UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
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.
Class Outstanding as of March 31, 1998
----- --------------------------------
Common Stock............................ 104,872,477
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
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................... 11
Part II Other Information
Item 1--Legal Proceedings.................................... 22
Item 2--Changes in Securities................................ 22
Item 3--Defaults Upon Senior Securities...................... 22
Item 4--Submission of Matters to a Vote of Security Holders.. 22
Item 5--Other Information.................................... 22
Item 6--Exhibits and Reports on Form 8-K..................... 22
Signature ................................................... 23
2
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
1997 1998
--------------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets --
Cash and cash equivalents ........................ $ 12,166 $ 28,192
Accounts receivable, net of allowance of
$6,072 and $5,826, respectively ................ 147,957 143,138
Prepaid and other current assets ................. 16,494 20,232
Inventories ...................................... 6,180 6,047
Deferred income taxes ............................ 5,318 2,699
----------- -----------
Total current assets ......................... 188,115 200,308
Property and equipment, net ......................... 1,289,300 1,310,583
Goodwill, net ....................................... 899,145 920,488
Other assets ........................................ 75,645 75,583
----------- -----------
Total assets ................................. $ 2,452,205 $ 2,506,962
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
Current portion of long-term debt ................ $ 45,846 $ 46,429
Accounts payable ................................. 59,073 48,816
Accrued interest ................................. 7,999 22,508
Other accrued liabilities ........................ 85,581 92,107
Unearned income .................................. 34,702 36,123
----------- -----------
Total current liabilities .................... 233,201 245,983
Long-term debt, less current portion ................ 1,358,651 1,370,180
Deferred income taxes ............................... 14,761 16,837
Accrued closure, post-closure and environmental costs 203,314 205,600
Other long-term obligations ......................... 45,641 44,632
Commitments and contingencies
Stockholders' Equity --
Common stock ..................................... 1,041 1,049
Additional paid-in capital ....................... 671,285 681,545
Retained deficit ................................. (75,689) (58,864)
----------- -----------
Total stockholders' equity ................... 596,637 623,730
----------- -----------
Total liabilities and stockholders' equity ..... $ 2,452,205 $ 2,506,962
=========== ===========
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts; unaudited)
Three Months Ended
March 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenues ........................ $ 197,412 $ 223,755
Cost of operations .............. 114,399 119,251
Selling, general
and administrative expenses ... 24,238 24,313
Depreciation and amortization ... 25,724 29,390
Acquisition related costs ....... -- 2,457
--------- ---------
Operating income .............. 33,051 48,344
Interest income ................. (738) (297)
Interest expense ................ 22,400 20,254
--------- ---------
Income before income taxes .... 11,389 28,387
Income tax expense ............ 4,675 11,638
--------- ---------
Net income .................... 6,714 16,749
Dividends on preferred stock .. (171) --
--------- ---------
Net income to common shareholders $ 6,543 $ 16,749
========= =========
Basic earnings per share:
Net income.................... $ 0.08 $ 0.16
======== =========
Weighted average common shares
outstanding................... 79,384 104,516
======== =========
Diluted earnings per share:
Net income ................... $ 0.08 $ 0.16
======== =========
Weighted average common and
common equivalent shares
outstanding................... 83,521 108,075
======== =========
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
March 31,
---------------------
1997 1998
--------- -------
<S> <C> <C>
Operating Activities --
Net income ....................................................... $ 6,714 $ 16,749
Adjustments to reconcile net income to cash
provided by operating activities --
Provisions for:
Depreciation and amortization .................................. 25,724 29,390
Closure and post-closure costs ................................. 2,671 2,564
Doubtful accounts .............................................. 872 429
Accretion of senior discount notes ............................. 3,876 7,195
Deferred income taxes .......................................... 2,370 4,695
Gain on sale of fixed assets ................................... (115) (446)
Change in operating assets and liabilities,
excluding the effects of purchase acquisitions --
Accounts receivable, prepaid expenses, inventories and other ... (50,316) 4,575
Accounts payable, accrued liabilities, unearned income and other 26,907 9,935
Closure and post-closure costs ................................. (76) (2,703)
--------- ---------
Cash provided by operating activities ............................... 18,627 72,383
--------- ---------
Investing Activities --
Cash expenditures for acquisitions, net of cash acquired ......... (36,632) (23,745)
Capital expenditures, other than for acquisitions ................ (18,845) (19,144)
Capitalized interest ............................................. (5,883) (15,024)
Proceeds from sale of assets ..................................... 518,859 1,322
Change in deferred acquisition costs and notes receivable ........ 67 3,375
--------- ---------
Cash provided by (used for) investing activities .................... 457,566 (53,216)
--------- ---------
Financing Activities --
Net proceeds from sale of common stock,
stock options and warrants ..................................... 486 1,079
Proceeds from long-term debt, net of issuance costs .............. 40,505 40,665
Repayments of long-term debt ..................................... (526,222) (36,701)
Other long-term obligations ...................................... 5,279 (8,171)
Dividends paid ................................................... (168) --
Equity transactions of pooled companies .......................... -- (13)
--------- ---------
Cash used for financing activities .................................. (480,120) (3,141)
--------- ---------
Increase (decrease) in cash and cash equivalents .................... (3,927) 16,026
Cash and cash equivalents, beginning of period ...................... 51,920 12,166
--------- ---------
Cash and cash equivalents, end of period ............................ $ 47,993 $ 28,192
========= =========
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
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, 1997, 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 March 31, 1998 and
for the three months ended March 31, 1997 and 1998 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, 1997 and the related notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC on March
31, 1998.
