Report of Independent Public Accountants EXHIBIT 13.2
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TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF WMX TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of WMX
Technologies, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of income, cash flows,
and stockholders' equity for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WMX Technologies, Inc. and
Subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ---------------------------
Arthur Andersen LLP
Chicago, Illinois
February 5, 1996
24
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
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For the three years ended December 31, 1995
(000's omitted except per share amounts)
1993 1994 1995
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REVENUE $8,636,116 $9,554,705 $10,247,617
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Operating Expenses $5,907,097 $6,543,687 $ 7,045,070
Special Charges 550,000 -- 335,193
Goodwill Amortization 92,994 108,093 117,482
Selling and Administrative Expenses 1,104,024 1,159,500 1,174,636
Gains from Stock Transactions of Subsidiaries (15,109) -- --
Interest Expense 293,040 335,175 424,736
Interest Income (41,198) (34,488) (39,804)
Minority Interest 52,749 145,760 94,359
Sundry Income, Net (95,779) (66,487) (75,688)
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Income From Continuing Operations Before Income Taxes $ 788,298 $1,363,465 $ 1,171,633
Provision For Income Taxes 345,867 586,974 517,043
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Income From Continuing Operations $ 442,431 $ 776,491 $ 654,590
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Discontinued Operations:
Income from operations, less applicable income taxes and
minority interest of $15,765 in 1993, $11,757 in 1994 and $15,040 in 1995 $ 10,345 $ 7,890 $ 11,958
Provision for loss on disposal, less applicable
income tax benefit and minority interest of $34,151 -- -- (62,649)
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NET INCOME $ 452,776 $ 784,381 $ 603,899
======================================================================================================================
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 485,374 484,144 485,972
======================================================================================================================
Earnings per Common and Common Equivalent Share:
Continuing Operations $.91 $1.60 $1.35
Discontinued Operations--
Income from operations .02 .02 .02
Provision for loss -- -- (.13)
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NET INCOME $.93 $1.62 $1.24
======================================================================================================================
The accompanying notes are an integral part of these statements.
25
WMX Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
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As of December 31, 1994 and 1995
($000's omitted except per share amounts)
1994 1995
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CURRENT ASSETS
Cash and cash equivalents $ 123,348 $ 189,031
Short-term investments 19,704 36,243
Accounts receivable, less reserve of
$64,361 in 1994 and $66,840 in 1995 1,878,064 1,880,934
Employee receivables 9,859 8,787
Parts and supplies 194,445 210,864
Costs and estimated earnings in excess of billings on uncompleted contracts 347,064 334,786
Prepaid expenses 379,895 360,404
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Total Current Assets $ 2,952,379 $ 3,021,049
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PROPERTY AND EQUIPMENT, at cost
Land, primarily disposal sites $ 4,158,612 $ 4,575,117
Buildings 1,332,568 1,572,821
Vehicles and equipment 7,118,714 7,498,718
Leasehold improvements 91,180 87,986
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$12,701,074 $13,734,642
Less--Accumulated depreciation and amortization (3,477,317) (3,968,943)
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Total Property and Equipment, Net $ 9,223,757 $ 9,765,699
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OTHER ASSETS
Intangible assets relating to acquired businesses, net $ 3,718,282 $ 4,205,031
Sundry, including other investments 1,345,104 1,572,977
Net assets of discontinued operations 183,651 130,552
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Total Other Assets $ 5,247,037 $ 5,908,560
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Total Assets $17,423,173 $18,695,308
============================================================================================================
CURRENT LIABILITIES
Portion of long-term debt payable within one year $ 890,686 $ 1,094,165
Accounts payable 971,796 1,072,372
Accrued expenses 940,507 991,539
Unearned revenue 265,024 263,029
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Total Current Liabilities $ 3,068,013 $ 3,421,105
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DEFERRED ITEMS
Income taxes $ 669,566 $ 956,525
Environmental liabilities 704,015 622,952
Other 607,694 684,452
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Total Deferred Items $ 1,981,275 $ 2,263,929
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LONG-TERM DEBT, less portion payable within one year $ 6,044,411 $ 6,420,610
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MINORITY INTEREST IN SUBSIDIARIES $ 1,536,165 $ 1,385,366
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COMMITMENTS AND CONTINGENCIES $ $
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PUT OPTIONS $ 252,328 $ 261,959
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STOCKHOLDERS' EQUITY
Preferred stock, $1 par value (issuable in series);
50,000,000 shares authorized; none outstanding during the years $ -- $ --
Common stock, $1 par value; 1,500,000,000 shares authorized;
496,386,758 shares issued in 1994 and 498,817,093 in 1995 496,387 498,817
Additional paid-in capital 357,150 422,801
Cumulative translation adjustment (150,832) (102,943)
Retained earnings 4,181,606 4,486,877
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$ 4,884,311 $ 5,305,552
Less--1988 Employee Stock Ownership Plan 19,729 13,062
Employee Stock Benefit Trust (12,386,629 shares in 1994
and 11,769,788 in 1995, at market) 323,601 350,151
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Total Stockholders' Equity $ 4,540,981 $ 4,942,339
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Total Liabilities and Stockholders' Equity $17,423,173 $18,695,308
============================================================================================================
The accompanying notes are an integral part of these balance sheets.
