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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, 1995
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.)
5400 LBJ FREEWAY, SUITE 300 -- TOWER ONE
DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 383-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
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 February 29, 1996, was approximately $1,027,472,999. The
aggregate market value was computed by using the closing price of the 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 14, 1996, was 65,906,973.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO
Joint Proxy Statement and Prospectus
for the 1996 Annual Meeting of Shareholders Part III
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 16
Item 3. Legal Proceedings...................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................. 20
Item 6. Selected Consolidated Financial Data................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 22
Item 8. Financial Statements and Supplementary Data............................ 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 60
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 60
Item 11. Executive Compensation................................................. 60
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 60
Item 13. Certain Relationships and Related Transactions......................... 60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 61
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PART I
ITEM 1. BUSINESS.
GENERAL
USA Waste Services, Inc. ("USA Waste" or the "Company") is the fourth
largest integrated solid waste management company in North America and serves
the full spectrum of municipal, commercial, industrial (roll-off), and
residential customers in 21 states. 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. USA Waste owns or
operates 29 landfills, 22 transfer stations, and 44 collection operations and
serves more than 500,000 customers. The Company has a diversified customer base
with no single customer accounting for more than 5% of the Company's revenue or
income from continuing operations during 1995. The Company employs approximately
2,500 persons.
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 5400 LBJ
Freeway, Suite 300, Tower One, Dallas, Texas 75240, and its telephone number is
214-383-7900.
Of the Company's revenues for the year ended December 31, 1995,
approximately 51.9% was attributable to collection operations, approximately
31.9% was attributable to landfill operations, approximately 10.2% was from
transfer operations, and approximately 6.0% from other operations. The Company's
average landfill volume for the year ended December 31, 1995, was approximately
23,400 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, however, the industry
has undergone a period of significant consolidation.
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 of 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.
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The rising costs associated with the new industry regulations have caused
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.
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:
- - 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 connection 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.
- - 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.
- - 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.
The Company materially expanded its operations and markets with its
acquisition of Chambers Development Company, Inc. ("Chambers") on June 30, 1995
(the "Chambers Merger"). With the addition of the Chambers' operations, which
included significant landfill capacity as well as collection and transfer
station operations, the Company established its presence in the Mid-Atlantic and
southeastern regions of the United States. The Chambers Merger provided the
Company the opportunity to capitalize on the substantial investment made by
Chambers in the permitting, design and construction of its landfills. The
Company has taken a variety of steps to increase waste flows and improve
efficiencies of Chambers' collection and landfill operations, including the
completion of recent acquisitions that complement existing Chambers operations,
implementing various routing and other operating efficiencies and attracting
additional customers. The Company has also undertaken to reduce overhead and
operating costs and increase employee productivity. In this connection, the
Company has closed the Chambers corporate headquarters in Pittsburgh,
Pennsylvania, relocated two regional offices of Chambers to existing facilities
of the Company and implemented headcount reductions. Additionally, the Company
is
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implementing incentive compensation programs for Chambers employees where such
programs were not previously available.
Since the Chambers Merger, the Company has continued to expand its
operations and revenue base through a series of smaller acquisitions that
complemented and expanded the Company's operations. During the last six months
of 1995, the Company completed ten additional acquisitions resulting in the
addition of three landfills, ten collection operations, and nine transfer
stations. These acquired operations are based in Arkansas, Georgia, Missouri,
New Jersey, Pennsylvania, Texas, and Virginia.
On December 18, 1995, USA Waste entered into an Agreement and Plan of
Merger (the "Merger Agreement") to acquire Western Waste Industries ("Western"),
a California corporation, through a merger transaction ("Western Merger"). The
Western Merger is subject to, among other conditions, approval of both
companies' stockholders. It is anticipated that the Western Merger will be
completed in April 1996 and that it will be accounted for as a pooling of
interests. The Merger Agreement provides that on the effective date of the
Western Merger, USA Waste will issue 1.5 shares of its Common Stock for every
share of Western's common stock outstanding (other than shares owned by USA
Waste). USA Waste expects to issue approximately 21.4 million shares of Common
Stock and assume options under Western's stock option plans equivalent to
approximately 5.2 million underlying USA Waste shares of Common Stock in
connection with the Western Merger. Following the Western Merger, the Company's
Board of Directors will be expanded from 9 to 12 members and will include
nominees of both USA Waste and Western.
Western provides integrated solid waste services in the United States, with
operations or properties at the end of 1995 in California, Texas, Louisiana,
Florida, Colorado and Arkansas. Western has over 90 municipal and regional
authority contracts and serves over 785,000 customers. As part of its business,
Western operates six landfills, three transfer stations and five recycling
facilities. For its fiscal year ended June 30, 1995, Western had operating
revenues of $270,941,000 and income from continuing operations of $17,089,000.
As a result of the Western acquisition, the Company will become the third
largest integrated solid waste management company in North America.
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 can not always
accurately predict 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, recycling, disposal, soil
remediation, and medical and special waste incineration services to municipal,
commercial, industrial and residential customers in 21 states.
Management of USA Waste's solid waste operations is achieved through a
divisional alignment that currently includes five regions/divisions organized by
geographic area. Each region/division is headed by a regional vice president
("RVP") or divisional vice president ("DVP"). Each RVP/DVP is responsible for
the oversight of the following departments: sales and marketing, administration
and financial, operations, and maintenance. In addition, each RVP/DVP 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/division
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generally encompasses a multi-state area and may have a concentration from five
to 25 districts. Regions/divisions 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.
