.
Every facility that treats, stores or disposes of hazardous wastes must obtain a
license from the federal EPA or an authorized state agency and must comply with
certain operating requirements. See "Environmental Regulation-Federal Regulation
of Hazardous Waste" below for a description of licenses issued under RCRA. All
of the Company's hazardous waste management facilities are subject to RCRA
licensing and have been issued RCRA Part B licenses, except for the Cleveland
facility, which is regulated under the Clean Water Act.
Two of the facilities described above are waste oil treatment and storage
facilities. Some petroleum products, such as gasoline, are considered hazardous
waste under federal law, and certain operations are located in states which
regulates waste oil as a hazardous waste. In order to handle a variety of waste
oil and petroleum products and support its site service activities in the
Northeast and Mid-Atlantic regions,
12
the Company has obtained a RCRA license for its Woburn, Massachusetts waste oil
facility. The Company's Virginia waste oil facility currently operates under
RCRA interim status.
The Company has made substantial modifications and improvements to the
physical plant, and treatment and process equipment in recent years at its
treatment facilities. These modifications are consistent with the Company's
strategy to upgrade the quality and efficiency of treatment services, to expand
the range of services provided, and to ensure regulatory compliance and
operating efficiencies at these facilities. Major features of this program are
the addition of new treatment systems, expansion of analytical testing
laboratories, drum storage and processing facilities, and equipment
rearrangement and replacement to improve operating efficiency. Further, the
Company believes that it can, with minor modifications at its plants, make
changes such that the existing plants would be able to process significantly
increased volumes of hazardous wastes and that no new facilities will be
required.
Chicago, IL. The Chicago, Illinois facility is located on the south side of
Chicago, on Lake Calumet. It provides treatment of nonhazardous and hazardous
industrial wastewaters, hazardous waste fuels blending, drummed waste processing
and consolidation, and transfer and repackaging of laboratory chemicals into lab
pack containers. In November 1993, the Illinois EPA issued a Part B license for
a ten-year term.
In November, 1995, the Company acquired assets from Chemical Waste
Management, Inc. ("ChemWaste") on an adjoining leased site, together with the
existing improvements, in exchange for sharing the costs of dismantling an
existing hazardous waste incinerator and cleaning up the adjoining site. The
existing improvements on the ChemWaste site, and other improvements completed
from 1995 through 1997 by the Company, have expanded the waste storage and
handling capabilities at the Chicago plant. Waste materials are shipped via rail
and truck to Chicago. The waste materials are either treated or processed for
transshipment in Chicago.
Under the sharing arrangement with ChemWaste, the Company could over a
period of 15 years be required to contribute up to a maximum of $2,000,000 for
dismantling and decontaminating the incinerator and other equipment, and up to a
maximum of $7,000,000 for studies and cleanup of the site. Any additional costs
beyond those contemplated by the sharing arrangement during this time period
would be borne by ChemWaste. The Company believes that it can appropriately
capitalize the expenditures in excess of amounts accrued that are required to
clean up the property. In addition, the Company entered into a five year
disposal services agreement with ChemWaste in connection with the acquisition of
the assets on the adjoining site. Pursuant to the terms of the disposal services
agreement, the Company has agreed to use best efforts to deliver waste materials
to ChemWaste facilities for disposal subject to certain customer preferences,
scheduling and other considerations.
Kimball, NE. In May 1995, the Company acquired a newly constructed hazardous
waste incinerator in Kimball, Nebraska from Ecova Corporation, an affiliate of
Amoco Oil Company. The Kimball facility includes a 45,000 ton-per-year fluidized
bed thermal oxidation unit for maximum destruction efficiency of hazardous
waste. The incinerator has a RCRA Part B license issued by the Nebraska
Department of Environmental Quality ("NDEQ") that was issued effective July 30,
1999 for a period of five years.
The incinerator is located on a 600 acre site, which includes a landfill for
disposal of incinerator ash. If the chemical composition of the ash meets permit
requirements, the ash can be classified as "delisted" and will no longer be
regulated as hazardous waste under federal and state laws. Although the ash will
be classified as nonhazardous, the landfill has been constructed to meet the
same stringent requirements as landfills designed to handle hazardous waste.
As part of the acquisition, the Company agreed to make royalty payments to
Ecova Corporation through 2004, based on the number of tons processed at the
facility.
Braintree, MA. The Braintree facility is located just south of Boston. The
facility is primarily engaged in drummed waste processing and consolidation,
solvent recovery, transformer decommissioning, PCB storage and processing,
blending of waste used as supplemental fuel by cement kilns or industrial
furnaces,
13
and pretreatment of waste to stabilize it before it is sent to landfills. The
facility was acquired by the Company in 1985 and operates under a state
Hazardous Waste Facility License issued by the Massachusetts Department of
Environmental Protection ("DEP") on January 13, 1999.
Natick, MA. The Natick, Massachusetts facility is located just west of
Boston. The facility is currently on standby. The facility has a state Hazardous
Waste Facility License (the state equivalent of a Part B license), which was
last issued in 1994 for a five year term. In January 2000, the Company submitted
a permit renewal application, which allows the facility to maintain its
hazardous waste management authority until a new license is issued. The facility
is also authorized by the federal EPA to handle PCBs.
Cleveland, OH. The Cleveland, Ohio facility is located south of downtown
Cleveland. It is a wastewater treatment facility that treats nonhazardous and
hazardous industrial wastewaters, and it serves as a transfer station for
various types of containerized hazardous and nonhazardous waste. The facility is
not subject to Part B licensing requirements, since its on-site wastewater
treatment activities are regulated pursuant to the Clean Water Act, and
therefore are exempt from RCRA.
Baltimore, MD. The Baltimore, Maryland facility is located in central
Baltimore. It provides treatment of nonhazardous and hazardous industrial
aqueous wastes, treatment of "lean waters" through the CES process, drummed
waste processing, waste stabilization, and transfer of lab pack containers. The
facility has a state Controlled Hazardous Substances permit (the state
equivalent of a Part B license), which was issued January 10, 2000 for a period
of five years. The permit also allows handling of material destined for fuels
blending and rail shipment of hazardous and nonhazardous waste.
Bristol, CT. The facility is located in Bristol, Connecticut, approximately
20 miles southwest of Hartford. It provides hazardous wastewater treatment,
drummed waste processing and consolidation, and transfer of lab pack containers.
This facility also provides treatment of special categories of hazardous
wastewaters known as "listed" wastewaters resulting from industrial processes
such as electroplating. The facility has a Part B license which was last issued
in 1995 for a five year term. In December 1999, the Company submitted a permit
renewal application, which allows the operations to continue until the renewal
application is approved.
Cincinnati, OH. The facility is located north of downtown Cincinnati, Ohio.
It provides hazardous wastewater treatment, drummed waste processing and
consolidation, pretreatment of waste to stabilize it before it is sent to
landfills, fuels blending, and transfer of lab pack containers. The facility is
also authorized to handle PCBs. The facility holds a state Hazardous Waste
Facility Installation and Operation permit (RCRA Part B) which was renewed in
December 1993 for a five-year term. A federal permit under the Hazardous and
Solid Waste Amendments to RCRA was issued in December 1996. In December 1998,
the Company submitted a permit application, which allows operations to continue
until the state issues the renewal permit.
WASTE OIL TREATMENT AND STORAGE FACILITIES. The Company has four waste oil
treatment and storage facilities: two in Massachusetts, one in Maine and one in
Virginia. The Massachusetts facilities are located in Kingston and Woburn, in
the Boston area. The Kingston facility has a state recycling permit and is able
to store oil collected from various activities, ranging from routine cleaning of
oil storage terminals to oil spill cleanups. The facility is also used for
maintenance activities, and for training of employees of the Company and
third-party customers. The Woburn facility is a waste oil storage and transfer
facility, which was issued a Part B license in October 1993 for a five-year
term. A renewal application was submitted to the state in November 1998, which
allows operations to continue until the renewal application is approved.
The facility in South Portland, Maine is a petroleum reclamation facility
that handles most of the waste oil received by the Company, which comes
primarily from the Company's remediation activities. It has a municipal sewer
user permit allowing the discharge of water separated from oil. The Company also
owns another property on Main Street in South Portland, which has a license to
store virgin oil, and it is also permitted for the temporary storage and
transfer of containerized hazardous waste.
14
The Virginia facility is located near Richmond and was acquired in
September 1994. The facility is able to store waste oil and
gasoline-contaminated hazardous wastes collected from various activities,
ranging from routine cleaning of oil storage terminals to oil spill cleanups.
The state has agreed that this facility is regulated under the Clean Water Act
and is, therefore, exempt from the requirement to obtain a RCRA Part B permit.
At this time the facility is proceeding with RCRA closure, and will subsequently
operate as an industrial wastewater treatment facility exempt from RCRA
permitting requirements.
ENVIRONMENTAL REGULATION
While the Company's business has benefited substantially from increased
governmental regulation of hazardous waste transportation, storage and disposal,
the industrial waste management industry itself has become the subject of
extensive and evolving regulation by federal, state and local authorities. The
Company is required to obtain federal, state and local licenses, or approvals
for each of its hazardous waste facilities. Such licenses are difficult to
obtain and, in many instances, extensive studies, tests, and public hearings are
required before the approvals can be issued. The Company has acquired all
operating licenses and approvals now required for the current operation of its
business, and has applied for or is in the process of applying for, all licenses
and approvals needed in connection with continued operation and planned
expansion or modifications of its operations.
The Company makes a continuing effort to anticipate regulatory, political
and legal developments that might affect its operations, but is not always able
to do so. The Company cannot predict the extent to which any environmental
legislation or regulation that may be enacted or enforced in the future may
affect its operations.
FEDERAL REGULATION OF HAZARDOUS WASTE
The most significant federal environmental laws affecting the Company are
RCRA, the Superfund Act and the Clean Water Act.
RCRA. RCRA is the principal federal statute governing hazardous waste
generation, treatment, transportation, storage and disposal. Pursuant to RCRA,
the EPA has established a comprehensive, "cradle-to-grave" system for the
management of a wide range of materials identified as hazardous waste. States
such as Massachusetts, Connecticut, Illinois, Maryland, Ohio and Nebraska, that
have adopted hazardous waste management programs with standards at least as
stringent as those promulgated by the EPA, have been authorized by the EPA to
administer their facility permitting programs in lieu of the EPA's program.
Every facility that treats, stores or disposes of hazardous waste must
obtain a RCRA permit from the EPA or an authorized state agency, and must comply
with certain operating requirements. Under RCRA, hazardous waste management
facilities in existence on November 19, 1980 were required to submit a
preliminary license application to the EPA, the so-called Part A Application. By
virtue of this filing, a facility obtained interim status, allowing it to
operate until licensing proceedings are instituted pursuant to more
comprehensive and exacting regulations (the Part B licensing process). Interim
Status facilities may continue to operate pursuant to the Part A Application
until their Part B licensing process is concluded. Of the Company's 12 waste
management facilities, only the Virginia waste oil facility operates under
interim status.
RCRA requires that Part B licenses contain provisions for required on-site
study and cleanup activities, known as "corrective action," including detailed
compliance schedules and provisions for assurance of financial responsibility.
The EPA has developed a system for assessing the relative environmental cleanup
priority of RCRA facilities, called the National Corrective Action
Prioritization System, with a High, Medium or Low ranking for each facility.
Although several facilities of its competitors have been assessed a High cleanup
priority, none of the Company's RCRA facilities have been assessed as a High
priority.
15
The Company has begun RCRA corrective action investigations at its Part B
licensed facilities in Braintree, Natick, Chicago, Cincinnati, and Woburn. The
Company is also involved in site studies at its non-RCRA facilities in
Cleveland, Ohio; Kingston, Massachusetts; and on Main Street in South Portland,
Maine. Corrective action at the Bristol, Connecticut, facility was completed in
1996. The Company spent approximately $311,000, $769,000 and $820,000 on
corrective action at the foregoing facilities for the years ended December 31,
1999, 1998 and 1997, respectively.
While the final scope of the work to be performed at these sites has not yet
been agreed upon, the Company believes, based upon information known to date
about the nature and extent of contamination at these sites, that accruals have
been established when required and such costs are not expected to have a
material effect on its results of operations or its competitive position, and
that it will be able to finance from operating revenue any additional corrective
action required at the sites.
The Bristol, Connecticut and Cincinnati, Ohio facilities were acquired from
a subsidiary of Southdown, Inc. Southdown Inc. has agreed to indemnify the
Company against any costs incurred or liability arising from contamination
on-site, including the cost of corrective action, or waste disposed of off-site,
including any liability under the Superfund Act, at those facilities.
The Company is also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final approval
from the Pennsylvania regulatory authorities, certifying final closure of the
facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action
investigation at the Chester site. PECO asked the Company to participate in the
site studies, and in October 1994, the Company agreed to be responsible for
seventy-five percent of the cost of these studies, which was estimated to be in
the range of $2,000,000, by, among other things, performing field services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts and credits to PECO totaling $908,000 through August 2, 1999.
The Company and PECO then negotiated an amendment to their 1994 agreement,
whereby the Company's responsibility for its share of the cost of site studies
was capped at $1,733,000. The studies are expected to be concluded in early
2000, whereupon the EPA's order will terminate. The Company had accrued $825,000
and $623,000 relating to this liability at December 31, 1999 and 1998,
respectively. The $825,000 balance owed under the amendment will be paid in
2000.
THE SUPERFUND ACT. The Superfund Act provides for immediate response and
removal actions coordinated by the EPA to releases of hazardous substances into
the environment, and authorizes the government to respond to the release or
threatened release of hazardous substances or to order persons responsible for
any such release to perform any necessary cleanup. The statute assigns joint and
several liability for these responses and other related costs, including the
cost of damage to natural resources, to the parties involved in the generation,
transportation and disposal of such hazardous substances. Under the statute, the
Company may be deemed liable as a generator or transporter of a hazardous
substance which is released into the environment, or as the owner or operator of
a facility from which there is a release of a hazardous substance into the
environment. See "Item 3.-Legal Proceedings" for a description of certain such
proceedings involving the Company.
CLEAN WATER ACT. This legislation prohibits discharges into the waters of
the United States without governmental authorization. The EPA has promulgated
"pretreatment" regulations under the Clean Water Act, which establish
pretreatment standards for introduction of pollutants into publicly owned
treatment works. In the course of its treatment process, the Company's
wastewater treatment facilities generate wastewater, which they discharge to
publicly owned treatment works pursuant to permits issued by the
16
appropriate governmental authority. The Clean Water Act also serves to create
business opportunities for the Company, in that, it may prevent industrial users
from discharging their untreated wastewaters to the sewer. If these industries
cannot meet their discharge specifications, then they may utilize the services
of an off-site pretreatment facility such as those operated by the Company.
