<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 0-19285
ALLIED WASTE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 88-0228636
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION.) IDENTIFICATION NO.)
15880 NORTH GREENWAY-HAYDEN LOOP, SUITE 100, SCOTTSDALE, ARIZONA 85260
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 423-2946
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO ___
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S CLASS OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF SEPTEMBER 30, 1997
----- ------------------------------------
<S> <C>
COMMON STOCK................... 101,044,723
</TABLE>
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<PAGE> 2
ALLIED WASTE INDUSTRIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets............................. 3
Condensed Consolidated Statements of Operations................... 4
Condensed Consolidated Statements of Cash Flows................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk........ 29
PART II OTHER INFORMATION
Item 1 -- Legal Proceedings................................................. 30
Item 2 -- Changes in Securities............................................. 30
Item 3 -- Defaults Upon Senior Securities................................... 30
Item 4 -- Submission of Matters to a Vote of Security Holders............... 30
Item 5 -- Other Information................................................. 30
Item 6 -- Exhibits and Reports on Form 8-K.................................. 30
Signature .................................................................. 31
</TABLE>
2
<PAGE> 3
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets --
Cash and cash equivalents ......................... $ 50,860 $ 79,742
Accounts receivable, net of allowance of
$6,353 and $7,211, respectively ................. 91,348 139,296
Prepaid and other current assets .................. 10,165 24,697
Inventories ....................................... 6,942 7,278
Assets held for sale .............................. 524,716 --
Deferred income taxes ............................. 5,809 12,860
----------- -----------
Total current assets ............................ 689,840 263,873
Property and equipment, net .......................... 734,829 940,070
Goodwill, net ........................................ 859,081 860,598
Other assets ......................................... 47,104 65,314
----------- -----------
Total assets .................................... $ 2,330,854 $ 2,129,855
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
Current portion of long-term debt ................. $ 534,682 $ 40,877
Accounts payable .................................. 57,203 45,381
Accrued interest .................................. 4,910 19,670
Other accrued liabilities ......................... 60,897 88,238
Unearned income ................................... 13,088 30,738
----------- -----------
Total current liabilities ....................... 670,780 224,904
Long-term debt, less current portion ................. 1,154,538 1,125,992
Convertible subordinated debt, net of discount,
less current portion .............................. 1,706 1,383
Deferred income taxes ................................ 53,095 28,201
Accrued closure, post-closure and
environmental costs ............................... 152,604 159,878
Deferred royalties and other long-term obligations ... 22,097 39,838
Commitments and contingencies
Stockholders' Equity --
Preferred stock, aggregate liquidation preference
of $9,907 at December 31, 1996 .................... 1 --
Common stock ...................................... 774 1,010
Additional paid-in capital ........................ 351,602 644,321
Retained deficit .................................. (76,343) (95,672)
----------- -----------
Total stockholders' equity ...................... 276,034 549,659
----------- -----------
Total liabilities and stockholders' equity ........ $ 2,330,854 $ 2,129,855
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
3
<PAGE> 4
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND NUMBER OF SHARES; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................ $ 205,116 $ 633,303 $ 71,898 $ 224,295
Cost of operations ...................... 117,215 344,468 40,564 116,624
Selling, general
and administrative expenses ........... 30,687 73,067 9,840 24,694
Depreciation and amortization ........... 24,305 82,237 8,045 29,460
Acquisition related costs ............... 6,041 2,618 279 2,618
------------ ------------ ------------ ------------
Operating income ...................... 26,868 130,913 13,170 50,899
Interest income ......................... (313) (1,333) (131) (229)
Interest expense ........................ 7,434 73,838 2,318 26,816
------------ ------------ ------------ ------------
Income before income taxes ............ 19,747 58,408 10,983 24,312
Income tax expense ...................... 9,388 24,532 5,401 9,885
------------ ------------ ------------ ------------
Income before extraordinary loss ...... 10,359 33,876 5,582 14,427
Extraordinary loss due to early
extinguishment of debt, net of
income tax benefit of $7,347, $35,467,
$7,347 and $525, respectively ......... 11,024 53,205 11,024 793
------------ ------------ ------------ ------------
Net income (loss) ....................... (665) (19,329) (5,442) 13,634
Dividends on preferred stock ............ (861) (381) (287) (44)
------------ ------------ ------------ ------------
Net income (loss) to common
shareholders ......................... $ (1,526) $ (19,710) $ (5,729) $ 13,590
============ ============ ============ ============
Net income (loss) per share:
Income before extraordinary loss ...... $ 0.15 $ 0.37 $ 0.08 $ 0.17
Extraordinary loss .................... (0.18) (0.59) (0.17) (0.01)
------------ ------------ ------------ ------------
Net income (loss) ..................... $ (0.03) $ (0.22) $ (0.09) $ 0.16
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding ......................... 62,636,827 89,965,384 64,711,463 86,084,779
============ ============ ============ ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE> 5
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
---------- ------------
<S> <C> <C>
Operating Activities --
Net loss ...................................................... $ (665) $ (19,329)
Adjustments to reconcile net loss to cash
provided by operating activities --
Charge for deferred debt issuance costs ....................... 18,809 21,548
Provisions for:
Depreciation and amortization ............................... 24,305 82,237
Closure and post-closure costs .............................. 1,035 6,650
Doubtful accounts ........................................... 1,701 2,893
Accretion of debentures ..................................... -- 15,984
Deferred income taxes ....................................... 2,940 (30,885)
(Gain) loss on sale of fixed assets ......................... 1,943 (927)
Change in operating assets and liabilities,
excluding the effects of purchase acquisitions --
Accounts receivable, prepaid expenses, inventories
and other ................................................... (19,128) (61,270)
Accounts payable, accrued liabilities, unearned income,
closure and post-closure costs and other .................... (19,707) 29,988
--------- -----------
Cash provided by operating activities ............................ 11,233 46,889
--------- -----------
Investing Activities --
Cash expenditures for acquisitions, net of cash acquired ...... (4,057) (129,470)
Capital expenditures, other than for acquisitions ............. (23,153) (81,493)
Capitalized interest .......................................... (10,013) (24,868)
Proceeds from sale of subsidiaries and fixed assets ........... 588 535,145
Change in deferred acquisition costs and notes receivable ..... (7,782) (9,959)
--------- -----------
Cash provided by (used for) investing activities ................. (44,417) 289,355
--------- -----------
Financing activities --
Net proceeds from sale of common stock,
stock options and warrants .................................. 47,999 329,677
Proceeds from long-term debt, net of issuance costs ........... 223,627 877,325
Repayments of long-term debt .................................. (232,998) (1,467,649)
Repurchase of warrant ......................................... -- (49,000)
Other long-term obligations ................................... (319) 2,740
Dividends paid ................................................ (898) (525)
Equity transactions of pooled companies ....................... (821) 70
--------- -----------
Cash provided by (used for) financing activities ................. 36,590 (307,362)
--------- -----------
Increase in cash and cash equivalents ............................ 3,406 28,882
Cash and cash equivalents, beginning of period ................... 5,193 50,860
--------- -----------
Cash and cash equivalents, end of period ......................... $ 8,599 $ 79,742
========= ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE> 6
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allied Waste Industries, Inc. ("Allied" or the "Company"), is
incorporated under the laws of the state of Delaware. Allied is a solid waste
management company providing non-hazardous waste collection, transfer, recycling
and disposal services in selected markets.
The condensed consolidated financial statements include the accounts of
Allied and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. The condensed consolidated balance
sheet as of December 31, 1996, which has been derived from audited consolidated
financial statements, and the unaudited interim condensed consolidated financial
statements included herein have been prepared 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
not misleading when read in conjunction with the Company's Annual Report on Form
10-K. The condensed consolidated financial statements as of September 30, 1997
and for the nine months ended September 30, 1996 and 1997 reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and results of
operations for such periods. The condensed consolidated financial statements and
accompanying notes have also been restated to reflect acquisitions accounted for
as poolings-of-interests (See Note 2).
Operating results for interim periods are not necessarily indicative of
the results for full years. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements of
Allied for the year ended December 31, 1996 and the related notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC on March
27, 1997 and amended on April 30, 1997, August 18, 1997 and August 21, 1997.
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1996. For a description of these
policies, see Note 1 of Notes to Consolidated Financial Statements for the year
ended December 31, 1996 in the Company's Annual Report on Form 10-K.
Certain reclassifications have been made in prior period financial
statements to conform to the current presentation.
FINANCIAL INSTRUMENTS
In June 1997, the Company repaid its senior credit facility and entered
into an Amended and Restated Credit Agreement (the "Credit Agreement"). The
Credit Agreement provides a six and one-half year senior secured $500 million
term loan facility (the "Term Loan Facility") and a six and one-half year senior
secured $400 million revolving credit facility (the "Revolving Credit Facility"
and together with the Term Loan Facility, the "Senior Credit Facility").
Principal payments on the Term Loan Facility are payable quarterly, beginning in
September 1997 and increase from $10 million to $100 million per annum through
maturity in December 2003. Principal under the Revolving Credit Facility is due
upon maturity.
6
<PAGE> 7
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The Senior Credit Facility bears interest, at the Company's option, at
either (a) a Base Rate, or (b) a Eurodollar Rate, both terms as defined in the
Credit Agreement, plus, in either case, an applicable margin. The applicable
margin will be adjusted from time to time pursuant to a pricing grid based upon
the Company's Total Debt to EBITDA ratio, as defined in the Credit Agreement,
and varies between zero percent and 0.75% for Base Rate loans (reduced from
0.25% to 1.50% under the prior senior credit facility), and 0.75% and 1.75% for
Eurodollar loans (reduced from 1.25% to 2.50% under the prior senior credit
facility). In addition, if at any time the Company's Senior Debt Ratio is
greater than 2.5 to 1.0, the applicable margin for all loans will be increased
by 0.25%.
