<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-1363
ENVIROSOURCE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 34-0617390
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1155 Business Center Drive, Horsham, PA 19044-3454
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(215) 956-5500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $.05 The Pacific Exchange
per share
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 12 months
(or for such shorter period 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. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $51,368,470 as of March 5,
1997.
The number of shares outstanding of the Registrant's Common
Stock as of the close of business on March 5, 1997 was
40,351,446.
<PAGE>
PART I
ITEM 1. Business.
--------
THE COMPANY
- -----------
EnviroSource, Inc. (the "Company") supplies industrial customers with
long-term, specialized services, primarily the recycling, handling,
stabilization or landfilling of environmentally sensitive wastes or by-products.
The Company's principal business segments are the Industrial Environmental
Services segment, which provides metals reclamation, recycling and other
specialized services for the steel industry, and the Treatment & Disposal
Services segment, which provides hazardous waste treatment and disposal services
and waste stabilization services for industrial and governmental customers.
The Company conducts its operations exclusively through its subsidiaries.
International Mill Service, Inc. and its subsidiaries ("IMS") constitute the
Industrial Environmental Services segment, and EnviroSource Treatment & Disposal
Services, Inc.("TDS"), through its Envirosafe and Conversion Systems
subsidiaries, constitutes the Treatment & Disposal Services segment.
References herein to the Company include its subsidiaries as well as its
Ohio predecessor, NEOAX, Inc., except where the context requires otherwise.
"Note" references herein are to Notes to Consolidated Financial Statements
appearing elsewhere in this Report.
DEVELOPMENT OF THE COMPANY
- --------------------------
The Company's predecessor was originally incorporated in Ohio in 1915 as
White Motor Corporation. Its name was changed to Northeast Ohio Axle, Inc. when
it emerged from reorganization proceedings in 1983 and was changed again in May
1986 to NEOAX, Inc. ("NEOAX"). In June 1987, NEOAX reincorporated in Delaware.
On November 14, 1989, the Company changed its name to EnviroSource, Inc.
<PAGE>
EnviroSource's present business units originally represented a portion of
the operations of IU International Corporation ("IU International"). Early in
1988, the Company acquired IU International with the goal of establishing a
substantial operating company centered primarily on the Company's stable and
growing steel industry business relationships and prospects. Between March 1988
and the end of 1991, the Company disposed of all the businesses it had owned
prior to the IU International acquisition and virtually all of IU
International's operations and assets other than the present Industrial
Environmental Services and Treatment & Disposal Services segments and IMSAMET
(discussed below), completing its transformation into an environmental services
company.
During 1993 the Company completed a comprehensive recapitalization (the
"Recapitalization") designed to increase the Company's liquidity and capital
resources, improve operating and financial flexibility, reduce interest expense
and preferred dividend requirements, and enhance the Company's ability to pursue
the growth opportunities in its businesses. The Recapitalization included the
sale of Common Stock to an affiliate of Freeman Spogli & Co.("FS&Co.") and
another investor (collectively, the "Investors") and the purchase by the
Investors of certain equity securities from The Dyson-Kissner-Moran Corporation
("DKM") and WM Financial Corporation ("WM Financial"). The sale of stock and
warrants to FS&Co. and the subsequent related transfers of stock are hereinafter
referred to as the "FSC Transaction." As a result of the FSC Transaction, FS&Co.
owns approximately 48% of the Common Stock of the Company.
In addition, in July 1993 the Company sold $220 million principal amount of
9-3/4% Senior Notes Due 2003 (the "Senior Notes"). A significant portion of the
proceeds from the sale of the Senior Notes was used to retire $150 million
principal amount of the Company's 14% Extendible Reset Senior Subordinated Notes
Due 1998.
During the fourth quarter of 1993 and throughout 1994 and 1995 the Company
took a number of steps to reduce costs and terminate unprofitable operations.
These steps included (i) terminating certain recycling units, (ii) discontinuing
efforts to obtain a hazardous waste landfill permit in Pennsylvania and (iii)
reorganizing the Envirosafe and Conversion Systems businesses into the TDS
business unit.
<PAGE>
To further reduce costs and increase profitability, in February 1996 the
Company announced a major reorganization of its headquarters organization that
saved the Company approximately $4.3 million in 1996 and is expected to save
approximately $5 million annually in 1997 and years thereafter. The
reorganization included the closing of the Company's corporate headquarters in
Stamford, Connecticut and the TDS headquarters in Horsham, Pennsylvania.
Activities of both offices were moved to IMS's offices in Horsham, Pennsylvania
in June 1996. Headcount was reduced by approximately 50 persons, primarily from
TDS. The Company recorded charges of approximately $4.4 million during 1996 for
the reorganization.
In November 1996 the Company announced that it had signed a definitive
agreement to sell IMSAMET, Inc. and its subsidiaries ("IMSAMET") in order to
focus the Company's efforts upon its steel-related businesses. IMSAMET is an
aluminum recycling and reclamation company. This sale was completed in January
1997.
BUSINESS SEGMENTS
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INDUSTRIAL ENVIRONMENTAL SERVICES
---------------------------------
The Company has served the steel industry for over 60 years. The Company
believes it increases its customers' productivity by providing cost-effective
and reliable on-site reclamation of steel and iron and a variety of other
specialized services that are essential to the efficient functioning of steel
mills. During the second quarter of 1996, IMS purchased a smaller steel mill
services company, thereby increasing its steel mill customer base.
North America's steel mills operate in a highly competitive environment.
Services that help to reduce their total process costs are therefore of
significant value. IMS provides recycling and metal recovery operations under
long-term contracts at over 50 steel mill sites in North America, including
integrated mills, mini-mills and specialty mills. Using specially designed
equipment, IMS provides a total recycling solution by processing slag (a
by-product of steel production), recovering valuable metallics and selling the
residual aggregate for road base and other uses. These services are economically
and environmentally attractive. Moreover, the effective removal of slag on a
continuous basis is critical to a steel mill's ability to remain in operation.
<PAGE>
The Company has successfully pursued a strategy of building on its
leadership position by offering an expanded range of services that enhance mill
productivity and provide IMS with growth opportunities. These services include
processing blast furnace iron scrap through an IMS-developed iron crushing
process, as well as specialized materials handling and surface conditioning. IMS
has enhanced the slab hauling process by using rubber-tired carriers that
straddle steel slabs to move them more efficiently throughout the mill. This
service, currently in place at two integrated steel mills, is significantly more
cost-effective than traditional rail and crane systems. IMS's services also
include a proprietary specialized steel slab surface conditioning process
(called scarfing) that helps its customers increase product yields and improve
product quality, while gaining measurable cost savings. This service is
currently provided at six steel mills.
IMS has a diversified customer base, with approximately half of its
revenues coming from integrated steel producers and half from mini-mills and
specialty mills. IMS's largest site is at USX Corporation's Gary Works, in Gary,
Indiana, the largest steel mill in the U.S. USX accounted for 20%, 20% and 22%
of the Company's consolidated revenues of continuing operations in 1996, 1995
and 1994 respectively (including revenues attributable to services performed by
the Treatment & Disposal Services segment). Long term contracts governing the
related services expire between late 1997 and 2001. Over the next several years,
the maintenance of USX as a customer will be material to the Company's
consolidated revenues and operating income.
Substantially all of IMS's services are provided on-site at steel mills,
using IMS employees and equipment. IMS's services are integrated with the
operations of its customers, providing for strong working partnerships. If
necessary, most equipment can be relocated, but this has not often been required
as contracts are generally long-term and IMS has a history of high renewal
rates.
Competition. Competition in IMS's markets is based primarily on quality of
-----------
service, reliability, technology and price. In its core steel reclamation
business, IMS services customers responsible for approximately one-third of
total domestic steel production. IMS has one large competitor and many smaller
competitors. The Company believes that IMS's leading market position is based on
its reliability, responsiveness to customer needs, capital resources and breadth
of expertise.
<PAGE>
TREATMENT & DISPOSAL SERVICES
-----------------------------
TDS, through its Envirosafe and Conversion Systems business units, has been
dedicated to the safe, economical treatment and disposal of industrial and
hazardous wastes since 1976. Through its Envirosafe subsidiaries, Envirosafe
Services of Ohio, Inc. and Envirosafe Services of Idaho, Inc. (collectively,
"Envirosafe"), TDS owns major commercial hazardous waste treatment and disposal
facilities in Ohio and Idaho. Envirosafe services some of the country's largest
steel, chemical, energy, automotive, aerospace, electronics and utility
companies, as well as numerous government agencies.
Envirosafe has approximately 4 million cubic yards of permitted disposal
capacity. In 1992 Envirosafe Services of Ohio, Inc. received final approval to
expand its Ohio facility and in 1993 completed construction of the first phase
of a 2.6 million cubic yard disposal cell. The second phase of construction of
this cell was completed in December 1994 and approval to accept waste was
obtained in January 1995. In late 1993, Envirosafe Services of Idaho, Inc.
received final approval to expand an active disposal cell at its Idaho facility
and completed construction of the second phase of such cell.
In the last few years, the Company completed a number of capital projects
in order to maintain and enhance its competitive position. These projects
included a new state-of-the-art stabilization and debris handling facility in
Ohio and a new debris handling facility and expanded stabilization capacity in
Idaho. Enhanced stabilization capability has allowed the Company to utilize its
proprietary Super Detox(R) technology for the stabilization of electric arc
furnace ("EAF") dust at each of its Ohio and Idaho facilities. See below for a
discussion of Super Detox(R) . In addition, a rail transfer facility was opened
in Idaho in 1993 and was upgraded in 1995. New rail service into the Ohio
facility became available during November 1996, giving the Company what it
believes to be the only hazardous waste treatment and disposal facility in the
United States with such direct rail service.
<PAGE>
The Ohio and Idaho facilities hold operating permits issued by state and
federal environmental agencies under the Resource Conservation and Recovery Act,
as amended ("RCRA"), that require renewal and modification from time to time.
The Company expects that it will obtain the renewals and modifications to its
permits that it requires to continue to provide landfill capacity in its
approved disposal cells well into the next decade. Historically, the Company's
hazardous waste treatment and disposal services business has been somewhat
seasonal, with the first quarter of the year tending to be slower depending
primarily on winter weather conditions.
Envirosafe and its competitors and customers are subject to a complex,
evolving array of federal, state and local environmental laws and regulations.
Such requirements not only can affect the demand for Envirosafe's services, but
could also require the Company to incur significant costs for such matters as
facility upgrading, remediation or other corrective action, facility closure and
post-closure maintenance and monitoring. It is possible that the future
imposition of additional environmental compliance requirements could have a
material adverse effect on TDS's results of operations or financial condition,
but the Company is unable to predict any such future requirements. The Company
believes that the Consolidated Financial Statements appropriately reflect all
presently known compliance costs in accordance with generally accepted
accounting principles. Stringent interpretation of environmental laws and
regulations governing hazardous waste treatment and disposal facilities by state
and federal regulators also subjects Envirosafe to violations and fines from
time to time, none of which has been material to the Company. In fact, the
Company believes that it has one of the best environmental compliance records in
the industry.
TDS currently operates and maintains a captive landfill for a domestic
steel mill pursuant to a service contract. TDS is currently exploring additional
opportunities for providing captive landfill services.
<PAGE>
TDS's Conversion Systems unit has provided electric utilities with turn-key
design, engineering and installation of systems for the stabilization of wet
scrubber effluent and boiler ash residues produced at coal-fired power plants.
These systems convert the sludge resulting from wet scrubber removal of sulfur
dioxide from power plant emissions into a concrete-like material suitable for
environmentally responsible landfilling. Conversion Systems substantially
completed its last major project of this type in 1995. However, in response to
Phase II of the "Acid Rain" provisions of the Clean Air Act Amendments of 1990,
additional opportunities may be available to Conversion Systems. Although it is
not yet clear how many power plants will install wet scrubbers and elect or be
required to include stabilization units, the Company believes that its
technology will continue to provide the utility industry with a cost-effective
and environmentally desirable waste management solution. The Company continues
to explore opportunities for utilizing its flue gas desulfurization sludge
stabilization expertise in the Eastern European market as well.
Conversion Systems also is the sole licensee of a proprietary technology
(Super Detox(R)) for stabilizing electric arc furnace dust - a listed hazardous
waste (KO61) under RCRA generated by steel mills - that renders the EAF dust
suitable for landfilling in non-hazardous landfills and for possible reuse. TDS
currently operates an EAF dust stabilization facility on-site at one of the
largest domestic mini-mills, and provides Super Detox(R) stabilization for EAF
dust at each of its regional Envirosafe Ohio and Idaho facilities. During 1994,
1995 and 1996, TDS entered into a number of new contracts to receive and process
EAF dust at its Envirosafe facilities. TDS actively continues to market this
process to other U.S. mini-mills and is exploring additional opportunities
internationally for its Super Detox(R) technology.
<PAGE>
In June 1995, Conversion Systems received from the U.S. Environmental
Protection Agency ("USEPA") a generic delisting for Super Detox(R)-stabilized
EAF dust, which allows TDS to handle EAF dust treated utilizing its proprietary
process as a non-hazardous waste. The generic delisting status for the process
will save TDS and its customers the time and expense involved in petitioning
USEPA on a facility-by-facility basis for delisting status. USEPA, as well as
the Illinois Department of Environmental Regulation, previously has granted site
specific delistings for this process. In addition, in November 1995, TDS
received from the Idaho Department of Health and Welfare a generic delisting for
Super Detox(R)-stabilized EAF dust which essentially has the same effect as the
USEPA delisting. The Company believes that the Super Detox(R) technology
provides an environmentally safer and more cost-effective solution than the
off-site thermal process currently employed by a large portion of the mini-mill
industry.
Horsehead Resource Development Company, Inc. ("Horsehead"), a competitor of
TDS in the EAF dust management business, has filed a petition for review of the
USEPA and Illinois delistings. The Company believes that such appeals are
without merit and ultimately will be denied. In any event, the delisting is not
necessary for the Company to continue these operations at its Ohio and Idaho
sites.
Competition. The Company's hazardous waste treatment and disposal business
-----------
is characterized by intense competition. Envirosafe has a limited number of
competitors in the off-site hazardous waste landfill business (there are 19
active, permitted hazardous waste landfills in the U.S.), only two of which
operate more than two landfills, and several competitors engaged in the
treatment or stabilization of hazardous waste. Competition in this industry is
based on service, site and process integrity and the all-in cost of disposal,
which includes treatment, stabilization and transportation costs and taxes.
Expanded use of rail services and additions to stabilization services will
further improve Envirosafe's competitive position. The market for hazardous
waste services generally is geographically broad, but is narrowed depending on
factors such as the types of waste a facility is permitted to accept, the types
of services offered by a facility, the cost of operation of a facility and the
proximity of the facility to the customer.
<PAGE>
TDS's principal competition in electric arc furnace flue dust stabilization
is Horsehead, a thermal metal recovery processor. Although Horsehead
historically had accounted for at least 60% of the U.S. market, within the last
year TDS has gained significant market share. The market for wet scrubber
stabilization units has been dormant and it is difficult to determine the number
and nature of Conversion System's viable competitors. However, TDS expects to
encounter increased competition through the decade from wet scrubber
manufacturers as well as from wet scrubber technologies and processes that do
not, or purport not to, require sludge stabilization units. Competition in these
businesses is based primarily on price, quality of service, technical expertise
and the environmental integrity of the process.
