1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------------- ------------- COMMISSION FILE NUMBER: 1-12154 USA WASTE SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 73-1309529 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1001 FANNIN SUITE 4000 HOUSTON, TEXAS 77002 (Address of principal executive offices) (713) 512-6200 (Registrant's telephone number, including area code) NO CHANGE (Former name, former address, and former fiscal year, if changed since last report) ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of shares of Common Stock, $.01 par value, of the Registrant outstanding at November 12, 1997, was 216,610,013.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS USA WASTE SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> September 30, December 31, 1997 1996 ------------- ----------- ASSETS (restated) <S> <C> <C> Current assets: Cash and cash equivalents $ 63,240 $ 26,079 Accounts receivable, net 435,637 265,002 Notes and other receivables 68,635 38,495 Deferred income taxes 55,776 48,561 Prepaid expenses and other 83,365 49,365 ---------- ----------- Total current assets 706,653 427,502 Notes and other receivables 55,963 49,059 Property and equipment, net 3,595,868 2,198,231 Excess of cost over net assets of acquired businesses, net 1,316,027 715,910 Other intangible assets, net 105,227 88,341 Other assets 264,881 152,504 ---------- ----------- Total assets $6,044,619 $ 3,631,547 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 194,192 $ 118,823 Accrued liabilities 256,399 206,591 Deferred revenues 55,851 35,640 Current maturities of long-term debt 39,317 34,606 ---------- ----------- Total current liabilities 545,759 395,660 Long-term debt, less current maturities 2,440,879 1,470,282 Deferred income taxes 187,842 45,421 Closure, post-closure, and other liabilities 369,784 246,194 ---------- ----------- Total liabilities 3,544,264 2,157,557 ---------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value; 10,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 500,000,000 shares authorized; 216,048,062 and 181,630,519 shares issued, respectively 2,160 1,816 Additional paid-in capital 2,363,732 1,504,449 Retained earnings (accumulated deficit) 150,625 (15,948) Foreign currency translation adjustment (15,678) (15,843) Less treasury stock at cost, 23,485 shares (484) (484) ---------- ----------- Total stockholders' equity 2,500,355 1,473,990 ---------- ----------- Total liabilities and stockholders' equity $6,044,619 $ 3,631,547 ========== =========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 2
3 USA WASTE SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, --------------------------- ----------------------------- 1997 1996 1997 1996 --------- ----------- ----------- ----------- (restated) (restated) <S> <C> <C> <C> <C> Operating revenues $ 761,751 $ 442,801 $ 1,878,460 $ 1,204,906 --------- ----------- ----------- ----------- Costs and expenses: Operating (exclusive of depreciation and amortization shown below) 388,908 231,509 970,373 649,829 General and administrative 81,945 51,647 207,352 147,708 Depreciation and amortization 87,671 51,344 219,255 138,893 Merger costs 104,152 84,751 109,411 125,047 Unusual items 24,720 50,848 24,720 63,800 --------- ----------- ----------- ----------- 687,396 470,099 1,531,111 1,125,277 --------- ----------- ----------- ----------- Income (loss) from operations 74,355 (27,298) 347,349 79,629 --------- ----------- ----------- ----------- Other income (expense): Interest expense (29,768) (15,417) (71,040) (45,080) Interest and other income, net 4,071 4,014 15,508 7,786 --------- ----------- ----------- ----------- (25,697) (11,403) (55,532) (37,294) --------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item 48,658 (38,701) 291,817 42,335 Provision for (benefit from) income taxes 23,463 (11,230) 121,364 31,355 --------- ----------- ----------- ----------- Income (loss) before extraordinary item 25,195 (27,471) 170,453 10,980 Extraordinary item related to early retirement of debt, net of tax benefit of $4,195 (6,293) -- (6,293) -- --------- ----------- ----------- ----------- Net income (loss) $ 18,902 $ (27,471) $ 164,160 $ 10,980 ========= =========== =========== =========== Primary earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.81 $ 0.06 Extraordinary item (0.03) -- (0.03) -- --------- ----------- ----------- ----------- Net income (loss) $ 0.09 $ (0.16) $ 0.78 $ 0.06 ========= =========== =========== =========== Fully diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.81 $ 0.06 Extraordinary item (0.03) -- (0.03) -- --------- ----------- ----------- ----------- Net income (loss) $ 0.09 $ (0.16) $ 0.78 $ 0.06 ========= =========== =========== =========== Primary weighted average number of common and common equivalent shares outstanding 218,197 176,392 220,342 180,675 ========= =========== =========== =========== Fully diluted weighted average number of common and common equivalent shares outstanding 218,197 176,392 229,527 181,480 ========= =========== =========== =========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
4 USA WASTE SERVICES, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Retained Foreign Additional Earnings Currency Preferred Common Paid-in (Accumulated Translation Treasury Stock Stock Capital Deficit) Adjustment Stock ---------- --------- ---------- ----------- ----------- ------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1996 $ -- $ 1,816 $1,504,449 $(15,948) $(15,843) $(484) Common stock options and warrants exercised, including tax benefits -- 28 65,601 -- -- -- Common stock issued in purchase acquisitions and development projects -- 67 225,078 -- -- -- Common stock issued for acquisitions accounted for as poolings of interests -- 71 23,372 527 -- -- Common stock issued in public offering -- 152 506,196 -- -- -- Common stock issued for United stock options -- 19 25,809 -- -- -- Foreign currency translation adjustment -- -- -- -- 165 -- Transactions of pooled companies -- -- (1,735) 1,567 -- -- Other -- 7 14,962 319 -- -- Net income -- -- -- 164,160 -- -- ---------- ------- ---------- -------- -------- ----- Balance, September 30, 1997 $ -- $ 2,160 $2,363,732 $150,625 $(15,678) $(484) ========== ======= ========== ======== ======== ===== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
5 USA WASTE SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 1997 1996 --------- -------- (restated) <S> <C> <C> Cash flows from operating activities: Net income $ 164,160 $ 10,980 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 219,255 138,893 Deferred income taxes 35,678 (14,827) Effect of nonrecurring charges 48,479 61,444 Changes in assets and liabilities, net of effects of acquisitions and divestitures (276,408) 43,591 --------- -------- Net cash provided by operating activities 191,164 240,081 --------- -------- Cash flows from investing activities: Acquisitions of businesses, net of cash acquired (1,339,392) (330,760) Capital expenditures (274,889) (287,532) Loans and advances to others (38,910) (13,856) Collection of loans to others 6,810 13,134 Proceeds from sale of assets 112,564 12,933 Change in restricted funds 9,198 (25,230) --------- -------- Net cash used in investing activities (1,524,619) (631,311) --------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 3,201,270 1,441,129 Principal payments on long-term debt (2,366,388) (1,065,261) Net proceeds from issuance of common stock 506,781 -- Proceeds from exercise of common stock options and warrants 32,753 35,671 Other (3,771) (1,260) --------- -------- Net cash provided by financing activities 1,370,645 410,279 --------- -------- Effect of exchange rate changes on cash and cash equivalents (29) 9 --------- -------- Increase in cash and cash equivalents 37,161 19,058 Cash and cash equivalents at beginning of period 26,079 27,780 --------- -------- Cash and cash equivalents at end of period $ 63,240 $ 46,838 ========= ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5
