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 March 31, 1999
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 May 7, 1999 was 32,355,961.
<PAGE>
SUPERIOR SERVICES, INC.
FORM 10-Q INDEX
For the Quarter Ended March 31, 1999
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.....................3
Condensed Consolidated Income Statements..................4
Condensed Consolidated Statements of Shareholders'
Investment................................................5
Condensed Consolidated Statements of Cash Flows...........6
Notes to Condensed Consolidated Financial Statements...7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................12-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................20
Item 6. Exhibits and Reports on Form 8-K............................20
SIGNATURES....................................................................21
EXHIBIT INDEX.................................................................22
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Superior Services, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,715 $ 8,464
Trade accounts receivable 58,122 57,602
Prepaid expenses and other current assets 5,607 10,853
------------ ------------
Total current assets 73,444 76,919
Property and equipment, net 312,497 325,438
Restricted funds held in trust 1,149 1,228
Other assets 5,529 7,364
Intangible assets, net 134,223 161,531
------------ ------------
Total assets $ 526,842 $ 572,480
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities:
Current maturities of long-term debt $ 5,194 $ 3,355
Trade accounts payable 18,069 16,725
Accrued payroll and related expenses 4,584 4,494
Other accrued expenses 31,838 29,634
------------ ------------
Total current liabilities 59,685 54,208
Long-term debt, net of current maturities 66,284 108,085
Disposal site closure and long-term care obligations 48,289 49,572
Deferred income taxes 23,865 24,008
Other liabilities 11,977 12,817
Commitments and contingencies
Common stock 322 324
Additional paid-in capital 249,023 249,027
Retained earnings 67,397 74,439
------------ ------------
Total shareholders' investment 316,742 323,790
------------ ------------
Total liabilities and shareholders' investment $ 526,842 $ 572,480
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
Superior Services, Inc.
Condensed Consolidated Income Statements
(In Thousands, Except Share and Per Share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Revenues $ 68,163 $ 80,008
Expenses:
Cost of operations 39,879 46,395
Selling, general and administrative costs 9,934 10,298
Merger costs 1,543 -
Depreciation and amortization expenses 9,316 10,966
--------- ---------
60,672 67,659
--------- ---------
Operating income 7,491 12,349
Other income (expense):
Interest expense (1,023) (950)
Other income 538 588
--------- ---------
Income before income taxes 7,006 11,987
Provision for income taxes 3,687 4,945
--------- ---------
Net income 3,319 7,042
========= =========
Earnings per share - basic and diluted $ 0.10 0.22
========= =========
Pro forma adjustments (Notes 1 and 3):
Net income, as reported $ 3,319 $ 7,042
Adjustment for income taxes (335) -
--------- ---------
Net income, as adjusted 2,984 $ 7,042
========= =========
Earnings per share as adjusted - basic and diluted $ 0.09 $ 0.22
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Shareholders' Investment
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Additional
Stock Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 32,202,297 $322 $249,023 $ 67,397 $316,742
Net income - - - 7,042 7,042
Issuance of common stock:
Exercise of warrants 119,417 1 (1) - -
Other 33,509 1 5 - 6
---------- ------- -------- --------- --------
Balance at March 31, 1999 32,355,223 $324 $249,027 $ 74,439 $323,790
========== ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1998 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,319 $ 7,042
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,316 10,966
Deferred income taxes 1,138 143
Gain on sale of assets 44 341
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Accounts receivable 852 2,539
Prepaid expenses and other current assets 820 (4,712)
Accounts payable and accrued expenses (4,261) (9,394)
Disposal site closure and long-term care
obligation 1,019 1,283
Other (140) (309)
-------- --------
Net cash provided by operating activities 12,107 7,899
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (14,133) (35,418)
Purchases of property and equipment (8,733) (13,726)
Proceeds from sale of property and equipment 810 108
Increase in restricted funds held in trust (449) (79)
-------- --------
Net cash used in investing activities (22,505) (49,115)
FINANCING ACTIVITIES
Net decrease in short-term borrowings (2,259) (1,839)
Proceeds from long-term debt 3,702 47,567
Payments of long-term debt (7,321) (5,767)
Issuance of common stock 1,407 4
Subchapter S distributions to former shareholders (894) -
-------- --------
Net cash provided by financing activities (5,365) 39,965
-------- --------
Net decrease in cash and cash equivalents (15,763) (1,251)
Cash and cash equivalents at beginning of period 44,955 9,715
-------- --------
Cash and cash equivalents at end of period $ 29,192 $ 8,464
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
Superior Services, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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.
