================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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: (480) 627-2700
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 November 10, 2000
-------- -----------------------------------
Common Stock.................. 196,805,832
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<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<S>
Part I Financial Information
<C>
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.............. 20
Part II Other Information
Item 1 Legal Proceedings.................................................................................. 33
Item 2 Changes in Securities.............................................................................. 33
Item 3 Defaults Upon Senior Securities.................................................................... 33
Item 4 Submission of Matters to a Vote of Security Holders................................................ 33
Item 5 Other Information.................................................................................. 33
Item 6 Exhibits and Reports on Form 8-K................................................................... 33
Signatures.................................................................................................... 34
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
September 30, December 31,
2000 1999
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets --
Cash and cash equivalents............................................... $ 112,613 $ 121,405
Accounts receivable, net of allowance of $44,895 and $59,490............ 854,353 867,667
Prepaid and other current assets........................................ 163,789 252,187
Deferred income taxes, net.............................................. 166,428 115,263
Assets held for sale.................................................... -- 891,900
------------------ ------------------
Total current assets.................................................. 1,297,183 2,248,422
Property and equipment, net............................................. 3,893,583 3,738,388
Goodwill, net .......................................................... 8,673,303 8,238,929
Other assets, net....................................................... 647,349 737,362
------------------ ------------------
Total assets.......................................................... $ 14,511,418 $ 14,963,101
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current portion of long-term debt....................................... $ 97,857 $ 1,002,928
Accounts payable........................................................ 486,083 481,318
Accrued closure, post-closure and environmental costs................... 175,543 134,968
Accrued interest........................................................ 175,255 158,251
Other accrued liabilities............................................... 592,809 613,663
Unearned revenue........................................................ 224,818 238,371
----------------- -----------------
Total current liabilities............................................. 1,752,365 2,629,499
Long-term debt, less current portion.................................... 9,641,614 9,240,291
Deferred income taxes................................................... 270,028 204,786
Accrued closure, post-closure and environmental costs................... 849,563 860,574
Other long-term obligations............................................. 267,339 388,396
Commitments and contingencies
Series A senior convertible preferred stock, 1,000 shares
authorized, issued and outstanding, liquidation preference of
$1,078 and $1,028 per share........................................... 1,052,207 1,001,559
Stockholders' equity.................................................... 678,302 637,996
----------------- -----------------
Total liabilities and stockholders' equity............................ $ 14,511,418 $ 14,963,101
================= =================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 4,314,878 $ 1,957,031 $ 1,474,731 $ 1,085,628
Cost of operations, excluding acquisition related
and unusual costs................................ 2,494,200 1,122,718 834,123 635,691
Selling, general and administrative expenses,
excluding acquisition related and unusual costs.. 317,944 139,269 107,085 72,324
Depreciation and amortization...................... 342,821 168,529 116,240 86,578
Goodwill amortization.............................. 164,894 57,881 56,236 39,395
Acquisition related and unusual costs.............. 105,517 549,774 48,591 548,657
------------- ------------- ------------- -------------
Operating income (loss).......................... 889,502 (81,140) 312,456 (297,017)
Equity in earnings of unconsolidated subsidiaries.. (37,981) (11,265) (10,194) (11,265)
Interest income.................................... (3,248) (5,382) (1,906) (4,713)
Interest expense................................... 657,433 232,703 222,332 151,671
------------- ------------- ------------- -------------
Income (loss) before income taxes................ 273,298 (297,196) 102,224 (432,710)
Income tax expense (benefit)....................... 168,089 (46,434) 72,447 (101,351)
Minority interest.................................. 3,816 1,500 1,037 971
------------- ------------- ------------- -------------
Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle........................................ 101,393 (252,262) 28,740 (332,330)
Extraordinary loss, net of income tax benefit...... 13,266 3,223 6,782 3,223
Cumulative effect of change in accounting principle,
net of income tax benefit........................ -- 64,255 -- --
------------- ------------- ------------- -------------
Net income (loss)................................ 88,127 (319,740) 21,958 (335,553)
Dividends on preferred stock....................... 50,829 11,219 17,340 11,219
------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders..................................... $ 37,298 $ (330,959) $ 4,618 $ (346,772)
============= ============= ============= =============
Basic EPS:
Income (loss) available to common shareholders
before extraordinary loss and cumulative effect of
change in accounting principle................... $ 0.27 $ (1.41) $ 0.06 $ (1.83)
Extraordinary loss, net of income tax benefit...... (0.07) (0.02) (0.04) (0.01)
Cumulative effect of change in accounting principle,
net of income tax benefit........................ -- (0.34) -- --
------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders..................................... $ 0.20 $ (1.77) $ 0.02 $ (1.84)
============= ============= ============= =============
Weighted average common shares..................... 188,739 187,312 188,789 187,969
============= ============= ============= =============
Diluted EPS:
Income (loss) available to common shareholders
before extraordinary loss and cumulative effect of
change in accounting principle................... $ 0.27 $ (1.41) $ 0.06 $ (1.83)
Extraordinary loss, net of income tax benefit...... (0.07) (0.02) (0.04) (0.01)
Cumulative effect of change in accounting principle,
net of income tax benefit........................ -- (0.34) -- --
------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders................................... $ 0.20 $ (1.77) $ 0.02 $ (1.84)
============= ============= ============= =============
Weighted average common and common
equivalent shares................................ 191,105 187,312 192,028 187,969
============= ============= ============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ALLIED WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended September 30,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities --
Net income (loss)............................................................. $ 88,127 $ (319,740)
Adjustments to reconcile net income (loss) to cash provided by operating
activities--
Provisions for:
Depreciation and amortization............................................... 507,715 226,410
Non-cash acquisition related and unusual costs.............................. 26,114 92,322
Cumulative effect of change in accounting principle, net of income tax benefit -- 64,255
Undistributed earnings of equity investment in unconsolidated subsidiaries.. (34,553) (3,497)
Doubtful accounts........................................................... 14,225 3,417
Accretion of debt and amortization of debt issuance costs................... 33,735 13,558
Deferred income taxes....................................................... 132,514 (97,894)
Gain on sale of assets...................................................... (9,048) (3,628)
Extraordinary loss due to early extinguishment of debt, net of income tax 13,266 3,223
benefit.........................................................................
Change in operating assets and liabilities, excluding the effects of purchase
acquisitions--
Accounts receivable, prepaid expenses, inventories and other................ (29,339) (35,189)
Accounts payable, accrued liabilities, unearned income, and other........... (692) (92,630)
Acquisition related and non-recurring accruals.............................. (138,057) 421,574
Closure and post-closure provision............................................ 48,445 22,627
Closure, and post-closure expenditures........................................ (42,154) (11,272)
Environmental expenditures.................................................... (23,584) (7,353)
-------------- --------------
Cash provided by operating activities........................................... 586,714 276,183
-------------- --------------
Investing activities --
Cost of acquisitions, net of cash acquired.................................... (789,984) (7,529,681)
Proceeds from divestitures, net of cash divested.............................. 1,000,548 --
Accruals for acquisition price and severance costs............................ (26,776) --
Net withdrawal from unconsolidated subsidiaries............................... 15,372 7,845
Capital expenditures, excluding acquisitions.................................. (290,337) (181,500)
Capitalized interest.......................................................... (32,916) (14,994)
Proceeds from sale of fixed assets............................................ 36,577 40,377
Change in deferred acquisition costs and notes receivable..................... (2,733) (24,566)
-------------- --------------
Cash used for investing activities.............................................. (90,249) (7,702,519)
-------------- --------------
Financing activities --
Net proceeds from sale of common stock and exercise of stock options
and warrants................................................................ -- 9,680
Proceeds from redeemable preferred stock, net of issuance costs............... -- 973,881
Proceeds from long-term debt, net of issuance costs........................... 1,732,000 8,357,478
Repayments of long-term debt.................................................. (2,237,257) (1,852,801)
-------------- --------------
Cash (used for) provided by financing activities................................ (505,257) 7,488,238
-------------- --------------
Increase (decrease) in cash and cash equivalents................................ (8,792) 61,902
Cash and cash equivalents, beginning of period.................................. 121,405 39,742
-------------- --------------
Cash and cash equivalents, end of period........................................ $ 112,613 $ 101,644
============== ==============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</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 "we"), a Delaware corporation, is the
second largest, non-hazardous solid waste management company in the United
States, as measured by revenues. We provide non-hazardous waste collection,
transfer, disposal and recycling services to approximately 9.9 million customers
in 40 states through a network of 338 collection companies, 152 transfer
stations, 164 active landfills, and 75 recycling facilities. We have organized
our operations into eight regions: Atlantic, Central, Great Lakes, Midwest,
Northeast, Southeast, Southwest and West. Consistent with our vertical
integration model, each region is organized into several operating districts and
each district is comprised of specific site operations. The districts consist of
stand-alone companies usually operating as a vertically integrated operation
within a common marketplace.
On July 30, 1999, we completed the acquisition of Browning-Ferris Industries,
Inc. ("BFI") for approximately $7.7 billion of cash and the assumption of
approximately $1.9 billion of BFI debt. Prior to the acquisition, BFI was the
second largest non-hazardous solid waste company in North America with annual
revenues of approximately $4.2 billion and provided integrated solid waste
management services.
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, 1999, 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. We believe that the
presentations and disclosures herein are adequate to make the information not
misleading when read in conjunction with our Annual Report on Form 10-K for the
year ended December 31, 1999. The Condensed Consolidated Financial Statements as
of September 30, 2000, and for the nine months and three months ended September
30, 2000 and 1999 reflect, in the opinion of management, all adjustments (which
include normal recurring adjustments) necessary to fairly state the financial
position and results of operations for such periods.
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 our Consolidated Financial Statements for the year
ended December 31, 1999 and the related notes thereto included in our Annual
Report on Form 10-K filed with the SEC on March 30, 2000.
There have been no significant additions to or changes in our accounting
policies since December 31, 1999. For a description of our accounting policies,
see Note 1 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999 in our Annual Report on Form 10-K.
