1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER: 1-12154 __________ USA WASTE SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> DELAWARE 73-1309529 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) </TABLE> 5400 LBJ FREEWAY SUITE 300 - TOWER ONE DALLAS, TEXAS 75240 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (214) 383-7900 (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 --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF MAY 1, 1996: COMMON STOCK $.01 PAR VALUE 66,014,914 SHARES
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> March 31, December 31, 1996 1995 ---- ---- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 16,591 $ 13,164 Accounts receivable, net 61,006 58,333 Notes and other receivables 13,133 13,802 Deferred income taxes 15,600 15,600 Prepaid expenses and other 25,411 19,223 ------ -------- Total current assets 131,741 120,122 Notes and other receivables 17,208 11,704 Property and equipment, net 599,869 593,293 Excess of cost over net assets of acquired businesses, net 95,643 91,250 Other intangible assets, net 27,639 27,528 Other assets 69,109 64,140 -------- -------- Total assets $941,209 $908,037 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 32,457 $ 32,364 Accrued liabilities 20,295 27,924 Deferred revenues 6,007 6,030 Current maturities of long-term debt 41,601 38,925 -------- -------- Total current liabilities 100,360 105,243 Long-term debt, less current maturities 354,978 334,860 Closure, post-closure, and other liabilities 61,887 65,085 -------- -------- Total liabilities 517,225 505,188 ------- ------- Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value; 10,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 150,000,000 shares authorized; 66,082,850 and 65,975,048 shares issued, respectively 661 660 Additional paid-in capital 728,924 727,971 Accumulated deficit (303,447) (323,963) Less treasury stock at cost, 144,975 shares and 138,810 shares, respectively (2,154) (1,819) --------- -------- Total stockholders' equity 423,984 402,849 ------- ------- Total liabilities and stockholders' equity $941,209 $908,037 ======= ======= </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 March 31, ---------- 1996 1995 -------- -------- <S> <C> <C> Operating revenues $124,629 $101,242 -------- -------- Costs and expenses: Operating 69,598 58,279 General and administrative 14,542 16,890 Depreciation and amortization 14,875 12,980 Unusual items -- 693 ----- -------- 99,015 88,842 -------- -------- Income from operations 25,614 12,400 -------- -------- Other income (expense): Interest expense: Nonrecurring interest -- (3,512) Other (5,767) (8,212) Interest and other income, net 2,033 1,845 -------- -------- (3,734) (9,879) -------- -------- Income before provision for income taxes 21,880 2,521 Provision for income taxes 1,364 2,337 ------- -------- Net income $20,516 $ 184 ======== ======== Earnings per common share $ 0.31 $ 0.00 ======== ======== Weighted average number of common and common equivalent shares outstanding 66,964 51,088 ======== ======== </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> Additional Preferred Common Paid-in Accumulated Treasury Stock Stock Capital Deficit Stock ----- ----- ------- ------- ----- <S> <C> <C> <C> <C> <C> Balance, December 31, 1995 $ -- $ 660 $727,971 $(323,963) $(1,819) Common stock issued in acquisitions -- 1 1,160 -- -- Common stock returned for acquisition settlement -- -- -- -- (751) Common stock issued from treasury upon exercise of stock options -- -- (82) -- 219 Common stock issued from treasury upon exercise of stock warrants -- -- (125) -- 197 Net income -- -- -- 20,516 -- ------- --- ------- ------- ----- Balance, March 31, 1996 $ -- $ 661 $728,924 $(303,447) $(2,154) ======= === ======= ======== ====== </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> Three months ended March 31, ----------------------------- 1996 1995 ---------- ----------- <S> <C> <C> Cash flows from operating activities: Net cash provided by operating activities $14 ,431 $14,163 ------- ------ Cash flows from investing activities: Acquisitions of businesses, net of cash acquired (12,246) -- Capital expenditures (14,680) (16,044) Loans and advances to others (7,659) (5,426) Collection of loans to others 1,158 102 Proceeds from sale of assets 633 4,155 Increase in restricted assets (499) 9,430) Other -- (384) -------- -------- Net cash used in investing activities (33,293) (27,027) -------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt 32,000 17,000 Principal payments on long-term debt (9,920) (10,792) Proceeds from exercise of stock options 137 30 Proceeds from exercise of warrants 72 517 -------- -------- Net cash provided by financing activities 22,289 6,755 ------ ------- Increase (decrease) in cash and cash equivalents 3,427 (6,109) Cash and cash equivalents at beginning of period 13,164 30,161 ------ ------ Cash and cash equivalents at end of period $16,591 $24,052 ======= ====== </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. ("the Company") as of March 31, 1996 and December 31, 1995, the related condensed consolidated statements of operations for the three months ended March 31, 1996 and 1995, the condensed consolidated statement of stockholders' equity for the three months ended March 31, 1996, and the condensed consolidated statements of cash flows for the three months ended March 31, 1996 and 1995 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 financial statements included herein should be read in connection with 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, 1995 and to the Company's Joint Proxy Statement and Prospectus dated April 2, 1996 included in the Company's Registration Statement on Form S-4 filed in connection with the acquisition of Western Waste Industries ("Western") (see Note 5). 