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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to__________
Commission file number 1-12154
USA WASTE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 FANNIN STREET, SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 512-6200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 25, 1997, was approximately $5,044,347,000. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)
The number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at March 25, 1997, was 154,110,368.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated as to
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PROXY STATEMENT
FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS PART III
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 51
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 51
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 51
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . 52
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PART I
ITEM 1. BUSINESS.
GENERAL
USA Waste Services, Inc. ("USA Waste" or the "Company") is the third
largest integrated solid waste management company in North America and serves
the full spectrum of municipal, commercial, industrial, and residential
customers in 36 states, the District of Columbia, Canada, Mexico, and Puerto
Rico. The Company's solid waste management services include collection,
transfer, and disposal operations and, to a lesser extent, recycling and
certain other waste management services. At December 31, 1996, USA Waste owned
or operated 123 collection operations, 61 transfer stations, 101 landfills, and
served more than 2 million customers. The Company has a diversified customer
base with no single customer accounting for more than 5% of the Company's
operating revenues during 1996. The Company employs approximately 9,800
people.
The terms "USA Waste" and the "Company" refer to USA Waste Services, Inc.,
a Delaware corporation incorporated on April 28, 1995, to become the successor
company of USA Waste Services, Inc., an Oklahoma corporation organized in 1987,
and include its predecessors, subsidiaries, and affiliates, unless the context
requires otherwise. USA Waste's executive offices are located at 1001 Fannin
Street, Suite 4000, Houston, Texas 77002, and its telephone number is (713)
512-6200.
Of the Company's revenues for the year ended December 31, 1996,
approximately 52.6% was attributable to collection operations, approximately
10.8% was from transfer operations, approximately 29.0% was attributable to
landfill operations, and approximately 7.6% from other operations. The
Company's average landfill volume for the year ended December 31, 1996, was
approximately 88,600 tons per day.
INDUSTRY BACKGROUND
USA Waste operates in the non-hazardous solid waste segment of the waste
management industry. Despite the size of this industry, it has historically
been a fragmented industry, with a multitude of local private and municipal
operators servicing relatively centralized areas. In recent years, the
industry has undergone a period of significant consolidation, however, local
private and municipal operations continue to service approximately 60% of the
domestic solid waste business.
One of the principal forces driving consolidation within the solid waste
management industry is increased regulation and enforcement of collection and
disposal activities. In October 1991, the Environmental Protection Agency
("EPA") adopted new regulations pursuant to Subtitle D of the Resource
Conservation and Recovery Act governing the disposal of solid waste. These
regulations led to a variety of requirements applicable to landfill disposal
sites, including the construction of liners and the installation of leachate
collection systems, groundwater monitoring systems, and methane gas recovery
systems. The regulations also required enhanced control systems to monitor
more closely the waste streams being disposed at the landfills, extensive
post-closure monitoring of sites, and financial assurances that landfill
operators will be able to comply with the stringent regulations. The result of
these regulatory requirements has been increased costs throughout the various
segments of the industry, with particularly significant increases for landfill
operators.
Compliance with the regulations currently in effect for the non-hazardous
solid waste industry requires significant capital expenditures. Many industry
participants have found the increased costs difficult, if not impossible, to
bear. A large number of smaller, independent operators have decided to either
close down their operations or sell them to stronger operators, and some
municipalities have chosen to discontinue, or are considering discontinuing,
their operations and turning the management of solid waste services over to
private concerns.
The rising costs associated with the new industry regulations have been a
cause of consolidation and acquisition activity within the industry. Large
waste management companies, with sufficient financial resources to absorb the
initial costs of bringing operations into compliance, have taken advantage of
discontinuations and divestitures by acquiring operations which either
complement existing businesses or otherwise increase overall strength and
flexibility. Compliance costs at the landfill/disposal level have directly
affected costs in the collection segment of the market as landfill operators
pass them on through higher fees for disposal or "tipping." In addition,
companies active in various segments of the industry continue to seek vertical
integration to enable them to become more cost effective and competitive.
Finally, the higher cost structure has also led to the merger of a number of
independent collection operations to enhance financial strength and improve
operating efficiencies.
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STRATEGY
The Company intends to capitalize on the consolidation in the solid waste
management industry in several ways. Key elements of the Company's strategy
include:
o Increasing productivity and operating efficiencies in existing and acquired
operations. The Company seeks to increase productivity, achieve
administrative and operating efficiencies, and improve profitability in
existing operations and acquired businesses, with the objective of becoming
the low cost operator in each of its markets. Measures taken by the
Company in this area include consolidating and implementing uniform
administrative and management systems, restructuring and consolidating
collection routes, improving equipment utilization, and increasing
employee productivity through incentive compensation and training programs.
The Company's management believes that its ability to serve markets as a
low cost operator is fundamental to achieving sustainable internal growth
and to realizing the benefits of its acquisition strategy.
o Increasing revenues and enhancing profitability through tuck-in
acquisitions. The Company continually seeks to expand its services through
the acquisition of additional solid waste management businesses and
operations that can be effectively integrated with the Company's existing
operations. These acquisitions typically involve adding collection
operations, transfer stations, or landfills that are complementary to
existing operations and that permit the Company to implement operating
efficiencies and increase asset utilization.
o Expanding into new markets through acquisitions. The Company pursues
acquisitions in new markets where the Company believes it can strengthen
its overall competitive position as a national provider of integrated solid
waste management services and where opportunities exist to apply the
Company's operating and management expertise to enhance the performance of
acquired operations.
On August 30, 1996, the Company consummated a merger agreement with
Sanifill, Inc. ("Sanifill") accounted for as a pooling of interests (the
"Sanifill Merger"). Under the terms of the Sanifill Merger, the Company issued
1.70 shares of its common stock for each share of Sanifill outstanding common
stock. The Sanifill Merger increased the Company's outstanding shares of
common stock by approximately 43,414,000 shares and the Company assumed
Sanifill's options and warrants equivalent to approximately 4,361,000
underlying shares of Company common stock. Sanifill owned and operated
nonhazardous waste disposal, treatment, collection, transfer station, and
recycling businesses and complementary operations. Since it was founded in
1989, Sanifill acquired 142 disposal, collection, and related businesses. As
of June 30, 1996, Sanifill operated 50 disposal and treatment facilities, 26
transfer stations, and 36 collection operations. In addition, Sanifill
provided sludge treatment and organic recycling services.
On May 7, 1996, the Company consummated a merger agreement with Western
Waste Industries ("Western") accounted for as a pooling of interests (the
"Western Merger"). Under the terms of the Western Merger, the Company issued
1.50 shares of its common stock for each share of Western outstanding common
stock. Prior to the Western Merger, the Company owned approximately 4.1% of
Western's outstanding shares (634,900 common shares), which were canceled on
the Western Merger's effective date. The Western Merger increased the
Company's outstanding shares of common stock by approximately 22,028,000 shares
and the Company assumed options under Western's stock option plans equivalent
to approximately 5,200,000 underlying Company shares of common stock. With the
addition of the Western operations, which include significant collection
operations, the Company significantly increased its presence in California and
added additional operations in Texas, Louisiana, Florida, Colorado, and
Arkansas. Western had 91 municipal and regional authority contracts and served
over 785,000 customers. As part of its business, Western operated six
landfills, three transfer stations, and five recycling facilities.
In addition to the consummation of public mergers with Sanifill and
Western, the Company acquired 90 collection operations, 18 transfer stations,
18 landfills, and six recycling businesses during 1996, with annualized
revenues aggregating approximately $383,000,000.
On March 12, 1997, the Company acquired all of the Canadian solid waste
subsidiaries of Allied Waste Industries, Inc. ("Allied"), representing 41
collection businesses, seven landfills, and eight transfer stations in the
provinces of Alberta, British Columbia, Manitoba, Ontario, Quebec, and
Saskatchewan, for approximately $518,000,000 in cash. These assets were
acquired by Allied in December 1996 from Laidlaw, Inc. in conjunction with
Allied's acquisition of all of Laidlaw, Inc.'s North American solid waste
businesses.
The Company's business is subject to extensive federal, state, and local
regulation and legislative initiative. Further, in some states and
municipalities, its business is subject to environmental regulation, mandatory
recycling laws, prohibitions on the deposit of certain waste in landfills, and
restrictions on the flow of solid waste. Because of continuing public awareness
and influence regarding the collection, transfer, and disposal of waste and the
preservation of the environment, and uncertainty with respect to the enactment
and enforcement of future laws and regulations, the Company cannot always
accurately predict
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the impact any future regulation or law may have on its operations. See
"Regulation" and "Legal Proceedings" for additional information.
OPERATIONS
USA Waste provides collection, transfer, disposal, and recycling services
to municipal, commercial, industrial, and residential customers in 36 states,
the District of Columbia, Canada, Mexico, and Puerto Rico.
Management of USA Waste's solid waste operations is achieved through an
alignment that currently includes five regions organized by geographic area.
Each region is headed by a regional vice president ("RVP"). Each RVP is
responsible for the oversight of the following departments: sales and
marketing, administration and finance, operations, and maintenance. In
addition, each RVP typically has a small staff that works interactively with
the corporate office to ensure proper regulatory compliance and reporting,
engineering services, internal and external development, and strategic
planning. Geographically, a region generally encompasses a multi-state area
and may have a concentration from approximately 15 to 50 districts. Regions
are divided into districts headed by a district manager. Each district manager
is responsible for the day-to-day oversight of the district's field operations,
with direct responsibility for customer satisfaction, employee motivation,
labor and equipment productivity, internal growth, financial budgets, and
profit and loss activity. A district generally encompasses a city, county, or
metropolitan area. In areas of substantial concentration, a divisional vice
president, reporting to a RVP, may oversee several districts.
Collection. Solid waste collection is provided under two primary types of
arrangements depending on the customer being served. Commercial and industrial
collection services are generally performed under one to three-year service
agreements, and fees are determined by such factors as collection frequency,
type of collection equipment furnished by USA Waste, type and volume or weight
of the waste collected, the distance to the disposal facility, and cost of
disposal. Most residential solid waste collection services are performed under
contracts with, or franchises granted by, municipalities or regional
authorities that have granted USA Waste exclusive rights to service all or a
portion of the homes in their respective jurisdictions. Such contracts or
franchises usually range in duration from one to five years. Recently, some
municipalities have requested bids on their residential collection contracts
based on the volume of waste collected. Residential collection fees are either
paid by the municipalities from their tax revenues or service charges or are
paid directly by the residents receiving the service.
As part of its services, the Company provides steel containers to most of
its commercial and industrial customers to store solid waste. These containers,
ranging in size from one to 45 cubic yards, are designed to be lifted
mechanically and either emptied into a collection vehicle's compaction hopper
or directly into a disposal site in the case of industrial customers. The use
of containers enables the Company to service most of its commercial and
industrial customers with collection vehicles operated by a single employee.
USA Waste often obtains waste collection accounts through acquisitions,
including the purchase of customer lists, routes, and equipment. Once a
collection operation is acquired, programs designed to improve equipment
utilization, employee productivity, operating efficiencies, and overall
profitability are implemented. USA Waste also solicits commercial and
industrial customers in areas surrounding acquired residential collection
markets as a means of further improving operating efficiencies and increasing
volumes of solid waste collection.
As of December 31, 1996, USA Waste operated collection operations in
approximately 123 locations in 32 states, Canada, Mexico, and Puerto Rico. On
an overall basis, Company collection operations deliver approximately 48% of
collected waste to landfills owned or operated by the Company. In the
remaining markets, the waste collected is delivered to a municipal, county, or
privately owned unaffiliated landfill or transfer station.
Transfer Stations. A transfer station is a facility located near
residential and commercial collection routes where solid waste is received from
collection vehicles and then transferred to and compacted in large,
specially-constructed trailers for transportation to disposal facilities. This
consolidation reduces costs by improving utilization of collection personnel
and equipment. Fees are generally based on such factors as the type and volume
or weight of the waste transferred and the transportation distance to disposal
sites. USA Waste owns or operates 61 transfer stations, most of which transfer
some or all of the waste received to a landfill owned or operated by the
Company.
Landfills. Municipal solid waste landfills are the primary depository for
solid waste in North America, Canada, and Mexico. These disposal facilities
are located on land with geological and hydrological properties that limit the
possibility of water pollution, and are operated under prescribed procedures.
A landfill must be maintained carefully to meet federal, state, and local
regulations. Maintenance includes excavation, continuous spreading and
compacting of waste, and covering of waste with earth or other inert material
at least once a day. The cost of transporting solid waste to a disposal
location places a geographic restriction on solid waste companies. Access to a
disposal facility, such as a landfill, is a necessity for all solid waste
management companies. While access can be obtained to disposal facilities
owned or operated by unaffiliated parties, USA Waste believes that it is
generally preferable for collection companies to utilize disposal facilities
owned or operated by affiliated parties so that access can be assured on
favorable terms. Customers are charged disposal charges or tipping fees
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based on market factors and the type and volume or weight of solid waste
deposited and the type and size of vehicles used in the conveyance of solid
waste.
The ownership or lease of a landfill site enables USA Waste to dispose of
waste without payment of disposal fees to unaffiliated parties. The Company
does not own or lease a landfill site in every metropolitan area in which it is
engaged in waste collection. To date, the Company has not experienced excessive
difficulty securing the use of disposal facilities owned or operated by
unaffiliated parties in those metropolitan areas in which it does not own or
operate its own landfill. The Company's landfills are also used by unaffiliated
waste collection companies and government agencies.
As of December 31, 1996, USA Waste owned and operated 84 non-hazardous
solid waste landfills and operated another 17 non-hazardous solid waste
landfills. Of the 101 landfills owned or operated by USA Waste, the average
remaining life based on remaining permitted capacity and current average daily
disposal volumes is approximately 25 years.
Recycling. In response to the increasing public environmental awareness
and expanding federal, state, and local regulations pertaining to waste
recycling, USA Waste has developed recycling as a component of its
environmentally responsible integrated solid waste management plan. Curbside
collection of recyclable materials for residential customers, commercial and
industrial collection of recyclable materials, and material recovery/waste
reduction facilities are services in which USA Waste has become involved to
complement its collection and transfer station operations. Although the
Company continues to provide the service of collecting recyclable products, to
date the Company has not made material capital investments in material
recovery/waste reduction facilities. Additional opportunities for expansion in
these areas will continue to be evaluated.
USA Waste operates curbside recycling programs in connection with its
residential collection operations in a number of markets and in association
with a number of its transfer stations. Fees are determined by such
considerations as market factors, frequency of collection, the type and volume
or weight of recycled material, the distance the recycled material must be
transported, and the value of the recycled material. Overall, however, USA
Waste is not materially affected financially by fluctuations in commodity
pricing for recyclable materials.
COMPETITION
The solid waste industry is highly competitive and requires substantial
amounts of capital. The industry is comprised of two large companies, WMX
Technologies, Inc. and Browning-Ferris Industries, Inc., a number of mid-sized
and small companies, numerous municipalities and other regional or multi-county
authorities, and large commercial and industrial companies handling their own
waste collection or disposal operations. WMX Technologies, Inc. and Browning-
Ferris Industries, Inc. have significantly larger operations and greater
financial resources than the Company. Municipalities and counties are often
able to offer lower direct charges to the customer for the same service by
subsidizing the cost of such services through the use of tax revenues and
tax-exempt financing. Generally, however, municipalities do not provide
significant commercial and industrial collection or waste disposal.
The Company competes for landfill business on the basis of tipping fees,
geographical location, and quality of operations. The Company's ability to
obtain landfill business may be limited by the fact that some major collection
companies also own or operate landfills to which they send their waste. The
Company competes for collection accounts primarily on the basis of price and
the quality of its services. Intense competition is encountered for both
quality of service and pricing. From time to time, competitors may reduce the
price of their services and accept lower profit margins in an effort to expand
or maintain market share or to competitively win bid contracts.
The Company provides residential collection services under a number of
municipal contracts. As is the case in the industry, such contracts come up for
competitive bidding periodically and there is no assurance that the Company
will be the successful bidder and will be able to retain such contracts. If the
Company is unable to replace any contract lost through the competitive bidding
process with a comparable contract within a reasonable time period or to use
any surplus equipment in other service areas, the earnings of the Company could
be adversely affected. However, during 1996, no one commercial customer or
municipal contract accounted for more than 5% of the operating revenues of the
Company. As the Company continues to grow, the loss of any one contract will
have less of an impact on the Company's operations as a whole.
Increased public environmental awareness and certain mandated state
regulations have resulted in increased recycling efforts in many different
areas of the country that are currently and will in the future reduce the
amount of solid waste destined for landfills. In addition, the Company could
face competition from companies engaged in waste incineration and other
alternatives to landfill disposal. Although the Company believes that
landfills will continue to be the primary depository for solid waste well into
the future, there can be no assurance that recycling, incineration, and waste
reduction efforts will not affect future landfill disposal volumes. The effect,
if any, on such volumes could also vary between different regions of the
country as well as within individual market areas in each region.
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PRICING
Operating costs, disposal costs, and collection fees vary widely throughout
the geographic areas in which the Company operates. The prices that the Company
charges are determined locally, and typically by the volume or weight, type of
waste collected, treatment requirements, risks involved in the handling or
disposing of waste, frequency of collections, distance to final disposal sites,
and amount and type of equipment furnished to the customer. Under certain
contracts, the Company's ability to pass on cost increases is limited.
Long-term solid waste collection contracts typically contain a formula,
generally based on published price indices, for automatic adjustment of fees to
cover increases in some, but not all, operating costs.
EMPLOYEES
At December 31, 1996, the Company had approximately 9,800 full-time
employees, of which approximately 2,300 were employed in clerical,
administrative, and sales positions, 235 in management, and the balance in
collection, transfer, and disposal operations. Approximately 1,700 of the
Company's employees at 37 operating locations are covered by collective
bargaining agreements. The Company has not experienced a work stoppage, and
management considers its employee relations to be good.
INSURANCE AND FINANCIAL ASSURANCE OBLIGATIONS
The Company carries a broad range of insurance coverages, which management
considers prudent for the protection of the Company's assets and operations.
Some of these coverages are subject to varying retentions of risk by the
Company. At December 31, 1996, the casualty coverages included $2,000,000
primary commercial general liability and $1,000,000 primary automobile
liability supported by $100,000,000 in umbrella insurance protection. The
umbrella insurance coverage was increased to $150,000,000 as of January 1,
1997. The property policy provides insurance coverages for all of the
Company's real and personal property, including California earthquake perils.
The Company also carries $200,000,000 in aircraft liability protection.
The Company maintains workers' compensation insurance in accordance with
laws of the various states in which it has employees. The Company also
currently has an environmental impairment liability ("EIL") insurance policy
for certain of its landfills and transfer stations that provides coverage for
property damages and/or bodily injuries to third parties caused by off-site
pollution emanating from such landfills or transfer stations. This policy
provides $5,000,000 of coverage per incident with a $10,000,000 aggregate
limit.
To date, the Company has not had any difficulty in obtaining insurance.
However, if the Company in the future is unable to obtain adequate insurance,
or decides to operate without insurance, a partially or completely uninsured
claim against the Company, if successful and of sufficient magnitude, could
have a material adverse effect upon the Company's financial condition or
results of operations. Additionally, continued availability of casualty and
EIL insurance with sufficient limits at acceptable terms is an important aspect
of obtaining revenue-producing waste service contracts.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. In
addition, the Company is required to provide financial assurance for closure
and post-closure obligations with respect to its landfills. The Company has
not experienced difficulty in obtaining performance bonds or letters of credit
for its current operations. At December 31, 1996, the Company had provided to
municipalities and other customers and various regulatory authorities surety
bonds of approximately $184,164,000 and letters of credit of approximately
$3,271,000 to secure its obligations, exclusive of letters of credit enhancing
industrial revenue bonds of approximately $164,639,000. Continued availability
of surety bonds and letters of credit in sufficient amounts at acceptable rates
is an important aspect of obtaining additional municipal collection contracts
and obtaining or retaining landfill operating permits.
REGULATION
General - Potential Adverse Effect of Government Regulations
All of the Company's principal business activities are subject to extensive
and evolving environmental, health, safety, and transportation laws and
regulations at the federal, state, and local levels. These regulations are
administered by the EPA in the United States and various other federal, state,
and local environmental, zoning, health, and safety agencies in the United
States and elsewhere, many of which periodically examine the Company's
operations to monitor compliance with such laws and regulations.
The development, expansion, and operation of landfills and transfer
stations are subject to extensive regulations governing siting, design,
operations, monitoring, site maintenance, corrective actions, financial
assurance, and closure and post-closure obligations. In order to construct,
expand, and operate a landfill or transfer station, the Company must obtain and
maintain one or more construction or operating permits and licenses and, in
certain instances, applicable zoning approvals. Obtaining the necessary permits
and approvals in connection with the acquisition, development, or expansion of
a landfill or transfer
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station is difficult, time-consuming (often taking two to three years or more),
and expensive, and is frequently opposed by local citizen and/or environmental
groups. Once obtained, operating permits are subject to modification and
revocation by the issuing agency. Compliance with current and future regulatory
requirements may require the Company, as well as others in the waste management
industry, from time to time, to make significant capital and operating
expenditures.
In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, time, and
frequency of collection.
