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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MARCH 30, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 0-16379
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CLEAN HARBORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2997780
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1501 WASHINGTON STREET, 02185-0327
BRAINTREE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (781) 849-1800 EXT. 4454
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
On March 18, 1998, the aggregate market value of the voting stock of the
registrant held by nonaffiliates of the registrant was $10,826,204. Reference is
made to Part III of this report for the assumptions on which this calculation is
based.
On March 18, 1998, there were outstanding 10,195,016 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 1998
annual meeting of stockholders (which is expected to be filed with the
Commission not later than April 30, 1998) 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 across the United States. The Company was incorporated in
Massachusetts in 1980. The principal offices of the Company are located in
Braintree, Massachusetts.
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
strong 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.
For the third consecutive year, the Company's earnings were adversely
affected by continued poor conditions in the hazardous waste disposal industry.
Intense price competition, unpredictable event business and fewer large scale
remediation projects generating waste for disposal contributed to weakness
across all segments of the hazardous waste disposal industry. To respond to
industry conditions, the Company instituted aggressive cost cutting measures and
profit improvement efforts in all its service lines during 1996, and these
efforts continued through 1997.
The Company currently maintains a network of sales and regional logistics
offices and service centers located in 23 states and Puerto Rico, and operates
12 waste management facilities. The service centers interface with 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 technical
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 utility, chemical, petroleum, transportation and
industrial firms, other waste management companies and government agencies.
Federal and state environmental regulation and enforcement programs have
been a major factor in providing demand for environmental services. The Company
believes that its business depends in large part on 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 adheres to 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 position in the industrial waste
management industry within the core markets in which it operates, the Company
strives to achieve internal growth through the efficient utilization of existing
facilities and the development of new waste management services. In addition,
the Company has achieved external growth through strategic acquisitions.
IMPROVED UTILIZATION OF WASTE MANAGEMENT FACILITIES. The Company currently
has 12 waste management facilities which represent a substantial investment in
permits, plants and equipment. In 1996, the Company started the implementation
of its CleanEXPRESS-Registered Trademark- system, which the Company believes has
resulted in, and will continue to result in, increased efficiencies relative to
the transfer of waste materials through the Company's network of waste
management facilities to its expanded and upgraded Chicago facility.
Implementation of CleanEXPRESS-Registered Trademark- is expected to be
substantially complete by the end of 1998.
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This network of transfer facilities provides the Company with significant
operating leverage. There are opportunities to expand waste handling capacity at
these facilities by modifying the terms of the existing permits and by adding
capital equipment and new technology. Through selected permit modifications, the
Company can expand the range of treatment services which it offers to its
customers without the large capital investment necessary to acquire or build new
waste management facilities.
NEW WASTE MANAGEMENT SERVICES. Industrial waste generators are demanding
alternatives to traditional waste disposal methods in order to increase
recycling and reclamation and to minimize the end disposal of hazardous waste.
The Company utilizes its technological expertise and innovation to improve and
expand the range of services which it offers to its customers.
In May 1995, the Company acquired a newly constructed hazardous waste
incinerator in Kimball, Nebraska, to incinerate liquid and solid wastes. The
availability of the Kimball incinerator has reduced 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, field services, industrial maintenance services
and emergency response services to be provided by a select number of service
providers. This trend should place smaller operators at a competitive
disadvantage due to their size and limited financial resources. To respond to
its customers' 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. Acquisitions within the Company's
existing areas of operation serve to capture incremental market share, while
geographic expansion creates new market opportunities. The Company continues to
evaluate other business opportunities in order to enhance service to its
existing customer base and expand its customer base.
ACQUISITIONS
The Company has completed three acquisitions since January 1, 1993.
DATE OF
ACQUISITION ACQUISITION PURCHASE PRICE
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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
1995 The assets of a newly constructed hazardous waste incinerator located in Kimball,
Nebraska $5.2 million
Prior to completing any acquisition, the Company strives to investigate the
current and contingent liabilities of the company or assets to be acquired,
including potential liabilities arising from noncompliance with environmental
laws by prior owners for which the Company, as a successor owner, might become
responsible. The Company also seeks to minimize the impact of potential
liabilities by obtaining indemnities and warranties from the sellers which may
be supported by deferring payment of or by escrowing a portion of the purchase
price. See "Legal Proceedings" below for a description of the indemnities which
the Company has received in connection with past acquisitions.
SERVICES PROVIDED BY THE COMPANY
SERVICES
The 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");
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and specialized repackaging, treatment and disposal services for laboratory
chemicals and household hazardous wastes ("CleanPack"-Registered Trademark-).
The Company markets these services through its sales organizations and, in many
instances, services in one area of the business support or lead to work in other
service lines.
In addition to these three principal services, the Company also provides
technical services such as analytical testing, site characterization,
remediation 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.
As an integral part of the Company's services, industrial wastes are
collected from customers and transported by the Company to and between its
facilities for treatment or bulking for shipment to final disposal locations.
Customers typically accumulate waste in containers, such as 55-gallon drums,
bulk storage tanks or 20-cubic yard roll-off boxes. In providing this service,
the Company utilizes a variety of specially designed and constructed tank trucks
and semi-trailers, as well as third-party transporters, including railroads.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed, roll-off boxes
or bulk dump trailers.
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.
The Company receives a detailed waste profile sheet prepared by the customer
to document the nature of the customer's waste. A sample of the delivered waste
is tested to ensure that it conforms to the customer's waste profile record and
to select an appropriate method of treatment and disposal. Once the wastes are
characterized, compatible 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 label is assigned to each container of waste,
enabling the Company to use sophisticated computer systems to track and document
the status, location and disposition of the waste.
WASTEWATER TREATMENT. The Company's wastewater treatment operations involve
processing hazardous wastes through the use of physical and chemical treatment
methods. The solid waste materials produced by these wastewater processing
operations are then disposed of off-site at facilities owned and operated by
unrelated businesses, while the treated effluent is discharged to the local
sewer system under permit.
The Company treats a broad range of industrial liquid and semi-liquid wastes
containing heavy metals, organics and suspended solids, including:
- -- acids and caustics;
- -- ammonias, sulfides and cyanides;
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- -- 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 mobility or solubility and convert waste to a more chemically
stable form. Stabilization technology includes many classes of immobilization
systems and applications. Stabilization is a frequent treatment method for
metal-bearing wastes received at several Company facilities, which treat the
waste to meet specific federal land disposal restrictions. After treatment, the
waste is tested to confirm that it has been rendered nonhazardous. It can then
be sent to a nonhazardous waste landfill, at significantly lower cost than
disposal at a hazardous waste landfill.
THERMAL TREATMENT. Thermal treatment refers to processes that use high
temperature combustion as the principal means of waste destruction. The
Company's state-of-the-art hazardous waste incinerator in Kimball, Nebraska,
uses a fluidized bed thermal oxidation unit for maximum destruction efficiency
of hazardous waste.
RESOURCE RECOVERY. Resource recovery involves the treatment of wastes using
various methods which 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. The Company operates treatment systems for
the reclamation and reuse of certain wastes, particularly solvent-based wastes
generated by industrial cleaning operations, metal finishing and other
manufacturing processes.
Spent solvents that can be recycled are processed through thin film
evaporators and other processing equipment and are distilled into usable
products. Upon recovery of these products, the Company either returns the
recovered solvents to the original generator or sells them to third parties.
Organic liquids and solids with sufficient heat value are blended to meet
strict specifications for use as supplemental fuels for cement kilns, industrial
furnaces and other high-efficiency boilers. The Company has installed fuels
blending equipment at its Chicago and Cincinnati plants to prepare these
supplemental fuels. The Company has established relationships with a number of
supplemental fuel users that are licensed to accept the blended fuel material.
Although the Company pays a fee to the users who accept this product, this
disposal method is substantially less costly than other disposal methods.
CLEAN EXTRACTION SYSTEM. The Clean Extraction System ("CES") is a hazardous
waste treatment system commercialized by the Company at its Baltimore facility,
which extracts organic compounds from industrial wastewater. CES removes organic
contaminants such as gasoline, acetone, methylene chloride, pesticides and other
chemicals, from industrial wastewater known as "lean water." Lean water is
generated by oil companies, utilities, and manufacturers of specialty chemicals
and pharmaceuticals.
The CES process enables the Company to handle a broad range of complex,
difficult to treat organic and inorganic wastewaters which would otherwise be
sent to other companies for disposal. CES offers the Company's industrial
customers, such as chemical or pharmaceutical companies, an attractive recycling
alternative to incineration or deep well injection of their waste systems.
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
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parties. The Company also arranges for the disposal of its customers' hazardous
wastes, which cannot be treated at Company-owned facilities. Wastes, which
cannot be disposed of in the Nebraska hazardous waste incinerator, are sent to
other incinerators, landfills, and disposal facilities operated by third
parties. On occasion, a customer's waste may be shipped directly to another
disposal company, such as a landfill or incinerator, if the size of the waste
shipment or its characteristics are such that the waste does not need to pass
through one of the Company's own waste management facilities. The Company has
negotiated favorable commercial terms with a number of disposal companies.
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 waste management companies and 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. The Company's
service centers are equipped with special equipment, such as high volume pumps,
pressure washers, nonsparking and chemical resistant tools, and a variety of
personal protective equipment, to perform maintenance services quickly, usually
during "off periods" to minimize the customer's production downtime.
SURFACE REMEDIATION. Surface remediation projects arise in two principal
areas: the planned cleanup of hazardous waste sites and the cleanup of
accidental spills and discharges of hazardous materials, such as those resulting
from transportation and industrial accidents. In addition, some surface
remediation projects involve the cleanup and maintenance of industrial lagoons,
ponds and other surface impoundments on a recurring basis. In all of these
cases, an extremely broad range of hazardous substances may be encountered.
Surface remediation projects generally require considerable interaction
among technical and project management services. Following the selection of the
preferred remedial alternative, the project team identifies the processes and
equipment for cleanup. Simultaneously, the Company's health and safety staff
develops a site safety plan for the project. Remedial approaches usually include
physical removal, mechanical dewatering and stabilization, or encapsulation.
GROUNDWATER RESTORATION. The Company's groundwater restoration services
typically involve response to above-ground spills, leaking underground tanks and
lines, hazardous waste landfills, and leaking surface impoundments. Groundwater
restoration efforts often require complex recovery systems, including recovery
drains or wells, air strippers, biodegradation or carbon filtration systems, and
containment barriers. These systems and technologies can be used individually or
in combination to remove a full range of floating or dissolved organic compounds
from groundwater. The Company designs and fabricates mobile or fixed site
groundwater treatment systems.
SITE AND FACILITY DECONTAMINATION. Site and facility decontamination
involves the cleanup and restoration of buildings, equipment, and other sites
and facilities that have been contaminated by exposure to hazardous materials
during a manufacturing process, or by fires, process malfunctions, spills or
other accidents. The Company's projects have included decontamination of
electrical generating stations,
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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 23 states and Puerto Rico. 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 for emergency response
projects, the Company relies in part upon a network of trained personnel who are
available on a contract basis for specific project assignments. The Company's
health and safety specialists and other skilled personnel assist field managers
in supervising these projects during and subsequent to the cleanup. The steps
performed by the Company include rapid response, containment and control
procedures, analytical testing and assessment, neutralization and treatment,
collection, and transportation of the substances to an appropriate treatment or
disposal facility.
CLEANPACK-REGISTERED TRADEMARK- SERVICES
The Company provides specialized repackaging, treatment and disposal
services for laboratory wastes, outdated chemicals, and household hazardous
wastes. Such chemicals and wastes are put into lab pack containers for shipment
and disposal. The Company offers generators of laboratory wastes the same
economical and environmentally sound disposal services that have been offered
for years to large industrial generators. The CleanPack-Registered Trademark-
operation services a wide variety of customers, including:
- -- pharmaceutical companies;
- -- engineering, and research and development divisions of industrial companies;
- -- college, university and high school laboratories;
- -- EPA laboratories and Veterans Administration facilities;
- -- hospitals and medical care laboratories;
- -- state and local municipalities; and
- -- thousands of residents through household hazardous waste collection days.
The Company provides a team of qualified and trained personnel to collect,
label and package waste at the customer's site. Lab packed wastes 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 recycling, reclamation, fuels blending, incineration,
aqueous treatment, and secure chemical landfill.
TECHNICAL SERVICES
Technical services consist primarily of analytical testing, site
characterization, remediation and personnel training. The Company's analytical
testing laboratories assist in performing a wide range of quantitative and
qualitative analyses to assist in determining the existence, nature, level, and
extent of contamination in various media. The Company's site remediation staff
identifies, evaluates and implements the appropriate environmental solution.
SITE REMEDIATION AND TECHNICAL SERVICES. The Company provides technical
capabilities and operational expertise to manage large-scale environmental
projects. The interdisciplinary teams of managers,
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geologists, chemists, engineers, scientists, technicians, and compliance experts
design and implement solution-oriented remedial programs incorporating both
off-site and on-site treatment. The areas of expertise include:
- -- remedial investigations;
- -- remediation technologies: design, fabrication, installation, and operations
and maintenance;
- -- decontamination and decommissioning operations; and
- -- high hazard materials handling.
The Company operates a state-certified analytical testing laboratory at its
waste handling facility in Braintree, Massachusetts, which tests samples
provided by customers to identify and quantify toxic pollutants. The laboratory
staff evaluates the properties of a given material, selects appropriate
analytical methods, and executes a laboratory work plan that results in a
comprehensive technical report.
The Company also maintains laboratories at its other principal waste
management facilities to identify and characterize waste materials prior to
acceptance for treatment and disposal.
PERSONNEL TRAINING. The Company provides comprehensive personnel training
programs for its own employees and for its customers on a commercial basis. Such
programs are designed to promote safe work practices under potential hazardous
environmental conditions, whether or not toxic chemicals are present, in
compliance with stringent regulations promulgated under the Federal Resource
Conservation and Recovery Act of 1976 ("RCRA") and the federal Occupational
Safety and Health Act ("OSHA"). The Company's Technical Training Center includes
confined space entry, exit, extraction, equipment, an air-system demonstration
maze, respirator fit testing room, leak and spill response equipment, and a
layout of a mock decontamination zone, all designed to fulfill the requirements
of OSHA Hazardous Waste and Emergency Response Standard.
SEASONALITY
The Company's operations may be affected by seasonal fluctuations due to
weather and budgetary cycles influencing the timing of customers' spending for
remedial activities. Typically during the first quarter of each year there is
less demand for environmental services due to the cold weather, particularly in
the Northeast and Midwest regions. In addition, factory closings for the
year-end holidays reduce the volume of industrial waste generated, which results
in lower volumes of waste handled by the Company during the first quarter of the
following year.
CUSTOMERS
The Company's sales efforts are directed toward establishing and maintaining
relationships with businesses which have ongoing requirements for one or more of
the Company's services. The Company's customer list includes many of the largest
industrial companies in the United States. 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 revenue base. The Company estimates
that more than 80% of its revenues are derived from previously served customers
with recurring needs for the Company's services. For the years ended December
31, 1997, 1996 and 1995, no single customer accounted for more than five percent
of the Company's revenues. The Company believes the loss of any single customer
would not have a material adverse effect on the Company's financial condition or
results of operations.
Although the Company's customer base is diverse, two industries each
provided over 10% of the Company's revenue in 1997. Approximately 15% of the
Company's revenues in 1997 were from the chemical and allied products industry,
while approximately 13% were from the electric, gas and sanitary industry. In
1996, two industries each provided over 10% of the Company's revenue.
Approximately 19%
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of the Company's revenues in 1996 were from the chemical and allied products
industry, while approximately 14% were from the electric, gas and sanitary
industry. In addition to serving industrial customers such as utilities,
railroads, pipelines, pharmaceutical manufacturers, and chemical companies, the
Company serves health care and educational institutions, federal, state and
local governmental bodies, and thousands of small quantity generators.
