UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-27508
SUPERIOR SERVICES, INC.
(exact name of Registrant as specified in its charter)
Wisconsin 39-1733405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South 84th Street, Suite 200, Milwaukee, Wisconsin 53214
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (414) 479-7800
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 and
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of Common Stock of the registrant, par value
$.01 per share, outstanding on August 4, 1998 was 26,958,577.
<PAGE>
SUPERIOR SERVICES, INC.
FORM 10-Q INDEX
For the Quarter Ended June 30, 1998
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets . . . . . . . . . 3
Condensed Consolidated Statements of Income . . . . . . 4
Condensed Consolidated Statements of
Shareholders' Investment . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows . . . . 6
Notes to Condensed Consolidated Financial Statements . 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 11-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Securities Holders . 18
Item 5. Other Matters . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
Superior Services, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
December 31, June 30,
1997 1998
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $42,684 $12,418
Trade accounts receivable 36,054 44,249
Prepaid expenses and other current assets 5,899 5,737
-------- --------
Total current assets 84,637 62,404
Property and equipment, net 221,346 244,272
Restricted funds held in trust 7,714 8,230
Other assets 4,387 3,874
Intangible assets, net 64,516 79,141
-------- --------
Total assets $382,600 $397,921
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $4,129 $1,623
Trade accounts payable 11,047 13,782
Accrued payroll and related expenses 7,769 4,077
Other accrued expenses 21,191 17,663
-------- --------
Total current liabilities 41,136 37,145
Long-term debt, net of current maturities 7,188 4,021
Disposal site closure and long-term
care obligations 41,281 45,361
Deferred income taxes 18,067 19,100
Other liabilities 13,606 12,439
Commitments and contingencies
Shareholders' investment:
Common stock 263 268
Additional paid-in capital 216,694 223,896
Retained earnings 44,365 55,691
-------- --------
Total shareholders' investment 261,322 279,855
-------- --------
Total liabilities and shareholders' investment $382,600 $397,921
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
(Restated) (Restated)
Revenues $48,807 $62,366 $82,707 $114,119
Expenses:
Cost of operations 26,283 33,244 44,356 61,953
Selling, general and
administrative costs 6,930 7,073 13,102 14,461
Merger costs 1,035 - 1,035 1,493
Depreciation and
amortization expenses 6,189 8,292 11,154 15,766
------- ------- ------- --------
40,437 48,609 69,647 93,673
------- ------- ------- --------
Operating income 8,370 13,757 13,060 20,446
Other income (expense):
Interest expense (513) (273) (845) (684)
Other income (expense) (235) 282 63 675
------- ------- ------- --------
Income before income taxes 7,622 13,766 12,278 20,437
Provision for income taxes 2,977 5,679 4,687 9,155
------- ------- ------- --------
Net income $4,645 $8,087 $7,591 $11,282
======= ======= ======= ========
Earnings per share - basic $0.22 $0.30 $0.36 $0.42
======= ======= ======= ========
Earnings per share - diluted $0.21 $0.30 $0.35 $0.42
======= ======= ======= ========
Pro forma adjustments (note 3):
Net income, as reported $4,645 $8,087 $7,591 $11,282
Adjustment for income taxes (299) - (503) 384
------- ------- ------- --------
Net income, as adjusted $4,346 $8,087 $7,088 $11,666
======= ======= ======= ========
Earnings per share as
adjusted - basic $0.20 $0.30 $0.33 $0.44
======= ======= ======= ========
Earnings per share as
adjusted - diluted $0.20 $0.30 $0.33 $0.43
======= ======= ======= ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Shareholders' Investment
(In Thousands, Except Share Amounts)
(Unaudited)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
Balance at
December 31, 1997,
as previously
reported 24,071,932 $241 $216,309 $42,859 $259,409
Shares issued for
pooling of interests 2,197,345 22 385 1,506 1,913
---------- ---- -------- ------- --------
Balance at
December 31, 1997,
as restated 26,269,277 263 216,694 44,365 261,322
Net income - - - 11,282 11,282
Issuance of
common stock:
Exercise of
stock options 196,007 2 1,521 - 1,523
Acquisitions 364,917 3 6,088 339 6,430
Subchapter S
distributions
to former
shareholders - - (407) (295) (702)
---------- ---- -------- ------- --------
Balance at
June 30, 1998 26,830,201 $268 $223,896 $55,691 $279,855
========== ==== ======== ======= ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the six months ended June 30,
1997 1998
(Restated)
OPERATING ACTIVITIES
Net income $7,591 $11,282
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 11,154 15,766
Deferred income taxes (280) 1,033
Gain on sale of assets (21) (94)
Changes in operating assets and liabilities,
net of effects of acquired businesses:
Accounts receivable (4,762) (7,351)
Prepaid expenses and other current assets (1,410) (391)
Accounts payable and accrued expenses 3,247 (3,126)
Disposal site closure and long-term
care obligation 1,966 1,697
Other (705) 502
------- -------
Net cash provided by operating activities 16,780 19,318
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (75,766) (26,066)
Purchases of property and equipment (13,399) (18,213)
Proceeds from sale of property and equipment 708 391
Increase in restricted funds held in trust (126) (516)
------- -------
Net cash used in investing activities (88,583) (44,404)
FINANCING ACTIVITIES
Proceeds from long-term debt 60,165 15
Payments of long-term debt (4,530) (6,016)
Issuance of common stock 5,032 1,523
Subchapter S distributions to former
shareholders (616) (702)
------- -------
Net cash provided by (used in)
financing activities 60,051 (5,180)
------- -------
Net decrease in cash and cash equivalents (11,752) (30,266)
Cash and cash equivalents at beginning of period 18,992 42,684
------- -------
