FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-28652
AMERICAN DISPOSAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3858494
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
745 McClintock Drive
Suite 405
Burr Ridge, Illinois 60521
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(630) 655-1105
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|_|
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 26, 1997: $76,341,000
Number of shares of Common Stock outstanding as of March 26, 1997: 8,872,501
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
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TABLE OF CONTENTS
Item No. Page
PART I.......................................................................3
1. BUSINESS.........................................................3
2. PROPERTIES......................................................22
3. LEGAL PROCEEDINGS ..............................................22
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.........................................................22
PART II.....................................................................23
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.....................................23
6. SELECTED CONSOLIDATED FINANCIAL DATA............................24
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................25
8. FINANCIAL STATEMENTS............................................32
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................50
PART III....................................................................51
PART IV.....................................................................52
14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON
FORM 8-K........................................................52
SIGNATURES..................................................................53
EXHIBIT INDEX...............................................................54
<PAGE>
PART I
ITEM 1. BUSINESS
General
American Disposal Services, Inc. (the "Company") is a regional,
integrated, non-hazardous solid waste services company that provides solid waste
collection, transfer and disposal services primarily in the Midwest and in the
Northeast. As of March 15, 1997, the Company owns five solid waste landfills and
owns, operates or has exclusive contracts to receive waste from 12 transfer
stations. The Company's landfills and transfer stations are supported by its
collection operations which, as of March 15, 1997, serve over 132,000
residential, commercial and industrial customers.
The Company began its operations in the Midwest and currently has
operations in Arkansas, Illinois, Kansas, Massachusetts, Missouri, Ohio,
Oklahoma, Pennsylvania and Rhode Island. The Company's principal growth strategy
is to identify and acquire solid waste landfills located in markets that are
within approximately 125 miles of significant metropolitan centers and to secure
dedicated waste streams for such landfills by acquisition or development of
transfer stations and acquisition of collection companies. From January 1993
through March 15, 1997, the Company has acquired 36 solid waste businesses,
including four solid waste landfills and 32 solid waste collection companies.
The Company's operating program generally involves a four-step process:
(i) acquiring solid waste landfills in its target markets; (ii) securing captive
waste streams for its landfills through the acquisition or development of
transfer stations serving those markets, through acquisitions of collection
companies and by entering into long-term contracts directly with customers or
collection companies; (iii) making "tuck-in" acquisitions of collection
companies to further penetrate its target markets; and (iv) integrating these
businesses into the Company's operations to achieve operating efficiencies and
economies of scale. As part of its acquisition program, the Company has, and in
the future may, as specific opportunities arise, evaluate and pursue
acquisitions in the solid waste collection and disposal industry that do not
strictly conform to the Company's four-step operating program.
The implementation of the Company's operating program is substantially
complete in its Missouri and Ohio regions. In the Missouri region (which also
includes Arkansas, Kansas and Oklahoma), the Company has acquired one landfill
and 15 collection companies and has acquired, developed or secured exclusive
contracts for five transfer stations. In the Ohio region, the Company has
completed the acquisition of one landfill and 11 collection companies and has
acquired, developed or secured exclusive contracts with four transfer stations.
The Company is in the second phase of its operating program in the Illinois,
western Pennsylvania and Rhode Island regions.
The Company's operating strategy emphasizes the integration of its solid
waste collection and disposal operations and the internalization of waste
collected. One of the Company's goals is for its captive waste streams (which
include the Company's collection operations and third-party haulers operating
under long-term collection contracts) to provide in excess of 50% of the volume
of solid waste disposed of at each of its landfills. During the year ended
December 31, 1996, the Company's captive waste constituted an average of
approximately 61% of the solid waste disposed of at its landfills.
American Disposal Services, Inc. was incorporated in the State of Delaware
in November 1995. The Company is the sole stockholder of ADS, Inc. ("ADS") an
Oklahoma corporation that was formed in January 1991, and County Disposal, Inc.
("CDI"), a Delaware corporation that was formed in April 1995. The Company
acquired all the shares of the common stock of ADS and CDI, effective as of
January 1, 1996, in exchange for which the previous stockholders of ADS and CDI
received shares of the Company's Common Stock (the "Exchange"). As part of the
Exchange, all options and warrants that had previously been granted by ADS and
CDI were cancelled in exchange for options and warrants granted by the Company.
In addition, effective as of May 31, 1996, the Company completed a 13.5-for-1
stock split of the Company's Common Stock (the "Stock Split"; together with the
Exchange, the "Restructuring").
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In January 1993, affiliates of Charterhouse Group International, Inc.
("Charterhouse") acquired a majority interest in ADS, the primary asset of which
was the Pittsburgh County landfill near McAlester, Oklahoma. In connection with
the Charterhouse investment, ADS recruited the Company's President in January
1993, and assembled the balance of the Company's senior management team from
1993 to the present. As a result of the management team's substantial experience
in the solid waste industry and the financial expertise and capital provided by
Charterhouse, the Company was able to finance its acquisition-based growth
strategy, which from the outset focused primarily on the identification and
acquisition of solid waste landfills located in secondary markets. Using this
strategy, CDI acquired three landfills in Illinois, Ohio and Pennsylvania in
1995 (the "CDI Acquisition").
Unless otherwise noted, all descriptions of the Company's business in this
Annual Report on Form 10-K are as of March 15, 1997.
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth under Item 1, "Business - Risk
Factors," together with other factors that appear with the forward-looking
statements, or in the Company's other Securities and Exchange Commission
filings, could affect the Company's actual results and could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company in this Annual Report on Form
10-K.
Industry Background
In the United States, landfilling is at present the most common means of
disposing of non-hazardous municipal solid waste ("MSW"), which consists
primarily of refuse and garbage from households and commercial establishments.
In addition, landfilling is one of the means of disposing of certain special
waste. Special waste, some types of which may require special handling, consists
of all waste not regulated as hazardous waste under federal or state laws other
than MSW and may include asbestos, petroleum contaminated soil, incinerator ash,
foundry sands and sewage and industrial sludges.
In October 1991, the EPA adopted the Subtitle D Regulations, which
generally became effective on October 9, 1993 (except for certain MSW landfills
accepting less than 100 tons per day, as to which the effective date was April
9, 1994, and new financial assurance requirements, which are scheduled to become
effective April 9, 1997). The Subtitle D Regulations specify design, siting,
operating, monitoring, closure and financial requirements for landfill
operations and, among other things, require upgraded or new composite landfill
liners, leachate collection and treatment, groundwater and methane gas
monitoring, stricter siting and locational criteria, closure and extended
post-closure requirements and financial assurances (such as a surety bond) that
the owner or operator can meet certain of these obligations. Each state is
required to revise its applicable solid waste regulations or programs to meet
the requirements of the Subtitle D Regulations or such requirements
automatically will be imposed by the EPA. Many states have already adopted
regulations or programs as stringent as, or more stringent than, the Subtitle D
Regulations, including all of those in which the Company's landfills are
located.
The Company believes that in recent years there has been a trend towards
consolidation of landfill ownership and that a similar trend is emerging in the
solid waste collection industry, which historically has been characterized by
numerous small companies. The Company believes that these trends will continue
and are the result of several factors:
o The Subtitle D Regulations and related state regulations and programs
have significantly increased the amount of capital and the technical
expertise required in order to own and operate a landfill. As a
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result, many landfill operators that lack the required capital or
expertise are electing to sell their landfills, as an alternative to
closing them.
o A number of municipalities are electing to privatize the operations of
their municipal landfills as an alternative to funding the changes to
these landfills that are required in order to comply with the Subtitle
D Regulations and related state regulations and programs.
o As a result of heightened sensitivity to environmental concerns by
many communities, it is becoming increasingly desirable in many
markets for collection companies to provide waste reuse and reduction
programs, such as recycling and composting, in addition to
conventional waste collection services. This development, as well as
more stringent bonding requirements being imposed on waste collection
companies by various municipalities, have increased the amount of
capital generally required for waste collection operations, causing
private collection companies that lack the requisite capital to sell
their operations to better capitalized companies.
Strategy
The Company's objective is to build a large regional fully-integrated
solid waste services company with an established market presence in secondary
markets. The Company's strategy for achieving this objective is to establish a
market presence generally anchored by its landfills; to increase volume in its
markets through "tuck-in" acquisitions of collection companies and marketing to
new customers; to provide a high level of customer service; to implement
selective price increases; and to continue to implement strict cost controls and
reduce corporate overhead as a percentage of revenues. There can be no
assurance, however, that the Company will be successful in the execution of its
strategy.
The Company targets acquisitions in geographic areas characterized by one
or more of the following criteria: (i) the availability of permitted and
underutilized landfill capacity located outside of, but within 125 miles of, a
significant metropolitan center; (ii) the absence of a dominant competitor in
the area which would preclude the Company from implementing its business
strategy; (iii) anticipated economic and population growth; and (iv) near or
medium-term scheduled closures of competing landfills.
The Company has adopted the following four-step operating program in
executing its business strategy:
1. Landfill Acquisitions. Once the Company identifies an area that
qualifies under its target market criteria, the Company seeks to establish
a market presence, generally by acquiring one or more landfills in that
area that can be accessed economically from the metropolitan center or
from the regional market area, either through direct hauling or through
strategically located transfer stations. In evaluating a landfill
acquisition, the Company considers, among others, the following factors:
(i) current disposal costs together with transportation costs to the
targeted landfill relative to transportation and disposal costs of
potential competitors; (ii) expected landfill life; (iii) opportunities
for landfill expansion; and (iv) projected short-term ability to secure a
minimum of 500 tons per day of disposal volume.
2. Secure Captive Waste Volumes. After the Company has acquired a
landfill, it seeks to build a market presence and increase the utilization
of the landfill by securing captive waste streams, which includes
developing and acquiring transfer stations, entering into waste collection
contracts and acquiring waste collection companies. Generally, the Company
pursues the acquisition of collection companies that: (i) have
well-established residential or commercial collection routes and accounts;
(ii) own and operate transfer stations; or (iii) do not own landfills and
are vulnerable to volatile disposal pricing, which the Company believes it
can minimize through landfill ownership.
3. "Tuck-in" Acquisitions. The Company acquires service rights,
obligations, machinery and equipment in "tuck-in" acquisitions of
collection companies to: (i) increase the waste stream directed to its
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landfills; (ii) maximize its market presence; and (iii) take advantage of
economies of scale which should increase earnings and return on capital.
4. Integration and Expansion of Operations. Immediately upon closing
any acquisition, the Company integrates the acquired company into its
operations by: (i) instituting strict cost control procedures; (ii)
consolidating and rationalizing collection routes and pricing; (iii)
implementing Company operating policies and procedures (including programs
designed to improve employee productivity and equipment utilization); (iv)
establishing a sales and marketing force; and (v) converting the acquired
company to the Company's accounting, data processing and management
reporting systems. During the transition period following acquisitions, the
Company retains the management of certain companies it acquires in order to
benefit from management's local operating knowledge and the goodwill it has
developed. Additionally, on a selective basis, the Company seeks to expand
the capacity of its landfills to accommodate increasing waste volumes and
improve profitability.
In addition, the Company may, as specific opportunities arise, evaluate
and pursue acquisitions in the solid waste collection and disposal industry that
do not strictly conform to the Company's four-step operating program.
Acquisition Program
In January 1993, representatives of Charterhouse and the Company's
management formulated an acquisition-based growth strategy to establish a large
regional fully-integrated solid waste management services company. To execute
its strategy, affiliates of Charterhouse acquired a majority interest in ADS,
which owned one landfill in Oklahoma, and began assembling a senior management
team. Using ADS as a platform for this strategy, the Company has increased the
number of landfills it owns from one to five and has completed 36 acquisitions
of solid waste companies since January 1993.
The Company has assembled an experienced acquisition team comprised of
operations, environmental, engineering, legal, financial and accounting
personnel, each engaged in identifying and evaluating acquisition opportunities
in order to execute its operating program. The Company has established
pre-acquisition review procedures for acquisition candidates, including legal,
financial, engineering, operational and environmental reviews. The environmental
review includes, where appropriate, investigation of geologic, hydrogeologic and
other site conditions, past and current operations (including types of waste
deposited), design and construction records, permits, regulatory compliance
history, regulatory agency records and available soil sampling, groundwater and
air monitoring results. The Company uses regional managers to assist in the
acquisition process by identifying suitable candidates and performing
pre-acquisition review and evaluation tasks.
In considering whether to proceed with an acquisition, in addition to
determining whether the candidate meets the Company's criteria described above,
the Company evaluates a number of factors, including: (i) the acquisition
candidate's historical and projected financial results; (ii) any expected
synergies with one or more of the Company's existing operations; (iii) the
proposed purchase price and the Company's expected resultant internal rate of
return on investment and the expected impact on the Company's earnings per
share; (iv) whether the candidate will enhance the Company's ability to effect
other acquisitions in the vicinity; (v) the candidate's customer service
reputation and relationships with the local communities; (vi) the composition
and size of the candidate's customer base; (vii) the types of services provided
by the candidate; and (viii) whether the candidate has definable and
controllable liabilities, including potential environmental liabilities. The
Company believes that significant opportunities exist to acquire new landfills
and to develop its existing markets, and reviews acquisition opportunities on an
ongoing basis.
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Completed Acquisitions
The Company has completed 36 acquisitions of solid waste companies since
January 1993, which are summarized in the table below.
Company Business Principal Location Date Acquired
- ------- -------- ------------------ -------------
Missouri Region:
Wheatland Landfill Scammon, KS January 1993
Pittsburgh Sanitation Collection Pittsburgh, KS January 1993
Ozark Sanitation Collection Carthage, MO January 1993
Trashmaster Collection Joplin, MO January 1993
A-1 Trash Service Collection Verona/Aurora, MO April 1993
Tate's Transfer Transfer Station Verona/Aurora, MO April 1993
Renfro Sanitation Collection Branson, MO June 1993
B&B Trash Collection Pittsburgh, KS July 1993
B&B Refuse Collection Neosho, MO December 1993
Apex Sanitation Collection Grove, OK and December 1993
Green Forest, AR
Epps Sanitation Collection Branson, MO December 1993
Cummings Sanitation Collection Nixa, MO May 1994
Light Hauling Collection Branson, MO August 1994
Poole's Sanitation Collection Bentonville, AR August 1994
Southwest Waste Collection Springfield, MO July 1996
Nesvold Sanitation Collection Seneca, MO December 1996
Sparky's Waste Control Collection Springfield, MO January 1997
Ohio Region:
Wyandot Landfill Upper Sandusky, OH August 1995
Environmental Transportation
and Management Collection Findlay, OH May 1996
R&R Waste Disposal Collection Findlay, OH May 1996
Jerry's Rubbish Collection Findlay, OH June 1996
Seneca Disposal Collection Tiffin, OH June 1996
Ross Bros. Waste & Recycling Collection and Mt. Vernon, OH September 1996
Transfer Station
Cargo Services Collection Mt. Gilead, OH December 1996
Rumpke Waste, Inc. (routes) Collection Fostoria, OH December 1996
Bowers-Phase II, Inc. Collection and Vickery, OH December 1996
Transfer Station
D&L Hauling Collection Findlay, OH October 1996
Rutledge Trucking Collection Delaware, OH November 1996
Morrow Sanitary Company Collection Mt. Gilead, OH November 1996
Illinois Region:
Livingston Landfill Pontiac, IL November 1995
Western Pennsylvania Region:
Clarion Landfill and Leeper, PA June 1995
Collection
Allied Waste Systems, Inc. Collection Youngstown, OH February 1997
Mauthe Sanitation Collection Strattanville, PA March 1996
Rhode Island Region:
T&J Trucking Collection Johnston, RI September 1996
American Disposal Services,
Inc./N.E.E.D. Collection Johnston, RI September 1996
A-1 Container Collection Rehoboth, MA January 1997
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Missouri Region. The Company established a market presence in the
southwest Missouri region in January 1993 with the acquisition of its Wheatland
landfill. The implementation of the Company's operating program is substantially
complete in its Missouri region. Since purchasing the Wheatland landfill, the
Company has acquired one transfer station and independently developed three
transfer stations. The Company also has exclusive contracts to accept waste from
two other transfer stations. Additionally, the Company acquired 15 collection
companies, including the three operations purchased simultaneously with the
Wheatland landfill. The collection operations and transfer stations have been
consolidated into three divisions. The Company has integrated acquired companies
by consolidating and rationalizing routes and pricing, reducing overhead through
consolidating an acquired company's operations, implementing the Company's cost
controls and operating procedures, converting acquired companies to the
Company's management reporting systems and implementing a sales and marketing
team. The Company continues to pursue "tuck-in" acquisitions of collection
companies to increase its per ton margins through internalizing waste streams.
The Company also seeks to expand its operations by taking advantage of the
economic efficiencies provided by its integrated operations and is in the
process of developing another transfer station. Since the acquisition of its
Wheatland landfill, the Company has increased the waste volume at its landfill
by approximately 1,100 tons per day.
Ohio Region. The Company established a market presence in north-central
Ohio in August 1995 with the acquisition of its Wyandot landfill, which is
located within approximately 125 miles of Cleveland, Ohio and within
approximately 75 miles of Toledo and Columbus, Ohio. The implementation of the
Company's operating program is substantially complete in its Ohio region. To
date, the Company has acquired 11 collection companies and has acquired,
developed or secured exclusive contracts with four transfer stations in the Ohio
region. Since the acquisition of the Wyandot landfill, the Company has increased
the waste volume at this landfill by approximately 300 tons per day, primarily
through the acquisition of collection companies, new operating contracts with
two transfer stations and the implementation of a new sales focus. To further
expand its operations, the Company is seeking to increase capacity at the
Wyandot landfill. Prior to the acquisition by the Company, the Wyandot
landfill's waste volume was composed primarily of special waste.
