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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1994
COMMISSION FILE NO. 0-16379
CLEAN HARBORS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2997780
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1200 CROWN COLONY DRIVE,
QUINCY, MASSACHUSETTS 02169
(Address of principal (Zip Code)
executive offices)
(617) 849-1800 EXT. 4454
(Registrant's telephone
number):
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 February 1, 1995, the aggregate market value of the voting stock of the
registrant held by nonaffiliates of the registrant was $23,884,480. Reference is
made to Part III of this report for the assumptions on which this calculation is
based.
On February 1, 1995, there were outstanding 9,431,282 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
1995 annual meeting of stockholders (which is expected to be filed with the
Commission not later than April 30, 1995) are incorporated by reference into
part III of this report.
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PART I
ITEM 1. BUSINESS
Clean Harbors, Inc., through its subsidiaries (collectively, the
"Company"), provides a wide range of industrial waste management services to a
diversified customer base in approximately 35 states. The Company was
incorporated in Massachusetts in 1980. The principal offices of the Company are
located at 1200 Crown Colony Drive, Quincy, Massachusetts 02169.
The Company is one of the largest providers of industrial waste management
services in the Northeast and Mid-Atlantic regions of the United States, with a
growing presence in the Central, Midwest and Southern regions. 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, variety of risk containment systems, and cost effectiveness.
The Company currently maintains a network of 22 service centers, 9 sales
offices and 11 waste management facilities. The service centers interface with
the customers, and perform a variety of environmental remediation and hazardous
waste management activities, utilizing the waste management facilities to store,
treat and dispose of waste. The Company also provides analytical testing and
engineering services which complement its primary services and permit it to
offer complete solutions to its customers' complex environmental requirements.
The Company's principal customers are chemical, petroleum, transportation,
utility and industrial firms, other waste management companies and government
agencies.
Intensified levels of federal and state environmental regulation and
enforcement have been a major factor in increasing the demand for the Company's
services. The Company believes that its success is attributable in large part to
customers' confidence in the Company's ability to comply with these regulations
and to manage effectively the risks involved in providing these services. 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 follows a risk management program designed to
reduce potential liabilities for the Company and its customers.
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 multiple
services in managing their environmental exposure.
In order to maintain and enhance its leading position in the industrial
waste management industry, the Company has implemented a strategy of internal
growth through the increased utilization of existing facilities, the addition of
new sales offices and service centers, and the development of new waste
management services. In addition, the Company achieves external growth through
strategic acquisitions.
Increased Utilization of Waste Management Facilities. The Company
currently has 11 waste management facilities which represent a substantial
investment in permits, plant and equipment. These facilities provide the Company
with significant operating leverage. There are opportunities to expand 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. The Company believes that permits for new
industrial waste management facilities will become increasingly difficult to
obtain, thereby placing new entrants and weaker competitors at a disadvantage.
Sales Office/Service Center Expansion. The Company opens sales offices in
attractive target markets in order to expand the Company's service areas. As
demand at a particular sales office reaches a sufficient level, the sales office
can be upgraded to a service center with field service capabilities by the
addition of field technicians, service personnel and equipment. The Company's
sales offices and service centers direct waste into the Company's waste
management facilities. This allows the Company to expand its service areas with
low risk
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capital investment and to maximize throughput with minimal incremental cost by
obtaining additional wastes to be handled by the Company's service centers and
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
into the environment. The Company utilizes its technological expertise and
innovation to improve and expand the range of services which it offers to its
customers. The Company has commercialized a hazardous waste treatment system,
the Clean Extraction System ("CES"), to extract toxic compounds from industrial
wastewaters by utilizing non-toxic liquid carbon dioxide at high pressures. CES
offers for certain wastewater streams a recycling alternative to incineration or
injection into deep underground wells.
Occasionally, companies primarily operating in other industries or engaged
in research and development have sought to join with the Company to evaluate the
commercial potential of a particular technology or process for solving
environmental problems. In May 1994, the Company signed a development agreement
with Molten Metal Technology, Inc. of Waltham, Massachusetts ("MMT"), an
environmental technology company developing an innovative, proprietary
processing technology known as Catalytic Extraction Processing ("CEP"). CEP
utilizes a molten metal bath as a catalyst and solvent to break down the
molecular structure of various hazardous wastes into its elements. With the
addition of various other elements, industrial compounds are made into products
for reuse as a raw material by the feedstock generator or for sale to other
industrial users. Development of the CEP system pursuant to the agreement is
subject to a number of conditions, including the execution of definitive
agreements, and no assurances can be given that the proposed CEP unit will be
successfully developed.
In November 1994, the Company signed a letter of intent to acquire a newly
constructed hazardous waste incinerator in Kimball, Nebraska, to incinerate
liquid and solid wastes which are not suitable for treatment in the CES, and are
not expected to be handled by the proposed CEP unit. These actions to develop
new waste management services are expected to reduce the Company's dependence on
outside disposal vendors.
Capitalization on Industry Consolidation. The Company believes that its
large industrial customers will ultimately require a comprehensive range of
waste treatment capabilities to be provided by a select number of service
providers. This trend will put smaller operators at a competitive disadvantage
due to their size and limited financial resources. To respond to its customers'
needs, the Company has increased the range of waste management services it
offers and has followed a strategy of acquiring companies in existing,
contiguous and new market areas. Since its formation in 1980, the Company has
completed 13 acquisitions, each of which has proven successful in expanding the
Company's market share and cash flow. 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 investigate
and discuss other potential acquisitions of permitted facilities in order to
enhance service to its existing customer base and expand its customer base to
include new regional customers as well as waste generators with operations in
several regions.
ACQUISITIONS
The Company has made six acquisitions since January 1, 1989. The Company is
also in the process of expanding its Chicago waste management facility onto an
adjoining site formerly occupied by Chemical Waste Management, Inc., which will
allow the Company to offer new waste treatment services in the Midwest region.
DATE OF
ACQUISITION ACQUISITION PURCHASE PRICE
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1989 ChemClear Inc., a publicly-traded company in the business of
treating liquid and semi-liquid hazardous and nonhazardous
industrial wastes at treatment plants in Baltimore,
Maryland; Cleveland, Ohio; Chicago, Illinois; and Chester,
Pennsylvania $27.6 million
1989 Murphy's Waste Oil Service, Inc., the operator of a waste
oil treatment and storage facility in Woburn, Massachusetts $0.2 million
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DATE OF
ACQUISITION ACQUISITION PURCHASE PRICE
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1992 Connecticut Treatment Corporation, the operator of a
hazardous waste storage and treatment facility in Bristol,
Connecticut $2.4 million
1992 Mr. Frank, Inc., a Chicago-based transportation and
environmental services company serving industrial companies
primarily in Illinois, Indiana and Michigan $2.2 million
1993 Spring Grove Resource Recovery, Inc., the operator of a
hazardous waste storage and treatment facility in
Cincinnati, Ohio $7.0 million
1994 The assets of a hazardous and nonhazardous oil reclamation
facility located near Richmond, Virginia $0.4 million
Prior to closing any acquisition, the Company attempts to investigate
thoroughly the current and contingent liabilities of the company 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 principal services provided by the Company fit within three categories:
treatment and disposal of industrial wastes ("Treatment and Disposal"); field
services provided at customer sites ("Field Services"); and specialized
repackaging, treatment and disposal services for laboratory chemicals and
household hazardous wastes ("LabPacks"). The Company markets these services on
an integrated basis and, in many instances, services in one area of the business
support or lead to a project undertaken in another area.
In addition to these three principal services, the Company also provides
technical services such as analytical testing and engineering services and
personnel training. Such technical services primarily support the Company's
principal services, although technical services are also offered to a limited
extent on a stand-alone commercial basis.
The Company currently maintains a network of 11 waste management
facilities, 22 service centers and 9 sales offices. The service centers and
sales offices accommodate sales personnel who develop and maintain contact with
the Company's customers. Customers are generally covered by a two person team:
an "account manager" who is responsible for sales and a "customer service
account manager" who is responsible for order taking, handling customer
inquiries and other administrative tasks. Account managers utilize the expertise
of product specialists in order to evaluate the scope of a potential job, quote
a job and ultimately detail the work order, including personnel and equipment
necessary to complete the job. The service centers also serve as depots for the
specialized equipment and trained technical personnel which respond to
customers' waste management requirements. The Company utilizes a "hub and spoke"
organization where service centers and sales offices feed waste disposal
business into the Company's 11 waste management facilities. Waste which cannot
be treated at those facilities is sent to other final disposal sites, such as
the Nebraska hazardous waste incinerator the Company intends to acquire.
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, or
in bulk in 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 other third-party transporters,
including railroads. Liquid waste is frequently transported in bulk, but may
also be transported in drums.
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Heavier sludges or bulk solids are transported in sealed, roll-off boxes or bulk
dump trailers. The Company is increasing its use of railroad transporters as a
way to efficiently and economically ship to disposal outlets across the United
States in an effort to reduce its transportation and outside disposal costs.
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 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.
Before the Company receives hazardous waste from a customer, detailed
paperwork and analysis are completed to document the nature of the waste. A
representative sample of the expected waste is analyzed in a Company-owned
laboratory in order to establish a waste profile and to enable the Company to
recommend the best method of treatment and disposal. Prior to unloading at the
Company's treatment facility, a representative sample of the delivered waste is
tested and analyzed to ensure that it conforms to the customer's waste profile
record. Once the wastes are characterized, compatible groups 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 character 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 treatment and resource recovery
operations involve processing hazardous wastes through the use of physical,
chemical, thermal or other methods, and the reclamation and reuse of certain
wastes. The nonrecoverable materials produced by these interim processing
operations are then disposed of off-site at facilities owned and operated by
unrelated businesses.
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. 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
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mobility or solubility and convert waste to a more chemically stable form.
Stabilization technology includes many classes of immobilization systems and
applications. Examples include low-temperature processes such as adding a
sand-like cement material, and high-temperature processes such as vitrification.
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 incineration as the principal means of waste destruction. The
Company operates an incinerator at its Braintree facility which was previously
used to destroy hospital waste. In late 1991, approvals were granted to allow
the incinerator to destroy nonhazardous wastes which were previously sent to
landfills or municipal incinerators. It also generates steam which is used in
steam distillation equipment for reclaiming solvents. Other waste residues are
incinerated in off-site facilities, such as the Nebraska hazardous waste
incinerator which the Company intends to acquire, and in similar facilities
owned and operated by other companies.
Resource Recovery. Resource recovery involves the treatment of wastes
using various methods which will effectively remove contaminants from the
original material to restore its fitness for its intended purpose, and to reduce
the volume of waste requiring disposal. In conjunction with recent regulatory
provisions restricting the burial of various types of hazardous wastes, the
Company substantially upgraded its existing facilities 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 clean, usable
products. Upon recovery of these products, the Company either returns the
recovered solvents to the original generator or sells them to third parties.
Other nonrecoverable organic liquids 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
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 which extracts
organic compounds from industrial wastewater. CES uses carbon dioxide that has
been compressed at high pressure into a liquid. Under these "supercritical"
conditions, carbon dioxide acts as a powerful solvent for most commonly
occurring contaminants. CES uses supercritical carbon dioxide as a solvent to
remove organic contaminants, such as gasoline, acetone, methylene chloride,
pesticides and other chemicals, from industrial wastewater called "lean water."
Lean water is generated by oil companies, utilities, and manufacturers of
specialty chemicals and pharmaceuticals.
The CES was installed at the Company's Baltimore facility, and began
commercial operation in June 1992. The system includes specialized pretreatment
and post-treatment systems and techniques, in addition to a central extractor
unit, to maximize extraction efficiency. In the Baltimore CES, wastewater
receives chemical and physical pretreatment before entering a central extractor
unit. The wastewater is fed into the top of a 40-foot tall pressurized chamber,
and flows down through a stack of perforated plates as a continual supply of
liquefied carbon dioxide rises from the bottom of the chamber. As the wastewater
and carbon dioxide mix, organic contaminants separate from the water and
dissolve in the carbon dioxide. The liquid carbon dioxide flows from the top of
the chamber into a decompression vessel. As the pressure decreases, the carbon
dioxide vaporizes into a gas, leaving the organic contaminants at the bottom of
the vessel, where they are collected. The concentrated organics can be recycled
or burned as a supplemental fuel for resource recovery. The cleansed water flows
from the bottom of the chamber, through a series of decompression and
post-treatment tanks. After treatment, the cleansed water is discharged to the
City of Baltimore sewer treatment works.
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This process enables the Company to handle a broad range of complex,
difficult to treat organic and inorganic "lean waters" formerly sent to other
companies for disposal. CES offers the Company's industrial customers, such as
chemical or pharmaceutical companies, an attractive recycling alternative to
disposal of their "lean water" by incineration or injection into deep
underground wells. Current treatment capacity is between six and ten million
gallons per year, depending on the characteristics of the wastewater being
treated.
Proposed Catalytic Extraction Processing. In May 1994, the Company signed
a development agreement with Molten Metal Technology, Inc. of Waltham,
Massachusetts ("MMT"), an environmental technology company developing an
innovative, proprietary processing technology known as Catalytic Extraction
Processing ("CEP"). CEP utilizes a molten metal bath as a catalyst and solvent
to break down the molecular structures of various hazardous wastes into their
elements. With the addition of various other elements, industrial compounds are
made into products for reuse as a raw material by the feedstock generator or for
sale to other industrial users. Under the development agreement, the Company and
MMT have agreed to install a CEP system at one of the Company's waste management
facilities. Development of the CEP system pursuant to the development agreement
is subject to a number of conditions and uncertainties, including the
negotiation and execution of definitive agreements, and no assurances can be
given that the CEP system will be successfully developed or operated.
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. Arrangements are made for
disposal primarily in incinerators such as the Nebraska hazardous waste
incinerator which the Company intends to acquire, and in other incinerators,
landfills, and disposal facilities operated by third parties. These arrangements
are typically made before the Company accepts waste. Although the Company's
facilities are licensed to store waste, such storage is for a short period of
time, usually a matter of days, before the waste is sent for ultimate disposal.
On occasion, a service center may also arrange to ship a customer's waste
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.
As the volume of waste handled by the Company has grown, the Company has
negotiated favorable disposal arrangements with numerous companies. The Company
is not dependent on any one disposal company, and the loss of any particular
outlet for disposal of waste would not have a material impact on the Company.
The Company's wastewater treatment operations are dependent upon access to
publicly owned treatment works and to hazardous or nonhazardous waste landfills
for the disposal of its byproduct wastes. Generally, the Company has not
experienced significant difficulty in obtaining the necessary permits from local
sewer authorities.
FIELD SERVICES
The Company provides a wide range of environmental field 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 and waste management companies, and to
governmental agencies. The Company's strategy is to 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. Service
centers are equipped with specialty equipment, such as high volume pumps,
pressure washers, nonsparking and chemical resistant tools, and a
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variety of personal protective equipment, to perform maintenance services
quickly, usually during "off periods" to minimize downtime from production.
