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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12154
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at November 9, 1998, was 574,368,632 (excluding 7,892,612 shares
held in the Waste Management, Inc. Employee Stock Benefit Trust).
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PART I.
ITEM 1. FINANCIAL STATEMENTS.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Current assets:
Cash and cash equivalents................................. $ 166,173 $ 184,052
Short-term investments.................................... 994 59,296
Accounts receivable, net.................................. 2,171,736 1,955,794
Notes and other receivables............................... 120,366 90,144
Parts and supplies........................................ 136,652 152,702
Deferred income taxes..................................... 325,000 52,592
Costs and estimated earnings in excess of billings on
uncompleted
contracts.............................................. 136,366 158,610
Prepaid expenses and other................................ 212,812 147,702
Net assets held for sale.................................. 746,600 --
----------- -----------
Total current assets.............................. 4,016,699 2,800,892
Notes and other receivables................................. 122,769 128,105
Property and equipment, net................................. 10,633,522 11,104,440
Excess of cost over net assets of acquired businesses,
net....................................................... 5,633,022 4,658,818
Other intangible assets, net................................ 146,324 118,653
Net assets of continuing businesses held for sale........... -- 154,384
Other assets................................................ 822,507 997,189
----------- -----------
Total assets...................................... $21,374,843 $19,962,481
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 901,918 $ 995,223
Accrued liabilities....................................... 2,365,710 1,881,085
Deferred revenues......................................... 336,817 296,996
Current maturities of long-term debt...................... 738,538 1,587,751
----------- -----------
Total current liabilities......................... 4,342,983 4,761,055
Long-term debt, less current maturities..................... 9,695,312 7,803,000
Deferred income taxes....................................... 480,148 517,612
Environmental liabilities................................... 1,143,024 1,030,755
Other liabilities........................................... 986,300 934,118
----------- -----------
Total liabilities................................. 16,647,767 15,046,540
----------- -----------
Minority interest in subsidiaries........................... 754,208 1,110,681
----------- -----------
Commitments and contingencies
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; 581,752,679 and 585,454,282 shares issued,
respectively........................................... 5,818 5,855
Additional paid-in capital................................ 3,697,033 3,828,475
Retained earnings......................................... 992,491 1,933,929
Accumulated other comprehensive income.................... (340,314) (283,193)
Restricted stock unearned compensation.................... -- (11,102)
Treasury stock at cost, 63,950 and 34,239,062 shares,
respectively........................................... (2,821) (1,369,329)
Employee stock benefit trust at market, 7,892,612
shares................................................. (379,339) (299,375)
----------- -----------
Total stockholders' equity........................ 3,972,868 3,805,260
----------- -----------
Total liabilities and stockholders' equity........ $21,374,843 $19,962,481
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Operating revenues......................... $ 3,160,306 $3,112,939 $ 9,236,544 $8,767,941
----------- ---------- ----------- ----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)............. 1,821,907 1,949,784 5,445,173 5,451,712
General and administrative............... 294,699 373,885 1,004,530 1,005,722
Depreciation and amortization............ 374,025 350,418 1,107,089 981,094
Merger costs............................. 1,561,915 104,152 1,573,062 109,411
Asset impairments and unusual items...... 666,952 52,480 666,952 125,947
(Income) loss from continuing operations
held for sale, net of minority
interest................................. 2,721 (85) 151 4,045
----------- ---------- ----------- ----------
4,722,219 2,830,634 9,796,957 7,677,931
----------- ---------- ----------- ----------
Income (loss) from operations.............. (1,561,913) 282,305 (560,413) 1,090,010
----------- ---------- ----------- ----------
Other income (expense):
Interest expense......................... (173,183) (135,949) (499,145) (403,419)
Interest and other income, net........... 19,054 18,540 142,561 158,909
Minority interest........................ 23,868 (29,423) (14,298) (84,441)
----------- ---------- ----------- ----------
(130,261) (146,832) (370,882) (328,951)
----------- ---------- ----------- ----------
Income (loss) from continuing operations
before income taxes...................... (1,692,174) 135,473 (931,295) 761,059
Provision for (benefit from) income
taxes.................................... (424,680) 80,277 (83,525) 397,862
----------- ---------- ----------- ----------
Income (loss) from continuing operations... (1,267,494) 55,196 (847,770) 363,197
Discontinued operations:
Income on disposal or from reserve
adjustment, net of applicable income
taxes and minority interest of $320
and $81,753 for the three and nine
months ended September 30, 1997,
respectively.......................... -- 204 -- 8,412
----------- ---------- ----------- ----------
Income (loss) before extraordinary item.... (1,267,494) 55,400 (847,770) 371,609
Extraordinary loss on refinancing of debt,
net of tax benefit of $2,600 for the nine
months ended September 30, 1998, and
$4,195 for the three and nine months
ended September 30, 1997................. -- (6,293) (3,900) (6,293)
----------- ---------- ----------- ----------
Net income (loss)................ $(1,267,494) $ 49,107 $ (851,670) $ 365,316
=========== ========== =========== ==========
Basic earnings per common share:
Continuing operations.................... $ (2.21) $ 0.10 $ (1.52) $ 0.67
Discontinued operations.................. -- -- -- 0.01
Extraordinary item....................... -- (0.01) -- (0.01)
----------- ---------- ----------- ----------
Net income (loss)........................ $ (2.21) $ 0.09 $ (1.52) $ 0.67
=========== ========== =========== ==========
Diluted earnings per common share:
Continuing operations.................... $ (2.21) $ 0.10 $ (1.52) $ 0.66
Discontinued operations.................. -- -- -- 0.01
Extraordinary item....................... -- (0.01) -- (0.01)
----------- ---------- ----------- ----------
Net income (loss)........................ $ (2.21) $ 0.09 $ (1.52) $ 0.66
=========== ========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED RESTRICTED EMPLOYEE
ADDITIONAL OTHER STOCK STOCK
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED TREASURY BENEFIT
STOCK STOCK CAPITAL EARNINGS INCOME COMPENSATION STOCK TRUST
--------- ------ ---------- ---------- ------------- ------------ ----------- ---------
Balance, December 31,
1997.................... $ -- $5,855 $3,828,475 $1,933,929 $(283,193) $(11,102) $(1,369,329) $(299,375)
Common stock options and
warrants exercised,
including tax
benefits.............. -- 37 85,397 -- -- -- 75,212 --
Earned compensation
related to restricted
stock, net of
reversals on forfeited
shares................ -- -- -- -- -- 759 -- --
Reversals of unearned
compensation upon
cancellation of
restricted stock...... -- -- -- -- -- 1,134 -- --
Common stock issued for
acquisitions.......... -- 53 130,132 -- -- -- -- --
Common stock option put
rights due to Merger,
including tax
benefits.............. -- -- 70,495 -- -- -- -- --
Cumulative translation
adjustment of foreign
currency statements... -- -- -- -- (57,121) -- -- --
Cash dividends.......... -- -- -- (87,805) -- -- -- --
Dividends paid to
employee stock benefit
trust................. -- -- 1,963 (1,963) -- -- -- --
Sale of treasury
stock................. -- -- 3,755 -- -- -- 725,104 --
Cancellation of WM
Holdings treasury
stock due to Merger... -- (141) (566,051) -- -- -- 566,192 --
Conversion of
Wheelebrator
Technologies, Inc.
stock options......... -- -- 20,138 -- -- -- -- --
Adjustment of employee
stock benefit trust to
market value.......... -- -- 79,964 -- -- -- -- (79,964)
Accelerated vesting of
restricted stock due
to Merger............. -- -- -- -- -- 9,209 -- --
Other................... -- 14 42,765 -- -- -- -- --
Net income (loss)....... -- -- -- (851,670) -- -- -- --
---- ------ ---------- ---------- --------- -------- ----------- ---------
Balance, September 30,
1998.................... $ -- $5,818 $3,697,033 $ 992,491 $(340,314) $ -- $ (2,821) $(379,339)
==== ====== ========== ========== ========= ======== =========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
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Cash flows from operating activities:
Net income (loss)......................................... $ (851,670) $ 365,316
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,107,089 981,094
Deferred income taxes.................................. 99,547 (259,374)
Undistributed earnings of equity investee.............. (3,294) 9,369
Minority interest in subsidiaries...................... 51,015 84,024
Interest on Liquid Yield Option Notes and Subordinated
Notes................................................. 14,127 15,810
Contribution to 1988 Employee Stock Ownership plan..... -- 5,000
Gain on sale of assets................................. (78,613) (115,575)
Effect of merger costs and asset impairments and
unusual items......................................... 1,443,800 145,185
Income on disposal of discontinued operations or
reserve adjustments, net of tax and minority
interest.............................................. -- (8,412)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and other receivables............ (160,665) (64,740)
Prepaid expenses and other........................... (231,354) 9,542
Other assets......................................... 101,188 (124,342)
Accounts payable and accrued liabilities............. (136,143) 165,028
Deferred revenues and other liabilities.............. 13,286 15,479
Other, net........................................... (71,430) (1,898)
----------- -----------
Net cash provided by operating activities......... 1,296,883 1,221,506
----------- -----------
Cash flows from investing activities:
Short-term investments.................................... 58,323 (107,011)
Acquisitions of businesses, net of cash acquired.......... (1,545,274) (1,251,644)
Capital expenditures...................................... (1,046,836) (859,889)
Proceeds from sale of assets.............................. 335,810 1,363,385
Acquisitions of minority interests........................ (887,849) (99,705)
Other..................................................... 95,090 6,812
----------- -----------
Net cash used in investing activities............. (2,990,736) (948,052)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 4,733,677 4,148,519
Principal payments on long-term debt...................... (3,829,113) (3,992,065)
Cash dividends............................................ (82,064) (232,248)
Net proceeds from issuance of common stock................ 607,358 506,781
Proceeds from exercise of common stock options and
warrants............................................... 266,579 84,353
Stock repurchases......................................... -- (902,961)
Other..................................................... (22,113) (34,094)
----------- -----------
Net cash provided by (used in) financing
activities...................................... 1,674,324 (421,715)
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 1,650 (5,343)
----------- -----------
Decrease in cash and cash equivalents....................... (17,879) (153,604)
Cash and cash equivalents at beginning of period............ 184,052 349,367
----------- -----------
Cash and cash equivalents at end of period.................. $ 166,173 $ 195,763
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1998 1997 1998 1997
----------- -------- --------- ---------
Net income (loss)............................. $(1,267,494) $ 49,107 $(851,670) $ 365,316
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of taxes of zero..................... (3,456) (21,147) (57,121) (148,297)
----------- -------- --------- ---------
Comprehensive income (loss)................... $(1,270,950) $ 27,960 $(908,791) $ 217,019
=========== ======== ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated financial statements of Waste Management, Inc.
