-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KlC6gS08Ye4vbyJOyHAEKVIZBDXISNxPosKhB/XVynEusCebR3m9PzvLDAv+lUhN VWk0Uiasxus7uFWie6ooHw== 0000950131-96-003105.txt : 19960701 0000950131-96-003105.hdr.sgml : 19960701 ACCESSION NUMBER: 0000950131-96-003105 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960628 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WMX TECHNOLOGIES INC CENTRAL INDEX KEY: 0000104938 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 362660763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01327 FILM NUMBER: 96588598 BUSINESS ADDRESS: STREET 1: 3003 BUTTERFIELD RD CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7085722478 MAIL ADDRESS: STREET 1: 3003 BUTTERFIELD ROAD CITY: OAKBROOK STATE: IL ZIP: 60521 FORMER COMPANY: FORMER CONFORMED NAME: WASTE MANAGEMENT INC DATE OF NAME CHANGE: 19930527 424B3 1 PROSPECTUS Filed Pursuant to Rule 424(b)(3) Registration No. 333-01327 PROSPECTUS 2,392,923 SHARES LOGO WMX TECHNOLOGIES, INC. COMMON STOCK $1 PAR VALUE ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- The 2,392,923 shares of common stock, $1 par value, covered by this prospectus may be offered and issued from time to time in connection with acquisitions of other businesses, properties or securities in business combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of 1933, as amended (the "1933 Act"). See "Securities Covered by this Prospectus" herein. This prospectus has also been prepared for use, with the Company's prior consent, by persons who have received or will receive shares in connection with such acquisitions and who wish to offer and sell such shares under circumstances requiring or making desirable its use. See "Securities Covered by this Prospectus" herein, and see the inside back cover page hereof for the identity of such individuals, if any. On June 20, 1996, the reported closing sale price for the Company's common stock on the New York Stock Exchange Composite Tape as reported in The Wall Street Journal (Midwest Edition) was $32 7/8. See "Market Prices of Common Stock; Dividends" herein. ----------- THE DATE OF THIS PROSPECTUS IS JUNE 20, 1996. Printed on recycled paper LOGO NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY WMX TECHNOLOGIES, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. TABLE OF CONTENTS Summary................................... 3 The Company............................... 7 Securities Covered by this Prospectus..... 10 Market Prices of Common Stock; Dividends.. 11 Selected Consolidated Financial Data...... 12 Management's Discussion and Analysis of Results of Operations and Financial Condition................................ 14 Business of the Company................... 31 General.................................. 31 Waste Services........................... 32 Solid Waste Management, Recycling and Related Services....................... 32 Collection............................. 32 Transfer............................... 33 Recycling and Energy Recovery.......... 33 Disposal............................... 34 Related Services....................... 35 Hazardous Waste Management and Related Services............................... 36 Chemical Waste Management Services..... 36 Low-Level and Other Radioactive Waste Services.............................. 37 International Waste Management and Related Services........................ 38 Collection Services..................... 39 Treatment and Disposal Services......... 39 Clean Energy, Clean Water and Related Services................................ 41 Wheelabrator Clean Energy............... 41 Wheelabrator Clean Water................ 41 Environmental and Infrastructure Engineering and Consulting Services..... 43 Regulation............................... 44 Waste Services.......................... 45 Solid Waste............................ 45 Hazardous Waste........................ 46
Clean Energy, Clean Water and Related Services............................... 47 Environmental and Infrastructure Engineering and Consulting Services.... 48 RCRA.................................... 48 Superfund............................... 49 International Waste Management and Related Services................... 50 Competition.............................. 50 Insurance................................ 53 Employees................................ 53 Acquisitions and Dispositions............ 54 Property and Equipment.................... 55 Management................................ 57 Directors and Executive Officers......... 57 Compensation of Executive Officers....... 60 Stock Options............................ 62 Long-Term Incentive Plan Awards.......... 63 Pension and Retirement Plans............. 64 Compensation of Directors................ 65 Outside Directors' Plans................. 65 Stock Option Plans for Non-Employee Directors............................... 66 Directors' Charitable Endowment Program.. 66 Compensation Committee Interlocks and Insider Participation............... 67 Certain Transactions..................... 67 Securities Ownership of Management........ 68 Ownership of Company Common Stock........ 68 Ownership of WTI Common Stock............ 70 Ownership of WM International Ordinary Shares.................................. 71 Legal Proceedings......................... 72 Description of Capital Stock.............. 75 Experts................................... 77 Additional Information.................... 77 Index to Financial Statements............. F-1
AVAILABLE INFORMATION WMX Technologies, Inc. (the "Company") is subject to the informational requirements of the Securities Exchange Act of 1934 (the "1934 Act") and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the public reference facilities maintained by the regional offices of the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange, and such reports, proxy statements and other information concerning the Company can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005 and at the offices of the Chicago Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605. This Prospectus constitutes a part of a Registration Statement (the "Registration Statement") filed by the Company with the Commission under the Securities Act of 1933. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and the exhibits relating thereto for further information with respect to the Company and the securities offered hereby. Any Statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is hereby made to a copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. 2 SUMMARY The Company.... WMX Technologies, Inc. Location....... The Company's executive offices are located at: 3003 Butterfield Road Oak Brook, Illinois 60521 (708) 572-8800 Business....... The Company is a leading international provider of environmental and related services. Through Waste Management, Inc., a wholly owned subsidiary of the Company ("WMI"), the Company provides integrated solid waste management services in North America, consisting of solid waste collection, transfer, resource recovery and disposal, to commercial, industrial, municipal and residential customers, as well as to other waste management companies. The Company's solid waste management services include Recycle America(R), Recycle Canada(R) and other paper, glass, plastic and metal recycling services; recovery of methane gas from sanitary landfills for use in electricity generation; and medical and infectious waste management services. The Company also provides street sweeping and parking lot cleaning services and Port-O-Let(R) portable sanitation services to municipalities and commercial and special event customers. WMI also manages the scaffolding and other on-site industrial services businesses owned by the Company's Rust International Inc. subsidiary. Through WMI and Chemical Waste Management, Inc., a wholly owned subsidiary of the Company ("CWM"), the Company also provides hazardous waste management services in North America. Its chemical waste management services, including treatment, storage, disposal and related services, are furnished to commercial and industrial customers, as well as to other waste management companies and to governmental entities. Through Advanced Environmental Technical Services, L.L.C., a 60%-owned subsidiary of the Company, the Company provides on-site integrated hazardous waste management services, including hazardous waste identification, packaging, removal and recycling services to industrial, institutional and governmental customers. CWM also furnishes radioactive waste management services, primarily to electric utilities and governmental entities. The Company provides comprehensive waste management and related services internationally, primarily through Waste Management International plc, a subsidiary owned approximately 56% by the Company and 12% each by the Company's Rust International Inc. and Wheelabrator Technologies Inc. subsidiaries ("Waste Management International"). Waste Management International provides a wide range of solid and hazardous waste management and related environmental services (or has interests in projects or companies providing such services) in ten countries in Europe and in Argentina, Australia, Brazil, Brunei, Hong Kong, Indonesia, Israel, Malaysia, New Zealand, Taiwan and Thailand. Waste Management International also has an approximately 20% interest in Wessex Water Plc, an English publicly traded company providing water treatment, water distribution, wastewater treatment and sewerage services. Wheelabrator Technologies Inc., an approximately 58%-owned subsidiary of the Company ("WTI"), provides a wide array of environmental products and services in 3 North America and abroad that are primarily utilized in meeting the needs of municipalities and industry for clean energy and clean water. WTI's clean energy group is a leading developer of facilities and systems for, and provider of services to, the trash-to-energy, energy, and independent power markets. Through the clean energy group, WTI develops, arranges financing for, operates and owns facilities that dispose of trash and other waste materials in an environmentally acceptable manner by recycling them into electrical or steam energy. Also within this group are business units which design, fabricate and install technologically advanced air pollution control systems and equipment. WTI's clean water group is principally involved in the design, manufacture, operation and ownership of facilities and systems used to purify water, to treat municipal and industrial wastewater, to treat and manage biosolids resulting from the treatment of wastewater by converting them into useful fertilizers, and to recycle organic wastes into compost material useable for horticultural and agricultural purposes. The clean water group also designs and manufactures various products used in water and wastewater treatment facilities and industrial processes, precision profile wire screens for use in groundwater wells and other industrial and municipal applications, and certain other industrial equipment. Rust International Inc., a subsidiary owned approximately 60% by the Company and 40% by WTI ("Rust"), furnishes environmental and infrastructure engineering and consulting services, primarily to clients in government and in the chemical, petrochemical, nuclear energy, utility, pulp and paper, manufacturing, environmental services and other industries. Rust also provides process engineering, construction, specialty contracting and related services through a business unit which Rust intends to sell or otherwise discontinue. On June 12, 1996, the Company announced that Rust closed the sale of its industrial process engineering and construction business based in Birmingham, Alabama to Raytheon Engineers & Constructors, Inc., a subsidiary of Raytheon Company. Rust also has an approximately 41% interest in NSC Corporation, a publicly traded provider of asbestos abatement and other specialty contractors services, and an approximately 37% interest in OHM Corporation, a publicly-traded provider of environmental remediation services. 4 FINANCIAL INFORMATION (SEE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY BEGINNING ON PAGE F-1)
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31, (UNAUDITED) ----------------------------------------------------------- ----------------------------------- 1991(1) 1992(2) 1993(3)(6) 1994(4)(6) 1995(5)(6) 1995(5) 1996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (000'S OMITTED, EXCEPT PER SHARE AMOUNTS) Revenue from continuing operations............ $ 7,550,914 $ 8,661,027 $ 8,636,116 $ 9,554,705 $10,247,617 $ 2,445,185 $ 2,417,191 Income from continuing operations............ $ 606,323 $ 921,175 $ 442,431 $ 776,491 $ 654,590 $ 101,292 $ 185,178 Earnings per common and common equivalent share--continuing operations............ $ 1.23 $ 1.86 $ .91 $ 1.60 $ 1.35 $ 0.21 $ 0.38 Total assets........... $12,572,310 $14,114,180 $16,264,476 $17,423,173 $18,695,308 $18,158,893 $18,945,387 Long-term debt, less portion payable within one year.............. $ 3,782,973 $ 4,312,511 $ 6,145,584 $ 6,044,411 $ 6,420,610 $ 6,724,695 $ 6,385,833 Dividends per share.... $ .42 $ .50 $ .58 $ .60 $ .60 $ 0.15 $ 0.15
- --------- (1) The results for 1991 include a special charge of $296,000,000 (before tax and minority interest) primarily to reflect then current estimates of the environmental remediation liabilities at waste disposal sites previously used or operated by the Company and its subsidiaries or their predecessors. (2) The results for 1992 include a non-taxable gain of $240,000,000 (before minority interest) resulting from the initial public offering of Waste Management International, as well as special charges of $219,900,000 (before tax and minority interest) primarily related to writedowns of the Company's medical waste business, CWM incinerators in Chicago, Illinois and Tijuana, Mexico and a former subsidiary's investment in its asbestos abatement business and certain restructuring costs incurred by the subsidiary and CWM related to the formation of Rust. (3) The results for 1993 include a non-taxable gain of $15,109,000 (before minority interest) relating to the issuance of shares by Rust, as well as a special asset revaluation and restructuring charge of $550,000,000 (before tax and minority interest) recorded by CWM related primarily to a revaluation of its thermal treatment business, and a provision of approximately $14,000,000 to adjust deferred income taxes resulting from the 1993 tax law change. See Notes 3 and 14 to the Company's Consolidated Financial Statements. (4) The results for 1994 include a charge of $9,200,000 (before tax and minority interest) recorded by Rust to write off assets and recognize costs of exiting certain of Rust's service lines and closing offices in a consolidation of certain of its other operations. See Note 14 to the Company's Consolidated Financial Statements. (5) The results for 1995 include a special charge of $140,600,000 (before tax) recorded by CWM in the first quarter, primarily to write off its investment in facilities and technologies that it abandoned because 5 they do not meet customer service or performance objectives, and a special charge of $194,600,000 (before tax and minority interest) recorded by Waste Management International in the fourth quarter relating to actions it is taking to sell or otherwise dispose of non-core businesses and investments, as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. See Note 14 to the Company's Consolidated Financial Statements. (6) In December 1995, the Rust Board of Directors approved a plan to sell or otherwise discontinue Rust's process engineering, construction, specialty contracting and similar lines of business. Accordingly, these businesses have been segregated as discontinued operations in the financial statements since 1993. It is not practical to restate periods prior to the formation of Rust on January 1, 1993 for the discontinued operations. See Note 15 to the Company's Consolidated Financial Statements. (7) Certain amounts have been restated to conform to 1996 classifications. Recent On June 10, 1996, the Company announced that WMI will developments....... reduce its paper recycling capacity by 15%. The Company said that prices for old corrugated cardboard, newsprint and mixed waste paper, after rising strongly in 1995, had returned to approximately the same level as early 1994, and that it expects recyclable commodity prices to remain flat for the remainder of 1996. The Company indicated that due to this weakness in recyclable commodity pricing, its 1996 second quarter earnings are expected to fall in the range of $.45 to $.47 per share, and earnings for 1996 are expected to be in the range of $1.85 to $1.90 per share. 6 THE COMPANY WMX Technologies, Inc. is a leading international provider of environmental and related services. Unless the context indicates to the contrary, as used in this prospectus the terms "Company" and "WMX Technologies" refer to WMX Technologies, Inc. and its subsidiaries. The Company provides integrated solid waste management services in North America through Waste Management, Inc., a wholly owned subsidiary of the Company (referred to herein, together with its subsidiaries and certain affiliated companies providing waste management and related services, as "Waste Management" or "WMI"). The Company's solid waste management services are provided to commercial, industrial, municipal and residential customers, as well as to other waste management companies and consist of solid waste collection, transfer, resource recovery and disposal services. As part of these services, the Company is engaged in providing, through its Recycle America(R), Recycle Canada(R) and other programs, paper, glass, plastic and metal recycling services to commercial and industrial operations and curbside collection of such materials from residences; in removing methane gas from sanitary landfill facilities for use in electricity generation; and in providing medical and infectious waste management services to hospitals and other health care and related facilities. In addition, through Waste Management the Company provides street sweeping and parking lot cleaning services and Port-O-Let(R) portable sanitation services to municipalities and commercial and special event customers. Since mid-1995, Waste Management also has managed the scaffolding and other on-site industrial services businesses owned by the Company's Rust International Inc. subsidiary. The Company also provides hazardous waste management services in North America. The Company's chemical waste treatment, storage, disposal and related services are provided through Waste Management and Chemical Waste Management, Inc., a wholly owned subsidiary of the Company (referred to herein, together with its subsidiaries, as "CWM"), and are provided to commercial and industrial customers, as well as to other waste management companies and to governmental entities. Through Advanced Environmental Technical Services, L.L.C., a 60%-owned subsidiary of the Company (referred to herein, together with its subsidiaries as "AETS"), the Company provides on-site integrated hazardous waste management services, including hazardous waste identification, packaging, removal and recycling services to industrial, institutional and governmental customers. Through its Chem-Nuclear Systems, Inc. wholly owned subsidiary (referred to herein, together with its subsidiaries, as "Chem- Nuclear"), the Company also furnishes radioactive waste management services, primarily to electric utilities and governmental entities. The Company provides comprehensive waste management and related services internationally, primarily through Waste Management International plc, a subsidiary owned approximately 56% by the Company and 12% each by the Company's Rust International Inc. and Wheelabrator Technologies Inc. subsidiaries (referred to herein, together with its subsidiaries, as "Waste Management International" or "WM International"). Waste Management International provides a wide range of solid and hazardous waste management and related environmental services (or has interests in projects or companies providing such services) in ten countries in Europe and in Argentina, Australia, Brazil, Brunei, Hong Kong, Indonesia, Israel, Malaysia, New Zealand, Taiwan and Thailand. Waste Management International also has an approximately 20% interest in Wessex Water Plc, an English publicly traded company providing water treatment, water distribution, wastewater treatment and sewerage services ("Wessex"). Wheelabrator Technologies Inc., an approximately 58%-owned subsidiary of the Company (referred to herein, together with its subsidiaries, as "WTI"), provides a wide array of environmental products and services that are primarily utilized in meeting the needs of municipalities and industry for clean energy and clean water. WTI's clean energy group is a leading developer of facilities and systems for, and provider of services to, the trash-to- energy, energy, and independent power markets. Through the clean energy group, WTI develops, arranges financing for, operates and owns facilities 7 that dispose of trash and other waste materials in an environmentally acceptable manner by recycling them into electrical or steam energy. Also within this group are business units which design, fabricate and install technologically advanced air pollution control and systems and equipment. WTI's clean water group is principally involved in the design, manufacture, operation and ownership of facilities and systems used to purify water, to treat municipal and industrial wastewater, to treat and manage biosolids resulting from the treatment of wastewater by converting them into useful fertilizers, and to recycle organic wastes into compost material useable for horticultural and agricultural purposes. The clean water group also designs and manufactures various products used in water and wastewater treatment facilities and industrial processes, precision profile wire screens for use in groundwater wells and other industrial and municipal applications, and certain other industrial equipment. Rust International Inc., a subsidiary owned approximately 60% by the Company and 40% by WTI (referred to herein, together with its subsidiaries, as "Rust"), furnishes environmental and infrastructure engineering and consulting services primarily to clients in federal, state and local government and in the chemical, petrochemical, nuclear, energy, utility, pulp and paper, manufacturing, environmental services and other industries. Rust also provides process engineering, construction, specialty contracting and related services through a business unit which Rust intends to sell or otherwise discontinue. On June 12, 1996, the Company announced that Rust closed the sale of its industrial process engineering and construction business based in Birmingham, Alabama to Raytheon Engineers & Constructors, Inc., a subsidiary of Raytheon Company. Rust also has an approximately 41% interest in NSC Corporation, a publicly traded provider of asbestos abatement and other specialty contracting services ("NSC"), and an approximately 37% interest in OHM Corporation, a publicly traded provider of environmental remediation services ("OHM"). See "Acquisitions and Dispositions" herein. The Company also owns an approximately 19% interest in ServiceMaster Limited Partnership, a provider of management services, including management of health care, education and commercial facilities, and lawn care, pest control and other consumer services. The following table shows the respective revenues of the Company's major business groups for the last three years, excluding the revenues of Rust's process engineering, construction, specialty contracting and related services business, which is being sold or otherwise discontinued and is being treated as a discontinued operation, and including the revenues of the asbestos abatement services business of a former subsidiary through the May 1993 sale of that business and the revenues of the Rust remediation services business transferred to OHM through the date of the transfer in May 1995.
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 ---------- ---------- ----------- (000'S OMITTED) Solid Waste Management and Related Services................................. $4,702,166 $5,117,871 $ 5,642,857 Hazardous Waste Management and Related Services................................. 661,860 649,581 613,883 Engineering, Industrial and Related Services................................. 1,035,004 1,140,294 1,027,430 Trash-to-Energy, Water Treatment, Air Quality and Related Services............. 1,142,219 1,324,567 1,451,675 International Waste Management and Related Services................................. 1,411,211 1,710,862 1,865,081 Elimination of Intercompany Revenue....... (316,344) (388,470) (353,309) ---------- ---------- ----------- Consolidated Revenue...................... $8,636,116 $9,554,705 $10,247,617 ========== ========== ===========
As a result of a strategic review begun in 1994, management and operations of the Company have been largely realigned on the basis of four principal global lines of business--waste services, clean energy, clean water and environmental and infrastructure engineering and consulting. The following table shows the respective revenues of these continuing lines of business (i.e., excluding revenues of Rust's process engineering, construction, specialty contracting and related services business) for the last three years. 8
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 ---------- ---------- ----------- (000'S OMITTED) Waste Services (including Scaffolding and Other On-Site Industrial Services)....... $7,457,371 $8,140,785 $ 8,634,836 Clean Energy.............................. 804,016 888,037 893,513 Clean Water............................... 392,194 489,295 618,472 Environmental and Infrastructure Engineering and Consulting............... 298,879 425,058 454,105 Elimination of Intercompany Revenue....... (316,344) (388,470) (353,309) ---------- ---------- ----------- Consolidated Revenue...................... $8,636,116 $9,554,705 $10,247,617 ========== ========== ===========
For information relating to expenses and identifiable assets attributable to the Company's major business groups, see Note 13 to the Company's Consolidated Financial Statements appearing elsewhere in this prospectus. For interim periods, the revenues and net income of certain of the Company's businesses may fluctuate for a number of reasons, including there being for some businesses less activity during the winter months. Regulatory or technological developments relating to the environment may require companies engaged in environmental services businesses, including the Company, to modify, supplement or replace equipment and facilities at costs which may be substantial. Because certain of the businesses in which the Company is engaged are intrinsically connected with the protection of the environment and the potential discharge of materials into the environment, a material portion of the Company's capital expenditures is, directly or indirectly, related to such items. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" set forth on pages 14 to 31 of this prospectus for a review of property and equipment expenditures by the Company for the last three years. The Company does not expect such expenditures, which are incurred in the ordinary course of business, to have a materially adverse impact on its and its subsidiaries' combined earnings or its or its subsidiaries' competitive position in the foreseeable future because the Company's businesses are based upon compliance with environmental laws and regulations and its services are priced accordingly. Although the Company strives to conduct its operations in compliance with applicable laws and regulations, the Company believes that in the existing climate of heightened legal, political and citizen awareness and concerns, companies in the environmental services industry, including the Company, will be faced, in the normal course of operating their businesses, with fines and penalties and the need to expend funds for remedial work and related activities with respect to waste treatment, disposal and trash-to-energy facilities. Where the Company concludes that it is probable that a liability has been incurred, a provision is made in the Company's financial statements for the Company's best estimate of the liability based on management's judgment and experience, information available from regulatory agencies and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of a specific site, as well as the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then the Company provides for the minimum amount within the range, in accordance with generally accepted accounting principles. Such estimates are subsequently revised, as necessary, as additional information becomes available. While the Company does not anticipate that the amount of any such revision will have a material adverse effect on the Company's operations or financial condition, the measurement of environmental liabilities is inherently difficult and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies, or other factors could materially alter this expectation at any time. Such matters could have a material adverse impact on earnings for one or more fiscal quarters or years. 9 While in general the Company's environmental services businesses have benefited substantially from increased governmental regulation, the environmental services industry itself is subject to extensive and evolving regulation by federal, state, local and foreign authorities. Due to the complexity of regulation of the industry and to public pressure, implementation of existing and future laws, regulations or initiatives by different levels of government may be inconsistent and difficult to foresee. In addition, the demand for certain of the Company's services may be adversely affected by the amendment or repeal, or reduction in enforcement of, federal, state and foreign laws and regulations on which the Company's businesses engaged in providing such services are dependent. Demand for certain of the Company's services may also be adversely affected by delays or reductions in funding, or failure of legislative bodies to fund, agencies or programs under such laws and regulations. The Company makes a continuing effort to anticipate regulatory, political and legal developments that might affect its operations but is not always able to do so. The Company cannot predict the extent to which any legislation or regulation that may be enacted, amended, repealed or enforced, or any failure or delay in enactment or enforcement of legislation or regulations or funding of agencies or programs, in the future may affect its operations. The Company was incorporated in Delaware in 1968 and subsequently succeeded to certain businesses owned by its organizers and others. The Company's common stock is listed on the New York Stock Exchange under the trading symbol "WMX" and is also listed on the Frankfurt Stock Exchange, the London Stock Exchange, the Chicago Stock Exchange and the Swiss Stock Exchanges in Basle, Zurich and Geneva. SECURITIES COVERED BY THIS PROSPECTUS The shares of common stock of the Company covered by this prospectus are available for use in connection with acquisitions of other businesses, properties or securities in business combination transactions, which may relate to businesses similar or dissimilar to the Company's environmental services and other operations. The consideration offered by the Company in such acquisitions, in addition to any shares of common stock offered by this prospectus, may include cash, debt or other securities (which may be convertible into shares of common stock of the Company covered by this prospectus), or assumption by the Company of liabilities of the business being acquired, or a combination thereof. The terms of acquisitions are typically determined by negotiations between the Company and the owners of the businesses, properties or securities (including newly issued securities) to be acquired, with the Company taking into account the quality of management, the past and potential earning power and growth of the businesses, properties or securities to be acquired, and other relevant factors. Shares of common stock issued to the owners of the businesses, properties or securities to be acquired normally are valued at a price reasonably related to the market value of the common stock either at the time the terms of the acquisition are tentatively agreed upon or at or about the time or times of delivery of the shares. With the consent of the Company, this prospectus may also be used by persons who have received or will receive from the Company common stock covered by this prospectus or by prospectuses under other registration statements in connection with acquisitions and who may wish to sell such stock under circumstances requiring or making desirable its use. The Company's consent to such use may be conditioned upon such persons' agreeing not to offer more than a specified number of shares following amendments to this prospectus, which the Company may agree to use its best efforts to prepare and file at certain intervals. The Company may require that any such offering be effected in an organized manner through securities dealers. Sales by means of this prospectus may be made from time to time privately at prices to be individually negotiated with the purchasers, or publicly through transactions on the New York or Chicago Stock Exchanges (which may involve crosses and block transactions), or in the over-the-counter market, at prices reasonably related to market prices at the time of sale or at negotiated prices. Broker-dealers participating in such transactions may act as agent 10 or as principal and, when acting as agent, may receive commissions from the purchasers as well as from the sellers (if also acting as agent for the purchasers). The Company may indemnify any broker-dealer participating in such transactions against certain liabilities, including liabilities under the 1933 Act. Profits, commissions and discounts on sales by persons who may be deemed to be underwriters within the meaning of the 1933 Act may be deemed underwriting compensation under that Act. Stockholders may also offer shares of stock issued in past and future acquisitions by means of prospectuses under other available registration statements or pursuant to exemptions from the registration requirements of the 1933 Act, including sales which meet the requirements of Rule 145(d) under that Act, and stockholders should seek the advice of their own counsel with respect to the legal requirements for such sales. See the inside back cover page of this prospectus for the identity of any persons who have received stock in connection with acquisitions by the Company and with respect to whom the Company has consented to the use of this prospectus in connection with sales of such stock. MARKET PRICES OF COMMON STOCK; DIVIDENDS The following table shows the per share high and low sales prices of the common stock of WMX Technologies on the New York Stock Exchange Composite Tape for the periods indicated, as reported by The Wall Street Journal (Midwest Edition), and also shows the cash dividends declared per share during such periods:
MARKET PRICE CASH DIVIDENDS ------------ DECLARED PER HIGH LOW SHARE ---- ---- -------------- 1994 ---- First Quarter .......... $30 3/4 $23 $.15 Second Quarter.......... 29 3/8 22 5/8 .15 Third Quarter .......... 30 3/8 26 3/8 .15 Fourth Quarter.......... 30 24 1/2 .15 1995 ---- First Quarter .......... $29 5/8 $25 3/4 $.15 Second Quarter.......... 28 3/4 26 3/4 .15 Third Quarter........... 32 1/2 28 1/4 .15 Fourth Quarter.......... 30 7/8 26 3/8 .15 1996 ---- First Quarter .......... $32 1/8 $27 3/4 $.15 Second Quarter (through June 20, 1996)......... $36 1/8 $31 5/8 $.16
See the cover page of this prospectus for a recent sale price of WMX Technologies' common stock. Due in part to the high level of public awareness of the business in which the Company is engaged, regulatory enforcement proceedings or other unfavorable developments involving the Company's operations or facilities, including those in the ordinary course of business, may be expected to engender substantial publicity which could from time to time have an adverse impact upon the market price for the Company's common stock. From September 1990 to December 1995, WMX Technologies maintained a program for the purchase of up to 25,000,000 shares of its common stock from time to time in the open market or in privately negotiated transactions. During 1992 and 1993, the Company purchased approximately 7,600,000 shares and 8,400,000 shares, respectively, of its common stock under this program. No Company shares were repurchased in 1994 or 1995. In December 1995, the Company terminated that program and announced that its Board of Directors had authorized the repurchase by the Company of up to an additional 25,000,000 shares of the Company's common stock from time to time over the following 24- month period in open market or privately negotiated transactions. 11 During 1994 and 1995, the Company sold put options on 31,600,000 shares of its common stock in conjunction with the repurchase program. The put options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares, in lieu of repurchasing the stock. Options on 17,900,000 shares expired unexercised in 1994 and 1995, as the price of the Company's stock was in excess of the strike price at maturity. Options on 4,700,000 shares were exercised in February 1995, and the Company elected to settle them for cash in the amount of $12,019,000. The remaining 9,000,000 options expire at various dates in 1996 at strike prices ranging from $27.34 to $31.45 per share. For additional information, see "Management's Discussion and Analysis of Results of Operations and Financial Condition--Financial Condition--Capital Structure." The Board of Directors of WMX Technologies intends to consider the payment of dividends on a quarterly basis, but the declaration of future dividends will necessarily be dependent upon business conditions, the earnings and financial position of WMX Technologies and such other matters as the Board deems relevant. At March 20, 1996, the Company had approximately 55,600 holders of record of its common stock. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial information for each of the five years in the period ended December 31, 1995 and for each of the three- month periods ended March 31, 1995 and 1996 is derived from the Company's Consolidated Financial Statements. The Company's Consolidated Financial Statements for each of the five years in the period ended December 31, 1995 have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon appears elsewhere in this prospectus. The unaudited financial information for the three-month periods ended March 31, 1995 and 1996 reflects, in management's opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. Interim results are not necessarily indicative of results for an entire year. The information below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Company's Consolidated Financial Statements, and the related Notes, and the other financial information included elsewhere in this prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31 (UNAUDITED) ----------------------------------------------------------- ----------------------- 1991(1) 1992(2) 1993(3)(6) 1994(4)(6) 1995(5)(6) 1995(5) 1996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (000'S OMITTED, EXCEPT PER SHARE AMOUNTS) Revenue from continuing operations............. $ 7,550,914 $ 8,661,027 $ 8,636,116 $ 9,554,705 $10,247,617 $ 2,445,185 $ 2,417,191 Income from continuing operations............. $ 606,323 $ 921,175 $ 442,431 $ 776,491 $ 654,590 $ 101,292 $ 185,178 Earnings per common and common equivalent share--continuing operations............. $ 1.23 $ 1.86 $ .91 $ 1.60 $ 1.35 $ 0.21 $ 0.38 Total assets............ $12,572,310 $14,114,180 $16,264,476 $17,423,173 $18,695,308 $18,158,893 $18,945,387 Long-term debt, less portion payable within one year............... $ 3,782,973 $ 4,312,511 $ 6,145,584 $ 6,044,411 $ 6,420,610 $ 6,724,695 $ 6,385,833 Dividends per share..... $ .42 $ .50 $ .58 $ .60 $ .60 $ 0.15 $ 0.15
- --------- (1) The results for 1991 include a special charge of $296,000,000 (before tax and minority interest) primarily to reflect then current estimates of the environmental remediation liabilities at waste disposal sites previously used or operated by the Company and its subsidiaries or their predecessors. 12 (2) The results for 1992 include a non-taxable gain of $240,000,000 (before minority interest) resulting from the initial public offering of Waste Management International, as well as special charges of $219,900,000 (before tax and minority interest) primarily related to writedowns of the Company's medical waste business, CWM incinerators in Chicago, Illinois and Tijuana, Mexico and a former subsidiary's investment in its asbestos abatement business and certain restructuring costs incurred by the subsidiary and CWM related to the formation of Rust. (3) The results for 1993 include a non-taxable gain of $15,109,000 (before minority interest) relating to the issuance of shares by Rust, as well as a special asset revaluation and restructuring charge of $550,000,000 (before tax and minority interest) recorded by CWM related primarily to a revaluation of its thermal treatment business, and a provision of approximately $14,000,000 to adjust deferred income taxes resulting from the 1993 tax law change. See Notes 3 and 14 to the Company's Consolidated Financial Statements. (4) The results for 1994 include a charge of $9,200,000 (before tax and minority interest) recorded by Rust to write off assets and recognize costs of exiting certain of Rust's service lines and closing offices in a consolidation of certain of its other operations. See Note 14 to the Company's Consolidated Financial Statements. (5) The results for 1995 include a special charge of $140,600,000 (before tax) recorded by CWM in the first quarter, primarily to write off its investment in facilities and technologies that it abandoned because they do not meet customer service or performance objectives, and a special charge of $194,600,000 (before tax and minority interest) recorded by Waste Management International in the fourth quarter relating to actions it is taking to sell or otherwise dispose of non-core businesses and investments, as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. See Note 14 to the Company's Consolidated Financial Statements. (6) In December 1995, the Rust Board of Directors approved a plan to sell or otherwise discontinue Rust's process engineering, construction, specialty contracting and similar lines of business. Accordingly, these businesses have been segregated as discontinued operations in the financial statements since 1993. It is not practical to restate periods prior to the formation of Rust on January 1, 1993 for the discontinued operations. See Note 15 to the Company's Consolidated Financial Statements. (7) Certain amounts have been restated to conform to 1996 classifications. RECENT DEVELOPMENTS On June 10, 1996, the Company announced that WMI will reduce its paper recycling capacity by 15%. The Company said that prices for old corrugated cardboard, newsprint and mixed waste paper, after rising strongly in 1995, had returned to approximately the same level as early 1994, and that it expects recyclable commodity prices to remain flat for the remainder of 1996. The Company indicated that due to this weakness in recyclable commodity pricing, its 1996 second quarter earnings are expected to fall in the range of $.45 to $.47 per share, and earnings for 1996 are expected to be in the range of $1.85 to $1.90 per share. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Consolidated Consolidated 1995 revenue from continuing operations of WMX Technologies, Inc. and its subsidiaries was $10.25 billion compared with $9.55 billion in 1994 and $8.64 billion in 1993. Consolidated 1995 net income was $603.9 million or $1.24 per share, compared with $784.4 million or $1.62 per share in 1994 and $452.8 million or $0.93 per share in 1993. Net income from continuing operations was $654.6 million or $1.35 per share in 1995, $776.5 million or $1.60 per share in 1994, and $442.4 million or $0.91 per share in 1993. Earnings from continuing operations during the three years were impacted by special charges, gains from stock transactions of subsidiaries, and an increase in U.S. tax rates. The following table reconciles reported earnings per share from continuing operations to earnings excluding such items:
1993 1994 1995 ----- ----- ----- Reported amount............................................. $0.91 $1.60 $1.35 Gains on stock transactions of subsidiaries................. (0.02) -- -- Special charges (see Note 14 to Consolidated Financial Statements)-- Chemical Waste Management, Inc............................ 0.59 -- 0.19 Waste Management International plc........................ -- -- 0.23 Rust International Inc.................................... -- 0.01 -- Costs related to early extinguishment of debt............... -- -- 0.01 Adjustment to deferred income taxes resulting from 1993 tax law change................................................. 0.03 -- -- ----- ----- ----- Amount excluding above items................................ $1.51 $1.61 $1.78 ===== ===== =====
