1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-10599
__________________________________
AMERICAN WASTE SERVICES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1602983
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One American Way, Warren, Ohio 44484-5555
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 856-8800
Indicate by a 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
--- ---
The registrant had 25,301,308 shares of its Class A Common Stock and 5,123,858
shares of its Class B Common Stock outstanding as of May 5, 1998.
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1
AMERICAN WASTE SERVICES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1998 and 1997 (Unaudited)................ 3
Condensed Consolidated Balance Sheets at March 31,
1998 and December 31, 1997 (Unaudited).................................... 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1998 and 1997 (Unaudited)................ 5
Notes to Condensed Consolidated Financial
Statements (Unaudited).................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities............................................ 16
Item 3. Defaults upon Senior Securities.................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
SIGNATURE................................................................... 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN WASTE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands except for per share amounts)
Three Months Ended
March 31,
------------------
1998 1997
------- -------
Net operating revenues...................................... $20,178 $17,498
Cost and expenses:
Cost of operations....................................... 17,391 16,166
Selling, general and administrative expense.............. 3,286 2,849
------- -------
Loss from operations........................................ (499) (1,517)
Other income (expense):
Interest expense......................................... (103) (32)
Other income, net........................................ 87 130
------- -------
Loss before income taxes.................................... (515) (1,419)
Provision (benefit) for income taxes........................ (103) (284)
------- -------
Net loss.................................................... $(412) $(1,135)
======= =======
Net loss per share.......................................... $(.01) $ (.04)
======= =======
Basic and diluted weighted average shares outstanding
(Note 3)................................................... 30,425 30,255
======= =======
See accompanying notes to condensed consolidated financial statements.
3
AMERICAN WASTE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
March 31, December 31,
1998 1997
--------- ------------
Assets
- ------
Current assets:
Cash and cash equivalents.......................................... $ 2,718 $ 3,080
Accounts receivable, net........................................... 17,369 17,004
Refundable income taxes............................................ 1,188 1,137
Current deferred tax benefit....................................... 260 260
Prepaid expenses and other current assets.......................... 1,843 2,388
-------- --------
Total current assets........................................... 23,378 23,869
Properties and equipment, net........................................... 92,582 93,393
Deposits................................................................ 2,802 2,765
Costs in excess of fair market value of net assets of acquired
businesses, net.................................................... 2,979 3,022
Other assets, net....................................................... 314 333
-------- --------
Total assets................................................... $122,055 $123,382
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt.................................. $ 178 $ 230
Accounts payable................................................... 6,142 7,116
Accrued payroll and other compensation............................. 917 1,114
Accrued income taxes............................................... 155 209
Other accrued taxes................................................ 944 1,291
Other liabilities and accrued expenses............................. 3,643 2,953
-------- --------
Total current liabilities...................................... 11,979 12,913
Long-term debt.......................................................... 8,170 8,205
Deferred income taxes................................................... 9,154 9,186
Accrued closure costs and post-closure monitoring costs................. 17,665 17,567
Other noncurrent liabilities............................................ 2,080 2,092
Shareholders' equity (Note 3):
Preferred stock, no par value...................................... -- --
Class A Common Stock, no par value................................. 64,267 64,267
Class B Common Stock, no par value................................. 780 780
Retained earnings.................................................. 8,140 8,552
Treasury Stock, Class B Common Stock, at cost...................... (180) (180)
-------- --------
Total shareholders' equity......................................... 73,007 73,419
-------- --------
Total liabilities and shareholders' equity..................... $122,055 $123,382
======== ========
See accompanying notes to condensed consolidated financial statements.