(the "Company") presented herein are unaudited. In the opinion of management,
such financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented. The financial
statements presented herein should be read in connection with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and the
Company's Joint Proxy Statement/Prospectus dated June 9, 1998, that was filed in
connection with the Merger (see below) and the Company's Current Report on Form
8-K dated September 23, 1998, that includes supplemental financial statements
that reflect the Merger.
1. BUSINESS COMBINATIONS
The Merger
On July 16, 1998, the Company consummated a merger with Waste Management
Holdings, Inc. ("WM Holdings") accounted for as a pooling of interests (the
"Merger") and, accordingly, the accompanying financial statements have been
restated to include the accounts and operations of WM Holdings for all periods
presented. Under the terms of the 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 17,400,000 underlying shares of the
Company's common stock. Any unvested WM Holdings options issued prior to March
10, 1998, vested upon consummation of the Merger due to change of control
provisions in the related plan. In connection with this transaction, the Company
incurred merger and other related costs in the third quarter of 1998 as
discussed in Note 3.
The condensed consolidated balance sheet at December 31, 1997, reflects the
combining of (i) the Company prior to consummation of the Merger ("Waste
Management") and (ii) WM Holdings as of that date. Combined and separate results
of operations for the three months ended March 31, 1998 and 1997 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
Three months ended March 31, 1997
Operating revenues................. $460,484 $2,204,985 $ -- $2,665,469
Income from continuing operations
before income taxes............. 96,916 241,616 (5,013)(c) 333,519
Net income......................... 57,962 115,032 (53)(c) 172,941
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(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
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Purchase Acquisitions
On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holdings Trust ("City Management") for approximately $810,000,000
consisting of cash paid, and liabilities and debt assumed. The businesses
acquired are primarily located in the state of Michigan and include several
collection operations, landfills, and transfer stations. This acquisition was
accounted for using the purchase method of accounting.
On March 31, 1998, the Company acquired the remaining outstanding shares of
Wheelabrator Technologies, Inc. ("WTI"), which it did not already own for $16.50
per share, or $876,200,000. This obligation was financed with bank debt.
On June 18, 1998, the Company acquired the solid waste businesses of
American Waste Systems, Inc. ("American") for approximately $150,000,000 in
cash. The acquired assets include three landfills and one collection operation
located in Ohio. This acquisition was accounted for using the purchase method of
accounting.
In addition to the acquisitions described above, during the nine months
ended September 30, 1998, the Company acquired seven landfills, 79 collection
businesses, and eight transfer stations for approximately $750,000,000 in cash
paid, and liabilities and debt assumed, and approximately 3,150,000 shares of
the Company's common stock in business combinations accounted for using the
purchase method of accounting.
Poolings of Interests Transactions
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 in exchange for all outstanding shares of
TransAmerican (the "TransAmerican Merger"). Periods reported prior to the
consummation of the TransAmerican Merger 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 presented. The businesses
acquired include five collection operations, nine landfills, and two transfer
stations located throughout the southern United States.
In addition to the TransAmerican Merger, the Company consummated five other
acquisitions accounted for as poolings of interests during the nine months ended
September 30, 1998, pursuant to which the Company issued approximately 200,000
shares of its common stock in exchange for all outstanding shares of the
acquired companies. Periods reported prior to the consummation of these poolings
of interests were not restated to include the accounts and operations of the
acquired companies as the combined results would not be materially different
from the results as previously presented. For the nine months ended September
30, 1998, the Company incurred $5,305,000 of merger costs related to the
TransAmerican Merger and the other poolings of interests transactions
consummated during the period.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Revolving credit facility............................... $ -- $ 430,000
Commercial paper, weighted average interest of 6.2% in
1998 and 6.1% in 1997................................. 1,183,784 356,327
Senior notes and debentures, interest 6% to 8.75%, due
1998 to 2026.......................................... 6,159,416 5,224,119
4% Convertible subordinated notes due 2002.............. 535,275 535,275
4 1/2% Convertible subordinated notes due 2001.......... 148,370 149,500
5% Convertible subordinated debentures due 2006......... 114,520 115,000
5.75% Convertible subordinated notes due 2005........... 453,616 450,182
Tax-exempt and project bonds, principal payable in
periodic installments, maturing through 2021, fixed
and variable interest rates ranging from 3.70% to
9.25% at September 30, 1998........................... 1,221,103 1,307,793
Installment loans and notes payable, interest at 5.34%
to 12.5%, maturing through 2020....................... 576,786 754,598
Other................................................... 40,980 67,957
----------- ----------
10,433,850 9,390,751
Less current maturities................................. 738,538 1,587,751
----------- ----------
$ 9,695,312 $7,803,000
=========== ==========
On August 7, 1997, the Company entered into a $2,000,000,000 senior
revolving credit facility with a consortium of banks (the "Credit Facility").
The Credit Facility is used for general corporate purposes including borrowings
and standby letters of credit and principal reductions are not required for the
Credit Facility during its five-year term. The Credit Facility requires a
facility fee not to exceed 0.30% per annum and loans under the Credit Facility
bear interest at a rate based on the Eurodollar rate plus a spread not to exceed
0.575% per annum. At December 31, 1997, the Company had borrowed $430,000,000
and had issued letters of credit of $467,029,000 under the Credit Facility. The
applicable interest rate and facility fee at December 31, 1997, was 6.1% and
0.1125% per annum, respectively.
Upon consummation of the Merger, the Company entered into a syndicated loan
facility in the amount of $3,000,000,000, (the "Syndicated Facility") which was
an addition to the Company's existing $2,000,000,000 Credit Facility. The
Syndicated Facility is renewable annually and provides for a one-year term
option at the Company's request. The facility is available for the issuance of
commercial paper and borrowings and up to $800,000,000 of standby letters of
credit. The applicable interest rate, facility fee and covenant restrictions for
the Syndicated Facility are similar to those contained in the Company's existing
Credit Facility which was amended to provide for the Merger.
Following the consummation of the Merger, the Company initiated a new
commercial paper issuance program under its own name to replace WM Holdings'
commercial paper issuance program which was subsequently discontinued. The
Company issues commercial paper as an alternative to bank borrowings to meet
working capital requirements. All commercial paper is fully backed by committed
bank credit lines.
At September 30, 1998, the Company had issued letters of credit totaling
$1,154,000,000 under the Credit Facility and Syndicated Facility; however, no
borrowings were outstanding under either facility.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Credit Facility. Interest on the 7% Notes and
6 1/8% Notes is payable semi-annually on January 15 and July 15.
The Company's 5.75% convertible subordinated notes due 2005, which are
classified as current liabilities in the December 31, 1997, condensed
consolidated balance sheet, were reclassified to long-term debt in the March 31,
1998, condensed consolidated balance sheets and remain classified long-term debt
at September 30, 1998. The notes contain provisions for optional redemption at
March 15, 1998 and March 15, 2000. Only $2,500,000 face amounts of notes were
submitted for redemption on March 31, 1998.
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 credit facilities provided by Chase Manhattan Bank
("Chase") and other banks, as revised in conjunction with the purchase of
remaining publicly held WTI shares. Upon consummation of the Merger, the Company
retired the outstanding indebtedness under the related revolving line of credit
and cancelled the Chase credit facility.
3. MERGER COSTS AND UNUSUAL ITEMS
The Company incurred $1,561,915,000 in merger costs and $666,952,000 in
unusual items in the third quarter of 1998. These charges reduced minority
interest expense by $37,000,000 and provided an estimated income tax benefit of
$634,500,000. These charges were the result of the Merger and management's
changes in strategic plans, restructurings and reorganizations, primarily
related to the Merger as discussed in Note 1. Charges expected in periods
subsequent to the third quarter of 1998, relate to the costs of a nature that
are not accruable until the cost is paid or until certain obligations are
contractually committed. The charges consist of the following items (dollars in
millions).