DISCONTINUED OPERATIONS
- -----------------------
The IMSAMET operations, which the Company sold in January 1997, served the
aluminum industry. At its Idaho facility, IMSAMET processed used aluminum
beverage cans ("UBCs") and aluminum dross and scrap. At facilities located in
Arizona (through a 70% owned partnership) and Utah, IMSAMET reclaimed aluminum
from dross, a by-product of the aluminum production process. IMSAMET also had a
50% interest in a Utah partnership, Solar Aluminum Technology Services, to
recycle saltcake (a by-product generated in the recovery of aluminum from dross)
into marketable aluminum metal concentrate, aluminum oxide and salt brine, using
a proprietary wet milling system.
SEGMENT DATA
- ------------
See Note J for information concerning revenues and operating income by
segment for the years ended December 31, 1996, 1995 and 1994 and the percentage
of total revenues contributed by each class of service of the Company's
continuing operations for each such year.
<PAGE>
EMPLOYEES
- ---------
At March 1, 1997, the Company employed approximately 1,800 persons. A
majority of the hourly employees in the Industrial Environmental Services
segment are covered by site-specific collective bargaining agreements with
various unions, including the International Union of Operating Engineers, the
United Steelworkers and the International Brotherhood of Teamsters. Several of
these contracts will be renegotiated in 1997. All other contracts will be
renegotiated in 1998 or thereafter. Fewer than 30 Treatment & Disposal Services
segment hourly employees are also unionized. The Company believes it has a good
working relationship with its employees.
ITEM 2. Properties.
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HEADQUARTERS
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The Company now maintains its headquarters at a single location in Horsham,
Pennsylvania in leased premises. Until June 1996, the Company's corporate
headquarters were located in leased premises in Stamford, Connecticut and the
headquarters of TDS were located in separate leased premises in Horsham,
Pennsylvania.
INDUSTRIAL ENVIRONMENTAL SERVICES
- ---------------------------------
IMS has operations providing metal recovery and other services at steel
mills throughout the continental United States and in Canada. Equipment located
at the sites operated by IMS and its subsidiaries includes prefabricated
storage, shop and office structures, pot carriers, slab haulers, loaders,
railcars, cranes, trucks, metal recovery plants and crushers and other
specialized mobile and stationary equipment used in metal-recovery operations
and industrial service work, most of which is owned. In addition to its
headquarters, IMS leases office space near Pittsburgh, Pennsylvania.
Management believes that the physical facilities for the Company's
Industrial Environmental Services segment are adequate for its operations and
provide sufficient capacity to meet its anticipated requirements. The metal
recovery and slag processing installations are generally located at specific
customer facilities and are adequate to handle current levels of customer
operations and anticipated future needs for current customers.
<PAGE>
TREATMENT & DISPOSAL SERVICES
- -----------------------------
Envirosafe owns substantially all of the land, buildings and equipment used
in its treatment and disposal operations in Oregon, Ohio and near Grand View,
Idaho. Conversion Systems owns the building and equipment at one stabilization
facility in Illinois and one in Pennsylvania and leases land for both
facilities. In addition to its headquarters, TDS leases office space in Ohio and
Idaho. Assuming the timely completion of subsequent phases under existing permit
authority, Envirosafe expects to maintain ample hazardous waste disposal
capacity into the next decade. Management believes that the physical facilities
for TDS are adequate for its operations and provide sufficient capacity to meet
its anticipated requirements.
ITEM 3. Legal Proceedings.
-----------------
The Company is a party to litigation and proceedings arising in the normal
course of its present or former businesses. In the opinion of management, the
outcome of such litigation and proceedings will not have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
* * *
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The Company's executive officers are as follows:
Name Age Position
Ronald P. Spogli 48 Chairman of the Board; Director
Louis A. Guzzetti, Jr. 57 President and Chief Executive
Officer; Director
George E. Fuehrer 48 Senior Vice President, Planning
Aarne Anderson 56 Vice President, Taxes
William B. Davis 46 Vice President and Treasurer
Bradley W. Harris 37 Controller
Leon Z. Heller 47 General Counsel and Secretary
James C. Hull 59 Vice President and Chief
Financial Officer
Officers are elected annually and hold office until their successors are
elected and qualified.
Ronald P. Spogli became a director and Chairman of the Board of the Company
in May 1993. Mr. Spogli is a founding partner of Freeman Spogli & Co. He is also
a director of Brylane, Inc., Buttrey Food and Drug Stores Company, Calmar, Inc.
and The Pantry, Inc.
Louis A. Guzzetti, Jr. has been a director and President and Chief
Executive Officer of the Company since October 1986.
<PAGE>
Aarne Anderson has been employed by the Company since May 1980, except for
the period from August 1983 through April 1984 during which he served as a
consultant to the Disposition Assets Trustee in the Company's reorganization.
Mr. Anderson was elected Vice President, Taxes in August 1985.
William B. Davis was elected Vice President of the Company in February 1995
and has been Treasurer of the Company since September 1991. Mr. Davis joined the
Company in July 1987 as Assistant Treasurer.
George E. Fuehrer has been employed by the Company since 1982 and has
served as its Senior Vice President, Planning since May 1989. Mr. Fuehrer also
served as President of IMSAMET from November 1995 until January 1997. From June
1988 until May 1989 he served as Senior Vice President - Finance of the Company.
He was its Treasurer from November 1984 until May 1989. Mr. Fuehrer also served
as Vice President - Finance from February 1984 until June 1988.
Bradley W. Harris has been the Company's Controller since September 1996,
when he joined the Company. From August 1981 to September 1996 Mr. Harris was
employed by Ernst & Young LLP, most recently as a Senior Manager.
Leon Z. Heller has been the Vice President and General Counsel of
International Mill Service, Inc., a subsidiary of the Company, since February
1991. Mr. Heller has served as the Company's General Counsel and Secretary since
September 1996.
James C. Hull has been the Company's Vice President and Chief Financial
Officer since May 1989, when he joined the Company.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
-----------------------------------------------------
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "ENSO" and on The Pacific Exchange under
the symbol "ES". The following table sets forth the high and low sales prices
for the Common Stock for each of the calendar quarters of 1996 and 1995, based
upon prices supplied by The National Association of Securities Dealers ("NASD").
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C> <C>
High Low High Low
---- --- ---- ---
First Quarter $4.25 $3.13 $4.50 $3.25
Second Quarter 4.38 3.38 4.75 4.00
Third Quarter 4.06 3.38 4.63 2.88
Fourth Quarter 3.88 2.44 3.25 2.50
</TABLE>
The Company is not currently in technical compliance with one of the
requirements for continued designation of its Common Stock as a Nasdaq National
Market tier security. The NASD indicated to the Company in March 1992 that it
did not intend to commence formal proceedings to remove the Common Stock from
the Nasdaq National Market tier. It is possible that in the future the NASD
could seek to do so, but the NASD has a procedure for seeking exemptions from
its requirements, which the Company would seek to utilize if necessary. If the
Common Stock were removed from the Nasdaq National Market tier, it would
continue to be eligible for inclusion in the regular Nasdaq inter-dealer
quotation system.
The Company has not paid a cash dividend on its Common Stock since the
confirmation of its plan of reorganization in November 1983 and has no present
plan to pay cash dividends. The Company is currently prohibited from paying cash
dividends on its Common Stock by its bank credit agreement and by the indenture
under which the Senior Notes were issued.
At March 5, 1997 the Company had approximately 3,300 holders of record of
its Common Stock.
<PAGE>
ITEM 6. Selected Financial Data.
-----------------------
The information presented below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, including Note B which
describes the 1996 and 1995 unusual items.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $212,789 $223,722 $230,434 $246,927 $207,864
Costs and expenses 189,264 189,233 193,914 222,224 185,483
Unusual items, net (1) 4,650 (2,624) 18,200
----- ------- -------- ------ --------
Operating income 18,875 37,113 36,520 6,503 22,381
Interest income 1,356 1,133 983 1,177 1,060
Interest expense (28,187) (23,483) (21,974) (25,261) (29,572)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (7,956) 14,763 15,529 (17,581) (6,131)
Income tax (benefit) expense 3,266 (5,208) (4,280) (2,549) (1,299)
----- ------- ------- ------- -------
Income (loss) from continuing operations (4,690) 9,555 11,249 (20,130) (7,430)
Income (loss) from discontinued operations(2) 399 949 (190) (1,444) (108)
--- --- ---- ------ ----
Income (loss) before extraordinary loss
and cumulative effect of accounting change (4,291) 10,504 11,059 (21,574) (7,538)
Extraordinary debt extinguishment loss (806) (21,930)
Cumulative effect of income tax accounting
change (2,302)
-------- -------- -------- -------- --------
Net income (loss) $ (4,291) $ 9,698 $ 11,059 $(45,806) $ (7,538)
========= ======== ======== ======== ========
Income (loss) applicable to common shares
and equivalents (3) $ (4,442) $ 7,959 $ 10,457 $(48,988) $(11,633)
======== ======== ======== ======== ========
Income (loss) per common share:
Continuing operations $ (.12) $ .19 $ .26 $ (.69) $ (.52)
Discontinued operations .01 .03 (.04)
Extraordinary loss (.02) (.64)
Cumulative effect of accounting change (.07)
-------- -------- -------- ---- ---------
Net income (loss) $ (.11) $ .20 $ .26 $ (1.44) $ (.52)
========== ======== ======== ======== ========
Average common shares and equivalents 40,443 40,527 40,292 34,009 22,251
(continued on next page)
<PAGE>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Total assets $459,909 $444,436 $442,872 $419,282 $436,483
Working capital deficiency (4) (8,762) (34,099) (8,275) (17,396) (5,138)
Debt (non-current) 268,424 275,158 259,263 233,297 231,405
Redeemable preferred stock (non-current) - - 31,396 38,711 43,850
Stockholders' equity 39,057 32,604 24,521 14,217 20,549
</TABLE>
Notes
- -----
(1) After related income taxes, 1996 unusual items reduced net income by
approximately $3 million or $.08 per share and 1995 unusual items
reduced net income by approximately $1 million or $.02 per share. See
Note B. The 1993 unusual items consisted of a $22 million
restructuring charge and a credit from reducing estimated IU
International liabilities that together reduced net income by $17.6
million or $.52 per share.
(2) See Note D.
(3) Includes gains from buying back Class G preferred stock of $.2 million
or $.01 per share in 1996 and $1.7 million or $.04 per share in 1994.
(4) The 1996 working capital deficiency was virtually eliminated upon the
January 1997 sale of the Company's IMSAMET subsidiary. See the pro
forma balance sheet on pages S-2 and S-3.
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
1996 VERSUS 1995
- ----------------
<TABLE>
<CAPTION>
1996
Year ended better(worse)
December 31, than 1995
------------ -------------
1996 1995 Amount %
---- ---- ------ -
(Dollars in thousands)
Revenues
<S> <C> <C> <C> <C>
Industrial Environmental Services $ 180,002 $ 181,081 $ (1,079) (1%)
Treatment & Disposal Services 32,787 42,641 (9,854) (23%)
------ ------ ------
$ 212,789 $ 223,722 $(10,933) (5%)
========= ========= ========
Gross Profit
Industrial Environmental Services $ 46,690 $ 51,523 $ (4,833) (9%)
Treatment & Disposal Services - 9,129 (9,129) (100%)
------ ----- ------
$ 46,690 $ 60,652 $(13,962) (23%)
========= ========= =========
Operating Income (Loss)
Industrial Environmental Services $ 33,668 $ 39,360 $ (5,692) (14%)
Treatment & Disposal Services (5,581) 1,611 (7,192) -
Corporate headquarters (4,562) (6,482) 1,920 30%
Unusual items, net (4,650) 2,624 (7,274) -
------ ----- ------
$ 18,875 $ 37,113 $(18,238) (49%)
========= ========= ======== ===
</TABLE>
Although conditions in the steel industry remained generally favorable
throughout 1996, Industrial Environmental Services revenues decreased slightly.
The Company's May 1996 acquisition of Alexander Mill Services, Inc. contributed
$6.6 million to revenues in the year, but the increase was largely offset by the
mid-1996 loss of a steel industry customer that accounted for $8.3 million of
revenues in 1995. At the beginning of the 1996 fourth quarter, a major steel
industry customer's employees commenced a strike that continues in 1997. That
customer contributed $3 million of revenues in the 1995 fourth quarter. Also in
1996 our largest steel industry customer experienced an explosion and a 60-day
outage at its largest blast furnace. Treatment & Disposal Services revenues
decreased primarily because 1995 revenues included over $7 million from the last
major phase of a scrubber sludge stabilization system contract. Revenues also
declined because treatment and disposal tonnage was lower during the first six
months of 1996 due to overall depressed market conditions. However, a
year-to-year tonnage increase was realized during the second half of 1996 as the
Company obtained additional contracts to stabilize electric arc furnace dust (a
hazardous waste produced by steel mini-mills).
<PAGE>
Industrial Environmental Services gross profit decreased due to the strike
and blast furnace outage discussed above together with somewhat lower profit
margins at a number of other steel industry customer sites. Treatment & Disposal
Services gross profit declined to zero primarily due to decreases in treatment
and disposal volumes and margins and the lack of new stabilization system
contracts. Treatment & Disposal Services also recorded $1.2 million of
additional closure costs for inactive waste treatment and disposal facilities in
1996, as compared with a $1 million reduction of expected closure costs for an
inactive landfill site in 1995.
Selling, general and administrative expenses decreased $3 million due
primarily to the effects of the 1996 reorganization discussed in the next
paragraph.
Unusual items, net. In 1996 unusual items included $4.4 million of charges
--------------------
for the Company's 1996 reorganization, which was initiated to improve
productivity and reduce costs. The reorganization consisted principally of
consolidating the Company's headquarters functions in a single location. The
Company's corporate headquarters in Stamford, Connecticut and the Treatment &
Disposal Services segment's headquarters in Horsham, Pennsylvania were closed
and their activities moved to the International Mill Service headquarters
building, also in Horsham. As a result of the reorganization, approximately 50
positions were eliminated, mostly in the Treatment & Disposal Services segment.
Cost savings of $4.3 million were realized during the year and ongoing annual
savings should approximate $5 million. In 1996 unusual items also included
charges of $1.2 million to settle the last disputed matter from the Company's
1993 restructuring. Partially offsetting these charges is a $.9 million credit
from reducing estimated liabilities remaining from the Company's 1988
acquisition of IU International Corporation ("IU International"). After related
income tax benefit, the unusual items increased the loss from continuing
operations by approximately $3 million or $.08 per share.
Interest expense increased $4.7 million for the year due to higher average
debt levels, primarily to finance the retirement of the Class G preferred stock
and also due to the Alexander acquisition.
<PAGE>
Current income tax expense consists of state and foreign taxes. Deferred
income taxes are discussed in the next section.
The Company completed the sale of its IMSAMET subsidiary in January 1997
for a gain of $8.3 million or $.21 per share, after taxes, that will be included
in first quarter results. Accordingly, IMSAMET's results have been classified as
discontinued operations.
Due to the factors described above and including the income of the
discontinued operations, the Company incurred a net loss of $4.3 million in 1996
as compared with income of $10.5 million before an extraordinary debt
extinguishment loss in 1995.
There was a minimal Class G preferred stock dividend requirement in 1996
because most of the Class G stock was retired at a $.2 million gain in the first
quarter and all of the remaining Class G stock was redeemed by July 15, 1996.
