As Filed With The Securities and Exchange Commission April 13, 2001 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO. 0-16379 ---------------- CLEAN HARBORS, INC. (Exact name of registrant as specified in its charter) ---------------- <TABLE> <S> <C> Massachusetts 04-2997780 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1501 Washington Street, 02184-7535 Braintree, Massachusetts (Zip Code) (Address of principal executive offices) </TABLE> Registrant's telephone number: (781) 849-1800 ext. 4454 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On February 28, 2001, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant was $14,730,644. Reference is made to Part III of this report for the assumptions on which this calculation is based. On February 28, 2001, there were outstanding 11,317,155 shares of Common Stock, $.01 par value. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive proxy statement for its 2001 annual meeting of stockholders (which is expected to be filed with the Commission not later than April 30, 2001) are incorporated by reference into part III of this report. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
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 2001. PART I ITEM 1. BUSINESS Clean Harbors, Inc., through its subsidiaries (collectively, the "Company"), operates in one industry segment providing a wide range of environmental 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 a presence in the Western region. The Company has a network of sales and regional logistics offices and service centers located in 27 states and Puerto Rico. The service centers interface with customers, and perform a variety of environmental remediation and hazardous waste management activities. The Company has 12 waste management facilities, which are managed separately from the regions, that transport, store, treat and dispose of waste. The Company also provides analytical testing, technical, and consulting and information management services, which complement its primary services and permit it to offer complete solutions to its customers' complex environmental requirements. The Company is one of the largest providers of environmental services in the United States. The Company has three major competitors, namely, Safety-Kleen Corp, ONYX-North America (the waste management subsidiary of the Paris-based Vivendi) and Philip Services Corp. The Company also competes against regional waste management firms and a number of smaller companies. The Company seeks to be recognized by customers as the premier supplier of a broad range of value- added environmental services based upon quality, responsiveness, customer service, information technologies, breadth of product offerings and cost effectiveness. The Company's principal customers are utility, chemical, petroleum, pharmaceutical, transportation and industrial firms, educational institutions, other environmental service companies and government agencies. The Company's past earnings were adversely affected by poor conditions in the environmental services industry. Intense price competition, waste minimization by industrial firms and unpredictable event business all contributed to weakness across all segments of the environmental services industry. The Company responded to industry conditions by implementing business process review programs, expanding the network of service centers and by enhancing revenue through increasing market share. As part of its commitment to employee safety and quality customer service, the Company has an extensive compliance program and a trained environmental, health and safety staff. The Company adheres to a risk management program designed to reduce potential liabilities for the Company and its customers. The Company was incorporated in Massachusetts in 1980. The principal offices of the Company are located in Braintree, Massachusetts. 1
Business Strategy The Company's strategy is to develop and maintain an ongoing relationship with a diversified group of customers who have recurring needs for treatment and disposal services, site services, analytical services, and information technologies and training in managing their overall environmental program. In order to maintain and enhance its position in the environmental services industry within the core markets in which it operates, the Company strives to achieve internal growth through expanding the network of service centers within the primary regions in which it operates, penetrating the industrial maintenance services market, improving utilization of existing facilities by increasing volumes of waste processed, developing new waste management services, capitalizing on industry consolidation and providing e-commerce solutions. In addition, the Company expects to achieve growth through strategic acquisitions. Expanded Network of Service Centers. The Company currently has 37 service centers, 5 of which were opened in 2000. By opening additional service centers within or contiguous to the regions in which it operates, the Company believes that it can, with minimal expenditure of funds, increase its market share. Much of the additional waste that is generated can be sent to existing facilities to increase the utilization of the plants and thereby increase their profitability. Penetrating the Industrial Maintenance Services Market. In the second quarter of 1999, the Company added to its service offerings industrial cleaning and maintenance. The Company expanded this service to 4 locations, 1 of which was opened in 2000. The Company believes that industrial maintenance services offer significant opportunities for growth for the Company because of the multi-billion dollar size of the market and the Company's small current penetration of this market. The expansion in industrial maintenance services leverages the Company's hazardous waste disposal assets because hazardous wastes are often removed in the cleaning process. Improved Utilization of Waste Management Facilities. The Company currently has 12 waste management facilities which represent a substantial investment in permits, plants and equipment. This network of facilities provides the Company with significant operating leverage. There are opportunities to expand waste handling capacity at these facilities by modifying the terms of the existing permits and by adding capital equipment and new technology. Through selected permit modifications, the Company can expand the range of treatment services which it offers to its customers without the large capital investment necessary to acquire or build new waste management facilities. New Waste Management Services. Industrial waste generators are demanding alternatives to traditional waste disposal methods in order to increase recycling and reclamation and to minimize the end disposal of hazardous waste. The Company utilizes its technological expertise and innovation to improve and expand the range of services which it offers to its customers, and to develop less expensive methods of disposing of hazardous waste. Capitalization on Industry Consolidation. The Company believes that its large industrial customers are increasingly requiring a comprehensive range of environmental services including: site services, industrial maintenance services, emergency response services and waste consulting and information management services to be provided by a select number of service providers. This trend should place smaller operators at a competitive disadvantage due to their size and limited financial resources. To respond to its customers' needs, the Company has increased the range of environmental services it offers and has as part of its strategy to acquire companies in existing, contiguous and new market areas. Acquisitions within the Company's existing areas of operation will capture incremental market share, while geographic expansion creates new market opportunities. The Company continues to evaluate other business opportunities in order to enhance service to its existing customer base and expand its customer base. E-commerce. In 1999, the Company enhanced its internet functionality to provide order fulfillment, waste profiling and transportation scheduling. The Company believes that its e-commerce capabilities are superior to 2
those of its competitors in the environmental services industry and that increasing the percentage of transactions that utilize e-commerce will result in lower costs of services. Acquisitions The Company has completed one acquisition since January 1, 1996. <TABLE> <CAPTION> Date of Acquisition Acquisition Purchase Price ----------- ------------------------------------------ -------------- <C> <S> <C> 1999 The assets of the Texas Transportation and Brokerage Divisions of American Ecology Environmental Services Corporation $1.9 million </TABLE> 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 environmental services. The services provided can be discussed in three primary categories: treatment and disposal of industrial wastes ("Treatment and Disposal"); site services provided at customer sites ("Site Services"); specialized repackaging, treatment and disposal services for laboratory chemicals and household hazardous wastes ("CleanPack(R)"). The Company also provides transportation for all forms of hazardous wastes ("Transportation and Logistics Management, and Analytical Testing Services"); and information management and training services. Although they are discussed separately to provide an understanding of the services offered, Site Services, CleanPack(R), and Transportation and Logistics Management Services are typically provided from one service location. The Company markets these services through its sales organizations and, in many instances, services in one area of the business support or lead to work in other service lines. Treatment and Disposal The Company transports, treats and disposes of industrial wastes for commercial and industrial customers, health care providers, educational and research organizations, other environmental services companies and governmental entities. The wastes handled include substances which are classified as "hazardous" because of their corrosive, ignitable, infectious, reactive or toxic properties, and other substances subject to federal and state environmental regulation. Waste types processed or transferred in drums or bulk quantities include: . flammables, combustibles and other organics; . acids and caustics; . cyanides and sulfides; . solids and sludges; . industrial wastewaters; . items containing PCBs, such as utility transformers and electrical light ballasts; . medical waste; 3
. other regulated wastes; and . nonhazardous industrial waste. The Company receives a detailed waste profile sheet prepared by the customer to document the nature of the customer's waste. A sample of the delivered waste is tested to ensure that it conforms to the customer's waste profile record and to select an appropriate method of treatment and disposal. Once the wastes are characterized, compatible wastes are consolidated to achieve economies in storage, handling, transportation and ultimate treatment and disposal. At the time of acceptance of a customer's waste at the Company's facility, a unique computer "bar code" identification label is assigned to each container of waste, enabling the Company to use sophisticated computer systems to track and document the status, location and disposition of the waste. Wastewater Treatment. The Company's wastewater treatment operations involve processing hazardous and nonhazardous wastes through the use of physical and chemical treatment methods. The solid waste materials produced by these wastewater processing operations are then disposed of off-site at facilities owned and operated by unrelated businesses, while the treated effluent is discharged to the local sewer system under permit. The Company treats a broad range of industrial liquid and semi-liquid wastes containing heavy metals, organics and suspended solids, including: . acids and caustics; . ammonias, sulfides and cyanides; . heavy metals, ink wastes and plating solutions; . landfill leachates and scrubber waters; and . oily wastes and water soluble coolants. Wastewater treatment can be economical as well as environmentally sound, by combining different wastewaters in a "batching" process that reduces costs for multiple waste stream disposal. For instance, acidic waste from one source can be neutralized with alkaline from a second source to produce a neutral solution. Physical Treatment. Physical treatment methods include distillation, separation and stabilization. These methods are used to reduce the volume or toxicity of waste material or to make it suitable for further treatment, reuse, or disposal. Distillation uses either heat or vacuum to purify liquids for resale. Separation utilizes techniques such as sedimentation, filtration, flocculation and centrifugation to remove solid materials from liquids. Stabilization refers to a category of waste treatment processes designed to reduce contaminant mobility or solubility and convert waste to a more chemically stable form. Stabilization technology includes many classes of immobilization systems and applications. Stabilization is a frequent treatment method for metal-bearing wastes received at several Company facilities, which treat the waste to meet specific federal land disposal restrictions. After treatment, the waste is tested to confirm that it has been rendered nonhazardous. It can then be sent to a nonhazardous waste landfill, at significantly lower cost than disposal at a hazardous waste landfill. Thermal Treatment. Thermal treatment refers to processes that use high temperature combustion as the principal means of waste destruction. The Company's state-of-the-art hazardous waste incinerator in Kimball, Nebraska, uses a fluidized bed thermal oxidation unit for maximum destruction efficiency of hazardous waste. Resource Recovery. Resource recovery involves the treatment of wastes using various methods which effectively remove contaminants from the original material to restore its fitness for its intended purpose and to reduce the volume of waste requiring disposal. The Company operates treatment systems for the reclamation and reuse of certain wastes, particularly solvent-based wastes generated by industrial cleaning operations, metal finishing and other manufacturing processes. Spent solvents that can be recycled are processed through thin film evaporators and other processing equipment and are distilled into usable products. Upon recovery of these products, the Company either returns 4
the recovered solvents to the original generator or sells them to third parties. Organic liquids and solids with sufficient heat value are blended to meet strict specifications for use as supplemental fuels for cement kilns, industrial furnaces and other high-efficiency boilers. The Company has installed fuels blending equipment at its Chicago and Cincinnati plants to prepare these supplemental fuels. The Company has established relationships with a number of supplemental fuel users that are licensed to accept the blended fuel material. Although the Company pays a fee to the users who accept this product, this disposal method is substantially less costly than other disposal methods. Clean Extraction System. The Clean Extraction System ("CES") is a hazardous waste treatment system commercialized by the Company at its Baltimore facility which extracts organic compounds from industrial wastewater. CES removes organic contaminants such as gasoline, acetone, methylene chloride, pesticides and other chemicals from industrial wastewater known as "lean water." Lean water is generated by firms such as oil companies, utilities, and manufacturers of specialty chemicals and pharmaceuticals. The CES process enables the Company to handle a broad range of complex, difficult to treat organic and inorganic wastewaters which would otherwise be sent to other companies for disposal. CES offers the Company's industrial customers, such as chemical or pharmaceutical companies, an attractive recycling alternative to incineration or deep well injection of their waste waters. Disposal. After treatment of industrial wastes at the Company's facilities, the hazardous waste residues (such as sludges), which remain after such treatment, are disposed of in facilities operated by third parties. The Company also arranges for the disposal of its customers' hazardous wastes which cannot be treated at Company-owned facilities. Wastes which cannot be disposed of in the Nebraska hazardous waste incinerator are sent to other incinerators, landfills, and disposal facilities operated by third parties. On occasion, a customer's waste may be shipped directly to another disposal company, such as a landfill or incinerator, if the size of the waste shipment or its characteristics are such that the waste does not need to pass through one of the Company's own waste management facilities. The Company has negotiated appropriate 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, 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. 5
Surface remediation projects generally require considerable interaction among technical and project management services. Following the selection of the preferred remedial alternative, the project team identifies the processes and equipment for cleanup. Simultaneously, the Company's health and safety staff develops a site safety plan for the project. Remedial approaches usually include physical removal, mechanical dewatering and stabilization, or encapsulation. Groundwater Restoration. The Company's groundwater restoration services typically involve response to above ground spills, leaking underground tanks and lines, hazardous waste landfills, and leaking surface impoundments. Groundwater restoration efforts often require complex recovery systems, including recovery drains or wells, air strippers, biodegradation or carbon filtration systems, and containment barriers. These systems and technologies can be used individually or in combination to remove a full range of floating or dissolved organic compounds from groundwater. The Company designs and fabricates mobile or fixed site groundwater treatment systems. Site and Facility Decontamination. Site and facility decontamination involves the cleanup and restoration of buildings, equipment, and other sites and facilities that have been contaminated by exposure to hazardous materials during a manufacturing process, or by fires, process malfunctions, spills or other accidents. The Company's projects have included decontamination of electrical generating stations, electrical and electronics components, transformer vaults, and commercial, educational, industrial, laboratory, research and manufacturing facilities. Emergency Response. The Company undertakes environmental remediation projects on both a planned and emergency basis. Emergency response actions may develop into planned remedial action projects when soil, groundwater, buildings or facilities are extensively contaminated. The Company has established specially trained emergency response teams which operate on a 24- hour basis from their service centers. The Company has also established a program called CleanER, which is a sub-contractor network responding to emergency response actions. Many of the Company's remediation activities result from a response to an emergency situation by one of its response teams. These incidents can result from transportation accidents involving chemical substances, fires at chemical facilities or hazardous waste sites, transformer fires or explosions involving PCBs, and other unanticipated developments when the substances involved pose an immediate threat to public health or the environment, such as possible groundwater contamination. Emergency response projects require trained personnel, equipped with protective gear and specialized equipment, prepared to respond promptly whenever these situations occur. To meet the staffing requirements for emergency response projects, the Company relies in part upon a network of trained personnel who are available on a contract basis for specific project assignments. The Company's health and safety specialists and other skilled personnel assist field managers in supervising these projects during and subsequent to the cleanup. The steps performed by the Company include rapid response, containment and control procedures, analytical testing and assessment, neutralization and treatment, collection, and transportation of the substances to an appropriate treatment or disposal facility. Site Remediation. The Company provides technical capabilities and operational expertise to manage large-scale environmental projects. The interdisciplinary teams of managers, geologists, chemists, engineers, scientists, technicians, and compliance experts design and implement solution- oriented remedial programs incorporating both off-site and on-site treatment. The areas of expertise include: . remedial investigations; . remediation technologies: design, in-house fabrication, installation, and operations and maintenance; . decontamination and decommissioning operations; . high hazard materials handling; and . mobile treatment services. 6
CleanPack(R) Services The Company provides specialized handling, packaging, transportation and disposal of laboratory quantities of outdated hazardous chemicals, household hazardous wastes, and waste pesticides and herbicides. CleanPack(R) chemists utilize the Company's CHOICE(TM) waste management software system to support the Company's lab pack services and complete the regulatory information required for every pick-up. The CleanPack(R) operation services a wide variety of customers including: . pharmaceutical companies; . engineering, and research and development departments of industrial companies; . college, university and high school laboratories; . commercial laboratories; . hospital and medical care laboratories and Veterans Administration facilities; . state and local municipalities; and . thousands of agri-businesses and residents through household hazardous waste and pesticide/herbicide collection programs. CleanPack(R) 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(R) operations include: High Hazard Services. Reactive Materials Technicians utilize specialized equipment and training to stabilize and desensitize highly reactive and potentially explosive chemicals. CustomPack(R) 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(R) chemists properly and safely segregate, package, transport, and un-package hazardous chemicals being moved from older laboratories to newer laboratories. Transportation and Logistics Management, and Analytical Testing Services As an integral part of the Company's services, industrial wastes are collected from customers and transported by the Company to and between its facilities for treatment or bulking for shipment to final disposal locations. Customers typically accumulate waste in containers, such as 55-gallon drums, bulk storage tanks or 20-cubic yard roll-off boxes. In providing this service, the Company utilizes a variety of specially designed and constructed tank trucks and semi-trailers as well as third-party transporters, including railroads. Liquid waste is frequently transported in bulk, but may also be transported in drums. Heavier sludges or bulk solids are transported in sealed, roll-off boxes or bulk dump trailers. The Company's fleet is equipped with a mobile satellite monitoring system and communications network which allows real-time communication with the transportation fleet. The Company operates a state-certified analytical testing laboratory at its waste handling facility in Braintree, Massachusetts, which tests samples provided by customers to identify and quantify toxic pollutants. The laboratory staff evaluates the properties of a given material, selects appropriate analytical methods and executes a laboratory work plan that results in a comprehensive technical report. The Company also maintains laboratories at its other principal waste management facilities to identify and characterize waste materials prior to acceptance for treatment and disposal. 7
