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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 AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND 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 EXCHANGED ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
7 1/8% Senior Notes Due 2017
7 1/8% Senior Notes Due 2007
7% Senior Notes Due 2004
6 1/2% Senior Notes Due 2002
5% Convertible Subordinated Notes Due 2006
4 1/2% Convertible Subordinated Notes Due 2001
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 16, 1998, was approximately $10,073,799,486. 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 16, 1998, was 218,995,641.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO
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Proxy Statement for the
1998 Annual Meeting of Stockholders Part III
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 63
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 63
Item 11. Executive Compensation...................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 63
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 64
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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, as measured
by revenues for the 1997 fiscal year, and currently serves the full spectrum of
commercial, industrial, municipal and residential customers in 48 states, the
District of Columbia, Canada, 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, 1997, USA Waste owned or operated an extensive network of
landfills, transfer stations, and collection operations and had a diversified
customer base in excess of seven million with no single customer accounting for
more than 5% of the Company's operating revenues during 1997. The Company
employed approximately 17,700 people as of December 31, 1997.
The terms "USA Waste" and the "Company" refer to USA Waste Services, Inc.,
a Delaware corporation incorporated on April 28, 1995, and includes 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.
The Company's common stock is listed on the New York Stock Exchange under the
trading symbol "UW."
For the year ended December 31, 1997, approximately 62%, 10%, 24%, and 4%
of the Company's revenues were attributable to collection, transfer, disposal,
and other waste management services, respectively. Information regarding the
Company's domestic and foreign operations is included in Note 10 to the
Company's Consolidated Financial Statements included elsewhere herein.
INDUSTRY BACKGROUND
USA Waste operates in the nonhazardous 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 operators 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 a large percentage of the North
American nonhazardous solid waste business.
One of the forces causing consolidation within the solid waste management
industry has been 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, post-closure
monitoring of sites and financial assurances that landfill operators will comply
with the stringent regulations. The result of these regulatory requirements has
been increased costs in various segments of the industry, particularly for
landfill operators.
The costs associated with the new industry regulations have caused some of
the consolidation and acquisition activity within the industry. Large waste
management companies are typically able to generate economies of scale and bring
existing operations into compliance. They have also acquired operations which
either complement existing businesses or otherwise improve their cost structure
and flexibility. The Company expects waste management companies active in
various segments of the industry to continue to seek vertical integration to
enable them to become more cost effective and competitive. Despite this industry
consolidation, many of the smaller localized companies have low cost positions
and provide strong competition in local markets.
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STRATEGY
The Company is focused on continuing to pursue profitable growth and
operational efficiencies in the nonhazardous solid waste business in North
America. Key components of the Company's strategy are:
Growth
Internal Growth
- Increasing revenues through the expansion of existing operations. The
Company continually strives to enhance its existing operations and
increase volume.
External Growth
- Increasing revenues and enhancing profitability through tuck-in and other
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.
- 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 an important 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. The completion of the Company's
recently announced proposed merger with Waste Management, Inc. ("WMI")
will significantly expand the Company's operations, both nationally and
internationally. It will also result in adding operations, such as
hazardous waste disposal, waste to energy operations and environmental
engineering activities, which are outside the Company's traditional
emphasis on solid waste disposal activities.
- Benefiting from the privatization of solid waste services provided by
municipalities. Municipalities currently provide a large percentage of
the solid waste management services in North America. Due to the capital
and regulatory requirement demands as well as the economics of the solid
waste industry, certain portions of these services have been privatized
each year. The Company pursues privatization opportunities where it
believes solid waste services can be provided at a cost efficient yet
profitable level.
Operational Efficiencies
- 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
activity.
- Internalization. The Company strives to strengthen its position in its
existing markets by expanding the scope of services through the
integration of its collection, transfer station, and landfill operations.
Internalization (expressed as a percentage) is the amount of waste
collected by the Company that is disposed at a landfill owned or operated
by the Company. Waste that can be internalized generally has greater
profitability than waste that is disposed of at a third party landfill.
The utilization of internal disposal capacity is an integral component of
the Company's ability to achieve its financial goals and objectives.
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- Decentralized management. Because the Company believes the solid waste
industry in North America is a local and regional business, the Company
is organized based upon a decentralized management and a streamlined
corporate structure. The Company believes this approach enhances its
ability to manage the local aspects of daily operations and service its
customers more effectively.
Financial Flexibility and Strength
- Preserving the financial foundation. The Company monitors the financial
demands of its existing operations, acquisition activities, and capital
expenditures program in an attempt to maintain its financial flexibility
and strength and its ability to capitalize on future opportunities. In
managing its financial resources, the Company utilizes commercial banks,
equity and debt offerings, and issues equity instruments in certain
acquisitions. The Company believes that its ability to continue as an
industry consolidator is directly related to its ability to maintain its
financial flexibility and strength.
The Company's business is subject to extensive federal, state, and local
regulation and legislative initiatives. Further, in some states and
municipalities, its business is subject to environmental regulation, mandatory
recycling laws, prohibitions on the deposit of certain types of 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 the impact that any future regulations or laws
may have on its operations. See "Regulation" and "Legal Proceedings" for
additional information.
ACQUISITION ACTIVITY IN 1997
On March 12, 1997, the Company acquired substantially all of the Canadian
solid waste subsidiaries of Allied Waste Industries Inc., ("Allied") for
approximately $518,000,000 in cash. Those businesses represented 41 collection
operations, seven landfills, and eight transfer stations in the provinces of
Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan with
annualized revenues of approximately $270,000,000.
On April 1, 1997, the Company acquired substantially all of the assets of
Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting
primarily of cash and the assumption of a limited amount of debt. The assets
acquired included 11 collection operations, 11 landfills, six transfer stations,
and three recycling operations, with annualized revenues of approximately
$115,000,000.
On June 10, 1997, the Company acquired the majority of WMI's Canadian solid
waste businesses for $124,000,000 in cash and 1,705,757 shares of the Company's
common stock. The assets acquired included 13 collection operations, one
landfill, and three transfer stations in the provinces of Alberta, British
Columbia, Ontario, and Quebec, with annualized revenues totaling approximately
$124,000,000.
On August 26, 1997, the Company consummated a merger with United Waste
Systems, Inc. ("United") accounted for as a pooling of interests (the "United
Merger"). Under the terms of the United Merger, the Company issued 1.075 shares
of its common stock for each outstanding share of United common stock.
Additionally, at the effective date of the United Merger, United stock options,
whether or not such stock options had vested or become exercisable, were
cancelled in exchange for shares of the Company's common stock equal in market
value to the fair value of such United stock options, as determined by an
independent third party. The United Merger increased the Company's outstanding
shares of common stock by approximately 51,900,000 shares, which included
approximately 1,900,000 shares exchanged for United stock options. United owned
and operated nonhazardous waste disposal, treatment, collection, transfer
station, and recycling businesses and complementary operations. At the time of
the United Merger, United owned or operated 39 landfills, 78 transfer stations,
and 80 collection operations.
In addition to the consummation of the aforementioned acquisition
transactions, the Company acquired 236 collection operations, 31 transfer
stations, and 26 landfills with annualized revenues aggregating approximately
$960,000,000 during 1997.
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RECENT DEVELOPMENTS
On December 9, 1997, the Company announced that it had executed a
definitive agreement to acquire the solid waste divisions of City Management
Holdings Trust ("City Management"), and on January 14, 1998, consummated such
transaction for approximately $735,000,000 consisting primarily of cash and a
limited amount of debt assumed. The businesses acquired include 20 collection
operations, ten landfills, and 12 transfer stations primarily in the state of
Michigan.
On January 27, 1998, the Company announced that it had entered into a
definitive agreement to acquire TransAmerican Waste Industries, Inc.
("TransAmerican") for approximately 2,000,000 shares of the Company's common
stock, subject to certain adjustments, and approximately $43,000,000 in
assumption of debt. This acquisition, which is subject to regulatory approval
and approval of TransAmerican shareholders, is expected to close during the
first half of 1998 and is anticipated to be accounted for as a pooling of
interests. The businesses to be acquired include five collection operations,
nine landfills, and two transfer stations located throughout the southern region
of the United States.
The Company entered into a definitive agreement on February 6, 1998, with
American Waste Systems, Inc. ("American"), to acquire American's solid waste
businesses for approximately $150,000,000 in cash. This transaction, which is
subject to regulatory approval and approval of American's shareholders, is also
expected to close in the first half of 1998. The operations to be acquired
include three landfills and one collection operation located in Ohio.
On March 10, 1998, the Company entered into a definitive agreement and plan
of merger pursuant to which a subsidiary of the Company will be merged with and
into WMI and WMI will become a wholly owned subsidiary of the Company (the "WMI
Merger"). As of the effective time of the WMI Merger, each outstanding share of
WMI, other than shares held in WMI's treasury or owned by WMI, the Company or
any of their wholly owned subsidiaries, will be converted into the right to
receive 0.725 shares of the Company. This transaction, which is expected to
close during 1998, is subject to regulatory approval and approval of the
stockholders of the Company and WMI. It is anticipated that the Company will
issue approximately 345,000,000 shares of its common stock related to this
transaction and that this merger will be accounted for as a pooling of
interests.
OPERATIONS
The Company provides collection, transfer, disposal, and recycling services
to commercial, industrial, municipal and residential customers in various
locations in the United States, Canada, and Puerto Rico.
Management of the Company'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
in the areas of regulatory compliance and reporting, legal services, engineering
services, internal and external development, and strategic planning.
Geographically, a region generally encompasses a multi-state or multi-province
area and may have up to 175 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 certain areas, a
divisional vice president, reporting to a RVP, may oversee several districts.
Collection Operations. 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 the Company, type and
volume or weight of the waste collected, the distance to the disposal facility,
labor cost, and cost of disposal. Most residential solid waste collection
services are performed under contracts with, or franchises granted by,
municipalities or regional
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authorities that have granted the Company 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.
The Company often obtains waste collection accounts through acquisitions,
including the purchase of customer lists and equipment. Once a collection
operation is acquired, programs designed to improve equipment utilization,
employee productivity, operating efficiencies, and overall profitability are
implemented. The Company 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.
The Company's collection operations internalized approximately 53.8% of
disposal costs paid to landfills for the year ended December 31, 1997 as
compared to 49.8% for the comparable prior year period. In the remaining
markets, waste is collected and 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. Transfer stations can also be used to facilitate internalizing disposal
costs by giving Company collection operations more cost effective access to
landfills owned or operated by the Company.
Landfills. Municipal solid waste landfills are the primary depository for
solid waste in North America. 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, the
Company believes that it is generally preferable for its collection operations
to utilize disposal facilities owned or operated by affiliated parties so that
access can be assured on favorable terms. Customers are charged disposal
charges, known as "tipping fees", 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 the Company to dispose of
waste without payment of tipping 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. The Company's average
landfill volume for the year ended December 31, 1997, was approximately 127,300
tons per day, and the average remaining life of the Company's landfills owned or
operated was approximately 25 years based on remaining permitted capacity and
current average daily disposal volumes.
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Recycling. In response to the increasing public environmental awareness and
expanding federal, state, and local regulations pertaining to waste recycling,
the Company 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 the Company 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. Opportunities for expansion in these areas will continue to be
evaluated.
The Company 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, labor costs, the distance the recycled material must be
transported, and the value of the recycled material. Overall, however, the
Company is not materially affected financially by fluctuations in commodity
pricing for recyclable materials.
COMPETITION
The solid waste industry is highly competitive. The industry is comprised
of a number of companies of various sizes, numerous municipalities and other
regional or multi-county authorities, and large commercial and industrial
companies handling their own waste collection or disposal operations.
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 internalize their waste.
The Company competes for collection accounts primarily based on 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 1997, no one commercial customer or
municipal contract accounted for more than 5% of the Company's operating
revenues. 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.
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 vary by the volume or weight, type
of waste collected, treatment requirements, risks involved in the handling or
disposing
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of waste, frequency of collections, distance to final disposal sites, labor
costs 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, 1997, the Company had approximately 17,700 full-time
employees, of which approximately 2,550 were employed in clerical,
administrative, and sales positions, 800 in management, and the balance in
collection, transfer, and disposal operations. Approximately 4,060 of the
Company's employees 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, 1997, the casualty coverages included $2,000,000
primary commercial general liability and $1,000,000 primary automobile liability
supported by $200,000,000 in umbrella insurance protection. 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 and countries in which it has employees. The Company
also currently has an environmental impairment liability ("EIL") insurance
policy for certain of its landfills, transfer stations, and recycling facilities
that provides coverage for property damages and/or bodily injuries to third
parties caused by off-site pollution emanating from such landfills, transfer
stations, or recycling facilities. This policy provides $5,000,000 of coverage
per loss with a $10,000,000 aggregate limit.
To date, the Company has not experienced 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,
results of operations or cash flows. 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. As of December 31, 1997, the Company had provided
letters of credit of approximately $567,729,000 and surety bonds of
approximately $75,271,000 to municipalities and other customers and other
regulatory authorities supporting tax-exempt bonds, performance of landfill
closure and post-closure requirements, insurance contracts, and other contracts.
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,
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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 station is difficult, time-consuming (often taking two to
three years or more), and expensive, and is frequently opposed by local citizen
as well as 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 nonhazardous 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, reinterpreted, 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 an 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. Moreover, the Company has not expended any material amount to
remedy any potential impacts of the Company's solid waste operations on the
public or the environment resulting from changes in such environmental
protection laws. Although the Company, to its
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knowledge, is currently in compliance in all material respects with all
applicable federal, state, and local laws, permits, regulations, and orders
affecting its operations where noncompliance would result in a material adverse
effect on the Company's financial condition, results of operations or cash
flows, 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 or other properties 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 previously 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 nonhazardous waste.
They also require states to develop programs to insure the safe disposal of
solid waste in landfills.
Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of nonhazardous 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 to the extent the
disposal of hazardous substances for which there is a release occurred during
their period of ownership or operation. 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
23% 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
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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 apply only to third party claims and might be insufficient to
cover a significant CERCLA mandated cleanup.
Although the Company may 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 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. The Company has received potentially responsible party
information requests regarding third party disposal sites. The environmental
agencies or other potentially responsible parties could assert that the Company
is liable for environmental response measures arising out of disposal at a site
that was selected by the Company, a waste transporter acquired by the Company,
or a waste transporter with whom the Company 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 potentially reduce the Company's
responsibility for remediation obligations under CERCLA.
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
categories: (1) likelihood of release, (2) waste characteristics, and (3)
targets. As of February 1998, the EPA had proposed or identified approximately
9,500 sites for preliminary assessment. 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
will undergo an assessment of environmental conditions thereon, but it does not
necessarily mean that an actual health or environmental threat currently exists
or has ever existed.
(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 nonhazardous 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
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circumstances, reduce the quantity of pollutants in those discharges. In 1990,
the EPA issued additional rules under the Clean Water Act which establish
standards for management of storm water runoff from landfills and which require
landfills to obtain storm water discharge permits. In addition, if a landfill or
a 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 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. These regulations impose
emission limitations and monitoring and reporting requirements on various
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 that may be more strict than comparable federal laws and regulations
governing hazardous and nonhazardous solid waste disposal, water and air
pollution, 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 the U.S. Congress and the EPA.
Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of hazardous and nonhazardous 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. From time to time, the U.S. Congress has
considered legislation authorizing states to adopt 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.
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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 or revoke contracts
or deny or revoke such permits on the basis of an applicant's (or permit
holder's) 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 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 1998 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
The Company has experienced rapid growth, primarily through acquisitions.
