1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (date of earliest event reported): September 12, 1996 USA WASTE SERVICES, INC. (Exact name of registrant as specified in its charter) Commission file number 1-12154 ------- DELAWARE 73-1309529 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 LBJ FREEWAY, SUITE 300 - TOWER ONE DALLAS, TEXAS 75240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 383-7900 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Pro Forma Condensed Consolidated Financial Statements The pro forma condensed consolidated financial statements of USA Waste Services, Inc. and subsidiaries (the "Company") listed below present the pro forma balance sheet as if the acquisitions which occurred after June 30, 1996 were consummated as of that date, and pro forma results of operations as if 1996 acquisitions had occured on January 1, 1995. The pro forma condensed consolidated balance sheet is as of June 30, 1996. The pro forma condensed consolidated statements of operations are for the six months ended June 30, 1996 and for the year ended December 31, 1995. (b) Exhibits 23.1 Consent of Independent Auditors 23.2 Consent of Independent Accountants 23.3 Consent of Independent Auditors 23.4 Consent of Independent Auditors 23.5 Consent of Independent Auditors 23.6 Consent of Independent Public Accountants 23.7 Consent of Independent Auditors 2 3 INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
Page ---- Item 7. Financial Statements and Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of June 30, 1996 . . . . . . . . . . . . . . 6 Pro Forma Condensed Consolidated Statement of Operations (unaudited) for the six months ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 7 Pro Forma Condensed Consolidated Statement of Operations (unaudited) for the year ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 8 Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . 9 Financial Statements of Businesses Acquired: Acquired Quebec Solid Waste Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Transport Sanico Lte'e: Auditors' Report Statement of Earnings and Retained Earnings for the Year ended December 31, 1995 Balance Sheet as of December 31, 1995 Statement of Changes in Financial Position for the Year Ended December 31, 1995 Notes to Financial Statements Les Entreprises De Rebuts Sanipan Inc.: Auditors' Report Statement of Earnings and Retained Earnings for the Year ended December 31, 1995 Balance Sheet as of December 31, 1995 Statement of Changes in Financial Position for the Year Ended December 31, 1995 Notes to Financial Statements Acquired Michigan and Ontario Solid Waste Companies . . . . . . . . . . . . . . . . . . . . . . . 22 Report of Independent Accountants Historical Summary of Revenues and Direct Expenses for the year ended December 31, 1995 Notes to Historical Summary of Revenues and Direct Expenses Report of Independent Accountants Historical Summary of Net Book Value of Property, Plant and Equipment Notes to Historical Summary of Net Book Value of Property, Plant and Equipment Kasper Brothers, Inc. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Report of Independent Accountants Balance Sheet as of September 30, 1995 Statement of Operations and Retained Earnings for the year ended September 30, 1995 Statement of Cash Flows for the year ended September 30, 1995 Notes to Financial Statements Arnoni Group Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Report of Independent Auditors Combined Balance Sheet as of December 31, 1995 Combined Statement of Income and Retained Earnings for the year ended December 31, 1995 Notes to Combined Financial Statements Jennings Environmental Services, Inc. Financial Statements. . . . . . . . . . . . . . . . . . . . 50 Independent Auditors' Report Balance Sheet as of December 31, 1995 Statement of Income for the year ended December 31, 1995 Statement of Changes in Stockholders' Equity for the year ended December 31, 1995 Statement of Cash Flows for the year ended December 31, 1995 Notes to Financial Statements Grand Central Sanitation, Inc. and Related Companies. . . . . . . . . . . . . . . . . . . . . . . 62 Independent Auditors' Report Combined Balance Sheet as of December 31, 1995 Combined Statement of Income for the year ended December 31, 1995 Combined Statement of Stockholders' Equity for the year ended December 31, 1995 Combined Statement of Cash Flows for the year ended December 31, 1995 Notes to Combined Financial Statements 4 4
Garnet Group Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Report of Independent Public Accountants Combined Balance Sheet as of December 31, 1995 Combined Statement of Operations for the year ended December 31, 1995 Combined Statement of Stockholders' Deficit for the year ended December 31, 1995 Combined Statement of Cash Flows for the year ended December 31, 1995 Notes to Combined Financial Statements Orange Group Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Report of Independent Auditors Combined Balance Sheet as of December 31, 1995 Combined Statement of Operations for the year ended December 31, 1995 Combined Statement of Retained Earnings for the year ended December 31, 1995 Combined Statement of Cash Flows for the year ended December 31, 1995 Notes to Combined Financial Statements Combined Companies (City, Alpine, and LGI) Financial Statements . . . . . . . . . . . . . . . . . . 108 Report of Independent Public Accountants Combined Balance Sheet as of December 31, 1995 Combined Statement of Operations for the year ended December 31, 1995 Combined Statement of Stockholders' Equity and Partners' Capital for the year ended December 31, 1995 Combined Statement of Cash Flows for the year ended December 31, 1995 Notes to Combined Financial Statements 5 USA WASTE SERVICES, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During 1996, USA Waste Services, Inc. (the "Company") acquired several waste collection businesses and landfills, at various dates, as described in Notes 2 and 16 to the 1995 Supplemental Consolidated Financial Statements and Notes 1 and 5 to the 1996 Supplemental Interim Condensed Consolidated Financial Statements included in the Company's Current Report on Form 8-K dated November 12, 1996, filed in connection with the acquisition of Sanifill, Inc. (the "Supplemental Financial Statements"). For those acquisitions accounted for under the pooling of interests method, the financial statements of the acquired companies are included with the Supplemental Financial Statements at their historical amounts, and, if material, all periods presented are restated as if the combination occurred on the first day of the earliest year presented. For acquisitions accounted for as purchases, the financial statements of the businesses acquired are included with the Supplemental Financial Statements since the date of the acquisitions. The accompanying pro forma condensed consolidated balance sheet as of June 30, 1996 has been prepared as if the acquisitions which occurred after June 30, 1996 were consummated as of that date. The accompanying pro forma condensed consolidated statements of operations for the year ended December 31, 1995 and for the six month period ended June 30, 1996 present the pro forma results of operations of the Company as if the 1996 acquisitions had occurred on January 1, 1995. The accompanying pro forma condensed consolidated financial statements should be read in conjunction with the Supplemental Financial Statements. 5 6 USA WASTE SERVICES, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands, Except Share and Par Value Amounts) (Unaudited) June 30, 1996 NOTE 1 The supplemental consolidated balance sheet will become the historical consolidated balance sheet of the Company after financial statements covering the date of consummation of the Sanifill, Inc. merger (August 30, 1996) are issued. NOTE 2 To reflect the historical balance sheet for acquisitions accounted for as poolings of interests and the purchase price allocations for acquisitions accounted for as purchases. See notes to pro forma condensed consolidated financial statements. 6
BUSINESSES ACQUIRED AFTER SUPPLEMENTAL JUNE 30, 1996 (NOTE 1) (NOTE 2) PRO FORMA ------------ -------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 34,626 ($11,787) $ 22,839 Accounts receivable, net 176,422 1,254 177,676 Notes and other receivables 14,343 -- 14,343 Deferred income taxes 38,870 -- 38,870 Prepaid expenses and other 39,333 213 39,546 ----------- ---------- ----------- Total current assets 303,594 (10,320) 293,274 ----------- ---------- ----------- Notes and other receivables 28,937 -- 28,937 Property and equipment, net 1,586,353 97,139 1,683,492 Excess of cost over net assets of acquired business, net 278,494 132,623 411,117 Other intangible assets, net 63,185 6,127 69,312 Other assets 117,332 2,386 119,718 ----------- ---------- ----------- Total assets $ 2,377,895 $ 227,955 $ 2,605,850 ----------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 73,154 426 $ 73,580 Accrued liabilities 93,170 3,045 96,215 Deferred revenues 15,853 374 16,227 Current maturities of long-term debt 24,766 2,863 27,629 ----------- ---------- ----------- Total current liabilities 206,943 6,708 213,651 ----------- ---------- ----------- Long-term debt 928,147 108,758 1,036,905 Closure, post-closure, and other liabilities 167,812 25,166 192,978 Deferred income taxes 28,845 29,400 58,245 ----------- ---------- ----------- 1,331,747 170,032 1,501,353 ----------- ---------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock: $1.00 par value; 10,000,000 shares authorized; none issued -- -- -- Common stock: $.01 par value; 150,000,000 shares authorized; historical 134,289,891 shares (137,184,979 pro forma shares) issued and outstanding 1,343 29 1,372 Additional paid-in capital 1,167,105 59,444 1,226,549 Retained earnings (accumulated deficit) (107,170) (1,352) (108,522) Foreign currency translation adjustment (14,646) -- (14,646) Less treasury stock at cost, 23,485 shares (484) (198) (682) ----------- ---------- ----------- Total stockholders' equity 1,046,148 57,923 1,104,071 ----------- ---------- ----------- Total liabilities and stockholders' equity $ 2,377,895 $ 227,955 $ 2,605,850 =========== ========== =========== 7 USA WASTE SERVICES, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited) For the Six Months Ended June 30, 1996 NOTE 1 The supplemental consolidated statement of operations will become the historical consolidated statement of operations of the Company after financial statements covering the date of consummation of the Sanifill, Inc. merger (August 30, 1996) are issued. NOTE 2 To reflect the revenues and expenses of businesses acquired during 1996 for the periods from January 1, 1996 through the dates of acquisition. NOTE 3 To reflect the revenues and expenses of businesses acquired subsequent to June 30, 1996 for the six months ended June 30, 1996. See notes to pro forma condensed consolidated financial statements. 7
BUSINESSES BUSINESSES ACQUIRED ACQUIRED THROUGH AFTER JUNE 30, JUNE 30, SUPPLEMENTAL 1996 1996 PRO FORMA (NOTE 1) (NOTE 2) (NOTE 3) ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- ----------- Operating revenues $ 610,267 $ 28,513 $ 42,711 $ -- $ 681,491 ---------- ----------- ----------- --------- ---------- Costs and expenses: Operating 336,211 15,739 12,530 -- 364,479 General and administrative 76,853 4,252 4,218 -- 85,323 Depreciation and amortization 69,804 3,745 2,986 -- 76,536 Merger costs 38,100 -- -- -- 38,100 Unusual items 12,952 -- -- -- 12,952 ---------- ----------- ----------- --------- ---------- 533,920 23,736 19,734 -- 577,390 ---------- ----------- ----------- --------- ---------- Income from operations 76,347 4,777 22,977 -- 104,100 ---------- ----------- ----------- --------- ---------- Other income (expense): Interest expense (22,457) (3,024) (9,641) -- (35,122) Interest income 2,998 96 128 -- 3,222 Other income, net 2,542 (38) 47 -- 2,552 ---------- ----------- ----------- --------- ---------- (16,917) (2,966) (9,465) -- (29,348) ---------- ----------- ----------- --------- ---------- Income before provision for income taxes 59,430 1,811 13,511 -- 74,752 Provision for income taxes 33,846 721 5,469 (61)(a) 39,975 ---------- ----------- ----------- --------- ---------- Net income $ 25,584 $ 1,091 $ 8,042 $ 61 $ 34,778 ========== =========== =========== ========= ========== Earnings per common share $ 0.19 $ 0.25 ========== ========== Weighted average number of common and common equivalent shares outstanding 135,790 1,375 2,895 140,060 ========== =========== =========== =========== ========== 8 USA WASTE SERVICES, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited) For the Year Ended December 31, 1995 NOTE 1 The supplemental consolidated statement of operations will become the historical consolidated statement of operations of the Company after financial statements covering the date of consummation of the Sanifill, Inc. merger (August 30, 1996) are issued. See notes to pro forma condensed consolidated financial statements. 8
AUDITED OTHER BUSINESSES BUSINESSES ACQUIRED ACQUIRED AFTER AFTER SUPPLEMENTAL DECEMBER 31, DECEMBER 31, PRO FORMA (NOTE 1) 1995 1995 ADJUSTMENTS PRO FORMA ---------- ---------- --------- ----------- ------------ Operating revenues $ 987,705 $ 127,054 $ 96,090 $ -- $ 1,210,849 Costs and expenses: Operating 551,305 81,778 53,147 -- 686,230 General and administrative 140,051 24,377 14,730 -- 179,158 Depreciation and amortization 119,570 13,225 8,340 -- 141,135 Merger costs 25,639 -- -- -- 25,639 Unusual items 4,733 -- -- -- 4,733 ---------- ---------- --------- -------- ------------ 841,298 119,380 76,217 -- 1,036,895 ---------- ---------- --------- -------- ------------ Income from operations 146,407 7,674 19,873 -- 173,954 Other income (expense): Interest expense: Nonrecurring (10,994) -- -- -- (10,994) Other (48,558) (4,549) (6,421) -- (59,528) Interest income 5,482 325 325 -- 6,132 Other income, net 5,143 (1,728) 323 -- 3,738 ---------- ---------- --------- -------- ------------ (48,927) (5,952) (5,773) -- (60,652) ---------- ---------- --------- -------- ------------ Income before provision for income taxes 97,480 1,722 14,100 -- 113,302 Provision for income taxes 44,992 787 1,752 3,788 (a) 51,319 ---------- ---------- --------- -------- ------------ Net income $ 52,488 $ 935 $ 12,348 $ (3,788) $ 61,983 ========== ========== ========= ======== ============ Earnings per common share $ 0.46 $ 0.52 (b) ========== ============ Weighted average number of common and common equivalent shares outstanding 113,279 847 114 5,303 (b) 119,543 ========== ========== ========= ======== ============ 9 USA WASTE SERVICES, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The accompanying pro forma condensed consolidated financial statements for the Company have been prepared based upon certain pro forma adjustments to the Supplemental Financial Statements. These pro forma adjustments are described below: (a) Provision for income taxes reflects the corporate income tax rate of 40% for all acquired businesses. (b) Pro forma earnings per common share for each period is based on the combined weighted average number of shares outstanding (considering pro forma shares issued by the Company in connection with the acquisitions). 9 10 AUDITORS' REPORT To the Directors of Transport Sanico Ltee We have audited the balance sheet of Transport Sanico Ltee as at December 31, 1995 and the statements of earnings and retained earnings and of changes in financial position for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1995 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles in Canada. /s/ DELOITTE & TOUCHE Chartered Accountants Montreal, Quebec October 25, 1996 10 11 TRANSPORT SANICO LTEE STATEMENT OF EARNINGS AND RETAINED EARNINGS YEAR ENDED DECEMBER 31, 1995 ====================================================================== 1995 1994 - ---------------------------------------------------------------------- $ $ (unaudited) REVENUE 6,638,214 6,658,879 Operating expenses 4,020,825 4,264,678 - ---------------------------------------------------------------------- Gross margin 2,617,389 2,394,201 - ---------------------------------------------------------------------- Sales and administrative expenses 3,153,346 1,605,090 Amortization of capital assets 5,024 5,479 - ---------------------------------------------------------------------- 3,158,370 1,610,569 - ---------------------------------------------------------------------- (Loss) earnings before income taxes (540,981) 783,632 Income taxes Current (recovery) (197,608) 298,207 Deferred 768 3,869 - ---------------------------------------------------------------------- (196,840) 302,076 - ---------------------------------------------------------------------- Net (loss) earnings (344,141) 481,556 Retained earnings, beginning of year 2,655,763 2,174,207 - ---------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR 2,311,622 2,655,763 ====================================================================== 11 12 TRANSPORT SANICO LTEE BALANCE SHEET AS AT DECEMBER 31, 1995 ====================================================================== 1995 1994 - ---------------------------------------------------------------------- $ $ (unaudited) ASSETS Current assets Cash 1,545,665 1,128,048 Accounts receivable 318,263 285,052 Prepaid advances and deposits 158,462 70,490 Advances to affiliated companies 1,858,208 1,892,590 Income taxes 464,238 - - ---------------------------------------------------------------------- 4,344,836 3,376,180 Capital assets (Note 3) 19,785 28,013 Other assets - 77,600 - ---------------------------------------------------------------------- 4,364,621 3,481,793 ====================================================================== LIABILITIES Current liabilities Accounts payable and accrued liabilities 799,142 460,894 Advances from affiliated companies 1,251,744 326,364 Income taxes - 37,427 Deferred income taxes 2,013 1,245 - ---------------------------------------------------------------------- 2,052,899 825,930 - ---------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (Note 4) 100 100 Retained earnings 2,311,622 2,655,763 - ---------------------------------------------------------------------- 2,311,722 2,655,863 - ---------------------------------------------------------------------- 4,364,621 3,481,793 ====================================================================== 12 13 TRANSPORT SANICO LTEE STATEMENT OF CHANGES IN FINANCIAL POSITION YEAR ENDED DECEMBER 31, 1995 ====================================================================== 1995 1994 - ---------------------------------------------------------------------- $ $ (unaudited) OPERATING ACTIVITIES Cash provided by operations Net (loss) earnings (344,141) 481,556 Items not affecting cash Amortization of capital assets 5,024 5,479 Gain on sale - 3,869 Deferred income taxes 768 - - ---------------------------------------------------------------------- (338,349) 490,904 Changes in non-cash working capital items 675,162 455,787 - ---------------------------------------------------------------------- 336,813 946,691 - ---------------------------------------------------------------------- INVESTING ACTIVITIES Other assets 77,600 92,577 Proceeds on disposal of capital assets 3,204 5,321 - ---------------------------------------------------------------------- 80,804 97,898 - ---------------------------------------------------------------------- Net change in cash 417,617 1,044,589 Cash, beginning of year 1,128,048 83,459 - ---------------------------------------------------------------------- CASH, END OF YEAR 1,545,665 1,128,048 ====================================================================== 13 14 TRANSPORT SANICO LTEE STATEMENT OF CHANGES IN FINANCIAL POSITION YEAR ENDED DECEMBER 31, 1995 ================================================================================ 1. STATUS AND NATURE OF ACTIVITIES The Company is incorporated under the Canada Business Corporations Act, and is wholly-owned by Intersan Inc. Its main operations are the picking-up and transportation of waste. 2. ACCOUNTING POLICIES The financial statements have been prepared in accordance with accounting principles generally accepted in Canada. They have been prepared for filing with the United States Securities and Exchange Commission.The significant accounting policies are as follows: Revenue recognition Contract revenues are accounted for when services are rendered. Capital assets Capital assets are recorded at acquisition cost and are amortized over their estimated useful lives using the following methods, rates and terms: Method Rate/term ------ --------- Equipment diminishing balance 20% Office furniture diminishing balance 20% Automotive equipment straight-line 5 to 10 years 3. CAPITAL ASSETS 14
