<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
MARCH 31, 1999
-----------------------
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 02184-7599
(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 10,607,990
- ------------------------------------- --------------------------------
(Class) (Outstanding at May 7, 1999)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGES
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<S> <C>
ITEM 1: FINANCIAL STATEMENTS
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2-3
Consolidated Statements of Cash Flows 4-5
Consolidated Statement of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7-9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-18
PART II: OTHER INFORMATION
Items No. 1 through 6 19
Signatures 20
</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
MARCH 31,
--------------------
1999 1998
------ ------
<S> <C> <C>
Revenues $44,648 $40,376
Cost of revenues 33,692 31,344
Selling, general and administrative expenses 9,113 7,897
Depreciation and amortization 2,366 2,284
------ ------
Loss from operations (523) (1,149)
Interest expense, net 2,229 2,340
------ ------
Loss before provision for income taxes (2,752) (3,489)
Provision for income taxes 90 90
------ ------
Net loss $(2,842) $(3,579)
------ ------
------ ------
Basic and fully diluted loss per share $(0.28) $(0.36)
------ ------
------ ------
Weighted average common
shares outstanding 10,514 10,184
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(1)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,552 $ 1,895
Restricted investments 1,203 2,366
Accounts receivable, net of allowance for doubtful
accounts of $1,129 and $1,013, respectively 37,042 41,409
Prepaid expenses 1,436 939
Supplies inventories 2,790 2,858
Income tax receivable 1,236 1,236
-------- --------
Total current assets 46,259 50,703
-------- --------
Property, plant and equipment:
Land 8,182 8,182
Buildings and improvements 39,677 39,521
Vehicles and equipment 79,762 79,430
Furniture and fixtures 2,190 2,190
Construction in progress 1,538 967
-------- --------
131,349 130,290
Less - Accumulated depreciation
and amortization 75,076 73,157
-------- --------
Net property, plant and equipment 56,273 57,133
-------- --------
Other assets:
Goodwill, net 19,850 20,031
Permits, net 13,079 13,322
Other 4,362 4,721
-------- --------
Total other assets 37,291 38,074
-------- --------
Total assets $139,823 $145,910
-------- --------
-------- --------
</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>
MARCH 31, DECEMBER 31,
1999 1998
(Unaudited)
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 3,461 $ 4,100
Accounts payable 15,600 17,998
Accrued disposal costs 5,631 6,335
Other accrued expenses 13,076 10,975
Income tax payable 10 50
-------- --------
Total current liabilities 37,778 39,458
-------- --------
Long-term obligations, less current maturities 67,134 68,774
Other 1,404 1,368
-------- --------
Total other liabilities 68,538 70,142
-------- --------
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 $5.6 million) 1 1
Common Stock, $.01 par value
Authorized-20,000,000 shares;
Issued and outstanding-10,521,355 and
10,420,874 shares, respectively 105 104
Additional paid-in capital 60,819 60,670
Accumulated other comprehensive loss (9) (10)
Accumulated deficit (27,409) (24,455)
-------- --------
Total stockholders' equity 33,507 36,310
-------- --------
Total liabilities and stockholders' equity $139,823 $145,910
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(3)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,842) $(3,579)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,366 2,284
Allowance for doubtful accounts 171 176
Amortization of deferred financing costs 85 196
Changes in assets and liabilities:
Accounts receivable 4,196 (1,087)
Income tax receivable -- 433
Prepaid expenses (497) (528)
Supplies inventories 68 26
Other assets 359 14
Accounts payable (2,497) 449
Accrued disposal costs (704) 1,699
Other accrued expenses 2,094 887
Income tax payable (40) 38
Other liabilities 36 (238)
------- -------
Net cash provided by operating activities 2,795 770
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (960) (754)
Proceeds from sale and maturities of
restricted investments 1,177 18
Cost of restricted investments acquired (12) (179)
Additions to permits (17) --
------- -------
