<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1998
REGISTRATION NO. 333-56337
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
WASTE MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 36-2660763
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3003 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
(630) 572-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
HERBERT A. GETZ, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
3003 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
(630) 572-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
CHARLES W. MULANEY, JR., ESQ. DAVID A. SCHUETTE, ESQ.
GARY P. CULLEN, ESQ. MAYER, BROWN & PLATT
SKADDEN, ARPS, SLATE, MEAGHER & FLOM 190 S. LASALLE STREET
(ILLINOIS) CHICAGO, ILLINOIS 60603
333 W. WACKER DRIVE, SUITE 2100 (312) 782-0600
CHICAGO, ILLINOIS 60606
(312) 407-0700
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 15, 1998
PROSPECTUS
20,000,000 SHARES
----------------------------------
[LOGO WASTE MANAGEMENT/SM/]
COMMON STOCK
------------
All of the shares of common stock, par value $1.00 per share ("Company Common
Stock"), of Waste Management, Inc. (the "Company" or "Waste Management")
offered hereby are being offered by the Company (the "Offering").
The Company Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "WMX." On June 12, 1998, the last reported sale price of the
Company Common Stock on the NYSE was $32 3/4 per share. See "Price Range of
Company Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMPANY COMMON STOCK
OFFERED HEREBY.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
- --------------------------------------------------------------------------------
Total......................................... $ $ $
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</TABLE>
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(1) The Company and USA Waste Services, Inc. have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities
under the Securities Act (as defined herein). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $425,000.
------------
The shares of Company Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Company Common Stock will be made in
New York, New York on or about , 1998.
------------
MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
------------
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF COMPANY COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF COMPANY
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in the "Prospectus Summary" and under the captions "Risk
Factors," "Combined Unaudited Pro Forma Condensed Financial Statements,"
"Notes to Combined Unaudited Pro Forma Condensed Financial Statements,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition for the Three Months Ended March 31, 1998," "Management's Discussion
and Analysis of Results of Operations and Financial Condition for the Year
Ended December 31, 1997" and elsewhere in this Prospectus, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements also include those
preceded by, followed by or that include the words "believes," "expects,"
"anticipates" or similar expressions. 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, including failure of
the Company to complete the merger described herein with USA Waste (as defined
herein), the inability of the Company to meet price increase and new business
sales goals, fluctuation in recyclable commodity prices, weather conditions,
slowing of the overall economy, increased interest costs arising from a change
in the Company's leverage, failure of the Company's plans to produce
anticipated cost savings, the timing and magnitude of capital expenditures,
inability to obtain or retain permits necessary to operate disposal or other
facilities or otherwise complete project development activities and inability
to complete contemplated dispositions of the Company's businesses and assets
at anticipated prices and terms. The Company makes no commitments 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. In addition, prospective purchasers of Company Common Stock should
consider carefully the information set forth herein under "Risk Factors,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition for the Three Months Ended March 31, 1998," "Management's Discussion
and Analysis of Results of Operations and Financial Condition for the Year
Ended December 31, 1997" and "Business" and the information set forth under
the captions "Business" and "Legal Proceedings" in Parts I and II of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "Waste Management 1997 Form 10-K"), which is incorporated by
reference herein. Other factors and assumptions not identified above were also
involved in the derivation of these forward-looking statements, and the
failure of such other assumptions to be realized as well as other factors may
also cause actual results to differ materially from those projected. The
Company does not assume any obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in
other factors affecting such forward-looking statements.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. Reports, proxy statements and
other information filed electronically by the Company with the Commission are
available at the Commission's worldwide web site at
2
<PAGE>
http://www.sec.gov. Company Common Stock is listed on the NYSE and the Chicago
Stock Exchange and reports, proxy statements and other information concerning
the Company also may be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 10005 and the offices of the Chicago Stock Exchange, 1
Financial Plaza, 440 South LaSalle Street, Chicago, Illinois 60605.
A registration statement on Form S-3 with respect to the offering (the
"Offering") of Company Common Stock to which this Prospectus relates (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") has been filed with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Prospectus does not contain all
the information contained in such Registration Statement, certain portions of
which have been omitted pursuant to the rules and regulations of the
Commission. For further information with respect to the Company and the
Offering, reference is made to the Registration Statement. Statements
contained in this Prospectus regarding the contents of any contract or any
other document are not necessarily complete and, in each instance, reference
is hereby made to the copy of such contract or document filed as an exhibit to
the Registration Statement. The Registration Statement may be inspected
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section, Securities and Exchange Commission, Washington, D.C. 20549, upon
payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 1-7327) are incorporated in this Prospectus by
reference and are made a part hereof:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
2. Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998.
3. Current Reports on Form 8-K filed January 7, 1998, February 2, 1998,
March 2, 1998, March 13, 1998 and May 19, 1998.
4. Joint Proxy Statement/Prospectus of the Company and USA Waste, dated
June 9, 1998 (the "Waste Management/USA Waste Joint Proxy
Statement/Prospectus") on Schedule 14A, filed by the Company with the
Commission on June 10, 1998.
5. The description of Company Common Stock contained in the Company's
Registration Statement on Form 8-A (as filed with the Commission on August
15, 1990), including any amendment or report filed for the purpose of
amending such description.
The following documents filed by USA Waste with the Commission pursuant to
the Exchange Act (File No. 1-12154) are incorporated in this Prospectus by
reference and are made a part hereof:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
2. Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998.
3. Waste Management/USA Waste Joint Proxy Statement/Prospectus on
Schedule 14A, filed by USA Waste with the Commission on June 10, 1998.
All documents filed by the Company or by USA Waste pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering, shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents (such documents, and the documents enumerated
above, being hereinafter referred to as the "Incorporated Documents"). Any
statement contained in an Incorporated Document shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed Incorporated Document modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all the Incorporated Documents (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference
into such documents). Such requests should be directed to Waste Management,
Inc., 3003 Butterfield Road, Oak Brook, Illinois 60523, (630) 572-8800,
Attention: General Counsel.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus or incorporated herein by reference. Unless
otherwise indicated, all references in this Prospectus to the "Company" and
"Waste Management" refer to Waste Management, Inc. and its subsidiaries.
THE COMPANY
Waste Management is a leading international provider of waste management
services. The Company provides integrated solid waste management services in
North America primarily through Waste Management of North America, Inc.
("WMNA"). The Company's solid waste management services are provided to
commercial, industrial, municipal and residential customers, as well as to
other waste management companies, and consist of solid waste collection,
transfer, resource recovery and disposal services. As part of these services,
the Company is engaged in providing, through its Recycle America(R) and other
programs, paper, glass, plastic and metal recycling services to commercial and
industrial operations and curbside collection of such materials from residences
and in removing methane gas from sanitary landfill facilities for use in
electricity generation. In addition, through WMNA, the Company provides Port-O-
Let(R) portable sanitation services to municipalities and commercial and
special event customers. WMNA also manages the on-site industrial cleaning
services businesses owned by the Company's Rust International Inc. ("Rust")
subsidiary.
The Company also provides hazardous waste management services. The Company's
chemical waste treatment, storage, disposal and related services in North
America are provided through WMNA and Chemical Waste Management, Inc. ("CWM"),
and are provided to commercial and industrial customers, as well as to other
waste management companies and to governmental entities. Through Advanced
Environmental Technical Services, L.L.C., a wholly owned subsidiary of the
Company ("AETS"), the Company provides on-site integrated hazardous waste
management services, including hazardous waste identification, packaging,
removal and recycling services, to industrial, institutional and governmental
customers. Through its wholly owned Chem-Nuclear Systems, L.L.C. subsidiary
("Chem-Nuclear"), the Company also furnishes radioactive waste management
services, primarily to electric utilities and governmental entities.
The Company provides comprehensive waste management and related services
outside North America through Waste Management International plc ("WM
International"), a subsidiary owned approximately 56% by the Company and 12%
each by subsidiaries of Rust and Wheelabrator Technologies Inc. ("Wheelabrator"
or "WTI"). WM International provides a wide range of solid and hazardous waste
management services in seven countries in Europe, seven countries in the Asia-
Pacific region and Argentina, Brazil and Israel.
Wheelabrator, a wholly owned subsidiary of the Company, is a leading
developer of facilities for, and provider of services to, the trash-to-energy
and waste-fuel powered independent power markets. WTI develops, arranges
financing for, operates and owns facilities that dispose of trash and other
waste materials in an environmentally acceptable manner by recycling them into
electrical or steam energy. WTI is also pursuing the development, ownership and
operation of power plants for industrial customers. In addition, WTI is
involved in the treatment and management of biosolids resulting from the
treatment of wastewater by converting them into useful fertilizers and the
recycling of organic wastes into compost material useable for horticultural and
agricultural purposes. WTI also designs and installs technologically advanced
air pollution control systems and equipment. In the first quarter of 1998, the
Company acquired the outstanding shares of WTI which it did not already own for
$876.2 million.
Rust, owned approximately 60% by the Company and 40% by WTI, is engaged in
furnishing environmental and infrastructure consulting and a variety of other
on-site industrial and related services primarily to clients in the public
sector and petrochemical, chemical, energy, utility, pulp and paper,
environmental services and other industries.
4
<PAGE>
The Company reports its continuing operations as being within a single
industry segment, waste management services. The Company's continuing
consolidated revenues were approximately $8.5 billion in 1994, $9.1 billion in
1995, $9.2 billion in 1996 and $9.2 billion in 1997.
The Company's principal executive offices are located at 3003 Butterfield
Road, Oak Brook, Illinois 60523, (630) 572-8800.
THE MERGER
On March 10, 1998, the Company entered into a definitive agreement and plan
of merger (the "Merger Agreement"), pursuant to which the Company will merge
(the "Merger") with a wholly owned subsidiary of USA Waste Services, Inc. ("USA
Waste"). Pursuant to the Merger Agreement, the Company's stockholders will
receive 0.725 of a share (the "Exchange Ratio") of common stock, par value
$0.01 per share, of USA Waste ("USA Waste Common Stock") for each share of
Company Common Stock. Based on the number of shares outstanding on June 9,
1998, and, assuming the consummation of the Offering, the Company's
stockholders immediately prior to the Merger are expected to own approximately
60% of the outstanding shares of USA Waste following the Merger, which will be
renamed "Waste Management, Inc." ("New Waste Management" or the "combined
company").
Following the consummation of the Merger, the current Chief Executive Officer
of USA Waste will remain in such position with New Waste Management, and the
current President and Chief Operating Officer, and Executive Vice President and
Chief Financial Officer of USA Waste are expected to remain in such positions
with New Waste Management. Robert S. Miller, who is currently Chairman of the
Board and Chief Executive Officer of Waste Management, will become non-
executive Chairman of the New Waste Management Board for a 12-month term, after
which John E. Drury, who is currently the Chairman of the Board and Chief
Executive Officer of USA Waste, will become Chairman of the Board and will
continue as Chief Executive Officer of New Waste Management. The Board of
Directors of New Waste Management (the "New Waste Management Board")
immediately following the effective time of the Merger will consist of 14
members, seven of whom will be designated by USA Waste and seven of whom will
be designated by the Company.
The consummation of the Merger is subject to a number of conditions,
including: (i) the expiration or termination of the applicable merger review
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and other similar laws; (ii) approval by the
stockholders of the Company of the Merger Agreement; (iii) approval by the
stockholders of USA Waste of the issuance of the USA Waste Common Stock to be
issued in the Merger (the "Share Issuance") and the amendment of the USA Waste
Restated Certificate of Incorporation to increase the number of authorized
shares of USA Waste Common Stock and to change the name of USA Waste to "Waste
Management, Inc.," in each case at the effective time of the Merger (the
"Charter Proposal"); (iv) there being in existence no court order which
effectively prohibits the Merger; (v) all relevant governmental authorities
must approve the Merger; (vi) each company's independent accountants must
provide a letter regarding their respective concurrence with the conclusions of
each company's management that the Merger will qualify for pooling of interests
accounting treatment; (vii) the shares of USA Waste Common Stock to be issued
in the Merger and to be issued upon exercise of the Company stock options must
be authorized for listing on the NYSE; (viii) each company must certify to the
other that its representations and warranties contained in the Merger Agreement
are materially true and correct and that it has performed all of its material
obligations under the Merger Agreement; (ix) no event or events shall have
occurred or be reasonably likely to occur which shall have had, or could
reasonably be expected to have, a material adverse effect with respect to
either company; (x) each company must receive an opinion from its tax counsel
that the Merger will qualify as a tax free reorganization; (xi) certain
individuals must be appointed to their positions as directors and/or executive
officers of New Waste Management and (xii) the sale of shares of Company Common
Stock in the Offering in order to qualify the Merger as a pooling of interests
for accounting and financial reporting purposes. The principal purpose for the
Offering is to facilitate the treatment of the Merger as a pooling of interests
for accounting and financial reporting purposes.
5
<PAGE>
USA Waste is the third largest integrated solid waste management company in
North America, as measured by revenues for the 1997 fiscal year, and currently
serves, through its subsidiaries, the full spectrum of commercial, industrial,
municipal and residential customers in 48 states, the District of Columbia,
Canada and Puerto Rico. USA Waste's solid waste management services include
collection, transfer and disposal operations and, to a lesser extent, recycling
and certain other waste management services. USA Waste, through its
subsidiaries, owns or operates an extensive network of landfills, transfer
stations and collection operations and, as of March 31, 1998, has a diversified
customer base in excess of eight million. USA Waste is subject to the
informational requirements of the Exchange Act and in accordance therewith
files reports, proxy statements and other information with the Commission.
Prospective purchasers of the Company Common Stock are urged to read and
consider carefully such reports, proxy statements and other information. USA
Waste Common Stock is traded on the NYSE under the symbol "UW." USA Waste's
principal executive offices are located at 1001 Fannin, Suite 4000, Houston,
Texas 77002.
The Board of Directors of the Company has fixed the close of business on June
9, 1998, as the record date for determination of holders of Company Common
Stock entitled to notice of and to vote at a special meeting of the
stockholders of the Company to be held on July 15, 1998 (the "Special
Meeting"), to consider and approve the Merger Agreement. Accordingly,
purchasers of the shares of Company Common Stock in the Offering will not be
entitled to vote such shares at the Special Meeting.
RECENT DEVELOPMENTS
In light of the proposed Merger, the Company will discontinue work on a
previously announced project to implement new information systems and projects
to remediate Year 2000 issues in its principal U.S. solid waste information
systems. Instead, the Company has negotiated a license of USA Waste's principal
information systems software. The Company also will decentralize certain of its
accounting activities and scale back its program to further centralize
purchasing and various other corporate programs. Such actions are not expected
to impact Waste Management's ability to meet customer service requirements.
The decision to discontinue these projects and initiatives will result in a
pre-tax charge to earnings during the second quarter currently estimated to be
between $70 million and $90 million. The charge will include a write-off of
previously capitalized costs for new information systems hardware and software,
severance and other commitments. In addition, as a result of the proposed
Merger, the Company is reviewing its current operational and overhead
structures and, as transitional decisions related to the Merger are made, may
incur additional asset write-downs, severance and other charges.
On May 15, 1998, the Company announced that its Board of Directors has
adopted a new dividend policy, reducing regular quarterly dividends from $0.17
per share to $0.01 per share. On such date, the Company declared a dividend to
be paid on July 2, 1998, to stockholders of record on June 17, 1998.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Company Common Stock Offered by 20,000,000 shares
the Company......................
Company Common Stock to be 475,835,871 shares(1)
Outstanding Immediately After the
Offering.........................
Use of Proceeds................... All of the estimated $614 million of the net
proceeds of the Offering will be used by the
Company for the repayment of indebtedness
under the Chase Facility (as defined herein)
and for the repayment of commercial paper.
See "Use of Proceeds."
NYSE Symbol....................... WMX
</TABLE>
- --------
(1) Based on the number of shares outstanding as of May 31, 1998, excluding
10,886,361 shares held by the Company's Employee Stock Benefit Trust. Does
not include employee stock options outstanding to purchase an aggregate of
22,093,567 shares of Company Common Stock exercisable as of May 31, 1998,
and options to purchase 4,593,045 shares of Company Common Stock which will
become exercisable as a result of the Merger. Also does not include an
aggregate of approximately 14,854,554 shares of Company Common Stock that
may be issued upon the conversion of (i) Liquid Yield Option Notes, zero
coupon-subordinated, interest 9%, due 2001, (ii) Liquid Yield Option Notes,
zero coupon-subordinated, interest 6%, due 2012, (iii) Liquid Yield Option
Notes, zero coupon-subordinated, interest 6%, due 2010 and (iv)
Subordinated Notes, interest 5.75%, due 2005, of the Company.
RISK FACTORS
See "Risk Factors" beginning on page 12 for a discussion of certain factors
that should be considered by prospective purchasers of Company Common Stock.
7
<PAGE>
SELECTED HISTORICAL AND SUMMARY COMBINED UNAUDITED
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following selected historical financial information of the Company for
each of the five years in the period ended December 31, 1997, has been derived
from the Company's audited historical financial statements. The following
selected historical financial information of the Company as of and for the
three months ended March 31, 1997 and 1998, has been derived from the Company's
unaudited historical financial statements and reflect all adjustments the
Company considers necessary for a fair presentation of the financial position
and results of operation for these periods. The selected historical financial
information should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition for the Three Months
ended March 31, 1998," "Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Year Ended December 31, 1997," the
consolidated financial statements of the Company (the "Consolidated Financial
Statements") and the notes thereto contained herein.
The summary combined unaudited pro forma condensed financial information is
derived from the combined unaudited pro forma condensed financial statements,
appearing elsewhere herein, which give effect to the Merger by combining the
results of operations of the Company and USA Waste using the pooling of
interests method of accounting as if the Merger had been consummated as of the
beginning of the periods presented and as if the Offering had been consummated
as of March 31, 1998 and should be read in conjunction with such pro forma
financial statements and notes thereto. See "Combined Unaudited Pro Forma
Condensed Financial Statements." The combined unaudited pro forma condensed
financial statements as of March 31, 1998, and for the years ended December 31,
1995, 1996 and 1997, and the three months ended March 31, 1998, were prepared
based on the respective historical financial statements of the Company and USA
Waste.
The combined unaudited pro forma condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have been achieved had the
Merger been consummated as of the beginning of the periods presented, nor is it
necessarily indicative of the future operating results or financial position of
New Waste Management. The combined unaudited pro forma condensed financial
information does not give effect to any possible divestitures of business units
(including those which may be required by the antitrust regulatory authorities)
or to any cost savings which may result from the integration of the Company's
and USA Waste's operations nor does such information include the nonrecurring
costs directly related to the Merger which are expected to be included in
operations of New Waste Management within the 12 months following the Merger.
Such nonrecurring costs have yet to be determined; however, such costs are
expected to be significant.
8
<PAGE>
WASTE MANAGEMENT SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 7,827,280 $ 8,537,883 $ 9,100,225 $ 9,225,636 $ 9,188,582 $ 2,204,985 $ 2,131,621
----------- ----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses...... $ 6,560,716 $ 7,090,342 $ 7,606,679 $ 7,756,225 $ 8,324,613 $ 1,947,344 $ 1,885,867
Asset impairment loss... 29,009 33,970 53,772 64,729 1,480,262 5,905 --
Special charges......... 524,767 -- 335,587 370,735 145,990 15,916 --
Gains from stock
transactions of
subsidiaries and
exchange of
exchangeable LYONs..... (15,109) -- -- -- -- -- --
Other (income) expenses,
net.................... 175,729 299,423 232,540 373,480 291,390 (5,796) 74,786
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before income taxes.... $ 552,168 $ 1,114,148 $ 871,647 $ 660,467 $(1,053,673) $ 241,616 $ 170,968
Provision for income
taxes.................. 283,347 512,683 451,741 436,473 215,667 127,231 96,551
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations.. $ 268,821 $ 601,465 $ 419,906 $ 223,994 $(1,269,340) $ 114,385 $ 74,417
Income (loss) from
discontinued
operations............. 19,886 27,324 4,863 (263,301) 95,688 647 --
Extraordinary item...... -- -- -- -- (516) -- --
Accounting changes...... -- (1,281) (84,672) -- (1,936) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 288,707 $ 627,508 $ 340,097 $ (39,307) $(1,176,104) $ 115,032 $ 74,417
=========== =========== =========== =========== =========== =========== ===========
Average common shares
outstanding............ 484,885 483,748 485,346 489,171 466,601 483,993 455,096
=========== =========== =========== =========== =========== =========== ===========
Basic earnings (loss)
per share:
Continuing operations.. $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72) $ 0.24 $ 0.16
Discontinued
operations............ 0.05 0.06 0.01 (0.54) 0.20 -- --
Extraordinary item..... -- -- -- -- -- -- --
Accounting changes..... -- -- (0.17) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 0.60 $ 1.30 $ 0.70 $ (0.08) $ (2.52) $ 0.24 $ 0.16
=========== =========== =========== =========== =========== =========== ===========
Diluted earnings (loss)
per share:
Continuing operations.. $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72) $ 0.23 $ 0.16
Discontinued
operations............ 0.04 0.06 0.01 (0.54) 0.20 -- --
Extraordinary item..... -- -- -- -- -- -- --
Accounting changes..... -- -- (0.17) -- -- -- --
----------- ----------- ----------- ----------- ----------- =========== ===========
Net income (loss).... $ 0.59 $ 1.30 $ 0.70 $ (0.08) $ (2.52) $ 0.23 $ 0.16
=========== =========== =========== =========== =========== =========== ===========
Dividends per share..... $ 0.58 $ 0.60 $ 0.60 $ 0.63 $ 0.67 $ 0.16 $ 0.17
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital
(deficit).............. $ (232,665) $ (682,017) $(1,047,078) $ (280,923) $(2,046,899) $ (502,443) $(2,329,447)
Intangible assets, net.. 3,230,826 3,406,897 3,892,355 3,871,919 3,198,374 3,728,860 3,686,079
Total assets............ 15,716,369 16,444,947 17,457,159 17,083,577 13,589,098 16,667,655 13,864,000
Long-term debt,
including current
maturities............. 6,897,786 6,899,223 7,478,074 7,525,100 6,627,022 7,203,395 7,300,049
Stockholders' equity.... 3,682,143 3,907,150 4,042,646 3,741,761 1,345,652 3,773,057 1,354,893
</TABLE>
9
<PAGE>
(1) 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. The Company has
accordingly restated its prior financial results. (See Note 2 to the
Consolidated Financial Statements.)
(2) The Company recorded an asset impairment loss in 1997, and restated prior
year financial statements to retroactively recognize impairment losses in
earlier years. See Note 16 to the Consolidated Financial Statements.
(3) The results for 1993 include a non-taxable gain of $15.1 million (before
minority interest), relating to the issuance of shares by Rust, as well as
a special asset revaluation and restructuring charge of $524.8 million
(before tax and minority interest) recorded by the CWM subsidiary of Waste
Management related primarily to a revaluation of its thermal treatment
business, and a provision of approximately $14 million to adjust deferred
income taxes resulting from the 1993 tax law change.
(4) The results for 1995 include a special charge of $140.6 million (before
tax) recorded by CWM, primarily to write off its investment in facilities
and technologies that it abandoned because they do not meet customer
service or performance objectives, and a special charge of $194.6 million
(before tax and minority interest) recorded by WM International relating to
actions it had decided to take to sell or otherwise dispose of non-core
business and investments, as well as core businesses and investments in low
potential markets, abandon certain hazardous waste treatment and processing
technologies, and streamline its country management organization.
(5) In 1995, the Rust Board of Directors approved a plan to sell or otherwise
discontinue Rust's process engineering, construction, specialty contracting
and similar lines of business. During 1996, the sale of the industrial
process engineering and construction business, based in Birmingham,
Alabama, was completed. In 1996, WTI sold its water process systems and
equipment manufacturing business, and Rust sold its industrial scaffolding
business. WTI entered into an agreement to sell its water and wastewater
facility operations and privatization business and Rust began implementing
plans to exit its remaining domestic and international engineering and
consulting business. These businesses were classified as discontinued
operations in the financial statements. The Rust disposition was not
completed within one year, and accordingly in 1997 this business has been
reclassified back into continuing operations, as operations held for sale,
in accordance with generally accepted accounting principles. The unused
portion ($87.0 million) of the previously recorded provision for loss on
disposal was reversed in discontinued operations, and an impairment loss
provision of $122.2 million was recognized in continuing operations.
(6) The results for 1996 include special charges of $47.1 million (before tax
and minority interest) related to WM International's sale of its investment
in Wessex Water plc and a charge of $169.5 million (before tax and minority
interest) to revalue its investments in France, Austria and Spain in
contemplation of exiting these markets and to write off an investment in a
hazardous waste disposal facility. Also in 1996, WMNA and CWM recorded
special charges of $154.1 million (before tax) for reengineering their
finance and administration functions and increasing reserves for certain
litigation.
(7) In 1997, the Company recorded a special charge of $41.6 million (pretax)
for severance related to WMNA, and WM International recorded a charge of
$104.4 million (before tax and minority interest) to reflect costs of
demobilization following the loss of the contract renewal for Buenos Aires,
Argentina, divestiture or closure of underperforming businesses, and the
writeoff of projects it decided to no longer pursue.
(8) In 1995, the Company changed its accounting for capitalized interest on
landfill cell construction. See Note 3 to the Consolidated Financial
Statements.
10
<PAGE>
SUMMARY COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------
1995 1996 1997 1998
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenues........ $10,316,307 $10,874,767 $11,802,350 $ 2,901,061
----------- ----------- ----------- -----------
Costs and expenses:
Operating (exclusive of
depreciation and
amortization shown
below).................. $ 6,176,196 $ 6,498,708 $ 7,479,745 $ 1,757,707
General and
administrative.......... 1,260,192 1,294,471 1,413,244 345,581
Depreciation and
amortization............ 1,178,896 1,256,727 1,382,356 351,458
Merger costs............. 26,539 126,626 109,411 --
Unusual items............ 394,092 499,264 1,650,972 --
(Income) loss from
continuing operations
held for sale, net of
minority interest........ (25,110) (315) 9,930 2,416
----------- ----------- ----------- -----------
$ 9,010,805 $ 9,675,481 $12,045,658 $ 2,457,162
----------- ----------- ----------- -----------
Income (loss) from
operations............... $ 1,305,502 $ 1,199,286 $ (243,308) $ 443,899
----------- ----------- ----------- -----------
Other income (expense):
Interest expense:
Nonrecurring........... $ (10,994) $ -- $ -- $ --
Other.................. (522,480) (522,921) (551,149) (153,942)
Interest income.......... 41,565 34,603 45,214 6,109
Minority interest........ (81,367) (41,289) (45,442) (25,302)
Other income, net ....... 257,586 108,390 126,172 70,323
----------- ----------- ----------- -----------
$ (315,690) $ (421,217) $ (425,205) $ (102,812)
----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before income taxes...... $ 989,812 $ 778,069 $ (668,513) $ 341,087
Provision for income
taxes.................... 492,885 486,616 361,464 161,815
----------- ----------- ----------- -----------
Income (loss) from
continuing operations.... $ 496,927 $ 291,453 $(1,029,977) $ 179,272
=========== =========== =========== ===========
Basic earnings (loss) per
common share from
continuing operations.... $ 1.00 $ 0.55 $ (1.88) $ 0.33
=========== =========== =========== ===========
Diluted earnings (loss)
per common share from
continuing operations.... $ 0.99 $ 0.54 $ (1.88) $ 0.32
=========== =========== =========== ===========
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital (deficit). $(1,537,137)
Intangible assets, net.... 5,651,426
Total assets.............. 21,248,259
Long-term debt, including
current maturities....... 10,317,063
Stockholders' equity...... 4,644,650
</TABLE>
11
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information contained
or incorporated by reference in this Prospectus, should be considered by
prospective purchasers of Company Common Stock prior to making an investment
decision.
RISKS RELATING TO THE MERGER
CONSUMMATION OF THE MERGER. There can be no assurance that the conditions to
the Merger will be satisfied or waived, and, therefore, there can be no
assurance that the Merger will be consummated upon the terms set forth in the
Merger Agreement, if at all. If the Merger is not consummated, purchasers of
the shares in the Offering will remain holders of Company Common Stock--a
security with investment characteristics that may be significantly different
from those of USA Waste Common Stock to be received in the Merger. Among other
things, the trading price of Company Common Stock would likely decline from
current levels if the Merger is not consummated. Either the Company or USA
Waste may terminate the Merger Agreement if the Merger is not completed by
October 31, 1998 (provided that such date may be extended by either party to
December 30, 1998, if the Merger has not been consummated as a result of (i)
the failure to obtain the requisite regulatory approvals or consents or (ii)
the existence of litigation or any governmental proceeding seeking to prevent
or prohibit consummation of the Merger and under certain other conditions).
Among the conditions that must be fulfilled in order to consummate the
Merger are: (i) the expiration or termination of the applicable merger review
waiting period under the HSR Act and other similar laws, (ii) approval by the
stockholders of the Company of the Merger Agreement; (iii) approval by the
stockholders of USA Waste of the Share Issuance and the Charter Proposal; (iv)
there being in existence no court order which effectively prohibits the
Merger; (v) all relevant governmental authorities must approve the Merger;
(vi) each company's independent accountants must provide a letter regarding
their respective concurrence with the conclusions of each company's management
that the Merger will qualify for pooling of interests accounting treatment;
(vii) the shares of USA Waste Common Stock to be issued in the Merger and to
be issued upon exercise of stock options granted to Company employees must be
authorized for listing on the NYSE; (viii) each company must certify to the
other that its representations and warranties contained in the Merger
Agreement are materially true and correct and that it has performed all of its
material obligations under the Merger Agreement; (ix) no event or events shall
have occurred or be reasonably likely to occur which shall have had, or could
reasonably be expected to have, a material adverse effect with respect to
either company; (x) each company must receive an opinion from its tax counsel
that the Merger will qualify as a tax free reorganization; (xi) certain
individuals must be appointed to their positions as directors and/or executive
officers of New Waste Management and (xii) the sale of shares of Company
Common Stock in the Offering in order to qualify the Merger as a pooling of
interests for accounting and financial reporting purposes. The principal
purpose for the Offering is to facilitate the treatment of the Merger as a
pooling of interests for accounting and financial reporting purposes.
In addition, the review of the Merger pursuant to the HSR Act may
substantially delay the Company's ability to consummate the Merger. The
Company and USA Waste submitted filings required by the HSR Act to the
Department of Justice ("DOJ") and the U.S. Federal Trade Commission ("FTC") on
March 24, 1998, and on April 23, 1998, received a Request for Additional
Documents and other Additional Information (a "second request") with respect
to the Merger. The time period for the DOJ to review the Merger will be
terminated 20 days following substantial compliance by both the Company and
USA Waste with the second request. Thereafter, the waiting period may be
extended only by court order or the consent of the parties. Consummation of
the Merger is subject to the expiration or termination of all applicable
waiting periods under the HSR Act and no action having been instituted by the
DOJ or FTC that is not withdrawn or terminated prior to the effective time of
the Merger. There can be no assurance that the DOJ will not seek an extension
of the 20-day Merger review period or that the DOJ will not challenge the
Merger on antitrust grounds in a formal proceeding, or if an extension is
sought or challenge is made, of the result. The Company expects that the DOJ
will require divestitures of assets of the Company and USA Waste in connection
with any decision not to object to the Merger. Any such divestitures or other
commitments required by the DOJ could limit the synergies, cost savings
12
<PAGE>
and other benefits expected. There can be no assurance that the Company and
USA Waste will agree to such divestitures or that, if agreed to, such
divestitures will not have a material adverse effect on New Waste Management.
FIXED EXCHANGE RATIO. The fraction of a share of USA Waste Common Stock into
which each share of Company Common Stock is to be converted in the Merger is
fixed. The market value of USA Waste Common Stock and/or Company Common Stock
at the Effective Time may vary significantly from the price as of the date of
execution of the Merger Agreement, the date hereof or the date on which
stockholders vote on matters related to the Merger due to, among other
factors, market perception of the synergies and cost savings expected to be
achieved by the Merger, changes in the business, operations or prospects of
the Company or USA Waste, market assessments of the likelihood that the Merger
will be consummated and the timing thereof, and general market and economic
conditions. Because the Exchange Ratio will not be adjusted to reflect changes
in the relative market values of USA Waste Common Stock and Company Common
Stock, the relative market values of USA Waste Common Stock issued in the
Merger and Company Common Stock surrendered in the Merger, may be higher or
lower than the relative market values of such shares at the time the Merger
was negotiated or approved by stockholders.
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS; REALIZATION OF SYNERGIES.
If the proposed Merger is consummated, integrating the operations and
management of the Company and USA Waste will be a detailed, time-consuming
process. Successful consummation of the Merger will alter the nature of USA
Waste's business by significantly expanding USA Waste's domestic and
international operations and by adding operations, such as hazardous waste
management services and waste-to-energy operations. The managements of the
Company and USA Waste expect that annualized synergies and cost savings of
approximately $800 million pre-tax will be realized from the Merger. There can
be no assurance that this integration will result in the achievement of all of
the anticipated synergies and other benefits expected to be realized from the
Merger or that this integration will occur without the Company or New Waste
Management experiencing the loss of key Company or USA Waste personnel. In
addition, USA Waste and the Company expect to incur certain nonrecurring costs
directly related to the Merger which are expected to be included in operations
of New Waste Management within the 12 months following the Merger. Such
nonrecurring costs have yet to be determined; however, such costs are expected
to be significant. Furthermore, any required divestitures of assets or other
commitments required by the Department of Justice could limit the synergies,
cost savings and other benefits expected. Moreover, the integration of these
organizations will require the dedication of management resources, which may
temporarily distract attention from the day-to-day business of New Waste
Management. The inability of management to successfully or timely integrate
the operations of the Company and USA Waste following the Merger could have a
material adverse effect on the business and operating results of New Waste
Management.
CERTAIN LEGAL PROCEEDINGS. On March 12, 1998, a stockholder of the Company
filed a purported class action suit in the Chancery Court of the State of
Delaware in New Castle County against the Company and certain of its current
and former directors. The complaint alleges, among other things, that (i) the
Merger is the product of unfair dealing and the price to be paid to members of
the purported class for their Company Common Stock is unfair and inadequate,
(ii) the Merger will prevent members of the purported class from receiving
their fair portion of the value of the Company's assets and business and from
obtaining the real value of their equity ownership of the Company, (iii)
defendants breached their fiduciary duties owed to the members of the
purported class by putting their personal interests ahead of the interests of
the Company's public stockholders and (iv) the members of the class action
will suffer irreparable damage unless the defendants are enjoined from
breaching their fiduciary duties. The complaint seeks equitable relief that
would enjoin or rescind the Merger, as the case may be, and monetary damages
from the defendants for unlawfully gained profits and special benefits. The
Company believes the suit to be without merit and intends to contest it
vigorously.
RISKS INHERENT IN THE INDUSTRY OR PARTICULAR TO THE COMPANY OR NEW WASTE
MANAGEMENT
COMPETITION. The waste management industry is highly competitive and
requires substantial capital resources. The industry consists of several large
national waste management companies, including both the Company and USA Waste,
as well as numerous local and regional companies of varying sizes and
financial
13
<PAGE>
resources. The Company competes, and, following the proposed Merger, New Waste
Management will compete, with numerous waste management companies and with
those counties and municipalities that maintain their own waste collection and
disposal operations. These counties and municipalities may have financial
competitive advantages due to the availability to them of tax revenues and
tax-exempt financing. In addition, competitors may reduce the price of their
services in an effort to expand sales volume or to win competitively bid
municipal contracts. Profitability may also be affected by the increasing
national emphasis on recycling, composting and other waste reduction programs
that could reduce the volume of solid waste collected or deposited in
landfills.
GOVERNMENT REGULATION. The Company's operations are, and, following the
proposed Merger, New Waste Management's operations will be, subject to and
substantially affected by federal, state, local and foreign laws, regulations,
orders and permits which govern environmental protection, health and safety,
zoning and other matters. These laws, regulations, orders and permits may
impose restrictions on operations that could adversely affect the Company's
or, following the proposed Merger, New Waste Management's, results of
operations and financial condition, such as limitations on the expansion of
disposal facilities, limitations on or the banning of disposal of out-of-state
waste or certain categories of waste or mandates regarding the disposal of
solid or hazardous waste. In particular, the Company is, and New Waste
Management will be, subject to extensive and evolving environmental and land
use laws and regulations, which have become increasingly stringent. These laws
and regulations affect the Company's businesses and will affect New Waste
Management's businesses in a variety of ways. In order to develop and operate
a landfill or other waste management facility, it is necessary to obtain and
maintain in effect various facility permits and other governmental approvals,
including those related to zoning, environmental protection and land use.
These permit approvals are difficult, time consuming and costly to obtain and
may be subject to community opposition by government officials or citizens,
regulatory delays, subsequent modifications and other uncertainties. There can
be no assurance that the Company or, following the proposed Merger, New Waste
Management, will be successful in obtaining and maintaining in effect permits
and approvals required for the successful operation and growth of its
business, including permits and approvals required for the development of
additional disposal capacity of landfills needed to replace existing capacity
as it is exhausted. The siting, design, operation and closure of landfills and
other disposal facilities are also subject to extensive regulations. These
regulations could require the Company or New Waste Management to undertake
investigatory or remedial activities, to curtail operations or to close a
landfill or other disposal facility temporarily or permanently. Furthermore,
future changes in these regulations may require the Company or New Waste
Management to modify, supplement or replace equipment or facilities at costs
which could be substantial. In addition, court decisions have ruled that state
and local governments may not constitutionally restrict the free movement of
waste in interstate commerce through the use of regulatory flow control laws.
It is not possible to predict what impact, if any, these decisions may have in
the future on the Company's or, following the proposed Merger, New Waste
Management's disposal facilities, particularly WTI's waste-to-energy
facilities.
POTENTIAL ENVIRONMENTAL LIABILITY; INSURANCE. Each of the Company and New
Waste Management may be subject to liability for environmental damage that its
landfills, transfer stations and collection operations may have caused or may
cause to its own properties or to nearby landowners, particularly as a result
of the contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such assets or
operations. Liability may also arise from any off-site environmental
contamination caused by pollutants or hazardous substances, the
transportation, treatment or disposal of which was arranged for by the
Company, or following the proposed Merger, New Waste Management, or their
predecessor owners of operations or assets acquired by such companies. Any
substantial liability for such environmental impacts could have a material
adverse effect on the Company's or, following the proposed Merger, New Waste
Management's, results of operations and financial condition.
The Company has established reserves in connection with certain of its
environmental remediation liabilities and liabilities for closure and post-
closure costs of disposal facilities owned or operated by it. While such
reserves have been established, the promulgation of new laws and the
development and discovery of new facts and conditions have required the
Company, and in the future may require the Company or, following the proposed
Merger, New Waste Management, to establish reserves for new remediation or
closure/post-closure liabilities and to adjust reserves for existing
liabilities. Thus, there can be no assurance that the current
14
<PAGE>
remediation and closure/post-closure reserves of the Company or New Waste
Management will adequately cover all of such company's remediation and
closure/post-closure costs.
In the ordinary course of its business, the Company is, and following the
proposed Merger, New Waste Management may become, involved in a variety of
legal and administrative proceedings relating to land use and environmental
laws and regulations. These may include proceedings by federal, state, local
or foreign agencies seeking to impose civil or criminal penalties on the
Company for violations of such laws and regulations, or to impose liability on
the Company under statutes, or to revoke, or deny renewal of, a permit;
actions brought by citizens' groups, adjacent landowners or governmental
entities opposing the issuance of a permit or approval to the Company or
alleging violations of the permits pursuant to which the Company operates or
laws or regulations to which the Company is subject; and actions seeking to
impose liability on the Company for any environmental impact at its owned or
operated facilities (or at facilities formerly owned or operated by the
Company or its predecessors) or damage that those facilities or other
properties may have caused to adjacent landowners or others, including
groundwater or soil contamination. The adverse outcome of one or more of these
proceedings could have a material adverse effect on the Company's or,
following the proposed Merger, New Waste Management's, financial position,
results of operations or cash flows. The Company has from time to time
received, and expects that, following the proposed Merger, New Waste
Management may in the future from time to time receive, citations or notices
from governmental authorities that its operations are not in compliance with
its permits or certain applicable environmental or land use laws and
regulations. The Company generally seeks to work with the authorities to
resolve the issues raised by such citations or notices. There can be no
assurance, however, that the Company or New Waste Management will always be
successful in this regard, or that such future citations or notices will not
have a materially adverse effect on the Company's or, following the proposed
Merger, New Waste Management's, financial position, results of operations or
cash flows.
The Company's insurance for environmental liability is very limited because
the Company believes that the cost for such insurance is high relative to the
coverage it would provide. Due to the limited nature of such insurance
coverage for environmental liability, if the Company were to incur liability
for environmental damage, such liability could have a material adverse effect
on the Company's or, following the proposed Merger, New Waste Management's
financial position, results of operations or cash flows.
LEVERAGE. The Company has, and following the proposed Merger, the combined
company will continue to have, consolidated indebtedness that is substantial
in relation to its stockholders' equity. As of March 31, 1998, on a pro forma
basis after giving effect to the Offering and the application of the proceeds
therefrom, the Company's total consolidated indebtedness (including short-term
debt) and stockholders' equity were approximately $6.7 billion and $2.0
billion, respectively. As of March 31, 1998, on a pro forma basis after giving
effect to the Merger and the Offering, New Waste Management's total
consolidated indebtedness (including short-term debt) and stockholders' equity
were $10.3 billion and $4.6 billion, respectively. See "Use of Proceeds,"
"Capitalization" and "Combined Unaudited Pro Forma Condensed Financial
Statements." The ability of the Company or, following the proposed Merger, New
Waste Management, to satisfy its obligations will be dependent upon its future
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control. The degree to which the Company or, following the proposed Merger,
New Waste Management, is leveraged may make it more vulnerable than its
competitors to the effects of an economic downturn or other adverse
development and could limit its ability to obtain additional financing.
