-----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, Ftu880jMpV/+RqGL5j1kpLLchwtct/Tp6j7jCqYq9cn0VQT28Rm8sz0Hz8KWBPQF 5POchQucPwcT/kgtDnAyxA== 0000950131-96-001320.txt : 19960401 0000950131-96-001320.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950131-96-001320 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHEELABRATOR TECHNOLOGIES INC /DE/ CENTRAL INDEX KEY: 0000790159 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 222678047 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10296 FILM NUMBER: 96540949 BUSINESS ADDRESS: STREET 1: 3003 BUTTERFIELD ROAD CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 6039293000 MAIL ADDRESS: STREET 1: 3003 BUTTERFIELD ROAD CITY: OAK BROOK STATE: IL ZIP: 60521 FORMER COMPANY: FORMER CONFORMED NAME: WHEELABRATOR GROUP INC DATE OF NAME CHANGE: 19890904 FORMER COMPANY: FORMER CONFORMED NAME: HENLEY GROUP INC DATE OF NAME CHANGE: 19890118 10-K 1 FORM 10-K ================================================================================ 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 DECEMBER 31, 1995 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: 0-14246 WHEELABRATOR TECHNOLOGIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2678047 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) LIBERTY LANE HAMPTON, NEW HAMPSHIRE 03842 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 603/929-3000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $0.01 par value New York Stock Exchange 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 AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY $1,199,657,285 AT FEBRUARY 1, 1996 (BASED ON THE CLOSING SALE PRICE ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON JANUARY 31, 1996, AS REPORTED BY THE WALL STREET JOURNAL (MIDWEST EDITION)). AT MARCH 1, 1996, THE REGISTRANT HAD ISSUED AND OUTSTANDING AN AGGREGATE OF 178,892,208 SHARES OF ITS COMMON STOCK. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1995 ARE INCORPORATED BY REFERENCE INTO PARTS I, II AND IV. PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 1, 1996 ARE INCORPORATED BY REFERENCE INTO PART III. ================================================================================ PART I ITEM 1 -- BUSINESS GENERAL Wheelabrator Technologies Inc. provides a wide array of environmental products and services that are primarily utilized in meeting the needs of municipalities and industry for clean energy and clean water. The Company's clean energy group is a leading developer of facilities and systems for, and provider of services to, the trash-to-energy, energy and independent power markets. Through this group, the Company develops, arranges financing for, operates and owns facilities that dispose of trash and other waste materials in an environmentally acceptable manner by recycling them into electrical or steam energy. Also within this group are business units which design, fabricate and install technologically-advanced air pollution control systems and equipment. The Company's clean water group is principally involved in the design, manufacture, operation and ownership of facilities and systems used to purify water, to treat municipal and industrial wastewater, to treat and manage biosolids resulting from the treatment of wastewater by converting them into useful fertilizers, and to recycle organic wastes into compost material useable for horticultural and agricultural purposes. The clean water group also designs and manufactures various products used in water and wastewater treatment facilities and industrial processes, precision profile wire screens for use in groundwater wells and other industrial and municipal applications, and certain other industrial equipment. The Company's predecessor companies and subsidiaries have been active in project development for approximately 20 years, and in related activities since the turn of the century. A description of projects in operation which are owned, leased or operated under long-term operating agreements by the Company's subsidiaries or affiliates is contained in Item 2 -- Properties. In addition to the projects described in Item 2, the Company has domestic and international projects in various stages of development that, in most cases, are subject to contingencies, many of which are beyond the Company's control. Such contingencies include, without limitation, obtaining required permits or approvals, obtaining equity and/or debt financing and consummating required project agreements. The Company (then known as The Henley Group, Inc.) was incorporated in Delaware in December 1985. The name of the Company was changed in December 1988 to The Wheelabrator Group Inc. and again in August 1989 to Wheelabrator Technologies Inc. Unless the context indicates to the contrary, as used in this report, the term "Company" refers to Wheelabrator Technologies Inc. and its subsidiaries. Unless otherwise indicated, all statistical and financial information under Item 1 and Item 2 of this report is given as of December 31, 1995. Approximately 58% of the Company's common stock, par value $0.01 per share (the "Common Stock"), outstanding as of March 1, 1996 was owned by WMX Technologies, Inc. ("WMX") or its affiliates. SERVICES AND PRODUCTS During 1995, the Company began managing its operations in the two principal industry segments described below. For information relating to revenues, operating profit and identifiable assets attributable to 1 the Company's industry segments, see Note 10 to the Company's Consolidated Financial Statements filed as an exhibit to this report and incorporated herein by reference. Clean Energy ENERGY PROJECTS. The Company, through Wheelabrator Environmental Systems Inc. and its subsidiaries, is a leading developer, operator and owner of trash- to-energy and independent power facilities in the United States. These facilities, either owned or operated, give the Company approximately 850 megawatts of electric generating capacity. The Company's trash-to-energy projects utilize proven boiler and grate technology capable of processing up to 2,250 tons of trash per day per facility. The heat from this combustion process is converted into high-pressure steam, which typically is used to generate electricity for sale to public utility companies under long-term contracts. The Company's trash-to-energy development activities have historically involved a number of contractual arrangements with a variety of private and public entities, including municipalities (which supply trash for combustion), utilities or other power users (which purchase the energy produced by the facility), lenders, public debtholders, joint venture partners and equity investors (which provide financing for the project) and the contractors or subcontractors responsible for building the facility. In addition, the Company's activities have often included identifying and acquiring sites for the facility and for the disposal of residual ash produced by the facility and obtaining necessary permits and licenses from local, state and federal regulatory authorities. The Company also develops, operates and, in some cases, owns independent power projects, which either cogenerate electricity and thermal energy or generate electricity alone for sale to utilities. Cogeneration is a technology which allows the consecutive use of two or more useful forms of energy from a single primary fuel source, thus providing a more efficient use of a fuel's total energy content. These power systems use waste wood, waste tires, waste coal or natural gas as fuel, and employ state-of-the-art technology, such as fluidized-bed combustion, to ensure the efficient burning of fuel with reduced emission levels. During 1995, the Company entered into a joint venture for the purpose of developing small cogeneration projects for district heating applications in Liaoning Province in The People's Republic of China. AIR QUALITY. The Company's subsidiaries design, fabricate and install advanced air pollution control and measurement systems and equipment. The Company offers electrostatic precipitators, flue-gas desulfurization systems (scrubbers), fabric-filter systems (baghouses) and nitrogen oxide ("NOx") control systems, which remove pollutants from the emissions of the Company's trash-to-energy facilities as well as power plants and other industrial facilities. The Company also designs, constructs and maintains tall concrete chimneys and storage silos. The Company's expertise in air pollution control technologies and chimney design and construction are used in the design and construction of the Company's trash-to-energy and biosolids pelletizer facilities, which the Company believes strengthens its competitive position. The Company offers both custom and pre-engineered systems for emissions control. The custom engineering division licenses a patented process for the removal of hydrogen sulfide from gaseous and liquid streams. The process controls hazardous gases and sulfur dioxide emissions, thereby reducing acid rain and odor problems. The Company also provides a full range of technologies and services for destroying or recycling volatile organic compounds ("VOCs") from air and liquid sources and NOx from air sources. Both VOCs and NOx are detrimental to air quality and the environment generally. The Company's VOC and NOx control systems are utilized by customers in a variety of industries, including oil refineries, chemical plants and automobile production facilities. Complementing the emission control divisions is a measurement division which 2 designs and installs continuous emissions monitoring systems ("CEMs") for the utility, trash-to-energy, industrial furnace and petrochemical industries, all of which are affected by regulations requiring the continuous monitoring of stack emissions. Clean Water Through Wheelabrator Water Technologies Inc. and its subsidiaries, the Company develops, operates and owns projects that purify water, treat water and wastewater, compost organic wastes and treat and manage biosolids. The Company also provides products and systems used to treat drinking water as well as industrial and municipal process and wastewater. WATER AND WASTEWATER TREATMENT SERVICES. The Company is a leading provider of a broad range of water and wastewater treatment services to municipalities and industry throughout the United States, Canada and Mexico. The Company provides services pursuant to approximately 40 plant maintenance and operation contracts, including water and wastewater treatment plant start-up assistance, plant operations and maintenance, planning and management, training of plant supervisors, operators and laboratory and maintenance personnel, refining process systems, management systems for process control, and plant diagnostic evaluations and energy audits. The Company also provides specialty repair and cleaning services for industrial water and wastewater management equipment. The Company's plant maintenance and operation contracts generally range in length from three to 10 years and often provide the owner of the facility with renewal options. The majority of such contracts are fixed price or lump sum contracts. In July 1995, the Company became the first in the United States to acquire a publicly owned wastewater treatment plant pursuant to Executive Order 12803 issued in 1992 which was intended to facilitate the privatization of municipal facilities. The agreement provides for a subsidiary of the Company to operate the 4.5 million gallon per day MCD Franklin Wastewater Treatment Plant in Franklin, Ohio for a period of 20 years and to expand the facility as needed to meet future population growth. In August 1995, the Company was selected by the City of Wilmington, Delaware to negotiate a similar public-private partnership, including the acquisition of the City's wastewater treatment plant. In addition, during 1995 the Company continued negotiations with several industrial concerns toward the development, ownership and operation of water and wastewater treatment facilities adjacent to existing industrial facilities. Because development of such facilities will generally involve a variety of contractual arrangements, as with development of the Company's other projects, there can be no assurance that such discussions will result in the development of any such facilities. In December 1995, the Company entered into an agreement with one industrial firm to design, build, own and operate a salt cake purification plant adjacent to the customer's facility. 3 BIOSOLIDS MANAGEMENT. The Company offers generators of biosolids (the non- hazardous sludges resulting from treatment of municipal and industrial wastewater) alternatives to landfilling or other disposal options. The Company currently provides a range of management services, including land application, drying, pelletizing, alkaline stabilization and composting to approximately 450 communities, typically pursuant to multi-year contracts under which the Company is paid by the generator to make beneficial use of the biosolids. Regulations issued by the United States Environmental Protection Agency ("EPA") in December 1992 under the Clean Water Act encourage the beneficial use of municipal sewage sludge by recognizing the resource value of biosolids as a fertilizer and soil conditioner, and establish requirements for land application designed to protect human health and the environment. Land application involves the application of non-hazardous biosolids as a natural fertilizer on farmland pursuant to rigorous site-specific permits issued by applicable state authorities. Biosolids are also used in land-reclamation projects such as strip mines. Land-applied biosolids are often stabilized prior to application using proprietary technology. The Company also develops and operates facilities at which biosolids are dried and pelletized, and has four facilities currently in operation and one other facility under construction. Development of dryer facilities generally involves various contractual arrangements with a variety of private and public entities, including municipalities (which generate the biosolids), lenders, contractors and subcontractors which build the facilities, and end-users of the fertilizer generated from the treatment process. These facilities incorporate a variety of biosolids drying and emission control technologies, some proprietary and some licensed to the Company under exclusive licensing arrangements. See "Patents, Trademarks, Licenses and Other Agreements." The Company has approximately 560 dry-tons-per-day of biosolids drying capacity either in operation or under construction. Biosolids which have been dried and pelletized are generally used as fertilizer by farmers, commercial landscapers and nurseries and as a bulking agent by fertilizer manufacturers. EQUIPMENT AND PROCESS SYSTEMS. The Company also engineers and manufactures a variety of environmental products and systems. The Company provides single- source, advanced-systems solutions for the treatment of municipal drinking water, industrial process water and wastewater, and for slurry pumping and high solids dewatering. It also provides systems designed to remove solids from liquid streams through the use of self-cleaning bar/filter screens, grinders, macerators, conveyors and compactor systems. The Company provides high technology water purification and wastewater treatment systems that utilize a variety of technologies including demineralizers, reverse osmosis and vacuum degasification. In addition, the Company designs and installs process technology systems utilizing evaporators, crystallizers, electrodialysis, dialysis, reverse osmosis, membranes and ultrafiltration for treating industrial process wastewater. The Company also produces profile wire screen products for groundwater production, hydrocarbon processing, food processing and coal/mineral processing. The Company provides a number of these products and technologies to industrial customers abroad through its operations in Spain, The Netherlands, Ireland, France, Australia, Japan, Malaysia, Taiwan and Singapore. The Company's engineered products and process systems are provided to municipal and industrial customers. In most situations, the Company can provide assistance to help the end-user select the appropriate technology for a given application. Turnkey systems provided by the Company range in value from $250,000 to over $30 million, and are typically designed and installed within 12 months following acceptance of a customer order. On such projects, the Company typically enters into lump-sum contracts under which the Company receives payments throughout the contract term based upon a predetermined schedule. The Company also designs and supplies enclosed automated composting systems that recycle organic wastes into beneficial products which are used by commercial landscapers, nurseries and fertilizer manufacturers. These composting systems, which consist of a series of parallel concrete bays through which organic waste is 4 advanced and agitated during the composting process, are sold to municipalities, among others. The Company has provided its proprietary and automated in-vessel composting technology to 25 facilities in operation, and 2 more are under construction. The Company also manufactures a line of nonpolluting materials cleaning systems for use by a variety of industrial customers, including foundries, steel processors, automobile producers and rubber and plastics producers, in cleaning and finishing metal and other materials. The Company manufactures portable, fully-enclosed units for cleaning difficult-to-clean surfaces such as ship decks and hulls. These systems capture the emissions particulate generated by such operations, preventing contamination of the environment. In addition, spare parts for materials cleaning systems are produced. The Company also manufactures high-alloy combustion grates used in the high-temperature furnaces of its trash-to-energy facilities. REGULATION While in general the Company's environmental services businesses have benefitted substantially from increased governmental regulation, the environmental services industry itself is subject to extensive and evolving regulation by federal, state, local and foreign authorities. Due to the complexity of regulation of the industry and to public pressure, implementation of existing and future laws, regulations or initiatives by different levels of government may be inconsistent and difficult to foresee. In addition, the demand for certain of the Company's services may be adversely affected by the amendment or repeal, or reduction in enforcement of, federal, state and foreign laws and regulations on which the Company's businesses engaged in providing such services are dependent. Demand for certain of the Company's services may also be adversely affected by delays or reductions in funding, or failure of legislative bodies to fund, agencies or programs under such laws and regulations. The Company makes a continuing effort to anticipate regulatory, political and legal developments that might affect its operations but is not always able to do so. The Company cannot predict the extent to which any legislation or regulation that may be enacted, amended, repealed or enforced, or any failure or delay in enactment or enforcement of legislation or regulations or funding of government agencies or programs, in the future may affect its operations. The Company's business activities are subject to environmental regulation under the same federal, state and local laws and regulations which apply to the Company's customers, including the Clean Air Act, as amended, the Clean Water Act, as amended, and the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"). The Company believes that it conducts its businesses in an environmentally responsible manner and believes itself to be in material compliance with applicable laws and regulations. The Company does not anticipate that maintaining compliance with current requirements will result in any material decrease in earnings. There can be no assurance, however, that such requirements will not change so as to require significant additional expenditures. In particular, pursuant to the Clean Air Act Amendments of 1990 it is probable that the air pollution control systems at certain trash-to-energy projects owned or operated by the Company's subsidiaries will be required to be modified by the end of the decade to comply with the more stringent regulations promulgated thereunder. Although the expenditures related to such modifications, to the extent required, will likely be significant, they are not expected to have a material adverse effect on the Company's liquidity or results of operations because the Company has the right to pass on to the majority of long-term contract users of its trash-to-energy facilities increased capital and operating costs resulting from changes in law. There can be no assurance, however, that in such event the Company would be able to recover, for each project, all such increased costs from its customers. Moreover, it is possible that future developments, such as increasingly strict requirements of environmental laws and enforcement policies thereunder, could affect 5 the manner in which the Company operates its projects and conducts its business, including the handling, processing or disposal of the wastes, by-products and residues generated thereby. In September 1994, the EPA released its draft Dioxin Reassessment Report, intended to update the EPA's scientific understanding of dioxin sources, the fate of dioxin emissions in the environment, and the potential link between dioxin in environmental media and any adverse human health effects. The EPA is in the process of revising its estimates of the annual contribution of trace dioxin emissions from trash-to-energy facilities and has indicated that, upon compliance with new air emissions standards proposed by the EPA in 1994, the trash-to-energy industry will contribute less than 50 grams of dioxin a year. The Company does not believe that the EPA's reassessment of dioxin, or compliance with the proposed air emissions standards, will have a material adverse effect on the Company's operations or financial position. In May 1994, the U.S. Supreme Court ruled that residual ash from the combustion of municipal solid waste is not exempt from federal hazardous waste regulations. The EPA and most states had previously taken the position that residual ash was exempt from such regulation pursuant to the Clarification of Household Waste Exclusion contained in RCRA. As a result of the Supreme Court's decision, the EPA announced that ash from the combustion of municipal solid waste is subject to regulation as a hazardous waste if, when characterized, it exhibits hazardous characteristics. In response to these developments, the Company installed its patented WES-PHix(R) technology at all of its trash-to- energy facilities not previously subject to characterization requirements. In January 1995, the EPA resolved a significant issue with respect to characterization of such ash with its determination that ash is only required to be characterized at the end of the trash-to-energy process in the majority of such facilities. This determination by the EPA, coupled with the use of the WES-PHix technology, has enabled the Company to continue to manage its residual ash as non-hazardous waste. Incremental expenditures required to treat and test residual ash at the impacted facilities, net of expected contractual reimbursements from customers, have not had and are not expected to have a material adverse impact on the Company's financial condition or results of operations. Flow Control Also in May 1994, the U.S. Supreme Court ruled that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Such laws typically involve a municipality specifying the disposal site for all solid waste generated within its borders. Since the ruling, several decisions of state or federal courts have invalidated regulatory flow control schemes in a number of jurisdictions. Other judicial decisions have upheld non-regulatory means by which municipalities may effectively control the flow of municipal solid waste. There can be no assurance that such alternatives to regulatory flow control will in every case be found to be lawful. For example, the Company's Gloucester County, New Jersey facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. A recent federal court ruling in that state invalidated a franchise applicable to construction and demolition waste and has cast doubt on the validity of the municipal solid waste disposal franchise, which is now being challenged in separate litigation. The Supreme Court's ruling has not to date had a material adverse effect on any of the Company's trash-to-energy operations. Federal legislation has been proposed, but not yet enacted, to effectively grandfather existing flow control mandates. In the event that such legislation is not adopted, the Company believes that affected municipalities will endeavor to implement alternative lawful means to continue controlling the flow of waste. In view of the uncertain state of the law at this time, however, the Company is unable to predict whether such efforts would be successful. 6 Public Utility Regulatory Policies Act The Company's energy facilities are subject to the provisions of various energy-related laws and regulations, including the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The ability of the Company's trash-to-energy and small power production facilities to sell power to electric utilities on advantageous terms and conditions and to avoid burdensome public utility regulation has historically depended, in part, upon the applicability of certain provisions of PURPA, which generally exempts the Company from state and federal regulatory control over electricity prices charged by, and the finances of, the Company and its energy producing subsidiaries. While the recent changes in Congressional leadership may increase the likelihood of a repeal or modification of PURPA, it remains unlikely that such action would retroactively abrogate the long-term contracts and rate orders pursuant to which most of the Company's existing projects sell electricity. Several recent rulings by state public utilities commissions, federal courts, and the Federal Energy Regulatory Commission have upheld the provisions of PURPA power contracts against utility company rate challenges. Furthermore, the operations of the Company's trash-to- energy and other small power production facilities business are not expected to be materially and adversely affected if the various benefits of PURPA are repealed or substantially reduced on a prospective basis, due to the passage of the Energy Policy Act of 1992 ("EPACT"). EPACT created an alternative ownership mechanism by which independent power producers can participate in the electricity generation industry without the burdens of traditional public utility regulation. COMPETITION The Company experiences substantial competition in all aspects of its business. It competes with a number of firms, both nationally and internationally, some of which may have greater financial and technical resources than the Company. The principal competitive factors with respect to the Company's project development activities include technological performance, service, technical know-how, price and performance guarantees. Competing for selection as a project developer may require commitment of substantial resources over a long period of time, without any certainty of being ultimately selected. Competition for attractive development opportunities is intense, as there are a number of competitors in the trash-to-energy, independent power, biosolids management and water and wastewater treatment industries interested in such opportunities. The Company believes that its comprehensive project development capabilities, operating experience and financing capabilities will enable it to continue to compete effectively. In its water and wastewater treatment services business, the Company competes with several national or international firms, primarily on the basis of price and technical capability and experience. In its biosolids management business, the Company competes with several large national and regional firms and numerous competitors which provide service in local markets. In the biosolids market, the principal competitive factors are price, availability of sites for temporary storage and beneficial reuse of biosolids and technical experience. In the air pollution control business, the Company competes with several large and small firms, both nationally and internationally, depending on the type and size of project being performed. The principal competitive factors in the air pollution control industry are price, technological capabilities and service. In supplying equipment and process systems, the Company competes with numerous manufacturing and engineering firms on a global basis, the principal competitive factors being price and technological performance. At the time of the 1990 merger between the Company and a subsidiary of WMX which resulted in WMX's acquisition of a controlling interest in the Company (the "1990 Merger"), the Company was granted an 7 option to acquire an equity interest in WMX's international waste services operations, now conducted through WM International plc ("WM International"), a majority-owned subsidiary of WMX. In connection with the acquisition of an equity interest in WM International in 1991, the Company agreed that it would not conduct waste management services operations or engage in the operation and maintenance of water and wastewater treatment facilities outside of North America, other than through its ownership interest in WM International, until the later of (i) July 1, 2000 and (ii) the date on which WMX ceases to beneficially own a majority of the outstanding shares of Common Stock or a majority of all outstanding voting equity interests of WM International. Notwithstanding the foregoing, in 1995, the Company and WM International entered into a joint venture agreement whereby the Company will have primary responsibility for the early stage development of trash-to-energy projects outside North America (except in Italy and Germany) and WM International will have the right to acquire up to 49% of all equity of any such project available to WM International, the Company and their affiliates, with the Company or other investors owning the balance. Subject to some exceptions, the Company has committed to expend $10 million in development costs during the initial term of the joint venture, which expires on July 1, 2000. Thereafter, the joint venture will continue indefinitely, subject to the right of either WM International or the Company to terminate it by giving one year's written notice. In connection with the initial public offering of ordinary shares of WM International, the Company, WM International, Chemical Waste Management, Inc. ("CWM") and WMX entered into an International Business Opportunities Agreement which incorporates certain previously existing agreements among certain of the parties thereto made in connection with the 1990 Merger. The International Business Opportunities Agreement was amended and restated in connection with the organization of Rust International Inc. ("Rust"), to which the Company transferred, among other things, its engineering, environmental consulting and construction businesses in 1993 in exchange for an equity interest in Rust, and Rust became a party thereto. Under the Amended and Restated International Business Opportunities Agreement, the parties agreed that in order to minimize the potential for conflicts of interest among various subsidiaries under the common control of WMX, WMX has the right to direct business opportunities to the WMX controlled subsidiary which, in the reasonable and good faith judgment of WMX, has the most experience and expertise in the particular line of business involved. Opportunities in North America relating to (i) the manufacture or assembly of well screens, materials cleaning equipment, pumps and packaged water and wastewater treatment facilities; (ii) the operation and maintenance and, with respect to item (c) below, design, engineering and construction, of (a) municipal trash-to-energy facilities, (b) water, wastewater and sewage treatment facilities (excluding facilities designed to treat hazardous waste streams), (c) chimneys and air pollution control equipment and facilities (which allocation is worldwide), and (d) small power projects and independent power generation facilities (except for landfill gas recovery facilities which are covered under the Intellectual Property Licensing Agreement described under "Patents, Trademarks, Licenses and Other Agreements"); and (iii) facilities which treat or otherwise stabilize ash residues from trash-to-energy facilities, have been allocated to the Company. The Agreement allocates certain business opportunities, some of which were previously allocated to the Company, to Rust. RESEARCH AND DEVELOPMENT The Company undertakes research and development in numerous areas of its operations, including energy generation, environmental control and the handling and recovery of waste materials and waste gases, water, wastewater and industrial process water technologies, and VOC catalyst and control technologies. the Company spent approximately $4.1 million, $3.5 million and $5.1 million on research and development during 1993, 1994 and 1995, respectively. In addition, the Company receives significant benefits from technological advances realized in connection with specific projects undertaken on its own behalf or under contracts with 8 customers. Significant technological benefits are also realized through the Company's experience in operating its existing projects. PATENTS, TRADEMARKS, LICENSES AND OTHER AGREEMENTS The Company owns or licenses a number of patents and patent applications or other proprietary technology that are important to various aspects of its business. While certain of such licenses or patented technology may be material to the development of a given project, the Company believes that its overall business depends primarily on such factors as project development capability, engineering skill, and research and production techniques rather than on patent protection. In January 1995, the Company acquired from