ITEM 1. BUSINESS
General
Sevenson Environmental Services, Inc. (the "Company") was incorporated in the State of New York in 1977 and changed its state of incorporation to Delaware in 1989. Effective May 19, 1998, the Company was reincorported in New York as a result of a merger with its predecessor of the same name. The Company provides a comprehensive range of field services for the remediation of sites and facilities contaminated by hazardous materials ("site remediation"). These services include on-site treatment, containment, and excavation and removal of contaminated materials. The Company also decontaminates, demolishes and closes contaminated industrial facilities and provides industrial cleaning services. Sevenson has performed site remediation field services since 1979, when it was selected as the principal contractor for the remediation of the Love Canal site in Niagara Falls, New York. The Company also participates as an investor in ventures which acquire, clean up and sell contaminated sites ("brownfields").
The Company's strategy has been to capitalize on its extensive hazardous waste site remediation experience. The Company believes that it is one of only a few national companies with such a high degree of expertise in site remediation services.
The Company does not own or operate offsite hazardous waste transportation, storage or disposal facilities. When required, the Company contracts with others for these services.
Since its inception, the Company has been successful in marketing its services to both private and public sector customers. The following table summarizes revenue contribution from these customers during the last three years:
Contract Revenues Years Ended December 31, (Dollars in Millions) 1998 1997 1996 Public Sector $37.3 (44%) $29.9 (37%) $26.0 (30%) Private Sector $47.4 (56%) $52.0 (63%) $59.7 (70%)
Total $84.7 $81.9 $85.7
The Company's customers include major industrial corporations and government agencies. Since entering the business in 1979, the Company has performed over 750 contracts including contracts at 71 Superfund sites.
In performing its services, Sevenson emphasizes safety, quality and cost effectiveness. The Company performs most work with its own employees and equipment, which allows it to maintain a high degree of control over its operations.
The Company operates nationwide, but most of its operations are in the eastern United States. It currently operates through offices in Niagara Falls, New York, Delmont (Pittsburgh), Pennsylvania, - 3 -
Chadds Ford (Philadelphia), Pennsylvania, Chicago (Munster, Indiana) and Fayetteville (Atlanta), Georgia. The operations of Waste Stream Technology Inc., the Company's bioremediation and laboratory subsidiary, are conducted at office, laboratory and shop facilities in Buffalo, New York.
The Remediation Process
The remediation process consists of three phases; site assessment, remedial design, and, finally, field cleanup operations. The site assessment phase is largely investigative, involving a detailed evaluation of the hazardous waste problem and the consideration of alternative solutions. The remedial design phase involves the preparation of a detailed remediation plan for the chosen solution. The third phase is the field implementation of the site remediation plan, which can include on-site treatment, containment, and excavation and removal of contaminated materials.
The Company's business is performing this third phase, the actual cleanup or "remediation" of a site. In so doing, the Company draws on project management expertise derived from over 20 years of hazardous waste site remediation experience. The Company believes that this expertise enables it to accurately assess the costs and risks of site remediation projects and that its experience and reputation for safe and timely completion of such projects give it a competitive advantage, especially for larger and more difficult projects.
While some firms in the environmental business offer services in more than one phase of the remediation process, the Company has chosen to focus on field cleanup operations. Sevenson believes that substantial business opportunities exist for the site remediation services which the Company provides and that broad- based public support for the cleanup of hazardous waste sites ensures that such opportunities will continue to flow.
Market Dynamics
Hazardous waste contamination of the environment first came to national attention in 1978 with publicity regarding the Love Canal site in Niagara Falls, New York. In the years that followed, public concern was heightened by the discovery of thousands of additional contaminated sites throughout the country and by the growing perception of the public health risk posed by these sites. In response to public concern, several regulatory statutes were enacted including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("Superfund"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and the Resource Conservation and Recovery Act of 1976, as amended in 1984 ("RCRA"), among others.
The Superfund program, other regulatory programs and pressure from Congress and the general public for the cleanup of hazardous waste sites sustain demand for site remediation services provided by the Company.
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According to the EPA, as of September, 1998 there were 1,370 existing and proposed sites on the EPA's National Priorities List ("NPL"), of which 1228 are either at some phase of cleanup or are complete. In addition to the NPL sites, there are thousands of other lesser contaminated sites which will require cleanup. As more hazardous waste sites move out of the study and design phases of the remediation process, the demand for site remediation services will increase.
Private sector expenditures for site remediation result in part from federal, state and local government efforts to force potentially responsible parties ("PRPs") to address and fund the remediation of contaminated sites. PRPs often take responsibility for the remediation process in an effort to control and minimize their liability. If the PRPs are not identifiable or decline to accept responsibility for a site, federal, state or local government agencies may fund the project directly and take legal action against the identifiable PRPs for recovery of expenses and damages. Also, recently published regulations for the RCRA Corrective Action Program, which addresses the clean-up of active manufacturing facilities, should result in more private sector cleanup projects.
Company Services
The Company's site remediation field services include on-site treatment, containment, and excavation and removal of contaminated materials and the decontamination and demolition of closed industrial plants. The Company provides one or a combination of these services, as required for the specific project.
On-Site Treatment. On-site treatment involves treating hazardous materials at the site to reduce or eliminate the hazardous properties of the materials. On-site treatment includes a variety of techniques which either eliminate the substance permanently, reduce its toxicity or volume, or stabilize its constituents for disposal on-site or off-site at a permitted disposal facility. Treatment methods used by the Company include stabilization and fixation, filtration, dewatering, air stripping and carbon adsorption, precipitation, bioremediation and thermal treatment.
Stabilization and fixation are used for organic material (such as petroleum products, solvents, and certain chemicals) and inorganic material (such as heavy metals). Generally, these involve mixing a reagent (such as kiln dust, fly ash, cement, lime or clay) with the contaminated material in order to form a solid, semi- impermeable mixture which can be more easily handled for transportation and eventual disposal in an on-site or off-site facility. Fixating agents can be mixed with inorganic material to chemically bond or physically encapsulate the material to reduce the potential for migration to other areas.
Filtration involves passing contaminated liquids through a filtering media, such as sand, diatomaceous earth or fabric, to separate solid contaminants from the base liquid.
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Dewatering involves pumping semi-liquid waste into a press which separates solids and liquids under pressure.
Air stripping and carbon adsorption involve passing contaminated liquids through a chamber of counterflowing forced air which strips away volatile contaminants. This air is then passed through an activated carbon filter which absorbs the contaminants.
Precipitation utilizes an agent which chemically reacts with soluble contaminants in a liquid, separating the contaminants from the base liquid. These contaminants can then be removed for treatment or disposal.
Bioremediation utilizes naturally-occurring microorganisms to degrade certain organic contaminants to reduce the level of contamination to within approved limits. Bioremediation can be a particularly effective solution for petroleum, petroleum derivatives, and wood and pulp wastes.
Thermal Treatment involves the application of heat to remove and destroy contaminants present in a matrix, typically soil.
Containment. Containment systems are constructed to prevent the migration of hazardous materials from a site to the surrounding groundwater, surface water, soil or air. While containment can be a permanent remedial solution, it is also used as an interim step that is followed by excavation and removal or onsite treatment. The types of containment systems that the Company installs include containment cells, surface caps and slurry walls.
Containment cells are constructed to hold contaminated materials and prevent them from escaping into the surrounding environment. Construction typically requires the excavation and placement of soil, the building and installation of leachate collection systems, and the installation of clay and synthetic liners.
Surface caps are built over contaminated zones to prevent rainwater and surface water from entering the zone, becoming contaminated, and ultimately migrating to surrounding soil and groundwater. Surface caps can be installed on older landfills or surface impoundments as a permanent remedial solution or as a temporary measure prior to other forms of remediation. They are also installed on newly filled containment cells to provide long-term closure. These caps are typically made of clay and synthetic liners, which are covered with soil and plantings.
Slurry walls are relatively impermeable vertical barriers built below ground around a source of contamination to prevent the lateral movement of contaminated groundwater from the contaminated zone to the surrounding area. The walls extend from the ground surface down to an impermeable underground layer such as natural clay. Slurry walls are semi-permanent barriers which provide a relatively impermeable wall. The construction of slurry walls involves special techniques for constructing deep, narrow trenches and the careful mixing and placement of slurry (a special mixture of water, clay and other materials).
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Excavation and Removal. Excavation and removal involves the excavation of contaminated materials for containment, on-site treatment, or off-site disposal. When off-site disposal is required the Company subcontracts with licensed third parties for the transportation of the material for off-site disposal. As part of its quality control program, the Company regularly samples and analyzes excavated materials to verify that the contaminants are consistent with those identified in the remediation plan. To avoid undue liability exposure associated with the transportation and disposal of hazardous materials, the Company, as a matter of policy, will not assume title to, or the status of "generator" for such materials. Typically, the customer retains the status of generator and owner of the materials until disposal at which time the disposal facility operator assumes ownership.
Facilities Decontamination, Demolition and Closure
In addition to site remediation, the Company provides decontamination, demolition and closure services for deactivated industrial facilities. Company personnel use various techniques to decontaminate facilities for reuse or prior to demolition and closure. Demolition and closure services include dismantling large structures, draining liquid wastes from pipes and tanks, removing above and below-ground tanks, cleaning and disposing of contaminated equipment, and controlled demolition. While the Company may remove relatively small amounts of asbestos incident to its facilities decontamination services, it does not generally perform asbestos removal.
Industrial Cleaning Services
The Company uses hydroblasting and vacuuming to dislodge and remove deposits, wastes and debris from boilers, process equipment, pipes, tubes, drains, vessels, sumps and other facilities in operating industrial plants. Hydroblasting is the application of high pressure (up to 10,000 psi) streams of water to the area or surface to be cleaned. Vacuuming is accomplished using truck mounted wet/dry vacuum units capable of moving up to 5,000 cubic feet of air per minute.
Brownfields
The Company participates in ventures which acquire, clean up and sell contaminated sites ("brownfields"). The Company's participation generally will involve acting, through a subsidiary, as an investor in the venture, as well as the remediation contractor.