Project Management. An increasingly important area of the Company's
operations is the management of complex environmental remediation projects.
These projects may include surface remediation, groundwater restoration, site
and facility decontamination, and emergency response. An interdisciplinary team
of managers, chemists, engineers, and compliance experts design and implement
result-oriented remedial programs, incorporating both off-site removal and
on-site treatment, as needed. The remedial projects group functions as a single
source management team, relieving the customer of the administrative and
operational burdens associated with environmental remediation. As a full-service
environmental services provider, the Company eliminates the need for multiple
subcontractors.
These projects vary widely in scope, duration and revenue, and they are
typically performed under service agreements between the customer and the
Company. Environmental remediation projects may be undertaken in conjunction
with or lead to contracts for additional remediation work or for hazardous waste
management services, and typically involve the Company's analytical laboratory
and engineering group.
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 engineering, project management and analytical 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, 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 internally designs and fabricates most 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
service centers covering 20 states. 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.
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
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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 closely supervise 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.
LABPACKS
The Company provides specialized repackaging, treatment and disposal
services for laboratory chemicals and household hazardous wastes. Such chemicals
and wastes are put into LabPacks, which are packages smaller than a 55-gallon
drum, generally less than five gallons or 50 pounds. The Company offers
generators of LabPack quantity waste the same economical and environmentally
sound disposal services that have been offered for years to large industrial
generators. The LabPack operation services a wide variety of customers,
including:
- engineering and research and development divisions of industrial
companies,
- college, university and high school labs,
- EPA labs and Veterans Administration facilities,
- hospitals and medical care labs,
- state and local municipalities, and
- tens of thousands of residents through household hazardous waste
collection days.
The Company provides a team of qualified personnel with science degrees and
special training to collect, label and package waste at the customer's site.
LabPacks are then transported to one of the Company's facilities for
consolidation into full-size containers, which are then sent for further
treatment or disposal as part of the Company's treatment and disposal services
described above. As described above, disposal options include reclamation, fuels
blending, incineration, aqueous treatment, and secure chemical landfill.
TECHNICAL SERVICES
Technical services consist primarily of analytical testing, engineering
services and personnel training. Many of the Company's principal services as
described above involve the selection and application of various technologies.
The Company's analytical testing laboratories perform a wide range of
quantitative and qualitative analyses to determine the existence, nature, level,
and extent of contamination in various media. The Company's engineering staff
identifies, evaluates and implements the appropriate environmental solution.
Analytical Testing and Engineering Services. The Company provides
analytical testing and engineering services as technical support to complement
its primary services. For example, if the Company is engaged to perform an
entire environmental remediation project, it will first perform a site or
situation assessment. A site assessment begins with the determination of the
existence of contamination. If present, the nature and extent of the
contamination is defined by gathering samples and then analyzing them at one of
the Company's laboratories in order to establish or verify the nature and extent
of the contaminants. The Company's engineering staff then develops, evaluates
and presents alternative solutions to remedy the particular situation. Often
treatment systems are completely designed, engineered and fabricated by the
Company in house. It then implements the mitigation and decontamination program
mutually selected by the customer and the Company.
Analytical testing and engineering services are also provided as a separate
service if a customer requires an analysis with respect to certain material, or
if a customer is searching for an appropriate solution to an environmental
problem or if an environmental assessment is required to allow a transfer of
property.
The Company operates an EPA-qualified and state-certified analytical
testing laboratory in Braintree, Massachusetts which tests samples provided by
customers to identify and quantify toxic pollutants in virtually every component
of the environment. The laboratory staff evaluates the properties of a given
material, selects
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appropriate analytical methods, and executes a laboratory work plan that results
in a comprehensive technical report.
The Company also maintains laboratories at its waste management facilities
to identify and characterize waste materials prior to acceptance for treatment
and disposal, and operates mobile laboratory facilities for field use in
emergency response and remedial action situations.
Personnel Training. The Company provides comprehensive personnel training
programs for its own employees and those of its customers on a commercial basis.
Such programs are designed to promote safe work practices under potential
hazardous environmental conditions, whether or not toxic chemicals are present,
in compliance with stringent regulations promulgated under RCRA and the federal
Occupational Safety and Health Act ("OSHA"). The Company's Technical Training
Center at its Kingston, Massachusetts facility includes a 2,000 gallon tank for
confined space entry, exit, and extraction, 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.
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 United States industrial companies. In addition, the Company's
customers include most of the major utilities in the Northeast and Mid-Atlantic
regions. The Company's customers are primarily chemical, 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, provide it with a recurring stream of revenue and
stability of cash flow. The Company estimates that in excess of 80% of its
revenues is derived from previously served customers with recurring needs for
the Company's services. 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.
The Company's customer base is diverse, and generally not concentrated in
particular industries, such as the petroleum or defense sectors, where business
activity may be cyclical. 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
who have recurring needs for multiple services in managing their environmental
exposure.
Under applicable environmental laws and regulations, generators of
hazardous wastes retain potential legal liability for the proper treatment of
such wastes through and including their ultimate disposal. In response to these
potential liability concerns, many large generators of industrial wastes and
other purchasers of waste management services (such as general contractors on
major remediation projects) have increasingly sought to decrease the number of
providers of such services that they utilize. Waste management companies which
are selected as "approved vendors" by such large generators and other purchasers
are firms, such as the Company, that possess comprehensive collection,
recycling, treatment, transportation, disposal and waste tracking capabilities
and have the expertise and financial capacity necessary to comply with
applicable environmental laws and regulations. By becoming an "approved vendor"
of a large waste generator or other purchaser, the Company becomes eligible to
provide waste management services to the various plants and projects of such
generator or purchaser which are 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
to such customers are being performed in compliance with applicable laws and
regulations and with other criteria established by the Company and by such
customers.
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COMPLIANCE
The Company regards compliance with applicable environmental regulations as
a critical component of its overall operations, both from the standpoint of the
health and safety of its employees and as a service to its customers. The
Company strives to maintain the highest professional standards in its compliance
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 operational facilities and service centers under
the direction of the Company's corporate compliance and health and safety staff.
The compliance staff consists of approximately 45 full-time employees who 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.
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 in substantial compliance with
applicable requirements. All 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 corporate compliance, which in turn reports directly to
the Chief Executive Officer.
MANAGEMENT OF RISKS
The Company follows a program of risk management policies and practices
designed to reduce potential liability, as well as to manage customers' ongoing
regulatory responsibility. This program includes installation of risk management
systems at the 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 avoids handling
high-hazard waste such as explosives, and frequently utilizes specialty
subcontractors to handle any such materials when discovered at a job site.
The Company only disposes of its wastes at facilities owned and operated by
firms which the Company has approved as prudent and financially sound.
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 present 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 on general liability where the retention is $500,000. Since
the early 1980s, casualty insurance 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 while 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 and at the Company's facilities, from
the time waste is picked up from a customer until its delivery to the final
disposal site. During 1994, the Company arranged to have its $30,000,000
comprehensive general liability insurance provide coverage for any
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in-transit pollution losses from accidents over and above the Lloyds of London
coverage, so that it now has $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 and comparable
state hazardous waste regulations 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 and 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
occurrences at its facilities, with the excess coverage provided by Lloyds of
London, and (ii) the full policy limits of insurance for non-sudden occurrences.
Operators of hazardous waste handling facilities are also required by
federal and state regulations to provide financial assurance that certain funds
will be available for closure of those facilities, should the facility cease
operation. For example, 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 utilizes its captive insurance company to
provide such financial assurance for the waste management facilities it
currently owns.
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 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, physical
loss to property, and 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 has been successful
in negotiating lower premiums recently, due in part to its favorable historical
loss experience. The cancellation terms applicable to the Company are similar to
those of other companies in other industries.
COMPETITION
The Company competes with numerous large and small companies, each of which
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 it offers a more comprehensive range of
industrial waste management services than any of its competitors in its service
territory. The Company also believes that its ability to market and provide its
services on an integrated basis constitutes a significant competitive advantage
for the Company.
The Company's competitive position with respect to its treatment and
disposal services is enhanced by the proximity of its facilities to hazardous
waste generators and the barriers to market entry provided by capital and
licensing requirements. However, treatment, recovery and disposal operations are
conducted by a number of national and regional waste management firms. The
Company believes that physical proximity of treatment and disposal facilities,
comprehensiveness of services, safety, and quality of services and efficiency
are the most significant factors in the market for treatment and disposal
services.
In field services, the Company's competitors include major national and
regional environmental services firms which have environmental remediation
staffs. The availability of skilled technical professional personnel, quality of
performance, diversity of services and, to a certain extent, price, are the key
competitive factors.
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EMPLOYEES
As of January 31, 1995, the Company employed 1,473 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 11 waste management
facilities and 22 service centers, various environmental remediation equipment,
and a fleet of approximately 1,074 registered pieces of transportation
equipment. Most service center locations are leased, and occasionally move to
other locations as operations grow and space requirements increase. The 11 waste
management facilities are described below. All of such facilities are owned by
the Company, except for the Chicago hazardous waste management facility which is
leased under a lease which (with extensions) expires September 2020 and the
Woburn, Massachusetts waste oil treatment and storage facility which is leased
under a lease which (with extensions) expires February 2004.
Hazardous Waste Management Facilities. The Company currently maintains
seven 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 the Resource Conservation and Recovery Act
of 1976 ("RCRA"). All seven hazardous waste management facilities, as well as
the Nebraska hazardous waste incinerator facility which the Company intends to
acquire, are subject to RCRA licensing. The incinerator and all seven of the
Company's hazardous waste management facilities have been issued RCRA Part B
licenses, one of which is under appeal.
In addition, two of the Company's four waste oil treatment and storage
facilities described below are subject to RCRA licensing, because some petroleum
products, such as gasoline, are considered hazardous waste under federal law. In
order to handle a variety of waste oil and petroleum products and support its
field service activities in the Northeast and Mid-Atlantic regions, the Company
has obtained RCRA licenses for those two facilities.
The Company has made substantial modifications and improvements to the
physical plant and treatment and process equipment 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, such as the CES in Baltimore, expansion of analytical testing
laboratories, drum storage and processing facilities, and equipment
rearrangement and replacement to improve operating efficiency.
Braintree, MA. The Company's largest facility is located in Braintree,
Massachusetts, 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 industrial furnaces, pretreatment of waste to stabilize it
before it is sent to landfills, and incineration of small quantities of
nonhazardous waste. The facility has been operated under a state Interim
Hazardous Waste Facility License, which gave it Part A Interim Status, since
1981. The Company acquired the facility in 1985. In June 1992, the Massachusetts
Department of Environmental Protection (the "DEP") approved the Company's
application for a final Hazardous Waste Facility License, which would give the
facility a final Part B license for a five-year term. The Town of Braintree and
two adjoining communities have appealed the DEP's decision to issue the final
Part B license, and requested an adjudicatory hearing before the DEP, which is
the normal appeal process. The appeal is an administrative proceeding before the
DEP, and the facility will continue to operate normally pursuant to its state
license and Interim Status authority under RCRA while the DEP considers the
appeal. The Company is confident the review will result in confirmation of the
license as
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granted. The authority from the federal EPA to handle PCBs is not impacted by
the towns' appeal of the Part B license.
Natick, MA. The Natick, Massachusetts facility is located just west of
Boston. Its primary services are collecting LabPacks and repackaging the small
quantities of laboratory and household chemicals into 55-gallon drum quantities,
consolidating wastes for shipment to other Company facilities or third parties
for further treatment or disposal, and serving as a transfer station for the
Northeast region. The facility has a state Hazardous Waste Facility License (the
state equivalent of a Part B license), which was renewed in October 1994 for a
five-year term. The facility is also authorized by the federal EPA to handle
PCBs.
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, drummed waste processing and consolidation, and transfer
and repackaging of laboratory chemicals into LabPacks. In November 1993, the
Illinois EPA issued a Part B license for a ten-year term, which significantly
expanded the waste handling and storage capacity of the facility. The new
license increased drum storage capacity from 1,240 drums to 1,875 drums and
allows handling of material destined for blending of waste used as supplemental
fuel by industrial furnaces, pretreatment of waste to stabilize it before it is
sent to landfills, and rail shipment of hazardous and nonhazardous waste. The
Company plans to make substantial expenditures to implement this increased
permitted capacity.
As an alternative to making the needed improvements to its own site, the
Company has entered into a definitive agreement with Chemical Waste Management,
Inc. ("ChemWaste") which would allow the Company to lease an adjoining site now
leased by ChemWaste and acquire their existing improvements in exchange for
sharing the costs of dismantling an existing hazardous waste incinerator and
cleaning up the adjoining site. The improvements on the ChemWaste site would
allow the Company to develop new product lines not currently handled at the
Company's existing facility. 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. Completion of this
transaction is subject to numerous regulatory approvals which the Company
expects to obtain in the Spring of 1995.
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 serves as a transfer station for various
types of containerized hazardous and nonhazardous waste. The facility is
licensed by the state as a wastewater treatment facility. 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 adjacent to
Interstate 95 in central Baltimore. It provides treatment of nonhazardous and
hazardous industrial aqueous wastes, drummed waste processing, pretreatment of
waste to stabilize it before it is sent to landfills, and transfer of LabPacks.
It is the only commercial hazardous waste treatment facility in Maryland. The
facility has a state Controlled Hazardous Substances permit (the state
equivalent of a Part B license), which was issued in 1987. In 1990, the Company
received a permit modification to expand the range of waste streams the facility
can accept and to install the CES, which allows the facility to treat a wide
range of hazardous wastewaters contaminated with gasoline, chlorinated solvents
and many other organic contaminants, which were formerly sent to other companies
for incineration. In 1992, the Maryland Department of the Environment issued a
new Controlled Hazardous Substances permit for a three-year term, which
significantly expanded the waste handling and storage capacity of the facility.
The new permit also allows handling of LabPacks and material destined for
fuels-blending, pretreatment of waste to stabilize it before it is sent to
landfills, and rail shipment of hazardous and nonhazardous waste.
Bristol, CT. In July 1992, the Company acquired Connecticut Treatment
Corporation, located in Bristol, Connecticut, approximately 20 miles southwest
of Hartford. It provides hazardous wastewater
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treatment, drummed waste processing and consolidation, and transfer of LabPacks.
This facility also offers two specialized services: equipment
"de-manufacturing," such as dismantling outdated computers, and treatment of
special categories of hazardous wastewaters known as "listed" wastewaters
resulting from industrial processes such as electroplating.