ALTERNATIVES TO LANDFILL DISPOSAL AND WASTE-TO-ENERGY FACILITIES. During the
past several years, alternatives to landfill disposal and waste-to-energy
facilities, such as recycling and composting, have increasingly been utilized
by certain customers of the Company. There also has been an increasing trend
at the state and local levels to mandate recycling and waste reduction at the
source and to prohibit the disposal of certain types of wastes, such as yard
wastes, at landfills or waste-to-energy facilities. These developments may
result in the volume of waste going to landfills and waste-to-energy
facilities being reduced in certain areas, which may affect the Company's or,
following the proposed Merger, New Waste Management's, ability to operate its
landfills and
15
<PAGE>
waste-to-energy facilities at full capacity, the prices that can be charged
for landfill disposal and waste-to-energy services and the resulting operating
margins.
RISKS GENERALLY ASSOCIATED WITH ACQUISITIONS. It is expected that if the
proposed Merger is consummated, New Waste Management will seek acquisitions
that complement its services, broaden its customer base and improve its
operating efficiencies. Such an acquisition strategy involves certain
potential risks associated with assessing, acquiring and integrating the
operations of acquired companies and identification and management of
potential risks associated with pre-existing liabilities of acquired
companies. There can be no assurance that attractive acquisition opportunities
will be available to New Waste Management, that New Waste Management will have
access to the capital required to finance potential acquisitions on
satisfactory terms or that any businesses acquired will prove profitable.
Future acquisitions may result in the incurrence of additional indebtedness or
the issuance of additional equity securities which could dilute the ownership
interests of then-existing stockholders. Among the risks associated with
acquisitions is the risk that the acquired company has engaged in or is
alleged to have engaged in conduct prior to the date of acquisition that
becomes the subject of civil or criminal legal action after such date. There
can be no assurance as to the outcome or consequence of any investigations or
matters related to such conduct, including any effect on New Waste
Management's ability to retain or obtain franchises or other business
opportunities.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Waste Management Restated
Certificate of Incorporation and Amended and Restated Bylaws contain
provisions that would likely have an effect of delaying or deterring a change
in control of the Company (other than the Merger). Such provisions include
provisions which (i) require stockholders to take action only at a formal
meeting, (ii) provide that only designated officers and the Board of Directors
may call special meetings of stockholders, (iii) prevent "greenmail" payments
by the Company, (iv) establish safeguards in connection with certain business
transactions and (v) provide for a classified Board of Directors. In addition,
the Restated Certificate of Incorporation requires the concurrence of the
holders of shares representing at least 80% of the outstanding shares of
Company Common Stock for the alteration, amendment or repeal of, or the
adoption of any provision inconsistent with, any of the preceding provisions.
In addition, the Company's Board of Directors is authorized without further
stockholder authorization, to create and issue 50 million shares of preferred
stock in series and to establish the voting powers, designations, preferences
and relative participating, optional or other special rights and any
qualifications, limitations or restrictions thereof relating to any such
series.
For a description of the relative rights of holders of Company Common Stock
and USA Waste Common Stock, see the discussion under the heading "Comparison
of Stockholder Rights" in the Waste Management/USA Waste Joint Proxy
Statement/Prospectus incorporated herein by reference.
INTERNATIONAL OPERATIONS AND EXPANSION. A significant portion of the
Company's operations are conducted internationally. The Company's operations
in foreign countries generally are, and following the proposed Merger, New
Waste Management's operations in foreign countries generally will be, subject
to a number of risks inherent in any business operating in foreign countries,
including political, social and economic instability, general strikes,
nationalization of assets, currency restrictions and exchange rate
fluctuations, nullification, modification or renegotiation of contracts, and
governmental regulation, all of which are beyond the control of the Company.
No prediction can be made as to how existing or future foreign governmental
regulations in any jurisdiction may affect the Company or New Waste Management
in particular or the solid waste management industry in general.
MATTERS RELATED TO WASTE MANAGEMENT ACCOUNTING PRACTICES. In November and
December 1997, several alleged purchasers of Waste Management securities
(including but not limited to Company Common Stock), who allegedly bought
their securities between 1996 and 1997, brought 14 purported class action
lawsuits against Waste Management and several of its current and former
officers in the United States District Court for the Northern District of
Illinois. Each of these lawsuits asserted that the defendants violated the
federal securities laws by issuing allegedly false and misleading statements
in 1996 and 1997 about Waste Management's financial
16
<PAGE>
condition and results of operations. Among other things, the plaintiffs
alleged that Waste Management employed accounting practices that were improper
and that caused its publicly filed financial statements to be materially false
and misleading. The lawsuits demanded, among other relief, unspecified
compensatory damages, pre- and post-judgment interest, attorneys' fees, and
the costs of conducting the litigation. In January 1998, the 14 putative class
actions were consolidated before one judge. On May 29, 1998, the plaintiffs
filed a consolidated amended complaint against the Company and four of its
former officers. The consolidated amended complaint seeks recovery on behalf
of a proposed class of all purchasers of the Company's securities between May
29, 1995, and October 30, 1997. The consolidated amended complaint alleges,
among other things, that Waste Management filed false and misleading financial
statements beginning in 1991 and continuing through October 1997 and seeks
recovery for alleged violations of the federal securities laws between May
1995 and October 1997. Like the individual complaints that preceded it, the
consolidated amended complaint seeks unspecified compensatory damages, pre-
and post-judgment interest, attorneys' fees, and the costs of conducting the
litigation. It is not possible at this time to predict the impact this
litigation may have on Waste Management or New Waste Management, although it
is reasonably possible that the outcome may have a material adverse impact on
their respective financial condition or results of operations in one or more
future periods. The Company intends to defend itself vigorously in this
litigation. The Company is aware of another action arising out of the same set
of facts alleging a cause of action under Illinois state law.
The Company is also aware that the Commission has commenced a formal
investigation with respect to the Company's previously filed financial
statements (which were subsequently restated) and related accounting policies,
procedures and system of internal controls. The Company intends to cooperate
with such investigation. The Company is unable to predict the outcome or
impact of this investigation at this time.
NEED FOR ADDITIONAL FINANCING. The Company will require and, if the proposed
Merger is consummated, New Waste Management is expected to require, additional
capital and letter of credit and bonding facilities from time to time to
pursue its acquisition strategy, fund internal growth and satisfy customer and
regulatory financial assurance requirements. A portion of Waste Management's,
or, if the proposed Merger is consummated, New Waste Management's, future
capital requirements may be provided through future issuances of debt or
equity securities. There can be no assurance that Waste Management or New
Waste Management will be successful in obtaining additional capital through
issuances of additional debt or equity securities or obtaining and maintaining
sufficient letter of credit and bonding facilities required for financial
assurance purposes. In addition, the Company's principal bank credit facility
will expire on December 31, 1998, and there can be no assurance that such
facility can be extended or replaced. See "Use of Proceeds." The Company
currently uses, and it is expected that New Waste Management will use,
variable rate debt as a financing alternative after the Merger. To the extent
that variable interest rates tend to fluctuate as general interest rates
change, an increase in interest rates could have a material adverse effect on
Waste Management's or New Waste Management's earnings in the future. See "--
Leverage."
CAPITALIZED EXPENDITURES. In accordance with generally accepted accounting
principles, the Company capitalizes certain expenditures and advances relating
to acquisitions, pending acquisitions and landfill development and expansion
projects. Indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, are expensed
as incurred. The Company's policy is to charge against earnings any
unamortized capitalized expenditures and advances (net of any portion thereof
that the Company estimates will be recoverable, through sale or otherwise)
relating to any facility or operation that is permanently shut down, any
pending acquisition that is not consummated and any landfill development or
expansion project that is not successfully completed. There can be no
assurance that the Company, or, if the proposed Merger is consummated, New
Waste Management, in future periods will not be required to incur a charge
against earnings in accordance with such policy, which charge, depending upon
the magnitude thereof, could have a material adverse effect on the Company's
or New Waste Management's results of operations and financial condition.
SEASONALITY. The Company's operating revenues tend to be somewhat lower in
the winter months. This is generally reflected in the Company's first and
fourth quarter results of operations. This is primarily attributed to
17
<PAGE>
the fact that (a) the volume of waste relating to construction and demolition
activities tends to increase in the spring and summer months and (b) the
volume of residential waste in certain regions where the Company operates, and
following the proposed Merger, where New Waste Management will operate, tends
to decrease during the winter months.
NEW WASTE MANAGEMENT DIVIDENDS. Waste Management has paid cash dividends on
Company Common Stock since 1976 while USA Waste has never declared or paid
cash dividends on USA Waste Common Stock. However, the Company recently
adopted a new dividend policy, substantially reducing the amount of its
quarterly dividend to $0.01 per share commencing with the dividend declared in
the second quarter of 1998. The decision whether to apply legally available
funds to the payment of dividends on common stock of New Waste Management will
be made by the New Waste Management Board from time to time in the exercise of
its business judgment. See "Price Range of Company Common Stock and Dividend
Policy."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Company
Common Stock in the Offering (assuming a public offering price of $32.00 per
share and after deducting the underwriting discounts, commissions and
estimated offering expenses payable by the Company) are estimated to be $614.4
million. The Company will use the net proceeds of the Offering for repayment
of outstanding borrowings under the Company's term loan and working capital
facility with the Chase Manhattan Bank ("Chase"), as administrative agent (the
"Chase Facility"), and for repayment of commercial paper. The Company will
repay the $575 million outstanding principal balance under the term loan
facility, together with accrued interest thereon. The term loan facility
currently bears interest at the rate of 6.2375% per annum and has a
termination date of December 31, 1998 (subject to earlier termination in the
event of a change-in-control, including the Merger). The Company is obligated
to repay the term loan facility from the net cash proceeds of the Offering.
Borrowings under the Chase Facility were incurred in connection with the
acquisition of the publicly held shares of WTI. The remaining net proceeds
will be used to repay outstanding commercial paper, which currently bears
interest at a rate of approximately 6% per annum, and matures on or before
June 26, 1998. Pending any such application, the proceeds will be invested in
short-term securities. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Three Months Ended March 31, 1998."
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDEND POLICY
The Company Common Stock is traded on the NYSE and the Chicago Stock
Exchange under the symbol "WMX." On June 12, 1998, the last reported sale
price of the Company Common Stock on the NYSE was $32 3/4 per share.
Prospective purchasers of Company Common Stock are urged to obtain current
market quotations for Company Common Stock.
MARKET PRICES
The table below sets forth, for the calendar quarters indicated, the range
of high and low sale prices of Company Common Stock as reported on the NYSE
Composite Transaction Tape.
<TABLE>
<CAPTION>
COMPANY COMMON
STOCK
------------------
HIGH LOW
-------- ---------
<S> <C> <C>
1996
Quarter ended March 31, 1996........................... $32 1/8 $27 3/4
Quarter ended June 30, 1996............................ 36 1/8 31 5/8
Quarter ended September 30, 1996....................... 33 1/4 28 5/8
Quarter ended December 31, 1996........................ 36 5/8 32 1/8
1997
Quarter ended March 31, 1997........................... $37 1/2 $30 1/8
Quarter ended June 30, 1997............................ 34 1/4 28
Quarter ended September 30, 1997....................... 35 3/8 29 1/4
Quarter ended December 31, 1997........................ 35 21 15/16
1998
Quarter ended March 31, 1998........................... $32 1/4 $22 1/16
Quarter ended June 30, 1998 (through June 12, 1998).... 35 1/16 30 11/16
</TABLE>
In February 1997, the Board of Directors of the Company approved a new
repurchase program to replace a stock repurchase program approved in December
1995. Under the new program, the Company is authorized to purchase during 1997
and 1998 up to 50 million shares of Company Common Stock in the open market,
in privately negotiated transactions or through issuer tender offers. The
Company repurchased 30 million shares
19
<PAGE>
through a "Dutch auction" tender offer in the second quarter of 1997, but did
not repurchase any other shares that year. Waste Management will not make any
future repurchases pursuant to the new repurchase program.
DIVIDENDS
The Company has declared cash dividends on Company Common Stock since 1976.
Dividends are declared and paid quarterly. Waste Management recently announced
that it will reduce its quarterly dividend to $0.01 per share commencing with
the dividend declared in the second quarter of 1998. The following table sets
forth dividends in respect of Company Common Stock declared in each of the
last two years.
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996...................................... $0.15 $0.16 $0.16 $0.16
1997...................................... 0.16 0.17 0.17 0.17
1998...................................... 0.17 0.01
</TABLE>
The Company's Board of Directors declared a $0.01 per share dividend on May
15, 1998, which will be paid on July 2, 1998, to stockholders of record on
June 17, 1998.
The Company's ability to pay dividends is restricted under a credit
agreement; however, so long as no event of default has occurred and is
continuing, the Company is permitted to pay regularly scheduled dividends in
amounts not to exceed $100 million in any calendar quarter. However, the
Merger Agreement limits the Company to current dividends of $0.17 per share,
or approximately $77.35 million per quarter. The decision whether to apply
legally available funds to the payment of dividends on common stock of New
Waste Management will be made by the New Waste Management Board of Directors
from time to time in the exercise of its business judgment.
20
<PAGE>
CAPITALIZATION
The following table sets forth the (i) actual capitalization of the Company
as of March 31, 1998, (ii) the capitalization of the Company as of March 31,
1998, as adjusted to give effect to the consummation of the sale of 20 million
shares offered hereby (assuming a public offering price of $32.00 per share
and after deducting underwriting discounts, commissions and estimated offering
expenses payable by the Company) and application of the net proceeds therefrom
and (iii) the pro forma combined capitalization of the Company and USA Waste
as of March 31, 1998, giving effect to the Merger and as adjusted for the
Offering. The obligation to former WTI stockholders was extinguished
subsequent to March 31, 1998, principally with borrowings under the Chase
Facility. See "Use of Proceeds."
The following table should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition for
the Three Months Ended March 31, 1998," "Management's Discussion and Analysis
of Results of Operations and Financial Condition for the Year Ended December
31, 1997," "Combined Unaudited Pro Forma Condensed Financial Statements" and
the Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------
(UNAUDITED)
(IN THOUSANDS)
COMPANY AND
USA WASTE
PRO FORMA
COMPANY COMBINED
COMPANY AS ADJUSTED AS ADJUSTED
ACTUAL FOR OFFERING FOR OFFERING
----------- ------------ ------------
<S> <C> <C> <C>
Short-term debt:
Credit facility....................... $ 180,000 $ 180,000 $ 180,000
Commercial paper...................... 427,595 427,595 427,595
Obligation to former WTI stockholders. 876,232 261,832 261,832
Other................................. 418,090 418,090 464,617
----------- ---------- -----------
1,901,917 1,287,517 1,334,044
----------- ---------- -----------
Long-term debt:
Credit facility....................... -- -- 1,333,000
Notes and debentures.................. 3,683,255 3,683,255 4,774,495
Convertible subordinated notes and
other subordinated notes............. 449,537 449,537 1,249,312
WTI project debt...................... 784,146 784,146 784,146
Other................................. 481,194 481,194 842,066
----------- ---------- -----------
5,398,132 5,398,132 8,983,019
----------- ---------- -----------
Stockholders' equity:
Company Common Stock.................. 507,102 507,102 5,723
Additional paid-in-capital............ 990,270 990,270 3,267,468
Retained earnings..................... 1,730,516 1,730,516 2,033,929
Accumulated other comprehensive
income............................... (261,331) (261,331) (316,298)
Treasury stock........................ (1,265,976) (651,576) (484)
Restricted stock unearned
compensation......................... (10,252) (10,252) (10,252)
Employee stock benefit trust.......... (335,436) (335,436) (335,436)
----------- ---------- -----------
1,354,893 1,969,293 4,644,650
----------- ---------- -----------
Total capitalization.................... $ 8,654,942 $8,654,942 $14,961,713
=========== ========== ===========
</TABLE>
21
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information of the Company for
each of the five years in the period ended December 31, 1997, has been derived
from the Company's audited historical financial statements. The following
selected historical financial information of the Company as of and for the
three months ended March 31, 1997 and 1998, has been derived from the
Company's unaudited historical financial statements and reflect all
adjustments the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. The selected
historical financial information should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition for the Three Months Ended March 31, 1998," "Management's Discussion
and Analysis of Results of Operations and Financial Condition for the Year
Ended December 31, 1997" and the Consolidated Financial Statements and the
notes thereto contained herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 7,827,280 $ 8,537,883 $ 9,100,225 $ 9,225,636 $ 9,188,582 $ 2,204,985 $ 2,131,621
----------- ----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses...... $ 6,560,716 $ 7,090,342 $ 7,606,679 $ 7,756,225 $ 8,324,613 $ 1,947,344 $ 1,885,867
Asset impairment loss... 29,009 33,970 53,772 64,729 1,480,262 5,905 --
Special charges......... 524,767 -- 335,587 370,735 145,990 15,916 --
Gains from stock
transactions of
subsidiaries and
exchange of
Exchangeable LYONs..... (15,109) -- -- -- -- -- --
Other (income) expenses,
net.................... 175,729 299,423 232,540 373,480 291,390 (5,796) 74,786
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before income taxes.... $ 552,168 $ 1,114,148 $ 871,647 $ 660,467 $(1,053,673) $ 241,616 $ 170,968
Provision for income
taxes.................. 283,347 512,683 451,741 436,473 215,667 127,231 96,551
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations.. $ 268,821 $ 601,465 $ 419,906 $ 223,994 $(1,269,340) $ 114,385 $ 74,417
Income (loss) from
discontinued
operations............. 19,886 27,324 4,863 (263,301) 95,688 647 --
Extraordinary item...... -- -- -- -- (516) -- --
Accounting changes...... -- (1,281) (84,672) -- (1,936) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 288,707 $ 627,508 $ 340,097 $ (39,307) $(1,176,104) $ 115,032 $ 74,417
=========== =========== =========== =========== =========== =========== ===========
Average common shares
outstanding............ 484,885 483,748 485,346 489,171 466,601 483,993 455,096
=========== =========== =========== =========== =========== =========== ===========
Basic earnings (loss)
per share:
Continuing operations.. $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72) $ 0.24 $ 0.16
Discontinued
operations............ 0.05 0.06 0.01 (0.54) 0.20 -- --
Extraordinary item..... -- -- -- -- -- -- --
Accounting changes..... -- -- (0.17) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 0.60 $ 1.30 $ 0.70 $ (0.08) $ (2.52) $ 0.24 $ 0.16
=========== =========== =========== =========== =========== =========== ===========
Diluted earnings (loss)
per share:
Continuing operations.. $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72) $ 0.23 $ 0.16
Discontinued
operations............ 0.04 0.06 0.01 (0.54) 0.20 -- --
Extraordinary item..... -- -- -- -- -- -- --
Accounting changes..... -- -- (0.17) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 0.59 $ 1.30 $ 0.70 $ (0.08) $ (2.52) $ 0.23 $ 0.16
=========== =========== =========== =========== =========== =========== ===========
Dividends per share..... $ 0.58 $ 0.60 $ 0.60 $ 0.63 $ 0.67 $ 0.16 $ 0.17
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital
(deficit).............. $ (232,665) $ (682,017) $(1,047,078) $ (280,923) $(2,046,899) $ (502,443) $(2,329,447)
Intangible assets, net.. 3,230,826 3,406,897 3,892,355 3,871,919 3,198,374 3,728,860 3,686,079
Total assets............ 15,716,369 16,444,947 17,457,159 17,083,577 13,589,098 16,667,655 13,864,000
Long-term debt,
including current
maturities............. 6,897,786 6,899,223 7,478,074 7,525,100 6,627,022 7,203,395 7,300,049
Stockholders' equity.... 3,682,143 3,907,150 4,042,646 3,741,761 1,345,652 3,773,057 1,354,893
</TABLE>
22
<PAGE>
(1) 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. The Company has
accordingly restated its prior financial results. (See Note 2 to the
Consolidated Financial Statements.)
(2) The Company recorded an asset impairment loss in 1997, and restated prior
year financial statements to retroactively recognize impairment losses in
earlier years. See Note 16 to the Consolidated Financial Statements.
(3) The results for 1993 include a non-taxable gain of $15.1 million (before
minority interest), relating to the issuance of shares by Rust, as well as
a special asset revaluation and restructuring charge of $524.8 million
(before tax and minority interest) recorded by the CWM subsidiary of Waste
Management related primarily to a revaluation of its thermal treatment
business, and a provision of approximately $14 million to adjust deferred
income taxes resulting from the 1993 tax law change.
(4) The results for 1995 include a special charge of $140.6 million (before
tax) recorded by CWM, primarily to write off its investment in facilities
and technologies that it abandoned because they do not meet customer
service or performance objectives, and a special charge of $194.6 million
(before tax and minority interest) recorded by WM International relating
to actions it had decided to take to sell or otherwise dispose of non-core
business and investments, as well as core businesses and investments in
low potential markets, abandon certain hazardous waste treatment and
processing technologies, and streamline its country management
organization.
(5) In 1995, the Rust Board of Directors approved a plan to sell or otherwise
discontinue Rust's process engineering, construction, specialty
contracting and similar lines of business. During 1996, the sale of the
industrial process engineering and construction business, based in
Birmingham, Alabama, was completed. In 1996, WTI sold its water process
systems and equipment manufacturing business, and Rust sold its industrial
scaffolding business. WTI entered into an agreement to sell its water and
wastewater facility operations and privatization business and Rust began
implementing plans to exit its remaining domestic and international
engineering and consulting business. These businesses were classified as
discontinued operations in the financial statements. The Rust disposition
was not completed within one year, and accordingly in 1997 this business
has been reclassified back into continuing operations, as operations held
for sale, in accordance with generally accepted accounting principles. The
unused portion ($87.0 million) of the previously recorded provision for
loss on disposal was reversed in discontinued operations, and an
impairment loss provision of $122.2 million was recognized in continuing
operations.
(6) The results for 1996 include special charges of $47.1 million (before tax
and minority interest) related to WM International's sale of its
investment in Wessex Water plc and a charge of $169.5 million (before tax
and minority interest) to revalue its investments in France, Austria and
Spain in contemplation of exiting these markets and to write off an
investment in a hazardous waste disposal facility. Also in 1996, WMNA and
CWM recorded special charges of $154.1 million (before tax) for
reengineering their finance and administration functions and increasing
reserves for certain litigation.
(7) In 1997, the Company recorded a special charge of $41.6 million (pretax)
for severance related to WMNA, and WM International recorded a charge of
$104.4 million (before tax and minority interest) to reflect costs of
demobilization following the loss of the contract renewal for Buenos
Aires, Argentina, divestiture or closure of underperforming businesses,
and the writeoff of projects it decided to no longer pursue.
(8) In 1995, the Company changed its accounting for capitalized interest on
landfill cell construction. See Note 3 to the Consolidated Financial
Statements.
23
<PAGE>
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following combined unaudited pro forma condensed financial statements
are based upon the historical financial statements of Waste Management and of
USA Waste and should be read in conjunction with those financial statements
and related notes. Such financial statements, as previously filed with the
Commission under the Exchange Act, are included or incorporated by reference
herein. These combined unaudited pro forma condensed financial statements give
effect to the Merger by combining the balance sheets and results of operations
of Waste Management and USA Waste using the pooling of interests method of
accounting as if the companies had been combined since their inception and as
if the Offering had been consummated as of March 31, 1998. The combined
unaudited pro forma condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have been achieved had the Merger
been consummated as of the beginning of the periods presented, nor is it
necessarily indicative of the future operating results or financial position
of New Waste Management. The combined unaudited pro forma condensed financial
information does not give effect to any possible divestitures of business
units which may be required by the antitrust regulatory authorities or to any
cost savings which may result from the integration of Waste Management's and
USA Waste's operations, nor does such information include the nonrecurring
costs directly related to the Merger which are expected to be included in
operations of New Waste Management within the 12 months following the Merger.
Such nonrecurring costs have yet to be determined; however, such costs are
expected to be significant.
24
<PAGE>
WASTE MANAGEMENT AND USA WASTE
COMBINED UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1998
The following combined unaudited pro forma condensed balance sheet presents
the combined financial position of Waste Management and USA Waste as of March
31, 1998. Such unaudited pro forma combined condensed balance sheet is based
on the historical balance sheets of Waste Management and USA Waste as of March
31, 1998, after giving effect to the Merger using the pooling of interests
method of accounting and to the pro forma adjustments as described in the
notes to combined pro forma condensed financial statements.
<TABLE>
<CAPTION>
WASTE PRO FORMA COMBINED
USA WASTE MANAGEMENT ADJUSTMENTS PRO FORMA
---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE
AMOUNTS)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 46,260 $ 311,861 $ -- $ 358,121
Short-term investments... -- 3,053 -- 3,053
Accounts receivable,
net..................... 468,619 1,448,797 -- 1,917,416
Notes and other
receivables............. 56,321 26,577 -- 82,898
Deferred income taxes.... 46,196 -- -- 46,196
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... -- 158,964 -- 158,964
Prepaid expenses and
other................... 58,891 230,374 -- 289,265
---------- ----------- --------- -----------
Total current assets... 676,287 2,179,626 -- 2,855,913
Notes and other
receivables.............. 22,951 100,044 -- 122,995
Property and equipment,
net...................... 4,601,573 7,126,426 (10,922)(a) 11,617,441
(99,636)(b)
Excess of cost over net
assets of acquired
businesses, net.......... 1,905,285 3,674,333 (66,464)(a) 5,513,154
Other intangible assets,
net...................... 126,526 11,746 -- 138,272
Net assets of continuing
businesses held for sale. -- 137,995 -- 137,995
Other assets.............. 256,783 633,830 (28,124)(c) 862,489
---------- ----------- --------- -----------
Total assets........... $7,589,405 $13,864,000 $(205,146) $21,248,259
========== =========== ========= ===========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable......... $ 196,735 $ 687,419 $ -- $ 884,154
Accrued liabilities...... 185,631 1,683,398 -- 1,869,029
Obligation to former WTI
stockholders............ -- 876,232 (614,400)(d) 261,832
Deferred revenues........ 69,484 236,339 -- 305,823
Current maturities of
long-term debt.......... 46,527 1,025,685 -- 1,072,212
---------- ----------- --------- -----------
Total current
liabilities........... 498,377 4,509,073 (614,400) 4,393,050
Long-term debt, less
current maturities....... 3,584,887 5,398,132 -- 8,983,019
Deferred income taxes..... 323,320 216,797 (25,029)(a) 520,293
5,205 (b)
Closure, post-closure, and
other liabilities........ 407,699 1,645,663 (85,557)(b) 1,967,805
---------- ----------- --------- -----------
Total liabilities...... 4,814,283 11,769,665 (719,781) 15,864,167
---------- ----------- --------- -----------
Minority interest in
subsidiaries............. -- 739,442 -- 739,442
---------- ----------- --------- -----------
Commitments and
contingencies
Stockholders' equity:
Preferred stock:
USA Waste: $.01 par
value; 10,000,000
shares authorized;
none issued............ -- -- -- --
Waste Management: $1
par value; 50,000,000
shares authorized;
none outstanding....... -- -- -- --
Common stock:
USA Waste: $.01 par
value, 500,000,000
shares authorized;
historical 219,834,550
shares (572,269,938
pro forma shares)
issued................. 2,198 -- 3,525 (d) 5,723
Waste Management: $1
par value;
1,500,000,000 shares
authorized;
507,101,744 shares
issued................. -- 507,102 (507,102)(d) --
Additional paid-in
capital................. 2,436,447 990,270 (11,250)(c) 3,267,468
(147,999)(d)
Retained earnings........ 374,459 1,730,516 (34,888)(a) 2,033,929
(19,284)(b)
(16,874)(c)
Accumulated other
comprehensive income.... (37,498) -- (278,800)(e) (316,298)
Foreign currency
translation adjustment.. -- (253,938) (17,469)(a) --
271,407 (c)
Treasury stock:
USA Waste: 23,485
shares, at cost........ (484) -- -- (484)
Waste Management:
40,983,967 shares, at
cost................... -- (1,265,976) 1,265,976 (d) --
Restricted stock
unearned compensation... -- (10,252) -- (10,252)
Employee stock benefit
trust; 10,886,361 Waste
Management shares, at
market (7,892,612 pro
forma shares)........... -- (335,436) -- (335,436)
Minimum pension
liability............... -- (7,393) 7,393 (e) --
---------- ----------- --------- -----------
Total stockholders'
equity................ 2,775,122 1,354,893 514,635 4,644,650
---------- ----------- --------- -----------
Total liabilities and
stockholders' equity.. $7,589,405 $13,864,000 $(205,146) $21,248,259
========== =========== ========= ===========
</TABLE>
See notes to combined unaudited pro forma condensed financial statements.
25
<PAGE>
WASTE MANAGEMENT AND USA WASTE
COMBINED UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
The following combined unaudited pro forma condensed statement of operations
for the three months ended March 31, 1998, was prepared based on the
historical statements of operations of Waste Management and USA Waste for such
period after giving effect to the Merger using the pooling of interests method
of accounting and to the pro forma adjustments described in the notes to
combined unaudited pro forma condensed financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------
USA WASTE PRO FORMA COMBINED
WASTE MANAGEMENT ADJUSTMENTS PRO FORMA
-------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues............. $769,440 $2,131,621 $ -- $2,901,061
-------- ---------- -------- ----------
Costs and expenses:
Operating (exclusive of
depreciation and amortization
shown below)................. 397,492 1,621,985 3,785 (b) 1,757,707
(265,555)(f)
General and administrative.... 81,916 263,882 (217)(f) 345,581
Depreciation and amortization. 86,110 -- (424)(a) 351,458
265,772 (f)
Loss from continuing operations
held for sale, net of minority
interest...................... -- 2,416 -- 2,416
-------- ---------- -------- ----------
565,518 1,888,283 3,361 2,457,162
-------- ---------- -------- ----------
Income from operations......... 203,922 243,338 (3,361) 443,899
-------- ---------- -------- ----------
Other income (expenses):
Interest expense.............. (38,368) (115,574) -- (153,942)
Interest income............... 1,799 4,310 -- 6,109
Minority interest............. -- (25,302) -- (25,302)
Other income, net............. 34,251 64,196 (28,124)(c) 70,323
-------- ---------- -------- ----------
(2,318) (72,370) (28,124) (102,812)
-------- ---------- -------- ----------
Income before income taxes..... 201,604 170,968 (31,485) 341,087
Provision for income taxes..... 80,642 96,551 170 (a) 161,815
(4,298)(b)
(11,250)(c)
-------- ---------- -------- ----------
Net income..................... $120,962 $ 74,417 $(16,107) $ 179,272
======== ========== ======== ==========
Basic earnings per common
share......................... $ 0.55 $ 0.16 $ 0.33
======== ========== ==========
Diluted earnings per common
share......................... $ 0.52 $ 0.16 $ 0.32
======== ========== ==========
Weighted average number of
common shares outstanding..... 219,201 455,096 (125,151)(g) 549,146
======== ========== ======== ==========
Weighted average number of
common and dilutive potential
common shares outstanding..... 244,250 455,296 (125,206)(g) 574,340
======== ========== ======== ==========
</TABLE>
See notes to combined unaudited pro forma condensed financial statements.
26
<PAGE>
WASTE MANAGEMENT AND USA WASTE
COMBINED UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
The following combined unaudited pro forma condensed statement of operations
for the year ended December 31, 1997, was prepared based on the historical
statements of operations of Waste Management and USA Waste for such year after
giving effect to the Merger using the pooling of interests method of
accounting and to the pro forma adjustments described in the notes to combined
unaudited pro forma condensed financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
WASTE PRO FORMA COMBINED
USA WASTE MANAGEMENT ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues...... $2,613,768 $ 9,188,582 $ -- $ 11,802,350
---------- ------------ ---------- ------------
Costs and expenses:
Operating (exclusive
of depreciation and
amortization shown
below)............... 1,345,769 7,195,376 17,766 (b) 7,479,745
(1,079,166)(f)
General and
administrative....... 284,946 1,129,237 (939)(f) 1,413,244
Depreciation and
amortization......... 303,241 -- (990)(a) 1,382,356
1,080,105 (f)
Merger costs.......... 109,411 -- -- 109,411
Unusual items......... 24,720 1,626,252 -- 1,650,972
Loss from continuing
operations held for
sale, net of minority
interest............... -- 9,930 -- 9,930
---------- ------------ ---------- ------------
2,068,087 9,960,795 16,776 12,045,658
---------- ------------ ---------- ------------
Income (loss) from
operations............. 545,681 (772,213) (16,776) (243,308)
---------- ------------ ---------- ------------
Other income (expense):
Interest expense...... (104,261) (446,888) -- (551,149)
Interest income....... 7,634 37,580 -- 45,214
Minority interest..... -- (45,442) -- (45,442)
Other income, net..... 14,213 173,290 (61,331)(a) 126,172
---------- ------------ ---------- ------------
(82,414) (281,460) (61,331) (425,205)
---------- ------------ ---------- ------------
Income (loss) from
continuing operations
before income taxes.... 463,267 (1,053,673) (78,107) (668,513)
Provision for income
taxes.................. 189,944 215,667 (25,199)(a) 361,464
(18,948)(b)
---------- ------------ ---------- ------------
Income (loss) from
continuing operations.. $ 273,323 $ (1,269,340) $ (33,960) $ (1,029,977)
========== ============ ========== ============
Basic earnings (loss)
per common share from
continuing operations.. $ 1.31 $ (2.72) $ (1.88)
========== ============ ============
Diluted earnings (loss)
per common share from
continuing operations.. $ 1.26 $ (2.72) $ (1.88)
========== ============ ============
Weighted average number
of common shares
outstanding............ 208,246 466,601 (128,315)(g) 546,532
========== ============ ========== ============
Weighted average number
of common and dilutive
potential common shares
outstanding............ 233,371 466,601 (153,440)(g) 546,532
========== ============ ========== ============
</TABLE>
See notes to combined unaudited pro forma condensed financial statements.
27
<PAGE>
WASTE MANAGEMENT AND USA WASTE
COMBINED UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
The following combined unaudited pro forma condensed statement of operations
for the year ended December 31, 1996, was prepared based on the historical
statements of operations of Waste Management and USA Waste for such year after
giving effect to the Merger using the pooling of interests method of
accounting and to the pro forma adjustments described in the notes to combined
unaudited pro forma condensed financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
WASTE PRO FORMA COMBINED
USA WASTE MANAGEMENT ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues........ $1,649,131 $9,225,636 $ -- $10,874,767
---------- ---------- ----------- -----------
Costs and expenses:
Operating (exclusive of
depreciation and
amortization shown
below)................. 881,401 6,660,766 21,135 (b) 6,498,708
(1,064,594)(f)
General and
administrative......... 200,101 1,095,459 (1,089)(f) 1,294,471
Depreciation and
amortization........... 191,044 -- 1,065,683 (f) 1,256,727
Merger costs............ 126,626 -- -- 126,626
Unusual items........... 63,800 435,464 -- 499,264
Income from continuing
operations held for sale,
net of minority interest. -- (315) -- (315)
---------- ---------- ----------- -----------
1,462,972 8,191,374 21,135 9,675,481
---------- ---------- ----------- -----------
Income from operations.... 186,159 1,034,262 (21,135) 1,199,286
---------- ---------- ----------- -----------
Other income (expense):
Interest expense........ (60,497) (462,424) -- (522,921)
Interest income......... 6,699 27,904 -- 34,603
Minority interest....... -- (41,289) -- (41,289)
Other income, net....... 6,376 102,014 -- 108,390
---------- ---------- ----------- -----------
(47,422) (373,795) -- (421,217)
---------- ---------- ----------- -----------
Income from continuing
operations before income
taxes.................... 138,737 660,467 (21,135) 778,069
Provision for income
taxes.................... 70,398 436,473 (20,255)(b) 486,616
---------- ---------- ----------- -----------
Income from continuing
operations............... $ 68,339 $ 223,994 $ (880) $ 291,453
========== ========== =========== ===========
Basic earnings per common
share from continuing
operations............... $ 0.39 $ 0.46 $ 0.55
========== ========== ===========
Diluted earnings per
common share from
continuing operations.... $ 0.37 $ 0.46 $ 0.54
========== ========== ===========
Weighted average number of
common shares
outstanding.............. 173,993 489,171 (134,522)(g) 528,642
========== ========== =========== ===========
Weighted average number of
common and dilutive
potential common shares
outstanding.............. 182,680 490,029 (134,758)(g) 537,951
========== ========== =========== ===========
</TABLE>
See notes to combined unaudited pro forma condensed financial statements.
28
<PAGE>
WASTE MANAGEMENT AND USA WASTE
COMBINED UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
The following combined unaudited pro forma condensed statement of operations
for the year ended December 31, 1995, was prepared based on the historical
statements of operations of Waste Management and USA Waste and for such year
after giving effect to the Merger using the pooling of interests method of
accounting and to the pro forma adjustments described in the notes to combined
unaudited pro forma condensed financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
WASTE PRO FORMA COMBINED
USA WASTE MANAGEMENT ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues......... $1,216,082 $9,100,225 $ -- $10,316,307
---------- ---------- ---------- -----------
Costs and expenses:
Operating (exclusive of
depreciation and
amortization shown
below).................. 672,117 6,514,932 22,924 (b) 6,176,196
(1,033,777)(f)
General and
administrative.......... 169,686 1,091,747 (1,241)(f) 1,260,192
Depreciation and
amortization............ 143,878 -- 1,035,018 (f) 1,178,896
Merger costs............. 26,539 -- -- 26,539
Unusual items............ 4,733 389,359 -- 394,092
Income from continuing
operations held for sale,
net of minority interest.. -- (25,110) -- (25,110)
---------- ---------- ---------- -----------
1,016,953 7,970,928 22,924 9,010,805
---------- ---------- ---------- -----------
Income from operations..... 199,129 1,129,297 (22,924) 1,305,502
---------- ---------- ---------- -----------
Other income (expense):
Interest expense:
Nonrecurring........... (10,994) -- -- (10,994)
Other.................. (58,619) (463,861) -- (522,480)
Interest income.......... 6,682 34,883 -- 41,565
Minority interest........ -- (81,367) -- (81,367)
Other income, net........ 4,891 252,695 -- 257,586
---------- ---------- ---------- -----------
(58,040) (257,650) -- (315,690)
---------- ---------- ---------- -----------
Income from continuing
operations before income
taxes..................... 141,089 871,647 (22,924) 989,812
Provision for income taxes. 60,313 451,741 (19,169)(b) 492,885
---------- ---------- ---------- -----------
Income from continuing
operations................ $ 80,776 $ 419,906 $ (3,755) $ 496,927
========== ========== ========== ===========
Basic earnings per common
share from continuing
operations................ $ 0.56 $ 0.86 $ 1.00
========== ========== ===========
Diluted earnings per common
share from continuing
operations................ $ 0.54 $ 0.86 $ 0.99
========== ========== ===========
Weighted average number of
common shares outstanding. 143,346 485,346 (133,470)(g) 495,222
========== ========== ========== ===========
Weighted average number of
common and dilutive
potential common shares
outstanding............... 150,575 500,312 (137,586)(g) 513,301
========== ========== ========== ===========
</TABLE>
See notes to combined unaudited pro forma condensed financial statements.
29
<PAGE>
WASTE MANAGEMENT AND USA WASTE
NOTES TO COMBINED UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined unaudited pro forma condensed financial statements assume the
issuance of USA Waste Common Stock in exchange for all outstanding Company
Common Stock. Such financial statements also assume that the Merger will be
accounted for using the pooling of interests method of accounting pursuant to
Opinion No. 16 of the Accounting Principles Board. The pooling of interests
method of accounting assumes that the combining companies have been merged
from their inception, and the historical financial statements for periods
prior to consummation of the Merger are restated as though the companies had
been combined from their inception.
Pursuant to the rules and regulations of the Commission, the combined
unaudited pro forma condensed statements of operations exclude the results of
operations associated with discontinued businesses, extraordinary items and
cumulative effects of accounting changes. The combined unaudited pro forma
condensed financial statements do not give effect to any cost savings which
may result from the integration of USA Waste's and Waste Management's
operations, nor do they include the nonrecurring costs directly related to the
Merger which are expected to be included in operations of New Waste Management
within 12 months succeeding the Merger. Such nonrecurring costs have yet to be
determined; however, such costs are expected to be significant.
Certain reclassifications have been made to the historical financial
statements of USA Waste and Waste Management to conform to the pro forma
presentation. Such reclassifications are not material to the combined
unaudited pro forma condensed financial statements.
2. PRO FORMA ADJUSTMENTS
(a) In June 1997, Waste Management sold a majority of its Canadian solid
waste businesses to USA Waste and, as a result of such sale, recorded a pre-
tax gain of approximately $61,331,000. USA Waste accounted for this
transaction as a purchase business combination and allocated the purchase
price to the assets acquired and liabilities assumed accordingly. Assuming
that USA Waste and Waste Management had been combined since their inception,
the gain recorded by Waste Management in 1997 has been eliminated and the
basis recorded by USA Waste for assets acquired and liabilities assumed has
been restored to Waste Management's historical book value. In addition, the
Combined Unaudited Pro Forma Condensed Statements of Operations for the year
ended December 31, 1997, and the three months ended March 31, 1998, have been
adjusted for the effect of lower amortization as a result of restoring the
book basis of the assets acquired and liabilities assumed by USA Waste to the
historical book value of Waste Management.
(b) Adjustments have been made to conform the accounting for certain
landfill related issues as if the companies had been combined since their
inception. The net impact of those adjustments on income (loss) from
continuing operations was an increase of $1,182,000 and $513,000 for the year
ended December 31, 1997, and the three months ended March 31, 1998,
respectively, and a decrease of $3,755,000 and $880,000 for the years ended
December 31, 1995 and 1996, respectively.
(c) In November 1997, USA Waste purchased a 49% limited partner interest in
the Limited Partnership, which was formed for the purpose of acquiring shares
of Company Common Stock on the open market. The Limited Partnership purchased
shares of Company Common Stock during November 1997 and sold substantially all
of such shares in March 1998. For the three months ended March 31, 1998, USA
Waste recorded other income of $28,124,000 for its equity in the earnings of
the Limited Partnership. An adjustment has been made to reverse USA Waste's
equity in the earnings of the Limited Partnership to account for the
transaction as if the companies had been combined since their inception.
