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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2001
-----------------------
Commission File Number 0-16379
CLEAN HARBORS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2997780
(State of Incorporation) (IRS Employer Identification No.)
1501 Washington Street, Braintree, MA 02184-7535
(Address of Principal Executive Offices) (Zip Code)
(781) 849-1800 ext. 4454
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 11,442,966
- ------------------------------------- --------------------
(Class) (Outstanding at August 8, 2001)
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CLEAN HARBORS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS PAGES
-----
Consolidated Income Statement 1
Consolidated Balance Sheets 2-3
Consolidated Statements of Cash Flows 4-5
Consolidated Statement of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7-15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16-26
PART II: OTHER INFORMATION
Items No. 1 through 6 27
Signatures 28
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
UNAUDITED
(in thousands except for earnings per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------
2001 2000 2001 2000
------- ------- -------- --------
Revenues $62,300 $62,242 $114,118 $114,979
Cost of revenues 43,110 42,795 81,561 81,904
Selling, general and administrative
expenses 11,362 10,679 21,142 20,864
Depreciation and amortization 2,759 2,674 5,548 5,179
------- ------- -------- --------
Income from operations 5,069 6,094 5,867 7,032
Interest expense, net 2,462 2,315 4,590 4,603
------- ------- -------- --------
Income before provision for (benefit from)
income taxes 2,607 3,779 1,277 2,429
Provision for (benefit from)
income taxes 218 140 (80) 230
------- ------- -------- --------
Net income $ 2,389 $ 3,639 $ 1,357 $ 2,199
======= ======= ======== ========
Basic earnings per share $0.20 $0.32 $0.10 $ 0.18
======= ======= ======== ========
Diluted earnings per share $0.18 $0.32 $0.09 $ 0.18
======= ======= ======== ========
Weighted average common
shares outstanding 11,396 11,050 11,349 10,992
======= ======= ======== ========
Weighted average common
shares plus potentially
dilutive common shares 12,703 11,107 12,052 11,138
======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 885 $ 2,629
Restricted investments 783 768
Accounts receivable, net of allowance for doubtful
accounts of $1,611 and $1,549, respectively 48,197 47,201
Prepaid expenses 2,184 1,563
Supplies inventories 3,769 3,379
Income taxes receivable 122 203
Deferred tax assets 2,788 2,400
-------- --------
Total current assets 58,728 58,143
-------- --------
Property, plant and equipment:
Land 8,478 8,478
Buildings and improvements 42,985 42,700
Vehicles and equipment 92,364 90,794
Furniture and fixtures 2,228 2,225
Construction in progress 2,005 794
-------- --------
148,060 144,991
Less - Accumulated depreciation
and amortization 93,739 89,389
-------- --------
Net property, plant and equipment 54,321 55,602
-------- --------
Other assets:
Goodwill, net 19,416 19,799
Permits, net 11,120 11,667
Other 4,309 4,357
-------- --------
Total other assets 34,845 35,823
-------- --------
Total assets $147,894 $149,568
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, DECEMBER 31,
2001 2000
-------- --------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 3,814 $ 2,405
Accounts payable 16,429 19,100
Accrued disposal costs 7,451 7,479
Other accrued expenses 12,511 12,601
Income taxes payable 308 137
-------- --------
Total current liabilities 40,513 41,722
-------- --------
Long-term obligations, less current maturities 60,699 64,853
Other 1,244 1,358
-------- --------
Total other liabilities 61,943 66,211
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value:
Series A Convertible;
Authorized-2,000,000 shares; Issued and
outstanding - none --- ---
Series B Convertible;
Authorized-156,416 shares; Issued and
outstanding 112,000 (liquidation
preference of $5.6 million) 1 1
Common Stock, $.01 par value
Authorized-20,000,000 shares;
Issued and outstanding-11,414,108 and
11,216,107 shares, respectively 114 112
Additional paid-in capital 64,667 61,999
Accumulated deficit (19,344) (20,477)
-------- --------
Total stockholders' equity 45,438 41,635
-------- --------
Total liabilities and stockholders' equity $147,894 $149,568
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,357 $ 2,199
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,548 5,179
Allowance for doubtful accounts 342 342
Amortization of deferred financing costs 265 172
Deferred income taxes (388) ---
(Gain) loss on sale of fixed assets (19) 6
Changes in assets and liabilities:
Accounts receivable (1,338) (7,764)
Prepaid expenses (621) (600)
Supplies inventories (390) (65)
Income taxes receivable 81 ---
Other assets 48 (4)
Accounts payable (3,360) 233
Accrued disposal costs (28) 2,573
Other accrued expenses (90) 1,054
Income taxes payable 171 123
Other liabilities (114) 48
------- -------
Net cash provided by operating activities 1,464 3,496
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,661) (4,570)
Proceeds from the sale of fixed assets 32 43
Cost of restricted investments acquired (15) (552)
------- -------
Net cash used in investing activities $(2,644) $(5,079)
------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
4
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes $(50,000) $ ---
Issuance of Subordinated Notes 35,000 ---
Additional borrowings under term notes 19,000 3,000
Net borrowings (repayments) under long-term
revolver 3,317 (527)
Payments on long-term obligations (5,152) (767)
Additions to deferred financing costs (2,854) ---
Proceeds from exercise of stock options 29 69
Proceeds from employee stock purchase plan 96 121
-------- ------
Net cash provided by (used in) financing activities (564) 1,896
-------- ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: (1,744) 313
Cash and cash equivalents, beginning of year 2,629 2,783
-------- ------
Cash and cash equivalents, end of period $ 885 $3,096
======== ======
Supplemental Information:
Non cash investing and financing activities:
Stock dividend on preferred stock $ 224 $ 224
The accompanying notes are an integral part of these consolidated financial
statements.
