ITEM 1. Business.
THE COMPANY
Envirosource, Inc. (the "Company") supplies industrial customers with specialized services, primarily the recycling, handling, stabilization or landfilling of environmentally sensitive wastes or by-products. These services are generally provided pursuant to long-term contracts which enable the Company to integrate its processes with those of its customers. The Company's principal business segments are (a) the IMS segment, which provides slag processing, metal recovery, materials handling, scrap management and a wide range of specialty services, such as scarfing and high speed flame cutting, for the steel industry; and (b) the Technologies segment, which provides hazardous waste treatment, stabilization and disposal services, regulatory assistance and laboratory services for the steel industry and other industrial and governmental customers.
The Company conducts its operations exclusively through its subsidiaries. International Mill Service, Inc. and its subsidiaries ("IMS") constitute the IMS segment, and Envirosource Technologies, Inc. ("Technologies"), through its Envirosafe and Conversion Systems subsidiaries, constitutes the Technologies segment.
References herein to the Company include its subsidiaries as well as its Ohio predecessor, NEOAX, Inc., except where the context requires otherwise. "Note" references herein are to Notes to Consolidated Financial Statements appearing elsewhere in this Report.
DEVELOPMENT OF THE COMPANY
The Company's predecessor was originally incorporated in Ohio in 1915 as White Motor Corporation. Its name was changed to Northeast Ohio Axle, Inc. when it emerged from reorganization proceedings in 1983 and was changed again in 1986 to NEOAX, Inc. ("NEOAX"). In 1987, NEOAX reincorporated in Delaware. In 1989, the Company changed its name to EnviroSource, Inc., and on June 22, 1998, the Company changed its name slightly to Envirosource, Inc.
Envirosource's present business units originally represented a portion of the operations of IU International Corporation ("IU International"). Early in 1988, the Company acquired IU International with the goal of establishing a substantial operating company centered primarily on the Company's stable and growing steel industry business relationships and prospects. Since 1988, the Company has disposed of all the businesses it had owned prior to the IU International acquisition and virtually all of IU International's operations and assets other than the present IMS and Technologies segments.
During 1993, the Company completed a comprehensive recapitalization that resulted in an affiliate of Freeman Spogli & Co. ("FS&Co) purchasing a significant amount of the Company's equity securities. As of December 31, 1998, FS&Co held approximately 47% of the outstanding shares of Common Stock of the Company. Also during 1993, the Company sold $220 million principal amount of 9-3/4% Senior Notes Due 2003 (the "1993 Notes"). A significant portion of the proceeds from the sale of the 1993 Notes was used to retire $150 million principal amount of the Company's 14% Extendible Reset Senior Subordinated Notes Due 1998.
In 1996, the Company moved its headquarters from Stamford, Connecticut, consolidating the activities of its corporate headquarters, as well as the headquarters for its IMS and Technologies segments, in Horsham, Pennsylvania.
In 1997, the Company issued $50 million of 9-3/4% Senior Notes Due 2003, Series B, (the "1997 Notes") having substantially the same terms as the Company's 1993 Notes. The Company used substantially all of the net proceeds to repay borrowings under the Company's bank credit facility that had been incurred to finance capital expenditures.
In the first quarter of 1998, the Company embarked on a profit improvement process entitled "ENSO 2000" that is intended to lower costs and increase revenues significantly. Management believes that most of the benefits from this process will be seen in the years after 1998.
BUSINESS SEGMENTS
IMS
The Company has served the steel industry for over 60 years. The Company believes it increases its customers' productivity by providing cost-effective and reliable on-site reclamation of steel and iron and a variety of other specialized services that are essential to the efficient functioning of steel mills.
North America's steel mills operate in a highly competitive environment. Services that help to reduce their total process costs are therefore of significant value. IMS generally provides recycling and metal recovery operations under long-term contracts with a diversified customer base of over 55 steel mill sites in North America, including integrated mills, mini-mills and specialty mills. Using specially designed equipment, IMS provides a total recycling solution by processing slag (a by-product of steel production), recovering valuable metallics and selling the residual aggregate for road base and other uses. These services are economically and environmentally attractive. Moreover, the effective removal of slag on a continuous basis is critical to a steel mill's ability to remain in operation.
The Company has successfully pursued a strategy of building on its leadership position by offering an expanded range of services that enhance mill productivity and provide IMS with growth opportunities. These services include processing blast furnace iron scrap through an IMS-developed iron crushing process, as well as specialized materials handling. IMS has used rubber-tired carriers at four integrated steel mills to move steel slabs throughout the mill, which is significantly more cost-effective than traditional rail and crane systems. IMS's services also include a proprietary specialized steel slab surface conditioning process (called scarfing) that helps its customers increase product yields and improve product quality, while gaining measurable cost savings. This service is currently provided at seven steel mills.
Substantially all of IMS's services are provided on-site at steel mills, by IMS employees using IMS-owned equipment. IMS's services are integrated with the operations of its customers, providing for strong working partnerships. If necessary, most equipment can be relocated, but this has not often been required as contracts are generally long-term and IMS has a history of high renewal rates.
IMS's largest site is at USX Corporation's Gary Works, in Gary, Indiana, the largest steel mill in the U.S. During the three years ended December 31, 1998, 18 to 20 percent of the Company's consolidated revenues of continuing operations (including revenues attributable to services performed by the Technologies segment) were from USX.
Competition. Competition in IMS's markets is based primarily on quality ----------- of service, reliability, technology and price. In its core steel reclamation business, the Company believes that IMS services customers which account for approximately 30% of total domestic steel production. IMS has one large competitor and a number of smaller competitors, including several newer entrants. The Company believes that IMS's solid market position is based on its reliability, responsiveness to customer needs, reputation and breadth of expertise.
TECHNOLOGIES
Technologies, through its Envirosafe and Conversion Systems business units, has been dedicated to the safe, economical treatment and disposal of industrial and hazardous wastes since 1976. Through its Envirosafe subsidiaries, Envirosafe Services of Ohio, Inc. and Envirosafe Services of Idaho, Inc. (collectively, "Envirosafe"), Technologies owns major commercial hazardous waste treatment and disposal facilities in Ohio and Idaho. Envirosafe services some of the country's largest steel companies, as well as companies in other industries and government agencies. However, Envirosafe has reoriented its business to focus primarily on its steel mini-mill customers and less on the volatile waste remediation business.
In 1992, Envirosafe Services of Ohio, Inc. received final approval to expand its Ohio facility and has subsequently completed construction of the first three phases of a 2.6 million cubic yard disposal cell. In 1993, Envirosafe Services of Idaho, Inc. received final approval to expand an active disposal cell at its Idaho facility and has completed construction of the second phase of such cell. Envirosafe currently has approximately 2.4 million cubic yards of permitted, unused disposal capacity.
During the last few years, the Company completed a number of capital projects in order to maintain and enhance its competitive position. These projects included a new state-of-the-art stabilization and debris handling facility in Ohio and a new debris handling facility and expanded stabilization capacity in Idaho. Enhanced stabilization capability has allowed the Company to utilize its proprietary Super Detox(R) technology for the stabilization of electric arc furnace ("EAF") dust at both its Ohio and Idaho facilities. See below for a discussion of Super Detox(R). In addition, the Envirosafe facilities were upgraded by adding the ability to receive material by rail, the Ohio facility directly and the Idaho facility through its rail transfer facility.
The Ohio and Idaho facilities hold operating permits, issued by state and federal environmental agencies under the Resource Conservation and Recovery Act, as amended ("RCRA"), that require renewal and modification from time to time. The Company expects that it will obtain the renewals and modifications to its permits that it requires to continue to provide landfill capacity well into the next decade. Historically, the Company's hazardous waste treatment and disposal services business has been somewhat seasonal, with fewer waste remediation projects in the winter. However, the Company believes that the increased volume of EAF dust stabilized at its facilities has made this business less seasonal.
Envirosafe and its competitors and customers are subject to a complex, evolving array of federal, state and local environmental laws and regulations. Such requirements not only can affect the demand for Envirosafe's services, but could also require the Company to incur significant costs for such matters as facility upgrading, remediation or other corrective action, facility closure and post-closure maintenance and monitoring. It is possible that future changes in environmental compliance requirements could have a material effect on Technologies' future results of operations or financial condition, but the Company is unable to predict any such future requirements. The Company believes that the Consolidated Financial Statements appropriately reflect all presently known compliance costs in accordance with generally accepted accounting principles. Stringent interpretation of environmental laws and regulations governing hazardous waste treatment and disposal facilities by state and federal regulators also subjects Envirosafe to violations and fines from time to time, none of which has been material to the Company. In fact, the Company believes that it has an excellent environmental compliance record.