During 1998, the Company acquired Alabama Waste Systems, Inc. and Acmar
Regional Landfill, Inc. (collectively "AWS"); Gopher Disposal, Inc., Eagle
Environmental, Inc., Materials Recovery, Ltd. and Watson's Rochester Disposal,
Inc. (collectively "Gopher"); PenPac, Inc., Heritage Recycling, Inc., Iorio
Carting, Inc., ACS Services, Inc., Recycling Techniques, Inc., Advanced Waste
Technologies, Inc., Baray, Inc., and Nicholas Enterprises, Inc. (collectively
"PenPac"); all accounted for using the pooling of interests method. Prior to
their merger, AWS, a substantial number of companies comprising Gopher and
PenPac had each selected S Corporation status for income tax purposes. As a
result of their merger, AWS, Gopher and PenPac terminated their S Corporation
elections. Pro forma provisions for income taxes are presented for the three
months ended March 31, 1998 and have been computed as if AWS, Gopher and PenPac
had been "C" Corporations during the period.
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, 1998 and the related notes thereto (the "Financial
Statements") included in the Company's Form 10-K for the year ended December 31,
1998.
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 1998 financial statements to conform to the 1999 presentation.
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<PAGE>
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, 1998. 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, 1998.
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 three months of 1999, the Company acquired 9 solid waste businesses
that were accounted for as purchases. Aggregate consideration for these
acquisitions was approximately $34.3 million in cash. The final determination of
cost, and allocations thereof, of certain of the Company's acquisitions is
subject to resolution of certain contingencies. Once such contingencies are
resolved, the purchase price is adjusted. Future payments are contingent based
on working capital adjustments, debt adjustments and contingent liabilities and
are recorded at the time of acquisition if the contingent payment can be
reasonably estimated. 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 three months of 1999, 12,331 shares were issued and $1.1
million of cash was paid in settlement of final valuation computations on
certain acquisitions that occurred in 1998.
The unaudited pro forma results of operations below assume that 1998 and
1999 acquisitions accounted for as purchases occurred at the beginning of 1998.
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.
Three Months Ended
March 31,
1998 1999
---- ----
(Unaudited and in thousands,
except per share amounts)
Total net revenue $83,383 $84,643
Net income $ 3,422 $ 7,048
Earnings per share - basic and diluted $ 0.11 $ 0.22
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, 1998 or which may be realized in the future.
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<PAGE>
4. Shareholders' Investment
On January 18, 1999, February 10, 1999, February 23, 1999 and March 24, 1999
the Company granted employee incentive stock options exercisable for 8,000,
2,000, 470,531, and 30,000 shares of Common Stock at exercise prices of $17.50,
$16.8125, $19.6875, and $19.875 per share, respectively. The exercise prices
were all fair market value on the grant date. The options become exercisable 25%
after one year and an additional 6.25% for each quarter thereafter.
Prior to its merger with the Company, GeoWaste Incorporated issued
warrants to an investment banker for investment advisory services rendered. The
warrants allowed the holders to acquire up to 192,800 shares of the Company's
common stock at $6.33 per share. On February 1, 1999, the holders of the
warrants converted the warrants into 119,417 shares of the Company's common
stock, following the cash-free exercise conversion rights contained in the
warrant agreement.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
---- ----
<S> <C> <C>
Numerator
Income from continuing operations used in computing
basic and diluted earnings per share $3,319 $7,042
====== ======
Denominator
Denominator for basic earnings per share - weighted
average common shares 31,653 32,305
Effect of dilutive securities - employee stock options
458 198
------ ------
Denominator for diluted warnings per share - adjusted
weighted average common shares 32,111 32,503
====== ======
</TABLE>
6. Landfill costs
Landfill costs include land held for development which is not being
amortized. In order to develop and operate a landfill, the Company typically
must go through several governmental review processes and obtain one or more
permits and often zoning or other land use approvals. Engineering and legal fees
paid to third parties incurred to obtain a disposal facility permit are
capitalized as landfill costs and amortized over the estimated related airspace
capacity. These costs are not amortized until the permit is obtained and
operations have commenced. If the Company determines
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<PAGE>
that the facility cannot be developed, these costs are charged to expense.