Champion International Corporation ("Champion") the exclusive, worldwide license rights for a proprietary plant effluent recycling process used in bleached kraft pulp mills and, from Sterling Pulp Chemicals, Ltd. ("Sterling"), the chloride removal process technology incorporated therein. The Company has a license agreement of unlimited duration with each of Champion and Sterling, subject to the Company fulfilling certain minimum obligations specified therein. The Company plans to design and market zero-liquid-discharge process water systems utilizing the licensed technology to remove chlorinated organics. Pursuant to a long-standing arrangement between the Company and von Roll Ltd. ("von Roll"), the Company has an exclusive license in the United States and Mexico to use certain combustion-grate technology owned by von Roll. The Company uses this technology in its trash-to-energy projects. The license agreement runs through December 31, 1998, subject to additional three-year-term renewals unless either party gives 12 months written notice of termination to the other. Either party to the license agreement may also terminate the contract upon one year's written notice and payment of a termination fee. Neither party has provided a termination notice. The Company has an agreement (the "Boiler Purchase Agreement") with Babcock & Wilcox Company ("B&W"), whereby B&W has agreed to provide, and the Company has agreed to purchase, certain boilers suitable for use in the Company's trash-to- energy facilities having a combustion capacity equal to or greater than 250 tons-per-day. In addition, B&W agrees to maintain the confidentiality of the Company's proprietary information incorporated in the boiler design, and not to use such information except for the purpose of manufacturing boilers for sale to the Company or its affiliates. The confidentiality provisions will survive the termination of the Boiler Purchase Agreement. The Boiler Purchase Agreement will remain in effect until June 30, 1997, subject to additional three-year-term renewals. The Company possesses foreign and domestic patents on various biosolids treatment processes. The Company has a license agreement with Seghers Engineering N.V. of Bruges, Belgium, granting the Company the exclusive right to use and market the Seghers Zerofuel sludge drying system, including the Seghodryer indirect multi-stage dryer for biosolids, within the United States and Canada. The license will remain in effect through the year 2011 provided that the Company meets specified levels of equipment orders or makes certain minimum payments under the agreement. In August 1994, the Company entered into a Know-How and Patent License Agreement with SC Technology AG of Switzerland pursuant to which the Company obtained certain exclusive patent and proprietary rights in the United States with respect to Swiss Combi dryer technology applicable to the drying and pelletizing of non-hazardous biosolids. The agreement has a five-year term with certain renewal rights. The Swiss Combi technology has been incorporated into the Baltimore, Maryland dryer 9 and pelletizer facility which is now under construction. In addition, the Company holds several patents relating to the processing of biosolids through a direct biosolids dryer system. The Company is a party to a Land Option Agreement, as amended (the "Land Option Agreement"), with Waste Management, Inc. ("Waste Management"), a wholly- owned subsidiary of WMX, providing the Company until December 31, 2020 with the right, subject to certain restrictions, to acquire or lease sites for future trash-to-energy, biosolids management, organic waste composting or, subject to certain pre-conditions, medical waste incineration and autoclave facilities at any of Waste Management's existing or future landfills in the United States and Canada. Under the Land Option Agreement, Waste Management is obligated to pay the Company, at the end of the stated term of the agreement, an amount in cash equal to the Company's book value (less related deferred taxes) for such portion of the option as has not been allocated to acquired or leased parcels. In addition, the Company is a party to an Airspace Dedication Agreement, as amended, with Waste Management permitting the Company, for a period ending August 12, 2008, and subject to certain conditions and restrictions, to reserve capacity at Waste Management landfills for the disposal of certain wastes for fees generally on terms at least as favorable as those charged to other customers, and granting disposal credits to be credited against future disposal fees. In connection with the 1990 Merger, the predecessor of WM International, Waste Management International, Inc. ("WMII"), and Waste Management entered into an Intellectual Property Licensing Agreement with the Company. WM International has succeeded to the rights and obligations of WMII under the Intellectual Property Licensing Agreement as well as certain other agreements to which the Company and WMII were parties. Pursuant to the Intellectual Property Licensing Agreement: (i) WM International granted the Company a 10-year, non-exclusive, royalty-free license, with two successive 5-year renewal options, to the "BRINI" recycling and composting technology owned by WM International; (ii) Waste Management granted the Company a 10-year, non-exclusive, royalty-free license, with two successive 5-year renewal options, to the Recycle America(R) and Recycle Canada(R) trademarks and logos and the related materials separation and processing technology of Waste Management for use in conjunction with recycling operations at or adjacent to any Company facility; (iii) Waste Management agreed to use reasonable efforts to enable the Company to sell recyclable materials to joint ventures or other markets developed by Waste Management; (iv) Waste Management agreed, to the extent consistent with its business plans, to use good faith efforts to develop its curbside recycling programs and free-standing recyclable materials recovery facilities to also support Company facilities; (v) the Company agreed to designate Waste Management as the provider of recyclable collection services for Company facilities to the extent possible, before offering such opportunity to any third party; (vi) Waste Management granted the Company a 10-year, non-exclusive, royalty-free license, with two successive 5- year renewal options, to all of Waste Management's proprietary technology and know-how in the area of landfill gas recovery and the conversion of such gas to energy (such license does not extend to the use by the Company of technology and know-how at sanitary landfill sites owned, operated or maintained by Waste Management or its subsidiaries and affiliates, other than the Company and its subsidiaries); and (vii) Waste Management agreed that only the Company, and not Waste Management, may develop the business of designing, constructing, operating and maintaining landfill gas recovery facilities for governmental, industrial and third party customers. To the extent the Company develops landfill gas recovery technology and know-how during the period of its license (and renewals) from Waste Management, it will share such technology and know-how with Waste Management on a similar royalty-free basis. The Company may waive its rights to develop landfill gas recovery systems on a case-by-case basis in those situations in which financial objectives specified by the Company's Board of Directors cannot be achieved by the Company through development of such projects. Projects waived by the Company may be developed by Waste Management. 10 The licenses and related rights and obligations to conduct business granted under the Intellectual Property Licensing Agreement terminate, as to facilities not already operational, contractually committed or the subject of, or contemplated by, a bid or other submission previously made by the Company or Waste Management, as the case may be, at the earlier of the termination of the stated license periods, the expiration of any patent licensed under the agreement, or the date on which the Company is no longer a majority-owned subsidiary of WMX. The Company, WMX, CWM, Rust and WM International are also parties to a First Amended and Restated Master License Agreement. Under the Master License Agreement, as amended, each of the Company, WMX, Rust and CWM, on the one hand, and WM International, on the other, is granted the right to license, on a non- exclusive basis, certain proprietary rights of the other. The consideration for any such license will be based upon the fair market value of a license for the licensed technology at the time of grant, but may not exceed the most favorable price charged an unaffiliated licensee for a comparable license. RAW MATERIALS Raw materials used by the Company, including fuel for its projects (such as trash, waste wood, waste tires, waste coal and natural gas), are generally readily available from many different suppliers. The majority of the solid waste disposed at the Company's energy projects is commonly obtained through long-term supply contracts with solid waste disposal authorities and municipalities under which minimum disposal fees are fixed and which generally provide for escalation in accordance with various price indexes. With respect to the Company's manufacturing businesses, the principal raw materials are carbon steel, steel alloy plate, stainless steel wire and plate and scrap metals. The raw materials necessary to each of the Company's businesses are readily available from a variety of sources and the Company does not anticipate any difficulty in obtaining such materials. EMPLOYEES As of December 31, 1995, the Company had approximately 4,600 full-time employees. The Company considers relations with its employees to be satisfactory. FINANCING CAPABILITIES AND FUNDING SUPPORT AGREEMENTS One of the most significant costs associated with the Company's own-and- operate projects may be debt service or lease rentals payable in connection with financing for the project. Financing structures vary substantially from transaction to transaction. The amount of annual financing cost is directly related to the capital cost of the facility, which may vary greatly from plant to plant, even with regard to similarly sized plants, due to a number of factors. These include the type of technology utilized, the amount of site preparation required and, where applicable, the form of energy generated and the proximity to the energy delivery point. Financing Capabilities Each trash-to-energy, cogeneration, biosolids pelletizer and major water/wastewater treatment own-and-operate project developed by the Company requires substantial amounts of capital that generally range from $30 million to $400 million. Historically, such capital requirements have been financed through the issuance of project debt and the investment of Company funds and third party equity. The debt has primarily consisted of long-term tax-exempt or taxable bonds secured by a pledge of project revenues and assets, with certain additional 11 security being provided, in some cases, directly or indirectly, by the Company, WMX or another project support entity. The Company has also used partnership, joint venture and sale and leaseback structures to bring third party equity into its project financings. The Company expects to finance its working capital requirements with its available cash. To the extent required, the Company has additional cash available to it pursuant to the Restated Funding Agreement described below or through the working capital program established between the Company and WMX described below under "Master Intercorporate Agreement." Certain agreements with respect to the Company's financing capabilities and funding support are described below. Restated Funding Agreement Pursuant to a Restated Funding Agreement between WMX and the Company, WMX agreed to use reasonable efforts to assist the Company, at the Company's request, in obtaining and maintaining a credit rating of "A" or better from Standard & Poor's Corporation or Moody's Investors Service for the Company's long-term unsecured debt securities. WMX's obligations under the Restated Funding Agreement, which terminate on August 12, 2008, may involve anything from contingent credit support obligations to and including WMX's purchase from the Company of up to $200 million principal amount of Company securities, which may be either debt, equity or a combination thereof (the "Securities"). WMX's obligations will be deemed satisfied by the purchase of such Securities, even if the purchase of all of the Securities does not enable the Company to obtain an "A" rating. In addition, the obligation to purchase any of the Securities will be suspended if the Company does not reasonably demonstrate its ability to pay interest or cash dividends, as the case may be, on the Securities. WMX's obligations will also be suspended during any period in which the Company obtains and maintains an "A" rating and will be reduced to the extent that the purchase of a lesser amount of Securities will allow the Company to obtain or maintain such a rating. Any Securities issued to WMX will be subject to mandatory repayment or redemption in equal annual installments during the 25 years following their date of issuance, and they may be prepaid or redeemed by the Company, at its option, if the directors of the Company not affiliated with WMX or the Company conclude that such repayment or redemption is in the best interests of the Company and its stockholders. Any Securities redeemed or prepaid prior to August 12, 2008 will restore availability under the $200 million purchase obligation referred to above. The Company has an implied "A-" credit rating from Standard & Poor's Corporation. The attainment of such rating did not involve the sale of any Securities to WMX. Master Support Agreement Under a Master Support Agreement between Resco Holdings Inc. ("Resco"), a wholly-owned subsidiary of the Company, and AlliedSignal Inc. ("AlliedSignal"), Resco is required to reimburse AlliedSignal for any credit support payments AlliedSignal is required to make under various credit support agreements with respect to trash-to-energy projects of Resco. In addition, Resco is required to maintain its Consolidated Tangible Net Worth (as defined in the Master Support Agreement) at an amount equal to $549.8 million, which amount is automatically increased (but not decreased) to 90% of Resco's Consolidated Tangible Net Worth at the end of each quarter. As of December 31, 1995, Resco was in compliance with this provision. Resco is prohibited from paying cash dividends or acquiring any shares of its capital stock if its Consolidated Tangible Net Worth is, or would as a consequence of such payment or acquisition be, less than the required amount. The Master Support Agreement also restricts the ability of Resco to subject its property or the properties of its subsidiaries to liens securing indebtedness for money borrowed or similar indebtedness and may require Resco, under certain circumstances, to refinance indebtedness of trash-to-energy projects for which AlliedSignal's credit support is provided. AlliedSignal is providing credit support in respect of two of the Company's trash-to-energy facilities pursuant to the Master Support Agreement. 12 Master Intercorporate Agreement In connection with the 1990 Merger, the Company, WMX and CWM entered into a Master Intercorporate Agreement. Among other things, the Company and WMX agreed to implement a cash management and working capital program under the agreement. The agreement was amended and restated in 1993 to modify certain aspects of the cash management program established thereunder and again in 1995 to extend the term of the $100 million funding commitment, as described below. Subject to certain restrictions specified in the agreement, WMX agreed to fund the Company's working capital requirements at rates equal to or lower than those the Company would otherwise be able to obtain on the open market. The Company may borrow up to $100 million from WMX through December 1996, with automatic annual renewal periods thereafter, pursuant to the Master Intercorporate Agreement, plus the amount of cash invested by the Company with WMX. The remaining obligations of WMX under the Master Intercorporate Agreement will terminate at the time that both (i) WMX does not own a majority of the capital stock of the Company and (ii) WMX does not exercise, prior to its expiration, the option to maintain majority ownership of the capital stock of the Company (as provided in the Master Intercorporate Agreement). ACQUISITIONS During 1995, the Company acquired one business, which specializes in the design and engineering of industrial wastewater treatment systems (primarily biological treatment) and is located outside the United States. The consideration paid was determined by direct negotiations with the owner of the acquired business. The Company also acquired a publicly owned wastewater treatment plant (see "Business-Services and Products-Clean Water-Water and Wastewater Treatment Services"). These acquisitions were not material to the Company's business as a whole. EQUITY INVESTMENTS Rust International Inc. The Company owns approximately 40% of the outstanding common stock of Rust, and the remaining shares are held by CWM (56%) and WMX (4%). Rust is a leading provider, through its subsidiaries, of environmental and infrastructure engineering and consulting services, primarily to clients in government and in the chemical, petrochemical, nuclear, energy, utility, pulp and paper, manufacturing, environmental services and other industries. Rust's environmental and infrastructure engineering and consulting services provide alternative solutions for client problems relating to removing and disposing of hazardous and toxic substances; managing solid waste, water and wastewater, groundwater and air resources; design and construction oversight of transportation facilities; and photogrammetry. Such services are provided to private industry, as well as federal, state and local governments, including the Department of Defense (the "DOD") and the Department of Energy (the "DOE"). The services include performing remedial investigations for the purpose of characterizing hazardous waste sites, preparing feasibility studies setting forth recommended alternative remedial actions, and providing engineering design and construction oversight services for remediation projects. The services provided also include the siting, permitting, design and construction oversight of solid and hazardous waste landfills and related facilities. Study, 13 design and construction oversight services are also provided, primarily to municipalities, special government agencies and, to some extent, private industry in connection with wastewater collection and treatment, potable water supply treatment and distribution, stormwater management and the building of streets, highways, airports, bridges, waterways and rail services. Rust also provides architectural services in connection with these and other activities. Additional services provided through Rust include environmental assessment services, the design of systems to properly and safely store, convey, treat and dispose of industrial, hazardous and radioactive materials and consulting services regarding disposal, waste minimization methods and techniques, air quality regulation and industrial hygiene and safety. Rust also has an international environmental and infrastructure engineering and consulting, process engineering and construction and related services business performing projects in 35 countries. In Europe, Rust has offices in the United Kingdom, Germany, Sweden and Turkey, and in the Asia-Pacific region, in Australia, Hong Kong, China, Singapore, Malaysia and Indonesia. In the Middle East and Africa, Rust also has offices in the United Arab Emirates, Saudi Arabia and South Africa. Rust's overseas operations provide such services to the World Bank and associated lending agencies, national, regional and local governments and to clients in the utility and industrial power and general manufacturing industries. In addition, Rust provides such services to WM International worldwide. In May 1995, Rust sold substantially all of its hazardous and radioactive remediation services business to OHM Corporation, a publicly traded provider of environmental remediation services ("OHM"). As a result of that transaction, Rust acquired an approximately 37% interest in OHM. Rust also engages in providing process engineering, construction, specialty contracting and related services, but has announced its intention to sell or otherwise discontinue that business in North America and certain locations outside North America. The process engineering services currently provided by Rust are of two general types - facility process engineering and facility design engineering. Process engineers create the processes by which facilities operate, such as chemical, petrochemical, energy and pulp and paper plants. Design engineering services provided by Rust encompass the following disciplines: architectural; electrical; control systems; process piping; mechanical; structural; heating, ventilating and air conditioning ("HVAC"); and civil. The construction services currently provided by Rust are generally performed in connection with projects on which Rust has also provided the design engineering services. Rust also requisitions and procures equipment and construction materials for clients and performs quality assurance and quality control oversight of vendor manufacturing practices. Waste Management manages the business of Rust Industrial Services Inc., a subsidiary of Rust ("RIS") providing scaffolding and other on-site industrial services. RIS provides scaffolding services primarily to the chemical, petrochemical and utilities industries. In most cases, the scaffolding services are provided in conjunction with periodic, routine cleaning and maintenance of refineries, chemical plants and utilities, although such services are also performed in connection with new construction projects. RIS also performs a variety of types of other industrial services -- water blasting, tank cleaning, explosives blasting, chemical cleaning, industrial vacuuming, catalyst handling, specialty chemicals and separation technologies --primarily for clients in the petrochemical, chemical, and pulp and paper industries, utilities and, to a lesser extent, the public sector. RIS also provides on-site plant services, including providing personnel to perform mechanical and electrical services, equipment installation, welding, HVAC, warehousing and inventory management services and technical support in the area of industrial hygiene and safety training. RIS assists clients in the nuclear and utility industries in 14 solving electrical, mechanical, engineering and related technical services problems. RIS also provides spent fuel storage (rerack) services to the nuclear power industry. Waste Management International plc The Company owns approximately 12% of the outstanding ordinary shares of WM International. Approximately 56% of WM International's outstanding ordinary shares are held indirectly by WMX, and an additional 12% of such shares are held by Rust. The remaining outstanding ordinary shares of WM International are held by public stockholders. WM International's business may broadly be characterized into two areas of activity, collection services and treatment and disposal services. The following table shows the derivation of WM International's revenues for the years indicated and includes revenue from construction of treatment or disposal facilities for third parties under "Treatment and Disposal Services":
YEAR ENDED DECEMBER 31, ----------------------- 1993 1994 1995 ---- ---- ---- Collection Services........................ 69% 64% 64% Treatment and Disposal Services............ 31% 36% 36%
In 1994, WM International completed 50 acquisitions in 10 countries, most of which were small acquisitions which complemented or expanded existing WM International operations in various markets. With its acquisition goals largely completed, WM International engaged in 25 additional small acquisitions during 1995. In accordance with its objective of maintaining a local identity, WM International, in certain cases, also operates through other companies or joint ventures in which WM International and its affiliates own less than a 100% interest. For example, WM International has an approximately 20% interest in Wessex Water Plc, an English publicly traded company providing water treatment, water distribution, wastewater treatment and sewerage services ("Wessex"). Through a joint venture with Wessex, WM International provides waste management and related services in the United Kingdom. Because of the size and timing of projects and acquisitions, WM International's revenue mix by country varies from year to year. Countries in which revenue exceeded 10% of WM International's consolidated total were: Italy (32%) and The Netherlands (11%) in 1993, Italy (26%) and Germany (12%) in 1994 and Italy (23%), Germany (14%), The Netherlands (11%) and The United Kingdom (11%) in 1995. While WM International has considerable experience in mobilizing for and managing foreign projects, its operations continue to be subject generally to such risks as currency fluctuations and exchange controls, the need to recruit and retain suitable local labor forces and to control and coordinate operations in different jurisdictions, changes in foreign laws or governmental policies or attitudes concerning their enforcement, political changes, local economic conditions and international tensions. In addition, price adjustment provisions based 15 on certain formulae or indices may not accurately reflect the actual impact of inflation on the cost of performance. WM International records and reports its earnings in pounds sterling. Currency fluctuations affecting the pounds sterling exchange rates will cause the Company's earnings from WM International to fluctuate. The Company may from time to time engage in hedging transactions in order to seek to mitigate the effect of such exchange rate fluctuations. COLLECTION SERVICES Collection services include collection and transportation of solid, hazardous and medical wastes and recyclable material from residential, commercial and industrial customers. WM International provided collection services as of December 31, 1995 to governmental and private customers in ten European countries, Argentina, Australia, New Zealand and Taiwan. Business is obtained through public bids or tenders, negotiated contracts, and, in the case of commercial and industrial customers, direct contracts. WM International operates 318 collection and staging facilities and 76 waste transfer facilities. Residential solid waste collection is normally performed by WM International pursuant to municipal contracts. WM International has approximately 1,500 municipal contracts, serving more than 6,800,000 residential properties. The scope, specifications, services provided and duration of such contracts vary substantially, with some contracts encompassing landfill disposal of collected waste, street-sweeping and other related municipal services. The largest number of municipal contracts held by WM International is in Italy where WM International services approximately 1,850,000 residential properties. Pricing for municipal contracts is generally based on volume of waste, number and frequency of collection pick-ups, and disposal arrangements. Longer-term contracts typically have formulae for periodic price increases or adjustments. WM International also provides curbside recycling services. Street, industrial premises, office and parking lot cleaning services are also performed by WM International, along with portable sanitation/toilet services for such occasions as outdoor concerts and special events. WM International's commercial and industrial solid and hazardous waste collection services are generally contracted for by individual establishments. In addition to solid waste collection customers, WM International provides services to small quantity waste generators, as well as larger petrochemical, pharmaceutical and other industrial customers, including collection of hazardous, chemical or medical wastes or residues. WM International has approximately 285,000 commercial and industrial customers. Contract terms and prices vary substantially between jurisdictions and types of customer. WM International also provides commercial and industrial recycling services. TREATMENT AND DISPOSAL SERVICES Treatment and disposal services include processing of recyclable materials, operation of both solid and hazardous waste landfills, operation of municipal and hazardous waste incinerators, operation of a trash-to-energy facility, operation of water and wastewater treatment facilities, operation of hazardous waste treatment facilities and construction of treatment or disposal facilities for third parties. The operation of solid waste landfills is currently WM International's most significant treatment and disposal service. Treatment and disposal services are provided under contracts which may be obtained through public bid or tender or direct negotiation, and are also provided directly to other waste service companies. At December 31, 1995, WM International owned, operated or maintained 23 waste treatment facilities, 79 recycling and recyclables processing facilities, 9 incinerators and 55 landfills. Once collected, solid wastes may be processed in a recyclables processing facility for sale or other disposition for use in various applications. Unprocessed solid wastes, or the portion of the waste stream 16 remaining after recovery of recyclable materials, require disposal, which may be accomplished through incineration (in connection with which the energy value may be recovered in a trash-to-energy facility) or through disposal in a solid waste landfill. The relative use of landfills versus incinerators differs from country to country and will depend on many factors, including the availability of land, geological and hydrological conditions, the availability and cost of technology and capital, and the regulatory environment. The main determinant of disposal method is generally the disposal cost per cubic meter at local landfills, as incineration is generally more expensive. At present, in most countries in which WM International operates, landfilling is the predominant disposal method employed. WM International owns or operates solid waste landfills in Argentina, Australia, Brazil, Denmark, France, Germany, Hong Kong, Indonesia, Italy, New Zealand, Spain, Sweden and the United Kingdom. Landfill disposal agreements may be separate contracts or an integrated portion of collection or treatment contracts. Demand for solid waste incineration is affected by landfill disposal costs and government regulations. The incineration process for non-hazardous solid waste has also been influenced by two significant factors in recent years: (i) increasingly strict control over air emissions from incinerators; and (ii) increasing emphasis on trash-to-energy incinerators, which utilize heat produced by incinerators to generate electricity and other energy. Incineration generates approximately 30% residue (by weight), which is either landfilled or, if permitted, recycled for use as a road base or in other construction uses. WM International's trash-to-energy incinerator in Hamm is a German-designed plant and the only privately operated trash-to-energy facility in Germany. It is among the first trash-to-energy facilities to fully comply with that country's stringent new air pollution requirements. The facility serves the household and commercial solid waste incineration needs of a population of approximately 600,000 in Hamm and nearby towns. Under its current permits, the facility is able to produce 18 megawatts per hour of steam-generated electricity and sold approximately 74,000 megawatt hours to the local power grid in 1995 (enough power for about 17,000 homes). In 1992, WM International entered into a contract with the County of Gutersloh, Germany to design, construct, own and operate a trash-to-energy facility. The facility is designed to convert 268,000 metric tons per year of municipal waste and sewage sludge into energy. The facility would be capable of producing enough electricity to power more than 35,000 homes. During 1995, WM International's permit application to develop and operate the Gutersloh facility was denied. WM International believes it is entitled to the permit and is appealing the denial. WM International also operates seven small conventional municipal solid and other waste incineration facilities. WM International owns or operates hazardous waste treatment facilities in Australia, Finland, France, Germany, Hong Kong, Indonesia, Italy, The Netherlands, Spain, Sweden and the United Kingdom and has entered into agreements with respect to the development of hazardous waste treatment facilities in Argentina and Thailand. WM International operates facilities in Hong Kong which are owned by the Hong Kong government. Control of the Hong Kong government passes to The People's Republic of China in 1997. WM International is unable to predict what impact, if any, this change will have on its operations in Hong Kong. 17 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names and ages of the Company's executive officers (as defined by the regulations of the Securities and Exchange Commission), the principal positions they hold with the Company and with WMX and its affiliates as of December 31, 1995, and summaries of their business experience. Experience shown with the Company includes experience with a predecessor of the Company prior to the August 1989 merger of such predecessor into Resco. Executive officers are elected by the Board of Directors and serve at the discretion of the Board. Phillip B. Rooney, the Company's Chairman and Chief Executive Officer, is also an executive officer of WMX and certain of its affiliates other than the Company and devotes a majority of his working time to his responsibilities in such other capacities. However, the Company anticipates that he will devote sufficient time and attention to the Company's business as reasonably may be required to fulfill the duties of his office.