A Technologies unit is the sole licensee of a proprietary technology (Super Detox(R)) for stabilizing EAF dust - a listed hazardous waste (KO61) under RCRA that is generated by steel mills - that renders the EAF dust suitable for disposal in non-hazardous waste landfills. Technologies currently operates an EAF dust stabilization facility on-site at one of the larger domestic mini-mills, and provides Super Detox(R) stabilization for EAF dust at both of its regional Envirosafe facilities. In recent years, Technologies entered into a number of new contracts to receive, process and dispose of EAF dust at its Envirosafe facilities. Technologies actively continues to market this treatment and disposal service to other U.S. mini-mills.
In 1995, Technologies received from the U.S. Environmental Protection Agency ("USEPA") a generic delisting for Super Detox(R) stabilized EAF dust. This delisting designates EAF dust treated utilizing this proprietary process as a non-hazardous waste suitable for landfilling in non-hazardous waste landfills. The generic delisting status for the process can save Technologies and its customers the time and expense involved in petitioning USEPA on a facility-by-facility basis for delisting status. The Illinois Environmental Protection Agency subsequently granted a site specific delisting for this process. In addition, in 1995 Technologies received from the Idaho Department of Health and Welfare a generic delisting for EAF dust stabilized at its Idaho regional facility utilizing the Super Detox(R) process; this ruling essentially has the same effect as the USEPA delisting.
The Company believes that the Super Detox(R) technology provides an environmentally safer and more cost-effective solution than competitive off-site thermal processes.
Conversion Systems has provided electric utilities with turn-key systems using its Poz-O-Tec(R) process for the stabilization of wet scrubber effluent and boiler ash residues produced at coal-fired power plants. Conversion Systems substantially completed its last major project of this type in 1995. However, Conversion Systems has licensed the Poz-O-Tec(R) technology for use in specific international markets.
Competition. The Company's hazardous waste treatment and disposal ----------- business is characterized by intense competition. The Company believes that Technologies treats and disposes of approximately 30% of the total domestic EAF dust production. Technologies has two primary competitors in this market: Horsehead Resource Development Company, Inc., a thermal metal recovery processor that has a larger market share, and another thermal recovery processor that has a smaller market share. In addition, there are a number of smaller competitors.
There are a limited number of competitors in the off-site hazardous waste landfill business (there are 19 active, permitted commercial hazardous waste landfills in the U.S.), only two of which operate more than two landfills, and several competitors engaged in the treatment or stabilization of hazardous waste. Competition in this industry is based on service, site and process integrity and the all-in cost of disposal, which includes treatment, transportation costs and taxes. Expanded use of rail services and additions to stabilization services will further improve Envirosafe's competitive position. The market for hazardous waste services generally is geographically broad, but is narrowed depending on factors such as the types of waste a facility is permitted to accept, the types of services offered by a facility, the cost of operation of a facility and the proximity of the facility to the customer.
SEGMENT DATA
See Note J for information concerning revenues and operating income by segment for the years ended December 31, 1998, 1997 and 1996 and the percentage of total revenues contributed by each class of service of the Company's continuing operations for each such year.
EMPLOYEES
At March 1, 1999, the Company employed approximately 1,600 persons. A majority of the hourly employees in both business segments are covered by site-specific collective bargaining agreements with various unions, including the International Union of Operating Engineers, the United Steelworkers and the International Brotherhood of Teamsters. Several of these contracts will be renegotiated in 1999. All other contracts will be renegotiated in 2000 or thereafter.
ITEM 2.
ITEM 2. Properties.
HEADQUARTERS
The Company, IMS and Technologies maintain their headquarters at a single location in Horsham, Pennsylvania in leased premises.
IMS
IMS has operations providing metal recovery and other services at steel mills throughout the continental United States and in Canada. Equipment located at the sites operated by IMS and its subsidiaries includes prefabricated storage, shop and office structures, pot carriers, slab haulers, loaders, railcars, cranes, trucks, metal recovery plants and crushers and other specialized mobile and stationary equipment used in metal-recovery operations and industrial service work, most of which is owned. In addition, IMS leases office space near Pittsburgh, Pennsylvania.
Management believes that the physical facilities for the Company's IMS segment are adequate for its operations and provide sufficient capacity to meet its anticipated requirements. The metal recovery and slag processing installations are generally located at specific customer facilities and are adequate to handle current levels of customer operations and anticipated future needs for current customers.
TECHNOLOGIES
Envirosafe owns substantially all of the land, buildings and equipment used in its treatment and disposal operations in Oregon, Ohio and near Grand View, Idaho. Conversion Systems owns the building and equipment at one stabilization facility in Illinois and one in Pennsylvania and leases land for both facilities.
Assuming the timely completion of subsequent phases under existing permit authority, Envirosafe expects to maintain ample hazardous waste disposal capacity well into the next decade. Management believes that the physical facilities for Technologies are adequate for its operations and provide sufficient capacity to meet its anticipated requirements.
ITEM 3.
ITEM 3. Legal Proceedings.
The Company is a party to litigation and proceedings arising in the normal course of its present or former businesses. In the opinion of management, the outcome of such litigation and proceedings will not have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
* * *
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are as follows:
Name Age Position
Robert N. Gurnitz 60 Chairman of the Board; Director
John T. DiLacqua 46 President and Chief Executive Officer; Director
John C. Heenan 48 Senior Vice President, Finance, Administration and Planning
Aarne Anderson 58 Vice President, Taxes
William B. Davis 48 Vice President and Treasurer
Bradley W. Harris 39 Controller
Leon Z. Heller 49 Vice President, General Counsel and Secretary
James C. Hull 61 Vice President and Chief Financial Officer
The specified age of each Executive Officer of the Company is as of March 31, 1999.
Officers are elected annually and hold office until their successors are elected and qualified.
Robert N. Gurnitz became a director of the Company in November 1997 and Chairman of the Board of the Company in December 1998. Mr. Gurnitz served as President and Chief Executive Officer of Northwestern Steel and Wire Co. from 1991 to 1993 and as its Chairman and Chief Executive Officer from 1993 to 1997. Prior to that he served in various senior management capacities with Rockwell International Corporation, Bethlehem Steel Corporation and Webcraft Technologies.
John T. DiLacqua became President, Chief Executive Officer and a director of the Company in January 1999. From October 1997 to December 1998, Mr. DiLacqua served as President of the U.S. Ferrous Operations of Philip Services Corporation, which included, among others, the former Luria Brothers Division of Connell Limited Partnership. Prior to that, he served as the President of the Luria Brothers Division of Connell Limited Partnership from May 1994 to October 1997, and, from December 1990 to May 1994, he served as its Vice President of Finance and Administration.
John C. Heenan became Senior Vice President, Finance, Administration and Planning in February 1999. From October 1997 to December 1998, Mr. Heenan served as Chief Financial Officer of the U.S. Ferrous Operations of Philip Services Corporation, which included, among others, the former Luria Brothers Division of Connell Limited Partnership. Prior to that, he served as the Vice President - Controller of the Luria Brothers Division of Connell Limited Partnership from April 1997 to October 1997. Prior to that, he served as Chief Financial Officer of Standard Chlorine Chemical Company from 1993 to 1997.
Aarne Anderson has been employed by the Company since May 1980, except for the period from August 1983 through April 1984 during which he served as a consultant to the Disposition Assets Trustee in the Company's reorganization. Mr. Anderson was elected Vice President, Taxes in August 1985.
William B. Davis was elected Vice President of the Company in February 1995 and has been Treasurer of the Company since September 1991. Mr. Davis joined the Company in July 1987 as Assistant Treasurer.
Bradley W. Harris has been the Company's Controller since September 1996, when he joined the Company. From August 1981 to September 1996, Mr. Harris was employed by Ernst & Young LLP, most recently as a Senior Manager.
Leon Z. Heller was elected Vice President of the Company in February 1998 and has served as the Company's General Counsel and Secretary since September 1996. Mr. Heller also has been the Vice President and General Counsel of International Mill Service, Inc., a subsidiary of the Company, since February 1991.
James C. Hull has been the Company's Vice President and Chief Financial Officer since May 1989, when he joined the Company.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "ENSO" and on The Pacific Exchange under the symbol "ES". The following table sets forth the high and low sales prices for the Common Stock for each of the calendar quarters of 1998 and 1997, based upon prices supplied by The Nasdaq Stock Market. On June 22, 1998, the Company effected a 1-for-7 reverse stock split. Prices per share have been restated accordingly for all periods presented.
