<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, 1997
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
<PAGE>
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. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $52,200,765 as of March 2, 1998.
The number of shares outstanding of the Registrant's Common Stock as of the
close of business on March 2, 1998 was 40,713,765.
<PAGE>
PART I
ITEM 1. Business.
THE COMPANY
EnviroSource, Inc.(the "Company") supplies industrial customers with
specialized services, primarily the recycling, handling, stabilization or
landfilling of environmentally sensitive wastes or by-products. These services
are generally provided pursuant to long term contracts which enable the Company
to integrate its processes with those of its customers. The Company's principal
business segments are (a) the IMS segment, which provides slag processing, metal
recovery, materials handling, scrap management and a wide range of specialty
services, such as scarfing and high speed flame cutting, for the steel industry;
and (b) the Technologies segment, which provides hazardous waste treatment and
disposal services, waste stabilization services, engineering, project
management, construction, regulatory assistance and laboratory services for the
steel industry and other industrial and governmental customers.
The Company conducts its operations exclusively through its subsidiaries.
International Mill Service, Inc. and its subsidiaries ("IMS") constitute the IMS
segment (formerly named the Industrial Environmental Services segment), and
EnviroSource Technologies, Inc.("Technologies", formerly known as EnviroSource
Treatment & Disposal Services, Inc.) through its Envirosafe and Conversion
Systems subsidiaries, constitutes the Technologies segment (formerly named 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 IMS and
Technologies segments and IMSAMET, Inc. (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 47% 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 "1993 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
Technologies business unit.
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 $5 million in 1997. The
reorganization included the closing of the Company's corporate headquarters in
Stamford, Connecticut and the Technologies headquarters in Horsham,
<PAGE>
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 Technologies. The Company recorded charges of approximately $4.4
million during 1996 for the reorganization. The Company has recently embarked on
a profit improvement program that is intended to lower costs and increase
revenues significantly in the latter quarters of 1998 and beyond.
In November 1996, the Company announced that it had signed a definitive
agreement to sell IMSAMET, Inc., an aluminum recycling and reclamation company,
in order to focus the Company's efforts upon its steel-related businesses. This
sale was completed in January 1997.
In September 1997, the Company issued $50 million of 9-3/4% Senior Notes
Due 2003, Series B, (the "1997 Notes") having substantially the same terms as
the Company's 1993 Notes. The Company used substantially all of the net proceeds
to repay borrowings under the Company's bank credit facility that had been
incurred to finance capital expenditures.
BUSINESS SEGMENTS
IMS
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.
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 generally provides recycling and metal recovery
operations under long-term contracts with a diversified customer base of over 55
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. IMS has used rubber-tired
carriers at two integrated steel mills to move steel slabs throughout the mill,
which 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, with a seventh
facility scheduled to commence operations later in 1998.
IMS has a diversified customer base, with approximately 45% of its revenues
coming from integrated steel producers and 55% 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% of the Company's
consolidated revenues of continuing operations in each of 1997, 1996 and 1995
(including revenues attributable to services performed by the Technologies
segment). Long term contracts governing the related services expire between 1999
and 2007. 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, by
IMS employees using IMS-owned 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, the Company believes that IMS services customers accounting for more
than 30% of total domestic steel production. IMS has one large competitor and a
number of smaller competitors, including several new entrants. 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>
TECHNOLOGIES
Technologies, 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"), Technologies owns major commercial hazardous waste treatment and
disposal facilities in Ohio and Idaho. Envirosafe services some of the country's
largest steel companies, as well as companies in other industries and government
agencies. Envirosafe has reoriented its business to focus more on its steel
mini-mill customers' production and less on the volatile waste remediation
business.
Envirosafe has approximately 3-1/2 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. The third phase of construction of this cell
is currently underway. 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 both 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 major hazardous waste treatment and disposal facility in
the United States with such direct rail service.
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
<PAGE>
seasonal, with the first quarter of the year tending to be slower depending
primarily on the extent to which winter weather conditions affected waste
remediation projects. However, the Company believes that the increased volume of
EAF dust stabilized at its Ohio and Idaho facilities has made this business less
seasonal.
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 Technologies 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.
Technologies currently operates and maintains a captive landfill for a
domestic steel mill pursuant to a service contract. Technologies is currently
exploring additional opportunities for providing captive landfill services, as
well as specialized environmental engineering and related services.
Technologies' Conversion Systems unit is the sole licensee of a proprietary
technology (Super Detox(R)) for stabilizing EAF dust - a listed hazardous waste
(KO61) under RCRA generated by steel mills - that renders the EAF dust suitable
for landfilling in non-hazardous waste landfills and for possible reuse.
Technologies 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 both of its regional Envirosafe Ohio and Idaho
facilities. During 1995, 1996 and 1997, Technologies entered into a number of
new contracts to receive and process EAF dust at its Envirosafe facilities.
Technologies 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 designates EAF dust treated utilizing this proprietary process
as a non-hazardous waste. If desired, the delisted material can be deposited in
a non-hazardous waste landfill. The generic delisting status for the process
will save Technologies and its customers the time and expense involved in
petitioning USEPA on a facility-by-facility basis for delisting status. USEPA
and the Illinois Department of Environmental Regulation previously had granted
site specific delistings for this process. In addition, in November 1995,
Technologies received from the Idaho Department of Health and Welfare a generic
delisting for EAF dust stabilized at its Idaho regional facility utilizing the
Super Detox(R) process; this ruling 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
Technologies in the EAF dust management business, filed a petition for review of
the USEPA delisting. Horsehead's petition for review of the USEPA delisting was
unanimously denied in December 1997. Horsehead filed a petition for rehearing
concerning such denial which was also denied; accordingly, Horsehead has no
further rights of appeal concerning the USEPA delisting. Horsehead also appealed
the Illinois delisting. This appeal was denied; accordingly, Horsehead has no
further rights of appeal concerning the Illinois delisting. In any event, the
Federal delisting is not necessary for the Company to continue these operations
at its Ohio and Idaho treatment and disposal facilities.
Conversion Systems 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 could be available to Conversion Systems, although it
is not yet clear how many power plants, if any, will install wet scrubbers and
elect or be required to include stabilization units.
<PAGE>
Competition. The Company's hazardous waste treatment and disposal business
-----------
is characterized by intense competition. Technologies' principal competition in
EAF dust stabilization is Horsehead, a thermal metal recovery processor.
Although Horsehead historically had accounted for at least 60% of the U.S.
market, the Company believes that this percentage has decreased significantly
within the last two years as Technologies has gained market share.
There are a limited number of competitors in the off-site hazardous waste
landfill business (there are 19 active, permitted commercial 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.
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.
SEGMENT DATA
See Note J for information concerning revenues and operating income by
segment for the years ended December 31, 1997, 1996 and 1995 and the percentage
of total revenues contributed by each class of service of the Company's
continuing operations for each such year.
EMPLOYEES
At March 1, 1998, the Company employed approximately 1,750 persons. A
majority of the hourly employees in the IMS 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 1998. All other contracts will be renegotiated in 1999 or
thereafter. Also, all of the hourly employees in the Technologies segment belong
to unions, either the International Brotherhood of Teamsters or the Operating
Engineers. The Company believes it has a good working relationship with its
employees.
<PAGE>
ITEM 2. Properties.
HEADQUARTERS
The Company 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 Technologies were located in separate leased premises in
Horsham, Pennsylvania.
IMS
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 IMS
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.
TECHNOLOGIES
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. Technologies continues to lease space in Horsham, Pennsylvania and
Ohio relating to former locations, and it is actively seeking to sublease 100%
of these locations.
<PAGE>
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 Technologies 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.
* * *
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are as follows:
Name Age Position
Ronald P. Spogli 50 Chairman of the Board; Director
Louis A. Guzzetti, Jr. 59 President and Chief Executive
Officer; Director
George E. Fuehrer 49 Senior Vice President, Planning
and Business Development
Aarne Anderson 57 Vice President, Taxes
William B. Davis 47 Vice President and Treasurer
Bradley W. Harris 38 Controller
Leon Z. Heller 48 Vice President, General Counsel
and Secretary
James C. Hull 60 Vice President and Chief
Financial Officer
<PAGE>
The specified age of each Executive Officer of the Company is as of March
31, 1998.
Officers are elected annually and hold office until their successors are
elected and qualified.
Ronald P. Spogli became a director and Chairman 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.
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 & Business Development since June
1997, and its Senior Vice President, Planning since May 1989. Mr. Fuehrer also
served as President of IMSAMET, Inc., a former subsidiary of the Company, 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 was elected Vice President of the Company in February 1998
and has served as the Company's General Counsel and Secretary since September
1996. Mr. Heller also has been the Vice President and General Counsel of
International Mill Service, Inc., a subsidiary of the Company, since February
1991.
