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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MARCH 30, 1999
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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, 1998
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 15, 1999, the aggregate market value of the voting stock of the
registrant held by nonaffiliates of the registrant was $10,260,091. Reference is
made to Part III of this report for the assumptions on which this calculation is
based.
On March 15, 1999, there were outstanding 10,521,355 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, 1999) are incorporated by reference into
part III of this report.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements, which are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "plans to," "estimates,"
"projects," or similar expressions. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in the fiscal year
1999.
PART I
ITEM 1. BUSINESS
Clean Harbors, Inc., through its subsidiaries (collectively, the "Company"),
operates in one industry segment and provides a wide range of hazardous waste
management services to a diversified customer base in the United States and
Puerto Rico. The Company is managed on a regional basis, with a full range of
services being offered in the Northeast, Mid-Atlantic and Midwest regions, and
has a strong presence in the Southern region. The Company has a network of sales
and regional logistics offices and service centers located in 23 states and
Puerto Rico. The service centers interface with customers, and perform a variety
of environmental remediation and hazardous waste management activities. The
Company has 12 waste management facilities around the country which store, treat
and dispose of industrial wastes. The Company also provides analytical testing,
technical, and consulting and information management services, which complement
its primary services and permit it to offer complete solutions to its customers'
complex environmental requirements.
The Company is one of the largest providers of industrial waste management
services in the United States. There are three major competitors, namely
Chemical Waste Management, Inc., Philip Services Corp. and Safety-Kleen Corp.,
and a number of smaller companies against which the Company competes. The
Company seeks to be recognized by its customers as the premier supplier of a
broad range of value-added industrial waste management services based upon
quality, responsiveness, customer service, information technologies, breadth of
product offerings and cost effectiveness. The Company's principal customers are
utility, chemical, petroleum, transportation and industrial firms, educational
institutions, and other waste management companies and government agencies.
The Company's earnings have been adversely affected by continued poor
conditions in the hazardous waste disposal industry. Intense price competition,
waste minimization by industrial firms, 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. The
Company has responded to industry conditions by implementing aggressive cost
cutting measures and by enhancing revenue through increasing market share. These
efforts to improve profitability are continuing.
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, and health and safety staff. The
Company adheres to a risk management program designed to reduce potential
liabilities for the Company and its customers.
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The Company was incorporated in the state of Massachusetts in 1980. The
principal offices of the Company are located in Braintree, Massachusetts.
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 and information technologies in managing their overall environmental
program.
In order to maintain and enhance its position in the industrial waste
management industry within the core markets in which it operates, the Company
strives to achieve internal growth through expanding the network of service
centers within the primary regions in which it operates, increasing utilization
of existing facilities by increasing volumes of waste processed, developing new
waste management services, and providing consulting and information management
services. In addition, the Company has achieved external growth through
strategic acquisitions.
EXPANDED NETWORK OF SERVICE CENTERS. The Company currently has 17 service
centers, 4 of which were opened in 1998. By opening additional service centers
within the regions in which it operates, the Company believes that it can, with
minimal expenditure of funds, increase its market share. The additional waste
that is generated within its territory can be sent to existing waste processing
facilities.
IMPROVED UTILIZATION OF WASTE MANAGEMENT FACILITIES. The Company currently
has 12 waste management facilities which represent a substantial investment in
permits, plants and equipment. This network of facilities provides the Company
with significant operating leverage. There are opportunities to expand waste
handling capacity at these facilities by modifying the terms of the existing
permits and by adding capital equipment and new technology. Through selected
permit modifications, the Company can expand the range of treatment services
which it offers to its customers without the large capital investment necessary
to acquire or build new waste management facilities.
NEW WASTE MANAGEMENT SERVICES. Industrial waste generators are demanding
alternatives to traditional waste disposal methods in order to increase
recycling and reclamation and to minimize the end disposal of hazardous waste.
The Company utilizes its technological expertise and innovation to improve and
expand the range of services which it offers to its customers, and to develop
less expensive methods of disposing of hazardous waste.
In 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.
CONSULTING AND INFORMATION MANAGEMENT SERVICES. In 1998, the Company
created a new subsidiary, Harbor Management Consultants, Inc. ("Harbor
Management") to provide consulting services and environmental information
management systems to a broad array of customers throughout the United States.
The Company believes that there is an opportunity to bring additional value to
the environmental departments of generators of hazardous waste by providing the
expertise required to streamline their environmental programs. Harbor Management
provides software development, systems integration, consulting and onsite
management services.
CAPITALIZATION ON INDUSTRY CONSOLIDATION. The Company believes that its
large industrial customers will ultimately require a comprehensive range of
waste treatment capabilities, site 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 is following a strategy of acquiring companies in
existing, contiguous and new market areas. Acquisitions within the Company's
existing areas of operation serve to capture incremental market share, while
geographic expansion creates new market opportunities. The
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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 two acquisitions since January 1, 1994.
DATE OF
ACQUISITION ACQUISITION PURCHASE PRICE
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1994 The assets of a hazardous and nonhazardous oil reclamation facility located near $0.4 million
Richmond, Virginia
1995 The assets of a newly constructed hazardous waste incinerator located in Kimball, $5.2 million
Nebraska
Prior to completing any acquisition, the Company strives to investigate the
current and contingent liabilities of the company or assets to be acquired,
including potential liabilities arising from noncompliance with environmental
laws by prior owners for which the Company, as a successor owner, might become
responsible. The Company also seeks to minimize the impact of potential
liabilities by obtaining indemnities and warranties from the sellers which may
be supported by deferring payment of or by escrowing a portion of the purchase
price. See "Legal Proceedings" below for a description of the indemnities which
the Company has received in connection with past acquisitions.
SERVICES PROVIDED BY THE COMPANY
SERVICES
The Company provides a wide range of hazardous waste management services.
The services provided can be discussed in three categories; treatment and
disposal of industrial wastes ("Treatment and Disposal"); site services provided
at customer sites ("Site Services"); and specialized repackaging, treatment and
disposal services for laboratory chemicals and household hazardous wastes
("CleanPack" -Registered Trademark-). Although they are discussed separately to
provide an understanding of the services offered, Site Services and CleanPack as
well as the collection of industrial wastes from customers are managed as one
full line service offering. Site Services, CleanPack and the collection of
industrial wastes from customers are all typically provided from one service
location. The Company markets these services through its sales organizations
and, in many instances, services in one category support or lead to work in
other service categories.
In addition to these three principal categories, the Company also provides
technical services such as analytical testing, site characterization,
remediation, personnel training, and consulting and information management
services. Such technical services primarily support the Company's principal
services, although technical services are also offered 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
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"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 and non-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;
-- heavy metals, ink wastes and plating solutions;
-- landfill leachates and scrubber waters; and
-- oily wastes and water soluble coolants.
Wastewater treatment can be economical as well as environmentally sound, by
combining different wastewaters in a "batching" process that reduces costs for
multiple waste stream disposal. For instance, acidic waste from one source can
be neutralized with alkaline from a second source to produce a neutral solution.
PHYSICAL TREATMENT. Physical treatment methods include distillation,
separation and stabilization. These methods are used to reduce the volume or
toxicity of waste material or to make it suitable for further treatment, reuse,
or disposal. Distillation uses either heat or vacuum to purify liquids for
resale. Separation utilizes techniques such as sedimentation, filtration,
flocculation and centrifugation to remove solid materials from liquids.
Stabilization refers to a category of waste treatment processes designed to
reduce contaminant mobility or solubility and convert waste to a more chemically
stable form. Stabilization 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.
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THERMAL TREATMENT. Thermal treatment refers to processes that use high
temperature combustion as the principal means of waste destruction. The
Company's state-of-the-art hazardous waste incinerator in Kimball, Nebraska,
uses a fluidized bed thermal oxidation unit for maximum destruction efficiency
of hazardous waste.
RESOURCE RECOVERY. Resource recovery involves the treatment of wastes using
various methods which effectively remove contaminants from the original material
to restore its fitness for its intended purpose and to reduce the volume of
waste requiring disposal. The Company operates treatment systems for the
reclamation and reuse of certain wastes, particularly solvent-based wastes
generated by industrial cleaning operations, metal finishing and other
manufacturing processes.
Spent solvents that can be recycled are processed through thin film
evaporators and other processing equipment and are distilled into usable
products. Upon recovery of these products, the Company either returns the
recovered solvents to the original generator or sells them to third parties.
Organic liquids and solids with sufficient heat value are blended to meet
strict specifications for use as supplemental fuels for cement kilns, industrial
furnaces and other high-efficiency boilers. The Company has installed fuels
blending equipment at its Chicago and Cincinnati plants to prepare these
supplemental fuels. The Company has established relationships with a number of
supplemental fuel users that are licensed to accept the blended fuel material.
Although the Company pays a fee to the users who accept this product, this
disposal method is substantially less costly than other disposal methods.
CLEAN EXTRACTION SYSTEM. The Clean Extraction System ("CES") is a hazardous
waste treatment system commercialized by the Company at its Baltimore facility,
which extracts organic compounds from industrial wastewater. CES removes organic
contaminants such as gasoline, acetone, methylene chloride, pesticides and other
chemicals from industrial wastewater known as "lean water." Lean water is
generated by firms such as oil companies, utilities, and manufacturers of
specialty chemicals and pharmaceuticals.
The CES process enables the Company to handle a broad range of complex,
difficult to treat organic and inorganic wastewaters which would otherwise be
sent to other companies for disposal. CES offers the Company's industrial
customers, such as chemical or pharmaceutical companies, an attractive recycling
alternative to incineration or deep well injection of their waste 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 parties. The Company also
arranges for the disposal of its customers' hazardous wastes which cannot be
treated at Company-owned facilities. Wastes which cannot be disposed of in the
Nebraska hazardous waste incinerator are sent to other incinerators, landfills
and disposal facilities operated by third parties. On occasion, a customer's
waste may be shipped directly to another disposal company, such as a landfill or
incinerator, if the size of the waste shipment or its characteristics are such
that the waste does not need to pass through one of the Company's own waste
management facilities. The Company has negotiated favorable commercial terms
with a number of disposal companies.
SITE SERVICES
The Company provides a wide range of environmental site services to maintain
industrial facilities and process equipment, as well as clean up or contain
actual or threatened releases of hazardous materials into the environment. These
services are provided primarily to large chemical, petroleum, transportation,
utility, industrial waste management companies and governmental agencies. The
Company's strategy is to 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,
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hydroblasting, vacuuming, and other methods to remove deposits from process
equipment, such as paint booths and plating lines, and storage facilities for
material used in the manufacturing or production process, such as feedstocks,
chemicals, fuels, paints, oils, inks, metals and many other items. The Company's
service centers are equipped with special equipment, such as high volume pumps,
pressure washers, nonsparking and chemical resistant tools, and a variety of
personal protective equipment, to perform maintenance services quickly, usually
during "off periods" to minimize the customer's production downtime.
SURFACE REMEDIATION. Surface remediation projects arise in two principal
areas: the planned cleanup of hazardous waste sites and the cleanup of
accidental spills and discharges of hazardous materials, such as those resulting
from transportation and industrial accidents. In addition, some surface
remediation projects involve the cleanup and maintenance of industrial lagoons,
ponds and other surface impoundments on a recurring basis. In all of these
cases, an extremely broad range of hazardous substances may be encountered.
Surface remediation projects generally require considerable interaction
among technical and project management services. Following the selection of the
preferred remedial alternative, the project team identifies the processes and
equipment for cleanup. Simultaneously, the Company's health and safety staff
develops a site safety plan for the project. Remedial approaches usually include
physical removal, mechanical dewatering and stabilization, or encapsulation.
GROUNDWATER RESTORATION. The Company's groundwater restoration services
typically involve response to above-ground spills, leaking underground tanks and
lines, hazardous waste landfills, and leaking surface impoundments. Groundwater
restoration efforts often require complex recovery systems, including recovery
drains or wells, air strippers, biodegradation or carbon filtration systems and
containment barriers. These systems and technologies can be used individually or
in combination to remove a full range of floating or dissolved organic compounds
from groundwater. The Company designs and fabricates mobile or fixed site
groundwater treatment systems.
SITE AND FACILITY DECONTAMINATION. Site and facility decontamination
involves the cleanup and restoration of buildings, equipment, and other sites
and facilities that have been contaminated by exposure to hazardous materials
during a manufacturing process, or by fires, process malfunctions, spills or
other accidents. The Company's projects have included decontamination of
electrical generating stations, electrical and electronics components,
transformer vaults, and commercial, educational, industrial, laboratory,
research and manufacturing facilities.
EMERGENCY RESPONSE. The Company undertakes environmental remediation
projects on both a planned and emergency basis. Emergency response actions may
develop into planned remedial action projects when soil, groundwater, buildings
or facilities are extensively contaminated. The Company has established
specially trained emergency response teams which operate on a 24-hour basis from
their service centers. The Company has also established a program called
CleanER-TM-, which is a sub-contractor network responding to emergency response
actions. Many of the Company's remediation activities result from a response to
an emergency situation by one of its response teams. These incidents can result
from transportation accidents involving chemical substances, fires at chemical
facilities or hazardous waste sites, transformer fires or explosions involving
PCBs, and other unanticipated developments when the substances involved pose an
immediate threat to public health or the environment, such as possible
groundwater contamination.
