-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7RKQkNnl2lO33K8mwPjNLi2SN47HSqS+UitypG84tbdrLxEmkmlVvYeXfHe7hGB Zuic0koR5LKr30xx6IAE/A== 0000881655-97-000004.txt : 19971126 0000881655-97-000004.hdr.sgml : 19971126 ACCESSION NUMBER: 0000881655-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN DISPOSAL SERVICES INC CENTRAL INDEX KEY: 0000881655 STANDARD INDUSTRIAL CLASSIFICATION: 4953 IRS NUMBER: 133858494 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28652 FILM NUMBER: 97718852 BUSINESS ADDRESS: STREET 1: 745 MCCLINTOK DR STREET 2: SUITE 305 CITY: BURR RIDGE STATE: IL ZIP: 60521 BUSINESS PHONE: 7086551105 MAIL ADDRESS: STREET 1: 745 MCCLINTOCK DRIVE STREET 2: SUITE 305 CITY: BURR RIDGE STATE: IL ZIP: 60521 10-Q 1 FORM 10-Q UNITED STATES 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 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 0-28652 AMERICAN DISPOSAL SERVICES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3858494 ------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 745 McClintock - Ste 230 Burr Ridge, Illinois 60521 -------------------------------------- --------- (Address of principal executive offices) (Zip Code) (630) 655-1105 -------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------- (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 periods 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 APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value - 19,142,626 shares as of November 14, 1997 AMERICAN DISPOSAL SERVICES, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1997 (Unaudited) and December 31, 1996 Condensed Consolidated Statements of Operations - Three months ended September 30, 1997 and 1996 (Unaudited); Nine months ended September 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 (Unaudited) Notes to the Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures 2 PART I. FINANCIAL INFORMATION AMERICAN DISPOSAL SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars In Thousands)
September 30, 1997 December 31, (Unaudited) 1996 ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents $ 3,781 $ 2,301 Restricted cash held in escrow 6,000 - Trade receivables, net 21,076 9,741 Prepaid expenses and other 1,271 1,248 Inventory 655 354 ------------------ ------------------ Total current assets 32,783 13,644 Property, plant, and equipment, net 156,258 93,692 Other assets: Cost over fair value of net assets of acquired businesses, net of accumulated amortization of $2,648 and $1,374 141,674 31,237 Other intangible assets, net of accumulated amortization of $637 and $439 1,799 1,610 Debt issuance costs, net of accumulated amortization of $560 and $204 3,085 2,392 Other assets 1,825 2,411 ------------------ ------------------ $ 337,424 $ 144,986 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,605 $ 3,359 Accrued liabilities 17,999 4,249 Deferred revenues 4,648 2,245 Current portion of long-term debt and capital lease obligations 1,226 2,572 ------------------ ------------------ Total current liabilities 32,478 12,425 Long-term debt and capital lease obligations, net of current portion 122,301 65,445 Accrued environmental and landfill costs 9,706 7,603 Deferred income taxes 1,416 1,416 Other long-term liabilities 1,849 - Total stockholders' equity (14,813,553 and 8,872,381 shares of common stock issued and outstanding) 169,674 58,097 ------------------ ------------------ $ 337,424 $ 144,986 ================== ==================
See accompanying notes. 3 AMERICAN DISPOSAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars In Thousands, Except Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues $35,373 $15,122 $81,647 $40,299 Cost of operations 19,334 8,100 44,414 21,270 Selling, general and administrative expenses 4,544 2,037 10,901 6,085 Depreciation and amortization 6,038 3,321 15,094 8,984 ---------- ---------- ---------- ---------- Operating income 5,457 1,664 11,238 3,960 Interest expense, net 1,740 1,374 5,198 4,431 Other income 36 30 145 67 ---------- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary loss 3,753 320 6,185 (404) Income tax benefit (expense) (1,238) (93) (1,988) 62 ---------- ---------- ---------- ---------- Income (loss) before extraordinary loss 2,515 227 4,197 (342) Extraordinary loss, net of income tax benefit - - - (476) ---------- ---------- ---------- ---------- Net income (loss) 2,515 227 4,197 (818) Preferred stock dividend - - - (109) ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders $ 2,515 $ 227 $ 4,197 $ (927) ========== ========== ========== ========== NET INCOME (LOSS) PER SHARE: Income (loss) before extraordinary loss $ 0.17 $ 0.03 $ 0.34 $ (0.07) Extraordinary loss, net of income tax benefit - - - (0.07) ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders $ 0.17 $ 0.03 $ 0.34 $ (0.14) ========== ========== ========== ========== Weighted Average Common Stock And Common Stock Equivalent Shares Outstanding 15,066,432 8,456,870 12,285,211 6,775,484 ========== ========== ========== ==========