Information Management and Personnel Training Services Information Management Services. The Company provides customers with software to streamline their environmental programs. The Company has developed a proprietary software product CHOICE(R), 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 internet to the Company through CleanLink(R) web enabled software. CHOICE(R) combined with CleanLink(R) provides customers with a total information package of inventory management, waste shipment and waste tracking information. Personnel Training. The Company provides comprehensive personnel training programs for its own employees and for its customers on a commercial basis. Such programs are designed to promote safe work practices under potentially hazardous conditions, whether or not toxic chemicals are present, in compliance with stringent regulations promulgated under the Federal Resource Conservation and Recovery Act of 1976 ("RCRA") and the Federal Occupational Safety and Health Act ("OSHA"). The Company's Technical Training Center includes confined space entry, exit and extraction equipment, an air-system demonstration maze, respirator fit testing room, leak and spill response equipment, and a layout of a mock decontamination zone, all designed to fulfill the requirements of OSHA Hazardous Waste and Emergency Response Standards. Seasonality The Company's operations may be affected by seasonal fluctuations due to weather and budgetary cycles influencing the timing of customers' spending for remedial activities. Typically during the first quarter of each year there is less demand for environmental services due to the cold weather, particularly in the Northeast and Midwest regions. In addition, factory closings for the year end holidays reduce the volume of industrial waste generated, which results in lower volumes of waste handled by the Company during the first quarter of the following year. Customers The Company's sales efforts are directed toward establishing and maintaining relationships with businesses which have ongoing requirements for one or more of the Company's services. The Company's customer list includes many of the largest industrial companies in the United States. The Company's customers are primarily chemical, pharmaceutical, petroleum, transportation, utility and industrial firms, other environmental services 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, the Mid-Atlantic and Upper Midwest, provide it with a recurring revenue base. The Company estimates that more than 80% of its revenues are derived from previously served customers with recurring needs for the Company's services. For the years ended December 31, 2000, 1999 and 1998, no single customer accounted for more than five percent of the Company's revenues. The Company believes the loss of any single customer would not have a material adverse effect on the Company's financial condition or results of operations. Although the Company's customer base is diverse, two industries each provided over 10% of the Company's revenue in 2000. Approximately 20% of the Company's revenues in 2000 were from the chemical, pharmaceutical and allied products industry, while approximately 14% were from the electric, gas and sanitary industry. In 1999, those same two industries each provided over 10% of the Company's revenue, with approximately 20% of the Company's revenues in 1999 from the chemical, pharmaceutical and allied products industry and approximately 14% from the electric, gas and sanitary industry. In addition to serving industrial customers such as utilities, railroads, pipelines, pharmaceutical manufacturers, and chemical companies, the Company serves health care and educational institutions, federal, state and local governmental bodies, and thousands of small quantity generators. Under applicable environmental laws and regulations, generators of hazardous wastes retain legal liability for the proper handling of those wastes up to and including their ultimate disposal. In response to these potential 8
concerns, many large generators of industrial wastes and other purchasers of waste management services (such as general contractors on major remediation projects) have decreased the number of providers they use for such services. The Company has been selected as an approved vendor by large generators because the Company possesses comprehensive collection, recycling, treatment, transportation, disposal, and waste tracking capabilities and has the expertise necessary to comply with applicable environmental laws and regulations. By becoming an approved vendor for a large waste generator or other purchaser, the Company becomes eligible to provide waste management services to the multiple plants and projects of each generator or purchaser located in the Company's service areas. However, in order to obtain such approved vendor status, it may be necessary for the Company to bid against other qualified competitors in terms of the services and pricing to be provided. Furthermore, large generators or other purchasers of waste management services often periodically audit the Company's facilities and operations to ensure that the Company's waste management services are being performed in compliance with applicable laws and regulations and other criteria established by the Company and such customers. Compliance/Health & Safety The Company regards compliance with applicable environmental regulations, and the health and safety of its workforce as critical components of its overall operations. The Company strives to maintain the highest professional standards in its compliance, and health and safety activities; its internal operating requirements are in many instances more stringent than those imposed by regulation. The Company's compliance program has been developed for each of its waste management facilities and service centers under the direction of the Company's corporate staff. The compliance, and health and safety staffs are responsible for facilities permitting and regulatory compliance, health and safety, field safety, compliance training, transportation compliance, and related record keeping. The Company also performs periodic audits and inspections of the disposal facilities of other firms utilized by the Company. The Company's treatment, storage and recovery facilities are frequently inspected and audited by regulatory agencies, as well as by customers. Although the Company's facilities have been cited on occasion for regulatory violations, the Company believes that each facility is currently in substantial compliance with applicable requirements. Major facilities and service centers have a full-time compliance, or health and safety representative to oversee the implementation of the Company's compliance program at the facility or service center. These highly trained regulatory specialists are independent from operations and report to the Director of Regulatory Affairs or the Director of Health and Safety, who in turn report to the General Counsel. Environmental Liabilities and Capital Expenditures The Company operates facilities that treat or store hazardous waste. Such facilities must obtain a RCRA license from the EPA or an authorized state agency, and must comply with certain operating requirements. The EPA and state agencies allocate their resources to remediation projects that they determine to be of high priority. None of the Company's RCRA facilities has been assessed a high priority by the EPA or state agency. This results in site investigation and environmental remediation being performed according to the timetable set by the EPA or state agencies. The following table summarizes non-reimbursed environmental remediation expenditures capitalized and expenses incurred for the years ended December 31 (in thousands): <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Environmental expenditures capitalized....................... $ 92 $274 $674 Environmental expenses incurred.............................. 225 37 95 ---- ---- ---- $317 $311 $769 ==== ==== ==== </TABLE> Although further investigation may cause a change in estimate, the Company expects remediation expenditures of the magnitude incurred for the last three years to continue for the foreseeable future. The 9
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, the Company's wastewater facilities, or at facilities owned and operated by firms which the Company has audited and approved. Typically, the Company applies established technologies to the treatment, storage and recovery of hazardous wastes. The Company believes its operations are conducted in a safe and prudent manner and in substantial compliance with applicable laws and regulations. Insurance The Company's insurance programs cover the potential risks associated with its multifaceted operations from two primary exposures: direct physical damage and third-party liability. The Company maintains a casualty insurance program providing coverage for vehicles, workers' compensation, employer's liability and commercial 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 for waste processing 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. Steadfast Insurance Company (a unit of Zurich Insurance N.A.) provides pollution liability coverage for waste in-transit with single occurrence and aggregate liability limits of $30,000,000. This Steadfast policy covers liability in excess of $1,000,000 for pollution caused by sudden and accidental occurrences during transportation of waste, from the time waste is picked up from a customer until its delivery to the final disposal site. The Company's $30,000,000 commercial umbrella liability policy provides additional coverage for in- transit pollution losses from accidents for a total of $60,000,000 of in- transit coverage. Federal and state regulations require liability insurance coverage for all facilities that treat, store or dispose of hazardous waste. The Resource Conservation Recovery Act (RCRA) and the Toxic Substances Control Act (TOSCA) 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 for sudden occurrences and $3,000,000 per occurrence and $6,000,000 in the aggregate for non-sudden occurrences. In May 2000, the Company purchased from Steadfast Insurance Company a policy insuring the Company's treatment, storage and disposal activities that meets the regulatory requirements. In addition, this policy provides excess limits above the regulatory requirements up to $30,000,000. 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 had purchased closure surety bonds from Frontier Insurance Company, as had a number of other companies that operate hazardous waste facilities. In June 2000 due to deteriorating financial condition, Frontier Insurance Company was dropped from the listing of approved 10
sureties. This required any company that had obtained financial assurance through Frontier Insurance Company to obtain financial assurance through some other source. In July 2000, the Company replaced the required financial assurance for closure through another qualified insurance company. Obtaining this replacement insurance required the Company to place $5,250,000 of collateral in the form of a letter of credit. The decrease in available funds to borrow due to the issuance of the letter of credit was partially offset by the release to the Company's general use of restricted investments of $1,152,000. These funds were released when financial assurance that had been provided by the Company's captive insurance company was placed with Steadfast Insurance Company. The Company utilizes its captive insurance company to provide financial assurance for the lagoons and incinerator located at the Chicago facility. Financial assurance for closure and post-closure relating the Company's incineration facility located in Kimball, Nebraska is provided under separate policies issued by Steadfast Insurance Company. 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 environmental services 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, commercial 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, Safety-Kleen Corp., ONYX-North America (the environmental services subsidiary of the Paris- based Vivendi) and Philip Services Corp. The Company also competes against regional waste management firms and numerous small companies. Each of these competitors is able to provide one or more of the environmental services offered by the Company, and some of which have access to greater financial resources. The Company believes that it offers a more comprehensive range of environmental services than its competitors in major portions of its service territory, that its ability to provide comprehensive services supported by unique information technologies capable of managing the customers' overall environmental program constitutes a significant competitive advantage, and that its stable ownership allows the Company to focus on building long-term relationships with its customers. Treatment and disposal operations are conducted by a number of national and regional environmental services 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 and CleanPack, the Company's competitors include several major national and regional environmental services firms, as well as numerous smaller local firms. The Company believes that availability of skilled technical professional personnel, quality of performance, diversity of services and price are the key competitive factors in this service industry. Employees As of February 26, 2001, the Company employed 1,459 full time employees. 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 37 service centers, various environmental remediation equipment, and a fleet of approximately 1,000 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. Substantially all of the Company's properties are pledged as collateral for its loans. Hazardous Waste Management Facilities. The Company operates hazardous waste management facilities at which it processes, treats and temporarily stores hazardous wastes for later resale, reuse, or off-site treatment or disposal. Every facility that treats, stores or disposes of hazardous wastes must obtain a license from the federal EPA or an authorized state agency and must comply with certain operating requirements. See "Environmental Regulation--Federal Regulation of Hazardous Waste" below for a description of licenses issued under RCRA. All of the Company's hazardous waste management facilities are subject to RCRA licensing and have been issued RCRA Part B licenses, except for the Cleveland facility, which is regulated under the Clean Water Act. Some of the facilities described above are waste oil treatment and storage facilities. Some petroleum products, such as gasoline, are considered hazardous waste under federal law, and certain operations are located in states which regulates waste oil as a hazardous waste. In order to handle a variety of waste oil and petroleum products and support its site service activities in the Northeast and Mid-Atlantic regions, the Company has obtained a RCRA license for its Woburn, Massachusetts waste oil facility. The Company's Virginia waste oil facility currently operates under RCRA interim status. The Company has made substantial modifications and improvements to the physical plant, and treatment and process equipment in recent years at its treatment facilities. These modifications are consistent with the Company's strategy to upgrade the quality and efficiency of treatment services, to expand the range of services provided, and to ensure regulatory compliance and operating efficiencies at these facilities. Major features of this program are the addition of new treatment systems, expansion of analytical testing laboratories, drum storage and processing facilities, and equipment rearrangement and replacement to improve operating efficiency. Further, the Company believes that it can, with minor modifications at its plants, make changes such that the existing plants would be able to process significantly increased volumes of hazardous wastes and that no new facilities will be required. Chicago, IL. The Chicago, Illinois facility is located on the south side of Chicago, on Lake Calumet. It provides treatment of nonhazardous and hazardous industrial wastewaters, hazardous waste fuels blending, drummed waste processing and consolidation, and transfer and repackaging of laboratory chemicals into lab pack containers. In November 1993, the Illinois EPA issued a Part B license for a ten-year term. In November, 1995, the Company acquired assets from Chemical Waste Management, Inc. ("ChemWaste") on an adjoining leased site, together with the existing improvements, in exchange for sharing the costs of dismantling an existing hazardous waste incinerator and cleaning up the adjoining site. The existing improvements on the ChemWaste site, and other improvements completed from 1995 through 1997 by the Company, have expanded the waste storage and handling capabilities at the Chicago plant. Waste materials are shipped via rail and truck to Chicago. The waste materials are either treated or processed for transshipment in Chicago. 12
Under the sharing arrangement with ChemWaste, the Company could over a period of 15 years be required to contribute up to a maximum of $2,000,000 for dismantling and decontaminating the incinerator and other equipment, and up to a maximum of $7,000,000 for studies and cleanup of the site. Any additional costs beyond those contemplated by the sharing arrangement during this time period would be borne by ChemWaste. The Company believes that it can appropriately capitalize the expenditures in excess of amounts accrued that are required to clean up the property. In addition, the Company entered into a five year disposal services agreement with ChemWaste in connection with the acquisition of the assets on the adjoining site. Pursuant to the terms of the disposal services agreement, the Company has agreed to use best efforts to deliver waste materials to ChemWaste facilities for disposal subject to certain customer preferences, scheduling and other considerations. Kimball, NE. In May 1995, the Company acquired a newly constructed hazardous waste incinerator in Kimball, Nebraska from Ecova Corporation, an affiliate of Amoco Oil Company. The Kimball facility includes a 45,000 ton-per-year fluidized bed thermal oxidation unit for maximum destruction efficiency of hazardous waste. The incinerator has a RCRA Part B license issued by the Nebraska Department of Environmental Quality ("NDEQ") that was issued effective July 30, 1999 for a period of five years. The incinerator is located on a 600 acre site, which includes a landfill for disposal of incinerator ash. If the chemical composition of the ash meets permit requirements, the ash can be classified as "delisted" and will no longer be regulated as hazardous waste under federal and state laws. Although the ash will be classified as nonhazardous, the landfill has been constructed to meet the same stringent requirements as landfills designed to handle hazardous waste. As part of the acquisition, the Company agreed to make royalty payments to Ecova Corporation through 2004, based on the number of tons processed at the facility. In 2000, this agreement was amended. The amended agreement reduced the royalty paid per ton processed and extended the term through 2009. 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 state Hazardous Waste Facility License issued by the Massachusetts Department of Environmental Protection ("DEP") on January 13, 1999 for a five year term. Natick, MA. The Natick, Massachusetts facility is located just west of Boston. The facility has a state Hazardous Waste Facility License (the state equivalent of a Part B license), which was last issued in 1994 for a five year term. In January 2000, the Company submitted a permit renewal application, which allows the facility to maintain its hazardous waste management authority until a new license is issued. The facility is also authorized by the federal EPA to handle PCBs. Subsequent to year end the Company decided to sell the facility and the facility is going through RCRA closure in preparation for sale. Cleveland, OH. The Cleveland, Ohio facility is located south of downtown Cleveland. It is a wastewater treatment facility that treats nonhazardous and hazardous industrial wastewaters, and it serves as a transfer station for various types of containerized hazardous and nonhazardous waste. The facility is not subject to Part B licensing requirements, since its on-site wastewater treatment activities are regulated pursuant to the Clean Water Act, and therefore are exempt from RCRA. Baltimore, MD. The Baltimore, Maryland facility is located in central Baltimore. It provides treatment of nonhazardous and hazardous industrial aqueous wastes, treatment of "lean waters" through the CES process, drummed waste processing, waste stabilization, and transfer of lab pack containers. The facility has a state Controlled Hazardous Substances permit (the state equivalent of a Part B license), which was issued January 10, 2000 for a period of five years. The permit also allows handling of material destined for fuels blending and rail shipment of hazardous and nonhazardous waste. 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 facility has a Part B license which was last issued in 1995 for a five year term. In December 1999, the Company submitted a permit renewal application, which allows the operations to continue until the renewal application is approved. Cincinnati, OH. The facility is located north of downtown Cincinnati, Ohio. It provides hazardous wastewater treatment, drummed waste processing and consolidation, pretreatment of waste to stabilize it before it is sent to landfills, fuels blending, and transfer of lab pack containers. The facility is also authorized to handle PCBs. The facility holds a state Hazardous Waste Facility Installation and Operation permit (RCRA Part B) which was renewed in December 1993 for a five-year term. A federal permit under the Hazardous and Solid Waste Amendments to RCRA was issued in December 1996. In December 1998, the Company submitted a permit application, which allows operations to continue until the state issues the renewal permit. Waste Oil Treatment and Storage Facilities. The Company has four waste oil treatment and storage facilities: two in Massachusetts, one in Maine and one in Virginia. The Massachusetts facilities are located in Kingston and Woburn, in the Boston area. The Kingston facility has a state recycling permit and is able to store oil collected from various activities, ranging from routine cleaning of oil storage terminals to oil spill cleanups. The facility is also used for maintenance activities, and for training of employees of the Company and third-party customers. The Woburn facility is a waste oil storage and transfer facility, which was issued a Part B license in October 1993 for a five-year term. A renewal application was submitted to the state in November 1998, which allows operations to continue until the renewal application is approved. The facility in South Portland, Maine is a petroleum reclamation facility that handles most of the waste oil received by the Company, which comes primarily from the Company's remediation activities. It has a municipal sewer user permit allowing the discharge of water separated from oil. The Company also owns another property on Main Street in South Portland, which has a license to store virgin oil, and it is also permitted for the temporary storage and transfer of containerized hazardous waste. The Prince George, Virginia facility is located near Richmond and was acquired in September 1994. The facility is able to store waste oil and gasoline-contaminated hazardous wastes collected from various activities, ranging from routine cleaning of oil storage terminals to oil spill cleanups. The state has agreed that this facility is regulated under the Clean Water Act and is, therefore, exempt from the requirement to obtain a RCRA Part B permit. At this time the facility is proceeding with RCRA closure, and will subsequently operate as an industrial wastewater treatment facility exempt from RCRA permitting requirements. ENVIRONMENTAL REGULATION While the Company's business has benefited substantially from increased governmental regulation of hazardous waste transportation, storage and disposal, the environmental services 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 permit from the EPA or an authorized state agency, unless a specific exemption exists, and must comply with certain operating requirements. Under RCRA, hazardous waste management facilities in existence on November 19, 1980 were required to submit a preliminary license application to the EPA, the so-called Part A Application. By virtue of this filing, a facility obtained interim status, allowing it to operate until licensing proceedings are instituted pursuant to more comprehensive and exacting regulations (the Part B licensing process). Interim Status facilities may continue to operate pursuant to the Part A Application until their Part B licensing process is concluded. Of the Company's 12 waste management facilities, only the Virginia waste oil facility operates under interim status. The Cleveland facility operates under a RCRA exemption for wastewater treatment tank systems and is subject to regulations under the Clean Water Act. 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 Company has begun RCRA corrective action investigations at its Part B licensed facilities in Braintree, Natick, Chicago, Cincinnati, and Woburn. The Company is also involved in site studies at its non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts; and on Main Street in South Portland, Maine. Corrective action at the Bristol, Connecticut, facility was completed in 1996. The Company spent approximately $317,000, $311,000 and $769,000 on corrective action at the foregoing facilities for the years ended December 31, 2000, 1999 and 1998, respectively. While the final scope of the work to be performed at these sites has not yet been agreed upon, the Company believes, based upon information known to date about the nature and extent of contamination at these sites, that accruals have been established when required and such costs are not expected to have a material effect on its results of operations or its competitive position, and that it will be able to finance from operating revenue any additional corrective action required at the sites. The Bristol, Connecticut and Cincinnati, Ohio facilities were acquired from a subsidiary of Southdown, Inc. Southdown Inc. has agreed to indemnify the Company against any costs incurred or liability arising from contamination on- site, including the cost of corrective action, or waste disposed of off-site, including any liability under the Superfund Act, at those facilities. The Company was also involved in a RCRA corrective action investigation at a site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site consists of approximately 30 acres which PECO had leased to various companies over the years. In 1989, the Company acquired by merger a public company named ChemClear Inc., which operated a hazardous waste treatment facility on approximately eight acres of the Chester site leased from PECO. The Company ceased operations at the Chester site, decontaminated the plant and equipment, engaged an independent engineer to certify closure, and obtained final approval from the Pennsylvania regulatory authorities, certifying final closure of the facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action investigation at the Chester site. PECO asked the Company to participate in the site studies, and in October 1994, the Company agreed to be responsible for seventy-five percent of the cost 15
