-----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, J/1AkPSEmhQx75KmUJ8F/dhGG3WAV+rlw8A2ZRTsnTMYnrgB01Ose46/nB31jZbK wyW/zMEqG/9rmlCs+wlXnQ== 0000950129-96-003271.txt : 19961205 0000950129-96-003271.hdr.sgml : 19961205 ACCESSION NUMBER: 0000950129-96-003271 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961204 SROS: CSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWNING FERRIS INDUSTRIES INC CENTRAL INDEX KEY: 0000014827 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 741673682 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06805 FILM NUMBER: 96675850 BUSINESS ADDRESS: STREET 1: 757 N ELDRIDGE CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 7138708100 10-K 1 BROWNING-FERRIS INDUSTRIES, INC. - 09/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. Commission File Number 1-6805. -------------------------- BROWNING-FERRIS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-1673682 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 757 N. ELDRIDGE HOUSTON, TEXAS 77079 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 870-8100. Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - -------------------------------- --------------------------------------------- Common Stock, $.16-2/3 par value New York Stock Exchange, Inc. Chicago Stock Exchange Incorporated Pacific Stock Exchange Incorporated 2 7.25% Automatic Common Exchange New York Stock Exchange, Inc. Securities Chicago Stock Exchange Incorporated Pacific Stock Exchange Incorporated Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The approximate aggregate market value of common stock held by non-affiliates of the registrant: $5.7 billion, computed on the basis of $26.88 per share, closing price of the common stock on the New York Stock Exchange, Inc. on December 2, 1996. There were 212,577,062 shares of the registrant's common stock, $.16-2/3 par value, outstanding as of December 2, 1996. DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12 and 13 of Part III (except for information required with respect to executive officers of the Company, which is set forth under "Business--Executive Officers of the Company" in Part I of this report) have been omitted from this report, since the Company will file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement, pursuant to Regulation 14A, which involves the election of directors. The information required by Items 10, 11, 12 and 13 of Part III of this report, which will appear in the definitive proxy statement, is incorporated by reference into this report. -ii- 3 TABLE OF CONTENTS
PAGE ---- PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 North American Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 COLLECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 POST-COLLECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Landfills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Transfer Stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Medical Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Recycling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SERVICES GROUP AND OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 International Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Waste-To-Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Waste Disposal Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Corporate Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Environmental Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . 19 ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS . . . . . . . . . 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 82 PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
-iii- 4 PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . 82 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
-iv- 5 PART I. ITEM 1. BUSINESS. GENERAL Browning-Ferris Industries, Inc. is one of the largest publicly-held companies that engages, through its subsidiaries and affiliates, in providing waste services. The Company collects, transports, treats and/or processes, recycles and disposes of commercial, residential and municipal solid waste and industrial wastes. BFI is also involved in waste-to- energy conversion, medical waste services, portable restroom services, and municipal and commercial sweeping operations. The terms "BFI" and "Company" refer to Browning-Ferris Industries, Inc., a Delaware corporation incorporated on October 26, 1970, and are used herein to include its subsidiaries, affiliates and predecessors, unless the context requires otherwise. BFI's executive offices are located at 757 N. Eldridge, Houston, Texas 77079. The Company's mailing address is P.O. Box 3151, Houston, Texas 77253, and its telephone number is (281) 870-8100. The Company (including unconsolidated affiliates) operates in approximately 450 locations in North America and approximately 300 locations outside North America and employs approximately 43,000 persons. No single customer or operating location accounts for a material amount of BFI's revenue or net income. During fiscal 1996, the Company began implementing a strategic refocus to emphasize internal growth rather than external growth and to more closely align the Company's performance objectives with its shareholders' interests. To support this strategy, the Company realigned its North American operating organization, revised its financial strategies, implemented revised incentive compensation plans for employees and reduced its capital expenditures budget for fiscal 1997 as compared to historic levels of such expenditures. See below and also "Corporate Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." In August 1996, the Company realigned its North American operating organization along functional lines into five groups: sales and marketing, collection, post-collection, business development, and business analysis. Each functional group is led by an officer in Houston who reports to the Company's chief operating officer. The Company's six North American regions and forty-five divisions were consolidated into thirteen market areas, each of which includes area vice presidents responsible for one of the five functional groups within the market area. Each market area is headed by a market area vice president who reports directly to the Company's chief operating officer and is responsible for coordinating the activities of the functional area vice presidents within his market area. The realignment is intended to increase the expertise and efficiency of each function, improve and integrate customer service, -1- 6 accelerate company-wide adoption of best practices and increase oversight and discipline respecting capital expenditures. The Company's international operations (excluding Canada) are aligned into two operational areas, Europe and the Pacific Rim, and report to the Chairman of BFI International, Inc. in Houston. BFI Europe, from its regional office in the Netherlands, oversees the Company's operations in Finland, Germany, Italy, the Netherlands, Spain, Switzerland and the United Kingdom. Management oversight for operations in Australia, the Dominican Republic, Hong Kong, Kuwait and New Zealand and the coordination of expansion into new markets outside Europe are provided from the corporate office in Houston. Management of the operations in each country is carried out by a country manager, and in some cases where the operations are larger or more extensive, by country managers, with one of the country managers being an experienced BFI expatriate employee and the other an experienced national manager. The Company believes that strong national management in each country of operation is extremely important, together with support from the corporate office in Houston and BFI's regional office in Europe, in areas of accounting, compliance, legal, technical, sales and market development. BFI has implemented a divisional market structure in several countries which permits and encourages increased growth opportunities in more localized markets. The Company's revised long-term financial goals are to: (i) generate cash returns on assets in excess of the weighted average cost of capital; (ii) increase profits at a faster pace than the increase in revenues; and (iii) maintain a strong credit rating appropriate for supporting business operations. To more closely align management interests to shareholder interests, the Company has also revised its long-term incentive compensation plans for management to reallocate a significant portion of their stock option participation to performance-based restricted stock that will vest only as certain performance measures are attained. The Company's business is subject to extensive U.S. and foreign governmental regulation and legislative initiative. Further, in some jurisdictions, both in the U.S. and foreign countries, its business is also subject to environmental regulation, mandatory recycling laws, medical waste regulation, preclusion of certain waste from landfills and restrictions on the flow of solid waste. Due to continuing public awareness and influence regarding waste and the environment, and uncertainty with respect to the enactment and enforcement of future laws, the Company can not always accurately project the impact any future regulation or legislative initiative may have on its operations. See "Regulation" and "Legal Proceedings - Environmental Proceedings" for additional information. The table below reflects for each of the three years ended September 30, 1996, the total revenues contributed by the Company's principal lines of business under the operating structuring in effect during such periods. -2- 7
Contribution to Consolidated Revenues (in millions) Year Ended September 30, ------------------------------------- 1996 1995 1994 ------ ------ ------ North American Operations - ------------------------- Collection Services - Solid Waste $2,886 $2,758 $2,360 Transfer and Disposal - Solid Waste 1,050 1,026 885 Recycling Services 531 675 359 Medical Waste Services 200 189 161 Services Group and Other 89 83 83 Elimination of Affiliated Companies' Revenues (513) (483) (392) ------ ------ ------ Total North American Operations 4,243 4,248 3,456 International Operations 1,536 1,531 859 - ------------------------ ------ ------ ------ Total Company $5,779 $5,779 $4,315 ====== ====== ======
Total assets at September 30, 1996, 1995 and 1994 were $7,601 million, $7,460 million and $5,797 million, respectively. In the fourth quarter of fiscal 1996, the Company reported pre-tax special charges of $447 million ($362 million or $1.80 per share after income taxes). The special charges during the fourth quarter resulted primarily from management decisions to sell the Company's Italian operations, divest certain domestic and international non-core business assets and operations, close certain recycling facilities not expected to achieve desired performance objectives, and write down to fair value the Company's investment in the Azusa, California, landfill. See Note (4) of Notes to Consolidated Financial Statements. -3- 8 NORTH AMERICAN OPERATIONS COLLECTION BFI collects solid waste in approximately 300 operating locations in 45 states, Puerto Rico and Canada. These operations provide solid waste collection services for commercial establishments, industrial plants, medical institutions, and governmental and residential units. BFI uses approximately 1 million containers and approximately 10,000 specially equipped collection trucks in its North American waste collection operations. The Company's commercial and industrial solid waste collection services are typically performed pursuant to service agreements that provide for one-year to three-year initial terms and specified successive terms thereafter. Residential collection contracts with individual homeowners, homeowner groups and municipalities are generally for periods of one to five years, frequently with renewable terms. Solid waste collection contracts with governmental units are usually awarded pursuant to a competitive bidding process. Operating costs, disposal costs and collection fees vary widely throughout the geographic areas of the Company's operations. Prices for solid waste collection services are determined locally, principally by the volume, weight and type of wastes collected, treatment required, risks involved in handling or disposing of the wastes, collection frequency, disposal costs, distance to final disposal sites, quantity and type of equipment furnished to the customer and other competitive factors. The Company's ability to pass on cost increases is often influenced by competitive and other factors. Long-term residential solid waste collection contracts often include a formula for adjusting fees, generally based on published price indices, to cover increases in certain operating costs. The Company is the largest provider of medical waste services in North America and collects infectious and pathological waste materials from approximately 153,000 customers. The Company also collects recyclable materials, principally paperboard, office paper and other paper products, in North American from approximately 7 million households, including curbside customers, and for approximately 203,000 commercial and industrial customers. The Company's recycling collection contracts often provide for the customers' participation in price increases or price decreases on resale of recycled commodities. POST-COLLECTION Landfills Sanitary landfilling is the primary method employed by the Company for final disposal of the segment of the solid waste stream that is not recycled. BFI currently operates 104 solid waste landfill sites in North America, 18 of which are operated under contracts with municipalities or others. The Company has approximately 16,000 acres permitted as landfill disposal sites, -4- 9 consisting of acres in unopened and unlined landfill cells, acres in filled and capped landfill cells which are in open landfill sites, and acres in open landfill cells. The acreage shown does not reflect the volume (or "airspace") available for disposal, which depends on the vertical space as well as the surface acres. BFI does not currently own or lease a landfill site in every metropolitan area in which it is engaged in solid waste collection; however, the Company intends to continue to seek, where advisable, ownership or lease of disposal facilities in all such areas. To date, the Company has not experienced excessive difficulty securing the use of disposal facilities owned or operated by others in those communities in which it does not operate its own landfill sites. Transfer Stations BFI operates 103 solid waste transfer stations where solid wastes are compacted for transfer to final disposal facilities. Transfer stations are used for the purpose of either (i) reducing costs associated with transporting waste to final disposal sites, or (ii) better utilizing the Company's disposal sites. Where practical, transfer and recycling functions are combined at the same transfer station to form "Trancycleries."(TM) Medical Waste The Company owns or operates 30 treatment sites using either incineration or autoclaving (steam sterilization) technology. One additional treatment site is in the permitting process. Recycling The Company currently operates 146 recycleries in North America which receive, process and dispose of recyclable materials. During fiscal 1996 the Company closed 12 recycling facilities due to the continuing weakness in recycled commodity prices, and plans to close additional facilities during fiscal 1997. The Company operates a centralized materials marketing group with the objective of establishing longer-term customer relationships and agreements with purchasers of recycled commodities. The Company has developed relationships with numerous other companies to assure municipalities and other customers of continuous and diversified resale markets. In order to reduce the impact of the price volatility that is inherent in this business segment, the Company has included floor pricing provisions in a large number of its fiber resale contracts. The Company also engages in organic materials recycling and/or disposal, tire recycling and other alternative energy concepts such as biomass fuels. The Company currently operates more than 40 organic processing centers. BFI also produces and markets decorative bark, mulch, compost and organic soils to secure a market for organic materials collected. SERVICES GROUP AND OTHER The Company also rents and services portable restroom facilities and provides street and parking lot sweeping. The Company may also participate, to a limited extent, in the end-use development of certain BFI landfills that have reached permitted capacity and other real and personal property in -5- 10 which it has an interest. From time to time, the Company sells or otherwise disposes of surplus land and other real or personal property and reflects any gain or loss from such transactions in the results of operations for the period in which the transactions occur. INTERNATIONAL OPERATIONS The Company is involved in waste collection, processing, disposal and/or recycling operations in approximately 300 locations (including locations of unconsolidated affiliates) in Australia, the Dominican Republic, Finland, Germany, Hong Kong, Italy, Kuwait, the Netherlands, New Zealand, Spain, Switzerland and the United Kingdom. European operations comprise the largest number of operating locations outside North America. The Company currently collects solid waste in approximately 175 locations and operates 60 landfill sites in its international operations (including, in each case, locations of unconsolidated affiliates). The Company also has 56 recycleries and 56 transfer stations in its international operations and uses approximately 310,000 containers and approximately 4,400 specially equipped collection trucks in its international waste collection operations. The Company owns 50% of the stock of Otto Entsorgungsdienstleistungen GmbH ("Otto Waste Services"), which is primarily engaged in providing collection and recycling services under long-term contracts with municipalities in Germany and Duales System Deutschland GmbH, the non-governmental organization responsible for the collection and processing of certain recyclable materials in Germany. During fiscal 1996, the Company reported consolidated revenues of approximately $662 million applicable to Otto Waste Services. During fiscal 1996, the Company announced its intention to divest its Italian operations. Although the Company intends to complete the sale during fiscal 1997, the Company does not have an agreement to sell the operations and cannot determine at present the timing, or terms of such divestiture. See Note (4) of Notes to Consolidated Financial Statements. WASTE-TO-ENERGY The Company and Air Products and Chemicals, Inc. ("Air Products"), headquartered in Allentown, Pennsylvania, are each 50% general partners in partnerships that design, build, own and operate facilities that burn solid waste and recover energy and other materials. These partnerships market their capabilities under the name American Ref-Fuel(R). In April 1996, Air Products announced its intention to divest its partnership interests in American Ref-Fuel. Air Products has advised the Company that it does not currently have an agreement to sell its partnership interests and cannot determine at the present the timing of any such sale. Air Products has the right (and the Company has a reciprocal right) under the buy-sell provisions of an agreement between the companies to designate a price and to submit offers to the Company which would require the Company to either purchase Air Products' partnership interests in American Ref- -6- 11 Fuel, or sell the Company's partnership interests to Air Products, in either case, at the designated price. In the event Air Products elected to initiate the buy-sell procedure, the Company would have at least 180 days to respond to the buy-sell offers. Additionally, the agreement requires that Air Products obtain the Company's consent before transferring its interest in American Ref-Fuel, which consent can not be unreasonably withheld. American Ref-Fuel currently operates five waste-to-energy facilities. Four of these facilities, which are located in Hempstead (Long Island), New York, Essex County, New Jersey, Niagara Falls, New York and Rochester, Massachusetts, have capacities of approximately 800,000 to 1,300,000 tons per year. A fifth facility, located in Preston, Connecticut, has a capacity of approximately 250,000 tons per year. Four of the facilities owned by American Ref-Fuel partnerships utilize the solid waste mass-burning technology of the German firm, Deutsche Babcock Anlagen GmbH ("DBA"), for which American Ref-Fuel is a licensee in North America. This technology has been utilized successfully for over 30 years in Europe and elsewhere. In June 1996, American Ref-Fuel completed its acquisition of a 90% interest in the SEMASS Partnership, which owns the SEMASS Resource Facility in Rochester, Massachusetts. The facility, which has a capacity of approximately 1,300,000 tons per year, utilizes a shred-and-burn process developed by Energy Answers Corporation, an Albany, New York based company which had been managing general partner of the facility since the plant's design phase. In connection with four of the existing American Ref-Fuel projects, both the Company and Air Products have delivered, and in connection with any future projects may be required to deliver, support agreements for certain project indebtedness of each of the respective subsidiary partners. See Note (11) of Notes to Consolidated Financial Statements for information concerning these obligations. The Company's equity and loan investments in American Ref-Fuel's waste-to-energy projects were approximately $192 million at September 30, 1996. American Ref-Fuel's business is very capital intensive and its ability to raise capital is an important factor in its competitiveness in the waste services industry. When feasible, American Ref-Fuel attempts to finance its projects with tax exempt bonds due to the lower interest costs. During fiscal 1997, the Company plans to evaluate select acquisition opportunities presented by American Ref-Fuel. All waste-to-energy facilities must meet rigid environmental laws and regulations. Existing laws and regulations can be changed or administered so as to affect the design, construction, startup or operation of such facilities. Management believes that the technologies employed at its facilities are capable of meeting anticipated future changes in laws and regulations; however, there can be no assurance that required environmental and other permits will be issued for any planned project. See "Regulation" and "Waste Disposal Risk Factors." -7- 12 REGULATION All of the Company's principal business activities in the United States are governed by federal, state and local laws and regulations pertaining to public health and the environment, as well as transportation laws and regulations. These regulatory systems are complex and are subject to change. The U.S. Congress and certain states have considered legislation, and some states are taking action, to ban or otherwise restrict the interstate transportation of wastes for disposal, to impose discriminatory fees on such transported wastes, to limit the types of wastes that may be disposed of at existing disposal facilities, and to mandate waste minimization initiatives, recycling quotas and composting of yard wastes. In recent years, a number of communities have instituted "flow control" requirements, which typically require that waste collected within a particular area be deposited at a designated facility. In May 1994, the U.S. Supreme Court ruled that a flow control ordinance was inconsistent with the Commerce Clause of the Constitution of the United States. A number of lower federal courts have struck down similar measures. Although the U.S. Congress has considered legislation that would partially grant flow control authority under the Commerce Clause, no legislation has been enacted. In the future, the U.S. Congress may consider bills that could at least partially overturn these court decisions and immunize particular governmental actions (for example, flow control mandates that were in place prior to the 1994 U.S. Supreme Court decision) from Commerce Clause scrutiny. Similarly, the U.S. Supreme Court has consistently held that state and local measures that seek to restrict the importation of extraterritorial waste or tax imported waste at a higher rate are unconstitutional. To date, congressional efforts to enable states to, under certain circumstances, impose differential taxes on out-of-state waste or restrict waste importation have not been successful. In the absence of federal legislation, certain local laws that directly or indirectly divert waste flows to designated facilities may be unenforceable, and discriminatory taxes and waste importation restrictions should continue to be subject to judicial invalidation. If the U.S. Congress adopts legislation allowing for certain types of flow control or restricting the importation of waste, or if legislation affecting interstate transportation of waste is adopted at the federal or state level, such legislation could adversely affect the Company's waste collection, transportation, treatment and disposal operations. Because a major component of the Company's business is the collection and disposal of solid waste in an environmentally sound manner, a material amount of the Company's capital expenditures are related (directly or indirectly) to environmental protection measures, including compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment. There are costs that are associated with facility upgrading, corrective actions, facility closure and post-closure care in addition to other costs normally associated with the Company's waste management activities. The majority of these expenditures -8- 13 are made in the normal course of the Company's business, and do not place the Company at any competitive disadvantage. In October 1991, the EPA issued its final regulations under Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA"), which set forth minimum federal performance and design criteria for municipal solid waste landfills. All Subtitle D regulations are in effect, except for the financial assurance requirements which the EPA has deferred to April 1997, although many states have already implemented financial assurance programs. Management of BFI believes that these regulations will have a favorable long-term impact on its landfill operations, but meeting these regulatory requirements has resulted in increased costs. Under the Clean Air Act, the EPA proposed regulations in May 1991 that require extensive methane gas collection systems to be installed at many of the Company's landfills. These regulations, as revised, were finalized in 1996 and will be phased in through the adoption of state regulations and implementation plans. The Company has proceeded to design, permit and install gas extraction and control systems at many of its facilities and believes these systems substantially comply with EPA regulations. The Company is also seeking operating or other applicable permits for these activities. In addition, landfills located in those areas of the country that do not meet prescribed air quality standards may require more costly control systems. State financial responsibility regulations, adopted in various forms, require owners or operators of waste disposal facilities and underground storage tanks to demonstrate the financial ability to respond to and correct sudden and accidental pollution occurrences, as well as non-sudden or gradual pollution occurrences. To meet these requirements, the Company has secured Environmental Impairment Liability ("EIL") insurance coverage in amounts the Company believes are in compliance with federal and state law. Under the current EIL policy, which is collateralized, the Company must reimburse the carrier for any losses. It is possible that the Company's net income could be adversely affected in a particular reporting period in the event of significant environmental impairment claims. Many state regulations also require owners or operators of waste disposal facilities to provide assurance of their financial ability to cover the estimated costs of proper closure and post-closure monitoring and maintenance of these facilities. The federal Subtitle D regulations require all states to adopt financial assurance regulations that meet the federal standards. The Company has generally relied upon its consolidated financial position to issue corporate guarantees, or has utilized letters of credit to satisfy these requirements. The EPA has proposed a financial test and corporate guarantee for use by private Subtitle D facilities, which, if adopted, would afford the Company a cost effective method to satisfy the financial assurance requirements. The Company has also established a captive insurance company that is being used to provide insurance as a recognized means of demonstrating this financial assurance. The Company has had success and is continuing its efforts to secure acceptance of captive-issued insurance policies which serve as a cost-effective alternative to certain other forms of financial assurance, such as letters of credit. -9- 14 In its international operations, the Company has noted a trend toward increased environmental regulation. For example, in Europe, policies have been established to encourage waste reduction, to promote re-use and recycling, to reduce packaging waste, to strengthen the standards for permitting and supervision of waste disposal operations and to control crossborder movements of waste. BFI, with its commitment to sustainable development and the rational management of all resources, including waste, believes that the continuation of this trend and enhanced enforcement of increasingly stringent regulations will benefit its international operations. COMPETITION BFI competes with both publicly-held and privately-owned waste services companies. This competition is intense and has increased in recent years. BFI believes that neither it nor any other waste services company has a significant portion of any major aspect of the solid waste services markets. In some geographic areas, all or part of the solid waste collection, processing and disposal services offered by BFI may also be provided by municipalities or by governmental authorities with regional or multi-county jurisdiction. Because solid waste services provided by municipal or regional governmental authorities are generally subsidized by tax revenues and utilize major equipment and facilities that are financed with proceeds from the sale of tax-exempt bonds, these authorities may provide such services at lower prices (though not necessarily at lower costs) than those of private companies. Competition is encountered primarily from publicly-held and numerous locally-owned private solid waste services companies and, to a lesser degree, from municipalities and other governmental units with respect to residential solid waste collection and solid waste sanitary landfills. Intense competition in pricing and type and quality of services offered is encountered. Some competitors in certain markets have increased competitive pressure by their willingness to accept lower pricing to maintain market share. WASTE DISPOSAL RISK FACTORS There are serious, sometimes unforeseeable, business risks and potentially substantial cost exposures associated with the establishment, ownership and operation of solid waste sanitary landfill sites and other types of waste processing and disposal facilities. These risk factors include, but are not limited to: (i) the difficulty of obtaining permits to expand or establish new sites and facilities and public and private opposition to the location, expansion and operation of these facilities, (ii) governmental actions at all levels that seek to restrict the interstate movement of waste for disposal, which can result in declining volumes of waste available for disposal at some facilities, (iii) costs associated with liner requirements, groundwater monitoring, leachate and landfill gas control, surface water control, post-closure monitoring, site cleanup, other remedial work and maintenance and long-term care obligations, (iv) the obligation to manage possible adverse effects on the environment, (v) regulations requiring demonstration of financial responsibility and conformance to prescribed or changing standards and methods of operation, (vi) judicial and -10- 15 administrative proceedings regarding alleged possible adverse environmental and health effects of landfills or other treatment and disposal facilities, and (vii) reduction in the volume of solid waste available for direct landfill disposal in certain states because of governmental incentives to reduce the daily volume of waste that may be disposed of, initiatives that require waste recycling, minimization or composting and because of incineration in large waste-to- energy facilities. See also "Waste-To-Energy", "Regulation" and "Legal Proceedings - Environmental Proceedings." BFI has periodically undertaken or been required, and may in the future undertake or be required, to cease or to alter substantially its operations at existing waste disposal sites, to implement new construction standards at existing facilities and to add additional monitoring, post-closure maintenance or corrective measures at waste disposal sites. Compliance with the Subtitle D regulations has required costly expenditures by the Company and may in the future require additional expenditures. See "Regulation" for information concerning capital expenditures relating to environmental and health laws and regulations and Notes (2) and (8) of Notes to Consolidated Financial Statements. If the Company is unable to continue disposing of planned volumes of wastes at existing solid waste landfills or is unable to either expand existing landfills or establish new sites, it would be required to obtain the rights to use other disposal facilities or to suspend or curtail solid waste collection or disposal activities. Any such actions would have an adverse impact on the Company's collection business and could substantially reduce the Company's revenues and income from operations and increase the risk of impairing the value of the Company's investment in existing or proposed facilities. These developments could also result in accelerating the recognition of closure costs and post- closure monitoring cost accruals for those landfills, with a corresponding negative impact on the Company's net income. The economic viability of certain waste-to-energy facilities may be adversely affected by (i) the availability of commercially reasonable energy sales contracts; (ii) the availability of landfills for the disposal of ash residue, bypass and nonprocessible waste; (iii) existing and proposed governmental standards applicable to the disposal of ash residue that could limit the number of sites available for such disposal; (iv) air emission standards applicable to the facilities, (v) the possible lower cost of other alternatives for waste disposal and (vi) the continuing uncertainty with respect to the enforceability of local flow control laws. Waste-to-energy facilities may also be adversely affected by many of the same factors that are currently impacting other waste disposal facilities. Certain geographic regions in the United States have, at times, experienced shortages of suitable solid waste disposal facilities. Without long term planning, many private and governmental solid waste collection companies operating in the affected areas, including BFI, could be required to curtail or even suspend land disposal operations, or seek other, more distant sites. In other cases, collection companies, including BFI, may be excluded from disposing of solid waste in landfills or waste-to-energy facilities either because of regulation or because of the landfill or facility owners' desire to preserve the remaining capacity for their own disposal needs. -11- 16 With respect to international operations, the profitability and risks associated with these operations can also be affected, to a greater or lesser extent depending on the foreign country in which the operations are located, by changes in national economies, financial and political policies, war, invasion, social instability, currency fluctuations and other risk factors associated with operations in foreign countries. CORPORATE DEVELOPMENT The Company's corporate development program will evaluate opportunities to expand its customer base by entering into new domestic and international markets, broadening the type of services offered and acquiring businesses and properties. However, the Company expects a reduction in capital expenditures for acquisitions and other corporate development activities during fiscal 1997 as compared to historic levels of such expenditures, with an increased emphasis on achieving returns over time at targeted amounts in excess of the Company's cost of capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company also intends to divest certain domestic and international business assets and operations that are not expected to achieve desired performance objectives. When investing in capital-intensive facilities such as landfills, the Company faces the risk that required permits will not be obtained or renewed. If permits are not ultimately obtained and maintained, the value of such facilities can be substantially impaired, which could adversely affect future results of operations. See "North American Operations - Post-Collection - - Landfills" and "Regulation." CAPITAL EXPENDITURES Capital expenditures were approximately $1.2 billion in fiscal 1996, consisting of $256 million for acquired businesses. Approximately $391 million was expended in connection with internal market development projects, municipal contracts and investment in affiliates and $579 million related to additions and replacements of capital items for existing operations, including existing landfill cell development. See Notes (5), (6) and (7) of Notes to Consolidated Financial Statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional financing information. -12- 17 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company, their positions (including their principal areas of responsibility with the Company) and their respective ages are as follows:
Name Position Age * - ---- -------- ----- Bruce E. Ranck President, Chief Executive Officer 47 and Director (1) Norman A. Myers Vice Chairman, Chief Marketing 60 Officer and Director (1) J. Gregory Muldoon Executive Vice President and 42 Chief Operating Officer Jeffrey E. Curtiss Senior Vice President and 48 Chief Financial Officer Hugh J. Dillingham, III Senior Vice President 47 Post Collection Sandra D. Glatzau Senior Vice President 44 Marketing and Sales J. Frederick Snyder Senior Vice President 43 Collection Rufus Wallingford Senior Vice President 56 and General Counsel David R. Hopkins Vice President, Controller 53 and Chief Accounting Officer Louis A. Waters Chairman and Chief Executive Officer of BFI 58 International, Inc. and Director (1)(2)