The environmental service business has undergone significant change over the three-year period. Overcapacity in the hazardous waste segment, an emphasis on waste minimization and recycling as opposed to land disposal, increased competition for landfill volume, changes in government regulation, and slow growth in the trash-to-energy market have affected the industry globally. In addition, political uncertainty in Italy and economic conditions in France and Germany have further affected the Company's international operations. The Company has taken a number of steps to realign and restructure its business in response to these changing conditions and to position itself for growth and improved profitability into the 21st century. Hazardous waste operations have been downsized and management of land disposal facilities has been integrated into the WMI North American solid waste management organization. WMI itself was reorganized during late 1993 to flatten the organization and bring decision-making closer to the customer. During 1994, the Company commenced a major strategic review of its operations, focusing on streamlining business units, enhancing management and planning processes, reducing operating costs and improving profitability, improving customer satisfaction, and increasing returns on capital and cash flow. As an outcome of these efforts, management was realigned on the basis of four principal global lines of business--waste services, clean energy, clean water, and environmental and infrastructure engineering and consulting services. Executives were named to head each of these global lines of business. The shares of CWM and Rust owned by the public were purchased by the Company. The management and sales organizations of Rust Industrial Services were integrated into the waste services line of business to provide a seamless offering to industrial customers. Rust exchanged its remediation business in 1995 for an equity interest in OHM. WTI and WM International formed a joint venture in 1995 to develop trash-to-energy projects on a worldwide basis outside 14 Germany, Italy and North America. A new management team at WM International completed an extensive review of its operations and management structure to refocus on its core waste services business, and as a result adopted a plan to sell or otherwise dispose of non-core businesses and investments, as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. During the fourth quarter of 1995, the Company announced that Rust would sell or discontinue its process engineering, construction, specialty contracting and similar lines of business and focus on the environmental and infrastructure engineering and consulting business. Operating results of the businesses to be discontinued have been segregated from continuing operations in the Consolidated Statements of Income and are not included in the analysis which follows. The analysis of results of continuing operations which follows reflects the Company's traditional management structure of five principal subsidiaries, each of which has operated in a relatively discrete portion of the environmental services industry or geographic area. WMI has provided integrated solid waste services and CWM has provided hazardous waste collection, transportation, treatment and disposal services in North America. WM International has provided these services, as well as trash-to-energy services, outside North America. WTI has been involved in trash-to-energy and independent power projects, water and wastewater treatment, and air quality control, primarily in North America. Rust has served the engineering, construction, environmental and infrastructure consulting, and on-site industrial and related services market in the United States and a number of foreign countries. Beginning in 1996, to conform to its new management structure, the Company will report operating results along the four major business lines discussed above. Note 13 to the Consolidated Financial Statements shows results of continuing operations for 1993, 1994 and 1995 on a line-of-business basis, as well as on the basis of the traditional management structure. 1994 OPERATIONS COMPARED WITH 1993 WMI WMI's revenue grew 8.8% to $5.12 billion in 1994 compared with $4.70 billion in 1993. Revenue growth occurred in all service lines as shown in the following table: Residential.......................................................... 4.6% Commercial........................................................... 8.1 Rolloff and industrial............................................... 11.1 Disposal, transfer and other......................................... 11.8
Price increases accounted for revenue growth of approximately 1.5%. WMI focused on pricing on a customer-by-customer basis and sought increases when and where appropriate. Pricing in the commercial, rolloff and industrial lines generally continued the positive trend begun in the fourth quarter of 1993. Residential work remained extremely competitive and disposal pricing varied by region, but generally improved during the year. Higher recyclable commodity prices, which can vary significantly from year to year, helped 1994 results. Volume increases accounted for revenue growth of 7.8%, despite the negative impact of the loss of volume from the contract to dispose of debris from Hurricane Andrew in 1993 and the loss of a disposal contract for the City of Philadelphia as of July 1, 1994. The increase in disposal, transfer and other revenue was aided by special waste volume, which increased over 20%, and recycling, which grew 29% (including the impact of higher commodity prices discussed above). Revenue decreases due to businesses sold exceeded revenue from acquisitions by approximately 0.5% in 1994, primarily the result of the sale during the first quarter of that year of WMI's Modulaire(R) mobile office business and certain other under-performing businesses, coupled with reduced acquisition activity. 15 Operating margins strengthened throughout the year following the 1993 reorganization discussed previously, and were 20.8% of revenue compared with 20.4% in 1993. This improvement resulted from productivity increases, particularly in the selling and administrative areas where expenses remained relatively constant in dollars and declined as a percentage of revenue, stronger pricing and increased volume, partially offset by higher costs of operating disposal facilities to comply with more stringent environmental regulations. CWM CWM revenue continued to decline in 1994, to $649.6 million from $661.9 million in 1993. The following table analyzes revenue changes in 1994 compared with 1993:
PERCENTAGE INCREASE/(DECREASE) ------------------- Price.................................................. 2.9% Volume................................................. (7.2) Purchased businesses................................... 2.4 ---- Total................................................ (1.9)% ====
Price and volume increases for low-level radioactive waste services, which increased revenue by 3.1%, were more than offset by a continuation of industry conditions which negatively impacted the remainder of the hazardous waste industry. The strong results in the low-level radioactive waste services line resulted from the acceleration of volume received at CWM's disposal facility in Barnwell, South Carolina, in anticipation of a state deadline which denied access to that facility to customers outside an eight-state region in the southeastern United States ("Southeast Compact") after June 30, 1994. Event business (revenue from relatively larger, typically non-recurring projects) was 9.0% of revenue in 1994 compared to 10.6% in 1993. The decline in event business revenue was primarily the result of reduced off-site disposal from environmental cleanup projects. During 1993, CWM completed a study of its business and began a strategic reconfiguration of its operations to meet then-current market demand. In connection therewith, CWM recorded a charge of $550 million before tax, including $381 million to write down assets, primarily incinerators, and $169 million for cash expenditures to be made as part of a program to reduce costs and improve efficiency. This restructuring was completed in 1994 and substantially all cash expenditures were made. As a result, overhead, including depreciation and amortization, was reduced in 1994 by approximately $60 million on an annualized basis. Operating expenses declined as a percentage of revenue in 1994 to 70.0% compared to 76.5% in 1993. Benefits from the restructuring were partially offset by severe weather in the northeast portion of the United States during the first quarter, which delayed projects and hampered operations, and a shift of revenue mix toward lower margin services. Selling and administrative expenses declined $22.3 million in 1994 on an absolute basis and were reduced from 19.3% of revenue to 16.3%, primarily as a result of the restructuring. WTI WTI revenue increased 16% to $1.32 billion in 1994. Businesses acquired in 1993 and 1994 contributed approximately 47% of the revenue increase, while incremental operating and construction revenue from new energy and water development projects accounted for the remainder. Revenue from existing businesses was flat in 1994 compared to 1993. Consolidated revenue for the energy business line (which includes WTI's air business) grew $83.1 million, or 11%, in 1994 to $844.7 million. Revenue from trash-to-energy and independent power facility operations grew $98.2 million from the prior year level and generated approximately 82% of the 1994 revenue for this business line compared with 78% in 1993. Air-related businesses were responsible for the balance of the revenue during both periods. Construction revenue on the Lisbon, Connecticut, 16 trash-to-energy facility provided half of the energy business growth. The third quarter 1994 commencement of commercial operations at the Falls Township trash-to-energy facility in Pennsylvania and the wood waste and scrap tire- fueled Ridge Generating Station in Florida provided an additional 25% of the revenue growth. Excellent plant operating performances, coupled with a shift in the mix of waste received at the trash-to-energy plants from lower-priced spot tons to generally higher-priced contract tonnage accounted for the remainder. Air business revenue fell in 1994 primarily because of an expected lull in air pollution control retrofit activity by utilities between Phases I and II of the Clean Air Act Amendments of 1990. In addition, many industrial customers delayed awards for air quality control equipment purchases in response to economic uncertainty and to rule-making delays and limited enforcement activities by the U.S. Environmental Protection Agency. Energy operating income increased to $247.0 million or 29.2% of revenue in 1994, versus $208.7 million, or 27.4% of revenue, in 1993. The addition of the Falls Township and Ridge facilities, modest improvement in gross margin, and a decline in selling and administrative expense were responsible for this improvement, despite Lisbon construction revenue having no associated margin recognition. Integration of acquired air businesses and a decrease in energy- related project development expenditures in response to limited market opportunities caused selling and administrative costs to decrease in 1994 in both absolute terms and as a percentage of revenue. Water revenue increased $97.1 million to $489.3 million in 1994, a 25% increase from the 1993 level of $392.2 million. Acquisitions contributed approximately $81.5 million or 84% of this revenue growth, and expanded WTI's presence in the industrial water and wastewater treatment markets while increasing the breadth of WTI's technology and process offerings. The full year impact of the New York Organic Fertilizer Company ("NYOFCO") biosolids pelletizer facility, which began commercial operations in the third quarter of 1993, accounted for an additional $35.5 million of incremental 1994 revenue. Increased 1994 revenue from sales of water process systems and equipment to industrial customers was offset by a decline in revenue from water, wastewater, and biosolids contract service operations and curtailed equipment procurement by municipal customers. Operating income from the water business line increased 22% to $41.1 million or 8.4% of revenue in 1994 compared with $33.7 million or 8.6% of revenue in 1993. Gross margin declined to 24.5% of revenue in 1994 versus 24.9% in 1993 because of competitive pricing pressures in the equipment product lines and faster relative growth of the process systems business, which is typically lower margin in nature. Selling and administrative expenses declined slightly in 1994 as a percentage of revenue as a result of consolidation of acquisitions partially offset by increased own/operate development expenditures. WM International WM International is a U.K. corporation which prepares its financial statements in pounds sterling under accounting principles prevailing in the United Kingdom. Such accounting principles differ in certain respects from those generally accepted in the United States ("US GAAP"). The discussion and analysis of WM International is based on US GAAP financial statements with pounds sterling translated to U.S. dollars at the rate used to translate WM International financial statements for inclusion in the Company's consolidated financial statements. Stated in U.S. dollars, WM International revenue grew by $299.7 million or 21.2% to $1.71 billion in 1994 compared with $1.41 billion in 1993. Components of revenue change are as follows:
PERCENTAGE INCREASE ------------------- Price.................................................. 1.7% Volume (including start-ups)........................... 8.9 Purchased businesses................................... 9.4 Foreign currency translation........................... 1.2 ---- Total................................................ 21.2% ====
17 Lower inflation and weak economic conditions in many European countries constrained WM International's ability to increase prices in 1994. In Italy, where a substantial portion of its business is municipal contracts, renewals during much of 1994 were consistently at reduced prices. However, a price increase was obtained on the municipal contract in Buenos Aires, Argentina. The volume increase in 1994 related primarily to construction activity on the solid waste SENT landfill in Hong Kong. Economic and competitive pressures caused volume declines in Italy, France, and Germany, which were more than offset by volume increases in other countries. Revenue increases from acquisitions slowed in 1994 compared to 1993. With WM International well positioned in many of its markets, it focused primarily on "tuck-in" acquisitions (small acquisitions in markets where it already had a support staff) and became more selective with respect to acquisitions. A significant portion of WM International's revenue arises in currencies other than pounds sterling (its reporting currency) or U.S. dollars. As a result, foreign currency movement has had and will continue to have an impact on reported revenue, expenses and net income, stated in both pounds sterling and U.S. dollars. Both the Company and WM International periodically engage in hedging transactions intended to mitigate currency risk. See "Derivatives." Operating expenses increased to 72.7% of revenue in 1994 compared to 71.5% in 1993 due to higher labor costs and pricing pressure in Italy, pricing pressure in Germany and France, and flow control issues and landfill permitting delays in Italy and France. Selling and administrative expenses decreased to 13.4% of revenue in 1994 compared with 14.1% in 1993 as a result of the impact of "tuck-in" acquisitions, a higher revenue base to absorb the cost of corporate and country management and administrative infrastructure, integration of acquired businesses, and a continued focus on improved productivity and administrative cost reduction. Rust Rust's 1994 revenue from continuing operations was $1.14 billion compared with $1.04 billion in 1993, an increase of 10.2%. Revenue growth by line of business is shown in the following table ($000's omitted):
PERCENTAGE 1993 1994 INCREASE ---------- ---------- ---------- Engineering and consulting services...... $ 298,879 $ 425,058 42.2% Remediation and industrial services...... 704,360 715,236 1.5 Asbestos abatement....................... 31,765 -- N/A ---------- ---------- Total.................................. $1,035,004 $1,140,294 10.2% ========== ==========
In May 1993, Rust transferred its asbestos abatement business to NSC in exchange for a 41% equity interest in NSC and NSC's ownership interest in two industrial services businesses. Excluding the effect of the asbestos abatement business, revenue increased 13.7% in 1994 compared with 1993. Engineering and consulting services revenue grew by 42.2% in 1994. The full year impact of 1993 acquisitions and domestic and foreign 1994 acquisitions resulted in revenue growth of 35.5%. The balance came from increases in existing businesses. Remediation and industrial services revenue grew by 1.5% in 1994. Growth was the result of the full year impact of 1993 acquisitions. Revenue in existing businesses declined due to severe weather in the first quarter and delays by scaffolding and industrial customers of scheduled plant maintenance. In addition, the anticipated award of a large Federal remedial contract was delayed. 18 In December 1994, Rust signed an agreement with OHM to acquire an approximately 37% interest in OHM in exchange for Rust's remediation services business. This transaction was completed in May 1995. For 1994, the business transferred had revenue of $231.1 million and operating income (after operating, selling and administrative expenses) of $6.0 million. Revenue from affiliated companies was $118.3 million in 1994 compared with $112.8 million in 1993. Excluding the charge discussed in the following paragraph, operating expenses were 79.7% of revenue in 1994 compared with 78.1% in 1993, partially the result of severe weather in the first quarter and delayed projects which resulted in less efficient personnel utilization. In addition, 1994 saw a shift in revenue mix in favor of lower margin businesses. Selling and administrative expenses were 13.2% of 1994 revenue compared with 12.7% of 1993 revenue. The increase in 1994 is attributable to the lower revenue base in existing businesses and to acquisition activity, which typically initially increases these costs, although it is anticipated that such expenses will decline as a percentage of revenue as the acquired companies are integrated into existing operations. In 1994, Rust recorded a pretax charge of $9.2 million for the write-off of assets and the recognition of one-time costs incurred in the fourth quarter in connection with the discontinuance of its marine construction and dredging operations, and the closing of offices in a consolidation of its other operations. After tax and minority interest, the charge reduced the Company's net income by $0.01 per share. 1995 OPERATIONS COMPARED WITH 1994 WMI Revenue for WMI was $5.64 billion in 1995 compared with $5.12 billion in 1994, an increase of 10.3%. 1995 revenue growth by line of business is shown in the following table: Residential.......................................................... 6.3% Commercial........................................................... 7.5 Rolloff and industrial............................................... 7.5 Disposal, transfer and other......................................... 20.3
Revenue growth came from price (2.5 to 3%) and volume (6 to 6.5%) increases, with acquisitions accounting for 1%. Prices of recyclable commodities continued the 1994 upward trend during the first six months of 1995, but then began moving downward and by the fourth quarter were below the levels of the same period in the prior year. Beginning 1996, commodity prices have been significantly below levels which were achieved in 1995 and management does not foresee these prices recovering to 1995 levels during 1996. Volume growth was helped by a relatively mild winter in 1995, whereas severe weather over a large part of the country adversely affected the first quarter of 1994. Volumes in 1995 were adversely impacted by the loss of the disposal contract for the City of Philadelphia as of July 1, 1994. Revenue from recycling increased 71.9% in 1995 compared with 1994 as a result of the favorable pricing discussed above, as well as WMI's marketing efforts and acquisition and construction of additional material recovery facilities. Operating expenses were 67.5% of revenue in 1995 and 68.4% in 1994. Milder weather in 1995, WMI's pricing effectiveness program, improved safety performance, higher recyclable commodity prices, internalization of recycling processing, and continuing productivity enhancements all contributed to the improvement. Selling and administrative expenses were 10.2% of revenue in 1995 compared with 10.8% in 1994. Although such expenses increased in absolute dollars, productivity enhancements have enabled WMI to manage a higher revenue base with relatively modest selling and administrative expense increases, the majority of which result from acquisitions and pay-for-performance compensation plans. 19 CWM CWM revenue (including hazardous waste revenues of WMI and AETS) again declined in 1995 as waste minimization, recycling, over-capacity and shifting governmental regulation and enforcement continued to adversely affect the hazardous waste industry. Total 1995 revenue was $613.9 million compared with $649.6 million in 1994. Pricing and volume growth were both negative, only partially offset by the 1995 acquisition of a 60% interest in Advanced Environmental Technology Corporation. In addition, unusually high revenue in the second quarter of 1994 at CWM's Barnwell, South Carolina, low-level radioactive waste disposal facility adversely impacted 1995 comparisons. However, during June 1995, South Carolina approved legislation which extended the authorized life of the Barnwell site until its permitted disposal capacity is fully utilized; previously, the site had been required to close at December 31, 1995. The legislation also again permitted acceptance of waste from outside the Southeast Compact. Event business continued to decline in 1995, to 7.7% of revenue versus 9.0% in 1994. Operating expenses increased as a percentage of revenue in 1995 to 75.6% compared to 70.0% in 1994. The increase was a function of pressure on pricing, a lower revenue base, and a shift in revenue mix toward lower margin technical services, which offset the benefit from personnel reductions. Selling and administrative expenses declined in both absolute terms and as a percentage of revenue as a result of personnel reductions. During the first quarter of 1995, CWM recorded a pretax charge of $140.6 million, primarily to write off its investment in facilities and technologies that it abandoned because they did not meet customer service or performance objectives in the current market environment. The percentages above exclude this charge. WTI WTI revenue increased 9.6% to $1.45 billion in 1995. Energy business line revenue was essentially flat as higher revenue from operating energy plants was offset by lower construction revenue on the Lisbon facility and by a further decline in air business revenue. Approximately 85% of the $42.3 million growth in revenue from operating plants was accounted for by the Falls Township and Ridge Generating Station facilities which began operations in 1994. Contractual price escalation on long-term trash disposal and energy sale contracts, partly offset by curtailment of electrical purchases by certain utility customers, accounted for the balance of the operating plant revenue growth. Spot pricing, on the whole, was stable, although there were increases in certain markets offset by declines in others, particularly Florida and the metropolitan New York City area. Air business revenue declined $30.7 million to 15% of total energy revenue, reflecting a continuation of the industry-wide decrease in activity in the face of regulatory uncertainty. Operating income from the energy business line grew $5.4 million to $252.4 million in 1995 and also increased as a percentage of revenue to 30.1% from 29.2%. Selling and administrative costs were flat compared to 1994 both as a percent of revenue and in absolute dollars, but operating margins improved due to cost containment efforts at operating energy facilities and less revenue on the Lisbon facility where no margin was recognized. Development activity increased slightly because of activities associated with the July 1995 joint venture agreement with WM International. Revenue in the water business line increased $129.2 million from $489.3 million in 1994 to $618.5 million in 1995, a 26% increase. The full year impact of businesses acquired in 1994 provided approximately 64% of this increase. In 1995, WTI successfully completed the privatization of the Miami Conservancy District wastewater treatment plant in Franklin, Ohio, the first privatization of a municipal wastewater treatment plant under Executive Order 12803 issued by President George Bush in 1992. Approximately 4% of the 1995 revenue growth came from the Baltimore I pelletizer facility, which began commercial operations at the start of the year. Existing businesses accounted for the remainder of the revenue growth as WTI increased its biosolids landspreading activities in California and experienced strong worldwide demand for its surface cleaning and screen products. 20 Operating income grew $9.6 million, or 23%, to $50.7 million and represented 8.2% of 1995 water revenue. Faster relative growth of the process systems business, which typically is lower margin in nature, and costs incurred to consolidate office and manufacturing locations were the principal reasons for the slight operating margin decline as a percent of revenue compared with 1994. Margins in the contract services business improved compared with 1994 due to cost reduction efforts, while equipment margins remained relatively stable and process systems margins declined slightly. Selling and administrative costs increased $11.3 million in 1995 because of the full year impact of 1994 acquisitions, but declined as a percent of revenue to 14.5%, a result of a higher revenue base and the integration of acquisitions into existing businesses. WM International WM International revenue, in U.S. dollars, grew $154.2 million or 9.0% to $1.87 billion in 1995 compared with $1.71 billion in 1994. Components of revenue change are as follows:
PERCENTAGE INCREASE/(DECREASE) ------------------- Price.................................................. 1.8% Volume (including start-ups)........................... (3.2) Purchased businesses................................... 4.5 Foreign currency translation........................... 5.9 ---- Total................................................ 9.0% ====
The major cause of the 1995 volume decline was the completion of the construction phase of the SENT landfill in Hong Kong, which opened during the year. A new pricing mechanism introduced by the Hong Kong government in March 1995, which requires generators to absorb a portion of the disposal cost for waste brought to the Hong Kong incinerator, has resulted in volume declines in certain waste streams, but the impact has been offset with other volumes. The future impact of these charges, on the incinerator and on the SENT landfill should they be extended to that facility, is uncertain. Pricing in Europe was negatively impacted in 1995 by relatively low inflation, highly competitive conditions in the solid waste market in France, softness in segments of the hazardous waste market, and a continuation of lower prices on rebids of municipal contracts in Italy. Acquisition activity continued to be below WM International's historical levels and focused particularly on "tuck-in" acquisitions which can complement or expand existing operations in a given market. WM International also increased its emphasis on acquisition and construction of material recovery facilities to take advantage of a continued emphasis on recycling as an alternative to land disposal. Operating expenses (excluding the special charge discussed below) increased to 75.6% of revenue in 1995 compared with 72.7% in 1994, a result of higher labor costs in Italy, continuing pressures on pricing, particularly in Italy and France, and disruption of operations in France during the fourth quarter due to widespread strikes and industrial action against the government. Selling and administrative costs increased 2.5% in absolute terms but declined as a percentage of revenue to 12.6% in 1995 from 13.4% in 1994 due to the higher revenue base, the benefit of "tuck-in" acquisitions, and continued emphasis on productivity improvements. Following a thorough review of its operations and management structure by a new management team, WM International announced a fourth quarter pretax special charge of $194.6 million, related to actions it is taking to sell or otherwise dispose of non-core businesses and investments, as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing facilities, and streamline its country management organization. Approximately $34.3 million of this charge represents cash costs related to severance of personnel and rents under non-cancelable leases. Approximately $11.2 million of the cash costs were paid prior to December 31, 1995. The majority of the balance will be paid in early 1996, although certain rent payments on leased facilities will continue into the future. WM International expects that upon completion of these actions, 21 overhead will be reduced by approximately $20 million annually, which management plans to invest in new marketing initiatives and operational productivity enhancements. However, the full benefit of these new programs will not be reflected in the short term, and management has cautioned WM International shareholders not to expect more than 5% to 10% growth in 1996 earnings. Rust Rust revenue from continuing operations decreased $112.9 million or 9.9% to $1.03 billion in 1995 compared with $1.14 billion in 1994. Revenue by business line is shown in the following table ($000's omitted):
PERCENTAGE 1994 1995 INCREASE/(DECREASE) ---------- ---------- ------------------- Engineering and consulting serv- ices............................ $ 425,058 $ 454,105 6.8% Industrial and other services.... 484,178 511,102 5.6 Remediation...................... 231,058 62,223 N/A ---------- ---------- Total.......................... $1,140,294 $1,027,430 (9.9)% ========== ==========
In May 1995, Rust exchanged its remediation business for an approximately 37% equity interest in OHM. Excluding the effect of the remediation business, revenue increased 6.2% in 1995 compared with 1994. This increase was the result of additional volume across existing businesses as the impact of acquisitions was not significant. Revenue from affiliated companies declined to $89.7 million in 1995 from $118.3 million in 1994. Backlog in continuing operations at December 31, 1995, was $476 million, down from $671 million at December 31, 1994. Approximately $177 million of the 1994 backlog relating to the remediation business was transferred to OHM. The backlog shown above does not include approximately $349 million at December 31, 1995, for several Department of Defense contracts, including two Total Environmental Restoration Contracts. There is no assurance that specific projects identified and performed under these contracts will generate aggregate revenue of $349 million over their remaining terms; in addition, a portion of any projects performed may be remediation work which would now be performed by OHM. Operating expenses were 79.5% of revenue in 1995 compared with 79.7% in 1994. Selling and administrative expenses also decreased to 13.1% of 1995 revenue from 13.2% of 1994 revenue. These slight improvements were primarily the result of the elimination of the relatively low margin remediation business. OTHER ITEMS Interest The following table sets forth the components of consolidated interest expense, net ($000's omitted):
1993 1994 1995 -------- -------- -------- Interest expense............................. $393,631 $439,687 $506,207 Interest income.............................. (41,198) (34,488) (39,804) Capitalized interest......................... (100,591) (104,512) (81,471) -------- -------- -------- Interest expense, net........................ $251,842 $300,687 $384,932 ======== ======== ========
Net interest expense has increased during the three-year period, partially the result of an earlier management decision to increase the leverage of the Company. Debt levels increased in 1993 to fund stock repurchase programs, acquisitions and capital expenditures, and approximately $130 million paid to acquire the minority interest in a subsidiary of Rust. Debt levels remained flat during 1994 but 22 interest expense increased as a result of higher U.S. interest rates and the full-year impact of the 1993 borrowings. The increase in debt in 1995 is primarily a result of the acquisition of the public ownership of CWM and Rust. Capitalized interest also declined substantially in 1995 as a number of significant capital projects were completed and became operational near the end of 1994. See "Financial Condition--Capital Structure." Minority Interest The minority interest in 1993 reflected the lower earnings of the Company's subsidiaries in that year and the minority interest (approximately $78.6 million) in the special charge recorded by CWM. Minority interest in 1995 reflects the repurchase of the public shares of CWM and Rust, as well as the minority interest (approximately $41.3 million) in the special charge recorded by WM International. Sundry Income, Net Sundry income relates primarily to earnings recorded on the equity method from the Company's investments in less than 50%-owned affiliates. In addition, CWM recognized a gain in the first quarter of 1993 on the sale of shares of common stock of WTI it had held for investment. Income Taxes In August 1993, the U.S. Congress passed and the President signed the Omnibus Budget Reconciliation Act of 1993, which, among other things, increased U.S. Federal income taxes for the Company and its domestic subsidiaries, retroactive in certain cases to January 1, 1993. The provision for 1993 income taxes includes approximately $14.0 million to adjust deferred income taxes as a result of this law. The consolidated income tax rate increased slightly in 1995 as a result of shifts in the sources of taxable income and the inability to realize tax benefits on a portion of the special charges. ACCOUNTING PRINCIPLES Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 112--Employers' Accounting for Postemployment Benefits--and FAS No. 115--Accounting for Certain Investments in Debt and Equity Securities. The adoption of FAS No. 112 did not have a material impact on the Company's financial statements as its previous accounting was substantially in compliance with the new standard. Other than for short-term investments which were previously accounted for in accordance with FAS No. 115, the Company does not have significant investments of the type covered by that standard. The Financial Accounting Standards Board ("FASB") has issued FAS No. 121-- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of--which is effective for fiscal years beginning after December 15, 1995. The Company does not believe the adoption of FAS No. 121 will have a material impact on the financial statements. In October 1995, the FASB issued FAS No. 123--Accounting for Stock-Based Compensation--which the Company also must adopt in 1996. FAS No. 123 provides an optional new method of accounting for employee stock options and expands required disclosure about stock options. If the new method of accounting is not adopted, the Company will be required to disclose pro forma net income and earnings per share as if it were. The Company is studying FAS No. 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the financial statements. DERIVATIVES From time to time the Company and certain of its subsidiaries use derivatives to manage currency, interest rate, and commodity (fuel) risk. Derivatives used are simple agreements which provide for payments based on the notional amount, with no multipliers or leverage. All derivatives are related to actual or anticipated instruments or transactions of the Company. While the Company 23 is exposed to credit risk in the event of non-performance by counterparties to derivatives, in all cases such counterparties are highly rated financial institutions and the Company does not anticipate non-performance. In addition, maximum credit exposure is represented by the fair value of contracts with a positive fair value; at December 31, 1995, such amounts were not material. The impact of derivatives on the Company's financial statements has not been significant. See Note 6 to Consolidated Financial Statements for further discussion of the use and accounting for such instruments. Also see "Financial Condition--Capital Structure" for a discussion of the Company's sale of put options in connection with its authorized stock repurchase program. ENVIRONMENTAL MATTERS The majority of the businesses in which the Company is engaged are intrinsically connected with the protection of the environment. As such, a significant portion of the Company's operating costs and capital expenditures could be characterized as costs of environmental protection. While the Company is faced, in the normal course of its business, with the need to expend funds for environmental protection and remediation, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its services are priced accordingly. Such costs may increase in the future as a result of legislation or regulation; however, the Company believes that in general it benefits from increased governmental regulation, which increases the demand for its services, and that it has the resources and experience to manage environmental risk. As part of its ongoing operations, the Company provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. Such costs include a final cap and cover on the site, methane gas and leachate management, and groundwater monitoring. The Company has also established procedures to evaluate potential remedial liabilities at closed sites which it owns or operated or to which it transported waste, including 106 sites listed on the Superfund National Priority List ("NPL") as of December 31, 1995. 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 (e.g., owner, operator, transporter, or generator), and the extent (e.g., amount and nature of waste hauled to the location, number of years of site operation by the Company, or other relevant factors) of the Company's alleged connection with the site, the accuracy and strength of evidence connecting the Company to the location, the number, connection and financial ability of other named and unnamed potentially responsible parties ("PRPs"), and the nature and estimated cost of the likely remedy. Where the Company concludes that it is probable that a liability has been incurred, provision is made in the financial statements. Cost estimates are based upon management's judgment and experience in remediating such sites for the Company as well as for unrelated parties, information available from regulatory agencies as to cost of remediation, and the number, financial resources and relative degree of responsibility of other PRPs who are jointly and severally liable for remediation of the specific site, as well as the typical allocation of costs among PRPs. These estimates sometimes involve a range of possible outcomes. In such cases, the Company provides for the amount within the range which constitutes its best estimate. If no amount within the range appears to be a better estimate than any other amount, then the Company provides for the minimum amount within the range in accordance with FAS No. 5. See Note 7 to Consolidated Financial Statements for additional details regarding the Company's environmental liabilities. Estimates of the extent of the Company's degree of responsibility for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions and are inherently difficult, and the ultimate outcome may differ from current estimates. However, the Company believes that its extensive experience in the environmental services business, as well as its 24 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 alter this expectation and necessitate the recording of additional liabilities which could be material. The impact of such future events cannot be estimated at the current time. The Company spent $34.8 million, $58.8 million and $50.1 million on remedial activities at closed sites in 1993, 1994 and 1995, respectively, and anticipates expenditures of approximately $48.5 million in 1996. The Company has filed suit against numerous insurance carriers seeking reimbursement for past and future remedial, defense and tort costs at a number of sites. The carriers involved have denied coverage and are defending these claims. No amounts have been recognized in the financial statements for any future insurance recoveries. The Company and certain of its subsidiaries are named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of a Company subsidiary's having owned, operated or transported waste to a disposal facility which is alleged to have contaminated the environment or, in certain cases, conducted environmental remediation activities at such sites. See "Financial Condition--Risks and Uncertainties." FINANCIAL CONDITION Liquidity and Capital Resources The Company had working capital deficits of $400.1 million at December 31, 1995, and $115.6 million at December 31, 1994, the result of emphasis on minimizing working capital requirements. The Company operates in a service industry with neither significant inventory nor seasonal variation in receivables, and accordingly, minimizing working capital typically does not significantly affect operations. Cash flow from operating activities, less net capital expenditures (other than acquisitions) and dividends, which the Company defines as "owners' cash flow," is available to make acquisitions, reduce debt, or repurchase common stock. The Company has increased its emphasis on raising the level of owners' cash flow, which was $518 million in 1995 and, based on budgeted levels of net income, capital expenditures net of dispositions, and working capital, is expected to exceed $600 million in 1996. The Company believes that it has adequate liquidity and resources to meet its current needs for replacement capital and finance anticipated growth. Acquisitions and Capital Expenditures Capital expenditures, including $443.5 million, $56.8 million and $154.1 million for property and equipment of purchased businesses in 1993, 1994 and 1995, respectively, are shown in the following table ($000's omitted):
1993 1994 1995 ---------- ---------- ---------- Land (primarily disposal sites)............. $ 660,226 $ 582,287 $ 517,162 Buildings and leasehold improvements........ 195,472 141,164 148,818 Vehicles.................................... 373,055 226,005 345,768 Containers.................................. 231,586 167,936 181,225 Other equipment............................. 702,374 395,022 348,102 ---------- ---------- ---------- Total..................................... $2,162,713 $1,512,414 $1,541,075 ========== ========== ==========
During 1993, the Company and its principal subsidiaries acquired 189 businesses for $715.7 million in cash and debt (including debt assumed), 1,046,801 shares of WMX common stock and 1,635,471 shares of WTI common stock. During 1994, 119 businesses were acquired for $214.5 million in cash and 25 debt (including debt assumed), 73,809 shares of the Company's common stock and 156,124 shares of WTI common stock. 136 businesses were acquired in 1995 for $302.0 million in cash and debt (including debt assumed) and 2,236,354 shares of the Company's common stock. The Board of Directors has approved a capital expenditure budget of $1.2 billion (excluding acquisitions) for 1996. The Company currently expects to finance capital expenditures, as well as any acquisition activity, through cash flow from operations. The Company believes that it has adequate resources to finance any attractive acquisitions that become available. Capital Structure Through 1993, the Company financed capital expenditures and acquisitions primarily through the use of debt, taking advantage of favorable interest rates. Beginning in 1994, increased emphasis has been placed on cash flow and reducing leverage. The following table reflects the impact of these strategies. However, although the Company generated $518 million of owners' cash flow in 1995, the debt to equity ratios were adversely impacted by the purchase, discussed below, of the public shares of CWM and Rust, as these transactions reduced minority interest and increased debt.