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of these
policies, see Note 1 of Notes to Consolidated Financial Statements for the year
ended December 31, 1997 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.
6
<PAGE>
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 three months ended March 31, 1997 and 1998 are as follows (in thousands):
Three Months Ended
March 31,
------------------
1997 1998
------ -------
(unaudited)
Supplemental Disclosures
Interest paid .......................................... $17,103 $12,670
Income taxes paid ...................................... 533 1,464
Non Cash Transactions
Common stock issued in acquisitions or
contributed to 401(k) plan .......................... $ 5,838 $ 6,971
Capital leases ......................................... 1,520 --
Debt and liabilities incurred or assumed in acquisitions 32,531 11,843
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.
The following table summarizes acquisitions for the three months ended
March 31, 1997 and 1998. In March 1998, the Company acquired two collection
companies in transactions accounted for as a poolings-of-interests. As the
effect of these business combinations was not significant, prior period
financial statements were not restated to include historical operating results
of the acquired companies. Prior period financial statements have been restated
to include historical operating results of one company acquired in the first
quarter of 1998 that was accounted for as a pooling-of-interests.
Three Months
Ended March 31,
---------------------
1997 1998
------- --------
(unaudited)
Number of businesses acquired and accounted for as:
Poolings-of-interests ........................... -- 3
Purchases ....................................... 2 8
Total consideration (in millions) ................. $ 68.9 $ 53.6
Shares of common stock issued ..................... 746,665 1,025,957(1)
- ---------
(1) Includes 129,090 shares of contingently issuable common stock.
7
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 March 31, 1998 (unaudited)
Revenues ................................. $ 221,753 $ 2,002 $ 223,755
Net income ............................... 16,311 438 16,749
Three months ended March 31, 1997 (unaudited)
Revenues ................................. 194,863 2,549 197,412
Net income ............................... 6,391 323 6,714
Year ended December 31, 1997
Revenues ................................. 875,028 9,495 884,523
Net income ............................... 412 413 825
Year ended December 31, 1996
Revenues ................................. 291,685 10,152 301,837
Net loss ................................. (80,582) 316 (80,266)
Year ended December 31, 1995
Revenues ................................. 262,243 9,540 271,783
Net income ............................... 13,130 (262) 12,868
</TABLE>
Unaudited pro forma income statement data
The following unaudited pro forma consolidated data for the year ended
December 31, 1997 and the three months ended March 31, 1998 presents the results
of operations of Allied as if the companies purchased and sold in 1997 and
through March 31, 1998, had all occurred as of January 1, 1997 (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.
