<PAGE>
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, 1996 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 1-10490
SANIFILL, INC.
(exact name of Registrant as specified in its charter)
Delaware 76-0279492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 Allen Parkway, Suite 700, Houston, Texas 77019
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (713) 942-6200
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 [_]
The number of shares of Common Stock of the registrant, par value $.01 per
share, outstanding at May 10, 1996 was 24,960,373.
This report contains 17 pages.
<PAGE>
FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.. 16
Item 6. Exhibits and Reports on Form 8-K..................... 16
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SANIFILL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,620 $ 2,835
Accounts receivable, net 52,945 47,019
Prepaid expenses 1,964 4,604
Other current assets 6,209 3,015
-------- --------
Total current assets 63,738 57,473
Property and equipment, net 702,629 572,329
Goodwill, net 115,786 97,974
Other assets 52,226 48,153
-------- --------
Total assets $934,379 $775,929
======== ========
LIABILITIES AND
STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 13,484 $ 13,359
Accounts payable 20,115 22,419
Accrued liabilities and other 30,555 25,111
-------- --------
Total current liabilities 64,154 60,889
Long-term debt, net of current maturities 204,009 209,329
Convertible subordinated debentures, net 155,985 58,213
Environmental reserves 50,211 43,339
Deferred income taxes, net 66,988 64,662
Other long-term obligations 15,855 23,906
-------- --------
Total liabilities 557,202 460,338
-------- --------
Commitments and contingencies
Stockholders' investment:
Preferred stock -- --
Common stock 233 217
Additional paid-in capital 298,879 245,490
Retained earnings 92,613 84,661
Foreign currency translation adjustment (14,548) (14,777)
-------- --------
Total stockholders' investment 377,177 315,591
-------- --------
Total liabilities and stockholders' investment $934,379 $775,929
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
-------- ----------
<S> <C> <C>
(Restated)
Revenues $81,000 $54,064
Cost of operations 51,895 35,038
------- -------
Gross Profit 29,105 19,026
Selling, general and administrative expenses 12,247 8,118
------- -------
Operating income 16,858 10,908
Interest expense 4,462 2,903
Interest income (209) (226)
Other income, net (648) (328)
------- -------
Income before income taxes 13,253 8,559
Income taxes 5,301 3,387
------- -------
Net income $ 7,952 $ 5,172
======= =======
Earnings per common and common equivalent share $0.35 $0.28
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,952 $ 5,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 11,326 9,092
Deferred income taxes 898 222
Provision for environmental reserves 1,004 897
Provision for doubtful accounts 210 108
Gain on sale of assets (239) (140)
Changes in assets and liabilities, excluding effects
of acquisitions:
Accounts receivable (3,837) (4,164)
Prepaid expenses 2,302 774
Other current assets (2,776) (384)
Accounts payable and accrued liabilities and other (4,114) (7,360)
Other, net (207) (132)
--------- ---------
Net cash provided by operating activities 12,519 4,085
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (29,061) (12,559)
Payments for acquisitions accounted for as purchases, net
of cash received of $22 in 1996 and $0 in 1995 (81,846) (2,000)
Reductions (Additions) to other noncurrent assets, net 1,447 (1,376)
Proceeds from sale of property and equipment 518 294
-------- ---------
Net cash used in investing activities (108,942) (15,641)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 112,063 25,226
Repayments of borrowings (16,971) (13,265)
Proceeds from issuances of common stock, net 712 828
Other, net 392 168
-------- -------
Net cash provided by financing activities 96,196 12,957
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 12 (96)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (215) 1,305
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,835 3,322
-------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,620 $ 4,627
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Sanifill, Inc. and subsidiaries ("Sanifill" or the "Company") own, operate,
acquire and develop nonhazardous waste disposal, waste treatment, waste
collection, recycling, waste transfer and complementary businesses located in
the United States, the Commonwealth of Puerto Rico, Mexico and Canada. The
nonhazardous waste industry is highly competitive and fragmented. Additionally,
this industry is subject to various foreign, federal, state and local laws and
substantial regulation under these laws. The Company's waste collection and
waste transfer businesses will from time to time also involve the collection,
transportation or transfer of relatively small quantities of materials that are
classified and regulated as hazardous substances or hazardous wastes under
federal or state environmental laws and regulations, as an ancillary service for
our nonhazardous solid waste customers.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and transactions have been
eliminated for all periods presented. The accounts of the one business acquired
on May 31, 1995 in a transaction accounted for as a pooling-of-interests have
been included as if the business had always been a member of the same operating
group; accordingly, the historical consolidated financial statements covering
the period ended March 31, 1995 have been restated. The accounts of the
businesses acquired in transactions accounted for as purchases have been
included from their respective acquisition dates.
