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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 19, 1997
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Allied Waste Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
0-19285 88-0228636
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(Commission File Number) (IRS Employer Identification No.)
15880 Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 423-2946
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Not Applicable
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(Former name or former address, if changed since last report.)
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ITEM 5. OTHER EVENTS
Allied Waste Industries, Inc. (the "Company") is a
vertically-integrated, non-hazardous solid waste management company providing
collection, recycling and disposal services.
RECENT DEVELOPMENTS
On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw Inc. ("Laidlaw") in the U.S. and Canada (the "Laidlaw Acquisition"),
for consideration comprised of $1.2 billion cash, 14.6 million shares of the
Company's common stock (the "Common Stock"), warrants to acquire 20.4 million
shares of Common Stock, and two junior subordinated debentures with an aggregate
face amount of $318 million (the "Allied Canada Debentures"). The cash
consideration was financed from the proceeds of a senior credit facility in the
aggregate amount of $1.275 billion (the "Senior Credit Facility") and the sale
of $525 million of the Company's 10 1/4% Senior Subordinated Notes due 2006 (the
"Notes").
On January 16, 1997, the Company entered into a Share Purchase Agreement
with USA Waste Services, Inc. ("USA Waste") pursuant to which USA Waste will
acquire (the "Canadian Sale") all of the Canadian non-hazardous solid waste
management operations of the Company for $518 million in cash. The Company
acquired the Canadian operations in the Laidlaw Acquisition in December 1996.
The Canadian Sale is anticipated to close during the first quarter of 1997,
subject to standard Canadian regulatory approvals. Under the terms of the
transaction, USA Waste will acquire 41 collection companies, 10 recycling
facilities and seven landfills in Canada. The Company will use proceeds from the
Canadian Sale to pay down approximately $500 million in debt under the Senior
Credit Facility. Unless otherwise indicated, all references to the Company and
its operations contained herein give effect to the Laidlaw Acquisition and the
Canadian Sale.
BUSINESS AND PROPERTIES
THE COMPANY
The Company is the fourth largest solid waste management company in the
United States, by revenues. The Company serves 1.8 million customers through
operations in 22 states. The Company has an extensive network of 33 transfer
stations, 23 recycling facilities and 46 landfills. The Company's strategy is to
develop vertically-integrated operations centered around landfills that are
owned or operated by the Company in the markets it serves.
INDUSTRY TRENDS
According to the National Solid Waste Management Association and Waste
Age Magazine, the North American solid waste industry was estimated to have had
revenues of more than $32 billion in 1995. The industry is highly fragmented
with the four largest companies accounting, in 1995, for approximately 30% of
revenues, seven mid-sized public companies accounting for approximately 4% of
revenues, and several thousand municipalities and independent collection firms
accounting for the remainder. The solid waste management industry has been
affected significantly by increased regulation of disposal activities and to a
lesser extent collection activities also, have been affected. In October 1991,
the Environmental Protection Agency (the "EPA") adopted new regulations pursuant
to Subtitle D ("Subtitle D") of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA") governing the disposal of non-hazardous solid waste.
These regulations led to a variety of requirements applicable to landfill
disposal sites, including the construction of liners and the installation of
leachate collection systems, groundwater monitoring systems and methane gas
recovery systems. The regulations also require enhanced control systems to
monitor more closely the waste streams being disposed at landfills, extensive
post-closure monitoring of sites and financial assurances that landfill
operators will be able to comply with the stringent regulations. The rising
costs associated with increasingly stringent industry regulations have tended to
promote consolidation and acquisition activity within the industry.
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The Company believes that these trends will continue and are the result
of several factors:
(1) Subtitle D and similar state regulations have significantly
increased the amount of capital and technical expertise required
to own and operate a landfill. As a result, many landfill
operators that lack the necessary capital or expertise are
electing to sell their landfills as an alternative to closing
them;
(2) a number of municipalities are electing to privatize their
municipal landfills as an alternative to funding the changes to
such landfills required by Subtitle D and related state
regulations; and
(3) as a result of heightened sensitivity to environmental conditions
in many communities, it is becoming increasingly desirable for
solid waste management companies to provide waste recycling
programs in addition to conventional collection and disposal
services.
These developments, as well as more stringent bonding requirements being imposed
on solid waste management companies by various municipalities, have increased
the amount of capital generally required for solid waste management operations,
causing smaller companies that lack the requisite capital to sell their
operations to better-capitalized companies.
BUSINESS STRATEGY
The Company's strategy is to build a vertically-integrated solid waste
management company with a strong presence in select markets. The Company plans
to implement this strategy by (i) establishing a market presence generally based
on its landfills; (ii) increasing volume in its markets through "tuck-in"
acquisitions of collection companies and marketing to new customers; (iii)
providing a high level of customer service; (iv) competitively pricing its
services based on the particular circumstances of each market; and (v)
continuing to control costs and reduce corporate overhead as a percentage of
revenues. The Company believes that its strategy to build vertically-integrated
operations will provide the Company with competitive advantages in its targeted
regional markets.