26
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
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For the three years ended December 31, 1995
($000's omitted except per share amounts)
1988
Employee Employee
Additional Cumulative Stock Stock
Common Paid-in Translation Retained Treasury Ownership Benefit
Stock Capital Adjustment Earnings Stock Plan Trust
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 $496,203 $ 708,296 $(166,566) $3,521,190 $ 204,490 $34,988 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income for the year $ -- $ -- $ -- $ 452,776 $ -- $ -- $ --
Cash dividends ($.58 per share) -- -- -- (280,858) -- -- --
Stock repurchase (8,443,400 shares) -- -- -- -- 278,363 -- --
Stock issued upon exercise of stock options 14 (8,749) -- -- (18,285) -- --
Treasury stock received in connection
with exercise of stock options -- -- -- -- 357 -- --
Tax benefit of non-qualified stock options
exercised -- 2,825 -- -- -- -- --
Contribution to 1988 ESOP (362,036 shares) -- -- -- -- -- (7,329) --
Treasury stock received as settlement for
claims -- -- -- -- 3,429 -- --
Stock issued upon conversion of LYONs -- (4,553) -- -- (7,882) -- --
Stock issued for acquisitions -- (4,655) -- -- (35,375) -- --
Transfer of equity interests
among controlled subsidiaries -- (24,694) -- -- -- -- --
Cumulative translation adjustment
of foreign currency statements -- -- (79,021) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $496,217 $ 668,470 $(245,587) $3,693,108 $ 425,097 $27,659 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income for the year $ -- $ -- $ -- $ 784,381 $ -- $ -- $ --
Cash dividends ($.60 per share) -- -- -- (290,266) -- -- --
Dividends paid to Employee Stock Benefit Trust -- 5,617 -- (5,617) -- -- --
Stock issued upon exercise of stock options -- (5,948) -- -- (8,250) -- (5,928)
Treasury stock received in connection
with exercise of stock options -- -- -- -- 260 -- --
Tax benefit of non-qualified stock options
exercised -- 1,527 -- -- -- -- --
Contribution to 1988 ESOP (375,312 shares) -- -- -- -- -- (7,930) --
Treasury stock received as settlement for
claims -- -- -- -- 2,741 -- --
Stock issued upon conversion of LYONs 96 1,442 -- -- (56) -- --
Common stock issued for acquisitions 74 1,471 -- -- -- -- --
Temporary equity related to put options -- (252,328) -- -- -- -- --
Proceeds from sale of put options -- 29,965 -- -- -- -- --
Sale of shares to Employee Stock Benefit Trust
(12,601,609 shares) -- (106,327) -- -- (419,792) -- 313,465
Adjustment of Employee Stock Benefit Trust
to market value -- 16,064 -- -- -- -- 16,064
Transfer of equity interests
among controlled subsidiaries -- (2,803) -- -- -- -- --
Cumulative translation adjustment
of foreign currency statements -- -- 94,755 -- -- -- --
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BALANCE, DECEMBER 31, 1994 $496,387 $ 357,150 $(150,832) $4,181,606 $ -- $19,729 $323,601
- -----------------------------------------------------------------------------------------------------------------------------------
Net income for the year $ -- $ -- $ -- $ 603,899 $ -- $ -- $ --
Cash dividends ($.60 per share) -- -- -- (291,421) -- -- --
Dividends paid to Employee Stock Benefit Trust -- 7,207 -- (7,207) -- -- --
Stock issued upon exercise of stock options 44 (4,405) -- -- (1,763) -- (17,393)
Treasury stock received in connection
with exercise of stock options -- -- -- -- 663 -- --
Tax benefit of non-qualified stock options
exercised -- 2,049 -- -- -- -- --
Contribution to 1988 ESOP (322,508 shares) -- -- -- -- -- (6,667) --
Treasury stock received as settlement for
claims -- -- -- -- 1,100 -- --
Common stock issued upon conversion of LYONs 150 2,448 -- -- -- -- --
Common stock issued for acquisitions 2,236 13,908 -- -- -- -- --
Temporary equity related to put options -- (9,631) -- -- -- -- --
Proceeds from sale of put options -- 21,622 -- -- -- -- --
Settlement of put options -- (12,019) -- -- -- -- --
Adjustment of Employee Stock Benefit Trust
to market value -- 43,943 -- -- -- -- 43,943
Transfer of equity interests
among controlled subsidiaries -- 529 -- -- -- -- --
Cumulative translation adjustment
of foreign currency statements -- -- 47,889 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $498,817 $ 422,801 $(102,943) $4,486,877 $ -- $13,062 $350,151
===================================================================================================================================
The accompanying notes are an integral part of these statements.
