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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 November 30, 1996 or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11016
ALLWASTE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2427167
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5151 SAN FELIPE, SUITE 1600
HOUSTON, TEXAS 77056-3609
(Address of Principal Executive Offices) (Zip Code)
(713) 623-8777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at January 9, 1997 was 36,225,424.
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REPORT INDEX
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PART AND ITEM NO. PAGE NO.
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PART I - Financial Information
Item 1 - Financial Statements
General Information ..................................................... 1
Condensed Consolidated Balance Sheets as of November 30, 1996 (unaudited)
and August 31, 1996 ................................................... 2
Condensed Consolidated Statements of Operations for the Three Months
Ended November 30, 1996 and 1995 (unaudited) .......................... 3
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended November 30, 1996 and 1995 (unaudited) .......................... 4
Notes to Condensed Consolidated Financial Statements (unaudited) ........ 5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 8
PART II - Other Information
Item 2 - Changes in Securities .......................................... 13
Item 6 - Exhibits and Reports on Form 8-K ............................... 13
</TABLE>
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PART I, ITEM 1 - FINANCIAL INFORMATION
GENERAL INFORMATION
The condensed consolidated financial statements 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
presentation and disclosures herein are adequate to make the information not
misleading, and the financial statements reflect all elimination entries and
normal adjustments which are necessary for a fair statement of the results for
the three months ended November 30, 1996 and 1995.
Operating results for interim periods are not necessarily indicative of
the results for full years. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements for the year ended August 31, 1996 and the related notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC.
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ALLWASTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,793 $ 2,436
Receivables, net 82,688 75,114
Prepaid expenses 4,351 3,796
Deferred income taxes and other current assets 9,931 11,170
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Total current assets 102,763 92,516
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INVESTMENTS 12,946 11,030
PROPERTY AND EQUIPMENT, at cost 250,076 248,280
Less -- Accumulated depreciation (124,967) (119,307)
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125,109 128,973
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GOODWILL, net of accumulated amortization 87,466 88,032
NOTES RECEIVABLE 13,782 13,517
OTHER ASSETS 3,055 3,119
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Total assets $ 345,121 $ 337,187
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,881 $ 19,250
Accrued liabilities:
Income taxes payable 1,529 5,383
Other 44,821 42,892
Current maturities of long-term and convertible
subordinated debt 6,103 6,249
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Total current liabilities 77,334 73,774
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LONG-TERM DEBT, net of current maturities 93,018 87,971
CONVERTIBLE SUBORDINATED DEBT, net of current maturities 33,905 33,924
DEFERRED INCOME TAXES AND OTHER LIABILITIES 11,895 10,572
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock 398 398
Additional paid-in capital 55,716 55,699
Retained earnings 87,077 84,163
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143,191 140,260
Less:
Treasury Stock (13,527) (8,561)
Unearned compensation related to outstanding
restricted Common Stock (695) (753)
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Total shareholders' equity 128,969 130,946
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Total liabilities and shareholders' equity $ 345,121 $ 337,187
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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ALLWASTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
November 30,
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1996 1995
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REVENUES $ 100,907 $ 99,798
COST OF OPERATIONS 74,451 72,213
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Gross profit 26,456 27,585
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 19,137 20,789
INTEREST EXPENSE (2,335) (2,411)
INTEREST INCOME 260 259
OTHER INCOME (EXPENSE), net 4 200
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Income from continuing operations before
income tax provision and minority interest 5,248 4,844
INCOME TAX PROVISION (2,414) (2,131)
MINORITY INTEREST, net of taxes 21 2
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Income from continuing operations 2,855 2,715
Discontinued Operations
Gain on sale of glass recycling operations, net of applicable income taxes -- 3,764
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Net income $ 2,855 $ 6,479
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NET INCOME PER COMMON SHARE:
Continuing operations $ .08 $ .07
Discontinued operations -- .09
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Net income per common share $ .08 $ .16
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 37,484 39,424
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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ALLWASTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
November 30,
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,855 $ 6,479
Reconciliation of net income to cash provided by operating activities:
Depreciation 6,954 7,145
Amortization 754 1,315
Gain on sale of glass recycling operations - (3,764)
Gain on sale of property and equipment (41) (154)
Amortization of unearned compensation - restricted stock 58 -
Change in assets and liabilities, net of effect of acquisitions
accounted for as purchases:
Receivables (7,574) (7,519)
Prepaid expenses and other current assets 684 (332)
Notes receivable and other assets (351) (346)
Accounts payable and accrued liabilities 3,752 806
Deferred income taxes and other liabilities 1,323 (1,067)
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Cash provided by operating activities 8,414 2,563
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of glass recycling operations - 41,500
Additions to property and equipment (4,077) (13,308)
Purchase of long-term investment (1,916) (2,605)
Proceeds from sale of property and equipment 944 347
Payments for acquisitions accounted for as purchases, net of cash acquired - (900)
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Cash provided by (used in) investing activities (5,049) 25,034
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of Common Stock 17 21
Net increase (decrease) in revolving credit facility 5,150 (23,010)
Net decrease in other long term borrowings (250) (750)
Purchases of convertible subordinated debentures (17) -
Purchases of Treasury Stock (4,966) (1,400)
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Cash used in financing activities (66) (25,139)
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EFFECT OF EXCHANGE RATE CHANGES 58 (103)
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INCREASE IN CASH AND CASH EQUIVALENTS 3,357 2,355
CASH AND CASH EQUIVALENTS, beginning of period 2,436 4,029
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CASH AND CASH EQUIVALENTS, end of period $ 5,793 $ 6,384
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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ALLWASTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Significant Accounting Policies --
The condensed consolidated financial statements include the accounts of
Allwaste, Inc. and its subsidiaries (the "Company"). There have been no
significant changes in the accounting policies of the Company during the
periods presented. For a description of these policies, see Note 1 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
August 31, 1996. Prior period amounts in the Condensed Consolidated Financial
Statements and Notes to Condensed Consolidated Financial Statements reflect the
Company's glass recycling operations as a discontinued operation, as discussed
in Note 6. Additionally, certain prior period amounts have been reclassified
to conform with the current period presentation.
