-----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, F4xVUIwHQuDPVC6DPabH/2PvmFqpbV/XrC8bbNWWxIa3mBWwuOJHTcuFaKSmG47Q MZIlZLTZ4r85i2ba+9hJZQ== 0000950129-97-005127.txt : 19971208 0000950129-97-005127.hdr.sgml : 19971208 ACCESSION NUMBER: 0000950129-97-005127 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971205 SROS: CSX 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-K405 SEC ACT: SEC FILE NUMBER: 001-06805 FILM NUMBER: 97732749 BUSINESS ADDRESS: STREET 1: 757 N ELDRIDGE CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 7138708100 10-K405 1 BROWNING-FERRIS INDUSTRIES, INC. - 09/30/97 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, 1997 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: $6.7 billion, computed on the basis of $35-3/8 per share, closing price of the common stock on the New York Stock Exchange, Inc. on December 3, 1997. There were 196,791,285 shares of the registrant's common stock, $.16-2/3 par value, outstanding as of December 3, 1997. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Waste Disposal Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Corporate Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Environmental Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 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 CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 93 PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
-iii- 4 PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . 93 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
-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., incorporated in Delaware 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 420 locations in North America and approximately 270 locations outside North America and employs approximately 40,000 persons. No single customer or operating location accounts for a material amount of BFI's revenue or net income. In November 1997, the Company announced the signing of an agreement to merge its operations located outside North America with SITA, S.A., a societe anonyme formed under the laws of the Republic of France ("SITA"). Pursuant to the terms of the agreement, the Company will sell to SITA all of its equity securities and other ownership interests of its international operations located outside the United States, Puerto Rico, Canada and Mexico. In return, the Company will receive US$1 billion and ordinary shares of SITA equating to approximately 20% equity ownership in SITA. The transaction is expected to be consummated during the first quarter of calendar 1998. The transaction has been approved by the boards of directors of the Company and SITA and is subject to the satisfactory completion of due diligence, approval by regulatory authorities, and authorization by SITA's shareholders of the issuance of additional ordinary shares. See "International." In September 1997, the Company commenced a $1 billion equity buy-back program. The first phase of the program was completed in October 1997 when the Company acquired 15 million shares of its Common Stock at a price of $39.00 per share in accordance with the terms of its "Dutch Auction" tender offer. The second phase of the program consists of the purchase of approximately $415 million of the Company's Common Stock and/or its 7.25% Automatic Common Exchange Securities in open market purchases and privately negotiated transactions and is expected to be completed by September 30, 1998. -1- 6 At the end of fiscal 1996, the Company announced 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 begin implementation of 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 as compared to historic levels of such expenditures. The Company continued to implement this strategy during fiscal 1997 by significantly reducing capital expenditures from the prior year, identifying and divesting of certain underperforming business operations, reducing its selling, general and administrative costs and, to a lesser extent, operating costs, and shifting its focus to return on gross assets in both its existing business operations and its business development activities. See below and also "Corporate Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." The Company's North American operating organization is aligned 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 either the Company's chief executive officer or chief operating officer. The North American operations are divided into 13 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 organizational structure is intended to maximize the expertise and efficiency of each function, improve and integrate customer service, 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. BFI Europe, from its regional office in the Netherlands, oversees the Company's operations in Finland, Germany, the Netherlands, Spain, Switzerland and the United Kingdom. Management oversight for operations in Australia, 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 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 -2- 7 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 stock that will be earned only as certain performance measures are attained. The Company's business is subject to extensive U.S. and foreign governmental regulation and legislative initiative, such as 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, 1997, the total revenues contributed by the Company's principal lines of business.
Contribution to Consolidated Revenues (in millions) Year Ended September 30, 1997 1996 1995 ------- -------- -------- North American Operations - ------------------------- Collection Services - Solid Waste $2,913 $2,886 $2,758 Transfer and Disposal - Solid Waste 1,079 1,050 1,026 Recycling Services 555 531 675 Medical Waste Services 199 200 189 Services Group and Other 106 89 83 Elimination of Affiliated Companies' Revenues (527) (513) (483) ------ ------ ------ Total North American Operations 4,325 4,243 4,248 International Operations 1,458 1,536 1,531 - ------------------------ ------ ------ ------ Total Company $5,783 $5,779 $5,779 ====== ====== ======
Total assets at September 30, 1997, 1996 and 1995 were $6,678 million, $7,601 million and $7,460 million, respectively. -3- 8 NORTH AMERICAN OPERATIONS COLLECTION BFI collects solid waste in approximately 275 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 911,000 containers and approximately 9,300 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 150,000 customers. The Company also collects recyclable materials, principally paperboard, office paper and other paper products, in North America from approximately 5.8 million households, including curbside customers, and for approximately 133,000 commercial and industrial customers. The Company's recycling collection contracts often provide for customer 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 98 solid waste landfill sites in North America, 19 of which are operated under contracts with municipalities or others. The Company has approximately 15,000 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 and landfill configuration 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 91 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 29 treatment sites using either incineration or autoclaving (steam sterilization) technology. The Company also utilizes over 100 collection sites to service medical waste customers in most major metropolitan cities in the United States. Recycling The Company currently operates 102 recycleries in North America which receive, process and dispose of recyclable materials. During fiscal 1997, the Company closed 35 recycling facilities due to the continuing weakness in recycled commodity prices, and plans to close additional facilities during fiscal 1998. 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 28 organic processing centers. SERVICES GROUP AND OTHER In April 1997, the Company acquired the lease and related assets of a waste-to-energy facility located in Chester, Pennsylvania. See "Waste-To-Energy". The Company also rents and services -5- 10 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 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 On November 10, 1997, the Company announced the signing of an agreement to merge its operations located outside North America with SITA, S.A., a societe anonyme formed under the laws of the Republic of France ("SITA"). The transaction is expected to be consummated during the first quarter of calendar 1998. Pursuant to the terms of the agreement, the Company will sell to SITA all of its equity securities and other ownership interests of its international operations located outside the United States, Puerto Rico, Canada and Mexico. In return, the Company will receive US$1 billion and ordinary shares, FF50 par value (the "Ordinary Shares"), of SITA equating to approximately 20% equity ownership in SITA. Suez Lyonnaise des Eaux, a societe anonyme formed under the laws of the Republic of France ("Suez Lyonnaise"), currently owns, and will own upon consummation of the transaction, greater than 50% of the Ordinary Shares of SITA. Pursuant to a Shareholders' Agreement between the Company and Suez Lyonnaise, the Company will be entitled to representation on SITA's board of directors. The transaction has been approved by the boards of directors of the Company and SITA and is subject to the satisfactory completion of due diligence and approval by regulatory authorities. The transaction is also subject to the authorization by SITA's shareholders of the issuance of the Ordinary Shares to the Company and a rights offering to existing shareholders of SITA. Upon completion of the transaction, SITA will be the largest waste services company in Europe with annualized revenues of approximately US$2.8 billion. The Company is involved in waste collection, processing, disposal and/or recycling operations in approximately 270 locations (including locations of unconsolidated affiliates) in Australia, Finland, Germany, Hong Kong, 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 160 locations and operates 47 landfill sites in its international operations (including, in each case, locations of unconsolidated affiliates). The Company also has 50 recycleries and 49 transfer stations in its international operations and -6- 11 uses approximately 285,000 containers and approximately 3,800 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 1997, the Company reported consolidated revenues of approximately $630 million applicable to Otto Waste Services. The Company's interest in Otto Waste Services will also be merged into SITA. 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). The Company also owns 100% of a lease of a waste-to-energy facility located in Chester, Pennsylvania. In April 1996, Air Products announced its intention to divest its partnership interests in American Ref-Fuel. On November 1, 1997, Air Products entered into an agreement to sell its 50% interests in American Ref-Fuel partnerships to a new company formed by Duke Energy Power Services, a subsidiary of Duke Energy Corporation, and United American Energy Corp. The sale is subject to approvals by each company's board of directors and relevant regulatory agencies. The transaction is expected to be consummated in December 1997. In April 1997, the Company acquired the lease and related assets of the Delaware County Resource Recovery Facility, located in Chester, Pennsylvania, from Westinghouse Electric Corporation. The facility, which has a capacity of approximately 1,000,000 tons per year, utilizes a rotary mass-burn process and is operated by American Ref-Fuel. American Ref-Fuel currently operates six waste-to-energy facilities, including the Chester, Pennsylvania facility. Five of these facilities, which are located in Hempstead (Long Island), New York, Essex County, New Jersey, Niagara Falls, New York, Rochester, Massachusetts and Chester, Pennsylvania, have capacities of approximately 800,000 to 1,300,000 tons per year. The Preston, Connecticut facility 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. -7- 12 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 $174 million at September 30, 1997. 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 1998, 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." 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. -8- 13 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 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 now in effect. 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. In March 1996, the EPA issued final regulations under the Clean Air Act to control release of landfill gas from municipal solid waste landfills. At many of its facilities, the Company has installed gas extraction and control systems that meet the technical specifications in the rule. At those facilities that do not have systems, and at new facilities, as appropriate, the Company will continue to design, permit and install gas collection and control systems in accordance with EPA and state requirements. 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 -9- 14 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 results of operations 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 and is expected to promulgate by early 1998, a financial test and corporate guarantee for use by private Subtitle D facilities, which, if adopted, will afford the Company an additional cost effective method to satisfy the financial assurance requirements. The Company has also established a captive insurance company that is being used in several states 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. 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 -10- 15 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 or which seek to limit the types of waste that can be disposed of in certain facilities, which can, in each case, 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 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. 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 results of 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. -11- 16 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. 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. On November 10, 1997, the Company announced that it had agreed to merge its operations located outside North America with SITA. See "International." CORPORATE DEVELOPMENT The Company's corporate development program will evaluate opportunities to expand its customer base by acquiring businesses and properties, broadening the type of services offered and entering into new domestic markets. The Company expects to modestly increase capital expenditures for acquisitions and other corporate development activities during fiscal 1998 as compared to fiscal 1997, but intends to maintain such expenditures below historic levels, with a continuing 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 intends to further divest certain domestic business assets and operations that are not expected to achieve desired performance objectives. The Company has also agreed to merge its operations located outside of North America with SITA. See "International." 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." -12- 17 CAPITAL EXPENDITURES Capital expenditures were approximately $527 million in fiscal 1997, consisting of $30 million for acquired businesses. Approximately $160 million was expended in connection with internal market development projects and municipal contracts and $337 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. 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 and 48 Director (1) Norman A. Myers Executive Vice President and 61 Chief Development Officer J. Gregory Muldoon Executive Vice President and 43 Chief Operating Officer Jeffrey E. Curtiss Senior Vice President and 49 Chief Financial Officer Hugh J. Dillingham, III Senior Vice President 48 Post Collection Sandra D. Glatzau Senior Vice President 45 Marketing and Sales J. Frederick Snyder Senior Vice President 44 Collection Rufus Wallingford Senior Vice President and 57 General Counsel David R. Hopkins Vice President, Controller and 54 Chief Accounting Officer
- ---------------- * As of December 3, 1997. (1) Serves on the Executive 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 Executive Vice President and Chief Development Officer in March 1997. He served as a director from 1978 through March 1997, as Vice Chairman of the Board from 1982 through March 1997 and as Chief Marketing Officer from 1981 through March 1997. He was initially elected a Vice President in December 1970 and 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 and has served in a number of operating positions. Mr. Muldoon is a director of the Boys and Girls Club of Greater Houston Inc. 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. 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. -14- 19 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. 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 4, 1998 in Houston, Texas. -15- 20 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, and Australia. 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. BFI believes that its property and equipment is well-maintained and adequate for its current needs, although 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. -16- 21 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. 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 102 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 76 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 62 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 17 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. -17- 22 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." 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, 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 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 -18- 23 complaint. Management of the Company is currently unable to determine whether the ultimate monetary sanction, if any, will be more than $100,000. 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, 1996 and 1997, 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 1996 Fiscal Year 1997 ------------------------- ------------------------- High Low High Low ------- ------- ------- ------- First Quarter $31-7/8 $27-3/8 $27-5/8 $24-1/8 Second Quarter 32-5/8 28 32-7/8 25-3/4 Third Quarter 32-7/8 27-7/8 35-1/2 26-3/8 Fourth Quarter 29-1/8 21-3/8 38-13/16 33-7/8
As of December 3, 1997, there were approximately 16,000 holders of record of BFI Common Stock. 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 1996 and 1997, 68 cents was paid in dividends on each share of Common Stock. The most recently declared quarterly cash dividend on the Common Stock was 19 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 Amended and Restated Multicurrency Revolving Credit Agreement and Second Amended and Restated 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 -19- 24 Stock pursuant to the most restrictive of such limitations was approximately $1.2 billion on September 30, 1997, after giving effect to cash dividends paid or declared through September 30, 1997. After payment for the shares of Common Stock acquired by the Company in accordance with the terms of its "Dutch Auction" tender offer, this amount was reduced by $585 million to approximately $615 million. See "Business-General." 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, 1997.
- ---------------------------------------------------------------------------- Year Ended September 30, ----------------------------------------------------------- 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- (In Thousands Except for Per Share Amounts) Operating Statement Data: - ---------------- Revenues $5,782,972 $5,779,277 $5,779,351 $4,314,541 $3,478,830 Income before special charges and extra- ordinary items $ 332,822 $ 273,014 $ 384,561 $ 283,973 $ 213,910 Income (loss) before extra- ordinary items $ 283,695 $ (89,172) $ 384,561 $ 283,973 $ 197,440 Net income (loss) $ 265,214 $ (101,331) $ 384,561 $ 278,710 $ 197,440 Income (loss) per common and common equivalent share - Income (loss) before extra- ordinary items $1.39 $(0.44) $1.93 $1.52 $1.15 Net income (loss) $1.30 $(0.50) $1.93 $1.49 $1.15 Cash dividends per common share $ .70 $ .68 $ .68 $ .68 $ .68
(Continued on Following Page) 21 26
- ---------------------------------------------------------------------------- Year Ended September 30, ---------------------------------------------------------- 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- (In Thousands Except for Per Share Amounts) Balance Sheet Data: - ------------------ Property and equipment, net $3,567,155 $3,920,721 $3,722,292 $3,049,767 $2,515,709 Total assets $6,678,292 $7,600,906 $7,460,372 $5,796,955 $4,295,642 Senior long-term debt $1,675,162 $2,766,885 $1,665,804 $ 713,680 $ 333,689 Convertible subordinated debentures $ -- $ -- $ 744,944 $ 744,949 $ 744,949 Common stock- holders' equity $2,660,763 $2,510,278 $2,741,750 $2,391,680 $1,532,603 Cash Flow Data: - -------------- Capital expenditures $ 494,725 $ 935,382 $ 929,596 $ 694,475 $ 606,240 Payments for businesses acquired $ 21,305 $ 188,451 $ 769,369 $ 398,734 $ 83,786 Cash flows from operating activities $ 999,100 $ 856,843 $1,030,489 $ 693,928 $ 613,965
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 Fiscal 1997 was a crucial year for the Company that included the reorganization of its North American operating business structure which became effective in August 1996 and the announcement at the end of fiscal 1996 of 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. In fiscal 1997, the Company significantly reduced capital expenditures from the prior year, streamlined its portfolio of assets largely through divestiture activities, reduced its selling, general and administrative ("SG&A") costs and, to a lesser extent, operating costs, and shifted its focus to return on gross assets in both its existing business operations and its business development activities. Subsequent to yearend, the Company announced the signing of an agreement to merge its international operations with SITA, a Paris-based company, in exchange for U.S. $1 billion and ordinary shares of SITA stock that will result in approximately a 20 percent ownership in SITA. Net income for fiscal 1997 was $332.8 million or $1.63 per share, before special charges and extraordinary items, an increase of 21.9% from the prior year, on consolidated revenues of $5.783 billion, flat with the prior year. Pre-tax special charges reported in fiscal 1997 were $82 million ($49 million or $0.24 per share after income taxes). The fiscal 1997 results were also reduced by after-tax extraordinary items of $18.5 million, or $0.09 per share, associated with the retirement of debt. After the special charges and extraordinary items, net income for fiscal 1997 was $265.2 million, or $1.30 per share. The current year results compare with net income, before special charges and an extraordinary item, for fiscal 1996 of $273.0 million or $1.36 per share, on consolidated revenues of $5.779 billion. Pre-tax special charges included in the fiscal 1996 results of operations were $447 million ($362 million or $1.80 per share after income taxes). The fiscal 1996 extraordinary item of $12.2 million, after tax ($0.06 per share) was associated with the redemption of $745 million of 23 28 Convertible Subordinated Debentures. After the special charges and extraordinary item, the Company reported a net loss for fiscal 1996 of $101.3 million, or $0.50 per share. Fiscal 1997 earnings, before special charges and extraordinary items, were favorably affected by improved operating profit in the Company's North American operations, which resulted from actions taken to (1) reduce SG&A staffing levels and operating costs in the Company's collection and recycling businesses, (2) improve customer pricing and (3) divest certain underperforming operations and assets. Similar actions taken in the Company's international operations also had a favorable effect on the Company's operating profitability during the latter part of the year. Fiscal 1997 results were affected negatively by severance and reorganization expenses of approximately $24 million associated with the reorganization of North American operations announced in June 1996 and the reductions, principally in the first half of the current fiscal year, in worldwide employee staffing levels to effect improvements in operating and administrative efficiency. Additionally, an increase in the Company's income from operations of $27.2 million, a significant portion of which is related to lower depreciation and amortization expense, was reflected in current year earnings as a result of the special charges of $447 million taken in the fourth quarter of fiscal 1996 and the special charges of $82 million taken in fiscal 1997 (see Note (4) of Notes to Consolidated Financial Statements). During fiscal 1997, the Company's actions reflected its previously announced strategic shift in focus away from an emphasis on external growth to an emphasis on internal growth and on increasing return on assets. Marketing and sales personnel were realigned with half of the sales force focused on customer segments by industry and the remainder on integrated direct sales (telephone-based sales). The redeployment and retraining of the sales force that was completed in the first half of fiscal 1997 is enabling sales personnel to better focus on the Company's customers. In addition, the plan to reduce SG&A, commenced during the first quarter of fiscal 1997, has resulted in the reduction of approximately 1,300 employees worldwide since the Company announced its reorganization in June 1996 and the consolidation of certain business and administrative activities. SG&A as a percent of revenues was 14.0% for fiscal 1997, lower than the prior year (15.1%). The Company exceeded its SG&A milestone for fiscal 1997, which was to reduce SG&A as a percent of revenues to 14.6% for the fiscal year. During the first quarter of fiscal 1997, the Company completed its initial marketplace and business line strategic reviews and identified core and non-core business operations (including those considered in the special charges incurred in the fourth quarter of fiscal 1996) to be marketed and sold with aggregate annual revenues of approximately $270 million in the U.S. and $130 million outside of the U.S. The Company has 24 29 continued its strategic reviews of underperforming marketplaces since the first quarter. The goal of these reviews is to identify the key drivers of performance or underperformance in each marketplace and identify actions to improve the business operations. However, in some cases, these reviews have resulted in a conclusion to divest the operations as it is evident that the Company will be unable to achieve its desired returns even with identified areas for improvement. As a result of these reviews, the Company identified additional business operations with annual revenues of $130 million in North America and $155 million (a portion of which is not consolidated for financial reporting purposes) in international operations to be divested (including those considered in the current fiscal year special charges). During fiscal 1997, the Company sold business operations with annual revenues of approximately $540 million (of which approximately $340 million related to North American operations), with most of these sales concluded during the latter half of the fiscal year. Additionally, subsequent to year-end, the Company announced the signing of an agreement to merge its international operations with SITA, a Paris-based company. (See "Subsequent Event"). The Company has also identified real estate assets of approximately $60 million that are actively being marketed. In March 1997, the Company initiated an effort to reduce operating expenses by $100 million on an annualized basis by the beginning of the fourth quarter of fiscal 1997. The Company reduced operating headcount through the re-routing of trucks, consolidations and closures of operating facilities and, where appropriate, after careful review, a reduction in supervisory personnel. Although this goal was not fully achieved during fiscal 1997, actions to be taken in fiscal 1998, in addition to those enumerated above, have been identified to further reduce operating expenses, including the consolidation of container and truck facilities, shedding fringe waste collection routes, reducing costs associated with accidents and injuries through increased focus on safety, and the implementation of disposal volume swaps with third parties. The Company is also optimistic that SAP, its new information systems platform, will assist in cost reduction efforts beginning in fiscal 1998. Maintenance and procurement areas will now have a tool that will provide information on a national basis. This data will enable managers to make better decisions and reduce operating costs. The Company also focused on asset management throughout fiscal 1997. Reduced capital spending is leading to lower fixed costs, which is another contributor to the Company's effort to reduce operating costs. Capital expenditures, including acquisitions, for fiscal 1997 were limited to $527 million compared with $1.2 billion in fiscal 1996. Revenues Revenues for fiscal 1997 were $5.8 billion, unchanged from fiscal years 1996 and 1995. The following table reflects the 25 30 contribution to total revenue of the Company's business segments for the last three years (in millions):
Year Ended September 30, --------------------------- 1997 1996 1995 ------- ------- ------- North American Operations (1) ----------------------------- Collection Services - Solid Waste $2,913 $2,886 $2,758 Transfer and Disposal - Solid Waste Unaffiliated customers 552 537 543 Affiliated companies 527 513 483 ------ ------ ------ 1,079 1,050 1,026 Recycling Services 555 531 675 Medical Waste Services 199 200 189 Services Group and Other 106 89 83 Elimination of affiliated companies' revenues (527) (513) (483) ------ ------ ------ Total North American Operations 4,325 4,243 4,248 ------ ------ ------ International Operations ------------------------ Germany 633 662 710 The Netherlands 289 323 323 United Kingdom 227 193 176 Other 309 358 322 ------ ------ ------ Total International Operations 1,458 1,536 1,531 ------ ------ ------ Total Company $5,783 $5,779 $5,779 ====== ====== ====== Percentage Increase from Prior Year --% --% 34%
--------------- (1) Revenues from Canadian operations of $176 million, $169 million and $178 million for fiscal years 1997, 1996 and 1995, respectively, are included in North American revenues. The following table reflects changes in revenues for fiscal 1997 from price, volume, acquisitions, divestitures, and foreign currency translation compared with revenue changes for fiscal years 1996 and 1995. The fiscal 1997 growth in revenue from acquisitions, price and volume was offset by the significant decrease in revenues due to the divestitures of business operations and foreign currency translation. 26 31
Change in Revenues ------------------------------ 1997 1996 1995 ------ ------ ------ Price 1.2% (5.9)% 5.9% Volume 1.0 0.4 5.8 Acquisitions 2.4 5.7 19.9 Divestitures (2.4) -- -- Foreign currency translation (2.1) (0.2) 2.4 ---- ---- ---- Total Percentage Increase 0.1% --% 34.0% ==== ==== ====
As shown above, acquisitions accounted for revenue growth of 2.4% during fiscal 1997 over fiscal 1996. Revenue growth due to acquisitions was attributable principally to acquisitions consummated in fiscal 1996. No significant acquisitions were closed in the current year with the emphasis on internal rather than external growth. Revenues increased 1.2% due to change in price during fiscal 1997. Increases in revenues due to price were noted in the Company's international, collection, medical waste and, to a lesser extent, recycling businesses while a decrease was experienced in the transfer and disposal business. The weighted average market prices for corrugated, office paper and newspaper in North America did not change significantly from fiscal 1996 to 1997. The increases in revenue due to volume in the current year compared with last year were driven by increases in the North American collection, transfer and disposal and recycling businesses. Revenues also reflect the effect of divestitures and lower international revenues from foreign currency translation due to the stronger U.S. dollar. Fiscal 1996 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 during fiscal 1995. 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 fiscal 1995. In North America, despite the mitigating impact of floor price contracts, the average price of recycling commodities for fiscal 1996 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 in fiscal 1996. Paper prices have historically been cyclical, but in late fiscal 1995 and through fiscal 1996, unprecedented changes in recycling commodity prices were experienced. 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. 27 32 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. Cost of Operations Cost of operations decreased $26 million or 0.6% during fiscal 1997 compared with fiscal 1996. The decrease in cost of operations is attributable to the impact of divestitures of certain business operations and the operating cost reduction program initiated in March 1997. As a result of this cost reduction program, the Company has reduced its operating headcount through the re-routing of trucks, consolidations and closures of operating facilities and, where appropriate, after careful review, a reduction in supervisory personnel. These decreased costs were offset largely by the increase in cost of operations related to businesses acquired in fiscal 1996 and, to a lesser extent, fiscal 1997. Cost of operations as a percent of revenues decreased from 74.7% for fiscal 1996 to 74.2% for fiscal 1997. Cost of operations increased $168 million (4%) in fiscal 1996, and $1,024 million (33%) in fiscal 1995, in both cases 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. 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 the prior year. The fiscal 1995 increase in cost of operations was due principally to the Attwoods and Otto acquisitions. Included in cost of operations is depreciation and amortization expense of approximately $474 million, $491 million and $453 million for fiscal years 1997, 1996 and 1995, respectively. 28 33 Selling, General and Administrative Expense SG&A was $812 million for fiscal 1997, a decrease of 7.1% from last year. SG&A as a percent of revenues decreased from 15.1% of revenues for fiscal 1996 to 14.0% of revenues in fiscal 1997. The $61.8 million decrease in SG&A was driven largely by the impact of divestitures of certain business operations as well as the reduction in employees worldwide and other cost reduction actions to improve operating and administrative efficiency. This decrease was offset partially by higher costs associated with businesses acquired (principally in fiscal 1996) and approximately $21 million in severance and reorganization expenses included in SG&A associated with both the reorganization of North American operations announced in June 1996 and the current year reduction of employees worldwide. SG&A expenses increased $31 million (4%) in fiscal 1996 and $196 million (30%) in fiscal 1995, in both cases 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. The increase in SG&A expense in fiscal 1996 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. SG&A expense for fiscal 1996 was offset partially by reduced incentive compensation related to the lower earnings level achieved in 1996. Increased SG&A expenses in fiscal 1995 over the prior year were principally due to acquisition activities, including the Attwoods and Otto acquisitions. Included in SG&A expense for fiscal years 1997, 1996 and 1995 was depreciation and amortization expense of $96 million, $112 million and $99 million, respectively. Special Charges, net Special charges of $82 million ($49 million or $0.24 per share after income taxes) were included in fiscal 1997 results of operations. Non-cash expenses of $53 million were due to cumulative foreign currency translation losses associated with the sale of Italian operations and $96 million were for anticipated losses related to decisions to divest additional underperforming or non-core business operations and assets located primarily in the United Kingdom, the Netherlands and the United States. These losses were offset partially by net 29 34 gains of $67 million arising largely from 56 divestitures completed in fiscal 1997, principally in North America. Special charges of $447 million ($362 million or $1.80 per 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. See Note (4) of Notes to Consolidated Financial Statements for further discussion of the special charges. Interest Expense and Income Interest expense and income for the last three fiscal years were as follows (in thousands):
1997 1996 1995 -------- -------- -------- Gross interest expense $174,939 $195,605 $170,958 Interest capitalized (9,714) (16,306) (11,429) -------- -------- -------- Interest expense $165,225 $179,299 $159,529 ======== ======== ======== Interest income $ 7,142 $ 8,842 $ 7,422 ======== ======== ========
Fiscal 1997 interest expense declined by $14.1 million to $165.2 million from $179.3 million for fiscal 1996. The decrease was driven principally by the $999.8 million reduction in debt during fiscal 1997, largely as a result of cash proceeds from the 56 businesses divested in fiscal 1997, increased cash flow from improved operating performance and the limitation on capital spending in fiscal 1997 ($527 million) compared with fiscal 1996 ($1.2 billion). In fiscal 1997, the Company significantly exceeded its current year milestone for long-term debt which was to maintain interest-bearing debt at or below the September 30, 1996 level. 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. 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. 30 35 Many of these construction projects were completed by fiscal 1996 yearend. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates declined slightly from fiscal 1996 to fiscal 1997 due to the reduction in equity earnings from Pfitzenmeier & Rau ("P&R") due to the acquisition of the remaining 50% ownership interest of P&R by Otto Waste Services during the second quarter of fiscal 1996, offset to a large extent by improved earnings from the Company's Hong Kong equity 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 P&R. 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. Income Taxes The Company's effective income tax rate for fiscal years 1997 and 1995 was 40.0%. 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 were not deductible for income tax purposes or that deductible amounts could expire prior to utilization by the Company. Minority Interest in Income of Consolidated Subsidiaries The minority interest in income of consolidated subsidiaries is principally associated with the net income of Otto Waste Services. The $1.7 million increase in fiscal 1997 over fiscal 1996 was not significant. The fiscal 1996 decline of $18.4 million from fiscal 1995 was principally due to the negative impact of lower recycling commodity prices received in Germany in fiscal 1996 as compared with the prior year. Extraordinary Items During the second quarter of fiscal 1997, the Company's unconsolidated affiliate, American Ref-Fuel Company of Hempstead, incurred a pre-tax charge to expense of $9.6 million associated with the redemption of approximately $250 million principal 31 36 amount of Series 1985 Bonds, which were refinanced. As a result, the Company has reflected an extraordinary charge, after tax, of $3.1 million (or approximately $0.02 per share) in its fiscal 1997 results of operations related to its 50% ownership interest in this affiliate. During the third quarter of fiscal 1997, the Company redeemed $160 million of private placement notes previously scheduled to mature in fiscal 1998 and $11.8 million of tax-exempt debt associated with a landfill that was sold in the third quarter by the Company. On September 3, 1997, the Company announced a tender offer for its $300 million 7 7/8% Senior Notes due March 15, 2005. Prior to expiration of the tender offer on September 17, 1997, approximately $230.5 million of these notes were tendered pursuant to the tender offer. During the fourth quarter of fiscal 1997, the Company also acquired $122.6 million of its outstanding publicly traded debt through open market purchases. The Company purchased $43.3 million of its 6.10% Senior Notes, $38.8 million of its 6.375% Senior Notes, $40.0 million of its 7.40% Debentures and $0.5 million of its 9 1/4% Debentures. These redemptions of debt, aggregating $524.9 million, resulted in extraordinary charges to the Company's fiscal 1997 net income of $15.4 million, after income taxes, or approximately $0.08 per share. On January 2, 1996, the Company announced that its $400 million 6 3/4% Convertible Subordinated Debentures due 2005 and its $345 million of 6 1/4% Convertible Subordinated Debentures due 2012 were being called for redemption. The redemption, which occurred on February 2, 1996, resulted in an extraordinary charge to the Company's fiscal 1996 net income of $12.2 million, after income taxes, or approximately $0.06 per share. Subsequent Event In November 1997, the Company announced the signing of an agreement to merge its operations outside North America with SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. Under the terms of the agreement, the Company will receive cash totaling U.S. $1 billion and ordinary shares of SITA stock that will result in approximately a 20 percent ownership in the company. Upon completion of the transaction, Suez Lyonnaise des Eaux will own more than 50 percent of SITA. The transaction has been approved by the boards of the Company and SITA, and is subject to satisfactory completion of due diligence, approval by regulatory authorities and authorization by SITA's shareholders of the issuance of additional ordinary shares. Closing of the transaction is anticipated by the end of the first quarter of calendar year 1998. SITA is a leading industrial waste services company, which provides collection, recycling, waste-to-energy and disposal services related to residential, commercial, industrial and medical waste. As a result of this transaction, SITA will be an industry leader in France, the United Kingdom, the Netherlands, Germany, Spain and Brazil. 32 37 This transaction and the resulting global partnership with SITA and its parent company represent a continuation of the Company's focus on its core North American business, while continuing to participate in the growth of the global environmental services industry. The Company intends to use the proceeds from the transaction to continue its Board-approved financial strategy to pay down debt and buy back equity. Additionally, the Company will accelerate a prudent, results-driven, external growth strategy as a result of this transaction and the recent streamlining of North American operations. Financial information related to the Company's international operations for fiscal 1997 and 1996 is as follows (amounts in thousands):
Fiscal Year ----------------------- 1997 1996 ---------- ---------- Revenues $1,458,316 $1,536,642 Cost of operations 1,135,061 1,195,441 ---------- ---------- Gross profit 323,255 341,201 SG&A 208,623 239,151 Special charges, net 145,144 244,973 ---------- ---------- Loss from operations $ (30,512) $ (142,923) ========== ========== Income from operations before special charges $ 114,632 $ 102,050 ========== ========== Equity in earnings of unconsolidated affiliates $ 19,367 $ 21,522 ========== ==========
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. 33 38
Year Ended September 30, ------------------------ 1997 1996 1995 ------ ------ ------ Profitability margins: Gross profit 25.8% 25.3% 28.2% Income from operations before special charges 11.8% 10.2% 13.7% Income from operations 10.4% 2.5% 13.7% Income before income taxes, minority interest and extraordinary items 8.6% 0.5% 12.0% Net income before special charges and extraordinary items (1) 5.8% 4.7% 6.7% Net income (loss) (1) 4.6% (1.8)% 6.7% Other financial information: Pre-tax, pre-interest return on average total assets, excluding special charges 10.2% 8.4% 12.2% Return on Gross Assets 11.9% 11.4% 13.9% Ratio of earnings to fixed charges 2.98(2) 1.02(3) 4.04
------------ (1) 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 1997 special charges of $82 million, the ratio of earnings to fixed charges for fiscal 1997 was 3.31. (3) 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 $82 million and $447 million taken in fiscal years 1997 and 1996, respectively, had a significant negative impact on the profitability margins of the Company other than the gross profit margin. Improvement was noted in each of the above profitability margins in fiscal 1997 when compared with fiscal 1996. These margins were affected favorably by the Company's operating and SG&A cost reduction efforts, the divestiture of certain underperforming business operations and assets, and improved customer pricing. The current year profitability margins were affected negatively by employees severance and reorganization expenses of approximately $24 million, although this effect was offset largely by an increase in income from operations of $27.2 million, a significant portion of which is related to reduced depreciation and amortization expense resulting from the 34 39 special charges taken in fiscal years 1996 and 1997. Improved operating profit margins were achieved in each of the Company's core business types in North America as well as its international operations during fiscal 1997. Exclusive of the impact of special charges, fiscal 1996 results reflected declines in all of the profitability margins presented above as compared with fiscal 1995. These profitability margins were affected negatively by the significant worldwide decline in the average value of recycling commodities in fiscal 1996. Lower average recycling commodity prices in the prior year principally affected earnings and profitability margins in the Company's North American and German operations. These profitability margins were also negatively affected in fiscal 1996 by the relatively low profit margins in the Company's Italian operations and, to a lesser extent, its Spanish and Australian operations. Total assets declined from $7.6 billion at September 30, 1996 to $6.7 billion at September 30, 1997. This decline resulted principally from the divestitures of 56 business operations and asset divestitures in fiscal 1997, decreases due to foreign currency translation and decreases for depreciation and amortization expense, offset partially by fiscal 1997 capital expenditures. 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. Pre-tax, pre-interest return on average total assets increased in fiscal 1997 over fiscal 1996 due both to the improved earnings and the reduction in assets over the course of the year. 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 fiscal 1996. As stated previously, management's focus shifted in fiscal 1997 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 measurement utilized by the Company which represents 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 1997 and 1996). 35 40 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 1997, 1996 and 1995 was 11.9%, 11.4% and 13.9%, respectively. The Company's goals and actions for fiscal 1998 will continue to align the Company's performance with its stockholders' interests. In addition, incentive compensation plans will continue to link employees to common goals and reward them only as stockholders and customers benefit from improved performance by the Company. The fiscal 1998 milestones for the Company and its North American operations are as follows:
Total Company ------------------------- Fiscal 1998 Fiscal 1998 Fiscal 1997 North American Milestones Actual Milestones ----------- ----------- -------------- SG&A as a percent of revenues 13.5% 14.0% 13.5% Operating profit margin 13.8% 11.8% 15.0% Revenue growth - Internal 3.5% 2.2% 4.0% Acquisitions 1.0% 2.4% 1.0% ----- ----- ----- Total 4.5% 4.6% (1) 5.0% ROGA 13.3% 11.9% 14.7%
---------- (1) Fiscal 1997 represents revenue growth from price, volume and acquisitions and exclude the effects of divestitures and foreign currency exchange. Additionally, the Company's fiscal 1997 milestones compared with its fiscal 1997 and 1996 actual performance was as follows (dollar amounts in millions): 36 41
Fiscal 1997 --------------------- Fiscal 1996 Milestone Actual Actual --------- --------- ------- SG&A as a percent of revenues 14.6% 14.0% 15.1% Operating profit margin 12.0% 11.8% 10.2% ROGA 11.9% 11.9% 10.4% Capital expenditures $790 $527 $1,226 Cash flow positive (reduce less than interest-bearing debt) $2,827 $1,827 $2,827
EBITDA (defined herein as income from operations plus depreciation and amortization expense before considering special charges) was $1.25 billion for fiscal 1997 compared with $1.19 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, 1997 and 1996, the Company's balance sheet included accrued environmental costs of $613 million and $666 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 37 42 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 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 102 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 76 of these 102 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 62 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 17 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 38 43 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, or possibly all, 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 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 39 44 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, ------------------------------- 1997 1996 1995 --------- -------- -------- Working capital (in thousands) $(189,861) $(10,695) $ 7,967 Working capital ratios .9:1 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. As discussed in Note (14) of Notes to Consolidated Financial Statements, 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. These securities are not included on the Company's balance sheet; an increase in common stockholders' equity will be reflected when cash proceeds totaling over $400 million are received by the Company no later than June 30, 1998. During December 1996, the Company amended the terms of its existing $750 million Multicurrency Revolving Credit Agreement which was originally established to fund the Company's acquisition of Attwoods plc in December 1994. Under the terms of the amended agreement, the facility has a 364-day term with a one-year, term-out option available to the Company at any time prior to its maturity date of December 1997. The agreement contains a net worth requirement consistent with the Company's $1 billion revolving credit agreement. At September 30, 1997 and 1996, the Company had no outstanding borrowings under this agreement. During the third quarter of fiscal 1997, the Company redeemed $160 million of private placement notes previously scheduled to mature in fiscal 1998 and $11.8 million of tax-exempt debt associated with a landfill that was sold in the third quarter by the Company. These redemptions resulted in extraordinary charges to the Company's net income of $1.7 million, after income taxes, or approximately $0.01 per share in the third quarter. 40 45 On September 3, 1997, the Company announced a tender offer for its $300 million 7 7/8% Senior Notes due March 15, 2005. Prior to expiration of the tender offer on September 17, 1997, approximately $230.5 million of these notes were tendered pursuant to the tender offer. During the fourth quarter of fiscal 1997, the Company also acquired $122.6 million of its outstanding publicly traded debt through open market purchases. The Company purchased $43.3 million of its 6.10% Senior Notes, $38.8 million of its 6.375% Senior Notes, $40.0 million of its 7.40% Debentures and $0.5 million of its 9 1/4% Debentures. As a result of these redemptions, the Company recorded extraordinary charges to the Company's net income of $13.7 million, after income taxes, or approximately $0.07 per share in the fourth quarter of fiscal 1997. 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. Borrowings under the commercial paper program may not exceed the available credit under the Company's two existing bank credit agreements. There were approximately $20.0 million of commercial paper borrowings outstanding as of September 30, 1997. As of September 30, 1997, the Company's unused committed borrowing capacity under its Multicurrency Revolving Credit Agreement and its $1 billion bank credit agreement was in excess of $1.7 billion. Such capacity may be used to refinance amounts outstanding under short-term facilities, for financing the Company's $1.0 billion stock buyback program, for financing requirements in connection with foreign exchange contracts or for other capital requirements. Of the $1.8 billion of the Company's long-term indebtedness outstanding at September 30, 1997, 84% 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 of approximately 7.2% for fiscal 1997 is consistent with fiscal 1996. Long-term indebtedness (including $466.8 million of Otto Waste Services debt, which has not been guaranteed by the Company) as a percentage of total capitalization decreased from 53% at September 30, 1996 to 41% at September 30, 1997, principally as a result of the debt redemptions discussed above. The ratio would have been 32% at September 30, 1997, on a pro forma basis assuming that under the provisions related to the Automatic Common Exchange Securities, cash proceeds of $409.7 million were paid to the Company to purchase common stock and such proceeds were utilized to repay long-term debt. 41 46 As a result of cash flows from operations, proceeds from divestitures and reduced capital spending, the Company generated surplus cash during fiscal 1997. In September 1997, the Company announced its commencement of a common stock repurchase program, and initiated a Dutch auction tender offer for the purchase of up to 15 million shares of common stock. In accordance with the terms of the offer, which expired October 1, 1997, the Company accepted for purchase 15 million shares at a price of $39.00 per share in October 1997. This purchase of approximately $585 million of common stock in the Dutch auction was the first phase of the Company's two-part program to buy back $1 billion of its common stock. The second phase of this program, approximately $415 million in open market purchases of common stock or automatic common exchange security units, is expected to be completed by September 30, 1998. In addition, the Company increased its quarterly dividend rate from $.17 per share to $.19 per share in September 1997. As of September 30, 1997, there have been no significant changes in balance sheet caption amounts compared with September 30, 1996, and there have been no material changes in the Company's financial condition from that reported at September 30, 1996, except with respect to the declines in balance sheet amounts associated with the impact of foreign currency exchange resulting from the strengthening of the U.S. dollar against the German, Dutch and Spanish currencies, and except as disclosed herein. The capital appropriations budget for fiscal year 1998 has been established at $550 million to provide for normal replacement requirements, new assets to support planned revenue growth within all consolidated businesses and corporate market development activities. Market development activities 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. As previously discussed, in November 1997, the Company announced the signing of an agreement to merge its operations outside North America with SITA, a subsidiary of Suez Lyonnaise des Eaux. Under the terms of the agreement, the Company will receive cash totaling U.S. $1 billion and shares of SITA stock that will result in approximately a 20 percent ownership in SITA. The transaction is subject to satisfactory completion of due diligence, approval by regulatory authorities and authorization by SITA's shareholders of the issuance of additional ordinary shares. Closing of the transaction is anticipated by the end of the first quarter of calendar year 1998. The Company intends to use the proceeds from the transaction to continue its Board-approved financial strategy to pay down debt and buy back equity. Additionally, the Company will accelerate a prudent, results-driven, external growth strategy as a result of this transaction and the recent streamlining of North American operations. 42 47 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. 43 48 Item 7A. - Quantitative and Qualitative Disclosure About Market Risk The Company currently utilizes no material derivative financial instruments which expose the Company to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. The table below presents principal cash flows and related weighted average interest rates of the Company's long-term debt at September 30, 1997 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at September 30, 1997. Implied forward rates should not be considered a predictor of actual future interest rates. The information is presented in U.S. dollar equivalents, the Company's reporting currency. The outstanding long-term debt amounts are presented in U.S. dollars and parenthetically in German deutsche mark, where applicable. Additionally, the U.S. dollar equivalent carrying value of German deutsche mark denominated debt is sensitive to foreign currency exchange rates.