27
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
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For the three years ended December 31, 1995
Increase (Decrease) in cash ($000's omitted)
1993 1994 1995
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Cash flows from operating activities:
Net income for the year $ 452,776 $ 784,381 $ 603,899
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 796,691 880,466 885,384
Provision for deferred income taxes 154,782 298,564 250,828
Minority interest in subsidiaries 57,986 149,703 138,162
Interest on Liquid Yield Option Notes (LYONs)
and WMX Subordinated Notes 37,162 33,551 23,021
Gain on sale of property and equipment, and
of investments by subsidiary (14,061) (14,876) (9,190)
Contribution to 1988 Employee Stock Ownership Plan 7,329 7,930 6,667
Gains from stock transactions of subsidiaries (15,109) -- --
Special charges, net of tax and minority interest 285,300 -- 202,492
Provision for loss on disposal of discontinued operations,
net of tax and minority interest -- -- 62,649
Changes in assets and liabilities,
excluding effects of acquired companies:
Receivables, net (112,489) (133,506) 45,232
Other current assets 41,038 (109,174) 48,214
Sundry other assets (29,445) (42,195) (72,282)
Accounts payable 33,328 155,254 39,669
Accrued expenses and unearned revenue (298,214) 43,121 (227,700)
Deferred items (24,015) (259,020) 61,557
Minority interest in subsidiaries (2,021) 14,038 (3,854)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,371,038 $ 1,808,237 $ 2,054,748
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Cash flows from investing activities:
Short-term investments $ 35,911 $ 2,755 $ (4,196)
Capital expenditures (1,719,178) (1,455,628) (1,386,932)
Proceeds from sale of property and equipment, and
of investments by subsidiary 134,169 276,822 141,774
Cost of acquisitions, net of cash acquired (581,745) (197,201) (224,304)
Other investments (185,256) (74,446) (44,193)
Acquisition of minority interests (129,524) (8,200) (68,370)
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NET CASH USED FOR INVESTING ACTIVITIES $(2,445,623) $(1,455,898) $(1,586,221)
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The accompanying notes are an integral part of these statements.
28
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1993 1994 1995
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Cash flows from financing activities:
Cash dividends $ (280,858) $ (290,266) $ (291,421)
Proceeds from issuance of indebtedness 3,407,759 1,710,586 1,803,383
Repayments of indebtedness (1,682,950) (1,752,552) (1,860,451)
Proceeds from exercise of stock options, net 9,193 7,970 14,132
Contributions from minority interests 28,072 22,169 24,394
Stock repurchases by Company and subsidiaries (315,302) (49,665) (102,484)
Preferred stock redemption by subsidiary (5,000) -- --
Proceeds from sale of put options -- 29,965 21,622
Settlement of put options -- -- (12,019)
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES $ 1,160,914 $ (321,793) $ (402,844)
- ----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents $ 86,329 $ 30,546 $ 65,683
Cash and cash equivalents at beginning of year 6,473 92,802 123,348
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 92,802 $ 123,348 $ 189,031
==========================================================================================================
The Company considers cash and cash equivalents
to include currency on hand, demand deposits with banks
and short-term investments with maturities of less than
three months when purchased.
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 263,716 $ 307,257 $ 401,715
Income taxes, net of refunds received $ 331,803 $ 241,657 $ 283,165
Supplemental schedule of noncash investing and
financing activities:
LYONs converted into common stock of the Company $ 3,329 $ 1,594 $ 2,598
Liabilities assumed in acquisitions of businesses $ 673,129 $ 244,560 $ 245,918
Fair market value of Company and subsidiary stock
issued for acquired businesses $ 64,500 $ 4,773 $ 66,172
WMX Subordinated Notes issued for acquisition
of CWM minority interest $ -- $ -- $ 436,830
29
WMX Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (000's omitted in all tables except
per share amounts)
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NOTE 1 BUSINESS AND FINANCIAL STATEMENTS
WMX Technologies, Inc. and its subsidiaries ("WMX" or the "Company") provide
environmental, engineering and consulting, and industrial services to
governmental, residential, commercial, and industrial customers on a worldwide
basis in four core lines of business: waste services, clean energy, clean water,
and environmental and infrastructure engineering and consulting. Through 1995,
process engineering, construction, specialty contracting and similar services
were also provided through businesses the Company intends to exit (see Note 15).
These businesses have been classified as discontinued operations and are
segregated from continuing operations in the accompanying financial statements
and notes thereto.
The accompanying financial statements are prepared on a consolidated basis and
include the Company and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. See Note 13 for
details of certain financial information by subsidiary, line of business and
geographic area.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates in the
near term.