________________ * As of December 3, 1996. (1) Serves on the Executive Committee of the Board of Directors. (2) Serves on the Finance Committee of the Board of Directors. -13- 18 Mr. Ranck was elected President and Chief Executive Officer in October 1995, having served as President and Chief Operating Officer of the Company since November 1991 and as Executive Vice President (Solid Waste Operations-North America) from October 1989 to November 1991. Prior to that time, he served the Company as a Regional Vice President in one of the Company's former regions for a period in excess of five years. Mr. Ranck has been a director of the Company since March 1990. He also serves as a director of Furon Co. and as a director or trustee of several educational and charitable organizations. Mr. Myers was elected a director in 1978, Chief Marketing Officer in March 1981 and Vice Chairman of the Board in December 1982. He was initially elected a Vice President in December 1970 and became an Executive Vice President in July 1976. Mr. Myers is a director of My Friends, a foundation for children in crisis. Mr. Muldoon was elected Executive Vice President and Chief Operating Officer in May, 1996 having served as Senior Vice President (Corporate Development) since September 1992 and as Vice President (Operations) since December 1991. He joined the Company in 1980 as a market development representative and from 1983 to 1988 served as a district manager in several locations. From early 1989 until October 1990, he served as President of CECOS International, Inc., a subsidiary of the Company, through the discontinuation of its hazardous waste business. He then served as Regional Vice President of one of the Company's former regions from October 1990 to November 1991. Mr. Curtiss became Senior Vice President and Chief Financial Officer of the Company in January 1992. Before that time, he served from August 1989 to January 1992 as Executive Vice President, Chief Financial Officer and a director of Heritage Media Corporation, an American Stock Exchange-listed company based in Dallas. Mr. Dillingham was elected Senior Vice President, Post Collection (formerly Senior Vice President (Processing and Disposal)) in March 1993, having served as Vice President (Disposal Operations) since December 1991. Prior to his election, he served as Divisional Vice President of Disposal Operations in one of the Company's former regions, and has over eighteen years of experience with the Company in landfill operations. Mr. Dillingham serves as a director of the Wildlife Habitat Council. Ms. Glatzau was elected Senior Vice President, Sales and Marketing in September, 1996. In May 1995, Ms. Glatzau was appointed Corporate Vice President - Marketing and Sales, and from March, 1992 through April, 1995, she served as Corporate Vice President - Investor Relations. Ms. Glatzau joined the Company in 1978 and served the Company at various levels including sales representative, regional sales trainer and sales manager and as Divisional Vice President of Marketing and Sales for one of the Company's former regions. -14- 19 Mr. Snyder was elected Senior Vice President, Collection in September, 1996. From 1989 through May 1996, Mr. Snyder served as Regional Vice President in two of the Company's former regions. Mr. Snyder joined the Company in 1976 and served as a District Manager from 1977 through 1989. Mr. Wallingford became Senior Vice President and General Counsel of the Company in January 1994. Prior to that time, he was a senior partner with the law firm of Fulbright & Jaworski L.L.P., Houston, Texas, for a period in excess of five years. Mr. Wallingford also serves as a director of the Children's Museum in Houston, Texas. Mr. Hopkins, who was a Divisional Vice President and Assistant Controller prior to becoming Controller of the Company in September 1986, joined the Company in September 1980. He was elected a Vice President and named Chief Accounting Officer in December 1986. From September 1991 to January 1992, he served as acting Chief Financial Officer of the Company. Mr. Waters has served as Chairman and Chief Executive Officer of BFI International, Inc. since May 1991 and as President of BFI International, Inc. from March 1993 to October 1996. He also serves as Chairman of the Finance Committee of the Company and as a member of the Executive Committee of the Company. He served as Chairman of the Executive Committee from September 1980 until 1988 and as Chairman of the Board of the Company from August 1969 to September 1980. Mr. Waters serves as a director or trustee of several business, educational and charitable organizations. All officers of the Company (including executive officers) are elected by the Board of Directors, generally at its meeting held the day of the annual meeting of stockholders or as soon thereafter as practicable. Each officer is elected to hold office until his successor shall have been chosen and shall have qualified or until his death or the effective date of his resignation or removal. Subject to Board of Director approval, the annual meeting of stockholders is scheduled to be held March 5, 1997 in Houston, Texas. ITEM 2. PROPERTIES. In its operations, the Company uses specially-equipped trucks, containers and compactors. The Company also owns and/or operates sanitary landfill sites throughout the United States and Canada, and in the United Kingdom, Germany, Hong Kong, the Netherlands, New Zealand, Spain, Australia and Italy. See "Business - North American Operations - Collection" and "Business - North American Operations - Landfills" and Notes (6) and (8) of Notes to Consolidated Financial Statements. The Company leases its executive offices which are located at 757 N. Eldridge, Houston, Texas. The Company also owns real estate, buildings and other physical properties, which it employs in its daily operations in a large number of its operating locations. The Company also leases a substantial portion of its transfer stations, offices, storage and shop space. See Notes (6) and (11) of Notes to Consolidated Financial Statements. -15- 20 BFI believes that its property and equipment is well-maintained and adequate for its current needs. Although during fiscal 1997 BFI expects a reduction in capital expenditures when compared to historic levels of such expenditures, substantial investments are expected to be made in additional property and equipment for expansion, for replacement of assets as they reach the end of their useful lives and in connection with corporate development activities. See "Business - Corporate Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain of the Company's property and equipment is subject to mortgages and liens securing payment of portions of Company indebtedness. See Notes (9) and (11) of Notes to Consolidated Financial Statements for information with respect to mortgage and lease obligations on these properties. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various administrative matters or litigation, including original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities of certain landfill disposal facilities, environmental proceedings relating to governmental actions resulting from the involvement of various subsidiaries of the Company with certain waste sites (including Superfund sites) (see "Environmental Proceedings"), personal injury and other civil actions, as well as other claims and disputes that could result in additional litigation or other adversary proceedings. While the final resolution of any such litigation or such other matters may have an impact on the Company's consolidated financial results for a particular reporting period, management believes that the ultimate disposition of such litigation or such other matters will not have a materially adverse effect upon the consolidated financial position of the Company. ENVIRONMENTAL PROCEEDINGS The Company strives to conduct its operations in compliance with applicable laws and regulations, including environmental rules and regulations, and has as its goal 100% compliance. However, management believes that in the normal course of doing business, companies in the waste disposal industry, including the Company, are faced with governmental enforcement proceedings and resulting fines or other sanctions and will likely be required to pay civil penalties or to expend funds for remedial work on waste disposal sites. The possibility always exists that such expenditures could be substantial, which would have a negative impact on earnings for a particular reporting period. Management of BFI believes that the existence of these proceedings does not provide an accurate reflection of the Company's operating policies, procedures and capabilities, although the Company will have to respond to those issues in filings required to be made with respect to its operations in certain jurisdictions. In any event, management of the Company believes that the ultimate resolution of such proceedings will neither individually nor in the aggregate have a materially adverse effect upon the consolidated financial position of the Company. -16- 21 The Company is continuously engaged in various original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities relating to waste treatment and disposal facilities, properties and activities. These proceedings, which are a necessary and routine part of waste disposal activities, are held before a variety of regulatory and judicial agencies at the federal, state and local level. In these proceedings, legal challenges are routinely raised by private parties and by the regulatory agencies, alleging a variety of adverse consequences (including adverse effects on the environment, in some instances with particular reference to the inequitable distribution of environmental burdens among various social groups and classes) if the proposed permits are granted or renewed. Opposition is also routinely encountered in connection with proposed changes in zoning designations, operating procedures, remedial or upgrading actions and post-closure activities at waste processing and disposal facilities. See "Business - Regulation." The Company is participating in potentially responsible party ("PRP") groups at 98 waste disposal sites listed on the EPA's National Priority List, which sites may be subject to remedial action under the Comprehensive Environmental Response, Compensation and Liability Act (also known as "Superfund"). Complete settlements with other members of the PRP groups and/or the EPA have been negotiated with respect to 69 of these sites. Partial settlements have been negotiated with regard to 13 of the sites. These settlements had no material effect on the Company's results of operations or consolidated financial position. Further, the Company has received information requests relating to 67 additional sites on the EPA's National Priority List. For 45 of these sites, the Company has determined that it is not a PRP. The Company's PRP status at the remaining 22 sites has not yet been determined. The number of Superfund sites with which the Company is involved may increase or decrease depending upon the EPA's findings from responses to these information requests and any future information requests which may be received. Superfund legislation permits strict joint and several liability to be imposed without regard to fault, and as a result, one company might be required to bear significantly more than its proportional share of the cleanup costs if it is unable to obtain appropriate contributions from other responsible parties. Management routinely reviews each site requiring corrective action (including Superfund sites) in which the Company is involved, considering its role with respect to each site and the relationship to the involvement of other parties at the site, the quantity and content of the waste with which it was associated, and the number and financial capabilities of the other parties at the various sites. Based on reviews of the various sites, currently available information and management's judgment and significant prior experience related to similarly situated facilities, expense accruals are provided by the Company for its share of estimated future costs associated with corrective actions to be implemented at certain of these sites and existing accruals are revised as deemed necessary. The final negotiated settlement relating to the large majority of Superfund sites occurs several years after a party's identification as a potentially responsible party, due to the many complex issues that must be addressed in determining the magnitude of the contamination at the site. The process for addressing contamination at a site usually includes technical investigations, selection of a remedy and implementation of the remedy selected. In many cases, the expenditures related to actual corrective action may be incurred over a number of years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters." -17- 22 Management believes that the ultimate disposition of these environmental matters will not have a materially adverse effect upon the liquidity, capital resources or consolidated financial position of the Company, although the resolution of one or more of these matters could have a significant negative impact on the Company's consolidated financial results for a particular reporting period. It can be reasonably expected that the Company will become involved in additional remedial actions and Superfund sites in the future. A subsidiary of the Company, CECOS International, Inc. ("CECOS"), is a party to a consent order with the U.S. Environmental Protection Agency, one aspect of which concerns a leachate pretreatment system that CECOS agreed to construct at one of its closed facilities. By letter dated March 16, 1994, the USEPA has demanded $528,500 in stipulated penalties due to CECOS's alleged failure to commence timely start-up of the leachate pretreatment system that is presently operating. On March 28, 1996, the USEPA filed a lawsuit styled United States of America v. CECOS International, Inc. in the United States District Court for the Southern District of Ohio, seeking payment of such stipulated penalties. CECOS is vigorously contesting this matter. Management of the Company is unable to conclude whether the ultimate monetary sanction in this matter, if any, will be more than $100,000. On April 27, 1992, a subsidiary of the Company paid the City of Philadelphia $1,600,000 as restitution and in settlement of any claims the City might have brought relating to the disposal at a City-owned treatment plant of non-hazardous waste material alleged to have been inconsistent with the authorization granted by the City. The Environmental Protection Agency and the United States Attorney for the Southern District of Pennsylvania (the "U.S. Attorney") have continued to investigate this matter and the Company has continued to fully cooperate with such investigation. The subsidiary has recently entered into a plea agreement with the U.S. Attorney calling for the subsidiary to enter a plea of guilty to three felony counts, one of which charges a violation of the Clean Water Act, and pay a fine of $3,000,000, together with a contribution of $1,500,000 to a program or programs designed to benefit the environment in the Southern Pennsylvania area. The subsidiary will also make restitution payments in the amount of $642,000 to various publicly owned treatment works in the Philadelphia area. On March 6, 1991, Region VI of the EPA filed an administrative proceeding entitled In the Matter of Chemical Reclamation Services, Avalon, Texas. The complaint alleged that Chemical Reclamation Services ("CRS"), a former subsidiary of the Company, failed to comply with certain notification requirements under RCRA and under regulations established under the Texas hazardous waste management program. The complaint sought a proposed monetary sanction against CRS in the amount of $229,500 and a claim for indemnity had been made against the Company. In September 1996, the Company agreed to pay a monetary sanction of $32,250, which represents one-half of the total monetary sanction imposed upon CRS, in full settlement of the alleged violations. -18- 23 On March 9, 1991, CECOS was named in a civil administrative complaint, entitled In the Matter of CECOS International, Inc., initiated by Region II of the EPA. This complaint alleges that CECOS landfilled certain waste generated by General Motors Corporation, that by definition contained polychlorinated biphenyls in excess of the regulatory limit, rather than incinerating such waste, and that CECOS failed to test the waste in accordance with the requirements of its permits. The original complaint sought monetary sanctions against CECOS in the amount of $14,150,000. In September 1996, the EPA withdrew certain of its allegations resulting in a reduction in the monetary sanctions sought to $2,975,000. CECOS is vigorously contesting the allegations in the complaint. Management of the Company is currently unable to determine whether the ultimate monetary sanction, if any, will be more than $100,000. In 1991, American Ref-Fuel Company of Essex County ("Ref-Fuel"), a New Jersey partnership, received notices from the New Jersey Department of Environmental Protection and Energy ("NJDEPE") alleging violations of its stormwater discharge permit. On December 1, 1991, Ref-Fuel entered into an Administrative Consent Order ("ACO") and has paid monetary sanctions in the amount of $487,000. On November 8, 1996, NJDEPE terminated the ACO stating that all required obligations have been fulfilled. A subsidiary of the Company owns a 50% interest in Ref-Fuel. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. BFI's Common Stock is traded on the New York Stock Exchange, the Chicago Stock Exchange, the Pacific Stock Exchange and The International Stock Exchange of the United Kingdom and Republic of Ireland Ltd. The table below sets forth by fiscal quarter, for the fiscal years ended September 30, 1995 and 1996, the high and low sales prices of BFI's Common Stock on the New York Stock Exchange - - Composite Transactions, as reported in The Wall Street Journal.
Fiscal Year 1995 Fiscal Year 1996 ------------------------- -------------------------- High Low High Low ------- ------- ------- ------- First Quarter $32-3/8 $25-5/8 $31-7/8 $27-3/8 Second Quarter 34-1/4 27-1/8 32-5/8 28 Third Quarter 37-7/8 32-3/4 32-7/8 27-7/8 Fourth Quarter 40-5/8 30 29-1/8 21-3/8
As of December 3, 1996, there were approximately 17,900 holders of record of BFI Common Stock. -19- 24 In June 1988, the Company's Board of Directors adopted a Preferred Stock Purchase Rights Plan and in connection therewith declared a dividend of one Preferred Stock Purchase Right (a "Right") on each outstanding share of the Company's Common Stock and on each share subsequently issued until separate Rights certificates are distributed or the Rights expire or are redeemed. See Note (13) of Notes to Consolidated Financial Statements for more detailed information concerning these Rights. BFI has paid cash dividends on its Common Stock each year since 1950. Cash dividends are paid quarterly. During each of fiscal 1995 and 1996, 68 cents was paid in dividends on each share of Common Stock. The most recently declared quarterly cash dividend on the Common Stock was 17 cents per share. The payment of dividends or other distributions on, or with respect to, the Common Stock is limited by provisions of the Company's Multicurrency Revolving Credit Agreement and Revolving Credit Agreement. See Note (9) of Notes to Consolidated Financial Statements for a description of these credit agreements. The amount available for payment of dividends or distributions on or with respect to Common Stock pursuant to the most restrictive of such limitations was approximately $945 million on September 30, 1996, after giving effect to cash dividends paid or declared through September 30, 1996. BFI currently expects to continue the payment of dividends, although future dividend payments will depend on BFI's earnings, financial needs and other factors. Due to the nature of the Company's business, the Company or its competitors receives unfavorable publicity from time to time, which can result in aberrational market conditions for the Company's securities. -20- 25 Item 6. - Selected Financial Data BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA The following is a summary of certain consolidated financial information regarding the Company for the five years ended September 30, 1996.
- ----------------------------------------------------------------------------- Year Ended September 30, ---------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------- (In Thousands Except for Per Share Amounts) Operating Statement Data: Revenues $5,779,277 $5,779,351 $4,314,541 $3,478,830 $3,277,635 Income before special charges and extra- ordinary item $ 273,014 $ 384,561 $ 283,973 $ 213,910 $ 175,607 Income (loss) before extra- ordinary item $ (89,172) $ 384,561 $ 283,973 $ 197,440 $ 175,607 Net income (loss) $ (101,331) $ 384,561 $ 278,710 $ 197,440 $ 175,607 Income (loss) per common and common equiv- alent share - Income (loss) before extra- ordinary item $(0.44) $1.93 $1.52 $1.15 $1.11 Net income (loss) $(0.50) $1.93 $1.49 $1.15 $1.11 Cash dividends per common share $ .68 $ .68 $ .68 $ .68 $ .68
(Continued on Following Page) -21- 26
- ----------------------------------------------------------------------------- Year Ended September 30, ---------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------- (In Thousands Except for Per Share Amounts) Balance Sheet Data: Property and equipment, net $3,920,721 $3,722,292 $3,049,767 $2,515,709 $2,263,653 Total assets $7,600,906 $7,460,372 $5,796,955 $4,295,642 $4,067,524 Senior long-term debt $2,766,885 $1,665,804 $ 713,680 $ 333,689 $ 349,183 Convertible subordinated debentures $ -- $ 744,944 $ 744,949 $ 744,949 $ 744,949 Common stock- holders' equity $2,510,278 $2,741,750 $2,391,680 $1,532,603 $1,460,406 Cash Flow Data: Capital expenditures $ 935,382 $ 929,596 $ 694,475 $ 606,240 $ 531,239 Payments for businesses acquired $ 188,451 $ 769,369 $ 398,734 $ 83,786 $ 21,644 Cash flows from operating activities $ 856,843 $1,030,489 $ 693,928 $ 613,965 $ 577,007
-22- 27 Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's operations, financial performance and results, as well as material set forth elsewhere herein, includes statements that are not historical facts. Such statements are forward- looking statements based on the Company's expectations and as such, these statements are subject to uncertainty and risk. These statements should be read in conjunction with the "Regulation", "Competition" and "Waste Disposal Risk Factors" sections of this document which describe many of the external factors that could cause the Company's actual results to differ materially from the Company's expectations. RESULTS OF OPERATIONS The Company's fiscal 1996 results were disappointing. Annual results were heavily influenced by the significant decline in worldwide recycling commodity prices experienced over the course of the past fiscal year and pre-tax special charges of $447 million ($362 million or $1.80 per share after income taxes) taken in the fourth quarter. As a result, the Company reported a net loss of $101 million for fiscal 1996. These fiscal 1996 results also include the after-tax extraordinary item ($12 million or $.06 per share after income taxes) associated with the $745 million of Convertible Subordinated Debentures redeemed during the second quarter of fiscal 1996. Before considering special charges and the extraordinary item, net income for the current fiscal year was $273 million. These fiscal 1996 results compare with net income for the prior fiscal year of $385 million. Fiscal 1996 revenues were unchanged from the prior fiscal year at $5.8 billion. As stated above, the decline in the average value of worldwide recycling commodities in the current year had a significant negative impact on the Company's fiscal 1996 results, particularly in North America and in Germany. In North America, apart from the significant decline in earnings from recycling operations, operating results were affected favorably by increased earnings in the collection business, partially due to improved customer pricing, and by reduced incentive compensation costs, as compared with the prior year. Current year results were also affected negatively by higher interest expense resulting from increased indebtedness, principally associated with the prior year acquisition of Attwoods plc ("Attwoods") and other acquisitions. A continuation of low recycling commodity prices is expected to continue to negatively affect the Company's earnings into fiscal 1997. The special charges of $447 million included in the fiscal 1996 results of operations resulted principally from management decisions to sell the Company's Italian operations, divest certain domestic and international non-core business assets and operations and close certain recycling facilities not expected to achieve desired performance objectives. The special charges also included a writedown to fair value of the Company's investment in the Azusa, California landfill. This writedown was a result of the changing competitive nature of waste disposal in the Los Angeles market area -23- 28 and the continuing negative legal climate, including recent adverse decisions by California judicial and regulatory authorities, bearing on the site's ability to accept municipal solid waste. See Note (4) of Notes to Consolidated Financial Statements for further discussion of the special charges. During fiscal 1996, the Company acquired 102 businesses with a combined annual revenue base of $333 million. In the first half of fiscal year 1995, the Company acquired Attwoods, the largest acquisition in the history of the Company, with estimated annualized revenues of $450 million, net of divested operations. Approximately 80% of Attwoods revenues, net of divested operations, was derived from collection and landfill operations with the remainder derived from recycling, medical waste and mineral extraction operations. The Company paid approximately $580 million to acquire this integrated service company with operations principally in the United States and the United Kingdom. Prior year results include the operating results of Attwoods beginning in December 1994. During June 1996, the Company announced the reorganization of its North American operating business structure, which became effective in August 1996. The Company's previous organization divided North America into 45 divisions reporting to six regional offices with operations conducted from approximately 400 districts. The new organization divides North America into 13 market areas and retains the district office organization. In addition, the new structure organizes the Company's operations by specific business functions with direct reporting to the corporate office. The new organization should better focus the Company on customer service, improving asset utilization and controlling costs. There was no reorganization charge recorded to cover the estimated future expenses associated with this announcement. The costs associated with this reorganization are being expensed as incurred and approximately $4.2 million of these costs was recorded as selling, general and administrative expense through September 30, 1996. The Company expects to incur additional costs associated with the reorganization during fiscal year 1997. During the fourth quarter, the Company announced a strategic shift in focus from an emphasis on external growth to an emphasis on internal growth with success measured by cash flow and return on gross assets. This strategic shift is also what led the Company to make the organization changes announced in June 1996 discussed above and to set new long- term financial goals. These revised goals and actions taken will more closely align the Company's performance with its stockholders' interests. The generation of cash flow in excess of the weighted average cost of capital is the Company's highest financial priority. In addition, the Company's revised incentive compensation plans link employees to common goals and reward them only as stockholders and customers benefit from the improved performance by the Company. Finally, the fiscal 1997 capital spending program has been substantially reduced from $1.2 billion in fiscal 1996 to $790 million in fiscal 1997, and the decisions involving capital spending are now centralized. -24- 29 Revenues Revenues for fiscal 1996 were $5.8 billion, unchanged from fiscal 1995. Fiscal 1994 revenues were $4.3 billion. The following table reflects the contribution to total revenue of the Company's business segments for the last three years (in millions):
Year Ended September 30, ------------------------------- 1996 1995 1994 ------ ------ ------ North American Operations (1) Collection Services - Solid Waste $2,886 $2,758 $2,360 Transfer and Disposal - Solid Waste Unaffiliated customers 537 543 493 Affiliated companies 513 483 392 ------ ------ ------ 1,050 1,026 885 Recycling Services 531 675 359 Medical Waste Services 200 189 161 Services Group and Other 89 83 83 Elimination of affiliated companies' revenues (513) (483) (392) ------ ------ ------ Total North American Operations 4,243 4,248 3,456 ------ ------ ------ International Operations Germany 662 710 344 The Netherlands 323 323 237 United Kingdom 193 176 55 Other 358 322 223 ------ ------ ------ Total International Operations 1,536 1,531 859 ------ ------ ------ Total Company $5,779 $5,779 $4,315 ====== ====== ====== Percentage Increase from Prior Year --% 34% 24%
- --------------- (1) Revenues from Canadian operations of $169 million, $178 million and $162 million for fiscal years 1996, 1995 and 1994, respectively, are included in North American revenues. The following table reflects changes in revenues for fiscal 1996 from price, volume, acquisitions and foreign currency translation compared with revenue changes for fiscal years 1995 and 1994. The fiscal 1996 growth in revenue from acquisitions was more than offset by the significant decrease in revenues due to price. -25- 30
Change in Revenues -------------------------------- 1996 1995 1994 ------ ------ ------ Price (5.9)% 5.9% 0.6% Volume 0.4 5.8 7.3 Acquisitions 5.7 19.9 16.6 Foreign currency translation (0.2) 2.4 (0.5) ---- ---- ---- Total Percentage Increase --% 34.0% 24.0% ==== ==== ====
Current year revenue growth due to acquisitions was due in part to the acquisition of Attwoods in December 1994, which resulted in increased revenues principally in the United States and the United Kingdom, as well as the Company's acquisition efforts over the past year. The 5.9% decrease in revenues in fiscal 1996 due to changes in price was due to the significant decline in the weighted average price of recycling commodities in North America and Germany during the year compared with last year. In North America, despite the mitigating impact of floor price contracts, the average price of recycling commodities for the current fiscal year declined 53% from the prior year average. The weighted average market prices in North America for corrugated, office paper and newspaper declined from $147 per ton in fiscal 1995 to $61 per ton this year. Paper prices have historically been cyclical, but in the past year, unprecedented changes in recycling commodity prices have been experienced. During fiscal 1996, the Company developed a mechanism to enable it to quickly adjust recycling customer pricing in order to preserve acceptable margins when commodity values decline. This mechanism was implemented over the latter half of fiscal 1996. The timely adjustment of customer fees to correspond with changing commodity prices should lessen earnings volatility in the future. The decline in revenues associated with lower worldwide recycling commodity prices was offset slightly by increases in revenues due to pricing in the North American collection business and, to a lesser extent, in the landfill and medical waste businesses. Revenues increased slightly due to volume in fiscal 1996 compared with last year due to increased volumes in recycling operations offset by reductions in collection and third party disposal volumes. Third party landfill volumes were affected negatively in the current year by self-imposed restricted volumes, the closing of certain sites and the loss of disposal contracts. The 34% increase in revenues in fiscal 1995 compared with fiscal 1994 was principally attributable to improved recycling business results, the impact in fiscal 1995 of the acquisition of Otto Waste Services ("Otto") in Germany in February 1994 and the Attwoods acquisition (with operations principally in the United States and the United Kingdom). North American recycling revenues increased $316 million in 1995, an 88% increase from fiscal 1994. Weighted average paper prices for fiscal 1995 reached an all-time high. Revenues from German operations were also favorably affected by the increased worldwide recycling commodity prices experienced in fiscal 1995. -26- 31 Cost of Operations Cost of operations increased $168 million (4%) in fiscal 1996, $1,024 million (33%) in fiscal 1995, and $598 million (24%) in fiscal 1994, in each case compared with the immediately prior year. Most of this increase in cost of operations is attributable to businesses acquired, including the acquisition of Attwoods in December 1994. Cost of operations as a percent of revenues increased to 74.7% in fiscal 1996 compared with 71.8% in fiscal 1995 and 72.4% in fiscal 1994. This increase as a percent of revenues from fiscal 1995 is principally attributable to the negative effect on revenues of lower worldwide recycling commodity prices in fiscal 1996 compared with last year. The fiscal 1995 increase in cost of operations was due principally to the Attwoods and Otto acquisitions. The fiscal 1994 increase was due largely to the Otto acquisition. Included in cost of operations is depreciation and amortization expense of approximately $491 million, $453 million and $371 million for fiscal years 1996, 1995 and 1994, respectively. Selling, General and Administrative Expense (SG&A) SG&A expenses increased $31 million (4%) in fiscal 1996, $196 million (30%) in fiscal 1995 and $88 million (16%) in fiscal 1994, in each case compared with the immediately prior year. SG&A expense as a percent of revenues increased to 15.1% in fiscal 1996 compared with 14.6% in fiscal 1995 and 15.0% in fiscal 1994. The current year increase in SG&A expense as a percent of revenue compared with the prior year resulted principally from the negative effect on revenues of lower worldwide recycling commodity prices between the years. The $31 million increase in SG&A expense in fiscal 1996 compared with the prior year was primarily related to higher costs (including goodwill amortization expense) associated with the Company's acquisition activities, a substantial portion of which was related to the acquisition of Attwoods in December 1994. Fiscal 1996 SG&A expense also included approximately $4.2 million of expenses associated with the reorganization announced in June 1996. The current year increase in SG&A expense was offset partially by the reduction in fiscal 1996 incentive compensation considering the lower earnings level achieved in 1996. The Company continuously strives to reduce SG&A costs through the consolidation of administrative functions and other cost control measures resulting from the identification and application of best practices within its operations. Increased SG&A expenses in fiscal years 1995 and 1994 over the prior years were principally due to acquisition activities, including the Attwoods and Otto acquisitions. Included in SG&A expense for fiscal years 1996, 1995 and 1994 was depreciation and amortization expense of $112 million, $99 million and $73 million, respectively. Special Charges Special charges of $447 million ($362 million or $1.80 per -27- 32 share after income taxes) were included in fiscal 1996 results of operations. The charges resulted principally from management decisions to sell the Company's Italian operations, divest certain domestic and international non-core business assets and operations and close certain recycling facilities not expected to achieve desired performance objectives. The special charges also included a writedown to fair value of the Company's investment in the Azusa, California landfill. This writedown was a result of the changing competitive nature of waste disposal in the Los Angeles market area and the continuing negative legal climate, including recent adverse decisions by California judicial and regulatory authorities, bearing on the site's ability to accept municipal solid waste. See Note (4) of Notes to Consolidated Financial Statements for further discussion of the special charges and potential additional related expenses to be recorded in fiscal 1997. Interest Expense and Income Interest expense and income for the last three fiscal years were as follows (in thousands):
1996 1995 1994 -------- -------- -------- Gross interest expense $195,605 $170,958 $104,759 Interest capitalized (16,306) (11,429) (11,600) -------- -------- -------- Interest expense $179,299 $159,529 $ 93,159 ======== ======== ======== Interest income $ 8,842 $ 7,422 $ 11,288 ======== ======== ========