(d) The stockholders' equity accounts have been adjusted to reflect the
assumed issuance of 352,435,388 shares of USA Waste Common Stock for the
486,117,777 shares of Company Common Stock issued and outstanding based on an
exchange ratio of 0.725 of a share of USA Waste Common Stock for each
outstanding share of Company Common Stock. The assumed issuance of shares
considers the 507,101,744 shares of Company Common Stock issued, the
40,983,967 shares of Company Common Stock held in treasury that will be
cancelled upon consummation of the Merger, and the 20 million shares of
Company Common Stock expected to be issued to reverse certain share
repurchases effected by the Company. Assuming that 20 million shares of
30
<PAGE>
Company Common Stock are issued through the Offering at an offering price of
$32 per share and net issuance costs of 4%, net proceeds would be
$614,400,000, which would be used to reduce the obligation to former WTI
stockholders. See Note 3 below. The actual number of shares of USA Waste
Common Stock to be issued pursuant to the Merger will be based upon the number
of shares of Company Common Stock issued and outstanding immediately prior to
the consummation of the Merger.
(e) Adjustments have been made to reclassify Waste Management's foreign
currency translation adjustment and minimum pension liability to accumulated
other comprehensive income to conform to the presentation of USA Waste as if
the companies had been combined since their inception.
(f) Adjustments have been made to reclassify Waste Management's depreciation
and amortization from operating expenses and general and administrative
expenses to a separate line item to conform to the presentation of USA Waste
as if the companies had been combined since their inception.
(g) Pro forma basic earnings per common share for each period are based on
the combined weighted average number of common shares outstanding, after
giving effect to the issuance of 0.725 of a share of USA Waste Common Stock
for each share of Company Common Stock. Pro forma diluted earnings per common
share for each period are based on the combined weighted average number of
common and dilutive potential common shares outstanding, after giving effect
to the issuance of 0.725 of a share of USA Waste Common Stock for each
outstanding share of Company Common Stock. The combined weighted average
shares outstanding used in the pro forma basic and diluted earnings per share
calculations are net of the shares of Company Common Stock that are held by
the Waste Management employee stock benefit trust and are treated similar to
treasury shares for earnings per share calculation purposes. The combined pro
forma diluted earnings per share for the year ended December 31, 1995, and the
three months ended March 31, 1998, have been calculated assuming conversion of
certain convertible debt, and therefore interest, net of taxes, of $9,100,000
and $5,014,000, respectively, has been added back to income from continuing
operations for this calculation. The USA Waste diluted earnings per common
share for the year ended December 31, 1997, includes 25,125,000 dilutive
potential common shares that become antidilutive for purposes of calculating
the combined pro forma diluted earnings per common share.
3. PRO FORMA EFFECT OF THE OFFERING ON RESULTS OF OPERATIONS
As previously discussed, in order for the Merger to qualify as a pooling of
interests, approximately 20 million shares of Company Common Stock must be
issued to reverse certain share repurchases effected by the Company. Assuming
that 20 million shares were issued at an offering price of $32 per share and
net issuance costs of 4%, net proceeds to Waste Management would be
$614,400,000. The proceeds from the Offering, after payment of dividends on
such stock based on the historical dividend rate, are assumed to be used to
reduce outstanding indebtedness at an average borrowing rate of 6%. The
applicable tax rate is assumed to be 42%. The following table summarizes the
pro forma effect of the Offering as if the Offering has occurred at the
beginning of the periods presented in the Combined Unaudited Pro Forma
Condensed Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ---------------
1995 1996 1997 1998
-------- -------- ----------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Pro forma income (loss) from
continuing operations......... $496,927 $291,453 $(1,029,977) $179,272
Decrease in interest expense as
a result of the Offering, net
of tax benefit................ 20,964 20,943 20,915 5,316
-------- -------- ----------- --------
Pro forma income (loss) from
continuing operations after
the Offering.................. $517,891 $312,396 $(1,009,062) $184,588
======== ======== =========== ========
Pro forma basic earnings per
common share from continuing
operations after the Offering. $ 1.02 $ 0.58 $ (1.80) $ 0.33
======== ======== =========== ========
Pro forma diluted earnings per
common share from continuing
operations after the Offering. $ 1.00 $ 0.57 $ (1.80) $ 0.32
======== ======== =========== ========
Weighted average number of
common shares outstanding
after the Offering............ 509,722 543,142 561,032 563,646
======== ======== =========== ========
Weighted average number of
common and potential dilutive
shares outstanding after the
Offering...................... 527,801 552,451 561,032 588,840
======== ======== =========== ========
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(TABLES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following is Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Three Months ended March 31, 1998,
and should be read in conjunction with the "Prospectus Summary--Recent
Developments" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Year Ended December 31, 1997." As
more fully described in the Notes to the consolidated financial statements for
the three months ended March 31, 1998 (the "Unaudited Consolidated Financial
Statements"), certain financial information in this Prospectus has been
restated to correct previously issued financial statements.
On March 10, 1998, the Company entered into the Merger Agreement with USA
Waste pursuant to which the Company will be merged with a wholly owned
subsidiary of USA Waste. Pursuant to the Merger Agreement, the Company's
stockholders will receive 0.725 of a share of USA Waste Common Stock for each
share of Company Common Stock. 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 HSR Act, 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 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 as discussed in Note 11 of the Unaudited
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 effect 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.
RESULTS OF OPERATIONS
Consolidated first quarter income from continuing operations was $74.4
million or $0.16 per diluted share for 1998, compared with $114.4 million or
$0.23 per diluted share for the same period in 1997 and $133.6
32
<PAGE>
million or $0.27 per diluted share for the same period in 1996. First quarter
net income was $74.4 million or $0.16 per diluted share for 1998 compared with
$115.0 million or $0.23 per diluted share for the same period in 1997 and
$138.4 million or $0.28 per diluted share for the same period in 1996. Per
share amounts referred to in this paragraph and throughout the 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 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 "--Other Items--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 outstanding shares of
WTI which it did not already own for an aggregate purchase price of $876.2
million. The Company also continued its divestiture plans in the first quarter
of 1998, with sales of several investments.
The Company has five primary operating subsidiaries. WMNA provides
integrated solid waste management services in North America and manages the
industrial cleaning services business of Rust. 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.
33
<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%).
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
34
<PAGE>
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.
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 0.8% 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.
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
35
<PAGE>
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 (0.4%) aggregating a 4.3% increase. This increase, however, was
largely offset by translation effects resulting from the strength of the
British 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. WTI 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.
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:
<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.
36
<PAGE>
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
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 Unaudited 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 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 non-integrated 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 Unaudited Consolidated Financial
Statements.
37
<PAGE>
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 Unaudited 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 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 Unaudited 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, $0.4 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 $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
Unaudited 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 Company 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
38
<PAGE>
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 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), 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 Unaudited Consolidated
Financial Statements).
The Board of Directors of the Company has authorized the Company to
repurchase shares of its own common stock (up to 50 million shares) 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.
On March 31, 1998, the Company acquired the outstanding shares of WTI which
it did not already own for an aggregate purchase price of $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 Company 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 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 Unaudited Consolidated Financial
Statements for a description of certain contingent liabilities of the Company
and its subsidiaries.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE YEAR ENDED DECEMBER 31, 1997
(TABLES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following is Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Year Ended December 31, 1997, and
should be read in conjunction with the "Prospectus Summary--Recent
Developments" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Three Months ended March 31, 1998."
As more fully described in the Notes to the Consolidated Financial Statements,
certain financial information in this Prospectus has been restated to correct
previously issued financial statements.
On March 10, 1998, the Company entered into the Merger Agreement with USA
Waste pursuant to which the Company will be merged with a wholly owned
subsidiary of USA Waste. Pursuant to the Merger Agreement, the Company's
stockholders will receive 0.725 shares of USA Waste Common Stock for each
share of Company Common Stock. 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 HSR Act, 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 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 WM
International may be accelerated and become payable with three months' notice.
At December 31, 1997, this debt totaled approximately $209 million, but by
March 17, 1998, had been reduced to $71 million. In addition, 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 $315 million in the
business at December 31, 1997.
RESULTS OF OPERATIONS
Consolidated 1997 (loss) from continuing operations of the Company (formerly
WMX Technologies, Inc.) and its subsidiaries was $(1,269.3) million or $(2.72)
per share compared with income of $224.0 million or $0.46 per share in 1996,
$419.9 million or $0.86 per share in 1995, and $601.5 million or $1.24 per
share in 1994. Net (loss) was $(1,176.1) million or $(2.52) per share in 1997,
$(39.3) million or $(0.08) per share in 1996, with net income of $340.1
million or $0.70 per share in 1995 and $627.5 million or $1.30 per share in
1994. Per share amounts referred to in this paragraph and throughout
Management's Discussion and Analysis are Basic Earnings Per Share as defined
by FAS No. 128. (See Note 11 to the Consolidated Financial Statements.)
Consolidated 1997 revenue from continuing operations was $9.19 billion
compared with $9.23 billion in 1996, $9.10 billion in 1995 and $8.54 billion
in 1994.
Results for all periods were impacted by special charges, asset impairments,
other adjustments, changes in estimates, and for 1995 and 1997, by changes in
accounting principles.
The Company has undertaken a number of initiatives in response to changing
conditions in its markets and in the environmental services industry. In
January 1997, the Board of Directors approved a package of strategic
initiatives designed to enhance stockholder value, the cornerstone of which is
a focus solely on waste management services in domestic and selected
international markets where the Company can be first or second
40
<PAGE>
in market share. In support of this, the Company divested non-core and non-
integrated businesses and assets valued at approximately $1.4 billion in 1997
with an additional $400 million targeted for disposition by the end of 1998. A
significant portion of the proceeds from the 1997 asset sales was utilized to
repurchase 30 million shares of Company Common Stock in a "Dutch auction"
tender offer which was concluded in the second quarter of the year. In
November 1997, the Board of Directors of the Company approved a major
organizational restructuring and cost-control program to substantially reduce
overhead in its North American waste services operations. As a result of the
restructuring, approximately 1,200 operating manager and managerial support
staff positions were eliminated, or about 20% of that employee group. It also
reduced the number of profit centers from 250 to 31, and established a
regional based operating structure which is focused on specific customer
segments, including commercial, industrial, residential and governmental
accounts. The program additionally includes new computer systems and
purchasing and fleet management initiatives designed to further reduce the
Company's operating costs over the next three years.
As a result of the strategy to focus on waste management services, late in
1996 and early 1997, the Company sold its domestic water operations as well as
its minority interest in Wessex. The environmental and infrastructure
engineering and consulting services lines of business have been classified 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
asset dispositions" for further discussion.
1997 OPERATIONS COMPARED WITH 1996
REVENUE. The following table sets forth changes in consolidated revenue from
1996 to 1997:
<TABLE>
<CAPTION>
PERCENTAGE
1996 1997 CHANGE
-------- -------- ----------
<S> <C> <C> <C>
North America (excluding trash-to-
energy)................................. $6,406.1 $6,451.3 0.7%
North American trash-to-energy........... 952.3 998.5 4.9
WM International......................... 1,913.8 1,790.0 (6.5)
Intercompany revenue..................... (46.6) (51.2)
-------- -------- ----
Total.................................... $9,225.6 $9,188.6 (0.4)%
======== ======== ====
</TABLE>
The solid waste services portion of North American revenue fell by 0.2% to
$5.72 billion in 1997, primarily due to divestiture of virtually all of the
Canadian business mid-year, as well as the sale of other various
underperforming North America locations. North American solid waste services
revenue growth by line of business is shown in the following table:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Residential.................................................... 1.2%
Commercial..................................................... (1.2)
Roll-off and industrial........................................ (0.3)
Disposal, transfer and other................................... 0.0
</TABLE>
Overall North American solid waste services revenue for the year decreased
0.2% primarily as a result of the effect of divestitures net of acquisitions
which accounted for a 1.5% decrease. Excluding such net divestitures, overall
revenue increased 1.3% as a result of a combination of higher prices and
increased volumes. The 1997 revenue growth started out slightly negative in
the first quarter as a result of lost customers in late 1996 following a price
increase earlier in 1996. Revenue growth generally strengthened throughout the
year, finishing with fourth quarter revenue in excess of 3% over the prior
year sales, after considering divestitures. Pricing was fairly weak throughout
the year, particularly during the first two quarters. Approximately one-third
41
<PAGE>
of the internal growth for the year came from pricing and the other two-thirds
from volume. The hazardous waste segment revenue continued to decline
slightly, falling about 6.8% from 1996.
The increase in the North American trash-to-energy revenues of $46.2 million
is largely attributed to $60.2 million of construction revenue for facilities
that are being built and operated by WTI but owned by customers. Excluding
this construction activity, 1997 revenue decreased $14.2 million or 1.5% from
1996 levels. Divestiture of certain biosolids landspreading contracts and
lower air pollution control engineering revenues were primarily responsible.
Spot waste disposal pricing remained stable on an overall basis compared to
1996, with slight strengthening in New England being offset by continued
downward pressure in the South Florida markets.
Expressed in U.S. dollars, WM International revenue decreased $123.8 million
or 6.5% in 1997 compared with 1996. Components of the revenue change are as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Price.......................................................... 4.4%
Volume......................................................... (1.4)
Purchased businesses, net of divestitures...................... (2.5)
Foreign currency translation................................... (7.0)
----
Total...................................................... (6.5)%
====
</TABLE>
Increased landfill disposal taxes, which are passed through in disposal
rates, accounted for 2.5% out of the 4.4% revenue growth from price. Volume in
1997 was lower than 1996 in three key markets. In Italy, landfill volumes were
reduced as the result of permitting delays on landfill expansions and new
landfill projects. The impact of this reduced capacity is expected to continue
into 1998. Revenue declined in Latin America from abnormally high levels in
1996 from cleaning activities for Buenos Aires during the 1996 mayoral
election, and in Germany as a result of general economic and competitive
conditions. Partially offsetting these items were improved volumes in the
Netherlands. Divestitures impacting 1997 revenue include the sale of various
operations within France, Spain, Austria and Germany. The sale of these
operations reduced 1997 revenue by approximately 3.5% or $67 million from 1996
levels. In addition, the weakness of the various currencies in which WM
International earns its revenues created a negative translation impact on
total reported revenue for the year. Foreign currency movement has had, and
can be expected to continue to have, an impact on reported revenue, expenses
and net income. See "--Derivatives and market risks" for further detail.
OPERATING EXPENSES. Operating expenses increased $534.6 million or 8.0% in
1997 over 1996. This increase occurred despite a slight revenue decline due to
several reasons. Remediation expenses, net of insurance recoveries increased
$96.8 million in 1997 from 1996. In 1997, insurance recoveries were $33.9
million higher than in 1996, and were more than offset by remediation cost
increases of $130.7 million. The increased remediation costs reflect $49.9
million of expense resulting from implemention of SOP 96-1 (see "--Accounting
Principles"), $14.8 million of expense related to a change in the discount
rate from 7% to 6% in the fourth quarter of 1997 and the balance primarily
related to changes in remediation cost estimates at several disposal sites.
Self-insurance expenses increased $95.0 million in 1997 from 1996. This
increase included $56.0 million related to changes in estimating techniques
with the balance coming from growth of prior years' claims. The Company
incurred losses in 1997 and accrued provisions in 1997 for loss-making
contracts totaling $136.2 million. These were primarily several large
contracts with respect to which the Company determined in 1997 that such
losses would continue for the contracts' duration. A large portion of this
loss provision relates to multi-year recyclables processing contracts. The
Company also recorded $13.6 million of additional reserves related to long-
term contracts of its Chem-Nuclear subsidiary as a result of changes in
estimated contract results. Other major items affecting operating expense in
1997 were accruals of $20.3 million primarily related to excess lease
obligations, and other asset disposals or write-downs totaling $28.9 million
primarily related to hazardous waste projects, obsolete inventory, scrapped
equipment including recycling assets and obsolete/unused software.
Effective October 1, 1997, the Board of Directors approved a management
recommendation to revise the Company's North American collection fleet
management policy. Front-end loaders will be replaced after eight
42
<PAGE>
years, and rear-end loaders and roll-off trucks after 10 years. The previous
policy was to not replace front-end loaders before they were a minimum of 10
years old and other heavy collection vehicles before they were a minimum of 12
years old. As a result of this decision, the Company recognized an impairment
writedown of $70.9 million in the fourth quarter of 1997 for those vehicles
scheduled for replacement in the next two years under the new policy.
Depreciable lives were adjusted commencing in the fourth quarter of 1997 to
reflect the new policy. Also effective October 1, 1997, the Company reduced
depreciable lives on containers from 15 and 20 years to 12 years, and ceased
assigning salvage value in computing depreciation on North American collection
vehicles and containers. These changes in estimates increased depreciation
expense by $33.7 million in the fourth quarter of 1997.
Also effective October 1, 1997, the Company changed its process for
estimating landfill lives. The Company now amortizes landfill costs over
estimated landfill capacity which includes permitted landfill airspace plus
expansions which are probable of being obtained in the next five years. The
Company's prior practice was to consider likely expansions in the amortization
calculations, whether or not the permits were expected to be obtained within
the next five years. Factors in determining probable expansions on a site-by-
site basis include secured rights to required land, status of legal,
environmental, regulatory and political issues, and the extent to which the
permit application process has proceeded. This change in estimate increased
depreciation and amortization by $12.7 million and the provision for closure
and post-closure by $3.1 million in the fourth quarter of 1997, and resulted
in estimated landfill capacity declining from 2.9 billion cubic yards to 1.8
billion cubic yards.
After considering the above, operating expenses as a percentage of revenue
for 1997 compared to 1996 increased. Hazardous waste operating expenses
increased as a percentage of revenue due to continued pressure on prices,
lower volumes and a shift in revenue mix toward lower margin services. Trash-
to-energy operating costs increased as a percentage of revenue primarily due
to the impact of increased construction revenue, which has a lower associated
margin. WM International operating expenses increased largely as a result of
lower margins for the operations in Italy.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $33.8 million or 3.1% in 1997 over 1996. As a percentage of revenue,
selling and administrative expenses increased from 11.9% in 1996 to 12.3% in
1997. Included in selling and administrative expenses in 1997 were $39.0
million in additional legal expense reflecting changes in estimates of
litigation-related liabilities. In addition, 1997 bad debt expense included
$8.7 million related to two large accounts receivable disputes settled in
1997, $6.7 million of accounts receivable in the New York City area that in
part were compromised as a result of agreements made with the New York City
licensing authorities, and $3.2 million for certain partner/venture
receivables. The Company also wrote off $4.0 million in various sales-related
assets which included prepaid advertising credits that were expected to expire
before their use. The Company reduced other administrative expenses as a
result of divestitures and is continuing to make productivity improvements in
many administrative areas.
SPECIAL CHARGES. In 1997, the Company recorded a special charge of $41.6
million (primarily in the fourth quarter) for severance. Employees terminated
were primarily field operating management and related support personnel.
Approximately $5.9 million of the severance had been paid by December 31,
1997, with the balance to be paid in 1998 and thereafter.
WM International also recorded a special charge in 1997 ($104.4 million
before tax and minority interest) to reflect the costs of demobilization in
Argentina following loss of the contract renewal for the City of Buenos Aires,
divestiture or closure of underperforming businesses, primarily in Italy and
Germany and the write-off of costs of projects, primarily in Germany, which it
decided to no longer pursue. The charge included $14.8 million of severance,
primarily related to operating personnel in Buenos Aires and with closed or
divested businesses in Italy and Germany. These terminations are expected to
occur and the severance paid in 1998.
43
<PAGE>
1996 OPERATIONS COMPARED WITH 1995
REVENUE. The following table sets forth changes in consolidated revenue from
1995 to 1996:
<TABLE>
<CAPTION>
PERCENTAGE
1995 1996 CHANGE
-------- -------- ----------
<S> <C> <C> <C>
North America (excluding trash-to-
energy)................................. $6,311.6 $6,406.1 1.5%
North American trash-to-energy........... 956.1 952.3 (0.4)
WM International......................... 1,865.1 1,913.8 2.6
Intercompany revenue..................... (32.6) (46.6)
-------- -------- ----
Total................................ $9,100.2 $9,225.6 1.4%
======== ======== ====
</TABLE>
The solid waste services portion of North American revenue grew 3.5% to
$5.73 billion in 1996. Solid waste services revenue growth in 1996 by line of
business is shown in the following table:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Residential.................................................... 4.2%
Commercial..................................................... 4.1
Roll-off and industrial........................................ 5.7
Disposal, transfer and other................................... 0.7
</TABLE>
Although the Company pursued price increases in 1996, the impact on North
American solid waste services revenue growth was minimal as a year-long
decline in recyclable commodity prices largely offset the benefit of increases
in the commercial and industrial markets. Volume growth added approximately
2.0% to such revenue. Acquisitions, net of dispositions, accounted for
approximately 1.5%. Recycling revenue declined 16.0% from 1995 to 1996 due to
the substantial price decline in recyclable commodities. The Company responded
by reducing its processing of lower grades of paper, adjusting the capacity of
its recycling operations and continually striving to reduce processing costs
and improve the marketing of commodities. However, despite these efforts, it
was unable to replace the profits associated with the stronger 1995 recyclable
commodities market. North American hazardous waste revenue declined 7.7% from
1995 as the industry problems continued.
The North American trash-to-energy revenue comparison is adversely affected
by the loss of the Lisbon construction revenue in 1996. Excluding this factor,
1996 revenue grew $33.8 million, or 3.7%, to $952.3 million. The commercial
operations of the Lisbon facility, which began in January 1996, contributed
$18.4 million of the increase. WTI acquired two industrial cogeneration plants
(so-called "inside-the-fence" facilities) during the year as part of its
strategy to leverage its energy plant operating capabilities and project
finance expertise by owning and/or operating power plants for industrial
customers. Together these acquisitions contributed $7.3 million to 1996
revenue growth. Contractual price escalation at existing facilities,
additional processing at several trash-to-energy plants, and lower energy
purchase curtailment accounted for most of the remaining revenue growth.
Overall spot pricing remained stable during the year.
Expressed in U.S. dollars, WM International revenue increased $48.7 million
or 2.6% in 1996 compared with 1995. Components of the revenue change are as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Price.......................................................... 1.4%
Volume......................................................... (0.6)
Purchased businesses........................................... 1.2
Foreign currency translation................................... 0.6
----
Total...................................................... 2.6%
====
</TABLE>
44
<PAGE>
Although WM International was able to implement price increases on its
services despite weak economies in many of its markets, the impact of such
increases was adversely affected by recyclable commodities prices falling
substantially from their highs in 1995. Difficult economic conditions in
Germany, France and Italy, as well as the closure of a landfill in France,
resulted in a volume decline, partially offset by hazardous waste volume
growth in The Netherlands and solid waste volume growth in the United Kingdom.
In addition, the Company was awarded contracts to design, build and operate
for fifteen years two transfer stations in Hong Kong. Construction revenue on
one of these projects contributed to revenue growth in 1996. International
acquisition activity was insignificant.
OPERATING EXPENSES. Operating expenses increased $145.8 million or 2.2% in
1996 over 1995. This increase was greater than the revenue increase due to
several reasons. Self-insurance expense increased $57.0 million in 1996 over
1995. This increase consisted of $31.0 million related to growth of prior
years claims, $18.0 million related to implementation of new claims reporting
processes for the Company's North American solid waste operations and $8.0
million related to higher 1996 claims and claims cost growth. In addition, the
Company accrued provisions for certain loss-making recycling contracts in 1996
totaling $12.4 million. During 1996 certain route optimization software along
with other software projects became obsolete, resulting in $7.4 million being
charged to operating expenses. Remediation expenses, net of insurance
settlement recoveries declined by $13.4 million in 1996 from 1995, primarily
as a result of additional settlements with insurance companies.
Excluding the above, operating expenses for 1996 compared to 1995 increased.
A large part of the increase was due to reduced recyclable commodity prices in
1996 as compared to 1995. Major declines in recyclable commodity pricing
resulted in actual disposal cost being incurred in some cases to physically
dispose of certain commodities which could not be sold. In addition, operating
expenses were impacted by severe weather during the year, particularly in
comparison to a mild 1995 winter in North America, and higher fuel costs.
Operating expenses as a percentage of revenue for WM International was
impacted by lower margin Hong Kong construction revenues and volume declines
in Europe that more than offset productivity improvements from streamlining of
its operations. Operating expenses in the trash-to-energy business declined in
both real terms and as a percentage of revenue as the result of the absence of
the Lisbon construction revenue, which carried no margin.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased only $3.7 million in 1996 from 1995. As a percentage of revenue,
such expenses declined from 12.0% to 11.9%. In 1996, the Company had two large
receivables totaling $10.6 million charged to bad debt expense as a result of
disputes with one customer and insolvency of another. In addition, $8.0
million was expensed primarily to write-off obsolete sales/customer oriented
software program costs. These expenses were offset by productivity
improvements in administrative processes throughout the organization.
SPECIAL CHARGES. In the fourth quarter of 1996, WM International recorded a
provision of $77.0 million after tax related to the sale of its investment in
Wessex and a charge of $169.5 million after tax to revalue its investments in
France, Austria and Spain in contemplation of exiting all or part of these
markets or forming joint ventures. The charge also included the write-off of
an investment in a hazardous waste disposal facility in Germany because
regulatory changes adversely affected its volumes. These charges, primarily of
a non-cash nature, reduced the Company's income by $213.6 million after tax.
Also, in the fourth quarter of 1996, Waste Management and CWM recorded
pretax charges of $154.1 million ($100.2 million after tax) for reengineering
their finance and administrative functions and increasing reserves for certain
litigation, including a dispute involving the computation of royalties on the
Emelle, Alabama, hazardous waste landfill. In December 1996, a federal court
in Memphis, Tennessee, held CWM liable for approximately $100.3 million in
damages to the former owners of the Emelle site. CWM is appealing the
decision. Any settlement of the Emelle litigation would be a cash payment, but
the timing of such payment is uncertain. The balance of the charge is
primarily non-cash, with $13.4 million of cash-related items paid largely in
1997.
45
<PAGE>
1995 OPERATIONS COMPARED WITH 1994
REVENUE. Consolidated revenue growth from 1994 to 1995 is shown in the table
which follows:
<TABLE>
<CAPTION>
PERCENTAGE
1994 1995 CHANGE
-------- -------- ----------
<S> <C> <C> <C>
North America (excluding trash-to-
energy)................................. $5,936.8 $6,311.6 6.3%
North American trash-to-energy........... 926.9 956.1 3.2
WM International......................... 1,710.9 1,865.1 9.0
Intercompany revenue..................... (36.7) (32.6)
-------- --------
Total................................ $8,537.9 $9,100.2 6.6%
======== ========
</TABLE>
The solid waste services portion of North American revenue was $5.53 billion
in 1995 compared with $5.10 billion in 1994, an increase of 8.4%. Solid waste
services revenue growth in 1995 by line of business is shown in the following
table:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Residential.................................................... 8.1%
Commercial..................................................... 2.8
Roll-off and industrial........................................ 0.6
Disposal, transfer and other................................... 23.2
</TABLE>
Revenue growth due to acquisitions was 1.0%, with 7.4% growth resulting from
price and volume increases. A significant portion of this internal growth,
2.0%, was the result of higher average recyclable commodity prices in 1995
compared with 1994. Actual commodity sales were approximately $100 million
higher due to this higher average rate. Additionally, commodity volumes were
higher in 1995 due to the Company's marketing efforts and the acquisition of
additional material recovery facilities, adding an additional $135 million of
revenue, and thus accounting for approximately 2.6% of the North American
solid waste revenue growth. The remaining 2.8% was a combination of price and
volume in the other lines of business.
North American hazardous waste revenue continued to decline in 1995 as waste
minimization, recycling, over-capacity and shifting governmental regulation
and enforcement continued to adversely affect the industry. Total 1995
hazardous waste revenue was $611.4 million compared with $643.1 million in
1994. Pricing and volume were both negative, only partially offset by the 1995
acquisition of a 60% interest in AETS. In addition, unusually high revenue in
the second quarter of 1994 at the Company's Barnwell, South Carolina, low-
level radioactive waste disposal facility adversely affected 1995 comparisons.
North American (WTI) trash-to-energy revenue was essentially flat from 1994
to 1995 as higher revenue from operating plants was largely offset by lower
construction revenue on the Lisbon, Connecticut, facility (which commenced
operations January 1, 1996). Approximately 78% of the growth in revenue from
operating plants was accounted for by the Falls Township and Ridge Generating
Station facilities, which began operations in 1994. Contractual price
escalation on long-term trash disposal and energy sales contracts, partly
offset by curtailment of electrical purchases by certain utility customers,
accounted for the balance of the operating plant revenue growth. Spot pricing
on the whole was stable, although there were increases in certain markets
offset by declines in others.
WM International revenue, in U.S. dollars, increased $154.2 million or 9.0%
in 1995 compared with 1994. Components of the revenue change are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
----------
<S> <C>
Price.......................................................... 1.8%
Volume (including start-ups)................................... (3.2)
Purchased businesses........................................... 4.5
Foreign currency translation................................... 5.9
----
Total...................................................... 9.0%
====
</TABLE>
46
<PAGE>
The major cause of the 1995 volume decline was less construction revenues as
a result of the completion of the construction phase of the SENT Landfill in
Hong Kong, which opened during the year. A new pricing mechanism introduced by
the Hong Kong government in March 1995, which required generators to absorb a
portion of the disposal cost for waste brought to WM International's Hong Kong
incinerator, resulted in volume declines in certain waste streams, but the
impact was offset with other volumes. Pricing in Europe was negatively
impacted in 1995 by relatively low inflation, highly competitive conditions in
the solid waste market in France, softness in segments of the hazardous waste
market, and a continuation of lower prices on rebids of municipal contracts in
Italy. Acquisition activity continued to be below WM International's
historical levels and focused particularly on "tuck-in" acquisitions which can
complement or expand existing operations in a given market. WM International
also increased its acquisition and construction of material recovery
facilities to take advantage of an emphasis on recycling as an alternative to
land disposal.
OPERATING EXPENSES. Operating expenses increased $487.0 million or 8.1% in
1995 over 1994. Remediation expenses, net of insurance recoveries increased
$29.5 million. The Company recorded additional loss reserves of $14.2 million
related to long-term contracts of its Chem-Nuclear subsidiary. In addition,
approximately $73.6 million of software development costs, certain landfill
development and expansion projects and other deferred costs which the Company
determined were not realizable were expensed in 1995.
Excluding the above, operating expenses were relatively constant as a
percentage of revenue for 1995 as compared to 1994 overall. North American
solid waste operating expenses declined as a percentage of revenue primarily
as a result of higher recyclable commodity prices. In addition, milder winter
weather in many parts of North America, increased internalization of
recyclables processing, and continuing route productivity enhancements
positively impacted operating expenses. Hazardous waste operating expenses
increased, however, as a percentage of revenue in 1995 due to continued
downward pressure on prices, a lower revenue base and a shift in revenue mix
toward lower margin services offsetting the benefit of headcount reductions.
Operating expenses at WM International increased as a result of higher labor
costs in Italy and widespread strikes and industrial actions against the
government in France in the fourth quarter of 1995.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $29.4 million or 2.8% in 1995 over 1994. While there was an increase
in absolute dollars, as a percentage of revenue, selling and administrative
expenses declined from 12.4% in 1994 to 12.0% in 1995. The decline as a
percentage of revenue crossed all operating groups as productivity
enhancements were instituted throughout the Company allowing selling and
administrative costs to be spread over a larger revenue base. The increase in
absolute dollars resulted primarily from acquisitions and pay-for-performance
compensation plans.
SPECIAL CHARGES. In the first quarter of 1995, in response to the continuing
deterioration of the chemical waste services market, the Company's CWM
subsidiary realigned its organization, and in connection therewith, recorded a
special charge of $140.6 million before tax ($91.4 million after tax). The
charge related primarily to a write-off of the investment in facilities and
technologies that CWM abandoned because they did not meet customer service or
performance objectives, but also includes $22.0 million of future cash
payments for rents under non-cancelable leases, guaranteed bank obligations of
a joint venture, and employee severance. The majority of the cash expenditures
were paid in 1995, although certain of the non-cancellable leases extend
through the year 2002.
In the fourth quarter of 1995, WM International recorded a special charge of
$194.6 million ($152.4 million after tax) primarily related to the actions it
had decided to take to sell or otherwise dispose of non-core businesses and
investments, as well as core businesses and investments in low potential
markets, abandon certain hazardous waste treatment and processing
technologies, and streamline its country management organization. The charge
reduced the Company's income by approximately $153.3 million before tax
($111.0 million after tax). The charge included $34.3 million of cash payments
for employee severance and rents under non-cancellable leases. Approximately
$11.2 million of the cash costs were paid in 1995. The majority of the balance
was paid in 1996, although certain rent payments on abandoned leased
facilities continue into the future.
47
<PAGE>
OTHER ITEMS
ASSET IMPAIRMENT LOSS. As a result of the comprehensive review of operating
assets and investments discussed in Notes 2, 3 and 16 to the Consolidated
Financial Statements, the Company recorded an impairment loss of $1.48 billion
in 1997. Prior period financial statements were restated to recognize
impairment losses in earlier periods. Asset impairment loss was $34.0 million
in 1994, $53.8 million in 1995 and $64.7 million in 1996.
The 1994 impairment losses included $22.4 million related to unsuccessful or
abandoned landfill development or expansion projects. In addition, the Company
abandoned certain vehicle-related systems development projects totaling $7.3
million. Several properties identified as surplus were written down to fair
value, resulting in $4.3 million in such charges.
The 1995 impairment losses included $48.2 million for several unsuccessful
landfill development or expansion projects. This included one site with an
impairment loss of $29.9 million, which was recognized as a result of the
passage of legislation prohibiting a previously planned expansion.
The 1996 impairment losses were primarily related to recycling investments.
Of the $47.8 million impairment loss related to these investments, $35.7
million represented goodwill, primarily related to two acquisitions made in
1995. These impairment losses were the result of major price declines in the
recyclable paper market caused by an industry-wide pricing collapse in the
pulp and paper market. In addition, impairment losses of $13.4 million were
recognized with respect to landfill facilities, primarily as a result of one
landfill site having its volumes curtailed and a planned expansion becoming
remote.
In 1997 impairment losses were primarily due to revaluation of numerous
treatment and disposal facilities of the Company and associated goodwill.
Revaluation of investments in the North American hazardous waste services
business accounted for $776.2 million of the impairment loss. This impairment
was a result of continuing pricing and volume declines in the hazardous waste
services markets, which currently have excess capacity. Changes in
environmental regulations are also allowing certain hazardous waste streams to
be managed by others with less expensive treatment and disposal alternatives.
In addition, $344.8 million of the 1997 impairment losses related to solid
waste landfills. This included $163.9 million related to the Company's
abandonment of several landfill development or expansion projects. The balance
of this impairment loss was primarily the result of substantial pricing or
volume declines at certain landfills and a shortening of estimated life of 10
landfills (See Note 3 to the Consolidated Financial Statements.) As a result
of the Company's adoption of a new fleet replacement policy in 1997, certain
older collection vehicles became impaired and a loss was recorded totaling
$70.9 million (See Note 3 to the Consolidated Financial Statements.) Other
1997 impairment losses included $122.2 million related to the revaluation of
Rust domestic engineering and consulting business, discussed below under "--
Discontinued operations and other major asset dispositions." Impairment losses
of $38.2 million were also recorded for surplus real estate being held for
sale. WTI recorded a 1997 impairment loss of $57.2 million. This included
$47.1 million related to revaluation of a wood waste burning independent power
production facility.
INTEREST. The following table sets forth the components of consolidated
interest expense, net:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest expense.......................... $456.1 $507.8 $498.0 $472.9
Interest income........................... (42.8) (34.9) (27.9) (37.6)
Capitalized interest...................... (105.9) (43.9) (35.6) (26.0)
------ ------ ------ ------
Interest expense, net..................... $307.4 $429.0 $434.5 $409.3
====== ====== ====== ======
</TABLE>
Gross interest expense increased from 1994 to 1995 as a result of an earlier
management decision to increase the leverage of the Company. Debt levels
increased in 1995, primarily a result of the acquisition of the public
ownership of CWM and Rust. The large decline in capitalized interest in 1995
is due to a change in accounting
48
<PAGE>
methods effective January 1, 1995. Capitalized interest declined further in
1996 and 1997 as significant capital projects were completed and the Company
reduced capital spending. See "--Financial Condition Capital --Structure" and
Note 3 to the Consolidated Financial Statements. Although the Company
repurchased a substantial number of its shares in 1996 and 1997, debt levels
were reduced in 1997 resulting in lower interest expense.
MINORITY INTEREST. Minority interest declined from 1994 to 1995 as a result
of the 1995 purchases by the Company of the publicly owned shares of CWM and
Rust and lower earnings by certain subsidiaries, as well as the minority
interest share (approximately $41.3 million) in the WM International special
charge. Minority interest declined from 1995 to 1996 as a result of higher
earnings by certain subsidiaries and the minority interest share
(approximately $63.8 million) in the WM International special charges.
Minority interest in 1997 was comparable to 1996, and was impacted by $27.9
million related to the WM International 1997 special charge and $15.9 million
by the 1997 WTI asset impairment loss.
SUNDRY INCOME, NET. Below is a summary of major components in sundry income,
net.
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gain on sale of investments/businesses...... $ 25.1 $168.9 $ 30.1 $180.3
Write down of investments................... -- -- -- (25.7)
Equity income............................... 60.2 77.0 61.4 (6.9)
Other....................................... 24.6 6.8 10.5 25.6
------ ------ ------ ------
Sundry income, net.......................... $109.9 $252.7 $102.0 $173.3
====== ====== ====== ======
</TABLE>
Equity income in 1994, 1995 and 1996 included income from ServiceMaster and
Wessex investments of $60.2 million, $77.0 million and $59.4 million,
respectively. These investments were sold in the second quarter of 1997 with
no equity income recorded for Wessex or ServiceMaster. Equity income in the
second quarter of 1997 was also reduced by $10.4 million related to a special
charge recorded by OHM, an environmental remediation services business
approximately 37% owned by Rust. Gains/(loss) on sale of
investments/businesses are primarily related to the following items (i) $25.1
million gain on sale of the Company's Modulaire mobile office services
business in 1994; (ii) $160 million gain in the fourth quarter of 1995
recorded as a result of the exchange of an interest in ServiceMaster Consumer
Services L.P. for an interest in ServiceMaster and an option to purchase 1.25
million ServiceMaster limited partnership shares; (iii) $30.1 million in 1996
and $43.4 million in 1997 of gains on sales of North American solid waste
businesses, (including $32.6 million on sale of Canadian operations); and (iv)
$129 million gain in the first quarter of 1997 from the sale of the Company's
investment in ServiceMaster. Writedown of investments includes $19.5 million
related to the OHM investment and $6.2 million in other investments, all of
which were recorded in the fourth quarter of 1997.
INCOME TAXES. The consolidated income tax rate varies between years as a
result of shifts in the source of taxable income. The inability to realize tax
benefits on a portion of the 1994, 1995, 1996 and 1997 special charges and
asset impairment loss resulted in an increased tax provision in those years,
primarily attributable to non-deductible goodwill and the writedown of
investments in subsidiaries. In addition, the Company increased deferred tax
valuation allowances and other tax reserves. See Note 4 to the Consolidated
Financial Statements.
DISCONTINUED OPERATIONS AND OTHER MAJOR ASSET DISPOSITIONS. During the
fourth quarter of 1995, the Company announced that Rust would sell or
discontinue its process engineering, construction, specialty contracting and
similar lines of business. Further, as the Company refined its business
strategy to focus on waste management services, other business units were
identified in 1996 and 1997 as units to be either sold or discontinued.
In 1996, Rust sold its engineering and construction business as well as its
industrial scaffolding business for $295.1 million, and WTI sold its water
process, manufacturing and custom engineered systems business for $369.6
million in cash. In 1997, Rust disposed of certain of its international
engineering and consulting
49
<PAGE>
businesses and WTI sold its remaining water services business for 2.3 million
registered shares of U.S. Filter stock, valued at approximately $64 million.
The Rust engineering and scaffolding businesses and its international
engineering and consulting businesses, together with the WTI water businesses,
have all been classified as discontinued operations in the accompanying
financial statements.
Because Rust did not sell its remaining domestic engineering and consulting
businesses prior to December 31, 1997, these businesses have been reclassified
as continuing operations held for sale in the accompanying financial
statements for all periods. The original provision, established in 1996, for
loss on the sale (approximately $87 million) of these discontinued businesses
has been reversed as income in "income (loss) on disposal" in discontinued
operations, and a new provision for loss on sale (approximately $122 million)
was provided as an asset impairment loss in the Consolidated Statements of
Income, all in the fourth quarter of 1997. While the Company intends to sell
these businesses, it is unable to estimate when a buyer will be found and a
sale can be consummated.
In 1997, Waste Management sold its investment in ServiceMaster for $626
million, and sold various non-integrated waste services businesses in North
America for $288.9 million. Additionally in 1997, WM International sold
businesses in France, Spain, Austria and Germany for $128.3 million and its
approximately 20% interest in Wessex for approximately $300 million.
In early 1998, WM International sold its Hamm, Germany waste-to-energy
facility for $137 million. Also in early 1998, Rust's 37% ownership of OHM was
sold for cash totaling $111.2 million. This sale occurred in connection with
the merger of OHM with International Technology Corporation. As part of this
transaction, Rust received a distribution of shares of NSC Corporation, a
leading U.S. asbestos abatement contractor, increasing its ownership of NSC
Corporation to 54.3%.
ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." The change reduced 1994 net income by
$1.3 million.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cell construction. See Note 3 to the Consolidated
Financial Statements. The change reduced 1995 net income by $84.7 million.
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 effect of adoption was not material. Impairments recorded prior to
1996 followed a methodology consistent with FAS No. 121.
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. See Note 9 to the Consolidated
Financial Statements.
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 remediation effort. The
adoption of SOP 96-1 reduced 1997 pretax income from continuing operations by
$49.9 million.