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 site managers
in supervising these projects during and subsequent to the cleanup. The steps
performed by the Company include rapid response, containment and
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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 handling, packaging, transportation and
disposal of laboratory quantities of outdated hazardous chemicals and household
hazardous wastes, and waste pesticides and herbicides.
CleanPack-Registered Trademark- chemists utilize the Company's CHOICE-TM- waste
management software system to support the Company's packaging services and
complete the regulatory information required for every pick-up. The
CleanPack-Registered Trademark- operation services a wide variety of customers
including:
-- pharmaceutical companies;
-- engineering, and research and development departments of industrial
companies;
-- college, university and high school laboratories;
-- commercial laboratories;
-- hospitals and medical care laboratories and Veterans Administration
facilities;
-- state agencies, regional and county programs, and local municipalities;
and
-- thousands of farmers and residents through household hazardous waste and
pesticide/herbicide collection programs.
CleanPack-Registered Trademark- chemists collect, identify, label, and
package waste into Department of Transportation approved containers. Lab packed
wastes are then transported to one of the Company's facilities where the waste
is consolidated for recycling, reclamation, fuels blending, aqueous treatment,
incineration, or secure chemical landfill.
Other services provided by the Company's CleanPack-Registered Trademark-
operations include:
HIGH HAZARD SERVICES. Reactive Materials Technicians utilize specialized
equipment and training to stabilize and desensitize highly reactive and
potentially explosive chemicals.
CLEANPACK-REGISTERED TRADEMARK- SERVICES. The Company provides training,
technical support, and disposal services for customers with the resources and
experience to package their own waste chemicals.
LABORATORY MOVE SERVICES. CleanPack-Registered Trademark- chemists properly
and safely segregate, package, transport, and un-package hazardous chemicals
being moved from older laboratories to newer laboratories.
TECHNICAL SERVICES
Technical services consist primarily of analytical testing, site
characterization, remediation, personnel training, and consulting and
information management services. 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, 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
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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.
CONSULTING AND INFORMATION MANAGEMENT SERVICES. Harbor Management provides
customers with the expertise to streamline their environmental programs through
software development, systems integration, consulting and on-site management
services. The Company has developed a proprietary software product
CHOICE-Registered Trademark-, as an on-site software product that provides such
key features as: waste tracking, manifesting, waste profiling, labeling, least
cost procurement and cost allocation reporting. Customers can link their data
via the internet to the Company through CleanLink-Registered Trademark- web
enabled software. CHOICE-Registered Trademark- combined with
CleanLink-Registered Trademark- provides customers with a total information
package of inventory management, waste shipment and waste tracking information.
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 as
well as many in the Midwest. The Company's customers are primarily chemical,
pharmaceutical, petroleum, transportation, utility and industrial firms, other
waste management companies, and government agencies. Management believes that
the Company's diverse customer base, in terms of number, industry and geographic
location, as well as its large presence in New England and the Mid-Atlantic,
provide it with a recurring revenue base. The Company estimates that more than
83% of its revenues are derived from previously served customers with recurring
needs for the Company's services. For the years ended December 31, 1998, 1997
and 1996, 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 industry groupings each
provided over 10% of the Company's revenue in 1998. Approximately 23% of the
Company's revenues in 1998 were from the chemical and allied products
industries, while approximately 12% were from the electric, gas and sanitary
industries. In 1997, those same two industry groupings each provided over 10% of
the Company's revenue, with approximately 15% of the Company's revenues from the
chemical and allied products industries and
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approximately 13% from the electric, gas and sanitary industries. In addition to
serving industrial customers such as utilities, railroads, pipelines,
pharmaceutical manufacturers, and chemical companies, the Company serves health
care and educational institutions, federal, state and local governmental bodies,
and thousands of small quantity generators.
Under applicable environmental laws and regulations, generators of hazardous
wastes retain legal liability for the proper handling of those wastes up to and
including their ultimate disposal. In response to these potential concerns, many
large generators of industrial wastes and other purchasers of waste management
services (such as general contractors on major remediation projects) have
decreased the number of providers they use for such services. The Company has
been selected as an approved vendor by large generators because the Company
possesses comprehensive collection, recycling, treatment, transportation,
disposal, and waste tracking capabilities and has the expertise necessary to
comply with applicable environmental laws and regulations. By becoming an
approved vendor for a large waste generator or other purchaser, the Company
becomes eligible to provide waste management services to the multiple plants and
projects of each generator or purchaser located in the Company's service areas.
However, in order to obtain such approved vendor status, it may be necessary for
the Company to bid against other qualified competitors in terms of the services
and pricing to be provided. Furthermore, large generators or other purchasers of
waste management services often periodically audit the Company's facilities and
operations to ensure that the Company's waste management services are being
performed in compliance with applicable laws and regulations and other criteria
established by the Company and 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. The Company's internal
operating protocols are in many instances more stringent than those imposed by
regulation. The Company's compliance program has been developed for each of its
waste management facilities and service centers under the direction of the
Company's corporate staff. The compliance, and health and safety staffs are
responsible for permitting facilities 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 Regulatory Affairs or the Director of
Health and Safety, who in turn report to the Company's General Counsel.
ENVIRONMENTAL LIABILITIES AND CAPITAL EXPENDITURES
The Company operates facilities that treat or store hazardous waste. Such
facilities must obtain a RCRA license from the EPA, or an authorized state
agency, and must comply with certain operating requirements. The EPA has
developed a system for assessing the relative environmental clean-up priority of
RCRA facilities called the National Corrective Action Prioritization System,
with a High, Medium or Low ranking for each facility. None of the Company's RCRA
facilities have been assessed a high priority.
9
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):
1998 1997 1996
--------- --------- ---------
Environmental expenditures capitalized................................ $ 674 $ 564 $ 420
Environmental expenses incurred....................................... 95 256 176
--------- --------- ---------
--------- --------- ---------
$ 769 $ 820 $ 596
--------- --------- ---------
--------- --------- ---------
Although further investigation may cause a change in estimates, the Company
expects remediation expenditures of the magnitude incurred for the last three
years to continue for the foreseeable future. The Company believes that
environmental cleanup can be financed out of results from operations and that
compliance with environmental laws will not adversely affect its competitive
position.
MANAGEMENT OF RISKS
The Company adheres to a program of risk management policies and practices
designed to reduce potential liability, as well as to manage customers' ongoing
environmental exposures. This program includes installation of risk management
systems at the Company's facilities, such as fire suppression, employee
training, environmental auditing, and policy decisions restricting the types of
wastes handled. The Company evaluates all revenue opportunities and declines
those which it believes involve unacceptable risks.
The Company disposes of its wastes at the Company's Kimball incineration
facility, Cleveland and Baltimore waste water treatment facilities 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 a handler of 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 at the Company's facilities and during transportation of waste from
the time waste is picked up from a customer until its delivery to the final
disposal site. The Company's $30,000,000 excess automobile liability insurance
provides additional coverage for any in-transit pollution losses from accidents
over and above the Lloyds of London coverage, so that it has a total of
$59,000,000 of in-transit coverage.
Federal and state regulations require liability insurance coverage for all
facilities that treat, store or dispose of hazardous waste. In 1989, the Company
established a captive insurance company pursuant to the Federal Risk Retention
Act of 1986. This company qualifies as a licensed insurance company and is
10
authorized to write professional liability and pollution liability insurance for
the Company and its operating subsidiaries. RCRA, the Toxic Substances Control
Act ("TSCA") 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 facilities cease operation.
Closure would include the cost of removing the waste stored at a facility which
ceased operating, and sending the material to another company for disposal. The
Company has obtained surety bonds to provide such financial assurance for
closure of the waste management facilities it currently operates, with the
exception of the Kimball incinerator, and the lagoons and defunct CWM
incinerator located at the Chicago facility. The Kimball incinerator has closure
and post-closure insurance provided by a commercial insurer. Closure for the
lagoons and defunct CWM incinerator at the Chicago facility is provided by an
insurance company owned by the Company. This liability is fully funded.
The Company's ability to continue conducting its industrial waste management
operations could be adversely affected if the Company should become unable to
obtain sufficient insurance or surety bonds to meet its business and regulatory
requirements in the future. The availability of insurance may also be influenced
by developments within the insurance industry, although other businesses in the
industrial waste management industry would be similarly impacted by such
developments.
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures, as well as those risks required to be insured by law or
contract. It is the policy of the Company to retain a significant portion of
certain expected losses related primarily to workers' compensation, 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 three major companies, namely Chemical Waste
Management, Inc. Philip Services Corp. and Safety-Kleen Corp., and numerous
small companies. Each of such competitors is able to provide one or more of the
industrial waste management services offered by the Company, and some of which
have access to greater financial resources. The Company believes 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 supported by unique
information technologies capable of managing the customers' overall
environmental program 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 site services, the Company's competitors include several major national
and regional environmental services firms, as well as numerous smaller local
firms. The Company believes that availability of skilled technical professional
personnel, quality of performance, diversity of services and price are the key
competitive factors.
EMPLOYEES
As of March 15, 1999, the Company employed 1,228 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.
11
ITEM 2. PROPERTIES
The properties of the Company consist primarily of its 12 waste management
facilities and 17 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 with terms (including extensions) that
expire September 2020, (ii) the Woburn, Massachusetts waste oil treatment and
storage facility which is leased with terms (including extensions) that expire
February 2013, and (iii) the Virginia waste oil treatment and storage facility
which is leased with terms (including extensions) that expire February 2002. In
connection with the placement of an industrial revenue bond in 1996, the Company
entered into a facilities lease with the City of Kimball, Nebraska, whereby the
City acquired a leasehold interest in the Kimball incinerator and the Company
leased the incinerator back from the City. The Company retains title to the
incinerator.
HAZARDOUS WASTE MANAGEMENT FACILITIES. The Company operates hazardous waste
management facilities at which it processes, treats and temporarily stores
hazardous wastes for later resale, reuse, or off-site treatment or disposal.
Every facility that treats, stores or disposes of hazardous wastes must obtain a
license from the federal EPA or an authorized state agency and must comply with
certain operating requirements. See "Environmental Regulation--Federal
Regulation of Hazardous Waste" below for a description of licenses issued under
RCRA. The Company's hazardous waste management facilities are subject to RCRA
licensing and have been issued RCRA Part B licenses, except for the Virginia
facility which operates under interim status, or are regulated under the Clean
Water Act or state or municipal regulations.
In recent years the Company has made substantial modifications and
improvements to the physical plant, and treatment and process equipment at its
treatment facilities. These modifications are consistent with the Company's
strategy to upgrade the quality and efficiency of treatment services, to expand
the range of services provided, and to ensure regulatory compliance and
operating efficiencies at these facilities. Major features of this program are
the addition of new treatment systems, 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 under certain circumstances would be able
to process significantly increased volumes of hazardous wastes.
CHICAGO, IL. The Chicago, Illinois facility is located on the south side of
Chicago, on Lake Calumet. It provides treatment of nonhazardous and hazardous
industrial wastewaters, hazardous waste fuels blending, drummed waste processing
and consolidation, and transfer and repackaging of laboratory chemicals into lab
pack containers. In November 1993, the Illinois EPA issued a Part B license for
a ten-year term.
In November, 1995, the Company acquired assets from Chemical Waste
Management, Inc. ("ChemWaste") on an adjoining leased site, together with the
existing improvements, in exchange for sharing the costs of dismantling an
existing hazardous waste incinerator and cleaning up the adjoining site. The
existing improvements on the ChemWaste site, and other improvements completed
from 1995 through 1997 by the Company, have expanded the waste storage and
handling capabilities at the Chicago plant. Waste materials are shipped via rail
and truck to Chicago. The waste materials are either treated or processed, or
are accumulated for bulk shipment to disposal facilities.
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 as additional purchase
12
cost 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 its 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
expired in November 1998. The Company submitted a timely renewal application and
expects that a new RCRA and air permit will be issued by NDEQ in 1999. While
waiting for issuance of its new permits, the Company can continue to operate
under the terms of its expired permit.
The incinerator is located on a 600 acre site, which includes a landfill for
disposal of incinerator ash. If the chemical composition of the ash meets permit
requirements, the ash can be classified as "delisted" and will no longer be
regulated as a hazardous waste under federal and state laws. Although the ash
will be classified as nonhazardous, the landfill has been constructed to meet
the same stringent requirements as landfills designed to handle hazardous waste.
As part of the acquisition, the Company agreed to make royalty payments to
Ecova Corporation through 2004, based on the number of tons processed at the
facility.
BRAINTREE, MA. The Braintree facility is located just south of Boston. The
facility is primarily engaged in drummed waste processing and consolidation,
solvent recovery, transformer decommissioning, PCB storage and processing,
blending of waste used as supplemental fuel by cement kilns or industrial
furnaces, 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
Hazardous Waste Facility License issued by the Massachusetts Department of
Environmental Protection (the state equivalent of a Part B license) which became
effective on January 13, 1999 for a period of 5 years.
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.
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.
13
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. A federal permit under the Hazardous and
Solid Waste Amendments to RCRA was issued in December 1996. In December 1998,
the Company submitted a permit application, which allows operations to continue
until the state issues the renewal permit.