The Company pursues acquisitions in geographic areas characterized by
one or more of the following criteria: (i) the availability of permitted and
underutilized landfill capacity located either close to or outside of, but
within economic range of, a major population center, (ii) disposal fees that
justify necessary transportation expenses, (iii) near or medium-term scheduled
closures of landfills near such a population center, (iv) a shift in landfill
ownership from public to private and (v) rural landfills that are likely to
provide opportunities in a local market.
The Company has adopted the following four-step operating program in
executing its business strategy:
(1) Landfill Acquisitions. Once the Company identifies an area that
qualifies under its target market criteria, the Company seeks to
establish a market presence, generally by acquiring one or more
landfills in that area that can be accessed economically from the
metropolitan center or from the regional market area, either
through direct hauling or through strategically located transfer
operations. In evaluating a landfill acquisition, the Company
considers, among others, the following factors: (i) current
disposal costs together with transportation costs to the targeted
landfill relative to transportation and disposal costs of
potential competitors, (ii) expected landfill capacity, (iii)
opportunities for landfill expansion, and (iv) projected
short-term ability to secure an acceptable level of disposal
volume.
(2) Secure Captive Waste Volumes. The Company seeks to build a market
presence and increase the utilization of the landfill by securing
captive waste streams, which includes developing and acquiring
transfer stations, entering into waste collection contracts and
acquiring waste collection companies. Generally, the Company
pursues the acquisition of collection companies that: (i) have
well-established residential or commercial collection routes and
accounts, (ii) own and operate transfer stations, or (iii) do not
own landfills and are vulnerable to volatile disposal pricing,
which the Company believes it can minimize through landfill
ownership.
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(3) "Tuck-in" Acquisitions. The Company acquires service rights,
obligations, machinery and equipment in "tuck-in" acquisitions of
collection companies to: (i) increase the waste stream directed
to its landfills, (ii) maximize its market presence, and (iii)
take advantage of economies of scale which should increase
earnings and return on capital.
(4) Integration of Operations. Immediately following an acquisition,
the Company begins to integrate the acquired company into its
operating and control systems, internalizing waste previously
disposed at third party landfills to facilities owned or operated
by the Company, establishing an operating plan, implementing the
Company's operating policies and procedures, including the
consolidation and rationalization of routes and pricing,
establishing new banking and cash control procedures, integrating
the acquired company's accounting, data processing and management
reporting systems and appointing a new board of directors. In
many acquisitions, the Company retains the management of the
company it acquires in order to benefit from the existing
management's understanding of the local market, personal and
business contacts, and goodwill in the community.
OPERATIONS
COLLECTION. Collection operations involve collecting and transporting
non-hazardous waste from the point of generation to the transfer station or the
site of disposal. Solid waste collection is generally provided under two primary
types of arrangements, depending on the customer being served.
Residential. Residential collection services are performed pursuant to
individual monthly subscriptions directly to households or long-term contracts
with municipal governments that give the Company exclusive rights to service all
or a portion of the homes in such municipalities at established rates. The
Company seeks to obtain municipal contracts which enhance the efficiency and
profitability of the Company's operations as a result of the density of
collection customers within a given area. At the end of the term of most
municipal contracts, the Company will attempt to renegotiate the contract, and
if unable to do so, will rebid the contract on a sealed bid basis. Residential
collection service arrangements with households are made directly between the
Company and the resident. The Company seeks to enter into residential service
arrangements where the route density is high, thereby creating certain economies
of scale. Collection fees are determined by the Company and the customer based
on general competitive and prevailing local economic conditions and include
other considerations such as collection frequency, the type and volume or weight
of the waste collected, the distance to the disposal facility, and cost of
disposal. Residential collection fees are either paid by the municipalities out
of tax revenues or service charges or are paid directly by the residents
receiving the service.
Commercial. The Company provides containerized non-hazardous solid waste
disposal services to a wide variety of commercial and industrial customers.
These customers are provided with containers that are designed to be lifted
mechanically and either emptied into a collection vehicle's compaction hopper
or, in the case of roll-off containers, to be loaded onto the collection
vehicle. The Company's commercial containers generally range in size from one to
eight cubic yards and its roll-off containers generally range in size from 20 to
40 cubic yards. Contracts for commercial containers typically have terms of up
to five years, may not be terminated by the customer prior to the end of the
term and have renewal options. Contracts for roll-off containers may provide for
temporary (such as the removal of waste from a construction site) or ongoing
services. Fees relating to those contracts are determined by general competitive
and prevailing local economic conditions and include other considerations such
as collection frequency, type of equipment furnished, distance traveled to the
disposal site, and the type and volume or weight of the waste collected.
TRANSFER STATIONS. A transfer station is a facility where solid waste is
received from third-party and Company owned collection vehicles and then
transferred to and compacted in large, specially-constructed trailers for
transportation to disposal facilities. This consolidation reduces costs by
improving utilization of collection personnel and equipment, and is an
increasingly common procedure in the solid waste management industry. Fees are
generally based upon such factors as the type and volume or weight of the waste
transferred and the transport distance involved. The Company believes that as
increased regulations and public pressure restrict the development of landfills
in urban and suburban areas, transfer stations will increasingly be used as an
efficient means to transport waste over longer distances to available landfills.