DEFERRED INCOME TAXES
- ---------------------
In 1996 the Company recognized $26 million of net deferred income tax
assets in its balance sheet. These assets represent tax benefits the Company
expects to realize over the next several years by utilizing its income tax loss
carryforwards and other deferred tax assets to reduce income taxes that would
otherwise be payable in cash.
Of the $26 million, $11.3 million will be realized when the Company
utilizes income tax loss carryforwards and other deferred tax assets to
eliminate income tax payments on the January 1997 gain from selling its IMSAMET
subsidiary. In addition, the Company has determined that it is more likely than
not that it will earn enough taxable income to realize the remaining $14.7
million over the next several years. Realization of this amount will require
cumulative taxable earnings of approximately $42 million. When the consolidated
results of continuing operations for the three most recent years are adjusted by
(1) excluding unusual items, and (2) adding back goodwill amortization (which is
not deductible for tax purposes), the pre-tax earnings, as adjusted, total over
$33 million and average $11 million annually. On this basis, the Company would
realize $14.7 million of deferred tax assets within approximately four years. On
the other hand, because its net operating loss carryforwards expire well into
the future, the Company would also realize $14.7 million of deferred tax assets
if, counting only profitable years, it earns $42 million of taxable income
during the fourteen year period ending in 2010, so long as the cumulative amount
of such earnings reaches at least $10 million by 2005, $21 million by 2006, $30
million by 2008 and $39 million by 2009.
<PAGE>
In making its determination that it is more likely than not that it will
earn enough taxable income to realize $26 million of net deferred tax assets,
the Company considered (1) its cumulative consolidated results of operations for
the three most recent years, (2) the reduction in interest expense obtained by
applying the IMSAMET net proceeds to reduce debt, (3) ongoing cost savings
achieved with its 1996 reorganization, and (4) profit improvements from treating
increased volumes of electric arc furnace dust with its proprietary Super
Detox(R) technology. Factors which could negatively affect this determination
would include (1) loss of a major customer or customers, (2) prolonged work
stoppages at major customers, (3) a major decline in United States steel
industry production, and (4) a material decrease in the level of electric arc
furnace dust currently treated with the Company's proprietary Super Detox(R)
technology.
The $26 million of income tax benefits were credited as follows: $4.4
million reduced the 1996 loss from continuing operations; $10.9 million reduced
goodwill in the balance sheet (because the related deferred tax assets arose
from IU International acquisition obligations - Note G); and $10.7 million
increased capital in excess of par value in the balance sheet (because the
related deferred tax asset arose from net operating loss carryforwards that
originated prior to the Company's 1983 reorganization). Of the $4.4 million that
reduced the 1996 loss from continuing operations, $1.3 million was applicable to
the pre-tax loss for the year and the other $3.1 million represents additional
tax benefits that reduced the loss from continuing operations by $.08 per share.
Deferred tax charges of $4.3 million or $.11 per share in 1995 and $1.7 million
or $.04 per share in 1994 arose from utilizing deferred tax assets attributable
to IU International acquisition obligations with corresponding credits to
goodwill.
As described further in Note C, the Company has additional income tax net
operating loss carryforwards and other deferred tax assets that are available to
further reduce any future federal income tax payments.
<PAGE>
1995 VERSUS 1994
- ----------------
<TABLE>
<CAPTION>
1995
Year ended better(worse)
December 31, than 1994
------------ ---------
1995 1994 Amount %
---- ---- ------ -
(Dollars in thousands)
Revenues
<S> <C> <C> <C> <C>
Industrial Environmental Services $ 181,081 $ 177,396 $ 3,685 2%
Treatment & Disposal Services 42,641 53,038 (10,397) (20%)
------ ------ -------
$ 223,722 $ 230,434 $ (6,712) (3%)
========= ========= ========
Gross Profit
Industrial Environmental Services $ 51,523 $ 50,619 $ 904 2%
Treatment & Disposal Services 9,129 14,936 (5,807) (39%)
----- ------ ------
$ 60,652 $ 65,555 $ (4,903) (7%)
========= ========= ========
Operating Income (Loss)
Industrial Environmental Services $ 39,360 $ 36,105 $ 3,255 9%
Treatment & Disposal Services 1,611 6,339 (4,728) (75%)
Corporate headquarters (6,482) (5,924) (558) (9%)
Unusual items, net 2,624 2,624 -
----- ------- -----
$ 37,113 $ 36,520 $ 593 2%
========= ========= ========
</TABLE>
Industrial Environmental Services revenue increased primarily due to high
production volumes resulting from generally favorable conditions in the steel
industry. Treatment & Disposal Services revenue decreased due to a reduction in
landfill disposal volume and lower landfilling prices for hazardous waste
clean-up projects, resulting from continuing depressed market conditions. These
decreases were partially offset by a higher proportion of higher-priced tonnage
requiring stabilization prior to landfilling.
Industrial Environmental Services gross profit improvements paralleled the
revenue increases. The Treatment & Disposal Services gross profit reduction was
primarily due to lower landfill profits, which paralleled the revenue reduction.
That segment's 1995 gross profit benefited from a $1 million reduction of
expected closure costs at an inactive landfill site. Reduced profits from
long-term contracts to design and supply scrubber sludge stabilization systems
for electric utilities were offset by improved profits from other services.
During 1995 the Treatment & Disposal Services segment embarked on a
comprehensive marketing program to attract additional landfill volume by
treating steel mill electric arc furnace dust with its proprietary Super
Detox(R) technology. Treatment & Disposal Services began processing this waste
stream at its landfills in the latter part 1995.
<PAGE>
Selling, general and administrative expenses were $2.9 million lower in
1995. Industrial Environmental Services' costs were $2.4 million lower in 1995
due primarily to headcount reductions. The $1.1 million improvement at Treatment
& Disposal Services resulted principally from headcount reductions, lower
marketing costs and lower performance-based compensation. Corporate headquarters
costs increased by $.6 million due to litigation expenses.
Unusual items, net. During 1995 the Company favorably resolved a number of
------------------
liabilities resulting from its 1988 acquisition of IU International, primarily
liabilities for insurance matters. The benefit of these developments was
partially offset by additional charges for other matters arising from the same
acquisition. The net credit to income in 1995 amounted to $3.6 million, before
taxes. The Company also increased its estimate of costs to complete the final
steps of its 1993 restructuring by $.2 million and incurred $1 million of
termination costs for additional headcount reductions during 1995. After related
income tax expense of $3.5 million, these items reduced net income by
approximately $1 million or $.02 per share.
Interest expense increased $1.5 million, primarily due to a higher average
debt level.
Income tax expense increased $.9 million primarily because of the
disproportionately high federal taxes not payable in cash related to the
aforementioned net unusual items, partially offset by lower state taxes payable.
In 1995 the Company entered into a new five-year bank credit facility, and
recorded a $.8 million extraordinary debt extinguishment loss to write off the
unamortized issuance costs of its previous bank credit agreement.
Due to the factors described above and including discontinued operations,
1995 net income, after deducting the $.8 million extraordinary loss and the $1
million adverse after-tax effect of the unusual items, was $9.7 million compared
with $11.1 million in 1994.
Class G preferred stock dividend requirements in 1995 were $.5 million
lower than in 1994, due to retirements during 1994. 1994 benefitted from a $1.7
million gain from purchasing and retiring Class G redeemable preferred stock,
which amounted to $.04 per share.
<PAGE>
The impact of inflation on revenues and results of operations has not been
significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity requirements arise primarily from the funding of
its capital expenditures, Treatment & Disposal Services trust fund payments,
working capital needs and debt service obligations. Historically, the Company
has met such requirements with cash flows generated by operations and with
additional debt financing.
The Company expects 1997 capital expenditures of $20 to $25 million,
primarily for equipment replacements, development of additional landfill
capacity and improvements to waste treatment facilities. Scheduled debt
repayments amount to $5.5 million in 1997.
Treatment & Disposal Services' landfill permits require it to fund closure
and post-closure monitoring and maintenance obligations by making essentially
nonrefundable trust fund payments. These payments declined sharply to $1.5
million in 1996. Based on current regulations, planned improvements to waste
treatment facilities and permitted capacity, such payments are expected to
amount to approximately $2.8 million in 1997 and $2.4 million in 1998, including
the reinvestment of Idaho trust fund earnings that the Company includes in
interest income. Thereafter, such payments are not expected to exceed the
reinvestment of trust fund earnings, based on current requirements.
The consolidated balance sheet reflects negative working capital of $8.8
million at December 31, 1996. However, the sale of IMSAMET (Note D) and
application of the proceeds to reduce debt virtually eliminated this deficiency,
as shown in the pro forma balance sheet as of December 31, 1996.
On March 15, 1995, a multiemployer pension plan contacted the Company
concerning a potential claim against the Company for deficiencies in the payment
of withdrawal liabilities by a subsidiary that was sold by IU International
Corporation prior to the Company's acquisition of IU International in 1988. See
Note N. The Company believes any such claim is unwarranted and, if such claim
were asserted, would contest any such claim vigorously. The Company believes it
would ultimately prevail on the merits. However, under the Multiemployer Pension
Plan Amendments Act of 1980, the federal statute governing such plans, the plan
trustees could require the Company to make substantial monthly payments before
any issues are arbitrated or litigated. If onerous monthly payments are imposed
by the plan, the Company will take any and all actions it deems necessary and
appropriate to protect itself until the matter can be arbitrated and/or
litigated on its merits. The Company continues to believe that the underlying
facts and circumstances support a conclusion that these matters will be resolved
with no material adverse effect on its financial condition. However, the
resolution of such matters, which potentially could take place in the current
fiscal year, could result in a charge that is material to results of operations
and cash flows in a single accounting period.
<PAGE>
Upon the sale of IMSAMET, the Company applied the net proceeds to pay down
bank borrowings, and also reduced the amount of its bank credit facility to $65
million of revolving credit borrowing and letter of credit capacity. By early
February 1997, revolving credit borrowings amounted to $31 million and $7.3
million of standby letters of credit were outstanding. The bank facility was
amended to accommodate the sale of IMSAMET, including changes to the financial
covenants that require the Company to meet certain financial ratios and tests
during 1997. To remain in compliance with the bank facility during 1998 and
thereafter, the Company will need to obtain further adjustments to the required
financial ratios and tests throughout the remaining term of the facility. The
Company and the banks that are parties to the facility intend to further amend
such ratios and tests. The $65 million amount of the credit facility declines by
12.5% in each of January 1999 and 2000 and the credit facility terminates in
January 2001.
Cash on hand, funds from operations and borrowing capacity under the bank
credit facility are expected to satisfy the Company's normal operating and debt
service requirements.
Because its businesses are environmentally-oriented, and therefore highly
regulated, the Company is subject to violations alleged by environmental
regulators and, occasionally, fines. Such violations and fines have not had, and
are not expected to have, a material impact on the Company's business. It is
possible that the future imposition of additional environmental compliance
requirements could have a material adverse effect on the Company's results of
operations or financial condition, but the Company is unable to predict any such
future requirements. See Note N, in which environmental compliance is discussed.
ITEM 8. Financial Statements and Supplementary Data.
-------------------------------------------
See the financial statements and schedules attached hereto and listed in
Item 14(a)(1) and (a)(2) hereof.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
------------------------------------------------
Not applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Company.
-----------------------------------------------
Reference is made to the information set forth under the headings (i)
"Election of Class B Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement to be filed pursuant to
Regulation 14A under the Securities Act of 1934 within 120 days after December
31, 1996 and (ii) "Executive Officers of the Registrant" in Part I of this
Annual Report on Form 10-K, which information is incorporated herein by
reference.
ITEM 11. Executive Compensation.
----------------------
Reference is made to the information set forth under the heading "Executive
Compensation" in the Company's Proxy Statement to be filed pursuant to
Regulation 14A under the Securities Act of 1934 within 120 days after December
31, 1996, which information is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
---------------------------------------------------
Reference is made to the information set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed pursuant to Regulation 14A under the Securities Act of
1934 within 120 days after December 31, 1996, which information is incorporated
herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
----------------------------------------------
Reference is made to the information set forth under the heading "Certain
Transactions" in the Company's Proxy Statement to be filed pursuant to
Regulation 14A under the Securities Act of 1934 within 120 days after December
31, 1996, which information is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
----------------------------------------------------
(a) Documents Filed as Part of this Report.
--------------------------------------
(1) Financial Statements.
--------------------
The following Consolidated Financial Statements of the Company and its
subsidiaries are included in this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
-----------------------------
The following schedules to the Consolidated Financial Statements of the
Company and its subsidiaries are included in this Report:
Schedules
---------
II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
or are inapplicable, and therefore have been omitted.
<PAGE>
(3) Exhibits.
--------
3.1 - Amended and Restated Certificate of Incorporation of
the Company (incorporated herein by reference to
Appendix A (pages A-1 to A-3) to the Company's Proxy
Statement filed April 29, 1996 in respect of its 1996
Annual Meeting of Stockholders(File No. 1-1363)).
3.2 - By-Laws of the Company (incorporated herein by
reference to Exhibit C (pages C-1 to C-9) to the
Company's Proxy Statement filed April 24, 1987,
in respect of its 1987 Annual Meeting of
Stockholders (File No. 1-1363)).
3.3 - Amendment to the By-Laws of the Company
(incorporated herein by reference to Exhibit 3.4
to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987 (File
No. 1-1363)).
4.1 - Loan and Security Agreement, dated as of April
6, 1993, between IMS Funding Corporation and
Greyhound Financial Corporation. (The Company
agrees to furnish a copy of such agreement to
the Commission upon request.)
4.2 - Agreement Amending Loan and Security Agreement and
Corporate Guarantee Agreement, dated as of December 8,
1995, between FINOVA Capital Corporation (formerly
known as Greyhound Financial Corporation), IMS Funding
Corporation, and International Mill Service, Inc. (The
Company agrees to furnish a copy of such agreement to
the Commission upon request.)
4.3 - Indenture, dated as of July 1, 1993, between the
Company and United States Trust Company of New
York, as Trustee, relating to the Company's 9-
3/4% Senior Notes due 2003, including the form
of such Notes attached as Exhibit A thereto
(incorporated herein by reference to Exhibit
4.10 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1993
(File No. 1-1363)).
<PAGE>
4.4 - First Supplemental Indenture, dated as of November 2,
1995, between the Company and United States Trust
Company of New York, as Trustee, relating to the
Company's 9-3/4% Senior Notes due 2003 (incorporated
herein by reference to Exhibit 4.15 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1995 (File No. 1-1363)).
4.5 - Registration Rights Agreement, dated as of May
13, 1993, among the Company, FS Equity Partners
II, L.P., The IBM Retirement Plan Trust Fund and
Enso Partners, L.P. (incorporated herein by
reference to Exhibit 4.29 to Amendment No. 1 to
the Company's Registration Statement on Form S-
1, filed June 14, 1993 (File No. 33-62050)).
4.6 - Warrant to purchase shares of Common Stock of
the Company issued to FS Equity Partners II,
L.P., dated as of May 13, 1993 (incorporated
herein by reference to Exhibit 4.30 to Amendment
No. 1 to the Company's Registration Statement on
Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.7 - Warrant to purchase shares of Common Stock of
the Company issued to The IBM Retirement Plan
Trust Fund, dated as of May 13, 1993 (incorporated
herein by reference to Exhibit 4.31 to Amendment
No. 1 to the Company's Registration Statement on
Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.8 - Warrant to purchase shares of Common Stock of
the Company issued to Enso Partners, L.P.,
dated as of May 13, 1993 (incorporated herein by
reference to Exhibit 4.32 to Amendment No. 1 to the
Company's Registration Statement on Form S-1, filed
June 14, 1993 (File No. 33-62050)).