Fiscal 1996 interest expense was $179.3 million, an increase of $19.8 million when compared with fiscal 1995 interest expense of $159.5 million. The increase in gross interest expense in fiscal 1996 was principally the result of acquisition activities, including the acquisition of Attwoods in the first half of fiscal year 1995. The $66.4 million increase in interest expense in fiscal 1995 over fiscal 1994 was also due principally to acquisition activities, including the impact in fiscal 1995 of the acquisitions of Otto (acquired in February 1994) and Attwoods. Interest capitalized fluctuates from year-to-year depending upon the number of construction and other qualifying projects and average interest capitalization rate. The increase in interest capitalized in fiscal 1996 compared with the prior year was due to increased construction activities at a number of landfills and other qualifying projects over the prior year. Fiscal year 1995 interest income declined principally as a result of adjustments in international operations related to interest income accrued in fiscal year 1994 on notes receivable amounts which the Company subsequently determined would not be collected. The increase in interest income in fiscal 1996 is reflective in part of the negative adjustment recorded in fiscal 1995 discussed above. -28- 33 Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates increased slightly from fiscal 1995 to 1996. This year-over-year improvement was due principally to earnings improvement of American Ref-Fuel and certain other domestic and international affiliates, partially offset by reduced earnings from the equity investees in Germany. The decline in earnings from equity investees in Germany was due to the acquisition of the remaining 50% ownership interest of Pfitzenmeier & Rau by Otto Waste Services during the second quarter of fiscal 1996. Equity in earnings of unconsolidated affiliates increased $17 million from fiscal 1994 to fiscal 1995 due principally to earnings improvement of American Ref-Fuel and German affiliates. The Company acquired a 50% ownership interest in Otto Waste Services in February 1994 and consolidates Otto's financial results, which include equity in earnings of Otto's unconsolidated affiliates. Minority Interest in Income of Consolidated Subsidiaries The changes in minority interest in income of consolidated subsidiaries are reflective of changes in the net income of Otto Waste Services. The current year decline of $18.4 million was principally due to the negative impact of lower recycling commodity prices received in Germany in the current year as compared with the prior year. The increase in minority interest in income of consolidated subsidiaries of $14.6 million from fiscal 1994 to 1995 was due to increased earnings from Otto, which was acquired in February 1994. Income Taxes The Company's effective income tax rate for fiscal 1996 was 40.0% prior to considering the special charges of $447 million taken in the fourth quarter. Actual income tax expense for fiscal 1996 exceeded pre-tax reported income (income before income taxes, minority interest and extraordinary item) significantly in recognition that certain amounts included in the special charges either are not deductible for income tax purposes or that deductible amounts could expire prior to utilization by the Company. The Company's effective income tax rate for fiscal years 1995 and 1994 was 40.0%. Profitability Ratios and Other Financial Information The following profitability ratios (shown as a percent of revenues) reflect certain profitability trends for the Company's operations. Also presented below are return on asset information and ratios of earnings to fixed charges. -29- 34
Year Ended September 30, ------------------------- 1996 1995 1994 ------ ------ ------ Profitability margins: Gross profit 25.3% 28.2% 27.6% Income from operations before special charges 10.2% 13.7% 12.6% Income from operations 2.5% 13.7% 12.6% Income before income taxes, minority interest and extraordinary item 0.5% 12.0% 11.6% Net income before special charges and extraordinary item (1) 4.7% 6.7% 6.6% Net income (loss) (1) (1.8)% 6.7% 6.5% Other financial information: Pre-tax, pre-interest return on average total assets, excluding special charges 8.4% 12.2% 11.4% Return on Gross Assets 11.4% 13.9% 14.0% Ratio of earnings to fixed charges 1.02(2) 4.04 4.25
- ------------ (1) Fiscal 1996 and 1995 amounts do not reflect the pro forma effect of the use of cash proceeds of $409.7 million to be received in the future under the provisions of the 7.25% Automatic Common Exchange Securities. See Note (14) of Notes to Consolidated Financial Statements. (2) Excluding the effects of the fiscal 1996 special charges of $447 million, the ratio of earnings to fixed charges for fiscal 1996 was 2.77. Special charges of $447 million taken in the fourth quarter of fiscal 1996 had a significant negative impact on the profitability margins of the Company other than the gross profit margin. Exclusive of the impact of these charges, fiscal 1996 results reflected declines in all of the profitability margins presented above as compared with the prior year. These profitability margins were affected negatively by the significant worldwide decline in the average value of recycling commodities in the current year. Lower average recycling commodity prices in the current year principally affected earnings and profitability margins in the Company's North American and German operations. These profitability margins were also negatively affected in the current year by the relatively low profit margins in the Company's Italian operations and, to a lesser extent, its Spanish and Australian operations. Management has made the decision to sell the Italian operations and is continuing to focus on improving its Spanish and Australian operating results. Operating income as a percent of revenues in the North American collection business improved in the current year over last year while the gross profit margin remained relatively flat. Improved pricing in the collection business in fiscal 1996 had a -30- 35 favorable impact on profitability margins. Slight improvements were noted in the transfer and disposal business operations in the current year as well. Profitability ratios improved in fiscal year 1995 principally due to increased commodity prices and volumes in the Company's recycling business, the continued focus on cost reductions and, to a lesser extent, improved pricing and volumes in other business areas. The increase in gross profit margin was driven by the Company's North American operations. An increase in operating profit margins was achieved as a result of the higher gross profit margin in North American operations and due to SG&A expenses increasing at a slower pace than revenues throughout the Company's international operations. Total assets increased to $7.6 billion in fiscal 1996, only a slight increase over the $7.5 billion of total assets at the end of fiscal 1995, reflective of the reduction in assets resulting from the special charges. During fiscal 1995, total assets of the Company increased by $1.7 billion from fiscal 1994, primarily as a result of the acquisition of Attwoods and other businesses, foreign currency translation and capital expenditures. Pre-tax, pre-interest return on average total assets, excluding special charges, decreased in fiscal 1996 from the prior year as a result of lower earnings, principally due to the significant worldwide decline in the average value of recycling commodities in the current year. Despite the significant increase in total assets in fiscal 1995, pre-tax, pre-interest return on average total assets increased to 12.2% for fiscal 1995 due to higher profitability. As stated above, management's focus has shifted from external growth to an emphasis on internal growth with success measured by cash flow and return on gross assets. Return on gross assets ("ROGA"), although not a measure of financial performance under generally accepted accounting principles, is a new measurement for the Company representing the quotient of operating cash flow divided by average gross assets, where operating cash flow and gross assets are defined as follows: Operating cash flow - the sum of (i) net income before extra- ordinary item, (ii) minority interest, (iii) interest expense, net of related income tax benefit, (iv) depreciation and amortization expense and (v) asset impairment writedowns (e.g. special charges in fiscal 1996). Gross assets - the sum of total assets, accumulated depreciation and amortization, and asset impairment writedowns (until such assets are sold or otherwise disposed of), less the sum of (i) current liabilities, net of interest-bearing indebtedness included therein, (ii) accrued environmental and landfill costs associated with the continuing operations of the Company and (iii) deferred income tax liabilities. The gross assets in the ROGA computation for a fiscal year are the average of the applicable five quarter-end amounts in the period. ROGA for fiscal years 1996, 1995 and 1994 was 11.4%, 13.9% and 14.0%, respectively. The Company's goal for fiscal 1997 is to increase ROGA by 0.5% from fiscal 1996 to 11.9%. -31- 36 EBITDA (defined herein as income from operations plus depreciation and amortization expense before considering special charges) was $1.19 billion for fiscal 1996 compared with $1.34 billion for the prior fiscal year. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is included in this discussion because the Company understands that such information is used by certain investors when analyzing the Company's financial condition and performance. The effect of general inflation, as measured by the average consumer price index, has not historically had a material impact on the Company's overall financial position or results of operations. ENVIRONMENTAL MATTERS As of September 30, 1996 and 1995, the Company's balance sheet included accrued environmental costs of $666 million and $703 million, respectively, associated with its obligations for closure and post-closure of its operating and closed landfills and for remediation and corrective actions at Superfund sites and other facilities which are discussed in the following paragraphs. See Notes (2) and (8) of Notes to Consolidated Financial Statements for a discussion of the Company's environmental and landfill accounting policies and other financial information related to environmental and landfill accruals. The Company's landfills are subject to specific operating permit requirements and the applicable existing regulatory requirements of the national, state and local jurisdictions in which they are operated. On an ongoing basis, the Company, based on input from its engineers, estimates its future cost requirements for closure and post-closure management of its landfills based on its interpretations of these regulations and standards. Accruals for these costs are typically provided as the remaining permitted airspace of these facilities is consumed. Engineering reviews of the future cost requirements for closure and post-closure monitoring and maintenance for the Company's operating landfills are performed at least annually and are the basis upon which the Company's estimates of these future costs and the related accruals are revised. In its foreign operations, the Company has noted a trend toward increased landfill regulation, particularly in those countries within the European Economic Community. While increasing regulation often presents new business opportunities to the Company, it likewise often results in increased operating costs in those jurisdictions in which such regulatory changes occur and could potentially have a negative impact on results of operations. The Company is also responsible for a significant number of closed solid waste landfills which require varying levels of inspection, maintenance, environmental monitoring and from time to time corrective action. An overall program of management has been implemented to provide a systematic and routine standard of care and maintenance and to ensure environmental compliance at these closed facilities. In fiscal year 1990, the Company announced its withdrawal from the hazardous waste collection, treatment and disposal business -32- 37 principally because the Company believed its resources would be better utilized if they were directed toward developing opportunities in the solid waste business. Anticipated cash expenditures related principally to remediation and post- closure monitoring at certain closed sites are expected to be required over a long period of time with no significant amounts anticipated to be paid in any single year. In addition, these future cash expenditures will be offset in part by the realization of related income tax benefits. Various subsidiaries of the Company are participating in potentially responsible party ("PRP") groups at 98 waste disposal sites listed on the U.S. Environmental Protection Agency's National Priority List, which may be subject to remedial action under Superfund. The Company's association with these sites is typically attributable to the transportation of waste to the listed sites by its subsidiaries (or their predecessors). In many cases, these waste disposal activities were performed by companies prior to their acquisition by the Company. Certain of the Company's subsidiaries have negotiated settlements with other members of the PRP groups and the EPA with respect to 69 of these 98 Superfund sites. Partial settlements have been negotiated with regard to 13 of the remaining sites. These settlements had no material effect on the Company's liquidity, results of operations or financial position. Further, various subsidiaries have received information requests relating to 67 additional sites on the EPA's National Priority List. For 45 of these sites, the Company has determined it is not a PRP; the Company's PRP status at the remaining 22 sites has not yet been determined. The number of Superfund sites with which the Company's subsidiaries are involved may increase or decrease depending upon the EPA's findings from responses to these information requests and any future information requests which may be received. Superfund legislation permits strict joint and several liability to be imposed without regard to fault, and as a result, one company may be required to bear significantly more than its proportional share of the cleanup costs if it is unable to obtain appropriate contributions from other responsible parties. The final negotiated settlement relating to the large majority of Superfund sites occurs several years after a company has been identified as a PRP due to the many complex issues that must be addressed in determining the magnitude of contamination present, the cause of the contamination and the recommended remedial action to be taken. In many cases, the expenditures related to actual remediation may also occur over a number of years. The Company has implemented programs to promote compliance with the laws, regulations and permit requirements governing its landfills and has as its goal 100% compliance. Even with these programs, management believes that in the normal course of doing business, companies in the waste disposal industry are faced with governmental enforcement proceedings resulting in fines or other sanctions and will likely be required to pay civil penalties or to expend funds for remedial work on waste disposal sites. These programs include systematic site reviews and evaluations of each site requiring corrective action (including Superfund sites) in which the Company's subsidiaries are involved, considering each subsidiary's role with respect to each site and the relationship to the involvement of other parties at the site, the quantity and -33- 38 content of the waste with which the subsidiary was associated, and the number and financial capabilities of the other parties at the various sites. Based on reviews of the various sites, currently available information, and management's judgment and significant prior experience related to similarly situated facilities, expense accruals are provided by the Company for its share of estimated future costs associated with corrective actions to be implemented at certain of these sites and existing accruals are revised as deemed necessary. Management also routinely reviews the realization of its investments in operating landfills and the adequacy of its accruals for the future costs of closure and post-closure monitoring and maintenance at its operating and closed landfills and adjusts its asset values and accruals as deemed appropriate. Management believes that the ultimate disposition of these environmental matters will not have a materially adverse effect upon the liquidity, capital resources, business or consolidated financial position of the Company, though resolution of one or more of these matters could have a significant negative impact on the Company's consolidated financial results for a particular reporting period. Due to the nature of the Company's business and the continuing emphasis of government in all jurisdictions and the public on environmental issues relating to the waste disposal industry, it can be reasonably expected that various subsidiaries of the Company will become involved in additional remediation actions and Superfund sites in the future. Management attempts to anticipate future changes in laws, regulations and operating permit requirements which may affect its operations; however, there is no assurance that such future changes will not significantly affect its operations. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital and related ratios at the end of the last three years were as follows:
As of September 30, ----------------------------------- 1996 1995 1994 --------- ---------- ---------- Working capital (in thousands) $(10,695) $ 7,967 $ 7,104 Working capital ratios 1.0:1 1.0:1 1.0:1
The Company's long-term strategy in managing working capital is to maintain substantial available commitments under bank credit agreements or other financial agreements to finance short-term capital requirements in excess of internally generated cash while minimizing working capital. In connection with the acquisition of Attwoods in December 1994, the Company and three of its subsidiaries entered into a Multicurrency Revolving Credit Agreement for a total facility of 500 million pounds sterling (subsequently converted to U.S. $750 million). The Company is currently engaged in amending this facility, which matures in December 1997, into a 364-day agreement. -34- 39 The Company had repaid the $550 million in U.S. dollars borrowed under this agreement by March 31, 1995. In March 1995, Otto entered into a five-year revolving credit facility in the amount of 600 million deutsche mark with a group of German and international banks. Interest is payable on loans under the facility at the Frankfurt Interbank Offered Rate plus a margin. The agreement requires a facility fee of .45% per annum (.30% per annum if Otto maintains certain net worth requirements) on the total facility commitment, whether used or unused. At September 30, 1996, Otto had outstanding borrowings under this facility of 250 million deutsche mark (approximately U.S. $163.9 million). In July 1995, the Company issued to the public 11,499,200 7.25% Automatic Common Exchange Securities with a stated amount of $35.625 per security ($409.7 million in total). Each security consists of (1) a purchase contract under which (a) the holder will purchase from the Company on June 30, 1998 (earlier under certain circumstances), for an amount in cash equal to the stated amount of $35.625, between .8333 of a share (in total approximately 9.6 million shares) and one share (a maximum of 11,499,200 shares) of the Company's common stock (depending on the then market value of the common stock) and (b) the Company will pay the holder contract fees at the rate of 2.125% per annum on the security, and (2) 5.125% United States Treasury Notes having a principal amount equal to $35.625 and maturing on June 30, 1998. The Treasury Notes underlying these securities are pledged as collateral to secure the holder's obligation to purchase the Company's common stock under the purchase contract. The principal of the Treasury Notes underlying such securities, when paid at maturity, will automatically be applied to satisfy in full the holder's obligation to purchase the Company's common stock. These securities are not included on the Company's balance sheet; an increase in common stockholders' equity will be reflected when the cash proceeds totalling over $400 million are received by the Company. On January 2, 1996, the Company announced that its $400 million 6 3/4% Convertible Subordinated Debentures due 2005 and its $345 million 6 1/4% Convertible Subordinated Debentures due 2012 ("the Debentures") were being called for redemption. The redemption, which occurred on February 2, 1996, resulted in a one-time extraordinary charge to the Company's net income of approximately $12.2 million, after income taxes, or approximately $.06 per share. The Debentures have been refinanced with (i) the issuance of $400 million of notes discussed below and (ii) additional commercial paper borrowings. These transactions had a favorable effect on the Company's weighted average interest rate. In January 1996, the Company issued $200 million of 6.10% Senior Notes due January 15, 2003 and $200 million of 6.375% Senior Notes due January 15, 2008 ("the Notes"). The Notes are not redeemable prior to maturity and are not subject to any sinking fund. The available credit capacity under the Company's $1 billion revolving credit agreement, which matures in May 2000, is used principally to support the Company's commercial paper program, under which up to $1.5 billion in commercial paper may be issued. -35- 40 Borrowings under the commercial paper program may not exceed the available credit under the Company's two existing bank credit agreements. There were approximately $438.3 million of commercial paper borrowings outstanding as of September 30, 1996. As of September 30, 1996, the Company's unused committed borrowing capacity under its Multicurrency Revolving Credit Agreement and its $1 billion bank credit agreement was in excess of $1.3 billion. Such capacity may be used to refinance amounts outstanding under short-term facilities, for financing requirements in connection with foreign exchange contracts or for other capital requirements. Of the $2.8 billion of the Company's long-term indebtedness outstanding at September 30, 1996, 72% was at fixed interest rates for a period of at least 12 months. Management's long-term objective is to maintain most of its indebtedness in fixed interest rate obligations, although variable rate debt has been and will likely continue to be used to meet short-term and certain longer term financing needs. The Company's weighted average cost of indebtedness declined to approximately 7.2% for fiscal 1996 from 7.6% for fiscal year 1995. Long-term indebtedness (including $553.1 million of Otto Waste Services debt, which has not been guaranteed by the Company) as a percentage of total capitalization increased from 47% at September 30, 1995 to 52% at September 30, 1996, principally as a result of acquisition and other market development activities and the special charges of $447 million taken in the fourth quarter of fiscal 1996. The capital appropriations budget for fiscal year 1997 has been established at $790 million, of which $514.6 million is intended to provide for normal replacement requirements and to provide new assets to support planned revenue growth within all consolidated businesses. The remaining $275.4 million is designated for corporate market development activities which principally include new or expanded solid waste transfer and disposal facilities, recycling processing centers, acquisitions of solid waste businesses and other investments in both North American and international operations. Cash flows from operating activities declined to $856.8 million for fiscal 1996 from $1.03 billion reported for last year, principally as a result of lower earnings and the decrease in cash associated with the changes in other liabilities offset partially by increased depreciation and amortization. The use of cash associated with the decrease in other liabilities was principally the result of the slight decline in fiscal 1996 income tax payments relating to current year earnings compared with fiscal 1995 despite significantly reduced taxable income, the reduction in the change in accounts payable between years and increased bonus payments early in fiscal 1996 associated with fiscal 1995 earnings. As of September 30, 1996, there were no significant changes in balance sheet caption amounts from September 30, 1995 other than the redemption of convertible subordinated debentures. The Company believes that its cash flows from operations and its access to cash from banks and other external sources, including the public markets, are more than sufficient for its financing needs. -36- 41 Item 8. - Financial Statements and Supplemental Data REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Browning-Ferris Industries, Inc.: We have audited the accompanying consolidated balance sheet of Browning-Ferris Industries, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, common stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule 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 Browning-Ferris Industries, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas December 4, 1996 -37- 42 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For The Three Years Ended September 30, 1996 (In Thousands Except for Per Share Amounts)
------------------------------------------------------------------------- Year Ended September 30, ------------------------------------ 1996 1995 1994 ------------------------------------------------------------------------- Revenues $5,779,277 $5,779,351 $4,314,541 Cost of operations 4,315,615 4,147,303 3,123,375 ---------- ---------- ---------- Gross profit 1,463,662 1,632,048 1,191,166 Selling, general and administrative expense 874,069 842,861 647,256 Special charges 446,800 -- -- ---------- ---------- ---------- Income from operations 142,793 789,187 543,910 Interest expense 179,299 159,529 93,159 Interest income (8,842) (7,422) (11,288) Equity in earnings of unconsolidated affiliates (55,370) (53,996) (37,084) ---------- ---------- ---------- Income before income taxes, minority interest and extraordinary item 27,706 691,076 499,123 Income taxes 105,188 276,430 199,649 Minority interest in income of consolidated subsidiaries 11,690 30,085 15,501 ---------- ---------- ---------- Income (loss) before extraordinary item (89,172) 384,561 283,973 Extraordinary item - loss on redemption of debt, net of income tax benefit of $4,467, $-- and $2,833 12,159 -- 5,263 ---------- ---------- ---------- Net income (loss) $ (101,331) $ 384,561 $ 278,710 ========== ========== ========== Number of common and common equivalent shares used in computing earnings per share 200,668 199,077 187,621 ========== ========== ==========
(Continued on Following Page) -38- 43 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For The Three Years Ended September 30, 1996 (In Thousands Except for Per Share Amounts)
------------------------------------------------------------------------- Year Ended September 30, ------------------------------------ 1996 1995 1994 ------------------------------------------------------------------------- Income (loss) per common and common equivalent share: Income (loss) before extraordinary item $ (.44) $ 1.93 $ 1.52 Extraordinary item (.06) -- (.03) ------- ------- ------- Net income (loss) $ (.50) $ 1.93 $ 1.49 ======= ======= ======= Cash dividends per common share $ .68 $ .68 $ .68 ======= ======= =======
The accompanying notes are an integral part of these financial statements. -39- 44 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS (In Thousands)
- ----------------------------------------------------------------------- September 30, -------------------------- 1996 1995 - ----------------------------------------------------------------------- CURRENT ASSETS: Cash $ 110,224 $ 92,808 Short-term investments 26,394 104,761 Receivables - Trade, net of allowances of $40,622 and $39,777 for doubtful accounts 929,316 926,791 Other 42,543 57,015 Inventories 51,536 50,090 Deferred income taxes 119,914 116,871 Prepayments and other 107,868 73,959 ---------- ---------- Total current assets 1,387,795 1,422,295 ---------- ---------- PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $2,737,788 and $2,395,795 3,920,721 3,722,292 ---------- ---------- OTHER ASSETS: Cost over fair value of net tangible assets of acquired businesses, net of accumulated amortization of $138,636 and $116,369 1,671,461 1,768,391 Other intangible assets, net of accumulated amortization of $110,835 and $142,780 110,925 116,303 Deferred income taxes 122,617 78,689 Investments in unconsolidated affiliates 287,051 272,205 Other 100,336 80,197 ---------- ---------- Total other assets 2,292,390 2,315,785 ---------- ---------- Total assets $7,600,906 $7,460,372 ========== ==========
The accompanying notes are an integral part of these financial statements. -40- 45 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (In Thousands Except for Share Amounts)
- ----------------------------------------------------------------------- September 30, -------------------------- 1996 1995 - ----------------------------------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 59,806 $ 62,463 Accounts payable 507,731 515,304 Accrued liabilities - Salaries and wages 129,203 122,656 Taxes, other than income 40,876 41,960 Other 430,187 434,855 Income taxes 35,586 53,045 Deferred revenues 195,101 184,045 ---------- ---------- Total current liabilities 1,398,490 1,414,328 ---------- ---------- DEFERRED ITEMS: Accrued environmental and landfill costs 541,838 568,644 Deferred income taxes 108,041 104,645 Other 275,374 220,257 ---------- ---------- Total deferred items 925,253 893,546 ---------- ---------- LONG-TERM DEBT, net of current portion 2,766,885 1,665,804 ---------- ---------- CONVERTIBLE SUBORDINATED DEBENTURES -- 744,944 ---------- ---------- COMMITMENTS AND CONTINGENCIES COMMON STOCKHOLDERS' EQUITY: Common stock, $.16 2/3 par; 400,000,000 shares authorized; 213,390,458 and 213,440,672 shares issued 35,572 35,581 Additional paid-in capital 1,730,612 1,801,407 Retained earnings 1,031,331 1,328,244 Treasury stock, 1,027,278 and 1,001,407 shares, at cost (11,926) (10,494) Stock and Employee Benefit Trust, 11,012,423 and 13,596,325 shares (275,311) (412,988) ---------- ---------- Total common stockholders' equity 2,510,278 2,741,750 ---------- ---------- Total liabilities and common stockholders' equity $7,600,906 $7,460,372 ========== ==========
The accompanying notes are an integral part of these financial statements. -41- 46 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1996 (In Thousands)
- -------------------------------------------------------------------------- Year Ended September 30, ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Shares of common stock: Beginning of year 213,441 197,085 174,232 Stock option exercises 563 423 867 Common stock issuances related to - Public offering -- -- 15,525 Dividend Reinvestment Plan 101 38 96 BFI Employee Stock Ownership and Savings Plan 754 318 597 Acquisitions 988 555 5,708 Stock and Employee Benefit Trust -- 15,000 -- Retirements of common stock (2,584) -- -- Other 127 22 60 -------- -------- -------- End of year 213,390 213,441 197,085 ======== ======== ======== Common stock: Beginning of year $ 35,581 $ 32,854 $ 29,044 Stock option exercises 94 71 145 Common stock issuances related to - Public offering -- -- 2,588 Dividend Reinvestment Plan 17 6 16 BFI Employee Stock Ownership and Savings Plan 126 53 100 Acquisitions 165 93 951 Stock and Employee Benefit Trust -- 2,501 -- Retirements of common stock (431) -- -- Other 20 3 10 -------- -------- -------- End of year 35,572 35,581 32,854 -------- -------- --------
(Continued on Following Page) -42- 47 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1996 (In Thousands)
- -------------------------------------------------------------------------- Year Ended September 30, ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Additional paid-in capital: Beginning of year 1,801,407 1,351,919 743,265 Stock option exercises and related income tax benefit 13,868 (933) 17,528 Common stock issuances related to - Public offering, net of issuance costs -- -- 431,307 Dividend Reinvestment Plan 2,908 1,137 2,587 BFI Employee Stock Ownership and Savings Plan 21,404 9,459 16,628 Acquisitions 29,133 8,245 139,788 Stock and Employee Benefit Trust -- 456,874 -- Adjustment of Stock and Employee Benefit Trust to market (62,388) 2,534 -- Issuance costs and present value of contract fees payable to holders of Automatic Common Exchange Securities -- (27,027) -- Retirements of common stock (74,858) -- -- Other (862) (801) 816 ---------- ---------- ---------- End of year 1,730,612 1,801,407 1,351,919 ---------- ---------- ---------- Retained earnings: Beginning of year 1,328,244 1,009,132 761,325 Net income (loss) (101,331) 384,561 278,710 Cash dividends (133,623) (137,014) (126,818) Foreign currency translation adjustment (61,959) 71,565 95,915 ---------- ---------- ---------- End of year 1,031,331 1,328,244 1,009,132 ---------- ---------- ----------
(Continued on Following Page) -43- 48 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1996 (In Thousands)
- -------------------------------------------------------------------------- Year Ended September 30, ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Treasury stock: Beginning of year (10,494) (2,225) (1,031) Stock option exercises (1,649) 27,013 (1,192) Common stock issuances related to - Dividend Reinvestment Plan -- 1,106 -- BFI Employee Stock Ownership and Savings Plan -- 9,228 -- Acquisitions 303 3,223 -- Reimbursement from Stock and Employee Benefit Trust -- (48,921) -- Other (86) 82 (2) ---------- ---------- ---------- End of year (11,926) (10,494) (2,225) ---------- ---------- ---------- Stock and Employee Benefit Trust: Beginning of year (412,988) -- -- Establishment of trust -- (459,375) -- Reimbursement of treasury stock -- 48,921 -- Reimbursements of common stock 75,289 -- -- Adjustment to market 62,388 (2,534) -- ---------- ---------- ---------- End of year (275,311) (412,988) -- ---------- ---------- ---------- Total common stockholders' equity $2,510,278 $2,741,750 $2,391,680 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. -44- 49 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For The Three Years Ended September 30, 1996 (In Thousands)
- ---------------------------------------------------------------------------- Year Ended September 30, -------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(101,331) $ 384,561 $ 278,710 --------- ---------- --------- Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization - Property and equipment 521,185 476,384 391,639 Goodwill 47,374 43,519 19,277 Other intangible assets 33,966 31,967 33,276 Special charges 446,800 -- -- Deferred income tax expense 3,034 23,450 23,458 Amortization of deferred investment tax credit (706) (706) (706) Provision for losses on accounts receivable 29,527 26,620 31,346 Gains on sales of fixed assets (4,512) (4,724) (5,167) Equity in earnings of unconsolidated affiliates, net of dividends received (13,455) (28,535) (19,442) Minority interest in income of consolidated subsidiaries, net of dividends paid 10,895 26,344 15,501 Increase (decrease) in cash from changes in assets and liabilities excluding effects of acquisitions: Trade receivables (28,683) (70,069) (112,586) Inventories 1,563 (5,466) 2,606 Other assets 29,991 52,625 (14,563) Other liabilities (118,805) 74,519 50,579 --------- --------- --------- Total adjustments 958,174 645,928 415,218 --------- --------- --------- Net cash provided by operating activities 856,843 1,030,489 693,928 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (935,382) (929,596) (694,475) Payments for businesses acquired (188,451) (769,369) (398,734) Investments in unconsolidated affiliates (82,535) (29,530) (54,342) Proceeds from disposition of assets 57,742 159,217 74,797 Purchases of short-term investments -- (42,179) -- Sales of short-term investments 302,065 201,924 147,424 Return of investment in unconsolidated affiliates 56,861 38,637 30,431 --------- ---------- --------- Net cash used in investing activities (789,700) (1,370,896) (894,899) --------- ---------- ---------
(Continued on Following Page) -45- 50 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For The Three Years Ended September 30, 1996 (In Thousands)
- ----------------------------------------------------------------------------- Year Ended September 30, ---------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of stock 13,316 15,363 450,876 Proceeds from issuances of indebtedness 980,834 1,062,652 175,111 Repayments of indebtedness (904,459) (591,884) (246,761) Dividends paid (137,944) (134,139) (122,944) --------- ---------- -------- Net cash provided by (used in) financing activities (48,253) 351,992 256,282 --------- ---------- -------- EFFECT OF EXCHANGE RATE CHANGES (1,474) 2,092 949 --------- ---------- -------- NET INCREASE IN CASH 17,416 13,677 56,260 CASH AT BEGINNING OF YEAR 92,808 79,131 22,871 --------- ---------- -------- CASH AT END OF YEAR $ 110,224 $ 92,808 $ 79,131 ========= ========== ======== SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest, net of capitalized amounts $174,590 $153,576 $ 97,996 Income taxes $163,251 $205,544 $174,005