Expected Maturity Date ------------------------------------------------------------------------- There- Fair 1998 1999 2000 2001 2002 after Total Value -------- -------- -------- -------- -------- -------- -------- -------- (Amounts in millions except for percentages) Fixed Rate $ 115 $ 116 $ 11 $ 5 $ 8 $ 1,017 $ 1,272 $ 1,330 Average interest rate 9.4% 9.3% 10.4% 10.4% 10.4% 7.1% 7.6% Fixed Rate (DM 366) $ 8 $ 36 $ 116 $ 21 $ 17 $ 64 $ 262 $ 262 Average interest rate 6.8% 6.8% 7.1% 6.8% 6.8% 6.8% 7.0% Variable Rate $ 20 -- -- -- -- $ 60 $ 80 $ 80 Average interest rate 5.8% -- -- -- -- 5.6% 5.7% Variable Rate (DM 360) -- -- $ 205 -- -- -- $ 205 $ 205 Average interest rate -- -- 5.5% -- -- -- 5.5%
44 49 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, 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, 1997 45 50 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For The Three Years Ended September 30, 1997 (In Thousands Except for Per Share Amounts)
- ----------------------------------------------------------------------------------- Year Ended September 30, -------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------- Revenues $ 5,782,972 $ 5,779,277 $ 5,779,351 Cost of operations 4,289,614 4,315,615 4,147,303 ----------- ----------- ----------- Gross profit 1,493,358 1,463,662 1,632,048 Selling, general and administrative expense 812,242 874,069 842,861 Special charges, net 81,879 446,800 -- ----------- ----------- ----------- Income from operations 599,237 142,793 789,187 Interest expense 165,225 179,299 159,529 Interest income (7,142) (8,842) (7,422) Equity in earnings of unconsolidated affiliates (53,988) (55,370) (53,996) ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary items 495,142 27,706 691,076 Income taxes 198,057 105,188 276,430 Minority interest in income of consolidated subsidiaries 13,390 11,690 30,085 ----------- ----------- ----------- Income (loss) before extraordinary items 283,695 (89,172) 384,561 Extraordinary items - Loss on redemption of debt by unconsolidated affiliate, net of income tax benefit of $1,677 3,124 -- -- Loss on redemption of debt, net of income tax benefits of $8,269 and $4,467 15,357 12,159 -- ----------- ----------- ----------- Net income (loss) $ 265,214 $ (101,331) $ 384,561 =========== =========== =========== Number of common and common equivalent shares used in computing earnings per share 203,745 200,668 199,077 =========== =========== ===========
(Continued on Following Page) 46 51 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For The Three Years Ended September 30, 1997 (In Thousands Except for Per Share Amounts)
- ---------------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Income (loss) per common and common equivalent share: Income (loss) before extraordinary items $ 1.39 $ (.44) $ 1.93 Extraordinary items (.09) (.06) -- -------- -------- -------- Net income (loss) $ 1.30 $ (.50) $ 1.93 ======== ======== ======== Cash dividends per common share $ .70 $ .68 $ .68 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 47 52 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS (In Thousands)
- ------------------------------------------------------------------------- September 30, ----------------------- 1997 1996 - ------------------------------------------------------------------------- CURRENT ASSETS: Cash $ 78,746 $ 110,224 Short-term investments 3,811 26,394 Receivables - Trade, net of allowances of $38,376 and $40,622 for doubtful accounts 820,678 929,316 Other 71,547 42,543 Inventories 40,414 51,536 Deferred income taxes 117,404 119,914 Prepayments and other 112,063 107,868 ---------- ---------- Total current assets 1,244,663 1,387,795 ---------- ---------- PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $2,512,196 and $2,737,788 3,567,155 3,920,721 ---------- ---------- OTHER ASSETS: Cost over fair value of net tangible assets of acquired businesses, net of accumulated amortization of $168,401 and $138,636 1,418,827 1,671,461 Other intangible assets, net of accumulated amortization of $92,794 and $110,835 81,208 110,925 Deferred income taxes 50,057 122,617 Investments in unconsolidated affiliates 235,559 287,051 Other 80,823 100,336 ---------- ---------- Total other assets 1,866,474 2,292,390 ---------- ---------- Total assets $6,678,292 $7,600,906 ========== ==========
The accompanying notes are an integral part of these financial statements. 48 53 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (In Thousands Except for Share Amounts)
- -------------------------------------------------------------------------- September 30, ------------------------- 1997 1996 - -------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 151,736 $ 59,806 Accounts payable 496,733 507,731 Accrued liabilities - Salaries and wages 115,477 129,203 Taxes, other than income 58,112 40,876 Other 414,601 430,187 Income taxes 19,204 35,586 Deferred revenues 178,661 195,101 ----------- ----------- Total current liabilities 1,434,524 1,398,490 ----------- ----------- DEFERRED ITEMS: Accrued environmental and landfill costs 505,278 541,838 Deferred income taxes 149,803 128,434 Other 252,762 254,981 ----------- ----------- Total deferred items 907,843 925,253 ----------- ----------- LONG-TERM DEBT, net of current portion 1,675,162 2,766,885 ----------- ----------- COMMITMENTS AND CONTINGENCIES COMMON STOCKHOLDERS' EQUITY: Common stock, $.16 2/3 par; 400,000,000 shares authorized; 213,387,697 and 213,390,458 shares issued 35,572 35,572 Additional paid-in capital 1,839,378 1,730,612 Retained earnings 1,080,810 1,031,331 Treasury stock, 1,239,246 and 1,027,278 shares, at cost (18,951) (11,926) Stock and Employee Benefit Trust, 7,252,452 and 11,012,423 shares (276,046) (275,311) ----------- ----------- Total common stockholders' equity 2,660,763 2,510,278 ----------- ----------- Total liabilities and common stockholders' equity $ 6,678,292 $ 7,600,906 =========== ===========
The accompanying notes are an integral part of these financial statements. 49 54 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For The Three Years Ended September 30, 1997 (In Thousands)
- -------------------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------ 1997 1996 1995 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 265,214 $ (101,331) $ 384,561 ----------- ----------- ----------- Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization - Property and equipment 501,656 521,185 476,384 Goodwill 43,215 47,374 43,519 Other intangible assets 24,799 33,966 31,967 Special charges, net 81,879 446,800 -- Deferred income tax expense 81,146 3,034 23,450 Amortization of deferred investment tax credit (706) (706) (706) Provision for losses on accounts receivable 30,116 29,527 26,620 Gains on sales of fixed assets (6,995) (4,512) (4,724) Equity in earnings of unconsolidated affiliates, net of dividends received and extraordinary item 7,373 (13,455) (28,535) Minority interest in income of consolidated subsidiaries, net of dividends paid 6,059 10,895 26,344 Increase (decrease) in cash from changes in assets and liabilities excluding effects of acquisitions and divestitures: Trade receivables (41,089) (28,683) (70,069) Inventories 4,103 1,563 (5,466) Other assets 42,430 29,991 52,625 Other liabilities (40,100) (118,805) 74,519 ----------- ----------- ----------- Total adjustments 733,886 958,174 645,928 ----------- ----------- ----------- Net cash provided by operating activities 999,100 856,843 1,030,489 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (494,725) (935,382) (929,596) Payments for businesses acquired (21,305) (188,451) (769,369) Proceeds from businesses divested 372,202 -- -- Investments in unconsolidated affiliates (39,700) (82,535) (29,530) Proceeds from disposition of assets 41,667 57,742 159,217 Purchases of short-term investments -- -- (42,179) Sales of short-term investments 21,539 302,065 201,924 Return of investment in unconsolidated affiliates 69,286 56,861 38,637 ----------- ----------- ----------- Net cash used in investing activities (51,036) (789,700) (1,370,896) ----------- ----------- -----------
(Continued on Following Page) 50 55 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For The Three Years Ended September 30, 1997 (In Thousands)
- ------------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of stock 68,761 13,316 15,363 Proceeds from issuances of indebtedness 191,255 980,834 1,062,652 Repayments of indebtedness (1,098,030) (904,459) (591,884) Dividends paid (137,572) (137,944) (134,139) ----------- ----------- ----------- Net cash provided by (used in) financing activities (975,586) (48,253) 351,992 ----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES (3,956) (1,474) 2,092 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (31,478) 17,416 13,677 CASH AT BEGINNING OF YEAR 110,224 92,808 79,131 ----------- ----------- ----------- CASH AT END OF YEAR $ 78,746 $ 110,224 $ 92,808 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest, net of capitalized amounts $ 170,398 $ 174,590 $ 153,576 Income taxes $ 168,393 $ 163,251 $ 205,544
The accompanying notes are an integral part of these financial statements. 51 56 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1997 (In Thousands)
- --------------------------------------------------------------------------------- Year Ended September 30, -------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------- Shares of common stock: Beginning of year 213,390 213,441 197,085 Stock option exercises 2,918 563 423 Common stock issuances related to - Dividend Reinvestment Plan 67 101 38 BFI Employee Stock Ownership and Savings Plan 699 754 318 Acquisitions 64 988 555 Stock and Employee Benefit Trust -- -- 15,000 Retirements of common stock (3,760) (2,584) -- Other 10 127 22 --------- --------- --------- End of year 213,388 213,390 213,441 ========= ========= ========= Common stock: Beginning of year $ 35,572 $ 35,581 $ 32,854 Stock option exercises 486 94 71 Common stock issuances related to - Dividend Reinvestment Plan 11 17 6 BFI Employee Stock Ownership and Savings Plan 117 126 53 Acquisitions 11 165 93 Stock and Employee Benefit Trust -- -- 2,501 Retirements of common stock (627) (431) -- Other 2 20 3 --------- --------- --------- End of year 35,572 35,572 35,581 --------- --------- ---------
(Continued on Following Page) 52 57 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1997 (In Thousands)
- ------------------------------------------------------------------------------------ Year Ended September 30, ---------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------ Additional paid-in capital: Beginning of year 1,730,612 1,801,407 1,351,919 Stock option exercises and related income tax benefit 81,140 13,868 (933) Common stock issuances related to - Dividend Reinvestment Plan 1,954 2,908 1,137 BFI Employee Stock Ownership and Savings Plan 20,811 21,404 9,459 Acquisitions 1,718 29,133 8,245 Stock and Employee Benefit Trust -- -- 456,874 Adjustment of Stock and Employee Benefit Trust to market 124,585 (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 (123,223) (74,858) -- Other 1,781 (862) (801) ---------- ---------- ---------- End of year 1,839,378 1,730,612 1,801,407 ---------- ---------- ---------- Retained earnings: Beginning of year 1,031,331 1,328,244 1,009,132 Net income (loss) 265,214 (101,331) 384,561 Cash dividends (142,266) (133,623) (137,014) Foreign currency translation adjustment (73,469) (61,959) 71,565 ---------- ---------- ---------- End of year 1,080,810 1,031,331 1,328,244 ---------- ---------- ----------
(Continued on Following Page) 53 58 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY For The Three Years Ended September 30, 1997 (In Thousands)
- --------------------------------------------------------------------------------------- Year Ended September 30, -------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------- Treasury stock: Beginning of year (11,926) (10,494) (2,225) Stock option exercises (5,313) (1,649) 27,013 Common stock issuances related to - Dividend Reinvestment Plan -- -- 1,106 BFI Employee Stock Ownership and Savings Plan -- -- 9,228 Acquisitions (1,468) 303 3,223 Reimbursement from Stock and Employee Benefit Trust -- -- (48,921) Other (244) (86) 82 ----------- ----------- ----------- End of year (18,951) (11,926) (10,494) ----------- ----------- ----------- Stock and Employee Benefit Trust: Beginning of year (275,311) (412,988) -- Establishment of trust -- -- (459,375) Reimbursement of treasury stock -- -- 48,921 Reimbursements of common stock 123,850 75,289 -- Adjustment to market (124,585) 62,388 (2,534) ----------- ----------- ----------- End of year (276,046) (275,311) (412,988) ----------- ----------- ----------- Total common stockholders' equity $ 2,660,763 $ 2,510,278 $ 2,741,750 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 54 59 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 12 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, 1997 and 1996, short-term investments of approximately $3.8 million and $26.4 million, respectively, were invested in time deposits. Inventories. Inventories consisting principally of equipment parts, materials and supplies are generally valued under a method which approximates the lower of cost (first-in, first-out) or market. Property and equipment. Property and equipment are recorded at cost. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering, construction and the direct costs of Company personnel 55 60 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 years 1997, 1996 and 1995 was $9,714,000, $16,306,000 and $11,429,000, 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 benefited phase is consumed. Units-of-production amortization rates are determined annually for each of the Company's operating landfills. The rates are based on estimates provided by the Company's engineers and accounting personnel, and consider the information provided by aerial surveys which are generally performed annually. Depreciation of property and equipment, other than landfills, is provided on the straight-line method based upon the estimated useful lives of the assets, generally estimated as follows: 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 1997, 1996 and 1995, maintenance and repairs charged to expense were $338,553,000, $336,374,000 and $325,658,000, 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 56 61 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. Deferred income taxes. Deferred tax assets and liabilities reflect the impact of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Such amounts are recorded using presently enacted tax rates and regulations. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Unamortized investment tax credits have been included in deferred income taxes for financial reporting purposes. The Company amortizes investment tax credits under the deferral method over the estimated useful lives of the related assets as they are placed in service. No investment tax credits have been generated since fiscal year 1992. Deferred revenues. Amounts billed to customers prior to providing the related services are deferred and later reported as revenues in the period in which the services are rendered. 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, 57 62 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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. 58 63 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other deferred items - Deferred items as of September 30, 1997 and 1996 were as follows (in thousands):
1997 1996 -------- -------- Self-insurance accruals $121,722 $ 90,515 Minority interest in consolidated subsidiaries 57,035 59,376 Accrued pension costs 31,792 39,734 Other 42,213 65,356 -------- -------- $252,762 $254,981 ======== ========
In addition to the above deferred items, included in other accrued liabilities at September 30, 1997 and 1996 was the current portion of self-insurance accruals of $89,567,000 and $87,274,000, respectively, and accrued pension costs of $16,849,000 and $14,625,000, respectively. The Company is self insured for workers' compensation, auto liability and general and comprehensive liability claims. Under its insurance policies, the Company generally has self-insured retention limits ranging from $500,000 to $5,000,000 and has obtained fully insured layers of coverage above such self-retention limits. The Company provides for its self-insurance accruals based upon estimates provided by a third-party actuary. The actuary reviews the Company's actual claims' activity and estimates the ultimate exposure related to these aggregate claims. The Company reviews its self-insurance accruals quarterly and revises these accruals as necessary. 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, 1997 or 1996. 59 64 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 1997 presentation. New accounting pronouncements. 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. 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 did not have a material effect on the Company's financial position or results of operations. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 - "Earnings Per Share". This statement, which establishes new standards for computing and presenting earnings per share, is effective for the Company's quarter ending December 31, 1997 and requires restatement for all periods presented. The Company believes that the adoption of SFAS No. 128 will not have a material effect on its earnings per share calculations. (3) Reorganization - During June 1996, the Company announced the reorganization of its North American operating business structure, which became effective in August 1996. The Company's previous organization divided North America into 45 divisions reporting to six regional offices with operations conducted from approximately 400 districts. The new organization divides North America into 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 expensed as incurred 60 65 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) and are included in selling, general and administrative expenses. (4) Special charges - Fiscal 1996 ($447 million). Special charges of $447 million ($362 million or $1.80 per share after income taxes) were included in fiscal 1996 results of operations. Charges of $349 million resulted principally from management decisions to sell the Company's Italian operations, divest certain domestic and international non-core business assets and operations and close certain recycling facilities not expected to achieve desired performance objectives. The remainder of the special charges related to the writedown of the Company's investment in the Azusa, California landfill to fair value, which was determined based upon the present value of the estimated future cash flows using a discount rate commensurate with the risks involved. 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 adverse decisions by California judicial and regulatory authorities in fiscal 1996 and early fiscal 1997, bearing on the site's ability to accept municipal solid waste. The Company initiated a plan to sell its Italian operations during the fourth quarter of fiscal 1996, which was formally approved by the Company's Board of Directors. The Company's investment in its Italian operations, before considering special charges, was $206 million as of September 30, 1996. The Company completed the sale of these operations during June 1997. Losses accumulated in the foreign currency translation component of common stockholders' equity (approximately $53 million) were recognized as an additional loss upon consummation of the sale of these operations and were included in the fiscal 1997 special charges (see discussion below). Summary financial information related to the Company's Italian operations is as follows (in thousands):
Year Ended September 30, --------------------------------------------- 1997 1996 1995 --------- --------- --------- Revenues $ 81,926 $ 122,782 $ 103,819 Income (loss) from operations and equity in earnings of unconsolidated affiliates before special charges $ (2,190)(1) $ (4,019)(2) $ 65
61 66 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) -------------- (1) Does not reflect impact of special charges taken in fiscal 1997 (see below). (2) Does not reflect special charge of $178.6 million included in the fiscal 1996 special charges. The Company also decided to divest of certain domestic and international non-core business assets and operations and close certain recycling facilities during the fourth quarter of fiscal 1996. These decisions were reached based on a review of the non-core business assets and operations which were not expected to achieve the Company's desired performance objectives and a review of certain of the Company's recycling operations which had been adversely affected by the significant decline in commodity prices at that time. The special charges, which included asset writedowns and related liabilities recorded for certain contractual arrangements, did not consider future expenses associated principally with severance and relocation costs which would occur as a result of these decisions. Assets of these operations, prior to the special charges, were approximately $177 million as of September 30, 1996. The results of operations for these non-core business assets and operations and recycling facilities were not material to the Company's consolidated results of operations as the aggregated revenues and income (loss) from operations of these assets and operations represented less than 4% of the Company's corresponding consolidated totals, on a pre-special charges basis. During fiscal 1997, the Company sold a number of these business operations and closed 35 recycling facilities. In October 1996 (pursuant to a judicial order issued in September), California authorities suspended the Company's ability to accept municipal solid waste at its Azusa, California landfill pending compliance with certain regulatory requirements. As a result of the changing competitive nature of waste disposal in the Los Angeles market area and the continuing negative legal climate, including the adverse decisions discussed above, bearing on the site's ability to accept municipal solid waste, $98 million was included in the special charges to reduce the carrying amount of this investment to its estimated fair value. The fair value was determined based upon the present value of the estimated future cash flows using a discount rate commensurate with the risks involved. The Company sold this landfill facility during fiscal 1997. Fiscal 1997 ($82 million). Special charges of $82 million ($49 million or $0.24 per share after income taxes) were reported in fiscal 1997. Included in these special charges were non-cash expenses of $53 million due to cumulative foreign currency translation losses 62 67 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) associated with the sale of Italian business operations and $96 million for anticipated losses related to decisions to divest additional underperforming or non-core business operations and assets located primarily in the United Kingdom, the Netherlands and the United States. These losses were offset partially by net gains of $67 million arising largely from 56 divestitures completed in fiscal 1997, principally in North America. The results of operations for these additional underperforming or non-core business operations to be divested were not material to the Company's consolidated results of operations for fiscal 1997 as the aggregated total assets, revenues and income (loss) from operations of these assets and business operations represented approximately 3% or less of the Company's corresponding consolidated totals, on a pre-special charge basis. (5) Business combinations - During the current fiscal year, the Company paid approximately $22.5 million (including additional amounts payable, primarily to former owners, of $1.2 million) to acquire 22 solid waste businesses, which were accounted for as purchases. In connection with these acquisitions, the Company recorded additional interest-bearing indebtedness of $2.5 million and other liabilities of $4.8 million. The results of these business combinations are not material to the Company's consolidated results of operations or financial position. During the prior 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. The results of all businesses acquired in fiscal years 1997 and 1996 have been included in the consolidated financial statements from the dates of acquisition. In allocating purchase price, the assets acquired and liabilities assumed in connection with the Company's acquisitions have been initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. As a result, the financial information included in the Company's consolidated financial statements is subject to 63 68 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) adjustment prospectively as subsequent revisions in estimates of fair value, if any, are necessary. (6) Property and equipment - Property and equipment at September 30, 1997 and 1996 was as follows (in thousands):
1997 1996 ---------- ---------- Land and improvements $ 330,835 $ 340,034 Buildings 596,053 616,596 Landfills 1,661,888 1,897,206 Vehicles and equipment 3,373,894 3,686,466 Construction-in-progress 116,681 118,207 ---------- ---------- Total property and equipment 6,079,351 6,658,509 Less accumulated depreciation and amortization 2,512,196 2,737,788 ---------- ---------- Property and equipment, net $3,567,155 $3,920,721 ========== ==========
Included in the landfill category of property and equipment, net are $35.7 million and $78.1 million as of September 30, 1997 and 1996, 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 investments 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 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%), 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). 64 69 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1997 1996 ---------- ---------- Combined Balance Sheet Information as of Fiscal Yearend: Assets - Current assets $ 279,938 $ 233,891 Noncurrent assets 1,434,272 1,528,799 ---------- ---------- $1,714,210 $1,762,690 ========== ========== Liabilities and Net Worth - Current liabilities $ 192,745 $ 181,184 Noncurrent liabilities 1,200,656 1,221,633 Net worth 320,809 359,873 ---------- ---------- $1,714,210 $1,762,690 ========== ========== Company's Investments in and Advances to Equity Investees (including subordinated note and other receivables of $60,984 and $63,106, respectively) $ 215,761 $ 259,486 ========== ==========
1997 1996 1995 -------- -------- -------- Combined Income Statement Information for the Fiscal Year Ended: Revenues $553,098 $511,086 $500,989 Gross profit $226,853 $213,236 $211,555 Income before extraordinary item $ 93,465 $ 95,438 $ 94,463 Extraordinary item (2) $ (9,602) $ -- $ -- Net income $ 83,863 $ 95,438 $ 94,463 Company's Income Statement Information: Equity in Earnings of Equity Investees (1) $ 53,988 $ 55,370 $ 53,996 Extraordinary item, net of income tax benefit of $1,677 (2) $ 3,124 $ -- $ -- Dividends Received from Equity Investees $ 56,560 $ 41,915 $ 25,461
------------------ (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. (2) During the second quarter of fiscal 1997, the 65 70 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Company's unconsolidated affiliate, American Ref-Fuel Company of Hempstead, incurred a pre-tax charge to expense of $9.6 million associated with the redemption of approximately $250 million principal amount of Series 1985 Bonds, which were refinanced. As a result, the Company has reflected an extraordinary charge, after tax, of $3.1 million (or approximately $.02 per share) in its fiscal 1997 Consolidated Statement of Operations related to its 50% ownership interest in this affiliate. Interest was payable on the Series 1985 Bonds due 2010 at a weighted average interest rate of approximately 7.3%, compared with the weighted average interest rate of approximately 5% for the new bonds, which are also due in 2010. (8) Accrued environmental and landfill costs - Accrued environmental and landfill costs at September 30, 1997 and 1996 were as follows (in thousands):
1997 1996 -------- -------- Continuing operations - Accrued costs associated with open landfills (including landfills under expansion) $248,820 $334,793 Accrued costs associated with closed landfills and corrective action costs (including Superfund sites) 264,516 223,781 -------- -------- Total 513,336 558,574 Less current portion (included in other accrued liabilities) 81,291 92,536 -------- -------- Total long-term $432,045 $466,038 ======== ======== Discontinued operations - Accrued costs of closure, post- closure and certain other liabilities associated with discontinued operations $ 99,914 $107,832 Less current portion (included in other accrued liabilities) 26,681 32,032 -------- -------- Total long-term $ 73,233 $ 75,800 ======== ======== Total long-term portion of accrued environmental and landfill costs $505,278 $541,838 ======== ========
66 71 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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". Open landfills. The Company operates 92 solid waste landfills in the United States, 18 of which are operated under contracts with municipalities or others. The Company also operates 53 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 1997, approximately $275-$325 million of additional accruals are to be provided over the remaining lives of these facilities. Estimated additional environmental costs ranging from $525-$575 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, 1997 and 1996 was as follows (in thousands): 67 72 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1997 1996 ---------- ---------- Senior indebtedness (maturing as set forth in the following paragraphs): 6.10% Senior Notes, net of unamortized discount of $1,218 and $1,838 $ 155,471 $ 198,162 6.375% Senior Notes, net of unamortized discount of $1,507 and $2,051 159,693 197,949 7 7/8% Senior Notes, net of unamortized discount of $195 and $783 69,306 299,217 7.40% Debentures, net of unamortized discount of $1,767 and $2,082 358,233 397,918 9 1/4% Debentures 99,500 100,000 Solid waste revenue bond obligations 219,974 149,127 Other notes payable, primarily 5.0%-15.5% 505,674 804,721 ---------- ---------- 1,567,851 2,147,094 Commercial paper and short-term facilities to be refinanced 259,047 679,597 ---------- ---------- Total long-term debt 1,826,898 2,826,691 Less current portion 151,736 59,806 ---------- ---------- Long-term debt, net of current portion $1,675,162 $2,766,885 ========== ==========
The long-term portion of the debt outstanding at September 30, 1997, matures as follows: 1999, $152,890,000; 2000, $331,130,000; 2001, $25,999,000; 2002, $24,358,000 and in subsequent years, $1,140,785,000. 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 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. 68 73 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7.40% Debentures. In September 1995, the Company issued $400 million of 7.40% Debentures due September 15, 2035. These debentures are not subject to any sinking fund and may be redeemed as a whole or in part, at the option of the Company at any time. The redemption price is equal to the greater of (i) the principal amount of the debentures and (ii) the present value of future principal and interest payments discounted at a rate specified under the terms of the indenture. Net proceeds received from the sale of these debentures were used to repay short-term indebtedness associated with various acquisitions, including the Attwoods acquisition. 9 1/4% Debentures. In May 1991, the Company issued $100 million of 9 1/4% Debentures which mature on May 1, 2021. The debentures may not be redeemed prior to maturity and are not subject to any sinking fund. 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, 1997 and 1996, the Company had no outstanding borrowings under this bank credit agreement. During December 1996, the Company amended the terms of its existing $750 million Multicurrency Revolving Credit Agreement which was originally established to fund the Company's acquisition of Attwoods plc in December 1994. Under the terms of the amended agreement, the facility has a 364-day term with a one-year, term-out option available to the Company at any time prior to its maturity date of December 1997. The facility can be utilized to borrow U.S. dollars, pounds sterling, 69 74 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) deutsche mark, French francs or Dutch guilders as determined by the Company. At the option of the Company, the loans bear a rate of interest based upon LIBOR or the federal funds rate, plus a margin, or the prime rate. The Multicurrency Revolving Credit Agreement with Credit Suisse, as administrative agent for a group of U.S. and international banks, requires a facility fee of 0.6% per annum on the total commitment, whether used or unused, and contains a net worth requirement consistent with the Company's $1 billion revolving credit agreement. At September 30, 1997 and 1996, 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, 1997 and 1996, Otto Waste Services had outstanding borrowings under this facility of 360 million deutsche mark (approximately U.S. $204.6 million) and 250 million deutsche mark (approximately U.S. $163.9 million), respectively. As of September 30, 1997, distributions from retained earnings could not exceed $1.188 billion 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 agreements under which they receive proceeds from the sale by government authorities of solid waste revenue bonds. These subsidiaries are obligated to make payments sufficient to pay the interest and retire the bonds. The weighted average interest rate of these issues is approximately 5.85%. 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 was payable semi-annually on the senior notes at rates ranging from 7.5% - 8.0%. Additionally, notes payable includes mortgages payable and other secured debt, unsecured debt and capitalized lease obligations of the Company. Approximately $208 million and 70 75 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) $336 million of this indebtedness at September 30, 1997 and 1996, 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. Extraordinary items. During the third quarter of fiscal 1997, the Company redeemed $160 million of private placement notes previously scheduled to mature in fiscal 1998 and $11.8 million of tax-exempt debt associated with a landfill that was sold in the third quarter by the Company. On September 3, 1997, the Company announced a tender offer for its $300 million 7 7/8% Senior Notes due March 15, 2005. Prior to expiration of the tender offer on September 17, 1997, approximately $230.5 million of these notes were tendered pursuant to the tender offer. During the fourth quarter of fiscal 1997, the Company also acquired $122.6 million of its outstanding publicly traded debt through open market purchases. The Company purchased $43.3 million of its 6.10% Senior Notes, $38.8 million of its 6.375% Senior Notes, $40.0 million of its 7.40% Debentures and $0.5 million of its 9 1/4% Debentures. These redemptions of debt, aggregating $524.9 million, resulted in extraordinary charges to the Company's fiscal 1997 net income of $15.4 million, after income taxes, or approximately $0.08 per share. 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. It is the Company's intention to refinance outstanding short-term borrowings classified as long-term debt through the use of existing committed long-term bank credit agreements in the event that alternative long-term refinancing is not arranged. A summary by country of commercial paper balances and other outstanding borrowings to be refinanced as of September 30, 1997 and 1996 is as follows (amounts in thousands): 71 76 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1997 1996 ----------------------- ----------------------- Amount Interest Amount Interest to be Rate at to be Rate at Refinanced Yearend Refinanced Yearend ---------- -------- ---------- -------- United States - Commercial paper $ -- --% $438,296 5.5% Germany 259,047 4-10% 241,301 5-10% -------- -------- $259,047 $679,597 ======== ========