6 USA WASTE SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The condensed consolidated balance sheets of USA Waste Services, Inc. and subsidiaries (the "Company") as of September 30, 1997 and December 31, 1996, the condensed consolidated statements of operations for the three and nine months ended September 30, 1997 and 1996, the condensed consolidated statement of stockholders' equity for the nine months ended September 30, 1997, and the condensed consolidated statements of cash flows for the nine months ended September 30, 1997 and 1996 are unaudited. In the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations, and cash flows for the periods presented. The Company has restated the previously issued financial statements as of December 31, 1996, and for the three and nine months ended September 30, 1996, to reflect the merger with United Waste Systems, Inc. ("United") consummated on August 26, 1997, accounted for using the pooling of interests method of accounting. The financial statements presented herein should be read in connection with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as amended on Form 10-K/A filed April 30, 1997, the Company's Joint Proxy Statement and Prospectus dated July 24, 1997, included in the Company's Registration Statement on Form S-4 filed in connection with the merger with United, and the supplemental consolidated financial statements and supplemental interim condensed consolidated financial statements and related notes thereto included in the Company's Current Report on Form 8-K dated November 12, 1997, filed in connection with the merger with United. 1. BUSINESS COMBINATIONS On August 26, 1997, the Company consummated a merger agreement with United (the "United Merger") accounted for as a pooling of interests and, accordingly, the accompanying financial statements have been restated to include the accounts and operations of United for all prior periods presented. Under the terms of the United Merger, the Company issued 1.075 shares of its common stock for each share of United outstanding common stock. Additionally, at the effective date of the United Merger, all United stock options, whether or not such stock options had vested or had become exercisable, were cancelled in exchange for the Company's common stock equal in market value to the fair value of such United stock options, as determined by an independent third party. The United Merger increased the Company's outstanding shares of common stock by approximately 51,900,000 shares, which includes approximately 1,900,000 shares exchanged for the aforementioned United stock options. In the third quarter of 1997, the Company incurred approximately $89,152,000 in merger related costs associated with the United Merger. Combined and separate results of operations of the Company prior to consummation of the merger ("USA Waste") and United for the restated periods are as follows (in thousands): <TABLE> <CAPTION> USA Waste United Combined ------------- ------------- ---------------- <S> <C> <C> <C> Six months ended June 30, 1997 (unaudited): Operating revenues $ 900,090 $ 216,619 $ 1,116,709 Income before income taxes 202,349 40,810 243,159 Net income 121,409 23,849 145,258 Six months ended June 30, 1996 (unaudited): Operating revenues $ 610,267 $ 151,838 $ 762,105 Income before income taxes 59,430 21,606 81,036 Net income 25,584 12,867 38,451 </TABLE> On March 12, 1997, the Company acquired all of the Canadian solid waste subsidiaries of Allied Waste Industries, Inc., representing 41 collection businesses, seven landfills, and eight transfer stations in the provinces of Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan for approximately $518,000,000 in cash. The acquisition was accounted for as a purchase. On April 1, 1997, the Company acquired substantially all of the assets of Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting primarily of cash and a limited amount of debt assumption. The assets acquired include 11 collection businesses, 11 landfills, six transfer stations, and three recycling businesses. The acquisition was 6
7 accounted for as a purchase. On June 10, 1997, the Company acquired the majority of the Waste Management, Inc. Canadian solid waste businesses for $124,000,000 in cash and 1,705,757 shares of the Company's common stock. The assets acquired include 13 collection businesses, one landfill, and three transfer stations in the provinces of Alberta, British Columbia, Ontario, and Quebec. The acquisition was accounted for as a purchase. During the nine months ended September 30, 1997, in addition to the above described transactions, the Company acquired 14 landfills, 160 collection businesses, 19 transfer stations, and one recycling business for approximately $476,153,000 in cash, $37,974,000 in liabilities incurred or debt assumed, and 3,729,000 shares of the Company's common stock. These acquisitions were accounted for as purchases. The unaudited pro forma information set forth below assumes all first, second, and third quarter 1997 acquisitions accounted for as purchases and all 1996 acquisitions accounted for as purchases occurred at the beginning of 1996. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the purchase acquisitions been consummated at that time (in thousands, except per share amounts): <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 1997 1996 ------------ ------------ <S> <C> <C> Operating revenues $ 2,223,410 $ 2,120,696 Income before extraordinary item 186,875 58,171 Net income 180,582 58,171 Primary earnings per common share: Income before extraordinary item 0.88 0.31 Net income 0.85 0.31 Fully diluted earnings per common share: Income before extraordinary item 0.87 0.31 Net income 0.84 0.31 </TABLE> In addition to the above described transactions, the Company consummated 23 acquisitions accounted for as poolings of interests during the nine months ended September 30, 1997, pursuant to which the Company issued approximately 7,057,000 shares of its common stock. Periods prior to the date of consummation of these acquisitions were not restated to include the accounts and operations of the acquired companies as the combined results would not be materially different from the results as presented. Related to these poolings of interests, the Company recognized merger costs of $1,996,000, $3,263,000, and $15,000,000 during the first, second, and third quarters of 1997, respectively. 2. DIVESTITURES In connection with the Company's merger with Sanifill, Inc., consummated on August 30, 1996, the United States Department of Justice ordered the divestiture of certain solid waste collection and disposal assets and operations in Houston, Texas. On January 31, 1997, the Company sold these assets to TransAmerican Waste Industries, Inc. ("TransAmerican") for $13,600,000 in cash plus warrants to purchase 1,500,000 shares of TransAmerican's common stock at an exercise price of $1.50 per share. The warrants are exercisable for a period of five years. On June 1, 1997, the Company sold eight collection businesses, eight landfills, and six transfer stations to Allied Waste Industries, Inc. for approximately $88,000,000. 7
8 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands): <TABLE> <CAPTION> September 30, December 31, 1997 1996 ---------- ---------- <S> <C> <C> Revolving credit facility $ 705,000 $ 637,000 United credit facility -- 31,450 Senior notes, interest at 7%, net of unamortized discount of $2,484 297,516 -- Senior notes, interest at 7.125%, net of unamortized discount of $2,943 297,057 -- Senior notes, maturing in varying annual installments through June 2005, interest ranging from 7.29% to 8.44% -- 182,500 Convertible subordinated notes, interest at 4% 535,275 -- Convertible subordinated notes, interest at 4 1/2% 150,000 150,000 Convertible subordinated debentures, interest at 5% 115,000 115,000 Subordinated debt, maturing in varying monthly installments, through January 2008, interest ranging from 7.25% to 10% 5,447 5,589 Tax-exempt bonds, principal payable in periodic installments maturing in 1997-2021, fixed and variable interest rates ranging from 3.55% to 9.25% at September 30, 1997 262,456 196,439 Promissory notes due September 2001, quarterly interest payments at 8% 6,000 6,000 Other 106,445 180,910 ---------- ---------- 2,480,196 1,504,888 Less current maturities 39,317 34,606 ---------- ---------- $2,440,879 $1,470,282 ========== ========== </TABLE> At December 31, 1996, the Company had borrowed $637,000,000 and had letters of credit issued of $277,994,000 under its $1,200,000,000 senior revolving credit facility. The credit facility was used to refinance existing bank loans and letters of credit and to fund additional acquisitions and working capital. The credit facility was available for standby letters of credit of up to $400,000,000. Loans under the credit facility bore interest at a rate based on the Eurodollar rate plus a spread not to exceed 0.75% per annum (spread set at 0.30% per annum, or an applicable interest rate of 5.87% per annum at December 31, 1996). The credit facility required a facility fee not to exceed 0.375% per annum on the entire available credit facility (facility fee set at 0.15% per annum at December 31, 1996). The credit facility contained financial covenants with respect to interest coverage and debt capitalization ratios. The credit facility also contained limitations on dividends, additional indebtedness, liens, and asset sales. Principal reductions were not required during the five-year term of the credit facility. On March 5, 1997, the credit facility was replaced with a $1,600,000,000 senior revolving credit facility with the same general terms, covenants, and limitations, which was available for standby letters of credit of up to $500,000,000. On August 7, 1997, the credit facility was again replaced with a $2,000,000,000 senior revolving credit facility with the same general items, covenants, and limitations, which is available for standby letters of credit up to $650,000,000. At September 30, 1997, the Company had borrowed $705,000,000 and had letters of credit of $462,291,000 under its $2,000,000,000 senior revolving credit facility. The applicable interest rate and facility fee at September 30, 1997, was 5.975% per annum and 0.1125% per annum, respectively. On February 7, 1997, the Company issued $535,275,000 of 4% convertible subordinated notes, due on February 1, 2002 ("Convertible Notes Offering"). Interest is payable semi-annually in February and August. The notes are convertible into shares of the Company's common stock at a conversion price of $43.56 per share. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined. The notes are redeemable after February 1, 2000 at the option of the Company at 101.6% of the principal amount, declining to 100.8% of the principal amount on February 1, 2001 and thereafter until maturity at which time the notes will be redeemed at par, plus accrued interest. Deferred offering costs of approximately $14,000,000 were incurred and are being amortized ratably over the life of the notes. The proceeds were primarily used to repay debt under the Company's revolving credit facility, to fund acquisitions, and for general corporate purposes. On February 7, 1997, concurrent with the Convertible Notes Offering, the Company completed a public offering of 11,500,000 shares of its common stock, priced at $35.125 per share. The net proceeds of approximately $387,438,000 were primarily used to repay debt under the Company's revolving credit facility and for general corporate purposes. 8
9 On March 3, 1997, United completed a public offering in which it issued 3,450,000 shares of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares of the Company's common stock, priced at $33.95 per share). The net proceeds of approximately $119,000,000 were primarily used to repay approximately $47,000,000 of debt under United's credit facility, to fund acquisitions, and for general corporate purposes. During August 1997 and September 1997, the Company prepaid the holders of the two privately placed senior note issuances with proceeds from its senior revolving credit facility. Interest on these privately placed senior notes ranged from 7.29% to 8.44%. Accordingly, the Company recorded extraordinary losses of approximately $9,286,000 related to this transaction comprised of prepayment penalties of approximately $7,975,000 and unamortized deferred offering costs of approximately $1,311,000. Additionally, upon consummation of the United Merger, the Company retired amounts under United's credit facility, and accordingly, recorded extraordinary losses to write-off the related unamortized deferred financing costs. On September 12, 1997, the Company issued $300,000,000 of 7% senior notes, due on October 1, 2004, and $300,000,000 of 7.125% senior notes, due on October 1, 2007 (the "Senior Notes"). The Senior Notes constitute senior and unsecured obligations of the Company, ranking equal in right of payment with all other senior and unsecured obligations of the Company, as defined. The Senior Notes are redeemable at the option of the Company at any time and from time to time at 100% of the principal amount of such notes, plus accrued interest. Deferred offering costs of approximately $4,125,000 were incurred and are being amortized ratably over the life of the Senior Notes. The proceeds were used to repay debt under the Company's revolving credit facility. In anticipation of this debt offering, the Company entered into interest rate locks on July 25, 1997, with various institutions as a hedging transaction to cover the future issuance of $600,000,000 of debt. The gain realized from this hedging transaction of approximately $5,632,000 will be amortized over the life of the Senior Notes using the effective interest method and has the effect of reducing the all-inclusive interest rate to 6.90% on the 7% senior notes, due on October 1, 2004, and to 7.06% on the 7.125% senior notes, due on October 1, 2007. Other long-term debt at September 30, 1997 and December 31, 1996 consists of miscellaneous notes payable and obligations under capital leases. Other long-term debt at December 31, 1996 also included $83,475,000 payable to the former owners of a landfill and collection operation acquired by the Company in December 1996. This amount was retired in January 1997 through additional borrowings from the Company's revolving credit facility. 4. INCOME TAXES The difference in federal income taxes at the statutory rate and the provision for (benefit from) income taxes for the three and nine months ended September 30, 1997 and 1996, is primarily due to non-deductible merger costs and state and local income taxes. 5. COMMITMENTS AND CONTINGENCIES Environmental matters -- The Company is subject to extensive and evolving federal, state, and local environmental laws and regulations in the United States and elsewhere that have been enacted in response to technological advances and the public's increased concern over environmental issues. As a result of changing governmental attitudes in this area, management anticipates that the Company will continually modify or replace facilities and alter methods of operation. The majority of the expenditures necessary to comply with the environmental laws and regulations are made in the normal course of business. Although the Company, to the best of its knowledge, is in compliance in all material respects with the laws and regulations affecting its operations, there is no assurance that the Company will not have to expend substantial amounts for compliance in the future. Litigation -- On or about March 8, 1993, an action was filed in the United States District Court for the Western District of Pennsylvania, captioned Option Resource Group, et al. v. Chambers Development Company, Inc., et al., Civil Action No. 93-354. This action was brought by a market maker in options in Chambers Development Company, Inc. ("Chambers") stock and two of its general partners and asserted federal securities law and common law claims alleging that Chambers, in publicly disseminated materials, intentionally or negligently misstated its earnings and that Chambers' officers and directors committed mismanagement and breach of fiduciary duties. These plaintiffs alleged that, as a result of large amounts of put options traded on the Chicago Board of Options Exchange between March 13 and March 18, 1992, they engaged in offsetting transactions resulting in approximately $2,100,000 in losses. The plaintiffs in Option Resource Group had successfully requested exclusion from a now settled class action of consolidated suits instituted on similar claims ("Class Action") and Option Resource Group continued as a separate lawsuit. In response to discovery on damages, the plaintiffs reduced their damages claim to $433,000 in alleged losses, plus interest and attorneys' fees, for a total damage claim of $658,000 as of August 21, 1995. Discovery was completed and a trial date was set for early 1997, then postponed by the court. The case was resolved 9
10 through an alternative dispute resolution process in the federal court. Plaintiffs were awarded $260,000 plus interest in the alternative dispute resolution proceeding. On August 3, 1995, Frederick A. Moran and certain related persons and entities filed a lawsuit against Chambers, certain former officers and directors of Chambers, and Grant Thornton, LLP, in the United States District Court for the Southern District of New York under the caption Moran, et al. v. Chambers, et al., Civil Action No. 95-6034. Plaintiffs, who claimed to represent approximately 484,000 shares of Chambers stock, requested exclusion from the settlement agreements which resulted in the resolution of the Class Action and asserted that they incurred losses attributable to shares purchased during the class period and certain additional losses by reason of alleged management misstatements during and after the class period. The claimed losses included damages to Mr. Moran's business and reputation. The Judicial Panel on Multidistrict Litigation transferred this case to the United States District Court for the Western District of Pennsylvania. Discovery closed on June 30, 1997, and the parties have agreed to a settlement in which Chambers will pay $550,000 to settle all claims against it and its former officers and directors, and Grant Thornton will pay $50,000. A settlement agreement is in the process of being executed by the respective parties. On April 17, 1997, a purported class action on behalf of the public shareholders