On September 30, 1997, the Company repaid $203 million on the Term Loan
Facility and $71 million outstanding on the Revolving Credit Facility. In
connection with this repayment, the Company amended the Credit Agreement (the
"Amendment") in October 1997. The Amendment expanded the Senior Credit Facility
to $1.1 billion from $900 million by increasing the Revolving Credit Facility
from $400 million to $600 million and by adding a $200 million delayed draw term
facility (the "Delayed Draw Term Facility"), after giving effect to the
repayment of $203 million on the Term Loan Facility on September 30, 1997. The
Revolving Credit Facility includes a $250 million sublimit for the issuance of
letters of credit (increased from $175 million at September 30, 1997). Interest
rates were not changed in connection with the Amendment.
The Credit Agreement contains certain financial covenants including,
but not limited to, a Total Debt to EBITDA ratio, a Senior Debt to EBITDA ratio,
a Fixed Charge Coverage ratio and an Interest Expense Coverage ratio, all terms
as defined in the Credit Agreement. In addition, the Credit Agreement also
limits the Company's ability to make acquisitions, purchase fixed assets above
certain amounts, pay dividends, incur additional indebtedness and liens, make
optional prepayments on certain subordinated indebtedness, make investments,
loans or advances, enter into certain transactions with affiliates or enter into
a merger, consolidation or sale of all or a substantial portion of the Company's
assets.
The Company has entered into interest rate protection agreements (the
"Agreements"), with reputable national commercial banks and investment banking
institutions to reduce its exposure to fluctuations in variable interest rates.
A summary of the Agreements outstanding as of September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Notional Amount Fixed Rate Period
- --------------- ---------- -------------------------------
(in millions)
<S> <C> <C>
$ 50 5.76% October 1996 - October 1997
50 5.81 October 1996 - October 1997
130 6.27 April 1997 - May 1998
50 6.08 September 1997 - September 2000
50 6.06 September 1997 - March 2000
</TABLE>
The Agreements effectively change the Company's interest rate paid on
its floating rate long-term debt to a weighted average fixed rate of
approximately 6.06% plus applicable margins imposed by the terms of the Credit
Agreement at September 30, 1997.
7
<PAGE> 8
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has also entered into additional interest rate protection
agreements with effective dates beginning in the future (the "Forward
Agreements"). These Forward Agreements provide continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under the Delayed Draw Term Facility of the Senior
Credit Facility. A summary of these Forward Agreements is as follows:
<TABLE>
<CAPTION>
Notional Amount Fixed Rate Period
- --------------- ---------- -----------------------------
(in millions)
<S> <C> <C>
$ 50 5.97% October 1997 - April 1999
50 6.02 October 1997 - October 1999
50 5.90 November 1997 - November 1999
50 5.91 November 1997 - November 1999
130 6.06 May 1998 - May 2001
</TABLE>
As the Company utilizes the Agreements for hedging purposes, amounts
paid to obtain the Agreements, if any, are capitalized into deferred financing
charges in the accompanying consolidated balance sheets and amortized over the
life of the specific Agreement.
ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"), which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS No. 128 is effective for periods
ending after December 15, 1997 and requires retroactive restatement of prior
periods earnings per share. The statement replaces the "primary earnings per
share" calculation with a "basic earnings per share" and redefines the "dilutive
earnings per share" computation. Management does not expect the adoption of the
statement to have a material effect on the Company's reported income per common
share.
EXTRAORDINARY LOSS, NET
On May 15, 1997, the Company repurchased (the "Repurchase") from
Laidlaw Inc. ("Laidlaw") and Laidlaw Transportation, Inc. (collectively, the
"Laidlaw Group") for $230 million in cash, the $150 million 7% Junior
Subordinated Debenture ($81.6 million book value), the $168.3 million Zero
Coupon Debenture ($34.9 million book value, collectively the "Allied
Debentures") and the warrant to purchase 20.4 million shares of common stock
($49.0 million book value, the "Warrant"), issued as partial consideration for
the purchase of Laidlaw's solid waste business in 1996 (the "Laidlaw
Acquisition"). An extraordinary charge of approximately $65.7 million ($39.4
million net of income tax benefit) related to the Repurchase was recorded in the
second quarter of 1997. In addition, on June 5, 1997, the Company replaced its
1996 Bank Agreement (as defined herein) with the Credit Agreement and recognized
an extraordinary charge of approximately $21.6 million ($13.0 million net of
income tax benefit) related to prepayment penalties and the write-off of
previous deferred debt issuance costs in the second quarter of 1997.
On September 30, 1997, the Company sold 18.6 million shares of common
stock with net proceeds of approximately $327.4 million (the "Equity Offering").
The Company used $203 million of the net proceeds to retire a portion of the
Term Loan Facility of the Credit Agreement, $71 million to repay the entire
amount outstanding on the Revolving Credit Facility and intends to use the
remaining proceeds for acquisitions and general corporate purposes. As a result
of the early repayment of debt outstanding under the Term Loan Facility, the
Company recognized an extraordinary charge of approximately $1.3 million ($0.8
million net of income tax benefit) related to the write-off of previously
deferred debt issuance costs in the third quarter of 1997.
8
<PAGE> 9
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions for
the nine months ended September 30, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1996 1997
------- -------
(unaudited)
<S> <C> <C>
Supplemental Disclosures
Interest paid .............................................. $20,808 $74,146
Income taxes paid .......................................... 6,030 11,200
Non Cash Transactions
Common stock issued in acquisitions or
contributed to 401(k) plan .............................. $ 5,716 $14,939
Capital leases ............................................. 11,671 14,973
Debt and liabilities incurred or assumed in acquisitions ... 5,039 62,815
Debt converted to common stock ............................. 5,485 1,290
Non-cash purchase and sale of operating businesses ......... -- 61,300
</TABLE>
2. BUSINESS COMBINATIONS AND DIVESTITURES
Acquisitions accounted for as purchases are reflected in the results of
operations since the date of purchase in Allied's condensed consolidated
financial statements. The results of operations for acquisitions accounted for
as poolings-of-interests are included in Allied's condensed consolidated
financial statements for all periods presented. Often, the final determination
of the cost, and the allocation thereof, of certain of the Company's
acquisitions is subject to resolution of certain contingencies. Once such
contingencies are achieved, the purchase price is adjusted. Shares issued in
connection with business acquisitions have been valued taking into consideration
certain restrictions placed on the stock.
On March 16, 1997, pursuant to a share purchase agreement with USA
Waste Services, Inc. ("USA Waste"), the Company sold to USA Waste (the "Canadian
Sale") for approximately $518 million substantially all of the Canadian solid
waste management operations of the Company acquired from Laidlaw. The Company
used the proceeds from the Canadian Sale to pay down approximately $517 million
in debt under the Senior Credit Facility.
In April 1997, the Company completed the sale of certain non-core
medical waste assets, acquired from Laidlaw, for approximately $6.7 million. In
addition, the Company sold five collection operations, one recycling facility
and one landfill, each acquired from Laidlaw, to USA Waste and Browning-Ferris
Industries ("BFI") during 1997 for approximately $68.4 million. No gain or loss
was recorded in connection with these sales.
9
<PAGE> 10
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes acquisitions for the nine months ended
September 30, 1996 and 1997. In May 1997, the Company acquired a collection
company in a transaction accounted for as a pooling-of-interests. As the effect
of this business combination was not significant, prior period financial
statements were not restated to include historical operating results of the
acquired company. Prior period financial statements have been restated to
include historical operating results of the four companies acquired in the third
quarter of 1997 that were accounted for as poolings-of-interests.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1996 1997
-------------- -----------
(unaudited)
<S> <C> <C>
Number of businesses acquired and accounted for as:
Poolings-of-interests......................................... 5 5
Purchases..................................................... 12 18
Total consideration (in millions)............................... $ 101.9 $ 303.6
Shares of common stock issued................................... 8,817,694(1) 5,985,143(2)
</TABLE>
- ----------
(1) Includes 774,804 shares of contingently issuable common stock.
(2) Includes 279,560 shares of contingently issuable common stock.
The following table presents revenues and net income restated from
amounts originally reported for the cumulative effect of acquisitions accounted
for as poolings-of-interests, (in thousands):
<TABLE>
<CAPTION>
Before After
Pooling Effect of Pooling
Effects Poolings Effects
--------- --------- ---------
<S> <C> <C> <C>
Three months ended September 30, 1997 (unaudited)
Revenues $ 218,175 $ 6,120 $ 224,295
Net income 13,693 (59) 13,634
Nine months ended September 30, 1997 (unaudited)
Revenues 613,361 19,942 633,303
Net loss (19,586) 257 (19,329)
Three months ended September 30, 1996 (unaudited)
Revenues 64,938 6,960 71,898
Net loss (5,465) 23 (5,442)
Nine months ended September 30, 1996 (unaudited)
Revenues 183,896 21,220 205,116
Net loss (1,228) 563 (665)
Year ended December 31, 1996
Revenues 246,679 27,733 274,412
Net loss (79,427) (391) (79,818)
Year ended December 31, 1995
Revenues 217,544 27,196 244,740
Net income 12,381 392 12,773
Year ended December 31, 1994
Revenues 158,354 27,250 185,604
Net loss (6,035) 1,483 (4,552)
</TABLE>
10
<PAGE> 11
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA INCOME STATEMENT DATA
The following unaudited pro forma consolidated data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 presents the
results of operations of Allied as if the companies acquired using the purchase
method of accounting for business combinations in 1996 and through September 30,
1997 (giving effect to the Canadian Sale), had all occurred as of January 1,
1996 (in thousands, except per share data). This data does not purport to be
indicative of the results of operations of Allied that might have occurred nor
which might occur in the future.
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
----------- ------------
(unaudited)
<S> <C> <C>
Revenues............................................. $ 906,410 $ 677,787
Operating income..................................... 13,406 136,620
Net loss............................................. (95,539) (16,255)
Net loss to common shareholders...................... (96,612) (16,636)
Net loss per common share............................ (1.24) (0.20)
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and September 30, 1997 was as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------------- -------------
(unaudited)
<S> <C> <C>
Land and improvements................................ $ 40,157 $ 62,954
Land held for permitting as landfills(1)............. 66,070 102,698
Landfills............................................ 320,763 452,254
Buildings and improvements........................... 60,954 79,185
Vehicles and equipment............................... 174,421 184,367
Containers and compactors............................ 159,032 173,913
Furniture and office equipment....................... 17,967 17,340
------------- -------------
839,364 1,072,711
Accumulated depreciation and amortization........... (104,535) (132,641)
------------- -------------
$ 734,829 $ 940,070
============= =============
</TABLE>
- ----------
(1) These properties have been approved for use as landfills, and the Company is
currently in the process of obtaining the necessary permits.