1. LONG-TERM DEBT: Long-term debt consists of the following (in thousands): <TABLE> <CAPTION> March 31, December 31, 1996 1995 ---------- --------- <S> <C> <C> Credit Facility: Revolving credit facility $ 83,613 $ 51,613 Term loan facility 209,228 215,835 Industrial revenue bonds 80,500 82,250 Other 23,238 24,087 ------ -------- 396,579 373,785 Less current maturities 41,601 38,925 ------- -------- $354,978 $334,860 ======= ======= </TABLE> On June 30, 1995, in connection with the acquisition of Chambers Development Company ("Chambers"), the Company entered into a $550,000,000 financing agreement consisting of a $300,000,000 five-year revolving credit and letter of credit facility and a $250,000,000 term loan facility. Borrowings under the credit facility are collateralized by all the stock and intercompany receivables of the Company and its subsidiaries, whether now owned or hereafter acquired. Revolving credit loans under the credit facility are limited to $180,000,000 at March 31, 1996, less the amount of any future industrial revenue bonds enhanced by letters of credit under the credit facility. Loans bear interest at a rate based on the Eurodollar rate or the prime rate, plus a spread not to exceed 1.75% per annum. The credit facility may also be used for letters of credit purposes with variable fees from 0.75% to 1.75% per annum charged on amounts issued. A commitment fee of up to .5% is required on the unused portion of the credit facility. On May 7, 1996, in connection with the acquisition of Western, the Company replaced its existing credit facility with a $750,000,000 senior revolving credit facility ("Credit Facility"). The Credit Facility will be used to refinance existing bank loans and letters of credit as well as fund additional acquisitions and working capital. The Credit Facility will be available for standby letters of credit of up to $300,000,000. Loans under the Credit Facility bear interest at a rate based on the Eurodollar rate plus a spread not to exceed 0.75% per annum (spread initially set at 0.405% per annum). The Credit Facility requires a facility fee not to exceed 0.38% per annum on the entire available credit facility (facility fee initially set at 0.22% per annum). The Company's liquidity will be enhanced by the Credit Facility as the financial covenants are less restrictive and principal reductions are not required for a three year period. 2. BUSINESS COMBINATIONS: During the three months ended March 31, 1996, the Company acquired 13 collection businesses for approximately $12,246,000 in cash and 64,624 shares of the Company's Common Stock. These acquisitions were accounted for under the purchase method of accounting and the pro forma effect of the acquisitions is not material to the Company's financial condition or its results of operations. 6
7 USA WASTE SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. INCOME TAXES: The difference in federal income taxes at the statutory rate and the provision for income taxes is primarily due to the net change in the valuation allowance. The valuation allowance for deferred tax assets had a net decrease of $5,814,000 in the first quarter of 1996 due to changes in the Company's gross deferred tax assets and liabilities and the realizations of a portion of the Company's net deferred tax asset. Future taxable income was projected utilizing annualized first quarter taxable income. Based on this analysis of taxable income, the Company has restored the net deferred tax asset to $15,600,000. If the Company's current trend of profitability continues, additional net deferred tax assets of up to approximately $87,800,000 could be recognized in future periods. 4. COMMITMENTS AND CONTINGENCIES: Environmental matters -- The Company is subject to extensive and evolving federal, state, and local environmental laws and regulations 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. Legal matters -- See Part II, Item 1, of this Form 10-Q for discussion of legal matters. Insurance -- The Company self-insures certain of its comprehensive general liability and workers' compensation risks, while maintaining third-party coverage to protect against catastrophic loss. The Company has not incurred significant fines, penalties, or liabilities for pollution or environmental liabilities at any of its facilities; however, the Company's operating results could be adversely affected in the future in the event of uninsured losses. Employment agreements -- The Company has entered into employment