Net cash provided by (used in) investing
activities $ 188 $ (915)
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(4)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under long-term
revolver $(1,614) $ 979
Payments on long-term obligations (750) (753)
Proceeds from employee stock purchase plan 38 31
------- ------
Net cash provided by (used in) financing activities (2,326) 257
------- ------
INCREASE IN CASH AND CASH EQUIVALENTS 657 112
Cash and cash equivalents, beginning of year 1,895 3,935
------- ------
Cash and cash equivalents, end of period $ 2,552 $4,047
------- ------
------- ------
Supplemental Information:
Non cash investing and financing activities:
Stock dividend on preferred stock $ 112 $ 112
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(5)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Series B Accumulated
Preferred Stock Common Stock Other
--------------------- ------------------- Additional Comprehensive Comprehensive
Number of $0.01 Par Number of $0.01 Par Paid-in Income Income
Shares Value Shares Value Capital (Loss) (Loss)
---------- --------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 112 $1 10,421 $104 $60,670 --- $(10)
Net loss --- --- --- --- --- $(2,842) ---
Other comprehensive income, net of tax:
Unrealized holding gains arrising during
the peroid --- --- --- --- --- 1 1
Reclassification adjustment for
gains included in net loss --- --- --- --- --- --- ---
-------
Other comprehensive income --- --- --- --- --- 1 ---
-------
Comprehensive loss --- --- --- --- --- $(2,841) ---
-------
-------
Preferred stock dividends:
Series B --- --- 71 1 111 --- ---
Employee stock purchase plan --- --- 29 --- 38 --- ---
---- ---- ------- ----- -------- -----
Balance at March 31, 1999 112 $1 10,521 $105 $60,819 --- $(9)
---- ---- ------- ----- -------- ----- -----
---- ---- ------- ----- -------- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
<S> <C> <C>
Balance at December 31, 1998 $(24,455) $36,310
Net loss (2,842) (2,842)
Other comprehensive income, net of tax:
Unrealized holding gains arrising during
the peroid --- 1
Reclassification adjustment for
gains included in net loss --- ---
Other comprehensive income --- ---
Comprehensive loss --- ---
Preferred stock dividends:
Series B (112) ---
Employee stock purchase plan --- 38
--------- --------
Balance at March 31, 1999 $(27,409) $33,507
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(6)
<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 statement of results of interim periods. The operating results for the
three months ended March 31, 1999 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, 1998 as filed with the Securities and
Exchange Commission.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Capitalization of Software Developed Internally
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"), effective for periods
beginning after December 15, 1998. SOP 98-1 provides guidance on defining
internal use software and the accounting for the costs thereof. The adoption of
this statement in the period ended March 31, 1999 did not have a significant
effect on the Company's results of operations or its financial position.
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 $24,500,00 revolving
credit portion (the "Revolver") and a $10,500,000 term promissory note. The
Revolver allows the Company to borrow up to $35,000,000 in cash and letters of
credit, based on a formula of eligible accounts receivable. At March 31, 1999,
the Revolver balance was $8,307,000, letters of credit outstanding were
$6,232,000 and funds available to borrow were approximately $7,100,000.
The Loan Agreement has covenants that require, among others, maintenance of a
minimum level of working capital and adjusted net worth. At March 31, 1999, the
Loan Agreement required minimum amounts of working capital and adjusted net
worth of $6,000,000 and $33,000,000 respectively. At March 31, 1999, the Company
had working capital and adjusted net worth of $8,481,000 and $34,507,000,
respectively. The Company must also maintain borrowing availability of not less
than $4,500,000 for sixty consecutive days prior to paying principal and
interest on its other indebtedness and dividends in cash on its preferred stock.
In the first quarter of 1999, the Company violated this covenant, which has been
waived by the financial institution through May 15, 1999.