December 31, 1997
-------------------
Reported Pro Forma
--------- ---------
(unaudited)
Revenues ........................ $884,523 $950,570
Operating income ................ 182,160 187,699
Net income ...................... 825 7,322
Net income to common shareholders 444 6,941
Net income per common share ..... 0.00 0.06
March 31, 1998
-------------------
Reported Pro Forma
--------- ---------
(unaudited)
Revenues ........................ $223,755 $225,615
Operating income ................ 48,344 48,404
Net income ...................... 16,749 16,686
Net income to common shareholders 16,749 16,686
Net income per common share ..... 0.16 0.15
8
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and March 31, 1998 was as
follows (in thousands):
1997 1998
----------- -----------
(unaudited)
Land and improvements .................... $ 101,202 $ 101,222
Land held for permitting as landfills(1) . 79,253 83,775
Landfills ................................ 756,504 782,189
Buildings and improvements ............... 95,546 94,152
Vehicles and equipment ................... 291,207 306,223
Containers and compactors ................ 138,942 145,380
Furniture and office equipment ........... 9,960 10,487
----------- -----------
1,472,614 1,523,428
Accumulated depreciation and amortization (183,314) (212,845)
----------- -----------
$ 1,289,300 $ 1,310,583
=========== ===========
- ----------
(1) These properties have been approved for use as landfills, and the
Company is currently in the process of obtaining permits.
4. NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income 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 basic earnings per share and diluted earnings per share is as
follows (in thousands, except per share data; unaudited):
Three Months Ended
March 31,
--------------------
1997 1998
-------- --------
Basic earnings per share computation:
Net income ..................................... $ 6,714 $ 16,749
Less: Preferred stock dividends ............... (171) --
-------- --------
Income available to common shareholders ........ $ 6,543 $ 16,749
======== ========
Weighted average common shares outstanding
during the period ........................... 79,384 104,516
======== ========
Basic earnings per share before extraordinary item $ 0.08 $ 0.16
======== ========
Diluted earnings per share computation:
Net income ..................................... $ 6,714 $ 16,749
Less: Preferred stock dividends ............... (171) --
Interest savings upon conversion of
convertible securities ...................... 8 --
-------- --------
Income available to common shareholders ........ $ 6,551 $ 16,749
======== ========
Weighted average common
shares outstanding during the period ........... 79,384 104,516
Effect of stock options and warrants,
assumed exercisable ............................ 2,966 3,171
Convertible notes, assumed converted ............. 163 --
Effect of shares assumed issued
pursuant to earn-out agreements ................ 1,008 388
-------- --------
Weighted average common and common
equivalent shares outstanding .................. 83,521 108,075
======== ========
Diluted earnings per share ....................... $ 0.08 $ 0.16
======== ========
9
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Conversion has not been assumed for 7% preferred stock in 1997, as the
effects would not be dilutive.
In 1997, the Company adopted SFAS No. 128 "Earnings per Share," which
required restatement of the prior period earnings per share amounts. The new
statement had no impact on the reported earnings per share for the three months
ended March 31, 1997
5. SUMMARIZED FINANCIAL INFORMATION OF ALLIED WASTE NORTH AMERICA, INC.
As discussed in Note 5 of the Company's Annual Report on Form 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, 1997 and March 31,
1998 is as follows (in thousands):
Summarized Consolidated Balance Sheet Information
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
Current assets ....................... $ 188,114 $ 200,307
Property and equipment, net .......... 1,289,300 1,310,583
Goodwill ............................. 899,144 920,488
Other non-current assets ............. 75,646 75,584
Current liabilities .................. 223,755 236,638
Long-term debt, net of current portion 1,103,961 1,115,490
Due to parent ........................ 731,983 894,677
Due to Allied Canada Finance, Ltd. ... 152,825 --
Other long-term obligations .......... 268,989 268,296
Retained deficit ..................... (29,309) (8,139)
Summarized Statement of Operations Information
Three Months Ended March 31,
1997 1998
------- --------
(unaudited)
Revenue ............................................... $197,412 $223,755
Operating costs and expenses ........................... 164,361 175,411
Operating income ....................................... 33,051 48,344
Net income ............................................. 6,714 21,170
6. SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company repaid approximately $1.7
million of related party debt.
Subsequent to March 31, 1998, the Company entered into a merger
agreement with the Rabanco Companies ("Rabanco") in a transaction that will be
accounted for using the pooling-of-interests method for business combinations.
Rabanco generates annual revenue of approximately $175 million. Rabanco provides
solid waste collection, recycling, transportation and disposal services in the
Pacific Northwest through a network of approximately 160 collection routes, 3
transfer stations, an extensive intermodal rail transportation system and a
major regional landfill.