7. Commitments and Contingencies
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. The range of
possible loss has been estimated not to exceed $1.3 million. At the time of the
consolidation of these companies into the Company, a contingent liability escrow
was established to cover the highest estimated costs of redemption 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 environmental 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.
The Company or its subsidiaries have been notified that they are potentially
responsible parties ("PRPs") in connection with two sites listed on the National
Priorities List ("NPL"). When the Company concludes that it is probable that a
liability has been incurred with respect to a site, provision will be made in
the Company's financial statements reflecting its best estimate of the liability
based on management's judgment and experience, information available from
regulatory agencies and the number, financial resources and relative degree of
responsibility of other potentially responsible parties who are jointly and
severally liable for remediation of the site as well as the typical allocation
of costs among such parties. If a range of possible outcomes is estimated and no
amount within the range appears to be a better estimate than any other, then the
Company will provide for the minimum amount within the range, in accordance with
generally accepted accounting principles.
One NPL location is a landfill owned by the Company for which the range of
total costs for remaining remediation is estimated to be between $688,000 and
$2.3 million. The Company has an accrued liability of approximately $2.3 million
relating to this matter. As the timing of payments is uncertain, the accrual was
not measured on a discounted basis. The reasonably possible loss for this site
is not expected to exceed the amounts accrued by the Company for the selected
remedial action. The Company has entered into settlement agreements with certain
of the generator PRPs, in which the generator PRPs agree to contribute a total
of approximately 62% of future remediation costs and the annual operating,
maintenance, and monitoring costs. The former owner of the location agreed to
indemnify the Company up to $2.8 million for any site liabilities the Company
may incur as a PRP. The Company has been paid approximately $500,000 by the
former owner. The Company and the former owner are in dispute regarding the cost
of a likely remediation plan. An engineer selected by
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<PAGE>
the former owner has estimated the total remediation costs to be $688,000. This
dispute is now before an arbitrator. The Company has recorded as an asset
approximately $2.3 million that is deemed probable of recovery from the
generator PRPs and through indemnification from the former owner. The Company
believes its existing financial reserves, together with the amounts paid and
remaining payable by the former owner and the contribution obligations of the
generator PRPs, are adequate to cover the currently anticipated remediation
costs.
The Company acquired Nicholas Enterprises, Inc. ("Nicholas") as part of the
PenPac acquisition on September 30, 1998. Prior to the Company's acquisition of
PenPac, Nicholas was named as a defendant in litigation pursuant to the New
Jersey Spill Compensation and Control Act at Sharkey's Landfill, a site in New
Jersey. During 1998, Nicholas was released from its liability pertaining to the
site in exchange for remitting $300,000 of insurance proceeds and other
additional assessments up to $50,000. Further, prior to the acquisition by the
Company, Nicholas was named as a PRP at the Cortese Landfill, a NPL site in New
York, pursuant to the Comprehensive Response, Compensation and Control Act.
During 1994, Nicholas agreed to pay approximately $200,000 to the State of New
York in final settlement of its share of past costs at the site. This amount has
been paid. Nicholas has requested, but not yet received, release of liability
for any subsequent costs related to this site. Although the Company has not been
informed of any additional liability related to these sites, under the terms of
the acquisition agreement for Nicholas, its former shareholders have agreed to
indemnify the Company, to the extent not covered by insurance, for all claims
arising from these sites.
As is the case with all sites, the performance of the elected remedies will
be subject to periodic review by regulatory agencies. In the event the selected
remedies do not perform adequately to meet applicable state and federal
standards, additional remedial measures beyond those currently anticipated could
be required by regulatory agencies. Implementation of any such additional
remedial measures may involve substantial additional costs beyond those
currently anticipated.