(2) Income Taxes --
With respect to continuing operations, income tax provisions for interim
periods are estimated based upon projections of the annual effective tax rates.
Certain assumptions have been made in this regard in estimating the effective
tax rate for fiscal 1997, the outcome of which may not be resolved until the
end of the fiscal year. The effective tax rate of 46% for the three months
ended November 30, 1996 reflects the estimated U.S. federal and state income
taxes and foreign taxes on the earnings of the Company's foreign subsidiaries.
Deferred tax assets and liabilities are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities. On the accompanying Condensed Consolidated Balance
Sheets, deferred tax assets and liabilities are netted within each tax
jurisdiction. The following table sets forth the gross deferred tax assets
(liabilities) recorded (in thousands):
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
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Current deferred tax assets $ 8,604 $ 8,681
Non-current deferred tax assets 3,472 3,383
Valuation allowance (1,230) (1,230)
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Total deferred tax assets 10,846 10,834
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Non-current deferred tax liabilities $ (14,690) $ (13,238)
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Net deferred tax liabilities $ (3,844) $ (2,404)
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The components of the net deferred tax assets (liabilities) are as follows (in thousands):
November 30, August 31,
1996 1996
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Depreciation and amortization $ (16,779) $ (15,753)
Financial reserves and accruals
not yet deductible 12,935 13,349
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Total $ (3,844) $ (2,404)
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</TABLE>
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(3) Net Income Per Common Share --
Net income per common share has been computed based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding. The calculation of fully-diluted net income per common share is
not materially different from the primary calculation. The following table
presents the primary weighted average number of shares outstanding for the
three months ended November 30, 1996 and 1995 (in thousands).
<TABLE>
<CAPTION>
For the Three Months Ended
November 30,
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1996 1995
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Common shares outstanding, beginning of fiscal period 39,799 39,609
Weighted average number of common shares outstanding:
Stock options, treasury stock method 68 129
Purchased companies -- 23
Exercise of stock options 2 40
Treasury stock and other, net (2,385) (377)
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Total weighted average common shares outstanding 37,484 39,424
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</TABLE>
(4) Long Term Debt --
The Company's credit facility consists of a revolving credit agreement
with a group of banks. This agreement, as last amended in August 1996,
provides an unsecured $160 million revolving line of credit to the Company
through January 31, 1999, at which time any outstanding borrowings convert to a
term loan due in equal quarterly installments through January 31, 2003. At
January 9, 1997, after utilizing $31.6 million of the credit facility for
letters of credit to secure certain insurance obligations and performance
bonds, available borrowing capacity under this agreement was $36.3 million.
Management believes that the Company is in compliance with all applicable
covenants under the revolving credit agreement as of November 30, 1996.
Borrowing availability is subject to the Company maintaining certain minimum
financial ratios as set forth in the agreement.
(5) Incentive Plans --
On October 26, 1995, the Company's Board of Directors adopted a limited
single-purpose incentive plan for certain key employees. In connection with
this plan, each participating key employee that purchased shares of the
Company's Common Stock, based on a designated percentage of their annual
salary, was granted a number of shares of restricted Common Stock equal to two
times the number of the shares purchased. On completion of the purchases,
participating key employees were granted an option to purchase a number of
shares of Common Stock equal to four times the number of shares purchased.
Shares of Common Stock issued under this incentive plan are treasury shares.
At November 30, 1996, 203,366 shares of restricted Common Stock and options to
purchase 423,464 shares of Common Stock have been granted. Additionally,
3,460 shares of restricted Common Stock were earned and not yet issued. The
Company does not contemplate that any additional restricted shares will be
issued under the incentive plan or that any options to purchase shares of
Common Stock will be granted under the plan.
