1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Laidlaw Environmental Services, Inc.
Our report on the consolidated financial statements of Laidlaw Environmental
Services, Inc. has been incorporated by reference in this form 10-K from page 31
of the 1997 Annual Report to Stockholders of Laidlaw Environmental Services,
Inc. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the exhibit index on
page 13 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Charlotte, North Carolina
October 7, 1997
18
2
10
LAIDLAW
ENVIRONMENTAL SERVICES
Selected Financial Data
($ in thousands, except per share amounts)
Year Ended August 31 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Revenues $ 678,619 $ 652,973 $ 599,241 $ 517,804 $ 511,554
Operating income before
restructuring $ 66,983 $ 57,319 $ 59,859 $ 45,548 $ 52,400
Applicable margin 9.9% 8.8% 10.0% 8.8% 10.2%
Income (loss) from continuing
operations $ (183,452) $ 6,714 $ 16,765 $ 22,531 $ 11,654
Net income (loss) per share from
continuing operations $ (1.329) $ 0.056 $ 0.140 $ 0.188 $ 0.097
Dividends per common share $ -- $ -- $ -- $ -- $ --
Total assets $ 1,610,878 $ 1,491,294 $ 1,367,411 $ 974,053 $ 947,976
Long-term debt $ 540,096 $ 55,838 $ 64,256 $ 18,454 $ 24,253
Weighted average common
and common stock equivalents
outstanding (000's) 138,033 120,000 120,000 120,000 120,000
3
11
LAIDLAW
ENVIRONMENTAL SERVICES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of the Company's operations, financial
performance and results for each of the three fiscal years in the period ended
August 31, 1997, should be read in conjunction with the Company's consolidated
financial statements and related notes thereto included elsewhere herein. As a
result of the reverse acquisition of Rollins Environmental Services, Inc. (the
"Acquisition"), the historical financial information included herein is that of
the hazardous and industrial waste operations ("Old LESI" or the "Accounting
Acquirer") of Laidlaw Inc. ("Laidlaw"). The results of operations of Rollins
have been included from the date of acquisition, May 15, 1997.
The following discussion and analysis of the Company's operations, financial
performance and results includes statements that are considered forward-looking
based on the Company's expectations and, as such, these statements are subject
to uncertainty and risk. See "Factors That May Influence Future Results" below.
RESULTS OF OPERATIONS:
Fiscal Year Ended August 31, 1997 compared with Fiscal Year Ended August 31,
1996
Operating results, before the restructuring charge, are as follows ($ in
millions):
Year Ended August 31 1997 1996
- -----------------------------------------------------------------------------------
Revenue $ 678.6 100.0% $ 653.0 100.0%
Operating expense 485.1 71.5% 473.6 72.5%
Depreciation and amortization 53.5 7.9% 48.3 7.4%
Selling, general and administrative 73.1 10.7% 73.8 11.3%
------------------------------------
Operating income $ 66.9 9.9% $ 57.3 8.8%
====================================
Revenues
Components of Revenue ($ in millions):
Year Ended August 31 1997 1996
- -----------------------------------------------------------------------------------
Service Center $ 301.6 38% $ 294.8 39%
Landfill 177.1 22% 190.3 25%
Incinerator 89.8 11% 31.4 4%
Transportation 95.4 12% 89.9 12%
Specialty Services 140.4 17% 148.0 20%
-----------------------------------
804.3 100% 754.4 100%
Less: Intercompany eliminations (125.7) (101.4)
-----------------------------------
Total revenue $ 678.6 $ 653.0
===================================
Revenues increased by $25.6 million, or 3.9%, during the fiscal year ended
August 31, 1997, compared to the fiscal year ended August 31, 1996, supported
primarily by increases in the incinerator and service center lines of business.
Revenue for incinerators increased 186.0% from fiscal year 1996 reflecting the
inclusion of the acquired Rollins' incineration facilities effective May 15,
1997. Service center revenue increased 2.3% over the prior year, also reflecting
the Acquisition. Landfill revenue decreased 6.9% primarily due to non-recurring
event projects performed in the prior year period by the Company's industrial
landfill in Utah, the most significant of which included management and disposal
activities related to dredging in the New York/New Jersey harbor area.
Transportation revenue increased 6.1%, while specialty services decreased 5.1%
from the prior year. Processing of intercompany streams increased 24.0% over the
prior year, reflecting the increased utilization of the Company's acquired
Rollins' incineration facilities. As a result, the Company increased the
internalization of waste disposal activities to 68.0% in fiscal 1997, up from
50.0% in fiscal 1995. Management anticipates increasing the internalization of
waste disposal activities to 75.0% with a full 12 month's contribution from the
Acquisition.
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
Percentage Increase (Decrease)
- -------------------------------------------------------------------------------
Expansion of customer base by acquisition 6.7%
Other, primarily through volume and price changes (2.7)%
Foreign exchange rate changes (0.1)%
----
Total 3.9%
====
The comparative increase in revenue for the year ended August 31, 1997, was
primarily due to the inclusion of acquired operations, the majority of which
related to the Acquisition. The increase was partially offset by lower pricing
and volumes received in the early portion of fiscal 1997. Lower volumes were
primarily related to dredging activities performed throughout the prior year by
the Company's landfill in Utah. Revenue also decreased due to pricing and volume
reductions at the Company's government services locations, the closure of a
wastewater facility in May 1997 and the Company's planned downsizing of its Gulf
Coast remedial
4
12
LAIDLAW
ENVIRONMENTAL SERVICES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
operations. The negative effect of these price and volume reductions were
diminished in the aggregate due to improvements, primarily in the fourth quarter
of the year, related to increased activity at certain of the Company's landfills
and at its PCB management operations. Additional harbor dredging project work
begun in the fourth quarter was also a positive factor.
The Company continues to focus on developing its sales force in order to expand
the customer base in the core markets in which it operates. While the Company
has taken action to protect its market share in existing regions and has
established new business relationships, significant price competition has
impacted revenue growth. The Company continues to take pricing actions in
response to industry conditions as it attempts to maintain a competitive mix of
price, performance and customer support services while managing profitability
and growth. The Company strives to mitigate the effects of price reductions by
reducing operating costs.
Operating Expenses
Operating expenses for the year ended August 31, 1997 increased $11.5 million,
or 2.4%, from the year ended August 31, 1996. The increase was mainly due to the
Acquisition. Operating expense, as a percentage of revenue, decreased to 71.5%
from 72.5% in the prior year, due to economies of scale gained through the
Acquisition and ongoing cost reduction initiatives.
The Company believes that its ability to manage operating costs is an important
factor in its ability to remain price competitive. During fiscal 1997, the
Company continued its process of consolidating common functions to reduce
redundant costs and improve the Company's ability to deliver its services.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $5.2 million, or 10.8%, during
the year ended August 31, 1997, compared to the year ended August 31, 1996. The
increase was associated with increased hazardous landfill cell consumption and
related amortization during the period as well as the inclusion of the Clive,
Utah incineration facility's depreciation expense as of September 1, 1996 and
inclusion of depreciation and amortization related to the Acquisition as of May
15, 1997. As a percentage of revenue, depreciation and amortization expense
increased to 7.9% from 7.4% during the prior year period due in part to the
higher hazardous landfill disposal as a proportion of total revenue and the
inclusion of the Clive facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.7 million, or 1.0%,
during the current fiscal year versus the prior year period. The decrease was
attributable to a number of cost reduction initiatives implemented and completed
during the current period. As a percentage of revenue, selling, general and
administrative expenses decreased to 10.7% from 11.3% in the prior year, due to
the cost reduction measures and economies of scale gained through the
Acquisition.
Restructuring Charge
A one-time restructuring charge of $331.7 million ($200 million after tax, or
$1.45 per share) impacted the current year earnings. The charge reflected the
closing of certain of the operating facilities that have become redundant, and
an impairment in the carrying value of certain operating facilities due to lower
expected future cash flows, as a result of the Acquisition. Management
anticipates that the Company can achieve cost reductions related to the
Acquisition of approximately $90 million annually, within six months of the
Acquisition, based on the historical operating levels for Rollins and Old LESI.