4.9 - Loan Agreement between the Industrial
Development Corporation of Owyhee County, Idaho
and Envirosafe Services of Idaho, Inc. relating
to $8,500,000 Industrial Revenue Bonds, Series
1994. (The Company agrees to furnish a copy of
such agreement to the Commission upon request.)
<PAGE>
4.10 - Credit Agreement, dated as of December 19, 1995, among
the Company, International Mill Service, Inc., the
lenders parties thereto, NationsBank, N.A., as
Administrative Agent, and Credit Lyonnais as
Syndication Agent (incorporated herein by reference
to Exhibit 4.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1995 (File No. 1-1363)).
4.11 - Assignment and Acceptance, dated as of February
8, 1996, between NationsBank, N.A. and Banque Paribas;
and Assignment and Acceptance, dated as of February
8, 1996, between Credit Lyonnais New York Branch and
Banque Paribas (incorporated herein by reference to
Exhibit 4.13 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996 (File
No. 1-1363)).
4.12 - First Amendment, dated as of May 15, 1996, to the
Credit Agreement, dated as of December 19, 1995, among
the Company, International Mill Service, Inc., the
lenders parties thereto, NationsBank, N.A., as
Administrative Agent, and Credit Lyonnais as
Syndication Agent (incorporated herein by reference
to Exhibit 4.15 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1996
(File No. 1-1363)).
4.13*- Second Amendment, dated as of December 23, 1996, to
the Credit Agreement, dated as of December 19, 1995,
among the Company, International Mill Service, Inc.,
the lenders parties thereto, NationsBank, N.A., as
Administrative Agent, and Credit Lyonnais as
Syndication Agent.
10.1 - Restated Incentive Stock Option Plan of the
Company, as amended (incorporated herein by
reference to Exhibit A to the Company's
Registration Statement on Form S-8, filed
January 17, 1989 (File No. 33-26633)).
*Filed herewith
<PAGE>
10.2 - Promissory Note of Louis A. Guzzetti, Jr., dated
March 31, 1993, payable to the Company, amending
and replacing the Promissory Notes dated October 15,
1987, March 31, 1991 and March 31, 1992 and the Letter
Amendments dated April 13, 1991 and May 12,
1992,(incorporated herein by reference to Exhibit
10.13 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1, filed
September 16, 1993 (File No. 33-46930)).
10.3 - Promissory Notes of Aarne Anderson, George E. Fuehrer
and Mr. Guzzetti, dated as of April 1, 1993, payable
to the Company, amending and replacing the Promissory
Notes dated January 13, 1989, April 1, 1991 and April
1, 1992,(incorporated herein by reference to Exhibit
10.17 to Post-Effective Amendment No. to the Company's
Registration Statement on Form S-1, filed September
16, 1993 (File No. 33-46930)).
10.4 - Stock Option Agreement, dated March 18, 1992,
between the Company and Raymond P. Caldiero
(incorporated herein by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1992
(File No. 1-1363)).
10.5 - Stock Option Agreement, dated March 18, 1992,
between the Company and Jeffrey G. Miller
(incorporated herein by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1992
(File No. 1-1363)).
<PAGE>
10.6 - Amendment, dated August 5, 1993, to the Stock
Option Agreement, dated March 18, 1992, between
the Company and Jeffrey G. Miller (incorporated
herein by reference to Exhibit 10.22 to Post-
Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1, filed
September 16, 1993 (File No. 33-46930)).
10.7 - Stock Option Agreement, dated August 5, 1993,
between the Company and Wallace B. Askins
(incorporated herein by reference to Exhibit
10.23 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1,
filed September 16, 1993 (File No. 33-46930)).
10.8 - Stock Option Agreement, dated November 1, 1993,
between the Company and Arthur R. Seder, Jr.
(incorporated herein by reference to Exhibit
10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31,
1993 (File No. 1-1363)).
10.9 - 1993 Stock Option Plan of the Company
(incorporated herein by reference to Exhibit
10.21 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, filed June
14, 1993 (File No. 33-62050)).
10.10 - EnviroSource, Inc. Stock Option Plan for Non-
Affiliated Directors, dated as of January 1,
1995 (incorporated herein by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 1-
1363)).
10.11 - Supplemental Executive Retirement Plan of the
Company, effective January 1, 1995 (incorporated
herein by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 1-1363)).
<PAGE>
10.12 - Employment Agreement, dated November 5, 1996, between
the Company and Aarne Anderson (incorporated herein
by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1996 (File No. 1-1363)).
10.13 - Employment Agreement, dated November 5, 1996, between
the Company and William B. Davis (incorporated herein
by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1996 (File No. 1-1363)).
10.14 - Employment Agreement, dated November 5, 1996, between
the Company and James C. Hull (incorporated herein
by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1996 (File No. 1-1363))
10.15 - Stock Purchase Agreement, dated November 26, 1996, by
and among IMCO Recycling Inc., IMSAMET, Inc. and
EnviroSource, Inc. (incorporated herein by reference
to Exhibit 10.1 to the Company's Form 8-K for January
21, 1997 (File 1-1363)).
10.16 - Amendment No. 1, dated as of January 21, 1997, to
Stock Purchase Agreement, dated November 26, 1996, by
and among IMCO Recycling Inc., IMSAMET, Inc. and
EnviroSource, Inc. (incorporated herein by reference
to Exhibit 10.2 to the Company's Form 8-K for January
21, 1997 (File No. 1-1363))
21.1* - Subsidiaries of the Company
23.1* - Consent of Ernst & Young LLP
(b) Reports on Form 8-K.
-------------------
During the last quarter of the fiscal year ended December 31, 1996, the
Company filed no Current Reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997
ENVIROSOURCE, INC.
/s/ Louis A. Guzzetti, Jr.
--------------------------
Louis A. Guzzetti, Jr.
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on March 28, 1997.
Signature Title
/s/ LOUIS A. GUZZETTI, JR. President and Chief Executive
- -------------------------
Louis A. Guzzetti, Jr. Officer (Principal Executive
Officer) and Director
/s/ JAMES C. HULL Vice President and Chief
- -----------------
James C. Hull Financial Officer (Principal
Financial and Accounting
Officer)
/s/ RONALD P. SPOGLI Chairman of the Board of
- --------------------
Ronald P. Spogli Directors
/s/ WALLACE B. ASKINS Director
- ---------------------
Wallace B. Askins
<PAGE>
/s/ RAYMOND P. CALDIERO Director
- -----------------------
Raymond P. Caldiero
/s/ MARK J. DORAN Director
- -----------------
Mark J. Doran
/s/ JEFFREY G. MILLER Director
- ---------------------
Jeffrey G. Miller
/s/ JON D. RALPH Director
- ----------------
Jon D. Ralph
/s/ JOHN M. ROTH Director
- ----------------
John M. Roth
/s/ CHARLES P. RULLMAN, JR. Director
- ---------------------------
Charles P. Rullman, Jr.
/s/ ARTHUR R. SEDER, JR. Director
- -----------------------
Arthur R. Seder, Jr.
/s/ J. FREDERICK SIMMONS Director
- ------------------------
J. Frederick Simmons
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
EnviroSource, Inc.
We have audited the accompanying consolidated balance sheets of EnviroSource,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EnviroSource, Inc. at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
February 21, 1997
<PAGE>
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------------------------
<S> <C> <C> <C>
Pro Forma
1996 1996 1995
---- ---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,678 $ 9,678 $ 8,367
Accounts receivable, less allowance
for doubtful accounts of $1,220
in 1996 and $729 in 1995 31,550 31,550 33,558
Net current assets of discontinued
IMSAMET operations 34,864 2,559
Net deferred income taxes 3,900 15,200
Other current assets 4,686 4,686 5,666
----- ----- -----
Total current assets 49,814 95,978 50,150
Property, plant and equipment:
Land and improvements 887 887 894
Landfill development 29,701 29,701 29,577
Buildings and improvements 25,501 25,501 24,128
Machinery and equipment 214,768 214,768 202,912
------- ------- -------
270,857 270,857 257,511
Less allowance for depreciation (128,392) (128,392) (114,044)
-------- -------- --------
142,465 142,465 143,467
Goodwill, less amortization 138,635 138,635 144,589
Closure trust funds and deferred
charges, less amortization 34,139 34,139 33,867
Landfill permits, less amortization 23,064 23,064 22,549
Net non-current assets of discontinued
IMSAMET operations 33,528
Net deferred income taxes 10,800 10,800
Debt issuance costs, less amortization 8,442 8,442 9,625
Other assets 6,386 6,386 6,661
----- ----- -----
$413,745 $459,909 $444,436
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS -- Continued
(Dollars in thousands)
December 31,
-----------------------------
Pro Forma
1996 1996 1995
---- ---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C> <C>
Accounts payable $ 9,302 $ 9,302 $ 11,762
Salaries, wages and related benefits 7,253 7,253 9,500
Insurance obligations 6,187 6,187 6,233
Estimated reorganization and
restructuring costs 2,207 2,207 1,779
Other current liabilities 16,823 15,287 13,359
Current portion of debt 8,504 64,504 8,524
Class G redeemable preferred stock 33,092
----- ------ ------
Total current liabilities 50,276 104,740 84,249
Long-term debt 268,424 268,424 275,158
Other liabilities 47,688 47,688 52,425
Stockholders' equity:
Common stock, par value $.05 per share,
shares authorized-60,000,000, shares
issued and outstanding-40,351,446 in
1996 and 40,194,244 in 1995 2,018 2,018 2,010
Capital in excess of par value 173,472 173,472 162,580
Accumulated deficit (126,331) (134,631) (130,189)
Stock purchase loans receivable from
officers (810) (810) (840)
Canadian translation adjustment (992) (992) (957)
---- ---- ----
Total stockholders' equity 47,357 39,057 32,604
------ ------ ------
$413,745 $459,909 $444,436
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Years Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ 212,789 $ 223,722 $ 230,434
Cost of revenues 166,099 163,070 164,879
Selling, general and
administrative expenses 23,165 26,163 29,035
Unusual items, net 4,650 (2,624)
----- ------ ------
Operating income 18,875 37,113 36,520
Interest income 1,356 1,133 983
Interest expense (28,187) (23,483) (21,974)
------- ------- -------
(Loss) income from continuing
operations before income taxes (7,956) 14,763 15,529
Income tax (expense) benefit:
Current (1,134) (1,262) (2,576)
Deferred 4,400 (3,946) (1,704)
----- ------ ------
3,266 (5,208) (4,280)
----- ------ -----
(Loss) income from
continuing operations (4,690) 9,555 11,249
Income (loss) from discontinued
IMSAMET operations 399 949 (190)
--- --- ----
(Loss) income before
extraordinary loss (4,291) 10,504 11,059
Extraordinary debt
extinguishment loss (806)
------ ---- ------
Net (loss) income (4,291) 9,698 11,059
Preferred stock dividend
requirements, reduced by
retirement gains of $250
in 1996 and $1,685 in 1994 (151) (1,739) (602)
---- ------ ----
(Loss) income applicable to
common shares and equivalents $ (4,442) $ 7,959 $ 10,457
========== ========== ==========
(Loss) income per share:
Continuing operations $ (.12) $ .19 $ .26
========== ========== ==========
Before extraordinary loss $ (.11) $ .22 $ .26
========== ========== ==========
Net (loss) income $ (.11) $ .20 $ .26
========== ========== ==========
Weighted average common and
common equivalent shares 40,443 40,527 40,292
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Capital in Stock Canadian
Common Excess of Accumulated Purchase Translation
Stock Par Value Deficit Loans Adjustment Total
----- --------- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 $ 2,003 $ 162,461 $ (148,605) $ (840) $ (802) $ 14,217
Common stock issued
(41,500 shares) 2 112 114
Net income 11,059 11,059
Preferred stock dividends
and accretion (2,287) (2,287)
Preferred stock
retirement gain 1,685 1,685
Translation adjustment (267) (267)
----- ------- ------- ----- ---- ----
BALANCE DECEMBER 31, 1994 2,005 162,573 (138,148) (840) (1,069) 24,521
Common stock issued
(100,485 shares) 5 7 12
Net income 9,698 9,698
Preferred stock dividends
and accretion (1,739) (1,739)
Translation adjustment 112 112
----- ------- -------- ---- --- ---
BALANCE DECEMBER 31, 1995 2,010 162,580 (130,189) (840) (957) 32,604
Common stock issued
(157,202 shares) 8 192 200
Deferred income tax benefit 10,700 10,700
Net loss (4,291) (4,291)
Preferred stock dividends
and accretion (401) (401)
Preferred stock
retirement gain 250 250
Loan repayment 30 30
Translation adjustment (35) (35)
-------- --------- --------- ------- --- ---
BALANCE DECEMBER 31, 1996 $ 2,018 $ 173,472 $(134,631) $ (810) $ (992) $ 39,057
======== ========= ========= ======= ========= ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EnviroSource, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
(Loss) income before extraordinary loss $ (4,291) $ 10,504 $ 11,059
Adjustments to reconcile (loss) income
before extraordinary loss to cash
provided by operating activities:
Deferred income taxes (4,400) 4,346 1,704
Depreciation 26,261 24,545 24,352
Amortization 9,715 9,071 10,656
Unusual items, net of payments 945 (6,816) (5,686)
Changes in working capital (1,741) 368 (4,079)
Other, net 1,674 (113) 4,010
----- ---- -----
Cash provided by operating activities 28,163 41,905 42,016
------ ------ ------
INVESTING ACTIVITIES
Property, plant and equipment:
Additions (21,883) (32,560) (39,261)
Proceeds from dispositions 2,930 383 594
Purchase of Alexander Mill Services, Inc.
(net of cash acquired) (5,953)
Landfill permit additions and
closure expenditures (3,186) (1,125) (1,199)
Closure trust fund payments (1,530) (9,087) (12,866)
Ongoing net cash flows related to
IU International acquisition (1,901) (9,600) (2,471)
Other (798) (2,299) (5,620)
---- ------ ------
Cash used by investing activities (32,321) (54,288) (60,823)
------- ------- -------
FINANCING ACTIVITIES
Debt issuance 60,000 75,188 41,500
Debt repayment (21,372) (60,173) (13,035)
Debt issuance costs (102) (2,624) (643)
Retirement of preferred stock (33,242) (42) (11,322)
Sale of common stock 185 12 114
--- -- ---
Cash provided by financing activities 5,469 12,361 16,614
----- ------ ------
CASH AND CASH EQUIVALENTS
Increase (decrease) during the year 1,311 (22) (2,193)
Beginning of year 8,367 8,389 10,582
----- ----- ------
End of year $ 9,678 $ 8,367 $ 8,389
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ACCOUNTING POLICIES
- -----------------------------
Principles of consolidation: The consolidated financial statements include
- ----------------------------
the accounts of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated. Certain amounts reported in prior years have
been reclassified for comparative purposes.
Use of estimates: Preparing financial statements in accordance with
- ------------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents: Cash equivalents are highly liquid investments with
- -----------------
maturities of three months or less when acquired.
