-----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, HE1JQBMDz6yn+iHwnGCgfQsoRKsvgL5fG5DDmP3CQNeZQeexO3sSYXI/K161F+YO Tk/Xh6l61a+HXafwFJYiaQ== 0000912057-97-011612.txt : 19970402 0000912057-97-011612.hdr.sgml : 19970402 ACCESSION NUMBER: 0000912057-97-011612 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN DISPOSAL SERVICES INC CENTRAL INDEX KEY: 0000881655 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 133858494 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24103 FILM NUMBER: 97573000 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 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1997 REGISTRATION NO. 333-24103 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERICAN DISPOSAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 4953 13-3858494 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
------------------------ 745 MCCLINTOCK DRIVE SUITE 305 BURR RIDGE, ILLINOIS 60521 (630) 655-1105 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ ANN L. STRAW, ESQ. AMERICAN DISPOSAL SERVICES, INC. 745 MCCLINTOCK DRIVE SUITE 305 BURR RIDGE, ILLINOIS 60521 (630) 655-1105 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF COMMUNICATIONS TO: STEPHEN W. RUBIN, ESQ. HOWARD L. SHECTER, ESQ. PROSKAUER ROSE GOETZ & MENDELSOHN LLP MORGAN, LEWIS & BOCKIUS LLP 1585 BROADWAY 101 PARK AVENUE NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10178 (212) 969-3000 (212) 309-6000
------------------------ Approximate date of commencement of proposed sale of securities to the public: As soon as possible after the Registration Statement becomes effective. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN DISPOSAL SERVICES, INC. CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ---------------------------------------------------------------------- ------------------------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................................... Facing Page of Registration Statement; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.... Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.............................................. Prospectus Summary; Risk Factors; The Company 4. Use of Proceeds............................................ Use of Proceeds 5. Determination of Offering Price............................ Underwriting 6. Dilution................................................... Not applicable 7. Selling Security Holders................................... Not applicable 8. Plan of Distribution....................................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered................. Description of Capital Stock 10. Interest of Named Experts and Counsel...................... Not applicable 11. Information With Respect to the Registrant
(a) Description of Business.................... Prospectus Summary; Business; Management's Discussion and Analysis of Financial Condition and Results of Operations (b) Description of Property.................... Business (c) Legal Proceedings.......................... Business (d) Dividends and Related Stockholder Matters.................................... Risk Factors; Capitalization; Dividend Policy; Description of Capital Stock (e) Financial Statements....................... Consolidated Financial Statements; Unaudited Pro Forma Consolidated Financial Statements; Financial Statements of Waste Management, Inc. Evansville, Indiana Operations; Financial Statements of Liberty Disposal, Inc. (f) Selected Financial Data.................... Prospectus Summary; Unaudited Pro Forma Consolidated Financial Statements; Selected Consolidated Financial Data (g) Supplementary Financial Information........ Not applicable (h) Management's Discussion and Analysis of Financial Condition and Results of Operations................................. Management's Discussion and Analysis of Financial Condition and Results of Operations (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. Experts (j) Directors and Executive Officers........... Management (k) Executive Compensation..................... Management (l) Security Ownership of Certain Beneficial Owners and Management...................... Principal Stockholders; Shares Eligible for Future Sale (m) Certain Relationships and Related Transactions............................... Certain Transactions
12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................... Not applicable
SUBJECT TO COMPLETION, DATED , 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 3,500,000 SHARES [LOGO] COMMON STOCK -------------- All of the shares of Common Stock offered hereby are being issued and sold by American Disposal Services, Inc. (the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ADSI." On March 31, 1997, the last sale price of the Common Stock as reported by the Nasdaq National Market was $17.75 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share................................ $ $ $ Total(3)................................. $ $ $
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other information. (2) Before deducting expenses of the offering payable by the Company estimated at $ . (3) The Underwriters have been granted an option, exercisable within 30 days from the date hereof, to purchase up to 525,000 additional shares of Common Stock, at the Price to Public per share, less the Underwriting Discount, for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------- The shares of Common Stock are offered by the Underwriters when, as and if delivered to and accepted by them, subject to their right to withdraw, cancel or reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of the certificates representing the shares will be made against payment on or about , 1997, at the offices of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281. ------------------- OPPENHEIMER & CO., INC. CREDIT SUISSE FIRST BOSTON The date of this Prospectus is , 1997. [LOGO] ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, PENALTY BIDS AND PASSIVE MARKET MAKING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION, SHARE AND PER SHARE DATA IN THIS PROSPECTUS: (I) GIVE EFFECT TO AN EXCHANGE OF THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE ("COMMON STOCK"), IN CONNECTION WITH THE FORMATION OF A HOLDING COMPANY, EFFECTIVE AS OF JANUARY 1, 1996; (II) GIVE EFFECT TO A 13.5 FOR 1 STOCK SPLIT CONSUMMATED ON MAY 31, 1996; (III) EXCLUDE 1,366,868 SHARES OF COMMON STOCK OF THE COMPANY ISSUABLE UPON EXERCISE OF OUTSTANDING WARRANTS AND STOCK OPTIONS; AND (IV) ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. AS USED IN THIS PROSPECTUS, THE TERMS "COMPANY" AND "AMERICAN DISPOSAL SERVICES" REFER COLLECTIVELY TO AMERICAN DISPOSAL SERVICES, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. ------------------------ THE COMPANY American Disposal Services is a regional, integrated, non-hazardous solid waste services company that provides solid waste collection, transfer and disposal services primarily in the Midwest and in the Northeast. The Company owns six solid waste landfills and owns, operates or has exclusive contracts to receive waste from 12 transfer stations. The Company's landfills and transfer stations are supported by its collection operations, which currently serve over 150,000 residential, commercial and industrial customers. The Company has adopted an acquisition-based growth strategy and intends to continue its expansion, generally in its existing and proximate markets. Since January 1993, the Company has acquired 37 solid waste businesses, including five solid waste landfills and 32 solid waste collection companies. As part of its acquisition strategy, the Company has recently acquired the Evansville, Indiana operations of Waste Management of Indiana, LLC (the "Indiana Acquisition") and has entered into a definitive agreement to acquire substantially all of the assets of Liberty Disposal, Inc. in Rhode Island ("Liberty Disposal"). The Company began its operations in the Midwest and currently has operations in Arkansas, Illinois, Indiana, Kansas, Massachusetts, Missouri, Ohio, Oklahoma, Pennsylvania and Rhode Island. The Company's principal growth strategy is to identify and acquire solid waste landfills located in markets that are within approximately 125 miles of significant metropolitan centers and to secure dedicated waste streams for such landfills by acquisition or development of transfer stations and acquisition of collection companies. The Company expects the current consolidation trends in the solid waste industry to continue as many independent landfill and collection operators lack the capital resources, management skills and technical expertise necessary to operate in compliance with increasingly stringent environmental and other governmental regulations. Further, several of the national waste management companies have announced their intention to focus on their core markets and have recently begun to divest certain of their non-core solid waste assets, which should present the Company with additional acquisition opportunities, such as the Indiana Acquisition. Due in part to these trends, the Company believes that significant opportunities exist to expand and further integrate its operations in each of its existing markets. As part of the Indiana Acquisition, the Company acquired a landfill, two collection companies, an exclusive transfer station contract and a permit to develop a new transfer station, all located in the southwestern Indiana region. The Indiana Acquisition provided the Company with the opportunity to enter the southwestern Indiana region and to secure a significant market share position in that region through the acquisition of a single, fully integrated solid waste management operation. The Liberty Disposal acquisition (the "Pending Acquisition") involves the purchase by the Company of substantially all of the assets of Liberty Disposal. The Company believes that Liberty Disposal, which operates 25 routes and offers commercial, residential and industrial waste collection and recycling services, is on a revenue basis the largest privately owned waste collection company in Rhode Island. In addition, the Company believes that the Pending Acquisition will nearly double the Company's revenue base in the 3 Rhode Island region, will result in the Company owning and operating one of the three largest collection companies in Rhode Island and will position the Company to expand further its market share in the region and the contiguous markets. The Company's operating program generally involves a four-step process: (i) acquiring solid waste landfills in its target markets; (ii) securing captive waste streams for its landfills through the acquisition or development of transfer stations serving those markets, through acquisitions of collection companies and by entering into long-term contracts directly with customers or collection companies; (iii) making "tuck-in" acquisitions of collection companies to further penetrate its target markets; and (iv) integrating these businesses into the Company's operations to achieve operating efficiencies and economies of scale. As part of its acquisition program, the Company has, and in the future may, as specific opportunities arise, evaluate and pursue acquisitions in the solid waste collection and disposal industry that do not strictly conform to the Company's four-step operating program. The implementation of the Company's operating program is substantially complete in its Missouri and Ohio regions. In the Missouri region (which also includes Arkansas, Kansas and Oklahoma), the Company has acquired one landfill and 15 collection companies and has acquired, developed or secured exclusive contracts with five transfer stations. In the Ohio region, the Company has completed the acquisition of one landfill and 11 collection companies and has acquired, developed or secured exclusive contracts with four transfer stations. The Company is in the second phase of its operating program in its Illinois, western Pennsylvania and Rhode Island regions, as well as in the southwestern Indiana region, where the Company began its operations in 1997. The Company's operating strategy emphasizes the integration of its solid waste collection and disposal operations and the internalization of waste collected. One of the Company's goals is for its captive waste streams (which include the Company's collection operations and third-party haulers operating under long-term collection contracts) to provide in excess of 50% of the volume of solid waste disposed of at each of its landfills. During the year ended December 31, 1996, the Company's captive waste constituted an average of approximately 61% of the solid waste disposed of at its landfills. The Company plans to continue to pursue its acquisition-based growth strategy to increase the internalization of waste collected and expand its presence in its existing and proximate markets. THE OFFERING
Common Stock offered......................... 3,500,000 shares Common Stock outstanding after the Offering................................... 12,372,501 shares(1) Use of proceeds.............................. To repay indebtedness, to fund the Pending Acquisition and related costs, for possible future acquisitions and for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................ ADSI
- ------------------------ (1) Does not include 1,366,868 shares of Common Stock issuable upon the exercise of warrants and stock options outstanding as of March 31, 1997. 4 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
YEARS ENDED DECEMBER 31, PRO FORMA YEAR ENDED ------------------------------- DECEMBER 31, 1994 1995 1996 1996(1) --------- --------- --------- --------------------- STATEMENT OF OPERATIONS DATA: Revenues.................................................. $ 18,517 $ 30,004 $ 56,804 $76,792 Cost of operations........................................ 12,647 17,286 30,376 41,518 Selling, general and administrative expenses.............. 4,910 5,882 8,328 10,438 Depreciation and amortization expense..................... 3,226 6,308 12,334 15,261 --------- --------- --------- ----------- Operating income (loss)................................... (2,266) 528 5,766 9,575 Interest expense.......................................... (1,497) (3,030) (5,745) (4,821) Interest income........................................... 2 189 260 260 Other income, net......................................... -- -- 179 179 --------- --------- --------- ----------- Income (loss) before income taxes and extraordinary item.................................................... (3,761) (2,313) 460 5,193 Income tax benefit (expense).............................. 1,372 (332) (245) (1,669) --------- --------- --------- ----------- Income (loss) before extraordinary item................... (2,389) (2,645) 215 $3,524 ----------- ----------- Extraordinary item -- loss on early retirement of debt.... -- (908) (476) --------- --------- --------- Net income (loss)......................................... (2,389) (3,553) (261) Preferred stock dividend.................................. -- (190) (109) --------- --------- --------- Net income (loss) to common stockholders.................. $ (2,389) $ (3,743) $ (370) --------- --------- --------- --------- --------- --------- Pro forma net income per share of common stock............ $ 0.32 ----------- ----------- Pro forma weighted average common stock and common stock equivalent shares used to calculate pro forma net income per share............................................... 11,118,854 ----------- ----------- OTHER DATA: EBITDA(2)................................................. $ 960 $ 6,836 $ 18,100 $24,836 EBITDA margin(3).......................................... 5.2% 22.8% 31.9% 32.3%
DECEMBER 31, 1996 ------------------------- ACTUAL AS ADJUSTED(4) --------- -------------- BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 2,301 $ 2,301 Working capital........................................................................ 1,219 2,154 Property and equipment, net............................................................ 93,692 117,117 Total assets........................................................................... 144,986 189,669 Long-term obligations, net of current portion.......................................... 65,445 54,554 Total stockholders' equity............................................................. 58,097 112,527
- ------------------------ (1) The pro forma information for the year ended December 31, 1996 gives effect to the Indiana Acquisition, the Pending Acquisition, the Offering and the application of the estimated proceeds therefrom, as described in "Use of Proceeds," as if each of the foregoing had occurred or been in effect on January 1, 1996. (2) EBITDA represents operating income plus depreciation and amortization. While EBITDA data should not be construed as a substitute for operating income, net income (loss) or cash flows from operations in analyzing the Company's operating performance, financial position and cash flows, the Company has included EBITDA data (which are not a measure of financial performance under generally accepted accounting principles) because it understands that such data are commonly used by certain investors to evaluate a company's performance in the solid waste industry. (3) EBITDA margin represents EBITDA expressed as a percentage of revenues. (4) Adjusted to give effect to the events described in (1) above as if each of the foregoing had occurred on December 31, 1996. 5 RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. IN ADDITION, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS--INTRODUCTION," "BUSINESS--INDUSTRY BACKGROUND," "BUSINESS--STRATEGY," "BUSINESS--ACQUISITION PROGRAM," "BUSINESS--COMPLETED ACQUISITIONS" "BUSINESS-- OPERATIONS" AND "BUSINESS--ENVIRONMENTAL REGULATIONS," AS WELL AS IN THE PROSPECTUS GENERALLY. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. ABILITY TO MANAGE GROWTH The Company's goal is to increase the scale of its operations significantly through the acquisition of other solid waste businesses and through internal growth. Consequently, the Company may experience periods of rapid growth with significantly increased staffing level requirements. Such growth could place a significant strain on the Company's management and on its operational, financial and other resources. The Company's ability to maintain and manage its growth effectively will require it to develop its management information systems capabilities and improve its operational and financial systems and controls. Moreover, the Company will need to attract, train, motivate, retain and manage its senior managers, technical professionals and other employees. Any failure to expand its management information system capabilities, to implement and improve its operational and financial systems and controls or to recruit appropriate additional personnel in an efficient manner at a pace consistent with the Company's business growth would have a material adverse effect on the Company's business, financial condition and results of operations. AVAILABILITY OF ADDITIONAL ACQUISITION TARGETS; INTEGRATION OF FUTURE ACQUISITIONS The Company's ongoing acquisition program is a key element of its acquisition-based growth strategy for expanding its solid waste management services. Consequently, the future growth of the Company depends in large part upon the successful continuation of this acquisition program. The Company may encounter substantial competition in its efforts to acquire landfills, transfer stations and collection companies. There can be no assurance that the Company will succeed in locating or acquiring appropriate acquisition candidates at price levels and on terms and conditions that the Company considers appropriate. In addition, if in the future the Company is successful in acquiring targeted companies, it will need to integrate these acquired companies into the Company's operations. There can be no assurance that the Company will successfully integrate future acquisitions into its operations, including the Indiana Acquisition and the Pending Acquisition. See "Business--Strategy," "--Acquisition Program" and "--Competition." HISTORY OF LOSSES AND WORKING CAPITAL DEFICITS; INTEGRATION OF COMPLETED ACQUISITIONS The Company has recorded net losses to common stockholders of approximately $2.4 million, $3.7 million and $370,000 during the fiscal years ended December 31, 1994, 1995 and 1996, respectively, and has had working capital deficits in the past. See "--Funding of Future Capital Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Introduction." The financial position and results of operations of the Company will depend to a large extent on the Company's ability to integrate effectively the operations of the 37 companies it has acquired from January 1993 to date and to realize expected efficiencies and economies of scale from such acquisitions. There can be no assurance that the Company's efforts to integrate these operations will be effective, that expected efficiencies and economies of scale will be realized or that the Company will be able to consolidate 6 successfully its operations. The failure to achieve any of these results could have a material adverse effect on the Company's business, financial condition and results of operations. SIGNIFICANT LEVERAGE Historically, the Company has incurred significant debt obligations in connection with financing its acquisitions and business growth. The Company has a $125 million revolving credit and term loan facility with ING (U.S.) Capital Corporation, as administrative agent, and Morgan Guaranty Trust Company of New York, as documentation agent (the "Credit Facility"). As of December 31, 1996, the Company's consolidated indebtedness was $68.0 million, its consolidated total assets were $145.0 million and its stockholders' equity was $58.1 million. The Company's ability to meet its debt service obligations will depend upon its future performance, which, in turn, will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond the Company's control. If the Company fails to generate sufficient cash flow to repay its debt, the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that such refinancing or any additional financing could be obtained on terms favorable to the Company or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company is currently in discussions to establish a significantly larger credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company intends to use all of the net proceeds of the Offering to repay outstanding amounts under the expansion facility under the Credit Facility and to fund the Pending Acquisition and related costs. However, closing of the Pending Acquisition may not occur or may be delayed until the conditions to closing are satisfied. There can be no assurance that the conditions to closing will be fulfilled and that the Company will consummate the Pending Acquisition. In addition, the net proceeds of the Offering may exceed the outstanding amounts under the expansion facility under the Credit Facility and the purchase price for the Pending Acquisition. The Company anticipates that any net proceeds not used to repay such indebtedness or to fund the Pending Acquisition will be used for working capital and general corporate purposes. The Company's management will have complete discretion to allocate the balance of the net proceeds from the Offering among acquisitions, working capital and general corporate purposes. See "Use of Proceeds." HIGHLY COMPETITIVE INDUSTRY The solid waste collection and disposal business is highly competitive and requires substantial amounts of capital. The Company competes with numerous solid waste management companies, many of which are significantly larger and have greater financial resources than the Company. The Company also competes with those counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. These counties, municipalities and solid waste districts may have financial advantages due to the availability to them of user fees, charges or tax revenues and the greater availability to them of tax-exempt financing. In addition, competitors may reduce the price of their services in an effort to expand market share or to win competitively bid municipal contracts. There can be no assurance that the Company will be able to compete successfully. See "Business--Competition." FUNDING OF FUTURE CAPITAL REQUIREMENTS The Company's acquisition-based growth strategy has resulted in a steady increase in its capital requirements, and such increase may continue in the future as the Company pursues its strategy. The Company has incurred working capital deficits in the past, and there can be no assurance that its available working capital will be sufficient in the future as it pursues its growth strategy. To the extent that internally generated cash, the cash available to the Company from the net proceeds of the Offering and cash 7 available under the Credit Facility are not sufficient to provide the cash required for future operations, capital expenditures, acquisitions, debt repayment obligations and financial assurance obligations, the Company will require additional equity or debt financing in order to provide such cash. There can be no assurance, however, that such financing will be available or, if available, will be on terms satisfactory to the Company. Where appropriate, the Company may seek to minimize the use of cash to finance its acquisitions by using capital stock, assumption of indebtedness or notes. However, there can be no assurance the owners of the businesses the Company may wish to acquire will be willing to accept non-cash consideration in whole or in part. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Acquisition Program." DEPENDENCE ON THIRD PARTY COLLECTION OPERATIONS A portion of the solid waste delivered to the Company's landfills is delivered by third party collection companies under informal arrangements or without long-term contracts. If these third parties discontinued their arrangements with the Company and if the Company were unable to replace these third party arrangements without incurring significant additional costs, the Company's business, financial condition and results of operations might be materially adversely affected. LIMITATIONS ON INTERNAL EXPANSION The Company's operating program depends on its ability to expand and develop its landfills, transfer stations and collection operations. The process of obtaining required permits and approvals to operate or expand solid waste management facilities, including landfills and transfer stations, has become increasingly difficult and expensive, often taking several years, requiring numerous hearings and compliance with zoning, environmental and other regulatory requirements, and often being subject to resistance from citizen or other groups. There can be no assurance that the Company will be successful in obtaining the permits it requires or that such permits will not contain onerous terms and conditions. An inability to receive such permits and approvals could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Extensive Environmental and Land Use Laws and Regulations." In some areas, suitable land may be unavailable for new landfill sites. There can be no assurance that the Company will be successful in obtaining new landfill sites or expanding the permitted capacity of its current landfills once its landfill capacity has been consumed. In such event, the Company could be forced to dispose of collected waste at landfills operated by its competitors, which could have a material adverse effect on the Company's landfill revenues and collection expenses. See "Business-- Operations--Landfills." EXTENSIVE ENVIRONMENTAL AND LAND USE LAWS AND REGULATIONS The Company is subject to extensive and evolving environmental and land use laws and regulations, which have become increasingly stringent in recent years as a result of greater public interest in protecting and cleaning up the environment. These laws and regulations affect the Company's business in many ways, including as set forth below. See "Business--Environmental Regulations" for further information concerning the matters set forth below. EXTENSIVE PERMITTING REQUIREMENTS. In order to develop and operate a landfill or other solid waste management facility, it is necessary to obtain and maintain in effect one or more facility permits and other governmental approvals, including those related to zoning, environmental and land use. In addition, the Company may be required to obtain similar permits and approvals in order to expand its existing landfill and solid waste management operations. These permits and approvals are difficult and time consuming to obtain and are frequently subject to community opposition, opposition by various local elected officials or citizens and other uncertainties. In addition, after an operating permit for a landfill or other facility is obtained, the permit may be subject to modification or revocation by the issuing agency, and it may be necessary to obtain periodically a renewal of the permit, which may reopen opportunities for opposition to 8 the permit. Moreover, from time to time, regulatory agencies may delay the review or grant of these required permits or approvals or may modify the procedures or increase the stringency of the standards applicable to its review or grant of such permits or approvals. In addition, the Company may not be able to ensure that its landfill operations are included and remain in the solid waste management plan of the state or county in which such operations are conducted. The Company may also have difficulty obtaining host agreements with counties or local communities, or existing host communities may demand modifications of existing host agreements in connection with planned expansions, either of which could adversely affect the Company's operations and increase the Company's costs and reduce its margins. There can be no assurance that the Company will be successful in obtaining and maintaining in effect the permits and approvals required for the successful operation and growth of its business, including permits or approvals required for planned landfill expansions, and the failure by the Company to obtain or maintain in effect a permit significant to its business could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DESIGN, OPERATION AND CLOSURE REQUIREMENTS. The design, operation and closure of landfills are subject to extensive regulations. These regulations include, among others, the regulations (the "Subtitle D Regulations") establishing minimum federal requirements adopted by the United States Environmental Protection Agency (the "EPA") in October 1991 under Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA"). The Subtitle D Regulations generally became effective on October 9, 1993 (except for new financial assurance requirements, which are scheduled to become effective April 9, 1997). The Subtitle D Regulations require all states to adopt regulations regarding landfill design, operation and closure requirements that are as stringent as, or more stringent than, the Subtitle D Regulations. All states in which the Company's landfills are located have in place extensive landfill regulations consistent with the Subtitle D requirements. These federal and state regulations require the Company to design the landfill in accordance with stringent technical requirements, monitor groundwater, post financial assurances, and fulfill landfill closure and post-closure obligations. These regulations could also require the Company to undertake investigatory, remedial and monitoring activities, to curtail operations or to close a landfill temporarily or permanently. Furthermore, future changes in these regulations may require the Company to modify, supplement, or replace equipment or facilities at costs which may be substantial. LEGAL AND ADMINISTRATIVE PROCEEDINGS. In the ordinary course of its business, the Company may become involved in a variety of legal and administrative proceedings relating to land use and environmental laws and regulations. These may include proceedings by federal, state or local agencies seeking to impose civil or criminal penalties on the Company for violations of such laws and regulations, or to impose liability on the Company under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") or comparable state statutes, or to revoke or deny renewal of a permit; actions brought by citizens' groups, adjacent landowners or governmental entities opposing the issuance of a permit or approval to the Company or alleging violations of the permits pursuant to which the Company operates or laws or regulations to which the Company is subject; and actions seeking to impose liability on the Company for any environmental damage at its landfill sites or that its landfills or other properties may have caused to adjacent landowners or others, or at sites to which it transported waste, including groundwater or soil contamination. The Company could incur substantial legal expenses during the course of the aforementioned proceedings, and the adverse outcome of one or more of these proceedings could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Legal Proceedings." During the ordinary course of its operations, the Company has from time to time received, and expects that it may in the future receive, citations or notices from governmental authorities that its operations are not in compliance with its permits or certain applicable environmental or land use laws and regulations. The Company generally seeks to work with the authorities to resolve the issues raised by such 9 citations or notices. There can be no assurance, however, that the Company will always be successful in this regard, and the failure to resolve a significant issue could result in one or more of the adverse consequences to the Company described below under "Potential Liabilities." POTENTIAL LIABILITIES. There may be various adverse consequences to the Company in the event that a facility owned or operated by the Company (or a predecessor owner or operator whose liabilities the Company may have acquired expressly or under successor liability theories) causes environmental damage, in the event that waste transported by the Company (or a predecessor) causes environmental damage at another site, in the event that the Company fails (or a predecessor failed) to comply with applicable environmental and land use laws and regulations or the terms of a permit or outstanding consent order or in the event the Company's owned or operated facility or the soil or groundwater thereunder is or becomes contaminated. These may include the imposition of substantial monetary penalties on the Company; the issuance of an order requiring the curtailment or termination of the operations involved or affected; the revocation or denial of permits or other approvals necessary for continued operation or landfill expansion; the imposition of liability on the Company in respect of any environmental damage (including groundwater or soil contamination) at its landfill sites or that its landfills or other facilities or other Company-owned or operated facilities caused to adjacent landowners or others or environmental damage at another site associated with waste transported by the Company; the imposition of liability on the Company under CERCLA or under comparable state laws; and criminal liability for the Company or its officers. Any of the foregoing could materially adversely affect the Company's business, financial condition and results of operations. As described under "Business--Environmental Regulations," CERCLA and analogous state laws impose retroactive strict joint and several liability on various parties that are, or have been, associated with a site from which there has been, or is threatened, a release of any hazardous substance (as defined by CERCLA) into the environment. Liability under RCRA, CERCLA and analogous state laws may include responsibility for costs of site investigations, site cleanup, site monitoring, natural resources damages and property damages. Liabilities under RCRA, CERCLA and analogous state laws can be very substantial and, if imposed upon the Company, could materially adversely affect the Company's business, financial condition and results of operations. In the ordinary course of its landfill and waste management operations and in connection with its review of landfill and other operations to be acquired, the Company has discovered at one landfill, and may in the future discover at other landfills or waste management facilities, indications of groundwater contamination. In such events, the Company would seek or be required to determine the magnitude and source of the problem and, if appropriate or required by applicable regulations, to design and implement measures to remedy, or halt the spread of, the contamination. There can be no assurance, however, that contamination discovered at a landfill or at other Company sites will not result in one or more of the adverse consequences to the Company described above. TYPE, QUANTITY AND SOURCE LIMITATIONS. Certain permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, certain permits and approvals, as well as certain state and local regulations, may limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states, under certain circumstances, to reduce the amounts of waste exported to other states. Although such legislation has not yet been adopted by Congress, if this or similar legislation is enacted, states in which the Company operates landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could materially adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state. 10 In addition, certain states and localities may for economic or other reasons restrict the exportation of waste from their jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the United States Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on taking waste out of the locality. However, certain state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, the Company may elect not to challenge such restrictions based upon various considerations. In addition, the aforementioned proposed federal legislation, if adopted, could allow states and localities to impose certain flow control restrictions. These restrictions could result in the volume of waste going to landfills being reduced in certain areas, which may materially adversely affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, the Company's business, financial condition and results of operations could be materially adversely affected. LIMITED OPERATING HISTORY Following the Exchange (as defined in "The Company"), the Company began operating as a consolidated entity effective as of January 1, 1996. Prior to 1996, the Company's operations were conducted by ADS, Inc. ("ADS") and County Disposal, Inc. ("CDI"), two subsidiaries of the Company, the operations of which were acquired by the Company's stockholders in 1993 and 1995, respectively. Accordingly, the Company has a limited history of operating as a consolidated entity and may experience difficulties as it integrates the operations of its subsidiaries. POTENTIAL LIABILITIES ASSOCIATED WITH ACQUISITIONS The businesses acquired by the Company may have liabilities that the Company did not discover or may have been unable to discover during its pre-acquisition investigations, including liabilities arising from environmental contamination or non-compliance by prior owners with environmental laws or regulatory requirements, and for which the Company, as a successor owner or operator, may be responsible. Any indemnities or warranties, due to their limited scope, amount, or duration, the financial limitations of the indemnitor or warrantor or other reasons, may not fully cover such liabilities. DEPENDENCE ON SENIOR MANAGEMENT The Company is highly dependent on its senior management team. The loss of the services of any member of senior management may have a material adverse effect on the Company's business, financial condition and results of operations. In an effort to minimize this risk, the Company has entered into employment contracts with certain members of senior management. The Company does not maintain "key man" life insurance with respect to members of senior management except for a $2.0 million policy maintained on the Company's President. LIMITS ON INSURANCE COVERAGE There can be no assurance that the Company's pollution liability insurance will provide sufficient coverage in the event an environmental claim were made against the Company or that the Company will be able to maintain in place such insurance at reasonable costs. An uninsured or underinsured claim of sufficient magnitude could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Liability Insurance and Bonding." INCURRENCE OF CHARGES RELATED TO CAPITALIZED EXPENDITURES In accordance with generally accepted accounting principles, the Company capitalizes certain expenditures and advances relating to acquisitions, pending acquisitions and landfill development and expansion projects. Indirect acquisition costs, such as executive salaries, general corporate overhead, public affairs 11 and other corporate services, are expensed as incurred. The Company's policy is to charge against earnings any unamortized capitalized expenditures and advances (net of any portion thereof that the Company estimates will be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any pending acquisition that is not consummated, and any landfill development or expansion project that is not or not expected to be successfully completed. Therefore, the Company may be required to incur a charge against earnings in future periods, which charge, depending upon the magnitude thereof, could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of capitalized expenditures in connection with certain operations and projects. USE OF ALTERNATIVES TO LANDFILL DISPOSAL Alternatives to landfill disposal, such as recycling and composting, are increasingly being used. In addition, incineration is an alternative to landfill disposal in certain of the Company's markets. There also has been an increasing trend at the state and local levels to mandate recycling and waste reduction at the source and to prohibit the disposal of certain type of wastes, such as yard wastes, at landfills. These developments may result in the volume of waste going to landfills being reduced in certain areas, which may affect the Company's ability to operate its landfills at their full capacity or affect the prices that can be charged for landfill disposal services. For example, Illinois, Ohio and Pennsylvania, states in which the Company operates landfills, have adopted bans on the disposal of yard waste or leaves in landfills located in those states, and all of the states in which the Company operates landfills have adopted rules restricting or limiting disposal of tires at landfills. In addition, each of the states in which the Company operates landfills has adopted plans or requirements which set goals for specified percentages of certain solid waste items to be recycled. These recycling goals are being phased in over the next few years. These alternatives, if and when adopted and implemented, may have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Environmental Regulations--State and Local Regulations." ABILITY TO MEET FINANCIAL ASSURANCE OBLIGATIONS The Company is required to post a performance bond or a bank letter of credit or to provide other forms of financial assurance in connection with closure and post-closure obligations with respect to landfills or its other solid waste management operations and may be required to provide such financial assurance in connection with municipal residential collection contracts. As of December 31, 1996, the Company had outstanding approximately $15.7 million of performance bonds. If the Company were unable to obtain surety bonds in sufficient amounts, or to provide other required forms of financial assurance, it would be unable to remain in compliance with the Subtitle D Regulations or comparable state requirements and, among other things, might be precluded from entering into certain municipal collection contracts and obtaining or holding landfill operating permits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business-- Liability Insurance and Bonding." 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. 12 CONTROL BY EXISTING STOCKHOLDERS Immediately following the Offering, the Company's principal stockholders (Charterhouse Equity Partners, L.P., Charterhouse Equity Partners II, L.P. and CDI Equity, LLC) will beneficially own approximately 40.6% of the outstanding shares of the Company's Common Stock. See "Principal Stockholders." As a result, such persons will have the ability to exercise significant influence over all matters requiring stockholder approval, such as the election of directors, mergers and acquisitions. Such a high level of ownership by such persons and entities may have a significant effect in delaying, deferring or preventing a change in control of the Company. ANTI-TAKEOVER PROVISIONS The Board of Directors may issue up to 5,000,000 shares of Preferred Stock in the future without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying or preventing a change in control of the Company without further action by the stockholders. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock-- Undesignated Preferred Stock." In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE Sale of substantial amounts of shares in the public market or the prospect of such sales could adversely affect the market price of the Company's Common Stock. Upon completion of the Offering, the Company will have outstanding 12,372,501 shares of Common Stock, of which 6,662,500 shares will be freely tradeable. The Company's officers and directors and Charterhouse Equity Partners, L.P., Charterhouse Equity Partners II, L.P. and CDI Equity, LLC who beneficially own an aggregate of 5,443,081 shares of Common Stock or options or warrants to purchase shares of Common Stock, have agreed not to sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber or exercise registration rights with respect to such securities for 180 days after the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc. In its sole discretion and at any time without notice, Oppenheimer & Co., Inc. may release all or any portion of the shares subject to lock-up agreements. In addition, following 180 days after the Offering, the holders of 5,023,371 shares of Common Stock and warrants to purchase 168,905 shares of Common Stock have demand and "piggy-back" rights with respect to the registration of such shares of Common Stock for sale to the public. If such holders, by exercising their registration rights, cause a large number of shares to be sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. Furthermore, if the Company is required to include such shares in Company-initiated registration statements, this could have an adverse effect on the Company's ability to raise needed capital. See "Shares Eligible for Future Sale" and "Underwriting." As of March 31, 1997, there were outstanding options to purchase a total of 1,197,963 shares of Common Stock and warrants to purchase a total of 168,905 shares of Common Stock. See "Management--1996 Stock Option Plan." ABSENCE OF DIVIDENDS The Company has never declared or paid dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. See "Dividend Policy." 13 THE COMPANY American Disposal Services, Inc. was incorporated in the State of Delaware in November 1995. The Company is the sole stockholder of ADS, an Oklahoma corporation that was formed in January 1991, and CDI, a Delaware corporation that was formed in April 1995. The Company acquired all the shares of the common stock of ADS and CDI, effective as of January 1, 1996, in exchange for which the previous stockholders of ADS and CDI received shares of the Company's Common Stock (the "Exchange"). As part of the Exchange, all options and warrants that had previously been granted by ADS and CDI were cancelled in exchange for options and warrants granted by the Company. In addition, effective as of May 31, 1996, the Company completed a 13.5-for-1 stock split of the Company's Common Stock (the "Stock Split"; together with the Exchange, the "Restructuring"). In January 1993, affiliates of Charterhouse Group International, Inc. ("Charterhouse") acquired a majority interest in ADS, the primary asset of which was the Pittsburg County landfill near McAlester, Oklahoma. In connection with the Charterhouse investment, ADS recruited the Company's President in January 1993, and assembled the balance of the Company's senior management team from 1993 to the present. As a result of the management team's substantial experience in the solid waste industry and the financial expertise and capital provided by Charterhouse, the Company was able to finance its acquisition-based growth strategy, which from the outset focused primarily on the identification and acquisition of solid waste landfills located in secondary markets. Using this strategy, CDI acquired three landfills in Illinois, Ohio and western Pennsylvania in 1995 (the "CDI Acquisition"). Since January 1993, the Company has acquired 37 solid waste businesses, including five solid waste landfills and 32 solid waste collection companies. As part of its acquisition-based growth strategy, the Company has recently consummated the Indiana Acquisition and has entered into a definitive agreement to acquire substantially all of the assets of Liberty Disposal. The Indiana Acquisition offers the Company the opportunity to enter a new market while the Pending Acquisition will significantly enhance the Company's market share in the Rhode Island region. The Company's principal executive offices are located at 745 McClintock Drive, Suite 305, Burr Ridge, Illinois 60521, and its telephone number is (630) 655-1105. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be $ million ($ million if the Underwriters' over-allotment option is exercised in full). The Company intends to apply the net proceeds of the Offering to repay amounts outstanding under the expansion facility under the Credit Facility and to fund the Pending Acquisition. The net proceeds of the Offering that have not been applied to repay amounts outstanding under the expansion facility under the Credit Facility and to fund the Pending Acquisition will be available for possible future acquisitions and for working capital and general corporate purposes. The expansion facility bears interest at a base rate plus 0.75% or at a rate of LIBOR plus 2.50% per annum and has a maturity date of June 30, 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Risk Factors--Discretion of Management to Allocate Offering Proceeds." While the Company has entered into letters of intent for certain proposed acquisitions other than the Pending Acquisition, these proposed transactions are not material to the Company's business. 14 PRICE RANGE OF COMMON STOCK The Common Stock of the Company has been quoted on the Nasdaq National Market under the symbol ("ADSI") since July 26, 1996, the date of the commencement of the Company's initial public offering. The following table sets forth, for the periods indicated, the high and low closing prices of the Common Stock as reported on the Nasdaq National Market:
HIGH LOW ------- ------- 1996 3rd Quarter......... $18.25 $9.00 4th Quarter......... $18.50 $15.50 1997 1st Quarter......... $18.00 $16.50
On March 31, 1997, the last reported sales price of the Common Stock was $17.75 per share and there were approximately 65 registered holders of the Common Stock. DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock, and neither ADS nor CDI has declared or paid any dividends on its common stock. The Company and its Board of Directors currently intend to retain any earnings for use in the operation and expansion of the Company's business and do not anticipate paying any dividends on the Common Stock for the foreseeable future. The Credit Facility prohibits the payment of cash dividends without prior bank approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 15 CAPITALIZATION The following table sets forth: (i) the current portion of long-term obligations and the actual capitalization of the Company at December 31, 1996; and (ii) the capitalization of the Company at December 31, 1996 as adjusted to reflect the sale of 3,500,000 shares of Common Stock offered hereby and the application of the estimated net proceeds of the Offering to repay amounts outstanding under the expansion facility under the Credit Facility and to fund the Pending Acquisition and related costs. See "Use of Proceeds."
