<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JULY 19, 1999
ALLIED WASTE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
<TABLE>
<S> <C>
0-19285 88-0228636
(COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
15880 N. GREENWAY/HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 627-2700
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<PAGE> 2
ITEM 5. OTHER EVENTS
On March 8, 1999 Allied Waste Industries, Inc. ("Allied or the "Company")
and Browning-Ferris Industries, Inc. ("BFI") announced that they had entered
into a definitive merger agreement under which Allied will acquire BFI for $45
in cash per BFI common share. The transaction is structured as a merger of BFI
with a subsidiary of Allied and is subject to the satisfaction of certain
conditions. Allied recently entered into (1) an agreement to sell BFI's medical
waste operations to Stericycle, Inc. for approximately $440.0 million, (2) an
agreement to sell BFI's Canadian solid waste operations to Waste Management,
Inc. for approximately $501.0 million, (3) an agreement to sell BFI Gas
Services, Inc. to Gas Recovery Systems, Inc. for approximately $78.0 million and
(4) an agreement to sell all of the shares of SITA, S.A. owned by BFI to Suez
Lyonnaise des Eaux, S.A. for approximately $444.0 million. The financial
statements and pro forma financial statements included herein are preliminary
and for informational purposes and should be read in connection with the Form
8-K filed on March 16, 1999 announcing this transaction and the Agreement and
Plan of Merger.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<C> <S> <C>
(A) PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Balance Sheet -- March 31, 1999 II-3
(unaudited)...............................................
Pro Forma Combined Statement of Operations for the Three II-4
Months Ended March 31, 1999 (unaudited)...................
Pro Forma Combined Statement of Operations for the Year II-5
Ended December 31, 1998 (unaudited).......................
Notes to Pro Forma Combined Financial Statements............ II-6
(B) FINANCIAL STATEMENTS FOR BROWNING-FERRIS INDUSTRIES, INC.
Report of Independent Public Accountants.................... II-13
Consolidated Balance Sheet -- September 30, 1997, 1998 and II-14
March 31, 1999 (unaudited)................................
Consolidated Statements of Operations for the Three Years II-15
Ended September 30, 1998 and the Six Months Ended March
31, 1998 and 1999 (unaudited).............................
Consolidated Statements of Common Stockholders' Equity for II-16
the Three Years Ended September 30, 1998..................
Consolidated Statements of Cash Flows for the Three Years II-17
Ended September 30, 1998 and the Six Months Ended March
31, 1998 and 1999 (unaudited).............................
Notes to Consolidated Financial Statements.................. II-18
</TABLE>
(C) EXHIBITS
<TABLE>
<C> <S>
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
</TABLE>
II-1
<PAGE> 3
PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheet as of March 31, 1999 gives
effect to the acquisition of Browning-Ferris Industries, Inc. ("BFI"), the
related financings, and the sales of the BFI medical waste operations, the
Canadian operations of BFI, the BFI Gas Services, Inc. operations and the shares
of SITA, S.A. owned by BFI, as if each had occurred on March 31, 1999. The
unaudited pro forma combined statement of operations for the three months ended
March 31, 1999 and the year ended December 31, 1998 give effect to these
transactions as if each had occurred on January 1, 1998.
These financial statements do not purport to be indicative of the combined
results of operations of Allied Waste Industries, Inc. ("Allied") and BFI that
might have occurred had the BFI acquisition been completed on such dates, nor
are they indicative of future results of operations. The pro forma adjustments
related to the purchase allocation of the BFI acquisition are preliminary and do
not give effect to any appraisal and marking to fair market value of the assets
and liabilities of BFI which Allied intends to do in connection with the
purchase accounting to be performed subsequent to the closing of the
acquisition. Purchase price adjustments recorded based upon information to be
received in the future may have a significant impact on total assets, total
liabilities, cost of operations, depreciation and amortization, goodwill
amortization and interest expense. In addition, the pro forma adjustments do not
reflect possible acquisition related costs relating to environmental related
matters, litigation liabilities, regulatory compliance matters, restructuring,
integration and abandonment of assets, which could result in significant
additional charges. Purchase accounting adjustments, acquisition related costs
and other possible charges which may arise from the acquisition of BFI may
materially impact our future combined financial position and combined financial
results of operations. The pro forma combined financial statements do not give
effect to possible future sales of assets or operations or to any cost savings
or other benefits of the business combination which may result from the
integration of Allied's and BFI's operations.
The unaudited pro forma combined financial statements should be read in
conjunction with the notes to the unaudited pro forma combined financial
statements, the historical consolidated financial statements of Allied and
related notes, as previously filed with the Securities and Exchange Commission
and incorporated herein by reference, and the historical consolidated financial
statements of BFI and related notes included elsewhere herein.
II-2
<PAGE> 4
ALLIED WASTE INDUSTRIES, INC.
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
ALLIED BFI RELATED TO THE BFI
HISTORICAL HISTORICAL BFI ACQUISITION DISPOSITIONS
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) PRO FORMA
---------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ 37,043 $ 60,519 $ 126,276(a) $ -- $ 223,838
Other current assets........ 454,745 771,295 2,504(b) (72,660) 1,155,884
Assets held for sale........ -- -- (1,463,000)(c) 1,463,000 --
---------- ---------- ----------- --------- -----------
Total current assets... 491,788 831,814 (1,334,220) 1,390,340 1,379,722
Property and equipment,
net....................... 1,799,733 2,847,495 -- (229,418) 4,417,810
Goodwill, net............... 1,451,412 602,507 6,329,154(d) (845,187) 7,537,886
Other assets................ 147,734 167,396 247,782(e) (12,980) 549,932
Investments in
unconsolidated
affiliates................ -- 484,953 -- (346,159) 138,794
---------- ---------- ----------- --------- -----------
Total assets........... $3,890,667 $4,934,165 $ 5,242,716 $ (43,404) $14,024,144
========== ========== =========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other current liabilities... $ 445,090 $ 883,770 $ -- $ (21,736) $ 1,307,124
Current portion of long-term
debt...................... 21,306 7,308 -- (594) 28,020
---------- ---------- ----------- --------- -----------
Total current
liabilities.......... 466,396 891,078 -- (22,330) 1,335,144
Long-term debt, net of
current portion........... 2,190,313 1,971,009 5,573,485(f) (5,364) 9,729,443
Other long-term
liabilities............... 252,941 770,143 -- (15,710) 1,007,374
Stockholders' equity........ 981,017 1,301,935 (330,769)(g) -- 1,952,183
---------- ---------- ----------- --------- -----------
Total liabilities and
equity.................... $3,890,667 $4,934,165 $ 5,242,716 $ (43,404) $14,024,144
========== ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this pro forma combined balance
sheet.
II-3
<PAGE> 5
ALLIED WASTE INDUSTRIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
ALLIED BFI RELATED TO THE BFI
HISTORICAL HISTORICAL BFI ACQUISITION DISPOSITIONS
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) PRO FORMA
---------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues............................ $408,045 $1,027,896 $ -- $(90,471) $1,345,470
Cost of operations.................. 230,014 644,554 -- (57,391) 817,177
Selling, general and administrative
expenses.......................... 33,809 132,659 -- (9,739) 156,729
Depreciation and amortization
expense........................... 38,873 98,481 -- (5,920) 131,434
Goodwill amortization............... 8,771 4,288 34,692(a) (940) 46,811
Acquisition related and unusual
costs............................. 1,116 19,183 -- -- 20,299
-------- ---------- --------- -------- ----------
Operating income.................... 95,462 128,731 (34,692) (16,481) 173,020
Interest income..................... (375) -- -- -- (375)
Interest expense.................... 27,845 30,049 134,817(b) -- 192,711
Equity in earnings of unconsolidated
affiliates........................ -- (10,967) -- (669) (11,636)
-------- ---------- --------- -------- ----------
Income (loss) before income taxes,
minority interest and
extraordinary loss................ 67,992 109,649 (169,509) (15,812) (7,680)
Income tax expense.................. 27,537 47,773 (53,253)(c) (6,638) 15,419
Minority interest................... -- 1,314 -- (374) 940
-------- ---------- --------- -------- ----------
Income (loss) before extraordinary
loss.............................. 40,455 60,562 (116,256) (8,800) (24,039)
Dividends on the senior convertible
preferred stock................... -- -- 17,055 -- 17,055
-------- ---------- --------- -------- ----------
Net income (loss) to common
shareholders before extraordinary
loss.............................. $ 40,455 $ 60,562 $(133,311) $ (8,800) $ (41,094)
======== ========== ========= ======== ==========
Basic EPS:
Net loss before extraordinary
loss.............................. $ 0.22 $ (0.13)
======== ==========
Weighted average common shares
outstanding....................... 186,403 186,403
======== ==========
Diluted EPS:
Net loss before extraordinary
loss.............................. $ 0.21 $ (0.13)
======== ==========
Weighted average common and common
equivalent shares outstanding..... 190,562 186,403
======== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined statement
of operations.
II-4
<PAGE> 6
ALLIED WASTE INDUSTRIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
ALLIED PRO FORMA RELATED TO THE BFI
HISTORICAL BFI BFI ACQUISITION DISPOSITIONS
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) PRO FORMA
---------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,575,612 $4,112,782 $ -- $(370,107) $5,318,287
Cost of operations................. 892,273 2,613,419 -- (228,413) 3,277,279
Selling, general and administrative
expenses......................... 155,835 515,149 -- (42,840) 628,144
Depreciation and amortization
expense.......................... 149,260 392,347 -- (26,481) 515,126
Goodwill amortization.............. 30,705 17,031 139,059(a) (3,928) 182,867
Acquisition related and unusual
costs............................ 247,902 (3,545) -- (257) 244,100
Asset impairments.................. 69,714 -- -- -- 69,714
---------- ---------- --------- --------- ----------
Operating income................... 29,923 578,381 (139,059) (68,188) 401,057
Interest income.................... (4,030) (4,723) -- 560 (8,193)
Interest expense................... 88,431 110,759 539,269(b) (408) 738,051
Equity in earnings of
unconsolidated affiliates........ -- (51,208) -- 7,846 (43,362)
---------- ---------- --------- --------- ----------
Income (loss) before income taxes,
minority interest and
extraordinary loss............... (54,478) 523,553 (678,328) (76,186) (285,439)
Income tax expense................. 43,773 206,283 (213,011)(c) (31,892) 5,153
Minority interest.................. -- 2,233 -- -- 2,233
---------- ---------- --------- --------- ----------
Income (loss) before extraordinary
loss............................. (98,251) 315,037 (465,317) (44,294) (292,825)
Dividends on the senior convertible
preferred stock.................. -- -- 66,602 -- 66,602
---------- ---------- --------- --------- ----------
Net income (loss) to common
shareholders before extraordinary
loss............................. $ (98,251) $ 315,037 $(531,919) $ (44,294) $ (359,427)
========== ========== ========= ========= ==========
Basic EPS:
Net loss before extraordinary
loss............................. $ (0.54) $ (1.60)
========== ==========
Weighted average common shares
outstanding...................... 182,796 182,796
========== ==========
Diluted EPS:
Net loss before extraordinary
loss............................. $ (0.54) $ (1.60)
========== ==========
Weighted average common and common
equivalent shares outstanding.... 182,796 182,796
========== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined statement
of operations.
II-5
<PAGE> 7
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ALLIED HISTORICAL
The historical balances represent the balance sheet and results of
operations of Allied as of and for each of the indicated periods as reported in
the historical consolidated financial statements of Allied.
2. BFI HISTORICAL BALANCE SHEET AND PRO FORMA STATEMENT OF OPERATIONS
BFI HISTORICAL BALANCE SHEET
The historical balances represent the consolidated balance sheet of BFI as
of March 31, 1999, as reported in the historical consolidated financial
statements of BFI.
BFI PRO FORMA STATEMENT OF OPERATIONS
The amounts related to the BFI Acquisition in the pro forma combined
statements of operations represent the historical results of operations of BFI
for the three months ended March 31, 1999 and the year ended September 30, 1998
adjusted to give effect to BFI's divestiture of its operations outside of North
America associated with the SITA Transaction (as defined below). Therefore, the
pro forma statements of operations do not include BFI's three months ended
December 31, 1998. Revenues and income before income taxes were $1,050.7 million
and $129.4 million, respectively, for the three months ended December 31, 1998.
In November 1997, BFI entered into an agreement to merge its operations
outside North America with SITA, a subsidiary of Suez Lyonnaise des Eaux. On
March 31, 1998, BFI announced that this transaction had been completed (the
"SITA Transaction"). Under the terms of the agreement, BFI received cash
totaling $950 million and shares of SITA stock amounting to approximately 19.2%
equity interest in SITA. Suez Lyonnaise des Eaux owns more than 50% of SITA.
The following table represents the historical results of operations of BFI
for the year ended September 30, 1998, giving pro forma effect to the SITA
Transaction as if it had occurred on October 1, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
BFI FOR SITA PRO FORMA
HISTORICAL TRANSACTION BFI
---------- ----------- ----------
<S> <C> <C> <C>
Revenues............................................... $4,745,748 $(632,966) $4,112,782
Cost of operations..................................... 3,064,171 (450,752) 2,613,419
Selling, general and administrative expenses........... 586,819 (71,670) 515,149
Depreciation and amortization expense.................. 469,955 (60,577) 409,378
Acquisition related and unusual costs.................. (21,464) 17,919 (3,545)
---------- --------- ----------
Operating income....................................... 646,267 (67,886) 578,381
Interest income........................................ (4,723) -- (4,723)
Interest expense....................................... 123,000 (12,241) 110,759
Equity income of unconsolidated affiliates............. (60,078) 8,870 (51,208)
---------- --------- ----------
Income before income taxes, minority interest and
extraordinary loss................................... 588,068 (64,515) 523,553
Income tax expense (benefit)........................... 232,089 (25,806) 206,283
Minority interest...................................... 6,606 (4,373) 2,233
---------- --------- ----------
Net income before extraordinary loss................... $ 349,373 $ (34,336) $ 315,037
========== ========= ==========
</TABLE>
II-6
<PAGE> 8
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
3. PRO FORMA ADJUSTMENTS RELATED TO THE BFI ACQUISITION
The pro forma adjustments related to the purchase allocation of the BFI
acquisition are preliminary and do not give effect to any appraisal and marking
to fair market value of the assets and liabilities of BFI which Allied intends
to do in connection with the purchase accounting to be performed subsequent to
the closing of the acquisition. Purchase price adjustments recorded based upon
information to be received in the future may have a significant impact on total
assets, total liabilities, cost of operations, depreciation and amortization,
goodwill amortization and interest expense. In addition, the pro forma
adjustments do not reflect possible acquisition related costs with respect to
environmental related matters, litigation liabilities, regulatory compliance
matters, restructuring, integration and abandonment of assets, which could
result in significant additional charges. Future combined financial position and
combined financial results of operations may be materially impacted by the
purchase accounting adjustments, acquisition related costs and other possible
charges which may arise from the acquisition of BFI.
The pro forma adjustments reflected in the pro forma combined financial
statements give effect to the following (in thousands):
PRO FORMA BALANCE SHEET
<TABLE>
<S> <C> <C> <C> <C>
(a) Sources Uses
-------------------------------------------- --------------------------------------------
The issuance of the 6.5% $1,000,000 The fees associated with the $ 25,000
senior convertible preferred issuance of the 6.5% senior
stock. convertible preferred stock.