- --------------------------------------------------------------------------------
NOTE 2 SUMMARY OF ACCOUNTING POLICIES
REVENUE RECOGNITION The Company recognizes revenue from long-term contracts on
the percentage-of-completion basis with losses recognized in full when
identified. Changes in project performance and conditions, estimated
profitability and final contract settlements may result in future revisions to
costs and income. Other revenues are recognized when the services are performed.
FOREIGN CURRENCY Certain foreign subsidiaries' assets and liabilities are
translated at the rates of exchange at the balance sheet date while income
statement accounts are translated at the average exchange rates in effect during
the period. The resulting translation adjustments are charged or credited
directly to stockholders' equity. Foreign exchange losses (net of related income
taxes and minority interest) of $529,000, $3,610,000 and $1,226,000 are included
in the Consolidated Statements of Income for 1993, 1994 and 1995, respectively.
SHORT-TERM INVESTMENTS The Company's short-term investments primarily consist
of securities having an investment grade of not less than A and a term to
maturity generally of less than one year, and because the investments have
always been held to maturity, are carried at cost. Such investments include tax-
exempt securities, certificates of deposit and Eurodollar time deposits.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The adoption of FAS 115 did not have a significant
effect on earnings for 1994, since the Company's accounting prior to adoption
was substantially in compliance with the new standard.
ENVIRONMENTAL LIABILITIES The Company provides for estimated closure and post-
closure monitoring costs over the operating life of disposal sites as airspace
is consumed. The Company has also established procedures to evaluate potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste, including 106 sites listed on the Superfund National Priority
List ("NPL"). Where the Company concludes that it is probable that a liability
has been incurred, provision is made in the financial statements, based upon
management's judgment and prior experience, for the Company's best estimate of
the liability. Such estimates are subsequently revised as deemed necessary as
additional information becomes available. See Note 7 for additional information.
CONTRACTS IN PROCESS Information with respect to contracts in process at
December 31, 1994 and 1995 is as follows:
1994 1995
- --------------------------------------------------------------------------------
Costs and estimated earnings
on uncompleted contracts $ 2,618,921 $ 2,510,898
Less: Billings on uncompleted contracts (2,365,334) (2,253,867)
----------- -----------
Total contracts in process $ 253,587 $ 257,031
=========== ===========
Contracts in process are included in the Consolidated Balance Sheets under the
following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 347,064 $ 334,786
Billings in excess of costs
and estimated earnings
on uncompleted contracts
(included in unearned revenue) (93,477) (77,755)
----------- -----------
Total contracts in process $ 253,587 $ 257,031
=========== ===========
All contracts in process are expected to be billed and collected within five
years.
Accounts receivable includes retainage which has been billed, but which is not
due pursuant to contract provisions until completion. Such retainage at December
31, 1995, is $23,095,000, including $6,724,000 that is expected to be collected
after one year. At December 31, 1994, retainage was $33,743,000.
PROPERTY AND EQUIPMENT Property and equipment (including major repairs and
improvements) are capitalized and stated at cost. Items of an ordinary
maintenance or repair nature are charged directly to operations. Disposal sites
are carried at cost and to the extent this exceeds end use realizable value,
such excess is amortized over the estimated life of the disposal site. Disposal
site improvement costs are capitalized and charged to operations over the
shorter of the estimated usable life of the site or the improvement.
Preparation costs for individual secure land disposal cells are recorded as
prepaid expenses and amortized as the airspace is filled. Significant costs
capitalized for such cells include excavation and grading costs, costs relating
to the design and construction of liner systems, and gas collection and leachate
collection systems. Unamortized cell construction cost at December 31, 1994 and
1995 was $154,100,000 and $187,689,000, respectively.
30
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DEPRECIATION AND AMORTIZATION The cost, less estimated salvage value, of
property and equipment is depreciated over the estimated useful lives on the
straight-line method as follows: buildings - 10 to 40 years; vehicles and
equipment - 3 to 20 years; leasehold improvements - over the life of the
applicable lease.
INTANGIBLE ASSETS Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of market value of net
assets acquired ("goodwill"). Such goodwill is being amortized on a straight-
line basis over a period of not more than forty years. The accumulated
amortization of intangible assets amounted to $458,167,000 and $572,587,000 as
of December 31, 1994 and 1995, respectively.
On an ongoing basis, the Company measures realizability of goodwill by the
ability of the acquired business to generate current and expected future
operating income in excess of annual amortization. If such realizability is in
doubt, an adjustment is made to reduce the carrying value of the goodwill. Such
adjustments have historically not been material to the Company's financial
statements.
CAPITALIZED INTEREST Interest has been capitalized on significant landfills,
trash-to-energy plants and other projects under construction in accordance with
FAS No. 34. Amounts capitalized and netted against Interest Expense in the
Consolidated Statements of Income were $100,591,000 in 1993, $104,512,000 in
1994 and $81,471,000 in 1995.
