<PAGE>
================================================================================
- --------------------------------------------------------------------------------
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 MARCH 31, 1998
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 1-7327
WASTE MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-2660763
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3003 Butterfield Road,
Oak Brook, Illinois 60523
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (630) 572-8800
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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Shares of Registrant's Common Stock, $1 par value, issued and
outstanding, at April 30, 1998--455,601,250
(excluding 10,886,361 shares held in the Waste Management, Inc. Employee Stock
Benefit Trust).
================================================================================
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<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I. Financial Information:
Consolidated balance sheets as of March 31, 1997, December 31, 1997, and
March 31, 1998..................................................... 3
Consolidated statements of income for the three months
ended March 31, 1996, 1997 and 1998................................ 5
Consolidated statements of stockholders' equity for the three months
ended March 31, 1996, 1997 and 1998................................ 6
Consolidated statements of cash flows for the three months
ended March 31, 1996, 1997 and 1998................................ 9
Notes to consolidated financial statements.............................. 11
Management's discussion and analysis of results of operations
and financial condition............................................ 24
PART II. Other Information............................................. 35
******
2
<PAGE>
PART I. FINANCIAL INFORMATION
Waste Management, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(000's omitted)
Assets
<TABLE>
<CAPTION>
Restated
--------------
March 31, 1997 December 31, 1997 March 31, 1998
-------------- ----------------- --------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 491,959 $ 132,811 $ 311,861
Short-term investments 631,006 59,296 3,053
Accounts receivable, less reserve of $48,359 at
March 31, 1997, $51,805 at December 31, 1997 and
$54,161 at March 31, 1998 1,565,520 1,539,413 1,463,754
Employee receivables 10,291 7,817 11,620
Parts and supplies 142,221 119,039 123,933
Costs and estimated earnings in excess of billings on
uncompleted contracts 255,184 158,610 158,964
Prepaid expenses 125,846 128,520 106,441
----------- ----------- -----------
Total Current Assets $ 3,222,027 $ 2,145,506 $ 2,179,626
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 4,567,871 $ 3,811,887 $ 3,866,957
Buildings 1,474,880 1,327,179 1,313,222
Vehicles and equipment 7,365,031 6,572,424 6,531,178
Leasehold improvements 86,249 77,202 81,732
----------- ----------- -----------
$13,494,031 $11,788,692 $11,793,089
Less--Accumulated depreciation and amortization (4,927,103) (4,534,543) (4,666,663)
----------- ----------- -----------
Total Property and Equipment, Net $ 8,566,928 $ 7,254,149 $ 7,126,426
----------- ----------- -----------
OTHER ASSETS:
Intangible assets relating to acquired businesses, net $ 3,728,860 $ 3,198,374 $ 3,686,079
Net assets of continuing businesses and surplus real
estate held for sale 262,664 154,384 137,995
Sundry, including other investments 887,176 836,685 733,874
----------- ----------- -----------
Total Other Assets $ 4,878,700 $ 4,189,443 $ 4,557,948
----------- ----------- -----------
Total Assets $16,667,655 $13,589,098 $13,864,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(000's omitted except per share amounts)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Restated
-------------------
March 31, 1997 December 31, 1997 March 31, 1998
------------------- ------------------- -------------------
CURRENT LIABILITIES:
<S> <C> <C> <C>
Portion of long-term debt payable within one year $ 1,063,426 $ 1,548,465 $ 1,025,685
Obligation to former Wheelabrator Technologies Inc.
shareholders - - 876,232
Accounts payable 861,533 758,047 687,419
Accrued expenses 1,590,711 1,652,314 1,683,398
Unearned revenue 208,800 233,579 236,339
----------- ----------- -----------
Total Current Liabilities $ 3,724,470 $ 4,192,405 $ 4,509,073
----------- ----------- -----------
DEFERRED ITEMS:
Income taxes $ 422,499 $ 212,869 $ 216,797
Environmental liabilities 700,337 840,378 851,406
Other 728,014 808,556 794,257
----------- ----------- -----------
Total Deferred Items $ 1,850,850 $ 1,861,803 $ 1,862,460
----------- ----------- -----------
LONG-TERM DEBT, less portion payable within one year $ 6,139,969 $ 5,078,557 $ 5,398,132
----------- ----------- -----------
NET LIABILITIES OF DISCONTINUED OPERATIONS $ 32,342 $ - $ -
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARIES $ 1,146,967 $ 1,110,681 $ 739,442
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value (issuable in
series), 50,000,000 shares authorized; none
outstanding during the periods $ - $ - $ -
Common stock, $1 par value; 1,500,000,000 shares
authorized; 507,101,774 shares issued 507,102 507,102 507,102
Additional paid-in capital 956,987 932,253 990,270
Cumulative translation adjustment (186,140) (239,319) (253,938)
Retained earnings 3,264,215 1,735,371 1,730,516
----------- ----------- -----------
$ 4,542,164 $ 2,935,407 $ 2,973,950
Less: Treasury stock; 12,291,956 shares at March 31,
1997, 41,177,630 at December 31, 1997, and
40,983,967 at March 31, 1998, at cost 403,747 1,271,885 1,265,976
1988 Employee Stock Ownership Plan 4,729 - -
Employee Stock Benefit Trust; 10,886,361
shares in 1997 and 1998, at market 329,312 299,375 335,436
Minimum pension liability 18,885 7,393 7,393
Restricted Stock unearned compensation 12,434 11,102 10,252
----------- ----------- -----------
Total Stockholders' Equity $ 3,773,057 $ 1,345,652 $ 1,354,893
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $16,667,655 $13,589,098 $13,864,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Restated
--------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE $2,144,479 $2,204,985 $2,131,621
---------- ---------- ----------
Operating expenses $1,532,718 $1,697,528 $1,621,985
Special charge - 15,916 -
Asset impairment loss 118 5,905 -
Selling and administrative expenses 261,821 249,816 263,882
Interest expense 108,723 115,055 115,574
Interest income (6,240) (12,362) (4,310)
Minority interest 26,443 27,075 25,302
(Income) loss from continuing operations held
for sale, net of minority interest (1,172) (119) 2,416
Sundry income, net (22,685) (135,445) (64,196)
---------- ---------- ----------
Income from continuing operations before
income taxes $ 244,753 $ 241,616 $ 170,968
Provision for income taxes 111,182 127,231 96,551
---------- ---------- ----------
Income from continuing operations $ 133,571 $ 114,385 $ 74,417
Discontinued operations:
Income from operations, less applicable income
taxes and minority interest of $4,497 in 1996 4,377 - -
Income from reserve adjustment, net of
applicable income taxes and minority
interest of $1,530 in 1996 and $7 in 1997 470 647 -
---------- ---------- ----------
NET INCOME $ 138,418 $ 115,032 $ 74,417
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING 489,231 483,993 455,096
========== ========== ==========
EARNINGS PER SHARE:
Basic -
Continuing operations $ 0.27 $ 0.24 $ 0.16
Discontinued operations 0.01 - -
---------- ---------- ----------
Net Income $ 0.28 $ 0.24 $ 0.16
========== ========== ==========
Diluted -
Continuing operations $ 0.27 $ 0.23 $ 0.16
Discontinued operations 0.01 - -
---------- ---------- ----------
Net Income $ 0.28 $ 0.23 $ 0.16
========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.16 $ 0.17
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1996
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
1988
Employee
Additional Cumulative Stock
Common Paid-In Translation Retained Treasury Ownership
Stock Capital Adjustment Earnings Stock Plan
--------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 498,817 $ 438,816 $ (102,943) $ 3,582,861 $ - $ 13,062
Net income for the period (restated) - - 138,418 - -
Cash dividends ($.15 per share) - - (74,173) - -
Dividends paid to Employee Stock Benefit
Trust - 1,718 - (1,718) - -
Common stock issued upon exercise of stock
options 48 (2,354) - - (1,814) -
Treasury stock received in connection with
exercise of stock options - - - 714 -
Tax benefit of non-qualified stock options
exercised - 1,289 - - -
Contribution to 1988 Employee Stock
Ownership Plan - - - - - (1,667)
Treasury stock received as settlement for
claims - - - 1,100 -
Common stock issued upon conversion of
Liquid Yield Option Notes 100 1,768 - - - -
Common stock issued for acquisitions 7,093 198,618 - - - -
Common stock purchased through
non-qualified deferred compensation plan 6,009
Adjustment of Employee Stock Benefit Trust
to market value - 23,026 - - -
Cumulative translation adjustment of
Foreign currency statements - - (9,539) - - -
--------- ---------- ------------ ----------- --------- -----------
Balance, March 31, 1996 (restated) $ 506,058 $ 668,890 $ (112,482) $ 3,645,388 $ - $ 11,395
========= ========== ============ =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Employee
Stock Minimum
Benefit Pension
Trust Liability
--------- -----------
<S> <C> <C>
Balance, January 1, 1996 $ 350,151 $ 11,692
Net income for the period (restated) - -
Cash dividends ($.15 per share) - -
Dividends paid to Employee Stock Benefit
Trust - -
Common stock issued upon exercise of stock
options (10,969) -
Treasury stock received in connection with
exercise of stock options - -
Tax benefit of non-qualified stock options
exercised - -
Contribution to 1988 Employee Stock
Ownership Plan - -
Treasury stock received as settlement for
claims - -
Common stock issued upon conversion of
Liquid Yield Option Notes - -
Common stock issued for acquisitions - -
Common stock purchased through
non-qualified deferred compensation
plan - -
Adjustment of Employee Stock Benefit Trust
to market value 23,026 -
Cumulative translation adjustment of
foreign currency statements - -
--------- -----------
Balance, March 31, 1996 (restated) $ 362,208 $ 11,692
========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1997
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-In Translation Retained Treasury
Stock Capital Adjustment Earnings Stock
--------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
<C>
Balance, January 1, 1997 $507,102 $887,026 $(79,213) $3,228,346 $419,871
Net income for the period (restated) - - - 115,032 -
Cash dividends ($.16 per share) - - - (77,422) -
Dividends paid to Employee Stock
Benefit Trust - 1,741 - (1,741) -
Common stock issued upon exercise of
stock options - (4,733) - - (16,029)
Compensation paid with stock
options - 701 - - -
Tax benefit of non-qualified stock
options exercised - 1,498 - - -
Unearned compensation related to
issuance of restricted stock to
employees - - - - -
Earned compensation related to
restricted stock (net of
reversals on forfeited shares) - - - - -
Contribution to 1988 Employee Stock
Ownership Plan - - - - -
Treasury stock received as
settlement for claims - - - - 141
Common stock issued upon conversion
of Liquid Yield Option Notes - (91) - - (236)
Temporary equity related to put
options - 95,789 - - -
Settlement of put options - (1,605) - - -
Common stock purchased through
non-qualified deferred
compensation plan - 1,156 - - -
Adjustment of Employee Stock
Benefit Trust to market value - (24,495) - - -
Cumulative translation adjustment
of foreign currency statements - - (106,927) - -
-------- -------- --------- ---------- --------
Balance, March 31, 1997 (restated) $507,102 $956,987 $(186,140) $3,264,215 $403,747
======== ======== ========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
1988
Employee Employee Restricted
Stock Stock Minimum Stock -
Ownership Benefit Pension Unearned
Plan Trust Liability Compensation
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $6,396 $353,807 $18,885 $ 2,541
Net income for the period (restated) - - - -
Cash dividends ($.16 per share) - - - -
Dividends paid to Employee Stock
Benefit Trust - - - -
Common stock issued upon exercise of
stock options - - - -
Compensation paid with stock
options - - - -
Tax benefit of non-qualified stock
options exercised - - - -
Unearned compensation related to
issuance of restricted stock to
employees - - - 10,001
Earned compensation related to
restricted stock (net of
reversals on forfeited shares) - - - (108)
Contribution to 1988 Employee Stock
Ownership Plan (1,667) - - -
Treasury stock received as
settlement for claims - - - -
Common stock issued upon conversion
of Liquid Yield Option Notes - - - -
Temporary equity related to put
options - - - -
Settlement of put options - - - -
Common stock purchased through
non-qualified deferred
compensation plan - - - -
Adjustment of Employee Stock
Benefit Trust to market value - (24,495) - -
Cumulative translation adjustment
of foreign currency statements - - - -
------ -------- ------- -------
Balance, March 31, 1997 (restated) $4,729 $329,312 $18,885 $12,434
====== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-In Translation Retained Treasury
Stock Capital Adjustment Earnings Stock
-------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $507,102 $932,253 $(239,319) $1,735,371 $1,271,885
Net income for the period - - - 74,417 -
Cash dividends ($.17 per share) - - - (77,422) -
Dividends paid to Employee Stock
Benefit Trust - 1,850 - (1,850) -
Common stock issued upon exercise
of stock options - (1,025) - - (5,577)
Tax benefit of non-qualified stock
options exercised - 300 - - -
Earned compensation related to
restricted stock(net of
reversals on forfeited shares) - - - - -
Reversal of unearned compensation upon
cancellation of restricted stock - - - - -
Common stock issued upon conversion
of Liquid Yield Option Notes - (95) - - (332)
Common stock purchased through
non-qualified deferred