(7)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 FINANCING ARRANGEMENTS (CONTINUED)
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 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. At December 31, 1997
the debt service coverage ratio was 1.04 to 1. Under the terms of the Bonds, the
deficiency in the debt coverage ratio did not and will not result in a default,
but the Company was required to pay into a debt service reserve fund held by the
Trustee for the Bonds a total amount equal to the annual debt service for one
year on the Bonds. Through March 31, 1999, the Company has paid $1,075,000 into
this fund, as required. Under the terms of the Bonds, the Company can request
that the balance of the debt service reserve fund be returned to the Company if
the debt service coverage ratio of 1.50 to 1 is met for two consecutive
quarters. For the quarters ended March 31, 1999 and December, 31, 1998, the debt
service coverage ratios were 1.68 and 1.58, respectively. In May 1999, the
Trustee for the Bonds returned the balance of the debt service reserve fund to
the Company. The balance of the debt service reserve fund was reflected as a
component of restricted cash at December 31, 1998, and of cash and cash
equivalents at and March 31, 1999.
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 1998, based upon this
review, the valuation allowance was increased to cover the value of all net
deferred tax assets. Accordingly, no tax benefit has been recorded relating to
the net losses and for the quarter ended March 31, 1999 and 1998. 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. If the Company reports earnings from operations 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.
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. A decision
is expected in the second quarter of 1999 regarding the administrative appeal.
The Company believes that it has properly reported its state income and intends
to contest the assessment vigorously. While the Company believes that the final
outcome of the dispute will not have a material adverse effect on the Company's
financial condition or results of operations, no assurance can be given as to
the final outcome of the dispute, the amount of any final
(8)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 INCOME TAXES (CONTINUED)
adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.
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>
Quarter Ended March 31, 1999
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
--------- ------ ------
<S> <C> <C> <C>
Net loss $ (2,842)
Less preferred dividends 112
--------- ------ ------
Basic and diluted EPS
(loss available to shareholders) $ (2,954) 10,514 $(0.28)
--------- ------ ------
--------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Loss
--------- ------ ------
<S> <C> <C> <C>
Net loss $ (3,579)
Less preferred dividends 112
--------- ------ ------
Basic and diluted EPS
(loss available to shareholders) $ (3,691) 10,184 $(0.36)
--------- ------ ------
--------- ------ ------
</TABLE>
The Company has issued options, warrants and convertible preferred
stock which are potentially dilutive to earnings. These have not been included
in the calculations, since their inclusion would have been antidilutive for the
above periods.
(9)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT
In addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "plans to," "estimates,"
"projects," or similar expressions. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Factors That May Affect Future
Results." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
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
March 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties 12.7 12.8
Other costs 62.8 64.8
---- ----
Total cost of revenues 75.5 77.6
Selling, general and administrative
expenses 20.4 19.5
Depreciation and amortization
of intangible assets 5.3 5.7
---- ----
Loss from operations (1.2)% (2.8)%
---- ----
---- ----
</TABLE>
(10)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Other Data:
- ----------
<S> <C> <C>
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) (in thousands) $1,843 $1,135
</TABLE>
REVENUES
Revenues for the first quarter of 1999 were $44,648,000, up
compared to revenues of $40,376,000 for the first quarter of the prior year. The
majority of the increase in revenues was due to an increase in revenue from site
services primarily due to a higher level of emergency response business for the
quarter ended March 31, 1999 compared to the same quarter of the prior year.
Billed hours on site services projects were flat as compared to the same quarter
of the prior year. Pricing on waste processed through the Company's facilities
increased by 1.3% for the quarter ended March 31, 1999 as compared to the same
quarter of the prior year. Revenue due to the volume of waste processed through
the Company's facilities was flat compared to the same quarter of the prior
year.
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; and direct shipment by
generators of waste to the ultimate treatment or disposal location.
