<PAGE>
=====================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
for the Quarterly Period Ended
September 30, 1998
-----------------------
Commission File Number 0-16379
Clean Harbors, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2997780
(State of Incorporation) (IRS Employer Identification No.)
1501 Washington Street, Braintree, MA 02185-0327
(Address of Principal Executive Offices) (Zip Code)
(781) 849-1800 ext. 4454
(Registrant's Telephone Number, Including Area Code)
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 that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 10,420,874
- ------------------------------------- --------------------------------
(Class) (Outstanding at November 2, 1998)
=====================================================================
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS Pages
-------
<S> <C>
Consolidated Statements of Operations 1
Consolidated Statements of Comprehensive Loss 2
Consolidated Balance Sheets 3-4
Consolidated Statements of Cash Flows 5-6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8-12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13-22
PART II: OTHER INFORMATION
Items No. 1 through 6 23-24
Signatures 25
</TABLE>
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands except for earnings per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues ................................ $ 50,884 $ 50,137 $ 144,851 $ 137,874
Cost of revenues ........................ 37,693 37,650 108,012 104,023
Selling, general and administrative
expenses ........................... 9,597 8,884 26,674 25,714
Depreciation and amortization ........... 2,287 2,274 6,823 6,983
--------- --------- --------- ---------
Income from operations .................. 1,307 1,329 3,342 1,154
Other income, net ....................... -- -- -- 800
Interest expense, net ................... 2,352 2,350 7,010 6,923
--------- --------- --------- ---------
Loss before provision for
income taxes ....................... (1,045) (1,021) (3,668) (4,969)
Provision for (benefit from) income taxes 90 (235) 270 (1,317)
--------- --------- --------- ---------
Net loss ........................ $ (1,135) $ (786) $ (3,938) $ (3,652)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted loss per share ........ $ (.12) $ (.09) $ (.42) $ (.40)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common
shares outstanding ................. 10,354 10,009 10,271 9,913
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss .................................. $(1,135) $ (786) $(3,938) $(3,652)
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains
arising during period .......... 1 3 3 14
Reclassification adjustment
for gains included in net loss 2 4 6 20
------- ------- ------- -------
Comprehensive loss ........................ $(1,132) $ (779) $(3,929) $(3,618)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....... $ 1,970 $ 3,935
Restricted investments .......... 2,266 1,088
Accounts receivable, net of
allowance for doubtful accounts 43,659 37,836
Prepaid expenses ................ 1,857 1,518
Supplies inventories ............ 3,019 2,811
Income tax receivable ........... 1,236 1,669
Deferred tax asset .............. 1,581 1,581
-------- --------
Total current assets 55,588 50,438
-------- --------
Property, plant and equipment:
Land ............................ 8,182 8,182
Buildings and improvements ...... 38,057 37,890
Vehicles and equipment .......... 78,624 77,281
Furniture and fixtures .......... 2,197 2,190
Construction in progress ........ 4,680 2,756
-------- --------
131,740 128,299
Less - Accumulated depreciation
and amortization ................ 71,917 66,392
-------- --------
Net property, plant and equipment 59,823 61,907
-------- --------
Other assets:
Goodwill, net ................... 20,212 20,755
Permits, net .................... 11,013 11,695
Deferred taxes non-current ...... 5,627 5,627
Other ........................... 4,549 4,523
-------- --------
Total other assets . 41,401 42,600
-------- --------
Total assets ....................... $156,812 $154,945
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
---------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations ............................................................. $ 4,034 $ 4,037
Accounts payable ........................................................... 16,853 13,760
Accrued disposal costs ..................................................... 7,061 7,100
Other accrued expenses ..................................................... 13,063 13,548
Income tax payable ......................................................... 90 10
Deferred tax liability ..................................................... 224 224
--------- ---------
Total current liabilities ...................................... 41,325 38,679
--------- ---------
Long-term obligations, less current maturities ................................ 71,281 68,020
Deferred taxes, long-term ..................................................... 6,871 6,871
Other ......................................................................... 1,142 1,351
--------- ---------
Total other liabilities ........................................ 79,294 76,242
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $.01 par value:
Series A Convertible;
Authorized-2,000,000 shares; Issued and
outstanding - none ................................................... -- --
Series B Convertible;
Authorized-156,416 shares; Issued and
outstanding 112,000 (liquidation
preference of $5,600,000) .......................................... 1 1
Common Stock, $.01 par value
Authorized-20,000,000 shares;
Issued and outstanding-10,356,212 and
10,101,490 shares, respectively ................................... 104 101
Additional paid-in capital ................................................. 60,518 60,087
Accumulated other comprehensive loss ....................................... (3) (12)