WASTE OIL TREATMENT AND STORAGE FACILITIES. The Company has four waste oil
treatment and storage facilities: two in Massachusetts, one in Maine and one in
Virginia. The Massachusetts facilities are located in Kingston and Woburn, in
the Boston area. The Kingston facility has a state recycling permit and is able
to store oil collected from various activities, ranging from routine cleaning of
oil storage terminals to oil spill cleanups. The facility is also used for
maintenance activities, and for training 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. A
renewal application was submitted to the state in November 1998, which allows
operations to continue until the renewal application is approved.
The facility in South Portland, Maine is a petroleum reclamation facility
that handles most of the waste oil received by the Company, which comes
primarily from the Company's remediation activities. It has a municipal sewer
user permit allowing the discharge of water separated from oil. The Company also
owns another property on Main Street in South Portland, which has a license to
store virgin oil, and it is also permitted for the temporary storage and
transfer of containerized hazardous waste.
The Virginia facility is located near Richmond and was acquired in September
1994. The facility is able to store waste oil and gasoline-contaminated
hazardous wastes collected from various activities, ranging from routine
cleaning of oil storage terminals to oil spill cleanups. The state has agreed
that this facility is regulated under the Clean Water Act and is, therefore,
exempt from many RCRA requirements; however, at this time, the facility operates
under RCRA interim status.
ENVIRONMENTAL REGULATION
While the Company's business has benefited substantially from increased
governmental regulation of hazardous waste transportation, storage and disposal,
the industrial waste management industry itself has become the subject of
extensive and evolving regulation by federal, state and local authorities. The
Company is required to obtain federal, state and local licenses or approvals for
each of its hazardous waste facilities. Such licenses are difficult to obtain
and, in many instances, extensive studies, tests, and public hearings are
required before the approvals can be issued. The Company has acquired all
operating licenses and approvals now required for the current operation of its
business, and has applied for or is in the process of applying for all licenses
and approvals needed in connection with continued operation and planned
expansion or modifications of its operations.
The Company makes a continuing effort to anticipate regulatory, political
and legal developments that might affect its operations, but is not always able
to do so. The Company cannot predict the extent to which any environmental
legislation or regulation that may be enacted or enforced in the future may
affect its operations.
14
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. Only the Company's Virginia
facility operates under interim status.
RCRA requires that Part B licenses contain provisions for required on-site
study and cleanup activities, known as "corrective action," including detailed
compliance schedules and provisions for assurance of financial responsibility.
The EPA has developed a system for assessing the relative environmental cleanup
priority of RCRA facilities, called the National Corrective Action
Prioritization System, with a High, Medium or Low ranking for each facility.
Although several facilities of its competitors have been assessed a High cleanup
priority, none of the Company's RCRA facilities have been assessed as a High
priority.
The Company has begun RCRA corrective action investigations at its Part B
licensed facilities in Braintree, Natick, and Woburn, MA; as well as Chicago,
IL; and Cincinnati, OH. The Company is also involved in site studies at its
non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts; and on Main
Street in South Portland, Maine. Corrective action at the Bristol, Connecticut,
facility was completed in 1996. The Company spent approximately $769,000,
$820,000 and $596,000 on corrective action at the foregoing facilities for the
years ended December 31, 1998, 1997 and 1996, 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 was estimated to be in
the range of $2,000,000, by, among other things, performing site services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts to PECO of $877,000 and $709,000 through December 31, 1998
and 1997, respectively. The Company had $623,000 and $791,000 accrued relating
to this liability at December 31, 1998 and 1997, respectively. No estimate can
be made as to when the remediation activity will be completed.
15
In the fourth quarter of 1998, PECO informed the Company that PECO had
expended approximately $3,500,000 relating to the site. The Company reviewed the
expenditures made and believes that it is not responsible for a significant
portion of the expenditures made by PECO either because (i) the expenditures
were for remediation rather than for the corrective action investigation and the
results of the corrective action investigation did not link the contamination to
the operations of the Company or (ii) the expenditures were to contain current
releases of contamination caused by entities other than the Company. The Company
is currently discussing the expenditures made by PECO with representatives of
PECO. The Company believes that the ultimate resolution of this dispute will not
have a material impact on its financial position or results of operations.
While the final scope of the work to be performed at all of the sites
described above 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 results of
operation 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 "Item 3--Legal Proceedings" for a description of certain such
proceedings involving the Company.
CLEAN WATER ACT. This legislation prohibits discharges into the waters of
the United States without governmental authorization. The EPA has promulgated
"pretreatment" regulations under the Clean Water Act, which establish
pretreatment standards for introduction of pollutants into publicly owned
treatment works. In the course of its treatment process, the Company's
wastewater treatment facilities generate wastewater, which they discharge to
publicly owned treatment works pursuant to permits issued by the appropriate
governmental authority. The Clean Water Act also serves to create business
opportunities for the Company, since the Act may prevent industrial users from
discharging their untreated wastewaters into the sewer. If these industries
cannot meet their discharge specifications, then they may utilize the services
of an off-site pretreatment facility such as those operated by the Company.
OTHER FEDERAL LAWS. Company operations are also subject to the Toxic
Substances Control Act ("TSCA"), pursuant to which the EPA regulates over 60,000
commercially produced chemical substances, including the proper disposal of
PCBs. TSCA has established a comprehensive regulatory program for PCBs, under
the jurisdiction of the EPA, which oversees the storage, treatment and disposal
of PCBs at the Company's facilities in Braintree and Natick, Massachusetts;
Cincinnati, Ohio; and Bristol, Connecticut. Under the Clean Air Act, the EPA
also regulates emissions into the air of potentially harmful substances. In its
transportation operations, the Company is regulated by the U.S. Department of
Transportation, the Federal Railroad Administration, and the U.S. Coast Guard,
as well as by the regulatory agencies of each state in which it operates or
through which its trucks pass. Health and safety standards under the
Occupational Safety and Health Act are also applicable.
16
STATE AND LOCAL REGULATIONS
Pursuant to the EPA's authorization of their RCRA equivalent programs,
Massachusetts, Connecticut, Illinois, Maryland, Ohio, and Nebraska have
regulatory programs governing the operations and permitting of hazardous waste
facilities. Accordingly, the hazardous waste treatment, storage and disposal
activities of the Company's Braintree, Natick, Woburn, Bristol, Chicago,
Baltimore, Cincinnati, and Kimball facilities are regulated by the relevant
state agencies in addition to federal EPA regulation.
Some states, such as Connecticut and Massachusetts, classify as hazardous
some wastes which are not regulated under RCRA. For example, Massachusetts
considers PCBs and used oil as "hazardous wastes," while RCRA does not.
Accordingly, the Company must comply with state requirements for handling state
regulated wastes, and, when necessary, obtain state licenses for treating,
storing, and disposing of such wastes at its facilities.
The Company believes that each of its facilities is in substantial
compliance with the applicable requirements of RCRA, state laws and regulations.
Eleven of the Company's 12 waste management facilities have been issued final
licenses. 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
governmental entities which receive treated wastewater from the treatment
processes. The Company's continued ability to operate its liquid waste treatment
process at each such facility is dependent upon its ability to continue these
sewer discharges.
The Company's facilities are regulated pursuant to state statutes, including
those addressing clean water and clean air. Local sewer discharge and flammable
storage requirements are applicable to certain of the Company's facilities. The
Company's facilities are subject to local siting, zoning and land use
restrictions. Although the Company's facilities occasionally have been cited for
regulatory violations, the Company believes it is in substantial compliance with
all federal, state and local laws regulating its business. Superfund legislation
permits strict joint and several liability to be imposed without regard to
fault, and as a result one PRP might be required to bear significantly more than
its proportional share of the cleanup costs if other PRP's do not pay their
share of such costs.
ITEM 3. LEGAL PROCEEDINGS
Certain Company subsidiaries have transported or generated waste sent to
sites, which have been designated state or federal Superfund sites. As a result,
the Company has been named as a potentially responsible party ("PRP") in a
number of lawsuits arising from the disposal of wastes at 27 state and federal
Superfund sites.
Fourteen of these sites involve two subsidiaries which the Company acquired
from ChemWaste, which is a former subsidiary of Waste Management, Inc. As part
of the acquisition, ChemWaste agreed to indemnify the Company with respect to
any liability of its Braintree and Natick subsidiaries for waste disposed of
before the Company acquired them. Accordingly, Waste Management is paying all
costs of defending the Company's Braintree and Natick subsidiaries in these 14
cases, including legal fees and settlement costs.
The Company's subsidiary which owns the Bristol, Connecticut facility is
involved in one Superfund site. As part of the acquisition of the Bristol,
Connecticut and Cincinnati, Ohio facilities, the seller and its parent company,
Southdown, Inc., agreed to indemnify the Company with respect to any liability
for waste
17
disposed of before the Company acquired the facilities, which would include any
liability arising from Superfund sites.
Six of the sites involve former subsidiaries of ChemClear Inc. One of the
six sites is the Strasburg Landfill site in Pennsylvania, which the Company
settled with the U.S. Government in late 1998. The Company is also a settling
party at the other five ChemClear sites. The Company believes its ultimate
exposure in these cases will not have a material impact on its financial
position or results of operations.
Mr. Frank, Inc., which was acquired by the Company in July 1992, is involved
in four Superfund sites, as a transporter of waste generated by others prior to
the Company's purchase of Mr. Frank, Inc. The Company acquired Mr. Frank, Inc.
in exchange for 233,000 shares of the Company's common stock, of which 33,222
shares were deposited into an escrow account to be held as security for the
sellers' agreement to indemnify the Company against potential liabilities,
including environmental liabilities arising from prior ownership and operation
of Mr. Frank, Inc.
The Company believes that any future settlement costs arising from any or
all of the 25 Superfund sites described above will not be material to the
Company's operations or financial position. The Company has also been identified
as a PRP at two additional sites, at which the Company believes that it has no
liability. The Company routinely reviews each Superfund site in which the
Company's subsidiaries are involved, considers each subsidiary's role at each
site and its relationship to the Company and other PRPs at the site, the
quantity and content of the waste it disposed of at the site, and the number and
financial capabilities of the other PRPs at the site. Based on reviews of the
various sites and currently available information, and management's judgment and
prior experience with similar situations, expense accruals are provided by the
Company for its share of future site cleanup costs, and existing accruals are
revised as necessary. As of December 31, 1998, the Company had accrued
environmental costs of $296,000 for cleanup of Superfund sites.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the EPA, are conducting an inquiry concerning certain railcars which
were destined for the Company's Kimball, Nebraska incinerator. Several railcars
containing waste material generated by the Company's waste treatment plants were
not delivered to the Company's Sterling, Colorado rail transfer facility in a
timely manner by the railroad Company. The Company has cooperated fully with
federal and state authorities and has arranged for company personnel to be
interviewed and has produced records, documents and other materials concerning
the railcars in question. The Company has conducted its own internal
investigation and believes that there has been no wrongdoing on the part of the
Company with respect to the late delivery of railcars. However, no assurances
can be given that the government authorities will not reach a different
conclusion or attempt to levy penalties.
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 1998.
18
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.
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
1998 HIGH LOW
- ------------------------------------------------------------------------------ --------- ---------
First Quarter................................................................. $ 2.063 $ 1.250
Second Quarter................................................................ 3.000 1.750
Third Quarter................................................................. 3.313 1.813
Fourth Quarter................................................................ 2.625 1.313
On March 15, 1999 there were 696 holders of record of the Company's common
stock, excluding stockholders whose shares were held in nominee name.
The Company has never declared nor paid any cash dividends on its common
stock. In February 1993, the Board of Directors authorized the issuance of up to
156,416 shares designated as Series B Convertible Preferred Stock (the
"Preferred Stock"), with a cumulative dividend of 7% during the first year and
8% thereafter, payable either in cash or by the issuance of shares of common
stock. On February 16, 1993, 112,000 shares of Preferred Stock were issued in
partial payment of the purchase price for the Cincinnati facility. Except for
payment of dividends on the Preferred Stock, the Company intends to retain all
earnings for use in the Company's business and therefore does not anticipate
paying any cash dividends on its common stock in the foreseeable future. The
Company's bank credit agreements contain financial covenants, which may
effectively restrict or limit the payment of dividends other than Preferred
Stock dividends. See Note 8 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 1998 dividends in common stock. The share price of the common stock and the
shares of common stock issued to holders of preferred stock during 1998 were as
follows:
RECORD DATE SHARE PRICE COMMON STOCK ISSUED
- ----------------------------------------------------------- ----------- ---------------------
January 1, 1998............................................ $ 1.600 70,002
April 1, 1998.............................................. 1.910 58,642
July 1, 1998............................................... 2.000 56,000
October 1, 1998............................................ 2.550 43,925
The Company anticipates that the Preferred Stock dividends payable through
1999 will be paid in common stock.