6
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Acquisition related and unusual costs --
During the year ended December 31, 1999, we recorded $588.9 million of
acquisition related and unusual costs primarily associated with the $9.6 billion
acquisition of BFI, which was accounted for as a purchase. The costs primarily
relate to environmental related matters, litigation liabilities, risk management
liabilities, loss contract provisions, transition costs and the write-off of
deferred costs relating to the acquisition. For a detailed description of the
costs, see Note 1 to our Consolidated Financial Statements for the year ended
December 31, 1999 in our Annual Report on Form 10-K.
In connection with the integration plan related to the acquisition of BFI in
1999, we identified and notified approximately 1,500 employees that they would
be retained for transition purposes for a specified period, after which they
will be terminated. Additionally, we identified certain offices and operations,
which were duplicative, and we are in the process of consolidating these
operations. As these costs are not accruable until committed or paid,
approximately $67.4 million and $59.7 million of transition costs were expensed
during 1999 and for the nine months ended September 30, 2000, respectively. We
estimate that we may incur approximately $21 million of additional transition
expenses associated with the integration of BFI during the fourth quarter of
2000. Additional amounts may be incurred in 2001.
Any subsequent changes in estimates of acquisition related and unusual costs
will be included in the acquisition related and unusual costs caption of the
statement of operations in the period in which the change in estimate is made.
During 2000, approximately $24.2 million of additional acquisition related costs
associated with the BFI acquisition were recorded to acquisition related and
unusual costs, primarily relating to changes in estimated loss contract
liabilities, litigation reserves and environmental reserves. We reversed
approximately $4.5 million of accruals to acquisition related and unusual costs
primarily related to the BFI and 1998 acquisitions. Additionally, in the third
quarter of 2000, we recorded a $26.1 million non-cash charge resulting from a
loss on the divestiture of an operation, which is included in acquisition
related and unusual costs.
The following table reflects the cash activity through September 30, 2000
related to the acquisition related and unusual costs accrued during 1999 (in
thousands):
<TABLE>
<CAPTION>
1999
Additions Balance
through 1999 2000 Remaining
Expense Expenditures Expenditures Adjustments September 30, 2000
---------------- ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Transition costs...... $ 77,350 $ (74,654) $ (2,091) $ -- $ 605
Loss contracts........ 32,643 (6,058) (9,304) 13,054 30,335
Litigation and
compliance costs.... 113,382 (1,553) (25,546) 3,341 89,624
---------------- ------------- ------------- ------------- --------------------
Total............... $ 223,375 $ (82,265) $ (36,941) $ 16,395 $ 120,564
================ ============= ============= ============= ====================
</TABLE>
7
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Extraordinary loss --
In September 2000, we repaid the Tranche D term loan prior to its maturity date.
In connection with this repayment, we recognized a non-cash extraordinary charge
for the early extinguishment of the debt of approximately $11.2 million ($6.8
million net of income tax benefit, $0.04 per share) related to the write-off of
previously deferred debt issuance costs.
In February 2000, we repaid the asset sale term loan facility prior to its
maturity date. In connection with this repayment, we recognized a non-cash
extraordinary charge for the early extinguishment of the debt of approximately
$10.7 million ($6.5 million net of income tax benefit, $0.03 per share) related
to the write-off of previously deferred debt issuance costs.
In July 1999, we repaid our credit facility prior to its maturity date. In
connection with this repayment, we recognized a non-cash extraordinary charge
for the early extinguishment of the debt of approximately $5.3 million ($3.2
million net of income tax benefit, $0.02 per share) related to the write-off of
previously deferred debt issuance costs.
Change in Accounting Principle --
During 1999, we evaluated our capitalized interest policy to assess the
comparability of the calculation with the change in the business strategy
resulting from the acquisition of BFI. As a result of this assessment, we
changed the method of calculating capitalization of interest under Statement of
Financial Accounting Standard ("SFAS") No. 34, Capitalization of Interest Cost.
Previously, interest was capitalized using a method that defined the area of a
landfill under development, as all acreage considered available for development.
Actual acquisition, permitting and construction costs incurred related to the
area under development qualified for interest capitalization. Any costs incurred
related to areas already developed and accepting waste no longer qualified for
interest capitalization. Under the new methodology, the area of a landfill under
development is defined as only the portion of the permitted acreage currently
undergoing active cell development. The effect of this change in definition is
to substantially reduce the acreage qualifying for interest capitalization. The
costs upon which interest is capitalized continue to include the actual
acquisition, permitting and construction costs incurred for cell development.
Consistent with the prior policy, as construction of an area is completed and
the area becomes available for use, the cell no longer qualifies for interest
capitalization.
The adoption of this method, which is accounted for as a change in accounting
principle, reflects the change in our operating strategy as a result of the BFI
acquisition. Previously our strategy was focused on the acquisition and
development of waste disposal capacity. Through the BFI acquisition, we
substantially achieved our previous strategy and are now focusing on the
increased utilization of landfill capacity. The impact of the change in
accounting principle is a cumulative charge of approximately $106.2 million
($64.3 million net of income taxes).
Statements of cash flows --
The non-cash transactions for the nine months ended September 30, 2000 and 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Debt and liabilities incurred or assumed in acquisitions............ $ 91,963 $ 1,849,892
Non-cash purchase and sale of operating businesses.................. -- 106,188
</TABLE>
8
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Use of estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Final settlement
amounts could differ from those estimates.
Recently issued accounting pronouncements --
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133. This statement amends the
accounting and reporting standards of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, with respect to specific interpretations and
circumstances, and incorporates certain decisions arising from the Derivatives
Implementation Group process.
In June 1999, the implementation date of SFAS No. 133 was deferred one year from
the original date to those fiscal years beginning after June 15, 2000 by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133. SFAS No.'s 133 and 138 require
all derivatives to be recorded as either assets or liabilities and the
instruments to be measured at fair value. Gains or losses resulting from changes
in the values of those derivatives are to be recognized immediately in earnings,
other comprehensive income or deferred, depending on the use of the derivative,
and whether or not it qualifies as a hedge. The statement requires a formal
documentation of hedge designation and assessment of the effectiveness of
transactions that receive hedge accounting. We will adopt SFAS No.'s 133 and 138
by January 1, 2001, as required.
We are in the process of reviewing our contracts to; identify existing
derivative instruments, determine the fair market value of those derivative
instruments, identify and document hedging relationships and determine the
effectiveness of those hedging relationships. We enter into interest rate swap
agreements to lock in the cost of a substantial portion of our floating rate
debt obligations. Additionally, we enter into commodity price swaps to lock in
margins on our sales of recyclable commodities. We believe that these two types
of activities represent our primary transactions to which SFAS No.'s 133 and 138
will be applicable. We expect that both our interest rate and our commodity
price swap agreements will be designated as cash flow hedges, and accordingly,
recorded in other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any ineffectiveness
will be taken to earnings during the period identified. Upon adoption, any
difference between the previous carrying amount, and the fair values upon
adoption, will be reflected as a cumulative effect of change in accounting
principle.
2. Business Combinations and Divestitures
Unaudited pro forma statement of operations data --
The following table compares, for the nine months ended September 30, 2000 and
1999, reported consolidated results of operations to unaudited pro forma
consolidated data as if all of the companies acquired or divested in 2000 and
1999 accounted for using the purchase method for business combinations were
acquired or divested as of January 1, 1999 (in thousands, except per share
data):
9
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
2000 1999
-------------------------------- --------------------------------
Reported Pro Forma(1) Reported Pro Forma(1)
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues..................................... $ 4,314,878 $ 4,382,727 $ 1,957,031 $ 4,173,618
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle....................... 101,393 101,733 (252,262) (404,393)
Income (loss) available to common
shareholders before extraordinary loss
and cumulative effect of change in
accounting principle....................... 50,564 50,904 (263,481) (453,988)
Basic earnings (loss) per share before
extraordinary loss and cumulative
effect of change in accounting principle... 0.27 0.27 (1.41) (2.42)
Diluted earnings (loss) per share before
extraordinary loss and cumulative
effect of change in accounting principle... 0.27 0.27 (1.41) (2.42)
<FN>
(1) The reported and pro forma results of operations exclude the BFI operations classified as "Assets held for sale"
and also exclude any projected annual cost savings.
This data does not purport to be indicative of our results of operations that
might have occurred, nor which might occur in the future.
</FN>
</TABLE>
3. Assets Held for Sale
The ability to successfully implement our vertical integration business plan is
a key consideration in determining whether we will continue to operate in a
specific market. In the normal course of business, we have exited markets in
which the execution of the vertical integration business plan was not
practicable.
In July 1999, management formalized plans to dispose of certain operations
required to be divested by governmental order as a condition for approval of the
acquisition of BFI (the "Allied Divestitures"). Additionally, management
identified other Allied operating districts (the "Allied Operations") in which
our vertical integration plan was not practicable as a result of the BFI
transaction and therefore, these districts were identified for divestiture. All
of these operations had been owned prior to the acquisition of BFI. In
accordance with SFAS 121, an impairment loss of $43.5 million was recorded
during 1999 to reduce the carrying value of the assets to the net realizable
value including an accrual for the cost of disposal.
The results of operations before depreciation and amortization and acquisition
related and unusual costs of the Allied Divestitures and the Allied Operations
included in consolidated operating income, in accordance with SFAS 121, was
approximately $2.6 million and $2.1 million during the nine months ended
September 30, 2000 and 1999, respectively. During the nine months ended
September 30, 2000 and 1999, we excluded from our Condensed Consolidated
Statements of Operations, in accordance with SFAS 121, depreciation and
amortization in the amount of $1.4 million and $2.4 million, respectively.
10
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
BFI Assets --
Concurrent with the acquisition of BFI, certain BFI operations were identified
by management as non-core or non-integrated operations and have been divested
along with certain operations required by governmental order to be divested.
These operations included BFI's Canadian operations ("BFI Canada"), medical
waste operations ("BFI Medical Waste"), gas systems operations ("BFI Gas") and
certain solid waste operations ("BFI Solid Waste Divestitures") (collectively,
the "BFI Divestitures"). The sales of these operations are being accounted for
in accordance with Emerging Issues Task Force Issue 87-11 -- Allocation of
Purchase Price to Assets to Be Sold. The BFI Divestitures were carried at the
net realizable value based on the terms of transactions including accruals for
cost of disposal, operating income and allocable interest expense. Accordingly,
approximately $24.3 million and $25.9 million of consolidated operating income
excluding acquisition related and unusual costs, and approximately $24.8 million
and $20.4 million of allocable interest expense related to the BFI Divestitures
were excluded from our Condensed Consolidated Statements of Operations for the
nine months ended September 30, 2000 and 1999, respectively.