The accompanying notes are an integral part of these financial statements. -46- 51 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of business and basis of presentation - Browning-Ferris Industries, Inc. and its subsidiaries (the "Company") provide waste services in the United States and in 14 foreign countries. The Company collects, transports, treats and/or processes, recycles and disposes of commercial, residential and municipal solid waste and industrial wastes. The Company is also involved in waste-to- energy conversion, medical waste services, portable restroom services, and municipal and commercial sweeping operations. The accompanying financial statements are prepared on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. Entities over which the Company exercises control are consolidated. Other investments are accounted for under the equity method or the cost method, as appropriate. Foreign currencies have been translated into United States dollars at appropriate exchange rates. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, and affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the Company's estimates. (2) Summary of significant accounting policies - Short-term investments. Short-term investments are carried at cost, which approximates the aggregate market value. At September 30, 1996 and 1995, short-term investments of approximately $26.4 million and $104.8 million, respectively, were invested in time deposits. Inventories. Inventories consisting principally of equipment parts, mate-rials and supplies are generally valued under a method which approximates the lower of cost (first-in, first-out) or market. Property and equipment. Property and equipment are recorded at cost. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering, construction and the direct costs of Company personnel dedicated for these purposes. Interest is capitalized on landfill permitting and construction projects and other projects under development while the assets are undergoing activities to ready them for their intended use. The interest capitalization rate is based on the Company's weighted average cost of indebtedness. Interest capitalized during fiscal -47- 52 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) years 1996, 1995 and 1994 was $16,306,000, $11,429,000 and $11,600,000, respectively. Management routinely reviews its investment in operating landfills, transfer stations and other significant facilities to determine whether the costs of these investments are realizable. Landfill permitting and acquisition costs, excluding the estimated residual value of land, are typically amortized as permitted airspace of the landfill is consumed. For many of the Company's landfills, preparation costs, which include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems, are also typically amortized as total permitted airspace of the landfill is consumed. In determining the amortization rate for these landfills, preparation costs include the total estimated costs to complete construction of the landfill's permitted capacity. For other landfills, the landfill preparation costs are generally less significant and are amortized as the airspace for the particular benefitted phase is consumed. Units-of- production amortization rates are determined annually for each of the Company's operating landfills. The rates are based on estimates provided by the Company's engineers and accounting personnel, and consider the information provided by aerial surveys which are generally performed annually. Depreciation of property and equipment, other than landfills, is provided on the straight-line method based upon the estimated useful lives of the assets, generally estimated as follows: buildings, 20 to 40 years and vehicles and equipment, 3 to 12 years. Expenditures for major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. During fiscal 1996, 1995 and 1994, maintenance and repairs charged to cost of operations were $336,374,000, $325,658,000 and $247,143,000, respectively. When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Intangible assets. The cost over fair value of net tangible assets of acquired businesses ("goodwill") is amortized on the straight- line method over periods not exceeding 40 years. Other intangible assets, substantially all of which are customer lists and covenants not to compete, are amortized on the straight-line method over their estimated lives, typically no more than seven years. The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of intangible assets should be revised or the remaining balances of intangible assets are not recoverable. When factors indicate that an evaluation should be performed for possible impairment, the Company uses an estimate of the future income from operations of the related business as a measure of future recoverability of these assets. -48- 53 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Deferred income taxes. Deferred tax assets and liabilities reflect the impact of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Such amounts are recorded using presently enacted tax rates and regulations. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred revenues. Amounts billed to customers prior to providing the related services are deferred and later reported as revenues in the period in which the services are rendered. Deferred items. Accrued environmental and landfill costs - Accrued environmental and landfill costs includes the non-current portion of accruals associated with obligations for closure and post-closure of the Company's operating and closed landfills, corrective actions and remediation at certain of these landfill facilities and corrective actions at Superfund sites. The Company, based on input from its engineers and accounting personnel, estimates its future cost requirements for closure and post-closure monitoring and maintenance for solid waste operating landfills in the United States based on its interpretation of the technical standards of the U.S. Environmental Protection Agency's Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state basis. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the U.S. consider final capping of the site, site inspections, ground-water monitoring, leachate management, methane gas control and recovery, and operation and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Future cost requirements for closure and post-closure monitoring and maintenance of foreign operating landfills are determined based on the country or local landfill regulations governing the facility. The Company typically provides accruals for these estimated costs as the remaining permitted airspace of such facilities is consumed. Reviews of the future cost requirements for closure and post-closure monitoring and maintenance for the Company's operating landfills by the Company's engineers and accounting personnel are performed at least annually and are the basis upon which the Company's estimates of these future costs and the related accrual rates are revised. -49- 54 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) An overall program of management of closed solid waste landfills previously owned or operated by the Company has been implemented to provide a systematic and routine standard of care and maintenance and to ensure environmental compliance at closed facilities which require varying levels of inspection, maintenance, environmental monitoring and, from time to time, corrective action. Additionally, the Company routinely reviews and evaluates each landfill site requiring corrective action (including Superfund sites) in which the Company's subsidiaries are involved, considering each subsidiary's role with respect to each site and the relationship to the involvement of other parties at the site, the quantity and content of the waste with which the subsidiary was associated and the number and financial capabilities of the other parties at the various sites. Based on reviews of the various sites, currently available information, and management's judgment and significant prior experience related to similarly situated facilities, expense accruals are provided by the Company for its share of estimated future costs associated with corrective actions to be implemented at certain of these sites and existing accruals are revised as deemed necessary. Expense accruals related to the estimated costs of post-closure care of previously owned or operated solid waste landfills are also reviewed on a periodic basis and revised as necessary. Accruals for closure, post-closure and certain other liabilities related to hazardous waste disposal were provided in fiscal 1990 when the Company discontinued its hazardous waste operations. The Company reviews the adequacy of these accruals on a periodic basis to determine whether any revisions in the accruals provided at that time are required. Other deferred items - Deferred items as of September 30, 1996 and 1995 were as follows (in thousands):
1996 1995 -------- -------- Self-insurance accruals $ 90,515 $ 82,508 Minority interest in consolidated subsidiaries 59,376 44,583 Accrued pension costs 39,734 34,798 Unamortized investment tax credits 20,393 21,099 Other 65,356 37,269 -------- -------- $275,374 $220,257 ======== ========
The Company amortizes investment tax credits under the deferral method over the estimated useful lives of the related assets as they are placed in service. No investment tax credits have been generated since fiscal year 1992. In addition to the above deferred items, included in other accrued liabilities at September 30, 1996 and 1995 was the current portion of self-insurance accruals of $87,274,000 and $83,971,000, respectively, -50- 55 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) and accrued pension costs of $14,625,000 and $20,388,000, respectively. Foreign exchange contracts. The Company enters into foreign exchange contracts as a hedge against certain of its net investments in foreign subsidiaries and purchase commitments from time to time. Realized and unrealized gains and losses on these contracts and the amortization of any premiums or discounts are deferred and included with translation adjustments in the separate component of common stockholders' equity or reflected as a deferred asset or liability associated with the anticipated purchase commitment. When deemed appropriate, the Company enters into foreign exchange contracts as a hedge against certain advances to foreign subsidiaries, which are to be repaid in the foreseeable future. Realized and unrealized gains and losses associated with these contracts are reflected in income for each period such contracts are outstanding. There were no significant foreign exchange contracts outstanding at September 30, 1996 or 1995. Cash flow information. The Consolidated Statement of Cash Flows provides information about changes in cash and excludes the effects of non-cash transactions, principally related to business combinations discussed in Note (5). Reclassifications. Certain reclassifications have been made in prior years' financial statements to conform to the fiscal year 1996 presentation. New accounting pronouncement. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement sets forth standards for the recognition and measurement of impairment of long-lived assets, including certain identifiable intangible assets and goodwill related to those assets, to be held and used in an entity's operations or expected to be disposed of. SFAS No. 121 is effective for the Company's fiscal year 1997. As the Company's current accounting practices are substantially in compliance with the provisions of the new standard, the adoption of SFAS No. 121 in fiscal 1997 is not expected to have a material effect on the Company's financial position or results of operations. (3) Reorganization - During June 1996, the Company announced the reorganization of its North American operating business structure, which became effective in August 1996. The Company's previous organization -51- 56 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) divided North America into 45 divisions reporting to six regional offices with operations conducted from approximately 400 districts. The new organization divides North America into 13 market areas and retains the district office organization. In addition, the new structure organizes the Company's operations by specific business functions with direct reporting to the corporate office. There was no reorganization charge recorded to cover the estimated future expenses associated with this announcement. The costs associated with this reorganization are being expensed as incurred and approximately $4.2 million was recorded as selling, general and administrative expense through September 30, 1996. (4) Special charges - Special charges of $447 million ($362 million or $1.80 per share after income taxes) were included in fiscal 1996 results of operations. Charges of $349 million resulted principally from management decisions to sell the Company's Italian operations, divest certain domestic and international non-core business assets and operations and close certain recycling facilities not expected to achieve desired performance objectives. The remainder of the special charges related to the writedown to fair value of the Company's investment in the Azusa, California landfill. This writedown was a result of the changing competitive nature of waste disposal in the Los Angeles market area and the continuing negative legal climate, including recent adverse decisions by California judicial and regulatory authorities, bearing on the site's ability to accept municipal solid waste. The Company has initiated a plan to sell its Italian operations, which has been formally approved by the Company's Board of Directors. The Company expects to complete the sale of these operations during 1997. The difficult political and economic environment and the inability to build the desired operating infrastructure in Italy have negatively affected the Company's ability to achieve adequate returns on invested capital and were significant factors considered in reaching this decision. The Company's investment in its Italian operations, before considering special charges, was $206 million as of September 30, 1996. During the period that the sale of all or substantially all of the Italian operations occurs, losses accumulated in the foreign currency translation component of common stockholders' equity ($49 million at September 30, 1996) must be reported as an additional loss on sale of these operations. Summary financial information related to the Company's Italian operations is as follows (in thousands):
For the Years Ended September 30, --------------------------------- 1996 1995 1994 --------- -------- -------- Revenues $ 122,782 $103,819 $ 55,489 Income (loss) from operations and equity in earnings of uncon- solidated affiliates $(182,584) $ 65 $ (7,831)
-52- 57 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company has also decided to divest of certain domestic and international non-core business assets and operations and close certain recycling facilities. These decisions were reached based on a review of the non-core business assets and operations which were not expected to achieve the Company's desired performance objectives and a review of certain of the Company's recycling operations which have been adversely affected by the significant decline in commodity prices. The special charges, which include asset writedowns and related liabilities recorded for certain contractual arrangements, do not consider future expenses associated principally with severance and relocation costs which will occur as a result of these decisions. These divestitures and closures are expected to be completed during 1997. Assets of these operations, prior to the special charges, were approximately $177 million as of September 30, 1996. The results of operations for these non-core business assets and operations and recycling facilities are not material to the Company's consolidated results of operations as the aggregated revenues and income (loss) from operations of these assets and operations represent less than 4% of the Company's corresponding consolidated totals, on a pre-special charges basis. In October 1996 (pursuant to a judicial order issued in September), California authorities suspended the Company's ability to accept municipal solid waste at its Azusa, California landfill pending compliance with certain regulatory requirements. The Company has appealed this decision. (See Note (11).) As a result of the changing competitive nature of waste disposal in the Los Angeles market area and the continuing negative legal climate, including the recent adverse decisions discussed above, bearing on the site's ability to accept municipal solid waste, $98 million was included in the special charges to reduce the carrying amount of this investment to its estimated fair value. The fair value was determined based upon the present value of the estimated future cash flows using a discount rate commensurate with the risks involved. (5) Business combinations - During the current fiscal year, the Company paid approximately $243.4 million (including additional amounts payable, principally to former owners, of $23.3 million and the issuance of 974,085 shares of the Company's common stock valued at $28.3 million) to acquire 102 solid waste businesses, which were accounted for as purchases, including the acquisition of the remaining 50% ownership interest of Pfitzenmeier & Rau ("P&R"), a joint venture previously owned 50% by Otto Waste Services, a 50% owned subsidiary of the Company. In connection with these acquisitions, the Company recorded additional interest-bearing indebtedness of $69.3 million (including $55.0 million related to P&R) and other liabilities of $37.4 million. The results of these business combinations are not material to the Company's consolidated results of operations or financial position. -53- 58 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) On December 2, 1994, the Company acquired majority control of Attwoods plc ("Attwoods"), which was a provider of waste services operating principally in the United States, the United Kingdom, the Caribbean and mainland Europe (primarily Germany) and also had mineral extraction operations in the United Kingdom. The Company increased its ownership from 56.6% of the outstanding ordinary shares (including ordinary shares represented by American Depository Shares) of Attwoods and 80.8% of the convertible preference shares of Attwoods (Finance) N.V., a finance subsidiary of Attwoods, at December 2, 1994 to 94.4% of the outstanding ordinary shares and 83.2% of the convertible preference shares as of December 31, 1994. The Company acquired the remaining ordinary shares that it did not own and certain additional preference shares during the second quarter of fiscal 1995. The Company paid approximately $580 million (in pounds sterling except where requested to pay U.S. dollars by individual shareholders) to acquire the ordinary and convertible preference shares of Attwoods as discussed above. Additionally, during the second quarter of fiscal 1995, the Company redeemed the remaining outstanding convertible preference shares. In connection with the acquisition, the Company sold in June 1995 the portable sanitation and accommodation business of Attwoods in continental Europe, primarily Germany. As a result of this transaction, the Company reduced the purchase price of this acquisition by the 80.5 million in deutsche mark (U.S. $56.8 million) received and further adjusted the purchase price for the 1.1 million in deutsche mark (U.S. $700,000) in contingent payments received subsequent to December 31, 1995. The Attwoods acquisition has been accounted for as a purchase. In addition to the Attwoods transaction, during the prior fiscal year, the Company paid approximately $191.5 million (including additional amounts payable, principally to former owners, of $9.4 million and the issuance of 262,948 shares of the Company's common stock valued at $8.1 million) to acquire 102 solid waste businesses. These businesses were accounted for as purchases and included the acquisition of the remaining 50% ownership interest outstanding of Servizi Industriali S.r.l., its joint venture in Italy. In connection with these acquisitions, the Company recorded additional interest-bearing indebtedness of $17.8 million and other liabilities of $49.3 million. The Company also exchanged 397,221 shares of its common stock and assumed liabilities and equity of $5.6 million in connection with one business combination that met the criteria to be accounted for as a pooling-of-interests. As the effect of this business combination was not significant, prior period financial statements were not restated. The results of all businesses acquired in fiscal years 1996 and 1995 have been included in the consolidated financial statements from the dates of acquisition. In allocating purchase price, the assets acquired and liabilities assumed in connection with the Company's acquisitions have been initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. As a result, the -54- 59 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) financial information included in the Company's consolidated financial statements is subject to adjustment prospectively as subsequent revisions in estimates of fair value, if any, are necessary. The Company's consolidated results of operations on an unaudited pro forma basis for fiscal year 1995, as though the businesses acquired during fiscal year 1995 had been acquired on October 1, 1994, are as follows (in thousands, except per share amounts): Pro forma revenues $5,978,994 Pro forma net income $ 387,416 Pro forma earnings per common and common equivalent share $ 1.94
These pro forma results are presented for informational purposes only and do not purport to show the actual results which would have occurred had the business combinations been consummated on October 1, 1994, nor should they be viewed as indicative of future results of operations. (6) Property and equipment - Property and equipment at September 30, 1996 and 1995 was as follows (in thousands):
1996 1995 ---------- ---------- Land and improvements $ 340,034 $ 303,848 Buildings 616,596 538,040 Landfills 1,897,206 1,737,975 Vehicles and equipment 3,686,466 3,387,795 Construction-in-progress 118,207 150,429 ---------- ---------- Total property and equipment 6,658,509 6,118,087 Less accumulated depreciation and amortization 2,737,788 2,395,795 ---------- ---------- Property and equipment, net $3,920,721 $3,722,292 ========== ==========
Included in the landfill category of property and equipment, net are $78.1 million and $118.6 million as of September 30, 1996 and 1995, respectively, related to solid waste landfill market development projects, including landfill permitting costs, for which amortization has not yet commenced. The Company reviews the realization of these projects on a periodic basis. (7) Investments in unconsolidated affiliates - The Company uses the equity method of accounting for invest-ments in unconsolidated affiliates over which it exercises control of 20% - 50%. The summarized combined balance sheet and income statement information presented in the table below (and the Company's related investments and earnings) includes amounts -55- 60 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) primarily related to the following significant equity investees: American Ref-Fuel Company of Hempstead, Inc. (New York) (50%), American Ref-Fuel Company of Essex County, Inc. (New Jersey) (50%), American Ref-Fuel Company of Southeastern Connecticut, Inc. (50%), American Ref-Fuel Company of Niagara, L.P. (New York) (50%), American Ref-Fuel Company Operations of SEMASS, L.P. (50%), Servizi Industriali Group (Italy) (50% - for the period through December 1994, at which time the remaining 50% ownership interest was acquired), Swire BFI Waste Services, Ltd. (Hong Kong) (50%), P&R (Germany) (50% - for the period February 1994 through February 1996, at which time the remaining 50% ownership interest was acquired) and Congress Development Company (Chicago, Illinois) (50%) (in thousands).
1996 1995 ---------- ---------- Combined Balance Sheet Information as of Fiscal Yearend: Assets - Current assets $ 233,891 $ 241,787 Noncurrent assets 1,528,799 1,118,959 ---------- ---------- $1,762,690 $1,360,746 ========== ========== Liabilities and Net Worth - Current liabilities $ 181,184 $ 142,967 Noncurrent liabilities 1,221,633 913,213 Net worth 359,873 304,566 ---------- ---------- $1,762,690 $1,360,746 ========== ========== Company's Investments in and Advances to Equity Investees (including subordinated note and other receivables of $63,106 and $81,822, respectively) $ 259,486 $ 239,372 ========== ========== 1996 1995 1994 -------- -------- -------- Combined Income Statement Information for the Fiscal Year Ended: Revenues $511,086 $500,989 $398,753 Gross profit $213,236 $211,555 $162,870 Net income $ 95,438 $ 94,463 $ 74,804 Company's Equity in Earnings of Equity Investees (1) $ 55,370 $ 53,996 $ 37,084 Dividends Received from Equity Investees $ 41,915 $ 25,461 $ 17,642
-56- 61 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) - ---------------- (1) Differences between the equity in earnings of equity investees reported by the Company and the Company's proportionate share of the combined earnings of the related equity investees have resulted principally from accounting differences in the recognition of income and the elimination of intercompany transactions. (8) Accrued environmental and landfill costs - Accrued environmental and landfill costs at September 30, 1996 and 1995 were as follows (in thousands):
1996 1995 -------- -------- Continuing operations - Accrued costs associated with open landfills (including landfills under expansion) $334,793 $343,746 Accrued costs associated with closed landfills and corrective action costs (including Superfund sites) 223,781 232,169 -------- -------- Total 558,574 575,915 Less current portion (included in other accrued liabilities) 92,536 101,295 -------- -------- Total long-term $466,038 $474,620 ======== ======== Discontinued operations - Accrued costs of closure, post- closure and certain other liabilities associated with discontinued operations $107,832 $126,931 Less current portion (included in other accrued liabilities) 32,032 32,907 -------- -------- Total long-term $ 75,800 $ 94,024 ======== ======== Total long-term portion of accrued environmental and landfill costs $541,838 $568,644 ======== ========
For a discussion of the Company's significant accounting policies related to these environmental and landfill costs, see Note (2) - "Summary of significant accounting policies" - "Deferred items" - "Accrued environmental and landfill costs". -57- 62 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Open landfills. The Company operates 100 solid waste landfills in the United States, 18 of which are operated under contracts with municipalities or others. The Company also operates 64 landfills outside of the United States. The Company is responsible for closure and post-closure monitoring and maintenance costs at most of these landfills which are currently operating or are engaged in expansion efforts. Estimated aggregate closure and post-closure costs will be fully accrued for these landfills at the time that such facilities cease to accept waste and are closed. Considering existing accruals at the end of fiscal 1996, approximately $225-$250 million of additional accruals are to be provided over the remaining lives of these facilities. Estimated additional environmental costs ranging from $425-$475 million, principally related to capping and certain methane gas control and recovery activities expected to occur during the operating lives of these sites, are also to be expensed over the remaining lives of these landfill facilities. Closed landfills and corrective action costs (including Superfund sites). These costs relate to closure and post-closure activities or corrective actions at closed solid waste landfills owned or previously operated by the Company as well as a number of Superfund sites where subsidiaries of the Company are participating in potentially responsible party groups or are otherwise involved. Discontinued operations. These costs relate to closure and post-closure activities or corrective actions at hazardous waste landfills owned or previously operated by the Company as well as a number of Superfund sites where subsidiaries of the Company previously disposed of hazardous waste and are participating in potentially responsible party groups or are otherwise involved. The Company discontinued its hazardous waste operations in April 1990. (9) Long-term debt - Long-term debt at September 30, 1996 and 1995 was as follows (in thousands): -58- 63 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1996 1995 ---------- ---------- Senior indebtedness: 6.10% Senior Notes, net of unamortized discount of $1,838 $ 198,162 $ -- 6.375% Senior Notes, net of unamortized discount of $2,051 197,949 -- 7.40% Debentures, net of unamortized discount of $2,082 and $2,136 397,918 397,864 7 7/8% Senior Notes, net of unamortized discount of $783 and $875 299,217 299,125 9 1/4% Debentures 100,000 100,000 Solid waste revenue bond obligations 149,127 114,079 Other notes payable, primarily 5.0%-14.0% 804,721 585,211 ---------- ---------- 2,147,094 1,496,279 Commercial paper and short-term facilities to be refinanced 679,597 231,988 ---------- ---------- Total long-term debt 2,826,691 1,728,267 Less current portion 59,806 62,463 ---------- ---------- Long-term debt, net of current portion $2,766,885 $1,665,804 ========== ==========
The long-term portion of the debt outstanding at September 30, 1996, matures as follows: 1998, $345,278,000; 1999, $159,767,000; 2000, $795,931,000; 2001, $27,137,000 and in subsequent years, $1,438,772,000. 6.10% and 6.375% Senior Notes. In January 1996, the Company issued $200 million of 6.10% Senior Notes due January 15, 2003 and $200 million of 6.375% Senior Notes due January 15, 2008 (the "Notes"). The Notes are not redeemable prior to maturity and are not subject to any sinking fund. Net proceeds from the sale of the Notes were applied to the repayment of a portion of the $745 million of Convertible Subordinated Debentures called for redemption on February 2, 1996. See Note (10). 7.40% Debentures. In September 1995, the Company issued $400 million of 7.40% Debentures due September 15, 2035. These debentures are not subject to any sinking fund and may be redeemed as a whole or in part, at the option of the Company at any time. The redemption price is equal to the greater of (i) the principal amount of the debentures and (ii) the present value of future principal and interest payments discounted at a rate specified under the terms of -59- 64 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the indenture. Net proceeds received from the sale of these debentures were used to repay short-term indebtedness associated with various acquisitions, including the Attwoods acquisition. 7 7/8% Senior Notes. In March 1995, the Company issued $300 million of 7 7/8% Senior Notes which mature on March 15, 2005. Net proceeds received by the Company from the sale were used to repay indebtedness associated with the acquisition of Attwoods and other working capital requirements. 9 1/4% Debentures. In May 1991, the Company issued $100 million of 9 1/4% Debentures which mature on May 1, 2021. The debentures may not be redeemed prior to maturity and are not subject to any sinking fund. 8 1/2% Sinking Fund Debentures. In April 1994, the Company called for redemption its $100 million 8 1/2% Sinking Fund Debentures due 2017 which were originally issued in January 1987. As a result, the Company recorded an after-tax loss of $5,263,000, which has been reflected as an extraordinary item in fiscal 1994 in the Company's Consolidated Statement of Operations. Bank credit agreements. During May 1995, the Company modified the terms of its existing $1 billion revolving credit agreement extending the maturity of the facility to May 2000. The agreement continues to provide total committed credit capacity of $1 billion. This $1 billion credit agreement can be utilized to borrow U.S. domestic dollars or Eurodollars on a committed basis. At the option of the Company and the participating banks, U.S. dollar and Eurodollar loans bear a rate of interest based on the London Interbank Offered Rate ("LIBOR"), the prime rate, the federal funds rate or a certificate of deposit rate, plus a margin. The $1 billion revolving credit agreement with a group of U.S. and international banks currently requires a facility fee of .1% per annum on the total commitment, whether used or unused. This $1 billion credit agreement is used primarily to support the Company's commercial paper program. The agreement contains a net worth requirement of $1.5 billion, which increases annually after September 30, 1995 by 20% of the consolidated net income of the preceding year and excludes the effect of any foreign currency translation adjustments on net worth. At September 30, 1996 and 1995, the Company had no outstanding borrowings under this bank credit agreement. In connection with the acquisition of Attwoods in December 1994, the Company and three of its subsidiaries entered into a Multicurrency Revolving Credit Agreement for a total facility of 500 million pounds sterling (subsequently converted to U.S. $750 million). The facility, which matures December 31, 1997, can be -60- 65 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) utilized to borrow U.S. dollars, pounds sterling or deutsche mark as determined by the Company. At the option of the Company, the loans bear a rate of interest, generally for periods of six months or less, based on the prime rate or LIBOR, a certificate of deposit rate or the federal funds rate, plus a margin. The Multicurrency Revolving Credit Agreement with Credit Suisse, as administrative agent for a group of U.S. and international banks, currently requires a facility fee of .12% per annum. This agreement contains a net worth requirement of $1.5 billion which increases annually after September 30, 1995 by 25% of the consolidated net income of the preceding year and excludes the effect of any foreign currency translations on net worth. Prior to March 31, 1995, the Company had repaid the $550 million in U.S. dollars borrowed during December 1994. Interest was payable on this indebtedness at an average interest rate of approximately 6.5%. At September 30, 1996 and 1995, the Company had no outstanding borrowings under this agreement. In March 1995, Otto Waste Services entered into a five-year revolving credit facility in the amount of 600 million deutsche mark with a group of German and international banks. Interest is payable on loans under the facility at the Frankfurt Interbank Offered Rate ("FIBOR") plus a margin. This agreement requires a facility fee of .45% per annum (.30% per annum if Otto Waste Services maintains certain net worth requirements) on the total facility commitment, whether used or unused. At September 30, 1996 and 1995, Otto Waste Services had outstanding borrowings under this facility of 250 million deutsche mark (approximately U.S. $163.9 million) and 140 million deutsche mark (approximately U.S. $98.1 million), respectively. As of September 30, 1996, distributions from retained earnings could not exceed $945 million under the most restrictive of the Company's net worth maintenance requirements. Solid waste revenue bond obligations. Certain subsidiaries of the Company have entered into agree-ments under which they receive proceeds from the sale by government authorities of solid waste revenue bonds. These subsidiaries are obligated to make payments sufficient to pay the interest and retire the bonds. The weighted average interest rate of these issues is approximately 5.89%. These issues mature at various dates through the year 2027. The solid waste revenue bond obligations of the subsidiaries are guaranteed by the Company. Other notes payable. During February and March 1995, the Company borrowed a total of $160 million under separate senior note agreements with a number of lending institutions. Interest is payable semi-annually on the senior notes at rates ranging from 7.5 - 8.0%. The senior notes mature between December 1997 and March 1998. -61- 66 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Additionally, notes payable includes mortgages payable and other secured debt, unsecured debt and capitalized lease obligations of the Company. Approximately $336 million and $321 million of this indebtedness at September 30, 1996 and 1995, respectively, relates to a large number of separate company debt instruments of Otto Waste Services and its consolidated subsidiaries. A substantial portion of the Otto Waste Services debt is secured by assets of the related companies and is payable in deutsche mark. Commercial paper and short-term facilities to be refinanced. Under the Company's commercial paper program, the Company is authorized to issue up to $1.5 billion in commercial paper. The Company may use proceeds from borrowings under this program to refinance existing indebtedness and for general corporate purposes, including interim financing of business acquisitions and funding working capital requirements. Borrowings under the commercial paper program may not exceed the available credit under the Company's existing bank credit agreements. At September 30, 1996 and 1995, the Company had commercial paper and other short-term borrowings of $679,597,000 and $231,988,000, respectively, classified as long-term debt. It is the Company's intention to refinance certain commercial paper balances and other outstanding borrowings classified as long-term debt through the use of existing committed long-term bank credit agreements in the event that alternative long-term refinancing is not arranged. A summary by country of such commercial paper balances and other outstanding borrowings to be refinanced as of September 30, 1996 and 1995 is as follows (amounts in thousands):
1996 1995 -------------------- -------------------- Amount Interest Amount Interest to be Rate at to be Rate at Refinanced Yearend Refinanced Yearend ---------- -------- ---------- -------- United States - Commercial paper $438,296 5.5% $ 34,317 6% Germany 241,301 5-10% 197,671 5-10% -------- -------- $679,597 $231,988 ======== ========