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 herein are adequate to make the information
presented 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.
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 of Sanifill, Inc. and subsidiaries for the year ended December 31,
1995 and the related notes thereto (the "Financial Statements") included in the
Company's Annual Report on Form 10-K filed with the SEC on March 27, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
Goodwill
Effective January 1, 1996, the Company changed its estimate of the useful life
of its goodwill from 25 to 40 years. The effects of this change will be
accounted for prospectively in the financial statements. The effect of this
change in estimate was to increase net income by $.2 million or nine tenths of
one cent per share in the first quarter 1996.
The Company changed its estimated goodwill life due to changes in facts and
circumstances that have occurred over time. Goodwill arises only in non-
landfill acquisitions at Sanifill. Prior to 1992, all of the Company's
acquisitions were landfill acquisitions, and the Company had no goodwill on its
balance sheet. In 1992, Sanifill began the evolution from its disposal-only
strategy to a disposal-based strategy which involved the acquisition of
collection and transfer businesses to vertically integrate around its existing
landfills. The Company chose a relatively short 25-year goodwill life when it
made its first collection acquisitions in 1992 because the new strategy was
unproven at Sanifill and because the remaining life of the permitted airspace at
the landfills fed by these early collection acquisitions was relatively short
(approximately 10 years). Today, the disposal-based strategy is in place in the
majority of Sanifill's markets. It has been proven to be a viable, profitable
strategy, and the average remaining life of the permitted airspace at the
Company's landfills has grown to 32 years, with
6
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
additional expansion opportunities available. Similarly, without regard to
Sanifill's average site life, the collection operations which have been acquired
or developed are important in size and can operate indefinitely and
independently of Sanifill's landfilling operations. Management believes that
these changes in fact support a longer goodwill life. In addition, the Company
has conducted a survey of the practices of other major public solid waste
companies and found that a substantial majority of them use a 40-year goodwill
life.
There have been no other significant additions to or changes in accounting
policies of the Company since December 31, 1995.
For a description of these policies, see Note 2 of Notes to Consolidated
Financial Statements for the year ended December 31, 1995 in the Company's
Annual Report on Form 10-K.
3. BUSINESS COMBINATIONS
The Company's acquisitions in transactions accounted for as purchases are
summarized as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
--------- -------
<S> <C> <C>
Acquisitions consummated
Collection businesses 9 3
Solid waste transfer stations 1 1
Municipal solid waste disposal facilities -- 1
Dry waste disposal facilities 2 --
Materials recovery facilities -- --
-------- -------
Total 12 5
======== =======
Consideration
Cash $ 75,408 $ 2,000
Notes 2,900 646
Common stock 31,366 11,387
-------- -------
Total $109,674 $14,033
======== =======
</TABLE>
The $109.7 million of consideration during the 1996 period includes $41.1
million related to a landfill and transfer station development project in the
Baltimore-Washington area.
Pro forma results of operations are not presented as the amounts do not
significantly differ from historical Company results.
In addition, the Company has agreed, in connection with certain transactions
which occurred during 1995, to pay additional amounts to the sellers upon the
achievement by the acquired businesses of certain negotiated goals, such as
targeted revenue levels, targeted disposal volumes or the issuance of permits
for expanded landfill airspace. The contingent consideration is payable in
cash, or, in some instances, in cash or stock, at the Company's option.