DECEMBER 31, 1996 ---------------------- AS ACTUAL ADJUSTED ---------- ---------- (IN THOUSANDS) Current portion of long-term obligations.................................................. $ 2,572 $ 2,572 ---------- ---------- ---------- ---------- Long-term obligations..................................................................... $ 65,445 $ 54,554 Stockholders' equity (1): Preferred stock: 5,000,000 shares authorized; no shares issued or outstanding........... -- -- Common stock: 20,000,000 shares authorized; 8,872,381 shares issued and outstanding; 12,372,381 shares issued and outstanding as adjusted.................................. 89 124 Warrants outstanding.................................................................... 107 107 Additional paid-in capital.............................................................. 66,170 120,565 Accumulated deficit..................................................................... (8,269) (8,269) ---------- ---------- Total stockholders' equity............................................................ 58,097 112,527 ---------- ---------- Total capitalization................................................................ $ 123,542 $ 167,081 ---------- ---------- ---------- ----------
- ------------------------ (1) Excludes 525,000 additional shares of Common Stock that may be sold pursuant to the Underwriters' over-allotment option and 1,332,039 shares of Common Stock reserved for issuance pursuant to stock options and outstanding warrants. 16 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated statement of operations, balance sheet, other data and pro forma financial data of the Company for the periods presented. See "The Company" and the Notes to Consolidated Financial Statements and pro forma financial data included elsewhere herein for information concerning the basis of presentation. The following selected consolidated financial data as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 have been derived from the audited consolidated financial statements of the Company included elsewhere in this Prospectus and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma financial data as of and for the year ended December 31, 1996 has been derived from the pro forma consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 are derived from audited consolidated financial statements that are not included herein.
PRO FORMA YEARS ENDED DECEMBER 31, YEAR ENDED ---------------------------------------------------------- DECEMBER 31, 1992 1993 1994 1995 1996 1996(1) ---------- ---------- ---------- ---------- ---------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT) STATEMENT OF OPERATIONS DATA: Revenues........................................ $ 146 $ 7,730 $ 18,517 $ 30,004 $ 56,804 $ 76,792 Cost of operations.............................. 249 5,750 12,647 17,286 30,376 41,518 Selling, general and administrative expenses.... 625 1,646 4,910 5,882 8,328 10,438 Depreciation and amortization expense........... 100 1,166 3,226 6,308 12,334 15,261 ---------- ---------- ---------- ---------- ---------- ------------- Operating income (loss)......................... (828) (832) (2,266) 528 5,766 9,575 Interest expense................................ (26) (417) (1,497) (3,030) (5,745) (4,821) Interest income................................. -- 35 2 189 260 260 Other income.................................... -- -- -- -- 179 179 ---------- ---------- ---------- ---------- ---------- ------------- Income (loss) before income taxes and extraordinary item............................ (854) (1,214) (3,761) (2,313) 460 5,193 Income tax benefit (expense).................... -- 391 1,372 (332) (245) (1,669) ---------- ---------- ---------- ---------- ---------- ------------- Income (loss) before extraordinary item......... (854) (823) (2,389) (2,645) 215 $ 3,524 ------------- ------------- Extraordinary item--gain (loss) on early retirement of debt............................ -- 74 -- (908) (476) ---------- ---------- ---------- ---------- ---------- Net income (loss)............................... (854) (749) (2,389) (3,553) (261) Preferred stock dividend........................ -- -- -- (190) (109) ---------- ---------- ---------- ---------- ---------- Net loss applicable to common stockholders...... $ (854) $ (749) $ (2,389) $ (3,743) $ (370) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Per share of common stock: Income (loss) before extraordinary item......... $ (2.14) $ (.58) $ (.99) $ (.80) $ .02 Extraordinary item.............................. -- .05 -- (.26) (.07) ---------- ---------- ---------- ---------- ---------- Net loss........................................ $ (2.14) $ (.53) $ (.99) $ (1.06) $ (.05) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income per share of common stock......................................... $ 0.32 ------------- ------------- Weighted average common stock and common stock equivalent shares used to calculate per share amounts....................................... 399,465 1,406,219 2,411,381 3,527,688 7,063,928 Pro forma weighted average common stock and common stock equivalent shares used to calculate pro forma net income per share...... 11,118,854 OTHER DATA: EBITDA(2)....................................... $ (728) $ 334 $ 960 $ 6,836 $ 18,100 $ 24,836 EBITDA margin(3)................................ (498.6)% 4.3% 5.2% 22.8% 31.9% 32.3%
17
DECEMBER 31, AS ADJUSTED ------------------------------------------------------- DECEMBER 31, 1992 1993 1994 1995 1996 1996(4) --------- --------- --------- ---------- ---------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 12 $ 2,134 $ 548 $ 6,383 $ 2,301 $ 2,301 Working capital (deficit).......................... (332) 788 (2,237) (8,819) 1,219 2,154 Property and equipment, net........................ 467 15,156 17,062 81,250 93,692 117,117 Total assets....................................... 705 35,651 37,557 114,693 144,986 189,669 Long-term debt and capital lease obligations, net of current portion............................... -- 16,073 18,487 48,789 65,445 54,554 Redeemable preferred stock......................... -- -- -- 1,908 -- -- Stockholders' equity............................... 89 12,531 12,132 33,855 58,097 112,527
- ------------------------ (1) The pro forma information for the year ended December 31, 1996 gives effect to the Indiana Acquisition, the Pending Acquisition, the Offering and the application of the estimated proceeds therefrom, as described in "Use of Proceeds," as if each of the foregoing had occurred or been in effect on January 1, 1996. (2) EBITDA represents operating income plus depreciation and amortization. While EBITDA data should not be construed as a substitute for operating income, net income (loss) or cash flows from operations in analyzing the Company's operating performance, financial position and cash flows, the Company has included EBITDA data (which are not a measure of financial performance under generally accepted accounting principles) because it understands that such data are commonly used by certain investors to evaluate a company's performance in the solid waste industry. (3) EBITDA margin represents EBITDA expressed as a percentage of revenues. (4) Adjusted to give effect to the events described in (1) above as if each of the foregoing had occurred on December 31, 1996. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Consolidated Financial Data," the Company's Consolidated Financial Statements and the notes thereto, the Company's Unaudited Pro Forma Consolidated Financial Statements and the notes thereto, Liberty Disposal's Financial Statements and the notes thereto and Waste Management, Inc. Evansville, Indiana Operations ("WMX-Evansville") Financial Statements and the notes thereto, included elsewhere herein. INTRODUCTION The Company has adopted an acquisition-based growth strategy that focuses principally on: (i) the identification and acquisition of solid waste landfills located in secondary markets that are within approximately 125 miles of significant metropolitan centers; and (ii) securing dedicated waste streams for such landfills by the acquisition or development of transfer stations and the acquisition of collection companies. The Company has completed 37 acquisitions since January 1993. All of these acquisitions were accounted for under the purchase method of accounting for business combinations. Accordingly, the amortization of goodwill and landfill airspace reflects the fair market value of the Company's assets at the time of their acquisition rather than their historical cost basis, and the results of operations for such acquired businesses are included in the Company's financial statements only from the applicable date of acquisition. As a result, the Company believes its historical results of operations for the periods presented are not directly comparable. There are several other aspects of the Company's growth strategy that cause management to believe that the Company's historical results of operations may not be consistent with future performance, including the following: - CONCENTRATION OF LANDFILL ASSETS. Since the CDI Acquisition, the mix of the Company's assets has been concentrated in landfills, as opposed to collection and transfer station operations. As a result of goodwill associated with the Company's acquisitions and the amortization expense associated with its landfill assets and closure obligations, the amount of depreciation and amortization as a percentage of the Company's revenues for the year ended December 31, 1996 was relatively high as compared to other solid waste companies (21.7%). Management believes that this percentage will decline as the Company further penetrates the market in its Illinois, southwestern Indiana, Missouri, Ohio, western Pennsylvania and Rhode Island regions by acquiring or developing transfer stations, acquiring collection operations and making "tuck-in" acquisitions of collection companies. - MANAGEMENT CAPABILITIES. Since 1993, the Company has assembled a management team with substantial experience in the solid waste industry. The Company believes that its senior management team has the ability to manage the Company's operations as they expand. Therefore, the Company believes that the amount of selling, general and administrative expenses is likely to decline as a percentage of revenues as the Company grows. - CELL DEVELOPMENT COSTS. Cells developed to date at the landfills acquired in the CDI Acquisition have been constructed with double liner composite systems. However, in September 1996, the Livingston, Illinois landfill received a permit to construct cells utilizing a single liner composite system. The Company continues to explore the possibility of using alternative design systems at its Ohio landfill, which should result in lower cell development costs. Consistent with its operating program, the Company believes acquisitions of solid waste companies will have a positive impact on its future results of operations and, accordingly, believes that the Company's historical results should be considered in conjunction with the Unaudited Pro Forma Consolidated Financial Statements and the notes thereto included elsewhere herein. Additionally, neither the historical nor the pro forma results of operations fully reflect the operating efficiencies and improvements that are 19 expected to be achieved by integrating acquired businesses, internalizing waste flows to the Company's landfills and realizing other synergies. See "Business--Strategy." GENERAL REVENUES. The Company's revenues are attributable primarily to fees charged to customers for waste collection, transfer and disposal services. The Company's collection services are generally provided under direct agreements with its customers or pursuant to contracts with municipalities. Commercial and municipal contract terms, where used, generally range from one to five years and commonly have automatic renewal options. A relatively small portion of such agreements also provide for the prepayment of certain fees, which fees are reflected as deferred revenues. The table below shows, for the periods indicated, the percentage of the Company's total revenues attributable to services provided:
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Collection(1)......................................................................... 68.0% 55.3% 47.5% Transfer.............................................................................. 9.1 5.0 2.1 Landfill(1)........................................................................... 22.8 39.0 49.9 Other................................................................................. 0.1 0.7 0.5 --------- --------- --------- Total Revenues.................................................................... 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
- ------------------------ (1) The portion of collection revenues attributable to disposal charges for waste collected by the Company and disposed of at the Company's landfills has been excluded from collection revenues and included in landfill revenues. A component of the Company's business strategy is to maximize internalization of waste it collects and thereby realize higher margins from its operations. By disposing of waste at Company-owned landfills, the Company retains the margin generated through disposal operations that would otherwise be earned by third-party landfills. During the year ended December 31, 1996, 93% of the total tonnage collected by the Company was disposed of at Company-owned landfills. This represents approximately 34% of the total tonnage disposed of at Company-owned landfills in the year ended December 31, 1996. During such period, the Company's captive waste (consisting of waste collected by the Company and delivered to any of its landfills and waste delivered to any of the Company's landfills by third-party haulers under long-term collection contracts) constituted an average of approximately 61% of the solid waste disposed of at its landfills. EXPENSES. Cost of operations include labor, maintenance and repairs, equipment and facility rent, utilities and taxes, the costs of ongoing environmental compliance, safety and insurance, disposal costs and costs of independent haulers transporting Company waste to disposal sites. Disposal costs include certain landfill taxes, host community fees, landfill site maintenance, fuel and other equipment operating expenses and provision for post-closure expenses, consisting of cap maintenance, groundwater monitoring, methane gas control and recovery and leachate treatment/disposal, anticipated to be incurred in the future. Selling, general and administrative ("SG&A") expenses include management, clerical and administrative compensation, overhead, sales costs, community relations expenses, provisions for estimated uncollectible accounts receivable and unrealizable acquisition costs and management fees paid to an affiliate of Charterhouse (which terminated upon closing of the Company's initial public offering in July 1996). Depreciation and amortization expense includes depreciation of fixed assets, closure costs and amortization of landfill airspace, goodwill, other intangibles and loan origination fees. The amount of landfill amortization expense related to airspace consumption can vary materially from landfill to landfill depending upon the purchase price, landfill configuration and cell development costs. 20 Certain direct landfill development costs, such as engineering, upgrading, construction and permitting costs, are capitalized and amortized based on airspace consumed. All of the Company's capitalized expenditures relating to cell development and landfill expansion work are in connection with cells for which the Company holds a permit for development. The Company believes that the costs associated with engineering, owning and operating landfills will increase in the future as a result of federal, state and local regulation and a growing community awareness of the landfill permitting process. Although there can be no assurance, the Company believes that it will be able to implement price increases sufficient to offset these increased expenses. All indirect landfill development costs, such as executive salaries, general corporate overhead, public affairs and other corporate services, are expensed as incurred. The Company capitalizes engineering, legal, accounting and other direct costs incurred in connection with potential acquisitions, accounted for using the purchase method for business combinations. The Company, however, routinely evaluates such capitalized costs and expenses those costs related to acquisitions not likely to occur. Indirect acquisition costs, such as executive salaries, general corporate overhead and other corporate services, are expensed as incurred. Accrued closure and post-closure costs represent an estimate of the current value of the future obligations associated with closure and post-closure monitoring of non-hazardous solid waste landfills currently owned by the Company. Site specific closure and post-closure engineering cost estimates are prepared annually for landfills owned by the Company. Estimated costs are accrued based on accepted tonnage as landfill airspace is consumed. The Company periodically updates its estimates of future closure and post-closure costs. These changes are accounted for on a prospective basis. The Company expects its closure and post-closure costs per ton to decrease as it expands landfill capacity and as such costs are amortized over greater airspace. The Company has estimated that, as of December 31, 1996, closure costs expected to occur during the operating lives of these facilities and expensed over these facilities' useful lives will approximate $35.2 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 $10.9 million. The December 31, 1995 and 1996 accruals for landfill closure and post-closure costs (including costs assumed through acquisitions) were approximately $6.2 million and $7.6 million, respectively. The accruals reflect relatively young landfills with estimated remaining lives, based on current waste flows, that range from approximately three to 50 years, and an estimated average remaining life of greater than 20 years. THE INDIANA ACQUISITION AND THE PENDING ACQUISITION Revenues of WMX-Evansville increased to $13.0 million in 1996 compared to $9.8 million in 1995, primarily due to the full year impact of acquisitions completed in 1995 and, to a lesser extent, internal growth in 1996. Direct operating profit increased to $2.2 million in 1996 compared to $1.4 million in 1995, due to the same factors. Revenues of Liberty Disposal were $7.0 million in 1996 compared to $7.3 million in 1995. Revenues in 1995 were positively impacted by one-time revenues associated with large construction projects. Operating income decreased to $303,000 in 1996 compared to $900,000 in 1995, primarily due to increased related party compensation and, to a lesser extent, advertising expenses. Net income decreased to $219,000 in 1996 compared to $787,000 in 1995 due to the same factors. 21 RESULTS OF OPERATIONS The following table sets forth items in the Company's consolidated statement of operations as a percentage of revenues for the periods indicated.