11
<PAGE> 12
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated by dividing net income
(loss) less dividend requirements on preferred stock by the weighted average
number of common shares and common share equivalents outstanding during each
period, as restated to reflect acquisitions accounted for as
poolings-of-interests. The computation of weighted average common and common
equivalent shares used in the calculation of net income (loss) per common share
is as follows (unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1997
---------- -----------
<S> <C> <C>
Common shares outstanding..................................... 61,625,419 101,044,723
Effect of using weighted average common shares
outstanding during the period............................... (2,122,720) (20,623,718)
Effect of stock options and warrants
assumed exercisable......................................... 2,196,588 9,091,649
Effect of convertible debt assumed converted.................. -- 222,369
Effect of shares assumed issued pursuant
to earn-out................................................. 937,540 230,361
---------- -----------
62,636,827 89,965,384
</TABLE>
Conversion has not been assumed for 7% preferred stock in 1996 and 1997
nor for Series D preferred stock, 9% preferred stock and convertible debt in
1996, as the effects would not be dilutive.
5. SUMMARIZED FINANCIAL INFORMATION OF ALLIED WASTE NORTH AMERICA, INC.
As discussed in Note 5 of the Company's 10-K, the $525 million of
10.25% Senior Subordinated Notes due 2006 (the "1996 Notes") issued by Allied
Waste North America, Inc. ("Allied NA"; a wholly owned, consolidated subsidiary
of the Company) are guaranteed by Allied and substantially all subsidiaries of
the Company. The separate complete financial statements of Allied NA have not
been included herein as management has determined that such disclosure is not
material. However, summarized financial information for Allied NA and
subsidiaries as of December 31, 1996 and September 30, 1997 is as follows (in
thousands):
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- ------------------
(unaudited)
<S> <C> <C>
Current assets........................................... $ 689,840 $ 263,873
Property and equipment, net.............................. 734,829 940,070
Goodwill................................................. 859,081 860,598
Other non-current assets................................. 47,104 65,314
Current liabilities...................................... 670,780 215,155
Long-term debt, net of current portion................... 1,045,497 887,375
Due to parent............................................ 354,388 705,272
Due to Allied Canada Finance, Ltd........................ 110,747 152,825
Other long-term obligations.............................. 227,796 222,606
Retained deficit......................................... (78,354) (53,378)
</TABLE>
12
<PAGE> 13
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 25, 1996, substantially all of the operating assets and
liabilities of Allied were contributed from Allied to Allied NA. The results of
operations for Allied NA from inception to December 31, 1996 were not material
except for the acquisition related costs and unusual items (see Note 1).
SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
------------------
(unaudited)
<S> <C>
Total revenue..................................................... $ 633,303
Total operating costs and expenses................................ 502,390
Operating income.................................................. 130,913
Net income before extraordinary loss.............................. 38,807
Extraordinary loss, net........................................... 13,831
Net income........................................................ 24,976
</TABLE>
6. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, approximately $975,000 of convertible
debt was converted into 162,500 shares of Common Stock in accordance with the
original terms of the debt.
Subsequent to September 30, 1997, the Company entered into a
conditional agreement to acquire solid waste collection, transfer and disposal
operations located in its existing Detroit and Western Michigan markets for net
cash consideration of approximately $131 million. The Company has also entered
into a conditional agreement to sell solid waste collection, transfer and
disposal operations located in 6 non-integrated markets for net cash proceeds of
approximately $134 million. The counterparty in the agreements is USA Waste. The
agreements with USA Waste to acquire and sell certain solid waste operations
(the "UW Transactions") are subject to, among other conditions, the completion
of due diligence, approval by the companies' boards of directors and customary
regulatory review. The UW Transactions are scheduled to be completed by the end
of 1997 when all conditions are expected to be satisfied.
Subsequent to September 30, 1997, the Company completed the acquisition
of 4 privately-held solid waste companies representing approximately $12.1
million in aggregate annual revenue. Total consideration of approximately $18.2
million, comprised of cash, notes and Common Stock, was paid in the separate
transactions.
In addition, in November 1997, the Company assumed ownership and
operation of the active solid waste disposal system for San Diego County,
California. Allied acquired operations of four landfills, one transfer station
and one material recovery facility for approximately $163 million in cash paid
directly to San Diego County. In addition, San Diego County will also receive
$16 million as a refund of its environmental closure fund.
In October 1997, the Company amended the Credit Agreement. The
Amendment expands the Senior Credit Facility to $1.1 billion from $900 million
by increasing the Revolving Credit Facility from $400 million to $600 million
and adding a $200 million Delayed Draw Term Facility, after giving effect to the
repayment of $203 million of the Term Loan Facility on September 30, 1997. The
Revolving Credit Facility includes a $250 million sublimit for the issuance of
letters-of-credit (increased from $175 million at September 30, 1997).
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and the notes thereto,
included elsewhere herein.
INTRODUCTION
The Company has experienced significant growth, a substantial portion
of which has resulted from the acquisition of solid waste businesses. From
January 1, 1992 through September 30, 1997, the Company has completed 117
acquisitions including the Laidlaw Acquisition (as described below). In 1996,
the Company acquired 22 businesses including the Laidlaw Acquisition and
subsequent to 1996 it has acquired 22 businesses, excluding the assets acquired
in the USA Waste transactions (see below). See Note 2 to the Company's
Consolidated Financial Statements. The Company's Consolidated Financial
Statements have been restated to reflect the acquisition of companies accounted
for using the pooling-of-interests method for business combinations. The
majority of the acquisitions were accounted for under the purchase method for
business combinations and, accordingly, the results of operations for such
acquired businesses are included in the Company's financial statements only from
the applicable date of acquisition. As a result, the Company believes its
historical results of operations for the periods presented are not directly
comparable.
On December 30, 1996, the Company completed the acquisition (the
"Laidlaw Acquisition") of substantially all of the non-hazardous solid waste
management business conducted by Laidlaw Inc. ("Laidlaw") in the United States
and Canada, for total consideration of approximately $1.5 billion comprised of
$1.2 billion cash, 14.6 million shares of Common Stock, a warrant (the
"Warrant") to acquire 20.4 million shares of the Company's Common Stock, par
value $0.01 per share (the "Common Stock"), and two junior subordinated
debentures with an aggregate face amount of $318.3 million comprised of a $150
million 7% Junior Subordinated Debenture and a $168.3 million Zero Coupon
Debenture (collectively, the "Allied Debentures"). The cash consideration was
financed from the proceeds of the 1996 Bank Agreement (as defined herein) and
the issuance of $525 million of 10.25% Senior Subordinated Notes due 2006 in a
Rule 144A private offering (the "1996 Notes").
On March 16, 1997, pursuant to a share purchase agreement with USA
Waste Services, Inc. ("USA Waste"), the Company sold to USA Waste all of the
Canadian solid waste management operations acquired from Laidlaw for
approximately $518 million (the "Canadian Sale"). The Company used the proceeds
from the Canadian Sale to pay down approximately $517 million in debt under the
1996 Bank Agreement.
On May 15, 1997, the Company, pursuant to a Securities Purchase
Agreement (the "Laidlaw Securities Purchase Agreement") with Laidlaw and Laidlaw
Transportation, Inc. (collectively, the "Laidlaw Group") and certain private
securities investment funds affiliated with either (i) Apollo Advisors II, L.P.
or (ii) the Blackstone Group, repurchased from the Laidlaw Group the Allied
Debentures and the Warrant for an aggregate purchase price of $230 million in
cash (the "Repurchase"). The net proceeds of $240 million related to the $418
million face value 11.3% senior discount notes, (the "Senior Discount Notes")
were used to fund the Repurchase. The offering of the Senior Discount Notes
closed on May 15, 1997. Also pursuant to the Laidlaw Securities Purchase
Agreement, the private securities investment funds purchased all of the Common
Stock of Allied held by Laidlaw.
On June 12, 1997, the Company completed a series of transactions with
USA Waste (the "USA Waste Transactions") pursuant to which the Company acquired
eight landfills (two of which were transferred to the Company in July 1997 after
completion of certain regulatory matters), eight collection operations, five
transfer stations and one recycling facility with an annual aggregate revenue of
$58.0 million for consideration of $87.5 million. Also pursuant to the USA Waste
Transactions, the Company sold to USA Waste one landfill, two collection
operations and one recycling facility with an aggregate of approximately $33.6
million in annual revenue for which it received consideration of approximately
$61.3 million.
14
<PAGE> 15
In November 1997, the Company assumed ownership and operation of the
active solid waste disposal system for San Diego County, California. Allied
acquired operations of four landfills, one transfer station, and one material
recovery facility for approximately $163 million in cash paid directly to San
Diego County. In addition, San Diego County will also receive $16 million as a
refund of its environmental closure fund.
GENERAL
Revenues. The Company's revenues are attributable primarily to fees
charged to customers for waste collection, transfer, recycling and disposal
services. The Company's collection services are generally provided under direct
agreements with its customers or pursuant to contracts with municipalities.
Commercial and municipal contract terms, where used, generally range from 1 to 5
years and commonly have automatic renewal options. The Company's landfill
operations include both Company-owned landfills and those operated for
municipalities for a fee. The Company is fully integrated in each geographic
region in which it is located as it provides collection, transfer and disposal
services. The tables below show for the periods indicated the percentage of the
Company's total reported revenues attributable to services provided and to
geographic region:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
------------------------------- Ended
1994 1995 1996 September 30, 1997
------ ------ ----- ------------------
<S> <C> <C> <C> <C>
Collection(1)...................... 73.8% 68.0% 64.8% 58.4%
Transfer .......................... 7.2 8.5 7.6 7.4
Landfill(1)........................ 12.4 16.2 19.9 24.2
Other.............................. 6.6 7.3 7.7 10.0
------ ------ ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
-------------------------------- Ended
1994 1995 1996 September 30, 1997
------ ------ ----- ------------------
<S> <C> <C> <C> <C>
Great Lakes........................ 27.2% 29.6% 28.1% 21.6%
Midwest .......................... 14.3 16.8 16.8 15.9
Northeast.......................... 14.7 11.1 9.8 22.7
Southeast.......................... 25.8 24.9 27.8 12.6
Southwest.......................... 4.7 4.3 2.3 16.3
West............................... 13.3 13.3 15.2 10.9
------ ------ ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ===== =====
</TABLE>
- ---------
(1) The portion of collection and third-party transfer revenues
attributable to disposal charges for waste collected by the Company and
disposed at the Company's landfills have been excluded from collection
and transfer revenues and included in landfill revenues.