See Accompanying Notes. 4 AMERICAN DISPOSAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) (Unaudited)
Nine Months Ended September 30, 1997 1996 ---------- ---------- OPERATING ACTIVITIES: Net income (loss) $ 4,197 $ (818) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 15,094 8,984 Provision for environmental and landfill costs 458 429 Extraordinary loss - 476 Changes in operating assets and liabilities, net of effects from acquisitions: Trade receivables (6,680) (2,047) Prepaid expenses, restricted cash held in escrow and other assets (5,233) (3,095) Accounts payable, accrued liabilities and accrued environmental and landfill costs 17,963 1,879 Deferred revenue 1,293 527 ---------- ---------- Net cash provided by operating activities 27,092 6,335 ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (16,445) (11,961) Cost of acquisitions (133,866) (15,303) ---------- ---------- Net cash used in investing activities (150,311) (27,264) ---------- ---------- FINANCING ACTIVITIES: Net proceeds from issuance of common stock 70,093 24,901 Exercise of common stock options 183 - Redemption of preferred stock - (1,950) Preferred stock dividend - (109) Proceeds from issuance of long-term debt 131,486 72,574 Repayments of indebtedness (76,015) (63,486) Payment of note payable to stockholder - (12,500) Debt issuance costs (1,049) (2,576) ---------- ---------- Net cash provided by financing activities 124,699 16,854 ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,480 (4,075) Cash and cash equivalents, at beginning of period 2,301 6,383 ---------- ---------- Cash and cash equivalents, at end of period $ 3,781 $ 2,308 ========== ========== NONCASH ACTIVITIES: Issuance of common stock for certain acquisitions $ 37,104 $ - ========== ==========
See accompanying notes. 5 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 and 1996 (Unaudited) 1. Formation and Basis of Presentation ADS, Inc. (ADS) was organized on January 15, 1991, to acquire, develop, and operate non-hazardous municipal solid waste disposal, collection, and transfer operations and provide non-hazardous solid waste disposal management services to commercial, industrial, and residential customers. During 1993, an affiliate of Charterhouse Equity Partners, L.P. (CEP) purchased a controlling interest in ADS. County Disposal, Inc. (County) was incorporated by Charterhouse Equity Partners II, L.P. (CEPII) on April 27, 1995, for the purpose of acquiring certain net assets of Envirite Corporation (Envirite). On April 28, 1995, Envirite and County entered into an Asset Purchase Agreement whereby County agreed to purchase from Envirite certain landfill facilities and waste transportation and collection equipment located in Livingston County, Illinois, and Wyandot County, Ohio; all of the issued and outstanding capital stock of County Environmental Services, Inc., a wholly-owned subsidiary of Envirite, which owned and operated a landfill facility and waste transportation and collection equipment located in Clarion County, Pennsylvania; and certain related assets and assumption of certain liabilities. Effective January 1, 1996, the stockholders of ADS and County exchanged their shares for shares of a newly created holding company by the name of American Disposal Services, Inc. (the Company). This share exchange (the Exchange) qualified as a transfer of companies under common controls as affiliates of Charterhouse Group International, Inc. are the general partners and in control of CEP and CEPII and, accordingly, the transaction was accounted for at historical cost in a manner similar to pooling of interests accounting. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. These financial statements should be read in conjunction with the consolidated financial statements, including the notes thereto, for the fiscal year ended December 31, 1996 included in the Company's Annual Report on Form 10-K/A. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. Related Party Interest Expense
Three months ended Nine months ended September 30, September 30, ----------------------- ---------------------- 1997 1996 1997 1996 ------ ------ ------ ------ (Dollars in Thousands) Charterhouse Equity Partners II, L.P. $ - $ - $ - $ 621 ====== ====== ====== ======