OTHER FEDERAL LAWS. Company operations are also subject to the Toxic
Substances Control Act ("TSCA"), pursuant to which the EPA regulates over 60,000
commercially produced chemical substances, including the proper disposal of
PCBs. TSCA has established a comprehensive regulatory program for PCBs, under
the jurisdiction of the EPA, which oversees the storage, treatment and disposal
of PCBs at the Company's facilities in Braintree and Natick, Massachusetts;
Cincinnati, Ohio; and Bristol, Connecticut. Under the Clean Air Act, the EPA
also regulates emissions into the air of potentially harmful substances. In its
transportation operations, the Company is regulated by the U.S. Department of
Transportation, the Federal Railroad Administration, and the U.S. Coast Guard,
as well as by the regulatory agencies of each state in which it operates or
through which its trucks pass. Health and safety standards under the
Occupational Safety and Health Act are also applicable.
STATE AND LOCAL REGULATIONS
Pursuant to the EPA's authorization of their RCRA equivalent programs,
Massachusetts, Connecticut, Illinois, Maryland, Ohio, and Nebraska have
regulatory programs governing the operations and permitting of hazardous waste
facilities. Accordingly, the hazardous waste treatment, storage and disposal
activities of the Company's Braintree, Natick, Woburn, Bristol, Chicago,
Baltimore, Cincinnati, and Kimball facilities are regulated by the relevant
state agencies in addition to federal EPA regulation.
Some states, such as Connecticut and Massachusetts, classify as hazardous
some wastes which are not regulated under RCRA. For example, Massachusetts
considers PCBs and used oil as "hazardous wastes," while RCRA does not.
Accordingly, the Company must comply with state requirements for handling state
regulated wastes, and, when necessary, obtain state licenses for treating,
storing, and disposing of such wastes at its facilities.
The Company believes that each of its facilities is in substantial
compliance with the applicable requirements of RCRA, state laws and regulations.
Eleven of the Company's 12 waste management facilities have been issued final
licenses, except for the Virginia facility which operates as an industrial
wastewater treatment facility exempt from RCRA permitting requirements. Once
issued, such licenses have maximum fixed terms of a given number of years which
differ from state to state, ranging from three years to ten years. The issuing
state agency may review or modify a license at any time during its term. The
Company anticipates that once a license is issued with respect to a facility,
the license will be renewed at the end of its term if the facility's operations
are in compliance with applicable requirements. However, there can be no
assurance that regulations governing future licensing will remain static, or
that the Company will be able to comply with such requirements.
The Company's wastewater treatment facilities are also subject to state and
local regulation, most significantly sewer discharge regulations adopted by the
municipalities which receive treated wastewater from the treatment processes.
The Company's continued ability to operate its liquid waste treatment process at
each such facility is dependent upon its ability to continue these sewer
discharges.
The Company's facilities are regulated pursuant to state statutes, including
those addressing clean water and clean air. Local sewer discharge and flammable
storage requirements are applicable to certain of the Company's facilities. The
Company's facilities are subject to local siting, zoning and land use
restrictions. Although the Company's facilities occasionally have been cited for
regulatory violations, the Company believes it is in substantial compliance with
all federal, state and local laws regulating its business. Superfund legislation
permits strict joint and several liability to be imposed without regard to
fault, and as a result one PRP might be required to bear significantly more than
its proportional share of the cleanup costs if other PRP's do not pay their
share of such costs
17
ITEM 3. LEGAL PROCEEDINGS
Certain Company subsidiaries have transported or generated waste sent to
sites, which have been designated state or federal Superfund sites. As a result,
the Company has been named as a potentially responsible party ("PRP") in a
number of lawsuits arising from the disposal of wastes at 27 state and federal
Superfund sites.
Fourteen of these sites involve two subsidiaries which the Company acquired
from ChemWaste, a former subsidiary of Waste Management, Inc. As part of the
acquisition, ChemWaste agreed to indemnify the Company with respect to any
liability of its Braintree and Natick subsidiaries for waste disposed of before
the Company acquired them. Accordingly, Waste Management is paying all costs of
defending the Company's Braintree and Natick subsidiaries in these 14 cases,
including legal fees and settlement costs.
The Company's subsidiary which owns the Bristol, Connecticut facility is
involved in one Superfund site. As part of the acquisition of the Bristol,
Connecticut and Cincinnati, Ohio facilities, the seller and its parent company,
Southdown, Inc., agreed to indemnify the Company with respect to any liability
for waste disposed of before the Company acquired the facilities, which would
include any liability arising from Superfund sites.
Six of the sites involve former subsidiaries of ChemClear Inc. One of the
six sites is the Strasburg Landfill site in Pennsylvania, which the Company
settled with the U.S. Government in late 1998. The Company is also a settling
party at the other five ChemClear sites. The Company believes its ultimate
exposure in these cases will not have a material impact on its financial
position or results of operations.
Mr. Frank, Inc., which was acquired by the Company in July 1992, is involved
in four Superfund sites, as a transporter of waste generated by others prior to
the Company's purchase of Mr. Frank, Inc. The Company acquired Mr. Frank, Inc.
in exchange for 233,000 shares of the Company's common stock, of which 33,222
shares were deposited into an escrow account to be held as security for the
sellers' agreement to indemnify the Company against potential liabilities,
including environmental liabilities arising from prior ownership and operation
of Mr. Frank, Inc. The Company has been identified as a PRP at two sites, at
which the Company believes that it has no liability.
The Company believes that any future settlement costs arising from any or
all of the 27 Superfund sites described above will not be material to the
Company's operations or financial position. The Company routinely reviews each
Superfund site in which the Company's subsidiaries are involved, considers each
subsidiary's role at each site and its relationship to the Company and other
PRPs at the site, the quantity and content of the waste it disposed of at the
site, and the number and financial capabilities of the other PRPs at the site.
Based on reviews of the various sites and currently available information, and
management's judgment and prior experience with similar situations, expense
accruals are provided by the Company for its share of future site cleanup costs,
and existing accruals are revised as necessary. As of December 31, 1999 and
1998, the Company had accrued environmental costs of $285,000 and $296,000,
respectively, for cleanup of Superfund sites.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the EPA, are conducting an inquiry concerning certain railcars which
were destined for the Company's Kimball, Nebraska incinerator. Several railcars
containing waste materials generated by the Company's waste treatment plants
were not delivered to the Company's Sterling, Colorado rail transfer facility in
a timely manner by the railroad company. The Company has cooperated fully with
federal and state authorities and has arranged for company personnel to be
interviewed and has produced records, documents and other materials concerning
the railcars in question. The Company has conducted its own internal
investigation and believes that there has been no wrongdoing on the part of the
Company with respect to the late delivery of railcars. However, assurances
cannot be given that the government authorities may not reach a different
conclusion or attempt to levy penalties.
18
In October 1995 an employee was killed in an accident when a drum exploded
at a facility in Cincinnati, Ohio operated by a subsidiary, Spring Grove
Resource Recovery, Inc. ("Spring Grove"). During 1999 the Company was notified
by the Justice Department that the Department believed it had a cause of action
against a subsidiary for potential civil and/or criminal violations of its RCRA
permit as a result of the 1995 accident. The Company has conducted an exhaustive
internal review of the circumstances leading up to the accident and believes
that the subsidiary did not knowingly violate any relevant terms of its RCRA
permit. The Company has also engaged the services of external legal and
regulatory experts to review the situation and they have also concluded that the
available evidence does not support a conclusion that the subsidiary knowingly
violated its permit. Assurances cannot be given, however, that government
authorities will not reach a different conclusion and proceed with legal action
or levy penalties. The Company has executed tolling agreements with the
government and is presently engaged in discussions with the government in an
effort to resolve this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1999.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock began trading publicly in the over-the-counter
market on November 24, 1987 and was added to the NASDAQ National Market System
effective December 15, 1987. The Company's common stock trades on The Nasdaq
Stock Market under the symbol: CLHB. The following table sets forth the high and
low sales prices of the Company's common stock for the indicated periods as
reported by NASDAQ.
HIGH LOW
1998 -------- --------
First Quarter............................................... $2.063 $1.250
Second Quarter.............................................. 3.000 1.750
Third Quarter............................................... 3.313 1.813
Fourth Quarter.............................................. 2.625 1.313
HIGH LOW
1999 -------- --------
First Quarter............................................... $2.438 $1.563
Second Quarter.............................................. 2.000 1.563
Third Quarter............................................... 1.813 1.313
Fourth Quarter.............................................. 1.813 1.063
On March 14, 2000 there were 667 holders of record of the Company's common
stock, excluding stockholders whose shares were held in nominee name.
The Company has never declared nor paid any cash dividends on its common
stock. In February 1993, the Board of Directors authorized the issuance of up to
156,416 shares designated as Series B Convertible Preferred Stock (the
"Preferred Stock"), with a cumulative dividend of 7% during the first year and
8% thereafter, payable either in cash or by the issuance of shares of common
stock. On February 16, 1993, 112,000 shares of Preferred Stock were issued in
partial payment of the purchase price for the Cincinnati facility. Except for
payment of dividends on the Preferred Stock, the Company intends to retain all
earnings for use in the Company's business and therefore does not anticipate
paying any cash dividends on its common stock in the foreseeable future. The
Company's bank credit agreements contain financial covenants, which may
effectively restrict or limit the payment of dividends other than Preferred
Stock dividends. See Note 9 to the Consolidated Financial Statements in Item 8
of this report.
Dividends on the Company's Preferred Stock are payable on the 15th day of
January, April, July and October, at the rate of $1.00 per share, per quarter;
112,000 shares are outstanding. The Company currently is restricted in the
payment of cash dividends due to covenants in its loan agreements. Under the
terms of the Preferred Stock, the Company can elect to pay dividends in cash or
in common stock with a market value equal to the amount of the dividend payable.
The Company elected to pay the 1999 dividends in common stock. The share price
of the common stock and the shares of common stock issued to holders of
preferred stock during 1999 were as follows:
RECORD DATE SHARE PRICE COMMON STOCK ISSUED
- ----------- ----------- -------------------
January 1, 1999................................ $1.570 71,340
April 1, 1999.................................. 1.712 65,402
July 1, 1999................................... 1.716 65,282
October 1, 1999................................ 1.456 76,909
The Company anticipates that the Preferred Stock dividends payable through
2000 will be paid in common stock.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be reviewed
in conjunction with Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 8--Financial Statements and
Supplementary Data of this report.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCOME STATEMENT DATA: 1999 1998 1997 1996 1995
- ---------------------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues.................................. $202,965 $197,439 $183,767 $200,213 $209,250
Cost of revenues.......................... 149,637 147,214 140,926 154,773 156,779
Selling, general and administrative
expenses................................ 37,190 34,976 34,114 36,161 39,574
Depreciation and amortization of
intangible assets....................... 9,501 9,112 9,228 9,827 10,081
Nonrecurring charges...................... -- -- -- -- 4,247
-------- -------- -------- -------- --------
Income (loss) from operations............. 6,637 6,137 (501) (548) (1,431)
Other income, net......................... -- -- 800 -- --
Interest expense, net..................... 8,599 9,631 9,182 9,170 8,657
-------- -------- -------- -------- --------
Loss before provision (benefit from)
income taxes............................ (1,962) (3,494) (8,883) (9,718) (10,088)
Provision for (benefit from) income
taxes................................... 282 360 4,845 (2,775) (3,195)
-------- -------- -------- -------- --------
Net loss.................................. $ (2,244) $ (3,854) $(13,728) $ (6,943) $ (6,893)
======== ======== ======== ======== ========
Basic and diluted net loss per share...... $ (0.25) $ (0.42) $ (1.42) $ (0.77) $ (0.77)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding............................. 10,649 10,309 9,959 9,653 9,475
======== ======== ======== ======== ========
Financial Data:
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)................................ $ 16,138 $ 15,249 $ 9,527 $ 9,279 $ 8,650
Working capital........................... $ 14,565 $ 11,245 $ 10,448 $ 14,245 $ 11,053
Total assets.............................. $145,247 $145,910 $147,850 $177,997 $186,444
Long-term obligations, less current
portion................................. $ 72,683 $ 68,774 $ 68,020 $ 68,668 $ 70,391
Stockholders' equity...................... $ 34,171 $ 36,310 $ 40,024 $ 53,584 $ 60,374
No cash dividends have been declared on the Company's common stock.
NONRECURRING CHARGES. During 1995, the Company recorded a $4,247,000
nonrecurring charge in connection with the reengineering of the Company's
operations and the write down of non-performing assets, as well as the
anticipated losses on the sale of certain non-core properties. Under the
reengineering program, the Company has closed or downsized small, satellite
offices; reduced employment levels; downsized its laboratory staff and relocated
the laboratory to its waste handling facility in Braintree, Massachusetts; and
relocated its corporate headquarters to a new location in Braintree,
Massachusetts. The components of the nonrecurring charge are as follows:
Severance and related costs................................. $1,097,000
Write-off of non-performing asset........................... 1,110,000
Real estate related charges................................. 2,040,000
----------
$4,247,000
==========
OTHER INCOME. During 1997, the Company recorded a $950,000 receivable in
connection with the settlement of a lawsuit and incurred approximately $150,000
in costs related to the litigation. The
21
Company recognized a pre-tax gain, net of related legal fees, of $800,000
resulting from the settlement, which is included in other income, net in the
consolidated statement of income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data associated with the Company's results of operations. This table and
subsequent discussions should be read in conjunction with Item 6 Selected
Financial Data and Item 8 Financial Statements and Supplementary Data of this
report.
PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------
TWELVE-MONTH YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties................... 12.5 14.3 13.9 13.8 15.4
Other costs............................................ 61.2 60.3 62.8 63.4 59.5
----- ----- ----- ----- -----
Total cost of revenues............................... 73.7 74.6 76.7 77.2 74.9
Selling, general and administrative expenses............. 18.3 17.7 18.6 18.2 18.9
Depreciation and amortization of intangible assets....... 4.7 4.6 5.0 4.9 4.9
Nonrecurring charges..................................... -- -- -- -- 2.0
----- ----- ----- ----- -----
Income (loss) from operations............................ 3.3 3.1 (0.3) (0.3) (0.7)
Other income, net........................................ -- -- 0.4 -- --
Interest expense, net.................................... 4.3 4.9 4.9 4.6 4.1
----- ----- ----- ----- -----
Loss before provision for (benefit from) income taxes.... (1.0) (1.8) (4.8) (4.9) (4.8)
Provision for (benefit from) income taxes................ 0.1 0.2 2.7 (1.4) (1.5)
----- ----- ----- ----- -----
Net loss............................................. (1.1)% (2.0)% (7.5)% (3.5)% (3.3)%
===== ===== ===== ===== =====
REVENUES. Revenues for 1999 were $202,965,000 as compared to $197,439,000
for 1998, an increase of $5,526,000 or 2.8%. The largest part of the increase in
revenues was due to a 6.7% increase in site services revenues. Other services
showing increases in revenues included CleanPack-Registered Trademark-,
transportation and logistics management, industrial maintenance, and consulting
and information management. The acquisition of the Texas Transportation and
Brokerage Divisions of American Ecology Environmental Services resulted in a
0.4% increase in revenues. Offsetting these increases in revenues is a 8.1%
decrease in the volume of waste processed through the Company's facilities. Most
of the decrease in the volume of waste processed through the Company's
facilities was due to the Company's decision to increase the selling prices on
certain waste streams that were determined to be unprofitable or only marginally
profitable. Pricing on waste processed through the Company's facilities
decreased by 3.3%.