4
AMERICAN WASTE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended
March 31,
----------------------------
1998 1997
---- ----
Operating activities:
Net loss................................................................... $ (412) $(1,135)
Reconciliation of net loss to cash provided (used) by operating activities:
Depreciation and amortization.......................................... 1,963 1,722
Provision for accrued closure costs and post-closure monitoring costs.. 98 99
Provision for deferred income taxes.................................... (32) (39)
Provision for losses on accounts receivable............................ 70 42
Gain on sales of fixed assets.......................................... -- (23)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............................. (435) 280
Increase in refundable income taxes.................................... (51) --
Decrease in prepaid expenses and other current assets.................. 545 774
Decrease in other assets............................................... 8 3
Decrease in accounts payable........................................... (974) (2,629)
Increase (decrease) in accrued payroll and other compensation.......... (197) 13
Decrease in accrued income taxes....................................... (54) (299)
Decrease in other accrued taxes........................................ (347) (312)
Decrease in accrued closure costs and post closure monitoring costs.... -- (143)
Increase in other liabilities and accrued expenses..................... 690 349
Decrease in other noncurrent liabilities............................... (12) (12)
------- -------
Net cash provided (used) by operating activities....................... 860 (1,310)
------- -------
Investing activities:
Capital expenditures................................................... (1,159) (2,811)
Proceeds from sales of fixed assets.................................... 61 86
Increase in deposits, net.............................................. (37) (29)
------- -------
Net cash used in investing activities.................................. (1,135) (2,754)
------- -------
Financing activities:
Proceeds from issuance of long-term debt............................... -- 2,450
Repayments of long-term debt........................................... (87) (375)
------- -------
Net cash provided (used) in financing activities....................... (87) 2,075
------- -------
Decrease in cash and cash equivalents....................................... (362) (1,989)
Cash and cash equivalents at beginning of year.............................. 3,080 4,286
------- -------
Cash and cash equivalents at end of period.................................. $ 2,718 $ 2,297
======= =======
See accompanying notes to condensed consolidated financial statements.
5
AMERICAN WASTE SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1998
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of American Waste
Services, Inc., and its subsidiaries (collectively the "Company" or "AWS") and
related notes included herein have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein consistent with such rules and regulations. The accompanying
unaudited condensed consolidated financial statements and related notes should
be read in conjunction with the consolidated financial statements and related
notes included in the CompanyOs 1997 Annual Report on Form 10-K. Certain prior
year amounts have been reclassified to be consistent with the 1998 presentation.
In the opinion of management, these unaudited condensed consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position of the Company as of
March 31, 1998, and the results of operations and cash flows for the three-month
periods ended March 31, 1998 and 1997.
The operating results for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Note 2. Merger
On February 6, 1998, the Company entered into a definitive Agreement and Plan of
Merger pursuant to which the Company will merge with a wholly owned subsidiary
of USA Waste Services, Inc. ("USA Waste"). Prior to the merger, the Company
will contribute its transportation, technical services, waste disposal brokerage
and management, and golf course and related operations together with certain
other assets and liabilities of the parent corporation into a wholly owned
subsidiary, Avalon Holdings Corporation ("Avalon"). After Avalon's stock has
been registered with the Securities and Exchange Commission, it will be
distributed in the form of a dividend from the Company on a corresponding and
pro rata basis to the Company's stockholders immediately prior to the merger
being consummated (the "Spin-off"). The transaction will provide for the
Company's stockholders to receive $4.00 per share in cash plus stock in Avalon.
Upon consummation of the merger, the Company will become a wholly owned
subsidiary of USA Waste.
Ronald E. Klingle, Chairman and Chief Executive Officer of the Company, Darrell
D. Wilson, President and Chief Operating Officer of the Company, and other
executive officers of the Company will resign their positions with the Company
and will assume similar positions with Avalon.
The proposed merger has been approved by the Boards of AWS and USA Waste.
Approval by the Company's stockholders is required, in addition to regulatory
reviews and approvals and other customary closing conditions. The parties
expect to complete the transactions during the second half of June 1998. The
Board of Directors has fixed the close of business on May 11, 1998 as the record
date for the determination of the stockholders entitled to vote at a special
meeting to be held on June 15, 1998. The merger and Spin-off proposals must be
approved by the holders of the Company's
6
Class A Common Stock, no par value, and the holders of the Company's Class B
Common Stock, no par value, each voting as a separate class. The affirmative
votes of the holders of at least two-thirds of the outstanding shares of each
class is required to approve the proposals. Holders of approximately 95 percent
of the outstanding shares of the Company's Class B Common Stock have agreed,
pursuant to voting agreements and irrevocable proxies, to vote in favor of the
proposals.
