ITEM 1. BUSINESS
General
Sevenson provides a comprehensive range of field services for the remediation of sites and facilities contaminated by hazardous materials ("site remediation"). These services include on-site treatment, containment, and excavation and removal of contaminated materials. The Company also decontaminates, demolishes and closes contaminated industrial facilities and provides industrial cleaning services. Sevenson has performed site remediation field services since 1979, when it was selected as the principal contractor for the remediation of the Love Canal site in Niagara Falls, New York. The Company also participates as an investor in ventures which acquire, cleanup and sell contaminated sites ("brownfields").
The Company's strategy has been to capitalize on its extensive hazardous waste site remediation experience. The Company believes that it is one of only a few national companies with such a high degree of expertise in site remediation services.
The Company does not own or operate offsite hazardous waste transportation, storage or disposal facilities. When required, the Company subcontracts with others for these services.
Since its inception, the Company has been successful in marketing its services to both private and public sector customers. The following table summarizes revenue contribution from these customers during the last three years:
Contract Revenues Years Ended December 31, (Dollars in Thousands) 1997 1996 1995 Public Sector $29.9 (37%) $26.0 (30%) $ 17.7 (17%) Private Sector $52.0 (63%) $59.7 (70%) $ 84.8 (83%)
Total $81.9 $85.7 $102.5
The Company's customers include major industrial corporations and government agencies. Since entering the business in 1979, the Company has performed over 675 contracts including contracts at 68 Superfund sites.
In performing its services, Sevenson emphasizes safety, quality and cost effectiveness. The Company performs most work with its own employees and equipment, which allows it to maintain a high degree of control over its operations.
The Company operates nationwide, but most of its operations are in the eastern United States. It currently operates through offices in Niagara Falls, New York, Delmont (Pittsburgh), Pennsylvania, Chadds Ford (Philadelphia), Pennsylvania, Chicago (Munster, Indiana) and Fayetteville (Atlanta), Georgia. The operations of Waste Stream Technology Inc., the Company's bioremediation and laboratory subsidiary, are conducted at office, laboratory and shop facilities in Buffalo, New York.
- 3 -
The Remediation Process
The remediation process consists of three phases; site assessment, remedial design, and, finally, field cleanup operations. The site assessment phase is largely investigative, involving a detailed evaluation of the hazardous waste problem and the consideration of alternative solutions. The remedial design phase involves the preparation of a detailed remediation plan for the chosen solution. The third phase is the field implementation of the site remediation plan, which can include on- site treatment, containment, and excavation and removal of contaminated materials.
The Company's business is performing this third phase, the actual cleanup or "remediation" of a site. In so doing, the Company draws on project management expertise derived from over 19 years of hazardous waste site remediation experience. The Company believes that this expertise enables it to accurately assess the costs and risks of site remediation projects and that its experience and reputation for safe and timely completion of such projects give it a competitive advantage, especially for larger and more difficult projects.
While some firms in the environmental business offer services in more than one phase of the remediation process, the Company has chosen to focus on field cleanup operations. Sevenson believes that substantial business opportunities exist for the site remediation services which the Company provides and that broad-based public support for the cleanup of hazardous waste sites ensures that such opportunities will continue to flow.
Market Dynamics
Hazardous waste contamination of the environment first came to national attention in 1978 with publicity regarding the Love Canal site in Niagara Falls, New York. In the years that followed, public concern was heightened by the discovery of thousands of additional contaminated sites throughout the country and by the growing perception of the public health risk posed by these sites. In response to public concern, several regulatory statutes were enacted including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("Superfund"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and the RCRA Amendments of 1984, among others.
The Superfund program, other regulatory programs and pressure from Congress and the general public for the cleanup of hazardous waste sites sustain demand for site remediation services provided by the Company.
According to the EPA, as of September, 1997 there were 1,256 existing and proposed sites on the EPA's National Priorities List ("NPL"), of which 504 were in the completed or deleted categories. In addition to the NPL sites, there are thousands of other lesser contaminated sites which will require cleanup. As more hazardous waste sites move out of the study and design phases of the remediation process, the demand for site remediation services will increase.
Private sector expenditures for site remediation result in part from federal, state and local government efforts to force potentially responsible parties ("PRPs") to address and fund the remediation of contaminated sites. PRPs often take responsibility for the remediation
- 4 -
process in an effort to control and minimize their liability. If the PRPs are not identifiable or decline to accept responsibility for a site, federal, state or local government agencies may fund the project directly and take legal action against the identifiable PRPs for recovery of expenses and damages. Also, ongoing efforts to finalize the regulations for the RCRA Corrective Action Program, which addresses the clean-up of active manufacturing facilities, should result in more private sector clean-up projects. However, there can be no assurance that these regulations will be finalized and, if finalized, how many cleanup projects may result.
Company Services
The Company's site remediation field services include on-site treatment, containment, and excavation and removal of contaminated materials and the decontamination and demolition of closed industrial plants. The Company provides one or a combination of these services, as required for the specific project.
On-Site Treatment. On-site treatment involves treating hazardous materials at the site to reduce or eliminate the hazardous properties of the materials. On-site treatment includes a variety of techniques which either eliminate the substance permanently, reduce its toxicity or volume, or stabilize its constituents for disposal on-site or off-site at a permitted disposal facility. Treatment methods used by the Company include stabilization and fixation, filtration, dewatering, air stripping and carbon adsorption, precipitation, bioremediation and thermal treatment.
Stabilization and fixation are used for organic material (such as petroleum products, solvents, and certain chemicals) and inorganic material (such as heavy metals). Generally, these involve mixing a reagent (such as kiln dust, fly ash, cement, lime or clay) with the contaminated material in order to form a solid, semi-impermeable mixture which can be more easily handled for transportation and eventual disposal in an on-site or off-site facility. Fixating agents can be mixed with inorganic material to chemically bond or physically encapsulate the material to reduce the potential for migration to other areas.
Filtration involves passing contaminated liquids through a filtering media, such as sand, diatomaceous earth or fabric, to separate solid contaminants from the base liquid.
Dewatering involves pumping semi-liquid waste into a press which separates solids and liquids under pressure.
Air striping and carbon adsorption involve passing contaminated liquids through a chamber of counterflowing forced air which strips away volatile contaminants. This air is then passed through an activated carbon filter which absorbs the contaminants.
Precipitation utilizes an agent which chemically reacts with soluble contaminants in a liquid, separating the contaminants from the base liquid. These contaminants can then be removed for treatment or disposal.
- 5 -
Bioremediation utilizes naturally-occurring microorganisms to degrade certain organic contaminants to reduce the level of contamination to within approved limits. Bioremediation can be a particularly effective solution for petroleum, petroleum derivatives, and wood and pulp wastes.
Thermal Treatment involves the application of heat to remove and destroy contaminants present in a matrix, typically soil.
Containment. Containment systems are constructed to prevent the migration of hazardous materials from a site to the surrounding groundwater, surface water, soil or air. While containment can be a permanent remedial solution, it is also used as an interim step that is followed by excavation and removal or onsite treatment. The types of containment systems that the Company installs include containment cells, surface caps and slurry walls.
Containment cells are constructed to hold contaminated materials and prevent them from escaping into the surrounding environment. Construction typically requires the excavation and placement of soil, the building and installation of leachate collection systems, and the installation of clay and synthetic liners.
Surface caps are built over contaminated zones to prevent rainwater and surface water from entering the zone, becoming contaminated, and ultimately migrating to surrounding soil and groundwater. Surface caps can be installed on older landfills or surface impoundments as a permanent remedial solution or as a temporary measure prior to other forms of remediation. They are also installed on newly filled containment cells to provide long-term closure. These caps are typically made of clay and synthetic liners, which are covered with soil and plantings.
Slurry walls are relatively impermeable vertical barriers built below ground around a source of contamination to prevent the lateral movement of contaminated groundwater from the contaminated zone to the surrounding area. The walls extend from the ground surface down to an impermeable underground layer such as natural clay. Slurry walls are semi-permanent barriers which provide a relatively impermeable wall. The construction of slurry walls involves special techniques for constructing deep, narrow trenches and the careful mixing and placement of slurry ( a special mixture of water, clay and other materials).
Excavation and Removal. Excavation and removal involves the excavation of contaminated materials for containment, on-site treatment, or off-site disposal. When off-site disposal is required the Company subcontracts with licensed third parties for the transportation of the material for off-site disposal. As part of its quality control program, the Company regularly samples and analyzes excavated materials to verify that the contaminants are consistent with those identified in the remediation plan. To avoid undue liability exposure associated with the transportation and disposal of hazardous materials, the Company, as a matter of policy, will not assume title to, or the status of "generator" for such materials. Typically, the customer retains the status of generator and owner of the materials until disposal at which time the disposal facility operator assumes ownership.
Facilities Decontamination, Demolition and Closure
In addition to site remediation, the Company provides decontamination, demolition and closure services for deactivated industrial facilities.
- 6 -
Company personnel use various techniques to decontaminate facilities for reuse or prior to demolition and closure. Demolition and closure services include dismantling large structures, draining liquid wastes from pipes and tanks, removing above and below-ground tanks, cleaning and disposing of contaminated equipment, and controlled demolition. While the Company may remove relatively small amounts of asbestos incident to its facilities decontamination services, it does not generally perform asbestos removal.
Industrial Cleaning Services
The Company uses hydroblasting and vacuuming to dislodge and remove deposits, wastes and debris from boilers, process equipment, pipes, tubes, drains, vessels, sumps and other facilities in operating industrial plants. Hydroblasting is the application of high pressure (up to 10,000 psi) streams of water to the area or surface to be cleaned. Vacuuming is accomplished using truck mounted wet/dry vacuum units capable of moving up to 5,000 cubic feet of air per minute.