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RECYCLING. In response to increasing awareness by the customer of
environmental concerns and expanding federal and state regulations pertaining to
waste recycling, the Company includes recycling as a component of its integrated
solid waste management plan. Services include curbside collection of recyclable
materials for residential customers, commercial and industrial collection of
recyclable materials, and, to a lesser extent, material recovery/waste
reduction. Recycling fees are generally service based wherein the customer pays
for the cost of removing, processing and disposing of potentially recyclable
materials. In most cases, mixed waste materials are received at an owned or
leased materials recovery facility (MRF) which is often integrated into or
contiguous to a transfer operation. Materials such as paper, cardboard, plastic,
aluminum and other metals are sorted, separated, accumulated, bound or placed in
a container and readied for transportation to a third-party which will reuse the
separated materials. The purchaser generally pays for the materials based on
fluctuating spot-market prices. Material for which there is no market or for
which the market price is insufficient to warrant processing are disposed of at
a landfill or other disposal facility.
LANDFILLS. Solid waste landfills are the primary method of disposal of
solid waste in the United States. A landfill must be carefully maintained to
meet federal, state and local regulations pursuant to Subtitle D. Maintenance
includes excavation, continuous spreading and compacting of waste, and covering
of waste with earth or other inert material. The cost of transferring solid
waste to a disposal location places a geographic restriction on solid waste
companies. Access to a disposal facility, such as a landfill, is a requirement
for all solid waste management companies. While access can be obtained to
disposal facilities owned or operated by unaffiliated parties, the Company
believes that it is generally preferable for collection companies to own or
operate their own disposal facilities thereby ensuring access on favorable terms
and the internalization of disposal fees.
MARKETING AND SALES
Each of the Company's districts has a staff responsible for sales and
marketing. The Company's policy is to periodically visit each commercial
account. In addition to calling on existing customers, each salesperson calls
upon potential customers within a specified territory in each service area.
In addition to its sales efforts directed at commercial and industrial
customers, the Company has a municipal marketing coordinator in most service
areas. The municipal marketing coordinators are responsible for interfacing with
each municipality or community to which the Company provides residential service
to assure customer satisfaction. In addition, the municipal coordinators
organize and handle bids for renewal and new municipal contracts in their
service area.
PROPERTY AND EQUIPMENT
The principal fixed assets used by the Company in its collection and
transfer operations are 33 owned or operated transfer/recycling facilities. The
Company operates 46 non-hazardous solid waste landfills.
The Company's principal executive offices are located at 15880
Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260 where it currently
leases 33,000 square feet of office space. The Company also maintains regional
administrative offices throughout the United States.
EMPLOYEES
The Company employs approximately 5,000 persons. Certain employees of
the Company are covered by collective bargaining agreements. The Company
believes that its relations with its employees are satisfactory.
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COMPETITION
The non-hazardous waste collection and disposal industry is highly
competitive. The industry is comprised of four national waste companies in
addition to the Company, WMX Technologies, Inc., Browning-Ferris Industries,
Inc. ("BFI"), Republic Industries, Inc., USA Waste Services, Inc. and local and
regional companies of varying sizes and competitive resources such as United
Waste Systems, Inc. and Superior Services, Inc. The Company also competes with
those counties and municipalities that maintain their own waste collection or
disposal operations. These counties and municipalities may have financial
advantages through their access to tax revenues and tax-exempt financing and
their ability to mandate the disposal of waste collected within the jurisdiction
at a municipal landfill. The Company may also experience competition from
companies using alternative methods of managing solid waste streams, such as
incineration.
The solid waste collection and disposal industry is currently undergoing
significant consolidation, and the Company encounters competition in its efforts
to acquire landfills and collection operations. Accordingly, it may become
uneconomical for the Company to make further acquisitions or the Company may be
unable to locate or acquire suitable acquisition candidates at price levels and
on terms and conditions that the Company considers appropriate, particularly in
markets the Company does not already serve.
ENVIRONMENTAL AND OTHER REGULATIONS
The Company is subject to extensive and evolving environmental laws and
regulations. These regulations are administered by the EPA and various other
federal, state and local environmental, zoning, health and safety agencies, many
of which periodically examine the Company's operations to monitor compliance
with such laws and regulations. The Company believes that there will be
increased regulation and legislation related to the waste management industry
and the Company attempts to anticipate such future regulatory requirements to
ensure compliance.
The Company's operation of landfills subjects it to certain operational,
monitoring, site maintenance, closure, postclosure and other obligations which
could give rise to increased costs for monitoring and corrective measures. In
connection with the Company's acquisition of existing landfills, it is often
necessary to expend considerable time, effort and money to obtain permits
required to increase the capacity of these landfills. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil or criminal penalties in case of violations.
