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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to__________
Commission file number 1-12154
USA WASTE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 FANNIN STREET, SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 512-6200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 25, 1997, was approximately $5,044,347,000. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)
The number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at March 25, 1997, was 154,110,368.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated as to
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PROXY STATEMENT
FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS PART III
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 51
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 51
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 51
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . 52
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PART I
ITEM 1. BUSINESS.
GENERAL
USA Waste Services, Inc. ("USA Waste" or the "Company") is the third
largest integrated solid waste management company in North America and serves
the full spectrum of municipal, commercial, industrial, and residential
customers in 36 states, the District of Columbia, Canada, Mexico, and Puerto
Rico. The Company's solid waste management services include collection,
transfer, and disposal operations and, to a lesser extent, recycling and
certain other waste management services. At December 31, 1996, USA Waste owned
or operated 123 collection operations, 61 transfer stations, 101 landfills, and
served more than 2 million customers. The Company has a diversified customer
base with no single customer accounting for more than 5% of the Company's
operating revenues during 1996. The Company employs approximately 9,800
people.
The terms "USA Waste" and the "Company" refer to USA Waste Services, Inc.,
a Delaware corporation incorporated on April 28, 1995, to become the successor
company of USA Waste Services, Inc., an Oklahoma corporation organized in 1987,
and include its predecessors, subsidiaries, and affiliates, unless the context
requires otherwise. USA Waste's executive offices are located at 1001 Fannin
Street, Suite 4000, Houston, Texas 77002, and its telephone number is (713)
512-6200.
Of the Company's revenues for the year ended December 31, 1996,
approximately 52.6% was attributable to collection operations, approximately
10.8% was from transfer operations, approximately 29.0% was attributable to
landfill operations, and approximately 7.6% from other operations. The
Company's average landfill volume for the year ended December 31, 1996, was
approximately 88,600 tons per day.
INDUSTRY BACKGROUND
USA Waste operates in the non-hazardous solid waste segment of the waste
management industry. Despite the size of this industry, it has historically
been a fragmented industry, with a multitude of local private and municipal
operators servicing relatively centralized areas. In recent years, the
industry has undergone a period of significant consolidation, however, local
private and municipal operations continue to service approximately 60% of the
domestic solid waste business.
One of the principal forces driving consolidation within the solid waste
management industry is increased regulation and enforcement of collection and
disposal activities. In October 1991, the Environmental Protection Agency
("EPA") adopted new regulations pursuant to Subtitle D of the Resource
Conservation and Recovery Act governing the disposal of solid waste. These
regulations led to a variety of requirements applicable to landfill disposal
sites, including the construction of liners and the installation of leachate
collection systems, groundwater monitoring systems, and methane gas recovery
systems. The regulations also required enhanced control systems to monitor
more closely the waste streams being disposed at the landfills, extensive
post-closure monitoring of sites, and financial assurances that landfill
operators will be able to comply with the stringent regulations. The result of
these regulatory requirements has been increased costs throughout the various
segments of the industry, with particularly significant increases for landfill
operators.
Compliance with the regulations currently in effect for the non-hazardous
solid waste industry requires significant capital expenditures. Many industry
participants have found the increased costs difficult, if not impossible, to
bear. A large number of smaller, independent operators have decided to either
close down their operations or sell them to stronger operators, and some
municipalities have chosen to discontinue, or are considering discontinuing,
their operations and turning the management of solid waste services over to
private concerns.
The rising costs associated with the new industry regulations have been a
cause of consolidation and acquisition activity within the industry. Large
waste management companies, with sufficient financial resources to absorb the
initial costs of bringing operations into compliance, have taken advantage of
discontinuations and divestitures by acquiring operations which either
complement existing businesses or otherwise increase overall strength and
flexibility. Compliance costs at the landfill/disposal level have directly
affected costs in the collection segment of the market as landfill operators
pass them on through higher fees for disposal or "tipping." In addition,
companies active in various segments of the industry continue to seek vertical
integration to enable them to become more cost effective and competitive.
Finally, the higher cost structure has also led to the merger of a number of
independent collection operations to enhance financial strength and improve
operating efficiencies.
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STRATEGY
The Company intends to capitalize on the consolidation in the solid waste
management industry in several ways. Key elements of the Company's strategy
include:
o Increasing productivity and operating efficiencies in existing and acquired
operations. The Company seeks to increase productivity, achieve
administrative and operating efficiencies, and improve profitability in
existing operations and acquired businesses, with the objective of becoming
the low cost operator in each of its markets. Measures taken by the
Company in this area include consolidating and implementing uniform
administrative and management systems, restructuring and consolidating
collection routes, improving equipment utilization, and increasing
employee productivity through incentive compensation and training programs.
The Company's management believes that its ability to serve markets as a
low cost operator is fundamental to achieving sustainable internal growth
and to realizing the benefits of its acquisition strategy.
o Increasing revenues and enhancing profitability through tuck-in
acquisitions. The Company continually seeks to expand its services through
the acquisition of additional solid waste management businesses and
operations that can be effectively integrated with the Company's existing
operations. These acquisitions typically involve adding collection
operations, transfer stations, or landfills that are complementary to
existing operations and that permit the Company to implement operating
efficiencies and increase asset utilization.
o Expanding into new markets through acquisitions. The Company pursues
acquisitions in new markets where the Company believes it can strengthen
its overall competitive position as a national provider of integrated solid
waste management services and where opportunities exist to apply the
Company's operating and management expertise to enhance the performance of
acquired operations.
On August 30, 1996, the Company consummated a merger agreement with
Sanifill, Inc. ("Sanifill") accounted for as a pooling of interests (the
"Sanifill Merger"). Under the terms of the Sanifill Merger, the Company issued
1.70 shares of its common stock for each share of Sanifill outstanding common
stock. The Sanifill Merger increased the Company's outstanding shares of
common stock by approximately 43,414,000 shares and the Company assumed
Sanifill's options and warrants equivalent to approximately 4,361,000
underlying shares of Company common stock. Sanifill owned and operated
nonhazardous waste disposal, treatment, collection, transfer station, and
recycling businesses and complementary operations. Since it was founded in
1989, Sanifill acquired 142 disposal, collection, and related businesses. As
of June 30, 1996, Sanifill operated 50 disposal and treatment facilities, 26
transfer stations, and 36 collection operations. In addition, Sanifill
provided sludge treatment and organic recycling services.
On May 7, 1996, the Company consummated a merger agreement with Western
Waste Industries ("Western") accounted for as a pooling of interests (the
"Western Merger"). Under the terms of the Western Merger, the Company issued
1.50 shares of its common stock for each share of Western outstanding common
stock. Prior to the Western Merger, the Company owned approximately 4.1% of
Western's outstanding shares (634,900 common shares), which were canceled on
the Western Merger's effective date. The Western Merger increased the
Company's outstanding shares of common stock by approximately 22,028,000 shares
and the Company assumed options under Western's stock option plans equivalent
to approximately 5,200,000 underlying Company shares of common stock. With the
addition of the Western operations, which include significant collection
operations, the Company significantly increased its presence in California and
added additional operations in Texas, Louisiana, Florida, Colorado, and
Arkansas. Western had 91 municipal and regional authority contracts and served
over 785,000 customers. As part of its business, Western operated six
landfills, three transfer stations, and five recycling facilities.
In addition to the consummation of public mergers with Sanifill and
Western, the Company acquired 90 collection operations, 18 transfer stations,
18 landfills, and six recycling businesses during 1996, with annualized
revenues aggregating approximately $383,000,000.
On March 12, 1997, the Company acquired all of the Canadian solid waste
subsidiaries of Allied Waste Industries, Inc. ("Allied"), representing 41
collection businesses, seven landfills, and eight transfer stations in the
provinces of Alberta, British Columbia, Manitoba, Ontario, Quebec, and
Saskatchewan, for approximately $518,000,000 in cash. These assets were
acquired by Allied in December 1996 from Laidlaw, Inc. in conjunction with
Allied's acquisition of all of Laidlaw, Inc.'s North American solid waste
businesses.
The Company's business is subject to extensive federal, state, and local
regulation and legislative initiative. Further, in some states and
municipalities, its business is subject to environmental regulation, mandatory
recycling laws, prohibitions on the deposit of certain waste in landfills, and
restrictions on the flow of solid waste. Because of continuing public awareness
and influence regarding the collection, transfer, and disposal of waste and the
preservation of the environment, and uncertainty with respect to the enactment
and enforcement of future laws and regulations, the Company cannot always
accurately predict
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the impact any future regulation or law may have on its operations. See
"Regulation" and "Legal Proceedings" for additional information.
OPERATIONS
USA Waste provides collection, transfer, disposal, and recycling services
to municipal, commercial, industrial, and residential customers in 36 states,
the District of Columbia, Canada, Mexico, and Puerto Rico.
Management of USA Waste's solid waste operations is achieved through an
alignment that currently includes five regions organized by geographic area.
Each region is headed by a regional vice president ("RVP"). Each RVP is
responsible for the oversight of the following departments: sales and
marketing, administration and finance, operations, and maintenance. In
addition, each RVP typically has a small staff that works interactively with
the corporate office to ensure proper regulatory compliance and reporting,
engineering services, internal and external development, and strategic
planning. Geographically, a region generally encompasses a multi-state area
and may have a concentration from approximately 15 to 50 districts. Regions
are divided into districts headed by a district manager. Each district manager
is responsible for the day-to-day oversight of the district's field operations,
with direct responsibility for customer satisfaction, employee motivation,
labor and equipment productivity, internal growth, financial budgets, and
profit and loss activity. A district generally encompasses a city, county, or
metropolitan area. In areas of substantial concentration, a divisional vice
president, reporting to a RVP, may oversee several districts.
