ITEM 1. Business. --------
THE COMPANY - -----------
EnviroSource, Inc. (the "Company") supplies industrial customers with long-term, specialized services, primarily the recycling, handling, stabilization or landfilling of environmentally sensitive wastes or by-products. The Company's principal business segments are the Industrial Environmental Services segment, which provides metals reclamation, recycling and other specialized services for the steel industry, and the Treatment & Disposal Services segment, which provides hazardous waste treatment and disposal services and waste stabilization services for industrial and governmental customers.
The Company conducts its operations exclusively through its subsidiaries. International Mill Service, Inc. and its subsidiaries ("IMS") constitute the Industrial Environmental Services segment, and EnviroSource Treatment & Disposal Services, Inc.("TDS"), through its Envirosafe and Conversion Systems subsidiaries, constitutes the Treatment & Disposal Services 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 May 1986 to NEOAX, Inc. ("NEOAX"). In June 1987, NEOAX reincorporated in Delaware. On November 14, 1989, the Company changed its name 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. Between March 1988 and the end of 1991, the Company 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 Industrial Environmental Services and Treatment & Disposal Services segments and IMSAMET (discussed below), completing its transformation into an environmental services company.
During 1993 the Company completed a comprehensive recapitalization (the "Recapitalization") designed to increase the Company's liquidity and capital resources, improve operating and financial flexibility, reduce interest expense and preferred dividend requirements, and enhance the Company's ability to pursue the growth opportunities in its businesses. The Recapitalization included the sale of Common Stock to an affiliate of Freeman Spogli & Co.("FS&Co.") and another investor (collectively, the "Investors") and the purchase by the Investors of certain equity securities from The Dyson-Kissner-Moran Corporation ("DKM") and WM Financial Corporation ("WM Financial"). The sale of stock and warrants to FS&Co. and the subsequent related transfers of stock are hereinafter referred to as the "FSC Transaction." As a result of the FSC Transaction, FS&Co. owns approximately 48% of the Common Stock of the Company.
In addition, in July 1993 the Company sold $220 million principal amount of 9-3/4% Senior Notes Due 2003 (the "Senior Notes"). A significant portion of the proceeds from the sale of the Senior Notes was used to retire $150 million principal amount of the Company's 14% Extendible Reset Senior Subordinated Notes Due 1998.
During the fourth quarter of 1993 and throughout 1994 and 1995 the Company took a number of steps to reduce costs and terminate unprofitable operations. These steps included (i) terminating certain recycling units, (ii) discontinuing efforts to obtain a hazardous waste landfill permit in Pennsylvania and (iii) reorganizing the Envirosafe and Conversion Systems businesses into the TDS business unit.
To further reduce costs and increase profitability, in February 1996 the Company announced a major reorganization of its headquarters organization that saved the Company approximately $4.3 million in 1996 and is expected to save approximately $5 million annually in 1997 and years thereafter. The reorganization included the closing of the Company's corporate headquarters in Stamford, Connecticut and the TDS headquarters in Horsham, Pennsylvania. Activities of both offices were moved to IMS's offices in Horsham, Pennsylvania in June 1996. Headcount was reduced by approximately 50 persons, primarily from TDS. The Company recorded charges of approximately $4.4 million during 1996 for the reorganization.
In November 1996 the Company announced that it had signed a definitive agreement to sell IMSAMET, Inc. and its subsidiaries ("IMSAMET") in order to focus the Company's efforts upon its steel-related businesses. IMSAMET is an aluminum recycling and reclamation company. This sale was completed in January 1997.
BUSINESS SEGMENTS - -----------------
INDUSTRIAL ENVIRONMENTAL SERVICES ---------------------------------
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. During the second quarter of 1996, IMS purchased a smaller steel mill services company, thereby increasing its steel mill customer base.
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 provides recycling and metal recovery operations under long-term contracts at over 50 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 and surface conditioning. IMS has enhanced the slab hauling process by using rubber-tired carriers that straddle steel slabs to move them more efficiently throughout the mill. This service, currently in place at two integrated steel mills, 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 six steel mills.
IMS has a diversified customer base, with approximately half of its revenues coming from integrated steel producers and half from mini-mills and specialty mills. IMS's largest site is at USX Corporation's Gary Works, in Gary, Indiana, the largest steel mill in the U.S. USX accounted for 20%, 20% and 22% of the Company's consolidated revenues of continuing operations in 1996, 1995 and 1994 respectively (including revenues attributable to services performed by the Treatment & Disposal Services segment). Long term contracts governing the related services expire between late 1997 and 2001. Over the next several years, the maintenance of USX as a customer will be material to the Company's consolidated revenues and operating income.
Substantially all of IMS's services are provided on-site at steel mills, using IMS employees and 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.
Competition. Competition in IMS's markets is based primarily on quality of ----------- service, reliability, technology and price. In its core steel reclamation business, IMS services customers responsible for approximately one-third of total domestic steel production. IMS has one large competitor and many smaller competitors. The Company believes that IMS's leading market position is based on its reliability, responsiveness to customer needs, capital resources and breadth of expertise.
TREATMENT & DISPOSAL SERVICES -----------------------------
TDS, 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"), TDS owns major commercial hazardous waste treatment and disposal facilities in Ohio and Idaho. Envirosafe services some of the country's largest steel, chemical, energy, automotive, aerospace, electronics and utility companies, as well as numerous government agencies.
Envirosafe has approximately 4 million cubic yards of permitted disposal capacity. In 1992 Envirosafe Services of Ohio, Inc. received final approval to expand its Ohio facility and in 1993 completed construction of the first phase of a 2.6 million cubic yard disposal cell. The second phase of construction of this cell was completed in December 1994 and approval to accept waste was obtained in January 1995. In late 1993, Envirosafe Services of Idaho, Inc. received final approval to expand an active disposal cell at its Idaho facility and completed construction of the second phase of such cell.
In 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 each of its Ohio and Idaho facilities. See below for a discussion of Super Detox(R) . In addition, a rail transfer facility was opened in Idaho in 1993 and was upgraded in 1995. New rail service into the Ohio facility became available during November 1996, giving the Company what it believes to be the only hazardous waste treatment and disposal facility in the United States with such direct rail service.
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 in its approved disposal cells well into the next decade. Historically, the Company's hazardous waste treatment and disposal services business has been somewhat seasonal, with the first quarter of the year tending to be slower depending primarily on winter weather conditions.
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 the future imposition of additional environmental compliance requirements could have a material adverse effect on TDS'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. 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 one of the best environmental compliance records in the industry.
TDS currently operates and maintains a captive landfill for a domestic steel mill pursuant to a service contract. TDS is currently exploring additional opportunities for providing captive landfill services.
TDS's Conversion Systems unit has provided electric utilities with turn-key design, engineering and installation of systems for the stabilization of wet scrubber effluent and boiler ash residues produced at coal-fired power plants. These systems convert the sludge resulting from wet scrubber removal of sulfur dioxide from power plant emissions into a concrete-like material suitable for environmentally responsible landfilling. Conversion Systems substantially completed its last major project of this type in 1995. However, in response to Phase II of the "Acid Rain" provisions of the Clean Air Act Amendments of 1990, additional opportunities may be available to Conversion Systems. Although it is not yet clear how many power plants will install wet scrubbers and elect or be required to include stabilization units, the Company believes that its technology will continue to provide the utility industry with a cost-effective and environmentally desirable waste management solution. The Company continues to explore opportunities for utilizing its flue gas desulfurization sludge stabilization expertise in the Eastern European market as well.
Conversion Systems also is the sole licensee of a proprietary technology (Super Detox(R)) for stabilizing electric arc furnace dust - a listed hazardous waste (KO61) under RCRA generated by steel mills - that renders the EAF dust suitable for landfilling in non-hazardous landfills and for possible reuse. TDS currently operates an EAF dust stabilization facility on-site at one of the largest domestic mini-mills, and provides Super Detox(R) stabilization for EAF dust at each of its regional Envirosafe Ohio and Idaho facilities. During 1994, 1995 and 1996, TDS entered into a number of new contracts to receive and process EAF dust at its Envirosafe facilities. TDS actively continues to market this process to other U.S. mini-mills and is exploring additional opportunities internationally for its Super Detox(R) technology.