The Company's strategy is to develop vertically integrated operations
to ensure internalization of waste it collects and thus realize higher margins
from its operations. By disposing of waste at Company-owned and/or operated
landfills, the Company retains the margin generated through disposal operations
that would otherwise be earned by third-party landfills. Approximately 60% of
Company-collected waste is disposed of at Company-owned and/or operated
landfills as measured using volume in the first nine months of 1997. In
addition, transfer stations are an integral part of the disposal process. The
Company locates its transfer stations in areas where its landfills are outside
of the population centers in which it collects waste. Such waste is transferred
to long-haul trailers and economically transported to its landfills.
15
<PAGE> 16
Expenses. Cost of operations includes labor, maintenance and repairs,
equipment and facility rent, utilities and taxes, the costs of ongoing
environmental compliance, safety and insurance, disposal costs and costs of
independent haulers transporting Company waste to the disposal site. Disposal
costs include certain landfill taxes, host community fees, payments under
agreements with respect to landfill sites that are not owned, landfill site
maintenance, fuel and other equipment operating expenses and accruals for
estimated closure and post-closure monitoring expenses anticipated to be
incurred in the future.
Selling, general and administrative expenses include management,
clerical and administrative compensation and overhead, sales costs, community
relations expenses and provisions for estimated uncollectible accounts
receivable and potentially unrealizable acquisition costs.
Depreciation and amortization expense includes depreciation of fixed
assets and amortization of landfill airspace, goodwill and other intangible
assets.
In connection with potential acquisitions, the Company incurs and
capitalizes certain transaction and integration costs which include stock
registration, legal, accounting, consulting, engineering and other direct costs.
When an acquisition is completed and is accounted for using the
pooling-of-interests method for business combinations, these costs are charged
to the statement of operations as acquisition related costs. When a completed
acquisition is accounted for using the purchase method for business
combinations, these costs are capitalized. The Company routinely evaluates
capitalized transaction and integration costs and expenses those costs related
to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.
Certain direct landfill development costs, such as engineering,
upgrading, construction and permitting costs, are capitalized and amortized
based on consumed airspace. The Company believes that the costs associated with
engineering, owning and operating landfills will increase in the future as a
result of federal, state and local regulation and a growing community awareness
of the landfill permitting process. Although there can be no assurance, the
Company believes that it will be able to implement price increases sufficient to
offset these increased expenses. All indirect landfill development costs, such
as executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred.
Accrued closure and post-closure costs represent an estimate of the
current value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes which are determined to be
changes in estimates are accounted for on a prospective basis.
Currently, the net present value of the closure and post-closure
commitment is calculated assuming inflation of 2.5% and a risk-free capital rate
of 7.0%. Discounted amounts previously recorded are accreted to reflect the
effects of the passage of time. The Company's current estimate of total future
payments for closure and post-closure is $713.0 million while the present value
of such estimate is $214.3 million. At December 31, 1996 and September 30, 1997,
accruals for landfill closure and post-closure costs (including costs assumed
through acquisitions) were approximately $107.5 million and $114.9 million. The
accruals reflect relatively young landfills with estimated remaining lives,
based on current waste flows, that range from 1 to over 75 years, and an
estimated average remaining life of greater than 30 years.
16
<PAGE> 17
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
The following table sets forth the percentage relationship that the
various items bear to revenues and the percentage change in dollar amounts
for the periods indicated. The statement of operations data have been restated
to give effect to acquisitions that were accounted for using the pooling-of-
interests method for business combinations. See Note 2 to the Company's
Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997
Compared
to 1996
% Change
1996 1997 in Amounts
----- ----- ----------
(unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues............................................. 100.0% 100.0% 212.0%
Cost of operations................................... 56.4 52.0 187.5
Selling, general and administrative expenses......... 13.7 11.0 151.0
Depreciation and amortization........................ 11.2 13.1 266.2
Acquisition related costs............................ 0.4 1.2 838.4
----- -----
Operating income..................................... 18.3 22.7 286.5
Interest expense, net................................ 3.0 11.9 1,115.7
Income tax provision................................. 7.5 4.4 83.0
Extraordinary loss, net.............................. 15.3 0.4 (92.8)
----- -----
Net income (loss).................................. (7.5)% 6.0% (350.5)
===== =====
</TABLE>
Revenues. Revenues in 1997 were $224.3 million compared to $71.9 million in
1996, an increase of 212.0%. Revenues of approximately $132.2 million in the
third quarter of 1997 were generated from companies acquired subsequent to the
end of the same period in the prior year, while increases in revenues
attributable to existing operations ("Internal Growth") amounted to $20.2
million. If the Laidlaw Acquisition, net of the Canadian Sale, is included as of
June 1996, Internal Growth would have approximated 11% with 7% attributable to
net volume increases and 4% attributable to price increases.
Cost of Operations. Cost of operations in 1997 was $116.6 million compared
to $40.6 million in 1996, an increase of 187.5%. The increase in cost of
operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations decreased to 52.0% in
1997 from 56.4% in 1996. Operating cost margins were favorably impacted by
financial benefits and operational efficiencies associated with the Laidlaw
Acquisition and the significant increase in revenues.
Selling, General and Administrative Expenses. SG&A expenses increased to
$24.7 million in 1997 compared to $9.8 million in 1996, an increase of 151.0%.
As a percentage of revenues, SG&A decreased to 11.0% in 1997 compared to 13.7%
in 1996. The increase in SG&A expense resulted from expenses associated with
acquired companies and expenses incurred in connection with the Company's
increase in personnel and other expenses related to the growth of the Company.
In addition, SG&A expenses include a charge of approximately $3.4 million
related to future post employment executive compensation and a credit of
approximately $3.0 million related to a favorable settlement of certain
litigation. The decrease in SG&A as a percentage of revenues can be attributed
to the substantial increase in the revenues of the Company resulting principally
from the Laidlaw Acquisition, while SG&A expenses have not increased at the same
rate.
17
<PAGE> 18
Depreciation and amortization. Depreciation and amortization in 1997 was
$29.5 million compared to $8.0 million in 1996, an increase of 266.2%. The
increase in depreciation and amortization expense is due to acquisitions and
capital expenditures. Fixed assets have increased from $441.4 million at
September 30, 1996 to $1.1 billion at September 30, 1997 and goodwill has
increased from $102.6 million at September 30, 1996 to $888.9 million at
September 30, 1997. As a percentage of revenues, depreciation and amortization
has increased to 13.1% in 1997 compared to 11.2% in 1996. This is primarily the
result of an increase in amortization of goodwill as a percentage of revenues to
2.6% in 1997 from 1.2% in 1996 related to increased goodwill in connection with
the Laidlaw Acquisition.
Acquisition related costs. Costs of $2.6 million and $0.3 million were
incurred in 1997 and 1996, respectively, for transaction and integration costs
directly related to acquisitions accounted for using the pooling-of-interests
method for business combinations. Transaction costs include stock registration,
legal, accounting, consulting, engineering and other direct third-party costs
incurred to complete the acquisitions. Integration costs include uncollectible
accounts receivable write-offs, employee termination and relocation, write down
of fixed assets and lease termination.
Net interest expense. Net interest expense was $26.6 million in 1997
compared to $2.2 million in 1996, an increase of 1,115.7%. The increase in
interest expense is due to the increase in debt from $254.5 million at September
30, 1996 compared to $1.2 billion at September 30, 1997. This increase in debt
outstanding is primarily the result of debt incurred in connection with the
Laidlaw Acquisition net of the application of the net proceeds received in
connection with the Canadian Sale.
Income taxes. Income taxes reflect a 41% effective income tax rate in 1997
as compared to a 49% rate in 1996. The Company's effective tax rate in 1997 and
1996 deviates from the federal statutory rate of 35%, due primarily to the
effects of differences in the treatment of goodwill for book and tax purposes,
state income taxes, and other permanent differences. The decrease in the
effective income tax rate is primarily due to the income tax accounting
treatment for the acquisition of S-Corporations in 1996, when using the
pooling-of-interests method of business combinations and the effects of one-time
pooling costs incurred in 1996.
Extraordinary loss, net. On September 30, 1997, the Company sold 18.6 million
shares of common stock with net proceeds of $327.4 million (the "Equity
Offering"). In connection with the Equity Offering, the Company retired $203
million of the Term Loan Facility of the Credit Agreement and, because of the
early retirement of debt, recognized an extraordinary charge of $1.3 million
($0.8 million net of income tax benefit) related to the write-off of previously
deferred debt issuance costs.
18
<PAGE> 19
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
The following table sets forth the percentage relationship that the
various items bear to revenues and the percentage change in dollar amounts for
the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997
Compared
to 1996
% Change
1996 1997 in Amounts
----- ------ ----------
(unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues ....................................... 100.0% 100.0% 208.8%
Cost of operations ............................. 57.1 54.4 193.9
Selling, general and administrative expenses ... 15.0 11.5 138.1
Depreciation and amortization .................. 11.8 13.0 238.4
Acquisition related costs ...................... 2.9 0.4 (56.7)
----- ------
Operating income ............................... 13.2 20.7 387.2
Interest expense, net .......................... 3.5 11.4 918.2
Income tax provision ........................... 4.6 3.9 161.3
Extraordinary loss, net ........................ 5.4 8.4 382.6
----- ------
Net loss ................................... (0.3)% (3.0) 2,806.6
===== ======
</TABLE>
Revenues. Revenues in 1997 were $633.3 million compared to $205.1 million in
1996, an increase of 208.8%. Revenues of approximately $373.4 million in the
first nine months of 1997 were generated from companies acquired subsequent to
the end of the same period in the prior year, while increases in revenues
attributable to Internal Growth amounted to $54.8 million. If the Laidlaw
Acquisition, net of the Canadian Sale, is included as of December 1995, Internal
Growth would have approximated 10% with 6% attributable to net volume increases
and 4% attributable to price increases.