Revenues for 1998 were $197,439,000 as compared to revenues of $183,767,000
for 1997, an increase of $13,672,000 or 7.4.%. The increase in revenues in 1998
as compared to 1997 was primarily due to a 7.9% increase in the volume of waste
processed through the Company's facilities and a 9.2% increase due to the number
of site service hours worked. These increases in revenues were partially offset
by a 0.9% decrease in revenues due to declines in pricing in 1998 as compared to
1997.
There were no major spills that impacted revenues in 1999, 1998 or 1997.
There are many factors which have impacted, and continue to impact, the
Company's revenues. These factors include: competitive industry pricing;
continued efforts by generators of hazardous waste to reduce the amount of
hazardous waste they produce; significant consolidation among treatment and
disposal
22
companies; industry-wide overcapacity; direct shipment by generators of waste to
the ultimate treatment or disposal location; and budgetary cycles influencing
the timing of customers' spending for remedial activities.
The Company continues to take pricing actions in response to industry
conditions, as it attempts to maintain a competitive mix of price, performance,
and customer support services while attempting to return to profitability and
growth. The Company attempts to mitigate the effects of price reductions by
reducing operating costs. There can be no assurance that pricing actions will be
effective in stimulating higher levels of sales or that cost reduction efforts
will offset the effect of pricing actions on the Company's gross margin.
COST OF REVENUES. Cost of revenues was $149,637,000 in 1999, $147,214,000
in 1998 and $140,926,000 in 1997. Other costs, as a percentage of revenues, were
61.2% in 1999, 60.3% in 1998 and 62.8% in 1997. Disposal costs paid to third
parties as a percentage of revenues were 12.5% in 1999, 14.3% in 1998 and 13.9%
in 1997.
One of the largest components of cost of revenues is the cost of sending
waste to other companies for disposal. In 1999, the costs of sending waste to
third parties decreased as a percentage of revenues primarily due the decline in
the volume of waste processed by the Company and the decrease in the proportion
of disposal revenues to total revenues. In addition, the Company has continued
to upgrade the quality and efficiency of its waste treatment services through
the development of new technology and continued modifications and upgrades at
its facilities. In 1999, other costs of revenues as a percentage of revenues
increased largely due to the inclusion of the settlement of an insurance claim
in cost of revenues in 1998 for an amount, net of legal expenses of $1,168,000.
In 1998 as compared to 1997, the cost of sending waste to third parties
increased as a percentage of revenue primarily due to the performance of certain
site service projects which generated waste types which could not be disposed of
in Company-owned facilities. Other costs of revenues increased by 3.0% from 1997
to 1998 in absolute dollar amount but decreased as a percentage of revenues from
62.8% in 1997 to 60.3% in 1998. The decrease as a percentage of revenues was
partially due to the settlement of an insurance claim in the fourth quarter of
1998 for an amount, net of legal expenses, of $1,168,000. The other major
component that caused the reduction in cost of revenues as a percentage of
revenues from 1997 to 1998 was cost reductions relating to occupancy expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $37,190,000 in 1999 from $34,976,000 in
1998 and from $34,114,000 in 1997. In the third quarter of 1998, the Company
formed Harbor Management Consultants and in the second quarter of 1999 initiated
Harbor Industrial Services. Just under a majority of the increase in selling,
general and administrative expenses for 1999 as compared to 1998 is due to
expenses of these new divisions. Salaries and benefits increased due to
increases in headcount due to higher revenues, increases in headcount in sales
and marketing due to strategic business initiatives and increases in
compensation to remain competitive in the employment markets in which the
Company operates. Expenses relating to information technologies increased due to
initiatives to improve the quality of management information. Partially
offsetting these increases were decreases achieved across a number of expense
categories through cost reductions.
Although selling, general and administrative expenses increased in absolute
dollars in 1998 as compared to 1997, such expenses as a percentage of revenues
decreased from 18.6% of revenues in 1997 to 17.7% of revenues in 1998, partly
due to efficiencies achieved through the implementation of information systems
and consolidation of administrative tasks. The 1998 increase in selling, general
and administrative expenses in absolute dollars was driven by increased salaries
and benefits caused by increases in headcount due to higher volumes of waste
processed, increases in headcount in sales and marketing due to strategic
business development initiatives, and increases in compensation to remain
competitive in the employment markets in which the Company operates. In
addition, the Company incurred costs to terminate leases and increased sales and
marketing efforts.
23
INTEREST EXPENSE, NET Interest expense decreased during 1999 to $8,599,000
from $9,631,000 in 1998. A large part of the decrease was due to interest
recorded of $439,000 on an income tax refund. The remainder of the decrease in
interest expense was due primarily to decreases in the average balance of loans
outstanding.
Interest expense increased from $9,182,000 in 1997 to $9,631,000 in 1998 due
primarily to an increase in the average balance of loans outstanding, which was
partly the result of increased levels of business activity.
INCOME TAXES. In 1999, income tax expense of $282,000 was recorded on a
pre-tax loss $(1,962,000), for an effective tax rate of (14.4%), as compared to
income tax expense of $360,000 that was recorded on a pre-tax loss of
$(3,494,000) for an effective tax rate of (10.3%) in 1998, and as compared to
tax expense of $4,845,000 that was recorded on a pre-tax loss of $(8,883,000)
for an effective tax rate of 54.5% for the year ended 1997. SFAS 109,
"Accounting for Income Taxes," requires that a valuation allowance be
established when, based on an evaluation of objective verifiable evidence, there
is a likelihood that some portion or all of the deferred tax assets will not be
realized. In 1997, based upon this review, the Company established a valuation
allowance for all but $113,000 of net deferred tax assets, which was the major
cause of the tax expense reported in 1997. The 1998 tax expense consists of
$247,000 of state income tax expense, which was primarily caused by tangible
property taxes and net worth taxes that are levied as a component of state
income taxes, and providing a valuation allowance for $113,000 of additional net
deferred tax assets. Income tax expense for the year ended 1999 consists
primarily of tangible property and net worth taxes that are levied as a
component of state income taxes. Partially offsetting these taxes in 1999 was a
$79,000 federal income tax refund that was filed for in 1999. A valuation
allowance was also provided for net deferred tax assets generated in 1998 and
1999, which had no effect on income tax expense.
The actual realization of the net operating loss carryforwards and other tax
assets depend on having future taxable income of the appropriate character prior
to their expiration under the tax laws. If the Company continues to report
losses in the future, no income tax benefit for these losses would be recorded.
If the Company reports earnings from operations in the future, and depending on
the level of these earnings, some portion or all of the valuation reserve would
be reversed, which would increase net income reported in future periods.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. The
Company has received a notice of intent to assess state income taxes from one of
the states in which it operates. The case is currently undergoing administrative
appeal. If the Company loses the administrative appeal, the Company may be
required to make a payment of approximately $3,000,000 to the state. The Company
cannot currently predict when the decision for the administrative appeal will be
made. The Company believes that it has properly reported its state income and
intends to contest the assessment vigorously. While the Company believes that
the final outcome of the dispute will not have a material adverse effect on the
Company's financial condition or results of operations, no assurance can be
given as to the final outcome of the dispute, the amount of any final
adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company and employees acting on behalf of the Company
make forward-looking statements concerning the expected revenues, results of
operations, capital expenditures, capital structure, plans and objectives of
management for future operations, and future economic performance. This report
contains forward-looking statements. There are many factors which could cause
actual results to differ materially from those projected in a forward-looking
statement, and there can be no assurance that such expectations will be
realized.
24
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: utilize its facilities and
workforce profitably, in the face of intense price competition; maintain or
increase market share in an industry which appears to be downsizing and
consolidating; realize benefits from cost reduction programs; generate
incremental volumes of waste to be handled through its facilities from existing
sales offices and service centers; and expand the revenues of the consulting and
information services, and industrial maintenance services.
The future operating results of the Kimball incinerator may be affected by
factors such as its ability to: obtain sufficient volumes of waste at prices
which produce revenue sufficient to offset the operating costs of the facility;
minimize downtime and disruptions of operations; and compete successfully
against other incinerators which have an established share of the incineration
market.
The Company's operations may be affected by the commencement and completion
of major site remediation projects; cleanup of major spills or other events;
seasonal fluctuations due to weather and budgetary cycles influencing the timing
of customers' spending for remedial activities; the timing of regulatory
decisions relating to hazardous waste management projects; changes in
regulations governing the management of hazardous waste; secular changes in the
waste processing industry towards waste minimization and the propensity for
delays in the remedial market; suspension of governmental permits; and fines and
penalties for noncompliance with the myriad of regulations governing the
Company's diverse operations. As a result of these factors, the Company's
revenue and income could vary significantly from quarter to quarter, and past
financial performance should not be considered a reliable indicator of future
performance.
Typically during the first quarter of each calendar year there is less
demand for environmental remediation due to the cold weather, particularly in
the Northeast and Midwest regions, and increased possibility of unplanned
weather related plant shutdowns. In addition, customer factory closings for the
year-end holidays reduce the volume of industrial waste generated, which results
in lower volumes of waste handled by the Company during the first quarter of the
following year.
The Company participates in a highly volatile industry, with multiple
competitors, several of which have taken large write-offs and asset write-downs
and undergone major restructurings during the past several years. Periodically,
the Company reviews long-lived assets for financial impairment. At the end of
1999, the Company determined based on this review that no asset write-downs were
required; however, if conditions in the industry deteriorate further, certain
assets could be determined to be impaired and an asset write-off could be
required. Also, industry conditions may result in significant volatility of the
Company's common stock price, as well as that of its competitors.
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to the Company, it likewise often results in increased operating
and compliance costs. The Company strives to conduct its operations in
compliance with applicable laws and regulations, including environmental rules
and regulations, and has 100% compliance as its goal.
This effort requires programs to promote compliance, such as training
employees and customers, purchasing health and safety equipment, and in some
cases hiring outside consultants and lawyers. Even with these programs,
management believes that in the ordinary course of doing business, companies in
the environmental services and waste disposal industry are routinely faced with
governmental enforcement proceedings resulting in fines or other sanctions and
will likely be required to pay civil penalties or to expend funds for remedial
work on waste management facilities.
From time to time, the Company has paid fines or penalties in governmental
environmental enforcement proceedings, usually involving its waste treatment,
storage and disposal facilities. The possibility always exists that substantial
expenditures could result from governmental proceedings, which would have
25
a negative impact on earnings for a particular reporting period. More
importantly, federal, state and local regulators have the power to suspend or
revoke permits or licenses needed for operation of the Company's plants,
equipment, and vehicles, based on the Company's compliance record, and customers
may decide not to use a particular disposal facility or do business with a
company because of concerns about the compliance record. Suspension or
revocation of permits or licenses would impact their Company's operations and
could have a material adverse impact on financial results.
Certain Company subsidiaries have transported or generated waste sent to
sites which have been designated state or federal Superfund sites. As a result,
the Company has been named as a potentially responsible party at 27 state and
federal Superfund sites. Fourteen of these sites involve two subsidiaries which
the Company acquired from Chemical Waste Management, Inc. ("ChemWaste"), a
former subsidiary of Waste Management, Inc. and one site involves a subsidiary,
which the Company acquired from Southdown, Inc., a public company. As part of
these acquisitions, ChemWaste and Southdown, Inc. agreed to indemnify the
Company with respect to any liability of such subsidiaries for waste disposed of
before the Company acquired them. With respect to the other Superfund sites, the
Company has established reserves or escrows, which it believes are appropriate,
such that any future settlement costs of lawsuits arising from any or all of the
27 Superfund sites are not expected to be material to the Company's operations
or financial position. The Company had accrued environmental costs of
approximately $285,000 and $296,000 for cleanup of Superfund sites at
December 31, 1999 and 1998, respectively.
The Company operates facilities that are subject to RCRA regulation. Under
RCRA, every facility that treats, stores or disposes of hazardous waste must
obtain a RCRA permit from EPA or an authorized state agency and must comply with
certain operating requirements. Of the Company's 12 waste management facilities,
nine are subject to RCRA licensing. RCRA requires that permits contain a
schedule of required on-site study and cleanup activities, known as "corrective
action," including detailed compliance schedules and provisions for assurance of
financial responsibility.
The EPA or applicable state agency have begun RCRA corrective action
investigations at the Company's RCRA licensed facilities in Baltimore, Maryland;
Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn,
Massachusetts; and Cincinnati, Ohio. The Company is also involved in site
studies at its non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts;
and South Portland, Maine.
In January 1995, the Company entered into a definitive agreement with
ChemWaste to lease a site previously leased by ChemWaste which adjoins the
Company's Chicago facility. During November 1995, the Company acquired the
existing improvements on the ChemWaste site in exchange for agreeing to share
the costs of dismantling an existing hazardous waste incinerator and cleaning up
the site. The improvements on the ChemWaste site allowed the Company to increase
processing capacity at the location and introduce efficiency initiatives
relative to collection, transportation, treatment and disposal of routinely
created hazardous wastes throughout its facility network. Under the sharing
arrangement with ChemWaste, the Company will manage the RCRA corrective action
investigation at the site and over a period of 15 years could be required to
contribute up to a maximum of $2,000,000 for dismantling and decontaminating the
incinerator and other equipment and up to a maximum of $7,000,000 for studies
and cleanup of the site. Any additional costs beyond those contemplated by the
sharing arrangement during this time period would be borne by ChemWaste. The
Company had accruals $1,627,000 and $1,532,000 relating to this liability at
December 31, 1999 and 1998, respectively, which are the unused amounts of a
remediation accrual that was established as part of the acquisition of
ChemWaste's Chicago facility. In addition, the Company believes that it would be
able to appropriately capitalize the remediation expenditures, in excess of the
amounts accrued, that it may be obligated to make under the agreement. No
estimate can be made as to when the remediation activities will be completed.
The Company acquired its RCRA facilities in Bristol, Connecticut and
Cincinnati, Ohio from a subsidiary of Southdown, Inc. Southdown has agreed to
indemnify the Company against any costs incurred
26
or liability arising from contamination on-site arising from prior ownership,
including corrective action. The prior owner of the Woburn facility provided a
limited indemnity for any costs incurred or liability arising from contamination
on-site due to prior ownership.