Property, plant and equipment: Property, plant and equipment is stated at
- ------------------------------
cost. Depreciation is computed by the straight-line method based on the
following lives: buildings -- 10 to 30 years and machinery and equipment -- 3 to
25 years. Landfill development costs are depreciated based on the ratio of cubic
yards of disposal capacity utilized to total cubic yards of disposal capacity.
Landfill permits: Costs to acquire and maintain landfill permits are
- -----------------
deferred and amortized based on the ratio of cubic yards of disposal capacity
utilized to total cubic yards of disposal capacity. Accumulated amortization was
$14.6 million and $13.3 million at December 31, 1996 and 1995.
Closure trust funds and deferred charges: Idaho landfill closure costs and
- ----------------------------------------
post-closure obligations (accrued as liabilities in the balance sheet) are
secured by a trust fund invested in U.S. government and government agency
securities. These investments, totaling $12.8 million and $11.4 million at
December 31, 1996 and 1995, are classified as "available-for-sale," have
maturities of four months to ten years and are carried at market value. Interest
income and realized gains and losses are recognized in earnings. Excess funds,
if any, will revert to the Company.
<PAGE>
NOTE A -- ACCOUNTING POLICIES -- CONTINUED
- ------------------------------------------
Ohio landfill trust fund balances represent deferred charges that are
amortized as part of closure costs. These trusts (also invested in U.S.
government and government agency securities) will fund the latter stages of
closure activity and all post-closure activity in perpetuity. Excess funds, if
any, revert to the State of Ohio; accordingly, no interest income is recognized.
Accumulated amortization was $12.1 million and $10.9 million at December 31,
1996 and 1995.
Closure costs: The estimated costs of future closure and post-closure
- ---------------
monitoring and maintenance of landfills are amortized or accrued based on the
ratio of cubic yards of disposal capacity utilized to total cubic yards of
disposal capacity. Closure costs are similar to landfill development costs, but
are generally incurred for aboveground construction. Closure cost accruals of
$8.8 million and $9.2 million are included in other long-term liabilities at
December 31, 1996 and 1995.
Goodwill: The excess of purchase price over fair value of net assets of
- --------
acquired businesses is recorded as an asset and amortized using the
straight-line method over periods of 15 to 40 years. Accumulated amortization
was $44 million and $39 million at December 31, 1996 and 1995. Most of the
goodwill is identified with the Company's excellent reputation and long-term
relationships within the steel industry. The carrying value of goodwill will be
reviewed if facts and circumstances suggest that it may be impaired. If this
review indicates that the goodwill will not be recoverable, as determined based
on anticipated cash flows over the remaining amortization period, the carrying
value of the goodwill will be reduced based on the discounted present value of
the anticipated cash flows.
<PAGE>
NOTE A -- ACCOUNTING POLICIES -- CONTINUED
- ------------------------------------------
Revenues: Most of the Company's revenues are recognized as services are
- ---------
provided. Revenues of $8 million in 1995 and $6.9 million in 1994 were from
long-term contracts to design, supply and construct "wet scrubber sludge"
stabilization systems for electric utilities. Revenues from such contracts are
recognized using the percentage-of-completion method, with progress toward
completion measured in labor hours. Such contracts are segmented between "design
and supply" and "construction", and a separate profit margin is recognized for
each segment.
Earnings per share: Per share amounts are calculated by dividing income
- -------------------
(loss) applicable to common shares and equivalents by the weighted average
number of common shares and equivalents outstanding during the period.
Stock-based compensation plans: The Company follows Accounting Principles
- -------------------------------
Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation plans and discloses the fair value of options
granted and pro forma earnings as permitted by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
Pro forma balance sheet: The pro forma balance sheet presents the financial
- -----------------------
position of the Company assuming the January 1997 sale of IMSAMET (Note D) took
place as of December 31, 1996.
<PAGE>
NOTE B -- UNUSUAL ITEMS, NET
- ----------------------------
1995 - The Company purchased IU International Corporation ("IU
- ----
International") in 1988. During 1995 the Company favorably resolved a number of
liabilities resulting from that acquisition, primarily liabilities for insurance
matters (Note G). The benefit of these developments was partially offset by
additional charges for other matters arising from the same acquisition. The net
credit to income in 1995 amounted to $3.6 million. The Company also increased
its estimate of costs to complete its 1993 restructuring by $.2 million and
incurred $1 million of termination costs for additional headcount reductions
during 1995. After related income tax expense of $3.5 million, these items
reduced net income by approximately $1 million or $.02 per share.
1996 - During 1996 the Company reduced its estimates of liabilities
- ----
remaining from the IU International acquisition by $.9 million. The Company also
settled the last disputed matter from its 1993 restructuring, which resulted in
an additional charge of $1.2 million for a terminated recycling unit.
Additionally, the Company provided $4.4 million for its 1996 reorganization,
which was initiated to improve productivity and reduce costs. The reorganization
consisted principally of consolidating all of the Company's headquarters
functions in a single location. The Company's corporate headquarters in
Stamford, Connecticut and the Treatment & Disposal Services segment's
headquarters in Horsham, Pennsylvania were closed and their activities moved to
the International Mill Service headquarters building, also in Horsham. As a
result, approximately 50 positions were eliminated, mostly in the Treatment &
Disposal Services segment. After related income tax benefit of $1.6 million,
these items increased the net loss by approximately $3 million or $.08 per
share.
In addition to payments required for the above items, the caption "unusual
items, net of payments" in the consolidated statements of cash flows includes
payments related to a restructuring charge in the fourth quarter of 1993.
<PAGE>
NOTE C -- INCOME TAXES
- ----------------------
The components of income tax benefit (expense) attributable to
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Current:
State $ (916) $ (1,001) $ (2,310)
Canadian (218) (261) (266)
---- ---- ----
(1,134) (1,262) (2,576)
Deferred:
Federal 4,400 (3,946) (1,704)
----- ------ ------
$ 3,266 $ (5,208) $ (4,280)
========= ========= =========
</TABLE>
Canadian income before income taxes amounted to $.6 million in 1996 and
1995 and $.7 million in 1994.
Income tax benefit (expense) varies from amounts computed by applying the
35% federal statutory rate for the following reasons (in thousands):
1996 1995 1994
---- ---- ----
Benefit (expense) of pre-tax
(loss) income from continuing
operations at statutory
rate $ 2,785 $ (5,167) $ (5,369)
Goodwill amortization (1,718) (1,733) (1,751)
Effect of reducing deferred
tax valuation allowance 3,100 2,253 4,375
Effects of state and Canadian
income taxes (595) (683) (1,535)
Other (306) 122
---- --- ---------
$ 3,266 $ (5,208) $ (4,280)
========= ========= =========
<PAGE>
NOTE C -- INCOME TAXES -- CONTINUED
- -----------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
December 31,
----------------
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 87,993 $114,099
Capital loss carryforwards 4,564 3,870
Allowance for a doubtful receivable
and insurance accruals that would
result in capital losses 5,018 6,682
Other insurance accruals 2,810 3,084
Reorganization and restructuring
accrual 1,280 1,108
Pension and other postretirement
benefits accruals 5,095 5,012
Closure cost accruals 3,332 3,304
Other accruals 6,473 9,391
----- -----
Total deferred tax assets 116,565 146,550
Valuation allowance (69,100) (124,425)
------- --------
Net deferred tax assets 47,465 22,125
------ ------
Deferred tax liabilities:
Tax over book depreciation plus
IU International acquisition purchase
price allocation to property, plant
and equipment (10,870) (11,671)
Tax over book post-closure deductions (6,288) (6,483)
Tax over book landfill permit
amortization (4,012) (3,747)
Other (295) (224)
---- ----
Total deferred tax liabilities (21,465) (22,125)
------- -------
Net deferred taxes $ 26,000 $ -0-
======== ======
<PAGE>
NOTE C -- INCOME TAXES -- CONTINUED
- -----------------------------------
The Company recognized $26 million of net deferred tax assets in the
balance sheet in the fourth quarter of 1996. Of this amount, $11.3 million will
be realized when the Company utilizes income tax loss carryforwards and other
deferred tax assets to eliminate income tax payments on the January 1997 gain
from selling its IMSAMET subsidiary (Note D). The balance was recognized because
the Company has determined that is more likely than not that it will earn
sufficient taxable income during the next several years to realize at least that
much tax benefit from utilizing net operating loss carryforwards and other
deferred tax assets to reduce income taxes that otherwise would be payable in
cash.
The income tax benefits that resulted from recording the $26 million of
deferred tax assets (by reducing the valuation allowance) were credited as
follows: $4.4 million reduced the 1996 loss from continuing operations; $10.9
million was credited to goodwill (because the related deferred tax assets arose
from IU International acquisition obligations-Note G); and $10.7 million
increased capital in excess of par value (because the related deferred tax
assets arose from net operating loss carryforwards that originated prior to the
Company's 1983 reorganization). The valuation allowance was reduced by an
additional $29.3 million, primarily due to the expiration of some of the net
operating loss carryforwards that originated prior to the Company's 1983
reorganization. In 1995 and 1994 the valuation allowance was reduced by $6.6
million and $6.1 million, respectively. Of these amounts $2.3 million and $4.4
million were credited to reduce income tax expense. In both years, the remaining
valuation allowance reductions were credited to reduce goodwill (because the
related deferred tax assets arose from IU International acquisition
obligations), resulting in deferred income tax expense.
The Company continues to carry a sizeable valuation allowance against the
remainder of its deferred tax assets, primarily because $55 million of the $88
million deferred tax asset represents net operating loss carryforwards that
expire in 1997 and 1998. The balance of the $88 million represents net operating
loss carryforwards that for the most part will not expire for seven or more
years. The deferred tax assets other than carryforwards represent items
already reflected in the financial statements that will become available
to reduce future income taxes as they become deductible for tax purposes.
<PAGE>
NOTE C -- INCOME TAXES -- CONTINUED
- -----------------------------------
Net operating loss carryforwards totaling $251 million expire as follows:
$10 million in 1997, $147 million in 1998, $1 million in 2000, $15 million in
2003, $46 million in 2005, $11 million in 2006, $9 million in 2008, $9 million
in 2009, and $3 million in 2010. In 1993 the Company underwent a
recapitalization that resulted in an "ownership change" (as defined in the
Internal Revenue Code) that could limit the future use of the net operating loss
carryforwards that expire through 2006. However, based on a comprehensive study
of its overall tax position, the Company does not believe this limitation will
affect its ability to utilize its net operating loss carryforwards.
Any additional income tax benefits attributable to net operating loss
carryforwards that originated prior to the Company's 1983 reorganization will be
credited to capital in excess of par value. Additional income tax benefits
attributable to IU International acquisition obligations will be credited to
goodwill. Additional income tax benefits attributable to other deferred tax
assets will reduce future income tax expense. Subject to limitations discussed
in the preceding paragraph and the Company's ability to generate sufficient
future taxable income, upon recognition of additional net deferred tax assets,
the $69.1 million valuation allowance would be credited as follows: $44.4
million to capital in excess of par value, $8.9 million to goodwill and $15.8
million to reduce income tax expense.
<PAGE>
NOTE D -- SALE OF IMSAMET
- -------------------------
On January 21, 1997, the Company sold the capital stock of IMSAMET, Inc., a
wholly-owned subsidiary that performed recycling and waste management services
for the aluminum industry, for $58 million realizing a pre-tax gain of $19.6
million. After a deferred income tax charge, the gain amounted to $8.3 million
or $.21 per share. The proceeds from the sale were used to repay $56 million of
revolving credit borrowings and expenses related to the transaction.
The assets and liabilities of IMSAMET have been classified in the balance
sheet as net assets of discontinued operations and consist of the following (in
thousands):
December 31,
---------------
1996 1995
---- ----
Accounts receivable $ 3,882 $ 3,650
Property, plant and equipment, net 17,929 19,095
Goodwill, less amortization 10,338 10,666
Other assets 6,861 7,922
------ ------
Total assets of IMSAMET 39,010 41,333
Accounts payable 1,210 1,363
Accrued expenses 1,380 1,441
Other liabilities 1,556 1,569
Debt 873
----- ---
Total liabilities of IMSAMET 4,146 5,246
----- -----
Net assets of discontinued operations $ 34,864 $ 36,087
======== ========
IMSAMET's results have been classified in the statement of operations as income
(loss) from discontinued operations. Summarized results of discontinued
operations are as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Revenues $ 37,399 $ 40,962 $ 29,081
========== ========= =========
Income (loss) before
income taxes $ 399 $ 1,349 $ (190)
Deferred income tax
expense 400
---------- --- ---------
Income (loss) from
discontinued operations $ 399 $ 949 $ (190)
========== ========= =========
</TABLE>
<PAGE>
NOTE D -- SALE OF IMSAMET -- CONTINUED
- --------------------------------------
Interest expense of $3.3 million in 1996, $3.6 million in 1995, and $3.2 million
in 1994 has been allocated to discontinued operations based on the ratio of the
net assets of IMSAMET to consolidated net assets (equal to stockholders' equity
plus debt not directly attributable to specific operations).
NOTE E -- ALEXANDER MILL SERVICES ACQUISITION
- ---------------------------------------------
The Company purchased Alexander Mill Services, Inc.("AMS"), a metal reclamation
company serving the mini-mill sector of the steel industry, in May 1996. The
results of AMS' operations are included in the consolidated statement of
operations from the acquisition date. Pro forma results of operations, as if
this transaction occurred at the beginning of each period, are as follows (in
thousands, except per share amounts):
Year ended
December 31,
------------
(Unaudited)
1996 1995
---- ----
Pro forma revenues $217,205 $234,221
Pro forma (loss) income before
extraordinary loss (3,640) 11,101
Pro forma net (loss) income (3,640) 10,205
Pro forma net (loss) income per share $ (.09) $ .21
The pro forma information is not necessarily indicative of the results that
would have occurred had the transaction taken place at the beginning of the
respective periods.
The cost of the acquisition was $9 million (including $2.6 million that is
payable to the former owner over three and one-half years with interest) plus
the assumption of $7.2 million of debt. In allocating the purchase price, $10.7
million was charged to goodwill.
<PAGE>
NOTE F -- DEBT
- --------------
Debt is summarized as follows (in thousands):
December 31,
----------------------
1996 1995
---- ----
9-3/4% Senior Notes $ 220,000 $ 220,000
Bank Credit Facility 89,000 44,000
Industrial revenue bond financings,
equipment loans and other 23,928 19,682
------ ------
332,928 283,682
Less current maturities 64,504 8,524
------ -----
Long-term debt $ 268,424 $ 275,158
========= =========
At December 31, 1996, required principal payments for each of the succeeding
five years are: $64.5 million in 1997 (including $59 million of revolving credit
borrowings repaid by early February), $5.8 million in 1998, $2.1 million in
1999, $.8 million in 2000 and $31 million in 2001.
The 9-3/4% Senior Notes (10.3% effective rate including amortization of issuance
costs) are due in 2003 and are redeemable, in whole or in part, at the Company's
option after June 15, 1998 at 104.9% of principal amount, declining to 100% by
June 15, 2001. Upon a change in control (as defined), the Company must offer to
purchase the Senior Notes at 101% of principal amount. The Senior Notes
indenture contains restrictions customarily found in such agreements, such as
limits on indebtedness and payments with respect to capital stock.