Under applicable environmental laws and regulations, generators of hazardous
wastes retain legal liability for the proper handling of those wastes up to and
including their ultimate disposal. In response to these potential concerns, many
large generators of industrial wastes and other purchasers of waste management
services (such as general contractors on major remediation projects) have
decreased the number of providers they use for such services. The Company has
been selected as an approved vendor by large generators because the Company
possess comprehensive collection, recycling, treatment, transportation,
disposal, and waste tracking capabilities and has the expertise necessary to
comply with applicable environmental laws and regulations. By becoming an
approved vendor for a large waste generator or other purchaser, the Company
becomes eligible to provide waste management services to the multiple plants and
projects of each generator or purchaser located in the Company's service areas.
However, in order to obtain such approved vendor status, it may be necessary for
the Company to bid against other qualified competitors in terms of the services
and pricing to be provided. Furthermore, large generators or other purchasers of
waste management services often periodically audit the Company's facilities and
operations to ensure that the Company's waste management services are being
performed in compliance with applicable laws and regulations, and within other
criteria established by the Company and by such customers.
COMPLIANCE/HEALTH & SAFETY
The Company regards compliance with applicable environmental regulations,
and the health and safety of its workforce as critical components of its overall
operations. The Company strives to maintain the highest professional standards
in its compliance, and health and safety activities; its internal operating
requirements are in many instances more stringent than those imposed by
regulation. The Company's compliance program has been developed for each of its
waste management facilities and service centers under the direction of the
Company's corporate compliance, health and safety, and training staffs. The
compliance, health and safety, and training staffs are responsible for
facilities permitting and regulatory compliance, health and safety, field
safety, compliance training, transportation compliance, and related record
keeping. The Company also performs periodic audits and inspections of the
disposal facilities of other firms utilized by the Company.
The Company's treatment, storage and recovery facilities are frequently
inspected and audited by regulatory agencies, as well as by customers. Although
the Company's facilities have been cited on occasion for regulatory violations,
the Company believes that each facility is currently in substantial compliance
with applicable requirements. Major facilities and service centers have a
full-time compliance, or health and safety representative to oversee the
implementation of the Company's compliance program at the facility or service
center. These highly-trained regulatory specialists are independent from
operations and report to the Director of Environmental, Health & Safety, who in
turn reports directly to the CEO.
ENVIRONMENTAL LIABILITIES AND CAPITAL EXPENDITURES
The Company operates facilities that treat or store hazardous waste. Such
facilities must obtain a RCRA license from the EPA, or an authorized state
agency, and must comply with certain operating requirements. The EPA has
developed a system for assessing the relative environmental clean-up priority of
RCRA facilities called the National Corrective Action Prioritization System,
with a High, Medium or Low ranking for each facility. None of the Company's RCRA
facilities have been assessed a high priority.
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The following table summarizes non-reimbursed environmental remediation
expenditures capitalized and expenses incurred, relating to RCRA facilities, for
the year ended December 31, (in thousands):
1997 1996 1995
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Environmental expenditures capitalized................................ $ 564 $ 420 $ 559
Environmental expenses incurred....................................... 256 176 231
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$ 820 $ 596 $ 790
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Although further investigation may cause a change in estimate, the Company
expects remediation expenditures of the magnitude incurred for the last three
years to continue for the foreseeable future. The Company believes that
environmental cleanup can be financed out of operations and that compliance with
environmental laws will not adversely affect its competitive position.
MANAGEMENT OF RISKS
The Company adheres to a program of risk management policies and practices
designed to reduce potential liability, as well as to manage customers' ongoing
environmental exposures. This program includes installation of risk management
systems at the Company's facilities, such as fire suppression, employee
training, environmental auditing, and policy decisions restricting the types of
wastes handled. The Company evaluates all revenue opportunities and declines
those which it believes involve unacceptable risks. The Company frequently
utilizes specialty subcontractors to handle any such materials when discovered
at a job site.
The Company disposes of its wastes at the Company's Kimball incineration
facility and facilities owned and operated by firms which the Company has
audited and approved. Typically, the Company applies established technologies to
the treatment, storage and recovery of hazardous wastes. The Company believes
its operations are conducted in a safe and prudent manner and in substantial
compliance with applicable laws and regulations.
INSURANCE
The Company's insurance programs cover the potential risks associated with
its multifaceted operations from two primary exposures: direct physical damage
and third-party liability. The Company maintains a casualty insurance program
providing coverage for vehicles, workers' compensation, employer's liability,
and comprehensive general liability in the aggregate amount of $30,000,000 per
year, subject to a retention of $250,000 per occurrence, except for general
liability where the retention is $500,000 per occurrence. The workers'
compensation limits are established by state statutes. Since the early 1980s,
casualty insurance policies have typically excluded liability for pollution,
which is covered under a separate pollution liability program.
The Company has pollution liability insurance policies covering the
Company's potential risk in three areas: as a contractor performing services at
customer sites, as a transporter of waste, and as it handles waste at the
Company's facilities. The Company has contractor's liability insurance of
$10,000,000 per occurrence and $10,000,000 in the aggregate, covering off-site
remedial activities and associated liabilities. Lloyds of London provides
pollution liability coverage for waste in-transit with single occurrence and
aggregate liability limits of $29,000,000. This Lloyds of London policy covers
liability in excess of $1,000,000 for pollution caused by sudden and accidental
occurrences during transportation of waste and at the Company's facilities, from
the time waste is picked up from a customer until its delivery to the final
disposal site. The Company's $30,000,000 excess automobile liability insurance
provides additional coverage for any in-transit pollution losses from accidents
over and above the Lloyds of London coverage, so that it has a total of
$59,000,000 of in-transit coverage.
9
Federal and state regulations require liability insurance coverage for all
facilities that treat, store or dispose of hazardous waste. In 1989, the Company
established a captive insurance company pursuant to the Federal Risk Retention
Act of 1986. This company qualifies as a licensed insurance company and is
authorized to write professional liability and pollution liability insurance for
the Company and its operating subsidiaries. RCRA, the Toxic Substances Control
Act and comparable state hazardous waste regulations typically require hazardous
waste handling facilities to maintain pollution liability insurance in the
amount of $1,000,000 per occurrence and $2,000,000 in the aggregate per year for
sudden occurrences and $3,000,000 per occurrence and $6,000,000 in the aggregate
per year for non-sudden occurrences. Currently, the Company uses its captive
insurance company to provide (i) the first $1,000,000 of insurance against
liability from sudden and non-sudden occurrences at its facilities, with the
excess coverage provided by Lloyds of London, and (ii) the full policy limits of
$3,000,000 per occurrence, $6,000,000 aggregate, of insurance for non-sudden
occurrences.
Operators of hazardous waste handling facilities are also required by
federal and state regulations to provide financial assurance for closure and
post-closure care of those facilities, should the facility cease operation.
Closure would include the cost of removing the waste stored at a facility which
ceased operating, and sending the material to another company for disposal. The
Company has obtained surety bonds to provide such financial assurance for
closure of the waste management facilities it currently owns, with the exception
of the Kimball incinerator which has closure and post-closure insurance provided
by a commercial insurer.
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 believes that
policy cancellation terms 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 its competitors in major portions of
its service territory. The Company also believes that its ability to provide
comprehensive services constitutes a significant competitive advantage for the
Company.
Treatment and disposal operations are conducted by a number of national and
regional waste management firms. The Company believes that the ability to
collect and transport waste products efficiently, quality of service, safety,
and pricing are the most significant factors in the market for treatment and
disposal services.
In field services, the Company's competitors include major national and
regional environmental services firms, as well as numerous smaller local firms.
The availability of skilled technical professional personnel, quality of
performance, diversity of services and price are the key competitive factors.
EMPLOYEES
As of March 19, 1998, the Company employed 1,129 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.
10
ITEM 2. PROPERTIES
The properties of the Company consist primarily of its 12 waste management
facilities and 12 service centers, various environmental remediation equipment,
and a fleet of approximately 750 registered pieces of transportation equipment.
Most service center locations are leased, and occasionally move to other
locations as operations and space requirements change. All of the waste
management facilities are owned by the Company, except (i) the Chicago hazardous
waste management facility which is leased under a lease which (with extensions)
expires September 2020, (ii) the Woburn, Massachusetts waste oil treatment and
storage facility which is leased under a lease which (with extensions) expires
February 2004, and (iii) the Virginia waste oil treatment and storage facility
which is leased under a lease which (with extensions) expires February 2002. In
connection with the placement of an industrial revenue bond in 1996, the Company
entered into a facilities lease with the City of Kimball, Nebraska, whereby the
City acquired a leasehold interest in the Kimball incinerator and the Company
leased the incinerator back from the City. The Company retains title to the
incinerator.
HAZARDOUS WASTE MANAGEMENT FACILITIES. The Company operates hazardous waste
management facilities at which it processes, treats and temporarily stores
hazardous wastes for later resale, reuse, or off-site treatment or disposal.
Every facility that treats, stores or disposes of hazardous wastes must obtain a
license from the federal EPA or an authorized state agency and must comply with
certain operating requirements. See "Environmental Regulation-Federal Regulation
of Hazardous Waste" below for a description of licenses issued under RCRA. All
of the Company's hazardous waste management facilities are subject to RCRA
licensing and have been issued RCRA Part B licenses, except for one interim
status facility.
Two of the facilities described above are waste oil treatment and storage
facilities, which are subject to RCRA licensing, because some petroleum
products, such as gasoline, are considered hazardous waste under federal law or
are located in a state which regulates waste oil as a hazardous waste. 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 or applied for RCRA licenses for those two facilities.
The Company has made substantial modifications and improvements to the
physical plant, and treatment and process equipment in recent years at its
treatment facilities. These modifications are consistent with the Company's
strategy to upgrade the quality and efficiency of treatment services, to expand
the range of services provided, and to ensure regulatory compliance and
operating efficiencies at these facilities. Major features of this program are
the addition of new treatment systems, 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.
Further, the Company believes that it can, with minor modifications at its
plants, make changes such that the existing plants would be able to process
significantly increased volumes of hazardous wastes and that no new facilities
will be required.
Chicago, IL. The Chicago, Illinois facility is located on the south side of
Chicago, on Lake Calumet. It provides treatment of nonhazardous and hazardous
industrial wastewaters, hazardous waste fuels blending, drummed waste processing
and consolidation, and transfer and repackaging of laboratory chemicals into lab
pack containers. In November 1993, the Illinois EPA issued a Part B license for
a ten-year term, which significantly expanded the waste handling and storage
capacity of the facility.
In November, 1995, the Company acquired assets from Chemical Waste
Management, Inc. ("ChemWaste") on an adjoining leased site, together with the
existing improvements, in exchange for sharing the costs of dismantling an
existing hazardous waste incinerator and cleaning up the adjoining site. The
existing improvements on the ChemWaste site, and other improvements completed
from 1995 through 1997 by the Company, have expanded the waste storage and
handling capabilities at the Chicago plant. The
11
Chicago facility also serves as the central receiving, processing and
transshipment facility for the CleanEXPRESS-Registered Trademark- program. Waste
materials are shipped via rail and truck to Chicago from all other Company
facilities. The waste materials are either treated or processed for
transshipment in Chicago.
Under the sharing arrangement with ChemWaste, the Company could over a
period of 15 years be required to contribute up to a maximum of $2,000,000 for
dismantling and decontaminating the incinerator and other equipment, and up to a
maximum of $7,000,000 for studies and cleanup of the site. Any additional costs
beyond those contemplated by the sharing arrangement during this time period
would be borne by ChemWaste. The Company believes that it can appropriately
capitalize the expenditures in excess of amounts accrued that are required to
clean up the property. In addition, the Company entered into a five year
disposal services agreement with ChemWaste in connection with the acquisition of
the assets on the adjacent site. Pursuant to the terms of the disposal services
agreement, the Company has agreed to use best efforts to deliver waste materials
to ChemWaste facilities for disposal subject to certain customer preferences,
scheduling and other considerations.
Kimball, NE. In May 1995, the Company acquired a newly constructed hazardous
waste incinerator in Kimball, Nebraska from Ecova Corporation, an affiliate of
Amoco Oil Company. The Kimball facility includes a 45,000 ton-per-year fluidized
bed thermal oxidation unit for maximum destruction efficiency of hazardous
waste. The incinerator has a RCRA Part B license issued by the Nebraska
Department of Environmental Quality ("NDEQ"). This permit will expire in
November 1998. The Company expects that a new RCRA and air permit will be issued
by NDEQ in 1999; however, the Company expects to be able to operate the facility
under its existing permit until the new permit is issued.
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 federal and state laws. 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.
As part of the acquisition, the Company agreed to make royalty payments to
Ecova Corporation through 2004, based on the number of tons processed at the
facility.
Braintree, MA. The Braintree facility is located just south of Boston. The
facility is primarily engaged in drummed waste processing and consolidation,
solvent recovery, transformer decommissioning, PCB storage and processing,
blending of waste used as supplemental fuel by industrial furnaces, and
pretreatment of waste to stabilize it before it is sent to landfills. The
facility was acquired by the Company in 1985 and operates under a state Interim
Hazardous Waste Facility License issued by the Massachusetts Department of
Environmental Protection ("DEP") in 1981. In June 1992, the DEP approved the
Company's application for a final Hazardous Waste Facility License and issued a
final Part B license. The Town of Braintree filed an appeal to the permit which
was withdrawn in December 1997.
Natick, MA. The Natick, Massachusetts facility is located just west of
Boston. The facility is currently on standby, but the Company plans to utilize
the facility in the near term for storing and repackaging lab pack containers.
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.
Cleveland, OH. The Cleveland, Ohio facility is located south of downtown
Cleveland. It is a wastewater treatment facility that treats nonhazardous and
hazardous industrial wastewaters, and it serves as a transfer station for
various types of containerized hazardous and nonhazardous waste. The facility is
not subject to Part B licensing requirements, since its on-site wastewater
treatment activities are regulated pursuant to the Clean Water Act, and
therefore are exempt from RCRA.
12
Baltimore, MD. The Baltimore, Maryland facility is located in central
Baltimore. It provides treatment of nonhazardous and hazardous industrial
aqueous wastes, treatment of "lean waters" through the CES process, drummed
waste processing, waste stabilization, and transfer of lab pack containers. The
facility has a state Controlled Hazardous Substances permit (the state
equivalent of a Part B license), which was last issued in 1992 for a three-year
term. The permit also allows handling of material destined for fuels-blending
and rail shipment of hazardous and nonhazardous waste. In June 1995, the Company
submitted a permit renewal application, which allows operations to continue
until the renewal application is approved.
Bristol, CT. The facility is located in Bristol, Connecticut, approximately
20 miles southwest of Hartford. It provides hazardous wastewater treatment,
drummed waste processing and consolidation, and transfer of lab pack containers.
This facility also provides treatment of special categories of hazardous
wastewaters known as "listed" wastewaters resulting from industrial processes
such as electroplating. The Connecticut Department of Environmental Protection
renewed the Part B license in 1995 for a five year term.
Cincinnati, OH. The facility is located north of downtown Cincinnati, Ohio.
It provides hazardous wastewater treatment, drummed waste processing and
consolidation, pretreatment of waste to stabilize it before it is sent to
landfills, fuels blending, and transfer of lab pack containers. The facility is
also authorized to handle PCBs. The facility holds a state Hazardous Waste
Facility Installation and Operation permit (RCRA Part B) which was renewed in
December 1993 for a five-year term, and a federal permit under the Hazardous and
Solid Waste Amendments to RCRA issued in December 1996. In May 1995, the Ohio
Hazardous Waste Facility Board approved the transfer of the facility hazardous
waste permit from the former owner of the facility to the Company.
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 Company expects to be able to operate using the existing permit until a new
permit is issued.