Although the amount and timing of any payments of additional contingent
consideration necessarily depend on whether and when these goals are met, the
maximum aggregate amount of contingent consideration potentially payable if all
payment goals are met would be $70.5 million, $12.9 million, of which was paid
half in cash and half in stock in March 1996. Of the remaining unpaid
contingent consideration of $57.6 million, $49.6 million relates to revenue and
volume targets. The remainder relates to permit expansions. Of the $57.6
million, $30.6 million relates to a contingent liability which, if the
applicable performance goal is met, would be payable in equal annual
installments over five years. In addition, consistent with industry practice,
the Company regularly agrees to provide royalties based on revenue generated at
the applicable disposal site to
7
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
sellers of waste disposal businesses that it acquires. The foregoing
quantification of contingent consideration does not include potential royalty
payments.
On May 31, 1995, the Company acquired Metropolitan Disposal and Recycling
Corporation, Energy Reclamation, Inc., and E. E. Equipment, Inc. (collectively,
"MDC") in a transaction accounted for as a pooling-of-interests. MDC conducts
collection and materials recovery facility activities. Aggregate consideration
consisted of approximately 1.1 million shares of the Company's common stock.
Revenues and net income of MDC were $8.9 million and $0.8 million, respectively,
for the period from January 1, 1995 through the acquisition date. These amounts
reflect estimated pooling adjustments to (i) eliminate intercompany transactions
with Sanifill, (ii) conform MDC to Sanifill's policy for amortization of
intangible assets and (iii) reflect income tax expense.
Since March 31, 1996, the Company has acquired seven collection businesses for
aggregate consideration of $2.6 million.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Property and equipment $813,039 $675,332
Less: Accumulated depreciation, depletion and amortization 110,410 103,003
-------- --------
Net property and equipment $702,629 $572,329
======== ========
</TABLE>
Property and equipment includes the following permit-related items (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
<S> <C> <C>
Permitting projects in process
Greenfield sites $ -- $ --
Nonoperating sites 549 153
Operating sites 11,949 12,861
Permitted land at nonoperating sites 32,746 24,416
Permitted land with construction in process 69,180 35,281
-------- --------
Total $114,424 $ 72,711
======== ========
</TABLE>
The increase in permitted land with construction in process during the three
months ended March 31, 1996 is primarily attributable to the recent acquisition
of a development project consisting of a landfill and two transfer stations in
the Baltimore-Washington area.
8
<PAGE>
SANIFILL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER SHARE
Earnings per common and common equivalent share have been computed based on
the weighted average number of shares outstanding. The following table
reconciles the number of common shares outstanding with the number of common
shares used in computing earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
-------- ----------
<S> <C> <C>
(Restated)
Common shares outstanding 23,299 18,329
Effect of using weighted average common shares
outstanding during the period (1,044) (199)
Effect of shares issuable under stock option plan
and stock warrants based on the treasury stock method 734 496
------ ------
Common and common equivalent shares used in
computing earnings per share 22,989 18,626
====== ======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Revenues in the quarter increased by $26.9 million (50%) over prior
year levels, due to a combination of acquisition and internal development
activities. Gross profit as a percentage of revenues increased by 1%, while
selling, general, and administrative expenses as a percentage of revenues
remained constant. This resulted in operating income of 21% of revenues and net
income of 10% of revenues. Net income increased by 54% to $8.0 million, and
earnings per share increased by 25% to $0.35.
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED MARCH 31, 1996 AND 1995
Revenues
The components of revenues are summarized as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Components of Revenue
--------------------------------
Three Months Ended
March 31,
--------------------------------
1996 1995
--------------- ---------------
(Restated)
<S> <C> <C> <C> <C>
Municipal solid waste disposal $17,287 21% $12,641 24%
Dry waste disposal 11,130 14 8,819 16
Special waste disposal 6,996 8 5,339 10
Collection/transfer 35,363 44 17,893 33
Nonhazardous oilfield waste 7,255 9 6,497 12
Recycling 2,969 4 2,875 5
------- -- ------- --
Total revenues $81,000 100% $54,064 100%
======= ==== ======= ====
</TABLE>
9
<PAGE>
Intercompany disposal transactions are eliminated from the collection/transfer
component in the previous analysis. The recycling category includes revenue
generated from the sale of recycled commodities, which for the three month
period ended March 31, 1996 was approximately 1% of total company revenues. The
factors impacting the year-to-year change in total revenues are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Change in 1996 vs. 1995 Total Revenues
--------------------------------------
Three Months Ended March 31,
--------------------------------------
<S> <C>
Domestic disposal operations
Existing: Price/mix $ 1,069
Volume 2,511
New: Acquired 4,959
Domestic collection operations 17,485
Mexico operations 912
-------
Total change $26,936
=======
</TABLE>
With regard to the revenue trends in existing operations for the three
months ended March 31, 1996, the Company's solid waste landfill operations
reported a 10% "same-store" revenue increase versus the same period last year,
of which approximately 4.6% related to volume increases and 5.4% to increases in
average price per unit. The Company's nonhazardous oilfield waste (NOW)
operations reported an 11% "same-store" revenue increase in the quarter versus
the same period last year.