agreements with certain of its executives and officers. These employment agreements include provisions governing compensation and benefits to be paid upon termination of employment with the Company or certain changes in control of the Company. Under certain conditions, the agreements can be terminated by the Company or the employee. Upon termination of an agreement, the employee's compensation would continue at approximately 75% of the employee's prior compensation for periods ranging from three to five years. During the three to five year period, the employee would be available to the Company on a part-time basis for consulting and also would not be permitted to engage in any activities in direct competition with the Company. If these executives were to be terminated without cause during 1996 or if certain executives elected to terminate their agreements, the aggregate annual compensation on a part-time basis would be approximately $1,250,000. If a change in control were to occur in 1996 and the executives were to elect to take the change in control payments, they would receive approximately $6,473,000. As of March 31, 1996, the Company has not recorded any accruals in the financial statements related to these employment agreements. Other commitments and contingencies -- The Company is a party to certain other litigation arising in the normal course of business. In addition, contingencies of an environmental nature currently exist at certain of its disposal sites. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial position and results of operations. 7
8 USA WASTE SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. MERGER WITH WESTERN WASTE INDUSTRIES: On May 7, 1996, the Company consummated an Agreement and Plan of Merger (the "Merger Agreement") to acquire Western through a merger transaction ("Western Merger") accounted for as a pooling of interests. Under the terms of the Merger Agreement, the Company issued 1.50 shares of its Common Stock for each share of Western outstanding common stock. Prior to the Western Merger, the Company owned approximately 4.1% of Western's outstanding shares (634,900 common shares of Western were recorded at cost of $12,596,000 in other assets in the condensed consolidated balance sheets at March 31, 1996 and December 31, 1995), which were canceled on the Western Merger's effective date. The Western Merger increased the Company's outstanding shares of Common Stock by approximately 23.1 million shares and the Company assumed options under Western's stock option plans equivalent to approximately 5.2 million underlying USA Waste shares of Common Stock. Following the Western Merger, the Company's Board of Directors was expanded from 9 to 11 members, with approval to appoint a twelfth member at a later date. See Part II, Item 5, of this Form 10-Q for USA Waste supplemental condensed consolidated financial information. 8
9 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 months ended March 31, 1996 and 1995, 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, 1995 and the Company's Joint Proxy Statement and Prospectus dated April 2, 1996, included in the Company's Registration Statement on Form S-4 filed in connection with the acquisition of Western. INTRODUCTION The Company provides non-hazardous solid waste management services, consisting of collection, transfer, disposal, soil remediation, and recycling services in 21 states. Since August 1990, the Company has experienced significant growth principally through the acquisition and integration of solid waste businesses and is now the fourth largest non- hazardous solid waste company in North America. The company owns or operates 29 landfills, 22 transfer stations, and 45 collection companies serving more than 500,000 customers. The Company's revenues consist primarily of fees charged for its collection and disposal services. Revenues for collection services include fees from residential, commercial, industrial, and municipal collection customers. A portion of these fees are billed in advance; a liability for future service is recorded upon receipt of payment and 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 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 being disposed of at the Company's landfill sites. Fees are charged at transfer stations based on the volume of solid waste deposited, taking into account the Company's cost of loading, transporting, and disposing of the solid waste at a landfill. Intercompany revenues between the Company's landfill and collection operations have been eliminated in the financial statements presented 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 expenses are capitalized and depreciated over the estimated useful life of a site as capacity is consumed, and include acquisition, engineering, upgrading, construction, and permitting costs. All indirect development expenses, such as administrative salaries and general corporate overhead, are expensed 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. 9