The Bristol facility has a Part B license issued by the federal EPA and the
Connecticut Department of Environmental Protection. The license was issued in
1987 and expired in 1991. A new license was applied for and the facility
continued to operate while the EPA and DEP reviewed the renewal application. The
Company also applied for approval to expand the number of hazardous waste codes
allowed to be handled, expand container storage capacity from 1,000 drums to
3,500 drums, and add eight tanks for storage of sludge and stabilization
materials. In October 1994, the DEP issued a draft of the renewal license, with
the additions requested by the Company, and invited comments from the public. If
comments were submitted, then a public hearing would have been necessary. No
public comments were received, and no hearing was required. The Company expects
to receive the final renewal license shortly. The term of the license will be
five years.
The Bristol facility also treats hazardous industrial wastewater, and has a
permit to discharge to the publicly owned sewage treatment works an average of
50,000 gallons per day of treated water. These treatment activities are licensed
by the Connecticut DEP pursuant to the Clean Water Act, and are not subject to
Part B licensing requirements. In 1990 the Company applied for renewal and
modification of its Clean Water Act license, to allow construction of additional
tanks for wastewater treatment and installation of new wastewater treatment
technologies, such as reverse osmosis and ultrafiltration. The discharge limit
would remain at 50,000 gallons average per day. The facility currently
discharges an average of approximately 30,000 gallons per day. In November 1994,
the DEP issued a draft of the renewal license, with the additions requested by
the Company, and invited comments from the public. The Company expects that
public comments will be submitted and that a public hearing will be held.
Cincinnati, OH. In February 1993, the Company acquired Spring Grove
Resource Recovery, Inc. ("Spring Grove"), 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, and transfer of LabPacks. The facility holds a federal Part B
license, which was issued in 1985 and expires in 1995, and a state Hazardous
Waste Facility Installation and Operation permit which was renewed in December
1993 for a five-year term. The facility is also authorized to handle PCBs. On
March 31, 1994, the Ohio EPA approved the Company's application for a revised,
comprehensive state permit that expands the range of waste that may be received
and treated at the facility and allows installation of sophisticated equipment
for handling and processing material to be sent to boilers and industrial
furnaces and used as supplemental fuel. The transfer of ownership to the Company
is subject to approval by regulatory authorities, which is expected during 1995.
The regulatory authorities have granted an exemption allowing the Company to
acquire the stock of Spring Grove and operate the facility in the interim. If
the transfer of ownership is not approved, then the seller has agreed to
repurchase Spring Grove for a price equal to what the Company paid for Spring
Grove ($7,000,000) with adjustments for depreciation and improvements.
Acquisition of the Kimball, Nebraska Hazardous Waste Incinerator. The
Company plans to acquire a newly constructed hazardous waste incinerator in
Kimball, Nebraska from Ecova Corporation, a wholly owned affiliate of Amoco Oil
Company. In November 1994, the Company signed a letter of intent with Ecova
Corporation, and a definitive asset purchase agreement is being negotiated.
The Kimball facility includes a 45,000 ton-per-year fluidized bed thermal
oxidation unit for maximum destruction efficiency of hazardous waste. It is a
new, state-of-the-art facility staffed with a highly trained and motivated
workforce. The Company believes that the facility offers capabilities which will
be very attractive to its major customers. In particular, the facility is
expected to have operating costs lower than most other incinerators, given the
minimal acquisition cost to the Company and its unique ability to dispose of
delisted ash on-site, which will save on the cost of shipping ash to another
company for landfilling. The Company expects to realize significant savings by
using the Kimball facility to incinerate waste previously sent to other
incinerators.
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The incinerator has a RCRA Part B permit issued by the Nebraska Department
of Environmental Quality ("NDEQ"). Construction is complete and final
performance tests were successfully completed in December 1994. The NDEQ has
approved commercial operation at 75% of capacity. All necessary permits to
operate the facility have been issued, and are expected to be transferred to the
Company in the Spring of 1995, when the acquisition is expected to be completed.
The construction of the incinerator and its operation have received widespread
support in the local community.
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
the permit requirements, which is subject to verification before it is
landfilled on-site, the ash will be classified as "delisted", meaning it will no
longer be regulated as a hazardous waste under RCRA. No other commercial
incineration facility in the United States is currently permitted to delist ash.
Although the ash will be classified as nonhazardous, the landfill has been
constructed to meet RCRA Subtitle C standards, which are the same stringent
requirements as for landfills designed to handle hazardous waste.
The letter of intent provides that Ecova will transfer the Kimball facility
to the Company in return for royalty payments through 2004, based on the number
of tons processed at the facility. The transaction is subject to negotiation of
definitive agreements and a number of approvals from the United States EPA and
the NDEQ which must approve the transfer of the facility to a new owner. The
Company must also arrange financing for the acquisition costs, currently
estimated to be approximately $10,000,000. According to the letter of intent, if
the acquisition does not take place for any reason (other than a default by the
seller), the Company would be obligated to reimburse certain of Ecova's costs of
operating the incinerator after November 22, 1994, which was the date the letter
of intent was signed.
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, and received a Part B license in October 1993 for a five-year term.
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 in South Portland located on Main Street. It has a license
to store virgin oil, but it also is permitted for the temporary storage and
transfer of containerized hazardous waste.
The Virginia facility is located near Richmond, and was acquired in
September 1994 from ChemWaste. The facility is able to store oil and
gasoline-contaminated wastewaters collected from various activities, ranging
from routine cleaning of oil storage terminals to oil spill cleanups. The
facility operates under interim status under RCRA while the state reviews its
application for a Part B license.
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 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.
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 or is in the process of
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applying for all operating licenses and approvals 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 planned expansion or
modifications of 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 and Ohio, 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 license 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 eleven waste
management facilities, eight are subject to RCRA licensing; of the eight, only
the Virginia waste oil facility operates under interim status. The other seven
have been issued Part B licenses, one of which is under appeal.
RCRA requires that Part B licenses 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 estimates that there are approximately 4,300 facilities that treat,
store or dispose of hazardous wastes, which can be compelled to take corrective
action when necessary. Some facilities are very large and have extensive
contamination problems which rival the largest Superfund sites. Other facilities
have relatively minor environmental problems. Still others will not need
remedial action at all. It is the EPA's policy to compel corrective action at
the "worst sites first." As a result, 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.
The EPA has begun RCRA corrective action investigations at the Company's
Part B licensed facilities in Braintree, Natick, Baltimore, Chicago, 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. The Company spent approximately $471,000 on corrective action at the
foregoing facilities in 1994. The Company does not expect that corrective action
will be required at its Richmond, Virginia waste oil facility.
The Company is also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by Philadelphia Electric Company ("PECO").
The site consists of approximately 30 acres which PECO has leased to various
companies over the years. In 1989, the Company acquired by merger a public
company called 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 is
estimated to be in the range of $1,000,000 to
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$2,000,000, by performing field service work and analytical services required to
complete the site studies and providing other environmental services to PECO at
discounted rates.
While the final scope of the work to be done at these facilities 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 such costs
will not have a material effect on its results of operations or its competitive
position, and that it will be able to finance from operating revenues any
additional corrective action required at its facilities. Environmental
expenditures that relate to current operations are expensed or capitalized as
appropriate.
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 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 also "Business-Legal Proceedings."
Clean Water Act. This legislation prohibits discharges to 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 waste water which they discharge to
publicly owned treatment works pursuant to permits issued by the 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 of 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 and the Interstate Commerce Commission, 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 and Ohio 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 and
Cincinnati facilities are regulated by the relevant state agencies in addition
to federal EPA regulation.
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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 and state laws and
regulations. Ten of the Company's eleven waste management facilities have been
issued final licenses; the one for the Braintree facility is under appeal. The
Richmond facility operates under interim status. 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.
ITEM 3. LEGAL PROCEEDINGS
In April 1988, the Board of Selectmen of Braintree, Massachusetts, approved
a cease and desist order with respect to the handling of flammable materials
stored at the Company's Braintree facility. The Board concluded that, when the
Company purchased the land on which the Braintree facility is located, a license
for the storage of flammable liquids was not conveyed as an incident of
ownership. The Company petitioned the Massachusetts Land Court for a declaratory
judgment that either the Company possesses such a license by operation of law or
that the statute requiring the license is pre-empted by the pervasive state
regulation of hazardous waste facilities. In March 1994, the Land Court issued a
favorable ruling, concluding that the statute is pre-empted by state hazardous
waste laws and regulations and no local flammable storage license is required.
The town has appealed this ruling, and has asked the Company to stipulate
certain facts with respect to the other issues of the case so that a final
appealable order can be issued by the Land Court. The Company has agreed to the
stipulation but the Town has taken no further action.
In August 1990, an action was filed in the New York Supreme Court, Albany
County, in connection with the accidental death of an employee of a Company
subsidiary who was working on the Hudson River in September 1989 while
responding to an oil spill. The complaint sought $10,000,000 under the federal
Longshoremen's and Harborworker's Compensation Act (the "Jones Act"). The
Company sought to dismiss the Jones Act claims on the grounds that the employee
was not a "seaman" within the meaning of the Jones Act and that the case was
governed by the New York Workers' Compensation statute. In March 1994, the trial
court judge granted the Company's motion for a summary judgment that the Jones
Act does not apply. The decision has been appealed.
In December 1991, the Company was asked to respond to an emergency cleanup
after a motor vehicle struck a utility pole near the State University of New
York at New Paltz, causing an electrical surge to overheat transformers which
discharged toxic chemicals throughout various student dormitories and classroom
buildings. The Company was hired by the State University of New York to perform
technical supervisory and
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laboratory work for the cleanup. The actual work of cleaning the buildings was
performed over approximately 15 months by other contractors hired by the State
of New York. In March 1993, a group of students sued the Dormitory Authority of
the State of New York ("DASNY") claiming that they were exposed to toxic
chemicals when DASNY allowed them to reoccupy the buildings after the accident
and prior to a complete removal of the toxic chemicals, causing them increased
risk of future illnesses. DASNY has denied the students' claims but recently
decided to sue the Company along with 16 other third-party defendants claiming
that if DASNY is liable to the students, these third-party defendants should
indemnify DASNY. The Company was hired by the State University of New York to
perform representative sampling for toxic chemicals but, according to its
contract, was not responsible for decisions as to when students should reoccupy
the buildings. Nevertheless, in June 1994, the Company and the 16 other third
parties were served with a third-party complaint filed in the Ulster County
Superior Court by DASNY. All action has been suspended pending a determination
by the trial judge as to whether the students are entitled to file a class
action lawsuit. The Company does not believe that it should incur any material
liability as a result of this lawsuit; however, in view of the fact that only
preliminary investigation and no discovery have been conducted, the Company is
not in a position to evaluate the merits of the lawsuit.
In January 1994, the Company received an amended complaint filed in Circuit
Court of Cook County, Illinois by a truck driver for a trucking company who
alleges that he was exposed to fumes from a wastewater treatment operation at
the Company's Chicago facility while he was offloading and cleaning his truck.
The Company has received information that the truck driver is suffering from
lung damage and decreasing lung capacity. The Company has not yet responded to
the amended complaint. The case is in the preliminary discovery stages and the
Company is not able to determine its potential liability, if any, at this point.
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 19 state and federal
Superfund sites.
Ten of these sites involve two subsidiaries which the Company acquired from
ChemWaste, which is a wholly-owned subsidiary of WMX Technologies, Inc. As part
of the acquisition, ChemWaste agreed to indemnify the Company with respect to
any liability of its Natick and Braintree subsidiaries for waste disposed of
before the Company acquired them. Accordingly, ChemWaste is paying all costs of
defending the Company's Natick and Braintree subsidiaries in these 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 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.
With respect to the other Superfund sites at which the Company believes it
may face liability, the Company has established reserves or escrows which it
believes are appropriate. Therefore, the Company believes that any future
settlement costs arising from any or all of the 19 Superfund sites will not be
material to the Company's operations or financial position. 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. As of December 31, 1994, the
Company had accrued environmental costs of $455,000 for cleanup of Superfund
sites. 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.
Five of the 19 sites involve former subsidiaries of ChemClear Inc. One of
the five sites is the Strasburg Landfill site in Pennsylvania. The Company and
two other parties identified as PRPs received an order from
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21
the EPA in 1989 to perform certain emergency measures at the site. The Company
responded by installing a leachate treatment and discharge system and repairing
the landfill slope. Since early 1990, the Company has spent approximately
$375,000 in complying with the EPA order. In 1992, the EPA issued its Record of
Decision for the site which proposes recapping and revegetating the landfill and
installing certain air emission and leachate treatment systems. The estimated
capital cost of the remediation plan for the site is approximately $6,500,000
with annual operating and maintenance costs of approximately $300,000. The EPA
has identified more than 20 additional PRPs at the site. In addition, the
Company and several other PRPs are attempting to identify other companies that
sent waste to the landfill and have them named as PRPs. In January 1993, the
Company and eight other PRPs submitted to the EPA a Response to Notice Letter,
which recommended additional study be performed at the site by the PRP group and
that a final remedy be based on the additional data developed during the study.
No reply has been received from the EPA. The Company believes its ultimate
exposure in this case 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 three 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 until July
1995 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.
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 1994.
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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.
1993 HIGH LOW
---- ---- ---
First Quarter............................................... $17.50 $12.50
Second Quarter.............................................. 17.25 11.25
Third Quarter............................................... 15.00 6.75
Fourth Quarter.............................................. 8.75 6.00
1994 HIGH LOW
---- ---- ---
First Quarter............................................... $9.25 $6.625
Second Quarter.............................................. 8.25 6.625
Third Quarter............................................... 8.125 5.75
Fourth Quarter.............................................. 7.25 3.625
On February 1, 1995 there were 932 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, 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. 112,000 shares of
Series B Convertible Preferred Stock were issued on February 16, 1993 in partial
payment of the purchase price for Spring Grove. Except for payment of dividends
on the Series B Convertible 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 Series B
Convertible Preferred Stock dividends. See Note 9 to the Consolidated Financial
Statements in Item 8 of this report.
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.
Change of Fiscal Year. In 1992, the Company elected to change its fiscal
year to coincide with the calendar year. Prior to the change, the Company's
fiscal year ended on February 28. As a result, the Company had a ten-month
transition period, from March 1, 1991 to December 31, 1991, between fiscal
years. The change in fiscal year creates a reporting period which is consistent
with various federal and state agencies which regulate the Company's business,
and allows better comparability of the Company's results to other publicly
traded environmental services companies.
Restructuring Costs. In the fall of 1990, the Company abandoned an effort
it began in 1987 to obtain a permit to install a high temperature rotary kiln
incinerator at its facility in Braintree, Massachusetts. During its fiscal year
ended February 28, 1991, the Company wrote off its investment in the project and
exited certain unprofitable businesses, resulting in restructuring charges of
$19,900,000.