compensation plan - 788 - - -
Conversion of WTI stock options
to WMI stock options - 20,138 - - -
Adjustment of Employee Stock
Benefit Trust to market value - 36,061 - - -
Cumulative translation adjustment
of foreign currency statements - - (14,619) - -
-------- -------- --------- ---------- ----------
Balance, March 31, 1998 $507,102 $990,270 $(253,938) $1,730,516 $1,265,976
======== ======== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1988
Employee Employee Restricted
Stock Stock Minimum Stock
Ownership Benefit Pension Unearned
Plan Trust Liability Compensation
--------- -------- --------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ - $299,375 $7,393 $11,102
Net income for the period - - - -
Cash dividends ($.17 per share) - - - -
Dividends paid to Employee Stock
Benefit Trust - - - -
Common stock issued upon exercise
of stock options - - - -
Tax benefit of non-qualified stock
options exercised - - - -
Earned compensation related to
restricted stock(net of
reversals on forfeited shares) - - - (322)
Reversal of unearned compensation upon
cancellation of restricted stock - - - (528)
Common stock issued upon conversion
of Liquid Yield Option Notes - - - -
Common stock purchased through
non-qualified deferred
compensation plan - - - -
Conversion of WTI stock options
to WMI stock options - - - -
Adjustment of Employee Stock
Benefit Trust to market value - 36,061 - -
Cumulative translation adjustment
of foreign currency statements - - - -
------- -------- ------ -------
Balance, March 31, 1998 $ - $335,436 $7,393 $10,252
======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
8
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Restated
---------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income for the period $ 138,418 $ 115,032 $ 74,417
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 256,389 248,260 265,772
Provision for deferred income taxes 46,969 (12,451) 39,603
Undistributed earnings of equity investees (8,959) (1,000) (1,082)
Minority interest in subsidiaries 27,313 27,064 24,925
Interest on Liquid Yield Option Notes and Subordinated Notes 5,607 5,486 4,858
Contribution to 1988 Employee Stock Ownership Plan 1,667 1,667 -
Special charges - 15,916 -
Asset impairment loss 118 5,905 -
Income from reserve adjustments, net of tax and minority interest
(470) (647) -
Gain on disposition of businesses and assets - (129,010) (53,396)
Changes in assets and liabilities, excluding effects of acquired or
divested companies:
Receivables, net 31,943 44,246 72,758
Other current assets (25,371) (31,919) 31,429
Sundry other assets 28,706 (17,158) 1,313
Accounts payable (234,807) (72,140) (71,006)
Accrued expenses and unearned revenue 16,666 237,095 45,895
Deferred items (66,076) (89,440) (72,032)
Other, net (375) (12,883) (8,920)
--------- --------- ----------
Net cash provided by operating activities $ 217,738 $ 334,023 $ 354,534
--------- --------- ----------
Cash flows from investing activities:
Short-term investments $ 9,607 $ 811 $ 56,227
Capital expenditures (267,180) (142,375) (166,584)
Proceeds from asset monetization program 25,546 330,016 210,537
Cost of acquisitions, net of cash acquired (35,695) (2,344) (90,125)
Other investments (14,578) (5,486) 115,151
Acquisition of minority interests (81,811) (10,013) (876,232)
--------- --------- ----------
Net cash obtained from (used for) investing activities $(364,111) $ 170,609 $ (751,026)
--------- --------- ----------
Cash flows from financing activities:
Cash dividends $ (74,173) $ (77,422) $ (77,422)
Proceeds from issuance of indebtedness and other obligations 340,236 222,691 1,513,376
Repayments of indebtedness (213,895) (486,566) (863,624)
Proceeds from exercise of stock options 9,763 11,296 10,245
Contributions from minority interests 2,143 - -
Other distributions to minority stockholders by affiliated companies - (4,355) (6,992)
Stock repurchases - - (41)
Settlement of put options - (1,605) -
--------- --------- ----------
Net cash obtained from (used for) financing activities $ 64,074 $(335,961) $ 575,542
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents $ (82,299) $ 168,671 $ 179,050
Cash and cash equivalents at beginning of period 169,541 323,288 132,811
--------- --------- ----------
Cash and cash equivalents at end of period $ 87,242 $ 491,959 $ 311,861
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
Waste Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Restated
-----------------------------
1996 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $103,116 $109,568 $110,716
Income taxes, net of refunds received 31,538 87,660 3,954
Supplemental schedule of noncash investing and financing activities:
LYONS converted into common stock of the Company $ 1,868 $ 145 $ 237
Liabilities assumed in acquisitions of businesses 85,670 - 37,210
Fair market value of Company or subsidiary stock issued for
acquired businesses 205,711 - -
Proceeds received in quarter ended June 30, 1997, from sale of
Investment in ServiceMaster LP - 625,978 -
The Company considers cash and cash equivalents to include
currency on hand, demand deposits with banks and short-term
investments with maturities of less than three months when
purchased.
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tables in millions except per share amounts,
unless otherwise noted)
The financial statements included herein have been prepared by Waste Management,
Inc. (the "Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial information included herein reflects, in
the opinion of the Company, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. The results for interim
periods are not necessarily indicative of results for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates in the
near term.
Note 1 - Restatements and Reclassifications -
In its 1997 Report on Form 10-K, the Company has restated and reclassified its
previously reported financial results for 1992 through 1997. Unaudited quarterly
financial data for 1996 and the first three quarters of 1997 have also been
restated and reclassified. Except as otherwise stated herein, all information
presented in this Report on Form 10-Q includes all such restatements and
reclassifications.
As a result of a comprehensive review begun in the third quarter of 1997, the
Company determined that certain items of expense were incorrectly reported in
previously issued financial statements. These principally relate to vehicle,
equipment and container depreciation expense, capitalized interest and income
taxes. With respect to depreciation, the Company determined that incorrect
vehicle and container salvage values had been used, and errors had been made in
the expense calculations. The Company also concluded that capitalized interest
relating to landfill construction projects had been misstated. On January 1,
1995, the Company changed its accounting for capitalized interest, but the
cumulative "catch-up" charge was not properly recorded in the 1995 financial
statements, and errors were made in applying the new method in subsequent years.
Accordingly, capitalized interest for the interim periods from 1995 through the
third quarter of 1997 has been restated.
The prior period restatements also include earlier recognition of certain asset
value impairments (primarily related to land, landfill and recycling
investments) and of environmental liabilities (primarily related to remediation
and landfill closure and post-closure expense accruals including restatement of
purchase accounting).
11
<PAGE>
The effect of such reclassifications, and the restatements discussed above on
the income statement line items, is shown in the following table.
<TABLE>
<CAPTION>
1996 1997
----------------------------- ------------------------------
First Quarter First Quarter
----------------------------- ------------------------------
Previously As Previously As
Reported Restated Reported Restated
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $2,144.5 $2,144.5 $2,198.3 $2,205.0
Operating expenses 1,494.8 1,532.7 1,617.8 1,697.5
Special charges - - - 15.9
Asset impairment loss - 0.1 - 5.9
Selling and administrative expenses 245.9 261.8 261.2 249.8
Interest, net 87.5 102.5 95.5 102.7
Minority interest 27.2 26.5 27.8 27.1
Income from continuing operations
held for sale - (1.2) - (0.1)
Sundry income (17.3) (22.7) (133.9) (135.4)
Provision for income tax 126.2 111.2 151.5 127.2
-------- -------- -------- --------
Income from continuing operations $ 180.2 $ 133.6 $ 178.4 $ 114.4
Discontinued operations 5.0 4.8 - 0.6
-------- -------- -------- --------
Net income $ 185.2 $ 138.4 $ 178.4 $ 115.0
======== ======== ======== ========
Basic income per share -
Continuing operations $ 0.37 $ 0.27 $ 0.37 $ 0.24
Discontinued operations 0.01 0.01 - -
-------- -------- -------- --------
Net income $ 0.38 $ 0.28 $ 0.37 $ 0.24
======== ======== ======== ========
Diluted income per share -
Continuing operations $ 0.36 $ 0.27 $ 0.36 $ 0.23
Discontinued operations 0.01 0.01 - -
-------- -------- -------- --------
Net income $ 0.37 $ 0.28 $ 0.36 $ 0.23
======== ======== ======== ========
</TABLE>
Note 2 - Income Taxes -
The following table sets forth the provision for income taxes for continuing
operations for the three months ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Currently payable $ 64,213 $139,682 $56,948
Deferred 46,969 (12,451) 39,603
-------- -------- -------
$111,182 $127,231 $96,551
======== ======== =======
</TABLE>
Note 3 - Merger Transaction -
On March 10, 1998, the Company entered into a definitive merger agreement (the
"Merger Agreement") with USA Waste Services, Inc. ("USA Waste") pursuant to
which the Company will be merged with a wholly-owned subsidiary of USA Waste
(the "Merger"). Pursuant to the Merger Agreement, the Company's stockholders
will receive .725 shares of common stock of USA Waste for each share of common
stock of the Company. The consummation of the Merger is subject to a number of
conditions, including the expiration or termination of the applicable merger
review waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976, approval by the stockholders of each company and other closing conditions.
In addition, the Merger is contingent upon the transaction qualifying for
pooling-of-interests accounting treatment. In order to qualify for pooling-of-
interests accounting treatment, the Company intends to sell a portion of its
treasury shares pursuant to a registered public offering or in private
transactions prior to the closing of the Merger. A lawsuit by an alleged Company
stockholder purporting to represent a class of the Company's stockholders has
been filed against the Company and the members of its Board of Directors
alleging breaches of fiduciary duty by the defendants in
12
<PAGE>
connection with the Merger. The lawsuit seeks, among other things, to have the
transaction enjoined and to recover unspecified damages. The Company believes
the suit to be without merit and intends to contest it vigorously.
Upon the consummation of the Merger, certain bank debt of Waste Management
International plc ("WM International") may be accelerated and become payable
with three months notice. At March 31, 1998, this debt totaled approximately
$69.7 million. The Company's credit facility with a group of banks led by Chase
Manhattan Bank, as discussed in Note 11, is also subject to earlier termination
in the event of a change-in-control. In addition, Wessex Water Plc ("Wessex")
has an option to acquire WM International's ownership in its United Kingdom
business at fair market value that may become exercisable upon the consummation
of the Merger. In 1997, this business had revenues of approximately $276 million
and operating income (before minority interest) of approximately $25 million. WM
International had a net investment of approximately $321.6 million in the
business at March 31, 1998.
The Company may have other "change of control" provisions in customer and
employee contracts or agreements, governmental franchises or facility permits
that may be triggered by the closing of the proposed Merger. The Company is
currently in the process of reviewing these contracts, franchises and permits,
but does not expect at this time that the effect of these provisions, in the
event they are triggered by the Merger, will have a material adverse effect on
future results of operations.
Note 4 - Business Acquisitions and Divestitures -
During the three months ended March 31, 1996, the Company and its principal
subsidiaries acquired 45 businesses for $35.7 million in cash (net of cash
acquired) and notes, $31.4 million of debt assumed, and 7.1 million shares of
the Company's common stock. These acquisitions were accounted for as purchases.
During the three months ended March 31, 1997, the Company and its principal
subsidiaries acquired seven businesses for $2.3 million in cash and notes. These
acquisitions were accounted for as purchases.
During the three months ended March 31, 1998, the Company and its principal
subsidiaries acquired nine businesses for $90.1 million in cash (net of cash
acquired) and notes. These acquisitions were accounted for as purchases.
The pro forma effect of the acquisitions made during 1996, 1997, and 1998 was
not material.
In the first quarter of 1997, the Company sold its investment in ServiceMaster
Limited Partnership ("ServiceMaster") for $626 million (with the proceeds
collected in the second quarter), and sold various nonintegrated waste services
businesses in North America for approximately $31.1 million. Additionally in the
first quarter of 1997, WM International sold its approximately 20% interest in
Wessex for approximately $300 million.
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 $876.2 million. This obligation was financed with bank debt (see
Note 11). This transaction accounted for as a purchase, resulted in an
additional $508.1 million of goodwill being recorded during the first quarter of
1998. During the remainder of 1998 the Company anticipates it will complete the
allocation of purchase price to the various assets of WTI and will adjust
goodwill accordingly.