The Company's operations will be subject to extensive regulation,
principally under the following federal statutes:
The Resource Conservation and Recovery Act of 1976, as amended. RCRA
regulates the handling, transportation and disposal of hazardous and
non-hazardous wastes and delegates authority to states to develop programs to
ensure the safe disposal of solid wastes. On October 9, 1991, the EPA
promulgated Solid Waste Disposal Facility Criteria for nonhazardous solid waste
landfills under Subtitle D. Subtitle D includes location standards, facility
design and operating criteria, closure and post-closure requirements, financial
assurance standards and groundwater monitoring as well as corrective action
standards, many of which had not commonly been in place or enforced previously
at landfills. Subtitle D applies to all solid waste landfill cells that received
waste after October 9, 1991, and, with limited exceptions, all landfills were
required to meet these requirements by October 9, 1993. Landfills that were not
in compliance with the requirements of Subtitle D on the applicable date of
implementation were required to close. In addition, landfills that stopped
receiving waste before October 9, 1993 were not required to comply with the
final cover provisions of Subtitle D. Each state must comply with Subtitle D and
was required to submit a permit program designed to implement Subtitle D to the
EPA for approval by April 9, 1993. States may impose requirements for landfill
units that are more stringent than the requirements of Subtitle D. Once a state
has an approved program, it must review all existing landfill permits to ensure
that they comply with Subtitle D.
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"),
as amended. This act establishes rules regulating the discharge of pollutants
into streams and other waters of the United States (as defined in the Clean
Water Act) from a variety of sources, including solid waste disposal sites. If
runoff from the Company's landfills or transfer stations may be discharged into
surface waters, the Clean Water Act requires the Company to apply for and obtain
discharge permits, conduct sampling and monitoring and, under certain
circumstances, reduce the quantity of pollutants in those discharges. The permit
program has been expanded to include stormwater discharges from landfills that
receive, or in the past received, industrial waste. In addition, if development
may alter or affect "wetlands," a permit may have to be obtained and certain
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mitigation measures may need to be undertaken before such development may be
commenced. This requirement is likely to affect the construction or expansion of
many solid waste disposal sites, including some owned or being developed by the
Company. The Clean Water Act provides civil, criminal and administrative
penalties for violations of its provisions.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended. The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA") addresses problems created by the
release or threatened release of hazardous substances into the environment.
CERCLA's primary mechanism for remediating such problems is to impose strict,
joint and several liability for cleanup of disposal sites on current owners and
operators of the site, former site owners and operators at the time of disposal,
and waste generators and parties who arranged for disposal at the facility. The
costs of a CERCLA cleanup can be substantial. Liability under CERCLA is not
dependent on the existence or disposal of "hazardous wastes" (as defined under
RCRA), but can also be founded on the existence of even minute amounts of the
more than 700 "hazardous substances" listed by the EPA.
The Clean Air Act, as amended. The Clean Air Act provides for increased
federal, state and local regulation of the emission of air pollutants. The EPA
has construed the Clean Air Act to apply to landfills. In March 1996, the EPA
adopted New Source Performance Standard and Emission Guidelines (the "Emission
Guidelines") for municipal solid waste landfills. These regulations impose
limits on air emissions from solid waste landfills. The Emission Guidelines
propose two sets of emissions standards, one of which is applicable to all solid
waste landfills that commence construction, reconstruction or modification after
May 30, 1991 and another which is applicable to all solid waste landfills that
received waste or had the capacity to receive waste after November 8, 1987. The
Emission Guidelines may be implemented by the states. These guidelines, combined
with the new permitting programs established under the recent Clean Air Act
amendments, will likely subject solid waste landfills to significant new
permitting requirements and, in some instances, require installation of methane
gas recovery systems.
The Occupational Safety and Health Act of 1970 ("OSHA"), as amended.
OSHA establishes certain employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious injury,
compliance with standards promulgated by the Occupational Safety and Health
Administration, and various recordkeeping, disclosure and procedural
requirements. Various standards, including standards for notices of hazards,
safety in excavation and demolition work, and the handling of asbestos, may
apply to the Company's operations.
Future Federal Legislation. In the future, the Company's collection,
transfer and landfill operations may also be affected by legislation that may be
proposed in the United States Congress that would authorize the states to enact
legislation governing interstate shipments of waste. Such proposed federal
legislation may allow individual states to prohibit the disposal of out-of-state
waste or to limit the amount of out-of-state waste that could be imported for
disposal and would require states, under certain circumstances, to reduce the
amounts of waste exported to other states. If this or similar legislation is
enacted, states in which the Company will operate landfills could act to limit
or prohibit the importation of out-of-state waste. Such state actions could
adversely affect landfills within these states that receive a significant
portion of waste originating from out-of-state.
State Regulation. Each state in which the Company operates has laws and
regulations governing solid waste disposal and water and air pollution and, in
most cases, regulations governing the design, operation, maintenance and closure
of landfills and transfer stations. Management believes that several states have
proposed or have considered adopting legislation that would regulate the
interstate transportation and disposal of waste in their landfills. Many states
have also adopted legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling.
The Company's collection and landfill operations may be affected by the
current trend toward laws requiring the development of waste reduction and
recycling programs. For example, a number of states have recently enacted laws
that will require counties to adopt comprehensive plans to reduce, through waste
planning, composting and recycling or other programs, the volume of solid waste
deposited in landfills within the next few years. A number of states have also
taken or propose to take steps to ban or otherwise limit the disposal of certain
wastes, such as yard wastes, beverage containers, newspapers, unshredded tires,
lead-acid batteries and household appliances into landfills.
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The Company has implemented and will continue to implement its own
environmental safeguards that comply with or exceed these governmental
requirements. Additionally, the Company's policy will be to obtain an
environmental assessment prepared by an independent environmental consulting
firm for all real estate acquired.
