Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
Commission File Number 0-19285
Allied Waste Industries, Inc.
(Exact name of registrant as specified in its charter)
--------------
Delaware 88-0228636
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15880 North Greenway-Hayden Loop, Suite 100
Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 423-2946
--------------
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value Nasdaq National Market
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 and 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. |_|
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant was $1,801,526,053 as of March 16, 1998.
The number of shares of the Company's common stock, $.01 par value,
outstanding at March 16, 1998 was 105,804,325.
The registrant's proxy statement is to be filed in connection with the
registrant's 1998 annual meeting of stockholders, portions of which are
incorporated by reference into Part III of this report.
PART I
Item l. Business
Allied Waste Industries, Inc., a Delaware corporation ("Allied" or the
"Company"), is the fifth largest, non-hazardous solid waste management company
in the United States, as measured by revenues. The Company serves approximately
1.4 million customers through operations in 18 states located primarily in the
Midwest, Northeast, Southeast and Southwest United States. As of March 16, 1998,
the Company provided its services through a network of 81 collection companies,
43 transfer stations, 56 landfills, and 21 recycling facilities. The Company had
revenues of $291.7 million and $875.0 million for the years ended December 31,
1996 and 1997, respectively. The substantial increase in revenues in 1997
compared to the same period in 1996 is primarily attributable to the acquisition
of substantially all of the non-hazardous solid waste management business
conducted by Laidlaw Inc. ("Laidlaw") on December 30, 1996 (the "Laidlaw
Acquisition").
Industry Trends
Based on data available from the Environmental Protection Agency (the
"EPA") and industry trade journals, the Company estimates that the total 1996
revenues of the non-hazardous solid waste industry in the United States were
approximately $36 billion. The non-hazardous solid waste industry is highly
fragmented. Approximately 41%, 32% and 27% of the revenue is generated by
publicly traded companies, municipalities and privately held companies,
respectively. The five largest publicly traded companies represent a substantial
majority of the publicly traded company revenues.
The non-hazardous solid waste industry is characterized by
consolidation. The Company believes that several factors will lead to continuing
acquisitions and consolidation in the industry. Rising costs, regulatory
complexities and increased capital expenditures will create opportunities for
large integrated public companies that have the requisite management expertise
and ready access to capital. The following factors are contributing to
consolidation and acquisition opportunities:
(1) Subtitle D of the Resource Conservation and Recovery Act of 1976,
as amended ("Subtitle D") and similar state regulations have significantly
increased the amount of capital, technical expertise, operating costs and
financial assurance obligations required to own and operate solid waste
landfills. As a result, many landfill operators that lack the necessary capital
or expertise are electing to sell their landfills as an alternative to closing
them. Industry data show that, in recent years, the number of landfills in the
United States has been decreasing. In 1988 there were approximately 7,500
landfills; by 1991, the number had dropped to 5,700; and in 1995 there were less
than 2,900 landfills.
(2) As an alternative to funding the changes required by Subtitle D,
many municipalities are electing to privatize their municipal solid waste
landfill operations. A survey cited in a 1996 industry trade journal, Waste Age,
indicates that of the 1,600 municipalities surveyed, which together represent
80% of the United States population, 11%, 35%, 27% and 22% are considering
privatization of solid waste collection services, material recovery facilities,
landfill operations and transfer stations, respectively.
(3) As a result of heightened sensitivity to environmental conditions
in many communities, it is becoming increasingly desirable for solid waste
management companies to provide waste recycling programs in addition to
conventional collection and disposal services.
These developments, as well as more stringent financial assurance
requirements being imposed on solid waste management companies by various
municipalities, have increased the amount of capital generally required for
solid waste management operations, causing smaller companies that lack the
requisite capital to sell their operations to better-capitalized companies.
2
Business Strategy
The major components of the Company's business strategy consist of: (1)
operating vertically integrated non-hazardous solid waste service businesses
with a high rate of waste internalization; (2) managing these businesses locally
with a strong focus on operations; (3) maintaining a high rate of growth through
acquisitions and internal development in existing and selected new markets; and
(4) maintaining the financial capacity, management capabilities and
administrative systems and controls to support on-going operations and future
growth. The Company operates almost exclusively in the United States.
Vertical Integration and Internalization. The vertical
integration business model is the key element of Allied's
operating philosophy and growth strategy. The fundamental
objective of the vertical integration business model is to
control the waste stream from the point of collection through
disposal and to achieve a high rate of waste internalization.
Allied seeks to build, through acquisitions and other market
development initiatives, market specific, vertically
integrated operations typically consisting of one or more
collection companies, transfer stations, processing centers
and landfills. Within its markets, Allied seeks to strengthen
its competitive position and improve its financial returns by
acquiring additional operating assets, typically through
"tuck-in" collection company acquisitions. Allied believes
that it can realize competitive advantages and strong future
growth by continuously implementing this strategy across
existing and new markets in the United States. Allied's
internalization rate, as measured by collection volumes, was
approximately 60% in 1997.
Focus on Operations. Allied's operations-oriented business
strategy is characterized by decentralized operations and
local management with significant experience in operating and
growing solid waste businesses. Allied only recruits operating
managers with extensive industry experience, usually with
significant experience in their geographic markets. Allied's
senior executive management, senior operating management and
regional vice presidents currently average approximately 18,
22 and 23 years of industry experience, respectively. By
continuing to hire and retain experienced, local
market-oriented managers, Allied believes that it will be well
positioned to react to changes in its market and will be able
to capitalize on growth opportunities in existing and new
markets.
Maintaining High Rate of Growth. Allied seeks to capitalize on
the on-going consolidation of the approximately $36 billion
solid waste industry in the United States. Allied intends to
grow primarily by acquiring privately-owned solid waste
companies and through internal development. Allied also
intends to take selective advantage of opportunities when
government entities privatize the operation of all or part of
their solid waste systems. In addition, Allied seeks to
achieve broad geographic and business mix diversification in
its operations and market development activities. Allied's
revenue mix for 1997 was approximately 59% collection, 25%
disposal, 7% transfer, 3% recycling and 6% other.
Maintaining Capacity for Future Growth. Allied implements its
business strategy by maintaining effective internal controls,
experienced management and sufficient financial capacity.
While Allied expects internal cash flows to fund most of its
working capital and capital expenditure requirements, Allied
intends to access the public and private capital markets, as
appropriate, to fund its continuing growth and market
development activities.
3
Operations
Collection. Collection operations involve collecting and transporting
non-hazardous waste from the point of generation to the transfer station or the
site of disposal. Solid waste collection is generally provided under two primary
types of arrangements, depending on the customer being served.
Commercial. The Company provides containerized non-hazardous solid
waste disposal services to a wide variety of commercial and industrial
customers. These customers are provided with containers that are
designed to be lifted mechanically and either emptied into a collection
vehicle's compaction hopper or, in the case of roll-off containers, to
be loaded onto the collection vehicle. The Company's commercial
containers generally range in size from one to eight cubic yards and
its roll-off containers generally range in size from 20 to 40 cubic
yards. Contracts for commercial containers typically have terms of up
to five years, may not be terminated by the customer prior to the end
of the term without a penalty and have renewal options. Contracts for
roll-off containers may provide for temporary (such as the removal of
waste from a construction site) or ongoing services. Fees relating to
those contracts are determined by general competitive and prevailing
local economic conditions and include other considerations such as
collection frequency, type of equipment furnished, distance traveled to
the disposal site, the cost of disposal and the type and volume or
weight of the waste collected.
Residential. Residential collection services are performed
pursuant to individual monthly subscriptions directly to households or
long-term contracts with municipal governments that give the Company
exclusive rights to service all or a portion of the homes in such
municipalities at established rates. The Company seeks to obtain
municipal contracts which enhance the efficiency and profitability of
the Company's operations as a result of the density of collection
customers within a given area. At the end of the term of most municipal
contracts, the Company will attempt to renegotiate the contract, and if
unable to do so, will rebid the contract on a sealed bid basis.
Residential collection service arrangements with households are made
directly between the Company and the resident. The Company seeks to
enter into residential service arrangements where the route density is
high, thereby creating additional economic benefit. Collection fees are
determined by the Company and the customer based on general competitive
and prevailing local economic conditions and include other
considerations such as collection frequency, the type and volume or
weight of the waste collected, the distance to the disposal facility,
and cost of disposal. Residential collection fees are either paid by
the municipalities out of tax revenues or service charges or are paid
directly by the residents who receive the service.
Transfer Stations. A transfer station is a facility where solid waste
is received from third-party and Company owned collection vehicles and then
transferred to and compacted in large, specially-constructed trailers for
transportation to disposal facilities. This consolidation reduces costs by
increasing the density of the waste being transported through compaction and by
improving utilization of collection personnel and equipment, and is an
increasingly common procedure in the solid waste management industry. Fees are
generally based upon such factors as the type and volume or weight of the waste
transferred and the transport distance involved. The Company believes that as
increased regulations and public pressure restrict the development of landfills
in urban and suburban areas, transfer stations will increasingly be used as an
efficient means to transport waste over longer distances to available landfills.
Recycling. In response to increasing awareness by the customer of
environmental concerns and expanding federal and state regulations pertaining to
waste recycling, the Company includes recycling as a component of its vertically
integrated solid waste business strategy. Services include curbside collection
of recyclable materials for residential customers, commercial and industrial
collection of recyclable materials, and, to a lesser extent, material
recovery/waste reduction. Recycling fees are generally service based wherein the
customer pays for the cost of removing, processing and disposing of potentially
recyclable materials. In most cases, mixed waste materials are received at an
owned or leased materials recovery facility ("MRF") which is often integrated
into or contiguous to a transfer operation. Materials such as paper, cardboard,
plastic, aluminum and other metals are sorted, separated,
4
accumulated, bound or placed in a container and readied for transportation to a
third-party which will reuse the separated materials. The purchaser generally
pays for the materials based on fluctuating spot-market prices. Material for
which there is no market or for which the market price is insufficient to
warrant processing are disposed of at a landfill or other disposal facility. The
Company seeks to avoid exposure to fluctuating commodity prices by passing
through substantially all of the profit or loss from the sale of recyclables to
its customers.
Landfills. Solid waste landfills are the primary method of disposal of
solid waste in the United States. Currently, a landfill must be designed,
permitted, operated and closed in compliance with federal, state and local
regulations pursuant to Subtitle D. Operating procedures include excavation,
continuous spreading and compacting of waste, and covering of waste with earth
or other inert material. The cost of transferring solid waste to a disposal
location places an economic restriction on the geographic scope of landfill
operations in a particular market. Access to a disposal facility, such as a
landfill, is a requirement for all solid waste management companies. While
access can generally be obtained to disposal facilities owned or operated by
unaffiliated parties, the Company believes that, in keeping with its business
strategy, it is preferable to own or operate its own disposal facilities thereby
ensuring access on favorable terms and the internalization of disposal fees.
Organization, Marketing and Sales
The Company's operations are organized into six regions which beginning
in 1998 were designated as Great Lakes, Midwest, Northeast, Southeast, Southwest
and West. Each region is organized into several operating districts and each
district is comprised of specific site operations. In determining these regions
and districts, the Company utilizes its vertical integration strategy to
optimize operating efficiencies within each region. Each of its regions and
substantially all of its districts include collection, transfer, processing and
disposal services, which facilitates efficient and cost effective waste handling
and allows the districts to maximize the internalization of waste. In
determining the boundaries of regions and districts, consideration is also given
to the aggregate revenues generated in each region and district and the growth
and expansion plans in each geographic area.
Each region is managed by a regional vice president, who is supported
by a modest staff which includes a regional controller. All regional vice
presidents and most regional controllers have significant industry experience
(in the case of regional vice presidents, averaging 24 years of experience).
Most regional offices are located in a district facility in order to reduce
overhead costs and to promote a close working relationship between the regional
management and field operations personnel. In addition, Allied generally makes
it a practice to fill management positions from within the organization.
The responsibilities of Allied's field management also are aligned with
the vertical integration model. All regional managers and generally most
district mangers have responsibility for all phases of the waste handling
process including collection, transfer, processing and disposal. Regional
management also has responsibility for growing regional revenues through both
acquisition and internal development initiatives. Allied believes that this
approach promotes the most efficient handling of waste, including increased
internalization, and results in reduced costs and increased profits. In addition
to base salary, regional and district management are compensated through a bonus
program and stock option plan. The compensation payable to each manager pursuant
to the bonus and stock option plans is largely based upon meeting or exceeding
operating profit goals in such manager's geographic area of responsibility.
Each of Allied's districts has a staff responsible for sales and
marketing. Allied's policy is to periodically visit each commercial account to
ensure customer satisfaction and to sell additional services. In addition to
calling on existing customers, each salesperson calls upon potential customers
within a defined area in each market.
5
In addition, to its sales efforts directed at commercial and industrial
customers, Allied has a municipal marketing coordinator in most service areas.
The municipal marketing coordinators are responsible for interfacing with each
municipality or community to which Allied provides residential service to ensure
customer satisfaction. In addition, the municipal coordinators organize and
handle bids for renewal and new municipal contracts in their service area.
Competition
The non-hazardous waste collection and disposal industry is highly
competitive. In addition to the Company, the industry is currently comprised of
four national waste companies, Waste Management, Inc.; Browning-Ferris
Industries, Inc. ("BFI"); Republic Industries, Inc.; and USA Waste Services,
Inc. ("USA Waste"); and local and regional companies of varying sizes and
competitive resources such as American Disposal Services, Inc., Superior
Services, Inc. and Waste Industries, Inc. The Company also competes with those
counties and municipalities that maintain their own waste collection or disposal
operations. These counties and municipalities may have financial advantages
through their access to tax revenues and tax-exempt financing and their ability
to mandate the disposal of waste collected within the jurisdiction at a
municipal landfill. The Company may also experience competition from companies
using alternative methods of managing solid waste streams, such as incineration.
The solid waste collection and disposal industry is currently
undergoing significant consolidation, and the Company encounters competition
through pricing and service in its efforts to acquire landfills and collection
operations. Accordingly, it may become uneconomical for the Company to make
further acquisitions or the Company may be unable to locate or acquire suitable
acquisition candidates at price levels and on terms and conditions that the
Company considers appropriate, particularly in markets the Company does not
already serve.
Environmental and Other Regulations
The Company is subject to extensive and evolving environmental laws and
regulations. These regulations are administered by the EPA and various other
federal, state and local environmental, zoning, health and safety agencies, many
of which periodically examine the Company's operations to monitor compliance
with such laws and regulations. Governmental authorities have the power to
enforce compliance with these regulations and to obtain injunctions or impose
civil or criminal penalties in case of violations. The Company believes that
there will be increased regulation and legislation related to the waste
management industry and the Company attempts to anticipate such future
regulatory requirements to ensure compliance.
The Company's operation of landfills subjects it to certain
operational, monitoring, site maintenance, closure, post-closure and other
obligations which could give rise to increased costs for monitoring and
corrective measures. In connection with the Company's acquisition of existing
landfills, it is often necessary to expend considerable time, effort and money
to obtain permits required to increase the capacity of these landfills. The
Company cannot predict whether or not it will be able to obtain the governmental
approvals necessary to establish new or expand existing landfills and, if it
does, whether or not it will be economically beneficial to do so.
The Company's operations are subject to extensive regulation,
principally under the following federal statutes:
The Resource Conservation and Recovery Act of 1976, ("RCRA") as
amended. RCRA regulates the handling, transportation and disposal of hazardous
and non-hazardous wastes and delegates authority to states to develop programs
to ensure the safe disposal of solid wastes. On October 9, 1991, the EPA
promulgated Solid Waste Disposal Facility Criteria for non-hazardous solid waste
landfills under Subtitle D. Subtitle D includes location standards, facility
design and operating criteria, closure and post-closure requirements, financial
assurance standards and groundwater monitoring as well as corrective action
standards, many of which had not commonly been in place or enforced previously
at landfills. Subtitle D applies to all solid waste landfill cells that received
waste
6
after October 9, 1991, and, with limited exceptions, all landfills were required
to meet these requirements by October 9, 1993. Landfills that were not in
compliance with the requirements of Subtitle D on the applicable date of
implementation, which varied state by state, were required to close. In
addition, landfills that stopped receiving waste before October 9, 1993 were not
required to comply with the final cover provisions of Subtitle D. Each state
must comply with Subtitle D and was required to submit a permit program designed
to implement Subtitle D to the EPA for approval by April 9, 1993. States may
impose requirements for landfill units that are more stringent than the
requirements of Subtitle D. Once a state has an approved program, it must review
all existing landfill permits to ensure that they comply with Subtitle D.
The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"), as amended. This act establishes rules regulating the discharge of
pollutants into streams and other waters of the United States (as defined in the
Clean Water Act) from a variety of sources, including solid waste disposal
sites. If runoff from the Company's landfills or transfer stations may be
discharged into surface waters, the Clean Water Act requires the Company to
apply for and obtain discharge permits, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in those
discharges. The permit program has been expanded to include stormwater
discharges from landfills that receive, or in the past received, industrial
waste. In addition, if development may alter or affect "wetlands," a permit may
have to be obtained and certain mitigation measures may need to be undertaken
before such development may be commenced. This requirement is likely to affect
the construction or expansion of many solid waste disposal sites, including some
owned or being developed by the Company.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980, ("CERCLA") as amended. CERCLA addresses problems created by the
release or threatened release of hazardous substances into the environment.
CERCLA's primary mechanism for remediating such problems is to impose strict,
joint and several liability for cleanup of disposal sites on current owners and
operators of the site, former site owners and operators at the time of disposal,
and waste generators and parties who arranged for disposal at the facility. The
costs of a CERCLA cleanup can be substantial. Liability under CERCLA is not
dependent on the existence or disposal of "hazardous wastes" (as defined under
RCRA), but can also be founded on the existence of even minute amounts of the
more than 700 "hazardous substances" listed by the EPA.
The Clean Air Act of 1970 (the "Clean Air Act"), as amended. The Clean
Air Act provides for increased federal, state and local regulation of the
emission of air pollutants. The EPA has applied the Clean Air Act to landfills.
In March 1996, the EPA adopted New Source Performance Standard and Emission
Guidelines (the "Emission Guidelines") for municipal solid waste landfills.
These regulations impose limits on air emissions from solid waste landfills. The
Emission Guidelines propose two sets of emissions standards, one of which is
applicable to all solid waste landfills that commence construction,
reconstruction or modification after May 30, 1991 and another which is
applicable to all solid waste landfills that received waste or had the capacity
to receive waste after November 8, 1987. The Emission Guidelines may be
implemented by the states. These guidelines, combined with the new permitting
programs established under the recent Clean Air Act amendments, will likely
subject solid waste landfills to significant new permitting requirements and, in
some instances, require installation of methane gas recovery systems.
The Occupational Safety and Health Act of 1970 ("OSHA"), as amended.
OSHA establishes certain employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious injury,
compliance with standards promulgated by the Occupational Safety and Health
Administration, and various recordkeeping, disclosure and procedural
requirements. Various standards, including standards for notices of hazards,
safety in excavation and demolition work, and the handling of asbestos, may
apply to the Company's operations.
7
Future Federal Legislation. In the future, the Company's collection,
transfer and landfill operations may also be affected by legislation that may be
proposed in the United States Congress that would authorize the states to enact
legislation governing interstate shipments of waste. Such proposed federal
legislation may allow individual states to prohibit the disposal of out-of-state
waste or to limit the amount of out-of-state waste that could be imported for
disposal and would require states, under certain circumstances, to reduce the
amounts of waste exported to other states. If this or similar legislation is
enacted, states in which the Company will operate landfills could act to limit
or prohibit the importation of out-of-state waste. Such state actions could
adversely affect landfills within these states that receive a significant
portion of waste originating from out-of-state.
State Regulation. Each state in which the Company operates has laws and
regulations governing solid waste disposal and water and air pollution and, in
most cases, regulations governing the design, operation, maintenance and closure
of landfills and transfer stations. Management believes that several states have
proposed or have considered adopting legislation that would regulate the
interstate transportation and disposal of waste in their landfills. Many states
have also adopted legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling.
The Company's collection and landfill operations may be affected by the
current trend toward laws requiring the development of waste reduction and
recycling programs. For example, a number of states have recently enacted laws
that will require counties to adopt comprehensive plans to reduce, through waste
planning, composting and recycling or other programs, the volume of solid waste
deposited in landfills within the next few years. A number of states have also
taken or propose to take steps to ban or otherwise limit the disposal of certain
wastes, such as yard wastes, beverage containers, newspapers, unshredded tires,
lead-acid batteries and household appliances into landfills.
The Company has implemented and will continue to implement its own
environmental safeguards that comply with or exceed these governmental
requirements. Additionally, the Company's policy is to obtain an environmental
assessment prepared by an independent environmental consulting firm for all real
estate acquired. For calendar year 1998, the Company expects to spend
approximately $24 million for closure, post-closure and remediation
expenditures.