Cost of Operations. Cost of operations in 1997 was $344.5 million compared
to $117.2 million in 1996, an increase of 193.9%. The increase in cost of
operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations decreased to 54.4% in
1997 compared to 57.1% in 1996. Operating cost margins were favorably impacted
by financial benefits and operational efficiencies associated with the Laidlaw
Acquisition and the significant increase in revenues.
Selling, General and Administrative Expenses. SG&A expenses increased to
$73.1 million in 1997 compared to $30.7 million in 1996, an increase of 138.1%.
As a percentage of revenues, SG&A decreased to 11.5% in 1997 compared to 15.0%
in 1996. The increase in SG&A expense resulted from expenses associated with
acquired companies and expenses incurred in connection with the Company's
increase in personnel and other expenses related to the growth of the Company.
In addition, SG&A expenses include a charge of approximately $3.4 million
related to future post employment executive compensation and a credit of
approximately $3.0 million related to a favorable settlement of certain
litigation. The decrease in SG&A as a percentage of revenues can be attributed
to the substantial increase in the revenues of the Company resulting principally
from the Laidlaw Acquisition, while SG&A expenses have not increased at the same
rate.
19
<PAGE> 20
Depreciation and amortization. Depreciation and amortization in 1997 was
$82.2 million compared to $24.3 million in 1996, an increase of 238.4%. The
increase in depreciation and amortization expense is due to acquisitions and
capital expenditures. Fixed assets have increased from $441.4 million at
September 30, 1996 to $1.1 billion at September 30, 1997 and goodwill has
increased from $102.6 million at September 30, 1996 to $888.9 million at
September 30, 1997. As a percentage of revenues, depreciation and amortization
increased to 13.0% in 1997 from 11.8% in 1996. This is primarily the result of
an increase in amortization of goodwill as a percentage of revenues to 2.7% in
1997 from 1.5% in 1996 related to increased goodwill in connection with the
Laidlaw Acquisition.
Acquisition related costs. Costs of $2.6 million and $6.0 million were
incurred in 1997 and 1996, respectively, for transaction and integration costs
directly related to acquisitions accounted for using the pooling-of-interests
method for business combinations. Transaction costs include stock registration,
legal, accounting, consulting, engineering and other direct third-party costs
incurred to complete the acquisitions. Integration costs include uncollectible
accounts receivable write-offs, employee termination and relocation, write down
of fixed assets and lease termination.
Net interest expense. Net interest expense was $72.5 million in 1997 compared
to $7.1 million in 1996, an increase of 918.2%. The increase in interest expense
is due to the increase in debt from $254.5 million at September 30, 1996
compared to $1.2 billion at September 30, 1997. This increase in debt
outstanding is primarily the result of debt incurred in connection with the
Laidlaw Acquisition net of the application of the net proceeds received in
connection with the Canadian Sale.
Income taxes. Income taxes reflect a 42% effective income tax rate in 1997 as
compared to a 48% rate in 1996. The Company's effective tax rate in 1997 and
1996 deviates from the federal statutory rate of 35%, due primarily to the
effects of differences in the treatment of goodwill for book and tax purposes,
state income taxes, and other permanent differences. The decrease in the
effective income tax rate is primarily due to the income tax accounting
treatment for the acquisition of S-Corporations in 1996, when using the
pooling-of-interests method of business combinations and the effects of one-time
pooling costs incurred in 1996.
Extraordinary loss, net. On May 15, 1997, the Company repurchased from the
Laidlaw Group the $150 million 7% Junior Subordinated Debenture, the $168.3
million Zero Coupon Debenture and a warrant to purchase 20.4 million shares of
Common Stock, used as partial consideration for the purchase of Laidlaw's solid
waste business in 1996, for an aggregate purchase price of $230 million in cash.
An extraordinary charge related to the Repurchase of approximately $65.7 million
($39.4 million net of income tax benefit) was charged to earnings in the second
quarter of 1997. In addition, the Company replaced its $1.275 billion Bank
Agreement with the $900 million Senior Credit Facility on June 5, 1997 and
recognized an extraordinary charge of approximately $21.6 million ($13.0 million
net of income tax benefit) in the second quarter of 1997. In connection with the
Equity Offering, the Company retired $203 million of the Term Loan facility of
the Credit Agreement and, because of the early retirement of debt, recognized an
extraordinary charge of $1.3 million ($0.8 million net of income tax benefit)
related to the write-off of previously deferred debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its acquisition, capital
expenditure and working capital needs primarily through bank financing, public
offerings and private placements of debt and equity securities. Between January
1, 1994 and September 30, 1997, the Company completed a $327.4 million public
equity offering and with a portion of the proceeds, paid down $203 million on
the Senior Credit Term Loan Facility and repaid $71 million outstanding under
the Revolving Credit Facility. It also amended the Senior Credit Facility by
increasing the Revolving Credit Facility by $200 million and by adding a $200
million Delayed Draw Term Facility. During this period, the Company completed
the $900 million Senior Credit Facility which replaced the $1.275 billion Bank
Agreement completed in connection with the Laidlaw Acquisition (of which $517
million was repaid with proceeds from the Canadian Sale in March 1997), a $418
million private placement of its 11.3% senior discount notes, a $525 million
private placement of the 1996 Notes, a public offering of its $100 million 12%
Senior Subordinated Notes due 2004 (the "1994 Notes") (substantially all of
which were repurchased pursuant to a tender offer (the "Tender
20
<PAGE> 21
Offer") in July 1996), a $50 million private placement of Common Stock, a $300
million senior revolving credit facility (all debt under which was repaid in
December 1996), and a $48 million public equity offering. Due to the acquisition
driven and the capital intensive nature of the Company's business strategy, the
Company has used, and believes that it is reasonably possible that it will
continue using amounts in excess of the cash generated from operations to fund
acquisitions and capital expenditures, including landfill development. In
connection with acquisitions, the Company has assumed or incurred indebtedness
with relatively short-term repayment schedules, thereby increasing its current
and medium-term liabilities. Additionally, operating equipment has been acquired
using financing leases which have short and medium-term maturities. As a result,
the Company has periodically had low levels of working capital or working
capital deficits.
During the first nine months ended September 30, 1996 and 1997, the
Company's cash flows for operating, investing and financing activities were as
follows (dollars in millions; unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (0.6) $ (19.3)
Charge for deferred debt issuance costs 18.8 21.5
Non-cash operating expenses(1) 29.9 76.9
(Gain) loss on sale of fixed assets 1.9 (0.9)
Decrease in operating assets and liabilities, net (38.8) (31.3)
-------- ----------
Cash provided by operating activities 11.2 46.9
-------- ----------
INVESTING ACTIVITIES:
Cash expenditures for acquisitions, net of cash acquired (4.0) (129.4)
Capital expenditures, other than for acquisitions (23.2) (81.5)
Capitalized interest (10.0) (24.9)
Proceeds from sale of subsidiaries and fixed assets 0.6 535.2
Other (7.8) (10.0)
-------- ----------
Cash provided by (used for) investing activities (44.4) 289.4
-------- ----------
FINANCING ACTIVITIES:
Net proceeds from sale and redemption of preferred stock,
common stock, stock options and warrants 48.0 329.7
Net proceeds from long-term debt 223.6 877.3
Repayments of long-term debt (233.0) (1,467.6)
Repurchase of warrant -- (49.0)
Other (2.0) 2.2
-------- ----------
Cash provided by (used for) financing activities 36.6 (307.4)
-------- ----------
Increase in cash $ 3.4 $ 28.9
======== ==========
</TABLE>
--------
(1) Consists principally of provisions for depreciation and amortization,
landfill closure and post-closure costs, doubtful accounts, accretion of
debentures and deferred income taxes.
21
<PAGE> 22
As of September 30, 1997, the Company had cash and cash equivalents of
$79.7 million. The Company's capital expenditure and working capital
requirements have increased significantly, reflecting the Company's rapid growth
by acquisition and development of revenue producing assets, and will increase
further as the Company continues to pursue its business strategy. During 1996
the Company completed the Laidlaw Acquisition for total consideration of
approximately $1.5 billion consisting of $1.2 billion cash, 14.6 million shares
of Common Stock, the Warrant to acquire 20.4 million shares of Common Stock, and
the Allied Debentures with an aggregate face amount of $318.3 million and
acquired 21 additional businesses for total consideration of approximately
$126.5 million of which approximately $73.9 million of such consideration was
paid in Common Stock and $3.9 million was paid in seller notes. Total annualized
revenues of the latter businesses are approximately $78.8 million. From January
1, 1997 through September 30, 1997, the Company has acquired solid waste
operations, representing approximately $205 million in annual revenues and sold
operations representing approximately $46.5 million in annual revenue. Net
consideration of approximately $235 million (including $10 million for a
landfill under development) comprised of cash, notes and Common Stock, was paid
in these transactions. For the calendar year 1997, the Company expects to spend
approximately $153 million for capital, closure and post-closure, and
remediation expenditures relating to its landfill operations. As the Company
continues to acquire waste operations in 1997, additional capital amounts will
be required during 1997 for the acquisition of businesses and the capital
expenditure requirements related to those acquired businesses.
On September 30, 1997, the Company's debt structure consisted of $525
million of the 1996 Notes, $297 million outstanding under the Term Loan
Facility, and approximately $240 million of the Senior Discount Notes. As of
September 30, 1997 there is aggregate availability under the Revolving Credit
Facility of approximately $287 million to be used for working capital, letters
of credit, acquisitions and other general corporate purposes. In October 1997,
the Company amended the Credit Agreement. The Amendment expanded the Senior
Credit Facility to $1.1 billion from $900 million by increasing the Revolving
Credit Facility from $400 million to $600 million and by adding a $200 million
Delayed Draw Term Facility, after giving effect to the repayment of $203 million
of the Term Loan Facility on September 30, 1997. The Revolving Credit Facility
includes a $250 million sublimit for the issuance of letters of credit
(increased from $175 million at September 30, 1997). The indentures relating to
the 1996 Notes, the Senior Discount Notes and the Senior Credit Facility contain
financial and operating covenants and significant restrictions on the ability of
the Company to complete acquisitions, pay dividends, incur indebtedness, make
investments and take certain other corporate actions. A substantial portion of
the Company's available cash will be required to be applied to service
indebtedness, including indebtedness incurred to finance the Laidlaw
Acquisition. Currently, on an annualized basis, this is expected to include
approximately $165 million in annual principal and interest payments.