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Extraordinary Item. During the third quarter of 1994, the Company
completed a public offering of $50,000,000 of 12.50% Senior Notes, and used the
net proceeds to prepay substantially all of the Company's debt, in order to
refinance debt which had a 13.25% interest rate. The Company also wanted to
reduce its reliance on floating rate bank debt, by extending the average life of
its long-term debt and obtaining longer-term capital at an attractive fixed
interest rate. The refinancing resulted in an extraordinary charge of $2,043,000
($.13 per share, net of income tax benefit of $1,220,000), for redemption
premiums paid to the holders of the prepaid debt and for the write-off of
deferred financing costs.
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Nonrecurring Charge. During the fourth quarter of 1994, the Company
renegotiated its lease on its corporate headquarters in Quincy, Massachusetts,
such that the lease will terminate on or before December 31, 1995. The Company
expects to relocate its headquarters to less expensive space in 1995. In
addition, the Company has vacated laboratory space it rents in Bedford,
Massachusetts, and is subleasing the space. As a result, the Company has taken a
one-time, noncash charge of $1,035,000 before taxes for the write-off of
leasehold improvements at the two locations.
TWELVE-MONTH
TWELVE-MONTH YEAR TEN-MONTH FISCAL YEAR
ENDED DECEMBER 31, PERIOD ENDED ENDED
------------------------------ DECEMBER 31, FEBRUARY 28,
1994 1993 1992 1991 1991
-------- -------- -------- - ------------ -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues................. $207,073 $200,114 $176,193 $127,473 $142,906
Cost of revenues......... 146,132 134,525 116,473 85,921 98,728
Restructuring costs and
RKI write-off.......... -- -- -- -- 19,898
Selling, general and
administrative
expenses............... 38,910 42,296 35,923 23,856 23,664
Depreciation and
amortization of
intangible assets...... 10,250 10,319 8,884 6,601 7,928
Nonrecurring charge...... 1,035 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from
operations............. 10,746 12,974 14,913 11,095 (7,312)
Interest expense (net)... 7,432 7,198 7,064 5,925 6,428
-------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and extraordinary
item................... 3,314 5,776 7,849 5,170 (13,740)
Provision (benefit) for
income taxes........... 1,619 2,645 2,774 1,567 (1,108)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... 1,695 3,131 5,075 3,603 (12,632)
Extraordinary loss
related to early
retirement of debt, net
of income tax benefit
of $823,000............ 1,220 -- -- -- --
-------- -------- -------- --------- --------
Net income (loss)........ $ 475 $ 3,131 $ 5,075 $ 3,603 $(12,632)
======== ======== ======== ======== ========
Net income (loss) per
common and common
equivalent share before
extraordinary item..... $ .13 $ .28 $ .52 $ .37 $ (1.40)
======== ======== ======== ======== ========
Extraordinary item....... $ (.13) -- -- -- --
======== ======== ======== ======== ========
Net income (loss) per
common and common
equivalent share....... $ .00 $ .28 $ .52 $ .37 $ (1.40)
======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares
outstanding............ 9,635 9,884 9,743 9,739 8,998
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 20,814 $ 18,320 $ 15,487 $ 14,529 $ 12,850
Total assets............. $159,875 $167,358 $153,939 $138,844 $135,881
Long-term debt, less
current portion........ $ 60,465 $ 62,507 $ 64,565 $ 63,381 $ 62,645
Stockholders' equity..... $ 67,326 $ 67,371 $ 58,065 $ 50,787 $ 46,776
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As part of its growth strategy, the Company seeks to expand into additional
service areas by opening new service centers and sales offices, and by acquiring
additional hazardous waste management facilities. In 1992, the Company made two
acquisitions (Connecticut Treatment Corporation and Mr. Frank, Inc.). In 1993,
the Company made one acquisition (Spring Grove Resource Recovery, Inc.) and
opened two service centers in Waukegan, Illinois and Portsmouth, New Hampshire
and eight sales offices. In 1994, the Company made one acquisition (the
Richmond, Virginia oil reclamation facility), closed the Portsmouth, New
Hampshire service center to reduce overhead, and opened two new service centers
in Lake Charles, Louisiana and Charleston, South Carolina.
Sales offices may become service centers as business around a sales office
develops and the Company adds staff and equipment to support the increasing
level of business. During 1994, the Company's sales office in St. Louis,
Missouri became a service center, by relocating to larger space and adding field
technicians and personnel to service customers. As its sales territories evolve,
the Company will relocate sales personnel from one area to another, and close
sales offices while opening others in areas with growth potential. In 1994, two
sales offices in Minnesota and Ohio were closed, while four new sales offices
were opened in Georgia; Tennessee; North Carolina; and Texas. The Company
currently has 9 sales offices and 22 service centers.
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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
TWELVE-MONTH YEAR TEN-MONTH FISCAL YEAR
ENDED DECEMBER 31, PERIOD ENDED ENDED
------------------------ DECEMBER 31, FEBRUARY 28,
1994 1993 1992 1991 1991
------ ------ ------ ------------- -------------
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third
parties.................. 13.5 15.4 18.2 20.6 17.7
Other costs................. 57.1 51.8 47.9 46.8 51.4
------ ------ ------ ------ -----
Total cost of
revenues............ 70.6 67.2 66.1 67.4 69.1
Restructuring costs and RKI
write-off...................... -- -- -- -- 13.9
Selling, general and
administrative expenses........ 18.8 21.1 20.4 18.7 16.6
Depreciation and amortization of
intangible assets.............. 4.9 5.2 5.0 5.2 5.5
Nonrecurring charge.............. 0.5 -- -- -- --
------ ------ ------ ------ -----
Income (loss) from
operations............... 5.2 6.5 8.5 8.7 (5.1)
Interest expense (net)........... 3.6 3.6 4.0 4.7 4.5
------ ------ ------ ------ -----
Income (loss) before
provision for income
taxes and extraordinary
item..................... 1.6 2.9 4.5 4.0 (9.6)
Provision (benefit) for income
taxes.......................... 0.8 1.3 1.6 1.2 (0.8)
------ ------ ------ ------ -----
Income (loss) before
extraordinary item............. 0.8 1.6 2.9 2.8 (8.8)
Extraordinary loss from early
retirement of debt............. 0.6 -- -- -- --
------ ------ ------ ------ -----
Net income (loss)........... 0.2% 1.6% 2.9% 2.8% (8.8)%
====== ====== ====== ====== ======
The Company's operations are subject to seasonal fluctuations. Typically
during the first quarter there is less demand for environmental remediation 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. Customer spending
for environmental remediation services is also influenced by budgetary cycles
and constraints, and remediation projects are typically fewer in the first
quarter of the budget year, with more projects occurring in subsequent quarters
as customers seek to complete budgeted projects before the end of the year.
The Company analyzes its results of operations based on the geographical
locations of its service centers. The Company believes this method of analysis
is appropriate because geographical areas differ in types of customers; the
scope and maturity of the Company's operations; the Company's investments in
facilities and the number of service centers and sales offices; degree of
competition; and local economic and regulatory conditions.
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The following table sets forth for the periods indicated the Company's
revenues by region, based upon the locations of its 22 service centers, as of
December 31, 1994.
NUMBER OF
SERVICE
REGION CENTERS 1994 1993 1992
- -------------- -------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, UNAUDITED)
Northeast 7 $ 82,391 40% $ 84,906 42% $ 77,872 44%
Mid-Atlantic 9 70,861 34% 63,894 32% 55,317 31%
Central 3 29,847 14% 26,044 13% 22,240 13%
Midwest 3 23,974 12% 25,270 13% 20,764 12%
--
-------- ---- -------- ---- -------- ----
Total 22 $207,073 100% $200,114 100% $176,193 100%
== ======== ==== ======== ==== ======== ====
The Company continues to expand its Mid-Atlantic region as it penetrates
the southern part of the country, by expanding its network of sales offices and
service centers. With its new service centers and sales offices in the southern
states of South Carolina, Georgia, Tennessee, Louisiana, and Texas, the Company
expects its business in that region to expand in 1995. The Company may decide to
form a new southern region so it can analyze and report on its results of
operations in that developing area.
Beginning in 1993, the Company also began to analyze its revenues on a
product line basis based upon the type of principal services provided. The
principal services provided by the Company fit within three categories:
treatment and disposal of industrial wastes ("Treatment and Disposal"); field
services provided at customer sites ("Field Services"); and specialized
repackaging, treatment and disposal services for laboratory chemicals and
household hazardous wastes ("LabPacks"). The following table sets forth such
product line data for the periods indicated. Comparable data for prior periods
is not available.
TYPE OF SERVICE 1994 1993
- ---------------------------------------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, UNAUDITED)
Treatment and Disposal........................ $ 84,523 41% $ 90,181 45%
Field Services................................ 94,360 46% 80,940 40%
LabPacks...................................... 28,190 13% 28,993 15%
-------- ---- -------- ----
Total.................................... $207,073 100% $200,114 100%
======== ==== ======== ====
1994 COMPARED WITH 1993
Revenues. Revenues for 1994 were $207,073,000, a 3.5% increase over 1993
revenues of $200,114,000. As shown in the regional revenue table above, the
Mid-Atlantic and Central regions showed continued progress in gaining market
share, as revenues in those regions grew 11% and 15%, respectively, in contrast
to the Northeast and Midwest regions, where revenues declined 3% and 5%,
respectively. Industrywide pricing pressures, particularly in the treatment and
disposal and LabPack product lines, impacted revenues.
The Northeast and Midwest regions have historically been strong markets for
handling drummed waste. Customers have changed their waste handling systems to
store and ship more waste in bulk, which allows them to ship directly to the
ultimate disposal location and bypass transfer facilities, reducing their unit
disposal costs. These changes, combined with efforts by customers to minimize
the amount of hazardous waste generated, tended to offset the Company's gains in
market share and number of jobs performed in all regions as it expands the range
of services offered and the geographic territory served. In addition, price
competition in the LabPack business has caused a decline in revenues from that
product line, particularly in the Northeast and Midwest regions.
The 3% revenue decline in the Northeast region was consistent with the
Company's expectations for the region, since the prevailing trend over the past
few years has been flat, as major industries in the region, such as defense,
aerospace, computers, and high-technology, have experienced cutbacks in
production. However,
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the mix of business has shifted, from treatment and disposal to field service.
During 1994, the Company completed several large remediation projects in the
Northeast region, which involved direct shipment of waste to disposal sites.
The 5% revenue decline in the Midwest region was due to a decline of
approximately 20% in the volumes of waste handled, as the Company avoided
low-margin waste and has focused on improving profitability in that region. The
Company expects to introduce new waste management capabilities in the Midwest
region with the significant expansion of its Chicago facility to include the
adjacent property.
Revenue in the Mid-Atlantic region grew 11% from 1993 to 1994, primarily
due to approximately $7,000,000 of revenue from the Company's leading role in
the cleanup of a large oil spill from a barge off the coast of Puerto Rico,
which occurred in the first quarter of 1994, and was classified as field service
revenue.
Revenue in the Central region grew 15% from 1993 to 1994, as the Company
continued to gain market share in the Central region, as it has for the past
several years. For example, 1992 revenues were 53% higher than 1991 revenues,
and 1993 revenues were 17% higher than 1992 revenues.
For purposes of reporting revenue by product line, large remediation jobs
are classified as field services, even though in some cases a substantial
portion of the revenue relates to the disposal of waste. The Company believes
its ability to handle, store and dispose of waste from field service projects
gives it a competitive advantage over other contractors, who do not have
permitted waste management facilities to store waste removed from a site
cleanup. Although the Company has seen a decline in the revenue from its
treatment and disposal product line, the total volume of drums and bulk material
handled in 1994 decreased less than 10% as compared to volumes handled in 1993,
which indicates that its field service activities are generating additional
waste volumes. Field service jobs also frequently involve direct shipment of
waste material to other disposal sites, such as incinerators, which is one
reason the Company has concluded it needs the Nebraska hazardous waste
incinerator.
LabPack product line revenue declined 3% from 1993 to 1994, primarily due
to price competition, particularly in collecting hazardous waste from
households, which is competitively bid by the municipalities sponsoring the
townwide or citywide collection programs.
Cost of Revenues. One of the largest components of cost of revenues is the
cost of sending waste to other companies for disposal. The Company has been able
to upgrade the quality and efficiency of its waste treatment services through
the development of new technology, strategic acquisitions, and continued
modifications and upgrades at its facilities. These actions reduced the
Company's costs and its dependence on outside disposal vendors. Internal waste
disposal capabilities have expanded as a result of the CES beginning commercial
operations in June 1992, the acquisition of Connecticut Treatment Corporation in
the third quarter of 1992, the issuance of a new permit at the Baltimore
facility in September 1992, and the acquisition of Spring Grove Resource
Recovery in the first quarter of 1993. The Company also benefited from a
competitive pricing environment among disposal facilities, such as landfills and
incinerators, to which the Company sends waste for ultimate disposal. As a
result, the Company's outside disposal costs decreased to 13.5% of revenue in
1994 from 18.2% of revenue in 1992. However, the Company has noticed a recent
change in the trend, as outside disposal costs increased from 13.6% of revenue
in the third quarter of 1994 to 16.3% of revenue in the fourth quarter of 1994.
The Company believes that recent price increases by disposal vendors, primarily
incinerators and cement kilns, indicate that the pricing environment may be
changing, a factor which supports the Company's recent decision to acquire the
Nebraska hazardous waste incinerator and reduce the Company's reliance on
third-party disposal outlets.
The Company's cost of revenues, excluding disposal costs paid to third
parties, increased to 57.1% of total revenues in 1994 from 51.8% in 1993, as
intense price competition and increased costs combined to offset the benefits
the Company experiences from a competitive pricing environment among disposal
facilities. While the Company has managed to control most of its fixed costs,
such as insurance costs, other items such as rent and telephone expense have
increased as the Company opens new locations and expands its service territory.
The largest increases in operating costs were for subcontractors, rentals, and
outside transportation.
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The Puerto Rico oil spill cleanup is classified as a field service job. In that
cleanup, the Company was primarily responsible for overseeing the work of local
employees and subcontractors, and the waste disposal was handled by other
parties. As a result, although the Company realized over $7,000,000 of revenue,
its gross margin on the job was significantly lower than the margins it
typically realizes on its field service work.