The following table summarizes non-reimbursed environmental remediation
expenditures capitalized and expenses incurred relating to the Company's
facilities for the years ended December 31, (in thousands):
1999 1998 1997
-------- -------- --------
Environmental expenditures capitalized.................. $274 $674 $564
Environmental expenses incurred......................... 37 95 256
---- ---- ----
$311 $769 $820
==== ==== ====
The Company expects environmental remediation expenditures of the magnitude
incurred for the last three years to continue for the foreseeable future. While
the final scope of work to be performed at these sites has not yet been agreed
upon, the Company believes, based upon information known to date about the
nature and extent of contamination at these sites, that accruals have been
established when required and such costs are not expected to have a material
effect on its results of operations or its competitive position, and that it
will be able to finance from operating revenue any additional corrective action
required at the sites.
The Company was also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final approval
from the Pennsylvania regulatory authorities, certifying final closure of the
facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action
investigation at the Chester site. PECO asked the Company to participate in the
site studies, and in October 1994, the Company agreed to be responsible for
seventy-five percent of the cost of these studies, which was estimated to be
approximately $2,000,000, by, among other things, performing site services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts and credits to PECO totaling $908,000 through August 2, 1999.
The Company and PECO then negotiated an amendment to their 1994 agreement,
whereby the Company's responsibility for its share of the cost of site studies
was capped at $1,733,000. The studies are expected to be concluded in early
2000, whereupon the EPA's order will terminate. The Company had accrued $825,000
and $877,000 relating to this liability at December 31, 1999 and 1998,
respectively. The $825,000 balance owed under the amendment will be paid in
2000.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the EPA, are conducting an inquiry concerning certain railcars which
were destined for the Company's Kimball, Nebraska incinerator. Several railcars
containing waste materials generated by the Company's waste treatment plants
were not delivered to the Company's Sterling, Colorado rail transfer facility in
a timely manner by the railroad Company. The Company has cooperated fully with
federal and state authorities and has arranged for company personnel to be
interviewed and has produced records, documents and other materials concerning
the railcars in question. The Company has conducted its own internal
investigation and believes that there has been no wrongdoing on the part of the
Company with respect to the late delivery of railcars. However, assurances
cannot be given that the government authorities may not reach a different
conclusion or attempt to levy penalties.
27
YEAR 2000
As was widely discussed in the media, companies around the world worked on
resolving the expected problems relating to the year 2000. The problem stemmed
from the fact that much of the computer software, computer hardware and control
devices produced in prior years provide only two digits with which to record the
year. This may result in these products not functioning or producing unexpected
results when the year 2000 is recorded as "00", and the program or device is
unable to differentiate whether the "00" represents the year 1900 or 2000. All
major systems of the Company performed properly when the year changed from 1999
to 2000. The Company does not expect revenues, expenses or cash flows for the
first quarter of 2000 to be materially impacted due to year 2000 issues.
Starting in 1996, the Company began a major upgrade of all management
information systems in order to improve the availability of management
information with the ultimate aim being better control over costs and better
availability of management information, which management believes will yield
improved operating results. In 1999, the Company purchased and installed a human
resource system at a cost of approximately $100,000. In 1999, the Company also
upgraded secondary computer software and hardware at a cost that was not
material to the results of operations of the Company.
In addition to computer software and hardware, the Company utilizes a
variety of control devices in its plants, most of which are not date or time
sensitive. Based on an inventory of the control devices, the cost of replacing
the control devices that were not year 2000 compliant was approximately
$100,000. The Company replaced these control devices during regularly scheduled
plant shutdowns in April of 1999.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company generated $6,106,000 from
operations even though the net loss was $(2,244,000) for the period. This result
was due to sources and uses of cash that vary from when the related revenues and
expenses were recorded. The primary sources of cash from operations were
non-cash expenses that totaled $10,528,000 and consisted of depreciation and
amortization of $9,501,000, additions to the allowance for doubtful accounts of
$683,000 and amortization of deferred financing costs of $344,000. A major
additional source of cash was an income tax refund of $1,114,000. These sources
of cash were partially offset by uses of cash of $2,800,000 due to increased
levels of accounts receivable and the net loss for the period of $(2,244,000).
For the year ended December 31, 1999, the Company obtained $896,000 from
financing activities. Sources of cash from financing activities were $4,139,000
due to additional borrowings under the term promissory note and $131,000 due to
the issuance of additional stock under the employee stock purchase plan.
Partially offsetting these sources of cash was $3,050,000 in payments on
long-term obligations and net repayments of $324,000 on the revolving credit
agreement.
For the year ended December 31, 1999, the Company generated $6,106,000 of
cash from operations, obtained $896,000 of cash from financing activities and
$1,255,000 from the sales and maturities of restricted investments, which was
almost completely due to the release of restricted funds that were held in a
debt service reserve fund at December 31, 1998. These funds totaling $8,227,000
were used to acquire property, plant and equipment of $5,080,000, to acquire two
divisions of American Ecology Environmental Services Corporation for $1,900,000
and to increase the amount of cash and cash equivalents by $888,000.
For the year ended December 31, 1998 the Company generated $3,896,000 in
cash from operations even though it lost $(3,854,000) for the year, primarily
due to non-cash expenses of $9,112,000 for depreciation and amortization,
$559,000 for the allowance for doubtful accounts and $490,000 for the
amortization of deferred financing costs. Additional sources of cash from
operations were the result of a $4,107,000 increase in the balance of accounts
payable at December 31, 1998 as compared to December 31, 1997, primarily due to
increased levels of operating activities; a refund of $433,000 of income taxes;
and a decrease in prepaid expenses of $579,000. Partially offsetting these
sources of cash from operations were
28
uses of cash of $4,132,000 resulting from increased levels of accounts
receivable at December 31, 1998 as compared to December 31, 1997, which was
primarily due to increased levels of sales in the fourth quarter of 1998 as
compared to the same quarter of the prior year; a decrease in other accrued
expenses of $2,573,000; and a decrease in accrued disposal costs of $765,000,
which was primarily caused by lower levels of waste on hand at December 31, 1998
when compared to December 31, 1997.
Cash generated from operations of $3,896,000, together with $3,935,000 of
cash on hand, was used primarily to fund additions to property, plant and
equipment, and permits of $5,208,000 and to purchase restricted investments of
$1,425,000. The largest component of the purchase of restricted investments was
to fund the debt service reserve fund, which is discussed later in Management's
Discussion and Analysis. Cash to make payments on long-term debt of $4,037,000
was obtained by additional borrowings on the revolving line of credit.
At December 31, 1999, the Company had a $30,500,000 Loan Agreement (the
"Loan Agreement") with a financial institution. The Loan Agreement provided for
a $24,500,000 revolving credit portion (the "Revolver") and a $6,000,000 term
promissory note (the "Term Note"). In May 1999, the Term Note was amended. The
Term Note as amended allowed the Company to increase the amount borrowed under
the Term Note by $4,139,000 from the $1,861,000 owed prior to the amendment of
the Term Note to the $6,000,000 principal amount of the Term Note as amended.
The Term Note has monthly principal payments of $100,000 with the last payment
due in May, 2004. The Revolver allows the Company to borrow up to $24,500,000 in
cash and letters of credit, based on a formula of eligible accounts receivable.
Letters of credit may not exceed $20,000,000 at any one time. In June 1999, the
term of the Revolver was extended from May 8, 2000 to May 8, 2001.
The Loan Agreement is collateralized by substantially all of the Company's
assets, and the Loan Agreement provides for certain covenants including, among
others, maintenance of a minimum level of working capital and adjusted net
worth. At December 31, 1999, the Loan Agreement required minimum levels of
working capital and adjusted net worth of $6,000,000 and $33,000,000,
respectively. At December 31, 1999, the Company had working capital and adjusted
net worth of $14,565,000 and $34,171,000, respectively. The Company must also
maintain borrowing availability of not less than $4,500,000 for sixty
consecutive days prior to paying principal and interest on its other
indebtedness and dividends in cash on its preferred stock. In the first half of
1999 and the first quarter of 2000, the Company violated this covenant, which
was or has been waived by the financial institution through May 15, 1999 and
2000, respectively. The financial institution has stated that it will continue
to waive this covenant, if violated; however, no assurance can be given that the
this covenant will be waived in the future by the financial institution. The
Company believes that it will meet this covenant for the foreseeable future.
In the first quarter of 2000, the Loan Agreement was amended and an
additional term promissory note (the "2000 Term Note") was entered into with the
financial institution. The original principal amount of the 2000 Term Note is
$3,000,000, it bears interest at the "prime" rate plus 1.5% or the Eurodollar
rate plus 3.0%, and it is payable in 36 monthly installments commencing on
May 1, 2000. The funds will be used to purchase vehicles and rolling stock that
the Company previously leased under operating leases. The purchase of the
vehicles will result in lower lease expense in costs of revenues and higher
levels of expense for depreciation and interest.
In the first quarter of 2000, the due date of the Revolver was extended from
May 8, 2001 to May 8, 2003. The Company has $50,000,000 of 12 1/2% Senior Notes
due May 15, 2001 (the "Senior Notes"). In May 2000, the Senior Notes will be
reclassified from a long-term liability to a current liability, since they will
then be payable within one year. The Loan Agreement, as amended, redefines the
working capital covenant to specifically exclude the Senior Notes as a component
of working capital and requires that the Company maintain $6,000,000 of working
capital, excluding the Senior Notes. The net worth covenant was changed to
require $30,000,000 of adjusted net worth.
29
In 1996 the Company issued $10,000,000 of 10.75% Economic Development
Revenue Bonds due September 1, 2026 issued by the City of Kimball, Nebraska (the
"Bonds"). Sinking fund payments began on September 1, 1999 in the amount of
$100,000 annually and continue in this amount until the year 2008, when the
annual sinking fund payment will gradually increase.
The Bonds provide for certain covenants and requirements relating to, among
others, incurrence of additional debt, payment of dividends and a debt service
coverage ratio of earnings before interest, income taxes, and depreciation and
amortization ("EBITDA") to total debt service. At December 31, 1997, the debt
service coverage ratio of 1.04 to 1 was less than the 1.25 to 1 required. Under
the terms of the Bonds, the deficiency in the debt coverage ratio did not and
will not result in a default, but the Company was required to pay into a debt
service fund held by the Trustee for the Bonds a total amount equal to the
annual debt service for one year on the Bonds. Through March 31, 1999, the
Company paid $1,075,000 into this fund, as required. Under the terms of the
Bonds, the Company can request that the balance of the debt service reserve fund
be returned to the Company if a debt service coverage ratio of 1.50 to 1 is met
for two consecutive quarters. For the quarters ended March 31, 1999 and
December 31, 1998, the debt service coverage ratios were 1.68 and 1.58,
respectively. In May 1999, the Trustee for the Bonds returned the balance of the
debt service reserve fund to the Company. The balance of the debt service
reserve fund was reflected as a component of restricted cash at December 31,
1998. At December 31, 1999 the debt service coverage ratio of 1.68 to 1 was
greater than the 1.25 to 1 required.
At December 31, 1999 and 1998, funds available to borrow under the Revolver
were $8,603,000 and $8,351,000, respectively. Management believes that
sufficient resources will be available to meet the Company's cash requirements
through at least May 2001. In May 2001 the $50,000,000 of Senior Notes mature.
Some portion or all of the borrowings under the Senior Notes will need to be
refinanced by the maturity date, with any portion not refinanced to be required
from other sources such as cash from operations or net proceeds from the sale of
assets or additional equity. The ability of the Company to refinance the Senior
Notes at reasonable interest rates is dependent upon improving results from
operations and is contingent on a favorable interest rate environment when the
Company attempts to refinance the debt. Failure to obtain refinancing could
materially adversely affect the Company.
The Company expects 2000 capital additions, excluding the $3,000,000
purchase of vehicles and rolling stock discussed previously, to be approximately
$4,000,000. The Company believes that it has all of the facilities required by
the business for the foreseeable future. Thus, the Company anticipates that
capital expenditures in 2000 will be limited to maintaining existing capital
assets, replacing site services equipment, and upgrading information technology
hardware and software. However, the Company continues to evaluate potential
acquisitions and opening additional site services offices within and next to the
Company's service areas. Thus, it is possible that capital additions could
exceed the $7,000,000 currently planned.
Dividends on the Company's Series B Convertible Preferred Stock are payable
on the 15th day of January, April, July and October, at the rate of $1.00 per
share, per quarter; 112,000 shares are outstanding. Under the terms of the
preferred stock, the Company can elect to pay dividends in cash or in common
stock with a market value equal to the amount of the dividend payable. Since
March 1995, the Company has elected to pay the dividends in common stock. The
Company issued a total of 279,000 shares of common stock to the holders of the
preferred stock for the year 1999. The Company anticipates that the preferred
stock dividends payable through 2000 will be paid in common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting of Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of the derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is
30
designated as part of the hedge transaction, and if it is, the type of hedge
transaction. The Company anticipates that the adoption of this standard will not
have a significant effect on the Company's results of operations or its
financial position. The statement is effective for periods beginning after
June 15, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk on the interest that it pays on its
debt due to changes in the general level of interest rates. The Company manages
its interest rate exposure by borrowing at fixed rates for longer time horizons
to finance non-current assets and by borrowing at variable rates for working
capital and other short term needs. The following table provides information
regarding the Company's fixed rate borrowings:
SCHEDULED MATURITY DATES 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- ------------------------ -------- ----------- -------- -------- -------- ---------- -----------
Economic Development Revenue Bonds........... $100,000 $ 100,000 $100,000 $100,000 $100,000 $9,400,000 $ 9,900,000
Senior Notes................................. -- 50,000,000 -- -- -- -- 50,000,000
-------- ----------- -------- -------- -------- ---------- -----------
Total........................................ $100,000 $50,100,000 $100,000 $100,000 $100,000 $9,400,000 $59,900,000
======== =========== ======== ======== ======== ========== ===========
Weighted average interest rate on total
outstanding fixed rate borrowings.......... 12.21% 11.90% 10.75% 10.75% 10.75% 10.75%
======== =========== ======== ======== ======== ==========
In addition to the fixed rate borrowings described in the table above, the
Company had at December 31, 1999 borrowings at variable interest rates of
$14,897,000 under the Revolver and Term Note which bear interest at the "prime"
rate (8.5% at December 31, 1999) plus 1.5% or at the Eurodollar rate (6.461% at
December 31, 1999) plus 3.0%. Hypothetically, if this amount were to remain
outstanding for the entire year and interest rates were to increase by 2.0%,
interest expense would increase by approximately $298,000. It is the Company's
policy not to hedge interest rate risk. The Revolver is due in May 2003 and the
last payment on the Term Note is due in May 2004.