6 3. Environmental Matters See the Company's Annual Report on Form 10-K/A for a description of environmental matters. 4. Public Offerings Effective May 13, 1997 the Company completed a public offering of 4,600,000 shares (including the underwriters' over-allotment option) at $16.50 per share. This resulted in net proceeds to the Company of approximately $70.1 million which were used to pay down a portion of the Company's Credit Facility. Effective October 27, 1997 the Company completed a public offering of 6,000,000 shares of common stock (3.5 million of the shares were issued and sold by the Company and 2.5 million of the shares were sold by certain selling stockholders) at $30.50 per share resulting in net proceeds to the Company of approximately $100.4 million. Effective October 30, 1997, the underwriters exercised their over-allotment option of 837,000 shares of common stock (825,000 shares were issued and sold by the Company and 12,000 shares were sold by certain selling stockholders) resulting in net proceeds to the Company of approximately $23.9 million. Immediately following the offering and the exercise of the underwriters' over-allotment option, the Company had 19,142,626 shares of common stock outstanding. 5. Acquisitions The acquisitions below have been accounted for using the purchase method of accounting and, accordingly, the results of their operations have been included in the Company's results of operations from their respective acquisition dates. The purchase prices have been allocated to the assets acquired and liabilities assumed based on their fair values at their respective acquisition dates with the residual allocated to cost over fair value of net assets acquired. During the first nine months of 1997, the Company acquired 22 non-hazardous solid waste businesses, consisting of 22 collection operations, six transfer stations, two beneficial reuse facilities, and three landfills. During 1996, the Company acquired sixteen non-hazardous solid waste businesses, consisting of sixteen collection operations and two transfer stations. The Company has not completed its valuation of certain of its 1997 and 1996 purchases and the purchase price allocations may be subject to change when additional information concerning asset and liability valuations is completed. The pro forma unaudited results of operations for the three and nine months ended September 30, 1997 and 1996, assuming each acquisition and the public offerings above had occurred on January 1, 1996, are as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues $40,427 $34,194 $113,988 $98,969 Operating income 6,597 5,182 17,813 13,323 Net income applicable to common stockholders before extraordinary loss 4,176 3,252 11,301 8,242 Pro forma income per share of common stock 0.21 0.17 0.57 0.48 Weighted average common stock and common stock equivalent shares outstanding 20,101,726 18,722,911 19,921,330 17,041,525
The proforma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on January 1, 1996 nor are they necessarily indicative of future operating results. 7 6. Recently Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted in the fourth quarter of 1997; earlier adoption is not allowed. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement 128 on the calculation of primary and fully diluted earnings per share for the three and nine months ended September 30, 1997 and 1996 is not material. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere herein. INTRODUCTION The Company has adopted an acquisition-based growth strategy that focuses on: (i) the identification and acquisition of solid waste landfills located in secondary markets that are within approximately 125 miles of significant metropolitan centers; and (ii) securing dedicated waste streams for such landfills by the acquisition or development of transfer stations and the acquisition of collection companies. The Company has completed 55 acquisitions from January 1993 through September 1997, including 22 collection companies, six transfer stations, two beneficial reuse facilities, and three landfills acquired in the nine months ended September 30, 1997 (the "1997 Acquisitions"). All of these acquisitions were accounted for under the purchase method of accounting for business combinations. Accordingly, the amortization of goodwill and landfill airspace reflects the fair market value of the Company's assets at the time of their acquisition rather than their historical cost basis, and the results of operations for such acquired businesses are included in the Company's financial statements only from the applicable date of acquisition. As a result, the Company believes its historical results of operations for the periods presented are not directly comparable. FORWARD LOOKING STATEMENTS Certain information contained in this Quarterly Report on Form 10-Q, including, without limitation information appearing under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Factors set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-1 could affect the Company's actual results and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company in this Quarterly Report on Form 10-Q. GENERAL The Company's revenues are attributable primarily to fees charged to customers for waste collection, transfer and disposal services. The Company's collection services are generally provided under direct agreements with its customers or pursuant to contracts with municipalities. Commercial and municipal contract terms, where used, generally range from one to five years and commonly have automatic renewal options. A relatively small portion of such agreements also provide for the prepayment of certain fees, which are reflected as deferred revenues. The table below shows for the periods indicated, the percentage of the Company's total revenues attributable to services provided: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Collection (1) 55.1% 46.0% 52.8% 42.1% Transfer 8.0 1.9 5.6 2.1 Landfill (1) 36.2 51.7 40.9 55.5 Other 0.7 0.4 0.7 0.3 ---------- ---------- ---------- ---------- Total Revenues 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== (1) The portion of collection revenues attributable to disposal charges for waste collected by the Company and disposed of at the Company's landfills has been excluded from collection revenues and included in landfill revenues. 