On March 17, 1998 the Company announced that the Federal Trade Commission and
the United States Department of Justice-Antitrust Division had completed their
review of the proposed acquisition by USA Waste and had granted early
termination of the pre-merger notification waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976.
On April 20, 1998, AWS received a written opinion as to the fair market value of
the capital stock of Avalon to serve as a valuation basis for establishing the
amount of any taxable gain resulting from the Spin-off. The opinion was based
on business, economic, market and other conditions that existed and that could
be evaluated by the appraiser as of March 31, 1998 and was further based upon
the investigation, premises, provisos and analyses set forth in the text of the
opinion. The opinion states that as of March 31, 1998 the fair market value of
the capital stock of Avalon is reasonably stated in the amount of $30.4 million.
AWS anticipates that the Spin-off will result in holders of AWS common stock
receiving a dividend, on a pro rata and corresponding basis, of one share of
Avalon common stock for every eight shares of AWS common stock held. This would
equate to a value of Avalon common stock of $8 per share based upon
approximately 3.8 million shares being outstanding. The dividend of the Avalon
common stock will be taxable to AWS stockholders. Stockholders of AWS should
not rely on the opinion as an indication of the prices at which shares of Avalon
common stock may actually trade.
AWS has received approval for the listing of Avalon's Class A Common Stock on
the American Stock Exchange, subject to, among other things, the registration of
such shares with the Securities and Exchange Commission ("SEC"). On May 8,
1998, a registration statement was filed with the SEC on Form 10 for the purpose
of registering the Avalon Class A Common Stock under Section 12(b) of the
Securities Exchange Act of 1934, as amended. On May 14, 1998 such registration
statement was declared effective.
Note 3. Net Loss Per Share
Class A Common Stock and Class B Common Stock are considered as one class of
stock for the calculation of basic and diluted net income (loss) per share. The
basic and diluted per share data has been computed using the weighted average
number of common shares outstanding each period which amounted to 30,425,000 and
30,255,000 in the first quarter of 1998 and 1997, respectively.
Note 4. Debt
The amount outstanding at March 31, 1998 under the Company's revolving credit
facility was $15.5 million, including $8.3 million in letters of credit. The
letters of credit were utilized to capitalize a captive insurance company,
incorporated and licensed under the laws of the State of Vermont, which issued
an insurance policy to provide the required financial assurances for closure
costs and post-closure monitoring costs to the State of Ohio for the Company's
American and Mahoning landfill facilities and its tire monofill facility. (See
Note 6. Closure Costs and Post-Closure Monitoring Costs.)
7
Note 5. Legal Matters
On or about October 3, 1991, one shareholder owning 100 shares of stock brought
suit against the Company and others on behalf of himself and a purported class
of other shareholders in the United States District Court for the Southern
District of New York. The suit, which was transferred to the United States
District Court for the Northern District of Ohio, alleges that the Company, the
signatories to the registration statement filed with the Securities and Exchange
Commission during October 1990, and the Company's underwriters violated federal
securities laws in connection with the Company's public offering of six million
shares of Class A Common Stock in October 1990. Among other things, the suit
alleges misrepresentations and failure to disclose allegedly material
information concerning the nature of the Company's market; the size of the
Company's market; the Company's failure to disclose that its landfills were
located within a 50-mile radius of each other in Ohio, thus making the Company
especially vulnerable to local conditions and competition; the Company's failure
to set forth the present and imminent competition; and the Company's growth.
The plaintiff sought damages in an unspecified amount alleged to have arisen in
part from the decline in the price of the Company's stock following the public
offering, and rescission.
On September 26, 1997 the Court granted the defendants' Motion for Summary
Judgment and dismissed plaintiff's case. On October 25, 1997, pursuant to the
federal rules of appellate procedure, plaintiff filed a Notice of Appeal. Such
appeal is currently pending and the Company intends to vigorously defend the
Court's order.