The Company is not subject to market risk arising from transactions in
foreign currencies since substantially all revenues and expenses are transacted
in U.S. dollars. The Company is subject to minimal market risk arising from
purchases of commodities since no significant amount of commodities are used in
the treatment of hazardous waste.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Clean Harbors, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Clean Harbors, Inc. and its subsidiaries (the "Company")
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 2000
32
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Revenues.................................................... $202,965 $197,439 $183,767
Cost of revenues............................................ 149,637 147,214 140,926
Selling, general and administrative expenses................ 37,190 34,976 34,114
Depreciation and amortization of intangible assets.......... 9,501 9,112 9,228
-------- -------- --------
Income (loss) from operations............................... 6,637 6,137 (501)
Other income, net........................................... -- -- 800
Interest expense, net....................................... 8,599 9,631 9,182
-------- -------- --------
Loss before provision for income taxes...................... (1,962) (3,494) (8,883)
Provision for income taxes.................................. 282 360 4,845
-------- -------- --------
Net loss.................................................... $ (2,244) $ (3,854) $(13,728)
======== ======== ========
Basic and diluted loss per share............................ $ (0.25) $ (0.42) $ (1.42)
======== ======== ========
Weighted average common shares outstanding.................. 10,649 10,309 9,959
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
33
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
Current assets:
Cash and cash equivalents................................. $ 2,783 $ 1,895
Restricted investments.................................... 1,116 2,366
Accounts receivable, net of allowance for doubtful
accounts of $1,157 and $1,013, respectively............. 43,780 41,409
Prepaid expenses.......................................... 1,094 939
Supplies inventories...................................... 2,808 2,858
Income tax receivable..................................... 122 1,236
-------- --------
Total current assets.................................... 51,703 50,703
-------- --------
Property, plant and equipment:
Land...................................................... 8,478 8,182
Buildings and improvements................................ 40,612 39,521
Vehicles and equipment.................................... 84,528 79,430
Furniture and fixtures.................................... 2,219 2,190
Construction in progress.................................. 1,224 967
-------- --------
137,061 130,290
Less-accumulated depreciation and amortization............ 80,849 73,157
-------- --------
56,212 57,133
-------- --------
Other assets:
Goodwill, net............................................. 20,566 21,055
Permits, net.............................................. 12,633 13,322
Other..................................................... 4,133 4,721
-------- --------
37,332 39,098
-------- --------
Total assets............................................ $145,247 $146,934
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
Current liabilities:
Current maturities of long-term obligations............... $ 1,300 $ 4,100
Accounts payable.......................................... 17,830 17,998
Accrued disposal costs.................................... 6,591 6,335
Other accrued expenses.................................... 11,360 11,999
Income taxes payable...................................... 57 50
-------- --------
Total current liabilities............................... 37,138 40,482
-------- --------
Other liabilities:
Long-term obligations, less current maturities............ 72,683 68,774
Other..................................................... 1,255 1,368
-------- --------
Total other liabilities................................. 73,938 70,142
-------- --------
Commitments and contingent liabilities (Notes 5, 7, 9, and
10)
Stockholders' equity:
Preferred stock, $.01 par value:
Series A convertible preferred stock Authorized
2,000,000 shares; issued and outstanding--none........ -- --
Series B convertible preferred stock Authorized 156,416
shares; issued and outstanding 112,000 shares
(liquidation preference of $5,600,000)................ 1 1
Common stock, $.01 par value:
Authorized 20,000,000 shares; issued and outstanding
10,798,007 and 10,420,874 shares, respectively........ 108 104
Additional paid-in capital................................ 61,245 60,670
Accumulated other comprehensive loss...................... (36) (10)
Accumulated deficit....................................... (27,147) (24,455)
-------- --------
Total stockholders' equity.............................. 34,171 36,310
-------- --------
Total liabilities and stockholders' equity.............. $145,247 $146,934
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(2,244) $(3,854) $(13,728)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 9,501 9,112 9,228
Allowance for doubtful accounts........................... 683 559 683
Amortization of deferred financing costs.................. 344 490 747
Deferred income taxes..................................... -- 113 4,570
Loss on sale of fixed assets.............................. -- 15 67
Changes in assets and liabilities, net of acquisition:
Accounts receivable..................................... (2,800) (4,132) 4,226
Prepaid expenses........................................ (155) 579 85
Supplies inventories.................................... 50 (47) 55
Income tax receivable................................... 1,114 433 (1)
Other assets............................................ 463 (198) (195)
Accounts payable........................................ (231) 4,107 (6,309)
Accrued disposal costs.................................. 256 (765) (812)
Other accrued expenses.................................. (769) (2,573) (349)
Income taxes payable.................................... 7 40 (152)
Other liabilities....................................... (113) 17 405
------- ------- --------
Net cash provided by (used in) operating activities..... 6,106 3,896 (1,480)
------- ------- --------
Cash flows from investing activities:
Additions to property, plant and equipment................ (5,080) (4,534) (3,366)
Acquisition............................................... (1,900) -- --
Proceeds from sales and maturities of restricted
investments............................................. 1,225 150 7,262
Cost of restricted investments purchased.................. -- (1,425) (172)
Proceeds from sale of fixed assets........................ -- 83 1,888
Increase in permits....................................... (359) (674) --
------- ------- --------
Net cash provided by (used in) investing activities..... (6,114) (6,400) 5,612
------- ------- --------
Cash flows from financing activities:
Payments on long-term obligations......................... (3,050) (4,037) (5,009)
Net borrowings (payments) under long-term revolver........ (324) 4,363 3,343
Issuance of long-term debt................................ 4,139 -- --
Additions to deferred financing costs..................... -- -- (62)
Proceeds from employee stock purchase plan................ 131 133 146
Proceeds from exercise of stock options................... -- 5 19
------- ------- --------
Net cash provided by (used in) financing activities..... 896 464 (1,563)
------- ------- --------
Increase (decrease) in cash and cash equivalents............ 888 (2,040) 2,569
Cash and cash equivalents, beginning of year................ 1,895 3,935 1,366
------- ------- --------
Cash and cash equivalents, end of year...................... $ 2,783 $ 1,895 $ 3,935
======= ======= ========
Supplemental information:
Cash payments (receipts) for interest and income taxes:
Interest, net............................................. $ 7,463 $ 9,967 $ 8,519
Income taxes, net......................................... (1,236) (201) 421
Noncash investing and financing activities:
Stock dividend on preferred stock......................... $ 448 $ 448 $ 448
Property, plant & equipment accrued....................... 194 131 --
The accompanying notes are an integral part of these consolidated financial
statements.
36
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
SERIES B
PREFERRED STOCK COMMON STOCK ACCUMULATED
--------------------- --------------------- ADDITIONAL OTHER
NUMBER OF $0.01 PAR NUMBER OF $0.01 PAR PAID-IN COMPREHENSIVE COMPREHENSIVE
SHARES VALUE SHARES VALUE CAPITAL INCOME (LOSS) INCOME (LOSS)
--------- --------- --------- --------- ---------- ------------- -------------
Balance at December 31,
1996....................... 112 $ 1 9,743 $ 98 $59,477 -- $(15)
Net loss................... -- -- -- -- -- $(13,728) --
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the
period................. -- -- -- -- -- 20 --
Reclassification
adjustment for losses
included in net loss... -- -- -- -- -- (17) --
--------
Other comprehensive
income................... -- -- -- -- -- 3 3
--------
Comprehensive loss......... -- -- -- -- -- $(13,725) --
========
Preferred stock dividends:
Series B................. -- -- 250 2 446 -- --
Employee stock purchase
plan..................... -- -- 99 1 145 -- --
Proceeds from exercise of
stock options............ -- -- 9 -- 19 -- --
--- ---- ------ ---- ------- -------- ----
Balance at December 31,
1997....................... 112 $ 1 10,101 $101 $60,087 -- $(12)
Net loss................... -- -- -- -- -- $ (3,854) --
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the
period................. -- -- -- -- -- 2 --
Reclassification
adjustment for gains
included in net loss... -- -- -- -- -- -- --
--------
Other comprehensive
income................... -- -- -- -- -- 2 2
--------
Comprehensive loss......... -- -- -- -- -- $ (3,852) --
========
Preferred stock dividends:
Series B................. -- -- 229 2 446 -- --
Employee stock purchase
plan..................... -- -- 88 1 132 -- --
Proceeds from exercise of
stock options............ -- -- 3 -- 5 -- --
--- ---- ------ ---- ------- -------- ----
Balance at December 31,
1998....................... 112 $ 1 10,421 $104 $60,670 -- $(10)
Net loss................... -- -- -- -- -- $ (2,244) --
Other comprehensive (loss),
net of tax:
Unrealized holding gains
arising in the
period................. -- -- -- -- -- -- --
Unrealized losses on
securities, net of
reclassification
adjustment............. -- -- -- -- -- (26) --
--------
Other comprehensive loss... -- -- -- -- -- (26) (26)
--------
Comprehensive loss......... -- -- -- -- -- $ (2,270) --
========
Preferred stock dividends:
Series B................. -- -- 279 3 445 -- --
Employee stock purchase
plan..................... -- -- 98 1 130 -- --
--- ---- ------ ---- ------- -------- ----
Balance at December 31,
1999....................... 112 $ 1 10,798 $108 $61,245 -- $(36)
=== ==== ====== ==== ======= ======== ====
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31,
1996....................... $ (5,977) $ 53,584
Net loss................... (13,728) (13,728)
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the
period................. -- --
Reclassification
adjustment for losses
included in net loss... -- --
Other comprehensive
income................... -- 3
Comprehensive loss......... -- --
Preferred stock dividends:
Series B................. (448) --
Employee stock purchase
plan..................... -- 146
Proceeds from exercise of
stock options............ -- 19
-------- --------
Balance at December 31,
1997....................... $(20,153) $ 40,024
Net loss................... (3,854) (3,854)
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the
period................. -- --
Reclassification
adjustment for gains
included in net loss... -- --
Other comprehensive
income................... -- 2
Comprehensive loss......... -- --
Preferred stock dividends:
Series B................. (448) --
Employee stock purchase
plan..................... -- 133
Proceeds from exercise of
stock options............ -- 5
-------- --------
Balance at December 31,
1998....................... $(24,455) $ 36,310
Net loss................... (2,244) (2,244)
Other comprehensive (loss),
net of tax:
Unrealized holding gains
arising in the
period................. -- --
Unrealized losses on
securities, net of
reclassification
adjustment............. -- --
Other comprehensive loss... -- (26)
Comprehensive loss......... -- --
Preferred stock dividends:
Series B................. (448) --
Employee stock purchase
plan..................... -- 131
-------- --------
Balance at December 31,
1999....................... $(27,147) $ 34,171
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Clean Harbors, Inc. and its wholly-owned subsidiaries (collectively, the
"Company") provide a broad range of environmental services including: industrial
waste management services involving transportation, treatment and disposal of
industrial wastes; site services provided at customer sites; and specialized
handling of laboratory chemicals and household hazardous wastes. The Company
provides these services to a diversified customer base across the United States,
primarily in the Northeast, Mid-Atlantic, Midwest and Western Regions.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company reflect
the application of certain significant accounting policies as described below:
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated statements include the accounts of Clean
Harbors, Inc. and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company recognizes revenues and accrues the related cost of treatment
and disposal upon the receipt of waste materials, except for incineration where
revenue is recognized as waste is burned. Other revenues are recognized as the
related costs are incurred.
(C) INCOME TAXES
Deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense or benefit is the result of changes between
deferred tax assets and liabilities.
A valuation allowance is established when, based on an evaluation of
objective verifiable evidence, there is a likelihood that some portion or all of
deferred tax assets will not be realized.
(D) EARNINGS PER SHARE
Basic EPS is calculated by dividing income available to common shareholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS gives effect to all potential dilutive common shares that were
outstanding during the period.
(E) SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The Company operates in a single segment as a full service
provider of
38
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
environmental services within the United States and Puerto Rico, and no
individual customer accounts for more than 5% of revenues.
(F) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with original
maturities of less than three months to be cash equivalents.
(G) INVESTMENTS
Debt securities are classified as "available for sale" or "held to
maturity." Available for sale securities are recorded at fair value with the
offsetting unrealized gain or loss included, net of tax, in stockholders'
equity. Held to maturity securities are recorded at purchase cost.
(H) SUPPLIES INVENTORY
Supplies inventory, stated at the lower of cost or market, is charged to
operations on a first-in, first-out basis.
(I) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company depreciates
and amortizes the cost of these assets, less the estimated salvage value, using
the straight-line method as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -----------
Buildings and improvements.................................. 5-30 years
Vehicles and equipment...................................... 3-15 years
Furniture and fixtures...................................... 5-8 years
Leaseholds are amortized over the shorter of the life of the lease or the
asset. Depreciation expense includes depreciation of property, plant and
equipment, and equipment capitalized under capital leases. Depreciation expense
was $7,694,000 for 1999, $7,461,000 for 1998 and $7,594,000 for 1997. Upon
retirement or other disposition, the cost and related accumulated depreciation
of the assets are removed from the accounts and the resulting gain or loss is
reflected in income.
(J) GOODWILL AND PERMITS
Goodwill and permits, as further discussed in Note 6, are stated at cost and
are being amortized using the straight-line method over 20 years for permits and
periods ranging from 20 to 40 years for goodwill.
An impairment in the carrying value of long-lived assets, including goodwill
and permits, is recognized when the expected future undiscounted cash flows
derived from the assets are less than its carrying value. In addition, the
Company's evaluation considers nonfinancial data such as market trends and
changes in management's market emphasis.
39
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the life of the related debt
instrument, and they are carried as a component of long-term debt.
(L) COSTS TO TREAT ENVIRONMENTAL CONTAMINATION
Costs relating to environmental cleanup resulting from operating activities
are expensed as incurred. Environmental cleanup costs that improve properties,
as compared with the condition of that property when originally acquired, are
capitalized to the extent that they are recoverable.
(M) LETTERS OF CREDIT
The Company utilizes letters of credit to provide collateral assurance to
issuers of performance bonds for certain contracts; to assure regulatory
authorities that certain funds will be available for corrective action
activities at its hazardous waste management facilities, as described in
Note 7(b) below; and to provide financial assurance to regulators of its captive
insurance company. As of December 31, 1999 and 1998, the Company had outstanding
letters of credit amounting to $6,299,000 and $6,111,000, respectively.
As of December 31, 1999, the Company had no significant concentrations of
credit risk.
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(O) RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the 1999 presentation.