James C. Hull has been the Company's Vice President and Chief Financial
Officer since May 1989, when he joined the Company.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock trades on The Nasdaq Stock Market (SM) 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 1997 and 1996, based upon prices supplied by The Nasdaq
Stock Market.
1997 1996
---- ----
High Low High Low
First Quarter $2.69 $1.75 $4.25 $3.13
Second Quarter 2.13 1.19 4.38 3.38
Third Quarter 2.75 1.94 4.06 3.38
Fourth Quarter 3.06 2.13 3.88 2.44
The Company is not currently in compliance with new Nasdaq National Market
maintenance standards. In order to continue the listing of its Common Stock as a
Nasdaq National Market security, the Company intends to seek exemption from
these standards or take action to become compliant.
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 indentures
under which the 1993 Notes and the 1997 Notes were issued.
On March 1, 1998 the Company had approximately 3,200 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 1997, 1996 and 1995 unusual items.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(In thousands, except for per share amounts)
Revenues $227,678 $212,789 $223,722 $230,434 $246,927
Costs and expenses 205,387 188,443 189,233 193,914 222,224
Unusual items, net (1) 1,300 5,471 (2,624) 18,200
-------- -------- --------- --------- --------
Operating income 20,991 18,875 37,113 36,250 6,503
Interest income 1,223 1,356 1,133 983 1,177
Interest expense (29,308) (28,187) (23,483) (21,974) (25,261)
-------- -------- --------- -------- --------
Income (loss) from continuing
operations before income taxes (7,094) (7,956) 14,763 15,529 (17,581)
Income tax (expense) benefit (1,368) 3,266 (5,208) (4,280) (2,549)
-------- -------- --------- -------- --------
Income (loss) from continuing
operations (8,462) (4,690) 9,555 11,249 (20,130)
Income (loss) from discontinued
IMSAMET operations (2) 9,600 399 949 (190) (1,444)
-------- -------- --------- -------- --------
Income (loss) before extraordinary
loss and cumulative effect of
accounting change 1,138 (4,291) 10,504 11,059 (21,574)
Extraordinary debt extinguishment
loss (806) (21,930)
Cumulative effect of accounting
change (639) (2,302)
-------- -------- --------- -------- --------
Net income (loss) $ 499 $ (4,291) $ 9,698 $ 11,059 $(45,806)
======== ======== ========= ======== ========
Income (loss) applicable to
common shares and equivalents
(3) $ 499 $ (4,442) $ 7,959 $ 10,457 $(48,988)
======== ======== ========= ======== ========
Income (loss) per common share:
Continuing operations $ (.21) $ (.12) $ .19 $ .26 $ (.69)
Discontinued operations .24 .01 .03 (.04)
Extraordinary loss (.02) (.64)
Cumulative effect of accounting
change (.02) (.07)
--------- -------- --------- -------- --------
Net income (loss) $ .01 $ (.11) $ .20 $ .26 $ (1.44)
======== ======== ========= ======== ========
Average common shares and
equivalents 40,533 40,443 40,527 40,292 34,009
<PAGE>
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- ------------
(in thousands)
Total assets $413,302 $459,909 $444,436 $442,872 $419,282
Working capital deficiency (779) (8,762) (34,099) (8,275) (17,396)
Debt (non-current) 281,614 268,424 275,158 259,263 233,297
Redeemable preferred stock
(non-current) - - - 31,396 38,711
Stockholders' equity 40,211 39,057 32,604 24,521 14,217
</TABLE>
Notes
- -----
(1) After related income taxes, 1997 unusual items reduced net income by
approximately $.8 million or $.02 per share, 1996 unusual items
increased the net loss by approximately $3.6 million or $.09 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, $1.7 million or $.04 per share in 1995, $.6
million or $.01 per share in 1994 and $3.2 million or $.09 per share in
1993.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1997 VERSUS 1996
1997
Year Ended better (worse)
December 31 than 1996
----------- ---------
1997 1996* Amount %
---- ----- ------ -
(Dollars in thousands)
REVENUES
IMS $185,587 $180,002 $ 5,585 3%
Technologies 42,091 32,787 9,304 28%
-------- -------- --------
$227,678 $212,789 $ 14,889 7%
======== ======== ========
GROSS PROFIT
IMS $ 42,320 $ 46,690 $ (4,370) (9%)
Technologies 5,235 821 4,414 538%
-------- -------- --------
$ 47,555 $ 47,511 $ 44 -
======== ======== ========
OPERATING INCOME (LOSS)
IMS $ 26,494 $ 31,476 $ (4,982) (16%)
Technologies (173) (4,534) 4,361 96%
Corporate headquarters (4,030) (2,596) (1,434) (55)%
Unusual items, net (1,300) (5,471) 4,171 76%
-------- -------- --------
$ 20,991 $ 18,875 $ 2,116 11%
======== ======== ========
*1996 operating income (loss) amounts have been reclassified consistent with the
method used to classify 1997 results.
IMS 1997 revenues increased $5.6 million or 3% over 1996. Most steel
industry customer sites reported strong production. Alexander Mill Services,
Inc., acquired in May 1996, contributed $10.1 million to revenues in 1997 as
compared with $6.6 million in the prior year. However, revenue increases were
largely offset by a revenue reduction resulting from a strike (settled in
mid-August) by a major steel customer's employees and the mid-1996 loss of a
steel industry customer that accounted for $4.6 million of revenues in 1996.
Technologies' revenues increased significantly in 1997 as compared to 1996 due
to a sharp increase in the volume of EAF dust (a hazardous waste produced by
steel mini-mills) processed at the Company's Ohio and Idaho treatment
facilities.
IMS gross profit decreased due to the effects of the strike and the loss of
a significant customer as outlined above and because a 1996 ownership change
disrupted production at another customer's steel mill throughout 1997.
Technologies' gross profit increased due to the increase in EAF dust disposal
volume.
<PAGE>
Selling, general and administative expenses increased $2.1 million as
compared to 1996. Cost savings realized as a result of the 1996 reorganization
were more than offset by an increase in legal fees and expenses attributable to
litigation between the Company and its largest competitor in the EAF dust
processing market, severance and other costs.
Unusual items, net. The 1997 unusual charges of $1.3 million were recorded
-------------------
for costs to satisfy regulatory requirements at disposal sites that have been
inactive since before the Company's 1988 acquisition of IU International
Corporation ("IU International") and to vacate an additional office as part of
the Company's further consolidation of its operations. After related income tax
benefits, the 1997 unusual charges reduced net income by approximately $.9
million or $.02 per share.
In 1996 unusual items included $4.4 million of charges for the Company's
1996 reorganization, $1.2 million to settle the last disputed matter from the
Company's 1993 restructuring and $.8 million of closure costs for inactive
disposal sites. Partially offsetting these charges was a $.9 million credit from
reducing estimated liabilities remaining from the Company's 1988 acquisition of
IU International. After related income tax benefits, the unusual items increased
the loss from continuing operations by approximately $3.6 million or $.09 per
share.
Even though debt levels were lower in 1997 (the Company paid down $56
million of debt in the first quarter with proceeds from the sale of its IMSAMET
subsidiary), interest expense of continuing operations increased $1.1 million
primarily because $3.3 million of consolidated interest expense was allocated to
discontinued operations in the prior year and also because the Company's
average effective interest rate was slightly higher in 1997.
In 1996 the Company recorded a $4.4 million deferred tax credit (as
discussed below), without which the 1996 loss from continuing operations would
have been more than $9 million as compared with the 1997 loss from continuing
operations of $8.5 million (after a negligible deferred tax credit). In 1997 a
$9.6 million gain from selling IMSAMET and a $.6 million charge for the
cumulative effect of a mandatory accounting change together with the loss from
continuing operations resulted in net income of $.5 million.
DEFERRED INCOME TAXES
The Company has determined that it is more likely than not that it will
earn enough taxable income over the next several years to realize the $15.3
million of deferred tax assets recognized in its balance sheet. Realization of
this amount will require cumulative taxable earnings of approximately $44
million. When the consolidated results of continuing operations for the four
most recent fiscal 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 $32 million and average $8 million
annually. On this basis, the Company would realize the $15.3 million of deferred
tax assets within approximately six years. On the other hand, because its net
operating loss carryforwards expire well into the future, the Company would also
realize $15.3 million of deferred tax assets if, counting only profitable years,
it earns $44 million of taxable income during the fifteen year period ending in
2012, so long as the cumulative amount of such earnings reaches at least $8
million by 2005, $19 million by 2006, $28 million by 2008, $39 million by 2009
and $42 million by 2010.