In June 1995, Conversion Systems received from the U.S. Environmental Protection Agency ("USEPA") a generic delisting for Super Detox(R)-stabilized EAF dust, which allows TDS to handle EAF dust treated utilizing its proprietary process as a non-hazardous waste. The generic delisting status for the process will save TDS and its customers the time and expense involved in petitioning USEPA on a facility-by-facility basis for delisting status. USEPA, as well as the Illinois Department of Environmental Regulation, previously has granted site specific delistings for this process. In addition, in November 1995, TDS received from the Idaho Department of Health and Welfare a generic delisting for Super Detox(R)-stabilized EAF dust which 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 the off-site thermal process currently employed by a large portion of the mini-mill industry.
Horsehead Resource Development Company, Inc. ("Horsehead"), a competitor of TDS in the EAF dust management business, has filed a petition for review of the USEPA and Illinois delistings. The Company believes that such appeals are without merit and ultimately will be denied. In any event, the delisting is not necessary for the Company to continue these operations at its Ohio and Idaho sites.
Competition. The Company's hazardous waste treatment and disposal business ----------- is characterized by intense competition. Envirosafe has a limited number of competitors in the off-site hazardous waste landfill business (there are 19 active, permitted 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, stabilization and 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.
TDS's principal competition in electric arc furnace flue dust stabilization is Horsehead, a thermal metal recovery processor. Although Horsehead historically had accounted for at least 60% of the U.S. market, within the last year TDS has gained significant market share. The market for wet scrubber stabilization units has been dormant and it is difficult to determine the number and nature of Conversion System's viable competitors. However, TDS expects to encounter increased competition through the decade from wet scrubber manufacturers as well as from wet scrubber technologies and processes that do not, or purport not to, require sludge stabilization units. Competition in these businesses is based primarily on price, quality of service, technical expertise and the environmental integrity of the process.
DISCONTINUED OPERATIONS - -----------------------
The IMSAMET operations, which the Company sold in January 1997, served the aluminum industry. At its Idaho facility, IMSAMET processed used aluminum beverage cans ("UBCs") and aluminum dross and scrap. At facilities located in Arizona (through a 70% owned partnership) and Utah, IMSAMET reclaimed aluminum from dross, a by-product of the aluminum production process. IMSAMET also had a 50% interest in a Utah partnership, Solar Aluminum Technology Services, to recycle saltcake (a by-product generated in the recovery of aluminum from dross) into marketable aluminum metal concentrate, aluminum oxide and salt brine, using a proprietary wet milling system.
SEGMENT DATA - ------------
See Note J for information concerning revenues and operating income by segment for the years ended December 31, 1996, 1995 and 1994 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, 1997, the Company employed approximately 1,800 persons. A majority of the hourly employees in the Industrial Environmental Services segment 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 1997. All other contracts will be renegotiated in 1998 or thereafter. Fewer than 30 Treatment & Disposal Services segment hourly employees are also unionized. The Company believes it has a good working relationship with its employees.
ITEM 2.
ITEM 2. Properties. ----------
HEADQUARTERS - ------------
The Company now maintains its headquarters at a single location in Horsham, Pennsylvania in leased premises. Until June 1996, the Company's corporate headquarters were located in leased premises in Stamford, Connecticut and the headquarters of TDS were located in separate leased premises in Horsham, Pennsylvania.
INDUSTRIAL ENVIRONMENTAL SERVICES - ---------------------------------
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 to its headquarters, IMS leases office space near Pittsburgh, Pennsylvania.
Management believes that the physical facilities for the Company's Industrial Environmental Services 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.
TREATMENT & DISPOSAL SERVICES - -----------------------------
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. In addition to its headquarters, TDS leases office space in Ohio and Idaho. Assuming the timely completion of subsequent phases under existing permit authority, Envirosafe expects to maintain ample hazardous waste disposal capacity into the next decade. Management believes that the physical facilities for TDS 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
Ronald P. Spogli 48 Chairman of the Board; Director
Louis A. Guzzetti, Jr. 57 President and Chief Executive Officer; Director
George E. Fuehrer 48 Senior Vice President, Planning
Aarne Anderson 56 Vice President, Taxes
William B. Davis 46 Vice President and Treasurer
Bradley W. Harris 37 Controller
Leon Z. Heller 47 General Counsel and Secretary
James C. Hull 59 Vice President and Chief Financial Officer
Officers are elected annually and hold office until their successors are elected and qualified.
Ronald P. Spogli became a director and Chairman of the Board of the Company in May 1993. Mr. Spogli is a founding partner of Freeman Spogli & Co. He is also a director of Brylane, Inc., Buttrey Food and Drug Stores Company, Calmar, Inc. and The Pantry, Inc.
Louis A. Guzzetti, Jr. has been a director and President and Chief Executive Officer of the Company since October 1986.
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.
George E. Fuehrer has been employed by the Company since 1982 and has served as its Senior Vice President, Planning since May 1989. Mr. Fuehrer also served as President of IMSAMET from November 1995 until January 1997. From June 1988 until May 1989 he served as Senior Vice President - Finance of the Company. He was its Treasurer from November 1984 until May 1989. Mr. Fuehrer also served as Vice President - Finance from February 1984 until June 1988.
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 has been the Vice President and General Counsel of International Mill Service, Inc., a subsidiary of the Company, since February 1991. Mr. Heller has served as the Company's General Counsel and Secretary since September 1996.
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 National Market tier of 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 1996 and 1995, based upon prices supplied by The National Association of Securities Dealers ("NASD").
The Company is not currently in technical compliance with one of the requirements for continued designation of its Common Stock as a Nasdaq National Market tier security. The NASD indicated to the Company in March 1992 that it did not intend to commence formal proceedings to remove the Common Stock from the Nasdaq National Market tier. It is possible that in the future the NASD could seek to do so, but the NASD has a procedure for seeking exemptions from its requirements, which the Company would seek to utilize if necessary. If the Common Stock were removed from the Nasdaq National Market tier, it would continue to be eligible for inclusion in the regular Nasdaq inter-dealer quotation system.
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 indenture under which the Senior Notes were issued.
At March 5, 1997 the Company had approximately 3,300 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, including Note B which describes the 1996 and 1995 unusual items.
Notes - -----
(1) After related income taxes, 1996 unusual items reduced net income by approximately $3 million or $.08 per share and 1995 unusual items reduced net income by approximately $1 million or $.02 per share. See Note B. The 1993 unusual items consisted of a $22 million restructuring charge and a credit from reducing estimated IU International liabilities that together reduced net income by $17.6 million or $.52 per share.
(2) See Note D.
(3) Includes gains from buying back Class G preferred stock of $.2 million or $.01 per share in 1996 and $1.7 million or $.04 per share in 1994.
(4) The 1996 working capital deficiency was virtually eliminated upon the January 1997 sale of the Company's IMSAMET subsidiary. See the pro forma balance sheet on pages S-2 and S-3.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. -------------------------------------------------
RESULTS OF OPERATIONS - ---------------------
1996 VERSUS 1995 - ----------------
Although conditions in the steel industry remained generally favorable throughout 1996, Industrial Environmental Services revenues decreased slightly. The Company's May 1996 acquisition of Alexander Mill Services, Inc. contributed $6.6 million to revenues in the year, but the increase was largely offset by the mid-1996 loss of a steel industry customer that accounted for $8.3 million of revenues in 1995. At the beginning of the 1996 fourth quarter, a major steel industry customer's employees commenced a strike that continues in 1997. That customer contributed $3 million of revenues in the 1995 fourth quarter. Also in 1996 our largest steel industry customer experienced an explosion and a 60-day outage at its largest blast furnace. Treatment & Disposal Services revenues decreased primarily because 1995 revenues included over $7 million from the last major phase of a scrubber sludge stabilization system contract. Revenues also declined because treatment and disposal tonnage was lower during the first six months of 1996 due to overall depressed market conditions. However, a year-to-year tonnage increase was realized during the second half of 1996 as the Company obtained additional contracts to stabilize electric arc furnace dust (a hazardous waste produced by steel mini-mills).