Cash and cash equivalents at end of period $7,240 $12,418
======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Superior Services, Inc. ("Superior" or the "Company") is an integrated
solid waste services company providing a range of collection, transfer,
transportation, disposal and recycling services to generators of solid
waste and special waste. The condensed consolidated financial statements
included herein have been prepared by the Company without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). As applicable under such regulations, certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. The Company believes that the presentations
and disclosures in the financial statements included herein are adequate
to make the information not misleading. The financial statements reflect
all elimination entries and normal adjustments that are necessary for a
fair statement of the results for the interim periods presented. The
Company has also restated its previously issued financial statements for
the three and six months ended June 30, 1997 and its consolidated balance
sheet as of December 31, 1997 to reflect the acquisition of Alabama Waste
Systems, Inc. and Acmar Regional Landfill, Inc. (collectively "AWS")
completed on March 31, 1998 and accounted for using the pooling of
interests method. Prior to the merger, AWS had elected S Corporation
status for income tax purposes. As a result of the merger, AWS terminated
its S Corporation election. Pro forma provisions for income taxes are
presented for the six months ended June 30, 1997 and have been computed as
if AWS had been a C Corporation during the periods presented.
Operating results for interim periods are not necessarily indicative of
the results for full years or other interim periods. It is suggested that
the condensed consolidated financial statements included herein be read in
conjunction with the consolidated financial statements of Superior for the
year ended December 31, 1997 and the related notes thereto (the "Financial
Statements") included in the Company's Form 10-K for the year ended
December 31, 1997.
The accompanying condensed consolidated financial statements include the
accounts of Superior and its subsidiaries. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications
have been made to the 1997 financial statements to conform to the 1998
presentation.
2. Significant Accounting Policies and Use of Estimates
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of
these policies, see Note 2 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 1997.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders'
investment. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments to be included in other comprehensive income. The Company has
no such transactions that would be accounted for as part of comprehensive
income.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective January 1, 1998. SFAS No.
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operation segments in interim financial reports. Adoption of SFAS No. 131
has had no effect on the Company's reported segments.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
In the first six months of 1998, the Company acquired 13 solid waste
businesses that were accounted for as purchases. Aggregate consideration
for these acquisitions was approximately $24.9 million in cash and 147,145
shares of Common Stock issued under the Company's Form S-4 Acquisition
Shelf Registration Statement. These acquisitions have been accounted for
as purchases and, accordingly, the results of their operations have been
included in the Company's financial statements from their respective dates
of acquisition.
During the first six months of 1998, 67,772 shares were issued and $1.4
million of cash was paid in settlement of final valuation computations on
certain acquisitions that occurred in 1997
The Company completed its mergers with TWR, Inc. ("TWR") and AWS on
March 1, 1998 and March 31, 1998, respectively. The TWR and AWS mergers
were accounted for as pooling of interests pursuant to which the Company
issued 150,000 and 2,197,345 shares of Common Stock, respectively, under
the Company's Form S-4 Acquisition Shelf Registration Statement. The
Company incurred nonrecurring merger costs of approximately $1.5 million
during the first quarter of 1998 as a result of the mergers with TWR and
AWS. The merger costs incurred in connection with the mergers with TWR and
AWS were $1,236,000 net of tax. The merger costs included severance and
bonuses, professional fees, and other merger related costs. As of
June 30, 1998, $985,000 had been accrued for merger costs expected to be
paid by the end of 1998. Included in the provision for income taxes for
the six months ended June 30, 1998 is $771,000 related to the cumulative
deferred tax provision associated with the AWS conversion from an S
Corporation to a Corporation in connection with their merger with the
Company. Periods prior to 1998 have not been restated to include the
accounts and operations of TWR as combined results are not materially
different from the results as previously presented. Combined and separate
results of operation of the Company prior to completion of the merger with
AWS for the restated six months ended June 30, 1997 are as follows (in
thousands, except per share amounts):
Superior AWS/Acmar Combined
Six months ended June 30, 1997
(unaudited):
Revenue $75,974 $6,733 $82,707
Income before income taxes 11,021 1,257 12,278
Net income 6,334 1,257 7,591
Earnings per share - basic $0.33 $0.36
Earnings per share - diluted $0.33 $0.35
The unaudited pro forma results of operations below assume that 1997 and
1998 acquisitions accounted for as purchases occurred at the beginning of
1997. In addition to combining the historical results of all such
acquired entities, the pro forma calculations include adjustments for
amortization of various intangibles acquired in conjunction with the
acquisitions. However, no adjustments have been reflected for
nonrecurring expenses as a result of the acquisition of the entities.