NAME AND TITLE AGE BUSINESS EXPERIENCE - -------------- --- ------------------- Phillip B. Rooney................ 51 A director of the Company since September 1988. Chairman of Chairman of the Board and the Board and Chief Executive Officer of the Company since Chief Executive Officer November 1990. President and Chief Operating Officer of WMX since November 1984. Chairman of the Board of Rust since January 1993. Chairman of the Board and Chief Executive Officer of Waste Management since January 1994. Mr. Rooney is also a director of WMX, WM International, Illinois Tool Works, Inc., Caremark International Inc., Urban Shopping Centers, Inc. and ServiceMaster Management Corporation, the general partner of ServiceMaster Limited Partnership. John M. Kehoe, Jr................ 62 Nominee for election as a director of the Company. President President and Chief Operating and Chief Operating Officer of the Company since January 1993. Officer Vice President of the Company from December 1991 through December 1992. President of Wheelabrator Environmental Systems Inc. ("WESI"), a subsidiary of the Company, from November 1990. Managing Director of the Company from June 1988 to November 1990. John J. Goody.................... 51 Vice President of the Company since August 1995. Chief Vice President; Chief Executive Executive Officer of Wheelabrator Water Technologies Inc. Officer, Wheelabrator Water ("WWTI") since January 1996 and Vice President of Technologies Inc. Wheelabrator Clean Water Inc., a predecessor company, from August to December 1995. President of Rust Limited from April 1993 to August 1995. Vice President and Chief Financial Officer of Rust from June 1991 to April 1993 and previously Senior Vice President-Government and Aerospace Operations of Rust beginning in 1990. Herbert A. Getz.................. 40 Secretary of the Company since July 1995, a position he Secretary previously held, as well as being the Company's Vice President and General Counsel, from November 1990 until May 1993.
18 Senior Vice President of WMX since May 1995, Vice President of WMX since May 1990 and General Counsel of WMX since August 1992. Assistant General Counsel of WMX from December 1985 to August 1992. Previously Vice President, General Counsel and Secretary of Waste Management from April 1989 to December 1993, and Vice President of Rust from January 1993 to May 1994. Mr. Getz is Chairman of the Board of Directors of NSC Corporation and a director of OHM Corporation. Richard S. Haak, Jr.............. 41 Controller of the Company since November 1993. Vice Controller President and Controller-Operations of WESI from September 1987 until November 1993. Ray L. Patel..................... 50 President of WWTI since January 1996 and of a predecessor President, Wheelabrator Water corporation, Wheelabrator Engineered Systems Inc. Technologies Inc. ("Engineered Systems"), from January 1993 to December 1995. Chief Executive Officer of Engineered Systems since April 1993. President of Johnson Filtration Systems Inc., Engineered Systems' predecessor, from April 1988 through December 1992. Division President of Wheelabrator Clean Water from November 1990 to July 1991. Mark P. Paul..................... 46 Vice President and General Counsel of the Company since May Vice President and 1993. Associate General Counsel and Staff Vice President of General Counsel the Company from February 1993 to May 1993. Vice President and General Counsel of WESI from September 1987 to May 1993. John D. Sanford.................. 42 Vice President, Chief Financial Officer and Treasurer of the Executive Vice President, Company since May 1993, and Executive Vice President since Chief Financial Officer August 1995. Staff Vice President-Finance of the Company and Treasurer from February 1993 to May 1993. Vice President and Chief Financial Officer of WESI from August 1987 to May 1993. James F. Wood.................... 53 Senior Vice President and General Manager of WESI from Senior Vice President November 1992 to December 1995. Vice President-Plant and General Manager, Operations of WESI from September 1990 to November 1992. Wheelabrator Environmental Managing Director of the Company from April 1989 to Systems Inc. September 1990. Vice President-Plant Services of WESI from May 1988 to April 1989.
19 ITEM 2 -- PROPERTIES The Company owns the building and surrounding grounds comprising its principal executive offices, located at Liberty Lane, Hampton, New Hampshire 03842. The Company believes that its property and equipment are generally well maintained, in good operating condition and adequate for its present needs. The inability to renew any short-term real property lease by the Company or any of its subsidiaries would not have a material adverse effect on its results of operations. The Company regularly upgrades and modernizes facilities and equipment and expands its facilities as necessary. The following tables set forth the Company's principal facility locations in operation and their use (including those operated by the Company for others under long-term contracts or similar arrangements) as of December 31, 1995. DESCRIPTION OF OWNED, LEASED AND/OR LONG-TERM OPERATED PROJECTS Set forth below is a description of projects in operation or under construction which are owned, leased or operated under long-term operating agreements by Company subsidiaries, partnerships or joint ventures controlled by Company subsidiaries. Unless indicated to the contrary below, each project is owned by subsidiaries or affiliates of the Company. While the Company exercises, or will exercise, operating control over each such project, the Company has no ownership interest in certain of the projects.
Projects in Operation DESIGN DESIGN PROJECT OUTPUT CAPACITY COMMENTS ------- ------ -------- -------- 1. Amarillo, Texas N/A 3,500,000 Owned and operated since 1976 by Coal Handling Facility TPY the Company and its predecessors. 2. Anderson, California 6mW 210 TPD Owned and operated by the Company Wood Waste Cogeneration since mid-1993. Facility 3. Baltimore, Maryland 60mW 2,250 TPD Owned and operated by the Company Trash-to-Energy Facility from 1985 to 1988. Operated by the Owner: Ford Motor Credit Company since 1988 under a long- Company ("Ford Credit") term lease expiring in 2007, with certain renewal and purchase options. 4. Baltimore, Maryland N/A 110 DTPD Owned and operated by the Company Biosolids Dryer and since January 1995. Pelletizer (Back River Project) 5. Bridgeport, Connecticut 70mW 2,250 TPD Operated since 1988 by the Company Trash-to-Energy Facility under a long-term lease expiring in Owner: Ford Credit 2009, with certain renewal and purchase options.
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DESIGN DESIGN PROJECT OUTPUT CAPACITY COMMENTS ------- ------ -------- -------- 6. Broward County, Florida 70mW 2,250 TPD Owned and operated by the Company South Site since mid-1991. Trash-to-Energy Facility 7. Broward County, Florida 70mW 2,250 TPD Owned and operated by the Company North Site since early 1992. Trash-to-Energy Facility 8. Claremont, 5mW 200 TPD Owned and operated by the Company New Hampshire since 1987. Trash-to-Energy Facility 9. Cobb County, Georgia N/A 35 DTPD Operated by the Company since late Biosolids Dryer and 1992 under a subcontract expiring in Pelletizer 1996, with a renewal option. Owner: Cobb County, Georgia 10. Concord, New Hampshire 14mW 575 TPD Owned and operated by the Company Trash-to-Energy Facility since 1989. 11. Earth, Texas N/A 3,500,000 Owned and operated since 1982 by Coal Handling Facility TPY the Company and its predecessors. 12. Falls Township, 53mW 1,500 TPD Owned and operated by the Company Pennsylvania Trash-to- since August 1994. Energy Facility 13. Frackville, Pennsylvania 47mW 1,700 TPD Owned and operated by the Company Anthracite Culm since 1989. Cogeneration Facility 14. Franklin, Ohio N/A 4.5 MGD Owned and operated by the Company MCD Franklin Wastewater since July 1995 under a long-term Treatment Plant contract expiring in 2015, with certain renewal options. 15. Hagerstown, Maryland N/A 16 DTPD Operated by the Company since late Biosolids Dryer and 1992 under a lease expiring in 1998, Pelletizer with a renewal option. Owner: Hagerstown, Maryland 16. Gloucester County, 14mW 575 TPD Owned and operated by the Company New Jersey since 1990. Trash-to-Energy Facility
21
DESIGN DESIGN PROJECT OUTPUT CAPACITY COMMENTS ------- ------ -------- -------- 17. Lisbon, Connecticut 13mW 500 TPD Operated since January 1, 1996 by Trash-to-Energy Facility the Company under a long-term Owner: Eastern contract expiring in 2020. Connecticut Resource Recovery Authority 18. Millbury, Massachusetts 45mW 1,500 TPD Operated by the Company since 1987 Trash-to-Energy Facility under a long-term lease expiring in Owner: Ford Credit 2007, with certain renewal and purchase options. 19. New York, New York N/A 300 DTPD Owned and operated by the Company Biosolids Dryer and since mid-1993. Pelletizer 20. North Andover, 40mW 1,500 TPD Owned and operated by the Company Massachusetts since 1985. Trash-to-Energy Facility 21. Norwalk, California 28mW 5,600 MCF Operated by the Company since 1988 Gas Cogeneration Facility per day under a lease expiring in 2008, with Owner: Signal Capital an option to buy, subject to prior Corporation rights of the State of California to purchase the lease and the facility after 2003. 22. Pinellas County, Florida 5mW 3,000 TPD Operated by the Company since 1983 Trash-to-Energy Facility under a long-term contract expiring Owner: Pinellas County, in 2003. Florida 23. Polk County, Florida 40mW 1,000 TPD Owned and operated since August Urban Wood Waste-to- 1995 by a partnership in which the Energy Facility Company owns an 81% interest. 24. Saugus, Massachusetts 40mW 1,500 TPD Operated by the Company since 1975; Trash-to-Energy Facility wholly-owned by the Company since 1987. 25. Shasta County, California 49mW 2,400 TPD Operated by the Company since 1988 Wood Waste Small Power under a long-term lease expiring in Production Facility 2007, with renewal and purchase Owner: Ford Credit options. 26. Sherman Station, Maine 18mW 800 TPD Operated by a partnership in which Wood Waste Cogeneration the Company has a 60% interest Facility since 1986. Leased by the Company Owner: Chrysler Financial under a long-term contract expiring Corporation in 2006, with renewal and purchase options.
22
DESIGN DESIGN PROJECT OUTPUT CAPACITY COMMENTS ------- ------ -------- -------- 27. Spokane, Washington 26mW 800 TPD Operated by the Company since late Trash-to-Energy Facility 1991 under a long-term contract Owner: City of Spokane, expiring in 2011. Washington 28. Tampa, Florida 20mW 1,000 TPD Operated by the Company since 1988 Trash-to-Energy Facility under a long-term contract expiring Owner: City of Tampa, in 2005. Florida 29. Westchester County, 60mW 2,250 TPD Owned and operated since 1984 by New York Westchester Resco Company L.P. Trash-to-Energy Facility ("Westchester Resco") (1)
- --------------------- (1) Westchester Resco is a limited partnership, 75% held by the Company, and 25% held indirectly by John Hancock Mutual Life Insurance Co. as a limited partner.
Project Under Construction DESIGN DESIGN PROJECT OUTPUT CAPACITY COMMENTS ------- ------ -------- -------- Baltimore, Maryland N/A 110 DTPD Owned by the Company. Construction Biosolids Dryer and expected to be completed in mid-1997. Pelletizer (Patapsco Project)
KEY: mW--Megawatts DTPD--Dry Tons Per Day TPD--Tons Per Day TPY--Tons Per Year MCF--Thousands of Cubic Feet MGD--Millions of Gallons Per Day 23 Non-Project Facilities Set forth below is a list of all of the primary non-project facilities owned by the Company as of December 31, 1995, and each of the principal plants and offices leased by the Company as of that date. Such list does not purport to be a complete list of all of the Company's leased properties.
LOCATION SITE USE NATURE OF INTEREST -------- -------- ------------------ Annapolis, Maryland......... Offices Lease Almelo, The Netherlands..... Manufacturing facility and office space Own Bilboa, Spain............... Offices Lease Billerica, Massachusetts.... Manufacturing facility and office space Lease Brisbane, Autralia.......... Manufacturing facility and office space Lease Charleville, France......... Manufacturing facility and office space Lease Chatelleurault, France...... Manufacturing facility Own Cologne, Germany............ Manufacturing facility and office space Lease Commerce, California........ Manufacturing facility and office space Lease Dublin, Ireland............. Manufacturing facility Own Halifax, United Kingdom..... Manufacturing facility and office space Own Hampton, New Hampshire...... Offices Own LaGrange, Georgia........... Manufacturing facility and office space Own New Brighton, Minnesota..... Manufacturing facility and office space Own Naperville, Illinois........ Offices Lease Parker, Arizona............. Carbon regeneration facility Own building/lease site Pittsburgh, Pennsylvania.... Offices Lease Rochester, New Hampshire.... Biosolids compost facility Own building/lease site Schaumburg, Illinois........ Offices Lease Singapore, Singapore........ Manufacturing facility and office space Own building/lease site Sturbridge, Massachusetts... Manufacturing facility Own Susona City, Japan.......... Manufacturing facility and office space Lease Taichung, Taiwan............ Manufacturing facility and office space Own Walterboro, South Carolina.. Foundry Own
ITEM 3 -- LEGAL PROCEEDINGS The business in which the Company is engaged is intrinsically connected with the protection of the environment and involves the potential for the discharge of materials into the environment. In the ordinary course of conducting its business activities, the Company becomes involved in judicial and administrative proceedings involving governmental authorities at the federal, state and local level including, in certain instances, proceedings instituted by citizens or local governmental authorities seeking to overturn governmental action in which governmental officials or agencies are named as defendants together with the Company or one or more of its subsidiaries, or both. In the majority of the situations where proceedings are commenced by governmental authorities, the matters involved relate to alleged technical violations of licenses or permits pursuant to which the Company operates or is seeking to operate or laws or regulations to which its operations are subject or are the result of different interpretations of the applicable requirements. From time to time the Company pays fines or penalties in proceedings relating to the Company's compliance with various environmental laws and 24 regulations. At December 31, 1995, a subsidiary of the Company was involved in one such proceeding where it is believed that sanctions involved may exceed $100,000. In addition, there are other routine lawsuits and claims pending against the Company and its subsidiaries incidental to their businesses. In the opinion of the Company's management, the ultimate liability, if any, with respect to the above proceedings and such other lawsuits and claims will not have a material adverse effect on the business and properties of the Company, taken as a whole, or its financial position or results of operations. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's security holders during the fourth quarter of 1995. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is traded on The New York Stock Exchange under the symbol "WTI." The table below sets forth by quarter, for the last two years, the high and low sales prices of the Common Stock on The New York Stock Exchange Composite Tape as reported by The Wall Street Journal (Midwest Edition) and also shows the cash dividends declared per share during such periods:
Market Price (1) -------------------- Cash Dividends 1994 High Low Declared Per Share ---- ---- --- ------------------ First Quarter $21-1/4 $17-1/4 -- Second Quarter $20-5/8 $17-3/4 $0.10 Third Quarter $18-3/4 $15-1/4 -- Fourth Quarter $15-1/2 $13-1/4 -- 1995 ---- First Quarter 17-1/2 12-1/2 -- Second Quarter 15-3/4 13-5/8 $0.11 Third Quarter 17 14-1/4 -- Fourth Quarter 16-3/4 14 --
The approximate number of holders of record of Common Stock as of March 20, 1996 was 15,900. During 1995, the Board of Directors declared, and the Company paid, an annual dividend in the amount of $0.11 per share. Future cash dividends will be considered by the Board of Directors based upon the Company's earnings and financial position and such other business considerations as the Board of Directors considers relevant. On December 12, 1995, the Company announced that the Board of Directors had authorized the repurchase of up to 20 million shares of Common Stock from time to time over the following 24-month period in the open market or in privately negotiated transactions, replacing a prior common stock repurchase program. During 1995, the Company repurchased a total of 7,194,600 shares. 25 ITEM 6 -- SELECTED FINANCIAL DATA The following selected consolidated financial information for each of the five years in the period ended December 31, 1995 is derived from the Company's Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon is incorporated by reference in this report. The information below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements, and the related Notes, and the other financial information filed as exhibits to this report and incorporated herein by reference. WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED SELECTED FINANCIAL DATA ------------------------------------ (000s omitted except per share amounts)
Years Ended December 31 ------------------------------------------------------------ 1991 1992 1993 1994 1995 RESULTS OF OPERATIONS Revenue $1,173,449 $1,483,054 $1,142,219 $1,324,567 $1,451,675 Income from continuing operations 126,059 176,382 156,755 180,162 162,149 Net income 126,059 134,152 163,102 184,895 137,858 Weighted average common and common equivalent shares outstanding 172,400 188,200 188,900 189,900 185,000 Earnings per common and common equivalent share: Income from continuing operations $ 0.73 $ 0.94 $ 0.83 $ 0.95 $ 0.88 Net income 0.73 0.71 0.86 0.97 0.75 Dividends declared per common share -- 0.04 0.08 0.10 0.11 FINANCIAL CONDITION (at year end) Total assets $2,712,173 $2,986,024 $3,081,709 $3,276,611 $3,220,193 Working capital 484,427 240,415 (2,999) (16,027) 98,165 Long-term debt 991,578 858,634 777,250 735,933 704,414 Stockholders' equity 891,351 1,039,343 1,286,838 1,424,882 1,450,265
- ---------------------------- . Certain prior period amounts have been reclassified to conform with the current year presentation. . 1991 income from continuing operations includes a $47.1 million pretax gain on the sale of certain foreign equity investments. . 1992 income from continuing operations includes a $47.0 million nontaxable gain related to the initial public offering of shares by WM International. . 1992 net income includes one-time charges of $42.2 million related to the adoption of two new financial accounting standards: Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." 26 . Beginning in 1993, the Company no longer consolidates the financial results of certain businesses contributed to form, in part, Rust. Revenue from the contributed businesses amounted to approximately $397.8 million and $554.7 million in 1991 and 1992, respectively. Beginning in 1993, the Company's share of Rust's net income is included in equity in earnings of affiliates. See Note 3 of the Notes to Consolidated Financial Statements. . 1993 income from continuing operations includes a $7.7 million nontaxable gain related to issuance of stock by Rust and a $6.5 million increase in the income tax provision due to revaluing deferred income taxes as a result of the enactment of the Omnibus Budget Reconciliation Act of 1993. See Notes 3 and 4 of the Notes to Consolidated Financial Statements. . 1993, 1994 and 1995 net income includes equity income from discontinued operations of Rust of $6.3 million, $4.7 million and $5.8 million, respectively. It is not practical to restate periods prior to 1993 for these discontinued operations. Net income for 1995 also includes a $30.1 million charge for the Company's equity in Rust's provision for loss on the disposal of discontinued operations. See Note 3 of the Notes to Consolidated Financial Statements. . 1995 income from continuing operations includes a reduction in equity income of $25.6 million related to a special charge recorded by WM International. See Note 3 of the Notes to Consolidated Financial Statements. . The increase in weighted average common and common equivalent shares outstanding in 1992 is largely due to shares issued in connection with acquisitions. During 1995, the weighted average common and common equivalent shares outstanding decreased due to stock repurchases. See Note 5 of the Notes to Consolidated Financial Statements. ---------------------------------------------- ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 8 through 13 of the Company's 1995 Annual Report to Stockholders (the "Annual Report") which discussion is filed as an exhibit to this report and incorporated herein by reference. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) The Consolidated Balance Sheets as of December 31, 1994 and 1995, Consolidated Statements of Income, Cash Flows and Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1995 and the Notes to Consolidated Financial Statements set forth on pages 14 through 27 of the Annual Report are filed as an exhibit to this report and incorporated herein by reference. (b) Selected Quarterly Financial Data (Unaudited) is set forth in Note 11 of the Notes to Consolidated Financial Statements referred to in Item 8(a) above and incorporated herein by reference. 27 ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors. The information appearing under the caption "Election of Directors" on pages 2 through 4 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 1, 1996 (the "Proxy Statement"), is incorporated herein by reference. Executive Officers. Information with respect to executive officers of the Company is set forth under the caption "Executive Officers of the Registrant" in Item 1 of this report. ITEM 11 -- EXECUTIVE COMPENSATION Information appearing under the caption "Compensation" on pages 8 through 12 of the Proxy Statement is incorporated herein by reference. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing under the caption "Principal Stockholders" on pages 1 and 2 of the Proxy Statement and under the caption "Securities Ownership of Management" on pages 5 through 7 of the Proxy Statement is incorporated herein by reference. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information appearing under the caption "Certain Transactions and Other Matters" on pages 19 through 25 of the Proxy Statement and in the first full paragraph on page 4 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) FINANCIAL STATEMENTS: The following financial statements and supplementary data of the Company are filed as an exhibit hereto and incorporated herein by reference: (i) Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995. (ii) Consolidated Balance Sheets as of December 31, 1994 and 1995. (iii) Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995. (iv) Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995. 28 (v) Notes to Consolidated Financial Statements. (vi) Report of Independent Public Accountants -- Arthur Andersen LLP. (2) SCHEDULES: Financial Statement Schedule II of the Company and the corresponding Report of Independent Public Accountants on Schedule are included in this report. All other schedules have been omitted since they are not applicable, not required, or the information is included in the above-referenced financial statements or notes thereto. (3) EXHIBITS: The exhibits to this report are listed in the Exhibit Index contained elsewhere herein. Included in the exhibits listed therein are the following exhibits which constitute management contracts or compensatory plans or arrangements:* (i) Restricted Unit Plan for Non-Employee Directors of the registrant as amended through June 10, 1991 (incorporated by reference to Exhibit 19.03 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). (ii) Amendment, dated as of December 6, 1991, to the Restricted Unit Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 19.05 to registrant's 1991 annual report on Form 10-K). (iii) Deferred Director's Fee Plan adopted June 10, 1991 (incorporated by reference to Exhibit 19.02 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). (iv) 1988 Stock Plan for Executive Employees of Old WTI and its subsidiaries ("1988 Stock Plan") (incorporated by reference to Exhibit 28.1 to Amendment No. 1 to the registrant's registration statement on Form S-8, Reg. No. 33-31523). (v) Amendments, dated as of September 7, 1990, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.02 to the registrant's 1990 annual report on Form 10-K). (vi) Amendment, dated as of November 1, 1990, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.04 to the registrant's 1990 annual report on Form 10-K). (vii) Amendment, dated as of December 6, 1991, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.02 to the registrant's 1991 annual report on Form 10-K). - ------------------------- * In the case of incorporation by reference to documents filed under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. 29 (viii) 1986 Stock Plan for Executive Employees of the registrant and its subsidiaries ("1986 Stock Plan") (incorporated by reference to Exhibit 28.2 to Amendment No. 1 to the registrant's registration statement on Form S-8, Reg. No. 33-13720). (ix) Amendment, dated as of November 1, 1990, to the 1986 Stock Plan (incorporated by reference to Exhibit 19.03 to the registrant's 1990 annual report on Form 10-K). (x) Amendment, dated as of December 6, 1991, to the 1986 Stock Plan (incorporated by reference to Exhibit 19.01 to the registrant's 1991 annual report on Form 10-K). (xi) 1991 Performance Unit Plan of the registrant (incorporated by reference to Exhibit 10.48 of the registrant's 1990 annual report on Form 10-K). (xii) Wheelabrator Technologies Inc. Corporate Incentive Bonus Plan (as amended and restated as of March 13, 1995) (incorporated by reference to Exhibit 10.38 to the registrant's 1994 annual report on Form 10-K). (xiii) Wheelabrator Technologies Inc. Long Term Incentive Plan (as amended and restated as of March 14, 1994) (incorporated by reference to Exhibit 10.40 to the registrant's 1993 annual report on Form 10-K). (xiv) Retirement Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 10.32 to the registrant's 1988 annual report on Form 10-K). (xv) Amendment, dated as of September 7, 1990, to the Retirement Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 19.01 to the registrant's 1990 annual report on Form 10-K). (xvi) Amendment, dated June 10, 1991, to the Retirement Plan for Non- Employee Directors of the registrant (incorporated by reference to Exhibit 19.01 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). (xvii) 1991 Stock Option Plan for Non-Employee Directors ("1991 Directors Plan") of the registrant adopted June 10, 1991 (incorporated by reference to Exhibit 19.04 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). (xviii) Amendment to 1991 Directors Plan dated as of December 22, 1993 (incorporated by reference to Exhibit 10.46 to the registrant's 1993 annual report on Form 10-K). (xix) Amendment to 1991 Directors Plan dated as of August 29, 1994 (incorporated by reference to Exhibit 10 to the registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1994). (xx) 1992 Stock Option Plan of the registrant (incorporated by reference to Exhibit 10.45 to the registrant's 1991 annual report on Form 10-K). 30 (B) REPORTS ON FORM 8-K: The Company did not file any reports on Form 8-K during the fiscal quarter ended December 31, 1995. 31 WHEELABRATOR TECHNOLOGIES INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (000'S OMITTED)
BALANCE AT ACCOUNTS BALANCE AT BEGINNING CHARGED WRITTEN END OF YEAR TO INCOME OFF OTHER(1) OF YEAR ---------- --------- -------- -------- ---------- 1993 Reserve for doubtful accounts $14,242 $2,754 ($1,917) ($5,795) $ 9,284 1994 Reserve for doubtful accounts $ 9,284 $2,783 ($2,955) $ 350 $ 9,462 1995 Reserve for doubtful accounts $ 9,462 $5,490 ($1,509) ($1,256) $12,187
(1) Reserves of purchased companies, translation adjustments, and transfers to affiliates. 32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Stockholders of Wheelabrator Technologies Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Wheelabrator Technologies Inc. Annual Report to Stockholders for 1995 incorporated by reference in this Form 10-K, and have issued our report thereon dated February 2, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of Wheelabrator Technologies Inc. included on page 32 of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated 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 consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP New York, New York, February 2, 1996 33 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, in Oak Brook, Illinois on the 29th day of March 1996. WHEELABRATOR TECHNOLOGIES INC. By /s/ PHILLIP B. ROONEY --------------------------- PHILLIP B. ROONEY, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 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.