Industrial Environmental Services gross profit decreased due to the strike and blast furnace outage discussed above together with somewhat lower profit margins at a number of other steel industry customer sites. Treatment & Disposal Services gross profit declined to zero primarily due to decreases in treatment and disposal volumes and margins and the lack of new stabilization system contracts. Treatment & Disposal Services also recorded $1.2 million of additional closure costs for inactive waste treatment and disposal facilities in 1996, as compared with a $1 million reduction of expected closure costs for an inactive landfill site in 1995.
Selling, general and administrative expenses decreased $3 million due primarily to the effects of the 1996 reorganization discussed in the next paragraph.
Unusual items, net. In 1996 unusual items included $4.4 million of charges -------------------- for the Company's 1996 reorganization, which was initiated to improve productivity and reduce costs. The reorganization consisted principally of consolidating the Company's headquarters functions in a single location. The Company's corporate headquarters in Stamford, Connecticut and the Treatment & Disposal Services segment's headquarters in Horsham, Pennsylvania were closed and their activities moved to the International Mill Service headquarters building, also in Horsham. As a result of the reorganization, approximately 50 positions were eliminated, mostly in the Treatment & Disposal Services segment. Cost savings of $4.3 million were realized during the year and ongoing annual savings should approximate $5 million. In 1996 unusual items also included charges of $1.2 million to settle the last disputed matter from the Company's 1993 restructuring. Partially offsetting these charges is a $.9 million credit from reducing estimated liabilities remaining from the Company's 1988 acquisition of IU International Corporation ("IU International"). After related income tax benefit, the unusual items increased the loss from continuing operations by approximately $3 million or $.08 per share.
Interest expense increased $4.7 million for the year due to higher average debt levels, primarily to finance the retirement of the Class G preferred stock and also due to the Alexander acquisition.
Current income tax expense consists of state and foreign taxes. Deferred income taxes are discussed in the next section.
The Company completed the sale of its IMSAMET subsidiary in January 1997 for a gain of $8.3 million or $.21 per share, after taxes, that will be included in first quarter results. Accordingly, IMSAMET's results have been classified as discontinued operations.
Due to the factors described above and including the income of the discontinued operations, the Company incurred a net loss of $4.3 million in 1996 as compared with income of $10.5 million before an extraordinary debt extinguishment loss in 1995.
There was a minimal Class G preferred stock dividend requirement in 1996 because most of the Class G stock was retired at a $.2 million gain in the first quarter and all of the remaining Class G stock was redeemed by July 15, 1996.
DEFERRED INCOME TAXES - ---------------------
In 1996 the Company recognized $26 million of net deferred income tax assets in its balance sheet. These assets represent tax benefits the Company expects to realize over the next several years by utilizing its income tax loss carryforwards and other deferred tax assets to reduce income taxes that would otherwise be payable in cash.
Of the $26 million, $11.3 million will be realized when the Company utilizes income tax loss carryforwards and other deferred tax assets to eliminate income tax payments on the January 1997 gain from selling its IMSAMET subsidiary. In addition, the Company has determined that it is more likely than not that it will earn enough taxable income to realize the remaining $14.7 million over the next several years. Realization of this amount will require cumulative taxable earnings of approximately $42 million. When the consolidated results of continuing operations for the three most recent years are adjusted by (1) excluding unusual items, and (2) adding back goodwill amortization (which is not deductible for tax purposes), the pre-tax earnings, as adjusted, total over $33 million and average $11 million annually. On this basis, the Company would realize $14.7 million of deferred tax assets within approximately four years. On the other hand, because its net operating loss carryforwards expire well into the future, the Company would also realize $14.7 million of deferred tax assets if, counting only profitable years, it earns $42 million of taxable income during the fourteen year period ending in 2010, so long as the cumulative amount of such earnings reaches at least $10 million by 2005, $21 million by 2006, $30 million by 2008 and $39 million by 2009.
In making its determination that it is more likely than not that it will earn enough taxable income to realize $26 million of net deferred tax assets, the Company considered (1) its cumulative consolidated results of operations for the three most recent years, (2) the reduction in interest expense obtained by applying the IMSAMET net proceeds to reduce debt, (3) ongoing cost savings achieved with its 1996 reorganization, and (4) profit improvements from treating increased volumes of electric arc furnace dust with its proprietary Super Detox(R) technology. Factors which could negatively affect this determination would include (1) loss of a major customer or customers, (2) prolonged work stoppages at major customers, (3) a major decline in United States steel industry production, and (4) a material decrease in the level of electric arc furnace dust currently treated with the Company's proprietary Super Detox(R) technology.
The $26 million of income tax benefits were credited as follows: $4.4 million reduced the 1996 loss from continuing operations; $10.9 million reduced goodwill in the balance sheet (because the related deferred tax assets arose from IU International acquisition obligations - Note G); and $10.7 million increased capital in excess of par value in the balance sheet (because the related deferred tax asset arose from net operating loss carryforwards that originated prior to the Company's 1983 reorganization). Of the $4.4 million that reduced the 1996 loss from continuing operations, $1.3 million was applicable to the pre-tax loss for the year and the other $3.1 million represents additional tax benefits that reduced the loss from continuing operations by $.08 per share. Deferred tax charges of $4.3 million or $.11 per share in 1995 and $1.7 million or $.04 per share in 1994 arose from utilizing deferred tax assets attributable to IU International acquisition obligations with corresponding credits to goodwill.
As described further in Note C, the Company has additional income tax net operating loss carryforwards and other deferred tax assets that are available to further reduce any future federal income tax payments.
1995 VERSUS 1994 - ----------------
Industrial Environmental Services revenue increased primarily due to high production volumes resulting from generally favorable conditions in the steel industry. Treatment & Disposal Services revenue decreased due to a reduction in landfill disposal volume and lower landfilling prices for hazardous waste clean-up projects, resulting from continuing depressed market conditions. These decreases were partially offset by a higher proportion of higher-priced tonnage requiring stabilization prior to landfilling.
Industrial Environmental Services gross profit improvements paralleled the revenue increases. The Treatment & Disposal Services gross profit reduction was primarily due to lower landfill profits, which paralleled the revenue reduction. That segment's 1995 gross profit benefited from a $1 million reduction of expected closure costs at an inactive landfill site. Reduced profits from long-term contracts to design and supply scrubber sludge stabilization systems for electric utilities were offset by improved profits from other services. During 1995 the Treatment & Disposal Services segment embarked on a comprehensive marketing program to attract additional landfill volume by treating steel mill electric arc furnace dust with its proprietary Super Detox(R) technology. Treatment & Disposal Services began processing this waste stream at its landfills in the latter part 1995.
Selling, general and administrative expenses were $2.9 million lower in 1995. Industrial Environmental Services' costs were $2.4 million lower in 1995 due primarily to headcount reductions. The $1.1 million improvement at Treatment & Disposal Services resulted principally from headcount reductions, lower marketing costs and lower performance-based compensation. Corporate headquarters costs increased by $.6 million due to litigation expenses.
Unusual items, net. During 1995 the Company favorably resolved a number of ------------------ liabilities resulting from its 1988 acquisition of IU International, primarily liabilities for insurance matters. The benefit of these developments was partially offset by additional charges for other matters arising from the same acquisition. The net credit to income in 1995 amounted to $3.6 million, before taxes. The Company also increased its estimate of costs to complete the final steps of its 1993 restructuring by $.2 million and incurred $1 million of termination costs for additional headcount reductions during 1995. After related income tax expense of $3.5 million, these items reduced net income by approximately $1 million or $.02 per share.