Six Months Ended June 30,
1997 1998
(Unaudited and in thousands, except per share amounts)
Total net revenue $113,849 $118,211
Net income $8,660 $11,429
Earnings per share - basic $0.40 $0.43
Earnings per share - diluted $0.40 $0.42
The pro forma financial information does not purport to be indicative of
the result, which would actually have been recognized had the purchase
transactions been completed on January 1, 1997 or which may be realized in
the future.
4. Shareholders' Investment
On February 24, 1998, the Company granted employee incentive stock
options exercisable for 358,774 shares of Common Stock at an exercise
price of either $25.875 or $28.457 per share (fair market value on grant
date was $25.875).
On May 12, 1998, the Company granted non-qualified common stock options
for 10,000 shares at an exercise price of $31.625 per share to independent
directors serving on the Company's Board of Directors. These options vest
ratably over an approximate three-year period.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share amounts).
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
Numerator
Income from continuing operations
used in computing basic and
diluted earnings per share $4,645 $8,087 $7,591 $11,282
====== ====== ====== =======
Denominator
Denominator for basic earnings
per share - weighted average
common shares 21,393,769 26,775,340 21,277,307 26,628,693
Effect of dilutive securities
employee stock options 328,691 487,738 347,120 471,978
------- ------- ------- -------
Denominator for diluted warnings
per share - adjusted weighted
average common shares 21,722,460 27,263,078 21,624,427 27,100,671
========== ========== ========== ==========
6. Commitments and Contingencies
In connection with an acquisition in March 1993, the Company was
required to accept the transfer of an adjacent closed landfill that is
listed on the National Priorities List ("NPL"). A remedial investigation
performed by the PRPs (including the Company) has determined the scope and
nature of the contamination at the site and the PRPs have submitted a
feasibility study to the EPA and WDNR, which describes the alternatives
for remediating the associated groundwater contamination. The WDNR has
formally approved the remedial alternative recommended by the PRPs which
calls for the installation of two to four additional gas extraction wells
(which would be connected to the existing gas extraction system at the
site) and continued groundwater monitoring. As of June 30, 1998, the
estimated one-time capital cost for the additional extractions wells was
$107,000. Annual operating, maintenance and monitoring costs for the new
extraction wells, the landfill cap, the existing gas extraction system and
groundwater monitoring system are estimated as $90,000. The operating
duration of the proposed remediation is uncertain, but could be 30 years
or longer. As the duration is uncertain, the accrual was not measured on
a discounted basis. The Company has entered into a settlement agreement
with certain generator PRPs that allocates the costs of the remediation.
Under the settlement agreement, certain of the generator PRPs agreed to
contribute to a total of approximately 42% of future costs for remedial
action and the annual operating, maintenance, and monitoring costs related
to the site. The seller and former owner of the closed landfill agreed to
indemnify the Company up to $2.8 million for any site liabilities,
including the annual costs of operating, maintaining and monitoring the
closed landfill and any costs the Company may incur as a PRP. The Company
has been paid $482,755 by the seller. The seller's remaining potential
indemnification obligation was collateralized as of June 30, 1998, by
$2,317,245 in cash held in escrow. The $2,317,245 recoverable from the
seller is included on the Company's balance sheet as part of "other
assets." On August 15, 1997, an engineer selected by the seller
determined that the reasonable present value of the cost of a likely
remediation plan for the closed landfill approximates $688,000. The
Company and seller are in dispute regarding the cost of a likely remedial
action plan. The seller has demanded arbitration and has filed a
declaratory judgment action in state circuit court. The state court
entered judgment on March 23, 1998 finding that the engineer's estimate is
final and binding on the parties. On April 30, 1998 the Company filed its
notice of appeal of the lower court judgment in state appellate court. If
the seller's position is accepted or upheld in the pending proceedings,
the Company may be required to return to the seller substantially all or a
substantial portion of the current amount held in escrow. This would
result in a reduction of its "other asset" and the related liability
account on its balance sheet, but would have no income statement effect.
Although the engineer's estimate of such potential costs was substantially
less than the Company's current estimate, the Company believes its
existing financial reserves, together with the amounts paid and remaining
payable by the seller and the contribution obligations of the generator
PRPs, are adequate to cover the currently anticipated remediation costs of
such landfill. As is the case with all sites on the NPL, the performance
of the selected remedy at the closed landfill will be subject to periodic
review by the WDNR and the EPA. In the event the selected remedy does not
perform adequately to meet applicable state and federal standards,
additional remedial measures beyond those currently anticipated could be
required by the WDNR or EPA. Implementation of any such additional
remedial measures may involve substantial additional costs beyond those
currently anticipated.
In connection with the formation of the Company in 1993 through the
consolidation of three groups of independent waste services companies,
certain potential environmental liabilities associated with the previously
filled portion of the Superior Valley Meadows landfill were identified.