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 and credits to PECO totaling $908,000 through August 2, 1999. The Company and PECO then negotiated an amendment to their 1994 agreement, whereby the Company's responsibility for its share of the cost of site studies was capped at $1,733,000. The Company had accrued $825,000 relating to this liability at December 31, 1999. The $825,000 balance owed under the amendment was paid in 2000. The Superfund Act. The Superfund Act provides for immediate response and removal actions coordinated by the EPA to releases of hazardous substances into the environment, and authorizes the government to respond to the release or threatened release of hazardous substances or to order persons responsible for any such release to perform any necessary cleanup. The statute assigns joint and several liability for these responses and other related costs, including the cost of damage to natural resources, and 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 ("POTW"). In the course of its treatment process, the Company's wastewater treatment facilities generate wastewater, which they discharge to POTW pursuant to permits issued by the appropriate governmental authority. In December 2000 the EPA promulgated new effluent limitations, pretreatment standards and source performance standards for centralized waste treatment ("CWT") facilities. The Company's Bristol, Connecticut; Baltimore, Maryland; Chicago, Illinois; Cleveland and Cincinnati, Ohio; South Portland, Maine; and Prince George, Virginia facilities are subject to the CWT regulations. The Company has until December 22, 2003 to achieve compliance with the new regulations. Compliance is achieved by meeting the effluent limits for specific contaminants using the best practicable treatment or "equivalent" technology. "Equivalent" technology is demonstrated by procedures negotiated with the local governmental authority responsible for operating the pretreatment program for the POTW. Until such time as the governmental authorities issue guidance on procedures to determine "equivalence" there is no way for the Company to quantify the impact of the CWT regulation on the facilities. 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 1990 Clean Air Act Amendments, the EPA regulates emissions into the air of potentially harmful substances. The recently promulgated Maximum Achievable Control Technology ("MACT") rule of the Clean Air Act, effective September 30, 2002, places a new set of technology-based emissions standards on incinerators, cement kilns and lightweight aggregate kilns. The Company's Kimball, Nebraska incinerator has demonstrated emissions levels that are at or below MACT standards with negligible investments or facility modifications. In its transportation operations, the Company is regulated by the U.S. Department of Transportation, the Federal Railroad Administration, and the U.S. Coast Guard, as well as by the regulatory agencies of each state in which it operates or through which its trucks pass. Health and safety standards under the Occupational Safety and Health Act are also applicable. State and Local Regulations Pursuant to the EPA's authorization of their RCRA equivalent programs, Massachusetts, Connecticut, Illinois, Maryland, Ohio, and Nebraska have regulatory programs governing the operations and permitting of 16
hazardous waste facilities. Accordingly, the hazardous waste treatment, storage and disposal activities of the Company's Braintree, Natick, Woburn, Bristol, Chicago, Baltimore, Cincinnati, and Kimball facilities are regulated by the relevant state agencies in addition to federal EPA regulation. Some states, such as Connecticut and Massachusetts, classify as hazardous some wastes which are not regulated under RCRA. For example, Massachusetts considers PCBs and used oil as "hazardous wastes," while RCRA does not. Accordingly, the Company must comply with state requirements for handling state regulated wastes, and, when necessary, obtain state licenses for treating, storing, and disposing of such wastes at its facilities. The Company believes that each of its facilities is in substantial compliance with the applicable requirements of RCRA, state laws and regulations. Eleven of the Company's 12 waste management facilities have been issued final licenses, except for the Virginia facility which operates as an interim status facility under RCRA. Once issued, such licenses have maximum fixed terms of a given number of years which differ from state to state, ranging from three years to ten years. The issuing state agency may review or modify a license at any time during its term. The Company anticipates that once a license is issued with respect to a facility, the license will be renewed at the end of its term if the facility's operations are in compliance with applicable requirements. However, there can be no assurance that regulations governing future licensing will remain static, or that the Company will be able to comply with such requirements. The Company's wastewater treatment facilities are also subject to state and local regulation, most significantly sewer discharge regulations adopted by the municipalities which receive treated wastewater from the treatment processes. The Company's continued ability to operate its liquid waste treatment process at each such facility is dependent upon its ability to continue these sewer discharges. The Company's facilities are regulated pursuant to state statutes, including those addressing clean water and clean air. Local sewer discharge and flammable storage requirements are applicable to certain of the Company's facilities. The Company's facilities are subject to local siting, zoning and land use restrictions. Although the Company's facilities occasionally have been cited for regulatory violations, the Company believes it is in substantial compliance with all federal, state and local laws regulating its business. Superfund legislation permits strict joint and several liability to be imposed without regard to fault, and as a result one PRP might be required to bear significantly more than its proportional share of the cleanup costs if other PRP's do not pay their share of such costs. ITEM 3. LEGAL PROCEEDINGS Certain Company subsidiaries have transported or generated waste sent to sites, which have been designated state or federal Superfund sites. As a result, the Company has been named as a potentially responsible party ("PRP") in a number of lawsuits arising from the disposal of wastes at 27 state and federal Superfund sites. Fourteen of these sites involve two subsidiaries which the Company acquired from ChemWaste, a former subsidiary of Waste Management, Inc. As part of the acquisition, ChemWaste agreed to indemnify the Company with respect to any liability of its Braintree and Natick subsidiaries for waste disposed of before the Company acquired them. Accordingly, Waste Management is paying all costs of defending the Company's Braintree and Natick subsidiaries in these 14 cases, including legal fees and settlement costs. The Company's subsidiary which owns the Bristol, Connecticut facility is involved in one Superfund site. As part of the acquisition of the Bristol, Connecticut and Cincinnati, Ohio facilities, the seller and its now parent company, Cemex, S.A., agreed to indemnify the Company with respect to any liability for waste disposed of before the Company acquired the facilities, which would include any liability arising from Superfund sites. Six of the sites involve former subsidiaries of ChemClear Inc. One of the six sites is the Strasburg Landfill site in Pennsylvania, which the Company settled with the U.S. Government in late 1998. The Company is also a 17
settling party at the other five ChemClear sites. The Company believes its ultimate exposure in these cases will not have a material impact on its financial position or results of operations. Mr. Frank, Inc., which was acquired by the Company in July 1992, is involved in four Superfund sites, as a transporter of waste generated by others prior to the Company's purchase of Mr. Frank, Inc. The Company acquired Mr. Frank, Inc. in exchange for 233,000 shares of the Company's common stock, of which 33,222 shares were deposited into an escrow account to be held as security for the sellers' agreement to indemnify the Company against potential liabilities, including environmental liabilities arising from prior ownership and operation of Mr. Frank, Inc. The Company has been identified as a PRP at two sites, at which the Company believes that it has no liability. The Company believes that any future settlement costs arising from any or all of the 27 Superfund sites described above will not be material to the Company's operations or financial position. The Company routinely reviews each Superfund site in which the Company's subsidiaries are involved, considers each subsidiary's role at each site and its relationship to the Company and other PRPs at the site, the quantity and content of the waste it disposed of at the site, and the number and financial capabilities of the other PRPs at the site. Based on reviews of the various sites and currently available information, and management's judgment and prior experience with similar situations, expense accruals are provided by the Company for its share of future site cleanup costs, and existing accruals are revised as necessary. As of December 31, 2000 and 1999, the Company had accrued environmental costs of $144,000 and $285,000, respectively, for cleanup of Superfund sites. Environmental regulations stipulate the amount of transit and holding time that shipments of hazardous waste are allowed. Certain federal agencies, including the EPA, conducted an inquiry concerning certain railcars which were destined for the Company's Kimball, Nebraska incinerator. Several railcars containing waste materials generated by the Company's waste treatment plants were not delivered to the Company's Sterling, Colorado rail transfer facility in a timely manner by the railroad company. The Company has cooperated fully with federal and state authorities and has arranged for company personnel to be interviewed and has produced records, documents and other materials concerning the railcars in question. The Company has conducted its own internal investigation and believes that there has been no wrongdoing on the part of the Company with respect to the late delivery of railcars. However, assurances cannot be given that the government authorities may not reach a different conclusion or may attempt to levy penalties. The Company is engaged in settlement negotiations with the government. In October 1995 an employee was killed in an accident when a drum exploded at a facility in Cincinnati, Ohio operated by a subsidiary, Spring Grove Resource Recovery, Inc. ("Spring Grove"). During 1999 the Company was notified by the Justice Department that the Department believed it had a cause of action against a subsidiary for potential civil and/or criminal violations of its permit issued under the Federal Resources Conservation and Recovery Act of 1976 ("RCRA") as a result of the 1995 accident. The Company has conducted an exhaustive internal review of the circumstances leading up to the accident and believes that the subsidiary did not knowingly violate any relevant terms of its RCRA permit. The Company has also engaged the services of external legal and regulatory experts to review the situation and they have also concluded that the available evidence does not support a conclusion that the subsidiary knowingly violated its permit. Assurances can not be given, however, that government authorities will not reach a different conclusion and proceed with legal action or attempt to levy penalties. The Company has executed tolling agreements with the government and is presently engaged in discussions with the government in an effort to resolve this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2000. 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. <TABLE> <CAPTION> High Low ------ ------ <S> <C> <C> 1999 First Quarter................................................ $2.438 $1.563 Second Quarter............................................... 2.000 1.563 Third Quarter................................................ 1.813 1.313 Fourth Quarter............................................... 1.813 1.063 <CAPTION> High Low ------ ------ <S> <C> <C> 2000 First Quarter................................................ $4.250 $1.188 Second Quarter............................................... 2.969 1.531 Third Quarter................................................ 3.250 1.563 Fourth Quarter............................................... 3.000 1.500 </TABLE> On February 26, 2001 there were 656 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, and the Company is prohibited under its loan agreements from paying 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. Dividends on the Company's Preferred Stock are payable on the 15th day of January, April, July and October, at the rate of $1.00 per share, per quarter; 112,000 shares are outstanding. The Company currently is restricted in the payment of cash dividends due to covenants in its loan agreements. Under the terms of the Preferred Stock, the Company can elect to pay dividends in cash or in common stock with a market value equal to the amount of the dividend payable. The Company was required to pay the 2000 dividends in common stock due to restrictions under its loan agreements. The share price of the common stock and the shares of common stock issued to holders of preferred stock during 2000 were as follows: <TABLE> <CAPTION> Record Date Share Price Common Stock Issued ----------- ----------- ------------------- <S> <C> <C> January 1, 2000............................ $1.206 92,849 April 1, 2000.............................. 2.859 39,169 July 1, 2000............................... 2.025 55,308 October 1, 2000............................ 2.831 39,558 </TABLE> The Company anticipates that commencing in the third quarter of 2001 the Preferred Stock dividends will be paid in cash. 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. <TABLE> <CAPTION> For the Year Ended December 31, ------------------------------------------------ Income Statement Data: 2000 1999 1998 1997 1996 - ---------------------- -------- -------- -------- -------- -------- (in thousands except per share amounts) <S> <C> <C> <C> <C> <C> Revenues.................... $233,466 $202,965 $197,439 $183,767 $200,213 Cost of revenues............ 166,303 149,637 147,214 140,926 154,773 Selling, general and administrative expenses.... 42,238 37,190 34,976 34,114 36,161 Depreciation and amortization of intangible assets..................... 10,656 9,501 9,112 9,228 9,827 -------- -------- -------- -------- -------- Income (loss) from operations................. 14,269 6,637 6,137 (501) (548) Other income, net........... -- -- -- 800 -- Interest expense, net....... 9,167 8,599 9,631 9,182 9,170 -------- -------- -------- -------- -------- Income (loss) before provision for (benefit from) income taxes............... 5,102 (1,962) (3,494) (8,883) (9,718) Provision for (benefit from) income taxes............... (2,016) 282 360 4,845 (2,775) -------- -------- -------- -------- -------- Net income (loss)........... $ 7,118 $ (2,244) $ (3,854) $(13,728) $ (6,943) ======== ======== ======== ======== ======== Basic earnings (loss) per share...................... $ 0.60 $ (0.25) $ (0.42) $ (1.42) $ (0.77) ======== ======== ======== ======== ======== Diluted earnings (loss) per share...................... $ 0.59 $ (0.25) $ (0.42) $ (1.42) $ (0.77) ======== ======== ======== ======== ======== Weighted average number of common shares outstanding.. 11,085 10,649 10,309 9,959 9,653 ======== ======== ======== ======== ======== Weighted average common shares plus potentially dilutive common shares..... 11,305 10,649 10,309 9,959 9,653 ======== ======== ======== ======== ======== Financial Data: Earnings before interest, taxes, depreciation and amortization (EBITDA)...... $ 24,925 $ 16,138 $ 15,249 $ 9,527 $ 9,279 Working capital............. $(33,474) $ 14,565 $ 11,245 $ 10,448 $ 14,245 Total assets................ $149,568 $145,247 $145,910 $147,850 $177,997 Debt........................ $ 67,727 $ 74,797 $ 74,032 $ 73,707 $ 75,373 Stockholders' equity........ $ 41,635 $ 34,171 $ 36,310 $ 40,024 $ 53,584 </TABLE> No cash dividends have been declared on the Company's common stock. Provision for (benefit from) income taxes. The 1997 provision for income taxes was primarily due to an increase in the valuation allowance for deferred taxes. The 2000 benefit from income taxes was primarily due to the partial reversal of this valuation reserve. See item captioned Income Taxes in Item 7, Management's Discussion and Analysis of Financial Condition. Other Income. During 1997, the Company recorded a $950,000 receivable in connection with the settlement of a lawsuit and incurred approximately $150,000 in costs related to the litigation. The Company recognized a pre-tax gain, net of related legal fees, of $800,000 resulting from the settlement, which is included in other income, net in the consolidated statement of income. 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth for the periods indicated certain operating data associated with the Company's results of operations. This table and subsequent discussions should be read in conjunction with Item 6 Selected Financial Data and Item 8 Financial Statements and Supplementary Data of this report. <TABLE> <CAPTION> Percentage Of Total Revenues ------------------------------------ Twelve-month Year Ended December 31, ------------------------------------ 2000 1999 1998 1997 1996 ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues: Disposal costs paid to third parties............................. 10.9 12.5 14.3 13.9 13.8 Other costs.......................... 60.3 61.2 60.3 62.8 63.4 ----- ----- ----- ----- ----- Total cost of revenues............. 71.2 73.7 74.6 76.7 77.2 Selling, general and administrative expenses.............................. 18.1 18.3 17.7 18.6 18.2 Depreciation and amortization of intangible assets..................... 4.6 4.7 4.6 5.0 4.9 ----- ----- ----- ----- ----- Income (loss) from operations.......... 6.1 3.3 3.1 (0.3) (0.3) Other income, net...................... -- -- -- 0.4 -- Interest expense, net.................. 3.9 4.3 4.9 4.9 4.6 ----- ----- ----- ----- ----- Income (loss) before provision for (benefit from) income taxes........... 2.2 (1.0) (1.8) (4.8) (4.9) Provision for (benefit from) income taxes................................. (0.8) 0.1 0.2 2.7 (1.4) ----- ----- ----- ----- ----- Net income (loss).................... 3.0% (1.1)% (2.0)% (7.5)% (3.5)% ===== ===== ===== ===== ===== </TABLE> Revenues for 2000 were $233,466,000 up $30,501,000 or 15.0% compared to revenues of $202,965,000 for 1999. Of the total revenue increase for the year, approximately 52% came from site services, which includes higher margin emergency response events, and 48.0% came from transportation and disposal services. The volume of waste processed through the Company's facilities increased 16.9%. The pricing of waste processed was flat. The Company cannot predict whether or not recent trends in volumes or pricing will continue. Revenues for 1999 were $202,965,000 as compared to $197,439,000 for 1998, an increase of $5,526,000 or 2.8%. Of the total revenue increase for the year, approximately $7,722,000 came from site services, due to a greater amount of services performed, which was partially offset by a $2,196,000 decrease in transportation and disposal services. The acquisition of the Texas Transportation and Brokerage Divisions of American Ecology Environmental Services resulted in a 0.4% increase in revenues. The volume of waste processed through the Company's facilities declined by 8.1%. Most of the decrease in the volume of waste processed through the Company's facilities was due to the Company's decision to increase the selling prices on certain waste streams that were determined to be unprofitable or only marginally profitable. Pricing on waste processed through the Company's facilities decreased by 3.3%. In June 2000, a major competitor of the Company, Safety-Kleen Corp., announced that it had filed for Chapter 11 bankruptcy protection. The Company does not believe that revenues for the year ended December 31, 2000 were significantly impacted by Safety-Kleen's announcement. 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 budgetary cycles influencing the timing of customers' spending for remedial activities. 21
Cost of Revenues. Cost of revenues was $166,303,000 for 2000 compared to $149,637,000 for 1999, an increase of $16,666,000. As a percentage of revenues, cost of revenues decreased from 73.7% for 1999 to 71.2% for 2000. One of the largest components of cost of revenues is the cost of sending waste to other companies for disposal. Disposal costs paid to third parties as a percentage of revenue declined from 12.5% for 1999 to 10.9% for 2000. This decrease was due to disposal revenues decreasing as a percentage of total revenues due to the revenue mix, and to continuing efforts to internalize the disposal of waste, to develop alternative lower cost disposal technologies and to identify lower cost suppliers. Other costs of revenues as a percentage of revenues declined from 61.2% for 1999 to 60.3% for 2000. This decrease was primarily due to increased margins on site service work performed due to the mix of jobs performed and due to increased margins on waste processed through the Company's facilities due to the increase in the volume of waste processed and fixed cost nature of the facilities. Cost of revenues was $149,637,000 for 1999 compared to $147,214,000 for 1998. As a percentage of revenues, cost of revenues decreased from 74.6% for 1998 to 73.7% for 1999. One of the largest components of cost of revenues is the cost of sending waste to other companies for disposal. Disposal costs paid to third parties declined from 14.3% for 1998 to 12.5% for 1999. The costs of sending waste to third parties decreased as a percentage of revenues primarily due to the decline in the volume of waste processed by the Company and the decrease in the proportion of disposal revenues to total revenues. In addition, the Company has continued to upgrade the quality and efficiency of its waste treatment services through the development of new technology and continued modifications and upgrades at its facilities. In 1999, other costs of revenues as a percentage of revenues increased largely due to the inclusion of the settlement of an insurance claim in cost of revenues in 1998 for an amount, net of legal expenses of $1,168,000. The Company believes that its ability to manage operating costs is an important factor in its ability to remain price competitive. The Company continues to upgrade the quality and efficiency of its waste treatment services through the development of new technology and continued modifications and upgrades at its facilities. In addition during the first quarter 1999, the Company commenced a strategic sourcing initiative in order to reduce operating costs by identifying suppliers that are able to supply goods and services at lower costs, by obtaining volume discounts where the Company is currently purchasing goods and services from various suppliers and consolidating these purchases with a small number of suppliers, and by reducing the internal costs of purchasing goods and services by reducing the number of suppliers that the Company uses through reducing the number of purchase orders that must be prepared and invoices that must be processed. No assurance can be given that the Company's efforts to manage future operating expenses will be successful. Efforts to reduce costs are ongoing. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $42,238,000 for 2000 from $37,190,000 for 1999, an increase of $5,048,000 or 13.6%. The increase in amounts earned under management incentive and commission plans due to improved results of operations and increased sales, as well as 401(K) contributions linked to the Company's performance, accounted for the largest portion of the increase in selling, general and administrative expenses. The next largest components of the increase resulted from increases in headcount due to higher levels of revenues, increases in headcount in sales and marketing due to strategic business initiatives and increases in compensation to remain competitive in the employment markets in which the Company operates. Strategic initiatives related to e-commerce and Harbor Industrial Services also resulted in increases in selling, general and administrative expenses. Partially offsetting these increases were decreases achieved across a number of expense categories through cost reductions. Selling, general and administrative expenses increased to $37,190,000 in 1999 from $34,976,000 in 1998 an increase of $2,214,000 or 6.3%. In the third quarter of 1998, the Company formed Harbor Management Consultants and in the second quarter of 1999 initiated Harbor Industrial Services. Just under a majority of the increase in selling, general and administrative expenses for 1999 as compared to 1998 is due to expenses of these new divisions. Salaries and benefits increased due to increases in headcount due to higher revenues, increases in headcount in sales and marketing due to strategic business initiatives and increases in compensation to remain competitive in the employment markets in which the Company operates. Expenses relating to information 22