The Company'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 the 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 the Company 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 on existing or
acquired operations, and the management of costs in a changing regulatory
environment. There can be no assurance that the Company will be able to continue
to expand and successfully manage its growth or that the site or pace of its
growth will not adversely affect its existing or acquired operations.
Acquisition Strategy
The Company regularly pursues opportunities 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. In
addition, the Company regularly pursues mergers and acquisition transactions,
some of which are significant, in new markets where the Company believes that it
can successfully become a provider of integrated solid waste management
services. Since 1990, the Company has consummated mergers with five publicly
traded companies, purchased assets from several other publicly traded companies,
and acquired hundreds of privately owned entities in the solid waste industry.
As one of the leading industry consolidators,
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the Company could announce other transactions with either publicly or privately
owned businesses at any time. 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 to the
Company, 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 Operations and Expansion
Significant portions of the Company's current operations are conducted in
Canada, and the Company intends to continue to expand its Canadian operations.
The Company's international operations will also significantly expand upon the
consummation of the WMI Merger. See "Recent Developments." Operations in foreign
countries generally are subject to a number of risks inherent in any business
operating in foreign countries, including political, social, and economic
instability, general strikes, nationalization of assets, currency restrictions
and exchange rate fluctuations, nullification, modification or renegotiation of
contracts, and governmental regulation, all of which are beyond the control of
the Company. 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.
Impact of WMI Transaction
Successful consummation of the WMI Merger will initially alter the nature
of the Company's business by significantly expanding the Company's domestic and
international operations and by adding operations, such as hazardous waste
disposal, waste to energy operations and environmental engineering activities.
If the WMI Merger is consummated, the Company's financial position is expected
to become more leveraged, which may limit its ability to incur additional
indebtedness and maintain its financial flexibility and strength. The success of
the WMI Merger will depend upon a number of factors, most importantly the
ability of the Company to realize expected synergies from the combined
operations of WMI and the Company. The consummation of the transaction is
subject to numerous conditions, and there can be no assurance that the WMI
Merger will occur as planned.
Need for Capital; Future Debt and Equity Financings
The Company expects to require additional capital from time to time to
pursue its acquisition strategy and to fund internal growth. A portion of the
Company's future capital requirements may be provided through future debt
incurrences or issuances of equity securities. There can be no assurance that
the Company will be successful in obtaining additional capital through such debt
incurrences or issuances of additional equity securities.
The Company has historically used variable rate debt under revolving bank
credit arrangements as one method of financing its rapid growth. Although recent
financings by the Company have reduced the amount of variable rate debt
currently outstanding, the Company intends to continue to use variable rate debt
as a financing alternative. To the extent that variable interest rates tend to
fluctuate as general interest rates change, an increase in interest rates could
have a material adverse effect on the Company's earnings in the future.
Profitability May be Affected by Factors Beyond the Company's Control,
Including Competition
The waste management industry is highly competitive and requires
substantial capital resources. The industry consists of two other large national
waste management companies, WMI and Browning-Ferris Industries, Inc. ("BFI"), as
well as numerous local and regional companies of varying sizes and financial
resources. The Company competes with numerous waste management companies, some
of which have significantly larger operations and greater resources than the
Company. On March 10, 1998, the Company and
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WMI entered into a agreement and plan of merger pursuant to which WMI will
become a wholly owned subsidiary of the Company. See "Recent Developments." The
Company also competes with those counties and municipalities that maintain their
own waste collection and disposal operations. These counties and municipalities
may have financial advantages due to the availability to them of tax revenues
and tax-exempt financing. In addition, competitors may reduce the price of their
services in an effort to expand sales volume or to win competitively bid
municipal contracts. Profitability may also be 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.
Capitalized Expenditures
In accordance with generally accepted accounting principles, the Company
capitalizes certain expenditures and advances relating to their acquisitions,
pending acquisitions, and landfill development and expansion projects. Indirect
acquisition costs, such as executive salaries, general corporate overhead,
public affairs and other corporate services, are expensed as incurred. The
Company's policy is to charge against earnings any unamortized capitalized
expenditures and advances (net of any portion thereof that the Company estimates
will be recoverable, through sale or otherwise) relating to any operation that
is permanently shut down, any pending acquisition that is not consummated, and
any landfill development or expansion project that is not successfully
completed. There can be no assurance that the Company in future periods will not
be required to incur a charge against earnings in accordance with such policy,
which charge, depending on the magnitude thereof, could have a material adverse
effect on the Company's financial position or results of operations.
Potential Adverse Effect of Government Regulation
The Company's operations are subject to and substantially affected by
federal, state and local laws, regulations, orders, and permits which govern
environmental protection, health and safety, zoning, and other matters. These
laws, regulations, orders, and permits 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. In particular, the Company is subject to extensive and
evolving environmental and land use laws and regulations, which have become
increasingly stringent. These laws and regulations affect the Company's
businesses in a variety of ways. In order to develop and operate a landfill or
other solid waste management facility, it is necessary to obtain and maintain in
effect various facility permits and other governmental approvals, including
those relating to zoning, environmental protection and land use. These permit
approvals are difficult, time consuming and costly to obtain and may be subject
to community opposition by various local officials or citizens, regulatory
delays, subsequent modifications and other uncertainties. There can be no
assurance that the Company will be successful in obtaining and maintaining in
effect permits and approvals required for the successful operation and growth of
its business, including permits and approvals for the development of additional
disposal capacity needed to replace existing capacity that is exhausted. The
siting, design, operation and closure of landfills are also subject to extensive
federal and state regulations. These regulations could also require the Company
to undertake investigatory or remedial activities, to curtail operations or to
close a landfill temporarily or permanently. Furthermore, future changes in
these regulations may require the Company to modify, supplement, or replace
equipment or facilities at costs which could be substantial.
Potential Environmental Liability
The Company may be subject to liability for environmental damage that its
landfills, transfer stations, and collection operations may have caused 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 hazardous
substances, the transportation, treatment or disposal of which was arranged for
by the Company or predecessor owners of operations or assets acquired by the
Company. Any
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substantial liability for environmental damage could materially adversely affect
the operating results and financial condition of the Company.
In the ordinary course of its business, the Company may become involved in
a variety of legal and administrative proceedings relating to land use and
environmental laws and regulations. These may include proceedings by federal,
state or local agencies seeking to impose civil or criminal penalties on the
Company for violations of such laws and regulations, or to impose liability on
the Company under federal or state statutes, or to revoke or deny renewal of a
permit; actions brought by citizens groups, adjacent landowners or governmental
ethics opposing the issuance of a permit or approval to the Company or alleging
violations of the permits pursuant to which the Company operates or laws or
regulations to which the Company is subject; and actions seeking to impose
liability on the Company for any environmental damage at its owned or operated
facilities (or at facilities formerly owned by the Company or its predecessors)
or damage that those facilities or other properties may have caused to adjacent
landowners or others, including groundwater or soil contamination. The adverse
outcome of one or more of these proceedings could have a material adverse effect
on the Company's financial position, results of operations or cash flows.
During the ordinary course of operations, the Company has from time to time
received, and expects that it may in the future from time to time receive,
citations or notices from governmental authorities that its operations are not
in compliance with its permits or certain applicable environmental or land use
laws and regulations. The Company generally seeks to work with the authorities
to resolve the issues raised by such citations or notices. There can be no
assurance, however, that the Company will always be successful in this regard or
that such future citations or notices will not have a materially adverse effect
on the Company's financial position, results of operations or cash flows.
The Company's insurance for environmental liability is very limited because
the Company believes that the cost for such insurance is high relative to the
coverage it would provide. Due to the limited nature of such insurance coverage
for environmental liability, if the Company were to incur liability for
environmental damage, such liability could have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Alternatives to Landfill Disposal
Alternatives to landfill disposal, such as recycling and composting, are
increasingly being used. In addition, in certain of the Company's markets,
incineration is an alternative to landfill disposal. There also has been an
increasing trend at the state and local levels to mandate recycling and waste
reduction at the source and to prohibit the disposal of certain types of wastes,
such as yard wastes, at landfills. These developments may result in the volume
of waste going to landfills being reduced in certain areas, which may affect the
Company's ability to operate its landfills at full capacity and the prices that
can be charged for landfill disposal services.
Shares Eligible for Future Sale May Adversely Affect Market Price of Stock
Sales of substantial amounts of the Company's common stock in the public
market could adversely affect the market price of such stock. The Company
maintains a shelf registration statement for the benefit of certain stockholders
relating to 4,000,000 shares of the Company's common stock. Such shares are
immediately saleable in the open market. In addition, the Company maintains a
shelf registration statement covering approximately 17,700,000 shares of the
Company's common stock at March 1, 1998, which may be issued in acquisitions. In
the event the market price of the Company's stock were adversely affected by
such sales, the Company's access to equity capital markets could be adversely
affected, and issuances of stock by the Company 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 and fourth quarter
results of operations. 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
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and summer months and (ii) the volume of 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,
1997, the Company's solid waste landfills aggregated approximately 47,500 total
acres, including approximately 14,000 acres that are currently permitted.
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, 1997, aggregate annual
rental payments on real estate leased by the Company were approximately
$17,732,000.
The Company owns approximately 13,450 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 approximately 918,900 steel containers in
use, ranging from one to 45 cubic yards, and a number of stationary compactors
and self-dumping hoppers.
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.
As of December 31, 1997, the Company or its subsidiaries has been notified
that they are potentially responsible parties ("PRPs") in connection with six
locations listed on the Superfund National Priorities List ("NPL"). None of the
six NPL sites at which claims have been made against the Company are owned by
the Company, and they are at different procedural stages under Superfund. At
four of the NPL sites, the Company's liability is well defined as a consequence
of a governmental decision as to the appropriate remedy. At the others, where
investigations have not been completed, remedies not selected or responsible
parties have been unable to reach agreement, the Company's liability is less
certain. While the Company, based on its status reviews of its PRP claims, does
not currently anticipate that the amount of such liabilities will have a
material adverse effect on the Company's operations, financial condition or cash
flows, the measurement of environmental liabilities is inherently difficult and
the possibility remains that technological, regulatory or enforcement
developments, the results of environmental studies, or other factors could
materially alter this expectation at any time.
The Company has been advised by the U.S. Department of Justice that United
is a target of a federal investigation relating to alleged violations of the
Clean Water Act at the Laurel Ridge Landfill in Kentucky. The investigation
relates to a period prior to the Company's acquisition of United. The Company is
not a target of the investigation and has pledged its full cooperation to the
government.
The Company and certain of its subsidiaries are parties 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, results of operations or
cash flows. 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 judgment for
violation of an 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. The Company is also
16
19
subject from time to time 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 the Company during the
fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages, as of March 1, 1998, 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 53, 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. Prior thereto, Mr.
Drury served in various management capacities at BFI, including President and
Chief Operating Officer of BFI from 1982 to 1991.
Rodney R. Proto, age 49, 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.
("Sanifill") 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.
Earl E. DeFrates, age 54, 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.
Susan J. Piller, age 45, has been Senior Vice President -- Employee
Relations since May 1996. Prior to joining the Company, Ms. Piller was at BFI
from 1984 until 1996, where she held various labor and employment positions,
including Vice President -- Employee Relations. Prior thereto, Ms. Piller was
employed by the Houston law firm of Fulbright & Jaworski.
William A. Rothrock, age 45, has been Senior Vice President -- Business
Development of the Company since August 1996. Mr. Rothrock held similar business
development positions with Sanifill from 1990 to 1996 and BFI from 1985 to 1990.
Ronald H. Jones, age 47, 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.
Gregory T. Sangalis, age 42, 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 WMI serving in various legal capacities
since 1986 and including Group Vice President and General Counsel from August
1992 to April 1995. Prior to joining WMI, he was General Counsel of Peavey
Company and had been engaged in the private practice of law in Minnesota.
Bruce E. Snyder, age 42, 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
17
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and management company in Oklahoma City, Oklahoma, and its affiliated companies,
ultimately serving as Senior Vice President.
18
21
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
------ ------
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............................................. $38.88 $28.63
Second Quarter............................................ 39.25 29.50
Third Quarter............................................. 44.13 38.00
Fourth Quarter............................................ 41.75 32.63
1998
First Quarter (through March 16, 1998).................... $46.00 $34.44
On March 16, 1998, the closing sale price as reported on the NYSE was
$46.00 per share. The number of holders of record of common stock based on the
transfer records of the Company at March 16, 1998, was 4,032. On March 10, 1998,
the last trading day prior to the announcement of the WMI transaction, the
closing stock price as reported on the NYSE was $39.13 per share.
The Company has never paid cash dividends on its common stock. Although
payment of dividends on the common stock is currently restricted by the terms of
the Company's revolving credit facility, the Board of Directors may review its
dividend policy in the future. See Note 4 to the Consolidated Financial
Statements of the Company included elsewhere herein.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information as of December
31, 1997 and 1996, and for each of the years in the three year period ended
December 31, 1997, has been derived from the audited consolidated financial
statements of the Company included elsewhere herein. This information should be
read in conjunction with such Consolidated Financial Statements and related
notes thereto. The selected consolidated financial information as of December
31, 1995, 1994 and 1993, and for each of the years in the two year period ended
December 31, 1994, has been derived from audited consolidated financial
statements of the Company, that have been previously included in the Company's
reports under the Exchange Act, that are not included herein. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenues......................................... $2,613,768 $1,649,131 $1,216,082 $1,043,687 $ 887,972
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 1,345,769 881,401 672,117 596,868 514,483
General and administrative............................... 284,946 200,101 169,686 159,097 144,623
Depreciation and amortization............................ 303,241 191,044 143,878 127,108 108,024
Merger costs............................................. 109,411 126,626 26,539 3,782 --
Unusual items............................................ 24,720 63,800 4,733 8,863 2,672
---------- ---------- ---------- ---------- ----------
2,068,087 1,462,972 1,016,953 895,718 769,802
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 545,681 186,159 199,129 147,969 118,170
---------- ---------- ---------- ---------- ----------
Other income (expense):
Shareholder litigation settlement and other litigation
related costs.......................................... -- -- -- (79,400) (5,500)
Interest expense:
Nonrecurring........................................... -- -- (10,994) (1,254) --
Other.................................................. (104,261) (60,497) (58,619) (54,102) (50,737)
Interest income.......................................... 7,634 6,699 6,682 5,085 5,072
Other income, net........................................ 14,213 6,376 4,891 2,629 1,749
---------- ---------- ---------- ---------- ----------
(82,414) (47,422) (58,040) (127,042) (49,416)
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary item.......... 463,267 138,737 141,089 20,927 68,754
Provision for income taxes................................. 189,944 70,398 60,313 8,959 29,170
---------- ---------- ---------- ---------- ----------
Income before extraordinary item........................... 273,323 68,339 80,776 11,968 39,584
Extraordinary item, net of taxes........................... (6,293) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income................................................. $ 267,030 $ 68,339 $ 80,776 $ 11,968 $ 39,584
========== ========== ========== ========== ==========
Basic earnings per common share:
Income before extraordinary item......................... $ 1.31 $ 0.39 $ 0.56 $ 0.08 $ 0.32
Extraordinary item....................................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income................................................. $ 1.28 $ 0.39 $ 0.56 $ 0.08 $ 0.32
========== ========== ========== ========== ==========
Diluted earnings per common share:
Income before extraordinary item......................... $ 1.26 $ 0.37 $ 0.54 $ 0.08 $ 0.32
Extraordinary item....................................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income............................................... $ 1.23 $ 0.37 $ 0.54 $ 0.08 $ 0.32
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................................ $ 86,736 $ 31,842 $ 26,134 $ 1,901 $ 37,565
Intangible assets, net..................................... 1,645,985 804,251 433,944 250,551 196,353
Total assets............................................... 6,622,845 3,631,547 2,455,102 1,833,099 1,617,422
Long-term debt, including current maturities............... 2,763,729 1,504,888 909,050 759,123 711,014
Stockholders' equity....................................... 2,628,976 1,473,990 1,149,885 688,603 623,510
20
23
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, 1997, 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 1997 to reflect the acquisition of United,
consummated August 26, 1997, 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 nonhazardous solid waste management services,
consisting of collection, transfer, disposal, recycling, and other miscellaneous
services in various locations throughout the United States, Canada, and Puerto
Rico. Since August 1990, the Company has experienced significant growth
principally through the acquisition and integration of solid waste businesses
and is currently the third largest nonhazardous solid waste management company
in North America, as measured by revenues for the 1997 fiscal year. As of
December 31, 1997, the Company owned or operated an extensive network of
landfills, transfer stations, and collection operations serving in excess of
seven million customers.