COST OF REVENUES
Cost of revenues were $33,692,000 for the quarter ended March 31, 1999
compared to $31,344,000 for the quarter ended March 31, 1998, an increase of
$2,348,000. As a percentage of revenues, cost of revenues decreased from 77.6%
for the quarter ended March 31, 1998 to 75.5% for the quarter ended March 31,
1999. One of the largest components of cost of revenues is the cost of sending
waste to other companies for disposal. Disposal costs paid to third parties as a
percentage of revenue declined slightly from 12.8% for the quarter ended March
31, 1998 to 12.7% for the quarter ended March 31, 1999. This decrease was due to
continuing efforts to internalize the disposal of waste, to develop alternative
lower cost disposal technologies and to identify lower cost suppliers. Other
costs of revenues as a percentage of revenues declined from 64.8% for the
quarter ended March 31, 1998 to 62.8% for the quarter ended March 31, 1999. This
decrease was primarily due to increased margins on site services work due to the
types of jobs performed and improved pricing on waste processed through the
Company's facilities.
(11)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COST OF REVENUES (CONTINUED)
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. During the first
quarter of 1999, the Company commenced a strategic sourcing initiative in order
to reduce operating costs by identifying suppliers that are able to supply goods
and services at lower costs, by obtaining volume discounts where the Company is
currently purchasing goods and services from various suppliers and consolidating
these purchases with a small number of suppliers, and by reducing the internal
costs of purchasing goods and services by reducing the number of suppliers that
the Company uses through reducing the number of purchase orders that must be
prepared and invoices that must be processed. No assurance can be given that the
Company's efforts to manage future operating expenses will be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $9,113,000
for the three months ended March 31, 1999 from $7,897,000 for the three months
ended March 31, 1998, an increase of $1,216,000 or 15.4%. The largest components
of the increase are due to increases in headcount due to higher levels of
revenues, increases in headcount in sales and marketing due to strategic
business initiatives and increases in compensation to remain competitive in the
employment markets in which the Company operates. The Company also experienced
increases in non-payroll sales and marketing expenses related to sales
initiatives.
INTEREST EXPENSE, NET
Interest expense net of interest income was $2,229,000 for the first
quarter of 1999 as compared to $2,340,000 for the first quarter of 1998. The
decrease in interest expense is primarily due to a decrease in the average
balance of loans outstanding.
INCOME TAXES
For the three months ended March 31, 1999, income tax expense of
$90,000 was recorded on a pre-tax loss of $2,752,000 for an effective tax rate
of (3.3%), as compared to a tax expense of $90,000 that was recorded on a
pre-tax loss of $3,849,000 for an effective tax rate of (2.3%). 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 1998, based on this review, the
valuation allowance was increased to cover the value of all net deferred tax
assets. Accordingly, the Company recorded no benefit on its books for the future
potential value of net operating loss carryforwards for the quarters ended March
31, 1998 and 1999.
(12)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES (CONTINUED)
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
earnings from operations 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.
The $90,000 in income tax expense recorded for the each of quarters
ended March 31, 1998 and 1999 is due to the tangible property taxes and net
worth taxes that are levied as a component of state income taxes.
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. A decision
is expected in the second quarter of 1999 regarding the administrative appeal.
The Company believes that it has properly reported its state income and intends
to contest the assessment vigorously. While the Company believes that the final
outcome of the dispute will not have a material adverse effect on the Company's
financial condition or results of operations, no assurance can be given as to
the final outcome of the dispute, the amount of any final adjustments or the
potential impact of such adjustments on the Company's financial condition or
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company and employees acting on behalf of the
Company make forward-looking statements concerning the expected revenues,
results of operations, capital expenditures, capital structure, plans and
objectives of management for future operations, and future economic performance.
This report contains forward-looking statements. There are many factors which
could cause actual results to differ materially from those projected in a
forward-looking statement, and there can be no assurance that such expectations
will be realized.