technologies increased due to initiatives to improve the quality of management information. Partially offsetting these increases were decreases achieved across a number of expense categories through cost reductions. Interest Expense, Net. Interest expense increased from $8,599,000 in 1999 to $9,167,000 in 2000. A large part of the increase was due to interest income of $439,000 recorded on an income tax refund in 1999. The remainder of the increase was due primarily to higher variable interest rates on the revolving credit facility and term notes. Interest expense decreased during 1999 to $8,599,000 from $9,631,000 in 1998. A large part of the decrease was due to interest income recorded on an income tax refund. The remainder of the decrease in interest expense was due primarily to decreases in the average balance of loans outstanding. Income Taxes. In 2000, an income tax benefit of $2,016,000 was recorded on pre-tax income $5,102,000, for an effective tax rate of (39.5%), as compared to income tax expense of $282,000 that was recorded on a pre-tax loss of $(1,962,000) for an effective tax rate of (14.4%) in 1999, and as compared to tax expense of $360,000 that was recorded on a pre-tax loss of $(3,494,000) for an effective tax rate of (10.3%) for the year ended 1998. SFAS 109, "Accounting for Income Taxes," requires that a valuation allowance be established when, based on an evaluation of objective verifiable evidence, there is a likelihood that some portion or all of the deferred tax assets will not be realized. The Company continually reviews the adequacy of the valuation allowance for deferred tax assets, and in 1997, based upon this review, the valuation allowance was increased to cover almost all net deferred tax assets. In 1998 and 1999 the valuation allowance was adjusted so as to reserve all net deferred tax assets. In the fourth quarter of 2000, the Company once again reviewed the valuation allowance for deferred tax assets. Based on the level of earnings for 2000 and management's projections for profits in future years, it was determined that it was more likely than not that $2,400,000 of the net deferred tax assets would be utilized. Accordingly, the 2000 provision for income taxes included a $2,400,000 benefit related to adjusting the valuation allowance. 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. The 1998 tax expense consists of $247,000 of state income tax expense, which was primarily due to tangible property taxes and net worth taxes that are levied as a component of state income taxes, and providing a valuation allowance for $113,000 of additional net deferred tax assets. Income tax expense for the year ended 1999 consists primarily of tangible property and net worth taxes that are levied as a component of state income taxes. Partially offsetting these taxes in 1999 was a $79,000 federal income tax refund that was filed for in 1999. The 2000 tax benefit consists of the $2,400,000 partial reversal of the valuation allowance and an $81,000 federal income tax refund. These benefits were partially offset by $360,000 of tangible property and net worth taxes that are levied as a component of state income taxes and $105,000 of federal alternative minimum taxes. 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 reports losses in the future, some portion or all of the 2000 benefit of $2,400,000 may be reversed which would increase income tax expense in future years. If the Company reports earnings from operations in the future, and depending on the level of these earnings, some portion or all of the $2,217,000 valuation reserve at December 31, 2000 would be reversed, which would increase net income reported in future periods. During the ordinary course of its business, the Company is audited by federal and state tax authorities which may result in proposed assessments. The Company has received a notice of intent to assess state income taxes from one of the states in which it operates. The case is currently undergoing administrative appeal. If the Company loses the administrative appeal, the Company may be required to make a payment of approximately $3,000,000 to the state. The Company cannot currently predict when the decision for the administrative appeal will be made. The Company believes that it has properly reported its state income and intends to contest the assessment vigorously. While the Company believes that the final outcome of the dispute will not have a material adverse effect on the Company's financial condition or results of operations, no assurance can be given as to the final outcome of the dispute, the amount of any final adjustments or the potential impact of such adjustments on the Company's financial condition or results of operations. 23
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; and generate incremental volumes of waste to be handled through its facilities from existing sales offices and service centers. The future operating results of the Kimball incinerator may be affected by factors such as its ability to: obtain sufficient volumes of waste at prices which produce revenue sufficient to offset the operating costs of the facility; minimize downtime and disruptions of operations; and compete successfully against other incinerators which have an established share of the incineration market. The recently promulgated Maximum Achievable Control Technology ("MACT") rule of the Clean Air Act, places a new set of technology-based emissions standards on incinerators, cement kilns and lightweight aggregate kilns. Although the Company's only impacted facility, its Kimball, Nebraska incinerator, has demonstrated emissions levels that are at or below MACT standards with negligible investments or facility modifications, the Company believes that facilities owned or operated by others may be uneconomic to upgrade to the new MACT standards. Management believes this could result in the closure of facilities, causing a reduction in incineration capacity and lead to improved pricing for incineration. However, no assurance can be given that this will happen. 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 yearend holidays reduce the volume of industrial waste generated, which results in lower volumes of waste handled by the Company during the first quarter of the following year. The Company participates in a highly volatile industry with multiple competitors, several of which have taken large write-offs and asset write- downs, operated under Chapter 11 bankruptcy protection and undergone major restructurings during the past several years. Periodically, the Company reviews long-lived assets for financial impairment. At the end of 2000, 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. 24
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 industry are routinely faced with governmental enforcement proceedings resulting in fines or other sanctions and will likely be required to pay civil penalties or to expend funds for remedial work on waste management facilities. From time to time, the Company has paid fines or penalties in governmental environmental enforcement proceedings, usually involving its waste treatment, storage and disposal facilities. The possibility always exists that substantial expenditures could result from governmental proceedings, which would have a negative impact on earnings for a particular reporting period. More importantly, federal, state and local regulators have the power to suspend or revoke permits or licenses needed for operation of the Company's plants, equipment, and vehicles, based on the Company's compliance record, and customers may decide not to use a particular disposal facility or do business with a company because of concerns about the compliance record. Suspension or revocation of permits or licenses would impact the Company's operations and could have a material adverse impact on financial results. Certain Company subsidiaries have transported or generated waste sent to sites which have been designated state or federal Superfund sites. As a result, the Company has been named as a potentially responsible party at 27 state and federal Superfund sites. Fourteen of these sites involve two subsidiaries which the Company acquired from Chemical Waste Management, Inc. ("ChemWaste"), a former subsidiary of Waste Management, Inc. and one site involves a subsidiary, which the Company acquired from Southdown, Inc., a public company. As part of these acquisitions, ChemWaste and Southdown, Inc. agreed to indemnify the Company with respect to any liability of such subsidiaries for waste disposed of before the Company acquired them. With respect to the other Superfund sites, the Company has established reserves or escrows, which it believes are appropriate, such that any future settlement costs of lawsuits arising from any or all of the 27 Superfund sites are not expected to be material to the Company's operations or financial position. The Company had accrued environmental costs of approximately $144,000 and $285,000 for cleanup of Superfund sites at December 31, 2000 and 1999, 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 the EPA or an authorized state agency and must comply with certain operating requirements. Of the Company's 12 waste management facilities, nine are subject to RCRA licensing. RCRA requires that permits contain a schedule of required on-site study and cleanup activities, known as "corrective action," including detailed compliance schedules and provisions for assurance of financial responsibility. The EPA or applicable state agency have begun RCRA corrective action investigations at the Company's RCRA licensed facilities in Baltimore, Maryland; Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn, Massachusetts; and Cincinnati, Ohio. The Company is also involved in site studies at its non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts; and South Portland, Maine. In January 1995, the Company entered into a definitive agreement with ChemWaste to lease a site previously leased by ChemWaste which adjoins the Company's Chicago facility. During November 1995, the Company acquired the existing improvements on the ChemWaste site in exchange for agreeing to share the costs of dismantling an existing hazardous waste incinerator and cleaning up the site. The improvements on the 25
ChemWaste site allowed the Company to increase processing capacity at the location and introduce efficiency initiatives relative to collection, transportation, treatment and disposal of routinely created hazardous wastes throughout its facility network. Under the sharing arrangement with ChemWaste, the Company will manage the RCRA corrective action investigation at the site and over a period of 15 years could be required to contribute up to a maximum of $2,000,000 for dismantling and decontaminating the incinerator and other equipment and up to a maximum of $7,000,000 for studies and cleanup of the site. Any additional costs beyond those contemplated by the sharing arrangement during this time period would be borne by ChemWaste. The Company had accruals of $1,729,000 and $1,627,000 relating to this liability at December 31, 2000 and 1999, respectively, which are the unused amounts of a remediation accrual that was established as part of the acquisition of ChemWaste's Chicago Facility. In addition, the Company believes that it would be able to appropriately capitalize the remediation expenditures, in excess of the amounts accrued, that it may be obligated to make under the agreement. No estimate can be made as to when the remediation activities will be completed. The Company acquired its RCRA facilities in Bristol, Connecticut and Cincinnati, Ohio from a subsidiary of Southdown, Inc. Southdown has agreed to indemnify the Company against any costs incurred or liability arising from contamination on-site arising from prior ownership, including corrective action. The prior owner of the Woburn facility provided a limited indemnity for any costs or liability arising from contamination on-site due to prior ownership. The following table summarizes non-reimbursed environmental remediation expenditures capitalized and expenses incurred relating to the Company's facilities for the years ended December 31, (in thousands): <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Environmental expenditures capitalized..................... $ 92 $274 $674 Environmental expenses incurred............................ 225 37 95 ---- ---- ---- $317 $311 $769 ==== ==== ==== </TABLE> The Company expects environmental remediation expenditures of the magnitude incurred for the last three years to continue for the foreseeable future. While the final scope of work to be performed at these sites has not yet been agreed upon, the Company believes, based upon information known to date about the nature and extent of contamination at these sites, that accruals have been established when required and such costs are not expected to have a material effect on its results of operations or its competitive position, and that it will be able to finance from operating revenue any additional corrective action required at the sites. The Company was also involved in a RCRA corrective action investigation at a site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site consists of approximately 30 acres which PECO had leased to various companies over the years. In 1989, the Company acquired by merger a public company named ChemClear Inc., which operated a hazardous waste treatment facility on approximately eight acres of the Chester site leased from PECO. The Company ceased operations at the Chester site, decontaminated the plant and equipment, engaged an independent engineer to certify closure, and obtained final approval from the Pennsylvania regulatory authorities, certifying final closure of the facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action investigation at the Chester site. PECO asked the Company to participate in the site studies, and in October 1994, the Company agreed to be responsible for seventy-five percent of the cost of these studies, which was estimated to be approximately $2,000,000, by, among other things, performing site services work and analytical services required to complete the site studies and providing other environmental services to PECO at discounted rates. The Company had provided discounts and credits to PECO totaling $908,000 through August 2, 1999. The Company and PECO then negotiated an amendment to their 1994 agreement, whereby the Company's responsibility for its share of the cost of site studies was capped at $1,733,000. The Company had accrued $825,000 relating to this liability at December 31, 1999. The $825,000 balance owed under the amendment was paid in 2000. 26
Environmental regulations stipulate the amount of transit and holding time that shipments of hazardous waste are allowed. Certain federal agencies, including the EPA, are conducting an inquiry concerning certain railcars, which were destined for the Company's Kimball, Nebraska incinerator. Several railcars containing waste materials generated by the Company's waste treatment plants were not delivered to the Company's Sterling, Colorado rail transfer facility in a timely manner by the railroad Company. The Company has cooperated fully with federal and state authorities and has arranged for company personnel to be interviewed and has produced records, documents and other materials concerning the railcars in question. The Company has conducted its own internal investigation and believes that there has been no wrongdoing on the part of the Company with respect to the late delivery of railcars. However, assurances cannot be given that the government authorities may not reach a different conclusion or attempt to levy penalties. Liquidity and Capital Resources For the year ended December 31, 2000, the Company generated $13,569,000 of cash from operations. Sources of cash consisted primarily of $7,118,000 of net income for the period and non-cash expenses of $10,656,000 for depreciation and amortization, $684,000 for the allowance for doubtful accounts and $345,000 for the amortization of deferred financing costs. Partially offsetting the non-cash expenses of $11,685,000 was a non-cash tax benefit related to the partial reversal of the valuation allowance for deferred taxes of $2,400,000 and a $70,000 gain on sale of fixed assets. Additional sources of cash from operations totaled $2,686,000 and consisted primarily of increases in other accrued expenses, accrued disposal costs and accounts payable. These increases in accrued expenses and accounts payable were primarily due to the greater amount of business performed in the fourth quarter of 2000 as compared to the fourth quarter of 1999. Partially offsetting these sources of cash were uses of cash from operations which totaled $5,450,000 and consisted primarily of a $4,105,000 increase in accounts receivable which was due to the greater amount of business performed in the fourth quarter of 2000 as compared to the fourth quarter of 1999. The Company defines free cash flow as cash provided by operations less cash required to maintain property, plant and equipment and additions to permits. In 2000, additions to property, plant and equipment totaled $7,403,000 which consisted of approximately $2,500,000 relating to the purchase of vehicles and rolling stock that had previously been leased under operating leases and approximately $4,900,000 in expenditures to maintain property, plant and equipment. The purchase of the vehicles and rolling stock was financed by borrowings under a $3,000,000 term note. Additions to permits were $92,000. The Company utilized the approximately $8,577,000 of free cash flow together with the $500,000 in term note borrowings in excess of vehicles and rolling stock purchased, a net reduction in restricted cash of $384,000, proceeds from the employee stock purchase plan of $154,000, proceeds from the exercise of stock options of $156,000, proceeds from the sale of fixed assets of $148,000 and a $154,000 reduction in cash on hand to reduce debt by $10,070,000. The Company expects 2001 capital expenditures to be approximately $7,500,000. This consists of $5,000,000 that is required to maintain existing property, plant and equipment and $2,500,000 of strategic initiatives to expand the Company's capabilities. The Company believes that it has all of the facilities required for the foreseeable future. Thus, capital expenditures are expected to be limited to maintaining existing capital assets, replacing site services equipment, upgrading information technology hardware and software, and specific strategic initiatives. The Company continues to evaluate potential acquisitions and opening additional site services offices within and next to the Company's service areas. Thus, it is possible that capital additions could exceed the $7,500,000 currently planned. The goal of the Company is to maximize shareholder value over time. The Company believes that shareholder value will be maximized by using free cash flow to make strategic investments in fixed assets to expand the Company's capabilities, to expand operations within or contiguous to the regions in which it operates, to expand its capabilities through acquisitions and to reduce debt. However, no assurance can be given that the Company will be able to generate free cash flow in the future. 27
For the year ended December 31, 1999, the Company generated $6,106,000 from operations even though the net loss was $(2,244,000) for the period. This result was due to sources and uses of cash that vary from when the related revenues and expenses were recorded. The primary sources of cash from operations were non-cash expenses that totaled $10,528,000 and consisted of depreciation and amortization of $9,501,000, additions to the allowance for doubtful accounts of $683,000 and amortization of deferred financing costs of $344,000. A major additional source of cash was an income tax refund of $1,114,000. These sources of cash were partially offset by uses of cash of $2,800,000 due to increased levels of accounts receivable and the net loss for the period of $(2,244,000). For the year ended December 31, 1999, the Company obtained $896,000 from financing activities. Sources of cash from financing activities were $4,139,000 due to additional borrowings under the term promissory note and $131,000 due to the issuance of additional stock under the employee stock purchase plan. Partially offsetting these sources of cash was $3,050,000 in payments on long-term obligations and net repayments of $324,000 on the revolving credit agreement. For the year ended December 31, 1999, the Company had proceeds of $1,225,000 from the sales and maturities of restricted investments, which was almost completely due to the release of restricted funds that were held in a debt service reserve fund at December 31, 1998. These proceeds together with cash from operations and financing activities were used to acquire property, plant and equipment of $5,080,000, to acquire two divisions of American Ecology Environmental Services Corporation for $1,900,000 and to increase the amount of cash and cash equivalents by $888,000. As amended, the Company had at December 31, 2000, a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial institution. The Loan Agreement provided for a $24,500,000 revolving credit portion (the "Revolver"), a $6,000,000 term promissory note (the "Term Note"), and a $3,000,000 term promissory note (the "2000 Term Note"). In May 1999, the Term Note was amended. The Term Note as amended allowed the Company to increase the amount borrowed under the Term Note by $4,139,000 from the $1,861,000 owed prior to the amendment of the Term Note to the $6,000,000 principal amount of the Term Note as amended. The Term Note had monthly principal payments of $100,000 with the last payment due in May, 2004. In March of 2000, the Loan Agreement was amended and an additional term promissory note, the 2000 Term Note, was entered into with the financial institution. The original principal amount of the 2000 Term Note is $3,000,000, and it is payable in 36 monthly installments commencing on May 1, 2000. The funds provided from the 2000 Term Note have been used primarily to purchase vehicles and rolling stock that the Company previously leased under operating leases. The Revolver allowed the Company to borrow up to $24,500,000 in cash and letters of credit, based on a formula of eligible accounts receivable. Letters of credit may not exceed $20,000,000 at any one time. At December 31, 2000 and 1999, funds available to borrow under the Revolver were $12,760,000 and $8,603,000, respectively. The Revolver requires the Company to pay a line fee of one- half of one percent on the unused portion of the line. In March 2000, the term of the Revolver was extended from May 8, 2001 to May 8, 2003. The Loan Agreement allowed for up to 80% of the outstanding balance of the Revolver and 100% of the balance of the term notes to bear interest at the Eurodollar rate plus three percent; the remaining balance bears interest at a rate equal to the "prime" rate plus one and one-half percent. The Loan Agreement was collateralized by substantially all of the Company's assets, and the Loan Agreement provided for certain covenants including, among others, maintenance of a minimum level of working capital and adjusted net worth. The Loan Agreement as amended in March 2000 redefined the working capital covenant to specifically exclude the Senior Notes as a component of working capital and required that the Company maintain $6,000,000 of working capital, excluding the Senior Notes. The net worth covenant was changed to require $30,000,000 of adjusted net worth. At December 31, 2000, the Company had working capital and adjusted net worth of $16,526,000 and $41,635,000, respectively. The Company was required to maintain borrowing availability of not less than $4,500,000 for sixty consecutive days prior to paying principal and interest on its other indebtedness and dividends in cash on its preferred stock. In the first half of 1999 and the first quarter of 2000, the Company violated this covenant, which was waived by the financial institution through May 15, 1999 and 2000, respectively. Since May 15, 2000 the Company has been in compliance with this covenant. 28