Illinois Region. The Company established a market presence in
north-central Illinois in November 1995 with the acquisition of its Livingston
landfill, which is located approximately 90 miles from downtown Chicago. The
acquisition of the Livingston landfill was attractive to the Company's
management because of the expected closing of two competing landfills (one of
which closed in October 1996) that accepted an aggregate of approximately 15,000
tons per day and the management team's experience with the Chicago market. Since
the acquisition of the Livingston landfill, the Company has increased the waste
volume at this landfill by approximately 3,500 tons per day through intensified
sales and marketing efforts. Approximately 74% of the waste volume at the
Livingston landfill is delivered under long-term contracts.
Western Pennsylvania Region. The Company entered the western Pennsylvania
region in June 1995 with the acquisition of its Clarion landfill and an
affiliated collection company. The Clarion landfill is located within 80 miles
of both Pittsburgh and Erie, Pennsylvania. The Company began the second phase of
its operating program in the western Pennsylvania region in March 1996 by
acquiring a second collection company. Since the acquisition of the Clarion
landfill, the Company has increased deliveries to this landfill by approximately
300 tons per day to the maximum daily limit, primarily through the acquisition
of collection companies. In addition, the Company acquired Allied Waste Systems
in January 1997, a collection company located in Youngstown, Ohio, which
services the western Pennsylvania region. As a result of this acquisition, the
volume of the Company's internalized waste has increased from 30% to 42% in the
western Pennsylvania region.
Rhode Island Region. The Company began operating in the Rhode Island
region in September 1996 with the acquisition of two collection companies. A
third collection company was acquired in January 1997. Although the Company's
initial entry into the Rhode Island region did not strictly conform to its
four-step operating program in that the Company did own a landfill in the
region, the opportunities presented by the Rhode Island region met the Company's
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overall business and operating objectives. Expansion into the Rhode Island
region allows the Company to expand its presence in the Northeast, an
unconsolidated market..
There can be no assurance that the Company will be successful in
implementing its operating program in any of these existing markets or in any
future markets.
Operations
The Company's waste management operations include the ownership and
operation of solid waste landfills, transfer stations and waste collection
services. The Company's landfills are relatively underutilized given their
potential size and the fact that the Company's operating program in a majority
of its markets has not yet been completed. There can be no assurance, however,
that the Company will be successful in executing its operating program. The
Company believes that all of its landfills and transfer stations comply with or
exceed the requirements mandated by the Subtitle D Regulations and the
applicable state regulations. The Company regularly monitors incoming waste at
its landfills to determine if such wastes are in compliance with its permits.
Landfills
The Company currently owns five landfill operations permitted to receive
solid waste. These landfill operations are located in Illinois, Ohio,
Pennsylvania, Kansas and Oklahoma.
Each of the Company's landfill operations is located on land owned by the
Company. The permitted waste streams at each of these landfills include both MSW
and certain special waste (the type of special waste varying from landfill to
landfill). During the year ended December 31, 1996, the Company's captive waste
(including the Company's collection operations and third party haulers operating
under long-term contracts) constituted an average of approximately 61% of the
solid waste disposed of at its landfills.
The table and landfill descriptions below provide certain additional
information, as of March 15, 1997, regarding the five landfill operations that
the Company currently owns and operates.
<TABLE>
<CAPTION>
Approximate Acreage
-------------------- Approximate
Unused Permitted
Landfills Location Total Permitted(1) Airspace(2)
- --------- ------------------- ----- ------------- ----------------
(in millions of
cubic yards)
<S> <C> <C> <C>
Livingston................ Pontiac, IL 556 255(3) 30.0
Wyandot(3)................ Upper Sandusky, OH 344 87 6.2
Clarion................... Leeper, PA 606 60 4.1
Wheatland................. Scammon, KS 68 55 1.3
Pittsburg County(4)....... Pittsburg, OK 76 15 0.4
</TABLE>
- ----------
(1) Permitted acreage, as used in this table and in this Annual Report,
represents the portion of the total acreage on which disposal cells and
supporting facilities have been constructed (including any that may have
been filled or capped) or may be constructed based upon an approval issued
by the state generally authorizing the development or siting of a landfill
on the acreage. Prior to actually constructing and/or operating each new
disposal cell on the permitted acreage, it may be necessary, depending
upon the regulatory requirements of the particular state, for the Company
to obtain additional authorizations with respect to such cell. The portion
of total acreage that is not currently permitted acreage is not currently
available for waste disposal.
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(2) Unused permitted airspace represents in cubic yards the portion of the
permitted acreage that has not yet been used for waste disposal but may be
available for waste disposal after certain approvals are secured and, in
some instances, new disposal cells are constructed. Prior to actually
constructing and/or operating a new disposal area or cell on permitted
acreage, it may be necessary, depending upon the regulatory requirements of
the particular state or locality, for the Company to obtain additional
authorizations.
(3) The Company has applied for a permit to increase the permitted acreage and
permitted cubic airspace at the Wyandot landfill by approximately 98 acres
and approximately 19.1 million cubic yards, respectively.
(4) The Company has applied for a permit to increase the permitted acreage and
permitted cubic airspace at the Pittsburg County landfill by approximately
15 acres and approximately 975,000 cubic yards, respectively.
The Company monitors the available permitted in-place disposal capacity at
each of its landfills on an ongoing basis and evaluates whether to seek to
expand this capacity. In making this evaluation, the Company considers various
factors, including the volume of waste projected to be disposed of at the
landfill, the size of the unpermitted acreage included in the landfill, the
likelihood that the Company will be successful in obtaining the necessary
approvals and permits required for the expansion and the costs that would be
involved in developing the expanded capacity. The Company also considers on an
ongoing basis the extent to which it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams at a particular landfill or to seek other permit
modifications. Set forth below is certain information concerning certain of the
new permits, permit modifications and approvals that the Company is currently
seeking to enable it to expand its disposal capacity. There can be no assurance
that the Company will succeed in obtaining any of such permits, permit
modifications or approvals, or that additional permits, permit modifications or
approvals will not be required or that additional requirements will not be
imposed by regulatory agencies.
Livingston. The Livingston landfill consists of approximately 556 acres,
of which approximately 255 are permitted acres. There are approximately 30
million cubic yards of unused permitted airspace. Previously, cells developed at
the Livingston landfill have been constructed with double composite liner
systems. In September 1996, the Livingston landfill received a permit to
construct cells using a single liner composite system. In February 1997,
Livingston received the significant modification permit from the Illinois
Environmental Protection Agency for a major lateral and vertical expansion and
re-permitting of the site. The significant modification permit includes
authorization to expand the residual waste monofill into a facility capable of
accepting various special wastes and MSW. The net effect of this authorization
increased the permitted acreage by approximately 200 acres to approximately 255
acres and increased the site's available capacity from approximately 6.0 million
cubic yards to an estimated available capacity of approximately 30 million cubic
yards. The Livingston landfill has approximately 14 years of total site life at
current disposal levels.
Wyandot. The Wyandot landfill consists of approximately 344 acres in three
proximate locations, and the Company has an option to purchase up to
approximately 94 adjacent additional acres in the vicinity. Approximately 87 of
the owned acres are permitted, and there are approximately 6.2 million cubic
yards of unused permitted airspace. Cells developed to date at the Wyandot
landfill have been constructed with double composite liner systems. The Company
has applied for a permit from applicable regulatory authorities to use a single
composite liner in constructing new cells, which the Company believes should
reduce cell development costs. The Company has applied for a permit from the
Ohio Environmental Protection Agency to expand its landfill capacity by using
the valley between two of the hills that are currently permitted for waste
disposal, as well as the option acreage. The Company anticipates that if it
exercised its option, obtained the required permits and constructed the
additional landfill areas, the Wyandot landfill would have approximately 50
years of total site life at current disposal levels.
Clarion. The Clarion landfill consists of approximately 606 acres, of which
approximately 60 are permitted acres. There are approximately 4.1 million cubic
yards of unused permitted airspace. Cells developed at the Clarion
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landfill have been, and due to regulatory requirements will continue to be,
constructed with double liner systems. The Clarion landfill has approximately 11
years of total site life at current disposal levels.
Wheatland. The Wheatland landfill consists of approximately 68 acres, and
the Company has an option to purchase up to approximately 800 additional acres
in the vicinity. Approximately 55 of the owned acres are permitted acres and
there are approximately 1.3 million cubic yards of unused permitted airspace.
The Company anticipates that after a planned expansion, the Wheatland landfill
would have approximately eight years of total site life at current disposal
levels (three years if such expansion is not approved by the Cherokee County
Board of Commissioners). In addition, the Company has an option to purchase an
undeveloped parcel in Missouri, which has been granted a permit to develop a
landfill.
Pittsburg County. The Pittsburg County landfill consists of approximately
76 acres, of which approximately 15 are permitted acres. There are approximately
0.4 million cubic yards of unused permitted airspace. The Company applied for a
permit in October 1996 to build a lateral expansion that would increase
permitted capacity to approximately 30 acres. The Company anticipates that after
the planned expansion, the Pittsburgh County landfill would have approximately
25 years of total site life at current disposal levels.
Transfer Stations
The Company has an active program to acquire, develop, own, operate and
contract to receive waste volumes from transfer stations in markets which are
proximate to its operations. The use of transfer stations reduces the Company's
costs associated with the transportation of its collected waste and also
increases the market area served by the Company's landfills. Presently, the
Company owns, operates or has exclusive contracts to receive waste from a total
of 12 transfer stations. In addition, two new transfer stations are under
construction, each of which will replace an existing transfer station.
Missouri Region. The Company owns, operates or has exclusive agreements
with six transfer stations in the Missouri region. In 1993, the Company acquired
its first transfer station in the Missouri region. Concurrently, the Company
entered into exclusive agreements with three municipal transfer stations to
receive their waste at the Company's Wheatland landfill. In 1995, the Company
developed and began operating two additional transfer stations. Currently, the
Company is constructing a transfer station in the region which will replace the
Bentonville, Arkansas transfer station.
Ohio Region. The Company owns, operates or has exclusive agreements with
four transfer stations in the Ohio region. The Company entered into exclusive
contracts in 1995 to receive waste from two transfer stations in its Ohio
region. The Company has recently acquired two transfer stations through its
acquisition of the Ross Bros. Waste & Recycling Company located in Mt. Vernon,
Ohio and Bowers-Phase II, Inc. in Vickery, Ohio. In 1996, the Company applied
for a permit to develop and operate a new transfer station for Marion County,
Ohio. Currently, this transfer station is under construction and when completed
will replace the Marion County transfer station.
Illinois Region. In August 1996, the Company secured additional volume
under an exclusive, long-term agreement with a transfer station in Bloomington,
Illinois.
Collection Operations
The Company collects solid waste from over 132,000 residential, commercial
and industrial customers through its own collection operations and through
brokerage arrangements with other haulers. The Company's collection operations
are conducted generally within a 50-mile radius of either its transfer stations
or landfills, which allows the Company to serve a geographic area within a
radius of approximately 125 miles from its landfills. The Company also contracts
with local generators of solid waste and directs the waste to either its own
landfill or to a third-party landfill or for additional handling at one of its
transfer stations. During the year ended December 31, 1996, the Company's
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captive waste (including the Company's collection operations and third party
haulers operating under long-term contracts) constituted an average of
approximately 61% of the solid waste disposed of at its landfills.
Fees for the Company's commercial and industrial collection services are
determined by such factors as collection frequency, type of equipment and
containers furnished, the type, volume and weight of the waste collected, the
distance to the disposal or processing facility and the cost of disposal or
processing. A majority of the Company's commercial and industrial waste
collection services are performed under contracts. Substantially all of the
Company's municipal solid waste collection services are performed under
contracts with municipalities. These contracts grant the Company exclusive
rights to service all or a portion of the residential homes in a specified
community or provide a central repository for residential waste drop-off. The
Company had 49 municipal contracts in place as of March 15, 1997. Municipal
contracts in the Company's market areas are typically awarded, at least
initially, on a competitive bid basis and usually range in duration from one to
five years. Fees are based primarily on the frequency and type of service, the
distance to the disposal or processing facility and the cost of disposal or
processing. Municipal collection fees are usually paid either by the
municipalities from tax revenues or through direct service charges to the
residents receiving the service. The Company also provides subscription
residential collection services directly to households.
Sales and Marketing
The Company has a coordinated marketing strategy which is formulated at
the corporate level and implemented at the regional level to achieve its desired
mix of MSW and special waste in each of its regions. For example, certain
employees of the Company in its Illinois, Ohio and western Pennsylvania regions
focus on securing special waste generated by industrial customers. In addition
to competitive pricing, the Company's marketing strategy emphasizes quality
service particularly with respect to rapid turnaround time at its landfills.
Each manager implements the Company's marketing strategy, which is overseen by
senior management. Depending upon the size of the region and its customer mix,
each manager may focus on commercial, industrial, residential or municipal
accounts to a varying degree. The Company maintains periodic contact with all of
its accounts to increase customer retention. Company salespersons call on
prospective customers in a specified geographic territory.
Since the Company acquires its waste collection operations primarily from
entrepreneurs who generally do not have independent sales forces, the Company
often retains these entrepreneurs during the transition period following the
acquisition of such operations to acquaint the Company's sales force with the
acquired companies' customer base.
The Company has a diverse customer base, with no single customer
accounting for more than 10% of the Company's revenues in 1996. The Company does
not believe that the loss of any single customer would have a material adverse
effect on the Company's results of operation.
Competition
The solid waste collection and disposal business is highly competitive and
requires substantial amounts of capital. The Company competes with numerous
local and regional companies and, in selected areas, with the large national
waste management companies. The industry is led by four national waste
management companies, WMX Technologies, Inc., Browning-Ferris Industries, Inc.,
Allied Waste Industries, Inc. (having completed its acquisition of the solid
waste management operations of Laidlaw Inc.) and USA Waste Services, Inc., and
includes numerous local and regional companies of varying sizes and competitive
resources such as United Waste Systems, Inc., Superior Services, Inc., Eastern
Environmental Services, Inc. and Republic Industries, Inc. The large national
companies, as well as a number of the regional companies, are significantly
larger and have greater financial resources than the Company. The Company also
competes with those counties and municipalities that maintain their own waste
collection and disposal operations. These counties and municipalities may have
financial advantages due to the availability to them of tax revenues and tax
exempt financing. The Company competes primarily by charging competitive prices
and offering quality service. Competitors may reduce the price of their services
in an effort to expand market share or to win competitively bid municipal
contracts.
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The solid waste collection and disposal industry is currently undergoing
significant consolidation, and the Company encounters competition in its efforts
to acquire landfills and collection operations. Accordingly, it may become
uneconomical for the Company to make further acquisitions or the Company may be
unable to locate or acquire suitable acquisition candidates at price levels and
on terms and conditions that the Company considers appropriate, particularly in
markets the Company does not already serve.
Competition in the disposal industry may also be affected by the
increasing national emphasis on recycling and other waste reduction programs,
which may reduce the volume of waste deposited in landfills.
Liability Insurance and Bonding
The Company carries a broad range of insurance for the protection of its
assets and operations that it believes is customary to the waste management
industry, including pollution liability coverage. Specifically, each of the
Company's five landfills has pollution liability coverage of $10.0 million per
occurrence or $10.0 million in the aggregate subject to a $10,000 deductible.
Nevertheless, if the Company were to incur liability for environmental damage
which exceeds coverage limits or is not covered by insurance, its business,
financial condition and results of operations could be materially adversely
affected.
The Company is required to post a performance bond or a bank letter of
credit or to provide other forms of financial assurance in connection with
closure and post-closure obligations with respect to landfills and its other
solid waste management operations and may be required to provide such financial
assurance in connection with municipal residential collection contracts. As of
December 31, 1996, the Company had outstanding approximately $15.7 million of
performance bonds. If the Company were unable to obtain surety bonds or letters
of credit in sufficient amounts, or to provide other required forms of financial
assurance, it would be unable to remain in compliance with the Subtitle D
Regulations or comparable state requirements and, among other things, might be
precluded from entering into certain municipal collection contracts and
obtaining or holding landfill operating permits.
Employees
At March 15, 1997, the Company employed approximately 490 employees, 63 of
whom were managers or professionals, 352 of whom were hourly paid employees
involved in collection, transfer and disposal operations, and 75 of whom were
sales, clerical, data processing or other administrative employees. None of the
Company's employees is represented by unions, and the Company has no knowledge
of any organizational efforts among its employees. The Company believes that its
relations with its employees are good.
Environmental Regulations
The Company is subject to extensive and evolving environmental laws and
regulations that have been enacted in response to technological advances and
increased concern over environmental issues. These regulations are administered
by the EPA and various other federal, state and local environmental,
transportation, health and safety agencies. The Company believes that there will
continue to be increased regulation, legislation and regulatory enforcement
actions related to the solid waste management, collection and disposal industry.
In light of these developments, the Company attempts to anticipate future
regulatory requirements that might be imposed and plans accordingly to remain in
compliance with the regulatory framework.
In order to develop and operate a landfill, transfer station or other
solid waste management facility, the Company typically must go through several
governmental review processes and obtain one or more permits and often zoning or
other land use approvals. These permits and zoning or land use approvals are
difficult and time consuming to obtain or to secure renewal of and sometimes are
opposed by various local elected officials and citizens' groups. Once obtained,
operating permits generally must be periodically renewed and are subject to
modification and revocation by the issuing agency.