DECEMBER 31 1993 1994 1995 ----------- ---- ---- ---- Long-term debt as a percent of total capital.............. 49.4% 45.6% 46.5% Short-term and long-term debt as a percent of short-term debt and total capital........................................ 52.5% 49.4% 50.7%
The above ratios include minority interest in subsidiaries and put options as part of total capital, and exclude project debt of WTI. A significant portion of WTI's debt is project debt, the interest and principal of which is expected to be paid by cash generated from operations of specific projects. In January 1995, the Company acquired all of the approximately 21.4% of the outstanding shares of CWM that it did not already own, in return for convertible subordinated debt (see Note 5 to Consolidated Financial Statements). In July 1995, WMX acquired the approximately 3.1 million Rust shares held by the public for $16.35 per share in cash. The Boards of Directors of WMX and WTI have authorized their respective companies to repurchase shares of their own common stock (up to 25 million shares in the case of WMX and 20 million shares in the case of WTI) in the open market or in privately negotiated transactions. These programs extend into 1997. WTI repurchased approximately 3.3 million shares in 1994 and approximately 7.2 million shares in 1995. WMX has not repurchased any of its shares in the last two years. During 1994 and 1995, in conjunction with its authorized repurchase program, WMX sold put options on 31.6 million shares of its common stock. The put options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. Proceeds from the sale of put options are credited to additional paid-in capital. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares, in lieu of repurchasing the stock. Options on 17.9 million shares expired unexercised, as the price of the Company's stock was in excess of the strike price at maturity. Options on 4.7 million shares were exercised in February 1995, and the Company elected to settle them for cash in the amount of $12.0 million, which was charged to paid- in capital. The remaining 9.0 million options expire at various dates in 1996, at strike prices ranging from $27.34 to $31.45 per share. The Company may sell additional put options in 1996. During 1994, the Company formed an Employee Stock Benefit Trust and sold 12.6 million shares of treasury stock to the Trust in return for a 30-year, 7.33% note with interest payable quarterly and principal due at maturity. The Company has agreed to contribute to the Trust each quarter funds sufficient, when added to dividends on the shares held by the Trust, to pay interest on the note as well as principal outstanding at maturity. At the direction of an administrative committee comprised of 26 Company officers, the Trustee will use the shares or proceeds from the sale of shares to pay employee benefits, and to the extent of such payments by the Trust, the Company will forgive principal and interest on the note. Risks and Uncertainties During the first quarter of 1995, WM International received an assessment of approximately 417 million Krona (approximately $62 million) from the Swedish Tax Authority, relating to a transaction completed in 1990. WM International believes that all appropriate tax returns and disclosures were filed at the time of transaction and intends to vigorously contest the assessment. A subsidiary of WMI has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). Although a lower Court had declared the zoning ordinance's height limitation unconstitutional, during 1995 the Connecticut Supreme Court reversed this ruling and remanded the case for further proceedings in the Superior Court. In November 1995, the Superior Court ordered the WMI subsidiary to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that removal of such waste is an inappropriate remedy and has appealed the Superior Court order to the state Supreme Court. The Company is unable to predict the outcome of the appeal or the nature and extent of the removal action that may ultimately be required following further appeals or as a result of the permitting process. However, if the Superior Court order as to removal of the waste is not modified, the subsidiary could incur substantial costs, which could vary significantly, depending upon the nature of any plan which is eventually approved by applicable regulatory authorities for removing the waste, the actual volume of waste to be moved, and other currently unforeseeable factors, and which could have a material adverse effect on the Company's financial condition and results of operations in one or more future periods. Since 1994, WTI had been involved in litigation concerning permits for the construction and operation of the Lisbon, Connecticut, trash-to-energy plant. These matters were resolved during 1995 and the plant began commercial operations in January 1996. From time to time, the Company and certain of its subsidiaries are named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of a Company subsidiary's having owned, operated or transported waste to a disposal facility which is alleged to have contaminated the environment or, in certain cases, conducted environmental remediation activities at such sites. Some of such lawsuits may seek to have the Company or its subsidiaries pay the cost of groundwater monitoring and health care examinations of allegedly affected persons for a substantial period of time, even where no actual damage is proven. While the Company believes that it has meritorious defenses to these lawsuits, their ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs' circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other things. Accordingly, it is possible such matters could have a material adverse impact on the Company's earnings for one or more fiscal quarters or years. In the ordinary course of conducting its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust and environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, may have an impact on earnings for a particular quarter or year. The Company does not believe that these proceedings, individually or in the aggregate, are material to its business or financial condition. 27 Outlook Although the Company believes that the actions taken over the past three years position it for long-term growth and improved profitability in a rapidly changing environmental services market, a number of challenges remain. The current low level of recyclable commodity prices and severe weather in many portions of the United States at the beginning of 1996 have adversely impacted WMI. As a result of slow growth in the domestic trash-to-energy business, WTI's revenue mix has been shifting to the lower margin water business. Consequently WTI management does not anticipate 1996 earnings growth in excess of 10%. WM International continues to confront political and economic uncertainty in some of its largest markets. To the extent they are within its control, the Company is responding to these challenges with increased management focus on core businesses, higher productivity through use of technology, and greater coordination among business units. Increased emphasis is also being placed on cash flow and control of capital expenditures. However, in light of the risk factors highlighted above, the Company anticipates that 1996 earnings per share growth (on continuing operations before special charges) will be in the range of 5% to 10% ($1.87 to $1.96). Since the preparation of Management's Discussion and Analysis of Results of Operations and Financial Condition set forth above, on June 10, 1996, the Company announced that WMI will reduce its paper recycling capacity by 15%. The Company said that prices for old corrugated cardboard, newsprint and mixed waste paper, after rising strongly in 1995, had returned to approximately the same level as early 1994, and that it expects recyclable commodity prices to remain flat for the remainder of 1996. The Company indicated that due to this weakness in recyclable commodity pricing, its 1996 second quarter earnings are expected to fall in the range of $.45 to $.47 per share, and earnings for 1996 are expected to be in the range of $1.85 to $1.90 per share. The following is Management's Discussion and Analysis of Results of Operations and Financial Condition for the three months ended March 31, 1996: RESULTS OF OPERATIONS: Consolidated For the three months ended March 31, 1996, WMX and its subsidiaries had net income from continuing operations of $185.2 million or $.38 per share, compared with $101.3 million or $.21 per share in the same period in 1995. Revenue for the quarter was $2.42 billion versus $2.45 billion (restated to eliminate discontinued operations) in the year-earlier quarter. First quarter 1995 results included a pretax charge of $140.6 million recorded by CWM, primarily to revalue investments in certain hazardous waste treatment and processing technologies and facilities, which reduced earnings by $.19 per share. Revenue, operating expenses (excluding special charges), selling and administrative expense, and operating margin for each of the continuing business lines are set forth in the tables below (in millions):
ENVIRONMENTAL & INFRASTRUCTURE WASTE CLEAN CLEAN ENGINEERING AND SERVICES ENERGY WATER CONSULTING ELIMINATIONS CONSOLIDATED -------- ------ ------ --------------- ------------ ------------ First Quarter 1996-- Revenue................... $2,037.5 $203.3 $150.3 $110.1 $(84.0) $2,417.2 Operating expenses........ 1,454.0 132.6 118.9 90.0 (84.0) 1,711.5 Selling & admin. expenses. 237.6 10.7 22.6 16.0 -- 286.9 -------- ------ ------ ------ ------ -------- Margin.................. $ 345.9 $ 60.0 $ 8.8 $ 4.1 $ -- $ 418.8 ======== ====== ====== ====== ====== ======== First Quarter 1995-- Revenue................... $2,032.6 $251.2 $137.1 $108.4 $(84.1) $2,445.2 Operating expenses........ 1,433.2 169.9 110.0 84.5 (84.1) 1,713.5 Selling & admin. expenses. 237.3 11.0 21.6 17.6 -- 287.5 -------- ------ ------ ------ ------ -------- Margin.................. $ 362.1 $ 70.3 $ 5.5 $ 6.3 $ -- $ 444.2 ======== ====== ====== ====== ====== ========
28 Waste Services Waste services revenue by source for the first quarter of 1996 compared to the same quarter in 1995 is shown in the following table (in millions):
PERCENTAGE 1996 1995 INCREASE/(DECREASE) -------- -------- ------------------- North America....................... Residential....................... $ 312.4 $ 293.1 6.6% Commercial........................ 405.0 394.3 2.7 Rolloff and industrial............ 315.9 305.1 3.5 Disposal, transfer and other*..... 456.7 439.8 3.8 Rust Industrial Services.......... 107.7 171.1 (37.1) International....................... 439.8 429.2 2.5 -------- -------- Total........................... $2,037.5 $2,032.6 0.2% ======== ======== =====
- ---------- *Includes hazardous waste revenue of $125.2 million in 1996 and $130.5 million in 1995. North American solid waste revenue grew 4.8% for the first quarter of 1996 compared to the same period in 1995. Price increases accounted for 0.5 to 1.0% of revenue growth; a decline in recyclable commodity prices caused a 1.0% loss in revenue that partially offset price increases of 1.5 to 2.0% in other solid waste business. Volume increases accounted for 2.0 to 2.5% revenue growth while acquisitions accounted for 1.5 to 2.0%. Industrial services revenue in 1995 included Rust's environmental remediation business, which was exchanged in May 1995 for an approximately 37% equity interest in OHM Corporation. International waste services revenue increased 2.5% for the first quarter of 1996 compared to the first quarter of 1995, a result of price (1.5%), volume (-2.8%), acquisitions (1.9%) and currency translation (1.9%). Revenue from all segments of the waste services business was negatively impacted by severe winter weather in many areas of the United States and most of northern Europe during the first quarter of 1996. In addition, as noted above, prices for recyclable commodities, which can vary significantly from year to year, were approximately 50% lower during the first quarter of 1996 than during the first quarter of 1995. Volumes at WM International's Hong Kong hazardous waste incinerator have declined since the Hong Kong government introduced a pricing mechanism in March 1995, that requires generators to absorb a portion of the disposal cost for their waste. Pricing in Europe continued to be negatively impacted by highly competitive conditions in France, softness in segments of the hazardous waste market, and lower prices on rebids of municipal contracts in Italy. Operating expenses were 71.4% of first quarter 1996 revenue compared to 70.5% in the first quarter of 1995. The increase was a function of the severe weather, which hampered operations, and the decline in the price of recyclable commodities. Selling and administrative expenses remained constant between years, both in dollars and as a percentage of revenue. Clean Energy Revenue declined to $203.3 million in the first quarter of 1996 compared to $251.2 million in the first quarter of 1995. The majority of the decrease relates to construction revenue from the Lisbon, Connecticut trash-to-energy plant included in the 1995 quarter; the plant has subsequently been completed and began commercial operations in January 1996. Revenue from existing energy facilities also decreased, a result of a number of factors including lower spot pricing for trash disposal in areas of Florida and the timing of scheduled maintenance at certain domestic facilities. Operating expenses declined slightly as a percentage of revenue in the first quarter of 1996 compared to the same 1995 quarter, primarily as a result of the 1995 Lisbon construction revenue 29 carrying no profit margin. Selling and administrative expenses remained essentially flat in dollar terms, but increased as a percentage of revenue because of the lower 1996 revenue base. The 1996 operating margin was below the 1995 comparable quarter in dollar terms, but improved as a percentage of revenue to 29.5% from 28.0% a year earlier. Clean Water Revenue for the first quarter grew $13.2 million to $150.3 million in 1996, a 10% increase compared to the prior year. Companies acquired in the previous twelve months provided $4.8 million or 36% of this increase. The balance was attributable to growth in existing operations, with biosolids and screen activity being particularly strong. The domestic industrial water process business experienced strong orders during the 1996 quarter, reversing the delays experienced late in 1995. Operating income grew $3.3 million, or 60%, to $8.8 million in the 1996 quarter compared to 1995. As a percentage of revenue, operating income increased from 4.0% in 1995 to 5.8% in 1996, due primarily to business mix and the benefits of consolidating office and manufacturing locations. Operating expenses declined slightly as a percentage of revenue due to a larger proportion of higher margin equipment and product sales, which offset weather- related declines in biosolids' margins. Selling and administrative expenses increased $1.0 million in 1996 compared to the first quarter of 1995, but decreased as a percentage of revenue from 15.7% to 15.0%. Environmental and Infrastructure Engineering and Consulting Total revenue improved slightly to $110.1 million in the first quarter of 1996 compared to $108.4 million in the first quarter of 1995. However, domestic engineering and consulting fees (labor-based revenues) were $6.3 million less in 1996 than in 1995, with the shortfall offset by an increase in subcontract and other pass-through revenues that have little or no markup. As a result, operating expenses increased from 77.9% of revenue in 1995 to 81.7% in 1996. The severe winter weather delayed client projects and reduced productivity. Selling and administrative expenses declined in 1996 compared to 1995 in both dollar terms and as a percentage of revenue as the Company realized benefits from cost-control programs and the consolidation of certain operating units. Discontinued Operations The discontinued businesses have been segregated from continuing operations in the accompanying balance sheets and statements of income. Results of operations for the three months ended March 31, 1996, were not material and were included in the reserve for loss on disposition provided previously. Revenue from these businesses was $142.8 million for the three months ended March 31, 1996, and $159.7 million for the comparable period in 1995. Interest The following table sets forth the components of consolidated interest, net, for the three months ended March 31, 1996 and 1995 (in millions):
1996 1995 ------ ------ Interest expense.......................................... $116.5 $126.2 Interest income........................................... (6.8) (8.9) Capitalized interest...................................... (17.2) (19.7) ------ ------ Interest expense, net................................. $ 92.5 $ 97.6 ====== ======
The lower net interest expense in 1996 was a function of lower rates, including the benefit of refinancing certain debt, offsetting a reduction in capitalized interest and the impact of debt incurred 30 to buy back the public ownership of CWM and Rust during 1995. Capitalized interest declined as a result of continuing management effort to reduce capital expenditures. Minority Interest Minority interest declined in the first quarter of 1996 compared to the same period in 1995 as a result of the purchase of the public shares of CWM and Rust, and stock repurchases by WTI under the repurchase program discussed below under "Financial Condition--Capital Structure". FINANCIAL CONDITION: Liquidity and Capital Resources The Company had a working capital deficit of $474.0 million at March 31, 1996, compared to a deficit of $400.1 million at December 31, 1995. The Company operates in a service industry with neither significant inventory nor seasonal variations in receivables, and accordingly, minimizing working capital typically does not adversely affect operations. The Company has adopted a strategy of raising the level of "owner's cash flow", which it defines as cash flow from operating activities less net capital expenditures (other than acquisitions) and dividends. Such amounts are available to make acquisitions, reduce debt, or repurchase common stock. For 1996, owners' cash flow was originally expected to exceed $600 million. Although the first quarter amount was negative, results were consistent with budgeted levels, and as a result of a subsequent downward revision in expected capital expenditures, the Company now anticipates that 1996 owners' cash flow will exceed $700 million. In addition, management has established a goal of converting approximately $1 billion of non-core or underperforming assets into cash over the next 18 to 24 months. Acquisitions and Capital Expenditures Capital expenditures, excluding property and equipment of purchased businesses, were $280.6 million for the three months ended March 31, 1996, and $261.7 million for the comparable quarter in 1995. In addition, the Company and its principal subsidiaries acquired 45 businesses for $67.1 million in cash and debt (including debt assumed) and 7.1 million shares of WMX common stock during the first quarter of 1996. For the first quarter of 1995, 34 businesses were acquired for $47.9 million in cash and debt (including debt assumed) and .2 million shares of WMX common stock. Capital Structure In connection with its authorized stock repurchase program, WTI repurchased 3.8 million shares, including 3.0 million shares during the first quarter of 1996. WMX had not repurchased any shares under its program as of March 31, 1996. In conjunction with WMX's periodic sales of put options on its common stock, at March 31, 1996, put options were outstanding for 9.0 million shares at strike prices ranging from $27.34 to $31.45 per share. Of these options, 4.3 million subsequently expired unexercised as the price of the Company's stock was in excess of the strike price at maturity. Subsequent to March 31, 1996, the Company sold additional put options and expects to continue to do so. BUSINESS OF THE COMPANY GENERAL WMX Technologies provides environmental and related services to commercial, industrial, and municipal and other governmental customers. Through WMI, the Company provides integrated solid waste management and related services in North America. Through WMI, CWM, AETS and Chem-Nuclear, the Company provides hazardous waste management services in North America. Through 31 Waste Management International, the Company also provides comprehensive waste management and related services (or has interests in projects or companies providing such services) in ten European countries and in Argentina, Australia, Brazil, Brunei, Hong Kong, Indonesia, Israel, Malaysia, New Zealand, Taiwan and Thailand. Through WTI, the Company provides a wide array of environmental products and services primarily utilized in meeting the needs for clean energy and clean water. Through Rust, the Company furnishes environmental and infrastructure engineering and consulting services. Unless the context indicates to the contrary, all statistical and financial information under the captions "Business of the Company" and "Property and Equipment" is given as of December 31, 1995. Also, unless the context indicates to the contrary, statistical and financial data appearing under the caption "Waste Services" relate only to the Company's Waste Management, CWM, AETS and Chem-Nuclear groups of subsidiaries and do not include any data relating to Rust, Rust's scaffolding and other on-site industrial services business managed by Waste Management, WTI or Waste Management International. See "Environmental and Infrastructure Engineering and Consulting Services," "Clean Energy, Clean Water and Related Services" and "International Waste Management and Related Services." WASTE SERVICES The Company's solid waste management and recycling services include residential, commercial and industrial collection, transfer and disposal services and related services provided by Waste Management. The Company's hazardous waste management services include chemical waste treatment, storage, disposal and related services provided by Waste Management and CWM, on-site integrated hazardous waste management services provided by AETS and low-level radioactive waste disposal services provided by Chem-Nuclear. For each of the three years in the period ended December 31, 1995, such services accounted for the following percentages of the Company's total North America waste services revenue (excluding scaffolding and other on-site industrial services revenue):
YEAR ENDED DECEMBER 31, ------------------- 1993 1994 1995 ----- ----- ----- Solid Waste and Recycling Collection Services: Residential.............................................. 20.4% 19.8% 19.4% Commercial............................................... 26.3 26.4 26.2 Roll-off and Industrial.................................. 20.8 21.5 21.3 Solid Waste Disposal, Transfer and Related Services....... 20.2 21.0 23.3 Hazardous Waste Services................................... 12.3 11.3 9.8 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
SOLID WASTE MANAGEMENT, RECYCLING AND RELATED SERVICES At December 31, 1995, Waste Management conducted solid waste management, recycling and related services operations in 48 states, the District of Columbia, four Canadian provinces and Mexico. During 1993, 1994 and 1995, operations in California, Florida and Pennsylvania together accounted for approximately 34%, 30% and 28%, respectively, of North America solid waste revenue. No customer accounted for as much as 2% of such revenue in 1993 or 1% in 1994 or 1995. Collection Waste Management provides solid waste collection services to approximately 1,072,500 commercial and industrial customers. Collection services are also provided to approximately 11,982,800 homes and apartment units. These services include collection of recyclable commodities. See "Recycling and Energy Recovery--Recycling" for a description of recycling services. 32 Commercial and Industrial Many of Waste Management's commercial and industrial customers utilize containers to store solid waste, including "roll-offs," which are large containers dropped off at construction or other sites for the deposit of waste and then hoisted when full onto a truck for transport. These containers, ranging from 1 to 45 cubic yards in size, are usually provided to the customer as part of Waste Management's services. Stationary compactors, which compact the volume of the stored waste prior to collection, are frequently installed on the premises of large volume customers and are usually provided to these customers in conjunction with Waste Management's collection services. Containerization enables Waste Management to service most of its commercial and industrial customers with collection vehicles operated by a single employee. Compaction serves to decrease the frequency of collection. Commercial and industrial collection services (which include containerized service to apartment buildings) are generally performed under one- to three- year service agreements. Fees are determined by such considerations as market factors, collection frequency, type of equipment furnished, length of service agreement, type and volume or weight of the waste collected, distance to the disposal facility and cost of disposal. Residential Most of Waste Management's residential solid waste collection services are performed under contracts with, or franchises granted by, municipalities giving Waste Management exclusive rights to service all or a portion of the homes in their respective jurisdictions. Such contracts or franchises usually range in duration from one to five years. The fees received by Waste Management are based primarily on market factors, frequency and type of service, the distance to processing or disposal facilities and cost of processing or disposal. Residential collection fees are either paid by the municipalities out of tax revenues or service charges or are paid directly by the residents receiving the service. Transfer Waste Management operates 151 solid waste transfer stations. A transfer station is a facility where solid waste is received from collection vehicles and then transferred to, and in some cases compacted in, large, specially constructed trailers for transportation to disposal or resource recovery facilities. This procedure reduces costs by improving utilization of collection personnel and equipment and improving the efficiency of transporting waste to final disposal facilities. The services of these facilities are provided to municipalities or counties and in most instances are also used by Waste Management and by other collection companies. Fees are generally based upon such considerations as market factors, the type and volume or weight of the waste transferred, the extent of processing of recyclable materials, the transport distance involved and the cost of disposal. Recycling and Energy Recovery Recycling Waste Management provides recycling services in the United States and Canada through its Recycle America(R), Recycle Canada(R) and other programs. Recycling involves the removal of reusable materials from the waste stream for processing and sale or other disposition for use in various applications. Participating commercial and industrial operations use containers to separate recyclable paper, glass, plastic and metal wastes for collection, processing and sale by Waste Management. Fees are determined by such considerations as market factors, frequency of collection, type and volume or weight of the recyclable material, degree of processing required, distance the recyclable material must be transported and value of the recyclable material. 33 As part of its residential solid waste collection services, Waste Management engages in curbside collection of recyclable materials from residences in the United States and Canada, also through its Recycle America(R), Recycle Canada(R) and other programs. Curbside recycling services generally involve the collection of recyclable paper, glass, plastic and metal waste materials, which may be separated by residents into different waste containers or commingled with other recyclable materials. The recyclable materials are then typically deposited at a local materials recovery facility where they are sorted and processed for resale. The prices received by the Company for recyclable materials fluctuate substantially from quarter to quarter and year to year depending upon domestic and foreign demand for such materials, the quality of such materials, prices for new materials and other factors. In some instances, the Company enters into agreements with the local governments of municipalities in which it provides recycling services whereby the governments share in the gains and losses resulting from fluctuation in prices of recyclable commodities. These agreements mitigate both the Company's gains and losses from such fluctuations. In 1995, Waste Management provided curbside recycling services to approximately 7,200,000 households pursuant to more than 1,000 contracts in the United States and Canada. Waste Management has approximately 188,000 commercial and industrial recycling services customers. Waste Management operates 129 materials recovery facilities for the receipt and processing of recyclable materials. Such processing consists of separating recyclable materials according to type and baling or otherwise preparing the separated materials for sale. Waste Management also participates in joint ventures with Stone Container Corporation and American National Can Corporation to engage, respectively, in the businesses of marketing paper fibre and aluminum, steel, and glass containers for recycling. In each case Waste Management sells to the joint venture, or has the joint venture market, the paper fibre or containers collected by Waste Management to Stone Container, American National Can or other parties who will process them for reuse. The joint venture with American National Can also owns and operates three glass processing facilities. During 1995, the joint ventures processed approximately 4,496,000 tons of recyclable materials. Waste Management also provides tire and demolition and construction debris recycling services. Energy Recovery At 34 Waste Management-owned or -operated sanitary landfill facilities, Waste Management is engaged in methane gas recovery operations. These operations involve the installation of a gas collection system into a sanitary landfill facility. Through the gas collection system, gas generated by decomposing solid waste is collected and transported to a gas-processing facility at the landfill site. Through physical processes methane gas is separated from contaminants. The processed methane gas generally is then either (i) sold directly to industrial users or (ii) sold to an affiliate of the Company which uses it as a fuel to power electricity generators. Electricity generated by these facilities is sold, usually to public utilities under long-term sales contracts, often under terms or conditions which are subject to approval by regulatory authorities. WMX Technologies also engages in other resource recovery activities through WTI's trash-to-energy and independent power operations and Waste Management International's operations. See "Clean Energy, Clean Water and Related Services" and "International Waste Management and Related Services." Disposal Waste Management operates 133 solid waste sanitary landfill facilities. Of this number, 103 are owned by Waste Management and the remainder are leased from, or operated under contract with, 34 others. Additional facilities are in various stages of development. Waste Management also provides yard-waste composting services, bioremediation of petroleum-contaminated soils and solidification of difficult-to-treat liquid wastes at a number of its disposal facilities. All of the sanitary landfill facilities are subject to governmental regulation. See "Regulation--Waste Services--Solid Waste." A sanitary landfill site must have geological and hydrological properties and design features which limit the possibility of water pollution, directly or by leaching. Sanitary landfill operations, which include carefully planned excavation, continuous spreading and compacting of solid waste and covering of the waste, are designed to maintain sanitary conditions, insure optimum utilization of the airspace and prepare the site for ultimate use for other purposes. Suitable sanitary landfill facilities and permission to expand existing facilities may be difficult to obtain in some areas because of land scarcity, local resident opposition and governmental regulation. As its existing facilities become filled in such areas, the solid waste disposal operations of Waste Management are and will continue to be materially dependent on its ability to purchase, lease or obtain operating rights for additional sites or expansion of existing sites and to obtain the necessary permits from regulatory authorities to construct and operate them. In addition, there can be no assurance that additional sites can be obtained or that existing facilities can continue to be expanded or operated. However, management believes that the facilities currently available to Waste Management are sufficient to meet the needs of its operations in most areas for the foreseeable future. To develop a new facility, Waste Management must expend significant time and capital resources without any certainty that the necessary permits will ultimately be issued for such facility or that the Company will be able to achieve and maintain the desired disposal volume at such facility. If the inability to obtain and retain necessary permits, the failure of a facility to achieve the desired disposal volume or other factors cause Waste Management to terminate development efforts for a facility, the capitalized development expenses of the facility may need to be written off. In varying degrees, Waste Management utilizes its own sanitary landfill facilities to accommodate its disposal requirements for collection and transfer operations. In 1993, 1994 and 1995 approximately 52%, 55% and 57%, respectively, of the solid waste collected by Waste Management was disposed of in sanitary landfill facilities operated by it. Usually these facilities are also used by other companies and government agencies on a noncontract basis for fees determined by such considerations as market factors and the type and volume or weight of the waste. Related Services Waste Management also provides or manages several types of services which are compatible with its solid waste collection operations. Included in these operations are scaffolding and other on-site industrial services, medical and infectious waste management services, portable sanitation services and street sweeping and parking lot cleaning services. Waste Management manages the business of Rust Industrial Services Inc., a subsidiary of Rust ("RIS"), providing scaffolding and other on-site industrial services. RIS provides scaffolding services primarily to the chemical, petrochemical and utilities industries. In most cases, the scaffolding services are provided in conjunction with periodic, routine cleaning and maintenance of refineries, chemical plants and utilities, although such services are also performed in connection with new construction projects. RIS also performs a variety of types of other industrial services--water blasting, tank cleaning, explosives blasting, chemical cleaning, industrial vacuuming, catalyst handling, specialty chemicals and separation technologies--primarily for clients in the petrochemical, chemical, and pulp and paper industries, utilities and, to a lesser extent, the public sector. RIS also provides on- site plant services, including providing personnel to perform mechanical and electrical services, equipment installation, welding, heating, ventilating and air conditioning ("HVAC"), warehousing and inventory 35 management services and technical support in the area of industrial hygiene and safety training. RIS assists clients in the nuclear and utility industries in solving electrical, mechanical, engineering and related technical services problems. RIS also provides spent fuel storage (rerack) services to the nuclear power industry. Waste Management's medical and infectious waste management services consist of collecting, transporting, treating and disposing of medical and infectious waste generated by hospitals, pharmaceutical manufacturers, medical clinics, physician and dentist offices and other sources. Waste Management also provides portable sanitation services to municipalities and commercial customers. The portable sanitation services, which are marketed under the Port-O-Let(R) trade name, are also used at numerous special events and public gatherings. Certain of these related services are marketed and performed primarily by employees operating out of Waste Management's solid waste operations facilities who also may have responsibility for some phase of solid waste marketing or operations. HAZARDOUS WASTE MANAGEMENT AND RELATED SERVICES Chemical Waste Management Services The Company operates chemical waste treatment, storage and disposal facilities in 16 states and also owns a majority interest in a subsidiary which operates a resource recovery and storage facility and a disposal facility in Mexico. The chemical wastes handled by the Company include industrial by-products and residues that have been identified as "hazardous" pursuant to the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), as well as other materials contaminated with a wide variety of chemical substances. Chemical waste may be collected from customers and transported by Waste Management or CWM or contractors retained by them or delivered by customers to their facilities. Chemical waste is transported by Waste Management or CWM primarily in specially constructed tankers and semi-trailers, including stainless steel and rubber or epoxy-lined tankers and vacuum trucks, or in containers or drums on trailers designed to comply with applicable regulations and specifications of the U.S. Department of Transportation ("DOT") relating to the transportation of hazardous materials. Waste Management and CWM also operate several facilities at which waste collected from or delivered by customers may be analyzed and consolidated prior to further shipment. The Company's seven secure land disposal facilities either have interim status or have been issued permits under RCRA. See "Regulation--RCRA." In general, the Company's secure land disposal facilities have received the necessary permits and approvals to accept chemical wastes, although some of such sites may accept only certain chemical wastes. Only chemical wastes in a stable, solid form which meet applicable regulatory requirements may be buried in the Company's secure disposal cells. These land disposal facilities are sited, constructed and operated in a manner designed to provide long-term containment of such waste. Chemical wastes may be treated prior to disposal. Physical treatment methods include distillation, evaporation and separation, all of which basically result in the separation or removal of solid materials from liquids. Chemical treatment methods include chemical oxidation and reduction, chemical precipitation of heavy metals, hydrolysis and neutralization of acid and alkaline wastes and essentially involve the transformation of wastes into inert materials through one or more chemical reaction processes. At two of its locations, the Company isolates treated chemical wastes in liquid form by injection into deep wells. Deep well technology involves drilling wells in suitable rock formations far below the base of fresh water and separated from it by other substantial geological confining layers. 36 AETS provides on-site integrated hazardous waste management services, including hazardous waste identification, packaging, removal and recycling services in North America. These services include on-site hazardous waste data management, education and training, inventory control and other administrative services, lab pack services, drum identification services, household hazardous waste programs, less-than-full load waste pickup and consolidation services, and related services. AETS provides these services primarily to industrial, institutional and public sector customers, including laboratories. In the United States, most chemical wastes generated by industrial processes are handled "on-site" at the generators' facilities. Since the mid-1970's, public awareness of the harmful effects of unregulated disposal of chemical wastes on the environment and health has led to extensive and evolving federal, state and local regulation of chemical waste management activities. The major federal statutes regulating the management of chemical wastes include RCRA, the Toxic Substances Control Act ("TSCA") and the Comprehensive Environmental Response, Compensation and Liabilities Act of 1980, as amended ("CERCLA" or "Superfund"), all primarily administered by the United States Environmental Protection Agency ("EPA"). The business is heavily dependent upon the extent to which regulations promulgated under these or similar state statutes and their enforcement over time effectively require wastes to be specially handled or managed and disposed of in facilities of the type owned and operated by the Company. See "Regulation--Waste Services--Hazardous Waste," "--RCRA" and "--Superfund." The chemical waste services industry currently has substantial excess capacity caused by a number of factors, including a decline in environmental remediation projects generating hazardous waste for off-site treatment and disposal, continuing efforts by hazardous waste generators to reduce volume and to manage it on-site, and the uncertain regulatory environment regarding hazardous waste management and remediation requirements. These factors have led to reduced demand and increased pressure on pricing for chemical waste management services, consequences which the Company expects to continue for the foreseeable future. Low-Level and Other Radioactive Waste Services Radioactive wastes with varying degrees of radioactivity are generated by nuclear reactors and by medical, industrial, research and governmental users of radioactive material. Radioactive wastes are generally classified as either high-level or low-level. High-level radioactive waste, such as spent nuclear fuel and waste generated during the reprocessing of spent fuel from nuclear reactors, contains substantial quantities of long-lived radionuclides and is the ultimate responsibility of the federal government. Low-level radioactive waste, which decays more quickly than high-level waste, largely consists of dry compressible wastes (such as contaminated gloves, paper, tools and clothing), resins and filters which have removed radioactive contaminants from nuclear reactor cooling water, solidified wastes from power plants which have become contaminated with radioactive substances and irradiated hardware. Chem-Nuclear provides comprehensive low-level radioactive waste management services in the United States consisting of disposal, processing and various other special services. To a lesser extent, it provides services with respect to radioactive waste that has become mixed with regulated chemical waste. Chem-Nuclear's radioactive disposal operations involve low-level radioactive waste only. Its Barnwell, South Carolina facility is one of two licensed commercial low-level radioactive waste disposal facilities in the United States and has been in operation since 1971. A trust has been established and funded to pay the estimated cost of decommissioning the Barnwell facility. A second fund, for the extended care of the facility, is funded by a surcharge on each cubic foot of waste received. Chem-Nuclear may be liable for additional costs if the extra charges collected to restore and maintain the facility are insufficient to cover the cost of restoring or maintaining the site after its closure (which 37 Chem-Nuclear has no reason to expect). Under state legislation enacted in 1995, the Barnwell, South Carolina facility is authorized to operate until its current permitted disposal capacity is fully utilized, unless such authorization is changed by legislation. However, presently pending in the South Carolina Supreme Court is a suit challenging the 1995 legislation, which repealed earlier legislation that would have closed the Barnwell facility to out-of-state wastes. While Chem-Nuclear believes the suit (to which it is not a party) lacks merit, it is impossible to predict the outcome of the suit and its impact on future operations at Barnwell. Chem-Nuclear also processes low-level radioactive waste at its customers' plants to enable such waste to be shipped in dry rather than liquid form to meet the requirements for receipt at disposal facilities and to reduce the volume of waste that must be transported. Processing operations include solidification, demineralization, dewatering and filtration. Other services offered by Chem-Nuclear include providing electro-chemical, abrasive and chemical removal of radioactive contamination, providing management services for spent nuclear fuel storage pools and storing and incinerating liquid radioactive organic wastes. INTERNATIONAL WASTE MANAGEMENT AND RELATED SERVICES The Company is a leading provider of comprehensive waste management and related services internationally, primarily through Waste Management International, which conducts essentially all of the waste management operations of the Company located outside North America. Waste Management International's business may broadly be characterized into two areas of activity, collection services and treatment and disposal services. The following table shows the derivation of Waste Management International's revenues for the years indicated and includes revenue from construction of treatment or disposal facilities for third parties under "Treatment and Disposal Services":
YEAR ENDED DECEMBER 31, -------------- 1993 1994 1995 ---- ---- ---- Collection Services........................................ 69% 64% 64% Treatment and Disposal Services............................ 31% 36% 36%
The Company has had international operations since the mid-1970's. However, the bulk of the Company's international operations and revenues are derived from the acquisition over the last several years of numerous companies and interests in Europe in various of its service lines. In 1993, major acquisitions included, in the UK, the acquisition by the joint venture described below between Waste Management International and Wessex of a solid waste collection and disposal company; in France, a company engaged primarily in solid waste collection; in The Netherlands, a company engaged in the collection and transportation of solid waste and the sorting of demolition waste; and, in Germany, a group of companies providing waste collection services and recyclables sorting. In 1994, Waste Management International completed 50 acquisitions in 10 countries, most of which were small acquisitions which complemented or expanded existing Waste Management International operations in various markets. With its acquisition goals largely completed, Waste Management International engaged in 25 additional small acquisitions during 1995. In accordance with its objective of maintaining a local identity, Waste Management International, in certain cases, operates through companies or joint ventures in which Waste Management International and its affiliates own less than a 100% interest. For example, Waste Management International is a party to a joint venture with Wessex to provide waste management and related services in the United Kingdom. 38 Because of the size and timing of projects and acquisitions, Waste Management International's revenue mix by country varies from year to year. Countries in which revenue exceeded 10% of Waste Management International's consolidated total were: Italy (32%) and The Netherlands (11%) in 1993, Italy (26%) and Germany (12%) in 1994 and Italy (23%), Germany (14%), The Netherlands (11%) and The United Kingdom (11%) in 1995. While Waste Management International has considerable experience in mobilizing for and managing foreign projects, its operations continue to be subject generally to such risks as currency fluctuations and exchange controls, the need to recruit and retain suitable local labor forces and to control and coordinate operations in different jurisdictions, changes in foreign laws or governmental policies or attitudes concerning their enforcement, political changes, local economic conditions and international tensions. In addition, price adjustment provisions based on certain formulae or indices may not accurately reflect the actual impact of inflation on the cost of performance. Collection Services Collection services include collection and transportation of solid, hazardous and medical wastes and recyclable material from residential, commercial and industrial customers. The residential solid waste collection process, as well as the commercial and industrial solid and hazardous waste collection process, is similar to that utilized by the Company in the United States. Waste Management International provided collection services as of December 31, 1995 to governmental and private customers in ten European countries, Argentina, Australia, New Zealand and Taiwan. Business is obtained through public bids or tenders, negotiated contracts, and, in the case of commercial and industrial customers, direct contracts. Waste Management International operates 318 collection and staging facilities and 76 waste transfer facilities. Residential solid waste collection is normally performed by Waste Management International pursuant to municipal contracts. Waste Management International has approximately 1,500 municipal contracts, serving more than 6,800,000 residential properties. The scope, specifications, services provided and duration of such contracts vary substantially, with some contracts encompassing landfill disposal of collected waste, street-sweeping and other related municipal services. The largest number of municipal contracts held by Waste Management International is in Italy where Waste Management International services approximately 1,850,000 residential properties. Pricing for municipal contracts is generally based on volume of waste, number and frequency of collection pick-ups, and disposal arrangements. Longer-term contracts typically have formulae for periodic price increases or adjustments. Waste Management International also provides curbside recycling services similar to those provided by Waste Management in North America. Street, industrial premises, office and parking lot cleaning services are also performed by Waste Management International, along with portable sanitation/toilet services for such occasions as outdoor concerts and special events. Waste Management International's commercial and industrial solid and hazardous waste collection services are generally contracted for by individual establishments. In addition to solid waste collection customers, Waste Management International provides services to small quantity waste generators, as well as larger petrochemical, pharmaceutical and other industrial customers, including collection of hazardous, chemical or medical wastes or residues. Waste Management International has approximately 285,000 commercial and industrial customers. Contract terms and prices vary substantially between jurisdictions and types of customer. Waste Management International also provides commercial and industrial recycling services. Treatment and Disposal Services Treatment and disposal services include processing of recyclable materials, operation of both solid and hazardous waste landfills, operation of municipal and hazardous waste incinerators, operation of a 39 trash-to-energy facility, operation of water and wastewater treatment facilities, operation of hazardous waste treatment facilities and construction of treatment or disposal facilities for third parties. The operation of solid waste landfills is currently Waste Management International's most significant treatment and disposal service. Treatment and disposal services are provided under contracts which may be obtained through public bid or tender or direct negotiation, and are also provided directly to other waste service companies. At December 31, 1995, Waste Management International owned, operated or maintained 23 waste treatment facilities, 79 recycling and recyclables processing facilities, 9 incinerators and 55 landfills. Once collected, solid wastes may be processed in a recyclables processing facility for sale or other disposition for use in various applications. Unprocessed solid wastes, or the portion of the waste stream remaining after recovery of recyclable materials, require disposal, which may be accomplished through incineration (in connection with which the energy value may be recovered in a trash-to-energy facility) or through disposal in a solid waste landfill. The relative use of landfills versus incinerators differs from country to country and will depend on many factors, including the availability of land, geological and hydrological conditions, the availability and cost of technology and capital, and the regulatory environment. The main determinant of disposal method is generally the disposal cost per cubic meter at local landfills, as incineration is generally more expensive. At present, in most countries in which Waste Management International operates, landfilling is the predominant disposal method employed. Waste Management International owns or operates solid waste landfills in Argentina, Australia, Brazil, Denmark, France, Germany, Hong Kong, Indonesia, Italy, New Zealand, Spain, Sweden and the United Kingdom. Landfill disposal agreements may be separate contracts or an integrated portion of collection or treatment contracts. Demand for solid waste incineration is affected by landfill disposal costs and government regulations. The incineration process for non-hazardous solid waste has also been influenced by two significant factors in recent years: (i) increasingly strict control over air emissions from incinerators; and (ii) increasing emphasis on trash-to-energy incinerators, which utilize heat produced by incinerators to generate electricity and other energy. Incineration generates approximately 30% residue (by weight), which is either landfilled or, if permitted, recycled for use as a road base or in other construction uses. Waste Management International's trash-to-energy incinerator in Hamm is a German-designed plant and the only privately operated trash-to-energy facility in Germany. It is among the first trash-to-energy facilities to fully comply with that country's stringent new air pollution requirements. The facility serves the household and commercial solid waste incineration needs of a population of approximately 600,000 in Hamm and nearby towns. Under its current permits, the facility is able to produce 18 megawatts per hour of steam-generated electricity and sold approximately 74,000 megawatt hours to the local power grid in 1995 (enough power for about 17,000 homes). In 1992, Waste Management International entered into a contract with the County of Gutersloh, Germany to design, construct, own and operate a trash-to-energy facility. The facility is designed to convert 268,000 metric tons per year of municipal waste and sewage sludge into energy. The facility would be capable of producing enough electricity to power more than 35,000 homes. During 1995, Waste Management International's permit application to develop and operate the Gutersloh facility was denied. Waste Management International believes it is entitled to the permit and is appealing the denial. Waste Management International also operates seven small conventional municipal solid and other waste incineration facilities. Waste Management International and WTI have also formed a joint venture to develop trash-to-energy projects outside Germany, Italy and North America. See "Competition" below. Waste Management International owns or operates hazardous waste treatment facilities in Australia, Finland, France, Germany, Hong Kong, Indonesia, Italy, The Netherlands, Spain, Sweden and the United Kingdom and has entered into agreements with respect to the development of hazardous waste treatment facilities in Argentina and Thailand. 40 CLEAN ENERGY, CLEAN WATER AND RELATED SERVICES Wheelabrator Clean Energy WTI, through Wheelabrator Environmental Systems Inc. and its subsidiaries, is a leading developer, operator and owner of trash-to-energy and independent power facilities in the United States. These facilities, either owned or operated, give WTI approximately 850 megawatts of electric generating capacity. WTI's trash-to-energy projects utilize proven boiler and grate technology capable of processing up to 2,250 tons of trash per day per facility. The heat from this combustion process is converted into high- pressure steam, which typically is used to generate electricity for sale to public utility companies under long-term contracts. WTI's trash-to-energy development activities have historically involved a number of contractual arrangements with a variety of private and public entities, including municipalities (which supply trash for combustion), utilities or other power users (which purchase the energy produced by the facility), lenders, public debtholders, joint venture partners and equity investors (which provide financing for the project) and the contractors or subcontractors responsible for building the facility. In addition, WTI's activities have often included identifying and acquiring sites for the facility and for the disposal of residual ash produced by the facility and obtaining necessary permits and licenses from local, state and federal regulatory authorities. WTI also develops, operates and, in some cases, owns independent power projects, which either cogenerate electricity and thermal energy or generate electricity alone for sale to utilities. Cogeneration is a technology which allows the consecutive use of two or more useful forms of energy from a single primary fuel source, thus providing a more efficient use of a fuel's total energy content. During 1995, WTI entered into a joint venture for the purpose of developing small cogeneration projects for district heating applications in a province of The People's Republic of China. WTI also designs, fabricates and installs advanced air pollution control and measurement systems and equipment. WTI offers electrostatic precipitators, flue-gas desulfurization systems (scrubbers), fabric-filter systems (baghouses) and nitrogen oxide ("NOx") control systems, which remove pollutants from the emissions of WTI's trash-to-energy systems, as well as power plants and other industrial facilities. WTI also designs, constructs and maintains tall concrete chimneys and storage silos. WTI offers both custom and pre-engineered systems for emission control. The custom engineering division licenses a patented process for the removal of hydrogen sulfide from gaseous and liquid streams. The process controls hazardous gases and sulfur dioxide emissions, thereby reducing acid rain and odor problems. WTI also provides a full range of technologies and services for destroying or recycling volatile organic compounds ("VOCs") from air and liquid sources and NOx from air sources. Both VOCs and NOx are detrimental to air quality and the environment generally. WTI's VOC and NOx control systems are utilized by customers in a variety of industries, including oil refineries, chemical plants and automobile production facilities. Complementing the emission control divisions is a measurement division which designs and installs continuous emissions monitoring systems for the utility, trash-to-energy, industrial furnace and petrochemical industries, all of which are affected by regulations requiring the continuous monitoring of stack emissions. Wheelabrator Clean Water Through Wheelabrator Water Technologies, Inc. and its subsidiaries, WTI develops, operates and owns projects that purify water, treat water and wastewater, compost organic wastes and treat and manage biosolids. WTI also provides products and systems used to treat drinking water as well as industrial and municipal process water and wastewater. WTI is a leading provider of a broad range of water and wastewater treatment services to municipalities and industry throughout the United States, Canada and Mexico, including water and wastewater treatment plant start-up assistance, plant operations and maintenance, planning and 41 management, training of plant supervisors, operators and laboratory and maintenance personnel, refining process systems, management systems for process control, and plant diagnostic evaluations and energy audits. WTI also provides specialty repair and cleaning services for industrial water and wastewater management equipment. In July 1995, WTI became the first company in the United States to acquire a publicly owned wastewater treatment plant pursuant to a federal Executive Order issued in 1992 which was intended to facilitate the privatization of municipal facilities. The agreement provides for a subsidiary of WTI to operate the 4.5 million gallon per day MCD Franklin Wastewater Treatment Plant in Franklin, Ohio for a period of 20 years and to expand the facility as needed to meet future population growth. In August 1995, WTI was selected by the City of Wilmington, Delaware to negotiate a similar public-private partnership, including the acquisition of that City's wastewater treatment plant. WTI also provides a range of biosolids management services, including land application, drying, pelletizing, alkaline stabilization and composting of non-hazardous biosolids to approximately 450 communities, typically pursuant to multi-year contracts under which WTI is paid by the generator to make beneficial use of the biosolids. Land application involves the application of non-hazardous biosolids as a natural fertilizer on farmland pursuant to rigorous site-specific permits issued by applicable state authorities. Biosolids are also used in land- reclamation projects such as strip mines. Regulations issued by the EPA in December 1992 under the Clean Water Act encourage the beneficial use of municipal sewage sludge by recognizing the resource value of biosolids as a fertilizer and soil conditioner, and establish requirements for land application designed to protect human health and the environment. WTI also develops and operates facilities at which biosolids are dried and pelletized and has four facilities currently in operation, and one other facility under construction. WTI has approximately 560 dry-tons-per-day of biosolids drying capacity either in operation or under construction. Biosolids which have been dried are generally used as fertilizer by farmers, commercial landscapers and nurseries and as a bulking agent by fertilizer manufacturers. Development of dryer facilities generally involves various contractual arrangements with a variety of private and public entities, including municipalities (which generate the biosolids), lenders, contractors and subcontractors which build the facilities, and end-users of the fertilizer generated from the treatment process. WTI also engineers and manufactures a variety of environmental products and systems. WTI provides single-source, advanced-systems solutions for the treatment of municipal drinking water, industrial process water and wastewater and for slurry pumping and high solids dewatering. It also provides systems designed to remove solids from liquid streams through the use of self-cleaning bar/filter screens, grinders, macerators, conveyors and compactor systems. WTI also provides high technology water purification and wastewater treatment systems which utilize a variety of technologies including demineralizers, reverse osmosis and vacuum degasification products. In addition, WTI designs and installs process technology systems utilizing evaporators, crystallizers, electrodialysis, dialysis, reverse osmosis and ultrafiltration for treating industrial process wastewater. WTI also produces profile wire screen products for groundwater production, hydrocarbon processing, food processing and coal/mineral processing. WTI also designs and supplies enclosed automated composting systems which recycle organic wastes into beneficial products which are used by commercial landscapers, nurseries and fertilizer manufacturers. WTI provides a number of these products and technologies to industrial customers abroad through its operations in Australia, France, Ireland, Japan, Malaysia, The Netherlands, Singapore, Spain and Taiwan. WTI also manufactures a line of nonpolluting materials cleaning systems for use by a variety of industrial customers, including foundries, steel processors, automobile producers and rubber and plastics producers, in cleaning and finishing metal and other materials. WTI also manufactures high- alloy combustion grates used in the high-temperature furnaces of its trash-to- energy facilities. 