The following table presents, for the periods indicated, the percentage
relationship which the captioned items in the Company's Condensed Consolidated
Statements of Operations bear to total revenues.
<TABLE>
<CAPTION>
Percentage Relationship to Total Revenues
-------------------------------------------
Three Months Ended
-------------------------------------------
March 31,
-------------------------------------------
1996 1995
------------------ -----------------------
<S> <C> <C>
(Restated)
Revenues 100% 100%
Cost of operations 64 65
---- ----
Gross profit 36 35
Selling, general and administrative expenses 15 15
---- ----
Operating income 21 20
Interest expense 6 5
Other income, net (1) (1)
---- ----
Income before income taxes 16 16
Income taxes 6 6
---- ----
Net income 10% 10%
==== ====
</TABLE>
Cost of Operations and Gross Profit
Cost of operations increased $16.9 million (48%) for the three month period
ended March 31, 1996, as compared with 1995. This increase was due primarily to
costs associated with facilities and operations opened or acquired since the
first quarter of 1995.
Gross profit increased $10.1 million (53%) for the three month period ended
March 31, 1996, as compared with 1995. Gross profit also increased as a percent
of revenues from 35% to 36% for the three month period. The increase in gross
profit as a percentage of revenue was primarily attributable to the benefits of
landfill volume and price increases, successful 1995 landfill airspace
expansions and value-adding engineering efforts partially offset by the decline
in prices for recycled fiber commodities in the quarter versus the same period
in the prior year.
10
<PAGE>
Selling, General and Administrative Expenses ("SG&A")
SG&A increased $4.1 million (51%) for the three month period ended March
31, 1996, as compared with 1995. SG&A remained constant as a percent of
revenues at 15% for the three month period. The absolute increase in SG&A was
due primarily to costs associated with facilities opened or acquired since the
first quarter of 1995.
Operating Income
Operating income increased $6.0 million (55%) for the three month period
ended March 31, 1996, as compared with 1995. Operating income also increased as
a percent of revenues from 20% to 21% for the three month period. The increase
in operating income in absolute dollars and as a percent of revenues from the
prior period reflected the factors discussed in Cost of Operations and Gross
Profit above, plus the Company's success in implementing its sales program, the
favorable economic conditions at certain sites, the Company's broad strategy of
vertical integration through collection business acquisitions and the
contribution from acquisitions since the first quarter of 1995.
Interest Expense
Interest expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 31,
--------------------
1996 1995
-------- ----------
<S> <C> <C>
(Restated)
Gross interest $6,147 $4,271
Less: capitalized interest (1,685) (1,368)
------- ---------
Interest expense $4,462 $2,903
====== ======
</TABLE>
Interest expense increased $1.6 million (54%) for the three month period
ended March 31, 1996, as compared with 1995. The increase in gross interest was
due primarily to higher average debt levels, partially offset by a decrease in
average interest rates.
Other Income, Net
Interest and other income increased $0.3 million (55%) for the three month
period ended March 31, 1996, as compared with 1995. The increase for the three
month period was due primarily to an increased contribution from a joint venture
equity interest in a landfill operation.
Income Taxes
The effective income tax rates for the three months ended March 31, 1996
was 40.0% as compared with 39.6% for 1995. The effective rates for both
quarters were higher than the statutory federal rate of 35% due primarily to the
effect of state income taxes and nondeductible expenses.