(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 were being called for redemption. The redemption, which occurred on February 2, 1996, resulted in an extraordinary charge to the Company's fiscal 1996 net income of $12.2 million, after income taxes, or approximately $.06 per share. (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. The Company and certain subsidiaries are involved in various environmental matters or proceedings, including original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities of certain landfill disposal facilities, and proceedings relating to governmental actions resulting from the involvement of various subsidiaries of the Company with certain waste sites (including Superfund sites), as well as other matters or claims that could result in additional environmental proceedings. 72 77 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) While the final resolution of any matter may have an impact on the Company's consolidated financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the consolidated financial position of the Company. Insurance matters. Under its insurance policies, the Company generally has self-insured retention limits ranging from $500,000 to $5,000,000 and has obtained fully insured layers of coverage above such self-retention limits. The Company has a wholly-owned domestic insurance subsidiary which operates as a captive insurance company. It currently writes insurance to meet financial assurance obligations related to closure and post-closure of certain landfills of the Company. At September 30, 1997, no claims had been made relative to this insurance operation, and no claim reserves had been posted. In order to meet existing governmental requirements, the Company has been able to secure an environmental impairment liability insurance policy in amounts which the Company believes are in compliance with the amounts required by federal and state law. Under this policy, the Company must reimburse the carrier for losses incurred by the Company. Waste-to-energy projects. 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 under this ownership structure are located in Hempstead, New York, Essex County in New Jersey, Preston, Connecticut, Niagara Falls, New York and Rochester, Massachusetts. Financing arrangements for four of these projects include agreements with the Company and 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: 73 78 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Hempstead, New York - Funding of 50% of periodic payments related to outstanding debt. At September 30, 1997, $210 million of total unamortized project debt was outstanding. Average annual debt service on 50% of the debt over the next five years is $10 million. The Company has guaranteed $5 million of additional partnership debt and annual debt service on such debt is estimated to be $.2 million. Essex County in New Jersey - Funding of 50% of cash deficiencies including debt service up to $50 to $100 million, depending upon the circumstances. Average annual debt service on 50% of the debt over the next five years is $10 million. Preston, Connecticut - Funding of 50% of periodic payments related to outstanding debt. At September 30, 1997, 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, 1997, $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 $300 million (weighted average fixed rate of 9.7%) of non-recourse debt as of September 30, 1997. 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, 1997, total minimum rental commitments becoming payable under all noncancellable operating leases are as follows (in thousands): 74 79 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1998 $ 87,624 2002 $ 38,952 1999 $ 71,175 2003 - 2007 $ 99,510 2000 $ 61,632 2008 - 2012 $ 59,920 2001 $ 48,603 All years thereafter $150,477
Total rental expenses for fiscal years 1997, 1996 and 1995, substantially all of which related to fixed amount rental agreements, were $107,622,000, $105,134,000 and $95,526,000, respectively. (12) Preferred stock - The Company is authorized by its Restated Certificate of Incorporation to issue 25 million shares of preferred stock, the terms and conditions to be determined by the Board of Directors in creating any particular series. (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 75 80 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) number of common and common equivalent shares used in computing primary earnings per share (in thousands):
Year Ended September 30, ------------------------------------ 1997 1996 1995 -------- -------- -------- Common shares outstanding, end of period 212,148 212,363 212,439 Less - Shares held in the Stock and Employee Benefit Trust (7,252) (11,012) (13,596) -------- -------- -------- Common shares outstanding for purposes of computing primary earnings per share, end of period 204,896 201,351 198,843 Effect of using weighted average common and common equivalent shares outstanding (2,096) (1,398) (1,199) Effect of shares issuable under stock option plans based on the treasury stock method 945 715 1,433 -------- -------- -------- Shares used in computing primary earnings per share 203,745 200,668 199,077 ======== ======== ========
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 diluted 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 76 81 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7.25% Automatic Common Exchange Securities had no effect on the computations for the periods presented. 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 affording employees, directors and other persons affiliated with the Company the right to purchase shares of its common stock. At September 30, 1997, options were available for future grants only under five plans, the Company's 1987, 1990, both 1993 plans and the 1996 plan. At September 30, 1997, 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. The 77 82 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) stock options generally vest 25% per year over a four-year period and expire after 10 years. The options are granted at a price equal to the stock's fair market value on the date of the grant. Transactions under all stock option plans are summarized below (option amounts in thousands):
1997 1996 1995 ------------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year 12,012 $ 27.49 10,173 $ 26.53 9,906 $ 25.21 Granted 1,974 $ 26.91 2,689 $ 30.46 1,758 $ 28.28 Exercised (2,918) $ 24.89 (564) $ 22.54 (1,287) $ 18.70 Terminated (550) $ 29.04 (286) $ 30.90 (204) $ 26.62 ---------- ------- ---------- Outstanding at end of year 10,518 $ 28.03 12,012 $ 27.49 10,173 $ 26.53 ========== ======= ========== Exercisable at end of year 5,787 $ 27.71 6,853 $ 26.77 5,922 $ 26.99 Available for future grants at end of year 9,979 12,424 4,926
As of September 30, 1997, the options outstanding are as follows (option amounts in thousands):
Outstanding Exercisable ------------------------------ ------------------- Weighted Weighted Weighted Average Average Average Range of Exercise Remaining Exercise Exercise Prices Options Price Years Options Price --------------- ------- --------- ---------- -------- --------- $17.31 - $20.00 588 $17.31 4.2 588 $17.31 $20.01 - $30.00 6,372 $26.15 6.5 3,458 $25.63 $30.01 - $40.00 3,191 $32.27 6.7 1,374 $33.87 $40.01 - $43.38 367 $40.88 2.2 367 $40.88
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 78 83 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) transferability. Such restrictions on current restricted stock grants lapse two years from the date of grant for officers, two to three years for 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 2,000,000 shares which may be awarded to officers and key employees as restricted stock grants or stock awards, 5,750 restricted shares were issued during the current year and 109,842 restricted shares were outstanding as of September 30, 1997. In addition, 5,232 restricted shares issued to non-employee directors were outstanding as of September 30, 1997. Common stock awards totaling 2,552 shares were granted to non-employee directors during fiscal 1997. Shares of restricted stock granted for the two years ended September 30, 1997 were as follows:
Year Ended September 30, ---------------------------- 1997 1996 ----------- ---------- Restricted stock granted 5,750 94,655 Weighted average fair value of restricted stock granted $31.82 $31.12
During fiscal 1997, 1,028,500 performance share awards were granted to officers and certain key employees pursuant to the Company's Long-Term Incentive Plan. After considering cancellation of 91,125 of these awards, 937,375 of the performance share awards remained outstanding as of September 30, 1997. These performance shares will vest in increments of 25% based upon the attainment of performance goals as described in the Long-Term Incentive Plan. The performance shares are earned only if the market price of the Company's common stock exceeds specific price targets while attaining certain levels of cash returns on gross assets in excess of the Company's weighted average cost of capital. No compensation expense has been recorded to date related to these awards. The Company accounts for all stock incentive plans related to employees under Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense related to these plans during fiscal years 1997, 1996 and 1995 was $1,662,000, $1,771,000 and $413,000, respectively. The Company's consolidated results of operations on a pro forma basis, as though the compensation cost for these plans had been determined consistent with SFAS No. 123, "Accounting 79 84 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) for Stock-Based Compensation", are as follows (in thousands, except per share amounts):
Year Ended September 30, --------------------------- 1997 1996 -------- --------- Pro forma income (loss) before extraordinary items $278,698 $ (91,642) Pro forma net income (loss) $260,217 $(103,801) Pro forma income (loss) per common and common equivalent share - Income (loss) before extraordinary items $ 1.37 $ (0.46) Net income (loss) $ 1.28 $ (0.52)
Because SFAS No. 123 has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for the grants:
Year Ended September 30, --------------------------------- 1997 1996 --------------- -------------- Risk-free interest rate 6.10% - 6.89% 5.56% - 6.70% Expected lives (in years) 6 6 Expected volatility 19.26% - 24.48% 22.87% - 25.75% Expected dividend yields 1.84% - 2.57% 2.15% - 2.66%
The weighted average fair values of options grant during fiscal years 1997 and 1996 were $7.68 and $8.67 per option, respectively. 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. 80 85 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (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, ------------------------------- 1997 1996 1995 --------- -------- -------- Beginning cumulative translation adjustment $ (31,138) $ 30,821 $(40,744) Translation adjustment for the fiscal year (126,334) (61,959) 71,565 Sale of Italian operations 52,865 -- -- --------- -------- -------- Ending cumulative translation adjustment $(104,607) $(31,138) $ 30,821 ========= ======== ========
(16) Income taxes - The components of (i) earnings before income taxes, minority interest and extraordinary items and (ii) the income tax provision for each of the three fiscal years ended September 30, are as set forth below (in thousands).
1997 1996 1995 --------- --------- --------- Domestic: Excluding special charges $ 498,141 $ 429,705 $ 563,648 Special charges 71,330 (187,087) -- --------- --------- --------- As reported 569,471 242,618 563,648 --------- --------- --------- Foreign (1): Excluding special charges 78,880 44,801 127,428 Special charges (153,209) (259,713) -- --------- --------- --------- As reported (74,329) (214,912) 127,428 --------- --------- --------- Total: Excluding special charges 577,021 474,506 691,076 Special charges (81,879) (446,800) -- --------- --------- --------- As reported $ 495,142 $ 27,706 $ 691,076 ========= ========= ========= -----------
(1) Amounts are net of intercompany interest expense for fiscal years 1997, 1996 and 1995 of $42,976,000, $53,660,000 and $36,572,000, respectively. The Company maintains a capital structure with respect to its foreign operations designed to minimize worldwide income and other tax costs. 81 86 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
State Federal Foreign & Local Total -------- -------- -------- -------- 1997: Current $101,460 $ 12,367 $ 3,790 $117,617 Deferred 45,944 19,296 15,906 81,146 Amortization of investment tax credit (706) -- -- (706) -------- -------- -------- -------- $146,698 $ 31,663 $ 19,696 $198,057 ======== ======== ======== ======== 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 ======== ======== ======== ========
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, 1997:
1997 1996 1995 ------ ------ ------ Excluding Special Charges: Income tax - U.S. federal rate 35.00% 35.00% 35.00% Federal effect of state income taxes (1.39) (2.31) (1.67) Effect of foreign operations .06 (2.05) (.20) All other, net 2.35 2.77 2.10 ----- ----- ----- Federal and foreign 36.02 33.41 35.23 State income taxes 3.98 6.59 4.77 ----- ----- ----- Effective income tax rate, excluding special charges 40.00 40.00 40.00 Effect of Special Charges -- 339.66 -- ----- ------ ----- Effective income tax rate 40.00% 379.66% 40.00% ===== ====== =====
82 87 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at September 30, 1997 and 1996, are as follows (in thousands):
1997 1996 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Depreciation and amortization $126,197 $535,195 $144,409 $468,326 Accrued environmental and landfill costs 159,508 -- 183,041 -- Accruals related to discontinued operations 10,211 -- 8,956 -- Self-insurance accruals 68,004 -- 56,457 -- Assets and operations to be divested 29,651 -- 107,247 -- Net operating loss carryforwards 82,843 -- 115,717 -- Other 285,196 141,768 318,449 138,649 -------- -------- -------- -------- Deferred tax assets and liabilities 761,610 676,963 934,276 606,975 Unamortized investment tax credits 19,716 20,393 Valuation allowance (47,273) (192,811) -------- -------- -------- -------- Deferred tax assets and liabilities, net of unamortized investment tax credits and valuation allowance $714,337 $696,679 $741,465 $627,368 ======== ======== ======== ========
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 $96 million are available to reduce future taxable income of the applicable foreign entities for periods which generally range from 1998 to 2001. Domestic state net operating loss carryforwards of approximately $794 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 1998 to 2012. The net change in the total valuation allowance 83 88 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) for the year ended September 30, 1997, was a decrease of $145.5 million, principally due to the sale of the Italian operations in the third quarter of fiscal 1997 compared with an increase in the prior year of $76.6 million, principally due to the special charges taken in the fourth quarter of fiscal 1996. Deferred income taxes have not been provided as of September 30, 1997, on approximately $696 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 1997, 1996 and 1995 were $12,710,000, $11,752,000 and $10,545,000, 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. 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. No additional disclosures pertaining to these plans have been included because the related amounts are not material to the Company's consolidated financial statements. 84 89 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table sets forth the funded status and amounts recognized in the Company's Consolidated Balance Sheet as of September 30, 1997 and 1996, and the significant assumptions used in accounting for the U.S. defined benefit plans. The measurement dates for these plans were June 30, 1997 and 1996.
1997 1996 --------- --------- (Dollar Amounts in Thousands) Actuarial present value of accumulated benefit obligations, including vested benefits of $186,856 and $161,986, respectively $(207,438) $(180,639) ========= ========= Actuarial present value of projected benefit obligation $(222,274) $(196,909) Plan assets at fair value, primarily commercial paper, common stocks (including 22,000 shares of the Company's common stock at both dates) and mutual funds 245,032 193,951 --------- --------- Projected benefit obligation (in excess of) less than plan assets 22,758 (2,958) Contributions made after measurement date but before end of fiscal year 4,762 7,263 Unrecognized net gain (32,020) (13,784) Unrecognized prior service cost (12,654) (13,957) Unrecognized net asset at transition (1,292) (1,486) --------- --------- Accrued pension costs $ (18,446) $ (24,922) ========= ========= Discount rate 7.75% 8.0% Rate of increase in compensation levels 4.0% 4.0% Expected long-term rate of return on assets 10.5% 9.5%
85 90 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The components of net annual pension cost for fiscal years 1997, 1996 and 1995 for the U.S. defined benefit plans were as follows (in thousands):
1997 1996 1995 -------- -------- -------- Service cost (benefits earned during the period) $ 13,454 $ 12,260 $ 9,933 Interest cost on projected benefit obligation 16,050 13,521 12,597 Investment gain on plan assets (42,564) (27,957) (14,097) Net amortization and deferral 21,765 12,056 (110) -------- -------- -------- Net annual pension cost $ 8,705 $ 9,880 $ 8,323 ======== ======== ========
Termination indemnity plan. The employees of the Company's Italian operations, which were divested in June 1997, were covered by a termination indemnity plan. Benefits under the plan, which were based on periods of service and the employee's compensation, were payable in a lump sum upon (1) retirement, (2) termination, (3) death after 10 years of credited service or (4) disability after 10 years of credited service. Expense in fiscal year 1997 for the period prior to divestiture and for fiscal years 1996 and 1995 related to this unfunded plan was $1,350,000, $1,809,000 and $1,798,000, 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 post-retirement benefit obligation of approximately $11.9 million at September 30, 1994) over a 20-year period. Current year expense was not material to the Company's results of operations. 86 91 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Postemployment benefits. The Company maintains no plans which provide significant benefits 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 relating to the Company's operations. For purposes of this table, general corporate expenses have been included in the computation of income from operations and are classified under "United States and Puerto Rico" (in thousands).
1997 1996 1995 ---------- ---------- ---------- Revenues: United States and Puerto Rico $4,148,647 $4,073,558 $4,070,021 ---------- ---------- ---------- Foreign - Canada 176,009 169,077 178,417 - Europe 1,351,560 1,425,390 1,433,923 - Other 106,756 111,252 96,990 ---------- ---------- ---------- Total foreign 1,634,325 1,705,719 1,709,330 ---------- ---------- ---------- Consolidated $5,782,972 $5,779,277 $5,779,351 ========== ========== ========== Combined income (loss) from operations and equity in earnings of unconsolidated affiliates: United States and Puerto Rico $ 653,866 (1) $ 327,421 (2) $ 626,798 ---------- ---------- ---------- Foreign - Canada 10,504 (7,857) 22,636 - Europe (28,782) (118,411) 186,251 - Other 17,637 (2,990) 7,498 ---------- ---------- ---------- Total foreign (641)(1) (129,258)(2) 216,385 ---------- ---------- ---------- Consolidated $ 653,225 $ 198,163 $ 843,183 ========== ========== ==========
87 92 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1997 1996 1995 ---------- ---------- ---------- Depreciation and amortization: United States and Puerto Rico $ 418,542 $ 438,639 $ 412,968 ---------- ---------- ---------- Foreign - Canada 18,370 17,615 14,473 - Europe 121,270 134,061 113,907 - Other 11,488 12,210 10,522 ---------- ---------- ---------- Total foreign 151,128 163,886 138,902 ---------- ---------- ---------- Consolidated $ 569,670 $ 602,525 $ 551,870 ========== ========== ========== Identifiable assets: United States and Puerto Rico $4,471,306 $4,803,978 $4,532,014 ---------- ---------- ---------- Foreign - Canada 185,372 206,908 183,210 - Europe 1,894,597 2,435,541 2,599,797 - Other 127,017 154,479 145,351 ---------- ---------- ---------- Total foreign 2,206,986 2,796,928 2,928,358 ---------- ---------- ---------- Consolidated $6,678,292 $7,600,906 $7,460,372 ========== ========== ========== -----------------
(1) Fiscal year 1997 earnings information includes special credits (principally net gains from the divestiture of business assets and operations) of $71,330,000 for operations in the United States and Puerto Rico and includes special charges of $153,209,000 for foreign operations, principally Europe. See Note (4). (2) Fiscal year 1996 earnings information for operations in the United States and Puerto Rico and for foreign operations include special charges of $187,087,000 and $259,713,000, respectively. See Note (4). (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. 88 93 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of September 30, --------------------------------------- 1997 1996 ------------------ ------------------ Book Fair Book Fair Value Value Value Value -------- -------- -------- -------- (In Thousands) Debt - 6.10% Senior Notes $155,471 $152,671 $198,162 $188,848 6.375% Senior Notes 159,693 154,879 197,949 184,171 7.40% Debentures 358,233 365,835 397,918 377,107 7 7/8% Senior Notes 69,306 74,086 299,217 311,575 9 1/4% Debentures 99,500 123,073 100,000 117,740 Solid waste revenue bond obligations 219,974 229,902 149,127 151,601 Other notes payable 505,674 526,259 804,721 837,174 Commercial paper and short-term facilities to be refinanced 259,047 258,365 679,597 676,489
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 is based on quoted market prices where available or on present value calculations which are calculated using current rates for similar debt with the same remaining maturities. In the normal course of business, the Company has letters of credit, performance bonds and other guarantees which are not reflected in the accompanying consolidated balance sheets. In the past, no significant claims have been made against these financial instruments. Management believes that the likelihood of performance under these financial instruments is minimal and expects no material losses to occur in connection with these financial instruments. (20) Related party transactions - Otto Holding International B.V. ("OHI") 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 $3.6 million, $4.7 million and $5.0 89 94 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) million for fiscal years 1997, 1996 and 1995, respectively. The Company, including Otto Waste Services, also purchased or entered into capital leases for approximately $30.8 million of containers from the OHI Group during fiscal year 1996; no such capital leases were entered into in fiscal 1997. Included in the Company's Consolidated Balance Sheet at September 30, 1997 and 1996, are the following amounts relating to transactions with the OHI Group (in thousands):
1997 1996 ------- ------- Other accrued liabilities $ -- $ 7,673 Capital lease obligations 30,014 44,000 Notes payable, interest payable at FIBOR plus 2% 8,077 3,131
During fiscal 1996, Otto Waste Services sold certain assets related to plastics processing to the OHI Group. These assets were sold to OHI for approximately $2.5 million resulting in a loss on the sale for Otto Waste Services of approximately $1.3 million which was included in the Company's fiscal 1996 earnings. Additionally, Otto Waste Services sold the stock of one of its subsidiaries to the OHI Group at its recorded book value of approximately $2.1 million. OHI also sold two companies specializing in plastics recycling and processing to Otto Waste Services at their net book value of approximately $372,000. In connection with the acquisition of these two companies, Otto Waste Services assumed liabilities of approximately $6.6 million of long-term debt with third parties and approximately $7.7 million in net payables with affiliated companies of Otto Waste Services and other companies within the OHI Group. (21) Quarterly financial information (Unaudited) -
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- (In Thousands Except for Per Share Amounts) Revenues 1997 $1,495,137 $1,413,731 $1,471,252 $1,402,852 1996 $1,430,781 $1,373,887 $1,471,368 $1,503,241 Gross profit 1997 $ 383,839 $ 359,381 $ 376,051 $ 374,087 1996 $ 382,676 $ 346,971 $ 356,018 $ 377,997 Income (loss) from operations 1997 $ 163,802 $ 152,754 $ 97,657(3) $ 185,024 (3) 1996 $ 174,162 $ 134,414 $ 134,802 $ (300,585)(5) Income taxes 1997 $ 50,507 $ 47,955 $ 30,688 $ 68,907 1996 $ 58,118 $ 42,205 $ 42,417 $ (37,552)
90 95 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- (In Thousands Except for Per Share Amounts) Income (loss) before extra- ordinary items 1997 $ 71,880 $ 70,955 $ 41,926 $ 98,934 1996 $ 83,010 $ 60,984 $ 62,022 $(295,188) Net income (loss) 1997 $ 71,880 $ 67,831(1) $ 40,241(4) $ 85,262(4) 1996 $ 83,010 $ 48,825(2) $ 62,022 $(295,188) Income (loss) per share: Income (loss) before extra- ordinary items 1997 $ .36 $ .35 $ .21 $ .48 1996 $ .42 $ .30 $ .31 $(1.47) Net income (loss) 1997 $ .36 $ .33 $ .20 $ .41 1996 $ .42 $ .24 $ .31 $(1.47)
------------- (1) In the second quarter of fiscal 1997, the Company recorded an after-tax loss of $3.1 million associated with the redemption of approximately $250 million of debt by an unconsolidated affiliate (American Ref-Fuel Company of Hempstead), which was reflected in the Company's Consolidated Statement of Operations as an extraordinary item. See Note (7). (2) 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). (3) In the third quarter of fiscal 1997, the Company incurred special charges of $84 million which included foreign currency translation losses associated with the sale of the Company's Italian operations and anticipated losses related to decisions to divest additional underperforming or non-core business operations and assets, offset partially by net gains from divestitures completed in the third quarter. In the fourth quarter of fiscal 1997, the Company reported a special credit of $2.2 million related principally to net gains from the sale of business operations in the fourth quarter, offset partially by changes in estimated losses associated with previous decisions to divest certain operations and assets. See Note (4). 91 96 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (4) In the third and fourth quarters of fiscal 1997, the Company recorded after-tax losses of $1.7 million and $13.7 million, respectively, associated with redemption of debt, which was reflected in the Company's Consolidated Statement of Operations as an extraordinary item. See Note (9). (5) 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). (22) Events Subsequent to Date of Financial Statements - Common stock repurchase program. In September 1997, the Company announced its commencement of a common stock repurchase program, and initiated a Dutch auction tender offer for the purchase of up to 15 million shares of common stock at a price that could range from $34.00 to $39.00 per share. In accordance with the terms of the offer, which expired on October 1, 1997, the Company accepted for purchase 15 million shares at a price of $39.00 per share in October 1997. This purchase of approximately $585 million of common stock in the Dutch auction was the first phase of the Company's two-part program to buy back $1 billion of its common stock. The second phase of this program, approximately $415 million in open market purchases and privately negotiated transactions of common stock or automatic common exchange security units, is expected to be completed by September 30, 1998. Merger of operations outside North America. In November 1997, the Company announced the signing of an agreement to merge its operations outside North America with SITA, a subsidiary of Suez Lyonnaise des Eaux. Under the terms of the agreement, the Company will receive cash totaling U.S. $1 billion and ordinary shares of SITA stock that will result in approximately a 20 percent ownership in SITA. Upon completion of the transaction, Suez Lyonnaise des Eaux will own more than 50 percent of SITA. The transaction has been approved by the boards of the Company and SITA, and is subject to satisfactory completion of due diligence, approval by regulatory authorities and authorization by SITA's shareholders of the issuance of additional ordinary shares. Closing of the transaction is anticipated by the end of the first quarter of calendar year 1998. Paris-based SITA is a leading industrial waste services company, which provides collection, recycling, waste-to-energy and disposal services related to residential, commercial, industrial and medical waste. 92 97 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 operations for the three years ended September 30, 1997. Consolidated balance sheet--September 30, 1997 and 1996. Consolidated statement of cash flows for the three years ended September 30, 1997. Consolidated statement of common stockholders' equity for the three years ended September 30, 1997. Notes to consolidated financial statements. SCHEDULES II Allowance for doubtful accounts for the three years ended September 30, 1997. 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. -93- 98 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 March 5, 1997. (Exhibit 3 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 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. (Exhibit 4.4 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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.)
-94- 99 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 Amended and Restated Multicurrency Revolving Credit Agreement, dated December 27, 1996, among BFI and Credit Suisse and the Banks specified therein. (Exhibit 4 of Form 10-Q for the quarter ended December 31, 1996, 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. (Exhibit 10.1 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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.)
-95- 100 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. (Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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. 1996 Stock Incentive Plan (Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.)
-96- 101 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 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.) 10.25 Parent Agreement, dated as of January 25, 1991, between Air Products and Chemicals, Inc. and BFI. (Exhibit 10.24 of Form 10-K for the fiscal year ended September 30, 1996, is hereby incorporated by reference.) 10.26 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.)
-97- 102 10.27 BFI Deferred Compensation Agreement (Exhibit 10.26 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.28 BFI Convertible Annual Incentive Award Plan. (Exhibit 10.27 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.29 BFI Stock and Employee Benefit Trust Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee. (Exhibit 10.28 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.30 Common Stock Purchase Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee. (Exhibit 10.29 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.31 BFI Annual Management Incentive Plan. (Exhibit 10.2 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 10.32 BFI Long-Term Incentive Plan. (Exhibit 10.3 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) * 10.33 Agreement, dated as of November 8, 1997, among BFI, BFI International, Inc., Suez Lyonnaise Des Eaux, S.A. and SITA, S.A. * 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 A Current Report on Form 8-K dated October 9, 1997 was filed pursuant to "Item 5. Other Events," relating to the Company's announcement of the final results of its Dutch Auction tender Offer. -98- 103 A Current Report on Form 8-K dated October 1, 1997 was filed pursuant to "Item 5. Other Events," relating to the Company's announcement of the Preliminary results of its Dutch auction tender offer. - ------------------ 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. - ------------------ -99- 104 SCHEDULE II BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES ALLOWANCE FOR DOUBTFUL ACCOUNTS For the Three Years Ended September 30, 1997 (In Thousands)
- ----------------------------------------------------------- Additions Balance Charged Deductions Balance Beginning to from End of of Year Income Reserves Year - ----------------------------------------------------------- 1997 $40,622 $30,116 $(32,362) $38,376 1996 $39,777 $29,527 $(28,682) $40,622 1995 $33,284 $26,620 $(20,127) $39,777
100 105 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, 1997 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/ Jeffrey E. Curtiss ---------------------------- Jeffrey E. Curtiss, Senior Vice President and Chief Financial Officer /s/ David R. Hopkins ---------------------------- David R. Hopkins, Vice President, Controller and Chief Accounting Officer -101- 106 /s/ Gregory D. Brenneman ---------------------------- Gregory D. Brenneman, Director /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/ Harry J. Phillips, Sr. ---------------------------- Harry J. Phillips, Sr., Director ---------------------------- Joseph L. Roberts, Jr., Director /s/ Marc J. Shapiro ---------------------------- Marc J. Shapiro, Director /s/ Robert M. Teeter ---------------------------- Robert M. Teeter, Director /s/ Marina v.N. Whitman ---------------------------- December 4, 1997 Marina v.N. Whitman, Director -102- 107 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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 March 5, 1997. (Exhibit 3 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 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. (Exhibit 4.4 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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.)
108 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 Amended and Restated Multicurrency Revolving Credit Agreement, dated December 27, 1996, among BFI and Credit Suisse and the Banks specified therein. (Exhibit 4 of Form 10-Q for the quarter ended December 31, 1996, 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. (Exhibit 10.1 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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.)
109 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. (Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 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. 1996 Stock Incentive Plan (Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.)
110 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 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.) 10.25 Parent Agreement, dated as of January 25, 1991, between Air Products and Chemicals, Inc. and BFI. (Exhibit 10.24 of Form 10-K for the fiscal year ended September 30, 1996, is hereby incorporated by reference.) 10.26 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.)