<PAGE>
In making its determination that it is more likely than not that it will
earn enough taxable income to realize $15.3 million of net deferred tax assets,
the Company considered (1) its cumulative consolidated results of operations for
the four most recent fiscal 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 EAF 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 EAF dust currently
treated with the Company's proprietary Super Detox(R) technology.
In 1996 the Company recognized $26 million of net deferred income tax
assets in its balance sheet. 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); 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).
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>
1996 VERSUS 1995
1996
Year Ended better (worse)
December 31, than 1995
------------ ---------
1996 1995 Amount %
---- ---- ------ -
(Dollars in thousands)
REVENUES
IMS $180,002 $181,081 $ (1,079) (1%)
Technologies 32,787 42,641 (9,854) (23%)
-------- -------- --------
$212,789 $223,722 $(10,933) (5%)
======== ======== ========
GROSS PROFIT
IMS $ 46,690 $ 51,523 $ (4,833) (9%)
Technologies 821 9,129 (8,308) (91%)
-------- -------- --------
$ 47,511 $ 60,652 $(13,141) (22%)
======== ======== ========
OPERATING INCOME (LOSS)
IMS $ 33,668 $ 39,360 $ (5,692) (14%)
Technologies (4,760) 1,611 (6,371) -
Corporate headquarters (4,562) (6,482) 1,920 30%
Unusual items, net (5,471) 2,624 (8,095) -
-------- -------- --------
$ 18,875 $ 37,113 $(18,238) (49%)
======== ======== ========
Although conditions in the steel industry remained generally favorable
throughout 1996, IMS 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 continued 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. Technologies revenues decreased primarily because
1995 revenues included over $8 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 EAF dust.
IMS 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. Technologies gross profit declined primarily due
to decreases in treatment and disposal volumes and margins and the lack of new
stabilization system contracts.
<PAGE>
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 Technologies
segment's headquarters in Horsham, Pennsylvania were closed and their activities
moved to the IMS headquarters building, also in Horsham. As a result of the
reorganization, approximately 50 positions were eliminated, mostly in the
Technologies segment. Cost savings of $4.3 million were realized during the year
and ongoing annual savings were expected to 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 and $.8 million of additional
closure costs for waste disposal sites that have been inactive since before the
Company's 1988 acquisition of IU International. Partially offsetting these
charges is a $.9 million credit from reducing estimated liabilities remaining
from the Company's 1988 acquisition of IU International. After related income
tax benefits, the 1996 unusual items increased the net loss from continuing
operations by approximately $3.6 million or $.09 per share.
During 1995 the Company favorably resolved a number of liabilities
resulting from its 1988 IU International acquisition, 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. 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.
Interest expense increased $4.7 million for the year due to higher average
debt levels, primarily to finance the retirement of Class G preferred stock and
also due to the Alexander acquisition.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding of
its capital expenditures, its Technologies segment's 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 1998 capital expenditures of $25 to $30 million,
primarily for equipment replacements, new services, development of additional
landfill capacity and improvements to waste treatment facilities. Scheduled debt
repayments amount to $5.8 million in 1998 (excluding $8 million of revolving
credit borrowings repaid in January 1998).
Technologies landfill permits require it to fund closure and post-closure
monitoring and maintenance obligations by making essentially non-refundable
trust fund payments. These payments totaled $1.5 million in 1997. Based on
current regulations, planned improvements to waste treatment facilities and
permitted capacity, such payments are expected to amount to approximately $2
million 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
million at December 31, 1997, due to including in current liabilities $8 million
of revolving credit borrowings because they were repaid in January 1998.
Upon the sale of IMSAMET, the Company applied the net proceeds to pay down
bank borrowings and reduced the amount of its bank credit facility to $65
million of revolving credit borrowing and letter of credit capacity. In
September 1997, the Company issued $50 million of 9-3/4% Senior Notes due 2003,
Series B, having substantially the same terms as the Company's existing $220
million of 9-3/4% Senior Notes due 2003. Most of the net proceeds were used to
pay off the outstanding balance on the Company's bank credit facility that had
been incurred to finance capital expenditures. In conjunction with this
transaction, the borrowing capacity under the bank credit facility was reduced
to $50 million, declining 12.5% in each of January 1999 and 2000. The facility
terminates in January 2001. As of December 31, 1997, $8 million of revolving
credit borrowings (repaid in January 1998) and $6.6 million of standby letters
of credit were outstanding.
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 through the term of the credit facility.
<PAGE>
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 O, in which environmental compliance is discussed.
YEAR 2000
Within the last two years, the Company has purchased new software packages
for most of its computer systems and is currently purchasing and implementing
new software for the rest. By early 1999, all the Company's software will either
be designed to accommodate the "year 2000" transition or upgraded through
routine software releases from reliable software suppliers. Related costs are
not expected to be significant.
<PAGE>
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 C 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, 1997 and (ii) "Executive Officers of the Company" 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, 1997, 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, 1997, 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, 1997, 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, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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 - Amendment of Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Page 2 to the Company's
Proxy Statement filed April 30, 1997, in respect of its 1997 Annual
Meeting of Stockholders (File No. 1-1363))
3.3 - 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)).
3.4 - 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)).
3.5 - By-Law Amendment Adopted March 26, 1997 By Unanimous Written Consent
of the Board of Directors, Effective June 19, 1997 (incorporated
by reference to Exhibit 3.5 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 (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 - Second Supplemental Indenture, dated as of September 24, 1997,
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 4.5 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1997 (File No. 1-1363).
4.6 - Indenture, dated as of September 30, 1997, 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, Series B, including
the form of such Notes attached as Exhibit A thereto (incorporated
herein by reference to Exhibit 4.6 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1997 (File
No. 1-1363).
4.7 - Registration Rights Agreement, dated as of September 30, 1997, among
the Company and Morgan Stanley Dean Witter, Jeffries & Company, Inc.
and NationsBanc Capital Markets, Inc. (incorporated herein by
reference to Exhibit 4.7 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-
1363)
4.8 - 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)).
4.9 - Loan Agreement, dated as of June 1, 1994, 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 - 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)).
4.12 - 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 (incorporated herein by reference to Exhibit 4.13
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 1-1363)).
4.13 - Third Amendment, dated effective as of June 30, 1997, to the Credit
Agreement, dated as of December 19, 1995, among the Company,
International Mill Service, Inc., the lenders parties hereto,
NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as
Syndication Agent (incorporated herein by reference to Exhibit 4.14
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997 (File No. 1-1363)).
4.14 - Fourth Amendment, dated as of September 23, 1997, 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 4.18
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997 (File No. 1-1363)).
<PAGE>
4.15*- Fifth Amendment, dated as of March 5, 1998, 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)).
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)).
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)).
<PAGE>
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 - 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)).
10.9 - 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)).
10.10 - 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)).
10.11 - 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)).
10.12 - 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)).
10.13 - 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))
10.14 - 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 filed
January 21, 1997 (File No. 1-1363)).
<PAGE>
10.15 - 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 filed 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, 1997, the
Company filed no Current Reports on Form 8-K.
* Filed herewith.
<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 31, 1998
ENVIROSOURCE, INC.
By: /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 31, 1998.
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
/s/ RAYMOND P. CALDIERO Director
- -----------------------
Raymond P. Caldiero
<PAGE>
/s/ ROBERT N. GURNITZ Director
- ---------------------
Robert N. Gurnitz
/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/ 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, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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,
present fairly in all material respects the information set forth therein.
As discussed in Note A to the financial statements, in 1997 the Company changed
its method of accounting for systems development costs.