In connection with the Company's acquisition of AWS 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
("ADEM") 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. The
municipality filed an appeal of this administrative decision in state circuit
court. The Company has landfill assets with a net book value of $3.8 million at
this site. 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. In addition to
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 ADEM solid waste permit.
Prior to the acquisition of the 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. The municipality approved a final settlement on
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<PAGE>
April 20, 1999. Such settlement will not have a material adverse effect on the
Company's financial condition or results of operations. Dismissal of the
proceedings is now pending.
In the normal course of its business and as a result of the extensive
government regulation of the solid waste industry, the Company periodically may
become subject to various judicial and administrative proceedings and
investigations involving federal, state or local agencies. To date, the Company
has not been required to pay any material fine or judgment for violation of an
environmental law. The Company is involved in various environmental matters and
governmental proceedings, including original or renewal permit filings in
connection with the establishment, operation, expansion, closure and post
closure activities of certain landfills. There can be no assurance that such
permits shall be granted or such proceedings resolved in a manner favorable to
the Company. From time to time, the Company also may be subjected to actions
brought by citizen's groups in connection with the permitting of landfills or
transfer stations, or alleging violations of the permits pursuant to which the
Company operates. The Company is also subject from time to time to claims for
personal injury or property damage arising out of accidents involving its
vehicles. 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 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.
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 either described in close proximity to
such statements or include the following (i) the Company's ability to manage its
growth; (ii) the availability to the Company of additional acquisition
opportunities at favorable pricing levels and the ability of the Company to
effectively integrate its existing and potential future acquisitions; (iii) the
continuing seasonality of its business; and (iv) competition for both collection
and disposal services and acquisitions. All of these factors, or others, 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
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<PAGE>
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 750,000 residential, commercial and
industrial customers in Alabama, Florida, Georgia, Illinois, Michigan,
Minnesota, Missouri, New Jersey, Ohio, Pennsylvania, West Virginia, and
Wisconsin. The Company also provides other integrated waste services, most of
which are project-based and many of that provide additional waste volumes to the
Company's landfills and recycling facilities. As of March 31, 1999, solid waste
operations consisted of 19 Company-owned solid waste landfills, four managed
third party landfills, 49 solid waste collection operations, 19 recycling
facilities and 15 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 March 31
1998 1999
---- ----
Collection 64% 64%
Third party disposal 17% 20%
Recycling 9% 7%
Other integrated waste services 10% 9%
---- ----
100% 100%
==== ====
The Company's strategy for future growth anticipates the recognition of
additional revenue from acquiring additional solid waste collection and disposal
operations as well as continued internal growth. The Company acquired or had
signed definitive agreements to purchase businesses with estimated annualized
revenues of $36 million in the first three months of 1999. Of the $36 million in
annualized revenues acquired, over $22 million related to solid waste collection
operations with the balance related to two special waste operations acquired by
the Special Services group. However, the Company believes that future operations
acquired will move its revenue mix away from recycling and other integrated
waste services and more towards solid waste collection and disposal.
Results of Operations
Overview
The information presented below reflects the pro forma net income exclusive
of merger costs incurred in connection with acquisitions during 1998 which were
accounted for as poolings of interest. Pro forma net income includes federal and
state income tax provisions for 1998 as if AWS, Gopher and PenPac had been
taxable entities, and excludes the cumulative deferred tax provision for AWS,
Gopher and PenPac which were Subchapter S Corporations prior to their
acquisition.