5
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
UNAUDITED
(in thousands)
Series B
Preferred Stock Common Stock
------------------------ ------------------------ Additional Total
Number of $0.01 Par Number of $0.01 Par Paid-in Accumulated Stockholders'
Shares Value Shares Value Capital Deficit Equity
-------- --------- ------- --------- ---------- ---------- ----------
Balance at December 31, 2000 112 $1 11,216 $112 $61,999 $(20,477) $41,635
Net income --- --- --- --- --- 1,357 1,357
Warrants issued --- --- --- --- 2,321 --- 2,321
Preferred stock dividends:
Series B --- --- 105 1 223 (224) ---
Proceeds from exercise of
stock options --- --- 29 --- 29 --- 29
Employee stock purchase plan --- --- 64 1 95 --- 96
------ ------ ------- ------ --------- -------- ----------
Balance at June 30, 2001 112 $1 11,414 $114 $64,667 $(19,344) $45,438
====== ====== ======= ====== ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
6
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The consolidated interim financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission, and include, in the opinion of management, all
adjustments of a normal recurring nature necessary for the fair statement of
results of interim periods. The operating results for the three and six months
ended June 30, 2001 are not necessarily indicative of those to be expected for
the full fiscal year. Reference is made to the audited consolidated financial
statements and notes thereto included in the Company's Report on Form 10-K for
the year ended December 31, 2000 as filed with the Securities and Exchange
Commission.
NOTE 2 RECLASSIFICATIONS
As disclosed in Note 4, the Company had outstanding $50,000,000 of 12.50%
Senior Notes due May 15, 2001 (the "Senior Notes") that were redeemed on April
30, 2001. Reclassifications were made between current maturities of long-term
obligations and long-term obligations, less current maturities as of December
31, 2000 to reflect the post-balance-sheet-date issuance of the long-term
obligations issued to refinance the Senior Notes.
NOTE 3 LEGAL MATTERS
As disclosed in the Form 10-K for the year ended December 31, 2000, the
Company was the subject of a review by the US Environmental Protection Agency
(the "US EPA") concerning the untimely delivery of certain railcars to the Clean
Harbors' rail facility in Sterling, Colorado. In 1998, the Company determined
that because the railcars had not been received in a timely fashion, the Company
should have filed exception reports notifying regulators of the delay in
arrival. The Company immediately filed the required reports with the
appropriate regulators thereby coming into compliance with the regulation, and
the Company implemented new internal reporting procedures to ensure that
exception reports would be filed in a timely fashion. To the Company's
knowledge, there have been no subsequent untimely filings.
No other infractions of any federal or state law were identified as a
result of this review. Accordingly, the Company agreed to enter into Civil
Consent Agreements with the US EPA to settle the matter without further
proceedings and without formally admitting to any alleged violations.
7
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 LEGAL MATTERS (CONTINUED)
The Company paid a penalty to the US EPA of $50,000 and donated $150,000 to the
City of Sterling to purchase hazardous material apparatus for the City's fire
department in connection with the settlement of the enforcement action taken by
the US EPA for violations of the hazardous waste exception reporting
requirements promulgated under the Resource Conservation and Recovery Act
(RCRA). The agreements and these payments effectively close this matter.
NOTE 4 FINANCING ARRANGEMENTS
The following table is a summary of the Company's long-term debt obligations:
June 30, DECEMBER 31,
2001 2000
------------------------------
(IN THOUSANDS)
Long-term obligations consist of the following:
Economic development revenue bonds, bearing interest at 10.75%............ $ 9,800 $ 9,800
Revolving credit with a financial institution, bearing interest at the
Eurodollar rate (3.863% at June 30, 2001) plus 3.00% or the "prime" rate
(7.00% at June 30, 2001) plus 1.50%, collateralized by substantially all
assets................................................................... 4,711 1,394
Term Note B payable, bearing interest at the greater of the "prime" rate
(7.00% at June 30, 2001) plus 3.50% or 12.00% collateralized
by substantially all assets............................................. 18,548 ---
1999 Term Note payable.................................................... --- 4,200
2000 Term Note payable, bearing interest at the Eurodollar rate (3.863%
at June 30, 2001) plus 3.00% or the "prime" rate (7.00% at June 30,
2001) plus 1.50% collateralized by substantially all assets.............. 1,833 2,333
Subordinated Notes, bearing interest at 16%.............................. 35,000 ---
Senior Notes payable, bearing interest at 12.50%......................... --- 50,000
-------- -------
69,892 67,727
Less: current maturities................................................. 3,814 2,405
Less: unamortized financing costs........................................ 3,113 469
Less: issue discount on Subordinated Notes............................... 2,266 ---
-------- -------
Long-term obligations.................................................... $60,699 $64,853
======== =======
8
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 FINANCING ARRANGEMENTS (CONTINUED)
Below is a summary of minimum principal payments due under the Company's long-
term obligations (in thousands):
YEAR Amount
- ---- ------------
Last half 2001................................................ $ 1,957
2002.......................................................... 3,814
2003.......................................................... 3,147
2004.......................................................... 7,525
2005.......................................................... 2,814
Thereafter.................................................... 50,635
--------
Total minimum payments due under long-term obligations
including current maturities................................ $69,892
========
The Company had outstanding $50,000,000 of 12.50% Senior Notes due May 15,
2001 (the "Senior Notes") that were redeemed on April 30, 2001. As described in
the Form 10-K for the year ended December 31, 2000, the Company had at December
31, 2000 a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial
institution (the "Lender"). The Loan Agreement provided for a $24,500,000
revolving credit facility (the "Revolver"), a $6,000,000 term promissory note
(the "1999 Term Note"), and a $3,000,000 term promissory note (the "2000 Term
Note"). On April 12, 2001, the Company signed and closed a $51,000,000 Amended
and Restated Loan Agreement (the "Amended Loan Agreement") with the Lender. The
Amended Loan Agreement increased the amount available to borrow under the
Revolver to $30,000,000 and extended the term of the Revolver to April 12, 2004.
The Revolver allows the Company to borrow up to $30,000,000 in cash and letters
of credit, based on a formula of eligible accounts receivable. Letters of credit
may not exceed $20,000,000 at any one time. At June 30, 2001, borrowings on the
Revolver were $4,711,000, letters of credit outstanding were $11,640,000 and the
amount available to borrow was $13,649,000. The Revolver requires the Company to
pay an unused line fee of one-half of one percent on the unused portion of the
line. The Amended Loan Agreement required the payment on April 12 of the then
$3,800,000 outstanding balance on the 1999 Term Note and provided for the
issuance of a new $19,000,000 term promissory note (the "Term Note B"). On April
12, 2001, $4,000,000 was advanced under Term Note B to pay the 1999 Term Note
and other amounts then borrowed by the Company, and the $15,000,000 balance of
Term Note B was advanced on April 30 towards the redemption of the Senior Notes.
The interest rate for Term Note B is the greater of the prime rate plus 3.50% or
12.00%, and it is payable in 84 monthly installments commencing May 1, 2001. The
terms of the 2000 Term Note remain unchanged.