The Company's operating 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 operating 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 operating 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, capitalized interest, 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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RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percentages for the various
Consolidated Statements of Operations line items and for certain supplementary
data.
PERIOD TO PERIOD CHANGE
-----------------------------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND
1996 1995
---------------------- ---------------------
STATEMENT OF OPERATIONS:
Operating revenues................................. $964,637 58.5% $433,049 35.6%
-------- --------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)..................... 464,368 52.7 209,284 31.1
General and administrative....................... 84,845 42.4 30,415 17.9
Depreciation and amortization.................... 112,197 58.7 47,166 32.8
Merger costs..................................... (17,215) (13.6) 100,087 377.1
Unusual items.................................... (39,080) (61.3) 59,067 1,248.0
-------- --------
605,115 41.4 446,019 43.9
-------- --------
Income from operations............................. 359,522 193.1 (12,970) (6.5)
-------- --------
Other income (expense):
Interest expense:
Nonrecurring.................................. -- -- 10,994 100.0
Other......................................... (43,764) (72.3) (1,878) (3.2)
Interest income.................................. 935 14.0 17 0.3
Other income, net................................ 7,837 122.9 1,485 30.4
-------- --------
(34,992) (73.8) 10,618 18.3
-------- --------
Income before income taxes and extraordinary
item............................................. 324,530 233.9 (2,352) (1.7)
Provision for income taxes......................... 119,546 169.8 (10,085) (16.7)
-------- --------
Income before extraordinary item................... 204,984 300.0 (12,437) (15.4)
Extraordinary item, net of taxes................... (6,293) (100.0) -- --
-------- --------
Net income......................................... $198,691 290.7% $(12,437) (15.4)%
======== ========
SUPPLEMENTARY DATA:
EBITDA(1).......................................... $471,719 125.1% $ 34,196 10.0%
EBITDA, excluding merger costs and unusual
items(1)......................................... 415,424 73.2 193,350 51.7
- ---------------
(1) EBITDA represents income from operations plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance under
generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when
analyzing the financial position and performance of the Company.
22
25
The following table presents, for the periods indicated, the percentage
relationship that the various Consolidated Statements of Operations line items
and certain supplementary data bear to operating revenues.
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
STATEMENT OF OPERATIONS:
Operating revenues:
Collection................................................ 62.2% 54.8% 54.3%
Transfer.................................................. 10.2 10.3 8.9
Disposal.................................................. 23.8 27.9 27.9
Other..................................................... 3.8 7.0 8.9
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 51.5 53.4 55.2
General and administrative................................ 10.9 12.1 14.0
Depreciation and amortization............................. 11.6 11.6 11.8
Merger costs.............................................. 4.2 7.7 2.2
Unusual items............................................. 0.9 3.9 0.4
----- ----- -----
79.1 88.7 83.6
----- ----- -----
Income from operations...................................... 20.9 11.3 16.4
----- ----- -----
Other income (expense):
Interest expense:
Nonrecurring........................................... -- -- (0.9)
Other.................................................. (4.0) (3.7) (4.8)
Interest Income........................................... 0.3 0.4 0.5
Other income, net......................................... 0.5 0.4 0.4
----- ----- -----
(3.2) (2.9) (4.8)
----- ----- -----
Income before income taxes and extraordinary item........... 17.7 8.4 11.6
Provision for income taxes.................................. 7.2 4.3 5.0
----- ----- -----
Income before extraordinary item............................ 10.5 4.1 6.6
Extraordinary item, net of taxes............................ (0.2) -- --
----- ----- -----
Net income.................................................. 10.3% 4.1% 6.6%
===== ===== =====
SUPPLEMENTARY DATA:
EBITDA(1)................................................... 32.5% 22.9% 28.2%
EBITDA, excluding merger costs and unusual items(1)......... 37.6 34.4 30.8
- ---------------
(1) EBITDA represents income from operations plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance under
generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when
analyzing the financial position and performance of the Company.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Operating Revenues
Operating revenues increased $964,637,000, or 58.5%, in 1997 as compared to
the respective prior year. This increase was primarily attributable to the
effect of acquisitions of domestic and Canadian solid waste businesses and the
internal growth of comparable operations. Acquisitions of domestic solid waste
businesses consummated during 1997 and the effect of such acquisitions
consummated during 1996 accounted for increases in operating revenues of
$624,200,000, or 37.8%. Acquisitions of Canadian solid waste businesses
consummated during 1997 and the effect of such acquisitions consummated during
1996, accounted for increases in operating revenues of $309,100,000, or 18.7%.
Internal growth of comparable operations resulted
23
26
in increases in operating revenues of $155,600,000, consisting of 3.3% due to
pricing and 6.1% due to volume. Offsetting these increases was the disposition
of certain nonstrategically located solid waste collection and disposal
operations and certain non-core businesses in 1997. Although the Company
operated in one line of business, integrated nonhazardous solid waste management
which encompasses the entire waste stream from collection to transfer station
and landfill, the change in the Company's mix of operating revenues from 1996 to
1997 reflects an increase in collection revenues as a percentage of total
revenues from 54.8% to 62.2%. This change is primarily the result of
acquisitions of certain solid waste businesses with large collection operations
in the first and second quarters of 1997, including the Canadian solid waste
subsidiaries of Allied and a majority of the Canadian solid waste businesses of
WMI.
Operating revenues increased $433,049,000, or 35.6%, in 1996 as compared to
the previous year. This increase was primarily attributable to 1996 acquisitions
and the full year effect of 1995 acquisitions which resulted in increases in
operating revenues of $349,757,000 or 28.8%. Internal growth of comparable
operations resulted in an increase in operating revenues of $100,637,000,
representing a 2.0% price increase and 6.3% volume increase. These increases
were partially offset by a decrease in operating revenues from non-core
businesses and a decrease in operating revenues related to divestitures.
As discussed above, the Company has made significant investments in
Canadian solid waste businesses in 1997 primarily through the acquisitions of
the Canadian solid waste subsidiaries of Allied in the first quarter and a
majority of WMI's Canadian solid waste businesses in the second quarter. As a
result, operating revenues from foreign operations have significantly increased
as a percentage of total operating revenues from 1995 to 1997. The following
table summarizes the Company's operating revenues by geographic area and the
percentage relationship of operating revenue by geographic area to total
operating revenues (dollars in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
United States and Puerto Rico........ $2,265,526 86.7% $1,624,742 98.5% $1,210,827 99.6%
Canada............................... 337,504 12.9 15,039 0.9 -- --
Mexico............................... 10,738 0.4 9,350 0.6 5,255 0.4
---------- ----- ---------- ----- ---------- -----
Total operating revenues... $2,613,768 100.0% $1,649,131 100.0% $1,216,082 100.0%
========== ===== ========== ===== ========== =====
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses increased $464,368,000, or 52.7%, in 1997 as
compared to the prior year. The increase in operating costs and expenses was
primarily attributable to new acquisitions, however, was offset by the increased
utilization of internal disposal capacity and cost reductions in comparable
operations. The effect of new acquisitions resulted in increases to operating
costs and expenses of $555,939,000, of which, $163,473,000 related to
acquisitions of Canadian solid waste businesses. A decrease in operating costs
and expenses from comparable operations of $56,701,000 resulted primarily from
the increased utilization of internal disposal capacity from 49.8% in 1996 to
53.8% in 1997, and operating synergies realized from tuck-in acquisitions and
the Company's mergers with United, Sanifill, and Western Waste Industries
("Western") in August 1997, August 1996, and May 1996, respectively.
Additionally, a decrease in operating costs and expenses in 1997 as compared to
1996 was the result of the disposition of certain nonstrategically located solid
waste collection and disposal operations and certain non-core businesses.
Operating costs and expenses decreased as a percentage of operating revenues
from 53.4% in 1996 to 51.5% in 1997. This decrease in operating costs and
expenses as a percentage of operating revenues was slightly offset by the effect
in the change in revenue mix as discussed above. Typically, as a percentage of
operating revenues, collection operations have higher operating costs and lower
margin returns than disposal operations.
Operating costs and expenses increased $209,284,000, or 31.1%, in 1996 as
compared to 1995, however, have decreased as a percentage of operating revenues
from 55.2% in 1995 to 53.4% in 1996. The net increases in operating costs and
expenses was primarily attributable to the effect of new acquisitions, net of
dispositions, which resulted in an increase of $283,563,000. This increase was
offset by a decrease of $14,215,000 related to increased internalization of
internal disposal capacity from 44.9% in 1995 to 49.8% in 1996, a decrease of
24
27
$4,506,000 related to the Company's decision to discontinue certain non-core
businesses, and a decrease of $45,258,000 related to improvements in comparable
operations primarily as a result of operating synergies realized from tuck-in
acquisitions and mergers with Chambers, Sanifill, and Western in June 1995,
August 1996, and May 1996, respectively.
General and Administrative
General and administrative expenses increased $84,845,000, or 42.4%, in
1997 as compared to 1996, and increased $30,415,000, or 17.9%, in 1996 as
compared to 1995. As a percentage of operating revenues, however, general and
administrative expenses decreased from 14.0% in 1995 to 12.1% in 1996 to 10.9%
in 1997. 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
United, Sanifill, Western, and Chambers in August 1997, August 1996, May 1996,
and June 1995, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased $112,197,000, or 58.7%, in
1997 as compared to 1996, and increased $47,166,000, or 32.8%, in 1996 as
compared to 1995. As a percentage of operating revenues, however, depreciation
and amortization decreased from 11.8% in 1995 to 11.6% in 1996 and 1997. The
increase in depreciation and amortization is primarily due to acquisitions,
increased landfill volumes, and upgrades to existing operations. The incremental
depreciation and amortization due to the improved utilization of internal
disposal capacity was offset by the improved utilization of equipment through
internal growth in collection and disposal operations.
Merger Costs
In the third quarter of 1997, the Company recorded $89,152,000 related to
its merger with United and $15,000,000 related to the acquisitions of other
businesses accounted for as poolings of interests. The costs related to the
United Merger included $17,566,000 of transaction costs, $26,198,000 of
severance and other termination benefits, $21,629,000 for the integration of
operations, and $23,759,000 of estimated losses related to the disposition of
duplicate facilities and the disposition of a Pennsylvania landfill ordered by
the United States Department of Justice. In the first and second quarters of
1997, the Company recorded $1,996,000 and $3,263,000, respectively, related to
the acquisition of other businesses accounted for as poolings of interests.
In the third quarter of 1996, the Company recorded $84,751,000 of merger
costs related to acquisitions accounted for as poolings of interests. Of that
amount, $80,000,000 related to the Company's merger with Sanifill, which
included $9,500,000 of transaction costs, $20,000,000 of relocation, severance,
and other termination benefits, $13,000,000 for the integration of operations,
and $37,500,000 for the disposal of duplicate facilities. The Company recorded
$35,000,000 of merger costs in the second quarter of 1996 related to its merger
with Western, which included $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 and $5,296,000 related to the acquisitions of other
businesses accounted for as poolings of interests. In the fourth quarter of
1996, the Company recorded $1,579,000 related to the acquisition of other
businesses accounted for as poolings of interests.
In 1995, the Company recorded $26,539,000 of merger costs related to
acquisitions accounted for as poolings of interests. Of that amount, $25,073,000
related to the Company's merger with Chambers in June 1995, which included
$11,900,000 of transaction costs, $9,473,000 of severance and other termination
benefits, and $3,700,000 of costs for integrating operations.
Unusual Items
In the third quarter of 1997, the Company recorded charges for unusual
items of $24,720,000, which included $10,400,000 of estimated losses for the
closure and abandonment of two transfer stations in Minnesota, $8,400,000 of
estimated losses related to the closure and abandonment of two landfills in
25
28
Massachusetts, and $5,920,000 of reserves for various other terminated projects.
In the third quarter of 1996, the Company recorded charges for unusual items of
$50,848,000, which included $28,900,000 for estimated losses related to the
disposition of certain non-core business assets, $15,000,000 of project reserves
related to certain operations in Mexico, and $6,948,000 of reserves for various
other terminated projects. In the second quarter of 1996, unusual items included
$4,824,000 of retirement benefits associated with Western's pre-merger
retirement and severance plans and $8,128,000 of estimated future losses related
to municipal solid waste contracts in California as a result of the decline in
the prices of recyclable materials.
Income from Operations
Income from operations increased $359,522,000 in 1997 and decreased
$12,970,000 in 1996 as compared to the respective prior year periods due to the
reasons discussed above. Exclusive of merger costs and unusual items, income
from operations as a percentage of operating revenues was 26.0%, 22.8%, and
18.9% in 1997, 1996, and 1995, respectively. The improvement in recurring
operations was the result of economies of scale realized by the Company as a
result of recent mergers and acquisitions, increased utilization of internal
disposal capacity, and improvements in comparable operations.
Other Income and Expense
Other income and expense consists of interest expense, interest income, and
other income. Interest expense, gross of amounts capitalized, increased due to
the Company's outstanding indebtedness. Interest capitalized was $25,198,000,
$21,189,000, and $13,808,000 in 1997, 1996, and 1995, respectively. The increase
in capitalized interest during each period is due to development activity
incurred in connection with disposal sites acquired in each respective year.
Nonrecurring interest of $10,994,000 in 1995 consists of various extension fees
and other charges related to the refinancing of certain Chambers senior notes in
the second quarter of 1995.
Provision for Income Taxes
The Company recorded a provision for income taxes before extraordinary
items of $189,944,000 in 1997, compared to $70,398,000 and $60,313,000 in 1996
and 1995, respectively. The difference in the provision for income taxes at the
federal statutory rate and the recorded amount primarily relates to
nondeductible merger costs and state and local income taxes.
Income before Extraordinary Item
For reasons discussed above, income before extraordinary item was
$80,776,000 in 1995, $68,339,000 in 1996, and $273,323,000 in 1997. Income
before extraordinary item, exclusive of nonrecurring charges and assuming a 40%
effective tax rate, increased $160,941,000 and $87,485,000 in 1997 and 1996,
respectively, as compared to the corresponding prior year.
Extraordinary Item
During the third quarter of 1997, the Company recorded extraordinary losses
related to the early retirement of two privately placed senior note issuances of
approximately $9,286,000, comprised of prepayment penalties of approximately
$7,975,000 and unamortized deferred offering costs of approximately $1,311,000.