(10) Convertible Subordinated Debentures - On January 2, 1996, the Company announced that its $400 million 6 3/4% Convertible Subordinated Debentures due 2005 and its $345 million 6 1/4% Convertible Subordinated Debentures due 2012 ("the Debentures") were being called for redemption. The redemption, which occurred on February 2, 1996, resulted in a one-time extraordinary charge to the Company's net income of $12.2 million, after income taxes, or approximately $.06 per share. The Debentures were refinanced with (i) the net proceeds from the -62- 67 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) issuance of $400 million of Senior Notes issued in January 1996 and (ii) additional commercial paper borrowings to be refinanced through other long-term financings. (11) Commitments and contingencies - Legal proceedings. The Company and certain subsidiaries are involved in various administrative matters or litigation, including personal injury and other civil actions, as well as other claims and disputes that could result in additional litigation or other adversary proceedings. While the final resolution of any matter may have an impact on the Company's consolidated financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the consolidated financial position of the Company. Environmental proceedings. California judicial and regulatory authorities suspended the Company's ability to accept municipal solid waste at certain portions of its Azusa, California landfill in January 1991. The Company has continued to use the facility for the disposal of primarily inert waste. Since January 1991, the Company has sought and received the ability to dispose of certain additional non- municipal solid waste streams at the facility. In 1995, the Company was allowed to continue to accept municipal solid waste in a portion of the landfill dependent on the satisfaction of certain technical requirements mandated by California authorities. In October 1996 (pursuant to a judicial order issued in September), California authorities again suspended the Company's ability to accept municipal solid waste at its Azusa, California landfill pending compliance with certain additional regulatory requirements. Although this decision has been appealed, the Company determined that recovery of its total investment in this facility was unlikely. Accordingly, a special charge of $98 million was recorded to reduce the carrying amount of this investment to its estimated fair value. See Note (4). The Company and certain subsidiaries are involved in various other environmental matters or proceedings, including original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities of certain landfill disposal facilities, and proceedings relating to governmental actions resulting from the involvement of various subsidiaries of the Company with certain waste sites (including Superfund sites), as well as other matters or claims that could result in additional environmental proceedings. While the final resolution of any matter may have an impact on the Company's consolidated financial results for a particular reporting period, management believes that the ultimate disposition -63- 68 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) of these matters will not have a materially adverse effect upon the consolidated financial position of the Company. Insurance matters. Under its insurance policies, the Company generally has self-insured retention limits ranging from $500,000 to $5,000,000 and has obtained fully insured layers of coverage above such self-retention limits. The Company has a wholly-owned domestic insurance subsidiary which operates as a captive insurance company. It currently writes insurance to meet financial assurance obligations related to closure and post-closure of certain landfills of the Company. At September 30, 1996, no claims had been made relative to this insurance operation, and no claim reserves had been posted. In order to meet existing governmental requirements, the Com-pany has been able to secure an environmental impairment liability insurance policy in amounts which the Company believes are in compliance with the amounts required by federal and state law. Under this policy, the Company must reimburse the carrier for losses incurred by the Company. Waste-to-energy projects. Subsidiaries of the Company and Air Products and Chemicals, Inc. ("Air Products") each have 50% ownership interests in American Ref-Fuel partnerships that construct, own and operate facilities which generate and sell electricity from the incineration of solid waste. The five facilities currently in commercial operation are located in Hempstead, New York, Essex County in New Jersey, Preston, Connecticut, Niagara Falls, New York and Rochester, Massachusetts. Financing arrangements for four of these projects include agreements with the Company and Air Products to each severally fund one-half of each partnership's cash deficiencies resulting from the partnership's failure to perform. With respect to the facilities located in Hempstead, New York, Essex County in New Jersey and Preston, Connecticut, the Company and Air Products generally will not be required to fund cash deficiencies associated with waste deliveries by the sponsoring municipality below certain minimum levels, changes in law or termination of incineration service for reasons other than default by the respective partnership. In the event of a partnership default which results in termination of incineration service, the Company may limit its financial obligations by partnership as follows: Hempstead, New York - Funding of 50% of periodic payments related to outstanding debt. At September 30, 1996, $215 million of total unamortized project debt was outstanding. Average annual debt service on 50% of the debt over the next five years is $11 million. -64- 69 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Essex County in New Jersey - Funding of 50% of cash deficiencies including debt service up to $50 to $100 million, depending upon the circumstances. Average annual debt service on 50% of the debt over the next five years is $10 million. Preston, Connecticut - Funding of 50% of periodic payments related to outstanding debt. At September 30, 1996, total outstanding debt included $86 million of unamortized project debt and $44 million of additional partnership debt (of which $22 million is guaranteed by the Company). Average annual debt service on 50% of the debt over the next five years is $6 million. With respect to the facilities located in Niagara Falls, New York and Rochester, Massachusetts, the Company may limit its financial obligations by partnership as follows: Niagara Falls, New York - Funding of 50% of partnership cash deficiencies, including debt service. At September 30, 1996, $165 million of total unamortized project debt was outstanding. Average annual debt service on 50% of the debt over the next five years is $3 million. SEMASS in Rochester, Massachusetts - Under support agreements and guarantees (i) lending up to 50% of $5 million to the SEMASS Partnership under certain circumstances, (ii) deferring up to 50% of $7 million of operating cost reimbursement, and (iii) funding up to 50% of $5 million in operating damages. These obligations have been assigned to the lenders. The SEMASS Partnership has borrowed approximately $342 million (weighted average fixed rate of 9.7%) of non-recourse debt as of September 30, 1996. Average annual debt service on 50% of the debt over the next five years is approximately $20 million. Operating leases. The Company and its subsidiaries lease substantial portions of their office and other facilities under various lease agreements. At September 30, 1996, total minimum rental commitments becoming payable under all noncancellable operating leases are as follows (in thousands): 1997 $65,495 2001 $31,455 1998 $59,340 2002 - 2006 $94,397 1999 $51,937 2007 - 2011 $63,893 2000 $44,546 All years thereafter $15,953
Total rental expenses for fiscal years 1996, 1995 and 1994, substantially all of which related to fixed amount rental agreements, were $105,134,000, $95,526,000 and $58,667,000, respectively. -65- 70 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (12) Preferred stock - The Company is authorized by its Restated Certificate of In-corporation to issue 25 million shares of preferred stock, the terms and conditions to be determined by the Board of Directors in creating any particular series. (13) Preferred Stock Purchase Rights Plan - In June 1988, the Board of Directors of the Company adopted a Preferred Stock Purchase Rights Plan (the "Plan") and in connection therewith declared a dividend of one Preferred Stock Purchase Right (a "Right") on each outstanding share of the Company's common stock and on each share subsequently issued until separate Rights certificates are distributed, or the Rights expire or are redeemed. When exercisable, each Right will entitle a holder to purchase one one-hundredth of a share of a new series of the Company's Preferred Stock at an exercise price of $110.00, subject to adjustment. The Plan, as subsequently amended in February 1996, provides that if the Company is acquired in a business combination transaction on or at any time after the date on which a person obtains ownership of stock having 20% or more of the Company's general voting power, provision generally must be made prior to the consummation of such transaction to entitle each holder of a Right to purchase at the exercise price a number of the acquiring company's common shares having a market value at the time of such transaction of two times the exercise price of the Right. The Plan also provides that upon the occurrence of certain other specific matters, each holder of a Right will have the right to receive, upon payment of the exercise price, shares of the new series of Preferred Stock having a market value of two times the exercise price of a Right. The Company has a right to redeem the Rights for $.05 per Right (subject to adjustment) prior to the time they become exercisable. The Rights will expire on June 13, 1998. (14) Common stock - Earnings per share. The following table reconciles the number of common shares shown as outstanding on the consolidated balance sheet with the number of common and common equivalent shares used in computing primary earnings per share (in thousands): -66- 71 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended September 30, ---------------------------- 1996 1995 1994 ------- ------- ------- Common shares outstanding, end of period 212,363 212,439 196,341 Less - Shares held in the Stock and Employee Benefit Trust (11,012) (13,596) -- ------- ------- ------- Common shares outstanding for purposes of computing primary earnings per share, end of period 201,351 198,843 196,341 Effect of using weighted average common and common equivalent shares outstanding (1,398) (1,199) (9,788) Effect of shares issuable under stock option plans based on the treasury stock method 715 1,433 1,068 ------- ------- ------- Shares used in computing primary earnings per share 200,668 199,077 187,621 ======= ======= =======
Shares of common stock held in the Stock and Employee Benefit Trust ("the Trust") are not considered to be outstanding in the computation of common shares outstanding until shares are utilized at the Company's option for the purposes for which the Trust was established. The difference between shares for primary and fully di-luted earnings per share was not significant in any year. Conversion of the 6 3/4% Convertible Subordinated Debentures due 2005, which were determined not to be common stock equivalents, was not assumed in the computation of fully diluted earnings per share because the debentures had an anti-dilutive effect in the periods prior to their redemption in February 1996. Earnings per common and common equivalent share were computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during each year. Common stock equivalents include stock options, the Company's 6 1/4% Convertible Subordinated Debentures due 2012 (the "6 1/4% Debentures") which were redeemed in February 1996, and the 7.25% Automatic Common Exchange Securities. The effect of the 6 1/4% Debentures on earnings per share was not significant or was not dilutive in the periods prior to their redemption in February 1996 and, accordingly, has not been included in the computations. The 7.25% Automatic Common Exchange Securities had no effect on the computations for the periods presented. -67- 72 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Stock and Employee Benefit Trust. In February 1995, the Company established a Stock and Employee Benefit Trust to which it sold 15,000,000 shares of the Company's newly issued common stock. This trust was established to provide the Company the option to use the trust to fund future payments under existing employee compensation and benefit plans as well as other general corporate purposes for which common stock might be issued. Shares issued to the trust are valued at market and reflected as a reduction of common stockholders' equity in the balance sheet. Automatic Common Exchange Securities. In July 1995, the Company issued to the public 11,499,200 7.25% Automatic Common Exchange Securities with a stated amount of $35.625 per security ($409.7 million in total). Each security consists of (1) a purchase contract under which (a) the holder will purchase from the Company on June 30, 1998 (earlier under certain circumstances), for an amount in cash equal to the stated amount of $35.625, between .8333 of a share (in total approximately 9.6 million shares) and one share (a maximum of 11,499,200 shares) of the Company's common stock (depending on the then market value of the common stock) and (b) the Company will pay the holder contract fees at the rate of 2.125% per annum on the security, and (2) 5.125% United States Treasury Notes having a principal amount equal to $35.625 and maturing on June 30, 1998. The Treasury Notes underlying these securities are pledged as collateral to secure the holder's obligation to purchase the Company's common stock under the purchase contract. The principal of the Treasury Notes underlying such securities, when paid at maturity, will automatically be applied to satisfy in full the holder's obligation to purchase the Company's common stock. These securities are not included on the Company's balance sheet; an increase in common stockholders' equity will be reflected when cash proceeds are received by the Company. Stock incentive plans. The Company presently maintains six stock option plans af-fording employees, directors and other persons affiliated with the Company the right to purchase shares of its common stock. At September 30, 1996, options were available for future grants only under five plans, the Company's 1987, 1990, both 1993 plans and the 1996 plan (subject to stockholder approval). At September 30, 1996, all of the options outstanding were non-qualified stock options. The exercise price, term and other conditions applicable to each option granted under the Company's plans are generally determined by the Compensation Committee at the time of the grant of each option and may vary with each option granted. No option may be granted at a price less than the stock's fair market value on the date of the grant. -68- 73 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Transactions under all stock option plans are summarized below: Year Ended September 30, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Options outstanding at beginning of year 10,172,917 9,905,868 9,708,547 Options granted 2,688,600 1,758,400 1,697,000 Options terminated (285,980) (204,395) (632,870) Options exercised (563,073) (1,286,956) (866,809) ---------- ---------- ---------- Options outstanding at end of year 12,012,464 10,172,917 9,905,868 ========== ========== ========== Options exercisable at end of year 6,852,999 5,921,652 5,939,033 Options available for future grants at end of year 2,423,544(1) 4,925,856 6,501,573 Total option price of options outstanding at end of year $330,267,919 $269,901,376 $249,683,713 Option price range: Options granted $25.56-$31.56 $28.00-$36.56 $25.44-$31.69 Options terminated $17.31-$40.44 $15.50-$40.44 $17.31-$43.38 Options exercised $12.81-$30.81 $ 9.34-$37.63 $ 7.00-$29.84 Options outstanding at end of year $17.31-$43.38 $12.81-$43.38 $ 9.34-$43.38
- ---------- (1) Excludes 10 million under the 1996 Plan, which is subject to stockholder approval. Under the 1993 and 1996 Stock Incentive Plans, restricted common stock of the Company may be granted to officers, other key employees and certain non-employee directors. Shares granted are subject to certain restrictions on ownership and transferability. Such restrictions on current restricted stock grants lapse two years from the date of grant for officers and key employees and three years for non-employee directors. The deferred compensation expense related to restricted stock grants is amortized to expense on a straight-line basis over the period of time the restrictions are in place and the unamortized portion is classified as a reduction of additional paid-in capital in the Company's Consolidated Balance Sheet. Additionally, the 1993 and 1996 Stock Incentive Plans provide for common stock awards. Restricted stock grants and common stock awards reduce stock options otherwise available for future grant. Of the 500,000 shares which may be awarded to officers and key employees as restricted stock grants or stock awards (excluding 1,500,000 shares which are subject to stockholder approval), 94,655 restricted shares were issued during the current year and 124,382 restricted shares were outstanding as of September 30, 1996. In addition, 8,024 restricted shares issued to non-employee directors were outstanding as of September 30, -69- 74 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1996. No common stock awards had been granted as of September 30, 1996. Dividend Reinvestment Plan. The Company has a Dividend Reinvestment Plan which provides registered common stockholders an opportunity to reinvest automatically their dividends in shares of the Company's common stock. Each participant in the plan may also make additional cash payments of not less than $25 per remittance and not more than $60,000 per calendar year to be invested in such common shares pursuant to the plan. The plan provides that newly issued shares may be acquired from the Company, purchased on the open market or purchased under a combination of the two alternatives. (15) Foreign currency translation - Increases (decreases) in the equity component for each period's translation adjustments are as follows (in thousands):
Year Ended September 30, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- Beginning cumulative translation adjustment $ 30,821 $ (40,744) $(136,659) Translation adjustment for the fiscal year (61,959) 71,565 95,915 --------- --------- --------- Ending cumulative translation adjustment $ (31,138) $ 30,821 $ (40,744) ========= ========= =========
(16) Income taxes - The components of (i) earnings before income taxes, minority interest and extraordinary item and (ii) the income tax provision for each of the three fiscal years ended September 30, are as set forth below (in thousands).
1996 ------------------------------- Excluding Special Special As Charges Charges Reported 1995 1994 -------- --------- -------- -------- -------- Domestic $429,705 $(187,087) $242,618 $563,648 $421,620 Foreign (1) 44,801 (259,713) (214,912) 127,428 77,503 -------- --------- -------- -------- -------- $474,506 $(446,800) $ 27,706 $691,076 $499,123 ======== ========= ======== ======== ========
-70- 75 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) - ---------- (1) Amounts are net of intercompany interest expense for fiscal years 1996, 1995 and 1994 of $53,660,000, $36,572,000 and $23,838,000, respectively. The Company maintains a capital structure with respect to its foreign operations designed to minimize worldwide income and other tax costs.
State Federal Foreign & Local Total -------- -------- -------- -------- 1996: Current $ 51,900 $ 33,497 $ 17,463 $102,860 Deferred 30,895 (35,382) 7,521 3,034 Amortization of investment tax credit (706) -- -- (706) -------- -------- -------- -------- $ 82,089 $ (1,885) $ 24,984 $105,188 ======== ======== ======== ======== 1995: Current $183,876 $ 46,480 $ 23,330 $253,686 Deferred 20,605 (6,764) 9,609 23,450 Amortization of investment tax credit (706) -- -- (706) -------- -------- -------- -------- $203,775 $ 39,716 $ 32,939 $276,430 ======== ======== ======== ======== 1994: Current $116,164 $ 42,107 $ 18,626 $176,897 Deferred 34,646 (220) (10,968) 23,458 Amortization of investment tax credit (706) -- -- (706) -------- -------- -------- -------- $150,104 $ 41,887 $ 7,658 $199,649 ======== ======== ======== ========
The following is a reconciliation between the U.S. federal income tax rate and the effective income tax rate for each of the three fiscal years in the period ended September 30, 1996: -71- 76 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1996 1995 1994 ------- ------- ------- Excluding Special Charges: Income tax - U.S. federal rate 35.00% 35.00% 35.00% Federal effect of state income taxes (2.31) (1.67) (.54) Effect of foreign operations (2.05) (.20) .89 All other, net 2.77 2.10 3.12 ------ ----- ----- Federal and foreign 33.41 35.23 38.47 State income taxes 6.59 4.77 1.53 ------ ----- ----- Effective income tax rate, excluding special charges 40.00 40.00 40.00 Effect of Special Charges 339.66 -- -- ------ ----- ----- Effective income tax rate 379.66% 40.00% 40.00% ====== ===== =====
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at September 30, 1996 and 1995, are as follows (in thousands):
1996 1995 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Depreciation and amortization $144,409 $468,326 $142,408 $460,444 Accrued environ- mental and landfill costs 183,041 -- 191,737 -- Accruals related to discontinued operations 8,956 -- 29,120 -- Self-insurance accruals 56,457 -- 52,310 -- Assets and operations to be divested 107,247 -- -- -- Net operating loss carryforwards 115,717 -- 108,983 -- Other 318,449 138,649 231,550 88,505 -------- -------- -------- -------- Deferred tax assets and liabilities 934,276 $606,975 756,108 $548,949 ======== ======== Valuation allowance (192,811) (116,244) -------- -------- Deferred tax assets, net of valuation allowance $741,465 $639,864 ======== ========
-72- 77 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The valuation allowance applies principally to a substantial portion of the net operating loss carryforwards and deductions associated with the special charges which could expire prior to utilization by the Company. Foreign net operating loss carryforwards of approximately $180 million are available to reduce future taxable income of the applicable foreign entities for periods which generally range from 1997 to 2003. Domestic state net operating loss carryforwards of approximately $831 million (the tax benefit of which is calculated at rates ranging generally from 5%- 10%) are available to reduce future taxable income of the applicable entities taxable in such states for periods which range from 1997 to 2011. The net change in the total valuation allowance for the year ended September 30, 1996, was an increase of $76.6 million, principally due to the special charges taken in the fourth quarter of fiscal 1996, compared with a decrease in the prior year of $3.2 million. Deferred income taxes have not been provided as of September 30, 1996, on approximately $820 million of undistributed earnings of foreign affiliates which are considered to be permanently reinvested. (17) Employee benefit plans - Employee stock ownership and savings plan. The Company sponsors an employee stock ownership and savings plan which incorporates deferred savings features permitted under IRS Code Section 401(k). The plan covers substantially all U.S. employees with one or more years of service except for certain employees subject to collective bargaining agreements. Eligible employees may make voluntary contributions to one or more of five investment funds through payroll deductions which, in turn, will allow them to defer income for tax purposes. The Company matches these voluntary contributions at a rate of $.50 per $1.00 on the first 5% of total earnings contributed by each participating employee. The Company matches the voluntary contributions through open market purchases or issuances of shares of the Company's common stock. The Company expenses its contributions to the employee stock ownership and savings plan which for fiscal years 1996, 1995 and 1994 were $11,752,000, $10,545,000 and $9,430,000, respectively. Employee retirement plans. The Company and its domestic subsidiaries have two defined benefit retirement plans covering substantially all U.S. employees except for certain employees subject to collective bargaining agreements. The benefits for these plans are based on years of service and the employee's compensation. The Company's general funding policy for these plans is to make annual contributions to the plans equal to or exceeding the actuary's recommended contribution. -73- 78 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company also has employees in various foreign countries that are covered by defined benefit pension plans. The benefits for these plans are based generally on years of service and the employee's compensation. Under the Company's funding policy, annual contributions are made in order to fund the plans over the participants' total expected periods of service in conformity with the requirements of local law or custom. The components of net annual pension cost for fiscal years 1996, 1995 and 1994 for the defined benefit plans were as follows (in thousands):
1996 1995 1994 -------- -------- -------- U.S. Plans: Service cost (benefits earned during the period) $ 12,260 $ 9,933 $ 11,260 Interest cost on projected benefit obligation 13,521 12,597 10,329 Investment gain on plan assets (27,957) (14,097) (11,728) Net amortization and deferral 12,056 (110) (1,534) -------- -------- -------- Net annual pension cost $ 9,880 $ 8,323 $ 8,327 ======== ======== ======== Non-U.S. Plans: Service cost (benefits earned during the period) $ 1,949 $ 1,969 $ 1,118 Interest cost on projected benefit obligation 2,163 1,748 1,004 Investment gain on plan assets (2,044) (2,628) (62) Net amortization and deferral (454) 12 (1,766) ------- ------- ------- Net annual pension cost $ 1,614 $ 1,101 $ 294 ======= ======= =======
The following table sets forth the funded status and amounts recognized in the Company's Consolidated Balance Sheet as of September 30, 1996 and 1995, and the significant assumptions used in accounting for the defined benefit plans. The measurement dates for the U.S. plans were June 30, 1996 and 1995 and for non-U.S. plans were September 30, 1996 and 1995. -74- 79 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1996 1995 ------------------- ------------------- U.S. Non-U.S. U.S. Non-U.S. --------- -------- --------- -------- (Dollar Amounts in Thousands) Actuarial present value of accumulated benefit obligations, including vested benefits of $161,986, $10,296, $141,572 and $18,787, respectively $(180,639) $(10,644) $(150,450) $(19,385) ========= ======== ========= ======== Actuarial present value of projected benefit obligation $(196,909) $(14,412) $(166,552) $(24,130) Plan assets at fair value, primarily commercial paper, common stocks (including 22,000 shares of the Company's common stock for U.S. plans at both dates) and mutual funds 193,951 20,234 159,140 30,415 --------- -------- --------- -------- Projected benefit obligation (in excess of) less than plan assets (2,958) 5,822 (7,412) 6,285 Contributions made after measurement date but before end of fiscal year 7,263 -- 4,000 -- Unrecognized net gain (13,784) (80) (13,653) (128) Unrecognized prior service cost (13,957) -- (15,259) -- Unrecognized net (asset) obligation at transition (1,486) 1,891 (1,680) 2,448 --------- -------- --------- -------- Prepaid (accrued) pension costs $ (24,922) $ 7,633 $ (34,004) $ 8,605 ========= ======== ========= ======== Discount rate 8.0% 6.5-8.5% 7.75% 6.5-8.5% Rate of increase in compensation levels 4.0% 3.0-6.5% 4.5% 3.5-7.0% Expected long-term rate of return on assets 9.5% 6.5-9.5% 9.5% 6.5-10.0%
Termination indemnity plan. The employees of the Company's Italian operations are covered by a termination indemnity plan. Benefits under the plan, which are based on periods of service and the employee's compensation, -75- 80 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) are payable in a lump sum upon (1) retirement, (2) termination, (3) death after 10 years of credited service or (4) disability after 10 years of credited service. Expense for fiscal years 1996, 1995 and 1994 related to this unfunded plan was $1,809,000, $1,798,000 and $1,203,000, respectively. Other postretirement benefits. The Company currently maintains an unfunded postretirement benefit plan which provides for employees participating in its medical plan to receive a monthly benefit after retirement based on years of service. As permitted under SFAS No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions", the Company has chosen to recognize the transition obligation (the actuarially-determined accumulated postretirement benefit obligation of approximately $11.9 million at September 30, 1994) over a 20-year period. Current year expense was not material to the Company's results of operations. Postemployment benefits. The Company maintains no plans which provide significant ben-efits to former or inactive employees after employment but before retirement. (18) Operations by industry segment and geographic area - The Company's revenues and income are derived principally from one industry segment, which includes the collection, transportation, processing/recovery and disposal of municipal solid waste and industrial wastes. This segment renders services to a variety of commercial, industrial, governmental and residential customers. Substantially all revenues represent income from unaffiliated customers. The table below reflects certain geographic information relat- ing to the Company's operations. For purposes of this table, general corporate expenses have been included in the computation of income from operations and are classified under "United States and Puerto Rico" (in thousands).
1996 1995 1994 ---------- ---------- ---------- Revenues: United States and Puerto Rico $4,073,558 $4,070,021 $3,293,297 ---------- ---------- ---------- Foreign - Europe 1,425,390 1,433,923 786,252 - Other 280,329 275,407 234,992 ---------- ---------- ---------- Total foreign 1,705,719 1,709,330 1,021,244 ---------- ---------- ---------- Consolidated $5,779,277 $5,779,351 $4,314,541 ========== ========== ==========
-76- 81 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1996 1995 1994 ---------- ---------- ---------- Combined income (loss) from operations and equity in earnings of unconsolidated affiliates: United States and Puerto Rico $ 327,421 (1) $ 626,798 $ 451,108 ---------- ---------- ---------- Foreign - Europe (118,411)(1) 186,251 91,035 - Other (10,847)(1) 30,134 38,851 ---------- ---------- ---------- Total foreign (129,258) 216,385 129,886 ---------- ---------- ---------- Consolidated $ 198,163 $ 843,183 $ 580,994 ========== ========== ========== Depreciation and amortization: United States and Puerto Rico $ 438,639 $ 412,968 $ 349,189 ---------- ---------- ---------- Foreign - Europe 134,061 113,907 72,288 - Other 29,825 24,995 22,715 ---------- ---------- ---------- Total foreign 163,886 138,902 95,003 ---------- ---------- ---------- Consolidated $ 602,525 $ 551,870 $ 444,192 ========== ========== ========== Identifiable assets: United States and Puerto Rico $4,803,978 $4,532,014 $3,626,134 ---------- ---------- ---------- Foreign - Europe 2,435,541 2,599,797 1,903,141 - Other 361,387 328,561 267,680 ---------- ---------- ---------- Total foreign 2,796,928 2,928,358 2,170,821 ---------- ---------- ---------- Consolidated (2) $7,600,906 $7,460,372 $5,796,955 ========== ========== ==========
- ----------------- (1) Fiscal year 1996 earnings information for operations in (i) the United States and Puerto Rico, (ii) Europe and (iii) other foreign countries include special charges of $187,087,000, $234,773,000 and $24,940,000, respectively. See Note (4). (2) The Attwoods acquisition in the first quarter of fiscal 1995 and the Otto Waste Services acquisition in the second quarter of fiscal 1994 each increased the identifiable assets of the Company by over $1.0 billion. -77- 82 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (19) Fair value of financial instruments - The following disclosures of the estimated fair values of financial instruments have been determined by the Company using available market data and valuation methodologies. Considerable judgment is required in developing the methodologies used to determine the estimates of fair value and in interpreting available market data and, accordingly, the estimates presented herein are not necessarily indicative of the values of such financial instruments in a current market exchange. Additionally, under certain financing agreements, the Company is prohibited from redeeming certain of the long-term debt before its maturity.
As of September 30, ---------------------------------------- 1996 1995 ------------------ ------------------- Book Fair Book Fair Value Value Value Value -------- -------- -------- -------- (In Thousands) Debt - 6.10% Senior Notes $198,162 $188,848 $ -- $ -- 6.375% Senior Notes 197,949 184,171 -- -- 7.40% Debentures 397,918 377,107 397,864 396,830 7 7/8% Senior Notes 299,217 311,575 299,125 322,606 9 1/4% Debentures 100,000 117,740 100,000 121,490 Solid waste revenue bond obligations 149,127 151,601 114,079 119,444 Other notes payable 804,721 837,174 585,211 608,435 Commercial paper and short-term facilities to be refinanced 679,597 676,489 231,988 231,701 Convertible subordinated debentures -- -- 744,944 742,806
The book values of cash, short-term investments, trade accounts receivables, trade accounts payable and financial instruments included in other receivables, other assets and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments. The estimated fair value of long-term debt and convertible subordinated debentures is based on quoted market prices where available or on present value calculations which are calculated using current rates for similar debt with the same remaining maturities. In the normal course of business, the Company has letters of credit, performance bonds and other guarantees which are not reflected in the accompanying consolidated balance sheets. In the past, no significant claims have been made against these financial instruments. Management believes that the likelihood of performance -78- 83 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) under these financial instruments is minimal and expects no material losses to occur in connection with these financial instruments. (20) Related party transactions - One of the Company's directors is affiliated with Otto Holding International B.V. ("OHI") which owns the other 50% interest of Otto Waste Services. The Company, primarily through its 50% ownership of Otto Waste Services, is engaged in various transactions through the ordinary course of business with OHI, its subsidiaries and unconsolidated affiliates or other affiliated parties ("OHI Group"). The OHI Group leased containers and equipment under operating leases and provided certain administrative services to Otto Waste Services during the current fiscal year. Charges for these administrative services were approximately $4.7 million and $5.0 million for fiscal year 1996 and 1995, respectively, and $3.5 million for the period from the acquisition date in February 1994 through the end of fiscal 1994. The Company, including Otto Waste Services, also purchased or entered into capital leases for approximately $30.8 million and $29.3 million, respectively, of containers from the OHI Group during fiscal years 1996 and 1995. Included in the Company's Consolidated Balance Sheet at September 30, 1996 and 1995, are the following amounts relating to transactions with the OHI Group (in thousands):
1996 1995 ---------- ---------- Accounts payable $ -- $ 613 Other accrued liabilities 7,673 -- Capital lease obligations 44,000 46,252 Notes payable, interest payable at FIBOR plus 2% 3,131 3,613
During fiscal 1996, Otto Waste Services sold certain assets related to plastics processing to the OHI Group. These assets were sold to OHI for approximately $2.5 million resulting in a loss on the sale for Otto Waste Services of approximately $1.3 million which is included in the Company's Consolidated Statement of Operations. Additionally, Otto Waste Services sold the stock of one of its subsidiaries to the OHI Group at its recorded book value of approximately $2.1 million. OHI also sold two companies specializing in plastics recycling and processing to Otto Waste Services at their net book value of approximately $372,000. In connection with the acquisition of these two companies, Otto Waste Services assumed liabilities of approximately $6.6 million of long-term debt with third parties and approximately $7.7 million in net payables with affiliated companies of Otto Waste Services and other companies within the OHI Group. -79- 84 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (21) Quarterly financial information (Unaudited) -
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- (In Thousands Except for Per Share Amounts) Revenues 1996 $1,430,781 $1,373,887 $1,471,368 $1,503,241 1995 $1,292,787 $1,409,366 $1,550,083 $1,527,115 Gross profit 1996 $ 382,676 $ 346,971 $ 356,018 $ 377,997 1995 $ 367,817 $ 403,059 $ 445,117 $ 416,055 Income (loss) from operations 1996 $ 174,162 $ 134,414 $ 134,802 $ (300,585)(2) 1995 $ 177,311 $ 193,034 $ 218,685 $ 200,157 Income taxes 1996 $ 58,118 $ 42,205 $ 42,417 $ (37,552) 1995 $ 65,010 $ 66,109 $ 76,724 $ 68,587 Income (loss) before extra- ordinary item 1996 $ 83,010 $ 60,984 $ 62,022 $ (295,188) 1995 $ 89,570 $ 92,809 $ 106,267 $ 95,915 Net income (loss) 1996 $ 83,010 $ 48,825(1) $ 62,022 $ (295,188) 1995 $ 89,570 $ 92,809 $ 106,267 $ 95,915 Income (loss) per share: Income (loss) before extra- ordinary item 1996 $ .42 $ .30 $ .31 $(1.47) 1995 $ .45 $ .47 $ .53 $ .48 Net income (loss) 1996 $ .42 $ .24 $ .31 $(1.47) 1995 $ .45 $ .47 $ .53 $ .48
-80- 85 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) - ------------- (1) In the second quarter of fiscal year 1996, the Company recorded an after-tax loss of $12.2 million associated with redemption of debt, which was reflected in the Company's Consolidated Statement of Operations as an extraordinary item. See Note (10). (2) In the fourth quarter of fiscal year 1996, the Company incurred special charges of $446.8 million related to decisions to sell the Company's Italian operations, divest non-core business assets and operations, close certain recycling facilities and writedown the investment in its Azusa, California landfill. See Note (4). -81- 86 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III. Items 10, 11, 12 and 13 of Part III (except for information required with respect to executive officers of the Company which is set forth under "Business - - Executive Officers of the Company" in Part I of this report) have been omitted from this report, since the Company will file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement, pursuant to Regulation 14A, which involves the election of directors. The information required by Items 10, 11, 12 and 13 of this report, which will appear in the definitive proxy statement, is incorporated by reference into Part III of this report. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS Browning-Ferris Industries, Inc. and Subsidiaries: Report of independent public accountants. Consolidated statement of income for the three years ended September 30, 1996. Consolidated balance sheet--September 30, 1996 and 1995. Consolidated statement of common stockholders' equity for the three years ended September 30, 1996. Consolidated statement of cash flows for the three years ended September 30, 1996. Notes to consolidated financial statements. SCHEDULES II Allowance for doubtful accounts for the three years ended September 30, 1996. Schedules, other than those listed above, are omitted because of the absence of conditions under which they are required, or because the information is included in the financial statements or notes thereto. -82- 87 EXHIBITS 3.1 Restated Certificate of Incorporation of BFI, dated October 7, 1991. (Exhibit 3(a) of Form 10-K for the fiscal year ended September 30, 1993, is hereby incorporated by reference.) 3.2 By-laws of BFI, as amended through September 6, 1995. 4.1 Rights Agreement, dated June 1, 1988, between BFI and Texas Commerce Bank National Association. (Exhibit 3.3 of Form 10-K for the fiscal year ended September 30, 1988, is hereby incorporated by reference.) 4.2 First Amendment, dated March 1, 1989, to Rights Agreement, dated as of June 1, 1988, between BFI and Texas Commerce Bank National Association. (Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 1989, is hereby incorporated by reference.) 4.3 Second Amendment, dated March 7, 1990, to Rights Agreement, dated as of June 1, 1988, between the Registrant and First Chicago Trust Company of New York as successor Rights Agent. (Exhibit 4.1 of Form 10-Q for the quarter ended March 31, 1990, is hereby incorporated by reference.) 4.4 Third Amendment, dated February 20, 1996, to Rights Agreement, dated as of June 1, 1988, between the Company and First Chicago Trust Company of New York as successor Rights Agent. (Exhibit 4 of Form 10-Q for the quarter ended March 31, 1996, is hereby incorporated by reference.) 4.5 Second Amended and Restated Revolving Credit Agreement, dated as of May 31, 1995, among BFI and Texas Commerce Bank National Association, as Administrative Agent, and the other banks named therein. 4.6 Restated Indenture, dated as of September 1, 1991, between First City, Texas-Houston, National Association, Trustee, and BFI. (Exhibit 4.8 of Form 10-K for the fiscal year ended September 30, 1991, is hereby incorporated by reference.) 4.7 Indenture, dated as of August 1, 1987, between First RepublicBank Houston, National Association, Trustee, and BFI. (Exhibit 4.1 to Registration Statement on Form S-3 No. 33-16537 is hereby incorporated by reference.)