Interest expense increased $1.5 million, primarily due to a higher average debt level.
Income tax expense increased $.9 million primarily because of the disproportionately high federal taxes not payable in cash related to the aforementioned net unusual items, partially offset by lower state taxes payable.
In 1995 the Company entered into a new five-year bank credit facility, and recorded a $.8 million extraordinary debt extinguishment loss to write off the unamortized issuance costs of its previous bank credit agreement.
Due to the factors described above and including discontinued operations, 1995 net income, after deducting the $.8 million extraordinary loss and the $1 million adverse after-tax effect of the unusual items, was $9.7 million compared with $11.1 million in 1994.
Class G preferred stock dividend requirements in 1995 were $.5 million lower than in 1994, due to retirements during 1994. 1994 benefitted from a $1.7 million gain from purchasing and retiring Class G redeemable preferred stock, which amounted to $.04 per share.
The impact of inflation on revenues and results of operations has not been significant.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The Company's liquidity requirements arise primarily from the funding of its capital expenditures, Treatment & Disposal Services trust fund payments, 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 1997 capital expenditures of $20 to $25 million, primarily for equipment replacements, development of additional landfill capacity and improvements to waste treatment facilities. Scheduled debt repayments amount to $5.5 million in 1997.
Treatment & Disposal Services' landfill permits require it to fund closure and post-closure monitoring and maintenance obligations by making essentially nonrefundable trust fund payments. These payments declined sharply to $1.5 million in 1996. Based on current regulations, planned improvements to waste treatment facilities and permitted capacity, such payments are expected to amount to approximately $2.8 million in 1997 and $2.4 million in 1998, including the reinvestment of Idaho trust fund earnings that the Company includes in interest income. Thereafter, such payments are not expected to exceed the reinvestment of trust fund earnings, based on current requirements.
The consolidated balance sheet reflects negative working capital of $8.8 million at December 31, 1996. However, the sale of IMSAMET (Note D) and application of the proceeds to reduce debt virtually eliminated this deficiency, as shown in the pro forma balance sheet as of December 31, 1996.
On March 15, 1995, a multiemployer pension plan contacted the Company concerning a potential claim against the Company for deficiencies in the payment of withdrawal liabilities by a subsidiary that was sold by IU International Corporation prior to the Company's acquisition of IU International in 1988. See Note N. The Company believes any such claim is unwarranted and, if such claim were asserted, would contest any such claim vigorously. The Company believes it would ultimately prevail on the merits. However, under the Multiemployer Pension Plan Amendments Act of 1980, the federal statute governing such plans, the plan trustees could require the Company to make substantial monthly payments before any issues are arbitrated or litigated. If onerous monthly payments are imposed by the plan, the Company will take any and all actions it deems necessary and appropriate to protect itself until the matter can be arbitrated and/or litigated on its merits. The Company continues to believe that the underlying facts and circumstances support a conclusion that these matters will be resolved with no material adverse effect on its financial condition. However, the resolution of such matters, which potentially could take place in the current fiscal year, could result in a charge that is material to results of operations and cash flows in a single accounting period.
Upon the sale of IMSAMET, the Company applied the net proceeds to pay down bank borrowings, and also reduced the amount of its bank credit facility to $65 million of revolving credit borrowing and letter of credit capacity. By early February 1997, revolving credit borrowings amounted to $31 million and $7.3 million of standby letters of credit were outstanding. The bank facility was amended to accommodate the sale of IMSAMET, including changes to the financial covenants that require the Company to meet certain financial ratios and tests during 1997. To remain in compliance with the bank facility during 1998 and thereafter, the Company will need to obtain further adjustments to the required financial ratios and tests throughout the remaining term of the facility. The Company and the banks that are parties to the facility intend to further amend such ratios and tests. The $65 million amount of the credit facility declines by 12.5% in each of January 1999 and 2000 and the credit facility terminates in January 2001.
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.
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 adverse effect on the Company's results of operations or financial condition, but the Company is unable to predict any such future requirements. See Note N, in which environmental compliance is discussed.
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 B 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, 1996 and (ii) "Executive Officers of the Registrant" 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, 1996, 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, 1996, 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, 1996, 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, 1996 and 1995
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
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 - 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)).
3.3 - 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)).
4.1 - Loan and Security Agreement, dated as of April 6, 1993, between IMS Funding Corporation and Greyhound Financial Corporation. (The Company agrees to furnish a copy of such agreement to the Commission upon request.)
4.2 - Agreement Amending Loan and Security Agreement and Corporate Guarantee Agreement, dated as of December 8, 1995, between FINOVA Capital Corporation (formerly known as Greyhound Financial Corporation), IMS Funding Corporation, and International Mill Service, Inc. (The Company agrees to furnish a copy of such agreement to the Commission upon request.)
4.3 - 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)).
4.4 - 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)).
4.5 - 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)).
4.6 - Warrant to purchase shares of Common Stock of the Company issued to FS Equity Partners II, L.P., dated as of May 13, 1993 (incorporated herein by reference to Exhibit 4.30 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.7 - Warrant to purchase shares of Common Stock of the Company issued to The IBM Retirement Plan Trust Fund, dated as of May 13, 1993 (incorporated herein by reference to Exhibit 4.31 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.8 - Warrant to purchase shares of Common Stock of the Company issued to Enso Partners, L.P., dated as of May 13, 1993 (incorporated herein by reference to Exhibit 4.32 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).
4.9 - Loan Agreement 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.)
4.10 - 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)).
4.11 - Assignment and Acceptance, dated as of February 8, 1996, between NationsBank, N.A. and Banque Paribas; and Assignment and Acceptance, dated as of February 8, 1996, between Credit Lyonnais New York Branch and Banque Paribas (incorporated herein by reference to Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 1-1363)).
4.12 - 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)).
4.13*- 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.
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)).
*Filed herewith
10.2 - Promissory Note of Louis A. Guzzetti, Jr., dated March 31, 1993, payable to the Company, amending and replacing the Promissory Notes dated October 15, 1987, March 31, 1991 and March 31, 1992 and the Letter Amendments dated April 13, 1991 and May 12, 1992,(incorporated herein by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-1, filed September 16, 1993 (File No. 33-46930)).
10.3 - Promissory Notes of Aarne Anderson, George E. Fuehrer and Mr. Guzzetti, dated as of April 1, 1993, payable to the Company, amending and replacing the Promissory Notes dated January 13, 1989, April 1, 1991 and April 1, 1992,(incorporated herein by reference to Exhibit 10.17 to Post-Effective Amendment No. to the Company's Registration Statement on Form S-1, filed September 16, 1993 (File No. 33-46930)).
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 - Stock Option Agreement, dated November 1, 1993, between the Company and Arthur R. Seder, Jr. (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 1-1363)).
10.9 - 1993 Stock Option Plan of the Company (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)).
10.10 - 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)).
10.11 - 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)).
10.12 - 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)).
10.13 - 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)).
10.14 - 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))
10.15 - Stock Purchase Agreement, dated November 26, 1996, by and among IMCO Recycling Inc., IMSAMET, Inc. and EnviroSource, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K for January 21, 1997 (File 1-1363)).
10.16 - Amendment No. 1, dated as of January 21, 1997, to Stock Purchase Agreement, dated November 26, 1996, by and among IMCO Recycling Inc., IMSAMET, Inc. and EnviroSource, Inc. (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K for January 21, 1997 (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, 1996, the Company filed no Current Reports on Form 8-K.
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 28, 1997 ENVIROSOURCE, INC.
/s/ Louis A. Guzzetti, Jr. -------------------------- Louis A. Guzzetti, Jr. 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 28, 1997.