/s/Ernst & Young LLP
Stamford, Connecticut
February 13, 1998
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,942 $ 9,678
Accounts receivable, less allowance for
doubtful accounts of $701 in 1997 and
$1,220 in 1996 33,260 31,550
Net current assets of discontinued
IMSAMET operations 34,864
Net deferred income taxes 2,755 15,200
Other current assets 3,966 4,686
-------- --------
Total current assets 49,923 95,978
Property, plant and equipment:
Land and improvements 1,184 887
Landfill development 27,993 29,701
Buildings and improvements 24,824 25,501
Machinery and equipment 234,359 214,768
-------- --------
288,360 270,857
Less allowance for depreciation (144,978) (128,392)
-------- --------
143,382 142,465
Goodwill, less amortization 132,766 138,635
Closure trust funds and deferred charges,
less amortization 33,810 34,139
Landfill permits, less amortization 23,849 23,064
Net deferred income taxes 12,582 10,800
Debt issuance costs, less amortization 10,130 8,442
Other assets 6,860 6,386
-------- -------
$413,302 $459,909
======== ========
See notes to consolidated financial statements.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands)
December 31,
------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,194 $ 9,302
Salaries, wages and related benefits 7,173 7,253
Insurance obligations 5,789 6,187
Estimated reorganization and
restructuring costs 963 2,207
Other current liabilities 10,797 15,287
Current portion of debt 13,786 64,504
--------- --------
Total current liabilities 50,702 104,740
Long term debt:
9-3/4% Senior Notes due 2003 270,000 220,000
Other long term debt 11,614 48,424
Other liabilities 40,775 47,688
Stockholders' equity:
Common stock, par value $.05 per share,
shares authorized - 60,000,000, shares
issued and outstanding - 40,713,765
in 1997 and 40,351,446 in 1996 2,036 2,018
Capital in excess of par value 174,194 173,472
Accumulated deficit (134,132) (134,631)
Stock purchase loans receivable from
officers (663) (810)
Canadian translation adjustment (1,224) (992)
-------- --------
Total stockholders' equity 40,211 39,057
-------- --------
$413,302 $459,909
======== ========
See notes to consolidated financial statements
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Years Ended December 31,
------------------------
1997 1996 1995
==== ==== ====
Revenues $227,678 $212,789 $223,722
Cost of revenues 180,123 165,278 163,070
Selling, general and
administrative expenses 25,264 23,165 26,163
Unusual items, net 1,300 5,471 (2,624)
-------- -------- --------
Operating income 20,991 18,875 37,113
Interest income 1,223 1,356 1,133
Interest expense (29,308) (28,187) (23,483)
-------- -------- --------
(Loss) income from continuing
operations before income taxes (7,094) (7,956) 14,763
Income tax (expense) benefit:
Current (1,399) (1,134) (1,262)
Deferred 31 4,400 (3,946)
-------- -------- --------
(1,368) 3,266 (5,208)
-------- -------- --------
(Loss) income from
continuing operations (8,462) (4,690) 9,555
Income from discontinued
IMSAMET operations, after taxes 9,600 399 949
-------- -------- --------
Income (loss) before extraordinary
loss and cumulative effect of
accounting change 1,138 (4,291) 10,504
Extraordinary debt extinguishment
loss (806)
Cumulative effect of accounting
change (639)
-------- -------- --------
Net income (loss) 499 (4,291) 9,698
Preferred stock dividend
requirements, reduced by
retirement gain of $250 in 1996 (151) (1,739)
-------- -------- --------
Income (loss) applicable to
common shares and equivalents $ 499 $ (4,442) $ 7,959
======== ======== ========
Income (loss) per share:
Continuing operations $ (.21) $ (.12) $ .19
Discontinued operations .24 .01 .03
Extraordinary loss (.02)
Cumulative effect of
accounting change (.02)
------- -------- -------
Net income (loss) $ .01 $ (.11) $ .20
======= ======== =======
Weighted average common (and in
1995 equivalent) shares 40,533 40,443 40,527
See notes to consolidated financial statements.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
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, 1995 $ 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
Common stock issued
(362,319 shares) 18 722 740
Net income 499 499
Loan repayment 147 147
Translation adjustment (232) (232)
------- -------- --------- ----- ------- --------
Balance December 31, 1997 $ 2,036 $174,194 $(134,132) $(663) $(1,224) $ 40,211
======= ======== ========= ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Income (loss) before extraordinary loss and
cumulative effect of accounting change $ 1,138 $ (4,291) $10,504
Adjustments to reconcile income (loss)
to cash provided by operating activities:
Deferred income taxes 11,969 (4,400) 4,346
Gain from sale of IMSAMET (21,600)
Depreciation 26,492 26,261 24,545
Amortization 11,029 9,715 9,071
Unusual items, net of payments (628) 1,766 (6,816)
Changes in working capital (271) (2,562) 368
Other, net 2,394 1,674 (113)
------- ------ -------
Cash provided by operating activities 30,523 28,163 41,905
------- ------ -------
INVESTING ACTIVITIES
Property, plant and equipment:
Additions (29,354) (21,883) (32,560)
Proceeds from dispositions 883 2,930 383
Net proceeds from sale of IMSAMET 56,464
Purchase of Alexander Mill Services, Inc.
(net of cash acquired) (5,953)
Landfill permit additions and closure
expenditures (4,044) (3,186) (1,125)
Closure trust fund payments (1,515) (1,530) (9,087)
Ongoing cash flows related to
IU International acquisition (10,808) (1,901) (9,600)
Other (1,117) (798) (2,299)
------- ------ ------
Cash provided (used) by investing
activities 10,509 (32,321) (54,288)
------- ------ ------
FINANCING ACTIVITIES
Debt issuance 82,000 60,000 75,188
Debt repayment (119,528) (21,372) (60,173)
Debt issuance costs (3,240) (102) (2,624)
Retirement of preferred stock (33,242) (42)
Sale of common stock 185 12
------- ------ ------
Cash provided (used) by financing
activities (40,768) 5,469 12,361
------- ------ ------
CASH AND CASH EQUIVALENTS
Increase (decrease) during year 264 1,311 (22)
Beginning of year 9,678 8,367 8,389
------- ------ ------
End of year $ 9,942 $ 9,678 $ 8,367
======= ======= =======
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 and improvements -- 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
$16.7 million and $14.6 million at December 31, 1997 and 1996.
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 $14.3 million and $12.8 million at
December 31, 1997 and 1996, are classified as "available-for-sale," have
maturities of one month 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.
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 $14 million and $12.1 million at December 31, 1997
and 1996.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE A -- ACCOUNTING POLICIES - continued
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
$10.1 million and $8.8 million are included in other long-term liabilities at
December 31, 1997 and 1996.
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 $48.8 million and $44 million at December 31, 1997 and 1996. 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.
Revenues: Most of the Company's revenues are recognized as services are
- --------
provided. Revenues of $8 million in 1995 were from long-term contracts to
design, supply and construct "wet scrubber sludge" stabilization systems for
electric utilities. Revenues from such contracts were recognized using the
percentage-of-completion method, with progress toward completion measured in
labor hours. Such contracts were segmented between "design and supply" and
"construction," and a separate profit margin was recognized for each segment.
Accounting Change: Pursuant to Emerging Issues Task Force (EITF) Issue No. 97-
- -----------------
- -13, the Company changed its accounting policy for systems development costs.
Previously, substantially all direct costs relating to systems development
were capitalized, including certain consulting costs to select software.
Under EITF Issue No. 97-13, such costs must be expensed as incurred, so the
unamortized balance of these costs totaling $639,000 as of September 30, 1997
was written off as a cumulative accounting change in the fourth quarter.
Earnings per share: In 1997, the Financial Accounting Standards Board (FASB)
- ------------------
issued Statement No. 128, Earnings per Share. Statement 128 replaces primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share is calculated by
dividing income (loss) applicable to common shares by the weighted average
number of shares outstanding during the period, excluding any dilutive effects
of options and warrants. Diluted earnings per share includes the effects of
common stock equivalents outstanding during the period and is very similar to
the previously reported fully diluted earnings per share. All earnings per share
amounts for all periods are presented in conformity with Statement 128
requirements.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE A -- ACCOUNTING POLICIES - continued
Basic and diluted earnings per share amounts were the same in 1997 and 1996
because there is no dilution when there is a loss from continuing operations.
Basic and diluted earnings per share amounts were identical in 1995 because the
dilutive effects of options and warrants were minimal.
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.
New FASB Statements: In June 1997, the FASB issued Statement No. 130,
- --------------------
"Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Further, in February 1998,
the FASB issued statement No. 132, "Pension and Other Postretirement
Disclosures." The new statements are effective in 1998. The Company is in the
process of evaluating the disclosure requirements of the new statements,
the adoption of which will have minimal impact on the Company's financial
statements.
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 and recorded $.8
million of additional closure costs for waste disposal sites that have been
inactive since before the Company's 1988 acquisition of IU International. 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 (including $2 million for
severance costs, $1.3 million for costs of vacated offices and abandoned assets
and $1.1 million for other costs) 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 Technologies segment's headquarters in Horsham, Pennsylvania were closed
and their activities moved to the IMS headquarters building, also in Horsham. As
a result, approximately 50 positions were eliminated, mostly in the Technologies
segment. In addition to severance and related costs, a liability was recorded
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE B -- UNUSUAL ITEMS, NET - continued
for occupancy expenses related to vacated facilities and abandoned assets were
written off. During 1996 $5.1 million of such costs (including $2.2 million of
severance costs, $1.3 million of costs related to terminated recycling
activities, $1 million of costs for vacated offices and abandoned assets and $.6
million of other costs) were charged against the liability, leaving a balance of
$3.4 million for remaining costs. After related income tax benefits of $1.9
million, the 1996 unusual items increased the net loss by approximately $3.6
million or $.09 per share.