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The Company's operation of solid waste management facilities subject it to
certain operational, monitoring, site maintenance, closure and post-closure and
financial assurance obligations which change from time to time and which could
give rise to increased capital expenditures and operating costs. In connection
with the Company's acquisition of existing landfills, it is often necessary to
expend considerable time, effort and money in complying with the governmental
review and permitting process necessary to maintain or increase the capacity of
these landfills. Governmental authorities have the power to enforce compliance
with these laws and regulations and to obtain injunctions or impose civil or
criminal penalties in the case of violations. During the ordinary course of its
landfill operations, the Company has from time to time received citations or
notices from such authorities that such operations are not in compliance with
certain applicable environmental laws and regulations. Upon receipt of such
citations or notices, the Company generally works with the authorities in an
attempt to resolve the issues raised by such citations or notices. Failure to
correct the problems to the satisfaction of the authorities could lead to
curtailed operations or even closure of a landfill.
In order to transport solid waste, it is generally necessary for the
Company to possess one or more permits and approvals from state or local
agencies. These permits must also be periodically renewed and are subject to
modification and revocation by the issuing agency. In addition, the Company's
waste transportation operations are subject to evolving law and regulations that
impose operational, monitoring, training and safety requirements. The Company
believes that its operations are in substantial conformity with its permits.
The principal federal, state and local statutes and regulations applicable
to the Company's operations are as follows:
The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA
regulates the generation, treatment, storage, handling, transportation and
disposal of solid waste and requires states to develop programs to insure the
safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and non-hazardous. Wastes are generally classified as hazardous wastes
if they: (i) either (a) are specifically included on a list of hazardous wastes
or (b) exhibit certain hazardous characteristics; and (ii) are not specifically
designated as non-hazardous. Wastes classified as hazardous under RCRA are
subject to much stricter regulation than wastes classified as non-hazardous.
Among the wastes that are specifically designated as non-hazardous waste are
household waste and special wastes. These wastes, which will be accepted at the
Company's landfills, may contain substances that may be as toxic or prone to
cause contamination as some wastes classified and regulated as hazardous.
In October 1991, the EPA adopted the Subtitle D Regulations. These new
regulations became generally effective in October 1993 (except for certain MSW
landfills accepting less than 100 tons per day, as to which the effective date
was April 9, 1994, and new financial assurance requirements, which become
effective April 9, 1997) and include location restrictions, siting criteria,
facility design standards, operating criteria, closure and post-closure
requirements, financial assurance requirements, groundwater monitoring
requirements, groundwater remediation standards and corrective action
requirements. In addition, these new regulations require that new landfill units
meet more stringent liner design criteria (typically, composite soil and
synthetic liners or two or more synthetic liners) designed to keep leachate out
of groundwater and have extensive collection systems to carry away leachate for
treatment prior to disposal. Groundwater wells must also be installed at
virtually all landfills to monitor groundwater quality. The Company believes
that there is no groundwater contamination at its landfills that is material to
its financial condition. The regulations also require, where threshold test
levels are present, that methane gas generated at landfills be controlled in a
manner that will protect human health and the environment. Each state is
required to revise its landfill regulations to meet these requirements or such
requirements will be automatically imposed upon it by the EPA. Each state is
also required to adopt and implement a permit program or other appropriate
system to ensure that landfills within the state comply with the Subtitle D
criteria. All states in which the Company owns landfills have adopted
regulations or programs as stringent as or more stringent than the Subtitle D
Regulations, which were first proposed by the EPA in August 1988. All states in
which the Company's landfills are located have adopted the required plans and
have submitted them to the EPA for review. Pennsylvania, Oklahoma, Ohio,
Illinois and Kansas have each received full EPA approval for their programs, and
Kansas has received partial approval for its program.
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The Federal Water Pollution Control Act of 1977, as amended (the "Clean
Water Act"). The Clean Water Act establishes rules regulating the discharge of
pollutants from a variety of sources, including solid waste disposal sites, into
waters of the United States. If runoff or collected leachate from the Company's
landfills is discharged into waters of the United States, the Clean Water Act
would require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in such discharge. Also, virtually all landfills are required to
comply with the new federal storm water regulations, which are designed to
prevent possibly contaminated storm water from flowing into surface waters.
These regulations required that applications for stormwater discharge permits be
submitted by October 1992. The Company is working with the appropriate
regulatory agencies to ensure that its facilities are in compliance with Clean
Water Act requirements, particularly as they apply to treatment and discharge of
leachate and storm water. The Company has secured or has applied for the
required discharge permits under the Clean Water Act or comparable
state-delegated programs. In those instances where the Company's applications
for discharge permits are pending and a final discharge permit has not been
issued, the Company is substantially in compliance with applicable substantive
standards set by the respective states in administering the Clean Water Act. To
ensure compliance with the Clean Water Act pretreatment and discharge
requirements, the Company has arranged to discharge its effluent to municipal
wastewater treatment facilities, except at the Pittsburgh County landfill, where
the state regulatory agency has allowed recirculation of the Company's leachate
to a lined area of the landfill.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA"). CERCLA established a regulatory and remedial program
intended to provide for the investigation and cleanup of facilities from which
there has been, or is threatened, a release of any hazardous substance into the
environment. CERCLA's primary mechanism for remedying such problems is to impose
strict joint and several liability for cleanup of facilities on current owners
and operators of the site, former owners and operators of the site at the time
of the disposal of the hazardous substances, as well as the generators of the
hazardous substances and the transporters who arranged for disposal or
transportation of the hazardous substances. The costs of CERCLA investigation
and cleanup can be very substantial. Liability under CERCLA does not depend upon
the existence or disposal of "hazardous waste" but can also be founded upon the
existence of even very small amounts of the many hundreds of "hazardous
substances" listed by the EPA, many of which can be found in household waste. If
the Company were to be found to be a responsible party for a CERCLA cleanup,
either at one of the Company's owned or operated facilities, or at a site where
waste transported by the Company has been stored or disposed of, the Company
could be held completely responsible for all investigative and remedial costs
even if others may also be liable. CERCLA also authorizes the imposition of a
lien in favor of the United States upon all real property subject to or affected
by a remedial action for all costs for which a party is liable. The Company's
ability to obtain reimbursement from others for their allocable share of such
costs would be limited by the Company's ability to find other responsible
parties and prove the extent of their responsibility and by the financial
resources of such other parties. In the past, legislation has been introduced in
Congress to limit the liability of municipalities and others under CERCLA as
generators and transporters of municipal solid waste. Although such legislation
has not been enacted, if it were to pass it would limit the Company's ability to
seek full contribution from municipalities for CERCLA cleanup costs even if the
hazardous substances that were released and caused the need for cleanup at one
of the Company's facilities were generated by or transported to the facility by
a municipality.
Continued funding for implementation of RCRA, the Clean Water Act and
CERCLA is scheduled for reauthorization by Congress this year. Depending upon
whether and how Congress acts, it is possible that each of these laws may be
changed in ways that may significantly affect the Company's business.
The Clean Air Act. The Clean Air Act, including the 1990 amendments,
provides for regulation, through state implementation of federal requirements,
of the emission of air pollutants from certain landfills based upon the date of
the landfill construction and volume per year of emissions of regulated
pollutants. The EPA has recently promulgated new source performance standards
regulating air emissions of certain regulated pollutants (methane and
non-methane organic compounds) from municipal solid waste landfills. The EPA has
also issued regulations controlling the emissions of particular regulated air
pollutants from municipal solid waste landfills. Landfills located in areas
designated as having
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air pollution problems may be subject to even more extensive air pollution
controls and emission limitations. In addition, the EPA has issued standards
regulating the disposal of asbestos-containing materials.
Each of the federal statutes described above contains provisions
authorizing, under certain circumstances, the bringing of lawsuits by private
citizens to enforce the provisions of the statutes.
The Occupational Safety and Health Act of 1970 ("OSHA"). OSHA establishes
employer responsibilities and authorizes the promulgation by the Occupational
Safety and Health Administration of occupational health and safety standards,
including the obligation to maintain a workplace free of recognized hazards
likely to cause death or serious injury, to comply with adopted worker
protection standards, to maintain certain records, to provide workers with
required disclosures and to implement certain health and safety training
programs. Various of those promulgated standards may apply to the Company's
operations, including those standards concerning notices of hazards, safety in
excavation and demolition work, the handling of asbestos and asbestos-containing
materials, and worker training and emergency response programs. The Company's
employees are trained to respond appropriately in the event there is an
accidental spill or release of packaged asbestos-containing materials or other
regulated substances during transportation or landfill disposal.
State and Local Regulation. Each state in which the Company now operates
or may operate in the future has laws and regulations governing the generation,
storage, treatment, handling, transportation and disposal of solid waste, water
and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. In addition, many states have adopted "Superfund" statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting
Company operations. These include zoning and health measures that limit solid
waste management activities to specified sites or activities, flow control
provisions that direct the delivery of solid wastes to specific facilities, laws
that grant the right to establish franchises for collection services and then
put out for bid for the right to provide collection services, and bans or other
restrictions on the movement of solid wastes into a municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on the importation of out-of-state
waste have not withstood judicial challenge. However, from time to time federal
legislation is proposed which would allow individual states to prohibit the
disposal of out-of-state waste or to limit the amount of out-of-state waste that
could be imported for disposal and would require states, under certain
circumstances, to reduce the amounts of waste exported to other states. Although
such legislation has not been passed by Congress yet, if this or similar
legislation is enacted, states in which the Company operates landfills could act
to limit or prohibit the importation of out-of-state waste. Such state actions
could materially adversely affect landfills within those states that receive a
significant portion of waste originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various considerations.
In addition, the aforementioned proposed federal legislation, if adopted, could
allow states and localities to impose certain flow control restrictions. These
restrictions could result in the volume of waste going to landfills being
reduced in certain areas, which may materially adversely affect the Company's
ability to operate its landfills at their full capacity and/or affect the prices
that can be charged for landfill disposal services. These restrictions may also
result in higher disposal costs for the Company's collection operations. If the
Company were unable to pass
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such higher costs through to its customers, the Company's business, financial
condition and results of operations could be materially adversely affected.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
affect the Company's ability to operate its facilities at their full capacity.
Risk Factors
Ability to Manage Growth. The Company's goal is to increase the scale of
its operations significantly through the acquisition of other solid waste
businesses and through internal growth. Consequently, the Company may experience
periods of rapid growth with significantly increased staffing level
requirements. Such growth could place a significant strain on the Company's
management and on its operational, financial and other resources. The Company's
ability to maintain and manage its growth effectively will require it to develop
its management information systems capabilities and improve its operational and
financial systems and controls. Moreover, the Company will need to attract,
train, motivate, retain and manage its senior managers, technical professionals
and other employees. Any failure to expand its management information system
capabilities, to implement and improve its operational and financial systems and
controls or to recruit appropriate additional personnel in an efficient manner
at a pace consistent with the Company's business growth would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Availability of Additional Acquisition Targets; Integration of Future
Acquisitions. The Company's ongoing acquisition program is a key element of its
acquisition-based growth strategy for expanding its solid waste management
services. Consequently, the future growth of the Company depends in large part
upon the successful continuation of this acquisition program. The Company may
encounter substantial competition in its efforts to acquire landfills, transfer
stations and collection companies. There can be no assurance that the Company
will succeed in locating or acquiring appropriate acquisition candidates at
price levels and on terms and conditions that the Company considers appropriate.
In addition, if in the future the Company is successful in acquiring targeted
companies, it will need to integrate these acquired companies into the Company's
operations. There can be no assurance that the Company will successfully
integrate future acquisitions into its operations.
History of Losses and Working Capital Deficits; Integration of Completed
Acquisitions. The Company has recorded net losses to common stockholders of
approximately $2.4 million, $3.7 million and $370,000 during the fiscal years
ended December 31, 1994, 1995 and 1996, respectively, and has had working
capital deficits in the past. The financial position and results of operations
of the Company will depend to a large extent on the Company's ability to
integrate effectively the operations of the companies it has acquired from
January 1993 to date and to realize expected efficiencies and economies of scale
from such acquisitions. There can be no assurance that the Company's efforts to
integrate these operations will be effective, that expected efficiencies and
economies of scale will be realized or that the Company will be able to
consolidate successfully its operations. The failure to achieve any of these
results could have a material adverse effect on the Company's business,
financial condition and results of operations.
Limited Operating History. Following the Exchange, the Company began
operating as a consolidated entity effective as of January 1, 1996. Prior to
1996, the Company's operations were conducted by ADS and CDI, two subsidiaries
of the Company, the operations of which were acquired by the Company's
stockholders in 1993 and 1995, respectively. Accordingly, the Company has a
limited history of operating as a consolidated entity and may experience
difficulties as it integrates the operations of its subsidiaries.
Significant Leverage. Historically, the Company has incurred significant
debt obligations in connection with financing its acquisitions and business
growth. The Company presently has a $125 million revolving credit and term loan
facility with ING (U.S.) Capital Corporation, as administrative agent, and
Morgan Guaranty Trust Company of
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New York, as documentation agent (the "Credit Facility"). As of December 31,
1996, the Company's consolidated indebtedness was $68.0 million, its
consolidated total assets were $145.0 million and its stockholders' equity was
$58.1 million. The Company's ability to meet its debt service obligations will
depend upon its future performance, which, in turn, will be subject to general
economic conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond the Company's control. If
the Company fails to generate sufficient cash flow to repay its debt, the
Company may be required to refinance all or a portion of its existing debt or to
obtain additional financing. There can be no assurance that such refinancing or
any additional financing could be obtained on terms favorable to the Company or
at all.
Highly Competitive Industry. The solid waste collection and disposal
business is highly competitive and requires substantial amounts of capital. The
Company competes with numerous solid waste management companies, many of which
are significantly larger and have greater financial resources than the Company.
The Company also competes with those counties, municipalities and solid waste
districts that maintain their own waste collection and disposal operations.
These counties, municipalities and solid waste districts may have financial
advantages due to the availability to them of user fees, charges or tax revenues
and the greater availability to them of tax-exempt financing. In addition,
competitors may reduce the price of their services in an effort to expand market
share or to win competitively bid municipal contracts. There can be no assurance
that the Company will be able to compete successfully.
Funding of Future Capital Requirements. The Company's acquisition-based
growth strategy has resulted in a steady increase in its capital requirements,
and such increase may continue in the future as the Company pursues its
strategy. The Company has incurred working capital deficits in the past, and
there can be no assurance that its available working capital will be sufficient
in the future as it pursues its growth strategy. To the extent that internally
generated cash and cash available under the Credit Facility are not sufficient
to provide the cash required for future operations, capital expenditures,
acquisitions, debt repayment obligations and financial assurance obligations,
the Company will require additional equity or debt financing in order to provide
such cash. There can be no assurance, however, that such financing will be
available or, if available, will be on terms satisfactory to the Company. Where
appropriate, the Company may seek to minimize the use of cash to finance its
acquisitions by using capital stock, assumption of indebtedness or notes.
However, there can be no assurance the owners of the businesses the Company may
wish to acquire will be willing to accept non-cash consideration in whole or in
part.
Dependence on Third Party Collection Operations. A portion of the solid
waste delivered to the Company's landfills is delivered by third party
collection companies under informal arrangements or without long-term contracts.
If these third parties discontinued their arrangements with the Company and if
the Company were unable to replace these third party arrangements without
incurring significant additional costs, the Company's business, financial
condition and results of operations might be materially adversely affected.
Limitations on Internal Expansion. The Company's operating program depends
on its ability to expand and develop its landfills, transfer stations and
collection operations. The process of obtaining required permits and approvals
to operate or expand solid waste management facilities, including landfills and
transfer stations, has become increasingly difficult and expensive, often taking
several years, requiring numerous hearings and compliance with zoning,
environmental and other regulatory requirements and often being subject to
resistance from citizen or other groups. There can be no assurance that the
Company will be successful in obtaining the permits it requires or that such
permits will not contain onerous terms and conditions. An inability to receive
such permits and approvals could have a material adverse effect on the Company's
business, financial condition and results of operations. In some areas, suitable
land may be unavailable for new landfill sites. There can be no assurance that
the Company will be successful in obtaining new landfill sites or expanding the
permitted capacity of its current landfills once its landfill capacity has been
consumed. In such event, the Company could be forced to dispose of collected
waste at landfills operated by its competitors, which could have a material
adverse effect on the Company's landfill revenues and collection expenses.
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Extensive Environmental and Land Use Laws and Regulations. The Company is
subject to extensive and evolving environmental and land use laws and
regulations, which have become increasingly stringent in recent years as a
result of greater public interest in protecting and cleaning up the environment.
These laws and regulations affect the Company's business in many ways, including
as set forth below.
Extensive Permitting Requirements. In order to develop and operate a
landfill or other solid waste management facility, it is necessary to obtain and
maintain in effect one or more facility permits and other governmental
approvals, including those related to zoning, environmental and land use. In
addition, the Company may be required to obtain similar permits and approvals in
order to expand its existing landfill and solid waste management operations.