Accumulated deficit ........................................................ (24,427) (20,153)
--------- ---------
Total stockholders' equity ..................................... 36,193 40,024
--------- ---------
Total liabilities and stockholders' equity .................................... $ 156,812 $ 154,945
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
4
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30,
---------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $(3,938) $(3,652)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................. 6,823 6,983
Deferred income taxes ......................... -- (1,399)
Allowance for doubtful accounts ............... 519 495
Amortization of deferred financing costs ...... 406 551
Loss on sale of fixed assets .................. -- 139
Changes in assets and liabilities:
Accounts receivable ........................... (6,342) (740)
Refundable income taxes ....................... 433 (148)
Prepaid expenses .............................. (339) (12)
Supplies inventories .......................... (208) 3
Other assets .................................. (26) --
Accounts payable .............................. 2,545 (3,586)
Accrued disposal costs ........................ (39) (1,017)
Other accrued expenses ........................ (485) (1,482)
Income taxes payable .......................... 80 (162)
Other liabilities ............................. (209) 331
------- -------
Net cash used in operating activities .................. (780) (3,696)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............. (2,990) (2,583)
Proceeds from sale and maturities of
restricted investments ............................. 113 7,307
Purchase of restricted investments ..................... (1,282) --
Proceeds from sale of fixed assets ..................... 24 1,814
------- -------
Net cash provided by (used in) investing
activities ......................................... (4,135) 6,538
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Unaudited
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30,
---------------------
1998 1997
------ -------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
long-term revolver ............................ (2,253) 2,200
Payments on long-term obligations ................. 5,120 (3,232)
Additions to deferred financing cost .............. (15) (61)
Proceeds from stock issuance ...................... 98 132
------- -------
Net cash provided by (used in) financing activities 2,950 (961)
------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................... (1,965) 1,881
Cash and cash equivalents, beginning of year ...... 3,935 1,366
------- -------
Cash and cash equivalents, end of period .......... $ 1,970 $ 3,247
------- -------
------- -------
Supplemental information:
Non cash investing and financing activities:
Stock dividend on preferred stock ........ $ 336 $ 336
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
Series B
Preferred Stock Common Stock
---------------------- ---------------------- Additional
Number of $0.01 Par Number of $0.01 Par Paid-in
Shares Value Shares Value Capital
--------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ....................... 112 $1 10,101 $101 $60,087
Comprehensive loss
Net loss ........................................ -- -- -- -- --
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) -- -- -- -- --
Comprehensive loss ................................. -- -- -- -- --
Preferred stock dividends:
Series B .......................................... -- -- 185 2 334
Employee stock purchase plan ....................... -- -- 67 1 91
Proceeds from exercise of stock options ............ -- -- 3 -- 6
----- ----- ------ ---- -------
Balance at September 30, 1998 ...................... 112 $1 10,356 $104 $60,518
----- ----- ------ ---- -------
----- ----- ------ ---- -------
Disclosure of reclassification amount:
Unrealized holding gains arising in the period ...
Reclassification adjustment for gains
included in net loss ...........................
Net unrealized gains on securities .................
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive Total
Income Income Accumulated Stockholders'
(Loss) (Loss) Deficit Equity
------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ....................... -- $(12) $(20,153) $ 40,024
Comprehensive loss
Net loss ........................................ $(3,938) -- (3,938) (3,938)
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 9 9 -- 9
-------
Comprehensive loss ................................. $(3,929) -- -- --
-------
-------
Preferred stock dividends:
Series B .......................................... -- -- (336) --
Employee stock purchase plan ....................... -- -- -- 92
Proceeds from exercise of stock options ............ -- -- -- 6
------ --------- ---------
Balance at September 30, 1998 ...................... -- $ (3) $(24,427) $ 36,193
------ --------- ---------
------ --------- ---------
Disclosure of reclassification amount:
Unrealized holding gains arising in the period ... $3
Reclassification adjustment for gains
included in net loss ........................... 6
-----
Net unrealized gains on securities ................. $9
-----
-----
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Basis of Presentation
The consolidated interim financial statements included herein have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include, in the opinion of management,
all adjustments (consisting of only normal recurring accruals) necessary for the
fair presentation of interim period results. The operating results for the three
months and nine months ended September 30, 1998 are not necessarily indicative
of those to be expected for the full fiscal year. Reference is made to the
audited consolidated financial statements and notes thereto included in the
Company's Report on Form 10-K for the year ended December 31, 1997 as filed with
the Securities and Exchange Commission.