CHARGE IN CHARGES EXPECTED EXPECTED
THIRD QUARTER EXPECTED IN CASH CASH
1998 FUTURE PERIODS PAYMENTS PROCEEDS
------------- -------------- -------- --------
MERGER COSTS
- ------------
Transaction or deal costs....................... $ 124.1 $ -- $124.1 $ --
Employee severance, separation, and transitional
costs......................................... 297.0 50.4 347.4 --
Restructuring charges relating to the
consolidation and relocation of operations,
and the transition and implementation of
information systems........................... 135.0 96.2 231.2 --
Estimated loss on the sale of:
Assets to comply with governmental orders..... 255.0 -- -- 457.0
Duplicate facilities and related leasehold
improvements, including the sale of the Oak
Brook, Illinois corporate office campus.... 184.7 -- -- 110.4
Duplicate revenue producing assets, including
two landfills and four transfer stations... 26.2 -- -- 18.8
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARGE IN CHARGES EXPECTED EXPECTED
THIRD QUARTER EXPECTED IN CASH CASH
1998 FUTURE PERIODS PAYMENTS PROCEEDS
------------- -------------- -------- --------
Provision for the abandonment of:
Revenue producing assets, including 13
landfills, two transfer stations and four
recycling operations which were determined
to be duplicative assets due to the
Merger..................................... 126.6 -- -- --
Non-revenue producing assets, consisting of
landfill projects and leasehold
improvements which were determined to be
duplicative assets due to the Merger....... 263.0 -- -- --
Other assets, consisting primarily of computer
hardware and software costs which have no
future value............................... 150.3 -- -- --
-------- ------ ------ ------
Total................................. $1,561.9 $146.6 $702.7 $586.2
======== ====== ====== ======
UNUSUAL ITEMS
- ------------
Provision for the loss on contractual
obligations for collection service............ $ 113.5 $ -- $ -- $ --
Changes in estimates relating to the
reassessment of ultimate losses for certain
legal and remediation issues.................. 140.3 -- 140.3 --
Estimated loss on the sale of other non-core
assets........................................ 195.1 -- -- 234.7
Curtailment and settlement costs of terminating
the defined benefit pension plan.............. 34.7 125.0 125.0 --
Compensation charges for the liquidation of the
Supplemental Executive Retirement Plan
("SERP") and other supplemental plans......... 68.8 -- 88.7 --
Put provisions of certain stock options......... 114.6 -- -- --
-------- ------ ------ ------
Total................................. $ 667.0 $125.0 $354.0 $234.7
======== ====== ====== ======
The Company expects to incur Merger related expenses in future periods
related to costs that are transitional in nature and not accruable until paid or
committed. Approximately $244,242,000 of the total expected Merger related cash
payments for merger costs and unusual items have been paid as of September 30,
1998, with the remaining cash payments expected to occur through 1999. The cash
payment related to the settlement of the defined benefit pension plan, as
discussed below, is currently estimated at $125,000,000 and is expected to occur
in the third quarter of 1999.
In August 1998, the Company decided to terminate the WM Holdings defined
benefit pension plan as of December 31, 1998, and liquidate the plan's assets
and settle its obligations to participants in 1999. Accordingly, as required
under the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standard No. 88, Employer's Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, this
decision has resulted in a curtailment expense charge of $34,716,000 in 1998,
and is currently estimated to result in an approximate net settlement charge and
cash payment in 1999 of $125,000,000. The amount of the 1999 settlement is
sensitive to changing interest rates and will increase if interest rates decline
and decrease if interest rates increase. This sensitivity is approximately
$20,000,000 for every 25 basis point fluctuation in interest rates.
10
12
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company has terminated certain supplemental benefit plans
of WM Holdings, with the most significant plan being the Supplemental Executive
Retirement Plan, and accordingly accrued such amounts as a charge during the
third quarter of 1998. The Company expects to make the cash payments to
participants during the fourth quarter of 1998.
As a result of the Merger, certain WM Holdings' employee stock option plans
that included change of control provisions whereby optionholders under such
plans received put provision benefits at Merger date for a 30 day period
(options on 3.5 million of the Company's shares) and for others a one year
period (options on 7.5 million of the Company's shares). These put provision
benefits give the participants a floor based on various average market formulas
near the merger date, and accordingly requires a charge to earnings. This charge
to pre-tax earnings was $114,600,000 ($70,495,000 after tax), in the third
quarter of 1998, with the after tax liability presented in stockholders' equity
in the accompanying balance sheet. To the extent the future market value of the
Company's stock exceeds $54.34 per share on the outstanding options with one
year put provisions, the Company would be required to record additional charges
to earnings in subsequent periods up through July 16, 1999. The charge related
to these stock option put rights has no impact to equity as the effect is a
direct increase to additional paid-capital, since these rights will be satisfied
by the issuance of stock.
4. INCOME TAXES
The difference in federal income taxes at the statutory rate and the
provision for (benefit from) income taxes for the three and nine months ended
September 30, 1998 and 1997, is primarily due to state and local income taxes
and non-deductible merger costs, non-deductible costs related to acquired
intangibles, and minority interest.
5. PER SHARE DATA
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 supercedes 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 was effective for the Company for the year ended December
31, 1997, and required 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.
The effect of the Company's common stock options and warrants and the
effect of the Company's convertible subordinated notes and debentures are
excluded from the dilutive earnings per share calculation for periods whereby
inclusion would be antidilutive. For the nine months ended September 30, 1997,
interest (net of taxes) of $5,610,000, has been added back to net income for the
diluted earnings per share calculation.
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
11
13
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares outstanding for the purpose of calculating basic and dilutive earnings
per common share, respectively (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
Number of common shares outstanding................... 573,796 546,155 573,796 546,155
Effect of using weighted average common shares
outstanding......................................... (1,483) (2,734) (14,562) (145)
------- ------- ------- -------
Weighted average number of common shares
outstanding......................................... 572,313 543,421 559,234 546,010
Dilutive effect of common stock options and
warrants............................................ -- 5,407 -- 5,056
Dilutive effect of convertible subordinated notes and
debentures.......................................... -- -- -- 9,024
------- ------- ------- -------
Weighted average number of common and dilutive
potential common shares outstanding................. 572,313 548,828 559,243 560,090
======= ======= ======= =======
At September 30, 1998, there were approximately 70 million shares
potentially issuable with respect to stock options and warrants and convertible
debt which could dilute basic earnings per share in the future.
Prior to the Merger, WM Holdings declared cash dividends of $82,060,000
during 1998 and $232,248,000 for the nine months ended September 30, 1997. In
addition, the Company declared a dividend of $.01 per share or $5,745,000 during
the third quarter of 1998. Based on the Company's weighted average common shares
outstanding, after considering the effect of the Merger, the cash dividends per
common share are $0.16 and $0.43 for the nine months ended September 30, 1998
and 1997, respectively.
6. 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 at December 31,
1997 and September 30, 1998, are as follows (in thousands):
FOREIGN MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME
----------- ---------- -------------
Balance, December 31, 1997....................... $(275,800) $(7,393) $(283,193)
Current-period change.......................... (57,121) -- (57,121)
--------- ------- ---------
Balance, September 30, 1998...................... $(332,921) $(7,393) $(340,314)
========= ======= =========
7. 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. 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 89 sites listed on the Superfund National
Priorities List ("NPL").
12
14
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Where the Company concludes that it is probable that a liability
has been incurred, provision is made in the financial statements.
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,
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.
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 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 for the first nine months of
1998 and 1997, were $42,000,000 and $13,000,000, respectively (which included
settlements in the third quarter of 1997, of $2,200,000; no settlements were
recorded in the third quarter of 1998), and have been included in operating
expense as a reduction to environmental expense.
8. COMMITMENTS AND CONTINGENCIES
Financial instruments -- 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 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.
The Company has been advised by the U.S. Department of Justice that Laurel
Ridge Landfill, Inc., a wholly-owned subsidiary of the Company as a result of
the Company's acquisition of United Waste Systems, Inc. ("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 in August 1997. The Company is
attempting to negotiate a resolution with the government.
Litigation -- 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
13
15
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 upheld
that ruling. In September 1998, the Company reached a settlement with the town
of New Milford, requiring annual payments to the town for a 25 year period. The
settlement agreement was adopted by the Superior Court, which modified its order
by substituting the payments for the removal of the waste.
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 facility in Gloucester County, New Jersey.
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. The negotiations with Gloucester County are
ongoing. 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
waste-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 $190-$210 million range. The impacted
facilities' long-term waste supply agreements generally require
14
16
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 one-half of the incremental expenditures
incurred to comply with these stricter air emission standards.
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 and claims 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.
15
17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 plc ("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 sought to enjoin the completion of a
proposed transaction whereby the Company indirectly acquired all WM
International ordinary shares not held by Company subsidiaries or, in the
alternative, rescission or compensatory damages. Among other things, the
complaint asserts that the defendants breached their fiduciary duties to the
holders of ADRs and that the holders of ADRs were denied a proper premium for
their ADRs. The WM International transaction became effective on November 3,
1998, as discussed in Note 11. 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 sought to
enjoin the completion of the above-described WM International transaction or, in
the alternative, rescission or compensatory damages. Among other things, the
complaint asserts that the defendants' breached their fiduciary duties to the
shareholders of WM International (Mr. Flynn was a director of WM International
and WM Holdings, its controlling shareholder) and that the shareholders of WM
International were 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 -- 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 primary automobile liability supported by $400,000,000 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.
16
18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED 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 September 30, 1998, this policy provides
$10,000,000 of coverage per loss with a $20,000,000 aggregate limit.
Through the date of the Merger, certain of WM Holdings' auto, general
liability and workers' compensation risks were self-insured up to $5,000,000 per
accident. For such programs, a provision was 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% at September 30, 1998 and December 31, 1997, based
on historical payment patterns. The self-insurance reserve included in the
accompanying consolidated balance sheets is $314,000,000 and $226,700,000 at
September 30, 1998 and December 31, 1997, respectively.
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.
9. NEW ACCOUNTING PRONOUNCEMENTS
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 required for interim
periods in the initial year of application. Adoption of this statement will not
have a material impact on the Company's financial statements.
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. The Company adopted SOP 98-5 in the third quarter of 1998. The impact of
SOP 98-5 was not material to 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 No.
133"). 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.
17
19
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCONTINUED OPERATIONS AND CONTINUING OPERATIONS HELD FOR SALE
In the fourth quarter of 1995, the Company approved a plan to sell or
otherwise discontinue the process engineering, construction, specialty
contracting and similar lines of business of Rust International, Inc. ("Rust"),
a subsidiary owned 60% by WM Holdings and 40% by WTI. At December 31, 1996,
management also classified as discontinued and planned to sell Rust's domestic
environmental and infrastructure engineering and consulting business and
Chemical Waste Management, Inc.'s ("CWM") high organic waste fuel blending
services business. Also, WTI classified certain of its water process systems and
equipment manufacturing businesses (sold in 1996) and its water and wastewater
facility operations and privatization business (sold in 1997) as discontinued
businesses in 1996 and 1997, respectively. Revenues from the discontinued
businesses were $17,200,000 for the three months and $81,900,000 for the nine
months ended September 30, 1997. Results of their operations in 1997 were
included in the reserve for loss on disposition provided previously, and such
results were not material.