1998 1997 High Low High Low ---- --- ---- --- First Quarter $21.44 $13.34 $18.81 $12.25 Second Quarter 17.63 12.25 14.88 8.31 Third Quarter 17.25 8.13 19.25 13.56 Fourth Quarter 8.13 4.00 21.44 14.88
The Company has been notified by The Nasdaq Stock Market that it is not currently in compliance with the Nasdaq National Market maintenance standards. However, The Nasdaq Stock Market has a procedure for seeking exemptions from its requirements, which the Company may seek to utilize. The Company is currently in compliance with The Pacific Exchange maintenance requirements.
The Company has not paid a cash dividend on its Common Stock since the confirmation of its plan of reorganization in November 1983 and has no present plan to pay cash dividends. The Company is currently prohibited from paying cash dividends on its Common Stock by its bank credit agreement and by the indentures under which the 1993 Notes and the 1997 Notes were issued.
On March 1, 1999 the Company had approximately 3,080 holders of record of its Common Stock.
ITEM 6.
ITEM 6. Selected Financial Data.
The information presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
1998 VERSUS 1997
Year Ended better (worse) December 31, than 1997 ------------------------- ------------------------- 1998 1997 Amount % ----------- ----------- ----------- ----------- (Dollars in thousands) REVENUES IMS $ 191,438 $ 185,587 $ 5,851 3% Technologies 40,938 42,091 (1,153) (3%) ----------- ----------- ----------- $ 232,376 $ 227,678 $ 4,698 2% =========== =========== ===========
GROSS PROFIT IMS $ 42,190 $ 42,320 $ (130) - Technologies 3,766 5,235 (1,469) (28%) ----------- ----------- ----------- $ 45,956 $ 47,555 $ (1,599) (3%) =========== =========== ===========
OPERATING INCOME (LOSS) IMS $ 26,465 $ 26,494 $ (29) - Technologies (796) (173) (623) (360%) Corporate headquarters (2,742) (4,030) 1,288 32% Unusual items, net (7,934) (1,300) (6,634) (510%) ----------- ----------- ----------- $ 14,993 $ 20,991 $ (5,998) (29%) =========== =========== ===========
IMS 1998 revenues increased $5.9 million or 3% over 1997 primarily because 1997 revenues were reduced by the effects of a strike (settled in mid-August 1997) by employees of a major steel industry customer. The revenue increase was partially offset by a revenue decrease attributable to an overall steel industry slowdown. Technologies revenues decreased in 1998 as compared to 1997. While the volume of waste processed increased over the prior year, average prices were lower in 1998 because much of the volume increase was lower-priced cleanup project business and because the market is very competitive.
The gross profit contribution associated with IMS's increased revenue in 1998 was entirely offset by the negative effects of blast furnace outages at the segment's largest customer, changes in manufacturing practices at several important customers and the overall steel industry slowdown, which significantly reduced steel production in the fourth quarter. IMS results depend to a great extent on the production volumes of its steel mill customers. Technologies' gross profit decreased due to processing lower-priced cleanup project business and market conditions noted above.
Selling, general and administrative expenses decreased as compared to 1997 primarily due to cost reductions resulting from the Company's profit improvement program and a reduction in legal fees and expenses attributable to litigation between the Company and its largest competitor in the electric arc furnace dust processing market (concluded in the 1998 first quarter).
Unusual items, net. In 1998 unusual charges totaled $7.9 million, consisting of - ------------------ $7.3 million of costs related to the Company's profit improvement program (including $3 million to write down excess equipment to its net realizable value, $2.2 million of program consulting costs and $2.1 million of severance costs) and $.6 million for other costs. The 1997 unusual charges of $1.3 million were recorded for costs to satisfy regulatory requirements at waste disposal sites that have been inactive since before the Company's 1988 acquisition of IU International Corporation ("IU International") and to vacate an office as part of the Company's consolidation of operations.
Interest expense increased $1.2 million as the overall debt level was higher in 1998.
Current income tax expense includes state and Canadian income taxes. In 1998 the Company wrote off its deferred tax assets of $15.3 million (see discussion below).
In 1997 the Company sold its IMSAMET subsidiary realizing an after-tax gain of $9.6 million. Also in 1997, the Company recognized a $.6 million charge for the cumulative effect of a mandatory accounting change.
Due to the factors described above, the 1998 net loss was $30.6 million as compared with net income of $.5 million in 1997.
DEFERRED INCOME TAXES
In 1996 the Company recognized $26 million of net deferred tax assets in its balance sheet. Of this amount, $12 million was realized when the Company utilized income tax loss carryforwards and other deferred tax assets to eliminate income tax payments on the gain from the January 1997 sale of its IMSAMET subsidiary. An additional $1.3 million of net deferred tax assets was recognized in 1997. In the fourth quarter of 1998, all of the Company's net deferred tax assets were charged against operations when the production of the Company's steel industry customers declined sharply and the Company reported negative quarterly operating income, thus preventing a determination that is it more likely than not that the Company will earn sufficient taxable income during the next several years to realize its net deferred tax assets. (See Note C.)
1997 VERSUS 1996
Year Ended better (worse) December 31, than 1996 ------------------------- ------------------------- 1997 1996 Amount % ----------- ----------- ----------- ----------- (Dollars in thousands) REVENUES IMS $ 185,587 $ 180,002 $ 5,585 3% Technologies 42,091 32,787 9,304 28% ----------- ----------- ----------- $ 227,678 $ 212,789 $ 14,889 7% =========== =========== ===========
GROSS PROFIT IMS $ 42,320 $ 46,690 $ (4,370) (9%) Technologies 5,235 821 4,414 538% ----------- ----------- ----------- $ 47,555 $ 47,511 $ 44 - =========== =========== ===========
OPERATING INCOME (LOSS) IMS $ 26,494 $ 31,476 $ (4,982) (16%) Technologies (173) (4,534) 4,361 96% Corporate headquarters (4,030) (2,596) (1,434) (55%) Unusual items, net (1,300) (5,471) 4,171 76% ----------- ----------- ----------- $ 20,991 $ 18,875 $ 2,116 11% =========== =========== ===========
IMS 1997 revenues increased $5.6 million or 3% over 1996. Most steel industry customer sites reported strong production. Alexander Mill Services, Inc., acquired in May 1996, contributed $10.1 million to revenues in 1997 as compared with $6.6 million in the prior year. However, revenue increases were largely offset by a revenue reduction resulting from a strike (settled in mid-August 1997) by employees of a major steel industry customer and the mid-1996 loss of a steel industry customer that accounted for $4.6 million of revenues in 1996. Technologies revenues increased significantly in 1997 as compared to 1996 due to a sharp increase in the volume of EAF dust (a hazardous waste produced by steel mini-mills) processed at the Company's Ohio and Idaho treatment facilities.
IMS gross profit decreased due to the effects of the strike and the loss of a significant customer as outlined above and because a 1996 ownership change disrupted production at another customer's steel mill throughout 1997. Technologies gross profit increased due to the increase in EAF dust disposal volume.
Selling, general and administrative expenses increased $2.1 million as compared to 1996. Cost savings realized as a result of the 1996 reorganization were more than offset by an increase in legal fees and expenses attributable to litigation between the Company and its largest competitor in the EAF dust processing market, severance and other costs.
Unusual items, net. The 1997 unusual charges of $1.3 million were recorded for - ------------------- costs to satisfy regulatory requirements at disposal sites that have been inactive since before the Company's 1988 acquisition of IU International Corporation and to vacate an office as part of the Company's consolidation of operations.
In 1996 unusual items included $4.4 million of charges for the Company's 1996 reorganization, $1.2 million to settle the last disputed matter from the Company's 1993 restructuring and $.8 million of closure costs for inactive disposal sites. Partially offsetting these charges was a $.9 million credit from reducing estimated liabilities remaining from the Company's 1988 acquisition of IU International.
Even though debt levels were lower in 1997 (the Company paid down $56 million of debt in the first quarter with proceeds from the sale of its IMSAMET subsidiary), interest expense of continuing operations increased $1.1 million primarily because $3.3 million of consolidated interest expense was allocated to discontinued operations in the prior year and also because the Company's average effective interest rate was slightly higher in 1997.
In 1996 the Company recorded a $4.4 million deferred tax credit (see discussion above), without which the 1996 loss from continuing operations would have been more than $9 million as compared with the 1997 loss from continuing operations of $8.5 million (after a negligible deferred tax credit). In 1997 a $9.6 million gain from selling IMSAMET and a $.6 million charge for the cumulative effect of a mandatory accounting change together with the loss from continuing operations resulted in net income of $.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding of capital expenditures, working capital needs and debt service obligations. Historically, the Company has met such requirements with cash flows generated by operations and with additional debt financing.
The Company expects 1999 capital expenditures of up to $20 or $25 million, primarily for equipment replacements and new services. Scheduled debt repayments amount to $2.5 million in 1999 (excluding $3 million of revolving credit borrowings repaid in January 1999).