9 A component of the Company's business strategy is to maximize internalization of the waste it collects and thereby realize higher margins from its operations. By disposing of waste at Company-owned landfills, the Company retains the margin generated through disposal operations that would otherwise be earned by third-party landfills. For the three months ended September 30, 1997, approximately 80% of the total tonnage collected by the Company was disposed of at Company-owned landfills. For the nine months ended September 30, 1997, approximately 84% of the total tonnage collected by the Company was disposed of at Company-owned landfills. This represents approximately 36% and 34% of the total tonnage disposed of at Company-owned landfills in the three and nine months ended September 30, 1997, respectively. Excluding the New England region where the Company does not own a landfill, approximately 95% and 97% of the total tonnage collected by the Company was disposed of at Company owned landfills for the three and nine months ended September 30, 1997, respectively. During the nine months ended September 30, 1997, the Company's captive waste (consisting of waste collected by the Company and delivered to any of its landfills and waste delivered to any of the Company's landfills by third-party haulers under long-term collection contracts) constituted an average of approximately 74% of the solid waste disposed of at its landfills. The Company has estimated that, as of December 31, 1996, closure costs expected to occur during the operating lives of these facilities and expensed over these facilities' useful lives will approximate $55.1 million. In addition, the Company has estimated that, as of December 31, 1996, total costs for post-closure activities, including cap maintenance, groundwater monitoring, methane gas control and recovery and leachate treatment/disposal for up to 30 years after closure in certain cases, will be approximately $16.7 million. The December 31, 1996 and September 30, 1997, accruals for landfill closure and post-closure costs (including costs assumed through acquisitions) were approximately $7.6 million and $9.7 million, respectively. The accruals reflect relatively young landfills with estimated remaining lives, based on current waste flows, that range from approximately three to 42 years, and an estimated average remaining life of greater than 18 years. RESULTS OF OPERATIONS The following table sets forth items in the Company's condensed consolidated statements of operations as a percentage of revenues for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues....................................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of operations............................. 54.7 53.5 54.4 52.8 Selling, general and administrative expenses... 12.8 13.5 13.4 15.1 Depreciation and amortization expenses......... 17.1 22.0 18.5 22.3 ---------- ---------- ---------- ---------- Operating income............................... 15.4 11.0 13.7 9.8 Interest expense, net.......................... 4.9 9.1 6.4 11.0 Other income................................... 0.1 0.2 0.2 0.2 Income tax provision (benefit)................. 3.5 0.6 2.4 (0.2) Extraordinary loss, net of income tax benefit.. - - - 1.2 ---------- ---------- ---------- ---------- Net income (loss)............................ 7.1 % 1.5 % 5.1 % (2.0)% ========== ========== ========== ========== EBITDA margin (1)............................. 32.5 % 33.0 % 32.3 % 32.1 % ========== ========== ========== ==========