Operations
Project Management. At the proposal stage, each major project is assigned to one of the Company's Operations Divisions. Project proposals are prepared under the supervision of the Operations Division Manager by estimators who have broad experience in project management and field operations, and who are therefore knowledgeable in assessing the cost and time frame required to complete a project. Estimators work with field and technical - 7 -
personnel on an ongoing basis to keep current on changes in the Company's operating capabilities. When a contract is obtained, the project is assigned a project manager who maintains overall project responsibility, a project engineer who tracks progress and is responsible for quality control, a superintendent who is responsible for all field operations, and a safety officer who is responsible for implementing the site safety plan. Field production and related costs are monitored daily by the project engineer and project manager. On a weekly basis such costs are reviewed by the Operations Division Manager and compared against the original project budgets.
Quality Control. To ensure and document that remediation plan requirements are met, the Company develops a quality control program for each project. Such a program involves a schedule of observation, sampling and testing throughout each phase of the project to determine whether project specification requirements are being achieved.
Health and Safety. For each project, the Company's health and safety staff develops a comprehensive health and safety program designed to address the specific exposures anticipated to be encountered during the project. The programs generally address daily employee hygiene, use of required safety devices, monitoring of hazards, and employee training. Every program requires the monitoring of employee health through physicals at the beginning and end of the project for all employees. The Company's commitment to health and safety is reflected by citations and awards which the Company has received from both public and private sector customers and by the Company's Workers Compensation experience rating which has consistently indicated a loss rate well below average.
Equipment. The Company seeks to maintain high utilization of its equipment. Prior to purchasing specialized equipment, the Company first determines how the cost of such equipment can be fully amortized over one or two projects. The Company seeks to avoid purchasing equipment which will not provide an immediate, substantial return on investment and also a continuing, regular return thereafter.
Marketing
Sevenson markets its services nationwide with concentration in the eastern United States.
The Company's marketing activities are primarily conducted by senior technical and management professionals. They are responsible for contacting appropriate representatives of corporations known to have specific problems and maintaining communication with consulting engineering firms, analytical laboratories and specialty contractors as a source of potential new business. The Company also participates in industrial and hazardous waste trade shows. In the public sector, the Company monitors government contract procurements and responds to requests for proposals and for competitive bids.
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Approximately 71%, 78% and 87% of revenues for 1998, 1997 and 1996, respectively, were the result of work awarded on the basis of competitive bids in both the public and private sectors.
Customers
The Company's two largest customers in 1998 accounted for 28% and 14% of 1998 revenues. The Company's largest customer in 1997 accounted for 28% of 1997 revenues. The Company's two largest customers in 1996 each accounted for 22% of 1996 revenues. No other customer accounted for more than 10% of total revenues in any of the three years in the period ended December 31, 1998. Because of the nature of the Company's business, which involves large, discrete contracts often completed within one year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. The Company believes that the loss of the United States government as a customer would have a material adverse effect on its business.
Backlog
On February 28, 1999, the Company had an estimated backlog of work under contracts believed to be firm of approximately $89.2 million, as compared with an estimated backlog of approximately $69.3 million and $62.0 million on February 28, 1998 and February 28, 1997, respectively.
The value of backlog is subject to change as the scope of work on projects changes. Customers generally retain the right to change the scope of work and to receive an appropriate increase or decrease in the contract price. Government agencies always, and private sector customers usually, retain the right to terminate contracts with the Company at any time, with or without cause. As a result, substantially all of the Company's backlog of $89.2 million at February 28, 1999 is subject to such right of termination.
The Company believes that backlog is not necessarily indicative of revenues to be earned by the Company in the current year or subsequent periods.
Insurance and Bonding
The Company currently maintains general liability insurance policies with aggregate limits of $22 million. These policies contain standard exclusions, including exclusions of claims arising out of actual, alleged or threatened discharge, dispersal or release of pollutants. Some projects require the Company to purchase a policy of pollution liability insurance for the project. The Company has been able to purchase such policies on all projects which have required them.
In general, government entities, and to a lesser extent, private sector customers, require the Company to obtain surety bonds as security for the Company's completion of a contract.
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The Company has been able to secure all the insurance and surety bonding required by all contracts which it has received. However, there is no assurance that insurance will continue to be available, that the possible types of liabilities that may be incurred by the Company will be covered by its insurance or that the liabilities incurred by the Company, although covered, will not exceed the limits of such policies. Also, there is no assurance that the Company will continue to be able to obtain surety bonds or that the surety bonds the Company is able to obtain will be adequate for its business needs.
Competition
The Company competes with both small and large companies in each aspect of its business, although no company is dominant.
Some of the Company's competitors possess certain capabilities which the Company does not, including professional engineering services and off-site transportation, storage and disposal capabilities. When required, the Company contracts for these services, but the broader capabilities of some of the Company's competitors may give them an advantage in obtaining certain projects.
The Company believes the principal competitive factors in the site remediation industry are price, reputation, experience, technical proficiency and financial strength. The Company believes it effectively competes on the basis of these factors.
Regulation
General. The Company's customers, including federal and state governments and owners and operators of contaminated sites and facilities and other parties responsible for facility and site cleanup, are subject to extensive and evolving environmental laws and regulations administered by the EPA and various other federal, state and local environmental, safety and health agencies and authorities. These laws contribute to the demand for the Company's services. Although the Company's customers remain responsible by law for their environmental problems, the Company must itself comply with the requirements of those laws applicable to its services. The Company believes it is in substantial compliance with all federal, state and local laws and regulations governing its business.
RCRA. RCRA is the principal federal statute governing hazardous waste generation, treatment, storage and disposal. RCRA, or EPA- approved state programs at least as stringent, govern any waste handling activities involving substances classified as "hazardous". Regulations under RCRA for hazardous waste generators, transporters and owners and operators of hazardous waste treatment, storage or disposal facilities impose detailed operating, inspection, training, emergency preparedness and response standards and requirements for closure, continuing financial responsibility, manifesting, record keeping and reporting.
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Superfund. Superfund generally addresses the cleanup of sites at which hazardous substances are located and have been released or are threatened to be released into the environment. Superfund imposes joint and several liability for costs of cleanup and damages to natural resources upon: (a) certain owners or operators of hazardous substance sites; (b) any person who arranged for the disposal, transport or treatment by any other party of hazardous substances owned or possessed by such person; and (c) certain transporters of hazardous substances. In addition, under the authority of Superfund and its implementing regulations, detailed requirements apply to the manner and degree of remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment.
Among other things, Superfund authorizes the federal government either to remediate sites at which hazardous substances were disposed of and have been or are threatened to be released into the environment or to order, or offer an opportunity to, persons potentially liable for the hazardous substances to do so. In addition, Superfund requires the EPA to establish a National Priorities List ("NPL") of sites at which hazardous substances have been or are threatened to be released and which require investigation or cleanup.
SARA specifically provides that contractors deemed "response action contractors" with respect to any release or threatened release of a hazardous substance in connection with a site on the NPL are not, subject to certain exceptions, liable under Superfund or any other federal law to any person for injuries, costs, damages, expenses or other liabilities which result from such release or threatened release. The Company may be a response action contractor in respect to a portion of the work it performs. This protection only applies to releases or threatened releases on NPL sites. This protection does not apply in the case of a release that is caused by the negligence or intentional misconduct of the response action contractor. Further this protection does not affect the liability of any person under any warranty under federal, state or common law, the liability of any person under state statutory or common law or the liability of any employer who is a response action contractor to any employee under any provision of law. Certain states, including New York, have similar protections for response action contractors.
SARA also allows the government, under certain circumstances, to agree to indemnify and hold harmless a response action contractor against liability for negligence in carrying out a response action at an NPL site, unless such liability was caused by the contractor's gross negligence or intentional misconduct. Any such indemnity will have deductibles and a limit to the amount of available indemnification.
Although the Company makes a continuing effort to avoid Superfund liabilities, the failure of the Company to conform its services to the requirements of Superfund could subject the Company to liabilities which could have a material adverse effect on the Company's business.
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Other. The Company's services could be subject to other federal environmental protection laws, including, without limitation, The Clean Water Act, The Clean Air Act and the Toxic Substances Control Act. Many states have adopted laws for the protection of the environment which may affect the Company, including laws governing the generation, handling, transportation and disposition of hazardous substances, and laws governing investigation and cleanup of, and liability for, contaminated sites. Some of the state provisions are broader and more stringent than federal law and regulations. In addition, the Company is subject to the federal Occupational Safety and Health Act which imposes requirements for employee safety and health. The failure of the Company to conform its services to the requirements of other applicable federal, state or common laws could subject the Company to liabilities which could have a material adverse effect on the Company's business. In addition, the Company cannot predict the extent to which it may be affected by any law that may be enacted or enforced in the future, or by new interpretations of existing laws.
Employees
As of March 16, 1999, the Company had 222 full-time employees of whom 11 were officers, 74 were project management, engineering and estimating personnel, 30 were scientists and technical personnel, 5 were in business development and marketing, 30 were administrative personnel and 72 were field and shop personnel. In addition, the Company employs from 150 to 200 field workers on an as-needed basis. The Company's ability to retain and expand its staff of qualified engineers, estimators, technicians and field personnel will be an important factor in the Company's future success. To date the Company has not experienced difficulty in attracting and retaining qualified personnel and does not expect difficulty in the foreseeable future.
Work at the Company's various project sites is performed by regular Company personnel and by locally hired field workers. The Company has no national union affiliations. The Company does have union agreements which apply to projects in the Niagara Falls, New York area and to specific projects elsewhere.
The Company considers its relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company and its subsidiaries currently operate out of six separate facilities. The Company believes that its current facilities are adequate for its present operations.
The following table summarizes the location and character of all significant property owned or leased by the Company as of February 28, 1999:
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Square Lease Property Location Footage Expiration
Headquarters, shop and yard facilities Niagara Falls, NY 55,000 Owned Office Delmont, PA 3,000 Owned Office Chadds Ford, PA 4,600 July 31, 1999 Office Fayetteville, GA 2,000 August 31, 1999 Office Munster, IN 2,050 November 30,1999 Waste Stream Technology Inc. Buffalo, NY 52,000 Owned
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party are pending except a suit for patent infringement in which a jury returned a verdict of $975,000 against the Company during the second quarter of 1997. The Company believes it has meritorious bases for appealing the verdict and is doing so. The patent in suit expired in 1994 and thus will have no effect on current or future operations or results. The Company knows of no legal proceedings pending or judgments entered against any director or officer of the Company in his or her capacity as such.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and positions with the Company are as follows:
Name Age Title
Michael A. Elia 47 President, Chief Executive Officer, Director
Laurence A. Elia 48 Vice President and Director
Richard A. Elia 45 Executive Vice President and Director
William J. McDermott 49 Vice President-Finance, Secretary and Director
Dena M. Armstrong 41 Treasurer, Assistant Vice President-Finance and Director
Michael A. Elia has served as Chief Executive Officer of the Company since 1984. From 1982 to 1984 he served as Vice President in charge of all civil, heavy and highway construction operations of the Company and from 1979 to 1982 he was a project manager with the Company. He received his B.S. degree in Civil Engineering from Villanova University.