10 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 Statements of Operations items: <TABLE> <CAPTION> Period to Period Change for the Three Months Ended March 31, 1996 and 1995 ------------------- $ % ----- ----- <S> <C> <C> Operating revenues $23,387 23.1% ------ Costs and expenses: Operating 11,319 19.4 General and administrative (2,348) (13.9) Depreciation and amortization 1,895 14.6 Unusual items (693) (100.0) ------- 10,173 11.5 ------ Income from operations 13,214 106.6 ------ Other income (expense): Interest expense: Nonrecurring interest 3,512 100.0 Other 2,445 29.8 Interest and other income, net 188 10.2 ------- 6,145 62.2 ------- Income before provision for income taxes 19,359 767.9 Provision for income taxes (973) (41.6) ------- Net income $20,332 11,050.0% ====== </TABLE> 10
11 The following table presents, for the periods indicated, the percentage relationship that the various components of the Condensed Consolidated Statements of Operations bear to operating revenues: <TABLE> <CAPTION> Three Months Ended March 31, ----------------- 1996 1995 -------- -------- <S> <C> <C> Operating revenues: Disposal 30.6% 31.9% Waste collection 52.3 52.1 Transfer stations 12.0 9.9 Other 5.1 6.1 ---- ------ 100.0 100.0 ----- ----- Costs and expenses: Operating 55.8 57.6 General and administrative 11.7 16.7 Depreciation and amortization 11.9 12.8 Unusual items -- 0.7 ----- ----- 79.4 87.8 ----- ----- Income from operations 20.6 12.2 ----- ----- Other income (expense): Interest expense: Nonrecurring interest -- (3.4) Other (4.6) (8.1) Interest and other income, net 1.6 1.8 ---- ---- (3.0) (9.7) ----- ----- Income before provision for income taxes 17.6 2.5 Provision for income taxes 1.1 2.3 ----- ----- Net income 16.5 0.2% ==== ===== </TABLE> THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Operating Revenues Operating revenues were $124,629,000 for the three months ended March 31, 1996, an increase of $23,387,000, or 23.1%, as compared to the corresponding period of 1995. The increase in operating revenues is attributable to the effect of acquisitions, less dispositions, and the growth in operating revenues from comparable operations, excluding the negative impact of severe weather conditions in certain market areas, and the decline in certain non-core businesses which do not provide a significant contribution to earnings. Acquisitions during 1996 and the effect of acquisitions made during 1995 accounted for an approximate 20% increase in operating revenues. Operating revenues from comparable disposal and collection operations increased approximately 1% due to price increases and approximately 9.1% due to volume increases, with the negative impact of the harsh weather conditions in 1996 and declines in other non-core revenues accounting for the remaining decrease of approximately 7%. Operating Costs and Expenses Operating costs and expenses increased $11,319,000, or 19.4%, for the three months ended March 31, 1996, as compared to the first quarter of 1995. The increase in operating costs and expenses in 1996 is primarily attributable to the impact of new business acquisitions, net of dispositions, made in 1995 and 1996 of $16,183,000. Offsetting the increase due to acquisitions is the effect of reduced operating costs and expenses of approximately $2,800,000 for the existing Chambers operations since the Company's merger with Chambers in June 1995, and the increased utilization of internal disposal from 50% in the first quarter of 1995 to 53%, which equates to approximately $1,000,000 in decreased costs, for the corresponding period of 1996. Operating 11
12 costs and expenses for other comparable operations decreased $1,064,000 due to the Company's ability to service internal growth without a proportionate increase in costs. As a percentage of operating revenues, operating costs and expenses decreased from 57.6% in the first quarter of 1995 to 55.8% for the corresponding period in 1996. This decrease occurred for the reasons described above despite the effect of the change in the mix of operating revenues for services provided, which would generally result in an increase in the percentage of operating costs to operating revenues. Operating revenues for disposal operations decreased from 31.9% in the first quarter of 1995 to 30.6% for the corresponding period of 1996, which increases operating costs as a percentage of operating revenues since disposal operations generally have lower operating cost margins than collection and transfer station operations. General and Administrative General and administrative expenses decreased $2,348,000 for the three months ended March 31, 1996, compared to the first quarter of 1995, and were down as a percent of operating revenues. This is the result of the Company's ability to integrate new business acquisitions without a proportionate increase in general and administrative expenses and cost reductions as a result of the merger with Chambers consummated in June 1995. Depreciation and Amortization Depreciation and amortization increased $1,895,000 for the three months ended March 31, 1996, compared to the first quarter of 1995 due primarily to the acquisition of new businesses. As a percentage of operating revenues, depreciation and amortization decreased due to improved utilization of equipment