Technologies landfill permits require it to fund closure and post-closure monitoring and maintenance obligations by making essentially non-refundable trust fund payments. These payments totaled $1.1 million in 1998. Based on current regulations, planned improvements to waste treatment facilities and permitted capacity, such trust funds are adequately funded and currently require only the reinvestment of Idaho trust fund earnings, which the Company includes in interest income.
The consolidated balance sheet reflects negative working capital of $.4 million at December 31, 1998, due to including in current liabilities $3 million of revolving credit borrowings because they were repaid in January 1999.
The Company has a $43.8 million bank credit facility that declines to $38.3 million in January 2000, $20 million in March 2000 and terminates in January 2001. As of December 31, 1998, $22 million of revolving credit borrowings (including $3 million repaid in January 1999) and $5.7 million of standby letters of credit were outstanding. The agreement contains convenants that require the Company to meet certain financial ratios and tests. These convenants were amended as of December 31, 1998 and the Company expects to be in compliance throughout 1999.
Cash on hand, funds from operations and borrowing capacity under the bank credit facility are expected to satisfy the Company's normal operating and debt service requirements through the term of the credit facility.
Because its businesses are environmentally-oriented, and therefore highly regulated, the Company is subject to violations alleged by environmental regulators and, occasionally, fines. Such violations and fines have not had, and are not expected to have, a material impact on the Company's business. It is possible that the future imposition of additional environmental compliance requirements could have a material effect on the Company's results of operations or financial condition, but the Company is unable to predict any such future requirements. See Note O, in which environmental compliance is discussed.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define applicable years. Computer programs that have date-sensitive software may recognize a date coded "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations that could cause disruptions of operations, including temporary inability to process transactions.
The Company has completed an assessment of its computer information systems. In the normal course of business, the Company has purchased new software packages for most of its computer systems and is currently purchasing and implementing new software for the rest. By mid-1999, all of the Company's software will be upgraded, through routine software releases from reliable software suppliers, to accommodate the Year 2000 transition. The Company has not incurred and does not anticipate incurring material incremental costs for Year 2000 issues relating to its computer information systems since all updates or replacements of such systems shall have occurred in the ordinary course of business and the Company expects to be in compliance throughout 1999.
The Company is currently assessing its non-information technology systems, including telecommunications and embedded systems. Many of these systems will be upgraded in the ordinary course of business, prior to December 31, 1999, and such upgrades are expected to accommodate the Year 2000. The remaining non-information technology systems will be upgraded or replaced as necessary to be Year 2000 compliant by December 31, 1999. The costs of compliance for non-information technology systems that would not otherwise be replaced or upgraded in the ordinary course of business are not expected to be material.
The Company is also addressing the Year 2000 activities of its suppliers and customers. The Company intends to contact significant suppliers and customers to determine if they are Year 2000 compliant, and if they are not, to ask when they will be compliant. This information will be used to assess the extent of interruption that could occur in the Company's operations if a supplier or customer were non-compliant. There can be no guarantee that failure to address Year 2000 issues by a third party would not have a material adverse effect on the Company. However, the Company believes that its communications with its suppliers and customers will minimize these risks.
The Company's Year 2000 program is based on management's best estimates of the Company's requirements. However, there can be no guarantee of the success of the Company's Year 2000 program and actual results could differ materially from the Company's plans. Factors that could impact implementation of this program include, but are not limited to, the availability of trained personnel, the ability to identify and correct all affected applications, and the failure of third parties on which the Company relies to resolve their Year 2000 issues.
To date, the Company has not made any contingency plans to address Year 2000 risks. Contingency plans will be developed if it appears that the Company or its significant suppliers or customers will not be Year 2000 compliant and such noncompliance can be expected to have a material adverse impact on the Company's operations.
SAFE HARBOR STATEMENT
Some of the statements in Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ materially from those projected. These forward-looking statements should be read in conjunction with the financial statements contained herein which include information describing factors that could cause actual results to differ materially from those projected in such forward-looking statements.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.
Since the Company is a service company doing business principally on a contract basis and almost entirely within the United States, its primary market risk is exposure to interest rate fluctuations on its debt instruments. Except for the bank revolving credit facility, which bears interest at variable rates, the Company's debt bears interest at fixed rates. The table below presents debt principal payments (in thousands) and the related average interest rates that will be in effect during each year, and should be read in conjunction with Note F. The fixed rates are the actual rates that will be in effect during each year. The variable interest rate is the average rate in effect at the end of 1998, and it fluctuates with a bank's prime rate or Eurodollar rates.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
See the financial statements and schedules attached hereto and listed in Item 14(a)(1) and (a)(2) hereof.
ITEM 9.
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 Company.
Reference is made to the information set forth under the headings (i) "Election of Class A Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement to be filed pursuant to Regulation 14A under the Securities Act of 1934 within 120 days after December 31, 1998 and (ii) "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K, which information is incorporated herein by reference.
ITEM 11.
ITEM 11. Executive Compensation.
Reference is made to the information set forth under the heading "Executive Compensation" in the Company's Proxy Statement to be filed pursuant to Regulation 14A under the Securities Act of 1934 within 120 days after December 31, 1998, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement to be filed pursuant to Regulation 14A under the Securities Act of 1934 within 120 days after December 31, 1998, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions.
Reference is made to the information set forth under the heading "Certain Transactions" in the Company's Proxy Statement to be filed pursuant to Regulation 14A under the Securities Act of 1934 within 120 days after December 31, 1998, which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of this Report. --------------------------------------
(1) Financial Statements. --------------------
The following Consolidated Financial Statements of the Company and its subsidiaries are included in this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. -----------------------------
The following schedules to the Consolidated Financial Statements of the Company and its subsidiaries are included in this Report:
Schedules ---------
II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required or are inapplicable, and therefore have been omitted.
(3) Exhibits. --------
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Appendix A (pages A-1 to A-3) to the Company's Proxy Statement filed April 29, 1996, in respect of its 1996 Annual Meeting of Stockholders (File No. 1-1363)).
3.2 Amendment of Amended and Restated Certificate of Incorporation (incorporated herein by reference to Page 2 to the Company's Proxy Statement filed April 30, 1997, in respect of its 1997 Annual Meeting of Stockholders (File No. 1-1363)).
3.3 Amendment of Amended and Restated Certificate of Incorporation (incorporated herein by reference to Pages 13 and 14 of the Company's Proxy Statement filed April 30, 1998, in respect of its 1998 Annual Meeting of Stockholders (File No. 1-1363)).
3.4 By-Laws of the Company (incorporated herein by reference to Exhibit C (pages C-1 to C-9) to the Company's Proxy Statement filed April 24, 1987, in respect of its 1987 Annual Meeting of Stockholders (File No. 1-1363)).
3.5 Amendment to the By-Laws of the Company (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1-1363)).
3.6 By-Laws Amendment Adopted March 26, 1997 By Unanimous Written Consent of the Board of Directors, Effective June 19, 1997 (incorporated by reference to Exhibit 3.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 1- 1363)).
4.1 Indenture, dated as of July 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-3/4% Senior Notes due 2003, including the form of such Notes attached as Exhibit A thereto (incorporated herein by reference to Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993 (File No. 1-1363)).
4.2 First Supplemental Indenture, dated as of November 2, 1995, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-3/4% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (File No. 1-1363)).
4.3 Second Supplemental Indenture, dated as of September 24, 1997, between the Company and United States Trust Company of New York, as Trustee, relating to the company's 9-3/4% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-1363).
4.4 Indenture, dated as of September 30, 1997, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-3/4% Senior Notes due 2003, Series B, including the form of such Notes attached as Exhibit A thereto (incorporated herein by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-1363).
4.5 Registration Rights Agreement, dated as of September 30, 1997, among the Company and Morgan Stanley Dean Witter, Jeffries & Company, Inc. and NationsBanc Capital Markets, Inc. (incorporated herein by reference to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-1363)
4.6 Registration Rights Agreement, dated as of May 13, 1993, among the Company, FS Equity Partners II, L.P., The IBM Retirement Plan Trust Fund and Enso Partners, L.P. (incorporated herein by reference to Exhibit 4.29 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.7 Loan Agreement, dated as of June 1, 1994, between the Industrial Development Corporation of Owyhee County, Idaho and Envirosafe Services of Idaho, Inc. relating to $8,500,000 Industrial Revenue Bonds, Series 1994. (The Company agrees to furnish a copy of such agreement to the Commission upon request).
4.8 Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 1-1363)).
4.9 First Amendment, dated as of May 15, 1996, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 (File No. 1-1363)).
4.10 Second Amendment, dated as of December 23, 1996, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 1-1363)).
4.11 Third Amendment, dated effective as of June 30, 1997, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties hereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 1-1363)).