At December 31, 1999, the assets held for sale are classified as a current asset
on our Condensed Consolidated Balance Sheet and are summarized as follows (in
thousands):
December 31, 1999
-----------------------
Accounts receivable, net..................... $ 90,396
Other current assets......................... 16,478
Property and equipment, net.................. 616,973
Goodwill, net................................ 247,383
Other long-term assets....................... 5,405
Current liabilities.......................... (64,682)
Long-term liabilities........................ (20,053)
-----------------------
Total net assets........................... $ 891,900
=======================
As of September 30, 2000, we have completed the divestitures of the operations
previously classified as assets held for sale.
4. Long-term Debt
Long-term debt at September 30, 2000 and December 31, 1999 consists of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Revolving credit facility, effective rates of 9.00%........................ $ 445,000 $ 65,000
Asset sale term loan facility, effective rate of 9.00%..................... -- 99,496
Tranche A, B and C loan facilities, effective rates ranging from 8.68%
to 9.26%................................................................. 4,500,000 4,500,000
Tranche D term loan facility, effective rates of 10.63% and 10.50%......... -- 500,000
1999 Senior subordinated notes, effective rates of 9.92%................... 2,007,484 2,008,119
1998 Senior notes, effective rates ranging from 7.38% to 7.91%............. 1,698,432 1,698,309
Senior notes and debentures, effective rates ranging from
8.63% to 10.36%.......................................................... 728,511 721,229
Market value put securities, effective rate of 6.32%....................... -- 249,705
Solid waste revenue bond obligations, weighted average effective
rates of 6.44% and 7.02%................................................. 314,705 316,299
Notes payable to banks, finance companies, and individuals,
weighted average interest rates ranging from 5% - 10%.................... 45,339 85,062
----------------- -----------------
9,739,471 10,243,219
Current portion............................................................ 97,857 1,002,928
----------------- -----------------
$ 9,641,614 $ 9,240,291
================= =================
</TABLE>
11
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the BFI acquisition in July 1999, we entered into a new
credit facility (the "1999 Credit Facility"). The 1999 Credit Facility provided
a $1.5 billion six-year revolving credit facility, a $556 million two-year asset
sale term loan (the "Asset Sale Term Loan") which was repaid in full in February
2000, a $1,750 million six-year Tranche A term loan (the "Tranche A Term Loan"),
a $1,250 million seven-year Tranche B term loan (the "Tranche B Term Loan"), a
$1,500 million eight-year Tranche C term loan (the "Tranche C Term Loan") and a
$500 million eight-year Tranche D term loan (the "Tranche D Term Loan"). The
Tranche D Term Loan was repaid in full in September 2000.
The 1999 Credit Facility bears interest at (a) an Alternate Base Rate, or (b) a
Eurodollar Rate, both terms defined in the 1999 Credit Facility, plus, in either
case, an applicable margin and may be used for working capital and other general
corporate purposes, acquisitions, and issuance of letters of credit. Of the $1.5
billion available under the Revolving Credit Facility, no more than $800 million
may be used to support the issuance of letters of credit. As of September 30,
2000, approximately $590 million was available on this facility.
We are required to make prepayments on the 1999 Credit Facility upon completion
of certain asset sales and issuances of debt or equity securities. Proceeds from
asset sales are to be applied to reduce the borrowings under the Tranche A, B
and C Term Loans on a pro rata basis. Required prepayments are to be made based
on a percentage of the net proceeds of any debt incurrence or equity issuance.
Proceeds of an issuance of debt or equity are to be applied to reduce borrowings
under the Tranche A, B and C Term Loans on a pro rata basis.
In July 1999, Allied Waste North America, Inc. ("Allied NA"; a wholly owned
consolidated subsidiary of Allied) issued $2.0 billion of senior subordinated
notes (the "1999 Notes") in a Rule 144A offering. In January 2000, these notes
were exchanged for substantially identical notes (which are also referred to as
the 1999 Notes) registered under the Securities Exchange Act of 1933. Interest
accrues on the 1999 Notes at an interest rate of 10% per annum, payable
semi-annually on May 1 and November 1. We used the proceeds from the 1999 Notes
as partial financing for the acquisition of BFI. We, together with substantially
all of our subsidiaries, guarantee the 1999 Notes.
In connection with the BFI acquisition on July 30, 1999, we assumed all of BFI's
debt securities with the exception of commercial paper that was paid off in
connection with the acquisition. BFI's debt securities were recorded at their
fair market values as of the date of the acquisition in accordance with Emerging
Issues Task Force Issue 98-1 -- Valuation of Debt Assumed in a Purchase Business
Combination. The effect of revaluing the debt securities resulted in an
aggregate discount from the historic face amount of $137.0 million. At September
30, 2000, the remaining unamortized discount related to the debt securities
assumed from BFI was $123.3 million.
The Market Value Put Securities ("MVPs") had an optional put on January 18,
2000, which was exercised. Accordingly, we repaid the MVPs in January through a
draw on our revolving credit facility.
5. Closure, Post-Closure and Environmental Liabilities
We have a network of 164 owned or operated active landfills with a net book
value of approximately $1.6 billion at September 30, 2000. The landfills have
operating lives ranging from one to over 150 years based on available capacity
using current annual volumes. The average life of our landfills approximates 39
years.
12
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Closure, Post-Closure Costs --
Estimated costs for closure and post-closure as required under the Environmental
Protection Agency's Subtitle D regulations, as implemented by individual states
are compiled and updated annually for each landfill from local and regional
company engineers and reviewed by senior management. The future estimated
closure and post-closure costs are increased at an inflation rate of 2.5%, and
discounted at a risk-free capital rate of 7.0%, per annum, based on the timing
of the amounts to be expended. The following table is a summary of the closure
and post-closure costs (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
-----------------
<S> <C>
Discounted Closure and Post-Closure Liability Recorded:
Current Portion................................................................ $ 75,316
Non-Current Portion............................................................ 442,032
-----------------
Total.......................................................................... $ 517,348
=================
Estimated Remaining Closure and Post-Closure Costs to be Expended:
Discounted..................................................................... $ 1,046,538
Undiscounted................................................................... 2,689,485
Estimated Total Future Payments:
2000........................................................................... $ 75,316
2001........................................................................... 66,652
2002........................................................................... 56,688
2003........................................................................... 68,166
2004........................................................................... 56,514
Thereafter..................................................................... 2,366,149
</TABLE>
Our periodic closure and post-closure expense has two components. The first
component is the site-specific per unit closure and post-closure expense. The
per unit rate is derived by dividing the estimated total remaining discounted
closure and post-closure costs by the remaining disposal capacity at each
landfill (consistent with the capacity used to calculate landfill amortization
rates). We use the resulting site-specific rates to record expense during a
given period based upon the consumption of disposal capacity during that period.
The second component is the accretion expense necessary to increase the accrued
closure and post-closure reserve balance to its future, or undiscounted, value.
To accomplish this, we accrete our closure and post-closure accrual balance
using the current risk-free capital rate and charge this accretion as an
operating expense in that period. We charged approximately $48.4 million,
related to per unit closure and post-closure expense and periodic accretion
during the nine months ended September 30, 2000. Changes in estimates of costs
or capacity are treated on a prospective basis.
13
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Environmental costs --
In connection with the acquisition of companies, we engage independent
environmental consulting firms to assist in conducting an environmental
assessment of companies acquired from third parties. Several contaminated
landfills and other properties were identified primarily during 1999 that will
require us to incur costs for incremental closure and post-closure measures,
remediation activities and litigation costs in the future. The ultimate amounts
for environmental liabilities cannot be determined and estimates of such
liabilities made by us, after consultation with our independent environmental
engineers, require assumptions about future events 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 final
apportionment of responsibility among the potentially responsible parties. Where
we have concluded that our estimated share of potential liabilities is probable,
a provision has been made in our Condensed Consolidated Financial Statements.
Since the ultimate outcome of these matters may differ from the estimates used
in our assessment to date, the recorded liabilities are periodically evaluated,
as additional information becomes available to ascertain whether the accrued
liabilities are adequate. We have determined that the recorded liability for
environmental matters as of September 30, 2000 and December 31, 1999 of
approximately $448.7 million and $478.2 million, respectively, represents the
most probable outcome of these contingent matters. We do not reduce our
estimated obligations for anticipated proceeds from other potentially
responsible parties or insurance companies. There were no significant recovery
receivables outstanding as of September 30, 2000. We do not expect that
adjustments to estimates, which are reasonably possible in the near term and
that may result in changes to recorded amounts, will have a material effect on
our consolidated liquidity, financial position or results of operations.
However, we believe that it is reasonably possible the ultimate outcome of
environmental matters, excluding closure and post-closure, could result in
approximately $35 million of additional liability.
The following table shows the activity and balances related to environmental
accruals and for closure and post-closure accruals related to open and closed
landfills from December 31, 1999 through September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Balance at Charges to Other Balance at
12/31/99 Expense Charges(1) Payments 9/30/00
------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Environmental costs......... $ 478,194 $ 3,251 $ (9,185) $ (23,584) $ 448,676
Open landfills closure and
post-closure costs........ 313,800 37,777 31,430 (12,693) 370,314
Closed landfills closure and
post-closure costs......... 203,548 10,668 21,361 (29,461) 206,116
<FN>
(1) Amounts consist primarily of recording liabilities related to acquired companies and subsequent adjustments.