At the time of the consolidation of these companies into the Company, a
contingent liability escrow was established to cover the then estimated
costs of remediation and monitoring with respect to the contingent
liabilities. To indemnify the Company against up to $1,308,000 of these
contingent liabilities, 130,800 shares of the Company's common stock
otherwise issuable as part of the consolidation to the individual who was
the principal shareholder of the prior owner of the site and who is now a
director, executive officer and significant shareholder of the Company,
were withheld from issuance. In order to preserve the Company's rights
under this indemnification arrangement prior to the February 24, 1997
expiration date for advancing such types of indemnification claims, the
Company formally notified the individual of the Company's claim against
the withheld shares for the entire amount of the originally established
liability escrow. The Company believes that the entire amount of such
environment liabilities will either be covered by the foregoing
indemnification arrangement or otherwise is not expected to have a
material adverse effect on the Company's results of operations or
financial condition.
In connection with the AWS merger on March 31, 1998, a landfill was
acquired which was subject to legal proceedings brought by the local
municipality. In October 1996, the municipality filed an administrative
appeal challenging the State of Alabama Department of Environmental
Management's (DEM) decision to issue a landfill permit modification. An
administrative commission appointed a judge to act as a hearing officer to
oversee the permit appeal. Based upon the hearing officer's
recommendation, the administrative commission in June 1997 unanimously
adopted the recommendation of the hearing officer that the landfill permit
modification was properly issued. Subsequently, the municipality filed an
appeal of this administrative decision in state circuit court. While the
Company believes it will be successful in defending the appeal of this
decision, there can be no assurance that this appeal will not be
determined adversely to the Company. Any such adverse decision, if
ultimately upheld, could impact the ability of such landfill to accept any
or certain volumes of waste and, in turn, could adversely effect the
Company's results of operations. Separately, the municipality in August
1996 filed in Federal district court a citizen's suit against the landfill
brought under provisions of the Clean Water Act and the Resource
Conservation and Recovery Act. The Company does not believe there is a
basis for a claim supporting the citizen's suit. In addition to the
Federal claims, the municipality has alleged certain state law claims
that, among other things, the prior owners of the landfill misrepresented
the geology and hydrogeology of an expansion portion of the landfill,
allegedly inducing the municipality to grant local approval for the
expansion of the landfill. This local approval is a prerequisite for
issuance of the DEM solid waste permit. Prior to the acquisition of this
landfill, the prior owners were engaged in settlement negotiations with
the municipality regarding these proceedings. Since the acquisition, the
Company has met with municipal officials and presented settlement offers
that the municipality currently has under consideration. The Company
believes that the ultimate resolution of the citizen's suit and the
municipality's state law claims will not have a material adverse effect on
the Company's financial condition or results of operations.
The Company carries a range of insurance, including a commercial general
liability policy and a property damage policy. The Company maintains a
limited environmental impairment liability policy on its landfills and
transfer stations that provides coverage, on a "claims made" basis,
against certain third party off-site environmental damage. There can be
no assurance that the limited environmental impairment policy will remain
in place or provide sufficient coverage for existing, but not yet known,
third party, off-site environmental liabilities. The Company is also a
party to various legal proceedings arising in the normal course of
business. The Company believes that the ultimate resolution of these
other matters will not have a material adverse effect on the Company's
financial condition or result of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis
are "forward-looking statements" intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform Act
of 1995. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the
Company "believes," anticipates, "expects" or words of similar import.
Similarly, statements that describe the Company's future plans,
objectives, strategies or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties
which are described in close proximity to such statements and are also set
forth in the Company's Form S-4 Registration Statement dated March 30,
1998, as amended (No. 333-48887) under the caption "Risk Factors", and
which could cause actual results to differ materially from those currently
anticipated. Shareholders, potential investors and other readers are
urged to consider these factors carefully in evaluating the forward-
looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein
are only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
General
The Company provides solid waste collection, transfer, transportation,
recycling and disposal services to over 570,000 residential, commercial
and industrial customers in Alabama, Florida, Illinois, Iowa, Michigan,
Minnesota, Missouri, Ohio, Pennsylvania, West Virginia, and Wisconsin.
The Company also provides other integrated waste services, most of which
are project-based and many of which provide additional waste volumes to
the Company's landfills and recycling facilities. As of June 30, 1998,
solid waste operations consisted of 17 Company-owned solid waste
landfills, four managed third party landfills, 41 solid waste collection
operations, 15 recycling facilities and 13 solid waste transfer stations.
As described more fully below, revenues for the periods presented were
comprised of fees received for the following services:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
Collection 54% 58% 55% 59%
Third party disposal 20% 17% 20% 17%
Recycling 10% 9% 11% 9%
Other integrated waste services 16% 16% 14% 15%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
The Company's strategy for future growth anticipates the recognition of
significant revenue from acquiring additional solid waste collection and
disposal operations as well as continued internal growth. The Company
acquired or merged with businesses with estimated annualized revenues of
almost $37 million in the first six months of 1998. The percentage of
revenue obtained from collection services increased to 59% in the first
six months of 1998 compared to 55% in the first six months of 1997 due to
a greater portion of revenue being generated from collection operations.
As it continues to acquire additional solid waste collection and disposal
operations, the Company believes that its revenue mix will continue to
shift away from recycling and other integrated waste services and more
towards solid waste collection and disposal.
