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, 1998
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 Pacific Exchange, Inc.
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 $4,021,646 as of March 1, 1999.
The number of shares outstanding of the Registrant's Common Stock as of the
close of business on March 1, 1999 was 5,813,394.
<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,
stabilization and disposal services, 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, and Envirosource Technologies, Inc. ("Technologies"), through its
Envirosafe and Conversion Systems subsidiaries, constitutes the Technologies
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 1986
to NEOAX, Inc. ("NEOAX"). In 1987, NEOAX reincorporated in Delaware. In 1989,
the Company changed its name to EnviroSource, Inc., and on June 22, 1998, the
Company changed its name slightly to Envirosource, Inc.
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. Since 1988, the
Company has 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.
During 1993, the Company completed a comprehensive recapitalization
that resulted in an affiliate of Freeman Spogli & Co. ("FS&Co) purchasing a
significant amount of the Company's equity securities. As of December 31, 1998,
FS&Co held approximately 47% of the outstanding shares of Common Stock of the
Company. Also during 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 1993 Notes was used to retire $150 million
principal amount of the Company's 14% Extendible Reset Senior Subordinated Notes
Due 1998.
In 1996, the Company moved its headquarters from Stamford, Connecticut,
consolidating the activities of its corporate headquarters, as well as the
headquarters for its IMS and Technologies segments, in Horsham, Pennsylvania.
In 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.
In the first quarter of 1998, the Company embarked on a profit
improvement process entitled "ENSO 2000" that is intended to lower costs and
increase revenues significantly. Management believes that most of the benefits
from this process will be seen in the years after 1998.
<PAGE>
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.
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 four 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 seven steel mills.
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.
IMS's largest site is at USX Corporation's Gary Works, in Gary,
Indiana, the largest steel mill in the U.S. During the three years ended
December 31, 1998, 18 to 20 percent of the Company's consolidated revenues of
continuing operations (including revenues attributable to services performed by
the Technologies segment) were from USX.
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 which account for
approximately 30% of total domestic steel production. IMS has one large
competitor and a number of smaller competitors, including several newer
entrants. The Company believes that IMS's solid market position is based on its
reliability, responsiveness to customer needs, reputation 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. However, Envirosafe has reoriented its business to
focus primarily on its steel mini-mill customers and less on the volatile waste
remediation business.
In 1992, Envirosafe Services of Ohio, Inc. received final approval to
expand its Ohio facility and has subsequently completed construction of the
first three phases of a 2.6 million cubic yard disposal cell. In 1993,
Envirosafe Services of Idaho, Inc. received final approval to expand an active
disposal cell at its Idaho facility and has completed construction of the second
phase of such cell. Envirosafe currently has approximately 2.4 million cubic
yards of permitted, unused disposal capacity.
During 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, the Envirosafe facilities
were upgraded by adding the ability to receive material by rail, the Ohio
facility directly and the Idaho facility through its rail transfer facility.
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 well into
the next decade. Historically, the Company's hazardous waste treatment and
disposal services business has been somewhat seasonal, with fewer waste
remediation projects in the winter. However, the Company believes that the
increased volume of EAF dust stabilized at its 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 future changes in
environmental compliance requirements could have a material effect on
Technologies' future 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 an excellent environmental compliance record.
A Technologies unit is the sole licensee of a proprietary technology
(Super Detox(R)) for stabilizing EAF dust - a listed hazardous waste (KO61)
under RCRA that is generated by steel mills - that renders the EAF dust suitable
for disposal in non-hazardous waste landfills. Technologies currently operates
an EAF dust stabilization facility on-site at one of the larger domestic
mini-mills, and provides Super Detox(R) stabilization for EAF dust at both of
its regional Envirosafe facilities. In recent years, Technologies entered into a
number of new contracts to receive, process and dispose of EAF dust at its
Envirosafe facilities. Technologies actively continues to market this treatment
and disposal service to other U.S. mini-mills.
In 1995, Technologies received from the U.S. Environmental Protection
Agency ("USEPA") a generic delisting for Super Detox(R) stabilized EAF dust.
This delisting designates EAF dust treated utilizing this proprietary process as
a non-hazardous waste suitable for landfilling in non-hazardous waste landfills.
The generic delisting status for the process can save Technologies and its
customers the time and expense involved in petitioning USEPA on a
facility-by-facility basis for delisting status. The Illinois Environmental
Protection Agency subsequently granted a site specific delisting for this
process. In addition, in 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 competitive off-site
thermal processes.
Conversion Systems has provided electric utilities with turn-key
systems using its Poz-O-Tec(R) process for the stabilization of wet scrubber
effluent and boiler ash residues produced at coal-fired power plants. Conversion
Systems substantially completed its last major project of this type in 1995.
However, Conversion Systems has licensed the Poz-O-Tec(R) technology for use in
specific international markets.
Competition. The Company's hazardous waste treatment and disposal
-----------
business is characterized by intense competition. The Company believes that
Technologies treats and disposes of approximately 30% of the total domestic EAF
dust production. Technologies has two primary competitors in this market:
Horsehead Resource Development Company, Inc., a thermal metal recovery processor
that has a larger market share, and another thermal recovery processor that has
a smaller market share. In addition, there are a number of smaller competitors.
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,
transportation costs and taxes. Expanded use of rail services and additions to
stabilization services will further improve Envirosafe's competitive position.
The market for hazardous waste services generally is geographically broad, but
is narrowed depending on factors such as the types of waste a facility is
permitted to accept, the types of services offered by a facility, the cost of
operation of a facility and the proximity of the facility to the customer.
<PAGE>
SEGMENT DATA
See Note J for information concerning revenues and operating income by
segment for the years ended December 31, 1998, 1997 and 1996 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, 1999, the Company employed approximately 1,600 persons. A
majority of the hourly employees in both business segments 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 1999. All other contracts will be renegotiated in 2000 or
thereafter.
ITEM 2. Properties.
HEADQUARTERS
The Company, IMS and Technologies maintain their headquarters at a
single location in Horsham, Pennsylvania in leased premises.
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, 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.
Assuming the timely completion of subsequent phases under existing
permit authority, Envirosafe expects to maintain ample hazardous waste disposal
capacity well 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.
<PAGE>
* * *
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are as follows:
Name Age Position
Robert N. Gurnitz 60 Chairman of the Board; Director
John T. DiLacqua 46 President and Chief Executive
Officer; Director
John C. Heenan 48 Senior Vice President, Finance,
Administration and Planning
Aarne Anderson 58 Vice President, Taxes
William B. Davis 48 Vice President and Treasurer
Bradley W. Harris 39 Controller
Leon Z. Heller 49 Vice President, General Counsel
and Secretary
James C. Hull 61 Vice President and Chief
Financial Officer
The specified age of each Executive Officer of the Company is as of
March 31, 1999.
Officers are elected annually and hold office until their successors
are elected and qualified.
Robert N. Gurnitz became a director of the Company in November 1997 and
Chairman of the Board of the Company in December 1998. Mr. Gurnitz served as
President and Chief Executive Officer of Northwestern Steel and Wire Co. from
1991 to 1993 and as its Chairman and Chief Executive Officer from 1993 to 1997.
Prior to that he served in various senior management capacities with Rockwell
International Corporation, Bethlehem Steel Corporation and Webcraft
Technologies.
John T. DiLacqua became President, Chief Executive Officer and a
director of the Company in January 1999. From October 1997 to December 1998, Mr.
DiLacqua served as President of the U.S. Ferrous Operations of Philip Services
Corporation, which included, among others, the former Luria Brothers Division of
Connell Limited Partnership. Prior to that, he served as the President of the
Luria Brothers Division of Connell Limited Partnership from May 1994 to October
1997, and, from December 1990 to May 1994, he served as its Vice President of
Finance and Administration.