(3) ACQUISITION
On May 25, 1999, the Company acquired the assets of the Texas Transportation
and Brokerage Divisions of American Ecology Services Corporation for a cash
price of $1,900,000. The divisions operate out of locations in Dallas, Houston
and Corpus Christi, Texas. The divisions provide waste management services
primarily to small quantity generators throughout Texas and transportation
services for both solid and liquid wastes. This acquisition has been accounted
for under the purchase method of accounting. The purchase price has been
allocated based on estimated fair values of assets acquired at the date of
acquisition. The acquisition resulted in $272,000 of acquired goodwill, which is
being amortized on the straight-line basis over 20 years. The results of the
acquired businesses have been included in the consolidated financial statements
since the acquisition date. The acquisition did not materially affect revenues
or results of operations for the year ended December 31, 1999.
Assuming this acquisition had occurred January 1, 1998, consolidated, pro
forma revenues, net loss and loss per share would not have been materially
different than the amounts reported for the years ended December 31, 1998 and
1999. Such unaudited pro forma amounts are not indicative of what the actual
40
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITION (CONTINUED)
consolidated results of operations might have been if the acquisition had been
effective at the beginning of 1998.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value.
The fair value of restricted investments is based on quoted market prices for
these securities. The fair values of the Company's bank borrowings approximate
fair value because the interest rates are based on floating rates identified by
reference to market rates. The fair values of the Company's senior notes and
economic development revenue bonds cannot be determined since there is no active
market in these securities. At December 31, 1999 and 1998, the estimated fair
values of the Company's financial instruments are as follows (in thousands):
NET
CARRYING FAIR UNREALIZED
AMOUNT VALUE LOSS
-------- -------- ----------
December 31, 1999
Cash and cash equivalents..................... $ 2,783 $ 2,783 $ --
Restricted investments available for sale..... 840 840 (55)
Restricted investments held to maturity....... 276 276 --
Long-term obligations for which no quoted
market prices are available................. 59,900 -- --
Other long-term obligations................... 14,897 14,897 --
December 31, 1998
Cash and cash equivalents..................... $ 1,895 $ 1,895 $ --
Restricted investments available for sale..... 942 942 (16)
Restricted investments held to maturity....... 1,424 1,424 --
Long-term obligations for which no quoted
market prices are available................. 60,000 -- --
Other long-term obligations................... 14,032 14,032 --
Available for sale securities are mortgage backed securities. Held to
maturity consist primarily of collateralized mortgage obligations. Contractual
maturities as of December 31, 1999 range from one to ten years, with the
majority being five years or less. Expected maturities may differ from
contractual maturities, as borrrowers may have the right to call or prepay
obligations without penalties.
(5) RESTRICTED INVESTMENTS
Federal and state regulations require liability insurance coverage for all
facilities that treat, store, or dispose of hazardous waste, and financial
assurance that certain funds will be available for closure of those facilities,
should a facility cease operation, and post closure coverage where required by
law. In 1989, the Company established a wholly-owned captive insurance company
pursuant to the Federal Risk Retention Act of 1986. This company qualifies as a
licensed insurance company and is authorized to write closure, professional
liability, and pollution liability insurance for the Company and its operating
subsidiaries. Investments are held by the captive insurance company as assets
against its insured liabilities and are restricted for future payment of
insurance claims. At December 31, 1999, the Company insured several facilities
for closure and post closure through its captive insurance company. At
December 31, 1999, the
41
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) RESTRICTED INVESTMENTS (CONTINUED)
amortized cost of these securities was $1,171,000. A valuation allowance of
$55,000 was recorded to reflect the fair value of available for sale securities
of $840,000. No valuation allowance was required to reflect the fair value of
held to maturity securities $276,000.
The amortized cost of these securities held at December 31, 1998 was
$1,232,000. A valuation allowance of $16,000 was recorded to reflect the fair
value of available for sale securities of $942,000, and a realized gain of
$2,000 was reflected in net income for the year. No valuation allowance was
required to reflect the fair value of held to maturity securities of $1,424,000.
In 1998 as further discussed in Note 9, the Company was required to pay
funds into a debt service reserve fund. These funds were restricted as to use
and were to provide additional security to the holders of the bonds. At
December 31, 1998, these payments plus interest earned totaled $1,118,000. In
May 1999, the Trustee for the Bonds returned the balance of the debt service
reserve fund to the Company.
(6) INTANGIBLE ASSETS
Below is a summary of intangible assets at December 31, 1999 and 1998 (in
thousands):
1999 1998
-------- --------
Goodwill.................................................. $28,948 $28,677
Permits................................................... 20,601 20,243
------- -------
49,549 48,920
Less accumulated amortization............................. 16,350 14,543
------- -------
$33,199 $34,377
======= =======
Permits consist of the value of permits acquired through acquisition and
environmental cleanup costs that improve facilities, as compared with the
condition of that property when originally acquired. Amounts capitalized as
permits were $359,000 and $2,554,000 in 1999 and 1998, respectively. Prior to
1998 permits were capitalized to construction in progress.
Amortization expense approximated $1,807,000, $1,651,000, and $1,634,000,
for the years 1999, 1998, and 1997, respectively.
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS
(A) LEGAL MATTERS
In the ordinary course of conducting its business, the Company becomes
involved in environmentally related lawsuits and administrative proceedings.
Some of these proceedings may result in fines, penalties or judgments against
the Company.
As of December 31, 1999, the Company has been named as a potentially
responsible party ("PRP") in a number of lawsuits arising from the disposal of
wastes by certain Company subsidiaries at 27 state and federal Superfund sites.
Fourteen of these cases involve two subsidiaries which the Company acquired from
Chemical Waste Management, Inc. ("ChemWaste"), a former subsidiary of Waste
Management, Inc. ("Waste Management"). As part of the acquisition, ChemWaste
agreed to indemnify the Company with respect to any liability of its Braintree
and Natick subsidiaries for waste disposed of before the Company acquired them.
Accordingly, Waste Management is paying all costs of defending the Natick and
Braintree
42
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
subsidiaries in these 14 cases, including legal fees and settlement costs. Four
cases involve Mr. Frank, Inc. and one case involves Connecticut Treatment Center
("CTC"). Southdown, Inc., from which the Company bought CTC, has agreed to
indemnify the Company with respect to any liability for waste disposed of by CTC
before the Company acquired CTC, and the sellers of Mr. Frank, Inc. agreed to a
limited indemnity against certain environmental liabilities arising from prior
operations of Mr. Frank, Inc. Six pending cases involve subsidiaries which the
Company acquired in January 1989, when it purchased all of the outstanding
shares of ChemClear Inc., a publicly traded company ("ChemClear"). The Company
has also been identified as a PRP at two additional sites at which the Company
believes it has no liability.
Management routinely reviews each Superfund site in which the Company's
subsidiaries are involved, considers each subsidiary's role at each site and its
relationship to the other PRPs at the site, the quantity and content of the
waste it disposed of at the site, and the number and financial capabilities of
the other PRPs at the site. Based on reviews of the various sites and currently
available information, and management's judgment and prior experience with
similar situations, expense accruals are provided by the Company for its share
of future site cleanup costs, and existing accruals are revised as necessary.
The Company had accrued environmental costs, based on the Company's estimate of
its expected liability of $285,000 and $296,000 for cleanup of Superfund sites
at December 31, 1999 and 1998, respectively. However, Superfund legislation
permits strict joint and several liability to be imposed without regard to fault
and, as a result, one PRP might be required to bear significantly more than its
proportional share of the cleanup costs if other PRPs do not pay their share of
such costs.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the United States Environmental Protection Agency, are conducting an
inquiry concerning certain railcars which were destined for the Company's
Kimball, Nebraska incinerator. Several railcars containing waste materials
generated by the Company's waste treatment plants were not delivered to the
Company's Sterling, Colorado rail transfer facility in a timely manner by the
railroad company. The Company has cooperated fully with the federal and state
authorities and has arranged for company personnel to be interviewed and has
produced records, documents and other materials concerning the railcars in
question. The Company has conducted its own internal investigation and believes
that there has been no wrongdoing on the part of the Company with respect to the
late delivery of railcars. However, assurances cannot be given that the
government authorities may not reach a different conclusion or attempt to levy
penalties.
In October 1995 an employee was killed in an accident when a drum exploded
at a facility in Cincinnati, Ohio operated by a subsidiary, Spring Grove
Resource Recovery, Inc. ("Spring Grove"). During 1999 the Company was notified
by the Justice Department that the Department believed it had a cause of action
against a subsidiary for potential civil and/or criminal violations of its RCRA
permit as a result of the 1995 accident. The Company has conducted an exhaustive
internal review of the circumstances leading up to the accident and believes
that the subsidiary did not knowingly violate any relevant terms of its RCRA
permit. The Company has also engaged the services of external legal and
regulatory experts to review the situation and they have also concluded that the
available evidence does not support a conclusion that the subsidiary knowingly
violated its permit. Assurances cannot be given, however, that government
authorities will not reach a different conclusion and proceed with legal action
or levy penalties. The Company has executed tolling agreements with the
government and is presently engaged in discussions with the government in an
effort to resolve this matter.
43
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
(B) ENVIRONMENTAL MATTERS
Under the Federal Resources Conservation and Recovery Act of 1976 ("RCRA"),
every facility that treats, stores or disposes of hazardous waste must obtain a
RCRA permit from the EPA or an authorized state agency and must comply with
certain operating requirements. Of the Company's 12 waste management facilities,
nine are subject to RCRA licensing. RCRA requires that permits contain a
schedule of required on-site study and cleanup activities, known as "corrective
action," including detailed compliance schedules and provisions for assurance of
financial responsibility.
The EPA or applicable state agency have begun RCRA corrective action
investigations at the Company's RCRA licensed facilities in Baltimore, Maryland;
Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn,
Massachusetts; and Cincinnati, Ohio. The Company is also involved in site
studies at its non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts;
and South Portland, Maine.
In January 1995, the Company entered into a definitive agreement with
ChemWaste to lease a site previously leased by ChemWaste which adjoins the
Company's Chicago facility. During November 1995, the Company acquired the
existing improvements on the ChemWaste site in exchange for agreeing to share
the costs of dismantling an existing hazardous waste incinerator and cleaning up
the site. Under the sharing arrangement with ChemWaste, the Company will manage
the RCRA corrective action investigation at the site and over a period of
15 years could be required to contribute up to a maximum of $2,000,000 for
dismantling and decontaminating the incinerator and other equipment, and up to a
maximum of $7,000,000 for studies and cleanup of the site. Any additional costs
beyond those contemplated by the sharing arrangement during this time period
would be borne by ChemWaste. The Company had accruals of $1,627,000 and
$1,532,000 relating to this liability at December 31, 1999 and 1998,
respectively, which are the unused amounts of a remediation accrual that was
established as part of the acquisition of ChemWaste's Chicago facility. In
addition, the Company believes that it would be able to appropriately capitalize
the remediation expenditures in excess of the amount accrued that it may be
obligated to make under the agreement. No estimate can be made as to when the
remediation activities will be completed.
Two RCRA facilities in Bristol, Connecticut and Cincinnati, Ohio were
acquired from a subsidiary of Southdown, Inc. Southdown has agreed to indemnify
the Company against any costs incurred or liability arising from contamination
on-site arising from prior ownership, including the cost of corrective action.
The prior owner of the Woburn facility provided a limited indemnity for any
costs incurred or liability arising from contamination on-site due to prior
ownership.
The following table summaries non-reimbursed environmental remediation
expenditures capitalized and expenses incurred relating to the Company's
facilities for the years ended December 31 (in thousands):
1999 1998 1997
-------- -------- --------
Environmental expenditures capitalized.................. $274 $674 $564
Environmental expenses incurred......................... 37 95 256
---- ---- ----
$311 $769 $820
==== ==== ====
44
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
The Company expects environmental remediation expenditures of the magnitude
incurred for the last three years to continue for the foreseeable future.
The Company was also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final approval
from the Pennsylvania regulatory authorities, certifying final closure of the
facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action
investigation at the Chester site. PECO asked the Company to participate in the
site studies, and in October 1994, the Company agreed to be responsible for
seventy-five percent of the cost of these studies, which was estimated to be in
the range of $2,000,000, by, among other things, performing field services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts and credits to PECO totaling $908,000 through August 2, 1999.
The Company and PECO then negotiated an amendment to their 1994 agreement,
whereby the Company's responsibility for its share of the cost of site studies
was capped at $1,733,000. The studies are expected to be concluded in early
2000, whereupon the EPA's order will terminate. The Company had accrued $825,000
and $877,000 relating to this liability at December 31, 1999 and 1998,
respectively. The $825,000 balance owed under the amendment will be paid in
2000.
(C) OTHER CONTINGENCIES
The Company is subject to various regulatory requirements, including the
procurement of requisite licenses and permits at its facilities. These licenses
and permits without which the Company's operations would be adversely affected
are subject to periodic renewal. 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.
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures, as well as those risks required to be insured by law or
contract. It is the policy of the Company to retain a significant portion of
certain expected losses related primarily to workers' compensation,
comprehensive general and vehicle liability. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of the
aggregate liability for claims.
(8) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
1999 1998
-------- --------
Insurance................................................. $ 2,329 $ 3,160
Other items............................................... 9,031 8,839
------- -------
$11,360 $11,999
======= =======
45
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS
As amended, the Company has a $30,500,000 Loan Agreement (the "Loan
Agreement") with a financial institution. The Loan Agreement provides for a
$24,500,000 revolving credit portion (the "Revolver") and a $6,000,000 term
promissory note (the "Term Note"). In May 1999, the Term Note was amended. The
Term Note as amended allowed the Company to increase the amount borrowed under
the Term Note by $4,139,000 from the $1,861,000 owed prior to the amendment of
the Term Note to the $6,000,000 principal amount of the Term Note as amended.
The Term Note has monthly principal payments of $100,000 with the last payment
due in May, 2004. The Revolver allows the Company to borrow up to $24,500,000 in
cash and letters of credit, based on a formula of eligible accounts receivable.
Letters of credit may not exceed $20,000,000 at any one time. At December 31,
1999 and 1998, funds available to borrow under the Revolver were $8,603,000 and
$8,351,000, respectively. The Revolver requires the Company to pay a line fee of
one half of one percent on the unused portion of the line. In June 1999, the
term of the Revolver was extended from May 8, 2000 to May 8, 2001.
The Loan Agreement allows for up to 80% of the outstanding balance of the
Revolver and 100% of the balance of the Term Note to bear interest at the
Eurodollar rate plus three percent; the remaining balance bears interest at a
rate equal to the "prime" rate plus one and one-half percent. The Loan Agreement
is collateralized by substantially all of the Company's assets, and the Loan
Agreement provides for certain covenants including, among others, maintenance of
a minimum level of working capital and adjusted net worth. At December 31, 1999,
the Loan Agreement required minimum levels of working capital and adjusted net
worth of $6,000,000 and $33,000,000, respectively. At December 31, 1999, the
Company had working capital and adjusted net worth of $14,565,000 and
$34,171,000, respectively. The Company must also maintain borrowing availability
of not less than $4,500,000 for sixty consecutive days prior to paying principal
and interest on its other indebtedness and dividends in cash on its preferred
stock. In the first half of 1999 and the first quarter of 2000, the Company
violated this covenant, which was or has been waived by the financial
institution through May 15, 1999 and 2000, respectively.