Laurence A. Elia has served as a Vice President of the Company since 1975 and in various executive capacities prior to that time. He is President of the Company's wholly-owned Canadian subsidiary. He received his A.B. and B.S. degrees in Engineering from Dartmouth College.
Richard A. Elia has served as a Vice President of the Company since 1982 and in various executive capacities prior to that time. From 1979 to 1982 he served as project manager for many major projects. He received his B.S. degree in Business Administration from Villanova University.
William J. McDermott has served as Vice President-Finance of the Company since 1986. From 1975 to 1986 he served as legal counsel and in various executive capacities with the Company. He received his J.D. and B.S. (Civil Engineering) degrees from the State University of New York at Buffalo. He is a member of the New York Bar.
Dena M. Armstrong joined the Company in 1975. She served in various project and headquarters administrative positions form 1975 to 1982. Since 1982 she has served as Assistant Vice President- Finance. She received her B.S. degree from Niagara University.
Michael, Laurence and Richard Elia are brothers; Dena M. Armstrong is their cousin.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Trading in the Company's Common Stock is reported on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol "SEVN". There is no market for the Company's Class B Common Stock.
The following table sets forth the high and low price of the Company's Common Stock as reported by the NASDAQ National Market System for the periods indicated (all prices are adjusted to reflect the eight-for-five stock split in the form of a 60% stock dividend which occurred in October, 1997):
YEAR QUARTER HIGH LOW
1998 4th Quarter 9 7 3/8 3rd Quarter 9 7 11/16 2nd Quarter 10 1/8 8 3/8 1st Quarter 12 1/2 8 1/2
1997 4th Quarter 14 1/2 10 3rd Quarter 15 12 2nd Quarter 13 9 1/2 1st Quarter 11 3/8 9 1/2
1996 4th Quarter 11 3/8 9 1/2 3rd Quarter 11 3/8 9 1/2 2nd Quarter 12 7/8 9 7/8 1st Quarter 12 9 1/2
(b) Approximate Number of Holders of Each Class of Common Stock. As of March 16, 1999, 2,110,779 shares of the Company's Common Stock were outstanding and the number of holders of record of that class on that date was 54. Because a substantial number of the Company's Common shares are held in street name, the Company believes that the number of beneficial owners of its Common Stock exceeds 700. As of the same date, there were 7,434,850 shares of the Company's Class B Common Stock outstanding which were held by five stockholders or in trust for their minor children.
(c) Dividends. Since the third quarter of 1994 the Company has paid a regular quarterly dividend. For the fourth quarter of 1998, the dividend rate paid was 3.5 cents per share of Common Stock and 3.18 cents per share of Class B Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information included under the caption "Five Year Selected Financial Data" on page 5 of the Sevenson Environmental Services, Inc. 1998 Annual Report to Stockholders is incorporated herein by reference.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL DATA AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" on pages 6 through 8 of the Sevenson Environmental Services, Inc. 1998 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company and its subsidiaries at December 31, 1998 and 1997, and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1998, together with the report thereon of Deloitte & Touche LLP dated February 5, 1999, are contained on pages 9 through 23 of the Sevenson Environmental Services, Inc. 1998 Annual Report to Stockholders and are incorporated herein by reference. Supplementary quarterly financial information contained on page 22 under "Quarterly Results" is incorporated herein by reference.
With the exception of the aforementioned information and the information incorporated by reference in Items 6 and 7, the Annual Report to Stockholders is not to be deemed filed as part of this Form 10-K Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors is contained under the caption "Election of Directors" in the Company's definitive Proxy Statement involving the election of directors at its 1999 Annual Meeting of Stockholders which the Company will file with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1998 and is incorporated herein by reference. Information related to Executive Officers of the Company appears on page 14 of this Annual Report on Form 10-K. The information included under "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement related to its 1999 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained under the captions "Executive Compensation", "Compensation Committee Interlocks and Insider Participation" and "Five-Year Stockholder Return comparison" in the Company's definitive Proxy Statement related to its 1999 Annual Meeting of Stockholders and is incorporated herein by reference.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained under the caption "Security Ownership of Management and Principal Stockholders" in the Company's definitive Proxy Statement related to its 1999 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained under the caption "Certain Transactions" in the Company's definitive Proxy Statement related to its 1999 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements and report of independent public accountants set forth on pages 9 through 23 of the Sevenson Environmental Services, Inc. 1998 Annual Report to Stockholders are incorporated by reference into this Annual Report on 10-K.
2. Financial statement schedules.
The following financial statement schedule should be read in conjunction with the financial statements incorporated by reference in Item 8 of this Form 10-K Annual Report:
Page Independent Auditor's Report on Schedules............. 19
Valuation and Qualifying Accounts..................... 20
Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in financial statements or notes thereto.
3. Exhibits - See the Exhibit Index on pages 21 and 22 of this Annual Report on Form 10-K.
The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired and upon receipt of payment of an amount equal to a charge of twenty-five cents for each exhibit page, with a minimum charge of two dollars per request. All requests should be addressed to the Vice President and Secretary of the Company at the address of the Company's principal offices.
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(b) Report on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of its fiscal year ended December 31, 1998.
(c) Exhibits Filed. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 16th day of March, 1999.
SEVENSON ENVIRONMENTAL SERVICES, INC.
/s/William J. McDermott _____________________________________ William J. McDermott Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed on the 16th day of March, 1999 by the following persons in the capacities indicated:
/s/Michael A. Elia /s/Arthur A. Elia _______________________________ _____________________________ Michael A. Elia, Director and Arthur A. Elia, Director President (Chief Executive Officer)
/s/Richard A. Elia /s/Laurence A. Elia _______________________________ _____________________________ Richard A. Elia, Director and Laurence A. Elia, Director Executive Vice President and Vice President
/s/William J. McDermott /s/Dena M. Armstrong _______________________________ _____________________________ William J. McDermott, Director, Dena M. Armstrong, Director, Vice President and Secretary Treasurer and Assistant (Chief Financial Officer) Vice President
/s/Joseph J. Castiglia /s/Robert S. Kelso _______________________________ _____________________________ Joseph J. Castiglia, Director Robert S. Kelso, Director
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Deloitte & Touche ___________ _______________________________________________ Deloitte & Touche LLP Telephone: (716)843-7200 Suite 250 Facsimile: (716)856-7760 Key Bank Tower 50 Fountain Plaza Buffalo, New York 14202
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
We have audited the consolidated financial statements of Sevenson Environmental Services, Inc. and Subsidiaries ("the Company") as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 5, 1999; such consolidated financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Sevenson Environmental Services, Inc. and subsidiaries, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
February 5, 1999
Buffalo, New York
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SEVENSON ENVIRONMENTAL SERVICES, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS _____________________________________________________________________________
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Description Additions _______________________ Balance at Charged to Beginning Cost and Charged to Balance at of Year Expenses Other Accounts Deductions End of Year
Allowance for doubtful accounts: 1996 $40,575 $0 $0 $0 $40,575 1997 40,575 $0 $0 $0 $40,575 1998 40,575 $0 $0 $0 $40,575
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EXHIBIT INDEX
Exhibit No.
3.1* Certificate of Incorporation 3.2* By-Laws. 9** Voting Agreement dated April 3, 1989 among Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.2* Agreement dated October 30,1981 between the Company and the Arthur A. Elia Trust, as amended and promissory note in the principal amounts of $1,000.000. 10.3* Agreement dated October 30, 1981 between the Company and the Alan R. Elia Trust, as amended, and promissory note in the principal amount of $1,000,000. 10.5** Stockholders Agreement dated April 3, 1989 among the Company, Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.6 Agreement dated as of January 1, 1997 between the Company and SCC Contracting, Inc. 10.7 Agreement dated as of January 1, 1997 between the Company and Sevenson Hotel Associates, Inc. 10.8** Tax Indemnity Agreement dated April 1, 1989 among the Company, Sevenson Environmental Ltd., SCC Contracting, Inc., Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.9* Indemnity Agreement dated April 17, 1989 among the Company, Sevenson Environmental Ltd., SCC Contracting, Inc., Albert Elia Building Company, Inc., Afore, Inc., Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.10* Split Dollar Insurance Agreement, dated March 1, 1984 between the Company and Michael A. Elia. 10.11* Split Dollar Insurance Agreement, dated March 1, 1984 between the Company and Laurence A. Elia. 10.12* Split Dollar Insurance Agreement, dated March 1, 1984, between the Company and Richard A. Elia. 10.13* Split Dollar Insurance Agreement, dated March 1, 1984, between the Company and William J. McDermott. 10.14* Sevenson Environmental Services, Inc. Pension Plan. 10.15* Sevenson Environmental Services, Inc. Profit Sharing Plan. 10.16* 1989 Sevenson Environmental Services, Inc. Incentive Stock Plan. 10.17** Option Agreement dated April 17, 1989 between the Company and Alan R. Elia, Sr. 13 Sevenson Environmental Services, Inc.'s 1998 Annual Report to Stockholders (such report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K Annual Report, is furnished for the information of the Commission and is not to be deemed "filed" as part of the Form 10-K). 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors 27 Financial Data Schedule
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* Incorporated by reference to the same exhibit numbers in the Company's registration statement on Form S-1 (File No. 0- 17536).
** Incorporated by reference to the same exhibit numbers in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-17536).
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EXHIBIT 13
1998 Annual Report to Stockholders
SEVENSON ENVIRONMENTAL SERVICES, INC.
Corporate Profile
Sevenson provides a comprehensive range of services for the remediation of sites and facilities contaminated by hazardous materials. Founded as a general construction business in 1917, Sevenson entered the remediation business in 1979 when it became the principal contractor for the remediation of the Love Canal site, Niagara Falls, New York. Sevenson has performed over 750 projects including projects at over 70 Superfund sites.