John C. Heenan became Senior Vice President, Finance, Administration
and Planning in February 1999. From October 1997 to December 1998, Mr. Heenan
served as Chief Financial Officer of the U.S. Ferrous Operations of Philip
Services Corporation, which included, among others, the former Luria Brothers
Division of Connell Limited Partnership. Prior to that, he served as the Vice
President - Controller of the Luria Brothers Division of Connell Limited
Partnership from April 1997 to October 1997. Prior to that, he served as Chief
Financial Officer of Standard Chlorine Chemical Company from 1993 to 1997.
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.
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.
<PAGE>
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 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 1998 and 1997, based upon prices supplied by The Nasdaq
Stock Market. On June 22, 1998, the Company effected a 1-for-7 reverse stock
split. Prices per share have been restated accordingly for all periods
presented.
1998 1997
High Low High Low
---- --- ---- ---
First Quarter $21.44 $13.34 $18.81 $12.25
Second Quarter 17.63 12.25 14.88 8.31
Third Quarter 17.25 8.13 19.25 13.56
Fourth Quarter 8.13 4.00 21.44 14.88
The Company has been notified by The Nasdaq Stock Market that it is not
currently in compliance with the Nasdaq National Market maintenance standards.
However, The Nasdaq Stock Market has a procedure for seeking exemptions from its
requirements, which the Company may seek to utilize. The Company is currently in
compliance with The Pacific Exchange maintenance requirements.
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, 1999 the Company had approximately 3,080 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.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 232,376 $ 227,678 $ 212,789 $ 223,722 $ 230,434
Costs and expenses 209,449 205,387 188,443 189,233 193,914
Unusual items, net (See Note B) 7,934 1,300 5,471 (2,624)
----------- ----------- ----------- ----------- -----------
Operating income 14,993 20,991 18,875 37,113 36,520
Interest income 1,262 1,223 1,356 1,133 983
Interest expense (30,510) (29,308) (28,187) (23,483) (21,974)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes (14,255) (7,094) (7,956) 14,763 15,529
Income tax (expense) benefit (16,384) (1,368) 3,266 (5,208) (4,280)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (30,639) (8,462) (4,690) 9,555 11,249
Income (loss) from discontinued IMSAMET
operations, after taxes (See Note D) 9,600 399 949 (190)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary loss
and cumulative effect of accounting
change (30,639) 1,138 (4,291) 10,504 11,059
Extraordinary debt extinguishment loss (806)
Cumulative effect of accounting change (639)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (30,639) $ 499 $ (4,291) $ 9,698 $ 11,059
=========== =========== =========== =========== ===========
Income (loss) applicable to common shares $ (30,639) $ 499 $ (4,442) $ 7,959 $ 10,457
=========== =========== =========== =========== ===========
Income (loss) per common share:
Continuing operations $ (5.27) $ (1.46) $ (.84) $ 1.35 $ 1.85
Discontinued operations 1.66 .07 .16 (.03)
Extraordinary loss (.13)
Cumulative effect of accounting
change (.11)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (5.27) $ .09 $ (.77) $ 1.38 $ 1.82
=========== =========== =========== =========== ===========
Average common shares 5,813 5,787 5,775 5,787 5,753
Total assets $ 387,456 $ 413,302 $ 459,909 $ 444,436 $ 442,872
Working capital deficiency (444) (779) (8,762) (34,099) (8,275)
Debt (non-current) 298,023 281,614 268,424 275,158 259,263
Redeemable preferred stock (non-current) - - - - 31,396
Stockholders' equity 9,843 40,211 39,057 32,604 24,521
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
1998 VERSUS 1997
1998
Year Ended better (worse)
December 31, than 1997
------------------------- -------------------------
1998 1997 Amount %
----------- ----------- ----------- -----------
(Dollars in thousands)
REVENUES
IMS $ 191,438 $ 185,587 $ 5,851 3%
Technologies 40,938 42,091 (1,153) (3%)
----------- ----------- -----------
$ 232,376 $ 227,678 $ 4,698 2%
=========== =========== ===========
GROSS PROFIT
IMS $ 42,190 $ 42,320 $ (130) -
Technologies 3,766 5,235 (1,469) (28%)
----------- ----------- -----------
$ 45,956 $ 47,555 $ (1,599) (3%)
=========== =========== ===========
OPERATING INCOME (LOSS)
IMS $ 26,465 $ 26,494 $ (29) -
Technologies (796) (173) (623) (360%)
Corporate headquarters (2,742) (4,030) 1,288 32%
Unusual items, net (7,934) (1,300) (6,634) (510%)
----------- ----------- -----------
$ 14,993 $ 20,991 $ (5,998) (29%)
=========== =========== ===========
IMS 1998 revenues increased $5.9 million or 3% over 1997 primarily because 1997
revenues were reduced by the effects of a strike (settled in mid-August 1997) by
employees of a major steel industry customer. The revenue increase was partially
offset by a revenue decrease attributable to an overall steel industry slowdown.
Technologies revenues decreased in 1998 as compared to 1997. While the volume of
waste processed increased over the prior year, average prices were lower in 1998
because much of the volume increase was lower-priced cleanup project business
and because the market is very competitive.
The gross profit contribution associated with IMS's increased revenue in 1998
was entirely offset by the negative effects of blast furnace outages at the
segment's largest customer, changes in manufacturing practices at several
important customers and the overall steel industry slowdown, which significantly
reduced steel production in the fourth quarter. IMS results depend to a great
extent on the production volumes of its steel mill customers. Technologies'
gross profit decreased due to processing lower-priced cleanup project business
and market conditions noted above.
<PAGE>
Selling, general and administrative expenses decreased as compared to 1997
primarily due to cost reductions resulting from the Company's profit improvement
program and a reduction in legal fees and expenses attributable to litigation
between the Company and its largest competitor in the electric arc furnace dust
processing market (concluded in the 1998 first quarter).
Unusual items, net. In 1998 unusual charges totaled $7.9 million, consisting of
- ------------------
$7.3 million of costs related to the Company's profit improvement program
(including $3 million to write down excess equipment to its net realizable
value, $2.2 million of program consulting costs and $2.1 million of severance
costs) and $.6 million for other costs. The 1997 unusual charges of $1.3 million
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 Corporation ("IU International") and to vacate an office as part
of the Company's consolidation of operations.
Interest expense increased $1.2 million as the overall debt level was higher in
1998.
Current income tax expense includes state and Canadian income taxes. In 1998 the
Company wrote off its deferred tax assets of $15.3 million (see discussion
below).
In 1997 the Company sold its IMSAMET subsidiary realizing an after-tax gain of
$9.6 million. Also in 1997, the Company recognized a $.6 million charge for the
cumulative effect of a mandatory accounting change.
Due to the factors described above, the 1998 net loss was $30.6 million as
compared with net income of $.5 million in 1997.
DEFERRED INCOME TAXES
In 1996 the Company recognized $26 million of net deferred tax assets in its
balance sheet. Of this 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 gain from the January 1997 sale of its
IMSAMET subsidiary. An additional $1.3 million of net deferred tax assets was
recognized in 1997. In the fourth quarter of 1998, all of the Company's net
deferred tax assets were charged against operations when the production of the
Company's steel industry customers declined sharply and the Company reported
negative quarterly operating income, thus preventing a determination that is it
more likely than not that the Company will earn sufficient taxable income during
the next several years to realize its net deferred tax assets. (See Note C.)
<PAGE>
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%
=========== =========== ===========
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
1997) by employees of a major steel industry customer 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.
Selling, general and administrative 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 and to vacate an office as part of the Company's consolidation of
operations.
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.
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 (see discussion
above), 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding of capital
expenditures, 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 1999 capital expenditures of up to $20 or $25 million,
primarily for equipment replacements and new services. Scheduled debt repayments
amount to $2.5 million in 1999 (excluding $3 million of revolving credit
borrowings repaid in January 1999).
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 $1.1 million in 1998. Based on
current regulations, planned improvements to waste treatment facilities and
permitted capacity, such trust funds are adequately funded and currently require
only the reinvestment of Idaho trust fund earnings, which the Company includes
in interest income.