USA Waste's current strategy with respect to the acquisition of landfill
and collection operations calls for decentralized management controls. Each
collection operation or district maintains its own computer operations and
collection service functions utilizing uniform programs and systems. These local
computer operations are linked to USA Waste's corporate office and are
integrated with a centralized corporate financial reporting system.
Solid Waste Landfills. Municipal solid waste landfills are the primary
depository for solid waste in North America. These disposal facilities are
located on land with geological and hydrological properties that limit the
possibility of water pollution, and are operated under prescribed procedures. A
landfill must be maintained carefully to meet federal, state and local
regulations. Maintenance includes excavation, continuous spreading and
compacting of waste, and covering of waste with earth or other inert material at
least once a day. The cost of transporting solid waste to a disposal location
places a geographic restriction on solid waste companies. Access to a disposal
facility, such as a landfill, is a necessity for all solid waste management
companies. While access can be obtained to disposal facilities owned or operated
by unaffiliated parties, 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 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.
Prior to the Chambers Merger, Chambers had invested substantial capital to
develop landfills in compliance with strict environmental standards. Development
activities included site selection and site feasibility studies, environmental
assessments (including hydrological and geological reviews), land acquisition,
engineering and design work for the site as a whole, and the design and
construction of the landfill infrastructure. The infrastructure consists of
roadway or rail access systems, initial clearing and site preparation systems. A
large portion of the infrastructure expenditures with respect to each site is
nonrecurring and required only at the initial phase in order to prepare the site
for the receipt of waste and to support the operation of the landfill throughout
its useful life.
USA Waste currently owns and operates 28 non-hazardous solid waste
landfills and operates one municipal landfill. Of the 29 landfills owned or
operated by USA Waste, the average remaining life based on remaining permitted
capacity and current average monthly disposal volumes is approximately 21 years.
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, the type and volume or
weight of the waste collected, and 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
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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 (roll-off) 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.
USA Waste operates collection operations in approximately 44 locations in
15 states. Of the foregoing 44 locations, 28 collection operations are
integrated with landfills owned by the Company. On an overall basis, Company
collection operations deliver approximately 46% 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 22 transfer stations. Of the 22 transfer
stations owned or operated by the Company, 19 transfer some or all of the waste
received to a landfill owned or operated by the Company.
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 operations. Although the Company has not made material
capital investments in these areas, 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. USA Waste also owns a 25% interest in
Automated Recycling Technologies, Inc. which operates two recycling and sorting
facilities in Ocean County, New Jersey. Through its subsidiary Waste Recovery
Corporation, USA Waste also arranges for the sale of recycled materials in bulk
by waste collection companies, including USA Waste, to the end-users of such
materials. Overall, however, USA Waste is not materially affected financially by
fluctuations in commodity pricing.
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Other. The Company owns and operates two soil remediation facilities in
Pennsylvania serving the greater Philadelphia metropolitan area, New Jersey, and
Southern New York. For a fee, contaminated soil is delivered to a remediation
facility and heated in a furnace under a carefully controlled process to remove
the contaminants. The decontaminated soil is then picked up by the owner or sold
to third parties as a clean soil product for a variety of uses. In addition, the
Company owns and operates a medical, special and municipal waste incineration
facility in South Carolina which is permitted to incinerate 200 tons per day of
medical waste, municipal solid waste and other approved non-hazardous special
wastes. State legislation, however, currently restricts the facility's permitted
incineration capacity to the greater of (i) 50 tons per day of medical waste or
(ii) on a monthly basis, 1/12 of the estimated amount of medical waste generated
within the State of South Carolina within one year.
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. (formerly Waste Management, Inc.) and Browning-Ferris
Industries, Inc., as well as a number of smaller companies, and numerous
municipalities and other regional or multi-county authorities and large
commercial and industrial companies handling their own waste collection or
disposal operations. WMX and Browning-Ferris 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 win competitively 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 1995, no one commercial customer or
municipal contract accounted for more than 5% of the total revenue 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, 1995, the Company had approximately 2,500 full-time
employees, of which approximately 430 were employed in clerical, administrative,
and sales positions, 90 in management, and the balance in collection, transfer,
remediation, and disposal operations. Approximately 595 of the Company's
employees at 16 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. The
casualty coverages currently include $2 million primary commercial general
liability and $1 million primary automobile liability supported by $100 million
in umbrella insurance protection. The property policy provides insurance
coverage for all of the Company's real and personal property.
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 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 million of
coverage per incident with a $10 million 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 business or its financial condition. 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 many of its landfills. The Company has
not experienced difficulty in obtaining performance bonds or letters of credit
for its current operations. At December 31, 1995, the Company had provided to
municipalities and other customers and various regulatory authorities surety
bonds of approximately $134,600,000 and letters of credit of approximately
$32,400,000 to secure its obligations, exclusive of letters of credit enhancing
industrial revenue bonds of approximately $82,250,000. 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 or
obtaining or retaining landfill operating permits.
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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 and various other federal, state, and local
environmental, zoning, health, and safety agencies, many of which periodically
examine the Company's operations to monitor compliance with such laws and
regulations.
The development, expansion, and operation of landfills, transfer stations,
and other disposal and remediation facilities 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, transfer
station, or soil remediation facility, 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, transfer station, or soil remediation facility 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, and time
and frequency of collection.