111 10.27 BFI Deferred Compensation Agreement (Exhibit 10.26 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.28 BFI Convertible Annual Incentive Award Plan. (Exhibit 10.27 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.29 BFI Stock and Employee Benefit Trust Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee. (Exhibit 10.28 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.30 Common Stock Purchase Agreement, dated February 28, 1995, between BFI and Wachovia Bank of North Carolina, N.A., as trustee. (Exhibit 10.29 of Form 10-K for the fiscal year ended September 30, 1995, is hereby incorporated by reference.) 10.31 BFI Annual Management Incentive Plan. (Exhibit 10.2 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) 10.32 BFI Long-Term Incentive Plan. (Exhibit 10.3 of Form 10-Q for the quarter ended March 31, 1997, is hereby incorporated by reference.) * 10.33 Agreement, dated as of November 8, 1997, among BFI, BFI International, Inc., Suez Lyonnaise Des Eaux, S.A. and SITA, S.A. * 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 A Current Report on Form 8-K dated October 9, 1997 was filed pursuant to "Item 5. Other Events," relating to the Company's announcement of the final results of its Dutch Auction tender Offer. EX-10.33 2 AGREEMENT DATED 11/8/97 1 AGREEMENT AGREEMENT (this "Agreement"), dated as of November 8, 1997, among BROWNING-FERRIS INDUSTRIES, INC., a Delaware corporation ("Parent"), BFI INTERNATIONAL, INC., a Delaware corporation ("International"), SUEZ LYONNAISE DES EAUX, S.A., a societe anonyme organized under the laws of the Republic of France ("Lion"), and SITA, S.A., a societe anonyme organized under the laws of the Republic of France ("Purchaser"). W I T N E S S E T H : WHEREAS, Parent and International, a direct wholly-owned subsidiary of Parent, are primarily engaged, through direct or indirect subsidiaries of Parent or International in the waste business, including the collection, transportation, disposal, and processing of solid and medical waste, the collection, transportation, processing and marketing or disposal of recyclable materials, the collection, treatment and disposal of hazardous materials and related activities, including quarrying operations, gas and electricity production, transportation of sand, gravel and asphalt, and pipe inspection and renovation, outside the United States, Canada and Mexico (the "Waste Business"); WHEREAS, Parent and International wish to sell and transfer to Purchaser, and Purchaser desires to purchase from Parent and International, Parent's and International's respective right, title and interest in and to the Waste Business; WHEREAS, in connection with such sale and transfer, Parent and International wish to sell and transfer to Purchaser and/or subsidiaries of Purchaser (or cause to be sold and transferred to Purchaser and/or subsidiaries of Purchaser), and Purchaser desires to purchase and/or cause its subsidiaries to purchase from Parent and International, all of the Shares (as defined herein); WHEREAS, in connection with such sale and transfer, prior to the execution and delivery of this -1- 2 Agreement Purchaser and OHI Holding International B.V.("Oscar") have entered into a shareholders agreement with respect to the Oscar Joint Venture (as defined herein); NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and on the terms and subject to the conditions set forth herein, the parties agree as follows: 1. (a) Specific Definitions. As used in this Agreement and the attached Annexes, the following terms shall have the meanings set forth or referred to below: "Affiliate", as applied to any Person, means any other Person directly or indirectly controlling, controlled by or under common control with such Person, including any Subsidiary of such Person. "French GAAP" means generally accepted accounting principles in France as applied from time to time by Purchaser. "International Subsidiaries" means, collectively, the Persons listed on the draft organizational chart attached as Annex A to this Agreement and any other Subsidiary of Parent through which the Waste Business is conducted, except as set forth in Annex A. The Parties shall consult concerning whether any business entities should be added to or deleted from Schedule A in order to cause Schedule A to conform to the financial statements for the Waste Business previously provided by Parent to Purchaser and shall agree in good faith on any revisions to Schedule A within 30 days of the date of this Agreement. "Oscar Joint Venture" means Otto Entsorgungsdienstleistungen GmbH. "Parent Subsidiaries" means, collectively, all of the Subsidiaries of Parent, including but not limited to International and the International Subsidiaries. -2- 3 "Person" means any individual, corporation, joint stock company, limited liability company, partnership, firm, joint venture, trust, association, unincorporated organization, governmental or regulatory body or other entity. "Purchaser Shares" means the ordinary shares, FF 50 par value, of Purchaser. "Selling Entities" means, collectively, any Parent Subsidiaries that own, beneficially or of record, any of the Shares. "Shares" means, collectively, the number and type of equity securities and other ownership interests of the International Subsidiaries specified in Schedule 1. "Subsidiary" means, with respect to any Person, any other Person, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such Person or by one or more of its direct or indirect Subsidiaries or by such Person and any one or more of its respective Subsidiaries. The term Subsidiary, when used with respect to Parent and International, shall be deemed to include the Oscar Joint Venture. "Waste Business" has the meaning set forth in the Recitals. (b) Schedule of Definitions. As used in this Agreement, the following terms shall have the meanings ascribed to them in the sections indicated below.
Term Section ---- ------- Acquisition Documents................................... 8(b)(iv) Agreement............................................... Preamble
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Term Section ---- ------- Ancillary Agreements................................................ Annex I, Section 1.5 Approval............................................................ Annex I, Section 1.7 Arbitration Rules................................................... 18(b) Auditors............................................................ 3(e) Cash Consideration.................................................. 2(a) Closing............................................................. 2(b) Closing Date........................................................ 2(b) Consideration....................................................... 2(a) Consideration Shares................................................ 2(a) Contracts........................................................... Annex I, Section 1.8 Contracts........................................................... Annex II, Section 2.7 Environmental Law................................................... Annex I, Section 1.25 Full Rights Subscription............................................ 2(d)(iv) Governmental Entity................................................. 12 Hazardous Substance................................................. Annex I, Section 1.25 International....................................................... Preamble International Acquisition Proposal.................................. 6(a) International Balance Sheet......................................... Annex I, Section 1.9(a) International Employee Benefit Plans................................ Annex I, Section 1.26 International Existing Real Property Lease.............................................................. Annex I, Section 1.21 International Financial Statements.................................. Annex I, Section 1.9(a) International Income Statement...................................... Annex I, Section 1.9(a) International Intellectual Property................................. Annex I, Section 1.23
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Term Section ---- ------- International Material Adverse Effect............................... Annex I, Section 1.1 International Material Contracts.................................... Annex I, Section 1.14 International Personal Property Leases.............................. Annex I, Section 1.22(b) Law................................................................. Annex I, Section 1.8 Lion................................................................ Preamble Local GAAP.......................................................... Annex I, Section 1.9(a) Loss................................................................ Annex VI, Section 6.2 Measuring Date...................................................... 2(d)(i) Measuring Price..................................................... 2(d)(i) Net Short-term and Long-term Debt................................... 2(b) Net Worth........................................................... 2(b) Oscar............................................................... Recitals Parent.............................................................. Preamble Parent Closing Consents............................................. Annex I, Section 1.10 Parent Contracts.................................................... Annex I, Section 1.8 Parent Minimum...................................................... 2(d)(iv) Proposed Parent Schedules........................................... 3(c) Proposed Purchaser Schedules........................................ 3(d) Purchased Entity.................................................... Annex I, Section 1.3 Purchaser........................................................... Preamble Purchaser Acquisition Proposal...................................... 6(b) Purchaser Balance Sheet............................................. Annex II, Section 2.8 Purchaser Balance Sheet Date........................................ Annex II, Section 2.8
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Term Section ---- ------- Purchaser Closing Consents......................................... Annex II, Section 2.9 Purchaser Contracts................................................ Annex II, Section 2.7 Purchaser Employee Benefit Plans................................... Annex II, Section 2.25 Purchaser Existing Real Property Annex II, Leases............................................................ Section 2.20 Purchaser Financial Statements..................................... Annex II, Section 2.8 Purchaser Income Statement......................................... Annex II, Section 2.8 Purchaser Intellectual Property.................................... Annex II, Section 2.22 Purchaser Material Adverse Effect.................................. Annex II, Section 2.1 Purchaser Material Contracts....................................... Annex II, Section 2.13(a) Purchaser Personal Property Leases................................. Annex II, Section 2.21(b) Rights Offering.................................................... 8(b)(i) Shareholders Agreement............................................. 8(b)(ii) Shareholders Meeting............................................... 2(d) Swire/BFI.......................................................... 2(b) Tax Return......................................................... 4(c) Taxes.............................................................. 4(a) Technical Cooperation Agreement.................................... 8(b)(iii) Transaction Agreement.............................................. 2(a) Transfer Taxes..................................................... 4(c) U.S. GAAP.......................................................... 3(e)
2. Purchase and Sale of Shares. (a) Each of the parties agrees that it shall enter into a Transaction Agreement (the "Transaction Agreement"), and such other local transfer agreements, as necessary, and Purchaser -6- 7 shall, and Parent shall cause the relevant Selling Entity or Selling Entities to, enter into a Traite d'Apport providing for the purchase by Purchaser and/or one or more of its Subsidiaries and the sale by Parent and International of all of the Shares and various intercompany loans, in consideration for the payment to Parent (and/or Subsidiaries of Parent) of an aggregate of US$1 billion in cash, payable in U.S. dollars (the "Cash Consideration") and the issuance to Parent (and/or wholly owned Subsidiaries of Parent) of the number of Purchaser Shares determined as set forth in Section 2(d) (the "Consideration Shares" and, collectively with the Cash Consideration, the "Consideration"). It is anticipated that the Shares and intercompany loans of Waste Care, Ltd. and BFI Acquisition, Ltd. will be contributed pursuant to the Traite d'Apport. The allocation of the Shares as between the Traite d'Apport and the Transaction Agreement shall be adjusted, if necessary, by the parties prior to the execution of the Traite d'Apport such that the value of the assets is sufficient to permit the Commissaire aux Apports to issue a favorable report. (b) Purchaser agrees that, at the closing of the transaction (which is expected to occur on the last day of a calendar month) (the "Closing"), (i) the amount of Net Short-term and Long-term Debt (as defined below) of the International Subsidiaries (including the Oscar Joint Venture) will be no higher than $215.5 million; and (ii) the amount of Net Worth (as defined below) will be no lower than $262 million. For purposes of this Agreement, "Net Short-term and Long-term Debt" shall mean the sum of (i) 100% of the short-term and long-term debt of the International Subsidiaries other than the Oscar Joint Venture and Swire/BFI Waste Services, Ltd. ("Swire/BFI"), less 100% of the cash and marketable securities of such Subsidiaries, (ii) 50% of (A) the short-term and long-term debt of the Oscar Joint Venture and its consolidated Subsidiaries, less (B) the cash and marketable securities of the Oscar Joint Venture and such Subsidiaries, and (iii) 50% of (A) the short-term and long-term debt of Swire/BFI and its consolidated Subsidiaries, less (B) the cash and marketable securities of Swire/BFI and loans by Swire/BFI to the Swire -7- 8 group. Net Short-term and Long-term Debt shall exclude intercompany debt transferred to the Purchaser pursuant to Section 2(c). For purposes of this Agreement, "Net Worth" shall mean the difference of (i) the sum of shareholders equity and intercompany loans of the International Subsidiaries (including subordinated loans to the Oscar Joint Venture), and (ii) the amount of goodwill of the International Subsidiaries. For purposes of applying the provisions of this Section 2(b), the comparison of the amounts set forth herein and the amounts for such items at Closing will be made on a constant currency basis and the amounts for such items will be calculated based on a balance sheet prepared in accordance with U.S. GAAP (as defined below). The Transaction Agreement will provide for a post-closing adjustment in favor of Purchaser in the event that any of the foregoing items is not satisfied. It is the intent of the Parties that the foregoing provisions and post-closing adjustment operate to permit Parent and International to retain the benefits of (or bear the cost of) ordinary course net income (or losses) between the date of this Agreement and the date of the Closing (the "Closing Date"). The foregoing provisions are not intended to permit Parent and International to retain income generated outside of the ordinary course of business (e.g., arising from a sale of assets out of the ordinary course of business). (c) At the Closing, Parent shall, and shall cause the Parent Subsidiaries to, assign and transfer, for no additional consideration, all of their respective rights as creditors with respect to indebtedness owed by the International Subsidiaries, on the one hand, to Parent and the Parent Subsidiaries which are not International Subsidiaries, on the other hand (including the loan to the Oscar Joint Venture). At or prior to the Closing, Parent shall, and shall cause the Parent Subsidiaries to, pay in full all intercompany accounts which represent indebtedness of Parent or the Parent Subsidiaries which are not International Subsidiaries owed to the International Subsidiaries. (d) The Closing Date of the transaction will be the date of the extraordinary meeting of Purchaser's -8- 9 shareholders (the "Shareholders Meeting") to approve the issuance of the Consideration Shares and the Rights Offering (as defined below). It is contemplated by the parties that at the Closing, Parent shall receive Purchaser Shares having a value approximating as closely as possible, pursuant to the following procedure, FF 2,700,000,000. In this regard, the Transaction Agreement shall contain provisions to the following effect: (i) There shall be determined a "Measuring Price" for a Purchaser Share which shall be the average per share closing price per share on the Paris Stock Exchange for the 15 trading days ending on the last trading day which is 21 calendar days, or the next earlier trading day, prior to the date on which the assemblee generale of Purchaser contemplated by this Agreement (and at which the Rights Offering is to be approved) is to be held, such date being herein referred to as the "Measuring Date". (ii) The "Measuring Price" shall be the per share price at which the Purchaser Shares are to be offered pursuant to the Rights Offering. (iii) If the Measuring Price is equal to or greater than FF 1,080 on the Measuring Date, the number of Purchaser Shares to be issued to Parent on the Closing Date shall be fixed as that number of whole Purchaser Shares (rounding to the nearest whole number) equal to the quotient obtained by dividing FF 2,700,000,000 by the Measuring Price. Such number of shares so determined shall be issued to Parent on the Closing Date. (iv) If the number of Purchaser Shares to be issued to Parent on the Closing Date pursuant to the foregoing procedure shall be less than 15% of the outstanding Purchaser Shares (the "Parent Minimum") after the consummation of the transactions contemplated hereby and assuming -9- 10 100% subscription ("Full Rights Subscription") of all Purchaser Shares to be offered pursuant to the Rights Offering, then either Parent or Purchaser shall have the right to terminate (by action of their respective boards of directors) the Transaction Agreement. (v) If the Measuring Price is less than FF 1,080 on the Measuring Date, Purchaser shall issue 2,500,000 Purchaser Shares to Parent at Closing. (vi) Lion, Purchaser and Parent agree that neither they nor any of their respective Affiliates nor any other person under the direction or at the request thereof shall, directly or indirectly, effect purchases of Purchaser Shares during the 15 days prior to the Measuring Date. (vii) Notwithstanding any provision to the contrary herein, if following the issuance of the Purchaser Shares and assuming Full Rights Subscription Lion would own less than 50.3% of the outstanding Purchaser Shares, Lion shall have a right to terminate this Agreement or the Transaction Agreement, as the case may be. (viii) Any determination by Purchaser or Parent, as the case may be, to terminate the Transaction Agreement pursuant to the foregoing provisions shall be exercised no later than five business days after the Measuring Date. (e) Parent and Purchaser agree that Purchaser will promptly after the date hereof enter into and maintain a call option for US$1,000,000,000 at a price of not more than FF6 per US$1, exercisable at any time prior to the Closing. Parent shall pay to Purchaser 27.5% of the cost of purchasing such call option up to a maximum of US$2,000,000 no later than (i) the Closing, or (ii) three days following the termination of this Agreement or the Transaction Agreement, as the case may be. In the event of the -10- 11 termination of this Agreement or the Transaction Agreement, Purchaser shall sell such call option and shall pay 27.5% of the net proceeds of such sale (if any) to Parent up to a maximum of US$2,000,000. 3. Representations, Due Diligence and Conditions to the Transaction Agreement. (a) The Transaction Agreement shall contain representations by Parent and International as set forth in Annex I and of Purchaser as set forth in Annex II, in each case with schedules included to qualify, where appropriate, such representations (b) Immediately following the execution of this Agreement, Purchaser shall commence a 70-day due diligence review of the International Subsidiaries and Parent shall commence a 70-day due diligence review of Purchaser. Parent, International and Purchaser, as the case may be, shall cooperate in full with such due diligence review and shall grant (and cause their Subsidiaries to grant) reasonable access to their facilities, personnel, books and records to the other Party and its investment bankers, accountants, attorneys and other advisors in connection with such review. (c) Prior to the fortieth day following the date of this Agreement, Parent shall deliver to Purchaser a complete set of schedules proposed to be appended to the Transaction Agreement in respect of Parent's representations therein (the "Proposed Parent Schedules"). If (i) the Proposed Parent Schedules or any amendments or supplements thereof (including the final versions of the Schedules) refer to matters concerning the International Subsidiaries, or there otherwise come to Purchaser's attention after the date hereof as a result of Purchaser's due diligence review any other matters concerning the International Subsidiaries which should be included in Parent's Schedules, which in the aggregate have caused or resulted, or could reasonably be expected to cause or result, in losses, claims, damages or liabilities not specifically reserved for in the International Financial Statements in an amount in excess of $25,000,000, or (ii) the Proposed Parent Schedules or any -11- 12 amendments or supplements thereto (including the final versions of the Schedules) refer to, or there otherwise come to Purchaser's attention, any non-competition agreements to which the International Subsidiaries are a party that may extend to the operations of Purchaser or Lion which, in Purchaser's or Lion's commercially reasonable judgment could have a material adverse effect on the ability of either Purchaser or Lion to conduct its business as currently conducted, then, in either such case, Purchaser shall have the right to terminate this Agreement by giving notice to Parent within 70 days of the date of this Agreement. Parent shall not amend or supplement the disclosure schedules to the Transaction Agreement on or following the seventieth day following the date of this Agreement. (d) Prior to the fortieth day following the date of this Agreement, Purchaser shall deliver to Parent a complete set of schedules proposed to be appended to the Transaction Agreement in respect of Purchaser's representations therein (the "Proposed Purchaser Schedules"). If the Proposed Purchaser Schedules or any amendments or supplements thereof (including the final versions of the Schedules) refer to matters concerning Purchaser, or there otherwise come to Parent's attention after the date hereof as a result of Parent's due diligence review any other matters concerning Purchaser which should be included in Purchaser's Schedules, which have, in either case, not theretofore been publicly disclosed with sufficient time so that the Market Price of the Purchaser Shares to be delivered at Closing reflects information concerning such matters and such matters, in the aggregate, have caused or resulted, or could reasonably be expected to cause or result, in losses, claims, damages or liabilities not specifically reserved for in the Purchaser Financial Statements in an amount in excess of $25,000,000, Parent shall have the right to terminate this Agreement by giving notice to Purchaser within 70 days of the date of this Agreement. Purchaser shall not amend or supplement the disclosure schedules to the Transaction Agreement on or following the seventieth day following the date of this Agreement. -12- 13 (e) In addition to the provisions of Section 3(b), during the 70-day period following the date of this Agreement, an internationally recognized firm of auditors independent of Parent and the Parent Subsidiaries and retained by Purchaser (the "Auditors") shall conduct an examination of the financial statements, books and records of the Selling Entities and the International Subsidiaries. Parent and International shall, and shall cause the Parent Subsidiaries to, cooperate in full with such examination and shall grant (and cause the Parent Subsidiaries to grant) the Auditors reasonable access to their facilities, personnel, books and records in connection with such examination. If the Auditors shall issue a written determination that either (i) the amount of Net Worth as of September 30, 1997 determined in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") is 10% or more less than $274 million (i.e., the U.S. GAAP Net Worth at September 30, 1997) or (ii) the amount of Net Worth as of September 30, 1997 determined in accordance with French GAAP is 10% or more less than $284 million (i.e., the French GAAP Net Worth at September 30, 1997), then Purchaser shall have the right to terminate this Agreement by giving notice to Parent within 80 days of the date hereof. In making such Net Worth determination, the Auditors shall use the same French accounting principles as those previously communicated to Parent by Purchaser (including, for example, goodwill amortization periods, depreciable lives and methods, treatment of lease obligations, proportional consolidation in Germany, treatment of general environmental reserves and municipal receivables in Spain and nonrecognition of goodwill of Oscar Affiliates) and refrain from making judgmental adjustments without an objective basis in fact, including adjustments relating to environmental matters, loss contracts, receivable reserves and goodwill realization. Such principles shall be set forth in a written protocol furnished to Parent by Purchaser as promptly as possible following the date hereof and approved by Purchaser, such approval not to be unreasonably denied or withheld. Any adjustments associated with Australia, Finland and New Zealand shall be taken into account only to the extent such adjustments are in excess of $4,000,000. In the event that the difference in Net Worth in U.S. GAAP or -13- 14 French GAAP is greater than 10% but less than 15%, Parent shall have the right, but not the obligation, to increase the target Net Worth at Closing for purposes of Section 2(b) by the greater of (i) the difference between $274 million and Net Worth as of September 30, 1997, determined in accordance with U.S. GAAP, and (ii) the difference between $284 million and Net Worth as of September 30, 1997, determined in accordance with French GAAP. The provisions of this Section 3(e) shall not affect Purchaser's rights under Section 2(b) of this Agreement. (f) It shall be a condition precedent to each party's execution of the Transaction Agreement that a commercial bank of national standing in the United States or international standing in Europe shall have issued to Purchaser a letter in customary form stating that it is "highly confident" (or similar wording) that Purchaser will be able to borrow an aggregate amount equivalent to or greater than $600 million from a commercial bank or commercial banks on terms and subject to conditions customarily extended to borrowers of size and creditworthiness similar to Purchaser, assuming (for purposes of determining the size and creditworthiness of Purchaser) that the transactions contemplated by this Agreement have been consummated. 4. Tax Matters. (a) Parent's Indemnification of Purchaser. The Transaction Agreement shall provide that Parent and International shall be liable for and shall indemnify and hold harmless Purchaser and its Affiliates from, against and in respect of (i) any taxes (including without limitation, income, gross receipts, windfall profits, gains, excise, severance, property, production, sales, value added, use, transfer, license, franchise, employment, withholding, capital, wage or similar taxes or assessments, together with interest, additions or penalties with respect thereto and any interest in respect of such interest, additions or penalties (collectively, "Taxes")), imposed with respect to the Selling Entities, (ii) any Taxes imposed with respect to any of the International Subsidiaries for the taxable periods, or portions thereof, ended on or before the Closing Date, and (iii) any Transfer -14- 15 Taxes for which Parent is liable pursuant to Section 4(c) hereof, except with respect to clauses (i) and (ii), Tax liabilities (A) previously paid, or (B) previously reserved for and reflected in the International Financial Statements. (b) Purchaser's Indemnification of Parent. The Transaction Agreement shall provide that Purchaser shall indemnify and hold harmless Parent and its Affiliates (other than the International Subsidiaries) from, against and in respect of any Taxes imposed with respect to any of the International Subsidiaries for any taxable period, or portion thereof, beginning after the Closing Date. (c) Transfer Taxes. All excise, sales, use, transfer, stamp, documentary, filing, recording and other similar taxes and fees which may be imposed or assessed as a result of the transactions effected pursuant to this Agreement or the Transaction Agreement, together with any interest, additions or penalties with respect thereto and any interest in respect of such interest, additions or penalties ("Transfer Taxes"), shall be borne by Parent. Any return, declaration, report, claim for refund or information return or statement thereto, including any amendment thereof, relating to Taxes (each, a "Tax Return") that must be filed in connection with Transfer Taxes shall be (i) prepared and filed when due by the party primarily or customarily responsible under the applicable local law for filing such Tax Return, (ii) prepared on a basis that is consistent with the allocation of the Consideration determined hereunder and (iii) provided to the other party at least 10 days prior to the applicable due date. (d) Cooperation. The Parties agree to negotiate in good faith with respect to the provisions of the Transaction Agreement concerning preparation of Tax Returns, conducting of Tax audits and contesting of Tax disputes and cooperation with respect to Tax matters generally. 5. Interim Operations of International. (a) Parent and International covenant and agree that, from the date hereof and prior to the Closing (unless Purchaser shall -15- 16 have previously consented in writing and except as specifically provided by this Agreement), International and the International Subsidiaries will not take any of the actions described in Section 1.13 of Annex I. (b) Purchaser covenants and agrees that, from the date hereof and prior to the Closing (unless Parent shall have previously consented in writing and except as specifically provided by this Agreement), Purchaser will not take any of the actions described in Section 2.12 of Annex II. (c) Until the Closing, Parent shall furnish to Purchaser copies of interim monthly financial statements for International and the International Subsidiaries (prepared in accordance with U.S. GAAP and, no less frequently than each fiscal quarter, prepared for International and the International Subsidiaries for such fiscal quarter on a combined basis) as soon as practicable but in any event within 35 days after the end of each month or quarter, as the case may be, together with any information ordinarily prepared in connection with such financial statements. All such interim financial statements shall fairly present in all material respects in accordance with U.S. GAAP the separate company, combined or consolidated, as the case may be, financial position of International and the International Subsidiaries covered thereby at the respective dates thereof, and the results of their separate company or consolidated, as the case may be, operations, stockholders' equity and cash flows for International and the International Subsidiaries covered thereby for the respective periods covered thereby, subject to year-end adjustments (consisting of normal recurring accruals) and the omission of explanatory footnote materials required by U.S. GAAP. Parent shall, and shall cause its accountants to, assist Purchaser in translating all financial statements provided pursuant to this Section into French GAAP. (d) Until the Closing, Purchaser shall furnish to Parent copies of such interim monthly financial statements for Purchaser (prepared in accordance with French -16- 17 GAAP and, no less frequently than each fiscal quarter, prepared for Purchaser for such fiscal quarter on a combined basis) as it prepares in the ordinary course of its business, as soon as practicable but in any event within 35 days after the end of each month or quarter, as the case may be, together with any information ordinarily prepared in connection with such financial statements. To the extent that such financial statements include balance sheets, all such interim financial statements shall fairly present in all material respects in accordance with French GAAP the financial position of Purchaser covered thereby at the respective dates thereof, and, to the extent that such financial statements include income statements and cash flow statements, the results of consolidated operations, stockholders' equity and cash flows for Purchaser covered thereby for the respective periods covered thereby, subject to year-end adjustments (consisting of normal recurring accruals) and the omission of explanatory footnote materials required by French GAAP. Purchaser shall, and shall cause its accountants to, assist Parent in translating all financial statements provided pursuant to this Section into U.S. GAAP. (e) Until the Closing, Parent and International shall cause the International Subsidiaries to have sufficient working capital to allow the International Subsidiaries to maintain their working capital at prudent levels which are sufficient to support their continued operations in the ordinary course of their business and consistent with past practices. (f) Parent agrees that it will not consent to any transfer of an interest in the Oscar Joint Venture by any other shareholder in the Oscar Joint Venture. Parent further agrees that, from September 30, 1997 through the date of Closing, Parent and the Parent Subsidiaries have not taken, accepted or received and will not take, accept or receive any dividends or distributions paid in cash, stock or other assets in respect of its interest in the Oscar Joint Venture or any payment of interest in respect of indebtedness owed by the Oscar Joint Venture to Parent or the Parent Subsidiaries unless all such amounts have been or -17- 18 will be loaned to the Oscar Joint Venture and will constitute intercompany loans transferred to Purchaser without any additional consideration at the Closing. 6. Acquisition Proposals. (a) Parent agrees that, except as otherwise agreed among the parties, neither Parent nor any Parent Subsidiaries nor any of the respective employees, officers, directors, agents or representatives (including counsel, financial advisors and accountants) of Parent or the Parent Subsidiaries shall, and Parent shall cause such Persons not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to stockholders of Parent or any Parent Subsidiary) with respect to a merger, consolidation, acquisition, disposition or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities or ownership interests of, International or any International Subsidiary (any such proposal or offer being hereinafter referred to as an "International Acquisition Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any Person relating to an International Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an International Acquisition Proposal. Parent shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. Parent shall take all necessary steps to inform the Persons referred to in the first sentence of this Section of the obligations undertaken by Parent in this Section. Parent shall notify Purchaser immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with Parent, any Parent Subsidiary or, to its knowledge, any of the Persons referred to in the first sentence of this Section. Parent shall promptly request each Person which has heretofore executed a confidentiality agreement in connection with its consideration of acquiring any assets, liabilities and/or equity securities or ownership interests -18- 19 of International or any International Subsidiary to return all confidential information heretofore furnished to such person by or on behalf of Parent or any Parent Subsidiary. (b) Purchaser and Lion agree that, except as otherwise agreed among the parties, neither Purchaser, Lion nor any of their respective Subsidiaries nor any of their respective employees, officers, directors, agents or representatives (including counsel, financial advisors and accountants) shall, and Purchaser and Lion shall cause such Persons not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to stockholders of Purchaser, Lion or any of their respective Subsidiaries) with respect to a merger, consolidation, acquisition, disposition or similar trans action involving, or any purchase of all or any significant portion of the assets or of the equity securities or ownership interests of Purchaser (any such proposal or offer being hereinafter referred to as a "Purchaser Acquisition Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any Person relating to a Purchaser Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement a Purchaser Acquisition Proposal. Lion and Purchaser shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. Lion and Purchaser shall take all necessary steps to inform the Persons referred to in the first sentence of this Section of the obligations undertaken by Lion and Purchaser in this Section. Lion and Purchaser shall notify Parent immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with Purchaser, Lion, any of their respective Subsidiaries or, to its knowledge, any of the Persons referred to in the first sentence of this Section. Purchaser and Lion shall promptly request each Person which has heretofore executed a confidentiality agreement in connection with its consideration of acquiring any assets, liabilities and/or equity securities -19- 20 or ownership interests of Purchaser to return all confidential information heretofore furnished to such person by or on behalf of Purchaser, Lion or any of their respective Subsidiaries. 7. Meeting of Purchaser's Shareholders. The Transaction Agreement shall provide that Purchaser shall take, consistent with applicable law and its statuts, all action necessary to convene a special meeting of its shareholders as promptly as practicable to consider and vote upon the approval of the issuance of the Consideration Shares as well as the Rights Offering and Debt Offering. 8. Certain Transactions. (a) Prior to the Closing, Purchaser shall use its best efforts, subject to market conditions, to borrow an aggregate amount equivalent to US$600,000,000 from a commercial bank or commercial banks on terms and subject to conditions customarily extended to borrowers of size and creditworthiness similar to Purchaser. (b) Prior to or contemporaneously with the Closing: (i) Purchaser shall take, consistent with applicable law and its statuts, all actions necessary to commence, on the Closing Date, a rights offering to raise approximately FF 2.4 billion from its existing shareholders (the "Rights Offering"). (ii) Parent and Lion shall execute and deliver, each to the other, a Shareholders Agreement in the form set forth in Annex B (the "Shareholders Agreement"). (iii) Parent and Purchaser shall execute and deliver, each to the other, a Technical Cooperation Agreement on the terms set forth in Annex C (the "Technical Cooperation Agreement"). (iv) Parent shall assign to Purchaser the benefits (including the benefits of any indemnification provisions) of each agreement, instrument, contract or arrangement executed within the last five years pursuant to -20- 21 which Parent or any Parent Subsidiary acquired any assets, liabilities or operations of the International Subsidiaries having a value of $5,000,000 or more in the aggregate (collectively, the "Acquisition Documents") to the extent that the Acquisition Documents relate to any assets, liabilities and operations of the International Subsidiaries. (v) Prior to Closing, Parent shall, or shall cause a Subsidiary to, acquire all shares of Browning-Ferris Industries Iberica S.A. not currently held by Parent or its Subsidiaries. In connection with such transaction, Parent may cause Browning-Ferris Industries Iberica S.A. to reverse the minority interest reserves included in its balance sheet at September 30, 1997 in respect of the acquisition of such interest. (vi) Without the prior written consent of Purchaser, Parent shall cause the International Subsidiaries not to prepay and refinance long-term indebtedness with short-term indebtedness. 9. Regulatory Approvals. The Parties shall use their respective best efforts to obtain all necessary regulatory consents and to cooperate fully with each other in seeking to obtain such consents. 10. Conditions. Annex III sets out the conditions to the obligations of all Parties to consummate the transactions contemplated by the Transaction Agreement. Annex IV sets out the conditions to the obligations of Parent and International to consummate the transactions contemplated by the Transaction Agreement. Annex V sets out the conditions to the obligations of Purchaser to consummate the transactions contemplated by the Transaction Agreement. The Transaction Agreement shall not provide other conditions to be satisfied. 11. Survival and Indemnification. The Transaction Agreement shall provide for the survival of certain representations and indemnification among the parties as set forth in Annex VI. -21- 22 12. Publicity. The initial press release concerning the matters contemplated by this Agreement shall be a joint press release and thereafter Parent and Purchaser shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and prior to making any filings with any court, tribunal, arbitrator, arbitration panel, or any governmental, administrative, or regulatory authority, agency, commission, or body or similar entity ("Governmental Entity") or with any securities exchange with respect thereto. Notwithstanding the foregoing, any party shall have the right to make such disclosure of the matters contemplated by this Agreement as is required under applicable law, provided, however, that the disclosing party shall give the other parties reasonable prior notice of each such disclosure. 13. Amendment and Waiver. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Purchaser and Parent, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 14. Assignment. No party to this Agreement may assign any of its rights or obligations under this Agreement without the prior written consent of the other party hereto. 15. Entire Agreement. This Agreement (including all Schedules and Annexes hereto) contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters, which will remain in full force and effect for the term provided for therein. -22- 23 16. Counterparts. This Agreement and any amendments hereto may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which shall be considered one and the same instrument. 17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE REPUBLIC OF FRANCE WITHOUT REFERENCE TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 18. Resolution of Disputes. Any dispute between the parties arising out of this Agreement, whether as to this Agreement's construction, interpretation or enforceability or as to any party's breach or alleged breach of any provision of this Agreement, shall be submitted to final and binding arbitration in accordance with the following procedures: (a) Any party may demand such arbitration by giving written notice of that demand to the other party. Any such arbitration shall be before a panel of three arbitrators, one selected by Parent, one selected by Purchaser and the third (who shall serve as chairman of the tribunal) selected by the agreement of each of the two arbitrators selected by the parties in the manner set forth in Section 18(b). The notice pursuant to this Section 18(a) shall state (x) the matter in controversy and (y) the name of the arbitrator selected by the party giving the notice. (b) Not more than 15 days after notice is given pursuant to Section 18(a), the other party shall give written notice to the party who demanded arbitration of the name of an arbitrator selected by the other party. If the other party shall fail to give such notice within such 15 day period, a second arbitrator shall be selected in accordance with the Arbitration Rules of the International Chamber of Commerce (the "Arbitration Rules"). Not more than 30 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to select a third arbitrator within such 30 day period, the third arbitrator shall be named -23- 24 pursuant to the Arbitration Rules. All arbitrators shall be fluent in English and French. (c) The dispute shall be arbitrated at a hearing to be conducted in French, although documents may be submitted in English or French. The arbitration shall take place in Geneva or such other place as the parties agree and shall be concluded as soon as practicable in accordance with the Arbitration Rules. Any award, which may be made by a majority of the arbitrators, shall be made as soon as possible following the conclusion of the arbitration and shall be conclusive and binding on the parties and may be entered as a judgment of any court having jurisdiction. (d) Each party shall bear half the arbitrators' fees and expenses and administrative expenses of the arbitration and its own legal and other costs. The agreement of the parties contained in the foregoing provisions of Section 18 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement. 19. Board of Directors. This Agreement is subject to approval by the Board of Directors of Parent, and Parent providing evidence thereof to Purchaser, not later than November 10, 1997. -24- 25 IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the date first written above. BROWNING-FERRIS INDUSTRIES, INC. By: ------------------------------------- Name: Title: BFI INTERNATIONAL, INC. By: ------------------------------------- Name: Title: SUEZ LYONNAISE DES EAUX, S.A. By: ------------------------------------- Name: Title: SITA, S.A. By: ------------------------------------- Name: Title: -25- 26 ANNEX A List of International Subsidiaries A-1 27 ANNEX B Shareholders Agreement B-1 28 SHAREHOLDERS AGREEMENT This Shareholders Agreement dated as of __________, 1998 between Browning-Ferris Industries, Inc., a corporation formed under the laws of the State of Delaware, U.S.A. ("Blue") and Suez Lyonnaise des Eaux, S.A., a societe anonyme formed under the laws of France ("Lion"), relating to SITA, S.A., a societe anonyme formed under the laws of France ("Solid"). WHEREAS, Blue, Lion and Solid are parties to a Transaction Agreement dated _________, 1998 (the "Transaction Agreement") providing, inter alia, (i) for the sale and exchange on the Closing Date (as defined therein) of certain stock held directly and indirectly by Blue, as set forth in the Transaction Agreement, for the consideration specified therein, and (ii) the undertaking by Solid of a capital increase through a rights offering (the "Rights Offering") to its existing shareholders on the terms specified in the Transaction Agreement; WHEREAS, the parties anticipate that following the consummation of the transactions contemplated in the Transaction Agreement, including the Rights Offering, Lion will own [ ]% of the outstanding capital stock of Solid and Blue will own [ ]% of the outstanding capital stock of Solid; and WHEREAS, Blue and Lion have agreed that they will participate in the ownership of Solid, attend to its management and have such other relationships with each other and with respect to Solid in accordance with, and in the manner, contemplated hereby. NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, Blue and Lion agree as follows: 1. DEFINITIONS. For purposes of this Shareholders Agreement: (a) "Affiliate" means with respect to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by or is under common control with such Person. (b) "Arbitration Rules" shall have the meaning specified in Section 4(b). 29 (c) "Blue" shall have the meaning specified in the preamble of this Shareholders Agreement. (d) "Blue Nominees" shall have the meaning specified in Section 2(a). (e) "Board" means the conseil d'administration of Solid. (f) "Change in Control" shall have the meaning specified in Section 3(e). (g) "Consultation Period" shall have the meaning specified in Section 2(c). (h) "Discussion Matter" shall have the meaning specified in Section 2 (d). (i) "Lion" shall have the meaning specified in the preamble of this Shareholders Agreement. (j) "Lock-Up Period" shall have the meaning specified in Section 3(b). (k) "Market Value" per Solid Share for purposes of this Shareholders Agreement means the average of the closing price for the shares of Solid on the 20 trading days on the Bourse de Paris ending on the trading day immediately preceding the date on which such Market Value is being determined, provided, however, if less than 20% of the outstanding Solid Shares are held by Persons other than Blue and Lion and other than Persons who hold in excess of 5% of the Solid Shares (other than investment funds, mutual funds and institutional investors), Market Value shall be determined in accordance with Section 6. (l) "Minimum Number" shall have the meaning specified in Section 2(a). (m) "Other Matter" shall have the meaning specified in Section 2(d). -2- 30 (n) "Person" (i) means any natural person, corporation, company, limited or general partnership, joint stock company, joint venture, association, limited liability company, trust, bank, trust company, land trust, business trust or other entity or organization organized or existing under any law and (ii) shall, for purposes of the definition of "Change in Control" in Section 3(e) only, also mean, as a single Person, any group or syndicate of Persons, as defined by clause (i) hereof, acting in concert for the purpose of acquiring, holding or disposing of securities of any other Person, as defined in such clause (i). (o) "Principals" means Blue and Lion and their respective successors and assigns. (p) "Prohibited Transferee" shall have the meaning specified in Section 3(b). (q) "Rights Offering" shall have the meaning specified in the preamble of this Shareholders Agreement. (r) "Significant Matter" shall have the meaning specified in Section 2(d). (s) "Solid" shall have the meaning specified in the preamble of this Shareholders Agreement. (t) "Solid Shares" means the ordinary shares, FF 50 par value, of Solid. (u) "Statuts" means the Statuts of Solid as in effect from time to time. (v) "Strategic Committee" means the committee of the Board referred to in Section 2(c). (w) "Subsidiary" means, with respect to any Person, any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person, are held by the Person or one or more of its Subsidiaries. -3- 31 (x) "Transaction Agreement" shall have the meaning specified in the preamble of this Shareholders Agreement. (y) "Transfer" shall have the meaning specified in Section 3(b). (z) "Wholly-Owned Subsidiary" means, with respect to a Person, a Subsidiary of such Person all of the capital stock of which (other than directors' qualifying shares) is owned by such Person. 2. MANAGEMENT OF SOLID. (a) For so long as Blue holds 10% or more of the outstanding Solid Shares (but subject to Section 2(h) below), Blue shall be entitled to designate from time to time a number of Board members (the "Blue Nominees") equal to the greater of (i) two and (ii) the largest whole number (the "Minimum Number") that does not exceed 20% of the total number of Board members. In the event that any of such Blue Nominees shall cease to serve as a director for any reason, Lion and Blue agree, in their capacity as shareholders of Solid, to cause the vacancy resulting thereby, subject to the terms of this Shareholders Agreement, with a person designated by Blue (and such person shall be a "Blue Nominee" for purposes hereof). Notwithstanding the foregoing, Lion shall not have any obligation to support the nomination, recommendation or election of any Blue Nominee pursuant to this Section 2(a) if Blue has acquired any Solid Shares in violation of the terms of this Shareholders Agreement or otherwise materially breached its obligations hereunder. The Principals agree that, during the term of this Shareholders Agreement, they will vote their respective Solid Shares at any meeting of shareholders of Solid at which directors are to be elected for the number of Blue Nominees, if any, necessary so that following such election of directors not fewer than the Minimum Number of Blue Nominees are serving on the Board. (b) Upon the termination of this Shareholders Agreement or in the event of a breach of the terms hereof by Blue at any time, Blue shall have no further rights under this Section 2 and shall cause all Blue Nominees on the Board to resign promptly from the Board and any committees thereof. In addition, if at any time Blue directly or indirectly owns Solid Shares representing less than 10% of the outstanding Solid Shares, Blue shall cause to resign promptly from the Board that number of Blue Nominees as shall exceed the number of directors that Blue would then be entitled to designate pursuant to Section 2(a) (i) or Section 2(a) (ii), as the case may be, provided, however, that if Blue is entitled to acquire additional Solid Shares pursuant to Section 2(h), the Blue Nominees shall not be required to resign until the passage of the 30-day notice -4- 32 period under Section 2(h) or, if notice is given pursuant to Section 2(h), until the passage of the 180-day acquisition period under Section 2(h) in the event that following the passage of such period Blue's ownership of Solid Shares remains less than 10%. (c) The Principals agree that, at any time Blue is entitled to have Blue Nominees serve on the Board, all Significant Matters, Other Matters and Discussion Matters shall be submitted to the Board for the prior approval by the Board. The Principals further agree that the Board will establish a "Strategic Committee" of the Board made up of two members of the Board designated by Lion, one member of the Board designated by the Chief Executive Officer of Solid and, for so long as Blue owns at least 10% of the outstanding Solid Shares (but subject to Section 2(h)), one member of the Board who is a Blue Nominee. Any party may designate any individual to substitute for any of its representatives on the Strategic Committee at any meeting at which any such representative does not attend, provided, that any such substitute need not otherwise be a member of the Strategic committee. The member of the Strategic Committee designated by the Chief Executive Officer of Solid will be the Chairman of the Strategic Committee and the member of the Strategic Committee designated by Blue will be the Vice-Chairman of the Strategic Committee. Unless the Strategic Committee unanimously determines not to consider a Significant Matter, Other Matter or Discussion Matter, each Significant Matter, Other Matter and Discussion Matters must be approved by the Strategic Committee of the Board in accordance with the procedures set forth in this Section 2(c) prior to proposal to the Board for its consideration, provided, however, that if the Strategic Committee does not act on a Significant Matter, Other Matter or Discussion Matter within seven days of notice being given in accordance with this Section to consider any such Significant Matter, Other Matter or Discussion Matter, the Board shall be free to vote on any such issue without the prior vote of the Strategic Committee. In the event that the Blue designee to the Strategic Committee has voted against adoption of a proposal with respect to a Significant Matter or an Other Matter that has been approved by a majority of the members present at a meeting of the Strategic Committee, then, prior to submission of such Significant Matter or Other Matter to the Board for approval, Blue and Lion shall consult in good faith for a period of 30 days (the "Consultation Period") in an effort to reach agreement on how to proceed with respect to such Significant Matter or Other Matter. Following such Consultation Period with respect to such Significant Matter or Other Matter, the Significant Matter or Other Matter shall be resubmitted to the Strategic Committee for consideration and, if approved by a -5- 33 majority of the members present at the meeting of the Strategic Committee, may then be submitted to the Board for consideration. The foregoing provisions shall not apply to Discussion Matters. Meetings of the Strategic Committee may be called at any time by the Board, the Chairman of the Strategic Committee or the Vice-Chairman of the Strategic Committee. Meetings of the Strategic Committee may be held at any time, in Paris or any other place as the Chairman of the Strategic Committee and the Vice-Chairman of the Strategic Committee shall mutually agree. Reasonable notice of meetings of the Strategic Committee (taking into account the urgency of the matter to be considered) shall be given by the person or persons calling the meeting. Members of the Strategic Committee may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting shall constitute presence in person at such meeting. At all meetings of the Strategic Committee a majority of the entire Strategic Committee shall constitute a quorum for the transaction of business, provided that at least one of the members present is a Blue designee. The vote of a majority of the members of the Strategic Committee present at a meeting at which a quorum is present shall be the act of the Strategic Committee. In case at any meeting of the Strategic Committee a quorum shall not be present, the members of the Strategic Committee present may adjourn the meeting from time to time until a quorum shall attend. Any action required or permitted to be taken at any meeting of the Strategic Committee may be taken without a meeting if all members of the Strategic Committee consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Strategic Committee. The validity, authorization or enforceability of any contract, agreement or instrument entered into by Solid or any of its Subsidiaries shall not be affected by the operation of this Section 2. (d) A "Significant Matter" shall mean any action, or failure to act, taking or having the effect of any of the following: (i) Approval of the annual operating and capital budgets of Solid for any year; (ii) Approval of the acquisition, regardless of the form thereof, by Solid or any Solid Subsidiary of the assets or securities of another Person for consideration greater than $50 million in value; -6- 34 (iii) Approval of the entry by Solid or any Solid Subsidiary into any joint venture, partnership, strategic alliance, merger or other business combination with another Person pursuant to which the value of the consideration paid or received by Solid (or the Solid Subsidiary) is greater than $50 million in value; (iv) Approval of the sale or other divestiture of assets of Solid or a Solid Subsidiary either (i) having a book value at the time of sale or divestiture of greater than $50 million, (ii) for consideration greater than $50 million or (iii) for consideration less than the fair market value of the assets proposed to be sold or divested (as determined in the sole discretion of the Board) or for no consideration; (v) A decision by the Board or the shareholders of Solid to issue or authorize the issue of equity securities of, or any other derivative security or financial instrument giving a right to an equity participation in, Solid, in any case in an amount in excess of $100 million or, in the case of a capital increase reserved to Lion or any Affiliate of Lion, in any amount in excess of $10 million, provided, however, that a proposed issuance of equity securities, or such derivative securities or financial instruments, in excess of $100 million shall be deemed not to be a Significant Matter if Blue is given the opportunity to subscribe for its pro rata share of such securities (based on its percentage ownership of Solid's capital) of such issuance; (vi) Presenting resolutions to the shareholders to approve an amendment of Solid's Statuts; and (vii) Approval of any agreement as to any transaction or series of related transactions between Solid (or any Subsidiary thereof) and Blue or any Subsidiary or Affiliate of Blue or between Solid (or any Subsidiary thereof) and Lion or any Subsidiary or Affiliate of Lion involving consideration or value which is greater than $10 million or the term of which exceeds one year or that is on terms which are less favorable to Solid (or any Subsidiary thereof) than could be obtained in arm's-length dealings with an independent third party (as determined in the sole discretion of the Board). An "Other Matter" shall mean any determination by Solid to enter a new line of business, provided that (i) entering into a business related or incidental to Solid's existing business operations shall be deemed not to be entering into a new line of -7- 35 business and (ii) this provision shall not apply to a new line of business if the aggregate expenditure by Solid involved in entering into such new line of business is less than $50 million. A "Discussion Matter" shall mean (i) a proposal by the management of Solid to expand its Waste Business into new countries or (ii) establishment of rates of return criteria for the operations of Solid. (e) All meetings of the Board and of the Strategic Committee may be conducted in French. Blue Nominees shall be entitled to be accompanied at such meetings by a translator if they desire. (f) Blue and Lion shall each be present, and shall cause any of their respective Affiliates that hold Solid Shares to be present, in person or by proxy, at all meetings of Solid shareholders. Blue and Lion agree that, for a period of 10 years, to the extent permitted by applicable law, they shall cast their votes at all meetings of shareholders in favor of the resolutions submitted by the Board. No vote by Blue at a shareholders meeting with respect to an item that constitutes a Significant Matter or Other Matter shall be deemed to constitute a waiver by Blue of its rights under Section 3(d) with respect to such Significant Matter or Other Matter. Lion and Blue shall vote its shares in favor of the other's nominees to the Board. (g) In the event Lion materially breaches any significant obligation (i) to present Significant Matters or Other Matters to the Strategic Committee or the Board or (ii) to vote its Solid Shares in support of the Blue Nominees, each in accordance with the terms of this Section 2, Blue shall promptly give Lion written notice thereof and if Lion does not cure such breach within 30 days of such notice from Blue, Blue shall have the right at its option to put all, but not less than all, of its Solid Shares to Lion at 110% of the Market Value of such Solid Shares. The rights set forth in this subsection (g) shall be in addition to any remedy Blue may otherwise have. (h) For purposes of Sections 2(a) and 2(c), Blue shall not be deemed to own 10% of the Solid Shares in the event that Blue has at any time Transferred Solid Shares such that, following such Transfer, Blue owns less than 10% of the Solid Shares (whether or not Blue thereafter acquires additional Solid Shares). In the event that, as a result of an issuance of additional Solid Shares or as a result of a stock split, reclassification or other recapitalization of Solid, Blue's ownership of Solid Shares decreases to below 10%, Blue shall notify Solid in writing within 30 days of such issuance, stock split, reclassification or recapitalization whether Blue intends to acquire -8- 36 additional Solid Shares to increase its ownership to 10% or more and, if so, Blue shall have a period of 180 days from the date of such issuance, stock split, reclassification or other recapitalization to acquire additional Solid Shares to increase its ownership of Solid Shares to 10%. If Blue gives such notice and effects such acquisition during such 180 day period, Blue shall be deemed for purposes of Section 2(a) and 2(c) to have owned 10% at all times. (i) At any time Blue is entitled under the provisions of this Section 2 to have a Blue Nominee serve on the Board, Blue shall be entitled to have one Blue Nominee serve on the compensation committee of the Board. 3. TRANSFERS AND ACQUISITIONS OF SOLID SHARES. (a) Transfers of Shares Between the Principals and their Subsidiaries. Notwithstanding any other provision of this Agreement, Solid Shares owned by Blue or a Subsidiary of Blue may be Transferred by Blue or such Subsidiary, as the case may be, to any Wholly-Owned Subsidiary of Blue or, in the case of Solid Shares issued to or owned or held by such Subsidiary, to Blue, provided that (i) written notice of such Transfer is given to Lion by Blue and (ii) any Wholly-Owned Subsidiary of Blue to which any Solid Shares are to be Transferred agrees to be bound by all the terms and provisions of this Shareholders Agreement applicable to Blue. Solid Shares owned by Lion or a Subsidiary of Lion may be Transferred by Lion or such Subsidiary, as the case may be, to any Subsidiary of Lion, or in the case of Solid Shares issued to or owned or held by such Subsidiary, to Lion, provided that (i) written notice of such Transfer is given to Blue by Lion and (ii) such transferee agrees to be bound by all the terms and provisions of this Shareholders Agreement applicable to Lion. (b) Disposition of Shares. Other than as set forth in Sections 3(a), 3(d) and 3(e), except with the prior written consent of Lion (which may be granted or withheld in Lion's sole discretion) neither Blue nor any Subsidiary of Blue may sell or transfer (including by dividend, pledge or mortgage) or otherwise dispose of (collectively, "Transfer"), or permit any pledgee or mortgagee of Blue or any Subsidiary of Blue to Transfer, any Solid Shares (i) for a period of three years from the Closing Date (the "Lock-Up Period") or (ii) following the Lock-Up Period, except in accordance with the provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 3, neither Blue nor any Subsidiary of Blue may Transfer, or permit any pledgee or -9- 37 mortgagee of Blue or any Subsidiary of Blue to Transfer, any Solid Shares to any entity listed on Annex I hereto (a "Prohibited Transferee"). (c) Sale of Shares. In the event that, at any time after the Lock-Up Period, Blue desires to Transfer all or any portion of its Solid Shares (other than in accordance with Section 3(a)) (including, in the context of an offre publique de vente or a private placement with unidentified purchasers, to any underwriter or underwriters) for a fixed price in cash, then Blue shall first offer or cause to be offered such stock for sale to Lion at a price and on terms which Blue is prepared to accept, in accordance with the following provisions: (i) Blue shall give notice in writing to Lion indicating the number of Solid Shares Blue desires to Transfer and specifying the price and terms which it is prepared to accept and irrevocably offering such Solid Shares to Lion or any Person designated by Lion. (ii) Within 30 days from the receipt of such notice, Lion shall deliver a written notice to Blue stating whether Lion or its designee accepts such offer. If Lion fails to deliver such notice within such 30-day period, Lion shall be deemed conclusively not to accept such offer. (iii) In the event that, within 30 days from the receipt of the notice of Blue referred to in Section 3(c)(i), Lion delivers a written notice to Blue to the effect that Lion accepts such offer, delivery of such notice shall constitute an agreement binding on Blue and Lion to sell and to purchase (or to cause Lion's designee to purchase, as the case may be), respectively, all of the Solid Shares offered by Blue, subject to receipt of any required regulatory approvals, at the price and upon the terms stated in the offer of Blue. (iv) If Lion fails to accept the offer of Blue within such 30-day period specified in Section 3(c)(ii), Blue shall be free for a period of 90 days from the date of the notification to Lion under Section 3(c)(i) to Transfer such Solid Shares to a third-party purchaser or third-party purchasers at a price not less than the price at which, and on terms no more favorable than, such Solid Shares were offered to Lion as provided in the notice to Lion and, upon such Transfer, such Solid Shares shall cease to be subject to the terms of this Shareholders Agreement. -10- 38 (v) In the event that Blue (or its Subsidiary) does not complete the Transfer contemplated by the foregoing Section 3(c)(iv) above within a period of 90 days from the date of the notification to Lion under Section 3(c)(i) of its desire to sell Solid Shares, all the provisions of this Section 3(c), including the notice and offer provisions of Section 3(c)(i), (ii) and (iii), shall apply to any proposed Transfer of such Solid Shares, other than as provided under Section 3(a). (vi) Any purchase of Blue's Solid Shares by Lion pursuant to Section 3(c)(iii) shall be completed in any manner permitted by then applicable French law and regulations upon payment of the purchase price to Blue (provided that Blue or its Subsidiary, as the case may be, shall have delivered good title to such Solid Shares free of all encumbrances in the manner provided for by then applicable French law). (vii) In the event that Blue desires to Transfer all or any portion of its Solid Shares (other than in accordance to Section 3(a)) for consideration other than a fixed price in cash, Lion shall retain, at Blue's expense, a financial advisor independent of both Lion and Blue to value such proposed consideration, Blue shall supply to Lion and its financial advisors all information requested by them in connection with such valuation, and Lion shall have the right to accept Blue's offer to purchase such Solid Shares at the cash equivalent of such consideration within 60 days from the receipt of the notice referred to in Section 3(c)(i). Such offer and purchase shall otherwise be governed by the provisions of this Section 3(c). (d) Significant Matter; Other Matter. In the event that on two separate occasions within any 12 month period during the duration of this Agreement, (i) the Blue designee to the Strategic Committee shall have voted against adoption of a proposal with respect to a Significant Matter at the meeting of the Strategic Committee following the Consultation Period with respect to such Significant Matter and (ii) such Significant Matter shall have been approved by a meeting of the Board at which all Blue Nominees present or represented voted against approval of such Significant Matter (such vote by the Board being a "Triggering Event") then Blue (or any Subsidiary thereof, as the case may be) may sell all, but not less than all, of its Solid Shares to any Person other than a Prohibited Transferee in accordance with the provisions of Section 3(c) (subject to Lion's right to purchase such Solid Shares in accordance with Section 3(c) by giving written notice to Lion within 10 days of such Triggering Event). In the event Blue has exercised its right pursuant to the immediately preceding sentence and at the end of the 90-day period provided under Section 3(c)(iv) Blue has not sold its Solid Shares, Blue shall have the right for a period of 30 days to put all, but not less than all, of its Solid Shares to Lion -11- 39 at a price of 99% of the Market Value on the date of the Triggering Event and, if at the end of such 30-day period Blue has not exercised such put right, Lion shall have a right for a period of 30 days to call all, but not less than all, of such Solid Shares at a price of 101% of the Market Value on the date of the Triggering Event. In the event that Blue does not transfer its Solid Shares pursuant to the right of first offer, put or call provisions of this Section 3(d), all provisions of this Shareholders Agreement (including Section 3(d) in the event of disagreements with respect to two additional Significant Matters) shall continue to apply. In the event that during the duration of this Agreement, (i) the Blue designee to the Strategic Committee shall have voted against adoption of a proposal with respect to an Other Matter at the meeting of the Strategic Committee following the Consultation Period with respect to such Other Matter and (ii) such Other Matter shall have been approved by a meeting of the Board (at which all Blue Nominees present or represented voted against approval of such Other Matter) then Blue (or any Subsidiary thereof, as the case may be) may sell all, but not less than all, of its Solid Shares to any Person other than a Prohibited Transferee in accordance with the provisions of Section 3(c) by giving written notice to Lion within 10 days of such meeting of the Board (subject to Lion's right to purchase such Solid Shares in accordance with Section 3(c)). In the event that Blue does not transfer its Solid Shares pursuant to the right of first offer provisions of this Section 3(d) within 90 days of such notice, all provisions of this Shareholders Agreement (including Section 3(d)) shall continue to apply. The Principals agree that neither they nor any of their respective Affiliates shall effect purchases of Solid Shares during the 20 trading days prior to any date upon which Market Value is determined pursuant to this Shareholders Agreement. (e) Change in Control. In the event of a Change in Control of Blue, Lion shall have the option either (i) to call from Blue (or its Subsidiaries, as the case may be) all, but not less than all, of Blue's Solid Shares at a price equal to 101% of the Market Value of such Solid Shares as of the date of such Change in Control by giving written notice to Blue at any time prior to the 30th day following receipt by Lion of written notice from Blue of such Change in Control or (ii) to terminate this Shareholders Agreement by giving written notice to Blue at any time prior to the 30th day following receipt by Lion of written notice from Blue of such Change in Control. In the event of a Change in Control of Lion, the Lock-Up Period shall immediately terminate. -12- 40 A "Change in Control" shall be deemed to have occurred as to Blue or Lion if any Person is or becomes the owner, directly or indirectly, of more than 30% of the total voting power of all shareholders or other equity holders of Blue or Lion, as the case may be, entitled to vote generally in the election of directors of Blue or Lion, as the case may be, provided, however, that a Change in Control shall be deemed not to have occurred with respect to Blue if Lion has approved the acquisition by such Person in writing in advance of the acquisition and that a Change in Control shall be deemed not to have occurred with respect to Lion if Blue has approved the acquisition by such Person in writing in advance of the acquisition. (f) Pledge of Solid Shares. The provisions of Section 3(b) and 3(c) shall be deemed not to apply to any pledge or mortgage by Blue or any Subsidiary thereof of the Solid Shares owned or held by it if such pledge or mortgage is required or provided for under the terms of any mortgage, trust, indenture or other agreement which provides that any Transfer of Solid Shares by the pledgee or mortgagee shall be governed by the provisions of Sections 3(b) and 3(c) of this Shareholders Agreement. (g) Acquisitions of Solid, Lion and Blue Shares. At any time this Shareholders Agreement is in effect, Blue agrees that none of Blue, any of its Affiliates, or any group of which Blue or any such Affiliate is a member, will acquire ownership (i.e., voting rights, economic rights or other rights) of any Solid Shares (or securities convertible into or exercisable for Solid Shares) except for (x) the acquisition of Solid Shares (provided that Blue has not breached its obligations under this Shareholders Agreement) which would not, after giving effect to such acquisition, result in ownership (i.e., voting rights, economic rights or other rights) of Solid Shares representing more than 25% of the outstanding Solid Shares or 30% of the voting rights in respect of the outstanding Solid Shares or (y) pursuant to a stock split, stock dividend, rights offering, recapitalization, reclassification or similar transaction made available to holders of Solid Shares generally; provided that any such Solid Shares shall be subject to the restrictions of this Shareholders Agreement. In the event that Blue directly or indirectly owns or acquires any Solid Shares in violation of this Shareholders Agreement, such Solid Shares shall immediately be disposed of to Persons who are not Affiliates of Blue (but only in compliance with the provisions of this Shareholders Agreement relating to Transfers of Solid Shares); provided, however, that Lion may also pursue any other available remedy to which it may be entitled as a result of such violation. At any time this Shareholders Agreement is in effect, Blue will give Solid reasonable prior notice of any acquisition of Solid Shares by Blue, any of its Affiliates or any group of which Blue or any such Affiliate is a member. -13- 41 At any time this Shareholders Agreement is in effect, Blue agrees that none of Blue or any of its Affiliates, or any group of which Blue or any such Affiliate is a member, will acquire ownership (i.e., voting rights, economic rights or other rights) of any shares of Lion's ordinary shares, par value FF____ per share (or securities convertible into or exercisable for Lion ordinary shares). In the event that Blue owns or acquires any Lion ordinary shares in violation of this Shareholders Agreement, such Lion ordinary shares shall immediately be disposed of in an orderly fashion to Persons who are not Affiliates of Blue and who will not, to the knowledge of Blue, after such disposition, own more than 5% of the outstanding Lion ordinary shares, provided that such 5% limitation shall not apply to transfers to investment funds, mutual funds and other similar types of passive investors; provided, further however, that Lion may also pursue any other available remedy to which it may be entitled as a result of such violation. At any time this Shareholders Agreement is in effect, Blue will give Solid reasonable prior notice of any acquisition of Lion ordinary shares by Blue, any of its Affiliates or any group of which Blue or any such Affiliate is a member. At any time this Shareholders Agreement is in effect, Lion agrees that none of Lion, Solid, any of their Affiliates, or any group of which Lion, Solid or any such Affiliate is a member, will acquire ownership (i.e., voting rights, economic rights or other rights) of any shares of Blue's Common Stock, par value $0.162/3 per share (or securities convertible into or exercisable for Blue Common Stock) except for (x) the acquisition of Blue Common Stock (provided that Lion has not breached its obligations under this Shareholders Agreement) which would not, after giving effect to such acquisition, result in ownership (i.e., voting rights, economic rights or other rights) of Blue Common Stock representing more than 10% of the outstanding Blue Common Stock or (y) pursuant to a stock split, stock dividend, rights offering, recapitalization, reclassification or similar transaction made available to holders of Blue Common Stock. In the event that Lion beneficially owns or acquires any Blue Common Stock in violation of this Shareholders Agreement, such Blue Common Stock shall immediately be disposed of in an orderly fashion to Persons who are not Affiliates of Lion or Solid and who will not, to the knowledge of Lion or Solid, after such disposition, own more than 5% of the outstanding Blue Common Stock, provided that such 5% limitation shall not apply to transfers to investment funds, mutual funds and other similar types of passive investors; provided, further however, that Blue may also pursue any other available remedy to which it may be entitled as a result of such violation. At any time this Shareholders Agreement is in effect, Lion and Solid will give Blue reasonable prior notice of any acquisition of Blue's Common Stock by Lion, Solid, any of their Affiliates, or any group of which Lion, Solid or any such Affiliate is a member. (h) Other than with respect to a Transfer in accordance with Section 3(a), the rights of Blue under this Shareholders Agreement shall not be transferable and -14- 42 shall terminate with respect to any Solid Shares Transferred by Blue. Any Solid Shares Transferred by Blue in accordance with the provisions of Section 3 shall be free of any restrictions under this Shareholders Agreement. 4. RESOLUTION OF DISPUTES. Any dispute between the Principals arising out of this Shareholders Agreement, whether as to this Shareholders Agreement's construction, interpretation or enforceability or as to any Principal's breach or alleged breach of any provision of this Shareholders Agreement, shall be submitted to final and binding arbitration in accordance with the following procedures: (a) Either Principal may demand such arbitration by giving written notice of that demand to the other Principal. Any such arbitration shall be before a panel of three arbitrators, one selected by each Principal and the third (who shall serve as chairman of the tribunal) selected by the agreement of each of the two arbitrators selected by the Principals in the manner set forth in Section 4(b). The notice pursuant to this Section 4(a) shall state (x) the matter in controversy and (y) the name of the arbitrator selected by the Principal giving the notice. (b) Not more than 15 days after notice is given pursuant to Section 4(a), the other Principal shall give written notice to the Principal who demanded arbitration of the name of an arbitrator selected by the other Principal. If the other Principal shall fail to give such notice within such 15 day period, a second arbitrator shall be selected in accordance with the Arbitration Rules of the International Chamber of Commerce (the "Arbitration Rules"). Not more than 30 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to select a third arbitrator within such 30 day period, the third arbitrator shall be named pursuant to the Arbitration Rules. All arbitrators shall be fluent in English and French. (c) The dispute shall be arbitrated at a hearing to be conducted in French, although documents may be submitted in English or French. The arbitration shall take place in Geneva or such other place as the Principals agree and shall be concluded as soon as practicable in accordance with the Arbitration Rules. Any award, which may be made by a majority of the arbitrators, shall be made as soon as possible following the conclusion of the arbitration and shall be conclusive and binding on the parties and may be entered as a judgment of any court having jurisdiction. -15- 43 (d) Each Principal shall bear half the arbitrators' fees and expenses and administrative expenses of the arbitration and its own legal and other costs. The agreement of the Principals contained in the foregoing provisions of Section 4 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the Principals arising out of this Shareholders Agreement. 5. SALES BY LION. (a) Lion will not reduce its ownership of Solid Shares to less than 40% of the outstanding Solid Shares voting rights unless Lion receives a written opinion of a nationally recognized French law firm in form and substance satisfactory to Blue, and delivers a copy of such opinion to Blue, to the effect that Lion and Blue will not be obligated to launch a tender offer for all of the outstanding Solid Shares as a result of such reduction in ownership. The parties agree that the provisions of this Section 5(a) are in addition to, and do not negate, the rights provided to Blue under the agreements executed in connection with the transactions contemplated by this Shareholders Agreement. 6. In the event that Market Value is being determined at any time when less then 20% of the outstanding Solid Shares are held by Persons other than Blue and Lion and other than Persons who hold in excess of 5% of the Solid Shares (other than investment funds, mutual funds and institutional investors), Market Value shall be determined as follows: Blue shall designate and appoint an investment bank to participate in establishing Market Value. Within 15 days after written notice of the identity of such investment bank by Blue is given, Lion shall appoint an investment bank to participate in establishing Market Value. Using generally accepted valuation techniques and investment banking methodology, such investment banks as so appointed shall endeavor to agree upon the Market Value of the subject Solid Shares and shall, within 30 days following the engagement of the second such investment bank, each deliver to the other in writing the amount arrived at as representing its opinion as to Market Value. If such amounts are the same (an "agreed value") or one of them shall be no less than 90 percent of the other, then the Market Value shall be the agreed value or the arithmetic mean of the two. If the two investment banks are unable to agree within 30 days after the appointment of its investment bank by Lion or if one of the amounts proposed by one of such two investment banks shall be less than 90 percent of the other, then such Market Value shall be established by a third investment bank appointed by the two investment banks named by the Principals or, failing such appointment by such investment banks -16- 44 within five days after the expiry of their 30-day period of effort, then by the President of the Paris Commercial Court. Such third investment bank shall be instructed to establish such Market Value (which shall not be greater than the larger of the two estimates nor less than the lesser of the two estimates), using generally accepted valuation techniques and investment banking methodology, as soon as possible and shall, upon completion of its task, so notify the Principals. 