The draw down of funds under 5,000,000 The payment of fees associated 254,120
the new credit facility. with the financing for the
transaction.
The issuance of the senior 2,000,000 The acquisition of BFI. 7,384,089
subordinated notes.
The draw down of funds under 1,000,000 The repayment of amounts under 374,000
the Asset Sale Term Loan. the old Allied credit
facility.
The proceeds from asset sales. 1,463,000 The repayment of the BFI 589,515
commercial paper and other
short-term facilities.
The repayment of amounts under 1,000,000
the Asset Sale Term Loan.
The repayment of amounts under 463,000
the senior secured credit
facilities.
The payment of severance and 177,000
termination fees.
The payment of transaction 70,000
costs associated with the
acquisition.
Net Cash Provided $ 126,276
</TABLE>
(b) The deferred tax benefit of $2.5 million from the write-off of deferred debt
issuance costs related to the repayment of loans outstanding under the old
Allied credit facility.
(c) The sale of assets relating to the BFI Canadian assets, BFI medical waste
operations, BFI Gas Services, Inc. operations and the BFI investment in
SITA, S.A. for approximately $1,463.0 million.
II-7
<PAGE> 9
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(d) The cost of the acquisition of BFI in excess of the net assets acquired in
the amount of $6,329.1 million.
(e) The payment of fees associated with the financings of $254.1 million less
the write-off of deferred financing costs associated with the old Allied
credit facility of $6.3 million.
(f) The draw down of funds under the senior secured credit facilities of
$5,000.0 million, the issuance of the senior subordinated notes of $2,000.0
million, and the draw down of funds on the Asset Sale Term Loan of $1,000.0
million, less the repayment of amounts outstanding under the old Allied
credit facility of $374.0 million, the repayment of the BFI commercial paper
and other short-term facilities of $589.5 million and the proceeds from the
BFI dispositions of $1,463.0 million applied to repay amounts under the
Asset Sale Term Loan.
(g) The issuance of 6.5% senior convertible preferred stock of $1,000.0 million
less associated fees of $25.0 million, and the deferred tax benefit from the
write-off of deferred debt issuance costs related to the repayment of
amounts outstanding under the old Allied credit facility of $2.5 million,
less the write-off of the deferred financing costs associated with the old
Allied credit facility of $6.3 million and the elimination of the BFI
stockholders' equity of $1,301.9 million as a result of the acquisition of
BFI.
II-8
<PAGE> 10
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
PRO FORMA STATEMENT OF OPERATIONS
(a) Goodwill amortization related to $6.1 billion of goodwill expected to be
recorded in connection with the acquisition of BFI, net of the impact of
divestitures, is based on a 40 year life and reduced by the elimination of
historical goodwill amortization of BFI.
(b) The net increase in interest expense and the amortization of debt issuance
costs, net of reduction for write-off of debt issuance costs related to the
old Allied credit facility calculated as follows (in thousands):
<TABLE>
<CAPTION>
INTEREST INTEREST EXPENSE
EXPENSE FOR FOR THE YEAR
THE THREE ENDED
MONTHS ENDED DECEMBER 31,
RATE DUE AMOUNT MARCH 31, 1999 1998
------------ ---- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Borrowings:
Credit Facility:
Asset Sale Term Loan--secured Libor +2.50% 2001 $1,000,000 $ 19,300 $ 77,200
Tranche A Term Loan--secured 5.74% +2.50% 2005 1,750,000 36,050 144,200
Tranche B Term Loan--secured 5.74% +2.75% 2006 1,250,000 26,531 106,125
Tranche C Term Loan--secured Libor +3.00% 2007 1,500,000 30,825 123,300
Tranche D Term Loan--unsecured Libor +3.50% 2004 500,000 10,900 43,600
Senior subordinated notes 9.5% 2009 2,000,000 47,500 190,000
Amortization of debt issuance
costs related to the financing 7,690 30,760
-------- ---------
Increase in interest expense 178,796 715,185
-------- ---------
Repayment of:
Old Allied credit facility Libor +0.75% 2004 374,000 (5,582) (22,328)
BFI commercial paper and other
short-term facilities 5.93% 2000 589,515 (8,740) (34,958)
Asset Sale Term Loan--secured Libor +2.50% 2001 1,000,000 (19,300) (77,200)
Tranche D Term Loan--unsecured Libor +3.50% 2004 463,000 (10,093) (40,374)
Amortization of debt issuance
costs related to the old Allied
credit facility (264) (1,056)
-------- ---------
Decrease in interest expense (43,979) (175,916)
-------- ---------
Adjustment to pro forma
interest expense $134,817 $ 539,269
======== =========
</TABLE>
As a portion of the financing arrangement has a variable rate which is not
covered by a hedging agreement, the effect of a 1/8% increase in the LIBOR rate
for the unhedged portion of variable rate debt is an increase in interest
expense of $0.9 million and $3.8 million for the three months ended March 31,
1999 and the year ended December 31, 1998, respectively. We used an estimated
9.5% interest rate for the senior subordinated notes. The actual rate will be
established when the senior subordinated notes are sold. Each 1/8% change in the
assumed interest rate on the senior subordinated notes would result in an
approximate corresponding $2.5 million change in cash interest expense.
(c) The Income tax expense at Allied's current tax rate of 39.5% applied to
deductible items.
II-9
<PAGE> 11
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
4. BFI DISPOSITIONS
The pro forma financial statements give effect to the proposed divestitures
of the BFI medical waste operations for approximately $440.0 million, the
Canadian operations of BFI for approximately $501.0 million, BFI Gas Services,
Inc. operations for $78.0 million and the BFI investment in SITA, S.A. for
$444.0 million (which are all under definitive agreement) and the resulting
reduction of debt and the associated interest savings.
The following table represents the historical balance sheets of the BFI
medical waste operations, the BFI Canadian operations, the BFI Gas Services Inc.
operations and the SITA investment (together, the "BFI Dispositions") which are
eliminated in the pro forma adjustments (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------------------
CANADIAN MEDICAL WASTE GAS SERVICES SITA BFI
OPERATIONS OPERATIONS OPERATIONS INVESTMENT DISPOSITIONS
---------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.............. $ -- $ -- $ -- $ -- $ --
Other current assets................... 54,636 18,024 -- -- 72,660
Assets held for sale................... (501,000) (440,000) (78,000) (444,000) (1,463,000)
--------- --------- -------- --------- ------------
Total current assets................. (446,364) (421,976) (78,000) (444,000) (1,390,340)
Property and equipment, net............ 95,053 56,365 78,000 -- 229,418
Goodwill, net.......................... 373,851 373,495 -- 97,841 845,187
Other assets........................... 12,980 -- -- -- 12,980
Investments in unconsolidated
affiliates........................... -- -- -- 346,159 346,159
--------- --------- -------- --------- ------------
Total assets......................... $ 35,520 $ 7,884 $ -- $ -- $ 43,404
========= ========= ======== ========= ============
Other current liabilities.............. $ 18,722 $ 3,014 $ -- $ -- $ 21,736
Current portion of long-term debt...... 19 575 -- -- 594
Long-term debt, net of current
portion.............................. 2,087 3,277 -- -- 5,364
Other long-term liabilities............ 14,692 1,018 -- -- 15,710
--------- --------- -------- --------- ------------
Total liabilities and equity......... $ 35,520 $ 7,884 $ -- $ -- $ 43,404
========= ========= ======== ========= ============
</TABLE>
II-10
<PAGE> 12
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables represent the historical results of operations of the
BFI medical waste operations, the Canadian operations of BFI and the SITA
investment which are eliminated in the pro forma adjustments (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------
CANADIAN MEDICAL WASTE SITA BFI
OPERATIONS OPERATIONS INVESTMENT DISPOSITIONS
---------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues............................................. $ 40,542 $ 49,929 $ -- $ 90,471
Cost of operations................................... 27,039 30,352 -- 57,391
Selling, general and administrative expenses......... 3,611 6,128 -- 9,739
Depreciation and amortization........................ 3,384 2,536 -- 5,920
Goodwill amortization................................ 241 699 -- 940
-------- -------- ----- --------
Operating income................................... 6,267 10,214 -- 16,481
Interest income...................................... -- -- -- --
Interest expense..................................... -- -- -- --
Equity in earnings of unconsolidated affiliates...... -- -- 669 669
-------- -------- ----- --------
Income before taxes, minority interest and
extraordinary loss............................... 6,267 10,214 (669) 15,812
Income taxes......................................... 2,820 4,086 (268) 6,638
Minority interest.................................... 374 -- -- 374
-------- -------- ----- --------
Income before extraordinary loss................... $ 3,073 $ 6,128 $(401) $ 8,800
======== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------------------
CANADIAN MEDICAL WASTE SITA BFI
OPERATIONS OPERATIONS INVESTMENT DISPOSITIONS
---------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues............................................. $172,457 $197,650 $ -- $370,107
Cost of operations................................... 109,147 119,266 -- 228,413
Selling, general and administrative expenses......... 19,122 23,718 -- 42,840
Depreciation and amortization........................ 15,196 11,285 -- 26,481
Goodwill amortization................................ 1,197 2,731 -- 3,928
Acquisition related and unusual costs................ -- 257 -- 257
-------- -------- ------ --------
Operating income................................... 27,795 40,393 -- 68,188
Interest income...................................... (560) -- -- (560)
Interest expense..................................... -- 408 -- 408
Equity in earnings of unconsolidated affiliates...... -- -- (7,846) (7,846)
-------- -------- ------ --------
Income before taxes and extraordinary loss......... 28,355 39,985 7,846 76,186
Income taxes......................................... 12,760 15,994 3,138 31,892
-------- -------- ------ --------
Income before extraordinary loss................... $ 15,595 $ 23,991 $4,708 $ 44,294
======== ======== ====== ========
</TABLE>
As discussed in note 2 to the BFI financial statements, there is no impact
to the historical statement of operations for the divestiture of BFI Gas
Services, Inc. for the periods presented as the net cash flows from methane gas
recovery activities at closed landfills were considered a component of closure
and post-closure costs.
5. NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS PER COMMON SHARE
Pro forma net income (loss) per common share is calculated by dividing pro
forma net income (loss) to common shareholders less requirements on the 6.5%
senior convertible preferred stock by the pro forma
II-11
<PAGE> 13
ALLIED WASTE INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
weighted average common and common equivalent shares outstanding during the
period. Pro forma weighted average common and common equivalent shares have been
computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
------------------ ------------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
<S> <C> <C> <C> <C>
Historical weighted average common shares........... 186,403 186,403 182,796 182,796
Common stock equivalents --
Stock options and warrants........................ N/A -- N/A --
Pro forma effect of issuing the 6.5% senior
convertible preferred stock....................... N/A -- N/A --
Pro forma effect of issuing stock dividends on the
6.5% senior convertible preferred stock........... N/A -- N/A --
------- ------- ------- -------
186,403 186,403 182,796 182,796
======= ======= ======= =======
</TABLE>
Conversion has not been assumed for stock options and warrants and the 6.5%
Preferred Stock in the diluted earnings per share calculation as the effect
would not be dilutive.