As a result, the cost of revenues increased to 70.6% of revenues in 1994,
as compared to 67.2% of revenues in 1993, reflecting the competitive pricing
trends in the hazardous waste industry. To offset this pricing erosion, the
Company in 1993 began a reengineering effort aimed at reducing its cost
structure and streamlining its treatment and disposal services, while
maintaining a high quality of customer service. The reengineering effort
involved costs for outside consultants, 10 full-time senior personnel, and a
major software conversion. The Company expects to implement its new treatment
and disposal program during 1995. One result of this reengineering effort was
the Company's decision to relocate its headquarters to less expensive, smaller
space. With the elimination of several functions and the centralization of
others, its headquarters staff is now less than 100 people. Other goals of the
reengineering effort were to increase the ratio of billable to nonbillable
personnel, improve bidding and execution of jobs, achieve better pricing of
remediation work, and decline jobs with less than acceptable margins. At
December 31, 1994, the Company had 1,498 regular employees, as compared to 1,493
employees at the end of 1993, and approximately 58% of its workforce was
billable personnel, compared to 54% at July 1, 1993, when the program began.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $38,910,000 or 18.8% of revenues in 1994,
as compared to $42,296,000 or 21.1% of revenues for 1993. One of the goals of
the reengineering program that began in 1993 was to reduce the number of
nonbillable personnel, through elimination of positions and reassigning some
people from nonbillable overhead positions to billable positions included in
gross margin, in an effort to reduce selling, general and administrative costs
to a quarterly rate of approximately $10,000,000 going into 1994. Management of
the Company set a goal of reducing selling, general and administrative costs
approximately 5% in 1994, and exceeded the goal by achieving an 8% reduction.
The Company's strategy to expand geographically, by adding sales offices
and service centers in the Southern region, and to add product lines, such as
the Nebraska incinerator, are expected to increase selling, general and
administrative costs to a quarterly rate above $10,000,000 during 1995.
Interest Expense. Interest expense for 1994 was 3.6% of revenues, the same
percentage as for 1993. Total debt at December 31, 1994 was $8,199,000 lower
than at December 31, 1993, as the Company used funds provided from operations to
reduce its bank debt. The public offering of $50,000,000 of 12.50% Senior Notes
caused an increase in the Company's average interest cost, since the interest
rate was higher than the floating rate paid on its bank debt. To the extent the
Company is required to borrow additional funds for the acquisition of the
Nebraska incinerator, and if prevailing interest rates continue to rise, its
interest expense in 1995 may increase accordingly. No interest was capitalized
during 1994 or 1993.
Provision for Income Taxes. The effective income tax rate for 1994 was
49%, an increase over the 46% effective income tax rate for 1993. The rate for
both years was higher than the combined state and federal statutory rate due in
part to the amortization of goodwill on acquisitions made before July 1991,
which is nondeductible for income tax reporting purposes. The rate fluctuates
depending on the amount of income before taxes, as compared to the fixed amount
of goodwill and other nondeductible items.
1993 COMPARED WITH 1992
Revenues. Revenues for 1993 were $200,114,000, a 13.6% increase over 1992
revenues of $176,193,000. As shown in the regional revenue table above, the
Mid-Atlantic, Central, and Midwest regions showed the benefit of the Company's
expansion efforts, as the combined revenues in those three regions grew 17%, in
contrast to the Northeast region, where revenues grew 9%. Despite the
recessionary economy, industrywide pricing pressures, and efforts by customers
to minimize the amount of hazardous waste generated, the Company continued to
experience growth in revenues, primarily from gains in market share in all
regions, by expanding the range of services offered and the geographic territory
served. New services not
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previously offered included: pretreatment of waste to stabilize it before it is
sent to landfills, treatment and disposal of special categories of hazardous
wastewaters (so-called "listed" waste and "lean water") previously sent to
competitors for disposal; blending of waste used as supplemental fuel by
industrial furnaces; and the introduction of new waste treatment technology,
such as the Clean Extraction System. The territory served expanded through
opening new sales offices in areas outside the existing service area, such as
Minnesota, Missouri, Kentucky, and Puerto Rico.
Revenue in the Mid-Atlantic region grew 16% from 1992 to 1993, primarily
through gains in market share. No new sales offices were opened in the region in
1993. In addition to expanding its base business in the Mid-Atlantic region, the
Company also benefited from rapid growth of its Puerto Rico business, which
accounted for approximately one-half of the $8,500,000 increase in revenue from
1992 to 1993.
Revenue in the Central region grew 17% from 1992 to 1993. The Central
region benefited from the February 1993 acquisition of Spring Grove Resource
Recovery and the opening of two sales offices (Buffalo and Columbus). The
Company experienced significant gains in market share in the Central region over
the past several years. For example, 1992 revenues were 53% higher than 1991
revenues. The Company expected even higher revenue growth in the Central region
in 1993, leveraging off the Spring Grove acquisition. While volumes of waste
handled at the Spring Grove facility and its revenues have grown since the
acquisition, Central region revenue growth overall was lower than expected,
largely because of lower remediation activity in the region in 1993.
Revenue in the Midwest region grew 22% from 1992 to 1993. The Midwest
region benefited from the July 1992 acquisition of Mr. Frank, Inc. and the
opening of a service center in Waukegan, Illinois and four sales offices.
However, gains in market share in this region were increasingly difficult to
achieve, due to competition from many smaller firms offering industrial
maintenance and waste disposal services at lower cost.
The Northeast region showed improved business levels, despite a decline in
industrial activity in the region. Revenue in the Northeast region grew 9% from
1992 to 1993. The Company believes it regained market share from competitors,
partly as a result of capitalizing on the July 1992 acquisition of Connecticut
Treatment Corporation, which treats "listed" wastewater. Although results for
1993 showed an increase in revenues in the Northeast, revenues from 1991 to 1992
declined 6%, which has been the prevailing trend over the past few years.
Gains in 1993 revenue in the Northeast exceeded the Company's expectations,
while revenue growth in the other three regions did not meet expectations,
primarily because of significantly lower remediation activity, particularly in
the Central and Midwest regions. While waste disposal volumes were strong in
1993, competition put downward pressure on prices, which contributed to a
shortfall in revenues, relative to expectations.
Cost of Revenues. The Company's outside disposal costs decreased to 15.4%
of revenue in 1993 from 18.2% of revenue in 1992, in part due to CES beginning
commercial operations and the acquisition of Connecticut Treatment Corporation
and Spring Grove Resource Recovery.
Employee costs grew significantly in 1993, as the Company increased its
staff in anticipation of double-digit revenue growth. At December 31, 1992, the
Company had 1,310 regular employees. Employment peaked during the summer of
1993; at September 30, 1993 the Company had 1,533 regular employees. The
Company's cost of revenues, excluding disposal costs paid to third parties,
increased from 47.9% of total revenues in 1992 to 51.8% in 1993, as intense
price competition and increased labor costs combined to offset the benefits the
Company experienced from a competitive pricing environment among disposal
facilities. As a result, the cost of revenues increased to 67.2% of revenues in
1993, as compared to 66.1% of revenues in 1992, reflecting the competitive
pricing trends in the hazardous waste industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $42,296,000 or 21.1% of revenues in 1993,
as compared to $35,923,000 or 20.4% of revenues for 1992. This increase was
primarily due to the costs associated with the expansion in the Mid-Atlantic,
Central and Midwest regions, and the administrative infrastructure required to
support new sales offices and service centers.
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During the third quarter of 1993, as part of its efforts to consolidate its
gains in market share and control costs, the Company closed two of the nine
sales offices opened earlier in the year while opening another sales office in
New York and a new service center in New Hampshire, areas where the Company had
established market share.
Interest Expense. Interest expense for 1993 decreased to 3.6% of revenues,
as compared to 4.0% of revenues for 1992. The decrease resulted primarily from a
series of reductions in the interest rates of the Company's revolving line of
credit and certain subordinated notes which occurred in the fourth quarter of
1992. The benefits of reduced interest rates were offset somewhat by the
additional indebtedness incurred for acquisitions in 1992. Total debt at
December 31, 1993 was approximately $5,000,000 higher than at December 31, 1992.
No interest was capitalized during 1993, as compared to $301,000 of interest
capitalized during 1992, primarily for the CES in Baltimore before it commenced
commercial operation on June 1, 1992.
Provision for Income Taxes. The effective income tax rate for 1993 was
46%, an increase over the 35% effective income tax rate for 1992. The rate for
1992 was lower than the combined state and federal statutory rate due in part to
the utilization of certain alternative minimum tax credit carryforwards. The
rate for 1993 was higher than the combined state and federal statutory rate due
in part to the amortization of goodwill which is nondeductible for income tax
reporting purposes. The rate fluctuates depending on the amount of income before
taxes, as compared to the fixed amount of goodwill and other nondeductible
amounts.
Earnings Per Share. In February 1993, the Company issued 112,000 shares of
Series B Convertible Preferred Stock with a stated value of $5,600,000 as part
of the purchase price for the Cincinnati facility. The preferred stock paid a
cumulative dividend of 7% until February 16, 1994, and thereafter 8%, payable
quarterly beginning on April 15, 1993. The 1993 dividend requirements of
$350,000 were deducted from net income in the calculation of earnings per share,
and reduced reported EPS by $.04 per share.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business has not been significantly affected by inflation
during the periods discussed above.
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: make permanent the cost reduction
benefits associated with its reengineering program initiated in the summer of
1993; to utilize its facilities and workforce profitably, in the face of intense
price competition; successfully increase market share in its existing service
territory while expanding its product offerings into other markets; and
integrate additional hazardous waste management facilities and generate
incremental volumes of waste to be handled through such facilities from existing
sales offices and service centers and others which may be opened in the future.
If the Company completes the acquisition of the Nebraska hazardous waste
incinerator, its future operating results 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. If the acquisition
does not take place for any reason (other than a default by the seller), the
Company would be obligated to reimburse certain of the seller's costs of
operating the incinerator after November 22, 1994, which was the date the letter
of intent was signed.
The Company's operations may be affected by the commencement and completion
of major site remediation projects; 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; secular changes in the process waste 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
regulations governing the Company's diverse operations. As a result of these
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32
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. 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.
The Company participates in a highly volatile industry, with multiple
competitors, many of which have taken large write-offs and asset write-downs and
undergone major restructurings during the past two years. As the industry
consolidates, other companies may undergo such restructurings and incur special
charges in an effort to reduce costs and offset the intense price competition in
a competitive marketplace. The Company's participation in a highly dynamic
industry often results 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
costs as the Company expands its compliance staff to cope with myriad federal,
state and local regulations. The Company strives to conduct its operations in
compliance with applicable laws and regulations, including environmental rules
and regulations, and has as its goal 100% compliance. 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 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. At December 31, 1994, however, there were no
pending governmental environmental enforcement proceedings where the Company
believes potential monetary sanctions will exceed $100,000. The possibility
always exists that substantial expenditures could result from governmental
proceedings, which would have 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 the 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 19 state and
federal Superfund sites. Ten of these sites involve two subsidiaries which the
Company acquired from Chemical Waste Management, Inc. ("ChemWaste"), a
wholly-owned subsidiary of WMX Technologies, 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 19 Superfund sites will not be material to the
Company's operations or financial position. As of December 31, 1994, the Company
had accrued environmental costs of $455,000 for cleanup of Superfund sites.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures primarily
by cash flow from operations and additions to long-term debt. Cash provided by
operations, before changes in current assets and current liabilities, was
$13,121,000 in 1994, as compared to $15,402,000 in 1993.
During 1993, the Company spent $8,078,000 on additions to property, plant
and equipment and construction in progress, excluding the cost to purchase
Spring Grove Resource Recovery, Inc. Net additions to long-term debt provided
$4,928,000 in 1993. During 1994, the Company spent $5,510,000 on additions to
property, plant, and equipment and construction in progress, excluding the cost
to acquire the oil processing facility near Richmond, Virginia, and reduced its
long-term debt by $8,199,000.
On May 25, 1989, the Company issued $30,000,000 of 13.25% Senior
Subordinated Notes due May 15, 1997 and warrants to purchase 100,000 shares of
common stock for aggregate proceeds, before issuance costs, of $30,300,000. The
notes matured at the rate of $7,500,000 per year commencing on May 15, 1994. At
December 31, 1993, the Company's current liabilities included the first
principal installment of $7,500,000, which was due and paid on May 15, 1994.
On August 4, 1994, the Company issued $50,000,000 of 12.50% Senior Notes
due May 15, 2001 (the "Senior Notes"). The Company used the net proceeds to
prepay the $22,500,000 outstanding principal amount of the 13.25% Senior
Subordinated Notes, at par plus a prepayment premium of 4.417%; to prepay the
$1,800,000 outstanding principal amount of a subordinated note to a financial
institution; to prepay the $489,000 outstanding principal amount of two junior
subordinated notes to the former owners of Mr. Frank, Inc.; and to reduce the
balance under its $55,000,000 Revolving Credit Agreement with three banks (the
"Revolver") by approximately $21,800,000.
The Senior Notes are not collateralized. 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.
In connection with the sale of the Senior Notes, the Company also amended
the terms of two 8% subordinated convertible notes, in the amount of $3,500,000
and $1,500,000, respectively. The two notes were collateralized by liens on
certain Company assets, and are convertible in common stock at $15 and $10 per
share, respectively. The holder of these two notes agreed to exchange such notes
for new 10% Senior Convertible Notes. The Company agreed to a higher interest
rate because the new notes are not collateralized and have less restrictive
covenants than the prior notes. The new notes rank pari passu with the Senior
Notes and have covenants identical to the Senior Note covenants. Principal of
the two Senior Convertible Notes is payable in five equal installments of
$1,000,000 each, beginning on October 31, 1995 and ending on October 31, 1999.
In connection with the issuance of the Senior Notes, the Company amended
the terms of the Revolver to reduce the size to $35,000,000. The amended
Revolver permits borrowings up to $35,000,000 in cash, and allows the Company to
have up to $20,000,000 of letters of credit outstanding. The combination of cash
and letters of credit outstanding may not exceed $35,000,000 at any one time. In
addition, the Revolver amendment extended the maturity date to August 1, 1997,
reduced the Eurodollar borrowing rate, reduced the fees for letters of credit,
and increased the limit on capital expenditures in any fiscal year from
$12,000,000 to two times depreciation expense. No principal is due under the
Revolver until it matures on August 1, 1997.
The Revolver provides for the maintenance of certain restrictive covenants
including, among others, restrictions on the ratio of accounts receivable to
current liabilities, total liabilities to tangible net worth, and earnings
before interest, taxes, and amortization to total interest expense. The Company
is also restricted from making certain dividend payments and incurring
additional debt. The Revolver is collateralized by substantially all of the
Company's assets. On January 31, 1995, the Company and its banks amended the
Revolver to modify certain covenants, due in part to the special charge in the
fourth quarter of 1994 for the
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write-off of leasehold improvements. The amendment also modified certain terms
of the Revolver, including the Company's borrowing limit, which fluctuates
depending on the level of accounts receivable which secure the Revolver. The
limit is the sum of 80% of eligible accounts receivable, less outstanding
letters of credit. As of February 10, 1995, the loans outstanding under the
Revolver were $4,581,000, the letters of credit aggregated $7,716,000, and the
Company had available Revolver borrowing capacity of $8,802,000. The
modifications to the Revolver will change the formula from 80% to 75% of
eligible accounts receivable, effective March 31, 1995. The borrowing
availability under the Revolver after March 31, 1995 will depend on the level of
business activity and the resulting amount of accounts receivable, and the usage
of letters of credit.