Brownfields
The Company participates in ventures which acquire, cleanup and sell contaminated sites ("brownfields"). The Company's participation generally will involve acting, through a subsidiary, as an investor in the venture, as well as the remediation contractor.
Operations
Project Management. At the proposal stage, each major project is assigned to one of the Company's six Operations Divisions. Project proposals are prepared under the supervision of the Operations Division Manager by estimators who have broad experience in project management and field operations, and who are therefore knowledgeable in assessing the cost and time frame required to complete a project. Estimators work with field and technical personnel on an ongoing basis to keep current on changes in the Company's operating capabilities. When a contract is obtained, the project is assigned a project manager who maintains overall project responsibility, a project engineer who tracks progress and is responsible for quality control, a superintendent who is responsible for all field operations, and a safety officer who is responsible for implementing the site safety plan. Field production and related costs are monitored daily by the project engineer and project manager. On a weekly basis such costs are reviewed by the Operations Division Manager and compared against the original project budgets.
Quality Control. To ensure and document that remediation plan requirements are met, the Company develops a quality control program for each project. Such a program involves a schedule of observation, sampling and testing throughout each phase of the project to determine whether project specification requirements are being achieved.
Health and Safety. For each project, the Company's health and safety staff develops a comprehensive health and safety program designed to address the specific exposures anticipated to be encountered during the project. The programs generally address daily employee hygiene, use of required safety devices, monitoring of hazards, and employee training. Every program requires the monitoring of employee health through physicals at the
- 7 -
beginning and end of the project for all employees. The Company's commitment to health and safety is reflected by citations and awards which the Company has received from both public and private sector customers and by the Company's Workers Compensation experience rating which has consistently indicated a loss rate well below average.
Equipment. The Company seeks to maintain high utilization of its equipment. Prior to purchasing specialized equipment, the Company first determines how the cost of such equipment can be fully amortized over one or two projects. The Company seeks to avoid purchasing equipment which will not provide an immediate, substantial return on investment and also a continuing, regular return thereafter.
Marketing
Sevenson's markets its services nationwide with concentration in the eastern United States.
The Company's marketing activities are primarily conducted by senior technical and management professionals. They are responsible for contacting appropriate representatives of corporations known to have specific problems and maintaining communication with consulting engineering firms, analytical laboratories and specialty contractors as a source of potential new business. The Company also participates in industrial and hazardous waste trade shows. In the public sector, the Company monitors government contract procurements and responds to requests for proposals and for competitive bids.
Approximately 78%, 87% and 86% of revenues for 1997, 1996 and 1995, respectively, were the result of work awarded on the basis of competitive bids in both the public and private sectors.
Customers
The Company's two largest customers in 1997 each accounted for 28% of 1997 revenues. The Company's two largest customers in 1996 each accounted for 22% of 1996 revenues. The Company's largest customer in 1995 accounted for 23% of 1995 revenues. No other customer accounted for more than 10% of total revenues in any of the three years in the period ended December 31, 1997. Because of the nature of the Company's business, which involves large, discrete contracts often completed within one year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. The Company believes that the loss of the United States government as a customer would have a material adverse effect on its business.
Backlog
On February 28, 1998, the Company had an estimated backlog of work under contracts believed to be firm of approximately $69.3 million, as compared with an estimated backlog of approximately $62.0 million and $58.5 million on February 28, 1997 and February 28, 1996, respectively.
The value of backlog is subject to change as the scope of work on projects changes. Customers generally retain the right to change the scope of work and to receive an appropriate increase or decrease in the contract price.
- 8 -
Government agencies always, and private sector customers usually, retain the right to terminate contracts with the Company at any time, with or without cause. As a result, substantially all of the Company's backlog of $69.3 million at February 28, 1998 is subject to such right of termination.
The Company believes that backlog is not necessarily indicative of revenues to be earned by the Company in the current year or subsequent periods.
Insurance and Bonding
The Company currently maintains general liability insurance policies with aggregate limits of $17 million. These policies contain standard exclusions, including exclusions of claims arising out of actual, alleged or threatened discharge, dispersal or release of pollutants. Some projects require the Company to purchase a policy of pollution liability insurance for the project. The Company has been able to purchase such policies on all projects which have required them.
In general, government entities, and to a lesser extent, private sector customers, require the Company to obtain surety bonds as security for the Company's completion of a contract.
The Company has been able to secure all the insurance and surety bonding required by all contracts which it has received. However, there is no assurance that insurance will continue to be available, that the possible types of liabilities that may be incurred by the Company will be covered by its insurance or that the liabilities incurred by the Company, although covered, will not exceed the limits of such policies. Also, there is no assurance that the Company will continue to be able to obtain surety bonds or that the surety bonds the Company is able to obtain will be adequate for its business needs.
Competition
The Company competes with both small and large companies in each aspect of its business, although no company is dominant.
Some of the Company's competitors possess certain capabilities which the Company does not, including professional engineering services and off-site transportation, storage and disposal capabilities. The Company often uses subcontractors to provide these capabilities, but the broader capabilities of some of the Company's competitors may give them an advantage in obtaining certain projects.
The Company believes the principal competitive factors in the site remediation industry are price, reputation, experience, technical proficiency and financial strength. The Company believes it effectively competes on the basis of these factors.
Regulation
General. The Company's customers, including federal and state governments and owners and operators of contaminated sites and facilities and other parties responsible for facility and site cleanup, are subject to extensive and evolving environmental laws and regulations administered by the EPA and various other federal, state and local environmental, safety and health
- 9 -
agencies and authorities. These laws contribute to the demand for the Company's services. Although the Company's customers remain responsible by law for their environmental problems, the Company must itself comply with the requirements of those laws applicable to its services. The Company believes it is in substantial compliance with all federal, state and local laws and regulations governing its business.
RCRA. The Resource Conservation and Recovery Act of 1976, as amended in 1984 ("RCRA"), is the principal federal statute governing hazardous waste generation, treatment, storage and disposal. RCRA, or EPA-approved state programs at least as stringent, govern any waste handling activities involving substances classified as "hazardous". Regulations under RCRA for hazardous waste generators, transporters and owners and operators of hazardous waste treatment, storage or disposal facilities impose detailed operating, inspection, training, emergency preparedness and response standards and requirements for closure, continuing financial responsibility, manifesting, record keeping and reporting.
Superfund. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("Superfund") generally addresses the cleanup of sites at which hazardous substances are located and have been released or are threatened to be released into the environment. Superfund imposes joint and several liability costs of cleanup and damages to natural resources upon: (a) certain owners or operators of hazardous waste sites; (b) any person who arranged for the disposal, transport or treatment by any other party of hazardous substances owned or possessed by such person; and (c) certain transporters of hazardous substances. In addition, under the authority of Superfund and its implementing regulations, detailed requirements apply to the manner and degree of remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment.
Among other things, Superfund authorizes the federal government either to remediate sites at which hazardous substances were disposed of and have been or are threatened to be released into the environment or to order, or offer an opportunity to, persons potentially liable for the hazardous substances to do so. In addition, Superfund requires the EPA to establish a National Priorities List ("NPL") of sites at which hazardous substances have been or are threatened to be released and which require investigation or cleanup.
The Superfund Amendments and Reauthorization Act of 1986 ("SARA") specifically provides that contractors deemed "response action contractors" with respect to any release or threatened release of a hazardous substance in connection with a site on the NPL are not, subject to certain exceptions, liable under Superfund or any other federal law to any person for injuries, costs, damages, expenses or other liabilities which result from such release or threatened release. The Company may be a response action contractor in respect to a portion of the work it performs. This protection only applies to releases or threatened releases on NPL sites. This protection does not apply in the case of a release that is caused by the negligence or intentional misconduct of the response action contractor. Further this protection does not affect the liability of any person under any warranty under federal, state or common law, the liability of any person under state statutory or common law or the liability of any employer who is a response action contractor to any employee under any provision of
- 10 -
law. Certain states, including New York, have similar protections for response action contractors.
SARA also allows the government, under certain circumstances, to agree to indemnify and hold harmless a response action contractor against liability for negligence in carrying out a response action at an NPL site, unless such liability was caused by the contractor's gross negligence or intentional misconduct. Any such indemnity will have deductibles and a limit to the amount of available indemnification.
Although the Company makes a continuing effort to avoid Superfund liabilities, the failure of the Company to conform its services to the requirements of Superfund could subject the Company to liabilities which could have a material adverse effect on the Company's business.
Other. The Company's services could be subject to other federal environmental protection laws, including, without limitation, The Clean Water Act, The Clean Air Act and the Toxic Substances Control Act. Many states have adopted laws for the protection of the environment which may affect the Company, including laws governing the generation, handling, transportation and disposition of hazardous substances, and laws governing investigation and cleanup of, and liability for, contaminated sites. Some of the state provisions are broader and more stringent than federal law and regulations. In addition, the Company is subject to the federal Occupational Safety and Health Act which imposes requirements for employee safety and health. The failure of the Company to conform its services to the requirements of other applicable federal, state or common laws could subject the Company to liabilities which could have a material adverse effect on the Company's business. In addition, the Company cannot predict the extent to which it may be affected by any law that may be enacted or enforced in the future, or by new interpretations of existing laws.