In 1996 the Company assumed $10,000,000 of 10.75% Economic Development Revenue Bonds due September 1, 2026 issued by the City of Kimball, Nebraska (the "Bonds"). In connection with the issuance of the Bonds, the Company entered into a facilities lease with the City of Kimball, whereby the City acquired a leasehold interest in the facility and the Company leased the facility back from the City. The Company retains title to the facility. The Bonds were issued at 100% of their principal value. The Bonds are not redeemable prior to September 1, 2006. From that date until September 1, 2008, the Bonds are redeemable at a premium. After September 1, 2008, the Bonds are redeemable at par. Sinking fund payments began on September 1, 1999 in the amount of $100,000 annually and continue in this amount until the year 2008, when the annual sinking fund payment will gradually increase. Effective June 1, 2000, the Bond Documents were amended in order to modify the limitation on additional debt covenant and certain related debt service reserve fund requirements. Under the amended Bond Documents, the Company may now issue Bank Debt up to $35,000,000 provided that after the issuance, the ratio of the Company's total debt to total capital (debt plus stockholders' equity) does not exceed 72% (which ratio will be reduced to 70% on January 1, 2006 and 65% on January 1, 2011). The amended Bond Documents require that the Company make six equal monthly payments of $125,000 each for a total of $750,000 into a debt service reserve fund held by the trustee, if either of the following occurs: (i) the Company's ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to total interest (the "EBITDA coverage ratio") for most recently completed fiscal year is less than 1.5 to 1.0, or (ii) the Company's ratio of debt to total capital at the end of such fiscal year is greater than 65%. The amended bond documents required that the Company satisfy these ratios retroactively to December 31, 1999. Because the Company did not satisfy both of these ratios as of December 31, 1999, the amended Bond Documents required that the Company make six monthly payments of $125,000 each into the debt service reserve fund commencing on June 1, 2000, for total of $750,000. In addition to the $750,000 required to be deposited into the debt service reserve fund based upon the level of the Company's additional debt, the Company could be required to make additional payments to bring the total of the debt service reserve fund to a maximum of approximately $1,200,000 (including the $750,000 described above) if the EBITDA coverage ratio for any fiscal year is less than 1.25 to 1.0. The EBITDA coverage ratio for the year ended December 31, 1999 was 1.39 to 1.0, and the Company was therefore not required to make any such additional payments into the debt service reserve fund based upon the Company's EBITDA coverage ratio. The maximum amount of the debt service reserve fund of approximately $1,200,000 is the same as under the Bond Documents prior to the amendment, but the amendment modified the terms under which the Company may be required to make payments into the fund described above. As of December 31, 2000, Bank Debt totaled $7,927,000 which was less than the $35,000,000 allowed; the Company's total debt to total capital ratio was 61.9% which is less than the 72.0% allowed; and the EBITDA coverage ratio was 2.24 to 1.0 which is greater than the 1.50 to 1.0 required. The Company expects to be in compliance with the Bond covenants at December 31, 2001. Under the Bond covenants, if the Company attains an EBITDA coverage ratio at the end of a calendar year of greater than 1.5 to 1.0, the balance on deposit in the debt service reserve fund in excess of $750,000 will be released for the Company's general use. The Bond Documents require that a minimum balance of $750,000 be maintained in the debt service reserve fund until the Bonds mature. The Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15, 2001 (the "Senior Notes"). The Senior Notes are not collateralized, and the Senior Note indenture does not provide for the maintenance of certain financial covenants, although it does limit, among other things, the issuance of additional debt by the Company or its subsidiaries and the payment of dividends on, and redemption of, capital stock of the Company and its subsidiaries. Interest is paid twice each year on the Senior Notes. The Senior Notes require that the Company provide not less than 30-day prior notice if the Senior Notes are to be redeemed prior to the due date. Notice of redemption has been given to the holders of the Senior Notes, providing for redemption on April 30, 2001. As described below, on April 12, 2001, the Company signed two agreements with lenders which provide that such lenders will provide the funds required to redeem the Senior Notes on the redemption date. 29
As described previously, the Company had at December 31, 2000 a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial institution (the "Lender"). The Loan Agreement provided for a $24,500,000 revolving credit facility (the "Revolver"), a $6,000,000 term promissory note (the "Term Note"), and a $3,000,000 term promissory note (the "2000 Term Note"). On April 12, 2001, the Company signed and closed a $51,000,000 Amended and Restated Loan Agreement (the "Amended Loan Agreement") with the Lender. The Amended Loan Agreement increased the amount available to borrow under the Revolver to $30,000,000 and extended the term of the Revolver to April 12, 2004. The Revolver allows the Company to borrow up to $30,000,000 in cash and letters of credit, based on a formula of eligible accounts receivable. Letters of credit may not exceed $20,000,000 at any one time. The Revolver requires the Company to pay an unused line fee of one-half of one percent on the unused portion of the line. The Amended Loan Agreement required the payment on April 12 of the then $3,800,000 outstanding balance on the Term Note and provided for the issuance of a new $19,000,000 term promissory note (the "Term Note B"). On April 12, 2001, $4,000,000 was advanced under Term Note B to pay the Term Note and other amounts then borrowed by the Company. The Amended Loan Agreement provides for the $15,000,000 balance of Term Note B to be advanced on April 30 to redeem the Senior Notes on that date, provided the representations of the Company in the Amended Loan Agreement remain true and correct in all material respects, the Company is not then in default of the Amended Loan Agreement, and the Company has then issued the Subordinated Notes described below. The interest rate for Term Note B is the greater of the prime rate plus 3.50% or 12.00%, and it is payable in 84 monthly installments commencing May 1, 2001. The terms of the 2000 Term Note remain unchanged. The Amended Loan Agreement allows for up to 80% of the outstanding balance of the Revolver and 100% of the balance of the 2000 Term Note to bear interest at the Eurodollar rate plus three percent; the remaining balance bears interest at the "prime" rate plus one and one-half percent. The Amended Loan Agreement is collateralized by substantially all of the Company's assets, and the Amended Loan Agreement provides for certain covenants including, among others, maintenance of a minimum level of working capital, adjusted net worth and earnings before interest, income taxes, depreciation and amortization ("EBITDA"). The Amended Loan Agreement requires that the Company maintain $10,000,000 of working capital excluding the current portion of liabilities under the Amended Loan Agreement and the Subordinated Note Agreement. The Company had $18,726,000 of working capital calculated on a pro forma basis as if the redemption had taken place on December 31, 2000. The net worth covenant requires that the Company maintain $35,000,000 of net worth until the Subordinated Notes described below are funded and, once the Notes are funded, the net worth covenant requires adjusted net worth, defined as net worth plus the the balance owned on the Subordinated Notes, to be greater than $60,000,000. At December 31, 2000, the pro forma adjusted net worth calculated as if the redemption had taken place on December 31, 2000 was $76,635,000. The Amended Loan Agreement requires that the Company maintain on a rolling four quarter basis a minimum EBITDA of $20,000,000. For the four quarter period ended December 31, 2000, the Company reported EBITDA of $24,925,000. The Amended Loan Agreement also requires that the Company maintain a Senior Debt to EBITDA ratio of not more than 2.25 to 1.0. At December 31, 2000, the pro forma ratio calculated as if the redemption had taken place on December 31, 2000 was 1.33 to 1.0. The Amended Loan Agreement also has conditions precedent to making loans (including the Revolver) including no material adverse change in assets, business or prospects of the Company. On April 12, 2001, the Company also signed a Securities Purchase Agreement (the "Subordinated Note Agreement") providing for the Company to issue on April 30, 2001, $35,000,000 of 16% Senior Subordinated Notes (the "Subordinated Notes"). Until October 30, 2006, the Company, at its option, may pay the interest at the 16% rate or may pay interest at 14% and defer payment of the remaining 2% until the Subordinated Notes are due. Interest payable in cash on the Subordinated Notes is due in semi-annual payments on April 30 and October 30. In conjunction with the Subordinated Notes, the Company will issue detachable warrants for 1,519,020 shares of common stock that are exercisable at $0.01 per share. One-half of the Subordinated Notes are due on April 30, 2007 with the balance due on April 30, 2008. The Subordinated Note Agreement calls for the $35,000,000 to be advanced on April 30, 2001 in order to redeem the Senior Notes. The Subordinated Note Agreement contains conditions of closing the most restrictive of which are that representations by the Company in the Agreement remain true, that the Company have not less than $3,500,000 available under the Revolver on 30
April 30, 2001, and that no material adverse change shall have occurred prior to April 30, 2001 in the business and financial condition of the Company. The Subordinated Note Agreement provides that the holders of the Subordinated Notes will be able to call the Notes in the event of a change in control of the Company. The Subordinated Note Agreement contains covenants the most restrictive of which require that the Company maintain a rolling four quarter fixed charge coverage ratio of not less than 1.10 to 1.0. For the year ended December 31, 2000, the fixed charge coverage ratio was 1.82 to 1.0. The Subordinated Notes require that the Company maintain a tangible capital base of not less than $27,000,000 for the quarters ending March 31 and June 30, 2001, not less than $30,500,000 for the quarter ending September 30, 2001, not less than $33,000,000 for the quarter ending December 31, 2001 and not less than $35,500,000 for quarters ending thereafter. At December 31, 2000, the tangible capital base was $45,169,000. The Company is required to maintain rolling four quarter earnings before interest, income taxes, depreciation and amortization (EBITDA) of not less than $18,000,000. For the four quarter period ended December 31, 2000, EBITDA was $24,925,000. The Company shall maintain a priority debt to EBITDA ratio calculated as of the last day of each fiscal quarter of not more than 2.25 to 1.0. Priority debt currently consists of debt issued under the Amended Loan Agreement. At December 31, 2000, the pro forma priority debt to EBITDA ratio calculated as if the redemption had taken place on December 31, 2000 was 1.33 to 1.0. The Company is required to maintain a ratio of total liabilities to tangible capital base of not more than 3.00 to 1.0 for the fiscal quarters ending June 30, September 30 and December 31, 2001 and for the quarters ending March 31, 2002 and thereafter a ratio of not more than 2.75 to 1.0. At December 31, 2000 the total liabilities to tangible capital base ratio was 1.61 to 1.0. The Company believes that cash generated from operations in the future together with availability under its Revolver will be sufficient to operate the business and fund capital expenditures. In addition, the Company believes that interest expense in 2001 will be somewhat higher than in 2000 with an increase in interest expense due to higher average interest rates being partially offset by lower average debt outstanding. Dividends on the Company's Series B Convertible Preferred Stock are payable on the 15th day of January, April, July and October, at the rate of $1.00 per share, per quarter; 112,000 shares are outstanding. Under the terms of the preferred stock, the Company can elect to pay dividends in cash or in common stock with a market value equal to the amount of the dividend payable. Since March 1995, the Company has been required to pay the dividends in common stock due to restrictions under its loan agreements. The Company issued a total of 227,000 shares of common stock to the holders of the preferred stock for the year 2000. The Company anticipates that commencing in the third quarter of 2001 the preferred stock dividends will be paid in cash. New Accounting Pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues, clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a non-compensatory plan; the accounting consequences of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000 but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN 44 did not have a material impact on the Company's results of operations or its financial position. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The staff believes that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company believes that its current revenue recognition policy complies with the Commission's guidelines. SAB 101 became effective in the fourth quarter of 2000. 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk on the interest that it pays on its debt due to changes in the general level of interest rates. The Company manages its interest rate exposure by borrowing at fixed rates for longer time horizons to finance non-current assets and by borrowing at variable rates for working capital and other short term needs. As previously discussed, the Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15, 2001. The Senior Notes require that the Company provide not less than 30-day notice if the Senior Notes are to be redeemed prior to the due date. Notice of redemption has been given to the holders of the Senior Notes, providing for redemption on April 30, 2001. The following table provides information regarding the Company's fixed rate borrowings assuming that the Senior Notes are redeemed as expected and partially replaced with $35,000,000 of Subordinated Notes (dollars in thousands): <TABLE> <CAPTION> Scheduled Maturity Dates 2001 2002 2003 2004 2005 Thereafter Total - ------------------------ ---- ---- ---- ---- ---- ---------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Economic Development Revenue Bonds........................ $100 $100 $100 $100 $100 $ 9,300 $ 9,800 Subordinated Notes............ -- -- -- -- -- 35,000 35,000 ---- ---- ---- ---- ---- ------- ------- Total......................... $100 $100 $100 $100 $100 $44,300 $44,800 ==== ==== ==== ==== ==== ======= ======= Weighted average interest rate on fixed rate borrowings excluding amortization of debt discount for warrants issued....................... 13.8% 14.9% 14.9% 14.9% 14.9% ==== ==== ==== ==== ==== </TABLE> In addition to the fixed rate borrowings described in the table above, the Company had at December 31, 2000 borrowings at variable interest rates of $7,927,000 under the Revolver and Term Notes which bear interest at the "prime" rate (9.50% at December 31, 2000) plus 1.5% or at the Eurodollar rate (6.64% at December 31, 2000) plus 3.0%. As previously discussed, notice of redemption has been given to the holders of the Senior Notes. The redemption of the Senior Notes is expected to result in a larger amount of variable rate debt being outstanding in 2001 as compared to the amount of variable rate debt outstanding at December 31, 2000. If the redemption of the Senior Notes had occurred on December 31, 2000, the amount of variable rate debt outstanding at December 31, 2000 would have been $22,927,000. The following table presents hypothetical situations of the amount of interest expense that would be incurred in 2001 if the redemption had taken place December 31, 2000, assuming that this amount remained outstanding for the entire year and assuming three scenario for interest rates: (i) interest rates remain unchanged from those on December 31, 2000, (ii) interest rates increase by 200 basis points and (iii) interest rates decrease by 200 basis points (dollars in thousands): <TABLE> <CAPTION> Pro Forma Interest if Interest if Interest if Principal Interest Rates Interest Rates Interest Rates Description of Debt Balance Remain Unchanged Increase 200 b.p. Decrease 200 b.p. ------------------- --------- ---------------- ----------------- ----------------- <S> <C> <C> <C> <C> Term Note B............. $19,000 $2,470 $2,850 $2,280 2000 Term Note.......... 2,333 225 271 178 Revolver................ 1,594 171 203 139 ------- ------ ------ ------ Total................... $22,927 $2,866 $3,324 $2,597 ======= ====== ====== ====== </TABLE> The Company is not subject to market risk arising from transactions in foreign currencies since substantially all revenues and expenses are transacted in U.S. dollars. The Company is subject to minimal market risk arising from purchases of commodities since no significant amount of commodities are used in the treatment of hazardous waste. 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Clean Harbors, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Clean Harbors, Inc. and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 6, 2001 (except for Note 16, as to which the date is April 12, 2001) 33
CLEAN HARBORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) <TABLE> <CAPTION> For the years ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- <S> <C> <C> <C> Revenues........................................ $233,466 $202,965 $197,439 Cost of revenues................................ 166,303 149,637 147,214 Selling, general and administrative expenses.... 42,238 37,190 34,976 Depreciation and amortization of intangible assets......................................... 10,656 9,501 9,112 -------- -------- -------- Income from operations.......................... 14,269 6,637 6,137 Interest expense, net........................... 9,167 8,599 9,631 -------- -------- -------- Income (loss) before provision for (benefit from) income taxes............................. 5,102 (1,962) (3,494) Provision for (benefit from) income taxes....... (2,016) 282 360 -------- -------- -------- Net income (loss)............................... $ 7,118 $ (2,244) $ (3,854) ======== ======== ======== Basic earnings (loss) per share................. $ 0.60 $ (0.25) $ (0.42) ======== ======== ======== Diluted earnings (loss) per share............... $ 0.59 $ (0.25) $ (0.42) ======== ======== ======== Weighted average common shares outstanding...... 11,085 10,649 10,309 ======== ======== ======== Weighted average common shares outstanding plus potentially dilutive common shares............. 11,305 10,649 10,309 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 34
CLEAN HARBORS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (dollars in thousands) <TABLE> <CAPTION> As of December 31, ----------------- 2000 1999 -------- -------- <S> <C> <C> Current assets: Cash and cash equivalents.................................. $ 2,629 $ 2,783 Restricted cash or investments............................. 768 1,116 Accounts receivable, net of allowance for doubtful accounts of $1,549 and $1,157, respectively........................ 47,201 43,780 Prepaid expenses........................................... 1,563 1,094 Supplies inventories....................................... 3,379 2,808 Income tax receivable...................................... 203 122 Deferred tax assets........................................ 2,400 -- -------- -------- Total current assets..................................... 58,143 51,703 -------- -------- Property, plant and equipment: Land....................................................... 8,478 8,478 Buildings and improvements................................. 42,700 40,612 Vehicles and equipment..................................... 90,794 84,528 Furniture and fixtures..................................... 2,225 2,219 Construction in progress................................... 794 1,224 -------- -------- 144,991 137,061 Less--accumulated depreciation and amortization............ 89,389 80,849 -------- -------- 55,602 56,212 -------- -------- Other assets: Goodwill, net.............................................. 19,799 20,566 Permits, net............................................... 11,667 12,633 Other...................................................... 4,357 4,133 -------- -------- 35,823 37,332 -------- -------- Total assets............................................. $149,568 $145,247 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 35
CLEAN HARBORS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (dollars in thousands) <TABLE> <CAPTION> As of December 31, ------------------ 2000 1999 -------- -------- <S> <C> <C> Current liabilities: Current maturities of long-term obligations.............. $ 52,300 $ 1,300 Accounts payable......................................... 19,100 17,830 Accrued disposal costs................................... 7,479 6,591 Other accrued expenses................................... 12,601 11,360 Income taxes payable..................................... 137 57 -------- -------- Total current liabilities.............................. 91,617 37,138 -------- -------- Other liabilities: Long-term obligations, less current maturities........... 14,958 72,683 Other.................................................... 1,358 1,255 -------- -------- Total other liabilities................................ 16,316 73,938 -------- -------- Commitments and contingent liabilities (Notes 5, 7, 9, 10, 11 and 16) Stockholders' equity: Preferred stock, $.01 par value: Series A convertible preferred stock: Authorized 2,000,000 shares; issued and outstanding-- none.................................................. -- -- Series B convertible preferred stock: Authorized 156,416 shares; issued and outstanding 112,000 shares (liquidation preference of $5,600,000)........................................... 1 1 Common stock, $.01 par value: Authorized 20,000,000 shares; issued and outstanding 11,216,107 and 10,798,007 shares, respectively........ 112 108 Additional paid-in capital............................... 61,999 61,245 Accumulated other comprehensive loss..................... -- (36) Accumulated deficit...................................... (20,477) (27,147) -------- -------- Total stockholders' equity............................. 41,635 34,171 -------- -------- Total liabilities and stockholders' equity............. $149,568 $145,247 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 36
CLEAN HARBORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> For the years ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss)................................. $ 7,118 $(2,244) $(3,854) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 10,656 9,501 9,112 Allowance for doubtful accounts................. 684 683 559 Amortization of deferred financing costs........ 345 344 490 Deferred income taxes........................... (2,400) -- 113 (Gain) loss on sale of fixed assets............. (70) -- 15 Changes in assets and liabilities, net of acquisition: Accounts receivable........................... (4,105) (2,800) (4,132) Prepaid expenses.............................. (469) (155) 579 Supplies inventories.......................... (571) 50 (47) Income tax receivable......................... (81) 1,114 433 Other assets.................................. (224) 463 (198) Accounts payable.............................. 374 (231) 4,107 Accrued disposal costs........................ 888 256 (765) Other accrued expenses........................ 1,241 (769) (2,573) Income taxes payable.......................... 80 7 40 Other liabilities............................. 103 (113) 17 ------- ------- ------- Net cash provided by operating activities..... 13,569 6,106 3,896 ------- ------- ------- Cash flows from investing activities: Additions to property, plant and equipment........ (7,403) (5,080) (4,534) Acquisition....................................... -- (1,900) -- Proceeds from sales and maturities of restricted investments...................................... 1,152 1,225 150 Cost of restricted investments purchased.......... (768) -- (1,425) Proceeds from sale of fixed assets................ 148 -- 83 Increase in permits............................... (92) (359) (674) ------- ------- ------- Net cash used in investing activities......... (6,963) (6,114) (6,400) ------- ------- ------- Cash flows from financing activities: Payments on long-term obligations................. (1,867) (3,050) (4,037) Net borrowings (payments) under long-term revolver......................................... (8,203) (324) 4,363 Issuance of long-term debt........................ 3,000 4,139 -- Proceeds from employee stock purchase plan........ 154 131 133 Proceeds from exercise of stock options........... 156 -- 5 ------- ------- ------- Net cash provided by (used in) financing activities................................... (6,760) 896 464 ------- ------- ------- Increase (decrease) in cash and cash equivalents... (154) 888 (2,040) Cash and cash equivalents, beginning of year....... 2,783 1,895 3,935 ------- ------- ------- Cash and cash equivalents, end of year............. $ 2,629 $ 2,783 $ 1,895 ======= ======= ======= Supplemental information: Cash payments (receipts) for interest and income taxes: Interest, net..................................... $ 9,172 $ 7,463 $ 9,967 Income taxes, net................................. 381 (1,236) (201) Non cash investing and financing activities: Stock dividend on preferred stock................. $ 448 $ 448 $ 448 Property, plant & equipment accrued............... 896 194 131 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 37