In September 1995, certain subsidiaries of the Company were informed that they
had been identified as potentially responsible parties by the Indiana Department
of Environmental Management relating to a Fulton County, Indiana, hazardous
waste disposal facility which is subject to remedial action under Indiana
environmental laws. Such identification is based upon the subsidiaries having
been involved in the transportation of hazardous substances to the facility.
These transportation activities occurred prior to the acquisition of such
subsidiaries by the Company. During the third quarter of 1997, the Company's
subsidiaries became parties to an Agreed Order for Remedial
Investigation/Feasibility Study and the Four County Landfill Site Participation
Agreement ("Participation Agreement"). A large number of waste generators and
other waste transportation and disposal companies have also been identified as
responsible or potentially responsible parties with respect to this facility.
Because the relevant law provides for joint and several liability among the
responsible parties, any one of them, including the Company's subsidiaries,
could be assessed the entire cost of the remediation, although this is unlikely.
Currently, no remedy has been selected and the extent of any ultimate liability
of any of the Company's subsidiaries with respect to this facility is currently
unknown.
When the Company concludes that it is probable that a liability has been
incurred with respect to a site, provision will be made in the Company's
financial statements reflecting its best estimate of the liability based on
management's judgment and experience, information available from regulatory
agencies, and the number, financial resources and relative degree of
responsibility of other potentially responsible parties who are jointly and
severally liable for remediation of the site as well as the typical allocation
of costs among such parties. If a range of possible outcomes is estimated and
no amount within the range appears to be a better estimate than any other, then
the Company will provide for the minimum amount within the range, in accordance
with generally accepted accounting principles. As such, the Company accrued a
liability of approximately $941,000 in the fourth quarter of 1995 relating to
this matter. The Company's estimates are revised, as deemed necessary, as
additional information becomes known. The Company anticipates obtaining
additional information by reason of, among other things, having entered into the
Participation Agreement.
8
While 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 the Company's expectations at any time, the Company does not
anticipate that the amount of any such revisions will have a material adverse
effect on it.
In addition to the foregoing, in the ordinary course of conducting its business,
the Company also becomes involved in lawsuits, administrative proceedings and
governmental investigations, including those relating to environmental matters.
Any of these proceedings may result in fines, penalties or judgments being
assessed which, from time to time, may have an impact on its business and
financial condition. The Company does not believe that any pending proceedings,
individually, or in the aggregate, would have a material adverse effect on it.
Note 6. Closure Costs and Post-Closure Monitoring Costs
The United States Environmental Protection Agency's "Subtitle (D) Regulations"
provide minimum design, construction and operating standards for virtually all
landfills in the United States. Furthermore, regulations promulgated by the
Ohio Environmental Protection Agency ("Ohio EPA") require every Ohio landfill to
utilize the "best available technology" with respect to cell preparation and
lining, leachate collection and treatment, and groundwater monitoring as well as
to provide financial assurances adequate to cover closure costs and post-closure
monitoring costs for a period of up to 30 years after the landfill is closed.
As a result of the above-described requirements, the Company has future
financial obligations with regard to closure costs and post-closure monitoring
costs associated with the disposal sites it operates. Although the precise
amount of these future obligations cannot be determined, the Company has
developed procedures to estimate these total projected costs based on
currently available facts, existing technology and presently enacted laws and
regulations. As of December 31, 1997, the Company estimated that the remaining
total closure costs and post-closure monitoring costs it will incur for all of
its disposal facilities is approximately $30.2 million. In accordance with
Ohio's financial assurance regulations, the Company currently estimates that it
will be required to provide approximately $31.7 million of financial assurances
to the State of Ohio; however, such financial assurances are reduced by actual
expenditures. The Company utilizes insurance to satisfy the financial assurance
requirements for its American and Mahoning landfill facilities and its tire
monofill facility. The Company uses a trust fund to satisfy the financial
assurance requirements for its East Liverpool facility. In April 1998 the
Company deposited approximately $.3 million into the trust to fund a portion of
the current financial assurance obligation for that facility. Such fund, which
is recorded by the Company at cost which approximates market value, is included
in the Consolidated Balance Sheets under the caption "Deposits" and amounted to
approximately $2.7 million at March 31, 1998 and December 31, 1997,
respectively. The funds in the trust are invested primarily in short-term
securities, commercial paper or certificates of deposit with investment earnings
accruing to the benefit of the Company. The Company will continue to review and
update the underlying assumptions used to estimate the total projected costs and
financial assurance requirements and, accordingly, such estimates will be
subject to periodic revision and adjustment at least annually.