Employees
As of March 17, 1998, the Company had 231 full-time employees of whom 11 were officers, 68 were project management, engineering and estimating personnel, 39 were scientists and technical personnel, 6 were in business development and marketing, 35 were administrative personnel and 72 were field and shop personnel. In addition, the Company employs from 150 to 200 field workers on an as-needed basis. The Company's ability to retain and expand its staff of qualified engineers, estimators, technicians and field personnel will be an important factor in the Company's future success. To date the Company has not experienced difficulty in attracting and retaining qualified personnel and does not expect difficulty in the foreseeable future.
Work at the Company's various project sites is performed by regular Company personnel and by locally hired field workers. The Company has no national union affiliations. The Company does have union agreements which apply to projects in the Niagara Falls, New York area and to specific projects elsewhere.
The Company considers its relations with its employees to be good.
- 11 -
ITEM 2.
ITEM 2. PROPERTIES
The Company and its subsidiaries currently operate out of six separate facilities. The Company believes that its current facilities are adequate for its present operations.
The following table summarizes the location and character of all significant property owned or leased by the Company as of February 28, 1998:
Property Location Square Footage Lease Expiration
Headquarters, shop and yard facilities Niagara Falls, NY 55,000 Owned
Office Delmont, PA 3,000 Owned
Office Chadds Ford, PA 4,600 July 31, 1999
Office Fayetteville, GA 2,000 August 31, 1998
Office Munster, IN 2,050 November 30,1999
Waste Stream Technology Inc. Buffalo, NY 52,000 Owned
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party are pending except a suit for patent infringement in which a jury returned a verdict of $975,000 against the Company during the second quarter of 1997. The Company believes it has meritorious basis for challenging the verdict and is doing so. The patent in suit expired in 1994 and thus will have no effect on current or future operations or results. The Company knows of no legal proceedings pending or judgments entered against any director or officer of the Company in his or her capacity as such.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and positions with the Company are as follows:
Name Age Title Michael A. Elia 46 President, Chief Executive Officer, Director Laurence A. Elia 47 Vice President and Director Richard A. Elia 44 Executive Vice President and Director William J. McDermott 48 Vice President-Finance, Secretary and Director Dena M. Armstrong 40 Treasurer, Assistant Vice President-Finance and Director
- 12 -
Michael A. Elia has served as Chief Executive Officer of the Company since 1984. From 1982 to 1984 he served as Vice President in charge of all civil, heavy and highway construction operations of the Company and from 1979 to 1982 he was a project manager with the Company. He received his B.S. degree in Civil Engineering from Villanova University.
Laurence A. Elia has served as a Vice President of the Company since 1975 and in various executive capacities prior to that time. He is President of the Company's wholly-owned Canadian subsidiary. He received his A.B. and B.S. degrees in Engineering from Dartmouth College.
Richard A. Elia has served as a Vice President of the Company since 1982 and in various executive capacities prior to that time. From 1979 to 1982 he served as project manager for many major projects. He received his B.S. degree in Business Administration from Villanova University.
William J. McDermott has served as Vice President-Finance of the Company since 1986. From 1975 to 1986 he served as legal counsel and in various executive capacities with the Company. He received his J.D. and B.S. (Civil Engineering) degrees from the State University of New York at Buffalo. He is a member of the New York Bar.
Dena M. Armstrong joined the Company in 1975. She served in various project and headquarters administrative positions form 1975 to 1982. Since 1982 she has served as Assistant Vice President-Finance. She received her B.S. degree from Niagara University.
Michael, Laurence and Richard Elia are brothers; Dena M. Armstrong is their cousin.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Trading in the Company's Common Stock is reported on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol "SEVN". There is no market for the Company's Class B Common Stock.
The following table sets forth the high and low price of the Company's Common Stock as reported by the NASDAQ National Market System for the periods indicated (all prices are adjusted to reflect the eight-for-five stock split in the form of a 60% stock dividend which occurred in October, 1997):
YEAR QUARTER HIGH LOW
1997 4th Quarter 14 1/2 10 3rd Quarter 15 12 2nd Quarter 13 9 1/2 1st Quarter 11 3/8 9 1/2
1996 4th Quarter 11 3/8 9 1/2 3rd Quarter 11 3/8 9 1/2 2nd Quarter 12 7/8 9 7/8 1st Quarter 12 9 1/2
- 13 -
YEAR QUARTER HIGH LOW
1995 4th Quarter 11 7/8 10 3/8 3rd Quarter 13 3/4 10 5/8 2nd Quarter 12 1/4 9 7/8 1st Quarter 10 1/2 9 1/2
(b) Approximate Number of Holders of Each Class of Common Stock. As of March 17, 1998, 2,652,725 shares of the Company's Common Stock were outstanding and the number of holders of record of that class on that date was 55. Because a substantial number of the Company's Common shares are held in street name, the Company believes that the number of beneficial owners of its Common Stock exceeds 700. As of the same date, there were 7,476,400 shares of the Company's Class B Common Stock outstanding which were held by five stockholders or in trust for their minor children.
(c) Dividends. Since the third quarter of 1994 the Company has paid a regular quarterly dividend. For the fourth quarter of 1997, the dividend rate paid was 3.5 cents per share of Common Stock and 3.18 cents per share of Class B Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information included under the caption "Five Year Selected Financial Data" on page 5 of the Sevenson Environmental Services, Inc. 1997 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL DATA AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" on pages 6 through 8 of the Sevenson Environmental Services, Inc. 1997 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company and its subsidiaries at December 31, 1997 and 1996, and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1997, together with the report thereon of Deloitte & Touche LLP dated February 6, 1998, are contained on pages 9 through 23 of the Sevenson Environmental Services, Inc. 1997 Annual Report to Stockholders and are incorporated herein by reference. Supplementary quarterly financial information contained on page 22 under "Quarterly Results" is incorporated herein by reference.
With the exception of the aforementioned information and the information incorporated by reference in Items 6 and 7, the Annual Report to Stockholders is not to be deemed filed as part of this Form 10-K Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
- 14 -
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors is contained under the caption "Election of Directors" in the Company's definitive Proxy Statement involving the election of directors at its 1998 Annual Meeting of Stockholders which the Company will file with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1997 and is incorporated herein by reference. Information related to Executive Officers of the Company appears on page 13 of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained under the captions "Executive Compensation", "Compensation Committee Interlocks and Insider Participation" and "Five- Year Stockholder Return comparison" in the Company's definitive Proxy Statement related to its 1998 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained under the caption "Security Ownership of Management and Principal Stockholders" in the Company's definitive Proxy Statement related to its 1998 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained under the caption "Certain Transactions" in the Company's definitive Proxy Statement related to its 1998 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements and report of independent public accounts set forth on pages 9 through 23 of the Sevenson Environmental Services, Inc. 1997 Annual Report to Stockholders are incorporated by reference into this Annual Report on 10-K.
2. Financial statement schedules.
The following financial statement schedules should be read in conjunction with the financial statements incorporated by reference in Item 8 of this Form 10-K Annual Report:
Page Independent Auditor's Report on Schedules...... 18 Valuation and Qualifying Accounts.............. 19
- 15 -
Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in financial statements or notes thereto.
3. Exhibits - See the Exhibit Index on page 21 of this Annual Report on Form 10-K.
The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired and upon receipt of payment of an amount equal to a charge of twenty-five cents for each exhibit page, with a minimum charge of two dollars per request. All requests should be addressed to the Vice President and Secretary of the Company at the address of the Company's principal offices.
(b) Report on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of its fiscal year ended December 31, 1997.
(c) Exhibits Filed. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2).
- 16 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of March, 1998.
SEVENSON ENVIRONMENTAL SERVICES, INC.
/s/ William J. McDermott William J. McDermott Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed on the 17th day of March, 1998 by the following persons in the capacities indicated:
/s/ Michael A. Elia /s/ Arthur A. Elia Michael A. Elia, Director and Arthur A. Elia, Director President (Chief Executive Officer)
/s/ Richard A. Elia /s/ Laurence A. Elia Richard A. Elia, Director and Laurence A. Elia, Director and Executive Vice President Vice President
/s/ William J. McDermott /s/ Dena M. Armstrong William J. McDermott, Director, Vice Dena M. Armstrong, Director, President and Secretary (Chief Treasurer and Assistant Vice Financial Officer) President
/s/ Joseph J. Castiglia /s/ Robert S. Kelso Joseph J. Castiglia, Director Robert S. Kelso, Director
- 17 -
Deloitte & Touche LLP _____________ ____________________________________________ Suite 250 Telephone: (716)843-7200 Key Bank Tower Facsimile: (716)856-7760 50 Fountain Plaza Buffalo, New York 14202
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
We have audited the consolidated financial statements of Sevenson Environmental Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 6, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Sevenson Environmental Services, Inc. and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
February 6, 1998
- 18 -
- 19 -
EXHIBIT INDEX
Exhibit No.