9
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 FINANCING ARRANGEMENTS (CONTINUED)
The Amended Loan Agreement allows for up to 80% of the outstanding balance
of the Revolver and 100% of the balance of the 2000 Term Note to bear interest
at the Eurodollar rate plus three percent; the remaining balance bears interest
at the "prime" rate plus one and one-half percent. The Amended Loan Agreement is
collateralized by substantially all of the Company's assets, and the Amended
Loan Agreement provides for certain covenants including, among others,
maintenance of a minimum level of working capital, adjusted net worth and
earnings before interest, income taxes, depreciation and amortization
("EBITDA"). The Amended Loan Agreement requires that the Company maintain
$10,000,000 of working capital excluding the current portion of liabilities
under the Amended Loan Agreement and the Subordinated Note Agreement. The
Company had $21,926,000 of working capital on June 30, 2001, excluding the
current portion of these notes. The net worth covenant requires adjusted net
worth, defined as net worth plus the balance owed on the subordinated notes, to
be greater than $60,000,000. At June 30, 2001, the adjusted net worth was
$80,438,000. The Amended Loan Agreement requires that the Company maintain on
a rolling four quarter basis a minimum EBITDA of $20,000,000. For the four
quarter period ended June 30, 2001 the Company reported EBITDA of $24,129,000.
The Amended Loan Agreement also requires that the Company maintain a Senior Debt
to EBITDA ratio of not more than 2.25 to 1.0. At June 30, 2001 Senior Debt to
EBITDA ratio was 1.53 to 1.0.
On April 30, 2001, the Company issued $35,000,000 of 16% Senior
Subordinated Notes (the "Subordinated Notes") under a Securities Purchase
Agreement (the "Subordinated Note Agreement"). Until October 30, 2006, the
Company, at its option, may pay the interest at the 16% rate or may pay interest
at 14% and defer payment of the remaining 2% in the form of like notes until the
Subordinated Notes are due. Interest payable in cash on the Subordinated Notes
is due in semi-annual payments on April 30 and October 30. In conjunction with
the Subordinated Notes, the Company issued detachable warrants for 1,519,020
shares of common stock that are exercisable at $0.01 per share and expire on
April 30, 2008. The Subordinated Notes yield 17.02% when the debt issue discount
relating to the warrants is included. One-half of the Subordinated Notes are due
on April 30, 2007 with the balance due on April 30, 2008. The Subordinated Note
Agreement provides that the holders of the Subordinated Notes will be able to
call the Notes in the event of a change in control of the Company.
The Subordinated Note Agreement contains covenants the most restrictive of
which require that the Company maintain a rolling four quarter fixed charge
coverage ratio of not less than 1.10 to 1.0. For the four quarters ended June
30, 2001, the fixed charge coverage ratio was 1.43 to 1.0. The Subordinated
Notes require that the Company maintain a tangible capital base of not less than
$27,000,000 for the quarter ending June 30, 2001, not less than $30,500,000 for
the quarter ending September 30, 2001, not less than $33,000,000 for the quarter
ending December 31, 2001 and not less than $35,500,000 for quarters ending
thereafter. At June
10
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 FINANCING ARRANGEMENTS (CONTINUED)
30, 2001, the tangible capital base was $49,902,000. The Company is required to
maintain rolling four quarter earnings before interest, income taxes,
depreciation and amortization (EBITDA) of not less than $18,000,000. For the
four quarter period ended June 30, 2001, EBITDA was $24,129,000. The Company
shall maintain a priority debt to EBITDA ratio calculated as of the last day of
each fiscal quarter of not more than 2.25 to 1.0. Priority debt at June 30, 2001
consisted of debt issued under the Loan Agreement. The priority debt to EBITDA
ratio on June 30, 2001 was 1.04 to 1.0. The Company is required to maintain a
ratio of total liabilities to tangible capital base of not more than 3.00 to 1.0
for the fiscal quarters ending June 30, September 30 and December 31, 2001 and
for the quarters ending March 31, 2002 and thereafter a ratio of not more than
2.75 to 1.0. At June 30, 2001 the total liabilities to tangible capital base
ratio was 1.35 to 1.0.
Effective June 1, 2000, the Bond Documents under which the Company has
outstanding $9,800,000 of industrial revenue bonds (the "Bonds") were amended in
order to modify the limitation on additional debt covenant and certain related
debt service reserve fund requirements. Under the amended Bond Documents, the
Company may now issue Bank Debt up to $35,000,000 provided that after the
issuance, the ratio of the Company's total debt to total capital (debt plus
stockholders' equity) does not exceed 72% (which ratio will be reduced to 70% on
January 1, 2006 and 65% on January 1, 2011). Although the debt to total capital
ratio was less than 72% and thus within covenant, the amended Bond Documents
require that the Company make six equal monthly payments of $125,000 each for a
total of $750,000 into a debt service reserve fund held by the trustee, if
either of the following occurs: (i) the Company's ratio of earnings before
interest, taxes, depreciation and amortization ("EBITDA") to total interest (the
"EBITDA coverage ratio") for the most recently completed fiscal year is less
than 1.5 to 1.0, or (ii) the Company's ratio of debt to total capital at the end
of such fiscal year is greater than 65%. Because the Company did not satisfy
both of these ratios as of December 31, 1999, the amended Bond Documents
required that the Company make six monthly payments of $125,000 each into the
debt service reserve fund commencing on June 1, 2000, for total of $750,000. In
addition to the $750,000 required to be deposited into the debt service reserve
fund based upon the level of the Company's additional debt, the Company could be
required to make additional payments to bring the total of the debt service
reserve fund to a maximum of approximately $1,200,000 (including the $750,000
described above) if the EBITDA coverage ratio for any fiscal year is less than
1.25 to 1.0. The EBITDA coverage ratio for the year ended December 31, 2000 was
2.24 to 1.0, and the Company was therefore not required to make any such
additional payments into the debt service reserve fund based upon the Company's
EBITDA coverage ratio. The maximum amount of the debt service reserve fund of
approximately $1,200,000 is the same as under the Bond Documents prior to the
amendment, but the amendment modified the terms under which the Company may be
required to make payments into the fund described above.