4.12 Fourth Amendment, dated as of September 23, 1997, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-1363)).
4.13 Fifth Amendment, dated as of March 5, 1998, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent (incorporated herein by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,1997 (File No. 1-1363)).
4.14* Sixth Amendment, dated as of March 26, 1999, to the Credit Agreement, dated as of December 19, 1995, among the Company, International Mill Service, Inc., the lenders parties thereto, NationsBank, N.A., as Administrative Agent, and Credit Lyonnais as Syndication Agent.
10.1 Restated Incentive Stock Option Plan of the Company, as amended (incorporated herein by reference to Exhibit A to the Company's Registration Statement on Form S-8, filed January 17, 1989 (File No. 33-26633)).
10.2 Promissory Note of Louis A. Guzzetti, Jr., dated March 31, 1998, payable to the Company, amending and replacing the Promissory Note dated March 31, 1993 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 (File No. 1-1363)).
10.3 Promissory Notes of Aarne Anderson, George E. Fuehrer and Mr. Guzzetti, dated as of March 31, 1998, payable to the Company, amending and replacing the Promissory Notes dated April 1, 1993(incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 (File No. 1-1363)).
10.4 Stock Option Agreement, dated March 18, 1992, between the Company and Raymond P. Caldiero (incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-1363)).
10.5 Stock Option Agreement, dated March 18, 1992, between the Company and Jeffrey G. Miller (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-1363)).
10.6 Amendment, dated August 5, 1993, to the Stock Option Agreement, dated March 18, 1992, between the Company and Jeffrey G. Miller (incorporated herein by reference to Exhibit 10.22 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-1, filed September 16, 1993(File No. 33-46930)).
10.7 Stock Option Agreement, dated August 5, 1993, between the Company and Wallace B. Askins (incorporated herein by reference to Exhibit 10.23 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-1, filed September 16, 1993 (File No. 33-46930)).
10.8 Envirosource, Inc. 1993 Stock Option Plan (incorporated herein by reference to Exhibit 10.21 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).
10.9 Envirosource, Inc. Stock Option Plan for Non-Affiliated Directors, dated as of January 1, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-1363)).
10.10 Supplemental Executive Retirement Plan of the Company, effective January 1, 1995(incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-1363)).
10.11 Employment Agreement, dated November 5, 1996, between the Company and Aarne Anderson (incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 (File No. 1-1363)).
10.12 Employment Agreement, dated November 5, 1996, between the Company and William B. Davis (incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 (File No. 1-1363)).
10.13 Employment Agreement, dated November 5, 1996, between the Company and James C. Hull (incorporated herein by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 (File No. 1-1363))
21.1* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
(b) Reports on Form 8-K.
During the last quarter of the fiscal year ended December 31, 1998, the Company filed no Current Reports on Form 8-K.
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1999 ENVIROSOURCE, INC.
By: /s/ JOHN T. DILACQUA ----------------------- John T. DiLacqua President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 31, 1999.
Signature Title
/s/ JOHN T. DILACQUA President, Chief Executive - -------------------- John T. DiLacqua Officer (Principal Executive Officer) and Director
/s/ JAMES C. HULL Vice President and Chief - ----------------- James C. Hull Financial Officer (Principal Financial and Accounting Officer)
/s/ ROBERT N. GURNITZ Chairman of the Board of - --------------------- Robert N. Gurnitz Directors
/s/ WALLACE B. ASKINS Director - --------------------- Wallace B. Askins
/s/ RAYMOND P. CALDIERO Director - ----------------------- Raymond P. Caldiero
/s/ JEFFREY G. MILLER Director - --------------------- Jeffrey G. Miller
/s/ JON D. RALPH Director - ---------------- Jon D. Ralph
/s/ JOHN M. ROTH Director - ---------------- John M. Roth
/s/ J. FREDERICK SIMMONS Director - ------------------------ J. Frederick Simmons
/s/ RONALD P. SPOGLI Director - -------------------- Ronald P. Spogli
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Envirosource, Inc.
We have audited the accompanying consolidated balance sheets of Envirosource, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Envirosource, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note A to the financial statements, in 1997 the Company changed its method of accounting for systems development costs.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania March 19, 1999
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
Envirosource, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the - --------------------------- accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts reported in prior years have been reclassified for comparative purposes.
Use of estimates: Preparing financial statements in accordance with generally - ----------------- accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash equivalents: Cash equivalents are highly liquid investments with maturities - ----------------- of three months or less when acquired.
Property, plant and equipment: Property, plant and equipment is stated at cost. - ----------------------------- Depreciation is computed by the straight-line method based on the following lives: buildings and improvements -- 10 to 30 years and machinery and equipment - -- 3 to 25 years. Landfill development costs are depreciated based on the ratio of cubic yards of disposal capacity utilized to total cubic yards of disposal capacity.
Landfill permits: Costs to acquire and maintain landfill permits are deferred - ----------------- and amortized based on the ratio of cubic yards of disposal capacity utilized to total cubic yards of disposal capacity. Accumulated amortization was $19.5 million and $16.7 million at December 31, 1998 and 1997.
Closure trust funds and deferred charges: Idaho landfill closure costs and - ------------------------------------------ post-closure obligations (accrued as liabilities in the balance sheet) are secured by a trust fund invested in U.S. government and government agency securities. These investments, totaling $15.3 million and $14.3 million at December 31, 1998 and 1997, are classified as "available-for-sale," have maturities of one month to ten years and are carried at amortized cost which approximates market value. Interest income and realized gains and losses are recognized in earnings. Excess funds, if any, will revert to the Company.
Ohio landfill trust fund balances represent deferred charges that are amortized as part of closure costs. These trusts (also invested in U.S. government and government agency securities) will fund the latter stages of closure activity and all post-closure activity in perpetuity. Excess funds, if any, revert to the State of Ohio; accordingly, no interest income is recognized. Accumulated amortization was $15.7 million and $14 million at December 31, 1998 and 1997.
Closure costs: The estimated costs of future closure and post-closure monitoring - ------------- and maintenance of landfills are amortized or accrued based on the ratio of cubic yards of disposal capacity utilized to total cubic yards of disposal capacity. Closure costs are similar to landfill development costs, but are generally incurred for aboveground construction. Closure cost accruals of $ 9.1 million and $10.1 million are included in other long-term liabilities at December 31, 1998 and 1997.
NOTE A -- ACCOUNTING POLICIES - continued
Goodwill: The excess of purchase price over fair value of net assets of acquired - -------- businesses is recorded as an asset and amortized using the straight-line method over periods of 15 to 40 years. Accumulated amortization was $53.6 million and $48.8 million at December 31, 1998 and 1997. The carrying value of goodwill will be reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that the goodwill will not be recoverable, as determined based on anticipated cash flows over the remaining amortization period, the carrying value of the goodwill will be reduced based on the discounted present value of the anticipated cash flows.
Revenues: The Company's revenues are recognized as services are provided. - --------
Accounting Change: Pursuant to Emerging Issues Task Force (EITF) Issue No. - ------------------ 97-13, the Company changed its accounting policy for systems development costs. Previously, substantially all direct costs relating to systems development were capitalized, including certain consulting costs to select software. Under EITF Issue No. 97-13, software selection costs must be expensed as incurred, so the unamortized balance of these costs totaling $639,000 as of September 30, 1997 was written off as a cumulative accounting change in the 1997 fourth quarter.
Earnings per share: Basic earnings per share is calculated by dividing income - ------------------ (loss) applicable to common shares by the weighted average number of shares outstanding during the period, excluding any dilutive effects of options and warrants. Diluted earnings per share includes the effects of common stock equivalents outstanding during the period. Basic and diluted earnings per share amounts are the same in each year because there is no dilution when there is a loss from continuing operations.
In June 1998 the company completed a 1-for-7 reverse stock split. Numbers of shares and per share amounts have been restated for all periods presented.
Stock-based compensation plans: The Company follows Accounting Principles Board - ------------------------------- Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation plans and discloses the fair value of options granted and pro forma earnings as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Comprehensive Income: As of January 1, 1998, the Company adopted SFAS No. 130, - --------------------- Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement had no impact on the Company's net income or stockholders' equity.
NOTE B -- UNUSUAL ITEMS, NET
1996 - Net unusual charges of $5.5 million consisted of $4.4 million for the - ---- 1996 reorganization (including $2 million for severance costs, $1.3 million for costs to vacate offices and abandon assets and $1.1 million for other costs), $1.2 million to settle the last disputed matter from the 1993 restructuring (related to a terminated recycling unit), and $.8 million of additional closure costs for waste disposal sites that have been inactive since before the Company's 1988 acquisition of IU International, less a $.9 million reduction of other estimated liabilities remaining from the IU International acquisition. During 1996, $5.1 million of costs were charged against the unusual item liabilities ($2.2 million of severance, $1.3 million for the terminated recycling unit, $1 million for vacated offices and abandoned assets and $.6 million for other costs), leaving a balance of $4.2 million for remaining costs, as compared with $2.9 million at the beginning of 1996.