The consolidated balance sheet reflects negative working capital of $.4 million
at December 31, 1998, due to including in current liabilities $3 million of
revolving credit borrowings because they were repaid in January 1999.
The Company has a $43.8 million bank credit facility that declines to $38.3
million in January 2000, $20 million in March 2000 and terminates in January
2001. As of December 31, 1998, $22 million of revolving credit borrowings
(including $3 million repaid in January 1999) and $5.7 million of standby
letters of credit were outstanding. The agreement contains convenants that
require the Company to meet certain financial ratios and tests. These convenants
were amended as of December 31, 1998 and the Company expects to be in compliance
throughout 1999.
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.
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 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.
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define applicable years. Computer programs that have
date-sensitive software may recognize a date coded "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations that
could cause disruptions of operations, including temporary inability to process
transactions.
The Company has completed an assessment of its computer information systems. In
the normal course of business, 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 mid-1999, all of the Company's software will be
upgraded, through routine software releases from reliable software suppliers, to
accommodate the Year 2000 transition. The Company has not incurred and does not
anticipate incurring material incremental costs for Year 2000 issues relating to
its computer information systems since all updates or replacements of such
systems shall have occurred in the ordinary course of business and the Company
expects to be in compliance throughout 1999.
The Company is currently assessing its non-information technology systems,
including telecommunications and embedded systems. Many of these systems will be
upgraded in the ordinary course of business, prior to December 31, 1999, and
such upgrades are expected to accommodate the Year 2000. The remaining
non-information technology systems will be upgraded or replaced as necessary to
be Year 2000 compliant by December 31, 1999. The costs of compliance for
non-information technology systems that would not otherwise be replaced or
upgraded in the ordinary course of business are not expected to be material.
The Company is also addressing the Year 2000 activities of its suppliers and
customers. The Company intends to contact significant suppliers and customers to
determine if they are Year 2000 compliant, and if they are not, to ask when they
will be compliant. This information will be used to assess the extent of
interruption that could occur in the Company's operations if a supplier or
customer were non-compliant. There can be no guarantee that failure to address
Year 2000 issues by a third party would not have a material adverse effect on
the Company. However, the Company believes that its communications with its
suppliers and customers will minimize these risks.
The Company's Year 2000 program is based on management's best estimates of the
Company's requirements. However, there can be no guarantee of the success of the
Company's Year 2000 program and actual results could differ materially from the
Company's plans. Factors that could impact implementation of this program
include, but are not limited to, the availability of trained personnel, the
ability to identify and correct all affected applications, and the failure of
third parties on which the Company relies to resolve their Year 2000 issues.
To date, the Company has not made any contingency plans to address Year 2000
risks. Contingency plans will be developed if it appears that the Company or its
significant suppliers or customers will not be Year 2000 compliant and such
noncompliance can be expected to have a material adverse impact on the Company's
operations.
SAFE HARBOR STATEMENT
Some of the statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements. These
statements are based on current expectations that involve a number of risks and
uncertainties which could cause actual results to differ materially from those
projected. These forward-looking statements should be read in conjunction with
the financial statements contained herein which include information describing
factors that could cause actual results to differ materially from those
projected in such forward-looking statements.
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.
Since the Company is a service company doing business principally on a contract
basis and almost entirely within the United States, its primary market risk is
exposure to interest rate fluctuations on its debt instruments. Except for the
bank revolving credit facility, which bears interest at variable rates, the
Company's debt bears interest at fixed rates. The table below presents debt
principal payments (in thousands) and the related average interest rates that
will be in effect during each year, and should be read in conjunction with Note
F. The fixed rates are the actual rates that will be in effect during each year.
The variable interest rate is the average rate in effect at the end of 1998, and
it fluctuates with a bank's prime rate or Eurodollar rates.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fixed rate debt $ 2,549 $ 359 $ 34 $ 8,587 $ 270,043
Average interest rate 10.37% 10.38% 10.38% 10.38% 10.45%
Variable rate debt $ 3,000 $ 19,000
Average interest rate 8.30% 8.30%
</TABLE>
<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.
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 A 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, 1998 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, 1998, 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, 1998, 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, 1998, 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, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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 Amendment of Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Pages 13 and 14 of the Company's
Proxy Statement filed April 30, 1998, in respect of its 1998 Annual
Meeting of Stockholders (File No. 1-1363)).
3.4 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)).
3.5 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)).
3.6 By-Laws 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 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)).
4.2 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)).
4.3 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).
4.4 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).
4.5 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)
4.6 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)).
4.7 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).
4.8 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)).
4.9 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)).
4.10 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)).
4.11 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)).
4.12 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)).
4.13 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
(incorporated herein by reference to Exhibit 4.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,1997
(File No. 1-1363)).
4.14* Sixth Amendment, dated as of March 26, 1999, 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)).
<PAGE>
10.2 Promissory Note of Louis A. Guzzetti, Jr., dated March 31, 1998,
payable to the Company, amending and replacing the Promissory Note
dated March 31, 1993 (incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998 (File No. 1-1363)).
10.3 Promissory Notes of Aarne Anderson, George E. Fuehrer and Mr.
Guzzetti, dated as of March 31, 1998, payable to the Company, amending
and replacing the Promissory Notes dated April 1, 1993(incorporated
herein by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1998 (File No.
1-1363)).
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)).
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 Envirosource, Inc. 1993 Stock Option Plan (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))
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, 1998, 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, 1999
ENVIROSOURCE, INC.
By: /s/ JOHN T. DILACQUA
-----------------------
John T. DiLacqua
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, 1999.
Signature Title
/s/ JOHN T. DILACQUA President, Chief Executive
- --------------------
John T. DiLacqua 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/ ROBERT N. GURNITZ Chairman of the Board of
- ---------------------
Robert N. Gurnitz Directors
<PAGE>
/s/ WALLACE B. ASKINS Director
- ---------------------
Wallace B. Askins
/s/ RAYMOND P. CALDIERO Director
- -----------------------
Raymond P. Caldiero
/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
/s/ RONALD P. SPOGLI Director
- --------------------
Ronald P. Spogli
<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, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
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
Philadelphia, Pennsylvania
March 19, 1999
<PAGE>
<TABLE>
<CAPTION>
Envirosource, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,134 $ 9,942
Accounts receivable, less allowance for
doubtful accounts of $1,045 in 1998 32,305 33,260
and $701 in 1997
Net deferred income taxes - 2,755
Other current assets 3,520 3,966
----------- -----------
Total current assets 40,959 49,923
Property, plant and equipment:
Land and improvements 1,184 1,184
Landfill development 34,729 31,800
Buildings and improvements 35,024 29,922
Machinery and equipment 233,387 225,454
----------- -----------
304,324 288,360
Less allowance for depreciation (157,387) (144,978)
----------- -----------
146,937 143,382
Goodwill, less amortization 127,931 132,766
Closure trust funds and deferred charges,
less amortization 33,205 33,810
Landfill permits, less amortization 22,974 23,849
Net deferred income taxes - 12,582
Other assets 15,450 16,990
----------- -----------
$ 387,456 $ 413,302
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Envirosource Inc.