13
<PAGE>
In the first quarter of 1998, WM International sold its Hamm, Germany waste-to-
energy facility for $137 million and the Company sold eight nonintegrated waste
services businesses for approximately $29.8 million. Also in the first quarter
of 1998, Rust International Inc.'s ("Rust") approximately 37% ownership of OHM
Corporation ("OHM") was sold for cash totaling $111.2 million. This sale
occurred in connection with the pending merger of OHM with International
Technology Corporation. As part of this transaction, Rust received from OHM a
distribution of shares of NSC Corporation, a leading U.S. asbestos abatement
contractor, increasing its ownership of NSC Corporation from 40% to
approximately 54%. The Company has determined it will dispose of this investment
and accordingly has not consolidated its results. This investment, which has a
carrying value of $9.8 million in the accompanying consolidated balance sheet at
March 31, 1998, continues to be accounted for under the equity method of
accounting.
The Company held an investment in a publicly traded equity security that was
sold in the first quarter of 1998 pursuant to outstanding put and call
"collars". Upon expiration of the collars, the Company delivered the shares for
net proceeds of $56.3 million, with no gain or loss recognized in 1998.
Note 5 - Discontinued Operations -
In the fourth quarter of 1995, the Board of Directors of Rust approved a plan to
sell or otherwise discontinue Rust's process engineering, construction,
specialty contracting and similar lines of business. During the second quarter
of 1996, the sale of the industrial process engineering and construction
businesses, based in Birmingham, Alabama, was completed.
During the fourth quarter of 1996, WTI sold its water process systems and
equipment manufacturing businesses. WTI had also entered into an agreement to
sell its water and wastewater facility operations and privatization business,
which was sold in the second quarter of 1997. As of September 30, 1996, Rust
sold its industrial scaffolding business and began implementing plans to exit
its remaining international engineering and consulting business. The Company
recorded a fourth-quarter 1996 provision for loss of $360.0 million before tax
and minority interest in connection with the planned divestiture of these
businesses, and other businesses subsequently reclassified to continuing
operations (see discussion below).
The discontinued businesses have been segregated and the accompanying
consolidated balance sheets, statements of income and related footnote
information have been restated. Revenues from the discontinued businesses were
$198.6 million in the first quarter of 1996, $50.9 million in the first quarter
of 1997, and none in the first quarter of 1998. The decreases in revenue during
the periods primarily reflect the sales of certain of the discontinued
businesses. As required by Accounting Principles Board Opinion No. 30, results
of their operations in 1997 were included in the reserve for loss on disposition
provided previously. Such results were not material.
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. In 1997, management reclassified the CWM business
back into continuing operations, and classified certain of its sites as
operations held for sale. The Rust disposition was not completed within one
year, and, accordingly, this business has been reclassified back into continuing
operations, as operations held for sale, at December 31, 1997, in accordance
with generally accepted accounting principles, although management is continuing
its efforts to market its
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<PAGE>
investment in this business. Because these businesses were reclassified to
continuing operations, the remaining provision for loss on disposal ($95 million
after tax--$87 million related to Rust and $8 million related to CWM) was
reversed in discontinued operations and an impairment loss for Rust of $122.2
million was recorded in continuing operations in the fourth quarter of 1997.
Prior year financial statements were restated. Information regarding the
businesses reclassified as continuing operations held for sale for the first
quarters is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C> <C>
Results of operations -
Revenue $89.9 $82.8 $86.3
Income (loss) before tax after minority interest 1.2 .1 (2.4)
Net income (loss) .6 (.2) (1.7)
</TABLE>
The net assets of these businesses at March 31, 1998 were $69.0 million. These
net assets are included in Net Assets of Continuing Businesses Held for Sale in
the accompanying balance sheet. At March 31, 1998 this caption included $69.0
million of surplus real estate which the Company is actively marketing.
The Company is currently evaluating its plans to sell these assets in light of
the merger discussed in Note 3, and the effect such divestitures may have on the
ability of the merger to qualify for pooling-of-interests accounting treatment.
Note 6 - Asset Impairment Loss -
In the first quarter of 1997, the Company recorded impairment losses of $5.9
million. This primarily related to a goodwill write-off attributable to
industrial cleaning business enterprise goodwill no longer realizable, as a
result of exiting certain areas of this business.
Note 7 - Special Charges -
In the first quarter of 1997, the Company recorded a special charge related to
severance of $15.9 million. The majority related to officers of the Company.
Note 8 - Accounting Principles -
Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The adoption of this statement did not have a material impact on the financial
statements.
FAS No. 123, "Accounting for Stock-Based Compensation," also became effective in
1996. However, FAS No. 123 permitted compensation to continue to be accounted
for under Accounting Principles Board Opinion No. 25, and the Company elected to
follow this alternative.
Effective January 1, 1997, the Company adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 provides that environmental remediation
liabilities should be accrued when the criteria of FAS No. 5, "Accounting for
Contingencies," are met. It also provides that the accrual for such liabilities
should include future costs for those employees expected to devote a significant
amount of time directly to the
15
<PAGE>
management of remediation liabilities. The adoption of SOP 96-1 reduced 1997
pretax income in the first quarter of 1997 by $49.9 million.
In February 1997, the Financial Accounting Standards Board issued FAS No. 128,
"Earnings Per Share" ("EPS"), which supercedes Accounting Principles Board
Opinion No. 15. Primary EPS is replaced by Basic EPS, which is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Fully diluted EPS is replaced
with Diluted EPS, which gives effect to all dilutive potential common shares.
The Company was required to adopt FAS No. 128 in the fourth quarter of 1997. All
prior periods presented have been restated.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income," and FAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." Both statements are effective for fiscal
years beginning after December 15, 1997, although FAS No. 131 does not apply to
the Company's interim financial statements until 1999. FAS No. 130, which has
been adopted by the Company in the first quarter of 1998, requires only a
different format for presentation of information already included in the
Company's financial statements. For the first quarter of 1996, 1997 and 1998,
comprehensive income was $31.5 million, $105.5 million and $59.8 million,
respectively. Items making up the Company's comprehensive income are net income
and cumulative translation adjustments of foreign currency statements. The
accumulative total amounts of other comprehensive income is represented in the
consolidated balance sheets as cumulative translation adjustment and minimum
pension liability within Stockholders' Equity. FAS No. 131 modifies the basis
for determining segments and expands required segment disclosure, but does not
affect accounting principles and, accordingly, will not require any change to
reported financial position, results of operations or cash flows. The Company is
currently evaluating the impact of FAS No. 131 on its segment reporting.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Under SOP 98-5, certain startup costs would be expensed rather than
capitalized. Amounts previously capitalized would be expensed in the first
quarter of 1999. The Company is currently evaluating the impact of SOP 98-5,
which may be material to the Company's results of operations.
Note 9 - Derivative Financial Instruments -
From time to time, the Company and certain of its subsidiaries use derivatives
to manage interest rate, currency and commodity (fuel) price risk. The Company's
policy is to use derivatives for risk management purposes only, and it does not
enter into such contracts for trading purposes. The Company enters into
derivatives only with counterparties which are financial institutions having
credit ratings of at least A- or A3, to minimize credit risk. The amount of
derivatives outstanding at any one point in time and gains or losses from their
use have not been and are not expected to be material to the Company's financial
statements.
Instruments used as hedges must be effective at managing risk associated with
the exposure being hedged and must be designated as a hedge at the inception of
the contract. Accordingly, changes in market values of hedge instruments must
have a high degree of inverse correlation with changes in market values or cash
flows of underlying hedged items. Derivatives that meet the hedge criteria are
accounted for under the deferral or accrual method, except for currency
agreements as discussed
16
<PAGE>
below. If a derivative does not meet or ceases to meet the aforementioned
criteria, or if the designated hedged item ceases to exist, then the Company
subsequently uses fair value accounting for the derivative, with gains or losses
included in sundry income. If a derivative is terminated early, any gain or
loss, including amounts previously deferred, is deferred and amortized over the
remaining life of the terminated contract or until the anticipated transaction
occurs.
Interest Rate Agreements. Certain of the Company's subsidiaries have entered
into interest rate swap agreements to balance fixed and floating rate debt in
accordance with management's criteria. The agreements are contracts to exchange
fixed and floating interest rate payments periodically over a specified term
without the exchange of the underlying notional amounts. The agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. Differences paid or received are accrued in the
financial statements as a part of interest expense on the underlying debt over
the life of the agreements and the swap is not marked to market.
Currency Agreements. From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or offsetting put and call
options with different strike prices. The Company receives or pays, based on the
notional amount of the option, the difference between the average exchange rate
of the hedged currency against the base currency and the average (strike price)
contained in the option. Complex instruments involving multipliers or leverage
are not used. Although the purpose for using such derivatives is to mitigate
currency risk, they do not qualify for hedge accounting under generally accepted
accounting principles and accordingly, must be adjusted to market value at the
end of each accounting period with gains or losses included in income.
The Company sometimes also uses foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and there
is a high probability that the transaction will occur. Gains or losses on
forward contracts pertaining to such transactions are deferred until the
designated transaction is completed. The impact of the forward contract is then
included with the results of the underlying transaction in the financial
statements.
Commodity Agreements. The Company utilizes derivatives to seek to mitigate the
impact of fluctuations in the price of fuel used by its vehicles. Quantities
hedged do not exceed committed fuel purchases or anticipated usage and
accordingly, gains and losses in the hedge positions are deferred and recognized
in operating expenses as fuel is purchased.
Note 10 - Environmental Liabilities -
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. Such costs may increase in the future as a
result of legislation or regulation; however, the Company believes that in
general it tends to benefit when government regulation increases, which may
increase the demand for its services, and that it has the resources and
experience to manage environmental risk.
As part of its ongoing operations, the Company provides for estimated closure
and post-closure monitoring costs over the operating life (including likely
expansion) of disposal sites as airspace is consumed. The Company has also
established procedures to evaluate its potential remedial liabilities at closed
sites which it
17
<PAGE>
owns or operated, or to which it transported waste, including 90 sites listed on
the Superfund National Priority List ("NPL"). 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.
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 quarter 1996, 1997
and 1998 were $39.0 million, $.4 million and $4.5 million, respectively, and
have been included in operating expenses as a reduction to environmental
remediation expenses.
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 or other factors could necessitate the
recording of additional liabilities which could be material.
Note 11 - Debt -
The Company's subordinated notes, which were classified as current liabilities
in the December 31, 1997 consolidated balance sheet, have been reclassified to
long-term debt in the March 31, 1998 consolidated balance sheet. The notes
contain provisions for optional redemption at March 15, 1998 and March 15, 2000.
Only $2.5 million face amount was submitted for redemption on March 15, 1998.
In connection with the acquisition of the remaining publicly held WTI shares,
the Company entered into a commitment with the Chase Manhattan Bank ("Chase")
whereby Chase, along with other financial institutions, committed to provide new
credit facilities in the amount of $1.25 billion. The new credit facilities,
which have a termination date of December 31, 1998 (subject to earlier
termination in the event of a change-in-control, including the Merger with USA
Waste), provided the funding for the WTI transaction and replaced the Company's
then-existing $250 million revolving credit facility. These facilities carry the
same financial covenants as that carried by the previous Chase facilities put in
place in December 1997, as amended. Additionally, the termination date of the
Company's $550 million standby trade receivables sale agreement has been
extended from June 30, 1998 to December 31, 1998.
Note 12 - Stockholders' Equity -
The Boards of Directors of the Company and WTI have authorized their respective
companies to repurchase shares of their own common stock (up to 50 million
shares in the case of the Company and 30 million shares in the case of WTI) in
the open market, in privately negotiated transactions, or through issuer tender
offers. The Company repurchased 30 million shares through a "Dutch auction"
tender offer in the
18
<PAGE>
second quarter of 1997 but has not repurchased any other shares in 1997 and does
not expect to conduct any repurchases in 1998.
WTI announced in March of 1997 the indefinite deferment of its previously
planned "Dutch auction" tender offer pending a further review of strategic
options in its core business. However, during the first quarter of 1997, WTI
repurchased 762,900 shares of its stock in the open market. All remaining
publicly held shares of WTI were acquired by the Company on March 31, 1998 (see
Note 4).
The Company periodically sold put options on its common stock through 1996. The
put options give the holders the right at maturity to require the Company to
repurchase its shares at specified prices. Proceeds from the sale of the options
were credited to additional paid-in capital. In the event the options are
exercised, the Company may elect to pay the holder in cash the difference
between the strike price and the market price of the Company's shares in lieu of
repurchasing the stock. In February 1997, options on 1.9 million shares were
exercised, and the Company elected to settle them for $1.6 million in cash; 1.0
million options expired unexercised as the price of the Company's stock was in
excess of the strike price at maturity. At March 31, 1997 and 1998, no put
options were outstanding, and the Company has since discontinued selling such
options.