GAIN RECOGNITION ON SALE OF SUBSIDIARIES' STOCK It is the Company's policy to
record in income gains from the sale or other issuance of previously unissued
stock by its subsidiaries. No such gains were recorded in 1994 or 1995.
ACCOUNTING PRINCIPLES The Financial Accounting Standards Board ("FASB") has
issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which is effective for fiscal years
beginning after December 15, 1995. The Company does not believe the adoption of
FAS 121 will have a material impact on the financial statements.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," which the Company also must adopt in 1996. FAS 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.
RESTATEMENT Certain amounts in previously issued financial statements have
been restated to conform to 1995 classifications.
- --------------------------------------------------------------------------------
NOTE 3 INCOME TAXES
The following tables set forth income from continuing operations before income
taxes, showing domestic and international sources, and the income tax provision,
showing the components by governmental taxing authority, for the years 1993
through 1995:
Income From Continuing Operations Before Income Taxes 1993 1994 1995
- ------------------------------------------------------------------------------------------
Domestic $616,805 $1,187,938 $1,167,120
International 171,493 175,527 4,513
-------- ---------- ----------
$788,298 $1,363,465 $1,171,633
======== ========== ==========
Income Tax Provision (Benefit)
- ------------------------------------------------------------------------------------------
Current tax expense
U.S. Federal $133,581 $ 215,569 $ 224,924
State and local 29,893 49,549 48,957
Foreign 36,410 30,611 42,810
-------- ---------- ----------
Total current $199,884 $ 295,729 $ 316,691
-------- ---------- ----------
Deferred tax expense
U.S. Federal $ 87,792 $ 215,644 $ 181,873
State and local 29,464 33,689 36,101
Foreign 32,327 44,507 (16,538)
-------- ---------- ----------
Total deferred $149,583 $ 293,840 $ 201,436
-------- ---------- ----------
U.S. Federal benefit from amortization of deferred
investment credit $ (3,600) $ (2,595) $ (1,084)
-------- ---------- ----------
Total provision $345,867 $ 586,974 $ 517,043
======== ========== ==========
The Federal statutory tax rate in 1993, 1994 and 1995 is reconciled to the
effective tax rate as follows:
- --------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of Federal benefit 4.9 4.0 4.7
Amortization of deferred investment credit (0.4) (0.2) (0.1)
Amortization of intangible assets relating to acquired businesses 4.2 2.2 2.8
Federal tax credits (1.4) (1.0) (1.2)
Non-taxable gains on issuance of stock by subsidiaries (0.7) -- --
Minority interest 2.8 4.2 3.3
Adjustment of deferred income taxes due to Omnibus Budget
Reconciliation Act 1.8 -- --
Other, net (2.3) (1.1) (0.4)
----- ----- ----
Effective tax rate 43.9% 43.1% 44.1%
===== ===== ====
31
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The Company uses the deferral method of accounting for investment credit,
whereby the credit is recorded in income over the composite life of the related
equipment.
Deferred income taxes result from the recognition, in different periods, of
revenue and expense for tax and financial statement purposes. The primary
components that comprise the 1994 and 1995 deferred tax (assets) liabilities are
as follows:
1994 1995
- --------------------------------------------------------------
Deferred tax assets
Reserves not deductible until paid $ (491,061) $ (526,202)
Deferred revenue (25,708) (24,472)
Net operating losses and
tax credit carryforwards (159,269) (266,898)
Other (69,812) (73,834)
---------- ----------
Subtotal $ (745,850) $ (891,406)
---------- ----------
Deferred tax liabilities
Depreciation and amortization $1,103,194 $1,368,258
Other 233,600 381,068
---------- ----------
Subtotal $1,336,794 $1,749,326
---------- ----------
Valuation allowance ($29,890,000 at
December 31, 1993) 78,622 98,605
---------- ----------
Net deferred tax liabilities $ 669,566 $ 956,525
========== ==========
The Company's subsidiaries have approximately $37 million of alternative
minimum tax credit carryforwards that may be used indefinitely. Various
subsidiaries have U.S. Federal and foreign operating loss carryforwards of
approximately $530 million and state operating loss carryforwards of
approximately $513 million. Foreign operating losses of $253 million may be
carried forward indefinitely; the remaining loss carryforwards have expiration
dates through the year 2010. Valuation allowances have been established for
uncertainties in realizing the tax benefits of loss carryforwards and for the
basis difference in certain assets. While the Company expects to realize the
deferred tax assets in excess of the valuation allowances, changes in estimates
of future taxable income or in tax laws could alter this expectation. The
increase in the valuation allowance since 1993 is primarily attributable to
uncertainty in realizing the tax benefit of certain foreign operating loss
carryforwards.
The Company has concluded that development and expansion of its foreign
business requires that the undistributed earnings of its foreign subsidiaries be
reinvested indefinitely outside the United States. If the reinvested earnings
were to be remitted, the U.S. income taxes due under current tax law would not
be material.