In 1997, management reclassified the CWM business back into continuing
operations, and classified certain of its sites as operations held for sale. The
Rust dispositions were not completed within one year, and accordingly, this
business was reclassified back into continuing operations, as operations held
for sale, at December 31, 1997, in accordance with generally accepted accounting
principles, though management continued its efforts to market these businesses.
Because 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 in the fourth quarter of 1997. Prior year financial
statements were restated. The majority of these assets were sold during the
second and third quarters of 1998, respectively, for amounts approximately equal
to their recorded net book values. Information regarding the businesses
reclassified as continuing operations held for sale for the first nine months is
as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Results of operations:
Revenue..................................... $62,186 $95,464 $238,108 $270,605
Income (loss) before tax after minority
interest................................. (2,721) 85 (151) (4,045)
Net income (loss)........................... (1,218) (204) (376) (3,542)
The Company is disposing of certain assets to comply with Merger related
governmental orders and is disposing of certain other non-core assets as a
result of implementing the Merger related business strategy. These businesses'
results of operations are fully included in revenues and expenses in the
accompanying statements of operations, for the nine months ended September 30,
1998, and generated third party revenues of $433,452,000 and earnings before
interest and taxes of $46,751,000. In addition, as a result of the merger,
various real estate became duplicative and surplus, and will be sold. As
discussed in Note 3, the Company has recorded a third quarter 1998 charge to
write down these assets to the net realizable value expected upon their sale.
The net assets, excluding working capital, of business held for sale are
included as current assets in net assets held for sale in the accompanying
condensed consolidated balance sheet as of September 30, 1998. This account also
includes $167,400,000 at September 30, 1998, of surplus real estate which the
Company is actively marketing for sale. At December 31, 1997, $73,300,000 of
surplus real estate held for sale was included in net assets of continuing
businesses held for sale (long-term) in the accompanying condensed consolidated
balance sheets.
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20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
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, WM Holdings agreed to pay approximately $432 million, in the
aggregate, to the holders of the approximately 20% of the outstanding shares of
WM International not owned by WM Holdings and its subsidiaries. Minority
shareholders of WM International have approved the transaction. In addition, the
English High Court has sanctioned the transaction. As a result of the
transaction becoming effective on November 3, 1998, WM International became an
indirect, wholly-owned subsidiary of WM Holdings.
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
Water plc ("Wessex") for 205 million pounds ($342 million). All of the
conditions precedent set forth in that agreement have been satisfied, and the
transaction is expected to close 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 24,000,000 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, however it is
anticipated that the Eastern Merger will be completed during 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 28, 1998, the Company entered into an agreement to sell
substantially all of the assets and future airspace rights required to be sold
in accordance with the terms of a governmental consent decree relating to the
Merger. In addition, certain duplicate properties arising from the Merger as
well as certain assets required to be sold from an earlier acquisition were also
included in the sale. The sales price was comprised of approximately $500
million cash, subject to certain adjustments, plus certain properties of the
buyer. The annual revenue for the assets being sold is approximately $275
million, of which approximately $180 million is generated by third parties. The
parties also entered into certain waste disposal agreements as part of the
transaction. The transaction, which is expected to close before December 31,
1998, is subject to approvals from various state and federal agencies as well as
other normal and customary closing conditions.
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21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
On July 16, 1998, USA Waste Services, Inc. (this registrant) consummated a
merger with Waste Management, Inc. (collectively the "Combined Company")
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 following discussion reviews the Company's operations for the three and
nine months ended September 30, 1998 and 1997, and should be read in conjunction
with the Company's condensed consolidated financial statements and related notes
thereto included elsewhere herein as well as the Company's supplemental
consolidated financial statements and related notes thereto included the
Company's Current Report on Form 8-K dated September 23, 1998.
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect the business and operations of the Company.
Certain of these factors are discussed under "Business -- Factors Influencing
Future Results and Accuracy of Forward-Looking Statements" included in Part I,
Item 1 of the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
INTRODUCTION
The Company 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. As of September 30, 1998, the Company owned
or operated an extensive network of landfills, transfer stations, and collection
operations and serves in excess of 25 million customers in North America.
The Company's operating revenues consist primarily of fees charged for its
collection and disposal services. Operating revenues for collection services
include fees from residential, commercial, industrial, and municipal collection
customers. A portion of these fees are billed in advance; a liability for future
service is recorded upon receipt of payment and operating revenues are
recognized as services are actually provided. Fees for residential and municipal
collection services are normally based on the type and frequency of service.
Fees for commercial and industrial collection services are normally based on the
type and frequency of service and the volume of solid waste collected.
The Company's operating revenues from its landfill operations consist of
disposal fees (known as tipping fees) charged to third parties and are normally
billed monthly or semi-monthly. Tipping fees are based on the volume or weight
of solid waste being disposed of at the Company's landfill sites. Fees are
charged at transfer stations based on the volume or weight of solid waste
deposited, taking into account the Company's cost of loading, transporting, and
disposing of the solid waste at a landfill. Intercompany revenues between the
Company's collection, transfer, and landfill operations have been eliminated in
the Condensed Consolidated Financial Statements presented elsewhere herein.
Operating expenses include direct and indirect labor and the related taxes
and benefits, fuel, maintenance and repairs of equipment and facilities, tipping
fees paid to third party landfills, property taxes, and accruals for future
landfill closure and post-closure costs. Certain direct landfill development
expenditures are capitalized and amortized over the estimated useful life of a
site as capacity is consumed, and include acquisition, engineering, upgrading,
construction, capitalized interest, and permitting costs. All indirect
development expenses, such as administrative salaries and general corporate
overhead, are charged to expense in the period incurred.
General and administrative costs include management salaries, clerical and
administrative costs, professional services, facility rentals, and related
insurance costs, as well as costs related to the Company's marketing and sales
force.
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22
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percentages for the various
condensed consolidated statement of operations line items and for certain
supplementary data.
PERIOD TO PERIOD PERIOD TO PERIOD
CHANGE FOR THE CHANGE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 AND 1997 1998 AND 1997
----------------------- -----------------------
$ % $ %
----------- --------- ----------- ---------
STATEMENT OF OPERATIONS:
Operating revenues........................ $ 47,367 1.5% $ 468,603 5.3%
----------- -----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)............ (127,877) (6.6) (6,539) (0.1)
General and administrative.............. (79,186) (21.2) (1,192) (0.1)
Depreciation and amortization........... 23,607 6.7 125,995 12.8
Merger costs............................ 1,457,763 1,399.6 1,463,651 1,337.8
Asset impairments and unusual items..... 614,472 1,170.9 541,005 429.5
(Income) loss from continuing operations
held for sale, net of minority
interest................................ 2,806 3,301.2 (3,894) (96.3)
----------- -----------
1,891,585 66.8 2,119,026 27.6
----------- -----------
Income (loss) from operations............. (1,844,218) (653.3) (1,650,423) (151.4)
----------- -----------
Other income (expense):
Interest expense........................ (37,234) (27.4) (95,726) (23.7)
Interest and other income, net.......... 514 2.8 (16,348) (10.3)
Minority interest....................... 53,291 181.1 70,143 83.1
----------- -----------
16,571 11.3 (41,931) (12.7)
----------- -----------
Income (loss) from continuing operating
before income taxes..................... (1,827,647) (1,349.1) (1,692,354) (222.4)
Provision for (benefit from) income
taxes................................... (504,957) (629.0) (481,387) (121.0)
----------- -----------
Income (loss) from continuing operating... (1,322,690) (2,396.4) (1,210,967) (333.4)
Discontinued operations................... (204) (100.0) (8,412) (100.0)
Extraordinary items....................... 6,293 100.0 2,393 38.0
----------- -----------
Net income (loss)......................... $(1,316,601) (2,681.1)% $(1,216,986) (333.1)%
=========== ===========
SUPPLEMENTARY DATA:
EBITDA(1)................................. $(1,820,611) (287.7)% $(1,524,428) (73.6)%
=========== ===========
EBITDA, as adjusted(1)(2)................. $ 254,430 32.2% $ 476,334 20.6%
=========== ===========
- ---------------
(1) EBITDA represents income (loss) from operations plus depreciation and
amortization expense. EBITDA, which is not a measure of financial
performance under generally accepted accounting principles, is provided
because the Company understands that such information is used by certain
investors when analyzing the financial position and performance of the
Company.
(2) The EBITDA "as adjusted" excludes merger costs, asset impairments and
unusual items, and (income) loss from continuing operations held for sale,
net of minority interest.
21
23
The following table presents, for the periods indicated, the percentage
relationship that the various condensed consolidated statements of operations
line items and certain supplementary data bear to operating revenues:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
STATEMENT OF OPERATIONS:
Operating revenues.......................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 57.6 62.6 59.0 62.2
General and administrative................................ 9.3 12.0 10.9 11.5
Depreciation and amortization............................. 11.8 11.3 12.0 11.2
Merger costs.............................................. 49.4 3.3 17.0 1.3
Asset impairments and unusual items....................... 21.2 1.7 7.2 1.4
(Income) loss from continuing operations held for sale, net
of minority interest...................................... 0.1 -- -- --
----- ----- ----- -----
149.4 90.9 106.1 87.6
----- ----- ----- -----
Income (loss) from operations............................... (49.4) 9.1 (6.1) 12.4
----- ----- ----- -----
Other income (expense):
Interest expense.......................................... (5.5) (4.4) (5.4) (4.6)
Interest and other income, net............................ 0.6 0.6 1.6 1.8
Minority interest......................................... 0.8 (0.9) (0.2) (1.0)
----- ----- ----- -----
(4.1) (4.7) (4.0) (3.8)
----- ----- ----- -----
Income (loss) from continuing operating before income
taxes..................................................... (53.5) 4.4 (10.1) 8.6
Provision for (benefit from) income taxes................... (13.4) 2.6 (0.9) 4.4
----- ----- ----- -----
Income (loss) from continuing operating..................... (40.1) 1.8 (9.2) 4.2
Discontinued operations..................................... -- -- -- 0.1
Extraordinary items......................................... -- (0.2) -- (0.1)
----- ----- ----- -----
Net income (loss)........................................... (40.1)% 1.6% (9.2)% 4.2%
===== ===== ===== =====
SUPPLEMENTARY DATA:
EBITDA(1)................................................... (37.6)% 20.3% 5.9% 23.6%
===== ===== ===== =====
EBITDA, as adjusted(1)(2)................................... 33.0% 25.4% 30.2% 26.4%
===== ===== ===== =====
- ---------------
(1) EBITDA represents income (loss) from operations plus depreciation and
amortization expense. EBITDA, which is not a measure of financial
performance under generally accepted accounting principles, is provided
because the Company understands that such information is used by certain
investors when analyzing the financial position and performance of the
Company.