Liability Insurance and Bonding
The Company carries general liability, comprehensive property damage,
workers' compensation, employer's liability, directors' and officers' liability
and other coverages it believes are customary to the industry. The Company also
has environmental impairment liability insurance for all of its operating
landfills except one owned and four operated sites. The environmental impairment
liability insurance is in the amount of up to $5 million for the policy term in
excess of a $1 million deductible per claim. Except as discussed in Legal
Proceedings below, management does not expect the impact of any known
environmental or other contingencies to be material to the Company's
consolidated liquidity, financial position or results of operations.
The Company is required to provide certain financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill and collection operations. These financial assurances include
performance bonds, letters of credit, insurance contracts and trust deposits
required principally to secure the Company's estimated landfill closure and
post-closure obligations and collection contracts. The Company expects to be
required to provide approximately $342.9 million in financial assurance
obligations relating to its landfill operations by the end of fiscal year 1998.
The Company expects that financial assurances will increase in the future as the
Company acquires and expands its activities and that a greater percentage of the
financial assurances will be comprised, directly and indirectly, of letters of
credit.
8
Employees
The Company employs approximately 5,400 persons. Certain employees of
the Company are covered by collective bargaining agreements. The Company
believes relations with its employees are satisfactory.
Item 2. Properties
The Company's principal executive offices are located at 15880 N.
Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260 where it currently
leases approximately 33,000 square feet of office space. The Company also
maintains six regional administrative offices in Arizona, Illinois, Missouri,
South Carolina, Colorado and New York.
The principal property and equipment of the Company consists of land
(primarily landfill sites, transfer stations, and bases for collection
operations), buildings, and vehicles and equipment, substantially all of which
are secured by liens to the Company's primary lenders. The Company owns or
leases real property in the states in which it is doing business. At December
31, 1997, 56 solid waste landfills, aggregating approximately 19,009 total
acres, including approximately 8,123 permitted acres, were owned and operated by
the Company. In addition, the Company owned or operated 81 collection companies,
43 transfer stations and 21 recycling facilities.
Item 3. Legal Proceedings
The Company is currently involved in certain routine litigation. The
Company believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits will
not have a materially adverse effect on the Company's consolidated liquidity,
financial position or results of operations.
The business of the Company is regulated by federal, state and local
provisions that relate to the protection of the environment. The nature of the
Company's business results in it frequently becoming a party to judicial or
administrative proceedings involving governmental authorities and other
interested parties. At December 31, 1997, the Company was not involved in any
such proceedings where management believes sanctions imposed by governmental
authorities may exceed $100,000. From time to time the Company may also be
subject to actions brought by citizens' groups, adjacent landowners or others in
connection with the permitting and licensing of its landfills or transfer
stations, or alleging personal injury, environmental damage or violations of the
permits and licenses pursuant to which the Company operates.
In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by certain subsidiaries of
the Company acquired from Laidlaw (the "LWS Subsidiaries") or other
third-parties, and properties under the management of the LWS Subsidiaries.
Several contaminated landfills and other properties were identified, two of
which are owned by subsidiaries of the Company, that require those subsidiaries
to incur costs for incremental closure and post-closure measures, remediation
activities and litigation costs in the future. The costs of performing the
investigation, design, remediation and allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters, including closure and post-closure costs, in the 1996
statement of operations and expects these amounts to be disbursed over the next
30 years.
The Company has been notified that it is considered a potentially
responsible party at a number of locations under CERCLA or other environmental
laws. The Company continually reviews its status with respect to each location,
taking into account the alleged connection to the location and the extent of the
contribution to the volume of waste at the location, the available evidence
connecting the entity to that location and the numbers and financial soundness
of other potentially responsible parties at the location. The ultimate amounts
for environmental liabilities at sites regarding which the Company may be a
potentially responsible party cannot be determined and estimates
9
of such liabilities made by the Company, after consultation with its independent
environmental engineers, require assumptions about future events due to a number
of uncertainties including the extent of the contamination, the appropriate
remedy, the financial viability of other potentially responsible parties and the
final apportionment of responsibility among the potentially responsible parties.
Where the Company has concluded that its estimated share of potential
liabilities is probable, a provision has been made in the consolidated financial
statements. Since the ultimate outcome of these matters may differ from the
estimates used in the Company's assessment to date, the recorded liabilities
will be periodically evaluated as additional information becomes available to
ascertain that the accrued liabilities are adequate. The Company has determined
that the recorded liability for environmental matters as of December 31, 1997 of
approximately $62.5 million represents the most probable outcome of these
contingent matters. The Company does not expect that adjustments to estimates,
which are reasonably possible in the near term and that may result in changes to
recorded amounts, will have a material effect on the Company's consolidated
liquidity, financial position or results of operations.
The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 have been under audit by the Internal
Revenue Service. In March 1994, the LWS Subsidiaries received a Statutory Notice
of Deficiency proposing that the LWS Subsidiaries pay additional taxes relating
to disallowed deductions in those income tax returns (the "Tax Controversy").
The consolidated tax group of the LWS Subsidiaries has also received notice that
fiscal years 1992, 1993 and 1994 will be examined regarding the Tax Controversy.
The LWS Subsidiaries could be directly liable for a substantial portion of any
tax and interest assessed if the disallowance of the deduction is sustained. In
addition, under Treasury Regulations promulgated under Section 1502 of the
Internal Revenue Code ("IRC"), each member of the consolidated tax group
including each LWS Subsidiary, is or could be severally liable for federal
income tax liabilities of the entire consolidated tax group, including any taxes
due on the deemed sale of assets by the LWS Subsidiaries pursuant to Section 338
of the IRC and all amounts at issue in the Tax Controversy which are ultimately
determined to be owed.
Any amounts at issue in the Tax Controversy and for which any LWS
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Laidlaw acquisition
agreement. The obligation of Laidlaw Inc. and Laidlaw Transportation, Inc.
(collectively, the "Laidlaw Group") to indemnify the Company in respect of
amounts at issue in the Tax Controversy is a general, unsecured obligation of
the Laidlaw Group. The ability of the Laidlaw Group to pay and fulfill such
indemnification obligation will depend on the financial condition of the Laidlaw
Group at the time of any required performance of such obligation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
PART II
Item 5. Market for the Common Stock and Related Stockholder Matters.
Dividend Policy
The Company has not paid dividends on its common stock, $0.01 par value
(the "Common Stock"), does not anticipate paying any dividends thereon in the
foreseeable future and is prohibited under the terms of the Company's long-term
indebtedness from paying such dividends.
Price Range of Common Stock
The Common Stock is traded on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "AWIN." The high and low sales prices per
share for the periods indicated were as follows:
High Low
Year ended December 31, 1996
First Quarter.................................. 9 1/4 6 1/2
Second Quarter................................. 10 3/8 8
Third Quarter.................................. 10 1/8 6 7/16
Fourth Quarter................................. 9 5/8 8
Year ended December 31, 1997
First Quarter.................................. 9 7/8 7 1/4
Second Quarter................................. 18 1/8 8
Third Quarter.................................. 20 1/8 14 1/4
Fourth Quarter................................. 24 3/8 18 3/8
As of March 16, 1998, there were approximately 579 record holders
of the Common Stock.
11
Recent Sales of Unregistered Securities
The following table reflects sales by the Company of unregistered
securities during the fiscal year ended December 31, 1997. Except as otherwise
disclosed, the issuances by the Company of the securities sold in the
transactions referenced below were not registered under the Securities Act of
1933, as amended, pursuant to the exemptions contemplated in Section 4(2) and
Section 3(a)(9) thereof, or Regulation D thereunder, for transactions not
involving a public offering. The consideration paid to the Company in respect of
each issuance was cash, unless otherwise indicated.
Number of
Shares or
Principal
Description/Date Amount Consideration Underwriters and Other Purchasers
Common Stock
January 24, 1997 684 $ 85,000 W. DeArman (cashless exercise of warrant)
January 24, 1997 2,568 45,000 Hambro International (cashless exercise of warrant)
January 27, 1997 42,431 958,750 Groot Family Trust (cashless exercise of warrant)
January 27, 1997 12,702 76,571 Larry Groot (cashless exercise of warrant)
March 4, 1997 80,808 425,001 Allied Capital (cashless exercise of warrant)
April 8, 1997 15,000 63,750 Oakes, Fitzwilliams (exercise of warrant)
April 15, 1997 30,000 127,500 Oakes, Fitzwilliams (exercise of warrant)
April 16, 1997 25,529 108,498 Oakes, Fitzwilliams (exercise of warrant)
April 21, 1997 15,000 63,750 Oakes, Fitzwilliams (exercise of warrant)
April 30, 1997 90,000 1,125,000 IPP92, LP (cashless exercise of warrant)
May 22, 1997 12,500 96,875 H. Steven Uthoff (exercise of warrant)
May 29, 1997 235,000 1,800,000 IPP92, LP (cashless exercise of warrant)
June 4, 1997 57,323 250,000 Morgan Keegan (cashless exercise of warrant)
June 16, 1997 28,125 102,094 James Van Weelden and Edward Van Weelden
(exercise of expiring warrant)
June 16, 1997 45,000 231,250 Mike Weible (exercise of warrant)
June 16, 1997 171,969 749,999 Southern Farm Bureau Life (cashless exercise of
warrant)
June 18, 1997 28,125 102,094 Thomas Van Weelden (exercise of expiring
warrant)
October 9, 1997 63,193 719,800 Ralph Velocci (commission paid in connection with
acquisitions)
October 15, 1997 162,500 975,000 IPP92, LP (conversion of note)
1997 Notes
May 15, 1997 $ 418,000,000 $ 240,000,000 Senior Discount Notes(1) (effective interest rate
at 11.3%)
(1) The Senior Discount Notes were subsequently registered on November 7, 1997.
12
Item 6. Selected Financial Data
The selected financial data presented below as of and for the five
years ended December 31, 1997 are derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The statement of operations, balance sheet and
other data have been restated to give effect to transactions accounted for using
the pooling-of-interests method for business combinations. See Note 2 to the
Company's Consolidated Financial Statements. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the notes thereto, included elsewhere herein. The
Company has not paid dividends on its Common Stock, does not anticipate paying
any dividends on its Common Stock in the foreseeable future, and is prohibited
under the terms of the Company's long-term indebtedness from paying such
dividends.
All amounts are in thousands except per share amounts and percentages.
Year Ended December 31,
1993 1994 1995 1996 1997
---------- ----------- ----------- ----------- --------
Statement of Operations Data:
Revenues.................................... $ 108,948 $ 200,184 $ 262,243 $ 291,685 $ 875,028
Cost of operations.......................... 68,374 128,271 153,524 171,947 475,381
Selling, general and
administrative expenses.................. 18,278 39,077 44,067 47,706 99,539
Depreciation and
amortization expense..................... 10,637 19,829 28,859 34,591 113,467
Acquisition related costs (1)............... -- -- 1,531 90,764 5,010
Unusual items (2)........................... -- 2,100 -- 5,744 --
----------- ----------- ----------- ----------- -----------
Operating income (loss)..................... 11,659 10,907 34,262 (59,067) 181,631
Interest income............................. (310) (1,107) (907) (2,219) (1,969)
Interest expense............................ 7,633 13,958 12,237 10,798 94,007
Other income, net........................... -- -- -- -- (1,076)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes........... 4,336 (1,944) 22,932 (67,646) 90,669
Income tax expense (benefit)................ 1,694 (663) 9,802 (475) 37,052
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
item..................................... 2,642 (1,281) 13,130 (67,171) 53,617
Extraordinary loss, net of income tax
benefit(4)............................... -- (3,029) -- (13,411) (53,205)
----------- ------------ ----------- ----------- --------
Net income (loss)........................... 2,642 (4,310) 13,130 (80,582) 412
Preferred dividends......................... (927) (3,773) (4,070) (1,073) (381)
Conversion fee on equity
securities converted(3).................. -- -- (2,151) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) available
to common shareholders................... $ 1,715 $ (8,083) $ 6,909 $ (81,655) $ 31
=========== =========== =========== ========== ===========
Basic EPS:
Income (loss) before extraordinary
loss................................... $ 0.08 $ (0.18) $ 0.17 $ (1.11) $ 0.61
Extraordinary loss....................... -- (0.11) -- (0.22) (0.61)
----------- ----------- ----------- ----------- -----------
Income (loss)............................ $ 0.08 $ (0.29) $ 0.17 $ (1.33) $ 0.00
=========== =========== =========== =========== ===========
Weighted average common shares.............. 21,490 27,907 40,559 61,364 87,045
=========== =========== =========== =========== ===========
13
Year Ended December 31,
1993 1994 1995 1996 1997
---------- ----------- ----------- ----------- -------------
Diluted EPS:
Income (loss) before
extraordinary loss..................... $ 0.08 $ (0.15) $ 0.16 $ (1.06) $ 0.57
Extraordinary loss....................... -- (0.09) -- (0.21) (0.57)
----------- ------------ ----------- ------------- -------------
Income (loss)............................ $ 0.08 $ (0.24) $ 0.16 $ (1.27) $ 0.00
=========== ============ =========== ============= =============
Weighted average common and
common equivalent shares............... 22,702 33,828 43,779 64,109 93,444
=========== ============ =========== ============= =============
Balance Sheet Data:
December 31,
1993 1994 1995 1996 1997
--------- -------- --------- ----------- ----------
Cash and cash equivalents............... $ 3,812 $ 6,269 $ 5,385 $ 51,079 $ 11,920
Working capital (deficit)............... 3,892 (10,087) (43,101) 19,457 (45,078)
Property and equipment, net............. 94,208 222,386 316,837 738,388 1,287,208
Goodwill................................ 34,880 78,633 89,431 857,350 899,145
Total assets............................ 159,926 379,324 480,841 2,338,267 2,448,660
Total long-term debt,
net of current portion............... 61,019 177,126 196,428 1,158,937 1,356,281
Stockholders' equity.................... 70,277 93,174 139,571 276,008 596,171
Long-term debt to
total capitalization................. 46% 66 % 58% 81% 69%
- -----------------------
(1) Acquisition related costs of $84.6 million were incurred in 1996 in
connection with the Laidlaw Acquisition for environmental related matters,
asset impairments and abandonments, acquisition related liabilities,
litigation matters, relocation and transition costs and bonuses, and other
integration costs related to companies acquired. Acquisition related costs
of $1.5 million, $6.2 million and $5.0 million were incurred in 1995, 1996
and 1997, respectively, for transaction and integration costs related to
acquisitions during each period. Acquisition related costs incurred in 1993
and 1994 for transaction and integration costs related to acquisitions made
in those years were immaterial. See Note 2 to the Company's Consolidated
Financial Statements.
(2) In December 1996 the Company recorded $5.7 million in unusual items related
to ongoing investigation and remediation of the Company's Norfolk landfill
and other non-recurring valuation adjustments. In December 1994 the Company
recorded a $2.1 million unusual item related to the Company's Norfolk
landfill.
(3) A non-cash conversion fee of $2.2 million was incurred in the fourth
quarter 1995 as a result of an inducement offered by the Company to holders
of certain convertible preferred stock and convertible subordinated notes
to exercise their conversion option to receive Allied common stock. The
inducement fee consisted of payment of dividends or interest from the
conversion date through the first call or redemption date of each
convertible security. Approximately 7.8 million shares of common stock were
issued for conversion and approximately 285,000 shares were issued for the
conversion fee.
(4) The extraordinary losses in 1994, 1996 and 1997 were incurred as a result
of premiums paid for the early extinguishment of debt and the write-off of
related deferred debt issue costs.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto, included
elsewhere herein.
Introduction
The Company has experienced significant growth, a substantial portion
of which has resulted from the acquisition of solid waste businesses. Since
January 1, 1992, the Company has completed over 130 acquisitions including the
Laidlaw Acquisition in 1996. In 1997, the Company acquired 35 businesses and
subsequent to 1997 it has acquired 12 businesses. See Note 2 to the Company's
Consolidated Financial Statements. The Company's Consolidated Financial
Statements have been restated to reflect the acquisition of companies accounted
for using the pooling-of-interests method for business combinations. The
majority of the acquisitions were accounted for under the purchase method for
business combinations and, accordingly, the results of operations for such
acquired businesses are included in the Company's financial statements only from
the applicable date of acquisition. As a result, the Company believes its
historical results of operations for the periods presented are not directly
comparable.
On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of $1.2 billion cash, 14.6 million shares
of Common Stock, warrants to acquire 20.4 million shares of Common Stock (the
"Warrant"), and two junior subordinated debentures with an aggregate face amount
of $318 million. The cash consideration was financed from the proceeds of its
$1.275 billion senior credit facility (the "Bank Agreement") and the sale of
$525 million of 10.25% senior subordinated notes due 2006 (the "1996 Notes").
In March 1997, pursuant to a Share Purchase Agreement with USA Waste,
the Company sold to USA Waste all of the Canadian non-hazardous solid waste
management operations of the Company for approximately $518 million (the
"Canadian Sale"). The Company used the proceeds from the Canadian Sale to pay
down approximately $517 million in debt under the Bank Agreement. The Company
acquired the Canadian operations in connection with the Laidlaw Acquisition.
In May 1997, pursuant to a Securities Purchase Agreement (the "Laidlaw
Securities Purchase Agreement") with the Laidlaw Group and certain private
securities investment funds affiliated with either (i) Apollo Advisors II, L.P.
or (ii) the Blackstone Group, the Company repurchased from the Laidlaw Group the
Allied Debentures and the Warrant for an aggregate purchase price of $230
million in cash (the "Repurchase"). The net proceeds of $230 million related to
the $418 million face value 11.3% senior discount notes (the "Senior Discount
Notes") were used to fund the Repurchase. Also pursuant to the Laidlaw
Securities Purchase Agreement, the private securities investment funds purchased
all of the Common Stock of Allied held by Laidlaw.
In June 1997, the Company completed a series of transactions with USA
Waste (the "USA Waste Transactions") pursuant to which the Company acquired
eight landfills (two of which were transferred to the Company in July 1997 after
completion of certain regulatory matters), eight collection operations, five
transfer stations and one recycling facility with an annual aggregate revenue of
$58.0 million for consideration of $87.5 million. Also pursuant to the USA Waste
Transactions, the Company sold to USA Waste one landfill, two collection
operations and one recycling facility with an aggregate of approximately $33.6
million in annual revenue for which it received consideration of approximately
$61.3 million.
15
In November 1997, the Company completed a second series of transactions
with USA Waste pursuant to which the Company acquired three landfills, seven
collection operations, two transfer stations and one recycling facility with an
annual aggregate revenue of $66.9 million for consideration of $124.0 million.
Also pursuant to this transaction, the Company sold to USA Waste six landfills,
seventeen collection operations, three transfer stations and four recycling
facilities with an aggregate of approximately $81.4 million in annual revenue
for which it received consideration of approximately $133.9 million.
In November 1997, the Company assumed ownership and operation of the
active solid waste disposal system for San Diego County, California. Allied
acquired operations of four landfills, one transfer station, and one material
recovery facility for approximately $163 million in cash paid directly to San
Diego County.
In December 1997, the Company acquired the ECDC landfill from Laidaw
Environmental Services, Inc. for approximately $89 million in cash, notes,
assumed debt and a contingent payable.
General
Revenues. The Company's revenues are attributable primarily to fees
charged to customers for waste collection, transfer, recycling and disposal
services. The Company's collection services are generally provided under direct
agreements with its customers or pursuant to contracts with municipalities.
Commercial and municipal contract terms, where used, generally range from 1 to 5
years and commonly have automatic renewal options. The Company's landfill
operations include both Company-owned landfills and those operated for
municipalities for a fee. The Company is fully integrated in each geographic
region in which it is located as it provides collection, transfer and disposal
services. The tables below show for the periods indicated the percentage of the
Company's total reported revenues attributable to services provided and to
geographic region:
Year Ended December 31,
1995 1996 1997
Collection(1).......................... 69.7% 66.7% 58.6%
Transfer............................... 7.9 7.2 7.0
Landfill(1)............................ 15.2 18.6 24.9
Other.................................. 7.2 7.5 9.5
------- ------- ------
Total Revenues..................... 100.0% 100.0% 100.0%
======= ======= ======
Year Ended December 31,
1995 1996 1997
Great Lakes............................ 29.8% 28.3% 22.9%
Midwest................................ 15.7 15.8 15.5
Northeast.............................. 14.8 13.3 22.5
Southeast.............................. 23.2 26.2 12.5
Southwest.............................. 4.0 2.1 15.5
West................................... 12.5 14.3 11.1
------- ------- ------
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 at the Company's landfills have
been excluded from collection revenues and included in landfill revenues.