of United entitled Schipper v. United Waste et al., Civil Action No. 15664-NC, was filed in the Court of Chancery of the State of Delaware against United and each of the members of United's Board of Directors asserting, among other things, that defendants breached their fiduciary duties to stockholders of United in negotiating the Merger Agreement with the Company and in engaging in certain related alleged acts and omissions. The complaint seeks, among other things, injunctive and other equitable relief against consummation of the United Merger, and damages and costs in an unspecified amount. The United Merger was closed on August 26, 1997, and the Company believes this claim is without merit. The Company is a party to various other litigation matters arising in the ordinary course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect to the Company's financial position, results of operations or cash flows. In the normal course of its business and as a result of the extensive government regulation of the solid waste industry, the Company periodically may become subject to various judicial and administrative proceedings and investigations involving federal, state, or local agencies. To date, the Company has not been required to pay any material fine or had a judgment entered against it for violation of any environmental law. From time to time, the Company also may be subjected to actions brought by citizen's groups in connection with the permitting of landfills or transfer stations, or alleging violations of the permits pursuant to which the Company operates. From time to time, the Company is also subject to claims for personal injury or property damage arising out of accidents involving its vehicles or other equipment. Insurance -- The Company carries a broad range of insurance coverages, which management considers prudent for the protection of the Company's assets and operations. Some of these coverages are subject to varying retentions of risk by the Company. The casualty coverages currently include $2,000,000 primary commercial general liability and $1,000,000 primary automobile liability supported by $200,000,000 in umbrella insurance protection. The property policy provides insurance coverage for all of the Company's real and personal property, including California earthquake perils. The Company also carries $200,000,000 in aircraft liability protection. The Company maintains workers' compensation insurance in accordance with laws of the various states and countries in which it has employees. The Company also currently has an environmental impairment liability ("EIL") insurance policy for certain of its landfills, transfer stations, and recycling facilities that provides coverage for property damages and/or bodily injuries to third parties caused by off-site pollution emanating from such landfills, transfer stations, or recycling facilities. This policy provides $5,000,000 of coverage per incident with a $10,000,000 aggregate limit. To date, the Company has not experienced any difficulty in obtaining insurance. However, if the Company in the future is unable to obtain adequate insurance, or decides to operate without insurance, a partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, could have a material adverse effect to the Company's financial condition, results of operations or cash flows. Additionally, continued availability of casualty and EIL insurance with sufficient limits at acceptable terms is an important aspect of obtaining revenue-producing waste service contracts. 6. EARNINGS (LOSS) PER COMMON SHARE Primary and fully dilutive earnings (loss) per common share amounts are calculated as follows for the periods indicated: For the three months ended September 30, 1997 10
11 Primary - based on (i) net income and (ii) the primary weighted average number of common shares and dilutive common equivalent shares outstanding of 218,197,000. Fully dilutive - based on (i) net income and (ii) the fully dilutive weighted average number of common shares, dilutive common equivalent shares, and other potentially dilutive securities outstanding of 218,197,000. For the three months ended September 30, 1996 Primary - based on (i) net loss and (ii) the primary weighted average number of common shares and dilutive common equivalent shares outstanding of 176,392,000. Fully dilutive - antidilutive for the three months ended September 30, 1996, and therefore presented as equal to primary loss per common share. For the nine months ended September 30, 1997 Primary - based on (i) net income plus the after-tax interest expense of approximately $8,271,000 on the Company's 4% convertible subordinated notes that are considered to be common stock equivalents, and (ii) the primary weighted average number of common and dilutive common equivalent shares outstanding of 220,342,000. Fully diluted - based on (i) net income plus (a) the after-tax interest expense of approximately $8,271,000 on the above mentioned 4% convertible subordinated notes, (b) the after-tax interest expense of approximately $3,029,000 on the Company's 4 1/2% convertible subordinated notes, and (c) the after-tax interest expense of approximately $2,581,000 on the Company's 5% convertible subordinated debentures, and (ii) the fully diluted weighted average number of common, dilutive common equivalent, and other potentially dilutive securities outstanding of 229,527,000. For the nine months ended September 30, 1996 Primary - based on net income and the primary weighted average number of common shares and dilutive common equivalent shares outstanding of 180,675,000. Fully dilutive - based on (i) net income and (ii) the fully diluted weighted average number of common shares and dilutive common equivalent shares outstanding and other potentially dilutive securities of 181,480,000. 7. NEW ACCOUNTING PRONOUNCEMENTS In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 96-1, Environmental Remediation Liabilities ("SOP No. 96-1"). SOP No. 96-1 provides authoritative guidance on the recognition, measurement, presentation, and disclosure of environmental remediation liabilities. The adoption of SOP No. 96-1 did not have a material effect to the Company's financial position, results of operations, or cash flows. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 specifies the computation, presentation, and disclosure requirements of earnings per share and supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the impact of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully-diluted earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. The following pro forma earnings per common share information assumes the Company adopted SFAS No. 128 in 1996 (in thousands, except per share amounts): 11
12 <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------- ----------------------------- 1997 1996 1997 1996 ----------- ------- ----------- ----------- <S> <C> <C> <C> <C> Reported: Primary earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.81 $ 0.06 Extraordinary item (0.03) -- (0.03) -- ----------- ------- ----------- ----------- Net income (loss) $ 0.09 $ (0.16) $ 0.78 $ 0.06 =========== ======= =========== =========== Weighted average number of common and common equivalent shares outstanding 218,197 176,392 220,342 180,675 =========== ======= =========== =========== Fully diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.81 $ 0.06 Extraordinary item (0.03) -- (0.03) -- ----------- ------- ----------- ----------- Net income (loss) $ 0.09 $ (0.16) $ 0.78 $ 0.06 =========== ======= =========== =========== Weighted average number of common and common equivalent shares outstanding 218,197 176,392 229,527 181,480 =========== ======= =========== =========== Pro forma: Basic earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.83 $ 0.06 Extraordinary item (0.03) -- (0.03) -- ----------- ------- ----------- ----------- Net income (loss) $ 0.09 $ (0.16) $ 0.80 $ 0.06 =========== ======= =========== =========== Basic weighted average shares 213,510 176,392 205,356 172,158 =========== ======= =========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.12 $ (0.16) $ 0.81 $ 0.06 Extraordinary item (0.03) -- (0.03) -- =========== ======= =========== =========== Net income (loss) $ 0.09 $ (0.16) $ 0.78 $ 0.06 =========== ======= =========== =========== Diluted weighted average shares 218,197 176,392 229,366 180,675 =========== ======= =========== =========== </TABLE> In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Assuming the Company adopted SFAS No. 130 in 1996, comprehensive income would have been $19,082,000 and $164,325,000 for the three and nine months ended September 30, 1997, respectively, and $11,132,000 for the nine months ended September 30, 1996. Comprehensive loss would have been $27,450,000 for the three months ended September 30, 1996. 8. SUBSEQUENT EVENTS From October 1, 1997 through November 3, 1997, the Company acquired 11 collection businesses and one landfill for approximately $56,044,000 in cash, $1,300,000 in liabilities incurred or debt assumed, and approximately 86,000 shares of the Company's common stock. These acquisitions were accounted for as purchases. The unaudited pro forma information set forth below assumes all 1997 acquisitions through November 3, 1997, accounted for as purchases and all 1996 acquisitions accounted for as purchases occurred at the beginning of 1996. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated at that time (in thousands, except per share amounts): 12