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NOTE 4 BUSINESS COMBINATIONS
During 1993, the Company and its principal subsidiaries acquired 189 businesses
for $581,745,000 in cash (net of cash acquired) and notes, $133,941,000 of debt
assumed, 1,046,801 shares of the Company's common stock and 1,635,471 shares of
common stock of Wheelabrator Technologies Inc. ("WTI"). These acquisitions were
accounted for as purchases.
During 1994, 119 businesses were acquired for $197,201,000 in cash (net of
cash acquired) and notes, $17,305,000 of debt assumed, 73,809 shares of the
Company's common stock and 156,124 shares of common stock of WTI. These
acquisitions were accounted for as purchases.
One hundred thirty-six businesses were acquired in 1995 for $224,304,000 in
cash (net of cash acquired) and notes, $77,689,000 of debt assumed, and
2,236,354 shares of the Company's common stock. Three of the aforementioned 1995
acquisitions, which otherwise met pooling of interests criteria, were not
significant in the aggregate and, consequently, prior period financial
statements were not restated. The remaining acquisitions were accounted for as
purchases.
The following summarizes the pro forma effect on continuing operations of
businesses acquired and accounted for as purchases (including those which
otherwise met pooling of interests criteria but were not significant in the
aggregate) in 1993, 1994 and 1995 as if they had been acquired as of January 1
of the preceding year (unaudited):
1993 1994 1995
- -------------------------------------------------------------------------------------------
Revenue as reported $8,636,116 $ 9,554,705 $10,247,617
Revenue of purchased businesses for period prior to
acquisition as stated above 555,218 477,040 161,868
---------- ----------- -----------
Pro forma revenue $9,191,334 $10,031,745 $10,409,485
========== =========== ===========
Net income as reported $ 442,431 $ 776,491 $ 654,590
Net income of purchased businesses for period prior
to acquisition as stated above 9,753 32,408 7,237
Adjustment for interest and goodwill amortization (18,532) (29,066) (7,649)
---------- ----------- -----------
Pro forma net income $ 433,652 $ 779,833 $ 654,178
========== =========== ===========
Earnings per share as reported $ .91 $ 1.60 $ 1.35
Effect of purchased businesses prior to acquisition
as stated above (.02) .01 --
---------- ----------- -----------
Pro forma earnings per share $ .89 $ 1.61 $ 1.35
========== =========== ===========
In January 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of Chemical Waste Management, Inc. ("CWM") that it did not
already own. The transaction provided for the CWM public shareholders to receive
a convertible subordinated WMX note for every 81.1 CWM shares held. See Note 5
for additional information. In July 1995, the Company acquired all of the
approximately 3.1 million shares of Rust International Inc. ("Rust") held by the
public, for $16.35 per share in cash.
32
- --------------------------------------------------------------------------------
NOTE 5 DEBT
The details relating to debt (including capitalized leases, which are not
material) as of December 31, 1994 and 1995, are as follows:
1994 1995
- -----------------------------------------------------------------------------------------------------------------------------
Commercial Paper, weighted average interest 5.8% in 1994 and 5.7% in 1995 $ 946,702 $1,119,356
Tailored Rate ESOP Notes, weighted average interest 4.81% in 1994 and 4.74% in 1995 50,000 20,000
Debentures, interest 8-3/4%, due 2018 249,085 249,085
Notes, interest 4-5/8% to 8-1/4%, due 1996-2011 2,684,170 3,184,170
Step-Up Notes, interest 6.22% through April 29, 1997 and 8% thereafter, due 2004 150,000 150,000
Solid waste disposal revenue bonds, interest 6% to 7.75%, due 1996-2013 252,385 251,085
Installment loans and notes payable, interest 5.34% to 10.6%, due 1996-2020 1,298,436 1,233,871
Project Debt, interest 4% to 10.64%, due 1996-2010 764,859 735,646
Other long-term borrowings 34,320 32,210
Liquid Yield Option Notes, zero coupon-subordinated, interest 9%, due 2001 10,721 8,945
Liquid Yield Option Notes, zero coupon-subordinated, interest 6%, due 2012 ("Exchangeable LYONs") 361,438 53,996
Liquid Yield Option Notes, zero coupon-subordinated, interest 6%, due 2010 ("CWM LYONs") 132,981 36,840
WMX Subordinated Notes, interest 5.75%, due 2005 -- 439,571
---------- ----------
Total debt $6,935,097 $7,514,775
Less--current portion 890,686 1,094,165
---------- ----------
Long-term portion $6,044,411 $6,420,610
========== ==========
The long-term debt as of December 31, 1995, is due as follows:
Second year $ 761,091
Third year 2,158,232
Fourth year 261,103
Fifth year 1,132,816
Sixth year and thereafter 2,107,368
----------
$6,420,610
==========
Certain of the Company's borrowings are redeemable at the option of the
holders prior to maturity. Such amounts and certain other borrowings which would
otherwise be classified as current liabilities have been classified as long-term
debt because the Company intends to refinance such borrowings on a long-term
basis with $1,503,000,000 of committed long-term borrowing facilities which it
has available. The committed facilities provide for unsecured long-term loans at
interest rates of prime or LIBOR plus 30 basis points and commitment fees of 6
to 8 basis points per annum. There are no compensating balance requirements or
any informal arrangements in connection with loans which would be made under
these facilities.