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: utilize its facilities and
workforce profitably in the face of intense price competition; maintain or
increase market share in an industry which appears to be downsizing and
consolidating; realize benefits from cost reduction programs; 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 develop the
consulting and information services business.
(13)
<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 quarter ended March 31, 1999, the Company generated $2,795,000
of cash from operations. The primary sources of cash from operations were a
$4,196,000 reduction of the accounts receivable balance at March 31, 1999 as
compared to the balance at December 31, 1998 due to lower levels of sales in the
first quarter of 1999 as compared to the fourth quarter of 1998, and non-cash
expenses of $2,366,000 for depreciation and amortization, $171,000 for the
allowance for doubtful accounts and $85,000 for the amortization of deferred
financing costs. Partially offsetting these sources of cash was a net use of
cash of $1,107,000 due to a net reduction in the combined balances of accounts
payable, accrued disposal costs and other accrued expenses, at March 31, 1999
compared to those of December 31, 1998, which was in turn due to lower levels of
activities and timing of periodic interest payments on long-term debt
obligations in the first quarter of 1999 as compared to the fourth quarter of
1998.
In addition, the Company obtained $188,000 from investing activities.
The source of cash from investing activities was $1,177,000 which was almost
completely due to release of restricted funds that were held in a debt service
reserve fund at December 31, 1998. The debt service reserve fund is discussed
later in Management's Discussion and Analysis of Financial Condition and
Liquidity. Primarily offsetting the source of cash from investing activities was
a use of cash of $960,000 to purchase property, plant and equipment.
(14)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
The Company used the $2,795,000 generated from operations and the
$188,000 generated from investing activities primarily to reduce borrowings
under the revolving line of credit of $1,614,000, to reduce the outstanding
balance on the term loan by $750,000 and to increase the amount of cash on hand
by $657,000.
For the quarter ended March 31, 1998 the Company generated $770,000
form operations and the Company obtained $257,000 from financing activities,
which consisted primarily of additional net borrowings. The Company used these
funds primarily to purchase property, plant and equipment of $754,000 and to
make payments into a debt service reserve fund of $179,000.
The Company believes 1999 capital additions of approximately
$5,000,000 will be required to maintain existing capital assets, replace site
services equipment and upgrade information technology hardware and software.
However, the Company continues to evaluate potential acquisitions, and the
Company continues to evaluate opening additional site services offices within
and next to the Company's service areas. Thus, it is possible that capital
additions could exceed the $5,000,000 currently planned.
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 March 31, 1999, working capital was
$8,481,000 and adjusted net worth was $34,507,000. The Company must also
maintain borrowing availability of not less than $4,500,000 for sixty days prior
to paying principal and interest on its indebtedness and dividends in cash on
its preferred stock. In the first quarter of 1999, the Company violated this
covenant, which has been waived by the financial institution through May 15,
1999. Management believes that it will be able to comply with this covenant for
the foreseeable future, and the financial institution has stated it will
continue to waive this covenant, if violated, so long as the Company is in
substantial compliance with the covenant. However, no assurance can be given
that this covenant will not be violated and that this covenant will be waived,
if violated, in the future by the financial institution. There were no other
violations of loan covenants at March 31, 1999.
At March 31, 1999, funds available to borrow under the Revolver were
$7,100,000. 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.
(15)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
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 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. At December 31, 1997
the debt service coverage ratio was 1.04 to 1. Under the terms of the Bonds, the
deficiency in the debt coverage ratio did not and will not result in a default,
but the Company was required to pay into a debt service reserve fund held by the
Trustee for the Bonds a total amount equal to the annual debt service for one
year on the Bonds. Through March 31, 1999, the Company has paid $1,075,000 into
this fund, as required. Under the terms of the Bonds, the Company can request
that the balance of the debt service reserve fund be returned to the Company if
the debt service coverage ratio of 1.50 to 1 is met for two consecutive
quarters. For the quarters ended March 31, 1999 and December, 31, 1998, the debt
service coverage ratios were 1.68 and 1.58, respectively. In May 1999, the
Trustee for the Bonds returned the balance of the debt service reserve fund to
the Company. The balance of the debt service reserve fund was reflected as a
component of restricted cash at December 31, 1998, and of cash and cash
equivalents at March 31, 1999.