CONSOLIDATED BALANCE SHEETS - (continued)
(Dollars in thousands)
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,949 $ 12,194
Salaries, wages and related benefits 7,370 7,173
Insurance obligations 4,588 5,789
Other current liabilities 12,947 11,760
Current portion of debt 5,549 13,786
----------- -----------
Total current liabilities 41,403 50,702
Long term debt:
9 3/4% Senior Notes due 2003 270,000 270,000
Other long-term debt 28,023 11,614
Other liabilities 38,187 40,775
Stockholders' equity:
Common stock, par value $.05 per share,
shares authorized - 20,000,000, shares
issued and outstanding - 5,813,394
in 1998 and 1997 291 291
Capital in excess of par value 175,969 175,939
Accumulated deficit (164,771) (134,132)
Accumulated other comprehensive income (1,556) (1,224)
Stock purchase loans receivable from
officers (90) (663)
----------- -----------
Total stockholders' equity 9,843 40,211
----------- -----------
$ 387,456 $ 413,302
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Envirosource, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 232,376 $ 227,678 $ 212,789
Cost of revenues 186,420 180,123 165,278
Selling, general and
administrative expenses 23,029 25,264 23,165
Unusual charges 7,934 1,300 5,471
----------- ----------- -----------
Operating income 14,993 20,991 18,875
Interest income 1,262 1,223 1,356
Interest expense (30,510) (29,308) (28,187)
----------- ----------- -----------
Loss from continuing
operations before income taxes (14,255) (7,094) (7,956)
Income tax (expense) benefit:
Current (1,047) (1,399) (1,134)
Deferred (15,337) 31 4,400
----------- ----------- -----------
(16,384) (1,368) 3,266
----------- ----------- -----------
Loss from continuing operations (30,639) (8,462) (4,690)
Income from discontinued
IMSAMET operations, after taxes 9,600 399
----------- ----------- -----------
Income (loss) before cumulative
effect of accounting change (30,639) 1,138 (4,291)
Cumulative effect of accounting
change (639)
----------- ----------- -----------
Net income (loss) (30,639) 499 (4,291)
Preferred stock dividend
requirement, reduced by
retirement gain of $250 (151)
----------- ----------- -----------
Income (loss) applicable to
common shares $ (30,639) $ 499 $ (4,442)
=========== =========== ===========
Income (loss) per share:
Continuing operations $ (5.27) $ (1.46) $ (.84)
Discontinued operations 1.66 .07
Cumulative effect of
accounting change (.11)
----------- ----------- -----------
Net income (loss) $ (5.27) $ .09 $ (.77)
=========== =========== ===========
Weighted average common shares 5,813 5,787 5,775
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Envirosource, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Capital in Other Stock
Common Excess of Accumulated Comprehensive Purchase
Stock Par Value Deficit Income (Loss) Loans Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996 $ 287 $ 164,303 $ (130,189) $ (957) $ (840) $ 32,604
Comprehensive income:
Net loss (4,291) (4,291)
Translation adjustment (35) (35)
-----------
Total comprehensive
income (loss) (4,326)
Common stock issued
(22,457 shares) 1 199 200
Deferred income tax benefit 10,700 10,700
Preferred stock dividends
and accretion, reduced by
retirement gain of $250 (151) (151)
Loan repayment 30 30
----------- ----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1996 288 175,202 (134,631) (992) (810) 39,057
Comprehensive income:
Net income 499 499
Translation adjustment (232) (232)
-----------
Total comprehensive income 267
Common stock issued
(51,760 shares) 3 737 740
Loan repayment 147 147
----------- ----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1997 291 175,939 (134,132) (1,224) (663) 40,211
Comprehensive income:
Net loss (30,639) (30,639)
Translation adjustment (332) (332)
-----------
Total comprehensive
income (loss) (30,971)
Loan repayment 573 573
Other 30 30
----------- ----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1998 $ 291 $ 175,969 $ (164,771) $ (1,556) $ (90) $ 9,843
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Envirosource, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) before cumulative effect
of accounting change $ (30,639) $ 1,138 $ (4,291)
Adjustments to reconcile income (loss)
to cash provided by operating activities:
Deferred income taxes 15,337 11,969 (4,400)
Gain from sale of IMSAMET (21,600)
Depreciation 27,330 26,492 26,261
Amortization 12,075 11,029 9,715
Unusual items, net of payments 4,896 (628) 1,766
Changes in working capital (2,031) (271) (2,562)
Other, net 915 2,394 1,674
----------- ----------- -----------
Cash provided by operating activities 27,883 30,523 28,163
INVESTING ACTIVITIES
Property, plant and equipment:
Additions (35,588) (29,354) (21,883)
Proceeds from dispositions 1,475 883 2,930
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 (2,751) (4,044) (3,186)
Closure trust fund payments (1,072) (1,515) (1,530)
Ongoing cash flows related to
IU International acquisition (2,400) (10,808) (1,901)
Other (527) (1,117) (798)
----------- ----------- -----------
Cash provided (used) by investing
activities (40,863) 10,509 (32,321)
FINANCING ACTIVITIES
Debt issuance 68,000 82,000 60,000
Debt repayment (59,828) (119,528) (21,372)
Debt issuance costs (3,240) (102)
Retirement of preferred stock (33,242)
Sale of common stock 185
----------- ----------- -----------
Cash provided (used) by financing
activities 8,172 (40,768) 5,469
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
Increase (decrease) during year (4,808) 264 1,311
Beginning of year 9,942 9,678 8,367
----------- ----------- -----------
End of year $ 5,134 $ 9,942 $ 9,678
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Envirosource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the
- ---------------------------
accounts of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated. Certain amounts reported in prior years have
been reclassified for comparative purposes.
Use of estimates: Preparing financial statements in accordance with generally
- -----------------
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents: Cash equivalents are highly liquid investments with maturities
- -----------------
of three months or less when acquired.
Property, plant and equipment: Property, plant and equipment is stated at cost.
- -----------------------------
Depreciation is computed by the straight-line method based on the following
lives: buildings 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 $19.5
million and $16.7 million at December 31, 1998 and 1997.
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 $15.3 million and $14.3 million at
December 31, 1998 and 1997, are classified as "available-for-sale," have
maturities of one month to ten years and are carried at amortized cost which
approximates 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 $15.7 million and $14 million at December 31, 1998 and 1997.
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
$ 9.1 million and $10.1 million are included in other long-term liabilities
at December 31, 1998 and 1997.
<PAGE>
NOTE A -- ACCOUNTING POLICIES - continued
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 $53.6 million and
$48.8 million at December 31, 1998 and 1997. 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: The Company's revenues are recognized as services are provided.
- --------
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, software selection 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 1997 fourth quarter.
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. Basic and diluted earnings per share
amounts are the same in each year because there is no dilution when there is a
loss from continuing operations.
In June 1998 the company completed a 1-for-7 reverse stock split. Numbers of
shares and per share amounts have been restated for all periods presented.
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 (SFAS) No. 123, Accounting for Stock-Based Compensation.
Comprehensive Income: As of January 1, 1998, the Company adopted SFAS No. 130,
- ---------------------
Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting
and display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or stockholders' equity.
<PAGE>
NOTE B -- UNUSUAL ITEMS, NET
1996 - Net unusual charges of $5.5 million consisted of $4.4 million for the
- ----
1996 reorganization (including $2 million for severance costs, $1.3 million for
costs to vacate offices and abandon assets and $1.1 million for other costs),
$1.2 million to settle the last disputed matter from the 1993 restructuring
(related to a terminated recycling unit), 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, less a $.9 million reduction of
other estimated liabilities remaining from the IU International acquisition.
During 1996, $5.1 million of costs were charged against the unusual item
liabilities ($2.2 million of severance, $1.3 million for the terminated
recycling unit, $1 million for vacated offices and abandoned assets and $.6
million for other costs), leaving a balance of $4.2 million for remaining costs,
as compared with $2.9 million at the beginning of 1996.
1997 - Unusual charges of $1.3 million were recorded for costs to satisfy
- ----
regulatory requirements at the inactive waste disposal sites and to vacate
another office. During 1997, costs totaling $2.5 million were charged against
these and other unusual item liabilities ($.7 million of severance, $.5 million
for vacated offices, $.5 million for inactive waste disposal sites, $.4 million
for the terminated recycling unit and $.4 million for other costs), leaving a
balance of $3 million at December 31, 1997.
1998 - Unusual charges of $7.9 million consisted of $7.3 million for the
- ----
Company's profit improvement program (including $3 million to write down excess
equipment to its net realizable value, $2.2 million of program consulting costs
and $2.1 million of severance costs) and $.6 million of other costs. During
1998, costs totaling $8 million were charged against these and other unusual
item liabilities ($3 million for excess equipment, $2 million of consulting
costs, $1.3 million of severance, $.6 million for vacated offices, $.6 million
for inactive waste disposal sites, $.4 million for the terminated recycling unit
and $.1 million for other costs), leaving a balance of $2.9 million at December
31, 1998.