In the first quarter of 1998, the Company granted stock options to purchase
approximately 4.5 million shares of its common stock to its officers, directors
and employees under its stock option plans. In addition, as part of the
acquisition of the WTI shares not previously owned by the Company, as discussed
in Note 4, outstanding WTI stock options were converted into options to acquire
approximately 1.7 million shares of Company stock at a weighted-average price of
$28.92 per share.
Note 13 - Commitments and Contingencies -
A substantial portion of the Company's performance bonds are issued by a wholly-
owned insurance company subsidiary, the sole business of which is to issue such
bonds to customers of the Company and its subsidiaries. Approximately $305
million (at fair market value) of Company assets, of which $180 million is cash
equivalents on the March 31, 1998 consolidated balance sheet, have been
contributed to this subsidiary to meet regulatory minimum capital requirements.
Because virtually no claims have been made against these performance bonds in
the past, management does not expect these bonds will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
During the first quarter of 1995, WM International received an assessment from
the Swedish Tax Authority of approximately 417 million Krona (approximately $52
million) plus interest from the date of the assessment, relating to a
transaction completed in 1990. WM International believes that all appropriate
tax returns and disclosures were properly filed at the time of the transaction
and intends to vigorously contest the assessment.
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. The Company is complying
with the order of the Superior Court
19
<PAGE>
while also seeking an alternative resolution to this matter. The Company is
unable to predict the outcome of this matter at this time. Depending upon the
nature of any plan eventually approved by applicable regulatory authorities for
removing the waste, the actual volume of waste to be moved, and other currently
unforeseeable factors, the subsidiary could incur costs which would have a
material adverse impact on the Company's results of operations in one or more
future periods.
In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of regulatory flow control laws. Such laws typically involve a
local government specifying a jurisdictional disposal site for all solid waste
generated within its borders. Since the ruling, several decisions of state or
federal courts have invalidated regulatory flow control schemes in a number of
jurisdictions. Other judicial decisions have upheld non-regulatory means by
which municipalities may effectively control the flow of municipal solid waste.
In addition, federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. There can be no
assurance that such alternatives to regulatory flow control will in every case
be found to be lawful or that such legislation will be enacted into law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's operations. In the event
that legislation to effectively grandfather existing flow control mandates is
not adopted, the Company believes that affected municipalities will endeavor to
implement alternative lawful means to continue controlling the flow of waste.
However, given the uncertainty surrounding the matter, it is not possible to
predict what impact, if any, it may have in the future on the Company's disposal
facilities, particularly WTI's trash-to-energy facilities.
WTI's Gloucester County, New Jersey, facility has 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. The State had
continued to enforce flow control during the stay period. In light of the
current circumstances, the facility has lowered its prices and solicited new
customers. Under the reimbursement agreement between the project company that
owns the Gloucester facility and the bank that provides credit support to the
project, the termination of the waste franchise constitutes an event of default.
WTI and the credit support bank are presently disputing the consequences of
these developments.
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 a project recapitalization,
the Gloucester project can be restructured to operate, in the absence of
regulatory 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 system 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
20
<PAGE>
required to be in compliance with the new rules by the end of the year 2000.
Currently available technologies will be adequate to meet the new standards. The
total capital expenditures required for such modifications are estimated to be
in the $180-$220 million range. The impacted facilities long-term waste supply
agreements generally require that customers pay, based on tonnage delivered,
their proportionate share of incremental capital, financing, and operating costs
resulting from changes in environmental regulations. Customer shares of capital
and financing costs are typically recovered over the remaining life of the waste
supply agreements. Pro rata operating costs are recovered in the period
incurred. The Company currently expects to recover approximately two-thirds of
the incremental expenditures incurred to comply with these stricter air emission
standards.
As the states and the U.S. Congress have accelerated their consideration of ways
in which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." WTI's power production
facilities are qualifying facilities under PURPA and depend on the sanctity of
their power sales agreements for their economic viability. WTI believes that
federal law offers strong protections to its PURPA contracts, and recent state
and federal agency and court decisions have unanimously upheld the inviolate
nature of these contracts. While there is a risk that future utility
restructurings, court decisions or legislative or administrative action in this
area could have an adverse effect on its business, the Company currently
believes such risk is remote.
In the ordinary course of conducting its business, the Company becomes involved
in lawsuits, administrative proceedings and governmental investigations,
including antitrust and environmental matters and commercial disputes. Some of
these proceedings may result in fines, penalties or judgments being assessed
against the Company which, from time to time, may have an impact on earnings for
a particular quarter or year. The Company does not believe that except or
otherwise discussed herein their outcome, individually or in the aggregate, will
have a material adverse impact on its financial condition or results of
operations.
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
the Company to acquire all of the shares of WTI common stock which the Company
did not own. The Company has consummated a merger in which WTI's stockholders
received $16.50 in cash per share of WTI's common stock. The lawsuits allege,
among other things, that the defendants have breached fiduciary duties to WTI's
minority stockholders because the merger consideration contemplated by the
proposal was inadequate and unfair. In addition, the purported derivative
lawsuit alleges that the proposal was part of a plan to misappropriate WTI's
corporate opportunity to repurchase its own shares. The Company believes that
its actions and those of WTI and its Board of Directors in connection with the
proposal have been in accordance with Delaware law. Accordingly, the Company
intends to contest these lawsuits vigorously.
In November and December 1997, several alleged purchasers of the Company's stock
brought purported class action lawsuits against the Company and several of its
current and former officers in the United States District Court for the Northern
District of Illinois. Each of the lawsuits asserts that the defendants violated
the federal securities laws by issuing allegedly false and misleading statements
in 1996 and 1997 about the Company's financial condition and results of
operations. Among other things, the plaintiffs allege that the Company employed
accounting practices that were improper and that caused its publicly-filed
financial statements to be materially false and misleading. The lawsuits demand,
among other relief,
21
<PAGE>
unspecified monetary damages, attorneys' fees, and the costs of conducting the
litigation. The Company intends to defend itself vigorously in this litigation.
In January 1998, the fourteen purported class actions were consolidated before
one judge in the Northern District of Illinois. Plaintiffs have until the end of
May 1998 to file a consolidated amended complaint. It is not possible at this
time to predict the impact this litigation may have on the Company, although it
is reasonably possible that the outcome may have a materially adverse impact on
its financial condition or results of operations in one or more future periods.
No provision has been made in the Consolidated Financial Statements for future
costs or liabilities, if any, associated with this litigation.
The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the Company's previously filed
financial statements 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.
A lawsuit by an alleged Company stockholder purporting to represent a class of
the Company's stockholders has been filed in the Chancery Court in and for New
Castle County, Delaware against the Company and the members of its Board of
Directors alleging breaches of fiduciary duty by the defendants in connection
with the Merger. The lawsuit seeks, among other things, to have the transaction
enjoined and to recover unspecified damages. The Company believes the suit to be
without merit and intends to contest it vigorously.
In April 1998, a purported derivative lawsuit was filed in the United States
District Court for the Northern District of Illinois by a purported Company
stockholder against current and former Company directors and officers and the
Company. The lawsuit alleges violations by the director and officer defendants
of their fiduciary duty to the Company and its stockholders in connection with
allegedly failing to maintain proper accounting policies, procedures and
controls and preparing allegedly false and misleading financial statements
during the period of 1991-1997. The lawsuit further alleges that the defendants'
conduct has injured the Company's goodwill, reputation, liquidity and
stockholders' equity and exposed the Company to securities fraud and other
liability. The lawsuit seeks primarily an unspecified amount of restitution or
recoupment of costs, fines or penalties incurred or to be incurred by the
Company or damages and injunctive relief prohibiting the Company from paying the
defendants benefits under various agreements and requiring the Company to
implement corporate governance and internal control mechanisms. The Company
intends to defend the matter vigorously.
Note 14 - Earnings Per Share -
Basic and Diluted Earnings Per Share ("EPS") from continuing operations are
computed as follows:
22
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Basic EPS
Income from continuing operations as reported $133.6 $114.4 $ 74.4
Average common shares outstanding 489.2 484.0 455.1
------ ------ ------
Basic EPS from continuing operations $ 0.27 $ 0.24 $ 0.16
====== ====== ======
Diluted EPS
Income from continuing operations as reported $133.6 $114.4 $ 74.4
After tax interest on Subordinated Notes and LYONs 2.5 2.5 -
------ ------ ------
Adjusted income from continuing operations $136.1 $116.9 $ 74.4
====== ====== ======
Average common shares outstanding 489.2 484.0 455.1
Add effect of dilutive securities --
Stock options, unvested restricted stock and
put options 0.7 1.0 0.2
Subordinated Notes 14.3 14.3 -
LYONs 0.5 - -
------ ------ ------
Adjusted average shares 504.7 499.3 455.3
====== ====== ======
Diluted EPS from continuing operations $ 0.27 $ 0.23 $ 0.16
====== ====== ======
</TABLE>
Common shares potentially issuable upon conversion of CWM LYONs and Exchangeable
LYONs and exercise of stock options with exercise prices greater than the
average price of the Company's stock were not included in the calculation of
Diluted EPS in any year, nor were shares potentially issuable with respect to
LYONs in 1997 and Subordinated Notes or LYONs in 1998, because their effect is
antidilutive. At March 31, 1998, there were 43.0 million common shares
potentially issuable with respect to stock options, restricted shares, and
convertible debt, which could dilute Basic EPS in the future. During the quarter
ended March 31, 1998, the Company issued 0.2 million shares upon exercise of
stock options and conversion of debt.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Tables in millions except per share amounts)
As more fully described in the Notes to Consolidated Financial Statements,
certain financial information in this Report has been restated to correct
previously issued financial statements.
On March 10, 1998, Waste Management, Inc. (the "Company") entered into a
definitive merger agreement (the "Merger Agreement") with USA Waste Services,
Inc. ("USA Waste") pursuant to which the Company will be merged with a wholly
owned subsidiary of USA Waste (the "Merger"). Pursuant to the Merger Agreement,
the Company's stockholders will receive .725 of a share of common stock of USA
Waste for each share of common stock of the Company. The consummation of the
Merger is subject to a number of conditions, including the expiration or
termination of the applicable merger review waiting period under the Hart-Scott-
Rodino Anti-Trust Improvements Act of 1976, approval by the stockholders of each
company and other typical closing conditions. In addition, the Merger is
contingent upon the transaction qualifying for pooling-of-interests accounting
treatment. In order to qualify for pooling-of-interests accounting treatment,
the Company intends to sell a portion of its treasury shares pursuant to a
registered public offering or in private transactions prior to the closing of
the Merger. A lawsuit by an alleged Company stockholder purporting to represent
a class of the Company's stockholders has been filed against the Company and the
members of its Board of Directors alleging breaches of fiduciary duty by the
defendants in connection with the Merger. The lawsuit seeks, among other things,
to have the transaction enjoined and to recover unspecified damages. The Company
believes the suit to be without merit and intends to contest it vigorously.
Upon the consummation of the Merger, certain long-term debt of Waste Management
International plc ("WM International") may be accelerated and become payable
with three months' notice. At March 31, 1998, this debt totaled approximately
$69.7 million. The Company's debt with Chase Manhattan Bank as discussed in Note
11 of the consolidated financial statements is also subject to earlier
termination in the event of a change-in-control. In addition, Wessex Water Plc
("Wessex") has an option to acquire WM International's ownership in its United
Kingdom business at fair market value that may become exercisable upon the
consummation of the Merger. In 1997, this business had revenues of approximately
$276 million and operating income (before minority interest) of approximately
$25 million. WM International had a net investment of approximately $321.6
million in the business at March 31, 1998.
As a result of the proposed Merger, the Company is reviewing its current
operational and overhead structures. As transitional decisions are made, the
Company may incur asset write-downs, severance and other charges related to such
decisions.
In addition, for the purpose of enhancing its ability to affect a smooth
transition, the Company has established enhanced severance and retention
incentive awards for certain of its employees. Severance will be accrued at the
time a formal severance plan is developed and approved and employees are
notified they are in an affected group. The anticipated retention plan payments,
which are estimated at approximately $37 million, will be accrued from the
beginning of the second quarter of 1998 through the employee's expected
retention period, with most payments currently being anticipated to be made
early in the second quarter of 1999. Retention awards will be paid if the
employee remains with the Company through the retention period or is severed
(other than for cause), regardless if the Merger is consummated.
