| CLEAN HARBORS INC ITEM 1A RISK FACTORS An investment in our securities involves certain risks, including those we describe below |
| You should consider carefully these risk factors together with all of the information included or referred to in this report before investing in our securities |
| Risks Relating to Our Business We assumed significant environmental liabilities as part of the CSD acquisition, and our financial condition and results of operations would be adversely affected if we were required to pay such liabilities more rapidly or in greater amounts than now estimated |
| We have accrued environmental liabilities, valued as of December 31, 2005, at approximately dlra170dtta7 million, substantially all of which we assumed in connection with the acquisition of the CSD assets |
| We calculate these liabilities on a present value basis in accordance with generally accepted accounting principles (which takes into consideration both the amount of such liabilities and the timing when it is projected that we will be required to pay such liabilities) |
| We anticipate such liabilities will be payable over many years and that cash flows generated from our operations will generally be sufficient to fund the payment of such liabilities when required |
| However, events not now anticipated (such as future changes in 22 ______________________________________________________________________ environmental laws and regulations or their enforcement) could require that such payments be made earlier or in greater amounts than now estimated, which could adversely affect our financial condition and results of operations |
| If we are unable to obtain at reasonable cost the significant amount of insurance and financial assurances which are required for our operations, our business and results of operations would be adversely affected |
| We are required to carry significant amounts of insurance, to occasionally post bid and performance bonds, and to provide substantial amounts of financial assurances to governmental agencies for potential closure and post-closure care of our licensed hazardous waste treatment facilities should those facilities cease operation |
| Our total estimated closure and post-closure costs requiring financial assurance by regulators as of December 31, 2005, was dlra286dtta5 million |
| We have placed most of the required financial assurance for closure through a qualified insurance company, Steadfast Insurance Company (a unit of Zurich Insurance NA) |
| We were required to and have posted letters of credit of approximately dlra73dtta5 million with Steadfast Insurance Company in order to obtain the insurance policies |
| The term of our current insurance policy from Steadfast Insurance Company will expire in September 2006, and our ability to continue conducting our operations could be adversely affected if we should become unable to obtain sufficient insurance, surety bonds and financial assurances at reasonable cost to meet our business and regulatory requirements in the future |
| The availability of insurance may be influenced by developments within the insurance industry itself, as well as the insurers’ or sureties’ assessment of their risk of loss with us |
| The environmental services industry in which we participate is subject to significant economic and business risks |
| Our future operating results may be affected by such factors as our ability to: utilize our facilities and workforce profitably in the face of intense price competition; maintain or increase market share in an industry which has experienced significant downsizing and consolidating; realize benefits from cost reduction programs; generate incremental volumes of waste to be handled through our facilities from existing and acquired sales offices and service centers; obtain sufficient volumes of waste at prices which produce revenue sufficient to offset the operating costs of the facilities; minimize downtime and disruptions of operations; and develop the site services business |
| In particular, economic downturns or recessionary conditions in North America, and increased outsourcing by North American manufacturers to plants located in countries with lower wage costs and less stringent environmental regulations, have adversely affected and may in the future adversely affect the demand for our services |
| The hazardous and industrial waste management business is also cyclical to the extent that it is dependent upon a stream of waste from cyclical industries such as the chemical and petrochemical, primary metals, paper, furniture and aerospace industries |
| If those cyclical industries slow significantly, the business that we receive from those industries is likely to slow |
| A significant portion of our business depends upon the demand for major remedial projects and regulatory developments over which we have no control |
| Our operations are significantly affected by the commencement and completion of major site remedial projects; cleanup of major spills or other events; seasonal fluctuations due to weather and budgetary cycles influencing the timing of customers’ spending for remedial activities; the timing of regulatory decisions relating to hazardous waste management projects; changes in regulations governing the management of hazardous waste; secular changes in the waste processing industry towards waste minimization and the propensity for delays in the remedial market; and changes in the myriad of governmental regulations governing our diverse operations |