In the first quarter of 2000, the Loan Agreement was amended and an
additional term promissory note (the "2000 Term Note") was entered into with the
financial institution. The original principal amount of the 2000 Term Note is
$3,000,000, it bears interest at the "prime" rate plus 1.5% or the Eurodollar
rate plus 3.0%, and it is payable in 36 monthly installments commencing on
May 1, 2000.
In the first quarter of 2000, the due date of the Revolver was extended from
May 8, 2001 to May 8, 2003. The Company has $50,000,000 of 12.50% Senior Notes
due May 15, 2001 (the "Senior Notes"). In May 2000, the Senior Notes will be
reclassified from a long-term liability to a current liability, since they will
then be payable within one year. The Loan Agreement, as amended, redefines the
working capital covenant to specifically exclude the Senior Notes as a component
of working capital and requires that the Company maintain $6,000,000 of working
capital, excluding the Senior Notes. The net worth covenant was changed to
require $30,000,000 of adjusted net worth.
46
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
In 1996 the Company issued $10,000,000 of 10.75% Economic Development
Revenue Bonds due September 1, 2026 issued by the City of Kimball, Nebraska (the
"Bonds"). In connection with the issuance of the Bonds, the Company entered into
a facilities lease with the City of Kimball, whereby the City acquired a
leasehold interest in the Facility and the Company leased the Facility back from
the City. The Company retains title to the facility. The Bonds were issued at
100% of their principal value. The Bonds are not redeemable prior to
September 1, 2006. From that date until September 1, 2008, the Bonds are
redeemable at a premium. After September 1, 2008, the Bonds are redeemable at
par. Sinking fund payments began on September 1, 1999 in the amount of $100,000
annually and continue in this amount until the year 2008, when the annual
sinking fund payment will gradually increase.
The Bonds provide for certain covenants and requirements relating to, among
others, incurrence of additional debt, payment of dividends and a debt service
coverage ratio of earnings before interest, income taxes, and depreciation and
amortization ("EBITDA") to total debt service. At December 31, 1997, the debt
service coverage ratio of 1.04 to 1 was less than the 1.25 to 1 required. Under
the terms of the Bonds, the deficiency in the debt coverage ratio did not and
will not result in a default, but the Company was required to pay into a debt
service fund held by the Trustee for the Bonds a total amount equal to the
annual debt service for one year on the Bonds. Through March 31, 1999, the
Company paid $1,075,000 into this fund, as required. Under the terms of the
Bonds, the Company can request that the balance of the debt service reserve fund
be returned to the Company if a debt service coverage ratio of 1.50 to 1 is met
for two consecutive quarters. For the quarters ended March 31, 1999 and
December 31, 1998, the debt service coverage ratios were 1.68 and 1.58,
respectively. In May 1999, the Trustee for the Bonds returned the balance of the
debt service reserve fund to the Company. The balance of the debt service
reserve fund was reflected as a component of restricted cash at December 31,
1998. At December 31, 1999 the debt service coverage ratio of 1.68 to 1 was
greater than the 1.25 to 1 required.
The Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15,
2001. The Senior Notes are not collateralized, and the Senior Note indenture
does not provide for the maintenance of certain financial covenants, although it
does limit, among other things, the issuance of additional debt by the Company
or its subsidiaries and the payment of dividends on, and redemption of, capital
stock of the Company and its subsidiaries. Interest is paid twice each year on
the Senior Notes.
In October 1999, the Company made the final $1,000,000 installment payment
on its 10% senior convertible notes.
47
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
The following table is a summary of the Company's long-term debt obligations
reflecting the transactions discussed above.
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Long-term obligations consist of the following:
Economic development revenue bonds, bearing interest at
10.75%................................................ $ 9,900 $10,000
Revolving credit with a financial institution, bearing
interest at the Eurodollar rate (6.461% at December
31, 1999) plus 3.00% or the "prime" rate (8.5% at
December 31, 1999) plus 1.50%, collateralized by
substantially all assets.............................. 9,597 9,921
Term note payable, bearing interest at the Eurodollar
rate (6.461% at December 31, 1999) plus 3.00% or the
"prime" rate (8.5% at December 31, 1999) plus 1.50%
collateralized by substantially all assets............ 5,300 3,111
Senior notes payable, bearing interest at 12.50%........ 50,000 50,000
Senior convertible notes, bearing interest at 10.00%.... -- 1,000
------- -------
74,797 74,032
Less current maturities................................. 1,300 4,100
Less unamortized financing costs........................ 814 1,158
------- -------
Long-term obligations................................... $72,683 $68,774
======= =======
Below is a summary of minimum principal payments due under the Company's
long-term obligations (in thousands):
YEAR AMOUNT
- ---- --------
2000........................................................ $ 1,300
2001........................................................ 51,300
2002........................................................ 1,300
2003........................................................ 10,897
2004........................................................ 600
Thereafter.................................................. 9,400
-------
Total minimum payments due under long-term obligations
including current maturities.............................. $74,797
=======
(10) LEASES
The Company leases facilities and personal property under certain operating
leases in excess of one year. Some of these lease agreements contain an
escalation clause for increased taxes and operating
48
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) LEASES (CONTINUED)
expenses and are renewable at the option of the Company. Future minimum lease
payments under operating leases are as follows (in thousands):
TOTAL
OPERATING
YEAR LEASES
- ---- ---------
2000........................................................ $ 6,615
2001........................................................ 4,837
2002........................................................ 3,533
2003........................................................ 2,604
2004........................................................ 1,630
Thereafter.................................................. 1,343
-------
$20,562
=======
During the years 1999, 1998 and 1997 rent expense was approximately
$14,058,000, $13,328,000, and $12,421,000, respectively.
(11) FEDERAL AND STATE INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1999 1998 1997
-------- -------- --------
Federal: Current....................................... $(78) $ -- $ --
Deferred............................................. -- -- 1,878
State: Current......................................... 360 247 269
Deferred............................................. -- 113 2,698
---- ---- ------
Net provision for income taxes......................... $282 $360 $4,845
==== ==== ======
The sources of significant timing differences which gave rise to deferred
taxes were as follows (in thousands):
1999 1998 1997
-------- -------- --------
Depreciation........................................ $(282) $ (403) $ (370)
Provision for doubtful accounts..................... (58) 15 2
Insurance reserves.................................. 91 (194) 415
Litigation.......................................... 21 174 (157)
Tax attributes...................................... -- (2,197) (864)
Permits............................................. (115) 796 (212)
Other............................................... (58) 786 (288)
Valuation Allowance................................. 401 1,136 6,050
----- ------- ------
Total deferred tax provision........................ $ -- $ 113 $4,576
===== ======= ======
49
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FEDERAL AND STATE INCOME TAXES (CONTINUED)
The effective income tax rate varies from the amount computed using the
statutory federal income tax rate as follows:
1999 1998 1997
-------- -------- --------
Statutory rate...................................... (34.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Valuation allowance............................... 20.4 32.5 68.1
Adjustment of prior year's estimated attributes... (9.4) -- 11.9
Goodwill amortization............................. 12.6 7.0 3.0
State income taxes, net of federal benefit........ 18.4 7.1 3.0
Income tax refund................................. (4.0) -- --
Other permanent differences....................... 10.4 (2.3) 2.5
----- ----- -----
Net provision for (benefit from) income taxes....... 14.4% 10.3% 54.5%
===== ===== =====
The components of the total net deferred tax asset at December 31, 1999 and
1998 were as follows (in thousands):
1999 1998
-------- --------
Current:
Workmens' compensation accrual.......................... $ 731 $ 822
Accrued closure......................................... 506 277
Provision for doubtful accounts......................... 466 408
Litigation accruals..................................... 279 300
Accrued rent holiday.................................... 104 99
Health insurance accrual................................ 34 34
Miscellaneous........................................... 197 220
Permits................................................. (226) (276)
Valuation allowance..................................... (2,091) (1,884)
------- -------
Total current deferred tax asset........................ $ -- $ --
------- -------
Long-term:
Net operating loss carryforwards........................ $11,198 $11,192
Tax credit carryforwards................................ 1,927 1,927
Other................................................... -- 39
Property, plant and equipment........................... (4,410) (4,522)
Permits................................................. (2,440) (2,555)
Valuation allowance..................................... (6,275) (6,081)
------- -------
Total long-term deferred tax asset...................... $ -- $ --
------- -------
Net deferred tax asset.................................. $ -- $ --
======= =======
SFAS 109, "Accounting for Income Taxes," requires that a valuation allowance
be established when, based on an evaluation of objective verifiable evidence,
there is a likelihood that some portion or all of the deferred tax assets will
not be realized. The Company continually reviews the adequacy of the valuation
allowance for deferred tax assets, and, in 1997, based upon this review, the
valuation allowance was
50
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FEDERAL AND STATE INCOME TAXES (CONTINUED)
increased by $6,050,000, which resulted in a non-cash charge to operations of
the same amount. The valuation allowance was increased by $401,000 and
$1,136,000 in 1999 and 1998, respectively. The actual realization of the net
operating loss carryforwards and other tax assets depend on having future
taxable income of the appropriate character prior to their expiration.
For federal income tax purposes at December 31, 1999, the Company had
regular tax net operating loss carryforwards of $26,304,000 which expire in 2010
and thereafter and alternative minimum tax net operating loss carryforwards of
$29,645,000, which have no expiration and which may be used to offset future
taxable income, if any. The Company also had $3,333,000 of SRLY net operating
loss carryforwards which may only be used to offset future taxable income, if
any, of former ChemClear entities. These net operating loss carryforwards expire
in the amounts of $489,000, $648,000 and $2,196,000 in the years 2001, 2002 and
2003, respectively.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities, which may result in proposed assessments. In
1996, the Company received a notice of intent to assess state income taxes from
one of the states in which it operates. This case is currently undergoing
administrative appeal. If the Company loses the administrative appeal, the
Company may be required to make a payment of approximately $3,000,000 to the
state. The Company cannot currently predict when the decision for the
administrative appeal will be made. The Company believes that it has properly
reported its state income and intends to contest the assessment vigorously.
While the Company believes that the final outcome of the dispute will not have a
material adverse effect on the Company's financial condition or results of
operations, no assurance can be given as to the final outcome of the audit, the
amount of any final adjustment or the potential impact of such adjustments on
the Company's financial condition or results of operations.
(12) LOSS PER SHARE
The following is a reconciliation of basic and diluted loss per share
computations (in thousands except for per share amounts):
YEAR ENDED 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
Net loss.................................. $ (2,244)
Less preferred dividends.................. 448
-------- ------- ------
Basic and diluted EPS (loss available to
shareholders)........................... $ (2,692) 10,649 $(0.25)
======== ======= ======
YEAR ENDED 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
Net loss.................................. $ (3,854)
Less preferred dividends.................. 448
-------- ------- ------
Basic and diluted EPS (loss available to
shareholders)........................... $ (4,302) 10,309 $(0.42)
======== ======= ======
51
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) LOSS PER SHARE (CONTINUED)
YEAR ENDED 1997
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
Net loss.................................. $(13,728)
Less preferred dividends.................. 448
-------- ------- ------
Basic and diluted EPS (loss available to
shareholders)........................... $(14,176) 9,959 $(1.42)
======== ======= ======
The Company has issued options, warrants and convertible preferred stock
which are potentially dilutive to earnings. These have not been included in the
above calculations, since their inclusion would have been antidilutive for the
years ended December 31, 1999, 1998 and 1997.
(13) STOCKHOLDERS' EQUITY
(A) STOCK OPTION PLANS
In 1987, the Company adopted a nonqualified stock option plan ("1987 Plan").
In 1992, the Company adopted an equity incentive plan, which provides for a
variety of incentive awards, including stock options ("1992 Plan"). As of
December 31, 1999, all awards under the 1992 Plan were in the form of
nonqualified stock options. These options generally become exercisable after a
period of one to five years from the date of grant, subject to certain
employment requirements, and terminate ten years from the date of grant. At
December 31, 1999, the Company had reserved 955,600 and 1,250,000 shares of
common stock for issuance under the 1987 and 1992 Plans, respectively.
Under the terms of the 1987 and 1992 Plans, as amended, options may be
granted to purchase shares of common stock at an exercise price less than the
fair market value on the date of grant. No compensation expense related to stock
option grants was recorded in 1999, 1998 or 1997, as the option exercise prices
were equal to, or greater than, the fair market value on the date of grant.
(B) SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), issued in 1995, defined
a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 123 as if the Company had applied
the new method of accounting are made below.
52
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plans for the three years ended December 31, 1999 is as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1996................... 1,466,948 $2.52
Granted at fair value............................ 137,750 2.01
Forfeited........................................ (293,338) 3.66
Exercised........................................ (8,800) 2.13
--------- -----
Outstanding at December 31, 1997................... 1,302,560 2.21
Granted at fair value............................ 618,125 1.77
Forfeited........................................ (516,536) 2.16
Exercised........................................ (2,700) 2.13
--------- -----
Outstanding at December 31, 1998................... 1,401,449 2.04
Granted at fair value............................ 40,500 1.91
Granted at a value greater than fair value....... 2,750 1.50
Forfeited........................................ (145,286) 2.07
Exercised........................................ -- --
--------- -----
Outstanding at December 31, 1999................... 1,299,413 $2.03
========= =====
Summarized information about stock options outstanding at December 31, 1999 is
as follows:
EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- --------------------- ----------- ----------- -------- --------- --------
$1.44- 1.75 113,250 7.64 1.50 30,100 1.54
1.81- 1.81 431,250 8.32 1.81 87,690 1.81
2.00- 2.00 36,000 8.19 2.00 4,000 2.00
2.13- 2.13 696,793 4.47 2.13 603,353 2.13
3.13-13.25 22,120 0.99 5.81 22,120 5.81
Options exercisable at December 31, 1999, 1998 and 1997 were 747,263,
599,605 and 579,872, respectively. The weighted average exercise prices for the
exercisable options at December 31, 1999, 1998 and 1997 were $2.17, $2.28, and
$2.34, respectively.