13 <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------ 1997 1996 --------------- --------------- <S> <C> <C> Operating revenues $ 2,257,103 $ 2,154,389 Income before extraordinary item 189,318 60,613 Primary earnings per common share: Income before extraordinary item 0.89 0.32 Net income 0.86 0.32 Fully diluted earnings per common share: Income before extraordinary item 0.88 0.32 Net income 0.85 0.32 </TABLE> 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion reviews the Company's operations for the three and nine months ended September 30, 1997 and 1996, and should be read in conjunction with the Company's condensed consolidated financial statements and related notes thereto included elsewhere herein as well as the Company's consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as amended on Form 10-K/A filed April 30, 1997, the Company's Joint Proxy Statement and Prospectus dated July 24, 1997, included in the Company's Registration Statement on Form S-4 filed in connection with the merger with United, and the supplemental consolidated financial statements and supplemental interim condensed consolidated financial statements and related notes thereto included in the Company's Current Report on Form 8-K dated November 12, 1997, filed in connection with the merger with United. INTRODUCTION The Company provides nonhazardous solid waste management services, consisting of collection, transfer, disposal, recycling, and other miscellaneous services. Since August 1990, the Company has experienced significant growth principally through the acquisition and integration of solid waste businesses and is the third largest nonhazardous solid waste management company in North America, as measured by 1996 revenues. The Company conducts operations in various locations throughout the United States, Canada, Puerto Rico, and Mexico. As of September 30, 1997, the Company owned or operated 381 collection businesses, 159 transfer stations, 164 landfills, and 21 recycling businesses serving more than 7,500,000 customers. The Company's operating revenues consist primarily of fees charged for its collection and disposal services. Operating revenues for collection services include fees from commercial, industrial, and municipal and residential collection customers. A portion of these fees are billed in advance; and upon receipt of payment a liability for future service is recorded and operating revenues are recognized as services are actually provided. Fees for residential services are normally based on the type and frequency of service. Fees for commercial and industrial services are normally based on the type and frequency of service and the volume of solid waste collected. The Company's operating revenues from its landfill operations consist of disposal fees (known as tipping fees) charged to third parties and are normally billed monthly. Tipping fees are based on the volume or weight of solid waste disposed of at the Company's landfill sites. Fees are charged at transfer stations based on the volume or weight of solid waste deposited, taking into account the Company's cost of loading, transporting, and disposing of the solid waste at a landfill. Intercompany operating revenues between the Company's collection, transfer, and landfill operations have been eliminated in the condensed consolidated financial statements presented elsewhere herein. Operating expenses include direct and indirect labor and the related taxes and benefits, fuel, maintenance and repairs of equipment and facilities, tipping fees paid to third party landfills, property taxes, and accruals for future landfill closure and post-closure costs. Certain direct landfill development expenditures are capitalized and depreciated over the estimated useful life of a site as capacity is consumed, and include acquisition, engineering, upgrading, construction, capitalized interest, and permitting costs. All indirect development expenses, such as administrative salaries and general corporate overhead, are charged to expense in the period incurred. General and administrative costs include management salaries, clerical and administrative costs, professional services, facility rentals, and related insurance costs, as well as costs related to the Company's marketing and sales force. 14
15 RESULTS OF OPERATIONS The following table presents, for the periods indicated, the period to period change in dollars (in thousands) and percent for the various Condensed Consolidated Statement of Operations line items and for certain supplementary data. <TABLE> <CAPTION> Period to Period Period to Period Change for the Change for the Three Months Ended Nine Months Ended September 30, September 30, 1997 and 1996 1997 and 1996 ---------------------------- ------------------------- $ % $ % ------------ ----------- ----------- --------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS Operating revenues $ 318,950 72.0% $ 673,554 55.9% --------- --------- Costs and expenses: Operating (exclusive of depreciation and amortization shown below) 157,399 68.0 320,544 49.3 General and administrative 30,298 58.7 59,644 40.4 Depreciation and amortization 36,327 70.8 80,362 57.9 Merger costs 19,401 22.9 (15,636) (12.5) Unusual items (26,128) (51.4) (39,080) (61.3) --------- --------- 217,297 46.2 405,834 36.1 --------- --------- Income (loss) from operations 101,653 372.4 267,720 336.2 --------- --------- Other income (expense): Interest expense (14,351) (93.1) (25,960) 57.2 Interest and other income, net 57 1.4 7,722 99.2 --------- --------- (14,294) 125.4 (18,238) 48.9 --------- --------- Income (loss) before income taxes and extraordinary item 87,359 225.7 249,482 589.3 Provision for (benefit from) income taxes 34,693 308.9 90,009 287.1 --------- --------- Income (loss) before extraordinary item 52,666 191.7 159,473 1,452.4 Extraordinary item (6,293) (100.0) (6,293) (100.0) --------- --------- Net income (loss) $ 46,373 168.8% $ 153,180 1,395.1% ========= ========= SUPPLEMENTARY DATA EBITDA (1) $ 137,980 573.8% $ 348,082 159.3% EBITDA excluding merger costs and unusual items (1) 131,253 82.2 293,366 72.0 </TABLE> (1) EBITDA represents income from operations plus depreciation and amortization expense. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is provided because the Company understands that such information is used by certain investors when analyzing the financial position and performance of the Company. 15
16 The following table presents, for the periods indicated, the percentage relationship that the various Condensed Consolidated Statements of Operations line items and certain supplementary data bear to operating revenues: <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS Operating revenues: Collection 62.7% 52.8% 61.5% 53.7% Transfer station 10.1 11.2 10.2 10.7 Disposal 23.5 28.9 24.3 28.3 Other 3.7 7.1 4.0 7.3 ------------- ------------- ------------- ------------- 100.0 100.0 100.0 100.0 ------------- ------------- ------------- ------------- Costs and expenses: Operating (exclusive of depreciation and amortization shown below) 51.1 52.3 51.7 53.9 General and administrative 10.8 11.7 11.0 12.3 Depreciation and amortization 11.5 11.6 11.7 11.5 Merger costs 13.6 19.1 5.8 10.4 Unusual items 3.2 11.5 1.3 5.3 ------------- ------------- ------------- ------------- 90.2 106.2 81.5 93.4 ------------- ------------- ------------- ------------- Income (loss) from operations 9.8 (6.2) 18.5 6.6 ------------- ------------- ------------- ------------- Other income (expense): Interest expense (3.9) (3.5) (3.8) (3.7) Interest and other income, net 0.5 0.9 0.8 0.6 ------------- ------------- ------------- ------------- (3.4) (2.6) (3.0) (3.1) ------------- ------------- ------------- ------------- Income (loss) before income taxes and extraordinary item 6.4 (8.8) 15.5 3.5 Provision for (benefit from) income taxes 3.1 (2.6) 6.5 2.6 ------------- ------------- ------------- ------------- Income (loss) before extraordinary item 3.3 (6.2) 9.0 0.9 Extraordinary item 0.8 -- (0.3) -- ------------- ------------- ------------- ------------- Net income (loss) 2.5% (6.2%) 8.7% 0.9% ============= ============= ============= ============= SUPPLEMENTARY DATA EBITDA (1) 21.3% 5.4% 30.2% 18.1% EBITDA excluding merger costs and unusual items (1) 38.2 36.1 37.3 33.8 </TABLE> (1) EBITDA represents income from operations plus depreciation and amortization expense. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is provided because the Company understands that such information is used by certain investors when analyzing the financial position and performance of the Company. 16