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Revenues....................................................................... 100.0% 100.0% 100.0% Cost of operations............................................................. 68.3 57.6 53.5 Selling, general and administrative expenses................................... 26.5 19.6 14.6 Depreciation and amortization expenses......................................... 17.4 21.0 21.7 --------- --------- --------- Operating income (loss)........................................................ (12.2) 1.8 10.2 Interest expense, net.......................................................... (8.1) (9.5) (9.7) Other income................................................................... -- -- 0.3 Income tax (expense) benefit................................................... 7.4 (1.1) (0.5) Extraordinary loss, net of income tax.......................................... -- (3.0) (0.8) --------- --------- --------- Net loss................................................................... (12.9)% (11.8)% (0.5)% --------- --------- --------- --------- --------- --------- EBITDA margin.................................................................. 5.2% 22.8% 31.9%
YEARS ENDED DECEMBER 31, 1996 AND 1995 REVENUES. Revenues in 1996 were $56.8 million compared to $30.0 million in 1995. Approximately $17.1 million of the increase was attributable to the impact of the full year contribution from the CDI Acquisition, which was acquired by the Company in separate closings in June, August and November of 1995. In addition, the Company completed 16 acquisitions in 1996, which accounted for approximately $6.5 million of the increase in revenues. COST OF OPERATIONS. Cost of operations in 1996 was $30.4 million compared to $17.3 million in 1995, an increase corresponding primarily to the Company's revenue growth described above. As a percentage of revenues, cost of operations declined to 53.5% in 1996 from 57.6% in 1995, due primarily to the following factors. The Company's proportion of landfill operations, which generally have lower operating costs than collection operations, has increased as a result of the full year contribution of the CDI Acquisition. In addition, operating cost savings occurred as a result of the consolidation of the acquired Missouri collection operations and the full year impact of the new transfer stations opened in the Missouri region. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. SG&A expenses were $8.3 million in 1996 compared to $5.9 million in 1995. The increase in the SG&A expenses resulted from the full year impact of the CDI Acquisition as well as increased expenses from the 16 acquisitions completed in 1996. As a percentage of revenues, SG&A expenses declined to 14.6% in 1996 from 19.6% in 1995. The decrease in SG&A expense as a percentage of revenues was due primarily to a significant increase in revenue, while corporate and other related administrative expenses increased moderately. In 1996, the Company terminated a management agreement with an affiliate of its principal shareholder, pursuant to which a management fee of $466,000 was paid in 1996. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for 1996 was $12.3 million compared to $6.3 million in 1995. The increase is due primarily to the CDI Acquisition which significantly increased landfill airspace amortization and provision for closure costs, and to a lesser extent, the capital expenditures and goodwill associated with acquisitions consummated in 1996. As a percentage of revenues, depreciation and amortization expense was 21.7% during 1996 versus 21.0% in 1995. The relatively high percentages are primarily due to the configuration of the Wheatland landfill in 1995 and the high concentration of the Company's assets in landfills following the CDI Acquisition in 1996. Depreciation and amortization expense is expected to decline as a percentage of revenues in future periods as the concentration of the Company's assets in landfills diminishes due to the full year impact of the 1996 22 collection company acquisitions and as the Company reduces future cell development cost. Net fixed assets increased to $93.7 million in 1996 from $81.3 million in 1995 and goodwill, net of accumulated amortization expense, increased to $31.2 million in 1996 from $15.7 million in 1995. NET INTEREST EXPENSE. Net interest expense was $5.5 million in 1996 compared to $2.8 million in 1995. This increase is attributable to the full year impact of additional debt incurred to complete the CDI Acquisition and the 16 acquisitions completed in 1996. INCOME TAXES. The Company recorded an income tax provision of $245,000 and $332,000 for 1996 and 1995, respectively. The 1996 provision reflects the Company having consolidated taxable income of $460,000. Although the Company recorded a net loss in 1995, the Company recorded an income tax provision because the Company's subsidiaries were not then consolidated and CDI reported a profit. EXTRAORDINARY LOSS. In 1996, the Company recognized an extraordinary loss of $476,000, representing the write-off of unamortized debt issuance costs in connection with the refinancing of its prior credit facility. YEARS ENDED DECEMBER 31, 1995 AND 1994 REVENUES. Revenues in 1995 were $30.0 million compared to $18.5 million in 1994. The increase in revenues was due primarily to the effects of the CDI Acquisition and, to a lesser extent, price and volume increases attributable to existing operations. Revenues of $10.1 million in 1995 were generated from companies acquired during 1995, while increases in revenue attributable to operations acquired prior to 1996 amounted to $1.3 million. COST OF OPERATIONS. Cost of operations in 1995 was $17.3 million compared to $12.6 million in 1994. This increase in costs was attributable primarily to increases in the Company's revenues described above. As a percentage of revenues, cost of operations was 57.6% in 1995 compared to 68.3% in 1994. This decrease was due primarily to operating efficiencies and improvements from the Company's development of its Missouri region and the impact of the CDI Acquisition, which shifted the relative proportion of the Company's assets toward landfills that typically operate at higher margins than collection operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $5.9 million in 1995 compared to $4.9 million in 1994. The increase was a result of expenses associated with the CDI Acquisition, expenses incurred in connection with the Company's increase in personnel and other expenses related to the anticipated expansion of the Company's operations. SG&A expenses as a percentage of revenues were 19.6% in 1995 compared to 26.5% in 1994. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense in 1995 was $6.3 million compared to $3.2 million in 1994. The increase in depreciation and amortization expense is due to the acquisition of the CDI landfills, with their relatively higher depreciation and amortization expense compared to depreciation and amortization expense of collection operations, depreciation of increased capital expenditures and a one time write-off of $505,000 following the Company's election in 1995 not to pursue the enforcement of several covenants not to compete. Net fixed assets increased to $81.3 million in 1995 from $17.1 million in 1994 and goodwill, net of accumulated amortization expense, increased to $15.7 million in 1995 from $13.6 million in 1994. NET INTEREST EXPENSE. Net interest expense increased to $2.8 million in 1995 from $1.5 million in 1994. This increase primarily reflects increased indebtedness incurred in connection with acquisitions and capital expenditures. INCOME TAXES. Although the Company recorded a net loss in 1995, the Company recorded an income tax expense of $300,000 in 1995 because the Company's subsidiaries were not then consolidated and CDI reported a profit in 1995. The Company recorded an income tax benefit of $1.4 million in 1994. See Note 6 of the Notes to Consolidated Financial Statements included elsewhere herein. 23 EXTRAORDINARY LOSS. In 1995, the Company recognized an extraordinary loss of $908,000, representing unamortized deferred debt issuance cost in connection with the extinguishment of debt outstanding under a prior credit facility. LIQUIDITY AND CAPITAL RESOURCES Due to the capital intensive nature of the solid waste industry, the Company has used, and expects to continue using, substantially all cash generated from operations to fund acquisitions, capital expenditures and landfill development. Certain operating equipment has also been acquired using leases which have short and medium-term maturities. As a result, the Company has incurred working capital deficits in the past, and there can be no assurance that its available working capital will be sufficient in the future as it pursues its acquisition-based growth strategy. Historically, the Company has satisfied its acquisition, capital expenditure and working capital needs primarily through equity and bank financings. There can be no assurance that such financing will continue to be available. Operating activities provided net cash of $11.7 million in the year ended December 31, 1996, compared to $5.6 million in the year ended December 31, 1995. From 1995 to 1996, depreciation and amortization expense increased by $6.0 million and accounts payable, accrued liabilities and accrued environmental and landfill costs increased by $1.5 million. The increase in each of these items was primarily due to increases in environmental and landfull costs, which correlated with the significant increase in landfill revenues resulting from the full year impact of the CDI Acquisition. From 1994 to 1995, depreciation and amortization expense increased by $3.1 million and accounts payable, accrued liabilities and accrued environmental and landfill costs increased by $1.6 million, primarily due to the CDI Acquisition. Investing activities used net cash of $39.0 million and $68.4 million in the years ended December 31, 1996 and 1995, respectively. The Company's capital expenditure and working capital requirements have increased significantly, reflecting the Company's rapid growth by acquisition and development of revenue producing assets and will increase further as the Company continues to pursue its acquisition-based growth strategy. During 1994, the Company spent $5.6 million in capital expenditures, of which $1.7 million was for cell development at the Company's initial two landfills. During 1995, when the Company acquired the three CDI landfills, the Company spent $6.2 million in capital expenditures, of which $4.9 million was for cell development. In connection with such acquisitions, the Company required $25.5 million in equity infusions from its principal stockholders and $36.7 million in bank debt. In 1996, the Company spent $14.0 million for capital expenditures, of which $9.0 million was used for cell development. The increase in cell development costs in 1996 over 1995 was due to the Company's ownership of the Clarion, Livingston and Wyandot landfills for the entire year and the fact that increased volumes at the landfills necessitated cell development prior to the winter season when construction activities cease. In 1997, in addition to the Pending Acquisition, which will be funded by the net proceeds of the Offering, the Company expects to spend approximately $14.5 million for capital expenditures, of which $9.0 million is anticipated to be used for cell development. Financing activities provided net cash of $23.2 million, $68.6 million and $5.7 million in the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities in 1996 reflects the application of the net proceeds from the Company's initial public offering, net proceeds from the refinancing of the Company's credit facilities and repayment of a note payable to a stockholder. Net cash provided by financing activities in 1995 reflects the proceeds from the issuance of a $12.5 million note payable and $25.5 million in equity to the Company's principal stockholders and increased borrowings under the Company's prior credit facility incurred in connection with the CDI Acquisiton. In March 1997, the Company increased the amount of its revolving and term loan credit facility with ING (U.S.) Capital Corporation, as administrative agent for the lenders, and Morgan Guaranty Trust Company of New York, as documentation agent for the lenders, from $110 million to $125 million. The Credit Facility provides the Company with a term loan of $25 million, a $5 million revolving credit facility 24 for working capital purposes, and a $95 million expansion facility, that may only be used for acquisitions. The various loans and lines of credit under the Credit Facility bear interest at rates per annum equal to, at the Company's discretion, either: (i) the higher of (a) the federal funds rate plus 0.5% and (b) the prime rate, plus an applicable margin ranging from 0% to 1.5%; or (ii) the London Interbank Offered Rate ("LIBOR"), plus an applicable margin ranging from 1.5% to 3.25%, and have maturities ranging from 2001 to 2003. As of December 31, 1996, the Company had borrowed $66.3 million under the Credit Facility. As of such date, the interest rates on the various loans and lines of credit under the Credit Facility ranged from 8.63% to 9.50% and the total unused availability under the Credit Facility was $43.7 million, of which $10.0 million may be used for working capital purposes and $33.7 million may be used for acquisitions. During the year ended December 31, 1996, the Company's operating income plus depreciation and amortization ("EBITDA") was $18.1 million and interest expense during this period was $5.7 million. The Company's ability to use the expansion facility is based upon a number of covenants, including the maintenance of specified debt to equity and fixed charge coverage ratios. The Company is in compliance with the terms of these covenants. Other covenants contain limitations on the payments of dividends, the incurrence of additional debt and the use of proceeds from certain debt or equity issuances. The Company may use proceeds from the Offering to repay indebtedness and then reborrow under the 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. See "Risk Factors--Funding of Future Capital Requirements." The Company expects that Subtitle D and other regulations that apply to the non-hazardous waste disposal industry will require the Company, as well as others in the industry, to alter operations and to modify or replace existing facilities. Such expenditures have been and will continue to be substantial. Regulatory changes could accelerate expenditures for closure and post-closure monitoring and obligate the Company to spend sums in addition to those presently reserved for such purposes. These factors, together with the other factors discussed above, could substantially increase the Company's operating costs. See "Risk Factors--Extensive Environmental and Land Use Laws and Regulations." 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. 25 BUSINESS INTRODUCTION American Disposal Services is a regional, integrated, non-hazardous solid waste services company that provides solid waste collection, transfer and disposal services primarily in the Midwest and in the Northeast. The Company owns six solid waste landfills and owns, operates or has exclusive contracts to receive waste from 12 transfer stations. The Company's landfills and transfer stations are supported by its collection operations, which currently serve over 150,000 residential, commercial and industrial customers. The Company has adopted an acquisition-based growth strategy and intends to continue its expansion, generally in its existing and proximate markets. Since January 1993, the Company has acquired 37 solid waste businesses, including five solid waste landfills and 32 solid waste collection companies. As part of its acquisition strategy, the Company has recently consummated the Indiana Acquisition and has entered into a definitive agreement to acquire substantially all of the assets of Liberty Disposal. The Company began its operations in the Midwest and currently has operations in Arkansas, Illinois, Indiana, Kansas, Massachusetts, Missouri, Ohio, Oklahoma, Pennsylvania and Rhode Island. The Company's principal growth strategy is to identify and acquire solid waste landfills located in markets that are within approximately 125 miles of significant metropolitan centers and to secure dedicated waste streams for such landfills by acquisition or development of transfer stations and acquisition of collection companies. The Company expects the current consolidation trends in the solid waste industry to continue as many independent landfill and collection operators lack the capital resources, management skills and technical expertise necessary to operate in compliance with increasingly stringent environmental and other governmental regulations. Further, several of the national waste management companies have announced their intention to focus on their core markets and have recently begun to divest certain of their non-core solid waste assets, which should present the Company with additional acquisition opportunities, such as the Indiana Acquisition. Due in part to these trends, the Company believes that significant opportunities exist to expand and further integrate its operations in each of its existing markets. As part of the Indiana Acquisition, the Company acquired a landfill, two collection companies, an exclusive transfer station contract and a permit to develop a new transfer station, all located in the southwestern Indiana region. The Indiana Acquisition provided the Company with the opportunity to enter the southwestern Indiana region and to secure a significant market share position in that region through the acquisition of a single, fully integrated solid waste management operation. The Pending Acquisition involves the purchase by the Company of substantially all of the assets of Liberty Disposal. The Company believes that Liberty Disposal, which operates 25 routes and offers commercial, residential and industrial waste collection and recycling services, is on a revenue basis the largest privately owned waste collection company in Rhode Island. In addition, the Company believes that the Pending Acquisition will nearly double the Company's revenue base in the Rhode Island region, will result in the Company owning and operating one of the three largest collection companies in Rhode Island and will position the Company to expand further its market share in the region and the contiguous markets. The Company's operating program generally involves a four-step process: (i) acquiring solid waste landfills in its target markets; (ii) securing captive waste streams for its landfills through the acquisition or development of transfer stations serving those markets, through acquisitions of collection companies and by entering into long-term contracts directly with customers or collection companies; (iii) making "tuck-in" acquisitions of collection companies to further penetrate its target markets; and (iv) integrating these businesses into the Company's operations to achieve operating efficiencies and economies of scale. As part of its acquisition program, the Company has, and in the future may, as specific opportunities arise, evaluate and pursue acquisitions in the solid waste collection and disposal industry that do not strictly conform to the Company's four-step operating program. 26 The implementation of the Company's operating program is substantially complete in its Missouri and Ohio regions. In the Missouri region (which also includes Arkansas, Kansas and Oklahoma), the Company has acquired one landfill and 15 collection companies and has acquired, developed or secured exclusive contracts with five transfer stations. In the Ohio region, the Company has completed the acquisition of one landfill and 11 collection companies and has acquired, developed or secured exclusive contracts with four transfer stations. The Company is in the second phase of its operating program in its Illinois, western Pennsylvania and Rhode Island regions, as well as in the southwestern Indiana region, where the Company began its operations in 1997. The Company's operating strategy emphasizes the integration of its solid waste collection and disposal operations and the internalization of waste collected. One of the Company's goals is for its captive waste streams (which include the Company's collection operations and third-party haulers operating under long-term collection contracts) to provide in excess of 50% of the volume of solid waste disposed of at each of its landfills. During the year ended December 31, 1996, the Company's captive waste constituted an average of approximately 61% of the solid waste disposed of at its landfills. The Company plans to continue to pursue its acquisition-based growth strategy to increase the internalization of waste collected and expand its presence in its existing and proximate markets. INDUSTRY BACKGROUND In the United States, landfilling is at present the most common means of disposing of non-hazardous municipal solid waste ("MSW"), which consists primarily of refuse and garbage from households and commercial establishments. In addition, landfilling is one of the means of disposing of certain special waste. Special waste, some types of which may require special handling, consists of all waste not regulated as hazardous waste under federal or state laws other than MSW and may include asbestos, petroleum contaminated soil, incinerator ash, foundry sands and sewage and industrial sludges. In October 1991, the EPA adopted the Subtitle D Regulations, which generally became effective on October 9, 1993 (except for certain MSW landfills accepting less than 100 tons per day, as to which the effective date was April 9, 1994, and new financial assurance requirements, which are scheduled to become effective April 9, 1997). The Subtitle D Regulations specify design, siting, operating, monitoring, closure and financial requirements for landfill operations and, among other things, require upgraded or new composite landfill liners, leachate collection and treatment, groundwater and methane gas monitoring, stricter siting and locational criteria, closure and extended post-closure requirements and financial assurances (such as a surety bond) that the owner or operator can meet certain of these obligations. Each state is required to revise its applicable solid waste regulations or programs to meet the requirements of the Subtitle D Regulations or such requirements automatically will be imposed by the EPA. Many states have already adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations, including all of those in which the Company's landfills are located. The Company believes that in recent years there has been a trend towards consolidation of landfill ownership and that a similar trend is emerging in the solid waste collection industry, which historically has been characterized by numerous small companies. The Company believes that these trends will continue and are the result of several factors: - The Subtitle D Regulations and related state regulations and programs have significantly increased the amount of capital and the technical expertise required in order to own and operate a landfill. As a result, many landfill operators that lack the required capital or expertise are electing to sell their landfills, as an alternative to closing them. - A number of municipalities are electing to privatize the operations of their municipal landfills as an alternative to funding the changes to these landfills that are required in order to comply with the Subtitle D Regulations and related state regulations and programs. 27 - As a result of heightened sensitivity to environmental concerns by many communities, it is becoming increasingly desirable in many markets for collection companies to provide waste reuse and reduction programs, such as recycling and composting, in addition to conventional waste collection services. This development, as well as more stringent bonding requirements being imposed on waste collection companies by various municipalities, have increased the amount of capital generally required for waste collection operations, causing private collection companies that lack the requisite capital to sell their operations to better capitalized companies. In addition to the ongoing consolidation trend involving independent landfill and collection operators, several of the national waste management companies have announced their intention to focus on their core markets and have recently begun to divest certain of their non-core solid waste assets, which should present the Company with other acquisition opportunities, such as the Indiana Acquisition. Due in part to these trends, the Company believes that significant opportunities exist to expand and further integrate its operations in each of its existing markets, as well as in new markets that meet the Company's acquisition criteria. STRATEGY The Company's objective is to build a large regional fully-integrated solid waste services company with an established market presence in secondary markets. The Company's strategy for achieving this objective is to establish a market presence generally anchored by its landfills; to increase volume in its markets through "tuck-in" acquisitions of collection companies and marketing to new customers; to provide a high level of customer service; to implement selective price increases; and to continue to implement strict cost controls and reduce corporate overhead as a percentage of revenues. The Company believes that this strategy of building an integrated entity should provide it with competitive cost advantages in its targeted regional markets. The Company's ability to implement its strategy is enhanced by the experience of its senior managers and their knowledge of the solid waste industry. There can be no assurance, however, that the Company will be successful in the execution of its strategy. See "Risk Factors." The Company targets acquisitions in geographic areas characterized by one or more of the following criteria: (i) the availability of permitted and underutilized landfill capacity located outside of, but within 125 miles of, a significant metropolitan center; (ii) the absence of a dominant competitor in the area which would preclude the Company from implementing its business strategy; (iii) anticipated economic and population growth; and (iv) near- or medium-term scheduled closures of competing landfills. The Company has adopted the following four-step operating program in executing its business strategy: 1. LANDFILL ACQUISITIONS. Once the Company identifies an area that qualifies under its target market criteria, the Company seeks to establish a market presence, generally by acquiring one or more landfills in that area that can be accessed economically from the metropolitan center or from the regional market area, either through direct hauling or through strategically located transfer stations. In evaluating a landfill acquisition, the Company considers, among others, the following factors: (i) current disposal costs together with transportation costs to the targeted landfill relative to transportation and disposal costs of potential competitors; (ii) expected landfill life; (iii) opportunities for landfill expansion; and (iv) projected short-term ability to secure a minimum of 500 tons per day of disposal volume. 2. SECURE CAPTIVE WASTE VOLUMES. After the Company has acquired a landfill, it seeks to build a market presence and increase the utilization of the landfill by securing captive waste streams, which includes developing and acquiring transfer stations, entering into waste collection contracts and acquiring waste collection companies. Generally, the Company pursues the acquisition of collection companies that: (i) have well-established residential or commercial collection routes and accounts; 28 (ii) own and operate transfer stations; or (iii) do not own landfills and are vulnerable to volatile disposal pricing, which the Company believes it can minimize through landfill ownership. 3. "TUCK-IN" ACQUISITIONS. The Company acquires service rights, obligations, machinery and equipment in "tuck-in" acquisitions of collection companies to: (i) increase the waste stream directed to its landfills; (ii) maximize its market presence; and (iii) take advantage of economies of scale which should increase earnings and return on capital. 4. INTEGRATION AND EXPANSION OF OPERATIONS. Immediately upon closing any acquisition, the Company integrates the acquired company into its operations by: (i) instituting strict cost control procedures; (ii) consolidating and rationalizing collection routes and pricing; (iii) implementing Company operating policies and procedures (including programs designed to improve employee productivity and equipment utilization); (iv) establishing a sales and marketing force; and (v) converting the acquired company to the Company's accounting, data processing and management reporting systems. During the transition period following acquisitions, the Company retains the management of certain companies it acquires in order to benefit from management's local operating knowledge and the goodwill it has developed. Additionally, on a selective basis, the Company seeks to expand the capacity of its landfills to accommodate increasing waste volumes and improve profitability. In addition, the Company may, as specific opportunities arise, evaluate and pursue acquisitions in the solid waste collection and disposal industry that do not strictly conform to the Company's four-step operating program. ACQUISITION PROGRAM In January 1993, representatives of Charterhouse and the Company's management formulated an acquisition-based growth strategy to establish a large regional fully-integrated solid waste management services company. To execute its strategy, affiliates of Charterhouse acquired a majority interest in ADS, which owned one landfill in Oklahoma, and began assembling a senior management team. See "The Company." Using ADS as a platform for this strategy, the Company has increased the number of landfills it owns from one to six and has completed 37 acquisitions of solid waste companies since January 1993. The Company has assembled an experienced acquisition team comprised of operations, environmental, engineering, legal, financial and accounting personnel, each engaged in identifying and evaluating acquisition opportunities in order to execute its operating program. The Company has established pre- acquisition review procedures for acquisition candidates, including legal, financial, engineering, operational and environmental reviews. The environmental review includes, where appropriate, investigation of geologic, hydrogeologic and other site conditions, past and current operations (including types of waste deposited), design and construction records, permits, regulatory compliance history, regulatory agency records and available soil sampling, groundwater and air monitoring results. The Company uses regional managers to assist in the acquisition process by identifying suitable candidates and performing pre- acquisition review and evaluation tasks. In considering whether to proceed with an acquisition, in addition to determining whether the candidate meets the Company's criteria described above, the Company evaluates a number of factors, including: (i) the acquisition candidate's historical and projected financial results; (ii) any expected synergies with one or more of the Company's existing operations; (iii) the proposed purchase price and the Company's expected resultant internal rate of return on investment and the expected impact on the Company's earnings per share; (iv) whether the candidate will enhance the Company's ability to effect other acquisitions in the vicinity; (v) the candidate's customer service reputation and relationships with the local communities; (vi) the composition and size of the candidate's customer base; (vii) the types of services provided by the candidate; and (viii) whether the candidate has definable and controllable 29 liabilities, including potential environmental liabilities. The Company believes that significant opportunities exist to acquire new landfills and to develop its existing markets, and reviews acquisition opportunities on an ongoing basis. COMPLETED ACQUISITIONS The Company has completed 37 acquisitions of solid waste companies since January 1993, which are summarized in the table below.
COMPANY BUSINESS PRINCIPAL LOCATION DATE ACQUIRED - ------------------------------ ------------------------------ ------------------------------ ---------------- MISSOURI REGION: Wheatland Landfill Scammon, KS January 1993 Pittsburg Sanitation Collection Pittsburg, KS January 1993 Ozark Sanitation Collection Carthage, MO January 1993 Trashmaster Collection Joplin, MO January 1993 A-1 Trash Service Collection Verona/Aurora, MO April 1993 Tate's Transfer Transfer Station Verona/Aurora, MO April 1993 Renfro Sanitation Collection Branson, MO June 1993 B&B Trash Collection Pittsburg, KS July 1993 B&B Refuse Collection Neosho, MO December 1993 Apex Sanitation Collection Grove, OK and December 1993 Green Forest, AR Epps Sanitation Collection Branson, MO December 1993 Cummings Sanitation Collection Nixa, MO May 1994 Light Hauling Collection Branson, MO August 1994 Poole's Sanitation Collection Bentonville, AR August 1994 Southwest Waste Collection Springfield, MO July 1996 Nesvold Sanitation Collection Seneca, MO December 1996 Sparky's Waste Control Collection Springfield, MO January 1997 OHIO REGION: Wyandot Landfill Upper Sandusky, OH August 1995 Environmental Transportation Collection Findlay, OH May 1996 and Management R&R Waste Disposal Collection Findlay, OH May 1996 Jerry's Rubbish Collection Findlay, OH June 1996 Seneca Disposal Collection Tiffin, OH June 1996 Ross Bros. Waste & Recycling Collection and Transfer Mt. Vernon, OH September 1996 Station D&L Hauling Collection Findlay, OH October 1996 Rutledge Trucking Collection Delaware, OH November 1996 Morrow Sanitary Company Collection Mt. Gilead, OH November 1996 Bowers-Phase II, Inc. Collection and Transfer Vickery, OH December 1996 Station Cargo Services Collection Mt. Gilead, OH December 1996 Rumpke Waste, Inc. (routes) Collection Fostoria, OH December 1996 ILLINOIS REGION: Livingston Landfill Pontiac, IL November 1995 WESTERN PENNSYLVANIA REGION: Clarion Landfill and Collection Leeper, PA June 1995 Mauthe Sanitation Collection Strattanville, PA March 1996 Allied Waste Systems, Inc. Collection Youngstown, OH February 1997 RHODE ISLAND REGION: T&J Trucking Collection Johnston, RI September 1996 American Disposal Services, Collection Johnston, RI September 1996 Inc./ N.E.E.D. A-1 Container Collection Rehoboth, MA January 1997 SOUTHWESTERN INDIANA REGION: WMX-Evansville Landfill, Collection and Evansville, IN April 1997 Transfer Station
30 MISSOURI REGION. The Company established a market presence in the southwest Missouri region in January 1993 with the acquisition of its Wheatland landfill. The implementation of the Company's operating program is substantially complete in its Missouri region. Since purchasing the Wheatland landfill, the Company has acquired one transfer station and independently developed three transfer stations. The Company also has exclusive contracts to accept waste from two other transfer stations. Additionally, the Company acquired 15 collection companies, including the three operations purchased simultaneously with the Wheatland landfill. The collection operations and transfer stations have been consolidated into three divisions. The Company has integrated acquired companies by consolidating and rationalizing routes and pricing, reducing overhead through consolidating an acquired company's operations, implementing the Company's cost controls and operating procedures, converting acquired companies to the Company's management reporting systems and implementing a sales and marketing team. The Company continues to pursue "tuck-in" acquisitions of collection companies to increase its per ton margins through internalizing waste streams. The Company also seeks to expand its operations by taking advantage of the economic efficiencies provided by its integrated operations and is in the process of developing another transfer station. Since the acquisition of its Wheatland landfill, the Company has increased the waste volume at its landfill by approximately 1,100 tons per day. OHIO REGION. The Company established a market presence in north-central Ohio in August 1995 with the acquisition of its Wyandot landfill, which is located within approximately 125 miles of Cleveland, Ohio and within approximately 75 miles of Toledo and Columbus, Ohio. The implementation of the Company's operating program is substantially complete in its Ohio region. To date, the Company has acquired 11 collection companies and has acquired, developed or secured exclusive contracts with four transfer stations in the Ohio region. Since the acquisition of the Wyandot landfill, the Company has increased the waste volume at this landfill by approximately 300 tons per day, primarily through the acquisition of collection companies, new operating contracts with two transfer stations and implementation of a new sales focus. To further expand its operations, the Company is seeking to increase capacity at the Wyandot landfill. See "Business--Operations--Landfills." Prior to the acquisition by the Company, the Wyandot landfill's waste volume was composed primarily of special waste. As part of its ongoing strategy in the Ohio region, the Company seeks to continue to increase its volume of internalized waste through additional "tuck-in" acquisitions in order to increase per ton margins. ILLINOIS REGION. The Company established a market presence in north-central Illinois in November 1995 with the acquisition of its Livingston landfill, which is located approximately 90 miles from downtown Chicago. The acquisition of the Livingston landfill was attractive to the Company's management because of the expected closing of two competing landfills (one of which closed in October 1996) that accepted an aggregate of approximately 15,000 tons per day and the management team's experience with the Chicago market. Since the acquisition of the Livingston landfill, the Company has increased the waste volume at this landfill by approximately 3,500 tons per day through intensified sales and marketing efforts. Approximately 74% of the waste volume at the Livingston landfill is delivered under long-term disposal contracts. WESTERN PENNSYLVANIA REGION. The Company entered the western Pennsylvania region in June 1995 with the acquisition of its Clarion landfill and an affiliated collection company. The Clarion landfill is located within 80 miles of both Pittsburgh and Erie, Pennsylvania. The Company began the second phase of its operating program in the western Pennsylvania region in March 1996 by acquiring a second collection company. Since the acquisition of the Clarion landfill, the Company has increased deliveries to this landfill by approximately 300 tons per day to the maximum daily limit, primarily through the acquisition of collection companies. In addition, the Company acquired Allied Waste Systems in February 1997, a collection company located in Youngstown, Ohio, which services the western Pennsylvania region. As a result of this acquisition, the volume of the Company's internalized waste has increased from 30% to 42% in the western Pennsylvania region. As part of its ongoing strategy in the western Pennsylvania market, the 31 Company seeks to continue to increase its volume of internalized waste through additional "tuck-in" acquisitions in order to increase per ton margins. RHODE ISLAND REGION. The Company began operating in the Rhode Island region in September 1996 with the acquisition of two collection companies. Although the Company's initial entry into the Rhode Island region did not strictly conform to its four-step operating program in that the Company did own a landfill in the region, the opportunities presented by the Rhode Island region met the Company's overall business and operating objectives. Expansion into the Rhode Island region allows the Company to expand its presence in the Northeast, an unconsolidated market. In January 1997, the Company acquired A-1 Container in Rehoboth, Massachusetts, a "tuck-in" acquisition, which has been integrated into the Company's Rhode Island region. In connection with the Pending Acquisition, the Company has agreed to purchase substantially all of the assets of Liberty Disposal. The Company believes that Liberty Disposal, which operates 25 routes and offers commercial, residential and industrial waste collection and recycling services, is on a revenue basis the largest privately owned waste collection company in Rhode Island. In addition, the Company believes that the Pending Acquisition will nearly double the Company's revenue base in the Rhode Island region, will result in the Company owning and operating one of the three largest collection companies in Rhode Island and will position the Company to expand further its market share in the region and the contiguous markets. SOUTHWESTERN INDIANA REGION. As part of the Indiana Acquisition, the Company acquired a landfill, two collection companies, an exclusive transfer station contract and a permit to develop a new transfer station, all located in the southwestern Indiana region. The Indiana Acquisition provided the Company with the opportunity to enter the southwestern Indiana region and to secure a significant market share position in that region through the acquisition of a single, fully integrated solid waste management operation. The Company plans to pursue additional "tuck-in" acquisitions of collection companies to increase its per ton margins through internalizing waste streams. There can be no assurance that the Company will be successful in implementing its operating program in any of these existing markets or in any future markets. See "Risk Factors--Ability to Manage Growth," "--Availability of Additional Acquisition Targets; Integration of Future Acquisitions," "--History of Losses and Working Capital Deficits; Integration of Completed Acquisitions," "--Funding of Future Capital Requirements," "--Limitations on Internal Expansion" and "--Limited Operating History." OPERATIONS The Company's waste management operations include the ownership and operation of solid waste landfills, transfer stations and waste collection services. The Company's landfills are relatively underutilized given their potential size and the fact that the Company's operating program in a majority of its markets has not yet been completed. There can be no assurance, however, that the Company will be successful in executing its operating program. See "Risk Factors." The Company believes that all of its landfills and transfer stations comply with or exceed the requirements mandated by the Subtitle D Regulations and the applicable state regulations. The Company regularly monitors incoming waste at its landfills to determine if such wastes are in compliance with its permits. LANDFILLS The Company currently owns six landfill operations permitted to receive solid waste. These landfill operations are located in Illinois, Indiana, Ohio, Pennsylvania, Kansas and Oklahoma. Each of the Company's landfill operations is located on land owned by the Company. The permitted waste streams at each of these landfills include both MSW and certain special waste (the type of special waste varying from landfill to landfill). During the year ended December 31, 1996, the Company's captive waste (including the Company's collection operations and third party haulers operating under long-term contracts) constituted an average of approximately 61% of the solid waste disposed of at its landfills. 32 The table and landfill descriptions below provide certain additional information, as of March 31, 1997 regarding the six landfills that the Company owns and operates.