In the fourth quarter of 1997, the Company began expensing process
reengineering costs (including $3.0 million previously capitalized) in
accordance with Emerging Issues Task Force consensus 97-13, reducing 1997 net
income by $1.9 million.
50
<PAGE>
Also in 1997, the Company began presenting earnings per share in accordance
with FAS No. 128. See Note 11 to the Consolidated Financial Statements for
further discussion.
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
requires only a different format for presentation of information already
included in the Company's financial statements. FAS No. 131 modifies the basis
for determining segments and expands required 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.
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. The derivatives used are simple agreements which 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 non-performance by
counterparties to derivatives, in all cases such counterparties are highly
rated financial institutions and the Company does not anticipate non-
performance. 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.
The Company has performed sensitivity analyses to determine how market rate
changes will affect the fair value of the Company's market risk sensitive
derivatives and related positions. Such an analysis is inherently limited in
that it represents a singular, hypothetical set of assumptions. Actual market
movements may vary significantly from the Company's assumptions. The effects
of such market movements may also directly or indirectly affect Company rights
and obligations not covered by the sensitivity analysis. Fair value
sensitivity is further not necessarily indicative of the ultimate cash flow or
earnings effect on the Company from the assumed market rate movements.
INTEREST RATE EXPOSURE. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's debt obligations, which are
mainly denominated in U.S. dollars. In addition, interest rate swaps are used
to lock-in or limit the variability in the interest expense of certain
floating rate debt obligations. An instantaneous, one percentage point decline
in interest rates across all maturities and applicable yield curves would
adversely affect the fair value of the Company's combined debt and interest
rate swap position at December 31, 1997, by approximately $250 million. This
analysis does not reflect the effect that declining interest rates would have
on other items such as pension liabilities, nor the favorable impact they
would have on interest expense and cash payments for interest.
CURRENCY RATE EXPOSURE. From time to time, the Company and certain of its
subsidiaries have used foreign currency derivatives to seek to mitigate the
impact of translation on foreign earnings and income from foreign investees.
Typically these derivatives have taken the form of purchased put options or
collars. There were no currency derivatives outstanding at December 31, 1997,
that relate to hedging the translation of foreign earnings.
The Company occasionally incurs currency risk from cross border
transactions. When such transactions are anticipated or committed to, the
Company may enter into forward contracts or purchase options to reduce or
eliminate the related foreign exchange risk. The Company also incurs exchange
rate risk from borrowings denominated in foreign currencies. An instantaneous,
10% adverse movement in foreign exchange rates would affect the fair value of
the Company's foreign currency borrowings and foreign exchange hedges at
December 31, 1997, by approximately $30 million. The total effect on the
Company from movements in exchange rates will also be influenced by other
factors. For example, an increase in the fair value of foreign currency
denominated debt caused by exchange rate movements may be more than offset by
an increase in the value of the Company's net investment in foreign countries.
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<PAGE>
COMMODITIES PRICE EXPOSURE. The Company operates a large fleet of vehicles
that require the purchase of a significant amount of diesel fuel. The Company
uses crude oil collars and swaps as a proxy to seek to mitigate the risk of
fluctuations in diesel fuel prices. The Company's fuel collars consist of a
call option or "cap" and a corresponding put option at a lower price or
"floor." The cap limits the Company's potential increased operating cost from
higher fuel prices whereas the floor limits the Company's potential cost
savings from a decline in fuel prices. Under its fuel swap agreements, the
Company collects payments from the swap counterparty when fuel prices average
above a certain reference price. When prices average below said reference
prices, the Company makes payments to the counterparty. All of the Company's
fuel hedges are cash settled. Quantities hedged do not exceed committed fuel
purchases or anticipated usage in any period. An instantaneous, 10% decrease
in the applicable reference price for hedges in place at December 31, 1997,
would cause a fair value loss to the Company of approximately $6 million. The
Company expects that these losses would be offset by savings from buying fuel
at prices below December 31, 1997, market prices.
EQUITY PRICE EXPOSURE. The Company occasionally obtains stock that it needs
to hold for a certain period of time. The Company sometimes seeks to mitigate
its market exposure to such holdings by entering into equity collars. Such a
collar consists of a "cap" that limits the Company's potential for gain from
appreciation in the stock price as well as a "floor" that limits the Company's
loss potential from a decline in the stock price. An instantaneous, 10%
decline in the price of the shares held by the Company at December 31, 1997,
would adversely affect the combined fair value of the stock and collar
positions by approximately $2 million.
The Company is also further subject to equity price exposure from Company
debt issues that are convertible into Company Common Stock. These debt issues
had an aggregate carrying value of $494.5 million as of December 31, 1997. An
instantaneous, 10% increase in the Company's stock price on December 31, 1997,
would increase the fair value of the Company's convertible debt by
approximately $23 million.
See Note 7 to the Consolidated Financial Statements for further discussion
of the use and accounting for derivative instruments. Also see "--Financial
Condition--Capital structure" for a discussion of the Company's sale of put
options in connection with its stock repurchase program.
ENVIRONMENTAL MATTERS
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 environmental 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 of disposal
sites as air space is consumed. The Company has also established procedures to
evaluate potential remedial liabilities at closed sites which it owns or
operated or to which it transported waste, including 89 sites listed on the
Superfund National Priority List ("NPL") as of December 31, 1997. Where the
Company concludes that it is probable that a liability has been incurred,
provision is made in the financial statements. See Note 8 to the Consolidated
Financial Statements for additional information regarding the Company's
environmental liabilities.
Estimates of the extent of the Company's degree of responsibility for 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 industry, 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 such adjustments would be material to its financial
statements, it is reasonably possible that technological, regulatory or
enforcement developments, the results of
52
<PAGE>
environmental studies, the existence and ability of other potentially
responsible third parties to contribute to the settlements of such
liabilities, or other factors could alter this expectation and necessitate the
recording of additional liabilities which could be material.
The Company spent, net of recoveries from other potentially responsible
parties, $71.5 million, $38.5 million, $69.8 million and $14.7 million on
remedial activities at closed sites in 1994, 1995, 1996 and 1997,
respectively, and anticipates such net expenditures of approximately $57.3
million in 1998.
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 received to date
($50.1 million in 1994, $38.2 million in 1995, $60.3 million in 1996 and $94.3
million in 1997) have been included in operating expenses as an offset to
environmental expenses.
From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including
purported class actions, on the basis of a Company subsidiary's having owned,
operated or transported waste to disposal facilities which are alleged to have
contaminated the environment or, in certain cases, conducted environmental
remediation activities at such sites.
YEAR 2000 ISSUES
Waste Management, like many other companies, expects to incur expenditures
to address the so-called "Year 2000" problem. The Year 2000 problem exists
because many computer systems and applications currently use two-digit data
fields to designate a year. As the century date change occurs, date-sensitive
systems will recognize the year 2000 as 1900, or not at all. This inability to
properly recognize or handle the year 2000 may cause systems to process
critical financial and operational information incorrectly, or to fail
completely. See "Prospectus Summary--Recent Developments."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES. The Company had working capital deficits of
$1,047.1 million, $280.9 million and $2,046.9 million as of December 31, 1995,
1996 and 1997, respectively. The Company operates in a capital intensive
service industry with neither significant inventory nor seasonal variation in
receivables, and generates substantial cash from operating activities. 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, including the proceeds from the sale of a
portion of the WTI water business late in 1996, 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 ($451 million), higher levels of
long-term debt payable within one year ($995 million) and higher accrued
expenses ($290 million) related to loss contract provision reserves, increased
self insurance reserves and other reserves recorded as a result of the
comprehensive review performed by management. See Note 2 to the Consolidated
Financial Statements.
Cash flow from operating activities, 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 Company Common Stock. Management has adopted a cash-driven
financial strategy including reduced capital spending and divestiture of non-
core assets and non-integrated businesses. Owners' cash flow was approximately
$0.3 billion, $0.5 billion, $1.0 billion and $1.8 billion in 1994 through
1997, respectively. The Company expects to generate approximately $400 million
during 1998 from the divestiture of certain non-core investments and non-
integrated businesses subject to constraints necessitated to meet pooling of
interests accounting treatment as required in 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. See "--Capital
Structure."
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<PAGE>
In February 1998, the credit ratings on the Company's senior unsecured long-
term debt were lowered to BBB by Standard & Poor's Rating Services and Baa3 by
Moody's Investors Service. Previously, the Company's debt was rated A- and
Baa1 by Standard & Poor's and Moody's, respectively. The lower credit ratings,
which are still investment grades, are not expected to have a material effect
on the Company's availability of long-term debt funding. These ratings are
independently issued by the rating agencies and are subject to change at any
time. On December 29, 1997, the Company put in place bank credit facilities
totaling $800 million for general corporate purposes including standby
liquidity for its commercial paper program. The facilities consist of a $550
million standby trade receivables sale agreement and a $250 million revolving
credit agreement, both of which expire June 30, 1998.
The Company historically has met its short-term funding requirements through
the issuance of commercial paper in the public markets, with bank credit
facilities available as standby liquidity. In February 1998, Moody's lowered
its rating of the Company's commercial paper from Prime-2 ("P2") to Prime-3
("P3"), and there may be times when the Company is unable to issue sufficient
commercial paper to meet its needs. The market for A2/P3-rated commercial
paper is somewhat smaller than for higher-rated commercial paper. At such
times, the Company will fund its requirements using the bank credit facilities
which are in place and sufficient to meet such needs.
ACQUISITIONS AND CAPITAL EXPENDITURES. Capital expenditures, including $56.8
million, $154.1 million, $91.8 million and $19.3 million for property and
equipment of purchased businesses in 1994, 1995, 1996 and 1997, respectively,
are shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996 1997
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Land (primarily disposal sites)............... $ 566.9 $ 470.5 $ 406.2 $359.9
Buildings and leasehold improvements.......... 141.2 148.8 109.3 76.4
Vehicles...................................... 226.0 345.8 204.9 160.9
Containers.................................... 167.9 181.2 115.8 112.1
Other equipment............................... 395.0 348.1 319.2 189.5
-------- -------- -------- ------
Total..................................... $1,497.0 $1,494.4 $1,155.4 $898.8
======== ======== ======== ======
</TABLE>
In 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197.2 million in cash and notes, $17.3 million of debt assumed, 73,809
shares of Company Common Stock and 156,124 shares of WTI common stock. During
1995, 136 businesses were acquired for $224.3 million in cash and notes, $77.7
million of debt assumed and 2.2 million shares of Company Common Stock. In
1996, 83 businesses were acquired for $104.8 million in cash and notes, $39.4
million of debt assumed and approximately 8.2 million shares of Company Common
Stock. During 1997, 45 businesses were acquired for $51.4 million in cash and
notes, $17.6 million of debt assumed and 121,551 shares of Company Common
Stock.
The Board of Directors has approved a capital expenditure budget of $1.3
billion for 1998, excluding acquisitions, although the Merger Agreement with
USA Waste limits the Company's 1998 capital expenditures, excluding
acquisitions, to $1.2 billion. The increase in the 1998 capital expenditure
budget primarily reflects increased spending for vehicles resulting from the
adoption of a new fleet management strategy in the fourth quarter of 1997, as
well as an anticipated increase in spending for new information systems and
landfill cell construction. The Company currently expects to finance capital
expenditures through cash flow from operations and believes that it has
adequate resources to finance attractive acquisitions that become available.
CAPITAL STRUCTURE. Although the Company has placed increasing emphasis on
generating owners' cash flow during 1994-1997, a substantial portion of such
cash has been returned to stockholders through stock repurchases. Debt to
total capital ratios were adversely impacted by the issuance of the
subordinated notes discussed below which were used to repurchase the publicly
held shares of CWM in 1995 and by the substantial
54
<PAGE>
reduction in stockholders' equity as a result of Company Common Stock
repurchases and losses sustained in 1996 and 1997. The following table sets
forth certain of the Company's leverage ratios:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Long-term debt as a percent of total capital........... 51.5% 52.9% 58.2% 67.4%
Short-term and long-term debt as a percent of short-
term
debt and total capital................................ 54.9% 56.8% 60.0% 73.0%
</TABLE>
The above ratios include minority interest in subsidiaries and put options
as part of total capital.
In January 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of CWM that it did not already own, in return for
convertible subordinated debt. In July 1995, Waste Management acquired the
approximately 3.1 million Rust shares held by the public for $16.35 per share
in cash. In the first quarter of 1998, the Company acquired the outstanding
shares of WTI which it did not already own for $16.50 per share or $876.2
million in the aggregate.
The Boards of Directors of Waste Management and WTI had authorized their
respective companies to repurchase shares of their own common stock. Waste
Management repurchased 30 million shares through a "Dutch auction" tender
offer in the second quarter of 1997 but did not repurchase any other shares
that year. The Company does not at this time expect to repurchase any
additional shares of Company Common Stock. WTI repurchased 5.1 million shares
in the first six months of 1997 but terminated its repurchase activity
following the Waste Management offer to acquire the remaining publicly held
shares.
During 1994 through 1996, in conjunction with its previously authorized
repurchase program, Waste Management sold put options on 42.3 million shares
of Company Common Stock. 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 put options were credited to additional paid-in
capital. See Note 10 to the Consolidated Financial Statements for further
information. There were no put options outstanding at December 31, 1997, and
the Company does not at this time expect to sell additional options in the
future.
In 1994, the Company formed an Employee Stock Benefit Trust and sold 12.6
million shares of treasury stock to the Trust in return for a 30-year, 7.33%
note with interest payable quarterly and principal due at maturity. The
Company has agreed to contribute to the Trust each quarter funds sufficient,
when added to dividends on the shares held by the Trust, to pay interest on
the note as well as principal outstanding at maturity. At the direction of an
administrative committee composed of Company officers, the Trust will use the
shares or proceeds from the sale of the shares to pay employee benefits, and
to the extent of such payments by the Trust, the Company will forgive
principal and interest on the note.
RISKS AND UNCERTAINTIES. See Note 12 to the Consolidated Financial
Statements for a description of certain contingent liabilities of the Company
and its subsidiaries.
55
<PAGE>
BUSINESS
GENERAL
Waste Management is a leading international provider of waste management
services. The Company provides integrated solid waste management services in
North America primarily through WMNA. The Company's solid waste management
services are provided to commercial, industrial, municipal and residential
customers, as well as to other waste management companies, and consist of
solid waste collection, transfer, resource recovery and disposal services. As
part of these services, the Company is engaged in providing, through its
Recycle America(R) and other programs, paper, glass, plastic and metal
recycling services to commercial and industrial operations and curbside
collection of such materials from residences and in removing methane gas from
sanitary landfill facilities for use in electricity generation. In addition,
through WMNA, the Company provides Port-O-Let(R) portable sanitation services
to municipalities and commercial and special event customers. WMNA also
manages the on-site industrial cleaning services businesses owned by the
Company's Rust subsidiary. In June 1997, the Company completed the sale of
most of the Company's solid waste assets in Canada to a subsidiary of USA
Waste. See Note 5 to the Consolidated Financial Statements.
The Company also provides hazardous waste management services. The Company's
chemical waste treatment, storage, disposal and related services in North
America are provided through WMNA and CWM, and are provided to commercial and
industrial customers, as well as to other waste management companies and to
governmental entities. Through AETS, the Company provides on-site integrated
hazardous waste management services, including hazardous waste identification,
packaging, removal and recycling services, to industrial, institutional and
governmental customers. Through Chem-Nuclear, the Company also furnishes
radioactive waste management services, primarily to electric utilities and
governmental entities.
The Company provides comprehensive waste management and related services
outside North America through WM International, a subsidiary owned
approximately 56% by the Company and 12% each by the Company's Rust and WTI
subsidiaries. WM International provides a wide range of solid and hazardous
waste management services in eight countries in Europe, seven countries in the
Asia-Pacific region and Argentina, Brazil and Israel.
Wheelabrator, a wholly owned subsidiary of the Company, is a leading
developer of facilities for, and provider of services to, the trash-to-energy
and waste-fuel powered independent power markets. WTI develops, arranges
financing for, operates and owns facilities that dispose of trash and other
waste materials in an environmentally acceptable manner by recycling them into
electrical or steam energy. WTI is also pursuing the development, ownership
and operation of power plants for industrial customers. In addition, WTI is
involved in the treatment and management of biosolids resulting from the
treatment of wastewater by converting them into useful fertilizers and the
recycling of organic wastes into compost material useable for horticultural
and agricultural purposes. WTI also designs and installs technologically
advanced air pollution control systems and equipment. In 1996, WTI sold its
water process, manufacturing and custom engineering business and in 1997, it
sold its water-contract operations, outsourcing and privatization business.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Three Months Ended March 31, 1998" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition for the Year Ended December 31, 1997." In the first quarter of 1998,
the Company acquired the outstanding shares of WTI which it did not already
own for an aggregate purchase price of $876.2 million.
Rust, owned approximately 60% by the Company and 40% by WTI, is engaged in
furnishing environmental and infrastructure consulting and a variety of other
on-site industrial and related services primarily to clients in the public
sector and petrochemical, chemical, energy, utility, pulp and paper,
environmental services and other industries. In early 1998, Rust sold its
approximately 37% interest in OHM, and received a distribution from OHM of
additional shares of NSC Corporation, a publicly traded provider of asbestos
abatement and other specialty contracting services ("NSC"). The distribution
increased Rust's interest in NSC from approximately 40% to 54%.
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<PAGE>
The Company reports its continuing operations as being within a single
industry segment, waste management services. The Company's continuing
consolidated revenues were approximately $8.5 billion in 1994, $9.1 billion in
1995, $9.2 billion in 1996 and $9.2 billion in 1997. For information relating
to the Company's operations in different geographic groups, see Note 14 to the
Company's Consolidated Financial Statements. For interim periods, the revenues
and net income of certain of the Company's operations may fluctuate for a
number of reasons, including there being for some businesses less activity
during the winter months.
The Company was incorporated in Delaware in 1968 and subsequently succeeded
to certain businesses owned by its organizers and others. The Company Common
Stock is traded on the NYSE under the symbol "WMX" and is also listed on the
Frankfurt Stock Exchange, the London Stock Exchange, the Chicago Stock
Exchange and the Swiss Stock Exchanges in Basle, Zurich and Geneva.
Also, unless the context indicates to the contrary, statistical and
financial data appearing under the caption "North American Solid and Hazardous
Waste Management Services" relate only to the Company's WMNA, CWM, AETS and
Chem-Nuclear groups of subsidiaries and do not include any data relating to
Rust, Rust's on-site industrial cleaning services business managed by WMNA,
WTI or WM International. For discussions of the data relating to WM
International and WTI, see "--International Waste Management and Related
Services" and "--Trash-to-Energy and Related Services."
THE MERGER
On March 10, 1998, the Company entered into the Merger Agreement, pursuant
to which the Company will merge with a wholly owned subsidiary of USA Waste.
Pursuant to the Merger Agreement, the Company's stockholders will receive
0.725 of a share of USA Waste Common Stock for each share of Company Common
Stock. The consummation of the Merger is subject to a number of conditions,
including: (i) the expiration or termination of the applicable merger review
waiting period under the HSR Act and other similar laws; (ii) approval by the
stockholders of the Company of the Merger Agreement; (iii) approval by the
stockholders of USA Waste of the Share Issuance and the Charter Proposal; (iv)
there being in existence no court order which effectively prohibits the
Merger; (v) all relevant governmental authorities must approve the Merger;
(vi) each company's independent accountants must provide a letter regarding
their respective concurrence with the conclusions of each company's management
that the Merger will qualify for pooling of interests accounting treatment;
(vii) the shares of USA Waste Common Stock to be issued in the Merger
Agreement and to be issued upon exercise of the Company stock options must be
authorized for listing on the NYSE; (viii) each company must certify to the
other that its representations and warranties contained in the Merger
Agreement are materially true and correct and that it has performed all of its
material obligations under the Merger Agreement; (ix) no event or events shall
have occurred or be reasonably likely to occur which shall have has, or could
reasonably be expected to have, a material adverse effect with respect to
either company; (x) each company must receive an opinion from its tax counsel
that the Merger will qualify as a tax free reorganization; (xi) certain
individuals must be appointed to their positions as directors and/or executive
officers and (xii) the sale of shares of Company Common Stock in the Offering
in order to qualify the Merger as a pooling of interests for accounting and
financial reporting purposes. The principal purpose for the Offering is to
facilitate the treatment of the Merger as a pooling of interests for
accounting and financial reporting purposes.
NORTH AMERICAN SOLID AND HAZARDOUS WASTE MANAGEMENT SERVICES
The Company's North American solid waste management and recycling services
include residential, commercial and industrial collection, transfer and
disposal services and related services provided by WMNA.
The Company's North American hazardous waste management services include
chemical waste treatment, storage, disposal and related services provided by
WMNA and CWM, on-site integrated hazardous waste management services provided
by AETS and low-level radioactive waste disposal services provided by Chem-
Nuclear. Many of the Company's solid and hazardous waste services are marketed
on an integrated basis to the Company's national account customers and to
other large industrial customers.
57
<PAGE>
For each of the four years in the period ended December 31, 1997, the North
American solid and hazardous waste revenue amounted to 67.3%, 67.5%, 68.2% and
68.0%, respectively, of the Company's total revenues. For each of the four
years in the period ended December 31, 1997, the following table shows the
percentages of the Company's total North American solid and hazardous waste
services revenue (excluding on-site industrial cleaning services revenue)
arising from the Company's principal solid and hazardous waste services:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Solid Waste and Recycling Collection Services:
Residential...................................... 19.9% 20.1% 20.4% 20.8%
Commercial....................................... 26.2 25.2 25.7 25.6
Roll-off and Industrial.......................... 21.0 19.8 20.4 20.5
Solid Waste Disposal, Transfer and Related
Services.......................................... 21.7 25.0 24.5 24.7
Hazardous Waste Services........................... 11.2 9.9 9.0 8.4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
SOLID WASTE MANAGEMENT, RECYCLING AND RELATED SERVICES
At December 31, 1997, WMNA conducted solid waste management, recycling and
related services operations in 47 states, the District of Columbia, Canada and
Mexico. During 1994, 1995, 1996 and 1997, operations in California, Florida
and Pennsylvania together accounted for approximately 31%, 29%, 26% and 29%,
respectively, of North American solid waste revenue. No customer accounted for
as much as 3% of such revenue in 1994, 1995, 1996 or 1997.
COLLECTION. WMNA provides solid waste collection services to approximately
1.1 million commercial and industrial customers. Collection services are also
provided to approximately 11.8 million homes and apartment units. These
services in many cases include collection of recyclable commodities. See "--
Recycling and Energy Recovery--Recycling" for a description of recycling
services.
COMMERCIAL AND INDUSTRIAL. Many of WMNA's commercial and industrial
customers utilize containers to store solid waste, including "roll-offs,"
which are large containers that are dropped off at construction or other sites
for the deposit of waste and then hoisted when full onto a truck for
transport. These containers, ranging from 1 to 45 cubic yards in size, are
usually provided to the customer as part of WMNA's services. Stationary
compactors, which compact the volume of the stored waste prior to collection,
are frequently installed on the premises of large volume customers and are
usually provided to these customers in conjunction with WMNA's collection
services. Containerization enables WMNA to service most of its commercial and
industrial customers with collection vehicles operated by a single employee.
Compaction serves to decrease the frequency of collection.
Commercial and industrial collection services (which include containerized
service to apartment buildings) are generally performed under one- to three-
year service agreements. Fees are determined by such considerations as market
factors, collection frequency, type of equipment furnished, length of service
agreement, type and volume or weight of the waste collected, distance to the
disposal facility and cost of disposal.
RESIDENTIAL. Most of WMNA's residential solid waste collection services are
performed under contracts with, or franchises granted by, municipalities
giving WMNA exclusive rights to service all or a portion of the homes in their
respective jurisdictions. Such contracts or franchises usually range in
duration from one to five years. The fees received by WMNA are based primarily
on market factors, frequency and type of service, the
58
<PAGE>
distance to processing or disposal facilities and cost of processing or
disposal. Residential collection fees are either paid by the municipalities
out of tax revenues or service charges or are paid directly by the residents
receiving the service.
TRANSFER. WMNA operates 164 solid waste transfer stations. A transfer
station is a facility where solid waste is received from collection vehicles
and then transferred to, and in some cases compacted in, large, specially
constructed trailers for transportation to disposal or resource recovery
facilities. This procedure reduces costs by improving utilization of
collection personnel and equipment and improving the efficiency of
transporting waste to final disposal facilities.
The services of these facilities are provided to municipalities or counties
and in most instances are also used by WMNA and by other collection companies.
Fees are generally based upon such considerations as competition, the type and
volume or weight of the waste transferred, the extent of processing of
recyclable materials, the transport distance involved and the cost of
disposal.
RECYCLING AND ENERGY RECOVERY. WMNA provides recycling services in the
United States through its Recycle America(R) and other programs. Recycling
involves the removal of reusable materials from the waste stream for
processing and sale or other disposition for use in various applications.
Participating commercial and industrial operations use containers to separate
recyclable paper, glass, plastic and metal wastes for collection, processing
and sale by WMNA. Fees are determined by such considerations as competition,
frequency of collection, type and volume or weight of the recyclable material,
degree of processing required, distance the recyclable material must be
transported and value of the recyclable material.
As part of its residential solid waste collection services, WMNA engages in
curbside collection of recyclable materials from residences in the United
States, also through its Recycle America(R) and other programs. Curbside
recycling services generally involve the collection of recyclable paper,
glass, plastic and metal waste materials, which may be separated by residents
into different waste containers or commingled with other recyclable materials.
The recyclable materials are then typically deposited at a local materials
recovery facility where they are sorted and processed for resale.
The prices received by the Company for recyclable materials fluctuate
substantially from quarter to quarter and year to year depending upon domestic
and foreign demand for such materials, the quality of such materials, prices
for new materials and other factors. In some instances, the Company enters
into agreements with customers or the local governments of municipalities in
which it provides recycling services whereby the customers or the governments
share in the gains and losses resulting from fluctuation in prices of
recyclable commodities. These agreements mitigate both the Company's gains and
losses from such fluctuations.
As of December 31, 1997, WMNA provided curbside recycling services to
approximately 7.9 million households in the United States. WMNA has
approximately 211,000 commercial and industrial recycling services customers.
WMNA operates 129 materials recovery facilities for the receipt and
processing of recyclable materials. Such processing consists of separating
recyclable materials according to type and baling or otherwise preparing the
separated materials for sale.
WMNA also participates in joint ventures with Stone Container Corporation
and American National Can Corporation to engage, respectively, in the
businesses of marketing paper fibre and aluminum, steel, and glass containers
for recycling. In each case WMNA sells to the joint venture, or has the joint
venture market, the paper fibre or containers collected by WMNA to Stone
Container, American National Can or other parties who will process them for
reuse. The joint venture with American National Can also owns and operates six
glass processing facilities. During 1997, the Stone Container joint venture
marketed approximately 2.1 million tons of paper fiber and the American
National Can joint venture processed approximately 466,000 tons of other
recyclable materials. WMNA also provides tire and demolition and construction
debris recycling services.
59
<PAGE>
At 38 WMNA-owned or -operated sanitary landfill facilities, WMNA is engaged
in methane gas recovery operations. These operations involve the installation
of a gas collection system into a sanitary landfill facility. Through the gas
collection system, gas generated by decomposing solid waste is collected and
transported to a gas-processing facility at the landfill site. Through
physical processes methane gas is separated from contaminants. The processed
methane gas generally is then either sold directly to industrial users or to
an affiliate of the Company which uses it as a fuel to power electricity
generators. Electricity generated by these facilities is sold, usually to
public utilities under long-term sales contracts, often under terms or
conditions which are subject to approval by regulatory authorities.
The Company also engages in other resource recovery activities through WTI's
trash-to-energy and related operations and WM International's operations. See
"--Trash-to-Energy and Related Services" and "--International Waste Management
and Related Services."
DISPOSAL. WMNA operates 130 solid waste sanitary landfill facilities. Of
this number, 101 are owned by WMNA and the remainder are leased from, or
operated under contract with, other parties. Additional facilities are in
various stages of development. WMNA also provides yard-waste composting
services, bioremediation of petroleum-contaminated soils and solidification of
difficult-to-treat liquid wastes at a number of its disposal facilities. All
of the sanitary landfill facilities are subject to governmental regulation.
See "Business--Regulation--Waste Management Services--Solid Waste" in the
Waste Management 1997 Form 10-K.
A sanitary landfill site must have geological and hydrological properties
and design features which limit the possibility of water pollution, directly
or by leaching. Sanitary landfill operations, which include carefully planned
excavation, continuous spreading and compacting of solid waste and covering of
the waste, are designed to maintain sanitary conditions, insure optimum
utilization of the airspace and prepare the site for ultimate use for other
purposes. Landfill site operations are required to be conducted in accordance
with the terms of permits obtained from various regulatory authorities, which
typically incorporate the requirements of Subtitle D of the Resource
Conservation and Recovery Act of 1976 ("RCRA") or applicable state
requirements, whichever are stricter. These requirements address such matters
as daily volume limitations, placement of daily, interim and final site cover
materials on waste disposed at the site, construction and operation of methane
gas and leachate management systems, periodic groundwater monitoring activity
and final closure requirements and post-closure monitoring and maintenance
activities.
Suitable sanitary landfill facilities and permission to expand existing
facilities may be difficult to obtain in some areas because of land scarcity,
local resident opposition and governmental regulation. As its existing
facilities become filled in such areas, the solid waste disposal operations of
WMNA are and will continue to be materially dependent on its ability to
purchase, lease or otherwise obtain operating rights for additional sites or
expansion of existing sites and to obtain the necessary permits from
regulatory authorities to construct and operate them. In addition, there can
be no assurance that additional sites can be obtained or that existing
facilities can continue to be expanded or operated. However, management
believes that the facilities currently available to WMNA are sufficient to
meet the needs of its operations in most areas for the foreseeable future.
To develop a new facility, WMNA must expend significant time and capital
resources without any certainty that the necessary permits will ultimately be
issued for such facility or that the Company will be able to achieve and
maintain the desired disposal volume at such facility. If the inability to
obtain and retain necessary permits, the failure of a facility to achieve the
desired disposal volume or other factors cause WMNA to abandon development
efforts for a facility, the capitalized development expenses of the facility
are written off.
In varying degrees, WMNA utilizes its own sanitary landfill facilities to
accommodate its disposal requirements for collection and transfer operations.
In 1994, 1995, 1996 and 1997 approximately 55%, 57%, 60% and 61%,
respectively, of the solid waste collected by WMNA was disposed of in sanitary
landfill facilities
60
<PAGE>
operated by it. Usually these facilities are also used by other companies and
government agencies on a noncontract basis for fees determined by such
considerations as competition and the type and volume or weight of the waste.
RELATED SERVICES. WMNA also provides or manages several types of services
which are compatible with its solid waste collection operations. Included in
these operations are on-site industrial cleaning services and portable
sanitation services.
WMNA manages the business of Rust Industrial Services, Inc., a subsidiary of
Rust ("RIS"), which provides on-site industrial services, including water
blasting, tank cleaning, explosives blasting, chemical cleaning, industrial
vacuuming, catalyst handling and separation technologies. RIS provides these
services primarily for clients in the petrochemical, chemical, and pulp and
paper industries, utilities and, to a lesser extent, the public sector. RIS
also assists clients in the nuclear and utility industries in solving
electrical, mechanical, engineering and related technical services problems.
Prior to selling the businesses in 1996 and early 1997, RIS also provided
scaffolding rental and erection services primarily to the chemical,
petrochemical and utilities industries and a variety of other on-site
services.
Waste Management Federal Services, Inc., a subsidiary of Rust, also provides
hazardous, radioactive and mixed waste program and facilities management
services, primarily to the United States Department of Energy and other
federal government agencies. Such services include waste treatment, storage,
characterization and disposal and privatization services.
WMNA also provides portable sanitation services to municipalities and
commercial customers. The portable sanitation services, which are marketed
under the Port-O-Let(R) trade name, are also used at numerous special events
and public gatherings.
HAZARDOUS WASTE MANAGEMENT AND RELATED SERVICES
CHEMICAL WASTE MANAGEMENT SERVICES. The Company operates chemical waste
treatment, storage and disposal facilities in 18 states and also owns a
majority interest in a subsidiary which operates a resource recovery and
storage facility and a disposal facility in Mexico. The chemical wastes
handled by the Company include industrial by-products and residues that have
been identified as "hazardous" pursuant to RCRA, as well as other materials
contaminated with a wide variety of chemical substances.
Chemical waste may be collected from customers and transported by WMNA or
CWM or contractors retained by them or delivered by customers to their
facilities. Chemical waste is transported primarily in specially constructed
tankers and semi-trailers, including stainless steel and rubber or epoxy-lined
tankers and vacuum trucks, or in containers or drums on trailers designed to
comply with applicable regulations and specifications of the U.S. Department
of Transportation ("DOT") relating to the transportation of hazardous
materials. WMNA and CWM also operate several facilities at which waste
collected from or delivered by customers may be analyzed and consolidated
prior to further shipment.
All of the Company's seven United States secure hazardous waste land
disposal facilities have been issued permits under RCRA. See "Business--
Regulation--RCRA" in the Waste Management 1997 Form 10-K. In general, the
Company's secure land disposal facilities have received the necessary permits
and approvals to accept chemical wastes, although some of such sites may
accept only certain chemical wastes. Only chemical wastes in a stable, solid
form which meet applicable regulatory requirements may be buried in the
Company's secure disposal cells. These land disposal facilities are sited,
constructed and operated in a manner designed to provide long-term containment
of such waste. Chemical wastes may be treated prior to disposal. Physical
treatment methods include distillation, evaporation and separation, all of
which effectively result in the separation or removal of solid materials from
liquids. Chemical treatment methods include chemical oxidation and reduction,
chemical precipitation of heavy metals, hydrolysis and neutralization of acid
and alkaline wastes and
61
<PAGE>
essentially involve the transformation of wastes into inert materials through
one or more chemical reaction processes. At two of its locations, the Company
isolates treated chemical wastes in liquid form by injection into deep wells.
Deep well technology involves drilling wells in suitable rock formations far
below the base of fresh water and separated from it by other substantial
geological confining layers.
AETS provides on-site integrated hazardous waste management services,
including hazardous waste identification, packaging, removal and recycling
services in North America. These services include on-site hazardous waste data
management, education and training, inventory control and other administrative
services, lab pack services, drum identification services, household hazardous
waste programs, less-than-full load waste pickup and consolidation services,
and related services. AETS provides these services primarily to industrial,
institutional and public sector customers, including laboratories.
In the United States, most chemical wastes generated by industrial processes
are handled "on-site" at the generators' facilities. Since the mid-1970s,
public awareness of the harmful effects of unregulated disposal of chemical
wastes on the environment and health has led to extensive and evolving
federal, state and local regulation of chemical waste management activities.
The major federal statutes regulating the management of chemical wastes
include RCRA, the Toxic Substances Control Act ("TSCA") and the Comprehensive
Environmental Response, Compensation and Liabilities Act of 1980, as amended
("CERCLA" or "Superfund"), all primarily administered by the United States
Environmental Protection Agency ("EPA"). The hazardous waste management
business is heavily dependent upon the extent to which regulations promulgated
under these or similar state statutes and their enforcement over time
effectively require wastes to be specially handled or managed and disposed of
in facilities of the type owned and operated by the Company. See "Business--
Regulation--Waste Management Services--Hazardous Waste," "RCRA" and
"Superfund" in the Waste Management 1997 Form 10-K. The chemical waste
services industry currently has substantial excess capacity caused by a number
of factors, including a decline in environmental remediation projects
generating hazardous waste for off-site treatment and disposal, continuing
efforts by hazardous waste generators to reduce volume and to manage the
wastes on-site, and the uncertain regulatory environment regarding hazardous
waste management and remediation requirements. These factors have led to
reduced demand and increased pressure on pricing for chemical waste management
services, conditions which the Company expects to continue for the foreseeable
future.
LOW-LEVEL AND OTHER RADIOACTIVE WASTE SERVICES. Radioactive wastes with
varying degrees of radioactivity are generated by nuclear reactors and by
medical, industrial, research and governmental users of radioactive material.
Radioactive wastes are generally classified as either high-level or low-level.
High-level radioactive waste, such as spent nuclear fuel and waste generated
during the reprocessing of spent fuel from nuclear reactors, contains
substantial quantities of long-lived radionuclides and is the ultimate
responsibility of the federal government. Low-level radioactive waste, which
decays more quickly than high-level waste, largely consists of dry
compressible wastes (such as contaminated gloves, paper, tools and clothing),
resins and filters which have removed radioactive contaminants from nuclear
reactor cooling water, solidified wastes from power plants which have become
contaminated with radioactive substances and irradiated hardware.
Chem-Nuclear provides comprehensive low-level radioactive waste management
services in the United States consisting of disposal, processing and various
other special services. To a lesser extent, it provides services with respect
to radioactive waste that has become mixed with regulated chemical waste.
Chem-Nuclear's radioactive disposal operations involve primarily low-level
radioactive waste. Its Barnwell, South Carolina facility, which has been in
operation since 1971, is one of three licensed commercial low-level
radioactive waste disposal facilities in the United States. A trust has been
established and funded to pay the estimated cost of decommissioning the
Barnwell facility. A second fund, for the extended care of the facility, is
funded by a surcharge on each cubic foot of waste received. Chem-Nuclear may
be liable for additional costs if the extra charges collected to restore and
maintain the facility are insufficient to cover the cost of restoring or
maintaining the site after its closure. The Company does not expect this to
have a material adverse impact on future operating results.
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<PAGE>
Under state legislation enacted in 1995, the Barnwell site is authorized to
operate until its current permitted disposal capacity is fully utilized.
However, that legislation was attached to a state appropriations bill that
included a provision for a state tax of $235 to be imposed on every cubic foot
of waste disposed of at the Barnwell facility. As a result of decreased
disposal volume and a shortfall in anticipated tax revenue, in June 1997, the
State of South Carolina enacted new legislation requiring that Chem-Nuclear
guarantee certain portions of anticipated tax revenues from the facility. Such
reduced disposal volume and the requirement that Chem-Nuclear fund such tax
payments have caused Chem-Nuclear to review its alternatives with respect to
the Barnwell facility. If Chem-Nuclear determines to close the Barnwell site,
the Company's earnings for one or more fiscal quarters or years could be
adversely affected.
Chem-Nuclear also processes low-level radioactive waste at its customers'
plants to enable such waste to be shipped in dry rather than liquid form to
meet the requirements for receipt at disposal facilities and to reduce the
volume of waste that must be transported. Processing operations include
solidification, demineralization, dewatering and filtration. Other services
offered by Chem-Nuclear include providing electro-chemical, abrasive and
chemical removal of radioactive contamination, providing management services
for spent nuclear fuel storage pools and storing and incinerating liquid
radioactive organic wastes.
INTERNATIONAL WASTE MANAGEMENT AND RELATED SERVICES
The Company is a leading provider of waste management and related services
internationally, primarily through WM International, which conducts
essentially all of the waste management operations of the Company located
outside North America. International waste management and related services
comprised approximately 20.0%, 20.5%, 20.7% and 19.5% of the Company's total
revenue in each of the four years ended December 31, 1994, 1995, 1996 and
1997. WM International's business may broadly be characterized into two areas
of activity, collection services and treatment and disposal services. The
following table shows the derivation of WM International's revenue for the
years indicated and includes revenue from construction of treatment or
disposal facilities for third parties under "--Treatment and Disposal
Services":
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Collection Services......................................... 64% 64% 65% 63%
Treatment and Disposal Services............................. 36% 36% 35% 37%
</TABLE>
While the Company has had international operations since the mid-1970s, the
bulk of the Company's international operations and revenues are derived from
the acquisition from 1990 to 1995 of numerous companies and interests in
Europe. However, with its acquisition goals largely completed, WM
International has engaged in only a few small acquisitions since 1995 and has
begun to dispose of certain operations which do not fit within its long-term
strategy.
In accordance with its objective of maintaining a local identity, WM
International, in certain cases, operates through companies or joint ventures
in which WM International and its affiliates own less than a 100% interest.
For example, WM International is a party to a joint venture with Wessex to
provide waste management and related services in the United Kingdom.
WM International's revenue mix by country varies from year to year.
Countries in which revenue exceeded 10% of WM International's consolidated
total revenues were: Italy (26%) and Germany (12%) in 1994; Italy (23%),
Germany (14%), the Netherlands (11%) and the United Kingdom (11%) in 1995;
Italy (25%), the United Kingdom (12%), Germany (11%) and the Netherlands (11%)
in 1996; and Italy (25%), the United Kingdom (15%) and the Netherlands (11%)
in 1997.
While WM International has considerable experience in mobilizing for and
managing foreign projects, its operations continue to be subject generally to
such risks as currency fluctuations and exchange controls, the need to recruit
and retain suitable local labor forces and to control and coordinate
operations in different jurisdictions,
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<PAGE>
changes in foreign laws or governmental policies or attitudes concerning their
enforcement, political changes, local economic conditions and international
tensions. In addition, price adjustment provisions based on certain formulae
or indices may not accurately reflect the actual impact of inflation on the
cost of performance.
During 1997, the Company sold all of its operations in France and Spain and
certain other businesses in Germany and Austria. In addition, in January 1998,
the Company sold its waste-to-energy facility located in Hamm, Germany. See
"--Treatment and Disposal Services."
COLLECTION SERVICES. Collection services include collection and
transportation of solid, hazardous and medical wastes and recyclable material
from residential, commercial and industrial customers. Street, industrial
premises, office and parking lot cleaning services are also performed by WM
International, along with portable sanitation/toilet services for occasions
such as outdoor concerts and special events. The residential solid waste
collection process, as well as the commercial and industrial solid and
hazardous waste collection process, is similar to that utilized by the Company
in the United States. Business is obtained through public bids or tenders,
negotiated contracts, and, in the case of commercial and industrial customers,
direct contracts.