-83- 88 4.8 First Supplemental Indenture, dated as of January 11, 1994, between Nations Bank of Texas, National Association, Trustee, and BFI. (Exhibit 4(f) to Registration Statement on Form S-3 No. 33-58790 is hereby incorporated by reference.) 4.9 Multicurrency Revolving Credit Agreement, dated December 5, 1994, between BFI Acquisition plc, BFI International, Inc., Browning-Ferris Industries Europe, Inc., BFI and Credit Suisse and the Banks specified therein. (Exhibit 10 of Form 10-Q for the quarter ended December 31, 1994, is hereby incorporated by reference). 4.10 Purchase Contract Agreement, dated as of June 28, 1995, between BFI and The First National Bank of Chicago, as Purchase Contract Agent. (Exhibit 4(i) of Form 8-K dated July 3, 1995, is hereby incorporated by reference.) 4.11 Pledge Agreement, dated as of June 28, 1995, among BFI, Texas Commerce Bank National Association, as Collateral Agent, and The First National Bank of Chicago, as Purchase Contract Agent. (Exhibit 4(j) of Form 8-K dated July 3, 1995, is hereby incorporated by reference.) 10.1 Employment Agreement, dated October 1, 1995, between BFI and William D. Ruckelshaus. 10.2 Deferral Agreement, dated December 28, 1988, between BFI and William D. Ruckelshaus. (Exhibit 10.2 of the Form 10-Q for the quarter ended December 31, 1988, is hereby incorporated by reference.) 10.3 Employment Agreement, dated July 10, 1989, between BFI and Harry J. Phillips, Sr. (Exhibit 10.5 of Form 10-K for the fiscal year ended September 30, 1989, is hereby incorporated by reference.) 10.4 First Amendment, dated January 21, 1992, to the Employment Agreement, dated as of July 10, 1989, between BFI and Harry J. Phillips, Sr. (Exhibit 10.6 to Registration Statement on Form S-4 No. 33-52240 is hereby incorporated by reference.) 10.5 Second Amendment, dated December 7, 1993, to the Employment Agreement, dated as of July 10, 1989, between BFI and Harry J. Phillips, Sr. (Exhibit 10 of the Form 10-Q for the quarter ended December 31, 1993, is hereby incorporated by reference.) 10.6 Form of Employment Agreement between BFI and each of Norman A. Myers, Bruce E. Ranck and certain other officers and former officers (Exhibit 10.6 of Form 10-K for the fiscal year ended September 30, 1989, is hereby incorporated by reference.)
-84- 89 10.7 Employment Agreement, dated as of November 1, 1991 between BFI and Louis A. Waters. (Exhibit 10.7 of Form 10-K for the fiscal year ended September 30, 1991, is hereby incorporated by reference.) 10.8 First Amendment, dated December 7, 1993, to the Employment Agreement, dated as of November 1, 1991, between BFI and Louis A. Waters. (Exhibit 10 of the Form 10-Q for the quarter ended December 31, 1993, is hereby incorporated by reference.) 10.9 Second Amendment, dated March 1, 1995, to Employment Agreement, dated as of November 1, 1991, between BFI and Louis A. Waters. 10.10 Executive Officer Form of Employment Agreement between BFI and certain executive officers, beginning in January 1993. (Exhibit 10.9 of Post-Effective Amendment No. 1 to Registration Statement on Form S-4 No. 33-52240 is hereby incorporated by reference.) 10.11 Trust Agreement, dated September 7, 1988, between BFI and Texas Commerce Bank, National Association with Louis A. Waters as Beneficiary. (Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 1988, is hereby incorporated by reference.) 10.12 Browning-Ferris Industries, Inc. 1993 Stock Incentive Plan. (Exhibit 4(d) to Registration Statement on Form S-8 No. 33-53393 is hereby incorporated by reference.) 10.13 Browning-Ferris Industries, Inc. 1993 Non-Employee Director Stock Plan (Exhibit 4(e) to Registration Statement on Form S-8 No. 33-53393 is hereby incorporated by reference.) 10.14 Browning-Ferris Industries, Inc. 1990 Stock Option Plan. (Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 1991, is hereby incorporated by reference.) 10.15 Browning-Ferris Industries, Inc. 1987 Stock Option Plan. (Exhibit 10.11 of Form 10-K for the fiscal year ended September 30, 1988, is hereby incorporated by reference.) 10.16 Browning-Ferris Industries, Inc. 1983 Stock Option Plan, as amended on December 2, 1986. (Exhibit 10.7 of Form 10-K for the fiscal year ended September 30, 1986, is hereby incorporated by reference.) 10.17 Browning-Ferris Industries, Inc.'s Cash Balance and Retirement Plan, as amended and restated pursuant to an indenture dated September 15, 1994. (Exhibit 10.18 of Form 10-K for the fiscal year ended September 30, 1994, is hereby incorporated by reference.)
-85- 90 10.18 BFI Employee Stock Ownership and Savings Plan, as amended through December 1, 1986. (Exhibit 10.10 of Form 10-K for the fiscal year ended September 30, 1986, is hereby incorporated by reference.) 10.19 Fifth Amendment dated June 8, 1988, to the BFI Employee Stock Ownership and Savings Plan. (Exhibit 10.16 of Form 10-K for the fiscal year ended September 30, 1988, is hereby incorporated by reference.) 10.20 Sixth Amendment, dated December 23, 1988, to the BFI Employee Stock Ownership and Savings Plan. (Exhibit 10.4 of the Form 10-Q for the quarter ended December 31, 1988, is hereby incorporated by reference.) 10.21 Seventh, Eighth and Ninth Amendments, dated as of May 31, 1989, June 7, 1989 and October 31, 1991, respectively, to the BFI Employee Stock Ownership and Savings Plan. (Exhibit 10.20 of Form 10-K for the fiscal year ended September 30, 1991, is hereby incorporated by reference.) 10.22 Tenth Amendment, dated September 7, 1993, to the BFI Employee Stock Ownership and Savings Plan. (Exhibit 10.22 of Form 10-K for the fiscal year ended September 30, 1993, is hereby incorporated by reference.) 10.23 Amended and Restated Partnership Agreement, dated as of January 25, 1991, between Air Products Ref-Fuel, Inc. and BFI Ref-Fuel, Inc. (Exhibit 10.23 of Form 10-K for the fiscal year ended September 30, 1993, is hereby incorporated by reference.) *10.24 Parent Agreement, dated as of January 25, 1991, between Air Products and Chemicals, Inc. and BFI. 10.25 Purchase and Transfer Agreement between Otto Holding International B.V., the Registrant and BFI Atlantic GmbH, dated September 27, 1993. (Exhibit 10.25 of Form 10-K for the fiscal year ended September 30, 1993, is hereby incorporated by reference.) 10.26 BFI Deferred Compensation Agreement. 10.27 BFI Convertible Annual Incentive Award Plan. 10.28 BFI Stock and Employee Benefit Trust Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee. 10.29 Common Stock Purchase Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee
-86- 91 * 12. Computation of Ratio of Earnings to Fixed Charges of Browning-Ferris Industries, Inc. and Subsidiaries. * 21. Subsidiaries of the Registrant. * 23.1 Consent of Arthur Andersen LLP. * 27.1 Financial Data Schedule.
__________________ *Filed herewith. Reports on Form 8-K None. ____________________ NOTE: Upon the request of a holder of the Company's securities directed to Browning-Ferris Industries, Inc., P.O. Box 3151, Houston, Texas 77253, Attn: Secretary, the Company will furnish a copy of any exhibit for ten cents per page to cover the cost of copying and mailing. -87- 92 SCHEDULE II BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES ALLOWANCE FOR DOUBTFUL ACCOUNTS For the Three Years Ended September 30, 1996 (In Thousands)
============================================================== Additions Balance Charged Deductions Balance Beginning to from End of of Year Income Reserves Year ============================================================== 1996 $39,777 $29,527 $(28,682) $40,622 1995 $33,284 $26,620 $(20,127) $39,777 1994 $21,870 $31,346 $(19,932) $33,284
-88- 93 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BROWNING-FERRIS INDUSTRIES, INC. (Registrant) DATE: December 4, 1996 By: /s/ Bruce E. Ranck ---------------------------------- Bruce E. Ranck President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ William D. Ruckelshaus ---------------------------------- William D. Ruckelshaus Chairman of the Board and Director /s/ Bruce E. Ranck ---------------------------------- Bruce E. Ranck, President, Chief Executive Officer and Director /s/ Norman A. Myers ---------------------------------- Norman A. Myers Vice Chairman, Chief Marketing Officer and Director /s/ Jeffrey E. Curtiss ---------------------------------- Jeffrey E. Curtiss, Senior Vice President and Chief Financial Officer -89- 94 /s/ David R. Hopkins ---------------------------------- David R. Hopkins, Vice President, Controller and Chief Accounting Officer /s/ William T. Butler ---------------------------------- William T. Butler, Director /s/ C. Jackson Grayson, Jr. ---------------------------------- C. Jackson Grayson, Jr., Director /s/ Gerald Grinstein ---------------------------------- Gerald Grinstein, Director, /s/ Ulrich Otto ---------------------------------- Ulrich Otto, Director, /s/ Harry J. Phillips, Sr. ---------------------------------- Harry J. Phillips, Sr., Director /s/ Joseph L. Roberts, Jr. ---------------------------------- Joseph L. Roberts, Jr., Director /s/ Marc J. Shapiro ---------------------------------- Marc J. Shapiro, Director /s/ Robert M. Teeter ---------------------------------- Robert M. Teeter, Director /s/ Louis A. Waters ---------------------------------- Louis A. Waters, Director /s/ Marina v.N. Whitman ---------------------------------- Marina v.N. Whitman, Director December 4, 1996 /s/ Peter S. Willmott ---------------------------------- Peter S. Willmott, Director -90- EX-10.24 2 PARENT AGREEMENT - AIR PRODUCTS AND CHEMICALS, INC 1 EXHIBIT 10.24 PARENT AGREEMENT (RELATING TO AMERICAN REF-FUEL COMPANY) DATED AS OF JANUARY 25, 1991 2 Parent AGREEMENT (RELATING TO AMERICAN REF-FUEL COMPANY) TABLE OF CONTENTS
PAGE ---- ARTICLE I MARKETING AGREEMENT Section 1.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II TRANSFER Section 2.1 Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.2 Additional Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.3 Transfers to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III OPTIONS TO BUY OR SELL Section 3.1 Buy-Sell Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.2 Option to Purchase in the Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.3 Closing of Purchases Under Sections 3.1 and 3.2 . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.4 Project Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.5 No Waiver of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.6 Non-Competition After Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV RESTRICTIONS ON SUBSIDIARIES Section 4.1 Single Purpose Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.2 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.3 Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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PAGE ---- ARTICLE V PERFORMANCE OF PARTNERSHIP OBLIGATIONS Section 5.1 Parents' Performance Under Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VI CERTAIN SERVICES Section 6.1 BFI Services to Partnership Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.2 Preferre Vendor Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VII POSSIBLE FORMATION OF LIMITED PARTNERSHIPS Section 7.1 Good Faith Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VIII CONFIDENTIALITY Section 8.1 Agreement to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 8.2 Agreement to Keep Confidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 8.3 Termination of Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE IX DISPUTES Section 9.1 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 9.2 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 9.3 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-ii- 4
PAGE ---- ARTICLE X MISCELLANEOUS Section 10.1 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 10.2 Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 10.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 10.4 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.5 Binding Effect; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.6 Multiple Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.7 Gender and Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.9 Headings, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 10.10 Obligations of Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-iii- 5 PARENT AGREEMENT (Relating to American Ref-Fuel Company) This Agreement, dated as of January 25, 1991, is between Air Products and Chemicals, Inc., a Delaware corporation ("APCI") having its principal place of business at 7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501, and Browning-Ferris Industries, Inc., a Delaware corporation ("BFI") having its principal place of business at 757 N. Eldridge, Houston, Texas 77079. A wholly-owned indirect subsidiary of APCI, Air Products Ref-Fuel, Inc. ("APRF"), is a partner in American REF-FUEL Company, a Delaware general partnership (the "Partnership") existing under an Amended and Restated Partnership Agreement, dated as of the date hereof (the "Partnership Agreement"). Another wholly-owned indirect subsidiary of APCI, Air Products Ref-Fuel Holdings Corp., a Delaware corporation (the "AP Holding Company"), wholly owns, directly or indirectly, APRF and various Project Subsidiaries of APCI. Certain inactive Project Subsidiaries are wholly owned, directly or indirectly, by APCI, but are not owned by the AP Holding Company. A wholly-owned indirect subsidiary of BFI, BFI Ref-Fuel, Inc. ("BFIES"), is also a partner in the Partnership. Another wholly-owned direct or indirect subsidiary of BFI (the "BFI Holding Company"), wholly owns, directly or indirectly, BFIES and all Project Subsidiaries of BFI. APCI and BFI will each, directly or through their respective wholly-owned subsidiaries, be the owner of a 50% interest in the Partnership and each of the Project Companies. 6 APCI and BFI are sometimes referred to herein as the "Parents" of their respective subsidiaries. Capitalized terms used herein and not specifically defined shall have the meanings ascribed to them in the Partnership Agreement. Therefore, APCI and BFI agree as follows: ARTICLE I Marketing Agreement SECTION 1.1. Termination. The Waste-Energy Resource Projects Marketing Cost Sharing Agreement dated as of October l, 1983 (the "Marketing Agreement") is terminated as of January 25, 1991 pursuant to clause (b) of paragraph 16 of that Agreement and shall have no further force or effect, except the cost-sharing and indemnity provisions (including, without limitation, clauses (a), (c) and (d) of paragraph 7 and clauses (a), (b), (c), (d) and (e) of paragraph 15) shall continue to apply in respect of any Projects or opportunities for Projects that were undertaken prior to such termination and that were terminated prior to such date. Activities in respect of other Projects or opportunities for Projects shall after January 25, 1991 be governed by the Partnership Agreement and any applicable Project Agreements, and except that the Marketing Agreement shall continue to apply to the extent that its provisions are made specifically applicable to any now existing Project Company by reason of the provisions of that Project Company's Partnership Agreement. ARTICLE II Transfer SECTION 2.1. Restrictions. Neither Parent will cause or permit any shares of capital stock of its Holding Company, or of its Project Subsidiaries, or any of its Project Subsidiaries' interests in any Project Company, to be issued, sold, assigned, transferred, pledged or otherwise encumbered or disposed of, directly or indirectly, by sale, merger or otherwise, except that a Parent may sell or permit the sale of, all, but not less than all, of the shares of capital stock of its Holding Company (the "Shares") if (1) it has received the prior written consent of the other Parent, which consent shall not be withheld unreasonably, and (2) the additional conditions set forth in Section 2.2 are satisfied, and except that interests in the Partnership or in Project Subsidiaries may be sold if and to the extent permitted pursuant to Article III or VII of this Agreement or pursuant to applicable provisions, if any, of a partnership agreement (or shareholders' agreement) for a Project Company. -2- 7 SECTION 2.2. Additional Conditions. A Parent shall not sell or permit the sale of the Shares unless the following conditions are met (or are waived in writing by the other Parent): (a) There is not pending a "Buy-Sell" procedure initiated pursuant to Section 3.1(b)(1); (b) The transaction does not result in a violation of any applicable law, rule or regulation, including but not limited to antitrust and securities laws; (c) Neither the buyer nor any of its Affiliates is a competitor of the other Parent or its Affiliates in the waste- to-energy business or any other phase of the waste handling and disposal business; (d) The senior unsecured debt, if any, of the buyer is rated by Standard & Poor's or Moody's as investment grade, or, if the buyer has no senior unsecured debt rated by Standard & Poor's or Moody's, the financial condition of the buyer is reasonably satisfactory to the other Parent; (e) The transaction will not, with or without the giving of notice or the lapse of time, or both, conflict with, or result in any breach of, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to the Project Agreements or any agreement or other instrument or obligation to which the Partnership, any Project Company, the transferor, or any Affiliate of the transferor is a party, or by which any of them or any of their properties or assets may be bound or affected, or any judgment, order, decree or law applicable to any of them; (f) Any outstanding borrowings by the transferor's subsidiaries from the Partnership or any Project Company shall be repaid in full; and (g) Each transferee shall agree to be bound by the provisions of this Agreement, and this Agreement shall be appropriately amended to take account of the transfer in a manner reasonably satisfactory to the transferee and all entities that will continue to be parties to this Agreement. SECTION 2.3. Transfers to Affiliates. Notwithstanding the provisions of Section 2.1, a Parent may at any time transfer or permit the transfer of all, but not less than all, of the Shares of its Holding Company, or the outstanding capital stock of any of its Project Subsidiaries or of its subsidiary that is the Partner in the Partnership, to any corporation that is wholly owned, directly or indirectly, by that Parent, provided that the conditions set forth in paragraphs (b), (e) and, if and to the extent that the other Parent may so reasonably request, (g) of Section 2.2 are met, and provided that each of its Project Subsidiaries and such Partner must at all times be wholly owned, directly or indirectly, by its Holding Company (except as otherwise permitted by Section 4.1 or 7.1). -3- 8 ARTICLE III Options to Buy or Sell SECTION 3.1. Buy-Sell Provision. (a) Each Parent shall be entitled to initiate the "Buy-Sell" procedure described below at any time, subject to the conditions set forth below. (b) (1) The Parent desiring to initiate the "Buy-Sell" procedure (the "initiating party") shall give to the other Parent (the "receiving party") at least 30 days' prior written notice that it intends to submit the offers described below. During such 30-day period the initiating party shall enter in good faith into such discussions as the receiving party shall reasonably request regarding the circumstances that gave rise to the initiating party's decision to initiate the "Buy-Sell" procedure. Also, if APCI is the initiating party, during such 30-day period BFI shall furnish to APCI the Statement described in Section 3.1(b)(2)(b). Within 45 days after the expiration of such 30-day period, the initiating party may, at its option, submit to the receiving party two offers in writing, the first of which shall be an offer to purchase the Shares of the receiving party's Holding Company and the second shall be an offer to sell to the receiving party the Shares of the initiating party's Holding Company. If BFI is the initiating party, its submission of the two offers shall be accompanied by the Statement described in Section 3.1(b)(2)(b). If APCI is the initiating party, its submission of the two offers shall include its irrevocable election whether or not to accept the arrangements contemplated by such Statement (which must be accepted in their entirety or not at all). Such offers shall be irrevocable except as expressly provided in Section 3.1(e) or 3.3. If the initiating party elects not to submit such offers within such 45-day period, its 30-day notice shall be deemed withdrawn and it may not again initiate the "Buy-Sell" procedure unless it has given a new 30-day notice in accordance with the first sentence of this Section 3.1(b)(1). (2) (a) Following the submission of the offers, BFI shall, if so requested by APCI, continue to work in good faith with APCI in an effort to develop terms and conditions that would apply if APCI were to buy BFI's Shares pursuant to the offers and under which BFI would supply solid waste and provide ash and by-pass disposal capacity and services and transportation services to Projects that, at the date the offers are submitted, are Development Projects. If terms and conditions for those activities have, prior to the submission of the Offers, been offered by BFI to the Partnership or the relevant Project Company, then the terms and conditions to be offered by BFI shall be consistent with those previously offered, subject to appropriate changes to reflect changed circumstances. (b) In accordance with Section 3.1(b)(1), BFI shall furnish APCI a Statement that shall apply if APCI were to buy BFI's Shares pursuant to the offers and that shall set forth the terms and conditions on which BFI -4- 9 would make disposal capacity available to Projects that are initiated by APCI or its Affiliates after the date the offers are submitted, but excluding Development Projects that are covered by Section 3.1(b)(2)(a). Such disposal capacity would be made available, at the posted market rate at the site in question, on an unreserved basis to such Projects owned, operated or controlled by APCI and its Affiliates, in solid waste landfills which are owned, operated or controlled by BFI or its Affiliates. The Statement shall also set forth the price, terms and conditions of a Site Option Agreement under which BFI would grant APCI an exclusive option for a minimum term of three years to purchase, lease or sublease lands that are owned or leased by BFI or its Affiliates and are located on or adjacent to solid waste landfill facilities owned, operated or controlled by BFI or its Affiliates. Except as specified above in this Section 3.1(b)(2)(b), the terms and conditions to be set forth in the Statement shall be determined solely by BFI. If APCI purchases BFI's Shares, and has elected to accept the arrangements contemplated by the Statement, then, at the closing of such purchase, the appropriate parties shall enter into definitive agreements regarding those arrangements. (Preliminary drafts of such agreements have been furnished by BFI to APCI for informational purposes, but shall not in any way be determinative of the eventual terms and conditions of the definitive agreements.) APCI's rights under such agreements shall be assignable to and enforceable by successors to APCI's interests in the Partnership and the Project Companies. (3) A party may not submit the offers described in Section 3.1(b)(1) if prior to such submission there has occurred and at the time of such submission there is continuing any event or condition which with or without the lapse of time or giving of notice, or both, would constitute a Terminating Act of such party, its Holding Company or a subsidiary that is a partner (or shareholder) in the Partnership or in a Project Company pursuant to Section 3.2(a)(1). (4) Upon due submission of the offers, neither party shall thereafter have the right to submit other offers pursuant to this Section 3.1(b) (unless and until the closing under the offers previously duly submitted fails to occur on the closing date therefor as defined in Section 3.3, by reason of any failure on the part of only one of the parties to perform its obligations under this Section and Section 3.3, in which event the party not so failing may, if otherwise so entitled, submit other offers). During the pendency of the offers, the Parents shall cause the Partnership and the Project Companies to be operated in the ordinary course in accordance with prior practice and in the best interest of the Partnership and the Project Companies and with due regard to the fiduciary obligations among partners. -5- 10 (c) The price to be contained in the offer to purchase shall be an amount of cash as the initiating party shall determine, subject to adjustment as provided in Section 3.1(f), plus the undertaking described below. The price to be contained in the offer to sell shall be the same amount of cash as is contained in the offer to purchase, subject to adjustment as provided in Section 3.1(f), plus the undertaking described below. The undertaking shall be as follows: APCI or BFI, whichever shall be the buyer (or shall be the Parent of the buyer), shall undertake at the closing of the purchase, subject to the provisions of Section 3.5, (i) to assume and indemnify the other Parent and its Affiliates against all obligations under the Company Support Agreements, (ii) to indemnify the other Parent and its Affiliates against, but not to assume, all other Project Liabilities, and (iii) to use its reasonable business efforts to have the other Parent and its Affiliates released from all Project Liabilities. (d) After submission of the irrevocable offers, the receiving party on behalf of itself or an Affiliate must accept one such offer and may not reject both offers (the acceptance of one such offer to constitute a rejection of the other and to be made in writing within 180 days following the submission of the offers) and if the receiving party has not accepted in writing one of the offers in such 180-day period, the receiving party shall be deemed to have accepted on the last day of such period the offer to purchase its Shares for the specified price. If APCI is the receiving party and elects to purchase BFI's Shares, its notice of acceptance shall be accompanied by a statement of its irrevocable election whether it will accept the arrangements contemplated by the Statement (which must be accepted in their entirety or not at all). (e) The foregoing provisions of this Section to the contrary notwithstanding, if, at any time after the offers described in Section 3.1(b)(1) have been submitted, either party becomes unable to meet the conditions set forth in Section 3.1(b)(3) for submitting the offers described in Section 3.1(b)(1), then the non-defaulting party shall have the right, upon notice to the defaulting party prior to the closing referred to in Section 3.3, unilaterally to rescind and invalidate such offers, and any acceptance thereof made or deemed to have been made, whereupon such offers and acceptance shall be deemed to have no further force or effect. (f) The purchase price to be paid pursuant to Section 3.1 is intended to be the amount that would be paid if the Holding Company that is being purchased (the "Sold Company") had no assets or liabilities other than its direct or indirect interests in the Partnership and the Project Companies and if the value of the Sold Company were equal to one-half of the value of the Partnership and the Project Companies. Although the Sold Company would have been restricted in its activities as provided in Section 4.1, the Parents recognize that the Sold Company may have acquired additional assets or liabilities, primarily because of its cash management policy and because of its income and franchise tax obligations. Accordingly, at the closing of a purchase under Section 3.1 APCI or BFI, whichever is the Parent of the Sold Company, shall indemnify the purchaser and its Affiliates, pursuant to an indemnity reasonably satisfactory to the purchaser, against all liabilities of the Sold Company and its Affiliates, other than Project Liabilities (as defined in Section 3.4) that the purchaser or its Parent is -6- 11 assuming or indemnifying against pursuant to the undertaking described in Section 3.1(c), and at or prior to the closing the Parent of the Sold Company may withdraw from the Sold Company and its subsidiaries any assets other than the Parent's direct or indirect interests in the Partnership and the Project Companies. In addition, if for any reason the Sold Company immediately prior to the closing has more or less than a one-half direct or indirect interest in the Partnership and each of the Project Companies, the purchase price shall be appropriately adjusted. The amount of such adjustment shall be based on the fair value of each entity that is not one-half owned by the Sold Company as determined in accordance with the procedures set forth in Section 3.2(d) (the second through the eighth sentences thereof) except that the fair value shall be determined as of the date of the submission of the irrevocable offers described in Section 3.1(b)(1) and the parties shall have 20 days after a request for valuation is made in which to attempt to agree on the selection of one nationally recognized investment banking firm. SECTION 3.2. Option to Purchase in the Event of Default (a) Each of the following circumstances shall constitute an "event of default" for purposes of this Section 3.2; (1) A Parent, or its Holding Company or its subsidiary that is a partner (or shareholder) in the Partnership or in a Project Company shall commit any Terminating Acts; (2) A partner (or shareholder) in the Partnership or in a Project Company or its Parent shall fail to pay when due any amounts owing pursuant to this Agreement, the Partnership Agreement, a Project Company Partnership Agreement (or Shareholders' or Parent Agreement for a Project Company), a Company Support Agreement or any other Project Agreement (but, in the case of such other Project Agreement, solely to the extent that such failure under such other Project Agreement results in a breach of a Company Support Agreement or a guaranty agreement entered into by a Parent in lieu of a Company Support Agreement) and such failure is not cured within 60 days after written notice thereof from the other Parent referring to this Section and specifying such failure; (3) It shall be finally determined that (i) a partner (or shareholder) in the Partnership or in a Project Company or its Parent shall have failed (other than a payment default) in any material respect to observe, perform or comply with any material agreement, condition or obligation required by this Agreement, the Partnership Agreement, a Project Company Partnership Agreement (or Shareholders' or Parent Agreement for a Project Company), a Company Support Agreement or any other Project Agreement (but, in the case of such other Project Agreement, solely to the extent that such failure under such other Project Agreement results in a breach of a Company Support Agreement or a guaranty agreement entered into by a Parent in lieu of a Company Support Agreement), (ii) such failure was still continuing at the time of the initiation of -7- 12 such proceeding and had continued for a period of at least 30 days after written notice thereof from the other Parent referring to this Section and specifying such failure, and (iii) steps to cure such failure have not commenced, or, if commenced, have not continued with all due diligence; (4) A Parent, directly or through Affiliates, shall have sold its direct or indirect equity interests in at least two Project Companies to the other Parent or its Affiliates pursuant to options to purchase because of the occurrence of an Event of Default under the applicable Project Company Partnership Agreement (or the Shareholders' Agreement or Parent