7. AMENDMENT. This Shareholders Agreement may not be amended except by a written instrument signed on behalf of each of the Principals. 8. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and either delivered personally or by facsimile transmission and shall be deemed given when received at the following addresses or facsimile transmission numbers (or at such other address or facsimile transmission number for a party as shall be specified by like notice): (a) If to Blue: ________________, Attention: ________________ (facsimile transmission number: _______________); with a copy (which shall not constitute notice) to ________________ (facsimile transmission number: _______________). (b) If to Lion: 1, Rue d' Astorg 75008 Paris, France, Attention: Le President du Directoire (facsimile transmission number: _______________); with copies (which shall not constitute notice) to Le Directeur Juridique (facsimile transmission number: _______________) and Sullivan & Cromwell, Attention: Richard A. Pollack (facsimile transmission number: 212-558-3588). 9. SEVERABILITY. Any term or provision of this Shareholders Agreement that is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Shareholders Agreement or affecting the validity or enforceability of any of the terms or provisions of this Shareholders Agreement in any other jurisdiction. If any provision of this Shareholders Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable. 10. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Shareholders Agreement (together with the documents and instruments delivered by the parties in connection with this Shareholders Agreement or specifically contemplated hereby) -17- 45 (a) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) is agreed to in English and shall be read and interpreted according thereto notwithstanding any translation hereof for the convenience of the parties into French; and (c) is solely for the benefit of the Principals hereto and, other than as provided herein, their respective successors, legal representatives and assigns and does not confer on any other person any rights or remedies hereunder. 11. APPLICABLE LAW. THIS SHAREHOLDERS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF FRANCE REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 12. ASSIGNMENT. Neither this Shareholders Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either Principal except as contemplated hereby without the prior written consent of the other Principals. Subject to the preceding sentence, this Shareholders Agreement will be binding upon, inure to the benefit of and be enforceable by the Principals and their respective successors and permitted assigns. 13. WAIVERS. Either Principal hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other Principal and (b) waive performance of any of the covenants or agreements contained herein. Any agreement on the part of a Principal to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Principal. Except as specifically and explicitly provided in this Shareholders Agreement, no action taken pursuant to this Shareholders Agreement shall be deemed to constitute a waiver by the Principal taking such action of compliance with any covenants or agreements contained in this Shareholders Agreement. The waiver by any Principal of a breach of any provision hereof shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provisions hereof. 14. This Shareholders Agreement shall terminate and expire at the later of (i) the fifth anniversary of the Closing Date and (ii) the date on which Blue owns less than 5% of the outstanding Solid Shares. -18- 46 SUEZ LYONNAISE DES EAUX, S.A. By: ------------------------------------ Name: Title: BROWNING-FERRIS INDUSTRIES, INC. By: ------------------------------------ Name: Title: Witnessed, as of the date hereof: SITA, S.A. By: ------------------------------------ Name: Title: -19- 47 ANNEX I - - Generale des Eaux - - Waste Management - - Bouygues - - Tredi-EMC - - FCC - - Caisse des Depots - - EDF - - RWE - - VEW - - Rethmann - - Any affiliate of any of the foregoing entities. -20- 48 ANNEX C Terms of Technical Cooperation Agreement In consideration of the transactions contemplated by the Transaction Agreement, including Parent's ongoing participation in Purchaser as a significant shareholder, participation in Purchaser's management and Purchaser's agreement not to engage in solid waste activities in the United States, Canada and Mexico and Parent's agreement not to engage in such activities outside of the United States, Canada and Mexico, Parent and Purchaser will enter into a Technical Cooperation Agreement (the "Cooperation Agreement") containing the following terms. For purposes of this Annex C, the "United States" shall include the Commonwealth of Puerto Rico. o Parent will undertake to cooperate with Purchaser in the development of and share with Purchaser technical information, know-how, proprietary information, intellectual property including patents, and assistance regarding the Waste Business, particularly technical information, know-how and assistance regarding solid waste technology in the United States, Canada and Mexico and Parent will not engage in the Waste Business outside of the United States, Canada and Mexico. o Purchaser will undertake to cooperate with Parent in the development of and share with Parent technical information, know-how, proprietary information, intellectual property including patents, and assistance regarding the collection, transportation, disposal, and processing or solid and medical waste, the collection, transportation, processing and marketing or disposal of recyclable materials (the "Business"), particularly technical information, know-how and assistance regarding solid waste technology outside of the United States, Canada and Mexico and Purchaser will not engage in the Business in the United States, Canada and Mexico, except for operations being conducted on the date of the Transaction Agreement. C-1 49 o Each of Parent and Purchaser will agree to share with the other party, among other things, (i) new methods and technologies (or methods known to one party but not the other party) of waste collection, transportation, disposal, processing, recycling, recycling processing and other activities related to the Waste Business and Purchaser's Business, as the case may be, (ii) standards and innovations to improve logistical efficiency in the conduct of the Waste Business and Purchaser's Business, as the case may be, (iii) standards and innovations regarding the design and operation of landfills, transfer stations and waste to energy facilities and (iv) standards to be maintained and actions to be taken to improve environmental safety and compliance with environmental regulations. o Each of Parent and Purchaser will agree that any technological information provided to the other party (as set forth above) will be provided with a royalty-free license to use such technological information in perpetuity. o Parent will provide Purchaser with a royalty-free license to use Parent's name outside the United States, Canada and Mexico following the Closing in connection with the business of the International Subsidiaries, which license shall be granted on reasonable terms for a reasonable duration (not to exceed 90 days) following the Closing. Parent and Purchaser shall negotiate concerning whether Parent will agree to provide Purchaser with a royalty-free license to use Parent's name independent of, or in conjunction with, Purchaser's name during the term of the Cooperation Agreement. o The sharing of technical information contemplated hereby shall be provided (during the term of the Cooperation Agreement) on a C-2 50 continuous basis without the need for requests for such information from either party. o Each of Parent and Purchaser will assist with the implementation and incorporation of the technical information to be provided hereunder by providing technical assistance and support to each other. o Each of Parent and Purchaser will consult with the other party as to the appropriate manner to aid in any technology sharing. o Each of Parent and Purchaser will provide technicians to the other party at such other party's expense who will work onsite to assist with any technology sharing. o Each of Parent and Purchaser (either, the "providing party") will provide a reasonable number of the other party's technicians access to its facilities at the providing party's expense for both short-term and long-term training. o For so long as Parent owns 10% or more of the outstanding Purchaser Shares, Purchaser will prepare quarterly financial reports in accordance with French GAAP at its own expense. o Purchaser will retain one full time employee for the purpose of reconciling Purchaser's quarterly and annual financial reports to U.S. GAAP. o Purchaser will commit to make its personnel available to and to provide access to Purchaser's books and records to such employee to enable such employee to discharge his responsibilities. o Parent will reimburse Purchaser for the salary and benefits payable to such employee. C-3 51 o Nothing contained herein shall be deemed to be a representation from Purchaser as to the accuracy of the presentation of Purchaser's financial reports in accordance with U.S. GAAP. o The Cooperation Agreement will terminate and expire at the later of (i) the fifth anniversary of the Closing Date, and (ii) the date on which Parent owns less than 5% of the outstanding Purchaser Shares. o The Cooperation Agreement will contain customary confidentiality provisions. o The Cooperation Agreement will be governed by French law. C-4 52 ANNEX I Representations and Warranties of Parent and the Selling Entities Parent and International will jointly and severally represent and warrant to Purchaser as follows: Section 1.1 Corporate Organization and Qualification. Each of the International Subsidiaries has been duly organized and is validly existing and in good standing under the laws of its jurisdiction of organization, and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated by it or the business conducted by it require such qualification, except for such failures to so qualify or be in good standing as a foreign corporation, which, in the aggregate, could not have a material adverse effect on the general affairs, business, assets, liabilities, financial condition, properties, operations or results of operations of the International Subsidiaries taken as a whole, or on the ability to operate or conduct the business of the International Subsidiaries, taken as a whole, in the manner in which it is presently operated or conducted (an "International Material Adverse Effect"), it being understood that for purposes of the definition of International Material Adverse Effect that any change, development or effect which could reasonably be expected to cause or result in losses, damages, claims or liabilities to or against the International Subsidiaries greater than $15,000,000 shall be deemed to be such a material adverse effect. Each of the International Subsidiaries has the corporate power and authority to carry on its business as currently conducted. Parent has delivered to Purchaser a complete and correct copy of each International Subsidiary's certificate of incorporation, by-laws or other comparable governing instruments, each as amended to date. Such instruments are in full force and effect. Section 1.2 Authorized Capital. Schedule 1.2 contains a true and complete list of all of the I-1 53 International Subsidiaries and sets forth with respect to each International Subsidiary (i) its jurisdiction of incorporation, (ii) each jurisdiction in which it is qualified to do business as a foreign corporation, (iii) its authorized, issued and outstanding equity securities or ownership interests and (iv) the holder or holders of all of its issued and outstanding equity securities or ownership interests. The authorized capital stock or equity capitalization of each International Subsidiary consists of the number and class of equity securities or ownership interests set forth opposite such International Subsidiary's name on Schedule 1.2. All of the Shares have been duly authorized and validly issued, and are fully paid and (except as set forth on Schedule 1.2) nonassessable. Section 1.3 Ownership and Title. Except as set forth in Schedule 1.3, (i) each of the Shares is owned, of record and beneficially, either directly or indirectly, by the applicable Selling Entity free and clear of all liens, pledges, security interests, voting trust arrangements, charges, options, restrictions, claims or other encumbrances, and (ii) each of the outstanding equity securities or ownership interests of each International Subsidiary other than any issuer of the Shares (each, a "Purchased Entity") is owned, of record and beneficially, either directly or indirectly, by a Purchased Entity, free and clear of all liens, pledges, security interests, voting trust arrangements, charges, options, restrictions, claims or other encumbrances, except, in the case of clause (i) or clause (ii), for such encumbrances as could not have a material adverse effect on the ability of any International Subsidiary to operate or conduct its business in the manner in which it is presently operated, or hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein with the result that the representation and warranties set forth in the second sentence of this Section 1.3 will be true and accurate. Immediately following the Closing, Purchaser or one or more of its Subsidiaries shall have good and valid title to all of the Shares, free and clear of any lien, pledge, security interest, voting trust arrangement, charge, option, I-2 54 restriction, claim, or other encumbrance, except for any encumbrances on the Shares arising or perfected following the Closing. Except as set forth in Schedule 1.3, immediately following the transfer to Purchaser or one of its Subsidiaries of the Shares, each of the outstanding equity securities or ownership interests of each International Subsidiary will be owned, of record and beneficially, either directly or indirectly, by Purchaser or one of its Subsidiaries, free and clear of all liens, pledges, security interests, voting trust arrangements, charges, options, restrictions, claims or other encumbrances, except for any encumbrances arising following the Closing, and Purchaser will have purchased and acquired all of Parent's direct or indirect right, title and interest in and to the Waste Business. Except for the International Subsidiaries, International does not have any Subsidiaries or own of record or beneficially, or is obligated to acquire, any equity security or ownership interest or investment in any Person. Except as set forth in Schedule 1.3, no International Subsidiary has any Subsidiaries or owns of record or beneficially, or is obligated to acquire, any equity security or ownership interest or investment in any Person. Section 1.4 No Dilution. Except as set forth in Schedule 1.4, no International Subsidiary has any equity securities or ownership interests reserved for issuance. Except as set forth in Schedule 1.4, there are no subscriptions, calls, commitments, rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, plans, arrangements or commitments with respect to the issuance, sale or purchase of any equity securities or ownership interests of any International Subsidiary or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, equity securities or ownership interests of any International Subsidiary, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Neither International nor any International Subsidiary has any outstanding securities or instruments the holders of which have the right to vote (or convert or I-3 55 exchange such securities or instruments into or for securities having the right to vote) with the shareholders of any International Subsidiary on any matter. Section 1.5 Corporate Authority. (a) Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under the Transaction Agreement and the Ancillary Agreements (as defined below) and to consummate the transactions contemplated thereby. Morgan Stanley & Co. Incorporated has rendered a written opinion to Parent to the effect that the Consideration is fair to Parent from a financial point of view. The Transaction Agreement is and as of and after the Closing will be, and as of and after the Closing the Ancillary Agreements will be, valid and binding agreements of Parent, enforceable against them in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. "Ancillary Agreements" means, collectively, the Shareholders Agreement and the Operations Agreement. (b) Each of the Selling Entities is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all requisite corporate power and authority and has taken all corporate action necessary to transfer, convey and sell to Purchaser the Shares held by it, and no other proceedings on the part of any Selling Entity are necessary to authorize the transactions contemplated by the Transaction Agreement. Section 1.6 Conduct of Business. Parent and the Parent Subsidiaries are engaged in the Waste Business only through the International Subsidiaries, and neither Parent, nor any Parent Subsidiary conducts any operations associated with, or owns any assets or properties used in, or holds any permits or licenses used in, the Waste Business, except for operations which after the Closing Date will be conducted I-4 56 pursuant to the Technical Services Agreement. None of the International Subsidiaries is, or (to Parent's knowledge) has been, engaged in any material business other than the Waste Business or owns or has owned any material assets or properties which are used in any business other than the Waste Business. Section 1.7 Governmental Filings. Other than the filings and/or notices required by Council Regulation (EEC) No. 4064/89, [List non-European antitrust or regulatory filings] and the filings and/or notices set forth in Schedule 1.7, no notices, reports or other filings are required to be made by Parent or any Parent Subsidiary with, nor are any consents, registrations, Approvals (as defined below), permits or authorizations required to be obtained by Parent or any Parent Subsidiary from, any Governmental Entity, in connection with the execution and delivery of the Transaction Agreement by Parent or International and the consummation by Parent or any Parent Subsidiaries of the transactions contemplated hereby, except for notices, reports, filings, consents, registrations, Approvals, permits or authorizations, the failure to make or obtain which could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. "Approval" means any approval, authorization, consent, license, franchise, order or permit of or by, or filing with, a Person. Section 1.8 Non-Contravention. The execution, delivery and performance of the Transaction Agreement and the Ancillary Agreements by Parent and any Parent Subsidiaries party thereto, and the consummation by Parent and any Parent Subsidiaries of the transactions contemplated in the Transaction Agreement and therein, do not and will not (a) violate or conflict with, or constitute a default under, any provision of the certificate of incorporation, by-laws or comparable governing instruments of Parent or any Parent Subsidiary, (b) violate any provision of, or constitute (or with notice or lapse of time or both would constitute) a default under, or accelerate or permit the I-5 57 acceleration of the performance required by, any agreement, lease, contract, note, mortgage, indenture, instrument, arrangement or other obligation (collectively, "Contracts") to which Parent or any Parent Subsidiary is a party or by which any of them or any of their respective assets or properties are bound or subject (collectively, the "Parent Contracts"), (c) entitle any party to cancel or terminate, or result in any change in the rights or obligations of any party under, or require a consent or waiver by any party to, any Parent Contract, (d) result in the creation of a lien, pledge, security interest, voting trust arrangement, charge, option, restriction, claim, or other encumbrance on the equity securities, ownership interests or on the assets of Parent or any Parent Subsidiary, (e) violate any law, statute, rule, regulation, ordinance, requirement, administrative ruling, order, judgment, injunction, award, decree or process of any Governmental Entity (collectively, "Law") by which or to which any of their respective assets or properties are bound or subject, or (f) result in the loss or impairment of any Approval of or benefitting Parent or any Parent Subsidiary; except (i) in the case of clauses (b), (d), (e) and (f) of this Section, for such violations, defaults, accelerations, losses or impairments as, when taken together with all other such violations, defaults, accelerations, losses and impairments, could not have an International Material Adverse Effect, and (ii) in the case of clauses (b) and (c), for violations, defaults, accelerations, cancellations, terminations of and changes in rights under the Contracts, instruments, agreements and obligations listed in Schedule 1.8. Section 1.9 Financial Statements; Projections. (a)(i) The consolidated balance sheet of the International Subsidiaries dated September 30, 1997 contained in Schedule 1.9(a)(i) (the "International Balance Sheet") fairly presents the consolidated assets, liabilities and financial position of the International Subsidiaries as a whole as of such date in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the accounting practices listed on Schedule 1.9(a)(ii), in each case consistently applied, except as specifically noted therein. The consolidated statement of income and of I-6 58 changes in financial position of the International Subsidiaries for the year ended September 30, 1997 contained in Schedule 1.9(a)(i) (the "International Income Statement," and, collectively with the International Balance Sheet, the "International Financial Statements") fairly presents the consolidated results of operations, retained earnings and changes in financial position, as the case may be, of the International Subsidiaries as a whole for such period, in each case in accordance with U.S. GAAP and the accounting practices listed in Schedule 1.9(a)(ii), in each case consistently applied, except as specifically noted therein. (ii) Except as set forth in Schedule 1.9(a)(iii), (A) each of the balance sheets contained in Schedule 1.9(a)(iii) in respect of each individual International Subsidiary fairly presents the assets, liabilities and financial position of such International Subsidiary as of the date hereof in accordance with the local jurisdiction accounting standards applicable to each such Subsidiary ("Local GAAP"), and (B) each of the statements of income and of changes in financial position contained in Schedule 1.9(a)(iii) in respect of each individual International Subsidiary fairly presents the results of operations, retained earnings and changes in financial position, as the case may be, of such International Subsidiary for the period covered thereby in accordance with Local GAAP. (b) The projections regarding the financial performance of the International Subsidiaries contained in Schedule 1.9(b) were based on assumptions which Parent believes are reasonable; provided that the foregoing does not constitute any representation or warranty with respect to the actual results which will be achieved by the International Subsidiaries. Section 1.10 Closing Consents. Except for the consents, waivers and authorizations set forth in Schedule 1.10 (the "Parent Closing Consents"), and other than as disclosed in Section 1.7, there are no Persons or entities, other than Parent, whose approval, consent, waiver or authorization is legally or contractually required to consummate the transactions contemplated by this Transaction Agreement, except for consents, waivers and authorizations, I-7 59 the failure to obtain which could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. As of the Closing, each of the Parent Closing Consents shall have been duly authorized, executed and delivered by each of the parties thereto and from and after the Closing shall be a valid and binding agreement of each such party, enforceable against such party in accordance with its terms. Section 1.11 No Actions. There is no action, claim, dispute, proceeding, suit, investigation or appeal pending or, to Parent's knowledge, threatened, against Parent or any Parent Subsidiary which questions or challenges the validity of this Transaction Agreement, any Ancillary Agreement or any Parent Closing Consent, or any action taken or proposed to be taken by Parent or any Parent Subsidiary pursuant hereto or thereto or in connection with the transactions contemplated hereby and thereby, and to the knowledge of Parent or any Parent Subsidiary no conditions exist which could reasonably be expected to lead to any such action, claim, dispute, proceeding, suit, investigation or appeal. Section 1.12 No Undisclosed Liabilities. Notwithstanding any other representation or warranty set forth in this Transaction Agreement and except as set forth in Schedule 1.12, no International Subsidiary had, at September 30, 1997, any liabilities of any nature (whether accrued, absolute, fixed, contingent, liquidated or unliquidated or otherwise and whether due or to become due, and whether or not required by generally accepted accounting principles to be set forth on a balance sheet of any International Subsidiary), except as and to the extent of the amounts specifically reflected or reserved against in the International Balance Sheet or in the notes thereto and except for liabilities which could not, in the aggregate, have an International Material Adverse Effect. Section 1.13 Absence of Certain Changes. Except as set forth in Schedule 1.13 and except as specifically I-8 60 provided for in the Transaction Agreement or agreed in writing between Parent and Purchaser, since September 30, 1997: (a) each of the Selling Entities and the International Subsidiaries has conducted its businesses only in the ordinary course of business consistent with past practice; (b) there has not occurred any damage, destruction or other casualty loss with respect to any asset or real or tangible personal property owned, leased or otherwise by International and the International Subsidiaries, whether or not covered by insurance, which could have an International Material Adverse Effect; (c) no International Subsidiary has (i) sold, pledged or agreed to sell or pledge any equity securities or ownership interests owned by it in any of its Subsidiaries; (ii) amended or violated its certificate of incorporation, by-laws or comparable governing documents; (iii) reclassified, split, subdivided, combined or reclassified any of its equity securities or ownership interests; or (iv) declared, set aside or paid any dividend payable in securities or property other than cash with respect to any of its equity securities or ownership interests; and no Selling Entity has sold, pledged or agreed to sell or pledge any equity securities or ownership interests owned by it in any of the International Subsidiaries; (d) no Selling Entity nor any International Subsidiary has (i) issued, sold, pledged, disposed of or encumbered any shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any of its equity securities or ownership interests or any of its other securities, property or assets; (ii) transferred, leased, licensed, guaranteed, sold, mortgaged, pledged, disposed of or subjected to or permitted the imposition of any lien, claim, restriction or encumbrance (other than statutory liens for taxes not yet due and payable) on any of its I-9 61 assets or properties, other than in the ordinary course of business consistent with past practice; (iii) acquired directly or indirectly, by purchase, redemption or otherwise any of its equity securities or ownership interests; (iv) incurred any indebtedness for borrowed money or guaranteed the obligations of any Person, or made any loans or advances, in each case except in the ordinary course of business consistent with past practice; (v) paid, discharged or satisfied any liability other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice, of liabilities reflected on or reserved against the financial statements contained in Schedule 1.9(a) or subsequently incurred in the ordinary course of business consistent with past practice; (vi) entered into any International Material Contract (as defined in Section 1.14) or agreement other than in the ordinary course of business consistent with past practice; or (vii) authorized capital expenditures in excess of $100,000,000 in the aggregate or made any direct or indirect acquisition of, or investment in, assets or stock of any other Person; (e) no International Subsidiary has, except in the ordinary course of business consistent with past practice, (i) granted any severance or termination pay to, or entered into any employment or severance agreement with, or increased the compensation payable to, any director, officer or other employee of any International Subsidiary; or (ii) established, adopted, entered into, made any new grants or awards under or amended any International Employee Benefit Plans (as defined in Section 1.26); (f) no Selling Entity nor any International Subsidiary has settled or compromised any claims or litigation or waived, assigned or released any rights or claims involving liability or potential liability of the International Subsidiaries or otherwise having a value of $5,000,000 per right, claim or action or $10,000,000 in the aggregate or, except in the ordinary course of business consistent with past practice, modified, amended or terminated any International Material Contracts to which it is a party or by which it or any of its properties is bound; I-10 62 (g) there has been no change in the accounting policies or procedures of any Selling Entity or any International Subsidiary; (h) no Selling Entity nor any International Subsidiary has made any tax election or settled or compromised promised any Tax liability of the International Subsidiaries or permitted any insurance policy naming an International Subsidiary as a beneficiary or a loss payable payee to be canceled or terminated, except, in any such case, in the ordinary course of business consistent with past practice and except to the extent that such Tax liabilities and insurance policy limits do not exceed $5,000,000 in the aggregate; (i) no International Subsidiary has sold, disposed of or otherwise abandoned, altered or written down the book value of (except for amortization and depreciation thereof in accordance with U.S. GAAP or Local GAAP, as the case may be), any item of the property, plant and equipment reflected on the International Balance Sheet contained in Schedule 1.9(a) or on the accounting records of International and the International Subsidiaries as of the Closing, except for sales and dispositions not exceeding $5,000,000 in the aggregate; (j) no Selling Entity nor any International Subsidiary has created any lien, claim, restriction or other encumbrance on or affecting title to the real property occupied or used by any International Subsidiary, other than liens not affecting the use, operation or value of such real property created in the ordinary course of business consistent with past practice, or entered into any leases or subleases for any real or personal property providing for annual payments greater than $15,000,000 in the aggregate; and (k) no Selling Entity nor any International Subsidiary has authorized or entered into an agreement to do any of the foregoing. I-11 63 Section 1.14 Material Contracts. (a) Schedule 1.14(a) contains a true and complete list of each agreement, instrument, contract or arrangement to which any International Subsidiary is a party or by which it or any of their respective properties or assets are bound: (i) which relates to the borrowing of money and pursuant to which the outstanding indebtedness is in excess of $5,000,000, or (ii) under which any International Subsidiary made or received payments in excess of $5,000,000 during 1997 or is reasonably likely to make or receive payments in excess of $5,000,000 during 1998; or (iii) which accounts for two percent (2%) or more of any Purchased Entity's revenue per annum or imposes any encumbrance, lien or restriction on any assets or properties (including International Intellectual Property (as defined in Section 1.23)) used in the manufacture or sale of any such product or service (collectively, the "International Material Contracts"). (b) Except as set forth in Schedule 1.14(b) and except for such failures to be valid, binding and enforceable, breaches, defaults, violations and events as could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each International Material Contract is a valid and binding obligation of each of the parties thereto and is enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, except for such failures to be valid and binding as could not, individually or in the aggregate, have an International Material Adverse Effect, (ii) no International Subsidiary is in violation or breach of, or in default under, any International Material Contract and, to Parent's knowledge, no other party to any International Material Contract is in violation or breach thereof, or in default thereunder, except, in either case, for such violations, breaches and defaults as could not, individually or in the aggregate, have an International Material Adverse Effect, and (iii) to Parent's knowledge, no I-12 64 event has occurred that, with the passage of time or the giving of notice or both, would permit the unilateral modification, acceleration, or termination of any International Material Contract. (c) Parent has caused to be delivered or made available to Purchaser a true, complete and current copy of each International Material Contract. (d) Except as set forth on Schedule 1.14(d)(i), and except for agreements providing, in the aggregate, for the nonstatutory compensation and benefits summarized in Schedule 1.14(d)(ii), neither Parent nor any Parent Subsidiary is a party to or bound by any agreement, instrument, contract or arrangement (i) to which any directors, executive officers or affiliates of Parent or any Parent Subsidiary, is a party or is bound, or (ii) which contains any provision or covenant limiting (x) the ability of any International Subsidiary to engage in any line of business, to compete with any Person, to do business with any Person or in any location or to employ any Person or (y) the ability of any Person to compete with or obtain products or services from any International Subsidiary. (e) Schedule 1.14(e) lists each Acquisition Document. Section 1.15 Approvals. Each of the International Subsidiaries has all Approvals required for the conduct of its business, except for Approvals, the failure to obtain which could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. All such Approvals are valid and in full force and effect, and the International Subsidiaries are in compliance with all such Approvals, except for such failures to be valid or to be in compliance as could not, individually or in the aggregate, have an International Material Adverse Effect. Except for such proceedings as could not, individually or in the aggregate, have an International Material Adverse Effort, there is no I-13 65 proceeding pending or, to Parent's or International's knowledge, threatened, that disputes the validity of any such Approval or that is likely to result in the revocation, cancellation or suspension, or any adverse modification of, any such Approval. Section 1.16 Compliance with Laws. Except as set forth in Schedule 1.16: (a) Parent, each Parent Subsidiary and their respective businesses, facilities, operations and agreements have complied with all Laws and Approvals, except for such instances of noncompliance as, when taken together with all other instances of noncompliance, could not have an International Material Adverse Effect. (b) No investigation or review by any Governmental Entity with respect to Parent, any Parent Subsidiary or any of their respective businesses, facilities, operations or agreements is pending or, to Parent's knowledge, threatened, except for investigations and reviews which could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. To Parent's knowledge, no Governmental Entity has indicated an intention to conduct the same, except for such investigations and reviews as, when taken together with all other investigations and reviews, could not have an International Material Adverse Effect. (c) Neither Parent nor any Parent Subsidiary has received any notice or communication alleging any noncompliance by any International Subsidiary with any Law or Approval that has not been cured, and no International Subsidiary is subject to any unpaid fine or any continuing sanction for any such noncompliance, except, in either case, for such instances of noncompliance as, when taken together with all other instances of noncompliance, could not have an International Material Adverse Effect. I-14 66 (d) Neither Parent nor any Parent Subsidiary is in violation of or in default under, and to Parent's knowledge, no event has occurred which, with the lapse of time or the giving of notice or both, would result in the violation of or default under, the terms of any judgment, decree, order, injunction or writ of any Governmental Entity, except for such violations or defaults as, when taken together with all other violations and defaults, could not have an International Material Adverse Effect. Section 1.17 Insurance. Schedule 1.17 (i) contains a true and accurate summary of the insurance coverage of the property, assets or business liabilities of the International Subsidiaries as a whole specifying with respect to each such type of coverage, the term of the policies or bonds, the limits and layers of liability and the annual premiums, and (ii) lists any agreements, arrangements or commitments under which any International Subsidiary indemnifies any other Person or is required to carry insurance for the benefit of any other Person in an amount in excess of $1,000,000 in the aggregate. The policies and bonds summarized in Schedule 1.17 are in full force and effect, all premiums due and payable thereon have been paid, no notice of cancellation or termination has been received with respect to any such policy, and the Selling Entities and the International Subsidiaries have complied with such policies and bonds. Such policies and bonds will remain in full force and effect through the respective dates set forth in Schedule 1.17 without the payment of additional premiums, except in the ordinary course of business, and will not in any way be affected by, terminate, or lapse by reason of the transactions contemplated by the Transaction Agreement. Section 1.18 Customers. Since September 30, 1997, to Parent's and International's knowledge, no municipality or other customer of any International Subsidiary accounting for one percent (1%) or more of the consolidated annual revenue of the International Subsidiaries has canceled or otherwise terminated its relationship with any International Subsidiary or has at any time decreased significantly its usage of the services of I-15 67 International or any International Subsidiary and there has been no material adverse change in the business relationship of any International Subsidiary with any such municipality or customer, as the case may be. To Parent's and International's knowledge, no such municipality or other customer intends to cancel or otherwise terminate its relationship with any International Subsidiary or to decrease significantly its usage of the services of any International Subsidiary, as the case may be. Section 1.19 Affiliate Interests. Except as set forth in Schedule 1.19: (a) Neither Parent, any Parent Subsidiary nor to the knowledge of Parent (after reasonable investigation) any director, executive officer or affiliate of Parent, any Parent Subsidiary, International or any International Subsidiary (i) has any interest in any property, real or personal, tangible or intangible, of any International Subsidiary, except for interests with a value of not greater than $1,000,000 in the aggregate, (ii) has any cause of action or other claim whatsoever against any International Subsidiary or their respective assets or properties, or owes any amount to, or is owed any amount by, any of them, except for claims and indebtedness not in excess of $1,000,000 in the aggregate, or (iii) owns, directly or indirectly, any debt, equity or other interest or investment in any Person which is a competitor, lessor, lessee, customer or supplier of any International Subsidiary, except securities of any publicly-held corporation which do not exceed one percent (1%) of the outstanding voting securities of such corporation. (b) There are no agreements, indebtedness, arrangements, understandings, obligations or other rights or obligations between any International Subsidiary, on the one hand, and Parent, any Parent Subsidiary, International, or to the knowledge of Parent (after reasonable investigation) any of their respective directors, officers, employees or Affiliates (other than the International Subsidiaries), on the other hand, other than agreements, indebtedness, I-16 68 arrangements, understandings, obligations and other rights which will not survive the Closing. Section 1.20 Title to Properties. Except as set forth on Schedule 1.20, each International Subsidiary has good and marketable title to or a valid leasehold interest in all of the properties and assets (real, personal, mixed, tangible and intangible) which are necessary to the conduct of their respective businesses as presently conducted, free and clear of all liens, claims, defects, encumbrances, encroachments, easements, restrictions, security interests, mortgages or deeds of trust, except (a) liens for current Taxes not yet due and payable, (b) such liens, easements and zoning restrictions as are matters of public record, are not substantial in character, amount or extent and do not impair the use or occupancy of such property or assets or the business operations of any International Subsidiary, and (c) liens noted in the International Financial Statements. Section 1.21 Leased Real Property. Except as set forth in Schedule 1.21, and except for such failures to be valid, binding and enforceable, breaches, defaults, violations and events as