42 ENVIRONMENTAL AND INFRASTRUCTURE ENGINEERING AND CONSULTING SERVICES Rust is a leading provider, through its subsidiaries, of environmental and infrastructure engineering and consulting services, primarily to clients in government and in the chemical, petrochemical, nuclear, energy, utility, pulp and paper, manufacturing, environmental services and other industries. Rust's environmental and infrastructure engineering and consulting services provide alternative solutions for client problems relating to removing and disposing of hazardous and toxic substances; managing solid waste, water and wastewater, groundwater and air resources; design and construction oversight of transportation facilities; and photogrammetry. Such services are provided to private industry, as well as federal, state and local governments, including the Department of Defense (the "DOD") and the Department of Energy (the "DOE"). The services include performing remedial investigations for the purpose of characterizing hazardous waste sites, preparing feasibility studies setting forth recommended alternative remedial actions, and providing engineering design and construction oversight services for remediation projects. The services provided also include the siting, permitting, design and construction oversight of solid and hazardous waste landfills and related facilities. Study, design and construction oversight services are also provided, primarily to municipalities, special government agencies and, to some extent, private industry in connection with wastewater collection and treatment, potable water supply treatment and distribution, stormwater management and the building of streets, highways, airports, bridges, waterways and rail services. Rust also provides architectural services in connection with these and other activities. Additional services provided through Rust include environmental assessment services, the design of systems to properly and safely store, convey, treat and dispose of industrial, hazardous and radioactive materials and consulting services regarding disposal, waste minimization methods and techniques, air quality regulation and industrial hygiene and safety. Rust also has an international environmental and infrastructure engineering and consulting, process engineering and construction services and related services business performing projects in 35 countries. In Europe, Rust has offices in the United Kingdom, Germany, Sweden and Turkey, and in the Asia- Pacific region, in Australia, Hong Kong, China, Singapore, Malaysia and Indonesia. In the Middle East and Africa, Rust also has offices in the United Arab Emirates, Saudi Arabia and South Africa. Rust's overseas operations provide such services to the World Bank and associated lending agencies, national, regional and local governments and to clients in the utility and industrial power and general manufacturing industries. In addition, Rust provides such services to Waste Management International worldwide. In May 1995, Rust sold substantially all of its hazardous and radioactive remediation services business to OHM. As a result of that transaction, Rust acquired an approximately 37% interest in OHM. See "Acquisitions and Dispositions." Rust also engages in providing process engineering, construction, specialty contracting and related services, but has announced its intention to sell or otherwise discontinue that business in North America and certain locations outside North America. The process engineering services currently provided by Rust are of two general types: facility process engineering and facility design engineering. Process engineers create the processes by which facilities operate, such as chemical, petrochemical, energy and pulp and paper plants. Design engineering services provided by Rust encompass the following disciplines: architectural, electrical, control systems, process piping, mechanical, structural, HVAC, and civil. The construction services currently provided by Rust are generally performed in connection with projects on which Rust has also provided the design engineering services. Rust also requisitions and procures equipment and construction materials for clients and performs quality assurance and quality control oversight of vendor manufacturing practices. On June 12, 1996, the Company announced that Rust closed the sale of its industrial process engineering and construction business based in Birmingham, Alabama to Raytheon Engineers & Constructors, Inc., a subsidiary of Raytheon Company. 43 Rust also has scaffolding and other on-site industrial services businesses, which are managed by Waste Management. See "Waste Services--Solid Waste Management, Recycling and Related Services--Related Services" above. REGULATION While in general the Company's environmental services businesses have benefited substantially from increased governmental regulation, the environmental services industry itself has become subject to extensive and evolving regulation by federal, state, local and foreign authorities. In particular, the regulatory process requires firms in the Company's industries to obtain and retain numerous governmental permits to conduct various aspects of their operations, any of which may be subject to revocation, modification or denial. As a result of governmental policies and attitudes relating to the industries, which are subject to reassessment and change, the Company believes that its ability to obtain applicable permits from governmental authorities on a timely basis, and to retain such permits, could be impaired. The Company is not in a position at the present time to assess the extent of the impact of such potential changes in governmental policies and attitudes on the permitting processes, but it could be significant. In particular, adverse decisions by governmental authorities on permit applications submitted by the Company may result in abandonment of projects, premature closure of facilities or restriction of operations, which could result in a loss of earnings from a facility, a write-off of capitalized development expenses or both. Federal, state, local and foreign governments have also from time to time proposed or adopted other types of laws, regulations or initiatives with respect to the environmental services industry. Included among them are laws, regulations and initiatives to ban or restrict the international, interstate or intrastate shipment of wastes, impose higher taxes on out-of-state waste shipments than in-state shipments, reclassify certain categories of hazardous wastes as non-hazardous and regulate disposal facilities as public utilities. Certain state and local governments have promulgated "flow control" regulations, which attempt to require that all waste generated within the state or local jurisdiction must go to certain disposal sites. The United States Congress has from time to time considered legislation that would enable or facilitate such bans, restrictions, taxes and regulations. Due to the complexity of regulation of the industry and to public pressure, implementation of existing or future laws, regulations or initiatives by different levels of government may be inconsistent and difficult to foresee. Many state and local governments have enacted mandatory or voluntary recycling laws and bans on the disposal of yard-waste in landfills. The effect of these and similar laws is to reduce the volume of wastes that would otherwise be disposed in Company landfills. In addition, municipalities and other governmental entities with whom the Company contracts to provide solid waste collection or disposal services, or both, may require the Company as a condition of securing the business to provide recycling services and operate recycling and composting facilities, which may cause the Company to incur substantial costs. The Company makes a continuing effort to anticipate regulatory, political and legal developments that might affect its operations but is not always able to do so. The Company cannot predict the extent to which any legislation or regulation that may be enacted, amended, repealed or enforced, or any failure or delay in enactment or enforcement of legislation or regulations or funding of government agencies or programs, in the future may affect its operations. Such matters could have a material adverse impact on the Company's earnings for one or more fiscal quarters or years. The demand for certain of the services provided by the Company, particularly its hazardous waste management services, is dependent on the existence and enforcement of federal, state and foreign laws and regulations which govern the discharge of hazardous substances into the environment and on the funding of agencies and programs under such laws and regulations. Such businesses will be adversely affected to the extent that such laws or regulations are amended or repealed, with the effect of reducing the regulation of, or liability for, such activity, that the enforcement of such laws and regulations is lessened or that funding of agencies and programs under such laws and regulations is 44 delayed or reduced. In particular, the EPA has recently proposed regulations under RCRA to redefine the term "hazardous waste" for regulatory purposes. Under the proposal, wastes containing minimal concentrations of hazardous substances would no longer be subject to the stringent record-keeping, handling, treatment and disposal rules applied to hazardous wastes under RCRA. Other EPA-proposed regulations would cause certain wastes which presently must be managed in TSCA-approved facilities to be eligible for disposal in facilities not approved under TSCA. These proposed rules would, if adopted, reduce the volume of wastes for which the Company's hazardous waste management services are needed. In addition to environmental laws and regulations, federal government contractors, including the Company, are subject to extensive regulation under the Federal Acquisition Regulation and numerous statutes which deal with the accuracy of cost and pricing information furnished to the government, the allowability of costs charged to the government, the conditions under which contracts may be modified or terminated, and other similar matters. Various aspects of the Company's operations are subject to audit by agencies of the federal government in connection with its performance of work under such contracts as well as its submission of bids or proposals to the government. Failure to comply with contract provisions or other applicable requirements may result in termination of the contract, the imposition of civil and criminal penalties against the Company, or the suspension or debarment of all or a part of the Company from federal government work, which could have a material adverse impact upon the Company's financial condition or earnings for one or more fiscal quarters or years. Among the reasons for debarment are violations of various statutes, including those related to employment practices, the protection of the environment, the accuracy of records and the recording of costs. Some state and local governments have similar suspension and debarment laws or regulations. Because of the high level of public awareness of environmental issues, companies in the environmental service business, including the Company, may in the normal course of their business be expected periodically to become subject to judicial and administrative proceedings. Governmental agencies may seek to impose fines on the Company or revoke, deny renewal of, or modify the Company's operating permits or licenses. The Company is also subject to actions brought by private parties or special interest groups in connection with the permitting or licensing of its operations, alleging violations of such permits and licenses, or other matters. In addition, increasing governmental scrutiny of the environmental compliance records of the Company, CWM, WTI, Rust, Waste Management International or their affiliates could cause a private or public entity seeking environmental services to disqualify the Company from competing for one or more projects, on the grounds that these records display inadequate attention to environmental compliance. WASTE SERVICES Solid Waste Operating permits are generally required at the state and local level for landfills, transfer stations and collection vehicles. Operating permits need to be renewed periodically and may be subject to revocation, modification, denial or non-renewal for various reasons, including failure of the Company to satisfy regulatory concerns. With respect to solid waste collection, regulation takes such forms as licensing of collection vehicles, truck safety requirements, vehicular weight limitations and, in certain localities, limitations on rates, area, time and frequency of collection. With respect to solid waste disposal, regulation covers various matters, including landfill location and design, groundwater monitoring, gas control, liquid runoff and rodent, pest, litter and traffic control. Zoning and land use requirements and limitations are encountered in the solid waste collection, transfer, recycling and energy recovery and disposal phases of the Company's business. In almost all cases the Company is required to obtain conditional use permits or zoning law changes in order to develop transfer station, resource recovery or disposal facilities. In addition, the Company's disposal facilities are subject to water and air pollution laws and regulations. Noise pollution laws and regulations may also affect the 45 Company's operations. Governmental authorities have the power to enforce compliance with these various laws and regulations and violators are subject to injunctions, fines and revocation of permits. Private individuals may also have the right to sue to enforce compliance. Safety standards under the Occupational Safety and Health Act ("OSHA") are also applicable to the Company's solid waste and related services operations. The EPA and various states acting pursuant to EPA-delegated authority have promulgated rules pursuant to RCRA which serve as minimum requirements for land disposal of municipal wastes. The rules establish more stringent requirements than previously applied to the siting, construction, operation and closure of all but the smallest municipal waste landfill facilities. In certain cases, the failure of some states to adopt the federal requirements may increase costs to meet inconsistent federal and state laws applicable to the same facility. The Company does not believe that continued compliance with the more stringent minimum requirements will have a material adverse effect on the Company's operations. See also "RCRA" and "Superfund" below for additional regulatory information. In March 1996, the EPA issued regulations that require large, municipal solid waste landfills to install and monitor systems to collect and control landfill gas. The regulations apply to landfills that are designed to accommodate 2.5 million cubic meters or more of municipal solid waste and that accepted waste for disposal after November 8, 1987, regardless of whether the site is active or closed. The date by which each affected landfill must have such gas collection and control system depends on whether the landfill began operation before or after May 30, 1991. Landfills constructed, reconstructed, modified or first accepting waste after May 30, 1991 generally must have systems in place by late 1998. Older landfills generally will be regulated by the states and will be required to have landfill gas systems in place within approximately 30 months of EPA's approval of the state program. Many state solid waste regulations already require collection and control systems. While the Company has not yet completed its study of the new regulations, compliance with them is not expected to have a material adverse effect on the Company. Hazardous Waste Waste Management and CWM are required to obtain federal, state, local and foreign governmental permits for their chemical waste treatment, storage and disposal facilities. Such permits are difficult to obtain, and in most instances extensive geological studies, tests and public hearings are required before permits may be issued. Waste Management's and CWM's chemical waste treatment, storage and disposal facilities are also subject to siting, zoning and land use restrictions, as well as to regulations (including certain requirements pursuant to federal statutes) which may govern operating procedures and water and air pollution, among other matters. In particular, Waste Management's and CWM's operations in the United States are subject to the Safe Drinking Water Act (which regulates deep well injection), TSCA (pursuant to which the EPA has promulgated regulations concerning the disposal of PCBs), the Clean Water Act (which regulates the discharge of pollutants into surface waters and sewers by municipal, industrial and other sources) and the Clean Air Act (which regulates emissions into the air of certain potentially harmful substances). In their transportation operations, Waste Management and CWM are subject to the jurisdiction of the Interstate Commerce Commission and regulated by the DOT and by regulatory agencies in each state. Employee safety and health standards under OSHA are also applicable. Of Waste Management's and CWM's chemical waste treatment or disposal facilities in the United States, all but one have been issued permits under RCRA. The facility without a RCRA permit continues to have interim status. A final permit is to be issued jointly by the authorized state, subject to EPA oversight, and by the EPA. The regulations governing issuance of permits contain detailed standards for hazardous waste facilities on matters such as waste analysis, security, inspections, training, preparedness and prevention, emergency procedures, reporting and recordkeeping. Once issued, a final permit has a maximum fixed term of 10 years, and such permits for land disposal 46 facilities are required to be reviewed five years from the date of issuance. The issuing agency (either the EPA or an authorized state) may review or modify a permit at any time during its term. The Company believes that Waste Management and CWM maintain each of their operating treatment, storage or disposal facilities in substantial compliance with the applicable requirements promulgated pursuant to RCRA and expects that the facility with interim status ultimately can qualify to be issued a RCRA permit. It is possible, however, that the issuance or renewal of a permit could be made conditional upon the initiation or completion of modifications or corrective actions at facilities, which might involve substantial additional capital expenditures on the part of Waste Management or CWM. Although the Company is informed that Waste Management and CWM anticipate the reauthorization of each permit at the end of its term if the facility's operations are in compliance with applicable requirements, there can be no assurance that such will be the case. The radioactive waste services of Chem-Nuclear are also subject to extensive governmental regulation. Due to the extensive geological and hydrological testing and environmental data required, and the complex political environment, it is difficult to obtain permits for radioactive waste disposal facilities. Various phases of Chem-Nuclear's low-level radioactive waste management services are regulated by various state agencies, the United States Nuclear Regulatory Commission (the "NRC") and the DOT. Regulations applicable to Chem-Nuclear's operations include those dealing with packaging, handling, labeling and routing of radioactive materials, and prescribe detailed safety and equipment standards and requirements for training, quality control and insurance, among other matters. Employee safety and health standards under OSHA are also applicable. See also "RCRA" and "Superfund" below for additional regulatory information. Clean Energy, Clean Water and Related Services WTI's business activities are subject to environmental regulation under federal, state and local laws and regulations, including the Clean Air Act, the Clean Water Act and RCRA. The Company believes that WTI's business is conducted in an environmentally responsible manner in material compliance with applicable laws and regulations. The Company does not anticipate that WTI's maintaining compliance with current requirements will result in any material decrease in earnings. There can be no assurance, however, that such requirements will not change so as to require significant additional expenditures. In particular, pursuant to the Clean Air Act Amendments of 1990 it is probable that the air pollution control systems at certain trash-to- energy projects owned or operated by WTI's subsidiaries will be required to be modified by the end of the decade to comply with the more stringent regulations promulgated thereunder. Although the expenditures related to such modifications, if required, will likely be significant, they are not expected to have a material adverse effect on WTI's liquidity or results of operations because WTI has the right to pass on to the majority of long-term contract users of its facilities increased capital and operating costs resulting from changes in law. There can be no assurance, however, that in such event WTI would be able to recover, for each project, all such increased costs from its customers. Moreover, it is possible that future developments, such as increasingly strict requirements of environmental laws, and enforcement policies thereunder, could affect the manner in which WTI operates its projects and conducts its business, including the handling, processing or disposal of the wastes, by-products and residues generated thereby. WTI's energy facilities are also subject to the provisions of various energy-related laws and regulations, including the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The ability of WTI's trash-to-energy and small power production facilities to sell power to electric utilities on advantageous terms and conditions and to avoid burdensome public utility regulation has historically depended, in part, upon the continuing applicability of certain provisions of PURPA, which generally exempts WTI from state and federal regulatory control over electricity prices charged by, and the 47 finances of, WTI and its energy-producing subsidiaries. While the recent changes in Congressional leadership may increase the likelihood of a repeal or modification of PURPA, it is unlikely that such action would abrogate the long-term contracts and orders pursuant to which most of WTI's existing projects sell electricity. Furthermore, the operations of WTI's trash-to- energy and other small power facilities business is not expected to be materially and adversely affected if the various benefits of PURPA are repealed or substantially reduced on a prospective basis, due to the passage of the Energy Policy Act of 1992 ("EPACT"). EPACT created an alternative ownership mechanism by which independent power producers can participate in the electricity generation industry without the burdens of traditional public utility regulation. Environmental and Infrastructure Engineering and Consulting Services The practice of engineering and architecture is regulated by state statutes. All states require engineers and architects to be registered by their respective state registration boards as a condition to offering or rendering professional services. Many states also require companies offering or rendering professional services, such as Rust, to obtain certificates of authority. Rust's businesses are also subject to OSHA regulations and to NRC regulations concerning services provided to nuclear power plants. RCRA Pursuant to RCRA, the EPA has established and administers a comprehensive, "cradle-to-grave" system for the management of a wide range of industrial by- products and residues identified as "hazardous" wastes. States that have adopted hazardous waste management programs with standards at least as stringent as those promulgated by the EPA may be authorized by the EPA to administer their programs in lieu of RCRA. Under RCRA and federal transportation laws, a transporter must deliver hazardous waste in accordance with a manifest prepared by the generator of the waste and only to a treatment, storage or disposal facility having a RCRA permit or interim status under RCRA. Every facility that treats or disposes of hazardous wastes must obtain a RCRA permit from the EPA or an authorized state and must comply with certain operating standards. The RCRA permitting process involves applying for interim status and also for a final permit. Under RCRA and the implementing regulations, facilities which have obtained interim status are allowed to continue operating by complying with certain minimum standards pending issuance of a permit. RCRA also imposes restrictions on land disposal of certain hazardous wastes and prescribes standards for hazardous waste land disposal facilities. Under RCRA, land disposal of certain types of untreated hazardous wastes has been banned except where the EPA has determined that land disposal of such wastes and treatment residuals should be permitted. The disposal of liquids in hazardous waste land disposal facilities is also prohibited. The EPA from time to time considers fundamental changes to its regulations under RCRA that could facilitate exemptions from hazardous waste management requirements, including policies and regulations that could implement the following changes: redefine the criteria for determining whether wastes are hazardous; prescribe treatment levels which, if achieved, could render wastes non-hazardous; encourage further recycling and waste minimization; reduce treatment requirements for certain wastes to encourage alternatives to incineration; establish new operating standards for combustion technologies; and indirectly encourage on-site remediation. To the extent such changes are adopted, they can be expected to adversely affect the demand for the Company's chemical waste management services. In this regard, the EPA has recently proposed regulations which would have the effect of reducing the volume of waste classified as hazardous for RCRA regulatory purposes. See "Regulation" above. 48 In addition to the foregoing provisions, RCRA regulations require the Company to demonstrate financial responsibility for possible bodily injury and property damage to third parties caused by both sudden and nonsudden accidental occurrences. See "Insurance" below. Also, RCRA regulations require the Company to provide financial assurance that funds will be available when needed for closure and post-closure care at its waste treatment, storage and disposal facilities, the costs of which could be substantial. Such regulations allow the financial assurance requirements to be satisfied by various means, including letters of credit, surety bonds, trust funds, a financial (net worth) test and a guarantee by a parent corporation. Under RCRA regulations, a company must pay the closure costs for a waste treatment, storage or disposal facility owned by it upon the closure of the facility and thereafter pay post- closure care costs. If such a facility is closed prior to its originally anticipated time, it is unlikely that sufficient funds will have been accrued over the life of the facility to fund such costs, and the owner of the facility could suffer a material adverse impact as a result. Consequently, it may be difficult to close such facilities to reduce operating costs at times when, as is currently the case in the hazardous waste services industry, excess treatment, storage or disposal capacity exists. Superfund Superfund provides for EPA-coordinated response and removal actions to releases of hazardous substances into the environment, and authorizes the federal government either to clean up facilities at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Superfund assigns liability for these response and other related costs to parties involved in the generation, transfer and disposal of such hazardous substances. Superfund has been interpreted as creating strict, joint and several liability for costs of removal and remediation, other necessary response costs and damage to natural resources. Liability extends to owners and operators of waste disposal facilities (and waste transportation vehicles) from which a release occurs, persons who owned or operated such facilities at the time the hazardous substances were disposed, persons who arranged for disposal or treatment of a hazardous substance at or transportation of a hazardous substance to such a facility, and waste transporters who selected such facilities for treatment or disposal of hazardous substances, as well as to generators of such substances. Liability may be trebled if the responsible party fails to perform a removal or remedial action ordered under the law. For additional information concerning potential Superfund liability, see "Legal Proceedings" below. Superfund created a revolving fund to be used by the federal government to pay for the cleanup efforts. In late 1990, federal Superfund spending through the end of the government's 1994 fiscal year was authorized to a maximum of $5.1 billion. For the federal government's 1995 fiscal year, a maximum of $1.4 billion of Superfund spending was authorized. As of the date of this report, the federal government had not approved any 1996 Superfund spending authorization. The U. S. Congress is expected to consider reauthorization and revision of the Superfund statute in 1996. In addition to possible changes in the statute's funding mechanisms and provisions for allocating cleanup responsibility, it is possible that Congress also will fundamentally alter the statute's provisions governing the selection of appropriate site cleanup remedies. For example, Congress may consider whether to continue Superfund's current reliance on stringent technology standards issued under other statutes (such as RCRA) to govern removal and treatment of remediation wastes or to adopt new approaches such as national or site-specific risk based standards. This and other potential policy changes could significantly affect the stringency and extent of site remediation, the types of remediation techniques that will be employed, and the degree to which permitted hazardous waste management facilities will be used for remediation wastes. In addition, Congress may consider revision of the liability imposed by the Superfund law for remediation of contamination caused prior to a party's acquisition of a contaminated site, which could reduce the remediation obligations of the Company and others who currently are jointly and severally liable for remediation obligations under Superfund. 49 International Waste Management and Related Services Waste Management International's operations are subject to the general business, liability, land-use planning and other environmental laws and regulations of the countries where the services are performed and, in Europe, to European Union ("EU") regulations and directives. The degree of local enforcement of applicable laws and regulations varies substantially between, and even within, the various countries in which Waste Management International operates. In addition to the statutes and regulations imposed by national, state or provincial, and municipal or other local authorities, many of the countries in which Waste Management International operates are members of the EU. The EU has issued and continues to issue environmental Directives and Regulations covering a broad range of environmental matters and has created a European Environmental Agency responsible for monitoring and collating member state environmental data. The Single European Act, passed in 1987, established three fundamental principles to guide the development of future EU environmental law: (i) the need for preventative action; (ii) the correction of environmental problems at the source; and (iii) the polluter's liability for environmental damage. The Treaty on European Union, signed in December 1991, came into force in November 1993. The Treaty applies the principle of "sustainable development" as a key component of EU policy-making and requires that environmental protection be integrated into the definition and application of all EU laws. It also introduced a new procedure for the adoption of waste management legislation (other than for proposals of a primarily fiscal nature) which it is predicted may result in the speedier implementation of EU waste laws. The impact of current and future EU legislation will vary from country to country according to the degree to which existing national requirements already meet or fall short of the new EU standards and, in some jurisdictions, may require extensive public and private sector investment and the development and provision of the necessary technology, expertise, administrative procedures and regulatory structures. These extensive laws and regulations are continually evolving in response to technological advances and heightened public and political concern. Outside Europe, continuing industrialization, population expansion and urbanization have caused increased levels of pollution with all of the resultant social and economic implications. The desire to sustain economic growth and address historical pollution problems is being accompanied by investments in environmental infrastructure, particularly in Southeast Asia, and the introduction of regulatory standards to further control industrial activities. The Company believes that Waste Management International's business is conducted in material compliance with applicable laws and regulations and does not anticipate that maintaining such compliance will adversely affect the Company's financial position. There can be no assurance, however, that such requirements will not change so as to require significant additional expenditures or operating costs. Waste Management International operates facilities in Hong Kong which are owned by the Hong Kong government. Control of the Hong Kong government passes to the People's Republic of China in 1997. Waste Management International is unable to predict what impact, if any, this change will have on its operations in Hong Kong. COMPETITION Waste Management encounters intense competition, primarily in the pricing and rendering of services, from various sources in all phases of its solid waste management and related operations. In the solid waste collection phase, competition is encountered, for the most part, from national, regional and local collection companies as well as from municipalities and counties (which, through use of tax revenues, may be able to provide such services at lower direct charges to the customer than can Waste 50 Management) and some large commercial and industrial companies which handle their own waste collection. In the solid waste transfer, resource recovery and disposal phases of its operations, competition is encountered primarily from municipalities, counties, local governmental agencies, other national or regional waste management companies and certain large corporations not primarily involved in the solid waste management services business. The Company also encounters intense competition in pricing and rendering of services in its medical and infectious waste management, portable sanitation and street sweeping and parking lot cleaning services businesses from numerous large and small competitors. In its hazardous waste management operations, the Company encounters competition from a number of sources, including several national or regional firms specializing primarily in chemical waste management, local waste management concerns and, to a much greater extent, generators of chemical wastes which seek to reduce the volume of or otherwise process and dispose of such wastes themselves. The basis of competition is primarily technical expertise and the price, quality and reliability of service. Waste Management International encounters intense competition from local companies and governmental entities in particular countries, as well as from major international companies. Pricing, quality of service and type of equipment utilized are the primary methods of competition for collection services, and proximity of suitable treatment or disposal facilities, technical expertise, price, quality and reliability of services are the primary methods of competition for treatment and disposal services. WTI experiences substantial competition in all aspects of its business. It competes with a large number of firms, both nationally and internationally, some of which may have substantially greater financial and technical resources than WTI. The principal competitive factors with respect to its project development activities include technological performance, service, technical know-how, price and performance guarantees. Competing for selection as a project developer may require commitment of substantial resources over a long period of time, without any certainty of being ultimately selected. Competition for attractive development opportunities is intense, as there are a number of competitors in the industry interested in such opportunities. The service industries in which Rust competes are highly competitive. Rust encounters intense competition, primarily in pricing, quality and reliability of services from various sources in all aspects of its environmental and infrastructure engineering and consulting services operations. Pursuant to the First Amended and Restated International Business Opportunities Agreement, dated January 1, 1993, by and among CWM, WTI, Waste Management International, Inc., Waste Management International, Rust and the Company (as amended, the "IBOA"), which agreement is also a successor to certain prior agreements among certain of the parties, each of CWM, WTI, Rust and the Company has agreed that, until the later of July 1, 2000 or the date on which the Company ceases to beneficially own a majority of the outstanding voting equity interests of such subsidiary or ceases to beneficially own a majority of the outstanding voting equity interests of Waste Management International, and in each case no longer has an option to obtain such ownership, such subsidiary or the Company will not engage (except through Waste Management International) in waste management services; design, development, construction and operation of trash-to-energy facilities in Italy or Germany; collection, storage, processing, treatment or disposal of hazardous wastes (including hazardous substance remediation services); or design, engineering and construction (where the customer is seeking third- party operation), operation and maintenance of water, wastewater and sewage treatment facilities (including facilities for treating hazardous waste streams whether or not the customer is seeking third-party operation) outside North America (i.e., the United States, its 51 territories and possessions, Canada and Mexico) (the "Waste Management International Allocated Activities"), except with respect to licensing of technology and minor interests of CWM, WTI or Rust in publicly held entities. WTI may engage outside North America in the design, engineering, construction, operation and maintenance of chimneys and air pollution control facilities (the "WTI Allocated Activities"). Rust may engage outside North America in activities relating to (i) architectural services, (ii) engineering and design services and procurement, construction and construction management services (including marine construction and dredging), other than those relating to the Waste Management International Allocated Activities and the WTI Allocated Activities, (iii) scaffolding services, (iv) demolition and dismantling services, (v) environmental consulting services, and (vi) industrial facility and power plant maintenance services (the "Rust Allocated Activities"). Sales by the Company of recyclables, licensing of technology and minor investments by the Company in publicly held entities are also permitted activities of the Company outside North America. Waste Management International has agreed that for the same time periods as are applicable to CWM, WTI, Rust and the Company above in this paragraph, it will not engage in North America in the type of activities included within the Waste Management International Allocated Activities outside North America and will not engage in the WTI Allocated Activities or the Rust Allocated Activities. Businesses or assets acquired by a party to the IBOA which are in the domain of another party thereto (according to the allocations described above) must be offered for sale to the other party at fair market value. In addition, WTI and Waste Management International have entered into an agreement whereby WTI will have primary responsibility for the early-stage development of trash-to-energy projects outside North America (except in Italy and Germany) and Waste Management International will have the right to acquire up to 49% of all equity of any such project available to Waste Management International, WTI and their affiliates, with WTI or other investors owning the balance. This arrangement is non-cancellable by WTI or Waste Management International without the other's consent prior to 2000. If the arrangement is cancelled, the right to develop trash-to-energy projects reverts to being part of the Waste Management International Allocated Activities. By agreement among the parties, the Company is responsible for determining business allocations among CWM, WTI, Rust, the Company and Waste Management International which are not controlled by the allocations set forth in the preceding two paragraphs. In this connection CWM, WTI, Rust, the Company and Waste Management International have agreed that in order to minimize the potential for conflicts of interest among various subsidiaries under the common control of the Company and for so long as the Company shall have beneficial ownership of a majority of the outstanding voting equity interests of such subsidiary (or an option to obtain such ownership), the Company has the right to direct future business opportunities to the Company or the Company-controlled subsidiary which, in the Company's reasonable and good faith judgment, has the most experience and expertise in that line of business, provided that the Company may not allocate a business opportunity to a particular subsidiary if such business opportunity would involve the subsidiary in a breach of its agreement not to compete as described in the immediately preceding paragraphs. Opportunities outside North America relating to the provision of future waste management services are generally to be allocated to Waste Management International, except that opportunities outside North America relating to the WTI Allocated Activities and the Rust Allocated Activities are generally to be allocated to WTI and Rust, as the case may be. Environmental opportunities other than waste management activities are to be allocated in the Company's good faith judgment. No party is liable for consequential damages, except for lost profits, for any breach of the IBOA. In addition, in connection with the transfer by Rust of its hazardous and radioactive substance remediation business (see "Acquisitions and Dispositions" below), the Company, Rust and their respective wholly owned affiliates agreed with OHM not to engage in providing on-site hazardous and radioactive substance remediation services in North America prior to 2002. 52 INSURANCE While the Company believes it operates professionally and prudently, its business exposes it to risks such as the potential for harmful substances escaping into the environment and causing damage or injuries, the cost of which could be substantial. The Company currently maintains liability insurance coverage for occurrences under various environmental impairment, primary casualty and excess liability insurance policies. The Company's insurance program includes coverage for pollution liability resulting from "sudden and accidental" releases of contaminants and pollutants. The Company believes that the coverage terms, available limits of liability, and costs currently offered by the insurance market do not represent sufficient value to warrant the purchase of "non-sudden and accidental" pollution liability insurance coverage. As such, the Company has chosen not to purchase risk transfer "non-sudden and accidental" pollution liability insurance coverage. To satisfy existing government requirements, the Company has secured non-risk transfer pollution liability insurance coverage in amounts believed to be in compliance with federal and state law requirements for "non-sudden and accidental" pollution. The Company must reimburse the insurer for losses incurred and covered by this insurance policy. In the event the Company continues not to purchase risk transfer "non- sudden and accidental" pollution liability insurance coverage, the Company's net income could be adversely affected in the future if "non-sudden and accidental" pollution losses should occur. EMPLOYEES WMX Technologies and its subsidiaries employ a total of approximately 73,200 persons in their worldwide continuing operations. Of this number, the Company employs approximately 38,700 persons in its North American solid and hazardous waste management services operations (excluding employees of the Rust scaffolding and other on-site industrial services business operated by Waste Management). Of this total, 35,900 persons are engaged in its Waste Management solid waste and related services operations, including approximately 27,200 persons employed in solid waste collection, transfer, resource recovery and disposal activities, and approximately 8,700 managerial, executive, sales, clerical, data processing and other solid waste and related activities. Approximately 2,800 employees are employed in the Company's hazardous waste services business, including 100 as managers or executives. Approximately 2,000 are employed in hazardous waste treatment, storage and disposal activities (including approximately 530 performing technical, analytical or engineering services), and approximately 700 are employed in sales, clerical, data processing and other hazardous waste-related activities. As of December 31, 1995, Waste Management International employed approximately 18,500 persons. Of this number, approximately 14,900 persons were employed in its collection services operations, 2,400 in its treatment and disposal services operations and 1,200 in administrative functions. At December 31, 1995, WTI had approximately 4,600 full-time employees. Rust employed approximately 11,400 persons at December 31, 1995 (excluding its process engineering and construction, specialty contracting and related services business which is to be sold or otherwise discontinued, but including the scaffolding and other on-site industrial services business managed by Waste Management), of whom approximately 4,200 provided technical or engineering services (excluding craft personnel hired on a temporary basis). At December 31, 1995, approximately 6,900 of the Company's employees in North America were unionized, primarily in the Company's solid waste and related services operations, under collective bargaining agreements expiring on various dates through 2002. At December 31, 1995, approximately 53 13,900 Waste Management International employees were represented by labor unions. The Company believes its employee relations are acceptable. ACQUISITIONS AND DISPOSITIONS Since August 1971, the Company has acquired a number of companies, and certain assets of other companies, engaged in various phases of the environmental services industry. See Note 4 to the Company's Consolidated Financial Statements filed as an exhibit to this report and incorporated herein by reference. The amounts and types of consideration generally have been determined by direct negotiations with the owners of the businesses acquired. In most instances, the owners of the acquired businesses were few in number, and often certain key former owners have continued to operate the businesses following acquisition by the Company. During 1995, the Company continued to acquire additional operations in the environmental services industry. Acquisitions have historically contributed significantly to the Company's growth. However, in recent years the Company's acquisition activity relative to the size of its revenue base has decreased. The Company's growth prospects may be affected by the availability of additional business acquisitions at reasonable prices and the Company's ability to finance such acquisitions. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere herein for a discussion of capital expenditures by the Company, including acquisitions. Other well-capitalized companies also compete intensely for businesses available to be acquired. The Company is continually engaged in the process of considering and negotiating additional acquisitions. Some future acquisitions could be material. The acquisition of businesses also entails certain inherent risks. Although the Company reviews businesses to be acquired, because of the nature of the liabilities involved in these businesses, there can be liabilities which will not become known until after the transactions are consummated. The Company seeks to minimize the impact of these liabilities and expenditures by obtaining indemnities and warranties from the seller which may be supported by deferring payment of a portion of the purchase price. These indemnities and warranties, if obtained, may not, however, fully cover the liabilities due to their limited scope, amount, or duration, the financial limitations of the indemnitor or warrantor, or other reasons. Businesses purchased may require expenditures to make up for deferred maintenance and to improve the quality or quantity of assets acquired. In certain cases, the Company establishes reserves in respect of the anticipated costs of remediation for acquired sites. On January 24, 1995, the Company acquired CWM common stock representing the approximately 21% interest in CWM held at that time by public stockholders. The acquisition occurred pursuant to a merger (the "Merger") in which all publicly held shares of CWM common stock were converted into convertible subordinated notes of the Company due January 24, 2005 and having a principal amount at maturity of $1,000 per note (the "Notes"), subject to the payment of cash in lieu of the issuance of fractional Notes. For a description of the terms of the Notes, see Note 5 to the Company's Consolidated Financial Statements. The Merger was approved by a committee of independent directors of CWM and by a majority of the public stockholders of CWM. As a result of the Merger, CWM became a wholly owned subsidiary of the Company. On March 14, 1995, the Company's Board of Directors approved a plan to reduce the scope of the Company's chemical waste management services business by selling or otherwise eliminating technologies and service locations which were not meeting customer service or performance objectives. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--1995 Operations Compared with 1994--CWM," included elsewhere herein for further information. In May 1995, OHM acquired Rust's hazardous and radioactive substance remediation business in exchange for an approximately 37% interest in OHM. In exchange for warrants to acquire an additional approximately 2.6% of OHM common stock, the Company also agreed in that transaction to guarantee up to $62 million of indebtedness of OHM. 54 In July 1995, the Company acquired the approximately 4% of Rust's shares held by the public for $16.35 per share in cash. The transaction was approved by a special committee of independent directors appointed by the Rust Board of Directors. As a result of that transaction, Rust became owned 60% by the Company and 40% by WTI. Additionally, Rust has announced its intention to sell or otherwise discontinue its process engineering, construction, specialty contracting and related services business. The terms of the sale have not yet been determined. The Company expects the sale of those portions of the business which are to be sold to be completed in 1996. On May 20, 1996, the Company announced that Rust signed an agreement to sell Rust's industrial process engineering and construction business based in Birmingham, Alabama, to Raytheon Engineers & Constructors, Inc., a subsidiary of Raytheon Company. In December 1995, the Company contributed its approximately 28% interest in ServiceMaster Consumer Services L.P. ("SMCS"), a provider of lawn care, pest control and other consumer services, to ServiceMaster L.P. ("SMLP"), the owner of the remaining interest in SMCS, in exchange for an approximately 19% interest in SMLP and an option to purchase up to 1.25 million SMLP limited partnership shares. The Company has also acquired numerous companies and interests in companies internationally through Waste Management International or its predecessors. See "International Waste Management and Related Services." PROPERTY AND EQUIPMENT The principal property and equipment of the Company consists of land (primarily disposal sites), buildings and waste treatment or processing facilities (other than disposal sites), and vehicles and equipment, which as of December 31, 1995 represented approximately 18%, 6% and 27%, respectively, of the Company's total consolidated assets. The Company believes that its vehicles, equipment and operating properties are well maintained and suitable for its current operations. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for a discussion of property and equipment expenditures by the Company for the last three years and the capital budget for 1996. The Company's subsidiaries lease numerous office and operating facilities throughout the world. For the year ended December 31, 1995, aggregate annual rental payments on real estate leased by the Company and its subsidiaries approximated $140,367,000. The principal fixed assets of Waste Management consist of vehicles and equipment (which include, among other items, approximately 20,800 collection and transfer vehicles, 1,568,600 containers and 21,000 stationary compactors in the United States and Canada). Waste Management owns or leases real property in most states and Canadian provinces in which it is doing business. At December 31, 1995, 103 solid waste disposal facilities, aggregating approximately 65,740 total acres, including approximately 14,290 permitted acres, were owned by Waste Management in the United States and Canada and 30 facilities, aggregating approximately 13,340 total acres, including approximately 5,860 permitted acres, were leased from parties not affiliated with Waste Management under leases expiring from 1996 to 2085. At December 31, 1995, the Company owned or leased in the United States a total of nine treatment, storage or disposal facilities. At such date, the Company's seven chemical waste facilities with secure land disposal sites aggregated approximately 7,865 acres, including approximately 1,470 permitted acres. The principal property and equipment of Waste Management International consist of land (primarily disposal sites) and vehicles and equipment, which as of December 31, 1995 represented approximately 13.1% and 30.3%, respectively, of Waste Management International's assets. The principal fixed assets utilized in Waste Management International's collection services operations at December 31, 1995 consisted of vehicles and equipment (which included, among other items, approximately 7,000 collection, transportation, and other route vehicles and approximately 300 pieces 55 of landfill and other heavy equipment), and approximately 285,000 containers, including approximately 3,550 stationary compactors. In addition, Waste Management International owns approximately 710 pieces of hazardous waste equipment, consisting predominately of containers and collection vehicles. The principal fixed assets utilized in Waste Management International's treatment and disposal services operations at December 31, 1995 consisted of 55 landfills, 23 waste treatment facilities, 79 recycling and recyclables processing facilities, nine incinerators and various other manufacturing, office and warehouse facilities owned, leased or operated by Waste Management International. WTI currently owns, operates or leases 16 trash-to-energy facilities, seven cogeneration and small power production facilities, two coal handling facilities, five biosolids drying, pelletizing and composting facilities, one wastewater treatment plant and various other manufacturing, office and warehouse facilities. Facilities leased or operated (but not owned) by WTI are under leases or agreements having terms expiring from the years 1996 to 2020, subject to renewal options in certain cases. The principal property and equipment of Rust consist of the vehicles, equipment and scaffolding inventory used in the scaffolding and other on-site industrial services business managed by Waste Management, which as of December 31, 1995 represented approximately 14% of Rust's total continuing consolidated assets. Rust believes that its equipment is well maintained and suitable for its current operations. Rust leases its corporate offices in Greenville, South Carolina and Birmingham, Alabama and numerous office, warehouse and equipment and scaffolding yard facilities in various locations throughout the United States. 56 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages (at April 1, 1996) of the Company's executive officers and directors, the positions they hold with the Company, and (because the Board of Directors is classified into three classes--Class I, expiring at the 1998 annual stockholders meeting, Class II, expiring at the 1999 annual stockholders meeting and Class III, expiring at the 1997 annual stockholders meeting) the classification of the Board to which they belong. All directors hold their positions until the annual meeting of stockholders at which their terms expire or until their respective successors are elected and qualify. Executive officers are selected by the Board of Directors and serve at the discretion of the Board of Directors.
