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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
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 23, 1998
COMMISSION FILE NUMBER: 1-12154
WASTE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 FANNIN, SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(713) 512-6200
(Registrant's telephone number, including area code)
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Supplemental Consolidated Financial Statements
The supplemental consolidated financial statements and supplemental interim
condensed consolidated financial statements of Waste Management, Inc. and
subsidiaries (the "Company") listed below have been prepared to give retroactive
effect to the merger with Waste Management Holdings, Inc. which has been
accounted for by the pooling of interests method as described in Notes 1 and 2
to the supplemental consolidated financial statements. The supplemental
consolidated balance sheets are as of December 31, 1997 and 1996, and the
related supplemental consolidated statements of operations, stockholders'
equity, and cash flows are for each of the three years in the period ended
December 31, 1997. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in historical financial statements that do not include the date
of consummation. These supplemental consolidated financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
(b) Exhibits
23.1 -- Consent of Independent Public Accountants
23.2 -- Consent of Independent Accountants
27 -- Restated Financial Data Schedule
27.1 -- Restated Financial Data Schedule
27.2 -- Restated Financial Data Schedule
27.3 -- Restated Financial Data Schedule
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INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Supplemental Consolidated Financial Statements:
Report of Independent Public Accountants.................. 3
Report of Independent Accountants......................... 5
Supplemental Consolidated Balance Sheets as of December
31, 1997 and 1996...................................... 6
Supplemental Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1996, and 1995.......... 7
Supplemental Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1997, 1996, and
1995................................................... 8
Supplemental Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996, and 1995.......... 11
Supplemental Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1997, 1996, and
1995................................................... 13
Notes to Supplemental Consolidated Financial Statements... 14
2
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waste Management, Inc.
(formerly known as USA Waste Services, Inc. prior to July 16, 1998):
We have audited the consolidated balance sheets of Waste Management
Holdings, Inc. (formerly known as Waste Management, Inc. prior to July 16, 1998)
and Subsidiaries (a Delaware corporation) as of December 31, 1997, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the four years in the period ended December 31, 1997
(1996 and prior, as restated). These financial statements are not included or
incorporated by reference herein. These financial statements are the
responsibility of Waste Management Holdings, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Management Holdings,
Inc. and Subsidiaries as of December 31, 1997, 1996 and 1995, and the results of
its operations and its cash flows for each of the four years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the Waste Management Holdings, Inc. consolidated
financial statements, effective January 1, 1995, Waste Management Holdings, Inc.
changed its method of accounting for capitalized interest on landfill cell
construction and effective January 1, 1997, Waste Management Holdings, Inc.
changed its method of accounting for environmental remediation liabilities.
We have also made a similar audit of the accompanying supplemental
consolidated balance sheets of Waste Management, Inc. (formerly known as USA
Waste Services, Inc. prior to July 16, 1998) and Subsidiaries (the "Company") at
December 31, 1997 and 1996, and the related supplemental consolidated statements
of operations, stockholders' equity, cash flows and comprehensive income for
each of the years in the three-year period ending December 31, 1997. The
supplemental consolidated statements give retroactive effect to the merger of
the companies known prior to July 16, 1998 as USA Waste Services, Inc. and Waste
Management, Inc. that formed the Company on July 16, 1998, which has been
accounted for as a pooling of interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We did not audit the consolidated financial statements of Waste Management,
Inc. (formerly known as USA Waste Services, Inc. prior to July 16, 1998) and
Subsidiaries included in the supplemental consolidated financial statements of
the Company which statements reflect total assets and revenues constituting
thirty-three percent and twenty-two percent, respectively, in 1997 and eighteen
percent and fifteen percent, respectively, in 1996 of the related supplemental
consolidated totals, after restatement to reflect certain adjustments as set
forth in Note 20. These financial statements, prior to the aforementioned
adjustments, were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Waste Management, Inc. (formerly known as USA Waste
Services, Inc. prior to July 16, 1998), and Subsidiaries is based solely upon
the report of the other auditors.
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
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financial statement presentation. We believe that our audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Waste Management,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, after giving retroactive effect to the merger described
in Note 1, all in conformity with generally accepted accounting principles.
As discussed in Note 2 to the supplemental consolidated financial
statements, effective January 1, 1997, Waste Management, Inc. changed its method
of accounting for environmental remediation liabilities.
Arthur Andersen LLP
Houston, Texas
September 23, 1998
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of USA Waste Services, Inc.:
We have audited the consolidated balance sheets of USA Waste Services, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USA Waste
Services, Inc. as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Houston, Texas
March 16, 1998
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Current assets:
Cash and cash equivalents................................. $ 184,052 $ 349,367
Short-term investments.................................... 59,296 319,338
Accounts receivable, net of allowance for doubtful
accounts of $86,728 and $70,349, respectively........... 1,955,794 1,896,057
Notes and other receivables............................... 90,144 68,243
Parts and supplies........................................ 152,702 147,853
Deferred income taxes..................................... 52,592 48,561
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 158,610 240,531
Prepaid expenses and other................................ 147,702 156,202
----------- -----------
Total current assets................................ 2,800,892 3,226,152
Notes and other receivables................................. 128,105 185,273
Property and equipment, net................................. 11,104,440 10,929,887
Excess of cost over net assets of acquired businesses,
net....................................................... 4,658,818 4,570,747
Other intangible assets, net................................ 118,653 105,423
Net assets of continuing businesses held for sale........... 154,384 227,351
Other assets................................................ 997,189 1,422,365
----------- -----------
Total assets........................................ $19,962,481 $20,667,198
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 995,223 $ 1,070,314
Accrued liabilities....................................... 1,881,085 1,568,639
Deferred revenues......................................... 296,996 248,181
Current maturities of long-term debt...................... 1,587,751 588,099
----------- -----------
Total current liabilities........................... 4,761,055 3,475,233
Long-term debt, less current maturities..................... 7,803,000 8,441,889
Deferred income taxes....................................... 517,612 620,898
Net liabilities of discontinued operations.................. -- 57,874
Environmental liabilities................................... 1,030,755 832,415
Other liabilities........................................... 934,118 770,865
----------- -----------
Total liabilities................................... 15,046,540 14,199,174
----------- -----------
Minority interest in subsidiaries........................... 1,110,681 1,177,463
----------- -----------
Commitments and contingencies
Put options................................................. -- 95,789
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value; 1,500,000,000 shares
authorized; 585,454,282 and 549,279,305 shares issued,
respectively............................................ 5,855 5,493
Additional paid-in capital................................ 3,828,475 2,894,900
Retained earnings......................................... 1,933,929 3,191,419
Accumulated other comprehensive income.................... (283,193) (113,941)
Restricted stock unearned compensation.................... (11,102) (2,541)
1988 Employee stock ownership plan........................ -- (6,396)
Treasury stock at cost, 34,239,062 and 9,291,061 shares,
respectively............................................ (1,369,329) (420,355)
Employee stock benefit trust at market, 7,892,612
shares.................................................. (299,375) (353,807)
----------- -----------
Total stockholders' equity.......................... 3,805,260 5,194,772
----------- -----------
Total liabilities and stockholders' equity.......... $19,962,481 $20,667,198
=========== ===========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Operating revenues.......................................... $11,802,350 $10,874,767 $10,316,307
----------- ----------- -----------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)............................................ 7,359,572 6,468,204 6,176,196
General and administrative................................ 1,413,244 1,294,471 1,260,192
Depreciation and amortization............................. 1,382,356 1,256,727 1,178,896
Merger costs.............................................. 109,411 126,626 26,539
Asset impairments and unusual items....................... 1,771,145 529,768 394,092
(Income) loss from continuing operations held for sale, net
of minority interest...................................... 9,930 (315) (25,110)
----------- ----------- -----------
12,045,658 9,675,481 9,010,805
----------- ----------- -----------
Income (loss) from operations............................... (243,308) 1,199,286 1,305,502
----------- ----------- -----------
Other income (expense):
Interest expense.......................................... (551,149) (522,921) (533,474)
Interest income........................................... 45,214 34,603 41,565
Minority interest......................................... (45,442) (41,289) (81,367)
Other income, net......................................... 126,172 108,390 257,586
----------- ----------- -----------
(425,205) (421,217) (315,690)
----------- ----------- -----------
Income (loss) from continuing operations before income
taxes..................................................... (668,513) 778,069 989,812
Provision for income taxes.................................. 361,464 486,616 492,885
----------- ----------- -----------
Income (loss) from continuing operations.................... (1,029,977) 291,453 496,927
Discontinued operations:
Income from operations of discontinued businesses, less
applicable income taxes and minority interest of $17,490
in 1996 and $9,125 in 1995.............................. -- 22,620 38,686
Income (loss) on disposal or from reserve adjustment, net
of applicable income tax and minority interest of
$100,842 in 1997, ($18,640) in 1996 and ($3,005) in
1995.................................................... 95,688 (285,921) (33,823)
----------- ----------- -----------
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principle................. (934,289) 28,152 501,790
Extraordinary loss on refinancing or retirement of debt, net
of applicable income taxes and minority interest of
$4,962.................................................... (6,809) -- --
Cumulative effect of change in accounting principle, net of
income tax of $1,100...................................... (1,936) -- --
----------- ----------- -----------
Net income (loss)........................................... $ (943,034) $ 28,152 $ 501,790
=========== =========== ===========
Basic earnings (loss) per common share:
Continuing operations..................................... $ (1.89) $ 0.55 $ 1.00
Discontinued operations................................... 0.17 (0.50) 0.01
Extraordinary item........................................ (0.01) -- --
Cumulative effect of changes in accounting principle...... -- -- --
----------- ----------- -----------
Net income (loss)......................................... $ (1.73) $ 0.05 $ 1.01
=========== =========== ===========
Diluted earnings (loss) per common share:
Continuing operations..................................... $ (1.89) $ 0.54 $ 0.99
Discontinued operations................................... 0.17 (0.49) 0.01
Extraordinary item........................................ (0.01) -- --
Cumulative effect of changes in accounting principle...... -- -- --
----------- ----------- -----------
Net income (loss)......................................... $ (1.73) $ 0.05 $ 1.00
=========== =========== ===========
Weighted average number of common shares outstanding........ 545,984 528,618 495,222
=========== =========== ===========
Weighted average number of common and dilutive potential
common shares outstanding................................. 545,984 537,927 513,301
=========== =========== ===========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED RESTRICTED
ADDITIONAL OTHER STOCK 1988 EMPLOYEE
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCK
STOCK STOCK CAPITAL EARNINGS INCOME COMPENSATION OWNERSHIP PLAN
--------- ------ ---------- ---------- ------------- ------------ --------------
Balance, January 1, 1995......... $ 1 $4,772 $1,700,884 $3,300,293 $(165,921) $ -- $(19,729)
Net income..................... -- -- -- 501,790 -- -- --
Cash dividends................. -- -- -- (291,421) -- -- --
Dividends paid to employee
stock benefit trust.......... -- -- 7,207 (7,207) -- -- --
Common stock issued upon
exercise of stock options
(including tax benefit)...... -- 18 12,254 -- -- -- --
Contribution to 1988 ESOP
(233,818 shares)............. -- -- -- -- -- -- 6,667
Common stock issued for
acquisitions................. -- 113 180,309 (8,072) -- -- --
Common stock issued in public
offerings and conversion of
subordinated debentures...... -- 137 229,876 -- -- -- --
Conversion of preferred stock
into common stock............ (1) 10 (8) -- -- -- --
Elimination of investment in
Western common stock......... -- (10) (11,358) -- -- -- --
Change in Western fiscal
year......................... -- -- -- (8,865) -- -- --
Preferred stock dividends...... -- -- -- (373) -- -- --
Temporary equity related to put
options...................... -- -- (9,631) -- -- -- --
Proceeds from sale of put
options...................... -- -- 21,622 -- -- -- --
Settlement of put options...... -- -- (12,019) -- -- -- --
Adjustment of employee stock
benefit trust to market
value........................ -- -- 43,943 -- -- -- --
Adjustment for minimum pension
liability.................... -- -- -- -- (3,957) -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- -- -- -- 40,466 -- --
Other.......................... -- 6 12,606 -- -- -- --
---- ------ ---------- ---------- --------- -------- --------
Balance, December 31, 1995....... $ -- $5,046 $2,175,685 $3,486,145 $(129,412) $ -- $(13,062)
==== ====== ========== ========== ========= ======== ========
EMPLOYEE
TREASURY STOCK
STOCK BENEFIT TRUST
----------- -------------
Balance, January 1, 1995......... $ (1,961) $ (323,601)
Net income..................... -- --
Cash dividends................. -- --
Dividends paid to employee
stock benefit trust.......... -- --
Common stock issued upon
exercise of stock options
(including tax benefit)...... 1,905 17,393
Contribution to 1988 ESOP
(233,818 shares)............. -- --
Common stock issued for
acquisitions................. -- --
Common stock issued in public
offerings and conversion of
subordinated debentures...... -- --
Conversion of preferred stock
into common stock............ -- --
Elimination of investment in
Western common stock......... -- --
Change in Western fiscal
year......................... -- --
Preferred stock dividends...... -- --
Temporary equity related to put
options...................... -- --
Proceeds from sale of put
options...................... -- --
Settlement of put options...... -- --
Adjustment of employee stock
benefit trust to market
value........................ -- (43,943)
Adjustment for minimum pension
liability.................... -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- --
Other.......................... (1,763) --
----------- -----------
Balance, December 31, 1995....... $ (1,819) $ (350,151)
=========== ===========
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS)
ACCUMULATED RESTRICTED
ADDITIONAL OTHER STOCK 1988 EMPLOYEE
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCK
STOCK STOCK CAPITAL EARNINGS INCOME COMPENSATION OWNERSHIP PLAN
--------- ------ ---------- ---------- ------------- ------------ --------------
Balance, January 1, 1996......... $ -- $5,046 $2,175,685 $3,486,145 $(129,412) $ -- $(13,062)
Net income..................... -- -- -- 28,152 -- -- --
Cash dividends................. -- -- -- (308,265) -- -- --
Dividends paid to employee
stock benefit trust.......... -- -- 6,943 (6,943) -- -- --
Common stock issued upon
exercise of stock options and
grants of restricted stock
(including tax benefit)...... -- 54 64,200 -- -- -- --
Unearned compensation related
to issuance of restricted
stock to employees........... -- -- -- -- -- (2,640) --
Earned compensation related to
restricted stock, net of
reversals on forfeited
shares....................... -- -- -- -- -- 99 --
Contribution to 1988 ESOP
(222,605 shares)............. -- -- -- -- -- -- 6,666
Common stock issued for
acquisitions................. -- 155 357,714 (7,670) -- -- --
Common stock issued for
conversion of subordinated
debentures................... -- 35 59,590 -- -- -- --
United two-for-one stock
split........................ -- 196 (196) -- -- -- --
Temporary equity related to put
options...................... -- -- 166,170 -- -- -- --
Proceeds from sale of put
options...................... -- -- 18,845 -- -- -- --
Adjustment of employee stock
benefit trust to market
value........................ -- -- 32,278 -- -- -- --
Adjustment for minimum pension
liability.................... -- -- -- -- (7,193) -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- -- -- -- 22,664 -- --
Common stock repurchased
(10,432,750 shares).......... -- -- -- -- -- -- --
Other.......................... -- 7 13,671 -- -- -- --
---- ------ ---------- ---------- --------- -------- --------
Balance, December 31, 1996....... $ -- $5,493 $2,894,900 $3,191,419 $(113,941) $ (2,541) $ (6,396)
==== ====== ========== ========== ========= ======== ========
EMPLOYEE
TREASURY STOCK
STOCK BENEFIT TRUST
----------- -------------
Balance, January 1, 1996......... $ (1,819) $ (350,151)
Net income..................... -- --
Cash dividends................. -- --
Dividends paid to employee
stock benefit trust.......... -- --
Common stock issued upon
exercise of stock options and
grants of restricted stock
(including tax benefit)...... 55,409 28,622
Unearned compensation related
to issuance of restricted
stock to employees........... -- --
Earned compensation related to
restricted stock, net of
reversals on forfeited
shares....................... -- --
Contribution to 1988 ESOP
(222,605 shares)............. -- --
Common stock issued for
acquisitions................. 8,177 --
Common stock issued for
conversion of subordinated
debentures................... -- --
United two-for-one stock
split........................ -- --
Temporary equity related to put
options...................... -- --
Proceeds from sale of put
options...................... -- --
Adjustment of employee stock
benefit trust to market
value........................ -- (32,278)
Adjustment for minimum pension
liability.................... -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- --
Common stock repurchased
(10,432,750 shares).......... (473,560) --
Other.......................... (8,562) --
----------- -----------
Balance, December 31, 1996....... $ (420,355) $ (353,807)
=========== ===========
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS)
ACCUMULATED RESTRICTED
ADDITIONAL OTHER STOCK 1988 EMPLOYEE
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCK
STOCK STOCK CAPITAL EARNINGS INCOME COMPENSATION OWNERSHIP PLAN
--------- ------ ---------- ---------- ------------- ------------ --------------
Balance, January 1, 1997......... $ -- $5,493 $2,894,900 $3,191,419 $(113,941) $ (2,541) $ (6,396)
Net loss....................... -- -- -- (943,034) -- -- --
Cash dividends................. -- -- -- (309,577) -- -- --
Dividends paid to employee
stock benefit trust.......... -- -- 7,294 (7,294) -- -- --
Common stock issued upon
exercise of stock options and
grants of restricted stock
(including tax benefit)...... -- 35 71,304 -- -- -- --
Unearned compensation related
to issuance of restricted
stock to employees........... -- -- -- -- -- (23,444) --
Earned compensation related to
restricted stock, net of
reversals on forfeited
shares....................... -- -- -- -- -- 2,357 --
Reversals of unearned
compensation upon
cancellation of restricted
stock........................ -- -- -- -- -- 12,526 --
Contribution to 1988 ESOP
(213,940 shares)............. -- -- -- -- -- -- 6,396
Common stock issued for
acquisitions................. -- 129 193,373 2,415 -- -- --
Common stock issued in public
offerings.................... -- 169 570,295 -- -- -- --
Common stock issued for United
stock options................ -- 19 25,809 -- -- -- --
Temporary equity related to put
options...................... -- -- 95,789 -- -- -- --
Settlement of put options...... -- -- (1,605) -- -- -- --
Adjustment of employee stock
benefit trust to market
value........................ -- -- (54,432) -- -- -- --
Adjustment for minimum pension
liability.................... -- -- -- -- 11,492 -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- -- -- -- (180,744) -- --
Common stock repurchased
(26,111,795 shares).......... -- -- -- -- -- -- --
Other.......................... -- 10 25,748 -- -- -- --
---- ------ ---------- ---------- --------- -------- --------
Balance, December 31, 1997....... $ -- $5,855 $3,828,475 $1,933,929 $(283,193) $(11,102) $ --
==== ====== ========== ========== ========= ======== ========
EMPLOYEE
TREASURY STOCK
STOCK BENEFIT TRUST
----------- -------------
Balance, January 1, 1997......... $ (420,355) $ (353,807)
Net loss....................... -- --
Cash dividends................. -- --
Dividends paid to employee
stock benefit trust.......... -- --