Collection. Solid waste collection is provided under two primary types of
arrangements depending on the customer being served. Commercial and industrial
collection services are generally performed under one to three-year service
agreements, and fees are determined by such factors as collection frequency,
type of collection equipment furnished by USA Waste, type and volume or weight
of the waste collected, the distance to the disposal facility, and cost of
disposal. Most residential solid waste collection services are performed under
contracts with, or franchises granted by, municipalities or regional
authorities that have granted USA Waste exclusive rights to service all or a
portion of the homes in their respective jurisdictions. Such contracts or
franchises usually range in duration from one to five years. Recently, some
municipalities have requested bids on their residential collection contracts
based on the volume of waste collected. Residential collection fees are either
paid by the municipalities from their tax revenues or service charges or are
paid directly by the residents receiving the service.
As part of its services, the Company provides steel containers to most of
its commercial and industrial customers to store solid waste. These containers,
ranging in size from one to 45 cubic yards, are designed to be lifted
mechanically and either emptied into a collection vehicle's compaction hopper
or directly into a disposal site in the case of industrial customers. The use
of containers enables the Company to service most of its commercial and
industrial customers with collection vehicles operated by a single employee.
USA Waste often obtains waste collection accounts through acquisitions,
including the purchase of customer lists, routes, and equipment. Once a
collection operation is acquired, programs designed to improve equipment
utilization, employee productivity, operating efficiencies, and overall
profitability are implemented. USA Waste also solicits commercial and
industrial customers in areas surrounding acquired residential collection
markets as a means of further improving operating efficiencies and increasing
volumes of solid waste collection.
As of December 31, 1996, USA Waste operated collection operations in
approximately 123 locations in 32 states, Canada, Mexico, and Puerto Rico. On
an overall basis, Company collection operations deliver approximately 48% of
collected waste to landfills owned or operated by the Company. In the
remaining markets, the waste collected is delivered to a municipal, county, or
privately owned unaffiliated landfill or transfer station.
Transfer Stations. A transfer station is a facility located near
residential and commercial collection routes where solid waste is received from
collection vehicles and then transferred to and compacted in large,
specially-constructed trailers for transportation to disposal facilities. This
consolidation reduces costs by improving utilization of collection personnel
and equipment. Fees are generally based on such factors as the type and volume
or weight of the waste transferred and the transportation distance to disposal
sites. USA Waste owns or operates 61 transfer stations, most of which transfer
some or all of the waste received to a landfill owned or operated by the
Company.
Landfills. Municipal solid waste landfills are the primary depository for
solid waste in North America, Canada, and Mexico. These disposal facilities
are located on land with geological and hydrological properties that limit the
possibility of water pollution, and are operated under prescribed procedures.
A landfill must be maintained carefully to meet federal, state, and local
regulations. Maintenance includes excavation, continuous spreading and
compacting of waste, and covering of waste with earth or other inert material
at least once a day. The cost of transporting solid waste to a disposal
location places a geographic restriction on solid waste companies. Access to a
disposal facility, such as a landfill, is a necessity for all solid waste
management companies. While access can be obtained to disposal facilities
owned or operated by unaffiliated parties, USA Waste believes that it is
generally preferable for collection companies to utilize disposal facilities
owned or operated by affiliated parties so that access can be assured on
favorable terms. Customers are charged disposal charges or tipping fees
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based on market factors and the type and volume or weight of solid waste
deposited and the type and size of vehicles used in the conveyance of solid
waste.
The ownership or lease of a landfill site enables USA Waste to dispose of
waste without payment of disposal fees to unaffiliated parties. The Company
does not own or lease a landfill site in every metropolitan area in which it is
engaged in waste collection. To date, the Company has not experienced excessive
difficulty securing the use of disposal facilities owned or operated by
unaffiliated parties in those metropolitan areas in which it does not own or
operate its own landfill. The Company's landfills are also used by unaffiliated
waste collection companies and government agencies.
As of December 31, 1996, USA Waste owned and operated 84 non-hazardous
solid waste landfills and operated another 17 non-hazardous solid waste
landfills. Of the 101 landfills owned or operated by USA Waste, the average
remaining life based on remaining permitted capacity and current average daily
disposal volumes is approximately 25 years.
Recycling. In response to the increasing public environmental awareness
and expanding federal, state, and local regulations pertaining to waste
recycling, USA Waste has developed recycling as a component of its
environmentally responsible integrated solid waste management plan. Curbside
collection of recyclable materials for residential customers, commercial and
industrial collection of recyclable materials, and material recovery/waste
reduction facilities are services in which USA Waste has become involved to
complement its collection and transfer station operations. Although the
Company continues to provide the service of collecting recyclable products, to
date the Company has not made material capital investments in material
recovery/waste reduction facilities. Additional opportunities for expansion in
these areas will continue to be evaluated.
USA Waste operates curbside recycling programs in connection with its
residential collection operations in a number of markets and in association
with a number of its transfer stations. Fees are determined by such
considerations as market factors, frequency of collection, the type and volume
or weight of recycled material, the distance the recycled material must be
transported, and the value of the recycled material. Overall, however, USA
Waste is not materially affected financially by fluctuations in commodity
pricing for recyclable materials.
COMPETITION
The solid waste industry is highly competitive and requires substantial
amounts of capital. The industry is comprised of two large companies, WMX
Technologies, Inc. and Browning-Ferris Industries, Inc., a number of mid-sized
and small companies, numerous municipalities and other regional or multi-county
authorities, and large commercial and industrial companies handling their own
waste collection or disposal operations. WMX Technologies, Inc. and Browning-
Ferris Industries, Inc. have significantly larger operations and greater
financial resources than the Company. Municipalities and counties are often
able to offer lower direct charges to the customer for the same service by
subsidizing the cost of such services through the use of tax revenues and
tax-exempt financing. Generally, however, municipalities do not provide
significant commercial and industrial collection or waste disposal.
The Company competes for landfill business on the basis of tipping fees,
geographical location, and quality of operations. The Company's ability to
obtain landfill business may be limited by the fact that some major collection
companies also own or operate landfills to which they send their waste. The
Company competes for collection accounts primarily on the basis of price and
the quality of its services. Intense competition is encountered for both
quality of service and pricing. From time to time, competitors may reduce the
price of their services and accept lower profit margins in an effort to expand
or maintain market share or to competitively win bid contracts.
The Company provides residential collection services under a number of
municipal contracts. As is the case in the industry, such contracts come up for
competitive bidding periodically and there is no assurance that the Company
will be the successful bidder and will be able to retain such contracts. If the
Company is unable to replace any contract lost through the competitive bidding
process with a comparable contract within a reasonable time period or to use
any surplus equipment in other service areas, the earnings of the Company could
be adversely affected. However, during 1996, no one commercial customer or
municipal contract accounted for more than 5% of the operating revenues of the
Company. As the Company continues to grow, the loss of any one contract will
have less of an impact on the Company's operations as a whole.
Increased public environmental awareness and certain mandated state
regulations have resulted in increased recycling efforts in many different
areas of the country that are currently and will in the future reduce the
amount of solid waste destined for landfills. In addition, the Company could
face competition from companies engaged in waste incineration and other
alternatives to landfill disposal. Although the Company believes that
landfills will continue to be the primary depository for solid waste well into
the future, there can be no assurance that recycling, incineration, and waste
reduction efforts will not affect future landfill disposal volumes. The effect,
if any, on such volumes could also vary between different regions of the
country as well as within individual market areas in each region.
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PRICING
Operating costs, disposal costs, and collection fees vary widely throughout
the geographic areas in which the Company operates. The prices that the Company
charges are determined locally, and typically by the volume or weight, type of
waste collected, treatment requirements, risks involved in the handling or
disposing of waste, frequency of collections, distance to final disposal sites,
and amount and type of equipment furnished to the customer. Under certain
contracts, the Company's ability to pass on cost increases is limited.
Long-term solid waste collection contracts typically contain a formula,
generally based on published price indices, for automatic adjustment of fees to
cover increases in some, but not all, operating costs.
EMPLOYEES
At December 31, 1996, the Company had approximately 9,800 full-time
employees, of which approximately 2,300 were employed in clerical,
administrative, and sales positions, 235 in management, and the balance in
collection, transfer, and disposal operations. Approximately 1,700 of the
Company's employees at 37 operating locations are covered by collective
bargaining agreements. The Company has not experienced a work stoppage, and
management considers its employee relations to be good.
INSURANCE AND FINANCIAL ASSURANCE OBLIGATIONS
The Company carries a broad range of insurance coverages, which management
considers prudent for the protection of the Company's assets and operations.
Some of these coverages are subject to varying retentions of risk by the
Company. At December 31, 1996, the casualty coverages included $2,000,000
primary commercial general liability and $1,000,000 primary automobile
liability supported by $100,000,000 in umbrella insurance protection. The
umbrella insurance coverage was increased to $150,000,000 as of January 1,
1997. The property policy provides insurance coverages for all of the
Company's real and personal property, including California earthquake perils.
The Company also carries $200,000,000 in aircraft liability protection.
The Company maintains workers' compensation insurance in accordance with
laws of the various states in which it has employees. The Company also
currently has an environmental impairment liability ("EIL") insurance policy
for certain of its landfills and transfer stations that provides coverage for
property damages and/or bodily injuries to third parties caused by off-site
pollution emanating from such landfills or transfer stations. This policy
provides $5,000,000 of coverage per incident with a $10,000,000 aggregate
limit.
To date, the Company has not had any difficulty in obtaining insurance.
However, if the Company in the future is unable to obtain adequate insurance,
or decides to operate without insurance, a partially or completely uninsured
claim against the Company, if successful and of sufficient magnitude, could
have a material adverse effect upon the Company's financial condition or
results of operations. Additionally, continued availability of casualty and
EIL insurance with sufficient limits at acceptable terms is an important aspect
of obtaining revenue-producing waste service contracts.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. In
addition, the Company is required to provide financial assurance for closure
and post-closure obligations with respect to its landfills. The Company has
not experienced difficulty in obtaining performance bonds or letters of credit
for its current operations. At December 31, 1996, the Company had provided to
municipalities and other customers and various regulatory authorities surety
bonds of approximately $184,164,000 and letters of credit of approximately
$3,271,000 to secure its obligations, exclusive of letters of credit enhancing
industrial revenue bonds of approximately $164,639,000. Continued availability
of surety bonds and letters of credit in sufficient amounts at acceptable rates
is an important aspect of obtaining additional municipal collection contracts
and obtaining or retaining landfill operating permits.