Signature Title
/s/ LOUIS A. GUZZETTI, JR. President and Chief Executive - ------------------------- Louis A. Guzzetti, Jr. 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/ RONALD P. SPOGLI Chairman of the Board of - -------------------- Ronald P. Spogli Directors
/s/ WALLACE B. ASKINS Director - --------------------- Wallace B. Askins
/s/ RAYMOND P. CALDIERO Director - ----------------------- Raymond P. Caldiero
/s/ MARK J. DORAN Director - ----------------- Mark J. Doran
/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/ CHARLES P. RULLMAN, JR. Director - --------------------------- Charles P. Rullman, Jr.
/s/ ARTHUR R. SEDER, JR. Director - ----------------------- Arthur R. Seder, Jr.
/s/ J. FREDERICK SIMMONS Director - ------------------------ J. Frederick Simmons
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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut February 21, 1997
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 -- 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 $14.6 million and $13.3 million at December 31, 1996 and 1995.
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 $12.8 million and $11.4 million at December 31, 1996 and 1995, are classified as "available-for-sale," have maturities of four months to ten years and are carried at market value. Interest income and realized gains and losses are recognized in earnings. Excess funds, if any, will revert to the Company.
NOTE A -- ACCOUNTING POLICIES -- CONTINUED - ------------------------------------------
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 $12.1 million and $10.9 million at December 31, 1996 and 1995.
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 $8.8 million and $9.2 million are included in other long-term liabilities at December 31, 1996 and 1995.
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 $44 million and $39 million at December 31, 1996 and 1995. Most of the goodwill is identified with the Company's excellent reputation and long-term relationships within the steel industry. 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.
NOTE A -- ACCOUNTING POLICIES -- CONTINUED - ------------------------------------------
Revenues: Most of the Company's revenues are recognized as services are - --------- provided. Revenues of $8 million in 1995 and $6.9 million in 1994 were from long-term contracts to design, supply and construct "wet scrubber sludge" stabilization systems for electric utilities. Revenues from such contracts are recognized using the percentage-of-completion method, with progress toward completion measured in labor hours. Such contracts are segmented between "design and supply" and "construction", and a separate profit margin is recognized for each segment.
Earnings per share: Per share amounts are calculated by dividing income - ------------------- (loss) applicable to common shares and equivalents by the weighted average number of common shares and equivalents outstanding during the period.
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 No. 123, Accounting for Stock-Based Compensation.
Pro forma balance sheet: The pro forma balance sheet presents the financial - ----------------------- position of the Company assuming the January 1997 sale of IMSAMET (Note D) took place as of December 31, 1996.
NOTE B -- UNUSUAL ITEMS, NET - ----------------------------
1995 - The Company purchased IU International Corporation ("IU - ---- International") in 1988. During 1995 the Company favorably resolved a number of liabilities resulting from that acquisition, primarily liabilities for insurance matters (Note G). The benefit of these developments was partially offset by additional charges for other matters arising from the same acquisition. The net credit to income in 1995 amounted to $3.6 million. The Company also increased its estimate of costs to complete its 1993 restructuring by $.2 million and incurred $1 million of termination costs for additional headcount reductions during 1995. After related income tax expense of $3.5 million, these items reduced net income by approximately $1 million or $.02 per share.
1996 - During 1996 the Company reduced its estimates of liabilities - ---- remaining from the IU International acquisition by $.9 million. The Company also settled the last disputed matter from its 1993 restructuring, which resulted in an additional charge of $1.2 million for a terminated recycling unit. Additionally, the Company provided $4.4 million for its 1996 reorganization, which was initiated to improve productivity and reduce costs. The reorganization consisted principally of consolidating all of the Company's headquarters functions in a single location. The Company's corporate headquarters in Stamford, Connecticut and the Treatment & Disposal Services segment's headquarters in Horsham, Pennsylvania were closed and their activities moved to the International Mill Service headquarters building, also in Horsham. As a result, approximately 50 positions were eliminated, mostly in the Treatment & Disposal Services segment. After related income tax benefit of $1.6 million, these items increased the net loss by approximately $3 million or $.08 per share.
In addition to payments required for the above items, the caption "unusual items, net of payments" in the consolidated statements of cash flows includes payments related to a restructuring charge in the fourth quarter of 1993.
NOTE C -- INCOME TAXES - ----------------------
The components of income tax benefit (expense) attributable to continuing operations are as follows (in thousands):
Canadian income before income taxes amounted to $.6 million in 1996 and 1995 and $.7 million in 1994.
Income tax benefit (expense) varies from amounts computed by applying the 35% federal statutory rate for the following reasons (in thousands):
1996 1995 1994 ---- ---- ---- Benefit (expense) of pre-tax (loss) income from continuing operations at statutory rate $ 2,785 $ (5,167) $ (5,369) Goodwill amortization (1,718) (1,733) (1,751) Effect of reducing deferred tax valuation allowance 3,100 2,253 4,375 Effects of state and Canadian income taxes (595) (683) (1,535) Other (306) 122 ---- --- --------- $ 3,266 $ (5,208) $ (4,280) ========= ========= =========
NOTE C -- INCOME TAXES -- CONTINUED - -----------------------------------
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):
December 31, ---------------- 1996 1995 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 87,993 $114,099 Capital loss carryforwards 4,564 3,870 Allowance for a doubtful receivable and insurance accruals that would result in capital losses 5,018 6,682 Other insurance accruals 2,810 3,084 Reorganization and restructuring accrual 1,280 1,108 Pension and other postretirement benefits accruals 5,095 5,012 Closure cost accruals 3,332 3,304 Other accruals 6,473 9,391 ----- ----- Total deferred tax assets 116,565 146,550 Valuation allowance (69,100) (124,425) ------- -------- Net deferred tax assets 47,465 22,125 ------ ------
Deferred tax liabilities: Tax over book depreciation plus IU International acquisition purchase price allocation to property, plant and equipment (10,870) (11,671) Tax over book post-closure deductions (6,288) (6,483) Tax over book landfill permit amortization (4,012) (3,747) Other (295) (224) ---- ---- Total deferred tax liabilities (21,465) (22,125) ------- ------- Net deferred taxes $ 26,000 $ -0- ======== ======
NOTE C -- INCOME TAXES -- CONTINUED - -----------------------------------
The Company recognized $26 million of net deferred tax assets in the balance sheet in the fourth quarter of 1996. Of this amount, $11.3 million will be realized when the Company utilizes income tax loss carryforwards and other deferred tax assets to eliminate income tax payments on the January 1997 gain from selling its IMSAMET subsidiary (Note D). The balance was recognized because the Company has determined that is more likely than not that it will earn sufficient taxable income during the next several years to realize at least that much tax benefit from utilizing net operating loss carryforwards and other deferred tax assets to reduce income taxes that otherwise would be payable in cash.
The income tax benefits that resulted from recording the $26 million of deferred tax assets (by reducing the valuation allowance) were credited as follows: $4.4 million reduced the 1996 loss from continuing operations; $10.9 million was credited to goodwill (because the related deferred tax assets arose from IU International acquisition obligations-Note G); and $10.7 million increased capital in excess of par value (because the related deferred tax assets arose from net operating loss carryforwards that originated prior to the Company's 1983 reorganization). The valuation allowance was reduced by an additional $29.3 million, primarily due to the expiration of some of the net operating loss carryforwards that originated prior to the Company's 1983 reorganization. In 1995 and 1994 the valuation allowance was reduced by $6.6 million and $6.1 million, respectively. Of these amounts $2.3 million and $4.4 million were credited to reduce income tax expense. In both years, the remaining valuation allowance reductions were credited to reduce goodwill (because the related deferred tax assets arose from IU International acquisition obligations), resulting in deferred income tax expense.
The Company continues to carry a sizeable valuation allowance against the remainder of its deferred tax assets, primarily because $55 million of the $88 million deferred tax asset represents net operating loss carryforwards that expire in 1997 and 1998. The balance of the $88 million represents net operating loss carryforwards that for the most part will not expire for seven or more years. The deferred tax assets other than carryforwards represent items already reflected in the financial statements that will become available to reduce future income taxes as they become deductible for tax purposes.