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The value of restricted shares awarded under this incentive plan through
November 30, 1996 was $0.9 million. These amounts were recorded as unearned
compensation related to outstanding restricted stock and are shown as a
separate component of Shareholders' Equity. Unearned compensation is being
amortized to expense over a predominately four year vesting period and amounted
to $0.1 million for the three months ended November 30, 1996.
Effective September 1996, the Company implemented the Economic Value Added
("EVA(R)") integrated management system. In October 1996, the Compensation
Committee adopted the Allwaste EVA Incentive Compensation Plan (the "EVA
Plan"), which will govern incentive bonus compensation payable to the Company's
executive officers and other key employees beginning in fiscal 1997. Under
this EVA Plan, eligible participants may receive incentive payments based on
the Company meeting or exceeding certain predetermined EVA improvement levels,
as determined by the Compensation Committee of the Board of Directors. A
portion of the incentive payments is carried forward to the following fiscal
year, or "banked", and is included in the calculation of the incentive payment
for that fiscal year.
(6) Discontinued Operations --
In September 1995, the Company sold its glass recycling operations to
Strategic Holdings, Inc. ("SHI"), a company formed by Equus II, Incorporated
("Equus"). In October 1996, the Company and Equus finalized an agreement with
respect to certain post-closing issues which were unresolved on the date of the
sales transaction. The total consideration, as adjusted, was $56.1 million,
including $41.5 million in cash, $8.0 million of redeemable Series A preferred
stock redeemable beginning in 2002, and a $6.6 million subordinated note
receivable due in 2002. The redeemable Series A preferred stock dividend is
$.065 per share for the period prior to September 1, 1996 and $.06 per share
thereafter. The subordinated note receivable interest rate is 11% for the
period prior to September 1, 1996 and 10.5% thereafter. The agreement also
provided that all dividends and interest due prior to August 31, 1997 will not
be paid when due, but "paid in kind" in the form of two 8.036% subordinated
notes issued September 30, 1996 and June 30, 1997 in the amounts of $1.3
million and $0.9 million, respectively. Principal on these two notes will be
due on November 30, 2002. At November 30, 1996, the Company had accrued $0.6
million for dividends and $1.0 million for interest which is reflected in other
income (expense) in the accompanying Consolidated Statements of Operations.
The Company also received warrants to purchase shares of SHI common stock,
providing the Company the right to own up to approximately 33% of the
outstanding stock of SHI. The Company may receive additional consideration in
the form of an adjustment to the purchase price in the event that Equus'
internal rate of return, as defined, exceeds certain predetermined targets.
The amount of such additional consideration, if any, is not presently
determinable. The Company recorded a gain on the sale of its glass recycling
operations of $3.8 million, net of applicable income taxes of $1.6 million, in
the first quarter of fiscal 1996.
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ALLWASTE, INC. AND SUBSIDIARIES
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For supplemental information, it is suggested that "Management's
Discussion and Analysis of Financial Condition and Results of Operations" be
read in conjunction with the corresponding section included in the Company's
Annual Report on Form 10-K for the year ended August 31, 1996. Additionally,
certain prior period amounts have been reclassified to conform with the current
period presentation.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided by operating activities was $8.4
million and $2.6 million during the three months ended November 30, 1996 and
1995, respectively. For the three months ended November 30, 1996, net income
was $2.9 million which included $7.7 million in depreciation and amortization.
For the three months ended November 30, 1995, net income was $6.5 million which
included $8.5 million in depreciation and amortization and a gain on the sale
of the Company's glass recycling operation of $3.8 million. Overall, the
improvement in cash provided by operating activities has been derived from an
increased focus on working capital management, which accounts for $6.3 million
of increased cash flow in the first quarter of fiscal 1997 compared to the
same period of 1996.
Net working capital was $25.4 million at November 30, 1996, which was up
significantly from 18.7 million at August 31, 1996. This increase is
primarily due to the increases in accounts receivables and cash and the
decrease in income taxes payable offset, in part, by the increase in accounts
payables in the first three months of fiscal 1997. The increase in accounts
receivables is primarily attributable to increased revenues in the first
quarter of fiscal 1997 over the Company's fourth quarter of 1996. The
Company's current ratio was 1.3 to 1 at November 30, 1996, which is consistent
with the ratio at August 31, 1996.
INVESTING ACTIVITIES. The Company used cash of $5.0 million in investing
activities in the three months ended November 30, 1996, compared with cash of
$25.0 million provided in the three months ended November 30, 1995. On
September 1, 1995, the Company sold its glass recycling operations for
consideration (as adjusted) consisting of: cash of $41.5 million, $8.0 million
of redeemable preferred stock and a $6.6 million subordinated note receivable.