These permits and approvals are difficult and time consuming to obtain and are
frequently subject to community opposition, opposition by various local elected
officials or citizens and other uncertainties. In addition, after an operating
permit for a landfill or other facility is obtained, the permit may be subject
to modification or revocation by the issuing agency, and it may be necessary to
obtain periodically a renewal of the permit, which may reopen opportunities for
opposition to the permit. Moreover, from time to time, regulatory agencies may
delay the review or grant of these required permits or approvals or may modify
the procedures or increase the stringency of the standards applicable to its
review or grant of such permits or approvals. In addition, the Company may not
be able to ensure that its landfill operations are included and remain in the
solid waste management plan of the state or county in which such operations are
conducted. The Company may also have difficulty obtaining host agreements with
counties or local communities, or existing host communities may demand
modifications of existing host agreements in connection with planned expansions,
either of which could adversely affect the Company's operations and increase the
Company's costs and reduce its margins. There can be no assurance that the
Company will be successful in obtaining and maintaining in effect the permits
and approvals required for the successful operation and growth of its business,
including permits or approvals required for planned landfill expansions, and the
failure by the Company to obtain or maintain in effect a permit significant to
its business could materially adversely affect the Company's business, financial
condition and results of operations.
Design, Operation and Closure Requirements. The design, operation and
closure of landfills are subject to extensive regulations. These regulations
include, among others, the regulations (the "Subtitle D Regulations")
establishing minimum federal requirements adopted by the United States
Environmental Protection Agency (the "EPA") in October 1991 under Subtitle D of
the Resource Conservation and Recovery Act of 1976 ("RCRA"). The Subtitle D
Regulations generally became effective on October 9, 1993 (except for new
financial assurance requirements, which are scheduled to become effective April
9, 1997). The Subtitle D Regulations require all states to adopt regulations
regarding landfill design, operation and closure requirements that are as
stringent as, or more stringent than, the Subtitle D Regulations. All states in
which the Company's landfills are located have in place extensive landfill
regulations consistent with the Subtitle D requirements. These federal and state
regulations require the Company to design the landfill in accordance with
stringent technical requirements, monitor groundwater, post financial
assurances, and fulfill landfill closure and post-closure obligations. These
regulations could also require the Company to undertake investigatory, remedial
and monitoring activities, to curtail operations or to close a landfill
temporarily or permanently. Furthermore, future changes in these regulations may
require the Company to modify, supplement, or replace equipment or facilities at
costs which may be substantial.
Legal and Administrative Proceedings. In the ordinary course of its
business, the Company may become involved in a variety of legal and
administrative proceedings relating to land use and environmental laws and
regulations. These may include proceedings by federal, state or local agencies
seeking to impose civil or criminal penalties on the Company for violations of
such laws and regulations, or to impose liability on the Company under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA") or comparable state statutes, or to revoke or deny renewal of a
permit; actions brought by citizens' groups, adjacent landowners or governmental
entities opposing the issuance of a permit or approval to the Company or
alleging violations of the permits pursuant to which the Company operates or
laws or regulations to which the Company is subject; and actions seeking to
impose liability on the Company for any environmental damage at its landfill
sites or that its landfills or other properties may have caused to adjacent
landowners or others, or at sites to which it transported waste, including
groundwater or soil contamination. The Company could incur substantial legal
expenses during the course of the
19
<PAGE>
aforementioned proceedings, and the adverse outcome of one or more of these
proceedings could materially adversely affect the Company's business, financial
condition and results of operations.
During the ordinary course of its operations, the Company has from time to
time received, and expects that it may in the future receive, citations or
notices from governmental authorities that its operations are not in compliance
with its permits or certain applicable environmental or land use laws and
regulations. The Company generally seeks to work with the authorities to resolve
the issues raised by such citations or notices. There can be no assurance,
however, that the Company will always be successful in this regard, and the
failure to resolve a significant issue could result in one or more of the
adverse consequences to the Company described below under "Potential
Liabilities."
Potential Liabilities. There may be various adverse consequences to the
Company in the event that a facility owned or operated by the Company (or a
predecessor owner or operator whose liabilities the Company may have acquired
expressly or under successor liability theories) causes environmental damage, in
the event that waste transported by the Company (or a predecessor) causes
environmental damage at another site, in the event that the Company fails (or a
predecessor failed) to comply with applicable environmental and land use laws
and regulations or the terms of a permit or outstanding consent order or in the
event the Company's owned or operated facility or the soil or groundwater
thereunder is or becomes contaminated. These may include the imposition of
substantial monetary penalties on the Company; the issuance of an order
requiring the curtailment or termination of the operations involved or affected;
the revocation or denial of permits or other approvals necessary for continued
operation or landfill expansion; the imposition of liability on the Company in
respect of any environmental damage (including groundwater or soil
contamination) at its landfill sites or that its landfills or other facilities
or other Company-owned or operated facilities caused to adjacent landowners or
others or environmental damage at another site associated with waste transported
by the Company; the imposition of liability on the Company under CERCLA or under
comparable state laws; and criminal liability for the Company or its officers.
Any of the foregoing could materially adversely affect the Company's business,
financial condition and results of operations.
CERCLA and analogous state laws impose retroactive strict joint and
several liability on various parties that are, or have been, associated with a
site from which there has been, or is threatened, a release of any hazardous
substance (as defined by CERCLA) into the environment. Liability under RCRA,
CERCLA and analogous state laws may include responsibility for costs of site
investigations, site cleanup, site monitoring, natural resources damages and
property damages. Liabilities under RCRA, CERCLA and analogous state laws can be
very substantial and, if imposed upon the Company, could materially adversely
affect the Company's business, financial condition and results of operations.
In the ordinary course of its landfill and waste management operations and
in connection with its review of landfill and other operations to be acquired,
the Company has discovered at one landfill, and may in the future discover at
other landfills or waste management facilities, indications of groundwater
contamination. In such events, the Company would seek or be required to
determine the magnitude and source of the problem and, if appropriate or
required by applicable regulations, to design and implement measures to remedy,
or halt the spread of, the contamination. There can be no assurance, however,
that contamination discovered at a landfill or at other Company sites will not
result in one or more of the adverse consequences to the Company described
above.
Type, Quantity and Source Limitations. Certain permits and approvals may
limit the types of waste that may be accepted at a landfill or the quantity of
waste that may be accepted at a landfill during a given time period. In
addition, certain permits and approvals, as well as certain state and local
regulations, may limit a landfill to accepting waste that originates from
specified geographic areas or seek to restrict the importation of out-of-state
waste or otherwise discriminate against out-of-state waste. Generally,
restrictions on the importation of out-of-state waste have not withstood
judicial challenge. However, from time to time federal legislation is proposed
which would allow individual states to prohibit the disposal of out-of-state
waste or to limit the amount of out-of-state waste that could be imported for
disposal and would require states, under certain circumstances, to reduce the
amounts of waste exported to other states. Although such legislation has not yet
been adopted by Congress, if this or similar legislation is enacted, states
20
<PAGE>
in which the Company operates landfills could act to limit or prohibit the
importation of out-of-state waste. Such state actions could materially adversely
affect landfills within those states that receive a significant portion of waste
originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various considerations.
In addition, the aforementioned proposed federal legislation, if adopted, could
allow states and localities to impose certain flow control restrictions. These
restrictions could result in the volume of waste going to landfills being
reduced in certain areas, which may materially adversely affect the Company's
ability to operate its landfills at their full capacity and/or affect the prices
that can be charged for landfill disposal services. These restrictions may also
result in higher disposal costs for the Company's collection operations. If the
Company were unable to pass such higher costs through to its customers, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Potential Liabilities Associated with Acquisitions. The businesses
acquired by the Company may have liabilities that the Company did not discover
or may have been unable to discover during its pre-acquisition investigations,
including liabilities arising from environmental contamination or non-compliance
by prior owners with environmental laws or regulatory requirements, and for
which the Company, as a successor owner or operator, may be responsible. Any
indemnities or warranties, due to their limited scope, amount, or duration, the
financial limitations of the indemnitor or warrantor or other reasons, may not
fully cover such liabilities.
Dependence on Senior Management. The Company is highly dependent on its
senior management team. The loss of the services of any member of senior
management may have a material adverse effect on the Company's business,
financial condition and results of operations. In an effort to minimize this
risk, the Company has entered into employment contracts with certain members of
senior management. The Company does not maintain "key man" life insurance with
respect to members of senior management except for a $2.0 million policy
maintained on the Company's President.
Limits on Insurance Coverage. There can be no assurance that the Company's
pollution liability insurance will provide sufficient coverage in the event an
environmental claim were made against the Company or that the Company will be
able to maintain in place such insurance at reasonable costs. An uninsured or
underinsured claim of sufficient magnitude could have a material adverse effect
on the Company's business, financial condition and results of operations.
Incurrence of Charges Related to Capitalized Expenditures. In accordance
with generally accepted accounting principles, the Company capitalizes certain
expenditures and advances relating to acquisitions, pending acquisitions and
landfill development and expansion projects. Indirect acquisition costs, such as
executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred. The Company's policy is to charge
against earnings any unamortized capitalized expenditures and advances (net of
any portion thereof that the Company estimates will be recoverable, through sale
or otherwise) relating to any operation that is permanently shut down, any
pending acquisition that is not consummated, and any landfill development or
expansion project that is not or not expected to be successfully completed.
Therefore, the Company may be required to incur a charge against earnings in
future periods, which charge, depending upon the magnitude thereof, could
materially adversely affect the Company's business, financial condition and
results of operations.
Use of Alternatives to Landfill Disposal. Alternatives to landfill
disposal, such as recycling and composting, are increasingly being used. In
addition, incineration is an alternative to landfill disposal in certain of the
Company's markets. There also has been an increasing trend at the state and
local levels to mandate recycling and waste reduction at the source and to
prohibit the disposal of certain type of wastes, such as yard wastes, at
landfills. These developments
21
<PAGE>
may result in the volume of waste going to landfills being reduced in certain
areas, which may affect the Company's ability to operate its landfills at their
full capacity or affect the prices that can be charged for landfill disposal
services. For example, Illinois, Ohio and Pennsylvania, states in which the
Company operates landfills, have adopted bans on the disposal of yard waste or
leaves in landfills located in those states, and all of the states in which the
Company operates landfills have adopted rules restricting or limiting disposal
of tires at landfills. In addition, each of the states in which the Company
operates landfills has adopted plans or requirements which set goals for
specified percentages of certain solid waste items to be recycled. These
recycling goals are being phased in over the next few years. These alternatives,
if and when adopted and implemented, may have a material adverse effect on the
business, financial condition and results of operations of the Company.
Ability to Meet Financial Assurance Obligations. The Company is required to
post a performance bond or to provide other forms of financial assurance in
connection with closure and post-closure obligations with respect to landfills
or its other solid waste management operations and may be required to provide
such financial assurance in connection with municipal residential collection
contracts. As of December 31, 1996, the Company had outstanding approximately
$15.7 million of performance bonds. If the Company were unable to obtain surety
bonds in sufficient amounts, or to provide other required forms of financial
assurance, it would be unable to remain in compliance with the Subtitle D
Regulations or comparable state requirements and, among other things, might be
precluded from entering into certain municipal collection contracts and
obtaining or holding landfill operating permits.
Seasonality. The Company's revenues tend to be somewhat lower in the
winter months. This is primarily attributable to the fact that: (i) the volume
of waste relating to construction and demolition activities tends to increase in
the spring and summer months; and (ii) the volume of industrial and residential
waste in the regions where the Company operates tends to decrease during the
winter months. In addition, particularly harsh weather conditions may delay the
development of landfill capacity and otherwise result in the temporary
suspension of certain of the Company's operations and could materially adversely
affect the Company's overall business, financial condition and results of
operations.
ITEM 2. PROPERTIES
The principal fixed assets used by the Company in connection with its
landfill operations are its landfills which are described under Item 1.
"Business--Operations--Landfills." The five landfills currently owned by the
Company are situated on sites owned by the Company.
The principal fixed assets used by the Company in its collection
operations and transfer stations as of March 15, 1997 are approximately 75 acres
of land used for transfer stations and other facilities related to collection
operations (of which approximately 29 acres are owned and 46 acres are leased);
and approximately 80 landfill equipment and machinery units, 35,000 collection
containers and small equipment units and 325 trucks and trailers (in each
instance, such number includes owned and leased units).
The Company's corporate headquarters are located in Burr Ridge, Illinois,
where it leases approximately 4,000 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company to revoke, or to deny renewal of, an operating
permit held by the Company. From time to time, the Company also may be subject
to actions brought by citizens' groups or adjacent landowners in connection with
the permitting and licensing of its
22
<PAGE>
landfills or transfer stations, or alleging environmental damage or violations
of the permits and licensees pursuant to which the Company operates.
In addition, the Company is or may become party to various claims and
suits pending for alleged damages to persons and property, alleged violation of
certain laws and for alleged liabilities arising out of matters occurring during
the normal operation of the waste management business. In the opinion of
management, the liability, if any, under these claims and suits would not
materially adversely affect the business, financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company has been quoted on the Nasdaq National
Market under the symbol ("ADSI") since July 26, 1996, the date of the
commencement of the Company's initial public offering. The following table sets
forth, for the periods indicated, the high and low closing prices of the Common
Stock as reported on the Nasdaq National Market:
High Low
-------- --------
1996
3rd Quarter................................................ $ 18 1/4 $ 9
4th Quarter................................................ $ 18 1/2 $ 15 1/2
On March 15, 1997, there were approximately 65 registered owners of the
Common Stock.
The Company has never declared or paid any dividends on its Common Stock,
and neither ADS nor CDI has declared or paid any dividends on its common stock.
The Company and its Board of Directors currently intend to retain any earnings
for use in the operation and expansion of the Company's business and do not
anticipate paying any dividends on the Common Stock for the foreseeable future.
The Credit Facility prohibits the payment of cash dividends without prior bank
approval.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated statement of
operations, balance sheet and other data of the Company for the periods
presented. See the Notes to the Consolidated Financial Statements included
elsewhere herein for information concerning the basis of presentation. The
following selected consolidated financial data as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 have been
derived from the audited consolidated financial statements of the Company
included elsewhere in this Annual Report on Form 10-K and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected consolidated financial data as of
December 31, 1992, 1993 and 1994 and for the years ended December 31, 1992 and
1993 are derived from audited consolidated financial statements that are not
included herein.
23
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share amount)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .................... $ 146 $ 7,730 $ 18,517 $ 30,004 $ 56,804
Cost of operations .......... 249 5,750 12,647 17,286 30,376
Selling, general and
administrative expenses ... 625 1,646 4,910 5,882 8,328
Depreciation and amortization
expense ................... 100 1,166 3,226 6,308 12,334
--------- ----------- ----------- ----------- -----------
Operating income (loss) ..... (828) (832) (2,266) 528 5,766
Interest expense ............ (26) (417) (1,497) (3,030) (5,745)
Interest income ............. -- 35 2 189 260
Other income ................ -- -- -- -- 179
--------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary
item ...................... (854) (1,214) (3,761) (2,313) 460
Income tax benefit
(expense) ................. -- 391 1,372 (332) (245)
--------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item ........ (854) (823) (2,389) (2,645) 215
Extraordinary item--gain
(loss) on early retirement
of debt ................... -- 74 -- (908) (476)
--------- ----------- ----------- ----------- -----------
Net income (loss) ........... (854) (749) (2,389) (3,553) (261)
Preferred stock dividend .... -- -- -- (190) (109)
--------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ................ $ (854) $ (749) $ (2,389) $ (3,743) $ (370)
========= =========== =========== =========== ===========
Per share of
common stock:
Income (loss) before
extraordinary item ....... $ (2.14) $ (.58) $ (.99) $ (.80) $ .02
Extraordinary item .......... -- .05 -- (.26) (.07)
--------- ----------- ----------- ----------- -----------
Net loss .................... $ (2.14) $ (.53) $ (.99) $ (1.06) $ (.05)
Weighted average common stock
and common stock equivalent
shares used to calculate
per share amounts.......... 399,465 1,406,219 2,411,381 3,527,688 7,063,928
</TABLE>
24
<PAGE>
December 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents... $ 12 $ 2,134 $ 548 $ 6,383 $ 2,301
Working capital (deficit)... (332) 788 (2,237) (8,819) 1,219
Property and equipment, net 467 15,156 17,062 81,250 93,692
Total assets................ 705 35,651 37,557 114,693 144,986
Long-term debt and capital
lease obligations, net of
current portion........... -- 16,073 18,487 48,789 65,445
Redeemable preferred stock -- -- -- 1,908 --
Stockholders' equity........ 89 12,531 12,132 33,855 58,097
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data," the Company's Consolidated Financial Statements
and the notes thereto included elsewhere herein.
Introduction
The Company has adopted an acquisition-based growth strategy that focuses
principally on: (i) the identification and acquisition of solid waste landfills
located in secondary markets that are within approximately 125 miles of
significant metropolitan centers; and (ii) securing dedicated waste streams for
such landfills by the acquisition or development of transfer stations and the
acquisition of collection companies. The Company has completed 36 acquisitions
since January 1993. All of these acquisitions were accounted for under the
purchase method of accounting for business combinations. Accordingly, the
amortization of goodwill and landfill airspace reflects the fair market value of
the Company's assets at the time of their acquisition rather than their
historical cost basis, and the results of operations for such acquired
businesses are included in the Company's financial statements only from the
applicable date of acquisition. As a result, the Company believes its historical
results of operations for the periods presented are not directly comparable.
There are several other aspects of the Company's growth strategy that
cause management to believe that the Company's historical results of operations
may not be consistent with future performance, including the following:
o Concentration of Landfill Assets. Since the CDI Acquisition, the mix
of the Company's assets has been concentrated in landfills, as opposed
to collection and transfer station operations. As a result of goodwill
associated with the Company's acquisitions and the amortization
expense associated with its landfill assets and closure obligations,
the amount of depreciation and amortization as a percentage of the
Company's revenues for the year ended December 31, 1996 was relatively
high as compared to other solid waste companies (21.7%). Management
believes that this percentage will decline as the Company further
penetrates the market in its Illinois, Missouri, Ohio, western
Pennsylvania and Rhode Island regions by acquiring or developing
transfer stations, acquiring collection operations and making
"tuck-in" acquisitions of collection companies.