APPROXIMATE ACREAGE APPROXIMATE ---------------------------- UNUSED PERMITTED LANDFILLS LOCATION TOTAL PERMITTED (1) AIRSPACE (2) - ----------------------------------- ----------------------------------- --------- ----------------- ------------------- (IN MILLIONS OF CUBIC YARDS) Livingston......................... Pontiac, IL 556 255 30.0 Wyandot(3)......................... Upper Sandusky, OH 344 87 6.2 Clarion............................ Leeper, PA 606 60 4.1 Wheatland.......................... Scammon, KS 68 55 1.3 Pittsburg County(4)................ Pittsburg, OK 76 15 0.4 Blackfoot.......................... Evansville, IN 379 166 17.9 --------- --- ----- Total.......................... 2,029 638 59.9 --------- --- ----- --------- --- -----
- ------------------------ (1) Permitted acreage, as used in this table and in this Prospectus, represents the portion of the total acreage on which disposal cells and supporting facilities have been constructed (including any that may have been filled or capped) or may be constructed based upon an approval issued by the state generally authorizing the development or siting of a landfill on the acreage. Prior to actually constructing and/or operating each new disposal cell on the permitted acreage, it may be necessary, depending upon the regulatory requirements of the particular state, for the Company to obtain additional authorizations with respect to such cell. The portion of total acreage that is not currently permitted acreage is not currently available for waste disposal. (2) Unused permitted airspace represents in cubic yards the estimated portion of the permitted acreage that has not yet been used for waste disposal but may be available for waste disposal after certain approvals are secured and, in some instances, new disposal cells are constructed. Prior to actually constructing and/or operating a new disposal area or cell on permitted acreage, it may be necessary, depending upon the regulatory requirements of the particular state or locality, for the Company to obtain additional authorizations. (3) The Company has applied for a permit to increase the permitted acreage and permitted cubic airspace at the Wyandot landfill by approximately 98 acres and approximately 19.1 million cubic yards, respectively. (4) The Company has applied for a permit to increase the permitted acreage and permitted cubic airspace at the Pittsburg County landfill by approximately 15 acres and approximately 975,000 cubic yards, respectively. The Company monitors the available permitted in-place disposal capacity at each of its landfills on an ongoing basis and evaluates whether to seek to expand this capacity. In making this evaluation, the Company considers various factors, including the volume of waste projected to be disposed of at the landfill, the size of the unpermitted acreage included in the landfill, the likelihood that the Company will be successful in obtaining the necessary approvals and permits required for the expansion and the costs that would be involved in developing the expanded capacity. The Company also considers on an ongoing basis the extent to which it is advisable, in light of changing market conditions and/or regulatory requirements, to seek to expand or change the permitted waste streams at a particular landfill or to seek other permit modifications. Set forth below is certain information concerning certain of the new permits, permit modifications and approvals that the Company is currently seeking to enable it to expand its disposal capacity. There can be no assurance that the Company will succeed in obtaining any of such permits, permit modifications or approvals, or that additional permits, permit modifications or approvals will not be required or that additional requirements will not be imposed by regulatory agencies. See "Risk 33 Factors--Limitations on Internal Expansion" and "--Extensive Environmental Land Use Laws and Regulations." LIVINGSTON. The Livingston landfill consists of approximately 556 acres, of which approximately 255 are permitted acres. There are approximately 30.0 million cubic yards of unused permitted airspace. Previously, cells developed at the Livingston landfill have been constructed with double composite liner systems. In September 1996, the Livingston landfill received a permit to construct cells using a single liner composite system. In February 1997, Livingston received a significant modification permit from the Illinois Environmental Protection Agency for a major lateral and vertical expansion and re-permitting of the site. This significant modification permit includes authorization to expand the residual waste monofill into a facility capable of accepting various special wastes and MSW, and thereby increases the permitted acreage by approximately 200 acres to approximately 255 acres and increased the site's available capacity from approximately 6.0 million cubic yards to an estimated available capacity of approximately 30.0 million cubic yards. The Livingston landfill has approximately 14 years of total site life at current disposal levels, which have increased substantially since its acquisition by the Company. WYANDOT. The Wyandot landfill consists of approximately 344 acres in three proximate locations, and the Company has an option to purchase up to approximately 94 adjacent additional acres in the vicinity. Approximately 87 of the owned acres are permitted, and there are approximately 6.2 million cubic yards of unused permitted airspace. Cells developed to date at the Wyandot landfill have been constructed with double composite liner systems. The Company has applied for a permit from applicable regulatory authorities to use a single composite liner in constructing new cells, which the Company believes should reduce cell development costs. In addition, the Company has applied for a permit from the Ohio Environmental Protection Agency to expand its landfill capacity by using the valley between two of the hills that are currently permitted for waste disposal, as well as the option acreage. The Company anticipates that if it exercised its option, obtained the required permits and constructed the additional landfill areas, the Wyandot landfill would have approximately 50 years of total site life at current disposal levels. CLARION. The Clarion landfill consists of approximately 606 acres, of which approximately 60 are permitted acres. There are approximately 4.1 million cubic yards of unused permitted airspace. Cells developed at the Clarion landfill have been, and due to regulatory requirements will continue to be, constructed with double liner systems. The Clarion landfill has approximately 11 years of total site life at current disposal levels. WHEATLAND. The Wheatland landfill consists of approximately 68 acres, and the Company has an option to purchase up to approximately 800 additional acres in the vicinity. Approximately 55 of the owned acres are permitted acres and there are approximately 1.3 million cubic yards of unused permitted airspace. The Company anticipates that after a planned expansion, the Wheatland landfill would have approximately eight years of total site life at current disposal levels (three years if such expansion is not approved by the Cherokee County Board of Commissioners). In addition, the Company has an option to purchase an undeveloped parcel in Missouri, which has been granted a permit to develop a landfill. PITTSBURG COUNTY. The Pittsburg County landfill consists of approximately 76 acres, of which approximately 15 are permitted acres. There are approximately 0.4 million cubic yards of unused permitted airspace. The Company applied for a permit in October 1996 to build a lateral expansion that would increase permitted capacity to approximately 30 acres. The Company anticipates that after the planned expansion, the Pittsburg County landfill would have approximately 25 years of total site life at current disposal levels. BLACKFOOT. The Blackfoot landfill in Evansville, Indiana consists of approximately 379 acres, of which approximately 166 are permitted acres. The site recently received a permit which increases the available capacity to approximately 17.9 million cubic yards of airspace. The Blackfoot landfill has approximately 45 years of total site life at current disposal levels. 34 TRANSFER STATIONS The Company has an active program to acquire, develop, own, operate and contract to receive waste volumes from transfer stations in markets which are proximate to its operations. The use of transfer stations reduces the Company's costs associated with the transportation of its collected waste and also increases the market area served by the Company's landfills. Presently, the Company owns, operates or has exclusive contracts to receive waste from a total of 12 transfer stations. In addition, two new transfer stations are under construction, each of which will replace an existing transfer station. MISSOURI REGION. The Company owns, operates or has exclusive agreements with six transfer stations in the Missouri region. In 1993, the Company acquired its first transfer station in the Missouri region. Concurrently, the Company entered into exclusive agreements with three municipal transfer stations to receive their waste at the Company's Wheatland landfill. In 1995, the Company developed and began operating two additional transfer stations. Currently, the Company is constructing a transfer station in the region which will replace the Bentonville, Arkansas transfer station. OHIO REGION. The Company owns, operates or has exclusive agreements with four transfer stations in the Ohio region. The Company entered into exclusive contracts in 1995 to receive waste from two transfer stations in its Ohio region. The Company has recently acquired two transfer stations through its acquisition of the Ross Bros. Waste & Recycling Co., located in Mt. Vernon, Ohio and Bowers-Phase II, Inc. in Vickery, Ohio. In 1996, the Company applied for a permit to develop and operate a new transfer station for Marion County, Ohio. Currently, this transfer station is under construction and when completed will replace the Marion County transfer station. ILLINOIS REGION. In August 1996, the Company secured additional volume under an exclusive, long-term agreement with a transfer station in Bloomington, Illinois. SOUTHWESTERN INDIANA REGION. The Company operates under an exclusive, long-term agreement with a transfer station in Evansville, Indiana. In addition, the Company has a permit to develop a new transfer station in the region. COLLECTION OPERATIONS The Company collects solid waste from over 150,000 residential, commercial and industrial customers through its own collection operations and through brokerage arrangements with other haulers. The Company's collection operations are conducted generally within a 50-mile radius of either its transfer stations or landfills, which allows the Company to serve a geographic area within a radius of approximately 125 miles from its landfills. The Company also contracts with local generators of solid waste and directs the waste to either its own landfill or to a third-party landfill or for additional handling at one of its transfer stations. During the year ended December 31, 1996, the Company's captive waste (including the Company's collection operations and third party haulers operating under long-term contracts) constituted an average of approximately 61% of the solid waste disposed of at its landfills. See "Risk Factors-- Dependence on Third Party Collection Operations." Fees for the Company's commercial and industrial collection services are determined by such factors as collection frequency, type of equipment and containers furnished, the type, volume and weight of the waste collected, the distance to the disposal or processing facility and the cost of disposal or processing. A majority of the Company's commercial and industrial waste collection services are performed under contracts. Substantially all of the Company's municipal solid waste collection services are performed under contracts with municipalities. These contracts grant the Company exclusive rights to service all or a portion of the residential homes in a specified community or provide a central repository for residential waste drop-off. The Company currently has 49 municipal contracts in place. Municipal contracts in the Company's market areas are typically awarded, at least initially, on a competitive bid basis and usually range in duration from one to five years. Fees are based primarily on the frequency and type of service, the distance 35 to the disposal or processing facility and the cost of disposal or processing. Municipal collection fees are usually paid either by the municipalities from tax revenues or through direct service charges to the residents receiving the service. The Company also provides subscription residential collection services directly to households. SALES AND MARKETING The Company has a coordinated marketing strategy which is formulated at the corporate level and implemented at the regional level to achieve its desired mix of MSW and special waste in each of its regions. For example, certain employees of the Company in its Illinois, Indiana, Ohio and western Pennsylvania regions focus on securing special waste generated by industrial customers. In addition to competitive pricing, the Company's marketing strategy emphasizes quality service particularly with respect to rapid turnaround time at its landfills. Each manager implements the Company's marketing strategy, which is overseen by senior management. Depending upon the size of the region and its customer mix, each manager may focus on commercial, industrial, residential or municipal accounts to a varying degree. The Company maintains periodic contact with all of its accounts to increase customer retention. Company salespersons call on prospective customers in a specified geographic territory. Since the Company acquires its waste collection operations primarily from entrepreneurs who generally do not have independent sales forces, the Company often retains these entrepreneurs during the transition period following the acquisition of such operations to acquaint the Company's sales force with the acquired companies' customer base. The Company has a diverse customer base, with no single customer accounting for more than 10% of the Company's revenues in 1996. The Company does not believe that the loss of any single customer would have a material adverse effect on the Company's results of operations. COMPETITION The solid waste collection and disposal business is highly competitive and requires substantial amounts of capital. The Company competes with numerous local and regional companies and, in selected areas, with the large national waste management companies. The industry is led by four national waste management companies, WMX Technologies, Inc., Browning-Ferris Industries, Inc., USA Waste Services, Inc. and Allied Waste Industries, Inc. (having completed its acquisition of the solid waste management operations of Laidlaw Inc.), and includes numerous local and regional companies of varying sizes and competitive resources such as United Waste Systems, Inc., Republic Industries, Inc., Superior Services, Inc. and Eastern Environmental Services, Inc. The large national companies, as well as a number of the regional companies, are significantly larger and have greater financial resources than the Company. The Company also competes with those counties and municipalities that maintain their own waste collection and disposal operations. These counties and municipalities may have financial advantages due to the availability to them of tax revenues and tax exempt financing. The Company competes primarily by charging competitive prices and offering quality service. Competitors may reduce the price of their services in an effort to expand market share or to win competitively bid municipal contracts. The solid waste collection and disposal industry is currently undergoing significant consolidation, and the Company encounters competition in its efforts to acquire landfills and collection operations. Accordingly, it may become uneconomical for the Company to make further acquisitions or the Company may be unable to locate or acquire suitable acquisition candidates at price levels and on terms and conditions that the Company considers appropriate, particularly in markets the Company does not already serve. Competition in the disposal industry may also be affected by the increasing national emphasis on recycling and other waste reduction programs, which may reduce the volume of waste deposited in landfills. See "Risk Factors--Highly Competitive Industry and "--Use of Alternatives to Landfill Disposal." 36 LIABILITY INSURANCE AND BONDING The Company carries a broad range of insurance for the protection of its assets and operations that it believes is customary to the waste management industry, including pollution liability coverage. Specifically, each of the Company's six landfills has pollution liability coverage of $10.0 million per occurrence or $10.0 million in the aggregate subject to a $10,000 deductible. Nevertheless, if the Company were to incur liability for environmental damage which exceeds coverage limits or is not covered by insurance, its business, financial condition and results of operations could be materially adversely affected. The Company is required to post a performance bond or a bank letter of credit or to provide other forms of financial assurance in connection with closure and post-closure obligations with respect to landfills and its other solid waste management operations and may be required to provide such financial assurance in connection with municipal residential collection contracts. As of December 31, 1996, the Company had outstanding approximately $15.7 million of performance bonds. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts, or to provide other required forms of financial assurance, it would be unable to remain in compliance with the Subtitle D Regulations or comparable state requirements and, among other things, might be precluded from entering into certain municipal collection contracts and obtaining or holding landfill operating permits. EMPLOYEES As of March 31, 1997, the Company employed approximately 580 employees, 75 of whom were managers or professionals, 414 of whom were hourly paid employees involved in collection, transfer and disposal operations, and 91 of whom were sales, clerical, data processing or other administrative employees. None of the Company's employees is represented by unions, and the Company has no knowledge of any organizational efforts among its employees. The Company believes that its relations with its employees are good. ENVIRONMENTAL REGULATIONS The Company is subject to extensive and evolving environmental laws and regulations that have been enacted in response to technological advances and increased concern over environmental issues. These regulations are administered by the EPA and various other federal, state and local environmental, transportation, health and safety agencies. The Company believes that there will continue to be increased regulation, legislation and regulatory enforcement actions related to the solid waste management, collection and disposal industry. In light of these developments, the Company attempts to anticipate future regulatory requirements that might be imposed and plans accordingly to remain in compliance with the regulatory framework. In order to develop and operate a landfill, transfer station or other solid waste management facility, the Company typically must go through several governmental review processes and obtain one or more permits and often zoning or other land use approvals. These permits and zoning or land use approvals are difficult and time consuming to obtain or to secure renewal of and sometimes are opposed by various local elected officials and citizens' groups. Once obtained, operating permits generally must be periodically renewed and are subject to modification and revocation by the issuing agency. The Company's operation of solid waste management facilities subject it to certain operational, monitoring, site maintenance, closure and post-closure and financial assurance obligations which change from time to time and which could give rise to increased capital expenditures and operating costs. In connection with the Company's acquisition of existing landfills, it is often necessary to expend considerable time, effort and money in complying with the governmental review and permitting process necessary to maintain or increase the capacity of these landfills. Governmental authorities have the power to enforce compliance with these laws and regulations and to obtain injunctions or impose civil or criminal penalties in the case of violations. During the ordinary course of its landfill operations, the Company has from time 37 to time received citations or notices from such authorities that such operations are not in compliance with certain applicable environmental laws and regulations. Upon receipt of such citations or notices, the Company generally works with the authorities in an attempt to resolve the issues raised by such citations or notices. Failure to correct the problems to the satisfaction of the authorities could lead to curtailed operations or even closure of a landfill. In order to transport solid waste, it is generally necessary for the Company to possess one or more permits and approvals from state or local agencies. These permits must also be periodically renewed and are subject to modification and revocation by the issuing agency. In addition, the Company's waste transportation operations are subject to evolving law and regulations that impose operational, monitoring, training and safety requirements. The Company believes that its operations are in substantial conformity with its permits. The principal federal, state and local statutes and regulations applicable to the Company's operations are as follows: THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA"). RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to insure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and non-hazardous. Wastes are generally classified as hazardous wastes if they: (i) either (a) are specifically included on a list of hazardous wastes or (b) exhibit certain hazardous characteristics; and (ii) are not specifically designated as non-hazardous. Wastes classified as hazardous under RCRA are subject to much stricter regulation than wastes classified as non-hazardous. Among the wastes that are specifically designated as non-hazardous waste are household waste and special wastes. These wastes, which will be accepted at the Company's landfills, may contain substances that may be as toxic or prone to cause contamination as some wastes classified and regulated as hazardous. In October 1991, the EPA adopted the Subtitle D Regulations. These new regulations became generally effective in October 1993 (except for new financial assurance requirements, which become effective April 9, 1997) and include location restrictions, siting criteria, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, these new regulations require that new landfill units meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) designed to keep leachate out of the groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Groundwater wells must also be installed at virtually all landfills to monitor groundwater quality. The Company believes that there is no groundwater contamination at its landfills that is material to its financial condition. The regulations also require, where threshold test levels are present, that methane gas generated at landfills be controlled in a manner that will protect human health and the environment. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed upon it by the EPA. Each state is also required to adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply with the Subtitle D criteria. All states in which the Company owns landfills have adopted regulations or programs as stringent as or more stringent than the Subtitle D Regulations, which were first proposed by the EPA in August 1988. All states in which the Company's landfills are located have adopted the required plans and have submitted them to the EPA for review. Pennsylvania, Oklahoma, Ohio, Illinois, Kansas and Indiana have each received full EPA approval for their programs. THE FEDERAL WATER POLLUTION CONTROL ACT OF 1977, AS AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes rules regulating the discharge of pollutants from a variety of sources, including solid waste disposal sites, into waters of the United States. If runoff or collected leachate from the Company's landfills is discharged into waters of the United States, the Clean Water Act would require the Company to 38 apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with federal storm water regulations, which are designed to prevent possibly contaminated storm water from flowing into surface waters. These regulations required that applications for stormwater discharge permits be submitted by October 1992. The Company is working with the appropriate regulatory agencies to ensure that its facilities are in compliance with Clean Water Act requirements, particularly as they apply to treatment and discharge of leachate and storm water. The Company has secured or has applied for the required discharge permits under the Clean Water Act or comparable state-delegated programs. In those instances where the Company's applications for discharge permits are pending and a final discharge permit has not been issued, the Company is substantially in compliance with applicable substantive standards set by the respective states in administering the Clean Water Act. To ensure compliance with the Clean Water Act pretreatment and discharge requirements, the Company has arranged to discharge its effluent to municipal wastewater treatment facilities, except at the Pittsburg County landfill, where the state regulatory agency has allowed recirculation of the Company's leachate to a lined area of the landfill. THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF 1980 ("CERCLA"). CERCLA established a regulatory and remedial program intended to provide for the investigation and cleanup of facilities from which there has been, or is threatened, a release of any hazardous substance into the environment. CERCLA's primary mechanism for remedying such problems is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, as well as the generators of the hazardous substances and the transporters who arranged for disposal or transportation of the hazardous substances. The costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend upon the existence or disposal of "hazardous waste" but can also be founded upon the existence of even very small amounts of the many hundreds of "hazardous substances" listed by the EPA, many of which can be found in household waste. If the Company were to be found to be a responsible party for a CERCLA cleanup, either at one of the Company's owned or operated facilities, or at a site where waste transported by the Company has been stored or disposed of, the Company could be held completely responsible for all investigative and remedial costs even if others may also be liable. CERCLA also authorizes the imposition of a lien in favor of the United States upon all real property subject to or affected by a remedial action for all costs for which a party is liable. The Company's ability to obtain reimbursement from others for their allocable share of such costs would be limited by the Company's ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties. In the past, legislation has been introduced in Congress to limit the liability of municipalities and others under CERCLA as generators and transporters of municipal solid waste. Although such legislation has not been enacted, if it were to pass it would limit the Company's ability to seek full contribution from municipalities for CERCLA cleanup costs even if the hazardous substances that were released and caused the need for cleanup at one of the Company's facilities were generated by or transported to the facility by a municipality. Continued funding for implementation of RCRA, the Clean Water Act and CERCLA is scheduled for re-authorization by Congress this year. Depending upon whether and how Congress acts, it is possible that each of these laws may be changed in ways that may significantly affect the Company's business. THE CLEAN AIR ACT. The Clean Air Act, including the 1990 amendments, provides for regulation, through state implementation of federal requirements, of the emission of air pollutants from certain landfills based upon the date of the landfill construction and volume per year of emissions of regulated pollutants. The EPA has recently promulgated new source performance standards regulating air emissions of certain regulated pollutants (methane and non-methane organic compounds) from municipal solid waste landfills. The EPA has also issued regulations controlling the emissions of particular regulated air pollutants from municipal solid waste landfills. Landfills located in areas designated as having air pollution 39 problems may be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Each of the federal statutes described above contains provisions authorizing, under certain circumstances, the bringing of lawsuits by private citizens to enforce the provisions of the statutes. THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA"). OSHA establishes employer responsibilities and authorizes the promulgation by the Occupational Safety and Health Administration of occupational health and safety standards, including the obligation to maintain a workplace free of recognized hazards likely to cause death or serious injury, to comply with adopted worker protection standards, to maintain certain records, to provide workers with required disclosures and to implement certain health and safety training programs. Various of those promulgated standards may apply to the Company's operations, including those standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials, and worker training and emergency response programs. The Company's employees are trained to respond appropriately in the event there is an accidental spill or release of packaged asbestos-containing materials or other regulated substances during transportation or landfill disposal. STATE AND LOCAL REGULATION. Each state in which the Company now operates or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. In addition, many states have adopted "Superfund" statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting Company operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put out for bid for the right to provide collection services, and bans or other restrictions on the movement of solid wastes into a municipality. Certain permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, certain permits and approvals, as well as certain state and local regulations, may limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states, under certain circumstances, to reduce the amounts of waste exported to other states. Although such legislation has not been passed by Congress yet, if this or similar legislation is enacted, states in which the Company operates landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could materially adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state. In addition, certain states and localities may for economic or other reasons restrict the exportation of waste from their jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the United States Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on taking waste out of the locality. However, certain state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, the Company may elect not to challenge such restrictions based upon various considerations. In addition, the aforementioned proposed federal legislation, if adopted, could allow states and localities to impose certain 40 flow control restrictions. These restrictions could result in the volume of waste going to landfills being reduced in certain areas, which may materially adversely affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, the Company's business, financial condition and results of operations could be materially adversely affected. There has been an increasing trend at the state and local level to mandate and encourage waste reduction at the source and waste recycling and to prohibit or restrict the disposal of certain types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect the Company's ability to operate its facilities at their full capacity. PROPERTY AND EQUIPMENT The principal fixed assets used by the Company in connection with its landfill operations are its landfills which are described under "Business--Operations--Landfills." The six landfills currently owned by the Company are situated on sites owned by the Company. The principal fixed assets used by the Company in its collection operations and transfer stations are approximately 85 acres of land used for transfer stations and other facilities related to collection operations (of which approximately 39 acres are owned and 46 acres are leased); and approximately 90 landfill equipment and machinery units, 40,000 collection containers and small equipment units and 380 trucks and trailers (in each instance, such number includes owned and leased units). The Company's corporate headquarters are located in Burr Ridge, Illinois, where it leases approximately 4,000 square feet of space. LEGAL PROCEEDINGS In the normal course of its business and as a result of the extensive governmental regulation of the waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company to revoke, or to deny renewal of, an operating permit held by the Company. From time to time, the Company also may be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of its landfills or transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company is or may become party to various claims and suits pending for alleged damages to persons and property, alleged violation of certain laws and for alleged liabilities arising out of matters occurring during the normal operation of the waste management business. In the opinion of management, the liability, if any, under these claims and suits would not materially adversely affect the business, financial condition or results of operations of the Company. 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information concerning the Company's executive officers and directors as of March 31, 1997:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- David C. Stoller..................................... 46 Chairman; Director Richard De Young..................................... 43 President; Director Richard Kogler....................................... 37 Vice President; Chief Operating Officer Stephen P. Lavey..................................... 35 Vice President; Chief Financial Officer Ann L. Straw......................................... 43 Vice President; General Counsel and Secretary Lawrence R. Conrath, Sr.............................. 40 Vice President; Controller John J. McDonnell.................................... 42 Vice President--Engineering Mary T. Ryan......................................... 43 Vice President--Corporate Affairs Merril M. Halpern.................................... 62 Director A. Lawrence Fagan (1)................................ 67 Director Richard T. Henshaw, III (2).......................... 58 Director G.T. Blankenship (2)................................. 68 Director Norman Steisel (1)................................... 54 Director
- ------------------------ (1) Member of audit committee (2) Member of compensation committee DAVID C. STOLLER has been Chairman and a director of the Company since the Exchange. He has served in the same capacities for ADS (since January 1993) and CDI (since May 1995). Since January 1997, he has been a Managing Director of Charterhouse, which is a private investment firm specializing in leveraged buy-out acquisitions. From August 1992 through December 1996, Mr. Stoller served as the Chairman of Charterhouse Environmental Capital Group, Inc. ("Charterhouse Environmental Capital"), which provided management and consulting services to companies with environmental operations including the Company. Charterhouse Environmental Capital is an affiliate of Charterhouse. Mr. Stoller was a partner at the law firm of Milbank, Tweed, Hadley & McCloy (where he remains as "Of Counsel") from January 1989 through July 1992. RICHARD DE YOUNG has been President and a director of the Company since the Exchange. He has also served as President of ADS since April 1994 and as a director since September 1993 and was the Chief Operating Officer and Vice President for ADS from January 1993 through April 1994. Mr. De Young has been a director of CDI since May 1995, and its President since July 31, 1996. From June 1982 through January 1993 he was employed by Waste Management of North America, a subsidiary of WMX Technologies, Inc. ("WMX"), most recently as a Regional Operations Vice President, with responsibility for landfill and collection operations in the Midwest region. RICHARD KOGLER has been a Vice President and the Chief Operating Officer of the Company since the Exchange. He previously served in the same capacities for ADS since May 1995 and as President of CDI between May 1995 and July 1996. He has been Vice President of CDI since July 31, 1996. From October 1984 through May 1995 Mr. Kogler was employed by WMX, most recently as a Regional Operations Vice President. STEPHEN P. LAVEY has been a Vice President and the Chief Financial Officer of the Company since February 1997. He was previously employed by Bank of America from June 1990 through January 1997, most recently as a Vice President in its Environmental Services Lending Group, specializing in the solid waste, environmental engineering and water purification industries. 42 ANN L. STRAW has been a Vice President and the General Counsel of the Company since the Exchange. She previously served in the same capacities for ADS (since June 1995) and for CDI (since June 1995). She has been the Secretary of the Company since the Exchange, and of ADS and CDI since July 31, 1995. From 1986 through May 1995 she was employed by WMX, most recently as a Group Counsel for WMX's Midwest Group. LAWRENCE R. CONRATH, SR. has been Controller of the Company since the Exchange and a Vice President since May 1996. He previously served as Controller for ADS since May 1994. Prior to joining the Company, Mr. Conrath spent two years with United Waste Systems, Inc., as Regional Controller of its Michigan region. From 1978 through 1990, Mr. Conrath was employed by WMX in several financial positions, most recently as Director of Accounting for the WMX Urban Services Group. JOHN J. MCDONNELL has been a Vice President--Engineering of the Company since the Exchange. He previously served as Environmental Engineer for ADS (since February 1993) and CDI (since June 1995). From 1985 through February 1993, Mr. McDonnell was employed by WMX, most recently as an Engineering Manager. MARY T. RYAN has been a Vice President--Corporate Affairs since March 1997 after joining the Company in November 1996. From May 1996 to November 1996, she was previously employed by Ketchum Public Relations as Senior Vice President, Corporate Issues. From July 1984 to April 1995 she was employed by WMX Technologies, Inc., most recently as Vice President, Management Services. MERRIL M. HALPERN has served as a director of the Company since the Exchange. Since October 1984, Mr. Halpern has served as Chairman of the Board of Charterhouse. From 1973 to October 1984, Mr. Halpern served as President and Chief Executive Officer of Charterhouse. Mr. Halpern is also a director of Designer Holdings Ltd., a developer and marketer of designer sportswear lines ("Designer Holdings"); Insignia Financial Group, Inc., a real estate management firm; and Microwave Power Devices, Inc., a manufacturer of highly linear power amplifiers primarily for the wireless telecommunications market ("MPD"). A. LAWRENCE FAGAN has served as a director of the Company since the Exchange. He has been President of Charterhouse since January 1997 and formerly served as Executive Vice President of Charterhouse since 1984. Mr. Fagan is also a director of Designer Holdings and MPD. RICHARD T. HENSHAW, III has been a director of the Company since the Exchange. He has served as a director of ADS (since January 1993) and CDI (since May 1995). Mr. Henshaw has been a Managing Director of Charterhouse since January 1997 and formerly served as a Senior Vice President of Charterhouse since 1991. Prior thereto he was a Senior Vice President of The Bank of New York. Mr. Henshaw is also a director of Cornell Corrections, Inc., a provider of privatized correctional services. G.T. BLANKENSHIP has been a director of the Company since the Exchange. He previously served as a director of ADS (since January 1991). Mr. Blankenship has been a self-employed private investor since 1990. NORMAN STEISEL has been a director of the Company since July 1996. He has been the President of EnEssCo Strategies, a strategic consulting services firm specializing in government regulated markets, since January 1994. From January 1990 through December 1993, Mr. Steisel was the First Deputy Mayor of the City of New York. Prior to 1990, he was a Senior Vice President at Lazard Freres & Co., specializing in environmental corporate and municipal finance. See "Certain Transactions" and "Principal Stockholders" for certain information concerning the Company's directors and executive officers. Directors of the Company hold office until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed 43 by and serve at the discretion of the Board of Directors. There are no family relationships among any directors or officers of the Company. The Board of Directors has established a compensation committee and an audit committee. The compensation committee reviews executive salaries, administers any bonus, incentive compensation and stock option plans of the Company, including the American Disposal Services, Inc. 1996 Stock Option Plan, and approves the salaries and other benefits of the executive officers of the Company. In addition, the compensation committee consults with the Company's management regarding pension and other benefit plans and compensation policies and practices of the Company. The audit committee reviews the professional services provided by the Company's independent auditors, the independence of such auditors from management of the Company, the annual financial statements of the Company and the Company's system of internal accounting controls. The audit committee also reviews such other matters with respect to the accounting, auditing and financial reporting practices and procedures of the Company as it may find appropriate or may be brought to its attention, and meets from time to time with members of the Company's internal audit staff. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Company's compensation committee determined the compensation of all the Company's executive officers. The compensation committee of the Board of Directors consists of Messrs. Blankenship and Henshaw. No member of the compensation committee or executive officer of the Company has a relationship that would constitute an interlocking relationship with the executive officers or directors of another entity. DIRECTOR COMPENSATION The only directors who are compensated for services as a director are Messrs. Blankenship and Steisel, each of whom receives $2,000 for each meeting of the Board of Directors that he attends and $500 for each meeting of a committee of the Board of Directors that he attends. EXECUTIVE COMPENSATION The following table sets forth, for the years ended December 31, 1996 and 1995, the cash compensation paid and shares underlying options granted to each of the five most highly compensated executive officers whose salary for each such fiscal year was in excess of $100,000. The Company did not pay bonuses to these individuals during the years ended December 31, 1996 and 1995. 44 SUMMARY COMPENSATION TABLE
SHARES UNDERLYING YEAR SALARY OPTIONS GRANTED --------- ---------- ---------------- Richard De Young, President(1)............................................. 1996 $ 275,442 282,743 1995 $ 230,092 0 Scott Flamm(2)(3).......................................................... 1996 $ 225,000 83,989 1995 $ 122,106 0 David C. Stoller(4)........................................................ 1996 $ 125,000 218,371 1995 0 0 Richard Kogler(5).......................................................... 1996 $ 160,500 52,082 1995 $ 93,246 0 Ann L. Straw(6)............................................................ 1996 $ 142,500 34,863 1995 $ 73,125 0
- ------------------------ (1) Options to purchase 282,743 shares were granted to Mr. De Young in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years. (2) Mr. Flamm resigned from the Company in February 1997. (3) Options to purchase 83,989 shares were granted to Mr. Flamm in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years. (4) Options to purchase 218,371 shares were granted to Mr. Stoller in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years. (5) Options to purchase 29,857 shares were granted to Mr. Kogler in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years. Mr. Kogler's 1995 compensation figure reflects employment during the period from May 1995 to year ended December 31, 1995. (6) Options to purchase 19,863 shares were granted to Ms. Straw in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years. Ms. Straw's 1995 compensation figure reflects employment during the period from June 1995 to year ended December 31, 1995. STOCK OPTIONS The following table contains information concerning the grant of options to purchase shares of the Company's Common Stock to each of the named executive officers of the Company during the year ended December 31, 1996. No stock appreciation rights ("SARS") were granted in 1996. 45 OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL ---------------------------------- RATES OF STOCK NUMBER OF PERCENT OF TOTAL APPRECIATION FOR OPTION SECURITIES OPTIONS GRANTED TERM (1) UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION --------------------------- NAME OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) DATE (2) 5% 10% - ------------------------------- --------------- ----------------- --------------- ----------- ------------ ------------- Richard De Young (3)........... 0 0% N/A N/A $ 0 $ 0 Scott Flamm(3)(4).............. 0 0% N/A N/A $ 0 $ 0 David C. Stoller(3)............ 0 0% N/A N/A $ 0 $ 0 Richard Kogler(3).............. 22,225 32.6% $ 9.00 07/30/06 $ 125,795 $ 318,788 Ann L. Straw(3)................ 15,000 22.0% $ 9.00 07/30/06 $ 84,901 $ 215,155
- ------------------------ (1) Amounts reported in these columns represent amounts that may be realized upon exercise of options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) on the Company's Common Stock over the term of the options. The potential realizable values set forth above do not take into account applicable tax and expense payments that may be associated with such option exercises. Actual realizable value, if any, will be dependent on the future price of the Common Stock on the actual date of exercise, which may be earlier than the stated expiration date. The 5% and 10% assumed annualized rates of stock price appreciation over the exercise period of the options used in the table above are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of the Common Stock on any date. There is no representation either express or implied that the stock price appreciation rates for the Common Stock assumed for purposes of this table will actually be achieved. (2) Each option is subject to earlier termination if the officer's employment with the Company is terminated for certain reasons. (3) Options granted in 1996 as part of the Exchange to replace options to purchase shares of ADS and CDI granted in prior years are excluded. (4) Mr. Flamm resigned from the Company in February 1997. 46 The following table sets forth information for each of the named executive officers with respect to the value of options outstanding as of December 31, 1996. There were no options exercised during 1996. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS DECEMBER 31, 1996 AT DECEMBER 31, 1996 (1) -------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------------------------- ----------- ------------- ------------ ------------- Richard De Young......................................... 111,376 171,367 $ 1,244,911 $ 1,974,328 Scott Flamm(2)........................................... 47,759 36,230 $ 529,647 $ 401,791 David C. Stoller......................................... 124,171 94,200 $ 1,377,067 $ 1,044,667 Richard Kogler........................................... 9,169 42,913 $ 102,056 $ 441,708 Ann L. Straw............................................. 6,103 28,760 $ 67,869 $ 280,844
- ------------------------ (1) Represents the difference between $18.50, the last reported sales price per share of the Common Stock on December 31, 1996, and the exercise price per share of the in-the-money options, multiplied by the number of shares underlying the in-the-money options. (2) Mr. Flamm resigned from the Company in February 1997. EMPLOYMENT AGREEMENTS In May 1996, Mr. Stoller entered into an employment agreement with the Company, under which he serves as the Company's Chairman. The employment agreement provides for an annual base salary of $300,000 and terminates on July 30, 1997, but is automatically renewed for successive one-year terms unless either party terminates the agreement on 180 days' notice. The employment agreement provides that Mr. Stoller will receive a $600,000 payment in the event his employment is terminated following a "change-in-control" of the Company. In May 1996, Mr. De Young entered into an employment agreement with the Company, under which he serves as the Company's President. The employment agreement provides for an annual base salary of $300,000 and terminates in July 1999. The employment agreement provides that Mr. De Young will receive a $600,000 payment in the event his employment is terminated following a "change-in-control" of the Company. In addition, if the Company retains an officer (other than the Chairman of the Board) in a capacity that is senior to Mr. De Young, or if his responsibilities are materially diminished (other than for cause), Mr. De Young will have the right to terminate his employment in which event he will be entitled to receive payments equal to the greater of $750,000 or the remaining aggregate amount of base salary otherwise payable under the employment agreement. In May 1995, Mr. Kogler entered into an employment agreement with the Company, which provides for an annual base salary of $150,000 and an initial term of three years (continuing on an at-will basis thereafter). In June 1995, Ms. Straw entered into an employment agreement with the Company, under which she serves as its Vice President and General Counsel. The employment agreement currently provides for an annual salary of $135,000 and terminates on June 2, 1998, but is automatically renewed for successive one-year terms unless either party terminates on 30 days' notice. 47 1996 STOCK OPTION PLAN Effective as of January 1, 1996, the Company adopted the American Disposal Services, Inc. 1996 Stock Option Plan (the "Plan"). The Plan is a stock plan providing for the grant of incentive stock options and nonqualified stock options to key employees and consultants of the Company and its subsidiaries. ADMINISTRATION. The Plan is administrated by the compensation committee of the Company's Board of Directors (the "Committee"). The Committee determines the key employees and consultants eligible to receive options and the terms thereof, all in a manner consistent with the Plan. SHARES SUBJECT TO OPTIONS. The Plan provides that the total number of shares of Common Stock that may be subject to options shall be 1,100,000 shares. Shares subject to any option which terminates or expires unexercised will be available for subsequent grants. In March 1997, the Board of Directors approved an amendment to the Plan to increase the total number of shares of Common Stock that may be subject to option grants to 1,600,000 shares. The effectiveness of such amendment is conditioned upon the approval thereof by the stockholders of the Company. OPTIONS. The Plan provides for the grant of incentive stock options and nonqualified stock options to key employees and consultants, as determined by the Committee. The exercise price of incentive stock options granted under the Plan shall be at least 100% of fair market value of the Common Stock on the date of grant and the exercise price of nonqualified stock options shall be at least equal to the par value of the Common Stock. Nonqualified stock options shall be exercisable for not more than ten years, and incentive stock options may be exercisable for up to ten years except as otherwise provided. The Committee may provide that an optionee may pay for shares upon exercise of an option: (i) in cash; (ii) in already-owned shares of Common Stock; (iii) by agreeing to surrender then exercisable options equivalent in value; (iv) by payment through a cash or margin arrangement with a broker; (v) in shares otherwise issuable upon exercise of the option; or (vi) by such other medium or by any combination of (i), (ii), (iii), (iv) or (v) as authorized by the Committee. The grant of an option may be accompanied by a reload option, which gives an optionee who pays the exercise price of an option with shares of Common Stock an additional option to acquire the same number of shares that was used to pay for the original option. Under certain circumstances, including termination of employment upon retirement, disability or death, the option may be exercised during an extended period. In connection with the Exchange, all options to purchase shares of ADS and CDI were exchanged for options to purchase shares of Common Stock under the Plan. 48 CERTAIN TRANSACTIONS Mr. Stoller is an officer of Charterhouse Environmental Capital, an affiliate of Charterhouse, which provided management and consulting services to the Company from 1993 through the closing of the Company's initial public offering on July 30, 1996. These services included: services relating to the Company's banking and other financial relationships including assistance in connection with the financing and refinancing of corporate indebtedness; analysis and assistance from both a financial and operational standpoint in connection with the expansion of the Company's business operations; assistance with strategic planning; and advice related to acquisitions. Fees paid by the Company to Charterhouse Environmental Capital were $515,000 in 1994, $659,000 in 1995 and $466,000 in 1996. On November 16, 1995, the Company borrowed $12.5 million from Charterhouse Equity Partners II, L.P. See "Principal Stockholders." The loan was scheduled to mature on November 15, 1996 and bore interest at a rate per annum equal to the prime rate plus 3%. The Company repaid this loan in June 1996 with $7.5 million of borrowings under the Credit Facility and the remaining $5.0 million was repaid with existing cash. Effective as of January 1, 1996, the Company entered into agreements with each of its executive officers providing that, upon such officer's exercise of stock options granted in exchange for options previously granted by CDI, the Company will pay to such officer an amount equal to the tax savings actually recognized by the Company as a result of the deductions attributable to such exercise. In no event can the payment to be received by an executive officer under such agreement exceed the difference between the federal income tax actually paid by such officer as a result of such option exercise and the amount of federal income tax that would have been paid by such officer had such option exercise been taxed at the capital gains rate. All future transactions, including loans, between the Company and its officers, directors, principal stockholders or their affiliates will be subject to approval of a majority of the independent and disinterested outside directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Common Stock as of March 31, 1997 and as adjusted to reflect the sale of the Common Stock offered hereby, by: (i) each person known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock; (ii) each of the Company's directors; (iii) the Company's Chief Executive Officer and each of the Company's other current executive officers; and (iv) the Company's directors and executive officers as a group.