1997 - During 1997, $1.9 million (including $.7 million of severance costs, $.4
- ----
million of vacated office costs, $.4 million of terminated recycling activity
costs and $.4 million of other costs) of costs were charged against
restructuring and reorganization liabilities, leaving a balance of $1.5 million
at December 31, 1997. Also during 1997, $1.3 million of unusual charges were
recorded for costs to satisfy regulatory requirements at waste disposal sites
that have been inactive since before the Company's 1988 acquisition of IU
International and to vacate another office. Costs totaling $2.5 million were
charged against these and other unusual item liabilities, leaving a balance for
remaining costs of $1.5 million at December 31, 1997. After related income tax
benefits, the 1997 unusual charges reduced net income by approximately $.8
million or $.02 per share.
NOTE C -- INCOME TAXES
The components of income tax benefit (expense) attributable to continuing
operations are as follows (in thousands)
1997 1996 1995
---- ---- ----
Current:
State $ (1,170) $ (916) $ (1,001)
Canadian (229) (218) (261)
-------- ------- --------
(1,399) (1,134) (1,262)
Deferred:
Federal 31 4,400 (3,946)
-------- ------- --------
$ (1,368) $ 3,266 $ (5,208)
======== ======= ========
Canadian income before income taxes amounted to $.7 million in 1997 and $.6
million in 1996 and 1995.
Income tax benefit (expense) varies from amounts computed by applying the
35% federal statutory rate for the following reasons (in thousands):
1997 1996 1995
---- ---- ----
Benefit (expense) of pre-tax
(loss) income from continuing
operations at statutory rate $ 2,483 $ 2,785 $ (5,167)
Goodwill amortization (1,692) (1,718) (1,733)
Effect of (increasing) reducing
deferred tax valuation allowance (1,454) 3,100 2,253
Effect of state and Canadian
income taxes (761) (595) (683)
Other 56 (306) 122
-------- ------- --------
$ (1,368) $ 3,266 $ (5,208)
======== ======= ========
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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):
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 85,643 $ 87,993
Capital loss carryforwards 248 4,564
Allowance for a doubtful receivable and insurance
accruals that would result in capital losses - 5,018
Other insurance accruals 2,937 2,810
Reorganization and restructuring accrual 655 1,280
Pension and other postretirement benefits accruals 4,331 5,095
Closure cost accruals 3,655 3,332
Other accruals 6,842 6,473
-------- --------
Total deferred tax assets 104,311 116,565
Valuation allowance (70,554) (69,100)
-------- --------
Net deferred tax assets 33,757 47,465
Deferred tax liabilities:
Tax over book depreciation plus IU International
acquisition purchase price allocation to
property, plant, and equipment (8,817) (10,870)
Tax over book post-closure deductions (5,710) (6,288)
Tax over book landfill permit amortization (3,893) (4,012)
Other (295)
-------- ---------
Total deferred tax liabilities (18,420) (21,465)
-------- ---------
Net deferred taxes $ 15,337 $ 26,000
======== ========
The Company recognized $26 million of net deferred tax assets in the
balance sheet in the fourth quarter of 1996. Of that amount, $12 million was
realized when the Company utilized 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 of $14 million from
1996 and an additional net benefit of $1.3 million in 1997 was
recognized because the Company has determined that it 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.
Virtually the entire $1.3 million 1997 income tax benefit was credited to
goodwill (because the related deferred tax assets arose from IU International
acquisition obligations - Note G). However, the valuation allowance increased by
a net $1.5 million because the deferred tax benefit applicable to continuing
operations for the year was more than offset by the reversal of a portion of the
valuation allowance that was credited to capital in excess of par value in 1996
that is not expected to be realized (discussed in the next paragraph).
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE C -- INCOME TAXES - continued
The $26 million 1996 income tax benefit (recognized by reducing the valuation
allowance) was credited as follows: $4.4 million reduced the loss from
continuing operations; $10.9 million was credited to goodwill (because the
related deferred tax assets arose from IU International acquisition
obligations); 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 the valuation allowance was reduced by $6.6 million, of which $2.3
million was credited to reduce income tax expense and the balance was 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 sizable valuation allowance against the
remainder of its deferred tax assets, primarily because $51 million of the $86
million deferred tax asset relates to net operating loss carryforwards that
expire in 1998. The balance of the $86 million represents net operating loss
carryforwards that for the most part will not expire for six 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.
Net operating loss carryforwards totaling $245 million expire as follows:
$147 million in 1998, $1 million in 2001, $15 million in 2003, $46 million in
2005, $11 million in 2006, $9 million in 2008, $11 million in 2009, $3 million
in 2010, and $2 million in 2011. 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 $70.6 million valuation allowance would be credited as follows: $48.8
million to capital in excess of par value, $8.8 million to goodwill and $13
million to reduce income tax expense.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE D -- SALE OF IMSAMET
In January 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. In the third quarter, a purchase price adjustment increased the pre-tax
gain by $2 million. After deferred income tax charges, the gain amounted to $9.6
million or $.24 per share. The proceeds from the sale were used to repay
revolving credit borrowings and expenses related to the transaction. The gain
from the sale in 1997 and IMSAMET's 1996 and 1995 results have been classified
as discontinued operations.
Summarized results of discontinued operations are as follows (in thousands):
1997 1996 1995
---- ---- ----
Gain from sale $ 21,600 $ - $ -
Revenues - 37,399 40,962
-------- -------- --------
$ 21,600 $ 37,399 $ 40,962
======== ======== ========
Income before income taxes $ 21,600 $ 399 $ 1,349
Deferred income tax expense (12,000) - (400)
-------- -------- --------
Income from discontinued
operations $ 9,600 $ 399 $ 949
======== ======== ========
Interest expense of $3.3 million in 1996 and $3.6 million in 1995 was 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 statements
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):
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- ALEXANDER MILL SERVICES ACQUISITION - continued
1996 1995
---- ----
(Unaudited)
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, $11
million was charged to goodwill.
NOTE F -- DEBT
Debt is summarized as follows (in thousands):
1997 1996
---- ----
9-3/4% Senior Notes due 2003 $270,000 $220,000
Bank credit facility 8,000 89,000
Industrial revenue bond financings,
equipment loans and other 17,400 23,928
-------- --------
295,400 332,928
Less current maturities (13,786) (64,504)
-------- --------
Long-term debt $281,614 $268,424
======== ========
At December 31, 1997, required principal payments by year are as follows: $13.8
million in 1998 (including $8 million of revolving credit borrowings repaid in
January), $2.2 million in 1999, $.8 million in 2000, $8.6 million in 2002 and
$270 million in 2003.
In September 1997, the Company issued $50 million of 9-3/4% Senior Notes due
2003, Series B, having substantially the same terms as the Company's existing
$220 million of 9-3/4% Senior Notes due 2003. Most of the net proceeds were used
to pay off the outstanding balance on the Company's bank credit facility that
had been incurred to finance capital expenditures. All of the Senior Notes
(10.5% effective rate including amortization of issuance costs) 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.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE F -- DEBT - continued
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. Upon the sale of IMSAMET in January 1997 (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. In conjunction with the issuance of the Senior Notes in
September 1997, the amount of the facility was reduced to $50 million. The
amount of revolving credit borrowing and letter of credit capacity declines by
12.5% in each of January 1999 and 2000. 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% (8.5% plus 1.25%
at December 31, 1997) or at Eurodollar rates plus from 1.5% to 2.5%
(approximately 5.91% plus 2.5% at December 31, 1997). 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
(1) is secured by accounts receivable, the Company's investments in stock and
intercompany notes of its subsidiaries, and a majority of the Company's
property, plant and equipment, (2) prohibits the payment of cash dividends, and
(3) contains covenants that require the Company to meet certain financial ratios
and tests. The facility terminates in January 2001. At December 31, 1997, $6.6
million of standby letters of credit were outstanding under the facility
(approximately $4.6 million secures liabilities already reflected in the
consolidated balance sheet).
Industrial revenue bond financings of $8.6 million carry a weighted average
effective interest rate of 9.3%. Equipment loans and other debt carry a weighted
average effective interest rate of 10%.
NOTE G -- IU INTERNATIONAL 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 $3 million at December
31, 1997 and $6.8 million at December 31, 1996. These amounts represent ongoing
obligations for insurance, employee benefits and other matters. Payments on such
obligations amounted to $10.8 million in 1997, $1.9 million in 1996 and $9.6
million in 1995. The Company paid $6.9 million of the 1997 amount and issued
362,319 shares of common stock valued at $.7 million to resolve an employee
benefit dispute related to the IU International acquisition for the amount
previously recorded in the financial statements.