The Company is also required to provide financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill operations and collection contracts. These financial assurance
requirements are satisfied by the Company issuing performance bonds, letters of
credit, insurance policies or trust deposits to secure the Company's obligations
as they relate to landfill closure and post-closure costs and performance under
certain collection contracts. At September 30, 1997, the Company had outstanding
approximately $312.5 million in financial assurance instruments, represented by
$258.6 million of performance bonds, $2.5 million of letters of credit, $45.1
million of insurance policies and $6.3 million of trust deposits. During
calendar year 1997, the Company expects to be required to provide approximately
$311.1 million in financial assurance obligations relating to its landfill
operations and collection contracts. The Company expects that financial
assurance obligations will increase in the future as it acquires and expands its
landfill activities and that a greater percentage of the financial assurance
instruments will be comprised of performance bonds and insurance policies.
22
<PAGE> 23
The Company has lease facilities (the "Lease Facilities") that allow it
to enter into equipment leases at rates ranging from similar term treasury note
rates plus 2.5% to 3.5% for terms of 36 to 84 months. In addition to equipment
leases outstanding at December 31, 1996 and September 30, 1997 of $45.2 million
and $55.9 million, respectively, the Company had available lease commitments of
$11.9 million and $16.8 million, respectively. The Company has entered into
master equipment lease facilities relating to the financing of the acquisition
of trucks and containers.
Subtitle D and other regulations that apply to the non-hazardous waste
disposal industry have required and will continue to require the Company, as
well as others in the industry, to alter operations and to modify or replace
pre-Subtitle D landfills. Such expenditures have been and will continue to be
substantial. Further regulatory changes could accelerate expenditures for
closure and post-closure monitoring and obligate the Company to spend sums in
addition to those presently reserved for such purposes. These factors, together
with the other factors discussed above, could substantially increase the
Company's operating costs and impair the Company's ability to invest in its
facilities.
The Company's ability to meet future capital expenditure and working
capital requirements, to make scheduled payments of principal, to pay interest,
or to refinance its indebtedness, and to fund capital amounts required for the
acquisition of businesses and the expansion of existing businesses depends on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. Based upon the current level of operations and anticipated
growth, management of the Company believes that available cash flow, together
with available borrowing under the Senior Credit Facility, the Lease Facilities
and other sources of liquidity, will be adequate to meet the Company's
anticipated future requirements for working capital, letters-of-credit, capital
expenditures, scheduled payments of principal of and interest on debt incurred
under the Senior Credit Facility, interest on the 1996 Notes and the Senior
Discount Notes, and capital amounts required for acquisitions and expansion.
However, the principal payment at maturity on the 1996 Notes and the Senior
Discount Notes may require refinancing. Also there can be no assurance that the
Company's business will generate sufficient cash flow from operations or that
future financings will be available in an amount sufficient to enable the
Company to service its indebtedness or to make necessary capital expenditures,
or that any refinancing would be available on commercially reasonable terms if
at all. Additionally, depending on the timing, amount and structure of any
future acquisitions and the availability of funds under the Senior Credit
Facility, the Company may need to raise additional capital to fund the
acquisition and integration of additional solid waste businesses. The Company
may raise such funds through additional bank financings or public or private
offerings of its debt and equity securities. There can be no assurance that the
Company will be able to secure such funding, if necessary, on favorable terms,
if at all. If the Company is not successful in securing such funding, the
Company's ability to pursue its business strategy may be impaired and results of
operations for future periods may be negatively affected.
SIGNIFICANT FINANCING EVENTS
In January 1994, the Company issued $100 million of 10 3/4% senior
subordinated notes (the "1994 Notes"). The net proceeds from the sale of the
1994 Notes after underwriting discount and other expenses, were approximately
$95 million. In July 1996, the Company completed the Tender Offer and purchased
substantially all of its 1994 Notes at the redemption price of $1,157.50 per
$1,000 principal amount. In connection with the Tender Offer, the Company
recognized an extraordinary charge of $18.4 million ($11.0 million net of income
tax benefit), in the third quarter of 1996. The Company also received a consent
from a majority of the holders of the 1994 Notes to eliminate all substantive
financial covenants associated with the remaining 1994 Notes.
On January 30, 1995, the Company obtained stockholder approval of the
issuance of 11,709,602 shares of Common Stock to TPG Partners, L.P. and TPG
Parallel I, L.P., for $50 million (less approximately $5.0 million of direct
offering costs and other costs related to an amendment to the 1994 Notes). Such
shares of Common Stock were purchased by the Apollo/Blackstone Investors (as
defined herein) contemporaneously with the Repurchase.
23
<PAGE> 24
During 1995, the Company offered to holders of all of its Series D, 9%
and $90 convertible preferred stock and its 6% Convertible Subordinated notes an
inducement to exercise their conversion option to receive Allied Common Stock.
The inducement consisted of the payment of dividends and interest that the
holders of these securities would have received from the date of conversion
through the first call or redemption date of each security. In total, 7,757,056
shares of Common Stock were issued upon conversion. Substantially all of the
Series D preferred stock and 6% Convertible Subordinated notes were converted,
all but 5,029 shares of the 9% preferred stock was converted and all of the $90
preferred stock was converted. Accordingly, the Company's annual dividend and
interest requirements decreased by approximately $2.7 million and $0.8 million,
respectively. The inducement resulted in a 1996 conversion fee charge of
approximately $2.2 million paid in 285,000 shares of Common Stock. On July 24,
1997, all of the 9,496 shares of preferred stock outstanding were converted in
accordance with their terms into 1,356,571 shares of Common Stock.
On January 24, 1996, the Company completed a public offering of its
Common Stock. It issued 7.6 million shares for approximately $48 million net of
$5.2 million in underwriter discounts, commissions and offering costs. The net
proceeds from the offering were used to repay amounts outstanding under the
Company's outstanding credit agreement and for other general corporate purposes.
In July 1996, in connection with the Tender Offer, the Company
completed a new $300 million revolving credit facility which was extinguished on
December 30, 1996 in connection with the financing of the Laidlaw Acquisition.
The Company recognized an extraordinary charge of $4.0 million ($2.4 million net
of income tax benefit), relating thereto in the fourth quarter of 1996.
In connection with the Laidlaw Acquisition, the Company issued a
warrant to Laidlaw for the purchase of 20.4 million shares of common stock of
the Company at an exercise price of $8.25 per share (the "Warrant"). The Warrant
was retired in connection with the Repurchase on May 15, 1997.
In December 1996, to partially finance the Laidlaw Acquisition, the
Company entered into a bank credit facility (the "1996 Bank Agreement")
consisting of (i) a $475 million five and one-half year amortizing senior
secured term loan facility, (ii) three amortizing senior secured term loan
facilities in an aggregate original principal amount of $500 million and with
ultimate maturities which ranged from six and one-half years to eight and
one-half years, and (iii) a $300 million five and one-half year senior secured
revolving credit facility. In connection with the closing of the Canadian Sale,
an aggregate amount of approximately $517 million was applied to prepayment of
the 1996 Bank Agreement.
In December 1996, Allied NA issued the 1996 Notes. Net proceeds from
the sale of the 1996 Notes, after the underwriting discount and other expenses,
were approximately $509 million. The net proceeds were used to pay a portion of
the cash purchase price of the Laidlaw Acquisition, repay amounts outstanding
under the Company's previous $300 million credit facility with Credit Suisse
First Boston as agent, fund certain acquisitions and for general corporate
purposes. Allied NA had an obligation to offer fully registered securities,
pursuant to an exchange offer, that are substantially identical to the 1996
Notes. Allied NA completed this exchange offer on July 23, 1997. The 1996 Notes
cannot be redeemed until December 1, 2001, except under certain circumstances.
Prior to December 1, 2001, the 1996 Notes are subject to redemption, at the
option of Allied NA, at the greater of (i) 100% of the principal amount of (ii)
the sum of the present values of the remaining scheduled payments of principal
and interest thereon discounted to maturity on a semi-annual basis at a
comparable treasury yield plus 75 basis points, plus in each case accrued and
unpaid interest to the date of redemption. At any time prior to December 1,
1999, up to 33% of principal amount of 1996 Notes will be redeemable, at the
option of Allied NA, from the proceeds of one or more public offerings of
capital stock by the Company at a redemption price of 110.25% of principal
amount, plus accrued interest. The 1996 Notes are guaranteed by the Company and
substantially all of Allied NA's current and future subsidiaries, the guarantees
of which are expressly subordinated to the guarantees of Allied NA's Senior
Credit Facility. The 1996 Notes contain several covenants, the most restrictive
of which limits Allied NA and its subsidiaries' ability to incur additional
indebtedness without complying with an interest coverage ratio test. Other
covenants contain limitations on payment of dividends, issuance of redeemable
preferred stock, transactions with affiliates, granting of liens and security
interests, sales of assets and the use of proceeds from sales of assets, mergers
and consolidations, and changes of control. The covenants do permit Allied NA to
incur certain indebtedness including the Senior Credit Facility, indebtedness
issued and/or assumed in permitted acquisitions and other indebtedness which is
limited to a certain percentage of Allied NA's total assets.