Reductions of $18 million relate to depreciation and amortization expense
savings, primarily due to the restructuring charge. The cash expense reductions
of $72 million relate to planned personnel reductions and lower operating and
administrative costs due to facility closures.
Allocated Interest Expense
Allocated interest expense decreased $17.5 million primarily as a result of the
recapitalization related to the Acquisition. Prior to May 15, 1997 interest
expense was allocated to Old LESI from the parent corporation, Laidlaw.
Interest Expense
Interest expense increased by $14.9 million from the prior fiscal year primarily
as a result of recapitalization related to the Acquisition. Effective May 15,
1997 interest expense includes financing costs associated with the Bank Credit
Facility, other long-term debt and the Subordinated Convertible Debenture, as
described in Note 4 and Note 5, respectively of the Notes to Consolidated
Financial Statements.
Other Income
Other income increased by $1.5 million from the prior fiscal year primarily as a
result of recapitalization related to the Acquisition and a resultant increase
in funds available for short-term investment.
Income Tax Expense (Benefit)
Prior to May 15, 1997, income tax expense was allocated by the parent
corporation using applicable income tax rates on income for tax purposes on a
separate return basis. Effective May 15, 1997 the Company is subject to full
federal and state income tax rates.
5
13
LAIDLAW
ENVIRONMENTAL SERVICES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS:
Fiscal Year Ended August 31, 1996 compared with Fiscal Year Ended August 31,
1995
Operating results are as follows ($ in millions):
Year Ended August 31 1996 1995
- ------------------------------------------------------------------------------
Revenue $ 653.0 100.0% $ 599.2 100.0%
Operating expense 473.6 72.5% 428.9 71.6%
Depreciation and amortization 48.3 7.4% 48.3 8.0%
Selling, general and administrative 73.8 11.3% 62.1 10.4%
----------------------------------
Operating results $ 57.3 8.8% $ 59.9 10.0%
==================================
Revenues
Components of Revenue ($ in millions):
Year Ended August 31 1996 1995
- -----------------------------------------------------------------------------
Service Center $ 294.8 39% $ 279.2 41%
Landfill 190.4 25% 139.1 21%
Incinerator 31.4 4% 30.1 4%
Transportation 89.9 12% 99.1 15%
Specialty Services 148.0 20% 131.0 19%
----------------------------------
754.5 100% 678.5 100%
Less: Intercompany eliminations (101.5) (79.3)
----------------------------------
Total revenue $ 653.0 $ 599.2
==================================
Revenues increased $53.8 million, or 9.0%, during the fiscal year ended August
31, 1996, compared to the fiscal year ended August 31, 1995, supported primarily
by the increased landfill activity. Landfill revenue for 1996 increased 36.9%
over 1995 primarily due to the full-year results of landfill operations acquired
from USPCI. Service center revenue increased 5.6%, while incinerator revenue
increased 4.3% over the previous fiscal year. Transportation revenue decreased
9.3% from the prior year period. Specialty services revenue increased $17.0
million, or 13.0%. Processing of intercompany streams during 1996 increased
$22.2 million, or 28.0%, over the prior year.
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
Percentage Increase (Decrease)
- -------------------------------------------------------------------------------
Expansion of customer base by acquisition 17.2%
Other, primarily through volume and price changes (8.4)%
Foreign exchange rate changes 0.2%
-----
Total 9.0%
=====
Growth in revenue in fiscal year 1996, was primarily attributable to the
inclusion of approximately $103 million from the acquired operations of USPCI
and Greenfield Services Corporation. Revenue from existing operations was lower,
primarily due to the reduced activity at the Company's remedial services
locations in the Gulf Coast and Western regions of the United States and a
decline in one-time, project work at the Company's landfills. Lower pricing
within the hazardous waste management industry was a component of lower revenue
for most areas of the Company.
Operating Expenses
Operating expenses increased $44.7 million, or 10.4%, during the year ended
August 31, 1996, compared to the year ended August 31, 1995. The increase was
primarily attributable to additional business obtained as part of the
acquisition of USPCI. As a percentage of revenue, operating expense increased to
72.5% from 71.6% in the comparable prior year, primarily due to downward pricing
pressure on revenue.
Depreciation and Amortization Expense
Depreciation and amortization expense for fiscal 1996 was essentially unchanged
from fiscal year 1995. As a percentage of revenue, depreciation and amortization
expense decreased to 7.4% from 8.0% in the prior year also due to the decline in
landfill cell amortization rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $73.8 million during fiscal
1996, increased 18.9% over the prior year. As a percentage of revenue, selling,
general and administrative expenses increased to 11.3% from 10.4% in the prior
year due to higher selling costs related to the acquired USPCI customer
accounts.
6
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LAIDLAW
ENVIRONMENTAL SERVICES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Allocated Interest Expense
Allocated interest expense increased 12.6% during the year ended August 31, 1996
over the prior year primarily related to an increase in allocated interest
expense from its parent, Laidlaw, associated with the acquisition of USPCI.
Interest Expense
Interest expense increased 24.4%, during 1996 compared to 1995 primarily as a
result of the acquisition of USPCI.
EARNINGS PER SHARE
Net income (loss) per common share is computed by dividing net income (loss) by
the weighted average number of common shares deemed outstanding for each period
presented. Shares of stock issuable pursuant to stock options, have not been
considered as their effect is anti-dilutive. Earnings (loss) per share were
$(1.329), $0.068 and $0.147 for the years ended August 31, 1997, 1996 and 1995,
respectively.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains various forward-looking statements under the safe harbor
provided within the meaning of the Private Securities Litigation Reform Act of
1995, relating to anticipated financial performance, business prospects, new
services, market forces, commitments, technological developments and other
matters. These statements are based on current plans and expectations of the
Company and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements.
Forward looking statements typically contain words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "predicts" or "projects," or
variations of these words, suggesting that future outcomes are uncertain.
The risks and uncertainties that may cause actual results to differ include,
among others, general economic conditions, risks associated with acquisitions,
fluctuations in operating results because of acquisitions and variations in
stock prices, changes in applicable federal, state and local laws and
regulations, especially environmental regulations, alternate and emerging
technologies, competition and pricing pressures, overcapacity in the industry,
seasonal fluctuations due to weather, uncertainties of litigation and risks
associated with the operations and growth of the newly acquired business of
Rollins. As a result of these factors, the Company's revenue and income could
vary significantly from quarter to quarter, and past financial performance
should not be considered a reliable indicator of future performance.
CAPITALIZATION
Prior to May 15, 1997, Laidlaw provided the majority of the financing for Old
LESI's operating and investing activities through a combination of intercompany
equity and debt investments. The total investment in the Company by Laidlaw is
included in stockholders' equity prior to May 15, 1997. At August 31, 1996, the
Company's capital consisted of $55.8 million of long-term debt and $1,094.8
million of stockholders' equity.
On May 15, 1997, Rollins issued 120 million common shares and a $350 million 5%
Subordinated Convertible Debenture ("PIK"), and paid $349.1 million in cash
($400 million, less debt of $50.9 million assumed), to Laidlaw to consummate the
Acquisition. This recapitalization resulted in the use of external financing
from the Bank Credit Facility and a reduction in stockholders' equity related to
the payments to Laidlaw. At August 31, 1997 the Company's capital consisted of
$540.1 million of long-term debt, a $350 million PIK and $328 million of
stockholders' equity.
LIQUIDITY
The cash provided by continuing operations during fiscal years 1997, 1996 and
1995 was $37 million, $21.9 million and $39.8 million, respectively. In 1997,
accounts payable, accrued liabilities and deferred liabilities decreased by
$52.6 million, excluding cash spending on acquisitions, which includes costs
related to landfill cell closures, site remediation and facility closures.
Deferred income taxes increased by $37.5 million. Cash provided by discontinued
operations was $0.4 million, $3.2 million and $0.3 million, in 1997, 1996 and
1995, respectively.
As a direct result of the personnel reductions and facility closures, related to
the Rollins acquisition, the Company plans incurring cash severance and closure
costs. With respect to the former Rollins' operations, approximately $17 million
of severance costs and $40 million of closure costs related to dismantling,
decontamination and regulatory approval are planned to be incurred. With respect
to the Old LESI operations, approximately $25 million of costs are scheduled to
be incurred. Of such costs, management expects to incur between $20 million and
$25 million within 12 months of the Acquisition.