The fair value of each option granted during 1999, 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
1999 1998 1997
-------- -------- --------
Dividend yield.......................................... none none none
Expected volatility..................................... 75.2% 75.0% 61.9%
Risk-free interest rate................................. 5.4% 5.8% 6.3%
Expected life........................................... 6.0 6.0 6.0
53
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
Weighted average fair value of options granted at fair value during:
1999........................................................ $1.91
=====
1998........................................................ $1.81
=====
1997........................................................ $0.93
=====
Weighted average fair value of options granted at greater than fair value
during:
1999........................................................ $1.50
=====
1998........................................................ $1.44
=====
1997........................................................ $0.88
=====
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance with
SFAS 123, the Company's net income and net income per common share for the years
ended December 31, 1999, 1998 and 1997, would approximate the pro forma amounts
as compared to the amounts reported:
NET LOSS
PER BASIC AND
NET LOSS DILUTED SHARE
------------ -------------
As reported:
1999...................................................... $ (2,244,000) $(0.25)
1998...................................................... (3,854,000) (0.42)
1997...................................................... (13,728,000) (1.42)
Pro forma:
1999...................................................... $ (2,945,000) $(0.28)
1998...................................................... (3,947,000) (0.43)
1997...................................................... (14,091,000) (1.46)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
(C) EMPLOYEE STOCK PURCHASE PLAN
In May of 1995, the Company's stockholders approved an Employee Stock
Purchase Plan (the "ESPP"), which is a qualified employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended, through
which employees of the Company are given the opportunity to purchase shares of
common stock. According to the ESPP, a total of one million shares of common
stock has been reserved for offering to employees over a period of five years,
in quarterly offerings of 50,000 shares each plus any shares not issued in any
previous quarter, commencing on July 1, 1995 and on the first day of each
quarter thereafter through April 1, 2000. Employees who elect to participate in
an offering may utilize up to 10% of their payroll for the purchase of common
stock at 85% of the closing price of the stock on the first day of such
quarterly offering or, if lower, 85% of the closing price on the last day of the
offering. As of December 31, 1999 and 1998, 98,200 and 94,000 shares,
respectively, of common stock had
54
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
been purchased under the ESPP. The weighted average fair per share value of the
purchase rights granted under the ESPP during 1999, 1998 and 1997 were $0.25,
$0.41 and $0.33, respectively.
(D) WARRANTS
In connection with the issuance of senior subordinated notes payable in
May 1989, the Company issued warrants to purchase 100,000 shares of common stock
at $20.75 per share in exchange for $300,000. In April 1990, the exercise price
of the warrants was reduced to $9 per share. In February 1991, in connection
with the refinancing of the Company's short-term debt, the exercise price was
further reduced to $5 per share. These warrants are exercisable at any time
until February 1, 2001.
In connection with the refinancing of the Company's short-term debt in
February 1991, the Company issued warrants to purchase 425,000 shares of common
stock at $5 per share to the three banks which provided the Revolver. These
warrants are exercisable at any time until February 6, 2001.
(E) PREFERRED STOCK
On February 16, 1993 the Company issued 112,000 shares of Series B
Convertible Preferred Stock, $0.01 par value ("Preferred Stock"), for the
acquisition of its Spring Grove facility. The liquidation value of each
preferred share is the liquidation preference of $50 plus unpaid dividends.
Preferred Stock may be converted by the holder into Common Stock at a conversion
rate of $18.63. There is no expiration date associated with the conversion
option. The Company had the option to redeem such Preferred Stock at liquidation
value plus a redemption premium of 3%, if the redemption occurred on or before
August 16, 1999; thereafter, the redemption premium declines 1% each year. Each
preferred share entitles its holder to receive a cumulative annual cash dividend
of $4.00 per share, or at the election of the Company, a common stock dividend
of equivalent value.
Dividends on the Preferred Stock are payable on the 15th day of January,
April, July and October, at the rate of $1.00 per share, per quarter. The
Company elected to pay the 1999 dividends in common stock with a market value
equal to the amount of the dividend payable. During 1999 the Company issued
278,933 shares of common stock to the holders of the Preferred Stock. The
Company anticipates that the Preferred Stock dividends payable through 2000 will
be paid in common stock.
(14) EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. The plan allows employees to
make contributions up to a specified percentage of their compensation. The
Company has an option of contributing to the plan, but no contribution was made
by the Company in 1999, 1998, or 1997.
55
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999
Revenue............................................... $44,648 $51,118 $54,602 $52,597
Income (loss) from operations......................... (523) 2,995 2,635 1,530
Net income (loss)..................................... (2,842) 705 317 (424)
Net income (loss) per common share.................... (0.28) 0.06 0.02 (0.05)
1998
Revenue............................................... $40,376 $53,591 $50,884 $52,588
Income (loss) from operations......................... (1,149) 3,184 1,307 2,795
Net income (loss)..................................... (3,579) 776 (1,135) 84
Net income (loss) per common share.................... (0.36) 0.06 (0.12) 0.00
The above information reflects all adjustments that are necessary to fairly
state the results of the interim periods presented. Any adjustments required are
of a normal recurring nature.
(16) OTHER INCOME
During 1997, the Company recorded a $950,000 receivable in connection with
the settlement of a lawsuit and incurred approximately $150,000 in costs related
to the litigation. The Company recognized a pre-tax gain, net of related legal
fees, of $800,000 resulting from the settlement, which is included in other
income, net, in the consolidated statements of operations.
56
CLEAN HARBORS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
ALLOWANCE FOR BEGINNING OPERATING FROM END OF
DOUBTFUL ACCOUNTS OF PERIOD EXPENSE RESERVES(A) PERIOD
- ----------------- --------- ---------- ----------- --------
1997.................................................. $1,063 $683 $696 $1,050
1998.................................................. 1,050 699 736 1,013
1999.................................................. 1,013 683 539 1,157
- ------------------------
(a) Amounts deemed uncollectible, net of recoveries.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
The information called for by Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated herein by reference to the
registrant's definitive proxy statement for its 2000 Annual Meeting of
Stockholders, which definitive proxy statement is expected to be filed with the
Commission not later than April 30, 2000.
For the purpose of calculating the aggregate market value of the voting
stock of the registrant held by nonaffiliates as shown on the cover page of this
report, it has been assumed that the directors and executive officers of the
registrant, as will be set forth in the Company's definitive proxy statement for
its 2000 Annual Meeting of Stockholders, are the only affiliates of the
registrant. However, this should not be deemed to constitute an admission that
all of such persons are, in fact, affiliates or that there are not other persons
who may be deemed affiliates of the registrant.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
PAGE
--------
1. Financial Statements:
Report of Independent Accountants........................... 32
Consolidated Statements of Income for the Three Years Ended
December 31, 1999........................................... 33
Consolidated Balance Sheets, December 31, 1999 and 1998..... 34-35
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1999..................................... 36
Consolidated Statements of Stockholders' Equity for the
Three Years Ended
December 31, 1999........................................... 37
Notes to Consolidated Financial Statements.................. 38-56
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts............... 57
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
58
3. Exhibits:
Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Commission. Upon request to the Company and payment of
a reasonable fee, copies of the individual exhibits will be furnished. The
Company undertakes to furnish to the Commission upon request copies of
instruments (in addition to the exhibits listed below) relating to the Company's
long-term debt.
ITEM NO. DESCRIPTION LOCATION
- -------- ------------------------------------------------------------ --------------
See Note:
3.1 Restated Articles of Organization of Clean Harbors, Inc. and
amendments thereto.......................................... (1)
3.2 Certificate of Vote of Directors Establishing a Series of a
Class of Stock (Series B Convertible Preferred Stock)....... (2)
3.4A Amended and Restated By-laws of Clean Harbors, Inc.......... (3)
4.1 Senior Note Indenture dated as of August 4, 1994, between
Clean Harbors, Inc., the Guarantor Subsidiaries of the
Company, and Shawmut Bank, N.A., as trustee for the holders
of the Company's 12.50% Senior Notes due May 15, 2001....... (4)
4.2 Loan and Security Agreement dated May 8, 1995 by and between
Congress Financial Corporation (New England) and the
Company's Subsidiaries as Borrowers......................... (5)
4.3 Term Promissory Note dated May 8, 1995 from the Company's
Subsidiaries as Debtors to Congress Financial Corporation
(New England) in the amount of $10,000,000.................. (5)
4.4 Guarantee dated May 8, 1995 by Clean Harbors, Inc. to
Congress Financial Corporation (New England) of the
obligations of the Company's Subsidiaries under the
Financing Agreements........................................ (5)
4.5 General Security Agreement dated May 8, 1995 by Clean
Harbors, Inc. in favor of Congress Financial Corporation
(New England)............................................... (5)
4.6 Letter Agreement dated November 21, 1995 by and between
Congress Financial Corporation (New England) and the
Company's Subsidiaries as Borrowers......................... (8)
4.7 Second Amendment to Financing Agreements dated March 20,
1996 by and between Congress Financial Corporation (New
England), the Company's Subsidiaries as Borrowers and Clean
Harbors, Inc. as Guarantor.................................. (8)
4.8 Amended and Restated Term Promissory Note dated March 20,
1996 from the Company's Subsidiaries as Debtors to Congress
Financial Corporation (New England) in the amount of
$15,000,000................................................. (8)
4.9 Third Amendment to Financing Agreements dated September 6,
1996 by and between Congress Financial Corporation (New
England), the Company's Subsidiaries as Borrowers, and Clean
Harbors, Inc. as Guarantor.................................. (8)
4.10 Fourth Amendment to Financing Agreements dated June 20, 1997
by and between Congress Financial Corporation (New England),
the Company's Subsidiaries as Borrowers, and Clean Harbors,
Inc. as Guarantor........................................... (9)
59
ITEM NO. DESCRIPTION LOCATION
- -------- ------------------------------------------------------------ --------------
See Note:
4.11 Fifth Amendment to Financing Agreements dated January 1,
1998 by and between Congress Financial Corporation (New
England), the Company's Subsidiaries as Borrowers, and Clean
Harbors, Inc. as Guarantor.................................. (9)
4.12 Sixth Amendment to Financial Agreements dated June 23, 1998
by and between Congress Financial Corporation (New England),
the Company's Subsidiaries as Borrowers, and Clean Harbors,
Inc. as guarantor........................................... (11)
4.13 Seventh Amendment to Financial Agreements dated May 24, 1999
by and between Congress Financial Corporation (New England),
the Company's Subsidiaries as Borrowers, and Clean Harbors,
Inc. as guarantor........................................... (13)
4.14 Second Amendment and Restated Term Promissory Notes Dated
May 24, 1999 by and between Congress Financial Corporation
(New England), the Company's Subsidiaries as Borrowers, and
Clean Harbors, Inc. as guarantor............................ (13)
4.15 Eighth Amendment to Financial Agreements dated March 28,
2000 by and between Congress Financial Corporation (New
England), the Company's Subsidiaries as Borrowers, and Clean Filed
Harbors, Inc. as guarantor.................................. herewith......
4.16 2000 Term Promissory Note Dated March 28, 2000 by and
between Congress Financial Corporation (New England), the
Company's Subsidiaries as Borrowers, and Clean Harbors, Inc.
as guarantor................................................ Filed herewith
10.35 Stock Purchase Agreement among Clean Harbors, Inc.,
Southdown Environmental Treatment Systems, Inc. and
Southdown, Inc. dated as of June 23, 1992................... (2)
10.36 Stock Purchase Agreement among Clean Harbors, Inc.,
Southdown Environmental Treatment Systems, Inc. and
Southdown, Inc. dated as of February 16, 1993............... (2)
10.37 Clean Harbors, Inc. 1987 Stock Option Plan.................. (6)
10.38 Clean Harbors, Inc. 1992 Equity Incentive Plan.............. (6)
10.39 Asset Purchase Agreement among Clean Harbors of Chicago,
Inc., Clean Harbors, Inc., CWM Chemical Services, Inc. and
Chemical Waste Management, Inc. dated as of January 30,
1995........................................................ (7)
10.40 Asset Purchase Agreement among Clean Harbors Technology
Corporation, Clean Harbors Inc. and Ecova Corporation dated
as of March 31, 1995........................................ (5)
10.41 Disposal Services Agreement by and between Chemical Waste
Management, Inc. and its subsidiary and affiliated companies
and Clean Harbors Environmental Services, Inc. and its
affiliated companies dated as of October 31, 1995........... (8)
10.42 Employment Agreement between the Company and David A. Eckert
dated March 14, 1996, as modified on March 4, 1998.......... (9)
10.43 Key Employee Retention Plan................................. (12)
21 Subsidiaries................................................ Filed herewith
23 Consent of Independent Accountants.......................... Filed herewith
60
ITEM NO. DESCRIPTION LOCATION
- -------- ------------------------------------------------------------ --------------
See Note:
24 Power of Attorney for Christy W. Bell, John F. Kaslow,
Daniel J. McCarthy, John T. Preston, Thomas J. Shields and
Lorne R. Waxlax............................................. Filed herewith
27 Financial Data Schedule..................................... Filed herewith
- ------------------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Form S-1
Registration Statement (No. 33-17565).
(2) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1992.
(3) Incorporated by reference to Exhibit 3.4A to the Company's Form 10-K Annual
Report for the Fiscal Year Ended February 28, 1991.
(4) Incorporated by reference to Exhibit 4.1 to the Company's Form S-2
Registration Statement (No. 33-54191).
(5) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-Q Quarterly Report for the Quarterly Period Ended June 30, 1995.
(6) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1993.
(7) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1994.
(8) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1995.
(9) Incorporated, by reference to the similarly numbered exhibit to the
Company's Form 10-K Annual Report for the Year 1996.
(10) Incorporated by reference to the similarly numbered exhibit to the
Company's Form 10-Q Quarterly Report for the Quarterly Period ended
September 30, 1996.
(11) Incorporated by reference to Exhibit 4.12 to the Company's Form 10-Q
Quarterly Report for the Quarterly Period ended June 30, 1998.
(12) Incorporated by reference to the similarly numbered exhibit to the
Company's Form 10-Q Quarterly Report for the Quarterly Period ended
March 31, 1999.
(13) Incorporated by reference to the similarly numbered exhibit to the
Company's Form 10-Q Quarterly Report for the Quarterly Period ended
June 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 27, 2000.
CLEAN HARBORS, INC.
BY: /S/ ALAN S. MCKIM,
-----------------------------------------
Alan S. McKim,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALAN S. MCKIM, Chairman Of The Board Of
------------------------------------------- Directors, President and March 27, 2000
Alan S. McKim, Chief Executive Officer
/s/ ROGER A. KOENECKE Senior Vice President and
------------------------------------------- Chief Financial Officer March 27, 2000
Roger A. Koenecke
* Director
------------------------------------------- March 27, 2000
Christy W. Bell
* Director
------------------------------------------- March 27, 2000
John F. Kaslow
* Director
------------------------------------------- March 27, 2000
Daniel J. McCarthy
* Director
------------------------------------------- March 27, 2000
John T. Preston
* Director
------------------------------------------- March 27, 2000
Thomas J. Shields
* Director
------------------------------------------- March 27, 2000
Lorne R. Waxlax
*By: /s/ ALAN S. MCKIM,
-------------------------------------------
Alan S. McKim,
ATTORNEY-IN-FACT
62