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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 cost