PERCENTAGE OWNERSHIP (1) ------------------------ NUMBER OF SHARES BENEFICIALLY PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED OFFERING OFFERING - --------------------------------------------------------------------------- ----------------- ----------- ----------- Charterhouse Environmental Holdings, L.L.C. (2)(3)......................... 1,867,289 21.05% 15.09% Charterhouse Equity Partners II, L.P. (3)(4)............................... 2,511,973 28.31% 20.30% CDI Equity, LLC (3)(5)..................................................... 644,109 7.26% 5.21% The Equitable Companies Incorporated (3)................................... 927,200 10.45% 7.49% The Capital Group Companies, Inc. (3)...................................... 575,000 6.48% 4.65% David C. Stoller (6)(7).................................................... 124,172 * * Richard De Young (6)(8).................................................... 119,069 * * Stephen P. Lavey........................................................... -- -- -- Merril M. Halpern (7)...................................................... -- -- -- A. Lawrence Fagan (7)...................................................... -- -- -- Richard T. Henshaw, III (7)................................................ -- -- -- G.T. Blankenship (9)....................................................... 100,935 1.14% * Norman Steisel............................................................. -- -- * Richard Kogler (6)......................................................... 10,345 * * Ann L. Straw (6)........................................................... 6,103 * * John J. McDonnell (6)(10).................................................. 33,840 * * Lawrence R. Conrath (6)(11)................................................ 20,246 * * Mary T. Ryan (12).......................................................... 5,000 * * All directors and executive officers as a group (13 persons)(6)............ 419,710 4.73% 3.39%
- ------------------------ * Less than one percent. (1) Assumes no exercise of the Underwriters' over-allotment option to purchase up to 525,000 additional shares of Common Stock from the Company. See "Underwriting." (2) The address of Charterhouse Environmental Holdings, L.L.C. ("Charter Environmental") is c/o Charterhouse Group International, Inc., 535 Madison Avenue, New York, New York 10022. Charterhouse Equity Partners, L.P. ("CEP") and StollerCo Partners, L.P. ("StollerCo") are the members of Charter Environmental, with a majority of the ownership interests being held by CEP. The general partner of CEP is CHUSA Equity Investors, L.P., whose general partner is Charterhouse Equity, Inc., a wholly-owned subsidiary of Charterhouse. As a result of the foregoing, all of the shares of Common Stock held by Charter Environmental would, for purposes of Section 13(d) of the Securities Exchange Act of 1934, be considered to be beneficially owned by Charterhouse. Mr. Stoller is a partner of StollerCo and disclaims beneficial ownership of shares of Common Stock held of record by Charter Environmental. (3) Information regarding The Equitable Companies Incorporated ("Equitable") and The Capital Group Companies, Inc. ("Capital Group") is based on Schedules 13G filed by such persons with the Securities and Exchange Commission as of December 31, 1996. Equitable filed its 13G jointly on 50 behalf of itself, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle and AXA. The address of Equitable is 787 Seventh Avenue, New York, NY 10019. The address of the Capital Group is 353 South Hope Street, Los Angeles, CA 90071. (4) The address of Charterhouse Equity Partners II, L.P. ("CEP II") is c/o Charterhouse Group International, Inc., 535 Madison Avenue, New York, New York 10022. The general partner of CEP II is CHUSA Equity Investors II, L.P., whose general partner is Charterhouse Equity II, Inc., a wholly-owned subsidiary of Charterhouse. As a result of the foregoing, all of the shares of Common Stock held by CEP II would, for purposes of Section 13(d) of the Securities Exchange Act of 1934, be considered to be beneficially owned by Charterhouse. (5) The address of CDI Equity, LLC ("CDI Equity") is c/o Aetna Life and Casualty Company, Conveyor IG6U, 151 Farmington Avenue, Hartford, Connecticut 06156. The member interests in CDI Equity, LLC are held as follows: 99% by Aetna Life Insurance Company, which is a wholly-owned subsidiary of Aetna Life and Casualty Company, and 1% by CDI Equity, Inc., a wholly-owned subsidiary of Aetna Life Insurance Company. (6) Includes options exercisable within 60 days of March 31, 1997 to purchase 124,172, 119,069, 10,345, 32,844, 19,348 and 6,103 shares granted under the American Disposal Services, Inc. 1996 Stock Option Plan to Messrs. Stoller, De Young, Kogler, McDonnell and Conrath and Ms. Straw, respectively. For purposes of computing the percentage of outstanding shares beneficially held by each person or group of persons named above on a given date, any security which such person or persons has the right to acquire within 60 days after such date is deemed to be beneficially owned for the purpose of computing the percentage ownership of such person or group of persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (7) Merril M. Halpern and A. Lawrence Fagan are executive officers, directors and stockholders of Charterhouse and Richard T. Henshaw, III and David C. Stoller are executive officers of Charterhouse. Messrs. Halpern, Fagan, Henshaw and Stoller each disclaim beneficial ownership of the shares of Common Stock beneficially owned by Charterhouse. (8) Includes 2,467 shares held jointly by Mr. De Young and his wife. (9) Includes 7,995 shares held by Mr. Blankenship's wife, of which Mr. Blankenship disclaims beneficial ownership. (10) Includes 996 shares held by Mr. McDonnell's minor children. (11) Includes 498 shares held jointly by Mr. Conrath and his wife and 400 shares held in an IRA for the benefit of Mr. Conrath. (12) Shares held jointly by Ms. Ryan and her husband. 51 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 20,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). The discussions of the Common Stock and Preferred Stock here and elsewhere in this Prospectus are qualified in their entirety by reference to: (i) the Certificate of Incorporation of the Company, as amended, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part; and (ii) the applicable Delaware law. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Stockholders casting a plurality of votes of the stockholders entitled to vote in an election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of Preferred Stock that may be issued at such future time or times. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company after the payment of all debts and other liabilities and subject to the prior rights of Preferred Stock that may be outstanding at such time. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company in the Offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. As of March 31, 1997, there were 8,872,501 shares of Common Stock outstanding. After giving effect to the issuance of the 3,500,000 shares of Common Stock offered by the Company hereby (assuming no exercise of the Underwriters' over-allotment option), there will be 12,372,501 shares of Common Stock outstanding upon the closing of the Offering. UNDESIGNATED PREFERRED STOCK The Company's Certificate of Incorporation authorizes 5,000,000 shares of Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control of others. At present, the Company has no plans to issue any of the Preferred Stock. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the 52 voting stock of the corporation outstanding at the time the transaction commenced (for the purposes of determining the number of shares outstanding, under Delaware law, those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer are excluded from the calculation); or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Section 203 defines a business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Certain provisions of the Company's Certificate of Incorporation and Delaware law may have a significant effect in delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. In particular, the ability of the Board of Directors to issue Preferred Stock without further stockholder approval may have the effect of delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. REGISTRATION RIGHTS After the Offering, the holders of 5,023,371 shares of Common Stock and warrants to purchase 168,905 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreements between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. The holders of such registrable securities may also require the Company on two separate occasions to file a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock, and the Company is required to use its diligent reasonable efforts to effect such registration. These rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration. TRANSFER AGENT The Transfer Agent for the Common Stock is the Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. Its telephone number is (212) 509-4000. 53 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have approximately 12,372,501 shares of Common Stock outstanding (assuming no exercise of the Underwriters' overallotment option). Of these shares, the 3,162,500 shares sold in the Company's initial public offering and the 3,500,000 shares sold in the Offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by an existing "affiliate" of the Company, as that term is defined by the Securities Act (an "Affiliate"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act. After the Offering, the holders of 5,023,371 shares of Common Stock, and warrants to purchase 168,905 shares of Common Stock, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by Affiliates) immediately upon the effectiveness of such registration. The Company's officers and directors and CEP, CEP II and CDI Equity, who beneficially own an aggregate of 5,443,081 shares of Common Stock or options or warrants to purchase shares of Common Stock, have agreed not to sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise any registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition for a period of 180 days after the date of this Prospectus, without the prior written consent of Oppenheimer & Co., Inc. Additionally, the Company has agreed not to sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition for a period 180 days after the date of this Prospectus, without the prior written consent of Oppenheimer & Co., Inc., subject to certain limited exceptions. In general, under Rule 144 as currently in effect, beginning 90 days after the Offering, a person (or person whose shares are aggregated) who owns shares that were purchased from the Company (or any Affiliate) at least two years previously (as of April 21, 1997, the holding period will be one year), including persons who may be deemed Affiliates of the Company, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock or the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale, and who owns shares within the definition of "restricted securities" under Rule 144 under the Securities Act that were purchased from the Company (or any Affiliate) at least three years previously (as of April 21, 1997, the holding period will be two years), would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. It is anticipated that after the expiration of such 90-day period no shares of Common Stock will be immediately eligible for sale under Rule 144. 54 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Oppenheimer & Co., Inc. and Credit Suisse First Boston Corporation are acting as Representatives, has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite the name of such Underwriter below:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK - ------------------------------------------------------------------------------ -------------- Oppenheimer & Co., Inc........................................................ Credit Suisse First Boston Corporation........................................ ............. -------------- Total......................................................................... 3,500,000 -------------- --------------
The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be changed by the Representatives. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any are taken. The Company has granted the Underwriters an option, exercisable for up to 30 days after the date of this Prospectus, to purchase up to an aggregate of 525,000 additional shares of Common Stock to cover 55 over-allotments, if any. If the Underwriters exercise such option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them as shown in the foregoing table bears to the 3,500,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The Representatives have advised the Company that the Underwriters do not intend to confirm sales in excess of 5% of the shares offered hereby to any account over which they exercise discretionary authority. The Company has agreed to indemnify the representatives of the Underwriters and the several Underwriters against certain liabilities, including, without limitation liabilities under the Securities Act. The Company's officers and directors and CEP, CEP II and CDI Equity, who beneficially own an aggregate of 5,443,081 shares of Common Stock or options or warrants to purchase shares of Common Stock, have agreed not to sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition for a period of 180 days after the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc. The Company has also agreed not to sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition for a period of 180 days after the date of this Prospectus, without the prior written consent of Oppenheimer & Co., Inc., subject to certain limited exceptions. See "Shares Eligible for Future Sale." The Representatives, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and "passive" market making in accordance with Regulation M under the Securities Act of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. In "passive" market making, market makers in the Common Stock who are Underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the Common Stock until the time, if any, at which a stabilizing bid is made. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the Common Stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. Such stablizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The legality of the Common Stock offered hereby will be passed upon for the Company by Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York 10036. Certain legal matters will be passed upon for the Underwriters by Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178. 56 EXPERTS The Consolidated Financial Statements of the Company at December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and the Registration Statement of which this Prospectus forms a part have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The Waste Management, Inc. Evansville, Indiana Operations Statement of Net Tangible Assets to be Sold at December 31, 1996 and the Statements of Revenue and Direct Operating Expenses for each of the two years in the period ended December 31, 1996, appearing in this Prospectus and the Registration Statement of which this Prospectus forms a part have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Liberty Disposal, Inc. at December 31, 1995 and 1996 and for each of the two years in the period ended December 31, 1996, appearing in this Prospectus and the Registration Statement of which this Prospectus forms a part have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act with respect to the Shares offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document that has been filed as an exhibit to the Registration Statement are qualified in their entirety by reference to such exhibits for a complete statement of their terms and conditions. Each such statement is qualified in its entirety by such reference. The Company also files periodic reports and other information required to be filed pursuant to the Securities Exchange Act of 1934, as amended. The Registration Statement and such periodic reports and other information may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 or at certain of the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed by the Commission. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is quoted on the Nasdaq National Market under the symbol "ADSI." Reports and other information concerning the Company may be inspected at the offices of the National Association of Securities Dealers, 1735 K Street N.W., Washington, D.C. 20006. 57 INDEX TO FINANCIAL STATEMENTS
PAGE --------- AMERICAN DISPOSAL SERVICES, INC. AND SUBSIDIARIES: CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors........................................................................... F-2 Consolidated Balance Sheets at December 31, 1996 and 1995................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994............... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994..... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............... F-6 Notes to Consolidated Financial Statements............................................................... F-7 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Consolidated Financial Statements.............................................................. F-19 Pro Forma Condensed Consolidated Balance Sheet at December 31, 1996...................................... F-20 Pro Forma Consolidated Income Statement for the year ended December 31, 1996............................. F-21 Notes to Pro Forma Consolidated Financial Statements..................................................... F-22 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS: Report of Independent Public Accountants................................................................. F-24 Statement of Net Tangible Assets to be Sold as of December 31, 1996...................................... F-25 Statements of Revenue and Direct Operating Expenses for the years ended December 31, 1996 and 1995....... F-26 Notes to Financial Statements............................................................................ F-27 LIBERTY DISPOSAL, INC.: Report of Independent Auditors........................................................................... F-31 Balance Sheets at December 31, 1996 and 1995............................................................. F-32 Statements of Income for the years ended December 31, 1996 and 1995...................................... F-33 Statements of Stockholder's Equity for the years ended December 31, 1996 and 1995........................ F-34 Statements of Cash Flows for the years ended December 31, 1996 and 1995.................................. F-35 Notes to Financial Statements............................................................................ F-36
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors American Disposal Services, Inc. We have audited the accompanying consolidated balance sheets of American Disposal Services, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Disposal Services, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 26, 1997, except as to Note 5 for which the date is March 21, 1997 and except as to Note 10 for which the date is March 25, 1997 F-2 AMERICAN DISPOSAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Current assets: Cash and cash equivalents............................................................... $ 2,301 $ 6,383 Cash held in escrow..................................................................... -- 156 Trade receivables--Net of allowance for doubtful accounts of $473 and $476.............. 9,741 6,331 Prepaid expenses........................................................................ 1,248 686 Inventory............................................................................... 354 312 ---------- ---------- Total current assets...................................................................... 13,644 13,868 Property and equipment, net............................................................... 93,692 81,250 Other assets: Cost over fair value of net assets of acquired businesses, net of accumulated amortization of $1,374 and $823....................................................... 31,237 15,739 Other intangible assets, net of accumulated amortization of $439 and $305............... 1,610 1,081 Debt issuance costs, net of accumulated amortization of $204 and $71.................... 2,392 815 Other................................................................................... 2,411 1,940 ---------- ---------- $ 144,986 $ 114,693 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 3,359 $ 3,185 Accrued liabilities..................................................................... 4,249 2,360 Deferred revenues....................................................................... 2,245 1,202 Current portion of long-term debt and capital lease obligations......................... 2,572 3,440 Note payable to stockholder............................................................. -- 12,500 ---------- ---------- Total current liabilities................................................................. 12,425 22,687 Long-term debt and capital lease obligations, net of current portion...................... 65,445 48,789 Accrued environmental and landfill costs.................................................. 7,603 6,214 Deferred income taxes..................................................................... 1,416 1,240 Redeemable preferred stock................................................................ -- 1,908 Stockholders' equity: Common stock, $.01 par value, 20,000,000 shares authorized; shares issued and outstanding; 1996--8,872,381; 1995--5,662,865......................................... 89 57 Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued and outstanding in 1996 and 1995.......................................................... -- -- Warrants outstanding...................................................................... 107 107 Additional paid-in capital................................................................ 66,170 41,590 Accumulated deficit....................................................................... (8,269) (7,899) ---------- ---------- 58,097 33,855 ---------- ---------- $ 144,986 $ 114,693 ---------- ---------- ---------- ----------
See accompanying notes. F-3 AMERICAN DISPOSAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Revenues................................................................... $ 56,804 $ 30,004 $ 18,517 Cost of operations......................................................... 30,376 17,286 12,647 Selling, general, and administrative expenses.............................. 8,328 5,882 4,910 Depreciation and amortization.............................................. 12,334 6,308 3,226 ---------- ---------- ---------- Operating income (loss).................................................... 5,766 528 (2,266) Interest expense........................................................... (5,745) (3,030) (1,497) Interest income............................................................ 260 189 2 Other income............................................................... 179 -- -- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary item................... 460 (2,313) (3,761) Income tax benefit (expense)............................................... (245) (332) 1,372 ---------- ---------- ---------- Income (loss) before extraordinary item.................................... 215 (2,645) (2,389) Extraordinary item -- loss on early retirement of debt..................... (476) (908) -- ---------- ---------- ---------- Net loss................................................................... (261) (3,553) (2,389) Preferred stock dividend................................................... (109) (190) -- ---------- ---------- ---------- Net loss applicable to common stockholders................................. $ (370) $ (3,743) $ (2,389) ---------- ---------- ---------- ---------- ---------- ---------- Per common share: Income (loss) before extraordinary item.................................. $ .02 $ (.80) $ (.99) Extraordinary item....................................................... (.07) (.26) -- ---------- ---------- ---------- Net loss................................................................. $ (.05) $ (1.06) $ (.99) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common stock and common stock equivalent shares outstanding.............................................................. 7,063,928 3,527,688 2,411,381 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. F-4 AMERICAN DISPOSAL SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ----------------------- WARRANTS PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT OUTSTANDING CAPITAL DEFICIT EQUITY ---------- ----------- ------------- ----------- ------------ ------------ Balance -- December 31, 1993......... 2,099,952 $ 21 $ 107 $ 14,170 $ (1,767) $ 12,531 Issuance of common stock, net of issuance costs..................... 282,393 3 -- 1,987 -- 1,990 Net loss............................. -- -- -- -- (2,389) (2,389) ---------- --- ----- ----------- ------------ ------------ Balance -- December 31, 1994......... 2,382,345 24 107 16,157 (4,156) 12,132 Issuance of common stock, net of issuance costs..................... 3,280,520 33 -- 25,433 -- 25,466 Net loss............................. -- -- -- -- (3,553) (3,553) Dividends on preferred stock......... -- -- -- -- (190) (190) ---------- --- ----- ----------- ------------ ------------ Balance -- December 31, 1995......... 5,662,865 57 107 41,590 (7,899) 33,855 Issuance of common stock, net of issuance costs..................... 3,162,500 32 -- 24,573 -- 24,605 Exercise of common stock warrants and options............................ 47,016 -- -- 7 -- 7 Dividends on preferred stock......... -- -- -- -- (109) (109) Net loss............................. -- -- -- -- (261) (261) ---------- --- ----- ----------- ------------ ------------ Balance at December 31, 1996......... 8,872,381 $ 89 $ 107 $ 66,170 $ (8,269) $ 58,097 ---------- --- ----- ----------- ------------ ------------ ---------- --- ----- ----------- ------------ ------------
See accompanying notes. F-5 AMERICAN DISPOSAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- OPERATING ACTIVITIES Net loss........................................................................ $ (261) $ (3,553) $ (2,389) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Extraordinary item, net....................................................... 476 908 -- Depreciation and amortization................................................. 12,334 6,308 3,226 Provision for environmental and landfill costs................................ 571 292 48 Deferred income taxes......................................................... 176 47 (1,372) Gain on sale of fixed assets.................................................. (98) -- -- Changes in operating assets and liabilities, net of effects from acquisitions: Trade receivables........................................................... (2,600) (340) (625) Prepaid expenses, cash held in escrow and other assets...................... (1,029) (33) (361) Inventory................................................................... (42) (128) (96) Accounts payable, accrued liabilities and accrued environmental and landfill costs..................................................................... 1,522 1,846 235 Deferred revenue............................................................ 656 254 210 ---------- ---------- --------- Net cash provided by (used in) operating activities............................. 11,705 5,601 (1,124) INVESTING ACTIVITIES Capital expenditures............................................................ (14,003) (6,173) (5,600) Cost of acquisitions............................................................ (25,029) (62,201) (580) ---------- ---------- --------- Net cash used in investing activities........................................... (39,032) (68,374) (6,180) FINANCING ACTIVITIES Net proceeds from issuances of common stock..................................... 24,605 25,466 1,990 Exercise of stock options and warrants.......................................... 7 -- -- Redemption of preferred stock................................................... (1,950) -- -- Net proceeds from issuance of preferred stock................................... -- 1,908 -- Preferred stock dividend........................................................ (109) (190) -- Proceeds from issuance of long-term debt........................................ 66,950 32,568 6,319 Repayments of indebtedness...................................................... (51,162) (2,698) (2,511) Proceeds from (payment of) note payable to stockholder.......................... (12,500) 12,500 -- Debt issuance costs............................................................. (2,596) (946) (80) ---------- ---------- --------- Net cash provided by financing activities....................................... 23,245 68,608 5,718 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents............................ (4,082) 5,835 (1,586) Cash and cash equivalents, at beginning of year................................. 6,383 548 2,134 ---------- ---------- --------- Cash and cash equivalents, at end of year....................................... $ 2,301 $ 6,383 $ 548 ---------- ---------- --------- ---------- ---------- --------- Supplemental cash flow information: Cash paid for interest.......................................................... $ 6,222 $ 2,515 $ 1,426 Cash (refunds) paid for income taxes............................................ (159) 478 --
See accompanying notes. F-6 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 1. FORMATION AND BASIS OF PRESENTATION ADS, Inc. (ADS) was organized January 15, 1991, to acquire, develop, and operate non-hazardous municipal solid waste disposal, collection, and transfer operations and provide non-hazardous solid waste disposal management services to commercial, industrial, and residential customers. During 1993, an affiliate of Charterhouse Equity Partners, L.P. (CEP) purchased a controlling interest in ADS. County Disposal, Inc. (County) was incorporated by Charterhouse Equity Partners II, L.P. (CEPII) on April 27, 1995, for the purpose of acquiring certain net assets of Envirite Corporation (Envirite). On April 28, 1995, Envirite and County entered into an Asset Purchase Agreement whereby County agreed to purchase from Envirite certain landfill facilities and waste transportation and collection equipment located in Livingston County, Illinois, and Wyandot County, Ohio; all of the issued and outstanding capital stock of County Environmental Services, Inc., a wholly-owned subsidiary of Envirite, which owned and operated a landfill facility and waste transportation and collection equipment located in Clarion County, Pennsylvania; and certain related assets and assumption of certain liabilities. Effective January 1, 1996, the stockholders of ADS and County exchanged their shares for shares of a newly created holding company by the name of American Disposal Services, Inc. (the Company). This share exchange (the Exchange) qualifies as a transfer of companies under common control as affiliates of Charterhouse Group International, Inc. are the general partners and in control of CEP and CEPII and, accordingly, the transaction has been accounted for at historical cost in a manner similar to pooling of interests accounting. The financial statements have been prepared as if this Exchange had occurred as of December 31, 1993. In July 1996, the Company issued 3,162,500 shares of common stock at $9.00 per share in its initial public offering. Proceeds from the offering, net of underwriting commissions and related expenses, were $24.6 million. Immediately following the offering, the Company had 8,825,365 common stock shares issued and outstanding. The offering proceeds were used to finance acquisitions and paydown a portion of the debt facility. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. No single group or customer represents greater than 10% of total accounts receivable. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. F-7 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Trade receivables, trade payables, and debt obligations are carried at cost which approximates fair value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash in banks and liquid investments with original maturities of three months or less. CASH HELD IN ESCROW Cash held in escrow represents cash held in banks restricted to fund obligations incurred in acquiring businesses. INVENTORY Inventory is stated at the lower of cost (first in, first out method) or market and consists principally of equipment parts, materials, and supplies. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the respective assets as follows: Vehicles and equipment..................... 3 to 12 years 25 to 30 Buildings.................................. years