(2) The EBITDA "as adjusted" excludes merger costs, asset impairments and
unusual items, and (income) loss from continuing operations held for sale,
net of minority interest.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
Operating Revenues
Operating revenue mix for the three and nine months ended September 30,
1998 and 1997 is shown in the table below (dollars in millions). For purposes of
these discussions, North American solid waste ("NASW") includes all solid waste
activities such as collection, transfer operations, recycling and disposal,
including landfills, waste-to-energy operations and hazardous waste disposal,
within North America (the United States,
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24
Canada, Mexico, and Puerto Rico); International includes all business activities
conducted outside North America; and Non-solid waste includes hazardous waste
incineration, on-site integrated hazardous waste management services, fuels
blending, radioactive waste management services, on-site industrial cleaning
services, and landfill liner manufacturing and installation.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- --------------------------------------
1998 1997 1998 1997
-------- -------- --------- --------
NASW:
Collection.......... $1,717.4 54.4% $1,575.7 50.6% $ 4,980.4 53.9% $4,367.3 49.8%
Disposal............ 828.3 26.2 746.6 24.0 2,302.2 24.9 2,080.7 23.7
Transfer............ 250.8 7.9 224.2 7.2 760.3 8.2 592.9 6.8
Recycling and
other............ 158.2 5.0 189.8 6.1 514.7 5.6 540.0 6.2
-------- ------ -------- ------ --------- ------ -------- ------
2,954.7 93.5 2,736.3 87.9 8,557.6 92.6 7,580.9 86.5
International......... 388.5 12.3 432.4 13.9 1,133.3 12.3 1,353.2 15.4
Non-solid waste....... 291.4 9.2 304.0 9.8 800.9 8.7 813.2 9.3
Intercompany.......... (474.3) (15.0) (359.8) (11.6) (1,255.3) (13.6) (979.4) (11.2)
-------- ------ -------- ------ --------- ------ -------- ------
Operating revenue..... $3,160.3 100.0% $3,112.9 100.0% $ 9,236.5 100.0% $8,767.9 100.0%
======== ====== ======== ====== ========= ====== ======== ======
For the three months ended September 30, 1998, operating revenues increased
$47,367,000 or 1.5% as compared to the corresponding prior year period. The
increase in operating revenues is primarily attributable to the effects of
acquisitions of North American solid waste businesses and the internal growth of
comparable operations. However, these increases are partially offset by the
divestiture of certain operations, as well as the impact of foreign currency
translation fluctuations. Acquisitions during 1998 of solid waste businesses and
the effect of such acquisitions consummated during 1997 accounted for an
increase in operating revenue of $171,963,000 for the three months ended
September 30, 1998. Internal growth for comparable North American collection,
transfer, landfill and recycling services was 5.4% for the three months ended
September 30, 1998. The internal growth for the quarter was primarily
attributable to increased volumes, accounting for 3.6%, and an improving pricing
environment, reflecting 1.8% of internal growth. Pricing fluctuations in North
American commodity sales negatively impacted internal growth by 0.7% for the
quarter. Operating revenues of international and other non-solid waste
operations, net of acquisitions and dispositions, declined $39,929,000 for the
quarter. Foreign currency translation negatively impacted the comparative
operating revenues for the quarter by $13,544,000. The remaining decrease in
operating revenues was primarily the result of dispositions during 1997 of
certain non-core businesses and non-strategically located solid waste
operations.
For the nine months ended September 30, 1998, operating revenues increased
$468,603,000 or 5.3% as compared to the corresponding prior year period. The
increase in operating revenues is primarily attributable to the effects of
acquisitions of North American solid waste businesses and the internal growth of
comparable operations. These increases are partially offset by the divestiture
of certain operations, as well as the impact of foreign currency translation
fluctuations. Acquisitions during 1998 of solid waste businesses and the effect
of such acquisitions consummated during 1997 accounted for an increase in
operating revenue of $812,663,000 for the nine months ended September 30, 1998.
Overall price and volume increases were $189,237,000. Foreign currency
translation negatively impacted the comparative nine month operating revenues by
$72,073,000. The remaining decrease in operating revenues was primarily the
result of dispositions during 1997 of certain non-core businesses and
non-strategically located solid waste operations, including the Hamm incinerator
in Germany, and operations in France and Spain.
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses decreased $127,877,000 or 6.6% and $6,539,000
or 0.1% for the three and nine months ended September 30, 1998, respectively, as
compared to the corresponding periods of 1997. As a percentage of operating
revenues, operating costs and expenses decreased from 62.6% to 57.6% for the
three months ended September 30, 1997 and 1998, respectively, and decreased from
62.2% to 59.0% for the nine months ended September 30, 1997 and 1998,
respectively. The improvements in operating margins reflect
23
25
operating synergies realized from the Company's tuck-in acquisition program, its
mergers with United Waste Systems, Inc. ("United") in August 1997 and with WM
Holdings in July 1998, and the results of the Company's internal growth for the
respective periods. The estimated operating synergies relating to the Merger was
approximately $13,000,000 for the three months ended September 31, 1998.
Additionally, the improvements in the operating margins reflect cost reductions
realized from the Company's efforts to increase its utilization of internal
disposal capacity, which improved from 55.6% to 60.0% for the three months ended
September 30, 1997 and 1998, respectively. In addition, the three months ended
September 30, 1997, included $34,176,000 of environmental costs, $59,957,000 of
excess insurance costs, and $280,000 in asset disposals and other write-offs.
Similarly, the nine months ended September 30, 1997, included $118,100,000 of
environmental costs, $59,597,000 of excess insurance costs, and $14,013,000 in
asset disposals and other write-offs.
General and Administrative Expenses
General and administrative expenses decreased $79,186,000 or 21.2% and
$1,192,000 or 0.1% for the three months and nine months ended September 30,
1998, respectively, as compared to the respective prior year periods. As a
percentage of operating revenues, general and administrative expenses have also
decreased from 12.0% to 9.3% for the three months ended September 30, 1997 and
1998, respectively, and from 11.5% to 10.9% for the nine months ended September
30, 1997, and 1998, respectively. The three months and nine months ended
September 30, 1997, included $25,600,000 in legal reserve adjustments. The nine
months ended September 30, 1998, included additional expenses of $4,300,000 for
the WM Holdings accounting review and $12,400,000 million related to various
strategic initiatives which WM Holdings had been pursuing. The decrease in
general and administrative expenses as a percentage of operating revenues is the
result of the Company's ability to integrate acquisitions of solid waste
businesses without a proportionate increase in such costs, as well as cost
reductions resulting from the Company's mergers with United in August 1997 and
WM Holdings in July 1998 and the nonrecurrance of the above mentioned 1997
expenses. The estimated general and administrative synergies relating to the
Merger was approximately $51,400,000 for the three months ended September 30,
1998.
Depreciation and Amortization
Depreciation and amortization expense increased $23,607,000 or 6.7% and
$125,995,000 or 12.8% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. In addition,
depreciation and amortization, as a percentage of operating revenues, increased
from 11.3% to 11.8%, and 11.2% to 12.0% for the three and nine month periods
from 1997 to 1998, respectively. The increase is due to the effect of
acquisitions of solid waste businesses, increased landfill volumes, and an
increased utilization of internal disposed capacity and changes in certain
accounting processes by WM Holdings. Effective October 1, 1997, WM Holdings
discontinued assigning salvage values to collection vehicles and containers, and
adopted a process which shortened the estimated useful lives of certain
landfills. The increase in depreciation and amortization is offset in part by
the discontinuance of depreciation and amortization during the three months
ended September 30, 1998 for assets identified to be sold or abandoned.
Merger Costs, Asset Impairments and Unusual Items
In the first, second, and third quarters of 1997, the Company recorded
merger cost expenses of $1,996,000, $3,263,000 and $104,152,000, respectively,
related to the acquisition of solid waste businesses accounted for under the
pooling of interests method of accounting. For the three months ended March 31,
1998, June 30, 1998 and September 30, 1998, respectively, the Company recorded
merger related charges of $5,842,000, $5,305,000 and $1,561,915,000 for the
acquisition of solid waste businesses accounted for as poolings of interest. In
the third quarter of 1998 these costs relate to the Merger. For the three and
nine months ending September 30, 1997, the Company recorded $52,480,000 and
$125,947,000, respectively, in asset impairments and unusual items. These items
are primarily related to the closing or writedown of disposal facilities or
projects. For the three months ended September 30, 1998, unusual items was
$666,952,000. The total third quarter 1998 pre-tax charges of $2,228,867,000 for
merger and related unusual items reduced minority interest expense by
$37,000,000 and provided an estimated income tax benefit of $634,500,000. The
24
26
table below summarizes the Merger and related unusual items recorded in the
third quarter of 1998 (in millions).