24
<PAGE> 25
On May 15, 1997, the Company, pursuant to the Laidlaw Securities
Purchase Agreement with the Laidlaw Group and certain private securities
investment funds affiliated with either (i) Apollo Advisors II, L.P. or (ii) the
Blackstone Group (the "Apollo/Blackstone Investors"), repurchased from the
Laidlaw Group the Allied Debentures and the Warrant for an aggregate purchase
price of $230 million in cash. Also pursuant to the Laidlaw Securities Purchase
Agreement, the Apollo/Blackstone Investors purchased all of the Common Stock
held by Laidlaw. In connection with the Repurchase, Allied issued $418 million
aggregate face amount of the Senior Discount Notes in a private offering on May
15, 1997. The net proceeds of $230 million realized from the sale of the Senior
Discount Notes were used to pay the cash consideration in the Repurchase. The
Senior Discount Notes were issued at a discount of principal amount and, unless
certain provisions are triggered, there will be no periodic cash payments of
interest before June 1, 2002. Thereafter, the Senior Discount Notes will accrue
cash interest at the rate of 11.30% per annum, payable semi-annually on June 1
and December 1 of each year, commencing December 1, 2002. Allied has an
obligation to offer exchange notes, pursuant to an exchange offer, that are
substantially identical to the Senior Discount Notes. On November 10, 1997, the
Securities and Exchange Commission declared Allied's registration statement on
Form S-4, as amended, relating to the exchange offer effective. Allied will
commence an exchange offer for the Senior Discount Notes on November 17, 1997.
The Senior Discount Notes cannot be redeemed until December 1, 2001, except
under certain circumstances. At any time prior to June 1, 2000, up to 33% of
principal amount of Senior Discount Notes will be redeemable, at the option of
Allied, from the proceeds of one or more public offerings of capital stock by
Allied at a redemption price of 111.30% of their accreted value, plus accrued
interest. The Senior Discount Notes contain several covenants, the most
restrictive of which limits Allied and its subsidiaries' and AWNA and its
subsidiaries' ability to incur additional indebtedness without complying with an
interest coverage ratio test. Other covenants contain limitations on payment of
dividends except for certain preferred stock, issuance of redeemable preferred
stock, transactions with affiliates, granting of liens and security interests,
sales of assets and the use of proceeds from sales of assets, mergers and
consolidations, and changes of control. The covenants do permit Allied and AWNA
to incur certain indebtedness including under the Credit Agreement, indebtedness
issued and/or assumed in permitted acquisitions and other indebtedness which is
limited to a certain percentage of AWNA's total assets.
In June 1997, the Company repaid its senior credit facility and entered
into an Amended and Restated Credit Agreement (the "Credit Agreement"). The
Credit Agreement provides a six and one-half year senior secured $500 million
term loan facility (the "Term Loan Facility") and a six and one-half year senior
secured $400 million revolving credit facility (the "Revolving Credit Facility"
and together with the Term Loan Facility, the "Senior Credit Facility").
On September 30, 1997, the Company repaid $203 million outstanding
under the Term Loan Facility and $71 million outstanding under the Revolving
Credit Facility of the Credit Agreement. In connection with this repayment,
pursuant to the Amendment, the Company amended the Credit Agreement in October
1997, providing for a six and one-half year senior secured $297 million funded
term loan facility (the "Funded Term Loan Facility") a six and one-half year
senior secured $200 million delayed draw term loan facility to finance certain
acquisitions prior to March 31, 1998 (the "Delayed Draw Term Loan Facility"),
and a six and one-half year senior secured $600 million revolving credit
facility due December 2003 (the "Revolving Credit Facility"). The Funded Term
Loan Facility is an amortizing senior secured term loan with annual principal
payments (payable quarterly) increasing from $6 million in 1997 to $60 million
in each of 2000, 2001, 2002 and 2003. The Delayed Draw Term Loan Facility may be
drawn in multiple advances and at varying amounts until either (i) the full $200
million has been drawn or (ii) March 31, 1998, whichever comes first. The
Delayed Draw Term Loan requires annual principal payments equal to a certain
percentage of the outstanding amount as of March 31 1998. Principal payments
begin in March 1999 at 10% of the original balance, increasing to 20% in the
years 2000-2002, and 30% in 2003. Principal under the Revolving Credit Facility
is due upon maturity.
25
<PAGE> 26
In addition to the scheduled principal payments above, the Company is
also required to make mandatory prepayments on the Senior Credit Facility equal
to 100% of the net proceeds from certain asset sales, the issuance of new debt
securities and extraordinary amounts, which include tax refunds, pension plan
reversions and certain insurance proceeds, and 50% of the net cash proceeds from
new equity issuances. Furthermore, the Company is also required to make
mandatory prepayments on the Senior Credit Facility equal to 50% of the
Company's annual Excess Cash Flow, as defined in the Credit Agreement, unless
the Company's Senior Debt Ratio, as defined in the Credit Agreement, for the
relevant fiscal year end is less than 2.0 to 1.0. Mandatory prepayments are
applied first to the Term Loan Facility and the Delayed Draw Term Facility on a
prorata basis against remaining scheduled principal payments, and second, to the
permanent reduction of the Revolving Credit Facility. In no event, however,
shall the Revolving Credit Facility be required to be reduced to an amount less
than $300 million in connection with any such mandatory prepayment.
Borrowings under the Revolving Credit Facility may be used for
acquisitions, the issuance of letters of credit, working capital and other
general corporate purposes. Of the $600 million available under the Revolving
Credit Facility ($400 million prior to the Amendment), no more than $250 million
($175 million prior the Amendment) may be used to support the issuance of
letters of credit.
The Senior Credit Facility bears interest, at the Company's option, at
either (a) a Base Rate, or (b) a Eurodollar Rate, both terms as defined in the
Credit Agreement, plus, in either case, an agreed upon applicable margin. The
applicable margin will be adjusted from time to time pursuant to a pricing grid
based upon the Company's Total Debt to EBITDA ratio, as defined in the Credit
Agreement, and varies between zero percent and 0.75% for Base Rate loans, and
0.75% and 1.75% for Eurodollar loans. In addition, if any time, the Company's
Senior Debt Ratio is greater than 2.5 to 1.0, the applicable margin for all
loans will be increased by 0.25%.
The Senior Credit Facility is guaranteed by substantially all of the
Company's present and future subsidiaries. In addition, the Senior Credit
Facility is secured by substantially all the personal property and a pledge of
the stock, of substantially all the Company's present and future subsidiaries.
The Credit Agreement contains certain financial covenants including,
but not limited to, a Total Debt to EBITDA ratio, a Senior Debt to EBITDA ratio,
a Fixed Charge Coverage ratio and an Interest Expense Coverage ratio, all terms
as defined in the Credit Agreement. In addition, the Credit Agreement also
limits the Company's ability to make acquisitions, purchase fixed assets above
certain amounts, pay dividends, incur additional indebtedness and liens, make
optional prepayments on certain subordinated indebtedness, make investments,
loans or advances, enter into certain transactions with affiliates or enter into
a merger, consolidation or sale of all or a substantial portion of the Company's
assets.
The Company has entered into interest rate protection agreements (the
"Agreements"), with reputable national commercial banks and investment banking
institutions to reduce its exposure to fluctuations in variable interest rates.
A summary of the Agreements outstanding as of September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Notional Amount Fixed Rate Period
--------------- ---------- -------------------------------------
(in millions)
<S> <C> <C>
$ 50 5.76% October 1996 - October 1997
50 5.81 October 1996 - October 1997
130 6.27 April 1997 - May 1998
50 6.08 September 1997 - September 2000
50 6.06 September 1997 - March 2000
</TABLE>
The Agreements effectively change the Company's interest rate paid on
its floating rate long-term debt to a weighted average fixed rate of
approximately 6.06% plus applicable margins imposed by the terms of the Credit
Agreement at September 30, 1997.
26
<PAGE> 27
The Company has also entered into additional interest rate protection
agreements with effective dates beginning in the future (the "Forward
Agreements"). These Forward Agreements provide continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under the Delayed Draw Term Facility of the Senior
Credit Facility. A summary of these Forward Agreements is as follows:
<TABLE>
<CAPTION>
Notional Amount Fixed Rate Period
--------------- ---------- -------------------------------------
(in millions)
<S> <C> <C>
$ 50 5.97% October 1997 - April 1999
50 6.02 October 1997 - October 1999
50 5.90 November 1997 - November 1999
50 5.91 November 1997 - November 1999
130 6.06 May 1998 - May 2001
</TABLE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This quarterly report 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 ("Forward Looking
Statements"). All statements other than statements of historical fact included
in this section, 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. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, number of acquisitions and projected or anticipated
benefits from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, earnings, levels of capital expenditures or
other aspects of operating results. All phases of the Company operations are
subject to a number of uncertainties, risks and other influences, many of which
are outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether Forward Looking Statements made by the Company ultimately prove to be
accurate. Such important factors ("Important Factors") that could cause actual
results to differ materially from the Company's expectations are disclosed in
this section and elsewhere in this report. 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 Important Factors
described below that could cause actual results to differ from the Company's
expectations.
Competition. The solid waste collection and disposal business is highly
competitive and requires substantial amounts of capital. The Company competes
with numerous waste management companies, a number of which have significantly
larger operations and greater resources than the Company. The Company also
competes with those counties and municipalities that maintain their own waste
collection and disposal operations. Forward Looking Statements assume that the
Company will be able to effectively compete with the other waste management
companies.
Availability of Acquisition Targets. The Company's ongoing acquisition
program is a key element of its expansion strategy. In addition, obtaining
landfill permits has become increasingly difficult, time consuming and
expensive. There can be no assurance that the Company will succeed in obtaining
landfill permits or locating appropriate acquisition candidates that can be
acquired at price levels that the Company considers appropriate and that
reflects historical prices. The Forward Looking Statements assume that a number
of acquisition candidates and landfill properties sufficient to meet the
Company's goals will be available for purchase and that the Company will be able
to complete the acquisition at prices that the Company has experienced in the
past two years.
27
<PAGE> 28
Integration. The Company's financial position and results of operations
depend to a large extent on the integration of recently acquired businesses. The
Forward Looking Statements assume that integration of acquired companies,
including the internalization of waste, will require from three to nine months
from the date the acquisition closes. Failure to achieve effective integration
in the anticipated time period or at all could have an adverse effect on the
Company's future results of operations.
Ongoing Capital Requirements. To the extent that internally generated cash
and cash available under the Company's existing credit facilities are not
sufficient to provide the cash required for future operations, capital
expenditures, acquisitions, debt repayment obligations and/or financial
assurance obligations, the Company will require additional equity and/or debt
financing in order to provide such cash. The Company has incurred significant
debt obligations in the last two years, which entail substantial debt service
costs. The Forward Looking Statements assume that the Company will be able to
raise the capital necessary to finance such requirements at rates that are as
good as or better than those it is currently experiencing. There can be no
assurance, however, that such financing will be available or, if available, will
be available on terms satisfactory to the Company.