10
<PAGE>
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. Since
January 1, 1993, the Company has completed over 125 acquisitions including the
Laidlaw Acquisition in 1996. In 1997, the Company acquired 35 businesses and
subsequent to 1997 it has acquired 13 businesses. See Note 2 to the Company's
Condensed Consolidated Financial Statements. The Company's Condensed
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 of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of cash, the Company's common stock, $0.01
par value, (the "Common Stock"), warrants, and subordinated debentures. The cash
consideration was financed from the proceeds of its $1.275 billion senior credit
facility (the "Bank Agreement") and the sale of $525 million of 10.25% senior
subordinated notes due 2006 (the "1996 Notes"). In March 1997, pursuant to a
Share Purchase Agreement with USA Waste, the Company sold to USA Waste all of
the Canadian non-hazardous solid waste management operations of the Company,
acquired in the Laidlaw Acquisition, 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 Bank Agreement.
In May 1997, the Company repurchased from the Laidlaw Group the
subordinated debentures and warrants issued in the Laidlaw Acquisition for an
aggregate purchase price of $230 million in cash (the "Repurchase"). Net
proceeds of $230 million from the $418 million face value 11.3% senior discount
notes (the "Senior Discount Notes") were used to fund the Repurchase.
Additionally, certain private securities investment funds purchased all of the
Common Stock of Allied held by Laidlaw.
In April 1998, the Company entered into a merger agreement with the
Rabanco Companies ("Rabanco") in a transaction that will be accounted for using
the pooling-of-interests method for business combinations. Rabanco generates
annual revenue of approximately $175 million excluding the effects of the
internalization of waste volumes. Rabanco provides solid waste collection,
recycling, transportation and disposal services in the Pacific Northwest through
a network of approximately 160 collection routes, 3 transfer stations, an
extensive intermodal rail transportation system and a major regional landfill.
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.
11
<PAGE>
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 revenues attributable to
geographic region (unaudited):
Year Ended December 31, Three Months
----------------------- Ended
1995 1996 1997 March 31, 1998
---- ---- ----- --------------
Collection(1) .................. 70.6% 67.7% 58.9% 57.7 %
Transfer ....................... 7.6 6.9 6.9 5.5
Landfill(1) .................... 14.6 18.0 24.7 29.9
Other .......................... 7.2 7.4 9.5 6.9
----- ----- ----- ----
Total Revenues 100.0% 100.0% 100.0% 100.0 %
===== ===== ===== =====
Year Ended December 31, Three Months
------------------------ Ended
1995 1996 1997 March 31, 1998
------ ------ ----- ---------------
Great Lakes .................... 28.8% 27.4% 30.0% 29.5 %
Midwest ........................ 15.2 15.3 15.3 14.9
Northeast ...................... 14.3 12.8 13.7 11.3
Southeast ...................... 25.9 28.7 14.7 15.7
Southwest ...................... 3.8 2.0 15.4 13.9
West ........................... 12.0 13.8 10.9 14.7
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0 %
===== ===== ===== ======
- ---------
(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 68% of
Company-collected waste is disposed of at Company-owned and/or operated
landfills as measured using volume in the first three months of 1998. 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 or railcars and transported to its landfills.
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.
12
<PAGE>
In connection with potential acquisitions, the Company incurs and
capitalizes certain transaction costs which include stock registration, legal,
accounting, consulting, engineering and other direct costs to complete the
acquisitions. Additionally, the Company incurs charges for integration costs
which include uncollectible accounts receivable write-offs, employee termination
and relocation, write down of fixed assets, lease termination, and other one
time charges related to the acquisitions. 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 of the company, 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 to the landfill
base. Additionally, the Company capitalizes interest on the costs associated
with landfills under development using the Company's average interest rate on
its outstanding debt. As the development process is completed, on a cell by cell
basis, these costs are excluded from the capitalizable base. All such costs are
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 $1.0 billion while the present value of
such estimate is $245.3 million. At December 31, 1997 and March 31, 1998,
accruals for landfill closure and post-closure costs (including costs assumed
through acquisitions) were approximately $140.8 million and $143.1 million. The
accruals reflect relatively young landfills with estimated remaining lives,
based on current waste flows, that range from 3 to over 75 years, and an
estimated average remaining life of greater than 30 years.
Year 2000 Systems Modifications. During 1997, Allied began modifying its
computer system programming to be able to process transactions in the year 2000.