(1) EBITDA margin represents operating income plus depreciation and amortization divided by revenues. THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 REVENUES. Revenues for the three months ended September 30, 1997 were $35.4 million compared to $15.1 million for the three months ended September 30, 1996. Of the $20.3 million increase in revenues, $17.7 million is 10 due primarily to the effects of companies acquired during 1996 (the operations of which were included in the Company's financial results for the full nine months ended September 30, 1997) and the additional impact of acquisitions completed during the nine months ended September 30, 1997. Approximately $2.6 million is attributable to increases in revenues in operations acquired prior to July 1996. COST OF OPERATIONS. Cost of operations for the three months ended September 30, 1997 were $19.3 million compared to $8.1 million for the three months ended September 30, 1996. This increase in costs was attributable primarily to increases in the Company's revenues described above. As a percentage of revenues, cost of operations was 54.7% in the 1997 period compared to 53.5% in the 1996 period. The increased costs as a percentage of the Company's overall revenue are due to the impact of more substantial collection versus landfill operations in the 1997 period compared to the same period in 1996, in accordance with the Company's acquisition-based growth strategy. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $4.5 million for the three months ended September 30, 1997 compared to $2.0 million for the three months ended September 30, 1996. This increase in costs was attributable primarily to increases in the Company's revenues described above. As a percentage of revenues, SG&A expenses decreased to 12.8% in the 1997 period from 13.5% in the 1996 period. The decrease in SG&A expenses as a percentage of revenues is due primarily to a significant increase in revenue producing assets, while corporate and other related administrative expenses increased moderately. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for the three months ended September 30, 1997 was $6.0 million compared to $3.3 million for the three months ended September 30, 1996. The increase in depreciation and amortization expense is due primarily to increases in the Company's revenues described above. As a percentage of revenues, depreciation and amortization expense was 17.1% and 22.0% for the three months ended September 30, 1997 and 1996, respectively. The decline as a percentage of revenues in the September 1997 period compared to the September 1996 period is due primarily to the diminished concentration of landfill assets, which typically have higher depreciation and amortization expense than collection operations. NET INTEREST EXPENSE. Net interest expense was $1.7 million for the three months ended September 30, 1997 compared to $1.4 million for the three months ended September 30, 1996, which is attributable to additional debt incurred in 1997 to finance certain acquisitions. INCOME TAXES. The Company recorded an income tax provision of $1.2 million for the three months ended September 30, 1997 compared to a $0.1 million income tax provision for the three months ended September 30, 1996. NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 REVENUES. Revenues for the nine months ended September 30, 1997 were $81.6 million compared to $40.3 million for the nine months ended September 30, 1996. Of the increase in revenues, $34.3 million is due primarily to the effects of companies acquired during 1996 (the operations of which were included in the Company's financial results for the full nine months ended September 30, 1997) and the additional impact of acquisitions completed during the nine months ended September 30, 1997. Approximately $7.0 million is attributable to increases in revenues in operations acquired prior to 1996. COST OF OPERATIONS. Cost of operations for the nine months ended September 30, 1997 were $44.4 million compared to $21.3 million for the nine months ended September 30, 1996. This increase was attributable primarily to the increase in revenues described above. As a percentage of revenues, cost of operations was 54.4% in the 1997 period compared to 52.8% in the 1996 period. The increased costs as a percentage of the Company's overall revenues are due to the impact of more substantial collection versus landfill operations in the 1997 period compared to the same period in 1996, in accordance with the Company's acquisition-based growth strategy. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to $10.9 million for the nine months ended September 30, 1997 compared to $6.1 million for the nine months ended September 30, 1996. As a percentage of revenues, SG&A expenses decreased to 13.4% in the 1997 period from 15.1% in the 1996 period. The 11 decrease in SG&A expenses as a percentage of revenues is due primarily to a significant increase in revenue producing assets, while corporate and other related administrative expenses increased moderately. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for the nine months ended September 30, 1997 was $15.1 million compared to $9.0 million for the nine months ended September 30, 1996. The increase in depreciation and amortization expense is due primarily to increases in the Company's revenues described above. As a percentage of revenues, depreciation and amortization expense was 18.5% and 22.3% for the nine months ended September 30, 1997 and 1996, respectively. The decline as a percentage of revenues in the September 1997 period compared to the September 1996 period is due primarily to the diminished concentration of landfill assets, which typically have higher depreciation and amortization expense than collection operations. NET INTEREST EXPENSE. Net interest expense was $5.2 million for the nine months ended September 30, 1997 compared to $4.4 million for the nine months ended September 30, 1996. This increase is attributable to additional debt incurred to complete certain 1997 acquisitions. INCOME TAXES. The Company recorded an income tax provision of $2.0 million for the nine months ended September 30, 1997 and an income tax benefit of $62,000 for the nine months ended September 30, 1996. LIQUIDITY AND CAPITAL RESOURCES Due to the capital intensive nature of the solid waste industry, the Company has used, and expects to continue using, substantially all cash generated from operations to fund acquisitions, capital expenditures and landfill development. Certain operating equipment has also been acquired using leases which have short and medium-term maturities. As a result, the Company has incurred working capital deficits in the past, and there can be no assurance that its available working capital will be sufficient in the future as it pursues its acquisition-based growth strategy. Historically, the Company has satisfied its acquisition, capital expenditure and working capital needs primarily through equity and bank financings. There can be no assurance that such financing will continue to be available. Operating activities in the quarter provided net cash of $27.1 million compared to $6.3 million in the nine months ended September 30, 1996, reflecting the additional operating contribution of the companies acquired. Investing activities used net cash of $150.3 million and $27.3 million in the nine months ended September 30, 1997 and 1996, respectively. The Company's capital expenditure and working capital requirements have increased significantly, reflecting the Company's rapid growth by acquisition and development of revenue producing assets, and will increase further as the Company continues to pursue its acquisition-based growth strategy. During the nine months ended September 30, 1997, the Company spent $16.4 million in capital expenditures, of which $8.2 million was for cell development. In fiscal year 1997, the Company expects to spend approximately $20.0 million for capital expenditures of which $9.0 million is anticipated to be used for cell development. In connection with the 1997 Acquisitions, the Company invested $171.0 million ($133.9 million in cash and $37.1 million in common stock). In the nine months ended September 30, 1997, financing activities provided net cash of $124.7 million, principally from the Company's May 1997 public offering and long-term debt issuances, compared to $16.9 million for the nine months ended September 30, 1996. On May 22, 1997, the Company increased the amount of its revolving and term loan (the "Credit Facility") with ING (U.S.) Capital Corporation, as administrative agent, Morgan Guaranty Trust Company of New York, as syndication agent, Union Bank of California, N.A., as documentation agent, and BHF-Bank Aktiengesellschaft and Bank of America Illinois, as co-agents, for the lenders, from $125 million to $200 million. The Credit Facility provides the Company with a term loan of $60 million and an expansion facility of $140 million to be used for acquisitions (of which $20 million may be used for working capital and letter of credit purposes). The various loans and lines of credit under the Credit Facility bear interest at rates per annum equal to, at the Company's discretion, either: (i) the prime rate, plus an applicable margin; or (ii) the London Interbank Offered Rate ("LIBOR"), plus an applicable margin, and have maturities ranging from 2002 to 2004. As of September 30, 1997, the Company had 12 borrowed $119.9 million under the Credit Facility. At such date, the total unused availability under the Credit Facility was $80.1 million. The Company's ability to use the expansion facility is based upon a number of covenants, including the maintenance of specified debt to equity and fixed charge coverage ratios. At September 30, 1997 the Company was in compliance with the terms of these covenants. Effective May 13, 1997, the Company completed a public offering of 4,600,000 shares (including the underwriters' over-allotment option) at $16.50 per share. This resulted in net proceeds to the Company of approximately $70.1 million which were used to pay down a portion of the Company's Credit Facility. Effective October 27, 1997 the Company completed a public offering of 6,000,000 shares of common stock (3.5 million of the shares were issued and sold by the Company and 2.5 million of the shares were sold by certain selling stockholders) at $30.50 per share resulting in net proceeds to the Company of approximately $100.4 million. Additionally, the underwriters exercised their over-allotment option of 837,000 shares of common stock (825,000 shares were issued and sold by the