Expenditures for major renewals are capitalized, and expenditures for routine maintenance and repairs are charged to expense as incurred. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering, construction of landfill improvements, cell development costs, and the direct costs of Company personnel dedicated for these purposes. Preparation costs for individual secure land disposal cells are recorded in property and equipment and amortized as the airspace is filled. INTANGIBLE ASSETS The cost over fair value of net assets of acquired businesses is amortized on the straight-line method over periods not exceeding 40 years. Other intangible assets, substantially all of which are covenants not to F-8 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) compete and customer lists, are amortized on the straight-line method over their estimated lives, typically no more than 12 years. Amortization expense for fiscal years 1996, 1995, and 1994 related to intangible assets was approximately $1.0 million, $1.4 million, and $600,000, respectively. In 1995, the Company determined not to enforce certain covenants not to compete which arose from 1993 transactions with the net book value of such covenants of $505,000, was fully written-off and included in 1995 amortization expense. DEFERRED ACQUISITION COSTS The Company capitalizes engineering, legal, accounting, and other direct costs paid to outside parties that are incurred in connection with potential acquisitions. The Company, however, routinely evaluates such capitalized costs and charges to expense those relating to abandoned acquisition candidates. Indirect acquisition costs, such as executive salaries, general corporate overhead, and other corporate services are expensed as incurred. Net deferred acquisition costs, included in other intangible assets, were approximately $545,000 and $370,000 at December 31, 1996 and 1995, respectively. ACCRUED ENVIRONMENTAL AND LANDFILL COSTS Accrued environmental and landfill costs represent landfill accruals which are provided for environmental compliance costs and closure and post-closure costs. These accruals are based on accounting estimates by management determined primarily from the results of engineering studies and reviews and on interpretation of the technical standards of the Environmental Protection Agency's Subtitle D regulations, or the approved state counterpart, and recently promulgated air emissions standards under the Clean Air Act, as they apply on a state-by-state basis. The Company typically provides accruals for these costs as permitted airspace of such facilities is consumed. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Certain of these accrued environmental and landfill costs, principally capping, leachate collection and removal, and methane gas control and recovery, are operating and maintenance costs to be incurred during the 30-year period after the facility closes, but are accrued during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the EPA's recently promulgated air emissions standards. An environmental and landfill cost accrual is provided as a liability assumed for purchased landfill operations based on permitted airspace consumed prior to the acquisition date and is included in the purchase price allocation (see Note 3). The Company has estimated that, as of December 31, 1996, post-closure expenses, including cap maintenance, groundwater monitoring, methane gas control and recovery and leachate treatment/disposal for up to 30 years after closure in certain cases, will approximate $10.9 million. In addition, the Company has estimated that, as of December 31, 1996, closure costs expected to occur during the operating lives of these facilities' useful lives will approximate $35.2 million. These accruals are reviewed by management periodically and revised prospectively for any significant changes in future cost estimates. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. F-9 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Landfill revenues are recorded at the date of actual waste disposal. Revenues billed prior to the performance of services are deferred and recorded as income in the period in which the related services are rendered, generally over a three-month period. EARNINGS PER SHARE Earnings per share is based on the weighted average number of common stock and common stock equivalent shares outstanding during each year and incremental shares from the assumed exercise of options and warrants granted and computed using the treasury stock method. STOCK-BASED COMPENSATION The Company typically grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for such stock option grants in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Options Issued to Employees" (APB 25), and, accordingly, typically recognizes no compensation expense for these stock option grants. 3. ACQUISITIONS The acquisitions below have been accounted for using the purchase method of accounting and, accordingly, the results of their operations have been included in the Company's results of operations from their respective acquisition dates. The purchase prices have been allocated to the assets acquired and liabilities assumed based on their fair values at their respective acquisition dates with the residual allocated to cost over fair value of net assets acquired. During 1996 the Company acquired 16 non-hazardous solid waste businesses, consisting of 16 collection operations and two transfer stations. As described in Note 1, the Company acquired three non-hazardous solid waste landfills and a solid waste collection operation (the Envirite Acquisition) during 1995. The Company has not completed its valuation of certain of its 1996 purchases and the purchase price allocations are subject to change when additional information concerning asset and liability valuations is completed. F-10 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 3. ACQUISITIONS (CONTINUED) The purchase prices allocated to the net assets acquired are as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Property and equipment.................................................. $ 8,425 $ 62,288 Accounts receivable and inventory....................................... 810 3,363 Other assets............................................................ 785 1,664 Cost over fair value of net assets acquired............................. 15,642 3,060 Total liabilities assumed............................................... (633) (8,174) --------- --------- Total cash paid......................................................... $ 25,029 $ 62,201 --------- --------- --------- ---------
The pro forma unaudited results of operations for the years ended December 31, 1996 and 1995, assuming each acquisition above had occurred on January 1, 1995, are as follows (in thousands, except per share data):
YEARS ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Revenues............................................................ $ 64,356 $ 56,371 Operating income (loss)............................................. 5,966 (1,106) Net loss applicable to common stockholders.......................... (370) (8,500) Pro forma loss per share of common stock............................ (.05) (2.41) Weighted average common stock and common stock equivalent shares outstanding....................................................... 7,063,928 3,527,688
The pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on January 1, 1995 nor are they necessarily indicative of future operating results. 4. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows (in thousands):
DECEMBER 31, --------------------- 1996 1995 ---------- --------- Land................................................................... $ 5,417 $ 5,038 Landfills.............................................................. 78,547 66,529 Buildings.............................................................. 3,285 2,695 Vehicles and equipment................................................. 23,977 14,335 ---------- --------- 111,226 88,597 Less: Accumulated depreciation and amortization........................ (17,534) (7,347) ---------- --------- $ 93,692 $ 81,250 ---------- --------- ---------- ---------
F-11 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 5. OBLIGATIONS Obligations, which approximate fair value, are summarized as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Long-term debt: Acquisition loan, ING Capital Corporation................................................. $ 41,506 $ -- Term loan, ING Capital Corporation........................................................ 24,750 -- Other borrowings, with interest rates ranging from 7.0% to 11.0%.......................... 1,101 1,285 Term loan, Bank of America................................................................ -- 20,000 Revolving loan, Bank of America........................................................... -- 10,847 Term loan A, ING Capital Corporation...................................................... -- 12,525 Term loan B, ING Capital Corporation...................................................... -- 4,000 Revolving loan, ING Capital Corporation................................................... -- 2,423 Capital lease obligations: Capital lease obligations with interest and principal due monthly through 1999, at various interest rates ranging from 6.0% to 9.5%, secured by equipment.......................... 660 1,149 --------- --------- 68,017 52,229 Less: Current portion....................................................................... 2,572 3,440 --------- --------- Long-term obligations, net of current portion............................................... $ 65,445 $ 48,789 --------- --------- --------- ---------
In May 1996, the Company entered into a credit agreement with Internationale Nederlanden (US) Capital Corporation (ING), as administrative agent, and Morgan Guaranty Trust Company of New York, as document agent, that provided for borrowings of up to $87 million to finance acquisitions and provide working capital (Credit Facility), which was used to repay the existing credit agreements with Bank of America and ING, as well as the note payable to stockholder and the redeemable preferred stock. In August 1996, this Credit Facility was amended to provide for borrowings up to $110 million. The Credit Facility consists of a $25 million term loan, $10 million revolving loan, and $75 million acquisition facility. The various loans and lines of credit under the Credit Facility bear interest at rates per annum equal to, at the Company's discretion either: (i) the higher of (a) the federal funds rate plus 0.5% and (b) the prime rate, plus an applicable margin ranging from 0% to 1.5%; or (ii) the London Interbank Offered Rate (LIBOR), plus an applicable margin ranging from 1.50% to 3.25%, and have maturities ranging from 2001 to 2003. The term loan had an interest rate of 8.88% at December 31, 1996 and the acquisition facility had an interest rate of 8.68% at December31, 1996. The Credit Facility is secured by substantially all of the assets of the Company. Under terms of the Credit Facility, the Company is subject to various debt covenants, including maintenance of certain financial ratios and other restrictions. The Credit Facility requires the Company to use 50% of the proceeds of any equity offering to repay a portion of the term loans. Effective March 21, 1997, the Company amended the Credit Facility (i) to expand the borrowing capacity to $125 million, (ii) to waive the term loan repayment requirement of any offering proceeds and (iii) to permit the reborrowing of any amounts under the expansion facility which may be repaid in connection with an equity offering consummated in 1997. In connection with refinancings during 1996 and 1995, the Company recognized an extraordinary loss, net of income tax benefit, of $476,000 and $908,000, respectively, representing unamortized deferred debt issuance costs. F-12 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 5. OBLIGATIONS (CONTINUED) At December 31, 1996, maturities of obligations (excluding capital lease obligations) are as follows (in thousands): 1997............................................................... $ 2,207 1998............................................................... 6,507 1999............................................................... 8,890 2000............................................................... 12,920 2001 and thereafter................................................ 36,833 --------- $ 67,357 --------- ---------
6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Deferred tax assets arising from: Net operating loss carryforwards........................................................... $ 2,938 $ 3,111 Closure and post-closure costs............................................................. 421 421 Amortization of intangibles................................................................ 881 550 Other...................................................................................... 26 41 --------- --------- Total deferred tax assets.................................................................... 4,266 4,123 Valuation allowance.......................................................................... (2,280) (2,323) --------- --------- Net deferred tax assets...................................................................... 1,986 1,800 Deferred tax liabilities arising from: Property and equipment..................................................................... 2,855 2,898 Amortization of intangibles and landfill................................................... 472 84 Capital leases............................................................................. 32 32 Other...................................................................................... 43 26 --------- --------- Total deferred tax liabilities............................................................... 3,402 3,040 --------- --------- Net deferred tax liability................................................................... $ 1,416 $ 1,240 --------- --------- --------- ---------
At December 31, 1996, the Company had net operating loss (NOL) carryforwards of approximately $8.0 million for federal income tax purposes that expire in years 2006 to 2010. The utilization of the NOL carryforwards is limited by future taxable earnings generated at the subsidiary level. The Company recorded a valuation allowance to reflect uncertainty as to the utilization of such NOL carryforwards for financial reporting purposes. The maximum annual utilization of such NOL carryforwards are limited under the Internal Revenue Code as a result of changes in ownership that have occurred. F-13 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 6. INCOME TAXES (CONTINUED) Significant components of the income tax expense (benefits) were as follows (in thousands):
DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Current: Federal........................................................................... $ 99 $ 141 $ -- State............................................................................. (30) 144 -- --------- --------- --------- 69 285 -- Deferred: Federal........................................................................... 146 38 (1,205) State............................................................................. 30 9 (167) --------- --------- --------- 176 47 (1,372) --------- --------- --------- Total provision..................................................................... $ 245 $ 332 $ (1,372) --------- --------- --------- --------- --------- ---------
A reconciliation from the statutory income tax rate to the effective income tax rate was as follows:
DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Federal statutory income tax rate.................................................... 34.0% (34.0)% (34.0)% Effect of: State taxes, net of federal tax effect............................................. -- 3.1 (2.9) Nondeductible goodwill............................................................. 15.5 -- -- Net operating loss with no benefit................................................. -- 39.6 0.1 Other, net......................................................................... 3.8 1.6 0.3 --- --------- --------- Effective tax rate................................................................... 53.3% 10.3% (36.5)% --- --------- --------- --- --------- ---------
7. RELATED PARTY TRANSACTIONS The Company had entered into a management agreement with a stockholder for certain services to be rendered to the Company in exchange for annual management fees. The management agreement was terminated in connection with the initial public offering during July 1996. Management fees of approximately $466,000, $659,000, and $515,000 were incurred in 1996, 1995, and 1994, respectively. At December 31, 1995, the Company had a $12,500,000 unsecured note payable outstanding to a stockholder, which was issued on November 16, 1995 and was due November 16, 1996, bearing an annual interest rate of prime plus 3%. The Company repaid the note payable to the stockholder in May 1996. Interest expense relating to this note payable was approximately $621,000 and $180,000 in 1996 and 1995, respectively. F-14 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 8. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL AND REGULATORY REQUIREMENTS The business and activities of the Company are, and may become more, extensively regulated by, among others, the federal Environmental Protection Agency, the Department of Transportation, the Interstate Commerce Commission, and various state and local environmental and transportation regulatory authorities. The Company is subject to various statutes and regulations which include, but are not limited to, the Resource Conservation and Recovery Act of 1976, the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Clean Air Act, and numerous state and local laws and regulations. The full impact of these laws and regulations and the possible adoption of new statutes and regulations with respect to the Company's facilities and operations is uncertain and could have material adverse effects on the Company's business, results of operations, and financial condition in that the Company: (i) could be required to incur additional expenses in compliance efforts, (ii) might be unable to comply, forcing the Company to cease operations, and (iii) could incur additional liability for past operation(s) of acquired assets. These regulations may also impose restrictions on the Company's operations, such as limiting the expansion of disposal facilities, limiting or banning the disposal of out-of-state waste or certain other categories of waste, or mandating the disposal of local refuse. Although the Company believes it is in substantial compliance with current regulatory requirements, because of heightened political and public concern over environmental issues, companies in the waste disposal industry, including the Company, may become subject to judicial and administrative proceedings involving federal, state, or local agencies in the normal course of business. The Company has obtained some levels of pollution liability insurance covering certain claims for sudden or gradual onset environmental damage at its landfill sites. The Company carries a comprehensive general liability insurance policy which management considers adequate to protect its assets and operations from other risks. The Company also may be subject to claims for personal injury or property damage arising out of motor vehicle accidents involving its trucks. The Company currently carries insurance with policy limits which management believes to be sufficient to cover these risks. If the Company were to incur liabilities outside of or in excess of its insurance limits, its financial condition could be adversely affected. In connection with the Company's existing landfills, the Company has provided financial assurance bonds for approximately $15.2 million at December 31, 1996, from a financial institution to provide financial assurance that closure and postclosure expenses will be met in the event that the Company is not able to fulfill its closure and postclosure obligations. F-15 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) At December 31, 1996, future minimum lease payments under noncancelable lease obligations are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ----------- ----------- 1997......................................................................................... $ 431 $ 1,151 1998......................................................................................... 192 930 1999......................................................................................... 104 667 2000......................................................................................... -- 298 2001 and thereafter.......................................................................... -- 437 ----- ----------- Total minimum lease payments................................................................. 727 $ 3,483 ----------- ----------- Less: Amount representing interest........................................................... 67 ----- Present value of net minimum lease payments.................................................. $ 660 ----- -----
Rental expense in 1996, 1995, and 1994 was approximately $1.3 million, $793,000, $132,000, respectively. REDEEMABLE PREFERRED STOCK On March 28, 1995, ADS issued 1,950 shares of its Series A Preferred Stock and 46,550 warrants to purchase shares of common stock of the Company, for $1,950,000. The holder of the warrants can purchase one common share for each warrant held at the exercise price of $.10 per share on or before December 31, 2002. The Company redeemed the outstanding preferred stock in May 1996, and paid any accrued dividends related to the preferred stock. The warrants were redeemed for shares of common stock in 1996. 9. STOCKHOLDERS' EQUITY STOCK OPTIONS The Company's Board of Directors adopted the American Disposal Services, Inc. 1996 Stock Option Plan effective January 1, 1996. As of December 31, 1996, the plan permits grants of options up to an aggregate of 1,100,000 shares of common stock to employees and certain consultants of the Company, on such terms as the Company's compensation committee (or a stock option subcommittee thereof) determines. Options granted under the plan as of January 1, 1996 replaced existing stock options granted by ADS and County in connection with the Exchange. The stock options vest over three and five year periods and are exercisable over a ten year period from the original grant dates. All vesting is subject to acceleration under specified circumstances. Options to purchase an aggregate of 63,601 shares were granted outside the plan to a former employee and were fully vested as of January 1, 1996. Such shares have an exercise price of $7.17 per share, increasing at 25% per annum from the date of original grant of the ADS stock options they replace. F-16 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 9. STOCKHOLDERS' EQUITY (CONTINUED) A summary of stock option information follows:
1996 1995 1994 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year................ 869,617 $ 7.36 186,444 $ 7.17 144,900 $ 7.17 Granted....................................... 68,270 9.00 683,173 7.41 41,544 7.17 Exercised..................................... 467 7.17 0 -- 0 -- Forfeited..................................... (2,506) 7.64 0 -- 0 -- --------- ----- --------- ----- --------- ----- Outstanding at end of year...................... 934,914 $ 7.47 869,617 $ 7.36 186,444 $ 7.17 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Exercisable at end of year...................... 434,553 105,223 0 Available for future grant...................... 228,220 293,984 977,157 Weighted average value of options granted during the year....................................... $ 4.33 $ 1.88
As of December 31, 1996, the Company had outstanding 934,914 options with exercise prices between $7.17 and $9.00 per share and weighted average remaining lives of 8.2 years. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Disclosure of pro forma information regarding net loss and net loss per share is required by FAS 123, and has been determined as if the Company had accounted for its stock options granted in 1996 and 1995 under the fair value method. The options granted in 1996 were valued using the Black-Scholes option pricing model. The options granted in 1995, as a non-public company, were valued using the minimum value method. The Black-Scholes option valuation model requires the input of highly subjective assumptions and, because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the model cannot necessarily provide a single measure of the fair value of its stock options. The following assumptions were utilized in the valuation:
DECEMBER 31, -------------------- 1996 1995 --------- --------- Risk-free interest rate................................................. 6.65% 5.85% Expected dividend yield................................................. 0% 0% Expected stock price volatility......................................... 44.4% n/a Expected life of options................................................ 5 years 5 years
F-17 AMERICAN DISPOSAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 9. STOCKHOLDERS' EQUITY (CONTINUED) Had compensation cost for the Company's stock options granted in 1996 and 1995 been determined based on the fair value at the dates of grants, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated:
DECEMBER 31, -------------------- 1996 1995 --------- --------- Pro forma net loss (in thousands of dollars)............................. ($ 687) ($ 3,807) Pro forma net loss per share applicable to common shareholders........... ($ 0.10) ($ 1.08)
The pro forma effect for 1996 and 1995 is not representative of the pro forma effect in future years as the pro forma disclosures reflect only the fair value of stock options granted in 1996 and 1995 and do not reflect the fair value of outstanding options granted prior to 1995. STOCK WARRANTS In connection with obtaining various credit agreements, the Company issued warrants to purchase 168,905 shares of common stock with exercise prices ranging from $4.72 to $7.41 per share. The Company recorded the fair value of the warrants as a component of equity and recognized debt issuance cost of $106,666. The warrants expire 10 years from date of issuance. In connection with the Exchange, 5,000,000 shares of new preferred stock of the Company were authorized with none issued at December 31, 1996 and 1995. 10. SUBSEQUENT EVENTS Subsequent to December 31, 1996, the Company acquired substantially all the assets of Sparky's Waste Control and A-1 Container, and acquired the stock of Allied Waste Systems, Inc. In addition, the Company entered into definitive asset purchase agreements on March 24, 1997 and March 25, 1997 to acquire substantially all the assets of Liberty Disposal, Inc. and the Evansville, Indiana operations of Waste Management of Indiana, LLC, respectively. F-18 AMERICAN DISPOSAL SERVICES, INC. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited Pro Forma Consolidated Financial Statements (Pro Forma Financial Data) is based on the historical Consolidated Financial Statements of the Company, Liberty Disposal, Inc. and Waste Management, Inc. Evansville, Indiana Operations included elsewhere herein, adjusted to give effect to the Acquisitions and this offering. The Pro Forma Condensed Consolidated Balance Sheet gives effect to the Acquisitions and this offering as if they had occurred as of December 31, 1996. The Pro Forma Consolidated Income Statement for the year ended December 31, 1996 gives effect to the Acquisitions and this offering as if they had occurred on January 1, 1996. The Pro Forma Financial Data does not purport to represent what the Company's results would actually have been had the Acquisitions in fact occurred on such date or to project the Company's results of operations and financial position for any future period or date. The Pro Forma Financial Data does not give effect to any transactions other than the Acquisitions and this offering, as discussed in the notes to the Pro Forma Financial Data set forth below. The Acquisitions were accounted for using the purchase method of accounting. Under purchase accounting, tangible and indentifiable intangible assets acquired and liabilities assumed are recorded at their respective fair values. The pro forma adjustments are based on available information and upon certain assumptions that management of the Company believes are reasonable under the circumstances. The Pro Forma Financial Data and accompanying notes should be read in conjunction with the historical Consolidated Financial Statements of the Company, Liberty Disposal, Inc. and Waste Management Inc. Evansville, Indiana Operations, including the notes thereto, and other financial information pertaining to the Company included elsewhere herein. F-19 AMERICAN DISPOSAL SERVICES, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
LIBERTY DISPOSAL ACQUISITION WMX-EVANSVILLE ACQUISITION ADJUSTED COMPANY ------------------------------ LIBERTY DISPOSAL ----------------------------- HISTORICAL HISTORICAL ADJUSTMENTS ACQUISITION (A) HISTORICAL ADJUSTMENTS ----------- ----------- ----------------- ----------------- ----------- ---------------- ASSETS Current Assets: Cash and cash equivalents............. $ 2,301 $ 116 $ (116) $ -- $ -- $ -- Trade receivables......... 9,741 890 (890) -- 1,524 -- Prepaids and other current assets.................. 1,602 74 (74) -- 91 -- ----------- ----------- -------- -------- ----------- ---------------- Total current assets...... 13,644 1,080 (1,080) -- 1,615 -- Property and equipment, net....................... 93,692 2,029 571 2,600 17,113 3,712 Cost over fair value of net assets acquired, net...... 31,237 26 11,774 11,800 -- 7,643 Other intangibles and deferred assets, net...... 4,002 81 19 100 -- 100 Other assets................ 2,411 45 (45) -- -- -- ----------- ----------- -------- -------- ----------- ---------------- Total assets........ $ 144,986 $ 3,261 $ 11,239 $ 14,500 $ 18,728 $ 11,455 ----------- ----------- -------- -------- ----------- ---------------- ----------- ----------- -------- -------- ----------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......... $ 3,359 $ 556 $ (556) $ -- $ -- $ -- Accrued expenses.......... 4,249 118 (118) -- 276 -- Deferred revenues......... 2,245 -- -- -- 404 -- Current portion of long term debt and capital lease obligations....... 2,572 356 (356) -- -- -- ----------- ----------- -------- -------- ----------- ---------------- Total current liabilities......... 12,425 1,030 (1,030) -- 680 -- Long-term debt and capital lease obligations, net of current portion...... 65,445 469 14,031 14,500 39 29,000 Accrued environmental and landfill costs.......... 7,603 -- -- -- 464 -- Deferred income taxes..... 1,416 -- -- -- -- -- Total stockholders' equity.................. 58,097 1,762 (1,762) -- 17,545 (17,545) ----------- ----------- -------- -------- ----------- ---------------- Total liabilities and stockholders' equity.... $ 144,986 $ 3,261 $ 11,239 $ 14,500 $ 18,728 $ 11,455 ----------- ----------- -------- -------- ----------- ---------------- ----------- ----------- -------- -------- ----------- ---------------- ADJUSTED WMX- EVANSVILLE COMPANY ACQUISITION (B) OFFERING (C) PRO FORMA --------------- ------------ ----------- ASSETS Current Assets: Cash and cash equivalents............. $ -- $ -- $ 2,301 Trade receivables......... 1,524 -- 11,265 Prepaids and other current assets.................. 91 -- 1,693 --------------- ------------ ----------- Total current assets...... 1,615 -- 15,259 Property and equipment, net....................... 20,825 -- 117,117 Cost over fair value of net assets acquired, net...... 7,643 -- 50,680 Other intangibles and deferred assets, net...... 100 -- 4,202 Other assets................ -- -- 2,411 --------------- ------------ ----------- Total assets........ $ 30,183 $ -- $ 189,669 --------------- ------------ ----------- --------------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......... $ -- $ -- $ 3,359 Accrued expenses.......... 276 -- 4,525 Deferred revenues......... 404 -- 2,649 Current portion of long term debt and capital lease obligations....... -- -- 2,572 --------------- ------------ ----------- Total current liabilities......... 680 -- 13,105 Long-term debt and capital lease obligations, net of current portion...... 29,039 (54,430) 54,554 Accrued environmental and landfill costs.......... 464 -- 8,067 Deferred income taxes..... -- -- 1,416 Total stockholders' equity.................. -- 54,430 112,527 --------------- ------------ ----------- Total liabilities and stockholders' equity.... $ 30,183 $ -- $ 189,669 --------------- ------------ ----------- --------------- ------------ -----------
- ------------------------------ (a) Reflects the pending acquisition of Liberty Disposal, Inc. accounted for using the purchase method. Pursuant to the Purchase Agreement, only property and equiment and intangible assets were acquired. The Company has not yet determined the final allocation of the purchase price and, accordingly, the amounts shown below may differ from the amounts ultimately determined. Allocation of purchase price based on preliminary estimated values: Property and equipment................................................................................................. $ 2,600 Cost over fair value of net assets acquired............................................................................ 11,800 Identifiable intangible assets......................................................................................... 100 --------- $ 14,500 --------- ---------
(b) Reflects the pending acquisition of Waste Management Inc. Evansville, Indiana Operations accounted for using the purchase method. The Company has not yet determined the final allocation of the purchase price and, accordingly, the amounts shown below may differ from the amounts ultimately determined. Allocation of purchase price based on preliminary estimated values: Property and equipment.................................................................................................. $ 3,825 Landfill................................................................................................................ 17,000 Other assets acquired................................................................................................... 1,615 Net liabilities acquired................................................................................................ (1,183) Cost over fair value of net assets acquired............................................................................. 7,643 Identifiable intangible assets.......................................................................................... 100 --------- $ 29,000 --------- ---------
(c) Reflects proceeds of this offering less underwriting discounts and estimated expenses and the application of net proceeds therefrom. F-20 AMERICAN DISPOSAL SERVICES, INC. PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT) (UNAUDITED)
LIBERTY DISPOSAL ACQUISITION WMX-EVANSVILLE ACQUISITION ---------------------------------- ------------------------------ COMPANY HISTORICAL HISTORICAL HISTORICAL (1) ADJUSTMENTS (2) (3) ADJUSTMENTS (4) OFFERING (5) ----------- ------------- ------------------- ------------- --------------- --------------- Revenues............... $ 56,804 $ 7,003 $ -- $ 12,985 $ -- $ -- Cost of operations..... 30,376 4,607 (4) 6,830 (291) -- Selling, general and administrative expenses............. 8,328 1,534 (695) 1,517 (246) -- Depreciation and amortization......... 12,334 559 331 2,467 (430) -- ----------- ------------- ----- ------------- ------- ----- Operating income....... 5,766 303 368 2,171 967 -- Interest expense....... (5,745) (84) 84 -- -- 924 Interest income........ 260 -- -- -- -- -- Other income........... 179 -- -- -- -- -- ----------- ------------- ----- ------------- ------- ----- Income before income taxes and extraordinary item... 460 219 452 2,171 967 924 Income tax expense (6).................. (245) -- (200) -- (947) (277) ----------- ------------- ----- ------------- ------- ----- Net income before extraordinary item... $ 215 $ 219 $ 252 $ 2,171 $ 20 $ 647 ----------- ------------- ----- ------------- ------- ----- ----------- ------------- ----- ------------- ------- ----- Pro forma net income per share of common stock................ Pro forma weighted average common stock and common stock equivalent shares outstanding (7)...... EBITDA (8)............. $ 18,100 ----------- ----------- COMPANY PRO FORMA ----------- Revenues............... $ 76,792 Cost of operations..... 41,518 Selling, general and administrative expenses............. 10,438 Depreciation and amortization......... 15,261 ----------- Operating income....... 9,575 Interest expense....... (4,821) Interest income........ 260 Other income........... 179 ----------- Income before income taxes and extraordinary item... 5,193 Income tax expense (6).................. (1,669) ----------- Net income before extraordinary item... $ 3,524 ----------- ----------- Pro forma net income per share of common stock................ $ 0.32 ----------- ----------- Pro forma weighted average common stock and common stock equivalent shares outstanding (7)...... 11,118,854 ----------- ----------- EBITDA (8)............. $ 24,836 ----------- -----------