NOTE C -- INCOME TAXES
The components of income tax (expense) benefit attributable to continuing
operations are as follows (in thousands):
1998 1997 1996
----------- ----------- -----------
Current:
State $ (897) $ (1,170) $ (916)
Canadian (150) (229) (218)
----------- ----------- -----------
(1,047) (1,399) (1,134)
Deferred:
Federal (15,337) 31 4,400
----------- ----------- -----------
$ (16,384) $ (1,368) $ 3,266
=========== =========== ===========
<PAGE>
NOTE C -- INCOME TAXES - continued
Canadian income before income taxes amounted to $.5 million in 1998, $.7 million
in 1997 and $.6 million in 1996.
Income tax (expense) benefit varies from amounts computed by applying the 35%
federal statutory rate for the following reasons (in thousands):
1998 1997 1996
----------- ----------- -----------
Benefit of pre-tax loss from
continuing operations at
statutory rate $ 4,989 $ 2,483 $ 2,785
Goodwill amortization (1,692) (1,692) (1,718)
Effect of (increasing)
reducing deferred tax
valuation allowance (19,098) (1,454) 3,100
Effect of state and Canadian
income taxes (583) (761) (595)
Other - 56 (306)
----------- ----------- -----------
$ (16,384) $ (1,368) $ 3,266
=========== =========== ===========
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):
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 35,652 $ 85,643
Capital loss carryforwards - 248
Insurance accruals 2,232 2,937
Reorganization and restructuring accrual 543 655
Pension and other postretirement
benefits accruals 4,040 4,331
Closure cost accruals 4,216 3,655
Other accruals 5,525 6,842
----------- -----------
Total deferred tax assets 52,208 104,311
Valuation allowance (36,811) (70,554)
----------- -----------
Net deferred tax assets 15,397 33,757
Deferred tax liabilities:
Tax over book depreciation plus IU
International acquisition purchase price
allocation to property, plant, and equipment (6,365) (8,817)
Tax over book post-closure deductions (5,417) (5,710)
Tax over book landfill permit amortization (3,615) (3,893)
----------- -----------
Total deferred tax liabilities (15,397) (18,420)
----------- -----------
Net deferred taxes $ - $ 15,337
=========== ===========
<PAGE>
NOTE C -- INCOME TAXES - continued
The Company recognized $26 million of net deferred tax assets in the balance
sheet in 1996; the corresponding $26 million of tax benefit was credited as
follows: $4.4 million reduced the 1996 loss from continuing operations; $10.9
million was credited to goodwill and $10.7 million increased capital in excess
of par value. Of the $26 million, $12 million was realized when the Company
utilized income tax loss carryforwards and other deferred tax assets to
eliminate income tax payments on the gain from the January 1997 sale of its
IMSAMET subsidiary (Note D). An additional $1.3 million of net deferred tax
assets was recognized in 1997, virtually all of which was credited to goodwill.
In the fourth quarter of 1998, all of the Company's net deferred tax assets were
written-off with a charge against operations, when the production of the
Company's steel industry customers declined sharply and the Company reported
negative quarterly operating income, thus preventing a determination that is it
more likely than not that the Company will earn sufficient taxable income during
the next several years to realize its net deferred tax assets.
In 1996 the valuation allowance was reduced by both the $26 million above and
$29.3 million that was primarily due to the expiration of net operating loss
carryforwards that originated prior to the Company's 1983 reorganization. In
1997 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. In 1998 the valuation
allowance was reduced by a net $33.7 million primarily because the $15.3 million
increase resulting from the corresponding charge against operations was more
than offset by a $49 million reduction due to writing off the deferred tax asset
representing an expired net operating loss carryforward and other changes.
The $35.7 million deferred tax asset above represents net operating loss
carryforwards totaling $101.9 million that expire at various dates from 2001 to
2018. Subject to the Company's ability to generate sufficient future taxable
income, upon recognition of additional net deferred tax assets, the $36.8
million valuation allowance would be credited as follows: $2 million to capital
in excess of par value, $8.8 million to goodwill and $26 million to reduce
income tax expense.
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. After deferred income tax charges, the 1997 gain
amounted to $9.6 million or $1.66 per share.
<PAGE>
NOTE D -- SALE OF IMSAMET - continued
Summarized results of discontinued operations are as follows (in thousands):
1997 1996
----------- -----------
Gain from sale $ 21,600 $ -
Revenues - 37,399
----------- -----------
$ 21,600 $ 37,399
=========== ===========
Income before income taxes $ 21,600 $ 399
Deferred income tax expense (12,000) -
----------- -----------
Income from discontinued operations $ 9,600 $ 399
=========== ===========
In 1996 interest expense of $3.3 million 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
cost of the acquisition was $9 million plus the assumption of $7.2 million of
debt. In allocating the purchase price, $10.7 million was charged to goodwill.
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 1996, are as follows (in
thousands, except per share amounts):
1996
-----------
(Unaudited)
Pro forma revenues $ 217,205
Pro forma net loss (3,640)
Pro forma net loss per share $ (.63)
The pro forma information is not necessarily indicative of the results that
would have occurred had the transaction taken place at the beginning of 1996.
<PAGE>
NOTE F -- DEBT
Debt is summarized as follows (in thousands):
1998 1997
----------- -----------
9 3/4% Senior Notes due 2003 $ 270,000 $ 270,000
Bank credit facility 22,000 8,000
Industrial revenue bond financings,
equipment loans and other 11,572 17,400
----------- -----------
303,572 295,400
Less current maturities (5,549) (13,786)
----------- -----------
Long-term debt $ 298,023 $ 281,614
=========== ===========
At December 31, 1998, required principal payments by year are as follows: $5.5
million in 1999 (including $3 million of revolving credit borrowings repaid in
January), $19.4 million in 2000, $8.7 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 and maturity date as the
Company's existing $220 million of Senior Notes. All of the Senior Notes (10.4%
effective rate including amortization of issuance costs) are redeemable, in
whole or in part, at the Company's option at 104.9% of principal amount,
declining to 100% by June 15, 2001. Upon a change in control, 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.
The Company's bank credit facility provides $43.8 million of revolving credit
borrowing and letter of credit capacity, which declines to $38.3 million in
January 2000, $20 million in March 2000 and terminates in January 2001. Interest
on borrowings is at the bank's prime rate plus 1.25% (prime rate was 8.25% at
December 31, 1998) or at Eurodollar rates plus 2.5% (Eurodollar rate was
approximately 5.45% at December 31, 1998). 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 portion of the Company's equipment, (2) prohibits the
payment of cash dividends, and (3) contains covenants that require the Company
to meet certain financial ratios and tests. At December 31, 1998, $5.7 million
of standby letters of credit were outstanding under the facility (approximately
$3.7 million of which secure liabilities already reflected in the consolidated
balance sheet).
An $8.5 million industrial revenue bond financing carries an effective interest
rate of 9.3%. Equipment loans and other debt carry a weighted average effective
interest rate of 8.8%.
<PAGE>
NOTE G -- IU INTERNATIONAL ACQUISITION OBLIGATIONS
The Company has certain ongoing obligations resulting from the 1988 acquisition
of IU International that are unrelated to current operations. Current
liabilities include IU acquisition obligations of $2.7 million at December 31,
1998 and $3 million at December 31, 1997. These amounts represent ongoing
obligations for insurance, employee benefits and other matters. In 1997 the
Company paid $6.9 million and issued 51,760 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 include IU International acquisition obligations
of $19 million at December 31, 1998 and $21 million at December 31, 1997 for
insurance, employee benefits and income tax matters.
NOTE H -- STOCKHOLDERS' EQUITY
A total of 426,799 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 1996 warrants to purchase 14,572 shares of the Company's common stock at
forty-nine cents per share were exercised using the cashless exercise feature
(by surrender of shares of common stock subject to the warrants).