NOTE C -- INCOME TAXES -- CONTINUED - -----------------------------------
Net operating loss carryforwards totaling $251 million expire as follows: $10 million in 1997, $147 million in 1998, $1 million in 2000, $15 million in 2003, $46 million in 2005, $11 million in 2006, $9 million in 2008, $9 million in 2009, and $3 million in 2010. In 1993 the Company underwent a recapitalization that resulted in an "ownership change" (as defined in the Internal Revenue Code) that could limit the future use of the net operating loss carryforwards that expire through 2006. However, based on a comprehensive study of its overall tax position, the Company does not believe this limitation will affect its ability to utilize its net operating loss carryforwards.
Any additional income tax benefits attributable to net operating loss carryforwards that originated prior to the Company's 1983 reorganization will be credited to capital in excess of par value. Additional income tax benefits attributable to IU International acquisition obligations will be credited to goodwill. Additional income tax benefits attributable to other deferred tax assets will reduce future income tax expense. Subject to limitations discussed in the preceding paragraph and the Company's ability to generate sufficient future taxable income, upon recognition of additional net deferred tax assets, the $69.1 million valuation allowance would be credited as follows: $44.4 million to capital in excess of par value, $8.9 million to goodwill and $15.8 million to reduce income tax expense.
NOTE D -- SALE OF IMSAMET - -------------------------
On January 21, 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, for $58 million realizing a pre-tax gain of $19.6 million. After a deferred income tax charge, the gain amounted to $8.3 million or $.21 per share. The proceeds from the sale were used to repay $56 million of revolving credit borrowings and expenses related to the transaction.
The assets and liabilities of IMSAMET have been classified in the balance sheet as net assets of discontinued operations and consist of the following (in thousands):
December 31, --------------- 1996 1995 ---- ---- Accounts receivable $ 3,882 $ 3,650 Property, plant and equipment, net 17,929 19,095 Goodwill, less amortization 10,338 10,666 Other assets 6,861 7,922 ------ ------ Total assets of IMSAMET 39,010 41,333
Accounts payable 1,210 1,363 Accrued expenses 1,380 1,441 Other liabilities 1,556 1,569 Debt 873 ----- --- Total liabilities of IMSAMET 4,146 5,246 ----- ----- Net assets of discontinued operations $ 34,864 $ 36,087 ======== ========
IMSAMET's results have been classified in the statement of operations as income (loss) from discontinued operations. Summarized results of discontinued operations are as follows (in thousands):
NOTE D -- SALE OF IMSAMET -- CONTINUED - --------------------------------------
Interest expense of $3.3 million in 1996, $3.6 million in 1995, and $3.2 million in 1994 has been 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 results of AMS' operations are included in the consolidated statement of operations from the acquisition date. Pro forma results of operations, as if this transaction occurred at the beginning of each period, are as follows (in thousands, except per share amounts):
Year ended December 31, ------------ (Unaudited) 1996 1995 ---- ---- Pro forma revenues $217,205 $234,221 Pro forma (loss) income before extraordinary loss (3,640) 11,101 Pro forma net (loss) income (3,640) 10,205 Pro forma net (loss) income per share $ (.09) $ .21
The pro forma information is not necessarily indicative of the results that would have occurred had the transaction taken place at the beginning of the respective periods.
The cost of the acquisition was $9 million (including $2.6 million that is payable to the former owner over three and one-half years with interest) plus the assumption of $7.2 million of debt. In allocating the purchase price, $10.7 million was charged to goodwill.
NOTE F -- DEBT - --------------
Debt is summarized as follows (in thousands):
December 31, ---------------------- 1996 1995 ---- ----
9-3/4% Senior Notes $ 220,000 $ 220,000 Bank Credit Facility 89,000 44,000 Industrial revenue bond financings, equipment loans and other 23,928 19,682 ------ ------ 332,928 283,682 Less current maturities 64,504 8,524 ------ ----- Long-term debt $ 268,424 $ 275,158 ========= =========
At December 31, 1996, required principal payments for each of the succeeding five years are: $64.5 million in 1997 (including $59 million of revolving credit borrowings repaid by early February), $5.8 million in 1998, $2.1 million in 1999, $.8 million in 2000 and $31 million in 2001.
The 9-3/4% Senior Notes (10.3% effective rate including amortization of issuance costs) are due in 2003 and are redeemable, in whole or in part, at the Company's option after June 15, 1998 at 104.9% of principal amount, declining to 100% by June 15, 2001. Upon a change in control (as defined), 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.
In December 1995, the Company entered into a $100 million, five-year bank credit facility. This resulted in an extraordinary debt extinguishment loss of $.8 million, consisting of the unamortized issuance costs of the previous bank credit agreement.
NOTE F -- DEBT -- CONTINUED - ---------------------------
Upon the sale of IMSAMET (Note D), the Company applied the net proceeds to repay bank facility borrowings and reduced the amount of the facility to $65 million of revolving credit borrowing and letter of credit capacity, declining by 12.5% in each of January 1999 and 2000 and terminating in January 2001. Interest rates, the commitment fee and letter of credit fees are based on a pricing ratio (as defined). Interest on borrowings is at the bank's prime rate plus from .25% to 1.25% (8.25% plus 1.25% at December 31, 1996) or at Eurodollar rates plus from 1.5% to 2.5% (approximately 5.53% plus 2.5% at December 31, 1996). 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 is secured by accounts receivable and the Company's investments in stock and intercompany notes of its subsidiaries. By early February 1997, revolving credit borrowings had been reduced to $31 million and $7.3 million of standby letters of credit were outstanding.
The bank facility prohibits cash dividends and contains financial covenants that require the Company to meet certain financial ratios and tests. The facility was amended to accommodate the sale of IMSAMET, including changes to the financial ratios and tests required during 1997.
Industrial revenue bond financings of $8.8 million carry a weighted average effective interest rate of 9.3%. Equipment loans and other debt carry a weighted average effective interest rate of 9.8%.
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 acquisition obligations of $6.8 million at December 31, 1996 and $7.1 million at December 31, 1995. These amounts represent ongoing obligations for insurance, employee benefits and other matters. As in the past, such payments will be reduced by IU International-related recoveries, if any. Payments on such obligations, reduced by recoveries, amounted to $1.9 million in 1996, $9.6 million in 1995 and $2.5 million in 1994.
Non-current other liabilities includes IU International acquisition obligations of $28.5 million at December 31, 1996 and $32.3 million at December 31, 1995 for insurance, employee benefits, income tax matters and other disputed matters.
NOTE H -- STOCKHOLDERS' EQUITY - -------------------------------
Warrants to purchase 200,000 shares of the Company's common stock at $3.50 per share expire on January 1, 1998. The warrants may be exercised using a cashless exercise feature (by the surrender of shares of common stock subject to the warrants). An affiliate of Freeman Spogli & Co. ("Freeman Spogli") that is a 47.5% stockholder holds warrants for 87% of such shares and The IBM Retirement Plan Trust Fund, a 6.6% stockholder, holds 12%. In 1995 warrants to purchase 695,652 shares of the Company's common stock at $4 per share and 200,000 shares at $3.50 per share were exercised using the cashless exercise feature, resulting in the issuance of 95,685 shares of the Company's common stock.
In 1996, warrants to purchase 102,002 shares of common stock were issued upon the cashless exercise of warrants to purchase the Company's common stock at seven cents per share.
A total of 3,440,235 shares of the Company's common stock have been reserved for the warrants described above and 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.
NOTE H -- STOCKHOLDERS' EQUITY -- CONTINUED - -------------------------------------------
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. At December 31, 1996, options for 920,320 shares were available for future grants.