3.1* Certificate of Incorporation 3.2* By-Laws. 9** Voting Agreement dated April 3, 1989 among Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.2* Agreement dated October 30,1981 between the Company and the Arthur A. Elia Trust, as amended and promissory note in the principal amounts of $1,000.000. 10.3* Agreement dated October 30, 1981 between the Company and the Alan R. Elia Trust, as amended, and promissory note in the principal amount of $1,000,000. 10.5** Stockholders Agreement dated April 3, 1989 among the Company, Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.6 Agreement dated as of January 1, 1997 between the Company and SCC Contracting, Inc. 10.7 Agreement dated as of January 1, 1997 between the Company and Sevenson Hotel Associates, Inc. 10.8** Tax Indemnity Agreement dated April 1, 1989 among the Company, Sevenson Environmental Ltd., SCC Contracting, Inc., Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.9* Indemnity Agreement dated April 17, 1989 among the Company, Sevenson Environmental Ltd., SCC Contracting, Inc., Albert Elia Building Company, Inc., Afore, Inc., Michael A. Elia, Laurence A. Elia, Richard A. Elia, Alan Elia, Jr., and William J. McDermott. 10.10* Split Dollar Insurance Agreement, dated March 1, 1984 between the Company and Michael A. Elia. 10.11* Split Dollar Insurance Agreement, dated March 1, 1984 between the Company and Laurence A. Elia. 10.12* Split Dollar Insurance Agreement, dated March 1, 1984, between the Company and Richard A. Elia. 10.13* Split Dollar Insurance Agreement, dated March 1, 1984, between the Company and William J. McDermott. 10.14* Sevenson Environmental Services, Inc. Pension Plan. 10.15* Sevenson Environmental Services, Inc. Profit Sharing Plan. 10.16* 1989 Sevenson Environmental Services, Inc. Incentive Stock Plan. 10.17** Option Agreement dated April 17, 1989 between the Company and Alan R. Elia, Sr. 13 Sevenson Environmental Services, Inc.'s 1997 Annual Report to Stockholders (such report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K Annual Report, is furnished for the information of the Commission and is not to be deemed "filed" as part of the Form 10-K). 21 Subsidiaries of the Registrant.
* Incorporated by reference to the same exhibit numbers in the Company's registration statement on Form S-1 (File No. 0-17536).
**Incorporated by reference to the same exhibit numbers in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-17536).
- 20 -
EXHIBIT 13
1997 Annual Report to Stockholders
Corporate Profile
Sevenson provides a comprehensive range of services for the remediation of sites and facilities contaminated by hazardous materials. Founded as a general construction business in 1917, Sevenson entered the remediation business in 1979 when it became the principal contractor for the remediation of the Love Canal site, Niagara Falls, New York. Headquartered in Niagara Falls, New York, the Company and its subsidiaries also maintain offices in Pittsburgh and Philadelphia, Pennsylvania; Atlanta, Georgia; Buffalo, New York; and Chicago, Illinois. Present full-time employees number 231. Trading in Sevenson's common stock is reported on the National Market tier of The Nasdaq Stock Market under the symbol SEVN.
Notice of Annual Meeting
The Annual Meeting of the Stockholders of Sevenson Environmental Services, Inc., will be held on Tuesday, May 19, 1998 at 10:00 a.m. EDT at the Comfort Inn, One Prospect Point, Niagara Falls, New York 14303.
Contents Page Annual Message to Stockholders 2-4 Financial Review 5-8 Consolidated Statements of Earnings 9 Consolidated Balance Sheets 10-11 Consolidated Statements of Cash Flows 12-13 Consolidated Statements of Stockholders' Equity 14 Notes to Consolidated Financial Statements 15-22 Independent Auditors' Report 23 Management 24 Corporate Information 24
Forward-Looking Statement
Certain statements and information included herein constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes", "expects", "anticipates", "hopes", or words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied in such forward-looking statements. You are urged to review the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as well as all reports filed by the Company subsequent to the Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
Financial Highlights
For the years ended December 31 (In thousands except per share data) 1997 1996 1995
INCOME STATEMENT
Revenue $81,939 $85,749 $102,472 Net Earnings $ 4,719 $ 6,282 $ 10,119 Earnings Per Share $ 0.47 $ 0.62 $ 1.00
Dividends Paid Per Share: Common $ 0.14 $ 0.14 $ 0.07 Class B Common $ 0.13 $ 0.13 $ 0.06 Weighted Average Common Shares Outstanding 10,104 10,106 10,150
BALANCE SHEET
Cash, Cash Equivalents and Marketable Securities $51,612 $49,597 $ 48,700 Working Capital $62,643 $65,738 $ 64,777 Total Assets $99,272 $97,085 $ 93,281 Long-Term Debt $ 2,000 $ 2,000 $ 2,000 Stockholders' Equity $84,373 $80,135 $ 75,715
Annual Message to Stockholders
After a difficult 1996, I expected progress and improvement in 1997. The year began with good business conditions and with a record backlog of work. The first and second quarters actually did show improvement. The disappointment occurred in the third and fourth quarters when the indefinite postponement of two larger projects constrained revenue while revenue and margin shortfalls at two other projects impacted earnings.
The problems we encountered in the third and fourth quarters were unrelated to each other and to industry conditions in general. The postponement of projects occurs from time to time. Revenue and margin shortfalls at particular projects also occasionally occur. What was unusual in 1997 was the coincidence of these several negative developments with an absence of compensating positive ones.
Revenue was reduced also by the loss of contracts to aggressive bidding by competitors. For a number of years aggressive bidding has been typical for contracts under $5 million. In the second half of 1997, we saw not only fewer new contract opportunities but those we did see consisted almost entirely of contracts under $5 million. This reflected, some in our industry say, a slackening of enforcement by regulatory agencies. Whether this is so or not, the flow of new projects did not meet my expectations.
I expect the Company will continue to face a challenging competitive situation in 1998. Demand is not expected to change dramatically either in the total value or size of remediation contracts awarded. Contracts under $5 million in value will, as always, make up the majority of contracts we must compete for. On the supply side, consolidation is helping to reduce industry overcapacity. However, new entrants will offset somewhat the positive effects of this trend.
To compete in an increasingly competitive market, the Company will continue to emphasize value-added services. Environmental cleanup projects generally offer many opportunities for value-added contractor input. Drawing on almost 20 years of hazardous waste experience, the Company can offer customers money-saving engineering alternatives and risk sharing contracting terms which competitors, especially new entrants, cannot conceive or match. The Company's success over the last several years with this approach is something that we are capitalizing upon to win repeat business and to convince new customers to choose Sevenson.
The Company is also targeting new projects which are technically or operationally more challenging. Such projects attract fewer bidders because of their greater difficulty. Ideally, they involve some special technical capability or specialized equipment which the Company possesses. The Company has an excellent track record of winning and successfully completing such projects.
Until the mid '90s, environmental cleanup was driven almost exclusively by government enforcement. With public budgets under pressure, a shift away from regulatory pressure to economic incentive has been taking place. Changes being enacted in regulatory requirements and liability standards are designed to encourage voluntary cleanup of "brownfield" sites. The Company is participating in brownfield cleanup both in its traditional role as a cleanup contractor and as an investor in the sites themselves. In 1997
the Company realized its first profits from a brownfield venture. At the end of 1997 the Company had over $8 million invested in brownfield sites and was looking for further opportunities.
Notwithstanding the challenges we face, I am hopeful that 1998 will reverse the trend of the last two years. Our backlog at the beginning of the year was a satisfactory $61 million and we are having success in adding new contracts. We are making improvements in operations and cost control which should enhance our profitability. In all, I look forward to being able to report progress to you as the year unfolds. In the meanwhile, I am grateful for your continuing support.
Cordially,
Michael A. Elia President and Chief Executive Officer
February 6, 1998
SEVENSON ENVIRONMENTAL SERVICES, INC.
Financial Review
Five-Year Selected Financial Data (In thousands, except per share amounts)
Management's Discussion and Analysis of Financial Condition and Results of Operations
SEVENSON ENVIRONMENTAL SERVICES, INC.
RESULTS OF OPERATIONS
The following table sets forth certain items of selected consolidated financial information as a percentage of revenues for the periods indicated. This table and the subsequent discussion should be read in conjunction with the selected financial information and the Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company included elsewhere in this Annual Report.
Years Ended December 31, 1997 1996 1995
Revenue 100.0% 100.0% 100.0% Gross Profit 16.8 19.3 21.9 Selling, General & Administrative Expenses 12.3 11.2 8.4 Earnings from Operations 4.5 8.1 13.5 Earnings Before Income Taxes 8.5 10.9 15.6 Net Earnings 5.8 7.3 9.9
1997 Versus 1996 - Revenue for 1997 was $81.9 million, 4% lower than 1996's revenue of $85.7 million. Revenue was affected by postponement of two large projects which were postponed for reasons specific to the affected projects. A further cause of lower revenue was the Company's loss of potential contracts to aggressive bidding by competitors. While aggressive bidding is not unusual, it was a greater factor in 1997 due to the size of projects out for bid, which were generally smaller and thus attracted more bidders.
At the end of the year, the Company's backlog of signed contracts stood at $61 million compared to $65 million a year earlier. Backlog was lower despite the fact that backlog at the end of the third quarter was a record $76 million. In the fourth quarter a paucity of new contract opportunities and competition combined to lower backlog.
Gross profit margin for 1997 was 16.8% versus 19.3% the prior year. Gross margin was lower due to a revenue shortfall on one larger project, and, to a lesser extent, by higher than expected costs on others. Margin varies from project to project depending upon the nature of the project, competition and the impact of operational conditions upon project execution; these factors are unique to each project. Prior to 1996, the Company's overall gross margin for each year was in the range of 20% to 25%. Gross margin for 1997 of 16.8% was substantially below this range due principally to the impact of two projects. Without these two projects, which had combined 1997 revenue of $9 million, gross margin would have been 20.9%.
Partially offsetting lower project gross margin was lower indirect cost, which raised overall gross margin by about 1%. Indirect costs were lower due principally to lower insurance costs.
Selling, general and administrative expense increased 5% to $10.1 million from $9.6 million in 1996. Increases in legal and travel expense were the principal contributors to the increase. Legal expense was higher due to litigation costs.