16
The Company's strategy is to develop vertically integrated operations
to ensure internalization of the waste it collects and thus realize higher
margins from its operations. By disposing of waste at Company-owned and/or
operated landfills, the Company retains the margin generated through disposal
operations that would otherwise be earned by third-party landfills.
Approximately 60% of Company-collected waste is disposed of at Company-owned
and/or operated landfills as measured using disposal volumes in 1997. In
addition, transfer stations are an integral part of the disposal process. The
Company locates its transfer stations in areas where its landfills are outside
of the population centers in which it collects waste. Such waste is transferred
to long-haul trailers and economically transported to its landfills.
Expenses. Cost of operations includes labor, maintenance and repairs,
equipment and facility rent, utilities and taxes, the costs of ongoing
environmental compliance, safety and insurance, disposal costs and costs of
independent haulers transporting Company waste to the disposal site. Disposal
costs include certain landfill taxes, host community fees, payments under
agreements with respect to landfill sites that are not owned, landfill site
maintenance, fuel and other equipment operating expenses and accruals for
estimated closure and post-closure monitoring expenses anticipated to be
incurred in the future.
Selling, general and administrative expenses include management,
clerical and administrative compensation and overhead, sales costs, community
relations expenses and provisions for estimated uncollectible accounts
receivable and potentially unrealizable acquisition costs.
Depreciation and amortization expense includes depreciation of fixed
assets and amortization of landfill development costs (including capitalized
interest), goodwill and other intangible assets.
In connection with potential acquisitions, the Company incurs and
capitalizes certain transaction and integration costs which include stock
registration, legal, accounting, consulting, engineering and other direct costs.
When an acquisition is completed and is accounted for using the
pooling-of-interests method for business combinations, these costs are charged
to the statement of operations as acquisition related costs. When a completed
acquisition is accounted for using the purchase method for business
combinations, these costs are capitalized. The Company routinely evaluates
capitalized transaction and integration costs and expenses those costs related
to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.
Certain direct landfill development costs, such as engineering,
upgrading, construction and permitting costs, are capitalized and amortized
based on consumed airspace. The Company believes that the costs associated with
engineering, owning and operating landfills will increase in the future as a
result of federal, state and local regulation and a growing community awareness
of the landfill permitting process. Although there can be no assurance, the
Company believes that it will be able to implement price increases sufficient to
offset these increased expenses. All indirect landfill development costs, such
as executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred.
Accrued closure and post-closure costs represent an estimate of the
current value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes which are determined to be
changes in estimates are accounted for on a prospective basis.
17
The net present value of the closure and post-closure commitment is
calculated assuming inflation of 2.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded and not yet expended are accreted to
reflect the effects of the passage of time. The Company's current estimate of
total future payments for closure and post-closure is $1.0 billion while the
present value of such estimate is $245.3 million. At December 31, 1996 and 1997,
accruals for landfill closure and post-closure costs (including costs assumed
through acquisitions) were approximately $107.6 million and $140.8 million,
respectively. The accruals reflect relatively young landfills with estimated
remaining lives, based on current waste flows, that range from 1 to over 75
years, and an estimated average remaining life of greater than 30 years.
Year 2000 Systems Modifications. During 1997, Allied began modifying
its computer system programming to process transactions in the year 2000.
Anticipated spending for this modification will be expensed as incurred and is
not expected to have a significant impact on the Company's ongoing results of
operations.
Results of Operations
The following table sets forth the percentage relationship that the
various items bear to revenues and the percentage of change in dollar amounts
for the periods indicated. The statement of operations data have been restated
to give effect to acquisitions that were accounted for using the
pooling-of-interests method for business combinations. See Note 2 to the
Company's Consolidated Financial Statements.
Year Ended December 31,
1996 1997
Compared Compared
to 1995 to 1996
% Change % Change
1995 1996 in Amounts 1997 in Amounts
---- ---- ---------- ---- ----------
Statement of Operations Data:
Revenues........................................... 100.0% 100.0% 11.3% 100.0% 200.0%
Cost of operations................................. 58.5 58.9 12.0 54.3 176.6
Selling, general and administrative expenses....... 16.8 16.4 8.2 11.4 108.6
Depreciation and amortization expense.............. 11.0 11.9 19.7 13.0 228.0
Acquisition related costs.......................... 0.6 31.1 6,333.3 0.6 (94.5)
Unusual costs...................................... -- 2.0 100.0 -- (100.0)
----- ----- -----
Operating income (loss)............................ 13.1 (20.3) (272.5) 20.7 (407.8)
Interest expense, net.............................. 4.3 2.9 (23.9) 10.5 969.8
Other income, net.................................. -- -- -- (0.1) 100.0
Income tax expense, (benefit) ..................... 3.7 (0.2) (105.1) 4.2 (7,520.0)
Extraordinary loss, net of income tax benefit ..... -- 4.6 100.0 6.1 297.0
----- ----- -----
Net income (loss)................................ 5.1% (27.6)% (714.5)% 0.0% (100.5)%
===== ====== =====
18
Years Ended December 31, 1997 and 1996
Revenues. Revenues in 1997 were $875.0 million compared to $291.7
million in 1996, an increase of 200.0%. Revenues of approximately $503.4 million
in 1997 were generated from companies acquired subsequent to the end of the same
period in the prior year, while increases in revenues attributable to existing
operations ("Internal Growth") amounted to $79.9 million. If the Laidlaw
Acquisition, net of the Canadian Sale, is included as of January 1996, Internal
Growth would have approximated 11.0% with 7.0% attributable to net volume
increases and 4.0% attributable to price increases.
Cost of Operations. Cost of operations in 1997 was $475.4 million
compared to $171.9 million in 1996, an increase of 176.6%. This increase in cost
of operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations decreased to 54.3% in
1997 from 58.9% in 1996. The improvement in gross margin is due primarily to the
integration of the assets acquired from Laidlaw during 1996 and the increased
volume at the landfills.
Selling, General and Administrative Expenses. SG&A expense in 1997 was
$99.5 million compared to $47.7 million in 1996, an increase of 108.6%. The
increase in SG&A expense resulted from expenses associated with acquired
companies and expenses incurred in connection with the Company's increase in
personnel and other expenses related to the growth of the Company. In addition,
SG&A expenses include a charge of approximately $3.4 million related to future
post employment executive compensation and a credit of approximately $3.0
million related to a favorable settlement of certain litigation. As a percentage
of revenues, SG&A decreased to 11.4% in 1997 from 16.4% in 1996. The decrease in
SG&A as a percentage of revenues is primarily due to the substantial increase in
the revenues of the Company resulting principally from the Laidlaw Acquisition,
while SG&A expenses have not increased proportionately.
Depreciation and Amortization Expense. Depreciation and amortization in
1997 was $113.5 million compared to $34.6 million in 1996, an increase of
228.0%. The increase in depreciation and amortization expense was due to
acquisitions and capital expenditures. Fixed assets have increased from $495.3
million in 1996, excluding the Laidlaw Acquisition on December 30, 1996 to $1.5
billion in 1997 and goodwill has increased to $939.1 million at December 31,
1997 from $116.8 million at December 31, 1996, excluding the Laidlaw Acquisition
on December 30, 1996. As a percentage of revenues, depreciation and amortization
increased to 13.0% in 1997 from 11.9% in 1996. This is primarily the result of
an increase in amortization of goodwill as a percentage of revenues to 2.7% in
1997 from 1.3% in 1996 related to increased goodwill in connection with the
Laidlaw Acquisition.
Acquisition Related Costs. Acquisition related costs in 1997 were $5.0
million compared to $90.8 million in 1996, a decrease of 94.5%. During 1996, in
connection with the Laidlaw Acquisition, the Company incurred approximately
$84.6 million in charges primarily associated with the acquisition, which
include $51.5 million of environmental related matters, $18.4 million of asset
impairments and abandonments, and $14.7 million of acquisition liabilities.
Unusual Items. In December 1996 the Company recorded $5.7 million in
unusual items including $2.0 million in connection with the ongoing
investigation and remediation of the Company's Norfolk landfill and $3.7 million
of other non-recurring valuation adjustments.
Other Income, Net. The Company recorded approximately $1.1 million of
other income, comprised of a $5.6 million gain on sale of assets to USA Waste in
the fourth quarter of 1997, net of a charge of approximately $4.5 million in
connection with the abandonment of certain collection and transfer operations.
19
Net Interest Expense. Net interest expense was $92.0 million in 1997
compared to $8.6 million in 1996, an increase of 969.8%. The increase in
interest expense is due to the increase in debt from $365.0 million at December
31, 1996, excluding the Laidlaw Acquisition on December 30, 1996, compared to
$1.4 billion at December 31, 1997. This increase in debt outstanding is
primarily the result of debt incurred in connection with the Laidlaw Acquisition
net of the application of the net proceeds received in connection with the
Canadian Sale. Additionally, in connection with the construction and development
of the Company's landfills, Allied capitalized approximately $36.9 million of
interest in 1997 compared to $13.0 million in 1996. The increase is primarily
due to the increase in the base of assets under development which qualify for
capitalized interest (primarily landfill assets) as a result of the Laidlaw
Acquisition in late 1996 and other acquisitions made during 1997.
Income Taxes. Income taxes reflect a 41% effective income tax rate for
1997 which deviates from the federal statutory rate of 35% due primarily to the
effects of differences in the treatment of goodwill for book and tax purposes,
state income taxes, and other permanent differences. See Note 10 to the
Consolidated Financial Statements.
Extraordinary Loss, Net. In May 1997, the Company repurchased from the
Laidlaw Group two junior subordinated debentures with an aggregate face amount
of $318 million and the Warrant, used as partial consideration for the Laidlaw
Acquisition, for an aggregate purchase price of $230 million in cash. An
extraordinary charge to earnings related to the Repurchase of approximately
$65.7 million ($39.4 million net of income tax benefit) was recorded. In
addition, the Company replaced its $1.275 billion Bank Agreement with the $900
million senior credit facility (the "Credit Agreement") in June 1997 and
recognized an extraordinary charge of approximately $21.6 million ($13.0 million
net of income tax benefit).
In September 1997, the Company sold 18.6 million shares of common stock
with net proceeds of approximately $327.4 million (the "Equity Offering"). In
October, the Company used $203 million of the net proceeds to retire a portion
of the term loan facility of the Credit Agreement, $71 million to repay the
entire amount outstanding on the revolving credit facility. As a result of the
early repayment of debt outstanding under the term loan facility, the Company
recognized an extraordinary charge in the third quarter of 1997 of approximately
$1.3 million ($0.8 million net of income tax benefit) for the write-off of
previously deferred debt issuance costs.
20
Years Ended December 31, 1996 and 1995
Revenues. Revenues in 1996 were $291.7 million compared to $262.2
million in 1995, an increase of 11.3%. Approximately 3.6% of the increase in
revenues is attributable to acquisitions and 7.7% is attributable to internal
growth. Revenues of $9.4 million for 1996 were generated from companies acquired
subsequent to December 1994, while increases in revenue attributable to existing
operations amounted to $20.1 million. Average price increases as a percentage of
revenue were approximately 3.0% of revenue while the remainder of Internal
Growth was from volume.
Cost of Operations. Cost of operations in 1996 was $171.9 million
compared to $153.5 million in 1995, an increase of 12.0%. This increase in cost
of operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations increased to 58.9% in
1996 from 58.5% in 1995. Cost of operations were effected by a significant
increase in municipal solid waste volumes offset by a decrease in higher margin
special waste volumes. This change in revenue mix had the effect of increasing
the cost of disposal relative to revenues.
Selling, General and Administrative Expenses. SG&A expenses increased
to $47.7 million in 1996 compared to $44.1 million in 1995, an increase of 8.2%.
As a percentage of revenues, SG&A decreased to 16.4% in 1996 from 16.8% in 1995.
The increase in SG&A expense resulted from expenses associated with acquired
companies and expenses incurred in connection with the Company's increase in
personnel and other expenses related to the anticipated growth of the Company as
it continues to acquire companies.
Depreciation and Amortization Expense. Depreciation and amortization in
1996 was $34.6 million compared to $28.9 million in 1995, an increase of 19.7%.
The increase in depreciation and amortization expense is due to acquisitions and
capital expenditures. Before the Laidlaw Acquisition, fixed assets increased to
$495.3 million at December 31, 1996 from $381.1 million at December 31, 1995 and
goodwill increased to $116.8 million at December 31, 1996 from $99.1 million at
December 31, 1995. As a percentage of revenues, depreciation and amortization
increased to 11.9% in 1996 from 11.0% in 1995.
Acquisition Related Costs. During 1996 in connection with the Laidlaw
Acquisition, the Company incurred approximately $84.6 million in charges, which
include $51.5 million of environmental related matters, $18.4 million of asset
impairments and abandonments, and $14.7 million of acquisition liabilities, of
which $2.0 million relates to litigation matters, $5.4 million relates to
relocation and transition costs and bonuses, $3.8 million relates to taxes,
claims and assessments and other integration costs, and $3.5 million relates to
acquired accounts receivable considered uncollectible.
In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by the acquired subsidiaries
or third-parties, and properties under the management of the acquired companies.
Several contaminated landfills and other properties were identified, two of
which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure measures,
remediation activities and litigation in the future. The costs of performing the
investigation, design, remediation and the allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters, including closure and post-closure costs, in the 1996
statement of operations and expects these amounts to be disbursed over the next
30 years.
21
As a result of the Laidlaw Acquisition, Allied increased its revenue
base by approximately 400% and entered into 14 new markets where it would
execute its operating strategy. In connection with the significant increase in
size and the redirection of its strategic operating emphasis, Allied determined
that certain asset values were impaired as they will provide no further benefit
to the Company. Included among the asset impairments are costs of $10.8 million
related to over 50 noncompetition agreements in several markets where the
counterparty no longer poses a significant threat, costs of $4.8 million for
discontinued facilities and costs of $2.8 million for market development
activities no longer being pursued.
Costs of $6.2 million were incurred in 1996 compared to $1.5 million in
1995 for transaction and integration costs directly related to acquisitions
accounted for using the pooling-of-interests method for business combinations.
Transaction costs include, but are not limited to, stock registration, legal,
accounting, consulting, engineering and other direct third-party costs incurred
to complete the acquisitions. Integration costs include, but are not limited to,
uncollectible accounts receivable write-offs, employee termination and
relocation, write down of fixed assets and lease termination.
Unusual Items. In December 1996 the Company recorded $5.7 million in
unusual items including $2.0 million in connection with the ongoing
investigation and remediation of the Company's Norfolk landfill and $3.7 million
of other non-recurring valuation adjustments.
Net Interest Expense. Net interest expense was $8.6 million in 1996
compared to $11.3 million in 1995, a decrease of 23.9%. The decrease in net
interest expense is partially due to the conversion of subordinated debt into
Common Stock in the fourth quarter of 1995 which resulted in a reduction to
annual interest charges and the refinancing of the 1994 Notes (as defined
herein) on July 31, 1996, resulting in a decrease in the interest rate from 12%
to 7% for the months of August through December 1996. Also, interest capitalized
in 1996 was $13.0 million compared to $11.1 million in 1995.
Conversion Fees. A non-cash conversion fee of $2.2 million was incurred
in the fourth quarter of 1995 as a result of an inducement offered by the
Company to holders of certain convertible preferred stock and convertible
subordinated notes to exercise their conversion option to receive Common Stock.
The inducement fee consisted of payment of dividends or interest from the
conversion date through the first call or redemption date of each convertible
security. Approximately 7.8 million shares of Common Stock were issued for
conversion and approximately 285,000 were issued for the conversion fee.
Income Taxes. Income taxes reflect a benefit at a 0.7% effective income
tax rate for 1996 which deviates from the federal statutory rate of 35% due
primarily to the treatment of expenses for book purposes that, when recognized
for tax purposes, may produce tax goodwill in excess of book goodwill. Other
items impacting the Company's effective tax rate for both 1996 and 1995 include
the differences in the treatment of goodwill for book and tax purposes, state
income taxes, and other permanent differences. See Note 10 to the Consolidated
Financial Statements.
Extraordinary Loss. On July 31, 1996, Allied completed a tender offer
(the "Tender Offer") for substantially all of the 1994 Notes at the redemption
price of $1,157.50 per $1,000 note. An extraordinary charge related to the
Tender Offer of approximately $18.4 million ($11.0 million net of income tax
benefit), was charged to earnings in the third quarter of 1996. In connection
with the Laidlaw Acquisition, the Company refinanced its $300 million senior
revolving credit facility and recognized an extraordinary charge of
approximately $4.0 million ($2.4 million net of income tax benefit) that was
charged to earnings in the fourth quarter of 1996.
22
Liquidity and Capital Resources
Historically, the Company has satisfied its acquisition, capital
expenditure and working capital needs primarily through bank financing and
public offerings and private placements of debt and equity securities. Between
January 1, 1994 and December 31, 1997, the Company has completed debt and equity
financings in excess of $3 billion.
Due to the acquisition driven and the capital intensive nature of the
Company's business strategy, the Company has used, and believes that it is
reasonably possible that it will continue using amounts in excess of the cash
generated from operations to fund acquisitions and capital expenditures,
including landfill development. In connection with acquisitions, the Company has
assumed or incurred indebtedness with relatively short-term repayment schedules,
thereby increasing its current and medium-term liabilities and operating
equipment has been acquired using financing leases which have short and
medium-term maturities. Additionally, the Company uses excess cash generated
from operations to pay down amounts owed on its revolver which is classified as
long-term debt. As a result, the Company has periodically had low levels of
working capital or working capital deficits.
During the years ended December 31, 1995, 1996 and 1997, the Company's
cash flows from operating, investing and financing activities were as follows
(in millions):
Year Ended December 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
Operating Activities:
Net income (loss)................................................. $ 13.1 $ (80.6) $ 0.4
Extraordinary loss on early extinguishments of debt............... -- 22.4 21.5
Acquisition related costs......................................... 1.5 91.7 --
Unusual items..................................................... -- 5.7 --
Non-cash operating expenses(1).................................... 37.5 39.9 108.3
Loss (gain) on sale of assets..................................... 0.3 1.9 (6.5)
Increase in operating assets and liabilities, net................. (10.4) (41.8) (41.1)
------------- ------------- -------------
Cash provided by operating activities........................ 42.0 39.2 82.6
------------- ------------- -------------
Investing Activities:
Cost of acquisitions, net of cash acquired........................ (18.7) (1,356.6) (324.5)
Capital expenditures.............................................. (59.4) (45.5) (157.2)
Proceeds from sale of fixed assets................................ 1.1 0.7 530.0
Other............................................................. (0.4) -- (6.0)
------------- ------------- -------------
Cash provided by (used for) investing activities............. (77.4) (1,401.4) 42.3
------------- ------------- -------------
Financing Activities:
Net proceeds from sale and
redemption of preferred stock and common stock............... 30.6 48.1 329.0
Net proceeds from long-term debt.................................. 67.2 1,810.0 1,118.2
Payments of long-term debt........................................ (55.8) (446.4) (1,578.4)
Other............................................................. (7.5) (3.8) (32.9)
------------- ------------- -------------
Cash provided by (used for) financing activities............. 34.5 1,407.9 (164.1)
------------- ------------- -------------
Increase (decrease) in cash....................................... $ (0.9) $ 45.7 $ (39.2)
============= ============= =============
- ------------------
(1) Consists principally of provisions for depreciation and amortization,
landfill closure and post-closure accruals, allowance for doubtful
accounts, potentially unrealizable acquisition costs and deferred income
taxes.
23
As of December 31, 1997, the Company had cash and cash equivalents of $11.9
million. The Company's capital expenditure and working capital requirements have
increased significantly, reflecting the Company's rapid growth by acquisition
and development of revenue producing assets, and will increase further as the
Company continues to pursue its business strategy. During 1997, the Company
acquired solid waste operations representing approximately $369.1 million in
annual revenues, and sold operations representing approximately $127.9 million
in annual revenue. Net consideration of approximately $528.3 million (including
$10.5 million for landfills under development) comprised of cash, notes and
Common Stock, was paid in these transactions. This consideration includes
several landfills acquired for approximately $348.2, million net of landfills
sold, with estimated annual net revenues of $83.1 million. Subsequent to
December 31, 1997, the Company acquired 12 operating solid waste businesses with
annual revenues of approximately $33.3 million for consideration of
approximately $55.0 million, of which $22.3 million consists of approximately 1
million shares of Common Stock. For the calendar year 1998, the Company expects
to spend approximately $210 million for capital expenditures, closure and
post-closure, and remediation expenditures relating to its landfill operations.
As the Company continues to acquire waste operations in 1998, additional capital
amounts will be required during 1998 for the acquisition of businesses and the
capital expenditure requirements related to those acquired businesses.