Headquartered in Niagara Falls, New York, the Company and its subsidiaries also maintain offices in Pittsburgh and Philadelphia, Pennsylvania; Atlanta, Georgia; Buffalo, New York; and Chicago, Illinois. Present full-time employees number 221. Sevenson's common stock trades on the National Market tier of The Nasdaq Stock Market (registered) under the symbol SEVN.
Notice of Annual Meeting
The Annual Meeting of the Stockholders of Sevenson Environmental Services, Inc., will be held on Tuesday, May 18, 1999 at 10:00 a.m. EDT at the Comfort Inn, One Prospect Point, Niagara Falls, New York 14303.
Contents
Page
Annual Message to Stockholders 4-5 Financial Review 6 Consolidated Statements of Earnings 12 Consolidated Balance Sheets 13-14 Consolidated Statements of Cash Flows 15-16 Consolidated Statements of Stockholders' Equity 17-19 Notes to Consolidated Financial Statements 20-34 Independent Auditors' Report 35 Management 36 Corporate Information 37
Forward-Looking Statement
Certain statements and information included herein constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes", "expects", "anticipates", "hopes", or words of
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similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied in such forward-looking statements. You are urged to review the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as well as all reports filed by the Company subsequent to the Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
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SEVENSON ENVIRONMENTAL SERVICES, INC.
Financial Highlights
For the years ended December 31 (In thousands except per share data) 1998 1997 1996 _________________________________________________________________
INCOME STATEMENT Revenue $ 84,700 $81,939 $85,749 Net Earnings $ 6,545 $ 4,719 $ 6,282 Earnings Per Share $ 0.66 $ 0.47 $ 0.62 Dividends Paid Per Share: Common $ 0.14 $ 0.14 $ 0.14 Class B Common $ 0.13 $ 0.13 $ 0.13 Weighted Average Common Shares Outstanding 9,946 10,104 10,106 ________ _______ _______
BALANCE SHEET - December 31 Cash, Cash Equivalents and Marketable Securities $ 59,924 $51,612 $49,597 Working Capital $ 62,106 $62,643 $65,738 Total Assets $103,464 $99,272 $97,085 Long-Term Debt $ 2,245 $ 2,000 $ 2,000 Stockholders' Equity $ 85,115 $84,373 $80,135 ________ _______ _______
Common Shares Outstanding 9,545 10,124 10,129 ________ _______ _______ Common Share Book Value $ 8.92 $ 8.33 $ 7.91
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To Our Stockholders:
I am pleased to report that our company made good progress in 1998. Revenues and margins were up while overhead expense was down. Perhaps best of all, we ended the year with a record backlog of work.
Revenues were up 3% to $84.7 million from $81.9 million in 1997. More significantly, earnings from operations increased 86% to $6.9 million from $3.7 million in 1997. Most of this improvement was due to the increased profitability of projects, but lower indirect and overhead expense also made substantial contributions. In all, these results demonstrate our success in turning things around after a disappointing 1997.
Net earnings for the year were $6.5 million (66 cents per share), up 38% over 1997's earnings of $4.7 million (47 cents per share). This increase was achieved despite a loss in the first quarter, our first such loss since 1990. As the year progressed, margins improved and for each quarter we reported higher earnings than the previous year's quarter. Contrast this with the previous year's downward trend in earnings from the second quarter of that year continuing through 1998's first quarter.
The Company ended the year with its strongest quarter of the year and with a record $91 million backlog to carry into 1999. Earlier in the year, a lack of quality bid opportunities and stiff competition caused the Company to experience difficulty in building backlog. The Company overcame this difficulty in the third quarter when we received two contracts from EPA Region II with a combined value of $26 million. With those contracts and others, we ended the third quarter and year with record backlog.
In 1999, as always, our success in increasing our backlog by winning new contracts will depend on ever changing industry conditions. Nevertheless, we came into 1999 with conditions greatly improved over the previous year and I am encouraged that we can build on our good start.
A disappointment in 1998 was our Brownfields business. Our efforts to close sales of sites which we currently own were frustrated. While our attention was devoted to those efforts, work on acquiring further sites was essentially suspended. We continue to believe that Brownfields present a significant opportunity for the Company and hope to make better progress in 1999.
In 1999 the Company plans to continue to expand its dredging, dewatering and water treatment capabilities. Throughout the country, contaminated sediments in waterways, lakes and harbors as well as in industrial waste lagoons and basins, are targeted for cleanup over the next several years. The Company has been performing this type of work for several years and has assembled the equipment and developed the reputation and expertise to establish itself as a leader in this business.
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The Company has received its first contract for work at the Oak Ridge, Tennessee, Department of Energy (DOE) site and another for work at the DOE's Savannah River site. Both Savannah River and Oak Ridge are multi-year, multi-billion dollar cleanup programs. We hope that these new contracts will lead us to other opportunities at those and other DOE sites.
On the private sector side of our business, we will continue to pursue sole source/preferred contractor status with Fortune 100 customers. The Company's outstanding performance and reputation are key to establishing these relationships. The Company assists customers from the earliest stages of a project, selecting remedial approaches, developing budgets and schedules, and expediting the project through completion. This approach has worked well for the Company and its customers, resulting in additional projects for the Company.
In closing, I thank our stockholders for their patience and understanding. After a couple of difficult years, we saw a turnaround in our performance and prospects in 1998. These I expect will lead to further improvement in 1999.
Cordially,
Michael A. Elia President and Chief Executive Officer
February 5, 1999
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SEVENSON ENVIRONMENTAL SERVICES, INC.
Financial Review
Five-Year Selected Financial Data (In thousands, except per share amounts)
Years Ended December 31, 1998 1997 1996 1995 1994 _________ ________ ________ ________ _______
INCOME STATEMENT DATA: Revenue $ 84,700 $ 81,939 $ 85,749 $102,472 $77,654 Earnings from Operations 6,862 3,670 6,946 13,851 11,524 Net Earnings 6,545 4,719 6,282 10,119 9,005 Basic and Diluted Earnings Per Share $ 0.66 $ 0.47 $ 0.62 $ 1.00 $ 0.89 _________ ________ ________ ________ _______
BALANCE SHEET DATA: DECEMBER 31 Working Capital $ 62,106 $ 62,643 $ 65,738 $ 64,777 $60,130 Total Assets 103,464 99,272 97,085 93,281 87,625 Long-Term Debt (including current maturities) 2,245 2,000 2,000 2,000 2,000 Stockholders' Equity 85,115 84,373 80,135 75,715 66,240 _________ ________ ________ ________ _______
Applicable per share amounts have been restated for the Company's stock split.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth certain items of selected consolidated financial information as a percentage of revenues for the periods indicated. This table and the subsequent discussion should be read in conjunction with the selected financial information and the Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company included elsewhere in this Annual Report.
Years Ended December 31, 1998 1997 1996
Revenue 100.0% 100.0% 100.0% Gross Profit 19.6 16.8 19.3 Selling, General & Administrative Expenses 11.5 12.3 11.2 Earnings from Operations 8.1 4.5 8.1 Earnings Before Income Taxes 11.7 8.5 10.9 Net Earnings 7.7 5.8 7.3
1998 Versus 1997 - Revenues for 1998 were $84.7 million, or 3% higher than 1997 revenues of $81.9 million. The minor increase was due to higher second quarter revenues ($28.9 million compared to $19.9 the prior year). One larger ($8.9 million) project begun and completed in the second quarter, was responsible for higher second quarter revenues. Revenues in the other quarters were either lower (first and third quarters) or only slightly higher (fourth quarter) than the prior year's corresponding quarters. Revenues were relatively flat over the years 1998 and 1997 for two reasons. First, the Company's backlog of signed contracts at the beginning of both years was about the same ($60.6 million in 1998 and $65.0 million in 1997). Second, the Company experienced difficulty building backlog from the fourth quarter of 1997 through the first half of 1998. Competition and weak private sector demand were primary causes of the difficulty.
The inability to build backlog ended in the third quarter with receipt of two contracts from EPA Region II with a combined value of $26.9 million. Backlog at September 30 was a record $98.7 million (compared to the previous record for that date of $76.0 million a year earlier). At year's end, back-log stood at $91.1 million which is a record for that date (compared to $60.6 million a year earlier and $65.0 million two years earlier, the previous record).
Earnings from operations increased 86% to $6.9 million from $3.7 million in 1997. The increase was attributable to higher gross margin (19.6% versus 16.8%) and, to a lesser extent, lower selling, general and administrative expense (SG&A).
Gross margin reflects the profit margin of projects performed during the year. Individual project profitability varies dependent upon the nature of the project, competition, and the impact of
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operational conditions upon project execution, all of which are unique to each project. For the years prior to 1996, the Company's gross margin was in the range of 20% to 25%. The gross margin of 19.6% realized in 1998 was slightly below this range. Without the impact of an $8 million project, which was performed under dispute and is the subject of a claim (no effect of which is included in the year's results), gross margin would have been in excess of 22%. Gross margin was also higher due to lower indirect costs. Indirect costs for equipment repair and maintenance, insurance and transportation were all lower. The decline in these costs was in part due to an initiative by management to control and reduce these costs.
SG&A expense was down 4% to $9.7 million compared to $10.1 million in 1997. Marketing, main office, and legal and accounting expenses were lower, but the decreases in these categories were partially offset by higher branch office expense. Again, this reduction was due in part to a management initiative to reduce expense.
Interest income was $2.4 million, virtually unchanged from 1997. The Company realized gain on sale of marketable securities of $852,000, also virtually the same in 1997.
The effective tax rate was 33.8% as compared to 32.5% in 1997. The higher rate was due to higher earnings from operations as a percentage of pre-tax earnings versus interest income. Interest income consists primarily for tax exempt and dividend income which have a lower effective tax rate.
1997 Versus 1996 - Revenue for 1997 was $81.9 million 4% lower than 1996's revenue of $85.7 million Revenue was affected by postponement of two large projects which were postponed for reasons specific to the affected projects. A further cause of lower revenue was the Company's loss of potential contracts to aggressive bidding by competitors. While aggressive bidding is not unusual, it was a greater factor in 1997 due to the size of projects out for bid, which were generally smaller and thus attracted more bidders.