1995 1994 ------------------------------ ----------- Accumulated Net Book Net Book Cost Amortization Value Value ------ ------------ -------- ----------- $ $ $ $ (unaudited) Equipment 56,231 40,104 16,127 23,845 Office furniture 18,358 16,826 1,532 2,126 Automotive equipment 7,089 4,963 2,126 2,042 ----------------------------------------------------------------- 81,678 61,893 19,785 28,013 ================================================================= 15 TRANSPORT SANICO LTEE STATEMENT OF CHANGES IN FINANCIAL POSITION YEAR ENDED DECEMBER 31, 1995 ================================================================================ 4. SHARE CAPITAL Authorized An unlimited number of preferred shares, non-voting, without par value An unlimited number of common shares, without par value 5. RELATED PARTY TRANSACTIONS During the year, sales and administrative expenses included management fees for an amount of $1,000,000 (nil in 1994) payable to the parent company. 15
1995 1994 --------------------- $ $ Issued 100 common shares 100 100 ============================================================================ 16 AUDITORS' REPORT To the Directors of Les entreprises de rebuts Sanipan Inc. We have audited the balance sheet of the business of Les entreprises de rebuts Sanipan Inc. acquired by USA Waste Services, Inc. as described in Note 1 as at December 31, 1995 and the statements of earnings, retained earnings and changes in financial position for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company, as described above as at December 31, 1995 and the results of its operations and the changes in its financial position for the year then ended, in accordance with generally accepted accounting principles in Canada. /s/ DELOITTE & TOUCHE Chartered Accountants Montreal, Quebec October 25, 1996 16 17 LES ENTREPRISES DE REBUTS SANIPAN INC. STATEMENT OF EARNINGS AND RETAINED EARNINGS YEAR ENDED DECEMBER 31, 1995 17
=============================================================================== 1995 1994 - ------------------------------------------------------------------------------- $ $ (unaudited) SALES 9,698,011 10,254,600 Operating expenses 7,108,132 6,867,768 - ------------------------------------------------------------------------------- Gross margin 2,589,879 3,386,832 - ------------------------------------------------------------------------------- Sales and administrative expenses 2,187,376 1,773,221 Write-down of investment 1,077,161 -- Amortization of capital assets 825,208 450,645 - ------------------------------------------------------------------------------- 4,089,745 2,223,866 - ------------------------------------------------------------------------------- Earnings before income taxes (1,499,866) 1,162,966 - ------------------------------------------------------------------------------- Income taxes Current recovery (258,000) (13,264) Deferred 293,000 442,435 - ------------------------------------------------------------------------------- 35,000 429,171 - ------------------------------------------------------------------------------- Net earnings (1,534,866) 733,795 Retained earnings, beginning of year 3,600,522 2,866,727 - ------------------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR 2,065,656 3,600,522 =============================================================================== 18 LES ENTREPRISES DE REBUTS SANIPAN INC. BALANCE SHEET AS AT DECEMBER 31, 1995 18
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- $ $ (unaudited) ASSETS Current assets Cash -- 17,186 Accounts receivable 117,595 96,594 Advances to affiliated companies 2,350,526 2,513,706 Inventories 26,525 26,526 Prepaid expenses 111,617 19,402 Income taxes 441,594 57,744 - -------------------------------------------------------------------------------- 3,047,857 2,731,158 Investment, at cost (Note 4) -- 1,077,161 Capital assets (Note 5) 10,588,894 7,569,276 Other assets -- 185,103 - -------------------------------------------------------------------------------- 13,636,751 11,562,698 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities Bank indebtedness 1,300,536 -- Accounts payable and accrued liabilities 1,220,574 1,226,872 Advances from affiliated companies 7,755,884 6,095,134 - -------------------------------------------------------------------------------- 10,276,994 7,322,006 Provision for post-closure costs 444,000 -- Deferred income taxes 849,101 639,170 - -------------------------------------------------------------------------------- 11,570,095 7,961,176 - -------------------------------------------------------------------------------- SHAREHOLDER'S EQUITY Share capital (Note 6) 1,000 1,000 Retained earnings 2,065,656 3,600,522 - -------------------------------------------------------------------------------- 2,066,656 3,601,522 - -------------------------------------------------------------------------------- 13,636,751 11,562,698 ================================================================================ 19 LES ENTREPRISES DE REBUTS SANIPAN INC. STATEMENT OF CHANGES IN FINANCIAL POSITION YEAR ENDED DECEMBER 31, 1995 19
================================================================================ 1995 1994 - -------------------------------------------------------------------------------- $ $ (unaudited) OPERATING ACTIVITIES Cash provided by operations Net earnings (1,534,866) 733,795 Items not affecting cash Amortization 825,208 450,645 Write-down of investment 1,077,161 -- Post closure costs 444,000 -- Deferred income taxes 209,931 367,172 Gain (loss) on sale of equipment 19,916 (313) - -------------------------------------------------------------------------------- 1,041,350 1,551,299 Changes in non-cash working capital items 1,320,567 1,224,002 - -------------------------------------------------------------------------------- 2,361,917 2,775,301 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (3,959,493) (2,916,473) Proceeds on disposal of capital assets 94,751 280 Decrease in outstanding loan from parent 185,103 22,346 - -------------------------------------------------------------------------------- (3,679,639) (2,893,927) - -------------------------------------------------------------------------------- Net change in cash (1,317,722) (118,626) Cash, beginning of year 17,186 135,812 - -------------------------------------------------------------------------------- CASH (BANK INDEBTEDNESS), END OF YEAR (1,300,536) 17,186 ================================================================================ 20 LES ENTREPRISES DE REBUTS SANIPAN INC. NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1995 ================================================================================ 1. BASIS OF PRESENTATION The financial statements of Les Entreprises de Rebuts Sanipan Inc. are prepared for the purpose of complying with the rules and regalations of the Securities and Exchange Commission (for inclusion in the current report on form 8K/A of USA Waste Services, Inc.) and reflect the operations of the company with the exclusion of the subsidiaries, Sablix Inc. and 2842-7979 Quebec Inc. since the subsidiaries are not part of the sale agreement to USA Waste Services, Inc. 2. STATUS AND NATURE OF ACTIVITIES The Company is incorporated under the Canada Business Corporations Act. The Company is held 100% by Intersan Inc. and its principal activity is the operation of a landfill site. 3. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with accounting principles generally accepted in Canada. The significant accounting policies are: Investment The investment in the subsidiaries is recorded at acquisition cost. Capital assets Capital assets are reported at cost and amortization is based on their estimated useful life at the following annual rates and terms: Method Rate/term Building declining balance 5% Automotive equipment straight-line 5 to 10 years Machinery and equipment declining balance 20% Furniture and fixtures declining balance 20% Leasehold improvements straight-line remaining lease term Landfill site improvements landfill utilized total capacity Computer equipment declining balance 20% 4. INVESTMENT, AT COST 1995 1994 ------------------- $ $ (unaudited) Shares of Sablix Inc., wholly-owned subsidiary -- 15,000 Shares of 2842-7979 Quebec Inc., wholly-owned subsidiary -- 1,062,161 - -------------------------------------------------------------------------------- -- 1,077,161 ================================================================================ 20 21 LES ENTREPRISES DE REBUTS SANIPAN INC. NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBERR 31, 1995 ================================================================================ 5. CAPITAL ASSETS SHARE CAPITAL Authorized An unlimited number of preferred shares, non-cumulative dividend at 12%, redeemable by the Company at an amount equal to the paid-up capital, without par value An unlimited number of common shares, voting, without par value
1995 1994 ------------------------------------- ---------- Accumulated Depreciation and Net Book Net Book Cost Amortization Value Value ---------- -------------- -------- ---------- $ $ $ $ (unaudited) Land 985,075 -- 985,075 985,075 Building 173,575 47,061 126,514 132,078 Automotive equipment 60,278 3,766 56,512 12,236 Machinery and equipment 2,214,466 141,663 2,072,803 272,364 Landfill site improvements 9,165,664 1,827,851 7,337,813 6,154,166 Computer equipment 16,370 6,193 10,177 13,357 - ----------------------------------------------------------------------------- 12,615,428 2,026,534 10,588,894 7,569,276 ============================================================================= 7. RELATED PARTY TRANSACTIONS During the year, sales and administrative expenses included management fees for an amount of $640,000 ($1,000,000 in 1994) payable to the parent company. 21
1995 1994 ----------------------------- $ $ (unaudited) Issued 100 common shares 1,000 1,000 ================================================================================ 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors of USA Waste Services, Inc. We have audited the accompanying historical summary of the net book value of property, plant and equipment of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995. This historical summary is the responsibility of the Company's management. Our responsibility is to express an opinion on the historical summary based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the historical summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical summary. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying historical summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange commission (for inclusion in the Current Report on Form 8K/A of USA Waste Services, Inc.) and is not intended to be a complete presentation of the net book value of property, plant and equipment of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. In our opinion, the historical summary referred to above presents fairly, in all material respects, the net book value of property, plant and equipment described in Note 1 to the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE Chartered Accountants Mississauga, Ontario November 8, 1996 22 23 COMBINED ONTARIO AND MICHIGAN OPERATIONS OF THE SOLID WASTE DIVISION OF PHILIP ENVIRONMENTAL INC. HISTORICAL SUMMARY OF THE NET BOOK VALUE OF PROPERTY, PLANT AND EQUIPMENT YEAR ENDED DECEMBER 31, 1995 (ALL AMOUNTS ARE EXPRESSED IN '000S OF U.S. DOLLARS) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The accompanying notes are an integral part of the Historical Summary of the Net Book Value of Property, Plant and Equipment. 23
DECEMBER 31, 1995 ---- Net book value $ 21,480 24 COMBINED ONTARIO AND MICHIGAN OPERATIONS OF THE SOLID WASTE DIVISION OF PHILIP ENVIRONMENTAL INC. NOTES TO THE HISTORICAL SUMMARY OF THE NET BOOK VALUE OF PROPERTY, PLANT AND EQUIPMENT DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. (the "Company") included the assets of the following locations and entities: Blackwell Road Landfill MacGregor Road Transfer Brampton Collection/Transfer Michigan Collection Brantford Collection Michigan Landfill Gore Landfill Michigan Transfer Hamilton Collection/Transfer Petrolia Landfill K & E Waste Resource St. Catherines Collection/Transfer The assets of the Company were acquired by USA Waste Services, Inc. on August 24, 1996. The historical summary of the net book value of property, plant and equipment reflects the assets attributable to the operations of the Company acquired by USA Waste Services, Inc. Property, plant and equipment Property, plant and equipment are stated at cost and are depreciated over their estimated useful lives generally on the following basis: buildings 20 to 40 years straight-line; equipment 5% to 30% straight-line. Landfill sites and improvements thereto are recorded at cost and amortized over the life of the landfill site based on the estimated landfill capacity utilized during the year. Operating costs associated with landfill sites are charged to operations as incurred. 24 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors of USA Waste Services, Inc. We have audited the accompanying historical summary of revenues and direct operating expenses of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995. This historical summary is the responsibility of the Company's management. Our responsibility is to express an opinion on the historical summary based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the historical summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical summary. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying historical summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange commission (for inclusion in the Current Report on Form 8K/A of USA Waste Services, Inc.) and is not intended to be a complete presentation of the revenues and direct operating expenses of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. In our opinion, the historical summary referred to above presents fairly, in all material respects, the revenues and direct operating expenses described in Note 1 to the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE Chartered Accountants Mississauga, Ontario November 8, 1996 25 26 COMBINED ONTARIO AND MICHIGAN OPERATIONS OF THE SOLID WASTE DIVISION OF PHILIP ENVIRONMENTAL INC. NOTES TO THE HISTORICAL SUMMARY OF REVENUES AND DIRECT OPERATING EXPENSES DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. (the "Company") includes the operations of the following locations and entities: Blackwell Road Landfill MacGregor Road Transfer Brampton Collection/Transfer Michigan Collection Brantford Collection Michigan Landfill Gore Landfill Michigan Transfer Hamilton Collection/Transfer Petrolia Landfill K & E Waste Resource St. Catherines Collection/Transfer The assets of the Company were acquired by USA Waste Services, Inc. on August 24, 1996. The historical summary of revenues and direct operating expenses reflect the operating revenues and expenses attributable to the operations of the Company acquired by USA Waste Services, Inc. The historical summary of revenues and direct operating expenses excludes management fees, other income, interest expense and income tax expense since these items are not considered comparable to those which will be reflected in future consolidated financial statements. Revenues and operating expenses Revenue from solid waste is recognized upon receipt and acceptance of waste material. Treatment, transportation and disposal costs are accrued when the related revenues are recognized. The major components of expenses are cost of hauling and disposal, depreciation, amortization, salaries and related expenses, maintenance, insurance and selling general and administration expenses. 26 27 COMBINED ONTARIO AND MICHIGAN OPERATIONS OF THE SOLID WASTE DIVISION OF PHILIP ENVIRONMENTAL INC. NOTES TO THE HISTORICAL SUMMARY OF REVENUES AND DIRECT OPERATING EXPENSES DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) Environmental liability The Company accrues for the estimated costs relating to the closure and post-closure monitoring of its landfill sites as well as remediation costs associated with its transfer and processing facilities. The Company charges earnings with these estimated future costs based on engineering estimates over the fill rate of landfill sites or the expected life of transfer and processing facilities. Amounts required to dispose of waste materials located at the Company's transfer and processing facilities are accrued when received. Property, plant and equipment Property, plant and equipment are stated at cost and are depreciated over their estimated useful lives generally on the following basis: buildings 20 to 40 years straight-line; equipment 5% to 30% straight-line. Landfill sites and improvements thereto are recorded at cost and amortized over the life of the landfill site based on the estimated landfill capacity utilized during the year. Operating costs associated with landfill sites are charged to operations as incurred. 2. RELATED PARTY TRANSACTIONS The Company had revenue of $7,785,000 with other Philip Environmental Inc. operating units during the year ended December 31, 1995. 27 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Kasper Brothers, Inc.: We have audited the accompanying balance sheet of Kasper Brothers, Inc. as of September 30, 1995 and the related statements of operations and retained earnings and cash flows for the fiscal year 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 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kasper Brothers, Inc. as of September 30, 1995 and the results of its operations and its cash flows for the fiscal year then ended in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania October 15, 1996 28 29 KASPER BROTHERS, INC. BALANCE SHEET AS OF SEPTEMBER 30, 1995 ASSETS See accompanying notes to financial statements. 29
Current assets: Cash and cash equivalents $ 36,070 Accounts receivable (net of allowance for doubtful accounts of $175,000) 2,079,676 Prepaid and other current assets 212,658 Bid bonds 91,419 ----------- Total current assets 2,419,823 Property and equipment: Transportation equipment 4,814,516 Containers and compactors 3,431,320 Office furniture and equipment 110,025 ----------- 8,355,861 Accumulated depreciation (6,628,865) ----------- Net property and equipment 1,726,996 Other assets 27,756 ----------- Total assets $ 4,174,575 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 539,720 Accrued expenses 249,828 State corporate taxes payable 3,000 ----------- Total current liabilities 792,548 Loans payable - officers 1,518,968 ----------- Total liabilities 2,311,516 Stockholders' equity: Common stock, $.1 stated value, 10,000 shares authorized, issued and outstanding 1,000 Retained earnings 1,862,059 ----------- Total stockholders' equity 1,863,059 ----------- Total liabilities and stockholders' equity $ 4,174,575 =========== 30 KASPER BROTHERS, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE YEAR ENDED SEPTEMBER 30, 1995 See accompanying notes to financial statements. 30
Operating revenues $ 13,524,467 Costs and expenses: Operating 8,410,654 General and administrative 4,577,392 Depreciation 845,923 ------------ 13,833,969 ------------ Loss from operations (309,502) ------------ Other income (expense): Interest expense, net (116,203) Gain on sale of assets 2,806 ------------ (113,397) ------------ Loss before taxes (422,899) Provision for state taxes 4,000 ------------ Net loss (426,899) Retained earnings at September 30, 1994 2,288,958 ------------ Retained earnings at September 30, 1995 $ 1,862,059 ============ 31 KASPER BROTHERS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1995 See accompanying notes to financial statements. 31