REGULATION
General - Potential Adverse Effect of Government Regulations
All of the Company's principal business activities are subject to extensive
and evolving environmental, health, safety, and transportation laws and
regulations at the federal, state, and local levels. These regulations are
administered by the EPA in the United States and various other federal, state,
and local environmental, zoning, health, and safety agencies in the United
States and elsewhere, many of which periodically examine the Company's
operations to monitor compliance with such laws and regulations.
The development, expansion, and operation of landfills and transfer
stations are subject to extensive regulations governing siting, design,
operations, monitoring, site maintenance, corrective actions, financial
assurance, and closure and post-closure obligations. In order to construct,
expand, and operate a landfill or transfer station, the Company must obtain and
maintain one or more construction or operating permits and licenses and, in
certain instances, applicable zoning approvals. Obtaining the necessary permits
and approvals in connection with the acquisition, development, or expansion of
a landfill or transfer
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station is difficult, time-consuming (often taking two to three years or more),
and expensive, and is frequently opposed by local citizen and/or environmental
groups. Once obtained, operating permits are subject to modification and
revocation by the issuing agency. Compliance with current and future regulatory
requirements may require the Company, as well as others in the waste management
industry, from time to time, to make significant capital and operating
expenditures.
In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, time, and
frequency of collection.
Federal, state, and local governments have from time to time proposed or
adopted other types of laws, regulations, or initiatives with respect to the
environmental services industry, including laws, regulations, and initiatives
to ban or restrict the international, interstate, or intrastate shipment of
wastes, impose higher taxes on out-of-state waste shipments than on in-state
shipments, limit the types of wastes that may be disposed of at existing
landfills, mandate waste minimization initiatives, require recycling and yard
waste composting, reclassify certain categories of non-hazardous waste as
hazardous, and regulate disposal facilities as public utilities. Congress has
from time to time considered legislation that would enable or facilitate such
bans, restrictions, taxes, and regulations, many of which could adversely
affect the demand for the Company's services. Similar types of laws,
regulations, and initiatives have also from time to time been proposed or
adjusted in other jurisdictions in which the Company operates. The effect of
these and similar laws could be a reduction of the volume of waste that would
otherwise be disposed of in Company landfills. The Company makes a continuing
effort to anticipate regulatory, political, and legal developments that might
affect operations, but it is not always able to do so. The Company cannot
predict the extent to which any legislation or regulation that may be enacted,
amended, repealed, or enforced in the future may affect its operations. Such
actions could adversely affect the Company's operations or impact the Company's
financial condition or earnings for one or more fiscal quarters or years.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. During the ordinary course of its operations, the Company
may from time to time receive citations or notices from such authorities that a
facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of such citations or notices, the Company will
work with the authorities to address their concerns. Failure to correct the
problems to the satisfaction of the authorities could lead to monetary
penalties, curtailed operations, jail terms, facility closure, or inability to
obtain permits for additional sites.
As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, management anticipates that
continually changing requirements in health, safety, and environmental
protection laws will require the Company and others engaged in the solid waste
management industry to continually modify or replace various facilities and
alter methods of operation at costs that may be substantial. Most of the
Company's expenditures incurred in the operation of its landfills relate to
complying with the requirements of laws concerning the environment. These
expenditures relate to facility upgrades, corrective actions, and facility
closure and post-closure care. The majority of these expenditures are made in
the normal course of the Company's business and neither materially adversely
affect the Company's earnings nor place the Company at any competitive
disadvantage. The Company has not expended any material amount to remedy the
potential impact to the public or the environment. Although the Company, to
the best of its knowledge, is currently in compliance in all material respects
with all applicable federal, state, and local laws, permits, regulations, and
orders affecting its operations, there is no assurance that the Company will
not have to expend substantial amounts for such actions in the future.
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. Although the Company conducts
due diligence investigations of the past waste management practices of the
businesses that it acquires, it can have no assurance that, through its
investigation, it will identify all potential environmental problems or risks.
As a result, the Company may have acquired, or may in the future acquire,
landfills that have unknown environmental problems and related liabilities. The
Company will be subject to similar risks and uncertainties in connection with
the acquisition of closed facilities that had been operated by businesses
acquired by the Company. The Company seeks to mitigate the foregoing risks by
obtaining environmental representations and indemnities from the sellers of the
businesses that it acquires. However, there can be no assurance that the
Company will be able to rely on any such indemnities if an environmental
liability exists.
Federal Regulation
The primary U.S. federal statutes affecting the business of the Company are
summarized below.
(1) The Solid Waste Disposal Act ("SWDA"), as amended by the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"). The SWDA and its
implementing regulations establish a framework for regulating the handling,
transportation, treatment, and disposal of hazardous and non-hazardous waste.
They also require states to develop programs to insure the safe disposal of
solid waste in landfills.
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Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of non-hazardous solid
waste. Under Subtitle D, the EPA has adopted regulations that establish
minimum standards for solid waste disposal facilities, which include location
standards, hydrogeological investigations, facility design requirements
(including liners and leachate collection systems), enhanced operating and
control criteria, groundwater and methane gas monitoring, corrective action
standards, closure and extended post-closure requirements, and financial
assurance standards. These federal regulations must be implemented by the
states, although states may impose requirements for landfill sites that are
more stringent than the federal Subtitle D standards. The Company could incur
significant costs in complying with such regulations; however, the Company does
not believe that the costs of complying with such standards will have a
material adverse effect on its operations. All of the Company's planned
landfill expansions will be engineered to meet or exceed all applicable
Subtitle D requirements.
(2) The Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA"). CERCLA, among other things, provides for
the cleanup of sites from which there is a release or threatened release of a
hazardous substance into the environment. CERCLA imposes joint and several
liability for the costs of cleanup and for damages to natural resources upon
the present and former owners or operators of facilities or sites from which
there is a release or threatened release of hazardous substances (former owners
and operators are liable only to the extent the release, and sometimes
disposal, occurred during their period of ownership). Waste generators and
transporters (including a contract carrier who has accepted a hazardous
substance for transportation) are also strictly liable. Under the authority
of CERCLA and its implementing regulations, detailed requirements apply to the
manner and degree of remediation of facilities and sites where hazardous
substances have been or are threatened to be released into the environment.
Liability under CERCLA is not dependent upon the intentional disposal of
"hazardous wastes," as defined under RCRA. It can be founded upon the release
or threatened release, even as a result of lawful, unintentional, and
non-negligent action, of any one of more than 700 "hazardous substances,"
including very small quantities of such substances. CERCLA requires the EPA to
establish a National Priorities List ("NPL") of sites at which hazardous
substances have been or are threatened to be released and which require
investigation or cleanup. More than 20% of the sites on the NPL are solid waste
landfills that ostensibly never received any regulated "hazardous wastes."
Thus, even if the Company's landfills have never received "hazardous wastes" as
such, it is likely that one or more hazardous substances have come to be
located at its landfills. Because of the extremely broad definition of
"hazardous substances," the same is true of other industrial properties with
which the Company or its predecessors has been, or with which the Company may
become, associated as an owner or operator. Consequently, if there is a release
or threatened release of such substances into the environment from a site
currently or previously owned or operated by the Company, the Company could be
liable under CERCLA for the cost of removing such hazardous substances at the
site, remediation of contaminated soil or groundwater, and for damages to
natural resources, even if those substances were deposited at the Company's
facilities before the Company acquired or operated them. The costs of a CERCLA
cleanup can be very substantial. Given the limited amount of environmental
impairment liability insurance maintained by the Company, a finding of such
liability could have a material adverse impact on the Company's business and
financial condition. Although the Company maintains environmental impairment
liability insurance in amounts the Company believes are compliant with state
and federal requirements, these coverages might be insufficient to cover a
significant CERCLA mandated cleanup.
Although the Company would not be liable under CERCLA for the cleanup of a
disposal site containing hazardous wastes transported to such site by the
Company so long as the site was selected by the generator of such waste, the
Company would be responsible for any hazardous waste during actual
transportation. Also, the Company could be liable under CERCLA for off-site
environmental contamination caused by the release of pollutants or hazardous
substances transported by the Company, or a waste transporter acquired by the
Company, where the transporter selected the disposal site. CERCLA imposes
liability for certain environmental response measures upon transporters who
arranged for the disposal site at which the release or threatened release of
hazardous substances occurred. It therefore is common in the solid waste
transport business to receive information requests from EPA about transporting
activities to third party disposal sites. USA Waste has received potentially
responsible party information requests regarding third party disposal sites.
The environmental agencies or other potentially responsible parties could
assert that USA Waste is liable for environmental response measures arising out
of disposal at a site that was selected by USA Waste, a waste transporter
acquired by USA Waste, or a waste transporter with whom USA Waste contracted.
Several bills are presently pending before the U.S. Congress to reauthorize
and substantially amend CERCLA. In addition to possible changes in the
statute's funding mechanisms and provisions for allocating cleanup
responsibility, Congress may also fundamentally alter the statute's provisions
governing the selection of appropriate site cleanup remedies. In this regard,
new approaches to cleanup, removal, treatment, and remediation of hazardous
substance contamination may be adopted which rely on nationally or
site-specific risk based standards. These types of policy changes could
significantly affect the stringency and extent of site remediation, the types
of remediation techniques employed, and the types of hazardous waste management
facilities that may be used for the treatment and disposal of hazardous
substances. Congress may additionally consider revision of the liability
imposed by CERCLA on current owners of property for contamination caused prior
to a party's acquisition of the site. This consideration could reduce the
remediation obligations of the Company for remediation obligations under
CERCLA.