Additionally, during the third quarter of 1997, the Company recorded
extraordinary losses of approximately $1,206,000 primarily related to the
write-off of the unamortized deferred financing costs related to United's credit
facility which was retired upon consummation of its merger with the Company.
Net Income
Net income was $80,776,000, $68,339,000, and $267,030,000 for 1995, 1996,
and 1997, respectively, for reasons discussed above.
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29
Variation in Quarterly Results
The Company has grown significantly through acquisitions, including the
consummation of one merger in 1997 and two mergers in 1996 with other publicly
owned companies 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, including quarterly results, have been restated. Moreover, the Company
incurred nonrecurring charges related to these mergers of $89,152,000 in the
third quarter of 1997 and $35,000,000 and $80,000,000 in the second and third
quarters of 1996, respectively. Additionally, the Company recognized other
nonrecurring charges of $18,248,000 in the second quarter, $55,599,000 in the
third quarter, and $1,579,000 in the fourth quarter of 1996, and $1,996,000 in
the first quarter, $3,263,000 in the second quarter, and $39,720,000 in the
third quarter of 1997, as further discussed in Notes 2, 11 and 13 to the
Consolidated Financial Statements included elsewhere herein.
The merger costs and unusual items (and the tax effects of such charges)
have significantly affected the quarterly trend analysis of the Company's
operating results for 1996 and 1997. A comparison of the reported quarterly
earnings (loss) per share for 1996 and 1997 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, is as follows:
AS REPORTED PRO FORMA
---------------- ---------------
BASIC DILUTED BASIC DILUTED
------ ------- ----- -------
1996
First Quarter...................................... $ 0.20 $ 0.19 $0.20 $0.19
Second Quarter..................................... 0.03 0.03 0.27 0.26
Third Quarter...................................... (0.16) (0.16) 0.33 0.31
Fourth Quarter..................................... 0.32 0.30 0.33 0.31
1997
First Quarter...................................... $ 0.30 $ 0.29 $0.31 $0.29
Second Quarter..................................... 0.43 0.40 0.44 0.41
Third Quarter...................................... 0.09 0.09 0.50 0.47
Fourth Quarter..................................... 0.47 0.45 0.47 0.45
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, 1997, the Company had working capital of $86,736,000 (a
ratio of current assets to current liabilities of 1.15:1) and a cash balance of
$51,241,000, which compares to working capital of $31,842,000 (a ratio of
current assets to current liabilities of 1.08:1) and a cash balance of
$26,079,000 as of December 31, 1996. For the year ended December 31, 1997, net
cash from operating activities was approximately $452,832,000, as compared to
$283,351,000 in 1996 and $128,692,000 in 1995, and net cash from financing
activities was approximately $1,603,985,000, as compared to $514,849,000 in 1996
and $382,811,000 in 1995. In 1997, net cash from operating activities and
financing activities was primarily used to fund acquisitions of businesses of
$1,818,996,000, which includes approximately $97,000,000 for a 49% interest in a
partnership formed for the purpose of acquiring shares of WMI (see "Recent
Developments"),
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and for capital expenditures of $436,317,000. The 49% partnership interest is
included in other assets at December 31, 1997, in the Consolidated Financial
Statements included herein. Net cash from operating activities and financing
activities in 1996 and 1995 was also primarily used to fund acquisitions of
businesses of $403,672,000 and $268,687,000, respectively, and for capital
expenditures of $443,247,000 and $252,648,000, respectively.
In general, 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 1998 capital expenditures through internally generated cash flow and amounts
available under its senior revolving credit facility.
SIGNIFICANT FINANCING EVENTS
At December 31, 1996, the Company had borrowed $637,000,000 and had letters
of credit issued of $277,994,000 under its $1,200,000,000 senior revolving
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 was available for standby
letters of credit of up to $500,000,000. On August 7, 1997, the credit facility
was again replaced with a $2,000,000,000 senior revolving credit facility with
the same general items, covenants, and limitations, which is available for
standby letters of credit up to $650,000,000. At December 31, 1997, the Company
had borrowed $430,000,000 and had letters of credit of $467,029,000 under its
$2,000,000,000 senior revolving credit facility. The applicable interest rate
and facility fee at December 31, 1997, was 6.1% per annum and 0.1125% per annum,
respectively.
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Convertible Notes Offering").
Interest is payable semi-annually in February and August. The notes are
convertible by the holders into shares of the Company's common stock at any time
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 at which time the notes will be redeemed at
par, 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,
to fund acquisitions, and for general corporate purposes.
On February 7, 1997, concurrent with the Convertible 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 3, 1997, prior to its becoming a wholly owned subsidiary of the
Company, United completed a public offering in which it issued 3,450,000 shares
of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares
of the Company's common stock, priced at $33.95 per share). The net proceeds of
approximately $119,000,000 were used to repay approximately $47,000,000 of debt
under United's credit facility and for general corporate purposes.
During August 1997 and September 1997, the Company prepaid the holders of
both privately placed senior note issuances an aggregate amount of $182,500,000
with proceeds from its senior revolving credit
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31
facility. Interest on these privately placed senior notes ranged from 7.29% to
8.44%. In connection with this transaction, the Company was required to pay
prepayment penalties of approximately $7,975,000, which was recorded as an
extraordinary item in the third quarter of 1997.
On September 12, 1997, the Company issued $300,000,000 of 7% senior notes
due October 1, 2004, and $300,000,000 of 7 1/8% senior notes due October 1,
2007. The senior notes constitute senior and unsecured obligations of the
Company, ranking equal in right of payment with all other senior and unsecured
obligations of the Company, as defined. The senior notes are redeemable at the
option of the Company at any time and from time to time at par of the principal
amount of such notes, plus accrued interest. Deferred offering costs of
approximately $4,125,000 were incurred and are being amortized ratably over the
life of the senior notes. The proceeds were used to repay debt under the
Company's senior revolving credit facility. In anticipation of this offering,
the Company entered into interest rate locks on July 25, 1997, with various
institutions as a hedging transaction to cover the future issuance of
$600,000,000 of debt. The gain realized from this hedging transaction of
approximately $5,632,000 is being amortized over the life of the related notes
using the effective interest method and has the effect of reducing the
all-inclusive interest rate to 6.90% on the 7% senior notes due October 1, 2004,
and 7.06% on the 7 1/8% senior notes due October 1, 2007. Interest is payable
semiannually on October 1 and April 1.
On December 17, 1997, the Company issued $350,000,000 of 6 1/2% senior
notes due December 15, 2002, and $150,000,000 of 7 1/8% senior notes due
December 15, 2017. The senior notes constitute senior and unsecured obligations
of the Company ranking equal in right of payment with all other senior and
unsecured obligations of the Company, as defined. The 6 1/2% senior notes due
December 15, 2002, are not redeemable. The $150,000,000 of 7 1/8% senior notes
due December 15, 2017, are redeemable, in whole or in part, at the option of the
Company at any time and from time to time at a redemption price equal to the
Make-Whole Price, as defined. Deferred offering costs of approximately
$3,713,000 were incurred and are being amortized ratably over the life of the
senior notes. The proceeds were used to repay debt under the Company's senior
revolving credit facility. In anticipation of this offering, the Company entered
into interest rate locks on December 9, 1997, with various institutions as a
hedging transaction to cover the future issuance of $500,000,000 of debt. The
amount paid by the Company from this hedging transaction of approximately
$6,845,000 is being amortized over the life of the related notes. The all
inclusive interest rate is 6.67% on the 6 1/2% senior notes due December 15,
2002, and is 7.27% on the 7 1/8% senior notes due December 15, 2017. Interest
payable semi-annually on December 15 and June 15.
In July 1997, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission to provide for the issuance of up to
$1,500,000,000 of either debt or equity securities, or a combination thereof, to
be used for general corporate purposes. The Company utilized the universal shelf
registration statement for the issuance of its senior notes in September and
December of 1997. As of December 31, 1997, the Company had available up to
$400,000,000 of either debt or equity securities, or a combination thereof,
under its existing universal shelf registration statement.
ACQUISITION ACTIVITY IN 1997
On March 12, 1997, the Company acquired all of Allied's Canadian solid
waste subsidiaries for approximately $518,000,000 in cash. Those businesses
represented 41 collection operations, seven landfills, and eight transfer
stations in the provinces of Alberta, British Columbia, Manitoba, Ontario,
Quebec, and Saskatchewan, with annualized revenues of approximately
$270,000,000.
On April 1, 1997, the Company acquired substantially all of the assets of
Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting
primarily of cash and the assumption of a limited amount of debt. The assets
acquired included 11 collection operations, 11 landfills, six transfer stations,
and three recycling operations, with annualized revenues of approximately
$115,000,000.
On June 10, 1997, the Company acquired the majority of WMI's Canadian solid
waste businesses for $124,000,000 in cash and 1,705,757 shares of the Company's
common stock. The assets acquired included 13 collection operations, one
landfill, and three transfer stations in the provinces of Alberta, British
Columbia, Ontario, and Quebec, with annualized revenues totaling approximately
$124,000,000.
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32
On August 26, 1997, the Company consummated a merger with United accounted
for as a pooling of interests. Under the terms of the United Merger, the Company
issued 1.075 shares of its common stock for each outstanding share of United
common stock. Additionally, at the effective date of the United Merger, United
stock options, whether or not such stock options had vested or become
exercisable, were cancelled in exchange for the Company's common stock equal in
market value to the fair value of such United stock options, as determined by an
independent third party. The United Merger increased the Company's outstanding
shares of common stock by approximately 51,900,000 shares, which included
approximately 1,900,000 shares exchanged for the United stock options. United
owned and operated nonhazardous waste disposal, treatment, collection, transfer
station, and recycling businesses and complementary operations. At the time of
the United Merger, United owned or operated 39 landfills, 78 transfer stations,
and 80 collection operations.
In addition to the consummation of the aforementioned acquisition
transactions, the Company acquired 236 collection operations, 31 transfer
stations, and 26 landfills with annualized revenues aggregating approximately
$960,000,000 during 1997.
RECENT DEVELOPMENTS
On December 9, 1997, the Company announced that it had executed a
definitive agreement to acquire the solid waste divisions of City Management,
and on January 14, 1998, consummated such transaction for approximately
$735,000,000 consisting primarily of cash and a limited amount of debt assumed.
The businesses acquired include 20 collection operations, ten landfills, and 12
transfer stations primarily in the state of Michigan.
On January 27, 1998, the Company announced that it had entered into a
definitive agreement to acquire TransAmerican for approximately 2,000,000 shares
of the Company's common stock, subject to certain adjustments, and approximately
$43,000,000 in assumption of debt. This acquisition, which is subject to
regulatory approval and approval of TransAmerican shareholders, is expected to
close during the first half of 1998 and is anticipated to be accounted for as a
pooling of interests. The businesses to be acquired include five collection
operations, nine landfills, and two transfer stations located throughout the
southern region of the United States.
The Company entered into a definitive agreement on February 6, 1998, with
American, to acquire American's solid waste businesses for approximately
$150,000,000 in cash. This transaction, which is subject to regulatory approval
and approval of American's shareholders, is also expected to close in the first
half of 1998. The operations to be acquired include three landfills and one
collection operation located in Ohio.
On March 10, 1998, the Company entered into a definitive agreement and plan
of merger pursuant to which a subsidiary of the Company will be merged with and
into WMI and WMI will become a wholly owned subsidiary of the Company. As of the
effective time of the WMI Merger, each outstanding share of WMI, other than
shares held in WMI's treasury or owned by WMI, the Company or any of their
wholly owned subsidiaries, will be converted into the right to receive 0.725
shares of the Company. This transaction, which is expected to close during 1998,
is subject to regulatory approval and approval of the stockholders of the
Company and WMI. It is anticipated that the Company will issue approximately
345,000,000 shares of its common stock related to this transaction and that this
merger will be accounted for as a pooling of interests.
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.
On August 4, 1997, the Company filed a shelf registration statement with
the Securities and Exchange Commission to provide for the issuance of up to
20,000,000 shares of the Company's common stock that may
30
33
be offered and issued by the Company from time to time in connection with the
acquisition directly or indirectly by the Company of other businesses or
properties or interests therein, and which may be reserved for issuance pursuant
to, or offered and issued upon exercise or conversion of, warrants, options,
convertible notes, or other similar instruments issued by the Company from time
to time in connection with such acquisitions. As of March 1, 1998, the Company
had approximately 17,700,000 shares of its common stock available for future
offerings and issuances under this shelf registration statement.
ENVIRONMENTAL MATTERS
The Company 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 accountants
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 does not discount its
accruals for closure and post-closure obligations.
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, 1997, will
be approximately $477,629,000. As of December 31, 1997 and 1996, the Company had
recorded liabilities of $220,378,000 and $167,290,000, respectively, for closure
and post-closure costs of disposal facilities. The difference between the
closure and post-closure costs accrued at December 31, 1997, 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. As of
December 31, 1997, the Company also expects to incur approximately $956,346,000
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.
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 and 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 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.
YEAR 2000 DATE CONVERSION
In 1997, the Company began to modify its computer information systems to
ensure proper processing of transactions relating to the year 2000 and beyond
and expects to complete the required modifications during 1998. The amount
charged to expense in 1997, as well as the amounts anticipated to be charged to
expense in 1998 related to the year 2000 computer compliance modifications, have
not been and are not expected to be material to the Company's financial
position, results of operations or cash flows.
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NEW ACCOUNTING PRONOUNCEMENTS
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 96-1, Environmental Remediation Liabilities ("SOP No. 96-1"). SOP No. 96-1
provides authoritative guidance on the recognition, measurement, presentation,
and disclosure of environmental remediation liabilities. The adoption of SOP No.
96-1 in 1997 did not have a material effect on the Company's financial position,
results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Assuming the Company adopted SFAS No. 130 in 1995,
comprehensive income would have been $263,861,000, $67,273,000, and $73,353,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. Adoption is
not recognized for interim periods in the initial year of application. Adoption
of this statement will not have a material impact on the consolidated financial
statements of the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
(1) Consolidated Financial Statements:
Report of Independent Accountants...................... 34
Consolidated Balance Sheets as of December 31, 1997 and
1996.................................................. 35
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995................ 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.......... 37
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995................ 38
Notes to Consolidated Financial Statements............. 39
(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.