Cash flows from operating activities: Net loss $(426,899) Adjustments to reconcile net (loss) to net cash provided by operating activities: Depreciation 845,923 Gain on sale of assets (2,806) Provision for bad debts 428,743 Changes in operating assets and liabilities: (Increase) in accounts receivable (352,697) Decrease in prepaid and other current assets 1,813 Decrease in bid bonds 1,450 Decrease in other assets 133 Increase in accrued expenses 22,725 Increase in corporate taxes payable 3,000 Increase in accounts payable 465,322 --------- Net cash provided by operating activities 986,707 --------- Cash flows from investing activities: Purchase of property and equipment (820,073) Proceeds from sale of property and equipment 8,293 --------- Net cash used in investing activities (811,780) --------- Cash flows from financing activities: Officer loan repayments (619,832) --------- Net cash used in financing activities (619,832) --------- Net decrease in cash and cash equivalents (444,905) Cash and cash equivalents at beginning of year 480,975 --------- Cash and cash equivalents at end of year $ 36,070 ========= Interest expense paid $ 128,500 ========= 32 KASPER BROTHERS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS: Kasper Brothers, Inc., a Pennsylvania Subchapter S Corporation, was incorporated October 1, 1992. The Company is in the business of collection, transportation and disposal of residential, commercial and industrial wastes and recyclables. Kasper Brothers, Inc. currently services the Philadelphia and New Jersey area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The significant accounting policies utilized in the preparation of the financial statements are as follows: CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation is computed using accelerated methods over the estimated useful lives of the assets, ranging from 5-7 years. Renewals and betterments that extend the economic useful lives of the related assets are capitalized. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in current operations. Expenditures for maintenance and repairs are charged to expense as incurred. BID BONDS: The Company is required to place deposits with high credit quality financial institutions at the inception of certain contracts. The deposits are held in certificates of deposits with Mellon Bank. The Company has outstanding letters of credit aggregating $39,500. 32 33 NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: CONCENTRATION OF CREDIT RISK: The Company encounters, in the normal course of business, exposure to concentrations of credit risk with respect to trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large customer base. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses have not exceeded management's expectations. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the financial statement date and the reported amounts of revenues during the reporting period. Actual results could differ from those estimates. INCOME TAXES: The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under such election, the Company's federal taxable income or loss are passed through to the individual shareholders. Therefore, no provision or liability for federal income tax has been included in these financial statements. The Company also elected Subchapter S status for state income tax purposes in Pennsylvania and New Jersey. 3. RETIREMENT PLAN: The Company has a profit sharing plan covering eligible employees. The Plan requires a two year waiting period for an employee to become eligible, and provides 100% immediate vesting. Company contributions are determined as a percentage of each eligible employee's salary. The contribution for the year ended September 30, 1995 was $222,618. 33 34 NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. RELATED PARTY TRANSACTIONS: The Corporation has outstanding uncollateralized loans to corporate officers Francis Kasprzak and John Kasprzak. The total loan balance at September 30, 1995 is $1,518,968. There are no specific repayment terms, but interest is paid at an annual rate of 9% on the outstanding balance. Interest expense incurred in connection with these loans was $128,500 for the year ended September 30, 1995. The Company rents office space in Pennsylvania from the Betsy Ross Partnership, a related partnership. The partners are Francis Kasprzak, John Kasprzak, and Michael Kasper, who are the shareholders of Kasper Brothers, Inc. The lease is renewed annually. Rent expense for the year ended September 30, 1995 was $135,000. 5. SUBSEQUENT EVENT: In April 1996, all of the assets of Kasper Brothers, Inc. were acquired by USA Waste Services Inc. The total purchase price was $10,676,000. In addition to the purchase of all assets, the Company entered into a contract not to compete and several employment contracts in the amounts of $450,000 and $600,000, respectively. 34 35 REPORT OF INDEPENDENT AUDITORS The Arnoni Group of Companies Pittsburgh, Pennsylvania We have audited the accompanying combined balance sheet of The Arnoni Group of Companies (consisting of The Arnoni Group, Inc., M.C. Arnoni Company, South Hills Disposal Company, Cochran Mill Associates, Inc. and Arnoni Family Partnership) as of December 31, 1995, and the related combined statement of income and retained earnings and combined statement of cash flows for year then ended. These combined financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these combined 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 audits 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 combined financial statements referred to above present fairly, in all material respects, the financial position of The Arnoni Group of Companies as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KAPLAN SIPOS & ASSOCIATES ------------------------------------- KAPLAN SIPOS & ASSOCIATES CERTIFIED PUBLIC ACCOUNTANTS Pittsburgh, Pennsylvania March 11, 1996 35 36 THE ARNONI GROUP OF COMPANIES COMBINED BALANCE SHEET DECEMBER 31, 1995 ASSETS The accompanying notes are an integral part of these financial statements. 36
Current Assets: Cash and Cash Equivalents $ 1,408,179 Accounts Receivable - Trade 1,244,742 Current Portion of Assets Limited as to Use 365,525 Prepaid Expenses and Other Current Assets 744,412 ----------- Total Current Assets 3,762,858 ----------- Property, Plant and Equipment 15,262,655 ----------- Other Assets: Long-Term Investments 430,080 Escrow Funds 1,993,149 Assets Limited as to Use Under Indenture of Trust and Held by Trustee 1,700,000 Intangible Assets 103,776 Other Non-Current Assets 2,121,981 ----------- Total Other Assets 6,348,986 ----------- Total Assets $25,374,499 =========== 37 THE ARNONI GROUP OF COMPANIES COMBINED BALANCE SHEET DECEMBER 31, 1995 LIABILITIES AND EQUITY The accompanying notes are an integral part of these financial statements. 37
Current Liabilities: Accounts Payable - Trade $ 497,918 Current Portion of Long-Term Debt 1,642,706 Unearned Revenue 678,294 Accrued Landfill Closure Costs -- Other Current Liabilities 801,446 ----------- Total Current Liabilities 3,620,364 Long-Term Liabilities: Unearned Revenue Net of Current Portion 117,207 Accrued Landfill Closure Costs, Net of Current Portion 4,131,241 Long-Term Debt, Net of Current Portion 15,118,426 ----------- Total Liabilities 22,987,238 ----------- Minority Interest 1,292 ----------- Equity: Contributed Capital 308,511 Retained Earnings 2,077,458 ----------- Total Equity 2,385,969 ----------- Total Liabilities and Equity $25,374,499 =========== 38 THE ARNONI GROUP OF COMPANIES COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of these financial statements. 38
Disposal Fees $ 13,541,456 Other Operating Income 92,828 ------------ 13,634,284 ------------ Operating Expenses 7,255,263 Selling, General and Administrative Expenses 1,816,204 Depreciation, Depletion and Amortization 3,169,601 ------------ 12,241,068 ------------ Income From Operations 1,393,216 Interest Expense (1,658,743) Other Income and Expenses 367,754 ------------ Net Income (Loss) Before Minority Interest 102,227 Minority Interest 4,139 ------------ Net Income (Loss) 106,366 Retained Earnings - Beginning 2,126,537 Dividends (155,445) ------------ Retained Earnings - Ending $ 2,077,458 ============ 39 THE ARNONI GROUP OF COMPANIES COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) 39
CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 106,366 Noncash Items Included in Net Income: Depreciation, Depletion and Amortization 3,342,053 Minority Interest in the Group (4,138) Gain on Assets (20,638) Changes In: Accounts Receivable - Trade 236,725 Prepaid Expenses and Other Current Assets (30,717) Escrow Funds (217,158) Intangible Assets (750) Other Non-Current Assets 225,470 Accounts Payable - Trade 156,109 Accrued Landfill Closure Costs 36,508 Other Current Liabilities (122,548) Unearned Revenue (526,067) ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES 3,181,215 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net Investing of Assets Held in Trust 32,280 Proceeds From Sale of Equipment 44,500 Property, Plant and Equipment Acquired (2,782,985) ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES (2,706,205) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Issuance of Long-Term Debt 1,099,880 Principal Payments on Long-Term Debt (1,403,878) Dividends Paid (155,445) ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES (459,443) ----------- Net Increase in Cash and Cash Equivalents 15,567 Cash and Cash Equivalents - Beginning 1,392,612 ----------- Cash and Cash Equivalents - Ending $ 1,408,179 =========== 40 THE ARNONI GROUP OF COMPANIES COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED) Supplemental Disclosure of Cash Flow Information: The accompanying notes are an integral part of these financial statements. 40
Cash Paid During the Year For: Interest $1,670,443 ========== Income Taxes $ -- ========== Supplemental Schedule of Noncash Investing and Financing Activities: Refinancing of Long-Term Debt Obligations $ 150,296 ========== 41 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The combined financial statements of The Arnoni Group of Companies are presented on the accrual basis of accounting and are prepared in conformity with generally accepted accounting principles. In order to facilitate the understanding of the data included in the financial statements, summarized below are the more significant accounting policies: Organization The Arnoni Group of Companies (the Group) encompasses five commonly controlled companies operating in the non-hazardous solid waste disposal industry. Included in the Group are The Arnoni Group, Inc., M.C. Arnoni Company, South Hills Disposal Company, Cochran Mill Associates, Inc., and Arnoni Family Partnership. 1. The Arnoni Group, Inc. was incorporated on December 23, 1991 and was organized under the laws of the Commonwealth of Pennsylvania. The Company provides management and administrative services to its affiliated companies. 2. M.C. Arnoni Company was formed on December 9, 1960 and was organized under the laws of the Commonwealth of Pennsylvania. The Company is a landfill owner/operator with facilities in Allegheny and Washington Counties, Pennsylvania. 3. South Hills Disposal Company was formed on July 18, 1949 and was organized under the laws of the Commonwealth of Pennsylvania. The Company provides residential and commercial waste collection services to the metropolitan Pittsburgh, Pennsylvania area. 4. Cochran Mill Associates, Inc. was incorporated on January 25, 1991 and was organized under the laws of the Commonwealth of Pennsylvania. The Company provides other waste industry services. 5. Arnoni Family Partnership was organized as a general partnership under the Pennsylvania Uniform Partnership Act. The Partnership participates in real estate and other investment activities. Principles of Combination The combined 1995 financial statements of the Group include the financial position, results of operations and cash flows of The Arnoni Group, Inc., M.C. Arnoni Company, South Hills Disposal Company Cochran Mill Associates, Inc., and Arnoni Family Partnership. All significant intercompany accounts and transactions have been eliminated. 41 42 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates Used By Management Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Revenue Recognition The Group recognizes revenue at the time waste disposal services are provided. Amortization Intangible assets include goodwill, organization costs, acquired contracts, non-compete covenants and other fees. Intangible assets are presented net of accumulated amortization of $223,730 and $467,309 in 1995 and 1994, respectively. Amortization expense charged to operations in 1995 and 1994 was $33,660 and $110,032, respectively. Depreciation The cost of property, equipment and leasehold improvements is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line and accelerated methods for financial reporting purposes and accelerated methods allowed under the Internal Revenue Code for income tax purposes. Depletion Landfill and landfill improvement costs, which have been incurred or estimated for the development of the entire permitted site, including engineering and professional costs associated with landfill construction, are depleted based upon total units of airspace filled during the year in relation to estimated total permitted airspace capacity. Land held for future development, outside of the currently permitted area, is excluded from depletion. Cash Flows The Group considers all short-term unrestricted investments with an original maturity of three months or less to be cash equivalents for the statement of cash flows. 42 43 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes M.C. Arnoni Company, South Hills Disposal Company, The Arnoni Group, Inc. and Cochran Mill Associates, Inc. have elected treatment as small business corporations (S Corporations) for federal and state income taxation purposes. This election relieves the Companies of most federal and state income tax liability, with income being taxable directly to the stockholders. M.C. Arnoni Company and South Hills Disposal Company organized as Pennsylvania business trusts effective February 28, 1993. Bad Debts on Accounts Receivable The Group uses the direct write-off method of recognizing bad debts, as such amounts are normally not significant. Concentration of Credit Risk The Group grants credit to its customers, substantially all of whom are either; a) located in the Pittsburgh, Pennsylvania metropolitan area or b) involved with the waste industry. The Group maintains balances on deposit with financial institutions at times, such balances exceed the maximum amount of coverage provided by the institutions' insurance programs. Landfill Expansion Project Costs In connection with landfill expansion plans, the Group incurs engineering, construction and professional costs. Costs associated with successful expansion applications are capitalized as part of the landfill site. Accrued Landfill costs The Group records landfill closure liabilities based upon estimates provided by the Group's internal engineers. The expense of closure activities is recognized ratably over the useful life of the landfill, based upon total units of airspace filled during the year. The portion of the recognized closure liability that is allocable to unutilized sections of the landfill has been recorded as a deferred charge. The deferred charge will be amortized to expense, ratably, as related portions of the landfill are utilized. Management anticipates that in 1996 landfill permit modifications will be submitted by the Group and if approved, significant changes in the landfill closure estimate calculations may result. 43 44 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Escrow Funds The Pennsylvania Department of Environmental Resources requires landfill operators to post bonds in order to operate in Pennsylvania. In addition, there are collateral bond requirements for landfill expansion and closure obligations. The Group has satisfied such requirements by delivering letters of credit backed by marketable securities. Long-Term Investments The Group's long-term investments include investments in certain real estate and equity securities recorded at cost, which approximate market values. NOTE B - PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment - at cost, less accumulated depreciation: Depletion and depreciation expense charged to operations was $3,135,941 in 1995. Depreciation charges capitalized as part of the landfill site construction amounted to $172,452 in 1995. Various pieces of machinery and equipment are pledged as collateral for loans. 44
Landfill $ 18,897,540 Land 296,096 Land Improvements 101,468 Building 720,152 Office Furniture and Equipment 219,593 Machinery and Equipment 4,739,980 Transportation Equipment 4,415,796 ------------ 29,390,625 Less: Accumulated Depletion and Depreciation (14,127,970) ------------ $ 15,262,655 ============ 45 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE C - ASSETS LIMITED AS TO USE Pursuant to the terms of the agreement to finance the construction of its landfill expansion, the following funds are held in trust at December 31, 1995: The funds held by trustee consist of the following securities which are valued at cost at December 31, 1995:
Debt Service Reserve Fund $ 1,743,836 Debt Service Fund 218,860 Revenue Fund 93,621 ----------- 2,056,317 Accrued Interest Receivable 9,208 ----------- 2,065,525 Less Assets to be Used Within One Year (365,525) ----------- $ 1,700,000 =========== The fair market value of the trusteed funds approximates $2,085,793 at December 31, 1995. The trusteed funds were created pursuant to an indenture of trust upon the issuance of Industrial Revenue Bonds to finance the construction of the Group's landfill expansion. The funds were established to; a) provide a vehicle for the payment of the principal and interest on the Group's debt obligation arising from the bond issuance, b) provide a vehicle for the disbursement of funds related to the construction of landfill expansion facilities, c) accumulate and disburse funds for the Group's operations and maintenance and d) accumulate and disburse funds for arbitrage rebate requirements. 45
U.S. Treasury Notes $1,688,578 Money Market Investments 367,739 ---------- 2,056,317 Accrued Interest Receivable 9,208 ---------- $2,065,525 ========== 46 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE D- BORROWED FUNDS Following is a summary of borrowed funds at December 31, 1995: 46
Industrial Revenue Bonds Description: Installment Debt Maturity Date: November 1, 2006 Interest Rate: Applicable Bond Rate at Issue Date Secured By: First mortgage on landfill facilities and security interest in unexpended funds Repayment Terms: Annual principal payments due and payable each November 1, ranging from $790,000 in 1996 to $2,010,000 in 2006 plus interest Covenants: Provisions of the loan agreement require the Group to maintain certain debt covenants $14,480,000 Notes Payable - Various Description: 21 Installment Loans Maturity Date: Various dates ranging from October, 1996 to January, 2001 Interest Rate: Rates vary from 6.96% to 9.80% Secured By: Equipment Repayment Term: Monthly principal and interest payments of $79,917 2,031,729 Mortgages Payable Description: 2 Installment Loans Maturity Date: Various dates ranging from October, 1997 to February, 2001 Interest Rate: Rates vary from 8.5% to 9% Secured By: Property Repayment Terms: Monthly principal and interest Payments of $1,936 68,875 ----------- Subtotal $16,580,604 ----------- 47 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE D - BORROWED FUNDS (CONTINUED) Following are maturities of long term debt for each of the next five year and in the aggregate:
Balance Forward $16,580,604 Note Payable - Individual Description: Installment Loan Maturity Date: January, 1999 Interest Rate: 8% Secured By: Real and Personal Property Repayment Terms: Monthly principal and interest payments of $5,455 180,528 ----------- $16,761,132 =========== Current Portion $ 1,642,706 Long-Term Portion 15,118,426 ----------- $16,761,132 =========== At December 31, 1995, the Group had total bank commitments of $500,000 on a line of credit, of which $500,000 was available at December 31, 1995. 47