| We do not control such factors and, as a result, our revenue and income can vary significantly from quarter to quarter, and past financial performance for certain quarters may not be a reliable indicator of future performance for comparable quarters in subsequent years |
| 23 ______________________________________________________________________ Seasonality makes it harder for us to manage our business and for investors to evaluate our performance |
| Our operations may be affected by seasonal fluctuations due to weather and budgetary cycles influencing the timing of customers’ spending for remedial activities |
| Typically during the first quarter of each calendar year there is less demand for environmental remediation due to weather related reasons, particularly in the northern and midwestern United States and Canada, and increased possibility of unplanned weather related plant shutdowns |
| This seasonality in our business makes it harder for us to manage our business and for investors to evaluate our performance |
| The extensive environmental regulations to which we are subject may increase our costs and potential liabilities |
| Our operations and those of others in the environmental industry are subject to extensive federal, state, provincial and local environmental requirements in both the United States and Canada |
| While increasing environmental regulation often presents new business opportunities for us, it often results in increased operating and compliance costs |
| Efforts to conduct our operations in compliance with all applicable laws and regulations, including environmental rules and regulations, require programs to promote compliance, such as training employees and customers, purchasing health and safety equipment, and in some cases hiring outside consultants and lawyers |
| Even with these programs, we and other companies in the environmental services industry are routinely faced with governmental enforcement proceedings which can result in fines or other sanctions and require expenditures for remedial work on waste management facilities and contaminated sites |
| Certain of these laws impose strict and, under certain circumstances, joint and several liability for cleanup of releases of regulated materials, and also liability for related natural resource damages |
| From time to time, we have paid fines or penalties in governmental environmental enforcement proceedings, usually involving our waste treatment, storage and disposal facilities |
| Although none of these fines or penalties that we have paid in the past has had a material adverse effect upon us, we might in the future be required to make substantial expenditures as a result of governmental proceedings, which would have a negative impact on our earnings |
| Furthermore, regulators have the power to suspend or revoke permits or licenses needed for operation of our plants, equipment, and vehicles based on, among other factors, our compliance record, and customers may decide not to use a particular disposal facility or do business with us because of concerns about our compliance record |
| Suspension or revocation of permits or licenses would impact our operations and could have a material adverse impact on financial results |
| Although we have never had any of our facilities’ operating permits revoked, suspended or non-renewed involuntarily, it is possible that such an event could occur in the future |
| In the past, practices have resulted in releases at and from certain of our facilities, which may require investigation and, in some cases, remediation |
| We are currently conducting remedial activities at certain of our sites |
| While, based on available information, we do not believe these remedial activities will result in a material adverse effect upon our operations or financial condition, these activities or the discovery of previously unknown conditions could result in material costs |
| Future changes in environmental regulations may require us to make significant capital expenditures |
| Changes in environmental regulations can require us to make significant capital expenditures for our facilities |
| These standards established new emissions limits and operational controls on all new and existing incinerators, cement kilns and light-weight aggregate kilns that burn hazardous waste-derived fuels |
| We have spent approximately dlra27dtta6 million since September 7, 2002 in order to bring our Kimball, Nebraska, Deer Park, Texas and Aragonite, Utah incineration facilities into compliance with the MACT regulations |
| Future environmental regulations could cause us to make significant additional capital expenditures and adversely affect our results of operations and cash flow |
| 24 ______________________________________________________________________ If our assumptions relating to expansion of our landfills should prove inaccurate, our results of operations and cash flow could be adversely affected |
| When we include the expansion airspace in our calculations of available airspace, we adjust our landfill liabilities to the present value of projected costs for cell closure, and landfill closure and post-closure |
| It is possible that any of our estimates or assumptions could ultimately turn out to be significantly different from actual results |
| In some cases we may be unsuccessful in obtaining an expansion permit or we may determine that an expansion permit that we previously thought was probable has become unlikely |