Federal, state, and local governments have from time to time proposed or
adopted other types of laws, regulations, or initiatives with respect to the
environmental services industry, including laws, regulations, and initiatives
to ban or restrict the international, interstate, or intrastate shipment of
wastes, impose higher taxes on out-of-state waste shipments than on in-state
shipments, limit the types of wastes that may be disposed of at existing
landfills, mandate waste minimization initiatives, require recycling and yard
waste composting, reclassify certain categories of non-hazardous waste as
hazardous, and regulate disposal facilities as public utilities. Congress has
from time to time considered legislation that would enable or facilitate such
bans, restrictions, taxes, and regulations, many of which could adversely
affect the demand for the Company's services. Similar types of laws,
regulations, and initiatives have also from time to time been proposed or
adjusted in other jurisdictions in which the Company operates. The effect of
these and similar laws could be a reduction of the volume of waste that would
otherwise be disposed of in Company landfills. The Company makes a continuing
effort to anticipate regulatory, political, and legal developments that might
affect operations, but it is not always able to do so. The Company cannot
predict the extent to which any legislation or regulation that may be enacted,
amended, repealed, or enforced in the future may affect its operations. Such
actions could adversely affect the Company's operations or impact the Company's
financial condition or earnings for one or more fiscal quarters or years.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. During the ordinary course of its operations, the Company
may from time to time receive citations or notices from such authorities that a
facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of such citations or notices, the Company will
work with the authorities to address their concerns. Failure to correct the
problems to the satisfaction of the authorities could lead to monetary
penalties, curtailed operations, jail terms, facility closure, or inability to
obtain permits for additional sites.
As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, management anticipates that
continually changing requirements in health, safety, and environmental
protection laws will require the Company and others engaged in the solid waste
management industry to continually modify or replace various facilities and
alter methods of operation at costs that may be substantial. Most of the
Company's expenditures incurred in the operation of its landfills relate to
complying with the requirements of laws concerning the environment. These
expenditures relate to facility upgrades, corrective actions, and facility
closure and post-closure care. The majority of these expenditures are made in
the normal course of the Company's business and neither materially adversely
affect the Company's earnings nor place the Company at any competitive
disadvantage. The Company has not expended any material amount to remedy the
potential impact to the public or the environment. Although the Company, to
the best of its knowledge, is currently in compliance in all material respects
with all applicable federal, state, and local laws, permits, regulations, and
orders affecting its operations, there is no assurance that the Company will
not have to expend substantial amounts for such actions in the future.
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. Although the Company conducts
due diligence investigations of the past waste management practices of the
businesses that it acquires, it can have no assurance that, through its
investigation, it will identify all potential environmental problems or risks.
As a result, the Company may have acquired, or may in the future acquire,
landfills that have unknown environmental problems and related liabilities. The
Company will be subject to similar risks and uncertainties in connection with
the acquisition of closed facilities that had been operated by businesses
acquired by the Company. The Company seeks to mitigate the foregoing risks by
obtaining environmental representations and indemnities from the sellers of the
businesses that it acquires. However, there can be no assurance that the
Company will be able to rely on any such indemnities if an environmental
liability exists.
Federal Regulation
The primary U.S. federal statutes affecting the business of the Company are
summarized below.
(1) The Solid Waste Disposal Act ("SWDA"), as amended by the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"). The SWDA and its
implementing regulations establish a framework for regulating the handling,
transportation, treatment, and disposal of hazardous and non-hazardous waste.
They also require states to develop programs to insure the safe disposal of
solid waste in landfills.
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Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of non-hazardous solid
waste. Under Subtitle D, the EPA has adopted regulations that establish
minimum standards for solid waste disposal facilities, which include location
standards, hydrogeological investigations, facility design requirements
(including liners and leachate collection systems), enhanced operating and
control criteria, groundwater and methane gas monitoring, corrective action
standards, closure and extended post-closure requirements, and financial
assurance standards. These federal regulations must be implemented by the
states, although states may impose requirements for landfill sites that are
more stringent than the federal Subtitle D standards. The Company could incur
significant costs in complying with such regulations; however, the Company does
not believe that the costs of complying with such standards will have a
material adverse effect on its operations. All of the Company's planned
landfill expansions will be engineered to meet or exceed all applicable
Subtitle D requirements.
(2) The Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA"). CERCLA, among other things, provides for
the cleanup of sites from which there is a release or threatened release of a
hazardous substance into the environment. CERCLA imposes joint and several
liability for the costs of cleanup and for damages to natural resources upon
the present and former owners or operators of facilities or sites from which
there is a release or threatened release of hazardous substances (former owners
and operators are liable only to the extent the release, and sometimes
disposal, occurred during their period of ownership). Waste generators and
transporters (including a contract carrier who has accepted a hazardous
substance for transportation) are also strictly liable. Under the authority
of CERCLA 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.
Liability under CERCLA is not dependent upon the intentional disposal of
"hazardous wastes," as defined under RCRA. It can be founded upon the release
or threatened release, even as a result of lawful, unintentional, and
non-negligent action, of any one of more than 700 "hazardous substances,"
including very small quantities of such substances. CERCLA 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. More than 20% of the sites on the NPL are solid waste
landfills that ostensibly never received any regulated "hazardous wastes."
Thus, even if the Company's landfills have never received "hazardous wastes" as
such, it is likely that one or more hazardous substances have come to be
located at its landfills. Because of the extremely broad definition of
"hazardous substances," the same is true of other industrial properties with
which the Company or its predecessors has been, or with which the Company may
become, associated as an owner or operator. Consequently, if there is a release
or threatened release of such substances into the environment from a site
currently or previously owned or operated by the Company, the Company could be
liable under CERCLA for the cost of removing such hazardous substances at the
site, remediation of contaminated soil or groundwater, and for damages to
natural resources, even if those substances were deposited at the Company's
facilities before the Company acquired or operated them. The costs of a CERCLA
cleanup can be very substantial. Given the limited amount of environmental
impairment liability insurance maintained by the Company, a finding of such
liability could have a material adverse impact on the Company's business and
financial condition. Although the Company maintains environmental impairment
liability insurance in amounts the Company believes are compliant with state
and federal requirements, these coverages might be insufficient to cover a
significant CERCLA mandated cleanup.
Although the Company would not be liable under CERCLA for the cleanup of a
disposal site containing hazardous wastes transported to such site by the
Company so long as the site was selected by the generator of such waste, the
Company would be responsible for any hazardous waste during actual
transportation. Also, the Company could be liable under CERCLA for off-site
environmental contamination caused by the release of pollutants or hazardous
substances transported by the Company, or a waste transporter acquired by the
Company, where the transporter selected the disposal site. CERCLA imposes
liability for certain environmental response measures upon transporters who
arranged for the disposal site at which the release or threatened release of
hazardous substances occurred. It therefore is common in the solid waste
transport business to receive information requests from EPA about transporting
activities to third party disposal sites. USA Waste has received potentially
responsible party information requests regarding third party disposal sites.
The environmental agencies or other potentially responsible parties could
assert that USA Waste is liable for environmental response measures arising out
of disposal at a site that was selected by USA Waste, a waste transporter
acquired by USA Waste, or a waste transporter with whom USA Waste contracted.
Several bills are presently pending before the U.S. Congress to reauthorize
and substantially amend CERCLA. In addition to possible changes in the
statute's funding mechanisms and provisions for allocating cleanup
responsibility, Congress may also fundamentally alter the statute's provisions
governing the selection of appropriate site cleanup remedies. In this regard,
new approaches to cleanup, removal, treatment, and remediation of hazardous
substance contamination may be adopted which rely on nationally or
site-specific risk based standards. These types of policy changes could
significantly affect the stringency and extent of site remediation, the types
of remediation techniques employed, and the types of hazardous waste management
facilities that may be used for the treatment and disposal of hazardous
substances. Congress may additionally consider revision of the liability
imposed by CERCLA on current owners of property for contamination caused prior
to a party's acquisition of the site. This consideration could reduce the
remediation obligations of the Company for remediation obligations under
CERCLA.
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The EPA's primary way of determining whether a site is to be included on
the NPL is the Hazard Ranking System, which evaluates the relative potential
for uncontrolled hazardous substances to pose a threat to human health or the
environment pursuant to a scoring system based on factors grouped into three
factor categories: (1) likelihood of release, (2) waste characteristics, and
(3) targets. As of mid-1996, the EPA had proposed or identified approximately
39,000 sites for preliminary assessment (including approximately 6,500 solid
waste landfills). These sites are compiled on the Comprehensive Environmental
Response, Compensation, and Liability Information System (CERCLIS) list. The
identification of a site on the CERCLIS list indicates only that the site has
been brought to the attention of the EPA and does not necessarily mean that an
actual health or environmental threat currently exists or has ever existed.
Like many of the landfills in the State of Illinois, the Company's Countryside
and Leroy Brown landfills were placed on the CERCLIS list. In 1996, the EPA
began an effort to reduce the number of sites on the CERCLIS list and recently
announced that more than 25,000 sites would be removed from the list.
The Countryside landfill in Grayslake, Illinois, was proposed for
preliminary assessment in 1979 and underwent a preliminary assessment in 1983
and a site inspection in 1986 under the EPA's program. The EPA has not taken
any further action with respect to the evaluation of the Countryside landfill
since 1986. Based on its review of the wastes deposited at the Countryside
landfill, the hydrogeological structure of the site, the facility's design, and
a report received by the Company from its independent environmental consultant
at the time the Company acquired the landfill, the Company does not believe
that the outcome of the EPA's evaluation of the Countryside landfill will
result in it being proposed for listing on the NPL or have any material adverse
impact on the operation of the landfill.
The Company's records indicate that in 1977 and 1978, the Leroy Brown
landfill in Macomb, Illinois, accepted 40 drums of material that would now be
classified as hazardous waste, and a small quantity of hazardous waste was
accepted by the landfill between 1987 and 1989. A screening site inspection
was performed by the Illinois Environmental Protection Agency ("IEPA") in 1989.
That inspection and further testing disclosed the presence of minimal
contamination of groundwater beneath the landfill. At this time, neither the
EPA nor the IEPA has recommended or required any remedial action, beyond normal
closure and post-closure monitoring, on the part of the Company with respect to
any hazardous substance present at the disposal facility. However, because of
the acceptance of the drums and the limited amount of hazardous waste at the
site, the IEPA could demand that the Company obtain a permit for a hazardous
waste facility. The process of securing this permit could take several years
and could result in significant expenditures. The IEPA could also require the
Company to develop and execute a closure and post-closure plan, which is
separate and apart from the plan already approved by the IEPA for the
non-hazardous landfill. The costs of developing and executing a new closure and
post-closure plan are dependent, in part, on the area of the existing site that
would be required to be closed and monitored as a hazardous waste facility and
are uncertain at this time.
In November 1993, a subsidiary of the Company acquired Kitsap County
Sanitary Landfill, Inc. ("KCSL"), which owns the Olympic View landfill.
Landfill operations at the Olympic View landfill began in the 1960s, at which
time the site was known as the "Barney White" site. The Barney White site was
closed in 1985 after reaching its capacity. A flexible membrane liner was
installed in late 1991, as an enhancement to the existing natural soil cap, in
order to minimize the production of leachate following detection of a small
amount of hazardous materials in groundwater monitoring wells. The Company
believes that it can avoid costly remediation through the maintenance of the
cap on the old site, the design of an appropriate monitoring program, and the
institution of a program of controls at the site, which should prevent harmful
leaching.
In addition, from May 1979 to May 1994, KCSL operated the Hansville County
landfill under a lease agreement with Kitsap County, Washington. Under the
agreement, KCSL was required to operate the landfill until 1989, when the
operation was replaced by a transfer station. The lease agreement did not
include provisions relating to closure costs and post-closure monitoring.
However, KCSL funded the closure costs and, at the request of the
landfill-permitting agency, implemented certain measures in response to minor
groundwater contamination detected near the site. The Company believes KCSL
has met its obligations by implementing such measures. There can be no
assurance, however, that state or federal environmental authorities will not
require KCSL to finance additional investigation or remedial action at the
site. KCSL has been indemnified by the landfill's previous owner against costs
in excess of $500,000 that may be incurred by KCSL to mitigate any required
action. The Company placed $500,000 in escrow at the closing of the KCSL
acquisition to fund any indemnified costs KCSL may be required to bear relating
to the Hansville County landfill.
(3) The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"). The Clean Water Act establishes rules for regulating the discharge of
pollutants into streams, rivers, groundwater, or other surface waters from a
variety of sources, including non-hazardous solid waste disposal sites. Should
run-off from the Company's landfills or transfer stations be discharged into
surface waters, the Clean Water Act could require the Company to apply for and
obtain discharge permits, conduct sampling and monitoring, and, under certain
circumstances, reduce the quantity of pollutants in those discharges. The EPA
issued additional rules under the Clean Water Act which establish standards for
storm water runoff from landfills and which require landfills to obtain storm
water discharge permits. In addition, if a Company landfill or transfer
station discharges wastewater through a sewage system to a publicly owned
treatment works, the facility must comply with discharge limits imposed by the
treatment works. Also, if development of a landfill may alter or affect
"wetlands," a permit may have
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to be obtained before such development could commence. This requirement is
likely to affect the construction or expansion of many landfill sites. The
Clean Water Act provides civil, criminal, and administrative penalties for
violations of its provisions.
(4) The Clean Air Act. The Clean Air Act provides for the federal, state,
and local regulation of the emission of air pollutants. The Company's soil
remediation facilities are required to obtain air emission permits for
operation under these regulations. These regulations also may impose emission
limitations and monitoring and reporting requirements on various other
operations of the Company, including its landfills and waste collection
vehicles. The EPA has construed the Clean Air Act to apply to landfills, which
may emit methane gas and other air pollutants. The costs of compliance with
Clean Air Act permitting and emission control requirements are not anticipated
to have a material adverse effect on the Company.
(5) The Occupational Safety and Health Act of 1970 (the "OSHA Act"). The
OSHA Act authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazards, safety in excavation and
demolition work, and the handling of asbestos, may apply to the Company's
operations.
State and Local Regulation
The states in which the Company operates have their own laws and
regulations governing hazardous and non-hazardous solid waste disposal, water
and air pollution, and, in most cases, releases and cleanup of hazardous
substances and liability for such matters. The states also have adopted
regulations governing the siting, design, operation, maintenance, closure, and
post-closure maintenance of landfills and transfer stations. The Company's
facilities and operations are likely to be subject to many, if not all, of
these types of requirements. In addition, the Company's collection and landfill
operations may be affected by the trend in many states toward requiring the
development of waste reduction and recycling programs. For example, several
states recently have enacted laws that require counties to adopt comprehensive
plans to reduce, through waste planning, composting, recycling, or other
programs, the volume of solid waste deposited in landfills. Additionally, the
disposal of yard waste in solid waste landfills has recently been banned in
several states. Legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling have also been considered
from time to time by Congress and the EPA.
Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of hazardous and non-hazardous solid
waste generated outside the state. While laws that overtly discriminate against
out-of-state waste have been found to be unconstitutional, some laws that are
less overtly discriminatory have been upheld in court. Additionally, certain
state and local governments have enacted "flow control" regulations, which
attempt to require that all waste generated within the state or local
jurisdiction be deposited at specific disposal sites. In May 1994, the U.S.
Supreme Court ruled that a flow control ordinance was unconstitutional.
Challenges to other such laws are pending. The outcome of pending litigation
and the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. The U.S. Congress has from time to time
and is currently considering legislation authorizing states to adopt such
regulations, restrictions, or taxes on the importation of extraterritorial
waste, and granting states and local governments authority to enact partial
flow control legislation. To date, such Congressional efforts have been
unsuccessful. The U.S. Congress' adoption of such legislation allowing for
restrictions on importation of extraterritorial waste or certain types of flow
control, or the adoption of legislation affecting interstate transportation of
waste at the federal or state level, could adversely affect the Company's solid
waste management services, including collection, transfer, disposal, and
recycling operations, and in particular the Company's ability to expand
landfill operations acquired in certain areas.
Many states and local jurisdictions in which the Company operates have
enacted "fitness" laws that allow agencies having jurisdiction over waste
services contracts or site permits to decline to award such contracts or deny
or revoke such permits on the basis of an applicant's (or permit holder's)
environmental or other legal compliance history. These laws authorize the
agencies to make determinations of an applicant's fitness to be awarded a
contract or to operate a facility and to deny or revoke a contract or permit
because of unfitness absent a showing that the applicant has been rehabilitated
through the adoption of various operating policies and procedures put in place
to assure future compliance with applicable laws and regulations.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, projected or anticipated benefits
from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, earnings, or other aspects of operating
results. The words "expect," "believe," "anticipate," "project," "estimate,"
and similar expressions are intended to identify forward-looking statements.
The Company cautions readers that such statements are not guarantees of future
performance or events and are subject to a number of factors that may tend to
influence the accuracy of the statements and the projections upon which the
statements are based, including but not limited
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to those discussed below. As noted elsewhere in this report, all phases of the
Company's operations are subject to a number of uncertainties, risks, and other
influences, many of which are outside the control of the Company, and any one
of which, or a combination of which, could materially affect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for 1997 and beyond and cause them
to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company:
No Assurance of Successful Management and Maintenance of Growth
USA Waste has experienced rapid growth, primarily through acquisitions.
USA Waste's future financial results and prospects depend in large part on its
ability to successfully manage and improve the operating efficiencies and
productivity of these acquired operations. In particular, whether the
anticipated benefits of acquired operations are ultimately achieved will depend
on a number of factors, including the ability of combined companies to achieve
administrative cost savings, rationalization of collection routes, insurance
and bonding cost reductions, general economies of scale, and the ability of the
Company, generally, to capitalize on its combined asset base and strategic
position. Moreover, the ability of USA Waste to continue to grow will depend
on a number of factors, including competition from other waste management
companies, availability of attractive acquisition opportunities, availability
of working capital, ability to maintain margins, and the management of costs in
a changing regulatory environment. There can be no assurance that USA Waste
will be able to continue to expand and successfully manage its growth.
Acquisition Strategy
The Company regularly pursues opportunities to expand through acquisitions.
The Company plans to continue to seek acquisitions that complement its
services, broaden its customer base, and improve its operating efficiencies.
The Company's acquisition strategy involves certain potential risks associated
with assessing, acquiring, and integrating the operations of acquired
companies. Although the Company generally has been successful in implementing
its acquisition strategy, there can be no assurance that attractive acquisition
opportunities will continue to be available, that the Company will have access
to the capital required to finance potential acquisitions on satisfactory
terms, or that any businesses acquired will prove profitable. Future
acquisitions may result in the incurrence of additional indebtedness or the
issuance of additional equity securities.
International Expansion
In 1997, a significant portion of the Company's operations will be
conducted in Canada. The Company's operations in foreign countries, including
Canada, generally are subject to a number of risks inherent in any business
operating in foreign countries, including political, social, and economic
instability, exchange rate fluctuations, and governmental regulation, all of
which are beyond the control of the Company. In particular, the Company's
Canadian operations will be subject to the various environmental, zoning,
health, and safety regulations as well as licensing and other requirements. No
prediction can be made as to how existing or future foreign governmental
regulations in any jurisdiction may affect the Company in particular or the
solid waste management industry in general.
Need for Capital; Debt Financing
The long-term debt of USA Waste, including current maturities, at December
31, 1996, was approximately $1,187,000,000. USA Waste expects to require
additional capital from time to time to pursue its acquisition strategy and to
fund internal growth. A portion of USA Waste's future capital requirements may
be provided through future debt incurrences or issuances of equity securities.
There can be no assurance that USA Waste will be able to obtain additional
capital through such debt incurrences or issuances of additional equity
securities.
Profitability May be Affected by Competition
The waste management industry is highly competitive and requires
substantial capital resources. The industry consists of a few large national
waste management companies as well as numerous local and regional companies of
varying sizes and financial resources. The two largest national waste
management companies have greater financial resources than USA Waste.
Competition may be enhanced and profitability may be adversely affected by the
increasing national emphasis on recycling, composting, incineration, and other
waste reduction programs that could reduce the volume of solid waste collected
or deposited in landfills.
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Potential Adverse Effect of Government Regulation
USA Waste's operations are subject to and substantially affected by
extensive federal, state, and local laws, regulations, orders, and permits,
which govern environmental protection, health and safety, zoning, and other
matters. These regulations may impose restrictions on operations that could
adversely affect the Company's results, such as limitations on the expansion of
disposal facilities, limitations on or the banning of disposal of out-of-state
waste or certain categories of waste, or mandates regarding the disposal of
solid waste. Because of heightened public concern, companies in the waste
management business may become subject to judicial and administrative
proceedings involving federal, state, or local agencies. These governmental
agencies may seek to impose fines or revoke or deny renewal of operating
permits or licenses for violations of various laws, including environmental
laws or regulations or to require remediation of environmental problems at
sites or nearby properties, or resulting from transportation or predecessors'
transportation and collection operations, all of which could have a material
adverse effect on the Company. Liability may also arise from actions brought
by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses,
or other matters.
Potential Environmental Liability
USA Waste is subject to liability for environmental damage that its
collection operations, transfer stations, and landfills cause or may cause
nearby landowners, particularly as a result of the contamination of drinking
water sources or soil, including damage resulting from conditions existing
prior to the acquisition of such assets or operations. Liability may also
arise from any off-site environmental contamination caused by pollutants or
hazardous substances under circumstances where transportation, treatment, or
disposal was arranged for USA Waste or predecessor owners of operations or
assets acquired by USA Waste. Any substantial liability for environmental
damage could materially adversely affect the operating results and financial
condition of USA Waste.