Common stock issued upon
exercise of stock options and
grants of restricted stock
(including tax benefit)...... 47,271 --
Unearned compensation related
to issuance of restricted
stock to employees........... -- --
Earned compensation related to
restricted stock, net of
reversals on forfeited
shares....................... -- --
Reversals of unearned
compensation upon
cancellation of restricted
stock........................ --
Contribution to 1988 ESOP
(213,940 shares)............. -- --
Common stock issued for
acquisitions................. 3,753 --
Common stock issued in public
offerings.................... -- --
Common stock issued for United
stock options................ -- --
Temporary equity related to put
options...................... -- --
Settlement of put options...... -- --
Adjustment of employee stock
benefit trust to market
value........................ -- 54,432
Adjustment for minimum pension
liability.................... -- --
Cumulative translation
adjustment of foreign
currency statements.......... -- --
Common stock repurchased
(26,111,795 shares).......... (1,000,208) --
Other.......................... 210 --
----------- -----------
Balance, December 31, 1997....... $(1,369,329) $ (299,375)
=========== ===========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
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WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)................................... $ (943,034) $ 28,152 $ 501,790
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 1,382,356 1,256,727 1,178,896
Deferred income taxes............................ (376,401) 189,205 111,048
Undistributed earnings of equity investees....... 8,000 (34,200) 1,500
Minority interest in subsidiaries................ 44,687 42,111 81,789
Interest on Liquid Yield Option Notes and
Subordinated Notes............................. 20,682 22,343 23,021
Contribution to 1988 Employee Stock Ownership
Plan........................................... 6,396 6,666 6,667
Net gain on disposal of assets................... (133,282) (36,126) (170,309)
Effect of merger costs, asset impairments and
unusual items.................................. 1,675,247 496,608 389,359
Cumulative effect of change in accounting
principle...................................... 1,936 -- --
Provision for (income) loss on disposal of
discontinued operations, net of tax and
minority interest.............................. (95,688) 285,921 33,823
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and notes and other
receivables.................................... (36,151) (83,422) 46,538
Prepaid expenses and other....................... 68,791 359 21,213
Other assets..................................... 90,614 (122,000) (79,172)
Accounts payable and accrued liabilities......... 225,036 5,429 (58,858)
Accrued shareholder litigation settlement........ -- -- (85,300)
Deferred revenues and other liabilities.......... 70,138 (185,305) 129,566
Other, net....................................... 46,510 50,911 (54,308)
----------- ----------- -----------
Net cash provided by operating activities............. 2,055,837 1,923,379 2,077,263
----------- ----------- -----------
Cash flows from investing activities:
Short-term investments.............................. (117,668) 1,170 17,804
Acquisitions of businesses, net of cash acquired.... (1,740,356) (508,450) (492,991)
Capital expenditures................................ (1,315,862) (1,506,799) (1,592,909)
Proceeds from sale of assets........................ 1,495,572 829,947 174,403
Other investments................................... (8,877) (16,372) (50,119)
Acquisition of minority interests................... (104,165) (342,034) (170,854)
Other............................................... (20,919) (33,391) (15,958)
----------- ----------- -----------
Net cash used in investing activities................. $(1,812,275) $(1,575,929) $(2,130,624)
----------- ----------- -----------
11
13
WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............ $ 4,547,357 $ 4,391,117 $ 2,582,104
Principal payments on long-term debt................ (4,351,894) (3,948,909) (2,502,764)
Cash dividends...................................... (309,577) (308,265) (291,421)
Net proceeds from issuance of common stock.......... 570,447 -- 251,999
Proceeds from exercise of common stock options and
warrants......................................... 78,175 119,284 27,943
Contributions from minority interest................ -- 10,242 24,394
Other distributions to minority shareholders by
affiliated companies............................. (36,341) -- --
Stock repurchases................................... (903,248) (473,560) --
Proceeds from sales of put options.................. -- 18,845 21,622
Settlement of put options........................... (1,605) -- (12,019)
Other................................................. 3,597 (6,965) (19,407)
----------- ----------- -----------
Net cash provided by (used in) financing activities... (403,089) (198,211) 82,451
----------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents......................................... (5,788) 2,807 2,316
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... (165,315) 152,046 31,406
Cash and cash equivalents at beginning of year........ 349,367 197,321 165,915
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 184,052 $ 349,367 $ 197,321
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Interest......................................... $ 539,329 $ 477,872 $ 506,866
Income taxes..................................... 410,232 359,698 334,738
Non-cash in investing and financing activities:
Note receivable from sale of assets.............. 26,583 27,800 --
Conversion of subordinated debt to common
stock.......................................... 1,159 62,176 54,259
Issuance of common stock for preferred stock
dividends...................................... -- -- 10,378
Exchange of interest in ServiceMaster Consumer
Services L.P. ................................. -- -- 467,000
Acquisitions of businesses and development
projects:
Liabilities incurred or assumed................ 207,918 470,664 320,396
Subordinated Notes issued for acquisition of
Chemical Waste Management, Inc. minority
interest.................................... -- -- 436,830
Common stock issued............................ 199,007 364,480 225,930
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
12
14
WASTE MANAGEMENT, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----------- ------- --------
Net income (loss)........................................ $ (943,034) $28,152 $501,790
----------- ------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes
of zero............................................. (180,744) 22,664 40,466
Minimum pension liability adjustment, net of taxes of
$4,727 in 1997, ($4,599) in 1996 and ($2,529) in
1995................................................ 11,492 (7,193) (3,957)
----------- ------- --------
Other comprehensive income (loss)........................ (169,252) 15,471 36,509
----------- ------- --------
Comprehensive income (loss).............................. $(1,112,286) $43,623 $538,299
=========== ======= ========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
13
15
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FINANCIAL STATEMENTS
Basis of presentation -- On July 16, 1998, USA Waste Services, Inc. (this
registrant) consummated a merger with Waste Management, Inc. accounted for as a
pooling of interests pursuant to which USA Waste Services, Inc. issued 0.725 of
a share of its common stock for each outstanding share of Waste Management, Inc.
common stock (the "Merger"). At the effective time of the Merger, Waste
Management, Inc. changed its name to Waste Management Holdings, Inc. ("WM
Holdings") and USA Waste Services, Inc. changed its name to Waste Management,
Inc. (herein referred to as "Waste Management" or the "Company"). The
supplemental consolidated financial statements of the Company have been prepared
to give retroactive effect to the Merger. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in historical financial
statements that do not include the date of consummation. These supplemental
consolidated financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
Business -- The Company is engaged in the solid waste management business
and provides solid waste management services, consisting of collection,
transfer, disposal, recycling, and other miscellaneous services to commercial,
industrial, municipal and residential customers in the United States and in
select international markets. The Company previously provided process
engineering and construction, specialty contracting and industrial scaffolding
services through its subsidiary, Rust International Inc. ("Rust"), and water
process systems, equipment manufacturing and water and wastewater facility
operations and privatization services through its subsidiary, Wheelabrator
Technologies Inc. ("WTI"). As of December 31, 1997, WTI and Rust had disposed of
all of these businesses, and accordingly they are classified as discontinued
operations in the accompanying supplemental financial statements.
Principles of consolidation -- The accompanying supplemental consolidated
financial statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company owns 50%
or less are accounted for under the equity method or cost method of accounting,
as appropriate.
Use of estimates -- The preparation of the 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 for certain revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.
Short-term investments -- As part of its cash management program, the
Company from time-to-time maintains a portfolio of marketable investment
securities, which totaled $3,000,000 and $11,000,000 at December 31, 1997 and
1996, respectively. The securities have an investment grade of not less than A
and a term to earliest maturity generally of less than one year, and include tax
exempt securities, certificates of deposit and Euro-dollar time deposits. These
securities are carried at cost, which approximates market.
Short-term investments also include marketable securities classified as
"trading," which are carried at market price with unrealized gains and losses
included in other income in the accompanying supplemental consolidated
statements of operations. At December 31, 1996, this category included the
shares of Wessex Water Plc ("Wessex") (see Note 14). At December 31, 1997, this
category included certain other equity
14
16
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities classified as "trading" as well as a price collar related to such
investment. These securities were delivered in 1998 in exchange for the cap
price of the collar. See Note 8.
Restricted funds held by trustees -- Restricted funds held by trustees of
$189,652,000 and $172,494,000 at December 31, 1997 and 1996, respectively, are
included in other assets and consist principally of funds deposited in
connection with landfill closure and post-closure obligations, insurance escrow
deposits, and amounts held for landfill and other construction arising from
industrial revenue financings. Amounts are principally invested in fixed income
securities of federal, state, and local governmental entities and financial
institutions. The Company considers its landfill closure, post-closure, and
construction escrow investments to be held to maturity. At December 31, 1997 and
1996, the aggregate fair value of these investments approximates their amortized
costs and substantially all of these investments mature within one year. The
Company's insurance escrow funds are invested in pooled investment accounts that
hold debt and equity securities and are considered to be available for sale. The
market value of those pooled accounts approximates their aggregate cost at
December 31, 1997 and 1996.
Concentrations of credit risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
spreading the trade credit risk. At December 31, 1997 and 1996, no single group
or customer represents greater than 10% of total accounts receivable. The
Company controls credit risk through credit approvals, credit limits, and
monitoring procedures. The Company performs credit evaluations for commercial
and industrial customers and performs ongoing credit evaluations of its
customers' financial condition, but generally does not require collateral to
support accounts receivable.
Derivative financial instruments -- From time to time, the Company and
certain of its subsidiaries use derivatives to manage interest rate, currency,
commodity (fuel) and equity price risk. The Company's policy is to use
derivatives for risk management purposes only, and it does not enter into such
contracts for trading purposes. The Company enters into derivatives only with
counterparties which are financial institutions having credit ratings of at
least A- or A3, to minimize credit risk. The amount of gains or losses from the
use of derivative financial instruments in non-hedging programs have not been
and are not expected to be material to the Company's consolidated financial
statements.
Instruments used as hedges must be effective at managing risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedge
instruments must have a high degree of inverse correlation with changes in
market values or cash flows of underlying hedged items. Derivatives that meet
the hedge criteria are accounted for under the deferral or accrual method,
except for currency agreements as discussed below. If a derivative does not meet
or ceases to meet the aforementioned criteria, or if the designated hedged item
ceases to exist, then the Company subsequently uses fair value accounting for
the derivative, with gains or losses included in other income. If a derivative
is terminated early, any gain or loss, including amounts previously deferred, is
deferred and amortized over the remaining life of the terminated contract or
until the anticipated transaction occurs.
Property and equipment -- Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance, and repairs are charged to expense as incurred. When
property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated useful lives of the
15
17
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related assets using the straight-line method. The estimated useful lives for
significant property and equipment categories are as follows (in years):
OCTOBER 1, 1997 PRIOR TO
AND THEREAFTER OCTOBER 1, 1997
--------------- ---------------
Vehicles................................................. 3 to 10 3 to 12
Machinery and equipment.................................. 3 to 20 3 to 20
Commercial and roll-off containers....................... 8 to 12 8 to 20
Buildings and improvements............................... 10 to 40 10 to 40
As of December 31, 1997, the Company assumed no salvage value for its
depreciable North American fixed assets. Prior to October 1, 1997, WM Holdings
assigned salvage value to certain fixed asset categories as described in Note 4.
Disposal sites are stated at cost and amortized ratably using the
units-of-production method over the estimated usable life of the site as
airspace of the landfill is consumed. Disposal site costs include expenditures
for the acquisition of land and related airspace, engineering and permitting
costs, direct site improvement costs, and capitalized interest. Disposal site
amortization rates are determined periodically (not less than annually) for each
disposal site based on estimates provided by the Company's engineers and
accountants. Disposal site amortization rate calculations consider information
provided by aerial and ground surveys and other density measures. Airspace from
disposal site permit expansions for those sites that the Company believes permit
expansion is probable is included in the usable life of the site and the costs
related to developing the expansion airspace is included in the disposal site
costs. Factors in determining probable expansions on a site-by site basis
include secured rights to required land, status of legal, environmental,
regulatory and political issues, and the extent to which the timing of the
permit application process has proceeded.
Business combinations -- The Company assesses each acquisition to determine
whether the pooling of interests or the purchase method of accounting is
appropriate. For those acquisitions accounted for under the pooling of interests
method, the financial statements of the acquired company are combined with those
of the Company 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 those acquisitions accounted for using the purchase
method of accounting, the Company allocates the cost of the acquired business to
the assets acquired and the liabilities assumed based on estimates of fair
values thereof. These estimates are revised during the allocation period as
necessary when information regarding contingencies becomes available to define
and quantify assets acquired and liabilities assumed. The allocation period
varies for each acquisition but does not exceed one year. To the extent
contingencies such as preacquisition environmental matters, litigation and
related legal fees and preacquisition tax matters are resolved or settled during
the allocation period, such items are included in the revised allocation of the
purchase price. After the allocation period, the effect of changes in such
contingencies is included in results of operations in the periods in which the
adjustments are determined. Management of the Company does not believe potential
deviations between its fair value estimates and actual fair values to be
material.
In certain business combinations, the Company will agree to pay additional
amounts to sellers contingent upon achievement by the acquired businesses of
certain negotiated goals, such as targeted revenue levels, targeted disposal
volumes, or the issuance of permits for expanded landfill airspace. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment. Contingent payments recorded as purchase price adjustments are
amortized over the remaining useful life of the related assets.
16
18
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excess of cost over net assets of acquired businesses -- The excess of cost
over net assets of acquired businesses is amortized on a straight-line basis
over a period not greater than 40 years commencing on the dates of the
respective acquisitions. Accumulated amortization was $700,648,000 and
$700,323,000 at December 31, 1997 and 1996, respectively.
Other intangible assets -- Other intangible assets consist primarily of
customer lists, covenants not to compete, licenses, permits, and contracts.
Other intangible assets are recorded at cost and amortized on a straight-line
basis. Customer lists are amortized over five to seven years. Covenants not to
compete are amortized over the term of the agreement, which is generally three
to five years. Licenses, permits, and contracts are amortized over the shorter
of the definitive terms of the related agreements or 40 years. Accumulated
amortization was $101,711,000 and $94,190,000 at December 31, 1997 and 1996,
respectively.
Long-lived assets -- Long-lived assets consist primarily of property and
equipment, excess of cost over net assets of acquired businesses, and other
intangible assets. The recoverability of long-lived assets is evaluated at the
operating unit level by an analysis of operating results and consideration of
other significant events or changes in the business environment. If an operating
unit has indications of impairment, such as current operating losses, the
Company will evaluate whether impairment exists on the basis of undiscounted
expected future cash flows from operations before interest for the remaining
amortization period. If impairment exists, the carrying amount of the long-lived
assets is reduced to its estimated fair value.
Contracts in process -- Contracts in process primarily relate to contracts
involving a substantial construction component. The status of the Company's
contracts in process as of the dates indicated is as follows (in thousands):
DECEMBER 31,
------------------------
1997 1996
----------- ----------
Costs and estimated earnings on uncompleted contracts....... $ 1,511,710 $1,192,231
Less: Billing on uncompleted contracts...................... (1,374,100) (979,900)
----------- ----------
Total contracts in progress....................... $ 137,610 $ 212,331
=========== ==========
Contracts in process are included in the accompanying supplemental
consolidated balance sheets under the following captions:
DECEMBER 31,
-------------------
1997 1996
-------- --------
Costs and estimated earnings in excess of billings of
uncompleted contracts..................................... $158,610 $240,531
Billings in excess of costs and estimates of earnings on
uncompleted contracts (included in deferred revenues)..... (21,000) (28,200)
-------- --------
Total contracts in process........................ $137,610 $212,331
======== ========
All contracts in process are expected to be billed and collected within
five years.
Income taxes -- Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred income tax expense represents the change during the period
in the deferred tax assets and deferred tax liabilities, net of the effect of
acquisitions. Deferred tax assets include tax loss and credit carryforwards and
are reduced by a valuation allowance if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
17
19
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign currency -- The functional currency of the majority of the
Company's foreign operations is the local currency of the country in which the
Company operates. Adjustments resulting from the translation of financial
information are included in comprehensive income.
Revenue recognition -- The Company recognizes revenues as services are
provided. Amounts billed and collected prior to services being performed are
included in deferred revenues. Results from long-term contracts are recorded on
the percentage-of-completion basis with losses recognized in full when
identified. Changes in project performance and conditions, estimated
profitability and final contract settlements may result in future revisions to
long-term contract costs and income.
Capitalized interest -- Interest has been capitalized on significant
landfills, trash-to-energy plants and other projects under construction. With
respect to capitalizing interest on landfills, the Company uses as a base for
interest capitalization, the discrete construction activities related to each
cell including the portion of common site cost related to the cell. During the
years ended December 31, 1997, 1996, and 1995, interest costs were $602,347,000,
$579,710,000, and $591,182,000, respectively, of which $51,198,000, $56,789,000,
and $57,708,000 were capitalized, respectively, with respect to the facilities
under construction.
New accounting pronouncements -- Effective January 1, 1997, the Company
adopted the American Institute of Certified Public Accountants Statement of
Position 96-1, Environmental Remediation Liabilities ("SOP 96-1"). SOP 96-1
provides that environmental remediation liabilities should be accrued when the
criteria of the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies, are met. SOP
96-1 also provides that the accrual for such liabilities should include future
costs for those employees expected to devote a significant amount of time
directly to the management of remediation liabilities. The adoption of SOP 96-1
during 1997 resulted in an increase to operating expenses of approximately
$49,900,000 for the period.