____________________________________________
____________________________________________
9
Item 2. ManagementOs Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information which management believes is
relevant to an assessment and understanding of the operations and financial
condition of American Waste Services, Inc. and its subsidiaries. As used in
this report, the term "AWS", or "Company" mean American Waste Services, Inc. and
its wholly owned subsidiaries, taken as a whole, unless the context indicates
otherwise. The following discussion should be read in conjunction with the
condensed consolidated financial statements and accompanying notes included in
this report and the consolidated financial statements and related notes included
in the CompanyOs 1997 Annual Report on Form 10-K.
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, 'forward looking statements.' The
Company cautions readers that forward looking statements, including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs, and income, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward looking statements, due to
risks and factors identified herein and from time to time in the Company's
reports filed with the Securities and Exchange Commission.
Merger
- ------
On February 6, 1998, the Company entered into a definitive Agreement and Plan of
Merger pursuant to which the Company will merge with a wholly owned subsidiary
of USA Waste Services, Inc. ("USA Waste"). Prior to the merger, the Company
will contribute its transportation, technical services, waste disposal brokerage
and management, and golf course and related operations together with certain
other assets and liabilities of the parent corporation into a wholly owned
subsidiary, Avalon Holdings Corporation ("Avalon"). After Avalon's stock has
been registered with the Securities and Exchange Commission, it will be
distributed in the form of a dividend from the Company on a corresponding and
pro rata basis to the Company's stockholders immediately prior to the merger
being consummated (the "Spin-off"). The transaction will provide for the
Company's stockholders to receive $4.00 per share in cash plus stock in Avalon.
Upon consummation of the merger, the Company will become a wholly owned
subsidiary of USA Waste.
Ronald E. Klingle, Chairman and Chief Executive Officer of the Company, Darrell
D. Wilson, President and Chief Operating Officer of the Company, and other
executive officers of the Company will resign their positions with the Company
and will assume similar positions with Avalon.
The proposed merger has been approved by the Boards of AWS and USA Waste.
Approval by the Company's stockholders is required, in addition to regulatory
reviews and approvals and other customary closing conditions. The parties
expect to complete the transactions during the second half of June 1998. The
Board of Directors has fixed the close of business on May 11, 1998 as the record
date for the determination of the stockholders entitled to vote at a special
meeting to be held on June 15, 1998. The merger and Spin-off proposals must be
approved by the holders of the Company's Class A Common Stock, no par value, and
the holders of the Company's Class B Common Stock, no par value, each voting as
a separate class. The affirmative votes of the holders of at least two-thirds
of the outstanding shares of each class is required to approve the proposals.
Holders of approximately 95 percent of the outstanding shares of the Company's
Class B Common Stock have agreed, pursuant to voting agreements and irrevocable
proxies, to vote in favor of the proposals.
10
On March 17, 1998 the Company announced that the Federal Trade Commission and
the United States Department of Justice-Antitrust Division had completed their
review of the proposed acquisition by USA Waste and had granted early
termination of the pre-merger notification waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976.
On April 20, 1998, AWS received a written opinion as to the fair market value of
the capital stock of Avalon to serve as a valuation basis for establishing the
amount of any taxable gain resulting from the Spin-off. The opinion was based
on business, economic, market and other conditions that existed and that could
be evaluated by the appraiser as of March 31, 1998 and was further based upon
the investigation, premises, provisos and analyses set forth in the text of the
opinion. The opinion states that as of March 31, 1998 the fair market value of
the capital stock of Avalon is reasonably stated in the amount of $30.4 million.