17 RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 Operating Revenues Operating revenues increased $318,950,000 or 72.0% and $673,554,000 or 55.9% for the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. The increase in operating revenues was attributable to the effect of acquisitions of domestic and Canadian solid waste businesses, less dispositions, and the internal growth of comparable operations. Acquisitions of domestic solid waste businesses consummated during 1997 and the effect of such acquisitions consummated during 1996 accounted for increases in operating revenues of $214,400,000 and $423,300,000, or 48.4% and 35.1%, for the three and nine months ended September 30, 1997, respectively. Acquisitions of Canadian solid waste businesses consummated during 1997 and the effect of such acquisitions consummated during 1996 accounted for increases in operating revenues of $103,800,000 and $217,200,000, or 23.4% and 18.0%, for the three and nine months ended September 30, 1997, respectively. Internal growth of comparable operations resulted in an increase in operating revenues of $41,600,000, consisting of increases of 3.6% due to pricing and 5.8% due to volumes for the three months ended September 30, 1997, and an increase in operating revenues of $115,900,000, consisting of 3.2% due to pricing and 6.4% due to volumes for the nine months ended September 30, 1997. These increases were offset by a decrease in operating revenues of 9.2% and 6.8% for the three and nine months ended September 30, 1997, respectively, primarily as a result of the disposition of certain Houston, Texas, solid waste collection and disposal operations in January 1997, which was ordered by the United States Department of Justice in connection with the Company's August 30, 1996, merger with Sanifill, Inc., the disposition of certain nonstrategically located solid waste collection operations in June 1997, and the disposition of other non-core businesses in 1997 and 1996. Although the Company operates one line of business, integrated nonhazardous solid waste management which encompasses the entire waste stream from collection to transfer station to landfill, the Company's mix of operating revenues reflects an increase in collection revenues as a percentage of total revenues from 52.8% and 53.7% for the three and nine months ended September 30, 1996, respectively, to 62.7% and 61.5% for the three and nine months ended September 30, 1997, respectively. The change in the Company's mix of operating revenues is primarily the result of acquisitions of certain solid waste businesses in the first and second quarters of 1997 with large collection operations. Such acquired businesses include the Canadian solid waste subsidiaries of Allied Waste Industries, Inc., and a majority of the Canadian solid waste businesses of Waste Management, Inc. Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown Below) Operating costs and expenses increased $157,399,000, or 68.0%, and $320,544,000, or 49.3% for the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. The net increase in operating costs and expenses was primarily attributable to the effect of new acquisitions, net of dispositions, however, was offset by the increased utilization of internal disposal capacity and the cost reductions in comparable operations. The effect of new acquisitions, net of dispositions, resulted in an increase to operating costs and expenses of $172,301,000 and $351,214,000 for the three and nine months ended September 30, 1997, respectively. A decrease in operating costs and expenses related to comparable operations of $14,902,000 and $30,670,00 for the three and nine months ended September 30, 1997, respectively, primarily resulted from the increased utilization of internal disposal capacity and operating synergies realized from tuck-in acquisitions and the Company's mergers with United, Sanifill, Inc., and Western Waste Industries in August 1997, August 1996, and May 1996, respectively. Operating costs and expenses decreased as a percentage of operating revenues from 52.3% to 51.1% for the three months ended September 30, 1996 and 1997, respectively, and from 53.9% to 51.7% for nine months ended September 30, 1996 and 1997, respectively. The improvements in operating costs as a percentage of revenues were slightly offset by the change in revenue mix, as discussed above, as collection operations typically have higher operating costs and expenses than disposal operations. General and Administrative General and administrative expenses increased $30,298,000 or 58.7% and $59,644,000 or 40.4% for the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. However, as a percentage of operating revenues, general and administrative expenses decreased from 11.7% and 12.3% for the three and nine months ended September 30, 1996, respectively, to 10.8% and 11.0% for the three and nine months ended September 30, 1997, respectively. The decrease in general and administrative expenses as a percentage of operating revenues is primarily the result of the Company's ability to integrate new business acquisitions without a proportionate increase in general and administrative 17
18 expenses as well as synergies resulting from the Company's mergers with United, Sanifill, Inc., and Western Waste Industries in August 1997, August 1996, and May 1996, respectively. Depreciation and Amortization Depreciation and amortization increased $36,327,000, or 70.8%, and $80,362,000, or 57.9% for the three and nine months ended September 30, 1997, as compared to the corresponding periods of 1996. The increase in depreciation and amortization is primarily related to new acquisitions, increased landfill disposal volumes, and upgrades to existing operations. However, as a percentage of operating revenues, deprecation and amortization for the three and nine months ended September 30, 1997, was consistent with such percentages for the corresponding periods of the prior year. The increase in depreciation and amortization due to the increased utilization of internal disposal capacity was offset by the improved utilization of equipment through internal growth in collection and disposal operations. Merger Costs In the third quarter of 1997, the Company recognized $89,152,000 related to the United Merger and $15,000,000 related to the acquisition of other businesses accounted for as poolings of interests. The $89,152,000 of merger costs related to United include $17,566,000 of transaction costs, $26,198,000 of severance and other termination benefits, $21,629,000 of costs related to integrating operations, and $23,759,000 of estimated losses related to the disposition of a Pennsylvania landfill ordered by the United States Department of Justice in connection with the United Merger and the disposition of other duplicative facilities. The Company recognized $1,996,000 and $3,263,000 in the first and second quarters of 1997, respectively, related to other acquisitions of businesses accounted for as poolings of interests. In the third quarter of 1996, the Company recognized $80,000,000 related to the merger with Sanifill, Inc. and $4,751,000 related to the acquisition of other businesses accounted for as poolings of interests. The $80,000,000 of merger costs related to Sanifill, Inc. include $9,500,000 of transaction costs, $20,000,000 of relocation, severance, and other termination benefits, $13,000,000 of costs related to integrating operations, and $37,500,000 of disposal of duplicative facilities. In the second quarter of 1996, the Company recognized $35,000,000 related to the merger with Western Waste Industries and $5,296,000 related to the acquisition of three other companies accounted for as poolings of interests. The $35,000,000 of merger costs related to Western Waste Industries include $6,800,000 of transaction costs, $15,000,000 of severance and other termination benefits, and $13,200,000 of costs related to integrating operations. Unusual Items In the third quarter of 1997, the Company recognized unusual items of $24,720,000, including estimated losses of $10,400,000 related to the closure of two transfer stations in Minnesota, $8,400,000 of estimated losses related to the closure and abandonment of two landfills in Massachusetts, and $5,920,000 of reserves for various terminated projects. In the third quarter of 1996, the Company recognized unusual items of $50,848,000, including $28,900,000 of estimated losses related to the disposition of certain