</FN>
</TABLE>
14
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Net Income (loss) Per Common Share
Net income (loss) per common share is calculated by dividing net income (loss)
before extraordinary loss and cumulative effect of change in accounting
principle, less dividend requirements on preferred stock, by the weighted
average number of common shares and common share equivalents outstanding during
each period. The computation of basic earnings (loss) per share and diluted
earnings (loss) per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share
computation:
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle....................... $ 101,393 $ (252,262) $ 28,740 $ (332,330)
Less: preferred stock dividends.............. 50,829 11,219 17,340 11,219
-------------- --------------- -------------- --------------
Income (loss) available to common
shareholders before extraordinary loss
and cumulative effect of change in
accounting principle....................... $ 50,564 $ (263,481) $ 11,400 $ (343,549)
============== =============== ============== ==============
Weighted average common shares
outstanding................................ 188,739 187,312 188,789 187,969
============== =============== ============== ==============
Basic earnings (loss) per share before
extraordinary loss and cumulative effect
of change in accounting principle.......... $ 0.27 $ (1.41) $ 0.06 $ (1.83)
============== =============== ============== ==============
Diluted earnings (loss) per share
computation:
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle....................... $ 101,393 $ (252,262) $ 28,740 $ (332,330)
Less: preferred stock dividends.............. 50,829 11,219 17,340 11,219
-------------- --------------- -------------- --------------
Income (loss) available to common
shareholders before extraordinary loss
and cumulative effect of change in
accounting principle....................... $ 50,564 $ (263,481) $ 11,400 $ (343,549)
============== =============== ============== ==============
Weighted average common shares
outstanding................................ 188,739 187,312 188,789 187,969
Dilutive effect of stock, stock options and
contingently issuable shares............... 2,366 -- 3,239 --
-------------- --------------- -------------- --------------
Weighted average common and
common equivalent shares outstanding....... 191,105 187,312 192,028 187,969
============== =============== ============== ==============
Diluted earnings (loss) per share before
extraordinary loss and cumulative effect
of change in accounting principle.......... $ 0.27 $ (1.41) $ 0.06 $ (1.83)
============== =============== ============== ==============
</TABLE>
15
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Commitments and Contingencies
We are subject to extensive and evolving laws and regulations and have
implemented our own environmental safeguards to respond to regulatory
requirements. In the normal course of conducting our operations, we may become
involved in certain legal and administrative proceedings. Some of these actions
may result in fines, penalties or judgments against us, which may have an impact
on earnings for a particular period. We accrue for litigation and regulatory
compliance contingencies when such costs are probable and reasonably estimable.
We expect that matters in process at September 30, 2000, which have not been
accrued in the Condensed Consolidated Balance Sheet, will not have a material
adverse effect on our consolidated liquidity, financial position or results from
operations.
In connection with certain acquisitions, we have entered into agreements to pay
royalties based on waste tonnage disposed at specified landfills. The royalties
are generally payable quarterly and amounts earned, but not paid, are accrued in
the accompanying Condensed Consolidated Balance Sheets.
We have operating lease agreements for service facilities, office space and
equipment. Future minimum payments under non-cancelable operating leases with
terms in excess of one year are as follows (in thousands):
December 31, 1999
-------------------------
2000 $ 32,749
2001 29,266
2002 26,831
2003 24,364
2004 19,263
Thereafter 58,904
Rental expense under such operating leases was approximately $25.3 million and
$22.2 million for the nine months ended September 30, 2000 and 1999,
respectively.
We carry a broad range of insurance coverage for protection of our assets and
operations from certain risks including environmental impairment liability
insurance for certain landfills.
We are also required to provide financial assurances to governmental agencies
under applicable environmental regulations relating to our landfill operations
and collection contracts. These financial assurance requirements are satisfied
by us issuing performance bonds, letters of credit, insurance policies or trust
deposits to secure our obligations as they relate to landfill closure and
post-closure costs and performance under certain collection contracts. At
September 30, 2000, we had outstanding approximately $1.5 billion in financial
assurance instruments, represented by $430.4 million of performance bonds,
$977.5 million of insurance policies, $45.6 million of trust deposits and $32.8
million of letters of credit. During calendar year 2000, we expect no material
increase in financial assurance obligations relating to our landfill operations
and collection contracts.
We have issued bank letters of credit in the aggregate amount of approximately
$481.0 million at September 30, 2000. These financial instruments are issued in
the normal course of business and are not reflected in the accompanying
Condensed Consolidated Balance Sheets. The underlying obligations of the
financial instruments are valued based on the likelihood of performance being
required. We do not expect any material losses to result from these off balance
sheet instruments based on historical results, and therefore, we are of the
opinion that the fair value of these instruments is zero.
16
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain of our subsidiaries have 50% ownership interests in American Ref-Fuel
partnerships ("Ref-Fuel") that construct, own and operate facilities which
generate and sell electricity from the incineration of solid waste (see Note 10
for subsequent events). Substantially all of the remaining ownership interests
are held by Duke/UAE Ref-Fuel LLC ("Duke/UAE"), an entity indirectly owned 65%
by Duke Capital Corporation ("Duke Capital") and 35% by United American Energy
Corporation. Financing arrangements for four of these projects include
agreements with Allied and Duke Capital to each severally fund one-half of each
partnership's cash deficiencies in the event of the partnership's failure to
perform.
In the event of a partnership default which results in termination of
incineration service, we may limit our financial obligations to funding up to
50% of periodic payments related to outstanding debt, and in certain
circumstances other operating cash deficiencies. Average annual debt service on
50% of the aggregate American Ref-Fuel partnership debt over the next five years
is $50 million. Funding of operating cash deficiencies would not be required in
excess of $100 million or 50% of the deficiency, whichever is less. Under
support agreements with one of the partnerships, a subsidiary of Allied
guarantees to lend up to $2.5 million, defer operating cost reimbursement up to
$3.5 million and fund up to $2.5 million in operating damages under certain
circumstances.
8. Segment Reporting
We classify our operations into eight U.S. geographic regions: Atlantic,
Central, Great Lakes, Midwest, Northeast, Southeast, Southwest and West. Our
revenues are derived from one industry segment, which includes the collection,
transfer, disposal and recycling of non-hazardous solid waste. We evaluate
performance based on several factors, of which the primary financial measure is
EBITDA before acquisition related and unusual costs. The accounting policies of
the business segments are the same as those described in the Organization and
Summary of Significant Accounting Policies (see Note 1). The tables below
reflect certain geographic information relating to our operations for the nine
and three months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999
------------------------------------------------ -----------------------------------------------
Revenues EBITDA Revenues EBITDA
from before from before
external Intersegment non-recurring external Intersegment non-recurring
customers revenues charges customers revenues charges
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Atlantic...... $ 454,119 $ 68,465 $ 155,548 $ 163,147 $ 31,370 $ 54,627
Central....... 403,110 93,849 137,191 268,476 66,548 87,472
Great Lakes... 490,686 121,470 192,001 279,325 79,310 124,875
Midwest....... 364,423 84,662 170,650 193,869 45,869 83,393
Northeast..... 714,741 152,542 186,723 291,382 47,072 84,404
Southeast..... 579,395 82,772 217,723 137,516 24,353 45,245
Southwest..... 571,515 95,380 221,505 219,679 47,611 90,684
West.......... 709,682 155,017 261,735 398,340 60,866 141,251
Other(1)...... 27,207 -- (40,342) 5,297 (865) (16,907)
------------- ------------- ------------- ------------- ------------- -------------
Total......... $ 4,314,878 $ 854,157 $ 1,502,734 $ 1,957,031 $ 402,134 $ 695,044
============= ============= ============= ============= ============= =============
<FN>
(1) Amounts relate primarily to our subsidiaries which provide services throughout the organization and not on a regional basis.
</FN>
</TABLE>
17
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
------------------------------------------------ -----------------------------------------------
Revenues EBITDA Revenues EBITDA
from before from before
external Intersegment non-recurring external Intersegment non-recurring
customers revenues charges customers revenues charges
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Atlantic...... $ 154,917 $ 23,071 $ 55,038 $ 108,135 $ 19,541 $ 36,510
Central....... 138,484 32,133 50,080 118,780 23,757 34,457
Great Lakes... 167,658 42,651 67,552 134,770 38,164 56,429
Midwest....... 125,564 29,533 59,326 101,959 22,788 43,064
Northeast..... 245,677 53,497 62,161 179,337 35,820 59,257
Southeast..... 196,194 29,040 75,938 115,345 18,067 37,586
Southwest..... 191,042 31,682 74,491 136,950 25,927 54,887
West.......... 248,055 56,368 98,123 186,860 33,480 67,336
Other(1)...... 7,140 -- (9,186) 3,492 (866) (11,913)
------------- ------------- ------------- ------------- ------------- -------------
Total......... $ 1,474,731 $ 297,975 $ 533,523 $ 1,085,628 $ 216,678 $ 377,613
============= ============= ============= ============= ============= =============
<FN>
(1) Amounts relate primarily to our subsidiaries which provide services throughout the organization and not on a regional basis.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of reportable segment primary financial measure to operating income (loss) (in thousands):
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Operating income (loss):
Total EBITDA before
acquisition related and
unusual costs for
reportable segments...... $ 1,502,734 $ 695,044 $ 533,523 $ 377,613
Depreciation and
amortization for
reportable segments...... 507,715 226,410 172,476 125,973
Acquisition related and
unusual costs for
reportable segments...... 105,517 549,774 48,591 548,657
------------------- -------------------- ------------------- -------------------
Operating income
(loss)................... $ 889,502 $ (81,140) $ 312,456 $ (297,017)
=================== ==================== =================== ===================
</TABLE>
Percentage of our total revenue attributable to services provided:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Collection(1).............. 62.0% 59.4% 62.0% 61.1%
Landfill(1)................ 23.1 27.2 24.0 23.9
Transfer(1)................ 5.1 6.4 5.8 5.5
Other...................... 9.8 7.0 8.2 9.5
------------------- -------------------- ------------------- -------------------
Total revenues........... 100.0% 100.0% 100.0% 100.0%
=================== ==================== =================== ===================
<FN>
(1) The portion of collection and third-party transfer revenues attributable to disposal charges for waste collected
by us and disposed at our landfills has been excluded from collection and transfer revenues and included in
landfill revenues.
</FN>
</TABLE>
18
<PAGE>
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Summarized Financial Data of Allied Waste North America, Inc.