II-12
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Browning-Ferris Industries, Inc.:
We have audited the accompanying consolidated balance sheet of
Browning-Ferris Industries, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Browning-Ferris Industries,
Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 3, 1998
II-13
<PAGE> 15
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 78,746 $ 89,893 $ 55,506
Short-term investments.................................... 3,811 5,812 5,013
Receivables--
Trade, net of allowances for doubtful accounts of
$38,376, $22,072 and $23,168.......................... 820,678 603,331 584,407
Other................................................... 71,547 16,205 19,430
Inventories............................................... 40,414 21,035 22,535
Deferred income taxes..................................... 117,404 99,695 90,582
Prepayments and other..................................... 112,063 101,696 54,341
----------- ----------- -----------
Total current assets............................... 1,244,663 937,667 831,814
----------- ----------- -----------
Property and Equipment, at cost, less accumulated
depreciation and amortization of $2,512,196, $2,223,913
and $2,260,775............................................ 3,567,155 2,812,221 2,847,495
----------- ----------- -----------
Other Assets:
Cost over fair value of net tangible assets of acquired
businesses, net of accumulated amortization of $168,401,
$83,050 and $91,643..................................... 1,418,827 592,946 602,507
Other intangible assets, net of accumulated amortization
of $92,794, $81,959 and $88,160......................... 81,208 70,594 75,477
Deferred income taxes..................................... 50,057 24,588 23,108
Investments in unconsolidated affiliates.................. 235,559 512,964 484,953
Other..................................................... 80,823 48,501 68,811
----------- ----------- -----------
Total other assets................................. 1,866,474 1,249,593 1,254,856
----------- ----------- -----------
Total assets....................................... $ 6,678,292 $ 4,999,481 $ 4,934,165
=========== =========== ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt....... $ 151,736 $ 9,241 $ 7,308
Accounts payable.......................................... 496,733 354,916 289,282
Accrued liabilities--
Salaries and wages...................................... 115,477 83,199 66,011
Taxes, other than income................................ 58,112 31,238 31,793
Other................................................... 414,601 332,221 310,396
Income taxes.............................................. 19,204 9,076 5,665
Deferred revenues......................................... 178,661 175,615 180,623
----------- ----------- -----------
Total current liabilities.......................... 1,434,524 995,506 891,078
----------- ----------- -----------
Long-term Debt, net of current portion...................... 1,675,162 1,792,863 1,971,009
----------- ----------- -----------
Other Liabilities:
Accrued environmental and landfill costs.................. 505,278 392,853 382,440
Deferred income taxes..................................... 149,803 210,511 207,702
Other..................................................... 252,762 194,290 180,001
----------- ----------- -----------
Total other liabilities............................ 907,843 797,654 770,143
----------- ----------- -----------
Commitments and Contingencies
Common Stockholders' Equity:
Common stock, $.16 2/3 par; 400,000,000 shares authorized;
213,387,697, 208,310,631 and 208,799,756 shares
issued.................................................. 35,572 34,725 34,807
Additional paid-in capital................................ 1,839,378 1,631,236 1,645,864
Retained earnings......................................... 1,080,810 1,368,485 1,469,381
Treasury stock, 1,239,246, 46,008,054 and 51,978,911
shares, at cost......................................... (18,951) (1,620,988) (47,978)
Stock and Employee Benefit Trust, 7,252,452 shares at year
end 1997................................................ (276,046) -- (1,800,139)
----------- ----------- -----------
Total common stockholders' equity.................. 2,660,763 1,413,458 1,301,935
----------- ----------- -----------
Total liabilities and common stockholders'
equity........................................... $ 6,678,292 $ 4,999,481 $ 4,934,165
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-14
<PAGE> 16
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $5,779,277 $5,782,972 $4,745,748 $2,650,459 $2,078,623
Cost of operations............................. 4,315,615 4,289,614 3,437,661 1,735,275 1,314,628
---------- ---------- ---------- ---------- ----------
Gross profit................................... 1,463,662 1,493,358 1,308,087 915,184 763,995
Selling, general and administrative expense.... 874,069 812,242 683,284 321,616 261,170
Depreciation and amortization expense.......... -- -- -- 258,642 204,513
Special charges (credits), net................. 446,800 81,879 (21,464) (21,464) 19,183
---------- ---------- ---------- ---------- ----------
Income from operations......................... 142,793 599,237 646,267 356,390 279,129
Interest expense............................... 179,299 165,225 123,000 72,242 60,586
Interest income................................ (8,842) (7,142) (4,723) -- (846)
Equity in earnings of unconsolidated
affiliates................................... (55,370) (53,988) (60,078) (25,094) (19,679)
---------- ---------- ---------- ---------- ----------
Income before income taxes, minority interest,
extraordinary items and cumulative effects of
changes in accounting principles............. 27,706 495,142 588,068 309,242 239,068
Income taxes................................... 105,188 198,057 232,089 123,697 97,771
Minority interest in income of consolidated
subsidiaries................................. 11,690 13,390 6,606 5,444 2,521
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary items and
cumulative effects of changes in accounting
principles................................... (89,172) 283,695 349,373 180,101 138,776
Extraordinary losses on redemptions of debt of
unconsolidated affiliates, net of income tax
benefits of $1,677 and $538 for fiscal years
1997 and 1998, respectively.................. -- 3,124 999 999 --
Extraordinary losses on redemption of debt, net
of income tax benefits of $4,467 and $8,269
for fiscal years 1996 and 1997,
respectively................................. 12,159 15,357 -- -- --
Cumulative effects of changes in accounting
principles, net of income tax benefit of
$4,611....................................... -- -- 9,563 9,563 --
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (101,331) $ 265,214 $ 338,811 $ 169,539 $ 138,776
========== ========== ========== ========== ==========
Income (loss) per share:
Basic--
Income (loss) before extraordinary items
and cumulative effects of changes in
accounting principles.................... $ (.446) $ 1.399 $ 1.939 $ .957 $ .870
Extraordinary items........................ (.061) (.091) (.005) (.005) --
Cumulative effects of changes in accounting
principles............................... -- -- (.053) (.051) --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ (.507) $ 1.308 $ 1.881 $ .901 $ .870
========== ========== ========== ========== ==========
Diluted--
Income (loss) before extraordinary items
and cumulative effects of changes in
accounting principles.................... $ (.446) $ 1.393 $ 1.927 $ .951 $ .865
Extraordinary items........................ (.061) (.091) (.005) (.005) --
Cumulative effects of changes in accounting
principles............................... -- -- (.053) (.051) --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ (.507) $ 1.302 $ 1.869 $ .895 $ .865
========== ========== ========== ========== ==========
Number of common shares used in computing
earnings per share:
Basic........................................ 199,953 202,800 180,153 188,110 159,450
========== ========== ========== ========== ==========
Diluted...................................... 199,953 203,745 181,298 189,338 160,516
========== ========== ========== ========== ==========
Cash dividends per common share................ $ .68 $ .70 $ .76 $ .38 $ .38
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-15
<PAGE> 17
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Shares of common stock:
Beginning of year......................................... 213,441 213,390 213,388
Stock option exercises.................................... 563 2,918 2,071
Common stock issuances related to--
Dividend Reinvestment Plan.............................. 101 67 8
BFI Employee Stock Ownership and Savings Plan........... 754 699 43
Acquisitions............................................ 988 64 4
Retirements of common stock............................... (2,584) (3,760) (7,252)
Other..................................................... 127 10 49
---------- ---------- ----------
End of year............................................... 213,390 213,388 208,311
---------- ---------- ----------
Common stock:
Beginning of year......................................... $ 35,581 $ 35,572 $ 35,572
Stock option exercises.................................... 94 486 345
Common stock issuances related to--
Dividend Reinvestment Plan.............................. 17 11 1
BFI Employee Stock Ownership and Savings Plan........... 126 117 7
Acquisitions............................................ 165 11 1
Retirements of common stock............................... (431) (627) (1,209)
Other..................................................... 20 2 8
---------- ---------- ----------
End of year............................................... 35,572 35,572 34,725
---------- ---------- ----------
Additional paid-in capital:
Beginning of year......................................... 1,801,407 1,730,612 1,839,378
Stock option exercises and related income tax benefit..... 13,868 81,140 61,551
Common stock issuances related to--
Dividend Reinvestment Plan.............................. 2,908 1,954 316
BFI Employee Stock Ownership and Savings Plan........... 21,404 20,811 1,607
Automatic Common Exchange Securities.................... -- -- 3,198
Acquisitions............................................ 29,133 1,718 119
Adjustment of Stock and Employee Benefit Trust to
market.................................................. (62,388) 124,585 (23,413)
Retirements of common stock............................... (74,858) (123,223) (251,424)
Other..................................................... (862) 1,781 (96)
---------- ---------- ----------
End of year............................................... 1,730,612 1,839,378 1,631,236
---------- ---------- ----------
Retained earnings:
Beginning of year......................................... 1,328,244 1,031,331 1,080,810
Net income (loss)......................................... (101,331) 265,214 338,811
Cash dividends............................................ (133,623) (142,266) (133,431)
Foreign currency translation adjustment................... (61,959) (73,469) 82,295
---------- ---------- ----------
End of year............................................... 1,031,331 1,080,810 1,368,485
---------- ---------- ----------
Treasury stock:
Beginning of year......................................... (10,494) (11,926) (18,951)
Stock option exercises.................................... (1,649) (5,313) (297)
Common stock issuances related to--
Automatic Common Exchange Securities.................... -- -- 406,461
Acquisitions............................................ 303 (1,468) 283
Common stock repurchases.................................. -- -- (2,008,468)
Other..................................................... (86) (244) (16)
---------- ---------- ----------
End of year............................................... (11,926) (18,951) (1,620,988)
---------- ---------- ----------
Stock and Employee Benefit Trust:
Beginning of year......................................... (412,988) (275,311) (276,046)
Reimbursements of common stock............................ 75,289 123,850 252,633
Adjustment to market...................................... 62,388 (124,585) 23,413
---------- ---------- ----------
End of year............................................... (275,311) (276,046) --
---------- ---------- ----------
Total common stockholders' equity........................... $2,510,278 $2,660,763 $1,413,458
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
II-16
<PAGE> 18
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (101,331) $ 265,214 $ 338,811 $ 169,539 $ 138,776
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization--
Property and equipment........................ 521,185 501,656 425,295 229,385 189,195
Goodwill...................................... 47,374 43,215 28,531 18,495 8,599
Other intangible assets....................... 33,966 24,799 16,129 10,762 6,719
Special charges (credits), net.................. 446,800 81,879 (21,464) (21,464) 19,183
Cumulative effects of changes in accounting
principles.................................... -- -- 9,563 9,563 --
Deferred income tax expense..................... 3,034 81,146 94,496 15,639 9,774
Amortization of deferred investment tax
credit........................................ (706) (706) (706) (354) (354)
Provision for losses on accounts receivable..... 29,527 30,116 20,604 15,040 10,388
Gains on sales of fixed assets.................. (4,512) (6,995) (4,654) (1,148) (3,266)
Equity in earnings of unconsolidated affiliates,
net of dividends received and extraordinary
items......................................... (13,455) 7,373 (19,876) 2,030 11,188
Minority interest in income of consolidated
subsidiaries, net of dividends paid........... 10,895 6,059 1,052 3,810 (761)
Increase (decrease) in cash from changes in
assets and liabilities excluding effects of
acquisitions and divestitures:
Trade receivables............................. (28,683) (41,089) (50,865) (5,942) 8,481
Inventories................................... 1,563 4,103 (6,415) (6,623) (1,478)
Other assets.................................. 29,991 42,430 40,246 82,214 40,892
Other liabilities............................. (118,805) (40,100) (137,166) (145,005) (121,551)
----------- ----------- ----------- ----------- -----------
Total adjustments............................... 958,174 733,886 394,770 206,402 177,009
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities......... 856,843 999,100 733,581 375,941 315,785
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (935,382) (494,725) (525,447) (227,400) (259,979)
Payments for businesses acquired.................. (188,451) (21,305) (24,409) (21,509) (16,485)
Proceeds from businesses divested................. -- 372,202 991,849 990,960 4,075
Investments in unconsolidated affiliates.......... (82,535) (39,700) (37,816) (35,900) (28,764)
Proceeds from disposition of assets............... 57,742 41,667 47,297 29,536 15,859
Purchases of short-term investments............... -- -- (119,655) (103,330) --
Sales of short-term investments................... 302,065 21,539 -- -- 799
Return of investment in unconsolidated
affiliates...................................... 56,861 69,286 99,884 28,304 13,971
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities...................................... (789,700) (51,036) 431,703 660,661 (270,524)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock........... 13,316 68,761 465,644 28,776 6,286
Proceeds from issuances of indebtedness........... 980,834 191,255 599,847 27,122 266,519
Repayments of indebtedness........................ (904,459) (1,098,030) (68,710) (67,391) (110,393)
Repurchases of common stock....................... -- -- (2,008,468) (954,675) (180,740)
Dividends paid.................................... (137,944) (137,572) (141,524) (74,800) (61,338)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities............. (48,253) (975,586) (1,153,211) (1,040,968) (79,666)
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES..................... (1,474) (3,956) (926) (830) 18
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... 17,416 (31,478) 11,147 (5,196) (34,387)
CASH AT BEGINNING OF YEAR........................... 92,808 110,224 78,746 78,746 89,893
----------- ----------- ----------- ----------- -----------
CASH AT END OF YEAR................................. $ 110,224 $ 78,746 $ 89,893 $ 73,550 $ 55,506
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest, net of capitalized amounts.............. $ 174,590 $ 170,398 $ 126,832 $ 77,678 $ 55,004
Income taxes...................................... $ 163,251 $ 168,393 $ 154,148 $ 81,513 $ 93,287
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-17
<PAGE> 19
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Browning-Ferris Industries, Inc. and its subsidiaries (the "Company")
provide waste services in the United States and Canada. The Company collects,
transports, treats and/or processes, recycles and disposes of commercial,
residential and municipal solid waste and industrial wastes. The Company is also
involved in waste-to-energy conversion, medical waste services, portable
restroom services, and municipal and commercial sweeping operations. Further,
the Company is engaged in waste services outside of North America, principally
in Europe, through its equity ownership in SITA, a publicly traded, Paris-based
subsidiary of Suez Lyonnaise des Eaux.
The accompanying financial statements are prepared on a consolidated basis.
All significant intercompany accounts and transactions have been eliminated.
Entities over which the Company exercises control are consolidated. Other
investments are accounted for under the equity method or the cost method, as
appropriate. Foreign currencies have been translated into United States dollars
at appropriate exchange rates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements, and affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the Company's estimates.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note 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. In the opinion of management, all adjustments and disclosures
necessary to a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1998 as filed with the Securities
and Exchange Commission.
Certain reclassifications have been made in prior year financial statements
to conform to the fiscal year 1999 presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SHORT-TERM INVESTMENTS
Short-term investments are carried at cost, which approximates the
aggregate market value. At September 30, 1997 and 1998, short-term investments
of approximately $3.8 million and $5.8 million, respectively, were invested in
time deposits.
INVENTORIES
Inventories consisting principally of equipment parts, materials and
supplies are generally valued under a method which approximates the lower of
cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Capitalized landfill costs
include expenditures for land and related airspace, permitting costs and
preparation costs. Landfill permitting and preparation costs represent only
direct costs related to these activities, including legal, engineering,
construction and the direct costs of Company personnel dedicated for these
purposes. Interest is capitalized on landfill permitting and construction
projects and other projects under development while the assets are undergoing
activities to ready them for their intended use. The interest capitalization
rate is based on the Company's weighted average cost of
II-18
<PAGE> 20
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
indebtedness. Interest capitalized during fiscal years 1996, 1997, and 1998 was
$16,306,000, $9,714,000 and $8,726,000, respectively. Management routinely
reviews its investment in operating landfills, transfer stations and other
significant facilities to determine whether the costs of these investments are
realizable.
Landfill permitting and acquisition costs, excluding the estimated residual
value of land, are typically amortized as permitted airspace of the landfill is
consumed. For most of the Company's landfills, preparation costs, which include
the costs of construction associated with excavation, liners, site berms and the
installation of leak detection and leachate collection systems, are also
typically amortized as total permitted airspace of the landfill is consumed. In
determining the amortization rate for these landfills, preparation costs include
the total estimated costs to complete construction of the landfill's permitted
capacity. For the remaining landfills, the landfill preparation costs are
generally less significant and are amortized as the airspace for the particular
benefited phase is consumed. Units-of-production amortization rates are
determined annually for each of the Company's operating landfills. The rates are
based on estimates provided by the Company's engineers and accounting personnel,
and consider the information provided by aerial surveys which are generally
performed annually.
Depreciation of property and equipment, other than landfills, is provided
on the straight-line method based upon the estimated useful lives of the assets,
generally estimated as follows:
<TABLE>
<S> <C>
Solid waste and recycling collection vehicles........... 8-10 years
Other trucks, tractors and trailers..................... 8 years
Landfill equipment...................................... 5-7 years
Containers and compactors............................... 12 years
Injection molded carts.................................. 10 years
Other residual carts.................................... 5 years
Transfer stations and buildings......................... 20-40 years
Office and other equipment.............................. 3-10 years
</TABLE>
Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
During fiscal 1996, 1997 and 1998, maintenance and repairs charged to expense
were $336,374,000, $338,553,000 and $292,663,000, respectively. When property
and equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.
INTANGIBLE ASSETS
The cost over fair value of net tangible assets of acquired businesses
("goodwill") is amortized on the straight-line method over periods not exceeding
40 years. Other intangible assets, substantially all of which are customer lists
and covenants not to compete, are amortized on the straight-line method over
their estimated lives, typically no more than seven years.
LONG-LIVED ASSETS
Long-lived assets are comprised principally of property and equipment,
goodwill and other intangible assets. The Company periodically evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful lives of these assets should be revised or the remaining balances of
these assets are not recoverable. When factors indicate that an evaluation
should be performed for possible impairment, the Company uses an estimate of the
future income from operations of the related asset or business as a measure of
future recoverability of these assets.
II-19
<PAGE> 21
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED INCOME TAXES
Deferred tax assets and liabilities reflect the impact of temporary
differences between the financial reporting basis and tax basis of assets and
liabilities. Such amounts are recorded using presently enacted tax rates and
regulations. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Unamortized investment tax credits have been included in deferred income
taxes for financial reporting purposes. The Company amortizes investment tax
credits under the deferral method over the estimated useful lives of the related
assets as they are placed in service. No investment tax credits have been
generated since fiscal year 1992.
DEFERRED REVENUES
Amounts billed to customers prior to providing the related services are
deferred and later reported as revenues in the period in which the services are
rendered.
OTHER LIABILITIES
Accrued environmental and landfill costs
Accrued environmental and landfill costs includes the non-current portion
of accruals associated with obligations for closure and post-closure of the
Company's operating and closed landfills, corrective actions and remediation at
certain of these landfill facilities and corrective actions at Superfund sites.