CLEAN HARBORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) <TABLE> <CAPTION> Series B Preferred Stock Common Stock Accumulated ------------ ------------ Other Retained Number $0.01 Number $0.01 Additional Comprehensive Comprehensive Earnings/ Total of Par of Par Paid-in Income Income (Accumulated Stockholders' Shares Value Shares Value Capital (Loss) (Loss) Deficit) Equity ------ ----- ------ ----- ---------- ------------- ------------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1997................... 112 $ 1 10,101 $101 $60,087 -- $(12) $(20,153) $40,024 Net loss............... -- -- -- -- -- $(3,854) -- (3,854) (3,854) Other comprehensive loss, net of tax Unrealized holding gains arising in the period................ -- -- -- -- -- 2 -- -- -- Reclassification adjustment for gains included in net loss.. -- -- -- -- -- -- -- -- -- ------- Other comprehensive income................ -- -- -- -- -- 2 2 -- 2 ------- Comprehensive loss..... -- -- -- -- -- $(3,852) -- -- -- ======= Preferred stock dividends: Series B............... -- -- 229 2 446 -- -- (448) -- Employee stock purchase plan.................. -- -- 88 1 132 -- -- -- 133 Proceeds from exercise of stock options...... -- -- 3 -- 5 -- -- -- 5 --- --- ------ ---- ------- ------- ---- -------- ------- Balance at December 31, 1998................... 112 $ 1 10,421 $104 $60,670 -- $(10) $(24,455) $36,310 Net Loss............... -- -- -- -- -- $(2,244) -- (2,244) (2,244) Other comprehensive loss, net of tax Unrealized holding gains arising in the period................ -- -- -- -- -- -- -- -- -- Unrealized losses on securities, net of reclassification adjustment............ -- -- -- -- (26) -- -- -- ------- Other comprehensive loss.................. -- -- -- -- -- (26) (26) -- (26) ------- Comprehensive loss..... -- -- -- -- -- $(2,270) -- -- -- ======= Preferred stock dividends: Series B............... -- -- 279 3 445 -- -- (448) -- Employee stock purchase plan.................. -- -- 98 1 130 -- -- -- 131 --- --- ------ ---- ------- ------- ---- -------- ------- Balance at December 31, 1999................... 112 $ 1 10,798 $108 $61,245 -- $(36) $(27,147) $34,171 Net Income............. -- -- -- -- -- $ 7,118 -- 7,118 7,118 Other comprehensive income, net of tax Unrealized holding gains arising in the period................ -- -- -- -- -- -- -- -- -- Reclassification adjustment for losses included in net income................ -- -- -- -- -- 36 -- -- -- ------- Other comprehensive income................ -- -- -- -- -- 36 36 -- 36 ------- Comprehensive income... -- -- -- -- -- $ 7,154 -- -- -- ======= Preferred stock dividends: Series B............... -- -- 227 2 446 -- -- (448) -- Employee stock purchase plan.................. -- -- 115 1 153 -- -- -- 154 Proceeds from exercise of stock options...... -- -- 76 1 155 -- -- -- 156 --- --- ------ ---- ------- ------- ---- -------- ------- Balance at December 31, 2000................... 112 $ 1 11,216 $112 $61,999 -- $ -- $(20,477) $41,635 === === ====== ==== ======= ======= ==== ======== ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 38
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) OPERATIONS Clean Harbors, Inc. and its wholly-owned subsidiaries (collectively, the "Company") provide a broad range of environmental services including: industrial waste management services involving transportation, treatment and disposal of industrial wastes; site services provided at customer sites; industrial cleaning and maintenance; and specialized handling of laboratory chemicals and household hazardous wastes. The Company provides these services to a diversified customer base across the United States, primarily in the Northeast, Mid-Atlantic, Midwest and Western Regions. (2) SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of the Company reflect the application of certain significant accounting policies as described below: (a) Principles of Consolidation The accompanying consolidated statements include the accounts of Clean Harbors, Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Revenue Recognition The Company recognizes revenues and accrues the related cost of treatment and disposal upon the receipt of waste materials, except for incineration where revenue is recognized as waste is burned. Other revenues are recognized as the related costs are incurred. (c) Income Taxes Deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit is the result of changes between deferred tax assets and liabilities. A valuation allowance is established when, based on an evaluation of objective verifiable evidence, there is a likelihood that some portion or all of deferred tax assets will not be realized. (d) Earnings per Share Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS gives effect to all potential dilutive common shares that were outstanding during the period. (e) Segment Information The Company operates in a single segment as a full service provider of environmental services within the United States and Puerto Rico, and no individual customer accounts for more than 5% of revenues. (f) Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with original maturities of less than three months to be cash equivalents. 39
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (2) SIGNIFICANT ACCOUNTING POLICIES--(Continued) (g) Investments Debt securities are classified as "available for sale" or "held to maturity." Available for sale securities are recorded at fair value with the offsetting unrealized gain or loss included, net of tax, in stockholders' equity. Held to maturity securities are recorded at amortized cost. (h) Supplies inventory Supplies inventory, stated at the lower of cost or market, is charged to operations on a first-in, first-out basis. (i) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company depreciates and amortizes the cost of these assets, less the estimated salvage value, using the straight-line method as follows: <TABLE> <CAPTION> Estimated Asset Classification Useful Life -------------------- ----------- <S> <C> Buildings and improvements..................................... 5-30 years Vehicles and equipment......................................... 3-15 years Furniture and fixtures......................................... 5-8 years </TABLE> Leaseholds are amortized over the shorter of the life of the lease or the asset. Depreciation expense includes depreciation of property, plant and equipment, and equipment capitalized under capital leases. Depreciation expense was $8,831,000 for 2000, $7,694,000 for 1999 and $7,461,000 for 1998. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss is reflected in income. Repairs and maintenance costs are expensed as incurred. (j) Goodwill and Permits Goodwill and permits, as further discussed in Note 6, are stated at cost and are being amortized using the straight-line method over 20 years for permits and periods ranging from 20 to 40 years for goodwill. An impairment in the carrying value of long-lived assets, including goodwill and permits, is recognized when the expected future undiscounted cash flows derived from the assets are less than its carrying value. In addition, the Company's evaluation considers nonfinancial data such as market trends and changes in management's market emphasis. (k) Deferred Financing Costs Deferred financing costs are amortized over the life of the related debt instrument, and they are carried as a component of long-term debt. (l) Costs to Treat Environmental Contamination Costs relating to environmental cleanup resulting from operating activities are expensed as incurred. Environmental cleanup costs that improve properties, as compared with the condition of that property when originally acquired, are capitalized to the extent that they are recoverable. 40
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (2) SIGNIFICANT ACCOUNTING POLICIES--(Continued) (m) Letters of Credit The Company utilizes letters of credit to provide collateral assurance to regulatory authorities that certain funds will be available for closure as described in Note 5. In addition the Company utilizes letters of credit to provide collateral for casualty insurance programs, to provide collateral for the vehicle lease line and to provide collateral for a transportation permit. As of December 31, 2000 and 1999, the Company had outstanding letters of credit amounting to $10,347,000 and $6,299,000, respectively. As of December 31, 2000, the Company had no significant concentrations of credit risk. (n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (o) Reclassifications Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the 2000 presentation. (3) ACQUISITION On May 25, 1999, the Company acquired the assets of the Texas Transportation and Brokerage Divisions of American Ecology Services Corporation for a cash price of $1,900,000. The divisions operate out of locations in Dallas and Houston, Texas. The divisions provide waste management services primarily to small quantity generators throughout Texas and transportation services for both solid and liquid wastes. This acquisition has been accounted for under the purchase method of accounting. The purchase price has been allocated based on estimated fair values of assets acquired at the date of acquisition. The acquisition resulted in $272,000 of acquired goodwill, which is being amortized on the straight-line basis over 20 years. The results of the acquired businesses have been included in the consolidated financial statements since the acquisition date. The acquisition did not materially affect revenues or results of operations for the years ended December 31, 2000 and 1999. Assuming this acquisition had occurred January 1, 1998, consolidated, pro forma revenues, net loss and loss per share would not have been materially different than the amounts reported for the years ended December 31, 1998 and 1999. Such unaudited pro forma amounts are not indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1998. 41
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents approximate fair value. The fair value of restricted investments is based on quoted market prices for these securities. The fair values of the Company's bank borrowings approximate fair value because the interest rates are based on floating rates identified by reference to market rates. The fair values of the Company's senior notes and industrial development revenue bonds (the "Bonds") cannot be determined, since there is no active market in these securities. At December 31, 2000 and 1999, the estimated fair values of the Company's financial instruments are as follows (in thousands): <TABLE> <CAPTION> Net Carrying Fair Unrealized Amount Value Loss -------- ------ ---------- <S> <C> <C> <C> December 31, 2000 Cash and cash equivalents...................... $2,629 $2,629 $ -- Restricted cash and cash equivalents........... 768 768 -- Senior Notes and Bonds for which no quoted market prices are available................................. 59,800 -- -- Other long-term obligations.................... 7,827 7,827 -- December 31, 1999 Cash and cash equivalents...................... $2,783 $2,783 $ -- Restricted investments available for sale...... 840 840 (55) Restricted investments held to maturity........ 276 276 -- Long-term obligations for which no quoted market prices are available................................. 59,900 -- -- Other long-term obligations.................... 14,897 14,897 -- </TABLE> Restricted cash and cash equivalents at December 31, 2000, as further discussed in Note 9, consists of investments in money market funds held in a debt service reserve fund. Available for sale securities are mortgage backed securities. Held to maturity securities consists primarily of collateralized mortgage obligations. Contractual maturities as of December 31, 1999 range from one to ten years, with the majority being five years or less. As further discussed in Note 5, securities available for sale and held to maturity were sold in 2000 when financial assurance for closure and post closure care of facilities was placed with a qualified insurance company. (5) RESTRICTED INVESTMENTS Operators of hazardous waste handling facilities are 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 had purchased closure insurance from Frontier Insurance Company, as had a number of other companies that operate hazardous waste facilities. In June 2000 due to deteriorating financial condition, Frontier Insurance Company was dropped from the listing of approved sureties. This required any company that had obtained financial assurance through Frontier Insurance Company to obtain financial assurance through some other source within 60 days. In July 2000, the Company obtained the required closure insurance through a qualified insurance company. As part of this transaction, closure insurance that had been placed with a wholly-owned captive insurance company was cancelled and placed with insurance from a third party insurer. The cancellation of the insurance with the wholly-owned captive insurance company allowed for the sale of the previously restricted securities. No restricted securities were held by the wholly-owned captive insurance company at December 31, 2000. 42
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (5) RESTRICTED INVESTMENTS--(Continued) At December 31, 1999 the wholly-owned captive insurance company held securities that were restricted for future payment of insurance claims. These securities had an amortized cost of $1,171,000. A valuation allowance of $55,000 was recorded to reflect the fair value of available for sale securities of $840,000. No valuation allowance was required to reflect the fair value of held to maturity securities of $276,000. In 2000 as further discussed in Note 9, the Company was required to pay funds into a debt service reserve fund. These funds were restricted as to use and were to provide additional security to the holders of the bonds. At December 31, 2000, these payments plus interest earned totaled $768,000. (6) INTANGIBLE ASSETS Below is a summary of intangible assets at December 31, 2000 and 1999 (in thousands): <TABLE> <CAPTION> 2000 1999 ------- ------- <S> <C> <C> Goodwill.................................................. $28,948 $28,948 Permits................................................... 20,693 20,601 ------- ------- 49,641 49,549 Less accumulated amortization............................. 18,175 16,350 ------- ------- $31,466 $33,199 ======= ======= </TABLE> Permits consist of the value of permits acquired through acquisition and environmental cleanup costs that improve facilities, as compared with the condition of that property when originally acquired. Amounts capitalized as permits were $92,000 and $359,000 in 2000 and 1999, respectively. Amortization expense approximated $1,825,000, $1,807,000 and $1,651,000, for the years 2000, 1999, and 1998, respectively. (7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS (a) Legal Matters In the ordinary course of conducting its business, the Company becomes involved in environmentally related lawsuits and administrative proceedings. Some of these proceedings may result in fines, penalties or judgments against the Company. As of December 31, 2000, the Company has been named as a potentially responsible party ("PRP") in a number of lawsuits arising from the disposal of wastes by certain Company subsidiaries at 27 state and federal Superfund sites. Fourteen of these cases involve two subsidiaries which the Company acquired from Chemical Waste Management, Inc. ("ChemWaste"), a former subsidiary of Waste Management, Inc. ("Waste Management"). As part of the acquisition, ChemWaste agreed to indemnify the Company with respect to any liability of its Braintree and Natick subsidiaries for waste disposed of before the Company acquired them. Accordingly, Waste Management is paying all costs of defending the Natick and Braintree subsidiaries in these 14 cases, including legal fees and settlement costs. Four cases involve Mr. Frank, Inc. and one case involves Connecticut Treatment Center ("CTC"). Southdown, Inc., from which the Company bought CTC, has agreed to indemnify the Company with respect to any liability for waste disposed of by CTC before the Company acquired CTC, and the sellers of Mr. Frank, Inc. agreed to a limited indemnity against certain environmental liabilities arising from prior operations of Mr. Frank, Inc. Six pending cases involve subsidiaries which the Company acquired in January 1989, when it purchased all of the outstanding shares of ChemClear Inc., a publicly traded 43
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS--(Continued) company ("ChemClear"). The Company has also been identified as a PRP at two additional sites at which the Company believes it has no liability. Management routinely reviews each Superfund site in which the Company's subsidiaries are involved, considers each subsidiary's role at each site and its relationship to the other PRPs at the site, the quantity and content of the waste it disposed of at the site, and the number and financial capabilities of the other PRPs at the site. Based on reviews of the various sites and currently available information, and management's judgment and prior experience with similar situations, expense accruals are provided by the Company for its share of future site cleanup costs, and existing accruals are revised as necessary. The Company had accrued environmental costs, based on the Company's estimate of its expected liability of $144,000 and $285,000 for cleanup of Superfund sites at December 31, 2000 and 1999, respectively. However, Superfund legislation permits strict joint and several liability to be imposed without regard to fault and, as a result, one PRP might be required to bear significantly more than its proportional share of the cleanup costs if other PRPs do not pay their share of such costs. Environmental regulations stipulate the amount of transit and holding time that shipments of hazardous waste are allowed. Certain federal agencies, including the United States Environmental Protection Agency, conducted an inquiry concerning certain railcars which were destined for the Company's Kimball, Nebraska incinerator. Several railcars containing waste materials generated by the Company's waste treatment plants were not delivered to the Company's Sterling, Colorado rail transfer facility in a timely manner by the railroad company. The Company has cooperated fully with the federal and state authorities and has arranged for company personnel to be interviewed and has produced records, documents and other materials concerning the railcars in question. The Company has conducted its own internal investigation and believes that there has been no wrongdoing on the part of the Company with respect to the late delivery of railcars. However, assurances cannot be given that the government authorities may not reach a different conclusion or attempt to levy penalties. The Company is engaged in settlement negotiations with the government. In October 1995 an employee was killed in an accident when a drum exploded at a facility in Cincinnati, Ohio operated by a subsidiary, Spring Grove Resource Recovery, Inc. ("Spring Grove"). During 1999 the Company was notified by the Justice Department that the Department believed it had a cause of action against the subsidiary for potential civil and/or criminal violations of its permit issued under the Federal Resources Conservation and Recovery Act of 1976 ("RCRA") as a result of the 1995 accident. The Company has conducted an exhaustive internal review of the circumstances leading up to the accident and believes that the subsidiary did not knowingly violate relevant terms of its RCRA permit. The Company has also engaged the services of external legal and regulatory experts to review the situation and they have also concluded that the available evidence does not support a conclusion that the subsidiary knowingly violated its permit. No assurances can be given, however, that government authorities will not reach a different conclusion and proceed with legal action or attempt to levy penalties. The Company has executed tolling agreements with the government and is presently engaged in discussions with the government in an effort to resolve this matter. (b) Environmental Matters Under the Federal Resources Conservation and Recovery Act of 1976 ("RCRA"), every facility that treats, stores or disposes of hazardous waste must obtain a RCRA permit from the EPA or an authorized state agency and must comply with certain operating requirements. Of the Company's 12 waste management facilities, nine are subject to RCRA licensing. RCRA requires that permits contain a schedule of required on-site study and 44
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS--(Continued) cleanup activities, known as "corrective action," including detailed compliance schedules and provisions for assurance of financial responsibility. The EPA or applicable state agency have begun RCRA corrective action investigations at the Company's RCRA licensed facilities in Baltimore, Maryland; Chicago, Illinois; Braintree, Massachusetts; Natick, Massachusetts; Woburn, Massachusetts; and Cincinnati, Ohio. The Company is also involved in site studies at its non-RCRA facilities in Cleveland, Ohio; Kingston, Massachusetts; and South Portland, Maine. In January 1995, the Company entered into a definitive agreement with ChemWaste to lease a site previously leased by ChemWaste which adjoins the Company's Chicago facility. During November 1995, the Company acquired the existing improvements on the ChemWaste site in exchange for agreeing to share the costs of dismantling an existing hazardous waste incinerator and cleaning up the site. Under the sharing arrangement with ChemWaste, the Company will manage the RCRA corrective action investigation at the site and over a period of 15 years could be required to contribute up to a maximum of $2,000,000 for dismantling and decontaminating the incinerator and other equipment, and up to a maximum of $7,000,000 for studies and cleanup of the site. Any additional costs beyond those contemplated by the sharing arrangement during this time period would be borne by ChemWaste. The Company had accruals of $1,729,000 and $1,627,000 relating to this liability at December 31, 2000 and 1999, respectively, which are the unused amounts of a remediation accrual plus accrued interest that was established as part of the acquisition of ChemWaste's Chicago Facility. In addition, the Company believes that it would be able to appropriately capitalize the remediation expenditures in excess of the amount accrued that it may be obligated to make under the agreement. No estimate can be made as to when the remediation activities will be completed. Two RCRA facilities in Bristol, Connecticut and Cincinnati, Ohio were acquired from a subsidiary of Southdown, Inc. Southdown has agreed to indemnify the Company against any costs incurred or liability arising from contamination on-site arising from prior ownership, including the cost of corrective action. The prior owner of the Woburn facility provided a limited indemnity for any costs incurred or liability arising from contamination on- site due to prior ownership. The following table summaries non-reimbursed environmental remediation expenditures capitalized and expenses incurred relating to the Company's facilities for the years ended December 31 (in thousands): <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Environmental expenditures capitalized..................... $ 92 $274 $674 Environmental expenses incurred............................ 225 37 95 ---- ---- ---- $317 $311 $769 ==== ==== ==== </TABLE> The Company was also involved in a RCRA corrective action investigation at a site in Chester, Pennsylvania owned by PECO Energy Company ("PECO"). The site consists of approximately 30 acres which PECO had leased to various companies over the years. In 1989, the Company acquired by merger a public company named ChemClear Inc., which operated a hazardous waste treatment facility on approximately eight acres of the Chester site leased from PECO. The Company ceased operations at the Chester site, decontaminated the plant and equipment, engaged an independent engineer to certify closure, and obtained final approval from the Pennsylvania regulatory authorities, certifying final closure of the facility. In 1993, the EPA ordered PECO to perform a RCRA corrective action investigation at the Chester site. PECO asked the Company to participate in the site studies, and in October 1994, the Company agreed to be responsible for seventy-five percent of the cost of these studies, which was estimated to be in the range of $2,000,000, by, among other things, performing field 45