International, federal, state, and local governments have also 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-site waste shipments than on
in-site shipments, limit the types of wastes that may be disposed of at existing
landfills, mandate waste minimization initiatives, recycling and yard waste
composting, reclassify certain categories of hazardous waste as non-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. 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 attempt to resolve the issues raised. 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.
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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 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 realize on any such indemnities if an environmental liability
exists.
Federal Regulation
The primary 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 wastes.
They also require states to develop programs to insure the safe disposal of
solid wastes in landfills.
Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of non-hazardous solid
wastes. While the role of the EPA is to provide overall regulatory direction,
the actual planning and implementation of solid waste programs under Subtitle D
are largely state and local functions. In October 1993, the EPA adopted
regulations under Subtitle D with respect to solid waste disposal facility
criteria, 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, many of which have not commonly been in place or
enforced at landfills. All Subtitle D regulations are in effect, except for
groundwater monitoring requirements, which will be phased in over a period of
five years ending October 9, 1996, and financial responsibility requirements,
which were to take effect in April 1997 although many states have already
implemented financial assurance programs. 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. Once a
state has an approved program, it will review all existing landfill permits to
ensure that they comply with the new regulations. Although the
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states were required to submit proposed permitting programs designed to
implement the Subtitle D regulations to the EPA by April 1993, some states have
not submitted their programs to the EPA and others have not fully completed
their implementation. Because the new regulations did not take effect until late
1993 and have not been fully implemented by the states, their full impact may
not be apparent for several years. The Company could incur significant costs in
complying with such regulations; however, the Company does not believe that such
enhanced 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
these 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 (including a
contract carrier who has accepted a hazardous substance for transportation
during such transportation) 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 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 impacted 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.
USA Waste would not be liable under CERCLA for the cleanup of a disposal
site containing hazardous wastes transported to such site by USA Waste so long
as the site was selected by the generator of such waste. However, USA Waste
would be responsible during actual transportation for any hazardous waste. Also,
USA Waste could be liable under CERCLA for off-site environmental contamination
caused by the release of pollutants or hazardous substances at sites to which
USA Waste, or a waste transporter acquired by USA Waste, arranged for the
disposal site. CERCLA imposes liability for certain environmental response
measures upon transporters who arranged for the disposal site at which the
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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 arranged for by USA Waste, a
waste transporter acquired by USA Waste or with whom USA Waste contracted.
The U.S. Congress may consider reauthorization revision of CERCLA in 1996.
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, current new approaches to
cleanup and removal, and treatment of remediation wastes 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 degree to
which permitted hazardous waste management facilities will be used for
remediation of waste. 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.
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 December 1989, the EPA had proposed or identified approximately
30,000 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.
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
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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. In
November 1990, the EPA issued additional rules, which established standards for
storm water runoff from landfills and which require landfills to obtain storm
water discharge permits, unless they are covered under a storm water general
permit issued by the EPA. 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 to be obtained before such development may be commenced. 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 of the Company's other
operations, including its landfills and waste collection vehicles. The EPA has
construed the Clean Air Act to apply to landfills. In May 1991, the EPA proposed
guidelines for new source performance standards regulating the emission of
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air pollutants from solid waste landfills. The regulations, as revised, are
expected to be finalized in early 1997. If the proposed regulations are adopted
by the EPA, they must be implemented by the states. These guidelines, combined
with the new permitting programs established under the 1990 Clean Air Act
Amendments, will likely subject solid waste landfills to new permitting
requirements and, in some instances, require installation of methane gas
recovery systems. The Clean Air Act Amendments could also result in the
imposition of strict requirements on many activities that have heretofore been
largely unregulated, as well as imposing more stringent requirements on, among
other activities, motor vehicle emissions. These costs are not anticipated to
adversely affect 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
wastes 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
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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 shareholders and the public informed about the Company's operations,
may from time to time issue certain statements, either in writing or orally,
that contain or may contain forward-looking information. 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. Such statements 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. 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 in the future could
affect the Company's consolidated results for 1996 and beyond and cause them to
differ materially from those that may be set forth in any forward-looking
statement 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 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, there can be no assurance that USA
Waste will be able to successfully integrate the operations of Chambers
Development Company, Inc. ("Chambers"), USA Waste's largest acquisition to date
(the "Chambers Merger"), or that USA Waste will be able to successfully
integrate the operations of Western Waste Industries if the Merger with Western
(the "Western Merger") is consummated. 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. USA Waste is
continually seeking acquisition opportunities and believes that there exist a
substantial number of potentially attractive consolidation opportunities in the
solid waste management industry. USA Waste may pursue significant acquisitions
if they can be achieved on acceptable terms. There can be no assurance that USA
Waste will be able to continue to expand and successfully integrate operations.
Need for Capital; Debt Financing
The long-term debt of USA Waste, including current maturities, at December
31, 1995 was approximately $373.8 million. 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 successful in obtaining
additional capital through such debt incurrences or issuances of additional
equity securities.
In addition, a large portion of the Company's existing indebtedness at
December 31, 1995 is priced at variable interest rates that fluctuate as general
interest rates change (see Note 5 to the consolidated financial statements). As
a result an increase in interest rates could adversely impact the Company's
earnings in the future.
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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 significantly greater financial resources than USA Waste.
Competition may also be affected by the increasing national emphasis on
recycling, composting, incineration, and other waste reduction programs that
could reduce the volume of solid waste collected or deposited in landfills.