Interest income was $2.4 million, up 9% from the prior year's interest income of $2.2 million. Higher interest rates and invested balances combined to produce the increase.
In 1997, the Company realized a gain of $300,000 on the sale of its ownership interest in a brownfield site, the Company's first completed brownfield venture.
The effective tax rate was 32.5% versus 32.8% for 1996. The lower effective rate was chiefly due to lower earnings from operations as a percentage of pre-tax earnings versus interest income. Interest income consists primarily of tax exempt and dividend income which have a lower effective tax rate.
1996 Versus 1995 - Revenue for 1996 was $85.7 million, a 16% decline from 1995's revenue of $102.5 million. Revenue was lower due to the difficulty the Company and the industry in general experienced in obtaining new contracts during a period which extended from the third quarter of 1995 into the second quarter of 1996. This difficulty was chiefly due to delays in awards of federally-funded projects associated with the federal budget impasse of that period. The impasse directly affected federal contracts which the Company was anticipating and indirectly affected privately funded cleanup projects by causing an increase in competition for those projects. As the year progressed, conditions gradually improved and the Company experienced greater success in securing contracts. By the end of the year, the Company had secured a record $107 million in new contracts or additions to existing contracts and had a contract backlog of $65 million, which was also a record.
Gross profit margin was slightly lower at 19.3% compared to 21.9% in 1995. The Company considers the gross margin achieved in 1996 to be slightly below, and in 1995 to be within, the normal range. The decline in gross margin percentage in 1996 from the previous year is attributed to the above-mentioned increase in competition for privately funded projects and to the fact that revenue from larger projects, which have higher margins, constituted a lower percentage of total revenue than in the previous year.
Also contributing to lower gross margin was higher indirect costs. The largest increase in indirect cost occurred in equipment depreciation expense. Other significant increases occurred in equipment-related expense and in insurance expense. Higher equipment-related expenses were incurred in servicing the Company's larger fleet of equipment and in renting specialized equipment necessary to service certain projects. Insurance expense was higher due to a reserve for an accident involving an employee.
Selling, general and administrative expense increased 12% to $9.6 million from $8.6 million in 1995. Increases occurred in virtually all categories despite lower revenue. A majority of the increase occurred in categories which are mostly unrelated to the level of current operations, such as professional fees and health insurance expense. Significant increases also occurred in business development and acquisition-related categories, which also do not correlate directly with current operations (but can, as in
1996, correlate with new business as evidenced by the Company's record backlog at year end).
Interest income was down 4% to $2.2 million from $2.3 million. The decrease was due to lower interest rates and lower invested balances.
The effective tax rate was 32.8% versus 36.6% for 1995. The lower effective rate was chiefly due to lower earnings from operations as a percentage of pre-tax earnings versus interest income. Interest income consists primarily of tax-exempt and dividend income which have a lower effective tax rate.
Fluctuations in Quarterly Results - The commencement or completion of projects within a particular quarter, the seasonal, weather-affected nature of the Company's business, the spending decisions of major customers, and the timing of regulatory decisions relating to projects, among other factors, may cause the Company's results to vary significantly from quarter to quarter and from year to year. The Company believes that these variations will continue in the future. The following selected financial data has been derived from unaudited interim financial statements which, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary to fairly present the information for such periods. Quarterly results of operations are not necessarily indicative of results to be achieved for full fiscal years.
1997 Net Quarter Revenue Earnings (In thousands) 1st $15,655 $ 714 2nd 19,945 2,034 3rd 24,855 1,195 4th 21,484 776
1996 Net Quarter Revenue Earnings (In thousands) 1st $13,858 $ 483 2nd 19,092 1,985 3rd 23,374 1,816 4th 29,425 1,998
Liquidity and Capital Resources - Net cash provided by operating activities was $10.8 million versus $9.0 million the prior year. Higher cash receipts from customers accounted for the increase. Revenues were higher in the first three quarters, but lower in the fourth, versus the prior year. This resulted in increased cash receipts from customers during the year and lower accounts receivable at year end.
Net cash used in investing activities was $6.6 million versus $9.4 million the prior year. The difference was due to increased investments in brownfield sites, offset by lower capital expenditures. In 1997 the Company continued to invest in brownfield sites. During the year the Company also completed the cleanup and sale of a brownfield site.
Capital expenditures were lower in 1997 relative to 1996 and 1995. However, capital expenditures in those two earlier years were high by historical standards. At $2.6 million, capital expenditures in 1997 were more consistent with years prior to 1995. The higher expenditure in 1996 and 1995 were principally related to the Company's expansion of its dewatering and water treatment operations in those years. Future capital expenditures will depend upon the nature and needs of future projects.
The Company paid a regular quarterly dividend of 3.5 cents per share of Common Stock and 3.18 cents per share of Class B Common Stock. Total dividends paid were $1.3 million.
The Board of Directors has authorized the repurchase of up to 800,000 shares of which 518,240 had been repurchased through December 31, 1997. However, no shares were repurchased during 1997.
In 1995 the Board of Directors authorized the Company to pursue the business strategy of acquiring, cleaning-up and disposing of "brownfield" sites, real property that is unmarketable or of substantially reduced value due to the presence of contamination. In 1996 the Company acquired interests in, and commenced the cleanup process at, two brownfield sites. In 1997 the cleanup and sale of one of these sites were completed and the Company acquired interests in one additional site. At the end of 1997, the Company's investment in brownfield sites was $8.6 million. The Company will invest further funds in the cleanup of the two remaining sites and intends to make further investments in the brownfield redevelopment business. The Company's ultimate, total investment in this business will depend upon the Company's success in finding and acquiring suitable brownfield sites.
On December 31, 1997, the Company had working capital of $62.6 million versus $65.7 million a year earlier. Working capital included $51.6 million in cash, cash equivalents and marketable securities. The Company expects that existing funds and cash generated by operations will be sufficient to meet all working capital and capital investment needs for the foreseeable future.
The Company has available from a bank a $5 million line of credit for stand-by letters of credit secured by marketable securities and a $5 million unsecured working capital line of credit. As of December 31, 1997, there were no outstanding letters of credit or borrowing against these lines.
The Company is aware of the "Year 2000" issue which affects most corporations and concerns the inability of information systems, primarily computer software programs, to properly recognize and process date-sensitive information relating to the Year 2000 and beyond. The Company believes it is pursuing appropriate courses of action to identify and address Year 2000 compliance including efforts to obtain assurances from its software vendors regarding compliance. The Company believes that it is on schedule to complete its Year 2000 initiatives and does not expect that the cost of compliance will have a material effect on its financial position or results of operations.
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA) _________________________________________________________________ 1997 1996 1995
REVENUES (Note 11) $ 81,939 $ 85,749 $ 102,472 __________ __________ __________ COSTS AND EXPENSES: Direct and indirect costs: 68,214 69,217 80,009 Selling, general and administrative 10,055 9,586 8,612 __________ __________ __________ 78,269 78,803 88,621 __________ __________ __________
EARNINGS FROM OPERATIONS 3,670 6,946 13,851 __________ __________ __________ OTHER: Interest income 2,385 2,168 2,255 Interest expense (226) (206) (205) Realized gain on sale of marketable securities 863 414 62 Realized gain on sale of real estate 299 0 0 __________ __________ __________ 3,321 2,376 2,112 __________ __________ __________ EARNINGS BEFORE INCOME TAXES 6,991 9,322 15,963
INCOME TAXES (Notes 1 and 8) 2,272 3,040 5,844 __________ __________ __________
NET EARNINGS $ 4,719 $ 6,282 $ 10,119 ========== ========== ========== BASIC AND DILUTED EARNINGS PER SHARE (Note 1) $ 0.47 $ 0.62 $ 1.00 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,104,252 10,106,190 10,151,133 ========== ========== ========== CASH DIVIDENDS PER SHARE: Common Stock $ 0.14 $ 0.14 $ 0.14 ========== ========== ==========
Class B Common Stock $ 0.13 $ 0.13 $ 0.13 ========== ========== ========== See notes to consolidated financial statements.
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA) _________________________________________________________________
ASSETS 1997 1996
CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 4,522 $ 1,472 Marketable securities (Note 2) 47,090 48,125 Accounts receivable (Note 3) 16,532 24,635 Costs and estimated earnings on contracts in progress in excess of related billings (Note 4) 4,847 3,296 Prepaid expenses and other current assets 688 705 Deferred income taxes (Notes 1 and 8) 0 504 _______ _______
Total current assets 73,679 78,737 _______ _______
PROPERTY AND EQUIPMENT (Notes 1 and 5): Land 308 308 Buildings and improvements 3,507 3,413 Construction and field equipment 18,040 15,697 Vehicles 5,596 5,425 Office furniture and equipment 1,671 1,622 _______ _______ 29,122 26,465 Less accumulated depreciation 14,763 12,269 _______ _______ Total property and equipment, net 14,359 14,196 _______ _______
INVESTMENT IN BROWNFIELD REAL ESTATE 8,631 1,857 _______ _______
OTHER ASSETS 2,603 2,295 _______ _______
TOTAL ASSETS $99,272 $97,085 ======= =======
See notes to consolidated financial statements.