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) LEGAL MATTERS AND OTHER CONTINGENCIES AND COMMITMENTS--(Continued) services work and analytical services required to complete the site studies and providing other environmental services to PECO at discounted rates. The Company had provided discounts and credits to PECO totaling $908,000 through August 2, 1999. The Company and PECO then negotiated an amendment to their 1994 agreement, whereby the Company's responsibility for its share of the cost of site studies was capped at $1,733,000. The studies were completed in 2000, whereupon the EPA's order will terminate. The Company had accrued $825,000 relating to this liability at December 31, 1999. The $825,000 balance owed under the amendment at the end of 1999 was paid in 2000. (c) Other Contingencies The Company is subject to various regulatory requirements, including the procurement of requisite licenses and permits at its facilities. These licenses and permits without which the Company's operations would be adversely affected are subject to periodic renewal. The Company anticipates that, once a license or permit is issued with respect to a facility, the license or permit will be renewed at the end of its term if the facility's operations are in compliance with the applicable regulatory requirements. Under the Company's insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. It is the policy of the Company to retain a significant portion of certain expected losses related primarily to workers' compensation, comprehensive general and vehicle liability. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims. (8) OTHER ACCRUED EXPENSES Other accrued expenses consist of the following (in thousands): <TABLE> <CAPTION> 2000 1999 ------- ------- <S> <C> <C> Insurance.................................................. $ 2,597 $ 2,329 Other items................................................ 10,004 9,031 ------- ------- $12,601 $11,360 ======= ======= </TABLE> 46
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (9) FINANCING ARRANGEMENTS The following table is a summary of the Company's long-term debt obligations: <TABLE> <CAPTION> December 31, 2000 1999 ------- ------- (in thousands) <S> <C> <C> Long-term obligations consist of the following: Economic development revenue bonds, bearing interest at 10.75%.................................................... $ 9,800 $ 9,900 Revolving credit with a financial institution, bearing interest at the Eurodollar rate (6.64% at December 31, 2000) plus 3.00% or the "prime" rate (9.50% at December 31, 2000) plus 1.50%, collateralized by substantially all assets.................................................... 1,394 9,597 Term note payable, bearing interest at the Eurodollar rate (6.64% at December 31, 2000) plus 3.00% or the "prime" rate (9.50% at December 31, 2000) plus 1.50% collateralized by substantially all assets................ 4,200 5,300 2000 Term Note payable, bearing interest at the Eurodollar rate (6.64% at December 31, 2000 plus 3.00% or the "prime" rate (9.50% at December 31, 2000) plus 1.50% collateralized by substantially all assets................ 2,333 -- Senior notes payable, bearing interest at 12.50%........... 50,000 50,000 ------- ------- 67,727 74,797 Less current maturities.................................... 52,300 1,300 Less unamortized financing costs........................... 469 814 ------- ------- Long-term obligations...................................... $14,958 $72,683 ======= ======= </TABLE> Below is a summary of minimum principal payments due under the Company's long-term obligations (in thousands): <TABLE> <CAPTION> Year Amount ---- ------- <S> <C> 2001............................................................. $52,300 2002............................................................. 2,300 2003............................................................. 3,027 2004............................................................. 700 2005............................................................. 100 Thereafter....................................................... 9,300 ------- Total minimum payments due under long-term obligations including current maturities.............................................. $67,727 ======= </TABLE> As amended, the Company had a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial institution. Subsequent to year end and as further disclosed in Note 16, the Company signed and closed on a $51,000,000 Amended and Restated Loan Agreement with the same financial institution. The Loan Agreement provided for a $24,500,000 revolving credit portion (the "Revolver"), a $6,000,000 term promissory note (the "Term Note"), and a $3,000,000 term promissory note (the "2000 Term Note"). In May 1999, the Term Note was amended. The Term Note as amended allowed the Company to increase the amount borrowed under the Term Note by $4,139,000 from the $1,861,000 owed prior to the amendment of the Term Note to the $6,000,000 principal amount of the Term Note as amended. The Term Note had monthly principal payments of $100,000 with the last payment due in May, 2004. In March of 2000, the Loan Agreement was amended and an additional 47
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (9) FINANCING ARRANGEMENTS--(Continued) term promissory note, the 2000 Term Note, was entered into with the financial institution. The original principal amount of the 2000 Term Note is $3,000,000, and it is payable in 36 monthly installments commencing on May 1, 2000. The funds provided from the 2000 Term Note have been used primarily to purchase vehicles and rolling stock that the Company previously leased under operating leases. The Revolver allowed the Company to borrow up to $24,500,000 in cash and letters of credit, based on a formula of eligible accounts receivable. Letters of credit may not exceed $20,000,000 at any one time. At December 31, 2000 and 1999, funds available to borrow under the Revolver were $12,760,000 and $8,603,000, respectively. The Revolver requires the Company to pay a line fee of one half of one percent on the unused portion of the line. In March 2000, the term of the Revolver was extended from May 8, 2001 to May 8, 2003. The Loan Agreement allowed for up to 80% of the outstanding balance of the Revolver and 100% of the balance of the term notes to bear interest at the Eurodollar rate plus three percent; the remaining balance bears interest at a rate equal to the "prime" rate plus one and one-half percent. The Loan Agreement was collateralized by substantially all of the Company's assets, and the Loan Agreement provided for certain covenants including, among others, maintenance of a minimum level of working capital and adjusted net worth. The Loan Agreement, as amended in March 2000, redefined the working capital covenant to specifically exclude the Senior Notes as a component of working capital and required that the Company maintain $6,000,000 of working capital, excluding the Senior Notes. The net worth covenant was changed to require $30,000,000 of adjusted net worth. At December 31, 2000, the Company had working capital and adjusted net worth of $16,526,000 and $41,635,000, respectively. The Company must also maintain borrowing availability of not less than $4,500,000 for sixty consecutive days prior to paying principal and interest on its other indebtedness and dividends in cash on its preferred stock. In the first half of 1999 and the first quarter of 2000, the Company violated this covenant, which was waived by the financial institution through May 15, 1999 and 2000, respectively. Since May 15, 2000 the Company has been in compliance with this covenant. In 1996 the Company assumed $10,000,000 of 10.75% Economic Development Revenue Bonds due September 1, 2026 issued by the City of Kimball, Nebraska (the "Bonds"). In connection with the issuance of the Bonds, the Company entered into a facilities lease with the City of Kimball, whereby the City acquired a leasehold interest in the facility and the Company leased the facility back from the City. The Company retains title to the facility. The Bonds were issued at 100% of their principal value. The Bonds are not redeemable prior to September 1, 2006. From that date until September 1, 2008, the Bonds are redeemable at a premium. After September 1, 2008, the Bonds are redeemable at par. Sinking fund payments began on September 1, 1999 in the amount of $100,000 annually and continue in this amount until the year 2008, when the annual sinking fund payment will gradually increase. Effective June 1, 2000, the Bond Documents were amended in order to modify the limitation on additional debt covenant and certain related debt service reserve fund requirements. Under the amended Bond Documents, the Company may now issue Bank Debt up to $35,000,000 provided that after the issuance, the ratio of the Company's total debt to total capital (debt plus stockholders' equity) does not exceed 72% (which ratio will be reduced to 70% on January 1, 2006 and 65% on January 1, 2011). The amended Bond Documents require that the Company make six equal monthly payments of $125,000 each for a total of $750,000 into a debt service reserve fund held by the trustee, if either of the following occurs: (i) the Company's ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to total interest (the "EBITDA coverage ratio") for most recently completed fiscal year is less than 1.5 to 1.0, or (ii) the Company's ratio of debt to total capital at the end of such fiscal year is greater than 65%. The amended bond documents required that the Company satisfy these ratios retroactively to December 31, 1999. Because the 48
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (9) FINANCING ARRANGEMENTS--(Continued) Company did not satisfy both of these ratios as of December 31, 1999, the amended Bond Documents required that the Company make six monthly payments of $125,000 each into the debt service reserve fund commencing on June 1, 2000, for total of $750,000. In addition to the $750,000 required to be deposited into the debt service reserve fund based upon the level of the Company's additional debt, the Company could be required to make additional payments to bring the total of the debt service reserve fund to a maximum of approximately $1,200,000 (including the $750,000 described above) if the EBITDA coverage ratio for any fiscal year is less than 1.25 to 1.0. The EBITDA coverage ratio for the year ended December 31, 1999 was 1.39, and the Company was therefore not required to make any such additional payments into the debt service reserve fund based upon the Company's EBITDA coverage ratio. The maximum amount of the debt service reserve fund of approximately $1,200,000 is the same as under the Bond Documents prior to the amendment, but the amendment modified the terms under which the Company may be required to make payments into the fund described above. As of December 31, 2000, Bank Debt totaled $7,927,000 which was less than the $35,000,000 allowed; the Company's total debt to total capital ratio was 61.9% which is less than the 72.0% allowed; and the EBITDA coverage ratio was 2.24 to 1.0 which is greater than the 1.50 to 1.0 required. Under the Bond covenants, if the Company attains an EBITDA coverage ratio of greater than 1.5 to 1.0, the balance on deposit in the debt service reserve fund in excess of $750,000 will be released for the Company's general use. The Bond Documents require that a minimum balance of $750,000 be maintained in the debt service reserve fund until the Bonds mature. The Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15, 2001. The Senior Notes are not collateralized, and the Senior Note indenture does not provide for the maintenance of certain financial covenants, although it does limit, among other things, the issuance of additional debt by the Company or its subsidiaries and the payment of dividends on, and redemption of, capital stock of the Company and its subsidiaries. Interest is paid twice each year on the Senior Notes. The Senior Notes require that the Company provide not less than 30-day prior notice if the Senior Notes are to be redeemed prior to the due date. Notice of redemption has been given to the holders of the Senior Notes, providing for redemption on April 30, 2001. As further described in Note 16, the Company signed two agreements with lenders which provide that such lenders will provide the funds required to redeem the Senior Notes on the redemption date. In October 1999, the Company made the final $1,000,000 installment payment on its 10% senior convertible notes. 49
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (10) LEASES The Company leases facilities and personal property under certain operating leases in excess of one year. Some of these lease agreements contain an escalation clause for increased taxes and operating expenses and are renewable at the option of the Company. Future minimum lease payments under operating leases are as follows (in thousands): <TABLE> <CAPTION> Total Operating Year Leases ---- --------- <S> <C> 2001............................................................. $ 5,929 2002............................................................. 4,988 2003............................................................. 4,070 2004............................................................. 2,861 2005............................................................. 1,746 Thereafter....................................................... 1,167 ------- $20,761 ======= </TABLE> During the years 2000, 1999 and 1998 rent expense was approximately $13,289,000, $14,058,000, and $13,328,000, respectively. (11) FEDERAL AND STATE INCOME TAXES The provision for income taxes consists of the following (in thousands): <TABLE> <CAPTION> 2000 1999 1998 ------- ---- ---- <S> <C> <C> <C> Federal: Current........................................ $ 24 $(78) $ -- Deferred.............................................. (2,025) -- -- State: Current.......................................... 360 360 247 Deferred.............................................. (375) -- 113 ------- ---- ---- Net provision for (benefit from) income taxes........... $(2,016) $282 $360 ======= ==== ==== </TABLE> The effective income tax rate varies from the amount computed using the statutory federal income tax rate as follows: <TABLE> <CAPTION> 2000 1999 1998 ------ ----- ----- <S> <C> <C> <C> Statutory rate............ 34.0% (34.0)% (34.0)% Increase (decrease) in taxes resulting from: Valuation allowance..... (120.5) 20.4 32.5 Adjustment of prior year's estimated attributes............. 24.7 (9.4) -- State income taxes, net of federal benefit..... 12.7 18.4 7.1 Goodwill amortization... 5.1 12.6 7.0 Meals and entertainment.......... 4.5 10.4 5.8 Other permanent differences............ -- (4.0) (8.1) ------ ----- ----- Net provision for (benefit from) income taxes....... (39.5)% 14.4% 10.3% ====== ===== ===== </TABLE> 50
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) FEDERAL AND STATE INCOME TAXES--(Continued) The components of the total net deferred tax asset at December 31, 2000 and 1999 were as follows (in thousands): <TABLE> <CAPTION> 2000 1999 ------ ------- <S> <C> <C> Current: Net operating loss carryforwards............................. $ 778 $ -- Workmens' compensation accrual............................... 745 731 Accrued closure.............................................. 14 506 Provision for doubtful accounts.............................. 624 466 Litigation accruals.......................................... 250 279 Accrued rent holiday......................................... 99 104 Health insurance accrual..................................... 34 34 Miscellaneous................................................ 81 197 Permits...................................................... (225) (226) Valuation allowance.......................................... -- (2,091) ------ ------- Total current deferred tax asset............................. $2,400 $ -- ------ ------- Long-term: Net operating loss carryforwards............................. $6,374 $11,198 Tax credit carryforwards..................................... 1,951 1,927 Property, plant and equipment................................ (3,915) (4,410) Permits...................................................... (2,193) (2,440) Valuation allowance.......................................... (2,217) (6,275) ------ ------- Total long-term deferred tax asset........................... $ -- $ -- ------ ------- Net deferred tax asset....................................... $2,400 $ -- ====== ======= </TABLE> SFAS 109, "Accounting for Income Taxes," requires that a valuation allowance be established when, based on an evaluation of objective verifiable evidence, there is a likelihood that some portion or all of the deferred tax assets will not be realized. The Company continually reviews the adequacy of the valuation allowance for deferred tax assets, and, in 1997, based upon this review, the valuation allowance was increased to cover almost all net deferred tax assets. In 1998 and 1999 the valuation allowance was adjusted so as to reserve all net deferred tax assets. In the fourth quarter of 2000, the Company once again reviewed the valuation allowance for deferred tax assets. Based on the level of earnings for 2000 and management's projections for profits in future years, it was determined that it was more likely than not that $2,400,000 of the net deferred tax assets would be utilized. Accordingly, the 2000 provision for income taxes included a $2,400,000 benefit related to adjusting the valuation allowance. The actual realization of the net operating loss carryforwards and other tax assets depend on having future taxable income of the appropriate character prior to their expiration. For federal income tax purposes at December 31, 2000, the Company had regular tax net operating loss carryforwards of $14,887,000 which expire in 2010 and thereafter. The Company also had $3,333,000 of SRLY net operating loss carryforwards which may only be used to offset future taxable income, if any, of former ChemClear entities. These net operating loss carryforwards expire in the amounts of $489,000, $648,000 and $2,196,000 in the years 2001, 2002 and 2003, respectively. During the ordinary course of its business, the Company is audited by federal and state tax authorities, which may result in proposed assessments. In 1996, the Company received a notice of intent to assess state income taxes from one of the states in which it operates. This case is currently undergoing administrative appeal. 51
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) FEDERAL AND STATE INCOME TAXES--(Continued) If the Company loses the administrative appeal, the Company may be required to make a payment of approximately $3,000,000 to the state. The Company cannot currently predict when the decision for the administrative appeal will be made. The Company believes that it has properly reported its state income and intends to contest the assessment vigorously. While the Company believes that the final outcome of the dispute will not have a material adverse effect on the Company's financial condition or results of operations, no assurance can be given as to the final outcome of the audit, the amount of any final adjustment or the potential impact of such adjustments on the Company's financial condition or results of operations. (12) INCOME (LOSS) PER SHARE The following is a reconciliation of basic and diluted loss per share computations (in thousands except for per share amounts): <TABLE> <CAPTION> Year Ended 2000 ----------------------------------- Income Shares Per-Share (Numerator) (Denominator) Income ----------- ------------- --------- <S> <C> <C> <C> Net income............................. $ 7,118 Less preferred dividends............... 448 ------- ------ ------ Basic EPS (income available to shareholders)......................... 6,670 11,085 0.60 Effect of dilutive securities.......... -- 220 (0.01) ------- ------ ------ Diluted EPS Income available to common shareholders plus assumed conversions.......................... $ 6,670 11,305 $ 0.59 ======= ====== ====== <CAPTION> Year Ended 1999 ----------------------------------- Income Shares Per-Share (Numerator) (Denominator) Loss ----------- ------------- --------- <S> <C> <C> <C> Net loss............................... $(2,244) Less preferred dividends............... 448 ------- ------ ------ Basic and diluted EPS (loss available to shareholders)...... $(2,692) 10,649 $(0.25) ======= ====== ====== <CAPTION> Year Ended 1998 ----------------------------------- Income Shares Per-Share (Numerator) (Denominator) Loss ----------- ------------- --------- <S> <C> <C> <C> Net loss............................... $(3,854) Less preferred dividends............... 448 ------- ------ ------ Basic and diluted EPS (loss available to shareholders)...... $(4,302) 10,309 $(0.42) ======= ====== ====== </TABLE> The Company has issued options, warrants and convertible preferred stock which are potentially dilutive to earnings. For the year ended December 31, 2000, some of the options outstanding but none of the warrants or convertible preferred stock are dilutive. Only those options where the options' exercise price was less than the average market price of the common shares for the period are included in the above calculations. For the years ended December 31, 1999 and 1998, the options, warrants and convertible stock outstanding have not been included in the above calculations, since their inclusion would have been antidilutive for the period. 52
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) STOCKHOLDERS' EQUITY (a) Stock Option Plans In 1987, the Company adopted a nonqualified stock option plan ("1987 Plan"), in 1992 the Company adopted an equity incentive plan, which provides for a variety of incentive awards, including stock options ("1992 Plan"), and in 2000, the Company adopted a stock incentive plan, which provides for awards in the form of incentive stock options, non-qualified stock options and restricted stock ("2000 Plan"). As of December 31, 2000, all awards under the 1992 and 2000 Plans were in the form of non-qualified stock options. These options generally become exercisable after a period of one to five years from the date of grant, subject to certain employment requirements, and terminate ten years from the date of grant. At December 31, 2000, the Company has reserved 955,600, 1,250,000 and 800,000 shares of common stock for issuance under the 1987, 1992 and 2000 Plans, respectively. Under the terms of the 1987, 1992 and 2000 Plans, as amended, options may be granted to purchase shares of common stock at an exercise price less than the fair market value on the date of grant. No compensation expense related to stock option grants was recorded in 2000, 1999 or 1998, as the option exercise prices were equal to, or greater than, the fair market value on the date of grant. (b) Supplemental Disclosures for Stock-Based Compensation The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company elected to continue to apply the accounting provisions of APB Opinion No. 25 for stock options. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are made below. Activity under the Plans for the three years ended December 31, 2000 is as follows: <TABLE> <CAPTION> Number of Weighted Average Shares Exercise Price --------- ---------------- <S> <C> <C> Outstanding at December 31, 1997................ 1,302,560 $2.21 Granted at fair value......................... 618,125 1.77 Forfeited..................................... (516,536) 2.16 Exercised..................................... (2,700) 2.13 --------- ----- Outstanding at December 31, 1998................ 1,401,449 2.04 Granted at fair value......................... 40,500 1.91 Granted at a value greater than fair value.... 2,750 1.50 Forfeited..................................... (145,286) 2.07 Exercised..................................... -- -- --------- ----- Outstanding at December 31, 1999................ 1,299,413 2.03 Granted at fair value......................... 603,894 2.32 Forfeited..................................... (280,035) 2.25 Exercised..................................... (75,800) 2.06 --------- ----- Outstanding at December 31, 2000................ 1,547,472 $2.10 ========= ===== </TABLE> 53
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) STOCKHOLDERS' EQUITY--(Continued) Summarized information about stock options outstanding at December 31, 2000 is as follows: <TABLE> <CAPTION> Exercisable ------------------ Weighted Average Weighted Weighted Range of Number of Remaining Average Number Average Exercise Options Contractual Exercise of Exercise Prices Outstanding Life Price Options Price -------- ----------- ----------- -------- ------- -------- <S> <C> <C> <C> <C> <C> $1.44-1.75 113,250 6.64 $1.50 52,400 $1.52 1.81-1.81 344,025 7.32 1.81 139,050 1.81 1.88-2.06 241,250 7.68 1.98 16,000 1.97 2.13-2.13 476,403 3.74 2.13 453,533 2.13 2.42-13.25 372,544 8.19 2.58 74,694 2.89 </TABLE> Options exercisable at December 31, 2000, 1999 and 1998 were 735,677, 747,263 and 599,605, respectively. The weighted average exercise prices for the exercisable options at December 31, 2000, 1999 and 1998 were $2.10, $2.17, and $2.28, respectively. The fair value of each option granted during 2000, 1999 and 1998 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Dividend yield........................................... none none none Expected volatility...................................... 80.5% 75.2% 75.0% Risk-free interest rate.................................. 6.3% 5.4% 5.8% Expected life............................................ 6.0 6.0 6.0 </TABLE> Weighted average fair value of options granted at fair value during: <TABLE> <S> <C> 2000................................................................. $2.32 ===== 1999................................................................. $1.91 ===== 1998................................................................. $1.81 ===== </TABLE> Weighted average fair value of options granted at greater than fair value during: <TABLE> <S> <C> 2000................................................................. $ -- ===== 1999................................................................. $1.50 ===== 1998................................................................. $ -- ===== </TABLE> 54