Name Title Signature Date ---- ----- --------- ---- Phillip B. Rooney Director, Chairman of the /s/ PHILLIP B. ROONEY March 29, 1996 Board and Chief Executive --------------------------- Officer Phillip B. Rooney John D. Sanford Executive Vice President, /s/ JOHN D. SANFORD March 29, 1996 Treasurer and Chief --------------------------- Financial Officer John D. Sanford Richard S. Haak, Jr. Controller and Principal /s/ RICHARD S. HAAK, JR. March 29, 1996 Accounting Officer --------------------------- Richard S. Haak, Jr. Dean L. Buntrock Director /s/ DEAN L. BUNTROCK March 29, 1996 --------------------------- Dean L. Buntrock William M. Daley Director /s/ WILLIAM M. DALEY March 29, 1996 --------------------------- William M. Daley Kay Hahn Harrell Director /s/ KAY HAHN HARRELL March 29, 1996 --------------------------- Kay Hahn Harrell Donald F. Flynn Director /s/ DONALD F. FLYNN March 29, 1996 --------------------------- Donald F. Flynn Paul M. Montrone Director /s/ PAUL M. MONTRONE March 29, 1996 --------------------------- Paul M. Montrone James E. Koenig Director /s/ JAMES E. KOENIG March 29, 1996 --------------------------- James E. Koenig Manuel Sanchez Director /s/ MANUEL SANCHEZ March 29, 1996 --------------------------- Manuel Sanchez Thomas P. Stafford Director /s/ THOMAS P. STAFFORD March 29, 1996 --------------------------- Thomas P. Stafford
34 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 1. Inapplicable. 2.01 Agreement and Plan of Merger, dated March 30, 1990 and amended as of July 24, 1990, among the registrant, WMX Technologies, Inc. ("WMX") and WM Sub, Inc. (incorporated by reference to Exhibit 2.01 to the registrant's statement on Form S-4, Reg. No. 33-36118). 2.02 Rust International Inc. Organizational Agreement, dated as of December 31, 1992 ("Organizational Agreement"), by and among the registrant, The Brand Companies, Inc. ("Brand") and Chemical Waste Management, Inc. ("CWM") (incorporated by reference to Exhibit 7 to Amendment No. 6 to Statement on Schedule 13D filed on January 5, 1993 by WMX, the registrant and CWM relating to securities of Brand, Commission File No. 1-7327). 3.01 Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.01 to registrant's 1989 annual report on Form 10-K). 3.02 Certificate of Amendment to the registrant's Restated Certificate of Incorporation dated May 6, 1993 (incorporated by reference to Exhibit 19 to the registrant's report on Form 10-Q for the quarter ended March 31, 1993). 3.03 By-Laws of the registrant as amended through November 1, 1990 (incorporated by reference to Exhibit 3.03 to the registrant's 1990 annual report on Form 10-K). 4. None. 5. Inapplicable. 6. Inapplicable. 7. Inapplicable. 8. Inapplicable. 9. None. 10.01 Master Support Agreement, dated as of February 26, 1986, among AlliedSignal Inc. ("AlliedSignal"), the registrant and Signal Capital Corporation, as amended and restated as of January 27, 1987, and as further amended and restated as of December 7, 1988, among AlliedSignal, Wheelabrator Technologies Inc. ("Old WTI"), the Guaranteeing Subsidiaries referred to therein, the Non-Company Resco Subsidiaries referred to therein, the registrant and Koll Real Estate Group, Inc.
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-1 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- ("KREG") (incorporated by reference to Exhibit 10.22 to Amendment No. 3 on Form 8 to KREG's registration statement on Form 10, Commission File No. 0-17189). 10.02 Assignment, Assumption and Release Agreement, dated as of December 7, 1988, among the registrant, Old WTI, the Old Guaranteeing Subsidiaries (as defined therein) and AlliedSignal (incorporated by reference to Exhibit 10.22B to Amendment No. 3 on Form 8 to KREG's registration statement on Form 10, Commission File No. 0-17189). 10.03 Assignment and Assumption Agreement, dated as of December 7, 1988, among the registrant, Old WTI and KREG (incorporated by reference to Exhibit 10.18B to KREG's 1988 annual report on Form 10-K, Commission File No. 0-17189). 10.04 Land Option Agreement ("Land Option Agreement"), dated as of August 12, 1988, between Old WTI and Waste Management, Inc. ("WMI") (incorporated by reference to Exhibit 10.15 to the registrant's 1988 annual report on Form 10-K). 10.05 Amendment No. 1, dated as of June 1, 1992, to Land Option Agreement between Resco Holdings Inc. ("Resco"), as successor by merger to Old WTI, and WMI (incorporated by reference to Exhibit 19.01 to the registrant's 1992 annual report on Form 10-K). 10.06 Amendment No. 2 dated as of November 15, 1995 to Land Option Agreement. 10.07 Second Amended and Restated Airspace Dedication Agreement, dated as of December 13, 1992, between Resco and WMI (incorporated by reference to Exhibit 19.02 to the registrant's 1992 annual report on Form 10-K). 10.08 Disposal Agreement, dated as of March 1, 1989, between Waste Management Inc. of Florida and Broward Waste Energy (incorporated by reference to Exhibit 10.17A to the registrant's 1988 annual report on Form 10-K). 10.09 Guaranty, dated August 2, 1988, from WMX to the registrant and Wheelabrator Technologies of North America Inc., formerly known as Wheelabrator Technologies Inc. ("WTNA") (incorporated by reference to Exhibit 10.19 to the registrant's 1988 annual report on Form 10-K). 10.10 Restricted Unit Plan for Non-Employee Directors of the registrant, as amended through June 10, 1991 (incorporated by reference to Exhibit 19.03 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991).
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-2 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 10.11 Amendment, dated as of December 6, 1991, to the Restricted Unit Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 19.05 to the registrant's 1991 annual report on Form 10-K). 10.12 Deferred Director's Fee Plan adopted June 10, 1991 (incorporated by reference to Exhibit 19.02 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). 10.13 Lease Agreement, dated as of September 15, 1987, between Wilmington Trust Company, as Owner Trustee, lessor, and Wheelabrator Millbury Inc., lessee (incorporated by reference to Exhibit 10.51 to the registrant's 1988 annual report on Form 10-K). 10.14 Lease Agreement, dated as of December 30, 1987, as amended and restated as of April 1, 1988, between Wilmington Trust Company, as Corporate Owner Trustee, and Donald E. Smith, as Individual Owner Trustee, lessor, and Signal Shasta Energy Company Inc., lessee (incorporated by reference to Exhibit 10.52 to the registrant's 1988 annual report on Form 10-K). 10.15 Lease Agreement, dated as of September 15, 1988, between State Street Bank and Trust Company of Connecticut, N.A., lessor, and Baltimore Refuse Energy Systems Company, Limited Partnership, lessee (incorporated by reference to Exhibit 10.40 to registrant's registration statement on Form S-4, Reg. No. 33-36118). 10.16 Second Amendment and Restatement of Lease Agreement, dated as of May 1, 1988, between the First National Bank of Boston, as Corporate Owner Trustee, James E. Mogavero, as Individual Owner Trustee, lessor, and Bridgeport Resco, lessee (incorporated by reference to Exhibit 10.41 to registrant's registration statement on Form S-4, Reg. No. 33- 36118). 10.17 Modification Agreement, dated as of August 24, 1989, among the registrant, Old WTI, WMI, KREG and Resco (incorporated by reference to Exhibit 28.01 to the registrant's Form 8-K dated August 24, 1989). 10.18 Assignment, Assumption and Release Agreement, dated December 18, 1989, among KREG, Henley Holdings, Inc., Henley, Henley Support Co. Two, the registrant and Resco amending the Modification Agreement (incorporated by reference to Exhibit 10.69 to the registrant's registration statement on Form S-4, Reg. No. 33-36118).
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-3 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 10.19 Letter Agreement, dated October 25, 1990, among the registrant, WMI, Resco, Henley and Henley Support Co. Two amending the Modification Agreement (incorporated by reference to Exhibit 10.46 to the registrant's 1990 annual report on Form 10-K). 10.20 Letter Agreement, dated November 8, 1991, among the registrant, Henley, KREG, WMX, WMI, New Henley Holdings Inc. and WTNA, amending the Modification Agreement (incorporated by reference to Exhibit 10.23 to the registrant's 1991 annual report on Form 10-K). 10.21 1988 Stock Plan for Executive Employees of Old WTI and its subsidiaries ("1988 Stock Plan") (incorporated by reference to Exhibit 28.1 to Amendment No. 1 to the registrant's registration statement on Form S-8, Reg. No. 33-31523). 10.22 Amendments, dated as of September 7, 1990, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.02 to the registrant's 1990 annual report on Form 10-K). 10.23 Amendment, dated as of November 1, 1990, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.04 to the registrant's 1990 annual report on Form 10-K). 10.24 Amendment, dated as of December 6, 1991, to the 1988 Stock Plan (incorporated by reference to Exhibit 19.02 to the registrant's 1991 annual report on Form 10-K). 10.25 1986 Stock Plan for Executive Employees of the registrant and its subsidiaries ("1986 Stock Plan") (incorporated by reference to Exhibit 28.2 to Amendment No. 1 to the registrant's registration statement on Form S-8, Reg. No. 33-31523). 10.26 Amendment, dated as of November 1, 1990, to the 1986 Stock Plan (incorporated by reference to Exhibit 19.03 to the registrant's 1990 annual report on Form 10-K). 10.27 Amendment, dated as of December 6, 1991, to the 1986 Stock Plan (incorporated by reference to Exhibit 19.01 to the registrant's 1991 annual report on Form 10-K). 10.28 Restated Funding Agreement, dated as of September 7, 1990, among Resco, the registrant and WMX (incorporated by reference to Exhibit 10.34 to the registrant's 1990 annual report on Form 10-K). 10.29 Intellectual Property Licensing Agreement, dated as of September 7, 1990, by and among Waste Management International, Inc. ("WMII"), WMI and the registrant (incorporated by reference to Exhibit 10.37 to the registrant's 1990 annual report on Form 10-K).
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-4 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 10.30 Amended and Restated Master Intercorporate Agreement, dated as of November 1, 1993, by and among WMX, CWM and the registrant (incorporated by reference to Exhibit 10.36 to the registrant's 1993 annual report on Form 10-K). 10.31 Wheelabrator Technologies Inc. Corporate Incentive Bonus Plan (as amended and restated as of March 13, 1995) (incorporated by reference to Exhibit 10.38 to the registrant's 1994 annual report on Form 10-K). 10.32 Wheelabrator Technologies Inc. Long Term Incentive Plan (as amended and restated as of March 23, 1994) (incorporated by reference to Exhibit 10.40 to the registrant's 1993 annual report on Form 10-K). 10.33 Retirement Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 10.32 to the registrant's 1988 annual report on Form 10-K). 10.34 Amendment, dated as of September 7, 1990, to the Retirement Plan for Non-Employee Directors of the registrant (incorporated by reference to Exhibit 19.01 to the registrant's 1990 annual report on Form 10-K). 10.35 Amendment, dated June 10, 1991, to the Retirement Plan for Non- Employee Directors of the registrant (incorporated by reference to Exhibit 19.01 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). 10.36 1991 Stock Option Plan for Non-Employee Directors of the registrant ("1991 Directors Plan") adopted June 10, 1991 (incorporated by reference to Exhibit 19.04 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1991). 10.37 Amendment to 1991 Directors Plan dated as of December 22, 1993 (incorporated by reference to Exhibit 10.46 to the registrant's 1993 annual report on Form 10-K). 10.38 Amendment to 1991 Directors Plan adopted on August 29, 1994 (incorporated by reference to Exhibit 10.46 to the registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1994). 10.39 1992 Stock Option Plan of the registrant (incorporated by reference to Exhibit 10.45 to the registrant's 1991 annual report on Form 10-K). 10.40 Rust Intercorporate Services Agreement ("Rust Intercorporate Services Agreement"), dated as of January 1, 1993, by and among the registrant, Rust
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-5 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- International Inc. ("Rust"), WMX and CWM (incorporated by reference to Exhibit 10.42 to the registrants's 1992 annual report on Form 10-K). 10.41 Amendment No. 1 dated as of August 10, 1993 to Rust Intercorporate Services Agreement (incorporated by reference to Exhibit 10.49 to the registrant's 1993 annual report on Form 10-K). 10.42 Amendment No. 2 dated as of August 25, 1995 to Rust Intercorporate Services Agreement 10.43 Amendment No. 3 dated as of December 31, 1995 to Rust Intercorporate Services Agreement 10.44 Organizational Agreement (see Item 2.02 hereof). 10.45 Third Amended and Restated International Development Agreement, dated as of January 1, 1993, among the registrant, WMX, CWM, WMII, Waste Management International B.V. ("WMIBV"), Waste Management International plc ("WM International"), Rust, WTI International Holdings Inc. ("WTI International") and RIH Inc. ("RIH") (incorporated by reference to Exhibit 19.05 to the registrant's 1992 annual report on Form 10-K). 10.46 First Amended and Restated International Business Opportunities Agreement ("IBOA"), dated as of January 1, 1993, by and among the registrant, WMX, CWM, WM International, WMII and Rust (incorporated by reference to Exhibit 28 to the registrant's registration statement on Form S-3, Reg. No. 33-59606). 10.47 Amendment Agreement, dated as of January 28, 1994, by and among the registrant, WMX, CWM, WM International, WMII and Rust amending the IBOA (incorporated by reference to Exhibit 10.53 to the registrant's 1993 annual report on Form 10-K). 10.48 Amendment Agreement, dated as of July 10, 1995, by and among the registrant, WMX, CWM, WM International, WMII and Rust amending the IBOA (incorporated by reference to Exhibit 10 to the registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1995). 10.49 Amended and Restated Master Dividend Deed, dated December 30, 1992, by and among the registrant, CWM, WMII, WMX's foreign nominee, WM International, WMIBV, RIH and WTI International (incorporated by reference to Exhibit 19.07 to the registrant's 1992 annual report on Form 10-K).
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-6 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 10.50 Reimbursement Agreement, dated March 10, 1993, between WMX and the registrant (incorporated by reference to Exhibit 10.51 to the registrant's registration statement on Form S-1, Reg. No. 33-47575). 11. None. 12. None. 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations. 13.2 Consolidated Financial Statements, Supplementary Data and Report of Independent Accountants. 14. Inapplicable. 15. Inapplicable. 16. None. 17. Inapplicable. 18. None. 19. Inapplicable. 20. Inapplicable. 21. List of subsidiaries of the registrant. 22. None. 23 Consent of Arthur Andersen LLP. 24. None. 25. Inapplicable. 26. Inapplicable.
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-7 WHEELABRATOR TECHNOLOGIES INC. EXHIBIT INDEX
Number and Description of Exhibit* - ---------------------------------- 27. Financial Data Schedule. 28. None.
- ------------------------- * In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, the registrant's file number under that Act is 0-14246. E-8 EX-10.06 2 LAND OPTION AGREEMENT Exhibit 10.06 LAND OPTION AGREEMENT AMENDMENT NO. 2 Amendment No. 2 ("Amendment No. 2") dated as of November 15, 1995 to the Land Option Agreement dated as of August 12, 1988 between Resco Holdings Inc. (successor by merger to Wheelabrator Holdings Inc.), a Delaware corporation (the "Grantee"), and Waste Management, Inc. (formerly known as Waste Management of North America, Inc.), an Illinois corporation (the "Grantor"), as previously amended by Amendment No. 1 thereto dated as of June 12, 1992 between Grantor and Grantee (collectively, the "Land Option Agreement"). All capitalized terms used herein and not otherwise defined shall have the meanings specified therefor in the Land Option Agreement. WHEREAS, pursuant to the Land Option Agreement, Grantor granted Grantee an exclusive option to purchase, lease or sublease portions of Landfills to use as sites for constructing, financing and operating Facilities; and WHEREAS, due to changes in market conditions affecting waste-to-energy plants which have occurred since 1988, the parties' intent in entering into the Land Option Agreement has not been fully realized; and WHEREAS, Grantor and Grantee have determined that it is in their respective best interests to amend the Land Option Agreement as set forth below to afford Grantee greater opportunities to make use of Landfills to use as sites for Facilities; and WHEREAS, WMX Technologies, Inc., a Delaware corporation and Grantor's parent, wishes to join in this Amendment No. 2 for the limited purpose of guaranteeing, to the extent provided for herein, Grantee's ability to realize a benefit from the Option; NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth below, the parties hereto agree as follows: 1. Amendment of Recital B to Land Option Agreement. The last sentence of Recital B to the Land Option Agreement is hereby amended and, as so amended, is hereby restated to read as follows: "As used in this Agreement, the terms "Current Landfills," "Future Landfills" and "Landfills" shall include any real estate or interest therein owned, leased or otherwise held by Chemical Waste Management, Inc., a Delaware corporation ("CWM") and a wholly-owned subsidiary of WMX Technologies, Inc., a Delaware corporation ("WMX"), or any wholly-owned subsidiary of CWM." 2. Amendment of Section 1.3 (Term of Option). The first sentence of Section 1.3 of the Land Option Agreement is hereby amended and, as so amended, is hereby restated to read as follows: "1.3 Term of Option. The Option as to all the Landfills shall expire at 5:00 p.m., Central Standard Time, or Central Daylight Savings Time, as the case may be ("CST"), on December 31, 1995, unless on or before such date and time Grantee pays to Grantor an additional payment (the "Extension Payment") in the amount of $15,000,000, in which event the Option shall expire at 5:00 p.m. CST on December 31, 2020 (said expiration time and date as the same may be extended are collectively referred to herein as the "Expiration Date")." 3. Amendment of Section 1.4 (Purchase Price or Rental). Section 1.4 of the Land Option Agreement is hereby amended as follows: (a) Section 1.4(b) is hereby amended and, as so amended, is hereby restated in its entirety to read as follows: "The base price of an Option Parcel (the "Base Price") shall be the book value per acre for such Option Parcel (including the book value of any improvements situated on the Option Parcel) as reflected in the latest available financial statements of WMX prior to the 30th day prior to the date of the Closing." (b) Section 1.4 is hereby further amended by deleting subsection (C) thereof in its entirety. 4. Addition of Section 2.8 (Schedule of Allocation). The Land Option Agreement is hereby amended by adding the following Section 2.8: "Section 2.8 Schedule of Allocation. Upon exercise of a Facility Option in accordance with Section 2.7 hereof, Grantee hereby agrees to allocate at least the portion of the Option specified on Exhibit A attached hereto to the acquired or leased parcel." 5. Addition of Section 9.10 (Change in Control). The Land Option Agreement is hereby amended by adding the following Section 9.10: "Section 9.10 Change in Control. Notwithstanding any other provision of this Agreement to the contrary, the Option shall immediately cease to be exercisable by Grantee as to all the Landfills for the remainder of its term upon the occurrence of a Change in Control. "Change in Control" shall mean the occurrence of any of the following events: (i) the Grantee or its parent is merged or consolidated or reorganized into or with another corporation or other legal person other than, in the case of the Grantee, its parent or an affiliate of its parent (an "Acquiror") and as a result of such merger, consolidation or reorganization less than 75% of the outstanding voting securities or other capital interests of the surviving, resulting, or acquiring corporation or other legal person are owned in the aggregate by the stockholders of the Grantee or its parent, as the case may be, directly or indirectly, immediately prior to such merger, consolidation or reorganization, other than the Acquiror or any corporation or other legal person controlling, controlled by or under common control with the Acquiror; (ii) the Grantee sells all or substantially all of its business and/or assets to an Acquiror, of which less than 75% of the outstanding voting securities or other capital interests are owned in the aggregate by the stockholders of the Grantee or its parent, directly or indirectly, immediately prior to such sale, other than any corporation or other legal person controlling, controlled by or under common control with the Acquiror; (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Grantee or its parent cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Grantee's or its parent's stockholders, as the case may be, of each new director of the Grantee or its parent, as the case may be, was approved by a vote of at least two-thirds of such directors of the Grantee or its parent, as the case may be, then still in office who were directors of the Grantee or its parent, as the case may be, at the beginning of any such period. Notwithstanding the above, any transaction which would otherwise constitute a Change in Control which is approved by a majority of the Board of Directors of the Grantee's parent prior to such transaction will not constitute a Change in Control under this Agreement." 6. Addition of Section 9.11 (WMX Guarantee). The Land Option Agreement is hereby amended by adding Section 9.11 as follows: "Section 9.11 WMX Guarantee. Notwithstanding any Change in Control, WMX hereby guarantees the payment to Grantee of the book value (less related deferred taxes), as reflected in an audited balance sheet of Grantee as of the Expiration Date, of any portion of the Option which, as of the Expiration Date, shall properly remain unallocated to parcels acquired or leased in accordance with the terms of Section 2.8 hereof and Exhibit A attached hereto. Such payment shall be made in cash by WMX to Grantee within 10 days following Grantee's delivery to WMX of the balance sheet hereinabove referred to accompanied by an auditor's report in form and substance reasonably satisfactory to WMX." 7. Addition of Exhibit A (Schedule of Allocation). The following Schedule of Allocation shall be added to the Land Option Agreement as Exhibit A thereto: "Schedule of Allocation Minimum Amount of Option Type of Facility For Which To Be Allocated to Option Parcel Option Parcel Is Acquired Or Leased -------------------------------- ----------------------------------- $30,000,000/1/ 1,500 tons per day solid waste energy conversion facility/1/ $ 500,000 Any biosolids management or organic waste composting or pelletizing facility /1/ A proportionate amount of the Option shall be allocated at a minimum to solid waste energy conversion facilities with greater or lesser capacities than 1,500 tons per day. The minimum portion of the Option which shall be allocated to Facilities not specified above shall be agreed upon by the parties not later than the Closing of the sale or lease of the Option Parcel involved." 8. Ratification of Agreement. Except as amended hereby, all of the terms and conditions of the Land Option Agreement shall remain in effect, and the Land Option Agreement, as amended by this Amendment No. 2, is hereby in all respects ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be executed as of the date first above written. RESCO HOLDINGS INC. By: /s/ Thomas A. Witt --------------------------------------- Vice President WASTE MANAGEMENT, INC. By: /s/ Donald Chappel --------------------------------------- Vice President WMX TECHNOLOGIES, INC. By: /s/ Herbert A. Getz --------------------------------------- Vice President EX-10.42 3 AMENDMENT #2 TO RUST INTERCORPORATE SER. AGMNT. Exhibit 10.42 AMENDMENT NO. 2 TO RUST INTERCORPORATE SERVICES AGREEMENT This Amendment No. 2 (the "Amendment") to that certain Rust Intercorporate Services Agreement (the "Services Agreement") dated as of January 1, 1993 by and among WMX Technologies, Inc. (formerly known as Waste Management, Inc.) ("WMX"), Chemical Waste Management, Inc. ("CWM"), Wheelabrator Technologies Inc. ("WTI") and Rust International Inc. ("Rust"), all Delaware corporations, is made as of August 25, 1995 by and among WMX, CWM, WTI and Rust. RECITALS -------- WHEREAS, WMX, CWM, WTI and Rust desire to extend the term of the Services Agreement as set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: AGREEMENTS ---------- 1. Modification of Services Agreement. Section 14(a) of the Services Agreement is hereby amended to read in its entirety as follows: "14. Miscellaneous. (a) Term. This Agreement and the parties' respective rights and obligations hereunder shall be deemed effective as of the Effective Date. Subject to Section 13 above, this Agreement will (unless terminated earlier pursuant to other provisions of this Agreement) continue through December 31, 2002 provided, however, that the Company's obligations pursuant to this Agreement to make any payments to WMX or its Subsidiaries, and WMX's obligations to make any payments to the Company or its Subsidiaries, of any Indebtedness, interest, cost, expense, fee, charge, premium allocation or other amounts, the parties' respective obligations pursuant to Sections 9, 12 and 13 above and this Section 14 shall survive any and all terminations." 2. Other Provisions. Except as expressly set forth in this Amendment, all provisions of the Services Agreement in effect immediately prior to the execution and delivery of this Amendment shall remain in full force and effect in accordance with their terms. 3. Choice of law. This Amendment shall be interpreted and construed in accordance with the internal laws (and not the conflicts of laws rules) of the State of Illinois applicable to contracts made and to be performed in the State of Illinois. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date set forth above. WMX TECHNOLOGIES, INC. By: /s/ Thomas A. Witt ---------------------------------------- Name: Thomas A. Witt Title: Vice President CHEMICAL WASTE MANAGEMENT, INC. By: /s/ Thomas A. Witt ---------------------------------------- Name: Thomas A. Witt Title: Secretary WHEELABRATOR TECHNOLOGIES INC. By: /s/ Herbert A. Getz ---------------------------------------- Name: Herbert A. Getz Title: Secretary RUST INTERNATIONAL INC. By: /s/ Jan Stern Reed ---------------------------------------- Name: Jan Stern Reed Title: Assistant Secretary EX-10.43 4 AMENDMENT #3 TO INTERCORPORATE SER. AGMNT. Exhibit 10.43 AMENDMENT NO. 3 TO RUST INTERCORPORATE SERVICES AGREEMENT This Amendment No. 3 (the "Amendment") to that certain Rust Intercorporate Services Agreement (the "Services Agreement") dated as of January 1, 1993 by and among WMX Technologies, Inc. (formerly known as Waste Management, Inc.) ("WMX"), Chemical Waste Management, Inc. ("CWM"), Wheelabrator Technologies Inc. ("WTI") and Rust International Inc. ("Rust" or the "Company"), all Delaware corporations, is made as of December 31, 1995 by and among WMX, CWM, WTI and Rust. RECITALS -------- WHEREAS, WMX, CWM, WTI and Rust desire to amend the Services Agreement in order for WMX and its Subsidiaries to provide additional services in connection with the management of Rust Industrial Services Inc. ("RIS"), a wholly owned subsidiary of Rust, as set forth herein; and WHEREAS, WMX, CWM, WTI and Rust desire to alter the administrative arrangements which apply to the employee benefit and welfare plans (other than stock option plans) referred to in the Services Agreement to reflect organizational changes in Rust; NOW, THEREFORE, in consideration of the mutual promises herein set forth and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: AGREEMENTS ---------- 1. RIS Services. Section 2(f) is added to the Services Agreement to read in its entirety as follows: "(f) RIS Services. WMX shall cause its Subsidiaries to operate and manage the business of RIS in a reasonable and prudent manner and in accordance with all applicable statutes, regulations, ordinances, rules, governmental consent agreements and orders, as well as such policies and procedures applicable to scaffolding services, industrial cleaning services, and utility services as may be adopted from time to time by Rust or RIS, subject to such exceptions or modifications thereto as Rust or RIS and WMX may from time to time agree upon. All capital and other expenditures incurred with respect to the business of RIS shall be for the account of RIS and shall be subject to approval by RIS in accordance with the procedures which shall be established by RIS. Notwithstanding the provisions of Section 9 of the Services Agreement, for providing such operation and management services to RIS, WMX and its Subsidiaries shall be allowed to allocate regional and corporate overhead to RIS on a basis no less favorable than the basis on which WMX and its Subsidiaries allocate such overhead to their other, wholly owned operating units." 2. Employee Benefits and Benefit Services. Section 6 of the Services Agreement is hereby amended to read in its entirety as follows: "6. Employee Benefits and Payroll and Benefit Services by the Company. (a) Responsibility for Savings and Retirement Plan. With respect to the Wheelabrator-Rust Savings and Retirement Plan jointly sponsored by the Company and WTI, the Company shall be responsible for all claims incurred under such plan and all contributions required by the terms of such plan with respect to employees of the Company or any of its Subsidiaries and WTI shall be responsible for all claims incurred under such plan and all contributions required by the terms of such plan with respect to employees of WTI or any of its Subsidiaries. If in the future WTI or any of its Subsidiaries establishes one or more savings and retirement plans for the benefit of its and its Subsidiaries' employees, the Company shall cause the trustees of the Savings and Retirement Plan to transfer to the trustees of such WTI retirement plan or plans cash, securities or other property, or a combination thereof, as determined by the Company, subject to approval by WTI (which shall not be unreasonably withheld), in an amount equal to the aggregate account balance of WTI's and its Subsidiaries' affected present or former employees (other than present or former employees of the Company or its Subsidiaries) as of the date of the transfer. "(b) Benefits Administration. WTI shall be solely responsible for the administration of employee benefit plans sponsored by WTI or any of its Subsidiaries ("WTI Plans"). However, if requested by WTI, WMX shall cause its Subsidiaries to provide to WTI and its Subsidiaries benefits administrative services with respect to such WTI Plans, including without limitation: (i) record keeping; (ii) employee enrollment and termination; (iii) claims and payout administration and processing; (iv) ERISA and other legal and regulatory compliance; (v) Internal Revenue Service reporting; (vi) employee communication; and (vii) preparation of reports. Further, WMX agrees to cause its Subsidiaries to provide to WTI and its Subsidiaries such benefits administrative services with respect to the portion of any employee benefit plan sponsored by WMX or its Subsidiaries which benefits employees of WTI or its Subsidiaries. For any such services WTI shall pay to WMX or its Subsidiaries each calendar quarter during the term of this Agreement, within 30 days after being notified of the amount due, a quarterly fee equal to WTI's portion of WMX's costs and third party charges or expenses related to administration of such plans, which portion shall be the arithmetic average of the monthly percentages for the three months of such quarter of all employees of all participating employers eligible (or who would be eligible, but for the applicable waiting period) to participate as of the end of each such month in the plan who were present or former employees of WTI or its Subsidiaries as of the end of each month (other than present or former employees of WMX or its Subsidiaries). "(c) Separate Reports. To the extent legally required, benefits administrative services to be provided by the Company, WMX or their Subsidiaries shall be performed with respect to employees of WTI and its Subsidiaries as a group separate and apart from employees of the Company, WMX and their Subsidiaries. To the extent practicable, all reports pertaining to benefits and benefit and welfare programs shall also be prepared for employees of WTI and its Subsidiaries as a group separate and apart from the Company, WMX and their Subsidiaries. "(d) Review of Method of Allocation. Promptly after the end of each year ending after the Effective Date, WMX and WTI shall review the method set forth in Section 6(b) above for WTI's paying charges, expenses or allocations and shall make such changes in such method as are necessary or appropriate to ensure that the charges, fees or allocations borne by WTI are proportionate to the services provided by WMX or its Subsidiaries to WTI pursuant to this Section 6." 3. Other Provisions. Except as expressly set forth in this Amendment, all provisions of the Services Agreement in effect immediately prior to the execution and delivery of this Amendment shall remain in full force and effect in accordance with their terms. 4. Choice of Law. This Amendment shall be interpreted and construed in accordance with the internal laws (and not the conflicts laws rules) of the State of Illinois applicable to contracts made and to be performed in the State of Illinois. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. RUST INTERNATIONAL INC. By: /s/ Jan Stern Reed ---------------------------------------- Name: Jan Stern Reed Title: Assistant Secretary WMX TECHNOLOGIES, INC. By: /s/ Thomas A. Witt ---------------------------------------- Name: Thomas A. Witt Title: Vice President CHEMICAL WASTE MANAGEMENT, INC. By: /s/ Thomas A. Witt ---------------------------------------- Name: Thomas A. Witt Title: Secretary WHEELABRATOR TECHNOLOGIES INC. By: /s/ Herbert A. Getz ---------------------------------------- Name: Herbert A. Getz Title: Secretary EX-13.1 5 MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBIT 13.1 Wheelabrator Technologies Inc. and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company") is a diversified environmental products and services company focused primarily on meeting customer requirements for clean energy and clean water. The Company has been a pioneer in the privatization of municipal infrastructure while providing water, wastewater, biosolids, air quality control, trash-to-energy, and independent power solutions to environmental problems of communities and industries worldwide. Wheelabrator is majority-owned by WMX Technologies, Inc. ("WMX") and holds minority interests in two other WMX-controlled subsidiaries, Waste Management International plc ("WM International") and Rust International Inc. ("Rust"). - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Consolidated revenue reached $1,451.7 million in 1995 compared to $1,324.6 million in 1994 and $1,142.2 million in 1993. Acquisitions, primarily of water- related companies, were responsible for approximately two-thirds of the 1995 growth, with new energy plants and internal growth accounting for the remainder. Slightly less than half of 1994's revenue increase was derived from acquisitions, and the balance came from operating and construction revenue associated with new energy and water development projects. During 1995, WMX continued the strategic review of its markets, operations, financial strategies, and organizational structure begun in 1994. Through this study, determinations were made to refocus WM International on its core waste services business and to sell or discontinue Rust's process engineering, construction, specialty contracting, and similar lines of business. Both decisions, which were announced in the fourth quarter of 1995, resulted in charges that adversely impacted Wheelabrator's earnings. The following table reconciles reported earnings per share to earnings per share excluding these and other special items.