The Company used the proceeds received in this transaction to reduce
outstanding debt. For the three months ended November 30, 1996, the $5.0
million used in investing activities was primarily attributable to capital
expenditures of $4.1 million compared to $13.3 million of capital expenditures
in the same prior year period.
The Company was able to reduce its capital spending in the first fiscal
quarter of 1997 primarily due to increased monitoring of equipment utilization,
transfers of underutilized owned equipment from lower volume, lower margin
locations to higher margin, higher volume locations and the use of short-term
equipment rentals. Expenditures for the remainder of fiscal 1997 are
anticipated to be approximately $17.0 million. The Company's fiscal 1997
capital expenditure program will be funded from cash flows from operating
activities. The Company paid $1.7 million in the first quarter of fiscal 1997
for an additional cash investment in the Company's previously owned glass
recycling operation. The Company paid $2.6 million in the first quarter of
1996 to acquire a 10% interest in The Safe Seal Company, Inc., which
specializes in valve repair and leak sealing.
FINANCING ACTIVITIES. In the three months ended November 30, 1996 and
1995, the Company used cash of $66,000 and $25.1 million in financing
activities, respectively. The Company's total short-term and long-term debt
increased by $4.9 million to $133.0 million at November 30, 1996 from $128.1
million at August 31, 1996. Included in the aforementioned long-term debt, the
Company's revolving credit facility increased by $5.2 million to $93.0 million
at November 30, 1996 from $87.8 million at August 31, 1996. This increase,
coupled with the use of $5.0 million to repurchase shares of the Company's
Common Stock, caused the Company's long-term debt as a percentage of
capitalization to increase to 50% at November 30, 1996 from 48% at August 31,
1996. During the three months ended November 30, 1996, the Company also paid
$0.3 million on other long-term borrowings that were predominantly associated
with business acquisitions from previous years.
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In July 1995, the Board of Directors authorized the Company to repurchase,
over a two year period, up to 5,000,000 shares of the Company's Common Stock,
either on the open market or in privately negotiated transactions. During the
three months ended November 30, 1996, the Company spent $5.0 million to
repurchase 1,064,200 shares of its Common Stock at an average cost of $4.67 per
share. Subsequent to November 30, 1996, the Company has repurchased 585,300
additional shares of its Common Stock at an average cost of $4.67 per share.
Future repurchases of the Company's Common Stock will be dependent upon
prevailing market conditions and other investment opportunities. As of
November 30, 1996, 3,725,400 shares of Common Stock had been repurchased under
the plan at an average cost of $4.54 per share.
The Company's credit facility consists of a revolving credit agreement
with a group of banks. This agreement, as last amended in August 1996,
provides an unsecured $160 million revolving line of credit to the Company
through January 31, 1999, at which time any outstanding borrowings convert to a
term loan due in equal quarterly installments through January 31, 2003. At
January 9, 1997, after utilizing $31.6 million of the credit facility for
letters of credit to secure certain insurance obligations and performance
bonds, available borrowing capacity under this agreement was $36.3 million.
Borrowing availability is subject to the Company maintaining certain minimum
financial ratios as set forth in the agreement. The Company anticipates that
its credit facilities are adequate to fund its financing needs.
Management believes it has adequate capital resources available from
internally generated funds, treasury shares and from the Company's revolving
credit agreement to meet anticipated working capital needs, planned capital
expenditures and to take advantage of new opportunities requiring capital.
RESULTS OF OPERATIONS
Allwaste, Inc. provides integrated industrial and environmental services
and acts as an outsourcing provider of on-site facility processes and services,
primarily in the United States, Canada and Mexico. With the completion of the
sale of the Company's glass recycling operations in September 1995, the Company
combined the prior industry segments of environmental services and container
services into a single industrial services operation.
Net income from continuing operations for the first quarter of fiscal 1997
was $2.9 million, compared with $2.7 million for the first quarter of fiscal
1996. Net income per common share from continuing operations was $.08 and $.07
for the three month periods ended November 30, 1996 and 1995, respectively.
The Company's revenues for the first three months of fiscal 1997 increased
slightly to $100.9 million, compared with $99.8 million in the same period in
fiscal 1996. The increase of $1.1 million was predominately internally
generated and attributable to increases in substantially all industry sectors
except those performed in the refining and petrochemical industries. Most
significantly, the Company's excavation/remediation activities benefited from a
continued increase in pulp and paper and quarry work through the first quarter
of fiscal 1997. Continuing increased demand for the Company's services by the
offshore oil and gas exploration industry in the Gulf of Mexico area and
positive growth in the Company's services used by the power plant and refinery
maintenance industries in the northeastern United States also contributed to
this growth. These revenue increases were partly offset by decreases in
revenue generated by the Company's operations that service the Pacific and Gulf
coast refining and petrochemical industries, which continue to be affected by
indefinitely postponed significant project work, and by the planned contraction
of the less profitable portions of the Company's transportation services.