1996 $1,642,706 1997 1,556,801 1998 1,418,764 1999 1,241,895 2000 1,225,882 Thereafter 9,675,084 ----------- $16,761,132 =========== 48 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE E - LANDFILL CLOSURE LIABILITIES Landfill closure activities involve monitoring and maintaining the landfill for a twenty year period subsequent to closing of the landfill. Based upon estimates by the Group's internal engineers, the total anticipated and accrued landfill closure costs as of December 31, 1995 amounted to $4,131,241. Closure obligations which are required to be satisfied within one year are classified as a current liability in the financial statements. The portion of the recognized closure liability that is allocable to unutilized sections of the landfill has been recorded as a deferred charge and included in other assets. This deferred charge amounted to $2,475,600 at December 31, 1995. The portion of the deferred charge that is expected to be recognized within one year is classified as a current asset in the financial statements. NOTE F - PENSION PLAN The Group maintains a defined contribution pension plan that covers all employees that meet the eligibility requirements. Pension costs are determined at the discretion of the Board of Directors, and are accrued and funded on a current basis. Also, the Group makes union pension contributions for employees working under union arrangements. Pension costs amounted to $49,896 in 1995. NOTE G - CONTRIBUTED CAPITAL The following summarizes the Group's capitalization as of December 31, 1995: Arnoni Group, Inc. - Common Stock; No Par Value, 10,000 Shares Authorized, Issued and outstanding. Arnoni Family Partnership - Partners' Capital M.C. Arnoni Company - Trust Units; No Par Value, 1,000 Shares Authorized, 530 Shares Issued and Outstanding. South Hills Disposal Company - Trust Units; No Par Value, 500 Shares Authorized, 100 Shares Issued and Outstanding. Cochran Mill Associates, Inc. - Common Stock; $1 Par Value, 5,000 Shares Authorized, Issued and Outstanding. 48 49 THE ARNONI GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (CONTINUED) NOTE H - COMMITMENTS AND CONTINGENCIES In the normal Course of business, the Group makes commitments to complete contracts at specified rates and dates. Further, the Group has entered into an agreement to lease a portion of it's landfill property for landfill gas commercial processing; as well as a disposal agreement with a customer that commits up to approximately fifteen percent (15%) of daily landfill capacity through December, 1997. The Group is committed to provide collateral bonding to the Pennsylvania Department of Environmental Resources to satisfy the Department's requirements. The Group has pledged as security for three (3) letters of credit issued to the Department, securities having a cost which approximates fair market value of $1,983,995 as collateral. The Group has been named as defendant in various legal actions arising out of the normal conduct of its business. In the opinion of management, based on the advice of legal counsel, the suits are without merit; management intends to vigorously defend its position. The Group carries a wide range of insurance coverage for the protection of the Group's assets and operations, including environmental impairment insurance. However, in the event uninsured losses occur, the Group's net income and financial position could be materially affected. 49 50 Independent Auditors' Report To the Board of Directors Jennings Environmental Services, Inc. Altamonte Springs, Florida We have audited the accompanying balance sheet of Jennings Environmental Services, Inc. (an S corporation) as of December 31, 1995 and the related statements, of income and changes in stockholders' equity and the statement of cash flows for the year 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 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 from 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jennings Environmental Services, Inc. as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BLAKE, KUEHLER, BABIONE & POOL Orlando, Florida March 18, 1996 50 51 JENNINGS ENVIRONMENTAL SERVICES, INC. Balance Sheet December 31, 1995 The accompanying notes are an integral part of these financial statements. 51
ASSETS ------ Current assets: Cash $ 118,740 Accounts receivable, net 470,869 Employee advances 2,145 Prepaid expenses 14,209 ----------- Total current assets 605,963 ----------- Property and equipment, net 2,105,356 ----------- Other assets: Deposits 8,763 Bonds 4,500 Loan costs, net 8,980 ----------- Total other assets 22,243 ----------- Total assets $ 2,733,562 =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 179,252 Line of credit 150,000 Other payables 45,926 Loans from stockholder 175,000 Current portion of long-term debt 536,419 ----------- Total current liabilities 1,086,597 ----------- Long-term liabilities: Long-term debt 1,015,368 Loans from stockholder 0 ----------- Total long-term liabilities 1,015,368 ----------- Total liabilities 2,101,965 ----------- Stockholders' equity: Common stock 79,970 Additional paid-in capital 605,930 Retained earnings (deficit) (54,303) ----------- Total stockholders' equity 631,597 ----------- Total liabilities and stockholders' equity $ 2,733,562 =========== 52 JENNINGS ENVIRONMENTAL SERVICES, INC. Statement of Income For the year ended December 31, 1995 The accompanying notes are an integral part of these financial statements. 52
Revenues: Gross revenues $ 4,598,237 Less disposal and franchise fees 1,408,126 ----------- Net revenues 3,190,111 Operating expenses 1,806,381 ----------- Income from operations before depreciation 1,383,730 Depreciation (649,959) ----------- Income from operations 733,771 Interest expense (179,775) ----------- Net income $ 553,996 =========== 53 JENNINGS ENVIRONMENTAL SERVICES, INC. Statement of Changes in Stockholders' Equity For the year ended December 31, 1995 The accompanying notes are an integral part of these financial statements. 53
Common Stock ------------ $.10 par value, 1,000,000 shares authorized, 799,700 shares issued and outstanding at December 31, 1995 Balance beginning of year $ 79,528 Shares issued during the year 442 --------- Balance end of year 79,970 ========= Additional Paid-in Capital -------------------------- Balance beginning of year $ 534,972 Shares issued during the year 70,958 --------- Balance end of year $ 605,930 ========= Retained Earnings Deficit ------------------------- Balance beginning of year, as previously reported $(720,799) Adjustment for understatement of accounts receivable 112,500 --------- Balance beginning of year, as restated (608,299) --------- Net income 553,996 --------- Balance end of year $ (54,303) ========= 54 JENNINGS ENVIRONMENTAL SERVICES, INC. Statement of Cash Flows For the year ended December 31, 1995 The accompanying notes are an integral part of these financial statements. 54
Cash flows from operating activities: Net income $ 553,996 ----------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 651,295 Allowance for doubtful accounts (10,000) (Increase) decrease in accounts receivable (164,441) (Increase) decrease in employee advances (1,145) (Increase) decrease in prepaid expenses (14,209) (Increase) decrease in other assets 0 Increase (decrease) in accounts payable 22,367 Increase (decrease) in other payables 44,972 ----------- Total adjustments 528,839 ----------- Net cash provided by operating activities 1,082,835 ----------- Cash flows from investing activities: Cash payments for the purchase of property (516,491) ----------- Net cash used by investing activities (516,491) ----------- Cash flows from financing activities: Net borrowing (repayment) on stockholder loan (25,000) Cash payments for loan costs (7,414) Proceeds from issuance of common stock 23,800 Repayment on line of credit 0 Principal payments on long-term debt (450,197) ----------- Net cash provided (used) by financing activities (458,811) ----------- Net increase in cash and equivalents 107,533 Cash and equivalents, beginning of year 11,207 ----------- Cash and equivalents, end of year $ 118,740 =========== 55 JENNINGS ENVIRONMENTAL SERVICES, INC. Statements of Cash Flows (Continued) December 31, 1995 The accompanying notes are an integral part of these financial statements. 55
Supplemental disclosures for cash flow information: Cash paid during the year for: Interest $ 158,441 =========== Schedule of noncash investing and financing activities: Acquisition of property and equipment: Cost of property and equipment acquired $ 1,171,693 Capital stock issued (46,600) Long-term debt incurred (608,602) ----------- Cash paid to acquire property and equipment $ 516,491 =========== 56 JENNINGS ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business The Company is a full service environmental services firm, collecting and transporting waste and recyclable materials to designated sites for reuse or disposal. The Company's operations are in the Central Florida area. Revenue Recognition The Company recognizes income from recycling and refuse collection as it is earned. Prebilled amounts are not recorded until the Company performs the service. Revenue from material resale is recognized when materials are sold. Accounts Receivable The Company uses the reserve method for uncollectible accounts. The allowance for doubtful accounts was $10,000 as of December 31, 1995. Bad debt expense for the year ended December 31, 1995 was $22,292. Customers are primarily commercial and industrial building owners and contractors in the Central Florida area. In the normal course of business, the Company extends unsecured credit to its customers. Property and Equipment Property and equipment is recorded at cost. Property and equipment is depreciated over the lives established by the Modified Accelerated Cost Recovery System (MACRS), which are shorter than the estimated useful lives that would have been used under generally accepted accounting principles. This variance caused by using MACRS is not considered material. The estimated useful lives of the property and equipment range from five to seven years. Cash and Cash Equivalents For the purpose of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Income Taxes The Company changed its tax status from nontaxable to taxable effective January 1, 1996. After that date, the financial statements will provide for the income tax effect of earnings reported in the statements, including taxes currently due and taxes deferred as different accounting methods are used for financial and income tax reporting. 56 57 JENNINGS ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes (Continued) Prior to the change in tax status, the Company did not record an income tax provision as income and losses were reported directly by the stockholders under provisions of Subchapter S of the Internal Revenue Code. Loan Costs Loan closing costs. are amortized on a straight-line basis over the life of the loan. Concentration of Risk The Company's cash funds are located in a single-financial institution. The amounts on deposit at December 31, 1995 exceeded the $100,000 federally insured limit. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment at December 31, 1995 consists of: 57
Vehicles $ 1,907,748 Roll-off containers 1,550,596 Non roll-off containers 189,959 Furniture and fixtures 24,959 Equipment 20,516 Computers and software 9,130 ----------- 3,702,908 Accumulated depreciation (1,597,552) ----------- Net property and equipment $ 2,105,356 =========== 58 JENNINGS ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 3 -- LINE OF CREDIT The Company has available a $300,000 line of credit, which is due on demand and matures October 31, 2000. Interest is payable monthly at the bank's prime lending rate. The total outstanding balance was $150,000 as of December 31, 1995. The line of credit is collateralized by certain equipment and is also personally guaranteed by the principal stockholder. NOTE 4 -- LONG-TERM DEBT Long-term debt consists of the following at December 31, 1995: 58
8.25% installment notes payable to a bank in monthly installments including principal and interest, maturing October 2000 as follows (see note below): Monthly installment of $24,205 $730,847 Monthly installment of $4,320 206,046 Monthly installment of $1,975 94,137 9.75% installment note payable to a bank in monthly installments of $15,622 including principal and interest, secured by transportation equipment, maturing February 1998, refinanced in 1995 0 8.25% installment note payable to a bank in monthly installments of $2,920 including principal and interest, secured by transportation equipment, maturing May 1999, refinanced in 1995 0 6.18% installment note payable to GMAC in monthly installments of $380 including principal and interest, secured by transportation equipment, maturing August 1996, paid off in 1995 0 59 JENNING ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 4 -- LONG-TERM DEBT (Continued) 59
10.50% installment note payable in monthly installments of $1,492 including principal and interest, secured by refuse containers, maturing January 1997 18,347 9.50% installment note payable to a financing company in monthly installments of $1,654 including principal and interest, secured by refuse containers, maturing December 1996 18,781 8.25% installment note payable to a financing company in monthly installments of $1,722 including principal and interest, secured by transportation equipment, maturing June 1997 27,573 8.75% installment note payable to a financing company in monthly installments of $2,955 including principal and interest, secured by refuse containers, maturing October 1997 59,940 8.75% installment note payable to a financing company in monthly installments of $8,480 including principal and interest, secured by transportation equipment, maturing November 1997 179,123 8.75% installment note payable to a financing company in monthly installments of $4,012 including principal and interest, secured by transportation equipment, maturing April 1999 138,468 11.00% installment note payable to a financing company in monthly installments of $3,192 including principal and interest, secured by refuse containers, maturing April 1998 78,525 ----------- Total long-term debt 1,551,787 Less current portion (536,419) ----------- Long-term debt $ 1,015,368 =========== 60 JENNINGS ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 4 -- LONG-TERM DEBT (Continued) The first three installment notes to a bank listed above are aggregated under a master note to the bank in the amount of $2,000,000. This note bears interest at .5% below the bank's prime rate at the time of any advance under the note, and matures five years after the date of such advance. This note is collateralized by substantially all business assets and is guaranteed by the principal stockholder of the Company. The principal portion of long-term debt matures according to the following schedule: Total interest costs incurred and expensed on the above notes was $158,441 for 1995. NOTE 5 -- STOCKHOLDER LOANS Loans from stockholder are unsecured, bear interest at the blended annual rate published by the Internal Revenue Service, and are payable on demand. NOTE 6 -- RELATED PARTY TRANSACTIONS Banking Relations The Company's principal stockholder is a director of Huntington National Bank (formerly security National Bank). The Company had $118,740 on deposit at this bank as of December 31, 1995. The Company also has its line of credit and installment debt obligations at this bank. The principal balance of these loans as of December 31, 1995 was $1,181,030. Stockholder Loans As discussed in Note 5, the Company had stockholder loans payable of $175,000 as of December 31, 1995. In February 1996, $100,000 of the loan outstanding was repaid. Accrued interest on the stockholder loan as of December 31, 1995 was $21,334. 60
1996 $536,419 1997 520,137 1998 351,431 1999 83,236 2000 60,564 ---------- $1,551,787 ========== 61 JENNINGS ENVIRONMENTAL SERVICES, INC. Notes to Financial Statements December 31, 1995 NOTE 6 -- RELATED PARTY TRANSACTIONS (Continued) Legal Fees The Company retains a law firm in which a stockholder of the company is a partner. The amount of fees paid to this firm in 1995 was $24,585. NOTE 7 -- LEASES The Company has noncancellable operating leases for office and shop facilities that expire through 1999. Future minimum lease payments under the operating- leases at December 31, 1995 are as follows: Total rent payments under the operating leases was $42,300 for the year ended December 31, 1995. NOTE 8 -- PRIOR PERIOD ADJUSTMENT Certain errors resulting in an understatement of previously reported accounts receivable and income as of December 31, 1994, in the amount of $112,500, were discovered by management of the Company subsequent to the issuance of the Company's financial statements on April 11, 1995. Accordingly, an adjustment has been made to net income for the year ended December 31, 1994, and retained earnings as of January 1, 1995, to correct the error. 61
1996 $45,775 1997 46,423 1998 42,685 1999 25,000 -------- Total minimum lease payments $159,883 ======== 62 INDEPENDENT AUDITORS' REPORT To the Board of Directors Grand Central Sanitation, Inc. and Related Companies Pen Argyl, Pennsylvania We have audited the accompanying combined balance sheet of Grand Central Sanitation, Inc. and Related Companies as of December 31, 1995, and the related combined statements of income, stockholders' equity and cash flows for the year 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 statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Grand Central Sanitation, Inc. and Related Companies as of December 31, 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information is presented only for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ BUCKNO LISICKY & COMPANY Allentown, Pennsylvania September 19, 1996 62 63 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES COMBINED BALANCE SHEET December 31, 1995 (Continued) 63
ASSETS CURRENT ASSETS Cash $ 166,238 Short-term investments 280,651 Trading securities 2,829,550 Accounts receivable, trade 2,498,766 Bid deposits 11,419 Prepaid expenses 149,974 ----------- Total current assets 5,936,598 ----------- PROPERTY AND EQUIPMENT Land and land improvements 18,767,429 Quarry rights 375,000 Buildings and building improvements 2,729,491 Office equipment 726,776 Autos and trucks 10,114,121 Equipment 22,081,893 Containers 3,862,190 ----------- 58,656,900 Less accumulated depreciation and amortization 39,163,607 ----------- Property and equipment, net 19,493,293 ----------- OTHER ASSETS New routes, less accumulated amortization $495,400 669,370 Loans receivable, related parties 30,183 Cash surrender value, officers' life insurance 1,801,281 Deferred income taxes 1,167,850 ----------- Total other assets 3,668,684 ----------- Total assets $29,098,575 =========== 64 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES COMBINED BALANCE SHEET December 31, 1995 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY
See Notes to Combined Financial Statements. 64CURRENT LIABILITIES Note payable, bank $ 250,000 Current maturities of long-term debt 3,228,763 Accounts payable, trade 1,825,953 Accrued profit sharing 100,000 Accrued interest payable 16,497 Payroll taxes payable 293,660 Landfill fees payable 355,330 Unearned revenue 597,575 ----------- Total current liabilities 6,667,778 ----------- LONG-TERM LIABILITIES Notes payable, less current maturities 10,891,692 Landfill taxes payable 356,292 Other long-term liabilities 589,447 ----------- Total long-term liabilities 11,837,431 ----------- OTHER LIABILITIES Landfill closure 2,048,247 Loans payable, stockholders 1,303,261 ----------- 3,351,508 ----------- STOCKHOLDERS' EQUITY Preferred stock, par value $100 per share; authorized 20,000 shares; issued and outstanding 2,000 shares 200,000 Common stock, par value $1 per share; authorized 10,000 shares; issued and outstanding 8,400 shares 8,400 Additional paid-in capital 3,901,272 Retained earnings 3,132,186 ----------- Total stockholders' equity 7,241,858 ----------- Total liabilities and stockholders' equity $29,098,575 =========== 65 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES COMBINED STATEMENT OF INCOME Year Ended December 31, 1995 See Notes to Combined Financial Statements. 65