See accompanying notes. F-21 AMERICAN DISPOSAL SERVICES, INC. NOTES TO PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) (1) Reflects the historical income statement for Liberty Disposal, Inc. for the year ended December 31, 1996, included herein. (2) Adjustments to reflect the historical amounts for the Liberty Disposal, Inc. acquisition noted in footnote (1) as follows: Reduction in cost of operations due to: Incremental rental expense as set forth in the Purchase Agreement........................................................ $ 88 Reduction in wage expense per employment agreements................ (92) --------- Net reduction in cost of operations.................................. $ (4) --------- --------- Reduction in selling, general and administrative expenses due to: Reduction in officer's salary per employment agreement............. $ (417) Reduction in office employee wages per employment agreements....... (278) --------- Net reduction in selling, general and administrative expenses........ $ (695) --------- --------- Incremental depreciation and amortization due to: Incremental depreciation of assets acquired........................ $ 16 Amortization of excess purchase price over forty years............. 295 Amortization of identifiable intangible assets over five years..... 20 --------- Net incremental depreciation and amortization........................ $ 331 --------- --------- Reduction in interest expense to reflect the debt not acquired....... $ (84) --------- ---------
(3) Reflects the historical statement of revenues and direct operating expenses for Waste Management, Inc. Evansville, Indiana Operations for the year ended December 31, 1996, included herein. F-22 AMERICAN DISPOSAL SERVICES, INC. NOTES TO PRO FORMA CONSOLIDATED INCOME STATEMENT (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) (4) Adjustments to reflect the historical amounts for the Waste Management, Inc. Evansville, Indiana Operations acquisition noted in footnote (3) as follows: Reduction in cost of operations due to reclassification to conform to the Company's financial presentation............................... $ 291 --------- --------- Reduction in selling, general and administrative salaries of employees terminated prior to the Acquisition...................... $ (246) --------- --------- Reduction in depreciation and amortization due to: Reduction in depreciation and amortization of assets acquired as a result of preliminary purchase price allocation.................. $ (932) Incremental amortization of excess purchase price over forty years............................................................ 191 Incremental amortization of identifiable intangible assets over five years....................................................... 20 Reclassification to conform to the Company's financial presentation..................................................... (291) --------- Net reduction in depreciation and amortization....................... $ (430) --------- ---------
(5) Reduction in interest expense to reflect the use of the proceeds of this Offering as follows: Net offering proceeds.............................................. $ 54,430 Funding of Liberty Disposal Acquisition............................ (14,500) Funding of WMX Evansville Acquisition.............................. (29,000) --------- Net proceeds available to pay down acquisition facility............ 10,930 Average 1996 interest rate on acquisition facility................. 8.45% --------- Reduction in interest expense...................................... $ 924 --------- ---------
(6) Adjusted to reflect the income tax effect of the pro forma adjustments based on an estimated marginal tax rate of 38% limited by the utilization of the net operating loss (NOL) carryforwards. The maximum annual utilization of such NOL carryforwards are limited under the Internal Revenue Code as a result of changes in ownership that have occurred. (7) Weighted average common stock and common stock equivalent shares outstanding at December 31, 1996 gives effect to the issuance of 3.5 million shares in this Offering as if such transaction had occurred as of January 1, 1996. (8) EBITDA represents operating income plus depreciation and amortization. While EBITDA data should not be construed as a substitute for operating income, net income or cash flows from operations in analyzing the Company's operating performance, financial position and cash flows, the Company has included EBITDA data (which are not a measure of financial performance under generally accepted accounting principles) because it understands that such data are commonly used by certain investors to evaluate a company's performance in the solid waste industry. F-23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Waste Management, Inc.: We have audited the accompanying statement of net tangible assets to be sold of the EVANSVILLE, INDIANA OPERATIONS OF WASTE MANAGEMENT, INC. (the "Business") as of December 31, 1996, and the related statements of revenue and direct operating expenses for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Business' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, the accompanying financial statements were prepared for the purpose of complying with Rule 3-05 of Regulation S-X of the Securities and Exchange Commission, and are not intended to be a complete presentation of assets and liabilities and results of operations on a stand-alone basis of the Evansville, Indiana Operations of Waste Management, Inc. In our opinion, the financial statements referred to above present fairly, in all material respects, the net tangible assets to be sold of the Evansville, Indiana Operations of Waste Management, Inc. at December 31, 1996, and the revenue and direct operating expenses for each of the two years in the period ended December 31, 1996, as described in Note 1, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois March 28, 1997 F-24 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS STATEMENT OF NET TANGIBLE ASSETS TO BE SOLD AS OF DECEMBER 31, 1996 ASSETS CURRENT ASSETS: Customer accounts receivable, net of allowance of $79,000.................... $1,524,000 Parts and supplies inventory................................................. 91,000 ---------- Total current assets................................................... 1,615,000 PROPERTY AND EQUIPMENT, at cost: Land, primarily disposal site................................................ 10,453,000 Buildings.................................................................... 1,684,000 Vehicles and equipment....................................................... 10,431,000 ---------- 22,568,000 Less--Accumulated depreciation and amortization.............................. 5,455,000 ---------- Total property and equipment, net...................................... 17,113,000 ---------- Total tangible assets to be sold....................................... $18,728,000 ---------- ----------
LIABILITIES AND NET TANGIBLE ASSETS TO BE SOLD CURRENT LIABILITIES: Portion of closure and post-closure liabilities payable within one year...... $ 276,000 Unearned revenue............................................................. 404,000 ---------- Total current liabilities.............................................. 680,000 CLOSURE AND POST-CLOSURE LIABILITIES, less portion payable within one year..... 464,000 NOTE PAYABLE................................................................... 39,000 CUSTOMER CONTRACT COMMITMENTS.................................................. ---------- Total liabilities...................................................... 1,183,000 ---------- Net tangible assets to be sold......................................... $17,545,000 ---------- ----------
The accompanying notes are an integral part of this statement. F-25 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------ Revenue.............................................................................. $ 12,985,000 $ 9,834,000 Direct operating expenses: Cost of sales...................................................................... 6,830,000 5,864,000 Selling, general, and administrative expenses...................................... 1,517,000 1,005,000 Depreciation and amortization...................................................... 2,467,000 1,525,000 ------------- ------------ Operating profit................................................................... $ 2,171,000 $ 1,440,000 ------------- ------------ ------------- ------------
The accompanying notes are an integral part of these statements. F-26 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On February 13, 1997, American Disposal Service, Inc. ("American") and Waste Management, Inc. ("WMI") entered into a Letter of Intent whereby American agreed in principle to purchase from WMI certain assets and assume certain liabilities of WMI's Evansville, Indiana Operations (the "Business"). An Asset Purchase Agreement (the "Agreement") was signed on March 25, 1997 and the transaction is expected to close on March 31, 1997. The accompanying statement of net tangible assets to be sold presents, as of December 31, 1996, the tangible assets of the Business to be sold to American and certain liabilities of the Business to be assumed by American pursuant to the Agreement. The tangible assets to be sold consist primarily of customer accounts receivable, parts and supplies inventory, a landfill facility and waste transportation and collection facilities and equipment located in and around Evansville, Indiana. The liabilities to be assumed consist primarily of closure and postclosure liabilities related to the landfill, a note payable to the former owner of the land on which the landfill was constructed and unearned revenue. The Business' customer accounts and customer account contracts will also be acquired by American. The accounts receivable and unearned revenue related to these customer accounts and customer account contracts are included in the accompanying statement of net tangible assets to be sold. However, cash, certain prepaid assets, certain property and equipment, goodwill, income tax benefits and liabilities, certain accrued expenses and certain other assets and liabilities related to the Business will be retained by WMI and are not included herein. Pursuant to the Agreement, American will assume certain contractual obligations that are not required by generally accepted accounting principles to be recorded in these financial statements. The statements of revenue and direct operating expenses represent those revenues and expenses that are specifically identifiable to the Business and do not include certain expenses as described in Note 3. As a result, the accompanying financial statements are not intended to be a complete presentation of the Business' assets and liabilities and results of operations had it been operated as a stand-alone entity (see Note 3). Rather, these financial statements were prepared for the purpose of complying with Rule 3-05 of Regulation S-X of the Securities and Exchange Commission. REVENUE RECOGNITION Revenues are recognized when the services are performed. Billings to customers and cash receipts from customers in advance of the providing of services are recorded as unearned revenue. No single customer accounted for more than 7% of revenue in 1996 or 1995. PROPERTY AND EQUIPMENT Property and equipment (including major repairs and improvements) are capitalized and stated at cost. Items of an ordinary maintenance or repair nature are charged directly to operations. Disposal sites are carried at cost and to the extent this exceeds end use realizable value, such excess is amortized over the estimated life of the disposal site, which is 45 years based upon the current site plans, permitted air space and annual volumes of waste. Disposal site improvement costs are capitalized and charged to operations F-27 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) over the shorter of the estimated usable life of the site or the improvements. These capitalized site improvement costs are included as land on the accompanying statement of net tangible assets to be sold. Preparation costs for individual secure land disposal cells are recorded as prepaid expenses which are included as land on the accompanying statement of net assets to be sold. These costs are amortized as the airspace is filled. Significant costs capitalized for such cells include excavation and grading costs, costs relating to the design and construction of liner systems, and gas collection and leachate collection systems. Unamortized site improvement and cell construction costs at December 31, 1996 was $7,974,000. Site improvement and cell construction amortization expense of $823,000 and $332,000 is included in direct operating expenses in the accompanying statements of revenues and direct operating expenses for the years ended December 31, 1996 and 1995, respectively. DEPRECIATION The cost, less estimated salvage value, of property and equipment is depreciated over the estimated useful lives on the straight-line method as follows: buildings--10 to 40 years; vehicles and equipment--3 to 20 years; containers--5 to 10 years. Depreciation expense of $1,644,000 and $1,193,000 is included in direct operating expenses in the accompanying statements of revenues and direct operating expenses for the years ended December 31, 1996 and 1995, respectively. The property and equipment included in the accompanying statement of net tangible assets to be sold includes the majority of property and equipment used by WMI to operate the Business. Certain of this property and equipment may not ultimately be acquired by American as the final list of assets to be sold is still being negotiated. ENVIRONMENTAL LIABILITIES The Business provides for estimated closure and postclosure monitoring costs over the operating life of its disposal sites as airspace is consumed. WMI has also established procedures to evaluate potential remedial liabilities at closed sites which it owns or operated, or to which it (or a company which it acquired) transported waste, including sites listed on the Superfund National Priority List ("NPL"). Where WMI concludes that it is probable that a liability has been incurred, provision is made in the financial statements, based upon management's judgment and prior experience, for WMI's best estimate of the liability. Such estimates are subsequently revised as deemed necessary as additional information becomes available. Based upon the advice of its environmental legal counsel, WMI does not believe any specific remedial liabilities exist related to the Business. Therefore, no specific remedial liabilities have been allocated by WMI to the Business as of December 31, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-28 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 2. ACQUISITION OF ROSE DISPOSAL SERVICES, INC. WMI acquired 100% of the outstanding shares of stock of Rose Disposal Services, Inc. ("Rose"), which operates waste hauling and landfill disposal operations in the Evansville, Indiana area, on April 28, 1995, for $7,000,000 in cash. This acquisition was accounted for using the purchase method of accounting. The revenues and direct operating expenses of Rose are included in the accompanying statements of revenue and direct operating expenses from the date of the acquisition. In conjunction with the acquisition of Rose, WMI entered into a royalty agreement whereby WMI is required to pay royalties to the former owner of the land on which the landfill facility was constructed based on volume and type of waste received by the landfill. Royalty expense of $215,000 and $131,000 is included in direct operating expenses in the accompanying statements of revenues and direct operating expenses for the years ended December 31, 1996 and 1995, respectively. 3. DIRECT OPERATING EXPENSES The direct operating expenses of the Business include costs associated with direct customer support to produce revenues. Such expenses (including certain allocations) include costs of vehicle drivers, vehicle operating expenses, disposal costs, landfill maintenance and operation costs, depreciation and amortization, supplies and certain occupancy costs. The direct operating expenses also include the royalty expenses described above in Note 2. Also included in direct operating expenses are certain selling, general and administrative expenses (including certain allocations), directly related to the operations in Evansville, Indiana. Certain other selling, general, and administrative expenses, interest expense, goodwill amortization, provision for income taxes and certain other costs incurred by WMI on behalf of and to support the Business have not been included in these financial statements since these costs have historically been included in WMI's consolidated statement of operations and have not been allocated to the various WMI businesses. Accordingly, as also indicated in Note 1, the accompanying financial statements are not intended to be a complete presentation of the Business' assets and liabilities and results of operations had it been operated as a stand-alone entity. 4. ENVIRONMENTAL COSTS AND LIABILITIES The operations of the Business are intrinsically connected with the protection of the environment. As such, a significant portion of the Business' operating costs and capital expenditures could be characterized as costs of environmental protection. While the Business is faced, in the normal course of business, with the need to expend funds for environmental protection, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its services are priced accordingly. The Business provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. Such costs are estimated based on the technical requirements of the Subtitle C and D Regulations of the U.S. Environmental Protection Agency or the applicable state requirements, whichever are stricter, and include such items as final cap and cover on the site, methane gas and leachate management, and groundwater monitoring. Landfill closure and post-closure costs of $374,000 and $216,000 are included in direct operating expenses in the accompanying statements of revenues and direct operating expenses for the years ended December 31, 1996 and 1995, respectively. F-29 WASTE MANAGEMENT, INC. EVANSVILLE, INDIANA OPERATIONS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 4. ENVIRONMENTAL COSTS AND LIABILITIES (CONTINUED) WMI has also established procedures to evaluate potential remedial laibilities at closed sites which it owns or operated, or to which it (or a company which it acquired) transported waste, including sites on the NPL. Based upon the advice of its environmental legal counsel, WMI does not believe any specific remedial liabilities exist related to the Business. Therefore, no specific remedial liabilities have been allocated by WMI to the Business as of December 31, 1996. The environmental liabilities included in the statement of net tangible assets to be sold consist only of closure and post-closure liabilities. 5. NOTE PAYABLE The note payable on the accompanying statement of net tangible assets to be sold represents the remaining principal due on a note payable to the former owner of the land on which the landfill was constructed. The note carries an interest rate of 9% per annum and is due on January 20, 2008. F-30 REPORT OF INDEPENDENT AUDITORS The Stockholder of Liberty Disposal, Inc. We have audited the accompanying balance sheets of Liberty Disposal, Inc. as of December 31, 1996 and 1995, and the related statements of income, stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Liberty Disposal, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois March 17, 1997 F-31 LIBERTY DISPOSAL, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------- 1996 1995 -------------------- CURRENT ASSETS Cash........................................................................................... $ 116 $ 411 Trade receivables -- Net of allowance for doubtful accounts of $200 and $240 in 1996 and 890 833 1995......................................................................................... Other receivables.............................................................................. -- 67 Prepaid expenses and other assets.............................................................. 74 71 --------- --------- Total current assets........................................................................... 1,080 1,382 Equipment, net................................................................................. 2,029 2,335 Cost in excess of fair value of net assets of acquired businesses, net of accumulated 26 28 amortization of $4 and $2.................................................................... Other intangible assets, net of accumulated amortization of $227 and $219...................... 81 89 Other assets................................................................................... 45 11 --------- --------- $ 3,261 $ 3,845 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable............................................................................. $ 556 $ 380 Accrued liabilities.......................................................................... 118 116 Current portion of debt obligations.......................................................... 356 324 --------- --------- Total current liabilities...................................................................... 1,030 820 Debt obligations, net of current portion....................................................... 469 833 Stockholder's equity: Common stock, no par value, 1,000 shares authorized -- 100 shares issued and outstanding..... -- -- Additional paid-in capital................................................................... 50 50 Retained earnings............................................................................ 1,712 2,142 --------- --------- 1,762 2,192 --------- --------- $ 3,261 $ 3,845 --------- --------- --------- ---------
See accompanying notes. F-32 LIBERTY DISPOSAL, INC. STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- Revenues....................................................................................... $ 7,003 $ 7,266 Cost of operations............................................................................. 4,607 4,417 Selling, general, and administrative expenses.................................................. 1,534 1,383 Depreciation and amortization.................................................................. 559 566 --------- --------- Operating income............................................................................... 303 900 Interest expense, net.......................................................................... 84 113 --------- --------- Net income..................................................................................... $ 219 $ 787 --------- --------- --------- ---------
See accompanying notes. F-33 LIBERTY DISPOSAL, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL TOTAL COMMON PAID-IN RETAINED STOCKHOLDER'S STOCK CAPITAL EARNINGS EQUITY ----------- ------------- ----------- ------------- Balance, January 1, 1995.......................................... $ -- $ 50 $ 1,608 $ 1,658 Stockholder distributions......................................... -- -- (253) (253) Net income........................................................ -- -- 787 787 ----------- --- ----------- ------ Balance, December 31, 1995........................................ -- 50 2,142 2,192 Stockholder distributions......................................... -- -- (649) (649) Net income........................................................ -- -- 219 219 ----------- --- ----------- ------ Balance, December 31, 1996........................................ $ -- $ 50 $ 1,712 $ 1,762 ----------- --- ----------- ------ ----------- --- ----------- ------
See accompanying notes. F-34 LIBERTY DISPOSAL, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- OPERATING ACTIVITIES Net income....................................................................................... $ 219 $ 787 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................................. 559 566 Provision for bad debts........................................................................ 133 310 Changes in operating assets and liabilities: Trade receivables............................................................................ (190) (132) Other receivables............................................................................ 67 (67) Prepaid expenses and other current assets.................................................... (3) (61) Other assets................................................................................. (34) 6 Accounts payable............................................................................. 176 1 Accrued liabilities.......................................................................... 2 (8) --------- --------- Net cash provided by operating activities........................................................ 929 1,402 INVESTING ACTIVITIES Capital expenditures............................................................................. (243) (1,024) Proceeds from sale of equipment.................................................................. -- 169 Cost of acquisitions............................................................................. -- (410) --------- --------- Net cash used in investing activities............................................................ (243) (1,265) FINANCING ACTIVITIES Proceeds from debt obligations................................................................... 331 2,428 Repayments of indebtedness....................................................................... (663) (1,903) Stockholder distributions........................................................................ (649) (253) --------- --------- Net cash provided by (used in) financing activities.............................................. (981) 272 --------- --------- Net increase (decrease) in cash.................................................................. (295) 409 Cash at beginning of year........................................................................ 411 2 --------- --------- Cash at end of year.............................................................................. $ 116 $ 411 --------- --------- --------- --------- Supplemental cash flow information: Interest paid.................................................................................. $ 87 $ 94
See accompanying notes. F-35 LIBERTY DISPOSAL, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 1. FORMATION AND BASIS OF PRESENTATION Liberty Disposal, Inc. (Company), a Rhode Island corporation, provides non-hazardous solid waste collection and transportation services throughout Rhode Island and eastern Massachusetts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. FAIR VALUE OF FINANCIAL INSTRUMENTS Trade receivables, trade payables, and borrowings under the revolving credit loan and other notes payable are carried at cost, which approximates fair value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company will, when determined necessary, accrue for estimated liabilities when the financial effect is probable and can be estimated by management. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is recognized in the period in which the related services are provided. EQUIPMENT Equipment is recorded at cost. Depreciation of equipment is computed using the accelerated methods over the estimated useful lives of the respective assets as follows: 4 to 7 Vehicles....................................................... years Containers and equipment....................................... 10 years
Expenditures for major renewals are capitalized and expenditures for routine maintenance and repairs are charged to expense as incurred. INTANGIBLE ASSETS The cost in excess of fair value of net assets of acquired businesses is amortized using the straight-line method over periods not exceeding 15 years. Other intangible assets, substantially all of which are covenants not to compete and customer lists, are amortized using the straight-line method over their F-36 LIBERTY DISPOSAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) estimated lives, typically no more than 15 years. Amortization expense for fiscal years 1996 and 1995 related to intangible assets was $10,500 and $8,200, respectively. ADVERTISING COSTS Advertising costs are expensed as incurred and amounted to $121,000 and $29,000 in 1996 and 1995, respectively. INCOME TAXES No provision for federal income taxes was required for the fiscal years 1996 and 1995, as a result of the Company's election to be treated as an S-Corporation. Accordingly, the income of the Company is reported in the individual tax returns of its stockholder. 3. ACQUISITIONS The Company acquired certain assets of two waste collection operations during February and March 1995 which were accounted for using the purchase method of accounting. Accordingly, operating results of these businesses since the dates of acquisition are included in the Company's statements of income. The purchase prices have been allocated to the net assets acquired based upon fair values at the dates of acquisition with the residual amounts allocated to cost in excess of fair value of net assets acquired. The purchase prices allocated to the net assets acquired in 1995 were as follows (in thousands): Equipment............................................................ $ 320 Cost in excess of fair value of net assets acquired.................. 21 Other intangible assets.............................................. 69 --------- Total cash paid...................................................... $ 410 --------- ---------
4. EQUIPMENT Equipment is summarized as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Containers................................................................. $ 1,505 $ 1,462 Equipment.................................................................. 1,331 1,323 Vehicles................................................................... 3,638 3,447 --------- --------- 6,474 6,232 Less: Accumulated depreciation............................................. (4,445) (3,897) --------- --------- $ 2,029 $ 2,335 --------- --------- --------- ---------
F-37 LIBERTY DISPOSAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996 AND 1995 5. DEBT OBLIGATIONS Debt obligations, which approximate fair value, are summarized as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Revolving credit loan, Fleet National Bank................................... $ 124 $ -- Term loan, Fleet National Bank............................................... 620 1,100 Note payable, AIG Credit Corporation......................................... 73 44 Other........................................................................ 8 13 --------- --------- 825 1,157 Less: Current portion........................................................ 356 324 --------- --------- Debt obligations, net of current portion..................................... $ 469 $ 833 --------- --------- --------- ---------
On December 22, 1995, the Company entered into a credit agreement with Fleet National Bank for a $1.1 million term loan and a $1.0 million revolving credit loan. The term loan is payable in 48 monthly installments of principal plus interest that began in January 1996 and will continue through December 1999. The Company may borrow up to $1.0 million under the revolving credit loan with the outstanding balance as of January 1, 1998 payable in 48 monthly installments of principal plus interest beginning January 1998 through December 2001. The term loan and revolving credit loan bear interest at a rate of prime plus 0.25% (8.50% and 8.75% at December 1, 1996 and 1995). The term loan and revolving credit loan are secured by substantially all of the Company's assets and are personally guaranteed by the Company's sole stockholder. The credit agreement contains covenants requiring compliance with certain financial ratios and restrictions as to the use of assets. In July of 1996 and 1995, the Company entered into an agreement with AIG Credit Corporation to finance a significant portion of the Company's annual insurance premiums. The 1995 note was payable in 9 monthly installments of principal plus interest at a rate of 8.2% that began in August 1995 and continued through April 1996. The 1996 note is payable in 11 monthly installments of principal plus interest at a rate of 7.63% that began in August 1996 and will continue through June 1997. Maturities of debt obligations are as follows (in thousands): 1997................................................................. $ 356 1998................................................................. 325 1999................................................................. 120 2000................................................................. 24 2001 and thereafter.................................................. --....... --------- $ 825 --------- ---------
6. RELATED PARTY TRANSACTIONS The Company rents its operational facilities and offices from the sole stockholder. Rent expense was approximately $62,150 and $62,550 in 1996 and 1995, respectively. F-38 LIBERTY DISPOSAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996 AND 1995 7. COMMITMENTS AND CONTINGENCIES The Company also may be subject to claims for personal injury or property damage arising out of motor vehicle accidents involving its trucks. The Company currently carries insurance with policy limits which management believes to be sufficient to cover these risks. If the Company were to incur liabilities in excess of its insurance limits, its financial condition may be adversely affected. 8. PROFIT SHARING RETIREMENT PLAN The Company makes discretionary contributions to the Liberty Disposal, Inc. Profit Sharing Retirement Plan, which covers all qualified employees. The Company contributed $75,000 in both 1996 and 1995. F-39 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................................. 3 Risk Factors................................................... 6 The Company.................................................... 14 Use of Proceeds................................................ 14 Price Range of Common Stock.................................... 15 Dividend Policy................................................ 15 Capitalization................................................. 16 Selected Consolidated Financial Data........................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 19 Business....................................................... 26 Management..................................................... 42 Certain Transactions........................................... 49 Principal Stockholders......................................... 50 Description of Capital Stock................................... 52 Shares Eligible for Future Sale................................ 54 Underwriting................................................... 55 Legal Matters.................................................. 56 Experts........................................................ 57 Additional Information......................................... 57 Index to Financial Statements.................................. F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3,500,000 SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- OPPENHEIMER & CO., INC. CREDIT SUISSE FIRST BOSTON , 1997 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table shows the expenses, other than underwriting discounts, which the Company expects to incur in connection with the issuance and distribution of the securities being registered under this registration statement. All expenses are estimated except for the Securities and Exchange Commission registration fee and the NASD filing fee.