through the internal volume growth in the collection and disposal operations without a corresponding increase in equipment and facilities. Unusual Items In 1995, the unusual items include $693,000 of severance and other termination benefits paid to former Chambers employees in connection with its pre-merger reorganization. Income from Operations For reasons discussed above, income from operations as a percent of operating revenues in the first quarter of 1996 was 20.6% as compared to 12.2% as in the first quarter of 1995. The improvement in recurring operations is the result of economies of scale realized by the Company with respect to recent acquisitions and improvements in comparative operations. Other Income and Expense Other income and expense consists of interest expense, interest income, and other income. Interest expense, gross of amounts capitalized, decreased as a result of an overall reduction in indebtedness and the refinancing of Chambers pre-merger indebtedness and the Company's existing indebtedness to lower rates at June 30, 1995. In addition, $3,512,000 of nonrecurring interest was incurred during the three months ended March 31, 1995, relating to extension fees and other charges associated with the aforementioned debt refinancing by Chambers. Capitalized interest for the first quarter of 1996 was approximately $1,573,000 as compared to $1,258,000 in the first quarter of 1995. 12
13 Provision for Income Taxes The provision for income taxes decreased $973,000 for the three months ended March 31, 1996, as compared to the corresponding period of 1995. The 1995 provision for income taxes represents current income taxes of USA Waste and Chambers on a separate basis. The decrease in the provision for income taxes in 1996 is the result of the change in the valuation allowance and corresponding recognition of the benefit for a portion of the Company's net deferred tax asset. Net Income For the reasons discussed above, net income increased $20,332,000 during the three months ended March 31, 1996 as compared to the corresponding period of 1995. 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 and hauling 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 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 March 31, 1996, the Company had working capital of $31,381,000 (a ratio of current assets to current liabilities of 1.31:1) and a cash balance of $16,591,000, which compares to working capital of $14,879,000 (a ratio of current assets to current liabilities of 1.14:1) and a cash balance of $13,164,000 as of December 31, 1995. During the first three months of 1996, the Company received net cash from operations of $14,431,000, and received net cash from financing activities of $22,289,000. These funds were used primarily to fund investments in other businesses of $12,246,000 and for capital expenditures of approximately $14,680,000. 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's budgeted cash requirements for the remainder of 1996 include estimated capital expenditures of approximately $75,000,000. The Company intends to finance the remainder of its 1996 capital requirements through internally generated cash flow and amounts available under its revolving credit facility. At March 31, 1996, the available line of credit for cash borrowings was $93,875,000. On May 7, 1996, in connection with the acquisition of Western, the Company replaced its existing credit facility with a $750,000,000 senior revolving credit facility ("Credit Facility"). The Credit Facility will be used to refinance existing bank loans and letters of credit as well as fund additional acquisitions and working capital. The Credit Facility will be available for standby letters of credit up to $300,000,000. Loans under the Credit Facility bear interest at a rate based on the Eurodollar rate plus a spread not to exceed 0.75% per annum (spread initially set at 0.405% per annum). The Credit Facility requires a facility fee not to exceed 0.38% per annum on the entire available credit facility (facility fee initially set at 0.22% per annum). The Company's liquidity will be enhanced by the Credit Facility as the financial covenants are less restrictive and principal reductions are not required for a three year period. The Company's business plan is to grow through acquisitions as well as development projects. The Company has issued equity securities in business acquisitions where appropriate and expects to do so in the future. Furthermore, the Company's future growth will depend greatly upon its ability to raise additional capital. 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. 13