CHARGE IN CHARGES EXPECTED EXPECTED
THIRD QUARTER EXPECTED IN CASH CASH
1998 FUTURE PERIODS PAYMENTS PROCEEDS
------------- -------------- -------- --------
MERGER COSTS
Transaction or deal costs, primarily professional
fees and filing fees............................. $ 124.1 $ -- $124.1 $ --
Employee severance, separation, and transitional
costs............................................ 297.0 50.4 347.4 --
Restructuring charges relating to the consolidation
and relocation of employees and facilities, and
the transition and implementation of information
systems.......................................... 135.0 96.2 231.2 --
Estimated loss on sale of:
Assets to comply with governmental orders........ 255.0 -- -- 457.0
Duplicate facilities and related leasehold
improvements, including the sale of the Oak
Brook, Illinois corporate office campus....... 184.7 -- -- 110.4
Duplicate revenue producing assets, including two
landfills and four transfer stations.......... 26.2 -- -- 18.8
Provision for abandonment of:
Revenue producing assets, including 13 landfills,
four transfer stations, and four recycling
operations which were determined to be
duplicative assets due to the Merger.......... 126.6 -- -- --
Non-revenue producing assets, consisting of
landfill projects and leasehold improvements
which were determined to be duplicative assets
due to the Merger............................. 263.0 -- -- --
Other assets, consisting primarily of computer
hardware and software costs which have no
future value.................................. 150.3 -- -- --
-------- -------- ------ ------
Total.................................... $1,561.9 $ 146.6 $702.7 $586.2
======== ======== ====== ======
UNUSUAL ITEMS
Provision for the loss on contractual obligations
for collection service........................... $ 113.5 $ -- $ -- $ --
Changes in estimates relating to the reassessment
of ultimate losses for certain legal and
remediation issues............................... 140.3 -- 140.3 --
Estimated loss on the sale of other non-core
assets........................................... 195.1 -- -- 234.7
Curtailment and settlement costs of terminating the
defined benefit pension plan..................... 34.7 125.0 125.0 --
Compensation charges for the liquidation of the
Supplemental Executive Retirement Plan ("SERP")
and other supplemental plans..................... 68.8 -- 88.7 --
Put provisions of certain stock options............ 114.6 -- -- --
-------- -------- ------ ------
Total.................................... $ 667.0 $ 125.0 $354.0 $234.7
======== ======== ====== ======
The Company expects to incur Merger related expenses in future periods
related to costs that are transitional in nature and not accruable until paid or
committed. Approximately $244,242,000 of the total expected Merger related cash
payments for merger costs and unusual items have been paid as of September 30,
1998, with the remaining cash payments expected to occur through 1999. The cash
payment related to the settlement of the defined benefit pension plan, currently
estimated at $125,000,000, is expected to occur in the third quarter of 1999.
25
27
The Company is disposing of certain assets to comply with Merger related
governmental orders and is disposing of certain other non-core assets as a
result of implementing the Merger related business strategy. For the nine months
ended September 30, 1998, the operations to be divested had operating revenues
of $433,452,000 and earnings before interest and taxes of $46,751,000.
Additionally, the Company is divesting certain facilities identified as
duplicate as a result of the Merger, as discussed in Note 10 to the accompanying
condensed consolidated financial statements.
The Company abandoned significant computer hardware and software projects
of WM Holdings in accordance with the plan to conform information technology
systems. These costs relate to mainframe technology and costs capitalized for a
financial computer system installation initiative that began in 1996 and was
terminated as a result of the Merger.
The Company recorded a loss on contractional obligations for multi-year
waste collection services. These losses were the result of deterioration of cost
structures in certain markets, such as Italy. In addition, the Merger resulted
in changes in management plans and intentions various markets.
The Company has increased its reserves for certain legal and environmental
remediation issues as a result of management's emphasis to resolve and settle
certain issues relating primarily to WM Holdings.
In August of 1998, the Company decided to terminate the WM Holdings defined
benefit plan as of December 31, 1998, and liquidate the plan's assets and settle
its obligations to participants in 1999. This decision has resulted in a
curtailment expense of $34,716,000 in 1998, and is currently estimated to result
in an approximate net settlement charge and cash payment in 1999 of
$125,000,000. The amount of the 1999 settlement is inversely related to interest
rate fluctuations. This sensitivity is approximately $20,000,000 for every 25
basis point fluctuation in interest rates.
In addition, the Company terminated certain of WM Holdings' supplemental
benefit plans, with the most significant plan being the SERP and accordingly
accrued the termination charge. The Company expects to make the required cash
payments to participants during the fourth quarter of 1998.
Certain WM Holdings' employee stock option plans included change of control
provisions that were triggered as a result of the Merger whereby the option
holders received certain put rights that require charges to earnings through the
put periods. The charge to pre-tax earnings as a result of these put rights was
$114,600,000, in the third quarter of 1998. To the extent the future market
value of the Company's common stock exceeds $54.34 per share, the Company will
be required to record additional charges to earnings through July 16, 1999, at
which time all put rights expire. The expense related to these stock option put
rights has no impact to equity as the offset is a direct increase to additional
paid-in capital, since these rights will be satisfied by the issuance of stock.
(Income) Loss from Continuing Operations Held for Sale, Net of Minority
Interest
As discussed in Note 10 to the condensed consolidated financial statements
included elsewhere herein, the Company had operations that were previously
classified as "discontinued" for accounting and financial reporting purposes
that were subsequently reclassified to continuing operations as the dispositions
were not completed within one year. The Company has continued its efforts to
market these businesses and has divested of substantially all of such operations
as of September 30, 1998.
Income (Loss) from Operations
Income (loss) from operations decreased $1,844,218,000 or 653.3% for the
three months ended September 30, 1998, and decreased $1,650,423,000 or 151.4%
for the nine months ended September 30, 1998, as compared to the respective
prior year periods due to the reasons discussed above. As a percentage of
operating revenues, income from operations, exclusive of merger costs, asset
impairments and unusual items, and (income) loss from continuing operations held
for sale, net of minority interest, increased from 14.1% to 21.3% and from 15.1%
to 18.1% for the three and nine months ended September 30, 1997 and 1998,
respectively.
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Other Income and Expenses
Other income and expenses consists of interest expense, interest income,
other income and minority interest. Interest costs, including amounts
capitalized, decreased for both the three and nine months ended September 30,
1998, as compared to the respective prior year periods, due to the decline in
the Company's outstanding indebtedness and lower borrowing rates. Capitalized
interest for the three and nine months ended September 30, 1998 was $10,726,000
and $29,153,000, respectively, as compared to $12,339,000 and $37,429,000 for
the comparable prior year periods. The decrease in capitalized interest is
primarily due to the decline of construction activities in 1998.
Other income for the nine months ended September 30, 1997, includes
$71,600,000 related to a favorable litigation settlement and the sale of certain
of the Company's investments and businesses, including $38,000,000 from the sale
of a waste-to-energy facility in Hamm, Germany. For the nine months September
30, 1997, other income also includes $129,000,000 related to the sale of the
Company's investment in ServiceMaster, which occurred during the first quarter
of 1997.
Provision for (Benefit From) Income Taxes
The Company recorded a benefit from income taxes of $424,680,000 and
$83,525,000 for the three and nine months ended September 30, 1998,
respectively, and a provision for income taxes of $80,277,000 and $397,862,000
for the three and nine months ended September 30, 1997, respectively. The
benefit from income taxes in the three and nine months ended September 30, 1998,
is the result of the Merger costs and unusual items related to the Merger as
discussed above. The difference in federal income taxes at the statutory rate
and the provision for (benefit from) income taxes for the three and nine months
ended September 30, 1998 and 1997, is primarily due to state and local income
taxes and non-deductible merger costs, non-deductible costs related to acquired
intangibles, and minority interest.
Discontinued Operations
The Company recorded $204,000 and $8,412,000 for the net results of
discontinued operations for the three and nine months ended September 30, 1997,
respectively. See Note 10 of the condensed consolidated financial statements
included herein for additional discussion of discontinued operations.
Extraordinary Item
During the second quarter of 1998, the Company recorded an extraordinary
loss related to the early retirement of debt. The outstanding debt of
approximately $40,000,000 that was retired was assumed as part of the merger
with TransAmerican that was consummated in May 1998, and had an average interest
rate of approximately 9.0%. The extraordinary item, before income taxes was
comprised of $1,811,000 for prepayment penalties and other fees and $4,689,000
for the write-off of unamortized discount and debt issuance costs. In the third
quarter of 1997, the Company recorded on extraordinary loss related to the early
retirement of two privately placed senior note issuances as well as wrote-off
the unamortized deferred financing costs related to United's credit facility
which was retired upon consummation of its merger with the Company.
Net Income (Loss)
For the three and nine months ended September 30, 1998, respectively, net
income (loss) was $(1,267,494,000) and $(851,670,000) or $(2.21) and $(1.52) per
share on a diluted basis as compared to $49,107,000 and $365,316,000 or $0.09
and $0.66 per share on a diluted basis for the respective prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in an industry that requires a high level of capital
investment with neither significant inventory nor seasonal variation in
receivables, and generates substantial cash from operating activities. The
Company's capital requirements basically stem from (i) its working capital needs
for its
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ongoing operations, (ii) capital expenditures for cell construction and
expansion of its landfill sites, as well as new trucks and equipment for its
collection operations, and (iii) business acquisitions. The Company's strategy
is to meet these capital needs first from internally generated funds and second
from various financing sources available to the Company, including the
incurrence of debt and the issuance of its common stock. It is further part of
the Company's strategy to minimize working capital while maintaining available
commitments under bank credit agreements to fund any capital needs in excess of
internally generated cash flow. The Company had unused and available credit
capacity under its Credit Facility and Syndicated Facility of $1,864,000,000 as
of November 9, 1998.