Company and 12,000 shares were sold by certain selling stockholders) resulting in net proceeds to the Company of approximately $23.9 million on October 30, 1997. The Company used substantially all of the net proceeds from this offering and the underwriters' over-allotment option to repay the $60.0 million term loan and pay down indebtedness outstanding under the expansion facility. At November 14, 1997 the Company had borrowing capacity of $140.0 million remaining in the Credit Facility, with $122.6 million available under its $140.0 million expansion facility. The Company is in discussions to establish a significantly larger credit facility that would afford the Company greater financing flexibility and reduce borrowing costs. The Company intends to satisfy its interest obligations as well as future capital expenditures and working capital requirements, with cash flows from operations and borrowings under the Credit Facility. However, the Company may need to raise additional capital to fund the acquisition and integration of additional solid waste businesses. The Company may raise such funds through bank financings or public or private offerings of its securities. There can be no assurance that the Company will be able to secure such funding, if necessary, on favorable terms, if at all. If the Company is not successful in securing such funding, the Company's ability to pursue its business strategy may be impaired and results of operations for future periods may be adversely affected. The Company expects that Subtitle D and other regulations that apply to the non-hazardous waste disposal industry will require the Company, as well as others in the industry, to alter operations and to modify or replace existing facilities. Such expenditures have been and will continue to be substantial. Regulatory changes could accelerate expenditures for closure and post-closure monitoring and obligate the Company to spend sums in addition to those presently reserved for such purposes. The factors, together with the other factors discussed above, could substantially increase the Company's operating costs. INFLATION AND PREVAILING ECONOMIC CONDITIONS To date, inflation has not had a significant impact on the Company's operations. Consistent with industry practice, most of the Company's contracts provide for a pass through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs. The Company therefore believes it should be able to implement price increases sufficient to offset most cost increases resulting from inflation. However, competitive factors may require the Company to absorb at least a portion of these cost increases, particularly during periods of high inflation. The Company is unable to determine the future impact of a sustained economic slowdown. SEASONALITY The Company's revenues tend to be somewhat lower in the winter months. This is primarily attributable to the fact that: (i) the volume of waste relating to construction and demolition activities tends to increase in the spring and summer months; and (ii) the volume of industrial and residential waste in the regions where the Company operates tends to decrease during the winter months. In addition, particularly harsh weather conditions may delay the development of landfill capacity and otherwise result in the temporary suspension of certain of the Company's operations and could materially adversely affect the Company's overall business, financial condition and results of operations. 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Financial Data Schedule (filed electronically only). b. Reports on Form 8-K: The Company filed a Form 8-K dated September 10, 1997 (Items 2 and 7). The following financial statements were incorporated by reference into such Form 8-K: Unaudited Pro Forma Consolidated Financial Statements Pro Forma Condensed Consolidated Balance Sheet at June 30, 1997 (Unaudited) Pro Forma Consolidated Income Statement for the year ended December 31, 1996 (Unaudited) Pro Forma Consolidated Income Statement for the six months ended June 30, 1997 (Unaudited) Fred B. Barbara Companies Combined Balance Sheets at June 30, 1997 and at December 31, 1996 and 1995 Combined Statements of Income for the six months ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994 Combined Statements of Stockholders' Equity for the six months ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994 Combined Statements of Cash Flows for the six months ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994 14 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 hereunto duly authorized. AMERICAN DISPOSAL SERVICES, INC. Date: November 14, 1997 /s/ Stephen P. Lavey --------------------- Stephen P. Lavey Vice President and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 9,781 0 21,076 0 655 32,783 156,258 0 337,424 32,478 122,301 0 0 169,674 0 337,424 0 81,647 0 44,414 0 0 5,198 6,185 1,988 4,197 0 0 0 4,197 0.34 0
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