could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each lease of real property to which any International Subsidiary is a party (each, an "International Existing Real Property Lease") is a valid and binding obligation of each party thereto and is enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, (ii) the International Subsidiaries are not in violation or breach of, or in default under, any International Existing Real Property Lease, and, to Parent's knowledge, no other party to any International Existing Real Property Lease is in violation or breach thereof, or in default thereunder, (iii) to Parent's and International's knowledge, no event has occurred that, with the passage of time or the giving of notice or both, would permit the I-17 69 unilateral modification, acceleration, or termination of any International Existing Real Property Lease, and (iv) each International Subsidiary which is a party to the International Existing Real Property Leases enjoys peaceful and undisturbed possession under each International Existing Real Property Lease. Section 1.22 Personal Property. (a) The equipment and fixtures used by the International Subsidiaries in connection with their respective businesses are, in the aggregate, in substantially good repair (reasonable wear and tear excepted) and are adequate for the uses to which they are being put. (b) Schedule 1.22(b) sets forth a true and complete list of all of the leases of personal property to which any International Subsidiary is a party which provides for payments in excess of $2,000,000 per year (collectively, the "International Personal Property Leases"). Parent has caused to be delivered or made available to the Purchaser a true and complete copy of each International Personal Property Lease. (c) Except as set forth in Schedule 1.22(c), and except for failures to be valid, binding or enforceable, defaults, and events which could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each International Personal Property Lease is a valid and binding obligation of each party thereto and is enforceable against each such party in accordance with its terms, (ii) there is no default or claim of default under any International Personal Property Lease, and (iii) no event has occurred that, with the passage of time or the giving of notice or both, would constitute a default by any party to any International Personal Property Lease, or would permit unilateral modification, acceleration, or termination of any International Personal Property Lease. I-18 70 Section 1.23 Intellectual Property. Schedule 1.23 includes a true, complete and current list of all patents, inventions, know-how that has been acquired for value, trade names, registered and unregistered trademarks, registered and unregistered service marks and registered and unregistered copyrights owned or used by any International Subsidiary, and all pending applications therefor and all licenses and other agreements relating thereto, other than immaterial items (collectively, the "International Intellectual Property"). Except as set forth in Schedule 1.23, an International Subsidiary owns the entire right, title and interest in and to the International Intellectual Property (including, without limitation, the exclusive right to use and license the same) and each item constituting part of the International Intellectual Property has been duly registered or filed with or issued by the appropriate authorities in the countries indicated in Schedule 1.23 and, to Parent's and International's knowledge, such registrations, filings and issuances remain in full force and effect. To Parent's and International's knowledge, there are no infringements or misappropriations of any proprietary rights or International Intellectual Property owned by or licensed by or to any International Subsidiary. The trademarks, service marks and trade names of the International Subsidiaries are enforceable by such entities and all patents comprising the International Intellectual Property are valid and enforceable by the International Subsidiaries. Except as set forth on Schedule 1.23, no consent of third parties will be required for the use of any International Intellectual Property as a consequence of the consummation of the transactions contemplated hereby. Except as set forth on Schedule 1.23, (i) no claims are currently being asserted by any Person to the use of any of the International Intellectual Property or challenging or questioning the validity or effectiveness of any such license or agreement, and the use of the International Intellectual Property by any International Subsidiary does not infringe on the rights of any Person and no suits or proceedings are pending or threatened against with respect to the foregoing; and (ii) no claims are currently being asserted, and, to Parent's and International's knowledge, no conditions exist upon which I-19 71 such claims could be based, that any International Subsidiary is in default or is not in full compliance with all licenses and other agreements under which it is using any item of the International Intellectual Property. To Parent's and International's knowledge there are no infringements of any proprietary rights owned by or licensed by or to any International Subsidiary. The trademarks, service marks and trade names of the International Subsidiaries are enforceable by such entities and the patents of such entities are valid and enforceable by the International Subsidiaries. The International Intellectual Property constitutes all of the intellectual property necessary for the operation of the International Subsidiaries' respective businesses as presently conducted and provides the International Subsidiaries with all requisite rights to conduct their respective businesses as presently conducted. Section 1.24 Employees. (a) Since September 30, 1997, there have been no increases in salaries, wages and fringe benefits of the employees of the International Subsidiaries (other than increases in the ordinary course of business of the International Subsidiaries consistent with past practice), nor do any such employees that are within the scope of applicability of collective bargaining agreements enjoy salary benefits in excess of what is provided under the relevant collective bargaining agreement. (b) Since September 30, 1997, there have been no changes in the employment conditions of any International Subsidiaries' employees nor have any additional employment relationships commenced or offers of employment been given by any International Subsidiary, except in the ordinary course of business consistent with past practice. (c) The International Subsidiaries have neither signed, nor are they liable under any policy of any life or like personal insurances in excess of compulsory insurances, nor do any of the employees of the International Subsidiaries enjoy any other benefits in excess of benefits provided by Law, except as stated in Schedule 1.25. I-20 72 (d) The pension liability of the International Subsidiaries is fully paid or provided for in the International Financial Statements and, subsequent to the Closing, the International Subsidiaries will not incur any costs in respect of any pension liability arising out of employment before the Closing. (e) With such exceptions as would not reasonably be likely to have a material adverse effect on the ability of the International Subsidiaries operating or conducting business in any particular country to operate or conduct such business in such country, the International Subsidiaries have paid all labor related charges. (f) To Parent's and International's knowledge, there are not pending any strikes, work stoppage or like in the International Subsidiaries. (g) To Parent's and International's knowledge there are no claims from present or former employees of the International Subsidiaries on account for overtime pay, wages, salaries, vacations, discrimination or termination of employment which could reasonably be expected to cause or result in losses, damages, claims or liabilities to or against the International Subsidiaries greater than $5,000,000 in the aggregate. Section 1.25 Litigation. Except as set forth on Schedule 1.25 and except for such matters as could not, in the aggregate, have an International Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, there are no (i) civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the knowledge of Parent or International, threatened against Parent or any Parent Subsidiary, or (ii) obligations or liabilities, whether or not accrued, contingent or otherwise, including, without limitation, those relating to matters involving any Environmental Law (as defined below) and occupational safety and health matters. "Environmental Law" means any multi-national, national, regional or local I-21 73 law, regulation, directive, treaty, convention, order, decree, permit, authorization, common law or government requirement relating to: (i) the protection, investigation or restoration of the environment, health, safety, or natural resources, (ii) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance (as defined below) or (iii) noise, odor, indoor air, employee exposure, wetlands, pollution, contamination or any injury or threat of injury to persons or property relating to any Hazardous Substance. "Hazardous Substance" means any substance that is: (i) listed, classified or regulated as hazardous, toxic, or harmful pursuant to any Environmental Law; (ii) any petroleum product or by-product, industrial, commercial or special waste, asbestos-containing material, lead product, hazardous material, polychlorinated biphenyls, radioactive materials or manufacturing byproduct; and (iii) any other substance which is the subject of regulatory action by any Governmental Authority in connection with any Environmental Law. Section 1.26 Employee Benefits. (a) Schedule 1.26 contains a true and accurate summary, for each jurisdiction in which International or any International Subsidiary conducts business, of the employees covered, amounts payable and material terms of payment under the employment, severance, bonus, incentive, deferred compensation, pension, profit sharing, stock option, stock, stock based, death benefit, health, disability and other employee benefit plans or agreements (the "International Employee Benefit Plans") maintained or contributed to by International or any International Subsidiary in such jurisdiction. Parent has delivered to Purchaser true, complete and correct copies of (i) each International Employee Benefit Plan and (ii) each trust agreement and annuity or other insurance contract relating to any International Employee Benefit Plan. (b) Neither International nor any International Subsidiaries is in default of any material obligation to be performed under any of the International Employee Benefit Plans. None of the International Employee Benefit Plans is subject to the provisions of the United States Employee I-22 74 Retirement Income Security Act of 1974, as amended. Each International Employee Benefit Plan has been administered in all material respects in accordance with its terms. All the International Employee Benefit Plans are in compliance in all material respects with the provisions of applicable law. All payments, deductions from wages, reports, returns and similar documents with respect to the International Employee Benefit Plans required to be filed with or paid to any Governmental Entity or International Employee Benefit Plan or distributed to any International Employee Benefit Plan participant have been duly and timely filed, distributed or paid. There is no pending or, to the knowledge of Parent, threatened litigation relating to any International Employee Benefit Plan, other than routine claims for benefits. Each International Employee Benefit Plan which is a pension plan has sufficient assets to discharge the liabilities for benefits thereunder. (c) Except as set forth on Schedule 1.26(c), the consummation of the transactions contemplated by this Transaction Agreement and the Ancillary Agreements will not (i) entitle any employees of International or any of International Subsidiaries to severance pay or (ii) accelerate or provide any other rights or credits under, or increase the amount payable or trigger any other obligation pursuant to, any of the International Employee Benefit Plans. Section 1.27 Environmental Matters. Except as disclosed in Schedule 1.27, and except for such instances of noncompliance, release, liability, deficiencies in permitting, use, circumstances, conditions, failures to reserve orders, decrees, injunctions, directives as could not, individually or in the aggregate, have an International Material Adverse Effect: (i) Parent and the Parent Subsidiaries have complied at all times with all applicable Environmental Laws; (ii) no property owned or operated by Parent or any Parent Subsidiary (including landfills, transfer stations, incinerators, or any storage, processing or recycling facility) has released any Hazardous Substance into the environment; (iii) no property formerly owned or operated by Parent or any Parent Subsidiaries has released I-23 75 any Hazardous Substance into the environment during such period of ownership or operation; (iv) no International Subsidiary is subject to any liability for any Hazardous Substance disposal or contamination on any owned or third party property; (v) each International Subsidiary possesses all permits, authorizations, licenses and approvals necessary to the current conduct of its operations and businesses and is not aware of any circumstances that would interfere with any future permit renewal, issuance or modification required for any planned future operations or facility expansions; (vi) neither Parent nor any Parent Subsidiary is subject to any order, decree, injunction, directive or investigation by any Governmental Entity or to any indemnity, agreement or other obligation to any third party relating to liability under any Environmental Law; (vii) none of the properties of any International Subsidiary have been used for the handling or disposal of any Hazardous Substances other than for the handling and disposal of uncontaminated household waste and similar materials having the same regulatory classification in compliance with all Environmental Laws; (viii) there are no other circumstances or conditions involving any International Subsidiary that could be expected to result in any claims, liabilities, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (ix) the International Subsidiaries have established appropriate reserves and posted all required financial assurances required under any Environmental Law to address all facility closure and post-closure obligations arising under any Environmental Law. Except with respect to conditions which could not, individually or in the aggregate, have an International Material Adverse Effect, (x) neither Parent nor any Parent Subsidiary has received any notice, demand, letter, claim or request for information indicating that it may be in violation of or subject to liability under any Environmental Law; and (ii) Parent has delivered to Purchaser copies of all environmental reports, studies, assessments, sampling data and other environmental information in its possession relating to any International Subsidiary or any of their current or former properties or operations. I-24 76 Section 1.28 Landfills. Schedule 1.28 lists each landfill owned or operated by International and the International Subsidiaries and accurately describes each such landfill by its city or county and state or province of location, total area (in square meters), permitted area (in square meters), estimated remaining permitted capacity in cubic meters, estimated or mandated closure date, and estimated closure, post-closure and reclamation liability at its projected or mandated closure date (computed at the closure date with and without discount to present value) and any other recorded or unrecorded accruals, contingent or otherwise, or reserves related to landfill liabilities of any type. Section 1.29 Taxes. Except as disclosed in Schedule 1.29: (i) Parent, International and the International Subsidiaries have timely filed all Tax Returns that are required to be filed with respect to International or any International Subsidiaries or any of their income, properties or operations; (ii) such Tax Returns are true, complete and accurate in all material respects; (iii) all Taxes due or shown as due on the returns described in clause (i) with respect to International or any International Subsidiaries (without regard to whether such Taxes have been assessed and without regard to whether the liability for such Taxes is disputed) have been timely paid or have been provided for in a reserve which is adequate for the payment of such Taxes and is identified in Schedule 1.29; (iv) Parent, International and each of the International Subsidiaries have maintained adequate provisions on their books for all Taxes that have accrued but are not yet due; (v) no adjustments or deficiencies relating to the Tax Returns referred to in clause (i) or any Taxes attributable to International or any International Subsidiaries have been assessed, proposed or asserted; (vi) there are no pending or (to the knowledge of Parent) threatened actions or proceedings for the assessment or collection of Taxes against International or any International Subsidiaries; (vii) there are no outstanding waivers or agreements extending or tolling the applicable statute of limitations for any period with respect to any Taxes of International or any International Subsidiaries; (viii) no audit or I-25 77 examination with respect to International or any International Subsidiaries is presently pending or (to the knowledge of Parent) threatened; (ix) no material claim has ever been made by an authority in a jurisdiction where International or any of the International Subsidiaries does not file Tax Returns that it is or may be subject to Taxes by that jurisdiction; (x) there are no liens on any of the assets of International or any International Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Taxes; (xi) neither International nor any of the International Subsidiaries is a party to any allocation or sharing agreement or intercompany account system (whether written or unwritten) in respect of Taxes.* Section 1.30 Brokers and Finders. Neither Parent nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated in the Transaction Agreement, except that Parent has employed Morgan Stanley & Co. Incorporated as its financial advisors, the arrangements with which have been disclosed in writing to Purchaser prior to the date hereof. Section 1.31 Aggregation. The imperfections, defects, orders, actions, defaults, liabilities, inaccuracies and other items omitted from disclosure in connection with the representations and warranties made in Sections 1.1 through 1.30 on grounds of immateriality or failure to have an International Material Adverse Effect do not and could not, taken as a whole, cause or result in losses, damages, claims or liabilities greater than $15,000,000. - -------- * [Other representations to be provided by non-U.S. tax counsel relevant to jurisdictions where companies or their assets are located.] I-26 78 ANNEX II Representations and Warranties of Purchaser Purchaser will represent and warrant to Parent as follows: Section 2.1 Corporate Organization and Qualification. Purchaser is a societe anonyme duly organized and is validly existing and in good standing under the laws of the Republic of France, and is qualified and in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated by it or the business conducted by it require such qualification, except for such failures to so qualify or be in good standing as a foreign corporation, which, in the aggregate, could not have a material adverse effect on the general affairs, business, assets, liabilities, financial condition, properties, operations or results of operations of Purchaser and its Subsidiaries, taken as a whole, or on the ability to operate or conduct the business of Purchaser and its Subsidiaries, taken as a whole, in the manner in which it is presently operated or conducted (a "Purchaser Material Adverse Effect"), it being understood that for purposes of the definition of Purchaser Material Adverse Effect that any change, development or effect which could reasonably be expected to cause or result in losses, damages, claims or liabilities to or against Purchaser greater than $15,000,000 shall be deemed to be such a material adverse effect. Purchaser has the corporate power and authority to carry on its business as currently conducted. Purchaser has made available to Parent a complete and correct copy of its statuts, as amended to date. Purchaser's statuts are in full force and effect. Section 2.2 Authorized Capital. The authorized capital stock or equity capitalization of Purchaser consists of ___ Purchaser Shares, all of which were outstanding on ________, 1997. All of the outstanding Purchaser Shares have been duly authorized and validly issued, and are fully paid and (except as set forth on Schedule 2.2) nonassessable. All of the outstanding equity securities or ownership interests of II-1 79 each of Purchaser's Subsidiaries is duly authorized and validly issued, and is fully paid and (except as set forth in Schedule 2.2) nonassessable and, except as set forth in Schedule 2.2, is owned, of record and beneficially, either directly or indirectly, by Purchaser free and clear of all liens, pledges, security interests, voting trust arrangements, charges, options, restrictions, claims or other encumbrances, except for such encumbrances as could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. Section 2.3 No Dilution. Except as set forth in Schedule 2.3, Purchaser does not have any Purchaser Shares reserved for issuance. Except as set forth in Schedule 2.3, there are no subscriptions, calls, commitments, rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, plans, arrangements or commitments with respect to the issuance, sale or purchase of any Purchaser Shares or other equity securities or ownership interests or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, Purchaser Shares or any equity securities or ownership interests of Purchaser, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Purchaser does not have any outstanding securities or instruments the holders of which have the right to vote (or convert or exchange such securities or instruments into or for securities having the right to vote) with the shareholders of Purchaser on any matter. Section 2.4 Corporate Authority. Subject only to the approval of Purchaser shareholders, Purchaser has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under the Transaction Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby. J.P. Morgan & Co. Incorporated has rendered a written opinion to Purchaser to II-2 80 the effect that the Consideration is fair to Purchaser from a financial point of view. The Transaction Agreement is, and as of and after the Closing will be, and as of and after the Closing the Ancillary Agreements will be, valid and binding agreements of Purchaser enforceable against Purchaser in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. Section 2.5 Consideration Shares. When issued at the Closing, the Consideration Shares shall be duly authorized, validly issued, fully paid and nonassessable. Section 2.6 Governmental Filings. Other than the filings and/or notices required by Council Regulation (EEC) No. 4064/89, [List non-European antitrust or regulatory filings] and the filings and/or notices set forth in Schedule 2.6, no notices, reports or other filings are required to be made by Purchaser with, nor are any consents, registrations, Approvals, permits or authorizations required to be obtained by Purchaser from, any Governmental Entity, in connection with the execution and delivery of the Transaction Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby, except for notices, reports, filings, consents, registrations, Approvals, permits or authorizations, the failure to make or obtain which could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. Section 2.7 Non-Contravention. The execution, delivery and performance of the Transaction Agreement and the Ancillary Agreements by Purchaser, and the consummation by Purchaser of the transactions contemplated in the Transaction Agreement and therein, do not and will not (a) violate or conflict with, or constitute a default under, any provision of the statuts or comparable governing instruments of Purchaser or any of its Subsidiaries, II-3 81 (b) violate any provision of, or constitute (or with notice or lapse of time or both would constitute) a default under, or accelerate or permit the acceleration of the performance required by, any Contracts to which Purchaser or any of its Subsidiaries is a party or by which any of them or any of their respective assets or properties are bound or subject (collectively, the "Purchaser Contracts"), (c) entitle any party to cancel or terminate, or result in any change in the rights or obligations of any party under, or require a consent or waiver by any party to, any Purchaser Contract, (d) result in the creation of a lien, pledge, security interest, voting trust arrangement, charge, option, restriction, claim, or other encumbrance on the equity securities, ownership interests or on the assets of Purchaser or any of its Subsidiaries, (e) violate any Law, by which or to which any of their respective assets or properties are bound or subject, or (f) result in the loss or impairment of any Approval of or benefitting Purchaser or any of its Subsidiaries; except (i) in the case of clauses (b), (d), (e) and (f) of this Section, for such violations, defaults, accelerations, losses or impairments as, when taken together with all other such violations, defaults, accelerations, losses and impairments, could not have a Purchaser Material Adverse Effect, and (ii) in the case of clauses (b) and (c), for violations, defaults, accelerations, cancellations, terminations of and changes in rights under the Contracts, instruments, agreements and obligations listed in Schedule 2.7. Section 2.8 Financial Statements. The consolidated balance sheet of Purchaser dated June 30, 1997 (the "Purchaser Balance Sheet Date") contained in Schedule 2.8(a) (the "Purchaser Balance Sheet") fairly presents the consolidated assets, liabilities and financial position of Purchaser and its consolidated Subsidiaries as a whole as of such date in accordance with French GAAP and the accounting practices listed on Schedule 2.8(a)(i), in each case consistently applied, except as specifically noted therein. The consolidated statement of income and of changes in financial condition dated June 30, 1997 contained in Schedule 2.8(a) of (the "Purchaser Income Statement", and, collectively with the Purchaser Balance Sheet, the II-4 82 "Purchaser Financial Statements") fairly presents the consolidated results of operations, retained earnings and changes in financial condition, as the case may be, of Purchaser and its consolidated Subsidiaries for such period, in each case in accordance with French GAAP and the accounting practices listed on Schedule 2.8(a)(i), in each case consistently applied, except as specifically noted therein. Section 2.9 Closing Consents. Except for the consents, waivers and authorizations set forth in Schedule 2.9 (the "Purchaser Closing Consents"), and other than as disclosed in Section 2.6, there are no Persons or entities, other than Purchaser, whose Approval, consent, waiver or authorization is legally or contractually required to consummate the transactions contemplated by this Transaction Agreement, except for consents, waivers and authorizations, the failure to obtain which could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. As of the Closing, each of the Purchaser Closing Consents shall have been duly authorized, executed and delivered by each of the parties thereto and from and after the Closing shall be a valid and binding agreement of each such party, enforceable against such party in accordance with its terms. Section 2.10 No Actions. There is no action, claim, dispute, proceeding, suit, investigation or appeal pending or, to Purchaser's knowledge, threatened, against Purchaser or any of its Subsidiaries which questions or challenges the validity of this Transaction Agreement, any Ancillary Agreement or any Purchaser Closing Consent, or any action taken or proposed to be taken by Purchaser or any of its Subsidiaries pursuant hereto or thereto or in connection with the transactions contemplated hereby and thereby, and (to the knowledge of Purchaser or any Subsidiary of Purchaser) no conditions exist which could reasonably be expected to lead to any such action, claim, dispute, proceeding, suit, investigation or appeal. II-5 83 Section 2.11 No Undisclosed Liabilities. Notwithstanding any other representation or warranty set forth in this Transaction Agreement and except as set forth in Schedule 2.11, Purchaser did not have, as of June 30, 1997, any liabilities of any nature (whether accrued, absolute, fixed, contingent, liquidated or unliquidated or otherwise and whether due or to become due, and whether or not required by generally accepted accounting principles to be set forth on Purchaser's Balance Sheet), except as and to the extent of the amounts specifically reflected or reserved against in the Purchaser Balance Sheet or in the notes thereto and except for liabilities which could not, in the aggregate, have a Purchaser Material Adverse Effect. Section 2.12 Absence of Certain Changes. Except as set forth in Schedule 2.12 and except as specifically provided for in the Transaction Agreement or agreed in writing between Parent and Purchaser, since the Purchaser Balance Sheet Date: (a) Purchaser has conducted its businesses only in the ordinary course of business consistent with past practice; (b) there has not occurred any damage, destruction or other casualty loss with respect to any asset or real or tangible personal property owned, leased or otherwise by Purchaser, whether or not covered by insurance, which could have a Purchaser Material Adverse Effect; (c) Purchaser has not (i) sold, pledged or agreed to sell or pledge any equity securities or ownership interests owned by it in any of its Subsidiaries; (ii) amended or violated its Statutes; (iii) reclassified, split, subdivided, combined or reclassified any of its equity securities or ownership interests; or (iv) declared, set aside or paid any dividend payable in securities or property other than cash with respect to any of its equity securities or ownership interests; (d) Purchaser has not (i) issued, sold, pledged, disposed of or encumbered any shares of, or securities convertible II-6 84 or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any of its equity securities or ownership interests or any of its other securities, property or assets; (ii) transferred, leased, licensed, guaranteed, sold, mortgaged, pledged, disposed of or subjected to or permitted the imposition of any lien, claim, restriction or encumbrance (other than statutory liens for taxes not yet due and payable) on any of its assets or properties, other than in the ordinary course of business consistent with past practice; (iii) acquired directly or indirectly, by purchase, redemption or otherwise any of its equity securities or ownership interests; (iv) incurred any indebtedness for borrowed money or guaranteed the obligations of any Person, or made any loans or advances, in each case except in the ordinary course of business consistent with past practice; (v) paid, discharged or satisfied any liability other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice, of liabilities reflected on or reserved against the financial statements contained in Schedule 2.8 or subsequently incurred in the ordinary course of business consistent with past practice; (vi) entered into any Purchaser Material Contract (as defined in Section 2.13) or agreement other than in the ordinary course of business consistent with past practice; or (vii) authorized capital expenditures in excess of US$200,000,000 in the aggregate or made any direct or indirect acquisition of, or investment in, assets or stock of any other Person having an aggregate acquisition price in excess of US$20,000,000; (e) Purchaser has not, except in the ordinary course of business consistent with past practice, (i) granted any severance or termination pay to, or entered into any employment or severance agreement with, or increased the compensation payable to, any director, officer or other employee of Purchaser; or (ii) established, adopted, entered into, made any new grants or awards under or amended any Purchaser Employee Benefit Plans (as defined in Section 2.25); (f) Purchaser has not settled or compromised any claims or litigation or waived, assigned or released any II-7 85 rights or claims involving liability or potential liability of Purchaser or otherwise having a value of $5,000,000 per right, claim or action or $10,000,000 in the aggregate or, except in the ordinary course of business consistent with past practice, modified, amended or terminated any Purchaser Material Contracts to which it is a party or by which it or any of its properties is bound; (g) there has been no change in the accounting policies or procedures of Purchaser; (h) Purchaser has not made any tax election or settled or compromised any Tax liability or permitted any insurance policy naming it as a beneficiary or a loss payable payee to be canceled or terminated, except, in any such case, in the ordinary course of business consistent with past practice and except to the extent that such Tax liabilities and insurance policy limits do not exceed US$5,000,000 in the aggregate; (i) Purchaser has not sold, disposed of or other wise abandoned, altered or written down the book value of (except for amortization and depreciation thereof in accordance with French GAAP), any item of the property, plant and equipment reflected on the Purchaser Balance Sheet contained in Schedule 2.8 or on the accounting records of Purchaser as of the Closing, except for sales and dispositions not exceeding US$5,000,000 in the aggregate; (j) Purchaser has not created any lien, claim, restriction or other encumbrance on or affecting title to the real property occupied or used by Purchaser, other than liens not affecting the use, operation or value of such real property created in the ordinary course of business consistent with past practice, or entered into any leases or subleases for any real or personal property providing for annual payments greater than $15,000,000 in the aggregate; and (k) Purchaser has not authorized or entered into an agreement to do any of the foregoing. II-8 86 Section 2.13 Material Contracts. (a) Schedule 2.13(a) contains a true and complete list of each agreement, instrument, contract or arrangement to which Purchaser is a party or by which it or any of their respective properties or assets are bound: (i) which relates to the borrowing of money and pursuant to which the outstanding indebtedness is in excess of US$5,000,000, or (ii) under which Purchaser made or received payments in excess of US$5,000,000 during 1997 or is reasonably likely to make or receive payments in excess of US$5,000,000 during 1998; or (iii) which accounts for two percent (2%) or more of Purchaser's revenue per annum or imposes any encumbrance, lien or restriction on any assets or properties (including Purchaser Intellectual Property, as defined in Section 2.22) used in the manufacture or sale of any such product or service (collectively, the "Purchaser Material Contracts"). (b) Except as set forth in Schedule 2.13(b) and except for such failures to be valid, binding and enforceable, breaches, defaults, violations and events as could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each Purchaser Material Contract is a valid and binding obligation of each of the parties thereto and is enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, except for such failures to be valid and binding as could not, individually or in the aggregate, have a Purchaser Material Adverse Effect, (ii) Purchaser is not in violation or breach of, or in default under, any Purchaser Material Contract and, to Purchaser's knowledge, no other party to any Purchaser Material Contract is in violation or breach thereof, or in default thereunder, except, in either case, for such violations, breaches and defaults as could not, individually or in the aggregate, have a Purchaser Material Adverse Effect, and (iii) to Purchaser's knowledge, no event has occurred that, with the passage of time or the giving of notice or both, would II-9 87 permit the unilateral modification, acceleration, or termination of any Purchaser Material Contract. (c) Purchaser has caused to be delivered or made available to Parent a true, complete and current copy of each Purchaser Material Contract. (d) Except as set forth on Schedule 2.13(d)(i), and except for agreements providing, in the aggregate, for the nonstatutory compensation and benefits summarized in Schedule 2.13(d)(ii), Purchaser is not a party to or bound by any agreement, instrument, contract or arrangement (i) to which any directors, executive officers or affiliates of Purchaser or any Purchaser Subsidiary, is a party or is bound, or (ii) which contains any provision or covenant limiting (x) the ability of Purchaser to engage in any line of business, to compete with any Person, to do business with any Person or in any location or to employ any Person or (y) the ability of any Person to compete with or obtain products or services from Purchaser. Section 2.14 Approvals. Purchaser has all Approvals required for the conduct of its business, except for Approvals, the failure to obtain which could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. All such Approvals are valid and in full force and effect, and Purchaser is in compliance with all such Approvals, except for such failures to be valid or to be in compliance as could not, individually or in the aggregate, have a Purchaser Material Adverse Effect. Except for such proceedings as could not, individually or in the aggregate, have a Purchaser Material Adverse Effect, there is no proceeding pending or, to Purchaser's knowledge, threatened, that disputes the validity of any such Approval or that is likely to result in the revocation, cancellation or suspension, or any adverse modification of, any such Approval. Section 2.15 Compliance with Laws. Except as set forth in Schedule 2.15: II-10 88 (a) Purchaser, and its businesses, facilities, operations and agreements have complied with all Laws and Approvals, except for such instances of noncompliance as, when taken together with all other instances of noncompliance, could not have a Purchaser Material Adverse Effect. (b) No investigation or review by any Governmental Entity with respect to Purchaser or any of its businesses, facilities, operations or agreements is pending or, to Purchaser's knowledge, threatened, except for investigations and reviews which could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein. To Purchaser's knowledge, no Governmental Entity has indicated an intention to conduct the same, except for such investigations and reviews as, when taken together with all other investigations and reviews, could not have a Purchaser Material Adverse Effect. (c) Purchaser has not received any notice or communication alleging any noncompliance by Purchaser with any Law or Approval that has not been cured, and Purchaser is not subject to any unpaid fine or any continuing sanction for any such noncompliance, except, in either case, for such instances of noncompliance as, when taken together with all other instances of noncompliance, could not have a Purchaser Material Adverse Effect. (d) Purchaser is not in violation of or in default under, and to Purchaser's knowledge, no event has occurred which, with the lapse of time or the giving of notice or both, would result in the violation of or default under, the terms of any judgment, decree, order, injunction or writ of any Governmental Entity, except for such violations or defaults as, when taken together with all other violations and defaults, could not have a Purchaser Material Adverse Effect. II-11 89 Section 2.16 Insurance. Schedule 2.16 (i) contains a true and accurate summary of the insurance coverage of the property, assets or business liabilities of Purchaser specifying with respect to each such type of coverage, the term of the policies or bonds, the limits and layers of liability and the annual premiums, and (ii) lists any agreements, arrangements or commitments under which Purchaser indemnifies any other Person or is required to carry insurance for the benefit of any other Person in an amount in excess of US$1,000,000 in the aggregate. The policies and bonds summarized in Schedule 2.16 are in full force and effect, all premiums due and payable thereon have been paid, no notice of cancellation or termination has been received with respect to any such policy, and Purchaser has complied with such policies and bonds. Such policies and bonds will remain in full force and effect through the respective dates set forth in Schedule 2.16 without the payment of additional premiums, except in the ordinary course of business, and will not in any way be affected by, terminate, or lapse by reason of the transactions contemplated by the Transaction Agreement. Section 2.17 Customers. Since the Purchaser Balance Sheet Date, to Purchaser's knowledge, no municipality or other customer of Purchaser accounting for one percent (1%) or more of Purchaser's consolidated annual revenue has canceled or otherwise terminated its relationship with Purchaser or has at any time decreased significantly its usage of the services of Purchaser and there has been no material adverse change in the business relationship of Purchaser with any such municipality or customer, as the case may be. To Purchaser's knowledge, no such municipality or other customer intends to cancel or otherwise terminate its relationship with Purchaser or to decrease significantly its usage of the services of Purchaser, as the case may be. Section 2.18 Affiliate Interests. Except as set forth in Schedule 2.18, neither Purchaser, any Purchaser Subsidiary nor to the knowledge of Purchaser (after reasonable investigation) any director, executive officer or affiliate of Purchaser or any Purchaser Subsidiary (i) has II-12 90 any interest in any property, real or personal, tangible or intangible, of Purchaser, except for interests with a value of not greater than US$1,000,000 in the aggregate (ii) has any cause of action or other claim whatsoever against Purchaser or their respective assets or properties, or owes any amount to, or is owed any amount by, any of them, except for claims and indebtedness not in excess of US$1,000,000 in the aggregate, or (iii) owns, directly or indirectly, any debt, equity or other interest or investment in any Person which is a competitor, lessor, lessee, customer