NOTE 2 Significant Accounting Policies
Earnings Per Share
In 1997 the Company implemented Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic EPS
is calculated by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
EPS gives effect to all potential dilutive common shares that were outstanding
during the period. The earnings per share for the Company under SFAS 128 were
the same as under the prior accounting standard for the periods presented in the
financial statements.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal periods beginning
after December 15, 1997, and the Company adopted its provisions for the quarter
ended March 31, 1998. Reclassification of earlier periods is required for
comparative purposes. Management determined that the statement had no material
impact on its financial position or results of operations.
NOTE 3 Financing Arrangements
As amended, the Company has a $35,000,000 Loan Agreement with a
financial institution. The Loan Agreement provided for a $24,500,000
revolving credit portion (the "Revolver") and a $10,500,000 term promissory
note. The Revolver allows the Company to borrow cash and letters of credit
based on a formula of eligible accounts receivable. At September 30, 1998,
the Revolver balance was $10,679,000, letters of credit outstanding were
$5,920,000 and funds available to borrow were approximately $5,300,000. In
June 1998, the term of the Revolver was extended from May 8, 1999 to May 8,
2000 under substantially the same terms and conditions.
8
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 Income Taxes
SFAS 109, "Accounting for Income Taxes," requires that a valuation
allowance be established when, based on an evaluation of objective verifiable
evidence, there is a likelihood that some portion or all of the deferred tax
assets will not be realized. The Company continually reviews the adequacy of the
valuation allowance for deferred tax assets, and, in 1997, based upon this
review, the valuation allowance was increased to reduce the carrying value of
deferred tax assets to the amount that is likely to be realized. Accordingly, no
tax benefit has been recorded for the three and nine months ended September 30,
1998, while a tax benefit for the loss for the three and nine months ended
September 30, 1997 was recorded. The actual realization of the net operating
loss carryforwards and other tax assets depend on having future taxable income
of the appropriate character prior to their expiration.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. The
Company has received a notice of intent to assess state income taxes from one of
the states in which it operates. The case is currently undergoing administrative
appeal. If the Company loses the administrative appeal, the Company may be
required to make a payment of approximately $3,000,000 to the state. The Company
believes that it has properly reported its state income and is contesting the
assessment vigorously. While the Company believes that the final outcome of the
dispute will not have a material adverse effect on the Company's financial
condition or results of operations, no assurance can be given as to the final
outcome of the dispute, the amount of any final adjustments or the potential
impact of such adjustments on the Company's financial condition or results of
operations.
9
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 Loss Per Share
The following is a reconciliation of basic and diluted loss per share
computations (in thousands except for per share amounts):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
----------- ------------- ----------
<S> <C> <C> <C>
Net loss ....................... $(1,135)
Less preferred dividend ........ 112
------- ------ ------
Basic and diluted EPS .......... $(1,247) 10,354 $ (.12)
(loss available to shareholders) ------- ------ ------
------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
----------- ------------- ----------
<S> <C> <C> <C>
Net loss ....................... $(786)
Less preferred dividends ....... 112
----- ------ ------
Basic and diluted EPS
(loss available to shareholders) $(898) 10,009 $ (.09)
----- ------ ------
----- ------ ------
</TABLE>
10
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 Loss Per Share (continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
------------ ------------- ---------
<S> <C> <C> <C>
Net loss ....................... $(3,938)
Less preferred dividends ....... 336
------------ ------------- ---------
Basic and diluted EPS
(loss available to shareholders) $(4,274) 10,271 $ (.42)
------------ ------------- ---------
------------ ------------- ---------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
------------ ------------- ---------
<S> <C> <C> <C>
Net loss ....................... $(3,652)
Less preferred dividends ....... 336
------------ ------------- ---------
Basic and diluted EPS
(loss available to shareholders) $(3,988) 9,913 $ (.40)
------------ ------------- ---------
------------ ------------- ---------
</TABLE>
The Company has issued options, warrants and convertible preferred
stock which are potentially dilutive to earnings. For the periods presented, the
options, warrants and convertible stock outstanding have not been included in
the preceding calculations, since their inclusion would have been antidilutive
for the periods presented.