The Company, based on input from its engineers and accounting personnel,
estimates its future cost requirements for closure and post-closure monitoring
and maintenance for solid waste operating landfills in the United States based
on its interpretation of the technical standards of the U.S. Environmental
Protection Agency's Subtitle D regulations and the air emissions standards under
the Clean Air Act as they are being applied on a state-by-state basis. Closure
and post-closure monitoring and maintenance costs represent the costs related to
cash expenditures yet to be incurred when a landfill facility ceases to accept
waste and closes. Accruals for closure and post-closure monitoring and
maintenance requirements in the U.S. consider final capping of the site, site
inspections, ground-water monitoring, leachate management, methane gas control
and recovery, and operation and maintenance costs to be incurred during the
period after the facility closes. Certain of these environmental costs,
principally capping and methane gas control costs, are also incurred during the
operating life of the site in accordance with the landfill operation
requirements of Subtitle D and the air emissions standards. Estimated future net
cash inflows from methane gas recovery activities are considered a cost
reduction component of closure and post-closure costs at a number of the
Company's landfills. Future net cash inflows of methane gas recovery activities
at each of these landfills represents cash to be received from sales of methane
gas or electricity in excess of the incremental costs to construct and operate
the methane gas recovery systems. Future cost requirements for closure and
post-closure monitoring and maintenance of Canadian operating landfills are
determined based on the landfill regulations governing the facility. The Company
typically provides accruals for these estimated costs as the remaining permitted
airspace of such facilities is consumed. Reviews of the future cost requirements
for closure and post-closure monitoring and maintenance for the Company's
operating landfills by the Company's engineers and accounting personnel are
performed at least annually and are the basis upon which the Company's estimates
of these future costs and the related accrual rates are revised.
An overall program of management of closed solid waste landfills previously
owned or operated by the Company has been implemented to provide a systematic
and routine standard of care and maintenance and to ensure environmental
compliance at closed facilities which require varying levels of inspection,
maintenance, environmental monitoring and, from time to time, corrective action.
Additionally, the Company routinely reviews and evaluates each landfill site
requiring corrective action (including Superfund sites) in which the Company's
subsidiaries are involved, considering each subsidiary's role with respect to
each site and the
II-20
<PAGE> 22
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
relationship to the involvement of other parties at the site, the quantity and
content of the waste with which the subsidiary was associated and the number and
financial capabilities of the other parties at the various sites. Based on
reviews of the various sites, currently available information, and management's
judgment and significant prior experience related to similarly situated
facilities, expense accruals are provided by the Company, to the extent
quantifiable, for its share of estimated future costs associated with corrective
actions to be implemented at certain of these sites and existing accruals are
revised as deemed necessary. Expense accruals related to the estimated costs of
post-closure care of previously owned or operated solid waste landfills are also
reviewed on a periodic basis and revised as necessary.
Accruals for closure, post-closure and certain other liabilities related to
hazardous waste disposal were provided in fiscal 1990 when the Company
discontinued its hazardous waste operations. The Company reviews the adequacy of
these accruals on a periodic basis to determine whether any revisions in the
accruals provided at that time are required.
OTHER NONCURRENT ITEMS
Other noncurrent items as of September 30, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Self-insurance accruals............................ $121,722 $132,359
Minority interest in consolidated subsidiaries..... 57,035 1,512
Accrued pension costs.............................. 31,792 18,631
Other.............................................. 42,213 41,788
-------- --------
$252,762 $194,290
======== ========
</TABLE>
In addition to the above items, included in other accrued liabilities at
September 30, 1997 and 1998 was the current portion of self-insurance accruals
of $89,567,000 and $71,774,000, respectively, and accrued pension costs of
$16,849,000 and $1,995,000, respectively.
The Company is self insured for workers' compensation, auto liability and
general and comprehensive liability claims. Under its insurance policies, the
Company generally has self-insured retention limits ranging from $500,000 to
$5,000,000 and has obtained fully insured layers of coverage above such
self-retention limits. The Company provides for its self-insurance accruals
based upon estimates provided by a third-party actuary. The actuary reviews the
Company's actual claims' activity and estimates the ultimate exposure related to
these aggregate claims. The Company reviews its self-insurance accruals
quarterly and revises these accruals as necessary.
CASH FLOW INFORMATION
The Consolidated Statement of Cash Flows provides information about changes
in cash and excludes the effects of non-cash transactions, principally related
to business combinations discussed in Note (6).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting of Comprehensive Income" was issued establishing standards for
reporting and presentation of comprehensive income and its components.
Comprehensive income is defined as all changes in a company's net assets except
II-21
<PAGE> 23
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
changes resulting from transactions with stockholders. The Company has adopted
SFAS No. 130 effective October 1, 1998. Comprehensive income (loss) is as
follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Net Income.................................................. $169,539 $138,776
Foreign currency translation adjustment:
Current period translation................................ (46,332) (25,666)
Reversal of portion of cumulative translation adjustment
in connection
with sale of international operations.................. 107,642 --
-------- --------
Total foreign currency translation adjustment............. 61,310 (25,666)
-------- --------
Comprehensive income........................................ $230,849 $113,110
======== ========
</TABLE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's quarter ending
December 31, 1999. The Company is currently evaluating the impact of SFAS No.
133 on its future results of operations and financial position.
In April 1998, Statement of Position ("SOP") No. 98-5, "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
statement, which is effective for the Company's fiscal year 2000, is to be
reported as a cumulative effect of a change in accounting principle. The Company
believes that the future adoption of SOP No. 98-5 will not have a material
effect on its results of operations or financial position.
(3) REORGANIZATION
During June 1996, the Company announced the reorganization of its North
American operating business structure, which became effective in August 1996.
The Company's previous organization divided North America into 45 divisions
reporting to six regional offices with operations conducted from approximately
400 districts. The new organization divides North America into market areas and
retains the district office organization. In addition, the new structure
organizes the Company's operations by specific business functions with direct
reporting to the corporate office. There was no reorganization charge recorded
to cover the estimated future expenses associated with this announcement. The
costs associated with this reorganization were expensed as incurred and were
included in selling, general and administrative expenses.
(4) SPECIAL CHARGES (CREDITS), NET
FISCAL 1996 SPECIAL CHARGES ($447 MILLION)
Special charges of $447 million ($362 million or $1.80 per share after
income taxes) were included in fiscal 1996 results of operations. Charges of
$349 million resulted principally from management decisions to sell the
Company's Italian operations, divest certain domestic and international non-core
business assets and operations and close certain recycling facilities not
expected to achieve desired performance objectives. The remainder of the special
charges related to the writedown of the Company's investment in the Azusa,
California landfill to fair value, which was determined based upon the present
value of the estimated future cash flows using a discount rate commensurate with
the risks involved.
The Company initiated a plan to sell its Italian operations during the
fourth quarter of fiscal 1996, which was formally approved by the Company's
Board of Directors. The Company's investment in its Italian
II-22
<PAGE> 24
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations, before considering special charges, was $206 million as of September
30, 1996. The Company completed the sale of these operations during June 1997.
Losses accumulated in the foreign currency translation component of common
stockholders' equity (approximately $53 million) were recognized as an
additional loss upon consummation of the sale of these operations and were
included in the fiscal 1997 special charges (see discussion below). Summary
financial information related to the Company's Italian operations is as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1997
---------- ---------
<S> <C> <C>
Revenues........................................... $122,782 $81,926
Loss from operations and equity in earnings of
unconsolidated affiliates before special
charges.......................................... $ (4,019)(1) $(2,190)(2)
</TABLE>
- ------------------------------
(1) Does not reflect special charge of $178.6 million included in the fiscal
1996 special charges.
(2) Does not reflect impact of special charges taken in fiscal 1997 (see below).
The Company also decided to divest of certain domestic and international
non-core business assets and operations and close certain recycling facilities
during the fourth quarter of fiscal 1996. These decisions were reached based on
a review of the non-core business assets and operations which were not expected
to achieve the Company's desired performance objectives and a review of certain
of the Company's recycling operations which had been adversely affected by the
significant decline in commodity prices at that time. The special charges, which
included asset writedowns and related liabilities recorded for certain
contractual arrangements, did not consider future expenses associated
principally with severance and relocation costs which would occur as a result of
these decisions. Assets of these operations, prior to the special charges, were
approximately $177 million as of September 30, 1996. The results of operations
for these non-core business assets and operations and recycling facilities were
not material to the Company's consolidated results of operations as the
aggregated revenues and loss from operations of these assets and operations
represented less than 4% of the Company's corresponding consolidated totals, on
a pre-special charges basis. During fiscal years 1997 and 1998, the Company sold
a number of these business operations and closed 47 recycling facilities.
In October 1996 (pursuant to a judicial order issued in September),
California authorities suspended the Company's ability to accept municipal solid
waste at its Azusa, California landfill pending compliance with certain
regulatory requirements. As a result of the changing competitive nature of waste
disposal in the Los Angeles market area and the continuing negative legal
climate, including the adverse decisions discussed above, bearing on the site's
ability to accept municipal solid waste, $98 million was included in the special
charges to reduce the carrying amount of this investment to its estimated fair
value. The fair value was determined based upon the present value of the
estimated future cash flows using a discount rate commensurate with the risks
involved. The Company sold this landfill facility during fiscal 1997.
FISCAL 1997 SPECIAL CHARGES ($82 MILLION)
Special charges of $82 million ($49 million or $0.24 per share after income
taxes) were reported in fiscal 1997. Included in these special charges were
non-cash expenses of $53 million due to cumulative foreign currency translation
losses associated with the sale of Italian business operations and $96 million
for anticipated losses related to decisions to divest additional underperforming
or non-core business operations and assets located primarily in the United
Kingdom, the Netherlands and the United States. These losses were offset
partially by net gains of $67 million arising largely from 56 divestitures
completed in fiscal 1997, principally in North America.
The results of operations for these additional underperforming or non-core
business operations to be divested were not material to the Company's
consolidated results of operations for fiscal 1997 as the aggregated total
assets, revenues and income (loss) from operations of these assets and business
operations
II-23
<PAGE> 25
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
represented approximately 3% or less of the Company's corresponding consolidated
totals, on a pre-special charge basis.
FISCAL 1998 SPECIAL CREDITS ($21 MILLION)
Special credits of $21.5 million ($12.9 million after income taxes or $.07
per share) were reported for fiscal 1998. These special credits are related
principally to the estimated gain of $17.9 million recognized from the sale in
March 1998 of substantially all of the Company's operations outside North
America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. In
exchange for these operations, the Company received $950 million in cash and an
ownership interest of approximately 19.2% in ordinary shares of SITA. Costs
associated with the sale of these operations included estimated transaction and
other expenses and losses accumulated in the foreign currency translation
component of common stockholders' equity (approximately $133 million). A portion
of the total gain, net of related costs, has been deferred in connection with
the Company's continuing investment in SITA.
The Company's consolidated results of operations on an unaudited pro forma
basis, as though the sale of the operations outside North America had occurred
on October 1, 1996 and 1997 are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------ MARCH 31,
1997 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma revenues..................... $4,328,394 $4,116,151 $2,020,862
Pro forma income before extraordinary
items and cumulative effects of
changes in accounting principles..... $ 350,855 $ 328,683 $ 159,411
Pro forma earnings per shares(1)
Basic................................ $ 1.73 $ 1.82 $ .85
Diluted.............................. $ 1.72 $ 1.81 $ .84
</TABLE>
- ---------------
(1) Excluding the after-tax impact of special charges (credits), net, earnings
per share amounts for the years ended September 30, 1997 and 1998 were:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Basic.................. $1.64 $1.55 $1.87 $1.82
Diluted................ $1.63 $1.54 $1.86 $1.81
</TABLE>
These pro forma results are presented for informational purposes and do not
purport to show the actual results which would have occurred had the sale of the
international operations been consummated on October 1, 1996, nor should they be
viewed as indicative of future results of operations. In addition, these pro
forma amounts give no effect to earnings from the Company's equity investment in
SITA on a pro forma basis for the periods prior to consummation of the sale of
the international operations. Had any such estimated earnings from the Company's
investment in SITA been considered in the Company pro forma results of
operations presented above, management believes that pro forma earnings per
share amounts would reflect significantly less dilution when compared with the
related historical earnings per share amounts.
The remaining amounts included in special credits were attributable
principally to net gains associated with the divestiture of certain North
American operations in the current fiscal year.
II-24
<PAGE> 26
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
On November 20, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force issued EITF No. 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract of an Internal Project That Combines
Business Process Reengineering and Information Technology Transformation", a
consensus ruling requiring that certain business process reengineering costs
typically capitalized by companies be expensed as incurred. The ruling further
required that previously capitalized costs of this nature be written off as a
cumulative effect of a change in accounting principle in the quarter containing
November 20, 1997. The Company had previously capitalized these types of costs
in connection with its current SAP software implementation project. As a result,
the Company recorded an after-tax charge of $13.8 million or $.076 diluted
earnings per share in the first quarter of fiscal 1998 as the cumulative effect
of a change in accounting principle.
During the second quarter of fiscal 1998, the Company changed its method of
accounting for recognition of value changes in its employee retirement plan for
purposes of determining annual expense under SFAS No. 87,"Employers' Accounting
for Pensions", effective October 1, 1997. The Company has changed its method of
calculating the value of assets of its plan from a calculation which recognized
changes in fair value of assets over five years to recognition of changes in
fair value immediately. The Company has also changed the method of recognizing
gains and losses from deferral within a 10% corridor and amortization of gains
outside this corridor over the future working careers of the participants to a
deferral below a 5% corridor, immediate recognition within a 5-10% corridor and
amortization of gains outside this corridor over the future working careers of
the participants. The new method is preferable because, in the Company's
situation, it produces results which more closely match current economic
realities of the Company's retirement plan through the use of the current fair
value of assets while still mitigating the impact of extreme gains and losses.
As a result, the Company recorded an after-tax credit of $4.2 million, or $.023
diluted earnings per share, as the cumulative effect of a change in accounting
principle.
(6) BUSINESS COMBINATIONS
During the fiscal year ended September 30, 1998, the Company paid
approximately $25.5 million (including additional amounts payable, principally
to former owners, of $.7 million and the issuance of 7,089 shares of the
Company's common stock valued at $.2 million) to acquire 30 solid waste
businesses, which were accounted for as purchases. In connection with these
acquisitions, the Company recorded additional interest-bearing indebtedness of
$.2 million and other liabilities of $1.5 million. The results of these business
combinations are not material to the Company's consolidated results of
operations or financial position.
During the fiscal year ended September 30, 1997, the Company paid
approximately $22.5 million (including additional amounts payable, primarily to
former owners, of $1.2 million) to acquire 22 solid waste businesses, which were
accounted for as purchases. In connection with these acquisitions, the Company
recorded additional interest-bearing indebtedness of $2.5 million and other
liabilities of $4.8 million. The results of these business combinations were not
material to the Company's consolidated results of operations or financial
position.
The results of all businesses acquired in fiscal years 1998 and 1997 have
been included in the consolidated financial statements from the dates of
acquisition. In allocating purchase price, the assets acquired and liabilities
assumed in connection with the Company's acquisitions have been initially
assigned and recorded based on preliminary estimates of fair value and may be
revised as additional information concerning the valuation of such assets and
liabilities becomes available. As a result, the financial information included
in the Company's consolidated financial statements is subject to adjustment
prospectively as subsequent revisions in estimates of fair value, if any, are
necessary.