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be reviewed
in conjunction with Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 8--Financial Statements and
Supplementary Data of this report.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
INCOME STATEMENT DATA: 1998 1997 1996 1995 1994
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues............................................. $ 197,439 $ 183,767 $ 200,213 $ 209,250 $ 207,073
Cost of revenues..................................... 146,860 140,542 154,608 156,779 146,132
Selling, general and administrative expenses......... 35,330 34,498 36,326 39,574 38,910
Depreciation and amortization of intangible assets... 9,112 9,228 9,827 10,081 10,250
Nonrecurring charges................................. -- -- -- 4,247 1,035
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........................ 6,137 (501) (548) (1,431) 10,746
Other income, net.................................... -- 800 -- -- --
Interest expense, net................................ 9,631 9,182 9,170 8,657 7,432
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary item................................. (3,494) (8,883) (9,718) (10,088) 3,314
Provision for (benefit from) income taxes............ 360 4,845 (2,775) (3,195) 1,619
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item.............. (3,854) (13,728) (6,943) (6,893) 1,695
Extraordinary loss related to early retirement of
debt, net of income tax benefit of $823,000........ -- -- -- -- 1,220
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ (3,854) $ (13,728) $ (6,943) $ (6,893) $ 475
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic EPS
Net income (loss) per common share before
extraordinary item............................... $ (0.42) $ (1.42) $ (0.77) $ (0.77) $ 0.13
Extraordinary item................................. $ -- $ -- $ -- $ -- $ (0.13)
Net income (loss) per share........................ $ (0.42) $ (1.42) $ (0.77) $ (0.77) $ --
Diluted EPS
Net income (loss) per common share before
extraordinary item............................... $ (0.42) $ (1.42) $ (0.77) $ (0.77) $ 0.13
Extraordinary item................................. $ -- $ -- $ -- $ -- $ (0.13)
Net income (loss) per share........................ $ (0.42) $ (1.42) $ (0.77) $ (0.77) $ --
Weighted average number of common shares
outstanding........................................ 10,309 9,959 9,653 9,475 9,635
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Financial Data:
Earnings before interest, taxes, depreciation and
amortization (EBITDA).............................. $ 15,249 $ 9,527 $ 9,279 $ 8,650 $ 20,996
Working capital...................................... $ 11,245 $ 10,448 $ 14,245 $ 11,053 $ 20,814
Total assets......................................... $ 145,910 $ 147,850 $ 177,997 $ 186,444 $ 159,875
Long-term obligations, less current portion.......... $ 68,774 $ 68,020 $ 68,668 $ 70,391 $ 60,465
Stockholders' equity................................. $ 36,310 $ 40,024 $ 53,584 $ 60,374 $ 67,326
No cash dividends have been declared on the Company's common stock.
NONRECURRING CHARGES. During 1995, the Company recorded a $4,247,000
nonrecurring charge in connection with the reengineering of the Company's
operations and the write down of non-performing
20
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.
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.
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 ($0.13 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.
21
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,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties........... 14.3 13.9 13.8 15.4 13.5
Other costs.................................... 60.1 62.6 63.4 59.5 57.1
--------- --------- --------- --------- ---------
Total cost of revenues....................... 74.4 76.5 77.2 74.9 70.6
Selling, general and administrative expenses..... 17.9 18.8 18.2 18.9 18.8
Depreciation and amortization of intangible
assets......................................... 4.6 5.0 4.9 4.9 4.9
Nonrecurring charges............................. -- -- -- 2.0 0.5
--------- --------- --------- --------- ---------
Income (loss) from operations.................... 3.1 (0.3) (0.3) (0.7) 5.2
Other income, net................................ -- 0.4 -- -- --
Interest expense, net............................ 4.9 4.9 4.6 4.1 3.6
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes
and extraordinary item......................... (1.8) (4.8) (4.9) (4.8) 1.6
Provision for (benefit from) income taxes........ 0.2 2.7 (1.4) (1.5) 0.8
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.......... (2.0) (7.5) (3.5) (3.3) 0.8
Extraordinary loss from early retirement of
debt........................................... -- -- -- -- 0.6
--------- --------- --------- --------- ---------
Net income (loss).............................. (2.0)% (7.5)% (3.5)% (3.3)% 0.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
REVENUES. Revenues for 1998 were $197,439,000 as compared to $183,767,000
for 1997 and $200,213,000 for 1996. The increase in revenues in 1998 to 1997 was
primarily due to a 7.9% increase in the volume of waste processed through the
Company's facilities and a 9.4% increase due to the number of site service hours
worked. These increases in revenues were partially offset by a 0.9% decrease in
revenues due to declines in pricing in 1998 as compared to 1997.
Revenues for the year ended 1998 compared to 1997 continued to be adversely
impacted by declining sales prices due to industry-wide pricing pressures.
However, improvements in pricing began to be experienced during 1998. Management
cannot predict if this recent improvement in pricing will continue.
There were no major spills or other events that significantly impacted 1998
revenues as compared to 1997. 1998 event revenue was flat compared to 1997.
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 site services emergency response
to an accident or cleanup of environmental contamination that is not expected to
recur. Over the preceding several years, the event business had consistently
produced revenue of approximately $30,000,000 and included at least one major
incident. In 1997, event business revenue was
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$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 for site services in 1997 was flat from 1996; thus, the decreased
business in emergency response was offset by an increase in base business.
Pricing in site services 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 site services work. Revenue for waste disposal
decreased due to a 4.0% decrease in volume and a 7.0% decrease in pricing.
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 was $146,860,000 in 1998, $140,542,000
in 1997 and $154,608,000 in 1996. Other costs of revenues, as a percentage of
revenues, was 60.1% in 1998, 62.6% in 1997 and 63.4% in 1996. Disposal costs
paid to third parties as a percentage of revenues were 14.3% in 1998, 13.9% in
1997 and 13.8% in 1996.
One of the largest components of disposal costs is the cost of sending waste
to other companies for disposal. In 1998, the costs of sending waste to third
parties increased as a percentage of revenues primarily due to the performance
of certain site service projects which generated waste types that could not be
disposed of in Company-owned facilities. Other costs of revenues increased by
3.0% from 1997 to 1998 in absolute dollar amount but decreased as a percentage
of revenues from 62.6% in 1997 to 60.1% in 1998. The decrease as a percentage of
revenues was partially due to the settlement of an insurance claim in the fourth
quarter of 1998 for an amount, net of legal expenses, of $1,168,000. This
settlement represents a partial reimbursement of expenses incurred by the
Company, relating to PECO, as discussed later under "Environmental
Contingencies." The other major component that caused the reduction in other
costs of revenues as a percentage of revenues from 1997 to 1998 was cost
reductions relating to occupancy expense.
The cost of sending waste to third parties decreased by 7.0% in absolute
dollar amounts 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.
In 1996, the Company started implementation of new logistic systems designed
to direct waste to the lowest cost processing facility. The implementation of
these systems was completed in 1998. The Company believes that this has resulted
in increased efficiencies relative to the collection, transportation, treatment
and disposal of routinely created hazardous waste through its expanded and
upgraded Chicago facility.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $35,330,000 in 1998 from $34,498,000 in
1997 but declined from $36,326,000 in 1996. Although selling, general and
administrative expenses increased in absolute dollar amount in 1998, such
expenses as a percentage of revenues decreased from 18.8% of revenues in 1997 to
17.9% of revenues in 1998, partly due to efficiencies achieved through
implementation of information systems and consolidation of administrative tasks.
The 1998 increase in selling, general and administrative expenses in
absolute dollar amount was driven by increases in salaries and benefits caused
by increases in headcount required to manage higher volumes of waste processed,
increases in headcount in sales and marketing to pursue strategic business
development initiatives, and increases in compensation to remain competitive in
the employment markets in which the Company operates. In addition, the Company
incurred costs to terminate leases and increased sales and marketing efforts.
The 5.0% decrease in absolute dollar amount 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.
INTEREST EXPENSE. Interest expense increased during 1998 to $9,631,000 from
$9,182,000 in 1997 and $9,170,000 in 1996. The increase in interest expense in
1998 compared to 1997 was primarily due to an increase in the average balance of
loans outstanding, which was partly the result of increased levels of business
activity. The slight increase in interest expense in 1997 as compared in 1996
was 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.
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 1998, income tax expense of $360,000 was recorded on a
pre-tax loss of $(3,494,000), for an effective tax rate of (10.3%), as compared
to income tax expense of $4,845,000 that was recorded on a pre-tax loss of
$(8,883,000) for an effective tax rate of (54.5%) in 1997, and as compared to
tax benefits that were recorded on a pre-tax loss of $(9,718,000) for an
effective tax rate of 28.6% for the year ended 1996. SFAS 109, "Accounting for
Income Taxes,"requires that a valuation allowance be established when, based on
an evaluation of objective verifiable evidence, there is a likelihood that some
portion or all of the deferred tax assets will not be realized. In 1997, based
upon this review, the Company established a valuation allowance for all but
$113,000 of net deferred tax assets, which was the major cause of the tax
expense reported in 1997. The 1998 tax expense consists of $247,000 of state
income tax expense, which was primarily caused by tangible property taxes and
net worth taxes that are levied as a component of state income taxes, and by
providing a valuation allowance of $113,000 for net deferred tax assets that
existed at December 31, 1997. A valuation allowance was also provided for net
deferred tax assets generated in 1998, which had no effect on income tax
expense. The 1996 income tax benefit was primarily the result of increasing net
deferred tax assets for the future benefit of net operating loss carryforwards.
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
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
these earnings, some portion or all of the valuation reserve would be reversed,
which would increase net income reported in future periods.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. The
Company has received a notice of intent to assess state income taxes from one of
the states in which it operates. The case is currently undergoing administrative
appeal. If the Company loses the administrative appeal, the Company may be
required to make a payment of approximately $3,000,000 to the state. A decision
is expected in the second quarter of 1999. 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 utilize its facilities and workforce
profitably in the face of intense price competition; maintain or increase market
share in an industry which appears to be downsizing and consolidating; realize
benefits from cost reduction programs; generate incremental volumes of waste to
be handled through its facilities from existing sales offices and service
centers; and develop the consulting and information services business.
The future operating results of the Kimball incinerator may be affected by
factors such as the Company's 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.
25
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 1998, 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.
The Company is party to 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 Company
maintains that it and not its customers have paid this tax since the Company was
required to reduce its selling prices in order to meet the disposal prices
charged by its competitors whose facilities are not located in the City of
Chicago and who, therefore, did not charge a similar tax. Since 1990, the
Company has paid approximately $3,000,000 to the City pursuant to this charge.
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.
On July 21, 1998 the Judge in the case issued in Final Order declaring the
City of Chicago waste fee to be unconstitutional under Illinois law. On August
7, 1998 the City filed a motion with the Court to reconsider its Final Order. On
September 11, 1998 the Court denied the City's motion for reconsideration of its
July 21 Final Order. On October 27, 1998 the Court granted the Company's motion
to dismiss the City's affirmative defense of (1) waiver and estoppel with
prejudice, and (2) laches and statute of limitations without prejudice. The
City's affirmative defense of voluntary payment was allowed to stand. The
Company is now engaged in settlement negotiations with the City of Chicago. The
Company cannot predict the outcome of these proceedings; 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 100% compliance as its goal.
This effort requires programs to promote compliance, such as training
employees and customers, purchasing health and safety equipment, and in some
cases hiring outside consultants and lawyers. Even with these programs,
management believes that in the ordinary course of doing business, companies in
the environmental services and waste disposal industry are 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, 1998, 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
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
power to suspend or revoke permits or licenses needed for operation of the
Company's plants, equipment, and vehicles, based on the Company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about the compliance record.
Suspension or revocation of permits or licenses would impact the Company's
operations and could have a material adverse impact on financial results.
Certain Company subsidiaries have transported or generated waste sent to
sites which have been designated state or federal Superfund sites. As a result,
the Company has been named as a potentially responsible party at 27 state and
federal Superfund sites. Fourteen of these sites involve two subsidiaries which
the Company acquired from Chemical Waste Management, Inc. ("ChemWaste"), a
former subsidiary of Waste Management, Inc., and one site involves a subsidiary,
which the Company acquired from Southdown, Inc., a public company. As part of
these acquisitions, ChemWaste and Southdown, Inc. agreed to indemnify the
Company with respect to any liability of such subsidiaries for waste disposed of
before the Company acquired them. With respect to the other Superfund sites, the
Company has established reserves or escrows, which it believes are appropriate,
such that any future settlement costs of lawsuits arising from any or all of the
Superfund sites are not expected to be material to the Company's operations or
financial position. The Company had accrued environmental costs of approximately
$296,000 and $572,000 for cleanup of Superfund sites at December 31, 1998 and
1997, 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 Company's other facilities are regulated under the
Clean Water Act and state regulations.
The EPA or applicable state agencies 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 increase
processing capacity at the location and introduce efficiency initiatives
relative to collection, transportation, treatment and disposal of routinely
created hazardous wastes throughout its facility network. Under the sharing
arrangement with ChemWaste, the Company will manage the RCRA corrective action
investigation at the site and over a period of 15 years could be required to
contribute up to a maximum of $2,000,000 for dismantling and decontaminating the
incinerator and other equipment and up to a maximum of $7,000,000 for studies
and cleanup of the site. Any additional costs beyond those contemplated by the
sharing arrangement during this time period would be borne by ChemWaste. The
Company had accrued $1,532,000 and $1,352,000 relating to this liability at
December 31, 1998 and 1997, respectively. In addition, the Company believes that
it would be able to appropriately capitalize as additional purchase cost 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.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company acquired its RCRA facilities in Bristol, Connecticut and
Cincinnati, Ohio from a subsidiary of Southdown, Inc. Southdown has agreed to
indemnify the Company against any costs incurred 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):
1998 1997 1996
--------- --------- ---------
Environmental expenditures capitalized.................................................... $ 674 $ 564 $ 420
Environmental expenses incurred........................................................... 95 256 176
--------- --------- ---------
$ 769 $ 820 $ 596
--------- --------- ---------
--------- --------- ---------
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 was estimated to be
in the range of $2,000,000, by, among other things, performing site 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 $877,000 and $709,000
through December 31, 1998 and 1997, respectively. The Company had $623,000 and
$791,000 accrued relating to this liability at December 31, 1998 and 1997. No
estimate can be made as to when the remediation activity will be completed.