11
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 Other Income
During the first quarter of 1997, the Company recorded a $950,000
receivable in connection with the settlement of a lawsuit and incurred
approximately $150,000 in costs related to the litigation during the first
quarter. The Company recognized a pre-tax gain, net of related legal fees, of
$800,000 resulting from the settlement, which is included in other income, net,
in the consolidated statements of operations. The $950,000 was received April,
1997.
12
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
operating data associated with the Company's results of operations.
<TABLE>
<CAPTION>
Percentage Of Total Revenues
---------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties 15.0 13.6 14.2 13.3
Other costs ........................ 59.0 61.5 60.4 62.1
-------- -------- --------- --------
Total cost of revenues ............. 74.0 75.1 74.6 75.4
Selling, general and administrative
expenses ........................... 18.9 17.7 18.4 18.7
Depreciation and amortization
of intangible assets ............... 4.5 4.5 4.7 5.1
-------- -------- --------- --------
Income from operations ...................... 2.6% 2.7% 2.3% 0.8%
-------- -------- --------- --------
-------- -------- --------- --------
Other Data:
- --------
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) (in thousands) ............... $ 3,594 $ 3,603 $ 10,165 $ 8,937
</TABLE>
REVENUES
Revenues for the quarter ended September 30, 1998 were $50,884,000
compared to revenues of $50,137,000 for the quarter ended September 30, 1997, an
increase of $747,000 or 1.5%. Revenues increased by 7.0% due to higher volumes
of waste processed and field service hours worked in the quarter ended September
30, 1998 as compared to the same quarter of the prior year and pricing was flat
in the current quarter as compared to the same period of the prior year. These
increases were partially offset by lower revenues on remediation projects
performed in the current quarter as compared to the same quarter of the prior
year.
13
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REVENUES (continued)
Revenues for the nine months ended September 30, 1998 were $144,851,000
compared to revenues of $137,874,000 for the nine months ended September 30,
1997, an increase of $6,977,000 or 5.1%. Revenues increased by 9.6% due to
higher volumes of waste processed and field service hours worked in the nine
months ended September 30, 1998 as compared to the same period of the prior
year. These increases in revenues were partially offset by a 1.9% decrease in
revenues due to pricing and a decrease in revenues due to remediation projects
performed.
Revenues for the nine months ended September 30, 1998 compared to the
same period of the prior year continued to be adversely impacted by declining
sales prices due to industry-wide pricing pressures. However, there has been a
recent improvement in pricing. Management can not predict if this recent
improvement in pricing will continue.
There were no major spills or other events that significantly impacted
revenues for the periods presented.
There are many factors which have impacted, and continue to impact, the
Company's revenues. These factors include: competitive industry pricing;
continued efforts by generators of hazardous waste to reduce the amount of
hazardous waste they produce; significant consolidation among treatment and
disposal companies; industry-wide over capacity of waste treatment facilities;
and direct shipment by generators of waste to the ultimate treatment or disposal
location.
COST OF REVENUES
Cost of revenues were $37,693,000 for the quarter ended September 30,
1998 compared to $37,650,000 for the quarter ended September 30, 1997, an
increase of $43,000. One of the largest components of cost of revenues is the
cost of sending waste to other companies for disposal. As a percentage of
revenues, disposal costs paid to third parties increased from 13.6% for the
quarter ended September 30, 1997 to 15.0% for the quarter ended September 30,
1998. This increase in outside disposal expense is due to a 13.8% increase in
the volume of wastes handled by the Company which were partly offset by
reductions in the waste sent directly to outside disposal vendors from
customers' sites.
14
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COST OF REVENUES (continued)
Cost of revenues were $108,102,000 for the nine months ended September
30, 1998 compared to $104,023,000 for the nine months ended September 30, 1997,
an increase of $4,079,000. As a percentage of revenues, disposal costs paid to
third parties increased from 13.3% for the nine months ended September 30, 1997
to 14.2% for the nine months ended September 30, 1998. This increase in outside
disposal expense is similarly due to a 21.1% increase in the volume of wastes
handled by the Company and an increase in wastes sent directly to outside
disposal vendors from customers' sites, which were partly offset by reductions
achieved in the internalization of waste.