14 The Company recently entered the New York City solid waste market on April 17, 1996, upon acquiring certain collection and paper processing operations of Barretti Carting Corp. and related entities for approximately $15,000,000 in cash. The Company has not yet closed on a related New York City transfer station pending the receipt of proper permits and government approvals. Upon receipt of such approvals the Company would be obligated to acquire these assets for approximately $16,000,000 in cash. The Company regularly engages in discussions relating to potential acquisitions and has identified several possible acquisition opportunities. The Company may announce acquisition transactions at any time. SEASONALITY AND INFLATION Because the volumes of certain types of waste, such as yard clippings and construction debris, tend to be higher in the spring and summer, the Company experiences seasonal variations in its revenues. As a result, during spring and summer, the Company's revenues tend to be higher than its revenues in fall and winter. In addition, during the winter, harsh weather conditions often temporarily affect the Company's ability to collect, transport, and dispose of waste, as experienced by certain operating locations in the first quarter of 1996. The seasonal impact is often offset by revenues added through acquisitions such that the Company's reported revenues have historically reflected increases in period to period comparisons. 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. 14
15 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 impact on the Company's financial condition. 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 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. The Company also may be subject to claims for personal injury or property damage arising out of accidents involving its vehicles. 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 stock and two of its general partners and asserts 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 allege 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 is continuing as a separate lawsuit. Discovery has been completed and a pretrial conference is scheduled for May 17, 1996. Plaintiffs filed a motion for summary judgment which is untimely under the court's case management. The court has stayed responses to the motion for summary judgment. 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. The Company intends to continue to vigorously defend against this action. Management of the Company believes the ultimate resolution of such complaint will not have a material adverse effect on the Company's financial position or results of operations. On August 3, 1995, Frederick A. Moran and certain related persons and entities filed a lawsuit against Chambers Development Company, Inc., certain former officers and directors of Chambers, and Grant Thronton, 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 claim 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 assert that they have 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 include damages to Mr. Moran's business and reputation. The Judicial Panel on Multidistrict Litigation has transferred this case to the United States District Court for the Western District of Pennsylvania. The Company has filed its answer to the complaint and intends to vigorously defend against these claims. The case is currently in discovery. Management of the Company believes the ultimate resolution of such complaint will not have a material adverse effect on the Company's financial position or results of operations. On or about February 1, 1996, an action was filed in the Circuit Court of Cook County, Illinois, captioned Allabastro v. USA Waste Services, Inc., Action No. 96L01165. The case was subsequently removed to the United States District Court for the Northern District of Illinois, Action No. 96-CV-1336. The plaintiff alleges to have entered into an oral agreement with the Company for brokerage services and is demanding a fee of $950,000 based on the alleged contract and on common law for acting as a broker/advisor to the Company in its 1993 purchase of an Indiana landfill and hauling operation from Chambers. Based on the same facts, the plaintiff is also demanding an additional $36,250,000 fee in connection with the June 1995 merger of Chambers with the Company. The plaintiff is also seeking unspecified damages for acting as a management advisor to the Company in its procurement of a landfill renovation/operation contract in Charleston, West Virginia. Interest and other costs are also demanded. The case is in the early stages of discovery. The 15
16 Company has filed its answer and intends to vigorously defend against this action, and management believes the ultimate resolution of this suit will not have a material adverse effect on the Company's financial position or results of operations. 16
17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the first quarter of 1996. 17