In the fourth quarter of 1998, PECO informed the Company that they had
expended approximately $3,500,000 related to the site. The Company reviewed the
expenditures made and believes that it is not responsible for a significant
portion of the expenditures made by PECO either because (i) the expenditures
made were for remediation rather than corrective action investigation and the
results of the corrective action investigation did not link the contamination to
the operations of the Company or (ii) the expenditures made were to contain
current releases of contamination caused by entities other than the Company. The
Company is currently discussing the expenditures made by PECO with
representatives or PECO. The Company believes that the ultimate resolution of
this dispute will not have a material impact on its financial position or
results of operations.
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 results of operations any additional
corrective action required at the sites.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the EPA, are conducting an inquiry concerning certain railcars which
were destined for the Company's Kimball, Nebraska incinerator. Several
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
railcars containing waste materials generated by the Company's waste treatment
plants were not delivered to the Company's Sterling, Colorado rail transfer
facility in a timely manner by the railroad company. The Company has cooperated
fully with federal and state authorities and has arranged for company personnel
to be interviewed and has produced records, documents and other materials
concerning the railcars in question. The Company has conducted its own internal
investigation and believes that there has been no wrongdoing on the part of the
Company with respect to the late delivery of railcars. However, no assurances
can be given that the government authorities will not reach a different
conclusion or attempt to levy penalties.
YEAR 2000
As has been widely discussed in the media, companies around the world are
working on resolving the potential problems relating to the year 2000. The
problem stems from the fact that much of the computer software, computer
hardware and control devices produced in prior years provide only two digits
with which to record the year. This may result in these products not functioning
or producing unexpected results when the year 2000 is recorded as "00", and the
program or device is unable to differentiate whether the "00" represents the
year 1900 or 2000. Throughout 1998, the Company has been working on identifying
and correcting year 2000 problems. Although the work is on-going, the Company
has identified potential year 2000 issues related to its management information
systems, control devices used at its plants, and readiness of vendors and
customers for the year 2000.
Starting in 1996, the Company began a major upgrade of all management
information systems in order to improve the availability of management
information with the ultimate aim being better control over costs and better
availability of management information, which management believes will yield
improved operating results. As a by-product of this upgrade, the Company
believes that all of its major management information systems are currently year
2000 compliant, with the exception of the accounts receivable and human resource
systems. The Company has installed an accounts receivable module as part of its
new financial software package. The Company is in the process of running the
accounts receivable system parallel to the existing system and anticipates that
the new accounts receivable system will be fully functional by the end of the
second quarter of 1999. The Company has purchased a human resource system at a
cost of approximately $100,000 that it expects to be able to install in 1999. At
this time, the management of the Company believes that all major systems will be
year 2000 compliant prior to the end of 1999.
The Company has also compiled a list of secondary software and hardware that
is not year 2000 compliant. Although the cost of modifying or replacing the
secondary software and hardware that is not year 2000 compliant has not been
determined, a review of the list indicates that the cost will not be material to
the results of operations of the Company.
In addition to computer software and hardware, the Company utilizes a
variety of control devices in its plants, most of which are not date or time
sensitive. Based on an inventory of the control devices, the cost of replacing
the control devices that are not year 2000 compliant is expected to be
approximately $100,000. The Company plans to replace these control devices
during regularly scheduled plant shutdowns in the second quarter of 1999.
The Company relies on a large number of primary vendors to supply required
products and services. Since the unavailability of key goods and services could
potentially disrupt the Company's operations, letters have been sent to all
primary and secondary vendors to determine their readiness for the year 2000. To
date 80% of vendors have responded to the Company's inquiry and all critical
vendors are being individually contacted. The effort to qualify all primary
vendors and certain potentially key secondary
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
vendors as to their readiness for the year 2000 problem is on-going. A target
date of July 31, 1999 has been established for the Company's primary vendors to
satisfy such year 2000 requests. A contingency plan for backup vendors is being
established and will be implemented for those primary vendors that fail to
comply.
The Company relies on its customers to pay for services performed within a
commercially reasonable period of time. If the computer systems of customers are
not year 2000 compliant, there is a possibility that the collection of bills,
thus cash flow, could be adversely impacted in the first quarter of 2000. In the
first half of 1999, the Company plans on developing policies and procedures to
limit the extension of credit to those customers who cannot represent to the
Company that their systems are year 2000 compliant, so that there is an
assurance that customers who owe money at December 31, 1999 will be able to pay
their bills in 2000.
As discussed above, the Company is trying to insure that all mission
critical software, hardware and control devices are year 2000 compliant and that
there will be no disruption of service to its client base. In addition, the
Company is trying to insure that primary suppliers, key secondary suppliers and
significant customers are ready for the year 2000. However, due to the pervasive
use of computers and control devices throughout all businesses, there is a risk
that certain key non-compliant year 2000 devices will be overlooked by the
Company, our vendors or our customers, which could adversely affect revenues or
cash flow early in the year 2000.
The Company has made significant progress on resolving problems related to
the year 2000. The Securities and Exchange Commission in Release 33-7558,
DISCLOSURE OF YEAR 2000 ISSUES AND CONSEQUENCES BY PUBLIC COMPANIES, INVESTMENT
ADVISERS, INVESTMENT COMPANIES, AND MUNICIPAL SECURITIES ISSUERS, dated August
4, 1998 requires that all companies disclose their most reasonably likely worst
case scenario. The Company has interpreted this to mean that the assumption is
that there will be no further future progress on resolving known problems
related to the year 2000. Although the Company intends to work diligently to
resolve known year 2000 problems, the Company believes that the most reasonably
likely worst case scenarios of not being able to make any further progress on
its known year 2000 problems would be a decrease in revenue due to disruptions
in plant operations, a decrease in cash flow due to inefficient collection of
monies owed the Company because of the accounts receivable system, a disruption
in cash flow due to the Company's customers not being able to pay their bills
due to their systems being non-compliant, and a decrease in revenues due to the
inability of the Company to obtain required goods and services because of
vendors' systems being non-compliant. The Company will continue to monitor the
situation and will continue to develop contingency plans as required.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998 the Company generated $3,896,000 in
cash from operations even though it lost $(3,854,000) for the year, primarily
due to non-cash expenses of $9,112,000 for depreciation and amortization,
$559,000 for the allowance for doubtful accounts and $490,000 for the
amortization of deferred financing costs. Additional sources of cash from
operations were the result of a $4,107,000 increase in the balance of accounts
payable at December 31, 1998 as compared to December 31, 1997, primarily due to
increased levels of operating activities; a refund of $433,000 of income taxes;
and a decrease in prepaid expenses of $579,000. Partially offsetting these
sources of cash from operations were uses of cash of $4,132,000 resulting from
increased levels of accounts receivable at December 31, 1998 as compared to
December 31, 1997, which was primarily due to increased levels of sales in the
fourth quarter of 1998 as compared to the same quarter of the prior year; a
decrease in other accrued expenses of $2,573,000; and a decrease in accrued
disposal costs of $765,000, which was primarily caused by lower levels of waste
on hand in December 31, 1998 when compared to December 31, 1997.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash generated from operations of $3,896,000, together with $3,935,000 of
cash on hand, was used primarily to fund additions to property, plant and
equipment, and permits of $5,208,000 and to purchase restricted investments of
$1,425,000. The largest component of the purchase of restricted investments was
to fund a debt service fund which is discussed later in Management's Discussion
and Analysis. Cash to make payments on long-term debt of $4,037,000 was obtained
by additional borrowings on the revolving line of credit.
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
the facilities 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 cash used in operations
of $1,480,000. The deficit from operations are largely the result of a decrease
in accounts payable of $6,309,000 offset by 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 prices. In addition, in 1997 the Company obtained $1,888,000 from the
sale of property, plant and equipment.
The Company expects 1999 capital additions to be approximately $5,000,000.
The Company believes that it has all of the facilities required by the business
for the foreseeable future. Thus, the Company anticipates that capital
expenditures in 1999 will be generally limited to maintaining existing capital
assets, replacement of site services equipment, and upgrades of information
technology hardware and software.
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 additional borrowing availability to a maximum
of $35,000,000 in cash and letters of credit as the Term Loan is amortized.
Letters of credit
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
may not exceed $20,000,000 at any one time. In June 1998, the term of the
Revolver was extended from May 8, 1999 to May 8, 2000 under substantially the
same terms and conditions.
The Loan Agreement provides for certain covenants the most restrictive of
which required, at December 31, 1998, the maintenance of a minimum level of
working capital of $6,000,000 and adjusted net worth of not less than
$33,000,000. At December 31, 1998, working capital was $11,245,000 and adjusted
net worth was $37,310,000. The Company must also maintain borrowing availability
of not less than $4,500,000 for sixty days prior to paying principal and
interest on its other indebtedness and dividends in cash on its preferred stock.
In the fourth quarter of 1998 and the first quarter of 1999, the Company
violated this covenant, which has been waived by the financial institution
through May 15, 1999. The financial institution has stated it will continue to
waive this covenant, if violated; however, no assurance can be given that this
covenant will be waived in the future by the financial institution. There were
no other violations of loan covenants at December 31, 1998.
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 did not and
will not result in a default, but the Company was required to pay funds 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. Through December 31, 1998,
the Company had paid $1,075,000 into this fund, as required. At December 31,
1998, the debt service coverage ratio was 1.58 to 1. If the debt service
coverage ratio of 1.50 to 1 is met for two consecutive quarters, the payments
made into the reserve fund will be returned to the Company.
At December 31, 1998 and 1997, funds available to borrow under the Revolver
were $8,351,000 and $9,900,000, respectively. Management believes that
sufficient resources will be available to meet the Company's cash requirements
for the foreseeable future. The Company has $50,000,000 of Senior Notes which
mature in May 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.