LIABILITY INSURANCE AND BONDING
The Company carries general liability, comprehensive property damage,
workers' compensation, employer's liability, directors' and officers' liability
and other coverages it believes are customary to the industry. The Company also
has environmental impairment liability insurance for all of its operating
landfills except one owned and four operated sites. The environmental impairment
liability insurance is in the amount of up to $5 million for the policy term in
excess of a $1 million deductible per claim. Except as discussed in Legal
Proceedings below, management does not expect the impact of any known
environmental or other contingencies to be material to the Company's liquidity,
financial position or results of operations.
The Company is required to provide certain financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill and collection operations. These financial assurances include
performance bonds, letters-of-credit, insurance contracts and trust deposits
required principally to secure the Company's estimated landfill closure and
post-closure obligations and collection contracts. The Company expects to be
required to provide approximately $221.6 million in financial assurance
obligations relating to its landfill operations. The Company expects that
financial assurances will increase in the future as the Company acquires and
expands its activities and that a greater percentage of the financial assurances
will be comprised of letters-of-credit.
LEGAL PROCEEDINGS
The Company is currently involved in certain routine litigation. The
Company believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits will
not have a materially adverse effect on the Company's consolidated financial
position or results of operations.
The business of the Company is regulated by federal, state and local
provisions that relate to the protection of the environment. The nature of the
Company's business results in it frequently becoming a party to judicial or
administrative proceedings involving governmental authorities and other
interested parties. At December 31, 1996, the Company was not involved in any
such proceedings where management believes sanctions imposed by governmental
authorities may exceed $100,000. From time to time the Company may also be
subject to actions brought by citizens' groups, adjacent landowners or others in
connection with the permitting and licensing of its landfills or transfer
stations, or alleging personal injury, environmental damage or violations of the
permits and licenses pursuant to which the Company operates.
The Company has been notified that it is considered a potentially
responsible party at a number of locations under CERCLA or other environmental
laws. The Company continually reviews its status with respect to each location,
taking into account the alleged connection to the location and the extent of the
contribution to the volume of waste at the location, the available evidence
connecting the entity to that location and the numbers and financial soundness
of other potentially responsible parties at the location. The actual liability
at these sites cannot currently be determined due to a number of uncertainties
including the extent of the contamination, the appropriate remedy, the financial
viability of other potentially responsible parties and the ultimate
apportionment of responsibility among such potentially responsible parties.
While the financial resolution of any of the above-described matters may
have an impact on the Company's consolidated financial results for a particular
reporting period, management believes that the ultimate disposition of these
matters will not have a materially adverse effect upon the consolidated
financial position of the Company.
Prior to the Company's acquisition of CRX, Inc. ("CRX"), an
investigation of an unrelated manufacturing facility led to allegations that
hazardous wastes were transported to and disposed of in CRX's Norfolk, Nebraska
landfill. In January 1992, the Nebraska Department of Environmental Quality (the
"NDEQ"), as agent for the EPA, published a preliminary assessment of the Norfolk
landfill. The NDEQ recommended that the Norfolk landfill be referred to the
NDEQ's Waste Recovery Section for groundwater monitoring and assessment.
Subsequently, the Company, in cooperation with the NDEQ,
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agreed on a groundwater monitoring program. The initial tests indicated organic
levels sufficient to warrant continued investigation to define the groundwater
contamination, the area impacted and the action needed, and such investigation
is ongoing. The Company has closed the Norfolk landfill, has proposed interim
measures to mitigate and/or control further dispersal of the organics and is
awaiting NDEQ approval of its proposal. A provision of $2.1 million, in excess
of the closure and post-closure reserves recorded in the normal course of
business, was made in the Company's 1994 Consolidated Financial Statements to
recognize the estimated costs of additional closure, post-closure and remedial
measures. Based on further technical assessment as of November 1996, the Company
believes that the provision for the Norfolk landfill may be increased in the
fourth quarter of 1996, which increase is not expected to have a material impact
on the annual cash flow of the Company. The exact amount of this increase, and
any resulting charge to earnings, is not determinable until additional
environmental assessments are completed. In addition, the Company intends to
vigorously seek recovery from other potentially responsible parties that may
share responsibility for the contamination at the Norfolk site.
The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 (the "LSW Subsidiaries") have been under
audit by the Internal Revenue Service. In March 1994, the LSW Subsidiaries
received a Statutory Notice of Deficiency proposing that the LSW Subsidiaries
pay additional taxes relating to disallowed deductions in those income tax
returns (the "Tax Controversy"). The consolidated tax group of the LSW
Subsidiaries has also received notice that fiscal years 1992, 1993 and 1994 will
be examined regarding the Tax Controversy. The LSW Subsidiaries could be
directly liable for a substantial portion of any tax and interest assessed if
the disallowance of the deduction is sustained. In addition, under Treasury
Regulations promulgated under Section 1502 of the Internal Revenue Code ("IRC"),
each member of the consolidated tax group including each LSW Subsidiary, is or
could be severally liable for federal income tax liabilities of the entire
consolidated tax group, including any taxes due on the deemed sale of assets by
the LSW Subsidiaries pursuant to Section 338 of the IRC and all amounts at issue
in the Tax Controversy which are ultimately determined to be owed.