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The EPA's primary way of determining whether a site is to be included on
the NPL is the Hazard Ranking System, which evaluates the relative potential
for uncontrolled hazardous substances to pose a threat to human health or the
environment pursuant to a scoring system based on factors grouped into three
factor categories: (1) likelihood of release, (2) waste characteristics, and
(3) targets. As of mid-1996, the EPA had proposed or identified approximately
39,000 sites for preliminary assessment (including approximately 6,500 solid
waste landfills). These sites are compiled on the Comprehensive Environmental
Response, Compensation, and Liability Information System (CERCLIS) list. The
identification of a site on the CERCLIS list indicates only that the site has
been brought to the attention of the EPA and does not necessarily mean that an
actual health or environmental threat currently exists or has ever existed.
Like many of the landfills in the State of Illinois, the Company's Countryside
and Leroy Brown landfills were placed on the CERCLIS list. In 1996, the EPA
began an effort to reduce the number of sites on the CERCLIS list and recently
announced that more than 25,000 sites would be removed from the list.
The Countryside landfill in Grayslake, Illinois, was proposed for
preliminary assessment in 1979 and underwent a preliminary assessment in 1983
and a site inspection in 1986 under the EPA's program. The EPA has not taken
any further action with respect to the evaluation of the Countryside landfill
since 1986. Based on its review of the wastes deposited at the Countryside
landfill, the hydrogeological structure of the site, the facility's design, and
a report received by the Company from its independent environmental consultant
at the time the Company acquired the landfill, the Company does not believe
that the outcome of the EPA's evaluation of the Countryside landfill will
result in it being proposed for listing on the NPL or have any material adverse
impact on the operation of the landfill.
The Company's records indicate that in 1977 and 1978, the Leroy Brown
landfill in Macomb, Illinois, accepted 40 drums of material that would now be
classified as hazardous waste, and a small quantity of hazardous waste was
accepted by the landfill between 1987 and 1989. A screening site inspection
was performed by the Illinois Environmental Protection Agency ("IEPA") in 1989.
That inspection and further testing disclosed the presence of minimal
contamination of groundwater beneath the landfill. At this time, neither the
EPA nor the IEPA has recommended or required any remedial action, beyond normal
closure and post-closure monitoring, on the part of the Company with respect to
any hazardous substance present at the disposal facility. However, because of
the acceptance of the drums and the limited amount of hazardous waste at the
site, the IEPA could demand that the Company obtain a permit for a hazardous
waste facility. The process of securing this permit could take several years
and could result in significant expenditures. The IEPA could also require the
Company to develop and execute a closure and post-closure plan, which is
separate and apart from the plan already approved by the IEPA for the
non-hazardous landfill. The costs of developing and executing a new closure and
post-closure plan are dependent, in part, on the area of the existing site that
would be required to be closed and monitored as a hazardous waste facility and
are uncertain at this time.
In November 1993, a subsidiary of the Company acquired Kitsap County
Sanitary Landfill, Inc. ("KCSL"), which owns the Olympic View landfill.
Landfill operations at the Olympic View landfill began in the 1960s, at which
time the site was known as the "Barney White" site. The Barney White site was
closed in 1985 after reaching its capacity. A flexible membrane liner was
installed in late 1991, as an enhancement to the existing natural soil cap, in
order to minimize the production of leachate following detection of a small
amount of hazardous materials in groundwater monitoring wells. The Company
believes that it can avoid costly remediation through the maintenance of the
cap on the old site, the design of an appropriate monitoring program, and the
institution of a program of controls at the site, which should prevent harmful
leaching.
In addition, from May 1979 to May 1994, KCSL operated the Hansville County
landfill under a lease agreement with Kitsap County, Washington. Under the
agreement, KCSL was required to operate the landfill until 1989, when the
operation was replaced by a transfer station. The lease agreement did not
include provisions relating to closure costs and post-closure monitoring.
However, KCSL funded the closure costs and, at the request of the
landfill-permitting agency, implemented certain measures in response to minor
groundwater contamination detected near the site. The Company believes KCSL
has met its obligations by implementing such measures. There can be no
assurance, however, that state or federal environmental authorities will not
require KCSL to finance additional investigation or remedial action at the
site. KCSL has been indemnified by the landfill's previous owner against costs
in excess of $500,000 that may be incurred by KCSL to mitigate any required
action. The Company placed $500,000 in escrow at the closing of the KCSL
acquisition to fund any indemnified costs KCSL may be required to bear relating
to the Hansville County landfill.
(3) The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"). The Clean Water Act establishes rules for regulating the discharge of
pollutants into streams, rivers, groundwater, or other surface waters from a
variety of sources, including non-hazardous solid waste disposal sites. Should
run-off from the Company's landfills or transfer stations be discharged into
surface waters, the Clean Water Act could require the Company to apply for and
obtain discharge permits, conduct sampling and monitoring, and, under certain
circumstances, reduce the quantity of pollutants in those discharges. The EPA
issued additional rules under the Clean Water Act which establish standards for
storm water runoff from landfills and which require landfills to obtain storm
water discharge permits. In addition, if a Company landfill or transfer
station discharges wastewater through a sewage system to a publicly owned
treatment works, the facility must comply with discharge limits imposed by the
treatment works. Also, if development of a landfill may alter or affect
"wetlands," a permit may have
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to be obtained before such development could commence. This requirement is
likely to affect the construction or expansion of many landfill sites. The
Clean Water Act provides civil, criminal, and administrative penalties for
violations of its provisions.
(4) The Clean Air Act. The Clean Air Act provides for the federal, state,
and local regulation of the emission of air pollutants. The Company's soil
remediation facilities are required to obtain air emission permits for
operation under these regulations. These regulations also may impose emission
limitations and monitoring and reporting requirements on various other
operations of the Company, including its landfills and waste collection
vehicles. The EPA has construed the Clean Air Act to apply to landfills, which
may emit methane gas and other air pollutants. The costs of compliance with
Clean Air Act permitting and emission control requirements are not anticipated
to have a material adverse effect on the Company.
(5) The Occupational Safety and Health Act of 1970 (the "OSHA Act"). The
OSHA Act authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazards, safety in excavation and
demolition work, and the handling of asbestos, may apply to the Company's
operations.
State and Local Regulation
The states in which the Company operates have their own laws and
regulations governing hazardous and non-hazardous solid waste disposal, water
and air pollution, and, in most cases, releases and cleanup of hazardous
substances and liability for such matters. The states also have adopted
regulations governing the siting, design, operation, maintenance, closure, and
post-closure maintenance of landfills and transfer stations. The Company's
facilities and operations are likely to be subject to many, if not all, of
these types of requirements. In addition, the Company's collection and landfill
operations may be affected by the trend in many states toward requiring the
development of waste reduction and recycling programs. For example, several
states recently have enacted laws that require counties to adopt comprehensive
plans to reduce, through waste planning, composting, recycling, or other
programs, the volume of solid waste deposited in landfills. Additionally, the
disposal of yard waste in solid waste landfills has recently been banned in
several states. Legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling have also been considered
from time to time by Congress and the EPA.
Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of hazardous and non-hazardous solid
waste generated outside the state. While laws that overtly discriminate against
out-of-state waste have been found to be unconstitutional, some laws that are
less overtly discriminatory have been upheld in court. Additionally, certain
state and local governments have enacted "flow control" regulations, which
attempt to require that all waste generated within the state or local
jurisdiction be deposited at specific disposal sites. In May 1994, the U.S.
Supreme Court ruled that a flow control ordinance was unconstitutional.
Challenges to other such laws are pending. The outcome of pending litigation
and the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. The U.S. Congress has from time to time
and is currently considering legislation authorizing states to adopt such
regulations, restrictions, or taxes on the importation of extraterritorial
waste, and granting states and local governments authority to enact partial
flow control legislation. To date, such Congressional efforts have been
unsuccessful. The U.S. Congress' adoption of such legislation allowing for
restrictions on importation of extraterritorial waste or certain types of flow
control, or the adoption of legislation affecting interstate transportation of
waste at the federal or state level, could adversely affect the Company's solid
waste management services, including collection, transfer, disposal, and
recycling operations, and in particular the Company's ability to expand
landfill operations acquired in certain areas.
Many states and local jurisdictions in which the Company operates have
enacted "fitness" laws that allow agencies having jurisdiction over waste
services contracts or site permits to decline to award such contracts or deny
or revoke such permits on the basis of an applicant's (or permit holder's)
environmental or other legal compliance history. These laws authorize the
agencies to make determinations of an applicant's fitness to be awarded a
contract or to operate a facility and to deny or revoke a contract or permit
because of unfitness absent a showing that the applicant has been rehabilitated
through the adoption of various operating policies and procedures put in place
to assure future compliance with applicable laws and regulations.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, projected or anticipated benefits
from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, earnings, or other aspects of operating
results. The words "expect," "believe," "anticipate," "project," "estimate,"
and similar expressions are intended to identify forward-looking statements.
The Company cautions readers that such statements are not guarantees of future
performance or events and are subject to a number of factors that may tend to
influence the accuracy of the statements and the projections upon which the
statements are based, including but not limited
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to those discussed below. As noted elsewhere in this report, all phases of the
Company's operations are subject to a number of uncertainties, risks, and other
influences, many of which are outside the control of the Company, and any one
of which, or a combination of which, could materially affect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for 1997 and beyond and cause them
to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company:
No Assurance of Successful Management and Maintenance of Growth
USA Waste has experienced rapid growth, primarily through acquisitions.