11
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 FINANCING ARRANGEMENTS (CONTINUED)
As of June 30, 2001, Bank Debt totaled $25,092,000 which was less than the
$35,000,000 allowed; the Company's total debt to total capital ratio was 60.6%
which is less than the 72.0% allowed; and the EBITDA coverage ratio was 2.06 to
1.0 which is greater than the 1.50 to 1.0 required. Under the Bond covenants, if
the Company attains an EBITDA coverage ratio of greater than 1.5 to 1.0 as of
any fiscal yearend beginning with December 31, 2001, the balance on deposit in
the debt service reserve fund in excess of $750,000 will be released for the
Company's general use. The Bond Documents require that a minimum balance of
$750,000 be maintained in the debt service reserve fund until the Bonds mature.
NOTE 5 INCOME TAXES
SFAS 109, "Accounting for Income Taxes," requires that a valuation allowance
be established when, based on an evaluation of objective verifiable evidence,
there is a likelihood that some portion or all of the deferred tax assets will
not be realized. The Company continually reviews the adequacy of the valuation
allowance for deferred tax assets, and, in 1998, based upon this review, the
valuation allowance was increased to cover the value of all net deferred tax
assets. In the fourth quarter of 2000, the Company once again reviewed the
valuation allowance for deferred tax assets. Based on the level of earnings for
2000 and management's projections for profits in future years, it was determined
that it was more likely than not that $2,400,000 of the net deferred tax assets
would be utilized. Accordingly, the fourth quarter 2000 provision for income
taxes included a $2,400,000 benefit relating to adjusting the valuation reserve.
The actual realization of the net operating loss carryforwards and other tax
assets depend on having future taxable income of the appropriate character prior
to their expiration. If the Company reports earnings from operations in the
future, and depending on the level of these earnings, some portion or all of the
valuation allowance would be reversed, which would increase net income reported
in future periods.
In the second quarter of 2001, the Company recorded $137,000 of tangible
property and net worth taxes that are levied as a component of state income
taxes, and the Company wrote off an $81,000 income tax refund that was rejected
by the Internal Revenue Service. In the second quarter of 2000, the Company
recorded $90,000 of state income taxes and $50,000 in federal alternative
minimum taxes. In the first half of 2001, the Company recorded a $388,000 tax
benefit relating to the first quarter loss which was partially offset by
$227,000 in state income taxes and the $81,000 income tax refund that was
written off. In the first half of 2000, the Company recorded $180,000 in state
income tax expense and $50,000 in federal alternative minimum taxes.
12
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 INCOME TAXES (CONTINUED)
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. In
1996, the Company received a notice of intent to assess state income taxes of
$3,000,000 from one of the states in which it operates. In the second quarter of
2001, the State reduced its demand from the $3,000,000 originally demanded to
$500,000. The case is currently undergoing administrative appeal. If the Company
loses the administrative appeal, the Company may be required to make a payment
of approximately $500,000 plus accrued interest to the state. The Company cannot
currently predict when the decision for the administrative appeal will be made.
The Company believes that it has properly reported its state income and intends
to contest the assessment vigorously. While the Company believes that the final
outcome of the dispute will not have a material adverse effect on the Company's
financial condition or results of operations, no assurance can be given as to
the final outcome of the dispute, the amount of any final adjustments or the
potential impact of such adjustments on the Company's financial condition or
results of operations.
NOTE 6 EARNINGS PER SHARE
The following is a reconciliation of basic and diluted income per share
computations (in thousands except for per share amounts):
Three Months Ended June 30, 2001
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Income
----------- ------------- ---------
Net income $2,389
Less preferred dividends 112
------- ------- ------
Basic EPS
(income available to shareholders) 2,277 11,396 0.20
Effect of dilutive securities --- 1,307 (0.02)
------ ------- ------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $2,277 12,703 $0.18
====== ====== ======
13
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 EARNINGS PER SHARE (CONTINUED)
Three Months Ended June 30, 2000
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Income
------------- ------------- ---------
Net income $3,639
Less preferred dividends 112
------- ------- -------
Basic EPS
(income available to shareholders) 3,527 11,050 0.32
Effect of dilutive securities --- 57 ---
------ ------ ------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $3,527 11,107 $0.32
====== ====== ======
Six Months Ended June 30, 2001
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Income
----------- ------------- ---------
Net income $1,357
Less preferred dividends 224
------- ------- ------
Basic EPS
(income available to shareholders) 1,133 11,349 0.10
Effect of dilutive securities --- 703 (0.01)
------- ------- ------
Diluted EPS
Income available to common share-
holders plus assumed conversions 1,133 12,052 $0.09
======= ====== ======
14
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 EARNINGS PER SHARE (CONTINUED)
Six Months Ended June 30, 2000
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Income
----------- ------------- ---------
Net income $2,199
Less preferred dividends 224
------- ------- ------
Basic EPS
(income available to shareholders) 1,975 10,992 0.18
Effect of dilutive securities --- 146 ---
------ -------- ------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $1,975 11,138 $0.18
====== ======== ======
The Company has issued options, warrants and convertible preferred stock
which are potentially dilutive to earnings. For the three months ended June 30,
2001, some of the options outstanding are dilutive while the convertible
preferred stock is not dilutive. For the six months ended June 30, 2001, the
warrants issued in conjunction with the Subordinated Notes as described in Note
4 and some of the options outstanding are dilutive while the convertible
preferred stock is not dilutive. The warrants outstanding at December 31, 2000
expired in the first quarter of 2001 without being exercised. For the three and
six months ended June 30, 2000 some of the options outstanding but none of the
warrants or convertible preferred stock then outstanding are dilutive. Only
those options and warrants where the exercise price was less than the average
market price of the common shares for the period are included in the above
calculations.
15
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statement
In addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "plans to," "estimates,"
"projects," or similar expressions. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in these forward-looking statements.
Factors that might cause such a difference include, but are not limited to those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Factors That May Affect Future
Results." Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's opinions only as of the date
hereof. The Company undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
operating data associated with the Company's results of operations.
Percentage of Total Revenues
------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties 9.6 11.4 9.0 11.9
Other costs 59.6 57.3 62.5 59.3
----- ----- ----- -----
Total cost of revenues 69.2 68.7 71.5 71.2
Selling, general and administrative
expenses 18.3 17.2 18.5 18.2
Depreciation and amortization
of intangible assets 4.4 4.3 4.9 4.5
----- ----- ----- -----
Income from operations 8.1% 9.8% 5.1% 6.1%
===== ===== ===== =====
16
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
Other Data:
- ----------
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) (in thousands) $7,828 $8,768 $11,415 $12,211
REVENUES
Revenues for the second quarter of 2001 were $62,300,000, an increase of
$58,000 from $62,242,000 of revenues for the second quarter of 2000. Site
services revenues decreased by $3,003,000 due to a greater amount of higher
margin emergency response events in 2000 as compared to 2001. Transportation and
disposal revenue increased by $3,003,000, reflecting growth in the Company's
base customer business.