Anticipated spending for this modification will be expensed as incurred and is
not expected to have a significant impact on the Company's ongoing operations or
the results thereof.
13
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1998
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.
Three Months Ended March 31,
-----------------------------
1998
Compared
to 1997
% Change
1997 1998 in Amounts
------- ------- ----------
(unaudited)
Statement of Operations Data:
Revenues ................................... 100.0% 100.0 % 13.4%
Cost of operations ......................... 58.0 53.3 4.3
Selling, general and administrative expenses 12.3 10.9 0.4
Depreciation and amortization .............. 13.0 13.1 14.4
Acquisition related costs .................. -- 1.1 --
----- -----
Operating income ........................... 16.7 21.6 45.9
Interest expense, net ...................... 11.0 8.9 (7.8)
Income tax provision ....................... 2.4 5.2 146.8
----- -----
Net income ............................... 3.3% 7.5 % 149.3
===== =====
Revenues. Revenues in 1998 were $223.8 million compared to $197.4 million in
1997, an increase of 13.4%. Revenues of approximately $11.0 million in the first
quarter of 1998 were generated from companies acquired, net of revenues sold,
subsequent to the end of the same period in the prior year. Increases in
revenues attributable to existing operations ("Internal Growth") amounted to
$15.4 million. Internal Growth approximated 8% with 5% attributable to net
volume increases and 3% attributable to price increases.
Cost of Operations. Cost of operations in 1998 was $119.3 million compared
to $114.4 million in 1997, an increase of 4.3%. 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 53.3% in
1998 from 58.0% in 1997. Operating cost margins were favorably impacted by an
increase in internalization of third-party disposal volumes to 68% in 1998 from
59% in 1997, increased volumes at the landfills and the integration of the
assets acquired from Laidlaw.
Selling, General and Administrative Expenses. SG&A expenses in 1998 were
$24.3 million compared to $24.2 million in 1997, an increase of 0.4%. As a
percentage of revenues, SG&A decreased to 10.9% in 1998 compared to 12.3% in
1997. The decrease in SG&A as a percentage of revenues can be attributed to a
continued increase in revenues while maintaining overhead costs at a relatively
constant level.
Depreciation and Amortization. Depreciation and amortization in 1998 was
$29.4 million compared to $25.7 million in 1997, an increase of 14.4%. The
increase in depreciation and amortization expense is due to acquisitions, a 43%
increase in internalized landfill tonnage, and increased capital expenditures.
As a percentage of revenues, depreciation and amortization has remained
relatively flat.
14
<PAGE>
Acquisition Related Costs. Costs of $2.5 million were incurred in 1998 for
transaction and integration costs directly related to acquisitions. 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, lease termination and
other one time charges related to the acquisitions.
Net Interest Expense. Net interest expense was $20.0 million in 1998
compared to $21.7 million in 1997, a decrease of 7.8%. The decrease in interest
expense was due to overall reduction in the average interest rate, and an
increase in capitalized interest to $15 million in 1998 compared to $6 million
in 1997, due to the acquisition of landfill assets and increases in landfills
under development. This decrease in interest expense was partially offset by an
increase in interest expense due to an increase in outstanding debt.
Income Taxes. Income taxes reflect a 41% effective income tax rate in 1998
and 1997 which deviates from the federal statutory rate of 35%, due primarily to
the effects of state income taxes and differences in the treatment of goodwill
for book and tax purposes, and other permanent differences.
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 March 31, 1998, the Company has completed debt and equity financings
in excess of $3 billion. Due to the acquisition driven and the capital intensive
nature of the Company's growth objectives, the Company has used, and believes
that it will likely continue using amounts in excess of the cash generated from
operations to fund the growth component of its business including acquisitions
and capital expenditures. 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 and operating
equipment has been acquired using financing leases which have short and
medium-term maturities. Additionally, the Company uses excess cash generated
from operations to pay down amounts owed on its revolving line of credit which
is classified as long-term debt. As a result, the Company has periodically had
low levels of working capital or working capital deficits. However, the Company
has approximately $494 million in undrawn, commited capacity available under the
Revolving Credit Facility at March 31, 1998.