USA Waste's future financial results and prospects depend in large part on its
ability to successfully manage and improve the operating efficiencies and
productivity of these acquired operations. In particular, whether the
anticipated benefits of acquired operations are ultimately achieved will depend
on a number of factors, including the ability of combined companies to achieve
administrative cost savings, rationalization of collection routes, insurance
and bonding cost reductions, general economies of scale, and the ability of the
Company, generally, to capitalize on its combined asset base and strategic
position. Moreover, the ability of USA Waste to continue to grow will depend
on a number of factors, including competition from other waste management
companies, availability of attractive acquisition opportunities, availability
of working capital, ability to maintain margins, and the management of costs in
a changing regulatory environment. There can be no assurance that USA Waste
will be able to continue to expand and successfully manage its growth.
Acquisition Strategy
The Company regularly pursues opportunities to expand through acquisitions.
The Company plans to continue to seek acquisitions that complement its
services, broaden its customer base, and improve its operating efficiencies.
The Company's acquisition strategy involves certain potential risks associated
with assessing, acquiring, and integrating the operations of acquired
companies. Although the Company generally has been successful in implementing
its acquisition strategy, there can be no assurance that attractive acquisition
opportunities will continue to be available, that the Company will have access
to the capital required to finance potential acquisitions on satisfactory
terms, or that any businesses acquired will prove profitable. Future
acquisitions may result in the incurrence of additional indebtedness or the
issuance of additional equity securities.
International Expansion
In 1997, a significant portion of the Company's operations will be
conducted in Canada. The Company's operations in foreign countries, including
Canada, generally are subject to a number of risks inherent in any business
operating in foreign countries, including political, social, and economic
instability, exchange rate fluctuations, and governmental regulation, all of
which are beyond the control of the Company. In particular, the Company's
Canadian operations will be subject to the various environmental, zoning,
health, and safety regulations as well as licensing and other requirements. No
prediction can be made as to how existing or future foreign governmental
regulations in any jurisdiction may affect the Company in particular or the
solid waste management industry in general.
Need for Capital; Debt Financing
The long-term debt of USA Waste, including current maturities, at December
31, 1996, was approximately $1,187,000,000. USA Waste expects to require
additional capital from time to time to pursue its acquisition strategy and to
fund internal growth. A portion of USA Waste's future capital requirements may
be provided through future debt incurrences or issuances of equity securities.
There can be no assurance that USA Waste will be able to obtain additional
capital through such debt incurrences or issuances of additional equity
securities.
Profitability May be Affected by Competition
The waste management industry is highly competitive and requires
substantial capital resources. The industry consists of a few large national
waste management companies as well as numerous local and regional companies of
varying sizes and financial resources. The two largest national waste
management companies have greater financial resources than USA Waste.
Competition may be enhanced and profitability may be adversely affected by the
increasing national emphasis on recycling, composting, incineration, and other
waste reduction programs that could reduce the volume of solid waste collected
or deposited in landfills.
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Potential Adverse Effect of Government Regulation
USA Waste's operations are subject to and substantially affected by
extensive federal, state, and local laws, regulations, orders, and permits,
which govern environmental protection, health and safety, zoning, and other
matters. These regulations may impose restrictions on operations that could
adversely affect the Company's results, such as limitations on the expansion of
disposal facilities, limitations on or the banning of disposal of out-of-state
waste or certain categories of waste, or mandates regarding the disposal of
solid waste. Because of heightened public concern, companies in the waste
management business may become subject to judicial and administrative
proceedings involving federal, state, or local agencies. These governmental
agencies may seek to impose fines or revoke or deny renewal of operating
permits or licenses for violations of various laws, including environmental
laws or regulations or to require remediation of environmental problems at
sites or nearby properties, or resulting from transportation or predecessors'
transportation and collection operations, all of which could have a material
adverse effect on the Company. Liability may also arise from actions brought
by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses,
or other matters.
Potential Environmental Liability
USA Waste is subject to liability for environmental damage that its
collection operations, transfer stations, and landfills cause or may cause
nearby landowners, particularly as a result of the contamination of drinking
water sources or soil, including damage resulting from conditions existing
prior to the acquisition of such assets or operations. Liability may also
arise from any off-site environmental contamination caused by pollutants or
hazardous substances under circumstances where transportation, treatment, or
disposal was arranged for USA Waste or predecessor owners of operations or
assets acquired by USA Waste. Any substantial liability for environmental
damage could materially adversely affect the operating results and financial
condition of USA Waste.
Shares Eligible for Future Sale May Adversely Affect Market Price of Stock
Sales of substantial amounts of USA Waste common stock in the public market
could adversely affect the market price of such stock. USA Waste maintains a
shelf registration statement for the benefit of certain stockholders relating
to 4,000,000 shares of USA Waste common stock. Such shares are immediately
saleable in the open market. In addition, USA Waste maintains a shelf
registration statement covering approximately 8,810,000 shares of USA Waste
common stock at March 15, 1997 that may be issued in acquisitions. In the
event the market price of USA Waste stock were adversely affected by such
sales, the Company's access to equity capital markets could be adversely
affected, and issuances of stock by USA Waste in connection with acquisitions,
or otherwise, could dilute earnings per share.
Seasonality
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter operating
results and may also be reflected in its fourth quarter operating results.
This is primarily attributed to the fact that (i) the volume of waste relating
to construction and demolition activities tends to increase in the spring and
summer months and (ii) the volume of waste relating to industrial and
residential waste in certain regions where the Company operates tends to
decrease during the winter months.
ITEM 2. PROPERTIES.
The principal property and equipment of the Company consists of land
(primarily landfill sites, transfer stations, and bases for collection
operations), buildings, and vehicles and equipment. The Company owns or leases
real property in most states in which it is doing business. At December 31,
1996, 84 solid waste landfills, aggregating approximately 30,527 total acres,
including approximately 8,258 permitted acres, were owned and operated by the
Company and 17 landfills, aggregating approximately 2,864 total acres,
including approximately 1,559 permitted acres, were operated by the Company or
leased from parties not affiliated with the Company.
The Company leases approximately 85,770 square feet of office space in
Houston, Texas, for its executive office under a ten year lease expiring in
2007. The Company owns real estate, buildings, and other physical properties
that it employs in substantially all of its solid waste collection operations.
The Company also leases a portion of its transfer stations, offices, and garage
and shop facilities. For the year ended December 31, 1996, aggregate annual
rental payments on real estate leased by the Company was approximately
$2,926,000.
The Company owns approximately 8,100 items of equipment, including waste
collection vehicles and related support vehicles, as well as bulldozers,
compactors, earth movers, and related heavy equipment and vehicles used in
landfill operations. The Company has more than 415,000 steel containers in use,
ranging from one to 45 cubic yards, and a number of stationary compactors and
self-dumping hoppers.
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The Company believes that its vehicles, equipment, and operating properties
are well maintained and adequate for its current operations. However, the
Company expects to make substantial investments in additional equipment and
property for expansion, for replacement of assets, and in connection with
future acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS.
On or about March 8, 1993, an action was filed in the United States
District Court for the Western District of Pennsylvania, captioned Option
Resource Group, et al. v. Chambers Development Company, Inc., et al., Civil
Action No. 93-354. This action was brought by a market maker in options in
Chambers stock and two of its general partners and asserts federal securities
law and common law claims alleging that Chambers, in publicly disseminated
materials, intentionally or negligently misstated its earnings and that
Chambers' officers and directors committed mismanagement and breach of
fiduciary duties. These plaintiffs allege that, as a result of large amounts
of put options traded on the Chicago Board of Options Exchange between March 13
and March 18, 1992, they engaged in offsetting transactions resulting in
approximately $2,100,000 in losses. The plaintiffs in Option Resource Group
had successfully requested exclusion from a now settled class action of
consolidated suits instituted on similar claims ("Class Action") and Option
Resource Group is continuing as a separate lawsuit. Plaintiffs filed a motion
for summary judgment which is untimely under the court's case management
procedures. The court has stayed responses to the motion for summary judgment.
In response to discovery on damages, the plaintiffs reduced their damages claim
to $433,000 in alleged losses, plus interest and attorneys' fees, for a total
damage claim of $658,000 as of August 21, 1995. Discovery has been completed
and a trial date has been set for early 1997. The Company intends to continue
to vigorously defend against this action. Management of the Company believes
the ultimate resolution of such complaint will not have a material adverse
effect on the Company's financial position or results of operations.
On August 3, 1995, Frederick A. Moran and certain related persons and entities
filed a lawsuit against Chambers, certain former officers and directors of
Chambers, and Grant Thornton, LLP, in the United States District Court for the
Southern District of New York under the caption Moran, et al. v. Chambers, et
al., Civil Action No. 95-6034. Plaintiffs, who claim to represent
approximately 484,000 shares of Chambers stock, requested exclusion from the
settlement agreements which resulted in the resolution of the Class Action and
assert that they have incurred losses attributable to shares purchased during
the class period and certain additional losses by reason of alleged management
misstatements during and after the class period. The claimed losses include
damages to Mr. Moran's business and reputation. The Judicial Panel on
Multidistrict Litigation has transferred this case to the United States
District Court for the Western District of Pennsylvania. The Company has filed
its answer to the complaint and intends to vigorously defend against these
claims. The case is currently in discovery. Management of the Company
believes the ultimate resolution of such complaint will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is a party to various other litigation matters arising in the
ordinary course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
position and results of operations. In the normal course of its business and as
a result of the extensive government regulation of the solid waste industry, the
Company periodically may become subject to various judicial and administrative
proceedings and investigations involving federal, state, or local agencies. To
date, the Company has not been required to pay any material fine or had a
judgment entered against it for violation of any environmental law. From time to
time, the Company also may be subjected to actions brought by citizen's groups
in connection with the permitting of landfills or transfer stations, or alleging
violations of the permits pursuant to which the Company operates. From time to
time, the Company is also subject to claims for personal injury or property
damage arising out of accidents involving its vehicles.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the stockholders of USA Waste during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages, as of March 1, 1997, of the
Company's executive officers (as defined by regulations of the Securities and
Exchange Commission), the positions they hold with the Company, and summaries
of their business experience.
John E. Drury, age 52, has been Chairman of the Board since June 30, 1995,
and Chief Executive Officer and a director of USA Waste since May 27, 1994.