25
<PAGE>
o Management Capabilities. Since 1993, the Company has assembled a
management team with substantial experience in the solid waste
industry. The Company believes that its senior management team has the
ability to manage the Company's operations as they expand. Therefore,
the Company believes that the amount of selling, general and
administrative expenses is likely to decline as a percentage of
revenues as the Company grows.
o Cell Development Costs. Cells developed to date at the landfills
acquired in the CDI Acquisition have been constructed with double
liner composite systems. However, in September 1996, the Livingston,
Illinois landfill received a permit to construct cells utilizing a
single liner composite system. The Company continues to explore the
possibility of using alternative design systems at its Ohio landfill,
which should result in lower cell development costs.
Consistent with its operating program, the Company believes acquisitions
of solid waste companies will have a positive impact on its future results of
operations. Additionally, the results of operations do not fully reflect the
operating efficiencies and improvements that are expected to be achieved by
integrating acquired businesses, internalizing waste flows to the Company's
landfills and realizing other synergies.
General
Revenues. The Company's revenues are attributable primarily to fees
charged to customers for waste collection, transfer and disposal services. The
Company's collection services are generally provided under direct agreements
with its customers or pursuant to contracts with municipalities. Commercial and
municipal contract terms, where used, generally range from one to five years and
commonly have automatic renewal options. A relatively small portion of such
agreements also provide for the prepayment of certain fees, which fees are
reflected as deferred revenues. The table below shows for the periods indicated,
the percentage of the Company's total revenues attributable to services
provided:
Years Ended December 31,
--------------------------------------
1994 1995 1996
----------- ------------- ------------
Collection (1)......................... 68.0% 55.3% 47.5%
Transfer............................... 9.1 5.0 2.1
Landfill (1)........................... 22.8 39.0 49.9
Other.................................. 0.1 0.7 0.5
----- ----- -----
Total Revenues......................... 100.0% 100.0% 100.0%
- ----------
(1) The portion of collection revenues attributable to disposal charges for
waste collected by the Company and disposed of at the Company's landfills
has been excluded from collection revenues and included in landfill
revenues.
A component of the Company's business strategy is to maximize
internalization of waste it collects and thereby realize higher margins from its
operations. By disposing of waste at Company-owned landfills, the Company
retains the margin generated through disposal operations that would otherwise be
earned by third-party landfills. During the year ended December 31, 1996, 93% of
the total tonnage collected by the Company was disposed of at Company-owned
landfills. This represents approximately 34% of the total tonnage disposed of at
Company-owned landfills in the year ended December 31, 1986. During such period,
the Company's captive waste (consisting of waste collected by the Company and
delivered to any of its landfills and waste delivered to any of the Company's
landfills by third-party haulers under long-term collection contracts)
constituted an average of approximately 61% of the solid waste disposed of at
its landfills.
26
<PAGE>
Expenses. Cost of operations include labor, maintenance and repairs,
equipment and facility rent, utilities and taxes, the costs of ongoing
environmental compliance, safety and insurance, disposal costs and costs of
independent haulers transporting Company waste to disposal sites. Disposal costs
include certain landfill taxes, host community fees, landfill site maintenance,
fuel and other equipment operating expenses and provision for post-closure
expenses, consisting of cap maintenance, groundwater monitoring, methane gas
control and recovery and leachate treatment/disposal, anticipated to be incurred
in the future.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation, overhead, sales costs, community
relations expenses, provisions for estimated uncollectible accounts receivable
and unrealizable acquisition costs and management fees paid to an affiliate of
Charterhouse (which terminated upon closing of the Company's initial public
offering in July 1996).
Depreciation and amortization expense includes depreciation of fixed
assets, closure costs and amortization of landfill airspace, goodwill, other
intangibles and loan origination fees. The amount of landfill amortization
expense related to airspace consumption can vary materially from landfill to
landfill depending upon the purchase price, landfill configuration and cell
development costs.
Certain direct landfill development costs, such as engineering, upgrading,
construction and permitting costs, are capitalized and amortized based on
airspace consumed. All of the Company's capitalized expenditures relating to
cell development and landfill expansion work are in connection with cells for
which the Company holds a permit for development. The Company believes that the
costs associated with engineering, owning and operating landfills will increase
in the future as a result of federal, state and local regulation and a growing
community awareness of the landfill permitting process. Although there can be no
assurance, the Company believes that it will be able to implement price
increases sufficient to offset these increased expenses. All indirect landfill
development costs, such as executive salaries, general corporate overhead,
public affairs and other corporate services, are expensed as incurred.
The Company capitalizes engineering, legal, accounting and other direct
costs incurred in connection with potential acquisitions, accounted for using
the purchase method for business combinations. The Company, however, routinely
evaluates such capitalized costs and expenses those costs related to
acquisitions not likely to occur. Indirect acquisition costs, such as executive
salaries, general corporate overhead and other corporate services, are expensed
as incurred.
Accrued closure and post-closure costs represent an estimate of the
current value of the future obligations associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned by the
Company. Site specific closure and post-closure engineering cost estimates are
prepared annually for landfills owned by the Company. Estimated costs are
accrued based on accepted tonnage as landfill airspace is consumed. The Company
periodically updates its estimates of future closure and post-closure costs.
These changes are accounted for on a prospective basis. The Company expects its
closure and post-closure costs per ton to decrease as it expands landfill
capacity and as such costs are amortized over greater airspace.
The Company has estimated that, as of December 31, 1996, total costs for
post-closure activities, including cap maintenance, groundwater monitoring,
methane gas control and recovery and leachate treatment/disposal for up to 30
years after closure in certain cases, will approximate $10.9 million. In
addition, the Company has estimated that, as of December 31, 1996, closure costs
expected to occur during the operating lives of these facilities and expensed
over these facilities' useful lives will approximate $35.2 million. At December
31, 1995 and 1996, accruals for landfill closure and post-closure costs
(including costs assumed through acquisitions) were approximately $6.2 million
and $7.6 million, respectively. The accruals reflect relatively young landfills
with estimated remaining lives, based on current waste flows, that range from
approximately 3 to 50 years, and an estimated average remaining life of greater
than 20 years.
27
<PAGE>
Results of Operations
The following table sets forth items in the Company's consolidated
statement of operations as a percentage of revenues for the periods indicated.
Years Ended December 31,
---------------------------
1994 1995 1996
-------- -------- ------
Revenues....................................... 100.0% 100.0% 100.0%
Cost of operations............................. 68.3 57.6 53.5
Selling, general and administrative expenses... 26.5 19.6 14.6
Depreciation and amortization expenses......... 17.4 21.0 21.7
-------- -------- ------
Operating income (loss)........................ (12.2) 1.8 10.2
Interest expense, net.......................... (8.1) (9.5) (9.7)
Other income................................... -- -- 0.3
Income tax (expense) benefit................... 7.4 (1.1) (0.5)
Extraordinary loss, net of income tax (0.0) (3.0) (0.8)
--------- --------- -------
Net loss................................. (12.9)% (11.8)% (0.5)%
========= ========= =======
EBITDA margin.................................. 5.2% 22.8% 31.9%
Years Ended December 31, 1996 and 1995
Revenues. Revenues in 1996 were $56.8 million compared to $30.0 million in
1995. Approximately $17.1 million of the increase was attributable to the impact
of the full year contribution from the CDI Acquisition, which was acquired by
the Company in separate closings in June, August and November of 1995. In
addition, the Company completed 16 acquisitions in 1996 which accounted for
approximately $6.5 million of the increase in revenues.
Cost of Operations. Cost of operations in 1996 was $30.4 million compared
to $17.3 million in 1995, an increase corresponding to the Company's revenue
growth described above. As a percentage of revenues, cost of operations declined
to 53.5% in 1996 from 57.6% in 1995, due primarily to the following factors. The
Company's proportion of landfill operations (which generally have lower
operating costs than collection operations) has increased as a result of the
full year contribution of the CDI Acquisition. In addition operating cost
savings occurred as a result of the consolidation of the acquired Missouri
collection operations and the full year impact of the new transfer stations
opened in the Missouri region.
Selling, General and Administrative Expenses. SG&A expenses were 8.3
million in 1996 compared to $5.9 million in 1995. The increase in the SG&A
expenses resulted from the full year impact of the CDI Acquisition as well as
increased expenses from the 16 acquisitions completed in 1996. As a percentage
of revenues, SG&A expenses declined to 14.6% in 1996 from 19.6% in 1995. The
decrease in SG&A expense as a percentage of revenues was due primarily to a
significant increase in revenues, while corporate and other related
administrative expenses increased moderately. In 1996 the Company terminated a
management agreement with an affiliate of its principal shareholder, pursuant to
which a management fee of $466,000 was paid in 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense for 1996 was $12.3 million compared to $6.3 million in 1995. The
increase is due primarily to the CDI Acquisition which significantly increased
landfill airspace amortization and provision for closure costs, and to a lesser
extent, the capital expenditures and goodwill associated with acquisitions
consummated in 1996. As a percentage of revenues, depreciation and amortization
expense was 21.7% during 1996 versus 21.0% in 1995. The relatively high
percentages are primarily due to the configuration of Wheatland landfill in 1995
and the high concentration of the Company's assets in landfills following the
CDI Acquisition in 1996. Depreciation and amortization expense is expected to
decline as a percentage of revenue in future periods as the concentration of the
Company's assets in landfills diminishes due to the full year
28
<PAGE>
impact of the 1996 collection company acquisitions and as the Company reduces
future cell development costs. Net fixed assets increased to $93.7 million in
1996 from $81.3 million in 1995 and goodwill, net of accumulated amortization
expense, increased to $31.2 million in 1996 from $15.7 million in 1995.
Net Interest Expense. Net interest expense was $5.5 million in 1996 versus
$2.8 million in 1995. This increase is attributable to the full year impact of
additional debt incurred to complete the CDI Acquisition, and the 16
acquisitions completed in 1996.
Income Taxes. The Company recorded an income tax provision of $245,000 and
$332,000 respectively for 1996 and 1995. The 1996 provision reflects the Company
having consolidated taxable income of $460,000. Although the Company recorded a
net loss in 1995, the Company recorded an income tax provision because the
Company's subsidiaries were not then consolidated and CDI reported a profit.
Extraordinary Loss. In 1996 the Company recognized an extraordinary loss
of $476,000, representing the write-off of unamortized debt issuance costs in
connection with the refinancing of its prior credit facility.
Years Ended December 31, 1995 and 1994
Revenues. Revenues in 1995 were $30.0 million compared to $18.5 million in
1994. The increase in revenues was due primarily to the effects of the CDI
Acquisition and, to a lesser extent, price and volume increases attributable to
existing operations. Revenues of $10.1 million in 1995 were generated from
companies acquired during 1995, while increases in revenue attributable to
operations acquired prior to 1996 amounted to $1.3 million.
Cost of Operations. Cost of operations in 1995 was $17.3 million compared
to $12.6 million in 1994. This increase in costs was attributable primarily to
increases in the Company's revenues described above. As a percentage of
revenues, cost of operations was 57.6% in 1995 compared to 68.3% in 1994. This
decrease was due primarily to operating efficiencies and improvements from the
Company's development of its Missouri region and the impact of the CDI
Acquisition, which shifted the relative proportion of the Company's assets
toward landfills that typically operate at higher margins than collection
operations.
Selling, General and Administrative Expenses. SG&A expenses were $5.9
million in 1995 compared to $4.9 million in 1994. The increase was a result of
expenses associated with the CDI Acquisition, expenses incurred in connection
with the Company's increase in personnel and other expenses related to the
anticipated expansion of the Company's operations. SG&A expenses as a percentage
of revenues were 19.6% in 1995 compared to 26.5% in 1994.
Depreciation and Amortization Expense. Depreciation and amortization
expense in 1995 was $6.3 million compared to $3.2 million in 1994. The increase
in depreciation and amortization expense is due to the acquisition of the CDI
landfills, with their relatively higher depreciation and amortization expense
compared to depreciation and amortization expense of collection operations,
depreciation of increased capital expenditures and a one time write-off of
$505,000 following the Company's election in 1995 not to pursue the enforcement
of several covenants not to compete. Net fixed assets increased to $81.3 million
in 1995 from $17.1 million in 1994 and goodwill, net of accumulated amortization
expense, increased to $15.7 million in 1995 from $13.6 million in 1994.
Net Interest Expense. Net interest expense increased to $2.8 million in
1995 from $1.5 million in 1994. This increase primarily reflects increased
indebtedness incurred in connection with acquisitions and capital expenditures.
Income Taxes. Although the Company recorded a net loss in 1995, the
Company recorded an income tax expense of $300,000 in 1995 because the Company's
subsidiaries were not then consolidated and CDI reported a profit in 1995. The
Company recorded an income tax benefit of $1.4 million in 1994. See Note 6 of
the Notes to Consolidated Financial Statements included elsewhere herein.
29
<PAGE>
Extraordinary Expense. In 1995, the Company recognized an extraordinary
loss of $908,000, representing unamortized deferred debt issuance cost in
connection with the extinguishment of debt outstanding under a prior credit
facility.
Liquidity and Capital Resources
Due to the capital intensive nature of the solid waste industry, the
Company has used, and expects to continue using, substantially all cash
generated from operations to fund acquisitions, capital expenditures and
landfill development. Certain operating equipment has also been acquired using
leases which have short and medium-term maturities. As a result, the Company has
incurred working capital deficits in the past, and there can be no assurance
that its available working capital will be sufficient in the future as it
pursues its acquisition-based growth strategy. Historically, the Company has
satisfied its acquisition, capital expenditure and working capital needs
primarily through equity and bank financings. There can be no assurance that
such financing will continue to be available.
Operating activities provided net cash of $11.7 million in the year ended
December 31, 1996, compared to $5.6 million in the year ended December 31, 1995.
From 1995 to 1996, depreciation and amortization expense increased by $6.0
million and accounts payable, accrued liabilities and accrued environmental and
landfill costs increased by $1.5 million. The increase in each of these items
was primarily due to increases in environmental and landfill costs, which
correlated with the significant increase in landfill revenues resulting from the
full year impact of the CDI Acquisition. From 1994 to 1995 depreciation and
amortization expense increased by $3.1 million and accounts payable, accrued
liabilities and accrued environmental and landfill costs increased by $1.6
million primarily due to the CDI acquisition.
Investing activities used net cash of $39.0 million and $68.4 million in
the years ended December 31, 1996 and 1995, respectively. The Company's capital
expenditure and working capital requirements have increased significantly,
reflecting the Company's rapid growth by acquisition and development of revenue
producing assets, and will increase further as the Company continues to pursue
its acquisition-based growth strategy. During 1994, the Company spent $5.6
million in capital expenditures, of which $1.7 million was for cell development
at the Company's initial two landfills. During 1995, when the Company acquired
the three CDI landfills, the Company spent $6.2 million in capital expenditures,
of which $4.9 million was for cell development. In connection with such
acquisitions, the Company required $25.5 million in equity infusions from its
principal stockholders and $36.7 million in bank debt. In 1996, the Company
spent $14.0 million for capital expenditures, of which $9.0 million was used for
cell development. The increase in cell development costs in 1996 over 1995 was
due to the Company's ownership of the Clarion, Livingston and Wyandot landfills
for the entire year and the fact that increased volumes at the landfills
necessitated cell development to occur prior to the winter season when
construction activities cease. In 1997, the Company expects to spend
approximately $14.5 million for capital expenditures, of which $9.0 million is
anticipated to be used for cell development. In 1997, the Company expects to
spend approximately $14.5 million for capital expenditures, of which $9.0
million is anticipated to be used for cell development.
Financing activities provided net cash of $23.2 million, $68.6 million and
$5.7 million in the years ending December 31, 1996, 1995 and 1994, respectively.
Net cash provided by financing activities in 1996 reflects the application of
the net proceeds from the Company's initial public offering, net proceeds from
the refinancing of the Company's credit facilities and repayment of a note
payable to a stockholder. Net cash provided by financing activities in 1995
reflects the proceeds from the issuance of a $12.5 million note payable and
$25.5 million in equity to the Company's principal stockholders and increased
borrowings under the Company's prior credit facility incurred in connection with
the CDI Acquisition.
In March 1997 the Company increased the amount of its Credit Facility with
Internationale Nederlanden (U.S.) Capital Corporation, as administrative agent
for the lenders, and Morgan Guaranty Trust Company of New York, as documentation
agent for the lenders, from $110 million to $125 million. The Credit Facility
provides the Company with a term loan of $25 million, a $5 million revolving
credit facility for working capital purposes, and a $95 million
30
<PAGE>
expansion facility, that may only be used for acquisitions. The various loans
and lines of credit under the Credit Facility bear interest at rates per annum
equal to, at the Company's discretion, either: (i) the higher of (a) the federal
funds rate plus 1/2 of 1% and (b) the prime rate, plus an applicable margin
ranging from 0% to 1.5%; or (ii) the London Interbank Offered Rate ("LIBOR"),
plus an applicable margin ranging from 1.5% to 3.25%, and have maturities
ranging from 2001 to 2003. As of December 31, 1996, the Company had borrowed
$66.3 million under the Credit Facility. As of such date, the interest rates on
the various loans and lines of credit under the Credit Facility ranged from
8.63% to 9.50% and the total unused availability under the Credit Facility was
$43.7 million, of which $10.0 million may be used for working capital purposes
and $33.7 million may be used for acquisitions. During the year ended December
31, 1996, the Company's operating income plus depreciation and amortization
("EBITDA") was $18.1 million and interest expense during this period was $5.7
million. The Company's ability to use the expansion facility is based upon a
number of covenants, including the maintenance of specified debt to equity and
fixed charge coverage ratios. The Company is in compliance with the terms of
these covenants. Other covenants contain limitations on the payments of
dividends, the incurrence of additional debt and the use of proceeds from debt
or equity issuances.