The Company believes that the existing level of working capital of $76.1 million
is adequate for normal growth and operating needs. Trade and other accounts
receivable continues to represent the largest portion of current assets,
totaling $210.9 million at August 31, 1997. The average days sales outstanding
reduced to 93 days, from 99 days at August 31, 1996. The Company's primary
sources of liquidity are cash flows from operations, existing cash and
short-term investments of $11.2 million, short-term unused working capital
7
15
LAIDLAW
ENVIRONMENTAL SERVICES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
bank lines of $14.6 million and the unused cash portion of the Bank Credit
Facility's revolver tranche of $100 million. Interest payments for the Company's
PIK are due semiannually, on November 15 and May 15 until its maturity on May
15, 2009. Interest payments due during the first two years after issuance of the
PIK are required to be satisfied by the issuance of the Company's common shares,
based on the market price of the common shares at the time the interest payments
are due. At the Company's option, any other interest or principal payments
(other than optional early redemption) may be satisfied by issuing common
shares, based on the market price at the time such payments are due.
The Company expects to fund the debt repayment requirements outlined in Note 4
of the Notes to Consolidated Financial Statements from cash flows from
operations. The $365.7 million due past fiscal 2002 includes approximately $125
million of industrial revenue bonds with maturities ranging primarily from 10 to
30 years.
The Company has not paid dividends during the reported periods, and does not
intend to pay dividends in the foreseeable future. Additionally, the credit
agreement pursuant to the Bank Credit Facility prohibits the payment of
dividends (unless a given percentage of lenders otherwise agree).
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
Investing activities from continuing operations used cash of $21.9 million,
$114.9 million and $300.8 million in 1997, 1996 and 1995, respectively. Net
expenditures for the purchase of fixed assets for normal replacement
requirements, and increases in services were $36.1 million, $104.3 million and
$68.7 million in 1997, 1996 and 1995, respectively. The Company's projected
capital expenditures for fiscal 1998 are approximately $40 million. The Company
believes that it has adequate resources to finance these expenditures.
Net cash provided by (used in) financing activities was $(2.5) million, $94.8
million and $263.8 million in 1997, 1996 and 1995, respectively.
Significant non-recurring items that affected cash flows during the past three
years included the acquisition of Rollins in 1997.
The Bank Credit Facility also contains negative, affirmative and financial
covenants customarily found in credit agreements for financings similar to the
financing provided under the Bank Credit Facility, including covenants limiting
annual capital expenditures, restricting debt, guaranties, liens, mergers and
consolidations, sales of assets and payment of dividends. The Company was in
compliance with its covenants at August 31, 1997.
INFLATION
The Company's business has not been, during the periods presented herein, and is
not expected in the near future to be, significantly affected by inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1 "Environmental Remediation Liabilities" ("SOP 96-1")
for fiscal years beginning after December 15, 1996. SOP 96-1 provides that
environmental remediation liabilities should be accrued when the criteria of
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies" are met and it includes benchmarks to aid in the determination of
when environmental remediation liabilities should be recognized. SOP 96-1 also
provides guidance with respect to the measurement of the liability and the
display and disclosure of environmental remediation liabilities in the financial
statements. The Company believes that the adoption of this SOP will not have a
material impact on the Company's financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 "Earnings Per Share". This standard is effective for financial
statements issued for periods ending after December 15, 1997, and will be
adopted for the interim period ended February 28, 1998, with restatement of
all prior-period earnings per share ("EPS") data presented. This statement
requires the presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed similarly to fully diluted EPS under the existing rules. The Company
does not expect that SFAS No. 128 will have a material impact on the earnings
per share computation.
8
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LAIDLAW
ENVIRONMENTAL SERVICES
Consolidated Statements of Income
($ in thousands, except per share amounts)
Year Ended August 31 1997 1996 1995
- --------------------------------------------------------------------------------------
Revenues $ 678,619 $ 652,973 $ 599,241
- --------------------------------------------------------------------------------------
Expenses:
Operating 485,062 473,563 428,932
Depreciation and amortization 53,506 48,291 48,386
Selling, general and administrative 73,068 73,800 62,064
Restructuring charge 331,697 -- --
- --------------------------------------------------------------------------------------
Total expenses 943,333 595,654 539,382
- --------------------------------------------------------------------------------------
Operating income (loss) (264,714) 57,319 59,859
Allocated interest expense 24,030 41,506 36,846
Interest expense 20,243 5,344 4,296
Other income 2,865 1,391 2,967
- --------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income tax (306,122) 11,860 21,684
Income tax expense (benefit) (122,789) 2,500 4,769
- --------------------------------------------------------------------------------------
Income (loss) from continuing operations
before minority interest (183,333) 9,360 16,915
Minority interest (net of tax) (119) (2,646) (150)
- --------------------------------------------------------------------------------------
Income (loss) from continuing operations (183,452) 6,714 16,765
Income from discontinued operations (net of tax) 20 1,496 819
- --------------------------------------------------------------------------------------
Net income (loss) $(183,432) $ 8,210 $ 17,584
======================================================================================
Per share data:
Net income (loss) from continuing operations $ (1.329) $ 0.056 $ 0.140
Income from discontinued operations -- 0.012 0.007
- --------------------------------------------------------------------------------------
Net income (loss) per share $ (1.329) $ 0.068 $ 0.147
======================================================================================
Weighted average common and common
stock equivalents outstanding (000's) 138,033 120,000 120,000
See accompanying Notes to Consolidated Financial Statements.
9
17
LAIDLAW
ENVIRONMENTAL SERVICES
Consolidated Balance Sheets
($ in thousands)
August 31 1997 1996
- -------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 11,160 $ -
Trade and other accounts receivable
(net of allowance for doubtful
accounts of $7,236 in 1997;
$4,985 in 1996) 210,914 184,626
Inventories 7,927 7,956
Income taxes recoverable - 5,017
Deferred income taxes 13,027 -
Other current assets 8,512 5,871
- -------------------------------------------------------------------------------
Total current assets 251,540 203,470
- -------------------------------------------------------------------------------
Long-term investments 51,909 37,093
- -------------------------------------------------------------------------------
Land, landfill sites and improvements 499,680 564,934
Buildings 423,712 397,165
Machinery and equipment 610,274 431,077
Construction in process 6,357 42,732
- -------------------------------------------------------------------------------
Property, plant and equipment 1,540,023 1,435,908
Less: Accumulated depreciation
and amortization (303,454) (323,180
- -------------------------------------------------------------------------------
Net property, plant and equipment 1,236,569 1,112,728
- -------------------------------------------------------------------------------
Net assets of discontinued operations - 55,827
Goodwill, at cost (net of
accumulated amortization
of $11,669 in 1997; $12,962 in 1996) 70,527 81,579
Deferred charges 333 597
- -------------------------------------------------------------------------------
Total assets $1,610,878 $1,491,294
===============================================================================
LIABILITIES
Current liabilities
Accounts payable $ 48,148 $ 88,806
Accrued liabilities 115,211 66,705
Current portion of long-term debt 12,086 7,282
- -------------------------------------------------------------------------------
Total current liabilities 175,445 162,793
- -------------------------------------------------------------------------------
Deferred items
Income taxes 49,790 86,985
Other 179,668 98,183
Long-term debt 528,010 48,556
Subordinated convertible debenture 350,000 -
- -------------------------------------------------------------------------------
Total liabilities 1,282,913 396,517
- -------------------------------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per
share; authorized 350,000,000,
issued and outstanding 180,435,311 in
1997, 120,000,000 in 1996 180,435 120,000
Additional paid-in capital 385,200 1,028,309
Accumulated deficit (237,670) (53,532
- -------------------------------------------------------------------------------
Total stockholders' equity 327,965 1,094,777
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,610,878 $1,491,294
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
10
18
LAIDLAW
ENVIRONMENTAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended August 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net Income (loss) $(183,432) $ 8,210 $ 17,584
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
continuing operations:
Income from discontinued operations (20) (1,496) (819)
Restructuring charge, net of
applicable income taxes 200,000 -- --
Depreciation and amortization 53,506 48,291 48,386
Deferred income taxes 37,507 783 4,298
Change in accounts receivable (8,151) (1,719) (6,896)
Change in accounts payable, accrued
liabilities and deferred liabilities (52,632) (30,692) (21,741)
Decrease in liabilities assumed
upon acquisition (17,945) -- --
Change in other, net 8,126 (1,428) (984)
- ----------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 36,959 21,949 39,828
Net cash provided by discontinued operations 425 3,199 276
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,384 25,148 40,104
- ----------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Cash acquired (expended) on acquisition of business 15,451 (8,000) (229,186)
Purchase of property, plant and equipment (36,097) (104,284) (68,650)
Increase in long-term investments (2,837) -- (1,238)
Proceeds from sales of equipment 1,596 3,319 1,176
Other -- (5,984) (2,859)
- ----------------------------------------------------------------------------------------------------
Net cash used in continuing operations (21,887) (114,949) (300,757)
Net cash used in discontinued operations (1,887) (5,026) (3,173)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,774) (119,975) (303,930)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of debt under Bank Credit Facility 375,000 -- --
Additional debt issuances 76,622 -- 32,251
Debt financing fees and expenses (18,788) -- --
Bank overdraft (32,188) 21,880 7,311
Repayment of long-term debt (61,542) (7,548) (27,049)
Payment to Laidlaw Inc. (349,116) -- --
Advances from Laidlaw Inc. 7,562 82,913 243,614
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in)
continuing operations (2,450) 97,245 256,127
Net cash provided by (used in)
discontinued operations -- (2,418) 7,699
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (2,450) 94,827 263,826
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,160 -- --
Cash and cash equivalents at:
Beginning of period -- -- --
====================================================================================================
End of period $ 11,160 $ -- $ --
====================================================================================================
CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized) $ 26,660 $ 34,050 $ 35,242
====================================================================================================
Income taxes $ -- $ -- $ --
====================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of Rollins
Fair value of assets acquired $ 495,168 $ -- $ --
Fair value of liabilities assumed 329,134 -- --
- ----------------------------------------------------------------------------------------------------
Fair value of stock issued $ 166,034 $ -- $ --
====================================================================================================
Issuance of subordinated convertible
debenture to Laidlaw Inc. $ 350,000
====================================================================================================
Accounts payable related to fixed assets $ -- $ 8,992 $ --
====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
11
19
LAIDLAW
ENVIRONMENTAL SERVICES
Consolidated Statements of Stockholders' Equity
Total
Common Additional Accumulated Stockholders'
($ in thousands) Stock Paid-in Capital Deficit Equity
- --------------------------------------------------------------------------------------------------------------
Balance at September 1, 1994 $ 120,000 $ 757,923 $ (79,326) $ 798,597
Net income -- -- 17,584 17,584
Net additional investment by Laidlaw Inc. -- 240,085 -- 240,085
- --------------------------------------------------------------------------------------------------------------
Balance at August 31, 1995 120,000 998,008 (61,742) 1,056,266
Net income -- -- 8,210 8,210
Net additional investment by Laidlaw Inc. -- 30,301 -- 30,301
- --------------------------------------------------------------------------------------------------------------
Balance at August 31, 1996 120,000 1,028,309 (53,532) 1,094,777
Net loss -- -- (183,432) (183,432)
Net additional investment by Laidlaw Inc. -- 7,562 -- 7,562
Issuance of subordinated convertible
debenture to Laidlaw Inc. -- (350,000) -- (350,000)
Cash paid to Laidlaw Inc. -- (349,116) -- (349,116)
Issuance of additional shares on acquisition 60,376 105,658 -- 166,034
Exercise of stock options 59 96 -- 155
Transfer of JTM Industries, Inc. to Laidlaw Inc. -- (57,309 -- (57,309)
Cumulative foreign currency translation adjustments -- -- (706) (706)
- --------------------------------------------------------------------------------------------------------------
Balance at August 31, 1997 $ 180,435 $ 385,200 $ (237,670) $ 327,965
==============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
12
20
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
NOTE 1 - BUSINESS COMBINATION
On May 15, 1997, pursuant to a February 6, 1997 stock purchase agreement (the
"Stock Purchase Agreement") between Rollins Environmental Services, Inc.
("Rollins") and Laidlaw Inc. ("Laidlaw"), Rollins acquired the hazardous and
industrial waste operations of Laidlaw ("Old LESI" or the "Accounting Acquirer")
(the "Acquisition"). The business combination was accounted for as a reverse
acquisition using the purchase method of accounting. Rollins issued 120 million
common shares and a $350 million 5% subordinated convertible debenture, and paid
$349.1 million in cash ($400 million, less debt of $50.9 million assumed), to
Laidlaw to consummate the Acquisition. Coincident with the closing of the
Acquisition, the continuing legal entity changed its name from Rollins
Environmental Services, Inc. to Laidlaw Environmental Services, Inc. (the
"Company"). As a result of the Acquisition, Laidlaw owns 67% of the issued
common shares of the Company. Accordingly, the Company adopted the Accounting
Acquirer's fiscal year-end of August 31.
The reverse acquisition purchase price is the fair market value of the Rollins
common shares outstanding prior to completion of the Acquisition. As the only
remaining conditions to close the Acquisition after signing the Stock Purchase
Agreement involved stockholder and regulatory approvals, the date of signing is
the appropriate determination date for the market price of the Rollins common
shares. The average closing market price per share on the NYSE - Composite
Transactions for the five trading days before and after February 6, 1997, was
$2.75. Applying this price per share to the 60,375,811 common shares outstanding
on February 6, 1997, resulted in a purchase price of approximately $166 million.
As a direct result of the personnel reductions and facility closures related to
the Rollins acquisition, the Company plans incurring cash severance and closure
costs. With respect to the former Rollins' operations, approximately $17 million
of severance costs and $40 million of closure costs related to dismantling,
decontamination and regulatory approval are planned to be incurred. With respect
to the Old LESI operations, approximately $25 million of costs are scheduled to
be incurred. Of such costs, management expects to incur between $20 million and
$25 million within 12 months of the Acquisition. (See Note 9.)
As a result of the Acquisition, the historical financial information included in
these consolidated financial statements is that of the Accounting Acquirer. The
results of operations of Rollins have been included from the date of
acquisition, May 15, 1997.
Condensed unaudited pro forma statements of operations data, as if the
Acquisition had occurred at the beginning of the previous year, are as follows
($ in thousands, except per share amounts):
Fiscal Year 1997 1996
- -------------------------------------------------------------------------
Revenue $ 825,505 $ 885,741
Loss from continuing operations (222,162) (23,981)
Income from discontinued operations 20 1,496
-----------------------
Net loss $ (222,142) $ (22,485)
=======================
Per share data:
Loss from continuing operations $ (1.204) $ (.131)
Income from discontinued operations .000 .008
-----------------------
Net loss $ (1.204) $ (.123)
=======================
Weighted average common and common stock
equivalents outstanding (000's) 184,444 182,787
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles requiring the Company
to make estimates and assumptions that affect reported amounts of assets,
liabilities, revenue and expenses, and disclosure of contingencies. Future
events could alter such estimates in the near term.
Certain figures as of August 31, 1996, and for the years ended August 31, 1996
and 1995 have been reclassified to conform to the current period's
presentations. The Company has revised its statement of cash flows for the years
ended August 31, 1996 and 1995 to reclassify certain long term liability amounts
from financing activities to operating activities and to reclassify bank
overdraft amounts from operating activities to financing activities.
Additionally, the amount reported as the change in Net Investment by Laidlaw
Inc. has been reclassified as a financing cash flow activity. Accordingly, cash
flows from operations decreased by $37,604 and $13,478 for the years ended
August 31, 1996 and 1995, respectively, and cash flows from financing activities
decreased by $907 and $244,191 for the years ended August 31, 1996 and 1995,
respectively, from the amounts previously reported.
13
21
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
A summary of the significant accounting policies followed in the preparation of
these consolidated financial statements is as follows:
Consolidation
The consolidated financial statements include the accounts of the Company and
all of its subsidiary companies. All significant intercompany transactions are
eliminated. The purchase method of accounting for business combinations has been
used.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and term deposits in
investments with maturities of less than three months.