From 1991 to May 1994, Mr. Drury served as a Managing Director of Sanders
Morris Mundy Inc. ("SMMI"), a Houston based investment banking firm. Mr. Drury
served as President and Chief Operating Officer of Browning-Ferris Industries,
Inc. ("BFI") from 1982 to 1991, during which time he had chief responsibility
for all solid waste operations.
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Rodney R. Proto, age 47, has been President, Chief Operating Officer, and a
director since joining USA Waste in August 1996. Prior to joining USA Waste,
Mr. Proto was President, Chief Operating Officer, and a director of Sanifill,
Inc. since February 1992. Prior to such time, Mr. Proto was employed by BFI
for twelve years where he served, among other positions, as President of
Browning-Ferris Industries Europe, Inc. from 1987 through 1991 and Chairman of
BFI Overseas from 1985 through 1987.
Donald F. Moorehead, Jr., age 46, has been Vice Chairman of the Board since
June 30, 1995, and Chief Development Officer since May 27, 1994. From October
1, 1990 to June 30, 1995, he was also Chairman of the Board, and from October
1, 1990 to May 27, 1994, he was Chief Executive Officer. Mr. Moorehead was
Chairman of the Board and Chief Executive Officer of Mid-American Waste
Systems, Inc. ("Mid-American") from the inception of Mid-American in December
1985 until August 1990 and continued as a director until February 1991.
Earl E. DeFrates, age 53, has been Executive Vice President and Chief
Financial Officer since May 1994. From October 1990 to April 1995, he was also
Secretary. Mr. DeFrates joined USA Waste as Vice President-Finance in October
1990 and was elected Executive Vice President in May 1994. Prior thereto, Mr.
DeFrates was employed by Acadiana Energy Inc. (formerly Tatham Oil & Gas, Inc.)
serving in various officer capacities including the company's Chief Financial
Officer, since 1980.
Gregory T. Sangalis, age 41, has been Vice President, General Counsel and
Secretary since April 4, 1995. Prior to joining USA Waste, Mr. Sangalis was
employed by a solid waste subsidiary of WMX Technologies, Inc. ("WMX") serving
in various legal capacities since 1986 and including Group Vice President and
General Counsel from August 1992 to April 1995. Prior to joining WMX, he was
General Counsel of Peavey Company and had been engaged in the private practice
of law in Minnesota.
Bruce E. Snyder, age 41, has been Vice President and Chief Accounting
Officer of USA Waste since July 1, 1992. Prior to joining USA Waste, Mr.
Snyder was employed by the international accounting firm of Coopers & Lybrand
L.L.P., serving there since 1989 as an audit manager. From 1985 to 1989, Mr.
Snyder held various financial positions with Price Edwards Henderson & Co., a
privately held real estate development and management company in Oklahoma City,
Oklahoma, and its affiliated companies, ultimately serving as Senior Vice
President.
Ronald H. Jones, age 46, has been Vice President and Treasurer since
joining USA Waste in June 1995. Prior to joining USA Waste, Mr. Jones was
employed by Chambers Development Company, Inc. ("Chambers") as Vice President
and Treasurer from July 1992 to June 1995, Director, Corporate Development from
December 1990 to July 1992, and Assistant Vice President - Finance from July
1989 to December 1990. Prior to joining Chambers, Mr. Jones was a Vice
President and Manager of the Cincinnati regional office engaged in corporate
and middle market lending with Bank of New York (formerly Irving Trust Company)
and with Chase Manhattan Bank.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "UW." The following table sets forth the range of
the high and low per share sales prices for the common stock as reported on the
NYSE Composite Tape.
HIGH LOW
-------- --------
1995
- ----
First Quarter ........................ $ 12.50 $ 10.00
Second Quarter ....................... 16.63 11.50
Third Quarter ........................ 22.00 14.63
Fourth Quarter ....................... 22.50 17.00
1996
- ----
First Quarter ........................ $ 25.63 $ 17.25
Second Quarter ....................... 32.63 24.00
Third Quarter ........................ 34.13 22.75
Fourth Quarter ....................... 34.25 28.63
1997
- ----
First Quarter (through March 25, 1997) $ 38.88 $ 28.63
On March 25, 1997, the closing sale price as reported on the NYSE was $37
3/8 per share. The number of holders of record of Common Stock based on the
transfer records of the Company at March 25, 1997, was 3,713.
The Company has never paid cash dividends on its common stock, and the
Company's Board of Directors presently intends to retain any earnings in the
foreseeable future for use in the Company's business. Payment of dividends on
the common stock is restricted by terms of the Company's revolving credit
facility. See Note 5 to the Consolidated Financial Statements of the Company.
14
17
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data set forth below include the accounts of the
Company and the businesses acquired in transactions accounted for as poolings
of interests as if such businesses had been combined since their inception.
The accounts of the businesses acquired in transactions accounted for as
purchases are included from their respective dates of acquisition.
For the Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(In Thousands, Except Per Share Amounts)
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 1,313,388 $ 987,705 $ 897,644 $ 778,966 $ 682,869
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Operating 704,917 551,305 520,255 455,282 424,497
General and administrative 160,539 140,051 138,819 126,347 130,956
Depreciation and amortization 153,168 119,570 112,860 96,861 77,872
Merger costs 120,656 25,639 3,782 -- --
Unusual items 63,800 4,733 8,863 2,672 72,090
----------- ----------- ----------- ----------- -----------
1,203,080 841,298 784,579 681,162 705,415
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 110,308 146,407 113,065 97,804 (22,546)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Shareholder litigation settlement and
other litigation related costs -- -- (79,400) (5,500) (10,853)
Interest expense:
Nonrecurring interest -- (10,994) (1,254) -- --
Other (45,547) (48,558) (47,678) (46,032) (44,612)
Interest income 5,267 5,482 4,670 4,835 6,840
Other income, net 8,060 5,143 2,570 1,161 2,285
----------- ----------- ----------- ----------- -----------
(32,220) (48,927) (121,092) (45,536) (46,340)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 78,088 97,480 (8,027) 52,268 (68,886)
Provision for (benefit from) income taxes 45,142 44,992 1,015 24,249 (27,554)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations $ 32,946 $ 52,488 $ (9,042) $ 28,019 $ (41,332)
=========== =========== =========== =========== ===========
Income (loss) from continuing operations
per common share $ 0.24 $ 0.46 $ (0.09) $ 0.29 $ (0.47)
=========== =========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 139,740 113,279 103,422 95,858 88,371
=========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 20,020 $ 30,109 $ 9,971 $ 45,805 $ 75,143
Intangible assets, net 517,399 262,205 185,066 152,370 104,471
Total assets 2,830,505 1,933,557 1,588,996 1,428,444 1,311,828
Long-term debt, including current maturities 1,187,000 731,741 688,673 650,331 614,684
Stockholders' equity 1,155,276 907,622 560,616 534,989 457,745
15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion reviews the Company's operations for the three
years ended December 31, 1996, and should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere herein. The Company has restated its previously issued financial
statements for years prior to 1996 to reflect the acquisitions of Western and
Sanifill, consummated May 7, 1996 and August 30, 1996, respectively, and
accounted for under the pooling of interests method of accounting.
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect the business and operations of the Company.
Certain of these factors are discussed under "Business - Factors Influencing
Future Results and Accuracy of Forward-Looking Statements" included in Item 1
of this report.
INTRODUCTION
The Company provides non-hazardous solid waste management services,
consisting of collection, transfer, disposal, recycling, and other
miscellaneous services in 36 states, the District of Columbia, Canada, Mexico,
and Puerto Rico. Since August 1990, the Company has experienced significant
growth principally through the acquisition and integration of solid waste
businesses and is now the third largest non-hazardous solid waste company in
North America. As of December 31, 1996, the Company owned or operated 123
collection companies, 61 transfer stations, and 101 landfills serving more than
2 million customers.
The Company's revenues consist primarily of fees charged for its collection
and disposal services. Revenues for collection services include fees from
residential, commercial, industrial, and municipal collection customers. A
portion of these fees are billed in advance; a liability for future service is
recorded upon receipt of payment and revenues are recognized as services are
provided. Fees for residential services are normally based on the type and
frequency of service. Fees for commercial and industrial services are
normally based on the type and frequency of service and the volume of solid
waste collected.
The Company's revenues from its landfill operations consist of disposal
fees (known as tipping fees) charged to third parties and are normally billed
monthly. Tipping fees are based on the volume or weight of solid waste being
disposed of at the Company's landfill sites. Fees are charged at transfer
stations based on the volume or weight of solid waste deposited, taking into
account the Company's cost of loading, transporting, and disposing of the solid
waste at a landfill. Intercompany revenues between the Company's collection,
transfer, and landfill operations have been eliminated in the consolidated
financial statements presented elsewhere herein.
Operating expenses include direct and indirect labor and the related taxes
and benefits, fuel, maintenance and repairs of equipment and facilities,
tipping fees paid to third party landfills, property taxes, and accruals for
future landfill closure and post-closure costs. Certain direct landfill
development expenditures are capitalized and depreciated over the estimated
useful life of a site as capacity is consumed, and include acquisition,
engineering, upgrading, construction, and permitting costs. All indirect
development expenses, such as administrative salaries and general corporate
overhead, are expensed in the period incurred.
General and administrative costs include management salaries, clerical, and
administrative costs, professional services, facility rentals, and related
insurance costs, as well as costs related to the Company's marketing and sales
force.
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19
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percent for the various
Consolidated Statements of Operations line items.