As of September 30, 1998, the Company had a working capital deficit of
$326,284,000 (a ratio of current assets to current liabilities of 0.92:1) and a
cash balance of $166,173,000 which compares to a working capital deficit of
$1,960,163,000 (a ratio of current assets to current liabilities of 0.59:1) and
a cash balance of $184,052,000 as of December 31, 1997. The working capital at
September 30, 1998, was impacted by the current asset "Net Assets Held for Sale"
of $746,600,000 and approximately $420,000,000 of remaining current liabilities
related to the merger cost and other unusual items recorded in the third quarter
of 1998. For the nine months ended September 30, 1998, net cash from operating
activities was approximately $1,296,883,000 and net cash from financing
activities was approximately $1,674,324,000, as compared to $1,221,506,000 and
$(421,715,000), respectively, for the corresponding prior year period. Net cash
from operating activities and financing activities was primarily used to fund
acquisitions of businesses and minority interest of $2,433,123,000, and
$1,351,349,000 and for capital expenditures of $1,046,836,000 and $859,889,000
for the nine months ended September 30, 1998 and 1997, respectively. For the
nine months ended September 30, 1997, the Company used cash in financing
activities of $1,135,209,000 for stock repurchases and dividends as compared to
$82,064,000 for the nine months ended September 30, 1998.
In general, the Company's capital expenditures and working capital
requirements have increased, reflecting the Company's business strategy of
growth through acquisitions and development projects. The Company intends to
finance the remainder of its 1998 capital expenditures through internally
generated cash flow and amounts available under its credit facility. The Company
believes that it has adequate liquidity and resources to meet its needs for
replacement capital and finance anticipated growth.
SIGNIFICANT FINANCING EVENTS
On August 7, 1997, the Company entered into a $2,000,000,000 senior
revolving credit facility with a consortium of banks (the "Credit Facility").
The Credit Facility is used for general corporate purposes including borrowings
and standby letters of credit and principal reductions are not required for the
Credit Facility during its five-year term. The Credit Facility requires a
facility fee not to exceed 0.30% per annum and loans under the Credit Facility
bear interest at a rate based on the Eurodollar rate plus a spread not to exceed
0.575% per annum. At December 31, 1997, the Company had borrowed $430,000,000
and had issued letters of credit of $467,029,000 under the Credit Facility. The
applicable interest rate and facility fee at December 31, 1997, was 6.1% and
0.1125% per annum, respectively.
Upon consummation of the Merger, the Company entered into a syndicated loan
facility ("Syndicated Facility") in the amount of $3,000,000,000, which was an
addition to the Company's existing $2,000,000,000 Credit Facility. The
Syndicated Facility is renewable annually and provides for a one-year term
option at the Company's request. The facility is available for the issuance of
commercial paper and borrowings and up to $800,000,000 of standby letters of
credit. The applicable interest rate, facility fee and covenant restrictions for
the Syndicated Facility are similar to those contained in the Credit Facility,
which was amended to provide for the Merger.
Following the consummation of the Merger, the Company initiated a new
commercial paper issuance program under its own name to replace WM Holdings'
commercial paper issuance program which was subsequently discontinued. The
Company issues commercial paper as alternative to bank borrowings to meet
working capital requirements. All commercial paper is fully backed by committed
bank credit lines.
At September 30, 1998, the Company had issued letters of credit totaling
$1,154,000,000 under the Credit Facility and Syndicated Facility; however, no
borrowings were outstanding under either facility.
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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 credit facilities provided by Chase Manhattan Bank
("Chase") and other banks, as revised in conjunction with the purchase of
remaining publicly held WTI shares. Upon consummation of the Merger, the Company
retired the outstanding indebtedness under the related revolving line of credit
and cancelled the Chase credit facility.
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.
ACQUISITION ACTIVITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holding Trust ("City Management") for approximately $810,000,000
consisting of cash paid, and liabilities and debt assumed. The businesses
acquired are primarily located in the state of Michigan and include several
collection operations, landfills, and transfer stations. This acquisition was
accounted for using the purchase method of accounting.
On May 6, 1998, the Company consummated a merger with TransAmerican
accounted for as a pooling of interests, pursuant to which the Company issued
approximately 1,975,000 shares of its common stock in exchange 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 presented. The businesses acquired include five collection
operations, nine landfills, and two transfer stations located throughout the
southern United States.
On June 18, 1998, the Company acquired the solid waste businesses of
American Waste Systems, Inc., for approximately $150,000,000 in cash. The
businesses acquired include three landfills and one collection operation located
in Ohio. This acquisition was accounted for using the purchase method of
accounting.
In addition to the aforementioned acquisitions, during the nine months
ended September 30, 1998, the Company acquired seven landfills, 79 collection
businesses, and eight transfer stations for approximately $750,000,000 in cash,
liabilities incurred and debt assumed, and approximately 3,150,000 shares of the
Company's common stock in business combinations during the nine months ended
September 30, 1998, accounted for under the purchase method of accounting.
RECENT DEVELOPMENTS
On June 29, 1998, WM Holdings announced that it had reached an agreement to
acquire the publicly owned shares of its subsidiary, Waste Management
International plc ("WM International"). Under the agreement, WM Holdings agreed
to pay approximately $432 million, in the aggregate, to the holders of the
approximately 20% of the outstanding shares of WM International not owned by WM
Holdings and its subsidiaries. Minority Shareholders of WM International have
approved the transaction. In addition, the English High Court has sanctioned the
transaction. As a result of the transaction becoming effective on November 3,
1998, WM International became an indirect, wholly-owned subsidiary of WM
Holdings.
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
Water plc ("Wessex") for 205 million pounds ($342 million). All of the
conditions precedent set forth in that agreement have been satisfied, and the
transaction is expected to close in the fourth quarter of 1998.
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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 24,000,000 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, however it is
anticipated that the Eastern Merger will be completed during 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.
The Company's business plan is to grow through acquisitions as well as
development projects. The Company has issued equity securities in business
acquisitions and expects to do so in the future. Furthermore, the Company's
future growth will depend greatly upon its ability to raise additional capital.
The Company continually reviews various financing alternatives and depending
upon market conditions could pursue the sale of debt and/or equity securities to
help effectuate its business strategy. Management believes that it can arrange
the necessary financing required to accomplish its business plan; however, to
the extent the Company is not successful in its future financing strategies the
Company's growth could be limited. On August 4, 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission to provide
for the issuance of up to 20,000,000 shares of the Company's common stock that
may be offered and issued by the Company from time to time in connection with
the acquisition directly or indirectly by the Company of other businesses or
properties or interests therein, and which may be reserved for issuance pursuant
to, or offered and issued upon exercise or conversion of, warrants, options,
convertible notes, or other similar instruments issued by the Company from time
to time in connection with such acquisitions. As of September 30, 1998, the
Company had approximately 13,600,000 shares of its common stock available for
future offerings and issuances under this shelf registration statement.
On September 28, 1998, the Company entered into an agreement to sell
substantially all of the assets and future airspace rights required to be sold
in accordance with the terms of a governmental consent decree relating to the
Merger. In addition, certain duplicate properties arising from the Merger as
well as certain assets required to be sold from an earlier acquisition were also
included in the sale. The sales price was comprised of approximately $500
million cash, subject to certain adjustments, plus certain properties of the
buyer. The annual revenue for the assets being sold is approximately $275
million, of which approximately $180 million is generated by third parties. The
parties also entered into certain waste disposal agreements as part of the
transaction. The transaction, which is expected to close before December 31,
1998, is subject to approvals from various state and federal agencies as well as
other normal and customary closing conditions.
SEASONALITY AND INFLATION
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter and fourth
quarter operating results. This is primarily attributable to the fact that (i)
the volume of waste relating to construction and demolition activities tends to
increase in the spring and summer months and (ii) the volume of residential
waste in certain regions where the Company operates tends to decrease during the
winter months.
The Company believes that inflation and changing prices have not had, and
are not expected to have, any material adverse effect on the results of
operations in the near future.
YEAR 2000 DATE CONVERSION
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive data by the Company's computerized
information systems. In 1997, the Company began to modify its computer
information systems to ensure proper processing of transactions relating to the
Year 2000 and beyond and expects to complete the majority of the required
modifications during 1998. The Company has completed its modification of the
accounts payable application and will complete its modification of the financial
reporting system by January 1999. The amount charged to expense during the three
and nine months
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ended September 30, 1998 and 1997, as well as the amounts anticipated to be
charged to expense related to the Year 2000 computer compliance modifications,
have not been and are not expected to be material to the Company's financial
position, results of operations or cash flows.
The Company is taking steps to resolve Year 2000 compliance issues that may
be created by customers, suppliers and financial institutions with whom the
Company does business. However, there can be no guarantee that the systems of
other entities will be converted timely.
The Company is in the process of establishing a worst case scenario and
written contingency plan to address any issues that could arise should the
Company or any of its significant suppliers or customers not be prepared to
accommodate Year 2000 issues timely. The Company believes that in an emergency
it could revert to the use of manual systems that do not rely on computers and
could perform the minimum functions required to provide information reporting to
maintain satisfactory control of the business. Should the Company have to
utilize manual systems, it is uncertain that it could maintain the same level of
operations, and this could have a material adverse impact on the business. The
Company intends to maintain constant surveillance on this situation and will
develop such contingency plans as are required by the changing environment.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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 required for interim periods in the initial
year of application. Adoption of this statement will not have a material impact
on the consolidated financial statements of the Company.
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. The Company adopted SOP 98-5 in the third quarter of 1998. The impact of
SOP 98-5 was not material to 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 No.
133"). 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 these
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.
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PART II.
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 1998, the Company or its subsidiaries has been notified
that they are potentially responsible parties ("PRPs") in connection with 89
sites listed on the Superfund National Priorities List ("NPL"). The majority of
situations involving NPL sites related 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. Where the
Company concludes that it is probable that a liability has been incurred,
provision is made in the financial statements.