All financial data for the three- and six-month periods ended June 30,
1997 and 1998 have been restated and give retroactive effect to reflect
the Company's March 31, 1998 acquisition of AWS in a transaction accounted
for as a pooling of interests.
Prior to the AWS merger, AWS had elected "S" Corporation status for
federal income tax purposes. As a result of the merger, AWS's "S"
Corporation status was terminated. Accordingly, certain pro forma
information is presented in the Company's Consolidated Statements of
Income as if AWS had been a taxable entity during the periods presented.
Results of Operations
The information presented below reflects the pro forma net income
exclusive of merger costs incurred in connection with the mergers with TWR
and AWS, which were accounted for as poolings of interest. Pro forma net
income includes federal and state income tax provisions for 1997 and 1998
as if AWS had been a taxable entity, and excludes the cumulative deferred
tax provision for AWS which were Subchapter S Corporations prior to the
merger.
Summary Financial Data
(in thousands, except per share data)
Three Months Ended June 30,
1997 Per Per
(restated) Share 1998 Share
Revenue $48,807 - $62,366 -
Net Income, as reported $4,645 $0.21 $8,087 $0.30
Pro forma adjustments:
Adjustment for income taxes 299 0.01 - -
----- ----- ------ -----
Pro forma net income 4,346 0.20 - -
Merger costs, net of tax 762 0.04 - -
----- ----- ------ -----
Pro forma net income, exclusive
of merger costs and cumulative
deferred tax provisions $5,108 $0.24 $8,087 $0.30
====== ===== ====== =====
Summary Financial Data
(in thousands, except per share data)
Six Months Ended June 30,
1997 Per Per
(restated) Share 1998 Share
Revenue $82,707 - $114,119 -
Net Income, as reported $7,591 $0.35 $11,282 $0.42
Pro forma adjustments:
Adjustment for income taxes 503 0.02 384 0.01
----- ----- ------- -----
Pro forma net income 7,088 0.33 11,666 0.43
Merger costs, net of tax 762 0.03 1,236 0.05
----- ----- ------- -----
Pro forma net income, exclusive
of merger costs and cumulative
deferred tax provisions $7,850 $0.36 $12,902 $0.48
====== ===== ======= =====
Overview
Revenues in the 1998 second quarter of $62.4 million increased 27.8%
over the comparable period in the prior year primarily due to businesses
acquired which were accounted for under the purchase method of accounting.
Net income increased 74.1% to $8.1 million in the 1998 second quarter,
from $4.6 million in the same period of 1997. Earnings per share increased
42.9% to $0.30 per share from $0.21 per share for the second quarter of
1997. The weighted average of common and common equivalent shares
outstanding was 27.3 million for the second quarter of 1998 and 21.7
million for the second quarter of 1997.
For the first six months of 1998, revenues increased 38.0% to $114.1
million compared to $82.7 million for the same period in the prior year,
primarily due to businesses acquired which were accounted for under the
purchase method of accounting. Net income, excluding one-time merger costs
and a cumulative deferred tax provision incurred in connection with the
acquisitions of AWS and TWR, increased 64.4% to $12.9 million in the first
half of 1998 from $7.9 million in the first half of 1997. Earnings per
share increased to $0.48 for the first six months of 1998 from $0.36 per
share for the same period in 1997. The weighted average of common and
common equivalent shares outstanding was 27.1 million for the first six
months of 1998 and 21.6 million for the first six months of 1997.
The following table sets forth for the periods indicated the percentage
of revenues represented by the individual line items reflected in the
Company's condensed consolidated statements of operations:
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Operations 53.9 53.3 53.6 54.3
Selling, general and
administrative expenses 14.2 11.3 15.8 12.7
Merger costs 2.1 - 1.3 1.3
Depreciation and amortization 12.7 13.3 13.5 13.8
---- ---- ---- ----
Operating income 17.1 22.1 15.8 17.9
Interest expense 1.1 0.4 1.0 0.6
Other (income) expense 0.4 (0.4) (0.1) (0.6)
---- ---- ---- ----
Income before income taxes 15.6 22.1 14.9 17.9
Income taxes 6.1 9.1 5.7 8.0
---- ---- ---- ----
Net income 9.5% 13.0% 9.2% 9.9%
==== ==== ==== ====
Revenues
Revenues increased $13.6 million, or 27.8%, and $31.4 million, or 38.0%,
for the three- and six-month periods, respectively, ended June 30, 1998
compared with the same periods in 1997. These increases for each 1998
period were primarily due to the impact of operations acquired which were
accounted for under the purchase method of accounting. Revenues for each
1998 period compared to the same periods in 1997 increased $11.7 million
and $27.1 million, respectively, from the impact of operations acquired
and accounted for under the purchase method. The increase in revenue was
also due, to a much lesser extent, to increases in volumes of wastes
collected and disposed at the Company's landfills. Daily disposal volume
at the Company's landfills rose to an average of more than 14,450 tons per
day in the 1998 second quarter compared to an average of 9,900 tons per
day in the corresponding period last year. The higher landfill volume was
predominantly the result of waste received at six new disposal sites
acquired since June 30, 1997 as the Company continues to aggressively
pursue acquisition opportunities, as well as increased volumes of special
waste streams.