The Company believes it has adequate cash resources available to fund its
future operations and anticipated capital expenditures. The Company anticipates
that its capital expenditures for the year ending December 31, 1995 will be
approximately $7,000,000, primarily for additions to property, plant and
equipment, excluding the cost to acquire the Nebraska hazardous waste
incinerator. The Company expects to finance these requirements through cash flow
from operations.
With respect to the planned acquisition of the Nebraska hazardous waste
incinerator, the Company expects to arrange approximately $10,000,000 of
additional financing for the costs of acquiring the facility, making certain
improvements, and establishing an escrow fund to assure that money will be
available over the next 30 years to pay the costs of closing the facility and
the on-site landfill, and monitoring the site after closure. The Company is
taking steps to obtain tax-exempt revenue bond financing from the State of
Nebraska for a portion of the costs, or arrange other financing before it
acquires the facility, which is expected to occur in the Spring of 1995. The
Company has agreed with its banks to limit its investment in the planned
acquisition to $5,000,000 until alternative financing is obtained.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," (SFAS 115) issued by the
Financial Accounting Standards Board in May 1993, supercedes SFAS 12 and
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The Company adopted SFAS 115 in 1994 which resulted in an unrealized
loss on securities of $220,000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Clean Harbors, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Clean Harbors, Inc. and its subsidiaries listed in Item
14(a) of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clean Harbors,
Inc. and its subsidiaries as of December 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 31, 1995
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CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
Revenues............................................... $207,073 $200,114 $176,193
Cost of revenues....................................... 146,132 134,525 116,473
Selling, general and administrative expenses........... 38,910 42,296 35,923
Depreciation and amortization of intangible assets..... 10,250 10,319 8,884
Nonrecurring charge.................................... 1,035 -- --
-------- -------- --------
Income from operations................................. 10,746 12,974 14,913
Interest expense (net)................................. 7,432 7,198 7,064
-------- -------- --------
Income before provision for income taxes and
extraordinary item................................... 3,314 5,776 7,849
Provision for income taxes............................. 1,619 2,645 2,774
-------- -------- --------
Income before extraordinary item....................... 1,695 3,131 5,075
Extraordinary loss related to early retirement of debt,
net of income tax benefit of $823,000................ 1,220 -- --
-------- -------- --------
Net income........................................ $ 475 $ 3,131 $ 5,075
-------- -------- --------
Net income per common and common equivalent share
before extraordinary item............................ $ .13 $ .28 $ .52
======== ======== ========
Extraordinary item..................................... $ (.13) -- --
======== ======== ========
Net income per common and common equivalent share...... $ .00 $ .28 $ .52
======== ======== ========
Weighted average common and common equivalent shares
outstanding.......................................... 9,635 9,884 9,743
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF DECEMBER 31,
---------------------
1994 1993
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,000 $ 816
Restricted investments................................... 1,542 1,037
Accounts receivable, less reserves of $1,495 and $1,372,
respectively........................................... 44,834 46,736
Prepaid expenses......................................... 1,894 2,353
Supplies inventories..................................... 2,670 2,428
Income tax receivable.................................... 178 607
-------- --------
Total current assets............................... 52,118 53,977
-------- --------
Property, plant and equipment:
Land..................................................... 8,209 8,209
Buildings and improvements............................... 31,535 31,737
Vehicles and equipment................................... 72,494 70,946
Furniture and fixtures................................... 2,129 2,201
Construction in progress................................. 3,118 1,903
-------- --------
117,485 114,996
Less--accumulated depreciation and amortization.......... 47,713 40,925
-------- --------
69,772 74,071
-------- --------
Other assets:
Goodwill (net)........................................... 22,926 23,650
Permits (net)............................................ 14,244 14,906
Other.................................................... 815 754
-------- --------
37,985 39,310
-------- --------
Total assets....................................... $159,875 $167,358
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
---------------------
1994 1993
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............ $ 1,715 $ 8,917
Accounts payable....................................... 10,686 9,564
Accrued disposal costs................................. 6,179 6,724
Other accrued expenses................................. 12,724 10,452
-------- --------
Total current liabilities........................ 31,304 35,657
-------- --------
Long-term obligations, less current maturities.............. 60,465 62,507
Deferred income taxes....................................... 780 1,823
Commitments and contingent liabilities (Notes 4, 8, 9, 10,
13 and 14)
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 at December 31, 1994 and 1993
(liquidation preference of $5,600,000)......... 1 1
Common stock, $.01 par value:
Authorized--20,000,000 shares; Issued and
outstanding--9,431,282 shares at December 31, 1994
and 9,425,829 shares at December 31, 1993......... 95 95
Additional paid-in capital............................. 58,590 58,556
Unrealized loss on restricted investments, net of
tax.................................................. (113) --
Retained earnings...................................... 8,753 8,719
-------- --------
Total stockholders' equity....................... 67,326 67,371
-------- --------
Total liabilities and stockholders' equity....... $159,875 $167,358
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
Cash flows from operating activities:
Net income................................... $ 475 $ 3,131 $ 5,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......... 10,250 10,319 8,884
Write-off of leasehold improvements.... 1,035 -- --
Allowance for doubtful accounts........ 776 709 942
Deferred compensation.................. -- -- 8
Amortization of deferred financing
costs................................ 357 408 645
Write-off of deferred financing
costs................................ 963 -- --
Deferred income taxes.................. (929) 692 339
Loss (gain) on sale of fixed assets.... 191 145 (43)
(Gain) loss on sale of investments..... 2 (1) --
Amortization of bond premiums
(discounts).......................... 1 (1) --
Changes in assets and liabilities, net
of effects of businesses acquired:
Accounts receivable............... 926 (8,454) (6,565)
Income taxes receivable........... 429 (191) (416)
Prepaid expenses.................. 459 531 430
Supplies inventories.............. (237) (157) (72)
Accounts payable.................. 1,122 (2,898) 2,353
Accrued disposal costs............ (545) 2,336 102
Other accrued expenses............ 2,260 (1,865) 3,088
Income tax payable................ -- 151 (189)
-------- -------- --------
Net cash provided by operating activities.... 17,535 4,855 14,581
-------- -------- --------
Cash flows from investing activities:
Payment for businesses acquired, net of cash
acquired.................................. (200) (1,394) (315)
Additions to property, plant and equipment... (5,270) (7,874) (9,815)
(Increase) decrease in other restricted
investments............................... -- 203 (529)
Proceeds from sales and maturities of
restricted investments.................... 232 248 --
Cost of restricted investments acquired...... (960) (463) --
Increase in other assets..................... (103) (97) (340)
Proceeds from sale of fixed assets........... 155 34 50
Increase in permits.......................... -- (147) (205)
-------- --------- --------
Net cash used in investing activities........ (6,146) (9,490) (11,154)
-------- --------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
38
40
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- ------- -------
Cash flows from financing activities:
Preferred stock dividend distribution............. $ (429) $ (251) $ --
Issuance of long-term debt........................ 50,000 -- 1,500
Payments on long-term obligations................. (33,449) (1,906) (2,651)
Additions to deferred financing costs............. (2,364) (293) (72)
Net (payments) borrowings under long-term
revolver....................................... (24,991) 6,630 (1,968)
Proceeds from exercise of stock options........... 28 646 40
-------- ------- -------
Net cash (used in) provided by financing
activities..................................... (11,205) 4,826 (3,151)
-------- ------- -------
Increase in cash....................................... 184 191 276
Cash, beginning of year................................ 816 625 349
-------- ------- -------
Cash, end of year...................................... $ 1,000 $ 816 $ 625
========= ======= =======
SUPPLEMENTAL INFORMATION:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- ------- -------
CASH PAYMENTS FOR INTEREST AND INCOME TAXES:
Interest.......................................... $ 6,648 $ 6,536 $ 7,123
Income Taxes...................................... 1,585 2,117 2,697
LIABILITIES ASSUMED IN CONJUNCTION WITH BUSINESS
ACQUISITIONS:
Fair value of assets acquired..................... $ 400 $ 7,834 $ 2,448
Cash paid......................................... 200 1,400 500
Issuance of common stock for acquisition.......... -- -- 2,155
Issuance of preferred stock for acquisition....... -- 5,600 --
Liabilities assumed............................... 200 834 1,948
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred................ $ 240 $ 154 $ 208
Note payable to seller of equipment acquired...... -- 50 --
Dividends declared but not paid................... 112 99 --
The accompanying notes are an integral part of these consolidated financial
statements.
39
41
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(in thousands)
SERIES B
PREFERRED STOCK COMMON STOCK
--------------- -------------- UNREALIZED
NUMBER $.01 NUMBER $.01 ADDITIONAL LOSS ON TOTAL
OF PAR OF PAR PAID-IN RESTRICTED RETAINED STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL INVESTMENTS EARNINGS EQUITY
------ ----- ------ ----- ----------- ----------- -------- ------------
Balance, at December 31,
1991........................ -- $ -- 9,084 $ 91 $ 49,833 $ -- $ 863 $ 50,787
----- ----- ------ ----- ---------- ----- -------- --------
Proceeds from exercise of
stock options............ -- -- 10 -- 40 -- -- 40
Deferred compensation on
stock options............ -- -- -- -- 8 -- -- 8
Issuance of common stock for
acquisition.............. -- -- 233 2 2,153 -- -- 2,155
Net income.................. -- -- -- -- -- -- 5,075 5,075
----- ----- ------ ----- ---------- ----- -------- --------
Balance, at December 31,
1992........................ -- $ -- 9,327 $ 93 $ 52,034 $ 5,938 $ 58,065
----- ----- ------ ----- ---------- ----- -------- --------
Issuance of preferred stock
for acquisition.......... 112 1 -- -- 5,599 -- -- 5,600
Preferred stock dividends:
Series B, $3.50 per
share.................. -- -- -- -- -- -- (350) (350)
Proceeds from exercise of
stock options............ -- -- 98 2 644 -- -- 646
Tax benefit from exercise of
stock options............ -- -- -- -- 279 -- -- 279
Net income............... -- -- -- -- -- -- 3,131 3,131
----- ----- ------ ----- ---------- ----- -------- --------
Balance, at December 31,
1993........................ 112 $ 1 9,425 $ 95 $ 58,556 -- $ 8,719 $ 67,371
----- ----- ------ ----- ---------- ----- -------- --------
Preferred stock dividends:
Series B, $4.00 per
share.................. -- -- -- -- -- -- (441) (441)
Proceeds from exercise of
stock options............ -- -- 6 -- 28 -- -- 28
Tax benefit from exercise of
stock options............ -- -- -- -- 6 -- -- 6
Unrealized loss on
restricted investments... -- -- -- -- -- (113) -- (113)
Net income............... -- -- -- -- -- -- 475 475
----- ----- ------ ----- ---------- ----- -------- --------
Balance, at December 31,
1994........................ 112 $ 1 9,431 $ 95 $ 58,590 $(113) $ 8,753 $ 67,326
===== ===== ====== ===== ========== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
42
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Clean Harbors, Inc. and its wholly-owned subsidiaries (collectively, the
"Company") are engaged in the business of industrial waste management services
involving treatment and disposal of industrial wastes; field services provided
at customer sites; and specialized handling of laboratory chemicals and
household hazardous wastes.
(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. Other revenues are recognized
as the related costs are incurred.
(c) Income Taxes
The Company has adopted the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Under the liability method
specified by SFAS 109, the deferred tax liability is 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 is the result of changes in the
liability for deferred taxes. The principal types of differences between assets
and liabilities for financial statement and tax return purposes are accumulated
depreciation, business combinations accounted for by the purchase method, and
provisions for doubtful accounts. The deferred tax liability is reduced by net
operating losses being carried forward for tax purposes.
(d) Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is based on net income
less preferred dividend requirements divided by the weighted average number of
common and common equivalent shares outstanding during each of the respective
years. Fully diluted net income per common share has not been presented as the
amount would not differ significantly from that presented.
(e) Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of less than three months to be cash equivalents.
(f) Restricted Investments
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115),
in 1994. Under this statement, the Company's debt securities are classified as
"available for sale" and are recorded at current market value with an offsetting
valuation adjustment, net of tax, to stockholders' equity. In accordance with
SFAS 115, financial statements from prior years have not been restated to
reflect the change in accounting method. There was no cumulative effect as a
result of adopting SFAS 115 in 1994.
41
43
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Supplies Inventory
Supplies inventory, stated at the lower of cost or market, is charged to
operations on a first-in, first-out basis.
(h) 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. 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. Site preparation and improvement costs are
included in land.
(i) Goodwill and Permits
Goodwill and permits, as further discussed in Notes 5 and 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.
(j) Capitalization of Interest
The Company capitalizes interest on funds used to finance the construction
of major capital additions. The Company capitalized interest costs aggregating
$301,000 in 1992. No interest was capitalized during 1994 and 1993.
(k) 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
8(b) below; and to provide financial assurance to regulators of its captive
insurance company. As of December 31, 1994 and 1993, the Company had outstanding
letters of credit amounting to $7,492,000 and $12,471,000, respectively.
As of December 31, 1994, the Company had no significant concentrations of
credit risk.
(l) Reclassifications
Certain reclassifications have been reflected in prior years' financial
statements to conform the presentations to that as of December 31, 1994.
42
44
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted investments,
and long-term obligations approximate fair value. The Company believes similar
terms for long-term obligations would be attainable. The fair value of
restricted investments is based on quoted market prices for these securities. At
December 31, 1994, the estimated fair values of the Company's financial
instruments are as follows (in thousands):
CARRYING FAIR
AMOUNT VALUE
--------- -------
Cash and cash equivalents................................ $ 1,000 $ 1,000
Restricted investments................................... 1,542 1,542
Long-term obligations.................................... 14,277 14,277
Senior notes............................................. 50,000 50,000
(4) 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. 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 collateral for its insurance policies and
are restricted for future payment of insurance claims. The amortized cost of
these securities held at December 31, 1994 was $1,731,000. A valuation allowance
of $220,000 was recorded to reflect the market value of $1,511,000, and a
realized loss of $1,000 was reflected in net income for the year. At December
31, 1993, the Company held securities of $1,006,000 with a market value of
$1,012,000. There were unrealized gains of $19,000 and unrealized losses of
$13,000 for these securities. In addition, a realized gain of $1,000 was
recorded in net income during 1993. Investments held consist of fixed maturity
and mortgage-backed securities. Fixed maturity securities, other than
mortgage-backed securities, have contractual maturity dates after five years
through ten years from December 31, 1994. Expected maturities will differ from
contractual maturities as borrowers may have the right to call or prepay
obligations without penalties.
(5) BUSINESS ACQUISITIONS
On September 30, 1994, the Company acquired the assets of a hazardous and
nonhazardous oil reclamation facility located near Richmond, Virginia from
Chemical Waste Management, Inc. ("ChemWaste") for $200,000 in cash and $200,000
in credits for future Company services.