AWS anticipates that the Spin-off will result in holders of AWS common stock
receiving a dividend, on a pro rata and corresponding basis, of one share of
Avalon common stock for every eight shares of AWS common stock held. This would
equate to a value of Avalon common stock of $8 per share based upon
approximately 3.8 million shares being outstanding. The dividend of the Avalon
common stock will be taxable to AWS stockholders. Stockholders of AWS should
not rely on the opinion as an indication of the prices at which shares of Avalon
common stock may actually trade.
AWS has received approval for the listing of Avalon's Class A Common Stock on
the American Stock Exchange, subject to, among other things, the registration of
such shares with the Securities and Exchange Commission ("SEC"). On May 8,
1998, a registration statement was filed with the SEC on Form 10 for the purpose
of registering the Avalon Class A Common Stock under Section 12(b) of the
Securities Exchange Act of 1934, as amended. On May 14, 1998 such registration
statement was declared effective.
Liquidity and Capital Resources
- -------------------------------
During the first quarter of 1998 the Company utilized existing cash and cash
generated from operating activities to meet operating needs, repay indebtedness
and fund capital expenditure programs. Capital spending totaled approximately
$1.2 million in the first quarter of 1998 which was principally related to the
purchase of equipment for the Company's landfill, collection and transportation
operations and continued landfill development. During 1998 the CompanyOs
capital spending is expected to range from $10 million to $12 million. Capital
expenditures in 1998 will relate principally to landfill development, acquiring
transportation equipment, replacing equipment or acquiring additional equipment
primarily to support disposal operations, acquiring equipment associated with
collection services, and engineering and construction costs related to
regulatory compliance at the CompanyOs landfills. 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.
The Company maintains an $18 million unsecured revolving credit facility with
two banks. Such facility provides for revolving credit loans and/or term loans.
On December 31, 2000 the Company must convert any outstanding revolving credit
loans into term loans payable quarterly with a final maturity date no later than
December 31, 2003. The agreement also provides for the issuance of letters of
credit up to an aggregate amount of $13 million until December 31, 2000.
11
Borrowings under the agreement bear interest at prime or, at the Company's
option, at a fixed rate above the Eurodollar rate. The agreement provides for
an annual fee of 3/8% on the unused portion of the facility and requires the
Company to maintain certain financial ratios. The amount of borrowings
outstanding under the revolving credit facility at March 31, 1998 and December
31, 1997 was $7.2 million. The Company also had $8.3 million in outstanding
letters of credit at March 31, 1998 and December 31, 1997, respectively. The
letters of credit were utilized to capitalize a captive insurance company,
incorporated and licensed under the laws of the State of Vermont, which issued
an insurance policy to provide the required financial assurances for closure and
post-closure monitoring costs to the State of Ohio for the Company's American
and Mahoning landfill facilities and its tire monofill facility.
As a result of federal and state laws and regulations, the Company has future
financial obligations with regard to closure costs and post-closure monitoring
costs associated with the disposal sites it operates. Although the precise
amount of these future obligations cannot be determined, the Company has
developed procedures to estimate such total projected costs based on currently
available facts, existing technology and presently enacted laws and regulations.
As of December 31, 1997, the Company estimates that the remaining total closure
costs and post-closure monitoring costs it will incur for all of its disposal
facilities is approximately $30.2 million. In accordance with Ohio's financial
assurance regulations, the Company currently estimates that it will be required
to provide approximately $31.7 million of financial assurances to the State of
Ohio relating to such costs; however, such financial assurances are reduced by
actual expenditures. As described above, the Company utilized insurance to
satisfy the financial assurance requirements for its American and Mahoning
landfill facilities and its tire monofill facility. The Company uses a trust
fund to satisfy the financial assurance requirements for its East Liverpool
landfill facility. In April 1998 the Company deposited approximately $.3
million into the trust fund to satisfy the current financial assurance
obligation for that facility. The Company will continue to review and update
the underlying assumptions used to estimate the total projected costs and
financial assurance requirements and, accordingly, such estimates will be
subject to periodic revision and adjustment at least annually.