On December 31, 1997, the Company's debt structure consisted of $525
million of the 1996 Notes, $294 million outstanding under the Term Loan
Facility, and approximately $255 million of the $418 million aggregate face
amount of senior discount notes (the "Senior Discount Notes"). As of December
31, 1997 there is aggregate availability under the Revolving Credit Facility of
approximately $550 million to be used for working capital, letters of credit,
acquisitions and other general corporate purposes. In October 1997, the Company
amended the Credit Agreement (the "Amendment"). The Amendment expanded the
Credit Agreement to $1.1 billion from $900 million by increasing the Revolving
Credit Facility from $400 million to $600 million and by adding a $200 million
delayed draw term facility (the "Delayed Draw Term Facility"), after giving
effect to the repayment of $203 million of the Term Loan Facility on September
30, 1997. The Revolving Credit Facility includes a $250 million sublimit for the
issuance of letters of credit (increased from $175 million at September 30,
1997). The indentures relating to the 1996 Notes, the Senior Discount Notes and
the Credit Agreement contain financial and operating covenants and restrictions
on the ability of the Company to complete acquisitions, pay dividends, incur
indebtedness, make investments and take certain other corporate actions. A
substantial portion of the Company's available cash will be required to be
applied to service indebtedness, including indebtedness incurred to finance the
Laidlaw Acquisition. Currently, on an annualized basis, this is expected to
include approximately $156.1 million in annual principal and interest payments.
The Company is also required to provide financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill operations and collection contracts. These financial assurance
requirements are satisfied by the Company issuing performance bonds, letters of
credit, insurance policies or trust deposits to secure the Company's obligations
as they relate to landfill closure and post-closure costs and performance under
certain collection contracts. At December 31, 1997, the Company had outstanding
approximately $359.2 million in financial assurance instruments, represented by
$303.3 million of performance bonds, $5.6 million of letters of credit, $38.2
million of insurance policies and $12.1 million of trust deposits. During
calendar year 1998, the Company expects to be required to provide approximately
$342.9 million in financial assurance obligations relating to its landfill
operations and collection contracts. The Company expects that financial
assurance obligations will increase in the future as it acquires and expands its
landfill activities and that a greater percentage of the financial assurance
instruments will be comprised of performance bonds and insurance policies.
The Company has lease facilities (the "Lease Facilities") that allow it
to enter into equipment leases at rates ranging from similar term treasury note
rates plus 2.5% to 3.5% for terms of 36 to 84 months. In addition to equipment
leases outstanding at December 31, 1996 and 1997 of $59.4 million and $62.9
million, respectively, the Company had available lease commitments of $11.9
million and $32.4 million, respectively. The Company intends to enter into
master equipment lease facilities relating to the financing of the acquisition
of trucks and containers.
24
Subtitle D and other regulations that apply to the non-hazardous waste
disposal industry have required the Company, as well as others in the industry,
to alter operations and to modify or replace pre-Subtitle D landfills. Such
expenditures have been and will continue to be substantial. Further regulatory
changes could accelerate expenditures for closure and post-closure monitoring
and obligate the Company to spend sums in addition to those presently reserved
for such purposes. These factors, together with the other factors discussed
above, could substantially increase the Company's operating costs and impair the
Company's ability to invest in its facilities.
The Company's ability to meet future capital expenditure and working
capital requirements, to make scheduled payments of principal, to pay interest,
or to refinance its indebtedness, and to fund capital amounts required for the
acquisition of businesses and the expansion of existing businesses depends on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. Based upon the current level of operations and anticipated
growth, management of the Company believes that available cash flow, together
with available borrowing under the Senior Credit Facility, the Lease Facilities
and other sources of liquidity, will be adequate to meet the Company's
anticipated future requirements for working capital, letters-of-credit, capital
expenditures, scheduled payments of principal and interest on debt incurred
under the Credit Agreement, interest on the 1996 Notes and the Senior Discount
Notes, and capital amounts required for acquisitions and expansion. However, the
principal payment at maturity on the 1996 Notes and the Senior Discount Notes
may require refinancing. There can be no assurance that the Company's business
will generate sufficient cash flow from operations or that future financings
will be available in an amount sufficient to enable the Company to service its
indebtedness or to make necessary capital expenditures, or that any refinancing
would be available on commercially reasonable terms if at all. Additionally,
depending on the timing, amount and structure of any future acquisitions and the
availability of funds under the Credit Agreement, the Company may need to raise
additional capital to fund the acquisition and integration of additional solid
waste businesses. The Company may raise such funds through additional bank
financings or public or private offerings of its debt and equity securities.
There can be no assurance that the Company will be able to secure such funding,
if necessary, on favorable terms, if at all. If the Company is not successful in
securing such funding, the Company's ability to pursue its business strategy may
be impaired and results of operations for future periods may be negatively
affected.
Significant Financing Events
In January 1994, the Company issued $100 million of 10.75% senior
subordinated notes (the "1994 Notes"). The net proceeds from the sale of the
1994 Notes after underwriting discounts and other expenses, were approximately
$95 million. In July 1996, the Company completed the Tender Offer and purchased
substantially all of its 1994 Notes at the redemption price of $1,157.50 per
$1,000 in principal amount. In connection with the Tender Offer, the Company
recognized an extraordinary charge of $18.4 million ($11.0 million net of income
tax benefit), in the third quarter of 1996. The Company also received a consent
from a majority of the holders of the 1994 Notes to eliminate all substantive
financial covenants associated with the remaining 1994 Notes.
In January 1995, the Company obtained stockholder approval of the
issuance of 11.7 million shares of Common Stock to TPG Partners, L.P. and TPG
Parallel I, L.P., for $50 million (less approximately $5.0 million of direct
offering costs and other costs related to an amendment to the 1994 Notes). Such
shares of Common Stock were purchased by the Apollo/Blackstone Investors (as
defined herein) contemporaneously with the Repurchase.
During 1995, the Company offered to holders of its Series D, 9% and $90
convertible preferred stock and its 6% Convertible Subordinated notes an
inducement to exercise their conversion option to receive Common Stock. The
inducement consisted of the payment of dividends and interest that the holders
of these securities would have received from the date of conversion through the
first call or redemption date of each security. In total, 7.8 million shares of
Common Stock were issued upon conversion. Accordingly, the Company's annual
dividend and interest requirements decreased by approximately $2.7 million and
$0.8 million, respectively. The inducement resulted in a 1996 conversion fee
charge of approximately $2.2 million paid in 285,000 shares of Common Stock.
25
In January 1996, the Company completed a public offering of its Common
Stock. It issued 7.6 million shares for approximately $48 million net of $5.2
million in underwriter discounts, commissions and offering costs. The net
proceeds from the offering were used to repay amounts outstanding under the
Company's outstanding credit agreement and for other general corporate purposes.
In July 1996, in connection with the Tender Offer, the Company
completed a new $300 million revolving credit facility. This revolving credit
facility was extinguished in December 1996 in connection with the financing of
the Laidlaw Acquisition. The Company recognized an extraordinary charge of $4.0
million ($2.4 million net of income tax benefit), relating to the extinguishment
in the fourth quarter of 1996.
In connection with the Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20.4 million shares of common stock of the Company
at an exercise price of $8.25 per share (the "Warrant"). The Warrant was retired
in connection with the Repurchase in May 1997.
In December 1996, to partially finance the Laidlaw Acquisition, the
Company entered into a bank credit facility (the "1996 Bank Agreement")
consisting of (i) a $475 million five and one-half year amortizing senior
secured term loan facility, (ii) three amortizing senior secured term loan
facilities in an aggregate original principal amount of $500 million and with
ultimate maturities which ranged from six and one-half years to eight and
one-half years, and (iii) a $300 million five and one-half year senior secured
revolving credit facility. In connection with the closing of the Canadian Sale,
an aggregate amount of approximately $517 million was applied to prepayment of
the 1996 Bank Agreement.
In December 1996, Allied Waste North America ("AWNA") issued the 1996
Notes. Net proceeds from the sale of the 1996 Notes, after the underwriting
discount and other expenses, were approximately $509 million. The net proceeds
were used to pay a portion of the cash purchase price of the Laidlaw
Acquisition, repay amounts outstanding under the Company's previous $300 million
revolving credit facility, fund certain acquisitions and for general corporate
purposes. AWNA had an obligation to offer fully registered securities, pursuant
to an exchange offer, that are substantially identical to the 1996 Notes. AWNA
completed this exchange offer in July 1997. The 1996 Notes cannot be redeemed
until December 1, 2001, except under certain circumstances. Prior to December 1,
2001, the 1996 Notes are subject to redemption, at the option of AWNA, at the
greater of (i) 100% of the principal amount or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to maturity on a semi-annual basis at a comparable treasury yield
plus 75 basis points, plus in each case accrued and unpaid interest to the date
of redemption. At any time prior to December 1, 1999, up to 33% of principal
amount of 1996 Notes will be redeemable, at the option of AWNA, from the
proceeds of one or more public offerings of capital stock by the Company at a
redemption price of 110.25% of principal amount, plus accrued interest. The 1996
Notes are guaranteed by the Company and substantially all of AWNA's current and
future subsidiaries, the guarantees of which are expressly subordinated to the
guarantees of AWNA's Senior Credit Facility.
In May 1997, the Company, pursuant to the Laidlaw Securities Purchase
Agreement with the Laidlaw Group and certain private securities investment funds
affiliated with either (i) Apollo Advisors II, L.P. or (ii) the Blackstone Group
(the "Apollo/Blackstone Investors"), repurchased from the Laidlaw Group the
Allied Debentures and the Warrant for an aggregate purchase price of $230
million in cash. Also pursuant to the Laidlaw Securities Purchase Agreement, the
Apollo/Blackstone Investors purchased all of the Common Stock held by Laidlaw.
In connection with the Repurchase, Allied issued $418 million aggregate face
amount of the Senior Discount Notes in a private offering on May 15, 1997. The
net proceeds of $230 million realized from the sale of the Senior Discount Notes
were used to pay the cash consideration in the Repurchase. The Senior Discount
Notes were issued at a discount of principal amount and, unless certain
provisions are triggered, there will be no periodic cash payments of interest
before June 1, 2002. Thereafter, the Senior Discount Notes will accrue cash
interest at the rate of 11.30% per annum, payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 2002. Allied had an obligation
to offer fully registered securities, pursuant to an exchange offer, that are
substantially identical to the Senior Discount Notes. Allied completed this
exchange offer on December 16, 1997. The Senior
26
Discount Notes cannot be redeemed until December 1, 2001, except under certain
circumstances. Prior to June 1, 2000, up to 33% of principal amount of Senior
Discount Notes will be redeemable, at the option of Allied, from the proceeds of
one or more public offerings of capital stock by Allied at a premium to their
accreted value, plus accrued interest.
In June 1997, the Company repaid its senior credit facility and entered
into the Credit Agreement. The Credit Agreement provides a six and one-half year
senior secured $500 million term loan facility (the "Term Loan Facility") and a
six and one-half year senior secured $400 million revolving credit facility (the
"Revolving Credit Facility" and together with the Term Loan Facility, the
"Senior Credit Facility").
On September 30, 1997, the Company repaid $203 million outstanding
under the Term Loan Facility and $71 million outstanding under the Revolving
Credit Facility of the Credit Agreement. In connection with this repayment, the
Company amended the Credit Agreement in October 1997, providing for a six and
one-half year senior secured $297 million funded term loan facility (the "Funded
Term Loan Facility"), a senior secured $200 million delayed draw term loan
facility to finance certain acquisitions prior to March 31, 1998 (the "Delayed
Draw Term Loan Facility"), and a senior secured $600 million revolving credit
facility due December 2003 (the "Revolving Credit Facility"). The Funded Term
Loan Facility is an amortizing senior secured term loan with annual principal
payments (payable quarterly) increasing from $6 million in 1997 to $60 million
in each of 2000, 2001, 2002 and 2003. The Delayed Draw Term Loan Facility may be
drawn in multiple advances and at varying amounts until either (i) the full $200
million has been drawn or (ii) March 31, 1998, whichever comes first. The
Delayed Draw Term Loan requires annual principal payments equal to a certain
percentage of the outstanding amount as of March 31, 1998. Principal payments
begin in March 1999 at 10% of the original balance, increasing to 20% in the
years 2000-2002, and 30% in 2003. Principal under the Revolving Credit Facility
is due upon maturity.
In addition to the scheduled principal payments above, the Company is
also required to make mandatory prepayments on the Senior Credit Facility equal
to 100% of the net proceeds from certain asset sales, the issuance of new debt
securities and extraordinary amounts, which include tax refunds, pension plan
reversions and certain insurance proceeds, and 50% of the net cash proceeds from
new equity issuances. Furthermore, the Company is also required to make
mandatory prepayments on the Senior Credit Facility equal to 50% of the
Company's annual Excess Cash Flow, as defined in the Credit Agreement, unless
the Company's Senior Debt Ratio, as defined in the Credit Agreement, for the
relevant fiscal year end is less than 2.0 to 1.0. Mandatory prepayments are
applied first to the Term Loan Facility and the Delayed Draw Term Facility on a
pro rata basis against remaining scheduled principal payments, and second, to
the permanent reduction of the Revolving Credit Facility. In no event, however,
shall the Revolving Credit Facility be required to be reduced to an amount less
than $300 million in connection with any such mandatory prepayment.
Borrowings under the Revolving Credit Facility may be used for
acquisitions, the issuance of letters of credit, working capital and other
general corporate purposes. Of the $600 million available under the Revolving
Credit Facility ($400 million prior to the Amendment), no more than $250 million
($175 million prior the Amendment) may be used to support the issuance of
letters of credit.
The Senior Credit Facility bears interest, at the Company's option, at
the lesser of (a) a Base Rate, or (b) a Eurodollar Rate, both terms as defined
in the Credit Agreement, plus, in either case, an agreed upon applicable margin.
The applicable margin will be adjusted from time to time pursuant to a pricing
grid based upon the Company's Total Debt to EBITDA ratio, as defined in the
Credit Agreement, and varies between zero percent and 0.75% for Base Rate loans,
and 0.75% and 1.75% for Eurodollar loans. In addition, if at any time, the
Company's Senior Debt Ratio is greater than 2.5 to 1.0, the applicable margin
for all loans will be increased by 0.25%.
The Senior Credit Facility is guaranteed by substantially all of the
Company's present and future subsidiaries. In addition, the Senior Credit
Facility is secured by substantially all the personal property and a pledge of
the stock, of substantially all the Company's present and future subsidiaries.
27
The Credit Agreement contains certain financial covenants including,
but not limited to, a Total Debt to EBITDA ratio, a Senior Debt to EBITDA ratio,
a Fixed Charge Coverage ratio and an Interest Expense Coverage ratio, all terms
as defined in the Credit Agreement. In addition, the Credit Agreement also
limits the Company's ability to make acquisitions, purchase fixed assets above
certain amounts, pay dividends, incur additional indebtedness and liens, make
optional prepayments on certain subordinated indebtedness, make investments,
loans or advances, enter into certain transactions with affiliates or enter into
a merger, consolidation or sale of all or a substantial portion of the Company's
assets. The Company is in compliance with all applicable covenants at December
31, 1997.
The Company has entered into interest rate protection agreements (the
"Agreements"), with reputable national commercial banks and investment banking
institutions to reduce its exposure to fluctuations in variable interest rates.
A summary of the Agreements outstanding as of December 31, 1997 is as follows:
Notional Amount Fixed Rate Period
--------------- ---------- ----------------------------------------
(in millions)
$ 130 6.27% April 1997 - May 1998
50 6.08 September 1997 - September 2000
50 6.06 September 1997 - March 2000
50 5.97 October 1997 - April 1999
50 6.02 October 1997 - October 1999
50 5.90 November 1997 - November 1999
50 5.91 November 1997 - November 1999
The Agreements effectively change the Company's interest rate paid on
its floating rate long-term debt to a weighted average fixed rate of
approximately 6.07% plus applicable margins imposed by the terms of the Credit
Agreement at December 31, 1997.
The Company has also entered into an additional interest rate
protection agreement with effective dates beginning in the future (the "Forward
Agreement"). This Forward Agreement provides continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under the Delayed Draw Term Facility of the Senior
Credit Facility. A summary of the Forward Agreement is as follows:
Notional Amount Fixed Rate Period
--------------- ---------- ----------------------------------
(in millions)
$ 130 6.06% May 1998 - May 2001
Disclosure Regarding Forward Looking Statements
This annual report includes forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended ("Forward Looking
Statements"). All statements other than statements of historical fact included
in this report, are Forward Looking Statements. Although the Company believes
that the expectations reflected in such Forward Looking Statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, number of acquisitions and projected or anticipated
benefits from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, earnings, levels of capital expenditures or
other aspects of operating results. All phases of the Company operations are
subject to a number of uncertainties, risks and other influences, many of which
are outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether Forward Looking Statements
28
made by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations.
Competition. The solid waste collection and disposal business is highly
competitive and requires substantial amounts of capital. The Company competes
with numerous waste management companies, a number of which have significantly
larger operations and greater resources than the Company. The Company also
competes with those counties and municipalities that maintain their own waste
collection and disposal operations. Forward Looking Statements assume that the
Company will be able to effectively compete with the other waste management
companies and municipalities.
Availability of Acquisition Targets. The Company's ongoing acquisition
program is a key element of its expansion strategy. In addition, obtaining
landfill permits has become increasingly difficult, time consuming and
expensive. There can be no assurance that the Company will succeed in obtaining
landfill permits or locating appropriate acquisition candidates that can be
acquired at price levels that the Company considers appropriate and that
reflects historical prices. The Forward Looking Statements assume that a number
of acquisition candidates and landfill properties sufficient to meet the
Company's goals will be available for purchase and that the Company will be able
to complete the acquisition at prices that the Company has experienced in the
past two years.
Integration. The Company's financial position and results of operations
depend to a large extent on the integration of recently acquired businesses. The
Forward Looking Statements assume that integration of acquired companies,
including the internalization of waste, will require from three to nine months
from the date the acquisition closes. Failure to achieve effective integration
in the anticipated time period or at all could have an adverse effect on the
Company's future results of operations.
Ongoing Capital Requirements. To the extent that internally generated
cash and cash available under the Company's existing credit facilities are not
sufficient to provide the cash required for future operations, capital
expenditures, acquisitions, debt repayment obligations and/or financial
assurance obligations, the Company will require additional equity and/or debt
financing in order to provide such cash. The Company has incurred significant
debt obligations in the last two years, which entail substantial debt service
costs. The Forward Looking Statements assume that the Company will be able to
raise the capital necessary to finance such requirements at rates that are as
good as or better than those it is currently experiencing. There can be no
assurance, however, that such financing will be available or, if available, will
be available on terms satisfactory to the Company.
Economic Conditions. The Company's business is affected by general
economic conditions. The Forward Looking Statements assume that the Company will
be able to achieve internal volume and price growth which is not impacted by an
economic downturn. As revenue of the Company continues to grow it is likely that
the rates of internal growth will reflect growth rates which are less than those
experienced in 1997. There can be no assurance that an economic downturn will
not result in a reduction in the volume of waste being disposed of at the
Company's operations and/or the price that the Company can charge for its
services.
Weather Conditions. Protracted periods of inclement weather may
adversely affect the Company's operations by interfering with collection and
landfill operations, delaying the development of landfill capacity and/or
reducing the volume of waste generated by the Company's customers. In addition,
particularly harsh weather conditions may result in the temporary suspension of
certain of the Company's operations. The Forward Looking Statements do not
assume that such weather conditions will occur.
29
Dependence on Senior Management. The Company is highly dependent upon
its senior management team. In addition, as the Company continues to grow, its
requirements for operations management with waste industry experience will also
increase. The availability of such experienced management is not known. The
Forward Looking Statements assume that experienced management will be available
when needed by the Company at compensation levels that are within industry
norms. The loss of the services of any member of senior management or the
inability to hire experienced operations management could have a material
adverse effect on the Company.
Influence of Government Regulation. The Company's operations are
subject to and substantially affected by extensive federal, state and local
laws, regulations, orders and permits, which govern environmental protection,
health and safety, zoning and other matters. These regulations may impose
restrictions on operations that could adversely affect the Company's results,
such as limitations on the expansion of disposal facilities, limitations on or
the banning of disposal of out-of-state waste or certain categories of waste or
mandates regarding the disposal of solid waste. Because of heightened public
concern, companies in the waste management business may become subject to
judicial and administrative proceedings involving federal, state or local
agencies. These governmental agencies may seek to impose fines or to revoke or
deny renewal of operating permits or licenses for violations of environmental
laws or regulations or to require remediation of environmental problems at sites
or nearby properties, or resulting from transportation or predecessors'
transportation and collection operations, all of which could have a material
adverse effect on the Company. Liability may also arise from actions brought by
individuals or community groups in connection with the permitting or licensing
of operations, any alleged violations of such permits and licenses or other
matters. The Forward Looking Statements assume that there will be no materially
negative impact on the Company's operations due to government regulation.