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 228,569 shares of common stock to the holders of the
preferred stock for the year 1998. The Company anticipates that the preferred
stock dividends payable through 1999 will be paid in common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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 is effective for fiscal periods
beginning after December 15, 1997, and the Company adopted its provisions in
fiscal 1998. Reclassification for earlier periods is required, unless
impracticable, for comparative purposes. The statement requires certain
disclosures and will not impact the results of operations.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In June 1998, FASB issued Statement No. 133, "Accounting of Derivative
Instruments and Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of the hedge transaction, and if it is, the type of hedge transaction. The
Company anticipates that the adoption of this standard will not have a
significant effect on the Company's results of operations or its financial
position. The statement is effective for periods beginning after June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), effective for periods beginning after
December 15, 1998. SOP 98-1 provides guidance on defining internal use software
and the accounting for the costs thereof. The Company anticipates that the
adoption of this statement will not have a significant effect on the Company's
results of operations or its financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to market risk arising from transactions in
foreign currencies since substantially all revenues and expenses are transacted
in U.S. dollars, and the Company is not subject to market risk arising from
purchases of commodities since no significant amount of commodities are used in
the treatment of hazaradous waste. Also, it is the Company's policy not to hedge
interest risk. The Company has borrowed funds in order acquire property, plant
and equipment and to provide working capital to meet opeating requirements. The
funds borrowed are at both fixed interest rates and floating interest rates.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Clean Harbors, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Clean Harbors, Inc. and its subsidiaries (the "Company")
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999
34
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Revenues..................................................................... $ 197,439 $ 183,767 $ 200,213
Cost of revenues............................................................. 146,860 140,542 154,608
Selling, general and administrative expenses................................. 35,330 34,498 36,326
Depreciation and amortization of intangible assets........................... 9,112 9,228 9,827
---------- ---------- ----------
Income (loss) from operations................................................ 6,137 (501) (548)
Other income, net............................................................ -- 800 --
Interest expense, net........................................................ 9,631 9,182 9,170
---------- ---------- ----------
Loss before provision for income taxes....................................... (3,494) (8,883) (9,718)
Provision for (benefit from) income taxes.................................... 360 4,845 (2,775)
---------- ---------- ----------
Net loss..................................................................... $ (3,854) $ (13,728) $ (6,943)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted loss per share............................................. $ (0.42) $ (1.42) $ (0.77)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................... 10,309 9,959 9,653
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
35
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
AS OF DECEMBER 31,
----------------------
1998 1997
---------- ----------
Current assets:
Cash and cash equivalents............................................................... $ 1,895 $ 3,935
Restricted investments.................................................................. 2,366 1,088
Accounts receivable, net of allowance for doubtful accounts of $1,013 and $1,050,
respectively.......................................................................... 41,409 37,836
Prepaid expenses........................................................................ 939 1,518
Supplies inventories.................................................................... 2,858 2,811
Income tax receivable................................................................... 1,236 1,669
Deferred tax asset...................................................................... -- 46
---------- ----------
Total current assets.................................................................. 50,703 48,903
---------- ----------
Property, plant and equipment:
Land.................................................................................... 8,182 8,182
Buildings and improvements.............................................................. 39,521 37,890
Vehicles and equipment.................................................................. 79,430 77,281
Furniture and fixtures.................................................................. 2,190 2,190
Construction in progress................................................................ 967 2,756
---------- ----------
130,290 128,299
Less--accumulated depreciation and amortization......................................... 73,157 66,392
---------- ----------
57,133 61,907
---------- ----------
Other assets:
Goodwill, net........................................................................... 20,031 20,755
Permits, net............................................................................ 13,322 11,695
Deferred taxes non-current.............................................................. -- 67
Other................................................................................... 4,721 4,523
---------- ----------
38,074 37,040
---------- ----------
Total assets.......................................................................... $ 145,910 $ 147,850
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
36
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
AS OF DECEMBER 31,
----------------------
1998 1997
---------- ----------
Current liabilities:
Current maturities of long-term obligations............................................. $ 4,100 $ 4,037
Accounts payable........................................................................ 17,998 13,760
Accrued disposal costs.................................................................. 6,335 7,100
Other accrued expenses.................................................................. 10,975 13,548
Income taxes payable.................................................................... 50 10
---------- ----------
Total current liabilities........................................................... 39,458 38,455
---------- ----------
Other liabilities:
Long-term obligations, less current maturities.......................................... 68,774 68,020
Other................................................................................... 1,368 1,351
---------- ----------
Total other liabilities............................................................. 70,142 69,371
---------- ----------
Commitments and contingent liabilities (Notes 4, 6, 8, and 9)
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 10,420,874 and 10,101,490
shares, respectively................................................................ 104 101
Additional paid-in capital.............................................................. 60,670 60,087
Accumulated other comprehensive loss.................................................... (10) (12)
Accumulated deficit..................................................................... (24,455) (20,153)
---------- ----------
Total stockholders' equity.......................................................... 36,310 40,024
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 145,910 $ 147,850
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
37
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net loss................................................................... $ (3,854) $ (13,728) $ (6,943)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization.............................................. 9,112 9,228 9,827
Allowance for doubtful accounts............................................ 559 683 651
Amortization of deferred financing costs................................... 490 747 631
Deferred income taxes...................................................... 113 4,570 (2,273)
Loss (gain) on sale of fixed assets........................................ 15 67 (77)
Gain on sale of investments................................................ -- -- (28)
Changes in assets and liabilities:
Accounts receivable...................................................... (4,132) 4,226 5,020
Income taxes receivable.................................................. 433 (1) (946)
Prepaid expenses......................................................... 579 85 436
Supplies inventories..................................................... (47) 55 104
Other assets............................................................. (198) (195) (873)
Accounts payable......................................................... 4,107 (6,309) 1,455
Accrued disposal costs................................................... (765) (812) 466
Other accrued expenses................................................... (2,573) (349) (3,277)
Income taxes payable..................................................... 40 (152) 162
Other liabilities........................................................ 17 405 946
---------- ---------- ----------
Net cash provided by (used in) operating activities.................... 3,896 (1,480) 5,281
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment................................. (4,534) (3,366) (3,126)
Proceeds from sales and maturities of restricted investments............... 150 7,262 740
Cost of restricted investments purchased................................... (1,425) (172) (1,278)
Proceeds from sale of fixed assets......................................... 83 1,888 965
Increase in permits........................................................ (674) -- (13)
---------- ---------- ----------
Net cash provided by (used in) investing activities.................... (6,400) 5,612 (2,712)
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term obligations.......................................... (4,037) (5,009) (7,355)
Net borrowings (payments) under long-term revolver......................... 4,363 3,343 (10,337)
Issuance of long-term debt................................................. -- -- 16,667
Additions to deferred financing costs...................................... -- (62) (564)
Proceeds from employee stock purchase plan................................. 133 146 161
Proceeds from exercise of stock options.................................... 5 19 --
---------- ---------- ----------
Net cash provided by (used in) financing activities.................... 464 (1,563) (1,428)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................. (2,040) 2,569 1,141
Cash and cash equivalents, beginning of year................................. 3,935 1,366 225
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 1,895 $ 3,935 $ 1,366
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
38
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Supplemental information:
Cash payments (receipts) for interest and income taxes:
Interest, net...................................................................... $ 9,967 $ 8,519 $ 8,849
Income taxes, net.................................................................. (201) 421 (430)
Noncash investing and financing activities:
Stock dividend on preferred stock.................................................. $ 448 $ 448 $ 447
The accompanying notes are an integral part of these consolidated financial
statements.
39
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
SERIES B
PREFERRED COMMON STOCK
STOCK ACCUMULATED
-------------------------- ------------------------ OTHER
NUMBER $.01 NUMBER $.01 ADDITIONAL COMPREHENSIVE COMPREHENSIVE
OF PAR OF PAR PAID-IN INCOME INCOME
SHARES VALUE SHARES VALUE CAPITAL (LOSS) (LOSS)
------------- ----- ----------- ----- ----------- --------------- ---------------
Balance at December 31,
1995........................ 112 $ 1 9,525 $ 96 $ 58,871 -- $ (7)
--
--- ----------- ----- ----------- ---------------
Net loss...................... -- -- -- $ (6,943)
---------------
Other comprehensive income,
net of tax:
Unrealized holding losses
arising during the
period.................... -- -- -- -- -- (25) --
Reclassification adjustment
for gains included in net
loss...................... -- -- -- -- -- 17 --
---------------
Other comprehensive loss.... -- -- -- -- -- (8) (8)
---------------
Comprehensive loss.......... -- -- -- -- -- $ (6,951) --
---------------
---------------
Preferred stock dividends:
Series B.................. -- -- 153 1 446 -- --
Employee stock purchase
plan...................... -- -- 65 1 160 -- --
--
--- ----------- ----- ----------- ---------------
Balance at December 31,
1996........................ 112 $ 1 9,743 $ 98 $ 59,477 -- $ (15)
--
--- ----------- ----- ----------- ---------------
Net loss...................... -- -- -- -- -- $ (13,728) --
---------------
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the period..... -- -- -- -- -- 20 --
Reclassification adjustment
for losses included in net
loss...................... -- -- -- -- -- (17) --
---------------
Other comprehensive income.. -- -- -- -- -- 3 3
---------------
Comprehensive loss.......... -- -- -- -- -- $ (13,725) --
---------------
---------------
Preferred stock dividends:
Series B.................. -- -- 250 2 446 -- --
Employee stock purchase
plan...................... -- -- 99 1 145 -- --
Proceeds from exercise of
stock options............. -- -- 9 -- 19 -- --
--
--- ----------- ----- ----------- ---------------
Balance at December 31,
1997........................ 112 $ 1 10,101 $ 101 $ 60,087 $ (12)
--
--- ----------- ----- ----------- ---------------
Net loss...................... -- -- -- -- -- $ (3,854) --
---------------
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the period..... -- -- -- -- -- 2 --
Reclassification adjustment
for gains included in net
loss...................... -- -- -- -- -- -- --
Other comprehensive income.. -- -- -- -- -- 2 2
---------------
Comprehensive loss.......... -- -- -- -- -- $ (3,852) --
---------------
---------------
Preferred stock dividends:
Series B.................. -- -- 229 2 446 -- --
Employee stock purchase
plan...................... -- -- 88 1 132 -- --
Proceeds from exercise of
stock options............. -- -- 3 -- 5 -- --
--
--- ----------- ----- ----------- ---------------
Balance at December 31,
1998........................ 112 $ 1 10,421 $ 104 $ 60,670 -- $ (10)
--
--
--- ----------- ----- ----------- ---------------
--- ----------- ----- ----------- ---------------
RETAINED
EARNINGS/ TOTAL
(ACCUMULATED STOCKHOLDERS'
DEFICIT) EQUITY
------------- -------------
Balance at December 31,
1995........................ $ 1,413 $ 60,374
------------- -------------
Net loss...................... (6,943) (6,943)
Other comprehensive income,
net of tax:
Unrealized holding losses
arising during the
period.................... -- --
Reclassification adjustment
for gains included in net
loss...................... -- --
Other comprehensive loss.... -- (8)
Comprehensive loss.......... -- --
Preferred stock dividends:
Series B.................. (447) --
Employee stock purchase
plan...................... -- 161
------------- -------------
Balance at December 31,
1996........................ $ (5,977) $ 53,584
------------- -------------
Net loss...................... (13,728) (13,728)
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the period..... -- --
Reclassification adjustment
for losses included in net
loss...................... -- --
Other comprehensive income.. -- 3
Comprehensive loss.......... -- --
Preferred stock dividends:
Series B.................. (448) --
Employee stock purchase
plan...................... -- 146
Proceeds from exercise of
stock options............. -- 19
------------- -------------
Balance at December 31,
1997........................ $ (20,153) $ 40,024
------------- -------------
Net loss...................... (3,854) (3,854)
Other comprehensive income,
net of tax:
Unrealized holding gains
arising in the period..... -- --
Reclassification adjustment
for gains included in net
loss...................... --
Other comprehensive income.. -- 2
Comprehensive loss.......... -- --
Preferred stock dividends:
Series B.................. (448) --
Employee stock purchase
plan...................... -- 133
Proceeds from exercise of
stock options............. -- 5
------------- -------------
Balance at December 31,
1998........................ $ (24,455) $ 36,310
------------- -------------
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
40
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 transportation, treatment and disposal of industrial wastes; site
services provided at customer sites; and specialized handling of laboratory
chemicals and household hazardous wastes. The Company provides these services to
a diversified customer base across the United States, primarily in the
Northeast, Mid-Atlantic, 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
Deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense or benefit is the result of changes between
deferred tax assets and liabilities.
A valuation allowance is established when, based on an evaluation of
objective verifiable evidence, there is a likelihood that some portion or all of
deferred tax assets will not be realized.
(d) Earnings per Share
Basic EPS is calculated by dividing income available to common shareholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS gives effect to all potential dilutive common shares that were
outstanding during the period.
(e) Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the
41
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas and major customers. The Company operates in a
single segment as a full service provider of environmental services within the
United States and Puerto Rico, and no individual customer accounts for more than
10% of revenues.
(f) Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of less than three months to be cash equivalents.
(g) Investments
Debt securities are classified as "available for sale" or "held to
maturity." Available for sale securities are recorded at fair value with an
offsetting valuation adjustment, net of tax, in stockholders' equity. Held to
maturity securities are recorded at purchase cost.
(h) Supplies Inventory
Supplies inventory, stated at the lower of cost or market, is charged to
operations on a first-in, first-out basis.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company depreciates
and amortizes the cost of these assets, less the estimated salvage value, using
the straight-line method as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- ----------------------------------------------------------------------------------------------------- -----------
Buildings and improvements........................................................................... 5-30 years
Vehicles and equipment............................................................................... 3-15 years
Furniture and fixtures............................................................................... 5-8 years
Leaseholds are amortized over the shorter of the life of the lease or the
asset. Depreciation expense includes depreciation of property plant and
equipment, and equipment capitalized under capital leases. Depreciation expense
was $7,461,000 for 1998, $7,594,000 for 1997 and $8,207,000 for 1996. Upon
retirement or other disposition, the cost and related accumulated depreciation
of the assets are removed from the accounts and the resulting gain or loss is
reflected in income.
(j) Goodwill and Permits
Goodwill and permits, as further discussed in Note 5, are stated at cost and
are being amortized using the straight-line method over 20 years for permits and
periods ranging from 20 to 40 years for goodwill.
An impairment in the carrying value of long-lived assets, including goodwill
and permits, is recognized when the expected future cash flows derived from the
assets are less than its carrying value. In addition, the Company's evaluation
considers nonfinancial data such as market trends and changes in management's
market emphasis.
42
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt
instrument, and they are carried as a component of long-term debt.
(l) Costs to Treat Environmental Contamination
Costs relating to environmental cleanup resulting from operating activities
are expensed as incurred. Environmental cleanup costs that improve properties,
as compared with the condition of that property when originally acquired, are
capitalized to the extent that they are recoverable.
(m) Letters of Credit
The Company utilizes letters of credit to provide collateral assurance to
issuers of performance bonds for certain contracts; to assure regulatory
authorities that certain funds will be available for corrective action
activities at its hazardous waste management facilities, as described in Note
6(b) below; and to provide financial assurance to regulators of its captive
insurance company. As of December 31, 1998 and 1997, the Company had outstanding
letters of credit amounting to $6,111,000 and $6,267,000, respectively.
As of December 31, 1998, the Company had no significant concentrations of
credit risk.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(o) Reclassifications
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the 1998 presentation.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value.
The fair value of restricted investments and senior notes is based on quoted
market prices for these securities. There is no available market price for the
revenue bonds so the face value of the revenue bonds has been reported as the
fair
43
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
value, which approximates their fair value. At December 31, 1998 and 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, 1998
Cash and cash equivalents.................................................... $ 1,895 $ 1,895 $ --
Restricted investments available for sale.................................... 942 958 (16)
Restricted investments held to maturity...................................... 1,424 1,424 --
Long-term obligations based on quoted market prices.......................... 50,000 48,328 (1,672)
Other long-term obligations.................................................. 24,032 24,032 --
December 31, 1997
Cash and cash equivalents.................................................... $ 3,935 $ 3,935 $ --
Restricted investments available for sale.................................... 801 782 (19)
Restricted investments held to maturity...................................... 306 284 (22)
Long-term obligations based on quoted market prices.......................... 50,000 48,000 (2,000)
Other long-term obligations.................................................. 23,707 23,707 --
Available for sale securities are mortgage backed securities. Held to
maturity consist primarily of collateralized mortgage obligations. Contractual
maturities as of December 31, 1998 range from one to ten years, with the
majority being five years or less. Expected maturities may differ from
contractual maturities, as borrowers 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, 1998, the Company insured several facilities
for closure and post closure through its captive insurance company. At December
31, 1998, the amortized cost of these securities was $1,232,000. A valuation
allowance of $16,000 was recorded to reflect the fair value of available for
sale securities of $942,000 and a realized gain of $2,000 was reflected in net
income for the year. No valuation allowance was required to reflect the fair
value of held to maturity securities of $1,424,000.