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<PAGE>
<TABLE>
<CAPTION>
Summary Financial Data
(in thousands, except per share data)
Three Months Ended March 31,
------------------------------------------------------------------
Per Per
1998 Share 1999 Share
---- ----- ---- -----
<S> <C> <C> <C> <C>
Revenue $68,163 - $80,008 -
Net income, as reported $ 3,319 $ 0.10 $ 7,042 $ 0.22
Pro forma adjustments:
Adjustment for income taxes (335) (0.01) - -
------- ------- ------- ------
Pro forma net income 2,984 0.09 7,042 0.22
Adjustments:
Deferred income taxes 771 0.02 - -
Merger costs, net of tax 1,286 0.05 - -
------- ------- ------- ------
Adjusted net income, exclusive of merger costs and
cumulative deferred tax provisions
$ 5,041 $ 0.16 $ 7,042 $ 0.22
======= ======= ======= ======
</TABLE>
Revenues in the 1999 first quarter of $80.0 million increased 17.4% over the
comparable period in the prior year primarily due to businesses acquired which
were accounted for under the purchase method of accounting. Pro forma earnings
per share, excluding one-time merger and cumulative deferred tax provisions for
the Gopher and PenPac companies which were "S" Corporations prior to their
acquisition in 1998, increased 37.5% to $0.22 per share from $0.16 per share for
the first quarter of 1998, as restated. The one-time merger costs and the
cumulative deferred tax provisions totaled approximately $0.07 per share in the
first quarter of 1998. Net income, exclusive of these merger costs and the
cumulative deferred tax provisions in 1998, increased 39.7% to $7.0 million in
the 1999 first quarter, from $5.0 million in the same period of 1998. The
weighted average of common and common equivalent shares outstanding was 32.5
million for the first quarter of 1999 and 32.1 million for the first quarter of
1998, as restated.
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 March 31,
1998 1999
---- ----
Revenues 100.0% 100.0%
Cost of operations 58.5 58.0
Selling, general and administrative expenses 14.6 12.9
Merger costs 2.2 -
Depreciation and amortization 13.7 13.7
Operating income 11.0 15.4
Interest expense 1.5 1.2
Other income (0.8) (0.8)
----- -----
Income before income taxes 10.3 15.0
Income taxes 5.4 6.2
----- -----
Net income 4.9% 8.8%
===== =====
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<PAGE>
Revenues
Revenues increased $11.8 million, or 17.4% for the first quarter of 1999
compared to the 1998 first quarter primarily due to the $9.8 million impact of
operations acquired which were accounted for under the purchase method of
accounting. 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
and to price increases enacted late in the quarter. Daily disposal volume at the
Company's landfills rose to an average of approximately 15,400 tons per day in
the 1999 first quarter compared to an average of 10,700 tons per day in the
corresponding period last year. The higher landfill volume was predominantly the
result of waste received at four new disposal sites acquired since March 31,
1998. The Company expects price increases to have a greater effect on organic
growth in the second quarter of 1999 due to a full quarter effect from the price
increases enacted late in the first quarter. Also, volume growth was lowered by
a large project which was performed by the Special Services group in the first
quarter of 1998 which the Company chose not to perform again in the first
quarter of 1999.
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 1999 first quarter compared to the 1998
first quarter as the average price received by the Company for its recyclable
waste products remains basically unchanged. The Company expects the recycling
operations to continue to be profitable due to the Company's floor-pricing
arrangement with a national paper company and fees received for providing
recyclable waste collection services to its customers.
Cost of Operations
Cost of operations for the three months ended March 31, 1999 increased $6.5
million, or 16.3%, to $46.4 million from $39.9 million for the three months
ended March 31, 1998. However, as a percentage of revenues, cost of operations
decreased from 58.5% in the first quarter of 1998 to 58.0% in the first quarter
of 1999. This was primarily due to cost savings at landfills owned and operated,
the higher relative percentage of integrated collection business resulting in a
higher overall percentage of waste collected by the Company which is disposed of
at its own facilities, and the higher relative percentage of business from
disposal operations (which generally have lower costs of operations than
collection operations and other integrated waste services). During the first
quarter of 1999, the Company internalized 62% of the waste it collected to its
own disposal sites compared to 59% during the first three months of 1998. The
Company's goal is to maintain or increase its internalization rate through
focusing on full vertical integration of its solid waste business in all of its
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
-15-
<PAGE>
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 $364,000, or 3.7%, to $10.3 million for the three-month
period ended March 31, 1999 from $9.9 million for the three-month period ended
March 31, 1998. However, as a percentage of revenues, SG&A decreased to 12.9% in
the first quarter of 1999 compared to 14.6% in the first quarter of 1998. The
Company believes that SG&A as a percentage of revenue would have been lower in
the first quarter of 1999 had the acquisitions completed in March been completed
earlier in the quarter. Resulting in a larger revenue base over which to spread
the costs. This trend of decreasing 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. The actual dollar amount of
SG&A increased primarily due to increased costs for personnel necessary to
service new customers, including those associated with the operations acquired,
and to support the Company's acquisition program.