24
<PAGE>
RESULTS OF OPERATIONS:
Consolidated -
- -------------
Consolidated first quarter income from continuing operations was $74.4 million
or $.16 per diluted share for 1998, compared with $114.4 million or $.23 per
diluted share for the same period in 1997 and $133.6 million or $.27 per diluted
share for the same period in 1996. First quarter net income was $74.4 million or
$.16 per diluted share for 1998 compared with $115.0 million or $.23 per diluted
share for the same period in 1997 and $138.4 million or $.28 per diluted share
for the same period in 1996. Per share amounts referred to in this paragraph and
throughout Management's Discussion and Analysis are Diluted Earnings Per Share
as defined by Statement of Financial Accounting Standards ("FAS") No. 128.
Consolidated revenue from continuing operations was $2.13 billion, $2.20 billion
and $2.14 billion for the first quarter 1998, 1997 and 1996, respectively.
Results for the first quarter of 1997 and 1996 were impacted by special charges
and asset impairment loss. In addition, both quarters were impacted by unusual
items included in operating, selling, general and administrative expenses and
sundry income, as discussed below in the year-to-year comparisons and "Other
Items" sections.
In the first quarter of 1997, the Company adopted a comprehensive set of
strategic initiatives designed to enhance shareholder value. The centerpiece of
that strategy is a focus solely on waste management services in domestic and
selected international markets where the Company holds or can develop a strong
competitive position.
As part of these initiatives, the Company articulated a financial strategy
focused on generating cash. The increased cash flow is to come from divestiture
of non-core or non-integrated assets, reduction of capital expenditures, control
of costs, and improved return on the asset base. During the first quarter of
1997, the Company monetized $330.0 million of non-core and non-integrated
assets, including the investment in Wessex, and capital expenditures were
reduced to $142.4 million from $267.2 million in the same quarter of 1996. In
the first quarter of 1997, the Company sold its approximately 20% ownership
interest in ServiceMaster with the proceeds collected in the second quarter, and
in early April 1997 its Wheelabrator Technologies Inc. ("WTI") subsidiary sold
its water and wastewater facility operations and privatization business to
United States Filter Corporation ("U.S. Filter") for 2.3 million shares of U.S.
Filter stock.
The environmental and infrastructure engineering and consulting services lines
of business were classified at the end of 1997 as continuing operations held for
sale in the accompanying financial statements. The Company had expected to
complete the sale of these businesses in 1997, and at this time is pursuing such
sales. See "Discontinued Operations and Other Major Dispositions" below for
further discussion.
During the first quarter of 1997, the Company announced a "Dutch auction" tender
offer through which it offered to repurchase 30 million shares of its stock.
Subsequent to March 31, 1997, the 30 million shares were repurchased at a price
of $30 per share.
In the first quarter of 1998, the Company acquired the remaining outstanding
shares of WTI of which it did not already own for $876.2 million. The Company
also continued its divestiture plans in the first quarter of 1998, with sales of
several investments.
25
<PAGE>
The Company has five primary operating subsidiaries. Waste Management of North
America, Inc. ("WMNA") provides integrated solid waste management services in
North America and manages the industrial cleaning services business of Rust
International Inc. ("Rust"). Chemical Waste Management, Inc. ("CWM") provides
chemical waste treatment, storage, disposal and related services and also
furnishes low-level radioactive waste management and disposal services in North
America. WTI is engaged in the ownership and operation of trash-to-energy,
waste-fuel powered, independent power, and biosolids pelletizer facilities as
well as providing biosolids land application services. WM International provides
comprehensive waste management and related services outside North America, with
operations in eight countries in Europe, seven countries in the Asia-Pacific
region, and Argentina, Brazil and Israel. The Company considers its operations
to be part of a single industry segment - waste management services - and
reports accordingly.
1997 Operations Compared With 1996
Revenue -
- -------
Consolidated revenue for the first quarter of 1997 compared with the same period
in 1996 is shown in the table that follows:
<TABLE>
<CAPTION>
Percentage
Increase/
1996 1997 (Decrease)
------------- ------------- --------------
<S> <C> <C> <C>
North America-
WMNA-
Residential $ 312.4 $ 319.0 2.1%
Commercial 394.0 399.6 1.4
Rolloff and industrial 299.8 299.0 (0.3)
Disposal, transfer and other 323.5 322.5 (0.3)
-------- -------- ----
Total WMNA $1,329.7 $1,340.1 0.8%
CWM 125.2 116.0 (7.3)
Rust 65.3 71.9 10.1
WTI 219.5 248.2 13.1
WM International 453.7 457.2 0.8
Eliminations (48.9) (28.4)
-------- -------- ----
Total $2,144.5 $2,205.0 2.8%
======== ======== ====
</TABLE>
In total, revenue grew 2.8% for the quarter compared with the same period in
1996. WMNA revenue growth of .8% reflects moderate increases in commercial and
residential revenue, while roll-off and industrial sales were virtually flat
versus the year ago period. Disposal and transfer revenues, increased during the
period but these gains were offset by declines in recycling material sales and
divestitures, including the impact from the sale of the medical waste business.
WMNA revenue was also impacted by an increased lost customer rate, as a result
of aggressive price increases implemented during the second and third quarters
of 1996. North America hazardous waste revenues decreased due to weakness in
hazardous waste pricing, a result of industry overcapacity.
WTI revenue in the first quarter of 1997 included $15.9 million of construction
revenue related to the retrofit of its Pinellas County, Florida trash-to-energy
facility and construction of a biosolids compost facility for Burlington County,
New Jersey. It had no similar construction revenue in the first quarter of 1996.
26
<PAGE>
The remaining $12.8 million of WTI's revenue growth was derived approximately
equally from new industrial cogeneration plants (so-called "inside-the-fence"
facilities) which it acquired in 1996, and existing businesses. WTI is
attempting to leverage its energy plant operating capabilities and project
financing expertise by owning and/or operating inside-the-fence power plants for
industrial customers.
WM International had revenue growth from price (1.4%), volume (2.5%) and
acquisitions (.4%) aggregating a 4.3% increase. This increase, however, was
largely offset by translation effects resulting from the strength of the pound
against other world currencies.
Operating Expenses -
- ------------------
Consolidated operating expenses increased $164.8 million or 10.8% in the first
quarter of 1997 versus 1996. North American operating expenses as a percentage
of revenue were impacted by weak commodity prices, and declines in hazardous
waste profitability. Wheelabrator operating expenses as a percentage of revenue
were impacted by construction revenue increases which carry virtually no profit,
and higher levels of required maintenance at certain trash-to-energy facilities.
The bulk of the operating expense increase, however, was the result of the
changes in estimates and accounting principles. Remediation expenses, net of
insurance recoveries increased $87.8 million in the first quarter of 1997 from
the same period in 1996. In the first quarter of 1997, remediation expenses were
impacted $49.9 million from implementation of SOP 96-1, and $13.4 million
related to changes in cost estimates at several disposal sites. In the first
quarter of 1996, remediation expenses were helped by insurance recoveries of $39
million offset by $14.1 million of additional expenses related to changes in
cost estimates. Other items affecting 1997 operating expense in the first
quarter of 1997 were losses incurred and accrued provisions for loss-making
contracts totaling $3.9 million, and various other asset disposals or write-
downs totaling $11.3 million.
Selling and Administrative Expenses -
- -----------------------------------
Selling and administrative expenses declined in the first quarter of 1997 by
$12.0 million compared with the same 1996 period. As a percentage of revenue,
selling and administrative expenses decreased from 12.2% in the first quarter of
1996, to 11.3% in the same quarter of 1997. This reduction was primarily the
result of successful cost reduction initiatives undertaken during the latter
part of 1996 across all lines of business, and impacting sales and
administrative productivity.
Special Charge -
- --------------
In the first quarter of 1997, the Company recorded a special charge of $15.9
million for severance. This severance was primarily related to officers of the
Company, including its chief executive at the time. Approximately $1.5 million
was paid in the first quarter, $4.4 million over the rest of 1997 and $1.9
million in the first quarter of 1998. The balance is payable over one to four
years, depending on the prior employee's position.
27
<PAGE>
1998 Operations Compared With 1997
Revenue -
- -------
Consolidated revenue for the first quarter of 1998 compared with the same
period in 1997 is shown in the table that follows:
<TABLE>
<CAPTION>
Percentage
Increase/
1997 1998 (Decrease)
------------- ------------- --------------
<S> <C> <C> <C>
North America-
WMNA-
Residential $ 319.0 $ 321.4 0.8%
Commercial 399.6 393.3 (1.6)
Rolloff and industrial 299.0 307.4 2.8
Disposal, transfer and other 322.5 359.8 11.6
-------- -------- -----
Total WMNA $1,340.1 $1,381.9 3.1%
CWM 116.0 113.1 (2.5)
Rust 71.9 70.0 (2.6)
WTI 248.2 226.8 (8.6)
WM International 457.2 368.6 (19.4)
Eliminations (28.4) (28.8)
-------- -------- -----
Total $2,205.0 $2,131.6 (3.3%)
======== ======== =====
</TABLE>
First quarter 1998 revenue declined $73.4 million compared to the first quarter
of 1997. The revenue decline was due principally to the effect of divestitures
($83.6 million) and foreign currency translation ($30.7 million), offset by
acquisitions ($32.7 million) and a net increase ($8.2 million)from price and
volume growth.
The WMNA revenue growth was particularly strong for the quarter. A 1.6% decrease
in commercial revenues was caused by divestitures (primarily the sale of WMNA's
Canadian operations in the second quarter of 1997). When acquisition and
divestiture impacts are factored out, commercial revenue increased $8.4 million
or 2.2%. Residential revenue increased almost 1%, despite very competitive
pricing conditions within this sector. Roll-off and industrial revenues
increased 2.8% including the impact of acquisitions and divestitures when
compared to the same period in 1997. The increase in this business line
excluding the impact of acquisitions and divestitures is $16.2 million or 5.7%.
Disposal, transfer and other increased 11.6% over the same period a year ago.
This increase was primarily the result of an increase of $8.2 million in
recycled material sales revenue, as well as $29.1 million of disposal, transfer
and other waste services revenue increases.
WTI first quarter revenue of $227 million was $21 million less than the same
period in 1997. The unfavorable variance compared with 1997 is due to a
contractual change from fixed power rates to lower variable rates for WTI's
Shasta, California project, a turbine outage at its Bridgeport, Connecticut
plant, and lower disposal fees for the Baltimore, Maryland and Gloucester
County, New Jersey facilities.
WM International revenue decreased $89 million in the first quarter as compared
to the first quarter of 1997. This decrease was primarily the result of
divestitures of the Hamm incinerator in Germany, and operations in France,
Spain, and Austria (7.0%). In addition, quarter-to-quarter comparisons were
impacted by the loss of the Buenos Aires, Argentina contract (3.7%), and the
impact of foreign currency translation (6.7%).
28
<PAGE>
Operating Expenses -
- ------------------
Consolidated operating expenses decreased $75.5 million or 4.5% in the first
quarter of 1998 as compared to the first quarter of 1997. As a percent of
revenue, operating expenses decreased slightly from 77.0% in the first quarter
of 1997, to 76.1% in the same period in 1998. Operating expenses as a percentage
of revenue were impacted by strong revenue growth in WMNA and reductions in
expenses from divestitures, offset by declines in WM International and WTI
performance. Operating expenses were impacted in each year by several other
items. First quarter 1998 depreciation and amortization increased in the North
American businesses by approximately $46 million due to changes in estimated
lives of vehicles, equipment, waste containers, landfills and computer systems,
and the elimination of the use of salvage value in calculating depreciation
expense. This increase was offset by a $9 million decrease in depreciation
expense as a result of the impact of asset impairment write-downs. Goodwill
amortization was $5.4 million lower in the 1998 quarter due to a write-down of
goodwill in the fourth quarter of 1997. First quarter 1998 expenses also reflect
a $14.8 million increase of casualty insurance expense as a result of a change
in the claims estimating techniques that occurred in the latter part of 1997.
First quarter 1997 operating expenses were impacted by $63 million of expense
for environmental costs, $3.9 million of loss-contract reserves, and $11.3
million of asset disposals and write-offs primarily related to information
systems and other projects discussed earlier.
Selling and Administrative Expenses -
- -----------------------------------
Selling and administrative expenses were $263.9 million in the first quarter of
1998, compared with $249.8 million in the first quarter of 1997. First quarter
1998 selling and administrative expenses decreased at WM International and WTI.
In actual dollars these expenses held constant at the Company's North American
solid waste operating locations, and decreased as a percent of WMNA revenue when
compared to the first quarter of 1997. The increase in consolidated selling and
administrative expenses is primarily the result of several one-time or unusual
costs. The Company incurred $5.8 million of costs relating to its pending merger
with USA Waste services, and $4.3 million related to the comprehensive
accounting review. The first quarter of 1998 was also impacted by $12.4 million
of expenses relating to previously announced strategic initiatives including
programs to develop new computer systems, purchasing processes and fleet
management programs intended to further reduce the Company's operating costs
over the next three years.