Other costs decreased to 59.0% of revenues for the quarter ended
September 30 1998, as compared to 61.5% of revenues for the same period of
the prior year, and they decreased to 60.4% of revenues for the nine months
ended September 30, 1998, as compared to 62.1% of revenues for the same
period of the prior year. These decreases were achieved even while the volume
of waste processed through the Company's plants increased due to improvements
in efficiencies in the plants and cost reductions.
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. During the first
nine months of 1998, the Company continued its process of consolidating common
functions to reduce redundant costs and improve the Company's ability to deliver
its services. No assurance can be given that the Company's efforts to manage
future operating expenses will be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 8.0% to
$9,597,000 for the three months ended September 30, 1998 as compared to
$8,884,000 for the same period of 1997. The largest components of the increase
are due to increases in headcount due to higher volumes of waste processed,
increases in headcount in sales and marketing due to strategic business
development initiatives, and increases in compensation to remain competitive in
the employment markets in which the Company operates. In addition, the Company
experienced increases in other sales and marketing expenses.
Selling, general and administrative expenses increased 3.7% to
$26,674,000 for the nine months ended September 30, 1998 as compared to
$25,714,000 for the same period of 1997. The largest components of the
increase are due to increases in headcount due to higher volumes of waste
processed, increases in headcount in sales and marketing due to strategic
business development initiatives, and increases in compensation to remain
competitive in the employment markets in which the Company operates. In
addition, the Company incurred costs to terminate leases and experienced
increases in other sales and marketing expenses. These increases were
partially offset by various cost reductions achieved.
15
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE, NET
Interest expense, net of $2,352,000 for the quarter ended September 30,
1998 was flat as compared to $2,350,000 for same quarter of the prior year.
Interest expense, net was $7,010,000 for the first nine months of 1998 as
compared to $6,923,000 for the same period of the prior year. The increase in
interest expense, net for the first nine months of 1998 when compared to the
same period of 1997 is primarily due to a decrease in interest income associated
with a reduction in the average balance of restricted cash.
INCOME TAXES
For the quarter ended September 30, 1998, income tax expense of
$90,000 was recorded on a pre-tax loss of $1,045,000 for an effective tax
rate of (8.6)%, as compared to an income tax benefit of $235,000 that was
recorded on a pre-tax loss of $(1,021,000) for an effective tax rate of 23.0%.
For the nine months ended September 30, 1998, income tax expense of
$270,000 was recorded on a pre-tax loss of $3,668,000 for an effective tax rate
of (7.4)%, as compared to a tax benefit of $1,317,000 that was recorded on a
pre-tax loss of $4,969,000 for an effective tax rate of 26.5%. SFAS 109,
"Accounting for Income Taxes," requires that a valuation allowance be
established when, based on an evaluation of objective verifiable evidence, there
is a likelihood that some portion or all of the deferred tax assets will not be
realized. The Company continually reviews the adequacy of its valuation
allowance for deferred tax assets, and, in the fourth quarter of 1997, based on
this review, the valuation allowance was increased to cover almost all of the
net deferred tax assets. Accordingly, the Company recorded no benefit on its
books for the future potential value of net operating loss carryforwards
generated during the three and nine months ended September 30, 1998, while these
tax benefits were recorded for the net operating loss carryforwards generated
during the same periods of the prior year.
The actual realization of the net operating loss carryforwards and
other tax assets depend on having future taxable income of the appropriate
character prior to their expiration under the tax laws. If the Company reports
taxable earnings in the future, and depending on the level of these earnings,
some portion or all of the valuation allowance would be reversed, which would
increase net income reported in future periods.
16
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES (continued)
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. The
Company has received a notice of intent to assess state income taxes from one of
the states in which it operates. The case is currently undergoing administrative
review. If the assessment is upheld, the Company may be required to make a
payment of approximately $3,000,000 to the state. The Company believes that it
has properly reported its state income and is contesting the assessment
vigorously. While the Company believes that the final outcome of the dispute
will not have a material adverse effect on the Company's financial condition or
results of operations, no assurance can be given as to the final outcome of the
dispute, the amount of any final adjustments or the potential impact of such
adjustments on the Company's financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company and employees acting on behalf of the
Company make forward-looking statements concerning the expected revenues,
results of operations, capital expenditures, capital structure, plans and
objectives of management for future operations, and future economic performance.