During the fourth quarter of 1997, the Company adopted the FASB's Emerging
Issues Task Force consensus 97-13 ("EITF 97-13"). EITF 97-13 requires that
process reengineering costs be expensed as incurred. The adoption of EITF
reduced 1997 net income by approximately $1,900,000.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Adoption is not recognized for interim
periods in the initial year of application. The Company is currently evaluating
the impact of SFAS No. 131 on its segment reporting.
3. BUSINESS COMBINATIONS
1997 Pooling of Interests Acquisitions
On August 26, 1997, the Company consummated a merger with United Waste
Systems, Inc. ("United") accounted for as a pooling of interests (the "United
Merger") and, accordingly, the accompanying supplemental consolidated financial
statements have been restated to include the accounts and operations of United
for all periods presented. Under the terms of the United Merger, the Company
issued 1.075 shares of its common stock for each outstanding share of United
common stock. Additionally, at the effective date of the United Merger, United
stock options, whether or not such stock options had vested or had become
exercisable, were cancelled in exchange for shares of the Company's common stock
equal in market value to the fair value of such United stock options, as
determined by an independent third party. The United Merger increased the
Company's outstanding shares of common stock by approximately 51,900,000 shares,
which includes approximately 1,900,000 shares exchanged for the United stock
options. In the third quarter of 1997, the Company incurred approximately
$89,152,000 in merger related costs associated with the United Merger,
18
20
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of which approximately $30,630,000 remained in accrued liabilities at December
31, 1997. Of this amount, $17,566,000 related to transaction costs, $26,198,000
for severance and other termination benefits, $21,629,000 for integration of
operations, and $23,759,000 for estimated losses related to the disposition of a
Pennsylvania landfill ordered by the United States Department of Justice in
connection with the United Merger and the disposition of other duplicative
facilities. The results of operations for United prior to consummation of the
United Merger for the restated periods are as follows (in thousands):
YEARS ENDED
DECEMBER 31,
SIX MONTHS ENDED -------------------
JUNE 30, 1997 1996 1995
---------------- -------- --------
(UNAUDITED)
Operating revenues.............................. $216,619 $335,743 $228,377
Net income...................................... 23,849 35,393 28,288
The Company consummated 23 additional acquisitions accounted for as
poolings of interests during 1997, pursuant to which Company issued
approximately 7,500,000 shares of its common stock in exchange for all
outstanding shares of acquired companies. Periods prior to consummation of these
poolings of interests were not restated to include the accounts and operations
of the acquired companies as combined results are not materially different from
the results as previously presented. In connection with these poolings of
interests, the Company incurred $1,996,000, $3,263,000, and $15,000,000 in
merger related costs in the first, second, and third quarters of 1997,
respectively.
1996 Pooling of Interests Acquisitions
On August 30, 1996, the Company consummated a merger with Sanifill, Inc.
("Sanifill") accounted for as a pooling of interests (the "Sanifill Merger")
and, accordingly, the accompanying supplemental consolidated financial
statements have been restated to include the accounts and operations of Sanifill
for all periods presented. Under the terms of the Sanifill Merger, the Company
issued 1.70 shares of its common stock for each share of Sanifill outstanding
common stock. The Sanifill Merger increased the Company's outstanding shares of
common stock by approximately 43,414,000 shares and the Company assumed
Sanifill's options and warrants equivalent to approximately 4,361,000 underlying
shares of the Company's common stock. In the third quarter of 1996, the Company
incurred approximately $80,000,000 in merger related costs associated with the
Sanifill Merger. The $80,000,000 of merger costs includes $9,500,000 of
transaction costs, $20,000,000 of relocation, severance, and other termination
benefits, $13,000,000 relating to integrating operations, and $37,500,000
relating to the disposal of duplicate facilities. The results of operations for
Sanifill prior to consummation of the Sanifill Merger for the restated periods
are as follows (in thousands):
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
---------------- -----------------
(UNAUDITED)
Operating revenues................................... $181,406 $256,705
Net income........................................... 18,964 27,913
On May 7, 1996, the Company consummated a merger with Western Waste
Industries ("Western") accounted for as a pooling of interests (the "Western
Merger") and, accordingly, the accompanying supplemental consolidated financial
statements have been restated to include the accounts and operations of Western
for all periods presented. Under the terms of the Western Merger, the Company
issued 1.50 shares of its common stock for each share of Western outstanding
common stock. Prior to the Western Merger, the Company owned approximately 4.1%
of Western's outstanding shares (634,900 common shares), which were cancelled on
the effective date of the Western Merger. The Western Merger increased the
Company's outstanding shares of common stock by approximately 22,028,000 shares
and the Company assumed options under Western's stock option plans equivalent to
approximately 5,200,000 underlying Company shares of
19
21
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock. In the second quarter of 1996, the Company incurred approximately
$35,000,000 in merger related costs associated with the Western Merger and
approximately $4,800,000 in benefits related to Western's pre-merger retirement
program. The $35,000,000 of merger costs include $6,800,000 of transaction
costs, $15,000,000 of severance and other termination benefits, and $13,200,000
of costs related to integrating operations. The results of operations for
Western prior to consummation of the merger for the restated periods are as
follows (in thousands):
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED)
Operating revenues................................. $68,441 $273,901
Net income......................................... 4,703 17,021
The Company consummated ten additional acquisitions accounted for as
poolings of interests during 1996, pursuant to which the Company issued
approximately 5,693,000 shares of its common stock in exchange for all
outstanding shares of the acquired companies. For eight of these poolings of
interests transactions, periods prior to consummation of these transactions were
not restated to include the accounts and operations of the acquired companies as
combined results are not materially different from the results as presented of
the originally pooled entities.
1995 Pooling of Interests Acquisitions
On June 30, 1995, the Company consummated a merger with Chambers
Development Company, Inc. ("Chambers") accounted for as a pooling of interests
and, accordingly, the accompanying supplemental consolidated financial
statements have been restated to include the accounts and operations of Chambers
for all periods presented. Under the terms of the merger agreement,
approximately 27,800,000 shares of the Company's common stock were issued in
exchange for all outstanding shares of Chambers common stock and Class A common
stock. Related to this merger, the Company incurred $25,073,000 in merger costs
in the second quarter of 1995, which includes $11,900,000 of transaction costs,
$9,473,000 of severance and other termination benefits, and $3,700,000 of costs
related to integrating operations.
The Company consummated seven additional acquisitions accounted for as
poolings of interests, pursuant to which the Company issued approximately
7,937,000 shares of its common stock in exchange for all outstanding shares of
the acquired companies. For five of these poolings of interests transactions,
periods prior to consummation of these transactions were not restated to include
the accounts and operations of the acquired companies as combined results are
not materially different from the results as presented of the originally pooled
entities.
1997 and 1996 Purchase Acquisitions
On March 12, 1997, the Company acquired substantially all of the Canadian
solid waste subsidiaries of Allied Waste Industries, Inc. for approximately
$518,000,000 in cash. Those businesses represented 41 collection operations,
seven landfills, and eight transfer stations in the provinces of Alberta,
British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan.
On April 1, 1997, the Company acquired substantially all of the assets of
Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting
primarily of cash and the assumption of a limited amount of debt. The assets
acquired included 11 collection operations, 11 landfills, six transfer stations,
and three recycling operations.
In addition to the above purchase acquisitions, the Company consummated
numerous other acquisitions that were accounted for under the purchase method of
accounting. Results of operations of companies that were acquired and subject to
purchase accounting are included from the dates of such acquisitions.
20
22
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total costs of acquisitions accounted for under the purchase method was
approximately $2,062,775,000 and $782,988,000 in 1997 and 1996, respectively.
The pro forma information set forth below assumes acquisitions in 1997 and
1996 accounted for as purchases had occurred at the beginning of 1996. The pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
Operating revenues......................................... $12,279,729 $12,338,383
Income (loss) from continuing operations................... (1,003,164) 362,124
Net income (loss).......................................... (916,320) 98,823
Basic earnings (loss) per common share:
Income (loss) from continuing operations................. (1.83) 0.67
Net income (loss)........................................ (1.67) 0.18
Diluted earnings (loss) per common share:
Income (loss) from continuing operations................. (1.83) 0.66
Net income (loss)........................................ (1.67) 0.18
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Land (primarily disposal sites), including costs incurred
for expansion projects in process........................ $ 7,118,462 $ 6,410,239
Vehicles................................................... 2,630,257 2,950,074
Machinery and equipment.................................... 3,050,526 3,198,531
Containers................................................. 1,637,023 1,597,541
Buildings and improvements................................. 1,654,389 1,761,939
Furniture and fixtures..................................... 542,052 555,836
----------- -----------
16,632,709 16,474,160
Less accumulated depreciation and amortization............. (5,528,269) (5,544,273)
----------- -----------
$11,104,440 $10,929,887
=========== ===========
Depreciation and amortization expense for property and equipment was
$1,234,177,000, $1,095,785,000, and $1,017,199,000 for the years ended December
31, 1997, 1996, and 1995, respectively.
Effective October 1, 1997, the Board of Directors of WM Holdings approved a
management recommendation to revise WM Holdings' North American collection fleet
management policy. The revised policy of WM Holdings replaces front-end loaders
after 8 years, and rear-end loaders and roll-off trucks after 10 years. The
previous policy was to not replace front-end loaders before they were a minimum
of 10 years old and other heavy collection vehicles before they were a minimum
of 12 years old. As a result of this decision, the Company recognized an
impairment writedown of $70,900,000 in the fourth quarter of 1997 for those
vehicles scheduled for replacement in the next two years under the new policy.
Depreciable lives have been adjusted for the WM Holdings fleet commencing in the
fourth quarter of 1997 to reflect the new policy. Also effective October 1,
1997, WM Holdings reduced depreciable lives on containers from 15 and 20 years
to 12 years, and ceased assigning salvage value in computing depreciation on
North American collection vehicles or containers.
21
23
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These changes in estimates resulted in an increase in depreciation expense of
$33,700,000 in the fourth quarter of 1997.
Also effective October 1, 1997, WM Holdings changed its process of
evaluating the probability that airspace from expansions will be permitted with
the effect of decreasing the useful life of the site. This process is
substantially consistent with the policy described in Note 2. This change in
estimate increased depreciation and amortization by $12,700,000 and the
provision for closure and post-closure by $3,100,000 in the fourth quarter of
1997.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Revolving credit facility................................... $ 430,000 $ 668,450
Commercial paper, weighted average interest of 6.1% in 1997
and 5.8% in 1996.......................................... 356,327 645,869
Senior notes and debentures, interest 6% to 8.75%,
due 1998 to 2026.......................................... 5,224,119 4,265,755
4% Convertible subordinated notes due 2002.................. 535,275 --
4 1/2% Convertible subordinated notes due 2001.............. 149,500 150,000
5% Convertible subordinated debentures due 2006............. 115,000 115,000
5.75% Convertible subordinated notes due 2005............... 450,182 444,736
Tax-exempt and project bonds, principal payable in periodic
installments, maturing through 2021, fixed and variable
interest rates ranging from 3.95% to 9.25% at December 31,
1997...................................................... 1,307,793 1,227,351
Installment loans and notes payable, interest at 5.34% to
12.5%, maturing through 2020.............................. 754,598 1,405,060
Other....................................................... 67,957 107,767
---------- ----------
9,390,751 9,029,988
Less current maturities..................................... 1,587,751 588,099
---------- ----------
$7,803,000 $8,441,889
========== ==========
The aggregate estimated payments, including scheduled minimum maturities,
of long-term obligations outstanding at December 31, 1997, for the following
five years and thereafter are as follows (in thousands).
1998........................................................ $1,587,751
1999........................................................ 462,258
2000........................................................ 765,374
2001........................................................ 539,520
2002........................................................ 815,134
thereafter.................................................. 5,220,714
----------
$9,390,751
==========
On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002 ("Convertible Notes Offering").
Interest is payable semi-annually in February and August. The notes are
convertible by the holders into shares of the Company's common stock at any time
at a conversion price of $43.56 per share. The notes are subordinated in right
of payment to all existing and future
22
24
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
senior indebtedness, as defined. The notes are redeemable after February 1, 2000
at the option of the Company at 101.6% of the principal amount, declining to
100.8% of the principal amount on February 1, 2001 and thereafter until maturity
at which time the notes will be redeemed at par, plus accrued interest. Deferred
offering costs of approximately $14,000,000 were incurred and are being
amortized ratably over the life of the notes. The proceeds were primarily used
to repay debt under the Company's credit facility, to fund acquisitions, and for
general corporate purposes.
During August 1997 and September 1997, the Company prepaid the holders of
certain privately placed senior note issuances an aggregate amount of
$182,500,000 with proceeds from its senior revolving credit facility. Interest
on these privately placed senior notes ranged from 7.29% to 8.44%. In connection
with this transaction, the Company was required to pay prepayment penalties of
approximately $7,975,000, which was recorded as an extraordinary item in the
third quarter of 1997.
On September 12, 1997, the Company issued $300,000,000 of 7% senior notes
due October 1, 2004, and $300,000,000 of 7 1/8% senior notes due October 1,
2007. The senior notes constitute senior and unsecured obligations of the
Company, ranking equal in right of payment with all other senior and unsecured
obligations of the Company, as defined. The senior notes are redeemable at the
option of the Company at any time and from time to time at par of the principal
amount of such notes, plus accrued interest. Deferred offering costs of
approximately $4,125,000 were incurred and are being amortized ratably over the
life of the senior notes. The proceeds were used to repay debt under the
Company's senior revolving credit facility. In anticipation of this offering,
the Company entered into interest rate locks on July 25, 1997, with various
institutions as a hedging transaction to cover the future issuance of
$600,000,000 of debt. The gain realized from this hedging transaction of
approximately $5,632,000 is being amortized over the life of the related notes
using the effective interest method and has the effect of reducing the
all-inclusive interest rate to 6.90% on the 7% senior notes due October 1, 2004,
and 7.06% on the 7 1/8% senior notes due October 1, 2007. Interest is payable
semi-annually on October 1 and April 1.
On December 17, 1997, the Company issued $350,000,000 of 6 1/2% senior
notes due December 15, 2002, and $150,000,000 of 7 1/8% senior notes due
December 15, 2017. The senior notes constitute senior and unsecured obligations
of the Company ranking equal in right of payment with all other senior and
unsecured obligations of the Company, as defined. The 6 1/2% senior notes due
December 15, 2002, are not redeemable. The $150,000,000 of 7 1/8% senior notes
due December 15, 2017, are redeemable, in whole or in part, at the option of the
Company at any time and from time to time at a redemption price equal to the
Make-Whole Price, as defined. Deferred offering costs of approximately
$3,713,000 were incurred and are being amortized ratably over the life of the
senior notes. The proceeds were used to repay debt under the Company's senior
revolving credit facility. In anticipation of this offering, the Company entered
into interest rate locks on December 9, 1997, as a hedging transaction to cover
the future issuance of $500,000,000 of debt. The amount paid by the Company from
this hedging transaction of approximately $6,845,000 is being amortized over the
life of the related notes. The all inclusive interest rate is 6.67% on the
6 1/2% senior notes due December 15, 2002, and is 7.27% on the 7 1/8% senior
notes due December 15, 2017. Interest is payable semi-annually on December 15
and June 15.
During 1996 and 1997, the Company replaced its existing credit facilities
with new credit facilities in connection with certain mergers and other
transactions. The credit facilities are used to refinance existing bank loans
and letters of credit, to fund acquisitions, and for working capital purposes.
At December 31, 1996, this credit facility was $1,200,000,000, including standby
letters of credit of up to $400,000,000. At December 31, 1996, the Company had
borrowed $637,000,000 under its $1,200,000,000 credit facility, and the
applicable interest rate was 5.87% per annum, with a facility fee of 0.15% per
annum. At December 31, 1997, total amount of the credit facility was
$2,000,000,000, including standby letters of credit of up to $650,000,000. At
December 31, 1997, the applicable interest rate was 6.1% per annum and the
facility fee was 0.1125% per annum, with the Company having borrowed
$430,000,000 and issued letters of credit of $467,029,000 under its
23
25
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,000,000,000 credit facility. The credit facility contains financial
convenants with respect to interest coverage and debt capitalization ratios and
contains limitations on dividends, additional indebtedness, liens, and asset
sales. Principal reductions are not required during the five-year term of the
credit facility, which was last replaced on August 7, 1997.
As of December 31, 1997, WM Holdings had in place committed standby trade
receivables sale and revolving credit facilities totaling $800,000,000 with a
group of six banks led by Chase Manhattan Bank (the "Lenders") for general
corporate purposes and to support WM Holdings commercial paper program. The
Lenders were committed to fund up to $550,000,000, if requested by WM Holdings,
by purchasing eligible receivables. Additionally, WM Holdings had a $250,000,000
unsecured revolving credit agreement with the Lenders. Both facilities were put
in place in December 1997 and expire June 30, 1998. The facilities provided for
commitment fees ranging from 18.75 to 37.5 basis points per annum and interest
rates tied to prime or LIBOR plus a margin. Under the terms of the revolving
credit agreement as amended, WM Holdings was required to maintain net worth of
$1,000,000,000 and consolidated debt (as defined in the agreement) not to exceed
3.5 times earnings (as defined in the agreement) before interest, taxes,
depreciation and amortization for the preceding four calendar quarters. As of
December 31, 1997, WM Holdings was in compliance with such restrictions. See
Note 20.
On June 5, 1996, United issued $150,000,000 of 4 1/2% convertible
subordinated notes, due June 1, 2001. Interest is payable semi-annually in June
and December. The notes are convertible into shares of the Company's common
stock at a conversion price of $30.23 per share. The notes are subordinated in
right of payment to all existing and future senior indebtedness, as defined. The
notes are redeemable after June 1, 1999, at the option of the Company at 101.8%
of the principal amount, declining annually to par on June 1, 2001, plus accrued
interest.