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 on
the combined company or to revoke or deny renewal of operating permits or
licenses for violations of 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
landfills, transfer stations and collection operations have caused or may cause
nearby landowners, particularly as a result of the contamination of drinking
water sources or soil, including damage resulting from conditions existing prior
to the acquisition of such assets or operations. Liability may also arise from
any off-site environmental contamination caused by pollutants or hazardous
substances under circumstances where transportation, treatment or disposal was
arranged for by 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.
Benefit of the Western Merger May Not be Achieved
USA Waste expects to derive substantial benefits from the Western Merger.
Whether the anticipated benefits of the Merger are ultimately achieved will
depend on a number of factors, including the ability of the combined companies
to achieve administrative cost savings, rationalization of collection routes,
insurance and bonding cost reductions, lower interest expense and general
economics of scale, the ability of the combined companies to retain municipal
contracts and generally to capitalize on the combined asset base and strategic
position of the combined entity.
In 1995, Western derived approximately 49% of its revenues from municipal
and regional authority contracts. The combined company is expected to generate
approximately 20% of its revenues from municipal and regional authority
contracts. Many municipal franchise agreements are of fixed duration and are
subject to negotiation and renewal, and competitive bidding and may contain
change of control provisions requiring a consent for transactions such as the
Merger. There can be no assurance that such franchise agreements will be renewed
or that necessary consents will be obtained, or that obtaining such
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renewals or consents will not result in these agreements containing terms less
favorable to the combined company than Western's existing franchise agreements.
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 recently filed
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 has a shelf registration
statement covering approximately 5,200,000 shares of USA Waste Common Stock that
may be used for 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.
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 soil remediation facilities, and vehicles and
equipment. The Company owns or leases real property in most states in which it
is doing business. At December 31, 1995, 26 solid waste landfills, aggregating
approximately 13,324 total acres, including approximately 2,121 permitted acres,
were owned by the Company and 3 landfills, aggregating approximately 655 total
acres, including approximately 171 permitted acres, were operated by the Company
or leased from parties not affiliated with the Company.
The Company leases approximately 27,550 square feet of office space in
Dallas for its executive office under an eight year lease expiring in 2003. 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, 1995, aggregate annual rental
payments on real estate leased by the Company was approximately $581,000.
The Company owns approximately 1,800 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 285,000 steel containers in use,
ranging from one to 45 cubic yards, and a number of stationary compactors and
self-dumping hoppers.
The Company believes that its vehicles, equipment, and operating properties
are well maintained and adequate for its current operations. However, the
Company expects to make substantial investments in additional equipment and
property for expansion, for replacement of assets, and in connection with future
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various 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
condition. 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 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
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violations of the permits pursuant to which the Company operates. The Company
also may be subject to claims for personal injury or property damage arising out
of accidents involving its vehicles.
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 Developement 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 $2.1 million 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. The case is currently near
the end of the discovery stage. 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. The Company intends to continue to vigorously defend against this
action, and management believes the ultimate resolution of this suit 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. The plaintiffs, who claim to represent
approximately 484,000 shares of Chambers common stock, requested exclusion from
the settlement agreement which resulted in the resolution of the Class Action
and have asserted 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 and intends to vigorously defend these claims. The case is currently
in discovery. Management of the Company believes that ultimate resolution of
such complaint will not have a material adverse effect on the Company's
financial position or results of operations.
On or about February 1, 1996, an action was filed in the Circuit Court of
Cook County, Illinois, captioned Allabastro v. USA Waste Services, Inc., Action
No. 96L01165. The plaintiff alleges to have entered into an oral agreement with
the Company for brokerage services and is demanding a fee of $950,000 based on
the alleged contract and on common law for acting as a broker/advisor to the
Company in its 1993 purchase of an Indiana landfill and hauling operation from
Chambers. Based on the same facts, the plaintiff is also demanding an additional
$36,250,000 fee in connection with the June 1995 merger of Chambers with the
Company. The plaintiff is also seeking unspecified damages for acting as a
management advisor to the Company in its procurement of a landfill
renovation/operation contract in Charleston, West Virginia. Interest and other
costs are also demanded. The case has not yet entered the discovery stage. The
Company intends to vigorously defend against this action, and management
believes the ultimate resolution of this suit will not have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of USA Waste during the
fourth quarter of 1995.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages, as of March 1, 1996, 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 51, 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") form 1982 to 1991, during which time he had chief responsibility for all
solid waste operations.
Donald F. Moorehead, Jr., age 45, 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.
David Sutherland-Yoest, age 39, has been President, Chief Operating Officer
and a director since May 27, 1994. Prior to joining USA Waste, he was President,
Chief Executive Officer and a director of Envirofil, Inc. ("Envirofil"). He
joined Envirofil in January 1993 and was elected a director in March 1993. From
September 1989 to June 1992, Mr. Sutherland-Yoest served as President of
Browning-Ferris Industries, Ltd. ("BFI Ltd."), the Canadian subsidiary of BFI.
From January through September 1989, Mr. Sutherland-Yoest served as
Vice-President, Corporate Development, for Laidlaw Waste Systems, Inc. From 1987
to September 1989, Mr. Sutherland-Yoest was Laidlaw's Regional Vice-President-
Atlantic Region, located in Columbus, Ohio. From 1981 to 1987, Mr.
Sutherland-Yoest served as District Manager-Vancouver and District
Manager-Calgary for BFI Ltd.