The Company intends to satisfy its interest obligations as well as future
capital expenditures and working capital requirements, with cash flows from
operations and borrowings under the Credit Facility. However, the Company may
need to raise additional capital to fund the acquisition and integration of
additional solid waste businesses. The Company may raise such funds through bank
financings or public or private offerings of its securities. There can be no
assurance that the Company will be able to secure such funding, if necessary, on
favorable terms, if at all. If the Company is not successful in securing such
funding, the Company's ability to pursue its business strategy may be impaired
and results of operations for future periods may be adversely affected.
The Company expects that Subtitle D and other regulations that apply to
the non-hazardous waste disposal industry will require the Company, as well as
others in the industry, to alter operations and to modify or replace existing
facilities. Such expenditures have been and will continue to be substantial.
Regulatory changes could accelerate expenditures for closure and post-closure
monitoring and obligate the Company to spend sums in addition to those presently
reserved for such purposes. These factors, together with the other factors
discussed above, could substantially increase the Company's operating costs.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb at least a portion of these cost increases, particularly
during periods of high inflation. The Company is unable to determine the future
impact of a sustained economic slowdown.
Seasonality
The Company's revenues tend to be somewhat lower in the winter months.
This is primarily attributable to the fact that: (i) the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months; and (ii) the volume of industrial and residential
waste in the regions where the Company operates tends to decrease during the
winter months. In addition, particularly harsh weather conditions may delay the
development of landfill capacity and otherwise result in the temporary
suspension of certain of the Company's operations and could materially adversely
affect the Company's overall business, financial condition and results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
31
<PAGE>
Page
American Disposal Services, Inc. and Subsidiaries:
Consolidated Financial Statements
Report of Independent Auditors .......................................... 33
Consolidated Balance Sheets at December 31, 1996 and 1995.................. 34
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994......................................... 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994................................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................................... 37
Notes to Consolidated Financial Statements................................. 38
32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Disposal Services, Inc.
We have audited the accompanying consolidated balance sheets of American
Disposal Services, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Disposal Services, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 26, 1997, except as to
Note 5 for which the
date is March 21, 1997 and
except as to Note 10
for which the date is
March 25, 1997
33
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents............................................................... $ 2,301 $ 6,383
Cash held in escrow..................................................................... -- 156
Trade receivables--Net of allowance for doubtful accounts of $473 and $476.............. 9,741 6,331
Prepaid expenses........................................................................ 1,248 686
Inventory............................................................................... 354 312
---------- ----------
Total current assets...................................................................... 13,644 13,868
Property and equipment, net............................................................... 93,692 81,250
Other assets:
Cost over fair value of net assets of acquired businesses, net of accumulated
amortization of $1,374 and $823....................................................... 31,237 15,739
Other intangible assets, net of accumulated amortization of $439 and $305............... 1,610 1,081
Debt issuance costs, net of accumulated amortization of $204 and $71.................... 2,392 815
Other................................................................................... 2,411 1,940
---------- ----------
$ 144,986 $ 114,693
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 3,359 $ 3,185
Accrued liabilities..................................................................... 4,249 2,360
Deferred revenues....................................................................... 2,245 1,202
Current portion of long-term debt and capital lease obligations......................... 2,572 3,440
Note payable to stockholder............................................................. -- 12,500
---------- ----------
Total current liabilities................................................................. 12,425 22,687
Long-term debt and capital lease obligations, net of current portion...................... 65,445 48,789
Accrued environmental and landfill costs.................................................. 7,603 6,214
Deferred income taxes..................................................................... 1,416 1,240
Redeemable preferred stock................................................................ -- 1,908
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized; shares issued and
outstanding; 1996--8,872,381; 1995--5,662,865......................................... 89 57
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued and
outstanding in 1996 and 1995.......................................................... -- --
Warrants outstanding...................................................................... 107 107
Additional paid-in capital................................................................ 66,170 41,590
Accumulated deficit....................................................................... (8,269) (7,899)
---------- ----------
58,097 33,855
---------- ----------
$ 144,986 $ 114,693
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
34
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Revenues................................................................... $ 56,804 $ 30,004 $ 18,517
Cost of operations......................................................... 30,376 17,286 12,647
Selling, general, and administrative expenses.............................. 8,328 5,882 4,910
Depreciation and amortization.............................................. 12,334 6,308 3,226
---------- ---------- ----------
Operating income (loss).................................................... 5,766 528 (2,266)
Interest expense........................................................... (5,745) (3,030) (1,497)
Interest income............................................................ 260 189 2
Other income............................................................... 179 -- --
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item................... 460 (2,313) (3,761)
Income tax benefit (expense)............................................... (245) (332) 1,372
---------- ---------- ----------
Income (loss) before extraordinary item.................................... 215 (2,645) (2,389)
Extraordinary item -- loss on early retirement of debt..................... (476) (908) --
---------- ---------- ----------
Net loss................................................................... (261) (3,553) (2,389)
Preferred stock dividend................................................... (109) (190) --
---------- ---------- ----------
Net loss applicable to common stockholders................................. $ (370) $ (3,743) $ (2,389)
---------- ---------- ----------
---------- ---------- ----------
Per common share:
Income (loss) before extraordinary item.................................. $ .02 $ (.80) $ (.99)
Extraordinary item....................................................... (.07) (.26) --
---------- ---------- ----------
Net loss................................................................. $ (.05) $ (1.06) $ (.99)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common stock and common stock equivalent shares
outstanding.............................................................. 7,063,928 3,527,688 2,411,381
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
35
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- WARRANTS PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT OUTSTANDING CAPITAL DEFICIT EQUITY
---------- ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993......... 2,099,952 $ 21 $ 107 $ 14,170 $ (1,767) $ 12,531
Issuance of common stock, net of
issuance costs..................... 282,393 3 -- 1,987 -- 1,990
Net loss............................. -- -- -- -- (2,389) (2,389)
---------- --- ----- ----------- ------------ ------------
Balance -- December 31, 1994......... 2,382,345 24 107 16,157 (4,156) 12,132
Issuance of common stock, net of
issuance costs..................... 3,280,520 33 -- 25,433 -- 25,466
Net loss............................. -- -- -- -- (3,553) (3,553)
Dividends on preferred stock......... -- -- -- -- (190) (190)
---------- --- ----- ----------- ------------ ------------
Balance -- December 31, 1995......... 5,662,865 57 107 41,590 (7,899) 33,855
Issuance of common stock, net of
issuance costs..................... 3,162,500 32 -- 24,573 -- 24,605
Exercise of common stock warrants and
options............................ 47,016 -- -- 7 -- 7
Dividends on preferred stock......... -- -- -- -- (109) (109)
Net loss............................. -- -- -- -- (261) (261)
---------- --- ----- ----------- ------------ ------------
Balance at December 31, 1996......... 8,872,381 $ 89 $ 107 $ 66,170 $ (8,269) $ 58,097
---------- --- ----- ----------- ------------ ------------
---------- --- ----- ----------- ------------ ------------
</TABLE>
See accompanying notes.
36
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ---------
OPERATING ACTIVITIES
Net loss........................................................................ $ (261) $ (3,553) $ (2,389)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Extraordinary item, net....................................................... 476 908 --
Depreciation and amortization................................................. 12,334 6,308 3,226
Provision for environmental and landfill costs................................ 571 292 48
Deferred income taxes......................................................... 176 47 (1,372)
Gain on sale of fixed assets.................................................. (98) -- --
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade receivables........................................................... (2,600) (340) (625)
Prepaid expenses, cash held in escrow and other assets...................... (1,029) (33) (361)
Inventory................................................................... (42) (128) (96)
Accounts payable, accrued liabilities and accrued environmental and landfill
costs..................................................................... 1,522 1,846 235
Deferred revenue............................................................ 656 254 210
---------- ---------- ---------
Net cash provided by (used in) operating activities............................. 11,705 5,601 (1,124)
INVESTING ACTIVITIES
Capital expenditures............................................................ (14,003) (6,173) (5,600)
Cost of acquisitions............................................................ (25,029) (62,201) (580)
---------- ---------- ---------
Net cash used in investing activities........................................... (39,032) (68,374) (6,180)
FINANCING ACTIVITIES
Net proceeds from issuances of common stock..................................... 24,605 25,466 1,990
Exercise of stock options and warrants.......................................... 7 -- --
Redemption of preferred stock................................................... (1,950) -- --
Net proceeds from issuance of preferred stock................................... -- 1,908 --
Preferred stock dividend........................................................ (109) (190) --
Proceeds from issuance of long-term debt........................................ 66,950 32,568 6,319
Repayments of indebtedness...................................................... (51,162) (2,698) (2,511)
Proceeds from (payment of) note payable to stockholder.......................... (12,500) 12,500 --
Debt issuance costs............................................................. (2,596) (946) (80)
---------- ---------- ---------
Net cash provided by financing activities....................................... 23,245 68,608 5,718
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents............................ (4,082) 5,835 (1,586)
Cash and cash equivalents, at beginning of year................................. 6,383 548 2,134
---------- ---------- ---------
Cash and cash equivalents, at end of year....................................... $ 2,301 $ 6,383 $ 548
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Cash paid for interest.......................................................... $ 6,222 $ 2,515 $ 1,426
Cash (refunds) paid for income taxes............................................ (159) 478 --
</TABLE>
See accompanying notes.
37
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. FORMATION AND BASIS OF PRESENTATION
ADS, Inc. (ADS) was organized January 15, 1991, to acquire, develop, and
operate non-hazardous municipal solid waste disposal, collection, and transfer
operations and provide non-hazardous solid waste disposal management services to
commercial, industrial, and residential customers. During 1993, an affiliate of
Charterhouse Equity Partners, L.P. (CEP) purchased a controlling interest in
ADS.
County Disposal, Inc. (County) was incorporated by Charterhouse Equity
Partners II, L.P. (CEPII) on April 27, 1995, for the purpose of acquiring
certain net assets of Envirite Corporation (Envirite). On April 28, 1995,
Envirite and County entered into an Asset Purchase Agreement whereby County
agreed to purchase from Envirite certain landfill facilities and waste
transportation and collection equipment located in Livingston County, Illinois,
and Wyandot County, Ohio; all of the issued and outstanding capital stock of
County Environmental Services, Inc., a wholly-owned subsidiary of Envirite,
which owned and operated a landfill facility and waste transportation and
collection equipment located in Clarion County, Pennsylvania; and certain
related assets and assumption of certain liabilities.
Effective January 1, 1996, the stockholders of ADS and County exchanged
their shares for shares of a newly created holding company by the name of
American Disposal Services, Inc. (the Company). This share exchange (the
Exchange) qualifies as a transfer of companies under common control as
affiliates of Charterhouse Group International, Inc. are the general partners
and in control of CEP and CEPII and, accordingly, the transaction has been
accounted for at historical cost in a manner similar to pooling of interests
accounting. The financial statements have been prepared as if this Exchange had
occurred as of December 31, 1993.
In July 1996, the Company issued 3,162,500 shares of common stock at $9.00
per share in its initial public offering. Proceeds from the offering, net of
underwriting commissions and related expenses, were $24.6 million. Immediately
following the offering, the Company had 8,825,365 common stock shares issued and
outstanding. The offering proceeds were used to finance acquisitions and paydown
a portion of the debt facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risks consist primarily of trade receivables. Credit risk on trade
receivables is minimized as a result of the large and diverse nature of the
Company's customer base. No single group or customer represents greater than 10%
of total accounts receivable. The Company maintains an allowance for losses
based on the expected collectibility of accounts receivable. Credit losses have
been within management's expectations.
38
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Trade receivables, trade payables, and debt obligations are carried at cost
which approximates fair value.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and liquid investments
with original maturities of three months or less.
CASH HELD IN ESCROW
Cash held in escrow represents cash held in banks restricted to fund
obligations incurred in acquiring businesses.
INVENTORY
Inventory is stated at the lower of cost (first in, first out method) or
market and consists principally of equipment parts, materials, and supplies.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
respective assets as follows:
<TABLE>
<S> <C>
Vehicles and equipment..................... 3 to 12 years
25 to 30
Buildings.................................. years
</TABLE>
Expenditures for major renewals are capitalized, and expenditures for
routine maintenance and repairs are charged to expense as incurred.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities,
including legal, engineering, construction of landfill improvements, cell
development costs, and the direct costs of Company personnel dedicated for these
purposes. Preparation costs for individual secure land disposal cells are
recorded in property and equipment and amortized as the airspace is filled.
INTANGIBLE ASSETS
The cost over fair value of net assets of acquired businesses is amortized
on the straight-line method over periods not exceeding 40 years. Other
intangible assets, substantially all of which are covenants not to
39
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compete and customer lists, are amortized on the straight-line method over their
estimated lives, typically no more than 12 years. Amortization expense for
fiscal years 1996, 1995, and 1994 related to intangible assets was approximately
$1.0 million, $1.4 million, and $600,000, respectively. In 1995, the Company
determined not to enforce certain covenants not to compete which arose from 1993
transactions with the net book value of such covenants of $505,000, was fully
written-off and included in 1995 amortization expense.
DEFERRED ACQUISITION COSTS
The Company capitalizes engineering, legal, accounting, and other direct
costs paid to outside parties that are incurred in connection with potential
acquisitions. The Company, however, routinely evaluates such capitalized costs
and charges to expense those relating to abandoned acquisition candidates.
Indirect acquisition costs, such as executive salaries, general corporate
overhead, and other corporate services are expensed as incurred. Net deferred
acquisition costs, included in other intangible assets, were approximately
$545,000 and $370,000 at December 31, 1996 and 1995, respectively.
ACCRUED ENVIRONMENTAL AND LANDFILL COSTS
Accrued environmental and landfill costs represent landfill accruals which
are provided for environmental compliance costs and closure and post-closure
costs. These accruals are based on accounting estimates by management determined
primarily from the results of engineering studies and reviews and on
interpretation of the technical standards of the Environmental Protection
Agency's Subtitle D regulations, or the approved state counterpart, and recently
promulgated air emissions standards under the Clean Air Act, as they apply on a
state-by-state basis. The Company typically provides accruals for these costs as
permitted airspace of such facilities is consumed. Closure and post-closure
monitoring and maintenance costs represent the costs related to cash
expenditures yet to be incurred when a landfill facility ceases to accept waste
and closes. Certain of these accrued environmental and landfill costs,
principally capping, leachate collection and removal, and methane gas control
and recovery, are operating and maintenance costs to be incurred during the
30-year period after the facility closes, but are accrued during the operating
life of the site in accordance with the landfill operation requirements of
Subtitle D and the EPA's recently promulgated air emissions standards. An
environmental and landfill cost accrual is provided as a liability assumed for
purchased landfill operations based on permitted airspace consumed prior to the
acquisition date and is included in the purchase price allocation (see Note 3).
The Company has estimated that, as of December 31, 1996, post-closure expenses,
including cap maintenance, groundwater monitoring, methane gas control and
recovery and leachate treatment/disposal for up to 30 years after closure in
certain cases, will approximate $10.9 million. In addition, the Company has
estimated that, as of December 31, 1996, closure costs expected to occur during
the operating lives of these facilities' useful lives will approximate $35.2
million. These accruals are reviewed by management periodically and revised
prospectively for any significant changes in future cost estimates.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
40
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Landfill revenues are recorded at the date of actual waste disposal.
Revenues billed prior to the performance of services are deferred and recorded
as income in the period in which the related services are rendered, generally
over a three-month period.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common stock
and common stock equivalent shares outstanding during each year and incremental
shares from the assumed exercise of options and warrants granted and computed
using the treasury stock method.
STOCK-BASED COMPENSATION
The Company typically grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for such stock option grants in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Options
Issued to Employees" (APB 25), and, accordingly, typically recognizes no
compensation expense for these stock option grants.
3. ACQUISITIONS
The acquisitions below have been accounted for using the purchase method of
accounting and, accordingly, the results of their operations have been included
in the Company's results of operations from their respective acquisition dates.
The purchase prices have been allocated to the assets acquired and liabilities
assumed based on their fair values at their respective acquisition dates with
the residual allocated to cost over fair value of net assets acquired.
During 1996 the Company acquired 16 non-hazardous solid waste businesses,
consisting of 16 collection operations and two transfer stations. As described
in Note 1, the Company acquired three non-hazardous solid waste landfills and a
solid waste collection operation (the Envirite Acquisition) during 1995.
The Company has not completed its valuation of certain of its 1996 purchases
and the purchase price allocations are subject to change when additional
information concerning asset and liability valuations is completed.