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, 1999 dividend in common stock.
Accordingly, the Company issued 71,340 shares of common stock to the holders of
the preferred stock in the period ended March 31, 1999. The Company anticipates
that the preferred stock dividends payable through 1999 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. Since 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.
(16)
<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 all 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 functional by the end of the second
quarter of 1999. The Company has purchased 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.
The Company has also compiled a list of secondary computer software and
hardware that is not year 2000 compliant. Although the cost of modifying or
replacing the secondary 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 replaced these control devices during
regularly scheduled plant shutdowns in April 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. A target date of July 31, 1999
has been established for the Company's primary vendors to satisfy such year 2000
requests. A contingency plan for backup vendors is being established and will be
implemented for those primary vendors that fail to comply.
(17)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (CONTINUED)
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 a
contingency plan should customers be unable to pay their bills when due in 2000.
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 software, hardware and control devices
will be overlooked by the Company, our vendors or our customers, 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 relating to the year 2000. The Company has interpreted this to
mean that the assumption is that there will be no 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 cash
flow due to inefficient collection of monies owed the Company because of the
accounts receivable system, a disruption in cash flow due to the Company's
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 PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1") 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.
The adoption of this statement in the period ended March 31, 1999 did not
have a significant effect on the Company's results of operations or its
financial position.
(18)
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No legal proceedings of a material nature have arisen in the first
quarter of 1999, and there have been no material changes during the first
quarter of 1999 in the pending legal proceedings disclosed in the Form 10-K for
the year ended December 31, 1998.
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
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
10.43 Key Employee Retention Plan Filed
herewith
27 Financial Data Schedule Filed
herewith
Reports on Form 8-K None
</TABLE>
(19)
<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: May 14, 1999 By: /s/ Alan S. McKim
-------------------------------------
Alan S. McKim
President and
Chief Executive Officer
Dated: May 14, 1999 By: /s/ Roger A. Koenecke
-------------------------------------
Roger A. Koenecke
Senior Vice President and
Chief Financial Officer
(20)
<PAGE>
Exhibit 10.43
KEY EMPLOYEE RETENTION PLAN
The Company recognizes that these are very difficult times in the environmental
services industry and desires to provide its key employees with a written
severance agreement which, when signed by the key employee and the Company, will
entitle the key employee to those Severance Benefits described below in the
event of a termination of his or her employment with the Company.
1. INVOLUNTARY TERMINATION. In the event that the key employee is terminated
involuntarily for any reason other than for "cause", the Key Employee
shall be entitled to receive the Severance Benefits described below.
Termination for "cause" shall be deemed to have occurred only if the
reason for such termination is any of the following:
(i) A material breach of the Key Employee's fiduciary duty to the
Company;
(ii) Willful, or repeated neglect or violation of duties after having
been previously warned of such neglect or violation; and
(iii) Entry against the Key Employee of a guilty plea, or a conviction,
judgment or order against the Key Employee in any proceeding or
action before any court relating to a willful violation of any
material law, rule or regulation relating to the business of the
Company or any of its affiliates or involving moral turpitude.
2. CHANGE IN CONTROL OF THE COMPANY. In the event of a Change of Control, as
defined below, and if within a period of 30 days after such Change of
Control, the Key Employee shall either (i) terminate his or her employment
with the Company for any reason, or (ii) shall not be offered a position
with the Company (or such other entity as may result from such Change of
Control, collectively "Successor"), equal to that which the Key Employee
held with the Company prior to the Change of Control, the Key Employee
shall be entitled to receive Severance Benefits. A position shall not be
deemed to be "equal" to that which the Key Employee held prior to the
Change of Control if such position does not have an equal or better
compensation package and similar job responsibilities, or its primary work
location is not within 30 miles of such location prior to the Change of
Control.