Charles A. Wilcox, age 43, has been Executive Vice President -- Operations
since December 1,1994. From April 1981 until November 1994, Mr. Wilcox held
positions with BFI including Managing Director of B.F.S.A. Ltd. (October 1984 to
December 1987) and Regional Vice President, Pacific Region (October 1988 to June
1993). Other assignments with BFI included District Manager, New Orleans;
President -- Special Services, Corporate; and Division Vice
President -- Northern Florida.
Earl E. DeFrates, age 52, 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 40, has been Vice President, General Counsel and
Secretary since April 4, 1995. Prior to joining USA Waste, Mr. Sangalis was
employed by the solid waste subsidiary of WMX Technologies, Inc. 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 40, has been Vice President, Corporate Controller, 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 a privately held real estate
development and management company in Oklahoma City, Oklahoma, and its
affiliated companies, ultimately serving as Senior Vice President.
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Hubert J. Bourque, age 46, has been Vice President -- Environmental Affairs
and Chief Compliance Officer since May 1994. From January 1993 to May 1994, Mr.
Bourque was Chief Compliance Officer and Senior Vice President of Environmental
Affairs for Envirofil. From June 1990 to December 1992, Mr. Bourque was
Divisional Vice President -- Environmental Affairs for BFI Ltd. From 1984 to
1990, Mr. Bourque was responsible for the direction of a technical group of 15
consulting professionals whose work involved solid waste planning, landfill and
transfer station design, and hazardous waste management for clients in North
America, the Middle East, the Caribbean and Southeast Asia.
James R. Jones, age 51, has been Vice President -- Engineering Services
since August 1994. From September 1992 through May 1994, Mr. Jones served as
Vice President, Operations Manager for the Kansas City area of Woodward-Clyde
Consultants. He joined Woodward-Clyde in January 1992 as Vice President,
National Practice Manager -- Solid Waste. From 1990 to August 1991, Mr. Jones
participated in the start-up of Equivest Waste Solutions, Inc., which merged
with Geowaste, Inc. in August 1991. From January 1974 to February 1990, he
served in various positions with BFI, including Divisional Vice President,
Engineering from 1980 to 1990.
19
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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 (the
"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 by the
NYSE.
HIGH LOW
------ ------
1994
First Quarter................................................ $15.00 $11.13
Second Quarter............................................... 13.38 10.38
Third Quarter................................................ 15.13 11.50
Fourth Quarter............................................... 15.13 11.00
1995
First Quarter................................................ $12.38 $10.00
Second Quarter............................................... 16.63 11.50
Third Quarter................................................ 21.88 14.63
Fourth Quarter............................................... 22.50 17.00
1996
First Quarter (through March 14, 1996)....................... $24.63 $17.25
On March 14, 1996, the closing sale price as reported on the NYSE was
$23.63 per share. The number of holders of record of Common Stock based on the
transfer records of the Company at March 14, 1996, was 3,846.
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.
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23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The Selected Consolidated 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 YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
-------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenues........................ $457,099 $ 434,224 $382,234 $351,359 $270,037
-------- --------- -------- -------- --------
Costs and Expenses:
Operating.............................. 253,884 257,370 217,345 208,928 230,129
General and administrative............. 62,178 71,500 66,968 75,426 23,332
Merger costs........................... 25,073 3,782 -- -- --
Unusual items.......................... 4,733 8,863 2,672 51,047 --
Depreciation and amortization.......... 56,378 56,139 52,222 44,139 39,209
-------- --------- -------- -------- --------
402,246 397,654 339,207 379,540 292,670
-------- --------- -------- -------- --------
Income (loss) from operations............. 54,853 36,570 43,027 (28,181) (22,633)
-------- --------- -------- -------- --------
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................................ (30,354) (32,804) (35,975) (35,840) (33,413)
Interest income........................ 2,666 2,641 3,539 5,435 11,814
Other income, net...................... 2,699 1,877 1,915 1,699 1,130
-------- --------- -------- -------- --------
(35,983) (108,940) (36,021) (39,559) (20,469)
-------- --------- -------- -------- --------
Income (loss) before income taxes......... 18,870 (72,370) 7,006 (67,740) (43,102)
Provision for (benefit from) income
taxes.................................. (11,393) 3,908 6,018 479 4,913
-------- --------- -------- -------- --------
Income (loss) from continuing
operations............................. $ 30,263 $ (76,278) $ 988 $(68,219) $(48,015)
======== ========= ======== ======== ========
Income (loss) from continuing operations
per common share....................... $ 0.55 $ (1.55) $ 0.01 $ (1.60) $ (1.07)
======== ========= ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding... 55,270 49,671 45,885 42,707 44,990
======== ========= ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)................. $ 14,879 $ (4,601) $ 26,932 $ 61,459 $141,845
Intangible assets, net.................... 118,778 93,416 70,566 45,049 41,311
Total assets.............................. 908,037 785,616 748,932 739,057 769,094
Long-term debt, including current
maturities............................. 373,785 410,714 402,800 411,341 424,368
Stockholders' equity...................... 402,849 164,349 224,550 202,547 239,395
21
24
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, 1995, 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 1995 to reflect the acquisition of Chambers,
consummated June 30, 1995, 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 Foward-Looking Information" 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 21 states. Since August 1990, the Company has experienced
significant growth principally through the acquisition and integration of solid
waste businesses and is now the fourth largest non-hazardous solid waste company
in North America. The Company owns or operates 29 landfills, 22 transfer
stations, and 44 collection companies serving more than 500,000 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
actually 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 landfill,
transfer, and collection operations have been eliminated in the financial
statements presented 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
expenses 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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25
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 items.