Net Income
Net income increased $2.8 million (54%) for the three month period ended
March 31, 1996, as compared with 1995 and remained constant as a percent of
revenues at 10%. The absolute increase in net income for the first quarter 1996
resulted from the same factors discussed in Operating Income and Other Income,
Net above.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's key working capital data are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -------------
<S> <C> <C>
Working capital (in thousands) $ (416) $ (3,416)
Ratio of current assets to current liabilities 0.99:1.0 0.94:1.0
</TABLE>
The Company's strategy in controlling working capital is to maintain
sufficient availability under its bank credit facility to finance short-term
capital needs in excess of internally generated funds with the goal of
minimizing working capital.
Financing Activities
Historically, the Company has financed its capital requirements from
internally generated funds, borrowings from banks, issuances of securities,
loans from sellers of businesses acquired and loans from other commercial
lenders. To date, the Company has been able to obtain satisfactory financing
for the operation of its businesses and believes that it will be able to obtain
such financing as required in the future. On April 17, 1995, the Company
amended its unsecured Revolving Credit Facility to increase its size from $160
million to $225 million and to increase its bank group from seven to nine banks.
The Revolving Credit Facility provides for a revolving credit period expiring on
November 30, 1997, at which time it converts to a term facility with a final
maturity date of November 30, 2001. Availability under this facility is tied to
the Company's cash flow and liquidity. Advances bear interest, at the Company's
option, at the prime rate or LIBOR, in each case plus a margin which is
calculated quarterly based upon the Company's ratio of indebtedness to cash
flow, or, in an amount not to exceed $100 million, at a rate negotiated between
the Company and certain banks party to the Revolving Credit Facility. At March
31, 1996, the Company had $52.1 million of cash borrowings and $46.7 million of
letters of credit issued under this facility for a total utilization of $98.8
million.
On March 4, 1996, the Company issued $115 million of 5% Convertible
Subordinated Debentures, due on March 1, 2006. Interest is payable semiannually
in March and September. The debentures are convertible into shares of the
Company's common stock at a conversion price of $48.13 per share. The
debentures are subordinated in right of payment to all existing and future
senior indebtedness, as defined. The debentures are redeemable after March 15,
1999 at the option of the Company at 102.5% of the principal amount, declining
annually to par on March 1, 2002, plus accrued interest. Deferred offering
costs of approximately $2.9 million were incurred and are being amortized
ratably over the life of the debentures. The proceeds were used to repay debt
under the Company's Revolving Credit Facility.
On March 18, 1996, the Company called for redemption all of its $60 million
series of 7-1/2% Convertible Subordinated Debentures due June 1, 2006 at a
redemption price of 104.5% of their face amount plus accrued interest from
December 1, 1995 to, and including, the redemption date. The redemption date
was April 17, 1996. Alternatively, holders of these debentures could convert
their debentures into Company common stock at any time prior to the close of
business on April 10, 1996, at a conversion price equal to $28.82 per share.
Holders who elected to convert received 34.70 shares of the Company's common
stock for each $1,000 principal amount of debentures surrendered. At March 31,
1996, $14.8 million had been converted into approximately .5 million shares of
the Company's common stock. As of the end of business on April 10, 1996, $59.8
million or 99.7% had been converted into approximately 2.1 million shares of the
Company's common stock.
Total long-term debt increased from $267.5 million at December 31, 1995, to
$360.0 million at March 31, 1996. The increase is attributable to borrowings
for the acquisition of waste disposal and collection businesses, the purchase of
property and equipment and working capital needs.