Inventories
Inventories are valued at the lower of cost, determined on a first-in, first-out
basis, or replacement cost.
Long-term investments
Long-term investments, held to maturity, are carried at cost, which approximates
fair market value, and consist primarily of long-term trust fund deposits with
government authorities to support closure and post-closure activities at several
of the Company's facilities.
Property, plant and equipment
Property, plant and equipment is recorded at cost.
Landfill sites, preparation costs and improvements are amortized on the basis of
landfill capacity utilized during the year. Landfill capacity represents total
permitted airspace which is measured in the form of cubic yards. Effective in
1996, the Company commenced capitalizing interest on landfill capacity under
development to the cost of the landfill. The effect of the adoption of this
policy was immaterial in the current and prior years.
During the construction and development period of an asset, the costs incurred,
including applicable interest costs, are classified as construction in process.
Once an asset has been completed and put into use, it is transferred to the
appropriate category and depreciation commences.
During fiscal years 1997, 1996 and 1995, the Company capitalized interest of
$6.7 million, $12.8 million and $5.9 million, respectively.
The cost of permits directly related to property, plant and equipment is
capitalized with the related asset and depreciated over the expected permit
life.
Depreciation and amortization of other property, plant and equipment is provided
substantially on a straight-line basis over their estimated useful lives which
are as follows:
Buildings - 20 to 40 years
Machinery and equipment - 5 to 30 years.
Goodwill
Goodwill is amortized on a straight-line basis over forty years.
Impairment
The Company periodically reviews the carrying values of its fixed assets and
intangibles to determine whether such values are recoverable. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant and equipment and intangibles in relation to the operating
performance and future undiscounted cash flows of the underlying business. The
Company adjusts the book value of the underlying asset if the sum of expected
future cash flows is less than book value. Any resulting write downs are charged
to depreciation and amortization expense.
Deferred charges
Deferred charges are amortized on a straight-line basis over a two- to five-year
period depending on the nature of the deferred costs.
Deferred financing costs
Deferred financing costs are amortized over the life of the related debt
instrument and included in long-term debt.
14
22
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
Environmental liabilities
Environmental liabilities include accruals for costs associated with closure and
post-closure monitoring and maintenance of the Company's landfills, remediation
at certain of the Company's facilities and corrective actions at Superfund
sites. The Company accrues for closure and post-closure costs over the life of
the landfill site as capacity is consumed.
Financial instruments
The Company's cash and cash equivalents, accounts receivable, certain long-term
investments, accounts payable, long-term debt and the subordinated convertible
debenture constitute financial instruments. Concentration of credit risks in
accounts receivable are limited due to the large number of customers comprising
the Company's customer base throughout North America. The Company performs
ongoing credit evaluations of its customers, but does not require collateral to
support customer accounts receivable. The Company establishes an allowance for
doubtful accounts based on the credit risk applicable to particular customers,
historical trends and other relevant information.
Derivative financial instruments
The Company uses interest rate swap agreements to minimize the impact of
interest rate fluctuations on floating interest rate long-term borrowings. The
differential paid or received on interest rate swap agreements is recognized as
an adjustment to interest expense. See Note 4 for fair value information
pertaining to long-term debt and derivative financial instruments.
Revenue recognition
Revenues, along with the related costs of treatment, disposal and
transportation, at the Company's service center operations, which primarily
collect, transport and prepare waste material for transfer to disposal
facilities are recognized when the waste material is accepted at the service
center. Pursuant to contracts with its customers, the Company accepts title to
waste material at such time and provides contractual indemnification to its
customers against future liability with respect to the waste materials.
Revenues from the Company's treatment and disposal operations, primarily
landfill and incineration facilities, are recognized when the waste material is
disposed of, whether burned, landfilled or treated.
Income taxes
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of such benefits
are more likely than not. Prior to May 15, 1997, the Company filed consolidated
tax returns with Laidlaw. Income taxes for the periods prior to May 15, 1997
have been calculated using applicable income tax rates on income for tax
purposes on a separate return basis.
Foreign currency translation
The Company's foreign operations are all of a self-sustaining nature. The
functional currency of the Company's foreign subsidiaries is its respective
local currency. Assets and liabilities are translated to U. S. Dollars at the
exchange rate in effect at the balance sheet date and revenue and expenses at
weighted monthly average exchange rates for the year. Gains and losses from the
translation of the financial statements of the foreign subsidiaries are included
in stockholders' equity.
NOTE 3 - ACCRUED LIABILITIES
Accrued liabilities consist of the following ($ in thousands):
August 31 1997 1996
- ---------------------------------------------------------------------------
Current portion of environmental liabilities $ 27,376 $ 26,327
Interest payable 12,643 938
Accrued severance pay 12,911 --
Accrued disposal costs 10,039 9,147
Other 52,242 30,293
-------------------
Total $115,211 $ 66,705
===================
NOTE 4 - LONG-TERM DEBT
Prior to May 15, 1997, Laidlaw provided the majority of the financing for Old
LESI's operating and investing activities through a
15
23
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
combination of intercompany equity and debt investments. The total investment in
the Company by Laidlaw is included in stockholders' equity prior to May 15,
1997. Interest expense associated with this intercompany financing has been
allocated to the Company based on its share of Laidlaw's consolidated net
assets.
The Company financed the cash consideration portion of the Acquisition and
certain fees related thereto with proceeds of a bank credit facility (the "Bank
Credit Facility") arranged pursuant to a credit agreement between the Company
and a syndicate of banks and other financial institutions. The Bank Credit
Facility consists of five parts: (i) a $275 million six-year senior revolving
credit facility with a $200 million letter of credit sublimit ("Revolving Credit
Facility"), (ii) a $165 million six-year senior amortizing term loan, (iii) a
$60 million six-year senior amortizing Canadian term loan, (iv) a $75 million
minimally amortizing seven-year senior term loan and (v) a $75 million minimally
amortizing eight-year senior term loan. The term loans referred to in clauses
(ii), (iii), (iv) and (v) are collectively referred to herein as the "Term
Loans".
The Term Loans were drawn upon in full May 15, 1997, the closing date of the
Acquisition. The Revolving Credit Facility has $200 million available for
letters of credit and $100 million available for loans, subject to the aggregate
limit of $275 million. As of August 31, 1997, $23.3 million of letters of credit
were issued and none was used for loans.
The Bank Credit Facility also contains negative, affirmative and financial
covenants customarily found in credit agreements for financings similar to the
financing provided under the Bank Credit Facility, including covenants limiting
annual capital expenditures, restricting debt, guaranties, liens, mergers and
consolidations, sales of assets and payment of dividends. The Company was in
compliance with its covenants at August 31, 1997.
The Bank Credit Facility is collateralized by certain tangible assets of the
Company. All of the capital stock of the Company's subsidiaries are pledged to
the lenders, and such subsidiaries guaranty the obligations of the Company to
the lenders.
Interest costs on the Bank Credit Facility are reset periodically, at least
annually, and vary depending on the particular facility and whether the Company
chooses to borrow under Eurodollar or non-Eurodollar loans. Interest costs on
the promissory note is based on U.S. Dollar London Interbank Offered Rate
("LIBOR"), determined on a semi-annual basis.
Long-term debt consisted of the following ($ in thousands):
August 31 1997 1996
- -----------------------------------------------------------------------------
Bank Credit Facility:
Term loans, U. S., with interest
rates from 8.095% to 9.225% $315,000 $ -
Term loans, Canadian, with interest
rates from 5.881% to 6.141% 60,000 -
Promissory note, due May 2003, with
an interest rate of 5.98% 60,000 -
Industrial Revenue Bonds, due 2003 - 2027,
with fixed interest rates from 6.0% to 9.0% 123,314 46,991
Other 948 9,717
----------------------
559,262 56,708
Less: current portion 12,086 7,282
Less: unamortized deferred financing costs 19,166 870
----------------------
Total $528,010 $ 48,556
======================
The aggregate amount of minimum payments required on long-term debt in each of
the years indicated is as follows ($ in thousands):
Year ending August 31
- ------------------------------------------------------------------------------
1998 $ 12,086
1999 26,827
2000 36,658
2001 51,500
2002 66,500
Thereafter 365,691
--------
Total minimum payments due $559,262
========
In management's view, due to the long-term debt being primarily based on
floating rates, the carrying amounts approximate fair value.