Other Items
Asset Impairment Loss -
- ---------------------
In the first quarter of 1997, the Company recorded impairment losses of $5.9
million. This primarily related to a goodwill write-off attributable to
industrial cleaning business enterprise goodwill no longer realizable, as a
result of exiting certain areas of this business.
Interest, Net -
- -------------
The following table sets forth the components of consolidated interest, net, for
the three months ended March 31, 1996, 1997 and 1998:
29
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Interest expense $116.4 $121.8 $119.2
Interest income (6.2) (12.4) (4.3)
Capitalized interest (7.7) (6.7) (3.6)
------ ------ ------
Interest expense, net $102.5 $102.7 $111.3
====== ====== ======
</TABLE>
Interest expense, net increased from 1997 to 1998 due to slightly higher
interest rates and less capitalized interest. The decline in capitalized
interest over the period reflects a decline in the amount of capital projects
under construction or in development.
Sundry Income, Net -
- ------------------
Below is a summary of major components in sundry income, net, for each of the
first quarters:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Gain on sale of investments/businesses $ - $129.0 $53.4
Equity income 20.6 2.1 1.1
Other 2.1 4.3 9.7
----- ------ -----
Sundry income, net $22.7 $135.4 $64.2
===== ====== =====
</TABLE>
Equity income in 1996 included income from ServiceMaster and Wessex investments
of $19.3 million. These investments were sold in the first quarter of 1997 with
no equity income recorded in 1997 for Wessex or ServiceMaster. Gains on sale of
investments/businesses consist of $129 million in the first quarter of 1997 from
the sale of the Company's investment in ServiceMaster, and for the first quarter
of 1998 consists of $2.9 million on sales of North American solid waste
businesses, $38.0 million from selling the waste-to-energy facility in Hamm,
Germany, $6.8 million on the divestiture of the OHM Corporation ("OHM") equity
investment, $3.1 million on the sale of an investment in preferred stock of a
scaffolding business and $2.6 million on the sale of a corporate aircraft.
Income Taxes -
- ------------
The Company's effective income tax rates before minority interest for the first
quarter 1996, 1997 and 1998 were 41.0%, 47.4% and 49.2%, respectively. The
fluctuations between periods are primarily due to the large shifts in the source
of taxable income attributable to numerous divestiture gains or losses, asset
impairment loss and other changes in income mix.
Discontinued Operations and Other Major Dispositions -
- ----------------------------------------------------
In line with the Company's strategy to focus on waste management services, other
industry segments, including the engineering, construction and consulting
businesses and industrial scaffolding business of Rust and the water businesses
of WTI, have been classified as discontinued operations or continuing operations
held for sale in the accompanying financial statements for all periods. See Note
5 to the consolidated financial statements. The remaining businesses to be sold
as of March 31, 1998 primarily consist of Rust's domestic environmental and
infrastructure engineering and consulting business. While the Company is
currently engaged in efforts to divest these businesses, it is reevaluating such
plans in light of the
30
<PAGE>
Merger discussed in Note 3, and the effect such divestitures may have on the
ability of the Merger to qualify for pooling-of-interests accounting treatment.
In the first quarter of 1997, the Company sold its investment in ServiceMaster
for $626 million, and sold various nonintegrated waste services businesses in
North America for $31.5 million. Additionally in the first quarter of 1997, WM
International sold its approximately 20% interest in Wessex for approximately
$300 million.
In the first quarter of 1998, WM International sold its Hamm, Germany waste-to-
energy facility for approximately $137 million and the Company sold eight
nonintegrated waste services businesses for approximately $29.8 million. Also in
the first quarter of 1998, Rust's 37% ownership of OHM was sold for cash
totaling $111.2 million. This sale occurred in connection with the pending
merger of OHM with International Technology Corporation. As part of this
transaction, Rust received from OHM a distribution of shares of NSC Corporation,
a leading U.S. asbestos abatement contractor, increasing its ownership of NSC
Corporation from 40% to approximately 54%. The Company has determined it will
dispose of this investment and, accordingly, has not consolidated its results.
This investment, which has a carrying value of $9.8 million in the accompanying
consolidated balance sheet at March 31, 1998, continues to be accounted for
under the equity method of accounting.
The Company held an investment in a publicly traded equity security that was
sold in the first quarter of 1998 pursuant to outstanding put and call
"collars". Upon expiration of the collars, the Company delivered the shares for
net proceeds of $56.3 million, with no gain or loss recognized in 1998.
Accounting Principles -
- ---------------------
See Note 8 to the consolidated financial statements.
Derivatives and Market Risks -
- ----------------------------
In the normal course of business, the Company is exposed to market risk,
including changes in interest rates, currency exchange rates, certain commodity
prices and certain equity prices. From time to time, the Company and certain of
its subsidiaries use derivatives to manage some portion of these risks.
Derivatives used are simple agreements that provide for payments based on the
notional amount, with no multipliers or leverage. All derivatives are related to
actual or anticipated exposures or transactions of the Company. While the
Company is exposed to credit risk in the event of nonperformance by
counterparties to derivatives, in all cases such counterparties are highly rated
financial institutions and the Company does not anticipate nonperformance. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company monitors its derivative positions by regularly evaluating
the positions at market and by performing sensitivity analyses. There has been
no material changes in the Company's exposure to market risk subsequent to
December 31, 1997. See Note 9 to the consolidated financial statements.
Environmental Liabilities -
- -------------------------
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. As part of its ongoing operations, the
Company provides for estimated closure and post-closure monitoring costs over
the life of disposal sites as airspace is consumed. The Company has also
established procedures to evaluate its potential remedial liability at closed
sites which it owns or
31
<PAGE>
operated, or to which it transported waste. While the Company believes that it
has adequately provided for its environmental liabilities, it is reasonably
possible that technological, regulatory or enforcement developments, the results
of environmental studies or other factors could necessitate the recording of
additional liabilities which could be material. For further discussion, see Note
10 to the consolidated financial statements.
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 quarter 1996, 1997
and 1998 were $39.0 million, $.4 million and $4.5 million, respectively, and
have been included in operating expenses as a reduction to environmental
remediation expenses.
FINANCIAL CONDITION:
Liquidity and Capital Resources -
- -------------------------------
The Company had working capital deficits of $968.5 million at March 31, 1996,
$502.4 million at March 31, 1997, and $2,329.4 million at March 31, 1998. These
compared to $1,047.1 million at December 31, 1995, $280.9 million at December
31, 1996, and $2,046.9 million at December 31, 1997. The Company operates in a
service industry with neither significant inventory nor seasonal variation in
receivables. As a result, emphasis is placed on minimizing working capital
requirements.
The increase in working capital between 1995 and 1996 is a result of lower
current debt maturities, strong cash flow and the reclassification to current of
the investment in Wessex to be sold, partially offset by increased accruals for
losses on the sale of certain investments. The increase in working capital
deficit between 1996 and 1997 results primarily from lower levels of cash and
short-term investments and higher levels of long-term debt payable within one
year. The 1998 increase in working capital deficit is primarily related to the
increased debt from the acquisition of WTI shares offset by the reclassification
of subordinated notes to long-term debt. See Note 11 to the consolidated
financial statements.
Cash flow from operating activities and asset monetization, less capital
expenditures (other than acquisitions) and dividends, which the Company defines
as "owners' cash flow," is available to meet current obligations, make
acquisitions, reduce debt or repurchase common stock. Management has adopted a
cash-driven financial strategy including reduced capital spending and
divestiture of noncore assets and nonintegrated businesses. Owners' cash flow
was approximately ($98.1) million, $444.2 million and $321.1 million for each of
the first quarters of 1996, 1997 and 1998, respectively. The Company expects to
generate approximately $400 million during 1998 from the divestiture of certain
noncore investments and nonintegrated businesses subject to constraints which
may be imposed upon the Company in order to qualify for pooling-of-interests
accounting treatment in connection with the Merger with USA Waste. The Company
believes that it has adequate liquidity and resources to meet its needs for
replacement capital and finance anticipated growth and debt service. See
"Capital Structure."
In connection with the acquisition on March 31, 1998 of the remaining publicly
held WTI shares, the Company entered into a commitment with the Chase Manhattan
Bank ("Chase") whereby Chase, along with other financial institutions, committed
to provide new credit facilities in the amount of $1.25 billion. The new credit
facilities, which have a termination date of December 31, 1998 (subject to
earlier
32
<PAGE>
termination in the event of a change-in-control, including the Merger with USA
Waste), provide the funding needed to complete the WTI transaction and replaced
the Company's then-existing $250 million revolving credit facility. These
facilities carry the same financial covenants as that carried by the previous
Chase facilities put in place in December 1997, as amended. Additionally, the
termination date of the Company's $550 million standby trade receivables sale
agreement has been extended from June 30, 1998 to December 31, 1998.
Acquisitions and Capital Expenditures -
- -------------------------------------
Capital expenditures, excluding property and equipment of purchased businesses,
were $166.6 million for the first quarter of 1998 compared to $142.4 million for
the first quarter of 1997 and $267.2 million for the first quarter of 1996. In
addition, the Company and its principal subsidiaries spent in the first quarter
of 1998, $90.1 million on acquisitions compared to $2.3 million on acquisitions
in the first quarter of 1997 and $67.1 million in cash and debt (including debt
assumed) and 7.1 million shares of Company common stock during the first quarter
of 1996.
Capital Structure -
- -----------------
Although the Company has placed increasing emphasis on generating owners' cash
flow during the last several years, a substantial portion of such cash has been
returned to stockholders through stock repurchases. However, during the first
quarter of 1997, total debt declined $497.6 million from the first quarter of
1996 and $321.7 million from December 31, 1996. Cash and marketable securities
increased $480.3 million in the first quarter of 1997 to $1.12 billion, in
preparation for the completion of the "Dutch auction" tender offer. During the
first quarter of 1998, debt (including obligations payable to WTI shareholders)
increased $96.7 million from the first quarter of 1997 and $673.0 million from
December 31, 1997, primarily reflecting the acquisition on March 31, 1998 of the
remaining publicly held shares of WTI. Cash and marketable securities increased
$122.8 million in the first quarter of 1998 from December 31,1997, primarily as
a result of the contribution of assets to meet the Company's captive insurance
company's regulatory requirements (see Note 13 to the consolidated financial
statements).
The Boards of Directors of the Company and WTI have authorized their respective
companies to repurchase shares of their own common stock (up to 50 million
shares in the case of the Company and 30 million shares in the case of WTI) in
the open market, in privately negotiated transactions, or through issuer tender
offers. The Company repurchased 30 million shares through a "Dutch auction"
tender offer in the second quarter of 1997 but has not repurchased any other
shares in 1997 and does not expect to conduct any repurchases in 1998.
WTI announced in March of 1997 the indefinite deferment of its previously
planned "Dutch auction" tender offer pending a further review of strategic
options in its core business. During the first quarter of 1997, WTI repurchased
762,900 shares of its stock in the open market. On March 31, 1998, the Company
acquired the remaining outstanding shares of WTI of which it did not already own
for $16.50 per share, or $876.2 million. This obligation was financed with bank
debt as further discussed in the "Liquidity and Capital Resources" section.
In conjunction with its authorized repurchase program, the Company periodically
sold put options on its common stock through 1996. These options provide the
holders the right at maturity to require the Company to repurchase its shares at
specified prices. In February 1997, the Company paid the holders of 1.9 million
put options cash of $1.6 million, representing the difference between the strike
price and the market price of the underlying shares at expiration, in lieu of
repurchasing the
33
<PAGE>
stock. There were no put options outstanding at March 31, 1997 and 1998, and the
Company has since discontinued selling such options.
Risks and Uncertainties -
- -----------------------
See Note 13 to the consolidated financial statements for a description of
certain contingent liabilities of the Company and its subsidiaries.
Forward-Looking Information -
- ---------------------------
Except for historical data, the information herein constitutes forward-looking
statements. Forward-looking statements are inherently uncertain and subject to
risks. Such statements should be viewed with caution. Actual results or
experience could differ materially from the forward-looking statements as a
result of many factors, failure of the Company to complete the Merger with USA
Waste, failure to achieve timely the cost savings anticipated by the parties as
a result of the Merger, including changes in the price of recyclable
commodities, weather conditions, slowing of the overall economy, higher interest
rates, market risk associated with derivatives, failure of the Company's
restructuring and reengineering plans to produce the anticipated cost savings,
the inability to complete the divestiture of discontinued businesses or the
monetization of other assets at appropriate prices and terms. The Company makes
no commitment to disclose any revisions to forward-looking statements, or any
facts, events or circumstances after the date hereof that may bear upon forward-
looking statements.