NAME AGE POSITION - ---- --- -------- Dean L. Buntrock (1) (4)............... 64 Chairman of the Board and Director Phillip B. Rooney (1) (3).............. 51 President and Director James E. Koenig........................ 48 Senior Vice President, Treasurer and Chief Financial Officer D. P. Payne............................ 53 Senior Vice President-Marketing and Communications Herbert A. Getz........................ 40 Senior Vice President, General Counsel and Secretary Thomas C. Hau.......................... 60 Vice President, Controller and Principal Accounting Officer Donald A. Wallgren..................... 54 Vice President and Chief Environmental Officer William P. Hulligan.................... 52 Executive Vice President, Waste Management Joseph M. Holsten...................... 43 Chief Executive Officer, Waste Management International H. Jesse Arnelle (2)................... 62 Director Howard H. Baker, Jr. (4)............... 70 Director Dr. Pastora San Juan Cafferty (3)...... 55 Director Jerry E. Dempsey (2)................... 63 Director Dr. James B. Edwards (2)............... 68 Director Donald F. Flynn (3).................... 56 Director Peter H. Huizenga (4).................. 57 Director Peer Pedersen (4)...................... 71 Director James R. Peterson (3).................. 68 Director Alexander B. Trowbridge (2)............ 66 Director
- ---------- (1) Member of the Executive Committee of the Board of Directors (2) Class I member (3) Class II member (4) Class III member Dean L. Buntrock has been a director of the Company and has served as Chairman of the Board of the Company since 1968. From 1968 until June 1996 he also served as Chief Executive Officer of the Company, and from September 1980 to November 1984 he also served as President. Mr. Buntrock is also a director of WTI, Waste Management International and Boston Chicken, Inc. 57 Phillip B. Rooney has served as a director of the Company since 1981, as Chief Executive Officer since June 1996, and as its President since November 1984. From November 1984 until June 1996 he served as Chief Operating Officer of the Company. Since January 1994, he has also served as Chairman of the Board and Chief Executive Officer of Waste Management. Mr. Rooney commenced employment with the Company in 1969 and first became an officer of the Company in 1971. Since November 1990, he has served as Chairman of the Board and Chief Executive Officer of WTI. Mr. Rooney is also a director of Waste Management International, WTI, Illinois Tool Works, Inc., Caremark International Inc., Urban Shopping Centers, Inc., and ServiceMaster Management Corporation, the general partner of ServiceMaster Limited Partnership. Herbert A. Getz has been a Senior Vice President of the Company since May 1995, a Vice President of the Company since May 1990 and General Counsel since August 1992. He has also been Secretary of the Company since January 1988. He also served as Assistant General Counsel of the Company from December 1985 until August 1992. Mr. Getz has also held the offices of Vice President, General Counsel and Secretary at Waste Management from April 1989 until December 1993, and Vice President and Secretary of Rust from January 1993 to May 1994. He has also served as Secretary of WTI since July 1995, a position he previously held, as well as being the General Counsel of WTI, from November 1990 until May 1993. Mr. Getz commenced employment with the Company in 1983. He is Chairman of the Board of Directors of NSC and a director of OHM. Thomas C. Hau has been a Vice President and the Controller and Principal Accounting Officer of the Company since he commenced employment with the Company in September 1990. From 1971 until his employment by the Company, Mr. Hau was a partner of Arthur Andersen LLP. William P. Hulligan has been Executive Vice President of Waste Management since January 1996, a position he previously held from September 1984 to January 1988. From 1986 to August 1993, he was also a Vice President of the Company. From August 1992 to March 1996, he also served as President of certain Waste Management operating groups. He was President of Waste Management from January 1988 to August 1992. He has been employed by the Company since 1979. Joseph M. Holsten has been Chief Executive Officer of Waste Management International since July 1995. From October 1993 to July 1995, he was Executive Vice President and Chief Financial Officer of Waste Management. Mr. Holsten was Vice President of Acquisitions and Project Development for Waste Management International from April 1992 to August 1993 and Vice President, Chief Financial Officer and Treasurer of Rust from September to October 1993. Mr. Holsten has been employed by the Company since 1981. James E. Koenig has been a Senior Vice President of the Company since May 1992, Treasurer of the Company since 1986 and its Chief Financial Officer since 1989. Mr. Koenig first became a Vice President of the Company in 1986. From 1984 to 1986, Mr. Koenig was Staff Vice President and Assistant to the Chief Financial Officer of the Company. Mr. Koenig has been employed by the Company since 1977. Mr. Koenig also served as Vice President, Chief Financial Officer and Treasurer of WTI from November 1990 to May 1993. He also serves as a director of WTI, Waste Management International and OHM. D. P. Payne has been a Senior Vice President of the Company since April 1995, a position he previously held from 1990 to 1993. He also served as President and Chief Executive Officer and a director of CWM from September 1991 to March 1995. Mr. Payne has been employed by the Company since 1990. Donald A. Wallgren has been Vice President and Chief Environmental Officer of the Company since 1992 and Vice President of Environmental Management of Waste Management since January 1995. He was Vice President and Chief Environmental Officer at Waste Management from 1989 to May 58 1990. From 1990 to 1992, he served as Vice President-Recycling, Development and Environmental Management of Waste Management. Mr. Wallgren has been employed by the Company since 1979. H. Jesse Arnelle has been a director of the Company since 1992 and senior partner of Arnelle, Hastie, McGee, Willis and Greene, a San Francisco-based corporate law firm, for more than the past ten years. He currently also serves as Chairman of the Pennsylvania State University Board of Trustees. Mr. Arnelle is also a director of Florida Power & Light (FPL Group), Eastman Chemical Corporation, Textron Corporation, Wells Fargo & Company and Wells Fargo Bank N.A., Armstrong World Industries and Union Pacific Resources, Inc. Howard H. Baker, Jr. has served as a director of the Company since 1989 and has been a member of the law firm of Baker, Donelson, Bearman & Caldwell for more than the past five years. From March 1987 to July 1988, Mr. Baker held the position of Chief of Staff to the President of the United States. Mr. Baker served three terms as a member of the United States Senate from 1967 to 1985. Mr. Baker is also a director of Federal Express Corporation, Pennzoil Company and United Technologies, Inc. He is Chairman of the Board of Trustees of the Mayo Foundation and a member of the Smithsonian Board of Regents. Dr. Pastora San Juan Cafferty has served as a Professor since 1985 at the University of Chicago's School of Social Service Administration where she has been a member of the faculty since 1971. She was elected a director of the Company in July 1994. Dr. Cafferty also serves as a director of Kimberly-Clark Corporation and People's Energy Corporation and on the boards of the Rush- Presbyterian-St. Luke's Medical Center and the Lyric Opera Association, both in Chicago. Jerry E. Dempsey has served as a director of the Company since 1984, and since September 1993, as Chairman and Chief Executive Officer of PPG Industries, Inc., a glass, coatings and chemicals company. From April 1984 to May 1988, Mr. Dempsey served as Vice Chairman of the Board of the Company. From May 1988 to June 1993, Mr. Dempsey was Senior Vice President of the Company. From July 1985 to September 1991, he was also President and Chief Executive Officer of CWM. From September 1991 to May 1993, Mr. Dempsey served as Chairman of the Board of CWM. Mr. Dempsey is also a director of Navistar International Corp. and PPG Industries, Inc. Dr. James B. Edwards has served as a director of the Company since 1995 and has been President of the Medical University of South Carolina since November 1982. From January 1981 to November 1982, he served as the United States Secretary of Energy, and previously as Governor of the State of South Carolina. Dr. Edwards is also a director of Phillips Petroleum Company, SCANA Corporation, Imo Industries Inc. and National Data Corporation. Donald F. Flynn has served as a director of the Company since 1981 and as Chairman of the Board and President of Flynn Enterprises, Inc., a financial advisory and venture capital firm, since February 1988. He also served as Chairman of the Board and Chief Executive Officer of Discovery Zone, Inc., an operator of indoor fun and fitness centers for children, from July 1992 until February 1996 and May 1995, respectively. On March 25, 1996, Discovery Zone, Inc. announced that it filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Mr. Flynn was a Senior Vice President of the Company from May 1975 to January 1991. He also served as the Company's Chief Financial Officer from March 1972 to December 1989 and the Company's Treasurer from May 1979 to December 1986. Mr. Flynn is also a director of Psychemedics Corporation, WTI and WM International. Peter H. Huizenga has served as a director of the Company since 1968 and President of Huizenga Capital Management, an investment management firm, since October 1990. He has also been of counsel to the law firm of Hlustik, Huizenga & Williams for more than the past five years. Mr. Huizenga served as Vice President and Secretary of the Company from May 1975 and September 1968, respectively, until his retirement from those positions on January 1, 1988. 59 Peer Pedersen has been a director of the Company since 1979 and Chairman of the Board of the law firm of Pedersen & Houpt, P.C. for more than the past five years. Mr. Pedersen is also a director of Aon Corporation, Boston Chicken, Inc., Latin American Growth Fund and Extended Stay America, Inc. James R. Peterson has been a director of the Company since 1980 and was a director and President and Chief Executive Officer of The Parker Pen Company from January 1982 to January 1985. The Parker Pen Company was principally involved in the manufacture and distribution of writing instruments and in providing temporary help services. Mr. Peterson is also a director of The Dun & Bradstreet Corporation. Alexander B. Trowbridge has served as a director of the Company since 1985 and President of Trowbridge Partners, Inc., a consulting services firm, since January 1990. He was President of the National Association of Manufacturers, Washington, D.C., from January 1980 to January 1990. Mr. Trowbridge also served as U.S. Secretary of Commerce in 1967 and 1968 and as Vice Chairman of Allied Chemical Corp. from 1976 to 1980. He also serves as a director of New England Mutual Life Insurance Co., PHH Corp., The Rouse Co., Sun Resorts International Ltd., Harris Corp., Sun Co. Inc., The Gillette Co., Warburg- Pincus Counsellors Funds and Icos Corp. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information with respect to compensation for services in all capacities paid by the Company and its subsidiaries for the past three years, to or on behalf of the Chairman of the Board and Chief Executive Officer of the Company at December 31, 1995, and each of the four other most highly compensated executive officers of the Company serving at December 31, 1995: SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION --------------------------------------------------- --------------------- AWARDS PAYOUTS ----------- --------- SECURITIES BONUS OTHER ANNUAL UNDERLYING LONG-TERM ALL OTHER NAME AND PRINCIPAL ---------------------- COMPEN- OPTIONS INCENTIVE COMPEN- POSITION YEAR SALARY CASH STOCK-BASED SATION(2) (SHARES)(4) PAYOUTS SATION(5) ------------------ ---- ---------- ---------- ----------- -------------- ----------- --------- --------- Dean L. Buntrock, 1995 $1,400,000 $ 0 $1,792,000(1) $437,980(1)(3) 205,505 $ 0 $10,500 Chairman and Chief 1994 1,400,000 1,120,000 0 77,420(3) 158,640 0 10,500 Executive Officer 1993 1,400,000 0 0 78,702(3) 122,449 0 500 Phillip B. Rooney, 1995 1,000,000 0 1,141,000(1) 228,200(1) 146,789 0 10,500 President and Chief 1994 1,000,000 1,029,280 0 -- 113,314 0 10,500 Operating Officer 1993 1,000,000 0 0 -- 87,464 97,800(6) 500 James E. Koenig, 1995 517,000 420,000 0 -- 62,615 0 10,500 Senior Vice 1994 500,000 250,000 0 -- 42,493 0 10,500 President and Chief 1993 500,000 0 0 -- 32,799 25,808(6) 500 Financial Officer D. P. Payne 1995 400,000 0 322,250(1) 64,450(1) 47,706 0 8,500 Senior Vice President 1994 400,000 0 0 -- 0 0 8,500 -- Human Resources 1993 400,000 0 0 -- 0 0 500 and Communications Herbert A. Getz 1995 365,000 300,000 0 -- 44,725 0 10,500 Senior Vice President, 1994 330,000 172,500 0 -- 24,221 0 10,500 General Counsel 1993 285,000 0 0 -- 18,695 14,398(6) 500 and Secretary
- ---------- (1) All of the amounts shown under "Bonus--Stock-Based" were deferred and are deemed to be invested in shares of the Company's common stock, and thus fully "at risk" until after retirement or other termination of employment. The deferring officers received a 20% Company match of the bonus deferred, included under "Other Annual Compensation," which vests over a four-year period and is also deemed invested and "at risk" in the same manner as the deferred bonus. See note 1 to the "Ownership of Company Common Stock" table on page 68. 60 (2) Excludes perquisites and other benefits, unless the aggregate amount of such compensation is at least the lesser of either $50,000 or 10 percent of the total annual salary and bonus reported for the named executive officer. (3) Includes financial planning expenses of $68,000 paid by the Company on behalf of the named executive officer in 1993, 1994 and 1995. (4) The numbers shown in the table above represent options for the purchase of shares of the Company's common stock granted to the named persons under the Employee Plans. The named officers also serve or served as directors or executive officers of direct or indirect subsidiaries of the Company which were publicly traded. Accordingly, during 1993, Messrs. Rooney, Koenig, Payne and Getz also received options for 150,000, 20,000, 20,000 and 20,000 Rust shares, respectively, and Mr. Payne received options for 62,696 CWM shares. Mr. Payne also received options for 22,833 CWM shares in 1994. In connection with the 1995 acquisitions by the Company of all of the publicly-held shares of Rust and CWM, such options to acquire shares of Rust and CWM, respectively, were converted into options to acquire shares of the Company. The options were granted under plans adopted by the relevant subsidiaries. (5) Amounts of All Other Compensation are amounts contributed by the Company for fiscal years 1993, 1994 and 1995 under the Company's Profit Sharing and Savings Plan and for fiscal year 1995 under the Company's Profit Sharing and Savings Plus Plan for the persons named above. (6) Paid pursuant to WTI's Performance Unit Plan, a long term incentive plan covering the two-year period ended December 31, 1992. 61 STOCK OPTIONS The following tables set forth certain information with respect to stock options granted to the persons named in the Summary Compensation Table during the year ended December 31, 1995. No options were granted to the persons named in the Summary Compensation Table during the year ended December 31, 1995 by CWM, Rust, WTI or WM International. COMPANY OPTION GRANTS IN 1995
INDIVIDUAL GRANTS -------------------------------------------- PERCENTAGE OF TOTAL POTENTIAL REALIZABLE VALUE AT NUMBER OF COMPANY ASSUMED ANNUAL RATES OF STOCK SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO PRICE TERM(4) OPTIONS EMPLOYEES (PER EXPIRATION -------------------------------- NAME GRANTED(1)(2) IN 1995 SHARE) DATE(3) 0% 5% 10% - ---- ------------- ---------- -------- ---------- --- ------------- -------------- Dean L. Buntrock 205,505 6.60 $27.25 04/03/05 $ 0 $ 3,521,817 $ 8,924,976 Phillip B. Rooney 146,789 4.72 27.25 04/03/05 0 2,515,579 6,374,970 James E. Koenig 62,615 2.01 27.25 04/03/05 0 1,073,057 2,719,337 D. P. Payne 47,706 1.53 27.25 04/03/05 0 817,556 2,071,847 Herbert A. Getz 44,725 1.44 27.25 04/03/05 0 766,469 1,942,384 All Stockholders as a group(5) -- -- 27.25 04/03/05 0 8,301,475,760 21,037,569,469
- ---------- (1) The option holder has the right to pay the exercise price by delivering previously acquired shares of the Company's common stock, and to have shares withheld to satisfy tax withholding requirements in connection with the exercise of options. Such options become immediately exercisable upon a Change in Control of the Company, as defined in the option plan. Options are non-transferable other than by will or the laws of descent and distribution. (2) Options become exercisable in three equal cumulative annual installments commencing April 3, 1996. (3) Options have a term of ten years, subject to earlier termination in certain events related to termination of employment. (4) The amounts under the columns labeled "5%" and "10%" are included by the Company pursuant to certain rules promulgated by the Securities and Exchange Commission and are not intended to forecast future appreciation, if any, in the price of the Company's stock. Such amounts are based on the assumption that the named persons hold the options granted for their full term. The actual value of the options will vary in accordance with the market price of the Company's common stock. The column headed "0%" is included to demonstrate that the options were granted at fair market value and optionees will not recognize any gain without an increase in the stock price, which increase benefits all stockholders commensurately. (5) Based upon the price of the Company's stock and the total shares outstanding as of the date of grant, if the price of the Company's common stock increased at the 5% or 10% rates shown in the table above, stockholders as a group would realize aggregate gains (excluding dividends) in the amounts shown above during the period from grant date to the April 3, 2005 option expiration date. 62 The following table sets forth certain information as to each exercise of stock options during the year ended December 31, 1995 by the persons named in the Summary Compensation Table and the fiscal year-end value of unexercised options: AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUE
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT IN- THE-MONEY OPTIONS AT ACQUIRED DECEMBER 31, 1995 DECEMBER 31, 1995(1) ON VALUE ------------------------- ------------------------- NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------- ----------- ----------- ------------- ----------- ------------- Dean L. Buntrock Company Options........ -- -- 578,830 392,399 $ 173,182 $860,126 WTI Options............ -- -- 33,336 0 261,584 0 WM International Op- tions................. -- -- 200,000 0 0 0 Phillip B. Rooney Company Options........ -- -- 584,057 312,527 123,703 614,373 WM International Op- tions................. -- -- 200,000 0 0 0 James E. Koenig Company Options........ 6,050 $44,429 88,435 105,429 58,343 249,315 WTI Options............ -- -- 120,000 0 941,628 0 WM International Op- tions................. -- -- 100,000 0 0 0 D. P. Payne Company Options........ -- -- 179,727 106,635 140,898 401,060 Herbert A. Getz Company Options........ 10,746 78,915 59,264 74,314 26,442 164,694 WTI Options............ -- -- 240,000 0 1,883,256 0 WM International Op- tions................. -- -- 40,000 0 0 0
- ---------- (1) Market value less exercise price, before payment of applicable income taxes. LONG TERM INCENTIVE PLAN AWARDS The following table sets forth certain information as to awards under the WMX Technologies, Inc. Long Term Incentive Plan (the "LTIP") with respect to the year ended December 31, 1995 to the persons named in the Summary Compensation Table:
PERFORMANCE ESTIMATED FUTURE PAYOUTS NUMBER OF OR OTHER UNDER NON-STOCK PRICE BASED SHARES, UNITS PERIOD UNTIL PLANS(3) OR OTHER MATURATION ----------------------------- NAME RIGHTS(1) OR PAYOUT(2) THRESHOLD TARGET MAXIMUM - ---- ------------- ------------ --------- -------- ---------- Dean L. Buntrock...... -- 3 years $700,000 $700,000 $2,100,000 Phillip B. Rooney..... -- 3 years 500,000 500,000 1,500,000 James E. Koenig....... -- 3 years 200,000 200,000 600,000 D. P. Payne........... -- 3 years 160,000 160,000 480,000 Herbert A. Getz....... -- 3 years 132,000 132,000 396,000
- ---------- (1) Awards consist of the designation of target percentages of annual salary at the end of the performance period to be paid if the Company achieves certain performance objectives. No payout occurs unless the Company achieves certain threshold performance objectives. Above the threshold, payouts may be greater than the target percentage to the extent that the Company's performance exceeds or fails to meet the target objectives specified in the plan. Payouts under the LTIP are based on the rank of the Company's total stockholder return (stock price appreciation plus reinvested dividends) among the total stockholder returns of the companies that comprise the Dow Jones Industrial Average over the performance period. 63 (2) The performance period includes calendar years 1995, 1996 and 1997. (3) At the end of the performance period, an amount equal to 50% of the performance award, if any, is to be paid in cash, and the remaining 50% is to be deemed to be invested in common stock of the Company. The participant is entitled to receive the value of such deemed investment on the date three years after the end of the performance period; provided that the participant is an officer of the Company or one of its subsidiaries on that date. Estimated future payouts were calculated using 1995 salaries, assume that a performance award will be earned at the levels shown, and do not reflect any possible subsequent increase or decrease in the value of the portion of the award which would be required to be deferred under the terms of the plan. PENSION AND RETIREMENT PLANS The following table sets forth estimated annual benefits payable upon retirement under the Company's Pension Plan and its Supplemental Executive Retirement Plan ("SERP") to employees of the Company in specified remuneration and years of service classifications. For purposes of the following table, it is assumed that the five executive officers named in the cash compensation table are eligible for the SERP benefits and that each such officer's annualized Final Average Compensation (as defined below) will be equal to his average annual compensation for the three years ended December 31, 1995. PENSION PLAN TABLE
YEARS OF SERVICE(2)(3) --------------------------------------------------------- REMUNERATION(1) 15 20 25 30 35 40 --------------- -------- -------- -------- -------- ---------- ---------- $ 400,000........ $ 90,000 $120,000 $150,000 $180,000 $ 210,000 $ 240,000 500,000........ 112,500 150,000 187,500 225,000 262,500 300,000 600,000........ 135,000 180,000 225,000 270,000 315,000 360,000 700,000........ 157,500 210,000 262,500 315,000 367,500 420,000 800,000........ 180,000 240,000 300,000 360,000 420,000 480,000 900,000........ 202,500 270,000 337,500 405,000 472,500 540,000 1,000,000........ 225,000 300,000 375,000 450,000 525,000 600,000 1,100,000........ 247,500 330,000 412,500 495,000 577,500 660,000 1,200,000........ 270,000 360,000 450,000 540,000 630,000 720,000 1,300,000........ 292,500 390,000 487,500 585,000 682,500 780,000 1,400,000........ 315,000 420,000 525,000 630,000 735,000 840,000 1,500,000........ 337,500 450,000 562,500 675,000 787,500 900,000 1,600,000........ 360,000 480,000 600,000 720,000 840,000 960,000 1,700,000........ 382,500 510,000 637,500 765,000 892,500 1,020,000 1,800,000........ 405,000 540,000 675,000 810,000 945,000 1,080,000 1,900,000........ 427,500 570,000 712,500 855,000 997,500 1,140,000 2,000,000........ 450,000 600,000 750,000 900,000 1,050,000 1,200,000
- ---------- (1) Upon normal retirement at age 65 or after completing five years of participation in the Company's Pension Plan, whichever is later, a participant is entitled to a pension based on the average of the participant's eligible compensation for the highest five consecutive years out of his or her last 10 years of service. For this purpose, a participant's eligible compensation generally includes all of his or her cash compensation, subject, in 1995, to the statutory maximum of $150,000. The annual lifetime benefit is equal to (i) 1% of average eligible compensation, multiplied by (ii) the number of his or her years of service, and, for a participant retiring at age 65 with 10 years of service, may not be less than $100 per month. Under the SERP, eligible participants who retire following age 60, or retire with at least 30 years of service, are entitled to a monthly benefit equal to (i) 1.5% of the participant's Final Average Compensation per year of service (Final Average 64 Compensation is the monthly average compensation of such participant for the highest three consecutive calendar years out of his or her last 10 calendar years of service), reduced by (ii) the amount of such participant's monthly benefit under the Pension Plan. Compensation used for calculating benefits under the SERP includes only the participant's salary and annual incentive bonus. Eligible participants are those officers who have served in such capacities for at least 10 years at the time of retirement. Payment of benefits under the SERP is made on the same basis as payments under the Pension Plan, and both plans provide for reduced payouts in the event of early retirement. (2) At December 31, 1995, the credited years of service for Messrs. Buntrock, Rooney, Koenig, Payne and Getz were 40, 27, 19, 5 and 13, respectively. (3) Benefits shown are computed on a straight-life annuity basis at normal retirement age. Provision is made for payment of pensions in joint and survivor form and in various other forms and at other times, on an actuarially equivalent basis. Benefits are not subject to reduction for social security benefits. COMPENSATION OF DIRECTORS Each member of the Board of Directors of the Company who is not an employee of the Company is paid an annual fee of $45,000. Such directors also receive $1,000 for each meeting they attend of each Committee of the Board of which such directors are members. The Company maintains a major medical expense insurance policy which is available to all directors of the Company. The policy covers the medical and dental expenses of the directors in excess of the coverage provided by the director's primary health insurance program. In addition, the Company paid Alexander B. Trowbridge, who is a director of the Company, $30,000 in 1995 for consulting services relating to marketing and government affairs projects, pursuant to a consulting agreement. Such agreement was terminated as of December 31, 1995. OUTSIDE DIRECTORS' PLANS The Company has two unfunded deferred compensation plans for non-employee members of its Board of Directors. Under the Deferred Directors' Fee Plan, such directors may make an irrevocable election annually to defer receipt of all or a portion of the directors' fees payable to them until termination of their membership on the Board of Directors. Such deferred amounts are deemed to be invested in the Company's common stock or, at the election of the director, in the common stock of any of the Company's majority-owned public subsidiaries, and during the period of deferral, such deferred amounts are credited with the dividends or stock splits that would be received had such investment actually been made. Upon termination of the director's service, the common stock deemed reflected by his or her deferred account is deemed to be sold, and the deemed proceeds of such sale (or an amount equal to the amount originally deferred, if greater) will be distributed to the director in cash, in a lump sum or installments. Under a similar plan maintained by WTI, Mr. Buntrock has deferred fees for services rendered as a director of WTI prior to the Company's acquisition of a majority interest of WTI in September 1990. Under the Directors' Phantom Stock Plan, certain non-employee directors received a one-time grant of 5,000 Phantom Shares at the time of adoption of such plan or at the time they first became directors. Each of such Phantom Shares was initially deemed to be equal in value to one share of the Company's common stock at the time of award. Phantom Shares are credited to a bookkeeping account which is adjusted to reflect stock (but not cash) dividends or stock splits which would be received with respect to an equivalent number of shares of the Company's common stock. Upon termination of the director's service, the director is paid an amount in cash, in a lump sum or installments, for each Phantom Share then credited to his or her account, equal to the then difference between the market price of the Company's common stock at the time of award and the average closing prices of one share 65 of the Company's common stock on the New York Stock Exchange Composite Tape for the most recent 10 consecutive trading days immediately preceding such termination. In 1991, the Company's Board of Directors terminated its authority to make additional grants under the Directors' Phantom Stock Plan. STOCK OPTION PLANS FOR NON-EMPLOYEE DIRECTORS The 1992 Stock Option Plan for Non-Employee Directors (the "Directors Plan") of the Company provides for the awards of options covering an aggregate of 150,000 shares of the Company's common stock. Each director of the Company who is neither an officer nor full-time employee of the Company or any of its subsidiaries, upon election or appointment to the Board of Directors, is granted an option to purchase a total of 15,000 shares of the Company's common stock at the fair market value of the stock at the time of grant. All options under the Directors Plan are for a term of 10 years from the date of grant and become exercisable with respect to 20% of the total number of shares subject to the option six months 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. Under the Directors Plan, in the event that the Company's shares of common stock are changed by a stock dividend, split or combination of shares, or a merger, consolidation or reorganization with another company in which holders of the Company's common stock receive other securities, or any other relevant change in the capitalization of the Company, a proportionate or equitable adjustment will be made in the number or kind of shares subject to unexercised options or available for options and in the purchase price for shares. If an option expires or is terminated or cancelled unexercised as to any shares, such released shares may again be optioned (including a grant in substitution for a cancelled option). Shares subject to options may be made available from unissued or reacquired shares of common stock. Options are not transferable by the optionee otherwise than by will or the laws of descent and distribution. Options terminate if the optionee ceases to be a director of the Company for any reason other than death, permanent disability, resignation or retirement. If the optionee ceases to be a director because of death or permanent disability, the optionee or his heirs, legatees or legal representative may exercise the option in full at any time during its term within three months after the date of termination. In the event of resignation or retirement, an option may be exercised by the optionee (or if he dies within three months after such termination, by his heirs, legatees or legal representative) at any time during its specified term prior to three months after the date of such resignation or retirement, but only to the extent it was exercisable at the date of such resignation or retirement. Prior to January 1, 1992, upon election to the Board of Directors non- employee directors received options for 10,000 shares under the Company's 1981 Stock Option Plan for Non-Employee Directors (the "1981 Plan"), the terms of which are substantially similar to the Directors Plan. No person who is the holder of an option granted under the 1981 Plan or the Employee Plans or who has purchased shares upon the exercise of such an option is eligible for a grant of options under the Directors Plan. DIRECTORS' CHARITABLE ENDOWMENT PROGRAM The Company maintains the Directors' Charitable Endowment Program pursuant to which the Company has purchased life insurance policies on members of the Board of Directors. Under the program, death benefits will be paid to the Company, and the Company in turn will donate such death benefits (up to $100,000 for each year of service on the Company's Board of Directors, subject to a $1,000,000 limit) to one or more charitable organizations recommended by the director. Directors derive no financial benefit from this program because all charitable deductions accrue solely to the Company. 66 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation and Stock Option Committee of the Company's Board of Directors consisted during 1995 of Messrs. Pedersen (Chairman), Baker (until September 13, 1995), Edwards, Peterson and Dr. Cafferty. Mr. Pedersen is Chairman of the Board of the law firm of Pedersen & Houpt, P.C. Mr. Baker is a member of the law firm of Baker, Donelson, Bearman & Caldwell. The Company has utilized the services of such firms, and currently anticipates that it may continue to utilize such firms to finish the matters they are currently handling, but does not anticipate referring any new matters to such firms. For 1995, the professional fees received by such firms from the Company were no more than approximately 1% of such firms' gross revenues. In 1995, Mr. Buntrock served on the Compensation Committees of the Boards of Directors of CWM, WTI and Rust. Mr. Rooney, who is an executive officer of WTI and Rust, serves as a director of the Company. CERTAIN TRANSACTIONS When an option is exercised by an optionee under the Employee Plans or WTI's stock option plans at a time when the fair market value of the underlying stock exceeds the option exercise price, the difference is treated as ordinary income to the optionee for income tax purposes and the company which issued the options is entitled to a deduction equal to such amount. To facilitate an optionee's purchase of stock upon exercise of such options, the Company and WTI have each adopted a policy of making available interest-free loans, in an amount up to the equivalent of all applicable tax withholding requirements, to optionees whose exercise of options results in ordinary income to them in excess of $10,000. All such loans normally are required to be repaid not later than April 15 in the year following the year in which such loans were made, unless otherwise extended. The due date for such loans made in 1993 by the Company was extended to December 31, 1994. The largest aggregate amounts of such loans from the Company and WTI in excess of $60,000 pursuant to such policy which were outstanding to the directors and executive officers of the Company since January 1, 1995 were as follows: Mr. Getz--$67,227. At May 15, 1996, $37,824 of such loan remained outstanding. The Company and WTI also each makes available to optionees interest-free loans for a period not to exceed 15 days to facilitate the exercise of options and the sale of the underlying stock. The largest aggregate amounts of such loans from the Company and WTI in excess of $60,000 which were outstanding to the directors and executive officers of the Company since January 1, 1995 were as follows: Mr. Trowbridge--$143,908; Mr. Getz--$232,480; Joseph M. Holsten-- $161,251; Mr. Koenig--$196,865; Donald A. Wallgren--$143,331. Such loans have been repaid and are not outstanding as of May 15, 1996. The Company has entered into an employment agreement with Phillip B. Rooney under which Mr. Rooney will be paid a minimum annual salary of $425,000 as President of the Company. Mr. Rooney also is eligible to receive annual bonuses and all benefits generally available to executives of the Company. The term of Mr. Rooney's employment under the agreement continues through August 31, 2000 and is automatically extended on each anniversary date for a period of five years from such anniversary date unless either party gives written notice of termination prior to the anniversary date. Upon the death or permanent disability of Mr. Rooney, the Company will pay annually 100% of his then current annual salary (including bonuses) for the balance of the term of the agreement. If the Company breaches or terminates the agreement or reduces the nature and scope of Mr. Rooney's authority and duties, it will continue to pay him for five years unless the termination was for cause, in which case its obligations under the agreement cease. In the event of a change in control of the Company, Mr. Rooney may elect to terminate the agreement and receive a lump sum payment of three times his average annual compensation (including bonuses) over the immediately preceding five years, which amount will be increased should an excise tax be imposed on him because of the payment. Were a change in control of the Company to have occurred on December 31, 1995 and if Mr. Rooney's employment with the Company were terminated as provided in the employment agreement, it is estimated that Mr. Rooney would have been eligible to receive approximately $4,805,500 (assuming no increase for any excise tax). During the term of the agreement, Mr. Rooney has agreed not to compete with the Company or its subsidiaries. 67 In connection with his transfer from CWM, where he was President, to the Company, the Company has entered into an employment agreement with D. P. Payne under which Mr. Payne will be paid a minimum annual salary of $400,000. Mr. Payne also is eligible to receive annual bonuses and all benefits generally available to executives of the Company. The term of Mr. Payne's employment under the agreement continues through December 31, 1999. Upon the death or permanent disability of Mr. Payne, the Company will pay his then current salary (including bonuses accrued as of the date of termination) for the balance of the calendar year in which such death or disability occurs but in no event for less than 180 days. If the Company terminates the agreement, it will continue to pay him an amount equal to his base salary until the end of the term of the agreement plus any unpaid but fully accrued annual bonus for the prior calendar year payable under the Annual Plan, unless the termination was for cause, in which case its obligations under the agreement cease. During the term of the agreement and for two years after the termination of the agreement, Mr. Payne has agreed not to compete with the Company or its subsidiaries. SECURITIES OWNERSHIP OF MANAGEMENT OWNERSHIP OF COMPANY COMMON STOCK The following table sets forth certain information as of February 1, 1996 as to the beneficial ownership of common stock of the Company by the directors, the Chairman of the Board and Chief Executive Officer and the four other most highly compensated executive officers of the Company as of December 31, 1995, and by all directors and persons serving as executive officers of the Company as a group:
NUMBER OF SHARES OF COMMON STOCK PERCENT OF OF THE COMPANY COMMON STOCK BENEFICIALLY OF THE NAME OWNED(2)(3) COMPANY(3)(5) ---- ---------------- ------------- Directors (Other than Executive Officers) H. Jesse Arnelle.......................... 12,610(4) * Howard H. Baker, Jr....................... 22,000(4) * Pastora San Juan Cafferty................. 7,000 * Jerry E. Dempsey.......................... 644,848 * James B. Edwards.......................... 1,766 * Donald F. Flynn........................... 595,581 * Peter H. Huizenga......................... 8,100,526 1.7 Peer Pedersen............................. 225,586(4) * James R. Peterson......................... 84,068(4) * Alexander B. Trowbridge................... 2,400(4) * Executive Officers(1) Dean L. Buntrock.......................... 3,537,683 * Herbert A. Getz........................... 122,800 * James E. Koenig........................... 153,965 * D. P. Payne............................... 208,853 * Phillip B. Rooney......................... 1,215,687 * All directors and executive officers as a group including persons named above (19 persons)................................... 15,288,907 3.1
- ---------- *Less than 1 percent. (1) Subsequent to February 1, 1996, pursuant to the Company's Non-Qualified Profit Sharing and Savings Plus Plan, Messrs. Buntrock, Payne, Rooney and all executive officers as a group acquired beneficial ownership of the equivalent of an additional 75,017, 13,448, 47,765 and 157,240 shares, 68 respectively, of common stock of the Company in connection with their voluntary deferral of bonus payments earned under the Company's Corporate Incentive Bonus Plan. (2) Directors and executive officers included in the group have sole voting power and sole investment power over shares listed, except (i) shares covered by options granted under the Company's stock option plans which were exercisable within 60 days of February 1, 1996; (ii) shares held pursuant to the Company's Profit Sharing and Savings Plan; (iii) Messrs. Edwards, Pedersen and Peterson, whose shares listed above include 312, 12,856 and 1,668 shares issuable upon conversion of the convertible subordinated notes due 2005 of WMX ("WMX Notes"), respectively; and (iv) Messrs. Buntrock, Dempsey, Getz, Huizenga, Koenig, Pedersen and Rooney, and all executive officers and directors as a group (including such individuals), who have shared voting and investment power over 458,418, 263,589, 42,777, 225,144, 39,837, 12,730, 65,567, and 1,110,242 shares, respectively. Such shares shown for Messrs. Buntrock, Dempsey, Huizenga, Pedersen and Rooney are held in trusts or foundations over which such individuals share voting and investment power with other co-trustees or directors of such trusts and foundations. Such shares shown for Messrs. Getz and Koenig are held jointly with their respective spouses. Ownership of shares shown for Messrs. Buntrock, Dempsey, Edwards, Getz, Huizenga and Rooney, and for all executive officers and directors as a group, includes shares of common stock of the Company not held directly by them but held by or for the benefit of (i) their spouses or (ii) their minor children and other children residing with them, as to which they have neither investment power nor voting power. Shares were held by or for the benefit of such spouses or children of the following persons and the executive officers and directors as a group at February 1, 1996, in the amounts indicated: Mr. Buntrock--42,404 (held by spouse); Mr. Dempsey--1,000 (held by spouse); Dr. Edwards--254 (held by spouse with 104 such shares issuable upon conversion of WMX Notes); Mr. Getz--240 (held by spouse); Mr. Huizenga--680,836 (held by spouse directly and as trustee); Mr. Rooney-- 101,184 (held by spouse directly and as trustee for children); and all executive officers and directors as a group (including such individuals)-- 825,918. Additionally, ownership of shares shown for Mr. Koenig includes 1,200 shares held by him as trustee of a family trust in which Mr. Koenig has no pecuniary interest. Each of the above named persons and the members of such group disclaim any beneficial ownership of such shares. (3) The numbers and percentages of shares shown in the table above are based on the assumption that currently outstanding stock options covering shares of the Company's common stock which were exercisable within 60 days of February 1, 1996 had been exercised as follows: Mr. Arnelle--12,000; Mr. Baker--20,000; Mr. Buntrock--672,527; Dr. Cafferty--6,000; Mr. Dempsey-- 224,828; Mr. Flynn--87,617; Mr. Getz--77,309; Mr. Koenig--111,472; Mr. Payne--208,653; Mr. Rooney--679,037; and all executive officers and directors as a group (including such individuals)--2,394,016. Such persons and the members of such group disclaim any beneficial ownership of the shares subject to such options. (4) Pursuant to the Company's Deferred Directors' Fee Plan, described under "Outside Directors' Plans," Messrs. Arnelle, Baker, Pederson, and Peterson have also acquired beneficial ownership of the equivalent of 719, 4,318, 25,678 and 4,784 shares, respectively, of the Company's common stock through their voluntary deferral of all or a portion of their directors' fees. Pursuant to the Company's Directors' Phantom Stock Plan, described under "Outside Directors' Plans," Messrs. Baker, Pederson, Peterson and Trowbridge have also acquired beneficial ownership of the equivalent of 10,000, 40,000, 40,000 and 40,000 shares, respectively, of the Company's common stock. (5) The Company does not know of any person who, as of February 1, 1996, directly owned more than five percent of the Company's outstanding common stock. The Company, however, received a copy of Schedule 13G for the year ended December 31, 1995 from the person set forth in the following table. Pursuant to the aggregation and attribution rules relating to the beneficial ownership of securities promulgated under the Securities Exchange Act of 1934, as amended, the person identified below is deemed to be the beneficial owner of such shares shown because such person is the parent company of various investment management companies which exercise discretionary 69 investment management over accounts holding such shares. No managed account alone owns five percent or more of the Company's common stock. The information presented in the following table is taken from the above- referenced Schedule 13G:
AMOUNT AND NATURE OF PERCENT TITLE OF NAME AND ADDRESS BENEFICIAL OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS ------------ --------------------------------- ---------- ------- Common Stock The Capital Group Companies, Inc. 25,091,160 5.2% 333 South Hope Street Los Angeles, California 90071
Subsequent to February 1, 1996, the Company received a copy of Schedule 13D filed by a group including George Soros, Quantum Industrial Partners LDC, QIH Management Investor, L.P., QIH Management, Inc., Stanley F. Druckenmiller, and Duquesne Capital Management, L.L.C. The information presented in the following table is taken from the above-referenced Schedule 13D:
AMOUNT AND NATURE OF PERCENT TITLE OF NAME AND ADDRESS BENEFICIAL OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS -------- ----------------------------------- ---------- ------- Common Stock George Soros 25,225,600 5.09% QIH Management Investor, L.P. QIH Management, Inc. Stanley F. Druckenmiller 888 Seventh Avenue, 33rd Floor New York, New York 10106 Quantum Industrial Partners LDC Kaya Flamboyan 9 Curacao, Netherlands Antilles Duquesne Capital Management, L.L.C. 2579 Washington Road, Suite 322 Pittsburgh, PA 15241-2591
OWNERSHIP OF WTI COMMON STOCK The following table sets forth certain information as of February 1, 1996 as to the beneficial ownership of WTI common stock by the directors, the Chairman of the Board and Chief Executive Officer and the four other most highly compensated executive officers of the Company as of December 31, 1995, and by all directors and persons serving as executive officers of the Company as a group:
NUMBER OF SHARES OF WTI COMMON PERCENT OF STOCK BENEFICIALLY WTI COMMON NAME OWNED(1)(2)(3) STOCK(2)(3) ---- ------------------ ----------- Directors (Other than Executive Officers) H. Jesse Arnelle........................... 0 * Howard H. Baker, Jr........................ 0 * Pastora San Juan Cafferty.................. 0 * Jerry E. Dempsey........................... 34,336 * James B. Edwards........................... 0 * Donald F. Flynn............................ 45,245 * Peter H. Huizenga.......................... 0 * Peer Pedersen.............................. 0 * James R. Peterson.......................... 0 * Alexander B. Trowbridge.................... 0 *
70
NUMBER OF SHARES OF WTI COMMON PERCENT OF STOCK BENEFICIALLY WTI COMMON NAME OWNED(1)(2)(3) STOCK(2)(3) ---- ------------------ ----------- Executive Officers Dean L. Buntrock........................... 135,000(4) * Herbert A. Getz............................ 240,000 * James E. Koenig............................ 121,500 * D. P. Payne................................ 0 * Phillip B. Rooney.......................... 374,769 * All directors and executive officers as a group including persons named above (19 persons).................................... 951,050 *
- ---------- * Less than 1 percent. (1) Directors and executive officers included in the group have sole voting power and sole investment power over WTI shares listed, except (i) WTI shares covered by options exercisable within 60 days of February 1, 1996; (ii) 10,000 WTI shares deemed to be beneficially owned by each of Messrs. Buntrock, Flynn and Rooney as a result of restricted units granted pursuant to WTI's Restricted Unit Plan for Non-Employee Directors and (iii) Messrs. Dempsey and Koenig, and all executive officers and directors as a group, who have shared voting and investment power over 33,336, 1,500 and 35,036 WTI shares, respectively. Such shares shown for Mr. Dempsey are held in a trust over which he shares voting and investment power, and such shares shown for Mr. Koenig are held jointly with his spouse. Such persons disclaim any beneficial ownership of the WTI shares subject to such restricted units. (2) Excludes an aggregate of 104,621,810 WTI shares beneficially owned by the Company that may be deemed beneficially owned by Messrs. Buntrock and Rooney because each such person may be deemed to be an affiliate of the Company. Each such person disclaims any beneficial ownership of such WTI shares. (3) The numbers and percentages of WTI shares shown in the table above are based on the assumption that currently outstanding stock options covering WTI shares which were exercisable within 60 days of February 1, 1996 had been exercised as follows: Mr. Buntrock--33,336; Mr. Getz--240,000; Mr. Koenig--120,000 and all executive officers and directors as a group (including such individuals)--393,336. Such persons and the members of such group disclaim any beneficial ownership of the shares subject to such options. (4) Pursuant to WTI's Deferred Director's Fee Plan, Mr. Buntrock has acquired beneficial ownership of the equivalent of an additional 8,228 WTI shares through his voluntary deferral of previously accrued director's fees. OWNERSHIP OF WM INTERNATIONAL ORDINARY SHARES The following table sets forth certain information as of February 1, 1996 as to the beneficial ownership of WM International ordinary shares (including ordinary shares represented by American Depositary Shares) by the directors, the Chairman of the Board and Chief Executive Officer and the four other most highly compensated executive officers of the Company as of December 31, 1995, and by all directors, and persons serving as executive officers of the Company as a group:
NUMBER OF SHARES PERCENT OF OF WM INTERNATIONAL ORDINARY WM INTERNATIONAL SHARES BENEFICIALLY OWNED ORDINARY SHARES NAME (1)(2)(3) (2)(3) ---- ---------------------------- ---------------- Directors (Other than Execu- tive Officers) H. Jesse Arnelle.......... 0 * Howard H. Baker, Jr....... 1,000 * Pastora San Juan Cafferty. 0 * Jerry E. Dempsey.......... 10,000 * James B. Edwards.......... 4,000 * Donald F. Flynn........... 300,000 * Peter H. Huizenga......... 550,000 * Peer Pedersen............. 10,000 * James R. Peterson......... 0 * Alexander B. Trowbridge... 600 *
71
NUMBER OF SHARES PERCENT OF OF WM INTERNATIONAL ORDINARY WM INTERNATIONAL SHARES BENEFICIALLY OWNED ORDINARY SHARES NAME (1)(2)(3) (2)(3) ---- ---------------------------- ---------------- Executive Officers Dean L. Buntrock........... 223,200 * Herbert A. Getz............ 40,000 * James E. Koenig............ 104,000 * D. P. Payne................ 400 * Phillip B. Rooney.......... 220,000 * All directors and executive officers as a group includ- ing persons named above (19 persons)................ 1,826,200 *
- ---------- * Less than 1 percent. (1) Directors and executive officers included in the group have sole voting power and sole investment power over WM International shares listed, except (i) WM International shares covered by options exercisable within 60 days of February 1, 1996; and (ii) Messrs. Koenig, Payne and Trowbridge, and all executive officers and directors as a group (including such individuals), who have shared voting and investment power over 4,000, 400, 600 and 6,000 WM International shares, respectively. Such WM International shares shown for Messrs. Koenig, Payne and Trowbridge are held jointly with their respective spouses. Ownership of shares shown for Messrs. Buntrock, Dempsey and Huizenga includes WM International shares not held directly by them but held by or for the benefit of their spouses as to which they have neither investment power nor voting power. WM International shares were held by or for the benefit of such spouses of the following persons at February 1, 1996 in the amounts indicated: Mr. Buntrock--3,000; Mr Dempsey--10,000; and Mr. Huizenga--30,000. Each of the above named persons disclaim any beneficial ownership of such shares. (2) Excludes an aggregate of 300,000,000 WM International shares beneficially owned by the Company that may be deemed beneficially owned by Messrs. Buntrock and Rooney because each such person may be deemed to be an affiliate of the Company. Excludes an aggregate of 45,000,000 WM International shares beneficially owned by WTI that may be deemed beneficially owned by Mr. Koenig because he may be deemed to be an affiliate of WTI. Each such person disclaims any beneficial ownership of such WM International shares. (3) The numbers and percentages of WM International shares shown in the table above are based on the assumption that currently outstanding stock options covering WM International shares which were exercisable within 60 days of February 1, 1996 had been exercised as follows: Messrs. Buntrock, Flynn and Rooney--200,000 each; Mr. Getz--40,000; and Mr. Koenig--100,000; and all executive officers and directors as a group (including such individuals)-- 980,000. Such persons and members of such group disclaim any beneficial ownership of the shares subject to such options. LEGAL PROCEEDINGS The majority of the businesses in which the Company is engaged are intrinsically connected with the protection of the environment and the potential for the unintended or unpermitted discharge of materials into the environment. In the ordinary course of conducting its business activities, the Company becomes involved in judicial and administrative proceedings involving governmental authorities at the federal, state and local level including, in certain instances, proceedings instituted by citizens or local governmental authorities seeking to overturn governmental action where governmental officials or agencies are named as defendants together with the Company or one or more of its subsidiaries, or both. In the majority of the situations where proceedings are commenced by governmental authorities, the matters involved relate to alleged technical violations of licenses or 72 permits pursuant to which the Company operates or is seeking to operate or laws or regulations to which its operations are subject or are the result of different interpretations of the applicable requirements. From time to time the Company pays fines or penalties in environmental proceedings relating primarily to waste treatment, storage or disposal facilities. As of March 31, 1996, a Company subsidiary engaged in providing hazardous waste management services was involved in one such governmental proceeding where it is believed that sanctions involved may exceed $100,000. The Company or certain of its subsidiaries have been identified as potentially responsible parties in a number of governmental investigations and actions relating to waste disposal facilities which may be subject to remedial action under Superfund. The majority of these proceedings are based on allegations that certain subsidiaries of the Company (or their predecessors) transported hazardous substances to the facilities in question, often prior to acquisition of such subsidiaries by the Company. Such proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and cleanup, which costs could be substantial. As of December 31, 1995, the Company or its subsidiaries had been notified that they are potentially responsible parties in connection with 106 locations listed on the Superfund National Priority List ("NPL"). Of the 106 NPL sites at which claims have been made against the Company, 19 are sites which the Company has come to own over time. All of the NPL sites owned by the Company were initially sited by others as land disposal facilities. At each of the 19 owned facilities, the Company is working in conjunction with the government to characterize or to remediate identified site problems. In addition, at these 19 facilities the Company has either agreed with other legally liable parties on an arrangement for sharing the costs of remediation or is pursuing resolution of an allocation formula. The 87 NPL sites at which claims have been made against the Company and which are not owned by the Company are at different procedural stages under Superfund. At some, the Company's liability is well defined as a consequence of a governmental decision as to the appropriate remedy and an agreement among liable parties as to the share each will pay for implementing that remedy. At others, where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, the Company's future costs are substantially uncertain. The Company periodically reviews its role, if any, with respect to each such location, giving consideration to the nature of the Company's alleged connection to the location (e.g., owner, operator, transporter or generator), the extent of the Company's alleged connection to the location (e.g., amount and nature of waste hauled to the location, number of years of site operation by the Company or other relevant factors), 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 at the location, and the nature and estimated cost of the likely remedy. Where the Company concludes that it is probable that a liability has been incurred, a provision is made in the Company's financial statements for the Company's best estimate of the liability based on management's judgment and experience, information available from regulatory agencies and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of a specific site, as well as the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then the Company provides for the minimum amount within the range, in accordance with generally accepted accounting principles. Sites subject to state action under state laws similar to the federal Superfund statute are treated by the Company in the same way as NPL sites. The Company's estimates are subsequently revised, as deemed necessary, as additional information becomes available. While the Company does not anticipate that the amount of any such revisions will have a material adverse effect on the Company's operations or financial condition, the measurement of environmental liabilities is inherently difficult and the possibility remains that 73 technological, regulatory or enforcement developments, the results of environmental studies, or other factors could materially alter this expectation at any time. Such matters could have a material adverse impact on earnings for one or more fiscal quarters or years. From time to time, the Company and certain of its subsidiaries are named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of a Company subsidiary's having owned, operated or transported waste to a disposal facility which is alleged to have contaminated the environment or, in certain cases, conducted environmental remediation activities at sites. Some of such lawsuits may seek to have the Company or its subsidiaries pay the costs of groundwater monitoring and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is proven. While the Company believes it has meritorious defenses to these lawsuits, their ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs' circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other factors. Accordingly, it is possible such matters could have a material adverse impact on the Company's earnings for one or more fiscal quarters or years. A subsidiary of the Company has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). Although a lower court had declared the zoning ordinance's height limitation unconstitutional, the Connecticut Supreme Court reversed that ruling and remanded the case for further proceedings in the Superior Court in the judicial district of Litchfield. On November 8, 1995, the Superior Court ordered the Company's subsidiary to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that removal of such waste is an inappropriate remedy and its subsidiary has appealed the Superior Court order to the Connecticut Supreme Court. The Company is unable to predict the outcome of the appeal or any removal action that may ultimately be required following further appeals or as a result of the permitting process. However, if the lower court order as to removal of the waste is not modified, the subsidiary could incur substantial costs, which could vary significantly depending upon the nature of any plan which is eventually approved by applicable regulatory authorities for removing the waste, the actual volume of waste to be moved and other currently unforeseeable factors and which could have a material adverse effect on the Company's financial condition and results of operations in one or more future periods. The Company and certain of its subsidiaries are also currently involved in other civil litigation and governmental proceedings relating to the conduct of their business. While the outcome of any particular lawsuit or governmental investigation cannot be predicted with certainty, the Company believes that these matters will not have a material adverse effect on its results of operations or financial condition. The Company has brought suit against a substantial number of insurance carriers in an action entitled Waste Management, Inc. et al. v. The Admiral Insurance Company, et al. pending in the Superior court in Hudson County, New Jersey. In this action the Company is seeking a declaratory judgment that environmental liabilities asserted against the Company or its subsidiaries, or that may be asserted in the future, are covered by insurance policies purchased by the Company or its subsidiaries. The Company is also seeking to recover defense costs and other damages incurred as a result of the assertion of environmental liabilities against the Company or its subsidiaries for events occurring over at least the last 25 years at approximately 130 sites and the defendant insurance carriers' denial of coverage of such liabilities. The defendants have denied liability to the Company and have asserted various defenses, including that environmental liabilities of the type for which the 74 Company is seeking relief are not risks covered by the insurance policies in question. The defendants are contesting these claims vigorously. Discovery is currently underway in this proceeding and is expected to continue for several years. No trial date has been set. The Company is unable at this time to predict the outcome of this proceeding. No amounts have been recognized in the Company's financial statements for any future recoveries. DESCRIPTION OF CAPITAL STOCK The following summary of the common stock and preferred stock of the Company is qualified by reference to the Company's Restated Certificate of Incorporation, as amended, a copy of which has been incorporated by reference as an exhibit to the registration statement of which this prospectus is a part. The Company's authorized capital stock consists of 1,500,000,000 shares of common stock, $1 par value per share, and 50,000,000 shares of preferred stock, $1 par value per share. Subject to any prior right of the preferred stock, if and when issued, the holders of shares of common stock of the Company will be entitled to receive such dividends as the Board of Directors of the Company in its discretion may from time to time declare out of funds legally available therefor and, upon liquidation, would be entitled to share ratably in any assets of the Company legally available for distribution to holders of shares of common stock. Each outstanding share of common stock is entitled to one vote on any matter submitted to a vote of stockholders, with no cumulative voting rights. There are no conversion, redemption or sinking fund provisions applicable to the common stock. All of the issued and outstanding shares of the Company are, and the shares of common stock offered by the Company hereby, when issued, will be, fully paid and nonassessable. Neither the preferred stock nor the common stock has any preemptive rights. The shares of preferred stock may be issued in connection with future acquisitions or other proper corporate purposes, although there are no present plans or arrangements for their issuance, other than any issuance which may occur pursuant to the exercise of preferred stock purchase rights described below. The Board of Directors is authorized without further stockholder authorization, to create and issue the preferred stock in series and to establish the voting powers, designations, preferences and relative participating, optional or other special rights and any qualifications, limitations, or restrictions thereof relating to any such series. In January 1987, the Board of Directors designated a series of preferred stock consisting of 2,500,000 shares of Series A Preferred Stock, $1 par value (the "Preferred Stock"), issuable in connection with the dividend of preferred stock purchase rights described below. The Company's Restated Certificate of Incorporation contains provisions which prevent "greenmail" payments by the Company, establish safeguards in connection with certain business transactions, provide that only designated officers and the Board of Directors may call special meetings of stockholders, require stockholders to take action only at a formal meeting and provide for a classified Board of Directors. In addition, the Restated Certificate of Incorporation requires the concurrence of the holders of shares representing at least 80% of the outstanding shares of common stock for the alteration, amendment or repeal of, or the adoption of any provision inconsistent with, any of the preceding provisions. In January 1987, the Company declared a dividend of one right (a "Right") for each outstanding share of common stock, $1 par value, of the Company. Each Right entitles the registered holder to purchase from the Company one four- hundredth of a share of Preferred Stock at a price of $68.75 (the "Exercise Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement (the "Rights Agreement") between the Company and Harris Trust and Savings Bank, as Rights Agent. 75 The Rights are evidenced by and transferred with and only with the common stock until the earlier to occur of (i) ten days following a public announcement that a person or group, including any affiliates or associates of such person or group, acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Company's outstanding voting stock (such person or group being hereinafter known as an "Acquiring Person") or (ii) ten days following the commencement of, or first public announcement of the intent to commence (which intent to commence is not withdrawn within five business days), a tender offer or exchange offer if, upon consummation thereof, the offeror would be the beneficial owner of 30% or more of the Company's outstanding voting stock (the earlier of such dates being called the "Distribution Date"). As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be mailed to holders of record of the common stock as of the close of business on the Distribution Date. The Rights are not exercisable until the Distribution Date and will expire on February 6, 1997, unless earlier redeemed by the Company as described below. The Exercise Price payable per Right, and the number of Rights or the number of shares of Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment in certain events from time to time to prevent dilution. Preferred Stock purchasable upon exercise of the Rights will be nonredeemable. Each share of Preferred Stock will have a minimum preferential quarterly dividend rate of $5 per share, but will be entitled to not less than an aggregate dividend of 400 times the dividend declared on the common stock. In the event of liquidation, the holders of the Preferred Stock will receive a preferential liquidation payment equal to the greater of $100 or 400 times the payment made per share of common stock. Each share of Preferred Stock will have 400 votes, voting together with the common stock. In addition, the Preferred Stock contains class vote provisions paralleling the class vote requirements for the Company's common stock which prevent "greenmail" payments by the Company and establish safeguards in connection with certain business transactions. Finally, in the event of any merger, consolidation or other transaction in which common stock is exchanged, each share of Preferred Stock will be entitled to receive 400 times the amount received per share of common stock. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Stock's dividend, liquidation and voting rights, the value of one four-hundredth interest in a share of Preferred Stock purchasable upon exercise of each Right is intended to approximate the value of one share of common stock. In the event that the Company is acquired in a merger or other business combination transaction, or 50% or more of its assets or earning power are sold in one transaction or a series of transactions, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Exercise Price of the Right, that number of shares of common stock of the acquiring company (or, in the event there is more than one acquiring company, the acquiring company receiving the greatest portion of the assets or earning power transferred) which at the time of such transaction would have a market value of two times the Exercise Price of the Right. In the event that the Company is the surviving corporation in a merger and the common stock is not changed or exchanged, or in the event that an Acquiring Person engages in one of a number of self-dealing transactions specified in the Rights Agreement, proper provision shall be made so that each holder of a Right will thereafter have the right to receive, upon exercise thereof at the then current Exercise Price, that number of shares of Preferred Stock having a market value of two times the Exercise Price of the Right. Upon the occurrence of any of the transactions referred to in this paragraph, any Rights that are or were at any time beneficially owned by an Acquiring Person engaging in any of such transactions or receiving the benefits thereof on or after the time the Acquiring Person became such shall become void. With certain exceptions, no adjustment in the Exercise Price will be required until cumulative adjustments require an adjustment of at least 1% in such Exercise Price. No fractional shares need be issued (other than fractions which are integral multiples of one one-hundredth of a share of Preferred 76 Stock) and, in lieu thereof, an adjustment in cash may be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise. At any time prior to ten days following a public announcement that an Acquiring Person exists, the Company may redeem the Rights in whole, but not in part, at a price of $.0125 per Right (the "Redemption Price"). Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company as a result of the ownership of the Right, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed as an exhibit to the registration statement of which this prospectus is a part. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement. The transfer agent and registrar for the common stock is Harris Trust and Savings Bank, Chicago, Illinois. The Company furnishes its stockholders quarterly reports (including unaudited summary financial information) and annual reports (including audited financial statements). EXPERTS The audited financial statements included in this prospectus and the schedules incorporated by reference elsewhere in the registration statements have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included or incorporated by reference herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. ADDITIONAL INFORMATION The Company has filed a registration statement with the Commission under the 1933 Act with respect to the securities offered hereby. This prospectus does not contain all the information included in the registration statement, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. The registration statement, including the exhibits filed therewith, may be examined at the office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, or copies thereof may be obtained upon request to the Commission on payment of the charge stipulated by the Commission. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and reference is made to the copy of such contract or other document as is filed as an exhibit to the registration statement of which this prospectus forms a part or as incorporated by reference as an exhibit thereto, each such statement being qualified in all respects by such reference. 77 INDEX TO FINANCIAL STATEMENTS
PAGE ---- WMX Technologies, Inc. and Subsidiaries-- Report of independent public accountants................................. F-2 Consolidated statements of income for the three years ended December 31, 1995 and (unaudited) for the three months ended March 31, 1995 and 1996. F-3 Consolidated balance sheets as of December 31, 1994 and 1995 and (unau- dited) March 31, 1996................................................... F-4 Consolidated statements of stockholders' equity for the three years and (unaudited) three months ended March 31, 1996........................... F-6 Consolidated statements of cash flows for the three years ended December 31, 1995 and (unaudited) for the three months ended March 31, 1995 and 1996.................................................................... F-8 Notes to consolidated financial statements............................... F-9
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of WMX Technologies, Inc.: We have audited the accompanying consolidated balance sheets of WMX Technologies, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WMX Technologies, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 5, 1996 F-2 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (000'S OMITTED EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31 MARCH 31 ----------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ----------- ---------- ---------- (UNAUDITED) Revenue................. $8,636,116 $9,554,705 $10,247,617 $2,445,185 $2,417,191 ---------- ---------- ----------- ---------- ---------- Operating Expenses..... $5,907,097 $6,543,687 $ 7,045,070 $1,683,950 $1,679,923 Special Charges........ 550,000 -- 335,193 140,600 -- Goodwill Amortization.. 92,994 108,093 117,482 29,510 31,564 Selling and Administrative Expenses.............. 1,104,024 1,159,500 1,174,636 287,530 286,886 Gains from Stock Trans- actions of Subsidiar- ies................... (15,109) -- -- -- -- Interest Expense....... 293,040 335,175 424,736 106,523 99,315 Interest Income........ (41,198) (34,488) (39,804) (8,886) (6,842) Minority Interest...... 52,749 145,760 94,359 29,314 28,075 Sundry Income, Net..... (95,779) (66,487) (75,688) (16,921) (17,359) ---------- ---------- ----------- ---------- ---------- Income From Continuing Operations Before In- come Taxes............ $ 788,298 $1,363,465 $ 1,171,633 $ 193,565 $ 315,629 Provision For Income Taxes................. 345,867 586,974 517,043 92,273 130,451 ---------- ---------- ----------- ---------- ---------- Income From Continuing Operations............. $ 442,431 $ 776,491 $ 654,590 $ 101,292 $ 185,178 ---------- ---------- ----------- ---------- ---------- Discontinued Operations: Income (loss) from operations, less applicable income taxes and minority interest of $15,765 in 1993, $11,757 in 1994, $15,040 in 1995 and $91 in the three months ended March 31, 1995.................. $ 10,345 $ 7,890 $ 11,958 $ (47) $ -- Provision for loss on disposal, less applicable income tax benefit and minority interest of $34,151... -- -- (62,649) -- -- ---------- ---------- ----------- ---------- ---------- Net Income.............. $ 452,776 $ 784,381 $ 603,899 $ 101,245 $ 185,178 ========== ========== =========== ========== ========== Average Common and Common Equivalent Shares Outstanding..... 485,374 484,144 485,972 484,814 489,913 ========== ========== =========== ========== ========== Earnings per Common and Common Equivalent Share: Continuing Operations.. $.91 $1.60 $1.35 $0.21 $0.38 Discontinued Opera- tions-- Income from opera- tions................ .02 .02 .02 -- -- Provision for loss.... -- -- (.13) -- -- ---------- ---------- ----------- ---------- ---------- Net Income.............. $.93 $1.62 $1.24 $0.21 $0.38 ========== ========== =========== ========== ==========
The accompanying notes are an integral part of these statements. F-3 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
DECEMBER 31 ------------------------ MARCH 31 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) Current Assets Cash and cash equivalents.............. $ 123,348 $ 189,031 $ 106,732 Short-term investments................. 19,704 36,243 24,636 Accounts receivable, less reserve of $64,361 in 1994, $66,840 in 1995 and $67,706 in 1996....................... 1,878,064 1,880,934 1,866,852 Employee receivables................... 9,859 8,787 9,720 Parts and supplies..................... 194,445 210,864 205,164 Costs and estimated earnings in excess of billings on uncompleted contracts.. 347,064 334,786 341,245 Prepaid expenses....................... 379,895 360,404 393,482 ----------- ----------- ----------- Total Current Assets................ $ 2,952,379 $ 3,021,049 $ 2,947,831 ----------- ----------- ----------- Property and Equipment, at cost Land, primarily disposal sites......... $ 4,158,612 $ 4,575,117 $ 4,738,622 Buildings.............................. 1,332,568 1,572,821 1,516,524 Vehicles and equipment................. 7,118,714 7,498,718 7,650,049 Leasehold improvements................. 91,180 87,986 89,958 ----------- ----------- ----------- $12,701,074 $13,734,642 $13,995,153 Less--Accumulated depreciation and am- ortization............................ (3,477,317) (3,968,943) (4,137,686) ----------- ----------- ----------- Total Property and Equipment, Net... $ 9,223,757 $ 9,765,699 $ 9,857,467 ----------- ----------- ----------- Other Assets Intangible assets relating to acquired businesses, net....................... $ 3,718,282 $ 4,205,031 $ 4,430,274 Sundry, including other investments.... 1,345,104 1,572,977 1,590,510 Net assets of discontinued operations.. 183,651 130,552 119,305 ----------- ----------- ----------- Total Other Assets.................. $ 5,247,037 $ 5,908,560 $ 6,140,089 ----------- ----------- ----------- Total Assets...................... $17,423,173 $18,695,308 $18,945,387 =========== =========== ===========
The accompanying notes are an integral part of these balance sheets. F-4 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
DECEMBER 31 ------------------------ MARCH 31 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) Current Liabilities Portion of long-term debt payable within one year....................... $ 890,686 $ 1,094,165 $ 1,315,189 Accounts payable....................... 971,796 1,072,372 846,712 Accrued expenses....................... 940,507 991,539 1,001,742 Unearned revenue....................... 265,024 263,029 258,151 ----------- ----------- ----------- Total Current Liabilities........... $ 3,068,013 $ 3,421,105 $ 3,421,794 ----------- ----------- ----------- Deferred Items Income taxes........................... $ 669,566 $ 956,525 $ 1,005,765 Environmental liabilities.............. 704,015 622,952 583,072 Other.................................. 607,694 684,452 677,801 ----------- ----------- ----------- Total Deferred Items................ $ 1,981,275 $ 2,263,929 $ 2,266,638 ----------- ----------- ----------- Long-Term Debt, less portion payable within one year........................ $ 6,044,411 $ 6,420,610 $ 6,385,833 ----------- ----------- ----------- Minority Interest in Subsidiaries....... $ 1,536,165 $ 1,385,366 $ 1,346,160 ----------- ----------- ----------- Commitments and Contingencies........... $ $ $ ----------- ----------- ----------- Put Options............................. $ 252,328 $ 261,959 $ 261,959 ----------- ----------- ----------- Stockholders' Equity Preferred stock, $1 par value (issuable in series); 50,000,000 shares authorized; none outstanding during the periods........................... $ -- $ -- $ -- Common stock, $1 par value; 1,500,000,000 shares authorized; 496,386,758 shares issued in 1994, 498,817,093 in 1995 and 506,057,872 in 1996.................................. 496,387 498,817 506,058 Additional paid-in capital............. 357,150 422,801 646,866 Cumulative translation adjustment...... (150,832) (102,943) (112,482) Retained earnings...................... 4,181,606 4,486,877 4,596,164 ----------- ----------- ----------- $ 4,884,311 $ 5,305,552 $ 5,636,606 Less--1988 Employee Stock Ownership Plan................................... 19,729 13,062 11,395 Employee Stock Benefit Trust (12,386,629 shares in 1994, 11,769,788 shares in 1995 and 11,408,128 shares in 1996, at mar- ket)................................ 323,601 350,151 362,208 ----------- ----------- ----------- Total Stockholders' Equity.......... $ 4,540,981 $ 4,942,339 $ 5,263,003 ----------- ----------- ----------- Total Liabilities and Stockhold- ers' Equity...................... $17,423,173 $18,695,308 $18,945,387 =========== =========== ===========
The accompanying notes are an integral part of these balance sheets. F-5 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS AND THREE MONTHS ENDED MARCH 31, 1996 ($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
1988 EMPLOYEE EMPLOYEE ADDITIONAL CUMULATIVE STOCK STOCK COMMON PAID-IN TRANSLATION RETAINED TREASURY OWNERSHIP BENEFIT STOCK CAPITAL ADJUSTMENT EARNINGS STOCK PLAN TRUST -------- ---------- ----------- ---------- --------- --------- -------- Balance, January 1, 1993.................... $496,203 $ 708,296 $(166,566) $3,521,190 $ 204,490 $34,988 $ -- -------- --------- --------- ---------- --------- ------- -------- Net income for the year.................. $ -- $ -- $ -- $ 452,776 $ -- $ -- $ -- Cash dividends ($.58 per share)............ -- -- -- (280,858) -- -- -- Stock repurchase (8,443,400 shares).... -- -- -- -- 278,363 -- -- Stock issued upon exercise of stock options............... 14 (8,749) -- -- (18,285) -- -- Treasury stock received in connection with exercise of stock options............... -- -- -- -- 357 -- -- Tax benefit of non- qualified stock options exercised..... -- 2,825 -- -- -- -- -- Contribution to 1988 ESOP (362,036 shares). -- -- -- -- -- (7,329) -- Treasury stock received as settlement for claims................ -- -- -- -- 3,429 -- -- Stock issued upon conversion of LYONs... -- (4,553) -- -- (7,882) -- -- Stock issued for acquisitions.......... -- (4,655) -- -- (35,375) -- -- Transfer of equity interests among controlled subsidiaries.......... -- (24,694) -- -- -- -- -- Cumulative translation adjustment of foreign currency statements... -- -- (79,021) -- -- -- -- -------- --------- --------- ---------- --------- ------- -------- Balance, December 31, 1993.................... $496,217 $ 668,470 $(245,587) $3,693,108 $ 425,097 $27,659 $ -- -------- --------- --------- ---------- --------- ------- -------- Net income for the year.................. $ -- $ -- $ -- $ 784,381 $ -- $ -- $ -- Cash dividends ($.60 per share)............ -- -- -- (290,266) -- -- -- Dividends paid to Employee Stock Benefit Trust................. -- 5,617 -- (5,617) -- -- -- Stock issued upon exercise of stock options............... -- (5,948) -- -- (8,250) -- (5,928) Treasury stock received in connection with exercise of stock options............... -- -- -- -- 260 -- -- Tax benefit of non- qualified stock options exercised..... -- 1,527 -- -- -- -- -- Contribution to 1988 ESOP (375,312 shares). -- -- -- -- -- (7,930) -- Treasury stock received as settlement for claims................ -- -- -- -- 2,741 -- -- Stock issued upon conversion of LYONs... 96 1,442 -- -- (56) -- -- Common stock issued for acquisitions.......... 74 1,471 -- -- -- -- -- Temporary equity related to put options............... -- (252,328) -- -- -- -- -- Proceeds from sale of put options........... -- 29,965 -- -- -- -- -- Sale of shares to Employee Stock Benefit Trust (12,601,609 shares)............... -- (106,327) -- -- (419,792) -- 313,465 Adjustment of Employee Stock Benefit Trust to market value.......... -- 16,064 -- -- -- -- 16,064 Transfer of equity interests among controlled subsidiaries.......... -- (2,803) -- -- -- -- -- Cumulative translation adjustment of foreign currency statements... -- -- 94,755 -- -- -- -- -------- --------- --------- ---------- --------- ------- -------- Balance, December 31, 1994.................... $496,387 $ 357,150 $(150,832) $4,181,606 $ -- $19,729 $323,601 -------- --------- --------- ---------- --------- ------- -------- Net income for the year.................. $ -- $ -- $ -- $ 603,899 $ -- $ -- $ -- Cash dividends ($.60 per share)............ -- -- -- (291,421) -- -- -- Dividends paid to Employee Stock Benefit Trust................. -- 7,207 -- (7,207) -- -- -- Stock issued upon exercise of stock options............... 44 (4,405) -- -- (1,763) -- (17,393) Treasury stock received in connection with exercise of stock options............... -- -- -- -- 663 -- -- Tax benefit of non- qualified stock options exercised..... -- 2,049 -- -- -- -- -- Contribution to 1988 ESOP (322,508 shares). -- -- -- -- -- (6,667) -- Treasury stock received as settlement for claims................ -- -- -- -- 1,100 -- -- Common stock issued upon conversion of LYONs................. 150 2,448 -- -- -- -- -- Common stock issued for acquisitions.......... 2,236 13,908 -- -- -- -- -- Temporary equity related to put options............... -- (9,631) -- -- -- -- -- Proceeds from sale of put options........... -- 21,622 -- -- -- -- -- Settlement of put options............... -- (12,019) -- -- -- -- -- Adjustment of Employee Stock Benefit Trust to market value.......... -- 43,943 -- -- -- -- 43,943 Transfer of equity interests among controlled subsidiaries.......... -- 529 -- -- -- -- -- Cumulative translation adjustment of foreign currency statements... -- -- 47,889 -- -- -- -- -------- --------- --------- ---------- --------- ------- -------- Balance, December 31, 1995.................... $498,817 $ 422,801 $(102,943) $4,486,877 $ -- $13,062 $350,151 ======== ========= ========= ========== ========= ======= ========
F-6 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS AND THREE MONTHS ENDED MARCH 31, 1996 (CONTINUED) ($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
1988 EMPLOYEE EMPLOYEE ADDITIONAL CUMULATIVE STOCK STOCK COMMON PAID-IN TRANSLATION RETAINED TREASURY OWNERSHIP BENEFIT STOCK CAPITAL ADJUSTMENT EARNINGS STOCK PLAN TRUST -------- ---------- ----------- ---------- -------- --------- -------- Balance, January 1, 1996................... $498,817 $422,801 $(102,943) $4,486,877 $ -- $13,062 $350,151 Net income for the period................ -- -- -- 185,178 -- -- -- Cash dividends ($.15 per share)............ -- -- -- (74,173) -- -- -- Dividends paid to Employee Stock Benefit Trust................. -- 1,718 -- (1,718) -- -- -- Stock issued upon exercise of stock options............... 48 (2,354) -- -- (1,814) -- (10,969) Treasury stock received in connection with exercise of stock options............... -- -- -- -- 714 -- -- Tax benefit of non- qualified stock options exercised..... -- 1,289 -- -- -- -- -- Contribution to 1988 ESOP.................. -- -- -- -- -- (1,667) -- Treasury stock received as settlement for claims................ -- -- -- -- 1,100 -- -- Common stock issued upon conversion of LYONs................. 100 1,768 -- -- -- -- -- Common stock issued for acquisitions.......... 7,093 198,618 -- -- -- -- -- Adjustment of Employee Stock Benefit Trust to market value.......... -- 23,026 -- -- -- -- 23,026 Cumulative translation adjustment of foreign currency statements... -- -- (9,539) -- -- -- -- -------- -------- --------- ---------- ------- ------- -------- Balance, March 31, 1996 (Unaudited)............ $506,058 $646,866 $(112,482) $4,596,164 $ -- $11,395 $362,208 ======== ======== ========= ========== ======= ======= ========