Economic Conditions. The Company's business is affected by general economic
conditions. The Forward Looking Statements assume that the Company will be able
to achieve internal volume and price growth which is not impacted by an economic
downturn. (As revenue of the Company continues to grow it is likely that the
rates of internal growth will reflect growth rates which are less than those
experienced in 1996.) There can be no assurance that an economic downturn will
not result in a reduction in the volume of waste being disposed of at the
Company's operations and/or the price that the Company can charge for its
services.
Weather Conditions. Protracted periods of inclement weather may adversely
affect the Company's operations by interfering with collection and landfill
operations, delaying the development of landfill capacity and/or educing the
volume of waste generated by the Company's customers. In addition, particularly
harsh weather conditions may result in the temporary suspension of certain of
the Company's operations. The Forward Looking Statements do not assume that such
weather conditions will occur.
Dependence on Senior Management. The Company is highly dependent upon its
senior management team. In addition, as the Company continues to grow, its
requirements for operations management with waste industry experience will also
increase. The availability of such experienced management is not known. The
Forward Looking Statements assume that experienced management will be available
when needed by the Company at compensation levels that are within industry
norms. The loss of the services of any member of senior management or the
inability to hire experienced operations management could have a material
adverse effect on the Company.
Influence of Government Regulation. The Company's operations are subject to
and substantially affected by extensive federal, state and local laws,
regulations, orders and permits, which govern environmental protection, health
and safety, zoning and other matters. These regulations may impose restrictions
on operations that could adversely affect the Company's results, such as
limitations on the expansion of disposal facilities, limitations on or the
banning of disposal of out-of-state waste or certain categories of waste or
mandates regarding the disposal of solid waste. Because of heightened public
concern, companies in the waste management business may become subject to
judicial and administrative proceedings involving federal, state or local
agencies. These governmental agencies may seek to impose fines or to revoke or
deny renewal of operating permits or licenses for violations of environmental
laws or regulations or to require remediation of environmental problems at sites
or nearby properties, or resulting from transportation or predecessors'
transportation and collection operations, all of which could have a material
adverse effect on the Company. Liability may also arise from actions brought by
individuals or community groups in connection with the permitting or licensing
of operations, any alleged violations of such permits and licenses or other
matters. The Forward Looking Statements assume that there will be no materially
negative impact on its operations due to government regulation.
28
<PAGE> 29
Potential Environmental Liability. The Company may incur liabilities for the
deterioration of the environment as a result of its operations. Any substantial
liability for environmental damage could materially adversely affect the
operating results and financial condition of the Company. Due to the limited
nature of the Company's insurance coverage of environmental liability, if the
Company were to incur liability for environmental damage, its business and
financial condition could be materially adversely affected. The Forward Looking
Statements assume that the Company will not incur any material environmental
liabilities other than those for which a provision has been recorded in the
consolidated financial statements and disclosed in the notes thereto.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb cost increases, resulting from inflation. The Company is
unable to determine the future impact of a sustained economic slowdown.
SEASONALITY
The Company believes that its collection and landfill operations can be
adversely affected by protracted periods of inclement weather which could delay
the development of landfill capacity or transfer of waste and/or reduce the
volume of waste generated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the financing of the Senior Credit Facility, the
Company has entered into interest rate swap agreements (the "Agreements") with
reputable national banks and investment banking institutions to reduce its
exposure to market changes in interest rates. See footnote 1 to Condensed
Consolidated Financial Statements. The Company's use of the Agreements has not
been and is not expected to be material with respect to its financial position
or results of operations.
29
<PAGE> 30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes to previously reported information.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
11.1 Statement regarding the computation of per share
earnings - primary.
11.2 Statement regarding the computation of per share
earnings - fully diluted.
12 Ratio of earnings to fixed charges.
27 Financial data schedule.
--------------
(b) Reports on Form 8-K
August 28, 1997. The Company's Current Report
on Form 8-K reports pro forma financial
statements related to the Laidlaw
Acquisition and the issuance of the
Senior Discount Notes.
November 4, 1997. The Company's Current Report on
Form 8-K reports pro forma financial
statements related to the Laidlaw
Acquisition, the acquisitions of Wayne
County-Oakland and Wayne County - Canton
and the completion of the 1997 Equity
Offering.
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Allied Waste Industries, Inc., has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLIED WASTE INDUSTRIES, INC.
By: /s/ HENRY L. HIRVELA
------------------------------------------
Henry L. Hirvela
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ PETER S. HATHAWAY
------------------------------------------
Peter S. Hathaway
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Date: November 14, 1997
31
<PAGE> 1
EXHIBIT 11.1
ALLIED WASTE INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - PRIMARY
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income before extraordinary loss ............. $ 10,359 $ 33,876 $ 5,582 $ 14,427
Extraordinary loss due to early extinguishment
of debt, net of income tax benefit ........ 11,024 53,205 11,024 793
------------ ------------ ------------ ------------
Net income (loss) ............................ (665) (19,329) $ (5,442) 13,634
Dividends on preferred stock ................. (861) (381) (287) (44)
------------ ------------ ------------ ------------
Adjusted net income (loss)
to common shareholders .................... $ (1,526) $ (19,710) $ (5,729) $ 13,590
============ ============ ============ ============
Historical weighted average common
shares outstanding ........................ 59,502,699 80,421,005 61,274,849 82,350,279
Common stock equivalents -
Stock options and warrants ................ 2,196,588 9,091,649 2,050,420 2,964,917
Issuable pursuant to
earn-out agreements ...................... 937,540 230,361 942,172 242,346
------------ ------------ ------------ ------------
Weighted average common and
common equivalent shares ................. 62,636,827 89,743,015 64,267,441 85,557,542
============ ============ ============ ============
Primary net income (loss) per share:
Income before extraordinary loss .......... $ 0.15 $ 0.37 $ 0.08 $ 0.17
Extraordinary loss ........................ (0.18) (0.59) (0.17) (0.01)
------------ ------------ ------------ ------------
Adjusted net income (loss) ................ $ (0.03) $ (0.22) $ (0.09) $ 0.16
============ ============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
ALLIED WASTE INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - FULLY DILUTED
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
----------------------------- ------------------------------
1996 1997 1996 1997
------------ ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income before extraordinary loss .............. $ 10,359 $ 33,876 $ 5,582 $ 14,427
Extraordinary loss due to early extinguishment
of debt, net of income tax benefit ......... 11,024 53,205 11,024 793
------------ ------------ ------------ ------------
Net income (loss) ............................. (665) (19,329) (5,442) 13,634
Dividends on preferred stock .................. (861) (381) (287) (44)
Interest savings upon conversion of
convertible securities ..................... -- 47 22 56
------------ ------------ ------------ ------------
Adjusted net income (loss) to
common shareholders ........................ $ (1,526) $ (19,663) $ (5,707) $ 13,646
============ ============ ============ ============
Historical weighted average
common shares outstanding .................. 59,502,699 80,421,005 61,274,849 82,350,279
Common stock equivalents -
Stock options and warrants ................. 2,196,588 9,091,649 2,050,420 2,964,917
Assumed conversions -
Series D preferred ......................... --(*) -- -- --
9% cumulative convertible preferred ........ --(*) -- -- (*) --
7% cumulative convertible preferred ........ --(*) --(*) -- (*) 339,143
Convertible notes .......................... --(*) 222,369 444,022 188,094
Issuable pursuant to earn-out
agreements ................................. 937,540 230,361 942,172 242,346
------------ ------------ ------------ ------------
Weighted average common and
common equivalent shares ................... 62,636,827 89,965,384 64,711,463 86,084,779
============ ============ ============ ============
Fully diluted net income (loss) per share:
Income before extraordinary loss ........... $ 0.15 $ 0.37 $ 0.08 $ 0.17
Extraordinary loss ......................... (0.18) (0.59) (0.17) (0.01)
------------ ------------ ------------ ------------
Adjusted net income (loss) ................. $ (0.03) $ (0.22) $ (0.09) $ 0.16
============ ============ ============ ============
</TABLE>
- ------------
(*) Assumed conversion of each of these securities, on an individual basis, has
an anti-dilutive effect on earnings per share.
<PAGE> 1
EXHIBIT 12
ALLIED WASTE INDUSTRIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
Fixed Charges:
Interest expensed ....................................... $ 6,996 $ 70,860
Interest capitalized .................................... 10,013 24,868
-------- ---------
Total interest expense .............................. 17,009 95,728
Interest component of rent expense ......................... 1,255 2,725
Amortization of debt issuance costs ........................ 438 2,978
-------- ---------
Total Fixed Charges ................................. $ 18,702 $ 101,431
======== =========
Earnings:
Income from continuing operations
before income taxes ................................. $ 19,747 $ 58,408
Plus fixed charges ...................................... 18,702 101,431
Less interest capitalized ............................... (10,013) (24,868)
-------- ---------
Total Earnings ...................................... $ 28,436 $ 134,971
======== =========
Ratio of earnings to fixed charges ......................... 1.52X 1.33X
======== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 79,742
<SECURITIES> 0
<RECEIVABLES> 146,507
<ALLOWANCES> 7,211
<INVENTORY> 7,278
<CURRENT-ASSETS> 263,873
<PP&E> 1,072,711
<DEPRECIATION> 132,641
<TOTAL-ASSETS> 2,129,855
<CURRENT-LIABILITIES> 224,904
<BONDS> 1,125,992
0
0
<COMMON> 1,010
<OTHER-SE> 548,649
<TOTAL-LIABILITY-AND-EQUITY> 2,129,855
<SALES> 633,303
<TOTAL-REVENUES> 633,303
<CGS> 344,468
<TOTAL-COSTS> 344,468
<OTHER-EXPENSES> 157,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,838
<INCOME-PRETAX> 58,408
<INCOME-TAX> 24,532
<INCOME-CONTINUING> 33,876
<DISCONTINUED> 0
<EXTRAORDINARY> 53,205
<CHANGES> 0
<NET-INCOME> (19,329)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