34
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
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 of 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 March 31, 1998, a Company subsidiary engaged in
providing hazardous waste management services was involved in one such
proceeding where it is believed that sanctions involved may exceed $100,000.
Subject to the discussion set forth in Note 13 to the Company's consolidated
financial statements included in this Report concerning the New Milford,
Connecticut landfill, which is owned and was operated by a wholly owned
subsidiary of the Company, the Company believes that these matters will not have
a material adverse effect on its results of operations or financial condition.
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.
In April 1998, a purported derivative lawsuit was filed in the United States
District Court for the Northern District of Illinois by a purported Company
stockholder against current and former Company directors and officers and the
Company. The lawsuit alleges violations by the director and officer defendants
of their fiduciary duty to the Company and its stockholders in connection with
allegedly failing to maintain proper accounting policies, procedures and
controls and preparing allegedly false and misleading financial statements
during the period of 1991-1997. The lawsuit further alleges that the
defendants' conduct has injured the Company's goodwill, reputation, liquidity
and stockholders' equity and exposed the Company to securities fraud and other
liability. The lawsuit seeks primarily an unspecified amount of restitution or
recoupment of costs, fines or penalties incurred or to be incurred by the
Company or damages and injunctive relief prohibiting the Company from paying the
defendants benefits under various agreements and requiring the Company to
implement corporate governance and internal control mechanisms. The Company
intends to defend the matter vigorously.
The Company and certain of its subsidiaries are also currently involved in other
civil litigation and governmental proceedings relating to the conduct of their
business, some of which are addressed elsewhere in this report or in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the
"1997 10-K Report"), as filed with the Securities and Exchange Commission.
While the outcome of any particular lawsuit or governmental investigation cannot
be predicted with certainty, the Company believes that, except as
35
<PAGE>
discussed elsewhere in this report or in the 1997 10-K Report, these matters
will not have a material adverse effect on its financial condition or results of
operations.
ITEM 5. Other Information
-----------------
The General Corporation Law of the State of Delaware and the Company's Restated
Certificate of Incorporation, as amended, provide for broad indemnification
rights of the Company's directors and officers. Pursuant to such law and
certificate, the Company has entered into indemnification agreements with its
directors and executive officers. The purpose of the agreements is to provide
for their indemnification in a reasonable and adequate manner and establish
procedures and presumptions with respect thereto to make their rights and the
process more certain than would otherwise be the case. Under the agreements, the
directors and executive officers are entitled to be indemnified against
expenses, judgments, fines and settlements in connection with proceedings,
claims, issues or matters arising by reason of their positions with the Company
or of serving in a position at another firm at the request of the Company. The
director or officer must have acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and,
with respect to any criminal proceeding, must not have had reasonable cause to
believe his or her conduct was unlawful. However, a director or officer is not
to be indemnified in any proceeding brought by or in the right of the Company if
the director or officer is adjudged to be liable to the Company and if
applicable law prohibits such indemnification, except that to the extent the
appropriate court so determines, indemnification against the director's or
officer's expenses in the matter shall be made. If the director or officer is
successful as to some but not all claims, issues or matters in a proceeding, he
or she shall be indemnified in respect of each successfully resolved claim,
issue or matter. If a change in control of the Company shall have occurred, the
director's or officer's entitlement to indemnification is to be presumed, and
the Company shall have the burden of proof to overcome the presumption. All
disputes between the parties with respect to each agreement are to be
exclusively resolved through binding arbitration. The agreements also specify
procedures to be followed by the Company in making decisions as to the
entitlement of directors and officers to indemnification in any particular case,
including that independent counsel shall make the determination in certain
circumstances.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits to this report are listed in the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K.
During the period covered by this Quarterly Report on Form 10-Q, the
Company filed reports on Form 8-K as follows:
(i) A report dated January 5, 1998 concerning the Company's intention to
prepare and file amended Form 10-Q and Form 10-K Reports for various
financial periods and to issue revised financial statements for certain
other financial periods and concerning the status and timing of its review
of its accounting and financial statement matters.
36
<PAGE>
(ii) A report dated January 29, 1998 concerning the timing of its announcements
of fourth-quarter and full-year 1997 earnings and plans to restate 1992 through
1997 financial results.
(iii) A report dated February 24, 1998 concerning (a) its 1997 full-year and
fourth-quarter financial results, including the impact of its comprehensive
examination of operations and accounting practices, (b) restated earnings for
the years 1992-1996 and the first three quarters of 1997, (c) certain new
accounting policies and practices and a new fleet management strategy, (d) its
outlook as to certain financial and operating matters and (e) certain
supplementary pro forma financial data for the full-year 1997.
(iv) A report dated March 11, 1998 concerning the announcement by the Company
and USA Waste Services, Inc. that they had executed a definitive merger
agreement.
37
<PAGE>
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.
/s/ DONALD R. CHAPPEL
-------------------------------
Donald R. Chappel
Vice President and Acting Chief
Financial Officer
May 14, 1998
38
<PAGE>
WASTE MANAGEMENT, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 None
3 None
4 None
10 Form of Indemnity Agreement with directors and certain officers of
the Company
11 None
12 Computation of Ratios of Earnings to Fixed Charges
15 None
18 None
19 None
22 None
23 None
24 None
27.1 Financial Data Schedule for the three months ended March 31, 1996
27.2 Financial Data Schedule for the three months ended March 31, 1997
27.3 Financial Data Schedule for the three months ended March 31, 1998
99 None
</TABLE>
__________
* Exhibits not listed are inapplicable.
39
<PAGE>
Exhibit 10
Form of Indemnity Agreement
INDEMNITY AGREEMENT
-------------------
THIS AGREEMENT is made as of the 8th day of December, 1997, by and between
Waste Management, Inc., a Delaware corporation (the "Corporation") and the
undersigned director and/or officer (the "Indemnitee") of the Corporation,
WHEREAS, it is essential to the Corporation to retain and attract as
directors and/or officers the most capable persons available; and
WHEREAS, through its Restated Certificate of Incorporation and By-laws it
is the express policy of the Corporation to indemnify its directors and officers
so as to provide them with the maximum possible protection permitted by law; and
WHEREAS, the vagaries of "public policy" and interpretations of statutes,
certificates of incorporation and by-laws make uncertain the indemnification
protection so provided; and
WHEREAS, the Board of Directors has concluded that such uncertainty and the
continuation of present trends in litigation against corporate directors and
officers will inevitably result in less effective direction and supervision of
the Corporation's business affairs, and the Board deems such consequences to be
so detrimental to the best interests of the Corporation's stockholders that it
is not only reasonable and prudent but necessary for the Corporation
contractually to obligate itself to indemnify in a reasonable and adequate
manner its directors and officers and establish procedures and presumptions with
respect thereto to make the process of indemnification more certain; and
WHEREAS, in connection therewith, Section 145 of the General Corporation
Law of the State of Delaware, under which the Corporation is organized, empowers
corporations to indemnify, among others, any person serving as a director and/or
officer of the corporation, and such Section 145 specifies that the
indemnification set forth therein shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under the
certificate of incorporation, bylaws, agreements, vote of stockholders or
disinterested directors or otherwise; and
WHEREAS, the Corporation desires to have Indemnitee serve or continue to
serve as a director or officer of the Corporation or of any other corporation,
subsidiary, partnership, joint venture, or trust or other enterprise of which he
has been or is serving at the request, for the convenience of or to represent
the interests of the Corporation free from undue concern for unpredictable,
inappropriate or unreasonable claims for damages by reason of his/her Corporate
Status (as defined below) and Indemnitee desires to serve or to continue to
serve (provided that he/she is furnished the indemnity provided for
hereinafter), in one or more of such capacities;
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the Corporation and Indemnitee hereby agrees as follows:
1. Agreement to Serve. Indemnitee will serve and/or continue to serve, at
the will of the Corporation or under separate contract, if such exists, the
Corporation or an Affiliate of the Corporation as a director and/or officer
faithfully and to the best of his ability so long as he/she is duly elected and
qualified in accordance with the provisions of the By-laws thereof or until such
time as he/she tenders his resignation in writing.
2. Indemnification. The Corporation shall indemnify, and advance Expenses
(as hereinafter defined) to, Indemnitee as provided in this Agreement and to the
fullest extent permitted by applicable law.
3. Proceedings Other Than Proceedings by or in the Right of the
Corporation. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 3 if, by reason of his/her Corporate Status (as
hereinafter defined), he/she is, or is threatened to be, made a party to any
threatened, pending, or completed Proceeding (as hereinafter defined), other
than a Proceeding by or in the right of the Corporation. Pursuant to this
Section 3, Indemnitee shall be indemnified against Expenses, judgments, fines,
and amounts paid in settlement actually and reasonably incurred by him/her or on
his/her behalf in connection with such Proceeding or any claim, issue or matter
related thereto, if he/she acted in good faith and in a manner he/she reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal Proceeding, had no reasonable cause to believe
his/her conduct was unlawful.
4. Proceedings by or in the Right of the Corporation. Indemnitee shall be
entitled to the rights of indemnification provided in this Section 4 if, by
reason of his/her Corporate Status, he/she is, or is threatened to be, made a
party to any threatened, pending or completed Proceeding brought by or in the
right of the Corporation to procure a judgment in its favor. Pursuant to this
Section 4, Indemnitee shall be indemnified against Expenses actually and
reasonably incurred by him/her or on his/her behalf in connection with such
Proceeding if he/she acted in good faith and in a manner he/she reasonably
believed to be in or not opposed to the best interests of the Corporation.
Notwithstanding the foregoing, no indemnification against such Expenses shall be
made in respect of any claim, issue or matter in such Proceeding as to which
Indemnitee shall have been adjudged to be liable to the Corporation if
applicable law prohibits such indemnification; provided, however, that if
applicable law so permits, indemnification against Expenses shall nevertheless
be made by the Corporation in such event if and only to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine.
5. Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his/her Corporate Status, a party to and
is successful, on the merits or otherwise, in any Proceeding or any claim, issue
or matter therein, he/she shall be indemnified against all Expenses actually and
reasonably incurred by him/her or on his/her behalf in connection therewith. If
2
<PAGE>
Indemnitee is not wholly successful in such a Proceeding but is successful, on
the merits or otherwise, as to one or more but less than all claims, issues or
matters in such a Proceeding, the Corporation shall indemnify Indemnitee against
all Expenses actually and reasonably incurred by him/her or on his/her behalf in
connection with each successfully resolved claim, issue or matter. For purposes
of this Section 5 and without limitation, the termination of any claim, issue or
matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
6. Indemnification for Expenses of a Witness. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of
his/her Corporate Status, a witness in any Proceeding, he/she shall be
indemnified against all Expenses actually and reasonably incurred by him/her or
on his/her behalf in connection therewith.
7. Advancement of Expenses. The Corporation shall advance all reasonable
Expenses incurred by or on behalf of Indemnitee in connection with any
Proceeding within ten (10) days after the receipt by the Corporation of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses.
8. Procedure for Determination of Entitlement to Indemnification.
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Corporation shall, promptly
upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 8(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in the specific case as follows: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined)
(unless Indemnitee shall request that such determination be made by the Board of
Directors or the stockholders, in which case by the person or persons or in the
manner provided for in clauses (ii) or (iii) of this Section 8(b)) in a written
opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee; (ii) if a Change in Control shall not have occurred, at the
discretion of the Board of Directors (a) by the Board of Directors by a majority
vote of a quorum consisting of Disinterested Directors (as hereinafter defined),
or (b) if a quorum of the Board of Directors consisting of Disinterested
Directors is not obtainable or, even if obtainable, such quorum of Disinterested
Directors so directs, by Independent Counsel in a written opinion to the Board
of Directors, a copy of which shall be delivered to Indemnitee or (c) by the
stockholders of the Corporation; or (iii) as provided in Section 9(b); and, if
so determined that
3
<PAGE>
Indemnitee is entitled to indemnification, payment to Indemnitee shall be made
within ten (10) days after such determination.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 8(b), the Independent
Counsel shall be selected as provided in this Section 8(c). If a Change in
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Corporation shall give written notice to
Indemnitee advising him/her of the identity of the Independent Counsel so
selected. If a Change in Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the
Corporation advising it of the identity of the Independent Counsel so selected.
In either event, Indemnitee or the Corporation, as the case may be, may, within
seven (7) days after such written notice of selection shall have been given,
deliver to the Corporation or to Indemnitee, as the case may be, a written
objection to such selection. Such objection may be asserted only on the ground
that the Independent Counsel so selected does not meet the requirements of
"Independent Counsel" (as hereinafter defined) and the objection shall set forth
with particularity the factual basis of such assertion. The Corporation shall
pay any and all reasonable fees and expenses of Independent Counsel incurred by
such Independent Counsel in connection with acting pursuant to Section 8(b).