On March 4, 1996, Sanifill issued $115,000,000 of 5% convertible
subordinated debentures, due on March 1, 2006. Interest is payable semi-annually
in March and September. The debentures are convertible into shares of the
Company's common stock at a conversion price of $28.31 per share. The debentures
are subordinated in right of payment to all existing and future senior
indebtedness, as defined. The debentures are redeemable after March 15, 1999 at
the option of the Company at 102.5% of the principal amount, declining annually
to par on March 1, 2002, plus accrued interest.
In WM Holdings' acquisition in 1995 of the outstanding Chemical Waste
Management, Inc. ("CWM") shares it did not already own, the CWM public
stockholders received a Subordinated Note, with a principal amount at maturity
of $1,000, for every 81.1 CWM shares held, with cash paid in lieu of issuance of
fractional notes. The notes are subordinated to all existing and future senior
indebtedness of WM Holdings. Each note bears cash interest at the rate of two
percent per annum of the $1,000 principal amount at maturity, payable
semi-annually. The difference between the principal amount at maturity of $1,000
and the $717.80 stated issue price of each note represents the stated discount.
At the option of the holder, each note can be purchased for cash by WM Holdings
on March 15, 2000, at $843.03. Accrued unpaid interest to those dates will also
be paid. The notes will be callable by WM Holdings on and after March 15, 2000,
for cash, at the stated issue price plus accrued stated discount and accrued but
unpaid interest through the date of redemption. In addition, each note is
convertible at any time prior to maturity into 26.078 shares of WM Holdings
common stock (equivalent to 18.907 shares of the Company's common stock),
subject to adjustment upon the occurrence of certain events. Upon any such
conversion, WM Holdings will have the option of paying cash equal to the market
value of the WM Holdings shares which would otherwise be issuable. As of
December 31, 1997, there were 549,404 such notes outstanding with a maturity
value amounting to $549,400,000. As such securities are redeemable at the option
of the holders prior to maturity, those which may be redeemed in 1998 are
classified as current in the accompanying financial statements at December 31,
1997. In prior years, such borrowings were classified as long-term because WM
Holdings had committed credit facilities in place to refinance them.
24
26
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ENVIRONMENTAL LIABILITIES
The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the final
cell of a landfill, and post-closure of landfills it operates or for which it is
otherwise responsible. The final closure and post-closure liabilities are
accrued and charged to expense as airspace is consumed such that the total
estimated final closure and post-closure cost will be fully accrued for each
landfill at the time the site discontinues accepting waste and is closed.
Estimates for final closure and post-closure accruals are based on management
reviews, typically performed not less than annually, including input from its
engineers and accountants and interpretations of current requirements and
proposed regulatory changes. The closure and post-closure requirements are
established under the standards of the U.S. Environmental Protection Agency's
Subtitle C and D regulations as implemented and applied on a state-by-state
basis. Such costs may increase in the future as a result of legislation or
regulation. Final closure and post-closure accruals consider estimates for the
final cap and cover for the site, methane gas control, leachate management and
groundwater monitoring, and other operational and maintenance costs to be
incurred after the site discontinues accepting waste, which is generally
expected to be for a period of up to thirty years after final site closure. For
purchased disposal sites, the Company assessed and recorded a final closure and
post-closure liability at the time the Company assumed closure responsibility
based upon the estimated total closure and post-closure costs and the percentage
of airspace utilized as of such date. Thereafter, the difference between the
final closure and post-closure costs accrued and the total estimated closure and
post-closure costs to be incurred is accrued and charged to expense as airspace
is consumed. Such costs for foreign landfills are estimated based on compliance
with local laws, regulations and customs.
The Company has also established procedures to evaluate its potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste, including 95 sites listed on the Superfund National
Priorities List ("NPL") as of December 31, 1997. The majority of situations
involving NPL sites relate to allegations that subsidiaries of the Company (or
their predecessors) transported waste to the facilities in question, often prior
to the acquisition of such subsidiaries by the Company. The Company routinely
reviews and evaluates sites requiring remediation, including NPL sites, giving
consideration to the nature (e.g., owner, operator, transporter, or generator),
and the extent (e.g., amount and nature of waste hauled to the location, number
of years of site operation by the Company, or other relevant factors) of the
Company's alleged connection with the site, the accuracy and strength of
evidence connecting the Company to the location, the number, connection and
financial ability of other named and unnamed potentially responsible parties
("PRPs"), and the nature and estimated cost of the likely remedy. Cost estimates
are based on management's judgment and experience in remediating such sites for
the Company as well as for unrelated parties, information available from
regulatory agencies as to costs of remediation, and the number, financial
resources and relative degree of responsibility of other PRPs who are jointly
and severally liable for remediation of a specific site, as well as the typical
allocation of costs among PRPs. These estimates are sometimes a range of
possible outcomes. In such cases, the Company provides for the amount within the
range which constitutes its best estimate. If no amount within the range appears
to be a better estimate than any other amount, then the Company provides for the
minimum amount within the range in accordance with the FASB's Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies ("SFAS No.
5"). The Company believes that it is "reasonably possible," as that term is
defined in SFAS No. 5 ("more than remote but less than likely"), that its
potential liability, at the high end of such ranges, would be approximately $202
million higher on a discounted basis in the aggregate than the estimate that has
been recorded in the financial statements as of December 31, 1997.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
25
27
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the existence and ability of other
potentially responsible third parties to contribute to the settlements of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could be material.
Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 3% until expected time
of payment and then discounted to present value at 6% (7% at December 31, 1996).
The portion of the Company's recorded environmental liabilities that is not
inflated or discounted was $344,700,000 and $358,500,000 at December 31, 1997
and 1996, respectively. Had the Company not discounted any portion of its
liability, the amount recorded would have been increased by approximately
$341,403,000 at December 31, 1997.
The Company's liabilities for final closure, post-closure monitoring and
environmental remediation costs were as follows (in thousands):
DECEMBER 31,
---------------------
1997 1996
---------- --------
Current portion, included in accrued liabilities............ $ 127,184 $123,908
Non-current portion......................................... 1,030,755 832,415
---------- --------
Total recorded.............................................. 1,157,939 $956,323
========
Amount to be provided over remaining life of active sites,
including discount of $341,403 in 1997 related to recorded
amounts................................................... 1,362,128
----------
Expected aggregate environmental liabilities based on
current cost.............................................. $2,520,067
==========
Anticipated payments (based on current costs) of environmental liabilities
at December 31, 1997, are as follows (in thousands):
1998........................................................ $ 127,184
1999........................................................ 109,589
2000........................................................ 71,063
2001........................................................ 61,355
2002........................................................ 49,748
Thereafter.................................................. 2,101,128
----------
Total....................................................... $2,520,067
==========
In addition to the amounts above, at a certain site the Company has
perpetual care obligations aggregating $657,000 per year beginning in 2027.
From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company subsidiary's having owned, operated or
transported waste to a disposal facility which is alleged to have contaminated
the environment or, in certain cases, conducted environmental remediation
activities at such sites. While the Company believes it has meritorious defenses
to these lawsuits, their ultimate resolution is often substantially uncertain
due to a number of factors, and it is possible such matters could have a
material adverse impact on the Company's earnings for one or more quarters or
years.
The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future remedial, defense and tort claim costs at a
number of sites. Carriers involved in these matters have
26
28
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
typically denied coverage and are defending against the Company's claims. While
the Company is vigorously pursuing such claims, it regularly considers
settlement opportunities when appropriate terms are offered. Settlements to date
($94,300,000 in 1997, $60,300,000 in 1996, and $38,200,000 in 1995) have been
included in operating expenses as an offset to environmental expenses.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the FASB's Statement
of Financial Accounting Standards No. 107, Disclosures about the Fair Value of
Financial Instruments. The estimated fair value amounts have been determined by
the Company using available market information and commonly accepted valuation
methodologies. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
or holders of the instruments could realize in a current market exchange. The
use of different assumptions and/or estimation methodologies may have a material
effect on the estimated fair values amounts. The fair value estimates presented
herein are based on information available to management as of December 31, 1997
and 1996. Such amounts have not been revalued since those dates, and current
estimates of fair value may differ significantly from the amounts presented
herein.
The carrying values of cash and cash equivalents, short-term investments,
restricted funds held by trustees, trade accounts receivable, trade accounts
payable, financial instruments included in notes and other receivables and other
assets, and derivative financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
The fair values of the Company's outstanding indebtedness is as follows (in
thousands):
DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Senior notes and debentures..................... $5,224,119 $5,345,490 $4,265,755 $4,351,142
4% Convertible subordinated notes due 2002...... 535,275 592,148 -- --
4 1/2% Convertible subordinated notes due
2001.......................................... 149,500 214,906 150,000 172,500
5% Convertible subordinated debentures due
2006.......................................... 115,000 170,631 115,000 142,025
5.75% Convertible subordinated notes due 2005... 450,182 467,821 444,736 511,070
Tax-exempt and project bonds.................... 1,307,793 1,371,871 1,227,351 1,295,324
Other borrowings................................ 1,608,882 1,616,919 2,827,146 2,837,967
8. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate agreements -- The Company and its subsidiaries have entered
into interest rate swap agreements to balance fixed and floating rate debt in
accordance with management's criteria. The agreements are contracts to exchange
fixed and floating interest rate payments periodically over a specified term
without the exchange of the underlying notional amounts. The agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. Differences paid or received are accrued in the
financial statements as a part of interest expense on the underlying debt over
the life of the agreements and the swap is not recorded on the balance sheet or
marked to market. As of December 31, 1997,
27
29
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate agreements in notional amounts and with terms as set forth in the
following table were outstanding:
NOTIONAL DURATION OF
CURRENCY AMOUNT RECEIVE PAY AGREEMENTS
-------- -------- ------- --- -----------
Hong Kong Dollar........... 100,000,000 Floating Fixed January 1996 to July 1998
Italian Lira............... 98,000,000,000 Floating Fixed March 1996 to March 1999
German Deutschemark........ 150,000,000 Floating Fixed March 1996 to January 2000
Dutch Guilder.............. 115,000,000 Floating Fixed November 1996 to January 2000
U.S. Dollar................ 24,000,000 Floating Fixed April 1997 to December 2012
U.S. Dollar................ 125,000,000 Floating Fixed June 1995 to June 1998
U.S. Dollar................ 24,000,000 Floating Fixed January 1995 to January 2000
U.S. Dollar................ 15,000,000 Floating Fixed November 1996 to November 1999
Currency agreements -- From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or collars. The Company
receives or pays, based on the notional amount of the option, the difference
between the average exchange rate of the hedged currency against the base
currency and the average (strike price) contained in the option. Complex
instruments involving multipliers or leverage are not used. Although the purpose
for using such derivatives is to mitigate currency risk, they do not qualify for
hedge accounting under generally accepted accounting principles and accordingly,
must be adjusted to market value at the end of each accounting period with gains
or losses included in other income. There were no currency derivatives of this
type outstanding at December 31, 1997.
The Company sometimes also uses foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and there
is a high probability that the transaction will occur. At December 31, 1997, a
subsidiary had sold Italian Lira forward for delivery in 1998 to hedge foreign
exchange exposure on a specific transaction. The amount was not material to the
supplemental consolidated financial statements, and any gain or loss will be
included in the measurement of the identified transaction.
Commodity agreements -- The Company utilizes derivatives to seek to
mitigate the impact of fluctuations in the price of fuel used by its vehicles.
Quantities hedged do not exceed anticipated fuel purchases in any period. Gains
or losses are recognized in operating expenses, as cost of fuel purchases, when
paid or received. The primary instruments used are collars, swaps and swaptions.
Collars consist of the purchase of call options along with a corresponding sale
of put options at a lower price, with the effect of establishing a "cap" and a
"floor" with respect to the price of specified quantities of fuel. A swap is an
agreement with a counterparty whereby the Company pays a fixed price and
receives a floating price for specified quantities during a given period. In a
swaption, the Company is paid a premium by the counterparty for the right, but
not the obligation, at the end of the option period (usually 90 to 180 days) to
enter into a swap with respect to a specified quantity in a given period in the
future. The following table summarizes the Company's position in crude oil
derivatives at December 31, 1997:
CONTRACT
TYPE QUANTITY PERIOD
---- -------- --------
Collars.................................................... 1.2 million bbls 1998
Collars.................................................... 2.0 million bbls 1999
Collars.................................................... 1.0 million bbls 2000
Swaps...................................................... 0.5 million bbls 2000
Swaption (exercisable in 1998)............................. 0.5 million bbls 2000
28
30
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity investments -- The Company occasionally acquires common stock that
it needs to hold for a period of time. To mitigate its exposure to fluctuations
in the market price of such investments during the holding period, the Company
sometimes enters into hedging arrangements consisting of put options or collars.
Changes in the intrinsic value of such instruments are recorded in stockholders'
equity if the underlying stock is classified as "available for sale" and in
other income if it is classified as "trading." The offsetting change in the
value of the derivative is included in short-term investments on the
supplemental consolidated balance sheets. At December 31, 1997, the Company had
outstanding a collar, which expired in 1998, on an investment in a publicly
traded equity security. The market price of the security was in excess of the
cap value of the collar at both December 31, 1997, and upon expiration, and
accordingly, the Company delivered the shares in exchange for the cap price,
with no gain or loss recognized in 1998.
See Note 9 for a discussion of the Company's sale of put options in
connection with its authorized stock repurchase program.
9. CAPITAL STOCK
The Board of Directors is authorized to issue preferred stock in series,
and with respect to each series, to fix its designation, relative rights
(including voting, dividend, conversion, sinking fund, and redemption rights),
preferences (including dividends and liquidation), and limitations. The Company
currently has no issued or outstanding preferred stock.
On February 7, 1997, concurrent with the Convertible Notes Offering, the
Company completed a public offering of 11,500,000 shares of its common stock,
priced at $35.125 per share. The net proceeds of approximately $387,438,000 were
primarily used to repay debt under the Company's credit facility and for general
corporate purposes.
On March 3, 1997, prior to its becoming a wholly owned subsidiary of the
Company, United completed a public offering in which it issued 3,450,000 shares
of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares
of the Company's common stock, priced at $33.95 per share). The net proceeds of
approximately $119,000,000 were used to repay approximately $47,000,000 of debt
under United's credit facility, to fund acquisitions, and for general corporate
purposes.
On March 18, 1996, Sanifill called for redemption all of its $60,000,000 of
7 1/2% convertible subordinated debentures due June 1, 2006, at redemption price
of 104.5% of their face amount plus accrued interest from December 1, 1995, to,
and including, the redemption date of April 17, 1996. Alternatively, holders of
these debentures were allowed to convert their debentures into common stock at
any time prior to the close of business on April 10, 1996, at a conversion price
equal to $28.82 per share (equivalent to $16.95 of the Company's common stock).
Holders electing to convert received 34.7 shares of Sanifill's common stock
(equivalent to 59 shares of the Company's common stock) for each $1,000
principal amount of debentures surrendered. The $60,000,000 of debentures were
ultimately converted to approximately 3,570,000 shares of Company common stock.
During 1994 through 1996, WM Holdings sold put options on 42,300,000 shares
of its common stock (equivalent to 30,700,000 shares of the Company's common
stock). The put options gave the holders the right at maturity to require WM
Holdings to repurchase shares of its common stock at specified prices. Proceeds
from the sale of put options were credited to additional paid-in capital. The
amount WM Holdings would be obligated to pay to repurchase shares of its common
stock if all outstanding put options were exercised was reclassified to a
temporary equity account. In the event the options were exercised, WM Holdings
had the right to pay the holder in cash the difference between the strike price
and the market price of WM Holdings' shares, in lieu of repurchasing the stock.
Options on 32,500,000 shares expired unexercised, as the price of WM
Holdings' stock was in excess of the strike price at maturity. WM Holdings
repurchased 3,100,000 shares of its common stock at a cost of
29
31
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$107,500,000, and 6,700,000 options were settled for cash of $13,600,000. There
were no put options outstanding at December 31, 1997.
In February 1997, the Board of Directors of WM Holdings authorized the
repurchase of up to 50,000,000 shares of its own common stock (equivalent to
36,250,000 shares of the Company's common stock) in the open market, in
privately negotiated transactions, or through issuer tender offers. WM Holdings
repurchased 30,000,000 shares of its own common stock (equivalent to 21,750,000
shares of the Company's common stock) through a "Dutch auction" tender offer in
the second quarter of 1997 but has not repurchased any other shares in 1997.
In June 1997, prior to the Merger, the Company acquired a majority of the
Canadian solid waste businesses of WM Holdings in a purchase business
combination for consideration that included 1,705,757 shares of the Company's
common stock. WM Holdings sold its shares of the Company's common stock on the
open market during December 1997 for approximately $65,000,000. As the Merger
was accounted for as a pooling of interests, WM Holdings' sale of its shares of
the Company's common stock is treated as an equity offering to the public for
financial accounting and reporting purposes.
Prior to the Merger, WM Holdings paid cash dividends of $309,577,000,
$308,265,000, and $291,421,000 to its shareholders during 1997, 1996, and 1995,
respectively. Based on the Company's weighted average common shares outstanding,
after considering the effect of the Merger, the cash dividends per common share
are $0.57, $0.58, and $0.59 for the years ended December 31, 1997, 1996, and
1995, respectively.
10. COMMON STOCK OPTIONS AND WARRANTS
In accordance with the Company's 1990 Stock Option Plan (the "1990 Plan"),
options to purchase 900,000 shares of the Company's common stock may be granted
to officers, directors, and key employees. In accordance with the Company's 1993
Stock Option Incentive Plan, as amended (the "1993 Plan"), options to purchase
6,500,000 shares of the Company's common stock may be granted to officers,
directors, and key employees. Options are granted under both the 1990 Plan and
the 1993 Plan at an exercise price which equals or exceeds the fair market value
of the common stock on the date of grant, with various vesting periods, and
expire up to ten years from the date of grant. No options are available for
future grant under the 1990 Plan.
In May 1996, the Company adopted the 1996 Stock Option Plan for
Non-Employee Directors ("1996 Directors Plan") to offer its directors who are
not officers, full-time employees, or consultants of the Company an annual grant
of 10,000 options on each January 1 (subsequently amended to 12,500 options). In
accordance with the 1996 Directors Plan, options to purchase up to 400,000
shares of the Company's common stock may be granted, with five year vesting
periods, and expiration dates ten years from the date of grant. Options may be
granted at an exercise price which equals fair market value of the common stock
on the date of grant.