Gross operating profit decreased to $26.5 million in the quarter ended
November 30, 1996 from $27.6 million in the quarter ended November 30, 1995.
Gross operating profit as a percentage of gross revenues decreased in the first
quarter of fiscal 1997 to 26% from 28% in the first quarter of fiscal 1996. This
decrease is primarily attributable to shortfalls related to the Company's
customers continued focus on pricing and the related effects of reduced volume
of significant project work in the refining and petrochemical area. Also,
contributing to the decrease was a general softness in the market and continued
price competition in the Company's container cleaning and repair services.
Selling, general and administrative ("SG&A") expenses decreased, as a
percentage of revenues, to 19% in the three months ended November 30, 1996,
from 21% in the same prior year period, while SG&A expenditures decreased by
$1.7 million to $19.1 million. SG&A relating to field operations decreased
$0.2 million or 1%. SG&A for the
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operations and corporate support functions decreased $0.9 million. A
significant portion of the improvement was attributable to the cost reduction
initiative adopted in the first half of fiscal 1996. This plan focused on the
improvement of profitability, the creation of shareholder value and enhanced
efforts to provide more cost-effective, value-added services to the Company's
large industrial customer base. The first quarter of fiscal 1996 included
severance expense of $0.6 million.
Interest expense decreased $0.1 million to $2.3 million in the three
months ended November 30, 1996 compared with $2.4 million for the three months
ended November 30, 1995 as a result of lower average interest rates which were
partially offset by higher average debt levels in the first quarter of fiscal
1997.
Interest income and other income (expense), net was $0.3 million in the
first quarter of fiscal 1997 compared to $0.5 million in the first quarter of
fiscal 1996. The income was primarily related to interest and dividends of
$0.4 million earned on the subordinated note receivable and preferred stock
acquired in the sale of the Company's glass recycling operations offset
predominately by losses recognized on sales of property and equipment.
The Company's effective income tax rate for the three months ended
November 30, 1996 was 46%. The effective tax rate was higher than the
statutory federal rate of 35% primarily due to the effect of the
nondeductibility of a portion of meal and entertainment expenses, the
nondeductible amortization of a portion of the Company's goodwill, state income
taxes and Canadian earnings which are taxed at a higher statutory rate.
ENVIRONMENTAL PROCEEDINGS
In November 1996, the West Virginia Department of Environmental Protection
(the "West Virginia DEP") issued a draft consent order against one of the
Company's subsidiaries, which order seeks to impose an aggregate of
approximately $229,000 in fines against the Company relating to a
transportation-related spill in West Virginia in November 1995. The Company
voluntarily remediated this spill in December 1995. The draft consent order
alleges that in remediating the spill, the Company did not comply with certain
technical West Virginia DEP remediation regulations relating to recordkeeping
and generator requirements. The Company believes that the West Virginia DEP
remediation regulations cited by the West Virginia DEP as the basis of this
draft consent order are not relevant in the context of an emergency spill
response. Therefore, the Company believes that it may be able to successfully
negotiate the imposition by the West Virginia DEP of significantly lower
penalties in the final consent order. The Company is actively negotiating the
draft consent order with the West Virginia DEP and does not believe that the
final consent order will have a material adverse effect on the Company's
results of operations or financial position.
FLUCTUATIONS IN RESULTS OF OPERATIONS.
Certain customers have varying levels of demand for the Company's services
based on the time of the year. Most of the Company's service lines tend to be
slowest in the winter (the Company's second fiscal quarter) and summer (the
Company's fourth fiscal quarter) months. Services provided to electric utility
customers are typically performed in the fall and spring when demand for
electricity is reduced and maintenance work can be performed more efficiently.
Likewise, services provided to refining and petrochemical customers tend to be
greater in the fall and spring when most planned turnarounds at customer plants
occur. In addition, the Company's acquisition program can affect not only
future results and rates of growth but also previously reported results because
of restatements if acquisitions are accounted for as poolings-of-interests.
The impact of inflation on the Company has been minimal.
OUTLOOK FOR 1997
The Company has clearly defined the industrial customer as the focus of
its business strategy. The Company's fiscal 1996 sale of its glass recycling
operations has allowed it to narrow its focus on providing services to the
industrial customer and provide additional capital for expansion of this core
business and developing opportunities independently
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or through partnering arrangements in the areas of water and wastewater
management, energy services, contract labor services and, through its
investment in The Safe Seal Company, Inc., leak sealing and valve restoration
services. The Company will continue to evaluate its complement of services
offered and allocate capital accordingly.