The accompanying notes are an integral part of these statements. F-7 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH ($000'S OMITTED)
FOR THE THREE FOR THE YEARS ENDED MONTHS ENDED MARCH DECEMBER 31 31 ------------------------------------- -------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income for the period................ $ 452,776 $ 784,381 $ 603,899 $ 101,245 $ 185,178 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......... 796,691 880,466 885,384 213,245 222,926 Provision for deferred income taxes.......... 154,782 298,564 250,828 32,809 65,252 Minority interest in subsidiaries.......... 57,986 149,703 138,162 29,302 28,075 Interest on Liquid Yield Option Notes (LYONs) and WMX Subordinated Notes.... 37,162 33,551 23,021 9,067 2,864 Gain on sale of property and equipment, and of investments by subsidiary............ (14,061) (14,876) (9,190) (1,899) (2,431) Contribution to 1988 Employee Stock Ownership Plan........ 7,329 7,930 6,667 1,667 1,667 Gains from stock transactions of subsidiaries.......... (15,109) -- -- -- -- Special charges, net of tax and minority interest.............. 285,300 -- 202,492 91,400 -- Provision for loss on disposal of discontinued operations, net of tax and minority interest. -- -- 62,649 -- -- Changes in assets and liabilities, excluding effects of acquired companies: Receivables, net....... (112,489) (133,506) 45,232 79,778 31,434 Other current assets... 41,038 (109,174) 48,214 (79,887) (31,351) Sundry other assets.... (29,445) (42,195) (72,282) (2,782) 17,976 Accounts payable....... 33,328 155,254 39,669 (161,140) (234,807) Accrued expenses and unearned revenue...... (298,214) 43,121 (227,700) 50,681 8,745 Deferred items......... (24,015) (259,020) 61,557 (24,041) (59,301) Minority interest in subsidiaries.......... (2,021) 14,038 (3,854) 2,665 2,057 ----------- ----------- ----------- --------- --------- Net Cash Provided by Operating Activities $ 1,371,038 $ 1,808,237 $ 2,054,748 $ 342,110 $ 238,284 ----------- ----------- ----------- --------- --------- Cash flows from investing activities: Short-term investments. $ 35,911 $ 2,755 $ (4,196) $ 6,480 $ 11,607 Capital expenditures... (1,719,178) (1,455,628) (1,386,932) (261,680) (280,551) Proceeds from sale of property and equipment, and of investments by subsidiary............ 134,169 276,822 141,774 66,562 25,546 Cost of acquisitions, net of cash acquired.. (581,745) (197,201) (224,304) (42,070) (35,695) Other investments...... (185,256) (74,446) (44,193) (16,090) (26,496) Acquisition of minority interests............. (129,524) (8,200) (68,370) (2,251) -- ----------- ----------- ----------- --------- --------- Net Cash Used for Investing Activities $(2,445,623) $(1,455,898) $(1,586,221) $(249,049) $(305,589) ----------- ----------- ----------- --------- --------- Cash flows from financing activities: Cash dividends......... $ (280,858) $ (290,266) $ (291,421) $ (72,658) $ (74,173) Proceeds from issuance of indebtedness....... 3,407,759 1,710,586 1,803,383 718,956 342,979 Repayments of indebtedness.......... (1,682,950) (1,752,552) (1,860,451) (554,722) (213,895) Proceeds from exercise of stock options, net. 9,193 7,970 14,132 4,265 9,763 Contributions from minority interests.... 28,072 22,169 24,394 10,761 2,143 Stock repurchases by Company and subsidiaries.......... (315,302) (49,665) (102,484) (23,266) (81,811) Preferred stock redemption by subsidiary............ (5,000) -- -- -- -- Proceeds from sale of put options........... -- 29,965 21,622 6,766 -- Settlement of put options............... -- -- (12,019) (12,019) -- ----------- ----------- ----------- --------- --------- Net Cash Provided by (Used for) Financing Activities $ 1,160,914 $ (321,793) $ (402,844) $ 78,083 $ (14,994) ----------- ----------- ----------- --------- --------- Net increase (decrease) in cash and cash equivalents............ $ 86,329 $ 30,546 $ 65,683 $ 171,144 $ (82,299) Cash and cash equivalents at beginning of period.... 6,473 92,802 123,348 123,348 189,031 ----------- ----------- ----------- --------- --------- Cash and cash equivalents at end of period................. $ 92,802 $ 123,348 $ 189,031 $ 294,492 $ 106,732 =========== =========== =========== ========= ========= The Company considers cash and cash equivalents to include currency on hand, demand deposits with banks and short-term investments with maturities of less than three months when purchased. Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized... $ 263,716 $ 307,257 $ 401,715 $ 98,093 $ 96,451 Income taxes, net of refunds received...... $ 331,803 $ 241,657 $ 283,165 $ 36,087 $ 31,538 Supplemental schedule of noncash investing and financing activities: LYONs converted into common stock of the Company............... $ 3,329 $ 1,594 $ 2,598 $ 29 $ 1,868 Liabilities assumed in acquisitions of businesses............ $ 673,129 $ 244,560 $ 245,918 $ 61,451 $ 89,820 Fair market value of Company and subsidiary stock issued for acquired businesses... $ 64,500 $ 4,773 $ 66,172 $ 5,150 $ 205,711 WMX Subordinated Notes issued for acquisition of CWM minority interest.............. $ -- $ -- $ 436,830 $ 436,830 $ --
The accompanying notes are an integral part of these statements. F-8 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000'S OMITTED IN ALL TABLES EXCEPT PER SHARE AMOUNTS) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 1. BUSINESS AND FINANCIAL STATEMENTS WMX Technologies, Inc. and its subsidiaries ("WMX" or the "Company") provide environmental, engineering and consulting, and industrial services to governmental, residential, commercial, and industrial customers on a worldwide basis in four core lines of business: waste services, clean energy, clean water, and environmental and infrastructure engineering and consulting. Through 1995, process engineering, construction, specialty contracting and similar services were also provided through businesses the Company intends to exit (see Note 15). These businesses have been classified as discontinued operations and are segregated from continuing operations in the accompanying financial statements and notes thereto. The accompanying financial statements are prepared on a consolidated basis and include the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. See Note 13 for details of certain financial information by subsidiary, line of business and geographic area. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income and expenses and disclosures of contingencies. Future events could alter such estimates in the near term. NOTE 2. SUMMARY OF ACCOUNTING POLICIES Unaudited Periods All information in the financial statements and the accompanying notes related to the three months ended March 31, 1995 and 1996 is unaudited. In the opinion of management, the unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. Revenue Recognition The Company recognizes revenue from long-term contracts on the percentage- of-completion basis with losses recognized in full when identified. Changes in project performance and conditions, estimated profitability and final contract settlements may result in future revisions to costs and income. Other revenues are recognized when the services are performed. Foreign Currency Certain foreign subsidiaries' assets and liabilities are translated at the rates of exchange at the balance sheet date while income statement accounts are translated at the average exchange rates in effect during the period. The resulting translation adjustments are charged or credited directly to stockholders' equity. Foreign exchange losses (net of related income taxes and minority interest) of $529,000, $3,610,000 and $1,226,000 are included in the Consolidated Statements of Income for 1993, 1994 and 1995, respectively. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-9 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Short-Term Investments The Company's short-term investments primarily consist of securities having an investment grade of not less than A and a term to maturity generally of less than one year, and because the investments have always been held to maturity, are carried at cost. Such investments include tax-exempt securities, certificates of deposit and Eurodollar time deposits. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of FAS 115 did not have a significant effect on earnings for 1994, since the Company's accounting prior to adoption was substantially in compliance with the new standard. Environmental Liabilities The Company provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. The Company has also established procedures to evaluate potential remedial liabilities at closed sites which it owns or operated, or to which it transported waste, including 106 sites listed on the Superfund National Priority List ("NPL"). 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. Such estimates are subsequently revised as deemed necessary as additional information becomes available. See Note 7 for additional information. Contracts in Process Information with respect to contracts in process at December 31, 1994 and 1995 is as follows:
1994 1995 ----------- ----------- Costs and estimated earnings on uncompleted con- tracts........................................... $ 2,618,921 $ 2,510,898 Less: Billings on uncompleted contracts........... (2,365,334) (2,253,867) ----------- ----------- Total contracts in process...................... $ 253,587 $ 257,031 =========== =========== Contracts in process are included in the Consolidated Balance Sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts......................... $ 347,064 $ 334,786 Billings in excess of costs and estimated earnings on uncompleted contracts (included in unearned revenue)......................................... (93,477) (77,755) ----------- ----------- Total contracts in process...................... $ 253,587 $ 257,031 =========== ===========
All contracts in process are expected to be billed and collected within five years. Accounts receivable includes retainage which has been billed, but which is not due pursuant to contract provisions until completion. Such retainage at December 31, 1995, is $23,095,000, including $6,724,000 that is expected to be collected after one year. At December 31, 1994, retainage was $33,743,000. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-10 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Property and Equipment Property and equipment (including major repairs and improvements) are capitalized and stated at cost. Items of an ordinary maintenance or repair nature are charged directly to operations. Disposal sites are carried at cost and to the extent this exceeds end use realizable value, such excess is amortized over the estimated life of the disposal site. Disposal site improvement costs are capitalized and charged to operations over the shorter of the estimated usable life of the site or the improvement. Preparation costs for individual secure land disposal cells are recorded as prepaid expenses and amortized as the airspace is filled. Significant costs capitalized for such cells include excavation and grading costs, costs relating to the design and construction of liner systems, and gas collection and leachate collection systems. Unamortized cell construction cost at December 31, 1994 and 1995 was $154,100,000 and $187,689,000, respectively. Depreciation and Amortization The cost, less estimated salvage value, of property and equipment is depreciated over the estimated useful lives on the straight-line method as follows: buildings--10 to 40 years; vehicles and equipment--3 to 20 years; leasehold improvements--over the life of the applicable lease. Intangible Assets Intangible assets relating to acquired businesses consist primarily of the cost of purchased businesses in excess of market value of net assets acquired ("goodwill"). Such goodwill is being amortized on a straight-line basis over a period of not more than forty years. The accumulated amortization of intangible assets amounted to $458,167,000 and $572,587,000 as of December 31, 1994 and 1995, respectively. On an ongoing basis, the Company measures realizability of goodwill by the ability of the acquired business to generate current and expected future operating income in excess of annual amortization. If such realizability is in doubt, an adjustment is made to reduce the carrying value of the goodwill. Such adjustments have historically not been material to the Company's financial statements. Capitalized Interest Interest has been capitalized on significant landfills, trash-to-energy plants and other projects under construction in accordance with FAS No. 34. Amounts capitalized and netted against Interest Expense in the Consolidated Statements of Income were $100,591,000 in 1993, $104,512,000 in 1994 and $81,471,000 in 1995. Gain Recognition on Sale of Subsidiaries' Stock It is the Company's policy to record in income gains from the sale or other issuance of previously unissued stock by its subsidiaries. No such gains were recorded in 1994 or 1995. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-11 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Accounting Principles Effective January 1, 1996, the Company adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The change did not have a material impact on the Company's financial statements. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation," which the Company also must adopt in 1996. FAS 123 provides an optional new method of accounting for employee stock options and expands required disclosure about stock options. If the new method of accounting is not adopted, the Company will be required to disclose pro forma net income and earnings per share as if it were. The Company is studying FAS 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the Company's financial statements. Restatement Certain amounts in previously issued financial statements have been restated to conform to 1996 classifications. NOTE 3. INCOME TAXES The following tables set forth income from continuing operations before income taxes, showing domestic and international sources, and the income tax provision, showing the components by governmental taxing authority, for the years 1993 through 1995: Income From Continuing Operations Before Income Taxes
1993 1994 1995 -------- ---------- ---------- Domestic.................................. $616,805 $1,187,938 $1,167,120 International............................. 171,493 175,527 4,513 -------- ---------- ---------- $788,298 $1,363,465 $1,171,633 ======== ========== ========== Income Tax Provision (Benefit) Current tax expense U.S. Federal............................ $133,581 $ 215,569 $ 224,924 State and local......................... 29,893 49,549 48,957 Foreign................................. 36,410 30,611 42,810 -------- ---------- ---------- Total current............................. $199,884 $ 295,729 $ 316,691 -------- ---------- ---------- Deferred tax expense U.S. Federal............................ $ 87,792 $ 215,644 $ 181,873 State and local......................... 29,464 33,689 36,101 Foreign................................. 32,327 44,507 (16,538) -------- ---------- ---------- Total deferred............................ $149,583 $ 293,840 $ 201,436 -------- ---------- ---------- U.S. Federal benefit from amortization of deferred investment credit........................ $ (3,600) $ (2,595) $ (1,084) -------- ---------- ---------- Total provision........................... $345,867 $ 586,974 $ 517,043 ======== ========== ==========
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-12 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Federal statutory tax rate in 1993, 1994 and 1995 is reconciled to the effective tax rate as follows: Federal statutory rate.................................... 35.0% 35.0% 35.0% State and local taxes, net of Federal benefit............. 4.9 4.0 4.7 Amortization of deferred investment credit................ (0.4) (0.2) (0.1) Amortization of intangible assets relating to acquired businesses............................................... 4.2 2.2 2.8 Federal tax credits....................................... (1.4) (1.0) (1.2) Non-taxable gains on issuance of stock by subsidiaries.... (0.7) -- -- Minority interest......................................... 2.8 4.2 3.3 Adjustment of deferred income taxes due to Omnibus Budget Reconciliation Act....................................... 1.8 -- -- Other, net................................................ (2.3) (1.1) (0.4) ---- ---- ---- Effective tax rate........................................ 43.9% 43.1% 44.1% ==== ==== ====
The Company uses the deferral method of accounting for investment credit, whereby the credit is recorded in income over the composite life of the related equipment. Deferred income taxes result from the recognition, in different periods, of revenue and expense for tax and financial statement purposes. The primary components that comprise the 1994 and 1995 deferred tax (assets) liabilities are as follows:
1994 1995 ---------- ---------- Deferred tax assets Reserves not deductible until paid............... $ (491,061) $ (526,202) Deferred revenue................................. (25,708) (24,472) Net operating losses and tax credit carryforwards................................... (159,269) (266,898) Other............................................ (69,812) (73,834) ---------- ---------- Subtotal....................................... $ (745,850) $ (891,406) ---------- ---------- Deferred tax liabilities Depreciation and amortization.................... $1,103,194 $1,368,258 Other............................................ 233,600 381,068 ---------- ---------- Subtotal....................................... $1,336,794 $1,749,326 ---------- ---------- Valuation allowance ($29,890,000 at December 31, 1993)............................................... 78,622 98,605 ---------- ---------- Net deferred tax liabilities..................... $ 669,566 $ 956,525 ========== ==========
The Company's subsidiaries have approximately $37 million of alternative minimum tax credit carryforwards that may be used indefinitely. Various subsidiaries have U.S. Federal and foreign operating loss carryforwards of approximately $530 million and state operating loss carryforwards of approximately $513 million. Foreign operating losses of $253 million may be carried forward indefinitely; the remaining loss carryforwards have expiration dates through the year 2010. Valuation allowances have been established for uncertainties in realizing the tax benefits of loss carryforwards - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-13 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- and for the basis difference in certain assets. While the Company expects to realize the deferred tax assets in excess of the valuation allowances, changes in estimates of future taxable income or in tax laws could alter this expectation. The increase in the valuation allowance since 1993 is primarily attributable to uncertainty in realizing the tax benefit of certain foreign operating loss carryforwards. The Company has concluded that development and expansion of its foreign business requires that the undistributed earnings of its foreign subsidiaries be reinvested indefinitely outside the United States. If the reinvested earnings were to be remitted, the U.S. income taxes due under current tax law would not be material. The following table sets forth the provision for income taxes for continuing operations for the three months ended March 31, 1995 and 1996:
1995 1996 ------- -------- Currently payable...................................... $60,021 $ 65,393 Deferred............................................... 32,523 65,252 Amortization of deferred investment credit............. (271) (194) ------- -------- $92,273 $130,451 ======= ========
NOTE 4. BUSINESS COMBINATIONS During 1993, the Company and its principal subsidiaries acquired 189 businesses for $581,745,000 in cash (net of cash acquired) and notes, $133,941,000 of debt assumed, 1,046,801 shares of the Company's common stock and 1,635,471 shares of common stock of Wheelabrator Technologies Inc. ("WTI"). These acquisitions were accounted for as purchases. During 1994, 119 businesses were acquired for $197,201,000 in cash (net of cash acquired) and notes, $17,305,000 of debt assumed, 73,809 shares of the Company's common stock and 156,124 shares of common stock of WTI. These acquisitions were accounted for as purchases. One hundred thirty-six businesses were acquired in 1995 for $224,304,000 in cash (net of cash acquired) and notes, $77,689,000 of debt assumed, and 2,236,354 shares of the Company's common stock. Three of the aforementioned 1995 acquisitions, which otherwise met pooling of interests criteria, were not significant in the aggregate and, consequently, prior period financial statements were not restated. The remaining acquisitions were accounted for as purchases. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-14 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following summarizes the pro forma effect on continuing operations of businesses acquired and accounted for as purchases (including those which otherwise met pooling of interests criteria but were not significant in the aggregate) in 1993, 1994 and 1995 as if they had been acquired as of January 1 of the preceding year (unaudited):
1993 1994 1995 ---------- ----------- ----------- Revenue as reported................... $8,636,116 $ 9,554,705 $10,247,617 Revenue of purchased businesses for period prior to acquisition as stated above................................ 555,218 477,040 161,868 ---------- ----------- ----------- Pro forma revenue..................... $9,191,334 $10,031,745 $10,409,485 ========== =========== =========== Net income as reported................ $ 442,431 $ 776,491 $ 654,590 Net income of purchased businesses for period prior to acquisition as stated above................................ 9,753 32,408 7,237 Adjustment for interest and goodwill amortization......................... (18,532) (29,066) (7,649) ---------- ----------- ----------- Pro forma net income.................. $ 433,652 $ 779,833 $ 654,178 ========== =========== =========== Earnings per share as reported........ $ .91 $ 1.60 $ 1.35 Effect of purchased businesses prior to acquisition as stated above....... (.02) .01 -- ---------- ----------- ----------- Pro forma earnings per share.......... $ .89 $ 1.61 $ 1.35 ========== =========== ===========
In January 1995, the Company acquired all of the approximately 21.4% of the outstanding shares of Chemical Waste Management, Inc. ("CWM") that it did not already own. The transaction provided for the CWM public shareholders to receive a convertible subordinated WMX note for every 81.1 CWM shares held. See Note 5 for additional information. In July 1995, the Company acquired all of the approximately 3.1 million shares of Rust International Inc. ("Rust") held by the public, for $16.35 per share in cash. During the three months ended March 31, 1996, the Company and its principal subsidiaries acquired 45 businesses for $35,695,000 in cash (net of cash acquired) and notes, $31,379,000 of debt assumed, and 7,093,075 shares of the Company's common stock. These acquisitions were accounted for as purchases. The pro forma effect of the acquisitions made during 1995 and 1996 is not material. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-15 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 5. DEBT The details relating to debt (including capitalized leases, which are not material) as of December 31, 1994 and 1995, are as follows:
1994 1995 ---------- ---------- Commercial Paper, weighted average interest 5.8% in 1994 and 5.7% in 1995................................ $ 946,702 $1,119,356 Tailored Rate ESOP Notes, weighted average interest 4.81% in 1994 and 4.74% in 1995...................... 50,000 20,000 Debentures, interest 8 3/4%, due 2018................. 249,085 249,085 Notes, interest 4 5/8% to 8 1/4%, due 1996-2011....... 2,684,170 3,184,170 Step-Up Notes, interest 6.22% through April 29, 1997 and 8% thereafter, due 2004.......................... 150,000 150,000 Solid waste disposal revenue bonds, interest 6% to 7.75%, due 1996- 2013................................ 252,385 251,085 Installment loans and notes payable, interest 5.34% to 10.6%, due 1996-2020................................. 1,298,436 1,233,871 Project Debt, interest 4% to 10.64%, due 1996-2010.... 764,859 735,646 Other long-term borrowings............................ 34,320 32,210 Liquid Yield Option Notes, zero coupon-subordinated, interest 9%, due 2001................................ 10,721 8,945 Liquid Yield Option Notes, zero coupon-subordinated, interest 6%, due 2012 ("Exchangeable LYONs")......... 361,438 53,996 Liquid Yield Option Notes, zero coupon-subordinated, interest 6%, due 2010 ("CWM LYONs").................. 132,981 36,840 WMX Subordinated Notes, interest 5.75%, due 2005...... -- 439,571 ---------- ---------- Total debt............................................ $6,935,097 $7,514,775 Less--current portion................................. 890,686 1,094,165 ---------- ---------- Long-term portion..................................... $6,044,411 $6,420,610 ========== ==========
The long-term debt as of December 31, 1995, is due as follows: Second year................................................... $ 761,091 Third year.................................................... 2,158,232 Fourth year................................................... 261,103 Fifth year.................................................... 1,132,816 Sixth year and thereafter..................................... 2,107,368 ---------- $6,420,610 ==========
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-16 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Certain of the Company's borrowings are redeemable at the option of the holders prior to maturity. Such amounts and certain other borrowings which would otherwise be classified as current liabilities have been classified as long-term debt because the Company intends to refinance such borrowings on a long-term basis with $1,503,000,000 of committed long-term borrowing facilities which it has available. The committed facilities provide for unsecured long-term loans at interest rates of prime or LIBOR plus 30 basis points and commitment fees of 6 to 8 basis points per annum. There are no compensating balance requirements or any informal arrangements in connection with loans which would be made under these facilities. In January 1995, the Company acquired the outstanding CWM shares it did not already own. The transaction provided for the CWM public shareholders to receive a convertible subordinated WMX note due 2005, with a principal amount at maturity of $1,000, for every 81.1 CWM shares held, with cash paid in lieu of issuance of fractional notes. The notes are subordinated to all existing and future senior indebtedness of WMX. Each note bears cash interest from January 24, 1995 at the rate of two percent per annum of the $1,000 principal amount at maturity, payable semi-annually. The difference between the principal amount at maturity of $1,000 and the $717.80 stated issue price of each note represents the stated discount which, together with the cash interest payable on the notes, will accrue at a rate of 5.75 percent per annum (determined on a semi-annual bond equivalent basis) for purposes of determining the prices at which WMX may purchase or redeem notes, as described below. At the option of the holder, each note will be purchased for cash by WMX on March 15, 1998, and March 15, 2000, at prices of $789.95 and $843.03, respectively, which represent the stated issue price plus accrued stated discount to those dates. Accrued unpaid interest to those dates will also be paid. The notes will be redeemable by WMX on and after March 15, 2000, for cash, at the stated issue price plus accrued stated discount and accrued but unpaid interest through the date of redemption. In addition, each note is convertible at any time prior to maturity, unless previously purchased or redeemed by WMX, into 26.078 shares of WMX common stock, subject to adjustment upon the occurrence of certain events. Upon any such conversion, WMX will have the option of paying cash equal to the market value of the WMX shares which would otherwise be issuable. As of December 31, 1995, there were 549,810 such notes outstanding with a maturity value amounting to $549,810,000. As of December 31, 1994, CWM LYONs and the Exchangeable LYONs (together with the CWM LYONs, the "LYONs") were convertible into or exchangeable for CWM shares. On January 24, 1995, the LYONs became convertible into the number of notes discussed in the preceding paragraph to which the holders would have been entitled had they converted or exchanged the LYONs immediately prior to the merger approval. In May 1994, the Company issued, at par, $150,000,000 of ten-year Step-Up Notes due April 30, 2004. The holders may elect to have the Step-Up Notes or any portion thereof repaid on April 30, 1997, at 100% of their principal amount together with accrued interest. The interest rate on the Step-Up Notes is 6.22% through April 29, 1997, and 8% thereafter. In November 1994, the Company issued $200,000,000 of 8 1/4% Notes due November 15, 1999, at a price of 99.925%. Neither of these issues is redeemable at the option of the Company prior to maturity. In January 1995, the Company issued $250,000,000 of 8 1/8% Notes due February 1, 1998, at a price of 99.671%. In March 1995, the Company issued $200,000,000 of 7 1/8% Notes due March 22, 1997, at a - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-17 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- price of 99.98%. In May 1995, the Company issued $200,000,000 of 6.65% Notes due May 15, 2005, at par. The holder of each 6.65% Note may elect to have such Note, or any portion thereof which is a multiple of $1,000, repaid on May 15, 2000 at 100% of its principal amount, together with accrued interest. The Company also issued in May 1995, $100,000,000 of 7% Notes due May 15, 2005, at a price of 99.293%. In June 1995, the Company issued $100,000,000 of 5.84% Notes due July 3, 1996, at par. In October 1995, the Company issued $250,000,000 of 6 1/4% Notes due October 15, 2000, at a price of 99.85%. None of these issues is redeemable at the option of the Company prior to maturity. In April 1996, the Company issued $150,000,000 of 6.25% Notes due April 1, 1999, at a price of 99.972%. The Notes are not redeemable prior to maturity. Also in April 1996, the Illinois Development Finance Authority issued and sold $69,795,000 of 4.625% Environmental Refunding Bonds (WMX Technologies, Inc.) Series 1996, maturing February 1, 1998, at a price of 100.291% plus accrued interest and loaned the proceeds to the Company. These Bonds were issued for the purpose of refunding all of the outstanding Illinois Development Finance Authority 7.75% Solid Waste Disposal Revenue Bonds (Waste Management, Inc. Project) Series 1988. NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS From time to time, the Company uses derivatives to manage interest rate, currency and commodity risk. The portfolio of such instruments (which are held for purposes other than trading) at December 31, 1995, is set forth in the paragraphs which follow. Where deemed advantageous, management will use derivatives in the future. Interest Rate Agreements Certain of the Company's subsidiaries have entered into interest rate swap agreements to reduce the impact of changes in interest rates on underlying borrowings. The agreements are contracts to exchange fixed and floating interest rate payments periodically over the term without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage. While the subsidiaries are exposed to market risk to the extent that receipts and payments under interest rate agreements are affected by market interest rates, such agreements are entered into as a hedge against interest rate exposure on existing debt. Accordingly, differences paid or received under the agreements are recognized as part of interest expense over the life of the agreements. The impact of swap agreements on consolidated interest expense and on the effective interest rate on consolidated debt was immaterial. As of December 31, 1995, interest rate agreements in notional amounts and with terms as set forth in the following table were outstanding:
NOTIONAL CURRENCY AMOUNT PAY RECEIVE DURATION OF AGREEMENT -------- -------- ----- -------- --------------------- Sterling....................... 20,000 Fixed Floating Feb. 1995 - Feb. 1999 Hong Kong dollar............... 250,000 Fixed Floating Feb. 1995 - Feb. 1997
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-18 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Currency Agreements From time to time, the Company and certain of its subsidiaries use foreign currency derivatives to mitigate the impact of translation on foreign earnings and income from foreign investees. Typically these have taken the form of purchased put options or offsetting put and call options with different strike prices. The Company receives or pays, based on the notional amount of the option, the difference between the average exchange rate of the hedged currency against the base currency and the average (strike price) contained in the option. Complex instruments involving multipliers or leverage are not used. While the Company may be required to make a payment in connection with these agreements, it will recognize an offsetting increase in the translation of foreign earnings or income from foreign investees. Although the purpose for using such derivatives is to mitigate currency risk, they do not qualify for hedge accounting under generally accepted accounting principles, and accordingly must be adjusted to market value at the end of each accounting period. Gains and losses on currency derivatives to date have not been material. As of December 31, 1995, the Company was party to the following average rate currency option (settles at expiration):
CURRENCY ---------------------- NOTIONAL AMOUNT HEDGED AGAINST --------------- ------------- -------- Collar, structured as offsetting put and call with different strike prices, covering the period January 1 to December 31, 1996............. 100,000 Swedish Krona Sterling
Significant foreign currency contracts outstanding during 1993, 1994 and 1995 were as follows:
CURRENCY AVERAGE --------------------------------- AMOUNT HEDGED AGAINST ---------- ------------------- ------------- 1993............................ 150,000 Sterling Dollar 9,300 Deutschemark Dollar 6,000 Finland Markka Sterling 1994............................ 85,000 Deutschemark Sterling 132,000 French Franc Sterling 184,000 Swedish Krona Sterling 20,000,000 Italian Lire Sterling 10,000,000 Italian Lire Deutschemark 23,000 Deutschemark Dollar 141,000 Sterling Dollar 1995............................ 46,600 Deutschemark Sterling 82,000 French Franc Sterling 13,500 Netherlands Guilder Sterling 180,000 Swedish Krona Sterling 1,500 Dollar Sterling 15,267,000 Italian Lire Sterling 11,820 Deutschemark Dollar 669 Sterling Swedish Krona 35,800 Sterling Dollar
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-19 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Commodity Agreements The Company utilizes collars, calls and swaps to mitigate the risk of price fluctuations on the fuel used by its vehicles. Quantities hedged equate to committed fuel purchases or anticipated usage, and accordingly, gains and losses are deferred and recognized as fuel is purchased. The following table summarizes the Company's positions in commodity derivatives as of December 31, 1995:
TYPE COMMODITY QUANTITY EXPIRATION ---- --------- ----------- ---------- Swaps....................................... Crude oil 3,000 bbls. 1996 Collars..................................... Crude oil 300 bbls. 1996 Swaps....................................... Crude oil 3,000 bbls. 1997 Collars..................................... Crude oil 350 bbls. 1997 Swaps....................................... Crude oil 2,000 bbls. 1998 Collars..................................... Crude oil 200 bbls. 1998 Collars..................................... Crude oil 100 bbls. 1999
The Company is exposed to credit loss in the event of non-performance by counterparties on interest rate, currency and commodity derivatives, but in all cases such counterparties are highly rated financial institutions and the Company does not anticipate non-performance. Maximum credit exposure is represented by the fair value of contracts with a positive fair value; at December 31, 1995, such amounts were not material. NOTE 7. ENVIRONMENTAL COSTS AND LIABILITIES The majority of the businesses in which the Company is engaged are intrinsically connected with the protection of the environment. As such, a significant portion of the Company's operating costs and capital expenditures could be characterized as costs of environmental protection. While the Company is faced, in the normal course of business, with the need to expend funds for environmental protection and remediation, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its services are priced accordingly. The Company provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. Such costs for U.S. landfills are estimated based on the technical requirements of the Subtitle C and D Regulations of the U.S. Environmental Protection Agency or the applicable state requirements, whichever are stricter, and include such items as final cap and cover on the site, methane gas and leachate management, and groundwater monitoring. Substantially the same standards are applied to estimate costs for foreign sites, even though current regulations in some foreign jurisdictions are less strict. The Company has also established procedures to evaluate potential remedial liabilities at closed sites which it owns or operated, or to which it transported waste, including 106 sites on the NPL as of December 31, 1995 and March 31, 1996. 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 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-20 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- to the nature (e.g., owner, operator, transporter, or generator), and the extent (e.g., amount and nature of waste hauled to the location, number of years of site operation by the Company, or other relevant factors) of the Company's alleged connection with the site, the accuracy and strength of evidence connecting the Company to the location, the number, connection and financial ability of other named and unnamed potentially responsible parties ("PRPs"), and the nature and estimated cost of the likely remedy. Cost estimates are based on management's judgment and experience in remediating such sites for the Company as well as for unrelated parties, information available from regulatory agencies as to costs of remediation, and the number, financial resources and relative degree of responsibility of other PRPs who are jointly and severably liable for remediation of a specific site, as well as the typical allocation of costs among PRPs. These estimates are sometimes a range of possible outcomes. In such cases, the Company provides for the amount within the range which constitutes its best estimate. If no amount within the range appears to be a better estimate than any other amount, then the Company provides for the minimum amount within the range in accordance with FAS No. 5. The Company believes that it is "reasonably possible," as that term is defined in FAS No. 5 ("more than remote but less than likely"), that its potential liability could be at the high end of such ranges, which would be approximately $150 million higher in the aggregate than the estimate that has been recorded in the financial statements as of December 31, 1995. Estimates of the extent of the Company's degree of responsibility for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions and are inherently difficult, and the ultimate outcome may differ from current estimates. However, the Company believes that its extensive experience in the environmental services business, as well as its involvement with a large number of sites, provides a reasonable basis for estimating its aggregate liability. As additional information becomes available, estimates are adjusted as necessary. While the Company does not anticipate that any such adjustment would be material to its financial statements, it is reasonably possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could necessitate the recording of additional liabilities which could be material. 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 inflated at 3% until expected time of payment and then discounted to present value at 7%. Had the Company not discounted any portion of its liability, the amount recorded would have been increased by approximately $171 million at December 31, 1995. The Company's active landfill sites have estimated remaining lives ranging from one to over 100 years based upon current site plans and annual volumes of waste. During this remaining site life, the Company will provide for an additional $1.12 billion of closure and post-closure costs, including accretion for the discount recognized to date. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-21 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- As of December 31, the Company's liabilities for closure, post-closure monitoring and environmental remediation costs were as follows:
1994 1995 ---------- ---------- Current portion, included in Accrued Expenses......... $ 108,750 $ 138,603 Non-current portion................................... 704,015 622,952 ---------- ---------- Total recorded...................................... $ 812,765 $ 761,555 Amount to be provided over remaining life of active sites, including discount of $169 million in 1994 and $171 million in 1995................................. 1,149,617 1,118,739 ---------- ---------- Expected aggregate undiscounted environmental liabili- ties................................................. $1,962,382 $1,880,294 ========== ==========
Anticipated payments of environmental liabilities at December 31, 1995, are as follows: 1996........................................................... $ 138,603 1997........................................................... 97,621 1998........................................................... 49,416 1999........................................................... 40,586 2000........................................................... 32,115 Thereafter..................................................... 1,521,953 ---------- $1,880,294 ==========