Any amounts at issue in the Tax Controversy and for which any LSW
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Stock Purchase
Agreement by and between the Company and Laidlaw, among others, dated September
17, 1996 (the "Purchase Agreement"). Further, the Company and Laidlaw, among
others, have entered into a Setoff Agreement, under which Laidlaw has agreed
that if the Tax Controversy results in any damage, liability or expense to any
LSW Subsidiary, and if Laidlaw fails to indemnify the Company against all such
damages, liabilities or expenses within 30 days of a demand for indemnification,
then the Company may set off the amount of all such damages, liabilities and
expenses against all amounts then owed by the Company under the certain debt
issued to Laidlaw consisting primarily of the Allied Canada Debentures.
Other than to the extent contemplated in the Setoff Agreement, the
obligation of Laidlaw to indemnify the Company in respect of amounts at issue in
the Tax Controversy is a general, unsecured obligation of Laidlaw. The ability
of Laidlaw to pay and fulfill such indemnification obligation will depend on the
financial condition of Laidlaw at the time of any required performance of such
obligation.
LIQUIDITY AND CAPITAL RESOURCES
Pro forma for the Laidlaw Acquisition as of September 30, 1996, the
Company had an estimated balance of cash and cash equivalents of $56.6 million.
Pro forma for the Laidlaw Acquisition on September 30, 1996, the Company's debt
structure consisted of $525 million of the Notes, amounts outstanding under the
Senior Credit Facility (which upon the consummation of the Laidlaw Acquisition
was approximately $975 million), and $110.8 million of Allied Canada Debentures.
The Company intends to use approximately $500 million of the proceeds from the
Canadian Sale to pay down the Senior Credit Facility.
After giving effect to the Laidlaw Acquisition and the Canadian Sale,
there will be aggregate availability under the Senior Credit Facility of $300
million pursuant to a revolving credit facility to be used for working capital,
letters for credit, acquisitions and other general corporate purposes. No more
than $200 million of funded loans (excluding amounts outstanding pursuant to
drawn letters of credit) may be outstanding at one time, of which not more than
$100 million may be used for acquisitions. The indenture relating to the 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.
9
<PAGE>
After consummation of the Laidlaw Acquisition and the Canadian Sale, the
Company intends to fund its cash needs through cash flow from operations and
borrowings under the Senior Credit Facility. Because of the capital intensive
nature of the solid waste industry, the Company may use amounts in excess of the
cash generated from operations to retire and service debt, fund acquisitions,
other landfill development and capital expenditures. The Company also intends to
enter into master equipment lease facilities relating to the financing of the
acquisition of trucks and containers. A substantial portion of the Company's
available cash will be required to be applied to service the indebtedness
incurred to finance the Laidlaw Acquisition, which is expected to include
approximately $140 million in annual principal and interest payments (after
giving effect to the payment of $500 million on the Senior Credit Facility after
the Canadian Sale). During calendar year 1997 (after giving effect to the
Canadian Sale), the Company also expects to spend approximately $130 million for
capital, closure and post-closure and remediation expenditures and expects to be
required to provide approximately $221.6 million in financial assurance
obligations relating to its landfill operations. Amounts expended on capital
expenditures and financial assurance obligations will increase as a result of
any acquisitions or expansions of the Company's operations. As a result of these
capital requirements, the Company may periodically have low levels of working
capital or be required to finance working capital deficits.
Further regulatory action by Federal, state and local governments 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 make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) 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. One of the primary factors impacting the Company's future
performance will be its ability to integrate the assets acquired in the Laidlaw
Acquisition after the Canadian sale, and to reduce redundancies and excess
costs. These operations are significantly larger than the Company's previous
operations and represent a substantial increase in the scope of the Company's
business. 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 and other sources of
liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, letters of credit, capital expenditures and
scheduled payments of principal of, and interest on debt incurred under the
Senior Credit Facility, and interest on the Notes. However, the principal
payments at maturity on the Notes may require refinancing. In addition, the
Company may consider the divestiture of certain of its assets to retire its debt
under the Senior Credit Facility. 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, including the Notes, 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
acquisition facility under the Senior Credit Facility, the Company may need to
raise additional capital to fund the acquisition and integration of additional
solid waste businesses. There can be no assurance that the Company will be able
to secure such additional funding on favorable terms, if at all.
10
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock at December 31, 1996 by: (i) each
person who is known by the Company to own beneficially more than five percent of
the outstanding shares of Common Stock, (ii) each of the director's names, (iii)
each of the Company's executive officers not included in the information
regarding the Board of Directors, and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
NAME OF PERSON OR IDENTITY OF GROUP (1) NUMBER PERCENT OF CLASS
- --------------------------------------- -------------- ----------------
<S> <C> <C>
Roger A. Ramsey............................... 998,667(2) 1.3%
Thomas H. Van Weelden......................... 1,309,013(3) 1.7%
Laidlaw Transportation, Inc. (4).............. 14,600,000(5 19.5%
669 Airport Freeway, Suite 400
Hurst, Texas 76053
TPG Partners, L.P............................. 11,776,765(6) 15.8%
TPG Parallel I, L.P.