Income: Refuse $ 32,933,990 Real estate rentals 88,314 33,022,304 ------------ Expenses: Operating 25,988,080 Administrative 3,853,230 ------------ 29,841,310 ------------ Operating income 3,180,994 ------------ Other income (expenses): Portfolio income 300,111 Miscellaneous sales and charges, net 24,912 Interest expense (1,319,061) ------------ (994,038) ------------ Income before income taxes 2,186,956 Federal and state income taxes 895,760 ------------ Net income $ 1,291,196 ============ 66 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES COMBINED STATEMENT OF STOCKHOLDERS' EQUITY Year Ended December 31, 1995 See Notes to Combined Financial Statements. 66
Preferred Stock Common Stock Additional ------------------- ------------------- Paid-In Retained Shares Amount Shares Amount Capital Earnings ------ -------- ------ ------ ---------- ---------- Balance, January 1, 1995 2,000 $200,000 8,400 $8,400 $3,901,272 $3,888,749 Net income - - - - - 1,291,196 Dividends paid - - - - - (28,067) Distribution to stockholders - - - - - (2,019,692) ----- -------- ----- ------ ---------- ---------- Balance, December 31, 1995 2,000 $200,000 8,400 $8,400 $3,901,272 $3,132,186 ===== ======== ===== ====== ========== ========== 67 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES STATEMENT OF CASH FLOWS Year Ended December 31, 1995 (Continued) 67
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,291,196 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,561,243 Gain on sale of equipment and securities (106,682) Provision for doubtful accounts 429,219 Noncash expenses offsetting loans payable, stockholders 111,081 Increase in closure accrual 286,734 Corporate tax estimate 895,760 Changes in assets and liabilities: (Increase) in trading securities (1,256,049) Decrease in accounts receivable, trade 70,793 Decrease in bid deposits 925 (Increase) in prepaid expenses (5,110) Decrease in prepaid federal and state taxes 3,526 (Increase) in loans receivable, related parties (788) (Decrease) in accounts payable, trade (184,669) Increase in other liabilities 490,401 ---------- Net cash provided by operating activities 6,587,580 ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of equipment and securities, net of reinvested purchases 191,760 Purchase of property and equipment (5,339,521) Purchases of new routes (246,500) ---------- Net cash used in investing activities (5,394,261) ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payment on note payable, bank (750,000) Proceeds from long-term debt 4,719,790 Payments on long-term debt (2,921,749) Payments on stockholder loans (467,232) Distribution of earnings to stockholders (2,951,897) ---------- Net cash used in financing activities (2,371,088) ---------- 68 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES STATEMENT OF CASH FLOWS Year Ended December 31, 1995 See Notes to Combined Financial Statements. 68
Net decrease in cash (1,177,769) Cash: Beginning 1,344,007 ---------- Ending $ 166,238 ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $1,319,061 ========== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Long-term debt incurred to refinance other long-term debt $5,035,441 ========== 69 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: Combined statements: The combined financial statements include the accounts of Grand Central Sanitation, Inc., Grand Central Sanitary Landfill, Inc., Grand Central Real Estate Company, Inc. and Pocono Independent Paperstock Company, Inc. The stockholders are the same for all of the companies. Nature of operations: The companies' operations consist of collection and disposal of solid waste and recycling operations. The combined entities have a single landfill in eastern Pennsylvania and accepts trash predominantly from the Pennsylvania, New Jersey and New York markets. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Trading securities: Investment securities classified as trading securities are those municipal bonds that the Company has over the history of its operations turned over frequently. Decisions to trade securities are based on various factors which include interest rate fluctuation and maturity length. Trading securities are to be carried at fair value. Unrealized gains or losses are to be reported as increases or decreases in income from operations. Fair values for trading securities are based on quoted market prices. As of December 31, 1995, the difference between market value and cost was immaterial for financial statement purposes and, accordingly, the investment securities for trading are carried at cost. Short-term investments: All certificates of deposit with a maturity of three months or more are included in short-term investments. Short-term investments are stated at cost which approximates their market value as of December 31, 1995. 69 70 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Property and equipment: Property and equipment are stated at cost. Depreciation on property and equipment is computed by various rates using straight-line and accelerated methods. The lives of the assets range as follows: New routes: New routes are carried at cost less accumulated amortization and are being amortized over a period of five years using the straight-line method. Unearned revenue: Unearned revenue consists of billings for services to be rendered in future periods. Note 2. Landfill Tax Escrow\Landfill Taxes Payable In March, 1994, the Company agreed to settle a tax dispute with Plainfield Township. The settlement required the Company to pay the balance of the escrow account and requires ten equal annual installments of $62,000 with payments commencing prior to December, 1994. The Company will be entitled to credits in the aggregate of $10,000 per year for amounts equal to the market value of product or services supplied to Plainfield Township. As of December 31, 1995, $356,292 discounted at 8% is owed to Plainfield Township. Note 3. Related Party Transactions The stockholders of Grand Central Sanitation, Inc. and Related Companies are also the stockholders of Continental Interloc, Inc. and Resource Consulting, Inc. 70
Land improvements 2-17 years Quarry rights 20 years Buildings and building improvements 5-31.5 years Office equipment 5-10 years Autos and trucks 3-7 years Equipment 4-15 years Containers 3-10 years 71 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Loans receivable with these related parties as of December 31, 1995 are as follows: The Company has loans payable, stockholders in the amount of $1,303,261 as of December 31, 1995, respectively. The loans due to the stockholders are noninterest bearing and have no fixed repayment terms. Note 4. Note Payable, Bank Grand Central Sanitation, Inc. has a $1,000,000 line of credit with a bank with interest payable monthly at the bank's National Commercial Rate. The note is collateralized by accounts receivable, machinery and equipment and is collateralized and cross defaulted with other Meridian Bank debt. Grand Central Sanitary Landfill, Inc. and Grand Central Real Estate Company, Inc. are sureties. The balance of the note is $250,000 as of December 31, 1995. Note 5. Long-Term Debt Long-term debt as of December 31, 1995 is as follows:
Continental Interloc, Inc. $26,557 Resource Consulting, Inc. 3,626 ------- $30,183 ======= 71
Summit Bank, real estate loans: $1,375 per month plus interest at prime plus .75%, due December, 2000. $ 96,250 $425 per month plus interest at prime plus .75%, due December, 2000. 30,175 $467 per month plus interest at prime plus .75%, due December, 2000. 33,133 $488 per month plus interest at prime plus .5%, due April, 1997. 7,313 $1,750 per month plus interest at prime plus .75%, due March, 2003. 152,013 72 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 72
$708 per month plus interest at prime plus .5%, due July, 1997. 13,459 $833 per month plus interest at prime plus .5%, due July, 1997. 15,834 $1,806 per month plus interest at prime plus .5%, due August, 2002. 144,445 $2,583 per month plus interest at prime plus .5%, due August, 2002. 206,667 $3,417 per month plus interest at prime plus .75%, due May, 2003. 304,084 $2,000 per month plus interest at 8.33%, due May, 2001. 130,000 Individual: Route purchase loan, $6,818 per month including interest at 6.5%, due December, 1997. 147,053 Equipment loan, $2,478 per month plus interest at 6.25%, various equipment pledged as collateral due November, 1999. 101,127 Meridian Bank: Equipment loan, $48,273 per month including interest at 6.45%, various equipment pledged as collateral, due January, 1998. 1,447,711 Real estate loan, $951 per month plus interest at bank's commercial rate plus .75%, land pledged as collateral, due January, 2004. 92,222 Real estate loan $353 per month plus interest at bank's commercial rate plus .75%, land pledged as collateral, due July, 1999. 15,232 73 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 73
Real estate loan, $1,250 per month plus interest at bank's commercial rate plus .75%, land pledged as collateral, due September, 2004. 131,250 Equipment loan, $2,083 per month plus interest at bank's commercial rate plus.5%, various equipment pledged as collateral, due December, 1996. 25,000 Consolidating loan, $94,704 per month plus interest at bank's commercial rate plus .25%, land, accounts receivable and equipment pledged as collateral, due April, 2000. 4,924,583 Equipment loan, $17,817 per month plus interest at bank's commercial rate, various equipment pledged as collateral, due June, 2000. 979,917 Equipment loan, $1,667 per month plus interest at bank's commercial rate plus .5%, various equipment pledged as collateral, due September, 2000. 96,667 Equipment loan, $846 per month plus interest at bank's commercial rate plus .75%, various equipment pledged as collateral, due September, 1999. 88,813 Consolidating loan, $18,611 per month plus interest at bank's commercial rate plus .75%, land, accounts receivable, and equipment pledged as collateral, due June, 2003. 1,675,000 74 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 74
Equipment loan, $533 per month plus interest at 6.65%, various equipment pledged as collateral, due December, 1998. 18,667 Real estate loan, $594 per month plus interest at bank's commercial rate plus .75%, land pledged as collateral, due July, 2007. 82,628 Consolidating loan, $41,667 per month plus interest at bank's commercial rate plus .25%, various equipment and accounts receivable pledged as collateral, due April, 2000. Grand Central Sanitary Landfill, Inc. and Grand Central Real Estate Company, Inc. are sureties of the loan. 2,166,667 Caterpillar Financial Services: Equipment loan, $3,967 per month including interest at 8%, equipment pledged as collateral, due September, 1999. 153,802 Equipment loan, $4,992 per month including interest at 8%, equipment pledged as collateral, due November, 1999. 200,842 Equipment loan, $5,503 per month including interest at 9%, equipment pledged as collateral, due December, 1999. 221,138 Equipment loan, $1,787 per month including interest at 9.5%, equipment pledged as collateral, due December, 1999. 71,140 75 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Maturities of long-term debt as of December 31, 1995 are as follows:
Equipment loan, $14,293 per month including interest at 9%, equipment pledged as collateral, due January, 1996. 6,548 Equipment loan, $6,149 per month plus interest at 8.6%, various equipment pledged as collateral, due July, 2000. 278,699 Neffs National Bank: Equipment loan, $945 per month, including interest at 9.5%, equipment pledged as collateral, due June, 1996. 6,414 Equipment loan, $3,149 per month including interest at 8.75%, equipment pledged as collateral, due June, 1996. 18,424 Nations Bank: Equipment loan, $12,513 per month plus interest at bank's commercial rate plus .5%, equipment pledged as collateral, due March, 1996. 37,538 ----------- 14,120,455 Less current maturities 3,228,763 ----------- $10,891,692 =========== 75
Year ending December 31 1996 $ 3,228,763 1997 3,173,198 1998 2,987,362 1999 2,567,046 2000 1,720,245 Thereafter 443,841 ----------- $14,120,455 =========== 76 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Note 6. Income Taxes Grand Central Sanitation, Inc. and Pocono Independent Paperstock Company, Inc. are operating as S Corporations under the IRS and Pennsylvania tax codes. The other two related companies included in these financial statements are C corporations. The Company adopted SFAS 109 in 1993. SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to difference between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. In addition, the accounting standard requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. The components of the net deferred tax assets as of December 31, 1995 are as follows: A valuation allowance has been provided to reduce the deferred tax asset to a level which, more likely than not, will be realized. The net deferred tax asset reflects managements estimate of the amount which will be realized from reversals of taxable temporary differences, which can be predicted with reasonable certainty. There was no change in the valuation allowance for the year ended December 31, 1995. As discussed further in Note 12, the companies were sold to USA Waste Services, Inc. Due to the sale of the combined companies, the use of USA Waste Services, Inc.'s effective tax rate of 40% was used to calculate the tax provision for 1995 as if the combined companies were classified as C corporations and there was taxable income for the combined companies. The provision reduced the amount recorded as distributed to the stockholders during the year. 76
Deferred tax asset: Net operating loss carry-forwards: Federal $ 969,850 State 401,377 Valuation allowance (203,377) ----------- Net deferred tax asset $ 1,167,850 =========== 77 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS The provision for federal and state income taxes for the year ended December 31, 1995 is as follows: Federal and state income taxes $895,760 ======== As of December 31, 1995, Grand Central Sanitary Landfill, Inc. has a net operating loss carryforward of approximately $2,852,500 for federal income tax purposes which, if not used, expires in 2007. It also has a net operating loss carryforward of $4,054,311 available to reduce future state taxable income. If not used, it will expire in 1998. As of December 31, 1995, Grand Central Real Estate Company, Inc. has federal net operating loss carryforwards of $142,052 and $46,923, which, if not used will expire in 2010 and 2009, respectively. It also has a net operating loss carryforward of $188,975 available to reduce future state taxable income. If not used, it will expire in 1998. Note 7. Profit Sharing Plan Grand Central Sanitation, Inc. adopted a profit sharing plan for all eligible employees effective April 1, 1985. The contribution to the plan is $100,000 for the year ended December 31, 1995. It is the policy of the Company to fund profit sharing costs accrued. Note 8. Rent Expense The Company rents various equipment on an as-needed basis. Rent expense for the year ended December 31, 1995 is $187,708. Note 9. Financial Instruments and Credit Risk Cash: Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash. The Company maintains cash accounts in various commercial banks. The amount on deposit as of December 31, 1995 exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $324,000 in one of the commercial banks. The Company has not experienced any losses as a result of these noninsured balances. 77 78 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Note payable, bank and long-term debt: The fair value of the companies' note payable, bank and long-term debt, whose interest rates are substantially based on the prime rate, is estimated using rates currently available to the companies for other borrowings with similar terms and remaining maturities. As of December 31, 1995, the fair value of long-term debt approximates the carrying value. Loans payable, stockholders: The fair value of the loans payable to the companies' stockholders has not been determined since the loans bear no interest and have no fixed repayment terms. Note 10. Letters of Credit The companies have various letters of credit with Meridian Bank to support contracts for trash removal from various municipalities. As of December 31, 1995, the amounts total $1,570,965. The companies have a letter of credit with Meridian Bank to support its obligation for closure of its landfill. The Commonwealth of Pennsylvania obligates all landfill operations to set aside funds or have valid letters of credit to support the clean-up of all landfills upon closure of such landfill. As of December 31, 1995, the letter of credit is $6,637,006. 78 79 GRAND CENTRAL SANITATION, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Note 12. Subsequent Event On May 6, 1996, Grand Central Sanitation, Inc. and Related Companies entered into an agreement to sell the companies to USA Waste Services, Inc. The sale, which was settled on May 15, 1996, was a stock-for-stock transaction which is being accounted for as a pooling of interests. 79 80 GARNET OF VIRGINIA, INC, AND GARNET OF MARYLAND, INC. COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 TOGETHER WITH AUDITORS' REPORT 80 81 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Garnet of Virginia, Inc., and Garnet of Maryland, Inc.: We have audited the accompanying combined balance sheet of Garnet of Virginia, Inc., and Garnet of Maryland, Inc. (Virginia and Washington, D.C., corporations, respectively) (the Companies), as of December 31, 1995, and the related combined statements of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Companies' 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Companies as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Houston, Texas February 2, 1996 81 82 GARNET OF VIRGINIA, INC., AND GARNET OF MARYLAND, INC. COMBINED BALANCE SHEET--DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 82
ASSETS ------ CURRENT ASSETS: Cash $ 12,742 Accounts receivable 57,923 Prepaid expenses 41,671 ------------ Total current assets 112,336 Restricted cash 893,769 Property and equipment, net of accumulated depreciation and amortization 19,822,279 Investment in affiliated company 1,007,652 Other assets, net 3,200,762 ------------ Total assets $ 25,036,798 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Current maturities of long-term debt $ 9,114,493 Notes payable to related party 5,155,000 Demand notes payable to related parties 889,810 Accounts payable- Trade 3,260,937 Related party 1,894,182 Accrued liabilities and other 1,202,096 ------------ Total current liabilities 21,516,518 LONG-TERM DEBT, net of current maturities 1,826,656 LANDFILL CLOSURE, POSTCLOSURE, CAPPING AND REMEDIATION RESERVES 7,487,500 ------------ Total liabilities 30,830,674 ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock 200 Retained deficit (5,794,076) ------------ Total stockholders' deficit (5,793,876) ------------ Total liabilities and stockholders' deficit $ 25,036,798 ============ 83 GARNET OF VIRGINIA, INC., AND GARNET OF MARYLAND, INC. COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 83
REVENUES $ 622,934 COST OF OPERATIONS 1,478,510 ----------- Gross loss (855,576) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 942,048 ----------- Operating loss (1,797,624) EQUITY IN NET LOSS OF AFFILIATED COMPANY 1,014,782 INTEREST EXPENSE 539,001 ----------- Net loss $(3,351,407) =========== 84 GARNET OF VIRGINIA, INC., AND GARNET OF MARYLAND, INC. COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 84
Common Stock Total -------------- Retained Stockholders' Shares Amount Deficit Deficit ------ ------ ----------- ------------- BALANCE, at December 31, 1994 100 $100 $(2,442,669) $(2,442,569) Net loss -- -- (3,351,407) (3,351,407) Issuance of common stock 100 100 -- 100 --- ---- ----------- ----------- BALANCE, at December 31, 1995 200 $200 $(5,794,076) $(5,793,876) === ==== =========== =========== 85 GARNET OF VIRGINIA, INC., AND GARNET OF MARYLAND, INC. COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 85
CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,351,407) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization 115,394 Changes in assets and liabilities- Accounts receivable 177,709 Prepaid expenses (15,178) Accounts payable, accrued liabilities and other 3,782,830 ----------- Net cash provided by operating activities 709,348 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,614,518) Investment of bond proceeds, net (893,769) Investment in affiliated company (281,658) Organizational costs (250,000) Payments for land purchase options (204,475) ----------- Net cash used in investing activities (7,244,420) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings, net of related costs 7,410,503 Repayments of borrowings (863,138) ----------- Net cash provided by financing activities 6,547,365 ----------- NET INCREASE IN CASH 12,293 CASH AT BEGINNING OF PERIOD 449 ----------- CASH AT END OF PERIOD $ 12,742 =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 53,060 =========== Property acquired under capital lease $ 284,228 =========== 86 GARNET OF VIRGINIA, INC., AND GARNET OF MARYLAND, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. ORGANIZATION AND BUSINESS: Garnet of Virginia, Inc., and Garnet of Maryland, Inc. (Virginia and Washington, D.C., corporations, respectively) (collectively, the Companies), are private companies engaged in various businesses in Washington, D.C. and surrounding areas. The business of each of the Companies is described below. Garnet of Virginia, Inc. (GOV)-GOV obtained a permit from King George County, Virginia, for the construction of a municipal solid waste landfill facility in King George County. With the exception of operating a temporary municipal solid waste transfer station in King George County for purposes of disposing of county residents' waste (in accordance with the landfill agreement with King George County), GOV's primary operations to date have been the permitting and design of a municipal solid waste landfill treatment facility. Garnet of Maryland, Inc. (GOM)--GOM, through a joint venture agreement with LG Industries, Inc. (LG), operates a municipal solid waste transfer station in Washington, D.C. The transfer station began operations in April 1995. In addition, GOM has obtained a permit to construct and operate a municipal solid waste transfer station in Anne Arundel County, Maryland. The Companies incurred operating losses during 1995 and as of December 31, 1995, the Companies had a working capital deficit of approximately $20.5 million. On February 2, 1996, all of the outstanding common stock of the Companies was purchased by Sanifill, Inc. (Sanifill). The purchase price of the Companies was sufficient to allow the Companies to recover the recorded value of their assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Combination Since voting control of the Companies is vested with a common group of stockholders, and because the Companies share certain administrative functions and costs, the financial statements of the Companies are presented on a combined basis as if they were a single entity. The combined financial statements represent the totals of the Companies' financial statements after eliminating significant intercompany balances and transactions. The Companies use the equity method to account for their investment in an affiliated company in which the Companies hold a 50 percent interest. Because the Companies do not have a parent-subsidiary relationship, the individual common stock ownership of the corporate entities as of December 31, 1995, is as follows: Revenue Recognition The Companies' revenues are comprised primarily of disposal fees charged to customers. 86
Shares Par Shares Legal Entity Authorized Value Outstanding Balance ------------ ---------- ----- ----------- ------- GOV 5,000 $1 100 $100 GOM 5,000 $1 100 $100 87 Cost of Operations Cost of operations include disposal fees, labor, fuel, equipment maintenance, depreciation, amortization charges and other direct costs of operating the transfer station facilities. Selling, General and Administrative Expenses Selling, general and administrative expenses include corporate management salaries, clerical and other administrative overhead. Properly and Equipment Property and equipment is recorded at cost. Expenditures for major additions and improvements are capitalized. Minor replacements, maintenance and repairs which do not improve or extend the life of such assets are charged to operations as incurred. Disposals are removed at cost, less accumulated depreciation and amortization, and any resulting gain or loss is reflected in current operations. The Companies have computed depreciation for financial reporting purposes on the straight-line method. The estimated lives used in computing depreciation are as follows: Years ----- Vehicles and equipment 7 years Furniture and fixtures 5 years Landfill development costs and land held for development include the cost of property, engineering, legal and other professional fees, and interest capitalized during the development period (which began in 1992) related to the King George County landfill. These costs will be amortized using the units-of-production method over the estimated permitted airspace capacity upon commencement of operations. Federal Income Taxes The Companies have elected to be treated as S Corporations for tax purposes in accordance with the Internal Revenue Code. Accordingly, federal and state income taxes have not been provided in the accompanying combined financial statements since taxes are payable by the stockholders on their total income or loss from all sources. 3. PROPERTY AND EQUIPMENT: A summary of property and equipment as of December 31, 1995, is as follows: 87
Landfill development costs $16,528,487 Land held for development 2,455,860 Vehicles and equipment 1,040,513 Furniture and fixtures 23,976 ----------- 20,048,836 Less-Accumulated depreciation and amortization (226,557) ----------- $19,822,279 ----------- 88 Maintenance and repairs charged to operations during fiscal 1995 were approximately $13,000. 4. INVESTMENTS IN AFFILIATED COMPANY: The Companies use the equity method of accounting for their investment in an unconsolidated affiliate. The summarized balance sheet and income statement information presented in the table below reflects the amounts related to the LG/Garnet of Maryland Joint Venture (JV): Under the terms of the joint venture agreement, net losses as defined are allocated 100 percent to GOM. Additionally, GOM is responsible for funding any deficits of the JV, and as such, current assets of the joint venture include a $2.1 million receivable from GOM for such deficits. Since the joint venture began operations in April 1995, the JV has incurred operating losses. In the event future profits are earned by the JV, GOM will have future first claim to recover cumulative losses prior to distribution of profits to LG. 88
December 31, 1995 ------------ Assets- Current $ 2,417,431 Noncurrent 1,007,652 ----------- $ 3,425,083 =========== Liabilities and owners' equity- Current liabilities $ 2,417,431 Owners' equity 1,007,652 ----------- $ 3,425,083 =========== Companies' investments in JV $ 1,007,652 =========== For the Year Ended December 31, 1995 ------------ Income statement- Revenues $ 3,624,420 Gross loss $ (629,748) Net loss $(1,014,782) Companies' equity in loss of joint venture $(1,014,782) =========== 89 5. OTHER ASSETS: Other assets at December 31, 1995, are comprised of the following: Organizational costs associated with formation of the JV are amortized over nine years, the term of the JV agreement, and bond issuance costs are amortized over the term of the bonds. Amortization expense for 1995 totaled $19,911. 6. LONG-TERM DEBT: Long-term debt consists of the following as of December 31, 1995:
Rent deposit with King George County $2,000,000 Land purchase options 417,975 Organization costs 254,496 Bond issuance costs 298,202 Other 250,000 --------- Total 3,220,673 Less-Accumulated amortization (19,911) ---------- $3,200,762 ========== Aggregate maturities of long-term debt are as follows:
Notes payable, maturing in varying amounts through April 1996, with interest ranging from prime plus 1% to prime plus 3% $ 8,598,274 Capitalized lease obligations payable in monthly installments of principal and interest through January 2000, with interest ranging from 7.9% to 14.8% 1,342,875 Series 1995A revenue bonds, bearing interest at 10%, interest payable semiannually, with final maturity at February 2016 1,000,000 ----------- Total debt 10,941,149 Less- Current portion 9,114,493 ----------- Long-term debt, net of current portion $ 1,826,656 =========== 89
Year ended December 31- 1996 9,114,493 1997 341,917 1998 292,097 1999 184,859 2000 7,783 Thereafter 1,000,000 ----------- Total $10,941,149 =========== 90 During 1995, the Companies obtained from the Industrial Development Authority of King George County, Virginia, a credit facility under which it may issue up to $30 million of tax-exempt industrial revenue bonds and $15 million in taxable industrial revenue bonds. Bonds issued under this facility are secured by future revenues of the landfill treatment facility as well as all personal and real property of the Companies. Additionally, all stockholders of the Companies have entered into a stock-pledge agreement further securing any borrowings under this facility. The bonds are covered by an indenture of trust and security agreement which places restrictions on the issuance of additional stock in the Companies and the sale of assets of the Companies. The bonds are subject to redemption at the direction of the Companies in the event of damage or destruction to the landfill treatment facility and at any time on or after February 2004 at a premium of 102 percent, declining to 100 percent in February 2006. The bonds are also subject to mandatory sinking fund redemption from 2007 through maturity in 2016. Proceeds from bonds issued are required to be held in trust for the purposes of funding construction of the project and may be utilized through requisition by the Company. As of December 31, 1995, approximately $894,000 of unspent bond proceeds was held in trust and are included in restricted cash in the accompanying combined balance sheet, and $1,000,000 of tax-exempt industrial revenue bonds were outstanding under the credit facility. The notes payable are collateralized by various property and equipment. Total assets recorded under capital leases and the accumulated depreciation and amortization thereon were approximately $899,000 and $190,000 as of December 31, 1995. Interest capitalized on funds used for landfill development was approximately $495,000 in 1995. 7. RELATED-PARTY TRANSACTIONS: In the ordinary course of business, the Companies engage in transactions with one of their significant stockholders, Blake R. Van Leer II and with Garnet, Inc., an affiliated company. As of December 31, 1995, notes payable to Blake R. Van Leer II and Garnet, Inc., totaled $675,000 and $214,810, respectively. Both of these notes are payable on demand and bear interest at prime plus 1 percent. Interest expense on these notes totaled approximately $20,000 during 1995. As of December 31, 1995, the Companies have notes payable of $5,155,000 to a partnership which is owned by four stockholders of the Companies. These notes payable are secured by a stock-pledge agreement from other stockholders of the Companies, bear interest at prime plus 1 percent and are due in February 1996. Interest expense on these notes totaled $386,768 for the year ended December 31, 1995, and is included in accrued liabilities in the accompanying combined balance sheet. In addition to the notes payable above, the Companies have accounts payable to the JV totaling approximately $1,894,000, representing operating deficits required to be funded by GOM under the terms of the joint venture agreement. See Note 4. 90 91 8. LANDFILL CLOSURE, POSTCLOSURE CAPPING AND REMEDIATION RESERVES: As part of the agreement with King George County for obtaining a municipal solid waste disposal permit, the Companies assumed the closure and postclosure responsibilities for the existing King George County landfill. As part of this agreement, the Companies agreed to exhume all waste from the existing landfill and transfer it to the new facility over a period not to exceed five years. Additionally, the Companies have assumed responsibility for the removal and disposal of tires from another county site. The Companies have material financial obligations relating to the final closure and postclosure care of the existing facility. Landfills are typically developed in a series of cells, each of which is constructed, filled and capped in sequence over the operating life of the landfill. When the final cell is filled and the operating life of the landfill is over, the final cell must be capped, the entire site must be closed and postclosure care and monitoring activities begin. The Companies have estimated, as of December 31, 1995, that total costs for final closure of the existing facility, including waste and tire removal, and postclosure activities, including cap maintenance, groundwater monitoring, methane gas monitoring and leachate treatment/ disposal for up to 10 years after closure and remediation costs, will approximate $6.0 million. In addition, the Companies have estimated, as of December 31, 1995, that capping costs expected to occur will approximate $1.5 million. The above amounts are net of costs to be shared by King George County under the terms of the landfill development agreement. The above estimates are based on engineering reviews and the applicable state and federal regulations. Engineering reviews are performed annually. In performing the review, the Companies analyze actual costs incurred versus total estimated costs, update cost estimates to reflect current regulatory requirements and consider requirements of proposed regulatory changes. Amendments to current laws and regulations governing the Companies' operations or more stringent implementation thereof, or unfavorable cost variances could have a material adverse effect on the Companies' operations or require substantial capital expenditures. 9. SIGNIFICANT CUSTOMER AND VENDOR: A certain customer of the Companies accounted for approximately 76 percent of 1995 revenues. This customer also provides services to the Companies which accounted for 35 percent of 1995 cost of operations. Additionally, another customer accounted for approximately 15 percent of 1995 revenues. The Companies receive services related to the development of the King George County landfill from a few vendors and contractors. Management believes they can purchase such services from other vendors and contractors similar to those currently offered whereby the Companies' operations would not be adversely affected. 10. COMMITMENTS AND CONTINGENCIES: Commitments As of December 31, 1995, the Companies have entered into various options to purchase land on which the King George County landfill treatment facility will be located as well as land adjacent to the landfill area. Substantially all of these options were exercised subsequent to year end for a total purchase price of approximately $5.7 million. 91 92 Leases The Companies have entered into an operating lease agreement with King George County for the land on which the landfill treatment facility will be located. Rent will begin on this facility once operations commence. In addition, the Companies have entered into lease agreements for land and buildings where transfer stations are currently located or are to be constructed. Minimum future lease payments under these leases are as follows: Litigation The Companies have received notice from an Underwriter used in connection with the offering of its Industrial Revenue Bonds that the underwriter is entitled to certain fees and expenses ranging from $200,000 to $570,000. The Companies believes such fees are not owed and intend to vigorously contest the fees. The Companies have received notice from a partnership that the partnership is entitled to a finder's fee for assisting the Company in obtaining third-party financing. The Companies believe that they have no liability in this matter and intend to contest the matter vigorously. The Companies received notice from a third-party alleging breach of contract in connection with a contract to purchase certain property for $945,000. The Plaintiffs filed suit in March 1995 seeking approximately $595,000 in compensatory damages, plus $350,000 in punitive damages. The Companies believe that they have no liability in this matter and intend to contest the matter vigorously. In addition to the above-described litigation, the Companies are involved in various other administrative proceedings, as well as other claims, disputes and assessments that could result in additional litigation or other proceedings. Management believes that the outcome of all of the matters discussed above will not have a material adverse effect on the Companies combined financial position or results of operations. 11. SUBSEQUENT EVENTS: In January 1996, the Companies obtained a working capital loan in the amount of $10 million from Sanifill. Proceeds of this loan were used to exercise substantially all outstanding land purchase options and for general working capital purposes. All of the land purchased by the Companies was deeded to King George County in accordance with the terms of the landfill development agreement. The Companies will lease this land from the county for operations of the landfill. 92
Year ending December 31- 1996 $ 433,100 1997 1,942,600 1998 1,952,500 1999 1,961,145 2000 1,970,222 Thereafter 54,757,204 ----------- $63,016,771 =========== 93 REPORT OF INDEPENDENT AUDITORS To The Stockholders The Orange Group Entities Orlando, Florida We have audited the accompanying combined balance sheet of The Orange Group as of December 31, 1995, and the related combined statements of operations, retained earnings, and cash flows for the year then ended. These combined financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these combined 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 discussed in Note 15 to the combined financial statements, the Group sold substantially all of its tangible and real property on February 5, 1996. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of The Orange Group as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ OSBURN, HENNING AND COMPANY July 13, 1996 Orlando, Florida 93 94 THE ORANGE GROUP COMBINED BALANCE SHEET December 31, 1995 See Notes to Combined Financial Statements. 94
ASSETS CURRENT ASSETS Cash $ 146,321 Accounts receivable 912,305 ---------- Total current assets 1,058,626 LAND AND EQUIPMENT, net of accumulated depletion and depreciation 4,560,795 OTHER ASSETS 116,395 ---------- Total assets $5,735,816 ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Note payable to bank $ 50,000 Current maturities of long-term notes payable 958,914 Current maturities of long-term notes payable - stockholders 428,439 Accounts payable 552,006 ---------- Total current liabilities 1,989,359 ---------- LONG-TERM LIABILITIES Notes payable, less current maturities 3,490,105 Notes payable - stockholders, less current maturities 710,377 Accrued closure and post-closure costs 632,974 ---------- Total long-term liabilities 4,833,456 ---------- Total liabilities 6,822,815 ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock 10,720 Additional paid-in capital 146,380 Retained earnings (deficit) (483,192) ---------- (326,092) Less treasury stock (760,907) ---------- Total stockholders' equity (deficit) (1,086,999) ---------- Total liabilities and stockholders' equity (deficit) $5,735,816 ========== 95 THE ORANGE GROUP COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 1995 See Notes to Combined Financial Statements. 95
SALES $7,798,100 ---------- COST OF SALES: Labor 1,285,690 Gas and oil 856,681 Materials 777,637 Depreciation and depletion 678,172 Repairs and maintenance 653,683 Trucking and hauling 498,077 Insurance 415,354 Equipment rental 274,620 Closure and post-closure provision 154,046 Other direct costs 464,735 ---------- 6,058,695 ---------- Gross profit 1,739,405 ---------- OPERATING EXPENSES: Salaries 304,408 Management fee expense 195,941 Taxes and license 174,778 Insurance 174,377 Legal and professional 78,683 Office expense 68,937 Telephone and utilities 65,833 Rents 65,331 Other operating expenses 31,964 ---------- 1,160,252 ---------- Income from operations 579,153 ---------- OTHER INCOME (EXPENSE): Interest (600,748) Loss on sale of assets (21,753) Miscellaneous 34,058 ---------- (588,443) ---------- Net loss $ (9,290) ========== 96 THE ORANGE GROUP COMBINED STATEMENT OF RETAINED EARNINGS Year Ended December 31, 1995 See Notes to Combined Financial Statements. 96