Shares Eligible for Future Sale May Adversely Affect Market Price of Stock
Sales of substantial amounts of USA Waste common stock in the public market
could adversely affect the market price of such stock. USA Waste maintains a
shelf registration statement for the benefit of certain stockholders relating
to 4,000,000 shares of USA Waste common stock. Such shares are immediately
saleable in the open market. In addition, USA Waste maintains a shelf
registration statement covering approximately 8,810,000 shares of USA Waste
common stock at March 15, 1997 that may be issued in acquisitions. In the
event the market price of USA Waste stock were adversely affected by such
sales, the Company's access to equity capital markets could be adversely
affected, and issuances of stock by USA Waste in connection with acquisitions,
or otherwise, could dilute earnings per share.
Seasonality
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter operating
results and may also be reflected in its fourth quarter operating results.
This is primarily attributed to the fact that (i) the volume of waste relating
to construction and demolition activities tends to increase in the spring and
summer months and (ii) the volume of waste relating to industrial and
residential waste in certain regions where the Company operates tends to
decrease during the winter months.
ITEM 2. PROPERTIES.
The principal property and equipment of the Company consists of land
(primarily landfill sites, transfer stations, and bases for collection
operations), buildings, and vehicles and equipment. The Company owns or leases
real property in most states in which it is doing business. At December 31,
1996, 84 solid waste landfills, aggregating approximately 30,527 total acres,
including approximately 8,258 permitted acres, were owned and operated by the
Company and 17 landfills, aggregating approximately 2,864 total acres,
including approximately 1,559 permitted acres, were operated by the Company or
leased from parties not affiliated with the Company.
The Company leases approximately 85,770 square feet of office space in
Houston, Texas, for its executive office under a ten year lease expiring in
2007. The Company owns real estate, buildings, and other physical properties
that it employs in substantially all of its solid waste collection operations.
The Company also leases a portion of its transfer stations, offices, and garage
and shop facilities. For the year ended December 31, 1996, aggregate annual
rental payments on real estate leased by the Company was approximately
$2,926,000.
The Company owns approximately 8,100 items of equipment, including waste
collection vehicles and related support vehicles, as well as bulldozers,
compactors, earth movers, and related heavy equipment and vehicles used in
landfill operations. The Company has more than 415,000 steel containers in use,
ranging from one to 45 cubic yards, and a number of stationary compactors and
self-dumping hoppers.
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The Company believes that its vehicles, equipment, and operating properties
are well maintained and adequate for its current operations. However, the
Company expects to make substantial investments in additional equipment and
property for expansion, for replacement of assets, and in connection with
future acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS.
On or about March 8, 1993, an action was filed in the United States
District Court for the Western District of Pennsylvania, captioned Option
Resource Group, et al. v. Chambers Development Company, Inc., et al., Civil
Action No. 93-354. This action was brought by a market maker in options in
Chambers stock and two of its general partners and asserts federal securities
law and common law claims alleging that Chambers, in publicly disseminated
materials, intentionally or negligently misstated its earnings and that
Chambers' officers and directors committed mismanagement and breach of
fiduciary duties. These plaintiffs allege that, as a result of large amounts
of put options traded on the Chicago Board of Options Exchange between March 13
and March 18, 1992, they engaged in offsetting transactions resulting in
approximately $2,100,000 in losses. The plaintiffs in Option Resource Group
had successfully requested exclusion from a now settled class action of
consolidated suits instituted on similar claims ("Class Action") and Option
Resource Group is continuing as a separate lawsuit. Plaintiffs filed a motion
for summary judgment which is untimely under the court's case management
procedures. The court has stayed responses to the motion for summary judgment.
In response to discovery on damages, the plaintiffs reduced their damages claim
to $433,000 in alleged losses, plus interest and attorneys' fees, for a total
damage claim of $658,000 as of August 21, 1995. Discovery has been completed
and a trial date has been set for early 1997. The Company intends to continue
to vigorously defend against this action. Management of the Company believes
the ultimate resolution of such complaint will not have a material adverse
effect on the Company's financial position or results of operations.
On August 3, 1995, Frederick A. Moran and certain related persons and entities
filed a lawsuit against Chambers, certain former officers and directors of
Chambers, and Grant Thornton, LLP, in the United States District Court for the
Southern District of New York under the caption Moran, et al. v. Chambers, et
al., Civil Action No. 95-6034. Plaintiffs, who claim to represent
approximately 484,000 shares of Chambers stock, requested exclusion from the
settlement agreements which resulted in the resolution of the Class Action and
assert that they have incurred losses attributable to shares purchased during
the class period and certain additional losses by reason of alleged management
misstatements during and after the class period. The claimed losses include
damages to Mr. Moran's business and reputation. The Judicial Panel on
Multidistrict Litigation has transferred this case to the United States
District Court for the Western District of Pennsylvania. The Company has filed
its answer to the complaint and intends to vigorously defend against these
claims. The case is currently in discovery. Management of the Company
believes the ultimate resolution of such complaint will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is a party to various other litigation matters arising in the
ordinary course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
position and results of operations. In the normal course of its business and as
a result of the extensive government regulation of the solid waste industry, the
Company periodically may become subject to various judicial and administrative
proceedings and investigations involving federal, state, or local agencies. To
date, the Company has not been required to pay any material fine or had a
judgment entered against it for violation of any environmental law. From time to
time, the Company also may be subjected to actions brought by citizen's groups
in connection with the permitting of landfills or transfer stations, or alleging
violations of the permits pursuant to which the Company operates. From time to
time, the Company is also subject to claims for personal injury or property
damage arising out of accidents involving its vehicles.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the stockholders of USA Waste during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages, as of March 1, 1997, of the
Company's executive officers (as defined by regulations of the Securities and
Exchange Commission), the positions they hold with the Company, and summaries
of their business experience.
John E. Drury, age 52, has been Chairman of the Board since June 30, 1995,
and Chief Executive Officer and a director of USA Waste since May 27, 1994.
From 1991 to May 1994, Mr. Drury served as a Managing Director of Sanders
Morris Mundy Inc. ("SMMI"), a Houston based investment banking firm. Mr. Drury
served as President and Chief Operating Officer of Browning-Ferris Industries,
Inc. ("BFI") from 1982 to 1991, during which time he had chief responsibility
for all solid waste operations.
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Rodney R. Proto, age 47, has been President, Chief Operating Officer, and a
director since joining USA Waste in August 1996. Prior to joining USA Waste,
Mr. Proto was President, Chief Operating Officer, and a director of Sanifill,
Inc. since February 1992. Prior to such time, Mr. Proto was employed by BFI
for twelve years where he served, among other positions, as President of
Browning-Ferris Industries Europe, Inc. from 1987 through 1991 and Chairman of
BFI Overseas from 1985 through 1987.
Donald F. Moorehead, Jr., age 46, has been Vice Chairman of the Board since
June 30, 1995, and Chief Development Officer since May 27, 1994. From October
1, 1990 to June 30, 1995, he was also Chairman of the Board, and from October
1, 1990 to May 27, 1994, he was Chief Executive Officer. Mr. Moorehead was
Chairman of the Board and Chief Executive Officer of Mid-American Waste
Systems, Inc. ("Mid-American") from the inception of Mid-American in December
1985 until August 1990 and continued as a director until February 1991.
Earl E. DeFrates, age 53, has been Executive Vice President and Chief
Financial Officer since May 1994. From October 1990 to April 1995, he was also
Secretary. Mr. DeFrates joined USA Waste as Vice President-Finance in October
1990 and was elected Executive Vice President in May 1994. Prior thereto, Mr.
DeFrates was employed by Acadiana Energy Inc. (formerly Tatham Oil & Gas, Inc.)
serving in various officer capacities including the company's Chief Financial
Officer, since 1980.
Gregory T. Sangalis, age 41, has been Vice President, General Counsel and
Secretary since April 4, 1995. Prior to joining USA Waste, Mr. Sangalis was
employed by a solid waste subsidiary of WMX Technologies, Inc. ("WMX") serving
in various legal capacities since 1986 and including Group Vice President and
General Counsel from August 1992 to April 1995. Prior to joining WMX, he was
General Counsel of Peavey Company and had been engaged in the private practice
of law in Minnesota.
Bruce E. Snyder, age 41, has been Vice President and Chief Accounting
Officer of USA Waste since July 1, 1992. Prior to joining USA Waste, Mr.
Snyder was employed by the international accounting firm of Coopers & Lybrand
L.L.P., serving there since 1989 as an audit manager. From 1985 to 1989, Mr.
Snyder held various financial positions with Price Edwards Henderson & Co., a
privately held real estate development and management company in Oklahoma City,
Oklahoma, and its affiliated companies, ultimately serving as Senior Vice
President.
Ronald H. Jones, age 46, has been Vice President and Treasurer since
joining USA Waste in June 1995. Prior to joining USA Waste, Mr. Jones was
employed by Chambers Development Company, Inc. ("Chambers") as Vice President
and Treasurer from July 1992 to June 1995, Director, Corporate Development from
December 1990 to July 1992, and Assistant Vice President - Finance from July
1989 to December 1990. Prior to joining Chambers, Mr. Jones was a Vice
President and Manager of the Cincinnati regional office engaged in corporate
and middle market lending with Bank of New York (formerly Irving Trust Company)
and with Chase Manhattan Bank.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "UW." The following table sets forth the range of
the high and low per share sales prices for the common stock as reported on the
NYSE Composite Tape.
HIGH LOW
-------- --------
1995
- ----
First Quarter ........................ $ 12.50 $ 10.00
Second Quarter ....................... 16.63 11.50
Third Quarter ........................ 22.00 14.63
Fourth Quarter ....................... 22.50 17.00
1996
- ----
First Quarter ........................ $ 25.63 $ 17.25
Second Quarter ....................... 32.63 24.00
Third Quarter ........................ 34.13 22.75
Fourth Quarter ....................... 34.25 28.63
1997
- ----
First Quarter (through March 25, 1997) $ 38.88 $ 28.63
On March 25, 1997, the closing sale price as reported on the NYSE was $37
3/8 per share. The number of holders of record of Common Stock based on the
transfer records of the Company at March 25, 1997, was 3,713.
The Company has never paid cash dividends on its common stock, and the
Company's Board of Directors presently intends to retain any earnings in the
foreseeable future for use in the Company's business. Payment of dividends on
the common stock is restricted by terms of the Company's revolving credit
facility. See Note 5 to the Consolidated Financial Statements of the Company.
14
17
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data set forth below include the accounts of the
Company and the businesses acquired in transactions accounted for as poolings
of interests as if such businesses had been combined since their inception.
The accounts of the businesses acquired in transactions accounted for as
purchases are included from their respective dates of acquisition.
For the Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(In Thousands, Except Per Share Amounts)
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 1,313,388 $ 987,705 $ 897,644 $ 778,966 $ 682,869
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Operating 704,917 551,305 520,255 455,282 424,497
General and administrative 160,539 140,051 138,819 126,347 130,956
Depreciation and amortization 153,168 119,570 112,860 96,861 77,872
Merger costs 120,656 25,639 3,782 -- --
Unusual items 63,800 4,733 8,863 2,672 72,090
----------- ----------- ----------- ----------- -----------
1,203,080 841,298 784,579 681,162 705,415
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 110,308 146,407 113,065 97,804 (22,546)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Shareholder litigation settlement and
other litigation related costs -- -- (79,400) (5,500) (10,853)
Interest expense:
Nonrecurring interest -- (10,994) (1,254) -- --
Other (45,547) (48,558) (47,678) (46,032) (44,612)
Interest income 5,267 5,482 4,670 4,835 6,840
Other income, net 8,060 5,143 2,570 1,161 2,285
----------- ----------- ----------- ----------- -----------
(32,220) (48,927) (121,092) (45,536) (46,340)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 78,088 97,480 (8,027) 52,268 (68,886)
Provision for (benefit from) income taxes 45,142 44,992 1,015 24,249 (27,554)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations $ 32,946 $ 52,488 $ (9,042) $ 28,019 $ (41,332)
=========== =========== =========== =========== ===========
Income (loss) from continuing operations
per common share $ 0.24 $ 0.46 $ (0.09) $ 0.29 $ (0.47)
=========== =========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 139,740 113,279 103,422 95,858 88,371
=========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 20,020 $ 30,109 $ 9,971 $ 45,805 $ 75,143
Intangible assets, net 517,399 262,205 185,066 152,370 104,471
Total assets 2,830,505 1,933,557 1,588,996 1,428,444 1,311,828
Long-term debt, including current maturities 1,187,000 731,741 688,673 650,331 614,684
Stockholders' equity 1,155,276 907,622 560,616 534,989 457,745
15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion reviews the Company's operations for the three
years ended December 31, 1996, and should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere herein. The Company has restated its previously issued financial
statements for years prior to 1996 to reflect the acquisitions of Western and
Sanifill, consummated May 7, 1996 and August 30, 1996, respectively, and
accounted for under the pooling of interests method of accounting.
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect the business and operations of the Company.
Certain of these factors are discussed under "Business - Factors Influencing
Future Results and Accuracy of Forward-Looking Statements" included in Item 1
of this report.
INTRODUCTION
The Company provides non-hazardous solid waste management services,
consisting of collection, transfer, disposal, recycling, and other
miscellaneous services in 36 states, the District of Columbia, Canada, Mexico,
and Puerto Rico. Since August 1990, the Company has experienced significant
growth principally through the acquisition and integration of solid waste
businesses and is now the third largest non-hazardous solid waste company in
North America. As of December 31, 1996, the Company owned or operated 123
collection companies, 61 transfer stations, and 101 landfills serving more than
2 million customers.
The Company's revenues consist primarily of fees charged for its collection
and disposal services. Revenues for collection services include fees from
residential, commercial, industrial, and municipal collection customers. A
portion of these fees are billed in advance; a liability for future service is
recorded upon receipt of payment and revenues are recognized as services are
provided. Fees for residential services are normally based on the type and
frequency of service. Fees for commercial and industrial services are
normally based on the type and frequency of service and the volume of solid
waste collected.
The Company's revenues from its landfill operations consist of disposal
fees (known as tipping fees) charged to third parties and are normally billed
monthly. Tipping fees are based on the volume or weight of solid waste being
disposed of at the Company's landfill sites. Fees are charged at transfer
stations based on the volume or weight of solid waste deposited, taking into
account the Company's cost of loading, transporting, and disposing of the solid
waste at a landfill. Intercompany revenues between the Company's collection,
transfer, and landfill operations have been eliminated in the consolidated
financial statements presented elsewhere herein.
Operating expenses include direct and indirect labor and the related taxes
and benefits, fuel, maintenance and repairs of equipment and facilities,
tipping fees paid to third party landfills, property taxes, and accruals for
future landfill closure and post-closure costs. Certain direct landfill
development expenditures are capitalized and depreciated over the estimated
useful life of a site as capacity is consumed, and include acquisition,
engineering, upgrading, construction, and permitting costs. All indirect
development expenses, such as administrative salaries and general corporate
overhead, are expensed in the period incurred.
General and administrative costs include management salaries, clerical, and
administrative costs, professional services, facility rentals, and related
insurance costs, as well as costs related to the Company's marketing and sales
force.
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19
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percent for the various
Consolidated Statements of Operations line items.
Period to Period Increase (Decrease)
----------------------------------------------
For the Years Ended For the Years Ended
December 31, 1996 December 31, 1995
and 1995 and 1994
--------------------- ---------------------
Operating revenues $ 325,683 33.0% $ 90,061 10.0%
--------- ---------
Costs and expenses:
Operating 153,612 27.9 31,050 6.0
General and administrative 20,488 14.6 1,232 0.9
Depreciation and amortization 33,598 28.1 6,710 5.9
Merger costs 95,017 370.6 21,857 577.9
Unusual items 59,067 1,248.0 (4,130) (46.6)
--------- ---------
361,782 43.0 56,719 7.2
--------- ---------
Income from operations (36,099) (24.7) 33,342 29.5
--------- ---------
Other income (expense):
Shareholder litigation settlement and other
litigation related costs -- -- 79,400 100.0
Interest expense:
Nonrecurring interest 10,994 100.0 (9,740) (776.7)
Other 3,011 6.2 (880) (1.8)
Interest income (215) (3.9) 812 17.4
Other income, net 2,917 56.7 2,573 100.1
--------- ---------
16,707 34.1 72,165 59.6
--------- ---------
Income (loss) before income taxes (19,392) (19.9) 105,507 1,314.4
Provision for income taxes 150 0.3 43,977 4,332.7
--------- ---------
Net income (loss) $ (19,542) (37.2) $ 61,530 680.5
========= =========
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20
The following table presents, for the periods indicated, the percentage
relationship that the various Consolidated Statements of Operations line items
bear to operating revenues.
Years Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
Operating revenues:
Collection 52.6% 52.7% 52.6%
Transfer station 10.8 9.2 10.0
Disposal 29.0 29.4 28.4
Other 7.6 8.7 9.0
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Operating 53.7 55.8 58.0
General and administrative 12.2 14.2 15.5
Depreciation and amortization 11.7 12.1 12.6
Merger costs 9.2 2.6 0.4
Unusual items 4.8 0.5 1.0
----- ----- -----
91.6 85.2 87.5
----- ----- -----
Income from operations 8.4 14.8 12.5
----- ----- -----
Other income (expense):
Shareholder litigation settlement and other
litigation related costs -- -- (8.8)
Interest expense:
Nonrecurring interest -- (1.1) (0.1)
Other (3.5) (4.9) (5.3)
Interest income 0.4 0.6 0.5
Other income, net 0.6 0.5 0.2
----- ----- -----
(2.5) (4.9) (13.5)
----- ----- -----
Income (loss) before income taxes 5.9 9.9 (1.0)
Provision for income taxes 3.4 4.6 0.1
----- ----- -----
Net income (loss) 2.5% 5.3% (1.1)%
===== ===== =====
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21
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Operating Revenues
Operating revenues increased $325,683,000, or 33.0%, in 1996 compared to 1995.
This increase is primarily attributable to 1996 acquisitions and the full year
effect of 1995 acquisitions which resulted in increased operating revenues of
$262,974,000. Internal growth of comparable core businesses resulted in an
increase in operating revenues of $80,054,000, representing a 2% price increase
and 7% volume increase. These increases were partially offset by a decrease in
operating revenues for non-core businesses of $10,049,000 and a decrease in
operating revenues related to divestitures of $7,296,000.
Operating revenues increased $90,061,000, or 10.0%, in 1995 compared to 1994.
The increase in operating revenues is primarily attributable to the effect of
new acquisitions, net of dispositions, which resulted in an increase of
$68,960,000. Comparable operations were negatively impacted by contract
renegotiations and terminations in the New Jersey area in 1994, which resulted
in a decrease in operating revenues of $39,210,000. The remainder of the
increase in 1995 of $60,311,000 related to price and volume increases of 2%
and 5%, respectively.
Operating Costs and Expenses
Operating costs and expenses increased $153,612,000, or 27.9%, in 1996 compared
to 1995, however, have decreased as a percentage of operating revenues from
55.8% in 1995 to 53.7% in 1996. The net increase in operating costs and
expenses is primarily attributable to the effect of new acquisitions, net of
dispositions, which resulted in an increase of $217,426,000. This increase was
offset by a decrease of $14,050,000 related to increased utilization of
internal disposal capacity from 44% in 1995 to 48% in 1996, a decrease of
$12,410,000 related to reduced operating costs and expenses for existing
Chambers operations since the Company's merger with Chambers in June 1995, a
decrease of $4,506,000 related to the Company's decision to discontinue certain
non-core businesses, and a decrease of $32,848,000 related to improvements in
comparable operations primarily as a result of operating synergies realized
from tuck-in acquisitions and mergers with Sanifill and Western in August 1996
and May 1996, respectively. These decreases as well as the increase in
operating revenues resulting from internal growth resulted in the decrease of
operating costs and expenses as a percentage of operating revenues.
Operating costs and expenses increased $31,050,000, or 6.0%, in 1995 compared to
1994, however, decreased as a percentage of operating revenues from 58.0% in
1994 to 55.8% in 1995. The net increase in operating costs and expenses is
primarily attributable to the effect of new acquisitions, net of dispositions,
which resulted in an increase of $50,090,000. Operating costs and expenses for
comparable operations increased slightly by $2,460,000. These increases were
offset by a decrease of $21,500,000 related to contract renegotiations and
terminations in the New Jersey area in 1994. The increase in operating revenues
from internal growth resulted in lower operating costs and expenses as a
percentage of operating revenues.
General and Administrative
General and administrative expenses have increased $20,488,000, or 14.6%, in
1996 compared to 1995, and increased $1,232,000, or 0.9%, in 1995 compared to
1994. As a percentage of operating revenues, however, general and
administrative expenses decreased from 15.5% in 1994 to 14.2% in 1995 to 12.2%
in 1996. The decrease in general and administrative expenses as a percentage
of operating revenues is primarily the result of the Company's ability to
integrate new business acquisitions without a proportionate increase in general
and administrative expenses as well as cost reductions resulting from mergers
with Sanifill, Western, and Chambers in August 1996, May 1996, and June 1995,
respectively.