| To the extent that such estimates, or the assumptions used to make those estimates, prove to be significantly different than actual results, or our belief that we will receive an expansion permit changes adversely in a significant manner, the landfill assets, including the assets incurred in the pursuit of the expansion, may be subject to impairment testing, and lower prospective profitability may result due to increased interest accretion and depreciation or asset impairments related to the removal of previously included expansion airspace |
| In addition, if our assumptions concerning the expansion airspace should prove inaccurate, certain of our cash expenditures for closure of landfills could be accelerated and adversely affect our results of operations and cash flow |
| Future conditions might require us to make substantial write-downs in our assets, which would adversely affect our balance sheet and results of operations |
| We participate in a highly volatile industry with multiple competitors, several of which have taken large write-offs and asset write-downs, operated under Chapter 11 bankruptcy protection and undergone major restructuring during the past several years |
| Periodically, we review long-lived assets for impairment |
| At the end of each of 2005, 2004 and 2003, we determined based on this review that no asset write-downs were required; however, if conditions in the industry were to deteriorate significantly, we could determine that certain of our assets were impaired and we would then be required to write-off all or a portion of our costs for such assets |
| Any such significant write-offs would adversely affect our balance sheet and results of operations |
| Other Risks Relating to Our Company and Common Stock Our substantial level of indebtedness and outstanding letters of credit could adversely affect our financial condition and ability to fulfill our obligations |
| As of March 1, 2006, we had dlra101dtta8 million of outstanding indebtedness and dlra89dtta2 million of outstanding letters of credit |
| Our substantial level of indebtedness and outstanding letters of credit may: · adversely impact our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; · require us to dedicate a substantial portion of our cash flow to the payment of interest on our indebtedness and fees on our letters of credit; · subject us to the risk of increased sensitivity to interest rate increases based upon variable interest rates, including our borrowings (if any) under our revolving credit facility; · increase the possibility of an event of default under the financial and operating covenants contained in our debt instruments; and · limit our ability to adjust to rapidly changing market conditions, reducing our ability to withstand competitive pressures and make us more vulnerable to a downturn in general economic conditions of our business than our competitors with less debt |
| If we are unable to generate sufficient cash flow from operations in the future to service our debt and fee obligations, we may be required to refinance all or a portion of our existing debt and letter of credit facilities, or to obtain additional financing and facilities |
| However, we may not be able to obtain any such refinancing or additional facilities on favorable terms or at all |
| 25 ______________________________________________________________________ The covenants in our financing agreements restrict our ability to operate our business and might lead to a default under our outstanding debt agreements |
| The agreements governing our revolving credit and letter of credit facilities and the indenture relating to our outstanding senior secured notes limit, among other things, our ability and the ability of our restricted subsidiaries to: · incur or guarantee additional indebtedness (including, for this purpose, reimbursement obligations under letters of credit) or issue preferred stock; · pay dividends or make other distributions to our stockholders; · purchase or redeem capital stock or subordinated indebtedness; · make investments; · create liens; · incur restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; · sell assets, including capital stock of our subsidiaries; · consolidate or merge with or into other companies or transfer all or substantially all of our assets; and · engage in transactions with affiliates |
| As a result of these covenants, we may not be able to respond to changes in business and economic conditions and to obtain additional financing, if needed, and we may be prevented from engaging in transactions that might otherwise be beneficial to us |
| Our revolving credit and letter of credit facilities require, and our future credit facilities may require, us to maintain specified financial ratios and satisfy certain financial condition tests |
| Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not be able to meet those tests |
| The breach of any of these covenants could result in a default under our revolving credit and letter of credit facilities |
| Upon the occurrence of an event of default under our revolving credit and letter of credit facilities or future credit facilities, the lenders could elect to declare all amounts outstanding under such credit facilities, including accrued interest or other obligations, to be immediately due and payable |
| If amounts outstanding under such credit facilities were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other indebtedness, including our senior secured notes |