This report contains forward-looking statements. There are many factors which
could cause actual results to differ materially from those projected in a
forward-looking statement, and there can be no assurance that such expectations
will be realized.
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: continue to implement the treatment
and disposal reengineering program; utilize its facilities and workforce
profitably in the face of intense price competition; increase market share in an
industry which appears to be downsizing and consolidating; realize benefits from
cost reduction programs; generate incremental volumes of waste to be handled
through its facilities from existing sales offices and service centers; obtain
sufficient volumes of waste at prices which produce revenue sufficient to offset
the operating costs of the facilities; minimize downtime and disruptions of
operations; and compete successfully against other incinerators which have an
established share of the incineration market.
17
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
The Company's operations may be affected by the commencement and
completion of major site remediation projects; cleanup of major spills or other
events; seasonal fluctuations due to weather and budgetary cycles influencing
the timing of customers' spending for remedial activities; the timing of
regulatory decisions relating to hazardous waste management projects; changes in
regulations governing the management of hazardous waste; secular changes in the
waste processing industry towards waste minimization and the propensity for
delays in the remedial market; suspension of governmental permits; and fines and
penalties for noncompliance with the myriad of regulations governing the
Company's diverse operations. As a result of these factors, the Company's
revenue and income could vary significantly from quarter to quarter, and past
financial performance should not be considered a reliable indicator of future
performance.
Typically during the first quarter of each calendar year there is less
demand for environmental remediation due to the cold weather, particularly in
the Northeast and Midwest regions, and increased possibility of unplanned
weather related plant shutdowns.
FINANCIAL CONDITION AND LIQUIDITY
For the nine months ended September 30, 1998, the Company's operations
consumed $780,000 of cash primarily to finance higher levels of accounts
receivable of $6,342,000 due to increased sales and to cover the net loss of
$3,938,000 for the period, which were partially offset by non-cash depreciation
and amoritization expenses of $6,823,000 and cash provided by an increase in
accounts payable of $2,545,000. The Company obtained $2,950,000 from financing
activities, which consisted primarily of additional net borrowings, and the
Company used $1,965,000 of cash on hand primarily to cover the cash used in
operations of $780,000, to fund the additions to property, plant and equipment
of $2,990,000 and to make payments into a debt service reserve fund of
$1,075,000.
Federal and state regulations require liability insurance coverage for
all facilities that treat, store, or dispose of hazardous waste, and financial
assurance that funds will be available for closure of these facilities, should a
facility cease operation, and post closure coverage where required by law. In
1989, the Company established a wholly-owned captive insurance company pursuant
to the Federal Risk Retention Act of 1986. This company qualifies as a licensed
insurance company and is authorized to write closure, professional liability,
and pollution liability insurance for the Company and its operating
subsidiaries. Investments are held by the captive insurance company as assets
against its insured liabilities and restricted for future payment of insurance
claims. In the nine months of 1997, the Company replaced a portion of the
closure insurance issued by its captive insurance company with bonds issued by a
bonding company. This allowed the captive insurance company to remit funds
previously classified as
18
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (continued)
restricted cash to the Company. In addition, on December 31, 1996, the Company
had on deposit collateral of $5,650,000 with a commercial insurance company to
provide for closure and post-closure of its incinerator and landfill. During
1996, the Company renegotiated its agreement with the insurance company to
replace collateral with a letter of credit. The cash from this transaction was
released to the Company in 1997. As a result of these two transactions, the
Company obtained $7,307,000 in the nine months ending September 30, 1997. The
Company used these funds, as well as proceeds from the sale of fixed assets of
$1,814,000, primarily to reduce debt by $1,032,000, to purchase equipment and
improve properties in the amount of $2,583,000 and to cover cash consumed in
operations of $3,696,000.
The Company expects 1998 capital additions to be in the range of
$4,300,000.