1997 - Unusual charges of $1.3 million were recorded for costs to satisfy - ---- regulatory requirements at the inactive waste disposal sites and to vacate another office. During 1997, costs totaling $2.5 million were charged against these and other unusual item liabilities ($.7 million of severance, $.5 million for vacated offices, $.5 million for inactive waste disposal sites, $.4 million for the terminated recycling unit and $.4 million for other costs), leaving a balance of $3 million at December 31, 1997.
1998 - Unusual charges of $7.9 million consisted of $7.3 million for the - ---- Company's profit improvement program (including $3 million to write down excess equipment to its net realizable value, $2.2 million of program consulting costs and $2.1 million of severance costs) and $.6 million of other costs. During 1998, costs totaling $8 million were charged against these and other unusual item liabilities ($3 million for excess equipment, $2 million of consulting costs, $1.3 million of severance, $.6 million for vacated offices, $.6 million for inactive waste disposal sites, $.4 million for the terminated recycling unit and $.1 million for other costs), leaving a balance of $2.9 million at December 31, 1998.
NOTE C -- INCOME TAXES
The components of income tax (expense) benefit attributable to continuing operations are as follows (in thousands):
1998 1997 1996 ----------- ----------- ----------- Current: State $ (897) $ (1,170) $ (916) Canadian (150) (229) (218) ----------- ----------- ----------- (1,047) (1,399) (1,134)
Deferred: Federal (15,337) 31 4,400 ----------- ----------- ----------- $ (16,384) $ (1,368) $ 3,266 =========== =========== ===========
NOTE C -- INCOME TAXES - continued
Canadian income before income taxes amounted to $.5 million in 1998, $.7 million in 1997 and $.6 million in 1996.
Income tax (expense) benefit varies from amounts computed by applying the 35% federal statutory rate for the following reasons (in thousands):
1998 1997 1996 ----------- ----------- -----------
Benefit of pre-tax loss from continuing operations at statutory rate $ 4,989 $ 2,483 $ 2,785 Goodwill amortization (1,692) (1,692) (1,718) Effect of (increasing) reducing deferred tax valuation allowance (19,098) (1,454) 3,100 Effect of state and Canadian income taxes (583) (761) (595) Other - 56 (306) ----------- ----------- ----------- $ (16,384) $ (1,368) $ 3,266 =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
1998 1997 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 35,652 $ 85,643 Capital loss carryforwards - 248 Insurance accruals 2,232 2,937 Reorganization and restructuring accrual 543 655 Pension and other postretirement benefits accruals 4,040 4,331 Closure cost accruals 4,216 3,655 Other accruals 5,525 6,842 ----------- ----------- Total deferred tax assets 52,208 104,311 Valuation allowance (36,811) (70,554) ----------- ----------- Net deferred tax assets 15,397 33,757
Deferred tax liabilities: Tax over book depreciation plus IU International acquisition purchase price allocation to property, plant, and equipment (6,365) (8,817) Tax over book post-closure deductions (5,417) (5,710) Tax over book landfill permit amortization (3,615) (3,893) ----------- ----------- Total deferred tax liabilities (15,397) (18,420) ----------- ----------- Net deferred taxes $ - $ 15,337 =========== ===========
NOTE C -- INCOME TAXES - continued
The Company recognized $26 million of net deferred tax assets in the balance sheet in 1996; the corresponding $26 million of tax benefit was credited as follows: $4.4 million reduced the 1996 loss from continuing operations; $10.9 million was credited to goodwill and $10.7 million increased capital in excess of par value. Of the $26 million, $12 million was realized when the Company utilized income tax loss carryforwards and other deferred tax assets to eliminate income tax payments on the gain from the January 1997 sale of its IMSAMET subsidiary (Note D). An additional $1.3 million of net deferred tax assets was recognized in 1997, virtually all of which was credited to goodwill. In the fourth quarter of 1998, all of the Company's net deferred tax assets were written-off with a charge against operations, when the production of the Company's steel industry customers declined sharply and the Company reported negative quarterly operating income, thus preventing a determination that is it more likely than not that the Company will earn sufficient taxable income during the next several years to realize its net deferred tax assets.
In 1996 the valuation allowance was reduced by both the $26 million above and $29.3 million that was primarily due to the expiration of net operating loss carryforwards that originated prior to the Company's 1983 reorganization. In 1997 the valuation allowance increased by a net $1.5 million because the deferred tax benefit applicable to continuing operations for the year was more than offset by the reversal of a portion of the valuation allowance that was credited to capital in excess of par value in 1996. In 1998 the valuation allowance was reduced by a net $33.7 million primarily because the $15.3 million increase resulting from the corresponding charge against operations was more than offset by a $49 million reduction due to writing off the deferred tax asset representing an expired net operating loss carryforward and other changes.
The $35.7 million deferred tax asset above represents net operating loss carryforwards totaling $101.9 million that expire at various dates from 2001 to 2018. Subject to the Company's ability to generate sufficient future taxable income, upon recognition of additional net deferred tax assets, the $36.8 million valuation allowance would be credited as follows: $2 million to capital in excess of par value, $8.8 million to goodwill and $26 million to reduce income tax expense.
NOTE D -- SALE OF IMSAMET
In January 1997, the Company sold the capital stock of IMSAMET, Inc., a wholly-owned subsidiary that performed recycling and waste management services for the aluminum industry. After deferred income tax charges, the 1997 gain amounted to $9.6 million or $1.66 per share.
NOTE D -- SALE OF IMSAMET - continued
Summarized results of discontinued operations are as follows (in thousands):
1997 1996 ----------- ----------- Gain from sale $ 21,600 $ - Revenues - 37,399 ----------- ----------- $ 21,600 $ 37,399 =========== ===========
Income before income taxes $ 21,600 $ 399 Deferred income tax expense (12,000) - ----------- ----------- Income from discontinued operations $ 9,600 $ 399 =========== ===========
In 1996 interest expense of $3.3 million was allocated to discontinued operations based on the ratio of the net assets of IMSAMET to consolidated net assets (equal to stockholders' equity plus debt not directly attributable to specific operations).
NOTE E -- ALEXANDER MILL SERVICES ACQUISITION
The Company purchased Alexander Mill Services, Inc. ("AMS"), a metal reclamation company serving the mini-mill sector of the steel industry, in May 1996. The cost of the acquisition was $9 million plus the assumption of $7.2 million of debt. In allocating the purchase price, $10.7 million was charged to goodwill. The results of AMS' operations are included in the consolidated statements of operations from the acquisition date. Pro forma results of operations, as if this transaction occurred at the beginning of 1996, are as follows (in thousands, except per share amounts):
----------- (Unaudited) Pro forma revenues $ 217,205 Pro forma net loss (3,640) Pro forma net loss per share $ (.63)
The pro forma information is not necessarily indicative of the results that would have occurred had the transaction taken place at the beginning of 1996.
NOTE F -- DEBT
Debt is summarized as follows (in thousands):
1998 1997 ----------- ----------- 9 3/4% Senior Notes due 2003 $ 270,000 $ 270,000 Bank credit facility 22,000 8,000 Industrial revenue bond financings, equipment loans and other 11,572 17,400 ----------- ----------- 303,572 295,400 Less current maturities (5,549) (13,786) ----------- ----------- Long-term debt $ 298,023 $ 281,614 =========== ===========
At December 31, 1998, required principal payments by year are as follows: $5.5 million in 1999 (including $3 million of revolving credit borrowings repaid in January), $19.4 million in 2000, $8.7 million in 2002, and $270 million in 2003.
In September 1997, the Company issued $50 million of 9 3/4% Senior Notes due 2003, Series B, having substantially the same terms and maturity date as the Company's existing $220 million of Senior Notes. All of the Senior Notes (10.4% effective rate including amortization of issuance costs) are redeemable, in whole or in part, at the Company's option at 104.9% of principal amount, declining to 100% by June 15, 2001. Upon a change in control, the Company must offer to purchase the Senior Notes at 101% of principal amount. The Senior Notes indenture contains restrictions customarily found in such agreements, such as limits on indebtedness and payments with respect to capital stock.