16
24
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
The promissory note and $39 million of the Industrial Revenue Bonds are
guaranteed by Laidlaw.
In July 1997, the Company entered into interest rate swap agreements to alter
interest rate exposures. These agreements, with a principal notional amount of
$160 million, expire in periods ranging from 1.5 to 2.5 years, with a weighted
average of 2.1 years. The Company pays fixed rates ranging from 5.945% to 6.07%,
and receives floating rates based on U.S. Dollar LIBOR, determined on a
quarterly basis of 5.719% at August 31, 1997.
Credit risk arises from the possible inability of counterparties to meet the
terms of their contracts on a net basis. All of the Company's interest rate swap
agreements have been entered into with major financial institutions which are
expected to fully perform under the terms of the agreements. The Company's
credit exposure on swaps is related not to the notional balances of the interest
rate swaps, but to the current and potential replacement costs of all profitable
contracts at year end. At August 31, 1997 this credit exposure is immaterial.
Credit exposure will increase along with the market value of the swaps, if
interest rates increase, and decrease if interest rates decline.
Derivative financial instrument fair values represent an approximation of
amounts the Company would have paid to or received from counterparties to
terminate its positions prior to maturity, and are based on capital market rates
prevailing at August 31, 1997. The Company's fair value benefit for all interest
rate derivative contracts as of August 31, 1997, was approximately $0.3 million.
At August 31, 1997, the Company had no plans to terminate these positions prior
to maturity.
NOTE 5 - SUBORDINATED CONVERTIBLE DEBENTURE
Pursuant to the Acquisition described in Note 1, the Company issued a $350
million 5% subordinated convertible, pay-in-kind debenture ("PIK") due May 15,
2009 to Laidlaw.
Interest on the PIK is payable semiannually, on November 15 and May 15 until
maturity. Beginning on May 15, 2002, and continuing until maturity, the PIK is
convertible, at the option of the holder into common shares of the Company based
on a conversion price per share of $3.75 (the "Conversion Price"). Beginning on
May 15, 2002, and continuing until maturity, the Company has the option to
redeem the PIK in cash if the common shares are trading at a market price
greater than or equal to 120% of the Conversion Price. The PIK ranks junior in
right of payment (principal and interest) to all other long-term debt, including
the Bank Credit Facility.
The estimated fair value of the PIK is based on quoted market prices, where
available, along with present value calculations which are calculated using
current rates for similar debt with the same remaining maturity. The Company
estimates that the fair value of the PIK at August 31, 1997 was $493.6 million.
Interest payments due during the first two years after issuance of the PIK are
required to be satisfied by the issuance of the Company's common shares, based
on the market price of the common shares at the time the interest payments are
due. At the Company's option, any other interest or principal payments, other
than optional early redemption, may be satisfied by issuing common shares, based
on the market price at the time such payments are due.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Lease Commitments:
Rental expense incurred under operating leases was $36.1 million, $35.9 million
and $35.4 million in 1997, 1996 and 1995, respectively. Minimum future rental
amounts required under operating leases for premises and equipment having
non-cancelable terms in excess of one year as of August 31, 1997, are as follows
($ in thousands):
Year ending August 31
- --------------------------------------------------------------------------------
1998 $ 18,163
1999 13,007
2000 9,853
2001 5,664
2002 3,454
Thereafter 9,365
--------
Total $ 59,506
========
17
25
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
Closure, Post-Closure and Environmental Liabilities:
The Company has recorded liabilities for closure and post-closure monitoring and
environmental remediation costs as follows ($ in thousands):
August 31 1997 1996
- --------------------------------------------------------------------------------
Current portion, included in accrued liabilities $ 27,376 $26,327
Non-current portion, included in deferred items-other 155,685 70,478
------------------
Total $183,061 $96,805
==================
The business of the Company's hazardous and industrial waste services is
continuously regulated by federal, state, provincial and local provisions that
have been enacted or adopted, regulating the discharge of materials into the
environment or primarily for the purpose of protecting the environment. The
nature of the Company's businesses results in its frequently becoming a party to
judicial or administrative proceedings involving all levels of governmental
authorities and other interested parties. The issues that are involved generally
relate to applications for permits and licenses by the Company and their
conformity with legal requirements and alleged technical violations of existing
permits and licenses. The Company does not believe that these matters will be
material to its operations or financial condition.
The Company, in the normal course of its business, expends funds for
environmental protection and remediation, but does not expect these expenditures
to have a materially adverse effect on its financial condition or results of
operations, since its business is based upon compliance with environmental laws
and regulations.
Closure and post-closure monitoring and maintenance costs for U.S. landfills are
estimated based on the technical requirements of Subtitle C and D Regulations of
the U. S. Environmental Protection Agency or the applicable state requirements,
whichever is stricter, and the air emissions standards under the Clean Air Act.
The costs include such items as final capping of the site, methane gas and
leachate management, groundwater monitoring and operation and maintenance costs
to be incurred during the period after the facility closes and ceases to accept
waste. Closure and post-closure costs for the Company's landfills in Canada are
based upon the local landfill regulations governing the facility.
The Company has also established procedures to routinely evaluate potential
remedial liabilities at sites which it owns or operates, or to which it
transports waste, including 22 sites listed on the Superfund National Priority
List ("NPL"). In the majority of situations, the Company's connection with NPL
sites relates to allegations that its subsidiaries, or their predecessors,
transported waste to the facilities in question, often prior to the acquisition
of such subsidiaries by the Company. The Company routinely reviews and evaluates
sites requiring remediation, including NPL sites, giving consideration to the
nature (i.e., owner, operator, transporter or generator), and the extent (i.e.,
amount and nature of waste hauled to the location, number of years of site
operations or other relevant factors), of the Company's alleged connection with
the site, the accuracy and strength of evidence connecting the Company to the
location, the number, connection and financial ability of other named and
unnamed potentially responsible parties and the nature and estimated cost of the
likely remedy. Where the Company concludes that it is probable that a liability
has been incurred, provision is made in the financial statements, based upon
management's judgment and prior experience, for the Company's best estimate of
the liability. If no amount within the range appears to be a better estimate
than any other amount, then the Company provides for the minimum amount within
the range in accordance with SFAS No. 5, "Accounting for Contingencies". Such
estimates are subsequently revised as deemed necessary as additional information
becomes available. The Company believes that it is more than remotely possible
but less than likely, that its potential liability could be at the high end of
such ranges, which would be approximately $26 million higher in the aggregate
than the estimate that has been recorded in the financial statements as of
August 31, 1997.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult to evaluate, such
that the ultimate outcome may differ from current estimates. However, the
Company believes that its extensive experience in the environmental services
business, as well as its involvement with a large number of sites, provides a
reasonable basis for estimating its aggregate liability. As additional
information becomes available, estimates are adjusted as necessary. While the
Company does not anticipate that any such adjustment would be material to its
financial statements, it is reasonably possible that technological, regulatory
or enforcement developments, the results of environmental studies or other
factors could necessitate the recording of additional liabilities which could be
material. The impact of such future events cannot be estimated at the current
time.
Where the Company believes that both the amount of a particular environmental
liability and the timing of the payments are reliably determinable, the cost in
current dollars is discounted to present value assuming inflation of 3.6% and a
risk free discount rate of
18
26
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
8.5%. Had the Company not discounted any portion of its liability, the amount
recorded would have been increased by approximately $9 million at August 31,
1997 (1996 - $9 million).
The majority of the Company's active landfill sites have estimated remaining
lives ranging from two to more than 100 years based upon current site plans and
anticipated annual volumes of waste. As of August 31, 1997, the Company
estimates that during this remaining site life, it will provide for an
additional $97 million (1996 - $72 million) of closure and post-closure costs,
including accretion for the discount recognized to date.