Balance Sheet Management
Management's long-term objectives regarding its outstanding debt are to
match the term of its debt with the economic life of its assets, structure debt
with staged maturity schedules, limit floating rate debt to no more than 40% of
total debt and to manage the Company's long-term debt to capitalization ratio,
for which a general upper limit of 53% has been established, subject to revision
from time to time as circumstances or opportunities dictate. Long-term debt as
a percentage of total capitalization was 46% at December 31, 1995 and 49% at
March
12
<PAGE>
31, 1996. The increase resulted primarily from the funding of a development
project in the Baltimore-Washington area. See Note 3. The Company's ratio of
debt to total capital, pro forma for the conversion of all of the $60 million
issue to equity discussed previously in the Financing Activities section, is
approximately 43% at March 31, 1996. The Company's weighted average cost of
indebtedness decreased to 7.5% for the first quarter of 1996 from 8.2% for the
first quarter of 1995. The Company's weighted average cost of indebtedness, pro
forma for the conversion of the $60 million issue to equity and the March 4,
1996 issuance of $115 million of 5% Convertible Subordinated Debentures, is
approximately 6.8% at March 31, 1996. As of March 31, 1996, 15% of the
Company's debt was subject to floating interest rates.
Capital Expenditures
Capital expenditures are expected to approximate $136 million in 1996 for
routine purchases of property and equipment, engineering, design and
construction costs associated with the development of existing landfills,
regulatory compliance and implementation costs and the completion of new
revenue-generating projects, including construction costs associated with new
landfill and transfer station development projects in Denver and the Baltimore-
Washington area. Further, the Company may also be required to make significant
expenditures to bring additional acquired disposal facilities into compliance
with applicable regulatory requirements, permit new disposal facilities, expand
permitted areas of existing disposal sites or in connection with certain
acquisition agreements, provide additional consideration, as defined, if
expansions of permitted airspace are obtained. The amount of these future
expenditures cannot be determined as they will depend upon the condition of the
disposal facilities acquired, the condition of any sites to be permitted and
when the terms of certain acquisition agreements are met.
In order to carry out its acquisition program and development strategy, the
Company will have significant capital requirements. The Company disbursed cash
of $71.1 million, $16.1 million and $31.0 million in 1995 through 1993,
respectively, in order to fund its acquisition program. In the first quarter of
1996, the Company had disbursed $75.4 million on this year's acquisition
program. The Company could potentially make acquisitions involving cash
consideration of up to $125 million or more in 1996 in connection with the
acquisition of waste disposal and collection businesses. The Company is
opportunistic in evaluating acquisitions, however, and may seek to effect
acquisitions involving consideration in excess of this range. The Company
anticipates the use of a combination of cash, notes, and shares of its common
stock to fund the purchase price for acquisitions. In order to fund such
acquisitions, the Company may seek to raise capital through additional bank
borrowings and public or private debt or equity markets. The availability of
these capital sources will depend upon prevailing market conditions, interest
rates and the then existing financial condition of the Company. In the event
that the Company's common stock does not maintain a sufficient market value, or
if potential acquisition candidates are unwilling to accept common stock as part
of the consideration for the sale of their businesses, the Company would be
required to utilize a greater amount of cash to continue its acquisition
program. If the Company were unable to secure the capital necessary to carry
out its acquisition program, the implementation of that portion of the Company's
growth strategy would be adversely affected.
Landfill Financial Obligations
The Company has material financial obligations relating to the closure of the
filled areas of landfill sites during their operating lives and the final
closure and post-closure care of facilities at the end of their operating lives.
These obligations apply to each disposal facility the Company operates or for
which it is otherwise responsible. Landfills are typically developed in a
series of cells, each of which is constructed, filled, and capped in sequence
over the operating life of the landfill. When the final cell is filled and the
operating life of the landfill is over, the final cell must be capped, the
entire site must be closed and post-closure care and monitoring activities
begin. The Company has estimated as of December 31, 1995 that total costs for
final closure and post-closure activities, including cap maintenance,
groundwater monitoring, methane gas monitoring and leachate treatment/disposal
for up to 30 years after closure in the majority of the cases, will approximate
$63.1 million. The Company has estimated as of December 31, 1995 that capping
costs expected to be incurred during the operating lives of its facilities and
expensed over the facilities' useful lives will approximate $142.5 million. In
addition, the Company has also acquired certain facilities where the potential
for minor remediation might exist. In such situations, the Company's engineers
estimate the total cost of remediation, which is estimated at March 31, 1996 to
be approximately $16.3 million.