Revenues for the first half of 2001 were $114,118,000, a decrease of
$861,000 or 0.7% from $114,979,000 of revenues for the first half of 2000. Site
services revenues decreased by $4,692,000 due to a greater amount of higher
margin emergency response events in 2000 as compared to 2001. Transportation and
disposal revenue increased by $4,973,000, reflecting growth in the Company's
base customer business.
There are many factors which have impacted, and continue to impact, the
Company's revenues. These factors include: competitive industry pricing;
continued efforts by generators of hazardous waste to reduce the amount of
hazardous waste they produce; significant consolidation among treatment and
disposal companies; industry-wide over capacity; and direct shipment by
generators of waste to the ultimate treatment or disposal location.
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. The Company
continues to upgrade the quality and efficiency of its waste treatment services
through the development of new technology and continued modifications and
upgrades at its facilities. In addition, the Company uses strategic sourcing
initiatives in order to reduce operating costs by identifying suppliers that are
able to supply goods and services at lower costs, by obtaining volume discounts
where the Company is currently purchasing goods and services from various
suppliers and consolidating these purchases with a small number of suppliers,
and by reducing the internal costs of purchasing goods and services by reducing
the number of suppliers that the Company uses through reducing the number of
purchase orders that must be prepared and invoices that must be processed. No
assurance can be given that the Company's efforts to manage future operating
expenses will be successful. Efforts to reduce costs are ongoing.
17
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COST OF REVENUES
Cost of revenues were $43,110,000 for the quarter ended June 30, 2001
compared to $42,795,000 for the quarter ended June 30, 2000, an increase of
$315,000 or 0.7%. As a percentage of revenues, cost of revenues increased from
68.7% for the quarter ended June 30, 2000 to 69.2% for the quarter ended June
30, 2001. One of the largest components of cost of revenues is the cost of
sending waste to other companies for disposal. Disposal costs paid to third
parties as a percentage of revenues declined from 11.4% for the quarter ended
June 30, 2000 to 9.6% for the quarter ended June 30, 2001. This decrease was due
to continuing efforts to internalize the disposal of waste, to develop
alternative lower cost disposal technologies and to identify lower cost
suppliers. Other costs of revenues as a percentage of revenues increased from
57.3% for the quarter ended June 30, 2000 to 59.6% for the quarter ended June
30, 2001. Other costs increased as a percentage of revenues due to less higher
margin emergency response work performed in the second quarter of 2001 as
compared to the second quarter of 2000.
Cost of revenues were $81,561,000 for the six months ended June 30, 2001
compared to $81,904,000 for the six months ended June 30, 2000, a decrease of
$343,000. As a percentage of revenues, cost of revenues increased from 71.2% for
the six months ended June 30, 2000 to 71.5% for the six months ended June 30,
2001. Disposal costs paid to third parties as a percentage of revenues declined
from 11.9% for the six months ended June 30, 2000 to 9.0% for the six months
ended June 30, 2001. This decrease was due to continuing efforts to internalize
the disposal of waste, to develop alternative lower cost disposal technologies
and to identify lower cost suppliers. Other costs of revenues as a percentage of
revenues increased from 59.3% for the six months ended June 30, 2000 to 62.5%
for the six months ended June 30, 2001. Other costs increased as a percentage of
revenues due to less higher margin emergency response work performed in the
first half of 2001 as compared to the first half of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $11,362,000
for the quarter ended June 30, 2001 from $10,679,000 for the quarter ended June
30, 2000, an increase of $683,000 or 6.4%. Increases in expenses primarily
consisted of $350,000 for two legal matters, $340,000 of costs related to
the refinancing of the Senior Notes, an increase in the 401(K) match which was
implemented in order to improve recruitment and retention of employees, and a
charge taken to write down the carrying value of the Natick, Massachusetts
facility to its net realizable value. These increases in expenses were partially
offset by a decrease in expense for commissions and the management incentive
program due to the Company not fully meeting its sales and profitability goals
for the second quarter of 2001 while these goals were reached in the second
quarter of 2000.
18
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
Selling, general and administrative expenses increased to $21,142,000 for
the six months ended June 30, 2001 from $20,864,000 for the six months ended
June 30, 2000, an increase of $278,000 or 1.3%. Increases in expenses primarily
consisted of $350,000 for two legal matters, $340,000 of costs related to
the refinancing of the Senior Notes, an increase in the 401(K) match which was
implemented in order to improve recruitment and retention of employees, and a
charge taken to write down the carrying value of the Natick, Massachusetts
facility to its net realizable value. These increases in expenses were partially
offset by a decrease in expense for commissions and the management incentive
program due to the Company not fully meeting its sales and profitability goals
for the first half of 2001 while these goals were reached in the first half of
2000.
INTEREST EXPENSE, NET
Interest expense net of interest income was $2,462,000 for the second
quarter of 2001 as compared to $2,315,000 for the second quarter of 2000. As
further discussed under "Financial Condition and Liquidity" later in this
report, on April 30, 2001 the Company redeemed $50,000,000 of Senior Notes.
Interest expense increased due to the higher interest rates on the debt issued
to refinance the Senior Notes. Partially offsetting this increase is a decrease
in expense due to lower average balances of debt outstanding.
Interest expense net of interest income was $4,590,000 for the first half
of 2001 as compared to $4,603,000 for the first half of 2000. Interest expense
decreased due to lower average balances of debt outstanding. Partially
offsetting this decrease is an increase in expense due to the higher interest
rates on the debt issued to refinance the Senior Notes.