The facility in South Portland, Maine is a petroleum reclamation facility
that handles most of the waste oil received by the Company, which comes
primarily from the Company's remediation activities. It has a municipal sewer
user permit allowing the discharge of water separated from oil. The Company also
owns another property on Main Street in South Portland, which has a license to
store virgin oil, and it is also permitted for the temporary storage and
transfer of containerized hazardous waste.
The Virginia facility is located near Richmond and was acquired in September
1994. The facility is able to store waste oil and gasoline-contaminated
hazardous wastes collected from various activities, ranging from routine
cleaning of oil storage terminals to oil spill cleanups. The facility operates
under RCRA interim status pending the final review of 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.
13
In late 1995, the EPA proposed to amend its hazardous waste regulations by
establishing constituent-specific exit levels known as "bright line" levels for
low-risk solid wastes that are designated as hazardous because they are listed,
or have been mixed with, derived from, or contain listed hazardous wastes. Under
the proposal, the Hazardous Waste Identification Rule ("HWIR"), generators of
listed hazardous wastes that meet the bright-line levels would no longer be
subject to the hazardous waste management system under Subtitle C of RCRA as
listed hazardous wastes. If adopted, it is believed that the HWIR could
adversely impact the Company's incinerator in Kimball, since many wastes which
are currently required to be managed as hazardous wastes may no longer require
incineration at a RCRA incineration unit such as Kimball. However, in October
1997, USEPA stated that, due to public comment, the Agency would not be
finalizing major portions of the HWIR, including the bright-line levels.
The Company is required to obtain federal, state and local licenses, or
approvals for each of its hazardous waste facilities. Such licenses are
difficult to obtain and, in many instances, extensive studies, tests, and public
hearings are required before the approvals can be issued. The Company has
acquired all operating licenses and approvals now required for the current
operation of its business, and has applied for or is in the process of applying
for, all licenses and approvals needed in connection with continued operation
and planned expansion or modifications of its operations.
FEDERAL REGULATION OF HAZARDOUS WASTE
The most significant federal environmental laws affecting the Company are
RCRA, the Superfund Act and the Clean Water Act.
RCRA. RCRA is the principal federal statute governing hazardous waste
generation, treatment, transportation, storage and disposal. Pursuant to RCRA,
the EPA has established a comprehensive, "cradle-to-grave" system for the
management of a wide range of materials identified as hazardous waste. States,
such as Massachusetts, Connecticut, Illinois, Maryland, Ohio and Nebraska, that
have adopted hazardous waste management programs with standards at least as
stringent as those promulgated by the EPA, have been authorized by the EPA to
administer their facility permitting programs in lieu of the EPA's program.
Every facility that treats, stores or disposes of hazardous waste must
obtain a RCRA 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 12 waste
management facilities, nine are subject to RCRA licensing; of the nine, only the
Virginia waste oil facility operates under interim status. The other eight have
been issued Part B licenses.
RCRA requires that Part B licenses contain provisions for required on-site
study and cleanup activities, known as "corrective action," including detailed
compliance schedules and provisions for assurance of financial responsibility.
The EPA has developed a system for assessing the relative environmental cleanup
priority of RCRA facilities, called the National Corrective Action
Prioritization System, with a High, Medium or Low ranking for each facility.
Although several facilities of its competitors have been assessed a High cleanup
priority, none of the Company's RCRA facilities have been assessed as a High
priority.
The Company has begun RCRA corrective action investigations at its Part B
licensed facilities in Braintree, Natick, Chicago, Cincinnati, and Woburn. The
Company is also involved in site studies at its non-RCRA facilities in
Cleveland, Ohio; Kingston, Massachusetts; and on Main Street in South Portland,
Maine. Corrective action at the Bristol, Connecticut, facility was completed in
1996. The Company spent
14
approximately $820,000, $596,000 and $790,000 on corrective action at the
foregoing facilities for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company is also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final approval
from the Pennsylvania regulatory authorities, certifying final closure of the
facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action
investigation at the Chester site. PECO asked the Company to participate in the
site studies, and in October 1994, the Company agreed to be responsible for
seventy-five percent of the cost of these studies, which is estimated to be in
the range of $2,000,000, by, among other things, performing field services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates.
While the final scope of the work to be performed at these sites has not yet
been agreed upon, the Company believes, based upon information known to date
about the nature and extent of contamination at these sites, that accruals have
been established when required and such costs are not expected to have a
material effect on its results of operations or its competitive position, and
that it will be able to finance from operating revenue any additional corrective
action required at the sites.
The Bristol, Connecticut and Cincinnati, Ohio facilities were acquired from
a subsidiary of Southdown, Inc. Southdown Inc. has agreed to indemnify the
Company against any costs incurred or liability arising from contamination
on-site, including the cost of corrective action, or waste disposed of off-site,
including any liability under the Superfund Act, at those facilities.
THE 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 into the waters of
the United States without governmental authorization. The EPA has promulgated
"pretreatment" regulations under the Clean Water Act, which establish
pretreatment standards for introduction of pollutants into publicly owned
treatment works. In the course of its treatment process, the Company's
wastewater treatment facilities generate 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 operated by the Company.
OTHER FEDERAL LAWS. Company operations are also subject to the Toxic
Substances Control Act ("TSCA"), pursuant to which the EPA regulates over 60,000
commercially produced chemical substances, including the proper disposal of
PCBs. TSCA has established a comprehensive regulatory program for PCBs, under
the jurisdiction of the EPA, which oversees the storage, treatment and disposal
of PCBs at the Company's facilities in Braintree and Natick, Massachusetts;
Cincinnati, Ohio; and Bristol, Connecticut. Under the Clean Air Act, the EPA
also regulates emissions into the air of potentially harmful substances.
15
In its transportation operations, the Company is regulated by the U.S.
Department of Transportation, the Federal Railroad Administration, and the U.S.
Coast Guard, as well as by the regulatory agencies of each state in which it
operates or through which its trucks pass. Health and safety standards under the
Occupational Safety and Health Act are also applicable.
STATE AND LOCAL REGULATIONS
Pursuant to the EPA's authorization of their RCRA equivalent programs,
Massachusetts, Connecticut, Illinois, Maryland, Ohio, and Nebraska have
regulatory programs governing the operations and permitting of hazardous waste
facilities. Accordingly, the hazardous waste treatment, storage and disposal
activities of the Company's Braintree, Natick, Woburn, Bristol, Chicago,
Baltimore, Cincinnati, and Kimball facilities are regulated by the relevant
state agencies in addition to federal EPA regulation.
Some states, such as Connecticut and Massachusetts, classify as hazardous
some wastes which are not regulated under RCRA. For example, Massachusetts
considers PCBs and used oil as "hazardous wastes," while RCRA does not.
Accordingly, the Company must comply with state requirements for handling state
regulated wastes, and, when necessary, obtain state licenses for treating,
storing, and disposing of such wastes at its facilities.
The Company believes that each of its facilities is in substantial
compliance with the applicable requirements of RCRA, state laws and regulations.
Eleven of the Company's twelve waste management facilities have been issued
final licenses. 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
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 22 state and federal
Superfund sites.
Eleven of these sites involve two subsidiaries, which the Company acquired
from ChemWaste, which is a subsidiary of Waste Management, 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.
16
The Company's subsidiary, which owns the Bristol, Connecticut facility, is
involved in one Superfund site. As part of the acquisition of the Bristol,
Connecticut and Cincinnati, Ohio facilities, the seller and its parent company,
Southdown, Inc., agreed to indemnify the Company with respect to any liability
for waste disposed of before the Company acquired the facilities, which would
include any liability arising from Superfund sites.
Five of the 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 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 spent approximately $450,000 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 EPA has advised the PRP group
that it plans to utilize Superfund monies to design and implement the remedy
specified in the Record of Decision for the site, and initiate a cost recovery
action for its past costs in the amount of approximately $6,000,000. The EPA
indicated that the future remediation costs are estimated to be $11,000,000. In
January 1996, the Company and 16 other PRPs signed a standstill and tolling
agreement with the EPA which has been extended ten times and which now allows
for settlement discussions to take place up to April 30, 1998. In March, 1997,
the Company and eight other PRPs submitted a revised settlement offer of $2.5
million to the government, which has been tentatively accepted by the government
pending negotiation of the consent order. In February 1996, the Company filed
suit in the U.S. District Court for the Eastern District of Pennsylvania against
certain PRP's in order to preserve its claims for cost recovery and contribution
against those parties. In January 1998, the Company filed its settlement
agreement with the Court. 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 as security for the
sellers' agreement to indemnify the Company against potential liabilities,
including environmental liabilities arising from prior ownership and operation
of Mr. Frank, Inc. The Company has been recently identified as a PRP at two
sites, at which the Company believes that it has no liability.
With respect to the 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 22 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
Company and other PRPs at the site, the quantity and content of the waste it
disposed of at the site, and the number and financial capabilities of the other
PRPs at the site. Based on reviews of the various sites and currently available
information, and management's judgment and prior experience with similar
situations, expense accruals are provided by the Company for its share of future
site cleanup costs, and existing accruals are revised as necessary. As of
December 31, 1997, the Company had accrued environmental costs of $572,000 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.
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 1997.
17
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.
1996 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
First Quarter.............................................................. $ 3.875 $ 2.375
Second Quarter............................................................. 4.125 2.875
Third Quarter.............................................................. 3.375 1.500
Fourth Quarter............................................................. 3.375 1.875
1997 HIGH LOW
- ------------------------------------------------------------------------------ --------- ---------
First Quarter................................................................. $ 2.688 $ 1.375
Second Quarter................................................................ 1.813 1.188
Third Quarter................................................................. 3.375 1.500
Fourth Quarter................................................................ 2.750 1.438
On March 17, 1998 there were 829 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 (the "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 Preferred Stock, the Company intends to
retain all earnings for use in the Company's business and therefore does not
anticipate paying any cash dividends on its common stock in the foreseeable
future. The Company's bank credit agreements contain financial covenants, which
may effectively restrict or limit the payment of dividends other than Preferred
Stock dividends. See Note 9 to the Consolidated Financial Statements in Item 8
of this report.
Dividends on the Company's Preferred Stock are payable on the 15th day of
January, April, July and October, at the rate of $1.00 per share, per quarter;
112,000 shares are outstanding. Under the terms of the Preferred Stock, the
Company can elect to pay dividends in cash or in common stock with a market
value equal to the amount of the dividend payable. The Company elected to pay
the 1997 dividends in common stock. The share price of the common stock and the
shares of common stock issued to holders of preferred stock during 1997 were as
follows:
RECORD DATE SHARE PRICE COMMON STOCK ISSUED
- ----------------------------------------------------------- ------------- ---------------------
January 1, 1997............................................ $ 2.05 54,637
April 1, 1997.............................................. 1.58 70,888
July 1, 1997............................................... 1.63 68,714
October 1, 1997............................................ 1.99 56,284
The Company anticipates that the Preferred Stock dividends payable through
1998 will be paid in common stock.
18
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.
OTHER INCOME. During 1997, the Company recorded a $950,000 receivable in
connection with the settlement of a lawsuit and incurred approximately $150,000
in costs related to the litigation during the first quarter. The Company
recognized a pre-tax gain, net of related legal fees, of $800,000 resulting from
the settlement, which is included in other income, net in the consolidated
statement of income.
NONRECURRING CHARGES. During 1995, the Company recorded a $4,247,000
nonrecurring charge in connection with the reengineering of the Company's
operations and the write down of non-performing assets, as well as the
anticipated losses on the sale of certain non-core properties. Under the
reengineering program, the Company has closed or downsized small, satellite
offices; reduced employment levels; downsized its laboratory staff and relocated
the laboratory to its waste handling facility in Braintree, Massachusetts; and
relocated its corporate headquarters to a new location in Braintree,
Massachusetts. The components of the nonrecurring charge are as follows:
Severance and related costs..................................... $1,097,000
Write-off of non-performing asset............................... 1,110,000
Real estate related charges..................................... 2,040,000
---------
$4,247,000
---------
---------
During 1994, the Company renegotiated its lease on its corporate
headquarters in Quincy, Massachusetts, such that the lease terminated in 1995.
In addition, the Company vacated laboratory space in Bedford, Massachusetts. As
a result, the Company took a one-time, noncash charge of $1,035,000 before taxes
for the write-off of leasehold improvements at the two locations.
EXTRAORDINARY ITEM. During 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 approximately $2,043,000 of expense relating to the
early retirement of the outstanding debt, and an extraordinary charge of
$1,220,000 ($.13
19
per share), net of income tax benefit, for redemption premiums paid to the
holders of the prepaid debt and for the write-off of deferred financing costs.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
INCOME STATEMENT DATA: 1997 1996 1995 1994 1993
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues............................................. $ 183,767 $ 200,213 $ 209,250 $ 207,073 $ 200,114
Cost of revenues..................................... 140,542 154,608 156,779 146,132 134,525
Selling, general and administrative expenses......... 34,498 36,326 39,574 38,910 42,296
Depreciation and amortization of intangible assets... 9,228 9,827 10,081 10,250 10,319
Nonrecurring charges................................. -- -- 4,247 1,035 --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........................ (501) (548) (1,431) 10,746 12,974
Other income, net.................................... 800 -- -- -- --
Interest expense, net................................ 9,182 9,170 8,657 7,432 7,198
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary item................................. (8,883) (9,718) (10,088) 3,314 5,776
Provision for (benefit from) income taxes............ 4,845 (2,775) (3,195) 1,619 2,645
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item.............. (13,728) (6,943) (6,893) 1,695 3,131
Extraordinary loss related to early retirement of
debt, net of income tax benefit of $823,000........ -- -- -- 1,220 --
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ (13,728) $ (6,943) $ (6,893) $ 475 $ 3,131
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic EPS
Net income (loss) per common share before
extraordinary item............................... $ (1.42) $ (.77) $ (.77) $ .13 $ .30
Extraordinary item................................. $ -- $ -- $ -- $ (.13) $ --
Net income (loss) per share........................ $ (1.42) $ (.77) $ (.77) $ .00 $ .30
Diluted EPS
Net income (loss) per common share before
extraordinary item............................... $ (1.42) $ (.77) $ (.77) $ .13 $ .28
Extraordinary item................................. $ -- $ -- $ -- $ (.13) $ --
Net income (loss) per share........................ $ (1.42) $ (.77) $ (.77) $ .00 $ .28
Weighted average number of common shares
outstanding........................................ 9,959 9,653 9,475 9,635 9,884
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Financial Data:
Earnings before interest, taxes, depreciation and
amortization (EBITDA).............................. $ 9,527 $ 9,279 $ 8,650 $ 20,996 $ 23,293
Working capital...................................... $ 11,759 $ 14,245 $ 11,053 $ 20,814 $ 18,320
Total assets......................................... $ 154,945 $ 177,997 $ 186,444 $ 159,875 $ 167,358
Long-term obligations, less current portion.......... $ 68,020 $ 68,668 $ 70,391 $ 60,465 $ 62,507
Stockholders' equity................................. $ 40,024 $ 53,584 $ 60,374 $ 67,326 $ 67,371
No cash dividends have been declared on the Company's common stock.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data associated with the Company's results of operations. This table and
subsequent discussions should be read in conjunction with Item 6--Selected
Financial Data and Item 8--Financial Statements and Supplementary Data of this
report.