201 Main Street, Suite 2420
Fort Worth, Texas 76102
Nolan Lehmann................................. 1,546,770(7) 2.1%
Brian A. O'Leary.............................. 6,005,241 8.0%
Daniel J. Ivan................................ 99,836(8) *
Larry D. Henk................................. 224,687(9) *
H. Steven Uthoff.............................. 139,000(10) *
Robert G. Reedy............................... 71,407(11) *
Alan B. Shepard............................... 74,272(12) *
William K. Reilly............................. 35,000(13) *
John M. Lewis................................. 36,811(14) *
James G. Coulter.............................. 11,811,765(15) 15.8%
Jeffrey A. Shaw............................... 35,000(13) *
All directors and executive officers as
a group(18 persons) (2)-(3), (6)-(15)......... 17,757,306 23.2%
</TABLE>
- ----------
* Does not exceed one percent.
(1) Unless otherwise indicated, the address of each person or group listed
above is 15880 N. Greenway-Hayden, Scottsdale, AZ 85260.
(2) Includes (i) 75,694 shares of Common Stock that are beneficially owned
by an affiliate of Mr. Ramsey and (ii) 564,494 shares of Common Stock
that are vested and may be acquired on the exercise of options.
(3) Includes 440,119 shares of Common Stock that are vested and may be
acquired on the exercise of options and warrants.
(4) Laidlaw Transportation, Inc. is a wholly-owned subsidiary of Laidlaw
Inc., 3221 North Service Road, Burlington, Ontario, Canada L7R 3Y8
(5) Does not include a warrant to purchase 20,400,000 shares of Common
Stock which may not be exercised by Laidlaw Transportation, Inc. or
any affiliate unless there is a change of control of the Company.
(6) The general partners of each of TPG Partners, L.P. and TPG Parallel I,
L.P. is TPG GenPar, L.P., a Delaware limited partnership. The general
partner of TPG GenPar, L.P. is TPG Advisors, Inc. a Delaware
corporation. The stockholders of TPG Advisors, Inc. are David
Bonderman, James G. Coulter and William S. Price, III, none of whom
own a majority of the outstanding stock.
(7) Includes (i) 1,491,449 shares of Common Stock that are beneficially
owned by an affiliate of Mr. Lehmann, and (ii) 45,000 shares of Common
Stock that are vested and may be acquired on the exercise of options.
(8) Includes 96,500 shares of Common Stock that are vested and may be
acquired on the exercise of options.
(9) Includes 179,800 shares of Common Stock that are vested and may be
acquired on the exercise of options.
11
<PAGE>
(10) Includes 137,500 shares of Common Stock that are vested and may be
acquired on the exercise of options and warrants.
(11) Includes 45,000 shares of Common Stock that are vested and may be
acquired on the exercise of options.
(12) Includes 45,000 shares of Common Stock that are vested and may be
acquired on the exercise of options.
(13) Represents shares of Common Stock that are vested and may be acquired
on the exercise of options.
(14) Includes 35,000 shares of Common Stock that are vested and may be
acquired on the exercise of options.
(15) Includes (i) 35,000 shares of Common Stock that are vested and may be
acquired on the exercise of options and (ii) 11,776,765 shares of
Common Stock which are beneficially owned by TPG Partners, L.P.
EXECUTIVE COMPENSATION
Summary of Compensation. The following table provides certain summary
information concerning compensation paid or accrued during the fiscal years
ended December 31, 1996, 1995 and 1994 to the Company's Chief Executive Officer
and to each of the four other highly compensated executive officers serving at
the end of the fiscal year ended December 31, 1996 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------------- -------------------
Other Annual Securities/Underlying
Name and Position Year Salary Bonus Compensation Options/SARs (1) (#)
- ------------------ ---- -------- -------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Roger A. Ramsey .............. 1996 $348,803 $120,000 $ 9,972(2) 600,000
Chief Executive Officer ...... 1995 260,000 200,000 -- 232,175
1994 223,538 32,500 -- 40,000
Thomas H. Van Weelden ........ 1996 357,345 120,000 6,849 600,000
President and COO ............ 1995 260,000 160,000 -- 232,175
1994 223,538 52,500 170,638(3) 40,000
Larry D. Henk ................ 1996 197,700 85,000 448 40,000
Vice President - Operations .. 1995 175,000 65,000 -- 150,000
1994 135,800 44,000 -- 68,100
H. Steven Uthoff ............. 1996 197,147 45,000 68,569 40,000
Vice President - Controller .. 1995 175,000 52,500 -- 150,000
1994 84,015 9,000 -- 25,000
Henry L. Hirvela ............. 1996 157,827 85,000 26,830 100,000
Vice President - CFO ......... 1995 -- -- -- --
1994 -- -- -- --
</TABLE>
- ----------
(1) See "--Option Grants in Last Fiscal Year," for certain information
regarding options granted during the fiscal year ended December 31, 1996.
(2) Represents dues associated with membership in certain organizations.
(3) Includes $156,261 paid by the Company as reimbursement for certain
relocation expenses, $10,772 for automobile allowance, fuel and
maintenance, and $3,605 for dues associated with membership in certain
organizations.