Western maintained three stock option plans ("Western Plans"): the 1992
Stock Option Plan ("1992 Western Plan"), the Incentive Stock Option Plan, and
the Non-Qualified Stock Option Plan, which allowed key employees and directors
of Western the right to purchase shares of its common stock. Options granted
under the 1992 Western Plan were designated as incentive or non-qualified in
nature, at the discretion of the Compensation Committee of Western's Board of
Directors, though only employees were eligible to receive incentive stock
options. Western had reserved 2,000,000 shares of its common stock under each of
the Western Plans. Options were granted under the Western Plans at an exercise
price which equaled or exceeded the fair market value on the date of grant.
Options were generally exercisable in installments beginning one year after the
grant date. As a result of the Western Merger, all unexpired and unexercised
options under the Western Plans converted to options to purchase shares of the
Company's common stock, as adjusted, subject to the same terms and conditions as
provided under the Western Plans. No additional options may be issued under
these plans.
30
32
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sanifill maintained an incentive compensation plan (the "Incentive Plan")
which allowed for the ability to grant non-qualified options, restricted stock,
deferred stock, incentive stock options, stock appreciation rights, and other
long-term incentive awards. Under the Incentive Plan, stock options were
typically granted at fair market value on the date of grant. The number of
shares available for issuance under the Incentive Plan was limited to 14% of the
number of outstanding shares of Sanifill's common stock at that time less shares
outstanding under the Incentive Plan and the Company's previously utilized stock
option plan (the "Stock Option Plan"). The Incentive Plan did not provide for
the granting of options to non-employee directors. The Stock Option Plan
provided for options of up to 382,500 of the authorized shares to be granted to
non-employee directors. In May 1995, Sanifill granted 26,095 shares of
restricted stock to certain key executives under the Incentive Plan, which were
to vest at the end of eight years or upon the achievement of certain financial
objectives, if sooner. During 1996, these financial objectives were met and all
restricted shares were vested. Sanifill incurred compensation expense of
$2,204,000 and $312,000 in 1996 and 1995, respectively, related to restricted
stock. As a result of the Sanifill Merger, all unexpired and unexercised options
under the plans converted to options to purchase shares of the Company's common
stock, as adjusted, subject to the same terms and conditions as provided under
such plans. No additional options may be issued under these plans.
United granted stock options pursuant to the 1992 Stock Option Plan,
various similar plans, and the 1992 Disinterested Director Stock Option Plan.
Under the 1992 Stock Option Plan, United was authorized to grant up to 5,900,000
incentive and non-statutory stock options. Under the 1992 Disinterested Director
Stock Option Plan, a fixed number of non-statutory stock options were granted
annually to members of United's Board of Directors. At the effective date of the
United Merger, United stock options, whether or not such stock options had
vested or had become exercisable, were cancelled in exchange for shares of the
Company's common stock equal in market value to the fair value of such United
stock options, as determined by an independent third party. No additional
options may be issued under these plans.
WM Holdings has two stock option plans currently in effect under which
future grants may be issued: the 1997 plan (the "1997 Plan") and the 1992 plan
for non-employee directors (the "Directors' Plan"). The plans provide for
accelerated vesting upon a "change in control" of WM Holdings as defined in the
plans. Options granted under the 1997 Plan are generally exercisable in three
equal cumulative installments beginning one year after the date of grant.
Options granted under the Directors' Plan become exercisable in five equal
installments beginning six months after the date of grant. Under the 1997 Plan,
non-qualified stock options may be granted at a price not less than 100% of the
market value on the date of grant, for a term of not more than ten years.
Twenty-three million shares of WM Holdings common stock (equivalent to 16.7
million shares of the Company's common stock) were initially reserved for
issuance under this plan. Pursuant to the Directors' Plan, 150,000 shares of WM
Holdings' common stock (equivalent to 108,750 shares of the Company's common
stock) were initially reserved. Options for a total of 15,000 shares of WM
Holdings (equivalent to 10,875 shares of the Company's common stock) are to be
granted, in five equal annual installments commencing with election to the Board
of WM Holdings, to each person who is not an officer or full-time employee of WM
Holdings or any of its subsidiaries.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").
SFAS No. 123 prescribes a fair value based method of determining compensation
expense related to stock-based awards granted to employees. The recognition
provisions of SFAS No. 123 are optional; however, entities electing not to adopt
the recognition provisions of SFAS No. 123 are required, beginning in 1996, to
make disclosures of pro forma net income and earnings per share as if the
recognition provisions of SFAS No. 123 had been applied as of January 1, 1995,
as well as disclosures regarding assumptions utilized in determining the pro
forma amounts. The Company did not adopt the recognition provisions of SFAS No.
123, however, required disclosures are included below.
31
33
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options granted by the Company in 1997, 1996, and 1995 have ten year
terms. Stock options granted by Chambers and Western became fully vested upon
consummation of the related mergers. Stock options granted by Sanifill continue
to vest under varying vesting periods ranging from immediate vesting to five
years following the date of grant. As discussed above, at the effective date of
the United Merger, United stock options, whether or not such stock options had
vested or had become exercisable, were cancelled in exchange for shares of the
Company's common stock equal in market value to the fair value of such United
stock options, as determined by an independent third party. The Company has
issued warrants expiring through 2002 for the purchase of shares of its common
stock in connection with private placements of debt and equity securities,
acquisitions of businesses, bank borrowings, reorganizations, and certain
employment agreements. The following table summarizes common stock option and
warrant transactions related to employees or Company directors under all of the
aforementioned plans and various predecessor plans for 1997, 1996, and 1995 (in
thousands):
OPTIONS AND WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
----------- ----------------
Outstanding at January 1, 1995.......................... 25,341 $21.58
Granted............................................... 7,767 23.37
Assumed in purchase acquisitions...................... 3,516 45.53
Exercised............................................. (2,254) 13.14
Forfeited............................................. (1,153) 43.60
------
Outstanding at December 31, 1995........................ 33,217 25.32
Granted............................................... 11,045 29.91
Assumed in purchase acquisitions...................... 373 24.92
Exercised............................................. (7,036) 16.99
Forfeited............................................. (1,126) 44.63
------
Outstanding at December 31, 1996........................ 36,473 27.77
Granted............................................... 8,389 39.22
Exercised............................................. (7,566) 17.91
Forfeited............................................. (2,583) 45.13
------
Outstanding at December 31, 1997........................ 34,713 31.61
======
Exercised at December 31, 1996.......................... 19,787 $27.96
Exercised at December 31, 1997.......................... 19,332 31.49
The common stock options and warrants outstanding at December 31, 1997,
include 22,622,000 common stock options and warrants granted by Chambers,
Western, Sanifill, United, and WM Holdings, of which 16,432,000 are exercisable.
The weighted average fair value of common stock options and warrants
granted to employees or Company directors during 1997 and 1996 were $12.85 and
$9.72, respectively. The fair value of each common stock option or warrant
granted to employees or Company directors by the Company during 1997 and 1996 is
estimated utilizing the Black-Scholes option-pricing model. The following
weighted average assumptions were used: dividend yield of 0% to 2%, risk-free
interest rates which vary for each grant and range from 5.61% to 7.19%, expected
life of four to seven years for all grants, and stock price volatility ranging
from 25.2% to 31% for all grants.
32
34
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Outstanding and exercisable stock options and warrants related to employees
or Company directors at December 31, 1997, were as follows (in thousands):
OUTSTANDING EXERCISABLE
------------------------------------------------- ------------------------------
OPTIONS AND WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS AND WEIGHTED AVERAGE
EXERCISE PRICE WARRANTS EXERCISE PRICE REMAINING TERM WARRANTS EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$2.25 to $10.00......... 3,367 $ 6.90 3.6 years 3,308 $ 6.86
$10.01 to $20.00........ 5,316 14.24 6.9 years 3,137 13.66
$20.01 to $30.00........ 6,195 25.41 8.3 years 1,929 24.12
$30.01 to $40.00........ 7,784 35.72 7.9 years 3,283 36.43
$40.01 to $50.00........ 10,500 44.59 6.5 years 6,126 46.07
$50.01 to $84.18........ 1,551 61.17 3.1 years 1,549 61.18
------ ------
$2.25 to $84.18......... 34,713 31.61 6.8 years 19,332 31.49
====== ======
The following table summarizes transactions involving common stock warrants
related to nonemployees for 1997, 1996, and 1995 (in thousands):
WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
-------- ----------------
Outstanding at January 1, 1995.............................. 312 $ 9.33
Granted................................................... 230 11.61
Exercised................................................. (415) 9.03
Forfeited................................................. -- --
----
Outstanding at December 31, 1995............................ 127 10.65
Granted................................................... 528 25.46
Exercised................................................. (81) 9.15
Forfeited................................................. (21) 10.50
----
Outstanding at December 31, 1996............................ 553 19.52
Granted................................................... 441 38.70
Exercised................................................. (136) 16.69
Forfeited................................................. (97) 13.50
----
Outstanding at December 31, 1997............................ 761 31.91
====
Exercisable at December 31, 1996............................ 222 $15.37
Exercisable at December 31, 1997............................ 320 16.84
The weighted average fair value of common stock warrants granted to
nonemployees during 1997 and 1996 were $12.54 and $10.37, respectively. The fair
value of each common stock warrant granted to nonemployees by the Company during
1997 and 1996 is estimated utilizing the Black-Scholes option-pricing model. The
following weighted average assumptions were used: dividend yield of 0%,
risk-free interest rates which vary for each grant and range from 5.06% to
7.67%, expected life of five years for all grants, and a stock price volatility
of approximately 31% for all grants. Compensation expense related to common
stock warrants granted to nonemployees was not material for the periods
presented.
33
35
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company applied the recognition provisions of SFAS No. 123, the
Company's net income (loss) and earnings (loss) per common share for 1997, 1996,
and 1995 would approximate the pro forma amounts shown below (in thousands,
except per share amounts):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- ------- --------
Net income (loss):
As reported........................................ $(943,034) $28,152 $501,790
Pro forma.......................................... (979,286) 3,114 494,578
Basic earnings (loss) per common share:
As reported........................................ $ (1.73) $ 0.05 $ 1.01
Pro forma.......................................... (1.80) 0.01 1.00
Diluted earnings (loss) per common share:
As reported........................................ $ (1.73) $ 0.05 $ 1.00
Pro forma.......................................... (1.80) 0.01 0.99
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
Commencing in 1996, WM Holdings made grants of restricted stock.
Compensation expense for grants of restricted shares is recognized ratably over
the vesting period (generally five to ten years) and amounted to approximately
$2,400,000 and $100,000 in 1997 and 1996, respectively. Unamortized compensation
expense related to grants of restricted stock was $11,102,000 at December 31,
1997.
11. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined benefit pension plan for all eligible
non-union domestic employees of WM Holdings. The benefits are based on the
employee's years of service and compensation during the highest five consecutive
years out of the last ten years of employment. The Company's funding policy is
to contribute annually an amount determined in consultation with its actuaries,
approximately equal to pension expense, except as may be limited by the
requirements of the Employee Retirement Income Security Act ("ERISA"). An
actuarial valuation report is prepared for the plan as of September 30 each year
and used, as permitted by the FASB's Statement of Financial Accounting Standards
No. 87, Employers Accounting for Pensions ("SFAS No. 87"), for the year-end
disclosures.
Net periodic pension expense for 1997, 1996, and 1995, based on discount
rates of, 7.75%, 7.75%, and 8.5%, respectively, included the following
components (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Service cost -- benefits earned during the year...... $ 15,000 $ 14,000 $ 11,800
Interest cost on projected benefit obligation........ 17,100 14,400 13,200
Actual return on plan assets......................... (50,400) (14,500) (22,300)
Net amortization and deferral........................ 36,100 2,500 9,100
-------- -------- --------
Net periodic pension expense............... $ 17,800 $ 16,400 $ 11,800
======== ======== ========
34
36
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used to determine the plan's funded status and pension expense
for the following year were as follows:
1997 1996
----- -----
Discount rate............................................... 7.25% 7.75%
Rate of increase in compensation............................ 3.5% 3.5%
Long-term rate of return on plan assets..................... 9.0% 9.0%
The following table sets forth the plan's funded status and the amount
recognized in the accompanying supplemental consolidated balance sheets at
December 31, 1997 and 1996, for its pension plan (in thousands):
DECEMBER 31,
---------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
of $231,000 and $182,500 at December 31, 1997 and 1996,
respectively........................................... $(248,900) $(199,500)
========= =========
Projected benefit obligations............................. $(284,800) $(223,700)
Plan assets at fair value, primarily common stocks, bonds
and real estate........................................... 264,900 193,700
--------- ---------
Plan assets less than projected benefit obligation.......... (19,900) (30,000)
Unrecognized net loss....................................... 55,200 52,600
Unrecognized overfunding at date of adoption (January 1,
1985) of SFAS No. 87, net of amortization, being
recognized over 15 years.................................. (3,300) (4,900)
Adjustment to recognize minimum liability................... -- (23,500)
--------- ---------
Prepaid pension cost (pension liability) included in the
supplemental consolidated balance sheets.................. $ 32,000 $ (5,800)
========= =========
The Company also has a non-qualified Supplemental Executive Retirement Plan
for certain officers of WM Holdings and an ERISA Excess Plan for non-officer
managers of those WM Holdings' companies who's eligible compensation exceeds the
ERISA limit (collectively, the "SERP"). The SERP, which is unfunded, provides
eligible executives with defined pension benefits outside the qualified WM
Holdings' retirement plan based on average earnings and years of service. The
SERP is valued each year (at September 30) by the Company's independent
actuaries, using the same assumptions as used for the qualified plan. The
following table sets forth information relating to the SERP (in thousands):
DECEMBER 31,
-------------------
1997 1996
-------- --------
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefits
of $36,300 and $27,700 at December, 1997 and 1996,
respectively........................................... $(41,000) $(33,200)
======== ========
Projected benefit obligation.............................. $(44,100) $(37,100)
Plan assets at fair value, primarily contributions made
after the measurement
date...................................................... -- 100
-------- --------
Plan assets less than projected benefit obligation.......... (44,100) (37,000)
Unrecognized net loss....................................... 11,800 11,200
Unrecognized overfunding at date of adoption of SFAS No. 87,
net of amortization, being recognized over 15 years....... 1,400 1,700
Adjustment to recognize minimum liability................... (10,100) (9,000)
-------- --------
Liability recorded (in other long-term liabilities)......... $(41,000) $(33,100)
======== ========
35
37
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERP expense for 1997, 1996 and 1995 included the following components (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
Service cost -- benefits earned during the year............ $1,000 $1,300 $1,100
Interest................................................... 2,800 2,200 2,200
Net amortization and deferral.............................. 1,100 1,000 1,100
------ ------ ------
Total expense.................................... $4,900 $4,500 $4,400
====== ====== ======
Waste Management International Plc ("WM International") participates in
both defined benefit and defined contribution retirement plans for its employees
in various countries. The projected benefit obligation, plan assets and unfunded
liability of the WM International defined benefit plans are not material. Other
WM Holdings' subsidiaries participate in various multi-employer pension plans
covering certain employees not covered under the Company's pension plan,
pursuant to agreements with collective bargaining units who are members of such
plans. These plans are generally defined benefit plans; however, in many cases,
specific benefit levels are not negotiated with or known by the employer
contributors. Contributions of $18,600,000, $16,500,000 and $18,300,000 for
subsidiaries' defined benefit plans were made and charged to income in 1997,
1996 and 1995, respectively.
Certain subsidiaries of WM Holdings provide postretirement health care
benefits to eligible employees, and certain postretirement benefits other than
pensions to a limited number of former employees of a manufacturing business it
has sold. The following table analyzes the obligation for postretirement
benefits other than pensions (primarily health care costs), measured as of
December 31 of each year, which is included in other liabilities on the
accompanying supplemental consolidated balance sheets (in thousands):
DECEMBER 31,
-----------------
1997 1996
------- -------
Accumulated postretirement benefit obligations:
Retirees.................................................. $43,100 $42,200
Other fully eligible participants......................... 1,500 6,700
Other active participants................................. 19,900 10,100
------- -------
64,500 59,000
Unrecognized:
Prior service (cost) credit............................... (3,900) 300
Gain...................................................... 8,700 8,500
------- -------
$69,300 $67,800
======= =======
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1998; the rate was assumed to
decrease by 0.5% per year to 6.0% in 2001 and remain at that level thereafter.
Increasing the assumed health care cost trend by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 by approximately $4,000,000 and the aggregate of the service
and interest cost components of net postretirement health care cost for 1997 by
approximately $300,000. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.0% in 1997 and 7.75% in
1995 and 1996.
36
38
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The expense for postretirement health care benefits was as follows (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
Service costs.............................................. $1,800 $ 700 $1,100
Interest................................................... 4,600 3,500 4,300
------ ------ ------
Total expense.................................... $6,400 $4,200 $5,400
====== ====== ======
WM Holdings had an Employee Stock Ownership Plan ("1988 ESOP") for all
eligible non-union United States and Canadian employees of certain subsidiaries.
The benefits are based on the employee's years of service and compensation. The
Company contributes each year an amount, if any, determined by the Board of
Directors of WM Holdings. This plan was terminated December 31, 1997.
Effective July 1, 1995, the Company established the USA Waste Services,
Inc. Employee Savings Plan ("Savings Plan"), a qualified defined contribution
retirement plan, covering employees (except those working subject to a
collective bargaining agreement) 21 years of age or older who have completed one
year of service or were actively employed on the Savings Plan's commencement
date. The Savings Plan allows eligible employees to contribute up to the lesser
of 15% of their annual compensation or the maximum permitted under IRS
regulations to various investment funds. The Company matches 50% of the first 6%
an employee contributes. Both employee and Company contributions vest
immediately. In 1997, 1996, and 1995, the Company contributed approximately
$5,335,000, $1,248,000, and $218,000, respectively, and incurred approximately
$225,000, $148,000, and $25,000, respectively, in administrative fees.