The 1998 Senior Notes and the 1999 Notes issued by Allied NA are guaranteed by
us and substantially all of our subsidiaries. These guarantees are full,
unconditional and joint and several of Allied NA's debt. The separate complete
financial statements of Allied NA have not been included herein as we have
determined that such disclosure is not considered to be material. However,
summarized consolidated balance sheet and statement of operations data for
Allied NA and subsidiaries as of September 30, 2000 and December 31, 1999 and
for the nine months ended September 30, 2000 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Summarized Consolidated Balance Sheet Data
September 30, December 31,
2000 1999
------------------------ -------------------------
(unaudited)
<S> <C> <C>
Current assets............................................... $ 1,297,183 $ 2,248,422
Property and equipment, net.................................. 3,893,583 3,738,388
Goodwill, net................................................ 8,673,303 8,238,929
Other non-current assets..................................... 647,349 737,362
Current liabilities.......................................... 1,752,365 2,629,499
Long-term debt, less current portion......................... 9,641,614 9,240,291
Due to parent................................................ 2,094,778 2,091,951
Other long-term obligations.................................. 1,386,930 1,453,756
Retained deficit............................................. (364,269) (452,396)
</TABLE>
<TABLE>
<CAPTION>
Summarized Consolidated Statement of Operations Data
Nine Months Ended September 30,
-----------------------------------------------------
2000 1999
----------------------- -------------------------
(unaudited)
<S> <C> <C>
Revenues..................................................... $ 4,314,878 $ 1,957,031
Operating costs and expenses................................. 3,425,376 2,038,171
Operating income (loss)...................................... 889,502 (81,140)
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle................... 101,393 (252,262)
Extraordinary loss, net...................................... 13,266 3,223
Cumulative effect of change in accounting principle, net..... -- 64,255
Net income (loss)............................................ 88,127 (319,740)
</TABLE>
10. Subsequent Events
On November 10, 2000, we entered into a definitive agreement to sell our
interest in two Ref-Fuel facilities located in Chester, Pennsylvania, and
Rochester, Massachusetts, to Duke/UAE. Additionally, pursuant to the agreement,
the ownership structure of the four remaining Ref-Fuel facilities located in New
York, New Jersey and Connecticut will be modified to give Duke/UAE operational
control of the entities. This transaction should allow us to reduce our debt
requirements by approximately $300 million and decrease our required letters of
credit related to Ref-Fuel by approximately $130 million. The transaction is
subject to customary closing provisions and the consents and approvals of
relevant municipalities and regulatory agencies, along with a requirement of
obtaining an investment grade rating of the acquiring entity from the credit
rating agencies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and the notes thereto, included elsewhere
herein.
Introduction
Allied Waste Industries Inc. ("Allied" or "we"), a Delaware corporation, is the
second largest, non-hazardous solid waste management company in the United
States, and operates as a vertically integrated company that provides
collection, transfer, disposal and recycling services for residential,
commercial and industrial customers. We operate in 40 states and serve
approximately 9.9 million commercial and residential customers from a base of
assets including 338 collection companies, 152 transfer stations, 164 active
landfills and 75 recycling facilities.
We have experienced significant growth, primarily resulting from the acquisition
of solid waste businesses. Since January 1, 1993, we have completed 269
acquisitions including 55 acquisitions in 1999. The results of operations for
the acquisitions accounted for under the purchase method for business
combinations are included in our financial statements only from the applicable
date of acquisition. As a result, we believe our historical results of
operations for the periods presented are not directly comparable to our current
results of operations.
On July 30, 1999, we completed the acquisition of Browning-Ferris Industries,
Inc. ("BFI") in a transaction accounted for as a purchase. As a result of the
acquisition, each share of BFI common stock was converted into the right to
receive $45 in cash. Including assumed and refinanced debt, the cost of
acquiring BFI was approximately $9.6 billion. Financing for the acquisition was
obtained from draws of $4.7 billion from credit facilities with a capacity of
$7.1 billion (the "1999 Credit Facility"), the sale of $1.0 billion of newly
issued senior convertible preferred stock (the "Preferred Stock") and the sale
of $2.0 billion of 10% Senior Subordinated Notes due 2009 (the "1999 Notes").
In connection with the acquisition of BFI, we initiated an asset divestiture
program, whereby we would sell for cash or through simultaneous buy and sell
transactions, certain non-core assets that do not fit with our vertical
integration operating strategy. The net proceeds from this initiative are
expected to generate approximately $1.6 billion, net of tax. As of September 30,
2000, we had completed divestitures, which generated approximately $1.3 billion
of net proceeds.
On November 10, 2000, we entered into a definitive agreement to sell our
interest in two Ref-Fuel facilities located in Chester, Pennsylvania, and
Rochester, Massachusetts, to Duke/UAE. Additionally, pursuant to the agreement,
the ownership structure of the four remaining Ref-Fuel facilities located in New
York, New Jersey and Connecticut will be modified to give Duke/UAE operational
control of the entities. This transaction should allow us to reduce our debt
requirements by approximately $300 million and decrease our required letters of
credit related to Ref-Fuel by approximately $130 million. The transaction is
subject to customary closing provisions and the consents and approvals of
relevant municipalities and regulatory agencies, along with a requirement of
obtaining an investment grade rating of the acquiring entity from the credit
rating agencies.
Integration of BFI. In connection with the acquisition of BFI on July 30, 1999,
we anticipated annual cost savings of approximately $360 million by the end of
2000 resulting from corporate and field SG&A savings, operations labor cost
savings, market cost savings and asset buy and sell agreements. As of June 30,
2000, we had substantially achieved the annual cost savings through headcount
reductions of approximately 2,900 employees, the closure of 51 facilities, 96
route rationalizations, the increase of internalization from 57% at the time of
acquisition to 63% at June 30, 2000 and other cost savings.
We have completed the management information systems conversions from BFI's
systems to Allied's systems for financial reporting, payroll, fixed assets and
maintenance tracking. We have also completed the conversion of the general
ledger and accounts payable from BFI's SAP system to Allied's system and have
not experienced any significant operational, accounting or reporting issues
related to any of these conversions.
20
<PAGE>
General
Revenues. Our revenues are attributable primarily to fees charged to customers
for waste collection, transfer, recycling and disposal services. We generally
provide collection services under direct agreements with our customers or
pursuant to contracts with municipalities. Commercial and municipal contract
terms, generally range from one to five years and commonly have automatic
renewal options. Our landfill operations include both company-owned landfills
and those operated for municipalities for a fee. In each geographic region in
which we are located, we provide collection, transfer and disposal services. The
following tables show for the periods indicated the percentage of our total
reported revenues attributable to services provided and revenues attributable to
geographic regions. The data below has been restated to give effect to
acquisitions that were accounted for using the pooling-of-interests method for
business combinations.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ------------------
1999 1998 1997 2000
--------- ---------- ----------- ------------------
<S> <C> <C> <C> <C>
Collection(1).................................. 60.7% 55.7% 57.2% 62.0%
Landfill(1).................................... 25.3 29.9 26.4 23.1
Transfer(1).................................... 5.6 7.1 6.7 5.1
Other.......................................... 8.4 7.3 9.7 9.8
--------- ---------- ----------- ------------------
Total revenues............................... 100.0% 100.0% 100.0% 100.0%
========= ========== =========== ==================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- -----------------------
1999 1998 1997 2000
--------- ---------- ----------- -----------------------
<S> <C> <C> <C> <C>
Atlantic....................................... 9.6% 6.7% 6.1% 10.5%
Central........................................ 12.2 19.1 18.8 9.3
Great Lakes.................................... 13.1 18.8 15.4 11.4
Midwest........................................ 9.8 10.2 10.0 8.4
Northeast...................................... 15.6 10.7 14.0 16.6
Southeast...................................... 9.2 3.7 3.6 13.4
Southwest...................................... 12.1 9.4 11.3 13.3
West........................................... 18.4 21.4 20.8 16.5
Other(2)....................................... -- -- -- 0.6
--------- ---------- ----------- -----------------------
Total revenues............................... 100.0% 100.0% 100.0% 100.0%
========= ========== =========== =======================
<FN>
(1) The portion of collection and third-party transfer revenues attributable to disposal charges for waste collected
by us and disposed at our landfills has been excluded from collection and transfer revenues and included in
landfill revenues.
(2) Amounts relate primarily to our subsidiaries which provide services throughout the organization and not on a regional basis.
</FN>
</TABLE>
Our strategy is to develop vertically integrated operations to ensure
internalization of the waste we collect and thus realize higher margins from our
operations. By disposing of waste at company-owned and/or operated landfills, we
retain the margin generated through disposal operations that would otherwise be
earned by third-party landfills. Approximately 65% of the waste we collect as
measured by disposal volumes were disposed of at landfills we own and/or operate
during the three months ended September 30, 2000. In addition, transfer stations
are an integral part of the disposal process. We locate our transfer stations in
areas where our landfills are outside of the population centers in which we
collect waste. Such waste is transferred to long-haul trailers and economically
transported to our landfills.
21
<PAGE>
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 our 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 cost, community relations'
expenses and provisions for estimated uncollectible accounts receivable.
Depreciation and amortization includes depreciation of fixed assets and
amortization of other intangible assets and landfill airspace. Goodwill
amortization includes the amortization of costs paid in excess of the net assets
acquired in purchase business combinations.
Landfill Accounting. We use a life-cycle accounting method for landfills and the
related closure and post-closure liabilities. This method applies the costs
associated with acquiring, developing, closing and monitoring the landfills over
the associated landfill capacity based on consumption. On an annual basis, we
update the development cost estimates (which include the costs to develop the
site as well as the individual cell construction costs), closure and
post-closure cost estimates and future capacity estimates for each landfill. The
cost estimates are prepared by local company and third-party engineers based on
the applicable local, state and federal regulations and site specific permit
requirements. Future capacity estimates are updated, using aerial surveys of
each landfill performed annually, by third-party engineers to estimate utilized
disposal capacity and remaining disposal capacity. These cost and capacity
estimates are reviewed and approved by senior operations management annually.