II-25
<PAGE> 27
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) PROPERTY AND EQUIPMENT
Property and equipment at September 30 was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Land and improvements....................... $ 330,835 $ 217,190
Buildings................................... 596,053 389,568
Landfills................................... 1,661,888 1,558,064
Vehicles and equipment...................... 3,373,894 2,704,058
Construction-in-progress.................... 116,681 167,254
---------- ----------
Total property and equipment...... 6,079,351 5,036,134
Less accumulated depreciation and
amortization.............................. 2,512,196 2,223,913
---------- ----------
Property and equipment, net....... $3,567,155 $2,812,221
========== ==========
</TABLE>
Included in the landfill category of property and equipment, net are $35.7
million and $54.1 million as of September 30, 1997 and 1998, respectively,
related to solid waste landfill market development projects, including landfill
permitting costs, for which amortization has not yet commenced. The Company
reviews the realization of these projects on a periodic basis.
(8) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company uses the equity method of accounting for investments in
unconsolidated affiliates over which it exercises voting control of 20%-50%. The
summarized combined balance sheet and income statement information (and the
Company's related investments and earnings) presented in the table below
includes amounts primarily related to the following significant equity
investees: SITA (France) (19.2% equity ownership with 20% Board of Director
representation) (acquired March 1998), American Ref-Fuel Company of Hempstead,
Inc. (New York) (50%), American Ref-Fuel Company of Essex County, Inc. (New
Jersey) (50%), American Ref-Fuel Company of Southeastern Connecticut, Inc.
(50%), American Ref-Fuel Company of Niagara, L.P. (New York) (50%), American
Ref-Fuel Company Operations of SEMASS, L.P. (50%), Swire BFI Waste Services,
Ltd. (Hong Kong) (50%) (through March 1998), P&R (Germany) (50%--for the period
February 1994 through February 1996, at which time the remaining 50% ownership
interest was acquired) and Congress Development Company (Chicago, Illinois)
(50%).
At September 30, 1998, the ordinary shares of SITA owned by the Company had
a net book value of $374 million and a market value, based on the Paris Stock
Exchange closing price, of approximately $477 million. Under the terms of the
Company's shareholders agreement with Suez Lyonnaise des Eaux, these ordinary
shares cannot be sold, transferred or otherwise disposed of by the Company until
after March 31, 2001, except with the prior written consent of Suez Lyonnaise
des Eaux.
II-26
<PAGE> 28
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Combined Balance Sheet Information:
Assets
Current assets....................................... $ 279,938 $1,742,447
Noncurrent assets.................................... 1,434,272 3,695,399
---------- ----------
$1,714,210 $5,437,846(1)
========== ==========
Liabilities and Net Worth
Current liabilities.................................. $ 192,745 $1,198,725
Noncurrent liabilities............................... 1,200,656 3,419,713
Net worth............................................ 320,809 819,408
---------- ----------
$1,714,210 $5,437,846
========== ==========
Company's Investments in and Advances to Equity
Investees(2).............................................. $ 215,761 $ 510,387
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Combined Statement of Operations Information:
Revenues............................................. $511,086 $553,098 $2,056,467
Gross profit......................................... $213,236 $226,853 $ 550,637
Income before extraordinary item..................... $ 95,438 $ 93,465 $ 154,328
Extraordinary item(4)................................ $ -- $ (9,602) $ (3,074)
Net income........................................... $ 95,438 $ 83,863 $ 151,254
Company's Statement of Operations Information:
Equity in earnings of equity investees(3)............... $ 55,370 $ 53,988 $ 60,078
Extraordinary item, net of income tax benefit of $1,677
and $538 for fiscal 1997 and 1998, respectively...... $ -- $ 3,124(4) $ 999(5)
Dividends Received from Equity Investees.................. $ 41,915 $ 56,560 $ 38,665
</TABLE>
- ------------------------------
(1) Includes assets of $3.8 billion related to SITA.
(2) Includes investment in excess of underlying equity of SITA of $237 million
and subordinated note and other receivables of $61 million as of September
30, 1997, and subordinated note and other receivables of $43 million as of
September 30, 1998.
(3) Differences between the equity in earnings of equity investees reported by
the Company and the Company's proportionate share of the combined earnings
of the related equity investees have resulted principally from accounting
differences in the recognition of income, the elimination of intercompany
transactions and the amortization of investment in excess of underlying
equity of SITA over 40 years.
(4) During the second quarter of fiscal 1997, the Company's unconsolidated
affiliate, American Ref-Fuel Company of Hempstead, incurred a pre-tax charge
to expense of $9.6 million associated with the redemption of approximately
$250 million principal amount of Series 1985 Bonds, which were refinanced.
As a result, the Company reflected an extraordinary charge, after tax, of
$3.1 million (or approximately $.015 per share) in its fiscal 1997
Consolidated Statement of Operations related to its 50% ownership interest
in this affiliate. Interest was payable on the Series 1985 Bonds due 2010 at
a weighted average interest rate of approximately 7.3%, compared with the
weighted average interest rate of approximately 5% for the new bonds, which
are also due in 2010.
II-27
<PAGE> 29
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) During the second quarter of fiscal 1998, the Company's unconsolidated
affiliate, American Ref-Fuel Company of Southeastern Connecticut, incurred a
pre-tax charge of $3.1 million associated with its obligation to redeem
approximately $90 million principal amount of 1988 Series A Bonds in
November 1998. As a result, the Company reflected an extraordinary charge,
after-tax of $999,000 (or approximately $.005 per share) in its fiscal 1998
Consolidated Statement of Operations related to its 50% ownership interest
in this affiliate. Interest was payable on the 1988 Series A Bonds at a
weighted average interest rate of approximately 7.9%, compared with the
weighted average interest rate of approximately 5.1% for the new bonds,
which mature in 2015.
(9) ACCRUED ENVIRONMENTAL AND LANDFILL COSTS
Accrued environmental and landfill costs at September 30 were as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Continuing operations--
Accrued costs associated with open landfills (including
landfills under expansion)............................. $248,820 $219,253
Accrued costs associated with closed landfills and
corrective action costs (including Superfund sites).... 264,516 173,722
-------- --------
Total............................................. 513,336 392,975
Less current portion (included in other accrued
liabilities)........................................... 81,291 72,711
-------- --------
Total long-term................................... $432,045 $320,264
======== ========
Discontinued operations--
Accrued costs of closure, post-closure and certain other
liabilities associated with discontinued operations.... $ 99,914 $ 88,322
Less current portion (included in other accrued
liabilities)........................................... 26,681 15,733
-------- --------
Total long-term................................... $ 73,233 $ 72,589
======== ========
Total long-term portion of accrued environmental and
landfill costs............................................ $505,278 $392,853
======== ========
</TABLE>
For a discussion of the Company's significant accounting policies related
to these environmental and landfill costs, see Note (2)--"Summary of significant
accounting policies"--"Other liabilities"--"Accrued environmental and landfill
costs".
OPEN LANDFILLS
The Company operates 88 solid waste landfills in the United States, 18 of
which are operated under contracts with municipalities or others. The Company
also operates 6 landfills in Canada. The Company is responsible for closure and
post-closure monitoring and maintenance costs at most of these landfills which
are currently operating or are engaged in expansion efforts. Estimated aggregate
closure and post-closure costs will be fully accrued for these landfills at the
time that such facilities cease to accept waste and are closed. Considering
existing accruals at the end of fiscal 1998, approximately $125-$175 million of
additional accruals are to be provided over the remaining lives of these
facilities. Estimated additional environmental costs ranging from $425-$475
million, principally related to capping and certain methane gas control and
recovery activities expected to occur during the operating lives of these sites,
are also to be expensed over the remaining lives of these landfill facilities.
II-28
<PAGE> 30
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CLOSED LANDFILLS AND CORRECTIVE ACTION COSTS (INCLUDING SUPERFUND SITES)
These costs related to closure and post-closure activities or corrective
actions at closed solid waste landfills owned or previously operated by the
Company as well as a number of Superfund sites where subsidiaries of the Company
are participating in potentially responsible party groups or are otherwise
involved.
DISCONTINUED OPERATIONS
These costs relate to closure and post-closure activities or corrective
actions at hazardous waste landfills owned or previously operated by the Company
as well as a number of Superfund sites where subsidiaries of the Company
previously disposed of hazardous waste and are participating in potentially
responsible party groups or are otherwise involved. The Company discontinued its
hazardous waste operations in April 1990.
(10) LONG-TERM DEBT
Long-term debt was as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------ ----------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Senior indebtedness (maturing as set forth in
the following paragraphs):
6.10% Senior Notes, net of unamortized
discount of $1,218, $986 and $870......... $ 155,471 $ 155,703 $ 155,819
6.375% Senior Notes, net of unamortized
discount of $1,507, $1,360 and $1,286..... 159,693 159,840 159,914
7 7/8% Senior Notes, net of unamortized
discount of $195, $169 and $156........... 69,306 69,332 69,345
7.40% Debentures, net of unamortized discount
of $1,767, $1,720 and $1,697.............. 358,233 358,280 358,303
9 1/4% Debentures............................ 99,500 99,500 99,500
Solid waste revenue bond obligations......... 219,974 220,044 254,479
Other notes payable, primarily 5.5%-15.5%.... 505,674 46,790 40,113
---------- ---------- ----------
1,567,851 1,109,489 1,137,473
Commercial paper and short-term facilities to
be refinanced................................ 259,047 692,615 840,844
---------- ---------- ----------
Total long-term debt........................... 1,826,898 1,802,104 1,978,317
Less current portion........................... 151,736 9,241 7,308
---------- ---------- ----------
Long-term debt, net of current portion......... $1,675,162 $1,792,863 $1,971,009
========== ========== ==========
</TABLE>
The long-term portion of the debt outstanding at September 30, 1998,
matures as follows: 2000, $698,795,000; 2001, $4,955,000; 2002, $4,425,000;
2003, $159,977,000 and in subsequent years, $924,711,000.
EXTRAORDINARY ITEMS
During the third quarter of fiscal 1997, the Company redeemed $160 million
of private placement notes previously scheduled to mature in fiscal 1998 and
$11.8 million of tax-exempt debt associated with a landfill that was sold in the
third quarter by the Company.
On September 3, 1997, the Company announced a tender offer for its $300
million 7 7/8% Senior Notes due March 15, 2005. Prior to expiration of the
tender offer on September 17, 1997, approximately $230.5 million of these notes
were tendered pursuant to the tender offer. During the fourth quarter of fiscal
1997, the Company also acquired $122.6 million of its outstanding publicly
traded debt through open market purchases.
II-29
<PAGE> 31
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company purchased $43.3 million of its 6.10% Senior Notes, $38.8 million of
its 6.375% Senior Notes, $40.0 million of its 7.40% Debentures and $0.5 million
of its 9 1/4% Debentures.
These redemptions of debt, aggregating $524.9 million, resulted in
extraordinary charges to the Company's fiscal 1997 net income of $15.4 million,
after income taxes, or approximately $.076 diluted earnings per share.
6.10% AND 6.375% SENIOR NOTES
In January 1996, the Company issued $200 million of 6.10% Senior Notes due
January 15, 2003 and $200 million of 6.375% Senior Notes due January 15, 2008
(the "Notes"). The Notes are not redeemable prior to maturity and are not
subject to any sinking fund. Net proceeds from the sale of the Notes were
applied to the repayment of a portion of the $745 million of Convertible
Subordinated Debentures called for redemption on February 2, 1996. See Note
(11).
7 7/8% SENIOR NOTES
In March 1995, the Company issued $300 million of 7 7/8% Senior Notes which
mature on March 15, 2005. Net proceeds received by the Company from the sale
were used to repay indebtedness associated with the acquisition of Attwoods and
other working capital requirements.
7.40% DEBENTURES
In September 1995, the Company issued $400 million of 7.40% Debentures due
September 15, 2035. These debentures are not subject to any sinking fund and may
be redeemed as a whole or in part, at the option of the Company at any time. The
redemption price is equal to the greater of (i) the principal amount of the
debentures and (ii) the present value of future principal and interest payments
discounted at a rate specified under the terms of the indenture. Net proceeds
received from the sale of these debentures were used to repay short-term
indebtedness associated with various acquisitions, including the Attwoods
acquisition.
9 1/4% DEBENTURES
In May 1991, the Company issued $100 million of 9 1/4% Debentures which
mature on May 1, 2021. The debentures may not be redeemed prior to maturity and
are not subject to any sinking fund.
SOLID WASTE REVENUE BOND OBLIGATIONS
Certain subsidiaries of the Company have entered into agreements under
which they receive proceeds from the sale by government authorities of solid
waste revenue bonds. These subsidiaries are obligated to make payments
sufficient to pay the interest and retire the bonds. The weighted average
interest rate of these issues is approximately 5.63%. These issues mature at
various dates through the year 2027. The solid waste revenue bond obligations of
the subsidiaries are either guaranteed by the Company or supported by letters of
credit issued by commercial banks.
OTHER NOTES PAYABLE
During February and March 1995, the Company borrowed a total of $160
million under separate senior note agreements with a number of lending
institutions. These notes were redeemed during fiscal 1997. Interest was payable
semi-annually on the senior notes at rates ranging from 7.5%-8.0%.
Additionally, notes payable includes mortgages payable and other secured
debt, unsecured debt and capitalized lease obligations of the Company.
Approximately $208 million of this indebtedness at Septem-
II-30
<PAGE> 32
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ber 30, 1997, related to a large number of separate company debt instruments of
Otto Waste Services and its consolidated subsidiaries (divested in March 1998).
BANK CREDIT AGREEMENTS
During May 1995, the Company modified the terms of its existing $1 billion
revolving credit agreement extending the maturity of the facility to May 2000.
The agreement continues to provide total committed credit capacity of $1
billion. This $1 billion credit agreement can be utilized to borrow U.S.
domestic dollars or Eurodollars on a committed basis. At the option of the
Company and the participating banks, U.S. dollar and Eurodollar loans bear a
rate of interest based on the London Interbank Offered Rate ("LIBOR") the prime
rate, the federal funds rate or a certificate of deposit rate, plus a margin.
The $1 billion revolving credit agreement with a group of U.S. and international
banks currently requires a facility fee of .1% per annum on the total
commitment, whether used or unused. This $1 billion credit agreement is used
primarily to support the Company's commercial paper program. At September 30,
1998 and 1997, the Company had no outstanding borrowings under this bank credit
agreement.
During December 1997, the Company amended the terms of its existing $750
million Multicurrency Revolving Credit Agreement to reduce the total commitment
to $500 million and to extend the termination date. Under the terms of the
amended agreement, the facility has a 364-day term with a one-year, term-out
option available to the Company at any time prior to its maturity date in
December 1998. The facility can be utilized to borrow U.S. dollars, pounds
sterling, deutsche mark, French francs or Dutch guilders as determined by the
Company. At the option of the Company, the loans bear a rate of interest based
upon LIBOR or the federal funds rate, plus a margin, or the prime rate. The
Multicurrency Revolving Credit Agreement with Credit Suisse, as administrative
agent for a group of U.S. and international banks, requires a facility fee of
.06% per annum on the total commitment, whether used or unused. At September 30,
1998 and 1997, the Company had no outstanding borrowings under this agreement.