Depreciation and Amortization
Depreciation and amortization increased $33,598,000, or 28.1%, in 1996 compared
to 1995, and increased $6,710,000, or 5.9%, in 1995 compared to 1994. As a
percentage of operating revenues, however, depreciation and amortization
decreased from 12.6% in 1994 to 12.1% in 1995 to 11.7% in 1996. The increase
in depreciation and amortization is primarily related to acquisitions and
upgrades to existing operations. The decrease in depreciation and amortization
as a percentage of operating revenues is the result of the Company's improved
utilization of equipment through internal volume growth in the collection and
disposal operations without a corresponding increase in equipment and
facilities.
Merger Costs
In the third quarter of 1996, the Company recognized $82,556,000 of merger
costs, of which approximately $80,000,000 related to the acquisition of
Sanifill and the remainder related to the acquisition of two landfills and a
collection company. The $80,000,000 of merger costs related to Sanifill
includes $9,500,000 of transaction costs, $20,000,000 of relocation, severance,
and other termination benefits, $13,000,000 of costs relating to integrating
operations, and $37,500,000 of disposal
19
22
of duplicate facilities. In the second quarter of 1996, the Company incurred
$35,000,000, $2,700,000, and $400,000 of merger costs related to the
acquisitions of Western, Grand Central Sanitation, Inc., and a collection
company, respectively. The $35,000,000 of merger costs related to Western
include $6,800,000 of transaction costs, $15,000,000 of severance and other
termination benefits, and $13,200,000 of costs related to integrating
operations. In the second quarter of 1995, the Company incurred $25,073,000 of
merger costs related to the Chambers acquisition, including $11,900,000 of
transaction costs, $9,473,000 of severance and other termination benefits, and
$3,700,000 of costs related to integrating operations. An additional $566,000
of merger costs was incurred in the second quarter of 1995 related to the
acquisition of a collection, materials recovery, and transfer station
operation.
Unusual Items
In the third quarter of 1996, the Company recognized unusual items of
$50,848,000, including $28,900,000 of estimated losses related to the
disposition of certain non-core business assets, $15,000,000 of project
reserves related to certain Mexico operations, and $6,948,000 of various other
terminated projects. In the second quarter of 1996, unusual items include
approximately $4,824,000 of retirement benefits associated with Western's
pre-merger retirement plan and approximately $8,128,000 of estimated future
losses related to municipal solid waste contracts in California as a result of
the continuing decline in prices of recyclable materials. In 1995, unusual
items represent $2,810,000 of severance and other termination benefits paid to
former Chambers employees in connection with its pre-merger reorganization,
$1,313,000 of estimated future losses associated with a New Jersey municipal
solid waste contract, and $610,000 of shareholder litigation settlement costs.
Income from Operations
Income from operations decreased $36,099,000 in 1996 and increased $33,342,000
in 1995 compared to the respective prior years due to the reasons discussed
above. In 1996, 1995, and 1994, the Company incurred certain nonrecurring
items reported as unusual items and merger costs. Excluding these nonrecurring
items, income from operations as a percentage of operating revenues would be
22.4%, 17.9%, and 14.0% in 1996, 1995, and 1994, respectively. The improvement
in recurring operations is the result of economies of scale realized by the
Company with respect to recent acquisitions, improved operating margins at
Chambers locations since the Chambers merger, dispositions of less profitable
businesses, and improvements in comparative operations.
Other Income and Expense
Other income and expense consists of interest expense, interest income, other
income, and shareholder litigation settlement costs. Shareholder litigation
costs were incurred in 1994 in connection with a settled class action of
consolidated suits or similar claims alleging federal securities violations
against Chambers, certain of its officers and directors, its former independent
auditors, and the underwriters of its securities. Interest expense consists
of recurring and nonrecurring interest. Nonrecurring interest of $10,994,000
and $1,254,000 in 1995 and 1994, respectively, consists of various extension
fees and other charges related to the refinancing of Chambers senior notes in
the second quarter of 1995. Overall, recurring interest expense, gross of
amounts capitalized, increased each year due to an increase in the Company's
average outstanding debt balance. Capitalized interest was $19,507,000,
$12,459,000, and $9,828,000 in 1996, 1995, and 1994, respectively. The
increase in capitalized interest is due to increased development activity
incurred in connection with disposal sites. The increase in other income in
1996 primarily relates to a gain realized on the sale of certain nonhazardous
oil field waste disposal operations in 1996.
Provision for Income Taxes
The Company recorded a provision for income taxes of $45,142,000, $44,992,000,
and $1,015,000 in 1996, 1995, and 1994, respectively. The difference in
provision for income taxes at the federal statutory rate and the reported
amounts relate primarily to nondeductible merger costs and state and local
income taxes.
Net Income (Loss)
For reasons discussed above, net income (loss) decreased $19,542,000 in 1996
and increased $61,530,000 in 1995 compared to the respective prior years.
Variation in 1996 Quarterly Results
The Company has grown significantly through acquisitions, including the
consummation of two mergers in 1996 with other publicly owned entities as
discussed in Note 2 to the consolidated financial statements included elsewhere
herein. These mergers were accounted for as poolings of interests and,
accordingly, operating results for periods prior to these mergers,
20
23
including quarterly results, have been restated. Moreover, the Company
incurred nonrecurring charges related to these mergers of $35,000,000 in the
second quarter and $80,000,000 in the third quarter. In addition, the Company
recognized approximately $12,952,000 of unusual items in the second quarter and
another $50,848,000 in the third quarter as detailed in Note 11 to the
consolidated financial statements included elsewhere herein.
The merger costs and unusual items (and the results of the tax effects of such
charges) have significantly affected the quarterly trend analysis of the
Company's operating results for 1996. A comparison of the reported quarterly
earnings (loss) per share for 1996 compared to pro forma earnings per share,
which exclude such merger costs and unusual items and reflect income taxes at a
40% effective tax rate, are as follows:
As Reported Pro forma
----------- ---------
First quarter $0.21 $0.21
Second quarter ($0.01) $0.28
Third quarter ($0.27) $0.32
Fourth quarter $0.32 $0.32
The Company's business strategy is to continue to grow through acquisitions.
Consequently, future quarterly results could be impacted by additional merger
costs and related expenses associated with such merger and acquisition activity.
Liquidity and Capital Resources
The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements basically stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
cell construction and expansion of its landfill sites, as well as new trucks
and equipment for its collection operations, and (iii) business acquisitions.
The Company's strategy is to meet these capital needs first from internally
generated funds and secondly from various financing sources available to the
Company, including the incurrence of debt and the issuance of its common stock.
It is further part of the Company's strategy to minimize working capital while
maintaining available commitments under bank credit agreements to fund any
capital needs in excess of internally generated cash flow.
As of December 31, 1996, the Company had working capital of $20,020,000 (a
ratio of current assets to current liabilities of 1.06:1) and a cash balance of
$23,511,000, which compares to working capital of $30,109,000 (a ratio of
current assets to current liabilities of 1.15:1) and a cash balance of
$21,058,000 as of December 31, 1995. For the year ended December 31, 1996, net
cash from operating activities was approximately $205,158,000 and net cash from
financing activities was approximately $374,709,000. These funds were used
primarily to fund investments in other businesses of $281,158,000 and for
capital expenditures of approximately $348,354,000.
The Company's capital expenditure and working capital requirements have
increased, reflecting the Company's business strategy of growth through
acquisitions and development projects. The Company intends to finance its 1997
capital expenditures through internally generated cash flow and amounts
available under its revolving credit facility.
On August 30, 1996, in connection with the Sanifill Merger, the Company
replaced its $750,000,000 senior revolving credit facility with a
$1,200,000,000 senior revolving credit facility ("Credit Facility") and retired
amounts under Sanifill's credit facility. The Credit Facility was used to
refinance existing bank loans and letters of credit and to fund additional
acquisitions and working capital. The Credit Facility was available for standby
letters of credit of up to $400,000,000. Loans under the Credit Facility bore
interest at a rate based on the Eurodollar rate plus a spread not to exceed
0.75% per annum (spread set at 0.30% per annum, or an applicable interest rate
of 5.87% per annum at December 31, 1996). The Credit Facility required a
facility fee not to exceed 0.375% per annum on the entire available Credit
Facility (facility fee set at 0.15% per annum at December 31, 1996). The Credit
Facility contained financial covenants with respect to interest rate coverage
and debt capitalization ratios. The Credit Facility also contained limitations
on dividends, additional indebtedness, liens, and asset sales. Principal
reductions were not required over the five-year term of the Credit Facility. On
March 5, 1997, the Credit Facility was replaced with a $1,600,000,000 senior
revolving credit facility with the same general terms, covenants, and
limitations, which is available for standby letters of credit of up to
$500,000,000.
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Notes Offering"). Interest is
payable semi-annually in February and August. The notes are convertible into
shares of the Company's common stock at a conversion price of $43.56 per share.
The notes are subordinated in right of payment to all
21
24
existing and future senior indebtedness, as defined. The notes are redeemable
after February 1, 2000 at the option of the Company at 101.6% of the principal
amount, declining to 100.8% of the principal amount on February 1, 2001 and
thereafter until maturity, plus accrued interest. Deferred offering costs of
approximately $14,000,000 were incurred and are being amortized ratably over the
life of the notes. The proceeds were used to repay debt under the Company's
Credit Facility and for general corporate purposes.
On February 7, 1997, concurrent with the Notes Offering, the Company completed a
public offering of 11,500,000 shares of its common stock, priced at $35.125 per
share. The net proceeds of approximately $387,438,000 were primarily used to
repay debt under the Company's Credit Facility and for general corporate
purposes.
On March 12, 1997, the Company acquired all of the Canadian solid waste
subsidiaries of Allied Waste Industries, Inc., representing 41 collection
businesses, seven landfills, and eight transfer stations in the provinces of
Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan, for
approximately $518,000,000 in cash. In connection with the transaction, the
Company's Canadian subsidiary borrowed $350,000,000, as evidenced by a
promissory note bearing interest at Banker's Acceptance plus 0.45%.
The Company currently intends to repay the $350,000,000 Canadian borrowings with
proceeds from its domestic credit facility prior to June 30, 1997. Reducing the
availability for this anticipated use, the Company has approximately
$824,000,000 available for additional cash borrowings under its credit facility
as of March 27, 1997.
On January 21, 1997, the Company executed a definitive agreement to acquire
substantially all of the assets of Mid-American Waste Systems, Inc.
("Mid-American") for approximately $201,000,000, consisting primarily of cash
and a limited amount of debt assumption. The assets to be acquired include
eleven collection businesses, eleven landfills, six transfer stations, and
three recycling centers. The acquisition has been approved by the Bankruptcy
Court and is expected to close during the second quarter of 1996.
On March 21, 1997, a Canadian subsidiary of the Company and WMX Technologies,
Inc.'s Waste Management unit ("WMX") jointly executed a letter of intent whereby
the Canadian subsidiary will acquire the majority of WMX's Canadian solid waste
businesses for approximately $186,000,000, including $124,000,000 in cash and
$62,000,000 in Company common stock. The assets to be acquired include 13
collection businesses, one landfill, and three transfer stations in the
provinces of Alberta, British Columbia, Ontario, and Quebec, which generate
approximately $124,000,000 in annualized operating revenues. The acquisition,
which is expected to close by May 31, 1997, is subject to regulatory approval
and final negotiation and execution of a definitive sales agreement.
The Company intends to fund the cash portions of the Mid-American and WMX
Canadian acquisitions from its existing credit facility.
The Company's business plan is to grow through acquisitions as well as
development projects. The Company has issued equity securities in business
acquisitions and expects to do so in the future. Furthermore, the Company's
future growth will depend greatly upon its ability to raise additional capital.
The Company continually reviews various financing alternatives and depending
upon market conditions could pursue the sale of debt and/or equity securities
to help effectuate its business strategy. Management believes that it can
arrange the necessary financing required to accomplish its business plan;
however, to the extent the Company is not successful in its future financing
strategies the Company's growth could be limited.
Environmental Matters
The Company also has material financial commitments for the costs associated
with its future closure and post-closure obligations with respect to the
landfills it operates or for which it is otherwise responsible. The Company
bases accruals for these commitments on periodic management reviews, typically
performed at least annually, based on input from its engineers and
interpretations of current regulatory requirements and proposed regulatory
changes. The accrual for closure and post-closure costs includes final
capping and cover for the site, methane gas control, leachate management and
ground water monitoring, and other operational and maintenance costs to be
incurred after each site discontinues accepting waste.
The Company has estimated that the aggregate final closure and post-closure
costs will be approximately $273,159,000. As of December 31, 1996 and 1995,
the Company had recorded liabilities of $117,762,000 and $98,066,000,
respectively, for closure and post-closure costs of disposal facilities. The
difference between the closure and post-closure costs accrued at December 31,
1996, and the total estimated final closure and post-closure costs to be
incurred will be accrued and charged to expense as airspace is consumed such
that the total estimated final closure and post-closure to be incurred will be
fully accrued for each landfill at the time the site stops accepting waste and
is closed. The Company also expects to incur approximately $658,121,000
related to future capping activities during the remaining operating lives of
the disposal sites, which are also being expensed over the useful lives of the
disposal sites as airspace is consumed.
22
25
Management believes that the ultimate disposition of these environmental
matters will not have a material, adverse effect on the financial condition of
the Company. However, the Company's operation of landfills subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations that could give rise to increased costs for monitoring and
corrective measures. The Company cannot predict the effect of any regulations
or legislation enacted in the future on the Company's operations.
Seasonality and Inflation
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter operating
results and may also be reflected in its fourth quarter operating results.
This is primarily attributable to the fact that (i) the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months and (ii) the volume of waste relating to industrial
and residential waste in certain regions where the Company operates tends to
decrease during the winter months.
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on the results of operations
in the near future.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supercedes Accounting Principles Board
Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation
of basic and diluted earnings per share. Basic earnings per share, which
excludes the impact of common stock equivalents, replaces primary earnings per
share. Diluted earnings per share, which utilizes the average market price per
share as opposed to the greater of the average market price per share or ending
market price per share when applying the treasury stock method in determining
common stock equivalents, replaces fully-diluted earnings per share. SFAS No.
128 is effective for the Company in 1997. The following pro forma earnings
(loss) per common share information assumes SFAS No. 128 was adopted in 1994
(in thousands, except per share amounts):
1996 1995 1994
---- ---- ----
Reported:
Earnings (loss) per common share $ 0.24 $ 0.46 $ (0.09)
Weighted average number of common and
common equivalent shares outstanding 139,740 113,279 103,422
Pro forma:
Basic earnings (loss) per common share $ 0.25 $ 0.48 $ (0.09)
Basic weighted average shares outstanding 133,892 109,623 100,296
Diluted earnings (loss) per common share $ 0.24 $ 0.46 $ (0.09)
Diluted weighted average shares outstanding 139,740 113,279 103,422
23
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
----
(1) Consolidated Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Balance Sheets as of
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 32
(2) Consolidated Financial Statement Schedules:
All financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the consolidated financial statements or the notes thereto.
24
27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of USA Waste Services, Inc.:
We have audited the accompanying consolidated balance sheets of USA Waste
Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Waste
Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 21, 1997
25
28
USA WASTE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Par Value Amounts)
December 31,
--------------------------
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 23,511 $ 21,058
Accounts receivable, net of allowance for doubtful
accounts of $14,426 and $7,730, respectively 210,038 136,247
Notes and other receivables 25,579 15,704
Deferred income taxes 39,714 20,101
Prepaid expenses and other 41,139 33,026
----------- -----------
Total current assets 339,981 226,136
Notes and other receivables 49,059 19,907
Property and equipment, net 1,810,251 1,319,199
Excess of cost over net assets of acquired businesses, net 433,913 206,638
Other intangible assets, net 83,486 55,567
Deferred income taxes -- 19,023
Other assets 113,815 87,087
----------- -----------
Total assets $ 2,830,505 $ 1,933,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 94,900 $ 64,437
Accrued liabilities 172,916 67,198
Deferred revenues 23,450 10,876
Current maturities of long-term debt 28,695 53,516
----------- -----------
Total current liabilities 319,961 196,027
Long-term debt, less current maturities 1,158,305 678,225
Deferred income taxes 8,786 --
Closure, post-closure, and other liabilities 188,177 151,683
----------- -----------
Total liabilities 1,675,229 1,025,935
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value;
10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value;
300,000,000 shares authorized;
139,609,250 and 124,019,297 shares issued, respectively 1,396 1,240
Additional paid-in capital 1,255,856 1,041,573
Accumulated deficit (85,649) (118,595)
Foreign currency translation adjustment (15,843) (14,777)
Less treasury stock at cost, 23,485 and 138,810 shares, respectively (484) (1,819)
----------- -----------
Total stockholders' equity 1,155,276 907,622
----------- -----------
Total liabilities and stockholders' equity $ 2,830,505 $ 1,933,557
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
29
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating revenues $ 1,313,388 $ 987,705 $ 897,644
----------- ----------- -----------
Costs and expenses:
Operating 704,917 551,305 520,255
General and administrative 160,539 140,051 138,819
Depreciation and amortization 153,168 119,570 112,860
Merger costs 120,656 25,639 3,782
Unusual items 63,800 4,733 8,863
----------- ----------- -----------
1,203,080 841,298 784,579
----------- ----------- -----------
Income from operations 110,308 146,407 113,065
----------- ----------- -----------
Other income (expense):
Shareholder litigation settlement
and other litigation related costs -- -- (79,400)
Interest expense:
Nonrecurring interest -- (10,994) (1,254)
Other (45,547) (48,558) (47,678)
Interest income 5,267 5,482 4,670
Other income, net 8,060 5,143 2,570
----------- ----------- -----------
(32,220) (48,927) (121,092)
----------- ----------- -----------
Income (loss) before income taxes 78,088 97,480 (8,027)
Provision for income taxes 45,142 44,992 1,015
----------- ----------- -----------
Net income (loss) 32,946 52,488 (9,042)
Preferred dividends -- -- 565
----------- ----------- -----------
Income (loss) available to common stockholders $ 32,946 $ 52,488 $ (9,607)
=========== =========== ===========
Earnings (loss) per common share $ 0.24 $ 0.46 $ (0.09)
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 139,740 113,279 103,422
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
27
30
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Foreign
Additional Currency
Preferred Common Paid-in Accumulated Translation Treasury
Stock Stock Capital Deficit Adjustment Stock
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 1994 $ 14 $ 965 $ 688,199 $ (151,331) $ -- $ (2,858)
Common stock options exercised -- 3 3,486 -- -- --
Common stock warrants exercised -- 3 148 -- -- --
Common stock issued to qualified defined
contribution plan -- 8 5,277 -- -- --
Common stock issued in acquisitions -- 26 27,799 -- -- --
Common stock issued from treasury upon
exercise of stock options -- -- (597) -- -- 897
Common stock issued for preferred
stock dividends -- 1 1,390 (565) -- --
Conversion of preferred stock into
common stock (14) 19 (5) -- -- --
Adjustment for contingent consideration
under guaranteed value commitments -- -- 3,703 -- -- --
Foreign currency translation adjustment -- -- -- -- (7,354) --
Other -- 2 442 -- -- --
Net loss -- -- -- (9,042) -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 -- 1,027 729,842 (160,938) (7,354) (1,961)
Common stock options exercised -- 3 2,822 -- -- --
Common stock warrants exercised -- 9 3,692 -- -- --
Common stock issued to qualified defined
contribution plan -- 4 3,529 -- -- --
Common stock issued in acquisitions
and development projects -- 71 80,001 -- -- --
Common stock issued from treasury
upon exercise of stock options -- -- (89) -- -- 142
Common stock issued for conversion of
subordinated debentures -- 37 46,704 -- -- --
Common stock issued in public offerings -- 99 180,513 -- -- --
Elimination of investment in Western
common stock -- (10) (11,358) -- -- --
Change in Western fiscal year -- -- -- (8,865) -- --
Adjustment for contingent consideration
under guaranteed value commitments -- -- 5,340 -- -- --
Foreign currency translation adjustment -- -- -- -- (7,423) --
Transactions of pooled companies -- -- -- (1,280) -- --
Other -- -- 577 -- -- --
Net income -- -- -- 52,488 -- --
----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 1995 $ -- $ 1,240 $ 1,041,573 $ (118,595) $ (14,777) $ (1,819)
Continued
28
31
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued
(In Thousands)
Foreign
Additional Currency
Preferred Common Paid-in Accumulated Translation Treasury
Stock Stock Capital Deficit Adjustment Stock
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 $ -- $ 1,240 $ 1,041,573 $ (118,595) $ (14,777) $ (1,819)
Common stock options exercised -- 20 21,654 -- -- --
Common stock warrants exercised -- 5 3,700 -- -- --
Common stock issued to qualified defined
contribution plan -- 3 473 -- -- --
Common stock issued in purchase acquisitions
and development projects -- 47 118,263 -- -- --
Common stock issued for acquisitions accounted
for as poolings of interests -- 42 6,302 -- -- --
Common stock returned for acquisition
settlement -- -- -- -- -- (751)
Common stock issued for investment in company -- 4 1,588 -- -- --
Common stock issued from treasury upon
exercise of stock options -- -- (481) -- -- 1,698
Common stock issued from treasury upon
exercise of stock warrants -- -- (119) -- -- 388
Common stock issued for conversion of
subordinated debentures -- 35 59,590 -- -- --
Restricted common stock, net of forfeitures -- -- 2,204 -- -- --
Foreign currency translation adjustment -- -- -- -- (1,066) --
Other -- -- 1,109 -- -- --
Net income -- -- -- 32,946 -- --
----------- ---------- ---------- ---------- ---------- -----------
Balance, December 31, 1996 $ -- $ 1,396 1,255,856 (85,649) (15,843) (484)
=========== ========== ========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
29
32
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 32,946 $ 52,488 $ (9,042)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 153,168 119,570 112,860
Deferred income taxes 2,903 12,358 (26,039)
Net gain on disposal of property and equipment (5,110) (1,259) (1,172)
Effect of nonrecurring charges 61,144 -- --
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and other receivables (76,371) (11,833) (19,575)
Prepaid expenses and other (5,388) (2,199) (1,090)
Other assets 8,697 (3,532) (5,989)
Accounts payable and accrued liabilities 61,154 (10,761) 8,600
Accrued shareholder litigation settlement -- (85,300) 85,300
Deferred revenues and other liabilities (26,804) 4,543 7,207
Other, net (1,181) (1,773) (23)
--------- --------- ---------
Net cash provided by operating activities 205,158 72,302 151,037
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (348,354) (229,497) (186,979)
Acquisitions of businesses, net of cash acquired (281,158) (89,968) (40,480)
Proceeds from sale of property and equipment 77,223 9,701 19,860
Loans and advances to others (18,399) (19,660) (7,504)
Collection of loans and advances to others 15,010 4,880 1,785
Change in restricted funds (21,851) 7,388 11,354
Proceeds from sale of investments -- 1,200 1,200
Other -- (612) (590)
--------- --------- ---------
Net cash used in investing activities (577,529) (316,568) (201,354)
--------- --------- ---------
continued
30
33
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In Thousands)
Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 1,263,880 $ 503,123 $ 149,644
Principal payments on long-term debt (913,767) (454,893) (131,567)
Net proceeds from issuance of common stock -- 185,927 7,241
Proceeds from exercise of common stock options 22,891 1,964 492
Proceeds from exercise of common stock warrants 3,974 3,701 151
Elimination of investment in Western -- (12,569) --
Other (2,269) (1,718) (1,481)
----------- ----------- -----------
Net cash provided by financing activities 374,709 225,535 24,480
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 115 (178) (84)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 2,453 (18,909) (25,921)
Cash and cash equivalents at beginning of year 21,058 39,967 65,888
----------- ----------- -----------
Cash and cash equivalents at end of year $ 23,511 $ 21,058 $ 39,967
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 62,223 $ 59,206 $ 48,030
Income taxes 27,374 41,210 26,294
Non-cash investing and financing activities:
Acquisitions of property and equipment through capital leases $ -- $ 7,600 $ 6,808
Note receivable from sale of property and equipment 27,800 -- --
Conversion of subordinated debentures to common stock 60,000 49,000 --
Issuance of common stock for preferred stock dividends -- -- 1,390
Acquisitions of businesses and development projects:
Liabilities incurred or assumed 326,493 25,332 11,028
Common stock issued 124,655 71,243 27,825
The accompanying notes are an integral part of these consolidated financial
statements.