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36
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. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USA Waste
Services, Inc. as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 16, 1998
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37
USA WASTE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 51,241 $ 26,079
Accounts receivable, net of allowance for doubtful
accounts of $34,923 and $17,502, respectively.......... 442,347 265,002
Notes and other receivables............................... 56,361 38,495
Deferred income taxes..................................... 52,592 48,561
Prepaid expenses and other................................ 52,845 49,365
---------- ----------
Total current assets.............................. 655,386 427,502
Notes and other receivables................................. 32,386 49,059
Property and equipment, net................................. 3,955,008 2,198,231
Excess of cost over net assets of acquired businesses,
net....................................................... 1,539,927 715,910
Other intangible assets, net................................ 106,058 88,341
Other assets................................................ 334,080 152,504
---------- ----------
Total assets...................................... $6,622,845 $3,631,547
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 237,176 $ 118,823
Accrued liabilities....................................... 228,771 206,591
Deferred revenues......................................... 63,417 35,640
Current maturities of long-term debt...................... 39,286 34,606
---------- ----------
Total current liabilities......................... 568,650 395,660
Long-term debt, less current maturities..................... 2,724,443 1,470,282
Deferred income taxes....................................... 320,439 45,421
Closure, post-closure, and other liabilities................ 380,337 246,194
---------- ----------
Total liabilities................................. 3,993,869 2,157,557
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 500,000,000 shares
authorized; 217,805,496 and 181,630,519 shares issued,
respectively........................................... 2,178 1,816
Additional paid-in capital................................ 2,392,797 1,504,449
Retained earnings (accumulated deficit)................... 253,497 (15,948)
Foreign currency translation adjustment................... (19,012) (15,843)
Less treasury stock at cost, 23,485 shares................ (484) (484)
---------- ----------
Total stockholders' equity........................ 2,628,976 1,473,990
---------- ----------
Total liabilities and stockholders' equity........ $6,622,845 $3,631,547
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Operating revenues....................................... $2,613,768 $1,649,131 $1,216,082
---------- ---------- ----------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................ 1,345,769 881,401 672,117
General and administrative............................. 284,946 200,101 169,686
Depreciation and amortization.......................... 303,241 191,044 143,878
Merger costs........................................... 109,411 126,626 26,539
Unusual items.......................................... 24,720 63,800 4,733
---------- ---------- ----------
2,068,087 1,462,972 1,016,953
---------- ---------- ----------
Income from operations................................... 545,681 186,159 199,129
---------- ---------- ----------
Other income (expense):
Interest expense:
Nonrecurring........................................ -- -- (10,994)
Other............................................... (104,261) (60,497) (58,619)
Interest income........................................ 7,634 6,699 6,682
Other income, net...................................... 14,213 6,376 4,891
---------- ---------- ----------
(82,414) (47,422) (58,040)
---------- ---------- ----------
Income before income taxes and extraordinary item........ 463,267 138,737 141,089
Provision for income taxes............................... 189,944 70,398 60,313
---------- ---------- ----------
Income before extraordinary item......................... 273,323 68,339 80,776
Extraordinary item related to early retirement of debt,
net of tax benefit of $4,195........................... (6,293) -- --
---------- ---------- ----------
Net income............................................... 267,030 68,339 80,776
Preferred dividends...................................... -- -- 373
---------- ---------- ----------
Net income available to common stockholders.............. $ 267,030 $ 68,339 $ 80,403
========== ========== ==========
Basic earnings per common share:
Income before extraordinary item....................... $ 1.31 $ 0.39 $ 0.56
Extraordinary item..................................... (0.03) -- --
---------- ---------- ----------
Net income............................................. $ 1.28 $ 0.39 $ 0.56
========== ========== ==========
Diluted earnings per common share:
Income before extraordinary item....................... $ 1.26 $ 0.37 $ 0.54
Extraordinary item..................................... (0.03) -- --
---------- ---------- ----------
Net income............................................. $ 1.23 $ 0.37 $ 0.54
========== ========== ==========
Weighted average number of common shares outstanding..... 208,246 173,993 143,346
========== ========== ==========
Weighted average number of common and dilutive potential
common shares outstanding.............................. 233,371 182,680 150,575
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
36
39
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED FOREIGN
ADDITIONAL EARNINGS CURRENCY
PREFERRED COMMON PAID-IN (ACCUMULATED TRANSLATION TREASURY
STOCK STOCK CAPITAL DEFICIT) ADJUSTMENT STOCK
--------- ------ ---------- ------------ ----------- --------
Balance, January 1, 1995.................... $ 1 $1,173 $ 836,829 $(140,083) $ (7,354) $(1,961)
Common stock options and warrants
exercised, including tax benefits...... -- 18 14,566 -- -- 142
Common stock issued in business
combinations and development
projects............................... -- 97 159,661 -- -- --
Common stock issued in public offerings
and conversion of subordinated
debentures............................. -- 137 229,876 -- -- --
Conversion of preferred stock into common
stock.................................. (1) 10 (8) -- -- --
Elimination of investment in Western
common stock........................... -- (10) (11,358) -- -- --
Change in Western fiscal year............. -- -- -- (8,865) -- --
Foreign currency translation adjustment... -- -- -- -- (7,423) --
Transactions of pooled companies.......... -- -- 2,660 (8,072) -- --
Preferred stock dividends................. -- -- -- (373) -- --
Other..................................... -- 4 9,443 -- -- --
Net income................................ -- -- -- 80,776 -- --
--- ----- ---------- --------- -------- -------
Balance, December 31, 1995.................. -- 1,429 1,241,669 (76,617) (14,777) (1,819)
Common stock options and warrants
exercised, including tax benefits...... -- 52 68,064 -- -- 2,086
Common stock issued in business
combinations and development
projects............................... -- 89 128,390 -- -- --
Common stock returned for acquisition
settlement............................. -- -- -- -- -- (751)
Common stock issued for conversion of
subordinated debentures................ -- 35 59,590 -- -- --
Foreign currency translation adjustment... -- -- -- -- (1,066) --
Transactions of pooled companies.......... -- 8 1,558 (7,670) -- --
United two-for-one stock split............ -- 196 (196) -- -- --
Other..................................... -- 7 5,374 -- -- --
Net income................................ -- -- -- 68,339 -- --
--- ----- ---------- --------- -------- -------
Balance, December 31, 1996.................. -- 1,816 1,504,449 (15,948) (15,843) (484)
Common stock options and warrants
exercised, including tax benefits...... -- 35 74,614 -- -- --
Common stock issued in business
combinations and development
projects............................... -- 146 260,264 -- -- --
Common stock issued in public offering.... -- 152 506,196 -- -- --
Common stock issued for United stock
options................................ -- 19 25,809 -- -- --
Foreign currency translation adjustment... -- -- -- -- (3,169) --
Transactions of pooled companies.......... -- -- (1,735) 2,415 -- --
Other..................................... -- 10 23,200 -- -- --
Net income................................ -- -- -- 267,030 -- --
--- ----- ---------- --------- -------- -------
Balance, December 31, 1997.................. $-- 2,178 $2,392,797 $ 253,497 $(19,012) $ (484)
=== ===== ========== ========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
37
40
USA WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
Cash flows from operating activities:
Net income................................................ $ 267,030 $ 68,339 $ 80,776
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 303,241 191,044 143,878
Deferred income taxes................................... 72,846 12,960 16,217
Net gain on disposal of assets.......................... (14,320) (6,040) (1,434)
Effect of nonrecurring charges.......................... 48,479 61,144 --
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and other receivables............. (94,073) (81,704) (14,279)
Prepaid expenses and other............................ 6,189 (5,388) (2,199)
Other assets.......................................... (36,511) 10,311 (7,406)
Accounts payable and accrued liabilities.............. (117,860) 63,149 (11,643)
Accrued shareholder litigation settlement............. -- -- (85,300)
Deferred revenues and other liabilities............... 19,747 (29,283) 11,855
Other, net............................................ (1,936) (1,181) (1,773)
----------- ----------- ---------
Net cash provided by operating activities................... 452,832 283,351 128,692
----------- ----------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.......... (1,818,996) (403,672) (268,687)
Capital expenditures...................................... (436,317) (443,247) (252,648)
Loans and advances to others.............................. (41,571) (18,399) (19,660)
Collection of loans and advances to others................ 43,480 15,010 4,880
Proceeds from sale of assets.............................. 244,756 80,294 11,181
Other..................................................... (22,828) (30,002) (1,178)
----------- ----------- ---------
Net cash used in investing activities....................... (2,031,476) (800,016) (526,112)
----------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 3,441,930 1,483,573 778,721
Principal payments on long-term debt...................... (2,384,846) (1,015,277) (642,313)
Net proceeds from issuance of common stock................ 506,348 -- 251,999
Proceeds from exercise of common stock options and
warrants................................................ 36,955 53,518 13,811
Other..................................................... 3,597 (6,965) (19,407)
----------- ----------- ---------
Net cash provided by financing activities................... 1,603,984 514,849 382,811
----------- ----------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (178) 115 (178)
----------- ----------- ---------
Increase (decrease) in cash and cash equivalents............ 25,162 (1,701) (14,787)
Cash and cash equivalents at beginning of year.............. 26,079 27,780 42,567
----------- ----------- ---------
Cash and cash equivalents at end of year.................... $ 51,241 $ 26,079 $ 27,780
=========== =========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest................................................ $ 110,798 $ 75,551 $ 67,543
Income taxes............................................ 66,044 33,019 51,573
Non-cash investing and financing activities:
Acquisitions of property and equipment through capital
leases................................................ -- -- 8,378
Note receivable from sale of assets..................... 26,583 27,800 --
Conversion of subordinated debentures to common stock... 500 60,000 51,661
Issuance of common stock for preferred stock
dividends............................................. -- -- 10,378
Acquisitions of businesses and development projects:
Liabilities incurred or assumed....................... 184,562 355,767 101,111
Common stock issued................................... 260,410 128,479 159,758
The accompanying notes are an integral part of these consolidated financial
statements.
38
41
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 nonhazardous solid waste management business and provides solid
waste management services, consisting of collection, transfer, disposal,
recycling, and other miscellaneous services to commercial, industrial, municipal
and residential customers in various locations throughout the United States,
Canada, and Puerto Rico. As discussed in Note 10, during 1997 the Company
contributed the net book value of its Mexico operations to a non-public solid
waste entity focusing on Mexico's solid waste market in exchange for a 37.5%
interest in that entity.
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
$84,475,000 and $61,098,000 at December 31, 1997 and 1996, 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, 1997 and 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,
1997 and 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 with 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.
39
42
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and
assuming no salvage value. The estimated useful lives for property and equipment
is as follows (in years):
Vehicles.................................................... 5 to 10
Machinery and equipment..................................... 5 to 10
Containers.................................................. 8 to 12
Buildings and improvements.................................. 20
Furniture and fixtures...................................... 3 to 7
Disposal sites are stated at cost and amortized ratably using the
units-of-production method over the estimated usable life of the site as
airspace of the landfill is consumed. Disposal site costs include expenditures
for the acquisition of land and related airspace, engineering and permitting
costs, direct site improvement costs, and capitalized interest. During the years
ended December 31, 1997, 1996, and 1995, interest costs were $129,459,000,
$81,686,000, and $83,421,000, respectively, of which $25,198,000, $21,189,000,
and $13,808,000 were capitalized, respectively, with respect to landfills and
facilities under construction. Disposal site amortization rates are determined
periodically not less than annually for each disposal site based on estimates
provided by the Company's engineers and accountants. Disposal site amortization
rate calculations consider information provided by aerial surveys, which are
generally performed annually, and other density measures, as well as the future
receipt of a disposal site permit expansion for those sites that the Company
believes permit expansion is probable.
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, however, 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. Management of the Company does not believe
potential deviations between its fair value estimates and actual fair values to
be material.
In certain business combinations, the Company will agree to pay additional
amounts to sellers contingent upon 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. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment. Contingent payments recorded as purchase price adjustments are
amortized over the remaining useful life of the related assets.
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
40
43
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisitions. Accumulated amortization was $55,041,000 and $38,894,000 at
December 31, 1997 and 1996, respectively.
Other intangible assets -- Other intangible assets consist primarily of
customer lists, covenants not to compete, licenses, permits, and contracts.
Other intangible assets are recorded at cost and amortized on a straight-line
basis. Customer lists are amortized over five to seven years. Covenants not to
compete are amortized over the term of the agreement, which is generally three
to five years. Licenses, permits, and contracts are amortized over the shorter
of the definitive terms of the related agreements or 40 years. Accumulated
amortization was $77,571,000 and $69,824,000 at December 31, 1997 and 1996,
respectively.
Long-lived assets -- Long-lived assets consist primarily of property and
equipment, excess of cost over net assets of acquired businesses, and other
intangible assets. 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, which is the closure of the final cell of a landfill, 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, 1997, will
be approximately $477,629,000. As of December 31, 1997 and 1996, the Company has
accrued $220,378,000 and $167,290,000, respectively, for final closure and
post-closure costs of disposal facilities. The Company does not discount its
accruals for closure and post-closure liabilities. The difference between the
final closure and post-closure costs accrued as of December 31, 1997, 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. As of
December 31, 1997, the Company also expects to incur an estimated $956,346,000
related to future capping activities during the remaining operating lives of
these disposal sites. The future capping costs are being charged to expense
through airspace amortization 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.
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 tax assets and deferred tax liabilities. Deferred tax assets
include tax loss and credit
41
44
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 or recognized through income as appropriate.
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 -- 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 is based on the weighted average number of common
shares outstanding, replaces primary earnings per share. Diluted earnings per
share, which is based on the weighted average number of common and dilutive
potential common shares outstanding, replaces fully diluted earnings per share
and 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 dilutive potential shares. SFAS No. 128
is effective for the Company in 1997 and requires all prior-period earnings per
share data to be restated to conform to its presentation. Accordingly, the
Company has restated all previously reported earnings per share amounts.
Diluted earnings per common share for the year ended December 31, 1997, has
been calculated assuming conversion of the Company's convertible subordinated
notes and debentures, and therefore interest, net of taxes, of $19,006,000 has
been added back to net income for this calculation. Diluted earnings per common
share for the year ended December 31, 1996, has calculated without assuming
conversion of the Company's convertible subordinated notes and debentures due to
their antidiluted notes for this period.
The following reconciles the number of common shares outstanding to the
weighted average number of common shares outstanding and the weighted average
number of common and dilutive potential common shares outstanding for the
purposes of calculating basic and dilutive earnings per common share,
respectively (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Number of common shares outstanding................... 217,782 181,631 161,813
Effect of using weighted average common shares
outstanding......................................... (9,536) (7,638) (18,467)
------- ------- -------
Weighted average number of common shares
outstanding......................................... 208,246 173,993 143,346
Dilutive effect of common stock options and
warrants............................................ 3,830 8,687 7,229
Dilutive effect of convertible subordinated notes and
debentures.......................................... 21,295 -- --
------- ------- -------
Weighted average number of common and dilutive
potential common shares outstanding................. 233,371 182,680 150,575
======= ======= =======
New accounting pronouncements -- In October 1996, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, Environmental Remediation Liabilities
("SOP No. 96-1"). SOP No. 96-1 provides authoritative guidance on the
recognition, measurement, presentation, and disclosure of environmental
remediation liabilities. The adoption of SOP No. 96-1 in 1997 did not have a
material effect on the Company's financial position, results of operations or
cash flows.
42
45
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Assuming the Company adopted SFAS No. 130 in 1995,
comprehensive income would have been $263,861,000, $67,273,000, and $73,353,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. Adoption is
not recognized for interim periods in the initial year of application. Adoption
of this statement will not have a material impact on the consolidated financial
statements of the Company.
2. BUSINESS COMBINATIONS
1997 Pooling of Interests Acquisitions
On August 26, 1997, the Company consummated a merger with United Waste
Systems, Inc. ("United") accounted for as a pooling of interests (the "United
Merger") and, accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of United for all
periods presented. Under the terms of the United Merger, the Company issued
1.075 shares of its common stock for each outstanding share of United common
stock. Additionally, at the effective date of the United Merger, United stock
options, whether or not such stock options had vested or had become exercisable,
were cancelled in exchange for shares of the Company's common stock equal in
market value to the fair value of such United stock options, as determined by an
independent third party. The United Merger increased the Company's outstanding
shares of common stock by approximately 51,900,000 shares, which includes
approximately 1,900,000 shares exchanged for the United stock options. In the
third quarter of 1997, the Company incurred approximately $89,152,000 in merger
related costs associated with the United Merger, of which approximately
$30,630,000 remained in accrued liabilities at December 31, 1997. Of this
amount, $17,566,000 related to transaction costs, $26,198,000 for severance and
other termination benefits, $21,629,000 for integration of operations, and
$23,759,000 for estimated losses related to the disposition of a Pennsylvania
landfill ordered by the United States Department of Justice in connection with
the United Merger and the disposition of other duplicative facilities. The
results of operations for United prior to consummation of the merger for the
restated periods are as follows (in thousands):
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------
JUNE 30, 1997 1996 1995
---------------- ---------- ----------
(UNAUDITED)
Operating revenues............................ $216,619 $335,743 $228,377
Net income.................................... 23,849 35,393 28,288
The Company consummated 23 additional acquisitions accounted for as
poolings of interests during 1997, pursuant to which Company issued
approximately 7,500,000 shares of its common stock in exchange for all
outstanding shares of 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. In connection with these poolings of interests, the Company incurred
43
46
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,996,000, $3,263,000, and $15,000,000 in merger related costs in the first,
second, and third quarters of 1997, respectively.