In January 1995, the Company acquired the outstanding CWM shares it did not
already own. The transaction provided for the CWM public shareholders to receive
a convertible subordinated WMX note due 2005, with a principal amount at
maturity of $1,000, for every 81.1 CWM shares held, with cash paid in lieu of
issuance of fractional notes. The notes are subordinated to all existing and
future senior indebtedness of WMX. Each note bears cash interest from January
24, 1995 at the rate of two percent per annum of the $1,000 principal amount at
maturity, payable semi-annually. The difference between the principal amount at
maturity of $1,000 and the $717.80 stated issue price of each note represents
the stated discount which, together with the cash interest payable on the notes,
will accrue at a rate of 5.75 percent per annum (determined on a semi-annual
bond equivalent basis) for purposes of determining the prices at which WMX may
purchase or redeem notes, as described below. At the option of the holder, each
note will be purchased for cash by WMX on March 15, 1998, and March 15, 2000, at
prices of $789.95 and $843.03, respectively, which represent the stated issue
price plus accrued stated discount to those dates. Accrued unpaid interest to
those dates will also be paid. The notes will be redeemable by WMX on and after
March 15, 2000, for cash, at the stated issue price plus accrued stated discount
and accrued but unpaid interest through the date of redemption. In addition,
each note is convertible at any time prior to maturity, unless previously
purchased or redeemed by WMX, into 26.078 shares of WMX common stock, subject to
adjustment upon the occurrence of certain events. Upon any such conversion, WMX
will have the option of paying cash equal to the market value of the WMX shares
which would otherwise be issuable. As of December 31, 1995, there were 549,810
such notes outstanding with a maturity value amounting to $549,810,000.
As of December 31, 1994, CWM LYONs and the Exchangeable LYONs (together with
the CWM LYONs, the "LYONs") were convertible into or exchangeable for CWM
shares. On January 24, 1995, the LYONs became convertible into the number of
notes discussed in the preceding paragraph to which the holders would have been
entitled had they converted or exchanged the LYONs immediately prior to the
merger approval.
In May 1994, the Company issued, at par, $150,000,000 of ten-year Step-Up
Notes due April 30, 2004. The holders may elect to have the Step-Up Notes or any
portion thereof repaid on April 30, 1997, at 100% of their principal amount
together with accrued interest. The interest rate on the Step-Up Notes is 6.22%
through April 29, 1997, and 8% thereafter. In November 1994, the Company issued
$200,000,000 of 8 1/4% Notes due November 15, 1999, at a price of 99.925%.
Neither of these issues is redeemable at the option of the Company prior to
maturity.
33
- --------------------------------------------------------------------------------
In January 1995, the Company issued $250,000,000 of 8-1/8% Notes due February
1, 1998, at a price of 99.671%. In March 1995, the Company issued $200,000,000
of 7-1/8% Notes due March 22, 1997, at a price of 99.98%. In May 1995, the
Company issued $200,000,000 of 6.65% Notes due May 15, 2005, at par. The holder
of each 6.65% Note may elect to have such Note, or any portion thereof which is
a multiple of $1,000, repaid on May 15, 2000 at 100% of its principal amount,
together with accrued interest. The Company also issued in May 1995,
$100,000,000 of 7% Notes due May 15, 2005, at a price of 99.293%. In June 1995,
the Company issued $100,000,000 of 5.84% Notes due July 3, 1996, at par. In
October 1995, the Company issued $250,000,000 of 6-1/4% Notes due October 15,
2000, at a price of 99.85%. None of these issues is redeemable at the option of
the Company prior to maturity.
- --------------------------------------------------------------------------------
NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company uses derivatives to manage interest rate,
currency and commodity risk. The portfolio of such instruments (which are held
for purposes other than trading) at December 31, 1995, is set forth in the
paragraphs which follow. Where deemed advantageous, management will use
derivatives in the future.
INTEREST RATE AGREEMENTS Certain of the Company's subsidiaries have entered
into interest rate swap agreements to reduce the impact of changes in interest
rates on underlying borrowings. The agreements are contracts to exchange fixed
and floating interest rate payments periodically over the term without the
exchange of the underlying notional amounts. The notional amounts of such
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The agreements provide only for
the exchange of interest on the notional amounts at the stated rates, with no
multipliers or leverage.