or supplier of Purchaser, except securities of any publicly-held corporation which do not exceed one percent (1%) of the outstanding voting securities of such corporation. Section 2.19 Title to Properties. Except as set forth on Schedule 2.19, Purchaser has good and marketable title to or a valid leasehold interest in all of the properties and assets (real, personal, mixed, tangible and intangible) which are necessary to the conduct of its businesses as presently conducted, free and clear of all liens, claims, defects, encumbrances, encroachments, easements, restrictions, security interests, mortgages or deeds of trust, except (a) liens for current Taxes not yet due and payable, (b) such liens, easements and zoning restrictions as are matters of public record, are not substantial in character, amount or extent and do not impair the use or occupancy of such property or assets or the business operations of Purchaser and (c) liens noted in the Purchaser Financial Statements. Section 2.20 Leased Real Property. Except as set forth in Schedule 2.20, and except for such failures to be valid, binding and enforceable, breaches, defaults, violations and events as could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each lease of real property to which Purchaser is a party (each, a "Purchaser Existing Real Property Lease") is a valid and binding obligation of each party thereto and is enforceable in accordance with its terms, subject to bankruptcy, II-13 91 insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, (ii) Purchaser is not in violation or breach of, or in default under, any Purchaser Existing Real Property Lease, and, to Purchaser's knowledge, no other party to any Purchaser Existing Real Property Lease is in violation or breach thereof, or in default thereunder, (iii) to Purchaser's knowledge, no event has occurred that, with the passage of time or the giving of notice or both, would permit the unilateral modification, acceleration, or termination of any Purchaser Existing Real Property Lease, and (iv) Purchaser enjoys peaceful and undisturbed possession under each Purchaser Existing Real Property Lease. Section 2.21 Personal Property. (a) The equipment and fixtures used by Purchaser in connection with its businesses are, in the aggregate, in substantially good repair (reasonable wear and tear excepted) and are adequate for the uses to which they are being put. (b) Schedule 2.21(b) sets forth a true and complete list of all of the leases of personal property to which Purchaser is a party which provides for payments in excess of $2,000,000 per year (collectively, the "Purchaser Personal Property Leases"). Purchaser has caused to be delivered or made available to Parent a true and complete copy of each Purchaser Personal Property Lease. (c) Except as set forth in Schedule 2.21(c), and except for failures to be valid, binding or enforceable, defaults, and events which could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, (i) each Purchaser Personal Property Lease is a valid and binding obligation of each party thereto and is enforceable against each such party in accordance with its terms, (ii) there is no default or claim of default under any Purchaser Personal Property Lease, and (iii) no event has occurred that, with the II-14 92 passage of time or the giving of notice or both, would constitute a default by any party to any Purchaser Personal Property Lease, or would permit unilateral modification, acceleration, or termination of Purchaser any Purchaser Personal Property Lease. Section 2.22 Intellectual Property. Schedule 2.22 includes a true, complete and current list of all patents, inventions, know-how that has been acquired for value, trade names, registered and unregistered trademarks, registered and unregistered service marks and registered and unregistered copyrights owned or used by any Purchaser Subsidiary, and all pending applications therefor and all licenses and other agreements relating thereto, other than immaterial items (collectively, the "Purchaser Intellectual Property"). Except as set forth in Schedule 2.22, Purchaser owns the entire right, title and interest in and to the Purchaser Intellectual Property (including, without limitation, the exclusive right to use and license the same) and each item constituting part of the Purchaser Intellectual Property has been duly registered or filed with or issued by the appropriate authorities in the countries indicated in Schedule 2.22 and, to Purchaser's knowledge, such registrations, filings and issuances remain in full force and effect. To Purchaser's knowledge, there are no infringements or misappropriations of any proprietary rights or Purchaser Intellectual Property owned by or licensed by or to Purchaser. The trademarks, service marks and trade names of Purchaser are enforceable by Purchaser and all patents comprising the Purchaser Intellectual Property are valid and enforceable by Purchaser. Except as set forth on Schedule 2.22, no consent of third parties will be required for the use of any Purchaser Intellectual Property as a consequence of the consummation of the transactions contemplated hereby. Except as set forth on Schedule 2.22, (i) no claims are currently being asserted by any Person to the use of any of the Purchaser Intellectual Property or challenging or questioning the validity or effectiveness of any such license or agreement, and the use of the Purchaser Intellectual Property by Purchaser does not infringe on the rights of any Person and no suits or proceedings are pending or threatened against with respect to the foregoing; and II-15 93 (ii) no claims are currently being asserted, and, to Purchaser's knowledge, no conditions exist upon which such claims could be based, that Purchaser is in default or is not in full compliance with all licenses and other agreements under which it is using any item of the Purchaser Intellectual Property. To Purchaser's knowledge there are no infringements of any proprietary rights owned by or licensed by or to Purchaser. The trademarks, service marks and trade names of Purchaser are enforceable by Purchaser and the patents of Purchaser are valid and enforceable by Purchaser. The Purchaser Intellectual Property constitutes all of the intellectual property necessary for the operation of Purchaser's businesses as presently conducted and provides Purchaser with all requisite rights to conduct its businesses as presently conducted. Section 2.23 Employees. (a) Since the Purchaser Balance Sheet Date, there have been no increases in salaries, wages and fringe benefits of the employees of Purchaser (other than increases in the ordinary course of business of Purchaser consistent with past practice), nor do any such employees that are within the scope of applicability of collective bargaining agreements enjoy salary benefits in excess of what is provided under the relevant collective bargaining agreement. (b) Since the Purchaser Balance Sheet Date, there have been no changes in the employment conditions of Purchaser's employees nor have any additional employment relationships commenced or offers of employment been given by Purchaser, except in the ordinary course of business consistent with past practice. (c) Purchaser has neither signed, nor is it liable under any policy of any life or like personal insurances in excess of compulsory insurances, nor do any of the employees of Purchaser enjoy any other benefits in excess of benefits provided by Law, except as stated in Schedule 2.23. (d) With such exceptions as would not reasonably be likely to have a material adverse effect on the ability II-16 94 of Purchaser operating or conducting business in any particular country to operate or conduct such business in such country, Purchaser has paid all labor related charges. (e) To Purchaser's knowledge, there are not pending any strikes, work stoppage or like in Purchaser. (f) To Purchaser's knowledge there are no claims from present or former employees of Purchaser on account for overtime pay, wages, salaries, vacations, discrimination or termination of employment which could reasonably be expected to cause or result in losses, damages, claims or liabilities to or against Purchaser greater than US$5,000,000 in the aggregate. Section 2.24 Litigation and Liabilities. Except as set forth on Schedule 2.24 and except for such matters as could not, in the aggregate, have a Purchaser Material Adverse Effect, hinder or delay the performance by any party of its obligations under this Agreement or hinder or delay the consummation of the transactions contemplated herein, there are no (i) civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the knowledge of Purchaser, threatened against Purchaser or any of its Subsidiaries, or (ii) obligations or liabilities, whether or not accrued, contingent or otherwise, including, without limitation, those relating to matters involving any Environmental Law and occupational safety and health matters. Section 2.25 Employee Benefits. (a) Schedule 2.25 contains a true and accurate summary, for each jurisdiction in which Purchaser conducts business, of the employees covered, amounts payable and material terms of payment under the employment, severance, bonus, incentive, deferred compensation, pension, profit sharing, stock option, stock, stock based, death benefit, health, disability and other employee benefit plans or agreements (the "Purchaser Employee Benefit Plans") maintained or contributed to by Purchaser in such jurisdiction. Purchaser has delivered to Parent true, complete and correct copies of (i) each Purchaser Employee Benefit Plan and (ii) each trust II-17 95 agreement and annuity or other insurance contract relating to any Purchaser Employee Benefit Plan. (b) Purchaser is not in default of any material obligation to be performed under any of the Purchaser Employee Benefit Plans. None of the Purchaser Employee Benefit Plans is subject to the provisions of the United States Employee Retirement Income Security Act of 1974, as amended. Each Purchaser Employee Benefit Plan has been administered in all material respects in accordance with its terms. All the Purchaser Employee Benefit Plans are in compliance in all material respects with the provisions of applicable law. All payments, deductions from wages, reports, returns and similar documents with respect to the Purchaser Employee Benefit Plans required to be filed with or paid to any Governmental Entity or Purchaser Employee Benefit Plan or distributed to any Purchaser Employee Benefit Plan participant have been duly and timely filed, distributed or paid. There is no pending or, to the knowledge of Purchaser, threatened litigation relating to any Purchaser Employee Benefit Plan, other than routine claims for benefits. Each Purchaser Employee Benefit Plan which is a pension plan has sufficient assets to discharge the liabilities for benefits thereunder. (c) Except as set forth on Schedule 2.25(c), the consummation of the transactions contemplated by this Transaction Agreement and the Ancillary Agreements will not (i) entitle any employees of Purchaser to severance pay or (ii) accelerate or provide any other rights or credits under, or increase the amount payable or trigger any other obligation pursuant to, any of the Purchaser Employee Benefit Plans. Section 2.26 Environmental Matters. Except as disclosed in Schedule 2.26 and except for such instances of noncompliance, release, liability, deficiencies in permitting, use, circumstances, conditions, failures to reserve orders, decrees, injunctions, directives and investigations as could not, individually or in the aggregate, have a Purchaser Material Adverse Effect,: (i) Purchaser has complied at all times with all applicable II-18 96 Environmental Laws; (ii) no property owned or operated by Purchaser (including landfills, transfer stations, incinerators, or any storage, processing or recycling facility) has released any Hazardous Substance into the environment; (iii) no property formerly owned or operated by Purchaser has released any Hazardous Substance into the environment during such period of ownership or operation; (iv) Purchaser is not subject to any liability for any Hazardous Substance disposal or contamination on any owned or third party property; (v) Purchaser possesses all permits, authorizations, licenses and approvals necessary to the current conduct of its operations and businesses and is not aware of any circumstances that would interfere with any future permit renewal, issuance or modification required for any planned future operations or facility expansions; (vi) Purchaser is not subject to any order, decree, injunction, directive or investigation by any Governmental Entity or to any indemnity, agreement or other obligation to any third party relating to liability under any Environmental Law; (vii) none of the properties of Purchaser have been used for the handling or disposal of any Hazardous Substances other than for the handling and disposal of uncontaminated household waste and similar materials having the same regulatory classification in compliance with all Environmental Laws; (vii) there are no other circumstances or conditions involving Purchaser that could be expected to result in any claims, liabilities, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (x) Purchaser has established appropriate reserves and posted all required financial assurances required under any Environmental Law to address all facility closure and post- closure obligations arising under any Environmental Law. Except with respect to conditions which could not, individually or in the aggregate, have a Purchaser Material Adverse Effect, (vi) Purchaser has not received any notice, demand, letter, claim or request for information indicating that it may be in violation of or subject to liability under any Environmental Law; and (ii) Purchaser has delivered to Parent copies of all environmental reports, studies, assessments, sampling data and other environmental II-19 97 information in its possession relating to Purchaser or any of its current or former properties or operations. Section 2.27 Landfills. Schedule 2.27 lists each landfill owned or operated by Purchaser and accurately describes each such landfill by its city or county and state or province of location, total area (in square meters), permitted area (in square meters), estimated remaining permitted capacity in cubic meters, estimated or mandated closure date, and estimated closure, post-closure and reclamation liability at its projected or mandated closure date (computed at the closure date with and without discount to present value) and any other recorded or unrecorded accruals, contingent or otherwise, or reserves related to landfill liabilities of any type. Section 2.28 Taxes. Except as disclosed in Schedule 2.28: (i) Purchaser timely filed all Tax Returns that are required to be filed with respect to Purchaser or any of its income, properties or operations; (ii) such Tax Returns are true, complete and accurate in all material respects; (iii) all Taxes due or shown as due on the returns described in clause (i) with respect to Purchaser (without regard to whether such Taxes have been assessed and without regard to whether the liability for such Taxes is disputed) have been timely paid or have been provided for in a reserve which is adequate for the payment of such Taxes and is identified in Schedule 2.28; (iv) Purchaser has maintained adequate provisions on their books for all Taxes that have accrued but are not yet due; (v) no adjustments or deficiencies relating to the Tax Returns referred to in clause (i) or any Taxes attributable to Purchaser has been assessed, proposed or asserted; (vi) there are no pending or (to the knowledge of Purchaser) threatened actions or proceedings for the assessment or collection of Taxes against Purchaser; (vii) there are no outstanding waivers or agreements extending or tolling the applicable statute of limitations for any period with respect to any Taxes of Purchaser; (viii) no audit or examination with respect to Purchaser is presently pending or (to the knowledge of Purchaser) threatened; (ix) no material claim has ever been made by an authority in a jurisdiction where Purchaser does II-20 98 not file Tax Returns that it is or may be subject to Taxes by that jurisdiction; (x) there are no liens on any of the assets of Purchaser that arose in connection with any failure (or alleged failure) to pay any Taxes; (xi) Purchaser is not a party to any allocation or sharing agreement or intercompany account system (whether written or unwritten) in respect of Taxes.* Section 2.29 Brokers and Finders. Neither Purchaser nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated in the Transaction Agreement, except that Purchaser has employed J.P. Morgan & Co. Incorporated as its financial advisors, the arrangements with which have been disclosed in writing to Parent prior to the date hereof. Section 2.30 Aggregation. The imperfections, defects, orders, actions, defaults, liabilities, inaccuracies and other items omitted from disclosure in connection with the representations and warranties made in Sections 2.1 through 2.29 on grounds of immateriality or failure to have a Purchaser Material Adverse Effect do not and could not, taken as a whole, cause or result in losses, damages, claims or liabilities greater than US$15,000,000. - -------- * Other representations to be provided by non-U.S. tax counsel relevant to jurisdictions where companies or their assets are located. II-21 99 ANNEX III Conditions to Obligations of Each Party The obligations of the parties to consummate the transactions contemplated by the Transaction Agreement will be subject to the satisfaction or waiver of the following conditions: (a) No court of competent jurisdiction shall have issued or entered any order which is then in effect and has the effect of making any of the transactions contemplated by the Transaction Agreement illegal or otherwise prohibiting their consummation. (b) Any waiting period (and any extension thereof) applicable to the consummation of the transactions contemplated hereby under any competition, merger control or similar Law, including Council Regulation (EEC) No. 4064/89 and [List non-European antitrust and regulatory filings], shall have expired or been terminated. III-1 100 ANNEX IV Conditions to the Obligations of Purchaser The obligation of Purchaser to consummate the transactions contemplated by the Transaction Agreement will be subject to the satisfaction or waiver of the following additional conditions: (a) Each of the representations and warranties of Parent and International contained in the Transaction Agreement shall be true and correct in all material respects as of the Measuring Date and the Closing as though made on and as of each such date, except that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date, and Purchaser shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of Parent to such effect. (b) Parent shall have performed or complied in all material respects with all agreements and covenants required by the Transaction Agreement to be performed or complied with by it on or prior to the Measuring Date and the Closing, as the case may be, and Purchaser shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of Parent to such effect. (c) Parent shall have furnished to Purchaser evidence reasonably satisfactory to it that the aggregate consolidated indebtedness of the International Subsidiaries as of the Closing does not exceed $215.5 million. (d) Parent and the Parent Subsidiaries shall have obtained the Parent Closing Consents. (e) Parent shall have executed and delivered the Shareholders Agreement. (f) Parent shall have executed and delivered the Technical Cooperation Agreement. IV-1 101 ANNEX V Conditions to the Obligations of Parent The obligation of Parent to consummate the transactions contemplated by the Transaction Agreement will be subject to the satisfaction or waiver of the following additional conditions: (a) Each of the representations and warranties of Purchaser contained in the Transaction Agreement shall be true and correct in all material respects as of the Measuring Date and the Closing, as though made on and as of each such date, except that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date, and Parent shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of Purchaser to such effect. (b) Purchaser shall have performed or complied in all material respects will all agreements and covenants required by the Transaction Agreement to be performed or complied with by it on or prior to the Measuring Date and the Closing, as the case may be, and Parent shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of Purchaser to such effect. (c) Purchaser shall have obtained the Purchaser Closing Consents. (d) Purchaser shall have executed and delivered the Shareholders Agreement. (e) Purchaser shall have executed and delivered the Technical Cooperation Agreement. V-1 102 ANNEX VI Survival and Indemnification Section 6.1 Survival. The representations of the parties shall survive the Closing until the publication of audited financial statements of Purchaser for the year ended December 31, 1999 (which is expected to be approximately March 31, 2000), except that the representations as to Corporate Organization and Qualification, Authorized Capital, Ownership and Title, No Dilution and Corporate Authority shall survive in perpetuity, the representations as to Environmental Matters shall survive until the fifth anniversary of the Closing and the representations as to Taxes and Employee Benefits shall survive until the expiration of all relevant statutes of limitations. Section 6.2 Indemnification. (a) Parent and International shall jointly and severally indemnify Purchaser against any direct losses, costs, expenses and damages of any kind or nature whatsoever (each, a "Loss") arising in connection with: (i) any breach of any representation, as qualified by schedules delivered in accordance with Section 3(a), made by Parent or International in the Transaction Agreement or any other certificate or document delivered pursuant to such Agreement, (ii) any breach or violation of, or failure to perform fully, any covenant, agreement, undertaking or obligation of Parent or International set forth in the Transaction Agreement, or (iii) any Taxes for which Parent and International are liable, in accordance with Section 4(a), pursuant to the Transaction Agreement. Parent and International shall not be liable for damages arising in connection with its indemnification obligations until the amount of damages incurred exceeds $15,000,000 in the aggregate. In such event, Parent and International shall be liable for all such damages including the first $15,000,000. (b) Purchaser shall indemnify Parent and International against all Losses arising in connection with: (i) any breach of any representation (as qualified by schedules delivered in accordance with Section 3(a), made by VI-1 103 Purchaser in the Transaction Agreement or any other certificate or document delivered pursuant to such Agreement) in respect of matters that were not publicly disclosed prior to the twentieth day prior to the Measuring Date, (ii) any breach or violation of, or failure to perform fully, any covenant, agreement, undertaking or obligation of Purchaser set forth in the Transaction Agreement, or (iii) any Taxes for which Purchaser is liable, in accordance with Section 4(b), pursuant to the Transaction Agreement. Purchaser shall not be liable for damages arising in connection with its indemnification obligations until the amount of damages (calculated as set forth below) incurred exceeds $15,000,000 in the aggregate. In such event, Purchaser shall be liable for all such damages including the first $15,000,000. For purposes of calculating damages to Parent and International in connection with any indemnity or claim, damages to Parent or International, as the case may be, shall be calculated as the damages to Purchaser in respect of such item multiplied by the fraction the numerator of which is the aggregate number of Consideration Shares issued to Parent and its Subsidiaries at Closing and the denominator of which is the number of Purchaser Shares outstanding at Closing (including the issuance of the Consideration Shares) (the "Parent Percentage Ownership"), such amount to be increased by an amount equal to such amount multiplied by the Parent Percentage Ownership. For purposes of calculating damages to Purchaser relating to an International Subsidiary which is less than 100% owned, directly or indirectly, by Parent, Purchaser may make a claim for indemnification for such Loss, subject to the provisions of this Section 6, only up to a percentage of such Loss equal to the percentage ownership of such International Subsidiary held, directly or indirectly, by Parent on the Closing. Section 6.3 Calculation of Loss. (a) In calculating the amount of a Loss, there shall be deducted: (i) an amount equal to any tax benefit (including the creation or increase of a tax loss carried forward) actually realized as a result of such Loss by any of the International Subsidiaries (if the claim is made by VI-2 104 the Purchaser) or by the Purchaser or any of its Affiliates (including, with respect to any tax benefit realized after the Closing with respect to a period prior to the Closing and not reflected on the closing balance sheet prepared in connection with the post-closing adjustment referred to in Section 2(b) of the Agreement, the International Subsidiaries) (if the claim is made by Parent or International); (ii) the amount of any specifically identified reserve or provision included in the International Financial Statements (if the claim is made by the Purchaser) or the Purchaser Financial Statements (if the claim is made by International and/or Parent), with respect to the facts or circumstances giving rise to such Loss; (iii) the amount of (i) proceeds actually received under any indemnification arrangement or any policy of insurance, paid to any International Subsidiary (if the claim is made by the Purchaser) or to the Purchaser or its Affiliates (if the claim is made by International and/or Parent), with respect to such Loss, minus (ii) the costs of collection of such proceeds and the insurance premiums paid with respect to any such policy for the period covering such Loss. (b) In the event that the amount of any deduction which shall be applied pursuant to this Section 6.3 is determined after payment by a party under this Agreement of the amount otherwise required pursuant to this Section 6, the indemnified party shall repay the paying party promptly after such determination any amount that the paying party would not have had to pay pursuant to this Section 6 had such determination been made at or prior to the time of such payment. Section 6.4 No party shall be entitled to make a claim for indemnification for Losses against the other in respect of any tax audit or claim which merely modifies the tax period during which a deductible charge or amortization may be taken or in respect of any VAT assessment (except if such VAT is not recoverable), except for any interest or penalties resulting therefrom. VI-3 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, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Earnings Available for Fixed Charges: Income (loss) before extraordinary items and minority interest $ 297,085 $ (77,482) $ 414,646 $ 299,474 $ 197,461 Income taxes 198,057 105,188 276,430 199,649 129,726 --------- --------- --------- --------- --------- Income before income taxes, extraordinary items and minority interest 495,142 27,706 691,076 499,123 327,187 Consolidated interest expense 165,225 179,299 159,529 93,159 70,894 Interest expense related to proportionate share of 50% owned affiliates 33,215 22,613 19,722 22,689 25,354 Portion of rents representing the interest factor 35,741 35,045 31,842 20,868 18,721 Less-Equity in earnings of affiliates less than 50% owned 3,210 3,238 1,643 4,698 -- --------- --------- --------- --------- --------- Total $ 726,113 $ 261,425 $ 900,526 $ 631,141 $ 442,156 ========= ========= ========= ========= ========= Fixed Charges: Consolidated interest expense and interest costs capitalized $ 174,939 $ 195,605 $ 170,958 $ 104,759 $ 89,563 Interest expense and interest costs capitalized related to proportionate share of 50% owned affiliates 33,215 24,408 20,351 22,974 25,484 Portion of rents representing the interest factor 35,741 35,045 31,842 20,868 18,721 --------- --------- --------- --------- --------- Total $ 243,895 $ 255,058 $ 223,151 $ 148,601 $ 133,768 ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges 2.98(1) 1.02(2) 4.04 4.25 3.31(3) ========= ========= ========= ========= =========
(1) Excluding the effects of the fiscal 1997 special charges of $81.9 million, the ratio of earnings to fixed charges for fiscal 1997 is 3.31. (2) 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. (3) 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 PAGE 8 FOR EXPLANATION OF PARENT AND SUBSIDIARY RELATIONSHIPS NORTH AMERICAN SUBSIDIARIES Attwoods of North America, Inc. Delaware BFI de Mexico, S.A. deC.V. Mexico BFI Energy Systems of Albany, Inc. Delaware BFI Energy Systems of Delaware County, 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 SEMASS, Inc. Delaware BFI Energy Systems of Southeastern Connecticut, Inc. Delaware BFI Medical Waste Systems of Washington, Inc. Delaware BFI of Metro New York, Inc. Delaware BFI of Ponce, Inc. Puerto Rico BFI Organics, Inc. Delaware Pioneer Southern, Inc. Delaware BFI Ref-Fuel, Inc. Delaware 1 BFI Services Group, Inc. California BFI Trans River (GP), Inc. Delaware BFI Trans River (LP), Inc. Delaware BFI Waste Systems of North America, Inc. Delaware Browning-Ferris Gas Services, Inc. Delaware 1 Browning-Ferris, Inc. Maryland TRC, Inc. Pennsylvania 1 Browning-Ferris Industries Chemical Services, Inc. Nevada Browning-Ferris Industries, Inc. Massachusetts Browning-Ferris Industries Ltd. Ontario 389343 Alberta Ltd. Alberta 2 Eldridge Finance Company Republic of Ireland Contenants - Rebut Cadi Ltee Quebec Usine de Triage Lachenaie Inc. Quebec BFI Energy Inc. Quebec 1 Environmental Waste Systems, Inc. Ontario 10133 Newfoundland Limited Newfoundland Browning-Ferris Industries of California, Inc. California Keller Canyon Landfill Company California Pleasant Hill Bayshore Disposal, Inc. California Browning-Ferris Industries of Connecticut, Inc. Delaware Browning-Ferris Industries of Florida, Inc. Delaware Browning-Ferris Industries of Hawaii, Inc. Delaware Honolulu Environmental Transfer, Inc. Hawaii
2 Browning-Ferris Industries of Illinois, Inc. Delaware Browning-Ferris Industries of New Jersey, Inc. New Jersey BFI Transfer Systems of New Jersey, Inc. New Jersey BFI Waste Systems of New Jersey, Inc. New Jersey Browning-Ferris Industries of New York, Inc. New York Browning-Ferris Industries of Ohio, Inc. Delaware 3 Warner Hill Development Company Ohio Browning-Ferris Industries of Pennsylvania, Inc. Delaware Imperial Landfill Company, Inc. Pennsylvania New Morgan Landfill Company, Inc. Pennsylvania Browning-Ferris Industries of Puerto Rico, Inc. Puerto Rico Browning-Ferris Industries of Tennessee, Inc. Tennessee Jefferson Pike Landfill, Inc. Delaware T.R.A.S.H., Inc. Tennessee Browning-Ferris Services, Inc. Delaware BFI Equipment Leasing I, Inc. Delaware Browning-Ferris Financial Services, Inc. Delaware CECOS International, Inc. New York 4 Eastern Disposal, Inc. Quebec Environmental Development Corp. Puerto Rico Global Indemnity Assurance Company Vermont International Disposal Corp. of California California Newco Waste Systems of New Jersey, Inc. New Jersey Risk Services, Inc. Delaware West Roxbury Crushed Stone Co. Massachusetts Woodlake Sanitary Service, Inc. Minnesota 5 VHG, Inc. Minnesota
-2- 3 INTERNATIONAL 6 Al-Mulla Environmental Systems, W.L.L. Kuwait BFI International Finance B.V. The Netherlands BFI International, Inc. Delaware Browning-Ferris Industries Europe, Inc. Delaware Browning-Ferris Industries Holding B.V. The Netherlands 7 BFI Iberica S.A. Spain Ingenieria Ambiental Alcarrena, S.A. Spain 8 Ingenieria Ambiental Granadina, S.A. Spain Ingenieria Ambiental Completa Spain Transric S.A. U.T.E. Alcobendas Spain 9 Castellana De Servicios, SA Y Transric S.A. U.T.E. Spain Ingenieria Ambiental Andaluza, S.A. Spain 10 Ingenieria Ambiental Antequerana, S.A. Spain Ingenieria Ambiental Catalana, S.A. Spain Gestion Y Tratamiento De Residuos, S.A. Spain BFI Finland Oy AB Finland Somero-BFI OY Finland Fritz Erismann AG Switzerland A. De Jong Gorcum Milieutelhniek B.V. The Netherlands Omega Randstad Holding B.V. The Netherlands Omega Randstad B.V. The Netherlands Mavebe Maatschapplj tot Verhur Van Bedrijfsen B.V. The Netherlands J. De Bruyn Onroerend Goeb B.V. The Netherlands Recycling Bedrijf Randstad B.V. The Netherlands Jansen Industriele Reinging En Afvalverwerking B.V. The Netherlands Maatman Afvalverwerking B.V. The Netherlands De Wit Milieu B.V. The Netherlands BFI Vastgoed B.V. The Netherlands Transportedrijf J. Van Tongeren B.V. The Netherlands BFI Bijzondere Afvalstoffen B.V. The Netherlands Van Rijswijk Containers B.V. The Netherlands Heerbaart Recycling B.V. The Netherlands IBA Recycling B.V. The Netherlands Heerbaart Reinigings-Bedrijven B.V. The Netherlands Reinmat B.V. The Netherlands Spitman Milieu B.V. The Netherlands IBA Milieu B.V. The Netherlands Niemendal Transport B.V. The Netherlands Oost-Nederlandse Reinigingsdienst B.V. The Netherlands Oost-Nederlandse Container Dienst B.V. The Netherlands B.V. Handelsmaatschappij R.V.R. The Netherlands West Holland Recycling B.V. The Netherlands 18 Alphen Recycling V.B. The Netherlands Lekkerkerk-Rehorst Vastgoed Combinatie B.V. The Netherlands Wijtrans Milieu B.V. The Netherlands
-3- 4 Spitman Industrele Services B.V. The Netherlands Kroon Bemeer Urmond B.V. The Netherlands Kroon Milieu Technick B.V. The Netherlands Groenheilde Reinging B.V. The Netherlands Maatman Elbergen B.V. The Netherlands Maatman Roolreiniging B.V. The Netherlands Jaap Van Vliet B.V. The Netherlands Koks Nilo Milieu B.V. The Netherlands Koks' Containerservice B.V. The Netherlands Zwart Vastgoed B.V. The Netherlands Koks/Nilo Recycling B.V. The Netherlands Wyjrans Recycling B.V. The Netherlands Recycling Maatschappij "Houtsnip" B.V. The Netherlands Recycling Amsterdam Vastgoed B.V. The Netherlands Contraned Milieu B.V. The Netherlands A.C.D. Milieu B.V. The Netherlands Browning-Ferris Industries Europa B.V. The Netherlands Jan Oldenburger B.V. The Netherlands Jan Oldenburger Beheer B.V. The Netherlands Jan Oldenburger Holding B.V. The Netherlands Jan Oldenburger Reinging B.V. The Netherlands Jan Oldenburger Container Service B.V. The Netherlands Nova Recycling B.V. The Netherlands BFI Jzondere Afval Stoffen Noord B.V. The Netherlands Riooltechnieken Nederland B.V. The Netherlands Eemsmond Handel En Transport B.V. The Netherlands Boekhorst Containers B.V. The Netherlands 19 Afvalstoffen Verw. Zeeland B.V. The Netherlands 20 Houtverwerding Limburg B.V. The Netherlands 21 Acts B.V. The Netherlands Verkerk Alphen A/D Rijn B.V. The Netherlands Verkerk Recycling B.V. The Netherlands Alphen Recycling B.V. The Netherlands Geisler Container B.V. The Netherlands Geisler Ligistiek B.V. The Netherlands Container Limburg B.V. The Netherlands Afval Recycling Midden Limburg B.V. The Netherlands Geisler Grondverzetbedrijf B.V. The Netherlands Transclean B.V. The Netherlands Kole Milieu B.V. The Netherlands Rademaker Milieu B.V. The Netherlands J. Poldervaart B.V. The Netherlands G. Poldervaart B.V. The Netherlands 22 Poldervaart Afvalverwerking B.V. The Netherlands Meisner Holding B.V. The Netherlands Meisner (Stortplaats Noord Drenthe) B.V. The Netherlands G.J. Eiland Beheer B.V. The Netherlands G.J. Eiland Containerdienst B.V. The Netherlands West Holland Milieu B.V. The Netherlands
-4- 5 Recycling Dordrecht B.V. The Netherlands Maatman Mileiu B.V. The Netherlands Maatman Reiniging B.V. The Netherlands R.J. Maatman Beher B.V. The Netherlands Maatman Containers B.V. The Netherlands Container Transport Maas and Waal B.V. The Netherlands Maas en Waal Pensioen B.V. The Netherlands BFI Acquisitions Ltd. United Kingdom Attwoods Ltd. United Kingdom Attwoods American Holdings Ltd. United Kingdom Attwoods Holdings Ltd. United Kingdom Ebenezer Mears Plant Hire Ltd. United Kingdom Ebenezer Mears Sand Producers Ltd. United Kingdom Attwoods Overseas Leasing Ltd. United Kingdom Attwoods Technologies Ltd. United Kingdom Attwoods Israeli Investments Ltd. United Kingdom Attwoods Israeli Ltd. United Kingdom 14 Green Land Ltd. United Kingdom Attwoods B.V. The Netherlands Attwoods Holdings GmbH Germany Attwoods & Dixi Entsorgungs GmbH Germany Omega Holding GmbH Germany ADCO Attwoods and Dixi Umweltschurtz GmbH Germany DPT Transport GmbH Germany ADCO Schleizer Umweltdienste GmbH Germany Schader Entsorgungs GmbH Germany Catina-Lecker Essen und Trinken GmbH Germany Olymp GmbH Transportable Sanitaersysteme Germany ADCO Mobil Raun GmbH Germany Old Original Bakewell Pudding Shop (U.K.) United Kingdom 15 A & J Bull (Holdings) Ltd. (U.K.) United Kingdom Vesta Investments Ltd. United Kingdom Attwoods Finance N.V. Netherlands Antilles Taskmasters Holdings Ltd. United Kingdom Chiefsum Ltd. United Kingdom Taskmasters Cleansing Services Ltd. United Kingdom Pritchard Industrial Services Ltd. United Kingdom BFI Ltd. United Kingdom 16 Wareham Ball Clay Co. Ltd. United Kingdom Community Recycling Ltd. United Kingdom 14 Green Land Reclamation Ltd. United Kingdom 14 Cranford Realty Ltd. United Kingdom 17 Drinkwater Sabey CWD Ltd. United Kingdom F. Avann Ltd. United Kingdom Drinkwater Sabey Ltd. United Kingdom 16 Sands and Gravels (Standlake) Ltd. United Kingdom Ebenezer Mears and Son, Ltd. United Kingdom Dorset Waste Management Ltd. United Kingdom Billetvale Ltd. United Kingdom
-5- 6 Surrey Operational Services Ltd. United Kingdom E. F. Phillips Ltd. United Kingdom Holmspring Ltd. United Kingdom Maybank Enterprises Holdings Ltd. United Kingdom Drinkwater and Murray Ltd. United Kingdom Openpitch Ltd. United Kingdom W.W. Drinkwater Ltd. United Kingdom Drinkwater Sabey (Tilmanstone) Ltd. United Kingdom W. Tinsley and Son Ltd. United Kingdom Maybank Enterprises Ltd. United Kingdom Dixi Sanitation Services (U.K.) Ltd. United Kingdom Attwoods (Jersey) Holdings Ltd. United Kingdom Browning-Ferris Industries (UK) Ltd. United Kingdom BFI Wastecare Limited United Kingdom BFI Carnforth, Limited United Kingdom BFI Coventry Limited United Kingdom Browning-Ferris Environmental Services Ltd. United Kingdom BFI Packington Limited United Kingdom Jackson Brickworks (Warwickshire) United Kingdom Browning-Ferris Services (U.K.) Ltd. United Kingdom Browning-Ferris Industries (Deutschland) GmbH Germany Browning-Ferris Industries (Belgium) S.A. Belgium Browning-Ferris Industries Reinigungstechnik GmbH Germany Browning-Ferris Industries Argentina, Inc. Argentina BFI Argentina S.A. Argentina 14 Soluciones Quimicas Argentina Browning-Ferris Industries (Australia) Pty. Ltd. Australia Browning-Ferris Industries (Cranbourne) Pty. Ltd. Australia Browning-Ferris Industries (N.S.W.) Pty. Ltd. Australia Environmental Consultants (Asia Pacific) Pty. Ltd. Australia Browning-Ferris Industries (Victoria) Pty. Ltd. Australia Builders Bins Pty. Ltd. Australia Browning-Ferris Industries (S.A.) Pty. Ltd. Australia Browning-Ferris Industries (ACT) Pty. Ltd. Australia Browning-Ferris Industries (W.A.) Pty. Ltd. Australia Browning-Ferris Industries (Superannuation) Pty. Ltd. Australia BFI (Central Coast) Pty. Ltd. Australia Jennings Liquid Waste Pty. Ltd. Australia Jennings Environmental Services Australia Browning-Ferris Industries Asia Pacific, Inc. Delaware 14 Swire BFI Waste Services, Ltd. Hong Kong Waylung Waste Collection Ltd. Hong Kong Midland Waste International, Ltd. Hong Kong Island East Transfer Station Hong Kong 11 Companhia de Sistemas de Residuos, Ltd. Hong Kong BF Landfill Services Taiwan Taiwan Waste Care, Ltd. New Zealand Hopper Services New Zealand General Rubbish-Wellington New Zealand
-6- 7 J.R. McKeen Contractors, Ltd. New Zealand Budget Bins, Ltd. New Zealand Winz Bins, Ltd. New Zealand Regular Rubbish Removal Ltd. New Zealand Waste Care Medisafe Ltd. New Zealand 23 BFI Waste Care Ltd. New Zealand Jumbo Bins, Ltd. New Zealand 24 Browning-Ferris Industries (N.Z.) Ltd. New Zealand 24 Waste Disposal Services Ltd. New Zealand 24 Allens United Septic Tank Cleaning Services (Whangerei) Ltd. New Zealand 24 Besco Bins Ltd. New Zealand 24 Allens Septic Tank Cleaning Services (Manawatu) Ltd. New Zealand Browning-Ferris Industries de Mexico, S.A. de C.V. Mexico BFI de EcoMex, S.A. de C.V. Mexico BFI International de Vallarta, S.A. de C.V. Mexico BFI de Vallarta Services, S.A. de C.V. Mexico BFI Atlantic, Inc. Delaware 12 BFI Atlantic GmbH Germany 13 Otto Entsorgungsdienstleistungen GmbH Germany Browning-Ferris Industries Taiwan, Inc. Taiwan
-7- 8 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 Dormant company - no operations 2 99% owned by Browning-Ferris Industries Ltd. and 1% owned by BFI Acquisitions, Ltd. 3 66-2/3% owned 4 50% owned by Browning-Ferris Industries Ltd. and 50% owned by Browning-Ferris Industries, Inc. (Delaware) 5 50% owned by Woodlake Sanitary Service, Inc. 6 49% owned 7 Browning-Ferris Industries, Inc. 33.83% Browning-Ferris Industries, B.V. 54.46% Carlos Benjumea Morenes 6.07% LuTranex, S.A. 3.46% Luis Basteiro .60% Jose Miguel Garrigues Walker 0.68% L.M. van Staalduinen 0.45% Dichonia Holding, B.V. 0.45% 8 90% owned by Browning-Ferris Industries Iberica S.A. 10% owned by Granada Municipality 9 50% owned by Ingenieria Ambiental Completa 50% owned by Castellana de Servicios, S.A. 10 80% owned by Ingenieria Ambiental Andaluza, S.A. 20% owned by Antequera Municipality 11 80% owned by Swire BFI Waste Services Limited 20% owned by Noriente-Gestao de Participacoes Limited 12 40% owned by BFI International, Inc. 40% owned by BFI Atlantic, Inc. 20% owned by Browning-Ferris Industries Ltd. 13 (Subsidiaries of this Company are not listed herein) 50% owned by BFI Atlantic GmbH 50% owned by Otto Holding International BV 14 50% owned 15 49% owned 16 60% owned 17 80% owned 18 25% owned 19 35% owned 20 40% owned 21 10% owned 22 50% owned by J. Poldervaart B.V. 50% owned by G. Poldervaart B.V. 23 1% owned by Waste Care Medisafe Ltd. 99% owned by Waste Care, Ltd. 24 1% owned by Jumbo Bins, Ltd. 99% owned by Waste Care, Ltd. -8- 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, 1997, included in this Form 10-K, into the Browning-Ferris Industries, Inc. previously filed Form S-8 Registration Statement File Nos. 33-38117, 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, 1997 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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA) 1,000 12-MOS SEP-30-1997 SEP-30-1997 82,557 0 930,601 (38,376) 40,414 1,244,663 6,079,351 (2,512,196) 6,678,292 1,434,524 1,675,162 0 0 35,572 2,625,191 6,678,292 0 5,782,972 0 4,289,614 864,005 30,116 158,083 495,142 198,057 283,695 0 18,481 0 265,214 1.30 1.30
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