The Company has historically focused on achieving growth through
acquisitions; however, in recent years, the Company has placed added emphasis on
increased internal growth. Although the Company will continue to focus on
internal growth, it does intend to evaluate acquisitions that fit its strategic
goals. The Company has focused on realizing increased internal growth
primarily by developing new outsourcing and co-sourcing opportunities with its
customers and expanding the number of service lines offered to customers by
each of its operating locations, providing solution-oriented and preventive
services that focus on improving customer efficiency and profitability,
transferring technology and knowledge among the Company's various operating
locations, implementing national marketing programs that target major
industries served by the Company, introducing services in new geographic areas
and developing services that address environmental concerns associated with new
products. The Company's ALLIES(R) program stresses collaboration between the
Company and its customers by focusing on creating flexible and innovative
solutions to a customer's problems and emphasizing the Company's services as an
economically-efficient outsourcing alternative that can maximize a customer's
competitive role in the emerging global market.
The Company is also focusing on cost control and gross margin expansion
through fiscal 1997. The Company intends to implement selected price increases
when market conditions permit and as a by-product of value-added selling
efforts. The Company anticipates savings resulting from the cost reduction in
fiscal 1996 and ongoing cost-reduction initiatives to positively affect its
results of operations in fiscal 1997.
A significant amount of the Company's revenues from its services are
generated on an as needed basis or from irregularly scheduled customer
turnarounds, outages and shutdowns. Although the Company may be chosen as the
vendor of choice, shutdowns, outages and turnarounds may, at the election of
the customers, be deferred or canceled without penalty. The Company is also
affected by business cycles experienced by its industrial customer bases and by
changes in environmental laws and regulations or by changes in the
interpretation or enforcement of such laws and regulations. The Company's
customers have a significant capacity in the short-term to defer industrial
cleaning, maintenance and disposal services. Deferrals can occur either due to
a reduction in maintenance or capital funds, customer budget restraints or,
conversely, increased demand for a customer's products that make it impractical
to perform cleaning and maintenance on anticipated schedules. These factors
make it difficult to predict, from quarter to quarter, the demand for the
Company's services.
NEW FINANCIAL ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which is effective for years beginning after December
15, 1995 (fiscal 1997 for the Company). This statement established criteria
for recognizing, measuring and disclosing impairments of long-lived assets,
identifiable intangibles and goodwill. The Company has adopted SFAS No. 121
effective in fiscal year 1997. Management does not expect that the adoption
will have a material effect on the Company's financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for years
beginning after December 15, 1995 (fiscal 1997 for the Company). This
statement allows entities to choose between a new fair value based method of
accounting for employee stock options or similar equity instruments and the
current intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25. Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied. The Company expects to continue accounting for employee stock options
and similar equity instruments in accordance with APB Opinion No. 25. The pro
forma effect for fiscal 1996 has not yet been determined.
-11-
<PAGE> 14
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain sections of this Report, specifically the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 relating to management's
current expectations regarding the future results of operations or financial
condition of the Company. These forward-looking statements may be identified by
the use of forward-looking terminology such as "may," "will," "believe,"
"anticipate," "should," or comparable terms or the negative thereof. These
statements are based solely on data currently available, which data is subject
to change as a result of changes in conditions and should not therefore be
viewed as assurance regarding the Company's future performance. These
statements involve risks and uncertainties that could cause the actual results
to differ materially from those described in the statements. In addition to the
risks and uncertainties specifically described in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Outlook for 1997," these forward-looking statements may also be
affected by the following risks and uncertainties: the effect of economic and
market conditions; the impact of costs, insurance recoveries and governmental,
judicial and other third party interpretation and determination in connection
with legal and environmental proceedings; and the impact of current, pending or
future legislation or regulations (collectively, the "Cautionary Statements").
Although the Company believes that the expectations reflected in any
forward-looking statements contained herein are reasonable, it can give no
assurance that such expectations will prove to have been correct. All subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements contained herein.
-12-
<PAGE> 15
ALLWASTE, INC. AND SUBSIDIARIES
PART II
ITEM 2 - CHANGES IN SECURITIES
The Company did not sell any unregistered securities during the first
quarter of fiscal 1997.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
No. Description
- ------- ------------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of Allwaste,
Inc. ("Allwaste") effective February 22, 1990. (Exhibit 3.1 to
the Allwaste Quarterly Report on Form 10-Q (File No. 0-15217) for
the fiscal quarter ended February 28, 1990 is hereby incorporated
by reference.)
3.2 -- Corrected Bylaws of Allwaste (Exhibit 3.2 to the Allwaste Annual
Report on Form 10-K (File No. 1-11008) for the fiscal year ended
August 31, 1992, filed November 27, 1992 (the "1992 10-K"), is
hereby incorporated by reference.)
3.3 -- Certificate of Designation of Series One Junior Participating
Preferred Stock of Allwaste, Inc., effective November 19, 1996.
(Exhibit 3.3 to the Allwaste Annual Report on Form 10-K for the
fiscal year ended August 31, 1996, (the "1996 10-K") is hereby
incorporated by reference.)
4.1 -- Specimen Common Stock certificate (Exhibit 4.1 to the Allwaste
Quarterly Report on Form 10-Q (File No. 1-11016) for the fiscal
quarter ended February 29, 1996 (the "February 10-Q") is hereby
incorporated by reference.)