1996 Pooling of Interests Acquisitions
On August 30, 1996, the Company consummated a merger 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 remained 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
costs relating to the 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 YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
---------------- -----------------
(UNAUDITED)
Operating revenues.................................. $181,406 $256,705
Net income.......................................... 18,964 27,913
On June 28, 1996, the Company consummated a merger with Salinas Disposal
Service, Inc., Rural Dispos-All Service, Inc., and Madison Lane Properties, Inc.
(collectively the "Salinas Companies") accounted for as a pooling of interests
and, accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of the Salinas Companies for all
periods presented. Under the terms of the merger agreement, approximately
786,000 shares of the Company's common stock were issued in exchange for all
outstanding shares of the Salinas Companies' common stock. Related to this
merger, the Company incurred $2,196,000 of merger costs in the second quarter of
1996. The results of operations for the Salinas Companies prior to consummation
of the merger for the restated periods are as follows (in thousands):
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED)
Operating revenues................................ $4,060 $16,587
Net income (loss)................................. (61) 842
On May 15, 1996, the Company consummated a merger 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.
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 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
44
47
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
owned approximately 4.1% of Western's outstanding shares (634,900 common
shares), which were cancelled on the effective date of the Western Merger. 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. The results of
operations for Western prior to consummation of the merger for the restated
periods are as follows (in thousands):
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED)
Operating revenues................................ $68,441 $273,901
Net income........................................ 4,703 17,021
The Company consummated eight additional acquisitions accounted for as
poolings of interests during 1996, pursuant to which the Company issued
approximately 2,839,000 shares of its common stock 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.
1995 Pooling of Interests Acquisitions
On September 29, 1995, the Company consummated a merger with Carmel Marina
Corporation, Neal Road Landfill Corporation, Jolan Road Landfill Corporation,
Cal Sanitation Services, Inc., and Portable Site Services, Inc. (collectively
the "Carmel Marina Companies") accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of the Carmel Marina Companies
for all periods presented. Under the terms of the merger agreement,
approximately 2,422,000 shares of the Company's common stock were issued in
exchange for all outstanding shares of the Carmel Marina Companies' common
stock. Related to this merger, the Company incurred $900,000 of merger costs in
the third quarter of 1995.
On June 30, 1995, the Company consummated a merger 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.
On May 31, 1995, the Company consummated a merger 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 of merger costs in the second quarter of 1995.
45
48
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company consummated two additional acquisitions accounted for as
poolings of interests, pursuant to which the Company issued approximately
2,588,000 shares of its common stock 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.
1997 and 1996 Purchase Acquisitions
On March 12, 1997, the Company acquired substantially all of the Canadian
solid waste subsidiaries of Allied Waste Industries Inc. for approximately
$518,000,000 in cash. Those businesses represented 41 collection operations,
seven landfills, and eight transfer stations in the provinces of Alberta,
British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan.
On April 1, 1997, the Company acquired substantially all of the assets of
Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting
primarily of cash and the assumption of a limited amount of debt. The assets
acquired included 11 collection operations, 11 landfills, six transfer stations,
and three recycling operations.
On June 10, 1997, the Company acquired the majority of Waste Management,
Inc.'s ("WMI") Canadian solid waste businesses for $124,000,000 in cash and
1,705,757 shares of the Company's common stock. The assets acquired included 13
collection operations, one landfill, and three transfer stations in the
provinces of Alberta, British Columbia, Ontario, and Quebec.
In addition to the above purchase acquisitions, 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
cost of acquisitions accounted for under the purchase method was $2,280,775,000
in 1997, which includes approximately $97,000,000 for a 49% interest in a
partnership formed for the purpose of acquiring shares of WMI (see Note 14), and
$638,788,000 in 1996, respectively. The 49% partnership interest is included in
other assets at December 31, 1997. The excess of the aggregate purchase price
over the fair value of net assets acquired in 1997 and 1996 was approximately
$942,175,000 and $351,797,000, respectively.
The pro forma information set forth below assumes acquisitions in 1997 and
1996 accounted for as purchases had occurred at the beginning of 1996. The 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,
--------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
Operating revenues.......................................... $3,099,007 $2,972,979
Income before extraordinary item............................ 301,746 141,408
Net income.................................................. 295,453 141,408
Basic earnings per common share:
Income before extraordinary item.......................... 1.43 0.78
Net income................................................ 1.40 0.78
Diluted earnings per common share:
Income before extraordinary item.......................... 1.36 0.74
Net income................................................ 1.33 0.74
46
49
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Disposal sites, including costs incurred for expansion
projects in process of $64,971 and $68,075,
respectively.............................................. $3,143,860 $1,695,628
Vehicles.................................................... 687,087 404,839
Machinery and equipment..................................... 251,523 186,231
Containers.................................................. 302,793 215,473
Buildings and improvements.................................. 250,008 191,463
Furniture and fixtures...................................... 46,031 40,979
Land........................................................ 162,715 130,912
---------- ----------
4,844,017 2,865,525
Less accumulated depreciation and amortization.............. (889,009) (667,294)
---------- ----------
$3,955,008 $2,198,231
========== ==========
Depreciation and amortization expenses for property and equipment was
$268,197,000, $162,949,000, and $118,785,000 for the years ended December 31,
1997, 1996, and 1995, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Senior revolving credit facility............................ $ 430,000 $ 637,000
United credit facility...................................... -- 31,450
6 1/2% Senior notes due 2002, net of unamortized discount of
$2,229.................................................... 347,771 --
7% Senior notes due 2004, net of unamortized discount of
$2,455.................................................... 297,545 --
7 1/8% Senior notes due 2007, net of unamortized discount of
$2,919.................................................... 297,081 --
7 1/8% Senior notes due 2017, net of unamortized discount of
$1,533.................................................... 148,467 --
Senior notes, maturing in varying annual installments
through September 2005, interest ranging from 7.29% to
8.44%..................................................... -- 182,500
4% Convertible subordinated notes due 2002.................. 535,275 --
4 1/2% Convertible subordinated notes due 2001.............. 149,500 150,000
5% Convertible subordinated debentures due 2006............. 115,000 115,000
Tax-exempt bonds, principal payable in periodic
installments, maturing through 2021, fixed and variable
interest rates ranging from 4.00% to 9.25% at December 31,
1997...................................................... 265,355 196,439
Other....................................................... 177,735 192,499
---------- ----------
2,763,729 1,504,888
Less current maturities..................................... 39,286 34,606
---------- ----------
$2,724,443 $1,470,282
========== ==========
The aggregate estimated payments, including scheduled minimum maturities,
of long-term obligations outstanding at December 31, 1997 for the five years
ending December 31, 1998 through 2002 are: 1998 -- $39,286,000,
1999 -- $27,558,000, 2000 -- $22,174,000, 2001 -- $28,220,000, and
2002 -- $170,734,000.
47
50
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Convertible Notes Offering").
Interest is payable semi-annually in February and August. The notes are
convertible by the holders into shares of the Company's common stock at any time
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 at which time the notes will be redeemed at
par, 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,
to fund acquisitions, and for general corporate purposes.
On February 7, 1997, concurrent with the Convertible 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 3, 1997, prior to its becoming a wholly owned subsidiary of the
Company, United completed a public offering in which it issued 3,450,000 shares
of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares
of the Company's common stock, priced at $33.95 per share). The net proceeds of
approximately $119,000,000 were used to repay approximately $47,000,000 of debt
under United's credit facility, to fund acquisitions, and for general corporate
purposes.
During August 1997 and September 1997, the Company prepaid the holders of
both privately placed senior note issuances an aggregate amount of $182,500,000
with proceeds from its senior revolving credit facility. Interest on these
privately placed senior notes ranged from 7.29% to 8.44%. In connection with
this transaction, the Company was required to pay prepayment penalties of
approximately $7,975,000, which was recorded as an extraordinary item in the
third quarter of 1997.
On September 12, 1997, the Company issued $300,000,000 of 7% senior notes
due October 1, 2004, and $300,000,000 of 7 1/8% senior notes due October 1,
2007. The senior notes constitute senior and unsecured obligations of the
Company, ranking equal in right of payment with all other senior and unsecured
obligations of the Company, as defined. The senior notes are redeemable at the
option of the Company at any time and from time to time at par of the principal
amount of such notes, plus accrued interest. Deferred offering costs of
approximately $4,125,000 were incurred and are being amortized ratably over the
life of the senior notes. The proceeds were used to repay debt under the
Company's senior revolving credit facility. In anticipation of this offering,
the Company entered into interest rate locks on July 25, 1997, with various
institutions as a hedging transaction to cover the future issuance of
$600,000,000 of debt. The gain realized from this hedging transaction of
approximately $5,632,000 is being amortized over the life of the related notes
using the effective interest method and has the effect of reducing the
all-inclusive interest rate to 6.90% on the 7% senior notes due October 1, 2004,
and 7.06% on the 7 1/8% senior notes due October 1, 2007. Interest is payable
semiannually on October 1 and April 1.
On December 17, 1997, the Company issued $350,000,000 of 6 1/2% senior
notes due December 15, 2002, and $150,000,000 of 7 1/8% senior notes due
December 15, 2017. The senior notes constitute senior and unsecured obligations
of the Company ranking equal in right of payment with all other senior and
unsecured obligations of the Company, as defined. The 6 1/2% senior notes due
December 15, 2002, are not redeemable. The $150,000,000 of 7 1/8% senior notes
due December 15, 2017, are redeemable, in whole or in part, at the option of the
Company at any time and from time to time at a redemption price equal to the
Make-Whole Price, as defined. Deferred offering costs of approximately
$3,713,000 were incurred and are being amortized ratably over the life of the
senior notes. The proceeds were used to repay debt under the Company's senior
revolving credit facility. In anticipation of this offering, the Company entered
into interest rate locks on December 9, 1997, as a hedging transaction to cover
the future issuance of $500,000,000 of debt. The amount
48
51
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid by the Company from this hedging transaction of approximately $6,845,000 is
being amortized over the life of the related notes. The all inclusive interest
rate is 6.67% on the 6 1/2% senior notes due December 15, 2002, and is 7.27% on
the 7 1/8% senior notes due December 15, 2017. Interest is payable semi-annually
on December 15 and June 15.
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, to fund additional acquisitions,
and for the 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 and retired amounts under Sanifill's senior
revolving credit facility. The senior revolving credit facility was used to
refinance existing bank loans and letters of credit and to fund additional
acquisitions and working capital. The senior revolving credit facility was
available for standby letters of credit of up to $400,000,000. Loans under the
senior revolving 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
senior revolving credit facility required a facility fee not to exceed 0.375%
per annum on the entire available senior revolving credit facility (facility fee
set at 0.15% per annum at December 31, 1996). The senior revolving credit
facility contained financial covenants with respect to interest coverage and
debt capitalization ratios. The senior revolving 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 senior
revolving credit facility. On March 5, 1997, the senior revolving credit
facility was replaced with a $1,600,000,000 senior revolving credit facility
with the same general terms, covenants, and limitations, which was available for
standby letters of credit of up to $500,000,000. On August 7, 1997, the
$1,600,000,000 senior revolving credit facility was replaced with a
$2,000,000,000 senior revolving credit facility with the same general terms,
covenants, and limitations, which is available for $650,000,000 of standby
letters of credit. At December 31, 1997, the Company had borrowed $430,000,000
and had issued letters of credit of $467,029,000 under its $2,000,000,000 senior
revolving credit facility. The applicable interest rate and facility fee at
December 31, 1997, was 6.1% and 0.1125% per annum, respectively.
United's credit facility provided for a three year, $190,000,000 revolving
credit facility due December 1999. Outstanding loans under the United credit
facility bore interest at a rate per annum equal to the Eurodollar Rate (Reserve
Adjusted) (as defined in the loan agreement providing for the United credit
facility) applicable to each interest period plus 0.625% to 1.25% per annum or
the Alternate Reference Rate (as defined) from time to time in effect. At
December 31, 1996, the weighted average interest rate was 6.98%. The credit
facility also allowed United to obtain up to $90,000,000 in letters of credit.
The aggregate amount that United was permitted to borrow under its credit
facility was reduced by the aggregate face amount of all outstanding letters of
credit issued thereunder. United's credit facility required United to comply
with covenants including the maintenance of certain financial ratios,
limitations on additional indebtedness, limitations on capital expenditures, and
a prohibition on United's payment of cash dividends on its common stock. In
connection with the United Merger, the Company retired amounts outstanding under
United's credit facility with proceeds from its senior revolving credit
facility.
On June 5, 1996, United issued $150,000,000 of 4 1/2% convertible
subordinated notes, due June 1, 2001. Interest is payable semi-annually in June
and December. The notes are convertible into shares of the
49
52
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's common stock at a conversion price of $30.23 per share. The notes are
subordinated in right of payment to all existing and future senior indebtedness,
as defined. The notes are redeemable after June 1, 1999, at the option of the
Company at 101.8% of the principle amount, declining annually to par on June 1,
2001, plus accrued interest. Deferred offering costs of approximately $5,287,000
were incurred and are being amortized ratably over the life of the notes. The
proceeds were used to repay outstanding indebtedness of approximately
$75,000,000 under United's credit facility, fund acquisitions and capital
expenditures, and for general corporate purposes.
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.
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 $28.82 per share (equivalent to $16.95 for the Company's common stock).
Holders electing to convert received 34.7 shares of Sanifill's common stock
(equivalent to 59 shares of the Company'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.
The Company has guaranteed specific obligations of certain unconsolidated
affiliates or businesses totaling approximately $58,749,000 and $25,000,000 at
December 31, 1997 and 1996, respectively. The Company believes that these
unconsolidated affiliates or businesses 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.
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 senior revolving 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 Company's senior revolving
credit facility (6.2% at December 31, 1997 and 1996.)
The Company has completed several tax-exempt bond issues totaling
$265,355,000 and $196,439,000 at December 31, 1997 and 1996, respectively, with
maturities ranging through 2021. Certain of the bonds are subject to annual
sinking fund redemptions and proceeds of the issues are restricted to fund
certain assets of the related projects. Certain of the bonds are supported by
irrevocable letters of credit and bear interest at floating rates with rates
reset weekly by a remarketing agent. An interest rate swap agreement with
approximately two years remaining at December 31, 1997, has fixed the rate at
6.29% on $24,000,000 of these bonds.
Other long-term debt at December 31, 1997 and 1996 consists primarily of
miscellaneous notes payable and obligations under capital leases. Other
long-term debt at December 31, 1996, also includes $83,475,000 paid in January
1997 through additional borrowings under the Company's senior revolving credit
facility to the former owners of a landfill and collection operation acquired by
the Company in December 1996.