WM Holdings has a Profit Sharing and Savings Plan ("PSSP") available to
certain employees of certain subsidiaries. The terms of the PSSP allow for
annual contributions by the Company as determined by the Board of Directors as
well as a match of employee contributions up to $750 per employee ($500 prior to
January 1, 1996). Effective January 1, 1998, the plan was renamed the
"Retirement Savings Plan", the matching contribution formula was increased, and
the discretionary annual contribution was discontinued. Certain subsidiaries
also sponsor non-contributory and contributory defined contribution plans
covering both salaried and hourly employees. Employer contributions are
generally based upon fixed amounts of eligible compensation. Charges to
operations for these plans were $37,000,000, $28,400,000 and $38,500,000 during
1997, 1996 and 1995, respectively.
During 1994, WM Holdings established an Employee Stock Benefit Trust and
sold 12,600,000 shares of its treasury stock to the Trust in return for a
30-year, 7.33% note with interest payable quarterly and principal due at
maturity. WM Holdings has agreed to contribute to the Trust each quarter funds
sufficient, when added to dividends on the shares held by the Trust, to pay
interest on the note as well as principal outstanding at maturity. At the
direction of an administrative committee comprised of WM Holdings officers, the
trustee will use the shares or proceeds from the sale of shares to pay employee
benefits, and to the extent of such payments by the Trust, the WM Holdings will
forgive principal and interest on the note. The shares of common stock issued to
the Trust are not considered to be outstanding in the computation of earnings
per share until the shares are utilized to fund obligations for which the trust
was established. Changes in the market value of these shares are charged or
credited to Additional Paid-In Capital.
37
39
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
The provision for income taxes on continuing operations consists of the
following (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- -------- --------
Current:
Domestic.......................................... $ 652,508 $274,536 $346,130
Foreign........................................... 85,357 22,875 35,707
--------- -------- --------
737,865 297,411 381,837
--------- -------- --------
Deferred:
Domestic.......................................... (397,537) 113,644 130,061
Foreign........................................... 21,136 75,561 (19,013)
--------- -------- --------
(376,401) 189,205 111,048
--------- -------- --------
Provision for income taxes................ $ 361,464 $486,616 $492,885
========= ======== ========
The difference between income taxes at the federal statutory rate and the
provision for income taxes on continuing operations for the years presented is
as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- -------- --------
Income taxes at federal statutory rate.............. $(233,980) $272,324 $346,435
Nondeductible merger costs.......................... 9,253 10,323 7,189
Nondeductible costs relating to acquired
intangibles....................................... 203,534 58,499 37,228
Writedown of investments in subsidiary.............. 42,781 59,337 --
Minority interest................................... 9,694 25,692 38,527
State and local income taxes, net of federal income
tax benefit....................................... 36,202 55,035 52,213
Federal tax credits................................. (23,395) (17,728) (16,663)
Foreign losses with no tax benefit.................. 16,726 -- --
Deferred tax valuation and other tax reserves....... 267,380 5,830 33,330
Gain on sale of foreign subsidiary.................. -- 17,523 --
Other............................................... 33,269 (219) (5,374)
--------- -------- --------
Provision for income taxes................ $ 361,464 $486,616 $492,885
========= ======== ========
The increased impact of nondeductible costs relating to acquired
intangibles on the 1997 consolidated tax provision is attributable to the asset
impairment losses discussed in Note 14. As a result of the 1997 comprehensive
review, the Company increased deferred tax valuation allowance and other tax
reserves.
38
40
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax assets (liabilities) are as follows
(in thousands):
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards......................... $ 287,190 $ 320,496
Environmental and other reserves......................... 749,098 638,623
Asset impairment, losses from planned asset divestitures,
and other............................................. 291,168 185,520
Valuation allowance...................................... (232,800) (130,100)
----------- -----------
Deferred tax assets.............................. 1,094,656 1,014,539
Deferred tax liabilities:
Property, equipment, intangible assets, and other........ (1,559,676) (1,586,876)
----------- -----------
Net deferred tax liabilities..................... $ (465,020) $ (572,337)
=========== ===========
At December 31, 1997, the Company had approximately $13,000,000 of
alternative minimum tax credit carryforwards that may be used indefinitely and
capital loss carryforwards of approximately $52,700,000 with expiration dates
through 2002. The Company had approximately $195,000,000 of U.S. federal net
operating loss ("NOL") carryforwards, $818,000,000 of state NOL carryforwards,
and $520,000,000 of foreign NOL carryforwards. Foreign NOL carryforwards may be
carried forward indefinitely, and the U.S. federal and state NOL carryforwards
have expiration dates through the year 2012. U.S. federal NOL carryforwards of
$155,000,000 are subject to annual limitation of approximately $39,000,000 due
to an ownership change within the meaning of Internal Revenue Code Section 382.
Valuation allowances have been established for uncertainties in realizing the
benefits of NOL and credit carryforwards. While the Company expects to realize
the deferred tax assets in excess of the valuation allowances, changes in
estimates of future taxable income or in tax laws could alter this expectation.
The valuation allowance decreased in 1996 by approximately $20,000,000 due
primarily to realization of capital loss carryforwards and adjustments for
certain NOL carryforwards previously estimated to be unrealizable. In 1997, the
valuation allowance increased approximately $102,700,000, composed of increases
to allowances due to the uncertainty of realizing alternative minimum tax
credits, tax benefits from certain asset impairment writedowns (primarily land),
foreign tax credits, and NOL carryforwards, partially offset by reductions.
The Company has concluded that its foreign business requires that the
undistributed earnings of its foreign subsidiaries be reinvested indefinitely
outside the United States. If the reinvested earnings were to be remitted, the
U.S. income taxes due under current tax law would not be material.
13. DOMESTIC AND FOREIGN OPERATIONS
As discussed in Note 1, the Company believes that all of its material
operations are part of the waste management services industry, and it currently
reports as a single industry segment. Foreign operations in 1997 were conducted
in ten countries in Europe, seven countries in the Asia Pacific region, Canada,
Mexico, Brazil, Israel, and Argentina. However, during 1997, WM International
sold substantially all of its operations in France, Spain, and Austria. WM
International also learned in late September 1997 that its joint venture
company's bid to continue to provide waste collection and cleaning services to
the city of Buenos Aires, which represented a substantial portion of its
business in Argentina, was not successful.
39
41
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to the Company's operations by geographic area is set
forth in the following table (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Operating revenues:
United States............................ $ 9,487,908 $ 8,727,878 $ 8,271,052
Europe................................... 1,411,800 1,539,200 1,527,300
Canada................................... 424,804 162,439 133,600
Other foreign............................ 477,838 445,250 384,355
----------- ----------- -----------
Total operating revenues......... $11,802,350 $10,874,767 $10,316,307
=========== =========== ===========
Income (loss) from operations:
United States............................ $ (452,263) $ 1,133,692 $ 1,272,470
Europe................................... 27,300 (12,800) 2,400
Canada................................... 120,727 14,908 9,000
Other foreign............................ 60,928 63,486 21,632
----------- ----------- -----------
Total income (loss) from
operations..................... $ (243,308) $ 1,199,286 $ 1,305,502
=========== =========== ===========
Identifiable assets at end of year:
United States............................ $15,540,790 $16,185,511 $14,801,930
Europe................................... 2,613,700 3,503,000 3,682,400
Canada................................... 1,311,091 297,904 177,500
Other foreign............................ 496,900 680,783 617,905
----------- ----------- -----------
Total identifiable assets at end
of year........................ $19,962,481 $20,667,198 $19,279,735
=========== =========== ===========
WM International operates facilities in Hong Kong which are owned by the
Hong Kong government. The Hong Kong economy has been impacted by the economic
uncertainty associated with many of the countries in the region. High and
volatile interest rates have resulted from speculation regarding its currency.
In addition to Hong Kong, WM International has operations in Indonesia and
Thailand. These countries have experienced illiquidity, volatile currency
exchange rates and interest rates, and reduced economic activity. WM
International, and therefore the Company, will be affected for the foreseeable
future by economic conditions in this region, although it is not possible to
determine the extent of such impact. At December 31, 1997, WM International had
a net investment of $107,500,000 in these countries (including Hong Kong).
Pre-tax income from Hong Kong was $25,700,000 in 1997. Income from Indonesia and
Thailand has not been significant to date.
14. ASSET IMPAIRMENTS AND UNUSUAL ITEMS
Fair values for asset impairment losses were determined for landfills,
hazardous waste facilities, recycling investments and other facilities,
primarily based on future cashflow projections discounted back using discount
rates appropriate for the risks involved with the specific assets. For surplus
real estate, market opinions and appraisals were used. In determining fair
values for abandoned projects and vehicles to be sold, recoverable salvage
values were determined using market estimates. Impaired assets to be sold are
primarily businesses to be sold (see Note 18) and surplus real estate. The
carrying amount of such real estate was $73,300,000 at December 31, 1997. The
Company is currently marketing these properties; however, since the disposal
date cannot be accurately estimated, these assets are classified as long-term
assets in the accompanying supplemental consolidated balance sheet at December
31, 1997.
40
42
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of asset impairments and unusual items for the periods indicated
is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Asset impairments:
Landfills, related primarily to management decisions to
abandon expansions and development projects due to
political or competitive factors, which will result in
closure earlier than previously expected (includes
$233,800 for hazardous waste sites).................... $ 592,882
Hazardous waste facilities, resulting from continuing
market deterioration, increased competition, excess
capacity and changing regulation....................... 131,400
Goodwill, primarily related to landfills and hazardous
waste facilities impaired (including $411,000 related
to hazardous waste business)........................... 433,400
Write-down of WTI long-lived assets, including $47,100
related to a wood waste burning independent power
production facility.................................... 57,200
Recycling investments, related primarily to continued
pricing, overcapacity and competitive factors.......... 21,500
Write-down to estimated net realizable value of trucks to
be sold as a result of new fleet management policy (See
Note 4)................................................ 70,900
Write-down to estimated net sales proceeds of businesses
to be sold (See Note 18)............................... 122,200
Abandoned equipment and facilities........................ 37,300
Surplus real estate....................................... 38,200
Provisions for losses on contractual commitments............ 120,173
Severance for terminated employees.......................... 41,630
Special charge for WM International, primarily costs of
demobilization in Argentina following loss of City of
Buenos Aires contract, divestiture or closure of
underperforming businesses (primarily in Italy and
Germany) and abandonment of projects (primarily in
Germany).................................................. 104,360
----------
Total............................................. $1,771,145
==========
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
Asset impairments:
Landfills, related primarily to management decisions to
abandon expansion projects due to political or
competitive factors, which will result in closure
earlier than previously expected....................... $ 20,348
Recycling investments, related primarily to pricing,
overcapacity and competitive factors................... 47,800
Other, primarily equipment to be scrapped................. 2,000
Surplus real estate....................................... 1,500
Estimated losses related to the disposition of certain
non-core business assets.................................. 28,900
Reserves for certain litigation and for reengineering of
finance and administrative functions...................... 154,100
Provisions for losses on contractual commitments............ 53,632
Western retirement benefits................................. 4,824
Special charge for WM International:
Loss on sale of investment in Wessex...................... 47,103
Revaluation of investments in France, Austria, and Spain
in contemplation of exiting all or part of these
markets or forming joint ventures and write-off of a
hazardous waste disposal facility in Germany with
volumes adversely affected by regulatory changes....... 169,561
----------
Total............................................. $ 529,768
==========
41
43
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
- ----------------------------
Asset impairments:
Landfills, related primarily to management decisions to
abandon expansion projects due to political or
competitive factors, which will result in closure
earlier than previously expected....................... $ 48,200
Hazardous waste facility costs, resulting from continuing
market deterioration, increased competition, excess
capacity and changing regulations...................... 2,200
Other, primarily abandoned computer system project
costs.................................................. 1,900
Surplus real estate....................................... 1,500
Provisions for losses on contractual commitments............ 1,313
Corporate and regional restructuring........................ 3,420
CWM restructuring, primarily related to a write-off of
abandoned facilities and technologies that did not meet
customer service or performance objectives and related
payments for non-cancelable leases, guaranteed bank
obligations of a joint venture, and employee severance.... 140,996
Special charge for WM International, consisting primarily of
disposition of non-core businesses and investments,
abandonment of certain hazardous waste treatment
technologies and related management reorganizations....... 194,563
----------
Total............................................. $ 394,092
==========
15. EARNINGS PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 specifies
the computation, presentation, and disclosure requirements of earnings per share
and supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which is based on the weighted average number
of common shares outstanding, replaces primary earnings per share. Diluted
earnings per share, which is based on the weighted average number of common and
dilutive potential common shares outstanding, replaces fully diluted earnings
per share and utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market price per share
when applying the treasury stock method in determining dilutive potential
shares. SFAS No. 128 is effective for the Company in 1997 and requires all
prior-period earnings per share data to be restated to conform to its
presentation. Accordingly, the Company has restated all previously reported
earnings per share amounts.
Diluted earnings per common share for the year ended December 31, 1995, has
been calculated assuming conversion of certain of the Company's convertible
subordinated notes and debentures, and therefore interest (net of taxes) of
$9,098,000 has been added back to net income for this calculation.
42
44
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reconciles the number of common shares outstanding to the
weighted average number of common shares outstanding and the weighted average
number of common and dilutive potential common shares outstanding for the
purposes of calculating basic and dilutive earnings per common share,
respectively (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
Number of common shares outstanding..................... 547,685 532,096 514,922
Effect of using weighted average common shares
outstanding........................................... (1,701) (3,478) (19,700)
------- ------- -------
Weighted average number of common shares outstanding.... 545,984 528,618 495,222
Dilutive effect of common stock options and warrants.... -- 9,309 7,671
Dilutive effect of convertible subordinated notes and
debentures............................................ -- -- 10,408
------- ------- -------
Weighted average number of common and dilutive potential
common shares outstanding............................. 545,984 537,927 513,301
======= ======= =======
At December 31, 1997, there were approximately 68 million common shares
potentially issuable with respect to stock options, restricted shares, and
convertible debt, which could dilute basic earnings per share in the future.
16. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and presentation of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The components of accumulated other comprehensive income are as follows
for the periods indicated (in thousands):
FOREIGN MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME
----------- ---------- -------------
Balance, December 31, 1995....................... $(117,720) $(11,692) $(129,412)
Current-period change.......................... 22,664 (7,193) 15,471
--------- -------- ---------
Balance, December 31, 1996....................... (95,056) (18,885) (113,941)
Current-period change.......................... (180,744) 11,492 (169,252)
--------- -------- ---------
Balance, December 31, 1997....................... $(275,800) $ (7,393) $(283,193)
========= ======== =========
17. COMMITMENTS AND CONTINGENCIES
Operating leases -- The Company leases many of its operating and office
facilities for various terms. Lease expense aggregated $189,176,000,
$185,760,000 and $186,254,000 during 1997, 1996 and 1995, respectively. These
amounts include rents under long-term leases, short-term cancelable leases and
rents charged as a percentage of revenue, but are exclusive of financing leases
capitalized for accounting purposes.
43
45
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The long-term rental obligations as of December 31, 1997, are due as
follows (in thousands):
First year.................................................. $ 151,390
Second year................................................. 138,858
Third year.................................................. 129,023
Fourth year................................................. 117,178
Fifth year.................................................. 105,790
Sixth through tenth years................................... 455,125
Eleventh year and thereafter................................ 130,389
----------
$1,227,753
==========
Financial instruments -- Letters of credit, performance bonds and other
guarantees have been provided by the Company supporting tax-exempt bonds,
performance of landfill closure and post-closure requirements, insurance
contracts, and other contracts. Total letters of credit, performance bonds and
other guarantees outstanding at December 31, 1997, aggregated approximately
$2.96 billion. A substantial portion of these performance bonds are issued by a
wholly-owned insurance company subsidiary, the sole business of which is to
issue such bonds to customers of the Company and its subsidiaries. Approximately
$277,700,000 (at fair market value) of Company assets have been contributed to
this subsidiary to meet regulatory minimum capital requirements. Because
virtually no claims have been made against these financial instruments in the
past, management does not expect these instruments will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk, such as bank letters of credit,
performance bonds and other guarantees, which are not reflected in the
accompanying supplemental consolidated balance sheets. Such financial
instruments are to be valued based on the amount of exposure under the
instrument and the likelihood of performance being required. In the Company's
experience, virtually no claims have been made against those financial
instruments. Management does not expect any material losses to result from these
off-balance-sheet instruments.
Environmental matters -- The Company is subject to extensive and evolving
federal, state, and local environmental laws and regulations in the United
States and elsewhere that have been enacted in response to technological
advances and the public's increased concern over environmental issues. As a
result of changing governmental attitudes in this area, management anticipates
that the Company will continually modify or replace facilities and alter methods
of operation. The majority of the expenditures necessary to comply with the
environmental laws and regulations are made in the normal course of business.
Although the Company, to the best of its knowledge, is in compliance in all
material respects with the laws and regulations affecting its operations, there
is no assurance that the Company will not have to expend substantial amounts for
compliance in the future.
Litigation -- The Company has been advised by the U.S. Department of
Justice that United is a target of a federal investigation relating to alleged
violations of the Clean Water Act at the Laurel Ridge Landfill in Kentucky. The
investigation relates to a period prior to the Company's acquisition of United.
The Company is not a target of the investigation and has pledged its full
cooperation to the government.
A Company subsidiary has been involved in litigation challenging a
municipal zoning ordinance which restricted the height of its New Milford,
Connecticut, landfill to a level below that allowed by the permit previously
issued by the Connecticut Department of Environmental Protection ("DEP").
Although a lower Court had declared the zoning ordinance's height limitation
unconstitutional, during 1995 the Connecticut Supreme Court reversed this ruling
and remanded the case for further proceedings in the Superior Court. In November
1995, the Superior Court ordered the subsidiary to apply for all governmental
permits needed to remove all waste above the height allowed by the zoning
ordinance, and the Connecticut Supreme Court has
44
46
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
upheld that ruling. On September 22, 1998, the Superior Court modified its
November 1995 order by approving a settlement agreement whereby the subsidiary
will pay periodic cash installments to New Milford in lieu of removal of the
waste above the allowable height. Such settlement will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows in one or more future periods.