If the Key Employee shall accept a position with the Successor after the Change
of Control and the Successor shall thereafter, within a period of two (2) years
from the Change of Control, change the Key Employee position so as not to be
equal to the Key Employee position prior to the Change in Control, and if the
Key Employee shall thereafter within a period of 30 days terminate his/her
employment with the Successor, the Key Employee shall be entitled to Severance
Benefits.
A Change of Control shall be deemed to have occurred if the Company is a party
to any merger, consolidation or sale of assets, or there is a tender offer for
the Company's common stock, or a contestable election of the Company's Directors
and as a result of any such event, either (i) the directors of the Company in
office immediately before such event cease to constitute a majority of the Board
of Directors of the Company, or of the Company succeeding to the Company's
business, or (ii) any company, person or entity (including one or more persons
and/or entities acting in concert as a group) other than an affiliate of the
Company, gains "control" (ownership of more than fifty percent (50%) of the
outstanding voting stock of the Company) over the Company. The concept of
"control" shall be deemed to mean the direct or indirect ownership, beneficially
or of record, of voting stock of the Company. Notwithstanding the foregoing, it
shall NOT be deemed a Change of Control if the Company is "taken private"
whereby the Company's stock ceases to be registered under the Securities Act of
1933, if the current major stockholder of the Company (Alan S. McKim) continues
to maintain a role as an Executive Officer of the Company and he or his family
continues to own at least 25% of the outstanding voting stock of the Company or
any successor thereto.
<PAGE>
3. SEVERANCE BENEFITS. Severance Benefits shall consist of payment of one
year's base salary at the rate in effect at the time of
termination of employment, payable periodically in accordance with the
Company's normal executive salary payment policies, plus one year of
continued medical, dental, life insurance and other benefits, if any,
available to the Key Employee at the time of his or her termination of
employment. Notwithstanding the foregoing, in the case of Severance
Benefits which arise as a result of a Change of Control of the Company,
the base salary portion of Severance Benefits shall be paid in full, (less
applicable federal, state and/or local income tax withholding) no later
than thirty (30) days after termination of employment which gives rise to
the Severance Benefits. If the Key Employee shall not have obtained new
employment upon termination of employment with the Company, the Key
Employee shall also be entitled to receive up to $15,000 in payment by the
Company to an executive out placement firm chosen by the Key Employee to
assist the Key Employee in finding new employment.
4. NON-COMPETITION AGREEMENT. In order to be eligible to participate in the
Key Employee Retention Plan, a Key Employee must have entered into the
Company's current form of one year non-competition agreement.
5. UN-FUNDED PLAN. Participants in the Key Employee Retention Plan should be
advised that the benefits under this Plan have not been funded by the
Company, and beneficiaries of the Plan thus become general creditors of
the Company.
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,552
<SECURITIES> 1,203
<RECEIVABLES> 38,171
<ALLOWANCES> 1,129
<INVENTORY> 2,790
<CURRENT-ASSETS> 46,259
<PP&E> 131,349
<DEPRECIATION> 75,076
<TOTAL-ASSETS> 139,823
<CURRENT-LIABILITIES> 37,778
<BONDS> 67,134
0
1
<COMMON> 105
<OTHER-SE> 33,401
<TOTAL-LIABILITY-AND-EQUITY> 139,823
<SALES> 0
<TOTAL-REVENUES> 44,648
<CGS> 0
<TOTAL-COSTS> 33,692
<OTHER-EXPENSES> 11,479
<LOSS-PROVISION> 171
<INTEREST-EXPENSE> 2,229
<INCOME-PRETAX> (2,752)
<INCOME-TAX> 90
<INCOME-CONTINUING> (2,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,842)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