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------
TWELVE-MONTH YEAR
ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties........... 13.9 13.8 15.4 13.5 15.4
Other costs.................................... 62.6 63.4 59.5 57.1 51.8
--------- --------- --------- --------- ---------
Total cost of revenues....................... 76.5 77.2 74.9 70.6 67.2
Selling, general and administrative expenses..... 18.8 18.2 18.9 18.8 21.1
Depreciation and amortization of intangible
assets......................................... 5.0 4.9 4.9 4.9 5.2
Nonrecurring charges............................. -- -- 2.0 0.5 --
--------- --------- --------- --------- ---------
Income (loss) from operations.................... (0.3) (0.3) (0.7) 5.2 6.5
Other income, net................................ 0.4 -- -- -- --
Interest expense, net............................ 5.0 4.6 4.1 3.6 3.6
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes
and extraordinary item......................... (4.8) (4.9) (4.8) 1.6 2.9
Provision for (benefit from) income taxes........ 2.6 (1.4) (1.5) 0.8 1.3
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.......... (7.5) (3.5) (3.3) 0.8 1.6
Extraordinary loss from early retirement of
debt........................................... -- -- -- 0.6 --
--------- --------- --------- --------- ---------
Net income (loss).............................. (7.5)% (3.5)% (3.3)% 0.2% 1.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
REVENUES. Revenues for 1997 were $183,767,000 as compared to $200,213,000
for 1996 and $209,250,000 for 1995. The decrease in revenue in 1997 from 1996
was caused by a number of factors including, in particular, a decrease in event
business and industry-wide pricing pressure. The Company defines event business
as field services emergency response to an accident or cleanup of environmental
contamination that is not expected to recur. Over the past several years, the
event business has consistently produced revenue of approximately $30,000,000
and included at least one major incident. In 1997, event business revenue was
$19,000,000; the Company attributes the reduction in event revenue to a decrease
in the size of the event market in 1997, including no major spills in its
service territory, rather than to reduction in market share. The Company can not
predict whether or not this trend will continue into future periods. Total hours
billed in the field services business in 1997 was flat from 1996; thus, the
decreased business in emergency response was offset by an increase in base
business. Pricing in the field services business decreased from the prior year
by 6.0%, in large part due to the decrease in emergency response business, which
tends to be at higher billable rates than other field services work. In the
disposal business, revenue decreased due to a 4.0% decrease in volume and a 7.0%
decrease in pricing.
During 1996, the Company received approximately $7,000,000 of revenue from
the cleanup of a large oil spill off the Maine coast. Excluding this event
business, the revenue declined approximately 8.0% from
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
1995 to 1996. The revenue decline was the result of industry-wide pricing
pressures and a decrease in the volumes of waste which were processed through
the Company's facilities.
There are many factors which have impacted, and continue to impact, the
Company's revenues. These factors include: competitive industry pricing;
continued efforts by generators of hazardous waste to reduce the amount of
hazardous waste they produce; significant consolidation among treatment and
disposal companies; industry-wide overcapacity; direct shipment by generators of
waste to the ultimate treatment or disposal location; and seasonal fluctuations
due to weather and budgetary cycles influencing the timing of customers'
spending for remedial activities.
The Company continues to take pricing actions in response to industry
conditions, as it attempts to maintain a competitive mix of price, performance,
and customer support services while attempting to return to profitability and
growth. The Company attempts to mitigate the effects of price reductions by
reducing operating costs. There can be no assurance that pricing actions will be
effective in stimulating higher levels of sales or that cost reduction efforts
will offset the effect of pricing actions on the Company's gross margin.
COST OF REVENUES. Cost of revenues were $140,542,000 in 1997, $154,608,000
in 1996 and $156,779,000 in 1995. 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. During
the second quarter of 1995, the Company acquired an incinerator in Kimball,
Nebraska which provides the Company with incineration capabilities, thus
reducing reliance on third parties.
Cost of revenues, as a percentage of revenues, was 76.5% in 1997, 77.2% in
1996 and 74.9% in 1995. Disposal costs as a percentage of revenue were 13.9%,
13.8% and 15.4% in 1997, 1996 and 1995, respectively. The cost of sending waste
to third parties decreased by 7.0% for the year ended 1997 as compared to the
year ended 1996; however, as a percentage of revenues, there was a slight
increase from 13.8% to 13.9% due to revenue declines related to pricing being
greater than the cost reductions achieved relating to outside disposal.
Similarly, other costs of revenues decreased by 10.0% from 1996 to 1997;
however, as a percentage of revenues, the decline was less due to revenue
decreases due to pricing.
The cost of revenues, as a percentage of revenues, for 1996 as compared to
1995 is comprised of a decrease in outside disposal costs to 13.8% from 15.4%
and an increase in other costs to 63.4% from 59.5%. The Company attributes the
decrease in outside disposal costs to the addition of the Kimball incinerator,
which allowed the Company to dispose of waste internally that had previously
been sent to third parties. The increase in other costs from 1995 to 1996 is
primarily due to the full year operating cost of the Kimball facility in 1996,
versus a partial year in 1995, since the incinerator was acquired in the second
quarter of 1995.
In 1996, the Company started implementation of its
CleanEXPRESS-Registered Trademark-system. The implementation of this system will
continue into 1998. The Company believes that the
CleanEXPRESS-Registered Trademark- system has resulted in, and will continue to
result in, increased efficiencies relative to the collection, transportation,
treatment and disposal of routinely created hazardous waste through its expanded
and upgraded Chicago facility.
The nonrecurring charge of $4,247,000 in 1995 resulted primarily from the
reengineering program, which identified more efficient methods of servicing
customers, as well as certain assets and field locations which were no longer
integral to the Company's operations. The Company significantly reduced its cost
structure. The reengineering and cost control efforts identified over
$10,000,000 in annual cost reductions, which were substantially realized in
1996. These savings, which were achieved in part through the
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
introduction of new computer systems, strengthened the Company's business
processes, allowed disposition of non-core assets, and reduced the number of
offices and the amount of rented space. Although the Company realized these
savings during 1996, they were offset by reduction in pricing, lower volumes and
other costs increasing. During 1997, the Company continued its process of
consolidating common functions to reduce redundant costs and improve the
Company's ability to deliver its services. The Company believes that its ability
to continue to manage operating costs is an important factor in its ability to
remain price competitive. However, no assurance can be given that the Company's
efforts to manage future operating expenses will be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined to $34,498,000 in 1997 from $36,326,000 in 1996
and $39,574,000 in 1995. The 5.0% decrease from 1996 to 1997 was caused by a
reduction in headcount among the general and administrative employees, and a
reduction in virtually all other components of general and administrative
expenses. These reductions were partially offset by increases in selling expense
due to the expansion in the sales force and an increase in royalty expense
related to Kimball plant volumes. The Company plans to continue to reduce costs
in 1998; however, no assurance can be given that this objective will be
accomplished.
The 8.2% decrease in selling, general and administrative expenses from 1995
to 1996 was the result of several cost cutting measures such as reducing
administrative staff, relocating the Company's corporate headquarters to a new
office park and reducing discretionary spending.
INTEREST EXPENSE. Interest expense increased during 1997 to $9,182,000 from
$9,170,000 in 1996 and $8,657,000 in 1995. The slight increase in interest
expense in 1997 as compared to 1996 is due to higher interest rates on some debt
in 1997 as compared to 1996, which was partially offset by a reduction in the
average debt outstanding in 1997 as compared to 1996.
The 5.9% increase in interest expense from 1995 to 1996 is due to an
increase in the average borrowings of approximately $5,000,000 for the twelve
months ended December 31, 1996. A portion of the increase in interest expense
during 1996 and 1995 was offset by interest income from restricted investments
of $559,000 in 1996 and $243,000 in 1995. No interest was capitalized during
1997, 1996 or 1995.
OTHER INCOME. During the first quarter of 1997, the Company recognized a
pre-tax gain, net of related legal fees, of $800,000 resulting from the
settlement of a lawsuit.
INCOME TAXES. In 1997, income tax expense of $4,845,000 was recorded on a
pre-tax loss of $8,883,000 for an effective tax rate of (54.5%), as compared to
tax benefits that were recorded on the pre-tax losses of 28.6% and 31.7% for the
years ended 1996 and 1995, respectively. SFAS 109, "Accounting for Income
Taxes," requires that a valuation allowance be established when, based on an
evaluation of objective verifiable evidence, there is a likelihood that some
portion or all of the deferred tax assets will not be realized. The Company
continually reviews the adequacy of its valuation allowance for deferred tax
assets, and, in 1997, based on this review, the valuation allowance was
increased by $6,050,000, which resulted in a non-cash charge to operations of
the same amount. This increase in the valuation allowance was the primary reason
for the change in the effective tax rate between 1997 and 1996.
The actual realization of the net operating loss carryforwards and other tax
assets depend on having future taxable income of the appropriate character prior
to their expiration under the tax laws. If the Company continues to report
losses in the future, no income tax benefit for these losses would be recorded.
If the Company reports earnings from operations in the future, and depending on
the level of these earnings, some portion or all of the valuation reserve would
be reversed, which would increase net income reported in future periods.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The fluctuation in the effective tax rate from 1995 to 1996 was due to the
amount of income before taxes, as compared to the fixed amount of goodwill and
other non-deductible items.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. The
Company has received a notice of intent to assess state income taxes from one of
the states in which it operates. The case is currently undergoing administrative
appeal. If the Company loses the administrative appeal, the Company may be
required to make a payment of approximately $3,000,000 to the state. The Company
believes that it has properly reported its state income and intends to contest
the assessment vigorously. While the Company believes that the final outcome of
the dispute will not have a material adverse effect on the Company's financial
condition or results of operations, no assurance can be given as to the final
outcome of the dispute, the amount of any final adjustments or the potential
impact of such adjustments on the Company's financial condition or results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company and employees acting on behalf of the Company
make forward-looking statements concerning the expected revenues, results of
operations, capital expenditures, capital structure, plans and objectives of
management for future operations, and future economic performance. This report
contains forward-looking statements. There are many factors which could cause
actual results to differ materially from those projected in a forward-looking
statement, and there can be no assurance that such expectations will be
realized.
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: integrate successfully the
CleanEXPRESS-Registered Trademark- program; continue to implement the treatment
and disposal reengineering program; utilize its facilities and workforce
profitably, in the face of intense price competition; maintain or increase
market share in an industry which appears to be downsizing and consolidating;
realize benefits from cost reduction programs; and generate incremental volumes
of waste to be handled through its facilities from existing sales offices and
service centers.
The future operating results of the Kimball incinerator may be affected by
factors such as its ability to: obtain sufficient volumes of waste at prices
which produce revenue sufficient to offset the operating costs of the facility;
minimize downtime and disruptions of operations; and compete successfully
against other incinerators which have an established share of the incineration
market.
The Company's operations may be affected by the commencement and completion
of major site remediation projects; cleanup of major spills or other events;
seasonal fluctuations due to weather and budgetary cycles influencing the timing
of customers' spending for remedial activities; the timing of regulatory
decisions relating to hazardous waste management projects; changes in
regulations governing the management of hazardous waste; secular changes in the
waste processing industry towards waste minimization and the propensity for
delays in the remedial market; suspension of governmental permits; and fines and
penalties for noncompliance with the myriad of regulations governing the
Company's diverse operations. As a result of these factors, the Company's
revenue and income could vary significantly from quarter to quarter, and past
financial performance should not be considered a reliable indicator of future
performance.
Typically during the first quarter of each calendar year there is less
demand for environmental remediation due to the cold weather, particularly in
the Northeast and Midwest regions, and increased possibility of unplanned
weather related plant shutdowns. In addition, customer factory closings for the
year-end holidays reduce the volume of industrial waste generated, which results
in lower volumes of waste handled by the Company during the first quarter of the
following year.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company participates in a highly volatile industry, with multiple
competitors, the major ones of which have taken large write-offs and asset
write-downs and undergone major restructurings during the past several years.
Periodically, the Company reviews long-lived assets for financial impairment. At
the end of 1997, the Company determined based on this review that no asset
write-downs were required; however, if conditions in the industry deteriorate
further, certain assets could be determined to be impaired and an asset
write-off could be required. Also, industry conditions may result in significant
volatility of the Company's common stock price, as well as that of its
competitors.
In the third quarter of 1997 the Company joined an ongoing lawsuit against
the City of Chicago challenging the imposition of a waste charge by the City of
Chicago on every gallon of waste received at the Company's Chicago facility. The
City charge being challenged is imposed on only two facilities in the City of
Chicago, the Company's facility and a facility operated by Liquid Recovery
Systems, Inc. (LRS), which is a co-plaintiff in the suit. Since 1990 the Company
has paid approximately $3,000,000 to the City pursuant to this charge and
continues to pay an average of approximately $42,000 per month.
The lawsuit challenges the legal authority of the City of Chicago to impose
the charge. The Company contends the charge is, among other things, an unlawful
tax on service occupations in violation of the Illinois Constitution. The
Company is seeking: (1) a declaration by the Circuit Court of Cook County that
the challenged charge is unconstitutional or otherwise unlawful; (2) an
injunction against the City's continued assessment and collection of the charge
and; (3) a refund of all charges paid plus interest.
The City of Chicago is vigorously defending its purported authority to
collect the charge and asserting that the Company is not entitled to a refund.
The Company expects the Court to rule in 1998 on several pending motions filed
by the Company, including a motion for partial summary judgment that is
dispositive of the substantive merits of the Company's claims. The Company
cannot predict when or whether the Court will decide in the Company's favor.
Accordingly, no account receivable has been recorded on the books of the Company
relating to this lawsuit.
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to the Company, it likewise often results in increased operating
and compliance costs. The Company strives to conduct its operations in
compliance with applicable laws and regulations, including environmental rules
and regulations, and has 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, 1997, 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.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 22 state and
federal Superfund sites. Eleven 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 22 Superfund sites are not expected to be
material to the Company's operations or financial position. The Company had
accrued environmental costs of approximately $572,000 and $434,000 for cleanup
of Superfund sites, at December 31, 1997 and 1996, respectively.
The Company operates facilities that are subject to RCRA regulation. Under
RCRA, every facility that treats, stores or disposes of hazardous waste must
obtain a RCRA permit from EPA or an authorized state agency and must comply with
certain operating requirements. Of the Company's 12 waste management facilities,
nine are subject to RCRA licensing. RCRA requires that permits contain a
schedule of required on-site study and cleanup activities, known as "corrective
action," including detailed compliance schedules and provisions for assurance of
financial responsibility.
The EPA or applicable state agency have begun RCRA corrective action
investigations at the Company's RCRA licensed facilities in Baltimore, Maryland;
Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn,
Massachusetts; and Cincinnati, Ohio. RCRA corrective action at the Bristol,
Connecticut, facility was completed in 1996. The Company is also involved in
site studies at its non-RCRA facilities in Cleveland, Ohio; Kingston,
Massachusetts; and South Portland, Maine.
In January 1995, the Company entered into a definitive agreement with
ChemWaste to lease a site previously leased by ChemWaste which adjoins the
Company's Chicago facility. During November 1995, the Company acquired the
existing improvements on the ChemWaste site in exchange for agreeing to share
the costs of dismantling an existing hazardous waste incinerator and cleaning up
the site. The improvements on the ChemWaste site allowed the Company to
implement the CleanEXPRESS-Registered Trademark- program. Under the sharing
arrangement with ChemWaste, the Company will manage the RCRA corrective action
investigation at the site and over a period of 15 years could be required to
contribute up to a maximum of $2,000,000 for dismantling and decontaminating the
incinerator and other equipment and up to a maximum of $7,000,000 for studies
and cleanup of the site. Any additional costs beyond those contemplated by the
sharing arrangement during this time period would be borne by ChemWaste. The
Company had accrued $1,352,000 relating to this liability at December 31, 1997
and 1996. In addition, the Company believes that it would be able to
appropriately capitalize the remediation expenditures that it may be obligated
to make under the agreement. No estimate can be made as to when the remediation
activities will be complete.
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 corrective action.