Residential solid waste collection is typically performed by WM
International pursuant to municipal contracts. At December 31, 1997, WM
International had approximately 1,540 municipal contracts, serving more than
4.8 million residential properties. The scope, specifications, services
provided and duration of such contracts vary substantially, with some
contracts encompassing landfill disposal of collected waste, street sweeping
and other related municipal services. The largest number of municipal
contracts held by WM International is in Italy where WM International services
approximately 1.7 million residential properties. Pricing for municipal
contracts is generally based on volume of waste, number and frequency of
collection pick-ups, and disposal arrangements. Longer-term contracts
typically have formulae for periodic price increases or adjustments. WM
International also provides curbside recycling services similar to those
provided by WMNA in North America.
WM International's commercial and industrial solid and hazardous waste
collection services are generally contracted for by individual establishments.
In addition to solid waste collection customers, WM International provides
services to small quantity waste generators, as well as larger petrochemical,
pharmaceutical and other industrial customers, including collection of
hazardous, chemical or medical wastes or residues. WM International has
approximately 293,000 commercial and industrial customers. Contract terms and
prices vary substantially among jurisdictions and types of customer. WM
International also provides commercial and industrial recycling services.
TREATMENT AND DISPOSAL SERVICES. Treatment and disposal services include
processing of recyclable materials, operation of both solid and hazardous
waste landfills, operation of municipal and hazardous waste incinerators,
operation of water and wastewater treatment facilities, operation of hazardous
waste treatment facilities and construction of treatment or disposal
facilities for third parties. Treatment and disposal services are provided
under contracts which may be obtained through public bid or tender or direct
negotiation, and are also provided directly to other waste service companies.
Once collected, solid wastes may be processed in a recyclables processing
facility for sale or other disposition for use in various applications.
Unprocessed solid wastes, or the portion of the waste stream remaining after
recovery of recyclable materials, require disposal, which may be accomplished
through incineration (in connection with which the energy value may be
recovered in a trash-to-energy facility) or through disposal in a solid waste
landfill. The relative use of landfills versus incinerators differs from
country to country and will depend on many factors, including the availability
of land, geological and hydrological conditions, the availability and cost of
technology and capital, and the regulatory environment. The main determinants
of the disposal method are the disposal costs at local landfills, as
incineration is generally more expensive, community preferences and regulatory
provisions.
At present, in most countries in which WM International operates,
landfilling is the predominant disposal method employed. WM International owns
or operates solid waste landfills in Argentina, Australia, Brazil,
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<PAGE>
Denmark, Germany, Hong Kong, Italy, New Zealand, Sweden and the United
Kingdom. Landfill disposal agreements may be separate contracts or an
integrated portion of collection or treatment contracts.
Demand for solid waste incineration is affected primarily by landfill
disposal costs, government regulations and, increasingly, public perception
issues. The incineration process for non-hazardous solid waste has also been
influenced by two significant factors in recent years: (i) increasingly strict
control over air emissions from incinerators; and (ii) increasing emphasis on
trash-to-energy incinerators, which utilize heat produced by incinerators to
generate electricity and other energy. Incineration generates approximately
30% residue (by weight), which is either landfilled or, if permitted, recycled
for use as a road base or in other construction uses.
Prior to January 1998, WM International operated a waste-to-energy
incinerator in Hamm, Germany. In light of the current overcapacity in the
German waste-to-energy market and the pending renegotiation of WM
International's disposal contracts with the local communities, WM
International entered into an agreement in April 1997 to sell the facility.
The transaction was completed in January 1998. Revenues from the Hamm facility
accounted for approximately 2% of WM International's 1997 consolidated
revenue. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition for the Three Months Ended March 31, 1998--Results of
Operations" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition for the Year Ended December 31, 1997--Financial
Condition."
In 1992, WM International entered into a contract with the County of
Gutersloh, Germany to design, construct, own and operate a trash-to-energy
facility. The facility is designed to convert 268,000 metric tons per year of
municipal waste and sewage sludge into energy. During 1995, WM International's
permit application to develop and operate the Gutersloh facility was denied.
WM International appealed the denial through the German administrative court
system. Throughout 1996 and 1997, WM International and the County of Gutersloh
engaged in discussions regarding the future viability of the proposed project
as well as the County of Gutersloh's right to terminate the 25-year operating
agreement and the lease agreement covering the site on which the plant is to
be constructed. In 1997, the County exercised its right to terminate the lease
agreement for the plant site, effectively terminating the permitting process
and the pending administrative court proceedings. The County has also
informally indicated its intention to terminate WM International's operating
agreement. As a result of the termination of the lease agreement and the
threatened termination of the operating agreement, WM International reserved
the full amount of its unamortized development cost in the project as a part
of the special charge recorded in the fourth quarter of 1997. WM International
is assessing its options to seek redress against the County of Gutersloh and
against state permitting authorities, but no assurances can be given that it
will be successful in obtaining damages in respect of the project.
WM International also operates five small, conventional municipal solid and
other waste incineration facilities. WM International and WTI have also formed
a joint venture to develop trash-to-energy projects outside Germany, Italy and
North America. See "Business--Competition" in the 1997 Waste Management Form
10-K.
WM International owns or operates hazardous waste treatment facilities in
Brazil, Brunei, Finland, Germany, Hong Kong, Indonesia, Italy, the
Netherlands, Sweden and the United Kingdom.
TRASH-TO-ENERGY AND RELATED SERVICES
WTI, through its subsidiaries, is a leading developer, operator and owner of
trash-to-energy and waste fuel powered independent power facilities in the
United States. These facilities, either owned or operated, give WTI
approximately 920 megawatts per hour of electric generating capacity. WTI's
trash-to-energy projects utilize proven boiler and grate technology and are
capable of processing up to 23,750 tons of solid waste per day. The heat from
this combustion process is converted into high-pressure steam, which typically
is used to generate electricity for sale to public utility companies under
long-term contracts.
WTI's trash-to-energy development activities have historically involved a
number of contractual arrangements with a variety of private and public
entities, including municipalities (which supply trash for
65
<PAGE>
combustion), utilities or other power users (which purchase the energy
produced by the facility), lenders, public debtholders, joint venture partners
and equity investors (which provide financing for the project) and the
contractors or subcontractors responsible for building the facility. In
addition, WTI's activities have often included identifying and acquiring sites
for the facility and for the disposal of residual ash produced by the facility
and obtaining necessary permits and licenses from local, state and federal
regulatory authorities.
WTI also develops, operates and, in some cases, owns independent power
projects, which either cogenerate electricity and thermal energy or generate
electricity alone for sale to customers, including utilities and private
industry. Cogeneration is a technology which allows the simultaneous
production of two or more useful forms of energy from a single primary fuel
source, thus providing a more efficient use of a fuel's total energy content.
These power systems use waste wood, waste tires, waste coal or natural gas as
fuel, and employ state-of-the-art technology, such as fluidized-bed
combustion, to ensure the efficient burning of fuel with reduced emission
levels.
In addition, WTI develops, operates and owns projects that compost organic
wastes and treat and manage biosolids. WTI provides a range of biosolids
management services, including land application, drying, pelletizing, alkaline
stabilization and composting, to more than 275 communities, typically pursuant
to multi-year contracts under which WTI is paid by the generator to make
beneficial use of the biosolids. Land application involves the application of
non-hazardous biosolids as a natural fertilizer on farmland pursuant to
rigorous site-specific permits issued by applicable state authorities.
Biosolids are also used in land reclamation projects such as strip mines.
Regulations issued by the EPA in December 1992 under the Clean Water Act
encourage the beneficial use of municipal sewage sludge by recognizing the
resource value of biosolids as a fertilizer and soil conditioner, and
establish requirements for land application designed to protect human health
and the environment.
WTI also develops and operates facilities at which biosolids are dried and
pelletized and has three facilities currently in operation, with one other
facility undergoing start-up activity. WTI has approximately 536 dry-tons-
per-day of biosolids drying capacity in operation. Biosolids which have been
dried are generally used as fertilizer by farmers, commercial landscapers and
nurseries and as a bulking agent by fertilizer manufacturers.
WTI subsidiaries also design and install advanced air pollution control
equipment and design, construct and maintain tall concrete chimneys and
storage silos. WTI's expertise in air pollution control technologies and
chimney design and construction is used in the design and construction of
WTI's trash-to-energy facilities, which WTI believes strengthens its
competitive position.
REGULATION
Regulatory or technological developments relating to the environment may
require companies engaged in waste management services and related businesses,
including the Company, to modify, supplement or replace equipment and
facilities at costs which may be substantial. Because the continuing business
in which the Company is engaged is intrinsically connected with the protection
of the environment and the potential discharge of materials into the
environment, a material portion of the Company's capital expenditures is,
directly or indirectly, related to such items. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition for the Year
Ended December 31, 1997--Financial Condition" for a review of property and
equipment expenditures by the Company for the last four years. The Company
believes that, in general, it tends to benefit when environmental regulation
increases, which may increase the demand for its services, and that it has the
resources and experience to manage environmental risk.
Although the Company strives to conduct its operations in compliance with
applicable laws and regulations, the Company believes that in the existing
climate of heightened legal, political and citizen awareness and concerns,
companies in the waste management services industry, including the Company,
will be faced, in the normal course of operating their businesses, with fines
and penalties and the need to expend funds for remedial
66
<PAGE>
work and related activities with respect to waste treatment, disposal and
trash-to-energy facilities. Where the Company concludes that it is probable
that a liability has been incurred, a provision is made in the Company's
financial statements for the Company's best estimate of the liability based on
management's judgment and experience, and information available from
regulatory agencies. This estimate is also based upon an analysis of the
number, financial resources and relative degree of responsibility of other
potentially responsible parties who are jointly and severally liable for
remediation of a specific site, as well as the typical allocation of costs
among such parties. If a range of possible outcomes is estimated and no amount
within the range appears to be a better estimate than any other, then the
Company provides for the minimum amount within the range, in accordance with
generally accepted accounting principles. Such estimates are subsequently
revised, as necessary, as additional information becomes available. While the
Company does not anticipate that the amount of any such revision will have a
material adverse effect on the Company's operations or financial condition,
the measurement of environmental liabilities is inherently difficult and the
possibility remains that technological, regulatory or enforcement
developments, the results of environmental studies, the existence and ability
of other potentially responsible third parties (including insurance carriers)
to contribute to the settlement of such liabilities or other factors could
materially alter this expectation at any time. Such matters could have a
material adverse impact on earnings for one or more fiscal quarters or years.
While in general the Company's business has benefitted from increased
governmental regulation, the business itself is subject to extensive and
evolving regulation by federal, state, local and foreign authorities. Due to
the complexity of regulation of the industry and to public pressure,
implementation of existing and future laws, regulations or initiatives by
different levels of government may be inconsistent and difficult to foresee.
In addition, the demand for certain of the Company's services may be adversely
affected by the amendment or repeal, or reduction in enforcement of, federal,
state and foreign laws and regulations on which the Company's business is
dependent. Demand for certain of the Company's services may also be adversely
affected by delays or reductions in funding, or failure of legislative bodies
to fund, agencies or programs under such laws and regulations. Although it is
not always able to do so, the Company makes a continuing effort to anticipate
regulatory, political and legal developments that might affect its operations.
The Company cannot predict the extent to which any legislation or regulation
that may be enacted, amended, repealed or enforced, or any failure or delay in
enactment or enforcement of legislation or regulations or funding of agencies
or programs, in the future may affect its operations.
For additional information regarding regulations affecting the Company, see
"Business--Regulation" in the Waste Management 1997 Form 10-K.
DESCRIPTION OF CAPITAL STOCK
The following summary of the common stock and preferred stock of the Company
is qualified by reference to Waste Management's Restated Certificate of
Incorporation, as amended, a copy of which has been incorporated by reference
as an exhibit to the registration statement of which this Prospectus is a
part.
The Company's authorized capital stock consists of 1,500,000,000 shares of
Company Common Stock, $1.00 par value per share, and 50,000,000 shares of
preferred stock, $1.00 par value per share. Subject to any prior right of the
preferred stock, if and when issued, the holders of shares of Company Common
Stock will be entitled to receive such dividends as the Board of Directors of
the Company in its discretion may from time to time declare out of funds
legally available therefor and, upon liquidation, would be entitled to share
ratably in any assets of the Company legally available for distribution to
holders of shares of Company Common Stock. Each outstanding share of Company
Common Stock is entitled to one vote on any matter submitted to a vote of
stockholders, with no cumulative voting rights. There are no conversion,
redemption or sinking fund provisions applicable to Company Common Stock. All
of the issued and outstanding shares of Company Common Stock are, and the
shares of Company Common Stock offered by the Company hereby, when issued,
will be, fully paid and nonassessable. Company Common Stock does not have any
preemptive rights.
67
<PAGE>
The shares of preferred stock may be issued in connection with future
acquisitions or other proper corporate purposes, although there are no present
plans or arrangements for their issuance. The Board of Directors of the
Company is authorized without further stockholder authorization, to create and
issue the preferred stock in series and to establish the voting powers,
designations, preferences and relative participating, optional or other
special rights and any qualifications, limitations or restrictions thereof
relating to any such series.
Waste Management's Restated Certificate of Incorporation contains provisions
which (i) require stockholders to take action only at a formal meeting, (ii)
provide that only designated officers and the Board of Directors may call
special meetings of stockholders, (iii) prevent " greenmail" payments by the
Company, (iv) establish safeguards in connection with certain business
transactions and (v) provide for a classified Board of Directors. In addition
the Restated Certificate of Incorporation requires the concurrence of the
holders of shares representing at least 80% of the outstanding shares of
Company Common Stock for the alteration, amendment or repeal of, or the
adoption of any provision inconsistent with, any of the preceding provisions.
On June 1, 1998, the Company had approximately 42,500 stockholders of
record. The transfer agent and registrar for the Company Common Stock is
Harris Trust and Savings Bank, Chicago, Illinois.
See "Comparison of Stockholder Rights" in the Waste Management/USA Waste
Joint Proxy Statement/Prospectus incorporated herein by reference for a
comparison of certain rights of the Company's stockholders to certain rights
of the stockholders of USA Waste.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ" and, together with Merrill Lynch, the "Underwriters"), the
Company has agreed to sell to each of the Underwriters, and each of the
Underwriters severally has agreed to purchase from the Company, the number of
shares of Company Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................
Donaldson, Lufkin & Jenrette Securities Corporation..................
----------
Total........................................................... 20,000,000
==========
</TABLE>
In the Purchase Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of
Company Common Stock offered hereby if any of such shares are purchased. Under
certain circumstances involving a default by an Underwriter, the Purchase
Agreement may be terminated.
The Underwriters have advised the Company that they propose initially to
offer the shares of Company Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus, and to certain dealers
at such price less a concession not in excess of $ per share of Company
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of Company Common Stock on sales to
certain other dealers. After the Offering, the public offering price,
concession and discount may be changed.
The Company has agreed, subject to certain exceptions, not to directly or
indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Company Common Stock or any securities convertible into or
exercisable or exchangeable for Company Common Stock, or file any registration
statement under the Securities Act with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, the economic consequence of ownership of the
Company Common Stock, whether any such swap or transaction is to be settled by
delivery of Company Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the
Underwriters for a period of 90 days after the date of this Prospectus.
In connection with the Offering, the Underwriters may engage in certain
transactions which stabilize, maintain or otherwise affect the price of
Company Common Stock. Such transactions may include the purchase of shares of
Company Common Stock in the open market to stabilize the price of Company
Common Stock or to cover all or a portion of a short position created by the
Underwriters selling more shares of Company Common Stock in connection with
the Offering than are available to purchase from the Company. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be
in the absence of such purchases. Neither the Company nor any of the
Underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of Company Common Stock. In addition, neither the Company nor any of the
Underwriters make any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act. USA Waste
has agreed to indemnify the Company and the Underwriters
69
<PAGE>
against certain liabilities, including liabilities under the Securities Act,
related to information (i) contained in the USA Waste Annual Report on Form
10-K for the fiscal year ended December 31, 1997, (ii) contained in the USA
Waste Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998, and (iii) furnished by USA Waste or its representatives for use in the
Waste Management/USA Waste Joint Proxy Statement/Prospectus.
Merrill Lynch was retained by the Company as financial advisor in connection
with the proposed Merger. Pursuant to a letter agreement between the Company
and Merrill Lynch, the Company agreed to pay Merrill Lynch (i) a fee of $1
million payable upon the execution of the letter agreement, (ii) a fee of $2
million contingent upon and payable in cash upon the execution of the Merger
Agreement and (iii) upon consummation of the Merger or certain other business
combination involving the Company and USA Waste, a fee in an amount equal to
the aggregate consideration paid in the Merger or such other business
combination (determined as of the closing of such transaction) multiplied by a
percentage equal to (a) 0.10%, if the per share consideration is less than or
equal to $25, (b) 0.10% plus (A) 0.0002% multiplied by (B) the number of cents
($0.01) by which the per share consideration is greater than $25, if the per
share consideration is greater than $25 and less than $35, or (c) 0.30%, if
the per share consideration is $35 or greater. Any fees previously paid to
Merrill Lynch under clauses (i) and (ii) above will be deducted from any fee
to which Merrill Lynch is entitled pursuant to clause (iii). The Company also
agreed that if it consummates a business combination with a party other than
USA Waste, the Company will pay Merrill Lynch an additional fee in an amount
to be mutually agreed upon by the Company and Merrill Lynch. Merrill Lynch has
provided an opinion to the Board of Directors of the Company with respect to
the fairness of the proposed Merger to the stockholders of the Company.
Additionally, the Company agreed to reimburse Merrill Lynch for reasonable
out-of-pocket expenses in connection with its advisory services, including,
without limitation, reasonable fees and disbursements of its legal counsel.
The Company has also agreed to indemnify Merrill Lynch and certain related
persons for certain liabilities related to or arising out of its engagement in
connection with its advisory services, including liabilities under the federal
securities laws.
Merrill Lynch also recently advised the Company regarding the recently
completed purchase of the shares of WTI that the Company did not previously
own, and has, in the past, provided financial advisory and financing services
to the Company and USA Waste and may provide such services to the surviving
corporation in the Merger and/or its affiliates and may receive fees for the
rendering of such services. In addition, in the ordinary course of its
business, Merrill Lynch and its affiliates may actively trade the debt and
equity securities of the Company and USA Waste for their own account and for
the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
In the ordinary course of business, DLJ and its affiliates may own or
actively trade the securities of USA Waste and the Company for their own
accounts and for the accounts of their customers and, accordingly, may at any
time hold a long or short position in USA Waste's or the Company's securities.
DLJ has performed investment banking and other services for the Company in the
past, including acting as an underwriter in connection with numerous debt
offerings by the Company. In addition, DLJ has performed investment banking
and other services for USA Waste in the past, including: (i) representing USA
Waste in connection with the Merger; (ii) acting as the lead manager in a
public offering of USA Waste senior notes completed in December 1997; (iii)
acting as the lead manager in a public offering of USA Waste senior notes
completed in September 1997; (iv) acting as USA Waste's financial advisor in
connection with USA Waste's merger with United Waste Systems, Inc.; (v) acting
as the lead manager in a public offering of USA Waste common stock and
convertible subordinated notes; (vi) acting as USA Waste's financial advisor
in connection with USA Waste's merger with Sanifill, Inc.; and (vii) acting as
USA Waste's financial advisor in connection with USA Waste's merger with
Western Waste Industries. DLJ has received usual and customary compensation
for its past services for USA Waste and the Company.
70
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Company Common Stock will be
passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois and Herbert A. Getz, Esq., Senior Vice President
and General Counsel of the Company. Certain legal matters will be passed upon
for the Underwriters by Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown
& Platt represents the Company from time to time in connection with other
matters.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997, 1996
and 1995, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the four years in the period ended December
31, 1997 (1996 and prior as restated), have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The consolidated balance sheets of USA Waste as of December 31, 1997 and
1996 and the consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997
appearing in the Annual Report (Form 10-K) of USA Waste for the year ended
December 31, 1997, incorporated by reference in this Prospectus, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
Interim (Unaudited) Consolidated Financial Statements
Consolidated balance sheets as of March 31, 1997, December 31, 1997, and
March 31, 1998......................................................... F-2
Consolidated statements of income for the three months ended March 31,
1996, 1997 and 1998.................................................... F-4
Consolidated statements of stockholders' equity for the three months
ended March 31, 1996, 1997 and 1998.................................... F-5
Consolidated statements of cash flows for the three months ended March
31, 1996, 1997 and 1998................................................ F-11
Notes to consolidated financial statements.............................. F-12
Annual Consolidated Financial Statements
Report of Independent Public Accountants................................ F-24
Consolidated Balance Sheets as of December 31, 1995, 1996 and 1997...... F-25
Consolidated Statements of Income for each of the four years ended
December 31, 1997...................................................... F-27
Consolidated Statements of Cash Flows for each of the four years ended
December 31, 1997...................................................... F-28
Consolidated Statements of Stockholders' Equity for each of the four
years ended December 31, 1997.......................................... F-29
Notes to Consolidated Financial Statements.............................. F-33
Schedule II--Valuation and Qualifying Accounts (as Restated)............ F-68
</TABLE>
F-1
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
RESTATED
--------------
MARCH 31, 1997 DECEMBER 31, 1997 MARCH 31, 1998
-------------- ----------------- --------------
<S> <C> <C> <C>
CURRENT ASSETS:
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.
F-2
<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
-------------- ----------------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Portion of long-term debt
payable within one year..... $ 1,063,426 $ 1,548,465 $ 1,025,685
Obligation to former WTI
stockholders................ -- -- 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.
F-3
<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.
F-4
<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>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
-------- ----------
<S> <C> <C>
Balance, January 1, 1996................................... $498,817 $438,816
Net income for the period (restated)....................... -- --
Cash dividends ($.15 per share)............................ -- --
Dividends paid to Employee Stock Benefit Trust............. -- 1,718
Common stock issued upon exercise of stock options......... 48 (2,354)
Treasury stock received in connection with exercise of
stock options............................................. -- --
Tax benefit of non-qualified stock options exercised....... -- 1,289
Contribution to 1988 Employee Stock Ownership Plan......... -- --
Treasury stock received as settlement for claims........... -- --
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................................................ -- --
-------- --------
Balance, March 31, 1996 (restated)......................... $506,058 $668,890
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-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>
CUMULATIVE 1988 EMPLOYEE EMPLOYEE MINIMUM
TRANSLATION RETAINED TREASURY STOCK STOCK PENSION
ADJUSTMENT EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY
- ----------- ---------- -------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$(102,943) $3,582,861 $ -- $13,062 $350,151 $11,692
-- 138,418 -- -- -- --
-- (74,173) -- -- -- --
-- (1,718) -- -- -- --
-- -- (1,814) -- (10,969) --
-- -- 714 -- -- --
-- -- -- -- -- --
-- -- -- (1,667) -- --
-- -- 1,100 -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- 23,026 --
(9,539) -- -- -- -- --
- --------- ---------- ------- ------- -------- -------
$(112,482) $3,645,388 $ -- $11,395 $362,208 $11,692
========= ========== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-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
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997....................... $507,102 $887,026 $(79,213)
Net income for the period (restated)........... -- -- --
Cash dividends ($.16 per share)................ -- -- --
Dividends paid to Employee Stock Benefit Trust. -- 1,741 --
Common stock issued upon exercise of stock
options....................................... -- (4,733) --
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........................................ -- -- --
Common stock issued upon conversion of Liquid
Yield Option Notes............................ -- (91) --
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)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<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>
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ---------- -------- -------------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$3,228,346 $419,871 $6,396 $353,807 $18,885 $ 2,541
115,032 -- -- -- -- --
(77,422) -- -- -- -- --
(1,741) -- -- -- -- --
-- (16,029) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 10,001
-- -- -- -- -- (108)
-- -- (1,667) -- -- --
-- 141 -- -- -- --
-- (236) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- (24,495) -- --
-- -- -- -- -- --
- ---------- -------- ------ -------- ------- -------
$3,264,215 $403,747 $4,729 $329,312 $18,885 $12,434
========== ======== ====== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<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
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
<S> <C> <C> <C>
Balance, January 1, 1998....................... $507,102 $932,253 $(239,319)
Net income for the period...................... -- -- --
Cash dividends ($.17 per share)................ -- -- --
Dividends paid to Employee Stock Benefit Trust. -- 1,850 --
Common stock issued upon exercise of stock
options....................................... -- (1,025) --
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) --
Common stock purchased through non-qualified
deferred compensation plan.................... -- 788 --
Conversion of WTI stock options to Waste
Management 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)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<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>
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ---------- ---------- -------------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$1,735,371 $1,271,885 $-- $299,375 $7,393 $11,102
74,417 -- -- -- -- --
(77,422) -- -- -- -- --
(1,850) -- -- -- -- --
-- (5,577) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- (322)
-- -- -- -- -- (528)
-- (332) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- 36,061 -- --
-- -- -- -- -- --
- ---------- ---------- --- -------- ------ -------
$1,730,516 $1,265,976 $-- $335,436 $7,393 $10,252
========== ========== === ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<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
========= ========= ==========
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.
F-11
<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 the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1998 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).
F-12
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 0.725 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
F-13
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-14
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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
F-15
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
Results of operations-
Revenue............................................. $89.9 $82.8 $86.3
Income (loss) before tax after minority interest.... 1.2 0.1 (2.4)
Net income (loss)................................... 0.6 (0.2) (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 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.
F-16
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-17
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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, $0.4 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
F-18
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 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.
F-19
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Swedish 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 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,
F-20
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 as 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
F-21
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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 14 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.
F-22
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--EARNINGS PER SHARE
Basic and Diluted Earnings Per Share ("EPS") from continuing operations are
computed as follows:
<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.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Waste Management, Inc.:
We have audited the accompanying consolidated balance sheets of Waste
Management, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997, 1996 and 1995, and the related consolidated statements of income, cash
flows and stockholders' equity for each of the four years in the period ended
December 31, 1997 (1996 and prior as restated--See Note 2). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Management, Inc. and
subsidiaries as of December 31, 1997, 1996 and 1995, and the results of their
operations and their cash flows for each of the four years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for capitalized
interest on landfill cell construction and effective January 1, 1997, the
Company changed its method of accounting for environmental remediation
liabilities.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II (1996 and prior as
restated) listed in the index of financial statements is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 24, 1998 (except with respect to the matters discussed in Note 19, as
to which the date is March 17, 1998).
F-24
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995, 1996 AND 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESTATED
------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............. $ 169,541 $ 323,288 $ 132,811
Short-term investments................ 12,156 319,338 59,296
Accounts receivable, less reserve of
$67,927 in 1995, $52,847 in 1996 and
$51,805 in 1997...................... 1,623,563 1,650,719 1,539,413
Employee receivables.................. 8,496 10,084 7,817
Parts and supplies.................... 143,527 135,417 119,039
Costs and estimated earnings in excess
of billings on uncompleted contracts. 242,675 240,531 158,610
Prepaid expenses...................... 120,344 119,273 128,520
----------- ----------- -----------
Total Current Assets................ $ 2,320,302 $ 2,798,650 $ 2,145,506
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost
Land, primarily disposal sites........ $ 4,202,829 $ 4,583,699 $ 3,811,887
Buildings............................. 1,532,475 1,485,045 1,327,179
Vehicles and equipment................ 7,115,078 7,454,460 6,572,424
Leasehold improvements................ 84,854 85,431 77,202
----------- ----------- -----------
$12,935,236 $13,608,635 $11,788,692
Less-Accumulated depreciation and
amortization......................... (4,119,397) (4,810,235) (4,534,543)
----------- ----------- -----------
Total Property and Equipment, Net... $ 8,815,839 $ 8,798,400 $ 7,254,149
----------- ----------- -----------
OTHER ASSETS
Intangible assets relating to acquired
businesses, net...................... $ 3,892,355 $ 3,871,919 $ 3,198,374
Net assets of continuing businesses
and surplus real estate held for
sale................................. 235,354 227,351 154,384
Sundry, including other investments... 1,575,337 1,387,257 836,685
Net assets of discontinued operations. 617,972 -- --
----------- ----------- -----------
Total Other Assets.................. $ 6,321,018 $ 5,486,527 $ 4,189,443
----------- ----------- -----------
Total Assets...................... $17,457,159 $17,083,577 $13,589,098
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-25
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESTATED
------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Portion of long-term debt payable
within one year...................... $ 1,088,033 $ 553,493 $ 1,548,465
Accounts payable...................... 999,164 951,491 758,047
Accrued expenses...................... 1,076,017 1,362,048 1,652,314
Unearned revenue...................... 204,166 212,541 233,579
----------- ----------- -----------
Total Current Liabilities........... $ 3,367,380 $ 3,079,573 $ 4,192,405
----------- ----------- -----------
DEFERRED ITEMS
Income taxes.......................... $ 549,682 $ 562,906 $ 212,869
Environmental liabilities............. 750,703 673,492 840,378
Other................................. 714,252 723,112 808,556
----------- ----------- -----------
Total Deferred Items................ $ 2,014,637 $ 1,959,510 $ 1,861,803
----------- ----------- -----------
LONG-TERM DEBT, less portion payable
within one year........................ $ 6,390,041 $ 6,971,607 $ 5,078,557
----------- ----------- -----------
NET LIABILITIES OF DISCONTINUED OPERA-
TIONS.................................. $ -- $ 57,874 $ --
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARIES....... $ 1,380,496 $ 1,177,463 $ 1,110,681
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
PUT OPTIONS............................. $ 261,959 $ 95,789 $ --
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value
(issuable in series); 50,000,000
shares authorized; none outstanding
during the years..................... $ -- $ -- $ --
Common stock, $1 par value;
1,500,000,000 shares authorized;
498,817,093 shares issued in 1995 and
507,101,774 in 1996 and 1997......... 498,817 507,102 507,102
Additional paid-in capital............ 438,816 887,026 932,253
Cumulative translation adjustment..... (102,943) (79,213) (239,319)
Retained earnings..................... 3,582,861 3,228,346 1,735,371
----------- ----------- -----------
$ 4,417,551 $ 4,543,261 $ 2,935,407
Less-Treasury stock; 12,782,864 shares
in 1996 and 41,177,630 in 1997, at
cost................................. -- 419,871 1,271,885
1988 Employee Stock Ownership Plan.. 13,062 6,396 --
Employee Stock Benefit Trust
(11,769,788 shares in 1995 and
10,886,361 in 1996 and 1997, at
market)............................ 350,151 353,807 299,375
Minimum pension liability........... 11,692 18,885 7,393
Restricted stock unearned
compensation....................... -- 2,541 11,102
----------- ----------- -----------
Total Stockholders' Equity.......... $ 4,042,646 $ 3,741,761 $ 1,345,652
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity............. $17,457,159 $17,083,577 $13,589,098
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESTATED
----------------------------------
1994 1995 1996 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE....................... $8,537,883 $9,100,225 $9,225,636 $ 9,188,582
---------- ---------- ---------- -----------
Operating expenses.......... $6,027,979 $6,514,932 $6,660,766 $ 7,195,376
Special charges............. -- 335,587 370,735 145,990
Asset impairment loss....... 33,970 53,772 64,729 1,480,262
Selling and administrative
expenses................... 1,062,363 1,091,747 1,095,459 1,129,237
Interest expense............ 350,220 463,861 462,424 446,888
Interest income............. (42,793) (34,883) (27,904) (37,580)
Minority interest........... 126,042 81,367 41,289 45,442
(Income) loss from
continuing operations held
for sale, net of minority
interest................... (24,143) (25,110) (315) 9,930
Sundry income, net.......... (109,903) (252,695) (102,014) (173,290)
---------- ---------- ---------- -----------
Income (loss) from
continuing operations
before income taxes........ $1,114,148 $ 871,647 $ 660,467 $(1,053,673)
Provision for income taxes.. 512,683 451,741 436,473 215,667
---------- ---------- ---------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS................... $ 601,465 $ 419,906 $ 223,994 $(1,269,340)
---------- ---------- ---------- -----------
Discontinued Operations:
Income from operations, less
applicable income taxes and
minority interest of
$45,031 in 1994, $9,125 in
1995 and $17,490 in 1996... $ 27,324 $ 38,686 $ 22,620 $ --
Income (loss) on disposal or
from reserve adjustment,
net of applicable income
taxes and minority interest
of ($3,005) in 1995,
($18,640) in 1996 and
$100,842 in 1997........... -- (33,823) (285,921) 95,688
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAOR-
DINARY ITEM AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNT-
ING PRINCIPLES............... $ 628,789 $ 424,769 $ (39,307) $(1,173,652)
---------- ---------- ---------- -----------
Extraordinary loss on
refinancing of debt, net of
tax benefit and minority
interest of $767............. $ -- $ -- $ -- $ (516)
Cumulative effect of changes
in accounting principles, net
of tax
benefit of $819 in 1994,
$48,147 in 1995 and $1,100 in
1997......................... (1,281) (84,672) -- (1,936)
---------- ---------- ---------- -----------
NET INCOME (LOSS)............. $ 627,508 $ 340,097 $ (39,307) $(1,176,104)
========== ========== ========== ===========
AVERAGE COMMON SHARES OUT-
STANDING..................... 483,748 485,346 489,171 466,601
========== ========== ========== ===========
EARNINGS (LOSS) PER SHARE:
Basic--
Continuing operations....... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued operations..... 0.06 0.01 (0.54) 0.20
Extraordinary item.......... -- -- -- --
Cumulative effect of changes
in accounting principles... -- (0.17) -- --
---------- ---------- ---------- -----------
NET INCOME (LOSS)......... $ 1.30 $ 0.70 $ (0.08) $ (2.52)
========== ========== ========== ===========
Diluted--
Continuing operations....... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued operations..... 0.06 0.01 (0.54) 0.20
Extraordinary item.......... -- -- -- --
Cumulative effect of changes
in accounting principles... -- (0.17) -- --
---------- ---------- ---------- -----------
NET INCOME (LOSS)......... $ 1.30 $ 0.70 $ (0.08) $ (2.52)
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED)
<TABLE>
<CAPTION>
RESTATED
-------------------------------------
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) for the
year..................... $ 627,508 $ 340,097 $ (39,307) $(1,176,104)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization............. 996,407 1,035,018 1,065,683 1,080,105
Provision for deferred
income taxes............. 204,400 114,000 196,500 (405,100)
Undistributed earnings of
equity investees......... (48,200) 1,500 (34,200) 8,000
Minority interest in
subsidiaries............. 148,783 81,789 42,111 44,687
Interest on Liquid Yield
Option Notes and
Subordinated Notes....... 33,551 23,021 22,343 20,682
Contribution to 1988
Employee Stock Ownership
Plan..................... 7,930 6,667 6,666 6,396
Special charges........... -- 335,587 370,735 145,990
Asset impairment loss..... 33,970 53,772 64,729 1,480,262
Extraordinary item........ -- -- -- 516
Cumulative effect of
changes in accounting
principles............... 1,281 84,672 -- 1,936
Loss (income) on disposal
of discontinued
operations or reserve
adjustments, net of tax
and minority interest.... -- 33,823 285,921 (95,688)
(Gain) on disposition of
business and assets...... (25,100) (168,875) (30,086) (180,293)
Changes in assets and
liabilities, excluding
effects of acquired or
divested companies:
Receivables, net.......... (119,785) 60,817 (1,718) 57,922
Other current assets...... (57,509) 23,412 5,747 62,602
Sundry other assets....... (43,116) (71,766) (132,311) 127,125
Accounts payable.......... 182,874 39,669 (61,268) (165,829)
Accrued expenses and
unearned revenue......... 32,363 (76,398) 11,923 529,763
Deferred items............ (298,097) 84,301 (185,532) 11,587
Other, net................ 57,163 (52,535) 52,092 48,446
----------- ----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES...... $ 1,734,423 $ 1,948,571 $ 1,640,028 $ 1,603,005
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Short-term investments.... $ 2,755 $ 17,804 $ 1,170 $ (53,569)
Capital expenditures...... (1,440,238) (1,340,261) (1,063,552) (879,545)
Proceeds from asset
monetization program..... 287,046 165,716 752,345 1,375,206
Cost of acquisitions, net
of cash acquired......... (197,201) (224,304) (104,778) (51,360)
Other investments......... (26,246) (50,119) (16,372) (8,877)
Acquisition of minority
interests................ (57,865) (170,854) (342,034) (104,165)
----------- ----------- ----------- -----------
NET CASH OBTAINED FROM
(USED FOR) INVESTING
ACTIVITIES................ $(1,431,749) $(1,602,018) $ (773,221) $ 277,690
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Cash dividends............ $ (290,266) $ (291,421) $ (308,265) $ (309,577)
Proceeds from issuance of
indebtedness............. 1,710,586 1,803,383 2,907,544 1,105,427
Repayments of
indebtedness............. (1,752,552) (1,860,451) (2,933,632) (1,967,048)
Proceeds from exercise of
stock options, net....... 7,970 14,132 65,766 41,220
Contributions from
minority interests....... 22,169 24,394 10,242 --
Other distributions to
minority stockholders by
affiliated companies..... -- -- -- (36,341)
Stock repurchases......... -- -- (473,560) (903,248)
Proceeds from sales of put
options.................. 29,965 21,622 18,845 --
Settlement of put options. -- (12,019) -- (1,605)
----------- ----------- ----------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES................ $ (272,128) $ (300,360) $ (713,060) $(2,071,172)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents. $ 30,546 $ 46,193 $ 153,747 $ (190,477)
Cash and cash equivalents
at beginning of year...... 92,802 123,348 169,541 323,288
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of year............ $ 123,348 $ 169,541 $ 323,288 $ 132,811
=========== =========== =========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for:
Interest, net of amounts
capitalized.............. $ 307,257 $ 439,323 $ 402,321 $ 428,531
Income taxes, net of
refunds received......... 241,657 283,165 326,679 344,188
Supplemental schedule of
noncash investing and
financing activities:
LYONs converted into
common stock of the
Company.................. 1,594 2,598 2,176 659
Liabilities assumed in
acquisitions of
businesses............... 225,723 219,285 114,897 23,356
Fair market value of
Company and subsidiary
stock issued for acquired
businesses............... 4,773 66,172 236,001 2,696
Exchange of interest in
ServiceMaster Consumer
Services L.P............. -- 467,000 -- --
Subordinated Notes issued
for acquisition of CWM
minority interest........ $ -- $ 436,830 $ -- $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
<S> <C> <C> <C>
Balance, January 1, 1994, as previously
reported...................................... $496,217 $668,470 $(245,587)
Cumulative effect of prior period adjustments.. -- 14,117 --
-------- -------- ---------
Balance, January 1, 1994, as restated.......... $496,217 $682,587 $(245,587)
-------- -------- ---------
Net income for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.60 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 5,617 --
Common stock issued upon exercise of stock
options...................................... -- (5,948) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 1,527 --
Contribution of 1988 ESOP (375,312 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 96 1,442 --
Common stock issued for acquisitions.......... 74 1,471 --
Temporary equity related to put options....... -- (252,328) --
Proceeds from sale of put options............. -- 29,965 --
Sale of shares to Employee Stock Benefit Trust
(12,601,609 shares).......................... -- (106,327) --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 16,064 --
Adjustment for minimum pension liability...... -- -- --
Transfer of equity interests among controlled
subsidiaries................................. -- (2,803) --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 94,755
-------- -------- ---------
Balance, December 31, 1994, as restated........ $496,387 $371,267 $(150,832)
-------- -------- ---------
Net income for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.60 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 7,207 --
Common stock issued upon exercise of stock
options...................................... 44 (4,405) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 2,049 --
Contribution of 1988 ESOP (322,508 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 150 2,448 --
Common stock issued for acquisitions.......... 2,236 15,768 --
Temporary equity related to put options....... -- (9,631) --
Proceeds from sale of put options............. -- 21,622 --
Settlement of put options..................... -- (12,019) --
Common stock purchased through nonqualified
deferred compensation plan................... -- 38 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 43,943 --
Adjustment for minimum pension liability...... -- -- --
Transfer of equity interests among controlled
subsidiaries................................. -- 529 --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 47,889
-------- -------- ---------
Balance, December 31, 1995, as restated........ $498,817 $438,816 $(102,943)
-------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ---------- -------- -------------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$3,693,108 $425,097 $27,659 $ -- $ -- $--
(483,341) -- -- -- 8,085 --
- ---------- -------- ------- -------- ------- ---
$3,209,767 $425,097 $27,659 $ -- $ 8,085 $--
- ---------- -------- ------- -------- ------- ---
$ 627,508 $ -- $ -- $ -- $ -- $--
(290,266) -- -- -- -- --
(5,617) -- -- -- -- --
-- (8,250) -- (5,928) -- --
-- 260 -- -- -- --
-- -- -- -- -- --
-- -- (7,930) -- -- --
-- 2,741 -- -- -- --
-- (56) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- (419,792) -- 313,465 -- --
-- -- -- 16,064 -- --
-- -- -- -- (350) --
-- -- -- -- -- --
-- -- -- -- -- --
- ---------- -------- ------- -------- ------- ---
$3,541,392 $ -- $19,729 $323,601 $ 7,735 $--
- ---------- -------- ------- -------- ------- ---
$ 340,097 $ -- $ -- $ -- $ -- $--
(291,421) -- -- -- -- --
(7,207) -- -- -- -- --
-- (1,763) -- (17,393) -- --
-- 663 -- -- -- --
-- -- -- -- -- --
-- -- (6,667) -- -- --
-- 1,100 -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- 43,943 -- --
-- -- -- -- 3,957 --
-- -- -- -- -- --
-- -- -- -- -- --
- ---------- -------- ------- -------- ------- ---
$3,582,861 $ -- $13,062 $350,151 $11,692 $--
- ---------- -------- ------- -------- ------- ---
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
<S> <C> <C> <C>
Balance, January 1, 1996, as restated.......... $498,817 $438,816 $(102,943)
-------- -------- ---------
Net (loss) for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.63 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 6,943 --
Common stock repurchase (14,390,000 shares)... -- -- --
Common stock issued upon exercise of stock
options and grants of restricted stock....... 217 (10,938) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 6,859 --
Unearned compensation related to issuance of
restricted stock to employees................ -- -- --
Earned compensation related to restricted
stock (net of reversals on forfeited shares). -- -- --
Contribution to 1988 ESOP (307,041 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 111 1,905 --
Common stock issued for acquisitions.......... 7,957 219,867 --
Temporary equity related to put options....... -- 166,170 --
Proceeds from sale of put options............. -- 18,845 --
Common stock purchased through nonqualified
deferred compensation plan................... -- 6,281 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 32,278 --
Adjustment for minimum pension liability...... -- -- --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 23,730
-------- -------- ---------
Balance, December 31, 1996, as restated........ $507,102 $887,026 $ (79,213)
-------- -------- ---------
Net (loss) for the year....................... $ -- $ -- $ --
Cash dividends ($.67 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 7,294 --
Common stock repurchase (30,000,000 shares)... -- -- --
Common stock issued upon exercise of stock
options and grants of restricted stock....... -- (6,051) --
Compensation paid with stock options.......... -- 701 --
Tax benefit of non-qualified stock options
exercised.................................... -- 2,741 --
Unearned compensation related to issuance of
restricted stock to employees................ -- -- --
Earned compensation related to restricted
stock (net of reversals on forfeited shares). -- -- --
Reversal of unearned compensation upon
cancellation of restricted stock............. -- -- --
Contribution to 1988 ESOP (295,089 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. -- (324) --
Common stock issued for acquisitions.......... -- (1,057) --
Temporary equity related to put options....... -- 95,789 --
Settlement of put options..................... -- (1,605) --
Common stock purchased through nonqualified
deferred compensation plan................... -- 2,171 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- (54,432) --
Adjustment for minimum pension liability...... -- -- --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- (160,106)
-------- -------- ---------
Balance, December 31, 1997..................... $507,102 $932,253 $(239,319)
-------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ----------- ---------- -------------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$3,582,861 $ -- $13,062 $350,151 $11,692 $ --
- ----------- ---------- ------- -------- ------- -------
$ (39,307) $ -- $ -- $ -- $ -- $ --
(308,265) -- -- -- -- --
(6,943) -- -- -- -- --
-- 473,560 -- -- -- --
-- (53,323) -- (28,622) -- --
-- 5,458 -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 2,640
-- -- -- -- -- (99)
-- -- (6,666) -- -- --
-- 2,513 -- -- -- --
-- (160) -- -- -- --
-- (8,177) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- 32,278 -- --
-- -- -- -- 7,193 --
-- -- -- -- -- --
- ----------- ---------- ------- -------- ------- -------
$ 3,228,346 $ 419,871 $ 6,396 $353,807 $18,885 $ 2,541
- ----------- ---------- ------- -------- ------- -------
$(1,176,104) $ -- $ -- $ -- $ -- $ --
(309,577) -- -- -- -- --
(7,294) -- -- -- -- --
-- 903,248 -- -- -- --
-- (47,271) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 23,444
-- -- -- -- -- (2,357)
-- -- -- -- -- (12,526)
-- -- (6,396) -- -- --
-- 773 -- -- -- --
-- (983) -- -- -- --
-- (3,753) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- (54,432) -- --
-- -- -- -- (11,492) --
-- -- -- -- -- --
- ----------- ---------- ------- -------- ------- -------
$1,735,371 $1,271,885 $ -- $299,375 $ 7,393 $11,102
- ----------- ---------- ------- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN MILLIONS EXCEPT PER SHARE AMOUNTS UNLESS OTHERWISE NOTED)
NOTE 1. BUSINESS AND FINANCIAL STATEMENTS
Waste Management, Inc. (formerly WMX Technologies, Inc.) and its
subsidiaries ("Waste Management" or the "Company") provide waste management
and related services to governmental, residential, commercial, and industrial
customers in the United States and in select international markets. The
Company previously provided process engineering and construction, specialty
contracting and industrial scaffolding services through its Rust International
Inc. ("Rust") subsidiary, water process systems, equipment manufacturing and
water and wastewater facility operations and privatization services through
its Wheelabrator Technologies Inc. ("WTI") subsidiary. As of December 31,
1997, WTI and Rust had sold all of these businesses, and accordingly they are
classified as discontinued operations in the accompanying financial
statements. The Company now operates in only the waste management services
industry. See Note 14 for details of certain financial information by
geographic area.