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA) _________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES: Accounts payable: Current $ 5,392 $ 7,696 Retentions 643 580 Note payable - current (Note 6) 12 331 Compensation, income taxes and other current liabilities (Note 8) 1,773 2,187 Deferred income taxes (Notes 1 and 8) 151 0 Amounts billed in excess of costs and estimated earnings on contracts in progress (Note 4) 3,065 2,205 _______ _______ Total current liabilities 11,036 12,999 _______ _______
DEFERRED INCOME TAXES (Notes 1 and 8) 1,863 1,951 _______ _______
NOTES PAYABLE (Note 6) 2,000 2,000 _______ _______
STOCKHOLDERS' EQUITY (Notes 1, 7 and 10): Common Stock, $.0625 par value: Authorized 19,200,000 shares, Issued 3,161,240 and 3,083,720 shares 198 193 Class B Common Stock, $.0625 par value: Authorized 12,800,000 shares, Issued 7,486,440 and 7,524,760 shares 468 470 Preferred Stock, $.10 par value: Authorized 1,000,000 shares, Outstanding - none 0 0 Additional paid-in capital 24,861 24,478 Retained earnings 61,872 58,455 _______ _______ 87,399 83,596 Treasury stock (518,240 shares common stock, at cost) (3,723) (3,723) _______ _______ 83,676 79,873 Unrealized gain on marketable securities, net of tax (Note 2) 792 357 Cumulative translation adjustment (95) (95) _______ _______ Total stockholders' equity 84,373 80,135 _______ _______
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $99,272 $97,085 ======= =======
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) ________________________________________________________________ 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Cash receipts from customers $ 89,368 $ 85,814 $ 94,852 Cash payments to subcontractors, suppliers and employees (77,976) (76,900) (86,553) Interest received 2,385 2,168 2,255 Interest paid (226) (206) (205) Taxes paid (2,725) (1,977) (5,259) Tax refunds received 8 122 84 _________ _________ ________ Net cash provided by operating activities 10,834 9,021 5,174 _________ _________ ________ CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased (25,627) (45,096) (26,868) Investments sold 28,114 42,006 29,993 Capital expenditures (2,577) (5,383) (6,890) Brownfield acquisition and remediation costs (7,544) (1,857) 0 Change in notes receivable 1 1 (1) Proceeds from sale of fixed assets 13 945 30 Proceeds from the sale of real estate 1,069 0 0 ________ ________ ________ Net cash used in investing activities (6,551) (9,384) (3,736) ________ ________ ________ CASH FLOWS FROM FINANCING ACTIVITIES: Debt proceeds 41 331 749 Principal payments of debt (360) (749) 0 Proceeds from exercise of stock options 388 31 110 Acquisition of treasury stock 0 (709) 0 Dividends paid (1,302) (1,295) (1,302) ________ ________ ________ Net cash used in financing activities (1,233) (2,391) (443) ________ ________ ________ EFFECT OF EXCHANGE RATE CHANGES ON CASH 0 0 5 ________ ________ ________ NET CHANGE IN CASH AND CASH EQUIVALENTS 3,050 (2,754) 1,000 ________ ________ ________
1997 1996 1995
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,472 4,226 3,226 ________ ________ _________ CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,522 $ 1,472 $ 4,226 ======== ======== ======== RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net earnings $ 4,719 $ 6,282 $ 10,119 Adjustments to reconcile net earnings to net cash provided by operating activities: Bad debt expense 0 24 39 Depreciation and amortization 2,406 2,405 1,903 Increase in cash surrender value of life insurance (326) (222) (251) Provision for deferred income taxes 412 482 585 Gain on sale of real estate (299) 0 0 Gain on sale of marketable securities (863) (414) (62) Loss (gain) on sale of fixed assets 17 (15) (5) Change in assets and liabilities affecting cash flow: Accounts receivable 8,103 1,916 (1,467) Costs and estimated earnings on contracts in progress in excess of related billings (1,551) (740) (1,175) Prepaid expenses and other current assets 17 141 416 Other assets (4) 13 28 Accounts payable (2,241) (1,242) 1,077 Compensation, income taxes and other current liabilities (416) 1,486 (1,061) Amounts billed in excess of costs and estimated earnings on contracts in progress 860 (1,095) (4,972) ________ ________ _______
NET CASH PROVIDED BY OPERATING ACTIVITIES $10,834 $ 9,021 $ 5,174 ======= ======= =======
See notes to consolidated financial statements.
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 7) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
SEVENSON ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 _________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business - Sevenson Environmental Services, Inc. (the "Company") was incorporated in the State of Delaware on February 27, 1989. It is the successor, as a result of a merger completed March 23, 1989, to a corporation of the same name incorporated in New York in 1977. The Company provides a comprehensive range of field services for the remediation of sites and facilities contaminated by hazardous materials including some Company-owned Brownfields. The Company's site remediation field services include on-site treatment, containment, and excavation and removal of contaminated materials. Other Company services include the decontamination, demolishing, and closing of deactivated industrial facilities and industrial cleaning and decontamination services to operating plants and refineries. The remediation process consists of three phases, namely, site assessment, remedial design, and site remediation. The third phase is the field implementation of the site remediation plan and is the phase in which the Company participates.
The Company provides its services in the United States and Canada. The Company's customers include major industrial corporations and government agencies. Because of the nature of the Company's business, which involves large, discrete contracts often completed within a year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. Management believes that the loss of the United States government as a customer would have a material adverse effect on its business.
Basis of Presentation - The Company specializes in hazardous waste site remediation. All majority-owned subsidiary companies are included in the consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated.
Related Party Transactions - SCC Contracting, Inc. ("SCC"), a construction company owned by the five principal shareholders of the Company has been, and is expected to continue to be, operated out of office facilities owned by the Company and has used, and is expected to continue to use, to varying degrees, the Company's office personnel, yard and shop facilities, computer resources, equipment and services of the same management and other personnel.
A formal agreement between the Company and SCC was adopted to provide guidelines for the performance and pricing of intercompany services and use of facilities. This services agreement specifies various formulae to determine charges to be made for the provision of services and facilities and equipment usage. The formulae are intended to fairly allocate expenses between the businesses. During the years ended December 31,1997, 1996 and 1995, expenses allocated to SCC amounted to approximately $195,918, $148,436 and $79,146, of which $18,604, $0 and $7,486 remained outstanding as of December 31, 1997, 1996 and 1995, respectively. During the years ended December 31, 1997, 1996, and 1995, SCC allocated expenses of $53,850,
$228,962, and $0, respectively, to the Company related to the use of equipment, of which $53,850 and $176,679 remained outstanding as of December 31, 1997 and 1996, respectively.
Segment Information - The business operations of the Company are concentrated in one segment.
Cash and Cash Equivalents - Cash and cash equivalents represent demand deposits with banks, certificates of deposit held by banks or financial institutions, money market funds and commercial paper, all having original maturities of three months or less. The Company places its temporary cash investments with high credit quality financial institutions.
Investment in Brownfield Real Estate - Investment in brownfield real estate represents investments in non-wholly owned subsidiaries which own various tracts of contaminated land ("brownfields") which were acquired during 1997 and 1996. The Company has agreed to perform site remediation services at the sites. The value of the asset includes the purchase price in addition to costs incurred in the site assessment, remedial design and site remediation. The Company expects the land to be sold upon remediation. The Company will recognize any gain or loss on the real estate transaction at time of sale.
Other Assets - Other assets represent the cash surrender value of officers' life insurance policies and various other intangible assets.
Property, Equipment and Depreciation - Property and equipment are carried at cost and are being depreciated using straight-line methods over the estimated useful lives of the related assets.
Method of Accounting for Contracts - The accompanying consolidated financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. The amount of revenue recognized is not related to the progress billings to customers.
On all projects, the amount of earnings recognized at statement date is that portion of the total estimated contract earnings that the cost expended bears to the anticipated final cost, based on current estimates of cost to complete the project.
Contract costs include all direct labor and benefits, materials unique to or installed in the project, subcontractor costs, outside vendor equipment rental and other direct costs including shop and yard charges.
As contracts extend over one or more years, revisions in cost and earnings estimates during the course of the project are reflected in the accounting period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements.
Operating Cycle - Assets and liabilities related to contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets, as they will be liquidated in the normal course of contract completion, although this may require more than one year.
Selling, General and Administrative Expenses - These expenses are charged to operations as incurred and are not allocated to contract costs.
Income Taxes - The Company provides for deferred taxes on all temporary differences (principally depreciation, prepaid expenses, bad debts and contract reserves) which are transactions reported for tax purposes in periods other than for financial reporting purposes.
Foreign Operations - All assets and liabilities of operations outside the United States are translated into U.S. dollars at exchange rates in effect at the end of the period. Operating results are translated at a weighted average of exchange rates in effect during the year. Net unrealized gains and losses on translation of foreign currency financial statements are recorded in stockholders' equity, as a cumulative translation adjustment, and will be included in income only upon sale or liquidation of the underlying asset. Realized gains and losses resulting from completed transactions are included in net earnings. Foreign operations are not considered a significant component of the Company's business.
Earnings Per Share - Effective December 31, 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces current earnings per share ("EPS") reporting requirements and requires the dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. The calculation of diluted EPS does not consider the effects of antidilution.
Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements during the reported period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications of 1996 and 1995 balances have been made to conform with classifications used in 1997.
2. MARKETABLE SECURITIES
The portfolio of marketable securities consists of equity securities, debt securities, mutual funds and certificates of deposit classified as available-for-sale or trading securities. Investments are reported at fair value estimated based upon quoted market prices. Realized holding gains and losses are included in earnings. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. Unrealized holding gains and losses for trading securities would be included in earnings.