The resale prices of, and demand for, recyclable waste products,
particularly wastepaper, can be volatile and subject to changing market
conditions. However, the impact of prices for recyclable wastepaper had
essentially no effect on revenues in the 1998 second quarter compared to
the 1997 second quarter as the average price received by the Company for
its recyclable waste products remains basically unchanged. The Company's
recycling operations continued to be profitable in the 1998 second quarter
due to the Company's floor-pricing arrangement with a national paper
company coupled with the cost effectiveness of the Company's processing
facilities and fees received for providing recyclable waste collection
services to its customers.
Cost of Operations
Cost of operations increased $7.0 million, or 26.5%, and $17.6 million,
or 39.7%, for the three- and six-month periods ended June 30, 1998,
respectively, compared to the same periods in 1997. As a percentage of
revenues, cost of operations decreased from 53.9% in the second quarter of
1997 to 53.3% in the second quarter of 1998, and increased from 53.6% in
the first six months of 1997 to 54.3% in the first six months of 1998.
The decrease in the percentage in the second quarter of 1998 compared to
the corresponding quarter in 1997 was primarily due to cost savings at
landfills owned and operated in both periods. The increase in the first
six months of 1998 compared to 1997 was due to the higher relative
percentage of non-integrated collection business resulting in a lower
overall percentage of waste collected by the Company which is disposed of
at its own facilities and due to the higher relative percentage of
business from collection operations and other integrated waste services
(which have higher costs of operations than disposal operations). The
Company currently internalizes 68% of the waste it collects to its own
disposal sites compared to 72% during the first six months of 1997. The
Company's goal is to maintain or increase its internalization rate through
focusing on full vertical integration of our solid waste business in all
of our service areas. Changes in this trend are dependent on the timing
and mix of potential future business acquisitions, as well as the
seasonality of the Company's operations. See "Seasonality." The increase
in the dollar amount of cost of operations was primarily attributable to
the costs of collecting and disposing of the increased volumes of wastes
received from services provided to new customers, including the operation
of new businesses acquired.
Selling, General and Administrative Expense ("SG&A")
SG&A increased $143,000, or 2.1%, and $1.4 million, or 10.4%, for the
three- and six-month periods ended June 30, 1998, respectively, compared
to the same periods in 1997. As a percentage of revenues, SG&A decreased
to 11.3% in the second quarter of 1998 compared to 14.2% the second
quarter of 1997, and to 12.7% in the first six months of 1998 compared to
15.8% in the first six months of 1997. The reduction in actual dollars of
SG&A in the second quarter of 1998 compared to the first quarter of 1998
is primarily attributed to reductions which were quickly implemented at
merged companies in Alabama. The trend of reducing SG&A as a percentage
of revenue is expected to continue in the near term due primarily to the
impact of spreading corporate SG&A costs over a larger revenue base as the
Company integrates acquisitions and continues to pursue its acquisition
growth strategy. While SG&A decreased as a percentage of revenues, the
actual dollar amount of SG&A increased primarily due to increased costs
for personnel necessary to support the Company's acquisition program and
to service new customers, including those associated with the operations
acquired.
Merger Costs
The Company incurred nonrecurring merger costs of approximately $1.5
million during the first six months of 1998 compared to $1.0 million in
the first six months of 1997, as a result of the mergers completed with
TWR and AWS March 1, 1998 and March 31, 1998, respectively. The one-time
merger costs included severance and bonuses, professional fees, and other
related merger costs. As of June 30, 1998, $985,000 had been accrued for
merger related costs expected to be paid by the end of 1998.
Depreciation and Amortization
Depreciation and amortization increased $2.1 million, or 34.0%, and $4.6
million, or 41.3%, for the three- and six-month periods ended June 30,
1998, respectively, compared to the same periods in 1997, due to increased
depreciation costs for the additional assets and operations acquired. As
a percentage of revenues, depreciation and amortization increased to 13.3%
in the second quarter of 1998 compared to 12.7% in the second quarter of
1997, and to 13.8% in the first six months of 1998 compared to 13.5% in
the first six months of 1997, due to the lower relative percentage of
revenues received from disposal operations (which typically have higher
depreciation and amortization costs as a percentage of revenue compared to
collection operations.)
Interest Expense
Interest expense decreased $240,000, or 46.8%, and $161,000, or 19.1%,
for the three- and six-month periods ended June 30, 1998, respectively,
compared to the same periods in 1997, primarily due to reduced interest
expense at operating locations acquired through acquisitions accounted for
as poolings of interest. No interest was capitalized during 1998.
Interest of $457,000 was capitalized during the first half of 1997
related to land being developed.
Other Income (Expense)
Other income (expense) increased $517,000 from other expense of $235,000
in the three-month period ended June 30, 1997, to income of $282,000 in
the three-month period ended June 30, 1998. Other income increased
$612,000 from other income of $63,000 in the six-month period ended June
30, 1997 to $675,000 in the six-month period ended June 30, 1998.