41
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
3. ACQUISITIONS (CONTINUED)
The purchase prices allocated to the net assets acquired are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Property and equipment.................................................. $ 8,425 $ 62,288
Accounts receivable and inventory....................................... 810 3,363
Other assets............................................................ 785 1,664
Cost over fair value of net assets acquired............................. 15,642 3,060
Total liabilities assumed............................................... (633) (8,174)
--------- ---------
Total cash paid......................................................... $ 25,029 $ 62,201
--------- ---------
--------- ---------
</TABLE>
The pro forma unaudited results of operations for the years ended December
31, 1996 and 1995, assuming each acquisition above had occurred on January 1,
1995, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Revenues............................................................ $ 64,356 $ 56,371
Operating income (loss)............................................. 5,966 (1,106)
Net loss applicable to common stockholders.......................... (370) (8,500)
Pro forma loss per share of common stock............................ (.05) (2.41)
Weighted average common stock and common stock equivalent shares
outstanding....................................................... 7,063,928 3,527,688
</TABLE>
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
January 1, 1995 nor are they necessarily indicative of future operating results.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1995
---------- ---------
Land................................................................... $ 5,417 $ 5,038
Landfills.............................................................. 78,547 66,529
Buildings.............................................................. 3,285 2,695
Vehicles and equipment................................................. 23,977 14,335
---------- ---------
111,226 88,597
Less: Accumulated depreciation and amortization........................ (17,534) (7,347)
---------- ---------
$ 93,692 $ 81,250
---------- ---------
---------- ---------
</TABLE>
42
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
5. OBLIGATIONS
Obligations, which approximate fair value, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Long-term debt:
Acquisition loan, ING Capital Corporation................................................. $ 41,506 $ --
Term loan, ING Capital Corporation........................................................ 24,750 --
Other borrowings, with interest rates ranging from 7.0% to 11.0%.......................... 1,101 1,285
Term loan, Bank of America................................................................ -- 20,000
Revolving loan, Bank of America........................................................... -- 10,847
Term loan A, ING Capital Corporation...................................................... -- 12,525
Term loan B, ING Capital Corporation...................................................... -- 4,000
Revolving loan, ING Capital Corporation................................................... -- 2,423
Capital lease obligations:
Capital lease obligations with interest and principal due monthly through 1999, at various
interest rates ranging from 6.0% to 9.5%, secured by equipment.......................... 660 1,149
--------- ---------
68,017 52,229
Less: Current portion....................................................................... 2,572 3,440
--------- ---------
Long-term obligations, net of current portion............................................... $ 65,445 $ 48,789
--------- ---------
--------- ---------
</TABLE>
In May 1996, the Company entered into a credit agreement with Internationale
Nederlanden (US) Capital Corporation (ING), as administrative agent, and Morgan
Guaranty Trust Company of New York, as document agent, that provided for
borrowings of up to $87 million to finance acquisitions and provide working
capital (Credit Facility), which was used to repay the existing credit
agreements with Bank of America and ING, as well as the note payable to
stockholder and the redeemable preferred stock. In August 1996, this Credit
Facility was amended to provide for borrowings up to $110 million. The Credit
Facility consists of a $25 million term loan, $10 million revolving loan, and
$75 million acquisition facility. The various loans and lines of credit under
the Credit Facility bear interest at rates per annum equal to, at the Company's
discretion either: (i) the higher of (a) the federal funds rate plus 0.5% and
(b) the prime rate, plus an applicable margin ranging from 0% to 1.5%; or (ii)
the London Interbank Offered Rate (LIBOR), plus an applicable margin ranging
from 1.50% to 3.25%, and have maturities ranging from 2001 to 2003. The term
loan had an interest rate of 8.88% at December 31, 1996 and the acquisition
facility had an interest rate of 8.68% at December31, 1996. The Credit Facility
is secured by substantially all of the assets of the Company. Under terms of the
Credit Facility, the Company is subject to various debt covenants, including
maintenance of certain financial ratios and other restrictions. The Credit
Facility requires the Company to use 50% of the proceeds of any equity offering
to repay a portion of the term loans. Effective March 21, 1997, the Company
amended the Credit Facility (i) to expand the borrowing capacity to $125
million, (ii) to waive the term loan repayment requirement of any offering
proceeds and (iii) to permit the reborrowing of any amounts under the expansion
facility which may be repaid in connection with an equity offering consummated
in 1997. In connection with refinancings during 1996 and 1995, the Company
recognized an extraordinary loss, net of income tax benefit, of $476,000 and
$908,000, respectively, representing unamortized deferred debt issuance costs.
43
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
5. OBLIGATIONS (CONTINUED)
At December 31, 1996, maturities of obligations (excluding capital lease
obligations) are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 2,207
1998............................................................... 6,507
1999............................................................... 8,890
2000............................................................... 12,920
2001 and thereafter................................................ 36,833
---------
$ 67,357
---------
---------
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting and income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Deferred tax assets arising from:
Net operating loss carryforwards........................................................... $ 2,938 $ 3,111
Closure and post-closure costs............................................................. 421 421
Amortization of intangibles................................................................ 881 550
Other...................................................................................... 26 41
--------- ---------
Total deferred tax assets.................................................................... 4,266 4,123
Valuation allowance.......................................................................... (2,280) (2,323)
--------- ---------
Net deferred tax assets...................................................................... 1,986 1,800
Deferred tax liabilities arising from:
Property and equipment..................................................................... 2,855 2,898
Amortization of intangibles and landfill................................................... 472 84
Capital leases............................................................................. 32 32
Other...................................................................................... 43 26
--------- ---------
Total deferred tax liabilities............................................................... 3,402 3,040
--------- ---------
Net deferred tax liability................................................................... $ 1,416 $ 1,240
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, the Company had net operating loss (NOL) carryforwards
of approximately $8.0 million for federal income tax purposes that expire in
years 2006 to 2010. The utilization of the NOL carryforwards is limited by
future taxable earnings generated at the subsidiary level. The Company recorded
a valuation allowance to reflect uncertainty as to the utilization of such NOL
carryforwards for financial reporting purposes. The maximum annual utilization
of such NOL carryforwards are limited under the Internal Revenue Code as a
result of changes in ownership that have occurred.
44
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES (CONTINUED)
Significant components of the income tax expense (benefits) were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current:
Federal........................................................................... $ 99 $ 141 $ --
State............................................................................. (30) 144 --
--------- --------- ---------
69 285 --
Deferred:
Federal........................................................................... 146 38 (1,205)
State............................................................................. 30 9 (167)
--------- --------- ---------
176 47 (1,372)
--------- --------- ---------
Total provision..................................................................... $ 245 $ 332 $ (1,372)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation from the statutory income tax rate to the effective income
tax rate was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Federal statutory income tax rate.................................................... 34.0% (34.0)% (34.0)%
Effect of:
State taxes, net of federal tax effect............................................. -- 3.1 (2.9)
Nondeductible goodwill............................................................. 15.5 -- --
Net operating loss with no benefit................................................. -- 39.6 0.1
Other, net......................................................................... 3.8 1.6 0.3
--- --------- ---------
Effective tax rate................................................................... 53.3% 10.3% (36.5)%
--- --------- ---------
--- --------- ---------
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company had entered into a management agreement with a stockholder for
certain services to be rendered to the Company in exchange for annual management
fees. The management agreement was terminated in connection with the initial
public offering during July 1996. Management fees of approximately $466,000,
$659,000, and $515,000 were incurred in 1996, 1995, and 1994, respectively.
At December 31, 1995, the Company had a $12,500,000 unsecured note payable
outstanding to a stockholder, which was issued on November 16, 1995 and was due
November 16, 1996, bearing an annual interest rate of prime plus 3%. The Company
repaid the note payable to the stockholder in May 1996. Interest expense
relating to this note payable was approximately $621,000 and $180,000 in 1996
and 1995, respectively.
45
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL AND REGULATORY REQUIREMENTS
The business and activities of the Company are, and may become more,
extensively regulated by, among others, the federal Environmental Protection
Agency, the Department of Transportation, the Interstate Commerce Commission,
and various state and local environmental and transportation regulatory
authorities. The Company is subject to various statutes and regulations which
include, but are not limited to, the Resource Conservation and Recovery Act of
1976, the Federal Water Pollution Control Act, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Clean Air Act, and
numerous state and local laws and regulations. The full impact of these laws and
regulations and the possible adoption of new statutes and regulations with
respect to the Company's facilities and operations is uncertain and could have
material adverse effects on the Company's business, results of operations, and
financial condition in that the Company: (i) could be required to incur
additional expenses in compliance efforts, (ii) might be unable to comply,
forcing the Company to cease operations, and (iii) could incur additional
liability for past operation(s) of acquired assets. These regulations may also
impose restrictions on the Company's operations, such as limiting the expansion
of disposal facilities, limiting or banning the disposal of out-of-state waste
or certain other categories of waste, or mandating the disposal of local refuse.
Although the Company believes it is in substantial compliance with current
regulatory requirements, because of heightened political and public concern over
environmental issues, companies in the waste disposal industry, including the
Company, may become subject to judicial and administrative proceedings involving
federal, state, or local agencies in the normal course of business.
The Company has obtained some levels of pollution liability insurance
covering certain claims for sudden or gradual onset environmental damage at its
landfill sites. The Company carries a comprehensive general liability insurance
policy which management considers adequate to protect its assets and operations
from other risks.
The Company also may be subject to claims for personal injury or property
damage arising out of motor vehicle accidents involving its trucks. The Company
currently carries insurance with policy limits which management believes to be
sufficient to cover these risks. If the Company were to incur liabilities
outside of or in excess of its insurance limits, its financial condition could
be adversely affected.
In connection with the Company's existing landfills, the Company has
provided financial assurance bonds for approximately $15.2 million at December
31, 1996, from a financial institution to provide financial assurance that
closure and postclosure expenses will be met in the event that the Company is
not able to fulfill its closure and postclosure obligations.
46
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1996, future minimum lease payments under noncancelable
lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1997......................................................................................... $ 431 $ 1,151
1998......................................................................................... 192 930
1999......................................................................................... 104 667
2000......................................................................................... -- 298
2001 and thereafter.......................................................................... -- 437
----- -----------
Total minimum lease payments................................................................. 727 $ 3,483
-----------
-----------
Less: Amount representing interest........................................................... 67
-----
Present value of net minimum lease payments.................................................. $ 660
-----
-----
</TABLE>
Rental expense in 1996, 1995, and 1994 was approximately $1.3 million,
$793,000, $132,000, respectively.
REDEEMABLE PREFERRED STOCK
On March 28, 1995, ADS issued 1,950 shares of its Series A Preferred Stock
and 46,550 warrants to purchase shares of common stock of the Company, for
$1,950,000. The holder of the warrants can purchase one common share for each
warrant held at the exercise price of $.10 per share on or before December 31,
2002. The Company redeemed the outstanding preferred stock in May 1996, and paid
any accrued dividends related to the preferred stock. The warrants were redeemed
for shares of common stock in 1996.
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company's Board of Directors adopted the American Disposal Services,
Inc. 1996 Stock Option Plan effective January 1, 1996. As of December 31, 1996,
the plan permits grants of options up to an aggregate of 1,100,000 shares of
common stock to employees and certain consultants of the Company, on such terms
as the Company's compensation committee (or a stock option subcommittee thereof)
determines. Options granted under the plan as of January 1, 1996 replaced
existing stock options granted by ADS and County in connection with the
Exchange. The stock options vest over three and five year periods and are
exercisable over a ten year period from the original grant dates. All vesting is
subject to acceleration under specified circumstances.
Options to purchase an aggregate of 63,601 shares were granted outside the
plan to a former employee and were fully vested as of January 1, 1996. Such
shares have an exercise price of $7.17 per share, increasing at 25% per annum
from the date of original grant of the ADS stock options they replace.
47
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option information follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................ 869,617 $ 7.36 186,444 $ 7.17 144,900 $ 7.17
Granted....................................... 68,270 9.00 683,173 7.41 41,544 7.17
Exercised..................................... 467 7.17 0 -- 0 --
Forfeited..................................... (2,506) 7.64 0 -- 0 --
--------- ----- --------- ----- --------- -----
Outstanding at end of year...................... 934,914 $ 7.47 869,617 $ 7.36 186,444 $ 7.17
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable at end of year...................... 434,553 105,223 0
Available for future grant...................... 228,220 293,984 977,157
Weighted average value of options granted during
the year....................................... $ 4.33 $ 1.88
</TABLE>
As of December 31, 1996, the Company had outstanding 934,914 options with
exercise prices between $7.17 and $9.00 per share and weighted average remaining
lives of 8.2 years.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Disclosure of pro forma information regarding net loss and net loss per
share is required by FAS 123, and has been determined as if the Company had
accounted for its stock options granted in 1996 and 1995 under the fair value
method. The options granted in 1996 were valued using the Black-Scholes option
pricing model. The options granted in 1995, as a non-public company, were valued
using the minimum value method. The Black-Scholes option valuation model
requires the input of highly subjective assumptions and, because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the model cannot necessarily provide a single measure of
the fair value of its stock options. The following assumptions were utilized in
the valuation:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C> <C> <C>
1996 1995
--------- ---------
Risk-free interest rate................................................. 6.65% 5.85%
Expected dividend yield................................................. 0% 0%
Expected stock price volatility......................................... 44.4% n/a
Expected life of options................................................ 5 years 5 years
</TABLE>
48
<PAGE>
AMERICAN DISPOSAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
9. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's stock options granted in 1996 and
1995 been determined based on the fair value at the dates of grants, the
Company's net loss and net loss per share would have been reduced to the pro
forma amounts indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C> <C> <C>
1996 1995
--------- ---------
Pro forma net loss (in thousands of dollars)............................. ($ 687) ($ 3,807)
Pro forma net loss per share applicable to common shareholders........... ($ 0.10) ($ 1.08)
</TABLE>
The pro forma effect for 1996 and 1995 is not representative of the pro
forma effect in future years as the pro forma disclosures reflect only the fair
value of stock options granted in 1996 and 1995 and do not reflect the fair
value of outstanding options granted prior to 1995.
STOCK WARRANTS
In connection with obtaining various credit agreements, the Company issued
warrants to purchase 168,905 shares of common stock with exercise prices ranging
from $4.72 to $7.41 per share. The Company recorded the fair value of the
warrants as a component of equity and recognized debt issuance cost of $106,666.
The warrants expire 10 years from date of issuance.
In connection with the Exchange, 5,000,000 shares of new preferred stock of
the Company were authorized with none issued at December 31, 1996 and 1995.
10. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company acquired substantially all the
assets of Sparky's Waste Control and A-1 Container, and acquired the stock of
Allied Waste Systems, Inc. In addition, the Company entered into definitive
asset purchase agreements on March 24, 1997 and March 25, 1997 to acquire
substantially all the assets of Liberty Disposal, Inc. and the Evansville,
Indiana operations of Waste Management of Indiana, LLC, respectively.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
<PAGE>
PART III
The information required by Part III (Items 10 through 13) is incorporated
by reference to the captions "Principal Stockholders," "Election of Directors,"
"Management" and "Certain Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the Company's fiscal year covered by this Report.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
Report of Independent Auditors .................................. 33
Consolidated Balance Sheets at December 31, 1996 and 1995.......... 34
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................. 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994........................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................. 37
Notes to Consolidated Financial Statements......................... 38
(a) 2. Financial Statement Schedules
No formal statement schedules are required by Regulation S-X for
each of the three years in the period ended December 31, 1996.
(b) No reports on Form 8-K have been filed during the last quarter of the
Company's fiscal year ended December 31, 1996.
(c) See Exhibit Index immediately following signature pages.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN DISPOSAL SERVICES, INC.
By: /s/ RICHARD DE YOUNG
-------------------------------------
Richard DeYoung
Date: March 26, 1997 President
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David C. Stoller Chairman and Director (principal March 26, 1997
- ----------------------------- executive officer)
/s/ David C. Stoller
/s/ Richard De Young President and Director March 26, 1997
- -----------------------------
/s/ Richard De Young
/s/ Stephen P. Lavey Chief Financial Officer (principal March 26, 1997
- ----------------------------- financial officer)
/s/ Stephen P. Lavey
/s/ Lawrence R. Conrath, Sr. Vice President and Controller) March 26, 1997
- ----------------------------- (principal accounting officer
/s/ Lawrence R. Conrath, Sr.
/s/ Merril M. Halpern Director March 26, 1997
- -----------------------------
/s/ Merril M. Halpern
/s/ A. Lawrence Fagan Director March 26, 1997
- -----------------------------
/s/ A. Lawrence Fagan
/s/ Richard T. Henshaw, III Director March 26, 1997
- -----------------------------
/s/ Richard T. Henshaw, III
/s/ G. T. Blankenship Director March 26, 1997
- -----------------------------
/s/ G. T. Blankenship
/s/ Norman Steisel Director March 26, 1997
- -----------------------------
/s/ Norman Steisel
53
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibits
----------- -----------------------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Amendment to Restated Certificate of Incorporation (1)
3.3 By-laws of the Company (1)
10.1 Credit Agreement dated as of August 30, 1996 among the
Company, Internationale Nederlanden (U.S.) Capital
Corporation, as administrative agent, and Morgan
Guaranty Trust Company of New York, as documentation
agent, and the other financial institutions party
thereto (2)
10.2 Amendment No. 1 to the Amended and Restated Credit
Agreement dated as of March 21, 1997 among the Company,
Internationale Nederlanden (U.S.) Capital Corporation,
as administrative agent, and Morgan Guaranty Trust
Company of New York, as documentation agent, and the
other financial institutions party thereto
10.3 Registration Rights Agreement dated as of January 1,
1997 among the Company and certain of its
stockholders(1)
10.4 Employment Agreement dated as of May 31, 1996 between
the Company and Richard De Young (1)
10.5 Employment Agreement dated January 26, 1993 between the
Company and John J. McDonnell, as amended (1)
10.6 Employment Agreement dated May 16, 1995 between the
Company and Richard T. Kogler (1)
10.7 Employment Agreement dated June 2, 1995 between the
Company and Ann L. Straw (1)
10.8 Employment Agreement dated May 3, 1994 between the
Company and Lawrence R. Conrath, Sr. (1)
10.9 Employment Agreement dated as of May 31, 1996 between
the Company and David C. Stoller (1)
10.10 Employment Agreement dated as of February 21, , 1997
between the Company and Stephen P. Lavey
10.11 American Disposal Services, Inc. 1996 Stock Option Plan
(1)
10.12 Form of Indemnification Agreement between the Company
and its directors (1)
10.13 Form of Indemnification Agreement between the Company
and its executive officers (1)
10.14 Form of Indemnification Agreement between the Company
and its directors and executive officers (1)
10.15 Form of Tax-Sharing Agreement between the Company and
its executive officers (1)
21.1 Subsidiaries of the Company (3)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (333-4889).
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated August 26, 1996.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1
(333-24103)
54
Exhibit 10.2
AMENDMENT NO. 2
AMENDMENT NO. 2, dated as of March 14, 1997, among AMERICAN DISPOSAL
SERVICES, INC., a Delaware corporation (the "Company"), each of the lenders
that is a signatory hereto (collectively, the "Lenders"; and Individually, a
"Lender"), ING (U.S.) CAPITAL CORPORATION (formerly, Internationale Nedorlanden
(U.S.) Capital Corporation), as administrative agent for the Lenders (the
"Administrative Agent") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
documentation agent (the "Documentation Agent").