Years Ended December 31, 1993 1994 1995 - ---------------------------------------------------------- Reported earnings per share $ 0.86 $0.97 $0.75 WM International special charge (see Note 3 to Consolidated Financial Statements) -- -- 0.14 Provision for loss on disposal of discontinued operations of Rust (see Note 3 to Consolidated Financial Statements) -- -- 0.16 Gain on stock transactions of affiliate (0.04) -- -- Adjustment to deferred income taxes resulting from 1993 tax law change 0.03 -- -- ------ ----- ----- Earnings per share excluding above items $ 0.85 $0.97 $1.05 ====== ===== =====
The ongoing WMX strategic review also recommended that Wheelabrator's organization be realigned and managed along the two principal industry segments that the Company serves. Therefore, the Company is now reporting its operating results in two industry segments--Clean Water and Clean Energy. Clean Water's principal products and services include equipment and process systems designed for a broad range of water and wastewater management applications, biosolids management, and outsourcing the operation, or ownership and operation, of water and wastewater treatment facilities. Its customer base is increasingly global in nature and includes both municipalities and industry. In addition, the Company's materials cleaning business is included in the Clean Water segment since its manufacturing and aftermarket capabilities are utilized by certain Company water businesses. The Clean Energy segment develops, owns, and operates trash-to- energy and independent power facilities that generate electricity and other forms of energy while providing trash disposal for municipal and industrial customers. Wheelabrator's air quality control business is also included in Clean Energy segment results. The analysis of operating results that follows reflects these two new segments. Results from prior years, during which the Company was organized and reported as one industry segment, have been restated to conform with the current presentation. - -------------------------------------------------------------------------------- 1994 OPERATIONS COMPARED WITH 1993 CLEAN WATER Clean Water revenue increased $97.1 million to $489.3 million in 1994, a 25 percent increase from 1993's $392.2 million level. Acquisitions contributed approximately $81.5 million, or 84 percent, of this revenue growth. Companies acquired during 1993 and 1994 significantly broadened Clean Water's technology and process know-how offerings to industrial customers while expanding its geographic presence in Europe, Mexico, the Pacific Rim, and certain domestic regional biosolids markets. The more significant companies acquired included HPD (1993) and Memtek (1994) in the U.S., Procesos y Sistemas de Separacion in Spain (1994), Darchet Engineering and Water Treatment in Singapore (1994), and Rossmark in the Netherlands (1994). The full year impact of the Company's New York Organic Fertilizer Company ("NYOFCO") biosolids pelletizer facility, which began commercial operations in the third quarter of 1993, accounted for an additional $35.5 million of incremental 1994 revenue. Water, wastewater, and biosolids contract service revenue declined approximately $15.0 million in 1994, primarily as a result of heightened competition for renewals and associated pricing pressure. Increased sales of water process systems and equipment to industrial customers were offset by curtailed equipment purchases by municipal customers. 8 - -------------------------------------------------------------------------------- Clean Water operating income increased 22 percent to $41.1 million in 1994 compared with $33.7 million in 1993. These amounts represent 8.4 percent and 8.6 percent of revenue, respectively. The segment's 1994 gross margin decreased to 24.5 percent of revenue versus the prior year's 24.9 percent level because of competitive pricing pressures in the equipment product lines and faster relative growth of the process systems businesses, which are typically lower margin in nature. Selling and administrative costs declined in 1994 as a percentage of revenue to 16.1 percent from the prior period's 16.3 percent level. Acquisition consolidation activities accounted for this decrease while offsetting increased own/operate development expenditures. CLEAN ENERGY Consolidated revenue for this segment grew $83.1 million, or 11 percent, in 1994 to $844.7 million. Revenue from trash-to-energy and independent power facility operations grew $98.2 million from the prior year level and generated approximately 82 percent of 1994 segment revenue versus 78 percent in 1993. Air-related businesses were responsible for the remaining revenue in both periods. Construction revenue on the Lisbon, Connecticut, trash-to-energy facility (the "Lisbon facility") built by Wheelabrator for the Eastern Connecticut Resource Recovery Authority provided half of the energy business growth. The third quarter 1994 commencements of commercial operations at the Falls Township trash-to-energy facility located near Philadelphia, Pennsylvania, and the wood waste and scrap tire-fueled Ridge Generating Station in Polk County, Florida, provided an additional 25 percent of the energy business growth. Excellent plant operating performances, particularly at existing independent power facilities, coupled with a shift in the mix of waste received at the trash-to-energy plants from lower-priced spot tons to generally higher- priced contract municipal tons accounted for the remainder. The economic recovery primarily drove the additional municipal receipts. Spot disposal fees remained at approximately 1993 levels throughout the year. Air business revenue fell in 1994 mainly because of an expected lull in air pollution control retrofit activity by utilities between Phases I and II of the Clean Air Act Amendments of 1990 (the "CAAA"). In addition, many industrial customers began to delay awards for air quality control equipment in response to economic uncertainty and to rule-making delays and limited enforcement activities by the U.S. Environmental Protection Agency ("EPA"). Clean Energy segment operating income increased to $247.0 million, or 29.2 percent of revenue, in 1994 versus $208.7 million, or 27.4 percent of revenue, in 1993. The addition of the Falls Township and Ridge Generating Station facilities, modest improvement in gross margin, and a decline in selling and administrative costs were responsible for this 18 percent growth. Improved operating performance at certain energy facilities accounted for gross margin improvement of 0.9 percentage points to 34.1 percent, despite Lisbon facility construction revenue having no associated margin recognition. Integration of acquired air businesses and a decrease in energy-related project development expenditures in response to limited market opportunities caused selling and administrative costs to decrease in 1994 in absolute terms and as a percentage of revenue. - -------------------------------------------------------------------------------- 1995 OPERATIONS COMPARED WITH 1994 CLEAN WATER Revenue grew $129.2 million to $618.5 million in 1995, which represents a 26 percent increase compared with the prior year. The full year impact of companies acquired in 1994 provided $82.5 million, or 64 percent, of this increase. Wheelabrator continued to expand its water process capabilities in the Pacific Rim through the late 1995 acquisition of Sun Chi Environmental Industries in Taiwan. Also during 1995, the Company successfully completed the privatization of the Miami Conservancy District wastewater treatment plant in Franklin, Ohio (the "MCD Franklin" facility). This municipal asset acquisition represents the first privatization of a municipal wastewater treatment plant under Executive Order 12803 issued by President Bush in 1992. Neither of these acquisitions had a significant impact on 1995's operating results. Approximately four percent of 1995's revenue growth came from the Baltimore I pelletizer facility, which began commercial operations at the start of the year. Existing businesses accounted for the balance of the revenue gain as Clean Water significantly increased its biosolids landspreading activities in California and experienced strong worldwide demand for its surface cleaning and screen products. The domestic industrial water process business encountered several delays in customer orders during the year due to extended bidding cycles on certain projects and reluctance by some customers to undertake environment- related capital spending. Clean Water's operating income grew $9.6 million, or 23 percent, to $50.7 million in 1995 and represented 8.2 percent of revenue. Faster relative growth of the segment's process systems businesses, which are typically lower margin in nature, and $3.0 million of costs incurred to consolidate office and manufacturing locations were the principal reasons for the slight operating margin decline compared with 1994. Gross margins in the contract services businesses improved in 1995 due to cost reduction efforts, while equipment margins remained relatively stable, and process system margins declined slightly due to the execution of several large lower-margin contracts. Overall, Clean Water's gross margin was 22.7 percent in 1995 compared with 24.5 percent in 1994. Selling and administrative costs increased $11.3 million to $89.9 million in 1995 because of the full year impact of prior year acquisitions but declined as a percent of revenue to 14.5 percent. Integration activities along with a revenue growth rate in excess of associated selling and overhead cost increases were responsible for the percentage decline. CLEAN ENERGY Revenue for this industry segment totaled $839.5 million during 1995 and was essentially flat versus 1994 because higher revenue from operating energy plants was offset by lower construction revenue on the Lisbon facility together with a further decline in air business revenue. The energy business' operating plants generated $42.3 million of revenue growth, with approximately 85 percent of the increase accounted for by the Falls Township and Ridge Generating Station facilities, which began operations in 1994. Contractual price escalation on long-term trash disposal and energy sale contracts, offset in part by increased curtailment of electrical purchases by certain utility customers, accounted for the balance of the operating plant revenue increase. Spot pricing, on the whole, was stable since competition-related declines in Florida and the metro New York City area were offset by increases in other regions. Construction revenue recognized on the Lisbon facility fell $16.8 million compared to 1994 as construction was completed around mid-year and the 9 Wheelabrator Technologies Inc. and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) - -------------------------------------------------------------------------------- plant underwent start-up and acceptance testing late in the fourth quarter. Air business revenue declined $30.7 million to 15 percent of 1995 segment revenue, reflecting a continuing, industry-wide decrease in activity in the face of regulatory uncertainty. Operating income from the Clean Energy segment grew $5.4 million to $252.4 million in 1995 and also increased as a percent of revenue by 0.9 percentage points to 30.1 percent. Gross margin improved to 35.0 percent of revenue, while selling and administrative costs were flat compared to the prior year both as a percent of revenue and in terms of actual dollars. The gross margin improvement resulted from reduced recognition of no-margin Lisbon facility construction revenue as well as optimization programs at operating energy facilities that focused on areas such as maintenance, chemical usage, and manpower. The energy business' international development activity expanded modestly following the July formation of a trash-to-energy development joint venture with WM International. Under the joint venture agreement, which covers areas outside of North America, Germany, and Italy, Wheelabrator has primary responsibility for early-stage development of projects, and WM International has the right to acquire up to 49 percent of the equity in all joint venture projects. Previously, under the terms of an intercompany business allocation agreement, Wheelabrator was not permitted to develop trash-to-energy projects outside North America. The Company's air business recognized an $8.8 million operating loss during 1995, approximately half of which related to management downsizing the organization to reflect reduced market demands. Warranty provisions and largely noncash fixed costs were responsible for the remainder. - -------------------------------------------------------------------------------- OTHER ITEMS INTEREST Interest expense declined from $64.5 million in 1993 to $52.5 million in 1994 principally as a result of lower outstanding debt, the March 1994 refinancing of the project debt associated with Wheelabrator's Westchester County, New York, trash-to-energy facility, and increased interest cost capitalization related to Company-owned projects under construction. Interest expense increased $8.3 million to $60.7 million during 1995 because a reduction in interest capitalization more than offset the benefit of lower project debt balances. Interest costs associated with three major facilities (Falls Township, Ridge Generating Station, and Baltimore I) were capitalized during 1994 prior to these plants commencing commercial operations. One Company-owned facility was in the early stage of construction during 1995. Interest income decreased from $18.3 million in 1993 to $14.3 million and $11.1 million in 1994 and 1995, respectively, because of lower average investment balances with WMX and lower rates. EQUITY IN EARNINGS OF AFFILIATES Equity income from the continuing operations of Wheelabrator's affiliates totaled $29.3 million in 1994 compared with $38.5 million in 1993. Improved local currency earnings and favorable exchange rate movements increased the Company's equity in WM International's earnings by $1.4 million, while equity in Rust's earnings decreased due to a shift in business mix to lower margin work, customer postponement of certain project awards and start-ups, and a special charge related to the discontinuance and consolidation of certain of Rust's operations. Wheelabrator also recognized a $7.7 million nontaxable gain in 1993 in connection with Rust's issuance of additional shares of its common stock. During 1995, WM International recognized a special charge related to the actions it is taking to sell or otherwise dispose of noncore businesses and investments as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. The charge followed a thorough review of WM International's operations and management structure and reflects WM International's intention to refocus on its core waste services business. Wheelabrator's share of this charge, including the Company's equity in the portion recognized by Rust, was $25.6 million and was the principal reason equity income from continuing operations fell to $5.0 million in 1995. Wheelabrator's share of WM International's 1995 earnings excluding the special charge declined $2.0 million from the prior year to $13.2 million. The Company's equity in the earnings of Rust's continuing operations increased $3.1 million to $17.5 million in 1995 after excluding the WM International special charge's impact on Rust. INCOME TAXES The Company's effective tax rates excluding the nontaxable 1993 Rust stock transaction gain and equity income, which is reported net of tax, were approximately 44.8 percent, 40.5 percent, and 39.2 percent in 1993, 1994, and 1995, respectively. The 1993 tax provision included a $6.5 million increase in deferred taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as a result of the enactment of the Omnibus Budget Reconciliation Act of 1993. The 1995 rate was lower than that in previous years and reflects the impact of ongoing tax planning activities, particularly in the international arena, and certain tax benefits associated with liquidation of Wheelabrator's investment in Abex, Inc. (See Note 4 of the Notes to Consolidated Financial Statements for additional tax information.) DISCONTINUED OPERATION In the fourth quarter of 1995, Rust announced that as a result of the ongoing WMX strategic review, it would sell or discontinue its process engineering, construction, specialty contracting, and similar lines of business and focus on its environmental and infrastructure engineering and consulting business. The businesses being sold are being accounted for as discontinued operations, and accordingly, Wheelabrator has reported its 40 percent equity interest in the historical operating results of these businesses and the provision for loss on their disposal separately from continuing operations. (See Note 3 of the Notes to Consolidated Financial Statements for additional information.) 10 - -------------------------------------------------------------------------------- ENVIRONMENTAL MATTERS The majority of Wheelabrator's businesses are involved with the protection of the environment. As such, a significant portion of the Company's operating costs and capital expenditures could be characterized as costs of environmental protection. While the Company is faced, in the normal course of its business, with the need to expend funds for environmental protection, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its products and services are priced accordingly. Although unlikely in the near- term, such ongoing compliance costs may increase in the future as a result of legislation or regulation. However, the Company believes that in general it benefits from increased government regulation, which increases the demand for its products and services, and that it has the resources and experience to manage environmental risk. Estimated closure and post-closure monitoring costs associated with ash residue monofills for which the Company is responsible include items such as final cap and cover on the site, leachate management, and groundwater monitoring. These costs are recognized in proportion to use of the permitted capacity at such disposal sites. Such costs are estimated based on the technical requirements of EPA or applicable state regulations, whichever are stricter. These accruals for closure and post-closure costs relate to expenditures to be incurred after a monofill ceases to accept ash residue. To the extent similar costs are incurred during the active life of the site, they are expensed as incurred. Preparation costs associated with these sites and their individual cells are capitalized and amortized over the respective estimated life of the disposal site or individual cell. Wheelabrator has instituted procedures to periodically evaluate other potential environmental exposures. When the Company concludes it is probable that a liability has been incurred, provision is made in the financial statements, based upon management's judgment and prior experience, for the Company's best estimate of the liability. Such estimates are subsequently revised as deemed necessary when additional information becomes available. While the Company does not anticipate that any such adjustment would be material to its financial statements, it is reasonably possible that future technological, regulatory or enforcement developments, results of environmental studies, or other factors could alter this expectation and necessitate the recording of additional liabilities, which could be material. Wheelabrator has been notified by certain private parties that it may be potentially responsible for a portion of the remediation costs related to a certain state-listed remediation site currently subject to an enforcement order that includes a site assessment study. Although the Company is considering joining the private parties to share in these costs, no litigation has been filed and the Company has not been named a potentially responsible party. At the present time, there is insufficient information available to estimate the remediation costs or the extent of Wheelabrator's responsibility beyond its possible voluntary sharing of enforcement order costs. An estimate of those costs is included in 1995's results of operations and is not material. Wheelabrator also becomes involved, in the normal course of business, in judicial and administrative proceedings related to alleged violations of licenses, permits, laws or regulations, or differing interpretations of applicable requirements. From time to time, the Company pays fines and penalties as a result of such proceedings. To date, such fines and penalties have not been material and, in the opinion of management, the ultimate liability, if any, with respect to these matters will not have a material adverse effect on the business and properties of the Company, taken as a whole, or its financial position or results of operation. ACCOUNTING PRONOUNCEMENTS The Company is required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), beginning in 1996. Wheelabrator does not believe the adoption of FAS 121 will have a material impact on its financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which the Company also must adopt in 1996. FAS 123 provides an optional new method of accounting for employee stock options and expands required disclosure about stock options. If the new method of accounting is not adopted, the Company will be required to disclose pro forma net income and earnings per share as if it were. The Company is studying FAS 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the financial statements. - -------------------------------------------------------------------------------- FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Operating activities continue to be Wheelabrator's principal source of liquidity and provided $237.3 million of cash in 1995 compared with $178.9 million in 1994 and $153.5 million in 1993. Operating cash flows in 1994 and 1993 included $29.8 million and $61.7 million, respectively, of payments to the Internal Revenue Service for previously recorded indemnities related to periods prior to 1989 during which Wheelabrator and certain other companies were part of a consolidated group for federal income tax purposes. After adjusting for these nonrecurring payments, the Company's cash flows from operating activities were $215.2 million, $208.7 million, and $237.3 million in 1993, 1994, and 1995, respectively. The decrease between 1993 and 1994 resulted primarily from cash used to fund the working capital needs of acquired businesses and the Falls Township, Ridge Generating Station, and Baltimore I facility operations plus a reduction in long-term liabilities. These uses were mitigated, in part, by increased net income before depreciation, 11 Wheelabrator Technologies Inc. and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) - -------------------------------------------------------------------------------- amortization, and undistributed earnings of affiliates. Cash flow from operating activities improved $28.6 million in 1995 compared to the adjusted 1994 figure. Higher net income before depreciation and amortization and before equity in the earnings and provision for discontinued operations of affiliates contributed $18.9 million of the increase. An increase in deferred income tax benefits and lower cash funding of working capital growth, net of a further decrease in long- term liabilities, contributed to the balance. Investing activities utilized $312.0 million and $122.5 million of cash in 1993 and 1994, respectively, and generated $6.1 million of cash in 1995. Progressively lower capital spending for new project construction was the main reason for this trend, coupled in 1995 with a reduction in acquisition activity and substitution of Company-backed letters of credit or guarantees for certain investments held by trustees. Wheelabrator spent $262.2 million on project construction during 1993 compared with $77.0 million in 1994 and $5.6 million in 1995. During 1993, the NYOFCO facility was completed, and the Falls Township, Ridge Generating Station, and Baltimore I facilities were being built. Construction of these three plants was finished in 1994. The Company began construction of a second pelletizer installation in Baltimore, Maryland, ("Baltimore II") during 1995. Nonproject capital expenditures were relatively constant at approximately $30 million in each of the three years. Cash payments for acquisitions, net of acquired cash, were $12.6 million in 1995 compared to $25.8 million in 1994 and $15.0 million in 1993. In addition, the Company issued approximately 1.6 million and 0.2 million shares of its common stock in connection with the 1993 and 1994 acquisitions. During 1993, seven businesses providing water and air quality-related environmental products and services as well as independent power were purchased. Acquisitions closed in 1994 included wastewater treatment operating contracts and eight companies supplying water quality products and services plus one air-related service business. Acquisition activity during 1995 included privatization of the MCD Franklin facility and purchase of one Clean Water-related business. The reduction in business acquisition activity in 1995 compared to prior years resulted, in part, because management believed the price of many available water businesses was inconsistent with creation of long-term shareholder value. The pro forma effect of acquisitions made in 1993, 1994, and 1995 on the Company's results of operations is not material. Financing activities required $200.8 million of cash in 1995 versus $96.1 million and $56.9 million in 1993 and 1994, respectively. Major uses included debt repayments, stock repurchases, and dividends. Dividend payments totaled $16.8 million in 1993, $19.0 million in 1994, and $20.3 million in 1995 as the Company increased its declared dividends from $0.08 per common share in 1993 to $0.10 and $0.11 per common share in 1994 and 1995, respectively. During 1994 and 1995, Wheelabrator repurchased 3.3 million and 7.2 million shares of its common stock at an aggregate cost of approximately $47.6 million and $104.2 million, respectively. No shares were repurchased in 1993. Short-term borrowings pursuant to the Master Intercorporate Agreement between the Company and WMX funded the 1994 share repurchases and were repaid using operating cash flow during the first half of 1995. The Company is authorized to repurchase an additional 19.2 million shares of its common stock through mid-December 1997 on the open market or in privately negotiated transactions provided market conditions make it attractive to do so. In addition to making scheduled repayments thereon, over the past several years Wheelabrator has refinanced at lower interest rates or repaid prior to maturity certain of its existing project debt. During 1993, the long-term project debt underlying the sale leaseback financing of the Company's Baltimore, Maryland, trash-to-energy facility was refinanced with the resulting rate benefit being recognized in the form of lower lease payments over the remaining term of the facility's operating lease. Additionally, approximately $40.0 million of letter of credit secured debt related to the Company's Westchester County facility was retired at par value in 1993. The remaining $113.0 million of project debt associated with the Westchester County facility was refinanced in March 1994. Half of the interest savings of approximately 4.7 percentage points is being shared with Westchester County in exchange for certain agreements covering the County's involvement in the retrofit of the facility to meet CAAA requirements and a five-year extension of the solid waste disposal agreement with the County. Private placement debt of $11.3 million associated with the Saugus, Massachusetts, trash-to-energy plant was also retired in 1994. In December 1995, Wheelabrator refinanced the remaining $28.6 million of bank debt connected with its Frackville, Pennsylvania, independent power facility. This refinancing lowered the interest rate premium above LIBOR on this floating rate debt by slightly under 1.2 percentage points and included a Wheelabrator guarantee of the project's debt obligations. Net of refinancing proceeds, $83.4 million, $47.4 million, and $31.8 million of cash was used to retire long-term debt in 1993, 1994, and 1995, respectively. The Company currently expects its major uses of capital during 1996 to include investments in new projects, continued acquisitions, and stock repurchases in addition to dividends, scheduled debt repayments, and nonproject capital expenditures. Planned project investments, which include continued construction of the Baltimore II pelletizer, are expected to require approximately $50 million of cash during 1996. Nonproject capital spending is expected to use a similar amount of cash, which represents an increase compared to past years due principally to planned investments in Clean Water businesses such as a Pacific Rim headquarters and research center located in Singapore and expansion of the Parker, Arizona, carbon regeneration facility. While the Company intends to continue to grow its Clean Water business through selected, strategic acquisitions, the level of spending will be dependent on the specific opportunities that are identified. Within the next five years, the air pollution control systems at certain trash-to-energy facilities owned or leased by Wheelabrator will be required to be modified to comply with more stringent air pollution control standards adopted by the EPA in October 1995. 