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.
The Company also maintains a stock option plan for outside directors that are
not affiliated with Freeman Spogli & Co. Under the plan, on January 1 of each
year each outside director is granted options to purchase 714 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 1998 two directors and in 1997 and 1996 one director 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.
<PAGE>
NOTE I -- STOCK OPTIONS - continued
In addition, three outside directors hold options, granted prior to 1995, to
purchase 8,571 shares of the Company's common stock at exercise prices equal to
the fair market value at the time of grant.
Option activity is summarized below:
<TABLE>
<CAPTION>
Weighted
Number of Shares -Average
-----------------------------
Under Exercise Range
-----------------------------
Available Option Price From To
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 207,309 227,376 $ 29.89 $ 17.50 $ 58.63
Granted (42,646) 42,646 25.32 18.38 27.56
Exercised (7,886) 19.60 17.50 25.38
Canceled 24,454 (24,454) 32.74 17.50 58.63
----------- -----------
BALANCE AT DECEMBER 31, 1996 189,117 237,682 29.13 17.50 58.63
Granted (15,140) 15,140 13.51 10.06 20.13
Canceled 24,701 (24,701) 27.49 17.50 57.75
----------- -----------
BALANCE AT DECEMBER 31, 1997 198,678 228,121 28.27 10.63 57.75
Granted (82,747) 82,747 14.34 13.60 21.00
Canceled 45,229 (45,229) 31.27 10.06 57.75
----------- -----------
BALANCE AT DECEMBER 31, 1998 161,160 265,639 23.42 10.06 49.00
=========== ===========
</TABLE>
Using the Black-Scholes option pricing model, the estimated per share weighted
average fair values of stock options granted were $9.95 in 1998, $8.19 during
1997 and $15.12 during 1996. Assumptions made in determining the estimates of
fair value include: risk-free interest rates of 4.7% in 1998, 5.5% in 1997 and
5.6% in 1996; a volatility factor of .58 in 1998, .48 in 1997 and .46 in 1996;
and a weighted-average expected life of 8 years for all three years.
Summarized information about stock options outstanding at December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
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
- ---------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$10.06 to $21.00 119,161 7.8 years $ 15.20 37,298 $ 17.07
$21.01 to $31.50 127,979 5.6 27.50 117,240 27.59
$31.51 to $49.00 18,499 0.5 48.16 18,499 48.16
----------- -----------
$10.06 to $49.00 265,639 6.2 23.42 173,037 27.52
=========== ===========
</TABLE>
<PAGE>
NOTE I -- STOCK OPTIONS - continued
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):
1998 1997 1996
----------- ----------- -----------
Pro forma net (loss) income $ (30,913) $ 213 $ (4,591)
Pro forma net (loss) income
per share $ (5.32) $ .04 $ (.82)
Because the Company's options vest over three or five year periods and only
options granted after December 31, 1994 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, which are organized by type of service, 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, 1998 is
as follows (in thousands):
1998 1997 1996
----------- ----------- -----------
REVENUES
IMS $ 191,438 $ 185,587 $ 180,002
Technologies 40,938 42,091 32,787
----------- ----------- -----------
$ 232,376 $ 227,678 $ 212,789
=========== =========== ===========
UNUSUAL ITEM (CHARGES)
CREDITS, NET
IMS $ (2,851) $ 69 $ (1,697)
Technologies (790) (1,491) (3,252)
Corporate headquarters (4,293) 122 (522)
----------- ----------- -----------
$ (7,934) $ (1,300) $ (5,471)
=========== =========== ===========
TOTAL OPERATING INCOME (LOSS)
IMS $ 23,614 26,563 $ 31,971
Technologies (1,586) (1,664) (8,012)
Corporate headquarters (7,035) (3,908) (5,084)
----------- ----------- -----------
$ 14,993 $ 20,991 $ 18,875
=========== =========== ===========
<PAGE>
NOTE J -- BUSINESS SEGMENTS - continued
1998 1997 1996
----------- ----------- -----------
INDENTIFIABLE ASSETS
IMS $ 246,768 $ 252,584 $ 252,958
Technologies 131,440 131,231 130,683
Corporate headquarters 9,248 29,487 41,404
----------- ----------- -----------
387,456 413,302 425,045
Discontinued operations - - 34,864
----------- ----------- -----------
$ 387,456 $ 413,302 $ 459,909
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
IMS $ 27,105 $ 25,925 $ 24,045
Technologies 11,275 10,807 7,569
Corporate headquarters 1,051 789 1,398
----------- ----------- -----------
39,431 37,521 33,012
Discontinued operations - - 2,964
----------- ----------- -----------
$ 39,431 $ 37,521 $ 35,976
=========== =========== ===========
CAPITAL EXPENDITURES
IMS $ 27,874 $ 21,002 $ 16,227
Technologies 7,714 8,342 4,761
Corporate headquarters - 10 5
----------- ----------- -----------
35,588 29,354 20,993
Discontinued operations - - 890
----------- ----------- -----------
$ 35,588 $ 29,354 $ 21,883
=========== =========== ===========
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 (in 1997 and 1996) and unamortized
debt issuance costs.
Revenues from USX Corporation, the Company's largest steel industry customer,
ranged from $41 to $46 million annually during the three years ended December
31, 1998. Accounts receivable due from USX Corporation totaled $3.6 million at
December 31, 1998. At December 31, 1998, $26 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:
1998 1997 1996
----------- ----------- -----------
Industrial recycling 69.6% 67.8% 70.5%
Specialized services 12.8% 13.7% 14.1%
Waste stabilization and disposal 17.6% 18.5% 15.4%
----------- ----------- -----------
100.0% 100.0% 100.0%
=========== =========== ===========
<PAGE>
NOTE K -- RETIREMENT PLANS
The Company has several non-contributory defined benefit pension plans covering
certain salaried and hourly employees. The plans provide pension benefits that
are based on varying levels of service and compensation. Assets of the plans are
principally common stocks, fixed income securities and cash equivalents. The
Company's contributions are based on funding standards established by the
Employee Retirement Income Security Act of 1974.
1998 1997
----------- -----------
Change in benefit obligations
Benefit obligations at beginning of year $ 21,585 $ 19,205
Service cost 564 700
Interest cost 1,550 1,533
Net actuarial losses 553 1,912
Benefits paid (2,886) (1,811)
Other 77 46
----------- -----------
Benefit obligations at end of year $ 21,443 $ 21,585
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 21,766 $ 19,183
Actual return on assets 1,533 4,248
Employer contributions 226 521
Benefits paid (2,886) (1,811)
Plan expenses (312) (347)
Other (33) (28)
----------- -----------
$ 20,294 $ 21,766
=========== ===========
Funded status $ (1,149) $ 180
Unrecognized net actuarial losses (gains) 393 (263)
Unamortized prior service cost decrease (3,120) (3,477)
Other (9) (354)
----------- -----------
Accrued pension cost $ (3,885) $ (3,914)
=========== ===========
Net periodic pension cost for defined benefit plans includes the following (in
thousands):
1998 1997 1996
----------- ----------- -----------
Service cost $ 564 $ 700 $ 763
Interest cost 1,550 1,533 1,386
Expected return on plan assets (1,463) (1,423) (1,300)
Net amortization and deferral (195) (267) (210)
----------- ----------- -----------
Net periodic pension costs $ 456 $ 543 $ 639
=========== =========== ===========
The actuarial present value of projected benefit obligations was determined
using discount rates of 7.25% in 1998 and 1997. 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>
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 $1.2 million in 1998,
$1.4 million in 1997 and $1.8 million in 1996.
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 $2.2 million in 1998,
$1.8 million in 1997 and $1.6 million in 1996.
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 $2.1 million in 1998, $2 million in 1997 and $1.6 million in 1996.