The following table summarizes non-reimbursed environmental remediation
expenditures capitalized and expenses incurred relating to the Company's
facilities for the years ended December 31, (in thousands):
1997 1996 1995
--------- --------- ---------
Environmental expenditures capitalized.................................................... $ 564 $ 420 $ 559
Environmental expenses incurred........................................................... 256 176 231
--------- --------- ---------
$ 820 $ 596 $ 790
--------- --------- ---------
--------- --------- ---------
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company expects environmental remediation expenditures of the magnitude
incurred for the last three years to continue for the foreseeable future.
The Company is also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final 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 $2,000,000, by, among other things, performing field service
work and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts and credits to PECO in the amount of $709,000 and $413,000
through December 31, 1997 and 1996, respectively. The Company had $791,000 and
$1,087,000 accrued relating to this liability at December 31, 1997 and 1996.
Remediation at this site is expected to be complete in one year.
While the final scope of work to be performed at these sites has not yet
been agreed upon, the Company believes, based upon information known to date
about the nature and extent of contamination at these sites, that accruals have
been established when required and such costs are not expected to have a
material effect on its results of operations or its competitive position, and
that it will be able to finance from operating revenue any additional corrective
action required at the sites.
LIQUIDITY AND CAPITAL RESOURCES
Federal and state regulations require liability insurance coverage for all
facilities that treat, store, or dispose of hazardous waste, and financial
assurance that funds will be available for closure of these facilities, should a
facility cease operation, and post closure coverage where required by law. In
1989, the Company established a wholly-owned captive insurance company pursuant
to the Federal Risk Retention Act of 1986. This company qualifies as a licensed
insurance company and is authorized to write closure, professional liability,
and pollution liability insurance for the Company and its operating
subsidiaries. Investments are held by the captive insurance company as assets
against its insured liabilities and are restricted for future payment of
insurance claims. In 1997, the Company replaced a portion of the closure
insurance issued by its captive insurance company with bonds issued by a bonding
company. This allowed the captive insurance company to remit funds previously
classified as restricted cash to the Company. In addition, at December 31, 1996,
the Company had on deposit collateral of $5,650,000 with a commercial insurance
company to provide for closure and post-closure costs of its incinerator and
landfill. During 1996, the Company renegotiated its agreement with the insurance
company to replace collateral with a letter of credit. The cash from this
transaction was released to the Company in 1997. As a result of these two
transactions, the Company obtained $7,262,000. The Company used these funds, as
well as $3,343,000 of additional borrowings under its revolving line of credit,
to purchase equipment and improve properties in the amount of $3,366,000, to pay
maturities on long-term debt of $5,009,000, and to cover the cash used in
operations of $1,480,000. The deficit from operations was largely the result of
a decrease in accounts payable of $6,309,000 offset by an a decrease in accounts
receivable of $4,226,000. Accounts payable decreased due to the Company paying
vendors in a more timely basis in 1997 as compared to 1996, which allowed for
smoother operations. Accounts receivable decreased in proportion to the decrease
in selling
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
prices. In addition, in 1997 the Company obtained $1,888,000 from the sale of
property, plant and equipment.
In 1996, the Company generated $5,281,000 from operations which was used
primarily to purchase equipment and improve properties in the amount of
$3,126,000 and to increase collateral relating to bonds issued to guarantee
closure of facilities in the amount of $1,278,000. In addition, the Company
obtained $965,000 from the sale of property, plant and equipment.
The Company expects 1998 capital additions to be in the range of $3,000,000.
The Company believes that it has all of the plants and facilities required by
the business for the foreseeable future. Thus, the Company anticipates that
capital expenditures in 1998 will be limited to maintaining existing capital
assets.
The Company has reviewed its systems for compliance with the year 2000, and
the Company determined that all major systems are or will be compliant before
the end of 1998. The Company believes that no material costs will be incurred to
modify software for year 2000 compliance.
In September of 1996, the Company refinanced its $45,000,000 revolving
credit and term loan agreement (the "Loan Agreement") with a financial
institution by (i) amending the Loan Agreement to reduce the maximum credit
thereunder from $45,000,000 to $35,000,000 and (ii) guaranteeing $10,000,000 of
10.75% Economic Development Revenue Bonds due September 1, 2026 issued by the
City of Kimball, Nebraska (the "Bonds"). The Company used the net proceeds from
the sale of the Bonds to repay a portion of its outstanding debt under the Loan
Agreement. That portion was originally incurred to pay for a portion of the
costs of the Kimball incinerator and landfill, including the prepaid closure
insurance programs, as well as the costs of improvements to the facility.
The Loan Agreement provides for a $24,500,000 revolving credit facility (the
"Revolver") and a $10,500,000 term promissory note (the "Term Note"). The Term
Note is payable in monthly installments of $250,000 with the last payment due in
January 2000. The Revolver allows increased borrowing availability to a maximum
of $35,000,000 in cash and letters of credit as the Term Loan is amortized.
Letters of credit may not exceed $20,000,000 at any one time. In June 1997, the
term of the Revolver was extended from May 8, 1998 to May 8, 1999 under
substantially the same terms and conditions.
The Loan Agreement provides for certain covenants the most restrictive of
which required, at December 31, 1997, the maintenance of a minimum level of
working capital of $10,000,000 and adjusted net worth of not less than
$40,000,000. At December 31, 1997, working capital was $11,759,000 and adjusted
net worth was $42,024,000. In 1998, the loan covenants were changed to require
working capital of not less than $6,000,000 and adjusted net worth of not less
than $33,000,000. In addition, the Bonds contain certain covenants the most
restrictive of which require that the Company maintain a ratio of earnings
before interest, income taxes, depreciation and amortization (EBITDA) to total
debt service of 1.25 to 1. At December 31, 1997, the debt service coverage ratio
was 1.04 to 1. Under the terms of the Bonds, the deficiency in the debt coverage
ratio will not result in a default, but the Company will be required to pay in
six equal monthly installments into a debt service reserve fund held by the
Trustee for the Bonds a total amount equal to one year's interest on the Bonds.
At December 31, 1997 and 1996, funds available to borrow under the Revolver
were $9,900,000 and $13,000,000, respectively. Management believes that
sufficient resources will be available to meet the Company's cash requirements
through at least December 31, 1998. The Company has $50,000,000 of Senior Notes
which mature in 2001. Some portion or all of the borrowings under the Senior
Notes will need to be refinanced by the maturity date. The ability of the
Company to refinance the Senior Notes at reasonable interest rates is dependent
upon improving results from operations and is contingent on a favorable interest
rate environment when the Company attempts to refinance the borrowings.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Dividends on the Company's Series B Convertible Preferred Stock are payable
on the 15th day of January, April, July and October, at the rate of $1.00 per
share, per quarter; 112,000 shares are outstanding. Under the terms of the
preferred stock, the Company can elect to pay dividends in cash or in common
stock with a market value equal to the amount of the dividend payable. Since
March 1995, the Company has elected to pay the dividends in common stock. The
Company issued a total of 250,523 shares of common stock to the holders of the
preferred stock for the year 1997. The Company anticipates that the preferred
stock dividends payable through 1998 will be paid in common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which is effective for both interim and fiscal periods ending after
December 31, 1997. The statement requires restatement of all prior period
earnings per share data presented after the effective date. SFAS 128 specifies
the computation, presentation and disclosure requirements for earnings per share
and is substantially similar to the standards recently issued by the
International Accounting Standards Committee entitled "International Accounting
Standards, Earnings Per Share." The Company adopted SFAS 128 for the period
ending December 31, 1997. The adoption of SFAS 128 resulted in no changes to
previously reported earnings for the years ended December 31, 1997, 1996, 1995
and 1994, and only a minor impact on the reported earnings per share amounts for
the year ended 1993.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for fiscal periods
beginning after December 15, 1997, and the Company will adopt its provisions in
fiscal 1998. Reclassification for earlier periods is required for comparative
purposes. The Company is currently evaluating the impact this statement will
have on its financial statements; however, because the statement requires only
additional disclosure, the Company does not expect the statement to have a
material impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for fiscal periods beginning after December 15,
1997, and the Company will adopt its provisions in fiscal 1998. Reclassification
for earlier periods is required, unless impracticable, for comparative purposes.
The Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material impact
on its financial position or results of operations.
In 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities," ("SOP
96-1") for fiscal years beginning after December 15, 1996. SOP 96-1 provides
that environmental remediation liabilities should be accrued when the criteria
of Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," are met and it includes benchmarks to aid in the determination
of when environmental remediation liabilities should be recognized in the
financial statements. The Company's management determined that the adoption of
SOP 96-1 had no material impact on the results of operations.
29
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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clean Harbors,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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
February 4, 1998
30
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues..................................................................... $ 183,767 $ 200,213 $ 209,250
Cost of revenues............................................................. 140,542 154,608 156,779
Selling, general and administrative expenses................................. 34,498 36,326 39,574
Depreciation and amortization of intangible assets........................... 9,228 9,827 10,081
Nonrecurring charges......................................................... -- -- 4,247
---------- ---------- ----------
Loss from operations......................................................... (501) (548) (1,431)
Other income, net............................................................ 800 -- --
Interest expense, net........................................................ 9,182 9,170 8,657
---------- ---------- ----------
Loss before provision for income taxes....................................... (8,883) (9,718) (10,088)
Provision for (benefit from) income taxes.................................... 4,845 (2,775) (3,195)
---------- ---------- ----------
Net loss..................................................................... $ (13,728) $ (6,943) $ (6,893)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted loss per share............................................. $ (1.42) $ (.77) $ (.77)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................... 9,959 9,653 9,475
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
31
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
AS OF DECEMBER 31,
----------------------
1997 1996
---------- ----------
Current assets:
Cash and cash equivalents............................................................... $ 3,935 $ 1,366
Restricted investments.................................................................. 1,088 8,190
Accounts receivable, net of allowance for doubtful accounts of $1,050 and $1,063,
respectively.......................................................................... 37,836 42,746
Prepaid expenses........................................................................ 1,518 1,603
Supplies inventories.................................................................... 2,811 2,866
Income tax receivable................................................................... 1,669 1,668
Deferred tax asset...................................................................... 1,581 3,152
---------- ----------
Total current assets.................................................................. 50,438 61,591
---------- ----------
Property, plant and equipment:
Land.................................................................................... 8,182 8,423
Buildings and improvements.............................................................. 37,890 39,585
Vehicles and equipment.................................................................. 77,281 78,050
Furniture and fixtures.................................................................. 2,190 2,191
Construction in progress................................................................ 2,756 1,819
---------- ----------
128,299 130,068
Less--accumulated depreciation and amortization......................................... 66,392 61,282
---------- ----------
61,907 68,786
---------- ----------
Other assets:
Goodwill, net........................................................................... 20,755 21,479
Permits, net............................................................................ 11,695 12,605
Deferred taxes non-current.............................................................. 5,627 9,208
Other................................................................................... 4,523 4,328
---------- ----------
42,600 47,620
---------- ----------
Total assets.......................................................................... $ 154,945 $ 177,997
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
32
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
AS OF DECEMBER 31,
----------------------
1997 1996
---------- ----------
Current liabilities:
Current maturities of long-term obligations............................................. $ 4,037 $ 4,370
Accounts payable........................................................................ 13,760 20,069
Accrued disposal costs.................................................................. 7,100 7,912
Other accrued expenses.................................................................. 13,548 14,609
Income taxes payable.................................................................... 10 162
Deferred tax liability.................................................................. 224 224
---------- ----------
Total current liabilities........................................................... 38,679 47,346
---------- ----------
Other liabilities:
Long-term obligations, less current maturities.......................................... 68,020 68,668
Deferred taxes, long-term............................................................... 6,871 7,453
Other................................................................................... 1,351 946
---------- ----------
Total other liabilities............................................................. 76,242 77,067
---------- ----------
Commitments and contingent liabilities (Notes 4, 7, 9, and 10)
Stockholders' equity:
Preferred stock, $.01 par value:
Series A convertible preferred stock
Authorized--2,000,000 shares; issued and outstanding--none.......................... -- --
Series B convertible preferred stock
Authorized--156,416 shares; issued and outstanding--112,000 shares (liquidation
preference of $5,600,000)........................................................... 1 1
Common stock, $.01 par value:
Authorized--20,000,000 shares; issued and outstanding 10,101,490 and 9,743,153 shares,
respectively........................................................................ 101 98
Additional paid-in capital.............................................................. 60,087 59,477
Unrealized loss on restricted investments, net of tax................................... (12) (15)
Accumulated deficit..................................................................... (20,153) (5,977)
---------- ----------
Total stockholders' equity.......................................................... 40,024 53,584
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 154,945 $ 177,997
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
33
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net loss................................................................... $ (13,728) $ (6,943) $ (6,893)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 9,228 9,827 10,081
Write-off for reengineering program........................................ -- -- 3,684
Allowance for doubtful accounts............................................ 683 651 381
Amortization of deferred financing costs................................... 747 631 536
Deferred income taxes...................................................... 4,570 (2,273) (3,286)
Loss (gain) on sale of fixed assets........................................ 67 (77) 9
(Gain) loss on sale of investments......................................... -- (28) 4
Changes in assets and liabilities, net of effects of businesses acquired:
Accounts receivable...................................................... 4,226 5,020 (3,962)
Income taxes receivable.................................................. (1) (946) (544)
Prepaid expenses......................................................... 85 436 (268)
Supplies inventories..................................................... 55 104 (300)
Other assets............................................................. (195) (873) (2,661)
Accounts payable......................................................... (6,309) 1,455 7,063
Accrued disposal costs................................................... (812) 466 1,267
Other accrued expenses................................................... (349) (3,277) 2,206
Income taxes payable..................................................... (152) 162 --
Other liabilities........................................................ 405 946 --
---------- ---------- ----------
Net cash provided by (used in) operating activities.................... (1,480) 5,281 7,317
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment................................. (3,366) (3,126) (12,984)
Proceeds from sales and maturities of restricted investments............... 7,262 740 202
Cost of restricted investments purchased................................... (172) (1,278) (6,124)
Proceeds from sale of fixed assets......................................... 1,888 965 36
Increase in permits........................................................ -- (13) (140)
---------- ---------- ----------
Net cash provided by (used in) investing activities.................... 5,612 (2,712) (19,010)
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term obligations.......................................... (5,009) (7,355) (2,922)
Net borrowings (payments) under long-term revolver......................... 3,343 (10,337) 4,848
Issuance of long-term debt................................................. -- 16,667 10,000
Additions to deferred financing costs...................................... (62) (564) (842)
Preferred stock dividend distribution...................................... -- -- (335)
Proceeds from employee stock purchase plan................................. 146 161 152
Proceeds from exercise of stock options.................................... 19 -- 17
---------- ---------- ----------
Net cash provided by (used in) financing activities.................... (1,563) (1,428) 10,918
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................. 2,569 1,141 (775)
Cash and cash equivalents, beginning of year................................. 1,366 225 1,000
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 3,935 $ 1,366 $ 225
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
34
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Supplemental information:
Cash payments (receipts) for interest and income taxes:
Interest, net...................................................................... $ 8,519 $ 8,849 $ 8,715
Income taxes, net.................................................................. 421 (430) 1,410
Liabilities assumed in conjunction with business acquisitions:
Fair value of assets acquired...................................................... $ -- $ -- $ 5,160
Cash paid.......................................................................... -- -- 4,132
Liabilities assumed................................................................ -- -- 1,028
Noncash investing and financing activities:
Capital lease obligations incurred................................................. $ -- $ -- $ 196
Stock dividend on preferred stock.................................................. 448 447 112
Property, plant & equipment accrued................................................ -- -- 865
The accompanying notes are an integral part of these consolidated financial
statements.