Anticipated payments of environmental liabilities for each of the next five
years and thereafter are as follows ($ in thousands):
Year ending August 31
- --------------------------------------------------------
1998 $ 27,376
1999 32,365
2000 22,735
2001 15,972
2002 10,926
Thereafter 170,687
---------
Total $ 280,061
=========
In conjunction with the acquisitions of certain facilities, the Company has
obtained varying amounts and types of indemnification from potential
environmental liabilities existing at the time of acquisition. Such indemnities
typically cover all or a portion of the costs associated with the remediation of
pre-existing environmental liabilities, and may be available for a limited
period of time.
Financial Assurance Obligations:
As of August 31, 1997, the Company was obligated to provide financial assurances
to the applicable regulatory authorities, totalling approximately $450 million,
in connection with the closure and post-closure requirements of certain facility
operating permits. The majority of these financial assurances have been provided
by Laidlaw at August 31, 1997. The Company is obligated to assume these
financial assurances from Laidlaw during fiscal 1998. The Company intends to
provide the required financial assurances through a combination of letters of
credit and insurance policies.
Legal Proceedings:
The consolidated federal income tax returns of Laidlaw Transportation, Inc. and
its U.S. subsidiaries (collectively "LTI") (which until May 15, 1997, included
certain of the subsidiaries of the Company) for the fiscal years ended August
31, 1986, 1987 and 1988, have been under audit by the Internal Revenue Service.
In March 1994, LTI received a statutory notice of deficiency proposing that LTI
pay additional taxes relating to disallowed deductions in those income tax
returns. The principal issue involved relates to the timing and the
deductibility for tax purposes of interest attributable to loans owing to
related foreign persons. LTI has petitioned the United States Tax Court
(captioned as Laidlaw Transportation, Inc. & Subsidiaries et al v. Commissioner
of Internal Revenue, Docket Nos. 9361-94 and 9362-94) for a redetermination of
claimed deficiencies of approximately $49.6 million (plus interest of
approximately $80.3 million as of August 31, 1997).
In October 1997, LTI received a statutory notice of deficiency proposing that
LTI pay additional taxes of approximately $143.5 million (plus interest of
approximately $121 million as of August 31, 1997) relating to disallowed
deductions in federal income tax returns for the fiscal years ended August 31,
1989, 1990 and 1991, based on the same issues. LTI intends to vigorously contest
these claimed deficiencies. The Company anticipates that the Internal Revenue
Service will propose adjustments for the same issue in subsequent taxation
years.
Pursuant to the Stock Purchase Agreement referred to in Note 1, Laidlaw and
Laidlaw Transportation, Inc. agreed to be responsible for any tax liabilities,
including the costs to defend the subsidiaries, resulting from these matters.
The Company believes that the ultimate disposition of these issues will not have
a materially adverse effect upon the Company's consolidated financial position
or results of operations.
NOTE 7 - STOCKHOLDERS' EQUITY
Prior to May 15, 1997, the Company's total stockholders' equity consisted of the
intercompany investment by Laidlaw. The 120 million shares of common stock
received by Laidlaw to consummate the Acquisition described in Note 1, are
deemed, for accounting purposes, to have been issued and outstanding in all
prior periods presented in these consolidated financial statements.
19
27
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
Authorized and issued capital stock:
Since the former Rollins is the continuing legal entity, its authorized and
issued capital stock constitutes that of the Company.
The Company is authorized to issue 350 million shares of its $1 par value common
stock and one million shares of its $1 par value preferred stock. The terms and
conditions of each issue of preferred stock are determined by the Board of
Directors.
At August 31, 1997, the Company had issued and outstanding 180,435,311 shares of
its $1 par value common stock. For accounting purposes, 120 million of these
shares were deemed outstanding in all periods prior to the Closing and
60,375,811 were deemed to have been issued on May 15, 1997, at $2.75 per share,
as consideration ($166,034,000) for the acquisition of the former Rollins by the
Company.
No preferred stock has been issued.
Each share of common stock outstanding includes one common stock purchase right
(a "Right") which is non-detachable and non-exercisable until certain defined
events occur, including certain tender offers or the acquisition by a person or
group of affiliated or associated persons of 15% or more of the Company's common
stock. Upon the occurrence of certain defined events, the Right entitles the
holder to purchase additional stock of the Company or stock of an acquiring
company at a 50% discount. The Right expires on June 30, 1999, unless earlier
redeemed by the Company at a price of $.01 per Right.
NOTE 8 - STOCK OPTION PLANS
The Company has the following stock option plans:
1. The 1982 Stock Option Plan of the former Rollins Environmental Services, Inc.
2. The 1993 Stock Option Plan of the former Rollins Environmental Services, Inc.
3. The 1997 Directors Stock Option Plan
4. The 1997 Stock Option Plan
All outstanding employee stock options granted by the former Rollins were fully
vested on May 15, 1997, in accordance with the terms of the Stock Purchase
Agreement referred to in Note 1.
Option activity is as follows:
August 31 1997
- ---------------------------------------------------------------------------
Number of options
Outstanding at May 15, 1997 1,106,555
Granted 1,187,500
Exercised (59,500)
Expired or canceled (194,510)
----------
Outstanding at end of year 2,040,045
==========
August 31 1997
- ---------------------------------------------------------------------------
Options available for grant 5,352,500
Options exercisable 852,545
Per share prices
Options granted $3.19
Options exercised $2.25 to $ 2.88
Options outstanding $2.63 to $12.25
Effective July 9, 1997, the directors of the Company set aside six million
shares of its $1 par value common stock for issuance under a 1997 stock option
plan. All options under this plan are for a term of ten years from the date of
grant and become exercisable with respect to 20% of the total number of shares
subject to the option, one year after the date of grant, and with respect to an
additional 20% at the end of each 12 month period thereafter on a cumulative
basis during the succeeding four years. The plan provides for the granting of
stock options to certain senior employees and officers of the Company at the
discretion of the Board of Directors. The plan will be submitted to the
Company's stockholders for approval at the next annual meeting. All options are
subject to certain conditions of service.
20
28
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
Effective July 9, 1997, the directors of the Company set aside 540,000 shares of
its $1 par value common stock for issuance under a 1997 directors stock option
plan. All options under this plan are for a term of ten years from the date of
grant and become exercisable with respect to 20% of the total number of shares
subject to the option, one year after the date of grant, and with respect to an
additional 20% at the end of each 12 month period thereafter on a cumulative
basis during the succeeding four years. The plan will be submitted to the
Company's stockholders for approval at the next annual meeting. All options are
subject to certain conditions of service.
On July 9, 1997, the Board of Directors granted 1,097,500 shares from the stock
option plan and 90,000 shares from the directors stock option plan, both at an
exercise price of $3.188, subject to stockholder approval of the plans.
The Company applies Accounting Principles Board ("APB") 25 in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
the plans in fiscal 1997 or 1996. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," defines a fair
value method of accounting for stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period, which is
usually the vesting, or exercise period.
During fiscal year 1996, the Accounting Acquirer had no stock option plan.
Accordingly, no pro forma disclosures are required. As a result of the exercise
terms of the Company's 1997 stock option plan effective July 9, 1997, pro forma
disclosure is immaterial for fiscal year 1997.
NOTE 9 - RESTRUCTURING CHARGE
The integration related to the Acquisition described in Note 1 resulted in the
closure and consolidation of certain operations formerly owned by Rollins or by
Old LESI. Such actions are expected to produce substantial cost savings.
With respect to the Old LESI operations, the Company recorded a one-time charge
of $331.7 million ($200 million after tax, or $1.52 per share) against income in
the quarter ended May 31, 1997, to reflect the closing of certain of the
operating facilities that had become redundant, and an impairment in the
carrying value of certain operating facilities due to lower expected future cash
flows, as a result of the Acquisition.
NOTE 10 - DISCONTINUED OPERATIONS
On May 1, 1997, in contemplation of the Acquisition described in Note 1, the
Company transferred, in a non-cash transaction, JTM Industries, Inc., its coal
combustion by-products management operations to Laidlaw. Accordingly, no gain or
loss was recognized on this transfer. These operations were retained by Laidlaw
and are not part of the Company's ongoing operations.
The Company has classified these operations as discontinued. Historically these
operations have been included in Laidlaw's Hazardous Waste Services segment for
financial reporting purposes.
Revenue for the discontinued operations for 1997, 1996 and 1995, was $41.5
million, $62.9 million and $43.6 million, respectively.