31
34
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- USA Waste Services, Inc. and subsidiaries (the "Company") is
engaged in the non-hazardous solid waste management business and provides solid
waste management services, consisting of collection, transfer, disposal,
recycling, and other miscellaneous services to municipal, commercial,
industrial, and residential customers. The Company conducts operations through
subsidiaries in multiple locations throughout the United States, primarily, and
in Canada, Puerto Rico, and Mexico.
Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company owns
50% or less are accounted for under the equity method or cost method of
accounting, as appropriate.
Use of 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 assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts for certain revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.
Restricted funds held by trustees -- Restricted funds held by trustees of
$49,618,000 and $31,716,000 at December 31, 1996 and 1995, respectively, are
included in other assets and consist principally of funds deposited in
connection with landfill closure and post-closure obligations, insurance escrow
deposits, and amounts held for landfill construction arising from industrial
revenue financings. Amounts are principally invested in fixed income
securities of federal, state, and local governmental entities and financial
institutions. The Company considers its landfill closure, post- closure, and
construction escrow investments to be held to maturity. At December 31, 1996,
the aggregate fair value of these investments approximates their amortized
costs and substantially all of these investments mature within one year. The
Company's insurance escrow funds are invested in pooled investment accounts
that hold debt and equity securities and are considered to be available for
sale. The market value of those pooled accounts approximates their aggregate
cost at December 31, 1996.
Concentrations of credit risk -- Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
investments and accounts receivable. The Company places its cash investments
with high quality financial institutions and limits the amount of credit
exposure to any one institution. Concentrations of credit risk with respect to
accounts receivable are limited because a large number of geographically
diverse customers make up the Company's customer base, thus spreading the trade
credit risk. No single group or customer represents greater than 10% of total
accounts receivable. The Company controls credit risk through credit
approvals, credit limits, and monitoring procedures. The Company performs
in-depth credit evaluations for commercial and industrial customers and
performs ongoing credit evaluations of its customers' financial condition but
generally does not require collateral to support accounts receivable. The
Company maintains an allowance for doubtful accounts for potential credit
losses.
Interest rate swap agreements -- The Company uses interest rate swap agreements
to minimize the impact of interest rate fluctuations on floating interest rate
long-term borrowings. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest expense.
Property and equipment -- Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance, and repairs are charged to expense as incurred. When
property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in results of operations. Depreciation is provided over the
estimated useful lives of the related assets using the straight-line method.
The estimated useful lives are five to thirty-five years for buildings and
improvements, three to twelve years for vehicles and machinery and equipment,
three to twelve years for containers, and three to ten years for furniture and
fixtures.
32
35
Disposal sites are stated at cost and amortized ratably using the
units-of-production method as airspace is consumed. Disposal site costs
include expenditures for acquisitions of land and related airspace, engineering
and permitting costs, direct site improvement costs, and capitalized interest.
During the years ended December 31, 1996, 1995, and 1994, interest costs were
$65,054,000, $72,011,000, and $58,760,000, respectively, of which $19,507,000,
$12,459,000, and $9,828,000 were capitalized, respectively, with respect to
landfills and facilities under construction.
Excess of cost over net assets of acquired businesses -- The excess of cost
over net assets of acquired businesses is amortized on a straight-line basis
over 40 years commencing on the dates of the respective acquisitions.
Accumulated amortization was $27,429,000 and $19,619,000 at December 31, 1996
and 1995, respectively.
Accounting for business combinations -- The Company assesses each acquisition
to determine whether the pooling of interests or the purchase method of
accounting is appropriate. For those acquisitions accounted for under the
pooling of interests method, the financial statements of the acquired company
are combined with those of the Company at their historical amounts, and, if
material, all periods presented are restated as if the combination occurred on
the first day of the earliest year presented. For those acquisitions accounted
for using the purchase method of accounting, the Company allocates the cost of
the acquired business to the assets acquired and the liabilities assumed based
on estimates of fair values thereof. These estimates are revised during the
allocation period as necessary when information regarding contingencies becomes
available to define and quantify assets acquired and liabilities assumed. The
allocation period varies for each acquisition, but generally does not exceed
one year. To the extent contingencies such as preacquisition environmental
matters, litigation and related legal fees, and preacquisition tax matters are
resolved or settled during the allocation period, such items are included in
the revised allocation of the purchase price. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods in which the adjustments are determined.
Other intangible assets -- Other intangible assets consist primarily of
customer lists, covenants not to compete, licenses, permits, and start-up
costs. Other intangible assets are recorded at cost and amortized on a
straight-line basis over three to forty years. Accumulated amortization was
$66,057,000 and $55,762,000 at December 31, 1996 and 1995, respectively.
Long-lived assets -- Long-lived assets consist primarily of excess of cost
over net assets of acquired businesses and disposal sites. The recoverability
of long-lived assets is evaluated at the operating unit level by an analysis of
operating results and consideration of other significant events or changes in
the business environment. If an operating unit has current operating losses
and based upon projections there is a likelihood that such operating losses
will continue, the Company will evaluate whether impairment exists on the basis
of undiscounted expected future cash flows from operations before interest for
the remaining amortization period. If impairment exists, the carrying amount
of the long-lived assets is reduced to its estimated fair value.
Closure, post-closure, and other liabilities -- The Company has material
financial commitments for the costs associated with its future obligations for
final closure and post-closure of landfills it operates or for which it is
otherwise responsible. While the precise amount of these future costs cannot be
determined with certainty, the Company has estimated that the aggregate final
closure and post-closure costs for all sites owned or operated as of December
31, 1996 will be approximately $273,159,000. As of December 31, 1996 and 1995,
the Company has accrued $117,762,000 and $98,066,000, respectively, for final
closure and post-closure costs of disposal facilities. The difference between
the final closure and post-closure costs accrued as of December 31, 1996 and
the total estimated final closure and post-closure costs to be incurred will
be accrued and charged to expense as airspace is consumed such that the total
estimated final closure and post-closure costs will be fully accrued for each
landfill at the time the site discontinues accepting waste and is closed. The
Company also expects to incur an estimated $658,121,000 related to future
capping activities during the remaining operating lives of these disposal
sites. These costs are also being charged to expense over the useful lives of
the disposal sites as airspace is consumed.
The Company bases its estimates for these accruals on management's reviews,
typically performed not less than annually, including input from its engineers
and accountants and interpretations of current requirements and proposed
regulatory changes. The closure and post-closure requirements are established
under the standards of the U.S. Environmental Protection Agency's Subtitle D
regulations as implemented and applied on a state-by-state basis. Final closure
and post-closure accruals consider estimates for the final cap and cover for
the site, methane gas control, leachate management and groundwater monitoring,
and other operational and maintenance costs to be incurred after the site
discontinues accepting waste, which is generally expected to be for a period of
up to thirty years after final site closure. For disposal sites that were
previously operated by others, the Company assessed and recorded a final
closure and post-closure liability at the time the Company assumed closure
responsibility based upon the estimated total closure and post-closure costs
and the percentage of airspace utilized as of such date. Thereafter, the
difference between the final closure and post-closure costs accrued and the
total estimated closure and post-closure costs to be incurred is accrued and
charged to expense as airspace is consumed.
33
36
Income taxes -- Deferred income taxes are determined based on the difference
between the financial reporting and tax bases of assets and liabilities.
Deferred income tax expense represents the change during the period in the
deferred income tax assets and deferred income tax liabilities. Deferred tax
assets include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Foreign currency translation -- The functional currency of the Company's
international operations is the local currency. Adjustments resulting from the
translation of financial information are reflected as a separate component of
stockholders' equity.
Revenue recognition -- The Company recognizes revenues as services are
provided. Amounts billed and collected prior to services being performed are
included in deferred revenues.
Earnings per common share -- Earnings per common share computations are based
on the weighted average number of shares of common stock outstanding and the
dilutive effect of stock options and warrants using the treasury stock method.
Reclassifications -- Certain previously reported amounts have been reclassified
to conform to the 1996 presentation.
New accounting pronouncement -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"). SFAS No. 128 specifies the computation,
presentation, and disclosure requirements of earnings per share and supercedes
Accounting Principles Board Opinion No. 15, Earnings Per Share. SFAS No. 128
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share, which excludes the impact of common stock equivalents,
replaces primary earnings per share. Diluted earnings per share, which
utilizes the average market price per share as opposed to the greater of the
average market price per share or ending market price per share when applying
the treasury stock method in determining common stock equivalents, replaces
fully-diluted earnings per share. SFAS No. 128 is effective for the Company in
1997. The following pro forma earnings per common share information assumes
SFAS No. 128 was adopted in 1994 (in thousands, except per share amounts):
1996 1995 1994
----------- ----------- -----------
Basic earnings per common share $ 0.25 $ 0.48 $ (0.09)
Basic weighted average shares outstanding 133,892 109,623 100,296
Diluted earnings per common share $ 0.24 $ 0.46 $ (0.09)
Diluted weighted average shares outstanding 139,740 113,279 103,422
2. BUSINESS COMBINATIONS
1996 Pooling of Interests Acquisitions
On August 30, 1996, the Company consummated a merger agreement with Sanifill,
Inc. ("Sanifill") accounted for as a pooling of interests (the "Sanifill
Merger") and, accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of Sanifill for all
periods presented. Under the terms of the Sanifill Merger, the Company issued
1.70 shares of its common stock for each share of Sanifill outstanding common
stock. The Sanifill Merger increased the Company's outstanding shares of
common stock by approximately 43,414,000 shares and the Company assumed
Sanifill's options and warrants equivalent to approximately 4,361,000
underlying shares of Company common stock. In the third quarter of 1996, the
Company incurred approximately $80,000,000 in merger related costs associated
with the Sanifill Merger, of which approximately $24,280,000 is remaining in
accrued liabilities at December 31, 1996. The $80,000,000 of merger costs
includes $9,500,000 of transaction costs, $20,000,000 of relocation, severance,
and other termination benefits, $13,000,000 of costs relating to integrating
operations, and $37,500,000 of disposal of duplicate facilities. The results
of operations for Sanifill prior to consummation of the merger for the restated
periods are as follows (in thousands):
Six Months Ended
June 30, 1996 Years Ended December 31,
------------- -----------------------
(unaudited) 1995 1994
---------- ---------- ----------
Operating revenues $ 181,406 $ 256,705 $ 192,479
Net income 18,964 27,913 19,233
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On May 15, 1996, the Company consummated a merger agreement with Grand Central
Sanitation, Inc. and related companies ("Grand Central"), accounted for as a
pooling of interests, pursuant to which the Company issued 2,067,605 shares of
its common stock in exchange for all outstanding shares of Grand Central. The
Company has restated its previously issued consolidated financial statements
for the three months ended March 31, 1996 to include the accounts and
operations of Grand Central, which had operating revenues and net income of
$8,455,000 and $1,538,000, respectively, during that period. Periods prior to
1996 were not restated as combined results are not materially different from
results as presented. Related to this merger, the Company incurred $2,700,000
of merger costs in the second quarter of 1996.
On May 7, 1996, the Company consummated a merger agreement with Western Waste
Industries ("Western") accounted for as a pooling of interests (the "Western
Merger") and, accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of Western for all
periods presented. Under the terms of the Western Merger, the Company issued
1.50 shares of its common stock for each share of Western outstanding common
stock. Prior to the Western Merger, the Company owned approximately 4.1% of
Western's outstanding shares (634,900 common shares), which were canceled on
the Western Merger's effective date. The Western Merger increased the
Company's outstanding shares of common stock by approximately 22,028,000 shares
and the Company assumed options under Western's stock option plans equivalent
to approximately 5,200,000 underlying Company shares of common stock. In the
second quarter of 1996, the Company incurred approximately $35,000,000 in
merger related costs associated with the Western Merger and approximately
$4,800,000 in benefits related to Western's pre-merger retirement program. The
$35,000,000 of merger costs include $6,800,000 of transaction costs,
$15,000,000 of severance and other termination benefits, and $13,200,000 of
costs related to integrating operations.
In connection with the Western Merger, Western changed its fiscal year end from
June 30 to December 31 to conform with the Company's year end. Western's
operating results for the six months ended June 30, 1995, were included in the
consolidated statements of operations for both of the years ended December 31,
1995 and 1994. The following is a consolidated summary of operations for
Western for the six months ended June 30, 1995 (in thousands):
Operating revenues $136,123
Net income 8,865
The consolidated financial statements for 1994 have not been restated for the
change in Western's fiscal year. The consolidated financial statements for
1994 include Western for the year ended June 30, 1995. The results of
operations for Western prior to consummation of the merger for the restated
periods are as follows (in thousands):
Three Months Ended
March 31, 1996 Years Ended December 31,
-------------- -----------------------
(unaudited) 1995 1994
-------- ---------
Operating revenues $68,441 $273,901 $270,941
Net income 4,703 17,021 17,089
On May 31, 1996, July 19, 1996, and August 30, 1996, the Company consummated
mergers accounted for as poolings of interests, pursuant to which the Company
issued 900,001, 475,330, and 648,318 shares of its common stock, respectively,
in exchange for all outstanding shares of the acquired companies. Periods
prior to consummation of the mergers were not restated to include the accounts
and operations of the acquired companies as combined results are not materially
different from the results as presented.
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1995 Pooling of Interests Acquisitions
On June 30, 1995, the Company consummated a merger agreement with Chambers
Development Company, Inc. ("Chambers") accounted for as a pooling of interests
and, accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of Chambers for all periods
presented. Under the terms of the merger agreement, approximately 27,800,000
shares of the Company's common stock were issued in exchange for all
outstanding shares of Chambers common stock and Class A common stock. Related
to this merger, the Company incurred $25,073,000 in merger costs in the second
quarter of 1995, which includes $11,900,000 of transaction costs, $9,473,000 of
severance and other termination benefits, and $3,700,000 of costs related to
integrating operations. The results of operations for Chambers prior to
consummation of the merger for the restated periods are as follows (in
thousands):
Three Months Ended
March 31, 1995
-------------- Year Ended
(unaudited) December 31, 1994
-----------------
Operating revenues $54,734 $257,989
Net loss (5,269) (90,244)
On May 31, 1995, the Company consummated a merger agreement with Metropolitan
Disposal and Recycling Corporation, Energy Reclamation, Inc., and EE Equipment,
Inc. (collectively "MDC") accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of MDC for all periods
presented. Under the terms of the merger agreement, approximately 1,900,000
shares of the Company's common stock were issued in exchange for all
outstanding shares of MDC common stock. Related to this merger, the Company
incurred $566,000 in merger costs in the second quarter of 1995. The results
of operations for MDC prior to consummation of the merger for the restated
periods are as follows (in thousands):
Three Months Ended
March 31, 1995
-------------- Year Ended
(unaudited) December 31, 1994
-----------------
Operating revenues $5,256 $19,654
Net income 458 401
On August 11, 1995 and November 13, 1995, the Company consummated mergers
accounted for as poolings of interests, pursuant to which the Company issued
800,000 and 1,787,502 shares of its common stock, respectively, in exchange for
all outstanding shares of the acquired companies. Periods prior to
consummation of these mergers were not restated to include the accounts and
operations of the acquired companies as combined results are not materially
different from the results as presented.
1994 Pooling of Interests Acquisition
On May 27, 1994, the Company consummated a merger agreement with Envirofil,
Inc. ("Envirofil") accounted for as a pooling of interests and, accordingly,
the accompanying consolidated financial statements have been restated to
include the accounts and operations of Envirofil for all periods presented.
Under the terms of the merger agreement, approximately 9,700,000 shares of the
Company's common stock were issued in exchange for all outstanding shares of
Envirofil common stock. Related to this acquisition, the Company incurred
$3,782,000 in merger costs in the second quarter of 1994.
1996 and 1995 Purchase Acquisitions
During 1996 and 1995, the Company consummated several acquisitions that were
accounted for under the purchase method of accounting. Results of operations of
companies that were acquired and subject to purchase accounting are included
from the dates of such acquisitions. The total costs of acquisitions accounted
for under the purchase method were $480,805,000 and $167,095,000 in 1996 and
1995, respectively. The excess of the aggregate purchase price over the fair
value of net assets acquired in 1996 and 1995 was approximately $229,074,000
and $70,751,000, respectively.
In addition, the Company has agreed in connection with certain transactions, to
pay additional amounts to the sellers upon the achievement by the acquired
businesses of certain negotiated goals, such as targeted revenue levels,
targeted disposal volumes, or the issuance of permits for expanded landfill
airspace. Although the amount and timing of any payments of additional
contingent consideration necessarily depend on whether and when these goals are
met, the maximum aggregate amount of contingent consideration potentially
payable if all payment goals are met is $72,075,000, of which $19,075,000
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relates to revenue and volume targets and $53,000,000 relates to permit
expansions. The contingent consideration is payable in cash or, in some
instances, in cash or stock, at the Company's option. In addition, the Company
has agreed in connection with certain acquisitions to provide royalties based
on revenues generated at the applicable disposal site to sellers of waste
disposal businesses. The foregoing quantification of contingent consideration
does not include such royalty payments.
The unaudited pro forma information set forth below assumes 1996 and 1995
acquisitions accounted for as purchases occurred at the beginning of 1995. The
unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions been consummated at that time (in
thousands, except per share amounts):
Years Ended December 31,
-----------------------------
1996 1995
---------- ----------
Operating revenues $1,469,136 $1,378,099
Net income 49,174 82,326
Earnings per common share 0.35 0.68
3. DIVESTITURES
In August 1996, the Company sold its five nonhazardous oil field waste transfer
stations and, in December 1996, the Company sold its six nonhazardous oil field
waste treatment facilities. Total consideration for the combined sale of the
nonhazardous oil field waste business consisted of $70,500,000 in cash,
$27,800,000 in the form of a five year note bearing interest at a rate of 7.5%,
and 2,000 warrants for the purchase of the buyer's stock. These transactions
resulted in a gain of $22,080,000, of which $18,280,000 is to be recognized
over the term of the note receivable. At December 31, 1996, the deferred gain
and note receivable were approximately $17,400,000 and $26,410,000,
respectively.
On December 31, 1993, Chambers sold its two transfer stations in Morris County,
New Jersey, to the Morris County Municipal Utilities Authority ("MCMUA") for
$9,500,000 in cash, which resulted in a deferred gain of $3,950,000.