The Company's bank credit facility provides $43.8 million of revolving credit borrowing and letter of credit capacity, which declines to $38.3 million in January 2000, $20 million in March 2000 and terminates in January 2001. Interest on borrowings is at the bank's prime rate plus 1.25% (prime rate was 8.25% at December 31, 1998) or at Eurodollar rates plus 2.5% (Eurodollar rate was approximately 5.45% at December 31, 1998). The commitment fee is currently .5% per annum on the unutilized portion of the facility. Outstanding letter of credit fees are currently 2.75% per annum. The facility (1) is secured by accounts receivable, the Company's investments in stock and intercompany notes of its subsidiaries, and a portion of the Company's equipment, (2) prohibits the payment of cash dividends, and (3) contains covenants that require the Company to meet certain financial ratios and tests. At December 31, 1998, $5.7 million of standby letters of credit were outstanding under the facility (approximately $3.7 million of which secure liabilities already reflected in the consolidated balance sheet).
An $8.5 million industrial revenue bond financing carries an effective interest rate of 9.3%. Equipment loans and other debt carry a weighted average effective interest rate of 8.8%.
NOTE G -- IU INTERNATIONAL ACQUISITION OBLIGATIONS
The Company has certain ongoing obligations resulting from the 1988 acquisition of IU International that are unrelated to current operations. Current liabilities include IU acquisition obligations of $2.7 million at December 31, 1998 and $3 million at December 31, 1997. These amounts represent ongoing obligations for insurance, employee benefits and other matters. In 1997 the Company paid $6.9 million and issued 51,760 shares of common stock valued at $.7 million to resolve an employee benefit dispute related to the IU International acquisition for the amount previously recorded in the financial statements. Non-current other liabilities include IU International acquisition obligations of $19 million at December 31, 1998 and $21 million at December 31, 1997 for insurance, employee benefits and income tax matters.
NOTE H -- STOCKHOLDERS' EQUITY
A total of 426,799 shares of the Company's common stock have been reserved for stock options (Note I). Under the terms of the Senior Notes indenture and bank credit facility, the Company may not declare or pay dividends or make cash distributions to the common stockholders.
In 1996 warrants to purchase 14,572 shares of the Company's common stock at forty-nine cents per share were exercised using the cashless exercise feature (by surrender of shares of common stock subject to the warrants).
An affiliate of Freeman Spogli & Co. owns approximately 47% of the Company's common stock.
The Company is authorized to issue 5.6 million shares of preferred stock, par value $.25 per share, with such terms and conditions as shall be specified by the Company's Board of Directors.
NOTE I -- STOCK OPTIONS
The Company maintains plans that provide incentive stock options and non-qualified stock options to key employees to purchase shares of the Company's common stock. The terms, conditions and numbers of shares are determined by the Compensation and Stock Option Committee of the Board of Directors. Incentive stock options may not be granted at exercise prices less than the fair market value of the stock at the time of grant. Non-qualified stock options may not be granted at exercise prices less than 50% of the fair market value at the time of grant. Options generally vest over three or five year periods.
The Company also maintains a stock option plan for outside directors that are not affiliated with Freeman Spogli & Co. Under the plan, on January 1 of each year each outside director is granted options to purchase 714 shares of the Company's common stock at the prior year-end market price. The plan also allows these directors to elect to receive below-market options in lieu of their annual directors' fees. In 1998 two directors and in 1997 and 1996 one director elected to receive such options in lieu of their $15,000 annual directors' fees. All options granted under the plan become exercisable on the following January 1.
NOTE I -- STOCK OPTIONS - continued
In addition, three outside directors hold options, granted prior to 1995, to purchase 8,571 shares of the Company's common stock at exercise prices equal to the fair market value at the time of grant.
Option activity is summarized below:
Using the Black-Scholes option pricing model, the estimated per share weighted average fair values of stock options granted were $9.95 in 1998, $8.19 during 1997 and $15.12 during 1996. Assumptions made in determining the estimates of fair value include: risk-free interest rates of 4.7% in 1998, 5.5% in 1997 and 5.6% in 1996; a volatility factor of .58 in 1998, .48 in 1997 and .46 in 1996; and a weighted-average expected life of 8 years for all three years.
Summarized information about stock options outstanding at December 31, 1998 is as follows:
NOTE I -- STOCK OPTIONS - continued
The following table summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon estimated fair values (in thousands, except for per share amounts):
1998 1997 1996 ----------- ----------- -----------
Pro forma net (loss) income $ (30,913) $ 213 $ (4,591)
Pro forma net (loss) income per share $ (5.32) $ .04 $ (.82)
Because the Company's options vest over three or five year periods and only options granted after December 31, 1994 are reflected in the calculations, the pro forma disclosures are not likely to be representative of future pro forma amounts.
NOTE J -- BUSINESS SEGMENTS
The Company's business segments, which are organized by type of service, are: IMS, which provides recycling and other specialized services for the steel industry, and Technologies, which operates hazardous waste disposal landfills and provides waste management and stabilization services for the steel industry, as well as companies in other industries and governmental agencies.
Information by business segment for the three years ended December 31, 1998 is as follows (in thousands):
1998 1997 1996 ----------- ----------- ----------- REVENUES IMS $ 191,438 $ 185,587 $ 180,002 Technologies 40,938 42,091 32,787 ----------- ----------- ----------- $ 232,376 $ 227,678 $ 212,789 =========== =========== ===========
UNUSUAL ITEM (CHARGES) CREDITS, NET IMS $ (2,851) $ 69 $ (1,697) Technologies (790) (1,491) (3,252) Corporate headquarters (4,293) 122 (522) ----------- ----------- ----------- $ (7,934) $ (1,300) $ (5,471) =========== =========== ===========
TOTAL OPERATING INCOME (LOSS) IMS $ 23,614 26,563 $ 31,971 Technologies (1,586) (1,664) (8,012) Corporate headquarters (7,035) (3,908) (5,084) ----------- ----------- ----------- $ 14,993 $ 20,991 $ 18,875 =========== =========== ===========
NOTE J -- BUSINESS SEGMENTS - continued
1998 1997 1996 ----------- ----------- ----------- INDENTIFIABLE ASSETS IMS $ 246,768 $ 252,584 $ 252,958 Technologies 131,440 131,231 130,683 Corporate headquarters 9,248 29,487 41,404 ----------- ----------- ----------- 387,456 413,302 425,045 Discontinued operations - - 34,864 ----------- ----------- ----------- $ 387,456 $ 413,302 $ 459,909 =========== =========== ===========
DEPRECIATION AND AMORTIZATION IMS $ 27,105 $ 25,925 $ 24,045 Technologies 11,275 10,807 7,569 Corporate headquarters 1,051 789 1,398 ----------- ----------- ----------- 39,431 37,521 33,012 Discontinued operations - - 2,964 ----------- ----------- ----------- $ 39,431 $ 37,521 $ 35,976 =========== =========== ===========
CAPITAL EXPENDITURES IMS $ 27,874 $ 21,002 $ 16,227 Technologies 7,714 8,342 4,761 Corporate headquarters - 10 5 ----------- ----------- ----------- 35,588 29,354 20,993 Discontinued operations - - 890 ----------- ----------- ----------- $ 35,588 $ 29,354 $ 21,883 =========== =========== ===========
Corporate headquarters expenses and assets support both segments but are not directly associated with either. Corporate assets consist principally of cash and cash equivalents, net deferred tax assets (in 1997 and 1996) and unamortized debt issuance costs.
Revenues from USX Corporation, the Company's largest steel industry customer, ranged from $41 to $46 million annually during the three years ended December 31, 1998. Accounts receivable due from USX Corporation totaled $3.6 million at December 31, 1998. At December 31, 1998, $26 million of consolidated accounts receivable result from services performed for domestic steel industry customers. IMS customers and operations are located throughout the United States and Canada. Technologies landfills are in Idaho and Ohio. Foreign operations are not significant.
The following table sets forth the percentage of total revenue contributed by each class of services during the three years ended December 31, 1997:
1998 1997 1996 ----------- ----------- ----------- Industrial recycling 69.6% 67.8% 70.5%
Specialized services 12.8% 13.7% 14.1%
Waste stabilization and disposal 17.6% 18.5% 15.4% ----------- ----------- ----------- 100.0% 100.0% 100.0% =========== =========== ===========
NOTE K -- RETIREMENT PLANS
The Company has several non-contributory defined benefit pension plans covering certain salaried and hourly employees. The plans provide pension benefits that are based on varying levels of service and compensation. Assets of the plans are principally common stocks, fixed income securities and cash equivalents. The Company's contributions are based on funding standards established by the Employee Retirement Income Security Act of 1974.