13
<PAGE>
The Company's environmental reserve reconciliation is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Environmental Reserves
Three Months Ended March 31, 1996
----------------------------------------
Closure/Post-
Closure/Capping Remediation Total
---------------- ------------ --------
<S> <C> <C> <C>
Reserve balance, beginning of period $31,852 $12,140 $43,992
Accrual charged to operations 1,004 -- 1,004
Reserves established in acquisitions 3,066 4,433 7,499
Costs incurred (55) (302) (357)
Other (1,151) -- (1,151)
------- ------- -------
Reserve balance, end of period $34,716 $16,271 $50,987
======= ======= =======
</TABLE>
The Company will accrue the remainder of the difference between the
closure/post-closure and capping components of the reserve balance at March 31,
1996 and the total estimated closure/post-closure and capping cost of its
facilities based on engineering estimates over the useful lives of those
facilities.
The Company is required to provide financial assurance to various
regulatory agencies for certain of its estimated closure/post-closure,
remediation and capping obligations (the "Obligations"). Accordingly,
irrevocable trust funds have been established for nine of its landfills.
Contributions to the trust funds have been invested by the trustees, all of
which are federally insured banks, primarily in United States government
obligations, municipal bonds and interest-bearing demand deposits. The
investments of eight of the trust funds are recorded by the Company at cost,
which approximates market. The investments in the remaining trust fund, which
amount to $5.3 million, as well as the related Obligations, have not been
recorded by the Company due to certain provisions of the trust agreement
regarding the ultimate disposition of any excess funds remaining after all
Obligations have been satisfied. The investments held in this trust fund exceed
the Obligations that would have been accrued at March 31, 1996. In addition to
irrevocable trust funds, the Company also provides financial assurance for
certain of its facilities by the issuance of letters of credit, surety bonds,
insurance policies, and corporate guarantees. The Company has established a
wholly-owned captive insurance subsidiary to provide financial assurance at
selected sites through the issuance of insurance policies and surety bonds. The
Company's total financial assurance for the Obligations is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Summary of Financial Assurance
March 31, 1996
------------------------------
<S> <C>
Irrevocable trust funds $15,853
Outstanding letters of credit 32,555
Third party surety bonds 16,018
Captive insurance subsidiary 12,760
Corporate guarantees 4,905
-------
Total financial assurance provided $82,091
=======
</TABLE>
INTERNATIONAL OPERATIONS
Sanifill currently provides waste collection, disposal, or both, services in
six Mexican cities. These include four cities located near the border with the
United States (Tijuana, Mexicali, Ensenada and Ciudad Juarez), Naucalpan, which
is a suburb of Mexico City, and Acapulco. In the first quarter of 1996, the
Company entered the Canadian solid waste market through its purchase of two
transfer stations and a collection operation located near Toronto, Canada.
In addition to being subject to similar business risks as the Company's
domestic operations, the Company's Mexican and Canadian operations are subject
to other risks such as currency fluctuations, political instability, currency
control regulations, changes in foreign law, the recruitment of labor,
compliance with foreign immigration laws, and import and export restrictions.
14
<PAGE>
SEASONALITY AND INFLATION
The volume of waste received by the Company at its landfills generally
varies with the level of economic activity. In addition, construction and
demolition activity is typically highest in the spring and summer months,
decreases in the fall and is at its lowest during the winter. The level of
construction and demolition activity also varies generally with the level of
economic activity in the region in which a facility is located. The Company's
MSW landfill operations experience somewhat similar, though less pronounced,
seasonal variations. The Company's NOW operations volumes also vary partially
with the level of oil and gas exploration and production activity.