We use the units of production method for purposes of calculating the
amortization rate at each landfill. This methodology divides the costs
associated with acquiring, permitting and developing the entire landfill by the
total remaining capacity of that landfill. The resulting per unit amortization
rate is applied to each unit disposed at the landfill and is recorded as expense
for that period. We expensed approximately $81.5 million, or an average of $1.28
per cubic yard consumed, related to landfill amortization during the year ended
December 31, 1999. The following is a rollforward of our investment in our
landfill assets excluding land held for permitting as landfills (in thousands):
<TABLE>
<CAPTION>
Net Book
Value of
Landfills
Net Book Cumulative Acquired Net Book
Value at Change in During Landfill Value at
December 31, Accounting 1999, net of Development Landfill December 31,
1998 Principle(1) Divestitures (2) Costs Amortization 1999
------------------- --------------- ----------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$ 924,698 (85,965) 501,735 162,754 (81,549) $ 1,421,673
<FN>
(1) Amount relates to the charge resulting from the change in accounting principle for interest previously capitalized
at our active landfills (See Note 1 to Condensed Consolidated Financial Statements).
(2) Landfills classified as assets held for sale are included as divestitures.
</FN>
</TABLE>
22
<PAGE>
Costs associated with developing the landfill include direct costs such as
excavation, liners, leachate collection systems, engineering and legal fees, and
capitalized interest. Estimated total future development costs are approximately
$2.6 billion, excluding capitalized interest, and we expect that this amount
will be spent over the remaining operating lives of the landfills. We have
available disposal capacity of approximately 2.7 billion cubic yards as of
December 31, 1999. We classify this total disposal capacity as either permitted
(having received the final permit from the governing authorities) and deemed
permitted. Our internal requirements to classify capacity as deemed permitted
are as follows:
1. Control of and access to the land where the expansion permit is being
sought.
2. All geologic and other technical siting criteria for a landfill have
been met, or a variance from such requirements has been received (or can
reasonably be expected to be achieved).
3. The political process has been assessed and there are no identified
impediments that cannot be resolved.
4. We are actively pursuing the expansion permit and an expectation that
the final local, state and federal permits will be received within the
next five years.
5. Senior operations management approval has been obtained.
Upon successfully meeting the preceding criteria, the costs associated with
developing, constructing, closing and monitoring the total additional future
capacity are considered in the calculation of the amortization and closure and
post-closure rates. At December 31, 1999, we had 2.11 billion cubic yards of
permitted capacity, and at 37 of our landfills, 545.0 million cubic yards of
deemed permitted capacity.
The following table reflects landfill airspace activity for active landfills we
owned or operated for the twelve months ended December 31, 1999 (airspace in
millions of cubic yards):
<TABLE>
<CAPTION>
Additions Additions
Balance Acquisitions, To To Changes in Balance
as of net of Deemed Permitted Airspace Engineering as of
12/31/98 Divestitures(1) Airspace Airspace Consumed Estimates 12/31/99
---------- -------------- ---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Permitted
airspace.. 1,167.3 976.3 -- 20.2 (63.8) 8.0 2,108.0
Number of
landfills. 76 75 -- -- -- -- 151
Deemed
airspace.. 268.3 273.7 35.6 (16.2) -- (16.4) 545.0
Number of
landfills. 21 13 3 -- -- -- 37
---------- -------------- ---------- ---------- ----------- ------------ ---------
Total
airspace.. 1,435.6 1,250.0 35.6 4.0 (63.8) (8.4) 2,653.0
Number of
landfills. 76 75 -- -- -- -- 151
<FN>
(1) Landfills classified as assets held for sale are included as divestitures.
</FN>
</TABLE>
Allied and its engineering consultants continually monitor the progress of
obtaining local, state and federal approval for each of its expansion permits.
If it is determined that the expansion no longer meets our criteria, the
capacity is removed from our total available capacity, the costs to develop that
capacity and the associated closure and post-closure costs are removed from the
landfill amortization base, and rates are adjusted prospectively. In addition,
any value assigned to deemed permitted capacity would be written-off to expense
during the period in which it is determined that the criteria are no longer met.
Management periodically reviews the realizability of its investment in our
landfill asset base. As part of our annual review, we will evaluate any events
and circumstances which may indicate that a landfill be reviewed for impairment.
Such review for recoverability will be made using undiscounted cash flows to
measure recoverability in accordance with Emerging Issues Task Force ("EITF")
Issue 95-23.
23
<PAGE>
Closure and post-closure costs represent our financial commitment for the
regulatory required costs associated with our future obligations for final
closure, which is the closure of a cell of a landfill once the cell is no longer
receiving waste, and post-closure monitoring and maintenance of landfills, which
is usually required for up to 30 years after a landfill's final closure. We
establish closure and post-closure requirements based on the standards of
Subtitle D as implemented on a state-by-state basis. We base closure and
post-closure accruals on cost estimates for capping and covering a landfill,
methane gas control, leachate management and groundwater monitoring, and other
operational and maintenance costs to be incurred after the site discontinues
accepting waste. We prepare site-specific closure and post-closure engineering
cost estimates annually for landfills owned and/or operated by us for which we
are responsible for closure and post-closure.
We accrue and charge closure and post-closure costs based on accepted tonnage as
landfill airspace is consumed to ensure that the total closure and post-closure
obligations are fully accrued for each landfill at the time that the site
discontinues accepting waste and is closed. For landfills purchased, we assess
and accrue the closure and post-closure liability at the time we assume closure
responsibility based upon the estimated closure and post-closure costs and the
percentage of airspace utilized as of the date of acquisition. After the date of
acquisition, we accrue and charge closure and post-closure costs as airspace is
consumed. We update and approve estimated closure and post-closure liabilities
annually based on assessments performed by in-house and independent
environmental engineers. Such costs may change in the future as a result of
permit modifications or changes in legislative or regulatory requirements.
We accrue closure and post-closure cost estimates based on the present value of
the future obligation. We discount future costs where we believe that both the
amounts and timing of related payments are reliably determinable. We annually
update our estimates of future closure and post-closure costs. We account for
the impact of changes, which are determined to be changes in estimates, on a
prospective basis.
In 2000, we calculated the net present value of the closure and post-closure
commitment assuming inflation of 2.5% and a risk-free capital rate of 7.0%. We
accrete discounted amounts previously recorded to reflect the effects of the
passage of time. We currently estimate total future payments for closure and
post-closure to be $2.7 billion. The present value of such estimate is $1.0
billion at December 31, 1999. Estimated total future payments may change due to
our initiatives to maintain effective cost control by determining alternative
methods of complying with regulatory requirements, efficient execution of our
responsibilities and partnering with experts to identify and implement
innovative methods. At September 30, 2000 and December 31, 1999, accruals for
landfill closure and post-closure costs (including costs assumed through
acquisitions) were approximately $576.4 million and $517.3 million,
respectively. The accruals reflect a portfolio of landfills with estimated
remaining lives, based on current waste flows, that range from one to over 150
years, and an estimated average remaining life of approximately 39 years at
December 31, 1999.
24
<PAGE>
Results of Operations
Three Months Ended September 30, 2000 and 1999
The following table sets forth the percentage relationship that the various
items bear to revenues and the percentage change in dollar amounts for the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------
2000
Compared to
1999
% Change
2000 1999 in Amounts
------------ ------------ ---------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.......................................................... 100.0% 100.0% 35.8%
Cost of operations, excluding acquisition related and unusual
costs........................................................... 56.6 58.6 31.2
Selling, general and administrative expenses, excluding
acquisition related and unusual costs........................... 7.3 6.7 48.1
Depreciation and amortization..................................... 7.9 8.0 34.3
Goodwill amortization............................................. 3.8 3.6 42.7
Acquisition related and unusual costs............................. 3.3 50.5 (91.1)
------------ ------------
Operating income (loss)......................................... 21.1 (27.4) 205.2
Equity in earnings of unconsolidated subsidiaries................. (0.7) (1.0) (9.5)
Interest expense, net............................................. 14.9 13.5 50.0
------------ ------------
Income (loss) before income taxes............................... 6.9 (39.9) 123.6
Income tax expense (benefit)...................................... 4.9 (9.4) 171.5
Minority interest................................................. 0.1 0.1 6.8
------------ ------------
Income (loss) before extraordinary loss......................... 1.9 (30.6) 108.6
Extraordinary loss, net of income tax benefit..................... 0.4 0.3 110.4
------------ ------------
Net income (loss)............................................... 1.5 (30.9) 106.5
Dividends on preferred stock...................................... 1.2 1.0 54.6
------------ ------------
Net income (loss) available to common shareholders.............. 0.3% (31.9)% 101.3%
============ ============
</TABLE>
Revenues. Revenues in 2000 were $1,474.7 million compared to $1,085.6 million in
1999, an increase of 35.8%. The increase in revenues is primarily due to the
acquisition of companies subsequent to June 30, 1999, the most significant of
which was BFI, which was acquired on July 30, 1999. Accordingly, the results in
2000 include three months of the operations acquired from BFI compared to two
months in 1999. Additionally, revenues attributable to existing operations
("Internal Growth") increased approximately 2.7% (3.9% if the decrease in
commodity revenues is excluded) in 2000 compared to the same period in 1999.
Cost of Operations. Cost of Operations in 2000 was $834.1 million compared to
$635.7 million in 1999, an increase of 31.2%. The increase in cost of operations
was primarily associated with the increase in revenues described above. As a
percentage of revenues, cost of operations decreased to 56.6% in 2000 from 58.6%
in 1999 primarily due to operational cost savings achieved as a result of
completing acquisitions in 2000 including the effects of increasing landfill
internalization from 57% in 1999 to 65% in 2000.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses in 2000 were $107.1 million compared to $72.3 million in
1999, an increase of 48.1%. As a percentage of revenues, SG&A increased to 7.3%
in 2000, from 6.7% in 1999 primarily relating to modest increases in
compensation throughout 2000.
Depreciation and Amortization. Depreciation and Amortization in 2000 was $116.2
million compared to $86.6 million in 1999, an increase of 34.3%. As a percentage
of revenues, depreciation and amortization expense decreased to 7.9% in 2000
from 8.0% in 1999. The decrease is primarily due to the increase in deprecation
being more than offset by the increase in revenues from the acquisition of BFI.
25
<PAGE>
Goodwill Amortization. Goodwill amortization in 2000 was $56.2 million compared
to $39.4 million in 1999, an increase of 42.7%. The increase in goodwill
amortization primarily results from three months of amortization of goodwill
recorded in connection with the acquisition of BFI during 2000 compared to two
months in 1999.