1998 1997 ----------- ----------- Change in benefit obligations Benefit obligations at beginning of year $ 21,585 $ 19,205 Service cost 564 700 Interest cost 1,550 1,533 Net actuarial losses 553 1,912 Benefits paid (2,886) (1,811) Other 77 46 ----------- ----------- Benefit obligations at end of year $ 21,443 $ 21,585 =========== ===========
Change in plan assets: Fair value of plan assets at beginning of year $ 21,766 $ 19,183 Actual return on assets 1,533 4,248 Employer contributions 226 521 Benefits paid (2,886) (1,811) Plan expenses (312) (347) Other (33) (28) ----------- ----------- $ 20,294 $ 21,766 =========== ===========
Funded status $ (1,149) $ 180 Unrecognized net actuarial losses (gains) 393 (263) Unamortized prior service cost decrease (3,120) (3,477) Other (9) (354) ----------- ----------- Accrued pension cost $ (3,885) $ (3,914) =========== ===========
Net periodic pension cost for defined benefit plans includes the following (in thousands):
1998 1997 1996 ----------- ----------- ----------- Service cost $ 564 $ 700 $ 763 Interest cost 1,550 1,533 1,386 Expected return on plan assets (1,463) (1,423) (1,300) Net amortization and deferral (195) (267) (210) ----------- ----------- ----------- Net periodic pension costs $ 456 $ 543 $ 639 =========== =========== ===========
The actuarial present value of projected benefit obligations was determined using discount rates of 7.25% in 1998 and 1997. The expected annual long-term rate of return on plan assets used in determining net periodic pension cost was 8.5% in both years.
NOTE K -- RETIREMENT PLANS - continued
The Company also sponsors several defined contribution retirement plans for which contributions and costs are based on percentages of defined earnings of participating employees. Costs for these plans amounted to $1.2 million in 1998, $1.4 million in 1997 and $1.8 million in 1996.
In addition, for the benefit of certain unionized employees, the Company participates in defined benefit multiemployer pension plans, for which reliable information concerning the Company's share of related estimated plan benefits and assets is not available, and defined contribution multiemployer pension plans. Costs for multiemployer pension plans amounted to $2.2 million in 1998, $1.8 million in 1997 and $1.6 million in 1996.
The Company also participates in several defined contribution multiemployer plans that provide health care and other welfare benefits to certain unionized employees during their working lives and after retirement. Costs for these plans amounted to $2.1 million in 1998, $2 million in 1997 and $1.6 million in 1996.
The Company also has several defined benefit postretirement plans that provide varying amounts of medical and death benefits, primarily to retired employees. The actuarially computed cost for these plans was $.3 million in 1998, $.4 million in 1997 and $.5 million in 1996. The Company funds postretirement benefits on a "pay-as-you-go" basis.
The Company incurred postretirement benefit obligations in connection with the IU International acquisition (Note G). Other long-term liabilities include $4.4 million of such obligations at December 31, 1998 and $4.6 million at December 31, 1997 based on a discount rate of 7.25%.
Future cost increases in health care benefits are assumed to be 8% in 1999, decreasing 1% per year to 5% to 2002 and remaining at that level thereafter. Increasing these rates by 1% each year would increase the accumulated postretirement benefit obligation as of December 31, 1998 by $.2 million and would not have had a material impact on the cost for 1998.
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION
Amortization in the consolidated statement of cash flows includes amortization of goodwill, landfill permits and deferred charges related to landfill closure together with non-cash interest costs. Changes in working capital include the following (in thousands):
1998 1997 1996 ----------- ----------- ----------- Accounts receivable $ 664 $ (2,000) $ 4,971 Other current assets 446 425 1,611 Accounts payable and other current liabilities (3,141) 1,304 (9,144) ----------- ----------- ----------- Cash used $ (2,031) $ (271) $ (2,562) =========== =========== ===========
NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION - continued
Closure trust fund payments include the following activity (in thousands):
1998 1997 1996 ----------- ----------- ----------- Purchases of investments $ (1,243) $ (1,654) $ (8,105) Sales of investments 171 139 6,575 ----------- ----------- ----------- Cash used $ (1,072) $ (1,515) $ (1,530) =========== =========== ===========
Ongoing net cash flows related to the IU International acquisition are principally payments of non-recurring pre-acquisition obligations.
The Company paid interest of $28.8 million in 1998 and 1997 and $28.9 million in 1996.
The Company paid income taxes, net of refunds, of $1.4 million in 1998, $1.1 million in 1997 and $.8 million in 1996.
NOTE M -- FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments carried in the Company's consolidated balance sheet are as follows (in thousands):
1998 1997 ------------------------- ------------------------- Carrying Fair Carrying Fair Amounts Values Amounts Values ----------- ----------- ----------- -----------
Long-term debt $ 298,023 $ 276,423 $ 281,614 $ 286,339 Other non-current assets and stock purchase loans 1,375 1,375 1,441 1,326
The fair values of financial instruments included in current assets and liabilities approximate their carrying amounts. The fair value of fixed-rate long-term debt, which is thinly traded, is based on management's best knowledge of recent trading prices. The fair values of other non-current assets and stock purchase loans are estimated using discounted cash flow analysis and borrowing rates in the Company's bank credit facility.
NOTE N -- RELATED PARTY TRANSACTION
One loan to an executive officer which originated to purchase common stock of the Company in January 1989 remains outstanding. The loan, as amended, bears interest at 6% and is due in April 1999. Each year half of the annual interest is payable in cash and half is added to the outstanding principal balance. The loan requires payment in full within 30 days of termination and provides for forgiveness in the event of the employee's death. As of December 31, 1998, the loan balance was $90,000 and accrued interest receivable totaled $47,345.
NOTE O -- COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for non-cancelable operating leases as of December 31, 1998 amount to $9.1 million in 1999, $7 million in 2000, $5.4 million in 2001, $3.9 million in 2002, $1.4 million in 2003 and $1.3 million thereafter. Operating leases are primarily for machinery and equipment. Rent expense was $11.6 million in 1998, $10.2 million in 1997 and $10.1 million in 1996.
At December 31, 1998, the Company had made commitments to spend $7.2 million for equipment additions.
The Company is required to maintain trust funds to secure its obligations to close its landfills and perform post-closure monitoring and maintenance procedures. Based on current regulations, planned improvements to waste treatment facilities and permitted capacity, such trust funds are adequately funded and currently require only the reinvestment of Idaho trust fund earnings that the Company includes in interest income.
The Company's Ohio and Idaho facilities hold operating permits issued by state and federal environmental agencies under the Resource Conservation and Recovery Act, as amended, that require renewal and modification from time to time. The Company expects that it will obtain the renewals and modifications to its permits that it requires to continue to provide landfill capacity in its approved disposal cells well into the next decade.
The Company and its competitors and customers are subject to a complex, evolving array of federal, state and local environmental laws and regulations. In particular, such requirements not only can affect the demand for treatment and disposal services, but could also require the Company to incur significant costs for such matters as facility upgrading, remediation or other corrective action, facility closure and post-closure maintenance and monitoring. It is possible that the future imposition of additional environmental compliance requirements could have a material effect on the Company's results of operations or financial condition, but the Company is unable to predict any such future requirements. The Company believes that the consolidated financial statements appropriately reflect all presently known compliance costs in accordance with generally accepted accounting principles.
The Company is a party to litigation and proceedings arising in the normal course of its present or former businesses. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company's financial condition or results of operations.
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share amounts)
Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Revenues $ 52,124 $ 57,710 $ 62,963 $ 59,579 Gross profit 8,220 11,944 14,431 11,361 Unusual charges (3,508) (526) (3,489) (411) Operating income (loss) (1,065) 6,294 5,075 4,689 Net loss (23,921)* (4,259) (887) (1,572)
Net loss per share $ (4.12) $ (.73) $ (.15) $ (.27) =========== =========== =========== ===========
*In the fourth quarter of 1998, the Company wrote off its deferred tax assets totaling $15.3 million.
Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Revenues $ 58,701 $ 57,149 $ 57,231 $ 54,597 Gross profit 11,976 11,538 13,222 10,819 Unusual charges (800) (500) - - Operating income 4,473 5,613 6,837 4,068 Income (loss): Continuing operations (3,274) (3,857) 7 (1,338) Discontinued operations - 1,300 - 8,300 Cumulative effect of change in accounting (639) - - - Net income (loss) (3,913) (2,557) 7 6,962
Income (loss) per share: Continuing operations $ (.56) $ (.66) $ - $ (.23) Discontinued operations .22 1.44 Cumulative effect of change in accounting (.11) ----------- ----------- ----------- ----------- Net income (loss) $ (.67) $ (.44) $ - $ 1.21 =========== =========== =========== ===========
Due to rounding, quarterly per share amounts do not necessarily add to the full year amounts.
(A) Amounts written off.
EXHIBIT INDEX
Number Description Page
4.14 Sixth Amendment to the Credit Agreement EXHIBIT 1
21.1 Subsidiaries of the Company EXHIBIT 2
23.1 Consent of Ernst & Young LLP EXHIBIT 3