The amortized cost of these securities held at December 31, 1997 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.
44
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) RESTRICTED INVESTMENTS (CONTINUED)
As further discussed in Note 8, the Company was required to pay funds into a
debt service reserve fund relating to the Company's economic development revenue
bonds. These funds are restricted as to use and are to provide additional
security to the holders of the bonds. At December 31, 1998, these payments plus
interest earned totaled $1,118,000.
(5) INTANGIBLE ASSETS
Below is a summary of intangible assets at December 31, 1998 and 1997 (in
thousands):
1998 1997
--------- ---------
Goodwill.................................................................................... $ 27,529 $ 27,529
Permits..................................................................................... 20,243 17,689
--------- ---------
47,772 45,218
Less--accumulated amortization.............................................................. 14,419 12,768
--------- ---------
$ 33,353 $ 32,450
--------- ---------
--------- ---------
Permits consist of the value of permits acquired through acquisition and
environmental cleanup costs that improve facilities, as compared with the
condition of that property when originally acquired. In 1998, $2,554,000 was
transferred from construction in progress to permits. Prior to 1998 all permits
were capitalized as construction in progress.
Amortization expense approximated $1,651,000, $1,634,000 and $1,620,000, for
the years 1998, 1997, and 1996, respectively.
(6) 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, 1998, the Company has been named as a potentially
responsible party ("PRP") in a number of lawsuits arising from the disposal of
wastes by certain Company subsidiaries at 27 state and federal Superfund sites.
Fourteen of these cases involve two subsidiaries which the Company acquired from
Chemical Waste Management, Inc. ("ChemWaste"), a former subsidiary of Waste
Management, Inc. ("Waste Management"). As part of the acquisition, ChemWaste
agreed to indemnify the Company with respect to any liability of its Braintree
and Natick subsidiaries for waste disposed of before the Company acquired them.
Accordingly, Waste Management is paying all costs of defending the Natick and
Braintree subsidiaries in these 14 cases, including legal fees and settlement
costs. Four cases involve Mr. Frank, Inc. and one case involves Connecticut
Treatment Center ("CTC"). Southdown, Inc., from which the Company bought CTC,
has agreed to indemnify the Company with respect to any liability for waste
disposed of by CTC before the Company acquired CTC, and the sellers of Mr.
Frank, Inc. agreed to a limited indemnity against certain environmental
liabilities arising from prior operations of Mr. Frank, Inc. Six pending cases
45
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
involve subsidiaries which the Company acquired in January 1989, when it
purchased all of the outstanding shares of ChemClear Inc., a publicly traded
company ("ChemClear"). The Company has also been identified as a PRP at two
additional sites at which the Company believes it has no liability.
Management routinely reviews each Superfund site in which the Company's
subsidiaries are involved, considers each subsidiary's role at each site and its
relationship to the other PRPs at the site, the quantity and content of the
waste it disposed of at the site, and the number and financial capabilities of
the other PRPs at the site. Based on reviews of the various sites and currently
available information, and management's judgment and prior experience with
similar situations, expense accruals are provided by the Company for its share
of future site cleanup costs, and existing accruals are revised as necessary.
The Company had accrued environmental costs, based on the Company's estimate of
its expected liability, of $296,000 and $572,000 for cleanup of Superfund sites
at December 31, 1998 and 1997, respectively. However, Superfund legislation
permits strict joint and several liability to be imposed without regard to fault
and, as a result, one PRP might be required to bear significantly more than its
proportional share of the cleanup costs if other PRPs do not pay their share of
such costs.
Environmental regulations stipulate the amount of transit and holding time
that shipments of hazardous waste are allowed. Certain federal agencies,
including the United States Environmental Protection Agency, are conducting an
inquiry concerning certain railcars which were destined for the Company's
Kimball, Nebraska incinerator. Several railcars containing waste materials
generated by the Company's waste treatment plants were not delivered to the
Company's Sterling, Colorado rail transfer facility in a timely manner by the
railroad company. The Company has cooperated fully with the federal and state
authorities and has arranged for company personnel to be interviewed and has
produced records, documents and other materials concerning the railcars in
question. The Company has conducted its own internal investigation and believes
that there has been no wrongdoing on the part of the Company with respect to the
late delivery of railcars. However, no assurances can be given that the
government authorities will not reach a different conclusion or attempt to levy
penalties.
(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 Company's other facilities are regulated under the
Clean Water Act and state regulations.
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.
46
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
In January 1995, the Company entered into a definitive agreement with
ChemWaste to lease a site previously leased by ChemWaste which adjoins the
Company's Chicago facility. During November 1995, the Company acquired the
existing improvements on the ChemWaste site in exchange for agreeing to share
the costs of dismantling an existing hazardous waste incinerator and cleaning up
the site. Under the sharing arrangement with ChemWaste, the Company will manage
the RCRA corrective action investigation at the site and over a period of 15
years could be required to contribute up to a maximum of $2,000,000 for
dismantling and decontaminating the incinerator and other equipment, and up to a
maximum of $7,000,000 for studies and cleanup of the site. Any additional costs
beyond those contemplated by the sharing arrangement during this time period
would be borne by ChemWaste. The Company had $1,532,000 and $1,352,000 accrued
relating to this liability at December 31, 1998 and 1997, respectively. In
addition, the Company believes that it would be able to appropriately capitalize
the remediation expenditures in excess of the amount accrued that it may be
obligated to make under the agreement. No estimate can be made as to when the
remediation activities will be completed.
Two RCRA facilities in Bristol, Connecticut and Cincinnati, Ohio were
acquired from a subsidiary of Southdown, Inc. Southdown has agreed to indemnify
the Company against any costs incurred or liability arising from contamination
on-site arising from prior ownership, including the cost of corrective action.
The 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):
1998 1997 1996
--------- --------- ---------
Environmental expenditures capitalized.................................................... $ 674 $ 564 $ 420
Environmental expenses incurred........................................................... 95 256 176
--------- --------- ---------
$ 769 $ 820 $ 596
--------- --------- ---------
--------- --------- ---------
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 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 site services work
and analytical services required to complete the site studies and providing
other environmental services to PECO at discounted rates. The Company had
provided discounts to PECO of $877,000 and $709,000 through December 31, 1998
and
47
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (CONTINUED)
1997, respectively. The Company had $623,000 and $791,000 accrued relating to
this liability at December 31, 1998 and 1997, respectively. No estimate can be
made as to when the remediation activity will be completed.
In the fourth quarter of 1998, the Company settled an insurance claim
relating to the PECO site for an amount, net of legal expenses, of $1,168,000.
This settlement represents a partial reimbursement of expenses incurred by the
Company relating to PECO. This settlement was recorded as a reduction of cost of
revenues.
Also, in the fourth quarter of 1998, PECO informed the Company that they had
expended approximately $3,500,000 relating to the site. The Company reviewed the
expenditures made and believes that it is not responsible for a significant
portion of the expenditures made by PECO either because (i) the expenditures
made were for remediation rather than for the corrective action investigation
and the results of the corrective action investigation did not link the
contamination to the operations of the Company or (ii) the expenditures made
were to contain current releases of contamination caused by entities other than
the Company. The Company is currently discussing the expenditures made by PECO
with representatives of PECO. The Company believes that the ultimate resolution
of this dispute will not have a material impact on its financial position or
results of operations.
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.
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.
48
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
1998 1997
--------- ---------
Insurance................................................................................... $ 3,160 $ 3,323
Other items................................................................................. 7,815 10,225
--------- ---------
$ 10,975 $ 13,548
--------- ---------
--------- ---------
(8) 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 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 did not and
will not result in a default, but the Company was required to pay 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. Through December 31, 1998,
the Company has paid $1,075,000 into this fund, as required. At December 31,
1998, the debt service coverage ratio was 1.58 to 1. If the debt service
coverage ratio of 1.50 to 1 is met for two consecutive quarters, the payments
made into the reserve fund will be returned to the Company.
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, 1998 and 1997, funds available to borrow under the
49
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) FINANCING ARRANGEMENTS (CONTINUED)
Revolver were $8,351,000 and $9,900,000, 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, 1998, the term of the Revolver was extended from May 8, 1999
to May 8, 2000.
The Loan Agreement allows for up to 80% of the outstanding balance of the
Revolver and 100% of the balance of the Term Note to bear interest at the
Eurodollar rate plus three percent; the remaining balance bears interest at a
rate equal to the "prime" rate plus one and one-half percent. The Loan Agreement
is collateralized by substantially all of the Company's assets, and the Loan
Agreement provides for certain covenants including, among others, maintenance of
a minimum level of working capital and adjusted net worth. At December 31, 1998,
the Loan Agreement required minimum levels of working capital and adjusted net
worth of $6,000,000 and $33,000,000, respectively. At December 31, 1998, the
Company had working capital and adjusted net worth of $11,245,000 and
$37,310,000, respectively. The Company must also maintain borrowing availability
of not less than $4,500,000 for sixty consecutive days prior to paying principal
and interest on its other indebtedness and dividends in cash on its preferred
stock. In the fourth quarter of 1998 and the first quarter of 1999, the Company
violated this covenant, which has been waived by the financial institution
through May 15, 1999.
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
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.
50
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) FINANCING ARRANGEMENTS (CONTINUED)
The following table is a summary of the Company's long-term debt obligations
reflecting the transactions discussed above.
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Long-term obligations consist of the following:
Economic development revenue bonds at 10.75%.............................................. $ 10,000 $ 10,000
Revolving credit with a financial institution, bearing interest at the Eurodollar rate
(5.55% at December 31, 1998) plus 3.00%, or the "prime" rate (7.75% at December 31,
1998) plus 1.50%, collateralized by substantially all assets............................ 9,921 5,559
Term note payable, bearing interest at the Eurodollar rate (5.55% at December 31, 1998)
plus 3.00% or the "prime" rate (7.75% at December 31, 1998) plus 1.50% collateralized by
substantially all assets................................................................ 3,111 6,111
Senior notes payable, bearing interest at 12.50%.......................................... 50,000 50,000
Senior convertible notes, bearing interest at 10.00%...................................... 1,000 2,000
Obligations under capital leases.......................................................... -- 37
--------- ---------
74,032 73,707
Less current maturities................................................................... 4,100 4,037
Less unamortized financing costs.......................................................... 1,158 1,650
--------- ---------
Long-term obligations..................................................................... $ 68,774 $ 68,020
--------- ---------
--------- ---------
51
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) FINANCING ARRANGEMENTS (CONTINUED)
Below is a summary of minimum principal payments due under the Company's
long-term obligations (in thousands):
YEAR AMOUNT
- ----------------------------------------------------------------------------------- ---------
1999............................................................................... $ 4,100
2000............................................................................... 10,132
2001............................................................................... 50,100
2002............................................................................... 100
2003............................................................................... 100
Thereafter......................................................................... 9,500
---------
Total minimum payments due under long-term obligations including current
maturities....................................................................... $ 74,032
---------
---------
(9) LEASES
The Company leases facilities and personal property under certain operating
leases in excess of one year. Some of these lease agreements contain an
escalation clause for increased taxes and operating expenses and are renewable
at the option of the Company. Future minimum lease payments under operating
leases are as follows (in thousands):
TOTAL
PERSONAL OPERATING
YEAR FACILITIES PROPERTY LEASES
- ------------------------------------------------------------ --------- --------- -----------
1999........................................................ $ 2,483 $ 4,085 $ 6,568
2000........................................................ 2,079 2,797 4,876
2001........................................................ 1,320 1,680 3,000
2002........................................................ 1,173 674 1,847
2003........................................................ 1,030 402 1,432
Thereafter.................................................. 2,107 96 2,203
--------- --------- -----------
$ 10,192 $ 9,734 $ 19,926
--------- --------- -----------
--------- --------- -----------
During the years 1998, 1997 and 1996 rent expense was approximately
$13,328,000, $12,421,000, and $12,501,000, respectively.