A summary of marketable securities at December 31, 1997 and 1996 follows:
(In Thousands) December 31, 1997 1996 _____________________ Common stock $ 4,884 $ 1,701 Preferred stock 188 313 Municipal bond inventory 13,447 27,097 Mutual funds 19,484 8,662 Certificates of deposit 0 852 Trading securities - at market, which approximates cost 9,087 9,500 ________ ________ Total $47,090 $48,125 ======== ========
Gross unrealized holding gains and losses at December 31, 1997 totaled $1,140,157 and $0, respectively, and $536,670 and $0, respectively, at December 31, 1996.
Contractual maturities for investments in debt securities available-for-sale at December 31, 1997 (in thousands) are as follows:
1997 1996 _____________________ Due in one year or less $ 4,474 $ 5,980 Due after one year through three years 6,857 14,151 Due after three years 2,116 6,966 _______ ________ Total $13,447 $27,097 ======= ========
Actual maturities may differ from contractual maturities because some issuers have the right to prepay obligations.
Gross gains of $888,000 in 1997 and $451,000 in 1996 and gross losses of $25,000 in 1997 and $37,000 in 1996 were realized on the sale of investments. The cost of securities sold is based on the specific identification method.
3. ACCOUNTS RECEIVABLE (In Thousands) December 31, 1997 1996 ____________________ Current estimates $14,235 $21,139 Retentions 1,989 3,234 Due from related companies, officers and employees 333 286 Other 16 17 _______ ______ 16,573 24,676 Less allowance for doubtful accounts 41 41 _______ ________ Total $16,532 $24,635 ======= ========
The Company anticipates that substantially all retentions will be collected within the next year.
4. CONTRACTS IN PROGRESS (In Thousands) December 31, 1997 1996 ____________________ Accumulated expenditures on contracts in progress $55,073 $74,057 Estimated earnings thereon 10,128 25,779 _______ _______ 65,201 99,836 Less applicable progress billings 63,419 98,745 _______ _______ Total $ 1,782 $ 1,091 ======= =======
The contracts are shown in the accompanying consolidated balance sheets as follows: (In Thousands) December 31, 1997 1996 ____________________ Costs and estimated earnings on contracts in progress in excess of related billings $ 4,847 $ 3,296 Billings on contracts in excess of costs and estimated earnings (3,065) (2,205) _______ _______
Total $ 1,782 $ 1,091 ======= =======
5. LINE OF CREDIT ARRANGEMENTS
The Company has available from a bank, two lines of credit. The first is a $5,000,000 line for the issuance of Stand-by Letters of Credit with a term of two years or less. This facility is secured by a perfected first security interest in managed liquid assets held by the Company at specified percentages available against market value. The second is a $5,000,000 line to be utilized for working capital, the issuance of Stand-by Letters of Credit and the acquisition or lease of equipment. Draws for working capital will be on demand, unsecured except for any excess value in the assigned liquid assets securing the equipment line and bear interest at the Bank's prime rate. Draws for stand-by letters of credit have terms of 180 days or less. Draws for the acquisition or lease of equipment are limited to a total of $1,500,000 and are on a term basis, secured by the specific equipment financed, and bear interest at the Bank's prime rate, or if elected, at an annual rate as determined by the Bank at its sole discretion. There are no compensating balance arrangements in connection with these lines. As of December 31, 1997 there were no outstanding borrowings under these lines.
6. NOTES PAYABLE
Notes payable represent amounts owing to the former shareholders of a construction company purchased by the Company in 1981. Interest on these notes accrues at the rate of 9% per annum. These notes must be repaid within six months after each former shareholder's death. It is anticipated that repayment will be funded by insurance on the life of each former shareholder. Additional notes for $11,774 and $330,591 were outstanding as of December 31, 1997 and 1996, respectively, with various vendors for the purchase of construction equipment.
7. CAPITAL STOCK
During 1997, the Company had an eight for five stock split. All per share and outstanding common share data were effected retroactively for the split.
The authorized capital stock of the Company consists of 19,200,000 shares of Common Stock, $.06 par value, 12,800,000 shares of Class B Common Stock, $.06 par value, and 1,000,000 shares of Preferred Stock, $.10 par value. The Company has issued 3,161,240, 3,083,720 and 3,053,720 shares of Common Stock and 7,486,440, 7,524,760 and 7,550,280 shares of Class B Common Stock as of December 31, 1997, 1996 and 1995, respectively. No shares of Preferred Stock have been issued. Holders of Common Stock are entitled to elect 25% of the Board of Directors so long as the number of outstanding shares of Common Stock is at least 10% of the total number of outstanding shares of both classes of Common Stock.
Except for the election or removal of Directors as described above and except for class votes as required by law, holders of both classes of common stock vote as a single class on all matters, with each share of Common Stock having one vote per share and each share of Class B Common Stock having ten votes per share.
Cash or property dividends to the holders of common stock may be paid as follows: (i) cash or property dividends may be declared and paid on the Common Stock without being declared and paid on the Class B Common Stock; and (ii) no cash or property dividends may be declared and paid on the Class B Common Stock unless dividends at least 10% greater in amount per share are paid concurrently on the Common Stock.
Dividends paid in shares of Common Stock or Class B Common Stock may be paid as follows: (i) shares of Common Stock may be paid to holders of shares of Common Stock or, if there is no Common Stock outstanding, to holders of Class B Common Stock, and shares of Class B Common Stock may be paid to holders of Class B Common Stock; and (ii) the same number of shares shall be paid in respect of each outstanding share of Common Stock and Class B Common Stock.
At the option of the holder of record, each share of Class B Common Stock is convertible at any time into one share of Common Stock. During 1997, 1996 and 1995, 38,320, 27,280, and 27,280 shares, respectively, of Class B Common Stock were converted into shares of Common Stock.
The authorized Preferred Stock is available for issuance from time to time in the future at the discretion of the Board of Directors of the Company, without stockholder approval. The Board of Directors has authority to prescribe for each series of Preferred Stock it establishes, the relative ranking with other series, the voting rights, if any, the dividend rate, the redemption and liquidation rights, the conversion rights, if any, and any other rights, preferences, qualifications, limitations or restrictions of the particular series.
The stockholders have entered into an Agreement pursuant to which they have a pro rata right of first refusal to purchase shares of Class B Common Stock proposed to be sold or disposed of by any of them to persons other than family members or executive officers of the Company and their family members, so long as such persons are approved by a majority in interest of the holders of Class B Common Stock. To the extent the rights of first refusal are not exercised, such rights may be assigned to the Company. Transferees take their shares of Class B Common Stock subject to the Stockholders Agreement. If the right of first refusal is not exercised, the party proposing to dispose of Class B Common Stock must, prior to the disposition, convert such shares into shares of Common Stock.
The Class B stockholders are parties to a Voting Agreement pursuant to which all shares of Class B Common Stock are to be voted in accordance with the majority vote, except in situations in which there exist certain conflicts of interest. The Voting Agreement is for a term of ten years and is subject to renewal.
In November of 1990, the Board of Directors approved a plan to repurchase up to 320,000 shares, or 3% of its outstanding common stock. In August 1992, the Board of Directors increased the number of shares to 480,000, or 5% of its outstanding common stock. In August 1995, the Board of Directors increased the number of shares to 800,000, or 8% of its outstanding common stock. Through December 31, 1997 the Company had repurchased a total of 518,240 shares for $3,723,000.
8. INCOME TAXES
The provision for income taxes is comprised of the following:
(In Thousands) Year ended December 31, 1997 1996 1995 ___________________________________ Currently payable: Federal $1,413 $1,980 $4,258 State 447 578 1,306 ______ ______ ______ 1,860 2,558 5,564 ______ ______ ______ Deferred: Federal 346 397 214 State 66 85 66 ______ ______ ______ 412 482 280 ______ ______ ______ Total $2,272 $3,040 $5,844 ====== ====== ======
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Year ended December 31, 1997 1996 1995 ________________________________ Provision based on statutory rate 34.0% 35.0% 35.0% State income taxes, net of federal tax benefit 5.9 4.7 5.7 Tax-exempt interest and dividends (7.8) (7.4) (4.3) Other 0.4 0.5 (0.2) ____ ____ ____ Total 32.5% 32.8% 36.6% ==== ==== ====
Deferred taxes relating to temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes are as follows:
(In Thousands) Year ended December 31, 1997 1996 1995 ____________________________________ Depreciation $ 195 $ 526 $ 396 Prepaid expenses 76 (13) (116) Contract reserves 24 0 (14) Contingency reserve 138 0 0 Other (21) (31) 14 _____ _____ _____ Total $ 412 $ 482 $ 280 ===== ===== ======
At December 31, 1997, the components of net deferred tax assets/liabilities are as follows:
Total of all deferred tax assets $ 467 Total of all deferred tax liabilities $ 2,481
No valuation allowance has been provided on the above deferred tax assets.
The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Such returns have been audited and settled through the year 1995.
9. PENSION PLANS
The Company makes contributions to industry-wide pension, welfare and health benefit funds for union employees. Other eligible employees participate in Company-sponsored defined contribution plans for which contributions are made at the rate of 7.0% of defined compensation up to $60,600 and then 10.5% thereafter. No contribution will be calculated on compensation in excess of $150,000. Total pension expense for employees in the defined contribution plans for the years ended December 31, 1997, 1996 and 1995 amounted to $583,000, $503,000, and $447,000, respectively.
In addition, the Company has a profit-sharing plan covering most regular non-union employees. The amount of contribution, if any, is at the discretion of the Board of Directors, and is not to exceed the maximum amount deductible for income tax purposes. Contributions of $150,000, $200,000, and $300,000 were made for the years ended December 31, 1997, 1996 and 1995, respectively.