NOTE 11 - INCOME TAXES
The income tax benefit is comprised as follows ($ in thousands):
Year ended August 31 1997
- ----------------------------------------------------------------------
Current:
Federal $ (30,236)
State 1,000
Foreign (2,064)
Deferred:
Federal (87,086)
State (12,440)
Foreign 8,037
---------
Income tax benefit $(122,789)
=========
21
29
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
A reconciliation of the income tax benefit, calculated by applying the statutory
federal income tax rate to the loss before income taxes is as follows ($ in
thousands):
Year ended August 31 1997
- -------------------------------------------------------------------------
Federal income tax benefit at statutory rate 35.0%
State income tax benefit 5.2%
Other (0.1)%
----
Income tax benefit 40.1%
====
The tax effect of temporary differences which comprise the current and
non-current deferred income tax amounts shown on the balance sheet are as
follows ($ in thousands):
August 31 1997 1996
- -----------------------------------------------------------------------------
Deferred tax assets:
Accrued liabilities $122,051 $ 35,372
Tax attribute carryovers 62,865 69,601
Interest 15,358 --
Other 7,016 1,858
-------------------
Total gross deferred tax assets 207,290 106,831
Less: valuation allowance 14,066 --
-------------------
Net deferred tax assets $193,224 $106,831
Deferred tax liabilities:
Excess of tax over book depreciation $223,732 $187,934
Other 6,255 5,882
-------------------
Total gross deferred tax liabilities 229,987 193,816
-------------------
Net deferred tax liability $ 36,763 $ 86,985
===================
The Company has net operating loss carryforwards for federal income taxes
expiring in the years 2008 to 2112 of $80.3 million. A valuation allowance of
$14.1 million has been recorded against $46.9 million of the loss carryforwards
which are subject to limitations of both Treasury Regulation 1.1502-21 and
Internal Revenue Code ("IRC") Section 382. Foreign net operating losses expiring
in the years 1999 to 2004 are $44.1 million. Interest carryovers of $27.1
million limited by IRC Section 163 (j) are available against federal tax without
expiration.
NOTE 12 - EARNINGS PER SHARE
Primary earnings per share amounts are computed based on the weighted average
number of shares actually outstanding. In 1997, the shares considered to be
common stock equivalents that would be outstanding, assuming the exercise of
dilutive stock options, have not been included as the effect of such inclusion
would be to increase earnings per share, and thus be anti-dilutive.
Additionally, fully diluted earnings per share amounts, which would include the
dilutive effect of the subordinated convertible debenture, have not been
included as the effect of such inclusion would be to increase earnings per
share, and thus be anti-dilutive.
NOTE 13 - RELATED PARTY TRANSACTIONS
Included in selling, general and administrative expenses are management fees
paid to Laidlaw in the amounts of $2.6 million, $4.6 million and $3.6 million
during 1997, 1996 and 1995, respectively.
Management fees have been allocated to the Company, prior to May 15, 1997, based
upon the Company's share of Laidlaw's consolidated revenue. Management fees are
charged by Laidlaw to each of its operating groups in order to recover its
general and administrative costs. The services provided by Laidlaw include
treasury, taxation and insurance.
Related party insurance transactions totalled $7.2 million, $7.2 million and
$7.7 million in 1997, 1996 and 1995, respectively.
Certain directors and officers of the Company are also directors and officers of
Laidlaw.
22
30
LAIDLAW
ENVIRONMENTAL SERVICES
Notes to Consolidated Financial Statements
NOTE 14 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company's revenues and income are derived from one industry segment and
principally in the United States, which includes the collection, transportation,
processing, recovery and disposal of hazardous and industrial wastes. The
segment renders services to a variety of commercial, industrial, governmental
and residential customers.
NOTE 15 - RECENT ACCOUNTING DEVELOPMENTS
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1 "Environmental Remediation Liabilities" ("SOP 96-1")
for fiscal years beginning after December 15, 1996. SOP 96-1 provides that
environmental remediation liabilities should be accrued when the criteria of
SFAS No. 5, "Accounting for Contingencies" are met and it includes benchmarks to
aid in the determination of when environmental remediation liabilities should be
recognized. SOP 96-1 also provides guidance with respect to the measurement of
the liability and the display and disclosure of environmental remediation
liabilities in the financial statements. The Company believes that the adoption
of this SOP will not have a material impact on the Company's financial condition
or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 "Earnings Per Share". This standard is effective for financial
statements issued for periods ending after December 15, 1997, and will be
adopted for the interim period ended February 28, 1998, with restatement of all
prior period earnings per share ("EPS") data presented. This statement requires
the presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS under the existing rules. The Company
does not expect that SFAS No. 128 will have a material impact on the earnings
per share computation.
NOTE 16 - QUARTERLY FINANCIAL DATA - UNAUDITED
($ in thousands) First Second Third* Fourth Total*
- ---------------------------------------------------------------------------------------------------------
1997
Revenues $ 172,565 $ 140,627 $ 155,330 $ 210,097 $ 678,619
Income (loss) from operations 14,899 9,169 (316,760) 27,978 (264,714)
Income (loss) from continuing operations 3,588 1,750 (197,155) 8,365 (183,452)
Income (loss) from discontinued operations 703 (917) 234 -- 20
Net income (loss) 4,291 833 (196,921) 8,365 (183,432)
Earnings per share:
Continuing operations:
Before restructuring $ 0.030 $ 0.015 $ 0.022 $ 0.046 $ 0.120
Restructuring charge -- -- (1.525) -- (1.449)
------------------------------------------------------------
0.030 0.015 (1.503) 0.046 (1.329)
Discontinued operations 0.006 (0.008) 0.002 -- --
------------------------------------------------------------
Net income (loss) per share $ 0.036 $ 0.007 $ (1.501) $ 0.046 $ (1.329)
============================================================
1996
Revenues $ 179,793 $ 150,362 $ 153,139 $ 169,679 $ 652,973
Income from operations 18,636 11,987 13,217 13,479 57,319
Income from continuing operations 3,791 365 739 1,819 6,714
Income (loss) from discontinued operations 579 (378) 622 673 1,496
Net income (loss) 4,370 (13) 1,361 2,492 8,210
Net income (loss) per share $ 0.036 $ (0.000) $ 0.011 $ 0.021 $ 0.068
* 1997 includes restructuring charge of $331.7 million ($200 million net of tax)
Results for the quarters include the results of operations of acquired companies
for the periods in which they were owned by the Company.
23
31
Laidlaw
Environmental Services
Report of Independent Accounts
To the Stockholders and Directors
Laidlaw Environmental Services, Inc.
We have audited the accompanying consolidated balance sheets of Laidlaw
Environmental Services, Inc. and Subsidiaries, as of August 31, 1997 and 1996,
and the related consolidated statements of income, cash flows, and changes in
stockholders' equity for each of the three years in the period ended August 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Laidlaw
Environmental Services, Inc. and Subsidiaries as of August 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended August 31, 1997, in accordance with
generally accepted accounting principles.
As discussed in Note 2, the statement of cashflows has been revised for the
years ended August 31, 1996 and 1995.
Charlotte, North Carolina /s/ Coopers & Lybrand LLP
October 7, 1997
24
COMMON STOCK AND DIVIDEND INFORMATION
The following table sets forth the reported high and low sales price information
for the common shares listed on the New York Stock Exchange and the Pacific
Exchange for the periods concurrent with that of the Accounting Acquirer:
Stock Price
1996 Fiscal Year High Low
- -----------------------------------------------
First Quarter $5.13 $3.00
Second Quarter $3.25 $2.13
Third Quarter $3.63 $2.25
Fourth Quarter $4.13 $2.75
1997 Fiscal Year High Low
- ----------------------------------------------
First Quarter $3.13 $1.88
Second Quarter $3.13 $1.63
Third Quarter $3.38 $2.63
Fourth Quarter $4.63 $2.88
As of October 7, 1997, Laidlaw Environmental Services, Inc. had approximately
22,200 holders of the common stock. Of that total, 6,234 were stockholders of
record.
Since September 1993, the Registrant has not declared nor paid any cash
dividends on its common stock.