PERIOD TO PERIOD INCREASE (DECREASE)
---------------------------------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
AND 1994 AND 1993
--------------------- -----------------------
Operating revenues...................... $ 22,875 5.3% $ 51,990 13.6%
-------- --------
Costs and expenses:
Operating............................. (3,486) (1.4) 40,025 18.4
General and administrative............ (9,322) (13.0) 4,532 6.8
Merger costs.......................... 21,291 563.0 3,782 --
Unusual items......................... (4,130) (46.6) 6,191 231.7
Depreciation and amortization......... 239 0.4 3,917 7.5
-------- --------
4,592 1.2 58,447 17.2
-------- --------
Income from operations.................. 18,283 50.0 (6,457) (15.0)
-------- --------
Other income (expense):
Shareholder litigation settlement and
other litigation related costs..... 79,400 100.0 (73,900) (1,343.6)
Interest expense:
Nonrecurring interest.............. (9,740) (776.7) (1,254) --
Other.............................. 2,450 7.5 3,171 8.8
Interest income....................... 25 0.9 (898) (25.4)
Other income, net..................... 822 43.8 (38) (2.0)
-------- --------
72,957 67.0 (72,919) (202.4)
-------- --------
Income (loss) before income taxes....... 91,240 126.1 (79,376) (1,133.0)
Provision for (benefit from) income
taxes................................. (15,301) (391.5) (2,110) (35.1)
-------- --------
Net income (loss)....................... $106,541 139.7% $(77,266) (7,820.4)%
======== ========
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26
The following table presents for the periods indicated, the percentage
relationship that the various Consolidated Statements of Operations items bear
to operating revenues.
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
----- ----- -----
Operating revenues:
Disposal.............................................. 31.9% 25.4% 26.9%
Waste collection...................................... 51.9 52.9 52.2
Transfer station...................................... 10.2 16.2 14.5
Other................................................. 6.0 5.5 6.4
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Operating............................................. 55.6 59.3 56.8
General and administrative............................ 13.6 16.5 17.5
Merger costs.......................................... 5.5 0.9 --
Unusual items......................................... 1.0 2.0 0.7
Depreciation and amortization......................... 12.3 12.9 13.7
----- ----- -----
88.0 91.6 88.7
----- ----- -----
Income from operations.................................. 12.0 8.4 11.3
----- ----- -----
Other income (expense):
Shareholder litigation settlement and other litigation
related costs...................................... -- (18.3) (1.4)
Interest expense:
Nonrecurring interest.............................. (2.4) (0.3) --
Other.............................................. (6.7) (7.5) (9.4)
Interest income....................................... 0.6 0.6 0.9
Other income, net..................................... 0.6 0.4 0.5
----- ----- -----
(7.9) (25.1) (9.4)
----- ----- -----
Income (loss) before income taxes....................... 4.1 (16.7) 1.9
Provision for (benefit from) income taxes............... (2.5) 0.9 1.6
----- ----- -----
Net income (loss)....................................... 6.6% (17.6)% 0.3%
===== ===== =====
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27
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Operating Revenues
Operating revenues were $457,099,000 in 1995, an increase of $22,875,000,
or 5.3%, as compared to 1994, and were $434,224,000 in 1994, an increase of
$51,990,000, or 13.6%, as compared to 1993. The increase in operating revenues
for both years is attributable to the effect of new acquisitions, less
dispositions, and the growth in operating revenues from comparable operations,
excluding the negative impact of certain businesses in New Jersey. Acquisitions
during 1995 and 1994 accounted for increases of $38,300,000 and $72,600,000,
respectively, in operating revenues, while dispositions in 1995 and 1994
accounted for decreases of $13,600,000 and $14,600,000, respectively, in
operating revenues compared to the respective prior years.
Operating revenues from comparable operations were most significantly
effected by certain businesses in New Jersey. Operating revenues in New Jersey
were negatively impacted as a result of contract renegotiations and terminations
in 1994 and 1993.
In December 1993, Chambers entered into a new three-year agreement at a
rate reduced from its existing contract for the municipal solid waste from
Bergen County, New Jersey, effective March 1994. A contract for the
transportation and disposal of ash generated by a local incinerator was lost in
March 1994. Another local solid waste contract for a local county expired in
December 1993, and still another local county began redirecting waste to a
competitor's landfill, commencing December 1, 1993.
On December 31, 1993, Chambers sold two transfer stations in Morris County,
New Jersey, to the Morris County Municipal Utilities Authority. Chambers agreed
to operate the transfer stations and provide certain transportation services at
a reduced rate until the county's long-term solid waste system is in operation,
or until December 31, 1996, if later. Morris County assumed operations of the
transfer stations on January 1, 1995, but Chambers continued providing
transportation services. Therefore, in 1995, operating revenues do not include
the pass-through of disposal and other costs necessary to operate the transfer
stations. Morris County has an option to extend the transportation agreement for
two six-month periods beyond 1996, if its solid waste system is not operational.