50
53
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Chambers incurred nonrecurring interest expense of $10,994,000 in 1995, 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 and surety bonds have been provided by the Company
supporting tax-exempt bonds, performance of landfill closure and post-closure
requirements, insurance contracts, and other contracts. Total letters of credit
and surety bonds outstanding at December 31, 1997, aggregated $567,729,000 and
$75,271,000, respectively.
5. 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 facilities approximate the carrying values due to the nature of the
instruments involved. The fair values of the Company's publicly held senior
notes and convertible debt are as follows (in thousands):
DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
6 1/2% Senior notes due 2002............. $347,771 $349,963 $ -- $ --
7% Senior notes due 2004................. 297,545 305,024 -- --
7 1/8% Senior notes due 2007............. 297,081 307,575 -- --
7 1/8% Senior notes due 2017............. 148,467 149,282 -- --
4% Convertible subordinated notes due
2002................................... 535,275 592,148 -- --
4 1/2% Convertible subordinated notes due
2001................................... 149,500 214,906 150,000 172,500
5% Convertible subordinated debentures
due 2006............................... 115,000 170,631 115,000 142,025
The fair value of the Company's $125,000,000 interest rate swap
approximates the carrying value due to the instrument's relatively short
remaining maturity and the differential between its fixed rate of 6.2% at
December 31, 1997 and 1996, compared to the related senior revolving credit
facility's variable rate of 5.86% and 5.87% at December 31, 1997 and 1996,
respectively.
The senior notes maturing in varying annual installments through September
2005, that were outstanding at December 31, 1996, have carrying values at the
respective dates that are considered to approximate their respective fair values
based on valuation techniques that consider cash flows discounted at current
market rates.
The fair values of the tax-exempt bonds approximate the carrying values as
the interest rates on a majority of the bonds are reset weekly based on the
credit quality of the letters of credit which collateralize the bonds.
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 the Company's performance under these
financial instruments is minimal and expects no material losses to occur in
connection with these financial instruments.
51
54
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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.
7. 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 (subsequently amended to 12,500 options). 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.
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 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
these 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 May 1995, Sanifill granted 26,095 shares of
restricted stock 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 and $312,000 in 1996 and 1995, 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
52
55
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
same terms and conditions as provided under such plans. No additional options
may be issued under these plans.
United granted stock options pursuant to the 1992 Stock Option Plan,
various similar plans, and the 1992 Disinterested Director Stock Option Plan.
Under the 1992 Stock Option Plan, United was authorized to grant up to 5,900,000
incentive and non-statutory stock options. Under the 1992 Disinterested Director
Stock Option Plan, a fixed number of non-statutory stock options were granted
annually to members of United's Board of Directors. At the effective date of the
United Merger, United stock options, whether or not such stock options had
vested or had become exercisable, were cancelled in exchange for shares of the
Company's common stock equal in market value to the fair value of such United
stock options, as determined by an independent third party. No additional
options may be issued under these plans.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("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 1997, 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 five
years following the date of grant. As discussed above, at the effective date of
the United Merger, United stock options, whether or not such stock options had
vested or had become exercisable, were cancelled in exchange for shares of the
Company's common stock equal in market value to the fair value of such United
stock options, as determined by an independent third party. 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
53
56
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees or Company directors under all of the aforementioned plans for 1997,
1996, and 1995 (in thousands):
OPTIONS AND WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
----------- ----------------
Outstanding at January 1, 1995........................... 15,328 $ 6.62
Granted................................................ 5,507 17.52
Exercised.............................................. (1,731) 8.58
Forfeited.............................................. (118) 29.62
------
Outstanding at December 31, 1995......................... 18,986 11.18
Granted................................................ 8,068 24.71
Exercised.............................................. (5,141) 10.05
Forfeited.............................................. (63) 15.71
------
Outstanding at December 31, 1996......................... 21,850 16.51
Granted................................................ 3,892 34.83
Exercised.............................................. (6,741) 15.61
Forfeited.............................................. (237) 21.97
------
Outstanding at December 31, 1997......................... 18,764 20.98
======
Exercisable at December 31, 1996......................... 10,669 $11.93
Exercisable at December 31, 1997......................... 8,417 13.69
The common stock options and warrants outstanding at December 31, 1997,
include 6,673,000 common stock options and warrants granted by Chambers,
Western, Sanifill, and United, of which 5,517,000 are exercisable. The Company
holds 23,485 shares of its common stock in treasury as of December 31, 1997, 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 1997 and 1996 were $11.40 and
$7.95, respectively. The fair value of each common stock option or warrant
granted to employees or Company directors by the Company during 1997 and 1996 is
estimated utilizing the Black-Scholes option-pricing model. The following
weighted average assumptions were used: dividend yield of 0%, risk-free interest
rates which vary for each grant and range from 5.61% to 6.31%, expected life of
four years for all grants, and stock price volatility ranging from 29.5% to 31%
for all grants.
Outstanding and exercisable stock options and warrants related to employees
or Company directors at December 31, 1997, were as follows (in thousands):
OUTSTANDING EXERCISABLE
------------------------------------------------- ------------------------------
OPTIONS AND WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS AND WEIGHTED AVERAGE
EXERCISE PRICE WARRANTS EXERCISE PRICE REMAINING TERM WARRANTS EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$2.25 to $10.00........... 3,367 $ 6.90 3.6 years 3,308 $ 6.86
$10.01 to $20.00.......... 5,316 14.24 6.9 years 3,137 13.66
$20.01 to $30.00.......... 6,099 25.41 8.4 years 1,836 24.06
$30.01 to $59.10.......... 3,982 35.09 9.5 years 136 40.25
------ -----
$2.25 to $59.10........... 18,764 20.98 7.4 years 8,417 13.69
====== =====
54
57
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes transactions involving common stock warrants
related to nonemployees for 1997, 1996, and 1995 (in thousands):
WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
-------- ----------------
Outstanding at January 1, 1995............................ 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
Granted................................................. 441 38.70
Exercised............................................... (136) 16.69
Forfeited............................................... (97) 13.50
----
Outstanding at December 31, 1997.......................... 761 31.91
====
Exercisable at December 31, 1996.......................... 222 $15.37
Exercisable at December 31, 1997.......................... 320 16.84
The weighted average fair value of common stock warrants granted to
nonemployees during 1997 and 1996 were $12.54 and $10.37, respectively. The fair
value of each common stock warrant granted to nonemployees by the Company during
1997 and 1996 is estimated utilizing the Black-Scholes option-pricing model. The
following weighted average assumptions were used: dividend yield of 0%,
risk-free interest rates which 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. No common stock warrants have been granted
by United to nonemployees for purposes other than business combinations.
Compensation expense related to common stock warrants granted to nonemployees in
1997 and 1996 was not material.
If the Company applied the recognition provisions of SFAS No. 123, the
Company's net income and earnings per common share for 1997, 1996, and 1995
would approximate the pro forma amounts shown below (in thousands, except per
share amounts):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
SFAS No. 123 charge, net of income taxes............. $ 18,059 $13,951 $ 3,192
Income before extraordinary item..................... 255,264 54,388 77,584
Net income........................................... 248,971 54,388 77,584
Basic earnings per common share:
Income before extraordinary item................... 1.23 0.31 0.54
Net income......................................... 1.20 0.31 0.54
Diluted earnings per common share:
Income before extraordinary item................... 1.18 0.30 0.52
Net income......................................... 1.15 0.30 0.52
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.
55
58
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
Effective July 1, 1995, the Company established the USA Waste Services,
Inc. Employee Savings Plan ("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 1997, 1996, and 1995, the Company contributed approximately
$5,335,000, $1,248,000, and $218,000, respectively, and incurred approximately
$225,000, $148,000, and $25,000, respectively, in administrative fees.
9. INCOME TAXES
The provision for income taxes on continuing operations consists of the
following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
Current:
Domestic........................................... $108,741 $52,063 $43,689
Foreign............................................ 8,357 5,375 407
-------- ------- -------
117,098 57,438 44,096
-------- ------- -------
Deferred:
Domestic........................................... 44,510 13,399 16,730
Foreign............................................ 28,336 (439) (513)
-------- ------- -------
72,846 12,960 16,217
-------- ------- -------
Provision for income taxes................. $189,944 $70,398 $60,313
======== ======= =======
The difference between income taxes at the federal statutory rate and the
provision for income taxes on continuing operations for the years presented is
as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
Income taxes at federal statutory rate............... $162,143 $48,558 $49,381
Nondeductible merger costs........................... 9,253 10,323 7,189
Nondeductible costs relating to acquired
intangibles........................................ 11,370 2,335 1,606
State and local income taxes, net of federal income
tax benefit........................................ 9,772 7,038 4,050
Foreign income taxes................................. 309 1,977 494
Federal tax credits.................................. (2,542) (305) (456)
Other................................................ (361) 472 (1,951)
-------- ------- -------
Provision for income taxes................. $189,944 $70,398 $60,313
======== ======= =======
Chambers' federal income tax returns for years 1988 through 1992 are
currently under examination by the Internal Revenue Service ("IRS"). The Company
has reached a 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 federal income tax returns for fiscal years 1991 through
1993 are currently under examination by the IRS. The IRS assessed additional tax
for these years, which the Company is vigorously protesting, which neither alone
56
59
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nor in aggregate would have a material effect on the Company's financial
position, results of operations or cash flows when resolved. USA Waste's federal
income tax returns for the years 1994 through 1996 are currently under
examination by the IRS.
The components of the net deferred tax assets (liabilities) are as follows
(in thousands):
DECEMBER 31,
----------------------
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 93,490 $ 87,496
Closure, post-closure, and other reserves................. 47,127 46,452
Self insurance............................................ 3,274 5,042
Asset impairments, losses from planned asset divestitures,
and other.............................................. 61,937 57,626
Valuation allowance....................................... (24,000) (24,000)
--------- ---------
Deferred tax assets............................... 181,828 172,616
Deferred tax liabilities:
Property, equipment, intangible assets, and other......... (449,675) (169,476)
--------- ---------
Net deferred tax assets (liabilities)............. $(267,847) $ 3,140
========= =========
At December 31, 1997, the Company had approximately $162,000,000 of federal
net operating loss ("NOL") carryforwards, $217,000,000 of state NOL
carryforwards, and $39,000,000 of foreign NOL carryforwards. Most of the federal
NOL carryforwards, which were primarily a result of losses incurred by Chambers
prior to the Company's merger with Chambers, will begin to expire in 2007. The
use of the federal NOL carryforwards is subject to annual limitations of
approximately $39,000,000 due to an ownership change within the meaning of
Internal Revenue Code Section 382. The Company periodically evaluates the
deferred tax assets and adjusts the related valuation allowance on the deferred
tax assets to an amount which is more likely than not to be realized through
future taxable income.
The provision for domestic income taxes on undistributed earnings of
foreign subsidiaries is made only on those amounts in excess of the funds
considered to be permanently reinvested. The Company has no present intention of
remitting undistributed earnings of foreign subsidiaries and therefore, no
deferred tax liability has been established related to these earnings. If the
reinvested earnings were to be remitted, the federal income taxes due under
current tax law would not have a material effect on the Company's financial
position, results of operations or cash flows.
10. DOMESTIC AND FOREIGN OPERATIONS
The Company operates in one line of business: integrated nonhazardous solid
waste management which encompasses the entire waste stream from collection to
transfer station to landfill. The Company conducts its operations in various
locations throughout the United States, Canada, and Puerto Rico. During 1997,
the Company contributed the net book value of its Mexico operations to a
non-public solid waste entity focusing on Mexico's solid waste market in
exchange for a 37.5% interest in that entity. Accordingly, the Company is
57
60
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting for this investment under the entity method of accounting. The
following is a summary of the Company's operations by geographic area (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Operating revenues:
United States and Puerto Rico................ $2,265,526 $1,624,742 $1,210,827
Canada....................................... 337,504 15,039 --
Mexico....................................... 10,738 9,350 5,255
---------- ---------- ----------
Total operating revenues............. $2,613,768 $1,649,131 $1,216,082
========== ========== ==========
Income from operations:
United States and Puerto Rico................ $ 429,526 $ 182,265 $ 201,297
Canada....................................... 116,227 5,908 --
Mexico....................................... (72) (2,014) (2,168)
---------- ---------- ----------
Total income from operations......... $ 545,681 $ 186,159 $ 199,129
========== ========== ==========
Identifiable assets at end of year:
United States and Puerto Rico................ $5,352,254 $3,481,060 $2,432,397
Canada....................................... 1,270,591 125,104 --
Mexico....................................... -- 25,383 22,705
---------- ---------- ----------
Total identifiable assets at end of
year............................... $6,622,845 $3,631,547 $2,455,102
========== ========== ==========
11. UNUSUAL ITEMS
A summary of unusual items is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Provision for asset impairments, abandoned projects,
and estimated losses related to the disposition of
non-core business assets............................ $24,720 $35,848 $ --
Provisions for losses on contractual commitments...... -- 23,128 1,313
Financing and professional fees....................... -- -- 610
Corporate and regional restructurings................. -- -- 2,810
Western retirement benefits........................... -- 4,824 --
------- ------- -------
Total unusual items......................... $24,720 $63,800 $ 4,733
======= ======= =======
In the third quarter of 1997, the Company charged to expense unusual items
of $10,400,000 related to estimated losses for the closure of two transfer
stations in Minnesota, $8,400,000 related to estimated losses for the closure
and abandonment of two landfills in Massachusetts, and $5,920,000 related to
reserves for various 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 the third quarter of 1996, the
Company also recognized approximately $50,848,000 of unusual items, which
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 reserves for various other terminated
projects.
58
61
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Operating leases -- The Company has entered into certain noncancelable
operating leases for vehicles, equipment, offices, and other facilities which
expire through 2017, certain of which contain renewal options. Lease expense
aggregated $29,476,000, $21,260,000, and $15,954,000, during 1997, 1996, and
1995, respectively. Future minimum lease payments under operating leases in
effect at December 31, 1997 are 1998 -- $10,990,000; 1999 -- $8,758,000;
2000 -- $7,223,000; 2001 -- $5,878,000; 2002 -- $5,290,000; and thereafter
$21,314,000.
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 -- As of December 31, 1997, the Company or its subsidiaries has
been notified that they are potentially responsible parties ("PRPs") in
connection with six locations listed on the Superfund National Priorities List
("NPL"). None of the six NPL sites at which claims have been made against the
Company are owned by the Company, and they are at different procedural stages
under Superfund. At four of the NPL sites, the Company's liability is well
defined as a consequence of a governmental decision as to the appropriate
remedy. At the others, where investigations have not been completed, remedies
not selected or responsible parties have been unable to reach agreement, the
Company's liability is less certain. While the Company, based on its status
reviews of its PRP claims, does not currently anticipate that the amount of such
liabilities will have a material adverse effect on the Company's operations,
financial condition or cash flows, the measurement of environmental liabilities
is inherently difficult and the possibility remains that technological,
regulatory or enforcement developments, the results of environmental studies, or
other factors could materially alter this expectation at any time.
The Company has been advised by the U.S. Department of Justice that United
is a target of a federal investigation relating to alleged violations of the
Clean Water Act at the Laurel Ridge Landfill in Kentucky. The investigation
relates to a period prior to the Company's acquisition of United. The Company is
not a target of the investigation and has pledged its full cooperation to the
government.