Potential Environmental Liability. The Company may incur liabilities
for the deterioration of the environment as a result of its operations. Any
substantial liability for environmental damage could materially adversely affect
the operating results and financial condition of the Company. Due to the limited
nature of the Company's insurance coverage of environmental liability, if the
Company were to incur liability for environmental damage, its business and
financial condition could be materially adversely affected. The Forward Looking
Statements assume that the Company will not incur any material environmental
liabilities other than those for which a provision has been recorded in the
consolidated financial statements and disclosed in the notes thereto.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb cost increases resulting from inflation. The Company is unable
to determine the future impact of a sustained economic slowdown.
Seasonality
The Company believes that its collection and landfill operations can be
adversely affected by protracted periods of inclement weather which could delay
the development of landfill capacity or transfer of waste and/or reduce the
volume of waste generated.
30
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1996 and 1997.
Consolidated Statements of Operations for the Three Years Ended
December 31, 1997.
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1997.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997.
Notes to Consolidated Financial Statements.
31
Report of Independent Public Accountants
To Allied Waste Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Allied Waste
Industries, Inc., (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 financial position of Allied Waste Industries, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
February 16, 1998.
32
ALLIED WASTE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
1996 1997
ASSETS
Current Assets --
Cash and cash equivalents ....................................... $ 51,079 $ 11,920
Accounts receivable, net of allowance of $6,522
and $6,072 ................................................... 94,405 147,604
Prepaid and other current assets ................................ 10,220 16,438
Inventories ..................................................... 6,961 6,179
Deferred income taxes ........................................... 5,809 5,318
Assets held for sale ............................................ 524,716 --
----------- -----------
Total current assets ..................................... 693,190 187,459
Property and equipment, net ........................................ 738,388 1,287,208
Goodwill, net ...................................................... 857,350 899,145
Other assets ....................................................... 49,339 74,848
----------- -----------
Total assets ............................................. $ 2,338,267 $ 2,448,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
Current portion of long-term debt ............................... $ 536,678 $ 45,846
Accounts payable ................................................ 58,995 58,783
Accrued interest ................................................ 4,910 7,999
Other accrued liabilities ....................................... 61,059 85,251
Unearned income ................................................. 12,091 34,659
----------- -----------
Total current liabilities ................................ 673,733 232,538
Long-term debt, less current portion ............................... 1,157,231 1,356,281
Convertible subordinated debt, net of discount, less current portion 1,706 --
Deferred income taxes .............................................. 53,095 14,761
Accrued closure, post-closure and environmental costs .............. 152,604 203,314
Other long-term obligations ........................................ 23,890 45,595
Commitments and contingencies
Stockholders' Equity --
Preferred stock, aggregate liquidation preference of
$9,907 at December 31, 1996 .................................. 1 --
Common stock .................................................... 793 1,036
Additional paid-in capital ...................................... 351,683 671,388
Retained deficit ................................................ (76,469) (76,253)
----------- -----------
Total stockholders' equity ............................... 276,008 596,171
----------- -----------
Total liabilities and stockholders' equity ............... $ 2,338,267 $ 2,448,660
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
33
ALLIED WASTE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
Year Ended December 31,
1995 1996 1997
Revenues............................................. $ 262,243 $ 291,685 $ 875,028
Cost of operations................................... 153,524 171,947 475,381
Selling, general and administrative expenses......... 44,067 47,706 99,539
Depreciation and amortization........................ 28,859 34,591 113,467
Acquisition related costs............................ 1,531 90,764 5,010
Unusual items........................................ -- 5,744 --
------------ ------------ ------------
Operating income (loss).......................... 34,262 (59,067) 181,631
Interest income...................................... (907) (2,219) (1,969)
Interest expense..................................... 12,237 10,798 94,007
Other income, net.................................... -- -- (1,076)
------------ ------------ ------------
Income (loss) before income taxes................ 22,932 (67,646) 90,669
Income tax expense (benefit)......................... 9,802 (475) 37,052
------------ ------------ ------------
Income (loss) before extraordinary loss............ 13,130 (67,171) 53,617
Extraordinary loss due to early extinguishment
of debt, net of income tax benefit ................ -- (13,411) (53,205)
------------ ------------ ------------
Net income (loss)................................ 13,130 (80,582) 412
Dividends on preferred stock......................... (4,070) (1,073) (381)
Conversion fee on equity securities converted........ (2,151) -- --
------------ ------------ ------------
Net income (loss) available
to common shareholders........................... $ 6,909 $ (81,655) $ 31
============ ============ ============
Basic EPS:
Net income (loss) before extraordinary loss...... $ 0.17 $ (1.11) $ 0.61
Extraordinary loss............................... -- (0.22) (0.61)
------------ ------------ ------------
Net Income (loss)................................ $ 0.17 $ (1.33) $ 0.00
============ ============ ============
Weighted average common shares outstanding........... 40,559 61,364 87,045
============ ============ ============
Diluted EPS:
Net income (loss) before extraordinary loss...... $ 0.16 $ (1.06) $ 0.57
Extraordinary loss............................... -- (0.21) (0.57)
------------ ------------ ------------
Net Income (loss)................................ $ 0.16 $ (1.27) $ 0.00
============ ============ ============
Weighted average common and common
equivalent shares outstanding.................... 43,779 64,109 93,444
============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
34
ALLIED WASTE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Total
Additional Retained Stock-
Preferred Common Paid-In Earnings holders'
Stock Stock Capital (Deficit) Equity
Balance December 31, 1994............... $ 44 $ 296 $ 92,834 $ -- $ 93,174
Common stock issued, net.............. -- 90 33,006 -- 33,096
Stock options and warrants exercised.. -- 8 2,048 -- 2,056
Series C, Series D, 9%
Cumulative Convertible, and
$90 Cumulative Convertible
preferred stock and
convertible notes converted......... (42) 124 6,523 -- 6,605
Dividends declared on preferred stock. -- -- -- (4,070) (4,070)
Conversion fee on equity
securities converted................ -- -- -- (2,151) (2,151)
Equity transactions of
pooled companies.................... -- -- (1,820) (449) (2,269)
Net income............................ -- -- -- 13,130 13,130
---------- ------- ----------- ----------- -----------
Balance December 31, 1995............... 2 518 132,591 6,460 139,571
Common stock issued, net.............. -- 242 162,535 -- 162,777
Warrants issued ...................... -- -- 49,000 -- 49,000
Stock options and warrants
exercised........................... -- 10 2,336 -- 2,346
9% Cumulative Convertible preferred stock
and convertible notes converted (1) 21 5,465 -- 5,485
Dividends declared on
preferred stock..................... -- -- (1,073) -- (1,073)
Equity transactions of pooled
companies........................... -- 2 829 (2,347) (1,516)
Net loss.............................. -- -- -- (80,582) (80,582)
---------- ------- ----------- ----------- -----------
Balance December 31, 1996............... 1 793 351,683 (76,469) 276,008
Common stock issued, net of
issuance costs and cancellations...... -- 213 357,798 -- 358,011
Warrants repurchased.................. -- -- (49,000) -- (49,000)
Stock grant amortization.............. -- -- 381 -- 381
Stock options and warrants exercised.. -- 13 4,195 -- 4,208
9% Cumulative Convertible preferred stock
and convertible notes converted..... (1) 17 2,174 -- 2,190
Dividends declared on
preferred stock..................... -- -- (381) -- (381)
Equity transactions of pooled
companies........................... -- -- 4,538 (196) 4,342
Net income............................ -- -- -- 412 412
---------- ------- ----------- ----------- -----------
Balance December 31, 1997............... $ -- $ 1,036 $ 671,388 $ (76,253) $ 596,171
========== ======= =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
35
ALLIED WASTE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1995 1996 1997
Operating Activities --
Net income (loss) ................................................ $ 13,130 $ (80,582) $ 412
Adjustments to reconcile net income (loss) to cash provided
by operating activities --
Extraordinary loss on early extinguishment of debt ............... -- 22,352 21,549
Provisions for:
Depreciation and amortization .................................. 28,859 34,591 113,467
Closure and post-closure ....................................... 711 1,300 7,146
Acquisition related costs ...................................... 1,531 91,693 --
Unusual items .................................................. -- 5,744 --
Doubtful accounts .............................................. 1,994 2,388 3,479
Accretion of senior discount notes ............................. -- -- 22,764
Deferred income taxes .......................................... 5,741 1,574 (38,531)
Loss (gain) on sale of assets .................................. 291 1,941 (6,529)
Write-off intangible assets .................................... 237 -- --
Change in operating assets and liabilities, excluding the
effects of purchase acquisitions --
Accounts receivable, prepaid expenses, inventories and other ... (9,091) (15,539) (67,161)
Accounts payable, accrued liabilities, unearned income and other (408) (24,553) 41,086
Closure and post-closure costs ................................. (1,003) (1,681) (15,105)
----------- ----------- -----------
Cash provided by operating activities ............................... 41,992 39,228 82,577
----------- ----------- -----------
Investing Activities --
Cost of acquisitions, net of cash acquired ....................... (18,715) (1,356,639) (324,492)
Capital expenditures ............................................. (48,281) (32,577) (120,221)
Capitalized interest ............................................. (11,088) (12,970) (36,929)
Proceeds from sale of assets ..................................... 1,057 729 529,969
Increase in cash value of life insurance policies ................ (272) -- --
Change in deferred acquisition costs and notes receivable ........ (85) (9) (5,969)
----------- ----------- -----------
Cash provided by (used for) investing activities .................... (77,384) (1,401,466) 42,358
----------- ----------- -----------
Financing activities --
Net proceeds from sale and redemption of preferred stock ......... (316) -- --
Net proceeds from sale of common stock, and exercise of
stock options and warrants ..................................... 30,911 48,119 329,019
Proceeds from long-term debt,
net of issuance costs .......................................... 67,196 1,810,057 1,118,158
Repayments of long-term debt ..................................... (55,812) (446,408) (1,578,413)
Repurchase of warrant ............................................ -- -- (49,000)
Other long-term obligations ...................................... (1,604) (1,152) 12,325
Dividends paid ................................................... (3,598) (1,188) (525)
Equity transactions of pooled companies .......................... (2,269) (1,516) 4,342
----------- ----------- -----------
Cash provided by (used for) financing activities .................... 34,508 1,407,912 (164,094)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents .................... (884) 45,674 (39,159)
Cash and cash equivalents, beginning of period ...................... 6,269 5,385 51,079
----------- ----------- -----------
Cash and cash equivalents, end of period ............................ $ 5,385 $ 51,059 $ 11,920
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
36
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Allied Waste Industries, Inc. ("Allied" or the "Company") is incorporated
under the laws of the State of Delaware. Allied is a solid waste management
company providing non-hazardous waste collection, transfer, recycling and
disposal services in selected markets.
Principles of consolidation and presentation --
The consolidated financial statements include the accounts of Allied
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. The consolidated financial statements and
accompanying notes have also been restated to reflect material acquisitions
accounted for as poolings-of-interests (See Note 2).
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
Cash and cash equivalents --
Cash equivalents are investments with original maturities of less than
ninety days and are stated at quoted market prices. The cash and cash
equivalents includes approximately $21.2 million of outstanding checks at
December 31, 1997.
Concentration of credit risk --
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions and limits the amount of credit exposure to any one
financial institution.
The Company provides services to commercial and residential customers
in the United States. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and other
information.
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, which includes interest to
finance the acquisition and construction of major capital additions during the
development phase, primarily landfills and transfer stations, until they are
completed and ready for their intended use. Depreciation is provided on the
straight-line method over the estimated useful lives of buildings (30-40 years),
vehicles and equipment (3-15 years), containers and compactors (5-10 years) and
furniture and office equipment (3-8 years). The cost of landfill airspace,
including original
37
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition cost and incurred and projected landfill preparation costs, is
amortized based on tonnage as landfill airspace is consumed. Management
periodically reviews the realizability of its investment in operating landfills.
Should events and circumstances indicate that any of the Company's landfills be
reviewed for possible impairment, such review for recoverability will be made in
accordance with Emerging Issues Task Force Discussion Issue ("EITF") 95-23. The
EITF outlines how cash flows for environmental exit costs should be determined
and measured.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1997, maintenance and repair expenses charged to cost of operations
were $18,031,000, $16,389,000 and $54,993,000, respectively. When property is
retired, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized.
Goodwill --
Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized on a straight-line basis over 40 years. The
Company continually evaluates whether events and circumstances have occurred
subsequent to its acquisition, that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's discounted future cash flows over the remaining life of the goodwill
in measuring whether the goodwill is recoverable. Goodwill amortization of
$4,262,000, $2,247,000 and $23,306,000 is included in depreciation and
amortization for the three years in the period ended December 31, 1997,
respectively. Accumulated goodwill amortization was $16,614,000 and $39,920,000
at December 31, 1996 and 1997, respectively.
Other assets --
Other assets includes notes receivable, landfill closure deposits,
deferred charges and miscellaneous non-current assets. Deferred charges include
costs incurred to acquire businesses and to obtain equity and debt financing.
Upon consummation of an acquisition, deferred costs relating to acquired
businesses accounted for as purchases are allocated to goodwill or landfill
airspace while costs relating to acquired businesses accounted for as
poolings-of-interests are expensed. Direct costs related to acquisitions under
evaluation are capitalized and reviewed for realization on a periodic basis.
These costs are expensed when management determines that the capitalized costs
provide no future benefit. Upon funding of equity and debt offerings, deferred
costs are charged to additional paid-in capital or are capitalized as debt
issuance costs and amortized using the interest method over the life of the
related debt. Miscellaneous assets include consulting and non-competition
agreements which are being amortized in accordance with the terms of the
respective agreements and contracts, not exceeding 5 years.
Accrued closure and post-closure costs --
Accrued closure and post-closure costs represent an estimate of the
current value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-
38
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
closure costs. The impact of changes determined to be changes in estimates
are accounted for on a prospective basis.
Environmental costs --
Allied accrues for costs associated with environmental remediation
obligations when such costs are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded when their receipts are deemed probable.
Other long-term obligations --
Other long-term obligations include non-competition agreements with
former owners of acquired companies and deferred royalty obligations. Guaranteed
minimum royalty obligations are recorded upon acquisition of the related asset
whereas royalty obligations dependent upon future waste accepted at landfills
are expensed as earned.
Revenue --
Advance billings are recorded as unearned income, and revenue is
recognized as income when services are provided.
Acquisition related costs --
In connection with the 1996 acquisition of substantially all of the
non-hazardous solid waste management business conducted by Laidlaw Inc. (the
"Laidlaw Acquisition"), the Company incurred approximately $84.6 million in
charges primarily associated with the acquisition, which include approximately
$51.5 million of environmental related matters for incremental closure and
post-closure measures, remediation activities and litigation costs, expected to
be disbursed over the next 30 years, $18.4 million of asset impairments and
abandonments consisting of $10.8 million related to over 50 noncompetition
agreements in several markets where the counterparty no longer poses a
significant threat, $4.8 million for discontinued facilities and $2.8 million
for market development activities no longer being pursued, and $14.7 million of
acquisition liabilities.
For the three years ended December 31, 1997, costs were $1.5 million,
$7.1 million and $5.0 million, respectively, for transaction and integration
costs directly related to acquisitions accounted for using the
pooling-of-interests method for business combinations.
Unusual items --
In December 1996 the Company recorded $5.7 million in unusual charges
including $2.0 million in connection with the ongoing investigation and
remediation of the Company's Norfolk landfill and $3.7 million of other
non-recurring valuation adjustments.
Other income, net. The Company recorded approximately $1.1 million of other
income, comprised of a $5.6 million gain on sale of assets to USA Waste in the
fourth quarter of 1997, net of a charge of approximately $4.5 million in
connection with the abandonment of certain collection and transfer operations.
39
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extraordinary loss --
1996:
In July 1996, the Company completed a tender offer (the "Tender Offer")
and purchased substantially all of its $100 million 12% Senior Subordinated
Notes due 2004 (the "1994 Notes") at the redemption price of $1,157.50 per
$1,000 note. An extraordinary charge to earnings related to the Tender Offer of
approximately $18.4 million ($11.0 million net of income tax benefit) was
charged to earnings in the third quarter of 1996. The Company also received a
consent from a majority of the holders of the 1994 Notes to eliminate all
substantive financial covenants associated with the remaining 1994 Notes.
In December 1996, the Company refinanced its $300 million senior
revolving credit facility with the proceeds from the senior credit facility
related to the Laidlaw Acquisition and recognized an extraordinary charge of
approximately $4.0 million ($2.4 million net of income tax benefit).
1997:
In May 1997, the Company repurchased (the "Repurchase") from Laidlaw Inc.
("Laidlaw") and Laidlaw Transportation, Inc. (collectively, the "Laidlaw Group")
for $230 million in cash, the $150 million 7% Junior Subordinated Debenture
($81.6 million book value), the $168.3 million Zero Coupon Debenture ($34.9
million book value, collectively the "Allied Debentures") and the warrant to
purchase 20.4 million shares of the Company's common stock, $0.01 par value (the
"Common Stock") ($49.0 million book value, the "Warrant"), issued as partial
consideration for the Laidlaw Acquisition. An extraordinary charge of
approximately $65.7 million ($39.4 million net of income tax benefit) related to
the Repurchase was recorded in the second quarter of 1997.
During June 1997, the Company replaced its Credit Facility (see Note 5)
with the Credit Agreement (see Note 5) and recognized an extraordinary charge of
approximately $21.6 million ($13.0 million net of income tax benefit) related to
prepayment penalties and the write-off of previously deferred debt issuance
costs.
In September 1997, the Company sold 18.6 million shares of common stock
with net proceeds of approximately $327.4 million (the "Equity Offering"). In
October, the Company used $203 million of the net proceeds to retire a portion
of the Term Loan Facility (see Note 5) of the Credit Agreement (see Note 5), $71
million to repay the entire amount outstanding on the Revolving Credit Facility
(see Note 5). As a result of the early repayment of debt outstanding under the
Term Loan Facility, the Company recognized an extraordinary charge of
approximately $1.3 million ($0.8 million net of income tax benefit) related to
the write-off of previously deferred debt issuance costs in the third quarter of
1997.
40
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of cash flows --
The supplemental cash flow disclosures and non-cash transactions for
the three years ended December 31, 1997 are as follows (in thousands):
Year Ended December 31,
1995 1996 1997
Supplemental Disclosures --
Interest paid............................................... $ 20,922 $ 26,667 $ 110,475
Income taxes paid........................................... 2,994 6,301 14,704
Non-Cash Transactions --
Common stock, preferred stock or warrants
issued in acquisitions, as commissions,
or contributed to 401(k) plan............................. $ 754 $ 164,764 $ 36,489
Capital leases ............................................. 21,659 19,094 35,491
Debt and liabilities incurred or assumed
in acquisitions........................................... 14,434 213,082 194,298
Debt converted to common stock.............................. 6,802 5,485 2,265
Dividends and interest paid, and
conversion fee on debt and equity securities
converted paid in common stock............................ 3,490 -- --
Non-cash purchase and sale of operating businesses.......... -- -- 181,434
Use of estimates --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Final settlement amounts could differ from those estimates.
Interest rate protection agreements --
Interest rate protection agreements are used to reduce interest rate risks
and interest costs of the Company's debt portfolio. The Company enters into
these agreements to change the fixed/variable interest rate mix of the portfolio
to reduce the Company's aggregate exposure to increases in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. Hedge accounting treatment is applied to interest rate derivative
contracts that are designated as hedges of specified debt positions. Amounts
payable or receivable under interest rate swap agreements are recognized as
adjustments to interest expense in the periods in which they accrue. Net
premiums paid for derivative financial instruments are deferred and recognized
ratably over the life of the instruments. Under hedge accounting treatment,
current period income is not affected by the increase or decrease in the fair
market value of derivative instruments as interest rates change and these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
41
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments --
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value
of Financial Instruments". The Company's Financial Instruments as defined by
SFAS No. 107 include cash, money market funds, accounts receivable, accounts
payable and long-term debt. The estimated fair value amounts have been
determined by the Company at December 31, 1997 using available market
information and valuation methodologies described below. Considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates may not be indicative of the amounts that could be
realized in a current market exchange. The use of different market assumptions
or valuation methodologies could have a material effect on the estimated fair
value amounts.
The carrying value of cash, money market funds, accounts receivable and
accounts payable approximate fair values due to the short-term maturities of
these instruments.
Stock-based compensation plans --
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, ("APB No. 25"). Effective in January
1, 1996, the Company adopted the disclosure option of SFAS No. 123, "Accounting
for Stock-based Compensation." SFAS No. 123 requires that companies, which do
not elect to account for stock-based compensation as prescribed by the
statement, disclose the pro forma effects on earnings and earnings per share as
if SFAS No. 123 had been adopted. Additionally, certain other disclosures with
respect to stock compensation and the related assumptions are used to determine
the pro forma effects of SFAS No. 123.