12 - -------------------------------------------------------------------------------- The compliance dates will vary by facility, but all affected facilities will be required to be in compliance with the new rules by the end of the year 2000. Currently available technologies will be adequate to meet the new standards. Although the total expenditures required for such modifications are estimated to be in the $250 - $300 million range, they are not expected to have a material adverse effect on the Company's liquidity or results of operations because provisions in the impacted facilities' long-term waste supply agreements allow the Company to recover from customers the majority of incremental capital and operating costs. Wheelabrator had net working capital of $98.2 million as of December 31, 1995, compared to a working capital deficit of $16.0 million at the previous year-end. Included in year-end 1995 working capital was $78.7 million of cash and cash equivalents. This cash plus an expected $250 - $300 million of net cash generated by operating activities and short-term borrowings from WMX are expected to be sufficient to meet the Company's anticipated short-term capital expenditure, dividend payment, debt retirement, and operating liquidity needs. Pursuant to the Master Intercorporate Agreement, which governs borrowing and lending between the Company and WMX, Wheelabrator may borrow up to $100.0 million in excess of any amounts loaned to WMX. In August 1995, this agreement was extended through December 1996, and will automatically renew on an annual basis thereafter unless either party provides 90-day notice of termination. In addition to using available internally-generated cash, expected share repurchase and acquisition activities will likely be funded by external, long-term financing of certain projects such as the two Baltimore pelletizers. Wheelabrator's ratio of total debt to total capital was approximately 34 percent at the end of 1995, which the Company believes to be indicative of substantial unused borrowing capacity given its historically strong ability to generate cash from operations. DERIVATIVES From time to time, the Company uses foreign currency derivatives to mitigate the impact of currency fluctuations on its equity income from WM International and on certain specifically identified transactions. In addition, Wheelabrator was a party to an interest rate swap agreement that minimized the impact of interest rate fluctuations on, and was a required part of the projected financing for, its Frackville facility. This swap agreement expired in December 1995. Derivatives used are confined to simple instruments that do not involve multipliers or leverage and have not had and are not expected to have a material impact on the Company's financial statements. The use of and accounting for these derivative instruments, all of which are considered nontrading in nature, are discussed more fully in Note 2 of the Notes to Consolidated Financial Statements. CONTINGENCIES In May 1994, the U.S. Supreme Court ruled that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Such laws typically involve a municipality specifying the disposal site for all solid waste generated within its borders. Since the ruling, several decisions of state or federal courts have invalidated regulatory flow control schemes in a number of jurisdictions. Other judicial decisions have upheld nonregulatory means by which municipalities may effectively control the flow of municipal solid waste. There can be no assurance that such alternatives to regulatory flow control will in every case be found to be lawful. For example, the Company's Gloucester County, New Jersey, facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. A recent federal court ruling in that state invalidated a franchise applicable to construction and demolition waste and has cast doubt on the validity of the municipal solid waste disposal franchise, which is now being challenged in separate litigation. The Supreme Court's ruling has not to date had a material adverse affect on any of the Company's trash-to- energy operations. Federal legislation has been proposed, but not yet enacted, to effectively grandfather existing flow control mandates. In the event that such legislation is not adopted, the Company believes that affected municipalities will endeavor to implement alternative lawful means to continue controlling the flow of waste. In view of the uncertain state of the law at this time, however, the Company is unable to predict whether such efforts would be successful. Since 1994, the Company was involved in litigation involving permits for the construction and operation of the Lisbon facility. These matters were resolved during 1995, and the plant began commercial operations in January 1996. - -------------------------------------------------------------------------------- OUTLOOK The Clean Water segment was reorganized and consolidated into one line of business in 1995. A thorough review of strategy has been conducted by management, and in the future, the Company intends to focus on increasing the long-term services component of this business by providing additional outsourcing services for plant operation and biosolids management as well as the ownership and operation of industrial process water and wastewater plants, municipal drinking water plants, and municipal wastewater plants. In addition, Clean Water will continue to develop and grow a strong technology and process base both to service its clients' needs worldwide and to support its service focus. The energy business' focus in 1996 will be on further optimizing operations at existing facilities while pursuing international opportunities for trash-to- energy and other waste fuel-fired power plants. Such development activities typically require multi-year efforts. The Company also intends to further capitalize on its power generation expertise by pursuing domestic opportunities to own and operate power plants for industrial customers. During 1995, management conducted a significant downsizing and consolidation of air business operations to size the business to fit the potential market and operate on a cash-positive basis. In 1996, management will keep the air business and other under-performing assets under close review. It is not anticipated that market conditions in the air business will improve significantly in the next two or three years. In light of the factors discussed above and the anticipated continued shift in the Company's revenue mix into lower-margin water businesses, Wheelabrator expects its 1996 earnings per share growth will not exceed ten percent. 13 EX-13.2 6 CONSOLIDATED BALANCE SHEETS EXHIBIT 13.2 Wheelabrator Technologies Inc. and Subsidiaries Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------ (000s omitted, except share amounts) December 31, 1994 1995 - ------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents $ 36,133 $ 78,732 Receivables, net of allowance of $9,462 in 1994 and $12,187 in 1995 216,367 215,080 Inventories 69,220 62,638 Costs and earnings in excess of billings 42,833 50,497 Other current assets 58,360 51,312 - ------------------------------------------------------------------------------------------------------ Total current assets 422,913 458,259 - ------------------------------------------------------------------------------------------------------ Property, plant, and equipment, net 1,680,002 1,624,159 Cost in excess of net assets of acquired businesses, net 230,711 233,533 Investments in affiliates 618,971 604,656 Other assets 324,014 299,586 - ------------------------------------------------------------------------------------------------------ Total assets $3,276,611 $3,220,193 ====================================================================================================== Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 35,749 $ 35,808 Due to WMX Technologies, Inc. 53,163 -- Accounts payable 94,375 93,327 Accrued liabilities 189,687 185,273 Advance payments on contracts 65,966 45,686 - ------------------------------------------------------------------------------------------------------ Total current liabilities 438,940 360,094 - ------------------------------------------------------------------------------------------------------ Long-term debt 735,933 704,414 Deferred income taxes 326,757 395,645 Deferred income 89,083 77,513 Other long-term liabilities 261,016 232,262 Commitments and contingencies Stockholders' equity: Preferred stock, par value $1.00 per share; 50,000,000 authorized; none issued or outstanding -- -- Common stock, par value $0.01 per share; 500,000,000 authorized; 189,545,407 shares issued in 1994 and 1995 1,895 1,895 Capital in excess of par value 877,428 876,595 Cumulative translation adjustment (17,650) (9,986) Treasury stock at cost; 3,270,054 shares in 1994, 10,112,610 shares in 1995 (47,489) (146,494) Retained earnings 610,698 728,255 - ------------------------------------------------------------------------------------------------------ Total stockholders' equity 1,424,882 1,450,265 - ------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $3,276,611 $3,220,193 ======================================================================================================
The accompanying notes are an integral part of these balance sheets. 14 Wheelabrator Technologies Inc. and Subsidiaries Consolidated Statements of Income - ------------------------------------------------------------------------------
(000s omitted, except per share amounts) Years Ended December 31, 1993 1994 1995 - ------------------------------------------------------------------------------ Revenue $1,142,219 $1,324,567 $1,451,675 - ------------------------------------------------------------------------------ Operating expenses 792,719 915,237 1,015,269 Selling and administrative expenses 107,276 119,380 130,976 Interest expense 64,484 52,454 60,726 Interest income (18,278) (14,250) (11,123) Equity in earnings of affiliates (1995 reduced by $25.6 million related to a special charge recorded by WM International) (38,462) (29,348) (4,998) Gains from stock transactions of affiliates (7,680) -- -- Other income, net (4,530) (1,589) (2,612) - ------------------------------------------------------------------------------ Income from continuing operations before income taxes 246,690 282,683 263,437 Income tax provision 89,935 102,521 101,288 - ------------------------------------------------------------------------------ Income from continuing operations 156,755 180,162 162,149 Equity income from discontinued operations (Note 3) 6,347 4,733 5,789 Equity in provision for loss on disposal of discontinued operations (Note 3) -- -- (30,080) - ------------------------------------------------------------------------------ Net income $ 163,102 $ 184,895 $ 137,858 ============================================================================== Weighted average common and common equivalent shares outstanding 188,900 189,900 185,000 ============================================================================== Earnings (loss) per common and common equivalent share: Continuing operations $ 0.83 $ 0.95 $ 0.88 Discontinued operations 0.03 0.02 (0.13) - ------------------------------------------------------------------------------ Net income $ 0.86 $ 0.97 $ 0.75 ==============================================================================
The accompanying notes are an integral part of these financial statements. 15 Wheelabrator Technologies Inc. and Subsidiaries Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------- (000s omitted) Years Ended December 31, 1993 1994 1995 - ----------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 163,102 $ 184,895 $ 137,858 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 75,323 95,254 107,814 Deferred income taxes 61,477 48,909 59,295 Undistributed earnings of affiliates (38,462) (29,348) (4,998) Equity in discontinued operations (6,347) (4,733) 24,291 Gains from stock transactions of affiliates (7,680) -- -- Deferred lease expense (7,349) (7,530) (10,523) Changes in assets and liabilities, net of effects of acquired and contributed businesses: Receivables, net (21,578) (29,258) (11,195) Inventories 4,101 (9,517) 5,014 Costs and earnings in excess of billings (12,879) (2,097) (7,664) Other current assets (2,439) (2,826) 12,296 Accounts payable (32,008) 10,525 (542) Accrued liabilities (21,965) (19,400) (933) Advance payments on contracts 380 (2,594) (27,637) Other long-term liabilities 23,822 (46,534) (36,713) Other, net (23,957) (6,883) (9,039) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 153,541 178,863 237,324 - ----------------------------------------------------------------------------------------------------------------- Investing Activities Capital expenditures (291,637) (105,459) (37,805) Proceeds from sale of investments 10,682 583 12,821 Sale of property, plant, and equipment 1,682 8,374 12,498 Investments held by trustees 9,917 5,936 36,810 Cash paid for acquisitions, net of acquired cash (14,983) (25,754) (12,571) Other, net (27,690) (6,206) (5,672) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (312,029) (122,526) 6,081 - ----------------------------------------------------------------------------------------------------------------- Financing Activities Additions to long-term debt -- 112,985 29,388 Repayments of long-term debt (83,443) (160,335) (61,181) Net borrowings from WMX Technologies, Inc. -- 53,163 (53,163) Proceeds from exercise of stock options 4,205 5,739 3,665 Dividends paid (16,826) (18,954) (20,301) Stock repurchase program -- (47,550) (102,368) Other, net -- (1,971) 3,154 - ----------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (96,064) (56,923) (200,806) - ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (254,552) (586) 42,599 Cash and cash equivalents at beginning of period 291,271 36,719 36,133 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 36,719 $ 36,133 $ 78,732 ================================================================================================================= Supplemental disclosure: Interest paid, net of amounts capitalized $ 62,490 $ 56,015 $ 59,812 ================================================================================================================= Income taxes paid $ 85,441 $ 73,790 $ 44,099 ================================================================================================================= Significant noncash investing activities: Net assets contributed to Rust International Inc. $ 244,278 $ -- $ -- ================================================================================================================= Common stock issued for acquisitions $ 30,972 $ 2,900 $ -- ================================================================================================================= Liabilities assumed in acquisitions $ 35,427 $ 74,938 $ 8,232 =================================================================================================================
The accompanying notes are an integral part of these financial statements. 16
Wheelabrator Technologies Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity - --------------------------------------------------------------------------------------------------------------------------- (000s omitted) Capital in Cumulative Common Excess of Translation Treasury Retained Stock Par Value Adjustment Stock Earnings Total - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 $1,865 $758,646 $(17,785) $ -- $296,617 $1,039,343 - --------------------------------------------------------------------------------------------------------------------------- Net income -- -- -- -- 163,102 163,102 Dividends declared ($0.08 per share) -- -- -- -- (14,962) (14,962) Foreign currency translation -- -- (15,885) -- -- (15,885) Exercise of stock options 7 4,195 -- 3 -- 4,205 Tax benefit from stock options -- 3,370 -- -- -- 3,370 Stock issued for acquisitions 16 30,707 -- 249 -- 30,972 Treasury shares from acquisition adjustments -- -- -- (969) -- (969) Investment in Rust International Inc. -- 77,662 -- -- -- 77,662 - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 1,888 874,580 (33,670) (717) 444,757 1,286,838 - --------------------------------------------------------------------------------------------------------------------------- Net income -- -- -- -- 184,895 184,895 Dividends declared ($0.10 per share) -- -- -- -- (18,954) (18,954) Foreign currency translation -- -- 16,020 -- -- 16,020 Exercise of stock options 5 4,457 -- 1,277 -- 5,739 Tax benefit from stock options -- 2,134 -- -- -- 2,134 Stock issued for acquisitions 2 2,898 -- -- -- 2,900 Treasury shares from acquisition adjustments -- -- -- (499) -- (499) Stock repurchases (3,273,800 shares) -- -- -- (47,550) -- (47,550) Investment in Rust International Inc. -- (6,641) -- -- -- (6,641) - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 1,895 877,428 (17,650) (47,489) 610,698 1,424,882 - --------------------------------------------------------------------------------------------------------------------------- Net income -- -- -- -- 137,858 137,858 Dividends declared ($0.11 per share) -- -- -- -- (20,301) (20,301) Foreign currency translation -- -- 7,664 -- -- 7,664 Exercise of stock options -- (1,488) -- 5,153 -- 3,665 Tax benefit from stock options -- 655 -- -- -- 655 Stock repurchases (7,194,600 shares) -- -- -- (104,154) -- (104,154) Treasury shares from acquisition adjustments -- -- -- (4) -- (4) - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $1,895 $876,595 $ (9,986) $(146,494) $728,255 $1,450,265 ===========================================================================================================================
The accompanying notes are an integral part of these financial statements. 17 Wheelabrator Technologies Inc. and Subsidiaries Notes to Consolidated Financial Statements (000s omitted in all tables except per share amounts) - -------------------------------------------------------------------------------- NOTE 1 BUSINESS DESCRIPTION Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company"), a majority- owned subsidiary of WMX Technologies, Inc. ("WMX"), is a multi-faceted environmental services company involved in two principal global lines of business: Clean Energy and Clean Water. Clean Energy develops, owns, and operates trash-to-energy and independent power facilities that generate electrical power for sale to utilities while providing trash disposal for municipal and commercial customers. Clean Water's products and services include equipment and process systems designed for water and wastewater management, water and wastewater treatment facility operation, and biosolids management. Its customer base is municipal and industrial in nature. The Company also offers air quality control systems for industrial and utility applications and has substantial equity investments in two WMX-controlled companies, Waste Management International plc ("WM International") and Rust International Inc. ("Rust"). Additional financial information by line of business and geographic area appears in Note 10. - -------------------------------------------------------------------------------- NOTE 2 SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Company's financial statements are prepared on a consolidated basis and include the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated. Investments in affiliates the Company does not control are accounted for using the equity method after elimination of material interaffiliate transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income, and expenses and disclosures of contingencies. Future events could alter such estimates. CONCENTRATIONS Wheelabrator's businesses offer a multitude of products and services to a diverse customer base. As of December 31, 1995, the Company believes it has no significant customer, supplier, product line, credit risk, geographic, or other concentrations that could expose the Company to adverse, near-term severe financial impacts. REVENUE RECOGNITION The Company recognizes revenue from certain long-term engineering, equipment supply, and construction contracts on the percentage-of-completion basis, with estimated losses recognized in full when identified. All other revenue is recognized when services are rendered or products are shipped. DEVELOPMENT AGREEMENT Through August 1994, the Company and WMX were parties to an agreement that provided for reimbursement by WMX of certain project development expenses incurred by Wheelabrator, subject to certain limitations. Wheelabrator billed WMX $6.9 million and $7.6 million under this agreement during 1993 and 1994, respectively. FOREIGN CURRENCY Certain foreign subsidiaries' income statement accounts are translated at the average exchange rates in effect during the period, while assets and liabilities are translated at the rates of exchange at the balance sheet date. The resulting balance sheet translation adjustments are charged or credited directly to stockholders' equity. Foreign exchange transaction gains and losses realized during 1993, 1994, and 1995 were not significant. CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of the Consolidated Statements of Cash Flows, all highly liquid instruments purchased with an original maturity of three months or less, and investments with WMX, are considered to be cash equivalents. Wheelabrator and WMX are parties to a Master Intercorporate Agreement that provides, among other things, for Wheelabrator to lend excess cash to WMX at interest rates at least as favorable as those Wheelabrator could otherwise obtain. In August 1995, this agreement was extended through December 31, 1996, and will automatically renew on an annual basis thereafter unless either party provides 90-day notice of termination. Under the agreement's terms, in the event Wheelabrator requires short-term cash for the conduct of its business and operations, WMX will make available to Wheelabrator such amounts as Wheelabrator requires, up to a total of $100.0 million in excess of amounts loaned by Wheelabrator to WMX. In addition, a right of set-off exists for amounts owed by either Wheelabrator or WMX. As such, net amounts invested with WMX pursuant to this agreement are considered to be highly liquid cash equivalents and are included in cash and cash equivalents on the Company's Consolidated Balance Sheets. At December 31, 1994, the Company had net borrowings from WMX of approximately $53.2 million. As of December 31, 1995, the Company had investments with WMX of $37.3 million. DERIVATIVE FINANCIAL INSTRUMENTS From time to time, the Company uses derivatives to manage currency and interest rate risk. The portfolio of such instruments (which are held for purposes other than trading) at December 31, 1995, is set forth below: INTEREST RATE AGREEMENT As part of the long-term financing of the Company's Frackville, Pennsylvania, independent power facility, Wheelabrator was required to enter into an interest rate swap agreement to reduce the impact of changes in interest rates on the underlying variable rate term loans. Under the agreement, which expired in December 1995, Wheelabrator paid a fixed interest rate of 9.65 percent and received floating interest rate payments from the counterparty at LIBOR without the exchange of the underlying $25 million notional amount. Net differences paid or received were included as part of interest expense over the life of the agreement. Wheelabrator incurred $1.3 million and $0.7 million of net interest expense under this agreement during 1994 and 1995, respectively, which increased the effective interest rate on the related debt by approximately four percent in 1994 and three percent in 1995. CURRENCY AGREEMENTS During 1994, the Company used foreign currency derivatives to mitigate the impact of currency fluctuations on its equity in the earnings of its WM International affiliate. Although the Company's purpose for using such derivatives was to hedge currency risk, they did not qualify for hedge accounting under generally accepted accounting principles and accordingly, were marked to market at the end of each interim accounting period. The derivatives in place during 1994 consisted of offsetting - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- put and call options with different strike prices. The Company received or paid, based on the notional amount of the option, the difference between the average exchange rate of the hedged currency against the base currency and the average (strike price) contained in the option. Complex instruments involving multipliers or leverage were not used. Although the Company incurred an expense in connection with these agreements, it recognized an offsetting increase in the translation of foreign earnings from foreign investees. All options expired in December 1994. The gains and losses recognized on these collars during 1994 were immaterial. Management carefully monitors market conditions and may enter similar agreements in the future when it is deemed beneficial. In addition, Wheelabrator has sold an immaterial amount of U.S. Dollars, German Deutsche Marks, British Pounds, French Francs, Italian Lira, and Dutch Guilders forward for delivery at various dates in 1996 to hedge foreign exchange exposure on specifically identified transactions. Gains or losses on these hedges are included in the measurement of the subsequent transaction. Where deemed advantageous, management will enter similar hedges in the future to mitigate foreign exchange exposure. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, receivables, investments held by trustees, accounts payable, and debt instruments. The book values of cash and cash equivalents, receivables, investments held by trustees, and accounts payable are considered to be representative of their respective fair values. The aggregate fair market value of Wheelabrator's long-term debt was approximately $828.3 million and $885.2 million on December 31, 1994 and 1995, respectively. The fair value of the Company's long-term debt was determined by discounting future cash flows at the quoted or estimated current rate applicable to each type of debt. See Note 6 for the terms and carrying values of the Company's various debt instruments. The fair value of the Frackville interest rate swap was a liability of approximately $0.6 million on December 31, 1994. The fair value of the interest rate swap was the estimated amount that the counterparty would have received to terminate the swap agreement at the balance sheet date. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment (including major improvements) are capitalized and stated at cost. Items of an ordinary maintenance or repair nature are charged directly to operating expense. The cost less estimated salvage value of property, plant, and equipment (except for land and unutilized land options) is generally depreciated on a straight-line basis over estimated useful lives that range from 3 to 35 years. Under a land option agreement with a WMX subsidiary, the Company has the exclusive right to purchase or lease sites for trash-to-energy or other facilities at existing or future landfills owned by the subsidiary. These land options are classified as property, plant, and equipment. The option cost attributable to each utilized site will be allocated to a facility and amortized on a straight-line basis over the estimated useful life of the facility upon commencement of operations. During 1994, amortization began on $29.6 million worth of exercised land options as two facilities located on such sites commenced operations. During 1995, the land option agreement was amended to include, among other things, a guarantee of value for Wheelabrator and an extension through 2020. The Company paid $15.0 million to WMX in conjunction with this amendment, which amount was capitalized net of amounts previously accrued and capitalized in conjunction with an earlier extension option. CAPITALIZED INTEREST The Company capitalizes interest on significant projects under construction in accordance with Statement of Financial Accounting Standards No. 34. Amounts capitalized and netted against interest expense in the Consolidated Statements of Income were $10.0 million in 1993, $12.1 million in 1994, and $0.1 million in 1995. COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES The excess of cost over fair value of the net assets of acquired businesses ("goodwill") is amortized on a straight-line basis over a maximum of 40 years. The accumulated amortization balances as of December 31, 1994 and 1995, were $15.9 million and $22.3 million, respectively. On an ongoing basis, the Company measures realizability of goodwill by the ability of the acquired businesses to generate current and undiscounted expected future cash flow in excess of unamortized goodwill. If such realizability is in doubt, an adjustment is made to reduce the carrying value of the goodwill. Such adjustments have not historically been material to the Company's financial statements. DISPOSAL CREDITS The Company classifies disposal credits as other assets until applied against the cost of disposing of materials such as biosolids or ash residue from its trash-to-energy facilities at WMX landfills. These credits are charged to expense as utilized. The Company utilized $2.5 million and $3.0 million of disposal credits during 1994 and 1995, respectively. There were approximately $34.2 million and $31.2 million of disposal credits remaining at December 31, 1994 and 1995, respectively. FACILITY MAINTENANCE ACCRUAL In order to match more consistently expenditures for major repair and overhaul activities with revenue, the Company follows a policy of accruing for major maintenance expenditures at its trash-to-energy and independent power facilities. Such accruals are based upon planned maintenance expenditures and are classified as current or noncurrent liabilities based on the expected timing of the expenditures. INCOME TAXES Income taxes are provided based on earnings reported for financial statement purposes. The provision for income taxes differs from the amounts currently payable because of timing differences in the recognition of certain income and expense items for financial reporting and tax reporting purposes. In accordance with Statement of Financial Accounting Standards No. 109, the Company accounts for income taxes using an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities, measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income taxes are not provided on undistributed earnings of affiliates because these earnings are considered to be permanently reinvested. If the reinvested earnings were to be remitted, the U.S. income taxes due under current tax law would not be material. Investment credits have been deferred and are included in income as a reduction of income tax expense over the estimated useful lives of the assets that gave rise to the credits. See Note 4. - -------------------------------------------------------------------------------- 19 Wheelabrator Technologies Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) - -------------------------------------------------------------------------------- ENVIRONMENTAL COSTS AND LIABILITIES The Company operates in the environmental industry and the majority of its businesses are involved with the protection of the environment. As such, a significant portion of the Company's operating costs and capital expenditures could be characterized as costs of environmental protection. While the Company is faced, in the normal course of its business, with the need to expend funds for environmental protection, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its products and services are priced accordingly. Although unlikely in the near-term, such ongoing compliance costs may increase in the future as a result of legislation or regulation. However, the Company believes that in general it benefits from increased government regulation, which increases the demand for its products and services, and that it has the resources and experience to manage environmental risk. Estimated closure and postclosure monitoring costs associated with ash residue monofills for which the Company is responsible include items such as final cap and cover on the site, leachate management, and groundwater monitoring. These costs are recognized in proportion to use of the permitted capacity at such disposal sites. Such costs are estimated based on the technical requirements of EPA or applicable state regulations, whichever are stricter. These accruals for closure and postclosure costs relate to expenditures to be incurred after a monofill ceases to accept ash residue. To the extent similar costs are incurred during the active life of the site, they are expensed as incurred. Preparation costs associated with these sites and their individual cells are capitalized and amortized over the respective estimated life of the disposal site or individual cell. Wheelabrator has instituted procedures to periodically evaluate other potential environmental exposures. When the Company concludes it is probable that a liability has been incurred, provision is made in the financial statements, based upon management's judgment and prior experience, for the Company's best estimate of the liability. Such estimates are subsequently revised as deemed necessary when additional information becomes available. While the Company does not anticipate that any such adjustment would be material to its financial statements, it is reasonably possible that future technological, regulatory or enforcement developments, results of environmental studies, or other factors could alter this expectation and necessitate the recording of additional liabilities, which could be material. The Company has recorded liabilities for closure and postclosure monitoring and environmental remediation costs as follows:
December 31, 1994 1995 - --------------------------------------------------- Current portion, included in accrued liabilities $ 4,562 $11,452 Noncurrent portion, included in other long-term liabilities 17,145 6,677 ------- ------- Total environmental liabilities $21,707 $18,129 ======= =======
During the remaining life of active sites, the Company anticipates providing an additional $2.1 million of closure and postclosure costs. CONTRACTS IN PROCESS Information with respect to contracts in process at December 31, 1994 and 1995, is as follows:
December 31, 1994 1995 - --------------------------------------------------------------- Costs and estimated earnings on uncompleted contracts $ 601,650 $ 450,202 Less: Billings on uncompleted contracts (624,783) (445,391) --------- --------- Total contracts in process $ (23,133) $ 4,811 ========= ========= Contracts in process are included in the Consolidated Balance Sheets under the following captions: December 31, 1994 1995 - --------------------------------------------------------------- Costs and earnings in excess of billings $ 42,833 $ 50,497 Advance payments on contracts (65,966) (45,686) --------- --------- Total contracts in process $ (23,133) $ 4,811 ========= =========
All contracts in process are expected to be billed and collected within three years. Accounts receivable includes retainage that has been billed but is not due pursuant to contract provisions until completion. Such retainage at December 31, 1995, is $14.2 million, including $1.3 million that is expected to be collected after one year. At December 31, 1994, retainage was $14.6 million. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share is calculated by dividing net income by the weighted average number of shares outstanding, including the effect of common stock equivalents determined using the treasury stock method. Common stock equivalents consist of unexercised stock options. The treasury stock method assumes that options with an exercise price below the average market price for the period are exercised at the beginning of the period and the proceeds from the exercise of such options are used to repurchase common stock. The following table reconciles the number of common shares shown as outstanding in the Consolidated Balance Sheets with the number of common shares used in computing earnings per share:
Years Ended December 31, 1994 1995 - ---------------------------------------------------------------------- Common shares issued, net of treasury stock per Consolidated Balance Sheets 186,275 179,433 Effect of shares issuable under stock options after applying the "treasury stock" method 782 643 Effect of using weighted average common shares outstanding during the year 2,843 4,924 ------- ------- Common shares used in computing earnings per share 189,900 185,000 ======= =======
ACCOUNTING PRONOUNCEMENTS Effective January 1, 1994, Wheelabrator adopted Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("FAS 112"). This new statement established accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 did not have a material impact on the Company's financial statements since its accounting prior to adoption of FAS 112 was substantially in compliance with 20 - -------------------------------------------------------------------------------- the new standard. Also effective during 1994 was Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" ("FAS 115"). The Company does not have significant investments and does not contemplate acquiring significant investments of the type covered in FAS 115. The Company is required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), beginning in 1996. Wheelabrator does not believe the adoption of FAS 121 will have a material impact on its financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which the Company also must adopt in 1996. FAS 123 provides an optional new method of accounting for employee stock options and expands required disclosure about stock options. If the new method of accounting is not adopted, the Company will be required to disclose pro forma net income and earnings per share as if it were. The Company is studying FAS 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the financial statements. RECLASSIFICATION Certain prior period amounts have been reclassified to conform with the current year presentation. - -------------------------------------------------------------------------------- NOTE 3 CAPITAL TRANSACTIONS, ACQUISITIONS, AND DIVESTITURES WM INTERNATIONAL Wheelabrator owns approximately 12 percent of WM International, a WMX subsidiary that owns substantially all of WMX's waste management services operations outside of North America. The investment is accounted for using the equity method due to the significance, through WMX, of Wheelabrator's influence over WM International. As of December 31, 1995, WM International was owned approximately 12 percent by Wheelabrator, 12 percent by Rust, 56 percent by WMX, and 20 percent by the public. During 1993, 1994, and 1995, respectively, Wheelabrator recorded equity in net income (loss) of WM International of $13.8 million, $15.2 million, and $(5.1) million. The Company's equity income was reduced by approximately $25.6 million during the fourth quarter of 1995 for its share of a largely noncash special charge recorded by WM International. The charge related to actions WM International is taking to sell or otherwise dispose of noncore businesses and investments as well as core businesses and investments in low potential markets, abandon certain hazardous waste treatment and processing technologies, and streamline its country management organization. The charge followed a thorough review of WM International's operations and management structure, and reflects WM International's intention to refocus on its core waste services business. Wheelabrator's investment in WM International totaled approximately $226.0 million and $228.7 million as of December 31, 1994 and 1995, respectively. Included within these investment balances are undistributed earnings of approximately $52.0 million and $47.0 million as of December 31, 1994 and 1995, respectively. As of December 31, 1995, the market value of the Company's WM International investment exceeded its book value by approximately $13.2 million. A summary of certain financial information for WM International follows:
December 31, 1994 1995 - -------------------------------------------------------------------------------- Current assets $ 828,011 $ 859,591 Noncurrent assets 3,216,661 3,375,998 Current liabilities 788,769 1,077,746 Noncurrent liabilities 1,042,062 893,717 Minority interest 330,172 357,934 Years Ended December 31, 1993 1994 1995 - -------------------------------------------------------------------------------- Revenue $1,411,211 $1,710,862 $1,865,081 Gross profit 402,065 466,265 260,206 Net income (loss) 114,246 126,753 (42,112)
RUST Wheelabrator owns approximately 40 percent of Rust, an environmental and infrastructure engineering and consulting company. The remaining 60 percent of Rust is owned directly or indirectly by WMX. During 1993, 1994, and 1995, Wheelabrator recorded equity in income from continuing operations of Rust of $25.0 million, $14.4 million, and $10.2 million, respectively. During 1993, the Company also recognized a nontaxable gain of $7.7 million from Rust's issuance of additional shares of its common stock. Wheelabrator's investment in Rust totaled approximately $387.2 million and $373.1 million as of December 31, 1994 and 1995. The investment balance includes approximately $51.5 million and $37.4 million of undistributed earnings as of December 31, 1994 and 1995, respectively. A summary of certain financial information for Rust follows:
December 31, 1994 1995 - -------------------------------------------------------------------------------- Current assets $ 494,595 $ 258,033 Noncurrent assets(1) 1,277,060 1,260,844 Current liabilities 254,068 123,207 Noncurrent liabilities 545,624 450,696
(1) 1995 noncurrent assets include approximately $130.6 million of net assets held for sale.
Years Ended December 31, 1993 1994 1995 - -------------------------------------------------------------------------------- Revenue $1,035,004 $1,140,294 $1,027,430 Gross profit 226,198 225,165 210,902 Income from continuing operations 64,355 43,754 25,514 Net income (loss) 79,964 55,587 (35,213)
DISCONTINUED OPERATIONS In the fourth quarter of 1995, Rust announced that as a result of its ongoing strategic review, it will sell or discontinue its process engineering, construction, specialty contracting, and similar lines of business and focus on its environmental and infrastructure engineering and consulting business. Rust has classified the businesses to be disposed of as discontinued operations. Wheelabrator has a 40 percent equity interest in Rust, and accordingly, has recorded 40 percent of Rust's provision for loss on the disposal of these operations. The Company's equity in the income from this segment of Rust has also been reported separately from continuing operations. The provision for loss on disposal of discontinued operations includes management's best estimates of the amounts expected to be realized on the sale of these businesses. The amounts Rust will ultimately realize could differ materially in the near-term from the amounts estimated in arriving at the provision for loss. 21 Wheelabrator Technologies Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) - -------------------------------------------------------------------------------- During 1993, 1994, and 1995, Wheelabrator paid Rust approximately $144.7 million, $101.6 million, and $26.8 million, respectively, for engineering, construction management, and other services. The terms of transactions between the Company and Rust are generally the same as the terms of comparable transactions with unaffiliated third parties. ACQUISITIONS In 1993, the Company acquired seven businesses engaged in providing water and air quality-related environmental products and services as well as independent power in exchange for approximately 1.6 million shares of Wheelabrator common stock and $15.0 million of cash. In 1994, in exchange for approximately 156 thousand shares of Wheelabrator common stock and $25.8 million of cash, the Company acquired wastewater treatment operating contracts and nine businesses engaged in providing air and water quality-related environmental products and services and in manufacturing surface finishing equipment. During 1995, Wheelabrator completed the privatization of the Miami Conservancy District wastewater treatment plant located in Franklin, Ohio, at a cost of approximately $6.8 million. Also during 1995, the Company acquired a Taiwanese company engaged in the design and engineering of water treatment equipment for approximately $5.8 million, net of cash acquired. The Company utilizes the purchase method of accounting, and the purchase price of the foregoing acquisitions has been allocated to their respective net assets based upon estimated fair market values. The results of operations of acquired entities have been included in Wheelabrator's financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions made during 1993, 1994, and 1995 is not material. - -------------------------------------------------------------------------------- NOTE 4 INCOME TAXES Summaries of the Company's income from continuing operations before income taxes and its income tax provisions are given below.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Years Ended December 31, 1993 1994 1995 - -------------------------------------------------------------------------------- Domestic $235,680 $272,650 $250,249 International 11,010 10,033 13,188 -------- -------- -------- Total $246,690 $282,683 $263,437 ======== ======== ======== INCOME TAX PROVISION (BENEFIT) Years Ended December 31, 1993 1994 1995 - -------------------------------------------------------------------------------- Current tax expense U.S. Federal $ 16,021 $ 37,152 $ 25,945 State and local 9,333 13,636 10,062 Foreign 3,883 3,603 6,765 -------- -------- -------- Total current 29,237 54,391 42,772 -------- -------- -------- Deferred tax expense U.S. Federal 54,780 43,713 51,046 State and local 6,697 4,860 9,855 Foreign -- 336 (1,606) -------- -------- -------- Total deferred 61,477 48,909 59,295 -------- -------- -------- U.S. Federal benefit from amortization of deferred investment credit (779) (779) (779) -------- -------- -------- Total provision $ 89,935 $102,521 $101,288 ======== ======== ========
The principal items accounting for the difference in income taxes computed at the U.S. statutory rates and as recorded are as follows:
Years Ended December 31, 1993 1994 1995 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes after federal income tax benefit 4.2 4.3 4.9 Equity income (5.5) (3.6) (0.7) Deferred tax revaluation relating to Omnibus Budget Reconciliation Act 2.6 -- -- Other, net 0.2 0.6 (0.8) ---- ---- ---- Effective tax rate 36.5% 36.3% 38.4% ==== ==== ====
During 1993, the Company recorded a $6.5 million increase in deferred income taxes due to the impact that the tax rate increase enacted in the Omnibus Budget Reconciliation Act of 1993 had on the net deferred income tax liability. The principal items that comprise the 1994 and 1995 deferred tax (assets) and liabilities are as follows:
December 31, 1994 1995 - -------------------------------------------------------------------------------- Reserves not deductible until paid $(107,761) $(102,400) Deferred income (25,233) (22,907) Basis difference in investments and capital loss carryforwards (12,904) (8,579) Alternative minimum tax credit carryforwards (17,289) (24,581) State net operating loss carryforwards (12,431) (13,435) Other (13,787) (410) Less: Valuation allowance 15,989 10,952 --------- --------- Subtotal (173,416) (161,360) --------- --------- Property, plant, and equipment 444,127 508,468 Nondeductible prepaid expenses 13,876 11,817 Other 42,170 36,720 --------- --------- Subtotal 500,173 557,005 --------- --------- Total deferred tax liability $ 326,757 $ 395,645 ========= =========
The Company has approximately $24.6 million of alternative minimum tax credit carryforwards that may be carried forward indefinitely. The Company has capital loss carryforwards of approximately $15 million with an expiration date of 1998. Also, various subsidiaries have state operating loss carryforwards of approximately $310 million with expiration dates through the year 2010. Valuation allowances have been established due to the uncertainty of ultimately realizing the tax benefit of certain state net operating loss carryforwards and the tax benefits attributed to basis differences in certain investments. While the Company expects to realize the deferred tax assets in excess of the valuation allowances, changes in estimates of future taxable income or tax laws could alter this expectation. The valuation allowance decreased $4.4 million during 1994 primarily as a result of the realization of tax benefits due to the disposition of certain investments. During 1995, the valuation allowance decreased $5.0 million due primarily to the realization of capital loss carryforwards. 22 - -------------------------------------------------------------------------------- NOTE 5 CAPITAL STOCK COMMON STOCK As of December 31, 1995, approximately 104.6 million shares of the Company's common stock were held by WMX or its subsidiaries. Under certain circumstances, WMX has options to purchase at fair market value newly issued shares of Wheelabrator common stock. WMX also has certain registration rights until August 24, 1999, with respect to certain of the Wheelabrator common stock it holds. During 1994 and 1995, the Company repurchased approximately 3.3 million and 7.2 million shares of its common stock for an aggregate cost of approximately $47.6 million and $104.2 million, respectively. The Company is authorized to repurchase an additional 19.2 million shares of its common stock through December 1997 on the open market or in privately negotiated transactions, if market conditions make it attractive to do so. The Company declared and paid cash dividends totaling $0.08, $0.10, and $0.11 per common share during 1993, 1994, and 1995, respectively. - -------------------------------------------------------------------------------- NOTE 6 LONG-TERM DEBT AND LEASE COMMITMENTS Long-term debt is as follows:
December 31, 1994 1995 - -------------------------------------------------------------------------------- Industrial development revenue bonds due 1996 to 2010 at rates of 4.0%-9.25% $686,210 $666,678 Private placement bonds due 2008 at a rate of 10.64% 20,000 20,000 Project financing from syndicate of commercial banks due 1995 to 2000 at a rate of 1.5% above LIBOR (8.44% at December 31, 1994) 33,699 -- Project financing from commercial bank due 1996 to 2000 at a rate of 0.325% above LIBOR (6.2625% at December 31, 1995) -- 28,641 Secured notes payable related to coal-handling facilities due 1996 to 1999 at rates of 9.0%-9.875% 24,950 20,327 Other nonproject debt due 1996 to 2008 at rates of 2.857% to 10.0% 6,823 4,576 -------- -------- 771,682 740,222 Less: Current portion 35,749 35,808 -------- -------- Total long-term debt $735,933 $704,414 ======== ========
At December 31, 1995, the Company's long-term project debt was collateralized by property, plant, and equipment with a net book value of approximately $731.1 million and approximately $45.6 million of investments held by trustees. Investments held by trustees typically represent proceeds of long-term debt related to trash-to-energy and independent power projects. These amounts generally consist of reserve funds maintained pursuant to project financing agreement requirements. The investments, which are included in other assets in the Consolidated Balance Sheets, are held in trust and use by the Company is restricted. Also included within other assets are deferred financing costs, which are amortized over the term of the related debt using a straight-line method that approximates the interest method. Financing for certain trash-to-energy facilities currently operated by the Company has been provided through sale and leaseback transactions arranged in previous years. The leases are classified as operating leases, with lease expense recognized on a straight-line basis over the base and bargain renewal periods of each agreement. Timing differences between lease payments and financial statement lease expense are included in other assets in the Consolidated Balance Sheets. Gains realized on the sale transactions are included in deferred income in the Consolidated Balance Sheets and are amortized on a straight-line basis over the terms of the respective leases. Principal payments on long-term debt and noncancelable operating lease payments for operating and office facilities at December 31, 1995, are due as follows:
Long-term Debt Operating Leases - -------------------------------------------------------------------------------- 1996 $ 35,808 $ 87,399 1997 34,312 88,555 1998 43,160 89,182 1999 43,541 92,466 2000 43,090 93,156 Thereafter 540,311 651,153 -------- ---------- Total $740,222 $1,101,911 ======== ==========
Total rent expense was $71.4 million, $72.7 million, and $70.5 million for the years ended December 31, 1993, 1994, and 1995, respectively. The Company has directly or indirectly guaranteed the payment of debt obligations at certain of its leased or owned facilities (see also Note 9). These guarantees contain various covenants, the most restrictive of which require the maintenance of specified levels of tangible net worth. The Company is in compliance with these covenants as of December 31, 1995. Resco Holdings Inc. ("Resco"), a wholly-owned subsidiary of Wheelabrator, and Allied Signal Inc. ("Allied Signal") are parties to an agreement that provides for specific credit support by Allied Signal for certain of Resco's trash-to- energy project subsidiaries. Under the agreement, Allied Signal may require Resco to refinance, without Allied Signal credit support, indebtedness of supported trash-to-energy projects if it is economical (as defined in the agreement) to do so. Resco and certain of its subsidiaries have agreed to reimburse Allied Signal for all amounts that may be paid by it under the agreement or various related credit support obligations. No support payments have been made by Allied Signal as of December 31, 1995. Resco is also required to maintain a minimum level of tangible net worth (approximately $549.8 million as of December 31, 1995). As of December 31, 1995, Resco was in compliance with this provision. Resco has agreed not to declare or pay any cash dividends to the Company at any time Resco's tangible net worth is less than the required amount. Resco owns substantially all of the net operating assets of the Company except certain net assets including cash and investments. The Company has the ability to pay cash dividends using assets other than those restricted within Resco. 23 Wheelabrator Technologies Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) - -------------------------------------------------------------------------------- NOTE 7 STOCK AND BENEFIT PLANS STOCK OPTION PLANS Wheelabrator's stock option plans provide for the grant to key employees of nonqualified options to purchase shares of the Company's common stock at a price equal to the fair market value at the time of grant. When nonqualified options are exercised, the Company receives a federal income tax deduction equal to the market value of the shares at exercise date less the exercise price. The associated tax savings is credited to capital in excess of par value. The status of the plans (including predecessor plans under which options remain outstanding) through December 31, 1995, was as follows:
Shares Option Price - ---------------------------------------------------------------- December 31, 1992 Outstanding 5,464 $ 3.87 - $15.75 Available for future grant 5,714 -- -- ------ 1993: Granted 673 $17.69 - $20.65 Exercised (1,031) $ 3.87 - $15.75 Cancelled: Predecessor plans (14) $11.90 Current plans (46) $14.25 - $20.65 ------ December 31, 1993 Outstanding 5,046 $ 3.87 - $20.65 Available for future grant 5,087 -- -- ------ 1994: Granted 815 $19.13 Exercised (593) $ 3.87 - $15.75 Cancelled: Predecessor plans (23) $11.90 Current plans (98) $15.75 - $20.65 ------ December 31, 1994 Outstanding 5,147 $ 3.87 - $20.65 Available for future grant 4,370 -- -- ------ 1995: Granted 1,283 $13.63 Exercised (341) $ 3.87 - $16.75 Cancelled: Predecessor plans (6) $11.90 Current plans (212) $15.75 - $20.65 ------ December 31, 1995 Outstanding 5,871 $ 3.87 - $20.65 ====== Available for future grant 3,299 -- -- ====== Exercisable at end of year 3,915 $ 3.87 - $20.65 ======
Outstanding options generally have a term of seven years from the date of the grant and expire at various dates through April 1, 2002. SAVINGS AND RETIREMENT PLAN Substantially all employees are participants in the Wheelabrator-Rust Savings and Retirement Plan, which is a qualified defined contribution plan consisting of a savings account component (the "Savings Account") and a retirement account component (the "Retirement Account"). Under the terms of the Savings Account, eligible employees of the Company may elect to contribute a portion of their annual compensation not to exceed 16 percent. The Company is required to match a minimum of 30 percent of the first six percent of eligible compensation contributed by an employee. Under the terms of the Retirement Account, eligible employees of the Company receive an annual contribution equal to a minimum of three percent of their eligible earnings. Employees vest in Company contributions and the associated earnings in the Savings Account at 20 percent per year and in the Retirement Account after five years. Wheelabrator's contributions to such plans during 1993, 1994, and 1995 amounted to approximately $6.2 million, $8.0 million, and $8.5 million, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain postretirement benefits other than pensions, which are primarily health care benefits offered to a limited number of former employees. The majority of the Company's active employees will not receive postretirement benefits other than pensions. During the fourth quarter of 1995, the Company settled litigation with a group of retirees regarding their level of future benefits. As a result, the accumulated postretirement benefit obligation for retiree health care plans was reduced by approximately $3.6 million. Details of the plans' expense recognized in the Consolidated Statements of Income are as follows:
Years Ended December 31, 1993 1994 1995 - ---------------------------------------------------- Service cost $ 50 $ 59 $ 64 Interest cost 2,646 2,590 3,155 Net amortization (27) (43) (55) ------ ------ ------ Total expense $2,669 $2,606 $3,164 ====== ====== ======
The following sets forth the plans' funded status reconciled with amounts reported in the Company's Consolidated Balance Sheets:
December 31, 1994 1995 - ------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees $37,727 $36,794 Fully eligible active plan participants 433 467 Other active plan participants 549 432 ------- ------- Total APBO 38,709 37,693 Unrecognized: Prior service cost 627 566 Gain 3,080 1,844 ------- ------- Accrued postretirement benefit liability $42,416 $40,103 ======= =======
For measurement purposes, a 10.0 percent annual rate of increase in the per capita cost of covered health care claims was assumed for 1996, decreasing by 0.5 percent annually to 7.5 percent in 2001 and remaining at that level thereafter. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by approximately $3.5 million and increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $0.3 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent in 1994 and 7.75 percent in 1995 based on expected payout patterns. 24 - -------------------------------------------------------------------------------- NOTE 8 ADDITIONAL FINANCIAL INFORMATION The following is a summary of inventories:
December 31, 1994 1995 - -------------------------------------------------------------- Raw materials $ 7,997 $16,595 Work in process 43,961 32,107 Finished goods 17,262 13,936 ------- ------- Total inventories $69,220 $62,638 ======= =======
Included in other current assets are spare parts and supplies of $23.6 million and $30.2 million as of December 31, 1994 and 1995, respectively. The following is a summary of property, plant, and equipment:
December 31, 1994 1995 - --------------------------------------------------------------- Land $ 118,971 $ 117,427 Land options 256,225 261,703 Machinery and equipment 1,271,152 1,318,223 Buildings and improvements 303,560 312,681 Construction-in-progress 40,367 8,233 Less: accumulated depreciation (310,273) (394,108) ---------- ---------- Total property, plant, and equipment $1,680,002 $1,624,159 ========== ==========
Depreciation of property, plant, and equipment for the years ended December 31, 1993, 1994, and 1995 was $62.4 million, $82.6 million, and $90.7 million, respectively. The following is a summary of accrued liabilities:
December 31, 1994 1995 - ------------------------------------------------------ Wages, salaries, and benefits $ 30,642 $ 30,079 Interest and lease expense 41,158 44,928 Warranties and contract reserves 14,428 20,602 Other 103,459 89,664 -------- -------- Total accrued liabilities $189,687 $185,273 ======== ========
- ------------------------------------------------------ NOTE 9 COMMITMENTS AND CONTINGENCIES The Company has issued or is a party to 461 bank letters of credit, performance bonds, and other guarantees. Such financial instruments (averaging approximately $1 million each) are given in the ordinary course of business. Since 1994, the Company was involved in litigation concerning permits for the construction and operation of the Lisbon, Connecticut, trash-to-energy plant. These matters were resolved during 1995, and the plant began commercial operations in January 1996. In May 1994, the U.S. Supreme Court ruled that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Such laws typically involve a municipality specifying the disposal site for all solid waste generated within its borders. Since the ruling, several decisions of state or federal courts have invalidated regulatory flow control schemes in a number of jurisdictions. Other judicial decisions have upheld nonregulatory means by which municipalities may effectively control the flow of municipal solid waste. There can be no assurance that such alternatives to regulatory flow control will in every case be found to be lawful. For example, the Company's Gloucester County, New Jersey, facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. A recent federal court ruling in that state invalidated a franchise applicable to construction and demolition waste and has cast doubt on the validity of the municipal solid waste disposal franchise, which is now being challenged in separate litigation. The Supreme Court's ruling has not to date had a material adverse affect on any of the Company's trash-to-energy operations. Federal legislation has been proposed, but not yet enacted, to effectively grandfather existing flow control mandates. In the event that such legislation is not adopted, the Company believes that affected municipalities will endeavor to implement alternative lawful means to continue controlling the flow of waste. In view of the uncertain state of the law at this time, however, the Company is unable to predict whether such efforts would be successful. Within the next five years, the air pollution control systems at certain trash-to-energy facilities owned or leased by Wheelabrator will be required to be modified to comply with more stringent air pollution control standards adopted by the EPA in October 1995. The compliance dates will vary by facility, but all affected facilities will be required to be in compliance with the new rules by the end of the year 2000. Currently available technologies will be adequate to meet the new standards. Although the total expenditures required for such modifications are estimated to be in the $250 - $300 million range, they are not expected to have a material adverse effect on the Company's liquidity or results of operations because provisions in the impacted facilities' long-term waste supply agreements allow the Company to recover from customers the majority of incremental capital and operating costs. Wheelabrator has been notified by certain private parties that it may be potentially responsible for a portion of the remediation costs related to a certain state-listed remediation site currently subject to an enforcement order that includes a site assessment study. Although the Company is considering joining the private parties to share in these costs, no litigation has been filed and the Company has not been named a potentially responsible party. At the present time, there is insufficient information available to estimate the remediation costs or the extent of Wheelabrator's responsibility beyond its possible voluntary sharing of enforcement order costs. An estimate of those costs is included in 1995's results of operations and is not material. There are various lawsuits and claims pending against Wheelabrator that have arisen in the normal course of Wheelabrator's business and relate mainly to matters of product liability, personal injury, and property damage. The outcome of these matters is not presently determinable, but in the opinion of management, based on the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. It is reasonably possible, however, that a change in the Company's estimate of its probable liability with respect to these matters could occur in the near-term. The Company is self-insured for general liability claims up to $2.0 million per occurrence. Liability insurance in effect during the last several years provides coverage for environmental matters only to a limited extent. 25 Wheelabrator Technologies Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) - -------------------------------------------------------------------------------- NOTE 10 SEGMENT AND GEOGRAPHIC INFORMATION During 1995, the Company began implementing the recommendations of a strategic review of WMX and its subsidiaries. Part of this implementation involved realigning the Wheelabrator organization and management into two principal industry segments: Clean Energy and Clean Water. Previously, the Company had been managed and reported as one segment. Information concerning the Company's business segments in 1993, 1994, and 1995 follows. Intersegment revenues are at prices that approximate market and are not material. Prior year information has been restated to conform with the current presentation.