The Company believes that inflation and changing prices have not had, and
are not expected in the near term to have, any material adverse effect on its
domestic results of operations.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this section, including without
limitation (a) the statement in the paragraph under "--Results of Operations for
the Interim Periods Ended March 31, 1996 and 1995--Operating Income" regarding
the reasons for the absolute increase in operating income for the first quarter
in 1996, (b) the statement in the paragraph under "--Results of Operations for
the Interim Periods Ended March 31, 1996 and 1995--Net Income" regarding the
reasons for the absolute increase in net income for the first quarter in 1996,
(c) the statement in the first textual paragraph under "--Liquidity and Capital
Resources" regarding the Company's strategy in controlling working capital, (d)
the statement in the first paragraph under "--Liquidity and Capital Resources--
Financing Activities" of the Company's belief as to its future ability to obtain
financing, (e) the statement under "--Liquidity and Capital Resources--Balance
Sheet Management," regarding Management's long-term objectives regarding the
Company's outstanding debt, (f) the statements under "--Liquidity and Capital
Resources--Capital Expenditures" regarding the possibility that the Company may
be required to make significant additional expenditures for certain purposes,
the inability to determine the amount of such expenditures and the reasons for
such inability, (g) all of the statements in the first two textual paragraphs
under "--Liquidity and Capital Resources--Landfill Financial Obligations," and
the table appearing between such paragraphs, (h) all of the statements in the
final paragraph under "--Liquidity and Capital Resources--Landfill Financial
Obligations," (i) the statements under "--International Operations" regarding
the additional risks to which the Company's Mexican and Canadian operations are
subject and (j) all of the statements under "--Seasonality and Inflation," are
forward looking statements. Although the Company believes that the expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in this section and
elsewhere in this Report, including without limitation in conjunction with the
forward looking statements included in this section. 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company becomes a party to litigation involving claims
of personal injury arising out of its collection and disposal businesses,
workers' compensation claims and related employee-relations disputes, commercial
disputes with vendors, claims arising out of the Company's efforts to permit
facilities and claims arising out of the competition for collection and disposal
contracts. These suits arise in the ordinary course of the Company's business
and are not, in the judgment of the Company's management, material to the
condition or prospects of the Company.
The Company's operations are subject to the risk of private actions for
damages should it intentionally or unintentionally injure the environment,
property or persons. The amount of damages to which the Company might be
exposed for any such injury would, of course, depend on the facts specific to
the particular case, but could be substantial.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed February 5, 1996. The Company filed
information with respect to acquisitions consummated from January 1, 1995
through February 4, 1996 and filed audited financial statements for the acquired
companies MDC, Falcon Disposal Service, Inc., Garnet of Virginia, Inc., Garnet
of Maryland, Inc., Southern Sanitation, Inc., Southern Waste, Services, Inc.,
Copper State Recycling, Inc., Southwest Disposal, Inc., Southwest Disposal
Partnership, Southern Sanitation, Inc., Land Reclamation Company and GO of
Wisconsin.
A report on Form 8-K was filed February 11, 1996. The Company filed restated
consolidated financial statements for the three year period ended December 31,
1994 to reflect the pooling of MDC.
A report on Form 8-K was filed March 20, 1996. The Company filed information
with respect to acquisitions consummated from January 1, 1995 through March 19,
1996 and filed audited financial statements for the acquired companies PST
Reclamation, Inc. and Taylor Land Resources, Inc.
A report on Form 8-K was filed March 28, 1996. The Company filed information
with respect to acquisitions consummated from January 1, 1996 through March 27,
1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant, Sanifill, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SANIFILL, INC.
Dated: May 13, 1996 /s/ J. CHRIS BREWSTER
--------------------------
By: J. Chris Brewster
Vice President - Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,620
<SECURITIES> 0
<RECEIVABLES> 52,945<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,738
<PP&E> 813,039
<DEPRECIATION> 110,410
<TOTAL-ASSETS> 934,379
<CURRENT-LIABILITIES> 64,154
<BONDS> 359,994<F2>
<COMMON> 233
0
0
<OTHER-SE> 376,944
<TOTAL-LIABILITY-AND-EQUITY> 934,379
<SALES> 81,000
<TOTAL-REVENUES> 81,000
<CGS> 51,895
<TOTAL-COSTS> 51,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 210
<INTEREST-EXPENSE> 4,462
<INCOME-PRETAX> 13,253
<INCOME-TAX> 5,301
<INCOME-CONTINUING> 7,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,952
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<FN>
<F1>ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
<F2>LONG-TERM DEBT, NET OF CURRENT MATURITIES AND CONVERTIBLE SUBORDINATED
DEBENTURES, NET
</FN>
</TABLE>