Accounting pronouncements not yet required to be adopted --
During 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income" and SFAS 131 "Disclosures About Segments of
an Enterprise and Related Information." The new statements are effective for
fiscal years beginning after December 15, 1997 and are not expected to have a
material impact on the Company's financial statements.
2. Business Combinations
Acquisitions accounted for as purchases are reflected in the results of
operations since the date of purchase in Allied's consolidated financial
statements. The results of operations for acquisitions accounted for as
poolings-of-interests are included in Allied's consolidated financial statements
for all periods presented. The final determination of the cost, and the
allocation thereof, of certain of the Company's acquisitions is subject to
resolution of certain contingencies. Once such contingencies are achieved, the
purchase price is adjusted. Certain shares issued in connection with business
acquisitions have been valued taking into consideration certain restrictions
placed on the stock.
On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of cash, Common Stock, a warrant to acquire
Common Stock, and subordinated debentures. The cash consideration was financed
from the proceeds of the Senior Credit Facility and the sale of the 1996 Notes
(see Note 5).
42
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reflects the allocation of purchase price for the
Laidlaw Acquisition, giving effect to the Canadian Sale (in thousands):
Current assets....................... $ 70,137
Property and equipment............... 353,793
Goodwill............................. 757,200
Non-current assets................... 2,550
Current liabilities.................. (88,759)
Long-term debt....................... (4,019)
Other long-term obligations.......... (106,648)
-----------
Total net assets $ 984,254
===========
The following table summarizes acquisitions for the three years ended
December 31, 1997, excluding the Laidlaw Acquisition:
1995 1996 1997
------- -------- -------
Number of businesses acquired accounted
for as:
Poolings-of-interests........... 5 5 9
Purchases....................... 13 16 26
Total consideration (in millions)...... $ 45.3 $ 126.5 $ 730.8
Shares of common stock issued:......... 4,000,040 8,924,374(1) 7,038,456(2)
(1) Includes 774,794 shares of contingently issuable common stock.
(2) Includes 359,516 shares of contingently issuable common stock.
Revenues and net income have been restated for acquisitions accounted
for as poolings-of-interests as presented in the following table (in thousands):
Allied
Before
Pooling 1997 Allied, as
Acquisitions Poolings Restated
Year ended December 31, 1997
Revenues........................................... $ 841,513 $ 33,515 $ 875,028
Net income......................................... 358 54 412
Year ended December 31, 1996
Revenues........................................... 246,679 45,006 291,685
Net loss .......................................... (79,427) (1,155) (80,582)
Year ended December 31, 1995
Revenues........................................... 217,544 44,699 262,243
Net income......................................... 12,381 749 13,130
Unaudited pro forma statement of operations data --
The following table compares, for the year ended December 31, 1996 and
1997, reported consolidated results of operations to unaudited pro forma
consolidated data as if all of the companies acquired in 1996 and 1997 accounted
for using the purchase method for business combinations were acquired as of
January 1, 1996 (in thousands, except per share data):
43
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 1997
------------------------------- ---------------------------------
Reported Pro Forma Reported Pro Forma
Revenues.............................. $ 291,685 $ 1,066,220 $ 875,028 $ 1,026,400
Operating income...................... (59,067) 190,570 181,631 210,280
Net income (loss)..................... (80,582) (83,046) 412 6,941
Net income (loss) to common
shareholders......................... (81,655) (84,119) 31 6,560
Net income (loss) per common
share - basic........................ (1.33) (1.07) 0.00 0.07
Net income (loss) per common
share - diluted...................... (1.27) (1.02) 0.00 0.07
This data does not purport to be indicative of the results of
operations of Allied that might have occurred nor which might occur in the
future.
3. Assets Held for Sale
During March 1997, the Company completed the sale of the Company's
Canadian non-hazardous solid waste management operations (the "Canadian Sale")
for approximately $518 million in cash and sold certain non-core medical waste
assets for approximately $6.7 million. No gain or loss was recorded on either
sale.
During the period from January 1, 1997 through March 16, 1997, the date of
sale, the Company excluded from consolidated statements of operations and
included in net assets held for sale at December 31, 1996, $5.8 million of
income from operations and $9.6 million of interest expense attributable to the
Canadian operations.
At December 31, 1996, the net assets held for sale are classified as
current assets in the consolidated balance sheet and are summarized as follows
(in thousands):
Cash............................... $ 628
Accounts receivable, net........... 43,104
Other current assets............... 6,402
Property and equipment, net........ 165,622
Goodwill........................... 349,192
Other long-term assets............. 13,099
Current liabilities................ (31,338)
Long-term liabilities.............. (21,993)
----------
Total net assets................... $ 524,716
==========
44
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment at December 31, 1996 and 1997 was as follows (in
thousands):
1996 1997
----------- -------------
Land and improvements....................... $ 40,377 $ 103,939
Land held for permitting as landfills(1).... 66,070 76,476
Landfills................................... 320,763 756,481
Buildings and improvements.................. 60,879 95,514
Vehicles and equipment...................... 290,278 286,180
Containers and compactors................... 63,158 135,870
Furniture and office equipment.............. 7,574 9,866
----------- ------------
849,099 1,464,326
Accumulated depreciation and amortization... (110,711) (177,118)
----------- ------------
$ 738,388 $ 1,287,208
=========== ============
(1) These properties have been approved for use as landfills, and the
Company is currently in the process of obtaining the necessary
permits.
5. Long-Term Debt
Long-term debt at December 31, 1996 and 1997 consists of the following
(in thousands):
To related parties --
1996 1997
-------- ---------
Unsecured notes payable to former stockholders, net of
discount, interest at an effective rate of 14%........ $ 110,747 $ --
Unsecured notes payable to stockholders, interest at 12%. 1,862 1,726
-------- ---------
112,609 1,726
Current portion....................................... 136 154
-------- ---------
$ 112,473 $ 1,572
======== =========
In connection with the Laidlaw Acquisition, a subsidiary of the
Company issued a $150 million 7% junior subordinated debenture and a $168.3
million zero coupon debenture recorded at a net discounted amount of $77.5
million and $33.2 million, respectively, at December 31, 1996. The debentures
were repaid during 1997 with the proceeds from the Senior Discount Notes.
The $2.0 million notes payable to related parties were issued in April
1995 in accordance with an agreement to acquire certain real estate. This
agreement was executed by one of the Company's subsidiaries prior to the
Company's acquisition of the subsidiary. The agreement required the payment of
an aggregate of $5.6 million to the previous owners upon issuance of a permit to
operate a landfill. Subsequent to execution of this agreement, certain previous
owners became stockholders of the Company. These notes bear interest at 12% per
annum with monthly principal and interest payments through maturity in May 1999
and are guaranteed by the Company.
45
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To unrelated parties --
1996 1997
----------- ---------
Senior credit facilities, weighted average interest
at 10.03% and 7.5% at December 31, 1996
and 1997, respectively......................................... $ 975,000 $ 438,000
Senior subordinated notes,
interest at 10.25%
at December 31, 1996 and 1997, unsecured....................... 525,010 525,000
Senior discount notes, interest at 11.3%.......................... -- 254,690
Notes payable to banks, finance companies and
individuals, weighted average interest rate of
10.35% and 6.37% at December 31, 1996 and 1997,
respectively and principal payable through 2014,
secured by vehicles, equipment, real estate,
accounts receivable or stock of certain subsidiaries........... 9,475 89,600
Notes payable to individuals and a commercial company,
interest at 5%-12%, principal and interest payable through
2006, unsecured................................................ 12,383 30,247
Obligations under capital leases of vehicles and
equipment, weighted average interest at
9.6% and 7.8% at December 31, 1996,
and 1997, respectively, payable monthly........................ 59,376 62,864
----------- -----------
1,581,244 1,400,401
Current portion................................................ 536,486 45,692
----------- -----------
$ 1,044,758 $ 1,354,709
=========== ===========
In connection with the Laidlaw Acquisition, the Company and Allied
Waste North America, Inc., a wholly owned subsidiary of the Company ("Allied
NA"), executed a $1.275 billion credit agreement (the "Credit Facility"). The
Credit Facility was comprised of (i) a $300 million revolving credit facility;
(ii) a $475 million 5.5 year senior term loan; (iii) a $100 million 6.5 year
Amortization Extended Term Loan AXELTMA; (iv) a $200 million 7.5 year AXELTMB;
and (v) a $200 million 8.5 year AXELTMC. In connection with the Canadian Sale,
Allied paid approximately $517 million of the Credit Facility. Payments were
made on a pro rata basis between the term loan and each of the AXEL traunches as
provided by the Credit Facility.
In June 1997, the Company repaid the Credit Facility and entered into
an Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit
Agreement provides a six and one-half year senior secured $500 million term loan
facility (the "Term Loan Facility") and a six and one-half year senior secured
$400 million revolving credit facility (the "Revolving Credit Facility" and
together with the Term Loan Facility, the "Senior Credit Facility"). Principal
payments on the Term Loan Facility are payable quarterly, beginning in September
1997 and increase from $10 million to $100 million per annum through maturity in
December 2003. Principal under the Revolving Credit Facility is due upon
maturity. The Senior Credit Facility bears interest at the lesser of (a) a Base
Rate, or (b) a Eurodollar Rate, both terms as defined in the Credit Agreement,
plus, in either case, an applicable margin. The applicable margin will be
adjusted from time to time pursuant to a pricing grid based upon the Company's
Total Debt to EBITDA ratio, as defined in the Credit Agreement, and varies
between zero percent and 0.75% for Base Rate loans, and 0.75% and 1.75% for
Eurodollar loans. In addition, if at any time the Company's Senior Debt Ratio is
greater than 2.5 to 1.0, the applicable margin for all loans will be increased
by 0.25%.
46
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 30, 1997, the Company repaid $203 million on the Term Loan
Facility and $71 million outstanding on the Revolving Credit Facility. In
connection with this repayment, the Company amended the Credit Agreement (the
"Amendment") in October 1997. The Amendment expanded the Senior Credit Facility
to $1.1 billion from $900 million by increasing the Revolving Credit Facility
from $400 million to $600 million and by adding a $200 million delayed draw term
facility (the "Delayed Draw Term Facility"), after giving effect to the
repayment of $203 million on the Term Loan Facility on September 30, 1997. The
Revolving Credit Facility includes a $250 million sublimit for the issuance of
letters of credit (increased from $175 million at September 30, 1997). Interest
rates were not changed in connection with the Amendment.
In connection with the Laidlaw Acquisition, Allied NA issued $525
million of 10.25% Senior Subordinated Notes due 2006 (the "1996 Notes") in a
Rule 144A offering which was subsequently registered with the Securities and
Exchange Commission. Net proceeds from the sale of the 1996 Notes, after the
underwriting discounts and other expenses, were approximately $509 million. The
net proceeds were used to pay a portion of the cash purchase price of the
Laidlaw Acquisition, repay amounts outstanding under the Company's previous $300
million credit facility, fund certain acquisitions and for general corporate
purposes. The 1996 Notes cannot be redeemed until December 1, 2001, except under
certain circumstances. Prior to December 1, 2001, the 1996 Notes are subject to
redemption, at the option of Allied NA, at prices specified in the indenture. At
any time prior to December 1, 1999, up to 33% of principal amount of the 1996
Notes will be redeemable, at the option of Allied NA, from the proceeds of one
or more public offerings of capital stock by the Company at a redemption price
of 110.25% of principal amount, plus accrued interest. The 1996 Notes are
guaranteed by the Company and substantially all of Allied NA's subsidiaries, the
guarantees of which are expressly subordinated to the guarantees of Allied NA's
Senior Credit Facility.
In May 1997, Allied issued $418 million aggregate face amount of senior
discount notes in a private offering (the "Senior Discount Notes"). The Senior
Discount Notes were issued at a discount of principal amount and, unless certain
provisions are triggered, there will be no periodic cash payments of interest
before June 1, 2002. Thereafter, the Senior Discount Notes will accrue cash
interest at the rate of 11.30% per annum, payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 2002. Allied completed an
exchange offer for the Senior Discount Notes on December 16, 1997. The Senior
Discount Notes cannot be redeemed until December 1, 2001, except under certain
circumstances. Prior to June 1, 2000, up to 33% of principal amount of Senior
Discount Notes will be redeemable, at the option of Allied, from the proceeds of
one or more public offerings of capital stock by Allied at a redemption premium
to their accreted value, plus accrued interest.
Convertible subordinated debt --
1996
Senior Convertible Subordinated Debentures, unsecured...... $ 975
Convertible note payable to an individual, unsecured....... 787
---------
1,762
Current portion......................................... 56
---------
$ 1,706
=========
The Senior Convertible Subordinated Debentures bear interest at 8.5%
per annum payable semi-annually, with principal payable in 2002. The debentures
are convertible into Allied common shares at $6.00 per share. Warrants to
purchase 195,000 common shares at $6.00 per share were issued in connection with
the sale of the debentures. In 1997, this debt was converted into 162,500 shares
of common stock.
47
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 8% Convertible note payable to an individual was payable quarterly
through September 1996. Beginning October 1996, principal and interest was
payable in equal monthly installments through October 2006. The note is
convertible into Allied common stock at $10.00 per share during the period of
January 1997 to December 1998. In 1997, this debt was converted into 75,494
shares of common stock.
Future maturities of long-term debt --
Aggregate future maturities of long-term debt outstanding at December
31, 1997 (in thousands):
Maturity 1997
-------- -----------
1998 $ 45,846
1999 54,920
2000 74,813
2001 74,356
2002 74,798
Thereafter 1,077,394
-----------
$ 1,402,127
===========
Future payments under capital leases, the principal amounts of which
are included above in future maturities of long-term debt, are as follows at
December 31, 1997 (in thousands):
1997
Maturity Principal Interest Total
-------- ------------ ----------- ---------
1998 $ 15,606 $ 5,090 $ 20,696
1999 12,540 3,775 16,315
2000 10,343 2,791 13,134
2001 10,601 1,794 12,395
2002 11,894 754 12,648
Thereafter 1,880 456 2,336
----------- ---------- ---------
$ 62,864 $ 14,660 $ 77,524
=========== ========== =========
Fair value of debt --
The Company's 1996 Notes had a fair value of $548.6 million and $577.5
million at December 31, 1996 and 1997, respectively, based upon quoted market
prices. The convertible subordinated debt has a fair value of approximately $2.4
million based upon the conversion features of the related instruments and market
price of the Company's common stock at December 31, 1996. The fair value of the
Zero Coupon Debenture and 7% Debenture approximates book value at December 31,
1996 due to the short passage of time since their origination. The Company's
Senior Discount Notes had a value of $292.6 million at December 31, 1997 based
upon quoted market prices. Management believes the carrying value of all
remaining long-term debt approximates fair value.
48
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest rate protection agreements --
The Company has entered into interest rate protection agreements (the
"Agreements"), with reputable national commercial banks and investment banking
institutions to reduce its exposure to fluctuations in variable interest rates.
A summary of the Agreements outstanding as of December 31, 1997 is as follows:
Notional Amount Fixed Rate Period
(in millions)
$ 130 6.27% April 1997 - May 1998
50 6.08 September 1997 - September 2000
50 6.06 September 1997 - March 2000
50 5.97 October 1997 - April 1999
50 6.02 October 1997 - October 1999
50 5.90 November 1997 - November 1999
50 5.91 November 1997 - November 1999
The Agreements effectively change the Company's interest rate paid on
its floating rate long-term debt to a weighted average fixed rate of
approximately 6.07% plus applicable margins imposed by the terms of the Credit
Agreement at December 31, 1997. The fair value of the Agreements as of December
31, 1997 was approximately $1.5 million, which reflects the estimated amounts
that the Company would pay to terminate the Agreements based on quoted market
prices of comparable contracts as of December 31, 1997.
The Company has also entered into an additional interest rate
protection agreement with effective dates beginning in the future (the "Forward
Agreement"). This Forward Agreement provides continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under the Delayed Draw Term Facility of the Senior
Credit Facility. A summary of the Forward Agreement is as follows:
Notional Amount Fixed Rate Period
(in millions)
$ 130 6.06% May 1998 - May 2001
Debt covenants --
The Company's Senior Credit Facility, the 1996 Notes and the Senior
Discount Notes, contain warranties and covenants, requiring the maintenance of
certain tangible net worth, debt to equity, and cash flow to debt ratios.
Additionally, these covenants limit among other things, the ability of the
Company to incur additional secured indebtedness, make acquisitions and purchase
fixed assets above certain amounts, transfer or sell assets, pay dividends
except on certain preferred stock, make optional payments on certain
subordinated indebtedness or make certain other restricted payments, create
liens, enter into certain transactions with affiliates or consummate a merger,
consolidation or sale of all or substantially all of its assets. At December 31,
1997, Allied was in compliance with all applicable covenants.
Substantially all subsidiaries of the Company are jointly and severally
liable for the obligations under the 1997 Notes and the Senior Credit Facility
through unconditional guarantees issued by the subsidiaries which are all,
except in one minor case, wholly-owned by the Company. No significant
restrictions exist regarding the ability of the subsidiary companies to pay
dividends or make loans or advances to Allied.
49
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Closure, Post-Closure and Environmental Costs
Closure and post-closure costs --
The net present value of the closure and post-closure commitment is
calculated assuming inflation of 2.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded are accreted to reflect the effects of
the passage of time. The Company's current estimate of total future payments for
closure and post-closure, in accordance with Subtitle D, is $1.0 billion, as
shown below, while the present value of such estimate is $245.3 million. At
December 31, 1996 and 1997, respectively, accruals for landfill closure and
post-closure costs (including costs assumed through acquisitions) were
approximately $107.6 million and $140.8 million. The accruals reflect relatively
young landfills whose estimated remaining lives, based on current waste flows,
range from 1 to over 75 years, with an estimated average remaining life of
greater than 30 years.
The Company's estimate of total future payments for closure and
post-closure liabilities for currently owned and operated landfills is as
follows (in thousands):
1998 $ 19,783
1999 15,087
2000 11,076
2001 12,311
2002 13,261
Thereafter 951,775
-------------
$ 1,023,293
=============
Environmental costs --
In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by subsidiaries acquired
from Laidlaw or other third-parties, and properties under the management of
companies acquired from Laidlaw. Several contaminated landfills and other
properties were identified, two of which are owned by subsidiaries of the
Company, that would require those subsidiaries to incur costs for incremental
closure and post-closure measures, remediation activities and litigation costs.
The costs of performing the investigation, design, remediation and the
allocation of responsibility to the subsidiaries of Allied vary significantly
between sites. Based on information available to the Company, Allied recorded a
provision of $51.5 million for environmental matters at sites acquired from
Laidlaw, including closure and post-closure costs, in the 1996 statement of
operations and expects these amounts to be disbursed over the next 30 years.
The ultimate amounts for environmental liabilities cannot be determined
and estimates of such liabilities made by the Company, after consultation with
its independent environmental engineers, require assumptions about future events
due to a number of uncertainties including the extent of the contamination, the
appropriate remedy, the financial viability of other potentially responsible
parties and the final apportionment of responsibility among the potentially
responsible parties. Where the Company has concluded that its estimated share of
potential liabilities is probable, a provision has been made in the consolidated
financial statements. Since the ultimate outcome of these matters may differ
from the estimates used in the Company's assessment to date, the recorded
liabilities will be periodically evaluated as additional information becomes
available to ascertain that the accrued liabilities are adequate. The Company
has determined that the recorded liability for environmental matters as of
December 31, 1996 and 1997 of approximately $45.0 million and $62.5 million,
respectively, represents the most probable outcome of these contingent matters.
The Company does not expect that adjustments to estimates, which are
50
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reasonably possible in the near term and that may result in changes to recorded
amounts, will have a material effect on the Company's consolidated liquidity,
financial positions or results of operations.
7. Stockholders' Equity
The authorized, issued and outstanding shares of the Company's classes
of capital stock were as follows:
Issued and Outstanding
Liquidation at December 31,
Preference Authorized
per Share Shares 1996 1997
--------- ------------- -------------- ---------------
Preferred stock, $.10 par --
Series C Convertible............. $ 10 800,000 -- --
Series D Convertible............. 15 267,000 -- --
Series E Convertible............. 5,000 3,000 -- --
9% Cumulative Convertible........ 1,000 30,000 -- --
$90 Cumulative Convertible....... 1,000 20,000 -- --
7% Cumulative Convertible........ 1,000 100,000 9,907 --
Common stock, $.01 par, net of
570,048 treasury shares.......... -- 200,000,000 78,461,266 103,563,906
Dividends declared and accrued on the Company's classes of preferred
stock were as follows:
Dividends Declared Accrued Dividends at
For The Years Ended December 31, December 31,
1995 1996 1997 1996 1997
Series D Convertible...................... $ 184 $ 1 $ -- $ -- $ --
9% Cumulative Convertible................. 2,466 377 -- -- --
$90 Cumulative Convertible................ 560 -- -- -- --
7% Cumulative Convertible................. 698 695 381 144 --
Series E Cumulative Convertible........... 162 -- -- -- --
--------- --------- ---------- -------- --------
$ 4,070 $ 1,073 $ 381 $ 144 $ --
========= ========= ========== ======== ========
During 1995, the Series E preferred stock, the Series C preferred
stock and $90 preferred stock was converted into Common Stock. During 1996, the
Series D preferred stock and 9% preferred stock was converted into Common Stock.