Simultaneous with entering into the agreement for the sale of these transfer
stations, Chambers and the MCMUA amended their operating and disposal service
agreement, pursuant to which Chambers operates the transfer stations and
provides waste disposal services, reducing the rates charged for such services
in 1994 and 1995. As a result of the interrelationship of the sale of the
transfer stations and the operating and disposal service agreement, the gain on
sale was deferred and recognized in 1994 as services were provided. As part of
the agreement of sale, the Company has continued to operate the transfer
stations and provide waste disposal services.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
--------------------------
1996 1995
----------- -----------
Disposal sites, including costs incurred for expansion projects
in process of $47,260 and $70,954, respectively $ 1,450,398 $ 1,020,388
Vehicles 327,605 220,754
Machinery and equipment 143,034 153,703
Containers 175,482 133,994
Buildings and improvements 142,460 108,081
Furniture and fixtures 35,597 29,261
Land 108,562 93,866
----------- -----------
2,383,138 1,760,047
Less accumulated depreciation and amortization (572,887) (440,848)
----------- -----------
$ 1,810,251 $ 1,319,199
=========== ===========
Depreciation and amortization of property and equipment was $133,763,000,
$101,826,000, and $93,678,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
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5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
-----------------------
1996 1995
---------- ----------
Credit facility:
Revolving credit facility $ 637,000 $ 51,613
Term loan facility -- 215,835
Sanifill credit facility -- 58,000
Western credit facility -- 41,000
Senior notes, maturing in varying annual installments
through June 2005, interest ranging from 7.29% to 8.44% 107,500 109,416
Convertible subordinated debentures, interest at 5% 115,000 --
Convertible subordinated debentures, interest at 7 1/2% -- 58,213
Subordinated debt, maturing in varying monthly installments
through January 2008, interest ranging from 7.25% to 10% 5,589 7,493
Industrial revenue bonds, principal payable in annual installments,
maturing in 1996-2009, variable interest rates (3.76% to 3.92%
at December 31, 1996), enhanced by letters of credit 164,639 130,374
Other 157,272 59,797
---------- ----------
1,187,000 731,741
Less current maturities 28,695 53,516
---------- ----------
$1,158,305 $ 678,225
========== ==========
The aggregate estimated payments, including scheduled minimum maturities, of
long-term obligations outstanding at December 31, 1996 for the five years
ending December 31, 1997 through 2001 are: 1997 -- $28,695; 1998 -- $28,393;
1999 - - $143,725; 2000 -- $34,537; and 2001 -- $752,223.
On May 7, 1996, in connection with the Western Merger, the Company replaced its
existing credit facility with a $750,000,000 senior revolving credit facility
and retired amounts outstanding under Western's credit facility. The credit
facility was used to refinance existing bank loans and letters of credit, to
fund additional acquisitions, and for working capital. The credit facility was
available for standby letters of credit of up to $300,000,000. Loans under the
credit facility bore interest at a rate based on the Eurodollar rate plus a
spread not to exceed 0.75% per annum (spread initially set at 0.405% per
annum). The credit facility required a facility fee not to exceed 0.375% per
annum on the entire available credit facility (facility fee initially set at
0.22% per annum).
On August 30, 1996, in connection with the Sanifill Merger, the Company
replaced the $750,000,000 senior revolving credit facility with a
$1,200,000,000 senior revolving credit facility ("Credit Facility") and retired
amounts under Sanifill's credit facility. The Credit Facility was used to
refinance existing bank loans and letters of credit and to fund additional
acquisitions and working capital. The Credit Facility was available for
standby letters of credit of up to $400,000,000. Loans under the Credit
Facility bore interest at a rate based on the Eurodollar rate plus a spread not
to exceed 0.75% per annum (spread set at 0.30% per annum, or an applicable
interest rate of 5.87% per annum at December 31, 1996). The Credit Facility
required a facility fee not to exceed 0.375% per annum on the entire available
Credit Facility (facility fee set at 0.15% per annum at December 31, 1996).
The Credit Facility contained financial covenants with respect to interest
coverage and debt capitalization ratios. The Credit Facility also contained
limitations on dividends, additional indebtedness, liens, and asset sales.
Principal reductions were not required during the five-year term of the Credit
Facility. On March 5, 1997, the Credit Facility was replaced with a
$1,600,000,000 senior revolving credit facility with the same general terms,
covenants, and limitations, which is available for standby letters of credit of
up to $500,000,000.
On March 4, 1996, Sanifill issued $115,000,000 of 5% convertible subordinated
debentures, due on March 1, 2006. Interest is payable semi-annually in March
and September. The debentures are convertible into shares of the Company's
common stock at a conversion price of $28.31 per share. The debentures are
subordinated in right of payment to all existing and future senior
indebtedness, as defined. The debentures are redeemable after March 15, 1999
at the option of the Company at 102.5% of the principal amount, declining
annually to par on March 1, 2002, plus accrued interest. Deferred offering
costs of approximately $2,900,000 were incurred and are being amortized ratably
over the life of the debentures. The proceeds were used to repay debt under
Sanifill's credit facility.
In May 1991, Sanifill issued $60,000,000 of 7 1/2% convertible subordinated
debentures due on June 1, 2006. Interest was payable semiannually in June and
December. The debentures were convertible into shares of the Company's common
stock
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at a conversion price of $16.95 per share. The debentures were subordinated in
right of payment to all existing and future senior indebtedness, as defined.
The debentures were redeemable after June 1, 1994 at the option of the Company
at 105.25% of the principal amount, declining annually to par on June 1, 2001,
plus accrued interest. Deferred offering costs of approximately $2,600,000
were incurred and were being amortized ratably over the life of the debentures.
On March 18, 1996, Sanifill called for redemption all of its $60,000,000 of
7 1/2% convertible subordinated debentures due June 1, 2006 at redemption price
of 104.5% of their face amount plus accrued interest from December 1, 1995 to,
and including, the redemption date of April 17, 1996. Alternatively, holders
of these debentures were allowed to convert their debentures into common stock
at any time prior to the close of business on April 10, 1996, at a conversion
price equal to $16.95 per share. Holders electing to convert received 34.7
shares of Sanifill's common stock for each $1,000 principal amount of
debentures surrendered. The $60,000,000 of debentures were ultimately
converted to approximately 3,570,000 shares of Company common stock. Deferred
offering costs of approximately $1,700,000 were recorded as a reduction to
additional paid-in-capital.
During 1996, the Company guaranteed specific obligations of two unconsolidated
affiliates totaling approximately $25,000,000. The Company is of the opinion
that these unconsolidated affiliates will be able to perform under their
respective obligations and that no payments will be required and, due to the
Company's ability to assume a senior debt position no losses will be incurred
under such guarantees.
On October 6, 1995, the Company completed a public offering of 6,345,625 shares
of its common stock, priced at $19.625 per share. The net proceeds of
approximately $118,000,000 were primarily used for the repayment of debt.
Approximately 75% of the proceeds were applied to the Company's credit facility
and the remainder was utilized for expansion through acquisitions.
In September 1992, the Company issued $49,000,000 of 8 1/2% convertible
subordinated debentures due October 15, 2002, with interest payable
semi-annually. The debentures were convertible into the Company's common stock
at any time on or before maturity, unless previously redeemed, at $13.25 per
share, subject to adjustment in certain events. The Company had an option to
redeem the debentures, in whole or in part, at any time on or after October 15,
1995, at an original redemption price of 105.67% of the principal amount,
declining to par over the term of the debentures. Between November 3, 1995 and
December 1, 1995, the Company converted the remaining balance of the debentures
of approximately $42,300,000 into approximately 3,193,000 shares of the
Company's common stock. The unamortized premium of $1,983,000 as of December
1, 1995, was recorded as a reduction to additional paid-in capital. Earlier in
1995, approximately $6,700,000 of debentures had been converted into
approximately 505,000 shares of the Company's common stock.
If the aforementioned public offering and subordinated debenture conversion
transactions, which occurred in October 1995 and November 1995, respectively,
had occurred on January 1, 1995, earnings per common share would have increased
by $0.03 for the year ended December 31, 1995 due to a reduction in interest
expense resulting from the retirement of long-term debt. Weighted average
number of common and common equivalent shares outstanding would have been
121,275,000.
As of December 31, 1995, the Company had borrowed $267,448,000 under its
$550,000,000 financing agreement, which consisted of a $300,000,000 five-year
revolving credit and letter of credit facility and a $250,000,000 term loan
facility. Revolving credit loans under the credit facility were limited to
$180,000,000 at December 31, 1995, less the amount of any future industrial
revenue bonds enhanced by letters of credit under the credit facility. Loans
bore interest at the Eurodollar rate or the prime rate, plus a spread not to
exceed 1.75% per annum (the applicable interest rate at December 31, 1995 was
7.31%). The credit facility was also used for letters of credit purposes with
variable fees from 0.5% to 1.75% per annum (1.5% at December 31, 1995) charged
on amounts issued. A commitment fee of up to 0.5% was required on the unused
portion of the credit facility.
In August 1995, the Company entered into a three year interest rate swap
agreement whereby the Company fixed a maximum interest rate on $125,000,000 of
its credit facility. The interest rate was a fixed annual rate of
approximately 5.9% plus the applicable spread over the Eurodollar rate (not to
exceed 1.75% per annum) as determined under the Credit Facility (6.20% at
December 31, 1996).
As of December 31, 1995, Sanifill had borrowed $58,000,000 under its
$225,000,000 credit facility, had $127,200,000 available under its credit
facility, and had utilized $39,800,000 of its credit facility for letters of
credit relating to landfill closure and post-closure obligations and securing
industrial revenue bonds and insurance contracts. Sanifill's credit facility
was paid off on August 30, 1996. The revolving credit facility provided for a
revolving credit period expiring on November 30, 1997, at which time it was to
convert to a term facility with a final maturity date of November 30, 2001.
Availability under this credit facility was tied to the Company's cash flow and
liquidity. Advances bore interest, at Sanifill's option, at the prime rate or
London Interbank Offered Rate ("LIBOR"), in each case, plus a margin which was
calculated quarterly based upon Sanifill's ratio of indebtedness to cash flow,
or, in an amount not to exceed $100,000,000, at a rate negotiated
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between Sanifill and certain banks party to the revolving credit facility
(6.84% at December 31, 1995). Under the terms of the credit facility, Sanifill
was required to maintain certain financial covenants regarding net worth,
coverage ratios, and additional indebtedness.
Western's credit facility consisted of a revolving line of credit and permitted
borrowings up to $100,000,000. At Western's option, borrowings under the
credit facility bore interest at the bank's prime rate and/or at LIBOR plus
0.75% to 2% per annum, depending upon certain financial ratios of Western
(6.69% at December 31, 1995). A commitment fee of 0.375% per annum was
required on the unused portion of the credit facility. Western's credit
facility was paid off on May 7, 1996. Under the terms of the credit facility,
Western was subject to various debt covenants including maintenance of certain
financial ratios, and in addition, was limited in the amount of cash dividends
it could pay.
The senior notes outstanding at December 31, 1996 are unsecured and require the
Company to maintain certain financial covenants regarding net worth, coverage
ratios, and additional indebtedness. The first principal payment was made July
30, 1996. Deferred offering costs of approximately $700,000 were incurred and
are being amortized ratably over the life of the senior notes.
The Company, Sanifill, and Western have completed several tax exempt industrial
revenue bond issues totaling $164,639,000 at December 31, 1996, with maturities
ranging up to 25 years. Certain of the bonds are subject to annual sinking
fund redemptions and proceeds of the issues are restricted to fund certain
assets of the projects. Substantially all of the bonds are supported by
irrevocable letters of credit and bear interest at floating rates (3.76% to
3.92% at December 31, 1996) with rates reset weekly by a remarketing agent. An
interest rate swap agreement with approximately three years remaining at
December 31, 1996 has fixed the rate at 6.29% on $24,000,000 of these bonds.
Other long-term debt at December 31, 1996 and 1995 consists of miscellaneous
notes payable and obligations under capital leases. Other long-term debt at
December 31, 1996 also includes $83,475,000 payable to the former owners of a
landfill and collection operation acquired by the Company in December 1996.
This amount was paid in January 1997 through additional borrowings under the
Credit Facility.
Chambers incurred nonrecurring interest expense of $10,994,000 and $1,254,000
in 1995 and 1994, respectively, as a result of amendments to its credit
facility and senior notes in November 1994. Chambers proratably accrued the
extension fees, the expected refinancing premium, and other charges incurred
upon consummation of its merger with the Company.
Letters of credit have been provided to the Company supporting industrial
revenue bonds, performance of landfill closure and post-closure requirements,
insurance contracts, and other contracts. Letters of credit outstanding at
December 31, 1996 aggregated $277,994,000.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, restricted funds held by
trustees, trade accounts receivable, trade accounts payable, and financial
instruments included in notes and other receivables and other assets
approximate their fair values principally because of the short-term maturities
of these instruments.
The fair values of the Company's debt maturing within one year and the Credit
Facility approximate the carrying values due to the nature of the instruments
involved. The senior notes and subordinated debt do not have readily available
market values; however, the carrying values are considered to approximate their
respective fair values based on valuation techniques that consider cash flows
discounted at current market rates.
The 5% convertible subordinated debentures had a quoted securities exchange
market value of 100% of the $115,000,000 face value of such securities as of
December 31, 1996.
The fair value of the $125,000,000 interest rate swap approximates the carrying
value due to the interest rate swap's relatively short remaining maturity of
approximately two years and the differential between its fixed rate of 6.20% at
December 31, 1996 compared to the related Credit Facility's variable rate of
5.87% at December 31, 1996.
The fair values of the industrial revenue bonds approximate the carrying values
as the interest rates on the bonds are reset weekly based on the credit quality
of the letters of credit which collateralize the bonds. The fair value of the
related $24,000,000 interest rate swap approximates the carrying value due to
the interest rate swap's relatively short remaining maturity of approximately
three years and the differential between its fixed rate of 6.29% compared to
the average interest rate of the related industrial revenue bonds of 3.84%.
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In the normal course of business, the Company has letters of credit,
performance bonds, insurance policies, and other guarantees that are not
reflected in the accompanying consolidated balance sheets. In the past, no
significant claims have been made against these financial instruments.
Management believes that the likelihood of performance under these financial
instruments is minimal and expects no material losses to occur in connection
with these financial instruments.
7. PREFERRED STOCK
The Board of Directors is authorized to issue preferred stock in series, and
with respect to each series, to fix its designation, relative rights (including
voting, dividend, conversion, sinking fund, and redemption rights), preferences
(including dividends and liquidation), and limitations. The Company currently
has no issued or outstanding preferred stock.
8. COMMON STOCK OPTIONS AND WARRANTS
In accordance with the Company's 1990 Stock Option Plan (the "1990 Plan"),
options to purchase 900,000 shares of the Company's common stock may be granted
to officers, directors, and key employees. In accordance with the Company's
1993 Stock Option Incentive Plan, as amended (the "1993 Plan"), options to
purchase 6,500,000 shares of the Company's common stock may be granted to
officers, directors, and key employees. Options are granted under both the
1990 Plan and the 1993 Plan at an exercise price which equals or exceeds the
fair market value of the common stock on the date of grant, with various
vesting periods, and expire up to ten years from the date of grant. No options
are available for future grant under the 1990 Plan.
In May 1996, the Company adopted the 1996 Stock Option Plan for Non-Employee
Directors ("1996 Directors Plan") to offer its directors who are not officers,
full-time employees, or consultants of the Company an annual grant of 10,000
options on each January 1. In accordance with the 1996 Directors Plan, options
to purchase up to 400,000 shares of the Company's common stock may be granted,
with five year vesting periods, and expiration dates ten years from the date of
grant. Options may be granted at an exercise price which equals fair market
value of the common stock on the date of grant.
In accordance with the Envirofil Employees' 1993 Stock Option Plan (the "1993
Envirofil Plan"), options could be granted to purchase 600,000 shares of the
Company's common stock. The 1993 Envirofil Plan terminates in January 2003.
Options were granted under the 1993 Envirofil Plan at an exercise price which
equaled or exceeded the fair market value of the common stock at the date of
grant, with various vesting periods, and expiration dates up to ten years from
date of grant. As a result of the merger, all unexpired and unexercised options
under the 1993 Envirofil Plan converted to options to purchase shares of the
Company's common stock, as adjusted, subject to the same terms and conditions
as provided under the 1993 Envirofil Plan. No additional options may be issued
under such plan.
Chambers had two plans under which stock options for the purchase of its Class
A common stock could be granted: the 1993 Stock Incentive Plan (the "1993
Chambers Plan") and the 1991 Stock Option Plan for Non-Employee Directors (the
"Chambers Directors' Plan"). The maximum number of shares of Chambers Class A
common stock available for grant under the 1993 Chambers Plan in each calendar
year was equal to one percent of the total number of outstanding shares of
Chambers Class A common stock as of the beginning of the year plus any shares
then reserved but not subject to grant under Chambers' terminated 1988 Stock
Option Plan (the "1988 Chambers Plan"). Any unused shares available for grant
in any calendar year were carried forward and available for award in succeeding
calendar years. Under the terms of the 1993 Chambers Plan, options were granted
at fair market value on the date of grant, but in no event were options granted
at less than the stock's par value, with various vesting periods, and
expiration dates up to ten years from date of grant.
Under the Chambers Directors' Plan, options could be granted to purchase
150,000 shares of Chambers Class A common stock. The Chambers Directors' Plan
stipulates that each person serving as a director and who was not employed by
Chambers was automatically granted options for the purchase of 2,000 shares of
Chambers Class A common stock on the third business day following each annual
stockholders' meeting. In addition, each nonemployee director at the effective
date of the plan was granted options to purchase 2,000 shares of Chambers Class
A common stock for each year previously served on Chambers' Board of Directors.
As a result of the merger, all unexpired and unexercised options under the 1993
Chambers Plan, the 1988 Chambers Plan, and the Chambers Directors' Plan
converted to options to purchase shares of the Company's common stock, as
adjusted, subject to the same terms and conditions as provided under the
Chambers Plans. No additional options may be issued under such plans.
Western maintained three stock option plans ("Western Plans"), the 1992 Stock
Option Plan ("1992 Western Plan"), the Incentive Stock Option Plan, and the
Non-Qualified Stock Option Plan, which allowed key employees and directors of
Western the right to purchase shares of its common stock. Options granted
under the 1992 Western Plan were designated as incentive or non-qualified in
nature, at the discretion of the Compensation Committee of Western's Board of
Directors, though only employees were eligible to receive incentive stock
options. Western had reserved 2,000,000 shares of its common stock under
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each of the Western Plans. Options were granted under the Western Plans at an
exercise price which equaled or exceeded the fair market value on the date of
grant. Options were generally exercisable in installments beginning one year
after the grant date. As a result of the Western Merger, all unexpired and
unexercised options under the Western Plans converted to options to purchase
shares of the Company's common stock, as adjusted, subject to the same terms
and conditions as provided under the Western Plans. No additional options may
be issued under such plans.
Sanifill maintained an incentive compensation plan (the "Incentive Plan") which
allowed for the ability to grant non-qualified options, restricted stock,
deferred stock, incentive stock options, stock appreciation rights, and other
long-term incentive awards. Under the Incentive Plan, stock options were
typically granted at fair market value on the date of grant. The number of
shares available for issuance under the Incentive Plan was limited to 14% of
the number of outstanding shares of Sanifill's common stock at that time less
shares outstanding under the Incentive Plan and the Company's previously
utilized stock option plan (the "Stock Option Plan"). The Incentive Plan did
not provide for the granting of options to non-employee directors. The Stock
Option Plan provided for options of up to 382,500 of the authorized shares to
be granted to non-employee directors. In March 1994 and May 1995, Sanifill
granted 190,155 and 26,095 shares of restricted stock, respectively, to certain
key executives under the Incentive Plan, which were to vest at the end of eight
years or upon the achievement of certain financial objectives, if sooner.
During 1996, these financial objectives were met and all restricted shares were
vested. Sanifill incurred compensation expense of $2,204,000, $312,000, and
$234,000 in 1996, 1995, and 1994, respectively, related to restricted stock.
As a result of the Sanifill Merger, all unexpired and unexercised options under
the plans converted to options to purchase shares of the Company's common
stock, as adjusted, subject to the same terms and conditions as provided under
such plans. No additional options may be issued under such plans.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123.
SFAS No. 123 prescribes a fair value based method of determining compensation
expense related to stock-based awards granted to employees. The recognition
provisions of SFAS No. 123 are optional; however, entities electing not to
adopt the recognition provisions of SFAS No. 123 are required, beginning in
1996, to make disclosures of pro forma net income and earnings per share as if
the recognition provisions of SFAS No. 123 had been applied as of January 1,
1995, as well as disclosures regarding assumptions utilized in determining the
pro forma amounts. The Company did not adopt the recognition provisions of
SFAS No. 123, however, required disclosures are included below.
Stock options granted by the Company in 1996 and 1995 have ten year terms.