15
<PAGE>
During the three months ended March 31, 1997 and 1998, the Company's
cash flows for operating, investing and financing activities were as follows
(dollars in millions; unaudited):
Three Months Ended
March 31,
------------------
1997 1998
--------- ------
Operating Activities:
Net income ................................................. $ 6.7 $ 16.7
Non-cash operating expenses ................................ 35.4 43.8
Increase (decrease) in operating assets and liabilities, net (23.5) 11.8
------ -----
Cash provided by operating activities ...................... 18.6 72.3
------ -----
Investing Activities:
Cash expenditures for acquisitions, net of cash acquired ... (36.6) (23.7)
Capital expenditures, other than for acquisitions .......... (18.9) (19.1)
Capitalized interest ....................................... (5.9) (15.0)
Proceeds from sale of fixed assets ......................... 518.9 1.3
Other ...................................................... 0.1 3.3
------ -----
Cash provided by (used for) investing activities ........ 457.6 (53.2)
------ -----
Financing Activities:
Net proceeds from sale and redemption of preferred stock,
common stock, stock options and warrants ............. 0.5 1.1
Net proceeds from long-term debt ........................ 40.5 40.6
Repayments of long-term debt ............................ (526.2) (36.7)
Other ................................................... 5.1 (8.1)
------ -----
Cash used for financing activities ...................... (480.1) (3.1)
------ -----
Increase (decrease) in cash ............................. $ (3.9) $ 16.0
====== =====
As of March 31, 1998, the Company had cash and cash equivalents of
$28.2 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 growth objectives. During 1997,
the Company acquired solid waste operations representing approximately $369.1
million in annual revenues, and sold operations representing approximately
$127.9 million in annual revenue. Both acquisitions and sales include landfill
assets. Net consideration of approximately $528.3 million (including $10.5
million for landfills under development) comprised of cash, notes and Common
Stock, was paid in these transactions. Subsequent to December 31, 1997, the
Company acquired 13 operating solid waste businesses with annual revenues of
approximately $33.8 million for consideration of approximately $55.9 million, of
which $22.3 million consists of approximately 1 million shares of Common Stock.
For the calendar year 1998, the Company expects to spend approximately $210
million for capital, closure and post-closure, and remediation expenditures. As
the Company continues to acquire waste operations during 1998, additional
capital amounts will be required to fund for the acquisition of businesses and
the related capital expenditure requirements.
On March 31, 1998, the Company's debt structure consisted of $525
million of the 1996 Notes, $458 million outstanding under the Credit Agreement,
and approximately $255 million of the $418 million aggregate face amount of the
Senior Discount Notes. As of March 31, 1998 there is aggregate availability
under the Revolving Credit Facility of approximately $494 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"). The Amendment expanded the Credit Agreement 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 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 Credit Agreement contain
financial and operating covenants and 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 $201.8 million in
mandatory 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 March 31, 1998, the Company had outstanding
approximately $381.6 million in financial assurance instruments, represented by
$326.3 million of performance bonds, $5.6 million of letters of credit, $38.2
million of insurance policies and $11.5 million of trust deposits. 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.
16
<PAGE>
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 1.5% to 2.0% for terms of 36 to 84 months. In addition to equipment
leases outstanding at December 31, 1997 and March 31, 1998 of $62.9 million and
$57.6 million, respectively, the Company had available lease commitments of
$32.4 million and $26.5 million, respectively. The Company intends to enter 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 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 and interest on debt incurred
under the Credit Agreement, 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. 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 Credit Agreement, 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.
Terms of Outstanding Debt
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 Waste North America, Inc. ("AWNA"), at the
greater of (i) 100% of the principal amount or (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 AWNA, 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 AWNA's current and
future subsidiaries, the guarantees of which are expressly subordinated to the
guarantees of AWNA's Senior Credit Facility.
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. The Senior
Discount Notes cannot be redeemed until December
17
<PAGE>
1, 2001, except under certain circumstances. 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 premium to their accreted value, plus accrued interest.
The Credit Agreement also provides for a six and one-half year senior
secured $297 million funded term loan facility (the "Funded Term Loan
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 $21 million in 1998, $33 million in 1999 and $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. At March
31, 1998, the Company had drawn $169 million of the Delayed Draw Term Facility.
The Delayed Draw Term Facility is an amortizing senior secured term loan with
annual payments (payable quarterly) increasing from $16.9 million in 1999 to
$33.8 million in each of 2000, 2001 and 2002 and $50.7 million in 2003.
Principal under the Revolving Credit Facility is due upon maturity.