Period to Period Increase (Decrease)
----------------------------------------------
For the Years Ended For the Years Ended
December 31, 1996 December 31, 1995
and 1995 and 1994
--------------------- ---------------------
Operating revenues $ 325,683 33.0% $ 90,061 10.0%
--------- ---------
Costs and expenses:
Operating 153,612 27.9 31,050 6.0
General and administrative 20,488 14.6 1,232 0.9
Depreciation and amortization 33,598 28.1 6,710 5.9
Merger costs 95,017 370.6 21,857 577.9
Unusual items 59,067 1,248.0 (4,130) (46.6)
--------- ---------
361,782 43.0 56,719 7.2
--------- ---------
Income from operations (36,099) (24.7) 33,342 29.5
--------- ---------
Other income (expense):
Shareholder litigation settlement and other
litigation related costs -- -- 79,400 100.0
Interest expense:
Nonrecurring interest 10,994 100.0 (9,740) (776.7)
Other 3,011 6.2 (880) (1.8)
Interest income (215) (3.9) 812 17.4
Other income, net 2,917 56.7 2,573 100.1
--------- ---------
16,707 34.1 72,165 59.6
--------- ---------
Income (loss) before income taxes (19,392) (19.9) 105,507 1,314.4
Provision for income taxes 150 0.3 43,977 4,332.7
--------- ---------
Net income (loss) $ (19,542) (37.2) $ 61,530 680.5
========= =========
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20
The following table presents, for the periods indicated, the percentage
relationship that the various Consolidated Statements of Operations line items
bear to operating revenues.
Years Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
Operating revenues:
Collection 52.6% 52.7% 52.6%
Transfer station 10.8 9.2 10.0
Disposal 29.0 29.4 28.4
Other 7.6 8.7 9.0
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Operating 53.7 55.8 58.0
General and administrative 12.2 14.2 15.5
Depreciation and amortization 11.7 12.1 12.6
Merger costs 9.2 2.6 0.4
Unusual items 4.8 0.5 1.0
----- ----- -----
91.6 85.2 87.5
----- ----- -----
Income from operations 8.4 14.8 12.5
----- ----- -----
Other income (expense):
Shareholder litigation settlement and other
litigation related costs -- -- (8.8)
Interest expense:
Nonrecurring interest -- (1.1) (0.1)
Other (3.5) (4.9) (5.3)
Interest income 0.4 0.6 0.5
Other income, net 0.6 0.5 0.2
----- ----- -----
(2.5) (4.9) (13.5)
----- ----- -----
Income (loss) before income taxes 5.9 9.9 (1.0)
Provision for income taxes 3.4 4.6 0.1
----- ----- -----
Net income (loss) 2.5% 5.3% (1.1)%
===== ===== =====
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21
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Operating Revenues
Operating revenues increased $325,683,000, or 33.0%, in 1996 compared to 1995.
This increase is primarily attributable to 1996 acquisitions and the full year
effect of 1995 acquisitions which resulted in increased operating revenues of
$262,974,000. Internal growth of comparable core businesses resulted in an
increase in operating revenues of $80,054,000, representing a 2% price increase
and 7% volume increase. These increases were partially offset by a decrease in
operating revenues for non-core businesses of $10,049,000 and a decrease in
operating revenues related to divestitures of $7,296,000.
Operating revenues increased $90,061,000, or 10.0%, in 1995 compared to 1994.
The increase in operating revenues is primarily attributable to the effect of
new acquisitions, net of dispositions, which resulted in an increase of
$68,960,000. Comparable operations were negatively impacted by contract
renegotiations and terminations in the New Jersey area in 1994, which resulted
in a decrease in operating revenues of $39,210,000. The remainder of the
increase in 1995 of $60,311,000 related to price and volume increases of 2%
and 5%, respectively.
Operating Costs and Expenses
Operating costs and expenses increased $153,612,000, or 27.9%, in 1996 compared
to 1995, however, have decreased as a percentage of operating revenues from
55.8% in 1995 to 53.7% in 1996. The net increase in operating costs and
expenses is primarily attributable to the effect of new acquisitions, net of
dispositions, which resulted in an increase of $217,426,000. This increase was
offset by a decrease of $14,050,000 related to increased utilization of
internal disposal capacity from 44% in 1995 to 48% in 1996, a decrease of
$12,410,000 related to reduced operating costs and expenses for existing
Chambers operations since the Company's merger with Chambers in June 1995, a
decrease of $4,506,000 related to the Company's decision to discontinue certain
non-core businesses, and a decrease of $32,848,000 related to improvements in
comparable operations primarily as a result of operating synergies realized
from tuck-in acquisitions and mergers with Sanifill and Western in August 1996
and May 1996, respectively. These decreases as well as the increase in
operating revenues resulting from internal growth resulted in the decrease of
operating costs and expenses as a percentage of operating revenues.
Operating costs and expenses increased $31,050,000, or 6.0%, in 1995 compared to
1994, however, decreased as a percentage of operating revenues from 58.0% in
1994 to 55.8% in 1995. The net increase in operating costs and expenses is
primarily attributable to the effect of new acquisitions, net of dispositions,
which resulted in an increase of $50,090,000. Operating costs and expenses for
comparable operations increased slightly by $2,460,000. These increases were
offset by a decrease of $21,500,000 related to contract renegotiations and
terminations in the New Jersey area in 1994. The increase in operating revenues
from internal growth resulted in lower operating costs and expenses as a
percentage of operating revenues.
General and Administrative
General and administrative expenses have increased $20,488,000, or 14.6%, in
1996 compared to 1995, and increased $1,232,000, or 0.9%, in 1995 compared to
1994. As a percentage of operating revenues, however, general and
administrative expenses decreased from 15.5% in 1994 to 14.2% in 1995 to 12.2%
in 1996. The decrease in general and administrative expenses as a percentage
of operating revenues is primarily the result of the Company's ability to
integrate new business acquisitions without a proportionate increase in general
and administrative expenses as well as cost reductions resulting from mergers
with Sanifill, Western, and Chambers in August 1996, May 1996, and June 1995,
respectively.
Depreciation and Amortization
Depreciation and amortization increased $33,598,000, or 28.1%, in 1996 compared
to 1995, and increased $6,710,000, or 5.9%, in 1995 compared to 1994. As a
percentage of operating revenues, however, depreciation and amortization
decreased from 12.6% in 1994 to 12.1% in 1995 to 11.7% in 1996. The increase
in depreciation and amortization is primarily related to acquisitions and
upgrades to existing operations. The decrease in depreciation and amortization
as a percentage of operating revenues is the result of the Company's improved
utilization of equipment through internal volume growth in the collection and
disposal operations without a corresponding increase in equipment and
facilities.
Merger Costs
In the third quarter of 1996, the Company recognized $82,556,000 of merger
costs, of which approximately $80,000,000 related to the acquisition of
Sanifill and the remainder related to the acquisition of two landfills and a
collection company. The $80,000,000 of merger costs related to Sanifill
includes $9,500,000 of transaction costs, $20,000,000 of relocation, severance,
and other termination benefits, $13,000,000 of costs relating to integrating
operations, and $37,500,000 of disposal
19
22
of duplicate facilities. In the second quarter of 1996, the Company incurred
$35,000,000, $2,700,000, and $400,000 of merger costs related to the
acquisitions of Western, Grand Central Sanitation, Inc., and a collection
company, respectively. The $35,000,000 of merger costs related to Western
include $6,800,000 of transaction costs, $15,000,000 of severance and other
termination benefits, and $13,200,000 of costs related to integrating
operations. In the second quarter of 1995, the Company incurred $25,073,000 of
merger costs related to the Chambers acquisition, including $11,900,000 of
transaction costs, $9,473,000 of severance and other termination benefits, and
$3,700,000 of costs related to integrating operations. An additional $566,000
of merger costs was incurred in the second quarter of 1995 related to the
acquisition of a collection, materials recovery, and transfer station
operation.
Unusual Items
In the third quarter of 1996, the Company recognized unusual items of
$50,848,000, including $28,900,000 of estimated losses related to the
disposition of certain non-core business assets, $15,000,000 of project
reserves related to certain Mexico operations, and $6,948,000 of various other
terminated projects. In the second quarter of 1996, unusual items include
approximately $4,824,000 of retirement benefits associated with Western's
pre-merger retirement plan and approximately $8,128,000 of estimated future
losses related to municipal solid waste contracts in California as a result of
the continuing decline in prices of recyclable materials. In 1995, unusual
items represent $2,810,000 of severance and other termination benefits paid to
former Chambers employees in connection with its pre-merger reorganization,
$1,313,000 of estimated future losses associated with a New Jersey municipal
solid waste contract, and $610,000 of shareholder litigation settlement costs.
Income from Operations
Income from operations decreased $36,099,000 in 1996 and increased $33,342,000
in 1995 compared to the respective prior years due to the reasons discussed
above. In 1996, 1995, and 1994, the Company incurred certain nonrecurring
items reported as unusual items and merger costs. Excluding these nonrecurring
items, income from operations as a percentage of operating revenues would be
22.4%, 17.9%, and 14.0% in 1996, 1995, and 1994, respectively. The improvement
in recurring operations is the result of economies of scale realized by the
Company with respect to recent acquisitions, improved operating margins at
Chambers locations since the Chambers merger, dispositions of less profitable
businesses, and improvements in comparative operations.
Other Income and Expense
Other income and expense consists of interest expense, interest income, other
income, and shareholder litigation settlement costs. Shareholder litigation
costs were incurred in 1994 in connection with a settled class action of
consolidated suits or similar claims alleging federal securities violations
against Chambers, certain of its officers and directors, its former independent
auditors, and the underwriters of its securities. Interest expense consists
of recurring and nonrecurring interest. Nonrecurring interest of $10,994,000
and $1,254,000 in 1995 and 1994, respectively, consists of various extension
fees and other charges related to the refinancing of Chambers senior notes in
the second quarter of 1995. Overall, recurring interest expense, gross of
amounts capitalized, increased each year due to an increase in the Company's
average outstanding debt balance. Capitalized interest was $19,507,000,
$12,459,000, and $9,828,000 in 1996, 1995, and 1994, respectively. The
increase in capitalized interest is due to increased development activity
incurred in connection with disposal sites. The increase in other income in
1996 primarily relates to a gain realized on the sale of certain nonhazardous
oil field waste disposal operations in 1996.