Non-current other liabilities includes IU International acquisition obligations
of $21 million at December 31, 1997 and $28.5 million at December 31, 1996 for
insurance, employee benefits and income tax matters.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE H -- STOCKHOLDERS' EQUITY
A total of 3,150,535 shares of the Company's common stock have been
reserved 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.
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 (by the surrender of shares of common stock subject to
the warrants), resulting in the issuance of 95,685 shares of the Company's
common stock. In 1996, 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.
An affiliate of Freeman Spogli & Co. owns approximately 47% of the Company's
common stock.
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,
1997, options for 923,820 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 & Co. Under the plan, on January 1 of each
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 1997 and 1996 one director and in 1995 two directors
elected to receive such options in lieu of their $15,000 annual directors' fees.
All options granted under the plan become exercisable on the following January
1. At December 31, 1997, options for 629,855 shares were available for future
grants.
In addition, three outside directors hold options, granted prior to 1995, to
purchase 60,000 shares of the Company's common stock at exercise prices equal to
the fair market value at the time of grant.
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE I -- STOCK OPTIONS - continued
Option activity is summarized below:
1997 1996 1995
---- ---- ----
Shares under option at January 1 1,663,776 1,591,642 1,286,885
Options granted 106,000 298,509 435,082
Options exercised at average exercise
prices of $2.80 in 1996 and
$2.50 in 1995 (55,200) (4,800)
Options expired or cancelled (172,916) (171,175) (125,525)
-------- -------- ---------
Shares under options at December 31 1,596,860 1,663,776 1,591,642
========= ========= =========
Options exercisable at December 31 1,185,773 1,049,011 886,485
========= ========= =========
At December 31, 1997, option exercise prices ranged from $1.44 to $8.25 per
share and the weighted average was $4.04 per share. These options, with a
weighted average remaining contractual life of 5.4 years, expire on various
dates from January 1998 through October 2007. During 1997 the weighted average
exercise price of options granted was $1.93 per share and of options cancelled
was $3.93 per share.
Using the Black-Scholes option pricing model, the estimated per share weighted
average fair values of stock options granted were $1.17 during 1997, $2.16
during 1996 and $2.15 during 1995. Assumptions made in determining the estimates
of fair value include: risk-free interest rates of 5.5% in 1997, 5.6% in 1996
and 6.4% in 1995, a volatility factor of .48 in 1997 and .46 in 1996 and 1995
and a weighted-average expected life of 8 years for all three years.
Summarized information about stock options outstanding at December 31, 1997 as
follows:
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
------ ----------- ---- ----- ----------- -----
$1.44 to $3.00 335,429 5.9 years $ 2.38 230,429 $ 2.59
$3.01 to $4.50 1,042,931 6.1 3.93 736,844 3.99
$4.51 to $8.25 218,500 1.0 7.10 218,500 7.10
--------- ---------
$1.44 to $8.25 1,596,860 5.4 4.04 1,185,773 4.29
========= =========
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):
<PAGE>
ENVIROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
NOTE I -- STOCK OPTIONS - continued
1997 1996 1995
---- ---- ----
Pro forma net (loss) income $ 213 $ (4,591) $ 9,509
Pro forma net (loss) income per share $ .01 $ (.12) $ .19
Because the Company's options vest over three or five year periods and only
options granted in 1995, 1996 and 1997 are reflected in the calculations, the
pro forma disclosures are not likely to be representative of future pro forma
amounts.
NOTE J -- BUSINESS SEGMENTS
The Company's business segments are: IMS, which provides recycling and other
specialized services for the steel industry, and Technologies, which operates
hazardous waste disposal landfills and provides waste management and
stabilization services for the steel industry, as well as companies in other
industries and governmental agencies.
Information by business segment for the three years ended December 31, 1997 is
as follows (in thousands):
1997 1996 1995
---- ---- ----
REVENUES
IMS $185,587 $180,002 $181,081
Technologies 42,091 32,787 42,641
-------- -------- --------
$227,678 $212,789 $223,722
======== ======== ========
UNUSUAL ITEM (CHARGES) CREDITS, NET
IMS $ 69 $ (1,697) $ (904)
Technologies (1,491) (3,252) (100)
Corporate headquarters 122 (522) 3,628
-------- -------- --------
$ (1,300) $ (5,471) $ 2,624
======== ======== ========
TOTAL OPERATING INCOME (LOSS)
IMS 26,563 $ 31,971 $ 38,456
Technologies (1,664) (8,012) 1,511
Corporate headquarters (3,908) (5,084) (2,854)
-------- -------- --------
$ 20,991 $ 18,875 $ 37,113
======== ======== ========
INDENTIFIABLE ASSETS
IMS $252,584 $252,958 $258,691
Technologies 131,231 130,683 136,516
Corporate headquarters 29,487 41,404 13,142
-------- -------- --------
413,302 425,045 408,349
Discontinued operations - 34,864 36,087
-------- -------- --------
$413,302 $459,909 $444,436
======== ======== ========
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J -- BUSINESS SEGMENTS - continued
1997 1996 1995
---- ---- ----
DEPRECIATION AND AMORTIZATION
IMS $ 25,925 $ 24,045 $ 21,972
Technologies 10,807 7,569 7,286
Corporate headquarters 789 1,398 1,333
-------- -------- --------
37,521 33,012 30,591
Discontinued operations - 2,964 3,025
-------- -------- --------
$ 37,521 $ 35,976 $ 33,616
======== ======== ========
CAPITAL EXPENDITURES
IMS $ 21,002 $ 16,227 $ 23,939
Technologies 8,342 4,761 6,345
Corporate headquarters 10 5 81
-------- -------- --------
29,354 20,993 30,365
Discontinued operations - 890 2,195
-------- -------- --------
$ 29,354 $ 21,883 $ 32,560
======== ======== ========
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 $46.2 million in 1997, $43.1 million in 1996 and $43.9
million in 1995 were from USX Corporation, the Company's largest steel industry
customer. Accounts receivable due from USX Corporation totaled $4.2 million
at December 31, 1997. At December 31, 1997, $26.3 million of consolidated
accounts receivable result from services performed for domestic steel industry
customers. IMS customers and operations are located throughout the United States
and Canada. Technologies 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, 1997:
1997 1996 1995
---- ---- ----
Industrial recycling 67.8% 70.5% 66.7%
Specialized services 13.7% 14.1% 14.2%
Waste stabilization and disposal 18.5% 15.2% 15.5%
Stabilization system design,
supply and construction .2% 3.6%
------ ----- -----
100.0% 100.0% 100.0%
===== ===== =====
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
1997 1996 1995
---- ---- ----
Service cost-benefits earned
during the period $ 700 $ 763 $ 787
Interest cost on projected
benefit obligations 1,533 1,386 1,393
Actual gain on plan assets (4,248) (2,576) (2,860)
Net amortization and deferral 2,558 1,066 1,341
------ ----- -----
Net periodic pension costs $ 543 $ 639 $ 661
====== ====== ======
The funded status, calculated principally using measurement dates of October 31,
1997 and 1996, and the liability accrued in the consolidated balance sheet for
defined benefit plans are as shown below (in thousands):
1997 1996
---- ----
Actuarial present value of benefit
obligations:
Vested $ 21,385 $ 19,070
======== ========
Accumulated $ 21,395 $ 19,081
======== ========
Projected $ 21,585 $ 19,205
Plan assets at fair value 21,766 19,183
-------- --------
Projected benefit obligations (less than)
in excess of plan assets (181) 22
Unrecognized net income (loss) 362 (391)
Prior service gain not yet recognized in
net periodic pension cost 3,477 3,985
Other 256 168
-------- --------
Pension liability $ 3,914 $ 3,784
======== ========
The actuarial present value of projected benefit obligations was determined
using discount rates of 7.25% in 1997 and 7.75% in 1996. The expected annual
long-term rate of return on plan assets used in determining net periodic pension
cost was 8.5% in both years.
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- RETIREMENT PLANS - continued
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 $1.7 million in 1997,
$1.8 million in 1996 and $1.6 million in 1995.
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 $1.8 million in 1997,
$1.6 million in 1996 and $1.7 million in 1995.
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 $.4 million in 1997 and $.5
million in 1996 and 1995. 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 amounted to $2 million in 1997, $1.6 million in 1996 and $1.7 million in
1995.