Acquisition Related and Unusual Costs. During the third quarter of 2000, we
recorded $48.6 million of acquisition related and unusual costs of which $17.0
million related to transitional personnel, duplicate facilities and integration
costs associated with the integration of BFI and a $26.1 million non-cash charge
resulting from a loss on the divestiture of an operation. Additionally, we
recorded charges of $7.0 million and reversed $1.5 million of acquisition
related and unusual costs primarily resulting from changes in estimates for
acquisition related accruals.
During the three months ended September 30, 1999, we recorded $548.7 million of
acquisition related and unusual costs associated with the acquisition of BFI.
The costs primarily relate to environmental related matters, litigation
liabilities, risk management liabilities, loss contract provisions, transition
costs, the write-off of deferred costs relating to the acquisition and an
impairment loss to reduce the carrying value of assets held for sale.
Interest Expense, Net. Net interest expense was $220.4 million in 2000 compared
to $147.0 million in 1999, an increase of 50.0%. The increase in 2000 primarily
results from three months of interest expense on debt incurred and assumed in
connection with the acquisition of BFI as compared to two months in 1999.
Income Taxes. Income taxes reflect a 70.9% effective income tax rate for the
three months ended September 30, 2000 and (23.4%) for the same period in 1999.
The effective income tax rates in 2000 and 1999 deviate from the federal
statutory rate of 35% primarily due to the non-deductibility of amortization
expense related to approximately $6.5 billion of goodwill recorded in connection
with the acquisition of BFI.
Extraordinary Loss, Net. In September 2000, we repaid the Tranche D term loan
prior to its maturity date. In connection with this repayment, we recognized a
non-cash extraordinary charge for the early extinguishment of the debt of
approximately $11.2 million ($6.8 million net of income tax benefit) related to
the write-off of previously deferred debt issuance costs.
In July 1999, we repaid our credit facility prior to its maturity date. In
connection with this repayment, we recognized a non-cash extraordinary charge
for the early extinguishment of the debt of approximately $5.3 million ($3.2
million net of income tax benefit) related to the write-off of previously
deferred debt issuance costs.
Dividends on Preferred Stock. Dividends on Preferred Stock were $17.3 million in
2000 and $11.2 million for the same period in 1999, which reflects the 6.5%
dividend on the Preferred Stock issued on July 30, 1999 in connection with the
financing of the acquisition of BFI. Dividends were not paid in cash, instead,
the liquidation preference of the Preferred Stock increased by the accrued, but
unpaid dividends.
26
<PAGE>
Nine Months Ended September 30, 2000 and 1999
The following table sets forth the percentage relationship that the various
items bear to revenues and the percentage change in dollar amounts for the
periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
2000
Compared to
1999
% Change
2000 1999 in Amounts
------------ ------------ ---------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.......................................................... 100.0% 100.0% 120.5%
Cost of operations, excluding acquisition related and unusual
costs........................................................... 57.8 57.4 122.2
Selling, general and administrative expenses, excluding
acquisition related and unusual costs........................... 7.4 7.1 128.3
Depreciation and amortization..................................... 7.9 8.6 103.4
Goodwill amortization............................................. 3.8 3.0 184.9
Acquisition related and unusual costs............................. 2.5 28.1 (80.8)
------------ ------------
Operating income (loss)......................................... 20.6 (4.2) 1,196.3
Equity in earnings of unconsolidated subsidiaries................. (0.9) (0.6) 237.2
Interest expense, net............................................. 15.2 11.6 187.8
------------ ------------
Income (loss) before income taxes............................... 6.3 (15.2) 192.0
Income tax expense (benefit)...................................... 3.9 (2.4) 462.0
Minority interest................................................. 0.1 0.1 154.4
------------ ------------
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle....................... 2.3 (12.9) 140.2
Extraordinary loss, net of income tax benefit..................... 0.3 0.1 311.6
Cumulative effect of change in accounting principle, net
of income tax benefit........................................... -- 3.3 --
------------ ------------
Net income (loss)............................................... 2.0 (16.3) 127.6
Dividends on preferred stock...................................... 1.2 0.6 353.1
------------ ------------
Net income (loss) available to common shareholders.............. 0.8% (16.9)% 111.3%
============ ============
</TABLE>
Revenues. Revenues in 2000 were $4,314.9 million compared to $1,957.0 million in
1999, an increase of 120.5%. The increase in revenues is primarily due to the
acquisition of companies subsequent to June 30, 1999, the most significant of
which was BFI, which was acquired on July 30, 1999. Accordingly, the results in
2000 include nine months of the operations acquired from BFI compared to two
months in 1999.
Cost of Operations. Cost of Operations in 2000 was $2,494.2 million compared to
$1,122.7 million in 1999, an increase of 122.2%. The increase in cost of
operations was primarily associated with the increase in revenues described
above. As a percentage of revenues, cost of operations increased to 57.8% in
2000 from 57.4% in 1999 primarily due to the change in revenue mix resulting
from the acquisition of BFI. BFI's revenue mix was more heavily weighted toward
collection revenue, which has lower margins than landfill revenues.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses in 2000 were $317.9 million compared to $139.3 million
in 1999, an increase of 128.3%. As a percentage of revenues, SG&A increased to
7.4% in 2000 from 7.1% in 1999 primarily relating to modest increases in
compensation throughout 2000.
Depreciation and Amortization. Depreciation and Amortization in 2000 was $342.8
million compared to $168.5 million in 1999, an increase of 103.4%. As a
percentage of revenues, depreciation and amortization expense decreased to 7.9%
in 2000 from 8.6% in 1999. The decrease is primarily due to the increase in
deprecation being more than offset by the increase in revenues from the
acquisition of BFI.
27
<PAGE>
Goodwill Amortization. Goodwill amortization in 2000 was $164.9 million compared
to $57.9 million in 1999, an increase of 184.9%. The increase in goodwill
amortization primarily results from nine months of amortization of goodwill
recorded in connection with the acquisition of BFI during 2000 compared to two
months in 1999.
Acquisition Related and Unusual Costs. During the first nine months of 2000, we
recorded $105.5 million of acquisition related and unusual costs of which $59.7
million related to transitional personnel, duplicate facilities and integration
costs associated with the integration of BFI and a $26.1 million non-cash charge
resulting from a loss on the divestiture of an operation. Additionally, we
recorded charges of $24.2 million and reversed $4.5 million primarily resulting
from changes in estimates for acquisition related accruals.
During the first nine months of 1999, we recorded $549.8 million of acquisition
related and unusual costs associated with the acquisition of BFI. The costs
primarily relate to environmental related matters, litigation liabilities, risk
management liabilities, loss contract provisions, transition costs, the
write-off of deferred costs relating to the acquisition and an impairment loss
to reduce the carrying value of assets held for sale.
Interest Expense, Net. Net interest expense was $654.2 million in 2000 compared
to $227.3 million in 1999, an increase of 187.8%. The increase in 2000 primarily
results from nine months of interest expense on debt incurred and assumed in
connection with the acquisition of BFI as compared to two months in 1999.
Income Taxes. Income taxes reflect a 61.5% effective income tax rate for the
nine months ended September 30, 2000 and (15.6%) for the same period in 1999.
The effective income tax rates in 2000 and 1999 deviate from the federal
statutory rate of 35% primarily due to the non-deductibility of amortization
expense related to approximately $6.5 billion of goodwill recorded in connection
with the acquisition of BFI.
Extraordinary Loss, Net. In September 2000, we repaid the Tranche D term loan
prior to its maturity date. In connection with this repayment, we recognized a
non-cash extraordinary charge for the early extinguishment of the debt of
approximately $11.2 million ($6.8 million net of income tax benefit) related to
the write-off of previously deferred debt issuance costs.
In February 2000, we repaid the asset sale term loan facility prior to its
maturity date. In connection with this repayment, we recognized a non-cash
extraordinary charge for the early extinguishment of the debt of approximately
$10.7 million ($6.5 million net of income tax benefit) related to the write-off
of deferred debt issuance costs.
In July 1999, we repaid our credit facility prior to its maturity date. In
connection with this repayment, we recognized a non-cash extraordinary charge
for the early extinguishment of the debt of approximately $5.3 million ($3.2
million net of income tax benefit) related to the write-off of previously
deferred debt issuance costs.
Cumulative Effect of Change in Accounting Principle, Net. In connection with the
acquisition of BFI, we changed our capitalized interest policy to more
accurately reflect our long-term business strategy. As a result, we recorded a
charge of $64.3 million, net of related tax, during 1999, to reflect the
cumulative effect on prior years of the change in the method of interest
capitalization.
Dividends on Preferred Stock. Dividends on Preferred Stock were $50.8 million in
2000 and $11.2 million for the same period in 1999, which reflects the 6.5%
dividend on the Preferred Stock issued on July 30, 1999 in connection with the
financing of the acquisition of BFI. Dividends were not paid in cash, instead,
the liquidation preference of the Preferred Stock increased by the accrued, but
unpaid dividends.
28
<PAGE>
Liquidity and Capital Resources
Historically, we have satisfied our acquisition, capital expenditure and working
capital needs primarily through bank financing and public offerings and private
placements of debt and equity securities. Between January 1992 and September
2000, we completed total debt financings in excess of $14.3 billion and equity
financings in excess of $1.4 billion, excluding stock issued for consideration
in business combinations.
Due to acquisitions and the capital requirements of our previous business
strategy, we have used amounts in excess of the cash generated from operations
to fund acquisitions and capital expenditures. In the future we anticipate that
cash flow from operations, less acquisitions and capital requirements, will be
sufficient to service our long and short-term debt. However, over the next
several quarters, transition and integration costs associated with the BFI
acquisition may cause us to have negative cash flow from operations or may cause
us to incur additional amounts of debt. Also, for certain acquisitions, current
liabilities are recorded for acquisition related and unusual costs that require
payment in the near term. Current liabilities periodically include scheduled
payments required under our 1999 Credit Facility. In addition, we have acquired
operating equipment using financing leases, which have short, and medium-term
maturities. Also we use excess cash generated from operations to pay down
amounts owed on our revolving line of credit, which is classified as long-term
debt. As a result, we periodically have low levels of working capital or working
capital deficits.
As of September 30, 2000, we had cash and cash equivalents of $112.6 million.