The Company, the Lenders, the Administrative Agent and the Documentation
Agent are parties to an Amended and Restated Credit Agreement, dated as of
August 26, 1996 (as modified and supplemented and in effect on the date hereof,
the "Credit Agreement"), providing, subject to the terms and conditions thereof,
for extensions of credit to be made by the Lenders to the Company in an
aggregate principal or face amount not exceeding $110,000,000.
The Company, the Lenders, the Administrate Agent and the Documentation
Agent wish to amend the Credit Agreement in certain respects and, accordingly,
the parties hereto agree as follows:
Section 1. DEFINITIONS. Except as otherwise defined in this Amendment,
terms defined in the Credit Agreement and used herein are used herein as defined
therein.
Section 2. AMENDMENTS. Subject to the satisfaction of the condition
precedent specified in Section 3 below, but effective as of the date hereof, the
Credit Agreement shall be amended as follows:
2.01 CHANGES TO COMMITMENT AMOUNTS. Section 1.01 of the Credit
Agreement shall be amended by amending in their entirety the following
definitions, as follows:
"EXPANSION LOAN COMMITMENT: shall mean, for each Expansion Loan
Lender, the obligation of such Lender to make one or more Expansion Loans in an
aggregate amount up to but not exceeding the amount set forth opposite the name
of such Lender on SCHEDULE 1.1 under the caption "Expansion Loan Commitment" (as
the same may be reduced from time to time in accordance with this Agreement).
The aggregate principal amount of the Expansion Loan Commitments is $95,000,000.
"WORKING CAPITAL LOAN COMMITMENT" shall mean, for each Working
Capital Lender, the obligation of such Lender to make Working Capital Loans in
an aggregate principal amount at any one time outstanding up to but not
exceeding the amount set forth opposite the name of such Lender on SCHEDULE 1.1
under the caption "Working Capital Loan Commitment" (as the same may be reduced
from time to time in accordance with this Agreement). The aggregate principal
amount of the Working Capital Loan Commitments is $5,000,000.
<PAGE>
In addition, Schedule 1.1 to the Credit Agreement shall be amended in its
entirety to read as Schedule l1.1 to this Amendment.
2.02. AMENDMENT TO INDEBTEDNESS COVENANT. Section 8.5 of the Credit
Agreement shall be amended by replacing the period at the end of clause (e)
thereof with "; and" and by adding a new clause (f) to read as follows:
"(f) Indebtedness of the Company consisting of the deferred purchase
price payable by the Company in respect of any Eligible Acquisition, so
long as:
(x) the aggregate principal amount of such Indebtedness does not
exceed $2,000,000 at any one time outstanding, and
(y) the maturity of such Indebtedness does not exceed 18 months."
2.03. AMENDMENT TO MAXIMUM TOTAL INDEBTEDNESS TO EBITDA COVENANT.
Clause (b) of Section 8.14 of the Credit Agreement shall be amended by
replacing the table therein with the following table:
"Period Ratio
From October 1, 1996 to and 3.75 to 1
including March 30, 1997
From March 31, 1997 to and 3.50 to 1
including September 29, 1997
From September 30, 1997 to and 3.50 to 1
including December 30, 1997
From December 31, 1998 to and 3.30 to 1
including March 30, 1998
From March 31, 1998 to and 3.00 to 1
including September 29, 1998
From September 30, 1998 to and 2.50 to 1"
including June 30, 2003
2
<PAGE>
2.04. REVOLVING NATURE OF A PORTION OF THE EXPANSION LOAN COMMITMENTS.
(a) The Definition of "Expansion Loan Commitment Termination Date" in
Section 1.1 of the Credit Agreement shall be amended by replacing the existing
parenthetical clause therein with the following:
"(other than amounts thereof (x) that may be required to be prepaid
pursuant to Section 2.8(a)(ii), or (y) that constitute 1997 Equity Prepayments,
in each case to the extent permitted to be reborrowed pursuant to SECTION
2.2(b))"
(b) The proviso to Section 2.2(b) of the Credit Agreement (Expansion Loan
Commitments) shall be amended in its entirety to read as follows:
"PROVIDED that (x) amounts prepaid pursuant to SECTION 2.&(a)(ii) AND (y)
1997 Equity Prepayments may be reborrowed as Expansion Loans to but not
including the Expansion Loan commitment Termination Date."
(c) Section 2.9 of the Credit Agreement (Application of Mandatory
Prepayments) shall be amended by adding the following at the end thereof.
3
<PAGE>
IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
AMERICAN DISPOSAL SERVICES, INC.
By:
---------------------------------
Title:
ING (U.S.) CAPITAL CORPORATION,
as Administrative Agent
By:
---------------------------------
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Documentation Agent
By:
---------------------------------
Title:
ING (U.S.) CAPITAL CORPORATION, as Lender
and as Issuing Lender
By:
---------------------------------
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Lender
By:
---------------------------------
Title:
BHR-BANK AKTIENGESELLSCHAFT, as Lender
By:
---------------------------------
Title:
By:
---------------------------------
Title
4
<PAGE>
<TABLE>
<CAPTION>
Lender Expansion Loan Pro Rate
Commitment Share
---------------------------------------
<S> <C> <C>
ING (U.S.) Capital Corporation $11,735,294.12 12.3529%
Morgan Guaranty Trust $11,735,294.12 12.3529%
Company of New York
BHF-Bank Aktiengesellschaft $11,176,370.59 11.7647%
The Boatmen's National Bank of $11,176,470.59 11.7647%
St. Louis
Harris Trust and Savings Bank $ 8,941,176.47 9.4118%
Mercantile Bank of St. Louis $ 8,941,176.47 9.4118%
National Association
National Bank of Canada, New York $11,176,470.59 11.7647%
Branch
Union Bank of California, N.A. $11,176,470.59 11.7647%
Wells Fargo Bank, N.A. $ 8,941,176.47 9.4118%
Van Kampen American Capital $ 0.00 0.0000%
Prime Rate Income Trust
Merrill Lynch Senior Floating Rate $ 0.00 0.0000%
Fund, Inc.
McDonnell Douglas Finance $ 0.00 0.0000%
Corporation
</TABLE>
5
Exhibit 10.10
AMERICAN DISPOSAL SERVICES, INC.
745 MCCLINTOCK DRIVE
SUITE 305
BURR RIDGE, IL 60521
February 21, 1997
Mr. Stephen Lavey
Dear Mr. Lavey:
American Disposal Services, Inc. A Delaware Corporation (the
"Corporation"), agrees to employ you and you agree to accept such employment
under the following terms and conditions (the "Agreement"):
1. TERM OF EMPLOYMENT. Except for earlier termination as provided in
Section 7 below, your employment under this Agreement shall be for a term
commencing on the data hereof (the Agreement shall be for a term commencing on
the date hereof (the "Effective Date") and continuing until the second
anniversary of the Effective Date (the "Term").
2. COMPENSATION. You shall be compensated for all services rendered
by you under this Agreement at rate of no less than $175,000 per annum (the
"Salary"), payable in such manner as is consistent with the Corporation's
payroll practices for executive employees.
3. DUTIES. During the term of your employment hereunder, you
agree to serve as a Vice President and Chief Financial Officer of the
Corporation subject to the control of the Board of Directors. Your principal
office shall be located within
<PAGE>
35 miles of Burr Ridge, Illinois. You shall be provided with such working
facilities and support services as are suitable to your position and appropriate
for the performance of your duties. You shall devote your full business time,
energies and attention to the business and affairs of the Corporation and its
subsidiaries.
4. BENEFITS. You shall be entitled to such benefits as are
generally provided by the Corporation to its senior executive employees
including, without limitation, personal leave, sick leave and vacation leave
to the extent such lease are provided to all senior executive employees. You
also shall have the benefit of any life and health insurance plans,
pensions, stock option plans, bonus plans and other similar plans as the
Corporation may have or may be establish from time to time for its senior
executive employees. The foregoing, however, shall not be construed to
require the Corporation to establish any such plans or to prevent the
Corporation from modifying or terminating any such plans, and no such action
or failure thereof shall affect this Agreement. You shall be entitled to
four weeks of paid vacation during each of the two years of the Term.
5. EXPENSES. The Corporation will reimburse you for reasonable
expenses, including travel expenses, incurred by you in connection with the
business of the Corporation upon the presentation by you of appropriate
substantiation for such expenses.
2
<PAGE>
6. CONFIDENTIALITY, NON-INTERFERENCE. In the course of your
employment by the Corporation, you will have access to confidential or
proprietary data or information of the Corporation and its operations. Except
as ordered by a court, you will not at any time divulge or communicate to any
person nor shall you direct any Corporation employee to divulge or communicate
to any person (other than to a person bound by confidentiality obligations
similar to those contained herein and other than as necessary in performing your
duties hereunder) or use to the detriment of the Corporation or for the benefit
of any other person, any off such data or information. The provisions of this
section 6 shall survive your employment hereunder, whether by the normal
expiration thereof or otherwise. The term "Confidential or proprietary data or
informational as used in this Agreement shall mean information not generally
available to the public, including, without limitation, personnel information,
financial information, customer lists, supplier lists, trade secrets,
information regarding operations, systems, services, knowhow, computer and any
other processed or collated data, computer programs, pricing, marketing and
advertising data, but shall not include information which later becomes public
knowledge other than by reason of a breach by you of the provisions of this
Section 6. You further agree that you will not, for a period of two years after
the termination of your employment hereunder, for your own account or for the
account of any other person, solicit any of the Corporation's key employees.
With respect to the convenience contained in this Section 6, you
3
<PAGE>
agree that any remedy at law for any breach of said covenants may be inadequate
and that the Corporation shall be entitled to specific performance or any other
mode of injunctive and/or other equitable relief to enforce its rights hereunder
or any other relief a court might award.
7. EARLIER TERMINATION.
(a) Your employment hereunder shall terminate prior to the
expiration of the Term on the following terms and conditions:
(i) This Agreement shall terminate automatically on the
date of your death.
(ii) This Agreement shall be terminated at the option of the
Corporation if you are unable to perform your duties
hereunder for 180 days (whether or not continuous)
during any period of 365 consecutive days by reason of
physical or mental disability. The disability shall be
deemed to have one hundred eightieth (180th) day of
your absence or lack of adequate performance.
(iii) The Corporation shall have the right to terminate this
Agreement at any time for
4
<PAGE>
"Just Cause" given by you. "Just Cause" shall
mean your commission of a felony, a crime
involving moral turpitude, embezzlement,
misappropriation of property of the Corporation or a
subsidiary, any other act involving dishonesty or
fraud with respect to the Corporation or a
subsidiary, a material breach of a directive which is
not cured within a specified reasonable time after
of such breach or repeated failure after written
the directives of the Board of Directors of the
Corporation.
(b) Upon termination of this Agreement pursuant to Section 7(a),
the Corporation's obligation's hereunder shall cease.
(c) You shall have the right to terminate this Agreement on five
days' written notice given to the Corporation within 60 days after the
occurrence of events or circumstances which constitute Good Reason (as
hereinafter defined). For purposes of this Agreement, events or circumstances
which constitute "Good Reason" shall be deemed to have occurred if the Board of
Directors of the Corporation materially diminishes your position, duties or
responsibilities under this Agreement, assigns to you duties or responsibilities
that are materially inconsistent.
5
<PAGE>
With your position as Vice President and Chief Financial Officer of the
Corporation or requires you to relocate your principal office in violation of
the provisions of Section 3 hereof. The events or circumstances set forth in
this Section 7 (c) shall not constitute Good Reason if they occur in connection
with the termination of your employment pursuant to Section 7(a) (i ), 7(a)
(ii) or 7(a) (iii) above.
(d) Notwithstanding anything contained herein to the contrary,
the Corporation shall have the right to terminate this Agreement at any time,
for any reason or for no reason.
(e) Upon termination of this Agreement pursuant to Section 7 (c)
or 7 (d) the Corporation shall pay you, in 24 equal monthly installments, an
amount equal to two times (2x) your annual Salary then in effect. Such payment
shall be in lieu of any other amounts otherwise payable to you under this
Agreement or otherwise arising from your employment by the Corporation, except
for accrued but unpaid wages and vacation time and any benefits which the
Corporation is obligated to continue under the express terms of any given
benefit plan.
(f) You shall have the right to terminate your employment
hereunder at any time for any reason or no reason; PROVIDED, that if you do so,
you shall not be entitled to receive any further amounts otherwise payable by
you under this Agreement or otherwise arising from your employment by the
Corporation, except for accrued but unpaid wages and vacation time
6
<PAGE>
and any benefits which the Corporation is obligated to continue under the
express terms of any given benefit plan.
8. ENTIRE AGREEMENT; MODIFICATION; CONSTRUCTION. This Agreement
constitutes the full and complete understanding of the parties, and will, on the
Effective Date, supersede all prior agreements and understandings, oral or
written, with respect to the subject matter hereof, including any agreements you
may have with the Corporation's subsidiaries. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements, oral
or otherwise, have been made by either party, or anyone acting on behalf of
either party, which are not embodied herein and that no other agreement,
statement or promise not contained in this Agreement shall be valid or binding.
This Agreement may not be modified or amended except by an instrument in writing
signed by the party against which enforcement thereof may be sought.
9. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
effective to the extent of such invalidity or unenforceability without rendering
invalid or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction.
7
<PAGE>
10. WAIVER OF BREACH. The waiver by either party of a breach or any
provision of this Agreement, which waiver must be in writing to be effective,
shall not operate as or be construed as a waiver of any subsequent breach.
11. NOTICES. All notices hereunder shall be in writing and shall be
hand delivered or sent by prepaid express mail or other overnight prepaid
courier or by certified registered mail, postage prepaid, return receipt
requested, if to you, to your residence as listed in the Corporation's records,
and if to the Corporation, to the address set forth at the head of this
Agreement, Attention: President, with copies to Proskauer Rose Goetz &
Mendelsohn LLP, 1585 Broadway, New York, New York 10036, Attention: Stephen W.
Rubin, Esq.
12. ASSIGNABILITY; BINDING EFFECT. This Agreement shall not be
assignable by you. This Agreement shall be binding upon and inure to the
benefit of you, your legal representatives, heirs and distributes, and shall be
binding upon and inure to the benefit of the Corporation, its successors and
assigns.
13. GOVERNING LAW. All questions pertaining to the validly,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Illinois, without regard to
the conflicts or choice of law provisions thereof.
8
<PAGE>
14. HEADINGS. The heading of this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
16. REVIEW OF THIS AGREEMENT. You acknowledge that you have (a)
carefully read this Agreement, (b) had an opportunity to consult with
independent counsel with respect to this Agreement and (c) entered into this
Agreement of your own free will.
If this letter correctly sets forth our understanding, please singe
the duplicate original in the space provided below and return it to the
Corporation, whereupon this shall constitute the employment agreement between
you and the Corporation effective on the Effective Date and for the Term stated
herein.
AMERICAN DISPOSAL SERVICES, INC.
By:
------------------------------
President
Agreed as of the date first
above written:
- -----------------------------
Stephen Lavey
9
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-13719) pertaining to the American Disposal Services, Inc. 1996 Stock
Option Plan of our report dated February 26, 1997, except as to Note 5 for which
the date is March 21, 1997, and as to Note 10 for which the date is March 25,
1997, with respect to the consolidated financial statements of American Disposal
Services, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Chicago, Illinois
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of December 31, 1996 and Statements of Operations for
the year ended December 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,301
<SECURITIES> 0
<RECEIVABLES> 10,214
<ALLOWANCES> 473
<INVENTORY> 354
<CURRENT-ASSETS> 13,644
<PP&E> 111,226
<DEPRECIATION> 17,534
<TOTAL-ASSETS> 144,986
<CURRENT-LIABILITIES> 12,425
<BONDS> 65,445
0
0
<COMMON> 89
<OTHER-SE> 58,008
<TOTAL-LIABILITY-AND-EQUITY> 144,986
<SALES> 0
<TOTAL-REVENUES> 56,804
<CGS> 51,038
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,485
<INCOME-PRETAX> 460
<INCOME-TAX> 245
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 476
<CHANGES> 0
<NET-INCOME> (261)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