35
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
SERIES B
PREFERRED
STOCK COMMON STOCK UNREALIZED
-------------- ------------- GAIN/(LOSS) RETAINED
NUMBER $.01 NUMBER $.01 ADDITIONAL ON EARNINGS/ TOTAL
OF PAR OF PAR PAID-IN RESTRICTED (ACCUMULATED) STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL INVESTMENTS DEFICIT) EQUITY
------ ----- ------ ----- ---------- ----------- ------------- -------------
Balance, at December 31, 1994........... 112 $1 9,431 $ 95 $58,590 $(113) $ 8,753 $67,326
------ ----- ------ ----- ---------- ----- ------------- -------------
Preferred stock dividends:
Series B, $4.00 per share............. -- -- 29 -- 112 -- (447) (335)
Proceeds from exercise of stock
options............................... -- -- 6 -- 17 -- -- 17
Employee Stock Purchase Plan............ -- -- 59 1 152 -- -- 153
Unrealized gain on restricted
investments........................... -- -- -- -- -- 106 -- 106
Net loss................................ -- -- -- -- -- -- (6,893) (6,893)
------ ----- ------ ----- ---------- ----- ------------- -------------
Balance, at December 31, 1995........... 112 $1 9,525 $ 96 $58,871 $ (7) $ 1,413 $60,374
------ ----- ------ ----- ---------- ----- ------------- -------------
Preferred stock dividends:
Series B, $4.00 per share............. -- -- 153 1 446 -- (447) --
Employee Stock Purchase Plan............ -- -- 65 1 160 -- -- 161
Unrealized loss on restricted
investments........................... -- -- -- -- -- (8) -- (8)
Net loss................................ -- -- -- -- -- -- (6,943) (6,943)
------ ----- ------ ----- ---------- ----- ------------- -------------
Balance, at December 31, 1996........... 112 $1 9,743 $ 98 $59,477 $ (15) $ (5,977) $53,584
------ ----- ------ ----- ---------- ----- ------------- -------------
Preferred stock dividends:
Series B, $4.00 per share............. -- -- 250 2 446 -- (448) --
Proceeds from exercise of stock
options............................... -- -- 9 -- 19 -- -- 19
Employee Stock Purchase Plan............ -- -- 99 1 145 -- -- 146
Unrealized gain on restricted
investments........................... -- -- -- -- -- 3 -- 3
Net loss................................ -- -- -- -- -- -- (13,728) (13,728)
------ ----- ------ ----- ---------- ----- ------------- -------------
Balance, at December 31, 1997........... 112 $1 10,101 $ 101 $60,087 $ (12) $(20,153) $40,024
------ ----- ------ ----- ---------- ----- ------------- -------------
------ ----- ------ ----- ---------- ----- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
36
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. The Company provides these services to a diversified
customer base across the United States, primarily in the Northeast,
Mid-Atlantic, Central, Midwest and Southern Regions.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company reflect
the application of certain significant accounting policies as described below:
(a) Principles of Consolidation
The accompanying consolidated statements include the accounts of Clean
Harbors, Inc. and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes revenues and accrues the related cost of treatment
and disposal upon the receipt of waste materials, except for incineration where
revenue is recognized as waste is burned. Other revenues are recognized as the
related costs are incurred.
(c) Income Taxes
Under the Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"), deferred tax assets and liabilities are
determined based upon the difference between the financial statement and tax
basis of assets and liabilities as measured by the enacted tax rates which will
be in effect when these differences reverse. Deferred tax expense or benefit is
the result of changes between deferred tax assets and liabilities.
A valuation allowance is established when, based on an evaluation of
objective verifiable evidence, there is a likelihood that some portion or all of
deferred tax assets will not be realized.
(d) Earnings per Share
In 1997, the Company implemented Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic EPS is
calculated by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
EPS gives effect to all potential dilutive common shares that were outstanding
during the period. The earnings per share for the Company under SFAS 128 were
the same as under the prior accounting standard for the years presented in the
financial statements.
(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.
37
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Investments
Debt securities are classified as "available for sale" or "held to
maturity." Available for sale securities are recorded at fair value with an
offsetting valuation adjustment, net of tax, in stockholders' equity. Held to
maturity securities are recorded at purchase cost.
(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. Depreciation expense includes depreciation of property plant and
equipment, and equipment capitalized under capital leases. Depreciation expense
was $7,594,000 for 1997, $8,207,000 for 1996 and $8,462,000 for 1995. 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.
(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) Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt
instrument, and they are carried as a component of long-term debt.
(k) Costs to Treat Environmental Contamination
Costs relating to environmental cleanup resulting from operating activities
are expensed as incurred. Environmental cleanup costs that improve properties,
as compared with the condition of that property when originally acquired, are
capitalized to the extent that they are recoverable.
38
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Letters of Credit
The Company utilizes letters of credit to provide collateral assurance to
issuers of performance bonds for certain contracts; to assure regulatory
authorities that certain funds will be available for corrective action
activities at its hazardous waste management facilities, as described in Note
7(b) below; and to provide financial assurance to regulators of its captive
insurance company. As of December 31, 1997 and 1996, the Company had outstanding
letters of credit amounting to $6,267,000 and $6,870,000, respectively.
As of December 31, 1997, the Company had no significant concentrations of
credit risk.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(n) Reclassifications
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the 1997 presentation.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value.
The fair value of restricted investments, revenue bonds and senior notes is
based on quoted market prices for these securities. At December 31, 1997, the
estimated fair values of the Company's financial instruments are as follows (in
thousands):
NET
CARRYING FAIR UNREALIZED
AMOUNT VALUE GAIN/(LOSS)
--------- --------- -------------
December 31, 1997
Cash and cash equivalents.................................................... $ 3,395 $ 3,395 $ --
Restricted investments available for sale.................................... 801 782 (19)
Restricted investments held to maturity...................................... 306 284 (22)
Long-term obligations based on quoted market prices.......................... 60,000 60,803 --
Other long-term obligations.................................................. 13,707 13,707 --
December 31, 1996
Cash and cash equivalents.................................................... $ 1,366 $ 1,366 $ --
Restricted investments available for sale.................................... 7,885 7,978 93
Restricted investments held to maturity...................................... 305 305 --
Long-term obligations based on quoted market prices.......................... 60,000 51,750 --
Other long-term obligations.................................................. 15,373 15,373 --
39
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Available for sale securities are mortgage backed securities. Held to
maturity consist primarily of collateralized mortgage obligations. Contractual
maturities as of December 31, 1997 range from one to ten years, with the
majority being five years or less. Expected maturities may differ from
contractual maturities, as borrrowers may have the right to call or prepay
obligations without penalties.
(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, and post closure coverage where required by
law. In 1989, the Company established a wholly-owned captive insurance company
pursuant to the Federal Risk Retention Act of 1986. This company qualifies as a
licensed insurance company and is authorized to write closure, professional
liability, and pollution liability insurance for the Company and its operating
subsidiaries. Investments are held by the captive insurance company as assets
against its insured liabilities and are restricted for future payment of
insurance claims. At December 31, 1997, the Company insured several facilities
for closure and post closure through its captive insurance company. In 1997, the
Company replaced a portion of the closure insurance issued by its captive
insurance company with bonds issued by a bonding company. This allowed the
captive insurance company to remit funds previously classified as restricted
investments to the Company. At December 31, 1997, the amortized cost of these
securities was $1,107,000. A valuation allowance of $19,000 was recorded to
reflect the fair value of available for sale securities of $782,000 and a
realized gain of $3,000 was reflected in net income for the year. No valuation
allowance was required to reflect the fair value of held to maturity securities
of $284,000. The amortized cost of these securities held at December 31, 1996
was $1,934,000. A valuation allowance of $35,000 was recorded to reflect the
fair value of $1,899,000, and a realized gain of $28,000 was reflected in net
income for the year.
At December 31, 1996, the Company had on deposit collateral of $5,650,000
with a commercial insurance company to provide for closure and post-closure
costs of its incinerator and landfill. During 1996 the Company renegotiated its
agreement with the insurance company to replace the collateral with a letter of
credit, and the Company transferred all its held-to-maturity government debt
securities to the available-for-sale category. The cash from this collateral was
released in 1997 to the Company. At December 31, 1996 the amortized cost of
these securities was $6,261,000, while the fair value was $6,354,000. The
Company had an additional $30,000 in escrow deposited for closure costs at
December 31, 1996. The fair value approximated the amortized costs of these
investments, therefore no valuation allowance has been recorded.
(5) BUSINESS ACQUISITIONS
In May 1995, the Company acquired a newly constructed hazardous waste
incinerator in Kimball, Nebraska from the Ecova Corporation, a wholly-owned
affiliate of Amoco Oil Company. The incinerator is located on a 600 acre site,
which includes a landfill for disposal of the ash from the incinerator. The
Company acquired the Kimball facility for $5,160,000.
40
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INTANGIBLE ASSETS
Below is a summary of intangible assets at December 31, 1997 and 1996 (in
thousands):
1997 1996
--------- ---------
Goodwill.................................................................................... $ 27,529 $ 27,529
Permits..................................................................................... 17,689 17,689
--------- ---------
45,218 45,218
Less--accumulated amortization.............................................................. 12,768 11,134
--------- ---------
$ 32,450 $ 34,084
--------- ---------
--------- ---------
Amortization expense approximated $1,634,000, $1,620,000, and $1,619,000,
for the years 1997, 1996, and 1995, respectively.
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS
(a) Legal Matters
In the ordinary course of conducting its business, the Company becomes
involved in environmentally related lawsuits and administrative proceedings.
Some of these proceedings may result in fines, penalties or judgments against
the Company.
As of December 31, 1997, the Company has been named as a potentially
responsible party ("PRP") in a number of lawsuits arising from the disposal of
wastes by certain Company subsidiaries at 22 state and federal Superfund sites.
Eleven of these cases involve two subsidiaries which the Company acquired from
Chemical Waste Management, Inc. ("ChemWaste"), a subsidiary of Waste Management,
Inc. As part of the acquisition, ChemWaste agreed to indemnify the Company with
respect to any liability of its Braintree and Natick subsidiaries for waste
disposed of before the Company acquired them. Accordingly, ChemWaste is paying
all costs of defending the Natick and Braintree subsidiaries in these 11 cases,
including legal fees and settlement costs. Three cases involve Mr. Frank, Inc.
and one case involves Connecticut Treatment Center ("CTC"). Southdown, Inc.,
from which the Company bought CTC, has agreed to indemnify the Company with
respect to any liability for waste disposed of by CTC before the Company
acquired CTC, and the sellers of Mr. Frank, Inc. agreed to a limited indemnity
against certain environmental liabilities arising from prior operations of Mr.
Frank, Inc. Five pending cases involve subsidiaries which the Company acquired
in January 1989, when it purchased all of the outstanding shares of ChemClear
Inc., a publicly traded company ("ChemClear"). The Company has also been
identified recently as a PRP at two additional sites at which the Company
believes it has no liability.
Management routinely reviews each Superfund site in which the Company's
subsidiaries are involved, considers each subsidiary's role at each site and its
relationship to the other PRPs at the site, the quantity and content of the
waste it disposed of at the site, and the number and financial capabilities of
the other PRPs at the site. Based on reviews of the various sites and currently
available information, and management's judgment and prior experience with
similar situations, expense accruals are provided by the Company for its share
of future site cleanup costs, and existing accruals are revised as necessary.
The Company had accrued environmental costs, based on the Company's estimate of
its expected liability, of
41
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
$572,000 and $434,000 for cleanup of Superfund sites at December 31, 1997 and
1996, respectively. However, Superfund legislation permits strict joint and
several liability to be imposed without regard to fault and, as a result, one
PRP might be required to bear significantly more than its proportional share of
the cleanup costs if other PRPs do not pay their share of such costs.
(b) Environmental Matters
Under the Federal Resources Conservation and Recovery Act of 1976 ("RCRA"),
every facility that treats, stores or disposes of hazardous waste must obtain a
RCRA permit from EPA or an authorized state agency and must comply with certain
operating requirements. Of the Company's 12 waste management facilities, nine
are subject to RCRA licensing. RCRA requires that permits contain a schedule of
required on-site study and cleanup activities, known as "corrective action,"
including detailed compliance schedules and provisions for assurance of
financial responsibility.
The EPA or applicable state agency have begun RCRA corrective action
investigations at the Company's RCRA licensed facilities in Baltimore, Maryland;
Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn,
Massachusetts; and Cincinnati, Ohio. RCRA corrective action at the Bristol,
Connecticut, facility was completed in 1996. The Company is also involved in
site studies at its non-RCRA facilities in Cleveland, Ohio; Kingston,
Massachusetts; and South Portland, Maine.
In January 1995, the Company entered into a definitive agreement with
ChemWaste to lease a site previously leased by ChemWaste which adjoins the
Company's Chicago facility. During November 1995, the Company acquired the
existing improvements on the ChemWaste site in exchange for agreeing to share
the costs of dismantling an existing hazardous waste incinerator and cleaning up
the site. The improvements on the ChemWaste site allowed the Company to
implement the CleanEXPRESS-Registered Trademark- program. Under the sharing
arrangement with ChemWaste, the Company will manage the RCRA corrective action
investigation at the site and over a period of 15 years could be required to
contribute up to a maximum of $2,000,000 for dismantling and decontaminating the
incinerator and other equipment, and up to a maximum of $7,000,000 for studies
and cleanup of the site. Any additional costs beyond those contemplated by the
sharing arrangement during this time period would be borne by ChemWaste. The
Company had accrued $1,352,000 relating to this liability at December 31, 1997
and 1996. In addition, the Company believes that it would be able to
appropriately capitalize the remediation expenditures in excess of the amount
accrued that it may be obligated to make under the agreement. No estimate can be
made as to when the remediation activities will be completed.
Two RCRA facilities in Bristol, Connecticut and Cincinnati, Ohio were
acquired from a subsidiary of Southdown, Inc. Southdown has agreed to indemnify
the Company against any costs incurred or liability arising from contamination
on-site arising from prior ownership, including the cost of corrective action.
42
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
The following table summaries non-reimbursed environmental remediation
expenditures capitalized and expenses incurred relating to the Company's
facilities for the years ended December 31, (in thousands):
1997 1996 1995
--------- --------- ---------
Environmental expenditures capitalized.................................................... $ 564 $ 420 $ 559
Environmental expenses incurred........................................................... 256 176 231
--------- --------- ---------
$ 820 $ 596 $ 790
--------- --------- ---------
--------- --------- ---------
The Company expects environmental remediation expenditures of the magnitude
incurred for the last three years to continue for the foreseeable future.
Environmental expenses incurred are included as a component of selling, general
and administrative expenses.
The Company is also involved in a RCRA corrective action investigation at a
site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site
consists of approximately 30 acres which PECO had leased to various companies
over the years. In 1989, the Company acquired by merger a public company named
ChemClear Inc., which operated a hazardous waste treatment facility on
approximately eight acres of the Chester site leased from PECO. The Company
ceased operations at the Chester site, decontaminated the plant and equipment,
engaged an independent engineer to certify closure, and obtained final approval
from the Pennsylvania regulatory authorities, certifying final closure of the
facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action
investigation at the Chester site. PECO asked the Company to participate in the
site studies, and in October 1994, the Company agreed to be responsible for
seventy-five percent of the cost of these studies, which is estimated to be in
the range of $2,000,000, by, among other things, performing field services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts to PECO of $709,000 and $413,000 through December 31, 1997
and 1996, respectively. The Company had $791,000 and $1,087,000 accrued relating
to this liability at December 31, 1997 and 1996, respectively. Remediation at
this site is expected to be complete in one year.
While the final scope of the work to be performed at these sites has not yet
been agreed upon, the Company believes, based upon information known to date
about the nature and extent of contamination at these sites, that accruals have
been established when required and such costs 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 sites.
(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.
43
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
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) Gain Contingency
In the third quarter of 1997 the Company joined an ongoing lawsuit against
the City of Chicago challenging the imposition of a waste charge by the City of
Chicago on every gallon of waste received at the Company's Chicago facility. The
City charge being challenged is imposed on only two facilities in the City of
Chicago, the Company's facility and a facility operated by Liquid Recovery
Systems, Inc. (LRS), which is a co-plaintiff in the suit. Since 1990 the Company
has paid approximately $3,000,000 to the City pursuant to this charge and
continues to pay an average of approximately $42,000 per month.