Management believes that cash provided from operations, the availability of
working capital, the CompanyOs unused portion of its revolving credit facility
and the Company's ability to incur additional indebtedness will be, for the
foreseeable future, sufficient to meet operating requirements, fund debt
repayments, fund present capital expenditure programs and provide for financial
assurance requirements of its disposal facilities.
12
Results of Operations
- ---------------------
Overall performance
Net operating revenues in the first quarter of 1998 increased 15.4% to $20.2
million compared with $17.5 million in the prior year's first quarter. The
Company recorded a net loss of $.4 million or a net loss of $.01 per share
compared to a net loss of $1.1 million or a net loss of $.04 per share in the
first quarter of 1997. Net operating revenues and operating income (loss) for
the CompanyOs business segments were as follows (in thousands):
Three Months Ended
March 31,
1998 1997
------- -------
Net operating revenues:
Integrated waste management and environmental services ............ $16,782 $13,994
Transportation of general and bulk commodities .................... 3,056 3,135
Other businesses .................................................. 340 369
------- -------
$20,178 $17,498
======= =======
Operating income (loss): (1)
Integrated waste management and environmental services ............ $ 1,494 $ (73)
Transportation of general and bulk commodities ..................... 87 138
Other businesses ................................................... (192) (166)
------- -------
1,389 (101)
Interest expense ........................................................ (103) (32)
Interest income ......................................................... 75 71
General corporate expenses .............................................. (1,876) (1,357)
------- -------
Income (loss) before income taxes ....................................... $ (515) $(1,419)
======= =======
(1) Segment operating income reflects the results of operations of each segment
before income taxes, interest income and expense, and items of a general nature
not readily allocable to a separate business segment.
Segment performance
Net operating revenues of the Company's primary business segment, integrated
waste management and environmental services, increased to $16.8 million in the
first quarter of 1998 from $14 million in the first quarter of the prior year.
The Company's disposal operations, including disposal brokerage, recorded
increased net operating revenues in the first quarter of 1998 compared with the
first quarter of the prior year primarily due to increased business of the
disposal brokerage operations partially offset by decreased net operating
revenues of the Company's landfill operations due to a decrease in the volume of
waste accepted at the Company's landfills. The decrease in disposal volumes was
partially offset by higher average disposal prices. Net operating revenues of
the transportation operations for the first quarter of 1998 increased compared
with the first quarter of 1997 primarily as a result of increased
13
business of the transportation brokerage business and, to a lesser extent,
increased transportation of hazardous and industrial waste. Net operating
revenues of the technical environmental services business increased during the
first quarter of 1998 compared with the first quarter of the prior year
primarily as a result of an increase in laboratory services. Net operating
revenues of the Company's collection operations also increased in the first
quarter of 1998 compared with the first quarter of 1997 primarily as a result of
an increase in the volume of business due to an expanded customer base. The
collection operations commenced operations in the third quarter of 1996.
Operating income of the integrated waste management and environmental services
segment was $1.5 million in the first quarter of 1998 compared with an operating
loss of $.1 million in the first quarter of the prior year. The increase is
primarily the result of the technical environmental services business recording
operating income in the first quarter of 1998 compared to a significant
operating loss in the first quarter of 1997. The operating loss in the first
quarter of 1997 was primarily attributed to a remediation project in Denver,
Colorado in which the technical environmental services business incurred
significant costs while recognizing very little revenue. The operating income
of both the transportation operations and the disposal operations was flat for
the first quarter of 1998 compared with the first quarter of 1997. The
collection operations incurred a smaller operating loss in the first quarter of
1998 compared with the prior year primarily as a result of an increase in the
volume of business.
The Company's second business segment, the transportation of general and bulk
commodities, recorded slightly lower net operating revenues and operating income
in the first quarter of 1998 compared with the first quarter of 1997 primarily
as a result of a decrease in business.