INCOME TAXES
SFAS 109, "Accounting for Income Taxes," requires that a valuation
allowance be established when, based on an evaluation of objective verifiable
evidence, there is a likelihood that some portion or all of the deferred tax
assets will not be realized. The Company continually reviews the adequacy of
the valuation allowance for deferred tax assets, and, in 1998, based upon this
review, the valuation allowance was increased to cover the value of all net
deferred tax assets. In the fourth quarter of 2000, the Company once again
reviewed the valuation allowance for deferred tax assets. Based on the level of
earnings for 2000 and management's projections for profits in future years, it
was determined that it was more likely than not that $2,400,000 of the net
deferred tax assets would be utilized. Accordingly, the fourth quarter 2000
provision for income taxes included a $2,400,000 benefit relating to adjusting
the valuation reserve. The actual realization of the net operating loss
carryforwards and other tax assets depend on having future taxable income of the
appropriate character prior to their expiration. If the Company reports earnings
from operations in the future, and depending on the level of these earnings,
some portion or all of the valuation allowance would be reversed, which would
increase net income reported in future periods.
19
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES (CONTINUED)
In the second quarter of 2001, the Company recorded $137,000 of tangible
property and net worth taxes that are levied as a component of state income
taxes, and the Company wrote off an $81,000 income tax refund that was rejected
by the Internal Revenue Service. In the second quarter of 2000, the Company
recorded $90,000 of state income taxes and $50,000 in federal alternative
minimum taxes. In the first half of 2001, the Company recorded a $388,000 tax
benefit relating to the first quarter loss which was partially offset by
$227,000 in state income taxes and the $81,000 income tax refund that was
written off. In the first half of 2000, the Company recorded $180,000 in state
income tax expense and $50,000 in federal alternative minimum taxes.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments. In
1996, the Company received a notice of intent to assess state income taxes of
$3,000,000 from one of the states in which it operates. In the second quarter of
2001, the state reduced its demand from the $3,000,000 orginally demanded to
$500,000. The case is currently undergoing administrative appeal. If the Company
loses the administrative appeal, the Company may be required to make a payment
of approximately $500,000 plus accrued intrest to the state. The Company cannot
currently predict when the decision for the administrative appeal will be made.
The Company believes that it has properly reported its state income and intends
to contest the assessment vigorously. While the Company believes that the final
outcome of the dispute will not have a material adverse effect on the Company's
financial condition or results of operations, no assurance can be given as to
the final outcome of the dispute, the amount of any final adjustments or the
potential impact of such adjustments on the Company's financial condition or
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: utilize its facilities and
workforce profitably in the face of intense price competition; maintain or
increase market share in an industry which appears to be downsizing and
consolidating; realize benefits from cost reduction programs; generate
incremental volumes of waste to be handled through its facilities from existing
sales offices and service centers; obtain sufficient volumes of waste at prices
which produce revenue sufficient to offset the operating costs of the
facilities; minimize downtime and disruptions of operations; and develop the
industrial services business.
The future operating results of the Company's incinerator may be
affected by factors such as its ability to: obtain sufficient volumes of waste
at prices which produce revenue sufficient to offset the operating costs of the
facility; minimize downtime and disruptions of operations; and compete
successfully against other incinerators which have an established share of the
incineration market.
20
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED)
The Company's operations may be affected by the commencement and completion
of major site remediation projects; cleanup of major spills or other events;
seasonal fluctuations due to weather and budgetary cycles influencing the timing
of customers' spending for remedial activities; the timing of regulatory
decisions relating to hazardous waste management projects; changes in
regulations governing the management of hazardous waste; secular changes in the
waste processing industry towards waste minimization and the propensity for
delays in the remedial market; suspension of governmental permits; and fines and
penalties for noncompliance with the myriad of regulations governing the
Company's diverse operations. As a result of these factors, the Company's
revenue and income could vary significantly from quarter to quarter, and past
financial performance should not be considered a reliable indicator of future
performance.
Typically during the first quarter of each calendar year there is less
demand for environmental remediation due to the cold weather, particularly in
the Northeast and Midwest regions, and increased possibility of unplanned
weather related plant shutdowns.
FINANCIAL CONDITION AND LIQUIDITY
For the six months ended June 30, 2001, the Company generated $1,464,000 of
cash from operations. Sources of operating cash totaled $7,812,000 and consisted
primarily of $1,357,000 of net income for the period, non-cash expenses of
$5,548,000 for depreciation and amortization, $342,000 for the allowance for
doubtful accounts and $265,000 for the amortization of deferred financing costs.
Partially offsetting these sources of cash were uses of cash of $6,348,000 which
was largely due to lower levels of accounts payable of $3,360,000 at June 30,
2001 as compared to December 31, 2000. The increase in accounts receivable of
$1,338,000 compared to the level at December 31, 2000, which was in turn due to
the higher level of sales in the second quarter of 2001 as compared to the
fourth quarter of 2000 accounted for the next largest use of funds from
operations.
For the six months ended June 30, 2001, the Company used $2,644,000 in
investing activities which consisted primarily of $2,661,000 of additions to
property, plant and equipment and an increase in restricted investments of
$15,000 relating to interest earned on the debt service reserve fund for the
industrial revenue bonds. These uses of funds were partially offset by proceeds
from the sale of fixed assets of $32,000.
For the six months ended June 30, 2001, the Company used $564,000 in
financing activities. As further discussed later in this section of the report,
on April 30, 2001 the Company redeemed $50,000,000 of Senior Notes. Sources of
funds consist of the issuance of Subordinated Notes of $35,000,000, borrowings
under Term Note B of $19,000,000, net borrowings under the revolving line of
credit of $3,317,000, proceeds from the employee stock purchase plan of $96,000
and proceeds from the exercise of stock options of $29,000. These sources of
funds were used to redeem the $50,000,000 of Senior Notes, to reduce long-term
obligations by $5,152,000 and to fund the cost of refinancing the long-term debt
of $2,854,000.
21
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
For the six months ended June 30, 2000, the Company generated
$3,496,000 of cash from operations. Sources of operating cash totaled
$11,929,000 and consisted primarily of $2,199,000 of net income for the period,
non-cash expenses of $5,179,000 for depreciation and amortization, $342,000 for
the allowance for doubtful accounts and $172,000 for the amortization of
deferred financing costs. Additional sources of cash were increases in accrued
disposal costs of $2,573,000 and other accrued expenses of $1,054,000. These
increases in liabilities were due primarily to the greater amount of business
performed in the second quarter of 2000 as compared to the fourth quarter of
1999. Partially offsetting these sources of cash were uses of cash of
$8,433,000 which were primarily due to higher levels of accounts receivable at
June 30, 2000 as compared to December 31, 1999 which was in turn due to the
higher levels of business in the second quarter of 2000 as compared to the
fourth quarter of 1999.