The Company's net worth maintenance requirements under its $1 billion
revolving credit agreement and its $500 million Multicurrency Revolving Credit
Agreement were amended, effective March 31, 1998. The definition of consolidated
net worth was amended to (i) include on a pro forma basis the $409.7 million of
common stock (subsequently issued upon the maturity of the Automatic Common
Exchange Securities in June 1998) and (ii) to reduce the consolidated net worth
requirements to $1.2 billion for the remainder of fiscal 1998. The consolidated
net worth requirement of $1.2 billion increases annually after September 30,
1998 by 20% of the consolidated net income of the preceding year and excludes
the effect of any foreign currency translation adjustments on net worth.
In March 1995, Otto Waste Services entered into a five-year revolving
credit facility in the amount of 600 million deutsche mark with a group of
German and international banks. Interest was payable on loans under the facility
at the Frankfurt Interbank Offered Rate ("FIBOR") plus a margin. This agreement
required a facility fee of .45% per annum (.30% per annum if Otto Waste Services
maintains certain net worth requirements) on the total facility commitment,
whether used or unused. At September 30, 1997, Otto Waste Services had
outstanding borrowings under this facility of 360 million deutsche mark
(approximately U.S. $204.6 million). Otto Waste Services was included with the
international operations divested in March 1998.
As of September 30, 1998, distributions from retained earnings could not
exceed $236 million under the most restrictive of the Company's net worth
maintenance requirements.
COMMERCIAL PAPER AND SHORT-TERM FACILITIES TO BE REFINANCED
Under the Company's commercial paper program, the Company is authorized to
issue up to $1.5 billion in commercial paper. The Company may use proceeds from
borrowings under this program to refinance existing indebtedness and for general
corporate purposes, including interim financing of business acquisitions
II-31
<PAGE> 33
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and funding working capital requirements. Borrowings under the commercial paper
program may not exceed the available credit under the Company's existing bank
credit agreements. It is the Company's intention to refinance outstanding
short-term borrowings classified as long-term debt through the use of existing
committed long-term bank credit agreements in the event that alternative
long-term refinancing is not arranged. A summary by country of commercial paper
balances and other outstanding borrowings to be refinanced is as follows
(amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------- MARCH 31,
1997 1998 1999
--------------------- --------------------- ----------
AMOUNT INTEREST AMOUNT INTEREST AMOUNT
TO BE RATE AT TO BE RATE AT TO BE
REFINANCED YEAREND REFINANCED YEAREND REFINANCED
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
United States--
Commercial paper...................... $ -- --% $590,676 5.8% $489,125
Market Value Put Securities........... -- --% -- --% 251,329
Other................................. -- --% 101,939 6.7% 100,390
Germany................................. 259,047 4-10% -- --% --
-------- -------- --------
$259,047 $692,615 $840,844
======== ======== ========
</TABLE>
On January 15, 1999, the Company issued $250 million of Market Value Put
Securities ("MVPs"). The MVPs bear interest at 6.08% and are subject to a
mandatory put on January 18, 2000. First Chicago Capital Markets, Inc. holds an
option to remarket the MVPs on that date for an additional two-year term.
Proceeds from the MVPs were used to repay a portion of the Company's commercial
paper balances.
As of March 31, 1999, distributions from retained earnings could not exceed
$82 million under the most restrictive of the Company's net worth maintenance
requirements.
(11) CONVERTIBLE SUBORDINATED DEBENTURES
On January 2, 1996, the Company announced that its $400 million 6 3/4%
Convertible Subordinated Debentures due 2005 and its $345 million 6 1/4%
Convertible Subordinated Debentures due 2012 were being called for redemption.
The redemption, which occurred on February 2, 1996, resulted in an extraordinary
charge to the Company's fiscal 1996 net income of $12.2 million, after income
taxes, or approximately $.061 per share.
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company and certain subsidiaries are involved in various administrative
matters or litigation, including personal injury and other civil actions, as
well as other claims and disputes that could result in additional litigation or
other adversary proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a materially adverse effect upon the consolidated financial position of the
Company.
ENVIRONMENTAL PROCEEDINGS
The Company and certain subsidiaries are involved in various environmental
matters or proceedings, including original or renewal permit application
proceedings in connection with the establishment, operation, expansion, closure
and post-closure activities of certain landfill disposal facilities, and
proceedings relating to governmental actions resulting from the involvement of
various subsidiaries of the Company with certain
II-32
<PAGE> 34
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
waste sites (including Superfund sites), as well as other matters or claims that
could result in additional environmental proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a materially adverse effect upon the consolidated financial position of the
Company.
INSURANCE MATTERS
Under its insurance policies, the Company generally has self-insured
retention limits ranging from $500,000 to $5,000,000 and has obtained fully
insured layers of coverage above such self-retention limits. The Company has a
wholly-owned domestic insurance subsidiary which operates as a captive insurance
company. It currently writes insurance to meet financial assurance obligations
related to closure and post-closure of certain landfills of the Company. At
September 30, 1998, no claims had been made relative to this insurance
operation, and no claim reserves had been posted.
In order to meet existing governmental requirements, the Company has been
able to secure an environmental impairment liability insurance policy in amounts
which the Company believes are in compliance with the amounts required by
federal and state law. Under this policy, the Company must reimburse the carrier
for losses incurred by the Company.
WASTE-TO-ENERGY PROJECTS
Certain of the Company's subsidiaries have 50% ownership interests in
American Ref-Fuel partnerships that construct, own and operate facilities which
generate and sell electricity from the incineration of solid waste.
Substantially all of the remaining ownership interests are held by Duke/UAE
Ref-Fuel LLC, an entity indirectly owned 65% by Duke Capital Corporation ("Duke
Capital") and 35% by United American Energy Corporation. The five facilities
currently in commercial operation under this ownership structure are located in
Hempstead, New York, Essex County in New Jersey, Preston, Connecticut, Niagara
Falls, New York and Rochester, Massachusetts. Financing arrangements for four of
these projects include agreements with the Company and Duke Capital to each
severally fund one-half of each partnership's cash deficiencies resulting from
the partnership's failure to perform.
With respect to the facilities located in Hempstead, New York, Essex County
in New Jersey and Preston, Connecticut, the Company and Duke Capital generally
will not be required to fund cash deficiencies associated with waste deliveries
by the sponsoring municipality below certain minimum levels, changes in law or
termination of incineration service for reasons other than default by the
respective partnership. In the event of a partnership default which results in
termination of incineration service, the Company may limit its financial
obligations by partnership as follows:
Hempstead, New York -- Funding of 50% of periodic payments related to
outstanding debt. At September 30, 1998, $210 million of total unamortized
project debt was outstanding. Average annual debt service on 50% of the debt
over the next five years is $11 million. The Company has guaranteed $5 million
of additional partnership debt and annual debt service on such debt is estimated
to be $.2 million.
Essex County in New Jersey -- Funding of 50% of cash deficiencies including
debt service up to $50 to $100 million, depending upon the circumstances.
Average annual debt service on 50% of the debt over the next five years is $10
million.
Preston, Connecticut -- Funding of 50% of periodic payments related to
outstanding debt. At September 30, 1998, total outstanding debt included $85
million of unamortized project debt and $43 million of additional partnership
debt (of which $21.5 million is guaranteed by the Company). Average annual debt
service on 50% of the debt over the next five years is $5 million.
II-33
<PAGE> 35
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
With respect to the facilities located in Niagara Falls, New York and
Rochester, Massachusetts, the Company may limit its financial obligations by
partnership as follows:
Niagara Falls, New York--Funding of 50% of partnership cash deficiencies
relating to debt service. At September 30, 1998, $165 million of total
unamortized partnership debt was outstanding (of which $82.5 million is
guaranteed by the Company). Average annual debt service on 50% of the debt over
the next five years is estimated to be $3 million.
SEMASS in Rochester, Massachusetts--Under support agreements and guarantees
(i) lending up to 50% of $5 million to the SEMASS Partnership under certain
circumstances, (ii) deferring up to 50% of $7 million of operating cost
reimbursement, and (iii) funding up to 50% of $5 million in operating damages.
These obligations have been assigned to the lenders. The SEMASS Partnership has
non-recourse indebtedness outstanding of approximately $291 million (weighted
averaged fixed rate of 9.7%) as of September 30, 1998. Average annual debt
service on 50% of the debt over the next five years is approximately $19
million.
OPERATING LEASES
The Company and its subsidiaries lease substantial portions of their office
and other facilities under various lease agreements. During the fourth quarter
of fiscal 1998, the Company acquired approximately $84 million of trucks and
containers under the purchase option provisions of related operating lease
agreements. At September 30, 1998, total minimum rental commitments becoming
payable under all noncancellable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................. $ 44,011
2000................................................. $ 40,450
2001................................................. $ 38,959
2002................................................. $ 39,876
2003................................................. $ 35,886
2004-2008............................................ $136,489
2009-2013............................................ $100,946
All years thereafter................................. $ 28,488
</TABLE>
Total rental expenses for fiscal years 1996, 1997 and 1998, substantially
all of which related to fixed amount rental agreements, were $105,134,000,
$107,622,000 and $97,088,000, respectively.
(13) PREFERRED STOCK
The Company is authorized by its Restated Certificate of Incorporation to
issue 25 million shares of preferred stock, the terms and conditions to be
determined by the Board of Directors in creating any particular series.
(14) PREFERRED STOCK PURCHASE RIGHTS PLAN
In June 1988, the Board of Directors of the Company adopted a Preferred
Stock Purchase Rights Plan and in connection therewith declared a dividend of
one Preferred Stock Purchase Right on each outstanding share of the Company's
common stock and on each share subsequently issued until separate Rights
certificates were distributed, or the Rights expired or were redeemed. In June
1998, prior to the expiration of the June 1988 plan, the Board of Directors
adopted a new plan and declared a dividend distribution of one Right for each
outstanding share of the Company's common stock, payable on June 15, 1998. When
exercisable, each Right will entitle a holder to purchase one one-hundredth of a
share of a new series of the Company's Preferred Stock at an exercise price of
$125.00, subject to adjustment.
II-34
<PAGE> 36
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the Company is acquired in a business combination transaction on or at
any time after the date on which a person obtains ownership of 20% or more of
the Company's outstanding common stock, provision generally must be made prior
to the consummation of such transaction to entitle each holder of a Right to
purchase at the exercise price a number of the acquiring company's common shares
having a market value at the time of such transaction of two times the exercise
price of the Right. The Rights also provide that upon the occurrence of certain
other specific matters, each holder will have the right to receive, upon payment
of the exercise price, shares of the new series of Preferred Stock having a
market value of two times the exercise price of a Right. The Company has a right
to redeem the Rights for $.01 per Right prior to the time they become
exercisable. The Rights will expire on June 15, 2008.
(15) COMMON STOCK
EARNINGS PER SHARE
In February 1997, SFAS No. 128, "Earnings Per Share" was issued. This
statement, which established new standards for computing and presenting earnings
per share, became effective for the Company's quarter ended December 31, 1997.
All prior periods presented have been restated pursuant to the requirements of
this new standard. The adoption of SFAS No. 128 had no material effect on the
Company's previously reported earnings per share. The following table reconciles
the number of common shares outstanding with the number of common shares used in
computing basic and diluted earnings per share for the three years ended
September 30, 1998 and the six months ended March 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common shares outstanding, end
of period..................... 212,363 212,148 162,303 186,105 156,821
Less--Shares held in Stock and
Employee Benefit Trust........ (11,012) (7,252) -- (6,082) --
------- ------- ------- ------- -------
Common shares outstanding for
purposes of computing earnings
per share, end of period...... 201,351 204,896 162,303 180,023 156,821
Effect of using weighted average
common shares outstanding..... (1,398) (2,096) 17,850 8,087 2,629
------- ------- ------- ------- -------
Shares used in computing
earnings per share--basic..... 199,953 202,800 180,153 188,110 159,450
Effect of shares issuable under
stock option plans based on
the treasury stock method..... -- 945 1,145 1,228 1,066
------- ------- ------- ------- -------
Shares used in computing
earnings per share--diluted... 199,953 203,745 181,298 189,338 160,516
======= ======= ======= ======= =======
</TABLE>
Shares of common stock held in the Stock and Employee Benefit Trust (the
"Trust") were not considered to be outstanding in the computation of common
shares outstanding until shares were utilized at the Company's option for the
purposes for which the Trust was established.
Basic earnings per share amounts were computed by dividing earnings by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share amounts were computed considering the
dilutive effect of stock options in the calculation. Options to purchase 2.8
million shares of common stock at prices ranging from $35.31 to $43.38 per share
were outstanding during fiscal 1998 but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
II-35
<PAGE> 37
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
than the average market price of the common shares. The 7.25% Automatic Common
Exchange Securities had no effect on the computations for the periods presented.
COMMON STOCK REPURCHASE PROGRAM
As previously announced, in October 1997, the Company repurchased 15
million shares of its outstanding common stock at a price of $39 per share under
the terms of a Dutch auction tender offer. This purchase of approximately $585
million of common stock was the first phase of a two-part program to buy back $1
billion of the Company's common stock. The second phase of the program,
approximately $415 million in open market purchases and privately negotiated
transactions of common stock or automatic common exchange security units, was
completed early in the third quarter of fiscal 1998.
In late March 1998, coincident with the announcement of completion of the
sale of its operations outside North America to SITA, the Company announced that
its Board of Directors had approved a $500 million increase to the current stock
repurchase program permitting the Company to repurchase additional shares of its
common stock. This expanded share repurchase program was completed in June 1998.
In early July 1998, the Company announced that its Board of Directors
approved an additional $750 million increase to its common stock repurchase
program. It is anticipated that this newly authorized share repurchase program
will be completed on or before September 30, 1999.
Through September 30, 1998, the Company had repurchased approximately 56.3
million shares of its common stock at a total cost of $2.0 billion, as
authorized under the common stock repurchase program discussed above.
STOCK AND EMPLOYEE BENEFIT TRUST
In February 1995, the Company established a Stock and Employee Benefit
Trust to which it sold 15,000,000 shares of the Company's newly issued common
stock. This trust was established to provide the Company the option to use the
trust to fund future payments under existing employee compensation and benefit
plans as well as other general corporate purposes for which common stock might
be issued. All remaining shares held in the Stock and Employee Benefit Trust
were fully utilized during the third quarter of fiscal 1998, and, as a result,
the trust has been terminated. Unutilized shares in the trust were valued at
market at the end of each reporting period and reflected as a reduction of
common stockholders' equity in the balance sheet.
AUTOMATIC COMMON EXCHANGE SECURITIES
In July 1995, the Company issued to the public 11,499,200 7.25% Automatic
Common Exchange Securities with a stated amount of $35.625 per security ($409.7
million in total). Each security consisted of (1) a purchase contract under
which (a) the holder would purchase from the Company on June 30, 1998 (earlier
under certain circumstances), for an amount in cash equal to the stated amount
of $35.625, between .8333 of a share (in total approximately 9.6 million shares)
and one share (a maximum of 11,499,200 shares) of the Company's common stock
(depending on the then market value of the common stock) and (b) the Company
would pay the holder contract fees at the rate of 2.125% per annum on the
security, and (2) 5.125% United States Treasury Notes having a principal amount
equal to $35.625 and maturing on June 30, 1998. The Treasury Notes underlying
these securities were pledged as collateral to secure the holders' obligations
to purchase the Company's common stock under the purchase contract. On June 30,
1998, the principal of the Treasury Notes underlying such securities was
automatically applied to satisfy in full the holders' obligations to purchase
the Company's common stock, and the Company issued 11,499,200 shares of its
common stock (from treasury stock) to the holders of these securities in
exchange for cash proceeds of $409.7 million.