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) STOCKHOLDERS' EQUITY--(Continued) Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant dates, as calculated in accordance with SFAS 123, the Company's net income and net income per common share for the years ended December 31, 2000, 1999 and 1998, would approximate the pro forma amounts as compared to the amounts reported: <TABLE> <CAPTION> Net Income Net Income (Loss) (Loss) per Diluted Share ----------- ----------------- <S> <C> <C> As reported: 2000........................................ $ 7,118,000 $ 0.59 1999........................................ (2,244,000) (0.25) 1998........................................ (3,854,000) (0.42) Pro forma: 2000........................................ $ 6,261,000 $ 0.55 1999........................................ (2,945,000) (0.28) 1998........................................ (3,947,000) (0.43) </TABLE> The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Additional awards in future years are anticipated. (c) Employee Stock Purchase Plan In May of 1995, the Company's stockholders approved an Employee Stock Purchase Plan (the "ESPP"), which is a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, through which employees of the Company are given the opportunity to purchase shares of common stock. A total of one million shares of common stock under the ESPP has been reserved for offering to employees through April 1, 2005. Employees who elect to participate in an offering may utilize up to 10% of their pay for the purchase of common stock at 85% of the closing price of the stock on the first day of such quarterly offering or, if lower, 85% of the closing price on the last day of the offering. For the years ended December 31, 2000 and 1999, 114,991 and 98,200 shares, respectively, of common stock had been purchased under the ESPP. The weighted average fair per share value of the purchase rights granted under the ESPP during 2000, 1999 and 1998 were $0.92, $0.25 and $0.41, respectively. (d) Warrants In connection with the issuance of senior subordinated notes payable in May 1989, the Company issued warrants to purchase 100,000 shares of common stock at $20.75 per share in exchange for $300,000. In April 1990, the exercise price of the warrants was reduced to $9 per share. In February 1991, in connection with the refinancing of the Company's short-term debt, the exercise price was further reduced to $5 per share. These warrants expired on February 1, 2001. In connection with the refinancing of the Company's short-term debt in February 1991, the Company issued warrants to purchase 425,000 shares of common stock at $5 per share to the three banks which provided the Revolver. These warrants expired on February 6, 2001. 55
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) STOCKHOLDERS' EQUITY--(Continued) (e) Preferred On February 16, 1993 the Company issued 112,000 shares of Series B Convertible Preferred Stock, $0.01 par value ("Preferred Stock"), for the acquisition of its Spring Grove facility. The liquidation value of each preferred share is the liquidation preference of $50 plus unpaid dividends. Preferred Stock may be converted by the holder into Common Stock at a conversion rate of $18.63. There is no expiration date associated with the conversion option. The Company had the option to redeem such Preferred Stock at liquidation value plus a redemption premium of 2%, if the redemption occurred on or before August 16, 2000; thereafter, the redemption premium declines 1% each year. Each preferred share entitles its holder to receive a cumulative annual cash dividend of $4.00 per share, or at the election of the Company, a common stock dividend of equivalent value. Dividends on the Preferred Stock are payable on the 15th day of January, April, July and October, at the rate of $1.00 per share, per quarter. The Company elected to pay the 2000 dividends in common stock with a market value equal to the amount of the dividend payable. During 2000 the Company issued 226,884 shares of common stock to the holders of the Preferred Stock. The Company anticipates that commencing in the third quarter of 2001 the Preferred Stock dividends will be paid in cash. (14) EMPLOYEE BENEFIT PLAN The Company has a profit-sharing plan under Section 401(K) of the Internal Revenue Code covering substantially all employees. The plan allows employees to make contributions up to a specified percentage of their compensation. The Company accrued $600,000 for the plan in 2000 which was paid in 2001. No contribution was made by the Company for 1999 or 1998. (15) QUARTERLY DATA (UNAUDITED) <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands except per share amounts) <S> <C> <C> <C> <C> 2000 Revenue.................................. $52,737 $62,242 $60,290 $58,197 Income from operations................... 938 6,094 4,366 2,871 Net income (loss)........................ (1,440) 3,639 1,907 3,012 Basic earnings (loss) per share.......... (0.14) 0.32 0.16 0.26 Diluted earnings (loss) per share........ (0.14) 0.32 0.15 0.25 1999 Revenue.................................. $44,648 $51,118 $54,602 $52,597 Income (loss) from operations............ (523) 2,995 2,635 1,530 Net income (loss)........................ (2,842) 705 317 (424) Basic and diluted earnings (loss) per share................................... (0.28) 0.06 0.02 (0.05) </TABLE> As further discussed in Note 11, included in the net income for the fourth quarter of 2000 is a $2,400,000 benefit related to the partial reversal of a valuation allowance for deferred tax assets. With the exception of the partial reversal of the valuation allowance, the above quarterly data reflects all adjustments that are necessary to fairly state the results of the interim periods presented, and adjustments required are of a normal recurring nature. Earnings per share are computed independently for each of the quarters presented. Due to this, the 2000 quarterly diluted earnings (loss) per share do not equal the total computed for the year. 56
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (16) SUBSEQUENT EVENT The Company has outstanding $50,000,000 of 12.50% Senior Notes due May 15, 2001 (the "Senior Notes"). The Senior Notes require that the Company provide not less than 30-day prior notice if the Senior Notes are to be redeemed prior to the due date. Notice of redemption has been given to the holders of the Senior Notes, providing for redemption on April 30, 2001. As described below, on April 12, 2001, the Company signed two agreements with lenders which provide that such lenders will provide the funds required to redeem the Senior Notes on the redemption date. As described in Note 9, the Company had at December 31, 2000 a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial institution (the "Lender"). The Loan Agreement provided for a $24,500,000 revolving credit facility (the "Revolver"), a $6,000,000 term promissory note (the "Term Note"), and a $3,000,000 term promissory note (the "2000 Term Note"). On April 12, 2001, the Company signed and closed a $51,000,000 Amended and Restated Loan Agreement (the "Amended Loan Agreement") with the Lender. The Amended Loan Agreement increased the amount available to borrow under the Revolver to $30,000,000 and extended the term of the Revolver to April 12, 2004. The Revolver allows the Company to borrow up to $30,000,000 in cash and letters of credit, based on a formula of eligible accounts receivable. Letters of credit may not exceed $20,000,000 at any one time. The Revolver requires the Company to pay an unused line fee of one-half of one percent on the unused portion of the line. The Amended Loan Agreement required the payment on April 12 of the then $3,800,000 outstanding balance on the Term Note and provided for the issuance of a new $19,000,000 term promissory note (the "Term Loan B"). On April 12, 2001, $4,000,000 was advanced under Term Note B to pay the Term Note and other amounts then borrowed by the Company. The Amended Loan Agreement provides for the $15,000,000 balance of Term Note B to be advanced on April 30 to redeem the Senior Notes on that date, provided the representations of the Company in the Amended Loan Agreement remain true and correct in all material respects, the Company is not then in default of the Amended Loan Agreement, and the Company has then issued the Subordinated Notes described below. The interest rate for Term Note B is the greater of the prime rate plus 3.50% or 12.00%, and it is payable in 84 monthly installments commencing May 1, 2001. The terms of the 2000 Term Note remain unchanged. The Amended Loan Agreement allows for up to 80% of the outstanding balance of the Revolver and 100% of the balance of the 2000 Term Note to bear interest at the Eurodollar rate plus three percent; the remaining balance bears interest at the "prime" rate plus one and one-half percent. The Amended Loan Agreement is collateralized by substantially all of the Company's assets, and the Amended Loan Agreement provides for certain covenants including, among others, maintenance of a minimum level of working capital, adjusted net worth and earnings before interest, income taxes, depreciation and amortization ("EBITDA"). The Amended Loan Agreement requires that the Company maintain $10,000,000 of working capital excluding the current portion of liabilities under the Amended Loan Agreement and the Subordinated Note Agreement. The Company had $18,726,000 of working capital calculated on a pro forma basis as if the redemption had taken place on December 31, 2000. The net worth covenant requires that the Company maintain $35,000,000 of adjusted net worth until the Subordinated Notes described below are funded, and once the Notes are funded, the net worth covenant requires adjusted net worth, defined as net worth plus the balance owed on the subordinated notes, to be greater than $60,000,000. At December 31, 2000, the pro forma adjusted net worth calculated as if the redemption had taken place on December 31, 2000 was $76,635,000. The Amended Loan Agreement requires that the Company maintain on a rolling four quarter basis a minimum EBITDA of $20,000,000. For the four quarter period ended December 31, 2000 the Company reported EBITDA of $24,925,000. The Amended Loan Agreement also requires that the Company maintain a Senior Debt to EBITDA ratio of not more than 2.25 to 1.0. At December 31, 2000 the pro forma ratio calculated as if the redemption had taken place on December 31, 2000 was 1.33 to 1.0. The Amended Loan Agreement also has conditions precedent to making loans (including the Revolver) including no material adverse change in the assets, business or prospects of the Company. 57
CLEAN HARBORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (16) SUBSEQUENT EVENT--(Continued) On April 12, 2001, the Company also signed a Securities Purchase Agreement (the "Subordinated Note Agreement") providing for the Company to issue on April 30, 2001, $35,000,000 of 16% Senior Subordinated Notes (the "Subordinated Notes"). Until October 30, 2006, the Company, at its option, may pay the interest at the 16% rate or may pay interest at 14% and defer payment of the remaining 2% until the Subordinated Notes are due. Interest payable in cash on the Subordinated Notes is due in semi-annual payments on April 30 and October 30. In conjunction with the Subordinated Notes, the Company will issue detachable warrants for 1,519,020 shares of common stock that are exercisable at $0.01 per share. One-half of the Subordinated Notes are due on April 30, 2007 with the balance due on April 30, 2008. The Subordinated Note Agreement calls for the $35,000,000 to be advanced on April 30, 2001 in order to redeem the Senior Notes. The Subordinated Note Agreement contains conditions of closing the most restrictive of which are that representations by the Company in the Agreement remain true, that the Company have not less than $3,500,000 available under the Revolver on April 30, 2001, and that no material adverse change shall have occurred prior to April 30, 2001 in the business and financial condition of the Company. The Subordinated Note Agreement provides that the holders of the Subordinated Notes will be able to call the Notes in the event of a change in control of the Company. The Subordinated Note Agreement contains covenants the most restrictive of which require that the Company maintain a rolling four quarter fixed charge coverage ratio of not less than 1.10 to 1.0. For the year ended December 31, 2000, the fixed charge coverage ratio was 1.82 to 1.0. The Subordinated Notes require that the Company maintain a tangible capital base of not less than $27,000,000 for the quarters ending March 31 and June 30, 2001, not less than $30,500,000 for the quarter ending September 30, 2001, not less than $33,000,000 for the quarter ending December 31, 2001 and not less than $35,500,000 for quarters ending thereafter. At December 31, 2001, the tangible capital base was $45,169,000. The Company is required to maintain rolling four quarter earnings before interest, income taxes, depreciation and amortization (EBITDA) of not less than $18,000,000. For the four quarter period ended December 31, 2000, EBITDA was $24,925,000. The Company shall maintain a priority debt to EBITDA ratio calculated as of the last day of each fiscal quarter of not more than 2.25 to 1.0. Priority debt currently consists of debt issued under the Amended Loan Agreement. At December 31, 2000, the pro forma priority debt to EBITDA ratio calculated as if the redemption had taken place on December 31, 2000 was 1.33 to 1.0. The Company is required to maintain a ratio of total liabilities to tangible capital base of not more than 3.00 to 1.0 for the fiscal quarters ending June 30, September 30 and December 31, 2001 and for the quarters ending March 31, 2002 and thereafter a ratio of not more than 2.75 to 1.0. At December 31, 2000 the total liabilities to tangible capital base ratio was 1.61 to 1.0. 58
CLEAN HARBORS, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 2000 (in thousands) <TABLE> <CAPTION> Additions Balance Charged to Deductions Balance Allowance for Beginning Operating From End of Doubtful Accounts of Period Expense Reserves(a) Period - ----------------- --------- ---------- ----------- ------- <S> <C> <C> <C> <C> 1998................................. $1,050 $559 $596 $1,013 1999................................. 1,013 683 539 1,157 2000................................. 1,157 684 292 1,549 </TABLE> - -------- (a) Amounts deemed uncollectible, net of recoveries. 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III The information called for by Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) is incorporated herein by reference to the registrant's definitive proxy statement for its 2001 Annual Meeting of Stockholders, which definitive proxy statement is expected to be filed with the Commission not later than April 30, 2001. For the purpose of calculating the aggregate market value of the voting stock of the registrant held by nonaffiliates as shown on the cover page of this report, it has been assumed that the directors and executive officers of the registrant, as will be set forth in the Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders, are the only affiliates of the registrant. However, this should not be deemed to constitute an admission that all of such persons are, in fact, affiliates or that there are not other persons who may be deemed affiliates of the registrant. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of this Report <TABLE> <CAPTION> Page ----- <S> <C> 1. Financial Statements: Report of Independent Accountants...................................... 33 Consolidated Statements of Income for the Three Years Ended December 34 31, 2000............................................................. Consolidated Balance Sheets, December 31, 2000 and 1999................ 35-36 Consolidated Statements of Cash Flows for the Three Years Ended 37 December 31, 2000.................................................... Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 2000.............................................. 38 Notes to Consolidated Financial Statements............................. 39-58 2. Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts.......................... 59 </TABLE> All other schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto. 60
3. Exhibits: Exhibits to the Form 10-K have been included only with the copies of the Form 10-K filed with the Commission. Upon request to the Company and payment of a reasonable fee, copies of the individual exhibits will be furnished. The Company undertakes to furnish to the Commission upon request copies of instruments (in addition to the exhibits listed below) relating to the Company's long-term debt. <TABLE> <CAPTION> Item No. Description Location -------- --------------------------------------------------------- --------- <C> <S> <C> See Note: 3.1 Restated Articles of Organization of Clean Harbors, Inc. and amendments thereto................................... (1) 3.2 Certificate of Vote of Directors Establishing a Series of a Class of Stock (Series B Convertible Preferred Stock).. (2) 3.4A Amended and Restated By-laws of Clean Harbors, Inc....... (3) 4.1 Senior Note Indenture dated as of August 4, 1994, between Clean Harbors, Inc., the Guarantor Subsidiaries of the Company, and Shawmut Bank, N.A., as trustee for the holders of the Company's 12.50% Senior Notes due May 15, 2001..................................................... (4) 4.2 Loan and Security Agreement dated May 8, 1995 by and between Congress Financial Corporation (New England) and the Company's Subsidiaries as Borrowers.................. (5) 4.3 Term Promissory Note dated May 8, 1995 from the Company's Subsidiaries as Debtors to Congress Financial Corporation (New England) in the amount of $10,000,000............... (5) 4.4 Guarantee dated May 8, 1995 by Clean Harbors, Inc. to Congress Financial Corporation (New England) of the obligations of the Company's Subsidiaries under the Financing Agreements..................................... (5) 4.5 General Security Agreement dated May 8, 1995 by Clean Harbors, Inc. in favor of Congress Financial Corporation (New England)............................................ (5) 4.6 Letter Agreement dated November 21, 1995 by and between Congress Financial Corporation (New England) and the Company's Subsidiaries as Borrowers...................... (8) 4.7 Second Amendment to Financing Agreements dated March 20, 1996 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers and Clean Harbors, Inc. as Guarantor......................... (8) 4.8 Amended and Restated Term Promissory Note dated March 20, 1996 from the Company's Subsidiaries as Debtors to Congress Financial Corporation (New England) in the amount of $15,000,000.................................... (8) 4.9 Third Amendment to Financing Agreements dated September 6, 1996 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor..................... (8) 4.10 Fourth Amendment to Financing Agreements dated June 20, 1997 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor......................... (9) 4.11 Fifth Amendment to Financing Agreements dated January 1, 1998 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor......................... (9) 4.12 Sixth Amendment to Financial Agreements dated June 23, 1998 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor......................... (11) </TABLE> 61
<TABLE> <CAPTION> Item No. Description Location -------- ---------------------------------------------------- -------------- <C> <S> <C> 4.13 Seventh Amendment to Financial Agreements dated May 24, 1999 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor........................................ (13) 4.14 Second Amendment and Restated Term Promissory Notes Dated May 24, 1999 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor........................................ (13) 4.15 Eighth Amendment to Financial Agreements dated March 28, 2000 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor........................................ (14) 4.16 2000 Term Promissory Note dated March 28, 2000 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor................ (14) 4.17 Amended and Restated Loan and Security Agreement dated April 12, 2001 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, And Clean Harbors, Inc. as Guarantor........................................ Filed herewith 4.18 Term Promissory Note B dated April 12, 2001 by and between Congress Financial Corporation (New England), the Company's Subsidiaries as Borrowers, and Clean Harbors, Inc. as Guarantor................ Filed herewith 4.19 Securities Purchase Agreement dated April 12, 2001 by and between institutional investors and Clean Harbors, Inc........................................ Filed herewith 4.20 Subordination Agreement dated April 12, 2001 by and between Clean Harbors, Inc. and its subsidiaries, Congress Financial Corporation (New England) and institutional investors............................. Filed herewith 10.35 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment Systems, Inc. and Southdown, Inc. dated as of June 23, 1992........... (2) 10.36 Stock Purchase Agreement among Clean Harbors, Inc., Southdown Environmental Treatment Systems, Inc. and Southdown, Inc. dated as of February 16, 1993....... (2) 10.37 Clean Harbors, Inc. 1987 Stock Option Plan.......... (6) 10.38 Clean Harbors, Inc. 1992 Equity Incentive Plan...... (6) 10.39 Asset Purchase Agreement among Clean Harbors of Chicago, Inc., Clean Harbors, Inc., CWM Chemical Services, Inc. and Chemical Waste Management, Inc. dated as of January 30, 1995........................ (7) 10.40 Asset Purchase Agreement among Clean Harbors Technology Corporation, Clean Harbors Inc. and Ecova Corporation dated as of March 31, 1995.............. (5) 10.41 Disposal Services Agreement by and between Chemical Waste Management, Inc. and its subsidiary and affiliated companies and Clean Harbors Environmental Services, Inc. and its affiliated companies dated as of October 31, 1995................................. (8) 10.42 Clean Harbors, Inc. 2000 Stock Incentive Plan....... (15) 10.43 Key Employee Retention Plan......................... (12) 21 Subsidiaries........................................ Filed herewith 23 Consent of Independent Accountants.................. Filed herewith </TABLE> 62
<TABLE> <CAPTION> Item No. Description Location -------- ----------------------------------------------------- -------------- <C> <S> <C> 24 Power of Attorney for Christy W. Bell, John F. Kaslow, Daniel J. McCarthy, John T. Preston, Thomas J. Shields and Lorne R. Waxlax....................... Filed herewith </TABLE> - --------------------- (1) Incorporated by reference to Exhibit 3.1 to the Company's Form S-1 Registration Statement (No. 33-17565). (2) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1992. (3) Incorporated by reference to Exhibit 3.4A to the Company's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1991. (4) Incorporated by reference to Exhibit 4.1 to the Company's Form S-2 Registration Statement (No. 33-54191). (5) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-Q Quarterly Report for the Quarterly Period Ended June 30, 1995. (6) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1993. (7) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1994. (8) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1995. (9) Incorporated, by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1996. (10) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-Q Quarterly Report for the Quarterly Period ended September 30, 1996. (11) Incorporated by reference to Exhibit 4.12 to the Company's Form 10-Q Quarterly Report for the Quarterly Period ended June 30, 1998. (12) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-Q Quarterly Report for the Quarterly Period ended March 31, 1999. (13) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-Q Quarterly Report for the Quarterly Period ended June 30, 1999. (14) Incorporated by reference to the similarly numbered exhibit to the Company's Form 10-K Annual Report for the Year 1999. (15) Incorporated by reference to the Company's Form DEF 14A Proxy Statement filed on April 28, 2000. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2000. 63
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 12, 2001. <TABLE> <S> <C> Clean Harbors, Inc. /s/ Alan S. McKim By: _______________________________________ Alan S. McKim Chief Executive Officer </TABLE> Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ Alan S. McKim Chairman Of The Board Of April 12, 2001 ___________________________________________ Directors and Chief Alan S. McKim Executive Officer /s/ Roger A. Koenecke Senior Vice President and April 12, 2001 ___________________________________________ Chief Financial Officer Roger A. Koenecke * Director April 12, 2001 ___________________________________________ Christy W. Bell * Director April 12, 2001 ___________________________________________ John F. Kaslow * Director April 12, 2001 ___________________________________________ Daniel J. McCarthy * Director April 12, 2001 ___________________________________________ John T. Preston * Director April 12, 2001 ___________________________________________ Thomas J. Shields * Director April 12, 2001 ___________________________________________ Lorne R. Waxlax /s/ Alan S. McKim *By: ______________________________________ Alan S. McKim (Attorney-in-Fact ) </TABLE> 64