In December 1995, the Company entered into a $100 million, five-year bank credit
facility. This resulted in an extraordinary debt extinguishment loss of $.8
million, consisting of the unamortized issuance costs of the previous bank
credit agreement.
<PAGE>
NOTE F -- DEBT -- CONTINUED
- ---------------------------
Upon the sale of IMSAMET (Note D), the Company applied the net proceeds to repay
bank facility borrowings and reduced the amount of the facility to $65 million
of revolving credit borrowing and letter of credit capacity, declining by 12.5%
in each of January 1999 and 2000 and terminating in January 2001. Interest
rates, the commitment fee and letter of credit fees are based on a pricing ratio
(as defined). Interest on borrowings is at the bank's prime rate plus from .25%
to 1.25% (8.25% plus 1.25% at December 31, 1996) or at Eurodollar rates plus
from 1.5% to 2.5% (approximately 5.53% plus 2.5% at December 31, 1996). The
commitment fee is currently .5% per annum on the unutilized portion of the
facility. Outstanding letter of credit fees are currently 2.75% per annum. The
facility is secured by accounts receivable and the Company's investments in
stock and intercompany notes of its subsidiaries. By early February 1997,
revolving credit borrowings had been reduced to $31 million and $7.3 million of
standby letters of credit were outstanding.
The bank facility prohibits cash dividends and contains financial covenants that
require the Company to meet certain financial ratios and tests. The facility was
amended to accommodate the sale of IMSAMET, including changes to the financial
ratios and tests required during 1997.
Industrial revenue bond financings of $8.8 million carry a weighted average
effective interest rate of 9.3%. Equipment loans and other debt carry a weighted
average effective interest rate of 9.8%.
<PAGE>
NOTE G -- IU INTERNATIONAL ACQUISITION OBLIGATIONS
- --------------------------------------------------
The Company has certain ongoing obligations resulting from the 1988 acquisition
of IU International that are unrelated to current operations. Current
liabilities include acquisition obligations of $6.8 million at December 31, 1996
and $7.1 million at December 31, 1995. These amounts represent ongoing
obligations for insurance, employee benefits and other matters. As in the past,
such payments will be reduced by IU International-related recoveries, if any.
Payments on such obligations, reduced by recoveries, amounted to $1.9 million in
1996, $9.6 million in 1995 and $2.5 million in 1994.
Non-current other liabilities includes IU International acquisition obligations
of $28.5 million at December 31, 1996 and $32.3 million at December 31, 1995 for
insurance, employee benefits, income tax matters and other disputed matters.
NOTE H -- STOCKHOLDERS' EQUITY
- -------------------------------
Warrants to purchase 200,000 shares of the Company's common stock at $3.50 per
share expire on January 1, 1998. The warrants may be exercised using a cashless
exercise feature (by the surrender of shares of common stock subject to the
warrants). An affiliate of Freeman Spogli & Co. ("Freeman Spogli") that is a
47.5% stockholder holds warrants for 87% of such shares and The IBM Retirement
Plan Trust Fund, a 6.6% stockholder, holds 12%. In 1995 warrants to purchase
695,652 shares of the Company's common stock at $4 per share and 200,000 shares
at $3.50 per share were exercised using the cashless exercise feature, resulting
in the issuance of 95,685 shares of the Company's common stock.
In 1996, warrants to purchase 102,002 shares of common stock were issued upon
the cashless exercise of warrants to purchase the Company's common stock at
seven cents per share.
A total of 3,440,235 shares of the Company's common stock have been reserved for
the warrants described above and for stock options (Note I). Under the terms of
the Senior Notes indenture and bank credit facility, the Company may not declare
or pay dividends or make cash distributions to the common stockholders.
<PAGE>
NOTE H -- STOCKHOLDERS' EQUITY -- CONTINUED
- -------------------------------------------
The Company is authorized to issue 5.6 million shares of preferred stock, par
value $.25 per share, with such terms and conditions as shall be specified by
the Company's Board of Directors.
NOTE I -- STOCK OPTIONS
- -----------------------
The Company maintains plans that provide incentive stock options and
non-qualified stock options to key employees to purchase shares of the Company's
common stock. The terms, conditions and numbers of shares are determined by the
Compensation and Stock Option Committee of the Board of Directors. Incentive
stock options may not be granted at exercise prices less than the fair market
value of the stock at the time of grant. Non-qualified stock options may not be
granted at exercise prices less than 50% of the fair market value at the time of
grant. Options generally vest over three or five year periods. At December 31,
1996, options for 920,320 shares were available for future grants.
In 1995 the Company adopted a stock option plan for outside directors that are
not affiliated with Freeman Spogli. Under the plan, on January 1 of each year
each outside director is granted options to purchase 5,000 shares of the
Company's common stock at the prior year-end market price. The plan also allows
these directors to elect to receive below-market options in lieu of their annual
directors' fees. In 1996 one director and in 1995 two directors elected to
receive such options. All options granted under the plan become exercisable on
the following January 1. At December 31, 1996 options for 656,139 shares were
available for future grants.
The Company previously granted the four outside directors options outside the
option plans to purchase 80,000 shares of the Company's common stock at exercise
prices equal to the fair market value at the time of grant.
<PAGE>
NOTE I -- STOCK OPTIONS -- CONTINUED
- -------------------------------------
Option activity is summarized below:
Shares
--------------------------------------
1996 1995 1994
Shares under option at Jan. 1 1,591,642 1,286,885 1,656,100
Options granted 298,509 435,082 48,740
Options exercised (at average
exercise prices of $2.80 in
1996, $2.50 in 1995 and $2.74
in 1994 (55,200) (4,800) (41,500)
Options expired or cancelled (171,175) (125,525) (376,455)
-------- -------- --------
Shares under option at Dec. 31 1,663,776 1,591,642 1,286,885
========= ========= =========
Options exercisable at Dec. 31 1,049,011 866,485 612,200
========= ======= =======
At December 31, 1996, option exercise prices ranged from $2.50 to $8.25 per
share and the weighted average was $4.16 per share. These options, with a
weighted-average remaining contractual life of 6.4 years, expire on various
dates from January 1997 through December 2006. During 1996 the weighted-average
exercise price of options granted was $3.62 per share and of options cancelled
was $4.68 per share.
Using the Black-Scholes option pricing model, the estimated per share
weighted-average fair values of stock options granted during 1996 and 1995 were
$2.16 and $2.15. Assumptions made in determining the estimates of fair value
include: risk-free interest rates of 5.6% in 1996 and 6.4% in 1995, a volatility
factor of 46% and a weighted-average expected life of 8 years for both 1996 and
1995.
<PAGE>
NOTE I -- STOCK OPTIONS -- CONTINUED
- ------------------------------------
Summarized information about stock options outstanding at
December 31, 1996 is as follows:
Options Outstanding Options Exercisable
-------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$2.50 to $4.00 911,776 7.5 years $3.35 406,011 $3.02
4.01 to 5.50 513,000 6.5 4.25 404,000 4.25
5.51 to 8.25 239,000 2.1 7.07 239,000 7.07
------- ---------
2.50 to 8.25 1,663,776 6.4 4.16 1,049,011 4.42
========= =========
The following table summarizes the pro forma effects assuming compensation cost
for such awards had been recorded based upon estimated fair values (in
thousands, except for per share amounts):
1996 1995
---- ----
Pro forma net(loss)income $(4,591) $ 9,509
Pro forma net(loss)income per share $( .12) $ .19
Because the Company's options vest over three or five year periods and only
options granted in 1995 and 1996 are reflected in the calculations, the pro
forma disclosures are not likely to be representative of future pro forma
amounts.
<PAGE>
NOTE J -- BUSINESS SEGMENTS
- ---------------------------
The Company's business segments are: Industrial Environmental Services, which
provides recycling and other specialized services for the steel industry, and
Treatment & Disposal Services, which operates hazardous waste disposal landfills
and provides waste management and stabilization services for the steel, electric
utility and other industries.
Information by business segment for the three years ended December 31, 1996
follows (in thousands):
1996 1995 1994
---- ---- ----
REVENUES
- --------
Industrial Environmental Services $ 180,002 $ 181,081 $ 177,396
Treatment & Disposal Services 32,787 42,641 53,038
------ ------ ------
$ 212,789 $ 223,722 $ 230,434
========= ========= =========
UNUSUAL ITEM (CHARGES) CREDITS, NET
- -----------------------------------
Industrial Environmental Services $ (1,697) $ (904) $ (580)
Treatment & Disposal Services (2,431) (100) 580
Corporate headquarters (522) 3,628
---- ----- ---------
$ (4,650 ) $ 2,624 $ -
========= ========= =========
TOTAL OPERATING INCOME (LOSS)
- -----------------------------
Industrial Environmental Services $ 31,971 $ 38,456 $ 35,525
Treatment & Disposal Services (8,012) 1,511 6,919
Corporate headquarters (5,084) (2,854) (5,924)
------ ------ ------
$ 18,875 $ 37,113 $ 36,520
========= ========= =========
IDENTIFIABLE ASSETS
- -------------------
Industrial Environmental Services $ 252,958 $ 258,691 $ 256,027
Treatment & Disposal Services 130,683 136,516 135,138
Corporate headquarters 41,404 13,142 16,296
------ ------ ------
425,045 408,349 407,461
Discontinued operations 34,864 36,087 35,411
------- ------- -------
$ 459,909 $ 444,436 $ 442,872
========= ========= =========
DEPRECIATION AND AMORTIZATION
- -----------------------------
Industrial Environmental Services $ 24,045 $ 21,972 $ 21,520
Treatment & Disposal Services 7,569 7,286 9,988
Corporate headquarters 1,398 1,333 1,209
----- ----- -----
33,012 30,591 32,717
Discontinued operations 2,964 3,025 2,291
----- ----- -----
$ 35,976 $ 33,616 $ 35,008
========= ========= =========
<PAGE>
NOTE J -- BUSINESS SEGMENTS -- CONTINUED
- ----------------------------------------
CAPITAL EXPENDITURES
- ---------------------
Industrial Environmental Services $ 16,227 $ 23,939 $ 14,274
Treatment & Disposal Services 4,761 6,345 17,428
Corporate headquarters 5 81 78
- -- --
20,993 30,365 31,780
Discontinued operations 890 2,195 7,481
--- ----- -----
$ 21,883 $ 32,560 $ 39,261
========= ========= =========
Corporate headquarters expenses and assets support both segments but are not
directly associated with either. Corporate assets consist principally of cash
and cash equivalents, net deferred tax assets and unamortized debt issuance
costs.
Revenues of approximately $43 million in 1996, $44 million in 1995 and $51
million in 1994 were from USX Corporation, the Company's largest steel industry
customer. At December 31, 1996, $23.2 million of consolidated accounts
receivable result from services performed for domestic steel industry customers.
Industrial Environmental Services customers and operations are located
throughout the United States and Canada. Treatment & Disposal Services landfills
are in Idaho and Ohio. Foreign operations are not significant.
The following table sets forth the percentage of total revenue contributed by
each class of services during the three years ended December 31, 1996:
1996 1995 1994
---- ---- ----
Industrial recycling 70.5% 66.7% 63.2%
Specialized services 14.1 14.2 13.8
Waste stabilization
and disposal 15.2 15.5 20.0
Stabilization system design,
supply and construction .2 3.6 3.0
-- --- ---
100.0% 100.0% 100.0%
===== ===== =====
<PAGE>
NOTE K -- RETIREMENT PLANS
- --------------------------
The Company has several non-contributory defined benefit pension plans covering
certain salaried and hourly employees. The plans provide pension benefits that
are based on varying levels of service and compensation. Assets of the plans are
principally common stocks, fixed income securities and cash equivalents. The
Company's contributions are based on funding standards established by the
Employee Retirement Income Security Act of 1974.
Net periodic pension cost for defined benefit plans includes the
following (in thousands):
1996 1995 1994
---- ---- ----
Service cost-benefits
earned during the period $ 763 $ 787 $ 868
Interest cost on projected
benefit obligations 1,386 1,393 1,276
Actual gain on plan assets (2,576) (2,860) (238)
Net amortization and deferral 1,066 1,341 (1,083)
----- ----- ------
Net periodic pension cost $ 639 $ 661 $ 823
======= ======= =======
<PAGE>
NOTE K -- RETIREMENT PLANS -- CONTINUED
- ---------------------------------------
The funded status, calculated principally using measurement dates of October 31,
1996 and 1995, and the liability accrued in the consolidated balance sheet for
defined benefit plans are as shown below (in thousands):
December 31,
----------------
1996 1995
---- ----
Actuarial present value of
benefit obligations:
Vested $ 19,070 $ 19,342
========= =========
Accumulated $ 19,081 $ 19,355
========= =========
Projected $ 19,205 $ 19,485
Plan assets at fair value 19,183 16,349
------ ------
Projected benefit obligations
in excess of plan assets 22 3,136
Unrecognized net loss (391) (2,633)
Prior service gain not yet recognized
in net periodic pension cost 3,985 4,333
Other 168 311
--- ---
Pension liability $ 3,784 $ 5,147
========= =========
The actuarial present value of projected benefit obligations was determined
using discount rates of 7.75% in 1996 and 7.25% in 1995. The expected annual
long-term rate of return on plan assets used in determining net periodic pension
cost was 8.5% in both years.
The Company also sponsors several defined contribution retirement plans for
which contributions and costs are based on percentages of defined earnings of
participating employees. Costs for these plans amounted to $1.8 million in 1996,
$1.6 million in 1995 and $1.5 million in 1994.
<PAGE>
NOTE K -- RETIREMENT PLANS -- CONTINUED
- ---------------------------------------
In addition, for the benefit of certain unionized employees, the Company
participates in defined benefit multiemployer pension plans, for which reliable
information concerning the Company's share of related estimated plan benefits
and assets is not available, and defined contribution multiemployer pension
plans. Costs for multiemployer pension plans amounted to $1.6 million in 1996
and $1.7 million in 1995 and 1994.
The Company also has several defined benefit postretirement plans that provide
varying amounts of medical and death benefits, primarily to retired employees.
The actuarially computed cost for these plans was $.5 million in 1996 and 1995
and $.4 million in 1994. The Company funds postretirement benefits on a
"pay-as-you-go" basis.
The Company also participates in several defined contribution multiemployer
plans that provide health care and other welfare benefits to certain unionized
employees during their working lives and after retirement. Costs for these
plans, which includes both current and postretirement benefit costs, amounted to
$1.6 million in 1996 and 1994 and $1.7 million in 1995.
The Company incurred postretirement benefit obligations in connection with the
IU International acquisition (Note G). As of December 31, 1996 and 1995, other
long-term liabilities includes $4.8 million and $5 million, respectively, of
such obligations, based on a discount rate of 7.25%. Future cost increases in
health care benefits are assumed to be 11% in 1997, decreasing 1% per year to 5%
in 2002 and remaining at that level thereafter. Increasing these rates by 1%
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $.3 million and would not have had a material impact on the
cost for 1996.
<PAGE>
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Amortization in the consolidated statement of cash flows includes amortization
of goodwill, landfill permits and deferred charges related to landfill closure
together with noncash interest costs. Changes in working capital include the
following (in thousands):
1996 1995 1994
---- ---- ----
Accounts receivable $ 4,971 $ 7,221 $ (8,483)
Other current assets 1,611 (549) 38
Accounts payable and other
current liabilities (8,323) (6,304) 4,366
------ ------ -----
Cash provided (used) $ (1,741) $ 368 $ (4,079)
========== ========== =========
Closure trust fund payments include the following activity (in thousands):
1996 1995 1994
---- ---- ----
Purchases of investments $ (8,105) $ (17,643) $ (16,193)
Sales of investments 6,575 8,556 3,327
----- ----- -----
Net cash used $ (1,530) $ (9,087) $ (12,866)
========== ========== =========
Ongoing net cash flows related to the IU International acquisition are
principally payments of non-recurring pre-acquisition obligations.