The lawsuit challenges the legal authority of the City of Chicago to impose
the charge. The Company contends the charge is, among other things, an unlawful
tax on service occupations in violation of the Illinois Constitution. The
Company is seeking: (1) a declaration by the Circuit Court of Cook County that
the challenged charge is unconstitutional or otherwise unlawful; (2) an
injunction against the City's continued assessment and collection of the charge
and; (3) a refund of all charges paid plus interest.
The City of Chicago is vigorously defending its purported authority to
collect the charge and asserting that the Company is not entitled to a refund.
The Company expects the Court to rule in 1998 on several pending motions filed
by the Company, including a motion for partial summary judgment that is
dispositive of the substantive merits of the Company's claims. The Company
cannot predict when or whether the Court will decide in the Company's favor.
Accordingly, no account receivable has been recorded on the books of the Company
relating to this lawsuit.
(8) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
1997 1996
--------- ---------
Insurance................................................................................... $ 3,323 $ 3,125
Other items................................................................................. 10,225 11,484
--------- ---------
$ 13,548 $ 14,609
--------- ---------
--------- ---------
(9) FINANCING ARRANGEMENTS
On September 6, 1996, the Company refinanced its $45,000,000 revolving
credit and term loan agreement (the "Loan Agreement") with a financial
institution by (i) amending the Loan Agreement to reduce the maximum credit
thereunder from $45,000,000 to $35,000,000, and (ii) guaranteeing $10,000,000 of
10.75% Economic Development Revenue Bonds due September 1, 2026 issued by the
City of Kimball, Nebraska (the "Bonds"). The Company used the net proceeds from
the sale of the Bonds to repay a
44
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
portion of its outstanding debt under the Loan Agreement. That portion was
originally incurred for acquisition costs associated with the acquisition of the
Kimball incinerator (the "Facility"), including the costs relating to insurance
premiums. In connection with the issuance of the Bonds, the Company entered into
a facilities lease with the City of Kimball, whereby the City acquired a
leasehold interest in the Facility and the Company leased the Facility back from
the City. The Company retains title to the Facility.
The Bonds were issued at 100% of their principal value. The Bonds are not
redeemable prior to September 1, 2006. From that date until September 1, 2008,
the Bonds are redeemable at a premium. After September 1, 2008, the Bonds are
redeemable at par. Sinking fund payments begin on September 1, 1999 in the
amount of $100,000 annually until the year 2008, when the annual sinking fund
payment will gradually increase. The Bonds provide for certain covenants and
requirements relating to, among others, incurrence of additional debt, payment
of dividends and a debt service coverage ratio of earnings before interest,
income taxes, and depreciation and amortization ("EBITDA") to total debt
service. At December 31, 1997, the debt service coverage ratio of 1.04 to 1 was
less than the 1.25 to 1 required. Under the terms of the Bonds, the deficiency
in the debt coverage ratio will not result in a default, but the Company will be
required to pay in six equal monthly installments into a debt service reserve
fund held by the Trustee for the Bonds a total amount equal to the annual debt
service for one year on the Bonds.
As amended, the Company has a $35,000,000 Loan Agreement with a financial
institution. The Loan Agreement provides for a $24,500,000 revolving credit
portion (the "Revolver") and a $10,500,000 term promissory note (the "Term
Note"). The Term Note has monthly principal payments of $250,000 with the last
payment due in January 2000. The Revolver allows the Company to borrow up to
$35,000,000 in cash and letters of credit, based on a formula of eligible
accounts receivable. Letters of credit may not exceed $20,000,000 at any one
time. At December 31, 1997 and 1996, funds available to borrow under the
Revolver were $9,900,000 and $13,000,000, respectively. The Revolver requires
the Company to pay a line fee of one half of one percent on the unused portion
of the line. In June, 1997, the term of the Revolver was extended from May 8,
1998 to May 8, 1999.
The Loan Agreement allows for up to 80% of the outstanding balance of the
combined Revolver and Term Note to bear interest at the Eurodollar rate plus
three percent; the remaining balance bears interest at a rate equal to the
"prime" rate plus one and one-half percent. The Loan Agreement is collateralized
by substantially all of the Company's assets, and the Loan Agreement provides
for certain covenants including, among others, maintenance of a minimum level of
working capital and adjusted net worth. At December 31, 1997, the Loan Agreement
required minimum levels of working capital and adjusted net worth of $10,000,000
and $40,000,000, respectively. At December 31, 1997, the Company had working
capital and adjusted net worth of $11,759,000 and $42,024,000, respectively. In
1998, the Loan Agreement was modified to require working capital of $6,000,000
and adjusted net worth of $33,000,000. The Company must also maintain borrowing
availability of not less than $4,500,000 for sixty consecutive days prior to
paying principal and interest on its other indebtedness and dividends in cash on
its preferred stock.
The Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15,
2001 (the "Senior Notes"). The Senior Notes are not collateralized, and the
Senior Note indenture does not provide for the maintenance of certain financial
covenants, although it does limit, among other things, the issuance of
45
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
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 sale of the Senior Notes, the Company 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 into common stock at $15 and $10 per share,
respectively, through October 1999. 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, which began on October 31, 1995 and end on October 31, 1999. The
Company has the option to convert such notes into common stock at $25 per share
if the market value of the common stock exceeds such price in the future.
The following table is a summary of the Company's long-term debt obligations
reflecting the transactions discussed above.
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Long-term obligations consist of the following:
Economic development revenue bonds at 10.75%.............................................. $ 10,000 $ 10,000
Revolving credit with a finance company, bearing interest at the "prime" rate (8.50% at
December 31, 1997) plus 1.50%, collateralized by substantially all assets............... 5,559 2,216
Term note payable, bearing interest at the "prime" rate (8.50% at December 31, 1997) plus
1.50%................................................................................... 6,111 9,750
Senior notes payable, bearing interest at 12.50%.......................................... 50,000 50,000
Senior convertible notes, bearing interest at 10.00%...................................... 2,000 3,000
Junior subordinated note payable to Southdown Environmental Treatment Systems, Inc.,
bearing interest at the Bank's base rate plus 2.00%..................................... -- 188
Junior subordinated notes to the former owners of Mr. Frank, Inc., bearing interest at the
Bank's base rate plus 1.00%............................................................. -- 21
Obligations under capital leases.......................................................... 37 198
--------- ---------
73,707 75,373
Less--current maturities.................................................................. 4,037 4,370
Less--unamortized financing costs......................................................... 1,650 2,335
--------- ---------
Long-term obligations..................................................................... $ 68,020 $ 68,668
--------- ---------
--------- ---------
46
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
Below is a summary of minimum principal payments due under the Company's
long-term obligations (in thousands), exclusive of obligations under capital
leases discussed in Note 10:
YEAR AMOUNT
- ----------------------------------------------------------------------------------- ---------
1998............................................................................... $ 4,000
1999............................................................................... 9,659
2000............................................................................... 211
2001............................................................................... 50,100
2002............................................................................... 100
Thereafter......................................................................... 9,600
---------
Total minimum payments due under long-term obligations including current
maturities....................................................................... $ 73,670
---------
---------
(10) LEASES
(a) Capital Leases
The Company possesses certain equipment under capital leases. The
obligations of the Company under such leases are collateralized by the leased
equipment. The capitalized cost of this equipment was $1,417,000 at December 31,
1997 and 1996 with related accumulated amortization of $1,161,000, and
$1,142,000 at December 31, 1997 and 1996, respectively.
Future minimum lease payments under capital leases are as follows (in
thousands):
YEAR AMOUNT
- ------------------------------------------------------------------------------------- -----------
1998................................................................................. $ 37
1999................................................................................. --
2000................................................................................. --
2001................................................................................. --
2002................................................................................. --
Thereafter........................................................................... --
---
Total minimum lease payments......................................................... $ 37
Less--amounts representing interest.................................................. --
---
Present value of minimum lease payments.............................................. $ 37
---
---
(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
47
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) LEASES (CONTINUED)
expenses and are renewable at the option of the Company. Future minimum lease
payments under operating leases are as follows (in thousands):
TOTAL
PERSONAL OPERATING
YEAR FACILITIES PROPERTY LEASES
- ------------------------------------------------------------ --------- --------- -----------
1998........................................................ $ 2,660 $ 4,534 $ 7,194
1999........................................................ 2,363 3,953 6,316
2000........................................................ 1,800 2,789 4,589
2001........................................................ 914 1,564 2,478
2002........................................................ 793 370 1,163
Thereafter.................................................. 2,170 273 2,443
--------- --------- -----------
$ 10,700 $ 13,483 $ 24,183
--------- --------- -----------
--------- --------- -----------
During the years 1997, 1996 and 1995 rent expense was approximately
$12,421,000, $12,501,000, and $14,120,000, respectively.
(11) FEDERAL AND STATE INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
--------- --------- ---------
Federal: Current.............................................. $ -- $ (911) $ --
Deferred.................................................... 1,878 (1,359) (3,057)
State: Current................................................ 269 405 --
Deferred.................................................... 2,698 (910) (138)
--------- --------- ---------
Net provision for (benefit from) income taxes................. $ 4,845 $ (2,775) $ (3,195)
--------- --------- ---------
--------- --------- ---------
The sources of significant timing differences which gave rise to deferred
taxes were as follows (in thousands):
1997 1996 1995
--------- --------- ---------
Depreciation................................................... $ (370) $ (227) $ --
Provision for doubtful accounts................................ 2 (8) 181
Insurance reserves............................................. 415 (596) 302
Litigation..................................................... (157) 348 (228)
Tax attributes................................................. (864) (1,378) (2,582)
Permits........................................................ (212) (224) (224)
Other.......................................................... (288) (184) (644)
Valuation Allowance............................................ 6,050 -- --
--------- --------- ---------
Total deferred tax provision (benefit)......................... $ 4,576 $ (2,269) $ (3,195)
--------- --------- ---------
--------- --------- ---------
48
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FEDERAL AND STATE INCOME TAXES (CONTINUED)
The effective income tax rate varies from the amount computed using the
statutory federal income tax rate as follows:
1997 1996 1995
--------- --------- ---------
Statutory rate................................................ (34.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Valuation allowance......................................... 68.1 -- --
Adjustment of prior year's estimated attributes............. 11.9 -- --
Goodwill amortization....................................... 3.0 2.6 2.0
State income taxes, net of federal benefit.................. 3.0 (0.8) (0.9)
Other permanent differences................................. 2.5 3.6 1.2
--------- --------- ---------
Net provision for (benefit from) income taxes................. 54.5% (28.6)% (31.7)%
--------- --------- ---------
--------- --------- ---------
The components of the total deferred tax asset at December 31, 1997 and 1996
were as follows (in thousands):
1997 1996
--------- ---------
Current:
Workmens' compensation accrual........................................ $ 628 $ --
Provision for doubtful accounts....................................... 423 425
Litigation accruals................................................... 475 144
Accrued rent holiday.................................................. 88 --
Health insurance accrual.............................................. 34 350
Miscellaneous......................................................... 1,431 1,253
Tax credits........................................................... -- 980
Valuation allowance................................................... (1,498) --
--------- ---------
Total current deferred tax asset...................................... $ 1,581 $ 3,152
--------- ---------
Long-term:
Net operating loss carryforwards...................................... $ 8,996 $ 8,004
Tax credit carryforwards.............................................. 1,927 1,074
Insurance reserve..................................................... -- 627
Accrued rent holiday.................................................. -- 68
Other................................................................. 35 214
Valuation allowance................................................... (5,331) (779)
--------- ---------
Total long-term deferred tax asset.................................... $ 5,627 $ 9,208
--------- ---------
Total deferred tax asset.............................................. $ 7,208 $ 12,360
--------- ---------
--------- ---------
49
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FEDERAL AND STATE INCOME TAXES (CONTINUED)
The components of the total deferred tax liability at December 31, 1997 and
1996 were as follows (in thousands):
1997 1996
--------- ---------
Current:
Permits.................................................................. $ 224 $ 224
--------- ---------
Long-term:
Permits.................................................................. 1,777 1,990
Property, plant and equipment............................................ 5,094 5,463
--------- ---------
Total long-term deferred tax liability................................... 6,871 7,453
--------- ---------
Total deferred tax liability............................................... $ 7,095 $ 7,677
--------- ---------
Net deferred tax asset..................................................... $ 113 $ 4,683
--------- ---------
--------- ---------
SFAS 109, "Accounting for Income Taxes," requires that a valuation allowance
be established when, based on an evaluation of objective verifiable evidence,
there is a likelihood that some portion or all of the deferred tax assets will
not be realized. The Company continually reviews the adequacy of the valuation
allowance for deferred tax assets, and, in 1997, based upon this review, the
valuation allowance was increased by $6,050,000, which resulted in a non-cash
charge to operations of the same amount. The actual realization of the net
operating loss carryforwards and other tax assets depend on having future
taxable income of the appropriate character prior to their expiration.
For federal income tax purposes at December 31, 1997, the Company has
regular tax net operating loss carryforwards of $17,905,000 and alternative
minimum tax net operating loss carryforwards of $2,712,000, which may be used to
offset future taxable income, if any. These net operating loss carryforwards
expire as follows (in thousands):
ALTERNATIVE
YEAR EXPIRES MINIMUM TAX NOL NOL
- --------------------------------------------------------------- ------------------- ---------
1998........................................................... $ 421 $ --
1999........................................................... 118 --
2000........................................................... 6 --
2001........................................................... 420 489
2002........................................................... 225 648
2003........................................................... 1,522 2,196
2010 and thereafter............................................ -- 14,572
Amounts expiring in 2003 and prior may only be used to offset future taxable
income, if any, of former ChemClear entities. In addition, the Company had
$1,687,000 of alternative minimum tax credits, which have no expiration.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities, which may result in proposed assessments. The
Company received a notice of intent to assess state income taxes from one of the
states in which it operates. This case is currently undergoing administrative
appeal. If the Company loses the administrative appeal, the Company may be
required to make a payment of
50
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FEDERAL AND STATE INCOME TAXES (CONTINUED)
approximately $3,000,000 to the state. A decision is expected within six months
regarding the administrative appeal. The Company believes that it has properly
reported its state income and intends to contest the assessment vigorously.
While the Company believes that the final outcome of the dispute will not have a
material adverse effect on the Company's financial condition or results of
operations, no assurance can be given as to the final outcome of the audit, the
amount of any final adjustment or the potential impact of such adjustments on
the Company's financial condition or results of operations.
(12) LOSS PER SHARE
The following is a reconciliation of basic and diluted loss per share
computations (in thousands except for per share amounts):
YEAR ENDED 1997
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
------------ --------------- -----------
Net loss............................................. $ (13,728)
Less preferred dividends............................. 448
------------ ------ -----------
Basic and diluted EPS
(loss available to shareholders)................... $ (14,176) 9,959 $ (1.42)
------------ ------ -----------
------------ ------ -----------
YEAR ENDED 1996
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
------------ --------------- -----------
Net loss............................................. $ (6,943)
Less preferred dividends............................. 447
------------ ------ -----------
Basic and diluted EPS
(loss available to shareholders)................... $ (7,390) 9,653 $ (.77)
------------ ------ -----------
------------ ------ -----------
YEAR ENDED 1995
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
------------ --------------- -----------
Net loss............................................. $ (6,893)
Less preferred dividends............................. 447
------------ ------ -----------
Basic and diluted EPS
(loss available to shareholders)................... $ (7,340) 9,475 $ (.77)
------------ ------ -----------
------------ ------ -----------
The Company has issued options, warrants and convertible preferred stock
which are potentially dilutive to earnings. These have not been included in the
above calculations, since their inclusion would have been antidilutive for the
years ended December 31, 1997, 1996 and 1995.