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment and the potential for the
unintended or unpermitted discharge of materials into the environment. In the
ordinary course of conducting its business activities, the Company becomes
involved in judicial and administrative proceedings involving governmental
authorities at the federal, state and local level, including, in certain
instances, proceedings instituted by citizens or local governmental authorities
seeking to overturn governmental action where governmental officials or agencies
are named as defendants together with the Company or one or more of its
subsidiaries, or both. In the majority of the situations where proceedings are
commenced by governmental authorities, the matters involved relate to alleged
technical violations of licenses or permits pursuant to which the Company
operates or is seeking to operate or laws or regulations to which its operations
are subject or are the result of different interpretations of the applicable
requirements. From time to time, the Company pays fines or penalties in
environmental proceedings relating primarily to waste treatment, storage or
disposal facilities. As of September 30, 1998, one Company subsidiary engaged in
providing hazardous waste management services and one Company subsidiary engaged
in providing municipal solid waste management services were involved in such
proceedings where it is believed that sanctions involved may exceed $100,000.
The Company believes that these matters will not have a material adverse effect
on its results of operations, financial condition, or cash flows. However, the
outcome of any particular proceeding cannot be predicted with certainty, and the
possibility remains that technological, regulatory or enforcement developments,
the results of environmental studies or other factors could materially alter
this expectation at any time.
The Company has been advised by the U.S. Department of Justice that Laurel
Ridge Landfill, Inc., a wholly-owned subsidiary of the Company as a result of
the Company's acquisition of 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 in August 1997. The Company is attempting to
negotiate a resolution with the government.
On August 27, 1998, a subsidiary of the Company paid the Pennsylvania
Department of Environmental Protection a civil penalty in the amount of $300,000
for the placement of excavated soils into quarry waters and wetlands without
authorization at the Milton Grove Construction and Demolition Landfill.
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 upheld that ruling. In
September 1998, the Company reached a settlement with the town of New Milford,
requiring annual payments to the town for a 25 year period. The settlement
agreement was adopted by the Superior Court, which modified its order by
substituting the payments for the removal of the waste.
In June 1997, judgment was entered against Chemical Waste Management, Inc.
("CWM"), a wholly-owned subsidiary of Waste Management Holdings, Inc., in U.S.
District Court in Memphis, Tennessee arising out of claims made by prior owners
of CWM's Emelle, Alabama hazardous waste landfill facility. The
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U.S. District Court found that the prior owners were entitled to unpaid
royalties due from the facility, punitive damages and attorneys' fees. CWM
appealed the judgement to the Sixth U.S. Circuit Court of Appeals. In September
1998, CWM and the Plaintiffs reached a comprehensive settlement whereby all
issues relating to the outstanding indebtedness and obligations arising out of
the U.S. District Court's judgement as well as the outstanding obligations
arising out of the underlying royalty agreement were resolved. This settlement
did not have a material adverse impact on the Company's financial condition,
results of operations, or cash flows.
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 facility in Gloucester County, New Jersey.
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. Negotiations with Gloucester County are ongoing.
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 $190-$210 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 one-half of the incremental expenditures
incurred to comply with these stricter air emission standards.
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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 and claims 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 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
34
36
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 sought to enjoin the completion of a proposed transaction whereby the
Company indirectly acquired all WM International ordinary shares not held by
Company subsidiaries or, in the alternative, rescission or compensatory damages.
Among other things, the complaint asserts that the defendants breached their
fiduciary duties to the holders of ADRs and that the holders of ADRs were denied
a proper premium for their ADRs. The WM International transaction became
effective on November 3, 1998 as discussed in Management's Discussion and
Analysis -- Recent Developments. 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 sought to
enjoin the completion of the above-described WM International transaction or, in
the alternative, rescission or compensatory damages. Among other things, the
complaint asserts that the defendants breached their fiduciary duties to the
shareholders of WM International (Mr. Flynn was a director of WM International
and WM Holdings, its controlling shareholder) and that the shareholders of WM
International were 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.
35
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Special Meeting of Stockholders held on July 15, 1998,
four proposals were submitted to a vote of the Company's stockholders. The
proposals and results of voting were as follows:
- Proposal to amend the Company's Restated Certificate of Incorporation to
a) increase the number of authorized shares of the Company's common
stock, par value $0.01 per share, from 500,000,000 to 1,500,000,000; and
b) change the name of USA Waste Services, Inc. ("USA Waste") to "Waste
Management, Inc."; in each case, at the time of the merger contemplated
by the Agreement and Plan of Merger (the "Merger Agreement"), dated as of
March 10, 1998 among USA Waste, Dome Merger Subsidiary, Inc., a Delaware
Corporation and a wholly-owned subsidiary of USA Waste, and Waste
Management, Inc., a Delaware corporation ("Old Waste Management").
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
- --------------------- --------- ----------- ----------
159,715,366 3,464,384 279,864 19,481,775
- Proposal to issue up to 380,625,000 shares of USA Waste common stock in
exchange for shares of common stock, par value $1.00 per share, of Old
Waste Management pursuant to the Merger Agreement.
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
- ----------- --------- ----------- ----------
162,431,764 607,060 420,787 19,481,777
- Proposal to approve an amendment to the Company's Amended and Restated
1993 Stock Incentive Plan increasing the aggregate number of shares that
may be issued under such Plan from 16,500,000 to 26,500,000.
VOTES
VOTES FOR AGAINST ABSTENTIONS
- ----------- --------- -----------
142,468,615 40,251,607 221,166
- Proposal to approve an amendment to the Company's 1996 Stock Option Plan
for Non-Employee Directors increasing the aggregate number of shares that
may be issued under such Plan from 400,000 to 1,400,000.
VOTES
VOTES FOR AGAINST ABSTENTIONS
- ----------- --------- -----------
176,362,497 6,248,300 330,592
36
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT NO.* DESCRIPTION
------------ -----------
12 -- Computation of Ratio of Earnings to Fixed Charges.
27 -- Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities and Exchange Act of 1934, the Registrant's file number under that
Act is 1-12154.
(b) Reports on Form 8-K:
During the third quarter of 1998, the Company filed reports on Form 8-K as
follows:
(i) a report dated July 14, 1998, reporting under Item 5 that the
Company sold $600,000,00 of its 7% Senior Notes due 2028 and $600,000,000
of its 6 1/8% Senior Notes due 2011 in an underwritten public offering.
(ii) a report dated July 16, 1998, reporting under Item 2 that the
consummation of the merger among USA Waste Services, Inc. and Waste
Management, Inc. and the concurred name change of USA Waste Services, Inc.
to Waste Management, Inc. (the "Company") and that former Waste Management
Inc. had changed its name to Waste Management Holdings, Inc. ("WM
Holdings"). Additionally, reporting under Item 5 the Company reported that
it had entered into a supplemental indenture with respect to an indenture
dated as of January 24, 1995, between WM Holdings and NationsBank of
Georgia, N.A., pursuant to which WM Holdings issued Convertible
Subordinated Notes due 2005. The supplemental indenture provides that the
convertible notes will, upon conversion pursuant to their terms, be
convertible into shares of the Company's common stock.
(iii) a report dated August 17, 1998, reporting under Item 2 that the
Company had entered into an Agreement and Plan of Merger with Eastern
Environmental Services, Inc. ("Eastern"), whereby each shareholder of
Eastern will receive 0.6406 shares of the Company's common stock for each
share of Eastern common stock held.
(iv) a report dated September 15, 1998, reporting under Item 4 that
upon recommendation of the Company's Audit Committee, the Board of
Directors of the Company resolved that the Company would retain Arthur
Andersen LLP as the Company's independent accountants.
(v) a report dated September 23, 1998, reporting under Item 7 the
Company's supplemental consolidated financial statements to account for the
pooling of interests transaction among the Company and WM Holdings.
(vi) an amendment to a report dated July 16, 1998, reporting under
Item 7 the historical financial statements of WM Holdings and the pro forma
financial statements which combine the Company and WM Holdings assuming the
Merger accounted for as a pooling of interests.
37
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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: November 13, 1998
38
40
INDEX TO EXHIBITS
EXHIBIT NO. * DESCRIPTION
------------- -----------
12 -- Computation of Ratio of Earnings to Fixed Charges.
27 -- Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities and Exchange Act of 1934, the Registrant's file number under that
Act is 1-12154.
1
EXHIBIT 12
WASTE MANAGEMENT, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
--------- ----------
Income (loss) from continuing operations before income
taxes, undistributed earnings from affiliated companies,
and minority interest..................................... $(920,291) $ 854,912
--------- ----------
Fixed charges deducted from income:
Interest expense.......................................... 499,145 403,419
Implicit interest in rents................................ 39,988 40,810
--------- ----------
539,133 444,229
--------- ----------
Earnings available for fixed charges.............. $(381,158) $1,299,141
========= ==========
Interest expense............................................ $ 499,145 $ 403,419
Capitalized interest........................................ 29,153 37,372
Implicit interest in rents.................................. 39,988 40,810
--------- ----------
Total fixed charges............................... $ 430,004 $ 481,601
========= ==========
Ratio of earnings to fixed charges........................ N/A(1) 2.7x
========= ==========
- ---------------
(1) The ratio of earnings to fixed charges for the nine months ended September
30, 1998, was less than a one-to-one ratio. Additional earnings available
for fixed charges of $811,162,000 were needed to have a one-to-one ratio.
The earnings available for fixed charges was negatively impacted by merger
cost of $1,561,915,000 and unusual items of $666,952,000 in the third
quarter of 1998 related to the Merger between USA Waste Services, Inc. and
Waste Management, Inc.
5
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
166,173,000
994,000
2,264,487,000
92,731,000
136,652,000
4,016,699,000
16,853,616,000
6,220,094,000
21,374,843,000
4,342,983,000
9,695,312,000
0
0
5,818,000
3,967,050,000
21,374,843,000
9,236,544,000
9,236,544,000
5,445,173,000
9,796,957,000
(128,263,000)
0
499,145,000
(931,295,000)
(83,525,000)
(847,770,000)
0
(3,900,000)
0
(851,670,000)
(1.52)
(1.52)