The operating revenues for the two transfer stations have declined from
approximately $42,100,000 in 1993 to $35,600,000 in 1994, to approximately
$13,000,000 in 1995. The combined negative impact of these contract
renegotiations and terminations was a decrease of operating revenues of
$39,200,000 from 1994 to 1995 and $40,200,000 from 1993 to 1994. It is expected
that the operating revenues for these New Jersey businesses will not be
significantly different in 1996 as compared to 1995, provided that Morris
County's solid waste system is not yet operational.
The components of the change in operating revenues are as follows:
1995 VS. 1994 1994 VS. 1993
------------- -------------
Price.................................................... 1.8% 0.9%
Volume................................................... 6.8 8.0
Acquisitions, net of dispositions........................ 5.7 15.2
Certain New Jersey businesses............................ (9.0) (10.5)
----- ------
Total change.................................. 5.3% 13.6%
===== ======
Operating Costs and Expenses
Operating costs and expenses decreased $3,486,000, or 1.4%, in 1995 as
compared to 1994, and increased $40,025,000 in 1994, or 18.4%, as compared to
1993. The decrease in operating costs and expenses in 1995 is attributable to a
$5,700,000 decrease due to the increased utilization of internal
25
28
disposal capacity and reduced operating costs and expenses for the Chambers
operations of approximately $5,000,000 since the Chambers Merger (excluding
reduction in costs in New Jersey of approximately $21,500,000). These decreases
are offset by increased operating costs and expenses as a result of new
acquisitions, net of dispositions. The impact of acquisitions also explains the
increase in operating costs and expenses in 1994. New business acquisitions
resulted in an increase in operating costs and expenses of $26,100,000 in 1995
and $45,600,000 in 1994 while dispositions resulted in a decrease of $7,400,000
in 1995 and $12,600,000 in 1994. Operating costs and expenses for comparable
operations accounted for the remainder of the increase of $10,000,000.
As a percentage of operating revenues, operating costs and expenses
increased from 56.8% in 1993 to 59.3% in 1994 and decreased to 55.6% in 1995.
The emphasis in internalization and operating efficiency improvements at the
Chambers existing operations after the Chambers Merger in 1995 contributes to
the decrease in operating costs as a percent of operating revenues. Another
factor affecting the percent of operating costs and expenses as a percentage of
operating revenues is the strategic business decisions to exit or reduce
operations in certain markets in 1994 where margins were not as high, thereby
improving the relationship between operating costs and revenues. For example, in
September 1994, the Company determined that it would exit the market in Phoenix,
Arizona, which resulted in the reduction of operating costs and decreased the
percentage of operating costs as compared to operating revenues in 1995, as
compared to 1994. Another factor affecting the relationship of operating costs
and expenses as a percentage of operating revenues is the Company's percentage
of operating revenues generated by type of service. The Company's operating
revenues from disposal operations decreased from 26.9% in 1993 to 25.4% in 1994
and then increased to 31.9% in 1995. This affects the relationship between
operating costs and expenses and operating revenues since disposal operations
generally have lower cost margins than collection and transfer station
operations.
Harsh weather conditions in the first quarter of 1994 adversely affected
operating costs in certain markets. In the second quarter of 1994, the Company
experienced higher operating costs in two of its larger collection operations
due to higher labor costs and certain variable expenses, which were not offset
by a corresponding increase in operating revenues. In addition, certain
businesses acquired in late 1994 had relatively higher operating costs as
operational cost improvements had not yet been fully implemented by the Company.
General and Administrative
General and administrative expenses decreased $9,322,000 in 1995, as
compared to 1994, and increased $4,532,000 in 1994 as compared to 1993. The
decrease in 1995 is the result of the Company's ability to integrate operating
revenues from acquisitions without a proportionate increase in general and
administrative expenses and cost reductions in connection with the Chambers
Merger. In 1994, general and administrative expenses increased due to business
acquisitions which accounted for an increase of $7,700,000 and by accrued
contributions of $2,300,000 in the fourth quarter of 1994.
General and administrative expenses as percentage of operating revenues
decreased from 17.5% in 1993 to 16.5% in 1994 and to 13.6% in 1995. This
decrease has been as a result of the Company's ability to integrate new
operating revenues without a corresponding increase in general and
administrative costs and cost savings resulting from mergers completed in 1995
(Chambers) and 1994 (Envirofil, Inc.).
Merger Costs
In 1995, the Company incurred approximately $25,100,000 in merger costs in
the second quarter related to the Chambers Merger, which included $11,900,000 of
transaction costs, $9,500,000 of severance and other termination benefits, and
$3,700,000 of costs related to integrating operations. In
26
29
1994, the Company incurred $3,782,000 of merger costs in the second quarter
related to the acquisition of Envirofil, Inc.
Unusual Items
In 1995, the unusual items include $2,800,000 of severance and other
termination benefits paid to former Chambers employees in connection with its
pre-merger reorganization, $1,300,000 of estimated future losses associated with
the renegotiated Bergen County, New Jersey, municipal solid waste contract, and
$600,000 of shareholder litigation settlement costs.
In 1994, unusual items consisted of $8,100,000 for asset impairments and
abandoned projects, including a $7,000,000 charge to reduce the carrying value
of the Chambers medical and special waste incinerator facility, and
restructuring costs of $800,000 relating to severance benefits. Unusual items of
$2,700,000 in 1993 consists of $4,900,000 for asset impairments and abandoned
projects, $2,100,000 for net losses on asset divesture and contractual
commitments, $1,600,000 for special directors and officers insurance premiums,
$900,000 for stock compensation expense, $300,000 for restructuring costs
relating to severance benefits, and a $7,100,000 credit for net gains on asset
divestitures.