In addition, the Company obtained $1,896,000 of cash from financing
activities which consisted of additional borrowings under the term note of
$3,000,000 and which was partially offset by repayments under the revolving line
of credit of $527,000 and repayments under the term notes of $767,000.
Additional sources of cash from financing activities consisted of proceeds from
the exercise of stock options of $69,000 and proceeds from issuances of stock
under the employee stock purchase plan of $121,000.
The $3,496,000 of cash generated from operations plus the $1,896,000
provided by financing activities together with $43,000 in proceeds from the sale
of fixed assets was used to purchase property, plant and equipment of
$4,570,000, to purchase $552,000 of restricted investments and to increase the
amount of cash on hand by $313,000.
The Company had outstanding $50,000,000 of 12.50% Senior Notes due May 15,
2001 (the "Senior Notes") that were redeemed on April 30, 2001. As described in
the Form 10-K for the year ended December 31, 2000, the Company had at December
31, 2000 a $33,500,000 Loan Agreement (the "Loan Agreement") with a financial
institution (the "Lender"). The Loan Agreement provided for a $24,500,000
revolving credit facility (the "Revolver"), a $6,000,000 term promissory note
(the "1999 Term Note"), and a $3,000,000 term promissory note (the "2000 Term
Note"). On April 12, 2001, the Company signed and closed a $51,000,000 Amended
and Restated Loan Agreement (the "Amended Loan Agreement") with the Lender. The
Amended Loan Agreement increased the amount available to borrow under the
Revolver to $30,000,000 and extended the term of the Revolver to April 12, 2004.
The Revolver allows the Company to borrow up to $30,000,000 in cash and letters
of credit, based on a formula of eligible accounts receivable. Letters of credit
may not exceed $20,000,000 at any one time. At June 30, 2001, borrowings on the
Revolver were $4,711,000, letters of credit outstanding were $11,640,000 and
the amount available to borrow was $13,649,000. The Revolver requires the
Company to pay an unused line fee of one-half of one percent on the unused
portion of the line. The Amended Loan Agreement required the payment on April 12
of the then $3,800,000 outstanding balance on the 1999 Term Note and provided
for the issuance of a new $19,000,000 term promissory note (the "Term Note B").
On April 12, 2001, $4,000,000 was advanced under Term Note B to pay the 1999
Term Note and other amounts then borrowed by the Company, and the $15,000,000
balance of Term Note B was advanced on April 30 towards the redemption of the
Senior Notes. The interest rate for Term Note B is the greater of the prime rate
plus 3.50% or
22
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
12.00%, and it is payable in 84 monthly installments commencing May 1, 2001. The
terms of the 2000 Term Note remain unchanged.
The Amended Loan Agreement allows for up to 80% of the outstanding balance
of the Revolver and 100% of the balance of the 2000 Term Note to bear interest
at the Eurodollar rate plus three percent; the remaining balance bears interest
at the "prime" rate plus one and one-half percent. The Amended Loan Agreement is
collateralized by substantially all of the Company's assets, and the Amended
Loan Agreement provides for certain covenants including, among others,
maintenance of a minimum level of working capital, adjusted net worth and
earnings before interest, income taxes, depreciation and amortization
("EBITDA"). The Amended Loan Agreement requires that the Company maintain
$10,000,000 of working capital excluding the current portion of liabilities
under the Amended Loan Agreement and the Subordinated Note Agreement. The
Company had $21,926,000 of working capital on June 30, 2001, excluding the
current portion of these notes. The net worth covenant requires adjusted net
worth, defined as net worth plus the balance owed on the Subordinated Notes, to
be greater than $60,000,000. At June 30, 2001, the adjusted net worth was
$80,438,000. The Amended Loan Agreement requires that the Company maintain on
a rolling four quarter basis a minimum EBITDA of $20,000,000. For the four
quarter period ended June 30, 2001 the Company reported EBITDA of $24,129,000.
The Amended Loan Agreement also requires that the Company maintain a Senior Debt
to EBITDA ratio of not more than 2.25 to 1.0. At June 30, 2001 Senior Debt to
EBITDA ratio was 1.52 to 1.0.
On April 30, 2001, the Company issued $35,000,000 of 16% Senior Subordinated
Notes (the "Subordinated Notes") under a Securities Purchase Agreement (the
"Subordinated Note Agreement"). Until October 30, 2006, the Company, at its
option, may pay the interest at the 16% rate or may pay interest at 14% and
defer payment of the remaining 2% in the form of like notes until the
Subordinated Notes are due. Interest payable in cash on the Subordinated Notes
is due in semi-annual payments on April 30 and October 30. In conjunction with
the Subordinated Notes, the Company issued detachable warrants for 1,519,020
shares of common stock that are exercisable at $0.01 per share and expire on
April 30, 2008. The Subordinated Notes yield 17.02% when the debt issue discount
relating to the warrants is included. One-half of the Subordinated Notes are due
on April 30, 2007 with the balance due on April 30, 2008. The Subordinated Note
Agreement provides that the holders of the Subordinated Notes will be able to
call the Notes in the event of a change in control of the Company.
23
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
The Subordinated Note Agreement contains covenants the most restrictive of
which require that the Company maintain a rolling four quarter fixed charge
coverage ratio of not less than 1.10 to 1.0. For the four quarters ended June
30, 2001, the fixed charge coverage ratio was 1.43 to 1.0. The Subordinated
Notes require that the Company maintain a tangible capital base of not less than
$27,000,000 for the quarter ending June 30, 2001, not less than $30,500,000 for
the quarter ending September 30, 2001, not less than $33,000,000 for the quarter
ending December 31, 2001 and not less than $35,500,000 for quarters ending
thereafter. At June 30, 2001, the tangible capital base was $49,902,000. The
Company is required to maintain rolling four quarter earnings before interest,
income taxes, depreciation and amortization (EBITDA) of not less than
$18,000,000. For the four quarter period ended June 30, 2001, EBITDA was
$24,129,000. The Company shall maintain a priority debt to EBITDA ratio
calculated as of the last day of each fiscal quarter of not more than 2.25 to
1.0. Priority debt at June 30, 2001 consisted of debt issued under the Loan
Agreement. The priority debt to EBITDA ratio on June 30, 2001 was 1.04 to 1.0.
The Company is required to maintain a ratio of total liabilities to tangible
capital base of not more than 3.00 to 1.0 for the fiscal quarters ending June
30, September 30 and December 31, 2001 and for the quarters ending March 31,
2002 and thereafter a ratio of not more than 2.75 to 1.0. At June 30, 2001 the
total liabilities to tangible capital base ratio was 1.35 to 1.0.