The Company incurred postretirement benefit obligations in connection with the
IU International acquisition (Note G). Other long-term liabilities include
$4.6 million of such obligations at December 31, 1997 and $4.8 million at
December 31, 1996 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%
to 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, 1997 by $.3 million and would not have had a material impact on the
cost for 1997.
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 non-cash interest costs. Changes in working
capital include the following (in thousands):
1997 1996 1995
---- ---- ----
Accounts receivable $ (2,000) $ 4,971 $ 7,221
Other current assets 425 1,611 (549)
Accounts payable and other
current liabilities 1,304 (9,144) (6,304)
-------- -------- -------
Cash provided (used) $ (271) $ (2,562) $ 368
======== ======== =======
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION - continued
Closure trust fund payments include the following activity (in thousands):
1997 1996 1995
---- ---- ----
Purchases of investments $ (1,654) $ (8,105) $ (17,643)
Sales of investments 139 6,575 8,556
-------- -------- ---------
Cash used $ (1,515) $ (1,530) $ (9,087)
======== ======== =========
Ongoing net cash flows related to the IU International acquisition are
principally payments of non-recurring pre-acquisition obligations.
The Company paid interest of $28.8 million in 1997, $28.9 million in 1996 and
$26.3 million in 1995, excluding capitalized interest of $.2 million in 1995.
The Company paid income taxes, net of refunds, of $1.1 million in 1997, $.8
million in 1996 and $1.2 million in 1995.
NOTE M -- FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments carried in the Company's
consolidated balance sheet are as follows (in thousands):
1997 1996
---- ----
Carrying Fair Carrying Fair
Amounts Values Amounts Value
------- ------ ------- -----
Long-term debt $281,614 $286,339 $268,424 $255,224
Other non-current assets
and stock purchase loans 1,441 1,326 1,797 1,671
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 -- RELATED PARTY TRANSACTIONS
In January 1989, loans were made to certain executive officers to purchase
common stock of the Company. The loans, as amended, bear interest at 6% and are
due in April 1998. Each year half of the annual interest is payable in cash and
half is added to the outstanding principal balance. The loans require payment in
full within 30 days of termination and provide for forgiveness in the event of
the employee's death. As of December 31, 1997, stock purchase loans due from
officers totaled $663,000 and accrued interest receivable totaled $223,000.
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N -- RELATED PARTY TRANSACTIONS - continued
In April 1986, the Company made a loan to an executive officer having the same
terms, as amended, as the stock purchase loans. As of December 31, 1997, this
loan and accrued interest totaled $509,000.
NOTE O -- COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for non-cancelable operating leases as of December
31, 1997 amount to $8.2 million in 1998, $6.3 million in 1999, $3.7 million in
2000, $2.3 million in 2001, $1.8 million in 2002 and $2.1 million thereafter.
Operating leases are primarily for machinery and equipment. Rental expense was
$10.2 million in 1997 and 1995 and $10.1 million in 1996.
At December 31, 1997, the Company had made commitments to spend $13.4 million
for equipment additions and improvements to waste treatment facilities. To
secure its obligations to close its landfills and perform post-closure
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 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 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>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997
Revenues $ 58,701 $ 57,149 $ 57,231 $ 54,597
Gross profit 11,976 11,538 13,222 10,819
Unusual charges (800) (500) - -
Operating income 4,473 5,613 6,837 4,068
Income (loss):
Continuing operations (3,274) (3,857) 7 (1,338)
Discontinued operations - 1,300 - 8,300
Cumulative effect of change
in accounting (639) - - -
Net income (loss) (3,913) (2,557) 7 6,962
Income (loss) per share:
Continuing operations $ (.08) $ (.09) $ - $ (.03)
Discontinued operations - .03 - .20
Cumulative effect of change
in accounting (.02) - - -
-------- -------- -------- -------
Net income (loss) $ (.10) $ (.06) $ - $ .17
======== ======== ======== =======
After deferred income taxes, 1997 unusual charges (Note B) amounted to $.3
million ($.01 per share) in the third quarter and $.5 million ($.01 per share)
in the fourth quarter.
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996
Revenues $ 52,634 $ 54,651 $ 52,546 $ 52,958
Gross profit 9,627 12,337 13,052 12,495
Unusual items, net 129 (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)
======== ======== ======= ========
<PAGE>
ENVIROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - continued
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. 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.
Due to rounding, quarterly per share amounts do not necessarily add to the full
year amounts.
<PAGE>
ENVIROSOURCE, INC. SCHEDULE II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end of
Description of period expenses accounts (A) period
- ----------- --------- -------- -------- --- ------
<S> <C> <C> <C> <C>
1997
----
Allowance for doubtful accounts $ 1,220 $ 158 $ 677 $ 701
======= ======= ====== =======
1996
----
Allowance for doubtful accounts $ 729 $ 728 $ 237 $ 1,220
======= ======= ====== =======
1995
----
Allowance for doubtful accounts $ 616 $ 149 $ 36 $ 729
======= ======= ====== =======
</TABLE>
(A) Amounts written off.
<PAGE>
EXHIBIT INDEX
Number Description Page
4.15 Fifth Amendment, dated as of March 5, 1998, EXHIBIT 1
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
FIFTH AMENDMENT, dated as of March 5,
1998 to the Credit Agreement, dated as of
December 19, 1995 (as amended prior to the
date hereof, 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 Borrower has requested that the Lenders agree to make various
changes in the Credit Agreement.
(2) 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.
(3) Capitalized terms used and not otherwise defined herein shall have
the meanings assigned to such terms in the Credit Agreement (the Credit
Agreement, as amended by, and together with, this Fifth Amendment, and as
hereinafter amended, modified, extended or restated from time to time, being
called the "Amended Agreement").
-----------------
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit
--------------------------
Agreement is hereby amended by deleting the definition of "L/C Commitment" and
substituting in lieu thereof the following:
""L/C Commitment": $25,000,000."
--------------
SECTION 1.02. AMENDMENTS TO SECTION 3. Section 3.1(b) of the Credit
------------------------
Agreement is hereby amended by deleting subparagraph (i) therefrom in its
entirety and substituting in lieu thereof the following:
"(i) be denominated in Dollars and shall be either (A) a
standby letter of credit issued to support obligations of the Parent or
any of its Subsidiaries, as the case may be, contingent or otherwise,
<PAGE>
(I) to provide credit support for workers' compensation, other
insurance programs and other corporate purposes, including to support
Existing Letters of Credit or (II) for the account of the Parent or any
of its Subsidiaries and for the benefit of the regional administrator
of the United States Environmental Protection Agency or the state
agency responsible for, or having authority over, the waste management
facility operated by the Parent or any of its Subsidiaries to provide
assurance that funds will be available in the event of closure and/or
post-closure care of any waste management facility operated by the
Parent or any of its Subsidiaries (any such standby letter of credit
described in this clause (A), a "Standby Letter of Credit") or (B) a
-------------------------
commercial letter of credit issued in respect of the purchase of goods
or services by the Parent or any of its Subsidiaries in the ordinary
course of business (a "Commercial Letter of Credit");"
---------------------------
SECTION 1.03. AMENDMENTS TO SECTION 4. Section 4.16 is amended by
-------------------------
deleting clause (c) therefrom and substituting in lieu thereof the following:
"(c) Letters of Credit will be used solely to support various
financial and other performance obligations of the Parent and its
Subsidiaries incurred in the ordinary course of business (including,
without limitation, to provide assurance that funds will be available
in the event of closure and/or post-closure care of any waste
management facility operated by the Parent or any such Subsidiary)."
SECTION 1.04. AMENDMENTS TO SECTION 7. (a) Section 7.1 of the Credit
------------------------
Agreement is hereby amended by deleting subclause (c) in its entirety and
substituting the following 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 1997 through and including
third quarter of fiscal 1998 1.05:1.00
<PAGE>
Fiscal quarters from and including fourth
quarter of fiscal 1998 through and including
first quarter of fiscal 1999 1.45:1.00
Second quarter of fiscal 1999 1.75:1.00
Third quarter of fiscal 1999 1.85:1.00
Fourth quarter of fiscal 1999 1.95:1.00
First quarter of fiscal 2000 and all fiscal
quarters thereafter 2.00:1.00"
(b) Section 7.1 of the Credit Agreement is hereby amended by
deleting subclause (d) in its entirety and substituting the following
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
-------------- -----
Fourth quarter of fiscal 1997 5.75:1.00
First quarter of fiscal 1998 5.70:1.00
Second quarter of fiscal 1998 5.60:1.00
Third quarter of fiscal 1998 5.40:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1998 through and including
second quarter of fiscal 1999 5.00:1.00
Fiscal quarters from and including third
quarter of fiscal 1999 through and including
fourth quarter of fiscal 1999 4.75:1.00
First quarter of fiscal 2000 and all fiscal
quarters thereafter 4.50:1.00"
<PAGE>
SECTION 1.05. REPRESENTATIONS AND WARRANTIES. The Parent and the
--------------------------------
Borrower hereby represent and warrant to each Lender that:
(a) The representations and warranties set forth in Section 4
of the Amended 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 Fifth Amendment Effective Date (as defined in Section
1.06) with the same effect as if made on and as of the date hereof or
the Fifth 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 Amended 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 Fifth Amendment have been duly
authorized by such party.