Merger Costs
The Company incurred no nonrecurring merger costs during the first three
months of 1999 compared to $1.5 million in the first three months of 1998
because there were no mergers completed during 1999 which were accounted for
using the pooling of interests method. The one-time merger costs in the first
quarter of 1998 included severance and bonuses, professional fees, and other
related merger costs.
Depreciation and Amortization
Depreciation and amortization increased $1.6 million, or 17.7%, for the
three-month period ended March 31, 1999, compared to the same period in 1998,
due to increased depreciation costs for the additional assets and operations
acquired. As a percentage of revenues, depreciation and amortization remained
the same at 13.7% in the first quarter of 1999 and 1998.
Interest Expense
Interest expense decreased $73,000, or 7.1%, for the three-month period
ended March 31, 1999 compared to the same period in 1998 primarily due to lower
average interest rates during 1999 compared to 1998. Interest of $724,000 was
capitalized during the first three months of 1999 related to land being
developed at the landfills.
Income Tax Expense
The Company's effective tax rate decreased from 52.6% for the three months
ended March 31, 1998 to 41.3% for the three-month period ended March 31, 1999.
The decrease was primarily due to the impact of certain nondeductible merger
costs and cumulative deferred tax provisions in 1998
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<PAGE>
associated with the conversions of AWS, Gopher and PenPac from subchapter S
Corporations to taxable entities.
Liquidity and Capital Resources
The Company's balance sheet at March 31, 1999 reflected approximately $8.5
million in cash and cash equivalents compared to $9.7 million at December 31,
1998. The decrease in cash and cash equivalents was primarily due to the use of
cash to acquire solid waste companies during the first three months of 1999.
At March 31, 1999, the Company had $104.3 million of outstanding borrowings,
and approximately $3.9 million in letters of credit outstanding under its
revolving credit facility, with $166.8 million available under its $275 million
revolving credit facility for future borrowings. Total long-term debt at March
31, 1999 was $108.1 million. At March 31, 1999, the ratio of the Company's
long-term debt to total capitalization was 25.0% compared to 17.3% at December
31, 1998. This increase was attributable to the increase in the use of debt
during the first quarter of 1999 to fund the Company's growth through
acquisitions.
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 1999 through the use of cash, assumption of
indebtedness, future royalties, and/or capital stock. 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.
Capital expenditures for the three months ended March 31, 1999 were $13.7
million compared to $8.7 million for the three months ended March 31, 1998,
primarily due to increased spending for landfill expansions. Capital
expenditures for 1999 are currently expected to be approximately $55 million
(including the $13.7 million expended through March 31, 1999) compared to $52.9
million in 1998. 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.
-17-
<PAGE>
Net cash provided by operations for the three months ended March 31, 1999
decreased to $7.9 million from $12.1 million in the three months ended March 31,
1998. The decrease was primarily due to the increase in prepaid expenses and
other current assets of $5.5 million and to a decrease in accounts payable and
accrued expenses of $5.1 million between the first three months of 1998 and the
first three months of 1999. The decrease in cash, resulting from the change in
operating assets, was partially offset by the increase in net income of $3.7
million between the first three months of 1998 and the first three months of
1999.
Net cash used in investing activities for the three months ended March 31,
1999 increased to $49.1 million from $22.5 million in the three months ended
March 31, 1998. The increase was primarily due to the Company's $35.4 million of
net cash payments for operations acquired in the three months ended March 31,
1999 compared to the $14.1 million of net cash payments in the three months
ended March 31, 1998.
Net cash provided by financing activities in the three months ended March
31, 1999 totaled $40.0 million, compared to $5.4 million of cash used in the
three months ended March 31, 1998, reflecting the proceeds from long-term debt
of $47.6 million compared to only $3.7 million in the first quarter of 1998.