(10) FEDERAL AND STATE INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
--------- --------- ---------
Federal: Current.............................................. $ -- $ -- $ (911)
Deferred.................................................... -- 1,878 (1,359)
State: Current................................................ 247 269 405
Deferred.................................................... 113 2,698 (910)
--------- --------- ---------
Net provision for (benefit from) income taxes................. $ 360 $ 4,845 $ (2,775)
--------- --------- ---------
--------- --------- ---------
52
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) FEDERAL AND STATE INCOME TAXES (CONTINUED)
The sources of significant timing differences which gave rise to deferred
taxes were as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Depreciation................................................... $ (403) $ (370) $ (227)
Provision for doubtful accounts................................ 15 2 (8)
Insurance reserves............................................. (194) 415 (596)
Litigation..................................................... 174 (157) 348
Tax attributes................................................. (2,197) (864) (1,378)
Permits........................................................ 796 (212) (224)
Other.......................................................... 786 (288) (184)
Valuation Allowance............................................ 1,136 6,050 --
--------- --------- ---------
Total deferred tax provision (benefit)......................... $ 113 $ 4,576 $ (2,269)
--------- --------- ---------
--------- --------- ---------
The effective income tax rate varies from the amount computed using the
statutory federal income tax rate as follows:
1998 1997 1996
--------- --------- ---------
Statutory rate................................................ (34.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Valuation allowance......................................... 32.5 68.1 --
Adjustment of prior year's estimated attributes............. (8.6) 11.9 --
Goodwill amortization....................................... 7.0 3.0 2.6
State income taxes, net of federal benefit.................. 7.1 3.0 (0.8)
Other permanent differences................................. 6.3 2.5 3.6
--------- --------- ---------
Net provision for (benefit from) income taxes................. 10.3% 54.5% (28.6)%
--------- --------- ---------
--------- --------- ---------
53
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) FEDERAL AND STATE INCOME TAXES (CONTINUED)
The components of the net deferred tax asset at December 31, 1998 and 1997
were as follows (in thousands):
1998 1997
--------- ---------
Current:
Workmens' compensation accrual........................................ $ 822 $ 628
Provision for doubtful accounts....................................... 408 423
Litigation accruals................................................... 300 475
Accrued rent holiday.................................................. 99 88
Health insurance accrual.............................................. 34 34
Miscellaneous......................................................... 497 1,431
Permits............................................................... (276) (224)
Valuation allowance................................................... (1,884) (2,809)
--------- ---------
Total current deferred tax asset...................................... $ -- $ 46
--------- ---------
Long-term:
Net operating loss carryforwards...................................... $ 11,192 $ 8,996
Tax credit carryforwards.............................................. 1,927 1,927
Other................................................................. 39 35
Property, plant and equipment permits................................. (4,522) (5,094)
Permits............................................................... (2,555) (1,777)
Valuation allowance................................................... (6,081) (4,020)
--------- ---------
Total long-term deferred tax asset.................................... $ -- $ 67
--------- ---------
Net deferred tax asset................................................ $ -- $ 113
--------- ---------
--------- ---------
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. In 1998, the valuation allowance was
increased by $1,136,000. 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, 1998, the Company had
regular tax net operating loss carryforwards of $22,749,000 which expire in 2010
and thereafter, and alternative minimum tax net operating loss carryforwards of
$26,090,000, which have no expiration and which may be used to offset future
taxable income, if any. The Company also had $3,333,000 of SRLY net operating
loss carryforwards which may only be used to offset future taxable income, if
any, of former ChemClear entities. These net operating loss carryforwards expire
in the amounts of $489,000, $648,000 and $2,196,000 in the years 2001, 2002 and
2003, respectively.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities, which may result in proposed assessments. 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
54
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) FEDERAL AND STATE INCOME TAXES (CONTINUED)
the Company loses the administrative appeal, the Company may be required to make
a payment of approximately $3,000,000 to the state. A decision is expected in
the second quarter of 1999 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.
(11) 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 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
------------ --------------- -----------
Net loss............................................. $ (3,854)
Less preferred dividends............................. 448
------------ ------ -----------
Basic and diluted EPS
(loss available to shareholders)................... $ (4,302) 10,309 $ (0.42)
------------ ------ -----------
------------ ------ -----------
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 $ (0.77)
------------ ------ -----------
------------ ------ -----------
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, 1998, 1997 and 1996.
(12) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
55
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY (CONTINUED)
In 1987, the Company adopted a nonqualified stock option plan ("1987 Plan").
In 1992, the Company adopted an equity incentive plan, which provides for a
variety of incentive awards, including stock options ("1992 Plan"). As of
December 31, 1998, 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, 1998, 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 1998, 1997 or 1996, 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.
(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.
56
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plans for the three years ended December 31, 1998 is as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
Outstanding at December 31, 1995............................... 1,286,991 $ 5.42
Granted at fair value........................................ 597,350 2.54
Forfeited.................................................... (417,393) 5.64
Exercised.................................................... -- --
---------- -----
Outstanding at December 31, 1996............................... 1,466,948 2.52
Granted at fair value........................................ 137,750 2.01
Forfeited.................................................... (293,338) 3.66
Exercised.................................................... (8,800) 2.13
---------- -----
Outstanding at December 31, 1997............................... 1,302,560 2.21
Granted at fair value........................................ 618,125 1.77
Forfeited.................................................... (516,536) 2.16
Exercised.................................................... (2,700) 2.13
---------- -----
Outstanding at December 31, 1998............................... 1,401,449 $ 2.04
---------- -----
---------- -----
Summarized information about stock options outstanding at December 31, 1998
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
- -------------- ----------- --------------- ----------- ----------- -----------
$ 1.44- 1.75 105,000 8.68 $ 1.49 7,800 $ 1.67
1.81- 1.81 503,375 9.32 1.81 -- --
2.00- 2.13 6,000 4.46 2.00 2,000 2.00
2.13- 2.13 761,746 5.42 2.13 564,477 2.13
3.13-13.25 25,328 1.79 6.02 25,328 6.02
Options exercisable at December 31, 1996, 1997 and 1998 were 508,780,
579,872 and 599,605, respectively. The weighted average exercise prices for the
exercisable options at December 31, 1996, 1997 and 1998 were $3.23, $2.34, and
$2.28, respectively.
The fair value of each option granted during 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
1998 1997 1996
--------- --------- ---------
Dividend yield................................................. none none none
Expected volatility............................................ 75.0% 61.9% 64.4%
Risk-free interest rate........................................ 5.8% 6.3% 5.6%
Expected life.................................................. 6.0 6.0 6.1
57
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY (CONTINUED)
Weighted average fair value of options granted at fair value during:
1998................................................................. $ 1.81
---------
---------
1997................................................................. $ 0.93
---------
---------
1996................................................................. $ 0.97
---------
---------
Weighted average fair value of options granted at greater than fair value
during:
1998................................................................. $ 1.44
---------
---------
1997................................................................. $ 0.88
---------
---------
1996................................................................. $ --
---------
---------
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, 1998, 1997 and 1996, would approximate the pro forma amounts
as compared to the amounts reported:
NET LOSS
PER BASIC AND
NET LOSS DILUTED SHARE
-------------- -------------
As reported:
1998......................................................... $ (3,854,000) $ (0.42)
1997......................................................... (13,728,000) (1.42)
1996......................................................... (6,943,000) (0.77)
Proforma:
1998......................................................... $ (3,947,000) $ (0.43)
1997......................................................... (14,091,000) (1.46)
1996......................................................... (7,251,000) (0.81)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
(c) Employee Stock Purchase Plan
In May of 1995, the Company's stockholders approved an Employee Stock
Purchase Plan (the "ESPP"), which is a qualified employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended, through
which employees of the Company are given the opportunity to purchase shares of
common stock. According to the ESPP, a total of one million shares of common
stock has been reserved for offering to employees over a period of five years,
in quarterly offerings of 50,000 shares each plus any shares not issued in any
previous quarter, commencing on July 1, 1995 and on the first day of each
quarter thereafter through April 1, 2000. Employees who elect to participate in
an offering may utilize up to 10% of their payroll for the purchase of common
stock at 85% of the closing price of the stock on the first day of such
quarterly offering or, if lower, 85% of the closing price on the last day of the
offering. As of December 31, 1998 and 1997, 94,000 and 99,000 shares,
respectively, of common stock had
58
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY (CONTINUED)
been purchased under the ESPP. The weighted average fair per share value of the
purchase rights granted under the ESPP during 1998, 1997 and 1996 were $0.41,
$0.33, and $0.72, 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 3%, if the redemption occurred on or before August 16, 1999;
thereafter, the redemption premium declines 1% each year. Each preferred share
entitles its holder to receive a cumulative annual cash dividend of $4.00 per
share, or at the election of the Company, a common stock dividend of equivalent
value.
Dividends on the Preferred Stock are payable on the 15th day of January,
April, July and October, at the rate of $1.00 per share, per quarter. The
Company elected to pay the 1998 dividends in common stock with a market value
equal to the amount of the dividend payable. During 1998 the Company issued
228,569 shares of common stock to the holders of the Preferred Stock. The
Company anticipates that the Preferred Stock dividends payable through 1999 will
be paid in common stock.
(13) EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. The plan allows employees to
make contributions up to a specified percentage of their compensation. 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 1998, 1997,
or 1996.
(14) 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, 1996 was $234,000. See Note 9 for further discussion
of lease commitments.
59
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenue........................................... $ 40,376 $ 53,591 $ 50,884 $ 52,588
Income (loss) from operations..................... (1,149) 3,184 1,307 2,795
Net income (loss)................................. (3,579) 776 (1,135) 84
Basic and diluted income (loss) per share......... (0.36) 0.06 (0.12) 0.00
1997
- --------------------------------------------------
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)
Basic and diluted loss per share.................. (0.21) (0.10) (0.09) (1.02)
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 16.
(16) 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.
60
CLEAN HARBORS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
ALLOWANCE FOR BEGINNING OPERATING FROM END OF
DOUBTFUL ACCOUNTS OF PERIOD EXPENSE RESERVES(A) PERIOD
- ----------------------------------------------- ----------- ------------- ------------- ---------
1996........................................... $ 1,045 $ 651 $ 633 $ 1,063
1997........................................... 1,063 683 696 1,050
1998........................................... 1,050 559 596 1,013
- ------------------------
(a) Amounts deemed uncollectible, net of recoveries.
61
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 1999 Annual Meeting of
Stockholders, which definitive proxy statement is expected to be filed with the
Commission not later than April 30, 1999.
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 1999 Annual Meeting of Stockholders, are the only affiliates of the
registrant. However, this should not be deemed to constitute an admission that
all of such persons are, in fact, affiliates or that there are not other persons
who may be deemed affiliates of the registrant.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
PAGE
---------
1. Financial Statements:
Report of Independent Accountants................................................................... 34
Consolidated Statements of Operations for the Three Years Ended December 31, 1998................... 35
Consolidated Balance Sheets, December 31, 1998 and 1997............................................. 36-37
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998................... 38-39
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1998......... 40
Notes to Consolidated Financial Statements.......................................................... 41-60
2. Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts...................................................... 61
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.
62
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.................................... (8)
4.10 Fourth Amendment to Financing Agreements dated June 20, 1997 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and
Clean Harbors, Inc. as Guarantor................................................... (9)
4.11 Fifth Amendment to Financing Agreements dated January 1, 1998 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and
Clean Harbors, Inc. as Guarantor................................................... (9)
63
ITEM NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------------------------------------- ----------------
4.12 Sixth Amendment to Financial Agreements dated June 23, 1998 by and between Congress
Financial Corporation (New England), the Company's Subsidiaries as Borrowers and
Clean Harbors, Inc. as guarantor................................................... (11)
10.35 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment
Systems, Inc. and Southdown, Inc. dated as of June 23, 1992........................ (2)
10.36 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment
Systems, Inc. and Southdown, Inc. dated as of February 16, 1993.................... (2)
10.37 Clean Harbors, Inc. 1987 Stock Option Plan........................................... (6)
10.38 Clean Harbors, Inc. 1992 Equity Incentive Plan....................................... (6)
10.39 Asset Purchase Agreement among Clean Harbors of Chicago, Inc., Clean Harbors, Inc.,
CWM Chemical Services, Inc. and Chemical Waste Management, Inc. dated as of January
30, 1995........................................................................... (7)
10.40 Asset Purchase Agreement among Clean Harbors Technology Corporation, Clean Harbors
Inc. and Ecova Corporation dated as of March 31, 1995.............................. (5)
10.41 Disposal Services Agreement by and between Chemical Waste Management, Inc. and its
subsidiary and affiliated companies and Clean Harbors Environmental Services, Inc.
and its affiliated companies dated as of October 31, 1995.......................... (8)
10.42 Employment Agreement between the Company and David A. Eckert dated March 14, 1996, as
modified on March 4, 1998.......................................................... (9)
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.
64
(9) Incorporated by reference to the similarly numbered exhibit to the Company's
Form 10-K Annual Report for the Year 1996.
(10) Incorporated by reference to the similarly numbered exhibit to the
Company's Form 10-Q Quarterly Report for the Quarterly Period ended
September 30, 1996.
(11) Incorporated by reference to Exhibit 4.12 to the Company's Form 10-Q
Quarterly Report for the Quarterly Period ended June 30, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
65
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 26, 1999.
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 26, 1999
Alan S. McKim Chief Executive Officer
/s/ ROGER KOENECKE Senior Vice President and
- ------------------------------ Chief Financial Officer March 26, 1999
Roger Koenecke
* Director
- ------------------------------ March 26, 1999
Christy W. Bell
* Director
- ------------------------------ March 26, 1999
John F. Kaslow
* Director
- ------------------------------ March 26, 1999
Daniel J. McCarthy
* Director
- ------------------------------ March 26, 1999
John T. Preston
* Director
- ------------------------------ March 26, 1999
Lorne R. Waxlax
*By: /s/ ALAN S. MCKIM
-------------------------
Alan S. McKim
ATTORNEY-IN-FACT
66