(4) Represents reimbursement for certain relocation expenses.
(5) Includes $26,553 paid by the Company as reimbursement for certain
relocation expenses and $277 for dues associated with membership in certain
organizations.
12
<PAGE>
Option Grants in Last Fiscal Year. The following table provides certain
information with respect to options granted to the Chief Executive Officer and
to each of the Named Executive Officers during the fiscal year ended December
31, 1996 under the Incentive Plans:
<TABLE>
<CAPTION>
Individual Grants Potential
------------------------------------------------------ Realizable Value
Number of Percent at Assumed
Securities of Total Annual Rates of
Underlying Options/SARs Stock Price Appreciation
Options/ Granted Exercise or for Option Term (2)
SARs Granted to Employees Base Price Expiration -------------------------
Name and Position (#) (1) in Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ----------------- ------------ ------------- -------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Ramsey 400,000 21% $ 9.500 06/21/06 $2,389,800 $6,056,221
Chief Executive Officer 100,000 5% 9.500 06/21/06 597,450 1,514,055
100,000 5% 8.125 N/A 510,977 1,294,916
Thomas H. Van Weelden 400,000 21% 9.500 06/21/06 2,389,800 6,056,221
President and COO 100,000 5% 9.500 06/21/06 597,450 1,514,055
100,000 5% 8.125 N/A 510,977 1,294,916
Larry D. Henk 40,000 2% 6.875 01/24/06 172,946 438,279
Vice President - Operations
H. Steven Uthoff 40,000 2% 6.875 01/24/06 172,946 438,279
Vice President - Controller
Henry L. Hirvela 100,000 5% 9.125 04/01/06 573,866 1,454,290
Vice President and CFO
</TABLE>
- ----------
(1) Each option granted under the Incentive Plans becomes immediately
exercisable on the occurrence of a Change in Control (as defined in the
Incentive Plans). No stock appreciation rights were granted during 1996.
Mr. Ramsey and Mr. Van Weelden each were awarded 100,000 in restricted
stock during 1996. The restrictions may be released or accelerated under
certain conditions.
(2) Because the exercise price of all options equals the market price per share
of Common Stock on the date of grant, the potential realizable value of the
options assuming 0% stock appreciation is zero.
13
<PAGE>
Aggregated Option Exercises and Fiscal Year End Option Values. The
following table provides certain information with respect to options exercised
during the fiscal year ended December 31, 1996 by the Chief Executive Officer
and each of the Named Executive Officers listed in the preceding tables:
<TABLE>
<CAPTION>
Number of Securities Value of the Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs at Fiscal Options/SARs at Fiscal
Acquired on Value Year-End (#) Year-End ($) (1)
Name Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Ramsey - - 564,494 595,181 $2,453,265 $353,313
Thomas H. Van Weelden - - 401,994 520,181 1,608,263 240,815
Larry D. Henk - - 179,800 90,000 825,975 344,000
H. Steven Uthoff - - 125,000 90,000 604,250 344,000
Henry L. Hirvela - - - 100,000 - 12,500
</TABLE>
- ----------
(1) Calculated by multiplying the number of shares underlying outstanding
in-the-money options by the difference between the last sales price of the
Common Stock on December 31, 1996 ($9.25 per share) and the exercise price,
which ranges between $3.00 and $9.125 per share. Options are in-the-money
if the fair market value of the underlying Common Stock exceeds the
exercise price of the option.
Employment Agreements. The Company has entered into Executive Employment
Agreements with certain Named Executive Officers. The Executive Employment
Agreements of Mr. Ramsey and Mr. Van Weelden provide a base salary of $500,000
and a primary term which expires in 1999 that, after each year of employment, is
automatically renewed for successive one-year terms. The Executive Employment
Agreements of Mr. Henk and Mr. Uthoff provide for salaries of $260,000 and
$225,000, respectively, and a primary term which expires in 1997 that is
automatically renewed for successive one-year terms. If the Executive Employment
Agreements of Messrs. Ramsey, Van Weelden, Henk or Uthoff are terminated by the
employee for Good Reason (as defined in the Executive Employment Agreement), or
by the Company without Cause (as defined in the Executive Employment Agreement),
the base salary will be paid until expiration of the term of the Executive
Employment Agreement. If the Executive Employment Agreements of Messrs. Ramsey,
Van Weelden, Henk or Uthoff are terminated by the employee for Good Reason or by
the Company without Cause and a Change in Control (as defined in the Executive
Employment Agreement) has occurred within the two years preceding the date of
termination, the Company is obligated to pay an amount equal to the sum of two
times the base salary on the date of termination and the bonus paid for the
previous year. The Company has also entered into Employment Agreements with
Anthony F. Ciofalo, Michael G. Hannon, Peter S. Hathaway, Steven M. Helm, Daniel
J. Ivan and Richard Van Hattem. These Employment Agreements provide for base
salaries ranging from $85,000 to $225,000, as well as terms and severance
arrangements similar to those found in the Executive Employment Agreements of
the Named Executive Officers.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ALLIED WASTE INDUSTRIES, INC.
Date: February 19, 1997 /s/ PETER S. HATHAWAY
---------------------------
Peter S. Hathaway
Vice President, Treasurer &
Chief Accounting Officer
15