(13) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
In 1987, the Company adopted a nonqualified stock option plan ("1987 Plan").
In 1992, the Company adopted an equity incentive plan, which provides for a
variety of incentive awards, including stock options
51
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
("1992 Plan"). As of December 31, 1997, all awards under the 1992 Plan were in
the form of nonqualified stock options. These options generally become
exercisable after a period of one to five years from the date of grant, subject
to certain employment requirements, and terminate ten years from the date of
grant. At December 31, 1997, the Company had reserved 955,600 and 1,250,000
shares of common stock for issuance under the 1987 and 1992 Plans, respectively.
Under the terms of the 1987 and 1992 Plans, as amended, options may be
granted to purchase shares of common stock at an exercise price less than the
fair market value on the date of grant. No compensation expense related to stock
option grants was recorded in 1997, 1996 or 1995, as the option exercise prices
were equal to, or greater than, the fair market value on the date of grant.
On December 19, 1996, the Compensation and Stock Option Committee of the
Board of Directors approved a plan whereby the stock options previously granted
to all employees at prices of $2.70 to $6.75 per share be repriced at then fair
market value ($2.125 per share) with the same vesting period commencing upon the
date of the award of their original option agreement, except for 61,945 options
for which the option life was extended five years.
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.
(b) Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), issued in 1995, defined
a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 123 as if the Company had applied
the new method of accounting are made below.
52
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plans for the year ended December 31, 1997 is as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
Outstanding at December 31, 1994............................... 1,061,877 $ 6.36
Granted...................................................... 362,120 3.12
Forfeited.................................................... (131,450) 6.85
Exercised.................................................... (5,556) 2.70
---------- -----
Outstanding at December 31, 1995............................... 1,286,991 5.42
Granted...................................................... 597,350 2.54
Forfeited.................................................... (417,393) 5.64
Exercised.................................................... -- --
---------- -----
Outstanding at December 31, 1996............................... 1,466,948 $ 2.52
Granted...................................................... 137,750 2.01
Forfeited.................................................... (293,338) 3.66
Exercised.................................................... (8,800) 2.13
---------- -----
Outstanding at December 31, 1997............................... 1,302,560 $ 2.21
---------- -----
---------- -----
Summarized information about stock options outstanding at December 31, 1997
is as follows:
EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- -------------- ----------- --------------- ----------- ----------- -----------
$ 1.56- 2.13 1,224,232 7.1 $ 2.10 553,144 $ 2.12
2.50- 3.38 61,120 8.2 2.65 10,120 3.33
6.50- 8.25 11,208 2.4 6.77 11,208 6.77
13.25-13.50 6,000 2.6 13.38 5,400 13.39
Options exercisable at December 31, 1995, 1996 and 1997 were 468,458,
508,780 and 579,872, respectively. The weighted average exercise prices for the
exercisable options at December 31, 1995, 1996 and 1997 were $6.20, $3.23, and
$2.34, respectively.
The fair value of each option granted during 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1997 1996
----------- -----------
Dividend yield........................................................... none none
Expected volatility...................................................... 61.9% 64.4%
Risk-free interest rate.................................................. 6.3% 5.6%
Expected life............................................................ 6.0 6.1
53
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
Weighted average fair value of options granted at fair value during:
1997................................................................. $ 0.93
---------
---------
1996................................................................. $ 0.97
---------
---------
1995................................................................. $ 2.14
---------
---------
Weighted average fair value of options granted at greater than fair value
during:
1997................................................................. $ 0.88
---------
---------
1996................................................................. $ --
---------
---------
1995................................................................. $ --
---------
---------
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance with
SFAS 123, the Company's net income and net income per common share for the years
ended December 31, 1997, 1996 and 1995, would approximate the pro forma amounts
as compared to the amounts reported:
NET LOSS
PER BASIC AND
NET LOSS DILUTED SHARE
-------------- -------------
As reported:
1997......................................................... $ (13,728,000) $ (1.42)
1996......................................................... (6,943,000) (0.77)
1995......................................................... (6,893,000) (0.77)
Proforma:
1997......................................................... $ (14,091,000) $ (1.46)
1996......................................................... (7,251,000) (0.81)
1995......................................................... (6,922,000) (0.78)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
(c) Employee Stock Purchase Plan
In May of 1995, the Company's stockholders approved an Employee Stock
Purchase Plan (the "ESPP"), which is a qualified employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended, through
which employees of the Company are given the opportunity to purchase shares of
common stock. According to the ESPP, a total of one million shares of common
stock has been reserved for offering to employees over a period of five years,
in quarterly offerings of 50,000 shares each plus any shares not issued in any
previous quarter, commencing on July 1, 1995 and on the first day of each
quarter thereafter through April 1, 2000. Employees who elect to participate in
an offering may utilize up to 10% of their payroll for the purchase of common
stock at 85% of the closing price of the stock on the first day of such
quarterly offering or, if lower, 85% of the closing price on the last day of the
offering. As of December 31, 1997 and 1996, 99,000 and 65,000 shares,
respectively, of common stock had
54
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
been purchased under the ESPP. The weighted average fair per share value of the
purchase rights granted under the ESPP during 1997, 1996 and 1995 were $0.33,
$0.72 and $0.84, respectively.
(d) Warrants
In connection with the issuance of senior subordinated notes payable in May
1989, the Company issued warrants to purchase 100,000 shares of common stock at
$20.75 per share in exchange for $300,000. In April 1990, the exercise price of
the warrants was reduced to $9 per share. In February 1991, in connection with
the refinancing of the Company's short-term debt, the exercise price was further
reduced to 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.
(e) 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. There
is no expiration date associated with the conversion option. The Company had the
option to redeem such Preferred Stock at liquidation value plus a redemption
premium of 5%, if the redemption occurred on or before August 16, 1997;
thereafter, the redemption premium declines 1% each year. Each preferred share
entitles its holder to receive a cumulative annual cash dividend of $4.00 per
share, or at the election of the Company, a common stock dividend of equivalent
value.
Dividends on the Preferred Stock are payable on the 15th day of January,
April, July and October, at the rate of $1.00 per share, per quarter. The
Company elected to pay the 1997 dividends in common stock with a market value
equal to the amount of the dividend payable. During 1997 the Company issued
250,523 shares of common stock to the holders of the Preferred Stock. The
Company anticipates that the Preferred Stock dividends payable through 1998 will
be paid in common stock.
(14) EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. The plan allows employees to
make contributions up to a specified percentage of their compensation. The
Company modified the plan during 1996 whereby the Company has an option of
contributing to the plan. No contribution was made by the Company in 1997 or
1996. During 1995, the Company's contribution aggregated approximately $834,000.
(15) RELATED PARTY TRANSACTIONS
The Company leased 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. The Company did not elect its
option to renew the lease. Total rent expense charged to operations for the
years ending December 31,
55
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) RELATED PARTY TRANSACTIONS (CONTINUED)
1996, and 1995 was $234,000 and $703,000, respectively. See Note 10 for further
discussion of lease commitments.
(16) QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenue........................................... $ 40,374 $ 47,363 $ 50,137 $ 45,893
Income (loss) from operations..................... (1,676) 1,501 1,329 (1,655)
Net loss.......................................... (1,983) (883) (786) (10,076)
Net loss per common share......................... (.21) (.10) (.09) (1.02)
1996
- --------------------------------------------------
Revenue........................................... $ 45,736 $ 49,638 $ 50,738 $ 54,101
Income (loss) from operations..................... (847) (1,093) 39 1,353
Net loss.......................................... (1,642) (2,605) (1,742) (954)
Net loss per common share......................... (.18) (.28) (.19) (.11)
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. The first quarter of 1997 includes $800,000 of net
other income, as discussed in Note 18.
(17) NONRECURRING CHARGES
During 1995, the Company recorded a $4,247,000 nonrecurring charge in
connection with the reengineering of the Company's operations and the write-off
of a non-performing asset, as well as the anticipated losses on the sale of
certain non-core properties. Under the reengineering program, the Company closed
or downsized small, satellite offices; eliminated positions, which were
primarily administrative; downsized and relocated the laboratory to its waste
handling facility in Braintree, Massachusetts; and relocated its corporate
headquarters to a new location in Braintree, Massachusetts. The components of
the nonrecurring charge are as follows:
Severance and related costs..................................... $1,097,000
Write-down of non-performing asset.............................. 1,110,000
Real estate related charges..................................... 2,040,000
---------
$4,247,000
---------
---------
(18) OTHER INCOME
During the first quarter of 1997, the Company recorded a $950,000 receivable
in connection with the settlement of a lawsuit and incurred approximately
$150,000 in costs related to the litigation during the first quarter. The
Company recognized a pre-tax gain, net of related legal fees, of $800,000
resulting from the settlement, which is included in other income, net, in the
consolidated statements of operations.
56
CLEAN HARBORS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
ALLOWANCE FOR BEGINNING OPERATING FROM END OF
DOUBTFUL ACCOUNTS OF PERIOD EXPENSE RESERVES(A) PERIOD
- ----------------------------------------------- ----------- ------------- ------------- ---------
1995........................................... $ 1,495 $ 381 $ 831 $ 1,045
1996........................................... 1,045 651 633 1,063
1997........................................... 1,063 683 696 1,050
- ------------------------
(a) Amounts deemed uncollectible, net of recoveries.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
The information called for by Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated herein by reference to the
registrant's definitive proxy statement for its 1998 Annual Meeting of
Stockholders, which definitive proxy statement is expected to be filed with the
Commission not later than April 30, 1998.
For the purpose of calculating the aggregate market value of the voting
stock of the registrant held by nonaffiliates as shown on the cover page of this
report, it has been assumed that the directors and executive officers of the
registrant, as will be set forth in the Company's definitive proxy statement for
its 1998 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................................................................... 30
Consolidated Statements of Income for the Three Years Ended December 31, 1997....................... 31
Consolidated Balance Sheets, December 31, 1997 and 1996............................................. 32-33
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997................... 34-35
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1997......... 36
Notes to Consolidated Financial Statements.......................................................... 37-56
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts...................................................... 57
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
58
3. Exhibits:
Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Commission. Upon request to the Company and payment of
a reasonable fee, copies of the individual exhibits will be furnished. The
Company undertakes to furnish to the Commission upon request copies of
instruments (in addition to the exhibits listed below) relating to the Company's
long-term debt.
ITEM NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------------------------------------- ----------------
3.1 Restated Articles of Organization of Clean Harbors, Inc. and amendments thereto...... See Note:
(1)
3.2 Certificate of Vote of Directors Establishing a Series of a Class of Stock (Series B
Convertible Preferred Stock)....................................................... (2)
3.4A Amended and Restated By-laws of Clean Harbors, Inc................................... (3)
4.1 Senior Note Indenture dated as of August 4, 1994, between Clean Harbors, Inc., the
Guarantor Subsidiaries of the Company, and Shawmut Bank, N.A., as trustee for the
holders of the Company's 12.50% Senior Notes due May 15, 2001...................... (4)
4.2 Loan and Security Agreement dated May 8, 1995 by and between Congress Financial
Corporation (New England) and the Company's Subsidiaries as Borrowers.............. (5)
4.3 Term Promissory Note dated May 8, 1995 from the Company's Subsidiaries as Debtors to
Congress Financial Corporation (New England) in the amount of $10,000,000.......... (5)
4.4 Guarantee dated May 8, 1995 by Clean Harbors, Inc. to Congress Financial Corporation
(New England) of the obligations of the Company's Subsidiaries under the Financing
Agreements......................................................................... (5)
4.5 General Security Agreement dated May 8, 1995 by Clean Harbors, Inc. in favor of
Congress Financial Corporation (New England)....................................... (5)
4.6 Letter Agreement dated November 21, 1995 by and between Congress Financial
Corporation (New England) and the Company's Subsidiaries as Borrowers.............. (8)
4.7 Second Amendment to Financing Agreements dated March 20, 1996 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers and
Clean Harbors, Inc. as Guarantor................................................... (8)
4.8 Amended and Restated Term Promissory Note dated March 20, 1996 from the Company's
Subsidiaries as Debtors to Congress Financial Corporation (New England) in the
amount of $15,000,000.............................................................. (8)
4.9 Third Amendment to Financing Agreements dated September 6, 1996 by and between
Congress Financial Corporation (New England), the Company's Subsidiaries as
Borrowers, and Clean Harbors, Inc. as Guarantor.................................... (9)
4.10 Fourth Amendment to Financing Agreements dated June 20, 1997 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and
Clean Harbors, Inc. as Guarantor................................................... Filed herewith
4.11 Fifth Amendment to Financing Agreements dated January 1, 1998 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and
Clean Harbors, Inc. as Guarantor................................................... Filed herewith
59
ITEM NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------------------------------------- ----------------
10.35 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment
Systems, Inc. and Southdown, Inc. dated as of June 23, 1992........................ (2)
10.36 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment
Systems, Inc. and Southdown, Inc. dated as of February 16, 1993.................... (2)
10.37 Clean Harbors, Inc. 1987 Stock Option Plan........................................... (6)
10.38 Clean Harbors, Inc. 1992 Equity Incentive Plan....................................... (6)
10.39 Asset Purchase Agreement among Clean Harbors of Chicago, Inc., Clean Harbors, Inc.,
CWM Chemical Services, Inc. and Chemical Waste Management, Inc. dated as of January
30, 1995........................................................................... (7)
10.40 Asset Purchase Agreement among Clean Harbors Technology Corporation, Clean Harbors
Inc. and Ecova Corporation dated as of March 31, 1995.............................. (5)
10.41 Disposal Services Agreement by and between Chemical Waste Management, Inc. and its
subsidiary and affiliated companies and Clean Harbors Environmental Services, Inc.
and its affiliated companies dated as of October 31, 1995.......................... (8)
10.42 Employment Agreement between the Company and David A. Eckert dated March 14, 1996, as
modified on March 4, 1998.......................................................... Filed herewith
21 Subsidiaries......................................................................... Filed herewith
23 Consent of Independent Accountants................................................... Filed herewith
24 Power of Attorney for Christy W. Bell, John F. Kaslow, Daniel J. McCarthy, John T.
Preston, and Lorne R. Waxlax....................................................... Filed herewith
27 Financial Data Schedule.............................................................. Filed herewith
- ------------------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Form S-1
Registration Statement (No. 33-17565).
(2) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1992.
(3) Incorporated by reference to Exhibit 3.4A to the Company's Form 10-K Annual
Report for the Fiscal Year Ended February 28, 1991.
(4) Incorporated by reference to Exhibit 4.1 to the Company's Form S-2
Registration Statement (No. 33-54191).
(5) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-Q Quarterly Report for the Quarterly Period Ended June 30, 1995.
(6) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1993.
(7) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1994.
(8) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1995.
(9) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-Q Quarterly Report for the Quarterly Period ended September 30,
1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 27, 1998.
CLEAN HARBORS, INC.
By: /s/ ALAN S. MCKIM,
-----------------------------------------
Alan S. Mckim,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ALAN S. MCKIM Chairman Of The Board Of
- ------------------------------ Directors, President and March 27, 1998
Alan S. McKim Chief Executive Officer
Vice President,
/s/ CARL D. PASCHETAG, JR. Financial Controller and
- ------------------------------ Treasurer (principal March 27, 1998
Carl D. Paschetag, Jr. financial and accounting
officer)
* Director
- ------------------------------ March 27, 1998
Christy W. Bell
* Director
- ------------------------------ March 27, 1998
John F. Kaslow
* Director
- ------------------------------ March 27, 1998
Daniel J. McCarthy
* Director
- ------------------------------ March 27, 1998
John T. Preston
* Director
- ------------------------------ March 27, 1998
Lorne R. Waxlax
*By: -------------------------
Alan S. McKim
ATTORNEY-IN-FACT
61