At the end of the year, the Company's backlog of signed contracts stood at $60.6 million compared to $65.0 million a year earlier. Backlog was lower despite the fact that backlog September 30 was a record for that date $76.0 million. In the fourth quarter a lack of new contract opportunities and competition combined to lower backlog.
Gross profit margin for 1997 was 16.8% versus 19.3% the prior year. Gross margin was lower due to a revenue shortfall on one larger project, and, to a lesser extent, by higher than expected costs on others. Gross margin was lower than usual in 1997 due principally to the impact of two projects. Without those two projects, which had combined 1997 revenue of $9 million, gross margin would have been 20.9%.
Partially offsetting lower project gross margin was lower indirect cost, which raised overall gross margin by about 1%. Indirect costs were lower due principally to lower insurance costs.
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Selling, general and administrative expense increased 5% to $10.1 million from $9.6 million in 1996. Increases in legal and travel expense were the principal contributors to the increase. Legal expense was higher due to litigation costs.
Interest income was $2.4 million, up 9% from the prior year's interest income of $2.2 million. Higher interest rates and invested balances combined to produce the increase.
In 1997, the Company realized a gain of $.3 million on the sale of its ownership interest in a Brownfield site, the Company's first completed Brownfield venture.
The effective tax rate was 32.5% versus 32.8% for 1996. The lower effective rate was chiefly due to lower earnings from operations as a percentage of pre-tax earnings versus interest income. Interest income consists primarily of tax exempt and dividend income which have a lower effective tax rate.
Fluctuations in Quarterly Results - The commencement or completion of projects within a particular quarter, the seasonal, weather-affected nature of the Company's business, the spending decisions of major customers, and the timing of regulatory decisions relating to projects, among other factors, may cause the Company's results to vary significantly from quarter to quarter and from year to year.The Company believes that these variations will continue in the future. The following selected financial data has been derived from unaudited interim financial statements which, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary to fairly present the information for such periods. Quarterly results of operations are not necessarily indicative of results to be achieved for full fiscal years.
1998 Net Quarter Revenue Earnings ________________________________________________________________ (In thousands) 1st $13,269 $ (239) 2nd 28,910 2,135 3rd 20,260 2,112 4th 22,261 2,537
1997 Net Quarter Revenue Earnings ________________________________________________________________ (In thousands) 1st $15,655 $ 714 2nd 19,945 2,034 3rd 24,855 1,195 4th 21,484 776
Liquidity and Capital Resources - Net cash provided by operating activities was $15.8 million as compared to $10.8 million in 1997. Higher cash receipts from customers and lower payments to subcontractors, suppliers and employees were responsible for the
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increase. Higher cash receipts were due to timing differences in the receipt of contract progress payments from customers. The timing of the receipt of progress payments is a function of project progress and contract payment terms. Lower payments to subcontractors etc., reflect, in part, increased margins.
Net cash used in investing activities was $4.3 million, down from $6.6 million in 1997. The decrease was due principally to lower Brownfield sites investment (see below). Also down were capital expenditures. Capital expenditures are generally for field equipment, either typical construction equipment, such as trucks, backhoes and bulldozers, or specialized processing and treatment equipment and facilities. The Company's decision to invest in such equipment depends upon the needs of current projects, the availability of needed equipment (either from the Company's fleet or by rental),and the anticipated future use of the equipment if purchased.
The Company paid a regular quarterly dividend of 3.5 cents per share of Common Stock and 3.18 cents per share of Class B Common Stock. Total dividends paid were $1.3 million.
The Board of Directors has authorized the repurchase of up to 1,200,000 shares of which 1,102,051 had been repurchased through December 31, 1998. During 1998, the Company repurchased 583,811 shares at a cost of $4.8 million.
In 1995 the Board of Directors authorized the Company to pursue the business strategy of acquiring, cleaning-up and disposing of "Brownfield" sites, real property that is unmarketable or of substantially reduced value due to the presence of contamination. In 1996 the Company acquired interests in, and commenced the cleanup process at, two Brownfield sites. In 1997 the cleanup and sale of one of these sites were completed and the Company acquired interests in one additional site. During 1998 no new sites were purchased nor were any sites sold. However, the Company continued to invest in the cleanup of the two remaining sites and purchased the interest of another party in one of the sites.At the end of 1998, the Company's investment in Brownfield sites was $10.2 million. The Company will invest further funds in the cleanup of one of the remaining sites (cleanup at the other sites is substantially complete) and intends to make further investments in the Brownfield redevelopment business. The Company's ultimate total investment in this business will depend upon the Company's success in finding and acquiring suitable Brownfield sites.
On December 31, 1998, the Company had working capital of $62.1 million versus $62.6 million a year earlier. Working capital included $59.9 million in cash, cash equivalents and marketable securities. The Company expects that existing funds and cash generated by operations will be sufficient to meet all working capital and capital investment needs for the foreseeable future.
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Year 2000 - The Company is aware of the "Year 2000" issue which affects most corporations and concerns the inability of information systems, primarily computer software programs, to properly recognize and process date-sensitive information relating to the Year 2000 and beyond. The Company believes it is pursuing appropriate courses of action to identify and address Year 2000 readiness issues including the purchase of an entirely new, Year 2000 ready accounting software system. The Company believes that it is on schedule to complete its Year 2000 initiatives before mid-year 1999 and does not expect the cost of compliance to exceed $200,000.
The Company does not believe its operations are significantly imperiled by Year 2000 issues. Other than accounting functions, which are being addressed, the principal operating functions of the Company are not dependent on information systems and thus are not exposed to material disruption by the failure of information systems to operate properly. To the extent that information systems are used as tools in these operating functions and their availability is reduced or lost due to Year 2000 issues, the Company would revert to manual backup systems without a material adverse effect on its day-to-day operation.
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SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA) _________________________________________________________________ 1998 1997 1996
REVENUE (Note 10) $ 84,700 $ 81,939 $ 85,749 __________ __________ __________ COSTS AND EXPENSES: Direct and indirect costs: 68,109 68,214 69,217 Selling, general and administrative (Note 1) 9,729 10,055 9,586 __________ __________ __________ 77,838 78,269 78,803 __________ __________ __________ EARNINGS FROM OPERATIONS 6,862 3,670 6,946 __________ __________ __________ OTHER: Interest income 2,377 2,385 2,168 Interest expense (210) (226) (206)
Realized gain on sale of marketable securities 852 863 414 Realized gain on sale of real estate 0 299 0 __________ __________ __________ 3,019 3,321 2,376 __________ __________ __________ EARNINGS BEFORE INCOME TAXES 9,881 6,991 9,322
INCOME TAXES (Notes 1 and 7) 3,336 2,272 3,040 __________ __________ __________
NET EARNINGS $ 6,545 $ 4,719 $ 6,282 ========== ========== ========== BASIC AND DILUTED EARNINGS PER SHARE (Note 1) $ 0.66 $ 0.47 $ 0.62 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 9,945,805 10,104,252 10,106,190 ========== ========== ========== CASH DIVIDENDS PER SHARE: Common Stock $ 0.14 $ 0.14 $ 0.14 ========== ========== ==========
Class B Common Stock $ 0.13 $ 0.13 $ 0.13 ========== ========== ==========
See notes to consolidated financial statements.
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SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA) _________________________________________________________________
ASSETS 1998 1997
CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 10,851 $ 4,522 Marketable securities (Note 2) 49,073 47,090 Accounts receivable, net (Note 3) 13,439 16,532 Costs and estimated earnings on contracts in progress in excess of related billings (Notes 1 and 4) 2,514 4,847 Prepaid expenses and other current assets 621 688 ________ _______
Total current assets 76,498 73,679 ________ _______
PROPERTY AND EQUIPMENT (Note 1): Land 307 308 Buildings and improvements 3,529 3,507 Construction and field equipment 18,700 18,040 Vehicles 5,786 5,596 Office furniture and equipment 1,723 1,671 ________ _______ 30,045 29,122 Less accumulated depreciation 16,996 14,763 ________ _______ Total property and equipment, net 13,049 14,359 ________ _______
INVESTMENT IN BROWNFIELD REAL ESTATE (Note 1) 10,192 8,631 ________ _______
OTHER ASSETS (Note 1) 3,725 2,603 ________ _______
TOTAL ASSETS $103,464 $99,272 ======== =======
See notes to consolidated financial statements.