4.2 -- Specimen debenture certificate (Exhibit 4.2 to the 1992 10-K is
hereby incorporated by reference.)
4.3 -- Form of Indenture between Allwaste and Texas Commerce Trust
Company of New York dated June 1, 1989, relating to certain
debentures of Allwaste. (Exhibit 4.1 to the Allwaste Quarterly
Report on Form 10-Q (File No. 0-15217) for the fiscal quarter
ended May 31, 1989 is hereby incorporated by reference.)
4.4 -- Stockholder Rights Agreement dated August 5, 1996, between
Allwaste and American Stock Transfer & Trust Company as Rights
Agent. (Exhibit 1 to the Allwaste, Inc. Registration Statement
on Form 8-A, filed November 14, 1996, is hereby incorporated by
reference.)
10.1 -- Employment Agreement dated October 23, 1986, between R.L. Nelson,
Jr. and Allwaste. (Exhibit 10.1 to the Allwaste Annual Report on
Form 10-K (File No. 1-11008) for the fiscal year ended August 31,
1994, filed November 29, 1994 (the "1994 10-K"), is hereby
incorporated by reference.)
10.2 -- Employment Agreement dated October 17, 1994, between Robert M.
Chiste and Allwaste. (Exhibit 10.6 to the 1994 10-K is hereby
incorporated by reference.)
10.3 -- Allwaste Amended and Restated 1989 Replacement Non-Qualified
Stock Option Plan. (Exhibit A to the Allwaste proxy statement
relating to its 1995 annual meeting of stockholders, filed
December 20, 1994, is hereby incorporated by reference.)
-13-
<PAGE> 16
10.4 -- Allwaste, Inc. Target 2000: One, Two, Four Plan. (Exhibit 10.4
to the Allwaste Quarterly Report on Form 10-Q (File No. 1-11008)
for the fiscal quarter ended February 29, 1996 (the "February
10-Q") is hereby incorporated by reference.)
10.5 -- Allwaste Employee Retirement Plan. (Exhibit 4.3 to the
Post-Effective Amendment No. 1 to Registration Statement on Form
S-8 (File No. 33-37684), filed August 7, 1995, is hereby
incorporated by reference.)
10.6 -- Credit Agreement dated as of November 30, 1993, as amended, by
and among Allwaste, Inc., a Delaware corporation, the Financial
Institutions signatory thereto, and Texas Commerce Bank National
Association, a national banking association, as Agent. (Exhibit
10.10 to the 1994 10-K is hereby incorporated by reference.)
10.7 -- Agreement and First Amendment to Credit Agreement dated January
21, 1994, by and among Allwaste, the Financial Institutions
signatory thereto, and Texas Commerce Bank National Association,
a national banking association, as Agent. (Exhibit 10.7 to the
February 10-Q is hereby incorporated by reference.)
10.8 -- Agreement and Second Amendment to Credit Agreement dated March
20, 1994, by and among Allwaste, the Financial Institutions
signatory thereto, and Texas Commerce Bank National Association,
a national banking association, as Agent. (Exhibit 10.8 to the
February 10-Q is hereby incorporated by reference.)
10.9 -- Agreement and Third Amendment to Credit Agreement dated May 31,
1994, by and among Allwaste, the Financial Institutions signatory
thereto, and Texas Commerce Bank National Association, a national
banking association, as Agent. (Exhibit 10.9 to the February
10-Q is hereby incorporated by reference.)
10.10 -- Agreement and Fourth Amendment to Credit Agreement dated October
18, 1994, by and among Allwaste, the Financial Institutions
signatory thereto, and Texas Commerce Bank National Association,
a national banking association, as Agent. (Exhibit 10.10 to the
February 10-Q is hereby incorporated by reference.)
10.11 -- Agreement and Fifth Amendment to Credit Agreement dated August
31, 1995, by and among Allwaste, the Financial Institutions
signatory thereto, and Texas Commerce Bank National Association,
a national banking association, as Agent. (Exhibit 10.11 to the
February 10-Q is hereby incorporated by reference.)
10.12 -- First Amendment to Employment Agreement dated as of October 26,
1995, between Robert M. Chiste and Allwaste. (Exhibit 10.6 to
the Allwaste Annual Report on Form 10-K (File No. 1-11016) for
the fiscal year ended August 31, 1995, filed November 30, 1995
(the "1995 Form 10-K") is hereby incorporated by reference.)
10.13 -- Agreement and Sixth Amendment to Credit Agreement dated February
29, 1996, by and among Allwaste, the financial institutions
signatory thereto and Texas Commerce Bank National Association, a
national banking association, as Agent. (Exhibit 10.13 to the
Allwaste Quarterly Report on Form 10-Q (File No. 1-11016) for the
fiscal quarter ended May 31, 1996 (the "May 10-Q") is hereby
incorporated by reference.)