18 ITEM 5. OTHER INFORMATION The following supplemental condensed consolidated balance sheets of USA Waste as of March 31, 1996 and December 31, 1995, and the related supplemental condensed consolidated statements of operations for the three months ended March 31, 1996 and 1995 are presented for informational purposes. These financial statements are in effect a restatement of the historical financial statements as if the Western Merger was consummated as of the beginning of the periods presented. These financial statements do not include the impact of certain cost and expense savings and other economic benefits that are expected to be realized as a result of the Western Merger. USA WASTE SERVICES, INC. SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Par Value Amounts ) (Unaudited) <TABLE> <CAPTION> March 31, December 31, 1996 1995 ---- ---- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 26,309 $ 18,223 Accounts receivable, net 89,143 90,427 Notes and other receivables 13,133 13,802 Deferred income taxes 20,101 20,101 Prepaid expenses and other 34,258 26,110 ---------- ---------- Total current assets 182,944 168,663 Notes and other receivables 17,208 11,704 Property and equipment, net 810,059 799,512 Excess of cost over net assets of acquired businesses, net 112,908 108,664 Other intangible assets, net 33,737 34,127 Other assets 75,040 67,694 --------- -------- Total assets $1,231,896 $1,190,364 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 41,187 $ 40,333 Accrued liabilities 38,637 48,618 Deferred revenues 6,007 6,030 Current maturities of long-term debt 42,854 40,157 ---------- ---------- Total current liabilities 128,685 135,138 Long-term debt 430,117 410,683 Closure, post-closure, and other liabilities 84,078 87,156 ---------- ---------- 642,880 632,977 --------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value; 10,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 150,000,000 shares authorized; 87,529,268 and 87,030,697 shares issued, respectively 875 870 Additional paid-in capital 802,960 796,235 Accumulated deficit (212,665) (237,899) Less treasury stock at cost, 144,975 and 138,810 shares, respectively (2,154) (1,819) --------- --------- Total stockholders' equity 589,016 557,387 -------- ---------- Total liabilities and stockholders' equity $1,231,896 $1,190,364 ========= ========= </TABLE> See accompanying notes. 18
19 USA WASTE SERVICES, INC. SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 1996 1995 ---- ---- <S> <C> <C> Operating revenues $193,070 $168,880 -------- -------- Costs and expenses: Operating 113,977 101,450 General and administrative 24,034 26,163 Depreciation and amortization 20,914 19,343 Unusual items -- 693 ----- --------- 158,925 147,649 -------- -------- Income from operations 34,145 21,231 ------ --------- Other income (expense): Interest expense: Nonrecurring interest -- (3,512) Other (6,580) (9,687) Interest and other income, net 2,202 2,322 -------- ------- (4,378) (10,877) -------- -------- Income before provision for income taxes 29,767 10,354 Provision for income taxes 4,533 5,816 -------- -------- Net income $ 25,234 $ 4,538 ========== ========= Earnings per common share $ 0.28 $ 0.06 ======== ========= Weighted average number of common and common equivalent shares outstanding 91,213 74,305 ====== ========= </TABLE> See accompanying notes. 19
20 USA WASTE SERVICES, INC. NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The supplemental condensed consolidated financial statements assume the issuance of USA Waste Common Stock in exchange for all outstanding Western Common Stock, excluding 634,900 shares of Western Common Stock held by USA Waste. Such financial statements also assume that the Western Merger is accounted for using the "pooling of interests" method of accounting pursuant to Opinion No. 16 of the Accounting Principles Board. The pooling of interests method of accounting assumes that the combining companies have been merged from their inception, and the historical financial statements for periods prior to consummation of the Merger are restated as though the companies have been combined from their inception. The supplemental condensed consolidated financial statements do not include any adjustment for estimated nonrecurring costs directly related to the Merger which are expected to be included in operations of the Company within the twelve months succeeding the consummation of the Merger. Such costs (which are currently estimated for purposes of this presentation to be approximately $27.0 million) include the severance benefits to be paid to certain officers of Western of approximately $1.2 million and an additional $2.0 million to be funded by USA Waste in connection with charitable contributions to be made at the direction of an affiliate of USA Waste. Actual merger costs may vary from such estimate. Certain reclassifications have been made to the historical financial statements of USA Waste and Western to conform to the supplemental presentation. Such reclassifications are not material to the supplemental condensed consolidated financial statements. SUPPLEMENTAL ADJUSTMENTS Adjustments to the supplemental condensed consolidated financial statements were as follows: (A) All significant intercompany balance sheet and statement of operations items between USA Waste and Western have been eliminated in the supplemental condensed consolidated financial statements. In February 1992, USA Waste acquired a 55% interest in a hauling company from a third party where Western owned the remaining 45%. In March 1993, USA Waste acquired the remaining 45% from Western. The supplemental condensed financial statements reflect the combined company's 100% ownership of the acquired hauling company as of February 1992. Western's earnings in minority interest from February 1992 through March 1993 and the gain on sale to USA Waste