Interest income increased $343,000 from $371,000 in the six-month period
ended June 30, 1997 to $714,000 in the six-month period ended June 30,
1998. Also, approximately $500,000 of direct costs associated with
acquisition activity primarily related to one unsuccessful acquisition bid
for a significant company being liquidated in a bankruptcy auction process
were charged against earnings in the second quarter of 1997.
Income Tax Expense
The Company's effective tax rate increased from 39.1% for the three
months ended June 30, 1997 to 41.3% for the three-month period ended
June 30, 1998, and from 38.2% for the six months ended June 30, 1997 to
44.8 % for the six months ended June 30, 1998. The increase is due to the
$771,000 cumulative deferred tax provision recognized in 1998 associated
with the AWS conversion from a subchapter S Corporation to a taxable
entity. As a Subchapter S Corporation prior to the merger, payments of
AWS' income taxes were the responsibility of its former stockholders.
Liquidity and Capital Resources
The Company's balance sheet at June 30, 1998 reflected approximately
$12.4 million in cash and cash equivalents compared to $42.7 million at
December 31, 1997. The decrease in cash and cash equivalents was
primarily due to the use of cash to acquire solid waste companies during
the first six months of 1998. Pending specific application, the Company
has invested its excess cash in short-term interest bearing securities.
The Company has entered into a definitive agreement pursuant to which
the Company will acquire GeoWaste Incorporated in a stock for stock
transaction. If the definitive purchase agreement were completed on the
terms set forth in such agreement, the Company would be required to issue
approximately 2,033,000 shares of common stock and to assume approximately
$9.6 million in indebtedness. There can be no assurance such acquisitions
will be completed or, if completed, will be completed on the same terms as
set forth in such purchase agreements.
At June 30, 1998, the Company had no outstanding borrowings, and
approximately $2.4 million in letters of credit outstanding, under its
$110 million revolving credit facility. Substantially all of the $110
million facility was available at June 30, 1998. Outstanding long-term
indebtedness at June 30, 1998 consisted primarily of equipment loan
facilities. At June 30, 1998, the ratio of the Company's long-term debt
to total capitalization ratio was 1.4% compared to 2.7% at December 31,
1997. This reduction was attributable to net cash flow from operations
applied to reduce outstanding indebtedness.
The Company's principal strategy for future growth is through the
acquisition of additional solid waste disposal, transfer and collection
operations. Although there can be no assurance that the Company will be
able to complete successfully any such acquisitions, the Company intends
to fund any such future acquisitions in 1998 through the use of cash,
capital stock, assumption of indebtedness, future royalties, and/or
contingent payments. The cash required to fund any future acquisitions
will likely be provided from one or more of the following sources:
existing cash balances, cash flow from operations and/or borrowings under
the Company's revolving credit facility. The Company is currently
negotiating an increase in the size of its revolving credit facility.
Capital expenditures for the six months ended June 30, 1998 were $18.2
million compared to $13.4 million for the six months ended June 30, 1997
primarily due increased spending for landfill expansions. Capital
expenditures for 1998 are currently expected to be approximately $44
million (including $18.2 million expended through June 30, 1998) compared
to $30.5 million in 1997. These amounts have been and will continue to be
primarily allocated to continued spending for landfill expansions. The
Company intends to fund future capital expenditures principally through
internally generated funds and, to a lesser extent, equipment lease
financing. In addition, as described above, the Company also anticipates
that it may require substantial additional capital expenditures to
facilitate its growth strategy of acquiring additional solid waste
collection and disposal businesses. If the Company is successful in
acquiring additional solid waste collection and disposal facilities, the
Company may also be required to make significant expenditures to bring any
such newly acquired disposal facilities into compliance with applicable
regulatory requirements, obtain permits for any such newly acquired
disposal facilities or expand the available disposal capacity at any such
newly acquired disposal facilities. The amount of these expenditures
cannot be currently determined, since they will depend on the nature and
extent of any acquired landfill disposal facilities, the condition of any
facilities acquired and the permitting status of any acquired sites. In
the past, the Company has been able to obtain other types of financing
arrangements, such as equipment lease financing, to fund its various
capital requirements. The Company believes it can readily access such
additional sources of financing as necessary to facilitate the Company's
growth.
Net cash provided by operations for the six months ended June 30, 1998
increased to $19.3 million from $16.8 million in the six months ended
June 30, 1997. The increase was primarily due to an increase in
depreciation and amortization, a noncash expense, of $4.6 million, the
increase in net income of $3.7 million, and the increase in deferred
income taxes of $1.3 million between the first six months of 1997 and the
first six months of 1998. These increased cash amounts were offset by the
decrease in accounts payable and accrued expenses of $6.4 million and the
increase in accounts receivable of $2.6 million between the first six
months of 1997 and the first six months of 1998.
Net cash used in investing activities for the six months ended June 30,
1998 decreased to $44.4 million from $88.6 million in the six months ended
June 30, 1997. The decrease was primarily due to the Company's $26.1
million of net cash payments for operations in the six months ended June
30, 1998 compared to the $75.8 million of net cash payments in the six
months ended June 30, 1997.
Net cash used in financing activities in the six months ended June 30,
1998 totaled $5.2 million, compared to $60.1 million of cash provided in
the six months ended June 30, 1997 reflecting proceeds from borrowings
under the Company's $110 million revolving credit facility in the second
quarter of 1997 as well as proceeds from the exercise of employee stock
options.