On February 16, 1993, the Company acquired all of the outstanding shares of
Spring Grove Resource Recovery, Inc. ("Spring Grove"), a hazardous waste
treatment, storage and disposal facility located in Cincinnati, Ohio, from
Southdown Environmental Treatment Systems, Inc. ("SETS") in exchange for
$1,400,000 in cash and 112,000 shares of newly issued Series B Convertible
Preferred Stock with a stated value of $5,600,000. The transfer of ownership
from the seller to the Company is subject to approval by regulatory authorities,
which is expected to be received during 1995.
On July 30, 1992, the Company acquired all of the outstanding shares of Mr.
Frank, Inc., located in Matteson, Illinois, in exchange for 233,000 shares of
the Company's common stock, with a fair market value of $2,155,000. The assets
acquired consist primarily of vehicles, equipment and a leasehold interest in
real estate. The acquisition was accounted for as a purchase, with approximately
$2,113,000 excess of acquisition cost over the fair value of Mr. Frank, Inc.'s
identifiable assets being assigned to goodwill. Upon closing, 32,222 of the
exchanged shares of the Company's common stock were deposited into an escrow
account to be
43
45
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
held until July 1995 as security for the sellers' agreement to indemnify the
Company against potential liabilities, including certain environmental
liabilities arising from prior ownership and operation of Mr. Frank, Inc.
On June 30, 1992, the Company acquired all of the outstanding shares of
Connecticut Treatment Corporation ("CTC"), a hazardous waste treatment, storage
and disposal facility located in Bristol, Connecticut, from SETS in exchange for
$500,000 in cash and a promissory note in the amount of $1,883,000. The first
principal installment on the note was $376,600, which was paid on June 30, 1993,
with installments of $94,150 due at the end of each quarter thereafter, until
the remaining balance is paid in full. The note bears interest at the corporate
base rate announced by The First National Bank of Boston (the "Bank") (8.5% at
December 31, 1994) plus 1%.
SETS' parent, Southdown, Inc., has indemnified the Company against on-site
and off-site environmental liabilities arising from the prior ownership and
operation of Spring Grove and CTC. The assets acquired consist primarily of real
estate and operating machinery for wastewater treatment and related facilities
and equipment. Both acquisitions were accounted for as purchases. In each case
the total acquisition cost equaled the fair value of the assets acquired;
therefore, no goodwill was recorded.
The results of operations of Spring Grove, CTC, Mr. Frank, Inc. and the
Richmond facility are included in the consolidated financial statements
subsequent to the dates of acquisition by the Company. Pro forma information has
not been included concerning these acquisitions since the assets and operations
acquired were not material to those of the Company.
(6) INTANGIBLE ASSETS
Below is a summary of intangible assets at December 31, 1994 and 1993 (in
thousands):
1994 1993
------- -------
Permits................................................. $17,536 $17,303
Goodwill................................................ 27,529 27,529
------- -------
45,065 44,832
Less--accumulated amortization.......................... 7,895 6,276
------- -------
$37,170 $38,556
======= =======
Amortization expense approximated $1,619,000, $1,433,000, and $1,325,000
for the years 1994, 1993, and 1992, respectively. The Company continually
reevaluates the propriety of the carrying amount of permits and goodwill as well
as the amortization period to determine whether current events and circumstances
warrant adjustments to the carrying value and estimates of useful lives. At this
time, the Company believes that no significant impairment of goodwill or permits
has occurred and that no reduction of the estimated useful lives is warranted.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
1994 1993
------- -------
Insurance............................................... $ 3,985 $ 2,971
Other items............................................. 8,189 7,481
------- -------
$12,174 $10,452
======= =======
44
46
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LEGAL MATTERS AND OTHER CONTINGENCIES
(a) Legal Matters
In January 1994, the Company received an amended complaint filed in Circuit
Court of Cook County, Illinois by a truck driver for a trucking company who
alleges that he was exposed to fumes from a wastewater treatment operation at
the Company's Chicago facility while he was offloading and cleaning his truck.
The Company has received information that the truck driver is suffering from
lung damage and decreasing lung capacity. The Company has not yet responded to
the amended complaint. The case is in the preliminary discovery stages and the
Company is not able to determine its potential liability, if any, at this point.
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. The Company does not believe that these proceedings, individually
or in the aggregate, are material to its business.
As of December 31, 1994, the Company has been named in a number of lawsuits
arising from the disposal of wastes by certain Company subsidiaries at 19 state
and federal Superfund sites. Ten of these cases involve two subsidiaries which
the Company acquired from Chemical Waste Management, Inc.
("ChemWaste"). 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, ChemWaste
is paying all costs of defending the Natick and Braintree subsidiaries in these
10 cases, including legal fees and settlement costs. Three cases involve Mr.
Frank, Inc. and one case involves CTC. As discussed in Note 5, Southdown, Inc.
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. have agreed to indemnify the Company against certain environmental
liabilities arising from prior ownership of Mr. Frank, Inc.
The remaining five pending cases involve former ChemClear subsidiaries. The
Company is unable to predict accurately its potential liability with respect to
these cases, but believes that any future settlement costs will not be material
to the Company's operations or financial position.
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 potentially responsible parties ("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, 1994, the Company had accrued
environmental costs of $455,000 for cleanup of Superfund sites. 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.
(b) Environmental Matters
Under the Resource Conservation and Recovery Act of 1976, as amended
("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 11 waste management facilities,
eight 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.
45
47
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The EPA has begun RCRA corrective action investigations at the Company's
RCRA licensed facilities in Baltimore, Maryland; Chicago, Illinois; Braintree,
Massachusetts; Natick, Massachusetts, and Woburn, Massachusetts. The Company is
also involved in site studies at its non-RCRA facilities in Cleveland, Ohio;
Kingston, Massachusetts; and South Portland, Maine. The Company spent
approximately $471,000 in 1994 and $600,000 in 1993 on corrective action at the
foregoing facilities. As discussed in Note 5, 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.
While the final scope of the work to be done at these facilities 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 such costs
will not have a material effect on its results of operations or its financial
position, and that it will be able to finance from operating revenues any
additional corrective action required at its facilities.
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Costs incurred to obtain or renew required
permits are capitalized to the related permit account as incurred and are
amortized over the permit's remaining life. Costs incurred to remediate
properties owned by the Company are capitalized in property, plant and equipment
only if the costs extend the life, increase the capacity or improve the safety
or efficiency of the property or the costs mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations or activities. Remediation costs incurred in excess of the fair
market value of the property being remediated are expensed as incurred.
(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 are subject to periodic renewal without which the Company's
operations would be adversely affected. The Company anticipates that, once a
license or permit is issued with respect to a facility, the license or permit
will be renewed at the end of its term if the facility's operations are in
compliance with the applicable regulatory requirements.
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, physical
loss to property, and 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.
(d) Other Commitments
The Company has entered into a definitive agreement with ChemWaste to lease
a site currently leased by ChemWaste which adjoins the Company's Chicago
facility. The Company will acquire their existing improvements in exchange for
sharing the costs of dismantling an existing hazardous waste incinerator and
cleaning up the site. The improvements on the ChemWaste site will allow the
Company to develop new product lines not currently handled at the Company's
existing Chicago facility. Under the sharing arrangement with ChemWaste, the
Company will manage the RCRA corrective action investigation at the site and
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.
46
48
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company plans to acquire a newly constructed hazardous waste
incinerator in Kimball, Nebraska from Ecova Corporation, a wholly-owned
affiliate of Amoco Oil Company. On November 22, 1994, the Company signed a
letter of intent with Ecova Corporation, and a definitive asset purchase
agreement is being negotiated. The incinerator has a RCRA Part B permit issued
by the Nebraska Department of Environmental Quality ("NDEQ") and the NDEQ has
approved commercial operation at 75% of capacity. All necessary permits to
operate the facility have been issued, and are expected to be transferred to the
Company in the Spring of 1995, when the acquisition is expected to be completed.
The letter of intent provides that Ecova will transfer the Kimball facility to
the Company in return for royalty payments through 2004, based on the number of
tons processed at the facility. The transaction is subject to negotiation of
definitive agreements and a number of approvals from the United States EPA and
the NDEQ which must approve the transfer of the facility to a new owner. The
Company must also arrange financing for the acquisition costs, currently
estimated to be approximately $10,000,000. According to the letter of intent, if
the acquisition does not take place for any reason (other than a default by the
seller), the Company would be obligated to reimburse certain of Ecova's costs of
operating the incinerator after November 22, 1994, which was the date the letter
of intent was signed.
(9) FINANCING ARRANGEMENTS
On May 25, 1989, the Company issued $30,000,000 of 13.25% Senior
Subordinated Notes due May 15, 1997 and warrants to purchase 100,000 shares of
common stock for aggregate proceeds, before issuance costs, of $30,300,000. The
notes matured at the rate of $7,500,000 per year commencing on May 15, 1994. At
December 31, 1993, the Company's current liabilities included the first
principal installment of $7,500,000, which was due and paid on May 15, 1994.
On August 4, 1994, the Company issued $50,000,000 of 12.50% Senior Notes
due May 15, 2001 (the "Senior Notes"). The Company used the net proceeds to
prepay the $22,500,000 outstanding principal amount of the 13.25% Senior
Subordinated Notes, at par plus a prepayment premium of 4.417%; to prepay the
$1,800,000 outstanding principal amount of a subordinated note to a financial
institution; to prepay the $489,000 outstanding principal amount of two junior
subordinated notes to the former owners of Mr. Frank, Inc.; and to reduce the
balance under its $55,000,000 Revolving Credit Agreement with three banks (the
"Revolver") by approximately $21,800,000.
The Senior Notes are not collateralized. 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 connection with the issuance of the Senior Notes, the Company amended
the terms of the Revolver to reduce the size to $35,000,000. The amended
Revolver permits borrowings up to $35,000,000 in cash, and allows the Company to
have up to $20,000,000 of letters of credit outstanding. The combination of cash
and letters of credit outstanding may not exceed $35,000,000 at any one time. In
addition, the Revolver amendment extended the maturity date to August 1, 1997,
reduced the Eurodollar borrowing rate, reduced the fees for letters of credit,
and increased the limit on capital expenditures in any fiscal year from
$12,000,000 to two times depreciation expense.
Interest on amounts outstanding under the Revolver is payable monthly in
arrears and accrues at the Bank's base rate, plus 1%, or, at the Company's
option, at a rate which is 2.50% over the "Eurodollar Rate" offered to the Bank
by prime banks in the Eurodollar interbank market. At December 31, 1994, the
Company had elected the Eurodollar option with respect to $4,000,000 of the
amounts outstanding under the Revolver; the Eurodollar Rate was 6.06% and the
Bank's base rate was 8.5%. The Company also pays a commitment fee of one-half of
1% per annum on the unused portion of the total commitment. At
47
49
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1994 and 1993, borrowings under the Revolver were $7,706,000 and
$32,705,000, respectively (exclusive of letters of credit).
The Revolver provides for the maintenance of certain restrictive covenants
including, among others, restrictions on the ratio of accounts receivable to
current liabilities, total liabilities to tangible net worth, and earnings
before interest, taxes, and amortization to total interest expense. The Company
is also restricted from making certain dividend payments and incurring
additional debt. The Revolver is collateralized by substantially all of the
Company's assets. On January 31, 1995, the Company and its banks amended the
Revolver to modify certain covenants, due in part to the special charge in the
fourth quarter of 1994 for the write-off of leasehold improvements. The
amendment also modified certain terms of the Revolver, including the Company's
borrowing limit, which fluctuates depending on the level of accounts receivable
which secure the Revolver. The limit is the sum of 80% of eligible accounts
receivable, less outstanding letters of credit. The modifications to the
Revolver will change the formula from 80% to 75% of eligible accounts
receivable, effective March 31, 1995.
In connection with the sale of the Senior Notes, the Company also amended
the terms of two 8% subordinated convertible notes, in the amounts of $3,500,000
and $1,500,000, respectively. The two notes were collateralized by liens on
certain Company assets, and are convertible in common stock at $15 and $10 per
share, respectively. The holder of these two notes agreed to exchange such notes
for new 10% Senior Convertible Notes, with less restrictive covenants than the
prior notes. The new notes rank pari passu with the Senior Notes and have
covenants identical to the Senior Note covenants. Principal of the two Senior
Convertible Notes is payable in five equal installments of $1,000,000 each,
beginning on October 31, 1995 and ending on October 31, 1999. The Company has
the option to convert such notes into common stock at $25 per share.
The following table is a summary of the Company's long-term debt obligations reflecting the transactions discussed above.
DECEMBER 31,
-------------------
1994 1993
------- -------
Long-term obligations consist of the following (in thousands):
Revolving credit agreement bearing interest at the Eurodollar
Rate (6.06% at December 31, 1994) plus 2.5%, or the Bank's
base rate (8.5% at December 31, 1994) plus 1%,
collateralized by substantially all assets.................. $ 7,706 $32,705
Senior subordinated notes payable, bearing interest at 13.25%
per year, collateralized by substantially all assets........ -- 30,000
Subordinated note payable to a financial institution, bearing
interest at the greater of (i) 8% or (ii) the financial
institution's prime rate (6.75% at December 31, 1993) plus
1%.......................................................... -- 2,150
Senior notes payable, bearing interest at 12.50%.............. 50,000 --
Senior convertible notes bearing interest at 10%.............. 5,000 --
Subordinated convertible notes bearing interest at 8%......... -- 5,000
Junior subordinated note payable to Southdown Environmental
Treatment Systems, Inc. bearing interest at the Bank's base
rate plus 2%................................................ 942 1,318
Junior subordinated notes to the former owners of Mr. Frank,
Inc. bearing interest at the Bank's base rate plus 1%....... 75 170
Obligations under capital leases.............................. 542 546
Other long-term obligations................................... 12 587
------- -------
64,277 72,476
Less--current maturities...................................... 1,715 8,917
Less--unamortized financing costs............................. 2,097 1,052
------- -------
Long-term obligations......................................... $60,465 $62,507
======= =======
48
50
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Below is a summary of minimum payments due under the Company's long-term
obligations (in thousands), exclusive of obligations under capital leases
discussed in Note 10:
YEAR AMOUNT
---- ------
1995.............................................................. $ 1,416
1996.............................................................. 1,404
1997.............................................................. 8,915
1998.............................................................. 1,000
1999.............................................................. 1,000
Thereafter........................................................ 50,000
-------
Total minimum payments due under long-term obligations including
current maturities.............................................. $63,735
=======
(10) LEASES
(a) Capital Leases
The Company possesses certain equipment under capital leases. The
capitalized cost of this equipment was $6,844,000 and $6,603,000 with related
accumulated amortization of $5,387,000 and $4,630,000 at December 31, 1994 and
1993, respectively. The obligations of the Company under such leases are
collateralized by the leased equipment.