of $2,829,000 have been eliminated. The excess cost over net assets of acquired businesses, net of accumulated amortization reported by USA Waste has also been eliminated. (B) Common stock, additional paid-in capital, and other assets have been adjusted to eliminate USA Waste's investment of 634,900 shares of Western Common Stock. (C) Adjustments have been made to reclassify Western's depreciation and amortization from operating expenses and general and administrative expenses to a separate line item to conform to the presentation of USA Waste as if the companies had been combined since their inception. (D) The stockholders' equity accounts have been adjusted to reflect the assumed issuance of 21,446,418 shares as of March 31, 1996 and 21,055,649 shares as of December 31, 1995 of USA Waste Common Stock for all issued and outstanding share of Western Common Stock (based on the exchange ratio of 1.50 shares of USA Waste Common Stock for each share of Western Common Stock outstanding). The actual number of shares of USA Waste Common Stock to be issued pursuant to the Merger will be based upon the number of shares of Western issued and outstanding immediately prior to the consummation of the merger, excluding USA Waste's ownership in Western consisting of 634,900 shares. (E) Income from continuing operations available to common shareholders per share for each period is based on the combined weighted average number of shares outstanding, after giving effect to the issuance of 1.5 shares of USA Waste Common Stock for each share of Western Common Stock outstanding. Fully diluted earnings per share are considered equal to primary earnings per share for all periods presented because the addition of potentially dilutive securities that are not common stock equivalents would have been either antidilutive or not material. 20
21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1(a) - Amendment to Registrant's Restated Certificate of Incorporation. 3.1(b) - Conformed Copy of Registrant's Restated Certificate of Incorporation. 3.2 - Bylaws [Incorporated by Reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-4, File No. 33-60103]. 4.1 - Specimen Stock Certificate [Incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on Form S-3, File No. 33-76224]. 10.1 - 1990 Stock Option Plan [Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990]. 10.2 - 1993 Stock Incentive Plan [Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-8, File No. 33-72436]. 10.3 - Envirofil, Inc. 1993 Stock Incentive Plan [Incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994]. 21
22 10.4 - Form of Employment Agreement between the Registrant and each of John E. Drury, Donald F. Moorehead, Jr., David Sutherland-Yoest, and Charles A. Wilcox [Incorporated by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994]. 10.5 - Employment Agreement between the Registrant and Earl E. DeFrates [Incorporated by reference to Exhibit 10.19 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994]. 10.6 - Employment Agreement between the Registrant and Gregory T. Sangalis [Incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-4, File No. 33-59259]. 10.7 - Revolving Credit and Term Loan Agreement dated as of June 27, 1995, among the Registrant, its subsidiaries, The First National Bank of Boston, Bank of America Illinois, J.P. Morgan Securities Inc., an Morgan Guaranty Trust Company of New York [Incorporated by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q dated June 30, 1995, as amended by Form 10-Q/A]. 10.8 - Shareholders Agreement dated December 18, 1995, among USA Waste Services, Inc., Donald F. Moorehead, Jr., John E. Drury, John G. Rangos, Sr., John G. Rangos Jr., Alexander W. Rangos, and John Rangos Development Corporation, Inc. [Incorporated by reference to Exhibit 1 to Schedule 13D dated December 17, 1995 relating to the Registrant]. 22
23 10.9 - Consulting and Non-Compete Agreement dated June 25, 1995, between the Registrant John G. Rangos, Sr. [Incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q/A dated June 30, 1995]. 10.10 - Employment Agreement dated June 25, 1995, between the Registrant and Alexander W. Rangos [Incorporated by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q/A dated June 30, 1995]. 10.11 - Employment Agreement dated December 18, 1995, between the Registrant and Kosti Shirvanian [Incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. 11.1 - Computation of Earnings Per Common Share. 27.1 - Financial Data Schedule. 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 May 14, 1996 BY: s/ Earl E. DeFrates - ----------------- --------------------------- Date Earl E. DeFrates, Executive Vice President, Chief Financial Officer May 14, 1996 BY: s/ Bruce E. Snyder - ----------------- ------------------------- Date Bruce E. Snyder, Vice President - Controller, Chief Accounting Officer 24
25 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------- <S> <C> 3.1(a) Amendment to Registrant's Restated Certificate of Incorporation. 3.1(b) Conformed Copy of Registrant's Restated Certificate of Incorporation. 11.1 Computation of Earnings per common share. 27.1 Financial Data Schedule. </TABLE>