Depreciation and Amortization
Depreciation and amortization increased $239,000 in 1995 and $3,917,000 in
1994 as compared to the prior years. In 1995, depreciation and amortization
decreased due to the change in the estimated useful life of excess cost over net
assets of acquired businesses related to certain acquisitions from 25 to 40
years, effective January 1, 1995, which resulted in decreased amortization
expense of approximately $1,488,000 for the year. This change in accounting
policy substantially offset the normal increase in depreciation and amortization
of property and equipment used to generate increased operating revenues. In
1994, the increase is primarily due to new acquisitions.
Depreciation and amortization, however, decreased as a percentage of
operating revenues from 13.7% in 1993 to 12.9% in 1994 and to 12.3% in 1995. The
decrease as a percent of operating revenues in 1995 was due to the change in
life used to amortize the excess of cost over net assets of acquired businesses
from 25 to 40 years and the result of a reduction in the estimates of costs to
be incurred to complete construction of certain landfills. In 1994, the decrease
is due to the impact of increased airspace projections resulting from future
expansions of existing landfill sites.
Income from Operations
Income from operations increased $18,283,000 in 1995 and decreased
$6,457,000 in 1994 as compared to their respective prior years due to the
reasons discussed above. In 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 revenues would be
18.5%, 11.3%, and 12.0% for 1995, 1994, and 1993, respectively. The improvement
in recurring operations in 1995 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, the change in useful life of
excess cost over net assets of acquired businesses, dispositions of less
profitable businesses, and improvements in comparative operations.
Other Income and Expense
Other income and expense consists of shareholder litigation settlement,
interest expense, interest income, and other income. Shareholder litigation
settlement costs were incurred in connection with a settled class action of
consolidated suits or similar claims alleging federal securities violations
against
27
30
Chambers, certain of its officers and directors, its former 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 refinancing the Senior Notes in the second quarter of 1995. Overall,
recurring interest expense, gross of amounts capitalized, decreased slightly
each year due to reductions in the average effective borrowing rate on the
Company's outstanding debt. Capitalized interest for 1995 approximated
$6,120,000 compared to $3,977,000 and $3,450,000 for 1994 and 1993,
respectively, due to increased development activity incurred in connection with
disposal sites. The increase in other income in 1995 is primarily a result of
the sale of real estate in Phoenix, Arizona, during the first quarter of 1995.
Provision for (Benefit from) Income Taxes
The Company recorded an income tax benefit of $11,393,000 in 1995 compared
to an income tax provision of $3,908,000 and $6,018,000 in 1994 and 1993,
respectively. Future taxable income was projected utilizing taxable income of
1995 and annualized earnings from acquisitions consummated during 1995. Based on
this analysis of taxable income, the Company, during the fourth quarter of 1995,
recognized a net deferred tax asset through a $15,600,000 reduction in the
valuation allowance. The deferred tax asset is reflected as a current asset on
the Company's balance sheet at December 31, 1995. If the Company's current trend
of profitability continues, additional net deferred tax assets of up to
approximately $93,600,000 could be recognized in future periods.
Net Income (Loss)
For the reasons discussed above, net income (loss) improved $106,541,000
for the year ended December 31, 1995 as compared to 1994 and decreased
$77,266,000 for the year ended December 31, 1994 as compared to 1993.
VARIATION IN 1995 QUARTERLY NET INCOME (LOSS)
The Company's operating results during 1995 reflect significant quarterly
variations in net income (loss) as reflected below (see Note 15 to the
consolidated financial statements for additional information):
QUARTER
-------------------------------------------------- NET INCOME
(LOSS)
--------------
(IN THOUSANDS)
First............................................. $ 184
Second............................................ (27,839)
Third............................................. 18,902
Fourth............................................ 39,016
The Company consummated the Chambers Merger on June 30, 1995, restating its
first quarter financial results in accordance with pooling of interests
accounting and reflecting combined operations with Chambers for the second
quarter of 1995. Prior to the merger, Chambers was involved in extensive
litigation, had a high level of debt and had been experiencing operating losses.
As a result of these losses, Chambers had generated a tax net operating loss
carryforward in excess of $230,000,000 at the date of the merger. As disclosed
in Note 2 to the consolidated financial statements, Chambers net loss of
approximately $5,269,000 in the first quarter of 1995 had a significant impact
on the restated first quarter results of the combined entities.
The net loss of approximately $27,839,000 reported by the Company in the
second quarter of 1995 principally results from the Chambers Merger costs of
approximately $25,073,000 recognized in the
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quarter and other unusual charges and nonrecurring interest costs relating to
Chambers which were also charged to expense during the quarter. Included in the
second quarter merger costs and unusual charges were $9,500,000 and $2,800,000
of severance and other termination benefits costs, respectively. The annualized
salary and benefits expense eliminated as a result of these terminations is
estimated to be $10,300,000.
Following the Chambers Merger, the Company initiated a comprehensive plan
to improve the operating results of the acquired Chambers businesses. In
addition to the terminations discussed above, this plan included closing the
Chambers corporate headquarters, adding managers with significant industry
experience, aggressively marketing additional volumes to the Chambers landfill
sites, refinancing Chambers indebtedness at lower borrowing costs, combining the
companies' insurance and bonding programs for additional cost savings, and
implementing operational changes and tightening financi