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SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 _________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES: Accounts payable: Current $ 5,514 $ 5,392 Retentions 396 643 Note payable - current (Note 5) 662 12 Compensation, income taxes and other current liabilities (Note 7) 2,134 1,773 Deferred income taxes (Notes 1 and 7) 102 151 Amounts billed in excess of costs and estimated earnings on contracts in progress (Note 1 and 4) 5,584 3,065 ________ _______ Total current liabilities 14,392 11,036 ________ _______
DEFERRED INCOME TAXES (Notes 1 and 7) 1,712 1,863 ________ _______
NOTES PAYABLE (Note 5) 2,245 2,000 ________ _______ STOCKHOLDERS' EQUITY (Notes 1, 6 and 9): Common Stock, $.01 and $.10 par value: Authorized 12,000,000 shares, Issued 3,212,830 and 3,161,240 shares 33 316 Class B Common Stock, $.01 and $.10 par value: Authorized 8,000,000 shares, Issued 7,434,850 and 7,486,440 shares 74 748 Preferred Stock, $.10 par value: Authorized 1,000,000 shares, Outstanding - none 0 0 Additional paid-in capital 25,420 25,463 Retained earnings 67,001 61,872 ________ _______ 92,528 87,399 Treasury stock (1,102,051 shares and 518,240 shares common stock, at cost) (8,487) (3,723) ________ _______ 84,041 83,676 Accumulated other comprehensive income: Unrealized gain on marketable securities, net of tax (Note 2) 1,074 792 Cumulative translation adjustment 0 (95) ________ _______ Total accumulated other comprehensive income 1,074 697 ________ _______ Total stockholders' equity 85,115 84,373 ________ _______ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,464 $99,272 ======== ======= - 14 -
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) ________________________________________________________________ 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Cash receipts from customers $ 92,699 $ 89,368 $ 85,814 Cash payments to subcontractors, suppliers and employees (76,074) (77,976) (76,900) Interest received 2,377 2,385 2,168 Interest paid (210) (226) (206) Taxes paid (3,412) (2,725) (1,977) Tax refunds received 421 8 122 _________ _________ ________ Net cash provided by operating activities 15,801 10,834 9,021 _________ _________ ________ CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased (23,258) (25,627) (45,096) Investments sold 22,054 28,114 42,006 Capital expenditures (1,276) (2,577) (5,383) Acquisition and remediation costs (2,349) (7,544) (1,857) Change in notes receivable 459 1 1 Proceeds from sale of fixed assets 7 13 945 Proceeds from the sale of real estate 69 1,069 0 ________ ________ ________ Net cash used in investing activities (4,294) (6,551) (9,384) ________ ________ ________ CASH FLOWS FROM FINANCING ACTIVITIES: Debt proceeds 1,073 41 331 Principal payments of debt (166) (360) (749) Proceeds from exercise of stock options 0 388 31 Acquisition of treasury stock (4,764) 0 (709) Dividends paid (1,321) (1,302) (1,295) ________ ________ ________ Net cash used in financing activities (5,178) (1,233) (2,391) ________ ________ ________ NET CHANGE IN CASH AND CASH EQUIVALENTS 6,329 3,050 (2,754) ________ ________ ________ CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,522 1,472 4,226 ________ ________ ________ CASH AND CASH EQUIVALENTS, END OF YEAR $10,851 $ 4,522 $ 1,472 ======== ======== ======== See notes to consolidated financial statements. - 15 -
1998 1997 1996
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net earnings $ 6,545 $ 4,719 $ 6,282 Adjustments to reconcile net earnings to net cash provided by operating activities: Bad debt expense 0 0 24 Depreciation and amortization 2,548 2,406 2,405 Increase in cash surrender value of life insurance (331) (326) (222) Provision for deferred income taxes (395) 412 482 Loss (gain) on sale of real estate 40 (299) 0 Gain on sale of marketable securities (852) (863) (414) Loss (gain) on sale of fixed assets 15 17 (15) Change in assets and liabilities affecting cash flow: Accounts receivable 3,093 8,103 1,916 Costs and estimated earnings on contracts in progress in excess of related billings 2,333 (1,551) (740) Prepaid expenses and other current assets 67 17 141 Other assets (17) (4) 13 Accounts payable (125) (2,241) (1,242) Compensation, income taxes and other current liabilities 361 (416) 1,486 Amounts billed in excess of costs and estimated earnings on contracts in progress 2,519 860 (1,095) _______ _______ _______
NET CASH PROVIDED BY OPERATING ACTIVITIES $15,801 $10,834 $ 9,021 ======= ======= =======
See notes to consolidated financial statements.
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SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 _________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business - Sevenson Environmental Services, Inc. (the "Company") was incorporated in the State of New York in 1977 and changed its state of incorporation to Delaware in 1989. Effective May 19, 1998, the Company was re-incorporated in New York as a result of a merger with its predecessor of the same name. The Company provides a comprehensive range of field services for the remediation of sites and facilities contaminated by hazardous materials including some Company-owned Brownfields. The Company's site remediation field services include on-site treatment, containment, and excavation and removal of contaminated materials. Other company services include the decontamination, demolishing, and closing of deactivated industrial facilities and industrial cleaning and decontamination services to operating plants and refineries. The remediation process consists of three phases, namely, site assessment, remedial design, and site remediation. The third phase is the field implementation of the site remediation plan and is the phase in which the Company participates.
The Company provides its services in the United States. The Company's customers include major industrial corporations and government agencies. Because of the nature of the Company's business, which involves large, discrete contracts often completed within a year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. Management believes that the loss of the United States government as a customer would have a material adverse effect on its business.
Basis of Presentation - All majority-owned subsidiary companies are included in the consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated.
Related Party Transactions - SCC Contracting, Inc. ("SCC"), a construction company owned by the five principal shareholders of the Company, has been, and is expected to continue to be, operated out of office facilities owned by the Company and has used, and is expected to continue to use, to varying degrees, the Company's office personnel, yard and shop facilities, computer resources, equipment and services of the same management and other personnel. The Company rents equipment owned by SCC for which the Company pays the fair market rate.
A formal agreement between the Company and SCC was adopted to provide guidelines for the performance and pricing of intercompany services and use of facilities. This services agreement specifies various formulae to determine charges to be made for the provision of services and facilities and equipment usage. The formulae are
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intended to fairly allocate expenses between the businesses. During the years ended December 31, 1998, 1997, and 1996, expenses allocated to SCC amounted to $135,722, $195,918 and $148,436, of which $16,759, $18,604 and $0 remained outstanding as of December 31, 1998, 1997 and 1996, respectively. During the years ended December 31, 1998, 1997 and 1996, SCC allocated expenses of $168,348, $53,850, and $228,962, respectively, to the Company related to the use of equipment, of which $168,348, $53,850, and $176,679 remained outstanding as of December 31, 1998, 1997 and 1996, respectively.
Segment Information - The business operations of the Company are concentrated in one segment, which is the remediation of sites and facilities contaminated by hazardous materials including some Company-owned Brownfields.
Cash and Cash Equivalents - Cash and cash equivalents represent demand deposits with banks, certificates of deposit held by banks or financial institutions, money market funds and commercial paper, all having original maturities of three months or less. The Company places its temporary cash investments with high credit quality financial institutions.
Investment in Brownfield Real Estate - Investment in Brownfield real estate represents investments in non-wholly owned subsidiaries which own various tracts of contaminated land ("Brownfields") which were acquired during 1997 and 1996. The Company has agreed to perform site remediation services at the sites. The value of the asset includes the purchase price in addition to costs incurred in the site assessment, remedial design and site remediation.
The Company expects the land to be sold upon remediation. The Company will recognize any gain or loss on the real estate transaction at time of sale.
Other Assets - Other assets represent the cash surrender value of officers' life insurance policies and various other intangible assets.
Property, Equipment and Depreciation - Property and equipment are carried at cost and are being depreciated using straight-line methods over the estimated useful lives of the related assets.
Method of Accounting for Contracts - The accompanying consolidated financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. The amount of revenue recognized is not related to the progress billings to customers.
On all projects, the amount of earnings recognized at statement date is that portion of the total estimated contract earnings that the cost expended bears to the anticipated final cost, based on current estimates of cost to complete the project.
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Contract costs include all direct labor and benefits, materials installed in the project, subcontractor costs, outside vendor equipment rental and other direct costs including shop and yard charges.
As contracts extend over one or more years, revisions in cost and earnings estimates during the course of the project are reflected in the accounting period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements.
Operating Cycle - Assets and liabilities related to contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets, as they will be liquidated in the normal course of contract completion, although this may require more than one year.
Selling, General and Administrative Expenses - These expenses are charged to operations as incurred and are not allocated to contract costs.
Income Taxes - The Company provides for deferred taxes on all temporary differences (principally depreciation, prepaid expenses, bad debts and contract reserves) which are transactions reported for tax purposes in periods other than for financial reporting purposes.
Method of Accounting for Stock-Based Compensation - The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," effective January 1, 1996. As permitted in that standard, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock-based compensation.
Earnings Per Share - Effective December 31, 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces previous earnings per share ("EPS") reporting requirements and requires the dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The calculation of diluted EPS does not consider the effects of antidilution. The diluted earnings per share calculation after rounding was not different than basic earnings per share calculation.
Accounting Standards Pronouncements - During 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 addresses the reporting and display of comprehensive income and its components.
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SFAS No. 130 divides comprehensive income into two categories which are "net income" and "other comprehensive income". The category known as "other comprehensive income" refers to all changes in stockholders' equity during a period except changes resulting from net income or loss, investments by stockholders and distributions to stockholders. Items considered comprehensive income include unrealized gains and losses on certain investments in debt and equity securities. The adoption of SFAS 130 resulted in additional disclosures, including a revision of previously disclosed information, but had no effect on the financial condition or results of operations of the Company. The Company has elected to display comprehensive income in the statements of stockholders equity, net of reclassification adjustments. Reclassification adjustments are made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods. The reclassification adjustment before tax for the years ended December 31, 1998, 1997, and 1996 amounted to $(852),$(863), and $(414), respectively. The reclassification adjustment, net of tax for the years ended December 31, 1998, 1997 and 1996 amounted to $(571), $(578), and $(277), respectively.
During 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of the Enterprise and Related Information." SFAS No. 131 requires disclosure of segments of a company's business based upon how a company is organized for making operating decisions and assessing performance. As the Company's disclosure of business segments did not change in 1998 from that disclosed in previous years, the adoption of SFAS No. 131 had no effect on the financial condition or results of operations of the Company.
During 1998, the Company adopted the provisions of SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The adoption of SFAS No. 132 resulted in additional disclosures about the Company's defined contribution plans, but had no effect on the financial condition or results of operations of the Company.
Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements during the reported period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications of 1997 and 1996 balances have been made to conform with classifications used in 1998.
2. MARKETABLE SECURITIES
The portfolio of marketable securities consists of equity securities, debt securities, mutual funds and certificates of deposit classified as available-for-sale or trading securities.
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Investments are reported at fair value estimated based upon quoted market prices. Realized holding gains and losses are included in earnings. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. Unrealized holding gains and losses for trading securities are included in earnings. The Company classifies debt securities as trading securities when it is the Company's intent to resell the securities with the objective of generating profits.
A summary of marketable securities at December 31, 1998 and 1997 follows:
(In Thousands) December 31, 1998 1997 ___________________ Available for sale: Common stock $ 6,056 $ 4,884 Preferred stock 62 188 Municipal bond inventory 11,484 13,447 Mutual funds 19,918 19,484 Trading securities - at market, which approximates cost 11,553 9,087 ________ _______ Total $ 49,073 $47,090 ======== =======
Gross unrealized holding gains and losses at December 31, 1998 totaled $1,722,000 and $119,000 respectively, and $1,308,000 and $176,000, respectively, at December 31, 1997.