(d) This Fifth 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 Fifth 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.
SECTION 1.06. EFFECTIVENESS. This Fifth Amendment shall become
-------------
effective only upon satisfaction of the following conditions precedent on or
prior to March 5, 1998 (the first date upon which each such condition ha
been satisfied being herein called the "Fifth Amendment Effective Date"):
(a) The Administrative Agent shall have received duly executed
counterparts of this Fifth Amendment which, when taken together, bear
the authorized signatures of the Borrower, the Parent and the Required
Lenders.
(b) (i) The representations and warranties set forth in
Section 1.05 shall be true and correct on and as of the Fifth Amendment
<PAGE>
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
reasonable expenses payable as of the Fifth Amendment Effective Date in
connection with the Amended Agreement and the other Loan Documents and
shall have paid an amendment fee of $62,500, which amendment fee shall
be distributed to the Lenders pro rata in accordance with their
Revolving Credit Commitments.
(d) The Administrative Agent shall have received from each of
the Guarantors duly executed Consents, in the form attached hereto as
Exhibit A, which bear the authorized signatures of such Guarantors.
---------
(e) 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.
(f) 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 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
Fifth 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 1.07. APPLICABLE LAW. THIS FIFTH AMENDMENT SHALL BE
---------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
SECTION 1.08. 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 Fifth Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreements set forth in this
Section 1.08 shall survive the termination of this Fifth Amendment and the
Amended Agreement.
SECTION 1.09. Counterparts. This Fifth 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.
<PAGE>
SECTION 1.10. Reference to and Effect on the Loan Documents. (a) On and
---------------------------------------------
after the Fifth Amendment Effective Date, each reference in the Amended
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
Amended Agreement as amended by this Fifth Amendment.
(b) Each of the amendments provided herein shall apply and be
effective only with respect to the provisions of the Amended Agreement
specifically referred to by such amendment. Except as specifically
amended above, the Amended 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 Fifth 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth 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: Vice President & Treasurer
----------------------------
ENVIROSOURCE, INC.
By: /s/William B. Davis
----------------------------------
Title: Vice President & Treasurer
----------------------------
NATIONSBANK, N.A., as Administrative
Agent, as Issuing Lender, as Swingline
Lender and as a Lender
By: /s/Thomas J. Kane
----------------------------------
Title: Vice President
----------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as
Syndication Agent and as a Lender
By: /s/Attila Koc
----------------------------------
Title: First Vice President
----------------------------
BANQUE PARIBAS, as a Lender
By: /s/Christopher S. Goodwin
----------------------------------
Title: Director
----------------------------
By: /s/Deanna C. Walker
----------------------------------
Title: Assistant Vice President
----------------------------
<PAGE>
ROYAL BANK OF CANADA, as a Lender
By: /s/Steven Yoon
----------------------------------
Title: Senior Manager
----------------------------
<PAGE>
EXHIBIT A
CONSENT
Dated as of March __, 1998
Each of the undersigned, as a Guarantor under one of the Guarantees,
dated as of December 19, 1995 (each, a "Guarantee") in favor of the Agent for
---------
the Lenders parties to the Credit Agreement referred to in the foregoing Fifth
Amendment, hereby consents to the Fifth Amendment and hereby confirms and agrees
that (i) the Guarantee to which such Guarantor is a party is, and shall continue
to be, in full force and effect and is hereby ratified and confirmed in all
respects except that, upon the effectiveness of, and on and after the date of,
the Fifth Amendment, each reference in such Guarantee to the Loan Documents or
any thereof, "thereunder", "thereof" or words of like import shall mean and be a
reference to the Loan Documents or such Loan Document as amended prior to the
date of and by the Fifth Amendment and (ii) the Security Documents (as defined
in the Credit Agreement referred to in the foregoing Fifth Amendment) to which
such Guarantor is a party and all of the Collateral described therein do, and
shall continue to, secure the payment of all of the Obligations (as defined
therein).
IMS STEEL SERVICES, INC.
By:
--------------------------------
Title:
--------------------------
CONVERSION SYSTEMS, INC.
By:
------------------------------
Title:
--------------------------
<PAGE>
ENVIROSOURCE CONTRACT SERVICES,
INC.
By:
------------------------------
Title:
--------------------------
ENVIROSOURCE MANAGEMENT CORP.
By:
------------------------------
Title:
--------------------------
ENVIROSOURCE TECHNICAL SERVICES,
INC.
By:
------------------------------
Title:
--------------------------
ENVIROSAFE SERVICES OF IDAHO, INC.
By:
------------------------------
Title:
--------------------------
ENVIROSAFE SERVICES OF NORTH
AMERICA, INC.
By:
------------------------------
Title:
--------------------------
ENVIROSAFE SERVICES OF OHIO, INC.
By:
------------------------------
Title:
--------------------------
ENVIROSAFE SERVICES OF TEXAS, INC.
By:
------------------------------
Title:
--------------------------
ENVIROSOURCE CORP.
By:
-------------------------------
Title:
--------------------------
ENVIROSOURCE TECHNOLOGIES, INC.
By:
------------------------------
Title:
--------------------------
ETDS, INC.
By:
-------------------------------
Title:
--------------------------
FOX HUNT FARMS, INC.
By:
------------------------------
Title:
--------------------------
IU INTERNATIONAL CORPORATION
By:
------------------------------
Title:
--------------------------
IU NORTH AMERICA FINANCE, INC.
By:
------------------------------
Title:
--------------------------
IU NORTH AMERICA, INC.
By:
------------------------------
Title:
--------------------------
MARCUS HOOK PROCESSING, INC.
By:
------------------------------
Title:
--------------------------
McGRAW CONSTRUCTION COMPANY, INC.
By:
------------------------------
Title:
--------------------------
NEOAX INVESTMENT CORP.
By:
------------------------------
Title:
--------------------------
NOSROC CORP.
By:
------------------------------
Title:
--------------------------
SONCOR CORP.
By:
------------------------------
Title:
--------------------------
IMS WAYLITE, INC.
By:
------------------------------
Title:
--------------------------
<TABLE>
<CAPTION>
ENVIROSOURCE, INC.
List of Subsidiaries
As of March 1, 1998
<S> <C> <C>
State or other % of voting
jurisdiction securities
in which owned by
Name of Company organized immed. parent
- --------------- --------- -------------
EnviroSource, Inc. Delaware
EnviroSource Corp. Wyoming 100
EnviroSource Management Corp. Delaware 100
EnviroSource Technical Services, Inc. Delaware 100
IU International Corporation Delaware 100
EnviroSource Technologies, Inc. Delaware 100
ETDS, Inc. Delaware 100
Conversion Systems, Inc. Delaware 100
EnviroSource Contract Services, 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
IMS Funding Corporation Delaware 100
IMS Steel Services, Inc. Pennsylvania 100
IMS Waylite, Inc. Pennsylvania 100
International Mill Service Limited Canada 100
McGraw Construction Company, Inc. Ohio 100
Neoax Investment Corp. Delaware 56(1)
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>
EXHIBIT 23.1
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 13, 1998 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, 1997.
/s/Ernst & Young LLP
Stamford, Connecticut
March 27, 1998
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,942
<SECURITIES> 0
<RECEIVABLES> 33,961
<ALLOWANCES> 701
<INVENTORY> 0
<CURRENT-ASSETS> 49,923
<PP&E> 283,360
<DEPRECIATION> 144,978
<TOTAL-ASSETS> 413,302
<CURRENT-LIABILITIES> 50,702
<BONDS> 281,614
0
0
<COMMON> 2,036
<OTHER-SE> 38,175
<TOTAL-LIABILITY-AND-EQUITY> 413,302
<SALES> 0
<TOTAL-REVENUES> 227,678
<CGS> 0
<TOTAL-COSTS> 180,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,308
<INCOME-PRETAX> (7,094)
<INCOME-TAX> 1,368
<INCOME-CONTINUING> (8,462)
<DISCONTINUED> 9,600
<EXTRAORDINARY> 0
<CHANGES> (639)
<NET-INCOME> 499
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