Our capital expenditure and working capital requirements have increased
significantly, reflecting our rapid growth through acquisition and development
of revenue producing assets, and will increase further compared to the year
ended December 31, 1999 as a result of the acquisition of BFI. During 1999, we
acquired solid waste operations, excluding the BFI acquisition, representing
approximately $381.2 million in annual revenues ($332.7 million net of
intercompany eliminations), and sold operations representing approximately
$372.5 million in annual revenues. During the nine months ended September 30,
2000, we acquired operations with annual revenues of $472.6 million ($458.9
million net of intercompany eliminations) for consideration of $840.0 million.
During the nine months ended September 30, 2000, we sold certain assets with
annual revenues of approximately $770.4 million ($636.0 million net of
intercompany eliminations) for consideration of approximately $1,053.5 million.
For the calendar year 2000, we expect to spend approximately $535 million for
capital expenditures, closure and post-closure, and remediation expenditures
relating to our landfill operations. We also expect to spend approximately $300
million for non-recurring integration and transaction costs primarily related to
the acquisition of BFI. The acquisition of additional waste operations would
require additional capital amounts and capital expenditure requirements.
As of September 30, 2000, our debt structure consisted primarily of $4.9 billion
outstanding under the 1999 Credit Facility, $2.0 billion of the 1999 Notes, $1.7
billion of the 1998 Senior Notes and $1.0 billion of debt assumed in connection
with the BFI acquisition. As of September 30, 2000 there is aggregate
availability under the revolving credit facility of the 1999 Credit Facility of
approximately $590 million to be used for working capital, letters of credit,
acquisitions and other general corporate purposes. The indentures relating to
the 1999 Credit Agreement, the 1999 Notes and the 1998 Senior Notes contain
financial and operating covenants and restrictions on our ability to complete
acquisitions, pay dividends, incur indebtedness, make investments and take
certain other corporate actions. A substantial portion of our available cash
will be required to service this indebtedness. For fiscal 2000, our scheduled
debt service is expected to be approximately $1.3 billion consisting of
approximately $371 million in principal repayments (including $250 million paid
in connection with the put on the MVP's which was exercised in January, 2000)
and approximately $900 million in interest payments. These amounts may vary
depending upon changes in interest rates.
29
<PAGE>
We are also required to provide financial assurances to governmental agencies
under applicable environmental regulations relating to our landfill operations
and collection contracts. We satisfy these financial assurance requirements by
issuing performance bonds, letters of credit, insurance policies or trust
deposits as they relate to landfill closure and post-closure costs and
performance under certain collection contracts. At September 30, 2000, we had
outstanding approximately $1.5 billion in financial assurance instruments,
represented by $430.4 million of performance bonds, $977.5 million of insurance
policies, $45.6 million of trust deposits and $32.8 million of letters of
credit. During calendar year 2000, we expect no material increase in financial
assurance obligations relating to our landfill operations and collection
contracts.
Subtitle D and other regulations that apply to the non-hazardous waste disposal
industry have required us, 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 us
to spend sums in addition to those presently reserved for such purposes. These
factors, together with the other factors discussed above, could substantially
increase our operating costs and affect our ability to invest in our facilities.
Our ability to meet future capital expenditure and working capital requirements,
to make scheduled payments of principal, to pay interest, or to refinance our
indebtedness, and to fund capital amounts required for the expansion of the
existing business depends on our future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond our control. On the basis of historical financial
information, including recent operating history of both Allied and BFI, we
believe that available cash flow, together with available borrowings under the
new credit facility, our lease facilities and other sources of liquidity, will
be adequate to meet our anticipated future requirements for working capital,
acquisition related and integration costs, letters of credit, capital
expenditures, scheduled payments of principal and interest on debt incurred
under the new credit facility, the assumed BFI debt, the 1998 Senior Notes, the
1999 Notes and other debt, and capital amounts required for growth. However, we
may have to refinance the principal payment at maturity on the 1998 Senior
Notes, the 1999 Notes and other debt. We cannot assure you that our business
will generate sufficient cash flow from operations, that we will be able to
avail ourselves to future financings in an amount sufficient to enable us to
service our indebtedness or to make necessary capital expenditures, or that any
refinancing would be available on commercially reasonable terms, if at all.
Further, depending on the timing, amount and structure of any possible future
acquisitions and the availability of funds under the new credit facility, we may
need to raise additional capital. We may raise such funds through additional
bank financings or public or private offerings of our debt and equity
securities. We cannot assure you that we will be able to secure such funding, if
necessary, on favorable terms, if at all. If we are not successful in securing
such funding, our ability to pursue our business strategy may be impaired and
results of operations for future periods may be negatively affected. (See Note 4
to Allied's Condensed Consolidated Financial Statements).
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Significant Financing Events
In July 1999, in connection with the completion of the acquisition of BFI, we
entered into new financing arrangements and repaid all amounts borrowed under
the then existing credit facility and all amounts borrowed by BFI under its
commercial paper program. The new financing arrangements were (i) the 1999
Credit Facility for Allied Waste North America, Inc. ("Allied NA"; a wholly
owned consolidated subsidiary of Allied), which is guaranteed by us and
substantially all of our subsidiaries (including BFI and its subsidiaries), from
a bank group for $7.1 billion to provide financing for the acquisition of BFI
and working capital for us following the acquisition, (ii) the sale of the $2.0
billion principal amount 1999 Notes by Allied NA which are guaranteed by us and
substantially all of our subsidiaries (including BFI and its subsidiaries), and
(iii) the sale for $1.0 billion of the Preferred Stock. In connection with the
completion of the acquisition of BFI, we also guaranteed certain of BFI's
remaining debt and, for the 1998 Senior Notes and for certain of BFI's remaining
debt, provided collateral (pari passu with the 1999 Credit Facility) consisting
of certain of BFI's assets. Both the 1999 Credit Facility and the 1999 Notes
contain restrictions on Allied's ability to make acquisitions, purchase fixed
assets above certain amounts, pay dividends, incur additional 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
Allied's assets. The 1999 Credit Facility, the 1999 Notes and the Preferred
Stock contain provisions, which could require repayment, in some cases at a
premium upon a defined "change of control". Allied and the Preferred Stock also
contain restrictions on Allied's ability to pay cash dividends on common stock.
New Accounting Standard
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133. This statement amends the
accounting and reporting standards of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, with respect to specific interpretations and
circumstances, and incorporates certain decisions arising from the Derivatives
Implementation Group process.
In June 1999, the implementation date of SFAS No. 133 was deferred one year from
the original date to those fiscal years beginning after June 15, 2000 by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133. SFAS No.'s 133 and 138 require
all derivatives to be recorded as either assets or liabilities and the
instruments to be measured at fair value. Gains or losses resulting from changes
in the values of those derivatives are to be recognized immediately in earnings,
other comprehensive income or deferred, depending on the use of the derivative,
and whether or not it qualifies as a hedge. The statement requires a formal
documentation of hedge designation and assessment of the effectiveness of
transactions that receive hedge accounting. We will adopt SFAS No.'s 133 and 138
by January 1, 2001, as required.
We are in the process of reviewing our contracts to; identify existing
derivative instruments, determine the fair market value of those derivative
instruments, identify and document hedging relationships and determine the
effectiveness of those hedging relationships. We enter into interest rate swap
agreements to lock in the cost of a substantial portion of our floating rate
debt obligations. Additionally, we enter into commodity price swaps to lock in
margins on our sales of recyclable commodities. We believe that these two types
of activities represent our primary transactions to which SFAS No.'s 133 and 138
will be applicable. We expect that both our interest rate and our commodity
price swap agreements will be designated as cash flow hedges, and accordingly,
recorded in other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any ineffectiveness
will be taken to earnings during the period identified. Upon adoption, any
difference between the previous carrying amount, and the fair values upon
adoption, will be reflected as a cumulative effect of change in accounting
principle.
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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 report, are
Forward Looking Statements. Although we believe that the expectations reflected
in such Forward Looking Statements are reasonable, we can give no assurance that
such expectations will prove to be 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, including whether and when the
acquisitions will be accretive to earnings, made by or to be made by us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results and the underlying
assumptions including internal growth as well as general economic and financial
market conditions. All phases of our operations are subject to a number of
uncertainties, risks and other influences, many of which are outside of our
control and any one of which, or a combination of which, could materially affect
the results of our operations and whether Forward Looking Statements made by us
ultimately prove to be accurate. Such important factors ("Important Factors")
that could cause actual results to differ materially from our expectations are
disclosed in this section and elsewhere in this report. All subsequent written
and oral Forward Looking Statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the Important Factors
described below that could cause actual results to differ from our expectations.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating Forward Looking Statements and are cautioned not to place
undue reliance on these Forward Looking Statements. The forward-looking
statements made herein are only made as of the date of this filing and we
undertake no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on our operations.
Consistent with industry practice, most of our contracts provide for a pass
through of certain costs, including increases in landfill tipping fees and, in
some cases, fuel costs. We therefore believe we should be able to implement
price increases sufficient to offset most cost increases resulting from
inflation. However, competitive factors may require us to absorb cost increases
resulting from inflation. We are unable to determine the future impact of a
sustained economic slowdown.
Seasonality
We believe that our collection, transfer 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.
Quantitative and Qualitative Disclosures About Market Risk.
See Note 6 "Long-term Debt" to the Consolidated Financial Statements for the
year ended December 31, 1999 in our Annual Report on Form 10-K.
32
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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 No. Description
----------- -----------
10 * Executive Employment Agreement between the Company and with Thomas W.
Ryan dated August 1, 2000.
27 * Financial Data Schedule for the nine months ended September 30, 2000.
(b) Reports on Form 8-K during the Quarter Ended September 30, 2000 --
August 3, 2000 Our Current Report on Form 8-K reports the financial results for
the second quarter of 2000.
* Filed herewith
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Signatures
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/ THOMAS W. RYAN
---------------------------------------------------------------
Thomas W. Ryan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ PETER S. HATHAWAY
---------------------------------------------------------------
Peter S. Hathaway
Senior Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)
Date: November 14, 2000
34
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EXHIBIT INDEX
Exhibit No. Description
----------- ------------
10 * Executive Employment Agreement between the Company and with Thomas W.
Ryan dated August 1, 2000.
27 * Financial Data Schedule for the nine months ended September 30, 2000.
* Filed herewith
35
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