Provision for Income Taxes
The Company recorded a provision for income taxes of $45,142,000, $44,992,000,
and $1,015,000 in 1996, 1995, and 1994, respectively. The difference in
provision for income taxes at the federal statutory rate and the reported
amounts relate primarily to nondeductible merger costs and state and local
income taxes.
Net Income (Loss)
For reasons discussed above, net income (loss) decreased $19,542,000 in 1996
and increased $61,530,000 in 1995 compared to the respective prior years.
Variation in 1996 Quarterly Results
The Company has grown significantly through acquisitions, including the
consummation of two mergers in 1996 with other publicly owned entities as
discussed in Note 2 to the consolidated financial statements included elsewhere
herein. These mergers were accounted for as poolings of interests and,
accordingly, operating results for periods prior to these mergers,
20
23
including quarterly results, have been restated. Moreover, the Company
incurred nonrecurring charges related to these mergers of $35,000,000 in the
second quarter and $80,000,000 in the third quarter. In addition, the Company
recognized approximately $12,952,000 of unusual items in the second quarter and
another $50,848,000 in the third quarter as detailed in Note 11 to the
consolidated financial statements included elsewhere herein.
The merger costs and unusual items (and the results of the tax effects of such
charges) have significantly affected the quarterly trend analysis of the
Company's operating results for 1996. A comparison of the reported quarterly
earnings (loss) per share for 1996 compared to pro forma earnings per share,
which exclude such merger costs and unusual items and reflect income taxes at a
40% effective tax rate, are as follows:
As Reported Pro forma
----------- ---------
First quarter $0.21 $0.21
Second quarter ($0.01) $0.28
Third quarter ($0.27) $0.32
Fourth quarter $0.32 $0.32
The Company's business strategy is to continue to grow through acquisitions.
Consequently, future quarterly results could be impacted by additional merger
costs and related expenses associated with such merger and acquisition activity.
Liquidity and Capital Resources
The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements basically stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
cell construction and expansion of its landfill sites, as well as new trucks
and equipment for its collection operations, and (iii) business acquisitions.
The Company's strategy is to meet these capital needs first from internally
generated funds and secondly from various financing sources available to the
Company, including the incurrence of debt and the issuance of its common stock.
It is further part of the Company's strategy to minimize working capital while
maintaining available commitments under bank credit agreements to fund any
capital needs in excess of internally generated cash flow.
As of December 31, 1996, the Company had working capital of $20,020,000 (a
ratio of current assets to current liabilities of 1.06:1) and a cash balance of
$23,511,000, which compares to working capital of $30,109,000 (a ratio of
current assets to current liabilities of 1.15:1) and a cash balance of
$21,058,000 as of December 31, 1995. For the year ended December 31, 1996, net
cash from operating activities was approximately $205,158,000 and net cash from
financing activities was approximately $374,709,000. These funds were used
primarily to fund investments in other businesses of $281,158,000 and for
capital expenditures of approximately $348,354,000.
The Company's capital expenditure and working capital requirements have
increased, reflecting the Company's business strategy of growth through
acquisitions and development projects. The Company intends to finance its 1997
capital expenditures through internally generated cash flow and amounts
available under its revolving credit facility.
On August 30, 1996, in connection with the Sanifill Merger, the Company
replaced its $750,000,000 senior revolving credit facility with a
$1,200,000,000 senior revolving credit facility ("Credit Facility") and retired
amounts under Sanifill's credit facility. The Credit Facility was used to
refinance existing bank loans and letters of credit and to fund additional
acquisitions and working capital. The Credit Facility was available for standby
letters of credit of up to $400,000,000. Loans under the Credit Facility bore
interest at a rate based on the Eurodollar rate plus a spread not to exceed
0.75% per annum (spread set at 0.30% per annum, or an applicable interest rate
of 5.87% per annum at December 31, 1996). The Credit Facility required a
facility fee not to exceed 0.375% per annum on the entire available Credit
Facility (facility fee set at 0.15% per annum at December 31, 1996). The Credit
Facility contained financial covenants with respect to interest rate coverage
and debt capitalization ratios. The Credit Facility also contained limitations
on dividends, additional indebtedness, liens, and asset sales. Principal
reductions were not required over the five-year term of the Credit Facility. On
March 5, 1997, the Credit Facility was replaced with a $1,600,000,000 senior
revolving credit facility with the same general terms, covenants, and
limitations, which is available for standby letters of credit of up to
$500,000,000.
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Notes Offering"). Interest is
payable semi-annually in February and August. The notes are convertible into
shares of the Company's common stock at a conversion price of $43.56 per share.
The notes are subordinated in right of payment to all
21
24
existing and future senior indebtedness, as defined. The notes are redeemable
after February 1, 2000 at the option of the Company at 101.6% of the principal
amount, declining to 100.8% of the principal amount on February 1, 2001 and
thereafter until maturity, plus accrued interest. Deferred offering costs of
approximately $14,000,000 were incurred and are being amortized ratably over the
life of the notes. The proceeds were used to repay debt under the Company's
Credit Facility and for general corporate purposes.
On February 7, 1997, concurrent with the Notes Offering, the Company completed a
public offering of 11,500,000 shares of its common stock, priced at $35.125 per
share. The net proceeds of approximately $387,438,000 were primarily used to
repay debt under the Company's Credit Facility and for general corporate
purposes.
On March 12, 1997, the Company acquired all of the Canadian solid waste
subsidiaries of Allied Waste Industries, Inc., representing 41 collection
businesses, seven landfills, and eight transfer stations in the provinces of
Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan, for
approximately $518,000,000 in cash. In connection with the transaction, the
Company's Canadian subsidiary borrowed $350,000,000, as evidenced by a
promissory note bearing interest at Banker's Acceptance plus 0.45%.
The Company currently intends to repay the $350,000,000 Canadian borrowings with
proceeds from its domestic credit facility prior to June 30, 1997. Reducing the
availability for this anticipated use, the Company has approximately
$824,000,000 available for additional cash borrowings under its credit facility
as of March 27, 1997.
On January 21, 1997, the Company executed a definitive agreement to acquire
substantially all of the assets of Mid-American Waste Systems, Inc.
("Mid-American") for approximately $201,000,000, consisting primarily of cash
and a limited amount of debt assumption. The assets to be acquired include
eleven collection businesses, eleven landfills, six transfer stations, and
three recycling centers. The acquisition has been approved by the Bankruptcy
Court and is expected to close during the second quarter of 1996.
On March 21, 1997, a Canadian subsidiary of the Company and WMX Technologies,
Inc.'s Waste Management unit ("WMX") jointly executed a letter of intent whereby
the Canadian subsidiary will acquire the majority of WMX's Canadian solid waste
businesses for approximately $186,000,000, including $124,000,000 in cash and
$62,000,000 in Company common stock. The assets to be acquired include 13
collection businesses, one landfill, and three transfer stations in the
provinces of Alberta, British Columbia, Ontario, and Quebec, which generate
approximately $124,000,000 in annualized operating revenues. The acquisition,
which is expected to close by May 31, 1997, is subject to regulatory approval
and final negotiation and execution of a definitive sales agreement.
The Company intends to fund the cash portions of the Mid-American and WMX
Canadian acquisitions from its existing credit facility.
The Company's business plan is to grow through acquisitions as well as
development projects. The Company has issued equity securities in business
acquisitions and expects to do so in the future. Furthermore, the Company's
future growth will depend greatly upon its ability to raise additional capital.
The Company continually reviews various financing alternatives and depending
upon market conditions could pursue the sale of debt and/or equity securities
to help effectuate its business strategy. Management believes that it can
arrange the necessary financing required to accomplish its business plan;
however, to the extent the Company is not successful in its future financing
strategies the Company's growth could be limited.
Environmental Matters
The Company also has material financial commitments for the costs associated
with its future closure and post-closure obligations with respect to the
landfills it operates or for which it is otherwise responsible. The Company
bases accruals for these commitments on periodic management reviews, typically
performed at least annually, based on input from its engineers and
interpretations of current regulatory requirements and proposed regulatory
changes. The accrual for closure and post-closure costs includes final
capping and cover for the site, methane gas control, leachate management and
ground water monitoring, and other operational and maintenance costs to be
incurred after each site discontinues accepting waste.
The Company has estimated that the aggregate final closure and post-closure
costs will be approximately $273,159,000. As of December 31, 1996 and 1995,
the Company had recorded liabilities of $117,762,000 and $98,066,000,
respectively, for closure and post-closure costs of disposal facilities. The
difference between the closure and post-closure costs accrued at December 31,
1996, and the total estimated final closure and post-closure costs to be
incurred will be accrued and charged to expense as airspace is consumed such
that the total estimated final closure and post-closure to be incurred will be
fully accrued for each landfill at the time the site stops accepting waste and
is closed. The Company also expects to incur approximately $658,121,000
related to future capping activities during the remaining operating lives of
the disposal sites, which are also being expensed over the useful lives of the
disposal sites as airspace is consumed.
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Management believes that the ultimate disposition of these environmental
matters will not have a material, adverse effect on the financial condition of
the Company. However, the Company's operation of landfills subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations that could give rise to increased costs for monitoring and
corrective measures. The Company cannot predict the effect of any regulations
or legislation enacted in the future on the Company's operations.
Seasonality and Inflation
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter operating
results and may also be reflected in its fourth quarter operating results.
This is primarily attributable to the fact that (i) the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months and (ii) the volume of waste relating to industrial
and residential waste in certain regions where the Company operates tends to
decrease during the winter months.
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on the results of operations
in the near future.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supercedes Accounting Principles Board
Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation
of basic and diluted earnings per share. Basic earnings per share, which
excludes the impact of common stock equivalents, replaces primary earnings per
share. Diluted earnings per share, which utilizes the average market price per
share as opposed to the greater of the average market price per share or ending
market price per share when applying the treasury stock method in deter