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 is conducting a comprehensive review to ensure that all internal
computer systems and equipment are, or prior to the end of 1999 will be, Year
2000 compliant. The Company's Year 2000 readiness plan includes the following
phases: (i) conducting an inventory of the Company's internal systems, including
information technology systems and non-information technology systems (which
include office and facilities' environment related systems) and the systems
acquired or to be acquired by the Company from third parties; (ii) assessing and
prioritizing any required remediation; (iii) remediating any problems by
repairing or, if appropriate, replacing the non-compliant systems; (iv) testing
of all remediated systems for Year 2000 compliance; and (v) developing
contingency plans that may be employed in the event that any system used by the
Company is unexpectedly affected by an unanticipated Year 2000 problem. The
Company has completed its inventory phase of this plan and is actively engaged
in completing the remaining phases. The Company currently expects to complete
all phases of this plan and that all computer systems will be Year 2000
complaint before October 31, 1999.
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<PAGE>
In addition to assessing its own systems, the Company has initiated
communication with all of its vendors, service providers and third party
business partners to assess their Year 2000 readiness. The Company plans to
continue assessment of its vendors, service suppliers and third party business
partners to ensure Year 2000 readiness. Despite the Company's diligence, there
can be no guarantee that the non-compliant systems of other entities which the
Company relies upon in its day to day operations will not have a material
adverse impact on the Company. The actual impact on the Company resulting from
non- compliance of these entities cannot be determined at this time.
The Company has limited the scope of its risk assessment to those factors
which it can reasonably be expected to influence. The Company has made the
assumption that government agencies, utility companies and national
telecommunication providers will continue to operate without interruption. The
lack of such services could have a material impact on the Company's ability to
operate, but the Company has little, if any, ability to influence such results,
or to make alternative arrangements in advance for such services if they are
unavailable. Additionally, the Company believes that disruptions in the economy
generally resulting from Year 2000 issues could have a material adverse impact
on the Company. The Company could be subject to litigation for computer system
failures such as equipment shutdown or failure to properly update business
records. Other potential consequences include the inability to accurately and
timely update customers' accounts, process financial transactions, bill
customers, report accurate data to management, shareholders, customers, and
others as well as business interruptions and financial losses. The amount of
potential liability or loss of revenue to the Company cannot be reasonably
estimated at this time.
The Company intends to develop contingency plans within the second quarter
of 1999 to address Year 2000 problems. The Company believes that this is an
appropriate time frame for developing these contingency plans and that efforts
prior to that time should be focused on the remediation and testing phases of
the Company's Year 2000 readiness plan.
While the Company believes its planning efforts should be 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 to
fully execute its Year 2000 initiative. Through March 31, 1999, the Company has
spent approximately $35,000 in connection with Year 2000 issues. All Year 2000
expenditures are made from the information systems department budget and are
expensed against earnings. The percentage of the information systems department
budget during 1999 expected to be used for Year 2000 remediation is less than
10%. No information systems projects have been deferred due to Year 2000
efforts.
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<PAGE>
PART II
Item 1. Legal Proceedings
See Note 7 to Condensed Consolidated Financial Statements included in
this Form 10-Q for information regarding certain legal proceedings.
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 March
31, 1999.
-20-
<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 May 14, 1999 /s/George K. Farr
George K. Farr
Chief Financial Officer
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<PAGE>
SUPERIOR SERVICES, INC.
EXHIBIT INDEX
Exhibit Number Exhibit Description
- -------------- -------------------
27 Financial Data Schedule
-22-
<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
THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,464
<SECURITIES> 0
<RECEIVABLES> 60,161
<ALLOWANCES> (2,559)
<INVENTORY> 2,605
<CURRENT-ASSETS> 76,919
<PP&E> 485,154
<DEPRECIATION> (159,716)
<TOTAL-ASSETS> 572,480
<CURRENT-LIABILITIES> 54,208
<BONDS> 108,085
0
0
<COMMON> 324
<OTHER-SE> 323,466
<TOTAL-LIABILITY-AND-EQUITY> 572,480
<SALES> 0
<TOTAL-REVENUES> 80,008
<CGS> 0
<TOTAL-COSTS> 57,361
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 518
<INTEREST-EXPENSE> 950
<INCOME-PRETAX> 11,987
<INCOME-TAX> 4,945
<INCOME-CONTINUING> 7,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,042
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
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