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 $.3 million in 1998, $.4
million in 1997 and $.5 million in 1996. The Company funds postretirement
benefits on a "pay-as-you-go" basis.
The Company incurred postretirement benefit obligations in connection with the
IU International acquisition (Note G). Other long-term liabilities include $4.4
million of such obligations at December 31, 1998 and $4.6 million at December
31, 1997 based on a discount rate of 7.25%.
Future cost increases in health care benefits are assumed to be 8% in 1999,
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, 1998 by $.2 million and
would not have had a material impact on the cost for 1998.
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):
1998 1997 1996
----------- ----------- -----------
Accounts receivable $ 664 $ (2,000) $ 4,971
Other current assets 446 425 1,611
Accounts payable and other
current liabilities (3,141) 1,304 (9,144)
----------- ----------- -----------
Cash used $ (2,031) $ (271) $ (2,562)
=========== =========== ===========
<PAGE>
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION - continued
Closure trust fund payments include the following activity (in thousands):
1998 1997 1996
----------- ----------- -----------
Purchases of investments $ (1,243) $ (1,654) $ (8,105)
Sales of investments 171 139 6,575
----------- ----------- -----------
Cash used $ (1,072) $ (1,515) $ (1,530)
=========== =========== ===========
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 1998 and 1997 and $28.9 million in
1996.
The Company paid income taxes, net of refunds, of $1.4 million in 1998, $1.1
million in 1997 and $.8 million in 1996.
NOTE M -- FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments carried in the Company's
consolidated balance sheet are as follows (in thousands):
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amounts Values Amounts Values
----------- ----------- ----------- -----------
Long-term debt $ 298,023 $ 276,423 $ 281,614 $ 286,339
Other non-current assets
and stock purchase loans 1,375 1,375 1,441 1,326
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 TRANSACTION
One loan to an executive officer which originated to purchase common stock of
the Company in January 1989 remains outstanding. The loan, as amended, bears
interest at 6% and is due in April 1999. Each year half of the annual interest
is payable in cash and half is added to the outstanding principal balance. The
loan requires payment in full within 30 days of termination and provides for
forgiveness in the event of the employee's death. As of December 31, 1998, the
loan balance was $90,000 and accrued interest receivable totaled $47,345.
<PAGE>
NOTE O -- COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for non-cancelable operating leases as of December
31, 1998 amount to $9.1 million in 1999, $7 million in 2000, $5.4 million in
2001, $3.9 million in 2002, $1.4 million in 2003 and $1.3 million thereafter.
Operating leases are primarily for machinery and equipment. Rent expense was
$11.6 million in 1998, $10.2 million in 1997 and $10.1 million in 1996.
At December 31, 1998, the Company had made commitments to spend $7.2 million for
equipment additions.
The Company is required to maintain trust funds to secure its obligations to
close its landfills and perform post-closure monitoring and maintenance
procedures. Based on current regulations, planned improvements to waste
treatment facilities and permitted capacity, such trust funds are adequately
funded and currently require only the reinvestment of Idaho trust fund earnings
that the Company includes in interest income.
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 effect on the Company's results of operations or financial
condition, but the Company is unable to predict any such future requirements.
The Company believes that the consolidated financial statements appropriately
reflect all presently known compliance costs in accordance with generally
accepted accounting principles.
The Company is a party to litigation and proceedings arising in the normal
course of its present or former businesses. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the Company's
financial condition or results of operations.
<PAGE>
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except
per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
1998
Revenues $ 52,124 $ 57,710 $ 62,963 $ 59,579
Gross profit 8,220 11,944 14,431 11,361
Unusual charges (3,508) (526) (3,489) (411)
Operating income (loss) (1,065) 6,294 5,075 4,689
Net loss (23,921)* (4,259) (887) (1,572)
Net loss per share $ (4.12) $ (.73) $ (.15) $ (.27)
=========== =========== =========== ===========
*In the fourth quarter of 1998, the Company wrote off its deferred tax assets
totaling $15.3 million.
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 $ (.56) $ (.66) $ - $ (.23)
Discontinued operations .22 1.44
Cumulative effect of
change in accounting (.11)
----------- ----------- ----------- -----------
Net income (loss) $ (.67) $ (.44) $ - $ 1.21
=========== =========== =========== ===========
Due to rounding, quarterly per share amounts do not necessarily add to the full
year amounts.
<PAGE>
<TABLE>
<CAPTION>
ENVIROSOURCE, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, and 1996
(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>
1998
----
Allowance for doubtful accounts $ 701 $ 728 $ 384 $ 1,045
=========== =========== =========== ===========
1997
----
Allowance for doubtful accounts $ 1,220 $ 158 $ 677 $ 701
=========== =========== =========== ===========
1996
----
Allowance for doubtful accounts $ 729 $ 728 $ 237 $ 1,220
=========== =========== =========== ===========
</TABLE>
(A) Amounts written off.
<PAGE>
EXHIBIT INDEX
Number Description Page
4.14 Sixth Amendment to the Credit Agreement EXHIBIT 1
21.1 Subsidiaries of the Company EXHIBIT 2
23.1 Consent of Ernst & Young LLP EXHIBIT 3
SIXTH AMENDMENT, dated as of March
26, 1999, to the Credit Agreement, dated as
of December 19, 1995 (as amended 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 Sixth 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. Amendments to Section 1.1. The following definition is
hereby added to Section 1.1 in appropriate alphabetical order:
""ETI": Envirosource Technologies, Inc. a Delaware corporation"
SECTION 1.02. Amendments to Section 2.6. (a) Section 2.6(b) of the
Credit Agreement is hereby amended by adding the following proviso between the
phrase "then in effect" and the period at the end thereof:
"; provided, however, that if the sale of ETI described in
Section 2.6(c) has occurred and the Revolving Credit
Commitments and L/C Commitment have been reduced to
$20,000,000 in connection therewith as contemplated in Section
2.6(c) prior to January 3, 2000, then no reduction of the
Revolving Credit Commitments pursuant to this Section 2.6(b)
shall occur on January 3, 2000"
(b) Section 2.6(c) of the Credit Agreement is hereby amended by
deleting subclause (c) in its entirety and substituting the following in lieu
thereof:
"The Revolving Credit Commitments and L/C Commitment shall be
reduced to $20,000,000 upon the earlier of (i) the fifth
Business Day after the receipt of Net After Tax Cash Proceeds
with respect to a Prepayment Event consisting of a sale by IU
International of all or substantially all of the assets and/or
the common stock of ETI or (ii) March 31, 2000."
(c) Section 2.6 of the Credit Agreement is hereby amended by
adding the following subclause (f) thereto:
"(f) In the event that the dollar amount of any Letter of
Credit outstanding on March 26, 1999 shall be reduced in size,
whether by agreement, amendment, non-renewal after expiration
or termination, then the Revolving Credit Commitments and the
L/C Commitment shall automatically and permanently be reduced
by an amount equal to the net amount of such reduction."