The Company paid interest of $28.9 million in 1996, $26.3 million in 1995, $23.7
million in 1994, excluding capitalized interest of $.2 million in 1995 and $.6
million in 1994.
The Company paid income taxes, net of refunds, of $.8 million in 1996, $1.2
million in 1995, and $1.6 million in 1994.
<PAGE>
NOTE M -- FINANCIAL INSTRUMENTS
- -------------------------------
The estimated fair values of financial instruments carried in the Company's
consolidated balance sheet are as follows (in thousands):
December 31,
-----------------------
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amounts Values Amounts Values
------- ------ ------- ------
Long-term debt $268,424 $255,224 $275,158 $252,092
Other non-current
assets and stock
purchase loans 1,797 1,671 3,602 3,329
The fair values of financial instruments included in current assets and
liabilities approximate their carrying amounts. The fair value of fixed-rate
long-term debt, which is thinly traded, is based on management's best knowledge
of recent trading prices. The fair values of other non-current assets and stock
purchase loans are estimated using discounted cash flow analysis and borrowing
rates in the Company's bank credit facility.
NOTE N -- COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Future minimum lease payments for non-cancelable operating leases as of December
31, 1996 amount to $7.1 million in 1997, $6.1 million in 1998, $4.6 million in
1999, $2.2 million in 2000, $.8 million in 2001 and $2.7 million thereafter.
Operating leases are primarily for machinery and equipment. Rental expense was
$10.1 million in 1996, 10.2 million in 1995, and $7.8 million in 1994.
At December 31, 1996, the Company had made commitments to spend $11.6
million for equipment additions and improvements to waste treatment facilities.
To secure its obligations to close its landfills and perform post-closure
<PAGE>
NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
- ----------------------------------------------------
monitoring and maintenance procedures, the Company must make payments into
closure trust funds. Based on current regulations, planned improvements to waste
treatment facilities and permitted capacity, such payments are expected to
amount to approximately $2.8 million in 1997 and $2.4 million in 1998, including
the reinvestment of Idaho trust fund earnings that the Company includes in
interest income. Thereafter, such payments are not expected to exceed the
reinvestment of trust fund earnings, based on current requirements.
At December 31, 1996, the Company was contingently liable for $7.3 million
of letters of credit outstanding under its bank credit facility of which
approximately $6.1 million secures liabilities already reflected in the
consolidated balance sheet.
IU International Corporation ("IU International") sold P-I-E Nationwide,
Inc. ("PIE") in 1985. PIE commenced bankruptcy proceedings in 1990 and ceased
operations, which triggered withdrawal liabilities to certain multiemployer
pension plans, estimated by PIE in 1990 to aggregate $58 million. In 1991 the
trustees of the largest plan sought information from the Company for the stated
purpose of determining whether the circumstances of IU International's 1985 sale
of PIE would justify a claim against the Company for any deficiencies in PIE's
payment of withdrawal liabilities to such plan. Such plan did not again contact
the Company concerning this matter until March 15, 1995, when the Company was
advised that such plan's consideration as to whether it would assert a claim is
ongoing. The Company believes any such claim is unwarranted and, if such claim
were asserted, would contest any such claim vigorously. The Company believes it
would ultimately prevail on the merits. However, under the Multiemployer Pension
Plan Amendments Act of 1980, the federal statute governing such plans, the plan
trustees could require the Company to make substantial monthly payments before
any issues are arbitrated or litigated. If onerous monthly payments are imposed
by the plan, the Company will take any and all actions it deems necessary and
appropriate to protect itself until the matter can be arbitrated and/or
litigated on its merits. The Company continues to believe that the underlying
<PAGE>
NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
- ----------------------------------------------------
facts and circumstances support a conclusion that these matters will be
resolved with no material adverse effect on its financial condition. However,
the resolution of such matters, which potentially could take place in the
current fiscal year, could result in a charge that is material to results of
operations and cash flows in a single accounting period.
The Company's Ohio and Idaho facilities hold operating permits issued by
state and federal environmental agencies under the Resource Conservation and
Recovery Act, as amended, that require renewal and modification from time to
time. The Company expects that it will obtain the renewals and modifications to
its permits that it requires to continue to provide landfill capacity in its
approved disposal cells well into the next decade.
The Company and its competitors and customers are subject to a complex,
evolving array of federal, state and local environmental laws and regulations.
In particular, such requirements not only can affect the demand for treatment
and disposal services, but could also require the Company to incur significant
costs for such matters as facility upgrading, remediation or other corrective
action, facility closure and post-closure maintenance and monitoring. It is
possible that the future imposition of additional environmental compliance
requirements could have a material adverse effect on the Company's results of
operations or financial condition, but the Company is unable to predict any such
future requirements. The Company believes that the consolidated financial
statements appropriately reflect all presently known compliance costs in
accordance with generally accepted accounting principles.
The Company is a party to litigation and proceedings arising in the normal
course of its present or former businesses. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the Company's
financial condition or results of operations.
<PAGE>
NOTE O -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------
(In thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996*
Revenues $52,634 $54,651 $52,546 $52,958
Gross profit 8,806 12,337 13,052 12,495
Unusual items, net 950 (960) (1,240) (3,400)
Operating income 4,098 6,093 6,230 2,454
Income (loss):
Continuing operations 898 (2,088) (1,044) (2,456)
Discontinued operations (312) 279 524 (92)
Net income (loss) 586 (1,809) (520) (2,548)
Income (loss) per share:
Continuing operations $.02 ($.05) ($.03) ($.07)
Discontinued operations (.01) .01 .02
---- --- --- -----
Net income (loss) $.01 ($.04) ($.01) ($.07)
==== ===== ===== =====
1995*
Revenues $53,835 $55,215 $54,349 $60,323
Gross profit 15,144 15,715 14,567 15,226
Unusual items, net 674 1,150 800
Operating income 9,337 10,276 9,187 8,313
Income:
Continuing operations 2,401 2,850 2,782 1,522
Discontinued operations 77 288 531 53
Extraordinary loss (806)
Net income 1,672 3,138 3,313 1,575
Income per share:
Continuing operations $.05 $.06 $.06 $.03
Discontinued operations .01 .01
Extraordinary loss (.02)
---- ---- ---- ----
Net income $.03 $.07 $.07 $.03
==== ==== ==== ====
* Discontinued operations reclassified in all periods.
After deferred income taxes, 1996 unusual items (Note B) affected income
(loss) from continuing operations as follows: losses of $2.2 million ($.06 per
share) in the first quarter, $.8 million ($.02 per share) in the second quarter
and $.9 million ($.02 per share) in the third quarter; $.6 million income ($.01
<PAGE>
per share) in the fourth quarter. Also, fourth quarter income from
continuing operations was reduced $.5 million ($.01 per share) by increased
closure costs related to inactive waste treatment sites. Of the $4.4 million
deferred income tax benefit (Note C), $1.3 million was applicable to the pre-tax
loss for the year and the other $3.1 million represents additional tax benefits
in the fourth quarter. If the $1.3 million were allocated among the quarters
based on an effective tax rate for the year, the losses from continuing
operations would have been as follows: $3.3 million ($.08 per share) in the
first quarter, $.8 million ($.02 per share) in the second quarter and $.8
million ($.02 per share) in the third quarter.
In 1995, after the disproportionate effect of deferred income taxes,
unusual items affected income from continuing operations as follows: $.5 million
income ($.01 per share) in the second quarter, $.1 million loss (no per share
effect) in the third quarter and $1.5 million loss ($.04 per share) in the
fourth quarter. Also, 1995 fourth quarter operating income and income from
continuing operations benefited by $1 million ($.03 per share) from reduced
expected closure costs at an inactive landfill site.
Due to rounding, quarterly per share amounts do not necessarily add to the
full year amounts.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
ENVIROSOURCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
Additions
-------------------------
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions (A) period
- ----------- --------- -------- -------- -------------- ------
1996
- ----
Allowance for doubtful
accounts $ 729 $ 728 $ 237 $ 1,220
========= ========= ============ ==========
1995
- ----
Allowance for doubtful
accounts $ 616 $ 149 $ 36 $ 729
========= ========= ============ ==========
1994
- ----
Allowance for doubtful
accounts $ 944 $ 143 $ 471 $ 616
========= ========= ============ ==========
</TABLE>
(A) Amounts written off.
<PAGE>
EXHIBIT INDEX
Number Description Page
4.13 Second Amendment, dated as of EXHIBIT 1
December 23, 1996, to the Credit
Agreement, dated as of December 19,
1995, among the Company,
International Mill Service, Inc.,
the lenders parties thereto,
NationsBank, N.A., as
Administrative Agent, and Credit
Lyonnais as Syndication Agent.
21.1 Subsidiaries of the Company. EXHIBIT 2
23.1 Consent of Ernst & Young LLP. EXHIBIT 3
EXECUTION COPY
SECOND AMENDMENT, dated as of December 23, 1996, to the
Credit Agreement, dated as of December 19, 1995 and amended
as of May 15, 1996 (as so amended, the "Credit Agreement"),
----------------
among International Mill Service, Inc., a Pennsylvania
corporation (the "Borrower"), EnviroSource, Inc., a Delaware
--------
corporation (the "Parent"), the several banks and other
------
financial institutions parties thereto (the "Lenders"),
-------
NationsBank, N.A., as administrative agent for the Lenders
(in such capacity, the "Administrative Agent"), and Credit
---------------------
Lyonnais New York Branch, the New York branch of a banking
organization organized under the laws of the Republic of
France, as syndication agent for the Lenders.
PRELIMINARY STATEMENTS:
(1) The Parent proposes to sell all the issued and outstanding shares of
common stock of IMSAMET to IMCO Recycling Inc., a Delaware corporation (the
"Purchaser"), pursuant to the Stock Purchase Agreement, dated November 26, 1996,
---------
among the Purchaser, the Parent and IMSAMET. The Borrower has requested that the
Lenders and the Administrative Agent agree to permit such sale and consent to
the release of IMSAMET and its Subsidiaries and SALTS from the Subsidiaries
Guarantee, the Security Documents and the Subordination Agreement.
(2) The Borrower has further requested that the Lenders agree to make
various changes in the covenants contained in subsection 7.1.
(3) The parties hereto have agreed, subject to the terms and conditions
hereof, to grant the requests of the Borrower and to amend the Credit Agreement
as provided herein.
(4) Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement.
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendment To Subsection 1.1. The definition of "Restricted
----------------------------
Companies" in subsection 1.1 of the Credit Agreement is hereby amended by
deleting from the second line thereof the word "IMSAMET,".
<PAGE>
SECTION 1.02. Amendments To Subsection 2.6.
-----------------------------
(a) Subsection 2.6(a) of the Credit Agreement is hereby amended by adding
the following sentence to the end thereof:
"Notwithstanding the foregoing, in the case of the Prepayment Event
consisting of the sale by the Parent of the common stock of IMSAMET, the
Revolving Credit Commitments shall be reduced upon the consummation of such
sale to $65,000,000."
(b) Subsection 2.6(b) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"(b) The Revolving Credit Commitments shall be reduced on each of
January 4, 1999 and January 3, 2000 by 12.5% of the Revolving Credit
Commitments then in effect."
SECTION 1.03. Amendment to Subsection 4.18(a). Subsection 4.18(a) of the
-------------------------------
Credit Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
"4.18 Collateral. (a) Except as otherwise provided for in subsection
----------
6.9 with respect to Subsidiaries acquired after the Closing Date, (i) all
of the shares of Capital Stock of each of the Parent's Subsidiaries (other
than (A) not more than 35% of the Capital Stock of each Foreign Subsidiary
and (B) until 60 days after the FINOVA Financing is terminated or any
refinancing thereof permitted by the terms hereof is terminated, all the
Capital Stock of IMS Funding), (ii) all Intercompany Notes issued to the
Parent or any of its domestic Subsidiaries (other than Intercompany Notes
issued to IMS Funding) and (iii) all trade accounts receivable of the
Parent and its domestic Subsidiaries (other than (A) trade accounts
receivable of IMS Funding and (B) trade accounts receivable to the extent
excluded by the Borrower Security Agreement) are pledged to the
Administrative Agent, for the ratable benefit of the Secured Parties,
pursuant to a Pledge Agreement, a Security Agreement or a supplement
thereto, as security for the Obligations."
SECTION 1.04. Amendments To Section 6.
------------------------
(a) Subsection 6.1(c) of the Credit Agreement is hereby amended by (i)
deleting the words "the IMSAMET Group, (iii)" in the fifth and sixth lines
thereof and (ii) by replacing "(iv)" in the sixth line thereof with "(iii)".
(b) Subsection 6.2(c) of the Credit Agreement is hereby amended by deleting
the words ", the Imsamet Group" in the fourth line thereof.
(c) Subsection 6.9(c) of the Credit Agreement is hereby amended by deleting
the text thereof in its entirety.
<PAGE>
SECTION 1.05. Amendments To Section 7.
------------------------
(a) Subsection 7.1(a) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"(a) Interest Coverage. Permit the ratio of (i) EBITDA for the
------------------
Reference Period with respect to the last day of any fiscal quarter of the
Parent referred to below to (ii) Consolidated Interest Expense for such
Reference Period to be less than the ratio set forth below opposite such
fiscal quarter:
Fiscal Quarter Ratio
-------------- -----
Fiscal quarters from and including fourth
quarter of fiscal 1995 through and including
first quarter of fiscal 1996 2.35:1.00
Fiscal quarters from and including second
quarter of fiscal 1996 through and including
third quarter of fiscal 1996 2.25:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1996 through and including
second quarter of fiscal 1997 1.95:1.00
Third fiscal quarter of fiscal 1997 2.00:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
first quarter of fiscal 1998 2.10:1.00
<PAGE>
Fiscal quarters from and including second
quarter of fiscal 1998 through and including
third quarter of fiscal 1998 2.60:1.00
Fourth quarter of fiscal 1998 and all fiscal
quarters thereafter 3.00:1.00"
(b) Subsection 7.1(c) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"(c) Debt Service Coverage. Permit the ratio of (i) EBITDA for the
-----------------------
Reference Period with respect to the last day of any fiscal quarter of the
Parent referred to below, plus any income tax refunds received by the
Parent and its Subsidiaries during such Reference Period, plus (without
duplication) IU Cash Inflows received by the Parent and its Subsidiaries
during such Reference Period, less (without duplication) IU Cash Outflows
from the Parent and its Subsidiaries during such Reference Period, less
Cash Taxes for such Reference Period, less (without duplication) Landfill
Permit Expenditures during such Reference Period, less Closure Trust Fund
Payments during such Reference Period to (ii) Consolidated Interest Expense
for such Reference Period, plus scheduled principal payments under
Indebtedness of the Parent and its Subsidiaries for such Reference Period
to be less than the ratio set forth below opposite such fiscal quarter:
Fiscal Quarter Ratio
-------------- -----
Fiscal quarters from and including fourth
quarter of fiscal 1995 through and including
third quarter of fiscal 1996 1.35:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1996 through and including
second quarter of fiscal 1997 1.40:1.00
Third fiscal quarter of fiscal 1997 1.45:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
first quarter of fiscal 1998 1.50:1.00
Fiscal quarters from and including second
quarter of fiscal 1998 through and including
third quarter of fiscal 1998 2.05:1.00
<PAGE>
Fiscal quarters from and including fourth
quarter of fiscal 1998 through and including
third quarter of fiscal 1999 2.45:1.00
Fourth quarter of fiscal 1999 and all fiscal
quarters thereafter 2.50:1.00"
(c) Subsection 7.1(d) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"(d) Debt To EBITDA Ratio. Permit the ratio of (i) Consolidated Total
--------------------
Debt as of the last day of any fiscal quarter of the Parent referred to
below to (ii) EBITDA for the Reference Period with respect to such day to
be more than the ratio set forth below opposite such fiscal quarter:
Fiscal Quarter Ratio
-------------- -----
Fiscal quarters from and including fourth
quarter of fiscal 1995 through and including
first quarter of fiscal 1996 4.75:1.00
Fiscal quarters from and including second
quarter of fiscal 1996 through and including
third quarter of fiscal 1996 5.00:1.00
Fourth fiscal quarter of fiscal 1996 5.50:1.00
Fiscal quarters from and including first
quarter of fiscal 1997 through and including
third quarter of fiscal 1997 4.80:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
first quarter of fiscal 1998 4.75:1.00
Fiscal quarters from and including second
quarter of fiscal 1998 through and including
third quarter of fiscal 1998 4.00:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1998 through and including
third quarter of fiscal 1999 3.75:1.00
<PAGE>
Fourth quarter of fiscal 1999 and all fiscal
quarters thereafter 3.50:1.00"
(d) Subsection 7.2(f) of the Credit Agreement is hereby amended by deleting
the text thereof in its entirety and substituting therefor the phrase "(f)
[intentionally deleted];".