During 1997, the 7% preferred stock was converted into Common Stock.
Warrants to purchase common stock --
Warrants to purchase common shares at December 31, 1996 and 1997 are
summarized as follows:
1996 1997
---------- -----------
Number of shares....................... 22,645,166 858,942
Purchase price per share............... $3.37 -- $13.50 $4.60 -- $7.00
Expiration dates....................... 1997 -- 2008 1998 -- 2005
51
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20,400,000 shares of Common Stock at an exercise
price of $8.25 per share. The Company repurchased this warrant from Laidlaw
during 1997.
8. Stock Option Plans
The 1991 Incentive Stock Plan ("1991 Plan"), the 1993 Incentive Stock
Plan ("1993 Plan") and the 1994 Incentive Stock Plan ("1994 Plan") provide for
the grant of non-qualified stock options, incentive stock options, shares of
restricted stock, shares of phantom stock and stock bonuses. The maximum number
of shares which may be granted under the 1991 Plan may not exceed the greater of
750,000 common shares or 7.5% of the number of common shares outstanding at the
end of a preceding fiscal quarter (4,463,778 shares at December 31, 1997). An
additional 500,000 and 1,000,000 common shares may be granted under the 1993
Plan and the 1994 Plan, respectively. The exercise price, term and other
conditions applicable to each option granted are generally determined by the
Compensation Committee of the Board of Directors.
The 1994 Amended and Restated Non-Employee Director Stock Option Plan
provides for the grant of non-qualified options to each member of the Board of
Directors, who is not also an employee of the Company, at a price equal to the
fair market value of a common share on the date of grant. The maximum number of
shares which may be granted under the plan is 750,000 common shares. All options
granted under the plan are fully vested and exercisable on the date of grant and
expire ten years from the grant date.
A summary of the status of the Company's stock option plans at December
31, 1995, and 1996 and 1997 and for the years then ended is presented in the
table and narrative below:
Years Ended December 31,
1995 1996 1997
Options outstanding, beginning of period......... 1,575,739 2,849,568 4,308,694
Options granted............................... 1,493,469 1,747,550 3,153,775
Options exercised............................. (183,606) (277,016) (457,780)
Options terminated............................ (36,034) (11,408) (104,333)
------------- ---------------- ---------------
Options outstanding, end of period............... 2,849,568 4,308,694 6,900,356
============= ================ ===============
Options exercisable, end of period............... 1,774,456 2,170,086 3,498,598
Weighted average fair value of options granted... $ 4.66 $ 8.64 $ 8.25
The Company accounts for its stock-based compensation plans under APB
No. 25, under which no compensation expense has been recognized, as all options
have been granted with an exercise price equal to the fair value of the
Company's Common Stock upon the date of grant. In 1996, the Company adopted SFAS
No. 123 for disclosure purposes and accordingly, the fair value of each option
grant has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
For the Years Ended December 31,
1995 1996 1997
Risk free interest rate.... 6.0% to 7.6% 5.2% to 6.7% 5.8% to 7.6%
Expected life.............. 8 years 5-8 years 5 years
Dividend rate.............. 0% 0% 0%
Expected volatility........ 51% 49% 25% to 50%
52
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Using these assumptions, pro forma net income (loss) and net income
(loss) per share would reflect additional compensation expense recognized over
the vesting periods of the options. The pro forma loss for 1997 includes the
impact of certain options that fully vested in 1997 due to a change in control.
The resulting pro forma net income (loss), in thousands, and pro forma net
income (loss) per share is as follows:
For the Years Ended December 31,
1995 1996 1997
Net income (loss): As reported $ 13,130 $(80,582) $ 412
Pro forma 12,389 (82,239) (11,359)
Net income (loss) per share: As reported $ 0.30 $ (1.26) $ 0.00
Pro forma 0.28 (1.28) (0.12)
The following table summarizes information about stock options
outstanding at December 31, 1997 which are fully vested, partially vested and
non-vested:
Fully Partially Non-
Vested Vested Vested
--------------- -------------- ---------------
Options outstanding:
Range of exercise prices.......$3.00 to $16.88 $4.50 to $9.50 $4.27 to $15.88
Number outstanding............. 2,908,073 1,642,243 2,350,040
Weighted average remaining life 6 years 8 years 9 years
Weighted average exercise price $6.25 $8.81 $10.31
Options exercisable:
Range of exercise prices.......$3.00 to $16.88 $4.50 to $9.50 --
Number outstanding............. 2,908,073 590,525 --
Weighted average remaining life 6 years 8 years --
Weighted average exercise price $6.25 $8.71 --
53
9. Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated by dividing net income
(loss), less dividend requirements on preferred stock, by the weighted average
number of common shares and common share equivalents outstanding during each
period as restated to reflect acquisitions accounted for as
poolings-of-interests. The computation of basic earnings per share and diluted
earnings per share is as follows (in thousands, except per share data):
Year Ended December 31,
1995 1996 1997
Basic earnings per share computation:
Income (loss) before extraordinary item.................... $ 13,130 $ (67,171) $ 53,617
Less: Preferred stock dividends............................ (4,070) (1,073) (381)
Conversion fee on equity securities converted........ (2,151) -- --
-------------- ------------- -------------
Income (loss) before extraordinary item
available to common shareholders......................... $ 6,909 $ (68,244) $ 53,236
============== ============= =============
Weighted average common shares outstanding
during the period........................................ 40,559 61,364 87,045
============== ============= =============
Basic earnings per share before extraordinary item......... $ 0.17 $ (1.11) $ 0.61
============== ============= =============
Diluted earnings per share computation:
Income (loss) before extraordinary item
available to common shareholders......................... $ 6,909 $ (68,244) $ 53,236
============== ============== =============
Weighted average common
shares outstanding during the period..................... 40,559 61,364 87,045
Effect of stock options and warrants,
assumed exercisable...................................... 1,771 1,777 6,126
Effect of Series C preferred stock, assumed converted...... 234 -- --
Effect of shares assumed issued
pursuant to earn-out agreements.......................... 1,215 968 273
-------------- ------------- -------------
Total Shares............................................... 43,779 64,109 93,444
============== ============= =============
Diluted earnings per share before extraordinary item....... $ 0.16 $ (1.06) $ 0.57
============== ============= =============
Conversion has not been assumed for Series D preferred stock and 9%
preferred stock, as the effect would not be dilutive for 1995 and 1996.
Additionally, conversion has not been assumed for stock options and warrants in
1996, nor has conversion been assumed for 7% preferred stock and convertible
notes in 1995, 1996 and 1997, as the effects would not be dilutive.
54
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1997, the Company adopted SFAS No. 128 "Earnings per Share,"
effective December 15, 1997. As a result, the Company's reported earnings for
1995 and 1996 were restated. The effect of this accounting change on previously
reported earnings per share data was as follows:
1995 1996
--------- ---------
Per share amounts
Primary earnings per share $ 0.16 $ (1.09)
Effect of SFAS No. 128 0.01 (0.02)
--------- ----------
Basic earnings per share as restated 0.17 $ (1.11)
========= ==========
Fully diluted earnings per share $ 0.16 $ (1.06)
Effect of SFAS No. 128 -- --
--------- ----------
Diluted earnings per share as restated $ 0.16 $ (1.06)
========= ==========
10. Income Taxes
The Company accounts for income taxes using a balance sheet approach
whereby deferred tax assets and liabilities are determined based on the
differences in financial reporting and income tax basis of assets, other than
goodwill, and liabilities, and the differences are measured using the income tax
rate in effect in the year of measurement.
The Company and its subsidiaries file a consolidated federal income tax
return. As of December 31, 1997, Allied had a net operating loss carryforward
("NOLC") for federal income tax purposes of approximately $3.7 million. The
NOLC, which expires beginning in 2004, is available to offset future taxable
income subject to potential limitations. The Company has placed a valuation
reserve on this NOLC to reflect limitations from separate Company filing rules.
The components of the income tax provision (benefit) consist of the following
(in thousands):
Year Ended December 31,
1995 1996 1997
Current tax provision.......... $ 4,724 $ 947 $ 75,793
Deferred provision (benefit)... 5,078 (1,422) (38,741)
----------- ----------- -----------
Total $ 9,802 $ (475) $ 37,052
=========== =========== ===========
Reconciliation of the federal statutory tax rate to the Company's effective rate
is as follows:
Year Ended December 31,
1995 1996 1997
Federal statutory tax rate........................ 35.0% (35.0)% 35.0%
Consolidated state taxes, net of federal benefit.. 5.0 (5.0) 3.1
Taxes of pooled companies......................... (3.5) 0.6 1.5
Amortization of goodwill.......................... 3.8 2.3 0.6
Potential tax goodwill greater than book goodwill. -- 34.7 --
Other permanent differences....................... 2.4 1.7 0.7
------ ----- -----
Effective tax rate................................ 42.7% (0.7)% 40.9%
====== ===== =====
55
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax benefits on the extraordinary items in 1996 and 1997 were based on the
Company's then ordinary combined federal and state rate of 40%.
The net current deferred tax asset of $5.8 million and $5.3 million, as
of December 31, 1996 and 1997, respectively, consists of the current benefit
expected to be obtained from the utilization of the Company's NOLCs and its
alternative minimum tax credits. These amounts include a valuation allowance of
$1.3 million, as of December 31, 1996 and 1997 to reflect possible limitations
on the ability to use NOLCs for separate company federal and state filing
purposes.
The components of the net long-term deferred tax liability are as follows (in
thousands):
Year Ended December 31,
1996 1997
Deferred tax liability relating primarily to property
consisting of landfill assets and debt basis
differences........................................ $ 78,700 $ 17,056
--------- ---------
Deferred tax assets relating to:
Closure and post-closure reserves.................. 1,883 954
Other reserves and estimated expenses.............. 23,722 1,341
--------- ---------
Deferred tax assets................................ 25,605 2,295
--------- ---------
Net long-term deferred tax liability................. $ 53,095 $ 14,761
========= =========
The change in the long-term deferred tax liability includes deferred
taxes related to 1997 acquisitions where the financial basis of assets acquired
exceeded the tax basis of those assets.
11. Commitments and Contingencies
The Company is subject to extensive and evolving laws and regulations
and has implemented its own environmental safeguards to respond to regulatory
requirements. In the normal course of conducting its operations, Allied may
become involved in certain legal and administrative proceedings. Some of these
actions may result in fines, penalties or judgements against the Company which
may have an impact on earnings for a particular period. Management expects that
such matters in process at December 31, 1997 which have not been accrued in the
consolidated balance sheet will not have a material adverse effect on the
Company's consolidated liquidity, financial position or results from operations.
The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 (the "LSW Subsidiaries") have been under
audit by the Internal Revenue Service. In March 1994, the LSW Subsidiaries
received a Statutory Notice of Deficiency proposing that the LSW Subsidiaries
pay additional taxes relating to disallowed deductions in those income tax
returns (the "Tax Controversy"). The consolidated tax group of the LSW
Subsidiaries has also received notice that fiscal years 1992, 1993 and 1994 will
be examined regarding the Tax Controversy. The LSW Subsidiaries could be
directly liable for a substantial portion of any tax and interest assessed if
the disallowance of the deduction is sustained. In addition, under Treasury
Regulations promulgated under Section 1502 of the Internal Revenue Code ("IRC"),
each member of the consolidated tax group including each LSW Subsidiary, is or
could be severally liable for federal income tax liabilities of the entire
consolidated tax group, including any taxes due on the deemed sale of assets by
the LSW Subsidiaries pursuant to Section 338 of the IRC and all amounts at issue
in the Tax Controversy which are ultimately determined to be owed.
56
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Any amounts at issue in the Tax Controversy and for which any LSW
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Stock Purchase
Agreement by and between the Company and Laidlaw, among others, dated September
17, 1996 (the "Purchase Agreement"). The obligation of Laidlaw to indemnify the
Company in respect of amounts at issue in the Tax Controversy is a general,
unsecured obligation of Laidlaw. The ability of Laidlaw to pay and fulfill such
indemnification obligation will depend on the financial condition of Laidlaw at
the time of any required performance of such obligation.
In connection with certain acquisitions, the Company has entered into
agreements to pay royalties based on waste tonnage disposed at specified
landfills. The royalties are generally payable quarterly and amounts earned but
not paid are accrued in the accompanying consolidated balance sheets.
Allied has operating lease agreements for service facilities, office
space and equipment. Future minimum payments under non-cancelable operating
leases with terms in excess of one year are as follows (in thousands):
December 31, 1997
1998 $ 5,236
1999 11,287
2000 9,053
2001 7,083
2002 5,551
Thereafter 20,913
Rental expense under such operating leases was $3,200,000, $6,848,000 and
$9,234,000 for the three years ended December 31, 1997, respectively.
The Company has entered into employment agreements with certain of its
executive officers for periods up to five years. The Company has agreed to
severance pay amounts equal to a multiple of defined compensation under certain
circumstances. In the event of a material change in control or termination of
all executive officers under such agreements, Allied would be required to make
payments of approximately $9.6 million.
Allied carries a broad range of insurance coverage for protection of
its assets and operations from certain risks including environmental impairment
liability insurance for certain landfills.
The Company has issued bank letters of credit, performance bonds and
other guarantees in the aggregate amount of approximately $359.2 million at
December 31, 1997. These financial instruments are issued in the normal course
of business and are not reflected in the accompanying balance sheets. The
underlying obligations of the financial instruments are valued based on the
likelihood of performance being required. Management does not expect any
material losses to result from these off balance sheet instruments based on
historical results, and therefore, is of the opinion that the fair value of
these instruments is zero.
12. Related Party Transactions
Transactions with related parties are entered into only upon approval
by a majority of the independent directors of the Company and only upon terms
comparable to those that would be available from unaffiliated parties.
57
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company leases certain properties and equipment in Illinois from
related parties resulting from prior year acquisitions. In connection with these
leases, payments of $69,000 and $45,000 for the years ended December 31, 1995
and 1996, respectively, were made to officers of the Company.
The Company made a payment of $254,000 in 1995, on a life insurance
policy for a related party assumed in a 1994 acquisition. A trust of the related
party is the beneficiary of the policy.
In connection with the receipt in April 1995 of all permits necessary
to develop a landfill on certain real estate acquired in July 1992, the Company
was obligated to pay $5.6 million to the previous owners of the real estate,
including current stockholders of the Company. During the years ended December
31, 1996 and 1997, the Company paid principal of $121,000 and $136,000,
respectively, to these stockholders. The Company has approximately $1.7 million
in promissory notes payable to these stockholders outstanding at December 31,
1997.
In connection with the successful completion of certain market
development projects during 1997, Allied paid approximately $2.5 million to a
former owner of an acquired company and a director of the Company.
13. Summarized Financial Information of Allied Waste North America, Inc.
As discussed in Note 5, the 1996 Notes issued by Allied NA (a
consolidated subsidiary of the Company) are guaranteed by Allied. The separate
complete financial statements of Allied NA have not been included herein as
management has determined that such disclosure is not considered to be material.
However, summarized balance sheet information for Allied NA and subsidiaries as
of December 31, 1996 and 1997 is as follows (in thousands):
Summarized Consolidated Balance Sheet Information
December 31, 1996 December 31, 1997
Current assets........................... $ 693,190 $ 187,459
Property and equipment, net.............. 738,388 1,287,208
Goodwill................................. 857,350 899,144
Other non-current assets................. 49,339 74,848
Current liabilities...................... 673,733 222,809
Long-term debt, net of current portion... 1,048,190 1,101,591
Due to parent............................ 354,468 731,983
Due to Allied Canada Finance, Ltd........ 110,747 152,825
Other long-term obligations.............. 229,588 268,943
Retained deficit......................... (78,460) (29,492)
On November 25, 1996, substantially all of the operating assets and
liabilities of Allied were contributed from Allied to Allied NA. The results of
operations from inception to December 31, 1996 were not material except for the
acquisition related costs and unusual items (see Note 1).
58
ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized Statement of Operations Information
Year Ended
December 31, 1997
-----------------
Total revenue........................................ $ 875,028
Total operating costs and expenses................... 693,397
Operating income..................................... 181,631
Net income before extraordinary loss................. 62,633
Extraordinary loss, net.............................. 13,831
Net income........................................... 48,802
14. Subsequent Events (unaudited)
Subsequent to December 31, 1997, the Company acquired 12 operating solid
waste businesses with annual revenues of approximately $33.3 million for
consideration of approximately $55.0 million, of which $22.3 million consists of
approximately 1 million shares of Common Stock.
59
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable.
60
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference to the
material appearing under the headings "Election of Directors" and "Certain
Stockholders" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Relationships and Related
Transactions" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders.
PART IV
Item 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K
Financial Statement Schedules --
Schedules have been omitted since the information required to be
submitted has been included in the Consolidated Financial Statements of
Allied Waste Industries, Inc. or the notes thereto, or the required
information is not applicable.
Exhibits --
2.1 Stock Purchase Agreement dated September 17, 1996 among the Company,
Allied NA, 3294862 Canada Inc., Laidlaw Inc., Laidlaw Transportation,
Inc., Laidlaw Waste Systems, Inc., Laidlaw Waste Systems (Canada) Ltd.
and Laidlaw Medical Services Ltd. Exhibit 2.1 to the Company's Current
Report on Form 8-K dated October 2, 1996, is incorporated herein by
reference.
2.2 Purchase Agreement relating to the 1996 Notes dated November 25, 1996.
Exhibit 2.1 to the Company's Current Report on Form 8-K dated December
19, 1996, is incorporated herein by reference.
2.3 Share Purchase Agreement dated January 15, 1997 among the Company,
Allied Waste Holdings (Canada) Ltd., Laidlaw Waste Systems, Inc., USA
Waste Services, Inc. and Canadian Waste Services, Inc. Exhibit 10.0 to
the Company's Current Report on Form 8-K dated January 30, 1997, is
incorporated herein by reference.
3.1 Amended Certificate of Incorporation of the Company (Incorporated
herein be reference to Exhibit 3.1 to the Company's report on Form 10-K
for the fiscal year ended December 31, 1996.).
3.2 Certificate of Designation, Preferences, Rights and Limitations of 7%
Cumulative Convertible Preferred Stock, par value $.10 per share dated
April 27, 1994. Exhibit 3.2 to Post-Effective
61
Amendment Number 1 to the Company's Registration Statement on Form S-1
(No. 33-75070) is incorporated herein by reference.
3.3 Amended and Restated Bylaws of the Company as of May 13, 1997. Exhibit
3.2 to the Company's report on Form 10-Q for the quarter ended June 30,
1997 is incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock par value $.01 per
share. Exhibit 4.2 of the Company's Registration Statement on Form
S-1 (No. 33-48507) is incorporated herein by reference.
4.2 Indenture relating to the 1994 Notes dated January 15, 1994 between the
Company and First Trust National Association, as trustee ("First
Trust"). Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (No. 33-73110) is incorporated herein by reference.
4.3 Specimen certificate representing the 1994 Notes. Exhibit 4.2 of the
Company's Registration Statement on Form S-1 (No. 33-48507) is
incorporated herein by reference.
4.4 Second Supplemental Indenture relating to the 1994 Notes dated June 30,
1994 between the Company and First Trust. Exhibit 1.1 to the Company's
Current Report on Form 8-K dated December 29, 1994, is incorporated
herein by reference.
4.5 Third Supplemental Indenture relating to the 1994 Notes dated January
31, 1995 between the Company and First Trust. Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q dated August 10, 1995, is
incorporated herein by reference.
4.6 Fourth Supplemental Indenture relating to the 1994 Notes dated January
23, 1996, between the Company and First Trust. Exhibit 10.1 to the
Company's Current Report on Form 8-K dated January 22, 1996, is
incorporated herein by reference.
4.7 Fifth Supplemental Indenture relating to the 1994 Notes dated July 30,
1996 between the Company and First Trust. Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q dated August 14, 1996, is incorporated
herein by reference.
4.8 Indenture relating to the 1996 Notes dated February 28, 1997 between
the Company and First Trust. Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (No. 333-22575) is incorporated herein by
reference.