Agreement of the Project Company). (b) A Terminating Act by an entity shall consist of: (i) the commencement by such entity of any proceeding under any applicable bankruptcy or insolvency law, or its consent to the commencement of any such proceeding against it, or the entry against it of a decree or order of a court having jurisdiction over it adjudicating it a bankrupt or insolvent or approving a petition seeking its reorganization under any applicable bankruptcy or insolvency law, if such decree or order shall have continued undischarged or unstayed for a period of 90 days or more; (ii) the assignment by such entity for the benefit of its creditors of all or any substantial part of its property or the winding up or liquidation of its affairs, its admission in writing of its inability to pay its debts generally as they become due or its consent to the appointment of a receiver, liquidator, trustee, curator or assignee of all or any substantial part of its properties, which appointment shall not have been vacated; (iii) the acquisition, pursuant to court order or otherwise, by a creditor of such entity of any rights with respect to its interest in a Holding Company, the Partnership, a Project Company or a partner (or shareholder) in the Partnership or in a Project Company or any property or activities arising therefrom, and such condition continues uncured for more than the shorter of 30 days or the period, if any, available to avoid having such acquisition constitute a breach of any Company Support Agreement or Project Agreement; or (iv) the Board of Directors of such entity taking formal action for the dissolution or the winding up of its affairs. (c) If an event of default shall occur at any time, then the Parent that is not affiliated with the defaulting entity shall have the right to purchase capital stock as follows: if the defaulting entity is the other Parent, the option shall apply to all, but not less than all, of the outstanding capital stock of the defaulting Parent's Holding Company; if the defaulting entity is a Holding Company, the option shall apply to all, but not less than -8- 13 all, of the outstanding capital stock of the Holding Company or, if the purchaser so elects, of its subsidiaries; and if the defaulting entity is a partner (or shareholder) in the Partnership or in a Project Company, the option shall apply to all, but not less than all, of the outstanding capital stock of the defaulting entity. In each case, the price shall be equal to 90% of the fair value of the capital stock (except that in the case of an event of default that is specified in clause (1) of Section 3.2(a) and that relates to a Terminating Act described in clause (i), (ii) or (iii) of Section 3.2(b), the percentage shall be 100%), plus (B) an undertaking, subject to the provisions of Section 3.5, to indemnify the seller and its Affiliates against all Project Liabilities, except that if only the capital stock of a partner (or shareholder) in the Partnership or in a Project Company is being sold, the indemnity shall be against only those Project Liabilities that arise out of the Partnership or the Project Company. The financial benefit conferred by this right to purchase at 90% of fair value shall be considered liquidated damages, and not a penalty, in respect of the event of default, it being agreed that it would be impracticable or extremely difficult to fix the actual damages, and shall be exclusive of any other right to damages in respect of the event of default. The right of purchase provided in this Section 3.2(c) shall be inapplicable if there has occurred and is continuing any event of default described in this Section 3.2(c) on the part of the purchaser or its Affiliates. (d) The right to purchase under Section 3.2(c) shall be exercisable by the purchaser giving written notice to the seller on or before the ninetieth day after such event of default has occurred, of its intention to exercise such right. The fair value of the capital stock of a corporation shall be deemed to be 50% of the fair value of the Partnership and Project Companies (such percentage to be appropriately adjusted if there are outstanding any minority equity interests in those entities), and shall be determined, as of the most recent practicable date prior to the delivery of the initial report referred to below, by a nationally recognized investment banking firm selected by agreement of the purchaser and the seller or, if they fail to select such firm not later than 20 days after the giving of the notice by the purchaser, then each of them shall within 10 days thereafter select, at its own expense, a nationally recognized investment banking firm. Such firms shall be instructed to attempt to agree on the fair value within 30 days after their selection or, failing such agreement, to select, within such 30 days, a third nationally recognized investment banking firm who shall alone determine the fair value. In determining such fair value, the investment banking firm or firms shall take into account the value of the obligations of the Parents and Affiliates under the Company Support Agreements, the effect of any minority equity interests that may be outstanding pursuant to Article VII and all other factors as such firm or firms deem relevant. Where the fair value is being determined by only one firm, as promptly as practicable, such firm shall deliver to the purchaser and the seller an initial report of its determination of fair value. The purchaser and the seller shall then have 20 days in which to submit to such firm their objections, if any, to the report. Thereafter, as promptly as practicable, such firm shall deliver to the purchaser and the seller its final report. The determination of fair value in accordance with the foregoing procedures shall be final, conclusive and binding on the purchaser and the seller for the purposes of this Section 3.2. However, the purchaser shall have the right, at its election, to rescind its notice of intention to purchase by so -9- 14 notifying the seller within 10 days after receipt of notice of the fair value as so determined. The fees and expenses of a firm selected by agreement of the purchaser and the seller or by agreement of two firms shall be borne equally by the purchaser and the seller, except that if the purchaser elects to rescind its notice of intention to purchase pursuant to the proviso in the preceding sentence, those fees and expenses shall be borne solely by the purchaser. (e) If the Partnership Agreement, or Shareholders' Agreement, or Parent Agreement, for a particular Project Company contains an option to purchase in the event of default, and the provisions of such other option are inconsistent with the provisions of Sections 3.2 through 3.6 of this Agreement, then the applicable provisions of this Agreement shall be controlling unless the provisions of such other option specifically state that they shall be controlling. SECTION 3.3. Closing of Purchases Under Sections 3.1 and 3.2. The closing of any purchase made pursuant to either of the offers provided for in Section 3.1 or pursuant to the option to purchase provided for in Section 3.2 shall be held at the principal office of the Partnership on the closing date, or such other location as shall be mutually agreeable. Such closing date shall be the date, which shall be not less than 20 days nor more than 60 days after the date upon which acceptance of the offer is made or deemed to be made or the notice of intention to exercise the right to purchase is given (the "Acceptance Date"), as the case may be, designated by written notice by the purchaser to the seller given not later than 10 days after such acceptance or notice of intention; provided, however, that if a dispute exists as to the right of a party to purchase or sell, or if an interest is to be valued, the closing shall be held not more than 45 days after the resolution of such dispute or the determination of such value; provided further that if there is any litigation or governmental requirement relating to such purchase and sale, the closing date shall be postponed until a date not more than 30 days after the termination of such litigation or satisfaction of all governmental requirements, and the parties shall use their reasonable business efforts to satisfy such requirements promptly; provided further that if the closing date shall be delayed more than 180 days after the Acceptance Date, either party, unless it has acted in bad faith in substantially contributing to the delay, shall, at its election, have the right to terminate the Buy-Sell or option procedure and the offers, and any acceptance thereof, shall have no further force or effect. At such closing the purchaser shall receive from the seller the certificates representing the capital stock being purchased, duly endorsed in blank and with all appropriate transfer and documentary stamps, if any, affixed and shall deliver to the seller (i) funds, by bank or certified check, in the amount of the purchase price, and (ii) the undertaking, in accordance with Section 3.1 or 3.2, whichever is applicable, regarding Project Liabilities, all in such form as shall be reasonably requested by the seller. Such stock shall be conveyed free and clear of any claims, pledges, liens or encumbrances. In addition, at the closing, there shall be paid in full any debts between the Sold Company or its subsidiaries and (x) the Project Companies and the Partnership in which the Sold Company or its subsidiaries participated, and (y) the seller and its Affiliates, except in each case to the extent that such debts are already appropriately reflected in the purchase price. Any party's right or obligation to purchase at the closing may be exercised or discharged by any Affiliate of that party. -10- 15 SECTION 3.4. Product Liabilities. For the purposes of this Article III, "Project Liabilities" shall mean: (1) all liabilities, obligations and commitments of the Parents or their Affiliates under or arising out of this Agreement, the Partnership Agreement, any Project Company Partnership Agreement (or Shareholders' Agreement), the Company Support Agreements or any Project Agreements, and (2) all liabilities, obligations and commitments incurred or assumed by the Partnership or any Project Company, except that Project Liabilities to be assumed or indemnified by a Parent or its Affiliates shall not include liabilities, obligations and commitments that are specifically intended to apply to the other Parent or its Affiliates following a sale of its Shares pursuant to this Article III or the dissolution or termination of the Partnership or a Project Company (such as obligations under the Site Option Agreement or obligations regarding maintaining confidentiality of information or refraining from competition with the Partnership or a Project Company), or that are incurred by the other Parent or its Affiliates in providing to the Partnership or a Project Company services described in the second sentence of Section 2.2(f) of the Partnership Agreement, or any liabilities for income or franchise taxes. SECTION 3.5. No Waiver of Defaults. Nothing contained in this Article III shall be construed as a limitation upon, and no action or transaction in pursuance of this Article III shall be deemed a satisfaction, waiver or discharge of, any rights, claims or causes of action of either Parent or its Affiliates against the other Parent or its Affiliates, whether for damages or other relief, arising out of or by virtue of (i) breach of this Agreement, the Partnership Agreement, any Project Company Partnership Agreement (or Shareholders' Agreement) or any Project Agreement, theretofore or thereafter committed, by the other Parent or its Affiliates or (ii) any event of default, theretofore or thereafter arising on the part of the other Partner or its Affiliates, and the undertakings provided for in Sections 3.1 and 3.2 shall not be construed to include or relate to any such rights, claims or causes of action, or any liability incident thereto, except, in each case, as and to the extent that such default or breach is taken into account in any computation or adjustment made pursuant to this Article III. SECTION 3.6 Non-Competition After Sale. For a period of three years following the sale of its Shares pursuant to Section 3.1 or 3.2, neither the selling Parent nor any of its Affiliates, without the express written consent of the other Parent, shall, (l) as principal, agent or in any other capacity or through the agency of any other corporation, partnership, joint venture or other agency, design, construct, own or operate Other Waste Incineration Plants that would compete with any Project that on the date the offers were submitted pursuant to Section 3.1, or on the date the notice of exercise of option was given pursuant to Section 3.2, was in Operation or was a Development Project, or (2) provide any services to Other Waste Incineration Plants that would compete with any Project that on the date the offers were submitted, or the notice of exercise of option was given, was a Development Project if to provide the services referred to in this clause (2) would, in the reasonable judgment of the other Parent, have a substantial adverse effect on any such Development Project. If the provisions of this Section 3.6 should be deemed to exceed the time or geographic limitations permitted by the applicable laws, then such provisions shall be and are hereby reformed to the maximum time or geographic limitations permitted by the applicable laws. -11- 16 ARTICLE IV Restrictions on Subsidiaries SECTION 4.1. Single Purpose Subsidiaries. It is the intention and agreement of each Parent that at all times it will own and operate BFIES, the BFI Holding Company, or APRF and the AP Holding Company, as the case may be, solely for the purpose of holding interests, directly or through wholly-owned Project Subsidiaries, in the Partnership or the Project Companies and will not permit them to acquire any assets or incur any liabilities not reasonably necessary to such purpose, and each of its Project Subsidiaries that participates in a Project that is being actively pursued will be wholly owned, directly or indirectly, by the Parent's Holding Company, will be owned and operated solely for the purpose of such participation and will not acquire any assets or incur any liabilities not reasonably necessary to such purpose, except as may be specifically permitted by this Agreement or the Partnership Agreement. The Parents recognize, however, that certain Project Subsidiaries of APCI that participated in Projects that are no longer being actively pursued are not so owned by the AP Holding Company, and that in the future other Project Subsidiaries of either Parent that participated in Projects that are not then being actively pursued may not be wholly owned by the Parent's Holding Company. If pursuant to this Agreement any entity shall have the right to purchase the capital stock of a Parent's Holding Company or the capital stock of the Holding Company's subsidiaries, then such right shall also extend to the capital stock of any Project Subsidiaries that are not so owned by the Holding Company, and the Parent of the Holding Company shall take such actions as the purchaser may reasonable request to effectuate such purchase. SECTION 4.2. Transfer Restrictions. It is the intention and agreement of each Parent that at all times its Holding Company and Project Subsidiaries will each be wholly owned, directly or indirectly, by it, and that it will, directly or indirectly, own a 50% interest in the Partnership and each of the Project Companies, except for transfers expressly permitted by this Agreement, the Partnership Agreement or the applicable Project Agreement. SECTION 4.3. Security Interest. As security for the performance by a Parent and its Affiliates of their obligations under this Agreement, the Partnership Agreement and the Partnership (or Shareholders') Agreements for the Project Companies, each Parent and its Affiliates hereby grant to the other Parent a security interest in all of the outstanding capital stock of the granting Parent's Holding Company and Project Subsidiaries and in any subsequently issued capital stock in such Holding Company or any present or future Project Subsidiaries. The certificates for all such capital stock shall be appropriately legended and promptly delivered to the other Parent. Such security interest may be foreclosed in any manner provided by law and is additional to any other security and remedies that may be available. Each Parent shall, and shall cause its Affiliates to, execute and deliver such financing statements and other instruments as the other Parent shall from time to time reasonably request to effectuate, perfect or confirm such security interest. -12- 17 ARTICLE V Performance of Partnership Obligations SECTION 5.1. Parents' Performance Under Partnership Agreement. If and to the extent that the Partnership Agreement for the Partnership, or the Partnership Agreement or Shareholders' Agreement for any Project Company, provides for obligations of APCI or BFI or their Affiliates that are not parties to such Agreement, APCI and BFI shall each perform the obligations provided for it, and shall cause its Affiliates to perform the obligations provided for them therein. Without limiting the generality of the foregoing, each Parent hereby agrees to be bound by Section 1.7 of the Partnership Agreement and guarantees the payment on demand of any borrowings by its Affiliates pursuant to Section 7.4 of the Partnership Agreement or the comparable provisions of any Partnership (or Shareholders') Agreement for any Project Company. Such guarantee is absolute, unconditional, present and continuing and is in no way conditional or contingent upon any event or circumstance, action or omission that might in any way discharge a guarantor or surety. ARTICLE VI Certain Services SECTION 6.1. BFI Services to Partnership Projects. If a particular Project shall be designated as a Development Project by the Partnership, BFI, if selected as the vendor in accordance with Section 6.2, will use its reasonable business efforts to cause one or more of its Affiliates to (a) provide or attempt to arrange through contracts with others to provide, adequate quantities of solid waste to the Project to the extent such solid waste is not being provided by the client or others that are under contract to the client or to the Project, (b) provide for the conceptual design of and operate, to the extent consistent with the Project, any stand-alone solid waste transfer stations or stand-alone recycling facilities that may be established as part of a particular Project, and (c) to the extent consistent with the Project, attempt to dispose of, if required (or provide for the disposal of), ash, bypass waste and other solid waste residues from the Projects, including undertaking to provide for the site for such disposal. SECTION 6.2. Preferred Vendor Status. It is the intention of BFI and APCI that the Partnership, or an appropriate Project Company, will construct, own and operate, at competitive prices, terms and conditions, any waste-to-energy plants which would be required by BFI for its sole or principal use as a provider of waste. BFI, in its capacity as the vendee of the services of the Partnership or a Project Company and APCI and BFI, each acting through its subsidiary that is a partner in the Partnership or the appropriate Project Company, will employ reasonable business efforts to achieve this goal. Accordingly, the Partnership and the Project Companies will be the preferred vendor to BFI for all procurement by BFI of waste-to-energy plant services of the types then being offered by them. The status of the Partnership and the Project Companies as the "preferred vendor" shall mean that BFI and its subsidiaries will not, so long as the Partnership is at least 45% owned by BFI (whether directly or through subsidiaries), purchase any such services from any unaffiliated third party unless BFI has determined in the exercise of its reasonable business judgment that the overall value, in terms of price, terms and conditions, quality, documentation, service and other matters, of such services available from the Partnership and the Project Companies is not competitive with that available from such -13- 18 other party, in which event BFI may purchase such services from such other party; provided, however, that BFI shall be excused from the foregoing obligation if upon written notice to the Partnership, BFI advises that (i) the Partnership has failed to respond within a reasonable period of time to a request by BFI (or its subsidiary) for a price quotation or other terms or information with respect to such services or has failed to commit to deliver such services within the time period in which BFI (or its subsidiary) shall have required such services to be delivered, which time period, in either case, shall not be substantially shorter than the time period that would have been required from or allowed to an unaffiliated third party; or (ii) in BFI's reasonable business judgment, it is not appropriate for the Partnership or a Project Company to furnish the particular service in light of the Partnership's expertise and experience; provided further that nothing in this Section 6.2 shall authorize BFI to take any action that would result in a breach of the DBA License or of BFI's covenant to DBA set forth in the Agreement dated December 12, 1990 by and among BFI, APCI, the Partnership and DBA. If at any time in accordance with this Section 6.2 BFI determines not to use the services of the Partnership or a Project Company, BFI shall give a full and prompt report to the Management Committee of the Partnership giving the rationale for this decision. The foregoing shall not authorize BFI or any of its subsidiaries to provide such services on their own in lieu of purchasing them from unaffiliated third parties or the Partnership. It is the intention of BFI and APCI that BFI will supply certain of its traditional services to the Partnership and the Project Companies at competitive prices, terms and conditions, including, without limitation, those services specified in Section 6.1. BFI, in its capacity as service provider, and APCI and BFI, each acting through its subsidiary that is a partner in the Partnership or the appropriate Project Company, will employ reasonable business efforts to achieve this goal. Accordingly, BFI will be the preferred vendor to the Partnership and each Project Company for all services of the types then being offered by BFI (directly or through its subsidiaries) in the Territory. The status of BFI as the "preferred vendor" shall mean that neither the Partnership nor any Project Company will, so long as it is at least 45% owned by BFI (whether directly or through subsidiaries), purchase any such services from any one other than BFI and its subsidiaries unless the Chief Executive Officer of the Partnership (the "CEO") has determined in the exercise of his reasonable business judgment that the overall value, in terms of price, terms and conditions, quality, documentation, service and other matters, of such services available from BFI and its subsidiaries is not competitive with that available from such other party, in which event the vendee may purchase such services from such other party; provided, however, that the vendee shall be excused from the foregoing obligation if upon written notice to BFI, the vendee advises that (i) BFI (or its appropriate subsidiary) has failed, in the reasonable business judgment of the CEO, to respond within a reasonable period of time to a request by the vendee for a price quotation or other terms or information with respect to such services or has failed to commit to deliver such services within the time period in which the vendee shall have required such services to be delivered, which time period, in either case, shall not be substantially shorter than the time period that would have been required from or allowed to an unaffiliated third party; or (ii) in the reasonable business judgment of the CEO, it is not appropriate for BFI and its subsidiaries to furnish the particular service in light of the expertise and experience of BFI and its subsidiaries or the stated preference of the vendee's customers regarding the selection of service providers. If at any time in accordance with this -14- 19 Section 6.2 the vendee elects not to use the services of BFI for any contract involving the expenditure of greater than $250,000, the CEO shall give a full and prompt report to the Management Committee of the Partnership giving the rationale for this decision. ARTICLE VII Possible Formation of Limited Partnerships SECTION 7.1. Good Faith Negotiations. The Parents recognize that one or both of them may desire to organize or reorganize Project Companies as limited partnerships, or to organize limited partnerships that would hold interests in Projects, and arrange for the sale of limited partnership interests to investors in order to reduce the financial commitments of the parties, while at the same time maintaining control of their interests in the Project Companies. The Parents agree that, following the submission of any such proposal by either Parent or an Affiliate, they, or their Affiliates, as appropriate, shall negotiate in good faith regarding such proposal and will not withhold their approval unreasonably. ARTICLE VIII Confidentiality SECTION 8.1. Agreement to Disclose. The Parents shall disclose or cause to be disclosed to the Partnership, the Project Companies and to each other and their respective Affiliates all information which in the collective judgment of the Parents is required for fulfillment of the business purpose of the Partnership and the Project Companies. SECTION 8.2. Agreement to Keep Confidential. Each Parent and its Affiliates will receive in confidence, will not use except in accordance with any applicable agreements and except for "permitted purposes," and will not disclose to a third party not under obligations of confidentiality and non-use acceptable to the disclosing Parent or its Affiliate, without the prior written consent of the disclosing Parent or its Affiliate, any information disclosed to a Parent or its Affiliates by the other Parent or its Affiliates in writing, or orally or by demonstration and reduced to writing within 15 days of disclosure, and identified as confidential at the time of such disclosure. "Permitted purposes" shall mean purposes consistent with the business purposes of the Partnership and its affiliated Project Companies. The care exercised by each Parent and its Affiliates in maintaining such information in confidence shall be the care exercised by that Parent with respect to its own information that it considers confidential. This Section 8.2 shall apply also to any confidential information disclosed to a Parent or its Affiliates by the other Parent or its Affiliates under the Marketing Agreement or the related Confidentiality Agreement dated as of October 1, 1983. SECTION 8.3. Termination of Confidentiality. The obligations set forth in Section 8.2 shall automatically terminate five years from and after the dissolution and winding up of the Partnership and all Project Companies or at such earlier time to the extent that the information identified as confidential: (i) has become available to the public through no fault of the receiving Parent or its Affiliates; -15- 20 (ii) is already known to the receiving Parent or its Affiliates at the time of disclosure and was not previously provided to such Parent or its Affiliates pursuant to the Marketing Agreement or the aforesaid related Confidentiality Agreement: (iii) is received by the receiving Parent or its Affiliates from a third party without obligation of confidentiality or non-use; or (iv) is subsequently developed by employees or consultants of the receiving Parent or its Affiliates independently of the disclosure hereunder. ARTICLE IX Disputes SECTION 9.1. Dispute Resolution. The parties shall endeavor in good faith to resolve any controversies or claims arising out of or relating to this Agreement, the Partnership Agreement or any Partnership (or Shareholders' or Parent) Agreement for any Project Company without resort to litigation or arbitration. To that end, if either party gives the other written notice (the "Notice") of a claim or controversy (a "Dispute"), they shall promptly engage in good faith discussions in an effort to resolve the Dispute and, if either party so requests, they shall select a mutually acceptable expert (the "Expert") to participate in the discussions, evaluate the respective positions of the parties and advise the parties of his opinion as to the merits of the Dispute. Such opinion shall be advisory only and shall not be binding on the parties. If by means of this procedure the parties are unable to resolve the Dispute within the 60-day period beginning when the Notice was given, then either party may commence litigation or, if the parties so agree or if binding arbitration is mandated by the applicable agreement, arbitration pursuant to Section 9.2. Time shall be of the essence, and each party shall in good faith proceed with the discussions contemplated herein. Each party shall be entitled to utilize the services of advisers and experts in connection with those discussions. The fees and expenses of the Expert will be borne equally by the parties. The provisions of this Section shall not apply where a party believes it requires a temporary restraining order, injunction or order for specific performance issued by a court in order to protect its interests, and time does not permit the party to comply with the procedures and the 60-day waiting period specified in this Section without the risk of substantial detriment to that party. In that event the party may apply for such judicial relief without such compliance. If any controversy or claim is submitted to arbitration or litigation, all counterclaims arising out of the same subject matter shall be asserted and resolved in that arbitration or litigation. SECTION 9.2. Arbitration. If the parties to a controversy or claim arising out of or relating to this Agreement agree to submit the matter to arbitration, then, unless the parties specify otherwise, the following procedures will apply. The controversy or claim shall be settled by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The parties shall agree on one arbitrator or, if they are -16- 21 unable to agree within 60 days after an arbitrator has first been proposed, then each party shall select one arbitrator, and the two arbitrators so selected shall together select the third arbitrator. Any arbitration shall be subject to the following: (a) Any award pursuant to such arbitration shall be accompanied by the written opinion of a majority of the arbitrators giving their reasons therefor and rendered within 30 days of the date of closing of the arbitration hearing. (b) The arbitrators shall be selected by mutual consent of the parties from a list of arbitrators knowledgeable about the operation of resource recovery facilities prepared by the American Arbitration Association, but if the parties cannot so agree within 20 days of the date of request for arbitration, the selection shall be made pursuant to the rules of such Association. (c) The award rendered by the arbitrators shall, solely with respect to the particular dispute, difference or alleged breach of this Agreement which was submitted to arbitration, be conclusive and binding upon the parties hereto and judgment on the award may be entered in any court of proper jurisdiction; provided, however, that nothing herein shall give the arbitrators any authority to amend, alter or delete any term, condition or provision of this Agreement. (d) Each party shall pay its own expenses of arbitration and the expenses of the arbitrators