(e) Subsection 7.4(g) of the Credit Agreement is hereby amended by deleting
the text thereof in its entirety and substituting therefor the phrase "(g)
[intentionally deleted].".
(f) Subsection 7.6(j) of the Credit Agreement is hereby amended by deleting
the text thereof in its entirety and substituting therefor the phrase "(j)
[intentionally deleted].".
(g) Subsection 7.7(b)(iv) of the Credit Agreement is hereby amended by
deleting the text thereof in its entirety and substituting therefor the phrase
"(iv) [intentionally deleted]; and".
(h) Subsection 7.9(g) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"(g) investments, loans and advances in Unrestricted Companies;
provided that the aggregate amount (in cash, property or other
consideration) of investments, loans and advances made after the Closing
Date in: (i) IMS Funding shall not exceed the greater of (A) $100,000 and
(B) the sum of (1) the aggregate amount of cash dividend payments or other
cash distributions paid to the Borrower by IMS Funding and (2) the
aggregate amount of cash payments made to the Borrower by IMS Funding under
that certain Operation, Maintenance and Lease Agreement between the
Borrower and IMS Funding, dated as of March 31, 1993; and (ii) other
Unrestricted Companies shall not exceed $7,000,000; provided further that
all such loans and advances pursuant to this subsection 7.9(g) shall be
evidenced by Intercompany Notes which are pledged to the Administrative
Agent for the ratable benefit of the Secured Parties, pursuant to the terms
of appropriate Pledge Agreements or supplements thereto, and all such
Intercompany Notes shall be covered by the Subordination Agreement;"
(i) Subsection 7.11 of the Credit Agreement is hereby amended by (i)
deleting the phrase "transactions with SALTS in an aggregate amount not
involving more than $500,000 at any time outstanding, (b)" in the first, second
and third lines thereof and (ii) by replacing "(c)" in the fourth line thereof
with "(b)".
SECTION 1.06. Release. The Lenders hereby (a) release and discharge (i) the
-------
pledge made by the Parent pursuant to the Parent Pledge Agreement in respect of
(A) the capital stock of IMSAMET and (B) the Intercompany Notes issued to the
Parent by IMSAMET, Imsamet of Utah and III, (ii) the pledge made by the Borrower
pursuant to the Borrower Pledge Agreement in respect of the Intercompany Note
issued to the Borrower by III, (iii) the pledge made by TDS pursuant to the
Subsidiaries Pledge Agreement in respect of the Intercompany Note issued to TDS
<PAGE>
by IMSAMET, (iv) the pledge made by IMSAMET pursuant to the Subsidiaries Pledge
Agreement of the capital stock of Imsamet of Utah and III and (v) IMSAMET,
Imsamet of Utah and III from their obligations under the Subsidiaries Guarantee,
the Subsidiaries Pledge Agreement, the Subsidiaries Security Agreement and the
Subordination Agreement and (b) authorize the Administrative Agent to execute
and deliver the Release and Agreement in the form of Exhibit A hereto.
SECTION 1.07. Representations And Warranties. The Parent and the Borrower
-------------------------------
hereby represent and warrant to the Agents and each Lender that:
(a) The representations and warranties set forth in Section 4 of the Credit
Agreement, and in each other Loan Document, are true and correct in all material
respects on and as of the date hereof and on and as of the Second Amendment
Effective Date (as defined in Section 1.08) with the same effect as if made on
and as of the date hereof or the Second Amendment Effective Date, as the case
may be, except to the extent such representations and warranties expressly
relate solely to an earlier date (in which case such representations and
warranties shall have been true and correct in all material respects on and as
of such earlier date).
(b) Each of the Loan Parties is in compliance with all the terms and
conditions of the Credit Agreement and the other Loan Documents on its part to
be observed or performed and no Default or Event of Default has occurred or is
continuing.
(c) The execution, delivery and performance by each of the Borrower and the
Parent of this Second Amendment have been duly authorized by such party.
(d) This Second Amendment constitutes the legal, valid and binding
obligation of each of the Borrower and the Parent, enforceable against it in
accordance with its terms, except as affected by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws affecting
creditors' rights generally.
(e) The execution, delivery and performance by each of the Borrower and the
Parent of this Second Amendment (i) do not conflict with or violate (A) any
provision of law, statute, rule or regulation, or of the certificate of
incorporation or by-laws of the Borrower or the Parent, (B) any order of any
Governmental Authority or (C) any provision of any indenture, agreement or other
instrument to which the Borrower or the Parent is a party or by which it or any
of its property may be bound and (ii) do not require any consents under, result
in a breach of or constitute (with notice or lapse of time or both) a default
under any such indenture, agreement or instrument.
(f) The assets of IMSAMET and its Subsidiaries represent less than 25% of
the total assets of the Parent and its Subsidiaries reported on the consolidated
balance sheet of the Parent and its Subsidiaries as of September 30, 1996, and
the operating income, revenue and EBITDA of IMSAMET and its Subsidiaries each
represent less than 25% of the operating income, revenue and EBITDA,
respectively, of the Parent and its Subsidiaries reported on the consolidated
<PAGE>
statements of operations and cash flows of the Parent and its Subsidiaries for
the nine-month period ended September 30, 1996.
(g) The Parent and the Borrower shall, upon the consummation of the sale of
the common stock of IMSAMET, transfer an amount in immediately available funds
equal to 100% of the Net After-Tax Cash Proceeds of such sale to the
Administrative Agent, to be applied by the Administrative Agent to outstanding
Loans in accordance with Sections 2.6(d) and 2.13 of the Credit Agreement.
SECTION 1.08. Effectiveness. This Second Amendment shall become effective
--------------
only upon satisfaction of the following conditions precedent on or prior to
January 31, 1997 (the first date upon which each such condition has been
satisfied being herein called the "Second Amendment Effective Date"):
-------------------------------
(a) The Administrative Agent shall have received duly executed counterparts
of (i) this Second Amendment which, when taken together, bear the authorized
signatures of the Borrower, the Parent and the Lenders and (ii) the Release and
Agreement, in the form of Exhibit A hereto, which, when taken together, bear the
---------
authorized signatures of the Borrower, the Parent, IMSAMET, Imsamet of Utah,
III, TDS and the Administrative Agent.
(b) (i) The representations and warranties set forth in Section 1.07 are
true and correct on and as of the Second Amendment Effective Date, (ii) no
Default or Event of Default has occurred or is continuing and (iii) there shall
not be any action pending or any judgment, order or decree in effect which is
likely to restrain, prevent or impose materially adverse conditions upon
performance by any Loan Party of its obligations under the Loan Documents.
(c) The Borrower shall have paid in full all fees and expenses accrued and
payable as of the Second Amendment Effective Date under the Credit Agreement and
under the Fee Letter.
(d) The Borrower shall have paid to the Administrative Agent 100% of the
Net After-Tax Cash Proceeds of the sale of the common stock of IMSAMET, which
proceeds shall be distributed to the Lenders in accordance with Sections 2.6(d)
and 2.13 of the Credit Agreement.
(e) The Administrative Agent shall have received from each of the
Guarantors duly executed Consents, in the form attached hereto as Exhibit B,
---------
which bear the authorized signatures of such Guarantors.
(f) The Administrative Agent shall have received an opinion of counsel to
the Borrower, the Parent and the other Loan Parties in form and substance
satisfactory to the Administrative Agent.
(g) The Administrative Agent shall have received such other documents,
legal opinions, instruments and certificates as it shall reasonably request and
such other documents, legal opinions, instruments and certificates shall be
<PAGE>
satisfactory in form and substance to the Administrative Agent and its counsel.
All corporate and other proceedings taken or to be taken in connection with this
Second Amendment and all documents incidental thereto, whether or not referred
to herein, shall be satisfactory in form and substance to the Administrative
Agent and its counsel.
SECTION 1.09. APPLICABLE LAW. THIS SECOND AMENDMENT SHALL BE
---------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
SECTION 1.10. Expenses. The Borrower shall pay all reasonable out-of-pocket
--------
expenses incurred by the Agents in connection with the preparation, negotiation,
execution and delivery and the Agents' and the Lenders' enforcement of this
Second Amendment, including, but not limited to, the reasonable fees and
disbursements of counsel. The agreement set forth in this Section 1.10 shall
survive the termination of this Second Amendment and the Credit Agreement.
SECTION 1.11. Counterparts. This Second Amendment may be
-------------
executed in any number of counterparts, each of which shall constitute an
original but all of which when taken together shall constitute but one
agreement.
SECTION 1.12. Reference To And Effect On The Loan Documents.
----------------------------------------------
(a) On and after the Second Amendment Effective Date, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement as amended by this Second Amendment.
(b) Each of the amendments provided herein shall apply and be effective
only with respect to the provisions of the Credit Agreement specifically
referred to by such amendment. Except as specifically amended above, the Credit
Agreement and the Revolving Credit Notes, and all other Loan Documents, are and
shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed.
(c) Except as specifically provided above, the execution, delivery and
effectiveness of this Second Amendment shall not operate as a waiver of any
right, power or remedy of any Lender, any Agent or any Secured Party under any
of the Loan Documents, nor constitute a waiver of any provision of any of the
Loan Documents.
SECTION 1.13. Waiver Of Notice Of IMSAMET Prepayment. The Lenders hereby
--------------------------------------
waive any notice required under Section 2.7 of the Credit Agreement in respect
of the prepayment contemplated by Section 1.08(d) hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed by their duly authorized officers, all as of the date first
above written.
INTERNATIONAL MILL SERVICE, INC.
By: /s/William B. Davis
--------------------
Title: Treasurer
ENVIROSOURCE, INC.
By: /s/William B. Davis
-------------------
Title: Treasurer
NATIONSBANK, N.A., as Administrative
Agent, as Issuing Lender, as Swingline Lender
and as a Lender
By: /s/Thomas J. Kane
------------------
Title: Corporate Finance Officer
CREDIT LYONNAIS NEW YORK BRANCH, as
Syndication Agent and as a Lender
By: /s/Attila Koc
--------------
Title: Vice President
BANQUE PARIBAS, as a Lender
By: /s/Pierre-Jean de Filippis
---------------------------
Title: General Manager
By: /s/Deanna C. Walker
--------------------
Title: Assistant Vice President
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
List of Subsidiaries
As of March 1, 1997
<S> <C> <C>
State or other % of voting
jurisdiction securities
Name of Company in which organized owned by immediate parent
- --------------- ------------------ -------------------------
ENVIROSOURCE, INC. Delaware
EnviroSource Corp. Wyoming 100
EnviroSource Management Corp. Delaware 100
EnviroSource Technical Services, Inc. Delaware 100
IU International Corporation Delaware 100
C. Brewer Terminals, Inc. Delaware 100
EnviroSource Treatment & Disposal Services, Inc. Delaware 100
ETDS, Inc. Delaware 100
Conversion Systems, Inc. Delaware 100
EnviroSource Management Systems, Inc. Delaware 100
Envirosafe Services of Idaho, Inc. Delaware 100
Envirosafe Services of North America, Inc. Delaware 100
Envirosafe Services of Ohio, Inc. Ohio 100
Envirosafe Services of Texas, Inc. Delaware 100
Fox Hunt Farms, Inc. Delaware 100
Marcus Hook Processing, Inc. Delaware 100
International Mill Service, Inc. Pennsylvania 100
Alexander Mill Services, Inc. Pennsylvania 100
IMS Funding Corporation Delaware 100
International Mill Service Limited Canada 100
McGraw Construction Company, Inc. Ohio 100
Neoax Investment Corp. Delaware 56(1)
Waylite Corporation Pennsylvania 100
IU North America Finance, Inc. Delaware 100
IU North America, Inc. Delaware 100
Nosroc Corp. Pennsylvania 100
Soncor Corp. Delaware 100
(1) 44% is owned by IU International Corporation and 56% is owned by
International Mill Service, Inc.
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment
No. 1 to the Registration Statement (Form S-8 No. 33-34566) pertaining to the
EnviroSource, Inc. Savings Plan, Registration Statement (Form S-8 No. 33-26633),
Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No.
33-1549), and Post-Effective Amendment No. 1 to the Registration Statement (Form
S-8 No. 33-13728), each of which pertains to EnviroSource, Inc.'s Incentive
Stock Option Plan, Registration Statement (Form S-8 No. 33-46925) pertaining to
the Envirosafe Services, Inc. Stock Option Plan, and the Registration Statement
(Form S-8 No. 33-53019) pertaining to the EnviroSource, Inc. 1993 Stock Option
Plan of our report dated February 21, 1997 with respect to the consolidated
financial statements and schedule of EnviroSource, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/Ernst & Young LLP
-----------------
Stamford, Connecticut
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in EnviroSource's Form 10-K for the
fiscal year ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,678
<SECURITIES> 0
<RECEIVABLES> 32,770
<ALLOWANCES> 1,220
<INVENTORY> 0
<CURRENT-ASSETS> 95,978
<PP&E> 270,857
<DEPRECIATION> 128,392
<TOTAL-ASSETS> 459,909
<CURRENT-LIABILITIES> 104,740
<BONDS> 268,424
0
0
<COMMON> 2,018
<OTHER-SE> 37,039
<TOTAL-LIABILITY-AND-EQUITY> 459,909
<SALES> 0
<TOTAL-REVENUES> 212,789
<CGS> 0
<TOTAL-COSTS> 166,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,187
<INCOME-PRETAX> (7,956)
<INCOME-TAX> (3,266)
<INCOME-CONTINUING> (4,690)
<DISCONTINUED> 399
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,291)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