non-core business assets, $15,000,000 of project reserves related to certain operations in Mexico, and $6,948,000 of various other terminated projects. In the second quarter of 1996, unusual items included $4,824,000 of retirement benefits associated with Western Waste Industries' pre-merger retirement and severance plans and $8,128,000 of estimated future losses related to municipal solid waste contracts in California as a result of the continuing decline in prices of recyclable materials. Income (Loss) from Operations Income (loss) from operations as a percentage of operating revenues was 9.8% and 18.5% for the three and nine months ended September 30, 1997, respectively, as compared to (6.2)% and 6.6% for the corresponding prior year periods. Exclusive of nonrecurring charges, income from operations was 26.7% and 25.6% as a percentage of operating revenues for the three and nine months ended September 30, 1997, as compared to 24.4% and 22.3% for the corresponding prior year periods. The improvement in recurring operations is the result of synergies and economies of scale realized by the Company as a result of recent mergers and acquisitions, increased utilization of internal disposal capacity, and improvements in comparable operations. Other Income and Expense Other income and expense consists of interest expense, interest income, and other income. Interest expense, gross of amounts capitalized, increased due to an increase in the Company's outstanding indebtedness. Interest capitalized for the three and nine 18
19 months ended September 30, 1997, was $6,145,000 and $17,772,000, respectively, as compared to $5,490,000 and $14,429,000 for the corresponding prior year periods. The increase in other income for the nine months ended September 30, 1997, as compared to the corresponding period of the prior year, primarily relates to the realization of a portion of the deferred gain recorded in connection with the 1996 sale of certain nonhazardous oilfield waste disposal operations. Provision for (Benefit From) Income Taxes The provision for (benefit from) income taxes increased $34,693,000 and $90,009,000 for the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. The difference in federal income taxes at the statutory rate and the provision for (benefit from) income taxes for the three and nine months ended September 30, 1997 and 1996, is primarily due to non-deductible merger costs and state and local income taxes. Income (Loss) Before Extraordinary Item For reasons discussed above, income (loss) before extraordinary item increased $87,359,000 and $249,482,000 during the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. Extraordinary Item During the third quarter of 1997, the Company recorded extraordinary losses related to the early retirement of the two privately placed senior note issuances of approximately $9,286,000 comprised of prepayment penalties of approximately $7,975,000 and unamortized deferred offering costs of approximately $1,311,000. Additionally, during the third quarter of 1997, the Company recorded extraordinary losses of approximately $1,206,000 primarily related to the write-off of the unamortized deferred financing costs related to the United credit facility which was retired upon consummation of the United Merger. Net Income (Loss) For reasons discussed above, net income (loss) increased $46,373,000 and $153,180,000 during the three and nine months ended September 30, 1997, respectively, as compared to the corresponding prior year periods. LIQUIDITY AND CAPITAL RESOURCES The Company operates in an industry that requires a high level of capital investment. The Company's capital requirements basically stem from (i) its working capital needs for its ongoing operations, (ii) capital expenditures for cell construction and expansion of its landfill sites as well as new trucks and equipment for its collection operations, and (iii) business acquisitions. The Company's strategy is to meet these capital needs first from internally generated funds and secondly from various financing sources available to the Company, including the incurrence of debt and the issuance of its common stock. It is further part of the Company's strategy to minimize working capital while maintaining available commitments under bank credit agreements to fund any capital needs in excess of internally generated cash flow. As of September 30, 1997, the Company had working capital of $160,894,000 (a ratio of current assets to current liabilities of 1.29:1) and a cash balance of $63,249,000, which compares to working capital of $31,842,000 (a ratio of current assets to current liabilities of 1.08:1) and a cash balance of $26,079,000 as of December 31, 1996. For the first nine months of 1997, net cash from operating activities was approximately $191,164,000 and net cash from financing activities was approximately $1,370,645,000. These funds were used primarily to fund investments in other businesses of $1,339,392,000 and for capital expenditures of approximately $274,889,000. The Company's capital expenditure and working capital requirements have increased reflecting the Company's business strategy of growth through acquisitions and development projects. The Company intends to finance the remainder of its 1997 capital expenditures through internally generated cash flow and amounts available under its revolving credit facility. At December 31, 1996, the Company had borrowed $637,000,000 and had letters of credit issued of $277,994,000 under its $1,200,000,000 senior revolving credit facility. The credit facility was used to refinance existing bank loans and letters of credit and to fund additional acquisitions and working capital. The credit facility was available for standby letters of credit of up to $400,000,000. Loans under the credit facility bore interest at a rate based on the Eurodollar rate plus a spread not to exceed 0.75% per annum (spread set at 0.30% per annum, or an applicable interest rate of 5.87% per annum at December 31, 1996). The credit facility required a facility fee not to exceed 0.375% per annum on the entire available credit facility (facility fee set at 0.15% per annum at December 31, 1996). The credit facility contained financial covenants with respect to interest 19
20 coverage and debt capitalization ratios. The credit facility also contained limitations on dividends, additional indebtedness, liens, and asset sales. Principal reductions were not required during the five-year term of the credit facility. On March 5, 1997, the credit facility was replaced with a $1,600,000,000 senior revolving credit facility with the same general terms, covenants, and limitations, which was available for standby letters of credit of up to $500,000,000. On August 7, 1997, the credit facility was again replaced with a $2,000,000,000 senior revolving credit facility with the same general items, covenants, and limitations, which is available for standby letters of credit up to $650,000,000. At September 30, 1997, the Company had borrowed $705,000,000 and had letters of credit of $462,291,000 under its $2,000,000,000 senior revolving credit facility. The applicable interest rate and facility fee at September 30, 1997, was 5.975% per annum and 0.1125% per annum, respectively. On February 7, 1997, the Company issued $535,275,000 of 4% convertible subordinated notes, due on February 1, 2002 ("Convertible Notes Offering"). Interest is payable semi-annually in February and August. The notes are convertible into shares of the Company's common stock at a conversion price of $43.56 per share. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined. The notes are redeemable after February 1, 2000 at the option of the Company at 101.6% of the principal amount, declining to 100.8% of the principal amount on February 1, 2001 and thereafter until maturity at which time the notes will be redeemed at par, plus accrued interest. Deferred offering costs of approximately $14,000,000 were incurred and are being amortized ratably over the life of the notes. The proceeds were primarily used to repay debt under the Company's credit facility and for general corporate purposes. On February 7, 1997, concurrent with the Convertible Notes Offering, the Company completed a public offering of 11,500,000 shares of its common stock, priced at $35.125 per share. The net proceeds of approximately $387,438,000 were primarily used to repay debt under the Company's credit facility and for general corporate purposes. On March 3, 1997, United completed a public offering in which it issued 3,450,000 shares of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares of the Company's common stock, priced at $33.95 per share). The net proceeds of approximately $119,000,000 were primarily used to repay approximately $47,000,000 of debt under United's credit facility and for general corporate purposes. During August and September 1997, the Company prepaid the holders of the two privately placed senior note issuances with proceeds from its senior revolving credit facility. Interest on these privately placed senior notes ranged from 7.29% to 8.44%. Accordingly, the Company recorded extraordinary losses of approximately $9,286,000 related to this transaction comprised of prepayment penalties of approximately $7,975,000 and unamortized deferred offering costs of approximately $1,311,000. Additionally, upon consummation of the United Merger, the Company retired amounts under United's credit facility, and accordingly, recorded extraordinary losses to write-off the related unamortized deferred financing costs. On September 12, 1997, the Company issued $300,000,000 of 7% senior notes, due on October 1, 2004, and $300,000,000 of 7.125% senior notes, due on October 1, 2007 (the "Senior Notes"). The Senior Notes constitute senior and unsecured obligations of the Company, ranking equal in right of payment with all other senior and unsecured obligations of the Company, as defined. The Senior Notes are redeemable at the option of the Company at any time and from time to time at par, plus accrued interest. Deferred offering costs of approximately $4,125,000 were incurred and are being amortized ratably over the life of the Senior Notes. The proceeds were used to repay debt under the Company's revolving credit facility. In anticipation of this debt offering, the Company entered into interest rate locks on July 25, 1997, with various institutions as a hedging transaction to cover the future issuance of $600,000,000 of debt. The gain realized from this hedging transaction of approximately $5,632,000 will be amortized over the life of the Senior Notes using the effective interest method and has the effect of reducing the all-inclusive interest rate to 6.90% on the 7% senior notes, due on October 1, 2004, and 7.06% on the 7.125% senior notes, due on October 1, 2007. The Company's business plan is to grow through acquisitions as well as development projects. The Company has issued equity securities in business acquisitions and expects to do so in the future. Furthermore, the Company's future growth will depend greatly upon its ability to raise additional capital. The Company continually reviews various financing alternatives and depending upon market conditions could pursue the sale of debt and/or equity securities to help effectuate its business strategy. Management believes that it can arrange the necessary financing required to accomplish its business plan; however, to the extent the Company is not successful in its future financing strategies, the Company's growth could be limited. On August 4, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission to provide for the issuance of up to 20,000,000 shares of the Company's common stock that may be offered and issued by the Company from time to time in connection with the acquisition directly or indirectly by the Company of other businesses or properties or interests therein, and which may be reserved for issuance pursuant to, or offered and issued upon exercise or conversion of, 20
21 warrants, options, convertible notes, or other similar instruments issued by the Company from time to time in connection with any such acquisitions. As of November 7, 1997, the Company had approximately 19,487,000 shares of its common stock available for future offerings and issuances under this shelf registration. SEASONALITY AND INFLATION The Company's operating revenues tend to be somewhat lower in the winter months. This is generally reflected in the Company's first quarter and fourth quarter results of operations. This is primarily attributable to the fact that (i) the volume of waste relating to construction and demolition activities tends to increase in the spring and summer months and (ii) the volume of industrial and residential waste in certain regions where the Company operates tends to decrease during the winter months. The Company believes that inflation and changing prices have not had, and are not expected to have, any material adverse effect on the results of operations in the near future. 21
22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to various litigation matters arising in the ordinary course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect to the Company's financial position, results of operations or cash flows. In the normal course of its business and as a result of the extensive government regulation of the solid waste industry, the Company periodically may become subject to various judicial and administrative proceedings and investigations involving federal, state, or local agencies. To date, the Company has not been required to pay any material fine or had a judgment entered against it for violation of any environmental law. From time to time, the Company also may be subjected to actions brought by citizen's groups in connection with the permitting of landfills or transfer stations, or alleging violations of the permits pursuant to which the Company operates. From time to time, the Company is also subject to claims for personal injury or property damage arising out of accidents involving its vehicles or other equipment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on August 26, 1997, a proposal to elect the nominees listed in the following table as directors of the Company was submitted to a vote of the Company's stockholders. The following table also shows the results of voting as to each nominee: <TABLE> <CAPTION> NOMINEE VOTES FOR VOTES WITHHELD ------- --------- -------------- <S> <C> <C> John E. Drury 125,752,212 1,323,737 William E. Moffett 125,860,069 1,215,880 John G. Rangos, Sr. 125,601,860 1,474,089 Jerome B. York 125,696,072 1,379,877 </TABLE> At the same meeting, proposals to (i) approve and adopt an Agreement and Plan of Merger dated as of April 13, 1997, by and among the Company, Riviera Acquisition Corp. and United Waste Systems, Inc., (ii) approve and adopt the USA Waste Services, Inc. 1997 Employee Stock Purchase Plan, (iii) approve an amendment to the Restated Certificate of Incorporation of the Company to increase the number of authorized shares of the Company from 300,000,000 to 500,000,000, and (iv) ratify the appointment of Coopers & Lybrand L.L.P. as independent accountants for the ensuing year were submitted to a vote of the Company's stockholders. All proposals were adopted by the stockholders. The voting was as follows: <TABLE> <CAPTION> VOTES BROKER VOTES FOR AGAINST ABSTENTIONS NON-VOTES --------- ------- ----------- --------- <S> <C> <C> <C> <C> United Merger 112,189,663 92,664 228,053 14,565,569 1997 Employee Stock Purchase Plan 126,038,501 756,409 281,039 -- Restated Certificate of Incorporation Amendment 111,656,537 911,880 142,554 14,364,978 Ratification of Independent Accountants 126,770,581 58,752 246,616 -- </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: The exhibits to this report are listed in the Exhibit Index included elsewhere herein. (b) REPORTS ON FORM 8-K: A report on Form 8-K (Amendment No. 2) dated March 12, 1997, was filed July 23, 1997, to amend the Company's previously filed Form 8-K regarding its acquisition of the Canadian solid waste subsidiaries of Allied Waste Industries, Inc. A report on Form 8-K dated August 26, 1997, was filed September 3, 1997, to report the consummation of the Company's 22
23 merger with United Waste Systems, Inc. and to file the historical financial statements of United Waste Systems, Inc. and the required pro forma financial information. A report on Form 8-K dated September 10, 1997, was filed September 24, 1997, to report the Company's sale of $300,000,000 of 7% Senior Notes due 2004, and $300,000,000 of 7.125% Senior Notes due 2007, in an underwritten public offering. 23
24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USA WASTE SERVICES, INC. Registrant November 14, 1997 BY: /s/ Earl E. DeFrates - ----------------- -------------------------------- Date Earl E. DeFrates, Executive Vice President and Chief Financial Officer (Principal Financial Officer) November 14, 1997 BY: /s/ Bruce E. Snyder - ----------------- -------------------------------- Date Bruce E. Snyder, Vice President and Chief Accounting Officer (Principal Accounting Officer) 24
25 USA WASTE SERVICES, INC. EXHIBIT INDEX <TABLE> <CAPTION> Number and Description of Exhibit (*) <S> <C> <C> 2 None 3(a) Amendment to Registrant's Restated Certificate of Incorporation 3(b) Conformed Copy of Registrant's Restated Certificate of Incorporation 4 None 10 None 11 Computation of Earnings (Loss) Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 15 None 18 None 19 None 22 None 23 None 24 None 27 Financial Data Schedule 99 None </TABLE> - --------------------------------------- (*) Exhibits not listed are inapplicable. 25