In 1995 the Company adopted a stock option plan for outside directors that are not affiliated with Freeman Spogli. Under the plan, on January 1 of each year each outside director is granted options to purchase 5,000 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 1996 one director and in 1995 two directors elected to receive such options. All options granted under the plan become exercisable on the following January 1. At December 31, 1996 options for 656,139 shares were available for future grants.
The Company previously granted the four outside directors options outside the option plans to purchase 80,000 shares of the Company's common stock at exercise prices equal to the fair market value at the time of grant.
NOTE I -- STOCK OPTIONS -- CONTINUED - -------------------------------------
Option activity is summarized below: Shares -------------------------------------- 1996 1995 1994
Shares under option at Jan. 1 1,591,642 1,286,885 1,656,100 Options granted 298,509 435,082 48,740 Options exercised (at average exercise prices of $2.80 in 1996, $2.50 in 1995 and $2.74 in 1994 (55,200) (4,800) (41,500) Options expired or cancelled (171,175) (125,525) (376,455) -------- -------- -------- Shares under option at Dec. 31 1,663,776 1,591,642 1,286,885 ========= ========= ========= Options exercisable at Dec. 31 1,049,011 866,485 612,200 ========= ======= =======
At December 31, 1996, option exercise prices ranged from $2.50 to $8.25 per share and the weighted average was $4.16 per share. These options, with a weighted-average remaining contractual life of 6.4 years, expire on various dates from January 1997 through December 2006. During 1996 the weighted-average exercise price of options granted was $3.62 per share and of options cancelled was $4.68 per share.
Using the Black-Scholes option pricing model, the estimated per share weighted-average fair values of stock options granted during 1996 and 1995 were $2.16 and $2.15. Assumptions made in determining the estimates of fair value include: risk-free interest rates of 5.6% in 1996 and 6.4% in 1995, a volatility factor of 46% and a weighted-average expected life of 8 years for both 1996 and 1995.
NOTE I -- STOCK OPTIONS -- CONTINUED - ------------------------------------
Summarized information about stock options outstanding at December 31, 1996 is as follows:
Options Outstanding Options Exercisable -------------------------- ----------------------- Weighted- Average Weighted- Weighted- Range of Number of Remaining Average Number of Average Exercise Options Contractual Exercise Options Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $2.50 to $4.00 911,776 7.5 years $3.35 406,011 $3.02 4.01 to 5.50 513,000 6.5 4.25 404,000 4.25 5.51 to 8.25 239,000 2.1 7.07 239,000 7.07 ------- --------- 2.50 to 8.25 1,663,776 6.4 4.16 1,049,011 4.42 ========= =========
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):
1996 1995 ---- ----
Pro forma net(loss)income $(4,591) $ 9,509
Pro forma net(loss)income per share $( .12) $ .19
Because the Company's options vest over three or five year periods and only options granted in 1995 and 1996 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 are: Industrial Environmental Services, which provides recycling and other specialized services for the steel industry, and Treatment & Disposal Services, which operates hazardous waste disposal landfills and provides waste management and stabilization services for the steel, electric utility and other industries.
Information by business segment for the three years ended December 31, 1996 follows (in thousands):
1996 1995 1994 ---- ---- ---- REVENUES - -------- Industrial Environmental Services $ 180,002 $ 181,081 $ 177,396 Treatment & Disposal Services 32,787 42,641 53,038 ------ ------ ------ $ 212,789 $ 223,722 $ 230,434 ========= ========= =========
UNUSUAL ITEM (CHARGES) CREDITS, NET - ----------------------------------- Industrial Environmental Services $ (1,697) $ (904) $ (580) Treatment & Disposal Services (2,431) (100) 580 Corporate headquarters (522) 3,628 ---- ----- --------- $ (4,650 ) $ 2,624 $ - ========= ========= =========
TOTAL OPERATING INCOME (LOSS) - ----------------------------- Industrial Environmental Services $ 31,971 $ 38,456 $ 35,525 Treatment & Disposal Services (8,012) 1,511 6,919 Corporate headquarters (5,084) (2,854) (5,924) ------ ------ ------ $ 18,875 $ 37,113 $ 36,520 ========= ========= =========
IDENTIFIABLE ASSETS - ------------------- Industrial Environmental Services $ 252,958 $ 258,691 $ 256,027 Treatment & Disposal Services 130,683 136,516 135,138 Corporate headquarters 41,404 13,142 16,296 ------ ------ ------ 425,045 408,349 407,461 Discontinued operations 34,864 36,087 35,411 ------- ------- ------- $ 459,909 $ 444,436 $ 442,872 ========= ========= =========
DEPRECIATION AND AMORTIZATION - ----------------------------- Industrial Environmental Services $ 24,045 $ 21,972 $ 21,520 Treatment & Disposal Services 7,569 7,286 9,988 Corporate headquarters 1,398 1,333 1,209 ----- ----- ----- 33,012 30,591 32,717 Discontinued operations 2,964 3,025 2,291 ----- ----- ----- $ 35,976 $ 33,616 $ 35,008 ========= ========= =========
NOTE J -- BUSINESS SEGMENTS -- CONTINUED - ----------------------------------------
CAPITAL EXPENDITURES - --------------------- Industrial Environmental Services $ 16,227 $ 23,939 $ 14,274 Treatment & Disposal Services 4,761 6,345 17,428 Corporate headquarters 5 81 78 - -- -- 20,993 30,365 31,780 Discontinued operations 890 2,195 7,481 --- ----- ----- $ 21,883 $ 32,560 $ 39,261 ========= ========= =========
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 and unamortized debt issuance costs.
Revenues of approximately $43 million in 1996, $44 million in 1995 and $51 million in 1994 were from USX Corporation, the Company's largest steel industry customer. At December 31, 1996, $23.2 million of consolidated accounts receivable result from services performed for domestic steel industry customers. Industrial Environmental Services customers and operations are located throughout the United States and Canada. Treatment & Disposal Services 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, 1996:
1996 1995 1994 ---- ---- ---- Industrial recycling 70.5% 66.7% 63.2%
Specialized services 14.1 14.2 13.8
Waste stabilization and disposal 15.2 15.5 20.0
Stabilization system design, supply and construction .2 3.6 3.0 -- --- --- 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.
Net periodic pension cost for defined benefit plans includes the following (in thousands): 1996 1995 1994 ---- ---- ----
Service cost-benefits earned during the period $ 763 $ 787 $ 868 Interest cost on projected benefit obligations 1,386 1,393 1,276 Actual gain on plan assets (2,576) (2,860) (238) Net amortization and deferral 1,066 1,341 (1,083) ----- ----- ------ Net periodic pension cost $ 639 $ 661 $ 823 ======= ======= =======
NOTE K -- RETIREMENT PLANS -- CONTINUED - ---------------------------------------
The funded status, calculated principally using measurement dates of October 31, 1996 and 1995, and the liability accrued in the consolidated balance sheet for defined benefit plans are as shown below (in thousands):
December 31, ---------------- 1996 1995 ---- ----
Actuarial present value of benefit obligations: Vested $ 19,070 $ 19,342 ========= ========= Accumulated $ 19,081 $ 19,355 ========= ========= Projected $ 19,205 $ 19,485 Plan assets at fair value 19,183 16,349 ------ ------ Projected benefit obligations in excess of plan assets 22 3,136 Unrecognized net loss (391) (2,633) Prior service gain not yet recognized in net periodic pension cost 3,985 4,333 Other 168 311 --- --- Pension liability $ 3,784 $ 5,147 ========= =========
The actuarial present value of projected benefit obligations was determined using discount rates of 7.75% in 1996 and 7.25% in 1995. The expected annual long-term rate of return on plan assets used in determining net periodic pension cost was 8.5% in both years.
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 $1.8 million in 1996, $1.6 million in 1995 and $1.5 million in 1994.
NOTE K -- RETIREMENT PLANS -- CONTINUED - ---------------------------------------
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 $1.6 million in 1996 and $1.7 million in 1995 and 1994.
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 $.5 million in 1996 and 1995 and $.4 million in 1994. The Company funds postretirement benefits on a "pay-as-you-go" basis.