Gross unrealized gains and losses by security are as follows:
(In Thousands) December 31, ____________________________________________ 1998 1997 Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ____________________________________________
Common Stock $ 1,145 $ 119 $ 711 $ 67 Preferred stock 12 0 13 0 Municipal bond inventory 73 0 169 0 Mutual Funds 492 0 415 109 _______ _____ _______ _____ $ 1,722 $ 119 $ 1,308 $ 176 ======= ===== ======= =====
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Contractual maturities for investments in debt securities available-for-sale at December 31, 1998 and 1997 (in thousands) are as follows:
(In Thousands) December 31, 1998 1997 _____________________ Due in one year or less $ 2,721 $ 4,474 Due after one year through three years 3,982 6,857 Due after three years 4,781 2,116 _______ ________ Total $11,484 $13,447 ======= ========
Actual maturities may differ from contractual maturities because some issuers have the right to prepay obligations. Should a need arise for additional funds, it is the Company's opinion that all securities are readily marketable thus the total investments in debt securities available for sale are included as current assets.
Gross gains of $1,262,000 in 1998, and $888,000 in 1997, and $451,000 in 1996 and gross losses of $410,000 in 1998, $25,000 in 1997 and $37,000 in 1996 were realized on the sale of investments. The cost of securities sold is based on the specific identification method.
3. ACCOUNTS RECEIVABLE
(In Thousands) December 31, 1998 1997 ____________________ Current estimates $10,883 $14,235 Retentions 2,338 1,989 Due from related companies, officers and employees 256 333 Other 2 16 _______ ______ 13,479 16,573 Less allowance for doubtful accounts 40 41 _______ ________ Total $13,439 $16,532 ======= ========
The Company anticipates that substantially all retentions will be collected within the next year.
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4. CONTRACTS IN PROGRESS
(In Thousands) December 31, ____________________ 1998 1997 Accumulated expenditures on contracts in progress $43,660 $55,073 Estimated earnings thereon 10,951 10,128 _______ _______ 54,611 65,201 Less applicable progress billings 57,681 63,419 _______ _______ Total $(3,070) $ 1,782 ======= =======
The contracts are shown in the accompanying consolidated balance sheet as follows: (In Thousands) December 31, _________________ 1998 1997
Costs and estimated earnings on contracts in progress in excess of related billings $ 2,514 $ 4,847 Billings on contracts in excess of costs and estimated earnings (5,584) (3,065) _______ _______
Total $(3,070) $ 1,782 ======= =======
5. NOTES PAYABLE
Notes payable represents: a) $2,000,000 owing to the former stockholders of a construction company purchased by the Company in 1981. Interest on these notes accrues at the rate of 9% per annum. These notes must be repaid within six months after each former stockholder's death. It is anticipated that repayment will be funded by insurance on the life of each former stockholder; b) notes for $527,055 and $11,774 were outstanding as of December 31, 1998 and 1997, respectively, with various vendors for the purchase of construction equipment. These notes mature at various dates between August 15, 1999 and January 1, 2000 and do not bear interest. c) additional notes for $380,000 were outstanding as of December 31, 1998, related to the purchase of National Conservation Corp. during the year. These notes mature on September 1, 2001 and do not bear interest.
6. CAPITAL STOCK
During 1998, the stockholders approved the Company's re-incorporation in New York State (see Note 1). In connection with such re-incorporation the par value of Common Stock and Class B Common Stock was reduced from $.10 per share to $.01 per share.
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During 1997, the Company had an eight-for-five stock split. All per share and average outstanding common share data were effected retroactively for the split. As a result of this action approximately 1,150,000 shares of Common Stock and 2,830,000 shares of Class B Common Stock were issued to stockholders of record on October 27, 1997. $398,000 was transferred to common stock from additional paid-in capital.
The authorized capital stock of the Company consists of 12,000,000 shares of Common Stock, $.01 par value, 8,000,000 shares of Class B Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.10 par value. The Company has issued 3,212,830, 3,161,240 and 3,083,720 shares of Common Stock and 7,434,850, 7,486,440 and 7,524,760 shares of Class B Common Stock as of December 31, 1998, 1997 and 1996, respectively. No shares of Preferred Stock have been issued. Holders of Common Stock are entitled to elect 25% of the Board of Directors so long as the number of outstanding shares of Common Stock is at least 10% of the total number of outstanding shares of both classes of Common Stock.
Except for the election or removal of Directors as described above and except for class votes as required by law, holders of both classes of common stock vote as a single class on all matters, with each share of Common Stock having one vote per share and each share of Class B Common Stock having ten votes per share.
Cash or property dividends to the holders of common stock may be paid as follows:
(i) cash or property dividends may be declared and paid on the Common Stock without being declared and paid on the Class B Common Stock; and
(ii) no cash or property dividends may be declared and paid on the Class B Common Stock unless dividends at least 10% greater in amount per share are paid concurrently on the Common Stock.
Dividends paid in shares of Common Stock or Class B Common Stock may be paid as follows:
(i) shares of Common Stock may be paid to holders of shares of Common Stock or, if there is no Common Stock outstanding, to holders of Class B Common Stock, and shares of Class B Common Stock may be paid to holders of Class B Common Stock; and
(ii) the same number of shares shall be paid in respect of each outstanding share of Common Stock and Class B Common Stock.
At the option of the holder of record, each share of Class B Common Stock is convertible at any time into one share of Common Stock. During 1998, 1997 and 1996, 51,590, 38,320, and 27,280 shares, respectively, of Class B Common Stock were converted into shares of Common Stock.
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The authorized Preferred Stock is available for issuance from time to time in the future at the discretion of the Board of Directors of the Company, without stockholder approval. The Board of Directors has authority to prescribe for each series of Preferred Stock it establishes, the relative ranking with other series, the voting rights, if any, the dividend rate, the redemption and liquidation rights, the conversion rights, if any, and any other rights, preferences, qualifications, limitations or restrictions of the particular series.
The stockholders have entered into an agreement pursuant to which they have a pro rata right of first refusal to purchase shares of Class B Common Stock proposed to be sold or disposed of by any of them to persons other than family members or executive officers of the Company and their family members, so long as such persons are approved by a majority in interest of the holders of Class B Common Stock. To the extent the rights of first refusal are not exercised, such rights may be assigned to the Company. Transferees take their shares of Class B Common Stock subject to the Stockholders Agreement. If the right of first refusal is not exercised, the party proposing to dispose of Class B Common Stock must, prior to the disposition, convert such shares into shares of Common Stock.
The Class B stockholders are parties to a Voting Agreement pursuant to which all shares of Class B Common Stock are to be voted in accordance with the majority vote, except in situations in which there exist certain conflicts of interest. The Voting Agreement is for a term of ten years and is subject to renewal.
In November, 1990, the Board of Directors approved a plan to repurchase up to 320,000 shares, which represents 3% of its outstanding common stock. In August, 1992, the Board of Directors increased the number of shares to 480,000, which represents 5% of its outstanding common stock. In August, 1995, the Board of Directors increased the number of shares to 800,000, which represents 8% of its outstanding common stock. In August 1998, the Board of Directors increased the number of shares to 1,200,000, which represents 11% of its outstanding common stock. Through December 31, 1998 the Company had repurchased a total of 1,102,051 shares for $8,487,000.
7. INCOME TAXES
The provision for income taxes is comprised of the following: (In Thousands) Year ended December 31, _________________________________ 1998 1997 1996
Currently payable: Federal $3,043 $1,413 $1,980 State 688 447 578 ______ ______ ______ 3,731 1,860 2,558 ______ ______ ______
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Deferred: Federal (337) 346 397 State (58) 66 85 ______ ______ ______ (395) 412 482 ______ ______ ______ Total $3,336 $2,272 $3,040 ====== ====== ======
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Year ended December 31, _________________________________ 1998 1997 1996
Provision based on statutory rate 34.0% 34.0% 35.0% State income taxes, net of federal tax benefit 4.2 5.9 4.7 Tax-exempt interest and dividends (4.6) (7.8) (7.4) Other 0.2 0.4 0.5 _____ _____ _____ Total 33.8% 32.5% 32.8% ===== ===== =====
Deferred taxes relating to temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes is as follows:
(In Thousands) Year ended December 31, _________________________________ 1998 1997 1996
Depreciation $ (247) $ 195 $ 526 Prepaid expenses (21) 76 (13) Contract reserves 136 24 0 Contingency reserve 0 138 0 Investment in joint ventures (282) 0 0 Other 19 (21) (31) _______ ______ ______ Total $ (395) $ 412 $ 482 ======= ====== ======
At December 31, 1998 the components of net deferred tax assets/liabilities are as follows:
(In Thousands) December 31, ____________________ 1998 1997 Total of all deferred tax assets $ 734 $ 467 Total of all deferred tax liabilities $2,548 $2,481
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Management has evaluated the available evidence about the future taxable income and other possible sources of realization of deferred tax assets. A valuation allowance against deferred tax assets at the balance-sheet date is not considered necessary because it is more likely than not the deferred tax asset will be fully realized.
The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return.Such returns have been audited and settled through the year 1995.
8. PENSION PLANS
The Company participates in industry-wide pension, welfare and health benefit funds for union employees. These plans are defined contribution plans. Total pension cost in the industry-wide pension, welfare and health benefit funds for union employees for the years ended December 31, 1998, 1997 and 1996 amounted to approximately $1,100,000, $1,600,000 and $1,600,000. Other eligible employees participate in a Company-sponsored defined contribution money purchase pension plan covering salaried and office employees and certain hourly employees of the Company for which contributions are made at the rate of 7.0% of defined compensation up to $60,600 and then 10.5% thereafter. No contribution will be calculated on compensation in excess of $150,000. Total pension expense for employees in the defined contribution plans for the years ended December 31, 1998, 1997, and 1996 amounted to $640,000, $580,000 and $520,000, respectively.
In addition, the Company has a defined contribution profit-sharing plan covering most regular non-union employees. The amount of contribution, if any, is at the discretion of the Board of Directors, and is not to exceed the maximum amount deductible for income tax purposes. Contributions of $200,000, $180,000 and $200,000 were made for the years ended December 31, 1998, 1997 and 1996, respectively.
No significant changes occurred during the period that affected comparability for the aforementioned pension plans, such as a change in the rate of employer contributions, a business combination, or a divestiture. The Company does not maintain any other post-retirement benefit plans.