The accompanying financial statements are prepared on a consolidated basis
and include the Company and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain of the
Company's subsidiaries are restricted as to payment of dividends to the
Company. However, the Company has access to the net assets of such
subsidiaries through intercompany loans and advances.
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 2. RESTATEMENT AND RECLASSIFICATION
The Company has restated and reclassified its financial statements for each
of the three years ended December 31, 1996. The cumulative after-tax effect
for periods prior to January 1, 1994, has been reflected as a charge to
beginning retained earnings in the Consolidated Statements of Stockholders'
Equity. Unaudited quarterly financial data for the years 1995 and 1996 and the
first three quarters of 1997, as shown in Note 20, has also been restated and
reclassified. Except as otherwise stated herein, all information presented in
the Consolidated Financial Statements and related notes 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 (see "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. Capitalized
interest for 1995, 1996 and the first three quarters of 1997 has accordingly
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). The reduction of the special charge in
1996 is due primarily to the reversal of software impairment charges which
were recorded prematurely.
F-33
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the restatements by category is as follows:
<TABLE>
<CAPTION>
CUMULATIVE RESTATEMENTS
THROUGH DECEMBER 31, 1996
-------------------------
(IN MILLIONS)
<S> <C>
Vehicle, equipment and container depreciation
expense....................................... $ 509
Capitalized interest........................... 192
Environmental and closure/post-closure costs
and reserves.................................. 173
Purchase accounting related to remediation
reserves...................................... 128
Asset impairment losses........................ 214
Software impairment charges.................... (85)
Other, including minority interest............. 301
------
Total pretax................................. $1,432
Tax effects on above items including income tax
reserve adjustments........................... (297)
------
$1,135
======
</TABLE>
In the fourth quarter of 1997, the Company reclassified the results of
certain Rust business units to continuing operations held for sale. These
businesses had previously been reported as discontinued operations. Accounting
standards require such reclassification because divestiture did not occur
within one year from the date the businesses were initially reported as
discontinued operations.
F-34
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also reclassified certain items of income and expense in
previously issued financial statements. The primary effect of such
reclassification is to increase various expense categories by amounts which
had been offset against gains in sundry income. Such reclassifications, which
did not change net income, affected various line items within the Consolidated
Statements of Income.
The effect of such reclassifications, and the restatements discussed above,
on the income statement line items, is shown in the following table:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RECLASSIFICATIONS RESTATEMENTS RESTATED
------------- ----------------- ------------ --------
<S> <C> <C> <C> <C>
1994
Revenue................. $8,482.7 $ 55.2 $ -- $8,537.9
-------- ------ ------- --------
Operating expenses...... $5,827.6 $ 42.2 $ 158.2 $6,028.0
Asset impairment loss... -- -- 34.0 34.0
Selling and administra-
tive expenses.......... 997.2 51.6 13.5 1,062.3
Interest, net........... 300.3 1.4 5.7 307.4
Minority interest....... 127.0 6.5 (7.5) 126.0
(Income) loss from con-
tinuing operations held
for sale............... -- (24.1) -- (24.1)
Sundry income, net...... (64.4) (51.0) 5.5 (109.9)
Provision for income
taxes.................. 552.6 13.9 (53.8) 512.7
(Income) loss from dis-
continued operations... (42.0) 14.7 -- (27.3)
Cumulative effect of
changes in accounting
principles............. -- -- 1.3 1.3
-------- ------ ------- --------
Net Income.......... $ 784.4 $ -- $(156.9) $ 627.5
======== ====== ======= ========
1995
Revenue................. $9,053.0 $ 47.2 $ -- $9,100.2
-------- ------ ------- --------
Operating expenses...... $6,220.9 $162.1 $ 131.9 $6,514.9
Special charge.......... 335.2 -- 0.4 335.6
Asset impairment loss... -- -- 53.8 53.8
Selling and administra-
tive expenses.......... 1,004.9 102.9 (16.1) 1,091.7
Interest, net........... 384.7 13.2 31.1 429.0
Minority interest....... 81.9 (4.3) 3.8 81.4
(Income) loss from con-
tinuing operations held
for sale............... -- (25.1) -- (25.1)
Sundry income, net...... (76.5) (172.5) (3.7) (252.7)
Provision for income
taxes.................. 483.7 8.9 (40.9) 451.7
(Income) loss from dis-
continued operations... 14.3 (38.0) 18.8 (4.9)
Cumulative effect of
changes in accounting
principles............. -- -- 84.7 84.7
-------- ------ ------- --------
Net Income.......... $ 603.9 $ -- $(263.8) $ 340.1
======== ====== ======= ========
1996
Revenue................. $9,187.0 $ 38.6 $ -- $9,225.6
-------- ------ ------- --------
Operating expenses...... $6,372.8 $ 7.8 $ 280.2 $6,660.8
Special charge.......... 471.6 -- (100.9) 370.7
Asset impairment loss... -- -- 64.7 64.7
Selling and administra-
tive expenses.......... 979.2 45.9 70.4 1,095.5
Interest, net........... 348.1 51.0 35.4 434.5
Minority interest....... 57.6 0.9 (17.2) 41.3
(Income) loss from con-
tinuing operations held
for sale............... -- (0.3) -- (0.3)
Sundry income, net...... (85.2) (56.0) 39.1 (102.1)
Provision for income
taxes.................. 565.1 (9.9) (118.7) 436.5
(Income) loss from dis-
continued operations... 285.7 (0.8) (21.6) 263.3
-------- ------ ------- --------
Net Income (loss)... $ 192.1 $ -- $(231.4) $ (39.3)
======== ====== ======= ========
</TABLE>
F-35
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These restatements increased (decreased) previously reported results and
earnings per share as shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations before income tax-
es................................................. $(180.8) $(230.3) $(382.4)
Provision for income taxes.......................... 39.9 32.0 128.6
------- ------- -------
Income from continuing operations................... $(140.9) $(198.3) $(253.8)
Discontinued operations............................. ( 14.7) 19.2 22.4
Cumulative effect of accounting change.............. (1.3) (84.7) --
------- ------- -------
Net income.......................................... $(156.9) $(263.8) $(231.4)
======= ======= =======
Earnings per share--
Basic--
Continuing operations............................. $ (0.29) $ (0.41) $ (0.52)
Discontinued operations........................... (0.03) 0.04 0.04
Accounting change................................. -- (0.17) --
------- ------- -------
Net income...................................... $ (0.32) $ (0.54) $ (0.48)
======= ======= =======
Diluted--
Continuing operations............................. $ (0.29) $ (0.39) $ (0.51)
Discontinued operations........................... (0.03) 0.04 0.03
Accounting change................................. -- (0.17) --
------- ------- -------
Net income...................................... $ (0.32) $ (0.52) $ (0.48)
======= ======= =======
</TABLE>
F-36
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. SUMMARY OF ACCOUNTING POLICIES
Revenue Recognition. The Company is primarily in a service business and
recognizes revenue when services are performed. Results from long-term
contracts are recorded on the percentage-of-completion basis with losses
recognized in full when identified. Changes in project performance and
conditions, estimated profitability and final contract settlements may result
in future revisions to long-term contract costs and income.
Foreign Currency. The functional currency of the majority of the Company's
foreign subsidiaries is the local currency of the country in which the
subsidiary operates. Accordingly, such subsidiaries' assets and liabilities
are translated at the rates of exchange at the balance sheet date while income
statement accounts are translated at the average exchange rates in effect
during the period. The resulting translation difference is charged or credited
directly to stockholders' equity, as revenues, expenses and cash flows of the
subsidiaries are primarily in their local currencies. Foreign exchange
transaction losses (income) (net of related income taxes and minority
interest) of $3.3 million, $2.2 million, $0.3 million and ($0.9) million are
included in the Consolidated Statements of Income for 1994, 1995, 1996 and
1997, respectively.
Cash Equivalents. All highly liquid investments with maturities of three
months or less at date of purchase are considered to be cash equivalents.
Short-Term Investments. As part of its cash management program, the Company
from time-to-time maintains a portfolio of marketable investment securities
($12.2 million, $11.0 million and $3.0 million at December 31, 1995, 1996 and
1997, respectively). The securities have an investment grade of not less than
A and a term to earliest maturity generally of less than one year, and include
tax exempt securities, certificates of deposit and Euro-dollar time deposits.
These securities are carried at cost.
Short-term investments also include investments classified as "trading,"
which are carried at market price with unrealized gains and losses included in
Sundry Income. At December 31, 1996, this category included the shares of
Wessex Water Plc ("Wessex") (see Note 15). At December 31, 1997, this category
included certain other equity securities classified as "trading" as well as a
price collar related to such investment. These securities were delivered in
1998 in exchange for the cap price of the collar. See Note 7.
Environmental Liabilities. The Company provides for estimated closure and
post-closure monitoring costs over the operating life of disposal sites as
airspace is consumed. The Company has also established procedures to evaluate
potential remedial liabilities at closed sites which it owns or operated, or
to which it transported waste, including 89 sites listed on the Superfund
National Priority List ("NPL"). When the Company concludes that it is probable
that a liability has been incurred, provision is made in the financial
statements, based upon management's judgment and prior experience, for the
Company's best estimate of the liability. Such estimates are subsequently
revised as deemed necessary as additional information becomes available. See
Note 8 for additional information.
Contracts in Process. Information with respect to contracts in process
(which relate primarily to contracts involving a substantial construction
component) at December 31, 1995, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Costs and estimated earnings on uncompleted
contracts....................................... $1,176.6 $1,192.2 $1,511.7
Less: Billing on uncompleted contracts........... (952.8) (979.9) (1,374.1)
-------- -------- --------
Total contracts in process..................... $ 223.8 $ 212.3 $ 137.6
======== ======== ========
</TABLE>
F-37
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contracts in process are included in the Consolidated Balance Sheets under
the following captions:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $242.7 $240.5 $158.6
Billings in excess of costs and estimated earnings on
uncompleted contracts (included in unearned revenue).. (18.9) (28.2) (21.0)
------ ------ ------
Total contracts in process........................... $223.8 $212.3 $137.6
====== ====== ======
</TABLE>
All contracts in process are expected to be billed and collected within five
years.
Accounts receivable includes retainage which has been billed, but which is
not due pursuant to contract provisions until completion. Such retainage at
December 31, 1997, is $5.3 million, including $1.1 million that is expected to
be collected after one year. Retainage was $8.0 million at December 31, 1996,
and $12.8 million at December 31, 1995.
Property and Equipment. Property and equipment (including major repairs and
improvements) are capitalized and stated at cost. Items of an ordinary
maintenance or repair nature are charged directly to operations. Disposal
sites are carried at cost and to the extent the land component exceeds end use
realizable value, such excess is amortized over the estimated life of the
disposal site. Disposal site improvement costs are capitalized and charged to
operations over the shorter of the estimated usable life of the site or the
improvement.
Preparation costs for individual secure land disposal cells are recorded as
land improvements. Cell costs are amortized as the airspace is filled.
Significant costs capitalized for such cells include excavation and grading
costs, costs relating to the design and construction of liner systems, and gas
collection and leachate collection systems.
Depreciation and Amortization. The cost, less estimated salvage value for
certain types of assets, of property and equipment had been depreciated over
the following estimated useful lives on the straight-line method: buildings,
10 - 40 years; heavy collection vehicles, 10 - 12 years; other vehicles, 3 - 6
years; rolloff containers, 20 years; other containers, 15 years; machinery and
equipment, 3 - 20 years; leasehold improvements, over the life of the
applicable lease.
Effective October 1, 1997, the Board of Directors approved a management
recommendation to revise the Company's North American collection fleet
management policy. Front-end loaders will be replaced after 8 years, and rear-
end loaders and rolloff trucks after 10 years. The previous policy was to not
replace front-end loaders before they were a minimum of 10 years old and other
heavy collection vehicles before they were a minimum of 12 years old. As a
result of this decision, the Company recognized an impairment writedown of
$70.9 million in the fourth quarter of 1997 for those vehicles scheduled for
replacement in the next two years under the new policy (see Note 16).
Depreciable lives have been adjusted commencing in the fourth quarter of 1997
to reflect the new policy. Also effective October 1, 1997, the Company reduced
depreciable lives on containers from 15 and 20 years to 12 years, and ceased
assigning salvage value in computing depreciation on North American collection
vehicles or containers. These changes in estimates increased depreciation
expense by $33.7 million in the fourth quarter of 1997.
Also effective October 1, 1997, the Company changed its process for
estimating landfill lives. The Company now amortizes landfill costs over
estimated landfill capacity which includes permitted landfill airspace plus
expansions which are probable of being obtained in the next five years. The
Company's prior practice was to consider likely future expansions in the
amortization calculations, whether or not the permits were expected to be
obtained within the next five years. Factors in determining probable
expansions on a site-by-site basis include secured rights to required land,
status of legal, environmental, regulatory and political issues, and the
extent to which the permit application process has proceeded. This change in
estimate increased depreciation and amortization by $12.7 million and the
provision for closure and post-closure by $3.1 million in the fourth quarter
of 1997, and resulted in estimated landfill capacity declining from 2.9
billion cubic yards to 1.8 billion cubic yards.
F-38
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of market value of net
assets acquired ("goodwill"). Such goodwill is amortized on a straight-line
basis over a period of not more than 40 years. The accumulated amortization of
intangible assets amounted to $582.9 million, $685.8 million and $670.7
million as of December 31, 1995, 1996 and 1997, respectively.
On an ongoing basis, the Company measures realizability of goodwill by the
ability of acquired businesses to generate current and expected future after-
tax operating income in excess of annual amortization. If such realizability
is in doubt, an adjustment is made to reduce the carrying value of the
goodwill.
Capitalized Interest. Interest has been capitalized on significant
landfills, trash-to-energy plants and other projects under construction.
Amounts capitalized and netted against Interest Expense in the Consolidated
Statements of Income were $105.9 million in 1994, $43.9 million in 1995, $35.6
million in 1996, and $26.0 million in 1997.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cells. Previously, interest was capitalized using a
method that allocated construction costs incurred to airspace on a total
landfill basis. The new method uses as a base for interest capitalization the
discrete construction activities related to each cell and results in less
interest being capitalized. In a landfill disposal services market
characterized by substantial price competition and minimal anticipated volume
growth, the new method reduces the risk of an asset impairment in the future.
The change reduced 1995 net income from continuing operations by $20.0 million
or approximately $0.04 per share. The unaudited proforma effect of this change
to a preferable method, on 1994 and 1995 had the change been made as of
January 1, 1994, and excluding the cumulative effect of the accounting change,
is shown in the following table:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------- -------------
1994 1995 1994 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from continuing operations.................. $601.5 $419.9 $581.5 $419.9
Net Income......................................... 627.5 340.1 607.5 424.8
Earnings per share--
Basic
Income from continuing operations................ $ 1.24 $ 0.86 $ 1.20 $ 0.86
Net income....................................... 1.30 0.70 1.26 0.87
Diluted
Income from continuing operations................ $ 1.24 $ 0.86 $ 1.20 $ 0.86
Net Income....................................... 1.30 0.70 1.26 0.87
</TABLE>
Self-Insurance. The Company self-insures for auto, general liability and
workers' compensation claims up to $5 million per claim. Provision is made in
each accounting period for estimated losses, including losses incurred but not
reported, and related reserves are adjusted as additional claim information
becomes available. Claim reserves are discounted at 6%, 7% and 6% at December
31, 1995, 1996 and 1997, respectively, based on historical payment patterns.
The self-insurance reserve included in the accompanying balance sheet was
$151.7 million, $188.0 million and $226.7 million at December 31, 1995, 1996
and 1997, respectively.
In the fourth quarter of 1997, the Company modified its self-insurance
reserve determination technique. The revised loss projection process improves
the estimation of future growth in claims. This change in estimate resulted in
a $56 million pre-tax charge.
Derivative Financial Instruments. In the normal course of business, the
Company enters into a variety of derivative financial instruments to manage
currency, interest rate, commodity (fuel) and equity price risk. See Note 7 to
Consolidated Financial Statements for a description of these financial
instruments and the methods of accounting for them.
F-39
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Principles. Effective January 1, 1994, the Company adopted FAS
No. 112, "Employers' Accounting for Postemployment Benefits." The change
reduced 1994 net income by $1.3 million.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cell construction. See "Capitalized Interest." The
cumulative effect of this change reduced 1995 net income by $84.7 million.
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." Impairments recorded prior to 1996 followed a methodology consistent with
FAS No. 121, and accordingly 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. See Note 9.
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 management of remediation
liabilities. The adoption of SOP 96-1 reduced 1997 pretax income by $49.9
million.
In the fourth quarter of 1997, the Company began expensing process
reengineering costs (including $3.0 million previously capitalized) in
accordance with Emerging Issues Task Force consensus 97-13, reducing 1997 net
income by $1.9 million.
Also in 1997, the Company began presenting earnings per share in accordance
with FAS No. 128. See Note 11 for further discussion.
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
requires only a different format for presentation of information already
included in the Company's financial statements. 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.
F-40
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. INCOME TAXES
The following tables set forth income from continuing operations before
income taxes, showing domestic and international sources, and the income tax
provision showing the components by governmental taxing authority, for the
years 1994 through 1997.
Income (Loss) From Continuing Operations Before Income Taxes
<TABLE>
<CAPTION>
1994 1995 1996 1997
-------- ------ ------ ---------
<S> <C> <C> <C> <C>
Domestic..................................... $ 952.5 $882.1 $654.9 $(1,153.3)
International................................ 161.6 (10.5) 5.6 99.6
-------- ------ ------ ---------
$1,114.1 $871.6 $660.5 $(1,053.7)
======== ====== ====== =========
Income Tax Provision (Benefit)
Current tax expense
U.S. federal............................... $ 230.1 $248.2 $172.3 $ 476.7
State and local............................ 52.6 54.2 50.2 67.1
Foreign.................................... 25.6 35.3 17.5 77.0
-------- ------ ------ ---------
Total current............................ $ 308.3 $337.7 $240.0 $ 620.8
-------- ------ ------ ---------
Deferred tax expense
U.S. federal............................... $ 145.4 $112.6 $ 96.8 $ (371.5)
State and local............................ 16.9 19.9 23.7 (26.4)
Foreign.................................... 42.1 (18.5) 76.0 (7.2)
-------- ------ ------ ---------
Total deferred........................... $ 204.4 $114.0 $196.5 $ (405.1)
-------- ------ ------ ---------
Total provision.......................... $ 512.7 $451.7 $436.5 $ 215.7
======== ====== ====== =========
</TABLE>
The federal statutory tax rate is reconciled to the effective tax rate as
follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
----- ----- ----- ------
<S> <C> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate... 35.00% 35.00% 35.00% (35.00)%
U.S. state and local taxes, net of federal
benefit......................................... 4.05 5.53 7.27 2.50
Non-deductible goodwill.......................... 2.66 4.09 8.50 18.15
Writedown of investments in subsidiary........... 0.25 -- 8.98 4.04
Minority interests............................... 4.68 4.42 3.89 0.91
Deferred tax valuation and other tax reserves.... (0.40) 3.82 0.89 25.25
Gain on sale of foreign subsidiary............... -- -- 2.65 --
Other............................................ (0.22) (1.03) (1.09) 4.62
----- ----- ----- ------
46.02% 51.83% 66.09% 20.47%
===== ===== ===== ======
</TABLE>
The increased impact of non-deductible goodwill on the 1997 consolidated tax
provision is attributable to the asset impairment losses discussed in Note 16.
As a result of the 1997 comprehensive review, the Company increased deferred
tax valuation allowances and other tax reserves.
F-41
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes result from the recognition in different periods of
revenue and expense for tax and financial statement purposes. The primary
deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Deferred tax assets
Reserves not deductible until paid........... $ (651.9) $ (599.7) $ (708.2)
Deferred revenue............................. (28.5) (20.3) (14.0)
Net operating losses and tax credit
carryforwards............................... (266.9) (233.0) (193.7)
Basis difference due to land writedowns...... (24.4) (26.4) (99.1)
Other........................................ (79.9) (85.3) (113.7)
--------- -------- ---------
Subtotal..................................... $(1,051.6) $ (964.7) $(1,128.7)
--------- -------- ---------
Deferred tax liabilities
Depreciation and amortization................ $ 1,076.3 $1,036.9 $ 850.9
Other........................................ 398.9 384.6 281.9
--------- -------- ---------
Subtotal................................... $ 1,475.2 $1,421.5 $ 1,132.8
--------- -------- ---------
Valuation allowance............................ $ 126.1 $ 106.1 $ 208.8
--------- -------- ---------
Net deferred tax liabilities................... $ 549.7 $ 562.9 $ 212.9
========= ======== =========
</TABLE>
The Company's subsidiaries have approximately $13.0 million of alternative
minimum tax credit carryforwards that may be used indefinitely and capital
loss carryforwards of approximately $52.7 million with expiration dates
through 2002. Various subsidiaries have U.S. federal and foreign operating
loss carryforwards of approximately $514 million and state operating loss
carryforwards of approximately $601 million. Foreign operating losses of $481
million may be carried forward indefinitely; the remaining loss carryforwards
have expiration dates through the year 2012. Valuation allowances have been
established for uncertainties in realizing the benefits of tax loss and credit
carryforwards. While the Company expects to realize the deferred tax assets in
excess of the valuation allowances, changes in estimates of future taxable
income or in tax laws could alter this expectation. During 1995, the valuation
allowance increased, primarily for the uncertainty of realizing foreign
operating loss carryforwards. The valuation allowance decreased in 1996 by
approximately $20 million due primarily to the realization of capital loss
carryforwards and adjustments for certain operating loss carryforwards
previously estimated to be unrealizable. In 1997, the valuation allowance
increased approximately $102.7 million, composed of increases to allowances
due to the uncertainty of realizing alternative minimum tax credits, tax
benefits from certain asset impairment writedowns (primarily land), foreign
tax credits, and net operating loss carryforwards, partially offset by
reductions in allowances attributable primarily to foreign net operating loss
carryforwards.
The Company has concluded that its foreign business requires that the
undistributed earnings of its foreign subsidiaries be reinvested indefinitely
outside the United States. If the reinvested earnings were to be remitted, the
U.S. income taxes due under current tax law would not be material.
NOTE 5. BUSINESS ACQUISITIONS AND DIVESTITURES
In 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197.2 million in cash and notes, $17.3 million of debt assumed, 73,809
shares of Company Common Stock and 156,124 shares of WTI common stock.
During 1995, 136 businesses were acquired for $224.3 million in cash and
notes, $77.7 million of debt assumed, and 2.2 million shares of Company Common
Stock.
In 1996, 83 businesses were acquired for $104.8 million in cash and notes,
$39.4 million of debt assumed, and 8.2 million shares of Company Common Stock.
F-42
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, 45 businesses were acquired for $51.4 million in cash and
notes, assumed debt of $17.6 million, and 121,551 shares of Company Common
Stock.
Three of the 1995 acquisitions, which otherwise met pooling of interests
criteria, were not significant in the aggregate and, consequently, prior
period financial statements were not restated. The remaining acquisitions were
accounted for as purchases. The pro forma effect of the acquisitions made
during the four years was not material.
In January 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of CWM that it did not already own for $436.8 million of
convertible subordinated notes. See Note 6 for additional information. In July
1995, the Company acquired all of the approximately 3.1 million shares of Rust
held by the public, for $16.35 per share in cash.
During 1997, the Company divested 24 solid waste operations in North America
for a total price of $288.9 million. The largest of these transactions was the
sale of most of its Canadian operations. Its Waste Management International
plc ("WM International") subsidiary sold substantially all of its remaining
operations in France for approximately $112 million, and its business in Spain
for approximately $16.3 million, and entered into an agreement for the sale
(completed in January 1998) of its Hamm, Germany waste-to-energy plant for
approximately $137.0 million.
In June 1997, the Company announced an offer to acquire, for $15 per share
in cash, all of the approximately 53 million outstanding shares of WTI it does
not already own. The price was increased to $16.50 per share pursuant to a
definitive merger agreement subsequently negotiated with a special committee
of independent WTI directors. The terms of the agreement have been approved by
the WTI special committee and by the Boards of Directors of the Company and
WTI, but the transaction remains subject to the approval of the holders of a
majority of WTI's outstanding shares, other than those held by the Company,
voting on it at a special meeting of WTI stockholders to be held March 30,
1998. Several lawsuits have been filed which seek, among other things, to
enjoin the proposed transaction. The Company believes that it has met the
legal standards applicable to transactions of this type and intends to
vigorously defend itself in these lawsuits.
F-43
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. DEBT
The details relating to debt (including capitalized leases, which are not
material) as of December 31, 1995, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Commercial Paper weighted average interest 5.7% in
1995, 5.8% in 1996 and 6.1% in 1997................ $1,119.4 $ 645.9 $ 356.3
Tailored Rate ESOP Notes, weighted average interest
4.74% in 1995 and 4.58% in 1996.................... 20.0 20.0 --
Notes and debentures, interest 6% to 8.75%, due
1998-2026.......................................... 3,583.3 4,083.3 4,133.3
Solid waste disposal revenue bonds, interest 4.15%
to 7.15%, due 1998-2013............................ 251.1 240.0 274.6
Installment loans and notes payable, interest 5.34%
to 10.6%, due 1998-2020............................ 1,197.8 1,137.1 518.9
Project debt, interest 3.95% to 10.64%, due 1998-
2018............................................... 735.6 833.8 829.0
Other long-term borrowings.......................... 31.5 30.2 20.5
Liquid Yield Option Notes, zero coupon-subordinated,
interest 9%, due 2001 ("LYONs").................... 8.9 7.4 7.4
Liquid Yield Option Notes, zero coupon-subordinated,
interest 6%, due 2012 ("Exchangeable LYONs")....... 54.0 53.4 9.5
Liquid Yield Option Notes, zero coupon-subordinated,
interest 6%, due 2010 ("CWM LYONs")................ 36.8 29.3 27.4
Subordinated Notes, interest 5.75%, due 2005
("Subordinated Notes")............................. 439.6 444.7 450.2
-------- -------- --------
Total debt.......................................... $7,478.0 $7,525.1 $6,627.1
Less--current portion............................... 1,088.0 553.5 1,548.5
-------- -------- --------
Long-term portion................................... $6,390.0 $6,971.6 $5,078.6
======== ======== ========
</TABLE>
The long-term debt as of December 31, 1997, is due as follows:
<TABLE>
<S> <C>
Second year..................................................... $ 434.7
Third year...................................................... 743.2
Fourth year..................................................... 511.3
Fifth year...................................................... 644.4
Sixth year and thereafter....................................... 2,745.0
--------
$5,078.6
========
</TABLE>
The LYONs, Exchangeable LYONs and CWM LYONs are redeemable at the option of
the holders on each June 30 until maturity, and the Exchangeable LYONs and the
CWM LYONs at the option of the Company at any time, at the issue price plus
accrued original issue discount to the date of redemption ($764.31, $429.86
and $474.09 per security, respectively, at December 31, 1997). Each LYON is
convertible into 34.88 shares of the Company's common stock at any time. The
Exchangeable LYONs and CWM LYONs are convertible as discussed below.
In the Company's acquisition in 1995 of the outstanding CWM shares it did
not already own, the CWM public stockholders received a Subordinated Note,
with a principal amount at maturity of $1,000, for every 81.1 CWM shares held,
with cash paid in lieu of issuance of fractional notes. The notes are
subordinated to all existing and future senior indebtedness of Waste
Management. Each note bears cash interest at the rate of two percent per annum
of the $1,000 principal amount at maturity, payable semi-annually. The
difference between the principal amount at maturity of $1,000 and the $717.80
stated issue price of each note represents the stated discount. At the option
of the holder, each note will be purchased for cash by Waste Management on
March 15,
F-44
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998, and March 15, 2000, at prices of $789.95 and $843.03, respectively.
Accrued unpaid interest to those dates will also be paid. The notes will be
callable by Waste Management on and after March 15, 2000, for cash, at the
stated issue price plus accrued stated discount and accrued but unpaid
interest through the date of redemption. In addition, each note is convertible
at any time prior to maturity into 26.078 shares of Waste Management common
stock, subject to adjustment upon the occurrence of certain events. Upon any
such conversion, Waste Management will have the option of paying cash equal to
the market value of the Waste Management shares which would otherwise be
issuable. As of December 31, 1997, there were 549,404 such notes outstanding
with a maturity value amounting to $549.4 million.
In connection with the Company's 1995 acquisition of the publicly held CWM
shares, CWM LYONs and Exchangeable LYONs which had been convertible into or
exchangeable for CWM shares became convertible into the number of notes
discussed in the preceding paragraph to which the holders would have been
entitled had they converted or exchanged the LYONs immediately prior to the
merger approval. As of December 31, 1997, the CWM LYONs and Exchangeable LYONs
were convertible or exchangeable into 8,332 and 4,695 Subordinated Notes,
respectively. Such Subordinated Notes in turn would be convertible into a
total of 339,718 shares of the Company's common stock.
The securities described above and certain of the Company's other debt
instruments are redeemable at the option of the holders prior to maturity and,
accordingly, those which may be redeemed in 1998 are classified as current in
the accompanying financial statements at December 31, 1997. In prior years,
such borrowings were classified as long-term because the Company had committed
credit facilities in place to refinance them.
The Company has in place committed standby trade receivables sale and
revolving credit facilities totaling $800 million with a group of six banks
led by Chase Manhattan Bank (the "Lenders") for general corporate purposes and
to support the Company's commercial paper program. The Lenders are committed
to fund up to $550 million, if requested by the Company, by purchasing
eligible receivables. Additionally, the Company has a $250 million unsecured
revolving credit agreement with the Lenders. Both facilities were put in place
in December 1997 and expire June 30, 1998. The facilities provide for
commitment fees ranging from 18.75 to 37.5 basis points per annum and interest
rates tied to prime or LIBOR plus a margin. Under the terms of the revolving
credit agreement as amended, the Company is required to maintain net worth of
$1.0 billion and consolidated debt (as defined in the agreement) not to exceed
3.5 times earnings (as defined in the agreement) before interest, taxes,
depreciation and amortization for the preceding four calendar quarters. As of
December 31, 1997, the Company was in compliance with such restrictions. The
Company had not obtained any funds under either facility as of February 24,
1998.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company and certain of its subsidiaries use
derivatives to manage interest rate, currency, commodity (fuel) and equity
price risk. The Company's policy is to use derivatives for risk management
purposes only, and it does not enter into such contracts for trading purposes.
The Company enters into derivatives only with counterparties which are
financial institutions having credit ratings of at least A- or A3, to minimize
credit risk. The amount of 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 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
F-45
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
recorded on the balance sheet or marked to market. As of December 31, 1997,
interest rate agreements in notional amounts and with terms as set forth in
the following table were outstanding:
<TABLE>
<CAPTION>
NOTIONAL DURATION OF
CURRENCY AMOUNT RECEIVE PAY AGREEMENTS
-------- ----------- -------- ----- ---------------
<S> <C> <C> <C> <C>
Hong Kong Dollar..................... 100 million Floating Fixed Jan '96-Jul '98
Italian Lira......................... 98 billion Floating Fixed Mar '96-Mar '99
German Deutschemark.................. 150 million Floating Fixed Mar '96-Jan '00
Dutch Guilder........................ 115 million Floating Fixed Nov '96-Jan '00
U.S. Dollar.......................... 24 million Floating Fixed Apr '97-Dec '12
</TABLE>
Currency Agreements. From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek to mitigate the impact
of translation on foreign earnings and income from foreign investees.
Typically these have taken the form of purchased put options or collars. The
Company receives or pays, based on the notional amount of the option, the
difference between the average exchange rate of the hedged currency against
the base currency and the average (strike price) contained in the option.
Complex instruments involving multipliers or leverage are not used. Although
the purpose for using such derivatives is to mitigate currency risk, they do
not qualify for hedge accounting under generally accepted accounting
principles and accordingly, must be adjusted to market value at the end of
each accounting period with gains or losses included in sundry income. There
were no currency derivatives of this type outstanding at December 31, 1997.
The Company sometimes also uses foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and
there is a high probability that the transaction will occur. At December 31,
1997, a subsidiary had sold Italian Lira forward for delivery in 1998 to hedge
foreign exchange exposure on a specific transaction. The amount was not
material to the consolidated financial statements, and any gain or loss will
be included in the measurement of the identified transaction.
Commodity Agreements. The Company utilizes derivatives to seek to mitigate
the impact of fluctuations in the price of fuel used by its vehicles.
Quantities hedged do not exceed anticipated fuel purchases in any period.
Gains or losses are recognized in operating expenses, as cost of fuel
purchases, when paid or received. The primary instruments used are collars,
swaps and swaptions. Collars consist of the purchase of call options along
with a corresponding sale of put options at a lower price, with the effect of
establishing a "cap" and a "floor" with respect to the price of specified
quantities of fuel. A swap is an agreement with a counterparty whereby the
Company pays a fixed price and receives a floating price for specified
quantities during a given period. In a swaption, the Company is paid a premium
by the counterparty for the right, but not the obligation, at the end of the
option period (usually 90 to 180 days) to enter into a swap with respect to a
specified quantity in a given period in the future. The following table
summarizes the Company's position in crude oil derivatives at December 31,
1997:
<TABLE>
<CAPTION>
CONTRACT
TYPE QUANTITY PERIOD
---- ---------------- --------
<S> <C> <C>
Collars......................................... 1.2 million bbls 1998
Collars......................................... 2.0 million bbls 1999
Collars......................................... 1.0 million bbls 2000
Swaps........................................... 0.5 million bbls 2000
Swaptions (exercisable in 1998)................. 0.5 million bbls 2000
</TABLE>
F-46
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equity Investments. The Company occasionally acquires common stock that it
needs to hold for a period of time. To mitigate its exposure to fluctuations
in the market price of such investments during the holding period, the Company
sometimes enters into hedging arrangements consisting of put options or
collars. Changes in the intrinsic value of such instruments are recorded in
stockholders' equity if the underlying stock is classified as "available for
sale" and in sundry income if it is classified as "trading." The offsetting
change in the value of the derivative is included in short term investments on
the balance sheet. At December 31, 1997, the Company had outstanding a collar,
which expired in 1998, on an investment in a publicly traded equity security.
The market price of the security was in excess of the cap value of the collar
at both December 31 and upon expiration, and accordingly, the Company
delivered the shares in exchange for the cap price, with no gain or loss
recognized in 1998.
See Note 10 for a discussion of the Company's sale of put options in
connection with its authorized stock repurchase program.
NOTE 8. ENVIRONMENTAL COSTS AND 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 environmental 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 estimated operating life of
disposal sites as airspace is consumed. Such costs for U.S. landfills are
estimated based on the technical requirements of the Subtitle C and D
regulations of the U.S. Environmental Protection Agency or the applicable
state requirements, whichever are stricter, and include such items as final
cap and cover on the site, methane gas and leachate management, and
groundwater monitoring. Such costs for foreign landfills are estimated based
on compliance with local laws, regulations and customs.
The Company has also established procedures to evaluate its potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste, including 89 sites listed on the 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.
The Company routinely reviews and evaluates sites requiring remediation,
including NPL sites, giving consideration to the nature (e.g., owner,
operator, transporter, or generator), and the extent (e.g., amount and nature
of waste hauled to the location, number of years of site operation by the
Company, or other relevant factors) of the Company's alleged connection with
the site, the accuracy and strength of evidence connecting the Company to the
location, the number, connection and financial ability of other named and
unnamed potentially responsible parties ("PRPs"), and the nature and estimated
cost of the likely remedy. Cost estimates are based on management's judgment
and experience in remediating such sites for the Company as well as for
unrelated parties, information available from regulatory agencies as to costs
of remediation, and the number, financial resources and relative degree of
responsibility of other PRPs who are jointly and severally liable for
remediation of a specific site, as well as the typical allocation of costs
among PRPs. These estimates are sometimes a range of possible outcomes. In
such cases, the Company provides for the amount within the range which
constitutes its best estimate. If no amount within the range appears to be a
better estimate than any other amount, then the Company provides for the
minimum amount within the range in accordance with FAS No. 5. The Company
believes that it is "reasonably possible," as that term is defined in FAS No.
5 ("more than remote but less than likely"), that its potential liability, at
the high end of such ranges, would be approximately $201.9 million higher
F-47
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on a discounted basis in the aggregate than the estimate that has been
recorded in the financial statements as of December 31, 1997.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of
remediation require a number of assumptions and are inherently difficult, and
the ultimate outcome may differ from current estimates. However, the Company
believes that its extensive experience in the environmental services business,
as well as its involvement with a large number of sites, provides a reasonable
basis for estimating its aggregate liability. As additional information
becomes available, estimates are adjusted as necessary. While the Company does
not anticipate that any such adjustment would be material to its financial
statements, it is reasonably possible that technological, regulatory or
enforcement developments, the results of environmental studies, the existence
and ability of other potentially responsible third parties to contribute to
the settlements of such liabilities, or other factors could necessitate the
recording of additional liabilities which could be material.
Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 3% until expected
time of payment and then discounted to present value at 6% (7% at December 31,
1995 and 1996). The portion of the Company's recorded environmental
liabilities that is not inflated or discounted was $440.9 million, $358.5
million and $344.7 million at December 31, 1995, 1996 and 1997, respectively.
Had the Company not discounted any portion of its liability, the amount
recorded would have been increased by approximately $368 million at December
31, 1997.
As of December 31, the Company's liabilities for closure, post-closure
monitoring and environmental remediation costs were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current portion, included in accrued expenses....... $ 140.3 $ 123.9 $ 127.2
Non-current portion................................. 750.7 673.5 840.4
-------- -------- --------
Total recorded.................................... $ 891.0 $ 797.4 $ 967.6
Amount to be provided over remaining life of active
sites, including discount of $332 million in 1995,
$305 million in 1996 and $368 million in 1997
related to recorded amounts........................ 2,817.2 2,666.4 1,919.9
-------- -------- --------
Expected aggregate undiscounted environmental
liabilities........................................ $3,708.2 $3,463.8 $2,887.5
======== ======== ========
</TABLE>
The decline between 1996 and 1997 in the expected aggregate undiscounted
amount is primarily due to a reduction in estimated airspace (see Note 3),
which correspondingly reduces closure and post-closure costs.