Retained earnings, beginning $ 345,309 Net loss (9,290) Dividends (819,211) ---------- Retained earnings (deficit), ending $ (483,192) ========== 97 THE ORANGE GROUP COMBINED STATEMENT OF CASH FLOWS Year Ended December 31, 1995 See Notes to Combined Financial Statements. 97
CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (9,290) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization 3,600 Depletion 32,247 Depreciation 645,925 Loss on sale of assets 21,753 Provision for post-closure costs 154,046 Increase in: Accounts receivable (131,035) Other assets (9,221) Increase in: Accounts payable 242,739 --------- Net cash provided by operating activities 950,764 --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (311,621) Proceeds from sale of assets 265,976 --------- Net cash used in investing activities (45,645) --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term notes payable 474,073 Repayment of long-term notes payable (826,343) Proceeds from notes payable - stockholders 348,000 Repayment of notes payable - stockholders (147,603) Proceeds from note payable to bank 30,000 Repayment of related party advances (4,958) Dividends (819,211) --------- Net cash used in financing activities (946,042) --------- NET DECREASE IN CASH (40,923) CASH, BEGINNING 187,244 --------- CASH, ENDING $ 146,321 ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 517,917 ========= Supplemental disclosure of non cash investing and financing activities: Purchase of equipment with proceeds of notes payable $ 157,167 ========= Reduction of notes payable through sale of asset $ 107,110 ========= 98 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 1. Principles of Combination The combined financial statements of The Orange Group (the Group) include the financial statements of Orange Waste, Recycling & Materials, Inc. (OWR), Orange Soil Cement, Inc. (OSC), Orange Trucking, Inc. (OTI), and Orange Transportation Corp. (OTC). OWR, OSC and OTI are owned fifty percent each by Randy Burden and Douglas Hooker. OTC is owned fifty percent by Messrs. Burden and Hooker, and fifty percent by a third party. The financial statements of the companies have been combined on the basis of common ownership and management. All significant balances and transactions between the companies have been eliminated in the accompanying combined financial statements. Note 2. Business Activity and Organization OWR was incorporated in 1981. Its principal business activity is the operation of a 70 acre Class III landfill and a 70 acre C & D landfill in Orange County, Florida. OWR also owns adjacent acreage which, when fully permitted, is expected to increase the size of the landfill by 50 acres. Its revenues are derived from the sale of soil excavated from the landfill (export), and the collection of fees from customers depositing qualifying waste into the landfill (import). OSC was incorporated in 1989. Its principal business activity is the mixing and sale of soil cement to road paving companies in the Central Florida area. OTI was incorporated in 1988. Its principal business activity is the hauling of soil for customers in the Central Florida area. OTC was incorporated in November, 1994. Its principal business activity is the hauling of waste materials from a collection site in South Florida and an OWR Orlando transfer station to OWR's landfill. Messrs. Burden and Hooker own another company, DTR, with which the Group has occasional financing transactions. Because of the common ownership of the Group and DTR, a note payable to DTR has been classified in the financial statements as note payable - stockholders. 98 99 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 3. Summary of Significant Accounting Policies Sales The companies comprising the Group use the accrual method of accounting. Sales are recognized upon product or service delivery. Cost of sales are recorded when sales are recognized. Accounts Receivable Accounts receivable are recorded net of the allowance for doubtful accounts that management deems necessary to allow for potentially uncollectible accounts. Based on its review of the detail of accounts comprising accounts receivable at December 31, 1995, management concluded no allowance was needed. Land and Equipment Land is recorded at cost, less accumulated depletion as related to the landfill. Depletion is recorded based on an estimate of soil removed as a percentage of the total soil available for removal. Equipment is recorded at cost, less accumulated depreciation. Depreciation is recorded based on the estimated useful lives of the assets using the straight-line method. Closure and Post-Closure Costs The Group member (OWR) which owns and operates the landfills accrues remaining estimated closure and post-closure costs on a unit-of-production method based on the landfills' estimated remaining airspace. The estimated accrual is treated as a long-term liability in the accompanying combined financial statements. See Note 7 for further discussion of these costs and accruals. 99 100 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 3. Summary of Significant Accounting Policies - (Continued) Income Taxes The members of the Group, with the consent of their stockholders, have elected to have their income or loss taxed under Section 1372 of the Internal Revenue Code, which provides that, in lieu of corporate income taxes, the stockholders are taxed on or receive deduction for their proportionate share of the income or loss. Accordingly, no income tax provision or benefit has been made in the accompanying combined financial statements. Note 4. Land and Equipment Land and equipment at December 31, 1995 are comprised of the following: Depreciation and depletion in 1995 were $645,925 and $32,247, respectively. Note 5. Note Payable to Bank OSC has a $50,000 line of credit with a bank. The line bears interest at the rate of prime plus 1.5% and matures May 1, 1996. The loan is secured by the accounts receivable of OSC which totalled approximately $198,000 at December 31, 1995. 100
OWR OSC OTI OTC Combined ---------- -------- -------- ---------- ---------- Land $ 759,513 $124,747 $ - $ - $ 884,260 Equipment 1,205,612 333,509 915,518 2,581,685 5,036,324 ---------- -------- -------- ---------- ---------- 1,965,125 458,256 915,518 2,581,685 5,920,584 Accumulated depreciation (290,584) (205,172) (297,105) (346,000) (1,138,861) Accumulated depletion (220,928) - - - (220,928) ---------- -------- -------- ---------- ---------- Land and equipment, net $1,453,613 $253,084 $618,413 $2,235,685 $4,560,795 ========== ======== ======== ========== ========== 101 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 6. Long-Term Notes Payable Long-term notes payable at December 31, 1995 consist of the following: CONTINUED ON NEXT PAGE 101
AmSouth Bank; due $12,450 monthly, including interest at 8% until September, 1996; thereafter, at prime plus 1.5%; matures April 13, 1998; collateralized by landfill $1,217,613 Equipment notes in original amount of $1,404,903; payable $29,273 per month principal and interest (9.365%); maturing January, 2000; collateralized by rolling stock with a carrying value at 12/31/95 of $1,205,880 1,196,929 Equipment note of $1,156,213; payable $19,120 per month principal and interest (8.273%); payments beginning January, 1995; maturing January, 2000; collateralized by trailers with a carrying value at 12/31/95 of $1,011,685 994,076 Equipment notes payable at approximately $28,500 per month; at rates ranging from 7.33% to 14.94%; maturing from March, 1996 to March, 1998; collateralized by equipment with a carrying value at 12/31/95 of $699,233 631,662 Two equipment notes in original amount of $481,969; payable $10,541 per month principal and interest (8.65% and 11.1%); maturing April, 1998 and March, 1999; collateralized by rolling stock with a carrying value at 12/31/95 of $359,810 348,387 Two mortgages payable at various intervals equalling approximately $33,000 per year; at rates of 8% and 8.5%; maturing April, 1996 and December, 1998; collateralized by land 60,351 Stockholder notes; unsecured; interest rates ranging from 11.75% to 12.65%; aggregate monthly payment totalling $12,674; any unpaid balances due November, 2003 765,817 Stockholder advances at 10% due on demand 373,000 ---------- 5,587,835 Less current maturities (1,387,353) ---------- $4,200,482 ========== 102 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 6. Long-Term Notes Payable - (Continued) Maturities of long-term notes payable as of December 31, 1995 are as follows: Composition of long-term notes payable by company is as follows:
Unrelated Parties Stockholders Total ---------- ------------ ---------- 1996 $ 958,914 $ 428,439 $1,387,353 1997 876,198 69,965 946,163 1998 1,808,323 78,908 1,887,231 1999 576,138 88,996 665,134 2000 229,446 100,374 329,820 Thereafter - 372,134 372,134 ---------- ---------- ---------- $4,449,019 $1,138,816 $5,587,835 ========== ========== ========== All of the above debt, as well as a $54,000 early pay-off penalty, was paid in February, 1996 upon the sale of the business discussed in Note 15. The early pay-off penalty has been expensed in these financial statements, and is included in accounts payable in the accompanying balance sheet. Note 7. Closure and Post-Closure Costs The Group (OWR) has material future financial obligations relating to the closure of the filled areas of its landfills during their productive lives, and the final closure and post-closure care at the end of their productive lives. Landfills are typically developed in a series of cells, each of which is constructed, filled and capped in sequence over the productive life of the landfill. When the final cell is filled, it must be capped, the entire site closed, and the post-closure care and monitoring activities begin. As of December 31, 1995, the Group estimated the capping costs expected to occur and be expensed over the landfills' useful lives to be $2,423,000. At December 31, 1995, the Group expects total costs for final closure and post-closure activities, including cap maintenance, groundwater monitoring and other maintenance activities for up to thirty years after closure, will approximate $1,827,000. The $632,974 closure and post-closure accrual at December 31, 1995 is based on the above estimated total costs factored by the estimated remaining airspace at December 31, 1995. CONTINUED ON NEXT PAGE 102
Unrelated Parties Stockholders Total ---------- ------------ ---------- OWR $1,885,768 $ 237,635 $2,123,403 OSC 6,198 237,015 243,213 OTI 348,386 291,166 639,552 OTC 2,208,667 373,000 2,581,667 ---------- ---------- ---------- $4,449,019 $1,138,816 $5,587,835 ========== ========== ========== 103 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 7. Closure and Post-Closure Costs - (Continued) Pursuant to applicable State of Florida regulations, a portion of the post-closure costs as estimated under a regulatory method must either be funded and escrowed currently, or a letter of credit or surety bond placed with the State to assure the long-term care required. OWR has met this obligation primarily by the funding of a separate, restricted escrow cash account. Restricted cash escrowed for this purpose was $61,358 at December 31, 1995, and is included in other assets on the accompanying combined balance sheet. In addition, OWR has posted a $25,000 letter of credit related to the estimated post-closure activities. Note 8. Components of Sales and Cost of Sales Components of 1995 sales and cost of sales by company, after elimination of intercompany transactions, are as follows: 103
OWR OSC OTI OTC Combined ----------- ---------- ---------- ---------- ---------- Sales: Landfill import and export $ 2,584,793 $ - $ - $ - $2,584,793 Soil cement - 1,622,527 - - 1,622,527 Trucking - - 1,110,471 2,480,309 3,590,780 ----------- ---------- ---------- ---------- ---------- 2,584,793 1,622,527 1,110,471 2,480,309 7,798,100 ----------- ---------- ---------- ---------- ---------- Cost of sales: Labor 300,869 50,665 244,274 689,882 1,285,690 Gas and oil 79,674 7,184 125,168 644,655 856,681 Materials - 777,637 - - 777,637 Depreciation and depletion 200,846 36,572 118,169 322,585 678,172 Repairs and maintenance 207,074 145,049 74,670 226,890 653,683 Trucking and hauling 1,524 76,405 371,636 48,512 498,077 Insurance 33,243 8,717 89,675 283,719 415,354 Equipment rental 126,272 6,100 - 142,248 274,620 Closure and post- closure accrual 154,046 - - - 154,046 Other direct costs 215,747 26,782 75,728 146,478 464,735 ----------- ---------- ---------- ---------- ---------- 1,319,295 1,135,111 1,099,320 2,504,969 6,058,695 ----------- ---------- ---------- ---------- ---------- Gross profit (loss) $ 1,265,498 $ 487,416 $ 11,151 $ (24,660) $1,739,405 =========== ========== ========== ========== ========== 104 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 9. Stockholders' Equity (Deficit) Components of stockholders' equity (deficit) by Company at December 31, 1995 are as follows: (a) 7,500 shares authorized and issued; 2,000 shares outstanding (b) 3,000 shares authorized; 120 shares issued and outstanding (c) 3,000 shares authorized and issued; 2,000 shares outstanding (d) 1,000 shares authorized; 100 shares issued and outstanding (e) 5,500 shares, at cost (f) 1,000 shares, at cost Note 10. Related Party Transactions The members of the Group have ongoing dealings with other affiliated companies which do not belong to the Group. Specifically, among other things, certain of these affiliates provide management and accounting services and rent equipment to and from the Group. The amounts charged (or not charged) for the above services and rentals are informally determined by management, and are influenced by the existence of the related party affiliations. CONTINUED ON NEXT PAGE 104
OWR OSC OTI OTC Combined ----------- -------- -------- --------- ----------- Common stock ($1 par) $ 7,500 (a) $ 120(b) $ 3,000 (c) $ 100 (d) $ 10,720 Additional paid-in capital 108,500 37,880 - - 146,380 Retained earnings (deficit) (387,204) 122,986 134,000 (352,974) (483,192) ----------- -------- -------- --------- ----------- Subtotal (271,204) 160,986 137,000 (352,874) (326,092) Less treasury stock (730,907)(e) - (30,000)(f) - (760,907) ----------- -------- -------- --------- ----------- Total $(1,002,111) $160,986 $107,000 $(352,874) $(1,086,999) =========== ======== ======== ========= =========== 105 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 10. Related Party Transactions - (Continued) During 1995, rental income of $39,574 was received from Orange Waste East, rent expense and repairs expense of $176,063 was paid to Southeast Rental and Leasing, Inc. (SRL), and management fees of $195,941 were paid to ROBCO, EOM, and CFCD, Inc. - all related parties by common ownership. Accounts payable on December 31, 1995 includes a $50,367 payable to SRL. As mentioned in Note 1, OTC is jointly owned with a third party. This third party owns an otherwise unrelated corporation, Waste Magic Recyclers, Inc. (WMR), with which the Group conducts ongoing business transactions. Sales revenue of $3,349,133 from WMR was recorded during 1995. Accounts receivable on December 31, 1995 includes a $295,539 receivable from WMR. All sales of equipment and related gains and losses were to related parties. Note 11. Leases The Group leases equipment, vehicles and trailers under seven separate operating leases. The required future minimum lease payments at December 31, 1995 are as follows: Note 12. Concentrations Financial statement instruments which potentially subject the Group to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Group places its temporary cash investments with high quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and generally short payment terms. However, substantially all of the Group's credit customers are Central Florida businesses and are thus susceptible to changes in that economy. A significant portion of the Group's sales during 1995 were to WMR. The loss of this customer could have a significant impact on the Group's operations. 105
Annual Payment --------- 1996 $ 390,878 1997 304,378 1998 270,694 1999 174,308 2000 14,526 106 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 13. Significant Risks And Uncertainties The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. For the Group, such estimates significantly affect the recovery period of long-lived assets and the expense accrual for landfill closure and post-closure costs. Since such estimates relate to unsettled transactions and events as of the balance sheet date, actual results, upon settlement, will differ from those estimated in preparing the financial statements. The Group's landfill activities are conducted under governmental permits with fixed durations. Upon expiration of the permit period, the permits are typically renewed, although the renewal review period may be protracted. It is possible that the terms and conditions of a renewed permit could differ from those of the former permit, thus potentially affecting the comparability of the results of operations currently to those in the future. At December 31, 1995 and February 5, 1996, two of the Group's several landfill operation permits were in the renewal review process. Management expects these permits to be renewed in due course and is unaware of any pending changes that might have a significant adverse affect on the landfill operations. Note 14. Fair Value of Financial Instruments There were no material differences in the recorded accounts of financial instruments and their related fair values at December 31, 1995. The estimated fair value of the note payable to bank, long-term notes payable, and long-term notes payable to stockholders was determined based on the pay off of such indebtedness at face value in connection with the February 5, 1996 sale discussed in Note 15 to the financial statements. 106 107 THE ORANGE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS Note 15. Event Subsequent to December 31, 1995 On February 5, 1996 the Group sold substantially all of its tangible and real property. A portion of the purchase price was in the form of assumption and/or liquidation of debt and leases associated with such assets, as well as pay-off of indebtedness to the Group's stockholders. The balance of the purchase price was allocated between cash and stock of the purchaser. In addition to their operating assets, the members of the Group sold other contractual rights and their business names, and the stockholders agreed not to compete with the businesses after the transaction is consummated. Accordingly, the business purpose of the members of the Group under the current management and ownership has ceased and none of the Group remains viable in the business activity they conducted during 1995. 107 108 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of the Combined Companies: We have audited the accompanying combined balance sheet of the Combined Companies, as defined in Note 1, as of December 31, 1995, and the related combined statements of operations, stockholders' equity and partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Combined Companies' managements. 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Combined Companies as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Houston, Texas September 13, 1996 108 109 COMBINED COMPANIES (CITY, ALPINE AND LGI) COMBINED BALANCE SHEET DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 729,867 Accounts receivable, net of allowance for doubtful accounts of $25,468 199,602 Prepaid expenses and other 16,303 Deferred income taxes 99,479 ---------- Total current assets 1,045,251 Property and equipment, net 1,271,183 Deferred income taxes 29,959 Other assets, net 578,234 ---------- Total assets $2,924,627 ========== LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL CURRENT LIABILITIES: Current maturities of long-term debt $ 319,973 Current maturities of notes payable to related parties 16,879 Accounts payable 172,712 Accrued liabilities 63,944 Deferred revenue 180,445 Income taxes payable 119,300 ---------- Total current liabilities 873,253 LONG-TERM DEBT, net of current maturities 1,195,694 NOTES PAYABLE TO RELATED PARTIES, net of current maturities 86,353 DEFERRED REVENUES 232,456 ---------- Total liabilities 2,387,756 ---------- STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL: Common stock 1,100 Retained earnings and partners' capital 535,771 ---------- Total stockholders' equity and partners' capital 536,871 ---------- Total liabilities and stockholders' equity and partners' capital $2,924,627 ========== The accompanying notes are an integral part of this combined financial statement. 109 110 COMBINED COMPANIES (CITY, ALPINE AND LGI) COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 OPERATING REVENUES $5,223,327 COSTS AND EXPENSES: Operating 2,928,279 General and administrative 1,362,885 Depreciation and amortization 462,252 ---------- 4,753,416 Income from operations 469,911 OTHER INCOME (EXPENSE): Interest expense (135,265) Other expense (45,601) Interest and other income 25,269 ---------- (155,597) ---------- Income before income taxes 314,314 PROVISION FOR INCOME TAXES 49,098 ---------- Net income $ 265,216 ========== The accompanying notes are an integral part of this combined financial statement. 110 111 COMBINED COMPANIES (CITY, ALPINE AND LGI) COMBINED STATEMENT OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 111