9. INCENTIVE STOCK PLAN
Effective March 1, 1989, the Company adopted the Sevenson Environmental Services, Inc. 1989 Incentive Stock Plan. The Plan is administered by the Compensation Committee of the Board of Directors and no member of the Committee may participate in the Plan, except that non-employee Directors, who may be members of the Committee, will receive a non-discretionary option of 4,800 shares of common stock thirty business days after their election to the Board. The Plan authorizes the Committee to grant to key employees, as it sees fit, incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock. No incentive stock options may be granted after March 1, 1999. Up to 600,000 shares of Common Stock are available for issuance under the Plan. - 30 -
Incentive stock options may be granted with durations of no more than ten years from the date of grant and the option price per share of incentive and nonqualified stock options and stock appreciation rights may not be less than the fair market value of the Common Stock at the time the option is granted. The total number of shares granted under these options at December 31, 1998 is 406,700, of which 200,740 shares are currently exercisable and 45,780 shares have been canceled. These options expire ten years from the date the options were granted and are subject to forfeiture if certain employment requirements are not met.
The following summarizes incentive stock option activity for the three years ended December 31, 1998: Price Ranges Shares Per Share ___________________________________ Outstanding January 1, 1996 164,000 $6.88-$12.34 Granted 68,800 $10.63 Exercised (4,480) $6.88-$7.50 Cancelled (14,400) $6.88-$10.78 ________ Outstanding December 31, 1996 213,920 $6.88-$12.34 Granted 58,500 $14.00 Exercised (39,200) $6.88-$10.78 Cancelled (7,900) $6.88-$10.78 ________ Outstanding December 31, 1997 225,320 $6.88-$14.00 Granted 57,000 $8.00 Cancelled (4,280) $10.78-$14.00 ________ Outstanding December 31, 1998 278,040 $6.88-$14.00 ========
Options Outstanding ________________________________________ Number Weighted Weighted Outstanding at Average Average December 31, Remaining Exercise Range of Exercise Prices 1998 Contractual Life Price ________________________________________________________________
$6.88 - $8.75 138,500 6.9 years $ 8.26 $10.63 - $14.00 139,540 8.1 years 12.96 _______ 278,040 =======
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Options Exercisable Number Weighted Exercisable at Average December 31, Exercise Range of Exercise Prices 1998 Price ________________________________________________________________ $6.88 - $8.75 70,720 $ 7.72 $10.63 - $14.00 130,020 11.47 _______ 200,740 =======
The Plan also provides for the award of shares of the Company's Common Stock subject to restrictions on disposition ("Restricted Stock"). While the restrictions remain in effect, the participant cannot sell or transfer the shares of Restricted Stock, but he or she has the other rights of a stockholder, including the right to vote and to receive dividends. Restricted Stock awarded under the plan is subject to the terms and conditions of the Plan and to other terms and conditions as the Committee specifies. The participant will forfeit to the Company his or her Restricted Stock if his or her employment with the Company and its subsidiaries terminates for any reason excepting death, prior to the expiration of the restrictions. No Restricted Stock has been awarded under the Plan.
At December 31, 1998 and 1997, the Company had 278,040 and 225,320 shares outstanding related to stock options with a range of exercise prices of $6.88 to $14.00 in both years at a weighted-average exercise price of $10.62 and $11.31, respectively, and with a weighted-average remaining contractual life in years of 7.5 for each year. Stock options with respect to 186,340 and 155,520 shares were exercisable at December 31, 1998 and 1997, respectively at a weighted-average exercise price of $10.15 and $10.36, respectively. The weighted-average fair value of stock options granted for the years ended December 31, 1998 and 1997, were $3.37 and $9.00, respectively.
Pro forma information regarding net income and earnings per common share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options and awards under the fair value method of that standard. The fair value of those stock options were estimated at the date of grant using a binomial option pricing model with the following weighted-average assumptions for the years ended December 31, 1998 and 1997: risk-free interest rates of 7.75% and 8.50%, respectively; dividend yields of 1.8% and 1.2%, respectively; volatility factors of the expected market price of the Company's common stock of 28% and 44%, respectively; and a weighted-average expected life of 7.5 for each year.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and net earnings per common share for the years ended December 31, 1998, 1997, and 1996 were $6,416, $4,364, and $5,997 and $.65, $.43, and $.59 respectively. - 32 -
10. MAJOR CUSTOMERS
The Company's two largest customers in 1998 accounted for 28% and 14% of 1998 revenues. The Company's largest customer in 1997 accounted for 28% of 1997 revenues. The Company's two largest customers in 1996 each accounted for 22% of 1996 revenues. Due to the nature of the Company's business, major customers fluctuate from year to year. No other customer accounted for more than 10% of total revenues in any of the three years in the period ended December 31, 1998.
11. CONTINGENCIES
The Company is a defendant or plaintiff in various claims and lawsuits arising in the normal course of business. The ultimate outcome of these actions cannot presently be determined. It is the opinion of management and its counsel that there will not be any material adverse effects on the Company's consolidated financial statements as a result of these actions.
12. BACKLOG
The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 1998, 1997 and 1996 and from contractual agreements on which work has not yet begun.
(In Thousands) 1998 1997 1996 ____________________________ Balance, January 1 $ 60,596 $ 64,961 $ 43,613 Contract adjustments 19,756 4,261 16,928 New contracts 95,953 72,286 90,649 ________ ________ ________ 176,305 141,508 151,190 Less contract revenue earned 85,212 80,912 86,229 ________ ________ ________ Balance, December 31 $ 91,093 $ 60,596 $ 64,961 ======== ======== ========
13. QUARTERLY RESULTS (UNAUDITED)
Unaudited summarized results for each quarter in 1998, 1997 and 1996 are as follows (in thousands, except per-share data):
First Second Third Fourth Quarter Quarter Quarter Quarter _______________________________________________________________ 1998: Revenues $ 13,269 $ 28,910 $ 20,260 $ 22,261 Gross margin 1,263 5,376 4,904 5,048 Provision for income taxes (266) 1,242 1,096 1,264 Net earnings (239) 2,135 2,112 2,537 Basic and diluted earnings per share (0.02) 0.21 0.21 0.26 _______________________________________________________________ - 33 -
1997: Revenues $ 15,655 $ 19,945 $ 24,855 $ 21,484 Gross margin 2,956 4,997 3,551 2,692 Provision for income taxes 291 1,160 599 222 Net earnings 714 2,034 1,195 776 Basic and diluted earnings per share 0.07 0.20 0.12 0.08 _______________________________________________________________ 1996: Revenues $ 13,858 $ 19,092 $ 23,374 $ 29,425 Gross margin 2,284 4,597 4,573 5,078 Provision for income taxes 250 923 969 898 Net earnings 483 1,985 1,816 1,998 Basic and diluted earnings per share 0.05 0.20 0.17 0.20 ______________________________________________________________
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Sevenson Environmental Services, Inc. Niagara Falls, New York
We have audited the accompanying consolidated balance sheets of Sevenson Environmental Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sevenson Environmental Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York February 5, 1999
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Management
Board of Directors
Michael A. Elia President and Chief Executive Officer
Arthur A. Elia Former President and Chief Executive Officer
Laurence A. Elia Vice President
Richard A. Elia Executive Vice President
William J. McDermott Vice President, Chief Financial Officer and Secretary
Dena M. Armstrong Treasurer and Assistant Vice President
Joseph J. Castiglia Former President and Chief Executive Officer, Pratt & Lambert United, Inc. (paint, industrial coatings and adhesives manufacturer)
Robert S. Kelso Former President and Chief Executive Officer, Calspan Corporation (an aerospace research and development company)
Audit Committee Joseph J. Castiglia Robert S. Kelso
Officers
Michael A. Elia President and Chief Executive Officer
Richard A. Elia Executive Vice President
Laurence A. Elia Vice President
William J. McDermott Vice President, Chief Financial Officer and Secretary
Dena M. Armstrong Treasurer and Assistant Vice President
Paul C. Thomson Vice President
Mason G. Wheeler Vice President
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Paul J. Hitcho, Ph.D. Vice President and Director of Health and Safety
John C. Robbins, P.E. Vice President
Philip R. DeLuca Vice President
Michael L. Lock Vice President
Corporate Information
Headquarters 2749 Lockport Road Niagara Falls, NY 14302-0396 (716) 284-0431 Internet: http://www.sevenson.com
Offices
Atlanta 105 Bradford Square Suite A Fayetteville, GA 30215 (770) 460-4620
Chicago 9245 Calumet Avenue Suite 101 Munster, Indiana 46321 (219) 836-0116
Philadelphia 4 Lake View Drive Chadds Ford, PA 19317 (215) 388-0721
Pittsburgh 100 Rock Springs Road Delmont, PA 15626 (412) 468-3377
Subsidiaries
Sevenson Environmental Services of PA, Inc.
Sevenson Industrial Services, Inc. 2749 Lockport Road Niagara Falls, NY 14302-0396 (716) 284-0431
Waste Stream Technology Inc. 302 Grote Street Buffalo, NY 14207 (716) 876-5290
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Auditors
Deloitte & Touche LLP 50 Fountain Plaza Suite 250 Buffalo, New York 14202
Transfer Agent and Registrar
American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005
Stock Listing
National Market tier of The Nasdaq Stock Market (registered) under the symbol SEVN
Form 10-K
Single copies of the Company's 1998 Annual Report on Securities and Exchange Commission Form 10-K will be provided without charge to stockholders upon written request directed to the Secretary, Sevenson Environmental Services, Inc., 2749 Lockport Road, Niagara Falls, New York 14302-0396.
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EXHIBIT 21
List of Subsidiaries All Wholly-Owned
Subsidiary Where Incorporated
Sevenson Environmental Ltd. Canada
Waste Stream Technology Inc. New York
Sevenson Industrial Services, Inc. New York
Sevenson Environmental Services of PA, Inc. Pennsylvania
Sevenson Resources, Inc. California
Senviro Investment Holdings, Inc. Delaware
EXHIBIT 23
DELOITTE & TOUCHE
Deloitte & Touche LLP Telephone: (716) 843-7200 Suite 250 Facsimile: (716) 856-7760 Key Bank Tower 50 Fountain Plaza Buffalo, New York 14202
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of Sevenson Environmental Services, Inc. on Form S-8 (No. 333-70223) of our report dated February 5, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of Sevenson Environmental Services, Inc. for the year ended December 31, 1998.
Deloitte & Touche LLP
March 30, 1999 Buffalo, N.Y.
________________ Deloitte Touche Tohmatsu ________________