The Company and certain of its subsidiaries are parties 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, results of operations or
cash flows. 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 judgment for
violation of an 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. The Company is also subject from
time to time 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
59
62
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commercial general liability and $1,000,000 primary automobile liability
supported by $200,000,000 in umbrella insurance protection. The property policy
provides insurance 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 and countries in which it has employees. The Company
also currently has an environmental impairment liability ("EIL") insurance
policy for certain of its landfills, transfer stations, and recycling facilities
that provides coverage for property damages and/or bodily injuries to third
parties caused by off-site pollution emanating from such landfills, transfer
stations, or recycling facilities. This policy provides $5,000,000 of coverage
per loss with a $10,000,000 aggregate limit.
To date, the Company has not experienced 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 on the Company's financial condition,
results of operations or cash flows. 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.
13. SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The following table summarizes the unaudited consolidated quarterly results
of operations for 1997 and 1996 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Operating revenues:
1997.................................. $460,484 $656,225 $761,751 $735,308
======== ======== ======== ========
1996.................................. $352,105 $410,000 $442,801 $444,225
======== ======== ======== ========
Income (loss) from operations:
1997.................................. $107,315 $165,679 $ 74,355 $198,332
======== ======== ======== ========
1996.................................. $ 66,880 $ 40,047 $(27,298) $106,530
======== ======== ======== ========
Income (loss) before income taxes and
extraordinary item:
1997.................................. $ 96,916 $146,243 $ 48,658 $171,450
======== ======== ======== ========
1996.................................. $ 55,529 $ 25,507 $(38,701) $ 96,402
======== ======== ======== ========
Net income (loss):
1997.................................. $ 57,962 $ 87,296 $ 18,902 $102,870
======== ======== ======== ========
1996.................................. $ 33,430 $ 5,021 $(27,471) $ 57,359
======== ======== ======== ========
Basic earnings (loss) per common share:
1997.................................. $ 0.30 $ 0.43 $ 0.09 $ 0.47
======== ======== ======== ========
1996.................................. $ 0.20 $ 0.03 $ (0.16) $ 0.32
======== ======== ======== ========
Diluted earnings (loss) per common
share:
1997.................................. $ 0.29 $ 0.40 $ 0.09 $ 0.45
======== ======== ======== ========
1996.................................. $ 0.19 $ 0.03 $ (0.16) $ 0.30
======== ======== ======== ========
60
63
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts.
Amounts presented for 1997 and 1996 are restated for the pooling of
interests transactions with United, Sanifill, and Western as discussed in Note
2, and are different from amounts originally reported. The results of operations
for 1997 and 1996 include certain nonrecurring charges for merger costs, unusual
items, and nonrecurring interest, as disclosed elsewhere herein. Nonrecurring
items charged to expense in the first, second, and third quarters of 1997 were
$1,996,000, $3,263,000, and $128,872,000, respectively. In 1996, nonrecurring
charges were $53,248,000, $135,599,000, and $1,579,000 in the second, third, and
fourth quarters, respectively.
14. SUBSEQUENT EVENTS
On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holdings Trust ("City Management") for approximately $735,000,000
consisting primarily of cash and a limited amount of debt assumed. The
businesses acquired include 20 collection operations, ten landfills, and 12
transfer stations primarily in the state of Michigan. This acquisition was
accounted for under the purchase method of accounting.
The unaudited pro forma information set forth below assumes acquisitions in
1996, 1997, and through February 1, 1998, accounted for as purchases had
occurred at the beginning of 1996. The 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,
--------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
Operating revenues.......................................... $3,394,513 $3,268,485
Income before extraordinary item............................ 315,307 154,969
Net income.................................................. 309,014 154,969
Basic earnings per common share:
Income before extraordinary item.......................... 1.49 0.85
Net income................................................ 1.46 0.85
Diluted earnings per common share:
Income before extraordinary item.......................... 1.41 0.81
Net income................................................ 1.39 0.81
On January 27, 1998, the Company announced that it had entered into a
definitive agreement to acquire TransAmerican Waste Industries, Inc.
("TransAmerican") for approximately 2,000,000 shares of the Company's common
stock, subject to certain adjustments, and approximately $43,000,000 in
assumption of debt. This acquisition, which is subject to regulatory approval
and approval of TransAmerican shareholders, is expected to close during the
first half of 1998 and is anticipated to be accounted for as a pooling of
interests. The businesses to be acquired include five collection operations,
nine landfills, and two transfer stations located throughout the southern region
of the United States.
The Company entered into a definitive agreement on February 6, 1998, with
American Waste Systems, Inc. ("American"), to acquire American's solid waste
businesses for approximately $150,000,000 in cash. This transaction, which is
subject to regulatory approval and approval of American's shareholders, is also
61
64
USA WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to close in the first half of 1998. The businesses to be acquired
include three landfills and one collection operation located in Ohio.
On March 10, 1998, the Company entered into a definitive agreement and plan
of merger pursuant to which a subsidiary of the Company will be merged with and
into WMI and WMI will become a wholly owned subsidiary of the Company. As of the
effective time of the merger, each outstanding share of WMI, other than shares
held in WMI's treasury or owned by WMI, the Company, or any wholly owned
subsidiary of either of them, will be converted into the right to receive 0.725
shares of the Company. This transaction, which is expected to close during 1998,
is subject to regulatory approval and approval of the stockholders of the
Company and WMI. It is anticipated that the Company will issue approximately
345,000,000 shares of its common stock related to this transaction and that this
merger will be accounted for as a pooling of interests.
62
65
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 1998
Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1998 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 1998 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
1998 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
1998 Proxy Statement and is incorporated herein by reference.
63
66
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, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
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:
EXHIBIT NO.* DESCRIPTION
------------ -----------
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of November 28, 1994, by and among the Registrant,
Chambers Acquisition Corporation and Chambers Development
Company, Inc. [Incorporated by reference to Appendix A in
the Registrant's Registration Statement on Form S-4, File
No. 33-59259].
2.2 -- 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].
2.3 -- Agreement and Plan of Merger, dated as of June 22, 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].
2.4 -- Amendment No. 1, dated as of July 18, 1996, to Agreement
and Plan of Merger 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].
2.5 -- Agreement and Plan of Merger, dated as of April 13, 1997,
by and among the Registrant, Riviera Acquisition
Corporation and United Waste Systems, Inc. [Incorporated
by reference to Appendix A in the Registrant's
Registration Statement on Form S-4, File No. 333-31979].
2.6 -- Agreement and Plan of Merger, dated March 10, 1998, by
and among the Registrant, Dome Merger Subsidiary, Inc.
and Waste Management, Inc. [Incorporated by reference to
Exhibit 99.1 of the Registrant's Current Report on Form
8-K dated March 10, 1998].
3.1 -- Restated Certificate of Incorporation, as amended
[Incorporated by reference to Exhibit 3(b) of the
Registrant's Quarterly Report, as amended, on Form 10-Q
for the three months ended September 30, 1997].
64
67
EXHIBIT NO.* DESCRIPTION
------------ -----------
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 the Registrant, 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 -- Supplemental Indenture, dated as of August 26, 1997,
among the Registrant, United Waste Systems, Inc. and
Bankers Trust Company relating to United Waste Systems,
Inc.'s 4 1/2% Convertible Subordinated Notes due June 1,
2001 [Incorporated by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K dated August 26,
1997].
4.5 -- Indenture for Senior Debt Securities dated September 10,
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 September 10, 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, as amended and restated.
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 -- 1997 Employee Stock Purchase Plan.
10.11 -- 401(k) Restoration Plan.
65
68
EXHIBIT NO.* DESCRIPTION
------------ -----------
10.12 -- Amended and Restated Revolving Credit Agreement dated as
of August 7, 1997, among the Registrant, Bank of America
National Trust and Savings Association, Morgan Guaranty
Trust Company of New York and other financial
institutions [Incorporated by reference to Exhibit 10.1
of the Registrant's Current Report on Form 8-K dated
August 26, 1997].
10.13 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and John E. Drury.
10.14 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and John E. Drury.
10.15 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Rodney R. Proto.
10.16 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Rodney R. Proto.
10.17 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Earl E. DeFrates.
10.18 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Earl E. DeFrates.
10.19 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Susan J. Piller.
10.20 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Susan J. Piller.
10.21 -- Employment Agreement dated as of October 7, 1997 between
the Registrant and William A. Rothrock.
10.22 -- Amendment dated as of December 12, 1997 to Employment
Agreement between the Registrant and William A. Rothrock.
10.23 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Gregory T. Sangalis.
10.24 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Gregory T. Sangalis.
10.25 -- Employment Agreement dated as of August 26, 1997 between
the Registrant and Ronald H. Jones.
10.26 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Bruce E. Snyder.
10.27 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Bruce E. Snyder.
10.28 -- Employment Agreement dated as of June 1, 1997 among the
Registrant, Canadian Waste Services, Inc. and David
Sutherland-Yoest.
10.29 -- Consulting and Non-compete Agreement dated June 25, 1995,
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].
10.30 -- 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].
10.31 -- Letter Agreement dated November 10, 1997, between the
Registrant and Kosti Shirvanian.
66
69
EXHIBIT NO.* DESCRIPTION
------------ -----------
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule.
27.2 -- Restated Financial Data Schedule.
27.3 -- Restated Financial Data Schedule.
27.4 -- Restated Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Registrant's file number under that Act
is 1-12154.
(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, 1997 to report the
supplemental financial statements of USA Waste Services, Inc. to reflect its
acquisition of United Waste Systems, Inc., which was accounted for as a pooling
of interests. The financial statements filed included: (i) The supplemental
consolidated balance sheets as of December 31, 1996 and 1995, and the related
supplemental consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996;
(ii) The supplemental interim condensed consolidated balance sheets as of June
30, 1997 and December 31, 1996, the related supplemental interim condensed
consolidated statements of operations for the six months ended June 30, 1997 and
1996, the related supplemental interim condensed consolidated statement of
stockholders' equity for the six months ended June 30, 1997, and the related
supplemental interim condensed consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996.
67
70
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 30, 1998
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 Chairman of the Board and Chief March 30, 1998
- ----------------------------------------------------- Executive Officer (Principal
John E. Drury Executive Officer)
/s/ RODNEY R. PROTO President, Chief Operating March 30, 1998
- ----------------------------------------------------- Officer and Director
Rodney R. Proto
/s/ EARL E. DEFRATES Executive Vice President and March 30, 1998
- ----------------------------------------------------- Chief Financial Officer
Earl E. DeFrates (Principal Financial Officer)
/s/ BRUCE E. SNYDER Vice President and Chief March 30, 1998
- ----------------------------------------------------- Accounting Officer (Principal
Bruce E. Snyder Accounting Officer)
/s/ RALPH F. COX Director March 30, 1998
- -----------------------------------------------------
Ralph F. Cox
/s/ RICHARD J. HECKMANN Director March 30, 1998
- -----------------------------------------------------
Richard J. Heckmann
/s/ RICHARD D. KINDER Director March 30, 1998
- -----------------------------------------------------
Richard D. Kinder
/s/ LARRY J. MARTIN Director March 30, 1998
- -----------------------------------------------------
Larry J. Martin
/s/ WILLIAM E. MOFFETT Director March 30, 1998
- -----------------------------------------------------
William E. Moffett
/s/ ALEXANDER W. RANGOS Director March 30, 1998
- -----------------------------------------------------
Alexander W. Rangos
/s/ JOHN G. RANGOS, SR. Director March 30, 1998
- -----------------------------------------------------
John G. Rangos, Sr.
/s/ KOSTI SHIRVANIAN Director March 30, 1998
- -----------------------------------------------------
Kosti Shirvanian
/s/ DAVID SUTHERLAND-YOEST Director March 30, 1998
- -----------------------------------------------------
David Sutherland-Yoest
/s/ JEROME B. YORK Director March 30, 1998
- -----------------------------------------------------
Jerome B. York
68
71
INDEX TO EXHIBITS
EXHIBIT NO.* DESCRIPTION
------------ -----------
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of November 28, 1994, by and among the Registrant,
Chambers Acquisition Corporation and Chambers Development
Company, Inc. [Incorporated by reference to Appendix A in
the Registrant's Registration Statement on Form S-4, File
No. 33-59259].
2.2 -- 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].
2.3 -- Agreement and Plan of Merger, dated as of June 22, 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].
2.4 -- Amendment No. 1, dated as of July 18, 1996, to Agreement
and Plan of Merger 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].
2.5 -- Agreement and Plan of Merger, dated as of April 13, 1997,
by and among the Registrant, Riviera Acquisition
Corporation and United Waste Systems, Inc. [Incorporated
by reference to Appendix A in the Registrant's
Registration Statement on Form S-4, File No. 333-31979].
2.6 -- Agreement and Plan of Merger, dated March 10, 1998, by
and among the Registrant, Dome Merger Subsidiary, Inc.
and Waste Management, Inc. [Incorporated by reference to
Exhibit 99.1 of the Registrant's Current Report on Form
8-K dated March 10, 1998].
3.1 -- Restated Certificate of Incorporation, as amended
[Incorporated by reference to Exhibit 3(b) of the
Registrant's Quarterly Report, as amended, on Form 10-Q
for the three months ended September 30, 1997].
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 the Registrant, 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 -- Supplemental Indenture, dated as of August 26, 1997,
among the Registrant, United Waste Systems, Inc. and
Bankers Trust Company relating to United Waste Systems,
Inc.'s 4 1/2% Convertible Subordinated Notes due June 1,
2001 [Incorporated by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K dated August 26,
1997].
72
EXHIBIT NO.* DESCRIPTION
------------ -----------
4.5 -- Indenture for Senior Debt Securities dated September 10,
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 September 10, 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, as amended and restated.
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 -- 1997 Employee Stock Purchase Plan.
10.11 -- 401(k) Restoration Plan.
10.12 -- Amended and Restated Revolving Credit Agreement dated as
of August 7, 1997, among the Registrant, Bank of America
National Trust and Savings Association, Morgan Guaranty
Trust Company of New York and other financial
institutions [Incorporated by reference to Exhibit 10.1
of the Registrant's Current Report on Form 8-K dated
August 26, 1997].
10.13 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and John E. Drury.
10.14 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and John E. Drury.
10.15 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Rodney R. Proto.
10.16 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Rodney R. Proto.
10.17 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Earl E. DeFrates.
10.18 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Earl E. DeFrates.
73
EXHIBIT NO.* DESCRIPTION
------------ -----------
10.19 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Susan J. Piller.
10.20 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Susan J. Piller.
10.21 -- Employment Agreement dated as of October 7, 1997 between
the Registrant and William A. Rothrock.
10.22 -- Amendment dated as of December 12, 1997 to Employment
Agreement between the Registrant and William A. Rothrock.
10.23 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Gregory T. Sangalis.
10.24 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Gregory T. Sangalis.
10.25 -- Employment Agreement dated as of August 26, 1997 between
the Registrant and Ronald H. Jones.
10.26 -- Employment Agreement dated as of June 1, 1997 between the
Registrant and Bruce E. Snyder.
10.27 -- Amendment dated as of December 1, 1997 to Employment
Agreement between the Registrant and Bruce E. Snyder.
10.28 -- Employment Agreement dated as of June 1, 1997 among the
Registrant, Canadian Waste Services, Inc. and David
Sutherland-Yoest.
10.29 -- Consulting and Non-compete Agreement dated June 25, 1995,
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].
10.30 -- 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].
10.31 -- Letter Agreement dated November 10, 1997, between the
Registrant and Kosti Shirvanian.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule.
27.2 -- Restated Financial Data Schedule.
27.3 -- Restated Financial Data Schedule.
27.4 -- Restated Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Registrant's file number under that Act
is 1-12154.