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
pro rata 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.
The Senior Credit Facility bears interest, at the Company's option, at
the lesser of (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 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%.
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 is in compliance with all applicable covenants at March 31,
1998.
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 December 31, 1997 is as follows:
18
<PAGE>
Notional Amount Fixed Rate Period
--------------- ---------- ---------------------------------------
(in millions)
$ 130 6.27% April 1997 - May 1998
50 6.08 September 1997 - September 2000
50 6.06 September 1997 - March 2000
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
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 6.07% plus applicable margins imposed by the terms of the Credit
Agreement at December 31, 1997.
The Company has also entered into an additional interest rate
protection agreement with effective dates beginning in the future (the "Forward
Agreement"). This Forward Agreement provides 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 the Forward Agreement is as follows:
Notional Amount Fixed Rate Period
--------------- ---------- ----------------------------------------
(in millions)
$ 130 6.06% May 1998 - May 2001
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. The forward- looking statements made herein are only made as of
the date of this filing and the Company undertakes no obligation to publicly
update such Forward Looking Statements to reflect subsequent events or
circumstances.
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
19
<PAGE>
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.
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 1997.) 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 reducing 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
20
<PAGE>
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.
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.
21
<PAGE>
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
-------- -----------------------------------------
12 Ratio of earnings to fixed charges.
27.1 Financial data schedule for March 31, 1998.
27.2 Financial data schedule for March 31, 1997.
--------------
(b) Reports on Form 8-K
None.
22
<PAGE>
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/ JAMES S. ENG
-------------------------
James S. Eng
Corporate Controller
(Principal Accounting Officer)
Date: May 14, 1998
23
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(in thousands except for ratios)
Three Months
Ended March 31,
-------------------
1997 1998
-------- -------
(unaudited)
<S> <C> <C>
Fixed Charges:
Interest expensed ............... $ 21,120 $ 19,272
Interest capitalized ............ 5,883 15,024
-------- --------
Total interest expense ...... 27,003 34,296
Interest component of rent expense . 965 925
Amortization of debt issuance costs 1,280 982
-------- --------
Total Fixed Charges ......... $ 29,248 $ 36,203
======== ========
Earnings:
Income from continuing operations
before income taxes ......... $ 11,389 $ 28,387
Plus fixed charges .............. 29,248 36,203
Less interest capitalized ....... (5,883) (15,024)
-------- --------
Total Earnings .............. $ 34,754 $ 49,566
======== ========
Ratio of earnings to fixed charges . 1.2x 1.4x
======== ========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,192
<SECURITIES> 0
<RECEIVABLES> 148,964
<ALLOWANCES> 5,826
<INVENTORY> 6,047
<CURRENT-ASSETS> 200,308
<PP&E> 1,523,428
<DEPRECIATION> 212,845
<TOTAL-ASSETS> 2,506,962
<CURRENT-LIABILITIES> 245,983
<BONDS> 1,370,180
0
0
<COMMON> 1,049
<OTHER-SE> 622,681
<TOTAL-LIABILITY-AND-EQUITY> 2,506,962
<SALES> 223,755
<TOTAL-REVENUES> 223,755
<CGS> 119,251
<TOTAL-COSTS> 119,251
<OTHER-EXPENSES> 56,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,254
<INCOME-PRETAX> 28,387
<INCOME-TAX> 11,638
<INCOME-CONTINUING> 16,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,749
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 47,993
<SECURITIES> 0
<RECEIVABLES> 116,589
<ALLOWANCES> 6,562
<INVENTORY> 7,021
<CURRENT-ASSETS> 194,937
<PP&E> 938,357
<DEPRECIATION> 127,442
<TOTAL-ASSETS> 1,940,877
<CURRENT-LIABILITIES> 207,562
<BONDS> 1,198,932
0
1
<COMMON> 809
<OTHER-SE> 288,088
<TOTAL-LIABILITY-AND-EQUITY> 1,940,877
<SALES> 197,412
<TOTAL-REVENUES> 197,412
<CGS> 114,399
<TOTAL-COSTS> 114,399
<OTHER-EXPENSES> 49,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,400
<INCOME-PRETAX> 11,389
<INCOME-TAX> 4,675
<INCOME-CONTINUING> 6,714
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 6,714
<EPS-PRIMARY> 0.08
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</TABLE>