Effective June 1, 2000, the Bond Documents under which the Company has
outstanding $9,800,000 of industrial revenue bonds (the "Bonds") were amended in
order to modify the limitation on additional debt covenant and certain related
debt service reserve fund requirements. Under the amended Bond Documents, the
Company may now issue Bank Debt up to $35,000,000 provided that after the
issuance, the ratio of the Company's total debt to total capital (debt plus
stockholders' equity) does not exceed 72% (which ratio will be reduced to 70% on
January 1, 2006 and 65% on January 1, 2011). Although the debt to total capital
ratio was less than 72% and thus within covenant, the amended Bond Documents
require that the Company make six equal monthly payments of $125,000 each for a
total of $750,000 into a debt service reserve fund held by the trustee, if
either of the following occurs: (i) the Company's ratio of earnings before
interest, taxes, depreciation and amortization ("EBITDA") to total interest (the
"EBITDA coverage ratio") for the most recently completed fiscal year is less
than 1.5 to 1.0, or (ii) the Company's ratio of debt to total capital at the end
of such fiscal year is greater than 65%. Because the Company did not satisfy
both of these ratios as of December 31, 1999, the amended Bond Documents
required that the Company make six monthly payments of $125,000 each into the
debt service reserve fund commencing on June 1, 2000, for total of $750,000. In
addition to the $750,000 required to be deposited into the debt service reserve
fund based upon the level of the Company's additional debt, the Company could be
required to make additional payments to bring the total of the debt service
reserve fund to a maximum of approximately $1,200,000 (including the $750,000
described above) if the EBITDA coverage ratio for any fiscal year is less than
1.25 to 1.0. The EBITDA coverage ratio for the year ended December 31, 2000 was
2.24 to 1.0, and the Company was therefore not required to make any such
additional payments into the
24
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
debt service reserve fund based upon the Company's EBITDA coverage ratio. The
maximum amount of the debt service reserve fund of approximately $1,200,000 is
the same as under the Bond Documents prior to the amendment, but the amendment
modified the terms under which the Company may be required to make payments into
the fund described above.
As of June 30, 2001, Bank Debt totaled $25,092,000 which was less than the
$35,000,000 allowed; the Company's total debt to total capital ratio was 60.6
which is less than the 72.0% allowed; and the EBITDA coverage ratio was 2.06 to
1.0 which is greater than the 1.50 to 1.0 required. Under the Bond covenants,
if the Company attains an EBITDA coverage ratio of greater than 1.5 to 1.0 as of
any fiscal yearend beginning with December 31, 2001, the balance on deposit in
the debt service reserve fund in excess of $750,000 will be released for the
Company's general use. The Bond Documents require that a minimum balance of
$750,000 be maintained in the debt service reserve fund until the Bonds mature.
The Company expects 2001 capital expenditures to be approximately $7,500,000.
This consists of $5,000,000 that is required to maintain existing property,
plant and equipment and $2,500,000 of strategic initiatives to expand the
Company's capabilities. The Company believes that it has all of the facilities
required for the foreseeable future. Thus, capital expenditures are expected to
be limited to maintaining existing capital assets, replacing site services
equipment, upgrading information technology hardware and software, and specific
strategic initiatives. The Company continues to evaluate potential acquisitions
and opening additional site services offices within and next to the Company's
service areas. Thus, it is possible that capital additions could exceed the
$7,500,000 currently planned.
The Company believes that cash generated from operations in the future
together with availability under its Revolver will be sufficient to operate the
business and fund capital expenditures. In addition, the Company believes that
interest expense in 2001 will be somewhat higher than in 2000 with an increase
in interest expense due to higher average interest rates being partially offset
by lower average debt outstanding.
Dividends on the Company's Series B Convertible Preferred Stock are payable
on the 15th day of January, April, July and October, at the rate of $1.00 per
share, per quarter; 112,000 shares are outstanding. Under the terms of the
preferred stock, the Company can elect to pay dividends in cash or in common
stock with a market value equal to the amount of the dividend payable. The
Company elected to pay the January and April 2001 dividends in common stock.
Accordingly, the Company issued 59,438 and 45,597 shares of common stock to the
holders of the preferred stock in the quarters ended March 31 and June 30, 2001,
respectively. The Company anticipates being able to resume cash payment of
preferred stock dividends starting with the July 15, 2001 dividend.
25
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill be amortized over their useful lives.
SFAS No. 141 is effective for all business combinations initiated after June 30,
2001 and for all business combinations accounted for by the purchase method
for which the date of acquisition is after June 30, 2001. The provisions of SFAS
No.142 will be effective for fiscal years beginning after December 15, 2001, and
will thus be adopted by the Company, as required, in fiscal year 2002. The
Company has historically accounted for acquisitions as purchases; thus, the
adoption of SFAS No. 141 is not expected to materially effect the Company's
results. The Company expects the adoption of SFAS No. 142 will eliminate
amortization of goodwill expense of $767,000 in 2002. The Company has not yet
tested goodwill for impairment using the criteria set forth under SFAS No. 142;
thus, the Company cannot predict what impact, if any, SFAS No. 142 will have on
its periodic tests of impaired assets.
26
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
See Note 3 to the financial statements.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company's 2001 Annual Meeting of Stockholders was held on June 16,
2001. At the meeting, the Stockholders elected John P. DeVillars and Daniel J.
McCarthy to serve as directors of the Company for a three-year term, until the
2004 Annual Meeting of Stockholders. Other directors whose term of office as
director continued after the meeting were: John F. Kaslow, John T. Preston, Alan
S. McKim, Thomas J. Shields and Lorne R. Waxlax.
Stockholders owning 10,377,559 shares of stock, or 91.0% of eligible shares
were represented in person or by proxy.
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibit No. Description Location
- ----------- ----------- --------
Reports on Form 8-K None
27
CLEAN HARBORS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Clean Harbors, Inc.
-------------------------
Registrant
Dated: August 13, 2001 By: /s/ Alan S. McKim
--------------------------
Alan S. McKim
Chairman of the Board and
Chief Executive Officer
Dated: August 13, 2001 By: /s/ Roger A. Koenecke
--------------------------
Roger A. Koenecke
Senior Vice President and
Chief Financial Officer
28