Interest expense
Interest expense was $103,000 in the first quarter of 1998 compared to $32,000
in the first quarter of the prior year. The increase was primarily attributed
to an increase in the amount of principal outstanding under the Company's
revolving credit facility. Interest costs totaling $103,000 were capitalized in
the first quarter of both 1998 and 1997.
General corporate expenses
General corporate expenses increased significantly in the first quarter of 1998
compared to the first quarter of 1997 primarily as a result of legal, accounting
and other costs associated with the Spin-off of Avalon and subsequent
acquisition of the Company by USA Waste.
Net income
The Company recorded a net loss of $.4 million in the first quarter of 1998
compared with a net loss of $1.1 million in the first quarter of 1997. The
Company's overall effective tax rate, including the effect of state income tax
provisions, was 20% for the first quarter of both 1998 and 1997 primarily as a
result of tax credits associated with the production and sale of landfill gas
produced at the Company's landfill gas extraction facility.
14
Trends and uncertainties
In the ordinary course of conducting its business, the Company becomes involved
in lawsuits, administrative proceedings and governmental investigations,
including those relating to environmental matters. Some of these proceedings
may result in fines, penalties or judgments being assessed against the Company
which, from time to time, may have an impact on its business and financial
condition.
Failure to consummate the previously mentioned transactions with USA Waste could
have an adverse impact upon the Company due to, among other things, the
incurrence of substantial fees and expenses relating to the transactions and the
potential disruption of the Company's relationships with its customers and
employees.
The Company is subject to extensive and evolving environmental laws and
regulations that have been enacted in response to technological advances and the
public's increased concern over environmental issues. As a result, the Company
believes that costs associated with the engineering, construction, ownership and
operation of landfills will increase in the future. Competitive factors may
require the Company to absorb all or a portion of these increased expenses.
The federal government as well as numerous states and local governmental bodies
are increasingly considering, proposing or enacting legislation to either
restrict or impede disposal and/or transportation of waste. A significant
portion of the Company's disposal and transportation revenues are derived from
the disposal or transportation of out-of-state waste. All of the Company's
landfills are located within the State of Ohio. Any regulation restricting or
impeding the transportation of waste, the acceptance of out-of-state waste for
disposal, or which levies significant taxes on the disposal of waste could have
a significant negative effect on the Company.
Competitive pressures within the environmental industry continue to impact the
financial performance of the Company's disposal, transportation and technical
environmental services operations. Increases in additional disposal capacity
within the industry, consolidation within the industry, and aggressive pricing
strategies of certain competitors could result in further declines in disposal
rates and/or disposal volumes thereby affecting the Company's financial
performance. Additionally, a further decline in the rates which customers are
willing to pay for its technical environmental and transportation services could
impact the future financial performance of the Company's operations.
The Company completed the construction of a landfill gas extraction facility at
its American landfill and began production in September 1996. In November 1996
the Company entered into a contract for the sale of all of the landfill gas, the
principal component of which is methane. The production and sale of the
landfill gas is expected to entitle the Company to qualify for tax credits from
the production of fuel from a nonconventional source. These tax credits, which
under current legislation expire at the end of 2007, have and could
significantly reduce the Company's overall effective tax rate.
____________________________________________
____________________________________________
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to "Item 3. Legal Proceedings" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 for a
description of legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On May 8, 1998, a registration statement was filed with the Securities
and Exchange Commission ("SEC") on Form 10 for the purpose of
registering the Avalon Holdings Corporation Class A Common Stock under
Section 12(b) of the Securities Exchange Act of 1934, as amended. On
May 14, 1998 such registration statement was declared effective.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
February 17, 1998 - Agreement and Plan of Merger by and among USA
Waste Services, Inc., C&S Ohio Corp. and American Waste Services,
Inc.
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SIGNATURE
Pursuant to the requirements 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.
AMERICAN WASTE SERVICES, INC.
(Registrant)
Date: May 15, 1998 By: /s/ Timothy C. Coxson
-------------------------- -------------------------------------------
Timothy C. Coxson, Executive Vice President,
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
17