10.14 -- Agreement and Seventh Amendment to Credit Agreement dated August
1, 1996, by and among Allwaste, the financial institutions
signatory thereto and Texas Commerce Bank National Association, a
national banking association, as Agent. (Exhibit 10.14 to the
1996 10-K is hereby incorporated by reference.)
10.15 -- First Amendment to Employment Agreement dated November 11, 1996,
between R. L. Nelson, Jr. and Allwaste. (Exhibit 10.15 to the
1996 10-K is hereby incorporated by reference.)
-14-
<PAGE> 17
10.16 -- Second Amendment to Employment Agreement dated October 25, 1996,
between Robert M. Chiste and Allwaste. (Exhibit 10.16 to the
1996 10-K is hereby incorporated by reference.)
10.17 -- First Amendment to Employment Agreement dated November 11, 1996,
between William L. Fiedler and Allwaste. (Exhibit 10.17 to the
1996 10-K is hereby incorporated by reference.)
10.18 -- Employment Agreement dated November 11, 1996, between David E.
Fanta and Allwaste. (Exhibit 10.18 to the 1996 10-K is hereby
incorporated by reference.)
10.19 -- Employment Agreement dated November 11, 1996, between T. Wayne
Wren, Jr. and Allwaste. (Exhibit 10.19 to the 1996 10-K is
hereby incorporated by reference.)
10.20 -- Employment Agreement dated November 11, 1996, between James E.
Rief and Allwaste. (Exhibit 10.20 to the 1996 10-K is hereby
incorporated by reference.)
10.21 -- Employment Agreement dated November 11, 1996, between Michael W.
Ramirez and Allwaste. (Exhibit 10.21 to the 1996 10-K is hereby
incorporated by reference.)
10.22 -- Executive Severance Agreement dated November 11, 1996, between R.
L. Nelson, Jr. and Allwaste. (Exhibit 10.22 to the 1996 10-K is
hereby incorporated by reference.)
10.23 -- Executive Severance Agreement dated November 11, 1996, between
Robert M. Chiste and Allwaste. (Exhibit 10.23 to the 1996 10-K
is hereby incorporated by reference.)
10.24 -- Executive Severance Agreement dated November 11, 1996, between
David E. Fanta and Allwaste. (Exhibit 10.24 to the 1996 10-K is
hereby incorporated by reference.)
10.25 -- Executive Severance Agreement dated November 11, 1996, between T.
Wayne Wren, Jr. and Allwaste. (Exhibit 10.25 to the 1996 10-K
is hereby incorporated by reference.)
10.26 -- Executive Severance Agreement dated November 11, 1996, between
James E. Rief and Allwaste. (Exhibit 10.26 to the 1996 10-K is
hereby incorporated by reference.)
10.27 -- Executive Severance Agreement dated November 11, 1996, between
William L. Fiedler and Allwaste. (Exhibit 10.27 to the 1996 10-K
is hereby incorporated by reference.)
10.28 -- Executive Severance Agreement dated November 11, 1996, between
Michael W. Ramirez and Allwaste. (Exhibit 10.28 to the 1996 10-K
is hereby incorporated by reference.)
10.29 -- 1996 Interim Management Bonus Plan. (Exhibit 10.29 to the 1996
10-K is hereby incorporated by reference.)
10.30 -- Third Amendment to Employment Agreement dated November 11, 1996,
between Robert M. Chiste and Allwaste. (Exhibit 10.30 to the
1996 10-K is hereby incorporated by reference.)
10.31 -- Allwaste EVA Incentive Compensation Plan. (Exhibit 10.31 to the
1996 10-K is hereby incorporated by reference.)
27.1 -- Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K.
None.
-15-
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Allwaste, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLWASTE, INC.
Dated: January 13, 1997 By: /s/ T. WAYNE WREN, JR.
-------------------------------
T. Wayne Wren, Jr.
Senior Vice President -
Chief Financial Officer and
Treasurer
-16-
<PAGE> 19
EXHIBIT INDEX
27 -- Financial Data Schedule
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 5,793
<SECURITIES> 0
<RECEIVABLES> 85,007
<ALLOWANCES> 2,319
<INVENTORY> 1,825
<CURRENT-ASSETS> 102,763
<PP&E> 250,076
<DEPRECIATION> 124,967
<TOTAL-ASSETS> 345,121
<CURRENT-LIABILITIES> 77,334
<BONDS> 126,923
398
0
<COMMON> 0
<OTHER-SE> 128,571
<TOTAL-LIABILITY-AND-EQUITY> 345,121
<SALES> 100,907
<TOTAL-REVENUES> 100,907
<CGS> 74,451
<TOTAL-COSTS> 74,451
<OTHER-EXPENSES> 19,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,335
<INCOME-PRETAX> 5,269
<INCOME-TAX> 2,414
<INCOME-CONTINUING> 2,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,855
<EPS-PRIMARY> 0.08
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