SECTION 1.03. Amendments to Section 7. (a) Section 7.1(a) of the Credit
Agreement is hereby amended by deleting subclause (a) in its entirety and
substituting the following in lieu thereof:
"(a) Interest Coverage. Permit the ratio of (i) EBITDA for the
Reference Period with respect to the last day of any fiscal
quarter of the Parent referred to below to (ii) Consolidated
Interest Expense for such Reference Period to be less than the
ratio set forth below opposite such fiscal quarter:
Fiscal Quarter Ratio
Fiscal quarters from and including fourth
quarter of fiscal 1995 through and including
first quarter of fiscal 1996 2.35:1.00
Fiscal quarters from and including second
quarter of fiscal 1996 through and including
third quarter of fiscal 1996 2.25:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1996 through and including
first quarter of fiscal 1997 1.95:1.00
Fiscal quarters from and including second
quarter of fiscal 1997 through and including
third quarter of fiscal 1997 1.75:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
fourth quarter of fiscal 1998 1.85:1.00
Fiscal quarters from and including first
quarter of fiscal 1999 through and including
third quarter of fiscal 1999 1.50:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1999 through and including
first quarter of fiscal 2000 1.65:1.00
Fiscal quarters from and including second
quarter of fiscal 2000 through and including
third quarter of fiscal 2000 2.25:1.00
Fourth quarter of fiscal 2000 and all fiscal
quarters thereafter 2.40:1.00"
(b) Section 7.1(c) 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
Fourth quarter of fiscal 1998 1.45:1.00
Fiscal quarters from and including first
quarter of fiscal 1999 through and including
second quarter of fiscal 1999 1.25:1.00
Third quarter of fiscal 1999 1.30:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1999 through and including
first quarter of fiscal 2000 1.45:1.00
Second quarter of fiscal 2000 and all fiscal
quarters thereafter 2.00:1.00"
(c) Section 7.1(d) 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
Fourth quarter of fiscal 1998 5.75:1.00
Fiscal quarters from and including first
quarter of fiscal 1999 through and including
second quarter of fiscal 1999 6.50:1.00
Third quarter of fiscal 1999 6.45:1.00
Fiscal quarters from and including fourth
quarter of fiscal 1999 through and including
first quarter of fiscal 2000 6.25:1.00
Second quarter of fiscal 2000 and all
fiscal quarters thereafter 4.50:1.00"
(d) Section 7.8 of the Credit Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"7.8 Limitation on Capital Expenditures. Make during any
fiscal year during the term of this Agreement, or commit prior
to or during such fiscal year to make during such fiscal year,
any Capital Expenditure, including any expenditure in the
ordinary course of business, which exceeds, when added to all
other Capital Expenditures made during such fiscal year or
committed to be made during such fiscal year in the aggregate
for the Parent and all its Subsidiaries, $35,000,000 in fiscal
year 1995, $35,000,000 in fiscal year 1996, $40,000,000 in
fiscal years 1997 and 1998 and $30,000,000 in any fiscal year
thereafter; provided, that for fiscal year 2000 only, up to
$5,000,000 not so expended in fiscal year 1999 may be carried
over for expenditure in fiscal year 2000. It is understood
that any amount so carried over to fiscal year 2000 shall be
deemed to be the amount expended first in fiscal year 2000."
SECTION 1.04. 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 Credit Agreement, and in each other Loan Document, are true and
correct in all material respects on and as of the date hereof and on
and as of the Sixth Amendment Effective Date (as defined in Section
1.05) with the same effect as if made on and as of the date hereof or
the Sixth Amendment Effective Date, as the case may be, except to the
extent such representations and warranties expressly relate solely to
an earlier date (in which case such representations and warranties
shall have been true and correct in all material respects on and as of
such earlier date).
(b) Each of the Loan Parties is in compliance with all the
terms and conditions of the Credit Agreement and the other Loan
Documents on its part to be observed or performed and no Default or
Event of Default has occurred or is continuing.
(c) The execution, delivery and performance by each of the
Borrower and the Parent of this Sixth Amendment have been duly
authorized by such party.
(d) This Sixth 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 Sixth 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 1.05. Effectiveness. This Sixth Amendment shall become
effective only upon satisfaction of the following conditions precedent (the
first date upon which each such condition has been satisfied being herein called
the "Sixth Amendment Effective Date"):
(a) The Administrative Agent shall have received duly executed
counterparts of this Sixth 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 1.04 shall be true and correct on and as of the Sixth Amendment
Effective Date, (ii) no Default or Event of Default has occurred or is
continuing and (iii) there shall not be any action pending or any
judgment, order or decree in effect which is likely to restrain,
prevent or impose materially adverse conditions upon performance by any
Loan Party of its obligations under the Loan Documents.
(c) The Borrower shall have paid in full all fees and
reasonable expenses in connection with the Credit Agreement, the
Amendment Fee Letter Agreement, the Fee Letter Agreement and the other
Loan Documents including, without limitation, the fees and expenses set
forth in Sections 1.07 and 1.08 hereto.
(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
Sixth 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 1.06. APPLICABLE LAW. THIS SIXTH AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 1.07. 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 Sixth Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreements set forth in this
Section 1.07 shall survive the termination of this Sixth Amendment and the
Amended Agreement.
SECTION 1.08. Fees. The Borrower shall pay (a) the Amendment Fee (as
defined in the Amendment to Credit Facility Fee Letter Agreement dated March 26,
1999 by the Borrower and the Parent to the Administrative Agent (the "Amendment
Fee Letter Agreement")) and (b) the Advisory Fee to NationsBanc Montgomery
Securities LLC ("NMS") (as defined in the Fee Letter Agreement dated March 26,
1999 by the Borrower and the Parent to NMS (the "Fee Letter Agreement")).
SECTION 1.09. Counterparts. This Sixth Amendment may be executed
in any number of counterparts, each of which shall constitute an original
but all of which when taken together shall constitute but one agreement.
SECTION 1.10. Reference to and Effect on the Loan Documents. (a) On and
after the Sixth 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 Sixth Amendment.
(b) Each of the amendments provided herein shall apply and be
effective only with respect to the provisions of the Credit Agreement
specifically referred to by such amendment. Except as specifically
amended above, the Credit Agreement and the Revolving Credit Notes, and
all other Loan Documents, are and shall continue to be in full force
and effect and are hereby in all respects ratified and confirmed.
(c) Except as specifically provided above, the execution,
delivery and effectiveness of this Sixth 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.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth 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/ JOHN W. POCALYKO
------------------------------------
Title: Managing Director
CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent
and as a Lender
By: /s/ ATTILA KOC
------------------------------------
Title: Senior Vice President
PARIBAS, as a Lender
By: /s/ CHRISTOPHER S. GOODWIN
------------------------------------
Title: Director
By: /s/ CHARLES N. ROLFE
------------------------------------
Title: Director
ROYAL BANK OF CANADA
By: /s/ JOHN D'ANGELO
------------------------------------
Title: Manager
<PAGE>
EXHIBIT A
CONSENT
Dated as of March 26, 1999
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 Sixth
Amendment, hereby consents to the Sixth 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 Sixth 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 Sixth Amendment and (ii) the Security Documents (as defined
in the Credit Agreement referred to in the foregoing Sixth 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:
ENVIROSOURCE MANAGEMENT CORP.
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:
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:
ENVIROSOURCE, INC.
List of Subsidiaries
As of March 1, 1999
-------------------
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
IU International Corporation Delaware 100
Envirosource Technologies, Inc. Delaware 100
ETDS, Inc. Delaware 100
Conversion Systems, Inc. Delaware 100
Envirosafe Services of Idaho, Inc. Delaware 100
Envirosafe Services of North America, Inc. Delaware 100
Envirosafe Services of Ohio, Inc. Ohio 100
Envirosafe Services of Texas, Inc. Delaware 100
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*
IU North America Finance, Inc. Delaware 100
IU North America, Inc. Delaware 100
Nosroc Corp. Pennsylvania 100
Soncor Corp. Delaware 100
- --------
* 44% is owned by IU International Corporation and 56% is owned by International
Mill Service, Inc.
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 March 19, 1999 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, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 30, 1999
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,134
<SECURITIES> 0
<RECEIVABLES> 33,350
<ALLOWANCES> 1,045
<INVENTORY> 0
<CURRENT-ASSETS> 40,959
<PP&E> 304,324
<DEPRECIATION> 157,387
<TOTAL-ASSETS> 387,456
<CURRENT-LIABILITIES> 41,403
<BONDS> 298,023
0
0
<COMMON> 291
<OTHER-SE> 9,552
<TOTAL-LIABILITY-AND-EQUITY> 387,456
<SALES> 0
<TOTAL-REVENUES> 232,376
<CGS> 0
<TOTAL-COSTS> 186,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,510
<INCOME-PRETAX> (14,255)
<INCOME-TAX> 16,384
<INCOME-CONTINUING> (30,639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,639)
<EPS-PRIMARY> (5.27)
<EPS-DILUTED> (5.27)
</TABLE>