The Company's $35,000,000 Loan Agreement with a financial
institution provides for certain covenants the most restrictive of which require
the maintenance of a minimum level of working capital of $6,000,000 and adjusted
net worth of not less than $33,000,000. At September 30, 1998, working capital
was $14,263,000 and adjusted net worth was $38,193,000. In addition, the
Indenture under which the Company has outstanding $10,000,000 of industrial
revenue bonds (the "Bonds") contain certain covenants the most restrictive of
which require that the Company maintain a rolling four quarter ratio of earnings
before interest, income taxes, depreciation and amortization (EBITDA) to total
debt service of 1.25 to 1. On December 31, 1997 and September 30, 1998 the
Company was in violation of this covenant. On September 30, 1998, the debt
service coverage ratio was 1.16 to 1. Under the terms of the Indenture, the
deficiency in the debt coverage ratio will not result in a default, but the
Company was required to pay in six equal monthly installments into a debt
service reserve fund held by the Trustee for the Bonds a total amount equal to
one year's interest on the Bonds. Through September 30, 1998, the Company had
paid $1,075,000 into this fund, as required.
19
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (continued)
On September 30, 1998, funds available to borrow under the Revolver
were $5,300,000. Management believes that sufficient resources will be available
to meet the Company's cash requirements for the foreseeable future. The Company
has $50,000,000 of Senior Notes which mature in 2001. Some portion or all of the
borrowings under the Senior Notes will need to be refinanced by the maturity
date. The ability of the Company to refinance the Senior Notes at reasonable
interest rates is dependent upon improving results from operations and is
contingent on a favorable interest rate environment when the Company attempts to
refinance the borrowings.
Dividends on the Company's Series B Convertible Preferred Stock are
payable on the 15th day of January, April, July and October, at the rate of
$1.00 per share, per quarter; 112,000 shares are outstanding. Under the terms of
the preferred stock, the Company can elect to pay dividends in cash or in common
stock with a market value equal to the amount of the dividend payable. The
Company elected to pay the January 15, April 15, and July 15, 1998 dividends in
common stock. Accordingly, the Company issued 56,000 and 184,644 shares of
common stock to the holders of the preferred stock in the three month and nine
month periods ended September 30, 1998, respectively. The Company anticipates
that the preferred stock dividends payable through 1998 will be paid in common
stock.
YEAR 2000
As has been widely discussed in the media, companies around the world
are working on resolving the anticipated problems relating to the year 2000. The
problem stems from the fact that much of the computer software, computer
hardware and control devices produced in prior years provide only two digits
with which to record the year. This may result in these products not functioning
or producing unexpected results when the year 2000 is recorded as "00", and the
program or device is unable to differentiate whether the "00" represents the
year 1900 or 2000. Throughout 1998, the Company has been working on identifying
and correcting the year 2000 problems. Although the work is on-going, the
Company has identified potential year 2000 issues related to its management
information systems, control devices used at its plants, and readiness of
vendors and customers for the year 2000.
20
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (continued)
Starting in 1996, the Company began a major upgrade of its management
information systems in order to improve the availability of management
information with the ultimate aim being better control over costs and better
availability of management information, which management believes will yield
improved operating results. As a by-product of this upgrade, the Company
believes that all of its major management information systems are currently year
2000 compliant, with the exception of the accounts receivable and human resource
systems. The Company has installed an accounts receivable module as part of its
new financial software package. The Company is in the process of running the
accounts receivable system parallel to the existing system and anticipates that
the new accounts receivable system will be fully functional by the end of the
first quarter of 1999. The Company has identified a human resource system at a
cost of approximately $100,000 that it expects to be able to install in 1999. At
this time, the management of the Company believes that all major systems will be
year 2000 compliant prior to the end of 1999. Also, the Company has compiled a
list of non-core computer software and hardware that is not year 2000 compliant.
Although the cost of modifying or replacing the non-core software and hardware
that is not year 2000 compliant has not been determined, a review of the list
indicates that the cost will not be material to the results of operations of the
Company.
In addition to computer software and hardware, the Company utilizes a
variety of control devices in its plants, most of which are not date or time
sensitive. Based on an inventory of the control devices, the cost of replacing
the control devices that are not year 2000 compliant is expected to be
approximately $100,000. The Company plans to replace these control devices
during regularly scheduled plant shutdowns in the first quarter of 1999.
The Company relies on a large number of primary vendors to supply
required products and services. Since the unavailability of key goods and
services could potentially disrupt the Company's operations, letters have been
sent to all primary and secondary vendors to determine their readiness for the
year 2000. To date 80% of vendors have responded to the Company's inquiry and
all critical vendors are being individually contacted. The effort to qualify all
primary vendors and certain potentially key secondary vendors as to their
readiness for the year 2000 problem is on-going.