In May 1994, the U.S. Supreme Court ruled that state and local governments
may not constitutionally restrict the free movement of trash in interstate
commerce through the use of regulatory flow control laws. Such laws typically
involve a local government specifying a jurisdictional disposal site for all
solid waste generated within its borders. Since the ruling, several decisions of
state or federal courts have invalidated regulatory flow control schemes in a
number of jurisdictions. Other judicial decisions have upheld non-regulatory
means by which municipalities may effectively control the flow of municipal
solid waste. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can be
no assurance that such alternatives to regulatory flow control will in every
case be found to be lawful or that such legislation will be enacted into law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse affect on the Company. In the event that legislation
to effectively grandfather existing flow control mandates is not adopted, the
Company believes that affected municipalities will endeavor to implement
alternative lawful means to continue controlling the flow of waste. However,
given the uncertainty surrounding the matter, it is not possible to predict what
impact, if any, it may have in the future on the Company's disposal facilities,
particularly WTI's trash-to-energy facilities.
WTI's Gloucester County, New Jersey, facility had historically relied on a
disposal franchise for substantially all of its supply of municipal solid waste.
On May 1, 1997, the Third Circuit Court of Appeals ("Third Circuit") permanently
enjoined the State of New Jersey from enforcing its franchise system as a form
of unconstitutional solid waste flow control, but stayed the injunction for so
long as any appeals were pending. On November 10, 1997, the U.S. Supreme Court
announced its decision not to review the Third Circuit decision, thereby ending
the stay and, arguably, the facility's disposal franchise. In response to these
developments, the facility lowered its prices and, following a new procurement,
was selected by Gloucester County on July 30, 1998, to negotiate a new ten year
solid waste disposal contract. In addition, on June 30, 1998, WTI obtained from
the project's credit support bank a one year extension of the letter of credit
securing the project debt.
The New Jersey legislature has been considering various alternative
solutions, including a bill that provides for the payment and recovery of bonded
indebtedness incurred by counties, public authorities and certain qualified
private vendors in reliance on the State's franchise system. WTI currently
believes that, through either legislative action or the planned project
recapitalization following the Gloucester solid waste negotiations, the
Gloucester project can be restructured to operate, in the absence of its
historic franchise, flow control, at a level of profitability which will not
result in a material adverse impact on consolidated results.
Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by WTI will be required to be
modified to comply with more stringent air pollution control standards adopted
by the United States Environmental Protection Agency in December 1995 for
municipal waste combusters. The compliance dates will vary by facility, but all
affected facilities will be required to be in compliance with the new rules by
the end of the year 2000. Currently available technologies will be adequate to
meet the new standards. The total capital expenditures required for such
modifications are estimated to be in the $180-$220 million range. The impacted
facilities long-term waste supply agreements generally require that customers
pay, based on tonnage delivered, their proportionate share of incremental
capital, financing, and operating costs resulting from changes in environmental
regulations. Customer shares of capital and financing costs are typically
recovered over the remaining life of the waste supply agreements. Pro rata
operating costs are recovered in the period incurred. The Company currently
expects to recover approximately two-thirds of the incremental expenditures
incurred to comply with these stricter air emission standards.
45
47
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Several purported class action lawsuits and one purported derivative
lawsuit seeking injunctive relief and unspecified money damages were filed in
the Chancery Court in and for New Castle County, Delaware against the Company,
WTI, and individual directors of WTI in connection with the June 20, 1997,
proposal by WM Holdings to acquire all of the shares of WTI common stock which
WM Holdings did not own. WM Holding's subsequently consummated a merger in which
WTI's stockholders received $16.50 in cash per share of WTI's common stock. The
lawsuits, which have since been consolidated into a single action, allege, among
other things, that the defendants breached fiduciary duties to WTI's minority
stockholders because the merger consideration contemplated by the proposal was
inadequate and unfair. The Company believes that the defendants' actions in
connection with the proposal were in accordance with Delaware law. Accordingly,
the Company intends to contest these lawsuits vigorously.
In November and December 1997, several alleged purchasers of WM Holdings
securities (including but not limited to WM Holdings common stock), who
allegedly bought their securities between 1996 and 1997, brought 14 purported
class action lawsuits against WM Holdings and several of its former officers in
the United States District Court for the Northern District of Illinois. Each of
these lawsuits asserted that the defendants violated the federal securities laws
by issuing allegedly false and misleading statements in 1996 and 1997 about WM
Holdings' financial condition and results of operations. Among other things, the
plaintiffs alleged that WM Holdings employed accounting practices that were
improper and that caused its publicly filed financial statements to be
materially false and misleading. The lawsuits demanded, among other relief,
unspecified compensatory damages, pre- and post-judgement interest, attorneys'
fees, and the costs of conducting the litigation. In January 1998, the 14
putative class actions were consolidated before one judge. On May 29, 1998, the
plaintiffs filed a consolidated amended complaint against WM Holdings and four
of its former officers. The consolidated amended complaint seeks recovery on
behalf of a proposed class of all purchasers of WM Holdings securities between
May 29, 1995, and October 30, 1997. The consolidated amended complaint alleges,
among other things, that WM Holdings filed false and misleading financial
statements beginning in 1991 and continuing through October 1997 and seeks
recovery for alleged violations of the federal securities laws between May 1995
and October 1997. Like the individual complaints that preceded it, the
consolidated amended complaint seeks unspecified compensatory damages, pre- and
post-judgement interest, attorneys' fees, and the costs of conducting the
litigation. It is not possible at this time to predict the impact this
litigation may have on WM Holdings or the Company, although it is reasonably
possible that the outcome may have a material adverse impact on their respective
financial condition or results of operations in one or more future periods. WM
Holdings intends to defend itself vigorously in the litigation. WM Holdings is
aware of another action arising out of the same set of facts alleging a cause of
action under Illinois state law and several other actions arising out of the
same set of facts, including one purported class action by business owners who
received WM Holdings shares in the sales of their businesses to WM Holdings
alleging breach of contract causes of action on the basis of allegedly false
representation and warranties. A purported derivative action has also been filed
by an alleged former shareholder of WM Holdings against certain former officers
and directors of WM Holdings and nominally against WM Holdings to recover
damages caused to WM Holdings as a result of the matter described in this
paragraph.
The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the WM Holdings previously
filed financial statements (which were subsequently restated) and related
accounting policies, procedures and system of internal controls. The Company
intends to cooperate with such investigation. The Company is unable to predict
the outcome or impact of this investigation at this time.
On March 12, 1998, a stockholder of WM Holdings filed a purported class
action suit in the Chancery Court of the State of Delaware in the New Castle
County against WM Holdings and certain of its former directors. The complaint
alleges, among other things, that (i) the Merger was the product of unfair
dealing and the price paid to members of the purported class for their WM
Holdings common stock was unfair and inadequate, (ii) the Merger will prevent
members of the purported class from receiving their fair portion of
46
48
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the value of WM Holdings' assets and business and from obtaining the real value
of their equity ownership of WM Holdings, (iii) defendants breached their
fiduciary duties owed to the members of the purported class by putting their
personal interests ahead of the interests of WM Holdings' public stockholders
and (iv) the members of the class action will suffer irreparable damage unless
the defendants are enjoined from breaching their fiduciary duties. The complaint
seeks equitable relief that would rescind the Merger and monetary damages from
the defendants for unlawfully gained profits and special benefits. WM Holdings
believes the suit to be without merit and intends to contest it vigorously.
In June 1998, an alleged holder of American Depository Receipts
representing ordinary shares of WM International ("ADRs") filed a putative class
action complaint in the Circuit Court of Cook County, Illinois, naming WM
Holdings, the Company and several directors of the Company as defendants. The
complaint seeks to enjoin the completion of a proposed transaction whereby the
Company will indirectly acquire all WM International ordinary shares not held by
Company subsidiaries or, in the alternative, rescission or compensatory damages
in the event the transaction is completed. Among other things, the complaint
asserts that the completion of the transaction will constitute a breach of
defendants' fiduciary duties to the holders of ADRs and if the transaction is
completed, the holders of ADRs will be denied a proper premium for their ADRs.
The Company intends to contest this litigation vigorously.
In July 1998, a putative class of alleged holders of WM International
ordinary shares filed a complaint in the Circuit Court of Cook County, Illinois,
naming Donald F. Flynn and WM Holdings as defendants. The complaint seeks to
enjoin the completion of the above-described WM International transaction or, in
the alternative, rescission or compensatory damages in the event the transaction
is completed. Among other things, the complaint asserts that the completion of
the transaction will constitute a breach of defendants' fiduciary duties to the
shareholders of WM International (Mr. Flynn is a director of WM International,
and WM Holdings is its controlling shareholder) and that, if the transaction is
completed, the shareholders of WM International will be denied a proper premium
for their ordinary shares. The Company intends to contest this litigation
vigorously.
The Company and certain of its subsidiaries are parties to various other
litigation matters arising in the ordinary course of business. Management
believes that the ultimate resolution of these matters will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows. In the normal course of its business and as a result of the
extensive government regulation of the solid waste industry, the Company
periodically may become subject to various judicial and administrative
proceedings and investigations involving federal, state, or local agencies. To
date, the Company has not been required to pay any material fine or judgement
for violation of an environmental law. From time to time, the Company also may
be subjected to actions brought by citizen's groups in connection with the
permitting of landfills or transfer stations, or alleging violations of the
permits pursuant to which the Company operates. The Company is also subject from
time to time to claims for personal injury or property damage arising out of
accidents involving its vehicles.
Insurance
Waste Management
The Company carries a broad range of insurance coverages, which management
considers prudent for the protection of the Company's assets and operations.
Some of these coverages are subject to varying retentions of risk by the
Company. The casualty policies provide for $2,000,000 per claim coverage for
primary commercial general liability and $1,000,000 per claim coverage for
primary automobile liability supported by $200,000,000 in umbrella insurance
protection. The property policy provides insurance coverage for all of the
Company's real and personal property, including California earthquake perils.
The Company also carries $200,000,000 in aircraft liability protection.
47
49
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains workers' compensation insurance in accordance with
laws of the various states and countries in which it has employees. The Company
also currently has an environmental impairment liability ("EIL") insurance
policy for certain of its landfills, transfer stations, and recycling facilities
that provides coverage for property damages and/or bodily injuries to third
parties caused by off-site pollution emanating from such landfills, transfer
stations, or recycling facilities. At December 31, 1997, this policy provides
$5,000,000 of coverage per loss with a $10,000,000 aggregate limit. Upon
consummation of the Merger (see Note 20), this policy was amended to provide
$10,000,000 of coverage per loss with a $20,000,000 aggregate limit.
WM Holdings
WM Holdings self-insures for auto, general liability and workers'
compensation claims up to $5,000,000 per claim. For such programs, a provision
is made in each accounting period for estimated losses, including losses
incurred but not reported, and the related reserves are adjusted as additional
claim information becomes available. Claim reserves are discounted at 6% and 7%
at December 31, 1997 and 1996, respectively, based on historical payment
patterns. The self-insurance reserve included in the accompanying supplemental
consolidated balance sheet is $226,700,000, and $188,000,000 at December 31,
1997 and 1996, respectively.
In the fourth quarter of 1997, WM Holdings modified its self-insurance
reserve determination technique. The revised loss projection process improves
the estimation of future growth in claims. This change in estimate resulted in a
$56,000,000 pre-tax charge to operations.
To date, the Company has not experienced any difficulty in obtaining
insurance. However, if the Company in the future is unable to obtain adequate
insurance, or decides to operate without insurance, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows. Additionally, continued availability of
casualty and EIL insurance with sufficient limits at acceptable terms is an
important aspect of obtaining revenue-producing waste service contracts.
Tax assessments
During the first quarter of 1995, WM International received an assessment
from the Swedish Tax Authority of approximately 417,000,000 Krona (approximately
$53,000,000) plus interest from the date of the assessment, relating to a
transaction completed in 1990. WM International believes that all appropriate
tax returns and disclosures were properly filed at the time of the transaction
and intends to vigorously contest the assessment.
18. DISCONTINUED OPERATIONS
In the fourth quarter of 1995, the Company approved a plan to sell or
otherwise discontinue Rust's process engineering, construction, specialty
contracting and similar lines of business. During the second quarter of 1996,
the sale of the industrial process engineering and construction businesses,
based in Birmingham, Alabama, was completed.
During the fourth quarter of 1996, WTI sold its water process systems and
equipment manufacturing businesses. WTI had also entered into an agreement to
sell its water and wastewater facility operations and privatization business,
which was sold in 1997. As of September 30, 1996, Rust sold its industrial
scaffolding business and began implementing plans to exit its remaining
international engineering and consulting business. The Company recorded a
fourth-quarter provision for loss of $360,000,000 before tax and minority
interest in connection with the planned divestiture of these businesses, and
others subsequently reclassified to continuing operations (see discussion
below).
The discontinued businesses have been segregated and the accompanying
supplemental consolidated balance sheets, statements of income and related
footnote information have been restated. Revenues from the
48
50
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued businesses were $84,800,000 in 1997, $734,500,000 for 1996 and
$1,511,000,000 in 1995. The decreases in revenue during the periods primarily
reflect the sales of certain of the discontinued businesses. Results of their
operations in 1997 were not material and were included in the reserve for loss
on disposition provided previously.
The Company had no operations classified as discontinued as of December 31,
1997. The following table summarizes the assets and liabilities as of December
31, 1996, which are presented on the supplemental consolidated balance sheet as
net assets of discontinued operations (in thousands):
DECEMBER 31,
1996
------------
Current assets.............................................. $ 74,700
Property and equipment and other noncurrent assets.......... 173,800
Current liabilities......................................... (47,500)
Noncurrent liabilities...................................... (258,874)
---------
Net liabilities of discontinued operations.................. $ (57,874)
=========
At December 31, 1996, management also classified as discontinued and
planned to sell Rust's domestic environmental and infrastructure engineering and
consulting business and CWM's high organic waste fuel blending services
business. In 1997, management reclassified the CWM business back into continuing
operations, and classified certain of its sites as operations held for sale. The
Rust disposition was not completed within one year, and accordingly this
business has been reclassified back into continuing operations, as operations
held for sale, at December 31, 1997, in accordance with generally accepted
accounting principles, although management is continuing its efforts to market
its investment in this business. As these businesses were reclassified to
continuing operations, the remaining provision for loss on disposal ($95,000,000
after tax -- $87,000,000 related to Rust and $8,000,000 related to CWM) was
reversed in discontinued operations and an impairment loss for Rust of
$122,200,000 was recorded in continuing operations. Prior year financial
statements have been restated. Information regarding the businesses reclassified
as continuing operations held for sale is as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Results of Operations:
Revenue............................................ $350,400 $361,500 $368,200
Income (loss) before tax after minority interest... (9,930) 315 25,110
Net income (loss).................................. (6,700) 100 13,900
DECEMBER 31,
--------------------
1997 1996
-------- --------
Condensed Balance Sheet:
Current assets............................................ $118,600 $147,500
Property and equipment and other noncurrent assets........ 164,700 162,000
Current liabilities....................................... (41,000) (44,200)
Noncurrent liabilities.................................... (161,216) (37,949)
-------- --------
Net assets................................................ $ 81,084 $227,351
======== ========
The net assets are included in Net Assets of Continuing Businesses Held for
Sale in the accompanying supplemental balance sheet. At December 31, 1997, this
caption also includes $73,300,000 of surplus real estate which the Company is
actively marketing.
49
51
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The following table summarizes the unaudited consolidated quarterly results
of operations for 1997 and 1996 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- -----------
1997
Operating revenues.......................... $2,665,469 $2,989,533 $3,112,939 $ 3,034,409
Operating income............................ 338,241 469,464 282,305 (1,333,318)
Income (loss) from continuing operations.... 172,294 135,707 55,196 (1,393,174)
Net income (loss)........................... 172,941 143,268 49,107 (1,308,350)
Earnings (loss) from continuing operations
per common share:
Basic..................................... 0.32 0.25 0.10 (2.56)
Diluted................................... 0.31 0.25 0.10 (2.56)
Earnings (loss) per common share:
Basic..................................... 0.32 0.26 0.09 (2.40)
Diluted................................... 0.31 0.26 0.09 (2.40)
1996
Operating revenues.......................... $2,496,584 $2,740,994 $2,815,547 $ 2,821,642
Operating income............................ 412,591 396,772 360,368 29,555
Income (loss) from continuing operations.... 166,781 118,859 127,643 (121,830)
Net income (loss)........................... 171,628 139,371 54,792 (337,639)
Earnings (loss) from continuing operations
per common share:
Basic..................................... 0.32 0.22 0.24 (0.23)
Diluted................................... 0.31 0.22 0.24 (0.23)
Earnings (loss) per common share:
Basic..................................... 0.33 0.26 0.10 (0.64)
Diluted................................... 0.32 0.26 0.10 (0.64)
Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts.
Amounts presented for 1997 and 1996 are restated for certain pooling of
interests transactions as discussed in Note 3, and are different from amounts
originally reported. The results of operations for 1997 and 1996 include certain
pre-tax charges for merger costs, asset impairments and unusual items, as
disclosed elsewhere herein. Such items charged to expense in the first, second,
third and fourth quarters of 1997 were $25,804,000, $52,922,000, $156,632,000
and $1,645,198,000, respectively. In 1996, such charges were $118,000,
$82,832,000, $149,946,000, and $423,498,000 in the first, second, third, and
fourth quarters, respectively.
20. SUBSEQUENT EVENTS
The Merger
On July 16, 1998, the Company consummated the Merger with WM Holdings
accounted for as a pooling of interests and, accordingly, the accompanying
supplemental financial statements have been restated to include the accounts and
operations of WM Holdings for all periods presented. Under the terms of the
50
52
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merger, the Company issued 0.725 of a share of its common stock for each share
of WM Holdings outstanding common stock. The Merger increased the Company's
outstanding shares of common stock by approximately 354,000,000 shares and the
Company assumed WM Holdings' stock options equivalent to approximately
16,000,000 underlying shares of the Company's common stock. Any unvested WM
Holdings options outstanding at December 31, 1997, vested upon consummation of
the Merger due to change in the related plan of control provisions. In
connection with this transaction, the Company expects to incur merger and other
related costs in the third quarter of 1998. The amount, which has yet to be
determined, is expected to include significant cash charges and is anticipated
to be material to the financial position, results of operations and cash flows.