4.9 1991 Incentive Stock Plan of the Company. Exhibit 10.T to the Company's
Form 10 dated May 14, 1991, is incorporated herein by reference.
4.10 1991 Non-Employee Director Stock Plan of the Company. Exhibit 10.U to
the Company's Form 10 dated May 14, 1991, is incorporated herein by
reference.
4.11 1993 Incentive Stock Plan of the Company. Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (No. 33-73110) is incorporated
herein by reference.
4.12 1994 Amended and Restated Non-Employee Director Stock Option Plan of
the Company. Exhibit B to the Company's Definitive Proxy Statement in
accordance with Schedule 14A dated April 28, 1994, is incorporated
herein by reference.
4.13 Amendment to the 1994 Amended and Restated Non-Employee Director Stock
Option Plan. Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q dated August 10, 1995, is incorporated herein by reference.
4.14 Amended and Restated 1994 Incentive Stock Plan. Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1996, is
incorporated herein by reference.
4.15 Indenture, dated as of May 15, 1997, by and among the Company and First
Bank National Association with respect to the Senior Discount Notes and
Exchange Notes. Exhibit 4.1 to the Company's Registration Statement on
Form S-4 (No. 333-31231) is incorporated herein by reference.
4.16 Indenture, dated as of December 1, 1996, by and among the Company, the
Guarantors and First Bank National Association with respect to the 1996
Notes and Exchange Notes. Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (No. 333-22575) is incorporated herein by
reference.
4.17 First Supplemental Indenture dated December 30, 1996 related to the
1996 Notes. Exhibit 4.2 to the Company's Registration Statement on Form
S-4 (No. 333-22575) is incorporated herein by reference.
4.18 Second Supplemental Indenture dated April 30, 1997 related to the 1996
Notes. Exhibit 4.3 to the Company's Registration Statement on Form S-4
(No. 333-22575) is incorporated herein by reference.
62
4.19 Senior Subordinated Guarantee dated as of December 1, 1996 related to
the 1996 Notes. Exhibit 4.5 to the Company's Registration Statement on
Form S-4 (No. 333-22575) is incorporated herein by reference.
4.20 Amendment No. 1 to the 1991 Incentive Stock Plan dated November 1,
1996.*
10.1 Agreement dated September 17, 1996, between Allied Waste Industries,
and the Laidlaw Group. Exhibit 10.1 to the Company's Current Report
on Form 8-K dated October 2, 1996, is incorporated herein by
reference.
10.2 Credit Agreement among the Company, Allied NA, and the various lenders
represented by Goldman Sachs Credit Partners, L.P., Credit Suisse and
Citibank, N.A. dated December 30, 1996. Exhibit 10.11 to the Company's
report on Form 10-K for the year ended December 31, 1996 is
incorporated herein by reference.
10.3 Securities Purchase Agreement dated April 21, 1997 between Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (U.K.) Partners III, L.P.; Blackstone Capital Partners II
Merchant Banking Fund L.P., Blackstone Offshore Capital Partners II
L.P. and Blackstone Family Investment Partnership II L.P.; Laidlaw Inc.
and Laidlaw Transportation, Inc.; and Allied Waste Industries. Exhibit
10.1 to the Company's report on Form 10-Q for the quarter ended March
31, 1997 is incorporated herein by reference.
10.4 Shareholders Agreement dated as of April 14, 1997 between Allied Waste
Industries, Inc. and Apollo Investment Fund III. L.P., Apollo Overseas
Partners III. L.P., and Apollo (U.K.) Partners III, L.P.; Blackstone
Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore
Capital Partners II L.P. and Blackstone Family Investment Partnership
II L.P. Exhibit 10.2 to the Company's report on Form 10-Q for the
quarter ended March 31, 1997 is incorporated herein by reference.
10.5 Amended and Restated Shareholders Agreement dated as of April 21, 1997
between Allied Waste Industries, Inc. and Apollo Investment Fund III.
L.P., Apollo Overseas Partners III. L.P., and Apollo (U.K.) Partners
III, L.P.; Blackstone Capital Partners II Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners II L.P. and Blackstone Family
Investment Partnership II L.P. Exhibit 10.3 to the Company's report on
Form 10-Q for the quarter ended March 31, 1997 is incorporated herein
by reference.
10.6 Registration Rights Agreement dated as of April 21, 1997 between Allied
Waste Industries, Inc. and Apollo Investment Fund III. L.P., Apollo
Overseas Partners III. L.P., and Apollo (U.K.) Partners III, L.P.;
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners II L.P. and Blackstone Family Investment
Partnership II L.P. Exhibit 10.4 to the Company's report on Form 10-Q
for the quarter ended March 31, 1997 is incorporated herein by
reference.
10.7 Amended and Restated Credit Agreement dated as of June 5, 1997 among
the Company, Allied Waste North America, the Lenders referred to
therein and Credit Suisse First Boston, Goldman Sachs Credit Partners
L.P., and Citibank, N.A., as agents. Exhibit 10.1 to the Company's
report on Form 10-Q for the quarter ended June 30, 1997 is incorporated
herein by reference.
10.8 Executive Employment Agreement between the Company and with Henry L.
Hirvela dated June 6, 1997. Exhibit 10.2 to the Company's report on
Form 10-Q for the quarter ended June 30, 1997 is incorporated herein by
reference.
10.9 Third Amendment to Executive Employment Agreement between the Company
and with Thomas H. Van Weelden dated January 30, 1997. Exhibit 10.3 to
the Company's report on Form 10-Q for the quarter ended June 30, 1997
is incorporated herein by reference.
10.10 Executive Employment Agreement between the Company and with Larry D.
Henk dated June 6, 1997. Exhibit 10.4 to the Company's report on Form
10-Q for the quarter ended June 30, 1997 is incorporated herein by
reference.
10.11 Executive Employment Agreement between the Company and with Steven M.
Helm dated June 6, 1997 Exhibit 10.5 to he Company's report on Form
10-Q for the quarter ended June 30, 1997 is incorporated herein by
reference.
10.12 Third Amendment to Executive Employment Agreement between the Company
and with Roger A. Ramsey dated January 30, 1997. Exhibit 10.6 to the
Company's report on Form 10-Q for the quarter ended June 30, 1997 is
incorporated herein by reference.
63
10.13 Registration Rights Agreement, dated as of December 5, 1996, by and
among the Company, Goldman, Sachs & Co., Merrill Lynch & Co., and
Credit Suisse First Boston. Exhibit 10.1 to the Company's Registration
Statement on Form S-4 (No. 333-31231) is incorporated herein by
reference.
10.14 Executive Employment Agreement between the Company and with Peter S.
Hathaway dated June 6, 1997.*
10.15 Executive Employment Agreement between the Company and with Michael G.
Hannon dated June 6, 1997.*
10.16 Share Purchase Agreement between Allied Waste Industries, Inc. and
Allied Waste Holdings (Canada) Ltd. and Laidlaw Waste Systems,
Inc. and USA Waste Services, Inc. and Canadian Waste Services,
Inc. dated January 15, 1997. Exhibit 10.0 to the Company's report
on Form 8-K dated January 30, 1997 is incorporated herein by
reference.
12 Ratio of earnings to fixed charges.*
21 Subsidiaries of the Registrant.. Exhibit 21 to the Company's report on
Form 10-K for the year ended December 31, 1996 is incorporated herein
by reference.
23.1 Consent of Arthur Andersen LLP.*
27.1 Financial Data Schedule for the year ended December 31, 1997.*
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.*
27.3 Restated Financial Data Schedule for the year ended
December 31, 1995.*
27.4 Restated Financial Data Schedule for the three months ended March
31, 1997.*
27.5 Restated Financial Data Schedule for the six months ended June 30,
1997.*
27.6 Restated Financial Data Schedule for the nine months ended
September 30, 1997.*
27.7 Restated Financial Data Schedule for the three months ended March
31, 1996.*
27.8 Restated Financial Data Schedule for the six months ended June 30,
1996.*
27.9 Restated Financial Data Schedule for the nine months ended
September 30, 1996.*
* Filed herewith.
64
Reports on Form 8-K during the Quarter Ended December 31, 1997--
November 4, 1997 The Company's current report on Form 8-K reports
the acquisition of Wayne County Disposal - Oakland, Inc.
and Wayne County Disposal - Canton, Inc. and
pro forma financial statements related to these
acquisitions.
65
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant, Allied Waste Industries, Inc., has
caused this Report to be signed on its behalf by the undersigned, in the City of
Scottsdale, State of Arizona, on March 30, 1998.
ALLIED WASTE INDUSTRIES, INC.
By: /s/HENRY L. HIRVELA
Henry L. Hirvela
Vice President-Chief Financial officer
(Principal Financial Officer)
By: /s/JAMES S. ENG
James S. Eng
Corporate Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
30, 1998.
Signature Title
/s/ROGER A. RAMSEY Director and Chairman of the Board of Directors
Roger A. Ramsey
/s/THOMAS H. VAN WEELDEN Director, President and Chief Executive Officer
Thomas H. Van Weelden
/s/HENRY L. HIRVELA Vice President - Chief Financial Officer
Henry L. Hirvela (Principal Financial Officer)
/s/PETER S. HATHAWAY Vice President - Chief Accounting Officer
Peter S. Hathaway
/s/NOLAN LEHMANN Director
Nolan Lehmann
/s/ALAN B. SHEPARD Director
Alan B. Shepard
/s/BRIAN A. O'LEARY Director
Brian A. O'Leary
/s/JAMES S. ENG Corporate Controller
James S. Eng (Principal Accounting Officer)
66
SIGNATURES - (Continued)
/s/MICHAEL GROSS Director
Michael Gross
/s/DAVID B. KAPLAN Director
David B. Kaplan
/s/ANTONY P. RESSLER Director
Antony P. Ressler
/s/HOWARD A. LIPSON Director
Howard A. Lipson
/s/DENNIS HENDRIX Director
Dennis Hendrix
/s/WARREN B. RUDMAN Director
Warren B. Rudman
/s/VINCENT TESE Director
Vincent Tese
67
EXHIBIT INDEX
Exhibit # Exhibit Page
2.1 Stock Purchase Agreement dated September 17, 1996 among the
Company, Allied NA, 3294862 Canada Inc., Laidlaw Inc., Laidlaw
Transportation, Inc.,Laidlaw Waste Systems, Inc., Laidlaw Waste
Systems (Canada) Ltd. and Laidlaw Medical Services Ltd. Exhibit
2.1 to the Company's Current Report on Form 8-K dated October 2,
1996, is incorporated herein by reference.
2.2 Purchase Agreement relating to the 1996 Notes dated November 25,
1996. Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 19, 1996, is incorporated herein by reference.
2.3 Share Purchase Agreement dated January 15, 1997 among the Company,
Allied Waste Holdings (Canada) Ltd., Laidlaw Waste Systems, Inc.,
USA Waste Services, Inc. and Canadian Waste Services, Inc.
Exhibit 10.0 to the Company's Current Report on Form 8-K dated
January 30, 1997, is incorporated herein by reference.
3.1 Amended Certificate of Incorporation of the Company Incorporated
herein by reference to Exhibit 3.1 to the Company's report on
Form 10-K for the fiscal year ended December 31, 1996.).
3.2 Certificate of Designation, Preferences, Rights and Limitations
of 7% Cumulative Convertible Preferred Stock, par value $.10 per
share dated April 27, 1994. Exhibit 3.2 to Post-Effective
Amendment Number 1 to the Company's Registration Statement on
Form S-1 (No. 33-75070) is incorporated herein by reference.
3.3 Amended and Restated Bylaws of the Company as of May 13, 1997.
Exhibit 3.2 to the Company's report on Form 10-Q for the quarter
ended June 30, 1997 is incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock par value $.01 per
share. Exhibit 4.2 of the Company's Registration Statement on Form
S-1 (No. 33-48507) is incorporated herein by reference.
4.2 Indenture relating to the 1994 Notes dated January 15, 1994
between the Company and First Trust National Association, as
trustee ("First Trust"). Exhibit 4.1 to the Company's Registration
Statement on Form S-1(No.33-73110) is incorporated herein by
reference.
4.3 Specimen certificate representing the 1994 Notes. Exhibit 4.2 of
the Company's Registration Statement on Form S-1 (No. 33-48507) is
incorporated herein by reference.
4.4 Second Supplemental Indenture relating to the 1994 Notes dated
June 30, 1994 between the Company and First Trust. Exhibit 1.1 to
the Company's Current Report on Form 8-K dated December 29, 1994,
is incorporated herein by reference.
4.5 Third Supplemental Indenture relating to the 1994 Notes dated
January 31, 1995 between the Company and First Trust. Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q dated
August 10, 1995, is incorporated herein by reference.
4.6 Fourth Supplemental Indenture relating to the 1994 Notes dated
January 23, 1996, between the Company and First Trust.
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
January 22, 1996, is incorporated herein by reference.
4.7 Fifth Supplemental Indenture relating to the 1994 Notes dated
July 30, 1996 between the Company and First Trust. Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q dated
August 14, 1996, is incorporated herein by reference.
4.8 Indenture relating to the 1996 Notes dated February 28, 1997
between the Company and First Trust. Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (No. 333-22575) is incorporated
herein by reference.
4.9 1991 Incentive Stock Plan of the Company. Exhibit 10.T to the
Company's Form 10 dated May 14, 1991, is incorporated herein by
reference.
4.10 1991 Non-Employee Director Stock Plan of the Company. Exhibit
10.U to the Company's Form 10 dated May 14, 1991, is incorporated
herein by reference.
4.11 1993 Incentive Stock Plan of the Company. Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (No. 33-73110) is
incorporated herein by reference.
4.12 1994 Amended and Restated Non-Employee Director Stock Option Plan
of the Company. Exhibit B to the Company's Definitive Proxy
Statement in accordance with Schedule 14A dated April 28, 1994, is
incorporated herein by reference.
4.13 Amendment to the 1994 Amended and Restated Non-Employee Director
Stock Option Plan. Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q dated August 10, 1995, is incorporated herein by
reference.
4.14 Amended and Restated 1994 Incentive Stock Plan. Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q dated May 31, 1996, is
incorporated herein by reference.
4.15 Indenture, dated as of May 15, 1997, by and among the Company and
First Bank National Association with respect to the Senior
Discount Notes and Exchange Notes Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (No. 333-31231) is incorporated
herein by reference.
4.16 Indenture, dated as of December 1, 1996, by and among the Company,
the Guarantors and First Bank National Association with respect to
the 1996 Notes and Exchange Notes. Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (No. 333-22575) is incorporated
herein by reference.
4.17 First Supplemental Indenture dated December 30, 1996 related to
the 1996 Notes.Exhibit 4.2 to the Company's Registration Statement
on Form S-4 (No. 333-22575) is incorporated herein by reference.
4.18 Second Supplemental Indenture dated April 30, 1997 related to the
1996 Notes. Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (No. 333-22575) is incorporated herein by reference.
4.19 Senior Subordinated Guarantee dated as of December 1, 1996 related
to the 1996 Notes. Exhibit 4.5 to the Company's Registration
Statement on Form S-4 (No. 333-22575) is incorporated herein by
reference.
4.20 Amendment No. 1 to the 1991 Incentive Stock Plan dated November 1,
1996.*
10.1 Agreement dated September 17, 1996, between Allied Waste
Industries, Inc., and the Laidlaw Group. Exhibit 10.1 to the
Company's Current Report on Form 8-K dated October 2, 1996, is
incorporated herein by reference.
10.2 Credit Agreement among the Company, Allied NA, and the various
lenders represented by Goldman Sachs Credit Partners, L.P., Credit
Suisse and Citibank, N.A. dated December 30, 1996. Exhibit 10.11
to the Company's report on Form 10-K for the year ended December
31, 1996 is incorporated herein by reference.
10.3 Securities Purchase Agreement dated April 21, 1997 between Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (U.K.) Partners III, L.P.; Blackstone Capital Partners II
Merchant Banking Fund L.P., Blackstone Offshore Capital Partners
II L.P. and Blackstone Family Investment Partnership II L.P.;
Laidlaw Inc. and Laidlaw Transportation, Inc.; and Allied Waste
Industries. Exhibit 10.1 to the Company's report on Form 10-Q
for the quarter ended March 31, 1997 is incorporated herein by
reference.
10.4 Shareholders Agreement dated as of April 14, 1997 between Allied
Waste Industries, Inc. and Apollo Investment Fund III. L.P.,
Apollo Overseas Partners III. L.P., and Apollo(U.K.) Partners III,
L.P.; Blackstone Capital Partners II Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners II L.P. and Blackstone
Family Investment Partnership II L.P. Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended March 31,
1997 is incorporated herein by reference.
10.5 Amended and Restated Shareholders Agreement dated as of April 21,
1997 between Allied Waste Industries, Inc. and Apollo Investment
Fund III. L.P., Apollo Overseas Partners III. L.P., and Apollo
(U.K.) Partners III, L.P.; Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners II L.P.
and Blackstone Family Investment Partnership II L.P.
Exhibit 10.3 to the Company's report on Form 10-Q for the quarter
ended March 31, 1997 is incorporated herein by reference.
10.6 Registration Rights Agreement dated as of April 21, 1997 between
Allied Waste Industries, Inc. and Apollo Investment Fund III.
L.P., Apollo Overseas Partners III. L.P., and Apollo (U.K.)
Partners III, L.P.; Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital
Partners II L.P. and Blackstone Family Investment Partnership II
L.P. Exhibit 10.4 to the Company's report on Form 10-Q for the
quarter ended March 31, 1997 is incorporated herein by reference.
10.7 Amended and Restated Credit Agreement dated as of June 5, 1997
among the Company, Allied Waste North America, the Lenders
referred to therein and Credit Suisse First Boston, Goldman Sachs
Credit Partners L.P., and Citibank, N.A., as agents. Exhibit 10.1
to the Company's report on Form 10-Q for the quarter ended
June 30, 1997 is incorporated herein by reference.
10.8 Executive Employment Agreement between the Company and with
Henry L.Hirvela dated June 6, 1997. Exhibit 10.2 to the Company's
report on Form 10-Q for the quarter ended June 30, 1997 is
incorporated herein by reference.
10.9 Third Amendment to Executive Employment Agreement between the
Company and with Thomas H. Van Weelden dated January 30, 1997.
Exhibit 10.3 to the Company's report on Form 10-Q for the quarter
ended June 30, 1997 is incorporated herein by reference.
10.10 Executive Employment Agreement between the Company and with Larry
D. Henk dated June 6, 1997. Exhibit 10.4 to the Company's report
on Form 10-Q for the quarter ended June 30, 1997 is incorporated
herein by reference.
10.11 Executive Employment Agreement between the Company and with Steven
M. Helm dated June 6, 1997 Exhibit 10.5 to he Company's report on
Form 10-Q for the quarter ended June 30, 1997 is incorporated
herein by reference.
10.12 Third Amendment to Executive Employment Agreement between the
Company and with Roger A. Ramsey dated January 30, 1997. Exhibit
10.6 to the Company's report on Form 10-Q for the quarter ended
June 30, 1997 is incorporated herein by reference.
10.13 Registration Rights Agreement, dated as of December 5, 1996, by
and among the Company, Goldman, Sachs & Co., Merrill Lynch & Co.,
and Credit Suisse First Boston. Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (No. 333-31231) is incorporated
herein by reference.
10.14 Executive Employment Agreement between the Company and with Peter
S. Hathaway dated June 6, 1997.*
10.15 Executive Employment Agreement between the Company and with
Michael G. Hannon dated June 6, 1997.*
10.16 Share Purchase Agreement between Allied Waste Industries, Inc. and
Allied Waste Holdings (Canada) Ltd. and Laidlaw Waste Systems,
Inc. and USA Waste Services, Inc. and Canadian Waste Services,
Inc. dated January 15, 1997. Exhibit 10.0 to the Company's report
on Form 8-K dated January 30, 1997 is incorporated herein by
reference.
12 Ratio of earnings to fixed charges.*
21 Subsidiaries of the Registrant. Exhibit 21 to the Company's
report on Form 10-K for the year ended December 31, 1996 is
incorporated herein by reference.
23.1 Consent of Arthur Andersen LLP.*
27.1 Financial Data Schedule for the year ended December 31, 1997.*
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.*
27.3 Restated Financial Data Schedule for the year ended
December 31, 1995.*
27.4 Restated Financial Data Schedule for the three months ended March
31, 1997.*
27.5 Restated Financial Data Schedule for the six months ended June 30,
1997.*
27.6 Restated Financial Data Schedule for the nine months ended
September 30, 1997.*
27.7 Restated Financial Data Schedule for the three months ended March
31, 1996.*
27.8 Restated Financial Data Schedule for the six months ended June 30,
1996.*
27.9 Restated Financial Data Schedule for the nine months ended
September 30, 1996.*
* Filed herewith.