10. INCENTIVE STOCK PLAN
Effective March 1, 1989, the Company adopted the Sevenson Environmental Services, Inc. 1989 Incentive Stock Plan. The Plan is administered by the Compensation Committee of the Board of Directors and no member of the Committee may participate in the Plan, except that non-employee Directors, who may be members of the Committee, will receive a non-discretionary option of 4,800 shares of common stock thirty business days after their election to the Board. The Plan authorizes the Committee to grant to key employees, as it sees fit, incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock. No incentive stock options may be granted after March 1, 1999. Up to 320,000 shares of Common Stock are available for issuance under the Plan.
The Company adopted Statement of Financial Accounting Standards (SFAS) No, 123, "Accounting for Stock-Based Compensation," effective January 1996. As permitted in that standard, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock-based compensation.
Incentive stock options may be granted with durations of no more than ten years from the date of grant and the option price per share of incentive and nonqualified stock options and stock appreciation rights may not be less than the fair market value of the Common Stock at the time the option is granted. The total number of shares granted, including cancelled shares, under these options through December 31, 1997 was 349,700 of which 155,520 shares are currently exercisable and 41,500 shares have been cancelled. These options expire ten years from the date the options were granted and are subject to forfeiture if certain employment requirements are not met.
The following summarizes incentive stock option activity for the three years ended December 31, 1997:
Price Ranges Shares Per Share Outstanding January 1, 1995 123,680 $6.88-$12.34 Granted 56,000 $10.78 Exercised (12,480) $6.88-$7.50 Cancelled (3,200) $6.88-$7.50 _______ Outstanding December 31, 1995 164,000 $6.88-$12.34 Granted 68,800 $10.63 Exercised (4,480) $6.88-$7.50 Cancelled (14,400) $6.88-$10.78 _______
Outstanding December 31, 1996 213,920 $6.88-$12.34 Granted 58,500 $14.00 Exercised (39,200) $6.88-$10.78 Cancelled (7,900) $6.88-$10.78 _______ Outstanding December 31, 1997 225,320 $6.88-$12.34 =======
The Plan also provides for the award of shares of the Company's Common Stock subject to restrictions on disposition ("Restricted Stock"). While the restrictions remain in effect, the participant cannot sell or transfer the shares of Restricted Stock, but he or she has the other rights of a stockholder, including the right to vote and to receive dividends. Restricted Stock awarded under the Plan is subject to the terms and conditions of the Plan and to other terms and conditions as the Committee specifies. The participant will forfeit to the Company his or her Restricted Stock if his or her employment with the Company and its subsidiaries terminates for any reason excepting death, prior to the expiration of the restrictions. No Restricted Stock has been awarded under the Plan.
At December 31, 1997 and December 31, 1996 the Company had 225,320 and 213,920 shares outstanding related to stock options with a range of exercise prices of $6.88 to $12.34 in both years at a weighted-average exercise price of $11.31 and $9.48, respectively, and with a weighted-average remaining contractural life in years of 7.5 and 7.4, respectively. Stock options with respect to 155,520 and 138,880 shares were exercisable at December 31, 1997 and 1996, respectively, at a weighted-average exercise price of $10.36 and $9.00, respectively. The weighted-average fair value of stock options granted for the years ended December 31,1997 and 1996, were $9.00 and $9.87, respectively.
Pro forma information regarding net income and earnings per common share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options and awards under the fair value method of that standard. The fair value of those stock options were estimated at the date of grant using a binomial option pricing model with the following weighted-average assumptions for the years ended December 31, 1997 and 1996: risk-free interest rates of 8.50% and 8.25%, respectively; dividend yields of 1.2% and 1.4%, respectively; volatility factors of the expected market price of the Company's common stock of 44% and 40%, respectively; and a weighted-average expected life of 10 for each year.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and net earnings per common share for the years ended December 31, 1997 and 1996, were $4,364 and $5,997, and $.43 and $.59, respectively.
11. MAJOR CUSTOMERS
The Company's largest customer in 1997 accounted for 28% of 1997 revenues. The Company's two largest customers in 1996 accounted for 22% each of 1996 revenues. The Company's largest customer in 1995 accounted for 23% of 1995 revenues. Due to the nature of the Company's business, major customers
fluctuate from year to year. No other customer accounted for more than 10% of total revenues in any of the three years in the period ended December 31, 1997.
12. CONTINGENCIES
The Company is a defendant or plaintiff in various claims and lawsuits arising in the normal course of business. The ultimate outcome of these actions cannot presently be determined and no provision for loss or gain, if any, that may result has been made in the accompanying consolidated financial statements. It is the opinion of management and its counsel that there will not be any material adverse effects on the Company's consolidated financial statements as a result of these actions.
13. BACKLOG
The following is an analysis of the Company's backlog of signed contracts at December 31, 1997, 1996 and 1995:
(In Thousands) 1997 1996 1995 ______________________________ Backlog, January 1 $ 64,961 $ 43,613 $ 58,404 New contracts 72,286 90,649 75,166 Revenues from construction contracts (80,912) (86,229) (103,505) Contract adjustments, net 4,261 16,928 13,548 ________ ________ ________ Backlog, December 31 $ 60,596 $ 64,961 $ 43,613 ======== ======== ========
14. QUARTERLY RESULTS (UNAUDITED)
Unaudited summarized results for each quarter in 1997, 1996 and 1995 are as follows (in thousands, except per-share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ________________________________________ 1997: Revenues $ 15,655 $ 19,945 $ 24,855 $ 21,484 Gross margin 2,956 4,997 3,551 2,692 Provision for income taxes 291 1,160 599 222 Net earnings 714 2,034 1,195 776 Basic and diluted earnings per share 0.07 0.20 0.12 0.08
1996: Revenues $ 13,858 $ 19,092 $ 23,374 $ 29,425 Gross margin 2,284 4,597 4,573 5,078 Provision for income taxes 250 923 969 898 Net earnings 483 1,985 1,816 1,998 Basic and diluted earnings per share 0.05 0.20 0.17 0.20
1995: Revenues $ 19,862 $ 24,980 $ 29,428 $ 28,202 Gross margin 4,002 6,113 7,176 5,172 Provision for income taxes 840 1,640 2,180 1,184 Net earnings 1,458 2,851 3,790 2,020 Basic and diluted earnings per share 0.15 0.28 0.37 0.20
Independent Auditors' Report
Board of Directors and Stockholders Sevenson Environmental Services, Inc. Niagara Falls, New York
We have audited the accompanying consolidated balance sheets of Sevenson Environmental Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sevenson Environmental Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York February 6, 1998
Management
Board of Directors
Michael A. Elia President and Chief Executive Officer
Arthur A. Elia Former President and Chief Executive Officer
Laurence A. Elia Vice President President, Sevenson Environmental Ltd.
Richard A. Elia Executive Vice President
William J. McDermott Vice President, Chief Financial Officer and Secretary
Dena M. Armstrong Treasurer and Assistant Vice President
Joseph J. Castiglia Former President and Chief Executive Officer, Pratt & Lambert United, Inc. (paint, industrial coatings and adhesives manufacturer)
Robert S. Kelso Former President and Chief Executive Officer, Calspan Corporation (an aerospace research and development company)
Audit Committee
Joseph J. Castiglia Robert S. Kelso
Officers
Michael A. Elia President and Chief Executive Officer
Richard A. Elia Executive Vice President
Laurence A. Elia Vice President
William J. McDermott Vice President, Chief Financial Officer and Secretary
Dena M. Armstrong Treasurer and Assistant Vice President
Paul C. Thomson Vice President
Mason G. Wheeler Vice President
Paul J. Hitcho, Ph.D. Vice President and Director of Health and Safety
John C. Robbins, P.E. Vice President
Philip R. DeLuca Vice President
Michael L. Lock Vice President
Corporate Information
Headquarters 2749 Lockport Road Niagara Falls, NY 14302-0396 (716) 284-0431 Internet: http://www.sevenson.com
Offices
Atlanta 105 Bradford Square Suite A Fayetteville, GA 30215 (770) 460-4620
Chicago 9245 Calumet Avenue Suite 101 Munster, Indiana 46321 (219) 836-0116
Philadelphia 4 Lake View Drive Chadds Ford, PA 19317 (215) 388-0721
Pittsburgh 100 Rock Springs Road Delmont, PA 15626 (412) 468-3377
Subsidiaries
Sevenson Environmental, Ltd.
Sevenson Environmental Services of PA, Inc.
Sevenson Industrial Services, Inc. 2749 Lockport Road Niagara Falls, NY 14302-0396 (716) 281-0431
Waste Stream Technology Inc. 302 Grote Street Buffalo, NY 14207 (716) 876-5290
Auditors
Deloitte & Touche LLP 50 Fountain Plaza Suite 250 Buffalo, New York 14202
Transfer Agent and Registrar
American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005
Stock Listing
NASDAQ National Market tier of the NASDAQ Stock Market under the symbol SEVN
Form 10-K Single copies of the Company's 1997 Annual Report on Securities and Exchange Commission Form 10-K will be provided without charge to stockholders upon written request directed to the Secretary, Sevenson Environmental Services, Inc., 2749 Lockport Road, Niagara Falls, New York 14302-0396.
EXHIBIT 21
List of Subsidiaries All Wholly-Owned
Subsidiary Where Incorporated
Sevenson Environmental Ltd. Canada
Waste Stream Technology Inc. Delaware
Sevenson Industrial Services, Inc. Delaware
Sevenson Environmental Services of PA, Inc. Pennsylvania
Sevenson International Environmental Services, Inc. Delaware
Sevenson Resources, Inc. California