Stock options granted by Chambers and Western became fully vested upon
consummation of the related mergers. Stock options granted by Sanifill
continue to vest under varying vesting periods ranging from immediate vesting
to four years following the date of grant. The Company has issued warrants
expiring through 2002 for the purchase of shares of its common stock in
connection with private placements of debt and equity securities, acquisitions
of businesses, bank borrowings, reorganizations, and certain employment
agreements. The following table summarizes common stock options and warrants
transactions related to employees or Company directors under all of the
aforementioned plans for 1996, 1995, and 1994 (in thousands):
Options and Weighted Average Option Price
Warrants Exercise Price Range
----------- ---------------- ------------
Outstanding at January 1, 1994 10,426
Granted 2,781
Exercised (1,083) $0.55 - $14.67
Forfeited (274)
------
Outstanding at December 31, 1994 11,850 $ 8.63
Granted 4,005 18.16
Exercised (1,250) 5.17
Forfeited (118) 29.62
------
Outstanding at December 31, 1995 14,487 11.58
Granted 5,937 24.60
Exercised (2,385) 10.87
Forfeited (46) 16.53
------
Outstanding at December 31, 1996 17,993 16.11
======
Exercisable at December 31, 1995 7,892 $ 10.12
Exercisable at December 31, 1996 9,137 11.14
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The common stock options outstanding at December 31, 1996 include 9,457,000
common stock options granted by Chambers, Western, and Sanifill, of which
7,189,000 are exercisable. The Company holds 23,485 shares of its common stock
in treasury as of December 31, 1996 for future distribution upon exercise of
options under the plans.
The weighted average fair value of common stock options and warrants granted to
employees or Company directors during 1996 and 1995 were $8.47 and $5.53,
respectively. The fair value of each common stock option or warrant granted to
employees or Company directors by the Company during 1996 and 1995 is estimated
utilizing the Black-Scholes option-pricing model. For USA Waste, the
following weighted average assumptions were used: dividend yield of 0%,
risk-free interest rates vary for each grant and range from 5.22% to 6.9%,
expected life of four years for all grants, and stock price volatility of
approximately 31% for all grants. For Chambers, Western, and Sanifill, the
following weighted average assumptions were used: dividend yield of 0%,
risk-free interest rates vary for each grant and range from 5.06% to 7.67%,
expected life of two or three years for all grants, and a stock price
volatility ranging from 16.5% to 25% for all grants.
Stock options and warrants outstanding and exercisable related to employees or
Company directors at December 31, 1996 were as follows (in thousands):
Outstanding Exercisable
------------------------------------------- -------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Remaining Term Options Exercise Price
------- ---------------- ---------------- ------- ----------------
$2.25 to $10.00 5,148 $ 6.87 4.95 years 4,871 $ 6.84
$10.01 to $20.00 6,247 14.11 7.49 years 3,225 13.31
$20.01 to $30.88 6,598 25.23 9.19 years 1,041 24.56
---------------- ------ ------------ ---------- ----- ------------
$2.25 to $30.88 17,993 $ 16.11 7.39 years 9,137 $ 11.14
====== =====
The following table summarizes transactions involving common stock warrants
related to nonemployees for 1996, 1995, and 1994 (in thousands):
Options and Weighted Average Option Price
Warrants Exercise Price Range
----------- ---------------- ------------
Outstanding at January 1, 1994 724
Granted 60
Exercised (472) $0.55 - $8.80
Forfeited --
----
Outstanding at December 31, 1994 312 $ 9.33
Granted 230 11.61
Exercised (415) 9.03
Forfeited -- --
----
Outstanding at December 31, 1995 127 10.65
Granted 528 25.46
Exercised (81) 9.15
Forfeited (21) 10.50
----
Outstanding at December 31, 1996 553 19.52
====
Exercisable at December 31, 1995 75 $ 10.58
Exercisable at December 31, 1996 222 15.37
The weighted average fair value of common stock warrants granted to
nonemployees during 1996 and 1995 were $10.37 and $4.27, respectively. The
fair value of each common stock warrant granted to employees or Company
directors by the Company during 1996 and 1995 is estimated utilizing the
Black-Scholes option-pricing model. For USA Waste, the following weighted
average assumptions were used: dividend yield of 0%, risk-free interest rates
vary for each grant and range from 5.06% to 7.67%, expected life of five years
for all grants, and a stock price volatility of approximately 31% for all
grants. For Chambers, Western, and Sanifill, the following weighted average
assumptions were used: dividend yield of 0%, risk-free interest rate of 7.15%
for all grants, expected life of five years for all grants, and a stock price
volatility of 16.5% for all grants.
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If the Company applied the recognition provisions of SFAS No. 123, the
Company's net income and earnings per common share for 1996 and 1995 would
approximate the pro forma amounts shown below (in thousands, except per share
amounts):
Years ended December 31,
------------------------
1996 1995
------- -------
SFAS No. 123 charge, net of income taxes $11,260 $ 2,371
Net income 21,686 50,117
Earnings per common share 0.16 0.44
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
9. EMPLOYEE BENEFIT PLANS
Effective July 1, 1995, the Company established the USA Waste Services, Inc.
Employee Savings Plan ("the Savings Plan"), a qualified defined contribution
retirement plan, covering employees (except those working subject to a
collective bargaining agreement) 21 years of age or older who have completed
one year of service or were actively employed on the Savings Plan's
commencement date. The Savings Plan allows eligible employees to contribute up
to the lesser of 15% of their annual compensation or the maximum permitted
under IRS regulations to various investment funds. The Company matches 50% of
the first 6% an employee contributes. Both employee and Company contributions
vest immediately. In 1996 and 1995, the Company contributed approximately
$1,248,000 and $218,000, respectively, and incurred approximately $148,000 and
$25,000, respectively, in administrative fees.
Western has a qualified defined contribution plan which generally covers all
full time salaried and clerical employees not represented by a bargaining
agreement. Eligible employees are allowed to contribute up to the lesser of
20% of their annual compensation or the maximum permitted under IRS regulations
to various investment funds. At its discretion, Western can match up to 50% of
the amount contributed by employees. Contributions to this plan were
discontinued January 1, 1997. Western's contributions for 1996, 1995, and 1994,
represented by issuance of Western common stock, were $753,000, $698,000, and
$661,000, respectively.
Sanifill has a defined contribution plan for employees meeting certain
employment requirements. Eligible employees are allowed to contribute up to
the lesser of 15% of their annual compensation or the maximum permitted under
IRS regulations to various investment funds. Sanifill matches all employee
contributions up to 3%. Contributions to this plan were discontinued January
1, 1997. Sanifill matching contributions were approximately $1,049,000,
$700,000, and $500,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Sanifill has an Employee Stock Purchase Plan ("ESPP") for all active employees
who have completed one year of continuous service. Employees may contribute
from 1% to 5% of their compensation. In addition, during any purchase period,
as defined, a single additional contribution of $25, or any multiple thereof
not exceeding $2,000, may be made by a participant to their account. At the
end of each purchase period, each participant's account balance is applied to
acquire common stock of Sanifill at 85% of the market value, as defined, on the
first day or last day of the purchase period, whichever price is lower. The
maximum amount per employee that may be contributed during any plan year, as
defined, shall not exceed $25,000. Contributions to the ESPP were discontinued
upon consummation of the Sanifill Merger. The number of shares reserved for
purchase under the ESPP is 470,886 and may be from either authorized and
unissued shares or treasury shares.
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10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Current:
Domestic $ 36,864 $ 32,227 $ 26,988
Foreign 5,375 407 66
-------- -------- --------
42,239 32,634 27,054
-------- -------- --------
Deferred:
Domestic 3,342 12,871 (26,272)
Foreign (439) (513) 233
-------- -------- --------
2,903 12,358 (26,039)
-------- -------- --------
Provision for income taxes $ 45,142 $ 44,992 $ 1,015
======== ======== ========
The difference between federal income taxes at the statutory rate and the
provision for income taxes for the years presented above is as follows (in
thousands):
Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
Provision (benefit) for income taxes at federal statutory rate $ 27,331 $ 34,118 $ (2,809)
Prior year income tax adjustment -- -- (4,300)
Nondeductible expenses 12,361 7,018 6,385
State and local income taxes, net of federal
income tax benefit 3,904 2,414 3,323
Foreign income taxes 1,977 494 --
Other (431) 948 (1,584)
-------- -------- --------
Provision for income taxes $ 45,142 $ 44,992 $ 1,015
======== ======== ========
Chambers' corporate tax returns for 1988 through 1992 are currently under
examination by the Internal Revenue Service ("IRS"). The Company has reached
tentative agreement with the IRS regarding the tax treatment of certain costs
and expenses deducted for financial statement purposes in these open tax years.
That agreement is subject to the approval of the Joint Committee on Taxation.
Western's corporate tax returns for fiscal years 1991 through 1993 are
currently under examination by the IRS. The IRS has proposed adjustments for
these years, which the Company is vigorously protesting, which neither alone
nor in aggregate would have a material effect on the Company's financial
position or results of operations when resolved. Sanifill's corporate tax
returns for 1994 and 1995 are currently under examination by the IRS. The
Company has been notified that USA Waste's 1994 corporate tax return will be
examined by the IRS.
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The components of the net deferred tax assets are as follows (in thousands):
December 31,
----------------------
1996 1995
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 85,449 $ 97,160
Litigation settlements -- 27,897
Closure, post-closure, and other reserves 32,176 28,794
Self insurance 5,042 5,243
Asset impairments, losses from planned asset
divestures, and other 53,764 24,704
Valuation allowance (24,000) (24,000)
--------- ---------
Deferred tax assets 152,431 159,798
Deferred tax liabilities:
Property, equipment, intangible assets, and other 121,503 120,674
--------- ---------
Net deferred tax assets $ 30,928 $ 39,124
========= =========
At December 31, 1996, the Company had approximately $205,000,000 of net
operating loss ("NOL") carryforwards, primarily as a result of losses incurred
by Chambers prior to the Company's merger with Chambers. Most of the NOL
carryforwards will begin to expire in 2007. The use of the NOL carryforwards
is subject to annual limitations of approximately $39,000,000 due to an
ownership change within the meaning of Section 382 of the Internal Revenue
Code. The valuation allowance as of December 31, 1996, 1995, and 1994
primarily relates to a portion of the NOL carryforwards which could expire
prior to utilization by the Company.
In December 1996, in connection with the settlement of Chambers' shareholder
litigation (see Note 12), the Claims Administrator of the Settlement Fund
Escrow Account distributed the shareholder litigation settlement to the
claimants. The distribution resulted in a portion of the $75,300,000
shareholder litigation settlement charge in 1994 becoming deductible in 1996.
Income taxes payable included in accrued liabilities was approximately
$21,702,000 at December 31, 1996.
11. UNUSUAL ITEMS
A summary of unusual items is as follows (in thousands):
Years Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
Provision for asset impairments, abandoned projects, and
estimated losses related to the disposition of non-core
business assets $35,848 $ -- $ 9,351
Provisions for losses on contractual commitments 23,128 1,313 2,252
Reversal of prior provisions for losses on asset
divestitures and contractual commitments -- -- (3,565)
Financing and professional fees -- 610 --
Corporate and regional restructurings -- 2,810 825
Western retirement benefits 4,824 -- --
------- ------- -------
Total unusual items $63,800 $ 4,733 $ 8,863
======= ======= =======
In the second quarter of 1996, unusual items include approximately $4,824,000
of retirement benefits associated with Western's pre-merger retirement plan and
approximately $8,128,000 of estimated future losses related to municipal solid
waste contracts in California as a result of the continuing decline in prices
of recyclable materials. In the third quarter of 1996, the Company also
recognized approximately $50,848,000 of unusual items. The unusual items
included $28,900,000 of estimated losses related to the disposition of certain
non-core business assets, $15,000,000 of project reserves related to certain
Mexico operations, and $6,948,000 of various other terminated projects.
In 1992, Chambers became a defendant in shareholder litigation arising out of
financial statement revisions (see Note 12) and, as a result of noncompliance
with certain covenants of its various long-term borrowing agreements, commenced
restructuring of its principal credit facilities and surety arrangements.
Chambers also initiated a major restructuring of its operations which included
a program to divest certain businesses that no longer met strategic and
performance objectives, the abandonment of
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various development activities, and the reorganization of its corporate and
regional operations. In 1995 and 1994, Chambers incurred substantial expenses
related to these matters as discussed below.
In 1995, Chambers recorded charges of $2,810,000 for severance and other
termination benefits paid to former Chambers employees in connection with its
pre-merger reorganization, $1,313,000 of estimated future losses associated
with the renegotiated Bergen County, New Jersey, municipal solid waste
contract, and $610,000 of shareholder litigation settlement costs.
In 1994, Chambers recorded charges of $3,366,000 for losses on asset
divestitures, including $1,114,000 to adjust a 1993 estimate of the loss on
divestiture of a collection, recycling, and transfer station operation and
$2,252,000 related to the estimated future loss on a municipal contract.
During 1994, Chambers also reversed 1993 provisions for losses on asset
divestitures and contractual commitments of $3,565,000, including $2,000,000
previously recorded for losses expected to be incurred on a municipal contract
with respect to which Chambers was able to negotiate an early termination and
$1,053,000 of excess reserve related to the sale of a recycling operation and
certain real estate.
In 1994, Chambers also recorded net charges of $8,237,000 for asset impairments
and abandoned projects, including $6,978,000 to reduce the carrying value of
Chambers' medical, special, and municipal waste incinerator facility to its
estimated net realizable value, determined as the present value of future cash
flows discounted at 12%. A permanent decline in the value of the incinerator
became evident as Chambers management determined its investment could not be
recovered through future operations, given current and forecasted pricing,
waste mix, and capacity trends as well as then recently proposed regulations
with respect to medical waste incinerator facilities and general declines in
the value of waste incinerator businesses. During 1994, Chambers also reached
a favorable settlement of previously reported litigation related to certain
contracts entered into with respect to its purchase of a landfill and its prior
purchase of a collection company. The settlement amount is included as a credit
to unusual items and includes receipt by Chambers of $1,200,000 in cash and the
forgiveness of all remaining non-compete payments totaling $525,000 that were
to have been paid by Chambers to various individuals in 1994, 1995, and 1996.
The remaining charge of $2,984,000 results from changes in 1993 estimates for
certain asset impairments and abandoned projects. In addition, Chambers
recorded a charge of $825,000 primarily relating to severance benefits paid to
employees terminated as part of Chambers' continued reorganization. With the
exception of the $1,200,000 litigation settlement received by Chambers and the
$825,000 payment of severance benefits, there was no cash flow effect related
to these unusual charges.
12. SHAREHOLDER LITIGATION SETTLEMENT
In 1994, in connection with the settlement of certain Chambers' shareholder
litigation, Chambers accrued $85,300,000 for the cost of the settlements and
$4,100,000 for other litigation related costs, of which $79,400,000 was
recorded as an expense and paid in 1995 and $10,000,000 was recorded as an
asset and ultimately paid from the proceeds of Chambers' directors and officers
liability insurance policy.
13. RELATED PARTY TRANSACTIONS
The Chambers' headquarters facility was leased from the principal stockholders
of Chambers under a lease dated December 29, 1986 with an initial term expiring
in October 2006 and a ten-year renewal option. The agreement provided for
monthly lease payments (aggregating $531,000 during 1995) prior to the Company
being released from the lease by assuming the related mortgage of $1,945,000
from the principal stockholders of Chambers in July 1995.
In August 1995 and pursuant to the terms of the Chambers merger, the Company
exercised an option to purchase real estate from John G. Rangos, Sr., a
principal stockholder of Chambers and a director of the Company, and Michael J.
Peretto, a former director of Chambers, and certain members of his family. The
real estate is adjacent to the Company's Monroeville landfill. The option to
purchase the real estate was granted pursuant to agreements among the parties
dated July 8, 1993. The total consideration paid by the Company for the real
estate was $2,986,000, of which $2,103,000 was paid to John G. Rangos, Sr. and
$883,000 was paid to Mr. Peretto and members of his family.
Pursuant to the terms of the Western Merger, the Company and the Shirvanian
Family Investment Partnership (the "Partnership"), of which Kosti Shirvanian, a
director of the Company, is a general partner, transferred to the Company the
Partnership's interests in the land and improvements constituting a portion of
a transfer station in Carson, California, in exchange for the issuance by the
Company of 337,500 shares of Company common stock.
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14. COMMITMENTS AND CONTINGENCIES
Operating leases -- The Company has entered into certain noncancelable
operating leases for vehicles, equipment, offices, and other facilities which
expire through 2011, certain of which contain renewal options. Lease expense
aggregated $6,609,000, $15,519,000, and $20,064,000 during 1996, 1995, and
1994, respectively. Future minimum lease payments under operating leases in
effect at December 31, 1996 are 1997 -- $6,858,000; 1998 -- $5,232,000; 1999 --
$4,265,000; 2000 -- $3,365,000; 2001 -- $3,009,000; and thereafter $10,315,000.
Environmental matters -- The Company is subject to extensive and evolving
federal, state, and local environmental laws and regulations in the United
States and elsewhere that have been enacted in response to technological
advances and the public's increased concern over environmental issues. As a
result of changing governmental attitudes in this area, management anticipates
that the Company will continually modify or replace facilities and alter methods
of operation. The majority of the expenditures necessary to comply with the
environmental laws and regulations are made in the normal course of business.
Although the Company, to the best of its knowledge, is in compliance in all
material respects with the laws and regulations affecting its operations, there
is no assurance that the Company will not have to expend substantial amounts for
compliance in the future.
Litigation -- On or about March 8, 1993, an action was filed in the United
States District Court for the Western District of Pennsylvania, captioned
Option Resource Group, et al. v. Chambers Development Company, Inc., et al.,
Civil Action No. 93-354. This action was brought by a market maker in options
in Chambers stock and two of its general partners and asserts federal
securities law and common law claims alleging that Chambers, in publicly
disseminated materials, intentionally or negligently misstated its earnings and
that Chambers' officers and directors committed mismanagement and breach of
fiduciary duties. These plaintiffs allege that, as a result of large amounts
of put options traded on the Chicago Board of Options Exchange between March 13
and March 18, 1992, they engaged in offsetting transactions resulting in
approximately $2,100,000 in losses. The plaintiffs in Option Resource Group
had successfully requested exclusion from a now settled class action of
consolidated suits instituted on similar claims ("Class Action") and Option
Resource Group is continuing as a separate lawsuit. Plaintiffs filed a motion
for summary judgment which is untimely under the court's case management
procedures. The court has stayed responses to the motion for summary judgment.
In response to discovery on damages, the plaintiffs reduced their damages claim
to $433,000 in alleged losses, plus interest and attorneys' fees, for a total
damage claim of $658,000 as of August 21, 1995. Discovery has been completed
and a trial date has been set for early 1997. The Company intends to continue
to vigorously defend against this action. Management of the Company believes
the ultimate resolution of such complaint will not have a material adverse
effect on the Company's financial position or results of operations.
On August 3, 1995, Frederick A. Moran and certain related persons and entities
filed a lawsuit against Chambers, certain former officers and directors of
Chambers, and Grant Thornton, LLP, in the United States District Court for the
Southern District of New York under the caption Moran, et al. v. Chambers, et
al., Civil Action No. 95-6034. Plaintiffs, who claim to represent
approximately 484,000 shares of Chambers stock, requested exclusion from the
settlement agreements which resulted in the resolution of the Class Action and
assert that they have incurred losses attributable to shares purchased during
the class period and certain additional losses by reason of alleged management
misstatements during and after the class period. The claimed losses include
damages to Mr. Moran's business and reputation. The Judicial Panel on
Multidistrict Litigation has transferred this case to the United States
District Court for the Western District of Pennsylvania. The Company has filed
its answer to the complaint and intends to vigorously defend against these
claims. The case is currently in discovery. Management of the Company
believes the ultimate resolution of such complaint will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is a party to various other litigation matters arising in the
ordinary course of business. Management believes that the ultimate resolution
of these matters will not have a material adverse impact on the Company's
financial position and results of operations. In the normal course of its
business and as a result of the extensive government regulation of the solid
waste industry, the Company periodically may become subject to various judicial
and administrative proceedings and investigations involving federal, state, or
local agencies. To date, the Company has not been required to pay any material
fine or had a judgment entered against it for violation of any environmental
law. From time to time, the Company also may be subjected to actions brought by
citizen's groups in connection with the permitting of landfills or transfer
stations, or alleging violations of the permits pursuant to which the Company
operates. From time to time, the Company is also subject to claims for personal
injury or property damage arising out of accidents involving its vehicles.
Insurance -- The Company carries a broad range of insurance coverages, which
management considers prudent for the protection of the Company's assets and
operations. Some of these coverages are subject to varying retentions of risk
by the Company. The casualty coverages currently include $2,000,000 primary
commercial general liability and $1,000,000 primary automobile liability
supported by $100,000,000 in umbrella insurance protection. The property
policy provides insurance
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coverage for all of the Company's real and personal property, including
California earthquake perils. The Company also carries $200,000,000 in
aircraft liability protection.
The Company maintains workers' compensation insurance in accordance with laws
of the various states in which it has employees. The Company also currently
has an environmental impairment liability ("EIL") insurance policy for certain
of its landfills and transfer stations that provides coverage for property
damages and/or bodily injuries to third parties caused by off-site pollution
emanating from such landfills or transfer stations. This policy provides
$5,000,000 of coverage per incident with a $10,000,000 aggregate limit.
To date, the Company has not had any difficulty in obtaining insurance.
However, if the Company in the future is unable to obtain adequate insurance,
or decides to operate without insurance, a partially or completely uninsured
claim against the Company, if successful and of sufficient magnitude, could
have a material adverse effect upon the Company's financial condition or
results of operations. Additionally, continued availability of casualty and
EIL insurance with sufficient limits at acceptable terms is an important aspect
of obtaining revenue-producing waste service contracts.
15. SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The following table summarizes the unaudited consolidated quarterly results of
operations for 1996 and 1995 (in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Operating revenues
1996 $ 282,525 $ 327,742 $ 352,754 $ 350,367
=========== =========== =========== ===========
1995 $ 222,944 $ 240,770 $ 262,434 $ 261,557
=========== =========== =========== ===========
Income (loss) from operations
1996 $ 54,164 $ 22,183 $ (50,194) $ 84,155
=========== =========== =========== ===========
1995 $ 32,626 $ 9,310 $ 51,994 $ 52,477
=========== =========== =========== ===========
Income (loss) before income taxes
1996 $ 46,082 $ 13,348 $ (58,386) $ 77,044
=========== =========== =========== ===========
1995 $ 19,398 $ (8,029) $ 41,224 $ 44,887
=========== =========== =========== ===========
Net income (loss)
1996 $ 27,652 $ (2,068) $ (38,864) $ 46,226
=========== =========== =========== ===========
1995 $ 11,639 $ (10,817) $ 24,734 $ 26,932
=========== =========== =========== ===========
Earnings (loss) per common share
1996 $ 0.21 $ (0.01) $ (0.27) $ 0.32
=========== =========== =========== ===========
1995 $ 0.11 $ (0.10) $ 0.22 $ 0.21
=========== =========== =========== ===========
Earnings (loss) per common share for each of the quarters presented is based on
the weighted average number of shares of common stock outstanding for each
period and the sum of the quarters may not necessarily be equal to the full
year earnings (loss) per common share amount.
Amounts presented for 1996 and 1995 are restated for the pooling of interests
transactions with Sanifill, Western, and Chambers, discussed in Note 2, and are
different from amounts originally reported. The results of operations for 1996
and 1995 include certain nonrecurring charges for merger costs, unusual items,
and nonrecurring interest, as disclosed elsewhere herein. In 1996,
nonrecurring charges amounted to $51,052,000 and $133,404,000 in the second and
third quarters, respectively. In 1995, nonrecurring charges amounted to
$4,206,000 and $37,160,000 in the first and second quarters, respectively.
16. SUBSEQUENT EVENTS
In connection with the Sanifill Merger, the United States Department of Justice
ordered the divestiture of certain solid waste collection and disposal assets
and operations in Houston, Texas. On January 31, 1997, the Company sold these
assets to TransAmerican Waste Industries, Inc. ("TransAmerican") for
$13,600,000 in cash plus warrants to purchase 1,500,000 shares of TransAmerican
common stock at an exercise price of $1.50 per share. The warrants are
exercisable for a period of five years.
49
52
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Notes Offering"). Interest is
payable semi-annually in February and August. The notes are convertible into
shares of the Company's common stock at a conversion price of $43.56 per share.
The notes are subordinated in right of payment to all existing and future senior
indebtedness, as defined. The notes are redeemable after February 1, 2000 at
the option of the Company at 101.6% of the principal amount, declining to 100.8%
of the principal amount on February 1, 2001 and thereafter until maturity, plus
accrued interest. Deferred offering costs of approximately $14,000,000 were
incurred and are being amortized ratably over the life of the notes. The
proceeds were primarily used to repay debt under the Company's Credit Facility
and for general corporate purposes.
On February 7, 1997, concurrent with the Notes Offering, the Company completed
a public offering of 11,500,000 shares of its common stock, priced at $35.125
per share. The net proceeds of approximately $387,438,000 were primarily used
to repay debt under the Company's Credit Facility and for general corporate
purposes.
If the aforementioned issuance of 4% convertible subordinated debentures and
public offering had occurred on January 1, 1996, earnings per share would have
increased by $0.05 for the year ended December 31, 1996 due to a reduction in
interest expense resulting from the repayment of debt under the Company's
credit facility being offset by an increase in the weighted average number of
common and common equivalent shares outstanding, which would have been
163,529,000.
On March 12, 1997, the Company acquired all of the Canadian solid waste
subsidiaries of Allied Waste Industries, Inc., representing 41 collection
businesses, seven landfills, and eight transfer stations in the provinces of
Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan, for
approximately $518,000,000 in cash. The acquisition was accounted for under
the purchase method of accounting.
On January 21, 1997, the Company executed a definitive agreement to acquire
substantially all of the assets of Mid-American Waste Systems, Inc. for
approximately $201,000,000, consisting primarily of cash and a limited amount
of debt assumption. The assets to be acquired include eleven collection
businesses, eleven landfills, six transfer stations, and three recycling
centers. The acquisition has been approved by the Bankruptcy Court and is
expected to close during the second quarter of 1996. The acquisition will be
accounted for under the purchase method of accounting.
Subsequent to December 31, 1996, in addition to the two aforementioned
acquisitions, the Company acquired 24 collection businesses, four transfer
stations, and one landfill for approximately $39,900,000 in cash, $14,359,000
in liabilities incurred or debt assumed, and 982,964 shares of the Company's
common stock under the purchase method of accounting.
The unaudited pro forma information set forth below assumes 1997, 1996, and
1995 acquisitions accounted for as purchases occurred at the beginning of 1995.
The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisitions been consummated at that
time (in thousands, except per share amounts):
Years Ended December 31,
--------------------------
1996 1995
---------- ----------
Operating revenues $1,926,948 $1,835,849
Net income 87,450 120,063
Earnings per common share 0.61 0.99
On March 21, 1997, a Canadian subsidiary of the Company and WMX Technologies,
Inc.'s Waste Management unit ("WMX") jointly executed a letter of
intent whereby the Company will acquire the majority of WMX's Canadian solid
waste businesses for approximately $186,000,000, including $124,000,000 in cash
and $62,000,000 in Company common stock. The assets to be acquired include 13
collection businesses, one landfill, and three transfer stations in the
provinces of Alberta, British Columbia, Ontario, and Quebec, which generate
approximately $124,000,000 in annualized operating revenues. The acquisition,
which is expected to close by May 31, 1997, is subject to regulatory approval
and final negotiation and execution of a definitive sales agreement.
50
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement for its
1997 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "1997 Proxy
Statement"), and is incorporated herein by reference. Information concerning
the executive officers of the Company is set forth above under "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth under the caption
"Election of Directors - Executive Compensation" in the 1997 Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth under the caption
"Election of Directors - Beneficial Ownership of USA Waste Common Stock" in the
1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth under the caption
"Election of Directors - Certain Relationships and Related Transactions" in the
1997 Proxy Statement and is incorporated herein by reference.
51
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules:
All Consolidated Financial Statement Schedules have been omitted since
the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements or the notes thereto.
(a)(3) Exhibits:
2.1 - Agreement and Plan of Merger, dated as of December 18, 1995, by
and among the Registrant, Riviera Acquisition Corporation and
Western Waste Industries [Incorporated by reference to Appendix A
in the Registrant's Registration Statement on Form S-4, File No.
333-02181].
2.2 - Agreement and Plan of Merger, dated as of June 22, 1996, by and
among the Registrant, Quatro Acquisitions Corp. and Sanifill,
Inc. [Incorporated by reference to Annex A in the Registrant's
Registration Statement on Form S-4, File No. 333-08161].
2.3 - Amendment No. 1 to Agreement and Plan of Merger, dated July 18,
1996, by and among the Registrant, Quatro Acquisition Corp. and
Sanifill, Inc. [Incorporated by reference to Annex A in the
Registrant's Registration Statement on Form S-4, File
No. 333-08161].
3.1 - Restated Certificate of Incorporation, as amended [Incorporated
by reference to Exhibit 3.1(b) of the Registrant's Quarterly
Report, as amended, on Form 10-Q for the three months ended March
31, 1996].
3.2 - Bylaws [Incorporated by reference to Exhibit 3.2 to the
Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form S-4, File No. 33-60103].
4.1 - Specimen Stock Certificate [Incorporated by reference to Exhibit
4.3 of the Registrant's Registration Statement on Form S-3, File
No. 33-76224].
4.2 - Supplemental Indenture, dated as of September 3, 1996, among USA
Waste Services, Inc., Sanifill, Inc., and Texas Commerce Bank
National Association relating to Sanifill, Inc.'s 5% Convertible
Subordinated Debentures Due March 1, 2006 [Incorporated by
reference to Exhibit 10.3 of the Registrant's Current Report on
Form 8-K dated September 3, 1996].
4.3 - Indenture for Subordinated Debt Securities dated February 3,
1997, among the Registrant and Texas Commerce Bank National
Association, as trustee [Incorporated by reference to Exhibit 4.1
of the Registrant's Current Report on Form 8-K dated February
7, 1997].
4.4 - Officers Certificate dated as of February 7, 1997, setting forth
the terms of the Registrant's 4% Convertible Subordinated Notes
due 2002 [Incorporated by reference to Exhibit 4.2 of the
Registrant's Current Report on Form 8-K dated February 7, 1997].
52
55
4.5 - Form of the Registrant's 4% Convertible Subordinated Notes due
2002 [Incorporated by reference to Exhibit 4.3 of the
Registrant's Current Report on Form-8-K dated February 7, 1997].
10.1 - 1990 Stock Option Plan [Incorporated by reference to Exhibit 10.1
of the Registrant's Annual report on Form 10-K for the year
ended December 31, 1990].
10.2 - 1993 Stock Incentive Plan [Incorporated by reference to Exhibit
4.4 of the Registrants Registration Statement on Form S-8, File
No. 33-72436].
10.3 - 1996 Stock Option Plan for Non-Employee Directors [Incorporated
by reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8, File No. 333-14115].
10.4 - Envirofil, Inc. 1993 Stock Incentive Plan [Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994].
10.5 - Western Waste Industries Amended and Restated 1983 Stock Option
Plan [Incorporated by reference to Exhibit 99.1 of the
Registrant's Registration Statement on Form S-8, File No.
333-02181].
10.6 - Western Waste Industries 1983 Non-Qualified Stock Option Plan
[Incorporated by reference to Exhibit 99.2 of the Registrant's
Registration Statement on Form S-8, File No. 333-02181].
10.7 - Western Waste Industries 1992 Option Plan [Incorporated by
reference to Exhibit 99.3 of the Registrant's Registration
Statement on Form S-8, File No. 333-02181].
10.8 - Sanifill, Inc. 1994 Long-Term Incentive Plan [Incorporated by
reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8, File No. 333-08161].
10.9 - Sanifill, Inc. 1989 Stock Option Plan [Incorporated by reference
to Exhibit 99.2 of the Registrant's Registration Statement on
Form S-8, File No. 333-08161].
10.10 - Amended and Restated Revolving Credit Agreement dated as of
August 30, 1996, among the Registrant, its subsidiaries, The
First National Bank of Boston, Bank of America Illinois, J.P.
Morgan Canada, and Morgan Guaranty Trust Company of New York
[Incorporated by reference to Exhibit 10.2 of the Registrant's
Current Report on Form 8-K dated September 3, 1996].
10.11 - Form of Employment Agreement between the Registrant and each of
John E. Drury, Donald F. Moorehead, Jr., David Sutherland-Yoest,
and Chuck A. Wilcox [Incorporated by reference to Exhibit 10.18
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994].
10.12 - Employment Agreement between the Registrant and Rodney R. Proto
[Incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K dated September 3, 1996].
10.13 - Employment Agreement between the Registrant and Earl E. DeFrates
[Incorporated by reference to Exhibit 10.19 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994].
10.14 - Employment Agreement between the Registrant and Gregory T.
Sangalis [Incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-4, File No.
33-59259].
10.15 - Consulting and Non-compete Agreement dated June 25, 1995, among
the Registrant, between the Registrant and John G. Rangos, Sr.
[Incorporated by reference to Exhibit 10.22 to the Registrant's
Quarterly Report on Form 10-Q/A for the period ended June 30,
1995].
10.16 - Employment Agreement dated June 25, 1995, between the Registrant
and Alexander W. Rangos [Incorporated by reference to Exhibit
10.22 to the Registrant's Quarterly Report on Form 10-Q/A for the
period ended June 30, 1995].
10.17 - Employment Agreement dated December 18, 1995, between the
Registrant and Kosti Shirvanian [Incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995].
10.18 - Amended and Restated Revolving Credit Agreement dated as of March
5, 1997, among the Registrant, its subsidiaries, Bank of America
Illinois, Morgan Guaranty Trust Company of New York, and J. P.
Morgan Canada.
11.1 - Computation of Earnings (Loss) Per Common Share.
53
56
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of Coopers & Lybrand L.L.P.
24.1 - Form 10-K Limited Power of Attorney.
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K:
During the last quarter of the period covered by this report, the
Company filed a Current Report on Form 8-K dated November 12, 1996.
Such Current Report is reported on Item 5. Other Events and on Item
7. Financial Statements and Exhibits. The Company filed restated
supplemental financial statements of USA Waste Services, Inc. to
include the financial statements of Sanifill, Inc. The financial
statements filed included: (i) The supplemental consolidated balance
sheets are as of December 31, 1995 and 1994, and the related
supplemental consolidated statements of operations, stockholders'
equity, and cash flows are for each of the three years in the period
ended December 31, 1995; and (ii) The supplemental interim condensed
consolidated balance sheets are as of June 30, 1996 and December 31,
1995, the related supplemental interim condensed consolidated
statements of operations are for the six months ended June 30, 1996
and 1995, the related supplemental interim condensed consolidated
statement of stockholders' equity is for the six months ended June 30,
1996, and the related supplemental interim condensed consolidated
statements of cash flows are for the six months ended June 30, 1996
and 1995.
54
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA WASTE SERVICES, INC.
By: /s/ JOHN E. DRURY
--------------------------------------
John E. Drury, Chief Executive Officer
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ JOHN E. DRURY Chief Executive Officer and March 31, 1997
- --------------------------------------
John E. Drury Chairman of the Board
(Principal Executive Officer)
/s/ RODNEY R. PROTO President, Chief Operating Officer, March 31, 1997
- --------------------------------------
Rodney R. Proto and Director
*
/s/ DONALD F. MOOREHEAD, JR. Chief Development Officer and March 31, 1997
- --------------------------------------
Donald F. Moorehead, Jr. Director
/s/ EARL E. DEFRATES Executive Vice President and March 31, 1997
- --------------------------------------
Earl E. DeFrates Chief Financial Officer
(Principal Financial Officer)
/s/ BRUCE E. SNYDER Vice President and March 31, 1997
- --------------------------------------
Bruce E. Snyder Chief Accounting Officer
*
/s/ KOSTI SHIRVANIAN Director March 31, 1997
- --------------------------------------
Kosti Shirvanian
*
/s/ DAVID SUTHERLAND-YOEST Director March 31, 1997
- --------------------------------------
David Sutherland-Yoest
*
/s/ RICHARD J. HECKMANN Director March 31, 1997
- --------------------------------------
Richard J. Heckmann
*
/s/ WILLIAM E. MOFFETT Director March 31, 1997
- --------------------------------------
William E. Moffett
*
/s/ ALEXANDER W. RANGOS Director March 31, 1997
- --------------------------------------
Alexander W. Rangos
55
58
*
/s/ JOHN G. RANGOS, SR. Director March 31, 1997
- --------------------------------------
John G. Rangos, Sr.
*
/s/ SAVEY TUFENKIAN Director March 31, 1997
-------------------------------------
Savey Tufenkian
*
/s/ LARRY J. MARTIN Director March 31, 1997
- --------------------------------------
Larry J.Martin
*
/s/ RALPH F. COX Director March 31, 1997
- --------------------------------------
Ralph F. Cox
* By Gregory T. Sangalis,
as attorney in-fact
56
59
INDEX TO EXHIBITS
Exhibit
Number
-------
2.1 - Agreement and Plan of Merger, dated as of December 18, 1995, by
and among the Registrant, Riviera Acquisition Corporation and
Western Waste Industries [Incorporated by reference to Appendix A
in the Registrant's Registration Statement on Form S-4, File No.
333-02181].
2.2 - Agreement and Plan of Merger, dated as of June 22, 1996, by and
among the Registrant, Quatro Acquisitions Corp. and Sanifill,
Inc. [Incorporated by reference to Annex A in the Registrant's
Registration Statement on Form S-4, File No. 333-08161].
2.3 - Amendment No. 1 to Agreement and Plan of Merger, dated July 18,
1996, by and among the Registrant, Quatro Acquisition Corp. and
Sanifill, Inc. [Incorporated by reference to Annex A in the
Registrant's Registration Statement on Form S-4, File
No. 333-08161].
3.1 - Restated Certificate of Incorporation, as amended [Incorporated
by reference to Exhibit 3.1(b) of the Registrant's Quarterly
Report, as amended, on Form 10-Q for the three months ended March
31, 1996].
3.2 - Bylaws [Incorporated by reference to Exhibit 3.2 to the
Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form S-4, File No. 33-60103].
4.1 - Specimen Stock Certificate [Incorporated by reference to Exhibit
4.3 of the Registrant's Registration Statement on Form S-3, File
No. 33-76224].
4.2 - Supplemental Indenture, dated as of September 3, 1996, among USA
Waste Services, Inc., Sanifill, Inc., and Texas Commerce Bank
National Association relating to Sanifill, Inc.'s 5% Convertible
Subordinated Debentures Due March 1, 2006 [Incorporated by
reference to Exhibit 10.3 of the Registrant's Current Report on
Form 8-K dated September 3, 1996].
4.3 - Indenture for Subordinated Debt Securities dated February 3,
1997, among the Registrant and Texas Commerce Bank National
Association, as trustee [Incorporated by reference to Exhibit 4.1
of the Registrant's Current Report on Form 8-K dated February
7, 1997].
4.4 - Officers Certificate dated as of February 7, 1997, setting forth
the terms of the Registrant's 4% Convertible Subordinated Notes
due 2002 [Incorporated by reference to Exhibit 4.2 of the
Registrant's Current Report on Form 8-K dated February 7, 1997].
4.5 - Form of the Registrant's 4% Convertible Subordinated Notes due
2002 [Incorporated by reference to Exhibit 4.3 of the
Registrant's Current Report on Form-8-K dated February 7, 1997].
10.1 - 1990 Stock Option Plan [Incorporated by reference to Exhibit 10.1
of the Registrant's Annual report on Form 10-K for the year
ended December 31, 1990].
10.2 - 1993 Stock Incentive Plan [Incorporated by reference to Exhibit
4.4 of the Registrants Registration Statement on Form S-8, File
No. 33-72436].
10.3 - 1996 Stock Option Plan for Non-Employee Directors [Incorporated
by reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8, File No. 333-14115].
10.4 - Envirofil, Inc. 1993 Stock Incentive Plan [Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994].
10.5 - Western Waste Industries Amended and Restated 1983 Stock Option
Plan [Incorporated by reference to Exhibit 99.1 of the
Registrant's Registration Statement on Form S-8, File No.
333-02181].
60
<CN>
10.6 - Western Waste Industries 1983 Non-Qualified Stock Option Plan
[Incorporated by reference to Exhibit 99.2 of the Registrant's
Registration Statement on Form S-8, File No. 333-02181].
10.7 - Western Waste Industries 1992 Option Plan [Incorporated by
reference to Exhibit 99.3 of the Registrant's Registration
Statement on Form S-8, File No. 333-02181].
10.8 - Sanifill, Inc. 1994 Long-Term Incentive Plan [Incorporated by
reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8, File No. 333-08161].
10.9 - Sanifill, Inc. 1989 Stock Option Plan [Incorporated by reference
to Exhibit 99.2 of the Registrant's Registration Statement on
Form S-8, File No. 333-08161].
10.10 - Amended and Restated Revolving Credit Agreement dated as of
August 30, 1996, among the Registrant, its subsidiaries, The
First National Bank of Boston, Bank of America Illinois, J.P.
Morgan Canada, and Morgan Guaranty Trust Company of New York
[Incorporated by reference to Exhibit 10.2 of the Registrant's
Current Report on Form 8-K dated September 3, 1996].
10.11 - Form of Employment Agreement between the Registrant and each of
John E. Drury, Donald F. Moorehead, Jr., David Sutherland-Yoest,
and Chuck A. Wilcox [Incorporated by reference to Exhibit 10.18
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994].
10.12 - Employment Agreement between the Registrant and Rodney R. Proto
[Incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K dated September 3, 1996].
10.13 - Employment Agreement between the Registrant and Earl E. DeFrates
[Incorporated by reference to Exhibit 10.19 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994].
10.14 - Employment Agreement between the Registrant and Gregory T.
Sangalis [Incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-4, File No.
33-59259].
10.15 - Consulting and Non-compete Agreement dated June 25, 1995, among
the Registrant, between the Registrant and John G. Rangos, Sr.
[Incorporated by reference to Exhibit 10.22 to the Registrant's
Quarterly Report on Form 10-Q/A for the period ended June 30,
1995].
10.16 - Employment Agreement dated June 25, 1995, between the Registrant
and Alexander W. Rangos [Incorporated by reference to Exhibit
10.22 to the Registrant's Quarterly Report on Form 10-Q/A for the
period ended June 30, 1995].
10.17 - Employment Agreement dated December 18, 1995, between the
Registrant and Kosti Shirvanian [Incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995].
10.18 - Amended and Restated Revolving Credit Agreement dated as of March
5, 1997, among the Registrant, its subsidiaries, Bank of America
Illinois, Morgan Guaranty Trust Company of New York, and J. P.
Morgan Canada.
11.1 - Computation of Earnings (Loss) Per Common Share.
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of Coopers & Lybrand L.L.P.
24.1 - Form 10-K Limited Power of Attorney.
27.1 - Financial Data Schedule.