The supplemental consolidated balance sheets at December 31, 1997 and 1996
reflect the combining of (i) the Company prior to consummation of the Merger
("Waste Management") and (ii) WM Holdings as of those dates. Combined and
separate results of operations for the three years ended December 31, 1997, and
the three months ended March 31, 1998, of Waste Management and WM Holdings for
the restated periods are as follows (in thousands):
WASTE
MANAGEMENT WM HOLDINGS ADJUSTMENTS COMBINED
---------- ----------- ----------- -----------
Three months ended March 31, 1998
(unaudited):
Operating revenues.................. $ 769,440 $ 2,131,621 $ -- $ 2,901,061
Income before income taxes.......... 201,604 170,968 (31,485)a,b,c 341,087
Net income.......................... 120,962 74,417 (16,107)a,b,c 179,272
Year ended December 31, 1997:
Operating revenues.................. $2,613,768 $ 9,188,582 $ -- $11,802,350
Income (loss) from continuing
operations before income taxes... 463,267 (1,053,673) (78,107)a,b,c (668,513)
Net income (loss)................... 267,030 (1,176,104) (33,960)a,b,c (943,034)
Year ended December 31, 1996:
Operating revenues.................. $1,649,131 $ 9,225,636 $ -- $10,874,767
Income from continuing operations
before income taxes.............. 138,737 660,467 (21,135)c 778,069
Net income (loss)................... 68,339 (39,307) (880)c 28,152
Year ended December 31, 1995:
Operating revenues.................. $1,216,082 $ 9,100,225 $ -- $10,316,307
Income from continuing operations
before income taxes.............. 141,089 871,647 (22,924)c 989,812
Net income.......................... 80,776 340,097 80,917c,d 501,790
- ---------------
a) In June 1997, WM Holdings sold a majority of its Canadian solid waste
businesses to the Company, and as a result, recorded a pre-tax gain of
approximately $61.3 million. An adjustment has been made to reverse this
amount and to account for the transaction as if the companies had been
combined since inception.
b) In November 1997, the Company purchased a 49% limited partner interest in an
entity formed for the purpose of acquiring shares of WM Holdings. The limited
partnership purchased shares of WM Holdings common stock during November 1997
and sold substantially all of such shares in March 1998. For the three months
ended March 31, 1998, the Company recorded other income of $28.1 million for
its equity in the earnings of the limited partnership. Adjustments have been
made to reverse this amount and to account for the transaction as if the
companies had been combined since inception.
c) Adjustments have been made to conform the accounting for certain landfill
related issues.
d) An adjustment has been made to conform the method of capitalizing interest to
the Company's method. On January 1, 1995, WM Holdings changed its method of
interest capitalization and recorded an after-tax
51
53
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cumulative effect of a change in accounting principle (to reduce income) of
approximately $84.7 million. The adjustment reverses this amount. Conforming
entries to adjust the amount of interest capitalized by WM Holdings during
1995, 1996 and 1997 were not made as these amounts would be immaterial.
The combined results of Waste Management and WM Holdings for the six months
ended June 30, 1998, are as follows (in thousands):
Operating revenues.......................................... $6,076,238
Income from continuing operations before taxes.............. 760,879
Net income.................................................. 415,824
Upon the consummation of the Merger, certain long-term debt of WM
International may be accelerated and become payable with three months notice. At
December 31, 1997, this debt totaled approximately $209,000,000, however, by
September 22, 1998, it had been reduced to approximately $93,000,000.
Business Combinations
On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holdings Trust ("City Management") for approximately $810,000,000
consisting primarily of cash and a limited amount of debt assumed. The
businesses acquired include 20 collection operations, ten landfills, and 12
transfer stations primarily in the state of Michigan. This acquisition was
accounted for under the purchase method of accounting.
On March 31, 1998, the Company acquired the remaining outstanding shares of
WTI, which it did not already own for $16.50 per share, or $876,200,000. This
obligation was financed with bank debt. This transaction accounted for as a
purchase, resulted in an additional $508,100,000 of goodwill being recorded
during the first quarter of 1998. During the remainder of 1998, the Company
anticipates it will complete the allocation of purchase price to the various
assets of WTI and will adjust goodwill accordingly.
On June 18, 1998, the Company acquired American Waste Systems, Inc.'s solid
waste businesses for approximately $150,000,000 in cash. The businesses acquired
include three landfills and one collection operation located in Ohio.
The unaudited pro forma information set forth below assumes the purchase
acquisitions in 1996 and 1997 that were discussed in Note 3, the above discussed
purchase acquisitions and numerous other purchase acquisitions that have
occurred through August 31, 1998, had occurred at the beginning of 1996. The pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Operating revenues......................................... $12,953,800 $13,012,454
Income (loss) from continuing operations................... (962,923) 402,365
Net income (loss).......................................... (876,079) 139,064
Basic earnings (loss) per common share:
Income (loss) from continuing operations................. (1.75) 0.75
Net income (loss)........................................ (1.59) 0.26
Diluted earnings (loss) per common share:
Income (loss) from continuing operations................. (1.75) 0.73
Net income (loss)........................................ (1.59) 0.25
52
54
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 6, 1998, the Company consummated a merger with TransAmerican Waste
Industries, Inc. ("TransAmerican") accounted for using the pooling of interests
method of accounting, pursuant to which the Company issued approximately
1,975,000 shares of its common stock for all outstanding shares of
TransAmerican. Periods reported prior to the consummation of this transaction
were not restated to include the accounts and operations of TransAmerican as the
combined results would not be materially different from the results as
previously reported. The businesses acquired include five collection operations,
nine landfills, and two transfer stations located throughout the southern United
States.
On June 29, 1998, WM Holdings announced that it had reached an agreement to
acquire the publicly owned shares of its subsidiary, WM International. Under the
agreement, holders of the approximately 20% of outstanding shares of WM
International not currently owned by the Company will receive 345 pence in cash
for each share held. The agreement values each WM International ADR, each
representing two WM International ordinary shares, at approximately $11.50 based
on the exchange rate at the time of the announcement. As the agreement is priced
in pounds sterling, the U.S. dollar value of the agreement will fluctuate with
the pound-dollar exchange rate. Closing of the transaction is subject to
approval by the WM International minority shareholders, approval of the English
High Court and satisfaction of other customary items, however, is expected to
occur in the fourth quarter of 1998.
On August 16, 1998, the Company entered into an agreement and plan of
merger to acquire Eastern Environmental Services, Inc. ("Eastern") through a
merger transaction ("Eastern Merger"). The agreement provides that on the
effective date of the Eastern Merger, the Company will issue 0.6406 of a share
of its common stock for each share of Eastern common stock. It is currently
estimated that the Company will issue approximately 23,200,000 shares pursuant
to the Eastern Merger, however, the actual number of shares to be issued will
not be determined until immediately prior to consummation. The Eastern Merger is
subject to, among other conditions, antitrust clearance and approval of
Eastern's stockholders, however it is anticipated that the Eastern Merger will
be completed in the fourth quarter of 1998 and that it will be accounted for as
a pooling of interests. The operating revenues of Eastern were approximately
$132,753,000 for the six months ended June 30, 1998.
On September 7, 1998, the Company agreed to acquire the 49% interest of WM
International's United Kingdom operations that is currently owned by Wessex for
205 million pounds ($342 million). The transaction is subject to Enron Corp.'s
pending offer to acquire Wessex and the Company's plan to acquire the 20% of
outstanding shares of WM International not currently owned by the Company.
Financing Transactions
In connection with the purchase of the remaining publicly held WTI shares,
WM Holdings entered into a commitment with Chase Manhattan Bank ("Chase")
whereby Chase, along with other financial institutions, has committed, subject
to the satisfaction of certain conditions, to provide new credit facilities in
the amount of $1,100,000,000. The new credit facilities, which will have a
termination date of December 31, 1998, provided the funding needed to complete
the WTI transaction and replaced WM Holdings $250,000,000 revolving credit
facility that existed prior to the Merger which was subsequently cancelled.
Additionally, the termination date of WM Holdings' $550,000,000 standby trade
receivables sale agreement was extended from June 30, 1998, to December 31,
1998.
On July 17, 1998, the Company issued $600,000,000 of 7% senior notes, due
on July 15, 2028 (the "7% Notes") and $600,000,000 of 6 1/8% mandatorily
tendered senior notes, due on July 15, 2011 (the "6 1/8% Notes"). The 7% Notes
are redeemable, in whole or in part, at the option of the Company at any time
and from time to time at the redemption price, as defined. The 6 1/8% Notes are
subject to certain mandatory tender features as described in the indenture. The
proceeds from the 7% Notes and 6 1/8% Notes were used to repay outstanding
indebtedness under the Company's senior revolving credit facility. Interest on
the 7% Notes and 6 1/8% Notes is payable semi-annually on January 15 and July
15.
53
55
WASTE MANAGEMENT, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon consummation of the Merger, the Company entered into a syndicated loan
facility in the amount of $3,000,000,000, which was an addition to the Company's
existing $2,000,000,000 senior revolving credit facility. The syndicated loan
facility is renewable annually and provides for a one-year term option at the
Company's request. The facility is available for borrowings and up to
$800,000,000 of standby letters of credit and to support the issuance of
commercial paper. The applicable interest rate, facility fee and covenant
restrictions for the syndicated loan facility are similar to those contained in
the Company's existing revolving credit facility which was amended to provide
for the Merger. Additionally, upon consummation of the Merger, the Company
retired the outstanding indebtedness under the WM Holdings' revolving line of
credit and cancelled the Chase credit facilities discussed above.
As a condition to completing the Merger, during June 1998, WM Holdings sold
20,000,000 shares of its common stock (equivalent to 14,500,000 shares of the
Company's common stock) in an offering to the public. The proceeds of
approximately $614,000,000 from this public offering were used by WM Holdings to
retire outstanding debt under its Chase credit facilities.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
Accounting for the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires
all costs of start-up activities to be expensed as incurred. Start-up activities
are defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer or beneficiary, initiating a
new process in an existing facility, or commencing some new operation.
Activities related to mergers or acquisitions are not considered start-up
activities, and therefore SOP 98-5 does not change the accounting for such
items. SOP 98-5 is effective for financial statements for years beginning after
December 15, 1998. Management is currently assessing the impact that the
adoption of SOP 98-5 will have on the Company's financial position, results of
operations and cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and derivatives used for hedging purposes. SFAS No. 133 requires that
entities recognize all derivative financial instruments as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management is currently assessing the impact that
the adoption of SFAS No. 133 will have on the Company's financial statements.
54
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WASTE MANAGEMENT, INC.
By: /s/ EARL E. DEFRATES
----------------------------------
Earl E. DeFrates,
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
By: /s/ BRUCE E. SNYDER
----------------------------------
Bruce E. Snyder,
Vice President and Chief
Accounting Officer (Principal
Accounting Officer)
Date: September 23, 1998
55
57
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
------- -------
23.1 -- Consent of Independent Public Accountants
23.2 -- Consent of Independent Accountants
27 -- Restated Financial Data Schedule
27.1 -- Restated Financial Data Schedule
27.2 -- Restated Financial Data Schedule
27.3 -- Restated Financial Data Schedule
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report on the supplemental consolidated financial statements of Waste
Management, Inc. and Subsidiaries dated September 23, 1998 included in Waste
Management, Inc.'s report on Form 8-K dated September 23, 1998 and incorporation
by reference into Waste Management, Inc.'s previously filed Registration
Statements on Form S-3 (File Nos. 333-00097, 333-08573, 333-32471, 333-33889 and
333-52197), on Form S-4 (File Nos. 333-31979, 333-32805 and 333-49253), and on
Form S-8 (File Nos. 33-43619, 33-72436, 33-84988, 33-84990, 33-59807, 33-61621,
33-61625, 33-61627, 333-02181, 333-08161, 333-14115, 333-14613, 333-34819,
333-51975, 333-56113 and 333-59247).
Arthur Andersen LLP
Houston, Texas
September 23, 1998
1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Waste Management, Inc. on Form S-3 (File Nos. 333-00097, 333-08573,
333-32471, 333-33889, and 333-52197), on Form S-4 (File Nos. 333-31979,
333-32805, and 333-49253), and on Form S-8 (File Nos. 33-43619, 33-72436,
33-84988, 33-84990, 33-59807, 33-61621, 33-61625, 33-61627, 333-02181,
333-08161, 333-14115, 333-14613, 333-34819, 333-51975, 333-56113, and
333-59247), of our report dated March 16, 1998, on our audits of the
consolidated financial statements of USA Waste Services, Inc. as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which
report is included in this Current Report on Form 8-K.
PricewaterhouseCoopers LLP
Houston, Texas
September 23, 1998
5
6-MOS 3-MOS
DEC-31-1998 DEC-31-1998
JAN-01-1998 JAN-01-1998
JUN-30-1998 MAR-31-1998
268,305,000 358,121,000
1,462,000 3,053,000
2,175,742,000 2,016,848,000
(95,885,000) (99,432,000)
0 0
2,997,035,000 2,855,913,000
18,086,116,000 17,229,816,000
(5,958,193,000) (5,612,375,000)
22,018,962,000 21,267,362,000
4,380,973,000 5,007,450,000
9,286,271,000 8,983,019,000
0 0
0 0
5,913,000 5,875,000
4,990,772,000 4,024,375,000
22,018,962,000 21,267,362,000
6,076,238,000 2,901,061,000
6,076,238,000 2,901,061,000
3,623,266,000 1,757,707,000
5,074,738,000 2,457,162,000
(85,341,000) (51,130,000)
0 0
325,962,000 153,942,000
760,879,000 341,087,000
341,155,000 161,815,000
419,724,000 179,272,000
0 0
(3,900,000) 0
0 0
415,824,000 179,272,000
0.75 0.33
0.73 0.32
5
12-MOS 9-MOS 6-MOS 3-MOS
DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
184,052,000 195,763,000 504,896,000 591,351,000
59,296,000 69,362,000 80,910,000 631,006,000
2,042,522,000 2,017,050,000 1,994,747,000 1,921,095,000
(86,728,000) (75,930,000) (67,140,000) (56,463,000)
0 0 0 0
2,800,892,000 2,902,105,000 3,313,889,000 3,774,519,000
16,632,709,000 17,708,728,000 17,338,941,000 16,810,658,000
(5,528,269,000) (5,949,408,000) (5,760,895,000) (5,653,573,000)
19,962,481,000 21,138,333,000 21,288,676,000 21,202,930,000
4,761,055,000 3,552,493,000 3,933,863,000 4,127,965,000
7,803,000,000 8,846,183,000 8,790,887,000 7,836,185,000
0 0 0 0
0 0 0 0
5,855,000 5,837,000 5,763,000 5,680,000
3,799,405,000 5,269,816,000 5,159,179,000 5,865,043,000
19,962,481,000 21,138,333,000 21,288,676,000 21,202,930,000
11,802,350,000 8,767,941,000 5,655,002,000 2,665,469,000
11,802,350,000 8,767,941,000 5,655,002,000 2,665,469,000
7,359,572,000 5,451,712,000 3,501,928,000 1,693,856,000
12,045,658,000 7,677,931,000 4,847,297,000 2,327,228,000
(125,944,000) (74,468,000) (85,351,000) (126,431,000)
0 0 0 0
551,149,000 403,419,000 267,470,000 131,153,000
(668,513,000) 761,059,000 625,586,000 333,519,000
361,464,000 397,862,000 317,585,000 161,225,000
(1,029,977,000) 363,197,000 308,001,000 172,294,000
95,688,000 8,412,000 8,208,000 647,000
(6,809,000) (6,293,000) 0 0
(1,936,000) 0 0 0
(943,034,000) 365,316,000 316,209,000 172,941,000
(1.73) 0.67 0.58 0.32
(1.73) 0.66 0.57 0.31
5
12-MOS 9-MOS 6-MOS 3-MOS
DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
349,367,000 295,184,000 340,881,000 123,018,000
319,338,000 4,224,000 5,878,000 4,636,000
1,966,406,000 2,264,666,000 2,189,284,000 2,092,823,000
(70,349,000) (67,559,000) (64,357,000) (73,706,000)
0 0 0 0
3,226,152,000 3,327,376,000 3,302,564,000 2,948,052,000
16,474,160,000 15,758,708,000 15,626,721,000 15,287,272,000
(5,544,273,000) (4,819,345,000) (4,642,164,000) (4,441,577,000)
20,667,198,000 21,343,967,000 21,254,915,000 20,653,809,000
3,475,233,000 3,606,288,000 3,531,832,000 3,865,527,000
8,441,889,000 7,226,448,000 7,123,055,000 6,385,833,000
0 0 0 0
0 0 0 0
5,493,000 5,460,000 5,418,000 5,163,000
5,189,279,000 5,420,145,000 5,464,712,000 5,556,401,000
20,667,198,000 21,343,967,000 21,254,915,000 20,653,809,000
10,874,767,000 8,053,152,000 5,237,578,000 2,496,584,000
10,874,767,000 8,053,125,000 5,237,578,000 2,496,584,000
6,468,204,000 4,785,144,000 3,115,997,000 1,479,507,000
9,675,481,000 6,883,394,000 4,428,215,000 2,083,993,000
(101,794,000) (51,769,000) (780,000) (5,766,000)
0 0 0 0
522,921,000 381,874,000 250,093,000 123,358,000
778,069,000 803,626,000 560,050,000 294,999,000
486,616,000 390,343,000 274,410,000 128,218,000
291,453,000 413,283,000 285,640,000 166,781,000
(263,301,000) (47,492,000) 25,359,000 4,847,000
0 0 0 0
0 0 0 0
28,152,000 365,791,000 310,999,000 171,628,000
0.05 0.69 0.59 0.33
0.05 0.68 0.58 0.32
5
12-MOS
DEC-31-1995
JAN-01-1995
DEC-31-1995
197,321,000
12,156,000
1,853,607,000
(77,906,000)
0
2,605,881,000
15,010,156,000
(4,619,112,000)
19,878,889,000
3,626,825,000
7,238,547,000
0
0
5,046,000
5,167,386,000
19,878,889,000
10,316,307,000
10,316,307,000
6,176,196,000
9,010,805,000
217,784,000
0
533,474,000
989,812,000
492,885,000
496,927,000
4,863,000
0
0
501,790,000
1.01
1.00