| The instruments governing certain of our indebtedness, including the indenture governing our senior secured notes and our revolving credit and letter of credit facilities, also contain cross-default provisions |
| Under these provisions, a default under one instrument governing our indebtedness may constitute a default under our other instruments of indebtedness that contain cross default provisions, which could result in the related indebtedness and the indebtedness issued under other instruments becoming immediately due and payable |
| In such event, we would need to raise funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or at all |
| Alternatively, such a default could require us to sell our assets and otherwise curtail operations to pay our creditors |
| The proceeds of such a sale of assets, or curtailment of operations, might not enable us to pay all of our liabilities |
| We have not paid, and do not anticipate paying for the foreseeable future, dividends on our common stock |
| We have not paid, and do not anticipate paying for the foreseeable future, any dividends on our common stock |
| Furthermore, our current credit agreement prohibits, and our indenture restricts, the 26 ______________________________________________________________________ payment by us of dividends on our common stock |
| We intend to retain future earnings, if any, for use in the operation and expansion of our business and payment of our outstanding debt |
| Our founder and other directors and executive officers, as a group, will be able to exercise substantial influence over matters submitted to our stockholders for approval |
| As of the March 1, 2006, Alan S McKim, our founder and chief executive officer, together with other directors and executive officers, beneficially held approximately 20dtta1prca of our outstanding common stock |
| As a result, our directors and executive officers will likely be able to exercise substantial influence over matters submitted to our stockholders for approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions |
| These stockholders may also delay or prevent a change of control even if such a change of control would benefit our other stockholders |
| The significant concentration of stock ownership might cause the trading price of our common stock to decline if investors were to perceive that conflicts of interest may exist or arise over any such potential transactions |
| Potential future sales of common stock by our directors and executive officers, and our other principal stockholders, may cause our stock price to fall |
| Future sales, or the availability for future sales, of substantial amounts of our common stock could adversely affect the market price of our common stock |
| As of March 1, 2006, Alan S McKim, our founder and chief executive officer, beneficially held approximately 18dtta8prca of our then outstanding common stock, and the three other holders which have reported to us that they each beneficially own in excess of 5prca of our outstanding common stock have reported that they collectively own an aggregate of 3cmam794cmam979 shares (approximately 19dtta5prca of our outstanding common stock as of March 1, 2006) |
| A decision by one or more of these major stockholders to sell a substantial number of their shares could adversely affect the market price of our common stock |
| All of the 19cmam561cmam692 shares of our common stock which were outstanding or subject to then exercisable warrants, conversion rights or options as of March 1, 2006, were or, upon issuance, will be freely tradable without restriction or further registration under the Securities Act, except for the approximately 3cmam936cmam139 of such shares beneficially held by our “affiliates” as that term is defined in Rule 144 under the Securities Act |
| The shares held by our “affiliates” include the shares beneficially held by our founder and other directors and executive officers described above |
| Shares beneficially owned by our affiliates may not be sold except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as Rule 144 |
| The Massachusetts Business Corporation Act and our By-Laws contain certain anti-takeover provisions |
| Section 8dtta06 and 7dtta02 of the Massachusetts Business Corporation Act provide that Massachusetts corporations which are publicly-held must have a staggered board of directors and that written demand by holders of at least 40prca of the outstanding shares of each relevant voting group of stockholders is required for stockholders to call a special meeting unless such corporations take certain actions to affirmatively “opt-out” of such requirements |
| In accordance with these provisions, our By-Laws provide for a staggered Board of Directors which consists of three classes of directors of which one class is elected each year for a three-year term, and require that written application by holders of at least 25prca (which is less than the 40prca which would otherwise be applicable without such a specific provision in our By-Laws) of our outstanding shares of common stock is required for stockholders to call a special meeting |
| In addition, our By-Laws prohibit the removal by the stockholders of a director except for cause |
| These provisions could inhibit a takeover of our company by restricting stockholders action to replace the existing directors or approve other actions which a party seeking to acquire us might propose |
| A takeover transaction would frequently afford stockholders an opportunity to sell their shares at a premium over then market prices |