The change in the expected aggregate undiscounted amount results primarily from changes in available airspace. The Company and certain of its subsidiaries are named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of a Company subsidiary's having owned, operated or transported waste to a disposal facility which is alleged to have contaminated the environment. While the Company believes it has meritorious defenses to these lawsuits, their ultimate resolution is often substantially uncertain due to a number of factors, and it is possible such matters could have a material adverse impact on the Company's earnings for one or more quarters or years. The Company has filed suit against numerous insurance carriers seeking reimbursement for past and future remedial, defense and tort claim costs at a number of sites. The carriers involved have denied coverage and are defending these claims. No amounts have been recognized in the financial statements for any future insurance recoveries. NOTE 8. STOCK OPTIONS The Company has three stock option plans currently in effect under which future grants may be issued: the 1992 Stock Option Plan (the "1992 Plan"), the 1992 Stock Option Plan for Non-Employee Directors (the "Directors' Plan") and the 1996 Replacement Stock Option Plan established in February 1996 (the "Replacement Plan"). Options granted under the 1992 Plan are generally exercisable in equal cumulative installments over a three- to five-year period beginning one year after the date of grant. Options granted under - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-22 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- the Directors' Plan become exercisable in five equal annual installments beginning six months after the date of grant. Options granted under the Replacement Plan are exercisable at the time or times determined by the committee administering the plan at the date of grant. Under the 1992 Plan, non-qualified stock options may be granted at a price equal to 100% of the market value on the date of grant, for a term of not less than five years nor more than ten years. Twelve million five hundred thousand shares of the Company's common stock were initially reserved for issuance under this plan. Pursuant to the Directors' Plan, 150,000 shares of the Company's common stock were initially reserved. Options for 15,000 shares are to be granted, at the time of election to the Board, to each person who is not an officer or full-time employee of the Company or any of its subsidiaries. Under the Replacement Plan, non-qualified options may be granted to persons holding options to acquire stock of a Corporation being acquired by the Company at a price and for such term (not to exceed ten years) determined by the committee administering the plan at the date of grant. Seven hundred thousand shares of the Company's common stock were initially reserved for issuance under this plan. As part of the acquisitions of the CWM and Rust shares not previously owned by the Company, as discussed in Note 4, outstanding CWM stock options were converted into options to acquire approximately 2,873,000 Company shares at prices of $21.97 to $63.33 per share and outstanding Rust stock options were converted into options to acquire approximately 1,976,000 Company shares at prices of $21.39 to $40.10 per share. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-23 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The status of the plans, including predecessor plans and replacement plans (together "Prior Plans") under which options remain outstanding, during the three years ended December 31, 1995, was as follows:
SHARES OPTION PRICE ------ --------------- January 1, 1993-- Outstanding........................................... 9,783 $ 3.46 - $41.80 Available for future grant............................ 14,822 - ------ 1993-- Granted................................................. 2,957 $30.90 - $38.45 Exercised............................................... 551 $ 3.46 - $35.44 Cancelled-- Prior Plans........................................... 179 $18.84 - $41.80 Current plans......................................... 328 $30.69 - $41.80 ------ December 31, 1993-- Outstanding........................................... 11,682 $ 4.33 - $41.80 Available for future grant............................ 12,193 - ------ 1994-- Granted................................................. 3,729 $24.33 - $29.03 Exercised............................................... 462 $ 4.33 - $25.72 Cancelled-- Prior Plans........................................... 312 $14.72 - $41.80 Current plans......................................... 826 $ 8.57 - $41.80 Additional shares available for future grant............ 6,000 - ------ December 31, 1994-- Outstanding........................................... 13,811 $ 7.20 - $41.80 Available for future grant............................ 15,290 - ------ 1995-- Granted................................................. 3,117 $23.21 - $28.90 Exercised............................................... 721 $ 7.20 - $30.69 Cancelled-- Prior Plans........................................... 1,111 $21.39 - $63.33 Current plans......................................... 316 $26.48 - $41.80 Converted CWM and Rust stock options.................... 4,849 $21.39 - $63.33 Shares no longer available for future grant............. 2,914 - ------ December 31, 1995-- Outstanding........................................... 19,629 $ 8.57 - $63.33 Available for future grant............................ 4,726 - ======
Options were exercisable with respect to 9,859,656 shares at December 31, 1995. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-24 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 9. CAPITAL STOCK The Board of Directors has the authority to create and issue up to 50,000,000 shares of $1 par preferred stock at such time or times, in such series, with such designations, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions thereof as it may determine. No shares of the preferred stock have been issued. Pursuant to a plan adopted by the Company in January 1987, each share of the Company's common stock carries the right (referred to herein as a "Right") to purchase one four-hundredth (subject to adjustment) of a share of Series A Preferred Stock, $1.00 par value ("Preferred Stock"), at a price of $68.75 (subject to adjustment). The Rights are tradeable only with the Company's common stock until they become exercisable. The Rights become exercisable ten days after the earlier of a public announcement that a person has acquired 20% or more of the Company's outstanding voting stock or a person's commencement or announcement of a tender or exchange offer that would result in his owning 30% or more of the Company's outstanding voting stock. The Rights are subject to redemption by the Company at a price of $.0125 per Right, subject to certain limitations, and will expire on February 6, 1997. The Preferred Stock carries certain preferential dividend and liquidation rights and certain voting and other rights. If the Company or its assets are acquired in certain merger or other transactions after a person acquires Company voting stock or commences or announces an offer as provided above, each holder of a Right may purchase at the exercise price of the Right, shares of common stock of the acquiring company having a market value of two times the exercise price of the Right. If the Company is the survivor in certain merger transactions or in the event of certain other "self-dealing" transactions, each holder of a Right may purchase at the exercise price of the Right, shares of Preferred Stock having a market value of twice the exercise price of the Right. Rights held by an acquiring person become void upon the occurrence of such events. On December 8, 1995, the Board of Directors of the Company authorized the repurchase by the Company of up to 25 million shares of its common stock from time to time in the open market or in privately negotiated transactions over a 24-month period. On the same date, the Board of Directors of WTI authorized WTI to repurchase up to 20 million shares of its common stock over a 24-month period. Both authorizations replaced existing common stock repurchase programs. WTI has repurchased 3.8 million shares, including 3 million shares during the first quarter of 1996. Through the first quarter of 1996, WMX had not repurchased any shares under this program. NOTE 10. EARNINGS PER SHARE Earnings per share are computed on the basis of the weighted average number of common and common equivalent shares outstanding during each period. Common stock equivalents relate primarily to the impact of options outstanding under the Company's stock option plans. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-25 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following table reconciles the number of common shares shown as outstanding in the Consolidated Balance Sheets with the number of common shares used in computing earnings per share:
1994 1995 ------- ------- Common shares issued, net of Employee Stock Benefit Trust shares per Consolidated Balance Sheets......... 484,000 487,047 Effect of shares issuable under stock options after applying the "treasury stock" method................. 396 627 Effect of using weighted average common shares outstanding during the year.......................... (252) (1,702) ------- ------- Common shares used in computing earnings per share.... 484,144 485,972 ======= =======
NOTE 11. COMMITMENTS AND CONTINGENCIES The Company leases several of its operating and office facilities for various terms. Rents charged to costs and expenses in the Consolidated Statements of Income amounted to $178,039,000 in 1993, $197,969,000 in 1994 and $186,248,000 in 1995. These amounts include rents under long-term leases, short-term cancellable leases and rents charged as a percentage of revenue, but are exclusive of financing leases capitalized for accounting purposes. The long-term rental obligations as of December 31, 1995, are due as follows: First year.................................................... $ 170,311 Second year................................................... 152,711 Third year.................................................... 140,162 Fourth year................................................... 132,892 Fifth year.................................................... 126,872 Sixth through tenth years..................................... 545,675 Eleventh year and thereafter.................................. 329,046 ---------- $1,597,669 ==========
During 1994 and 1995, the Company sold put options on 31.6 million shares of its common stock. The put options give the holders the right at maturity to require the Company to repurchase shares of its common stock at specified prices. Proceeds from the sale of put options were credited to additional paid-in capital. The amount the Company would be obligated to pay to repurchase shares of its common stock if all outstanding put options were exercised has been reclassified to a temporary equity account. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares, in lieu of repurchasing the stock. Options on 17.9 million shares expired unexercised in 1994 and 1995, as the price of the Company's stock was in excess of the strike price at maturity. Options on 4.7 million shares were exercised in February 1995, and the Company elected to settle them for cash at a total cost of $12,019,000. The remaining 9.0 million options (which were also outstanding at March 31, 1996) expire at various dates - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-26 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- in 1996, at strike prices ranging from $27.34 to $31.45 per share. 4.3 million of these options subsequently expired unexercised in the second quarter as the price of the Company's stock was in excess of the strike price at maturity. The Company has sold and expects to continue to sell additional put options during 1996. The Company's insurance program includes coverage for pollution liability resulting from "sudden and accidental" releases of contaminants and pollutants. Management believes that the coverage terms, available limits of liability, and costs currently offered by the insurance market do not represent sufficient value to warrant the purchase of "non-sudden and accidental" pollution liability insurance coverage. As such, the Company has chosen not to purchase risk transfer "non-sudden and accidental" pollution liability insurance coverage. To satisfy existing government requirements, the Company has secured non-risk transfer pollution liability insurance coverage in amounts believed to be in compliance with Federal and State law requirements for "non-sudden and accidental" pollution. The Company must reimburse the insurer for losses incurred and covered by this insurance policy. In the event the Company continues not to purchase risk transfer "non- sudden and accidental" pollution liability insurance coverage, the Company's net income could be adversely affected in the future if "non-sudden and accidental" pollution losses should occur. The Company has issued or is a party to approximately 3,120 bank letters of credit, performance bonds and other guarantees. Such financial instruments (averaging approximately $639,000 each), including those provided for affiliates and not otherwise recorded, are given in the ordinary course of business. Because virtually no claims have been made against these financial instruments in the past, management does not expect these instruments will have a material adverse effect on the consolidated financial position or results of operations of the Company. Since 1994, WTI has been involved in litigation involving permits for the construction and operation of the Lisbon, Connecticut, trash-to-energy plant. These matters were resolved during 1995 and the plant began commercial operations in January 1996. During the first quarter of 1995, Waste Management International plc ("WM International") received an assessment of approximately 417 million Krona (approximately $62 million) from the Swedish Tax Authority, relating to a transaction completed in 1990. WM International believes that all appropriate tax returns and disclosures were properly filed at the time of the transaction and intends to vigorously contest the assessment. A subsidiary of Waste Management, Inc. ("WMI") has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). Although a lower court declared the zoning ordinance's height limitation unconstitutional, the Connecticut Supreme Court reversed that ruling and remanded the case for further proceedings in the Superior Court. In November 1995, the Superior Court ordered the WMI subsidiary to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that removal of such waste is an inappropriate remedy and has appealed the Superior Court order to the state Supreme Court. The Company is unable to predict the outcome of the appeal or the nature and extent of the removal action that may ultimately - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-27 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- be required following further appeals or as a result of the permitting process. However, if the Superior Court order as to removal of the waste is not modified, the subsidiary could incur substantial costs, which could vary significantly depending upon the nature of any plan which is eventually approved by applicable regulatory authorities for removing the waste, the actual volume of waste to be moved and other currently unforeseeable factors, and which could have a material adverse effect on the Company's financial condition and results of operations in one or more future periods. In the ordinary course of conducting its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust and environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, may have an impact on earnings for a particular quarter or year. The Company does not believe that these proceedings, individually or in the aggregate, are material to its business or financial condition. NOTE 12. BENEFIT PLANS The Company has a defined benefit pension plan for all eligible non-union domestic employees of WMX, CWM and WMI. The benefits are based on the employee's years of service and compensation during the highest five consecutive years out of the last ten years of employment. The Company's funding policy is to contribute annually the minimum required amount determined by its actuaries. Net periodic pension expense for 1993, 1994 and 1995, based on discount rates of 8.50% for all three years, included the following components:
1993 1994 1995 -------- -------- -------- Service cost--benefits earned during the year..................................... $ 10,785 $ 11,075 $ 11,752 Interest cost on projected benefit obliga- tion..................................... 9,507 11,532 13,228 Expected return on plan assets............ (11,055) (12,335) (13,237) Net amortization and deferral............. (1,451) (1,310) 33 -------- -------- -------- Net periodic pension expense.............. $ 7,786 $ 8,962 $ 11,776 ======== ======== ========
Assumptions, used to determine the plan's funded status as of December 31, are as follows:
1994 1995 ---- ---- Discount rate................................................. 8.5% 7.75% Rate of increase in compensation levels....................... 4.0% 4.0% Expected long-term rate of return on assets................... 9.0% 9.0%
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-28 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following table sets forth the plan's funded status and the amount recognized in the Company's Consolidated Balance Sheets at December 31, 1994 and 1995 for its pension plan:
1994 1995 --------- --------- Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $120,881 and $152,031 at December 31, 1994 and 1995, respectively........................ $(136,713) $(167,287) ========= ========= Projected benefit obligation........................ $(156,609) $(191,059) Plan assets at fair value, primarily common stocks, bonds and real estate................................ 136,740 167,068 --------- --------- Plan assets less than projected benefit obligation.... $ (19,869) $ (23,991) Unrecognized net loss................................. 39,304 29,801 Unrecognized overfunding at date of adoption (January 1, 1985) of FAS No. 87, net of amortization, being recognized over 15 years........................................ (8,727) (6,422) --------- --------- Pension cost included in prepaid (accrued) expenses... $ 10,708 $ (612) ========= =========
The Company also has a non-qualified defined benefit plan for officers of WMX, CWM and WMI who have served in such capacities for at least 10 years at the time of retirement. The benefits are based on the officer's years of service and compensation during the highest three consecutive years out of the last ten years of employment. The benefits are reduced by such officer's benefits under the pension plan. This plan is not funded. Expense for 1993, 1994 and 1995 for this plan was $2,551,000, $3,418,000 and $4,202,000, respectively. WM International participates in both defined benefit and defined contribution retirement plans for its employees in various countries. The projected benefit obligation and the plan assets of the WM International defined benefit plans are not material. Other subsidiaries participate in various multi-employer pension plans covering certain employees not covered under the Company's pension plan, pursuant to agreements with collective bargaining units who are members of such plans. These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer-contributors. Contributions of $15,242,000, $16,194,000 and $18,369,000 for subsidiaries' defined contribution plans were made and charged to income in 1993, 1994 and 1995, respectively. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-29 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following table analyzes the obligation for postretirement benefits other than pensions (primarily health care costs), which is included in other deferred items on the Consolidated Balance Sheets, as of December 31, 1994 and 1995:
1994 1995 ------- ------- Accumulated Postretirement Benefit Obligations: Retirees.................................................. $57,216 $52,255 Other fully eligible participants......................... 10,960 9,682 Other active participants................................. 9,478 10,695 ------- ------- $77,654 $72,632 Unrecognized: Prior service cost........................................ 627 566 Gain...................................................... 9,501 7,911 ------- ------- $87,782 $81,109 ======= =======
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care claims was assumed for 1996; the rate was assumed to decrease by 0.5% per year to 6.0% in 2001 and remain at that level thereafter. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $4,341,000, and the aggregate of the service and interest cost components of net postretirement health care cost for 1995 by approximately $403,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.5% in 1994 and 7.75% in 1995. The expense for postretirement health care benefits was $7,300,000 in 1993, $4,668,000 in 1994 and $5,359,000 in 1995. The service and interest components of the expense were $3,000,000 and $4,300,000, respectively, in 1993, $1,049,000 and $3,619,000, respectively, in 1994, and $1,094,000 and $4,265,000, respectively, in 1995. The Company has an Employee Stock Ownership Plan ("1988 ESOP") for all eligible non-union United States and Canadian employees of WMX, CWM and WMI. The benefits are based on the employee's years of service and compensation. The Company contributes each year an amount, if any, determined by the Board of Directors of the Company. Information concerning the 1988 ESOP is as follows:
1993 1994 1995 ------ ------ ------ Expense recorded (contribution)........................ $7,329 $7,930 $6,667 ====== ====== ====== Interest expense on 1988 ESOP debt..................... $1,510 $1,965 $1,147 ====== ====== ====== Dividends on unallocated 1988 ESOP shares used by the 1988 ESOP............................................. $ 964 $ 780 $ 555 ====== ====== ======
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-30 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Company has a Profit Sharing and Savings Plan ("PSSP") available to certain employees of WMX, CWM and WMI. The terms of the PSSP allow for annual contributions by the Company as determined by the Board of Directors as well as a match of employee contributions up to $500 per employee ($750 effective January 1, 1996). Charges to operations for the PSSP were $11,589,000 in 1993, $27,334,000 in 1994 and $24,882,000 in 1995. Rust, WTI and WM International also sponsor non-contributory and contributory defined contribution plans covering both salaried and hourly employees. Employer contributions are generally based upon fixed amounts of eligible compensation and amounted to $18,614,000, $23,431,000 and $23,017,000 during 1993, 1994 and 1995, respectively. Effective January 1, 1994, the Company and its principal subsidiaries adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits." This new statement established accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 did not have a significant effect on earnings, because the Company's accounting prior to adoption was substantially in compliance with the new standard. During 1994, the Company established an Employee Stock Benefit Trust and sold 12.6 million shares of treasury stock to the Trust in return for a 30- year, 7.33% note with interest payable quarterly and principal due at maturity. The Company has agreed to contribute to the Trust each quarter funds sufficient, when added to dividends on the shares held by the Trust, to pay interest on the note as well as principal outstanding at maturity. At the direction of an administrative committee comprised of Company officers, the trustee will use the shares or proceeds from the sale of shares to pay employee benefits, and to the extent of such payments by the Trust, the Company will forgive principal and interest on the note. The shares of common stock issued to the Trust are not considered to be outstanding in the computation of earnings per share until the shares are utilized to fund obligations for which the trust was established. NOTE 13. COMPANY'S OPERATIONS IN DIFFERENT INDUSTRIES AND GEOGRAPHICAL AREAS The analysis of operations by industry segment which follows reflects the Company's traditional management structure of five principal subsidiaries, each of which has operated in a relatively discrete portion of the environmental services industry or geographic area. WMI has provided integrated solid waste services and CWM has provided hazardous waste collection, transportation, treatment and disposal services in North America. WM International has provided these services, as well as trash-to-energy services, outside North America. WTI has been involved in trash-to-energy and independent power projects, water and wastewater treatment (including biosolids management) and air quality control, primarily in North America. Rust has served the environmental and infrastructure engineering and consulting, and on-site industrial and related services markets in the United States and a number of foreign countries. Whereas solid waste, hazardous waste and trash-to-energy operations have been performed by three distinct organizations in North America, these services have been provided internationally by a single management organization. Because of the different business environment for international operations, the Company has managed these as a discrete segment. Following is an analysis of the Company's continuing operations by these historical segments. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-31 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ENGI- TRASH-TO- INTERNA- NEERING, ENERGY, WATER TIONAL INDUSTRIAL TREATMENT, WASTE CORPO- AND AIR QUALITY MANAGE- RATE AND SOLID HAZARD- RELATED AND RELATED MENT ELIMINA- CONSOLI- WASTE OUS WASTE SERVICES SERVICES SERVICES TIONS(1) DATED ---------- ---------- ---------- ------------- ---------- --------- ----------- 1993 Revenue................ $4,702,166 $ 661,860 $1,035,004 $1,142,219 $1,411,211 $(316,344) $ 8,636,116 Operating expenses including goodwill amortization.......... 3,193,183 506,264 808,694 792,719 1,009,145 (309,914) 6,000,091 Special charge......... -- 550,000 -- -- -- -- 550,000 Selling and administrative expenses.............. 547,413 128,058 131,575 107,276 198,969 (9,267) 1,104,024 ---------- ---------- ---------- ---------- ---------- --------- ----------- Income from operations. $ 961,570 $ (522,462) $ 94,735 $ 242,224 $ 203,097 $ 2,837 $ 982,001 ========== ========== ========== ========== ========== ========= =========== Identifiable assets.... $6,912,271 $1,498,631 $1,360,703 $3,081,709 $3,315,621 $(169,169) $15,999,766 ========== ========== ========== ========== ========== ========= =========== Depreciation and amortization expense.. $ 461,963 $ 63,971 $ 43,971 $ 75,323 $ 121,050 $ 22,084 $ 788,362 ========== ========== ========== ========== ========== ========= =========== Capital expenditures(2)....... $1,139,004 $ 157,786 $ 124,754 $ 303,905 $ 403,326 $ 26,009 $ 2,154,784 ========== ========== ========== ========== ========== ========= =========== 1994 Revenue................ $5,117,871 $ 649,581 $1,140,294 $1,324,567 $1,710,862 $(388,470) $ 9,554,705 Operating expenses including goodwill amortization.......... 3,502,445 454,765 915,129 915,237 1,244,597 (380,393) 6,651,780 Selling and administrative expenses.............. 549,608 105,736 153,230 119,380 230,014 1,532 1,159,500 ---------- ---------- ---------- ---------- ---------- --------- ----------- Income from operations. $1,065,818 $ 89,080 $ 71,935 $ 289,950 $ 236,251 $ (9,609) $ 1,743,425 ========== ========== ========== ========== ========== ========= =========== Identifiable assets.... $7,388,766 $1,375,341 $1,472,263 $3,276,611 $4,037,922 $(311,381) $17,239,522 ========== ========== ========== ========== ========== ========= =========== Depreciation and amortization expense.. $ 479,333 $ 59,381 $ 57,542 $ 95,254 $ 154,575 $ 24,514 $ 870,599 ========== ========== ========== ========== ========== ========= =========== Capital expenditures(2)....... $ 950,383 $ 57,983 $ 57,242 $ 115,082 $ 304,999 $ 20,397 $ 1,506,086 ========== ========== ========== ========== ========== ========= =========== 1995 Revenue................ $5,642,857 $ 613,883 $1,027,430 $1,451,675 $1,865,081 $(353,309) $10,247,617 Operating expenses including goodwill amortization.......... 3,806,798 463,984 816,528 1,015,269 1,410,282 (350,309) 7,162,552 Special charges........ -- 140,600 -- -- 194,593 -- 335,193 Selling and administrative expenses.............. 578,290 94,551 135,012 130,976 235,807 -- 1,174,636 ---------- ---------- ---------- ---------- ---------- --------- ----------- Income from operations. $1,257,769 $ (85,252) $ 75,890 $ 305,430 $ 24,399 $ (3,000) $ 1,575,236 ========== ========== ========== ========== ========== ========= =========== Identifiable assets.... $8,506,954 $1,159,467 $1,387,565 $3,220,193 $4,235,589 $ 54,988 $18,564,756 ========== ========== ========== ========== ========== ========= =========== Depreciation and amortization expense.. $ 457,820 $ 48,860 $ 49,796 $ 107,814 $ 181,341 $ 32,041 $ 877,672 ========== ========== ========== ========== ========== ========= =========== Capital expenditures(2)....... $1,101,312 $ 65,080 $ 34,606 $ 45,101 $ 263,352 $ 31,624 $ 1,541,075 ========== ========== ========== ========== ========== ========= ===========
- ---------- (1) Includes corporate office and elimination of intercompany transactions. (2) Includes property and equipment of purchased businesses. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-32 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- As a result of a strategic review begun in 1994, management and operations of the Company have been realigned on the basis of four principal global lines of business--waste services, clean energy, clean water, and environmental and infrastructure engineering and consulting. The following table analyzes continuing operations on a line-of-business basis.
ENVIRONMENTAL AND INFRASTRUCTURE WASTE CLEAN CLEAN ENGINEERING AND CORPORATE AND SERVICES ENERGY WATER CONSULTING ELIMINATIONS (2) CONSOLIDATED ----------- ---------- -------- ----------------- ---------------- ------------ 1993 Revenue................. $ 7,457,371 $ 804,016 $392,194 $298,879 $(316,344) $ 8,636,116 Operating expenses including goodwill amortization........... 5,259,571 532,619 294,525 223,290 (309,914) 6,000,091 Special charge.......... 550,000 -- -- -- -- 550,000 Selling and administrative expenses............... 956,588 46,899 63,937 45,867 (9,267) 1,104,024 ----------- ---------- -------- -------- --------- ----------- Income from operations.. $ 691,212 $ 224,498 $ 33,732 $ 29,722 $ 2,837 $ 982,001 =========== ========== ======== ======== ========= =========== Identifiable assets..... $12,356,320 $2,196,145 $485,349 $297,258 $ 664,694 $15,999,766 =========== ========== ======== ======== ========= =========== Depreciation and amortization expense... $ 693,819 $ 62,777 $ 21,446 $ 10,320 $ -- $ 788,362 =========== ========== ======== ======== ========= =========== Capital expenditures(1). $ 1,802,781 $ 209,091 $112,965 $ 26,718 $ 3,229 $ 2,154,784 =========== ========== ======== ======== ========= =========== 1994 Revenue................. $ 8,140,785 $ 888,037 $489,295 $425,058 $(388,470) $ 9,554,705 Operating expenses including goodwill amortization........... 5,738,990 589,610 369,592 333,981 (380,393) 6,651,780 Selling and administrative expenses............... 971,075 44,032 78,615 64,246 1,532 1,159,500 ----------- ---------- -------- -------- --------- ----------- Income from operations.. $ 1,430,720 $ 254,395 $ 41,088 $ 26,831 $ (9,609) $ 1,743,425 =========== ========== ======== ======== ========= =========== Identifiable assets..... $13,470,901 $2,152,458 $587,480 $402,053 $ 626,630 $17,239,522 =========== ========== ======== ======== ========= =========== Depreciation and amortization expense... $ 751,251 $ 62,460 $ 40,813 $ 16,075 $ -- $ 870,599 =========== ========== ======== ======== ========= =========== Capital expenditures(1). $ 1,374,893 $ 76,392 $ 35,725 $ 14,576 $ 4,500 $ 1,506,086 =========== ========== ======== ======== ========= =========== 1995 Revenue................. $ 8,634,836 $ 893,513 $618,472 $454,105 $(353,309) $10,247,617 Operating expenses including goodwill amortization........... 6,099,597 574,865 477,842 360,557 (350,309) 7,162,552 Special charges......... 325,336 9,857 -- -- -- 335,193 Selling and administrative expenses............... 972,018 44,751 89,922 67,945 -- 1,174,636 ----------- ---------- -------- -------- --------- ----------- Income from operations.. $ 1,237,885 $ 264,040 $ 50,708 $ 25,603 $ (3,000) $ 1,575,236 =========== ========== ======== ======== ========= =========== Identifiable assets..... $14,535,905 $2,025,491 $612,824 $392,486 $ 998,050 $18,564,756 =========== ========== ======== ======== ========= =========== Depreciation and amortization expense... $ 742,148 $ 73,098 $ 44,744 $ 17,682 $ -- $ 877,672 =========== ========== ======== ======== ========= =========== Capital expenditures(1). $ 1,485,958 $ 12,404 $ 33,415 $ 9,288 $ 10 $ 1,541,075 =========== ========== ======== ======== ========= ===========
- ---------- (1) Includes property and equipment of purchased businesses. (2) Includes corporate office and elimination of intersegment transactions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-33 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Foreign operations in 1995 were conducted in 10 countries in Europe, eight countries in the Asia Pacific region, and Canada, Brazil, Mexico, Israel, and Argentina. The information relating to the Company's foreign operations is set forth in the following tables:
UNITED OTHER STATES EUROPE FOREIGN CONSOLIDATED ----------- ---------- -------- ------------ 1993 Revenue............................ $ 6,994,757 $1,241,811 $399,548 $ 8,636,116 =========== ========== ======== =========== Income from operations............. $ 754,502 $ 184,412 $ 43,087 $ 982,001 =========== ========== ======== =========== Identifiable assets................ $12,444,968 $2,955,078 $599,720 $15,999,766 =========== ========== ======== =========== 1994 Revenue............................ $ 7,427,611 $1,504,154 $622,940 $ 9,554,705 =========== ========== ======== =========== Income from operations............. $ 1,476,067 $ 198,251 $ 69,107 $ 1,743,425 =========== ========== ======== =========== Identifiable assets................ $12,628,264 $3,725,393 $885,865 $17,239,522 =========== ========== ======== =========== 1995 Revenue............................ $ 7,837,050 $1,800,768 $609,799 $10,247,617 =========== ========== ======== =========== Income from operations............. $ 1,515,729 $ 17,951 $ 41,556 $ 1,575,236 =========== ========== ======== =========== Identifiable assets................ $13,769,141 $3,920,962 $874,653 $18,564,756 =========== ========== ======== ===========
No single customer accounted for as much as 3% of consolidated revenue in 1993, 1994 and 1995. WM International operates facilities in Hong Kong which are owned by the Hong Kong government. On July 1, 1997, control of the Hong Kong government transfers to mainland China. WM International is unable to predict what impact, if any, this change will have on its operations in Hong Kong. At December 31, 1995, WM International had identifiable assets of $242.5 million related to its Hong Kong operations, which generated 1995 pretax income of approximately $16.5 million. NOTE 14. SPECIAL GAINS AND CHARGES During the third quarter of 1993, the Company recorded a special charge of $550.0 million (before tax and minority interest) as a result of CWM recording a special asset revaluation and restructuring charge. The charge consisted of $381.0 million to write down assets, primarily incinerators, and $169.0 million for cash expenditures. Substantially all of the cash expenditures were made as of December 31, 1994. As a result of this program, overhead, including depreciation and amortization, was reduced in 1994 by approximately $60 million on an annualized basis. Results for 1993 include a non-taxable gain of $15.1 million (before minority interest) relating to the second quarter issuance of shares by Rust in connection with the acquisition of the minority interest in a subsidiary. In 1994, Rust recorded a charge of $9.2 million (before tax and minority interest) for the writeoff of assets and the recognition of one-time costs incurred during the fourth quarter in connection with - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-34 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- the discontinuance of its marine construction and dredging operations, and the closing of offices in a consolidation of its other operations. This charge is included in Operating Expenses ($6.6 million) and Selling and Administrative Expenses ($2.6 million) in the Consolidated Statement of Income. In the first quarter of 1995, in response to the continuing deterioration of the chemical waste services market, CWM took additional steps to realign its organization, and in connection therewith, recorded a special charge of $140.6 million before tax ($91.4 million after tax or $.19 per WMX share). The charge related primarily to a write-off of the investment in facilities and technologies that CWM abandoned because they do not meet customer service or performance objectives, but also includes $22.0 million of future cash payments for rents under non-cancellable leases, guaranteed bank obligations of a joint venture, and employee severance. The majority of the cash expenditures were paid in 1995, although certain of the non-cancellable leases extend through the year 2002. In the fourth quarter of 1995, WM International recorded an exceptional charge of $194.6 million ($152.4 million after tax) primarily related to the actions it is taking to sell or otherwise dispose of non-core businesses and investments, as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. The charge reduced the Company's income by approximately $153.3 million before tax ($111.0 million after tax). The charge included $34.3 million of cash payments for employee severance and rents under non-cancellable leases. Approximately $11.2 million of the cash costs were paid prior to December 31, 1995. The majority of the balance will be paid in early 1996, although certain rent payments on leased facilities will continue into the future. WM International expects that upon completion of these actions, overhead will be reduced by approximately $20 million annually, which management plans to invest in new marketing initiatives and operational productivity enhancements. NOTE 15. DISCONTINUED OPERATIONS In December 1995, the Rust Board of Directors approved a plan to sell or otherwise discontinue Rust's process engineering, construction, specialty contracting and similar lines of business and have Rust focus on its environmental and infrastructure engineering and consulting businesses. The discontinued businesses have been segregated and the accompanying consolidated balance sheets, statements of income and related footnote information have been restated. Rust has engaged investment bankers to assist it in valuing and identifying potential buyers for the major business units to be sold, and expects to complete the sales in 1996. Provision has been made for estimated loss on disposal of the discontinued operations, net of related tax benefits and minority interest, and is included in the 1995 consolidated statement of income. The provision for loss includes management's best estimate of the amounts to be realized on the sale of businesses and assets. The amounts Rust will ultimately realize could differ materially in the near term from these estimates. On June 12, 1996, the Company announced that Rust closed the sale of its industrial process engineering and construction business based in Birmingham, Alabama to Raytheon Engineers & Constructors, Inc., a subsidiary of Raytheon Company. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-35 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Revenues of the discontinued businesses were $499,461,000 in 1993, $542,613,000 in 1994, and $731,731,000 in 1995. Following is a summary of the assets and liabilities as of December 31, 1994 and 1995, which are reflected on the consolidated balance sheets as net assets of discontinued operations:
1994 1995 --------- --------- Current assets......................................... $ 136,466 $ 163,662 Property and equipment and other noncurrent assets..... 162,926 94,251 Current liabilities.................................... (111,718) (122,529) Noncurrent liabilities................................. (4,023) (4,832) --------- --------- Net assets of discontinued operations................ $ 183,651 $ 130,552 ========= =========
Results of operations for the three months ended March 31, 1996, were not material and were included in the reserve for loss on disposition provided previously. Revenue from these businesses was $142.8 million for the three months ended March 31, 1996, and $159.7 million for the comparable period in 1995. NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and commonly accepted valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on information available to management as of December 31, 1994, and December 31, 1995. Such amounts have not been revalued since those dates, and current estimates of fair value may differ significantly from the amounts presented herein.
DECEMBER 31, 1994 DECEMBER 31, 1995 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- Nonderivatives-- Assets-- Cash and cash equivalents.... $ 123,348 $ 123,348 $ 189,031 $ 189,031 Receivables.................. 1,887,923 1,887,923 1,889,721 1,889,721 Short-term investments....... 19,704 19,704 36,243 36,243 Liabilities-- Commercial paper............. 946,702 944,837 1,119,356 1,120,209 Project debt................. 764,859 828,320 735,646 880,619 Liquid Yield Option Notes and WMX Subordinated Notes...... 505,140 500,410 539,352 576,024 Other borrowings............. 4,718,396 4,586,522 5,120,421 5,319,414 Derivatives relating to debt... -- 1,653 -- (74) Other derivatives carried as-- Assets (in Other Assets)..... 307 307 -- -- Liabilities (in Accrued Ex- penses)..................... (1,105) (16,245) (65) (16,647) Letters of credit, performance bonds and guarantees.......... -- -- -- --
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-36 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Cash, Receivables and Short-Term Investments The carrying amounts of these items are a reasonable estimate of their fair value. Liabilities For debt issues that are publicly traded, fair values are based on quoted market prices or dealer quotes. Due to the short-term nature of the ESOP notes, their carrying value approximates fair value. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. Derivatives The fair value of derivatives generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at December 31, thereby taking into account unrealized gains and losses. Dealer quotes are available for most of the Company's derivatives. Deferred gains and losses are shown as assets and liabilities, as offsetting such amounts against the related nonderivative instrument is permitted only pursuant to a right of setoff or master netting agreement. Off-Balance Sheet Financial Instruments In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk, such as bank letters of credit, performance bonds and other guarantees, which are not reflected in the accompanying balance sheets. Such financial instruments are to be valued based on the amount of exposure under the instrument and the likelihood of performance being required. In the Company's experience, virtually no claims have been made against these financial instruments. Management does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-37 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is an analysis of certain items in the Consolidated Statements of Income by quarter for 1994 and 1995.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ---------- ---------- ---------- ---------- ----------- 1994 Revenue................. $2,170,661 $2,420,106 $2,459,336 $2,504,602 $ 9,554,705 Gross profit............ 649,818 747,041 749,669 756,397 2,902,925 Income from continuing operations............. 161,777 202,155 207,093 205,466 776,491 Net income.............. 162,612 203,117 212,885 205,767 784,381 Income from continuing operations per common and common equivalent share.................. .33 .42 .43 .42 1.60 Net income per common and common equivalent share.................. .34 .42 .44 .42 1.62 1995 Revenue................. $2,445,185 $2,635,665 $2,619,227 $2,547,540 $10,247,617 Gross profit............ 591,125 788,929 794,941 574,877 2,749,872 Income from continuing operations............. 101,292 212,462 230,801 110,035 654,590 Net income.............. 101,245 219,127 233,848 49,679 603,899 Income from continuing operations per common and common equivalent share.................. .21 .44 .47 .23 1.35 Net income per common and common equivalent share.................. .21 .45 .48 .10 1.24
See Note 14 to Consolidated Financial Statements for a discussion of the special charges affecting the 1994 fourth quarter and full year results and the 1995 first quarter, fourth quarter and full year results. See Note 15 to Consolidated Financial Statements for a discussion of the decision to discontinue certain operations, announced during the fourth quarter of 1995. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- F-38 -----END PRIVACY-ENHANCED MESSAGE-----