II-36
<PAGE> 38
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK INCENTIVE PLANS
The Company presently maintains six stock option plans affording employees,
directors and other persons affiliated with the Company the right to purchase
shares of its common stock. At September 30, 1998, options were available for
future grants only under four plans, the Company's 1990 plan, both 1993 plans
and the 1996 plan. At September 30, 1998, all of the options outstanding were
non-qualified stock options, except for 51,300 incentive stock options issued to
the Company's officers. The exercise price, term and other conditions applicable
to each option granted under the Company's plans are generally determined by the
Compensation Committee at the time of the grant of each option and may vary with
each option granted. The stock options generally vest 25% per year over a
four-year period and expire after 10 years. The options are granted at a price
equal to the stock's fair market value on the date of the grant.
Transactions under all stock option plans are summarized below (option
amounts in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 10,173 $26.53 12,012 $27.49 10,518 $28.03
Granted....................... 2,689 $30.46 1,974 $26.91 1,985 $36.15
Exercised..................... (564) $22.54 (2,918) $24.89 (2,071) $26.85
Terminated.................... (286) $30.90 (550) $29.04 (476) $30.39
------- ------ ------
Outstanding at end of year.... 12,012 $27.49 10,518 $28.03 9,956 $29.78
------- ------ ------
Exercisable at end of year.... 6,853 $26.77 5,787 $27.71 5,801 $28.33
Available for future grants at
end of year................. 12,424 9,979 8,276
</TABLE>
As of September 30, 1998, the options outstanding are as follows (option
amounts in thousands):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------- --------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING YEARS OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$17.31-$20.00............ 454 $17.31 3.2 454 $17.31
$20.01-$30.00............ 4,641 $26.09 5.8 3,246 $25.78
$30.01-$40.00............ 4,495 $33.95 7.1 1,735 $33.34
$40.01-$43.38............ 366 $40.88 1.2 366 $40.88
</TABLE>
Under the 1993 and 1996 Stock Incentive Plans, restricted common stock of
the Company may be granted to officers, other key employees and certain
non-employee directors. Shares granted are subject to certain restrictions on
ownership and transferability. Such restrictions on outstanding restricted stock
grants lapse two years from the date of grant for officers, 18 months to three
years for key employees and three years for non-employee directors. However,
beginning in fiscal 1997, annual stock awards granted to non-employee directors
are no longer restricted. The deferred compensation expense related to
restricted stock grants is amortized to expense on a straight-line basis over
the period of time the restrictions are in place and the unamortized portion is
classified as a reduction of additional paid-in capital in the Company's
Consolidated Balance Sheet. Additionally, the 1993 and 1996 Stock Incentive
Plans provide for common stock awards. Restricted stock grants and common stock
awards reduce stock options otherwise available for future grant. Of the
2,000,000 shares which may be awarded to officers and key employees as
restricted stock grants or stock awards, 46,850 restricted shares were issued
during the current year and 51,600 restricted shares were outstanding as of
September 30, 1998. In addition, 1,980 restricted shares issued to non-employee
directors were outstanding as of September 30, 1998. Common stock awards
totaling 2,135 shares were granted to non-employee directors during fiscal 1998.
Shares of restricted stock granted for the three years ended September 30, 1998
were as follows:
II-37
<PAGE> 39
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Restricted stock granted........................ 94,655 5,750 46,850
Weighted average fair value of restricted stock
granted....................................... $31.12 $31.82 $35.15
</TABLE>
During fiscal 1997 and 1998, performance share awards of 1,028,500 and
198,500, respectively, were granted to officers and certain key employees
pursuant to the Company's Long-Term Incentive Plan. After considering
cancellation of 219,875 of these awards, 1,007,125 of the performance share
awards remained outstanding as of September 30, 1998. These performance shares
vest in increments of 25% based upon the attainment of performance goals as
described in the Long-Term Incentive Plan. The performance shares are earned
only if the market price of the Company's common stock exceeds specific price
targets while attaining certain levels of cash returns on gross assets in excess
of the Company's weighted average cost of capital. No compensation expense has
been recorded to date related to these awards.
The Company accounts for all stock incentive plans related to employees
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Compensation expense related to these plans during fiscal years
1996, 1997 and 1998 was $1,771,000, $1,662,000 and $963,644, respectively.
The Company's consolidated results of operations on a pro forma basis, as
though the compensation cost for these plans had been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation", are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Pro forma income (loss) before extraordinary
items and cumulative effects of changes in
accounting
principles..................................... $ (91,642) $278,698 $341,214
Pro forma net income (loss)...................... $(103,801) $260,217 $330,652
Pro forma income (loss) per common and common
equivalent share
Income (loss) before extraordinary items and
cumulative effects of changes in accounting
principles.................................. $ (0.46) $ 1.37 $ 1.88
Net income (loss).............................. $ (0.52) $ 1.28 $ 1.82
</TABLE>
Because SFAS No. 123 has not been applied to options granted prior to
October 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for the grants:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate..................... 5.6%-6.7% 6.1%-6.9% 5.1%-5.9%
Expected lives (in years)................... 6 6 6
Expected volatility......................... 22.9%-25.8% 19.3%-24.5% 21.0%-23.2%
Expected dividend yields.................... 2.2%-2.7% 1.8%-2.6% 1.9%-2.1%
</TABLE>
The weighted average fair values of options granted during fiscal years
1996, 1997 and 1998 were $8.67, $7.68 and $9.78 per option, respectively.
II-38
<PAGE> 40
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment Plan which provides registered
common stockholders an opportunity to reinvest automatically their dividends in
shares of the Company's common stock. Each participant in the plan may also make
additional cash payments of not less than $25 per remittance and not more than
$60,000 per calendar year to be invested in such common shares pursuant to the
plan. The plan provides that newly issued shares may be acquired from the
Company, purchased on the open market or purchased under a combination of the
two alternatives.
(16) FOREIGN CURRENCY TRANSLATION
Increases (decreases) in the component of common stockholders' equity
associated with foreign currency translation adjustments for the three years
ended September 30, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1997
---- ---- 1998
<S> <C> <C> <C>
Beginning cumulative translation adjustment..... $ 30,821 $ (31,138) $(104,607)
Translation adjustment for the fiscal year...... (61,959) (126,334) (25,347)
Sale of Italian operations...................... -- 52,865 --
Sale of international operations................ -- -- 107,642
--------- --------- ---------
Ending cumulative translation adjustment........ $ (31,138) $(104,607) $ (22,312)
========= ========= =========
</TABLE>
(17) INCOME TAXES
The components of (i) earnings before income taxes, minority interest,
extraordinary items and cumulative effects of changes in accounting principles
and (ii) the income tax provision for each of the three fiscal years ended
September 30, are as set forth below (in thousands).
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Domestic:
Excluding special credits (charges)............ $ 429,705 $ 498,141 $517,719
Special credits (charges)...................... (187,087) 71,330 3,545
--------- --------- --------
As reported.................................... 242,618 569,471 521,264
--------- --------- --------
Foreign(1):
Excluding special credits (charges)............ 44,801 78,880 48,885
Special credits (charges)...................... (259,713) (153,209) 17,919
--------- --------- --------
As reported.................................... (214,912) (74,329) 66,804
--------- --------- --------
Total:
Excluding special credits (charges)............ 474,506 577,021 566,604
Special credits (charges)...................... (446,800) (81,879) 21,464
--------- --------- --------
As reported.................................... $ 27,706 $ 495,142 $588,068
========= ========= ========
</TABLE>
- ---------------
(1) Amounts are net of intercompany interest expense for fiscal years 1996, 1997
and 1998 of $53,660,000, $42,976,000 and $18,795,000, respectively. Prior to
the divestiture of its international operations in March 1998, the Company
maintained a capital structure with respect to its foreign operations
designed to minimize worldwide income and other tax costs.
II-39
<PAGE> 41
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
STATE &
FEDERAL FOREIGN LOCAL TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996:
Current............................... $ 51,900 $ 33,497 $ 17,463 $102,860
Deferred.............................. 30,895 (35,382) 7,521 3,034
Amortization of investment tax
credit............................. (706) -- -- (706)
-------- -------- -------- --------
$ 82,089 $ (1,885) $ 24,984 $105,188
======== ======== ======== ========
1997:
Current............................... $101,460 $ 12,367 $ 3,790 $117,617
Deferred.............................. 45,944 19,296 15,906 81,146
Amortization of investment tax
credit............................. (706) -- -- (706)
-------- -------- -------- --------
$146,698 $ 31,663 $ 19,696 $198,057
-------- -------- -------- --------
1998:
Current............................... $105,191 $ 15,593 $ 17,515 $138,299
Deferred.............................. 74,471 9,640 10,385 94,496
Amortization of investment tax
credit............................. (706) -- -- (706)
-------- -------- -------- --------
$178,956 $ 25,233 $ 27,900 $232,089
======== ======== ======== ========
</TABLE>
The following is a reconciliation between the U.S. federal income tax rate
and the effective income tax rate for each of the three fiscal years in the
period ended September 30, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------ ----- ------
<S> <C> <C> <C>
Excluding Special Charges:
Income tax--U.S. federal rate........................... 35.00% 35.00% 35.00%
Federal effect of state income taxes.................... (2.31) (1.39) (1.66)
Effect of foreign operations............................ (2.05) .06 (.14)
All other, net.......................................... 2.77 2.35 1.53
------ ----- ------
Federal and foreign..................................... 33.41 36.02 34.73
State income taxes...................................... 6.59 3.98 4.74
------ ----- ------
Effective income tax rate, excluding special charges.... 40.00 40.00 39.47
Effect of Special Charges................................. 339.66 -- --
------ ----- ------
Effective income tax rate................................. 379.66% 40.00% 39.47%
====== ===== ======
</TABLE>
II-40
<PAGE> 42
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at September 30, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Depreciation and amortization........... $126,197 $535,195 $ 89,818 $488,489
Accrued environmental and landfill
costs................................. 159,508 -- 132,790 --
Accruals related to discontinued
operations............................ 10,211 -- 4,270 --
Self-insurance accruals................. 68,004 -- 69,683 --
Assets and operations to be divested.... 29,651 -- 19,399 --
Net operating loss carryforwards........ 82,843 -- 89,192 --
Other................................... 285,196 141,768 240,610 153,025
-------- -------- -------- --------
Deferred tax assets and liabilities..... 761,610 676,963 645,762 641,514
Unamortized investment tax credits...... 19,716 19,010
Valuation allowance..................... (47,273) (71,466)
-------- -------- -------- --------
Deferred tax assets and liabilities, net
of unamortized investment tax credits
and valuation allowance............... $714,337 $696,679 $574,296 $660,524
======== ======== ======== ========
</TABLE>
The valuation allowance applies principally to a substantial portion of the
net operating loss carryforwards and deductions associated with the special
charges which could expire prior to utilization by the Company. Foreign net
operating loss carryforwards of approximately $27 million are available to
reduce future taxable income of the applicable foreign entities for periods
which generally range from 1999 to 2004. Domestic state net operating loss
carryforwards of approximately $1.6 billion (the tax benefit of which is
calculated at rates ranging generally from 5%-10%) are available to reduce
future taxable income of the applicable entities taxable in such states for
periods which range from 1999 to 2013. The net change in the total valuation
allowance for the year ended September 30, 1998, was an increase of $24.2
million, principally due to increased valuation reserves related to the
increased net operating loss carryforwards resulting from the restructuring of
U.S. legal entities. The fiscal 1997 valuation allowance decreased by $145.5
million from the prior year due to the sale of the Italian operations in the
third quarter of fiscal 1997.
Deferred income taxes have not been provided as of September 30, 1998, on
approximately $76 million of undistributed earnings of foreign affiliates which
are considered to be permanently reinvested.
(18) EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN
The Company sponsors an employee stock ownership and savings plan which
incorporates deferred savings features permitted under IRS Code Section 401(k).
The plan covers substantially all U.S. employees with one or more years of
service except for certain employees subject to collective bargaining
agreements. Eligible employees may make voluntary contributions to one or more
of six investment funds through payroll deductions which, in turn, will allow
them to defer income for tax purposes. The Company matches these voluntary
contributions at a rate of $.50 per $1.00 on the first 5% of the total earnings
contributed by each participating employee. The Company matches the voluntary
contributions through open market purchases or issuances of shares of the
Company's common stock. The Company expenses its contributions to the employee
stock ownership and savings plan which for fiscal years 1996, 1997 and 1998 were
$11,752,000, $12,710,000 and $12,195,000, respectively.
II-41
<PAGE> 43
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE RETIREMENT PLANS
The Company and its domestic subsidiaries have two defined benefit
retirement plans covering substantially all U.S. employees except for certain
employees subject to collective bargaining agreements. The benefits for these
plans are based on years of service and the employee's compensation. The
Company's general funding policy for these plans is to make annual contributions
to the plans equal to or exceeding the actuary's recommended contribution.
During the second quarter of fiscal 1998, the Company changed its method of
accounting for recognition of value changes in its employee retirement plan for
purposes of determining annual expense under SFAS No. 87, "Employers' Accounting
for Pensions", effective October 1, 1997. See Note (5).
The employees of the Company in various international operations,
substantially all of which were divested in March 1998, were covered by defined
benefit plans. The benefits for these plans were based generally on years of
service and the employee's compensation. Under the Company's funding policy,
annual contributions were made in order to fund the plans over the participants'
total expected periods of service in conformity with the requirements of local
law or custom. No additional disclosures pertaining to these plans have been
included because the related amounts were not material to the Company's
consolidated financial statements.
The following table sets forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheet as of September 30, 1997 and 1998, and
the significant assumptions used in accounting for the U.S. defined benefit
plans. The measurement dates for these plans were June 30, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations,
including vested benefits of $186,856 and $231,046,
respectively.............................................. $(207,438) $(257,897)
========= =========
Actuarial present value of projected benefit obligation..... $(222,274) $(271,277)
Plan assets at fair value, primarily commercial paper,
common stocks (including 22,000 shares of the Company's
common stock at both dates) and mutual funds.............. 245,032 287,774
--------- ---------
Projected benefit obligation (in excess of) less than plan
assets.................................................... 22,758 16,497
Contributions made after measurement date but before end of
fiscal year............................................... 4,762 6,248
Unrecognized net gain....................................... (32,020) (1,224)
Unrecognized prior service cost............................. (12,654) (11,351)
Unrecognized net asset at transition........................ (1,292) (1,099)
--------- ---------
Prepaid (accrued) pension costs............................. $ (18,446) $ 9,071
========= =========
Discount rate............................................... 7.75% 6.75%
Rate of increase in compensation levels..................... 4.0% 4.0%
Expected long-term rate of return on assets................. 10.5% 10.5%
</TABLE>
II-42
<PAGE> 44
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net annual pension cost for fiscal years 1996, 1997 and
1998 for the U.S. defined benefit plans were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost (benefits earned during the period)... $ 12,260 $ 13,454 $ 12,100
Interest cost on projected benefit obligation...... 13,521 16,050 17,806
Investment gain on plan assets..................... (27,957) (42,564) (40,315)
Net amortization and deferral...................... 12,056 21,765 5,343
-------- -------- --------
Net annual pension (income) expense................ $ 9,880 $ 8,705 $ (5,066)
======== ======== ========
</TABLE>
TERMINATION INDEMNITY PLAN
The employees of the Company's Italian operations, which were divested in
June 1997, were covered by a termination indemnity plan. Benefits under the
plan, which were based on periods of service and the employee's compensation,
were payable in a lump sum upon (1) retirement, (2) termination, (3) death after
10 years of credited service or (4) disability after 10 years of credited
service. Expense in fiscal year 1997 for the period prior to divestiture and for
fiscal year 1996 related to this unfunded plan was $1,350,000 and $1,809,000,
respectively.