- ----------------------------------------------------------------------------------------------------------------------------- Corporate & Clean Energy(1) Clean Water Eliminations(2) Consolidated - --------------------------------------------------------------------------------------------------------------------------------- 1993 Revenue $ 761,558 $392,194 $(11,533) $1,142,219 Operating expenses including goodwill amortization 508,963 294,525 (10,769) 792,719 Selling and administrative expenses 43,861 63,937 (522) 107,276 ---------- -------- -------- ---------- Operating income $ 208,734 $ 33,732 $ (242) $ 242,224 ========== ======== ======== ========== Identifiable assets $2,018,156 $485,349 $578,204 $3,081,709 ========== ======== ======== ========== Depreciation and amortization expense $ 56,026 $ 21,446 $ (2,149) $ 75,323 ========== ======== ======== ========== Capital expenditures(3) $ 194,645 $112,965 $ (3,705) $ 303,905 ========== ======== ======== ========== 1994 Revenue $ 844,703 $489,295 $ (9,431) $1,324,567 Operating expenses including goodwill amortization 556,838 369,592 (11,193) 915,237 Selling and administrative expenses 40,859 78,615 (94) 119,380 ---------- -------- -------- ---------- Operating income $ 247,006 $ 41,088 $ 1,856 $ 289,950 ========== ======== ======== ========== Identifiable assets $2,055,449 $587,480 $633,682 $3,276,611 ========== ======== ======== ========== Depreciation and amortization expense $ 56,678 $ 40,813 $ (2,237) $ 95,254 ========== ======== ======== ========== Capital expenditures(3) $ 74,857 $ 35,725 $ 4,500 $ 115,082 ========== ======== ======== ========== 1995 Revenue $ 839,484 $618,472 $ (6,281) $1,451,675 Operating expenses including goodwill amortization 546,018 477,842 (8,591) 1,015,269 Selling and administrative expenses 41,074 89,922 (20) 130,976 ---------- -------- -------- ---------- Operating income $ 252,392 $ 50,708 $ 2,330 $ 305,430 ========== ======== ======== ========== Identifiable assets $1,952,457 $612,824 $654,912 $3,220,193 ========== ======== ======== ========== Depreciation and amortization expense $ 64,922 $ 44,744 $ (1,852) $ 107,814 ========== ======== ======== ========== Capital expenditures(3) $ 11,676 $ 33,415 $ 10 $ 45,101 ========== ======== ======== ==========
(1) Includes Air businesses. (2) Includes unallocated corporate assets, investments in affiliates, and elimination of intercompany transactions. (3) Includes property, plant, and equipment of purchased businesses. Wheelabrator has foreign operations in six European countries, five countries in the Asia-Pacific region, Canada, and Mexico. Information relating to the Company's foreign operations is set forth below:
United States Europe Asia-Pacific Other Foreign Consolidated - -------------------------------------------------------------------------------------------------- 1993 Revenue $1,074,699 $ 37,612 $15,094 $14,814 $1,142,219 ========== ======== ======= ======= ========== Operating income $ 228,632 $ 2,855 $ 2,807 $ 7,930 $ 242,224 ========== ======== ======= ======= ========== Identifiable assets $3,047,736 $ 20,523 $ 6,397 $ 7,053 $3,081,709 ========== ======== ======= ======= ========== 1994 Revenue $1,212,771 $ 70,399 $23,781 $17,616 $1,324,567 ========== ======== ======= ======= ========== Operating income $ 280,218 $ 6,017 $ 3,365 $ 350 $ 289,950 ========== ======== ======= ======= ========== Identifiable assets $3,139,778 $102,441 $27,505 $ 6,887 $3,276,611 ========== ======== ======= ======= ========== 1995 Revenue $1,240,311 $150,464 $40,340 $20,560 $1,451,675 ========== ======== ======= ======= ========== Operating income $ 290,224 $ 9,915 $ 4,139 $ 1,152 $ 305,430 ========== ======== ======= ======= ========== Identifiable assets $3,062,077 $ 97,664 $51,818 $ 8,634 $3,220,193 ========== ======== ======= ======= ==========
26 - -------------------------------------------------------------------------------- NOTE 11 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(1)
First Second Third Fourth Full Year - ------------------------------------------------------------------------------------------- 1994 Revenue $281,332 $321,661 $334,707 $386,867 $1,324,567 Operating expenses 195,584 218,508 228,624 272,521 915,237 Income from continuing operations 39,635 48,028 45,886 46,613 180,162 Net income 40,140 48,610 49,389 46,756 184,895 Weighted average common and common equivalent shares outstanding 190,200 190,500 190,400 188,600 189,900 Earnings per common and common equivalent share: Income from continuing operations $ 0.21 $ 0.25 $ 0.24 $ 0.25 $ 0.95 Net Income 0.21 0.26 0.26 0.25 0.97 Market price: High 21 1/4 20 5/8 18 3/4 15 1/2 21 1/4 Low 17 1/4 17 3/4 15 1/4 13 1/4 13 1/4 1995 Revenue $373,299 $369,994 $355,951 $352,431 $1,451,675 Operating expenses 267,893 260,590 247,403 239,383 1,015,269 Income from continuing operations(2) 43,700 49,694 49,900 18,855 162,149 Net income (loss) 43,676 52,968 51,376 (10,162) 137,858 Weighted average common and common equivalent shares outstanding 186,400 185,300 185,500 182,500 185,000 Earnings per common and common equivalent share: Income from continuing operations $ 0.23 $ 0.27 $ 0.27 $ 0.10 $ 0.88 Net income (loss) 0.23 0.29 0.28 (0.06) 0.75 Market price: High 17 1/2 15 3/4 17 16 3/4 17 1/2 Low 12 1/2 13 5/8 14 1/4 14 12 1/2
(1) Previously reported numbers have been restated for the discontinued operations. (2) Fourth quarter of 1995 reduced by $25.6 million related to a special charge recorded by WM International. Report of Independent Public Accountants - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS OF WHEELABRATOR TECHNOLOGIES INC.: We have audited the accompanying consolidated balance sheets of Wheelabrator Technologies Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income, cash flows, and changes in stockholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wheelabrator Technologies Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSON LLP ARTHUR ANDERSEN LLP New York, New York February 2, 1996 27 Wheelabrator Technologies Inc. Directors and Officers - -------------------------------------------------------------------------------- BOARD OF DIRECTORS Phillip B. Rooney James E. Koenig Chairman of the Board and Sr. Vice President, Chief Executive Officer Chief Financial Officer and Treasurer Wheelabrator Technologies Inc. WMX Technologies, Inc. Dean L. Buntrock Paul M. Montrone Chairman of the Board and President and Chief Executive Officer Chief Executive Officer Fisher Scientific International Inc. WMX Technologies, Inc. William M. Daley Manuel Sanchez Partner Partner Mayer Brown & Platt Sanchez & Daniels Donald F. Flynn Lt. Gen. Thomas P. Stafford Chairman of the Board and President Consultant Flynn Enterprises, Inc. General Technical Services, Inc. Kay Hahn Harrell Chairman and Chief Executive Officer Fairmarsh Consulting - -------------------------------------------------------------------------------- OFFICERS Phillip B. Rooney Herbert A. Getz Mark P. Paul Chairman of the Board and Secretary Vice President and Chief Executive Officer General Counsel John J. Goody John M. Kehoe, Jr. Vice President John D. Sanford President and Executive Vice President, Chief Operating Officer Richard S. Haak, Jr. Chief Financial Officer Controller and Treasurer - -------------------------------------------------------------------------------- STAFF OFFICERS SUBSIDIARY OFFICERS Robert J. Gagalis Bruno R. Dunn Staff Vice President Vice President Operations Corporate Development Wheelabrator Environmental Systems Inc. Mark P. Hepp Staff Vice President Ray L. Patel Engineering & Construction President and Chief Operating Officer Wheelabrator Water Technologies Inc. Wheelabrator Technologies Inc. Corporate Information - -------------------------------------------------------------------------------- STOCKHOLDER INFORMATION Headquarters Wheelabrator Technologies Inc. Liberty Lane Hampton, NH 03842 (603) 929-3000 - -------------------------------------------------------------------------------- STOCK TRANSFER AGENT AND REGISTRAR Mellon Securities Transfer Services 85 Challenger Road Overpeck Centre Ridgefield Park, NJ 07660 - -------------------------------------------------------------------------------- STOCK LISTING Wheelabrator Technologies Inc. common stock is listed on the New York Stock Exchange under the stock trading symbol WTI. - -------------------------------------------------------------------------------- SHAREHOLDER SERVICES If you have questions concerning Wheelabrator Technologies Inc., or your investment in the Company, we will be pleased to assist you. You may contact Wheelabrator Shareholder Services by calling (800) 443-6474, or by writing Wheelabrator Shareholder Services, P.O. Box 1800, Pittsburgh, PA 14230. - -------------------------------------------------------------------------------- CORPORATE REPORTS A copy of the Company's report on Form 10-K filed with the Securities and Exchange Commission may be obtained without charge. 28 EX-21 7 SUBSIDIARIES OF REGITRANT Exhibit 21 SUBSIDIARIES OF REGISTRANT Set forth below is a list of subsidiaries of Wheelabrator Technologies Inc. as of December 31, 1995. Each subsidiary is organized under the laws of the jurisdiction indicated in parentheses following its name. Resco Holdings Inc. (Delaware) Johnson Filtration Systems (France) S.A. (France) Wheelabrator Sisson Lehman S.A. (France) Johnson Filtration Systems Limited (Ireland) Johnson Filtration Systems (Australia) Pty. Ltd. (Australia) Massachusetts Refusetech, Inc. (Delaware) Pullman Torkelson Utility Fuels Company (Delaware) Signal Overseas Capital Corporation N.V. (Neth. Ant.) Swindell-Dressler Energy Supply Company (Delaware) Swindell-Dressler Leasing Company (Delaware) WESI Peekskill Inc. (Delaware) WESI Westchester Inc. (Delaware) Wheelabrator-Berger (Maschinenfabriken)GmbH (Germany) Wheelabrator Clean Air Holdings Inc. (Delaware) Wheelabrator Clean Air Systems Inc. (Delaware) Westates Carbon-Arizona Inc. (Arizona) Pullman Chimney of Canada Ltd. (Canada (Federal) Pullman Power Products Corporation (Delaware) Pullman Power Products International Corporation (Delaware) Pullman Power Products of Ohio, Inc. (Ohio) Wheelabrator Clean Water Inc. (Delaware) Johnson Filtration Systems (Japan) Ltd. (Japan) Johnson Filtration Systems (India) Limited (India) HPD/Procesos y Sistemas de Separacion, S.A. (Spain) Wheelabrator Asia-Pacific (Pte) Ltd. (Singapore) Wheelabrator Clean Water Systems Inc. (Maryland) EnviroLand, Incorporated (Michigan) IPS Rochester Inc. (Delaware) Soaring Vista Properties, Inc. (Maryland) Wheelabrator Clean Water New Jersey Inc. (Delaware) Wheelabrator Cobb Inc. (Delaware) Enviro-Gro Technologies, Inc. (New York) Enviro-Gro Technologies II, Inc. (New York) Wheelabrator Mexicana, S.A. de C.V. (Mexico) Wheelabrator Servicios Ambientales, S.A. de C.V. (Mexico) Wheelabrator Clean Water Systems Canada Inc. (Ontario) Wheelabrator EOS Inc. (Delaware) Envirotech Operating Services (Petaluma), Inc. (Delaware) Wheelabrator EOS of Ohio Inc. (Delaware) Wheelabrator EOS Puerto Rico Inc. (Delaware) Wheelabrator EOS of Wilmington Inc. (Delaware) Wheelabrator EOS Canada Inc. (Ontario Wheelabrator Cleanfuel Corporation (Delaware) Wheelabrator Coal Refinery Inc. (Delaware) ICRC Company (Delaware) International Coal Refinery Company (Delaware) The Wheelabrator Corporation (Delaware) Wheelabrator Canada Inc. (Ontario) MPF Engineered Filtered Products Inc. (Ontario) Wheelabrator Technologies (UK) Limited (United Kingdom) Tilghman Wheelabrator Limited (United Kingdom) JFS (UK) Limited (United Kingdom) Tilghman Wheelabrator Special Products Ltd. (United Kingdom) Blastrac Europe Ltd. (United Kingdom) Neptune Nichols Limited (United Kingdom) Northedge Limited (United Kingdom) R.B.S. Pension Trustees Limited (United Kingdom) St. George's Engineering Ltd. (United Kingdom) Tilghman (1988) Limited (United Kingdom) Tilghman (Broadheath) Limited (United Kingdom) Tilghman (Engineers) Limited (United Kingdom) Wheelabrator Energy Leasing Company (Delaware) Wheelabrator Energy Systems Inc. (Delaware) Wheelabrator Water Technologies International Holdings Inc. (Delaware) Darchet Engineering and Water Treatment Pte. Ltd. (Singapore) Darchet Industrial Water Pte. Ltd. (Singapore) Darchet (M) Sdn Bhd (Malaysia) Darchet Industrial Water (M) Sdn Bhd (Malaysia) Darchet Industrial Water (Penang) Sdn Bhd (Malaysia) RWB Beheer B.V. (The Netherlands) Rossmark - van Wijk & Boerma Waterbehandeling B.V. (The Netherlands) Rossmark-De Roo Milieutechniek B.V. (The Netherlands) P.V. Pacific Private Ltd. (Singapore) P.V. Pacific (Malaysia) Sdn.Bhd. (Malaysia) RWB Belgium N.V./S.A. (Belgium) Miller-Rossmark Ltd. (United Kingdom) Wheelabrator Engineered Systems (Poland) Spoka z organiczona odpowiedzialnoscia (Poland) Sun Chi Co. Ltd. (Taiwan) Wheelabrator Environmental Systems Inc. (Delaware) Bensalem Power Company (Pennsylvania) NH/VT Energy Recovery Corporation (New Hampshire) North Broward Holdings Inc. (Delaware) Wheelabrator North Broward Inc. (Delaware) North Broward County Resource Recovery Project, Inc. (Florida) Riley Energy Systems of Lisbon Corporation (Delaware) Riley Energy Systems of Lisbon Connecticut Corp. (Connecticut) SES Brooklyn Inc. (Delaware) SES Brooklyn Navy Yard Inc. (Delaware) SES Connecticut Inc. (Delaware) SES Seattle Inc. (Delaware) Signal Capital Sherman Station Inc. (Delaware) Signal RESCO, Inc. (Delaware) South Broward Holdings Inc. (Delaware) Wheelabrator South Broward Inc. (Delaware) South Broward County Resource Recovery Project, Inc. (Florida) WESI Baltimore Inc. (Delaware) WESI Capital Inc. (Delaware) Wheelabrator Albion Inc. (Delaware) Wheelabrator Albion Power Inc. (Delaware) Wheelabrator Cedar Creek Inc. (Delaware) Wheelabrator Concord Inc. (Delaware) Wheelabrator Connecticut Inc. (Delaware) Wheelabrator Culm Services Inc. (Delaware) Wheelabrator Epping Inc. (Delaware) Wheelabrator Falls Inc. (Delaware) Wheelabrator Frackville Energy Company Inc. (Delaware) Wheelabrator Frackville Properties Inc. (Delaware) Wheelabrator Fuel Services Inc. (Delaware) Wheelabrator Gloucester Inc. (Delaware) Wheelabrator Hudson Energy Company Inc. (Delaware) Wheelabrator McKay Bay Inc. (Florida Wheelabrator Mecklenburg Inc. (Delaware) Wheelabrator Millbury Inc. (Delaware) Wheelabrator NHC Inc. (Delaware) Wheelabrator Norwalk Energy Company Inc. (Delaware) Wheelabrator New Hampshire Inc. (Delaware) Wheelabrator New Jersey Inc. (Delaware) Wheelabrator North Shore Inc. (Delaware) Wheelabrator Penacook Inc. (Delaware) Wheelabrator Pinellas Inc. (Delaware) Wheelabrator Plant Services Inc. (Delaware) Wheelabrator Polk Inc. (Delaware) Wheelabrator Power Marketing Inc. (Delaware) Wheelabrator Putnam Inc. (Delaware) Wheelabrator Ridge Energy Inc. (Delaware) Wheelabrator San Diego Inc. (Delaware) Wheelabrator Saugus Inc. (Delaware) Wheelabrator Shasta Energy Company Inc. (Delaware) Wheelabrator Sherman Station One Inc. (Delaware) Wheelabrator Sherman Station Two Inc. (Delaware) Wheelabrator Shrewsbury Inc. (Delaware) Wheelabrator Spokane Inc. (Delaware) Wheelabrator Tidewater Inc. (Delaware) Wheelabrator Fuels Service Corporation (Delaware) Wheelabrator Coal Services Company (Delaware) Wheelabrator Land Resources Inc. (Delaware) Wheelabrator Sinto do Brasil Equipamentos Industriais Ltda. (Brazil) Wheelabrator Utility Services Inc. (Delaware) WTI International Energy Inc. (Delaware) WTI China One Inc. (Delaware) WTI China Two Inc. (Delaware) WTI China Three Inc. (Delaware) WTI China Four Inc. (Delaware) WTI China Holdings I Inc. (Cayman Islands) WTI China Holdings II Inc. (Cayman Islands) WTI Taicang LLC (Cayman Islands) WTI Xuzhou LLC (Cayman Islands) WTI Yingkou LLC (Cayman Islands) WTI Rust Holdings Inc. (Delaware) Signal Own-And-Operate Inc. (Delaware) WTI International Holdings Inc. (Delaware) Wheelabrator Technologies/Rust International Charitable Foundation Inc. (Delaware) SES Bridgeport L.L.C. Delaware Wheelabrator Baltimore L.L.C. Delaware EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports to the Stockholders of Wheelabrator Technologies Inc., incorporated by reference in this Form 10-K, and into the registrant's previously filed Registration Statements on Form S-8 (registration nos. 33-31523, 33-13720, 33- 47989, 33-48837, 33-62281 and 33-64431), the registrant's previously filed Registration Statement on Form S-4 (registration no. 33-36118) and the registrant's previously filed Registration Statement on Form S-3 (registration no. 33-59606). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP New York, New York March 27, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1995, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 78,732 0 227,267 12,187 62,638 458,259 2,018,267 394,108 3,220,193 360,094 704,414 1,895 0 0 1,448,370 3,220,193 0 1,451,675 0 1,015,269 0 5,490 60,726 263,437 101,288 162,149 (24,291) 0 0 137,858 0.75 0
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