Seasonality
The Company's historical results of operations have tended to vary
seasonally, with the first quarter of the year typically generating the
least amount of revenues, and with revenues higher in the second and third
quarters, followed by a decline in the fourth quarter. This seasonality
reflects the lower volume of waste, as well as decreased revenues from
project-based and other integrated waste services during the fall and
winter months, as well as the operating difficulties experienced during
the protracted periods of cold and inclement weather typically experienced
during the winter in the Upper Midwest. Also, certain operating and other
fixed costs remain relatively constant throughout the calendar year,
resulting in a similar seasonality of operating income.
Year 2000 Initiative
The Company has determined that it will need to modify or replace
portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company
also has initiated discussions with its significant suppliers and
financial institutions to ensure that those parties have appropriate plans
to remediate Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. The Company is
assessing the extent to which its operations are vulnerable should those
organizations fail to properly remediate their computer systems.
A team of internal staff is managing the Company's comprehensive Year
2000 initiative. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers and financial institutions are
fully supported. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no guarantee that
the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a
material effect on the Company. The Company currently estimates that it
will cost approximately $250,000 and that it will take approximately 18
months for the Company to fully execute its Year 2000 initiative.
PART II
Item 1. Legal Proceedings
See Note 6 to Condensed Consolidated Financial Statements included in
this Form 10-Q for information regarding certain legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 annual meeting of shareholders was held on Tuesday,
May 12, 1998. At the meeting, the shareholders elected each of G.William
Dietrich, Francis J. Podvin, and Donald Taylor to the Company's Board of
Directors for three-year terms expiring at the Company's 2001 annual
meeting of shareholders and until their successors are duly qualified and
elected. The terms of all other then serving directors continued after
the meeting, including Joseph P. Tate, Gary G. Edler, Warner C. Frazier
and Walter G. Winding. As of the April 2, 1998 record date for the annual
meeting, 26,715,100 shares of Common Stock were outstanding and eligible
to vote. Of the 23,496,436 shares of Common Stock voted at the meeting in
person or by proxy, the following votes were recorded for each nominee:
For Withheld
Name Votes Percentage Votes Percentage
G. William Dietrich 23,250,151 98.9% 246,285 1.1%
Francis J. Podvin 23,317,441 99.2% 178,995 0.8%
Donald Taylor 23,358,856 99.4% 137,580 0.6%
The tabulation of votes for the election of directors resulted in no
broker non-votes or abstentions.
At the meeting, the Company's shareholders also voted to amend the
Company's 1996 Equity Incentive Plan. Of the 23,496,436 shares of common
stock voted at the meeting in person or by proxy, the following votes were
recorded:
For Withheld Votes
Votes Percentage Votes Percentage
17,716,583 75.4% 1,710,871 7.3%
Against Abstain
Votes Percentage Votes Percentage
4,034,677 17.2% 34,305 0.1%
Item 5. Other Matters
Effective July 13, 1998, Gary G. Edler resigned as a member of the
Company's Board of Directors due to personal considerations.
The deadline for submission of shareholder proposals pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended
("Rule 14a-8"), for inclusion in the Company's proxy statement and proxy
card for its 1999 annual meeting of shareholders is December 5, 1998. For
director nominations or other business to be properly brought before the
Company's 1999 annual meeting of shareholders by a shareholder, the
shareholder must give written notice of such proposed nominee or business
complying with the Company's By-laws to the Secretary of the Company no
earlier than February 11, 1999, and no later than March 13, 1999. After
March 13, 1999, notice to the Company of a shareholder proposal submitted
otherwise than pursuant to Rule 14a-8 will be considered untimely, and the
persons named in proxies solicited by the Board of Directors of the
Company for its 1999 annual meeting of shareholders may exercise
discretionary voting power with respect to any such proposal as to which
the Company does not receive timely notice.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits filed with this Form 10-Q report are incorporated herein
by reference to the Exhibit Index accompanying this report.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Services, Inc.
(Registrant)
Date August 14, 1998 /s/ George K. Farr
George K. Farr
Chief Financial Officer
<PAGE>
SUPERIOR SERVICES, INC.
EXHIBIT INDEX
Exhibit Number Exhibit Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUPERIOR SERVICES, INC.
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,418
<SECURITIES> 0
<RECEIVABLES> 46,262
<ALLOWANCES> (2,013)
<INVENTORY> 1,458
<CURRENT-ASSETS> 62,404
<PP&E> 340,072
<DEPRECIATION> (95,800)
<TOTAL-ASSETS> 397,921
<CURRENT-LIABILITIES> 37,145
<BONDS> 4,021
0
0
<COMMON> 268
<OTHER-SE> 279,587
<TOTAL-LIABILITY-AND-EQUITY> 397,921
<SALES> 0
<TOTAL-REVENUES> 114,119
<CGS> 0
<TOTAL-COSTS> 77,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> 684
<INCOME-PRETAX> 20,437
<INCOME-TAX> 9,155
<INCOME-CONTINUING> 11,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,282
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