Retained Common Stock Earnings and ---------------------- Partners' Shares Amount Capital Total -------- -------- ------------- ------- BALANCE, December 31, 1994 10,100 $1,100 $368,019 $369,119 Net income - - 265,216 265,216 Distributions - - (97,464) (97,464) ------ ------ -------- ------- BALANCE, December 31,1995 10,100 $1,100 $535,771 $536,871 ====== ====== ======== ======== 112 COMBINED COMPANIES (CITY, ALPINE AND LGI) COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 The accompanying notes are an integral part of this combined financial statement. 112
CASH FLOWS FROM OPERATING ACTIVITIES: $ 265,216 Net income Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 462,252 Provision for doubtful accounts 25,468 Deferred income taxes (78,611) Loss on sale of assets 6,316 Changes in assets and liabilities- Accounts receivable (16,521) Prepaid expenses and other 20,159 Accounts payable and accrued liabilities 18,407 Deferred revenue 278,417 Income taxes payable 88,819 --------- Net cash provided by operating activities 1,069,922 ========= CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (477,910) Purchase of service route (253,317) --------- Net cash used in investing activities (731,227) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 616,700 Repayments of borrowings (392,370) Distributions to partners (97,464) --------- Net cash provided by financing activities 126,866 --------- NET INCREASE IN CASH 465,561 CASH AT BEGINNING OF PERIOD 264,306 --------- CASH AT END OF PERIOD $ 729,867 --------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for taxes $ - --------- Cash paid for interest $ 135,575 --------- 113 COMBINED COMPANIES (CITY, ALPINE AND LGI) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. ORGANIZATION AND BUSINESS The accompanying combined balance sheet and related combined statements of operations, stockholders' equity and partners' capital and cash flows include the following companies (collectively, the Combined Companies). City Disposal, Inc. (City), provides waste collection and recycling services primarily in Denver, Colorado. Alpine Disposal and Recycling, Inc. (Alpine), provides waste collection and recycling services in Portland, Oregon. L.G. Industries, Inc. (LGI), operates a construction and demolition waste transfer station and holds a 50 percent interest in a joint venture with Garnet of Maryland (a subsidiary of Sanifill, Inc.). This joint venture operates a municipal solid waste transfer station. LGI and the joint venture operate in the same facility in Washington, D.C., and serve customers primarily in the Washington, D.C., and Annapolis, Maryland, markets. In February, May and August 1996, Sanifill, Inc. (Sanifill), acquired City, Alpine and LGI, respectively. The purchase price for each of these companies is sufficient to allow each company to recover the recorded value of its assets. Sanifill intends to integrate the Combined Companies into its existing operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Fiscal Year Although the accompanying combined financial statements are dated as of and for the year ended December 31, 1995, one of the companies has a fiscal year-end of October 31, 1995. The combined financial statements include 12 months of the Combined Companies' operations, the fiscal year-ends of which are all within 93 days of the December 31, 1995, year-end. Revenue Recognition The Combined Companies' revenues are comprised primarily of collection fees charged to customers and sales of recyclables. Revenues are recorded in the combined financial statements as the services are performed. Operating Costs Operating costs include labor, fuel, equipment maintenance, disposal fees and other direct costs of operating the collection and recycling operations. 113 114 -2- General and Administrative Expenses General and administrative expenses include corporate management salaries, clerical and other administrative overhead. Property and Equipment Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized. Minor replacements, maintenance and repairs which do not improve or extend the life of such assets are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation and amortization, and any resulting gain or loss is reflected in current operations. The Combined Companies have computed depreciation for financial reporting purposes on the straight-line method. The estimated lives used in computing depreciation are as follows: Other Assets Other assets consist primarily of contracts purchased by one of the Combined Companies (Alpine) to provide trash collection services to residential and commercial customers within the city of Portland, Oregon. The purchased contracts are accounted for using the purchase method of accounting and are amortized over the life of each contract, ranging from three to 15 years. The financial results of the purchased contracts have been included in the combined financial statements of the Combined Companies from the date each contract was purchased. During the year ended December 31, 1995, Alpine purchased one contract from the city of Portland, Oregon, for $253,317 which is being amortized over the life of the contract, three years. The pro forma effect of the purchased contract for the full year was not material to the results of operations or financial position for the Combined Companies. Use of Estimates The preparation of financial statements in conformity with generally accepted principles requires the Combined Companies to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and affect the reported amounts of revenues and expenses during the reporting period. Income Taxes Alpine is a partnership for federal income tax purposes. In accordance with the partnership provisions of the Internal Revenue Code, the earnings of Alpine are included in the personal tax returns of the partners; therefore, no federal or state income tax expense is recorded in the accompanying combined financial statements for the income of this entity. City and LGI are C Corporations for federal income tax purposes. City and LGI use the liability method in accounting for income taxes. Under this method, deferred taxes are recorded based upon differences between the financial reporting basis and tax basis 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. 114
YEARS ---------- Machinery and equipment 3-10 years Buildings and improvements 3-31 years 115 -3- 3. STOCKHOLDERS' EQUITY: Common stock of the corporate entities as of December 31, 1995, consists of the following: 4. PROPERTY AND EQUIPMENT: A summary of property and equipment as of December 31, 1995, is as follows:
Shares Shares Issued and Combined Company Par Value Authorized Outstanding ---------------- --------- ---------- ----------- City Disposal, Inc. No par 50,000 10,000 L.G. Industries, Inc. No par 10,000 100 Maintenance and repairs charged to operations during 1995 were approximately $227,287. 5. OTHER ASSETS: A summary of other assets, net of accumulated amortization, as of December 31, 1995, is as follows:
Machinery and equipment $1,972,347 Buildings and improvements 157,134 ---------- 2,129,481 Less-Accumulated depreciation and amortization 858,298 ---------- Total Property and equipment, net $1,271,183 ========== 6. ACCRUED LIABILITIES: Accrued liabilities and other consist of the following at December 31, 1995:
Route Costs $ 569,160 Other assets 9,074 ---------- Total other assets $ 578,234 ========== 7. LONG-TERM OBLIGATIONS: Long-Term Debt Long-term debt consists of the following as of December 31, 1995:
Accrued wages $ 13,134 Other accruals 50,810 ---------- Total accrued liabilities and other $ 63,944 ========== 115
Notes payable, maturing in varying amounts from December 1996 through July 2004, with interest ranging from 7.8% to 10.5% $1,089,572 Notes payable, due in March 2001, with interest at prime plus 2.75% 371,095 Line of credit with a bank, due in January 1996, with interest at prime plus 3% 55,000 ---------- 1,515,667 Less-Current maturities 319,973 ---------- Long-term debt, net of current maturities $1,195,694 ========== 116 -4- Notes Payable to Related Parties Notes payable to related parties consists of the following as of December 31, 1995: Notes payable, maturing in varying amounts from December 1997 through November 2004, with interest ranging from 8% to 10% $103,232 Less-Current maturities 16,879 -------- Long-term debt to related parties, net of current maturities $ 86,353 ======== Interest expense for 1995 on related-party debt totaled $6,962. Aggregate maturities of long-term debt and notes payable to related parties are as follows: Year ending December 31 1996 $ 336,852 1997 264,923 1998 238,039 1999 233,155 2000 235,924 Thereafter 310,006 ---------- Total $1,618,899 ========== The notes payable are collateralized by various property and equipment of the Combined Companies. 8. RELATED-PARTY TRANSACTIONS: In February 1995, LGI entered into a joint venture agreement with Garnet of Maryland (GOM) for the operation of a municipal solid waste transfer station in Washington, D.C. Under the terms of this agreement, the joint venture (LGI/GOM) is operated in a Washington, D.C. facility leased by LGI. LGI leases this facility to LGI/GOM under a sublease agreement. Furthermore, under the terms of the joint venture agreement, LGI receives reimbursement of various operating expenses and receives a guaranteed royalty of at least $25,000 per month. In the event that LGI/GOM's net income exceeds $25,000 per month, LGI and GOM participate in profits on a 50/50 basis, with any amounts paid to LGI under the $25,000 guarantee, reducing the amount of profit allocable to LGI. As a condition to entering into the joint venture agreement, LGI received a payment of $250,000 from GOM as an access fee. This amount is recorded in deferred revenue and is being amortized over the life of the agreement (10 years). The table below details LGI's related-party transactions for 1995: Guaranteed royalties $250,000 Reimbursement of operating expenses 14,400 Reimbursement of rent expense 192,984 Accounts receivable from LGI/GOM 160,800 9. FEDERAL INCOME TAXES: Deferred tax assets and liabilities are recognized and presented considering the future consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities using the tax rates in effect during the period when taxes are actually paid or recovered. 116 117 -5- Federal income taxes have been provided based on the statutory rate of 34 percent plus applicable state taxes. Components of the income tax provision reflected in the accompanying combined statement of operations for the year ended December 31, 1995, consist of the following: A reconciliation of the total income tax provision to the amounts calculated by applying the federal statutory tax rate is as follows:
Current - Federal $ 31,348 State 96,361 -------- Total 127,709 -------- Deferred - Federal (63,492) State (15,119) -------- Total (78,611) -------- Total income tax provision $ 49,098 ======== The components of deferred income tax assets and liabilities are as follows:
Tax at statutory rate $106,867 State taxes 7,463 Utilization of prior-year net operating losses (31,654) Effect of excluding income of partnership (33,578) -------- Total income tax provision $ 49,098 ======== The components of deferred income tax benefit for 1995 are as follows:
Current Long-Term --------- --------- Deferred income tax assets - Deferred revenue $59,429 $95,019 Cash to accrual conversions 20,625 -- State tax credits 19,425 -- ------- ------- Total deferred income tax assets 99,479 95,019 ------- ------- Deferred income tax liabilities - Property and equipment -- 65,060 ------- ------- Total deferred income tax liabilities -- 65,060 ------- ------- Net deferred income tax asset $99,479 $29,959 ======= ======= 117
Deferred revenues $(56,982) Depreciation 22,231 Cash to accrual conversions (43,860) -------- Deferred income tax benefit $(78,611) ======== 118 -6- 10. COMMITMENTS AND CONTINGENCIES: Leases The Combined Companies have various operating leases for facilities and equipment. Rental expense under operating and month-to-month leases, net of subleases, was $118,142 for the year ended December 31, 1995. LGI entered into an operating lease for the Washington, D.C., coliseum for the purpose of operating a construction and demolition transfer station. As discussed in Note 8, LGI entered into a sublease agreement for this property whereby rent expense is 100 percent reimbursed by LGI/GOM. Future minimum lease payments, net of subleases, are as follows: 1996 $ 153,500 1997 163,000 1998 172,900 1999 181,545 2000 190,622 Thereafter 757,204 ---------- Total $1,618,771 ========== Other than the lease described above, the Combined Companies have no significant long-term noncancelable operating lease obligations. Litigation The Combined Companies are involved in certain claims and litigation arising in the normal course of business. Management believes the outcome of such matters will not have an adverse effect on the Combined Companies' combined financial position or results of operations. 11. SUBSEQUENT EVENTS: On August 30, 1996, Sanifill merged into USA Waste, Inc. (USA). Under the terms of the merger, each share of Sanifill's outstanding common stock was exchanged for 1.70 shares of USA common stock. In addition, USA assumed all of Sanifill's options and warrants outstanding. 118 119 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USA WASTE SERVICES, INC. By /s/ GREGORY T. SANGALIS ------------------------------------- Gregory T. Sangalis Vice President, General Counsel & Secretary November 13, 1996 119 120 USA WASTE SERVICES, INC. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 23.1 Consent of Independent Auditors 23.2 Consent of Independent Accountants 23.3 Consent of Independent Auditors 23.4 Consent of Independent Auditors 23.5 Consent of Independent Auditors 23.6 Consent of Independent Public Accountants 23.7 Consent of Independent Auditors
1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181 and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated October 25, 1996, on our audit of the balance sheet of Les Entreprises de Rebuts Sanipan Inc. as of December 31, 1995, and the related statements of earnings and retained earnings and changes in financial position for the year then ended, our report dated October 25, 1996, on our audit of the balance sheet of Transport Sanico Ltee as of December 31, 1995, and the related statements of earnings and retained earnings and changes in financial position for the year then ended, our report dated November 8, 1996, on our audit of the historical summary of revenues and direct operating expenses of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995, and our report dated November 8, 1996, on our audit of the historical summary of the net book value of property, plant and equipment of the Combined Ontario and Michigan Operations of the Solid Waste Division of Philip Environmental Inc. for the year ended December 31, 1995, which are included in this Current Report on Form 8-K/A. /s/ DELOITTE & TOUCHE DELOITTE & TOUCHE Chartered Accountants Mississauga, Ontario November 13, 1996
1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated October 15, 1996, on our audit of the balance sheet of Kasper Brothers, Inc. as of September 30, 1995 and the related statements of operations and retained earnings and cash flows for the fiscal year then ended, which is included in this Current Report on Form 8-K/A. COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania November 13, 1996
1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated March 11, 1996, on our audit of the balance sheets of The Arnoni Group of Companies (consisting of The Arnoni Group, Inc., M.C. Arnoni Company, South Hills Disposal Company, Cochran Mill Associates, Inc. and Arnoni Family Partnership) as of December 31, 1995, and the related combined statement of income and retained earnings and combined statement of cash flows for the year then ended, which is included in this Current Report on Form 8-K/A. KAPLAN SIPOS & ASSOCIATES CERTIFIED PUBLIC ACCOUNTANTS Pittsburgh, Pennsylvania November 13, 1996
1 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated March 18, 1996, on our audit of the balance sheet of Jennings Environmental Services, Inc. (an S corporation) as of December 31, 1995 and the related statements of income and changes in stockholders' equity and the statement of cash flows for the year then ended, which is included in this Current Report on Form 8-K/A. BLAKE, KUEHLER, BABIONE & POOL Orlando, Florida November 13, 1996
1 EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated September 19, 1996, on our audits of the combined balance sheet of Grand Central Sanitation, Inc. and Related Companies as of December 31, 1995, and the related combined statements of income, stockholders' equity and cash flows for the year then ended, which is included in this Current Report on Form 8-K/A. BUCKNO LISICKY & COMPANY Allentown, Pennsylvania November 13, 1996
1 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-59807, 33-61621, 33-61625, 33-61627, 33-72436, 33-84988, 33-84990, 333-14115, and 333-14613), of our report dated February 2, 1996, on our audit of the Combined balance sheet of Garnet of Virginia, Inc., and Garnet of Maryland, Inc., as of December 31, 1995 and the related combined statements of operations, stockholders' deficit and cash flows for the year then ended, and our report dated September 13, 1996, on our audit of the combined balance sheet of the Combined Companies (consisting of City Disposal, Inc., Alpine Disposal and Recycling, Inc. and L.G. Industries, Inc.) as of December 31, 1995, and the related combined statements of operations, stockholders' equity and partners' capital and cash flows for the year then ended, which are included in this Current Report on Form 8-K/A. ARTHUR ANDERSEN LLP Houston, Texas November 13, 1996
1 EXHIBIT 23.7 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the USA Waste Services, Inc. Registration Statements on Form S-4 (File Nos. 33-77110, 33-59259, 33-60103, 33-63981, 333-02181, and 333-08161), Registration Statements on Form S-3 (File Nos. 33-42988, 33-43809, 33-76226, 33-85018, 333-00097, and 333-08573), and Registration Statements on Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-14115, and 333-14613), of our report dated July 13, 1996, on our audit of the combined balance sheet of The Orange Group (consisting of Orange Waste, Recycling & Materials, Inc., Orange Soil Cement, Inc., Orange Trucking, Inc. and Orange Transportation Corp.), as of December 31, 1995, and the related combined statements of operations, retained earnings, and cash flows for the year then ended, which is included in this Current Report on Form 8-K/A. OSBURN, HENNING AND COMPANY Orlando, Florida November 13, 1996