9. Presumptions and Effect of Certain Proceedings.
(a) If a Change in Control shall have occurred, when making a
determination with respect to entitlement to indemnification hereunder, the
person, persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee has
submitted a request for Indemnification in accordance with Section 8(a) and the
Corporation shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any determination
contrary to that presumption.
(b) If the person, persons or entity empowered or selected under
Section 8 to determine whether Indemnitee is entitled to indemnification shall
not have made such determination within forty-five (45) days after receipt by
the Corporation of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent a prohibition of such
indemnification under applicable law.
(c) The termination of any Proceeding or of any claim, issue or matter
related thereto by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he/she reasonably believed to be in or not opposed
to the best interest of the Corporation or, with respect to any criminal
Proceeding, that Indemnitee had reasonable cause to believe that his/her conduct
was unlawful. In addition, neither the failure of
4
<PAGE>
the Independent Counsel to have made a determination as to whether Indemnitee
has met any particular standard of conduct or had any particular belief, nor an
actual determination by the Independent Counsel that the Indemnitee has not met
such standard of conduct or did not have such belief, prior to the commencement
of proceedings by Indemnitee to secure an arbitral or judicial determination
that Indemnitee should be indemnified under applicable law shall be a defense to
Indemnitee's claim or create a presumption that Indemnitee has not met any
particular standard of conduct or did not have any particular belief.
10. Arbitration.
(a) All disputes between the parties with respect to the terms or
conditions of this Agreement shall be exclusively resolved by and through an
arbitration proceeding to be conducted under the auspices of the American
Arbitration Association (the "AAA") in Chicago, Illinois pursuant to the AAA's
Commercial Arbitration Rules (the "Arbitration"). Such Arbitration shall be
conducted in as expedited a manner as is then permitted by such rules. The
Arbitrators in any such Arbitration shall be persons who are expert in the
subject matter of the dispute. Both the foregoing agreement of the parties to
arbitrate any and all such claims, and the results, determination, finding,
judgment and/or award rendered through such Arbitration shall be final and
binding on the parties thereto and may be specifically enforced by legal
proceedings.
(b) The Corporation shall appoint one (1) Arbitrator and Indemnitee
shall appoint one (1) Arbitrator within the period of thirty (30) calendar days
commencing on the date of any claim hereunder, and the two Arbitrators so
appointed shall appoint a third Arbitrator within the period thirty (30)
calendar days commencing on the date on which the last of the two Arbitrators
has been selected. If either the Corporation or Indemnitee fails to select its
respective Arbitrator, or in the event that the two Arbitrators chosen by the
Corporation and the Indemnitee are unable or unwilling to select a third
Arbitrator within fourteen (14) calendar days following the selection of the
last of them, then the AAA shall select the Arbitrator that was not selected by
the Corporation, Indemnitee or the first two Arbitrators, as the case may be,
and the three Arbitrators shall constitute the arbitration panel for purposes of
the dispute.
(c) The Corporation shall bear all costs in connection with such
Arbitration including, without limitation, costs of the attorneys, witnesses and
experts; provided, however, that, with respect to any claim subject to this
Section 10 which is brought by Indemnitee, Indemnitee shall be required to repay
to the Corporation his or her respective share of such costs if the arbitration
panel shall have concluded that such claim is frivolous in nature. The parties
hereto acknowledge and agree that time is of the essence in this Arbitration
proceeding, and the Arbitrators shall be instructed and required to render their
decision within ten (10) calendar days following completion of the Arbitration.
(d) Any and legal proceedings to enforce this Agreement (except for
any action to compel arbitration hereunder or any action to enforce any award or
judgment rendered thereby), shall be governed in accordance with this Section
10.
5
<PAGE>
(e) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 10 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Agreement.
11. Non-Exclusivity; Survival of Rights; Insurance.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Restated Certificate of Incorporation, the By-Laws, any agreement, a
vote of stockholders, a resolution of Disinterested Directors or otherwise. No
amendment, alteration or repeal of the Restated Certificate of Incorporation or
the By-Laws or of any provision hereof shall be effective as to Indemnitee with
respect to any action or omission by such Indemnitee in his/her Corporate Status
prior to such amendment, alteration or repeal. To the extent that a change in
the General Corporation Law of the State of Delaware (whether by statute or
judicial action) permits greater indemnification by agreement than would be
afforded currently under the Corporation's Restated Certificate of
Incorporation, By-Laws and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change. The provisions of this Agreement shall continue as to
an Indemnitee whose Corporate Status has ceased and shall inure to the benefit
of his/her heirs, executors and administrators.
(b) To the extent that the Corporation maintains an insurance policy
or policies providing liability insurance for directors, officers, employees,
agents or fiduciaries of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Corporation, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) The Corporation shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
12. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever: (A)
the validity, legality and enforceability of the remaining provisions of this
Agreement shall not be in any way be affected or impaired thereby; and (B) to
the fullest extent possible, the provisions of this Agreement shall be construed
so as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
13. Definitions. For purposes of this Agreement:
6
<PAGE>
(a) "Arbitrator" means an attorney who is an Independent Counsel and
who is selected in accordance with Section 10(b) of this Agreement to act as
arbitrator.
(b) "Change in Control" means
(i) The Corporation is merged or consolidated or reorganized
into or with another corporation or other legal person (an
"Acquiror") and as a result of such merger, consolidation or
reorganization less than 75% of the outstanding voting securities
or other capital interests of the surviving, resulting or
acquiring corporation or other legal person are owned in the
aggregate by the stockholders of the Corporation, directly or
indirectly, immediately prior to such merger, consolidation or
reorganization, other than by the Acquiror or any corporation or
other legal person controlling, controlled by or under common
control with the Acquiror; or
(ii) The Corporation sells all or substantially all of its
business and/or assets to an Acquiror, of which less than 75% of
the outstanding voting securities or other capital interests are
owned in the aggregate by the stockholders of the Corporation,
directly or indirectly, immediately prior to such sale, other
than by a corporation or other legal person controlling,
controlled by or under common control with the Acquiror; or
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), disclosing that any person or group
(as the terms "person" and "group" are used in Section 13(d)(3)
or Section 14(d)(2) of the Exchange Act and the rules and
regulations promulgated thereunder) has become the beneficial
owner (as the term "beneficial owner" is defined under Rule 13d-3
or any successor rule or regulation promulgated under the
Exchange Act) of 20% or more of the issued and outstanding shares
of voting securities of the Corporation; or
(iv) During any period of two consecutive years, individuals
who at the beginning of any such period constitute the directors
of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for
election by the Corporation's stockholders, of each new director
of the Corporation was approved by a vote of at least two-thirds
of such directors of the Corporation then still in office who
were directors of the Corporation at the beginning of any such
period.
(c) "Corporate Status" means the status of a person who is or was a
director, officer, employee, agent or fiduciary of the Corporation or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the request of the
Corporation.
7
<PAGE>
(d) "Disinterested Director" means a director of the Corporation who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(e) "Expenses" means all attorneys' fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, or being or preparing to be a witness in a
Proceeding.
(f) "Indemnitee" means any person who is, or is threatened to be made,
a witness in or a party to any Proceeding as described in Sections 3, 4, 5 or 6
by reason of his/her Corporate Status.
(g) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the Corporation or
Indemnitee in any matter (other than with respect to the rights of Indemnitee
under this Agreement or other indemnitees under similar indemnity agreements);
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Counsel" shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Corporation or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(h) "Proceeding" means any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding whether civil, criminal, administrative or investigative, except one
initiated by an Indemnitee. For purposes of this definition, a counterclaim,
cross claim or third party claim in a Proceeding shall be considered a separate
and distinct Proceeding.
14. Notice. Indemnitee shall give the Corporation notice in writing as
soon as reasonably practicable of any claim made against him/her for which
indemnity will or could be sought under this Agreement. In addition, Indemnitee
shall, at the Corporation's expense, give the Corporation such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power. Notice to the Corporation shall be directed to Waste Management, Inc.
3003 Butterfield Road, Oak Brook, Illinois 60521, ATTN: Secretary (or such
other address as the Corporation shall designate in writing to Indemnitee).
Notices to Indemnitee shall be directed to the address set forth below the
signature of the Indemnitee on this Agreement (or such other address as the
Indemnitee shall designate in writing to the Corporation). Notices shall be
deemed received three (3) days after the date postmarked, if sent by prepaid
certified mail, return receipt requested, properly addressed.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute one and the same original.
8
<PAGE>
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with Delaware law.
17. Successors and Assigns. This Agreement shall be binding upon the
Corporation and its successors and assigns.
18. Amendment. This Agreement may be amended or modified only by a
writing executed and signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
WASTE MANAGEMENT, INC.
By:_____________________________________
Secretary
Its_____________________________________
INDEMNITEE:
________________________________________
PRINT NAME: ____________________________
Address for Notices:
________________________________________
9
<PAGE>
EXHIBIT 12
Waste Management, Inc.
Ratio of Earnings to Fixed Charges
(Unaudited)
(millions of dollars, except ratio)
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Income From Continuing Operations Before
Income Taxes, Undistributed Earnings
from Affiliated Companies and
Minority Interest.......................... $262.2 $267.7 $195.2
Interest Expense............................. 116.4 121.8 119.2
Capitalized Interest......................... (7.7) (6.7) (3.6)
One-Third of Rents Payable in the Next Year 13.8 12.5 11.5
------ ------ ------
Income From Continuing Operations Before
Income Taxes, Undistributed Earnings
from Affiliated Companies, Minority
Interest, Interest and One-Third
of Rents................................... $384.7 $395.3 $322.3
====== ====== ======
Interest Expense............................. $116.4 $121.8 $119.2
One-Third of Rents Payable in the Next Year 13.8 12.5 11.5
------ ------ ------
Interest Expense plus One-Third of Rents..... $130.2 $134.3 $130.7
====== ====== ======
Ratio of Earnings to Fixed Charges........... 2.95 to 1 2.94 to 1 2.47 to 1
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1996 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 87,242
<SECURITIES> 4,636
<RECEIVABLES> 1,908,078
<ALLOWANCES> 73,706
<INVENTORY> 0
<CURRENT-ASSETS> 2,636,069
<PP&E> 13,543,018
<DEPRECIATION> 4,441,577
<TOTAL-ASSETS> 17,974,393
<CURRENT-LIABILITIES> 3,604,533
<BONDS> 6,385,833
0
0
<COMMON> 506,058
<OTHER-SE> 3,816,501
<TOTAL-LIABILITY-AND-EQUITY> 17,974,393
<SALES> 0
<TOTAL-REVENUES> 2,144,479
<CGS> 0
<TOTAL-COSTS> 1,532,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,147
<INTEREST-EXPENSE> 108,723
<INCOME-PRETAX> 244,753
<INCOME-TAX> 111,182
<INCOME-CONTINUING> 133,571
<DISCONTINUED> 4,847
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,418
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1997 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 491,959
<SECURITIES> 631,006
<RECEIVABLES> 1,613,879
<ALLOWANCES> 48,359
<INVENTORY> 0
<CURRENT-ASSETS> 3,222,027
<PP&E> 13,494,031
<DEPRECIATION> 4,927,103
<TOTAL-ASSETS> 16,667,655
<CURRENT-LIABILITIES> 3,724,470
<BONDS> 6,139,969
0
0
<COMMON> 507,102
<OTHER-SE> 3,265,955
<TOTAL-LIABILITY-AND-EQUITY> 16,667,655
<SALES> 0
<TOTAL-REVENUES> 2,204,985
<CGS> 0
<TOTAL-COSTS> 1,719,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,705
<INTEREST-EXPENSE> 115,055
<INCOME-PRETAX> 241,616
<INCOME-TAX> 127,231
<INCOME-CONTINUING> 114,385
<DISCONTINUED> 647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,032
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1998 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 311,861
<SECURITIES> 3,053
<RECEIVABLES> 1,517,915
<ALLOWANCES> 54,161
<INVENTORY> 0
<CURRENT-ASSETS> 2,179,626
<PP&E> 11,793,089
<DEPRECIATION> 4,666,663
<TOTAL-ASSETS> 13,864,000
<CURRENT-LIABILITIES> 4,509,073
<BONDS> 5,398,132
0
0
<COMMON> 507,102
<OTHER-SE> 847,791
<TOTAL-LIABILITY-AND-EQUITY> 13,864,000
<SALES> 0
<TOTAL-REVENUES> 2,131,621
<CGS> 0
<TOTAL-COSTS> 1,621,985
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,243
<INTEREST-EXPENSE> 115,574
<INCOME-PRETAX> 170,968
<INCOME-TAX> 96,551
<INCOME-CONTINUING> 74,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,417
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