Anticipated payments of environmental liabilities at December 31, 1997, are
as follows:
<TABLE>
<S> <C>
1998............................................................. $ 127.2
1999............................................................. 153.5
2000............................................................. 121.7
2001............................................................. 115.0
2002............................................................. 91.3
Thereafter....................................................... 2,278.8
--------
Total.......................................................... $2,887.5
========
</TABLE>
F-48
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the amounts above, at certain sites the Company has perpetual
care obligations aggregating $657,000 per year beginning in 2027.
From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including
purported class actions, on the basis of a Company subsidiary's having owned,
operated or transported waste to a disposal facility which is alleged to have
contaminated the environment or, in certain cases, conducted environmental
remediation activities at such sites. While the Company believes it has
meritorious defenses to these lawsuits, their ultimate resolution is often
substantially uncertain due to a number of factors, and it is possible such
matters could have a material adverse impact on the Company's earnings for one
or more quarters or years.
The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future remedial, defense and tort claim costs at a
number of sites. Carriers involved in these matters have typically denied
coverage and are defending against the Company's claims. While the Company is
vigorously pursuing such claims, it regularly considers settlement
opportunities when appropriate terms are offered. Settlements to date ($50.1
million in 1994, $38.2 million in 1995, $60.3 million in 1996, and $94.3
million in 1997) have been included in operating expenses as an offset to
environmental expenses.
NOTE 9. STOCK OPTIONS
The Company has two stock option plans currently in effect under which
future grants may be issued: the 1997 Waste Management, Inc. Equity Incentive
Plan (the "1997 Plan") and the 1992 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). The plans provide for accelerated vesting
upon a "change in control" of the Company as defined in the plans.
Options granted under the 1997 Plan are generally exercisable in three equal
cumulative installments beginning one year after the date of grant. Options
granted under the Directors' Plan become exercisable in five equal annual
installments beginning six months after the date of grant.
Under the 1997 Plan, non-qualified stock options may be granted at a price
not less than 100% of the market value on the date of grant, for a term of not
more than ten years. Twenty-three million shares of the Company's common stock
were initially reserved for issuance under this plan.
Pursuant to the Directors' Plan, 150,000 shares of the Company's common
stock were initially reserved. Options for a total of 15,000 shares are to be
granted, in five equal annual installments commencing with election to the
Board, to each person who is not an officer or full-time employee of the
Company or any of its subsidiaries.
As part of the acquisitions of the CWM and Rust shares not previously owned
by the Company, as discussed in Note 5, outstanding CWM stock options were
converted into options to acquire approximately 2,873,000 Company shares at a
weighted-average price of $34.90 per share and outstanding Rust stock options
were converted into options to acquire approximately 1,976,000 Company shares
at a weighted-average price of $30.26 per share.
F-49
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The status of the plans, including predecessor plans, replacement plans and
similar plans for employees generally (together "Prior Plans") under which
options remain outstanding, during the four years ended December 31, 1997, was
as follows (shares in thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997
---------------- ---------------- ---------------- ----------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 11,682 $33.63 13,811 $32.24 19,629 $32.04 20,170 $32.33
Granted................. 3,729 26.49 3,117 27.29 4,106 31.90 6,203 31.19
Exercised............... 462 17.77 721 20.47 2,614 25.96 1,138 26.61
Canceled:
Prior plans............ 1,138 33.54 1,427 32.76 1,466 33.63 1,176 36.88
Current plans.......... -- -- -- -- -- -- 2,061 33.01
Additional shares
available for future
grant.................. 6,000 -- -- -- 515 -- 23,000 --
Converted CWM, Rust and
other stock options.... -- -- 4,849 33.01 515 18.07 -- --
Shares no longer
available for future
grant.................. -- -- 2,914 -- -- -- -- --
Outstanding at end of
year................... 13,811 32.24 19,629 32.04 20,170 32.33 21,998 31.99
Options exercisable at
end of year............ 7,210 33.77 9,860 33.57 12,577 33.87 15,055 32.78
Options available for
future grant........... 15,290 -- 4,726 -- 1,044 -- 18,789 --
Weighted average fair
value of options
granted (disclosure not
applicable for 1994) .. -- N/A -- $ 9.60 -- $10.53 -- $10.23
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
---------------------------- ----------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ ------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$15.71-$17.16.................... 78 5.2 years $16.18 75 $16.19
21.39- 29.87.................... 5,990 6.0 years 26.74 4,940 26.65
30.05- 39.27.................... 13,950 6.6 years 32.51 8,061 33.72
$40.10-$61.03.................... 1,980 3.2 years 44.90 1,979 44.89
------ ------
21,998 6.1 years $31.99 15,055 $32.78
====== ======
</TABLE>
As permitted by FAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to account for its employee stock option plans
under Accounting Principles Board Opinion No. 25. Accordingly, no compensation
cost has been recognized for grants of stock options. Had compensation cost
been determined under FAS No. 123, the Company's net income and income per
share would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Net income (loss)-
As reported........................................ $340.1 $(39.3) $(1,176.1)
Pro forma.......................................... 336.1 (50.4) (1,194.3)
Basic income (loss) per share-
As reported........................................ $ 0.70 $(0.08) $ (2.52)
Pro forma.......................................... 0.69 (0.10) (2.57)
Diluted income (loss) per share-
As reported........................................ $ 0.70 $(0.08) $ (2.52)
Pro forma.......................................... 0.69 (0.10) (2.57)
</TABLE>
F-50
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because FAS No. 123 has not been applied to options granted prior to January
1, 1995, this pro forma disclosure may not be indicative of future results.
The fair value of options granted is estimated at the date of grant using an
option pricing model substantially equivalent to the Black-Scholes model with
the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate.................................... 7.19% 6.25% 6.71%
Dividend yield............................................. 2% 2% 2%
Expected volatility........................................ 25.17% 25.17% 25.17%
Expected life in years..................................... 7 7 7
</TABLE>
Commencing in 1996, the Company also made grants of restricted stock.
Compensation expense for grants of restricted shares is recognized ratably
over the vesting period (generally five to ten years) and amounted to $0.1
million and $2.4 million in 1996 and 1997, respectively. Unamortized
compensation expense related to grants of restricted stock was $11.1 million
at December 31, 1997.
NOTE 10. CAPITAL STOCK
The Board of Directors has the authority to create and issue up to 50
million shares of preferred stock, $1.00 par value per share, at such time or
times, in such series with such designations, preferences and relative
participating, optional or other special rights and qualifications,
limitations or restrictions thereof as it may determine. No shares of the
preferred stock have been issued.
The Boards of Directors of Waste Management and WTI have authorized their
respective companies to repurchase shares of their own common stock (up to 50
million shares in the case of Waste Management and 30 million shares in the
case WTI) in the open market, in privately negotiated transactions, or through
issuer tender offers. Both authorizations replaced prior common stock
repurchase authorizations. Waste Management repurchased 30 million shares
through a "Dutch auction" tender offer in the second quarter but has not
repurchased any other shares in 1997 and does not expect to conduct any
repurchases in 1998. WTI repurchased 5.1 million shares in the first six
months of 1997 but suspended its repurchase activity following the Waste
Management offer to acquire its remaining public shares.
During 1994 through 1996, the Company sold put options on 42.3 million
shares of its common stock. The put options gave the holders the right at
maturity to require the Company to repurchase shares of its common stock at
specified prices. Proceeds from the sale of put options were credited to
additional paid-in capital. The amount the Company would be obligated to pay
to repurchase shares of its common stock if all outstanding put options were
exercised was reclassified to a temporary equity account. In the event the
options were exercised, the Company had the right 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.
Options on 32.5 million shares expired unexercised, as the price of the
Company's stock was in excess of the strike price at maturity. The Company
repurchased 3.1 million shares of stock at a cost of $107.5 million, and 6.7
million options were settled for cash of $13.6 million. There were no put
options outstanding at December 31, 1997.
F-51
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. EARNINGS PER SHARE
In February 1997, the FASB issued FAS No. 128, "Earnings Per Share" ("EPS"),
which supersedes 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 by 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.
Basic and Diluted (1997 diluted computations not shown as all potentially
issuable common shares are antidilutive) EPS from continuing operations are
computed as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Basic EPS
Income from continuing operations as
reported.................................... $601.5 $419.9 $224.0 $(1,269.3)
Average common shares outstanding............ 483.7 485.3 489.2 466.6
------ ------ ------ ---------
Basic EPS from continuing operations......... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
====== ====== ====== =========
Diluted EPS
Income from continuing operations as
reported.................................... $601.5 $419.9 $224.0
After tax interest on Subordinated Notes and
LYONs....................................... 0.6 9.1 --
------ ------ ------
Adjusted income from continuing operations... $602.1 $429.0 $224.0
------ ------ ------
Average common shares outstanding.............. 483.7 485.3 489.2
Add effect of dilutive securities-
Stock options, unvested restricted stock and
put options................................. 0.4 0.6 0.8
Subordinated Notes........................... -- 14.4 --
LYONs........................................ 0.7 -- --
------ ------ ------
Adjusted average shares.................... 484.8 500.3 490.0
------ ------ ------
Diluted EPS from continuing operations......... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
====== ====== ====== =========
</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 Subordinated Notes or LYONs in 1996, because their effect is
antidilutive. In 1997 the Company had a loss from continuing operations and,
accordingly, no adjustment is made to Basic EPS because all potentially
issuable common shares would be antidilutive. At December 31, 1997, there were
37.4 million common shares potentially issuable with respect to stock options,
restricted shares and convertible debt, which could dilute Basic EPS in the
future. During 1997, the Company issued 1.2 million shares upon exercise of
stock options and conversion of debt.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases many of its operating and office facilities for various
terms. Rents charged to costs and expenses in the Consolidated Statements of
Income amounted to $177.2 million in 1994, $170.3 million in 1995, $164.5
million in 1996 and $159.7 million in 1997. These amounts include rents under
long-term leases, short-term cancelable leases and rents charged as a
percentage of revenue, but are exclusive of financing leases capitalized for
accounting purposes.
F-52
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The long-term rental obligations as of December 31, 1997, are due as
follows:
<TABLE>
<S> <C>
First year...................................................... $ 140.4
Second year..................................................... 130.1
Third year...................................................... 121.8
Fourth year..................................................... 111.3
Fifth year...................................................... 100.5
Sixth through tenth years....................................... 438.5
Eleventh year and thereafter.................................... 125.7
--------
$1,168.3
========
</TABLE>
The Company's insurance program includes coverage for pollution liability
resulting from "sudden and accidental" releases of contaminants and
pollutants. Management believes that the coverage terms, available limits of
liability, and costs currently offered by the insurance market do not
represent sufficient value to warrant the purchase of "non-sudden and
accidental" pollution liability insurance coverage. As such, the Company has
chosen not to purchase risk transfer "non-sudden and accidental" pollution
liability insurance coverage. To satisfy existing government requirements, the
Company has secured non-risk-transfer pollution liability insurance coverage
in amounts believed to be in compliance with federal and state law
requirements for "non-sudden and accidental" pollution. The Company must
reimburse the insurer for losses incurred and covered by this insurance
policy. In the event the Company continues not to purchase risk transfer "non-
sudden and accidental" pollution liability insurance coverage, net income
could be adversely affected in the future if "non-sudden and accidental"
pollution losses should occur.
The Company has issued or is a party to approximately 3,370 bank letters of
credit, performance bonds and other guarantees. Such financial instruments
(averaging approximately $669,000 each), including those provided for
affiliates and not otherwise recorded, are given in the ordinary course of
business. A substantial portion of these performance bonds are issued by a
wholly-owned insurance company subsidiary, the sole business of which is to
issue such bonds to customers of the Company and its subsidiaries.
Approximately $277.7 million (at fair market value) of Company assets have
been contributed to this subsidiary to meet regulatory minimum capital
requirements. Because virtually no claims have been made against these
financial instruments in the past, management does not expect these
instruments will have a material adverse effect on the consolidated financial
position or results of operations of the Company.
During the first quarter of 1995, WM International received an assessment
from the Swedish Tax Authority of approximately 417 million Krona
(approximately $53 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 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
unforseeable 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.
F-53
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1994, the U.S. Supreme Court ruled that state and local governments
may not constitutionally restrict the free movement of trash in interstate
commerce through the use of regulatory flow control laws. Such laws typically
involve a local government specifying a jurisdictional disposal site for all
solid waste generated within its borders. Since the ruling, several decisions
of state or federal courts have invalidated regulatory flow control schemes in
a number of jurisdictions. Other judicial decisions have upheld non-regulatory
means by which municipalities may effectively control the flow of municipal
solid waste. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can
be no assurance that such alternatives to regulatory flow control will in
every case be found to be lawful or that such legislation will be enacted into
law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse affect on 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 systems at certain
trash-to-energy facilities owned or leased by WTI will be required to be
modified to comply with more stringent air pollution control standards adopted
by the United States Environmental Protection Agency in December 1995 for
municipal waste combusters. The compliance dates will vary by facility, but
all affected facilities will be required to be in compliance with the new
rules by the end of the year 2000. Currently available technologies will be
adequate to meet the new standards. The total capital expenditures required
for such modifications are estimated to be in the $180-$220 million range. The
impacted facilities long-term waste supply agreements generally require that
customers pay, based on tonnage delivered, their proportionate share of
incremental capital, financing, and operating costs resulting from changes in
environmental regulations. Customer shares of capital and financing costs are
typically recovered over the remaining life of the waste supply agreements.
Pro rata operating costs are recovered in the period incurred. The Company
currently expects to recover approximately two-thirds of the incremental
expenditures incurred to comply with these stricter air emission standards.
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
F-54
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
believes it has adequately provided for such matters in its financial
statements and does not believe that 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 does not own. The Company has agreed to a merger in whch WTI's
stockholders would receive $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, 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 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 (although the Company has not yet been served)
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
F-55
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
transaction enjoined and to recover unspecified damages. The Company believes
the suit to be without merit and intends to contest it vigorously.
NOTE 13. BENEFIT PLANS
The Company has a qualified defined benefit pension plan for all eligible
non-union domestic employees of Waste Management, CWM and Waste Management of
North America, Inc. ("WMNA"). The benefits are based on the employee's years
of service and compensation during the highest five consecutive years out of
the last ten years of employment. The Company's funding policy is to
contribute annually an amount determined in consultation with its actuaries,
approximately equal to pension expense, except as may be limited by the
requirements of the Employee Retirement Income Security Act. An actuarial
valuation report is prepared for the plan as of September 30 each year and
used, as permitted by FAS No. 87, for the year-end disclosures.
Net periodic pension expense for 1994 through 1997, based on discount rates
of 8.5%, 8.5%, 7.75% and 7.75%, respectively, included the following
components:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service cost-benefits earned during the year.... $ 11.1 $ 11.8 $ 14.0 $ 15.0
Interest cost on projected benefit obligation... 11.5 13.2 14.4 17.1
Expected return on plan assets.................. (12.3) (13.2) (13.8) (17.1)
Net amortization and deferral................... (1.3) -- 1.8 2.8
------ ------ ------ ------
Net periodic pension expense.................. $ 9.0 $ 11.8 $ 16.4 $ 17.8
====== ====== ====== ======
</TABLE>
Assumptions used to determine the plan's funded status and pension expense
for the following year were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................. 7.75% 7.75% 7.25%
Rate of increase in compensation.............................. 4.0% 3.5% 3.5%
Long-term rate of return on plan assets....................... 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the plan's funded status and the amount
recognized in the Company's Consolidated Balance Sheets at December 31, 1995,
1996 and 1997, for its pension plan:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $152.0 million, $182.5 million and
$231.0 million at December 31, 1995, 1996 and
1997, respectively............................... $(167.3) $(199.5) $(248.9)
======= ======= =======
Projected benefit obligations..................... $(191.1) $(223.7) $(284.8)
Plan assets at fair value, primarily common stocks,
bonds and real estate.............................. 149.1 193.7 264.9
------- ------- -------
Plan assets less than projected benefit obligation.. $ (42.0) $ (30.0) $ (19.9)
Unrecognized net loss............................... 47.8 52.6 55.2
Unrecognized overfunding at date of adoption
(January 1, 1985) of FAS No. 87, net of
amortization, being recognized over 15 years....... (6.4) (4.9) (3.3)
Adjustment to recognize minimum liability........... (17.6) (23.5) --
------- ------- -------
Prepaid pension cost (pension liability) included in
the Consolidated Balance Sheets.................... $ (18.2) $ (5.8) $ 32.0
======= ======= =======
</TABLE>
The Company also has a non-qualified Supplemental Executive Retirement Plan
for certain officers of Waste Management, CWM and WMNA, and an ERISA Excess
Plan for non-officer managers of those companies who's eligible compensation
exceeds the ERISA limit (collectively, the "SERP"). The SERP, which is
unfunded, provides eligible executives with defined pension benefits outside
the qualified Waste Management, Inc. Retirement Plan, based on average
earnings and years of service. The SERP is valued each year (at
F-56
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
September 30) by the Company's independent actuaries, using the same
assumptions as used for the qualified plan. The following table sets forth
information relating to the SERP:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested
benefits of $24.5 million, $27.7 million and $36.3
million at December 31, 1995, 1996 and 1997,
respectively........................................ $(24.5) $(33.2) $(41.0)
------ ------ ------
Projected benefit obligation......................... $(29.5) $(37.1) $(44.1)
Plan assets at fair value, primarily contributions made
after the measurement date............................ 0.1 0.1 --
------ ------ ------
Plan assets less than projected benefit obligation..... $(29.4) $(37.0) $(44.1)
Unrecognized net loss.................................. 6.5 11.2 11.8
Unrecognized underfunding at date of adoption of FAS
No. 87, net of amortization, being recognized over 15
years................................................. 2.5 1.7 1.4
Adjustment to recognize minimum liability.............. (4.0) (9.0) (10.1)
------ ------ ------
Liability recorded (in Other Deferred Items)........... $(24.4) $(33.1) $(41.0)
====== ====== ======
</TABLE>
SERP expense for 1994, 1995, 1996 and 1997 included the following
components:
<TABLE>
<CAPTION>
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service cost - benefits earned during the year....... $1.0 $1.1 $1.3 $1.0
Interest............................................. 1.7 2.2 2.2 2.8
Net amortization and deferral........................ 0.8 1.1 1.0 1.1
---- ---- ---- ----
Total expense...................................... $3.5 $4.4 $4.5 $4.9
==== ==== ==== ====
</TABLE>
WM International participates in both defined benefit and defined
contribution retirement plans for its employees in various countries. The
projected benefit obligation, plan assets and unfunded liability of the WM
International defined benefit plans are not material. Other subsidiaries
participate in various multi-employer pension plans covering certain employees
not covered under the Company's pension plan, pursuant to agreements with
collective bargaining units who are members of such plans. These plans are
generally defined benefit plans; however, in many cases, specific benefit
levels are not negotiated with or known by the employer-contributors.
Contributions of $16.1 million, $18.3 million, $16.5 million and $18.6 million
for subsidiaries' defined benefit plans were made and charged to income in
1994, 1995, 1996 and 1997, respectively.
Waste Management, WMNA and CWM provide postretirement health care benefits
to eligible employees, and WTI provides certain postretirement benefits other
than pensions to a limited number of former employees of a manufacturing
business it has sold. The following table analyzes the obligation for
postretirement benefits other than pensions (primarily health care costs),
measured as of December 31 of each year, which is included in other deferred
items on the Consolidated Balance Sheets.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligations:
Retirees............................................. $42.4 $42.2 $43.1
Other fully eligible participants.................... 5.5 6.7 1.5
Other active participants............................ 9.8 10.1 19.9
----- ----- -----
$57.7 $59.0 $64.5
Unrecognized:
Prior service (cost) credit.......................... 0.6 0.3 (3.9)
Gain................................................. 7.9 8.5 8.7
----- ----- -----
$66.2 $67.8 $69.3
===== ===== =====
</TABLE>
F-57
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1998; the rate was assumed
to decrease by 0.5% per year to 6.0% in 2001 and remain at that level
thereafter. Increasing the assumed health care cost trend by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by approximately $4.0 million and the
aggregate of the service and interest cost components of net postretirement
health care cost for 1997 by approximately $0.3 million. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75% in 1995 and 1996 and 7.0% in 1997.
The expense for postretirement health care benefits was as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service cost.......................................... $1.1 $1.1 $0.7 $1.8
Interest.............................................. 3.6 4.3 3.5 4.6
---- ---- ---- ----
Total expense....................................... $4.7 $5.4 $4.2 $6.4
==== ==== ==== ====
</TABLE>
The Company had an Employee Stock Ownership Plan ("1988 ESOP") for all
eligible non-union United States and Canadian employees of Waste Management,
CWM and WMNA. The benefits are based on the employee's years of service and
compensation. The Company contributes each year an amount, if any, determined
by the Board of Directors of the Company. This plan terminated December 31,
1997.
Information concerning the 1988 ESOP is as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expense recorded (contribution)............................ $7.9 $6.7 $6.7 $6.4
==== ==== ==== ====
Interest expense on 1988 ESOP debt......................... $2.0 $1.1 $1.0 $1.0
==== ==== ==== ====
Dividends on unallocated 1998 ESOP shares used by the 1988
ESOP...................................................... $0.8 $0.6 $0.4 $0.2
==== ==== ==== ====
</TABLE>
The Company has a Profit Sharing and Savings Plan ("PSSP") available to
certain employees of Waste Management, Inc., CWM and WMNA. The terms of the
PSSP allow for annual contributions by the Company as determined by the Board
of Directors as well as a match of employee contributions up to $750 per
employee ($500 prior to January 1, 1996). Charges to operations for the PSSP
were $27.3 million in 1994, $24.9 million in 1995, $16.0 million in 1996 and
$17.9 million in 1997. Effective January 1, 1998, the plan was renamed the
"Retirement Savings Plan", the matching contribution formula was increased,
and the discretionary annual contribution was discontinued.
Rust, WTI and WM International also sponsor non-contributory and
contributory defined contribution plans covering both salaried and hourly
employees. Employer contributions are generally based upon fixed amounts of
eligible compensation and amounted to $12.1 million, $13.6 million, $12.4
million and $19.1 million during 1994, 1995, 1996 and 1997, respectively.
During 1994, the Company established an Employee Stock Benefit Trust and
sold 12.6 million shares of treasury stock to the Trust in return for a 30-
year, 7.33% note with interest payable quarterly and principal due at
maturity. The Company has agreed to contribute to the Trust each quarter funds
sufficient, when added to dividends on the shares held by the Trust, to pay
interest on the note as well as principal outstanding at maturity. At the
direction of an administrative committee comprised of Company officers, the
trustee will use the shares or proceeds from the sale of shares to pay
employee benefits, and to the extent of such payments by the Trust, the
Company will forgive principal and interest on the note. The shares of common
stock issued to the Trust are not considered to be outstanding in the
computation of earnings per share until the shares are utilized to fund
obligations for which the trust was established. Changes in the market value
of these shares are charged or credited to Additional Paid-In Capital.
F-58
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
As discussed in Note 1, the Company believes that all of its material
operations are part of the waste management services industry, and it
currently reports as a single industry segment. Foreign operations in 1997
were conducted in ten countries in Europe, seven countries in the Asia Pacific
region, and Canada, Mexico, Brazil, Israel and Argentina. However, during the
year, WMNA sold most of its Canadian operations, and WM International sold
substantially all of its operations in France, Spain and Austria. WM
International also learned in late September that its joint venture company's
bid to continue to provide waste collection and cleaning services to the City
of Buenos Aires, which represented a substantial portion of its business in
Argentina, was not successful.
Information relating to the Company's continuing operations is set forth in
the following table (operating income is defined as revenue less operating
expenses, special charges, asset impairment loss and selling and
administrative expenses):
<TABLE>
<CAPTION>
UNITED OTHER
STATES EUROPE FOREIGN CONSOLIDATED
--------- -------- ------- ------------
<S> <C> <C> <C> <C>
1994
Revenue............................... $ 6,654.6 $1,322.7 $560.6 $ 8,537.9
========= ======== ====== =========
Operating income...................... $ 1,166.2 $ 184.2 $ 63.2 $ 1,413.6
========= ======== ====== =========
Identifiable assets................... $11,587.0 $3,471.0 $748.3 $15,806.3
========= ======== ====== =========
1995
Revenue............................... $ 7,060.2 $1,527.3 $512.7 $ 9,100.2
========= ======== ====== =========
Operating income...................... $ 1,069.0 $ 2.4 $ 32.8 $ 1,104.2
========= ======== ====== =========
Identifiable assets................... $12,384.1 $3,682.4 $772.7 $16,839.2
========= ======== ====== =========
1996
Revenue............................... $ 7,103.1 $1,539.2 $583.3 $ 9,225.6
========= ======== ====== =========
Operating income...................... $ 972.2 $ (12.8) $ 74.5 $ 1,033.9
========= ======== ====== =========
Identifiable assets................... $12,752.4 $3,503.0 $828.2 $17,083.6
========= ======== ====== =========
1997
Revenue............................... $ 7,222.4 $1,411.8 $554.4 $ 9,188.6
========= ======== ====== =========
Operating income...................... $ (855.1) $ 27.3 $ 65.5 $ (762.3)
========= ======== ====== =========
Identifiable assets................... $10,438.0 $2,613.7 $537.4 $13,589.1
========= ======== ====== =========
</TABLE>
No single customer accounted for as much as 3% of consolidated revenue in
1994, 1995, 1996 or 1997.
WM International operates facilities in Hong Kong which are owned by the
Hong Kong government. The Hong Kong economy has been impacted by the economic
uncertainty associated with many of the countries in the region. High and
volatile interest rates have resulted from speculation regarding its currency.
In addition to Hong Kong, WM International has operations in Indonesia and
Thailand. These countries have experienced illiquidity, volatile currency
exchange rates and interest rates, and reduced economic activity. WM
International, and therefore the Company, will be affected for the foreseeable
future by economic conditions in this region, although it is not possible to
determine the extent of such impact. At December 31, 1997, WM International
had a net investment of $107.5 million in these countries (including Hong
Kong). Pretax income from Hong Kong was $25.7 million in 1997. Income from
Indonesia and Thailand has not been significant to date.
F-59
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. SPECIAL CHARGES
In the first quarter of 1995, in response to the continuing deterioration of
the chemical waste services market, CWM realigned its organization, and in
connection therewith, recorded a special charge of $140.6 million before tax
($91.4 million after tax). The charge related primarily to a write-off of the
investment in facilities and technologies that CWM abandoned because they did
not meet customer service or performance objectives, but also includes $22.0
million of future cash payments for rents under non-cancelable leases,
guaranteed bank obligations of a joint venture, and employee severance. The
majority of the cash expenditures were paid in 1995, although certain of the
non-cancelable leases extend through the year 2002.
In the fourth quarter of 1995, WM International recorded a special charge of
$194.6 million ($152.4 million after tax) primarily related to the actions it
had decided to take to sell or otherwise dispose of non-core businesses and
investments, as well as core businesses and investments in low potential
markets, abandon certain hazardous waste treatment and processing
technologies, and streamline its country management organization. The charge
reduced the Company's income by approximately $153.3 million before tax
($111.0 million after tax). The charge included $34.3 million of cash payments
for employee severance and rents under non-cancelable leases. Approximately
$11.2 million of the cash costs were paid in 1995. The majority of the balance
was paid in 1996, although certain rent payments on abandoned leased
facilities continue into the future.
In the fourth quarter of 1996, WM International recorded a provision of
$77.0 million after tax related to the sale of its investment in Wessex and a
charge of $169.5 million after tax to revalue its investments in France,
Austria and Spain in contemplation of exiting all or part of these markets or
forming joint ventures. The charge also included the write-off of an
investment in a hazardous waste disposal facility in Germany because
regulatory changes adversely affected its volumes. These charges, primarily of
a non-cash nature, reduced the Company's income by $213.6 million after tax.
Also, in the fourth quarter of 1996, Waste Management and CWM recorded
pretax charges of $154.1 million ($100.2 million after tax) for reengineering
their finance and administrative functions and increasing reserves for certain
litigation, including a dispute involving the computation of royalties on the
Emelle, Alabama, hazardous waste landfill. In December 1996, a federal court
in Memphis, Tennessee, held CWM liable for approximately $100.3 million in
damages to the former owners of the Emelle site. CWM is appealing the
decision. Any settlement of the Emelle litigation would be a cash payment, but
the timing is not currently estimable. The balance of the charge is primarily
non-cash, with $13.4 million of cash-related items paid mostly in 1997.
In 1997, the Company recorded a special charge of $41.6 million (primarily
in the fourth quarter) for severance. Employees terminated were primarily
field operating management and related support personnel. Approximately $5.9
million of the severance had been paid by December 31, 1997, with the balance
being paid in 1998 and thereafter.
WM International also recorded a special charge in 1997 ($104.4 million
before tax and minority interest) to reflect the costs of demobilization in
Argentina following loss of the contract renewal for the City of Buenos Aires,
divestiture or closure of underperforming businesses, primarily in Italy and
Germany and the writeoff of costs of projects, primarily in Germany, which it
decided to no longer pursue. The charge included $14.8 million of severance,
primarily related to operating personnel in Buenos Aires and with closed or
divested businesses in Italy and Germany. These terminations are expected to
occur and the severance paid in 1998.
F-60
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. ASSET IMPAIRMENT LOSS
As a result of the comprehensive review of operating assets and investments
discussed in Note 2, the Company recorded an impairment loss of $1,401.2
million in the fourth quarter of 1997, and restated prior financial statements
to retroactively recognize impairment losses in earlier periods. Fair values
were determined for landfills, hazardous waste facilities, recycling
investments and other facilities, primarily based on future cashflow
projections discounted back using discount rates appropriate for the risks
involved with the specific assets. For surplus real estate, market opinions
and appraisals were used. In determining fair values for abandoned projects
and vehicles to be sold, recoverable salvage values were determined using
market estimates. The losses related to the following asset categories:
<TABLE>
<CAPTION>
IMPAIRMENT
LOSS
----------
<S> <C>
1994--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 22.4
Abandonment of other projects, primarily vehicle on board computer
systems projects................................................. 7.3
Surplus real estate............................................... 4.3
--------
Total........................................................... $ 34.0
========
1995--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 48.2
Hazardous waste facility costs, resulting from continuing market
deterioration, increased competition, excess capacity and
changing regulation.............................................. 2.2
Other, primarily abandoned computer systems project costs......... 1.9
Surplus real estate............................................... 1.5
--------
Total........................................................... $ 53.8
========
1996--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 13.4
Recycling investments, related primarily to pricing, overcapacity
and competitive factors.......................................... 47.8
Other, primarily equipment to be scrapped......................... 2.0
Surplus real estate............................................... 1.5
--------
Total........................................................... $ 64.7
========
1997--
Landfills, related primarily to management decisions to abandon
expansions and development projects due to political or
competitive factors, which will result in closure earlier than
previously expected (includes $233.8 million for hazardous waste
sites)........................................................... $ 578.6
Hazardous waste facilities, resulting from continuing market
deterioration, increased competition, excess capacity and
changing regulation.............................................. 131.4
Goodwill, primarily related to landfills and hazardous waste
facilities impaired (includes $411 million related to hazardous
waste business).................................................. 433.4
Write-down of WTI long-lived assets, including $47.1 million
related to a wood waste burning independent power production
facility......................................................... 57.2
Recycling investments, related primarily to continued pricing,
overcapacity and competitive factors............................. 21.5
Write-down to estimated net realizable value of trucks to be sold
as a result of new fleet management policy (Note 2).............. 70.9
Write-down to estimated net sales proceeds of business to be sold
(Note 17)........................................................ 122.2
Abandoned equipment and facilities................................ 26.9
Surplus real estate............................................... 38.2
--------
Total........................................................... $1,480.3
========
</TABLE>
F-61
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impaired assets to be sold are primarily businesses to be sold (see Note 17)
and surplus real estate. The carrying amount of such real estate was $73.3
million at December 31, 1997. The Company is currently marketing these
properties; however, since the disposal date cannot be accurately estimated,
these assets are classified as long-term assets in the accompanying balance
sheet at December 31, 1997.
NOTE 17. DISCONTINUED OPERATIONS
In the fourth quarter of 1995, the Rust Board of Directors approved a plan
to sell or otherwise discontinue Rust's process engineering, construction,
specialty contracting and similar lines of business. During the second quarter
of 1996, the sale of the industrial process engineering and construction
businesses, based in Birmingham, Alabama, was completed.
During the fourth quarter of 1996, WTI sold its water process systems and
equipment manufacturing businesses. WTI had also entered into an agreement to
sell its water and wastewater facility operations and privatization business,
which was sold in 1997. As of September 30, 1996, Rust sold its industrial
scaffolding business and began implementing plans to exit its remaining
international engineering and consulting business. Waste Management recorded a
fourth-quarter provision for loss of $360.0 million before tax and minority
interest in connection with the planned divestiture of these businesses, and
others subsequently reclassified to continuing operations (see discussion
below).
The discontinued businesses have been segregated and the accompanying
consolidated balance sheets, statements of income and related footnote
information have been restated. Revenues from the discontinued businesses were
$1,186.5 million in 1994, $1,511.0 million in 1995, $734.5 million for 1996
and $84.8 million in 1997. The decreases in revenue during the periods
primarily reflect the sales of certain of the discontinued businesses. Results
of their operations in 1997 were not material and were included in the reserve
for loss on disposition provided previously.
The following table summarizes the assets and liabilities as of December 31,
1995 and 1996, which are reflected on the consolidated balance sheet as net
assets of discontinued operations. The Company had no operations classified as
discontinued as of December 31, 1997.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current assets.......................................... $ 445.1 $ 74.7
Property and equipment and other noncurrent assets...... 570.4 173.8
Current liabilities..................................... (306.7) (47.5)
Noncurrent liabilities.................................. (90.8) (258.9)
------- -------
Net assets (liabilities) of discontinued operations... $ 618.0 $ (57.9)
======= =======
</TABLE>
At December 31, 1996, management also classified as discontinued and planned
to sell Rust's domestic environmental and infrastructure engineering and
consulting business and CWM's high organic waste fuel blending services
business. In 1997, management reclassified the CWM business back into
continuing operations, and classified certain of its sites as operations held
for sale. The Rust disposition was not completed within one year, and
accordingly this business has been reclassified back into continuing
operations, as operations held for sale, at December 31, 1997, in accordance
with generally accepted accounting principles, although management is
continuing its efforts to market its investment in this business. As these
businesses were reclassified to continuing operations, the remaining provision
for loss on disposal ($95 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
F-62
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of $122.2 million was recorded in continuing operations. Prior year financial
statements have been restated. Information regarding the businesses
reclassified as continuing operations held for sale is as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Results of operations--
Revenue...................................... $373.0 $368.2 $361.5 $ 350.4
Income (loss) before tax after minority
interest.................................... 24.1 25.1 0.3 (9.9)
Net income (loss)............................ $ 12.1 $ 13.9 $ 0.1 $ (6.7)
------ ------ ------ -------
Condensed balance sheet--
Current assets...................................... $125.3 $147.5 $ 118.6
Property and equipment and other noncurrent assets.. 163.7 162.0 164.7
Current liabilities................................. (39.0) (44.2) (41.0)
Noncurrent liabilities.............................. (14.6) (37.9) (161.2)
------ ------ -------
Net assets........................................ $235.4 $227.4 $ 81.1
====== ====== =======
</TABLE>
The net assets are included in Net Assets of Continuing Businesses Held for
Sale in the accompanying balance sheet. At December 31, 1997, this caption
also includes $73.3 million of surplus real estate which the Company is
actively marketing.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and commonly accepted valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company or
holders of the instruments could realize in a current market exchange. The use
of different assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The fair value estimates presented
herein are based on information available to management as of December 31,
1995, 1996, and 1997. Such amounts have not been revalued since those dates,
and current estimates of fair value may differ significantly from the amounts
presented herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- ------------------ ------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nonderivatives--
Assets--
Cash and cash
equivalents.......... $ 169.5 $ 169.5 $ 323.3 $ 323.3 $ 132.8 $ 132.8
Receivables........... 1,632.1 1,632.1 1,660.8 1,660.8 1,547.2 1,547.2
Short-term
investments.......... 12.2 12.2 319.3 319.3 59.3 59.3
Liabilities--
Commercial paper...... 1,119.4 1,120.2 645.9 646.2 356.3 356.5
Project debt.......... 735.6 880.6 833.8 896.7 829.0 885.2
Liquid Yield Option
Notes and
Subordinated Notes... 539.3 576.0 534.8 602.7 494.5 512.1
Other borrowings...... 5,083.8 5,284.5 5,510.6 5,610.0 4,947.3 5,063.4
Derivatives relating to
debt................... -- (0.1) -- (4.8) -- (3.3)
Other derivatives--
Assets................ -- -- -- 2.8 -- --
Liabilities........... (0.1) (16.6) -- (0.1) -- (0.3)
Letters of credit,
performance bonds and
guarantees............. -- -- -- -- -- --
</TABLE>
F-63
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash, Receivables and Investment. The carrying amounts of these items are a
reasonable estimate of their fair value.
Liabilities. For debt issues that are publicly traded, fair values are based
on quoted market prices or dealer quotes. Due to the short-term nature of the
ESOP notes, their carrying value approximates fair value. Interest rates that
are currently available to the Company for issuance of debt with similar terms
and remaining maturities are used to estimate fair value for debt issues that
are not quoted on an exchange.
Derivatives. The fair value of derivatives generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at
December 31, thereby taking into account unrealized gains and losses. Dealer
quotes are available for most of the Company's derivatives. Unrealized gains
and losses are shown as assets and liabilities, as offsetting such amounts
against the related nonderivative instrument is permitted only pursuant to a
right of setoff or master netting agreement.
Off-Balance-Sheet Financial Instruments. In the normal course of business,
the Company is a party to financial instruments with off-balance-sheet risk,
such as bank letters of credit, performance bonds and other guarantees, which
are not reflected in the accompanying consolidated balance sheets. Such
financial instruments are to be valued based on the amount of exposure under
the instrument and the likelihood of performance being required. In the
Company's experience, virtually no claims have been made against these
financial instruments. Management does not expect any material losses to
result from these off-balance-sheet instruments and, therefore, is of the
opinion that the fair value of these instruments is zero.
NOTE 19. SUBSEQUENT EVENTS
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 0.725 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 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 (although the Company has not yet been served) 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 WM
International may be accelerated and become payable with three months notice.
At December 31, 1997, this debt totalled approximately $209 million, however,
by March 17, 1998, it had been reduced to $71 million. In addition, 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 $315 million in the business at December 31, 1997.
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.
F-64
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 15, 1998, approximately $2.5 million face amount of Subordinated
Notes (see Note 6) were submitted for redemption by the holders in accordance
with their terms. The next optional redemption date is March 15, 2000, and
accordingly the remaining outstanding Subordinated Notes will be classified as
long-term as of March 31, 1998.
In connection with the planned purchase of the remaining publicly held WTI
shares, the Company has entered into a commitment with the Chase Manhattan
Bank ("Chase") whereby Chase, along with other financial institutions, has
committed, subject to the satisfaction of certain conditions, to provide new
credit facilities in the amount of $1.1 billion. The new credit facilities,
which will 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), will provide the funding needed to complete the WTI transaction and
replace the Company's existing $250 million revolving credit facility.
Additionally, the termination date of the Company's $550 million standby trade
receivables sale agreement will be extended from June 30, 1998, to December
31, 1998.
NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is an analysis of certain items in the Consolidated Statements
Income, as restated and reclassified (see Note 2), by quarter for 1995, 1996
and 1997. Sum of per share amounts for the quarters does not always equal the
full year amount due to rounding and, in the case of Diluted EPS, the method
of calculation prescribed by FAS No. 128. See Note 15 for a discussion of
special charges, Note 16 for a discussion of the asset impairment losses, and
Note 17 for a discussion of operations discontinued during 1995 and 1996.