Securities and Exchange Commission registration fee................ $ 20,125 Nasdaq fee......................................................... * NASD filing fee.................................................... 7,141 Blue Sky fees and expenses......................................... 5,000 Legal fees and expenses............................................ * Accounting fees and expenses....................................... * Printing and engraving expenses.................................... * Transfer agent's fee............................................... * --------- Total...................................................... $ * --------- ---------
- ------------------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware ("Section 145") permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, Section 145 permits the corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification may be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. II-1 To the extent that a director, officer, employee, or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in the preceding two paragraphs, Section 145 requires that he be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 145 provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in Section 145. Article Fifth of the Company's Certificate of Incorporation eliminates the personal liability of the directors of the Company to the Company or its stockholders for monetary damages for breach of fiduciary duty as directors, with certain exceptions, and Article Sixth requires indemnification of directors and officers of the Company, and for advancement of litigation expenses to the fullest extent permitted by Section 145. Article Sixth of the Company's By-laws provides for indemnification of the Company's officers and directors to the fullest extent permitted by Section 145 and other applicable laws as currently in effect and as they may be amended in the future. The Underwriting Agreement filed herewith as Exhibit 1.1 provides for indemnification of the directors, certain officers, and controlling persons of the Company by the Underwriters against certain civil liabilities, including liabilities under the Securities Act. The Company has also entered into agreements with its directors and executive officers providing for indemnification in certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. As part of the Exchange, the Company issued an aggregate of 5,676,901 shares of its Common Stock, options to purchase 869,615 shares of Common Stock and Warrants to purchase 215,455 shares of Common Stock (after giving effect to the Stock Split) to the then stockholders, option holders and warrant holders, respectively, of ADS and CDI, effective as of January 1, 1996. No underwriters were engaged in connection with the foregoing sales of securities. Such sales were made in reliance on the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"), relating to sales by an issuer not involving a public offering. All of the foregoing shares are deemed to be restricted securities for the purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBITS - ------------- ----------------------------------------------------------------------------------------------------- 1.1........ Form of Underwriting Agreement 3.1........ Restated Certificate of Incorporation of the Company (1) 3.2........ Amendment to Restated Certificate of Incorporation (1) 3.3........ By-laws of the Company (1) 4.1........ Specimen Common Stock Certificate (1) 5.1........ Opinion of Proskauer Rose Goetz & Mendelsohn LLP * 10.1....... Asset Purchase Agreement dated as of March 24, 1997 by and among Liberty Disposal, Inc., John M. Harpootian, Trustee, The Liberty Disposal, Inc. Charitable Remainder Annual Trust--1997 and to Company* 10.2....... Asset Purchase Agreement dated as of March 25, 1997 by and between American Disposal Services of Missouri, Inc. and Waste Management of Indiana, LLC*
II-2
EXHIBIT NO. DESCRIPTION OF EXHIBITS - ------------- ----------------------------------------------------------------------------------------------------- 10.3....... Credit Agreement dated as of August 30, 1996 among the Company, Internationale Nederlanden (U.S.) Capital Corporation, as administrative agent, and Morgan Guaranty Trust Company of New York, as documentation agent, and the other financial institutions party thereto (2) 10.4....... Amendment No. 2 to the Amended and Restated Credit Agreement dated as of March 21, 1997 among the Company, ING (U.S.) Capital Corporation, as administrative agent, and Morgan Guaranty Trust Company of New York, as documentation agent, and the other financial institutions party thereto(3) 10.5....... Registration Rights Agreement dated as of January 1, 1997 among the Company and certain of its stockholders(1) 10.6....... Employment Agreement dated as of May 31, 1996 between the Company and Richard De Young (1) 10.7....... Employment Agreement dated January 26, 1993 between the Company and John J. McDonnell, as amended (1) 10.8....... Employment Agreement dated May 16, 1995 between the Company and Richard T. Kogler (1) 10.9....... Employment Agreement dated June 2, 1995 between the Company and Ann L. Straw (1) 10.10...... Employment Agreement dated May 3, 1994 between the Company and Lawrence R. Conrath, Sr. (1) 10.11...... Employment Agreement dated as of May 31, 1996 between the Company and David C. Stoller (1) 10.12...... Employment Agreement dated as of February 21, 1997 between the Company and Stephen P. Lavey (3) 10.13...... American Disposal Services, Inc. 1996 Stock Option Plan (1) 10.14...... Form of Indemnification Agreement between the Company and its directors (1) 10.15...... Form of Indemnification Agreement between the Company and its executive officers (1) 10.16...... Form of Indemnification Agreement between the Company and its directors and executive officers (1) 10.17...... Form of Tax-Sharing Agreement between the Company and its executive officers (1) 21.1....... Subsidiaries of the Company 23.1....... Consent of Ernst & Young LLP 23.2....... Consent of Arthur Andersen LLP 23.5....... Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in exhibit 5.1) * 24.1....... Powers of Attorney are set forth on the signature pages hereof
- ------------------------ (*) To be filed by amendment. (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (333-4889). (2) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated August 26, 1996. (3) Filed as an exhibit to the Company's annual report on Form 10-K for the year ended December 31, 1996. II-3 (b) Financial Statement Schedules None ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement (filed herewith as Exhibit 1.1) certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described above in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted against the Registrant by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 2 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burr Ridge, State of Illinois, on April 1, 1997. AMERICAN DISPOSAL SERVICES, INC. BY: /S/ RICHARD DE YOUNG ----------------------------------------- Richard De Young PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registrant's registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- * Chairman and Director April 1, 1997 - ------------------------------ (principal executive David C. Stoller officer) /s/ RICHARD DE YOUNG President and Director April 1, 1997 - ------------------------------ Richard De Young * Chief Financial Officer April 1, 1997 - ------------------------------ (principal financial Stephen P. Lavey officer) * Vice President and April 1, 1997 - ------------------------------ Controller (principal Lawrence R. Conrath, Sr. accounting officer) II-5 SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- * Director April 1, 1997 - ------------------------------ Merril M. Halpern * Director April 1, 1997 - ------------------------------ A. Lawrence Fagan * Director April 1, 1997 - ------------------------------ Richard T. Henshaw, III * Director April 1, 1997 - ------------------------------ G. T. Blankenship * Director April 1, 1997 - ------------------------------ Norman Steisel /s/ RICHARD DE YOUNG ---------------------------------------- Richard De Young *By: ATTORNEY-IN-FACT II-6 EX-1.1 2 EXHIBIT 1.1 UNDERWRITING AGREEMENT 3,500,000 Shares American Disposal Services, Inc. Common Stock UNDERWRITING AGREEMENT ________, 1997 Oppenheimer & Co., Inc. Credit Suisse First Boston Corporation c/o Oppenheimer & Co., Inc. Oppenheimer Tower World Financial Center New York, New York 10281 On behalf of the Several Underwriters named in Schedule I attached hereto. Gentlemen: American Disposal Services, Inc., a Delaware corporation (the "Company"), proposes to sell to you and the other underwriters named in Schedule I to this Agreement (the "Underwriters"), for whom you are acting as Representatives, an aggregate of 3,500,000 shares (the "Firm Shares") of the Company's common stock, $0.01 par value (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 525,000 shares (the "Option Shares") of Common Stock from it for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. SALE AND PURCHASE OF THE SHARES. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at $____ per share (the "Initial Price"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I to this Agreement. (b) The Company grants to the several Underwriters an option to purchase, severally and not jointly, all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and only once thereafter within 30 days after the date of this Agreement, in each case upon written or telegraphic notice, or verbal or telephonic notice confirmed by written or telegraphic notice, by the Representatives to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before the Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. 2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (same day) funds to the Company, shall take place at the offices of Oppenheimer & Co., Inc., at Oppenheimer Tower, World Financial Center, New York, New York 10281, at 10:00 a.m., New York City time, on the third business day following the date of this Agreement, provided, however, that if the Shares sold hereunder are priced after 4:30 p.m., New York time, on any business day, payment and delivery in respect of the Firm Shares shall take place on the fourth business day following the date of this Agreement; if it is determined that settlement within the foregoing time frame is not feasible, then payment and delivery in respect of the Firm Shares shall occur at such time on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (same day) funds to the Company shall take place at the offices of -2- Oppenheimer & Co., Inc. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment are called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of exercise of the option as described in Section l(b) and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, at least one full business day before the Firm Shares Closing Date (or the Option Shares Closing Date in the case of the Option Shares). 3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Company has prepared in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the published rules and regulations thereunder (the "Rules") adopted by the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. ________), including a preliminary prospectus relating to the Shares, and has filed with the Commission the registration statement and such amendments thereto as may have been required to the date of this Agreement. Copies of such Registration Statement (including all amendments thereto) and of the related preliminary prospectus have heretofore been delivered by the Company to you. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Securities Act for the purpose of registering additional Shares, which registration shall be effective upon filing with the Commission. The term "Registration Statement" means the Registration Statement as amended at the time and on the date it becomes effective (the "Effective Date"), including all exhibits and information, if any, deemed to be part of the Registration Statement pursuant to Rule 424(a), Rule 430A and Rule 462(b) of the Rules. The term "preliminary prospectus" means any preliminary prospectus (as described in Rule 430 of the Rules) included at any time as a part of the Registration Statement. The term "Prospectus" means the prospectus in the form first used to confirm sales of the Shares (whether such prospectus was included in the Registration Statement at the time of effectiveness or was subsequently filed with the Commission pursuant to Rule 424(b) of the Rules) or the preliminary prospectus forming part of the Registration Statement at the time it was declared effective together with the term sheet permitted under Rule 434(b) and filed with the Commission pursuant to Rule 424(b), as applicable. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus, as soon after the Effective Date and the date of this Agreement as the Representatives deem advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). -3- 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Underwriter as follows: (a) On the Effective Date the Registration Statement complied, and on the date of the Prospectus, on the date any post-effective amendment to the Registration Statement or any related registration statement filed with the Commission pursuant to Rule 462(b) of the Rules shall become effective, on the date any supplement or amendment to the Prospectus is filed with the Commission and on each Closing Date, the Registration Statement and the Prospectus (and any amendment thereof or supplement thereto) will comply in all material respects with the applicable provisions of the Securities Act and the Rules and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder; the Registration Statement did not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the other dates referred to above neither the Registration Statement nor the Prospectus, nor any amendment thereof or supplement thereto, will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the Registration Statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus as amended or supplemented complied in all material respects with the applicable provisions of the Securities Act and the Rules and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The Company makes no representation or warranty as to any information contained in or omitted from (i) the paragraphs with respect to stabilization or affiliate transactions on the inside front cover page of the Prospectus and (ii) the statements contained under the caption "Underwriting" in the Prospectus. The Company acknowledges that such statements constitute the only information furnished in writing by the Representatives on behalf of the several Underwriters specifically for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. (b) All contracts and other documents required to be filed as exhibits to the Registration Statement have been filed with the Commission as exhibits to the Registration Statement. (c) The financial statements of the Company (including all notes thereto) included in the Registration Statement and Prospectus fairly present the financial position, the results of operations, stockholders' equity and cash flows and the other information purported to be shown therein of the Company at the respective dates and for the respective periods to which they apply; and such financial statements have been prepared -4- in conformity with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of the results for such periods have been made. There are no schedules required to be included in the Registration Statement in order to present fairly in all material respects the information required to be stated therein; and the historical financial information and statistical data set forth in the Prospectus under the captions "Summary Consolidated Financial Information," "Capitalization," and "Selected Consolidated Financial Data" are fairly stated in all material respects in relation to the financial statements from which they have been derived. The pro forma financial data included in the Registration Statement and the Prospectus present fairly the information shown therein, comply in all material respects with the requirements of the Securities Act and the Rules and Regulations with respect to pro forma financial statements, have been properly compiled on the pro forma basis described therein and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (d) Each of Ernst & Young LLP and Arthur Andersen LLP, whose reports are filed with the Commission as a part of the Registration Statement, are and, during the periods covered by their reports, were independent public accountants as required by the Securities Act and the Rules. (e) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. Each subsidiary of the Company has been duly incorporated or formed and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation or organization. The Company has no subsidiary or subsidiaries other than as set forth on Schedule II and Schedule III hereto (collectively, the "Subsidiaries") and does not control, directly or indirectly, any other corporation, partnership, joint venture, association or other business organization. Each of the Company and its subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its business makes such qualification necessary, except for such jurisdictions where the failure to so qualify individually or in the aggregate would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, and the Company has not received any claim or notice from any official authority in any jurisdiction that it is required to be qualified or licensed to do business in any such jurisdiction in which it is not so qualified or licensed. Except as disclosed in the Registration Statement and the Prospectus, the Company and its subsidiaries do not own, lease or license any asset or property or conduct any business outside the United States of America. Each of the Company and its subsidiaries has all requisite corporate power and authority, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental or regulatory bodies or any other person or entity, to own, lease and license its assets and -5- properties and conduct its businesses as now being conducted and as described in the Registration Statement and the Prospectus, except for such authorizations, approvals, consents, orders, licenses, certificates and permits which, if not obtained, would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole; no such authorization, approval, consent, order, license, certificate or permit contains a materially burdensome restriction other than as disclosed in the Registration Statement and the Prospectus; and the Company has all such corporate power and authority, and such authorizations, approvals, consents, orders, licenses, certificates and permits to enter into, deliver and perform this Agreement and to issue and sell the Shares (except as may be required under the Securities Act, the Exchange Act and state and foreign Blue Sky laws). (f) Except as disclosed in the Registration Statement and the Prospectus, the Company owns or possesses adequate and enforceable rights to use all (to the extent any of them exist) patents, patent applications, trademarks, trademark applications, service marks, copyrights, copyright applications, licenses and other similar rights (collectively, the "Intangibles") necessary for the conduct of its business as now being conducted and as described in the Registration Statement and the Prospectus. The Company has not infringed, is not infringing, and has not received any notice of infringement of, any Intangible of any other person and the Company does not know of any basis therefor except for such infringements which individually or in the aggregate would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. The Company has not received any notice of infringement of any of its Intangibles and the Company does not know of any basis therefor. (g) Each of the Company and its subsidiaries has good and marketable title in fee simple to each of the items of personal property which are reflected in the financial statements referred to in Section 4(c) or are referred to in the Registration Statement and the Prospectus as being owned by it and valid and enforceable leasehold interests in each of the items of real and personal property which are referred to in the Registration Statement and the Prospectus as being leased by it, in each case free and clear of all liens, encumbrances, claims, security interests and defects, other than those described in the Registration Statement and the Prospectus and other than those that could not materially affect the value thereof or materially interfere with the use made or presently contemplated to be made thereof by them. (h) Except as disclosed in the Registration Statement and the Prospectus, there is no litigation or governmental or other proceeding or investigation before any court or before or by any public body or board pending or, to the Company's knowledge, threatened (and the Company does not know of any basis therefor) against, or involving the assets, properties or businesses of, the Company or any of its subsidiaries which, if determined adversely to the Company or any of its subsidiaries, would materially -6- adversely affect the value or the operation of any such assets or properties or the business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement. (i) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein, there has not been any material adverse change in the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business; each of the Company and its subsidiaries has not entered into any transaction, other than in the ordinary course of business, that is material to the Company and its subsidiaries, taken as a whole; each of the Company and its subsidiaries has not sustained any material loss or interference with its assets, businesses or properties from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree. Since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected in the Registration Statement and the Prospectus, each of the Company and its subsidiaries has not undertaken any liability or obligation, direct or contingent, except for liabilities or obligations undertaken in the ordinary course of business. (j) Each agreement listed in the Exhibits to the Registration Statement is in full force and effect and is valid and enforceable by the Company or one of its subsidiaries in accordance with its terms, except where the failure of any such agreement to be in full force and effect and valid and enforceable by the Company or one of its subsidiaries in accordance with its terms would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, assuming the due authorization, execution and delivery thereof by each of the other parties thereto. Neither the Company, nor to the best of the Company's knowledge, any other party is in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default which default or event would have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company of any other indenture, mortgage, deed of trust, note or any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their properties or businesses is bound or affected which default or event would have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. -7- (k) Each of the Company and its subsidiaries is not in violation of any term or provision of its charter or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company. (l) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby or thereby (including, without limitation, the issuance and sale by the Company of the Shares) will (i) give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or any event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any of its subsidiaries pursuant to the terms of, any indenture, mortgage, deed of trust, note or other agreement or instrument to which the Company or any of its subsidiaries, is a party or by which any of them or their properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any of its subsidiaries, except for such terminations, accelerations, conflicts, breaches, defaults and events which would not, individually or in the aggregate, result in a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, or (ii) violate any provision of the charter or by-laws of the Company or any of its subsidiaries. (m) The Company has an authorized and outstanding capitalization as set forth under the caption "Capitalization" in the Prospectus. All of the outstanding shares of Common Stock have been duly and validly authorized and have been duly and validly issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive or other similar statutory right. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable and none of them will be issued in violation of any preemptive or other similar statutory right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or agreement to issue, any share of stock of the Company or any security convertible into, or exercisable or exchangeable for, stock of the Company. The Common Stock and the undesignated preferred stock, $0.01 par value (the "Preferred Stock") and the Shares conform to all statements in relation thereto contained in the Registration Statement and the Prospectus. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described or referred to therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or -8- contingent, for borrowed money, (ii) entered into any transaction not in the ordinary course of business or (iii) declared or paid any dividend or made any distribution on any shares of its stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its stock. (o) No holder of any security of the Company has any right to have any security owned by such holder included in the Registration Statement or to demand separate registration of any security owned by such holder during the period ending 180 days from the date of this Agreement. The Company has obtained from all officers and directors of the Company and Charterhouse Equity Partners, L.P., Charterhouse Equity Partners II, L.P. and CDI Equity, LLC, who together hold _________ shares of Common Stock (including _________ shares of Common Stock issuable upon exercise of stock options and warrants), their enforceable written agreement that for a period of at least 180 days from the date of this Agreement they will not, without the prior written consent of the Representatives, sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise any registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition. All other shares of Common Stock which are outstanding or issuable upon the exercise of stock options or warrants or the conversion of debt instruments constitute "restricted securities" within the meaning of Rule 144 under the Securities Act and the Rules for which the applicable holding period began no earlier than ____________. (p) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares. This Agreement has been duly and validly executed and delivered by the Company and constitutes and will constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (A) as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent transfer, fraudulent conveyance, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether considered in proceedings in equity or at law) and (B) with respect to this Agreement, to the extent that rights to indemnity or contribution under this Agreement may be limited by federal, state or foreign securities laws or the public policy underlying such laws. (q) Each of the Company and its subsidiaries is conducting its business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and federal environmental laws and regulations, except where the failure to be so in compliance would not have a material adverse effect on the assets or properties, business, -9- results of operations or financial condition of the Company and its subsidiaries, taken as a whole. (r) No transaction has occurred between or among the Company and any of its officers or directors or any affiliate or affiliates of any such officer or director that is required to be described in and is not described in the Registration Statement and the Prospectus. (s) The Company has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of any of the Shares. (t) The Company has filed all federal, state, local and foreign tax returns which are required to be filed through the date hereof, or has received extensions thereof, and has paid all taxes shown on such returns and all assessments received by it, except where the failure to file, extend the due date of or pay the same, individually or in the aggregate would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. (u) The Shares have been approved for quotation on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market, subject to official notice of issuance. 5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(A)(a). (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect, and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representatives. (c) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 5(d) shall be true and -10- correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. (d) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer or chief accounting officer of the Company, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (e) The Representatives shall have received at the time this Agreement is executed and on each Closing Date a letter or letters signed by Ernst & Young LLP, addressed to the Representatives and dated, respectively, the date of this Agreement and each such Closing Date, in form and substance satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating in effect that: (i) in their opinion the audited financial statements and financial statement schedules, if any, and pro forma financial statements included in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Consolidated Financial Information" and "Selected Consolidated Financial Data"; a reading of the minutes of the meetings of the stockholders and directors and finance and audit committees of the Company; and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, nothing came to their attention which caused them to believe that: (A) the amounts in "Summary Consolidated Financial Information" and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not agree with the -11- corresponding amounts in the audited financial statements from which such amounts were derived; or (B) the audited financial statements as of and for the three years ended December 31, 1996 included in the Registration Statement (i) do not comply in form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and (ii) are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements; or (C) (i) with respect to the Company there were, at a specified date not more than five business days prior to the date of the letter, any increases in the total current liabilities and long-term debt of the Company or capital stock of the Company or decreases in working capital (deficit) or total stockholders' equity (deficit) of the Company, as compared with the amounts shown on the Company's audited December 31, 1996 balance sheet included in the Registration Statement and the Prospectus, or (ii) for the period from December 31, 1996 to such specified date not more than five business days prior to the date of the letter, there were any increases in net losses except for increases in net losses set forth in the Registration Statement and the Prospectus, in which case the Company shall deliver to the Representatives a letter containing an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Representatives; (iii) they have performed certain other procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and specified by the Representatives agrees with the accounting records of the Company; and (iv)on the basis of a reading of the unaudited pro forma financial statements included in the Registration Statement and the Prospectus (the "pro forma financial statements"); carrying out certain specified procedures; inquiries of certain officials of the Company who have responsibility for financial and accounting matters; and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing came to their attention which caused them to believe that the pro forma financial statements do not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that -12- the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of the letter. (f) The Representatives shall have received at the time this Agreement is executed and on each Closing Date a letter or letters signed by Arthur Andersen LLP, addressed to the Representatives and dated, respectively, the date of this Agreement and each such Closing Date, in form and substance satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating in effect that in their opinion the audited consolidated financial statements and financial statement schedules, if any, included in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules. References to the Registration Statement and the Prospectus in this paragraph (f) are to such documents as amended and supplemented at the date of the letter. (g) The Representatives shall have received on each Closing Date from Proskauer Rose Goetz & Mendelsohn LLP, counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. Each Subsidiary of the Company set forth on Schedule II hereto has been duly incorporated or formed and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation or organization. (ii) Each of the Company and the Subsidiaries set forth on Schedule II hereto has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus; and the Company has all requisite corporate power and authority and all necessary governmental authorizations, approvals, consents, orders, licenses, certificates and permits required pursuant to New York State law, federal law and the General Corporation Law of the State of Delaware or known to such counsel to be required under the laws of other jurisdictions, and all other necessary authorizations, approvals, consents, orders, licenses, certificates and permits either called for by any contracts or other documents of which such counsel has knowledge or which are, to such counsel's knowledge, otherwise required, to enter into, deliver and -13- perform this Agreement and to issue and sell the Shares, other than those required under the Securities Act, the Exchange Act and state and foreign Blue Sky laws. (iii) The Company has authorized and issued of record capitalization as set forth under the caption "Capitalization" in the Prospectus; the certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company; all of the outstanding shares of Common Stock of the Company have been duly and validly authorized and have been duly and validly issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive or other similar statutory right. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable and none of them will have been issued in violation of any preemptive or other similar statutory right. To such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or agreement to issue, any share of stock of the Company or any security convertible into, or exercisable or exchangeable for, stock of the Company. The Common Stock, the Preferred Stock and the Shares conform to all statements in relation thereto contained in the Registration Statement and the Prospectus in all material respects. (iv) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement. This Agreement has been duly and validly executed and delivered by the Company and constitutes and will constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (A) as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, fraudulent conveyance, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether considered in proceedings in equity or at law) and (B) with respect to this Agreement, to the extent that rights to indemnity or contribution under this Agreement may be limited by federal, state or foreign securities laws or the public policy underlying such laws. (v) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will (i) give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or any event which with notice or lapse of time, or both, would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance -14- upon any properties or assets of the Company or any of its subsidiaries pursuant to the terms of, any indenture, mortgage, deed of trust, note or other agreement or instrument of which such counsel has knowledge and to which the Company or any of its subsidiaries is a party or by which any of them or their properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation of which such counsel has knowledge and applicable to the Company or any of its subsidiaries, except for such terminations, accelerations, conflicts, breaches, defaults and events which would not, individually or in the aggregate, result in a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, or (ii) violate any provision of the charter or by-laws of the Company or any of its subsidiaries. (vi) To such counsel's knowledge, no default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, of any indenture, mortgage, deed of trust, note or any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their assets or properties or businesses is bound or affected which default would have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. (vii)To such counsel's knowledge, each of the Company and its subsidiaries is not in violation of any term or provision of its charter or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a material adverse effect on the assets or properties, businesses, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. (viii) No consent, approval, authorization or order of any federal or New York State court or governmental agency or body or under the General Corporation Law of the State of Delaware or otherwise known to such counsel to be required is required for the performance of this Agreement by the Company or the consummation of the transactions contemplated hereby, except such as have been obtained under the Securities Act, the Exchange Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. (ix) Except as described in the Registration Statement and the Prospectus, to such counsel's knowledge, there is no litigation or governmental or other proceeding or investigation before any court or before or by any public body or board pending or threatened (and such counsel does not know of any basis -15- therefor) against, or involving the assets, properties or businesses of, the Company or any of its subsidiaries which, if determined adversely to the Company or any of its subsidiaries, would materially adversely affect the value or the operation of any such assets or properties or the business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole. (x) The agreement of each of the Company, Charterhouse Equity Partners, L.P., Charterhouse Equity Partners II, L.P. and CDI Equity, LLC stating that for a period of 180 days from the date of the Prospectus they will not, without the Representatives' prior written consent, sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise any registration rights with respect to, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned by them or hereafter acquired or with respect to which they have or hereafter acquire the power of disposition has been duly and validly delivered by such persons and constitutes a legal, valid and binding obligation of each such person enforceable against each such person in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, fraudulent transfer, fraudulent conveyance, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether considered in proceedings in equity or at law). All shares of Common Stock which are outstanding or issuable upon the exercise of stock options or warrants or the conversion of debt instruments of which such counsel has knowledge either (i) are subject to a written agreement obtained by the Company pursuant to Section 4(o) of this Agreement or (ii) constitute "restricted securities" within the meaning of Rule 144 under the Securities Act and the Rules for which the applicable holding period began no earlier than ____________. (xi) The statements in the Prospectus under the captions "Risk Factors--Extensive Environmental and Land Use Laws and Regulations"; "--Anti-Takeover Provisions"; "--Shares Eligible for Future Sale; Possible Adverse Effect on Future Market Price"; "Business--Environmental Regulations; "Management --Employment Agreements"; "--Compensation Committee Interlocks and Insider Participation"; "--Executive Compensation"; "--1996 Stock Option Plan"; "Certain Transactions"; "Description of Capital Stock" and "Shares Eligible for Future Sale" insofar as such statements constitute a summary of documents referred to therein or matters of law, are fair summaries of the material provisions thereof and accurately present in all material respects the information called for with respect to such documents and matters. All contracts and other documents required to be filed as exhibits to, or described in, the Registration Statement of which such -16- counsel has knowledge have been so filed with the Commission or are fairly described in the Registration Statement, as the case may be. (xii) The Registration Statement, all preliminary prospectuses and the Prospectus and each amendment or supplement thereto (except for the financial statements and notes and other financial and statistical data included therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules. (xiii) The Registration Statement has become effective under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are threatened, pending or contemplated. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of the Company and public officials and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the State of New York, the General Corporation Law of the State of Delaware and the federal laws of the United States; provided that such counsel shall state that in their opinion the Underwriters and they are justified in relying on such other opinions. Such counsel shall also state that in connection with rendering the opinions in (i) and (ii) of this Section 5(g), such counsel has assumed that the corporation laws of the States of Missouri and Kansas are identical to the General Corporation Law of the State of Delaware. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. Such counsel shall also state that, to such counsel's knowledge, the opinion of Ann L. Straw referred to in Section 5(h) of this Agreement is accurate and complete, and that in their opinion, the Underwriters are justified in relying on such opinion of Ann L. Straw. In addition, such counsel shall state that such counsel has participated in conferences with certain officers of, and with the accountants and counsel for, the Company and representatives of the Representatives concerning the preparation of the Registration Statement, the preliminary prospectus and the Prospectus. Such counsel shall also state that although it has made certain inquiries and investigations in connection with the preparation of the Registration Statement, such counsel did not independently verify the accuracy or completeness of the statements made therein or in the preliminary prospectus or in the Prospectus and the limitations inherent in the role of outside counsel are such that such counsel cannot and does not assume responsibility for or pass on the accuracy and completeness of such statements, except insofar as such statements relate to such counsel. On the basis of the foregoing, such counsel shall state that its work in connection with this matter did not disclose any information that caused such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial and statistical data, as to which such counsel need make no statement) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the -17- Prospectus as of its date and as of the date of such letter, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (other than financial statements and other information of a statistical, accounting, or financial nature which are or should be contained therein, as to which such counsel shall express no view). (h) The Representatives shall have received on each Closing Date from Ann L. Straw, General Counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that the statements in the Prospectus under the caption "Business-Legal Proceedings" insofar as such statements constitute a summary of documents referred to therein or matters of law, are fair summaries of the material provisions thereof and accurately present in all material respects the information called for with respect to such documents and matters. (i) The Representatives shall have received on each Closing Date from McAfee & Taft, special counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) Each Subsidiary of the Company set forth on Schedule III hereto has been duly incorporated or formed and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation or organization. (ii) Each of the Subsidiaries set forth on Schedule III hereto has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted. (j) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and their counsel and the Underwriters shall have received from Morgan, Lewis & Bockius LLP a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Morgan, Lewis & Bockius LLP such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (k) The Representatives shall have received on each Closing Date a certificate, including exhibits thereto, addressed to the Representatives and dated such Closing Date, of the Secretary or an Assistant Secretary of the Company, signed in such officer's capacity as such officer, as to the (i) certificate of incorporation and bylaws of the Company, (ii) resolutions authorizing the execution and delivery of the Registration Statement, this Agreement and the performance of the transactions contemplated by this Agreement, the Registration Statement, the Prospectus and the offering of the Shares, and -18- (iii) incumbency of the person or persons authorized to execute and deliver the Registration Statement, this Agreement and any other documents contemplated by the offering of the Shares. (l) The Representatives shall have received on each Closing Date certificates of the Secretaries of State of each State where the Company or any of its subsidiaries is incorporated and doing business as to the good standing of the Company or such subsidiary, listing all charter documents on file, if applicable, qualification of the Company or such subsidiary to do business as a foreign corporation, if applicable, payment of taxes and filing of annual reports. In addition, the Representatives shall have received copies of all charter documents of the Company, County Disposal, Inc. and ADS, Inc. certified by the Secretary of State of the State of such corporation's incorporation. 6. COVENANTS OF THE COMPANY. (A) The Company covenants and agrees as follows: (a) The Company shall prepare the Prospectus in a form approved by the Representatives and file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if such second business day would be more than fifteen business days after the Effective Date of the Registration Statement or any post-effective amendment thereto, such earlier date as would permit such Prospectus to be filed without filing a post-effective amendment as set forth in Rule 430A(a)(3) under the Securities Act and shall promptly advise the Representatives (i) when the Registration Statement shall have become effective, (ii) when any amendment thereof or any related registration statement filed with the Commission pursuant to Rule 462(b) of the Rules shall have become effective, (iii) of any request by the Commission for any amendment of the Registration Statement or the Prospectus or for any additional information, (iv) of the prevention or suspension of the use of any preliminary prospectus or the Prospectus or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. If contemplated by this Agreement, the Company shall prepare and file with the Commission in conformity with the Securities Act and the Rules a related registration statement pursuant to Rule 462(b) under the Securities Act for the purpose of registering additional shares. The Company shall not file any amendment of the Registration Statement or amendment or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to -19- prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act and the Rules, any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Securities Act or the Rules, the Company promptly shall prepare and file with the Commission, subject to the third sentence of paragraph (a) of this Section 6(A), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (c) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules. (d) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto and amendments thereof) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Securities Act or the Rules, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (e) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (f) For a period of five years after the date of this Agreement, the Company shall supply to the Representatives, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its -20- capital stock and to furnish to the Representatives a copy of each annual or other report it shall be required to file with the Commission. (g) Without the prior written consent of the Representatives, for a period of 180 days after the date of this Agreement, the Company shall not issue, sell or register with the Commission, or otherwise encumber or dispose of, directly or indirectly, any equity securities of the Company (or any securities convertible into or exercisable or exchangeable for equity securities of the Company), except for (i) the issuance of the Shares pursuant to the Registration Statement, (ii) the issuance of shares pursuant to the exercise of outstanding options under the Company's existing stock option plans, (iii) in connection with an acquisition by the Company of another entity pursuant to which the Company sells or transfers any of its shares of Common Stock to a third party as part or all of the purchase price of such entity; provided, however, that prior to any sale or transfer, such third party shall have agreed in writing with the Representatives that it will not sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise any registration rights with respect to, such shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for the remainder of the 180 days after the date of this Agreement, and (iv) the sale or transfer by the Company of shares of Common Stock in connection with the hiring of officers or directors not previously employed by the Company; provided, however, that prior to any sale or transfer, such officer or director shall have agreed in writing with the Representatives that he or she will not sell, offer to sell, distribute, pledge, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or encumber, or exercise any registration rights with respect to, such shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for the remainder of the 180 days after the date of this Agreement. (h) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market (including any required registration under the Exchange Act). (B) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses of the Company incident to the public offering of the Shares and the performance of the obligations of the Company under this Agreement including those relating to (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and the printing, filing and distribution of this Agreement; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(A)(e), including the fees and disbursements of -21- counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda (it being understood that the Company shall not be responsible for the fees and disbursements of counsel for the Underwriters other than as described in this Section 6(B)(iii)); (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of all reports and information required by Section 6(A)(f); and (vii) inclusion of the Shares for quotation on the Nasdaq National Market. 7. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or are based upon any misrepresentation or breach of any representation or warranty by the Company contained in this Agreement; provided, however, that such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter (i) if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein or, (ii) as to any preliminary prospectus, with respect to any Underwriter, to the extent that any such loss, claim, damage or liability of such Underwriter results from an untrue statement of a material fact contained in, or the omission of a material fact from, such preliminary prospectus, which untrue statement or omission was corrected in the Prospectus, if such Underwriter sold Shares to the person alleging such loss, claim, damage or liability -22- without sending or giving, at or prior to the written confirmation of such sale, a copy of the Prospectus, unless such failure resulted from the failure of the Company to deliver copies of the Prospectus to such Underwriter on a timely basis to permit such sending or giving. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, contained in the last paragraph of the cover page, in the paragraph relating to stabilization or the paragraph relating to affiliate transactions on the inside front cover page of the Prospectus and the statements with respect to the public offering of the Shares under the caption "Underwriting" in the Prospectus; provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation -23- subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent; provided, however, that such consent shall not be unreasonably withheld. 8. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 7(a) and 7(b) is due in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Securities Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, bear to (y) the underwriting discounts received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or omission or alleged omission of a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata -24- allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) the Company shall be liable and responsible for any amount in excess of such underwriting discount; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the failure so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriter's obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. TERMINATION. This Agreement may be terminated with respect to the Shares to be purchased on a Closing Date by the Representatives by notifying the Company at any time (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if there has been any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business; (ii) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (iii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the offering; (iv) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (v) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc. or on the -25- American Stock Exchange, Inc. has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (vi) if a banking moratorium has been declared by any state or federal authority, or (b) at or before any Closing Date, that any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will, upon the request of the Representatives, reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date, (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or -26- (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(B), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. MISCELLANEOUS. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 6(B), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters and the Company and their respective successors and assigns, and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered or by telephone or telegraph if subsequently confirmed in writing, (a) if to the Representatives, c/o Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281 Attention: Marshall A. Heinberg, and (b) if to the Company, to its agent for service as such agent's address appears on the cover page of the Registration Statement. -27- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. -28- This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, AMERICAN DISPOSAL SERVICES, INC. By ---------------------------------------- Name: Title: Confirmed: OPPENHEIMER & CO., INC. CREDIT SUISSE FIRST BOSTON CORPORATION Acting severally on behalf of itself and as representative of the several Underwriters named in Schedule I annexed hereto. By Oppenheimer & Co., Inc. By ---------------------------------------- Name: Marshall A. Heinberg Title: Managing Director -29- SCHEDULE I Number of Firm Shares to Name Be Purchased ---- -------------- Oppenheimer & Co., Inc................................. Credit Suisse First Boston Corporation................. ------------- TOTAL 3,500,000 ------------- ------------- -i- SCHEDULE II SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- County Disposal, Inc. Delaware American Disposal Services of Kansas, Inc. Kansas County Disposal (Illinois), Inc. Delaware County Disposal (Ohio), Inc. Delaware County Landfill, Inc. Delaware Southwest Waste, Inc. Missouri Tate's Transfer Systems, Inc. Missouri -ii- SCHEDULE III SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- ADS, Inc. Oklahoma Pittsburg County Landfill, Inc. Oklahoma American Disposal Services of Missouri, Inc. Oklahoma -iii- EX-21.1 3 EXHIBIT 21.1 LIST OF SUBSIDIARIES EHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Name State of Incorporation - ---- ---------------------- ADS, Inc. Oklahoma County Disposal, Inc. Delaware American Disposal Services of Kansas, Inc. Kansas* American Disposal Services of Missouri, Inc. Missouri* Tata's Transfer Systems, Inc. Oklahoma* Pittsburg County Landfill, Inc. Delaware* County Disposal (Illinois), Inc. Delaware* County Disposal (Ohio), Inc. Delaware** County Landfill, Inc. Delaware** Southwest Waste, Inc. Missouri* Bowers Phase II, Inc. Ohio** Allied Waste Systems, Inc. Ohio** Ross Bros. Waste and Recycling Co., Inc. Ohio** * Indirect Ownership through ADS, Inc. ** Indirect Ownership through County Disposal, Inc. EX-23.1 4 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the references to our firm under the caption "Experts" and to the use of our report dated February 26, 1997, except as to Note 5 for which the date is March 21, 1997 and as to Note 10 for which the date is March 25, 1997, and to the use of our report dated March 17, 1997 in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-24103) and related Prospectus of American Disposal Services, Inc. for the registration of up to 4,025,000 shares of its common stock. ERNST & YOUNG LLP Chicago, Illinois March 31, 1997 EX-23.2 5 EXHIBIT 23.2 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 28, 1997 included in this Registration Statement on Form S-1. ARTHUR ANDERSEN LLP Chicago, Illinois April 1, 1997 -----END PRIVACY-ENHANCED MESSAGE-----