OTHER POSTRETIREMENT BENEFITS
The Company currently maintains an unfunded postretirement benefit plan
which provides for employees participating in its medical plan to receive a
monthly benefit after retirement based on years of service. As permitted under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", the Company chose to recognize the transition obligation (the
actuarially-determined accumulated post-retirement benefit obligation of
approximately $11.9 million at September 30, 1994) over a 20-year period.
Current year expense was not material to the Company's results of operations.
During the fourth quarter of fiscal 1998, the Company restricted the
participation in its postretirement benefit plan to employees over the age of 55
with 10 years of experience and individuals already covered by the plan. The
curtailment gain of $9.4 million associated with this benefit reduction was
recognized in income in the fourth quarter of fiscal 1998.
POSTEMPLOYMENT BENEFITS
The Company maintains no plans which provide significant benefits to former
or inactive employees after employment but before retirement.
(19) OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company's revenues and income are derived principally from one industry
segment, which includes the collection, transportation, processing/recovery and
disposal of municipal solid waste and industrial wastes. This segment renders
services to a variety of commercial, industrial, governmental and residential
customers. Substantially all revenues represent income from unaffiliated
customers.
II-43
<PAGE> 45
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below reflects certain geographic information relating to the
Company's operations. For purposes of this table, general corporate expenses
have been included in the computation of income from operations and are
classified under "United States and Puerto Rico" (in thousands).
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States and Puerto Rico.............. $4,073,558 $4,148,647 $3,937,564
---------- ---------- ----------
Foreign--
Canada.................................. 169,077 176,009 172,458
Other (principally Europe).............. 1,536,642 1,458,316 635,726
---------- ---------- ----------
Total foreign...................... 1,705,719 1,634,325 808,184
---------- ---------- ----------
Consolidated............................ $5,779,277 $5,782,972 $4,745,748
========== ========== ==========
Combined income (loss) from operations and
equity in earnings of unconsolidated
affiliates:
United States and Puerto Rico.............. $ 327,421(1) $ 653,866(2) $ 602,059(3)
---------- ---------- ----------
Foreign--
Canada..................................... (7,857) 10,504 20,417
Other (principally Europe)................. (121,401) (11,145) 83,869(3)
---------- ---------- ----------
Total foreign...................... (129,258)(1) (641)(2) 104,286
---------- ---------- ----------
Consolidated................................. $ 198,163 $ 653,225 $ 706,345
========== ========== ==========
</TABLE>
- ------------------------------
(1) Fiscal year 1996 earnings information for operations in the United States
and Puerto Rico and for foreign operations include special charges of
$187,087,000 and $259,713,000, respectively. See Note (4).
(2) Fiscal year 1997 earnings information includes special credits (principally
net gains from the divestiture of business assets and operations) of
$71,330,000 for operations in the United States and Puerto Rico and includes
special charges of $153,209,000 for foreign operations, principally Europe.
See Note (4).
(3) Fiscal year 1998 earnings information includes special credits (principally
net gains from the divestiture of business assets and operations) of
$3,545,000 for operations in the United States and Puerto Rico and
$17,919,000 related to the divestiture of substantially all of the Company's
operations outside of North America in March 1998. See Note (4).
II-44
<PAGE> 46
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization:
United States and Puerto Rico........................ $ 438,639 $ 418,542 $ 392,713
---------- ---------- ----------
Foreign--
Canada............................................ 17,615 18,370 16,393
Other (principally Europe)........................ 146,271 132,758 60,849
---------- ---------- ----------
Total foreign................................ 163,886 151,128 77,242
---------- ---------- ----------
Consolidated......................................... $ 602,525 $ 569,670 $ 469,955
========== ========== ==========
Identifiable assets:
United States and Puerto Rico........................ $4,803,978 $4,471,306 $4,426,392
---------- ---------- ----------
Foreign--
Canada............................................ 206,908 185,372 171,936
Other (principally Europe)........................ 2,590,020 2,021,614 401,153
---------- ---------- ----------
Total foreign................................ 2,796,928 2,206,986 573,089(1)
---------- ---------- ----------
Consolidated......................................... $7,600,906 $6,678,292 $4,999,481
========== ========== ==========
</TABLE>
- ------------------------------
(1) Fiscal year 1998 identifiable assets declined significantly due to the
divestiture of substantially all of the Company's operations outside of
North America in March 1998, offset partially by the increase associated
with the Company's investment in SITA of $373,888,000 at September 30, 1998.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments have been determined by the Company using available market data and
valuation methodologies. Considerable judgment is required in developing the
methodologies used to determine the estimates of fair value and in interpreting
available market data and, accordingly, the estimates presented herein are not
necessarily indicative of the values of such financial instruments in a current
market exchange. Additionally, under certain financing agreements, the Company
is prohibited from redeeming certain of the long-term debt before its maturity.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------------------
1997 1998
-------------------- --------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt--
6.10% Senior Notes............................ $155,471 $152,671 $155,703 $157,907
6.375% Senior Notes........................... 159,693 154,879 159,840 162,112
7.40% Debentures.............................. 358,233 365,835 358,280 366,542
7 7/8% Senior Notes........................... 69,306 74,086 69,332 77,297
9 1/4% Debentures............................. 99,500 123,073 99,500 123,779
Solid waste revenue bond obligations.......... 219,974 229,902 220,044 230,420
Other notes payable........................... 505,674 526,259 46,790 51,375
Commercial paper and short-term facilities to
be refinanced.............................. 259,047 258,365 692,615 698,262
</TABLE>
The book values of cash, short-term investments, trade accounts
receivables, trade accounts payable and financial instruments included in other
receivables, other assets and accrued liabilities approximate their fair values
principally because of the short-term maturities of these instruments.
II-45
<PAGE> 47
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair value of long-term debt is based on quoted market prices
where available or on present value calculations which are calculated using
current rates for similar debt with the same remaining maturities.
In the normal course of business, the Company has letters of credit,
performance bonds and other guarantees which are not reflected in the
accompanying consolidated balance sheets. In the past, no significant claims
have been made against these financial instruments. Management believes that the
likelihood of performance under these financial instruments is minimal and
expects no material losses to occur in connection with these financial
instruments.
(21) RELATED PARTY TRANSACTIONS
Otto Holding International B.V. ("OHI") owns the other 50% interest of Otto
Waste Services. Otto Waste Services was included with the international
operations divested by the Company in March 1998. The Company, primarily through
its 50% ownership of Otto Waste Services, was previously engaged in various
transactions through the ordinary course of business with OHI, its subsidiaries
and unconsolidated affiliates or other affiliated parties ("OHI Group"). The OHI
Group leased containers and equipment under operating leases and provided
certain administrative services to Otto Waste Services during the current fiscal
year. Charges for these administrative services were approximately $1.8 million,
$3.6 million and $4.7 million for fiscal years 1998, 1997 and 1996,
respectively. The Company, including Otto Waste Services, also purchased or
entered into capital leases for approximately $30.8 million of containers from
the OHI Group during fiscal year 1996; no such capital leases were entered into
in fiscal 1998 or 1997. Included in the Company's Consolidated Balance Sheet at
September 30, 1997 were the following amounts relating to transactions with the
OHI Group (in thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Capital lease obligations........................ $30,014
Notes payable, interest payable at FIBOR plus
2%............................................. 8,077
</TABLE>
During fiscal 1996, Otto Waste Services sold certain assets related to
plastics processing to the OHI Group. These assets were sold to OHI for
approximately $2.5 million resulting in a loss on the sale for Otto Waste
Services of approximately $1.3 million which was included in the Company's
fiscal 1996 earnings. Additionally, Otto Waste Services sold the stock of one of
its subsidiaries to the OHI Group at its recorded book value of approximately
$2.1 million. OHI also sold two companies specializing in plastics recycling and
processing to Otto Waste Services at their net book value of approximately
$372,000. In connection with the acquisition of these two companies, Otto Waste
Services assumed liabilities of approximately $6.6 million of long-term debt
with third parties and approximately $7.7 million in net payables with
affiliated companies of Otto Waste Services and other companies within the OHI
Group.
(22) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On March 8, 1999, the Company and Allied announced that they had entered
into a definitive merger agreement under which Allied will acquire the Company
for $45 in cash for each outstanding share of the Company's common stock. The
transaction is structured as a merger of the Company with a subsidiary of Allied
and is subject to the approval of the Company's stockholders and other customary
conditions. The Company and Allied are pursuing the necessary approvals. The
merger agreement may be terminated and the merger may be abandoned under a
number of conditions. If this were to occur, dependent upon the reasons for
termination of the merger agreement, a termination fee of $225 million could be
payable by the Company to Allied, receivable by the Company from Allied, or no
fee may be payable.
II-46
<PAGE> 48
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(23) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................. 1997 $1,495,137 $1,413,731 $1,471,252 $1,402,852
1998 $1,344,742 $1,305,717 $1,042,648 $1,052,641
Gross profit............. 1997 $ 383,839 $ 359,381 $ 376,051 $ 374,087
1998 $ 363,383 $ 348,993 $ 293,636 $ 302,075
Income from operations... 1997 $ 163,802 $ 152,754 $ 97,657(1) $ 185,024(1)
1998 $ 175,321(2) $ 181,069(2) $ 141,578 $ 148,299
Income taxes............. 1997 $ 50,507 $ 47,955 $ 30,688 $ 68,907
1998 $ 59,916 $ 63,781 $ 53,453 $ 54,939
Income before
extraordinary items and
cumulative effects of
changes in accounting
principles............. 1997 $ 71,880 $ 70,955 $ 41,926 $ 98,934
1998 $ 86,758 $ 93,343 $ 84,201 $ 85,071
Net income............... 1997 $ 71,880 $ 67,831(3) $ 40,241(4) $ 85,262(4)
1998 $ 72,995(5) $ 96,544(5) $ 84,201 $ 85,071
Earnings per share:
Income before
extraordinary items
and cumulative
effects of changes
in accounting
principles
1997-- Basic........ $ 0.357 $ 0.350 $ 0.206 $ 0.484
Diluted...... $ 0.356 $ 0.349 $ 0.205 $ 0.480
1998-- Basic........ $ 0.454 $ 0.504 $ 0.483 $ 0.500
Diluted...... $ 0.451 $ 0.501 $ 0.480 $ 0.497
Net Income
1997-- Basic........ $ 0.357 $ 0.335 $ 0.198 $ 0.417
Diluted...... $ 0.356 $ 0.334 $ 0.197 $ 0.414
1998-- Basic........ $ 0.382 $ 0.521 $ 0.483 $ 0.500
Diluted...... $ 0.380 $ 0.518 $ 0.480 $ 0.497
</TABLE>
- ------------------------------
(1) In the third quarter of fiscal 1997, the Company incurred special charges of
$84 million which included foreign currency translation losses associated
with the sale of the Company's Italian operations and anticipated losses
related to decisions to divest additional underperforming or non-core
business operations and assets, offset partially by net gains from
divestitures completed in the third quarter. In the fourth quarter of fiscal
1997, the Company reported a special credit of $2.2 million related
principally to net gains from the sale of business operations in the fourth
quarter, offset partially by changes in estimated losses associated with
previous decisions to divest certain operations and assets. See Note (4).
(2) In the second quarter of fiscal 1998, the Company recorded pre-tax special
credits of $17.9 million related to the gain recognized from the sale in
March 1998 of substantially all of the Company's operations outside of North
America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. The
remaining
II-47
<PAGE> 49
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
special credits of $2.6 million and $1.0 million recorded in the first and
second quarters of fiscal 1998, respectively, related principally to net
gains associated with the divestiture of certain North American Operations.
See Note (4).
(3) In the second quarter of fiscal 1997, the Company recorded an after-tax loss
of $3.1 million associated with the redemption of approximately $250 million
of debt by an unconsolidated affiliate (American Ref-Fuel Company of
Hempstead), which was reflected in the Company's Consolidated Statement of
Operations as an extraordinary item. See Note (8).
(4) In the third and fourth quarters of fiscal 1997, the Company recorded
after-tax losses of $1.7 million and $13.7 million, respectively, associated
with redemption of debt, which was reflected in the Company's Consolidated
Statement of Operations as an extraordinary item. See Note (10).
(5) In the first quarter of fiscal 1998, the Company recorded an after-tax
charge of $13.8 million as the cumulative effect of a change in accounting
principle in response to the FASB's Emerging Issues Task Force EITF No.
97-13, "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering
and Information Technology Transformation", a consensus ruling requiring
that certain business process reengineering costs typically capitalized by
companies be expensed as incurred. In the second quarter of fiscal 1998, the
Company recorded an after-tax credit of $4.2 million as the cumulative
effect of a change in accounting principle. The Company changed its method
of accounting for recognition of value changes in its employee retirement
plan for purposes of determining annual expense under SFAS No. 87,
"Employers' Accounting for Pensions", effective October 1, 1997. See Note
(5).
II-48
<PAGE> 50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Allied Waste Industries, Inc., has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLIED WASTE INDUSTRIES, INC.
By: /s/ PETER S. HATHAWAY
------------------------------------
Vice President
and Chief Accounting Officer
Date: July 19, 1999
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference into Allied Waste Industries, Inc.'s previously filed Registration
Statements on Forms S-4 (File No. 333-59265 and File No. 333-60727) and Forms
S-8 (File No. 33-42354, File No. 33-63510, File No. 33-79654, File No. 33-79756,
File No. 33-79664, File No. 333-48357, File No. 333-62473-01, File No. 333-68815
and File No. 333-81821) of our reports dated March 3, 1998 on the Allied Waste
Industries, Inc. December 31, 1998 financial statements incorporated by
reference into this Current Report on Form 8-K.
Arthur Andersen LLP
Phoenix, Arizona
July 16, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference into Allied Waste Industries, Inc.'s previously filed Registration
Statements on Forms S-4 (File No. 333-59265 and File No. 333-60727) and Forms
S-8 (File No. 33-42354, File No. 33-63510, File No. 33-79654, File No. 33-
79756, File No. 33-79664, File No. 333-48357, File No. 333-62473-01, File No.
333-68815 and File No. 333-81821) of our report dated December 3, 1998 on the
Browning-Ferris Industries, Inc. September 30, 1998 financial statement included
in this Current Report on Form 8-K.
Arthur Andersen LLP
Houston, Texas
July 16, 1999