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- ------------------- -------------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,151.8 $2,164.3 $2,326.3 $2,339.2 $2,322.3 $2,334.2 $2,252.6 $2,262.5
Operating expenses...... 1,485.3 1,542.4 1,603.4 1,671.2 1,589.9 1,645.9 1,542.3 1,655.4
Asset impairment loss... -- 33.7 -- 3.5 -- 3.8 -- 12.8
Special charges......... 140.6 141.0 -- -- -- -- 194.6 194.6
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit......... $ 525.9 $ 447.2 $ 722.9 $ 664.5 $ 732.4 $ 684.5 $ 515.7 $ 399.7
Selling and
administrative
expenses............... 245.2 250.5 256.3 275.1 251.8 270.6 251.6 295.6
Interest, net........... 97.7 108.5 97.4 113.7 96.2 111.3 93.4 95.5
Minority interest....... 26.1 26.0 37.0 37.0 34.7 34.7 (15.9) (16.4)
Sundry income........... (16.9) (22.1) (14.1) (29.2) (23.4) (39.0) (22.1) (187.5)
Provision for income
tax.................... 82.6 64.4 143.2 126.8 152.3 132.2 105.6 128.3
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 91.2 $ 19.9 $ 203.1 $ 141.1 $ 220.8 $ 174.7 $ 103.1 $ 84.2
Discontinued operations. 10.0 7.0 16.0 7.9 13.1 7.6 (53.4) (17.6)
Accounting changes...... -- (84.7) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ 101.2 $ (57.8) $ 219.1 $ 149.0 $ 233.9 $ 182.3 $ 49.7 $ 66.6
======== ======== ======== ======== ======== ======== ======== ========
Basic income (loss) per
share-
Continuing operations.. $ 0.19 $ 0.04 $ 0.42 $ 0.29 $ 0.45 $ 0.36 $ 0.21 $ 0.17
Discontinued
operations............ 0.02 0.01 0.03 0.02 0.03 0.02 (0.11) (0.03)
Accounting changes..... -- (0.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.21 $ (0.12) $ 0.45 $ 0.31 $ 0.48 $ 0.38 $ 0.10 $ 0.14
======== ======== ======== ======== ======== ======== ======== ========
Diluted income (loss)
per share-
Continuing operations.. $ 0.19 $ 0.04 $ 0.41 $ 0.29 $ 0.44 $ 0.35 $ 0.21 $ 0.17
Discontinued
operations............ 0.02 0.01 0.03 0.01 0.03 0.02 (0.11) (0.03)
Accounting changes..... -- (0.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.21 $ (0.12) $ 0.44 $ 0.30 $ 0.47 $ 0.37 $ 0.10 $ 0.14
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-65
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- ------------------- -------------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,144.5 $2,144.5 $2,331.0 $2,331.0 $2,372.7 $2,372.7 $2,338.8 $2,377.4
Operating expenses...... 1,494.8 1,532.7 1,619.3 1,701.4 1,630.5 1,716.8 1,628.2 1,709.9
Asset impairment loss... -- 0.1 -- 11.7 -- 1.7 -- 51.2
Special charges......... -- -- -- -- -- -- 471.6 370.7
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit......... $ 649.7 $ 611.7 $ 711.7 $ 617.9 $ 742.2 $ 654.2 $ 239.0 $ 245.6
Selling and
administrative
expenses............... 245.9 261.8 246.7 259.6 240.4 264.7 246.2 309.4
Interest, net........... 87.5 102.5 87.9 105.3 84.9 111.4 87.8 115.3
Minority interest....... 27.2 26.5 31.4 29.5 32.1 28.3 (33.1) (43.0)
Sundry income........... (17.3) (23.9) (21.4) (21.4) (23.5) (37.7) (23.0) (19.4)
Provision for income
tax.................... 126.2 111.2 149.4 130.8 168.1 132.2 121.4 62.3
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 180.2 $ 133.6 $ 217.7 $ 114.1 $ 240.2 $ 155.3 $ (160.3) $ (179.0)
Discontinued operations. 5.0 4.8 5.3 20.5 5.0 (72.8) (301.0) (215.8)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 185.2 $ 138.4 $ 223.0 $ 134.6 $ 245.2 $ 82.5 $ (461.3) $ (394.8)
======== ======== ======== ======== ======== ======== ======== ========
Basic income (loss) per
share-
Continuing operations.. $ 0.37 $ 0.27 $ 0.44 $ 0.23 $ 0.49 $ 0.32 $ (0.33) $ (0.37)
Discontinued
operations............ 0.01 0.01 0.01 0.04 0.01 (0.15) (0.62) (0.44)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.38 $ 0.28 $ 0.45 $ 0.27 $ 0.50 $ 0.17 $ (0.95) $ (0.81)
======== ======== ======== ======== ======== ======== ======== ========
Diluted income (loss)
per share-
Continuing operations.. $ 0.36 $ 0.27 $ 0.43 $ 0.23 $ 0.48 $ 0.31 $ (0.33) $ (0.37)
Discontinued
operations............ 0.01 0.01 0.01 0.04 0.01 (0.14) (0.62) (0.44)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.37 $ 0.28 $ 0.44 $ 0.27 $ 0.49 $ 0.17 $ (0.95) $ (0.81)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-66
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------
FOURTH
FIRST QUARTER SECOND QUARTER THIRD QUARTER QUARTER
------------------- ------------------- ------------------- ---------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,198.3 $2,205.0 $2,327.3 $2,333.3 $2,351.2 $2,351.2 $ 2,299.1
Operating expenses...... 1,617.8 1,697.5 1,639.2 1,715.5 1,839.2 1,819.5 1,962.9
Asset impairment loss... -- 5.9 -- 46.9 -- 26.2 1,401.2
Special charges......... -- 15.9 -- 0.9 -- 0.9 128.3
-------- -------- -------- -------- -------- -------- ---------
Gross profit........ $ 580.5 $ 485.7 $ 688.1 $ 570.0 $ 512.0 $ 504.6 $(1,193.3)
Selling and
administrative
expenses............... 261.2 249.8 253.8 257.1 266.5 292.2 330.1
Interest, net........... 95.5 102.7 93.6 101.1 92.3 99.7 105.8
Minority interest....... 27.8 27.1 27.9 27.9 30.4 29.4 (39.0)
Sundry income........... (133.9) (135.5) (32.5) (28.1) (8.1) (8.1) 8.4
Provision for income
tax.................... 151.5 127.2 170.1 127.9 67.7 61.6 (101.0)
-------- -------- -------- -------- -------- -------- ---------
Income from continuing
operations............. $ 178.4 $ 114.4 $ 175.2 $ 84.1 $ 63.2 $ 29.8 $(1,497.6)
Discontinued operations. -- 0.6 0.8 7.6 -- 0.2 87.3
Accounting changes...... -- -- -- -- -- -- (2.0)
Extraordinary item...... -- -- -- -- -- -- (0.5)
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)....... $ 178.4 $ 115.0 $ 176.0 $ 91.7 $ 63.2 $ 30.0 $(1,412.8)
======== ======== ======== ======== ======== ======== =========
Basic income (loss) per
share-
Continuing operations. $ 0.37 $ 0.24 $ 0.37 $ 0.18 $ 0.14 $ 0.07 $ (3.29)
Discontinued
operations........... -- -- -- 0.01 -- -- 0.19
Accounting changes.... -- -- -- -- -- -- --
Extraordinary item.... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)..... $ 0.37 $ 0.24 $ 0.37 $ 0.19 $ 0.14 $ 0.07 $ (3.10)
======== ======== ======== ======== ======== ======== =========
Diluted income (loss)
per share-
Continuing operations. $ 0.36 $ 0.23 $ 0.37 $ 0.18 $ 0.14 $ 0.07 $ (3.29)
Discontinued
operations........... -- -- -- 0.01 -- -- 0.19
Accounting changes.... -- -- -- -- -- -- --
Extraordinary item.... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)..... $ 0.36 $ 0.23 $ 0.37 $ 0.19 $ 0.14 $ 0.07 $ (3.10)
======== ======== ======== ======== ======== ======== =========
</TABLE>
F-67
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
($000'S OMITTED)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AS RESTATED)
<TABLE>
<CAPTION>
EFFECT OF
BALANCE CHARGED ACCOUNTS FOREIGN BALANCE
BEGINNING TO WRITTEN CURRENCY END OF
OF YEAR INCOME OFF OTHER(A) TRANSLATION YEAR
--------- ------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
1994--Reserve for doubt-
ful accounts (B)(C).... $57,279 $35,720 $(38,621) $5,072 $ 1,760 $61,210
1995--Reserve for doubt-
ful accounts (C)....... $61,210 $48,914 $(45,224) $1,814 $ 1,213 $67,927
1996--Reserve for doubt-
ful accounts (B)(C).... $67,927 $52,766 $(69,799) $4,374 $ (245) $55,023
1997--Reserve for doubt-
ful accounts (B)(C).... $55,023 $51,691 $(51,406) $ 641 $(2,605) $53,344
======= ======= ======== ====== ======= =======
</TABLE>
- --------
(A) Reserves of companies accounted for as purchases.
(B) Includes reserves for doubtful long-term notes receivable.
(C) Excludes discontinued operations.
F-68
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, COMPANY
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cautionary Statement Concerning Forward-Looking Statements................ 2
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 12
Use of Proceeds........................................................... 19
Price Range of Company Common Stock and Dividend Policy................... 19
Capitalization............................................................ 21
Selected Historical Financial Information................................. 22
Combined Unaudited Pro Forma Condensed Financial Statements............... 24
Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Three Months Ended March 31, 1998............ 32
Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Year Ended December 31, 1997................. 40
Business.................................................................. 56
Description of Capital Stock.............................................. 67
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
20,000,000 SHARES
--------------------------------
[LOGO WASTE MANAGEMENT/SM/]
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
in connection with the distribution of the securities being registered, other
than the underwriting discounts and commissions. All of the amounts shown are
estimates except for the Securities and Exchange Commission filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee................... $184,191
Costs of printing and engraving................................. $100,000
Legal fees and expenses......................................... $100,000
Accounting fees and expenses.................................... $ 20,000
Transfer Agent Fees............................................. $ 10,000
Miscellaneous................................................... $ 10,809
--------
Total....................................................... $425,000
========
</TABLE>
- --------
*To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for payments of unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The Registrant's Restated Certificate of
Incorporation contains such a provision.
Under Article VII of the Registrant's Amended and Restated By-Laws as
currently in effect, as well as under Article TWELFTH of the Registrant's
Restated Certificate of Incorporation, each person who is or was a director or
officer of the Registrant, or who serves or served any other enterprise or
organization at the request of the Registrant, shall be indemnified by the
Registrant to the full extent permitted by the Delaware General Corporation
Law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who, by reason of the fact that such
person is or was a director or officer of such corporation, is made (or
threatened to be made) a party to an action other than one brought by or on
behalf of the corporation, against reasonable expenses (including attorneys'
fees), judgments, fines and settlement payments, if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of such corporation and, in criminal actions, in addition, had
no reasonable cause to believe his conduct was unlawful. In the case of
actions on behalf of the corporation, indemnification may extend only to
reasonable expenses (including attorneys' fees) and only if such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, provided that no such
indemnification is permitted in respect of any claim as to which such person
is adjudged liable to such corporation except to the extent that a court
otherwise provides. To the extent that such person has been successful in
defending any action (even one on behalf of the corporation), he is entitled
to indemnification for reasonable expenses (including attorneys' fees).
The indemnification provided for by the Delaware General Corporation Law is
not exclusive of any other rights of indemnification, and a corporation may
maintain insurance against liabilities for which indemnification is not
expressly provided by the Delaware General Corporation Law. The Registrant has
entered into agreements to indemnify its directors and officers in addition to
the indemnification provided for in the Restated Certificate of Incorporation.
These agreements, among other things, indemnify the Registrant's directors and
officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by such person in
II-1
<PAGE>
any action or proceeding, including any action by or in the right of the
Registrant, on account of services as a director or officer of the Registrant
or as a director or officer of any subsidiary of the Registrant, or as a
director or officer of any other company or enterprise to which the person
provides services at the request of the Registrant.
The Registrant maintains a liability insurance policy providing coverage for
its directors and officers.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1 Form of Purchase Agreement
2 Agreement and Plan of Merger, dated as of March 10, 1998,
by and among USA Waste, Dome Merger Subsidiary and Waste
Management (incorporated by reference to Annex A to the
Joint Proxy Statement/Prospectus contained in the Regis-
tration Statement on Form S-4 of USA Waste Services, Inc.,
Registration No. 333-56113)
4.1(a) Restated Certificate of Incorporation of Registrant, as
amended as of May 24, 1985 (incorporated by reference to
Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1985)
4.1(b) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, recorded May 23, 1986 (incorpo-
rated by reference to Exhibit 4(c) to Registrant's Regis-
tration Statement on Form S-8, Registration No. 33-6265)
4.1(c) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, recorded May 15, 1987 (incorpo-
rated by reference to Exhibit 4.5(d) to Registrant's Reg-
istration Statement on Form S-4, Registration No. 33-
15518)
4.1(d) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, filed May 19, 1989 (incorporated
by reference to Exhibit 3(e) to Registrant's Registration
Statement on Form S-3, Registration No. 33-30190)
4.1(e) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, filed May 18, 1990 (incorporated
by reference to Exhibit 4(h) to Registrant's Registration
Statement on Form S-8, Registration No. 33-35936)
4.1(f) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, filed May 14, 1993 (incorporated
by reference to Exhibit 4(a) to Registrant's Current Re-
port on Form 8-K dated May 14, 1993)
4.1(g) Certificate of Amendment of Restated Certificate of Incor-
poration of Registrant, filed May 9, 1997 (incorporated by
reference to Exhibit 3(a) to Registrant's Current Report
on Form 8-K dated May 9, 1997)
4.1(h) Conformed copy of Restated Certificate of Incorporation of
Registrant, as amended (incorporated by reference to Ex-
hibit 3(b) to Registrant's Current Report on Form 8-K
dated May 9, 1997)
4.2 By-Laws of Registrant, as amended and restated as of No-
vember 4, 1997 (incorporated by reference to Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997)
5 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
regarding legality of the securities being registered
23.1 Consent of Arthur Andersen LLP
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5)
</TABLE>
- --------
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
2. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT, OR AMENDMENT THERETO, TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN OAK BROOK, ILLINOIS ON JUNE 15,
1998.
WASTE MANAGEMENT, INC.
/s/ Robert S. Miller
By: _________________________________
Robert S. Miller
Chairman of the Board and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT, OR AMENDMENT THERETO, HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert S. Miller Director, Chairman of the June 15, 1998
____________________________________ Board and Chief Executive
Robert S. Miller Officer
/s/ Donald F. Flynn Director June 15, 1998
____________________________________
Donald F. Flynn
/s/ Peer Pederson Director June 15, 1998
____________________________________
Peer Pederson
/s/ James R. Peterson Director June 15, 1998
____________________________________
James R. Peterson
/s/ James B. Edwards Director June 15, 1998
____________________________________
James B. Edwards
/s/ H. Jesse Arnelle Director June 15, 1998
____________________________________
H. Jesse Arnelle
/s/ Pastora San Juan Cafferty Director June 15, 1998
____________________________________
Pastora San Juan Cafferty
/s/ Paul M. Montrone Director June 15, 1998
____________________________________
Paul M. Montrone
/s/ Steven G. Rothmeier Director June 15, 1998
____________________________________
Steven G. Rothmeier
/s/ Roderick M. Hills Director June 15, 1998
____________________________________
Roderick M. Hills
/s/ John C. Pope Director June 15, 1998
____________________________________
John C. Pope
/s/ Mark T. Spears Vice President, Controller June 15, 1998
____________________________________ and Principal Accounting
Mark T. Spears Officer
/s/ Donald R. Chappel Vice President, and June 15, 1998
____________________________________ Principal Financial Officer
Donald R. Chappel
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1 Form of Purchase Agreement
2 Agreement and Plan of Merger, dated as of March 10, 1998, by
and among USA Waste, Dome Merger Subsidiary and Waste Manage-
ment (incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus contained in the Registration Statement
on Form S-4 of USA Waste Services, Inc., Registration No. 333-
56113)
4.1(a) Restated Certificate of Incorporation of Registrant, as
amended as of May 24, 1985 (incorporated by reference to Ex-
hibit 4.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1985)
4.1(b) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, recorded May 23, 1986 (incorporated by
reference to Exhibit 4(c) to Registrant's Registration State-
ment on Form S-8, Registration No. 33-6265)
4.1(c) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, recorded May 15, 1987 (incorporated by
reference to Exhibit 4.5(d) to Registrant's Registration
Statement on Form S-4, Registration No. 33-15518)
4.1(d) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, filed May 19, 1989 (incorporated by refer-
ence to Exhibit 3(e) to Registrant's Registration Statement on
Form S-3, Registration No. 33-30190)
4.1(e) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, filed May 18, 1990 (incorporated by refer-
ence to Exhibit 4(h) to Registrant's Registration Statement on
Form S-8, Registration No. 33-35936)
4.1(f) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, filed May 14, 1993 (incorporated by refer-
ence to Exhibit 4(a) to Registrant's Current Report on Form 8-
K dated May 14, 1993)
4.1(g) Certificate of Amendment of Restated Certificate of Incorpora-
tion of Registrant, filed May 9, 1997 (incorporated by refer-
ence to Exhibit 3(a) to Registrant's Current Report on Form 8-
K dated May 9, 1997)
4.1(h) Conformed copy of Restated Certificate of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit
3(b) to Registrant's Current Report on Form 8-K dated May 9,
1997)
4.2 By-Laws of Registrant, as amended and restated as of November
4, 1997 (incorporated by reference to Exhibit 3 to Regis-
trant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
5 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) re-
garding legality of the securities being registered
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(included in Exhibit 5)
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WASTE MANAGEMENT, INC.
(a Delaware corporation)
20,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: June ___, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. Representations and Warranties............................................................. 3
(a) Representations and Warranties by the Company................................ 3
(i) Compliance with Registration Requirements............................ 3
(ii) Incorporated Documents............................................... 4
(iii) Independent Accountants.............................................. 4
(iv) Financial Statements................................................. 4
(v) No Material Adverse Change in Business............................... 4
(vi) Good Standing of the Company......................................... 4
(vii) Good Standing of Subsidiaries........................................ 5
(viii) Capitalization....................................................... 5
(ix) Authorization of Agreement........................................... 5
(x) Authorization and Description of Securities.......................... 5
(xi) Absence of Defaults and Conflicts.................................... 5
(xii) Absence of Proceedings............................................... 6
(xiii) Accuracy of Exhibits................................................. 6
(xiv) Absence of Further Requirements...................................... 6
(xv) Possession of Licenses and Permits................................... 7
(xvi) Compliance with Cuba Act............................................. 7
(xvii) Environmental Laws................................................... 7
(xviii) Registration Rights.................................................. 7
(xix) Merger Agreement..................................................... 8
(b) Officer's Certificates....................................................... 8
SECTION 2. Sale and Delivery to Underwriters; Closing................................................. 8
(a) Securities................................................................... 8
(b) Payment...................................................................... 8
(c) Denominations; Registration.................................................. 9
SECTION 3. Covenants of the Company................................................................... 9
(a) Compliance with Securities Regulations and
Commission Requests.......................................................... 9
(b) Filing of Amendments......................................................... 9
(c) Delivery of Registration Statements..........................................10
(d) Delivery of Prospectus.......................................................10
(e) Continued Compliance with Securities Laws....................................10
(f) Blue Sky Qualifications......................................................10
(g) Rule 158.....................................................................11
(h) Use of Proceeds..............................................................11
(i) Restriction on Sale of Securities............................................11
(j) Reporting Requirements.......................................................11
SECTION 4. Payment of Expenses........................................................................11
(a) Expenses.....................................................................11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Termination of Agreement.........................................12
SECTION 5. Conditions of Underwriters' Obligations.......................................12
(a) Effectiveness of Registration Statement..........................12
(b) Opinion of Counsel for Company...................................12
(c) Opinion of General Counsel of Company............................13
(d) Opinion of Counsel for USA Waste.................................13
(e) Opinion of Counsel for Underwriters..............................13
(f) Officers' Certificate of Company.................................13
(g) Officers' Certificate of USA Waste...............................13
(h) Accountants' Comfort Letters.....................................14
(i) Bring-down Comfort Letters.......................................14
(j) Approval of Listing..............................................14
(k) USA Waste Agreement..............................................14
(l) Additional Documents.............................................14
(m) Termination of Agreement.........................................14
SECTION 6. Indemnification...............................................................14
(a) Indemnification of Underwriters..................................14
(b) Indemnification of Company, Directors and Officers...............15
(c) Actions against Parties; Notification............................16
(d) Settlement without Consent if Failure to Reimburse...............17
SECTION 7. Representations, Warranties and Agreements to Survive Delivery................18
SECTION 8. Termination of Agreement......................................................18
(a) Termination; General.............................................18
(b) Liabilities......................................................19
SECTION 9. Default by One or More of the Underwriters....................................19
SECTION 10. Notices.......................................................................19
SECTION 11. Parties.......................................................................19
SECTION 12. GOVERNING LAW AND TIME........................................................20
SECTION 13. Effect of Headings............................................................20
</TABLE>
ii
<PAGE>
WASTE MANAGEMENT, INC.
(a Delaware corporation)
20,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
------------------
June ___, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
as Representatives of the Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Waste Management, Inc. a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and the other Underwriter named in Schedule A
hereto (collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 19 hereof), for whom
Merrill Lynch and Donaldson, Lufkin & Jenrette Securities Corporation are acting
as representatives (in such capacity, the "Representatives"), with respect to
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares of Common Stock, par value
$1.00 per share, of the Company ("Common Stock") set forth in Schedule A hereto.
The aforesaid 20,000,000 shares of Common Stock to be purchased by the
Underwriters are hereinafter called the "Securities."
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-56337) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus. Promptly after
execution and delivery of this Agreement, the Company will either (i)
<PAGE>
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." The form of Prospectus used before
such registration statement became effective, and any prospectus that omitted,
as applicable, the rule 430A Information or the Rule 434 Information, that was
used after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act (including the USA Waste Information (as defined below)), at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final form of Prospectus,
including the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the 1933 Act (including the USA Waste Information), in the form
first furnished to the Underwriters for use in connection with the offering of
the Securities is herein called the "Prospectus." For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR"). All information (i) contained in any document filed by USA
Waste Services, Inc. ("USA Waste") with the Commission pursuant to the 1934 Act
and incorporated by reference and made a part of the Registration Statement or
(ii) supplied by USA Waste for inclusion in the Waste Management/USA Waste Joint
Proxy Statement/Prospectus (as such term is defined in the Prospectus),
including all financial statements and schedules, is collectively referred to
herein as the "USA Waste Information." The Company, the Underwriters and USA
Waste are entering into an Indemnification Agreement (the "USA Waste Agreement")
relating to the USA Waste Information.
All references in this Agreement to financial statements and schedules and
other information which is "contained", "included", or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of 1934, as amended (the "1934
Act"), which is or is deemed to be incorporated by reference in the
Registration Statement, such preliminary prospectus or the Prospectus, as the
case may be.
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SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, and as of the Closing
Time referred to in Section 2(c) hereof, and agrees with each Underwriter, as
follows:
(i) Compliance with Registration Requirements. The Company meets the
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has been
declared effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time, the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither the Prospectus nor any amendments or supplements
thereto, at the time the Prospectus or any amendments or supplements
thereto were issued and at the Closing Time, included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. If
Rule 434 is used, the Company will comply with the requirements of Rule
434. The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or the
Prospectus (A) made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the
Representatives expressly for use in the Registration Statement or the
Prospectus or (B) contained in the USA Waste Information
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering were identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Incorporated Documents. The documents filed by the Company with
the Commission and incorporated or deemed to be incorporated by reference
in the Prospectus (other than the USA Waste Information), at the time they
were or hereafter are filed with the Commission, complied and will comply
in all material respects with the requirements of the 1934 Act and the
rules and regulations of the Commission thereunder (the "1934 Act
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Regulations") and, when read together with the other information in the
Prospectus, at the time the Registration Statement became effective, at the
time the Prospectus was issued and at the Closing Time, did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided that no representation is made in this
subsection with respect to the USA Waste Information.
(iii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules of the Company and its
subsidiaries included in the Registration Statement are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iv) Financial Statements. The consolidated financial statements of
the Company and its subsidiaries included in the Registration Statement and
the Prospectus, together with the related schedules and notes, present
fairly the financial position of the Company and its consolidated
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
supporting schedule included in the Registration Statement presents fairly
in accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in
the Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to
pro forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein; provided,
however, that the representation contained in this sentence shall not apply
to any adjustments relating solely to USA Waste.
(v) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change, or any development which may reasonably be
expected to result in a material adverse change, in the condition,
financial or otherwise, or in the earnings or business affairs of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business (a "Material Adverse Effect"),
(B) there have been no transactions entered into by the Company or any of
its subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) except for regular dividends on its
Common Stock, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under this Agreement and the USA Waste Agreement; and the
Company is duly qualified as a foreign corporation to transact business and
is in good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or
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leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(vii) Good Standing of Subsidiaries. Each of the Company's active
subsidiaries which contributed 5% or more to the Company's consolidated
revenues, net income or net assets during the Company's most recent fiscal
year (each a "Subsidiary" and collectively, the "Subsidiaries") has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary is owned by the Company, directly or through
subsidiaries, free and clear of any lien, encumbrance, claim or equity
(except for such shares of capital stock of the Subsidiaries subject to
liens, encumbrances, equities and claims not material to the Company and
its Subsidiaries taken as a whole).
(viii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus in the column
entitled "Company Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options
referred to in the Prospectus); the shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; and none of the outstanding shares
of capital stock of the Company was issued in violation of the preemptive
or other similar rights of any securityholder of the Company.
(ix) Authorization of Agreement. Each of this Agreement and the USA
Waste Agreement has been duly authorized, executed and delivered by the
Company.
(x) Authorization and Description of Securities. The Securities to
be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued,
fully paid and non-assessable; the Common Stock conforms in all material
respects to all statements relating thereto contained in the Prospectus and
such description conforms in all material respects to the rights set forth
in the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(xi) Absence of Defaults and Conflicts. Neither the Company nor any
of its Subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract,
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indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any subsidiary is
subject (collectively, "Agreements and Instruments") except for such
defaults that would not result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the USA Waste
Agreement and the consummation of the transactions contemplated in this
Agreement and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds", but excluding the Merger (as such term is defined in the
Registration Statement)) and compliance by the Company with its obligations
under this Agreement and the USA Waste Agreement have been duly authorized
by all necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to, the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
Subsidiary, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective assets, properties or operations. As
used herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any Subsidiary.
(xii) Absence of Proceedings. There are no legal or governmental
proceedings pending or, to the knowledge of the Company, threatened which
are required to be disclosed in the Registration Statement or the
Prospectus, other than those disclosed therein, and there is no pending
legal or governmental proceeding to which the Company or any subsidiary is
a party or of which any of their property or assets is the subject which is
not described in the Registration Statement, including ordinary routine
litigation incidental to the business, which might reasonably be expected
to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement; provided that no
representation is made in this subsection with respect to the USA Waste
Information.
(xiii) Accuracy of Exhibits. There are no contracts or documents which
are required to be described in the Registration Statement, the Prospectus
or the documents filed by the Company with the Commission and incorporated
by reference therein or to be filed as exhibits thereto which have not been
so described and filed as required; provided that no representation is made
in this subsection with respect to the USA Waste Information.
(xiv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental
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authority or agency is necessary or required for the performance by the
Company of its obligations hereunder in connection with the offering,
issuance or sale of the Securities under this Agreement or the consummation
of the transactions contemplated by this Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
(xv) Possession of Licenses and Permits. The Company and each of the
Subsidiaries has obtained all such certificates, licenses and permits of a
material nature from all federal, state, municipal and other public
authorities as are now required by such public authorities to enable them
to carry on the business and operations now operated by them and which are
material to the business of the Company and its subsidiaries considered as
one enterprise.
(xvi) Compliance with Cuba Act. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xvii) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) to the best of the Company's knowledge,
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release
or threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company
and its subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in compliance
with their requirements, (C) there are no pending or, to the best of the
Company's knowledge, threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D) to
the best of the Company's knowledge, there are no events or circumstances
that might reasonably be expected to form the basis of an order for clean-
up or remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of its
subsidiaries relating to Hazardous Materials or any Environmental Laws.
(xviii) Registration Rights. Except as described in the Registration
Statement, there are no persons with rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
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(xix) Merger Agreement. The Merger Agreement (as such term is defined
in the Registration Statement) has been duly authorized, executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by the other parties thereto, constitutes a valid and binding
agreement of the Company and the execution, delivery and performance of the
Merger Agreement and the consummation of the Merger have been duly
authorized by all necessary corporate action (other than the adoption of
the Merger Agreement by the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote with respect thereto
and the filing and recordation of the Certificate of Merger relating
thereto) and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of,
or default or Repayment Event under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any Subsidiary pursuant to, the Agreements and
Instruments (except as set forth in the Company Disclosure Schedule
attached to the Merger Agreement and except for such conflicts, breaches or
defaults or Repayment Events or liens, charges or encumbrances that would
not result in a Material Adverse Effect), nor will such action result in
any violation of (A) the provisions of the charter or by-laws of the
Company or any Subsidiary, or, (B) assuming that all consents, approvals,
authorizations and permits described in Section 3.05(b) of the Merger
Agreement have been obtained and all filings and notifications described in
Section 3.05(b) of the Merger Agreement have been made, any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
respective assets, properties or operations (except with respect to clause
(B) for such violations that would not result in a Material Adverse
Effect).
(b) Officer's Certificates. Any certificate signed by any officer of the
Company and delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Securities. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Securities set forth
in Schedule A opposite the name of such Underwriter, subject to such adjustments
among the Underwriters as the Representatives in their sole discretion shall
make to eliminate any sales or purchases of fractional securities.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the offices of Mayer, Brown &
Platt, 190 South LaSalle Street, Chicago, Illinois, or at such other place as
shall be agreed upon by the Representatives and the Company, at 10:00 A.M.
(Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 9), or such other time
not later than seven business days after such date as
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shall be agreed upon by the Representatives and the Company (such time and date
of payment and delivery being herein called "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives, through the facilities of The Depository Trust Company
("DTC"), for the respective accounts of the Underwriters of the Securities to be
purchased by them. It is understood that each Underwriter has authorized the
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Securities which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Securities to be purchased by any Underwriter whose funds have not
been received by the Closing Time, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(c) Denominations; Registration. Unless delivery is to be made through the
facilities of DTC, certificates for the Securities shall be in such
denominations and registered in such names as the Representatives may request in
writing at least two full business days before the Closing Time. Unless delivery
is to be made through the facilities of DTC, the certificates for the Securities
will be made available for examination and packaging by the Representatives in
the City of New York not later than 10:00 A.M. (Eastern time) on the business
day prior to the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives notice
of its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus, will
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furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall reasonably object, provided that any such objection
shall not prevent the filing of any such amendment or supplement which, in the
opinion of counsel to the Company, is required to be filed at such time pursuant
to the 1933 Act or the 1933 Act Regulations.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies (or photocopies thereof) of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated or
deemed to be incorporated by reference therein) and signed copies (or
photocopies thereof) of all consents and certificates of experts, and will also
deliver to the Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(without exhibits) for each of the Underwriters. The copies of the Registration
Statement and each amendment thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectus. The Company hereby consents to the use of the
copies of each preliminary prospectus previously delivered to the Underwriters
for purposes permitted by the 1933 Act. The Company will furnish to each
Underwriter, without charge, during the period when the Prospectus is required
to be delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request. The Prospectus and any amendments or supplements thereto furnished to
the Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary to amend the
Registration Statement or amend or supplement the Prospectus in order that the
Prospectus will not include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Company will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. Promptly from time to time, the Company will
use its best efforts when and as requested by you to qualify the Securities for
offering and sale under the
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securities laws of such jurisdictions as you may request and to comply with such
laws as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its security
holders as soon as practicable an earnings statement for the purposes of, and to
provide the benefits contemplated by, the last paragraph of Section 11(a) of the
1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds".
(i) Restriction on Sale of Securities. Except as described in the
Registration Statement, during a period of 90 days from the date of the
Prospectus, the Company will not, without the prior written consent of Merrill
Lynch, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the sale of the
Securities hereunder, (B) any shares of Common Stock issued by the Company upon
the exercise of an option or warrant outstanding on the date hereof and referred
to in the Prospectus, (C) any shares of Common Stock issued by the Company upon
the conversion of debt of the Company outstanding on the date hereof and
referred to in the Prospectus, (D) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to existing employee benefit plans of
the Company referred to in the Prospectus or (E) up to 2,000,000 shares of
previously registered Common Stock issued pursuant to the Company's Common Stock
"acquisition shelf" registration statement.
(j) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay or
cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including (i) the printing and filing of the Registration
Statement (including financial statements and exhibits) as originally filed and
of each amendment thereto, (ii) the printing of this Agreement, and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable
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upon the sale, issuance or delivery of the Securities to the Underwriters, (iv)
the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of the preliminary prospectus, any Term Sheets and of the
Prospectus and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriters of copies of the Blue Sky Survey and
any supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities, (ix) the filing fees, if any, incident to the
review by the National Association of Securities Dealers, Inc. (the "NASD") of
the terms of the sale of the Securities and (x) the fees and expenses incurred
in connection with the listing of the Securities on the New York Stock Exchange.
It is understood, however, that except as provided in this Section and Section 6
hereof, you will pay all of your own costs and expenses, including the fees of
your counsel, transfer taxes on resale of any of the Securities by you and any
advertising expenses connected with any offers you may make.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
8(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses to third parties, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof and
of USA Waste contained in Section 1 of the USA Waste Agreement or in
certificates of any officer of the Company or USA Waste delivered pursuant to
the provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder and by USA Waste of its covenants and other
obligations under the USA Waste Agreement, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of Skadden,
Arps, Slate, Meagher & Flom (Illinois), counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect set forth
in Exhibit A hereto.
12
<PAGE>
(c) Opinion of General Counsel of Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Herbert A. Getz, General Counsel of the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect set forth in Exhibit
B hereto.
(d) Opinion of Counsel for USA Waste. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of
___________________________, counsel for USA Waste, in form and substance
satisfactory to counsel for the Underwriters, to the effect set forth in Exhibit
C hereto.
(e) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Mayer, Brown & Platt, counsel for the Underwriters, with respect to the
matters set forth in clauses ( i) through (v), inclusive, and (vi) (solely as to
the information in the Prospectus under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto and in clauses (i) and
(iv) (solely as to preemptive or other similar rights arising by operation of
law or under the charter or by-laws of the Company) of Exhibit B hereto . In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representatives. Such
counsel may also state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public officials.
(f) Officers' Certificate of Company. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change, or any
development which may reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings or business
affairs of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change or development, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or, to the
Company's knowledge, are contemplated by the Commission.
(g) Officers' Certificate of USA Waste. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Waste Management/USA Waste Joint Proxy
Statement/Prospectus, any material adverse change, or any development which may
reasonably be expected to result in a material adverse change, in the condition,
financial or otherwise, or in the earnings or business affairs of USA Waste and
its subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, and the Representatives shall have received a
certificate of the President or a Vice President of USA
13
<PAGE>
Waste and of the chief financial or chief accounting officer of USA Waste, dated
as of Closing Time, to the effect that (i) there has been no such material
adverse change or development and (ii) the representatives and warranties in
Section 1 of the USA Waste Agreement are true and correct with the same force
and effect as though expressly made at and as of Closing Time.
(h) Accountants' Comfort Letters. At the time of the execution of this
Agreement, the Representatives shall have received from each of Arthur Andersen
LLP and Coopers & Lybrand LLP a letter dated such date, in form and substance
satisfactory to the Representatives, containing statements and information of
the type ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(i) Bring-down Comfort Letters. At Closing Time, the Representatives shall
have received from each of Arthur Andersen LLP and Coopers & Lybrand LLP a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in their respective letters furnished pursuant to subsection (h)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.
(j) Approval of Listing. At Closing Time, the Securities shall be listed
on the New York Stock Exchange.
(k) USA Waste Agreement. The Company, USA Waste and the Underwriters shall
have executed and delivered the USA Waste Agreement.
(l) Additional Documents. At Closing Time, counsel for the Underwriters
shall have been furnished with such documents as they may reasonably require for
the purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of any
of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein contemplated
shall be reasonably satisfactory in form and substance to the Representatives
and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 6 and 7 shall survive any such termination and remain in
full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and
(iii) below.
14
<PAGE>
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including,
subject to Section 6(c) below, the fees and disbursements of counsel chosen
by Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission (A) made in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or (B)
contained in the USA Waste Information; and provided, further, that as to any
preliminary prospectus, the Prospectus or any amendment or supplement thereto,
this indemnity agreement shall not inure to the benefit of any Underwriter on
account of any loss, liability, claim, damage or expense arising from the fact
that such Underwriter sold Securities to a person as to whom it shall be
established that there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus or of the Prospectus as then
amended or supplemented in any case where such delivery is required by the 1933
Act if the Company has previously furnished copies thereof in sufficient
quantity to such Underwriter and the loss, claim, damage or liability of such
Underwriter results from an untrue statement or omission of a material fact
contained in such preliminary prospectus, Prospectus or amendment or supplement
thereto, which was corrected in the Prospectus or in the Prospectus as then
amended or supplemented.
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed
15
<PAGE>
the Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representatives expressly for use
in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company, subject to the further
provisions of this paragraph regarding assumption of defense by an indemnifying
party. An indemnifying party may participate at its own expense in the defense
of any such action; provided, however, that counsel to the indemnifying party
shall not (except with the consent of the indemnified party) also be counsel to
the indemnified party. If it so elects within a reasonable time after receipt of
such notice, an indemnifying party, jointly with any other indemnifying parties
receiving such notice, may assume the defense of such action with counsel chosen
by it and approved by the indemnified parties defendant in such action (which
approval will not be unreasonably withheld), unless such indemnified parties
reasonably object to such assumption on the ground that there may be legal
defenses available to them which are different from or in addition to those
available to such indemnifying party. If an indemnifying party assumes the
defense of such action, the indemnifying parties shall not be liable for any
fees and expenses of counsel for the indemnified parties incurred thereafter in
connection with such action. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 (if the indemnified parties are parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
16
<PAGE>
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement; provided that an indemnifying party shall not be liable for any such
settlement effected without its consent if such indemnifying party, prior to the
date of such settlement, (1) reimburses such indemnified party in accordance
with such request for the amount of such fees and expenses of counsel as the
indemnifying party believes in good faith to be reasonable and (2) provides
written notice to the indemnified party that the indemnifying party disputes in
good faith the reasonableness of the unpaid balance of such fees and expenses.
SECTION 7. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Underwriters.
SECTION 8. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the
17
<PAGE>
Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 6
and 7 shall survive such termination and remain in full force and effect.
SECTION 9. Default by One or More of the Underwriters. If any of the
Underwriters shall fail at Closing Time to purchase the Securities which it is
obligated to purchase under this Agreement (the "Defaulted Securities"), the
Representatives shall have the right, but not the obligation, within 24 hours
thereafter, to make arrangements for any of the non-defaulting Underwriters, or
any other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then the obligation of the Underwriters
to purchase and of the Company to sell the Securities shall terminate without
liability on the part of any non-defaulting Underwriter or the Company.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the Representatives or the Company shall have the right
to postpone Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or the Prospectus or
in any other documents or arrangements. As used herein, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 9.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if hand delivered,
mailed, delivered by a nationally recognized next-day air courier or transmitted
by any standard form of telecommunication. All such notices and communications
shall be deemed to have been duly given: when delivered by hand, if personally
delivered; one business day after being timely delivered to a next-day air
courier; five business days after being deposited in the mail, postage prepaid,
if mailed; and when receipt is acknowledged by the recipient's telecopier
machine, if telecopied. Notices to the Underwriters shall be directed to the
Representatives at Merrill Lynch & Co., North Tower, World Financial Center, New
York, New York 10281-1201, attention of Charles A. Lewis; notices to the Company
shall be directed to it at 3003 Butterfield Road, Oak Brook, Illinois 60521,
attention of General Counsel.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriters and the Company and their respective successors.
Nothing expressed or mentioned in
18
<PAGE>
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters and the Company and their respective
successors and the controlling persons and officers and directors referred to in
Section 6 and their heirs and legal representatives, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
19
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
WASTE MANAGEMENT, INC.
By:
------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------------
Authorized Signatory
For themselves and as Representatives of the Underwriters named in Schedule A
hereto.
20
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Underwriter Securities
- ------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation.........
----------
Total 20,000,000
==========
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
WASTE MANAGEMENT, INC.
20,000,000 Shares of Common Stock
(Par Value $1.00 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $____________.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $________, being an amount equal to the initial
public offering price set forth above less $_________ per share.
Sch B-1
<PAGE>
Exhibit 5
June 15, 1998
Waste Management, Inc.
3003 Butterfield Road
Oak Brook, Illinois 60523
Re: Waste Management, Inc. - Registration Statement on Form S-3 (No. 333-56337)
Ladies and Gentlemen:
We are acting as special counsel to Waste Management, Inc., a Delaware
corporation (the "Company"), in connection with the public offering of up to
20,000,000 shares (the "Shares") of the Company's Common Stock, par value $1.00
per share (the "Common Stock"), held in the treasury of the Company.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In rendering the opinion set forth herein, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement on Form S-3 (File No. 333-56337), as filed with the
Securities and Exchange Commission (the "Commission") under the Act on June 9,
1998, (such Registration Statement being hereinafter referred to as the
"Registration Statement"); (ii) the form of the Purchase Agreement (the
"Purchase Agreement") proposed to be entered into by and among the Company, as
issuer, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson,
Lufkin & Jenrette Securities Corporation, as underwriters (the "Underwriters"),
filed as an exhibit to the Registration Statement; (iii) the Restated
Certificate of Incorporation and the By-Laws of the Company, as amended to date;
(iv) a specimen certificate representing the Common Stock; (v) certain
resolutions of the Board of
<PAGE>
Waste Management, Inc.
June 15, 1998
Page 2
Directors of the Company and drafts of certain resolutions (the "Draft
Resolutions") of the Pricing Committee of the Board of Directors of the Company
(the "Pricing Committee"), in each case relating to the sale of the Shares and
related matters. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinion set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of the
Company and others.
Members of our firm are admitted to the practice of law in the State of
Illinois, and we do not express any opinion as to the laws of any other
jurisdiction other than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the opinion that when
(i) the Registration Statement becomes effective; (ii) the Draft Resolutions
have been adopted by the Pricing Committee; (iii) the price at which the Shares
are to be sold to the Underwriters pursuant to the Purchase Agreement and other
matters relating to the issuance and sale of the Shares have been approved by
the Pricing Committee in accordance with the Draft Resolutions; (iv) the
Purchase Agreement has been duly executed and delivered; and (v) certificates
representing the Shares in the form of the specimen certificate examined by us
have been manually signed by an authorized officer of the transfer agent and
registrar for the Common Stock and registered by such transfer agent and
registrar, and delivered to and paid for by the Underwriters as contemplated by
the
<PAGE>
Waste Management, Inc.
June 15, 1998
Page 3
Purchase Agreement, the sale of the Shares will have been duly authorized, and
the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the heading "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps,
Slate, Meagher & Flom (Illinois)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 24, 1998 (except with respect to the matters discussed in Note
19, as to which the date is March 17, 1998), and to all references to our Firm
included in or made part of this Registration Statement.
Arthur Andersen LLP
Chicago, Illinois
June 15, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
of Waste Management, Inc. on Form S-3, relating to the registration of 20
million shares of Waste Management, Inc. common stock, $1 par value, of our
report dated March 16, 1998, on our audits of the consolidated financial
statements of USA Waste Services, Inc. as of December 31, 1997 and 1996, and for
the years ended December 31, 1997, 1996 and 1995, which report is included in
Form 10-K for the year ended December 31, 1997. We also consent to the reference
to our firm under the caption "Experts."
Coopers & Lybrand, L.L.P.
Houston, Texas
June 15, 1998