shall be equally shared; except that if any matter or dispute raised by a party or any defense or objection thereto was unreasonable, the arbitrators may assess, as part of the award, all or any part of the arbitration expenses (including reasonable attorneys' fees) of the other party or parties and of the arbitrators against the party raising such unreasonable matter or dispute or defense or objection thereto. (e) The arbitrators shall fix the time and place in New York City for the arbitration hearing, which shall be held within 45 days after appointment of the arbitrators. Notice of such hearing shall be given by the arbitrators to the parties at least 20 days in advance, unless the parties by mutual agreement waive such notice. (f) The parties shall submit all documents and proof upon which they intend to rely within 30 days after the appointment of the arbitrators. All parties shall be afforded a reasonable opportunity to examine such documents and proof prior to any hearing. (g) The arbitrators, when authorized by law to subpoena witnesses or documents, may do so upon their own initiative or upon the request of any party. All evidence shall be taken in the presence of the arbitrators and all of the parties, except when any of the parties is absent in default, or has waived the right to be present. -17- 22 (h) Any party may be represented by counsel. A party intending to be so represented shall notify the other party or parties and the arbitrators of the name and address of counsel at least three days prior to the date set for the hearing at which counsel is first to appear. When an arbitration is initiated by counsel, or where any attorney replies for another party, such notice is deemed to have been given by such party. (i) The parties may modify any period of time by mutual agreement. The arbitrators for good cause may extend any period of time established by this Agreement, except the time for making the award. The panel shall notify the parties of any such extension of time and its reason therefor. (j) The scope of discovery allowed with respect to the arbitration proceeding shall be the same as that allowed under the Federal Rules of Civil Procedure. (k) If a controversy or claim that is to be settled by arbitration pursuant to this Agreement also arises under the Partnership Agreement or a Partnership (or Shareholders' or Parent) Agreement for any Project Company or any Project Agreement, the matter shall, to the extent permitted by the applicable agreements, be resolved in one combined arbitration proceeding, with each Parent and its Affiliates acting as only one party. SECTION 9.3. Specific Performance. The parties acknowledge that the failure of either party to substantially perform its material obligations and covenants under this Agreement may result in a significant frustration of the respective business objectives of the parties under this Agreement and that the remedies at law may be inadequate to protect the rights and interests of the other party. Accordingly, the parties, in addition to the remedies otherwise available under the law for the enforcement of this Agreement and in view of Section 10.1, expressly consent to an order for specific performance of such obligations and covenants of a party or an order granting other substantially equivalent equitable remedies calculated to require performance of any such covenants or obligations. ARTICLE X Miscellaneous SECTION 10.1. Damages. A Parent and its Affiliates shall not be entitled to recover from the other Parent or its Affiliates special or consequential damages, or damages for anticipated future profits, loss of business opportunities or other similar speculative damages for breach of any covenant or understanding set forth in this Agreement or the Partnership Agreement, and shall only be entitled to seek reimbursement for the actual out-of-pocket costs and expenses incurred by the non-breaching party as a direct result of the conduct of the breaching party (except as provided in Section 3.2(c) for a right of liquidated damages). -18- 23 SECTION 10.2. Representations and Warranties. Each party represents and warrants, as of January 25, 1991 ("the Execution Date"), as follows: (i) It is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware, and is duly authorized, qualified, permitted and licensed under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted (except where failure to be so authorized, qualified, permitted and licensed would not have a material adverse effect on the business, operations, properties, assets or financial condition of such corporation). (ii) It is not a party to any contract, agreement or other commitment or instrument or subject to any charter or other corporate restriction or subject to any restriction or condition contained in any permit, license, judgment, order, writ, injunction, decree or award which would prevent or restrict its ability to enter into and perform its obligations under this Agreement or which materially and adversely affects or in the future is expected (as far as such party can, as of the Execution Date, reasonably foresee) to materially and adversely affect its business operations, properties, assets or conditions (financial or otherwise) considered as a consolidated enterprise. (iii) This Agreement has been duly and validly authorized by any necessary corporate action and will be, when executed and delivered, its legal, valid and binding obligation. SECTION 10.3. Notices. (a) Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be sufficient if personally delivered or sent by air courier, or by certified or registered mail (return receipt requested) properly stamped and addressed, or by telecopy as follows: (i) If to APCI, addressed to 7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501, marked for the attention of the Corporate Secretary with a copy sent to the same address marked for the attention of the Vice President - Energy Systems (telecopy no. (215) 481-8223). (ii) If to BFI, addressed to, in the case of mail delivery, P.O. Box 3151, Houston, Texas 77253, or, in the case of other delivery, 757 N. Eldridge, Houston, Texas 77079, in either case marked for the attention of the Secretary, with a copy sent to the same address marked for the attention of the Chairman, American REF-FUEL Company (telecopy no. (713) 870-7825). -19- 24 (b) Either party may change its address by giving written notice of its new address to the other party. SECTION 10.4. CHOICE OF LAW. THIS AGREEMENT AND ALL RIGHTS AND LIABILITIES OF THE PARTIES SHALL BE SUBJECT TO AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. SECTION 10.5. Binding Effect; Amendments. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective legal representatives, successors and permitted assigns. The written agreement of both Parents is required for any amendment to this Agreement. Nothing in this Agreement shall be deemed to create any right in any third party and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party, except as expressly provided herein. SECTION 10.6. Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original hereof for all purposes, and shall be binding upon the party so signing, irrespective of whether or not both parties executed each counterpart, but all of which shall be and constitute one instrument. SECTION 10.7. Gender and Numbers. Whenever the context requires, the gender of all words used herein shall include the masculine, feminine or neuter, and the number of all words shall include the singular and plural. SECTION 10.8. Severability. If any provision of this Agreement, or the application thereof, shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby, but rather shall be enforced to the maximum extent permissible under applicable law. The Parents shall negotiate in good faith regarding amendments to this Agreement that would, to the maximum extent permissible under applicable law, effectuate the intent of any provision determined to be invalid or unenforceable. SECTION 10.9. Headings, etc. Captions and headings contained in this Agreement are for ease of reference only and do not constitute a part of this Agreement. SECTION 10.10. Obligations of Affiliates. Whenever this Agreement provides for obligations of an Affiliate of a Parent, the failure of the Affiliate to perform those obligations shall be deemed a breach of this Agreement by that Parent, but shall not give rise to any cause of action against the Affiliate pursuant to this Agreement (although a cause of action regarding such failure may arise pursuant to an agreement to which the Affiliate is a party). -20- 25 AIR PRODUCTS AND CHEMICALS, INC. ATTEST: By: --------------------------------- SEAL - -------------------------------- BROWNING-FERRIS INDUSTRIES, INC. ATTEST: By: --------------------------------- SEAL - -------------------------------- -21- EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (Unaudited) (Dollar Amounts in Thousands)
Year Ended September 30, -------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Earnings Available for Fixed Charges: Income (loss) before extraordinary item and minority interest $(77,482) $414,646 $299,474 $197,461 $175,607 Income taxes 105,188 276,430 199,649 129,726 112,273 -------- -------- -------- ------- -------- Income before income taxes, extraordinary item and minority interest 27,706 691,076 499,123 327,187 287,880 Consolidated interest expense 179,299 159,529 93,159 70,894 71,096 Interest expense related to proportionate share of 50% owned affiliates 22,613 19,722 22,689 25,354 25,269 Portion of rents repre- senting the interest factor 35,045 31,842 20,868 18,721 16,393 Less-Equity in earnings (losses) of affiliates less than 50% owned 3,238 1,643 4,698 -- 22 -------- -------- -------- -------- -------- Total $261,425 $900,526 $631,141 $442,156 $400,616 ======== ======== ======== ======== ======== Fixed Charges: Consolidated interest expense and interest costs capitalized $195,605 $170,958 $104,759 $ 89,563 $ 86,908 Interest expense and interest costs capi- talized related to proportionate share of 50% owned affiliates 24,408 20,351 22,974 25,484 26,952 Portion of rents repre- senting the interest factor 35,045 31,842 20,868 18,721 16,393 -------- -------- -------- -------- -------- Total $255,058 $223,151 $148,601 $133,768 $130,253 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 1.02(1) 4.04 4.25 3.31(2) 3.08 ======== ======== ======== ======== ========
(1) Excluding the effects of the fiscal 1996 special charges of $446.8 million, the ratio of earnings to fixed charges for fiscal 1996 is 2.77. (2) Excluding the effects of the fiscal 1993 reorganization charge of $27.0 million, the ratio of earnings to fixed charges for fiscal 1993 is 3.51. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 BROWNING-FERRIS INDUSTRIES, INC. LIST OF SUBSIDIARIES (SEE INDEX ON PAGES 10 AND 11 FOR EXPLANATION OF PARENT AND SUBSIDIARY RELATIONSHIPS) 10 Al-Mulla Environmental Systems, W.L.L. Kuwait Acco International, Inc. Texas Acco Paper Mill Fibers Co., Inc. Texas Acco Waste Paper, Inc. Texas Attwoods of North America, Inc. Delaware Attwoods Inc. Delaware MedX, Inc. Florida Enviro-Solutions, Inc. Georgia Bio-Safe Systems Inc. Wisconsin National Environmental Services Corp. Illinois County Sanitation, Inc. Florida BFI of Port Richmond, Inc. Pennsylvania Eastern Waste Industries, Inc. Maryland Mednet, Inc. Maryland Industrial Waste Service, Inc. Florida Attwoods Environmental, Inc. Delaware Attwoods Environmental of Florida, Inc. Florida Jones Road Landfill and Recycling, Inc. Florida 14 Jones Road Landfill and Recycling Ltd. Florida Attwoods Environmental of Pennsylvania, Inc. Pennsylvania Attwoods New Jersey Holdings, Inc. New Jersey Aliance Corporation New Jersey BFI of Mt. Laurel, N.J., Inc. New Jersey BFI of Southwestern N.J., Inc. New Jersey Churchdale Leasing, Inc. New Jersey Eastern Solid Waste Equipment Co. New Jersey BFI Constructors California BFI Disposal Systems of North America, Inc. Delaware BFI Disposal Systems of Alabama, Inc. Delaware Blount County Disposal, Inc. Alabama Lawrence County Disposal, Inc. Alabama South Alabama Disposal, Inc. Alabama Walker County Disposal, Inc. Alabama BFI Disposal Systems of Florida, Inc. Florida Polk County Disposal, Inc. Florida Wood Resource Recovery, Inc. Florida BFI Disposal Systems of Georgia, Inc. Delaware East DeKalb Landfill, Inc. Georgia Marble Mill Recycling & Transfer Station, Inc. Georgia Moreland Avenue Disposal, Inc. Georgia
2 (SEE INDEX ON PAGES 7 THROUGH 9 FOR EXPLANATION OF PARENT AND SUBSIDIARY RELATIONSHIPS) BFI Disposal Systems of Mississippi, Inc. Delaware Escatawpa Environmental Services, Inc. Mississippi BFI Disposal Systems of North Carolina, Inc. Delaware Holly Springs Disposal, Inc. North Carolina Sampson County Disposal, Inc. North Carolina BFI Disposal Systems of Ohio, Inc. Delaware Browning-Ferris Industries of Ohio, Inc. Delaware 1 Warner Hill Development Company Ohio 1 Warner Hill Improvement Company Ohio Browning-Ferris Gas Services, Inc. Delaware BFI Energy Systems, Inc. Delaware BFI Ref-Fuel, Inc. Delaware BFI Energy Systems of Albany, Inc. Delaware BFI Energy Systems of Delaware County, Inc. Delaware BFI Energy Systems of SEMASS, Inc. Delaware BFI Energy Systems of SEMASS (LP), Inc. Delaware BFI Energy Systems of Boston, Inc. Massachusetts BFI Energy Systems of Essex County, Inc. New Jersey BFI Energy Systems of Hempstead, Inc. Delaware BFI Energy Systems of Niagara, Inc. Delaware BFI Energy Systems of Plymouth, Inc. Delaware BFI Energy Systems of Southeastern Connecticut, Inc. Delaware BFI Energy Systems-U.K., Inc. Delaware BFI Trans River (GP), Inc. Delaware BFI Trans River (LP), Inc. Delaware BFI International Finance B.V. Netherlands BFI Investments, Inc. Delaware BFI Medical Waste Systems, Inc. Delaware BFI Medical Waste Systems (Atlantic), Inc. Delaware BFI Medical Waste Systems of New Jersey, Inc. New Jersey BFI Medical Waste Systems (South Central), Inc. Tennessee Health Management, Inc. Tennessee Bio-Tech Services, Inc. Missouri BFI Medical Waste Systems (Steel), Inc. Delaware BFI Medical Waste Systems (Southeast), Inc. Delaware BFI Medical Waste Systems of Arizona, Inc. Delaware BFI Medical Waste Systems of California, Inc. Delaware BFI Medical Waste Systems of Colorado, Inc. Colorado BFI Medical Waste Systems of Illinois, Inc. Delaware BFI Medical Waste Systems of Minnesota, Inc. Delaware BFI Medical Waste Systems of Oregon, Inc. Delaware BFI Medical Waste Systems of Utah, Inc. Delaware BFI Medical Waste Systems of Washington, Inc. Delaware
- 2 - 3 Merrimack Valley Medical Services Company, Inc. Massachusetts BFI of Metro New York, Inc. Delaware BFI Organics, Inc. Delaware Pioneer Southern, Inc. Delaware BFI Services Group, Inc. California BFI of Ponce, Inc. Puerto Rico BFI Northern Transfer, Inc. Delaware BFI Pharmaceutical Services, Inc. Delaware BFI Recycling Systems of Minnesota, Inc. Minnesota BFI Special Services, Inc. Delaware BFI Waste Systems of North America, Inc. Delaware BFI Transportation, Inc. Delaware BFI Waste Systems of Michigan, Inc. Delaware BFI Waste Systems of Ohio, Inc. Delaware Karas Trucking Co., Inc. Ohio Lorain County Resource Recovery Complex, Inc. Delaware Youngstown BFI Waste Systems, Inc. Ohio BFI Whispering Oaks Sanitary Landfill, Inc. Missouri Browning-Ferris, Inc. Delaware BFI de Mexico, S.A. deC.V. Mexico BFI Medical Waste Systems of Texas, Inc. Texas Browning-Ferris Industries of Louisiana, Inc. Louisiana Health Management of New Orleans, Inc. Louisiana Ninety Plus, Inc. Louisiana RMRR, Inc. Texas Browning-Ferris, Inc. Maryland BFI Transfer Systems of Maryland, Inc. Maryland Mon Valley Sanitary Landfill, Inc. Pennsylvania TRC, Inc. Pennsylvania BFI Acquisition No. 10, Inc. Georgia Browning-Ferris Industries Chemical Services, Inc. Nevada Browning-Ferris Industries, Inc. Massachusetts Northern Disposal, Inc. Massachusetts Suburban Disposal Co., Inc. Massachusetts Browning-Ferris Industries Ltd. Ontario 389343 Alberta Ltd. Alberta 31 Eldridge Finance Company Republic of Ireland Contenants - Rebut Cadi Ltee Quebec Usine de Triage Lachenaie Inc. Quebec BFI Energy Inc. Quebec 2 Environmental Waste Systems, Inc. Ontario 10133 Newfoundland Limited Newfoundland Browning-Ferris Industries (DC), Inc. Delaware Browning-Ferris Industries of Alabama, Inc. Alabama
- 3 - 4 Browning-Ferris Industries of Arizona, Inc. Delaware Browning-Ferris Industries of Arkansas, Inc. Arkansas Browning-Ferris Industries of California, Inc. California American Sheds, Inc. California Azusa Land Reclamation Co., Inc. California Keller Canyon Landfill Company California Loma Linda Disposal Company, Inc. California Pleasant Hill Bayshore Disposal, Inc. California Browning-Ferris Industries of Colorado, Inc. Colorado Jeffco Land Reclamation Company Colorado RPS, Inc. Colorado Browning-Ferris Industries of Connecticut, Inc. Delaware Browning-Ferris Industries of Florida, Inc. Delaware Tanis Leasing Company Florida Browning-Ferris Industries of Georgia, Inc. Georgia BFI Tire Recyclers of Georgia, Inc. Georgia Browning-Ferris Industries of Atlanta, Inc. Delaware 3 UWL, Inc. Georgia Browning-Ferris Industries of Hawaii, Inc. Delaware Honolulu Environmental Transfer, Inc. Hawaii Browning-Ferris Industries of Idaho, Inc. Idaho Browning-Ferris Industries of Illinois, Inc. Delaware Active Service Corp. Illinois Brooks Disposal Service, Inc. Illinois 11 Congress Development Co. Illinois E&E Hauling, Inc. Illinois Hoving and Sons, Inc. West Virginia Oak Brook Disposal, Inc. Illinois Browning-Ferris Industries of Indiana, Inc. Indiana Browning-Ferris Industries of Iowa, Inc. Iowa Browning-Ferris Industries of Kansas City, Inc. Missouri Browning-Ferris Industries of Kansas, Inc. Kansas Browning-Ferris Industries of Kentucky, Inc. Delaware Browning-Ferris Industries of Maine, Inc. Delaware Browning-Ferris Industries of Marion County, Inc. Delaware Browning-Ferris Industries of Michigan, Inc. Michigan Browning-Ferris Industries of Minnesota, Inc. Minnesota Action Disposal System, Inc. Minnesota BFI Tire Recyclers of Minnesota, Inc. Minnesota FFF, Inc. Minnesota Browning-Ferris Industries of Mississippi, Inc. Mississippi Browning-Ferris Industries of Mississippi Valley, Inc. Missouri Browning-Ferris Industries of Montana, Inc. Nevada Browning-Ferris Industries of Nebraska, Inc. Nebraska
- 4 - 5 Browning-Ferris Industries of New Hampshire, Inc. New Hampshire Hooksett Recycling & Processing Center, Inc. New Hampshire Browning-Ferris Industries of New Jersey, Inc. New Jersey BFI Transfer Systems of New Jersey, Inc. New Jersey Browning-Ferris Industries of Central Jersey, Inc. Delaware Browning-Ferris Industries of Elizabeth, N.J., Inc. New Jersey Browning-Ferris Industries of Gloucester, N.J., Inc. New Jersey Browning-Ferris Industries of North Jersey, Inc. New Jersey Browning-Ferris Industries of Paterson, N.J., Inc. New Jersey Browning-Ferris Industries of South Jersey, Inc. New Jersey Browning-Ferris Industries of Western Jersey, Inc. New Jersey Browning-Ferris Industries of Southwestern Jersey, Inc. New Jersey Browning-Ferris Industries of New York, Inc. New York Browning-Ferris Industries of Northern Michigan, Inc. Michigan Browning-Ferris Industries of Ohio and Michigan, Inc. Ohio BFI Great Lakes Medical, Inc. Michigan Browning-Ferris Industries of Oregon, Inc. Oregon Browning-Ferris Industries of Pennsylvania, Inc. Delaware Homestand Land Corp. Pennsylvania Imperial Landfill Company, Inc. Pennsylvania New Morgan Landfill Company, Inc. Pennsylvania Browning-Ferris Industries of Pinal County, Inc. Arizona Browning-Ferris Industries of Puerto Rico, Inc. Puerto Rico Browning-Ferris Industries of Quincy, Illinois, Inc. Iowa Longview of Northeast Missouri, Inc. Missouri Browning-Ferris Industries of Rhode Island, Inc. Delaware Browning-Ferris Industries of Rochester, Inc. Minnesota Browning-Ferris Industries of South Atlantic, Inc. North Carolina CMS Development Corp. North Carolina Browning-Ferris Industries of Southern Illinois, Inc. Delaware Browning-Ferris Industries of Southeastern Michigan, Inc. Michigan Browning-Ferris Industries of Springfield, Inc. Missouri Springfield Relay Systems, Inc. Missouri Browning-Ferris Industries of St. Louis, Inc. Delaware BFI Modern Landfill, Inc. Illinois Halls Ferry Investments, Inc. Missouri Jeffco Land Reclamation, Inc. Missouri Longview of St. Louis, Inc. Missouri Schroder Solid-Waste Service, Inc. Missouri Browning-Ferris Industries of Tennessee, Inc. Tennessee BFI Mississippi Transfer, Inc. Delaware Jefferson Pike Landfill, Inc. Delaware T.R.A.S.H., Inc. Tennessee Browning-Ferris Industries of Utah, Inc. Utah
- 5 - 6 Browning-Ferris Industries of Vermont, Inc. Vermont Browning-Ferris Industries of Washington, Inc. Washington Fibres International, Inc. Washington Browning-Ferris Industries of Western Kansas, Inc. Kansas Browning-Ferris Industries of West Virginia, Inc. Delaware Browning-Ferris Industries of Wisconsin, Inc. Wisconsin River City Refuse Removal, Inc. Wisconsin Town & Country Waste Service, Inc. Wisconsin Troy Area Landfill, Inc. Wisconsin Browning-Ferris Industries of Wyoming, Inc. Wyoming BFI International, Inc. Delaware BFI Atlantic, Inc. Delaware 34 BFI Atlantic GmbH Germany 35 Otto Entsorgungsdienstleistung GmbH Germany BFI Waste Systems (Thailand) Limited Kingdom of Thailand Browning-Ferris Industries Chile, Inc. Delaware 33 Browning-Ferris Industries (Australia) Pty. Ltd. Australia Browning-Ferris Industries (A.C.T.) Pty. Ltd. Australia Browning-Ferris Industries (Cranbourne) Pty. Ltd. Australia Browning-Ferris Industries (N.S.W.) Pty. Ltd. Australia Browning-Ferris Industries (S.A.) Pty. Ltd. Australia Browning-Ferris Industries (Superannuation) Pty Ltd. Australia Browning-Ferris Industries (Vic.) Pty. Ltd. Australia Browning-Ferris Industries Asia Pacific, Inc. Delaware 32 UMW-BFI Waste Services Sdn Bhd Malaysia Browning-Ferris Industries Malaysia Sdn Bhd Malaysia 15 Swire BFI Waste Services Ltd. Hong Kong 36 C.S.R. Macau - Compenhia de Sistemas Macau de Residuos Limitada Waylung Waste Collection Limited Hong Kong Midland Waste International Limited Hong Kong Island East Transfer Station Company Limited Hong Kong Waste Care Limited New Zealand Allens Septic Tank Cleaning Services New Zealand (Manawatu) Limited Allens United Septic Tank Cleaning Services New Zealand (Whangarei) Limited Besco Bins (1992) Limited New Zealand Browning-Ferris Industries (NZ) Limited New Zealand Waste Disposal Services Limited New Zealand Container Rubbish Services (1992) Limited New Zealand Hopper Services (Wellington) Limited New Zealand J.R. McKeen Contractors Limited New Zealand Jumbo Bins Limited New Zealand
- 6 - 7 Waste Care Medi Safe Limited New Zealand Winz Bins (N.Z.) Limited New Zealand Browning-Ferris Industries de Costa Rica S.A. Costa Rica Browning-Ferris Industries Finance B.V. Netherlands Browning-Ferris Industries (Ireland) Limited Republic of Ireland Falkenberg Limited Republic of Ireland Browning-Ferris Landfill Services Ltd. Republic of China Browning-Ferris Industries Europe, Inc. Delaware 8 BFI Acquisitions plc United Kingdom 13 Attwoods Limited United Kingdom Browning-Ferris Industries (Belgium) Belgium Browning-Ferris Industries Reinigungstechnik GmbH Germany Browning-Ferris Industries (Deutschland) GmbH Germany Browning-Ferris Industries Europa B.V. Netherlands 17 Browning-Ferris Industries (Italia) S.r.l. Italy 25 Nuova ISPA S.r.l. Italy ISPA S.r.l. Italy 26 Grosso Scarl Italy 9 Servizi Industriali S.r.l. Italy Fineco Partecip S.r.l. Italy 18 Maddalena e Rossi S.r.l. Italy 19 Impresa Maddalena S.r.l. Italy 22 Ecofin S.r.l. Italy 23 Valeco S.p.A Italy 20 Assia S.r.l. Italy 21 Imec S.r.l. Italy G.E.A. Italia S.r.l. Italy Ca' Brusa S.r.l. Italy 27 ISUC S.r.l. Italy Technoveneta S.r.l. Italy Ecoimpresa S.r.l. Italy Feller S.r.l. Italy 24 Eldridge Finance Co. Italy Browning-Ferris Industries UK Limited United Kingdom BFI Packington Limited United Kingdom Jacksons (Warwickshire) Brickworks Limited United Kingdom Browning-Ferris Services (U.K.) Limited United Kingdom Browning-Ferris Environmental Services Limited United Kingdom BFI Wastecare Limited United Kingdom BFI Coventry Limited United Kingdom BFI Carnforth Limited United Kingdom BFI Holding B.V. Netherlands 6 Browning-Ferris Industries Iberica S.A. Spain Ingenieria Ambiental Alcarrena S.A. Spain
- 7 - 8 16 Ingenieria Ambiental Granadina S.A. Spain Ingenieria Imbiental Castellana, S.A. Spain Transric UTE 28 Castellana de Servicios, S.A. y Spain Transric, S.A., UTE Ingeniera Ambiental Andaluza, S.A. Spain 29 Ingenieria Ambiental Antequerana, S.A. Spain Ingenieria Ambiental Catalana, S.A. Spain Gestion y Tratarniento de Residuos, S.A. Spain Jansen Industriele reiniging en afvalverwerking B.V. Netherlands Jaap Van Vliet B.V. Netherlands Riooltechnieken Nederland B.V. Netherlands West Holland Milieu B.V. Netherlands Koks Nilo Milieu B.V. Netherlands Koks' Containerservice B.V. Netherlands Zwart Vastgoed B.V. Netherlands Koks/Nilo Recycling B.V. Netherlands Cotraned Milieu B.V. Netherlands A.C.D. Milieu B.V. Netherlands Recycling Amsterdam Vastgoed B.V. Netherlands Recycling Maatschappij "Houtsnip" B.V. Netherlands Wijtrans Recycling B.V. Netherlands Maatman Milieu B.V. Netherlands Maatman Reiniging B.V. Netherlands Maatman Rioolreiniging B.V. Netherlands Maatman Afvalverwerking B.V. Netherlands Maatman Eibergen B.V. Netherlands R.J. Maatman Beheer B.V. Netherlands Maatman Containers B.V. Netherlands Wijtrans Milieu B.V. Netherlands Spitman Industrie Service B.V. Netherlands Groenheide Reiniging B.V. Netherlands Kroon Beheer Urmond B.V. Netherlands Kroon Milieu Techneck B.V. Netherlands BFI Vastgoed B.V. Netherlands West Holland Recycling B.V. Netherlands Van Rijswijk Containers B.V. Netherlands Lekkerkerk-Rehorst Vastgoed Combinatie B.V. Netherlands Oost Nederlandse Reinigingsdienst B.V. Netherlands Oost-Nederlandse Container Dienst B.V. Netherlands B.V. Handelsmaatschappij R.V.R. Netherlands IBA Recycling B.V. Netherlands Spitman Chemie B.V. Netherlands Spitman Milieu B.V. Netherlands
- 8 - 9 IBA Milieu B.V. Netherlands Niemendal Transport B.V. Netherlands Heerbaart Recycling B.V. Netherlands Reinmat B.V. Netherlands Transportbedrijf J. van Tongeren B.V. Netherlands Browning-Ferris Industries Umwelttechnik Austria Gesellschaft m.b.H. Latin American Environmental Services, Inc. Delaware Browning-Ferris Services, Inc. Delaware BFI Equipment Leasing I, Inc. Delaware Browning-Ferris Financial Services, Inc. Delaware CECOS International, Inc. New York Condor Waste Transportation, Inc. Texas 12 Cotecnica, C.A. Venezuela Dave Systems, Inc. California Ameride Corporation California Disposal Specialists, Inc. Vermont Dooley Equipment Corporation Massachusetts 5 Eastern Disposal Inc. Quebec Environmental Development Corp. Puerto Rico Global Indemnity Assurance Company Vermont Hennepin Transfer, Inc. Minnesota HL-NIW, Inc. New York Indoco, Inc. Texas International Disposal Corp. of California California International Disposal Corporation of Kansas Kansas Landfill, Inc. Missouri Lake Area Disposal, Inc. Wisconsin Land Reclamation, Inc. New York Louis Kmito & Son, Inc. Massachusetts M & N Disposal, Inc. Wisconsin M & N Recycling, Inc. Wisconsin National Disposal Service of Nebraska, Inc. Nebraska Newco Waste Systems of New Jersey, Inc. New Jersey Niagara Landfill, Inc. New York Niagara Recycling, Inc. New York Pine Bend Landfill, Inc. Minnesota Risk Services, Inc. Delaware West Roxbury Crushed Stone Co. Massachusetts Westowns Disposal Systems, Inc. Wyoming Woodlake Sanitary Service, Inc. Minnesota 30 VHG, Inc. Minnesota 4 Minneapolis Refuse, Incorporated Minnesota
- 9 - 10 ______________________ Parent-subsidiary relationships are indicated by indentations. Except as otherwise indicated by symbol preceding the name, 100% of the voting securities of each of the subsidiaries is owned by the indicated parent of such subsidiary. 1 66-2/3% owned 2 Namesaver corporation. No stock issued at this time 3 100% of Preferred Stock of UWL, Inc. owned by Browning-Ferris Industries of Georgia, Inc. 4 9% of stock owned by Woodlake Sanitary Service, Inc. 5 50% owned by Browning-Ferris Industries Ltd. 50% owned by Browning-Ferris Industries, Inc. (Delaware) 6 Browning-Ferris Industries, Inc. 33.84% BFI Holding B.V. 54.45% Carlos Benjumea Morenes 6.07% Jaime Ventura 3.46% Luis Basteiro .60% Grupo Liga Financera 0.68% L.M. van Staalduinen 0.45% Bel. Hoeberg B. 0.45% 8 49,999 ordinary shares owned by Browning-Ferris Industries Europe, Inc. 1 ordinary share is held by nominee shareholder, Browning-Ferris Industries UK Limited 9 50% owned by Browning-Ferris Industries (Italia) S.r.l. and 50% owned by outside party 10 49% owned 11 50% owned by Browning-Ferris Industries of Illinois, Inc. and 50% John Sexton Sand and Gravel Corp. 12 45% owned 13 Listing sets forth the Attwoods domestic subsidiaries; a listing of the international subsidiaries is forthcoming. 14 Limited partnership that operates the Jones Road Landfill, of which 99% owned by Attwoods Environmental, Inc. and 1% owned by Jones Road Landfill and Recycling, Inc. 15 50% owned by Browning-Ferris Industries Asia Pacific, Inc. and 50% owned by Swire Engineering Limited 16 90% owned by Browning-Ferris Industries Iberica S.A. 10% owned by Granada Municipality 17 95% owned by Browning-Ferris Industries Europe, Inc. 5% owned by BFI International, Inc. 18 80% owned by Browning-Ferris Industries (Italia) S.r.l. 20% owned by Fineco Partecip S.r.l. 19 99.23% owned by Maddalena e Rossi S.r.l. .77% owned by Browning-Ferris Industries (Italia) S.r.l. 20 95% owned by Imp. Maddalena 5% owned by Maddalena and Rossi 21 80% ownd by Imp. Maddalena 20% owned by Maddalena and Rossi
- 10 - 11 22 37.5% owned by Impresa Maddalena S.r.l. 67.5% owned by outside party 23 80% owned by Ecofin S.r.l. 20% owned by outside party 24 1% owned by Browning-Ferris Industries (Italia) S.r.l. 99% outside party 25 80% owned by Browning-Ferris Industries (Italia) S.r.l. 20% owned by Impresa Maddalena S.r.l. 26 65% owned by ISPA S.r.l. 35% owned by outside party 27 44% owned by G.E.A. Italia 56% owned by outside party 28 50% owned by Ingenieria Ambiental Castellana, S.A. 50% owned by Castellana de Servicios, S.A. 29 80% owned by Ingenieria Ambiental Andaluza, S.A. 20% owned by Antequera Municipality 30 50% owned by Woodlake Sanitary Service, Inc. 31 99% owned by Browning-Ferris Industries Ltd. and 1% owned by Browning-Ferris Industries (Italia) S.r.l. 32 49% owned by Browning-Ferris Industries Asia Pacific, Inc. 51% owned by UMW Industries (1985) Sdn Bhd 33 99% owned by BFI International, Inc. 1% owned by Browning-Ferris Industries Asia Pacific, Inc. 34 40% owned by BFI International, Inc. 40% owned by BFI Atlantic, Inc. 20% owned by Browning-Ferris Industries Ltd. 35 (Subsidiaries of this Company are not listed herein) 50% owned by BFI Atlantic GmbH 50% owned by Otto Holding International B.V. 36 70% owned by Swire BFI Waste Services Limited 30% owned by Noriente-Gestao de Participacoes Limited
- 11 - EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated December 4, 1996, included in this Form 10-K, into the Browning-Ferris Industries, Inc. previously filed Form S-8 Registration Statement File Nos. 33-41281, 33-53393 and 33-56583, Form S-3 Registration Statement File Nos. 33-58298 and 33-65055 and Form S-4 Registration Statement File Nos. 33-52240 and 33-58889. ARTHUR ANDERSEN LLP Houston, Texas December 4, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the Company's consolidated financial statements for the twelve months ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. (In thousands except per share data.) 1,000 12-MOS SEP-30-1996 SEP-30-1996 136,618 0 1,012,481 (40,622) 51,536 1,387,795 6,658,509 (2,737,788) 7,600,906 1,398,490 2,766,885 0 0 35,572 2,474,706 7,600,906 0 5,779,277 0 4,315,615 1,291,342 29,527 170,457 27,706 105,188 (89,172) 0 12,159 0 (101,331) (.50) (.50)
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