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, which includes both current and postretirement benefit costs, amounted to $1.6 million in 1996 and 1994 and $1.7 million in 1995.
The Company incurred postretirement benefit obligations in connection with the IU International acquisition (Note G). As of December 31, 1996 and 1995, other long-term liabilities includes $4.8 million and $5 million, respectively, of such obligations, based on a discount rate of 7.25%. Future cost increases in health care benefits are assumed to be 11% in 1997, decreasing 1% per year to 5% in 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, 1996 by $.3 million and would not have had a material impact on the cost for 1996.
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 noncash interest costs. Changes in working capital include the following (in thousands):
1996 1995 1994 ---- ---- ----
Accounts receivable $ 4,971 $ 7,221 $ (8,483) Other current assets 1,611 (549) 38 Accounts payable and other current liabilities (8,323) (6,304) 4,366 ------ ------ -----
Cash provided (used) $ (1,741) $ 368 $ (4,079) ========== ========== =========
Closure trust fund payments include the following activity (in thousands):
1996 1995 1994 ---- ---- ----
Purchases of investments $ (8,105) $ (17,643) $ (16,193) Sales of investments 6,575 8,556 3,327 ----- ----- ----- Net cash used $ (1,530) $ (9,087) $ (12,866) ========== ========== =========
Ongoing net cash flows related to the IU International acquisition are principally payments of non-recurring pre-acquisition obligations.
The Company paid interest of $28.9 million in 1996, $26.3 million in 1995, $23.7 million in 1994, excluding capitalized interest of $.2 million in 1995 and $.6 million in 1994.
The Company paid income taxes, net of refunds, of $.8 million in 1996, $1.2 million in 1995, and $1.6 million in 1994.
NOTE M -- FINANCIAL INSTRUMENTS - -------------------------------
The estimated fair values of financial instruments carried in the Company's consolidated balance sheet are as follows (in thousands):
December 31, ----------------------- 1996 1995 -------------------- -------------------- Carrying Fair Carrying Fair Amounts Values Amounts Values ------- ------ ------- ------
Long-term debt $268,424 $255,224 $275,158 $252,092 Other non-current assets and stock purchase loans 1,797 1,671 3,602 3,329
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 -- COMMITMENTS AND CONTINGENCIES - ---------------------------------------
Future minimum lease payments for non-cancelable operating leases as of December 31, 1996 amount to $7.1 million in 1997, $6.1 million in 1998, $4.6 million in 1999, $2.2 million in 2000, $.8 million in 2001 and $2.7 million thereafter. Operating leases are primarily for machinery and equipment. Rental expense was $10.1 million in 1996, 10.2 million in 1995, and $7.8 million in 1994.
At December 31, 1996, the Company had made commitments to spend $11.6 million for equipment additions and improvements to waste treatment facilities. To secure its obligations to close its landfills and perform post-closure
NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED - ----------------------------------------------------
monitoring and maintenance procedures, the Company must make payments into closure trust funds. Based on current regulations, planned improvements to waste treatment facilities and permitted capacity, such payments are expected to amount to approximately $2.8 million in 1997 and $2.4 million in 1998, including the reinvestment of Idaho trust fund earnings that the Company includes in interest income. Thereafter, such payments are not expected to exceed the reinvestment of trust fund earnings, based on current requirements.
At December 31, 1996, the Company was contingently liable for $7.3 million of letters of credit outstanding under its bank credit facility of which approximately $6.1 million secures liabilities already reflected in the consolidated balance sheet.
IU International Corporation ("IU International") sold P-I-E Nationwide, Inc. ("PIE") in 1985. PIE commenced bankruptcy proceedings in 1990 and ceased operations, which triggered withdrawal liabilities to certain multiemployer pension plans, estimated by PIE in 1990 to aggregate $58 million. In 1991 the trustees of the largest plan sought information from the Company for the stated purpose of determining whether the circumstances of IU International's 1985 sale of PIE would justify a claim against the Company for any deficiencies in PIE's payment of withdrawal liabilities to such plan. Such plan did not again contact the Company concerning this matter until March 15, 1995, when the Company was advised that such plan's consideration as to whether it would assert a claim is ongoing. The Company believes any such claim is unwarranted and, if such claim were asserted, would contest any such claim vigorously. The Company believes it would ultimately prevail on the merits. However, under the Multiemployer Pension Plan Amendments Act of 1980, the federal statute governing such plans, the plan trustees could require the Company to make substantial monthly payments before any issues are arbitrated or litigated. If onerous monthly payments are imposed by the plan, the Company will take any and all actions it deems necessary and appropriate to protect itself until the matter can be arbitrated and/or litigated on its merits. The Company continues to believe that the underlying
NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED - ----------------------------------------------------
facts and circumstances support a conclusion that these matters will be resolved with no material adverse effect on its financial condition. However, the resolution of such matters, which potentially could take place in the current fiscal year, could result in a charge that is material to results of operations and cash flows in a single accounting period.
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 adverse 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 O -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------- (In thousands, except per share amounts)
Fourth Third Second First Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996* Revenues $52,634 $54,651 $52,546 $52,958 Gross profit 8,806 12,337 13,052 12,495 Unusual items, net 950 (960) (1,240) (3,400) Operating income 4,098 6,093 6,230 2,454 Income (loss): Continuing operations 898 (2,088) (1,044) (2,456) Discontinued operations (312) 279 524 (92) Net income (loss) 586 (1,809) (520) (2,548) Income (loss) per share: Continuing operations $.02 ($.05) ($.03) ($.07) Discontinued operations (.01) .01 .02 ---- --- --- ----- Net income (loss) $.01 ($.04) ($.01) ($.07) ==== ===== ===== =====
1995* Revenues $53,835 $55,215 $54,349 $60,323 Gross profit 15,144 15,715 14,567 15,226 Unusual items, net 674 1,150 800 Operating income 9,337 10,276 9,187 8,313 Income: Continuing operations 2,401 2,850 2,782 1,522 Discontinued operations 77 288 531 53 Extraordinary loss (806) Net income 1,672 3,138 3,313 1,575 Income per share: Continuing operations $.05 $.06 $.06 $.03 Discontinued operations .01 .01 Extraordinary loss (.02) ---- ---- ---- ---- Net income $.03 $.07 $.07 $.03 ==== ==== ==== ====
* Discontinued operations reclassified in all periods.
After deferred income taxes, 1996 unusual items (Note B) affected income (loss) from continuing operations as follows: losses of $2.2 million ($.06 per share) in the first quarter, $.8 million ($.02 per share) in the second quarter and $.9 million ($.02 per share) in the third quarter; $.6 million income ($.01
per share) in the fourth quarter. Also, fourth quarter income from continuing operations was reduced $.5 million ($.01 per share) by increased closure costs related to inactive waste treatment sites. Of the $4.4 million deferred income tax benefit (Note C), $1.3 million was applicable to the pre-tax loss for the year and the other $3.1 million represents additional tax benefits in the fourth quarter. If the $1.3 million were allocated among the quarters based on an effective tax rate for the year, the losses from continuing operations would have been as follows: $3.3 million ($.08 per share) in the first quarter, $.8 million ($.02 per share) in the second quarter and $.8 million ($.02 per share) in the third quarter.
In 1995, after the disproportionate effect of deferred income taxes, unusual items affected income from continuing operations as follows: $.5 million income ($.01 per share) in the second quarter, $.1 million loss (no per share effect) in the third quarter and $1.5 million loss ($.04 per share) in the fourth quarter. Also, 1995 fourth quarter operating income and income from continuing operations benefited by $1 million ($.03 per share) from reduced expected closure costs at an inactive landfill site.
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
4.13 Second Amendment, dated as of EXHIBIT 1 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.
21.1 Subsidiaries of the Company. EXHIBIT 2
23.1 Consent of Ernst & Young LLP. EXHIBIT 3