Future minimum lease payments under capital leases are as follows (in thousands):
YEAR AMOUNT
---- ------
1995.............................................................. $329
1996.............................................................. 150
1997.............................................................. 101
1998.............................................................. 9
1999.............................................................. --
Thereafter........................................................ --
----
Total minimum lease payments...................................... $589
Less--amounts representing interest.......................... 47
----
Present value of minimum lease payments........................... $542
====
49
51
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Operating 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 expenses and are renewable
at the option of the Company. Future minimum lease payments under operating
leases are as follows (in thousands):
YEAR AMOUNT
---- ------
1995.............................................................. $ 3,774
1996.............................................................. 1,884
1997.............................................................. 1,147
1998.............................................................. 798
1999.............................................................. 557
Thereafter........................................................ 716
-------
$ 8,876
=======
During the years 1994, 1993 and 1992 rent expense was approximately
$14,182,000, $9,796,000, and $9,483,000, respectively. The Company has entered
into an agreement to sublease its Bedford, Massachusetts facility. See Note 17
below.
(11) FEDERAL AND STATE INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1994 1993 1992
------- ------- ------
Federal--
Current.................................. $1,941 $ 958 $2,370
Deferred................................. (699) 1,222 314
State--
Current.................................. 721 995 235
Deferred................................. (344) (530) (145)
------- ------- ------
Net provision for income taxes................ $1,619 $2,645 $2,774
====== ====== ======
Effective January 1, 1992 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company had previously adopted SFAS 96. The adoption of SFAS 109 did not have a
material impact on the Company's financial condition or results of operations.
50
52
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The sources of significant timing differences which gave rise to deferred
taxes were as follows (in thousands):
1994 1993 1992
------- ------ ------
Accelerated depreciation..................... $ (508) $ 501 $ (495)
Provision for doubtful accounts.............. (54) 88 25
Vacation accrual............................. 67 88 115
Rent holiday................................. (107) (28) (66)
Insurance reserves........................... (163) (127) 386
Restructuring reserves....................... -- -- (148)
Litigation................................... 57 98 211
Tax attributes, net of valuation allowance... (271) 639 --
Permits...................................... (242) -- --
Other........................................ 178 (567) 141
------- ------ ------
Total deferred tax provision................. $(1,043) $ 692 $ 169
======= ====== ======
The effective income tax rate varies from the amount computed using the
statutory federal income tax rate as follows:
1994 1993 1992
------ ----- -----
Statutory rate......................................... 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit........ 7.0 5.0 2.0
Goodwill amortization............................. 7.4 4.7 6.0
Other permanent differences....................... .5 3.9 .6
Utilization of alternative minimum tax credit..... -- -- (7.3)
Valuation allowance adjustment.................... -- (1.8) --
------ ----- -----
Net provision for income taxes......................... 48.9% 45.8% 35.3%
====== ===== =====
The components of the total deferred tax asset at December 31, 1994 and
1993 were as follows (in thousands):
1994 1993
------ ------
Current:
Provision for doubtful accounts...................... $ 598 $ 543
Accrued vacation pay................................. -- 67
Litigation accruals.................................. 437 495
Miscellaneous........................................ 371 675
Deferred:
Accrued rent holiday................................. 223 105
Deferred compensation................................ -- 36
Insurance reserve.................................... 1,328 1,131
Other................................................ 255 142
Various tax attributes............................... 5,496 5,226
Valuation allowance.................................. (763) (763)
------ ------
Total deferred tax asset............................. $7,945 $7,657
====== ======
51
53
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the total deferred tax liability at December 31, 1994 and
1993 were as follows (in thousands):
1994 1993
------ ------
Deferred:
Permits.............................................. $2,883 $3,130
Property, plant and equipment........................ 5,842 6,350
------ ------
Total deferred tax liability......................... 8,725 $9,480
------ ------
Net deferred tax liability................................ $ 780 $1,823
====== ======
For federal income tax purposes at December 31, 1994, as a result of the
acquisition of ChemClear Inc. ("ChemClear") in January 1989, the Company has
regular tax net operating loss carryforwards of $3,333,000 and alternative
minimum tax net operating loss carryforwards of $2,712,000, which may be used to
offset future taxable income, if any, of the former ChemClear entities, subject
to certain limitations. These net operating loss carryforwards expire commencing
in 2002.
(12) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
In 1987, the Company adopted a nonqualified stock option plan (the "1987
Plan"). In 1992, the Company adopted a nonqualified equity incentive plan which
provides for a variety of incentive awards, including stock options (the "1992
Plan"). As of December 31, 1994, all awards under the 1992 Plan were in the form
of 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,
1994, the Company had reserved 955,600 and 800,000 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 not less than
85% of the fair market value on the date of grant. The difference between the
exercise price and fair market value at the date of grant is charged to
operations ratably over the option vesting period. Total compensation expense
charged to operations in the year 1992 was approximately $8,000. All existing
deferred compensation was fully amortized during 1992. No options were granted
during 1994 and 1993 with exercise prices lower than the fair market value of
the common stock at the date of grant.
On October 10, 1994, the Board of Directors approved a plan whereby all
employees (excluding senior management) who previously were awarded stock
options at prices of $6.50 to $15.00 per share be given the opportunity to
surrender those options in exchange for new options awarded at fair market value
($6.00 per share) with the same vesting period commencing upon the date of the
award of their original option agreement.
52
54
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Below is a summary of the stock option activity under the 1987 and 1992
Plans through December 31, 1994:
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
Outstanding at December 31, 1991........................... 791,654 $ 2.70-15.00
Granted............................................... 348,500 8.25-13.25
Exercised............................................. (10,049) 2.70- 7.65
Forfeited............................................. (69,610) 7.65-15.00
--------- --------------
Outstanding at December 31, 1992........................... 1,060,495 $ 2.70-15.00
--------- --------------
Exercisable at December 31, 1992........................... 475,563 $ 2.70-10.00
--------- --------------
Granted............................................... 445,750 7.00-15.00
Exercised............................................. (98,457) 2.70- 8.25
Forfeited............................................. (517,867) 6.50-15.00
--------- --------------
Outstanding at December 31, 1993........................... 889,921 $ 2.70-15.00
--------- --------------
Exercisable at December 31, 1993........................... 398,969 $ 2.70-10.00
--------- --------------
Granted............................................... 462,138 $ 6.00- 8.25
Exercised............................................. (5,453) 2.70- 7.65
Forfeited............................................. (284,729) 6.00-12.00
--------- --------------
Outstanding at December 31, 1994........................... 1,061,877 $ 2.70-13.50
========= ==============
Exercisable at December 31, 1994........................... 337,941 $ 2.70-13.50
========= ==============
(b) 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 fair market value ($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 fair market value ($5 per share) to the three banks which provided the
Revolver. These warrants are exercisable at any time until February 6, 2001.
(c) Preferred Stock
On February 16, 1993 the Company issued 112,000 shares of Series B
Convertible Preferred Stock, $.01 par value ("Preferred Stock"), for the
acquisition of Spring Grove. 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. The
Company has the option to redeem such Preferred Stock at liquidation value plus
a redemption premium of 7%, if the redemption occurs on or before August 16,
1995; thereafter, the redemption premium declines 1% each year. Each preferred
share entitles its holder to receive a cumulative annual cash dividend, which
was $3.50 per share from February 16, 1993 to February 16, 1994 and $4.00 per
share thereafter, or at the election of the Company, a common stock dividend of
equivalent value. At December 31, 1994, the Company had reserved 450,000 shares
of common stock for issuance upon the conversion of, or as dividends upon, the
Preferred Stock.
53
55
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) 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, a portion
of which is matched by the Company. During the years 1994, 1993 and 1992, the
Company's nonelective contributions aggregated approximately $825,000, $743,000,
and $609,000, respectively.
(14) RELATED PARTY TRANSACTIONS
The Company leases certain facilities from a partnership of which the
Company's principal stockholder is a limited partner. Under the terms of the
lease, the Company agreed to make aggregate lease payments of $5,633,000 from
the inception of the lease through June 1, 1996. In addition, the Company has an
option to renew the lease for a five-year period. Total rent expense charged to
operations was $703,000 during each of the years in the three-year period ended
December 31, 1994. See Note 10 for further discussion of lease commitments. The
Company has subleased a portion of these facilities to an unrelated third party.
(15) QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Revenue....................................... $51,285 $49,683 $53,258 $52,847
Income (loss) from operations................. 2,925 4,083 3,855 (117)(a)
Net income (loss) before extraordinary item... 597 1,251 1,082 (1,235)
Net income (loss)............................. 597 1,251 (138) (1,235)
Net income per common and common equivalent
share before extraordinary item............. .05 .12 .10 (.14)
Extraordinary item............................ -- -- (.13) --
Net income (loss) per common and common
equivalent share............................ $ .05 $ .12 $ (.03) $ (.14)
1993
Revenue....................................... $43,452 $51,847 $52,038 $52,777
Income from operations........................ 3,224 4,369 2,391 2,990
Net income.................................... 835 1,440 275 581
Net income per common and common equivalent
share....................................... $ .08 $ .13 $ .02 $ .05
- ---------------
(a) Reflects a one-time, noncash charge of $1,035,000 for the write-off of
leasehold improvements and machinery.
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) STOCK PURCHASE AGREEMENT
In connection with the acquisition of its Braintree and Natick subsidiaries
from ChemWaste, the Company entered into a disposal agreement with ChemWaste
under which the Company is entitled to quantity discounts if it delivers
specified minimum amounts of hazardous waste to ChemWaste's disposal facilities.
At the same time, the Company and its principal stockholder entered into a stock
purchase agreement with ChemWaste under which the Company and its principal
stockholder agreed that, through the term of the disposal agreement, they will
not, subject to certain exceptions, sell the stock or substantially all of
54
56
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the assets of the Company or any of its subsidiaries to any third party without
first offering to sell such stock or assets to ChemWaste on the same terms as
those offered by a third party or, in the case of a proposed public offering, at
90% of the proposed public offering price. These agreements, as amended, expire
on March 31, 1995.
(17) EXTRAORDINARY ITEM
As described in Note 9 above, during the third quarter of 1994, the Company
completed a public offering of $50,000,000 of Senior Notes, and used the net
proceeds to prepay substantially all of the Company's debt. The refinancing
resulted in an extraordinary charge of $2,043,000 ($.13 per share, net of income
tax benefit of $1,220,000), for redemption premiums paid to the holders of the
prepaid debt and for the write-off of deferred financing costs.
(18) NONRECURRING CHARGE
During the fourth quarter of 1994, the Company renegotiated its lease on
its corporate headquarters in Quincy, Massachusetts, such that the lease will
terminate on or before December 31, 1995. In addition, the Company has vacated
laboratory space it rents in Bedford, Massachusetts, and is subleasing the
space. As a result, the Company has taken a one-time, noncash charge of
$1,035,000 before taxes for the write-off of leasehold improvements at the two
locations.
55
57
SCHEDULE II
CLEAN HARBORS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(in thousands)
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
BEGINNING OPERATING FROM END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD EXPENSE RESERVES(A) PERIOD
- -------------------------------------- --------- ---------- ----------- -------
1992....................... $ 1,379 $ 1,066(b) $ 853 $1,592
1993....................... 1,592 709 929 1,372
1994....................... 1,372 776 653 1,495
- ---------------
(a) Amounts deemed uncollectible, net of recoveries.
(b) Includes $127,000 of reserve requirements for accounts receivable of Mr.
Frank, Inc. at the date of acquisition.
56
58
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 1994 Annual Meeting of
Stockholders, which definitive proxy statement is expected to be filed with the
Commission not later than April 30, 1995.
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 set forth in the Company's definitive proxy statement for its
1995 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........................................ 34
Consolidated Statements of Income for the Three Years Ended December 31,
1994................................................................... 35
Consolidated Balance Sheets, December 31, 1994 and 1993.................. 36-37
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1994............................................................... 38-39
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1994...................................................... 40
Notes to Consolidated Financial Statements............................... 41
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts........................... 56
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.
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.
57
59
LOCATION
ITEM NO. DESCRIPTION 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, 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 Amended and Restated Revolving Credit Agreement dated as
of August 1, 1994 by and among Clean Harbors, Inc., the
Subsidiaries listed on Schedule 1 thereto, Clean Harbors
of Baltimore, as Guarantor, and The First National Bank
of Boston, individually and as agent, USTrust, and
Shawmut Bank, N.A........................................ (5)
4.3 First Amendment dated January 31, 1995 to the Amended and
Restated Revolving Credit Agreement dated as of August 1,
1994 by and among Clean Harbors, Inc., the Subsidiaries
listed on Schedule 1 thereto, Clean Harbors of Baltimore,
as Guarantor, and The First National Bank of Boston,
individually and as agent, USTrust, and Shawmut Bank,
N.A...................................................... Filed herewith
10.34 Employment Agreement between Clean Harbors, Inc. and
James A. Pitts dated March 20, 1992...................... (2)
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................................................. Filed herewith
11.1 Statement re computation of Net Income (Loss) per
Share.................................................... Filed herewith
21 Subsidiaries............................................. Filed herewith
23 Consent of Independent Accountants....................... Filed herewith
24 Power of Attorney for John F. Kaslow, Daniel J. McCarthy,
Lorne R. Waxlax, and Christy W. Bell..................... Filed herewith
27 Financial Data Schedule.................................. Filed herewith
58
60
- ---------------
(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 Exhibit 4.1 to the Company's Form 10-Q
Quarterly Report for the Quarterly Period Ended June 30, 1994.
(6) Incorporated by reference to the similarly numbered exhibit to the
Company's Form 10-K Annual Report for the Year 1993.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1994.
59
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 February 22, 1995.
CLEAN HARBORS, INC.
/S/ ALAN S. MCKIM
By:
------------------------------------
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 February 22, 1995
- ---------------------------------- Directors, President and Chief
ALAN S. MCKIM Executive Officer
/S/ JAMES A. PITTS Executive Vice President of February 22, 1995
- ---------------------------------- Finance and Administration and
JAMES A. PITTS Chief Financial Officer
(principal financial officer)
/S/ MARY-ELLEN DRINKWATER Vice President and Controller February 22, 1995
- ---------------------------------- (principal accounting officer)
MARY-ELLEN DRINKWATER
* Director February 22, 1995
- ----------------------------------
CHRISTY W. BELL
* Director February 22, 1995
- ----------------------------------
JOHN F. KASLOW
* Director February 22, 1995
- ----------------------------------
DANIEL J. MCCARTHY
* Director February 22, 1995
- ----------------------------------
LORNE R. WAXLAX
*By: /S/ ALAN S. MCKIM Attorney-In-Fact February 22, 1995
- ----------------------------------
ALAN S. MCKIM
60