The Company relies on its customers to pay for services performed
within a commercially reasonable period of time. If the computer systems of
customers are not year 2000 compliant, there is a possibility that the
collection of bills, thus cash flow, could be adversely impacted in the first
quarter of 2000. In the first half of 1999, the Company plans on developing
policies and procedures to limit the extension of credit to those customers who
cannot represent to the Company that their systems are year 2000 compliant, so
that there is an assurance that customers who owe money at December 31, 1999
will be able to pay their bills in 2000.
21
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (continued)
As discussed above, the Company is trying to insure that all mission
critical software, hardware and control devices are year 2000 compliant and that
there will be no disruption of service to its client base. In addition, the
Company is trying to insure that primary suppliers, key secondary suppliers and
significant customers are ready for the year 2000. However, due to the pervasive
use of computers and control devices throughout all businesses, there is a risk
that certain key non-compliant year 2000 devices will be overlooked, which could
adversely affect revenues or cash flow early in the year 2000.
The Company has made significant progress on resolving problems
related to the year 2000. The Securities and Exchange Commission in Release
33-7558, DISCLOSURE OF YEAR-2000 ISSUES AND CONSEQUENCES BY PUBLIC COMPANIES,
INVESTMENT ADVISERS, INVESTMENT COMPANIES, AND MUNICIPAL SECURITIES ISSUERS,
dated August 4, 1998 requires that all companies disclose their most
reasonably likely worst case scenario assuming that they are unable to make
any further future progress on resolving known problems related to the year
2000. Although the Company intends to work diligently to resolve known year
2000 problems, the Company believes that the most reasonably likely worst
case scenarios of not being able to make any further progress on its known
year 2000 problems would be a decrease in revenue due to disruptions in plant
operations, a decrease in cash flow due to inefficient collection of monies
owed the Company because of the accounts receivable system, a disruption in
cash flow due to our customers not being able to pay their bills due to their
systems being non-compliant and a decrease in revenues due to the inability
of the Company to obtain required goods and services because of the vendor's
systems being non-compliant. The Company will continue to monitor the
situation and will continue to develop contingency plans as required.
NEW ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Management does not expect the statement to have a material impact on
its financial position or results of operations.
22
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As disclosed in the Form 10-K for the year ended December 31, 1997, the
Company joined an ongoing lawsuit against the City of Chicago challenging the
imposition of a waste charge by the City of Chicago on every gallon of waste
received at the Company's Chicago facility. Since 1990, the Company has paid
approximately $3,000,000 to the City pursuant to this charge.
The lawsuit challenges the legal authority of the City of Chicago to
impose the charge. The Company contends the charge is, among other things, an
unlawful tax on service occupations in violation of the Illinois Constitution.
The Company was seeking: (1) a declaration by the Circuit Court of Cook County
that the challenged charge is unconstitutional or otherwise unlawful; (2) an
injunction against the City's continued assessment and collection of the charge;
and (3) a refund of all charges paid plus interest.
On July 21, 1998 the Judge in the case issued a Final Order declaring
the City of Chicago waste fee to be unconstitutional under Illinois law. On
August 7, 1998 the City filed a motion with the Court to reconsider its Final
Order. On September 11, 1998 the Court denied the City's motion for
reconsideration of its July 21st Final Order.
On October 27, 1998 the Judge granted the Company's motion to dismiss
the City's affirmative defenses of waiver and estoppel with prejudice. The
defenses of laches and statute of limitations were dismissed without prejudice.
The City's affirmative defense of voluntary payment was allowed to stand.
The Company has until November 20, 1998 to file its response.
The Company cannot predict the outcome of these proceedings,
accordingly, no account receivable has been recorded on the books of the Company
relating to this lawsuit.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Debt
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
23
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibit 27 - Financial Data Schedule.
B) Reports on Form 8-K
None
24
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Clean Harbors, Inc.
-------------------------
Registrant
Dated: August 12, 1998 By: /s/ Alan S. McKim
--------------------------------
Alan S. McKim
President and
Chief Executive Officer
Dated: August 12, 1998 By: /s/ Roger A. Koenecke
---------------------------------
Roger A. Koenecke
Senior Vice President and
Chief Financial Officer
25
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