While the subsidiaries are exposed to market risk to the extent that receipts
and payments under interest rate agreements are affected by market interest
rates, such agreements are entered into as a hedge against interest rate
exposure on existing debt. Accordingly, differences paid or received under the
agreements are recognized as part of interest expense over the life of the
agreements. The impact of swap agreements on consolidated interest expense and
on the effective interest rate on consolidated debt was immaterial. As of
December 31, 1995, interest rate agreements in notional amounts and with terms
as set forth in the following table were outstanding:
Notional
Currency Amount Pay Receive Duration of Agreement
- ---------------------------------------------------------------------------
Sterling 20,000 Fixed Floating Feb. 1995 - Feb. 1999
Hong Kong dollar 250,000 Fixed Floating Feb. 1995 - Feb. 1997
CURRENCY AGREEMENTS From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or offsetting put and call
options with different strike prices. The Company receives or pays, based on the
notional amount of the option, the difference between the average exchange rate
of the hedged currency against the base currency and the average (strike price)
contained in the option. Complex instruments involving multipliers or leverage
are not used. While the Company may be required to make a payment in connection
with these agreements, it will recognize an offsetting increase in the
translation of foreign earnings or income from foreign investees. Although the
purpose for using such derivatives is to mitigate currency risk, they do not
qualify for hedge accounting under generally accepted accounting principles, and
accordingly must be adjusted to market value at the end of each accounting
period. Gains and losses on currency derivatives to date have not been material.
As of December 31, 1995, the Company was party to the following average rate
currency option (settles at expiration):
Currency
-------------------------------
Notional Amount Hedged Against
- ------------------------------------------------------------------------------------------------------
Collar, structured as offsetting put and call
with different strike prices, covering the
period January 1 to December 31, 1996 100,000 Swedish Krona Sterling
34
- --------------------------------------------------------------------------------
Significant foreign currency contracts outstanding during 1993, 1994 and 1995
were as follows:
Currency
----------------------------------------
Average Amount Hedged Against
- --------------------------------------------------------------------------------
1993 150,000 Sterling Dollar
9,300 Deutschemark Dollar
6,000 Finland Markka Sterling
1994 85,000 Deutschemark Sterling
132,000 French Franc Sterling
184,000 Swedish Krona Sterling
20,000,000 Italian Lire Sterling
10,000,000 Italian Lire Deutschemark
23,000 Deutschemark Dollar
141,000 Sterling Dollar
1995 46,600 Deutschemark Sterling
82,000 French Franc Sterling
13,500 Netherlands Guilder Sterling
180,000 Swedish Krona Sterling
1,500 Dollar Sterling
15,267,000 Italian Lire Sterling
11,820 Deutschemark Dollar
669 Sterling Swedish Krona
35,800 Sterling Dollar
COMMODITY AGREEMENTS The Company utilizes collars, calls and swaps to mitigate
the risk of price fluctuations on the fuel used by its vehicles. Quantities
hedged equate to committed fuel purchases or anticipated usage, and accordingly,
gains and losses are deferred and recognized as fuel is purchased. The following
table summarizes the Company's positions in commodity derivatives as of December
31, 1995:
Type Commodity Quantity Expiration
- --------------------------------------------------------------------------------
Swaps Crude oil 3,000 bbls. 1996
Collars Crude oil 300 bbls. 1996
Swaps Crude oil 3,000 bbls. 1997
Collars Crude oil 350 bbls. 1997
Swaps Crude oil 2,000 bbls. 1998
Collars Crude oil 200 bbls. 1998
Collars Crude oil 100 bbls. 1999
The Company is exposed to credit loss in the event of non-performance by
counterparties on interest rate, currency and commodity derivatives, but in all
cases such counterparties are highly rated financial institutions and the
Company does not anticipate non-performance. Maximum credit exposure is
represented by the fair value of contracts with a positive fair value; at
December 31, 1995, such amounts were not material.
- --------------------------------------------------------------------------------
NOTE 7 ENVIRONMENTAL COSTS AND LIABILITIES
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. While the Company is faced, in the normal
course of business, with the need to expend funds for environmental protection
and remediation, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
services are priced accordingly.
The Company provides for estimated closure and post-closure monitoring costs
over the operating life of disposal sites as airspace is consumed. Such costs
for U.S. landfills are estimated based on the technical requirements of the
Subtitle C and D Regulations of the U.S. Environmental Protection Agency or the
applicable state requirements, whichever are stricter, and include such items as
final cap and cover on the site, methane gas and leachate management, and
groundwater monitoring. Substantially the same standards are applied to estimate
costs for foreign sites, even though current regulations in some foreign
jurisdictions are less strict.
35
- --------------------------------------------------------------------------------
The Company has also established procedures to evaluate potential remedial
liablilities at closed sites which it owns or operated, or to which it
transported waste, including 106 sites on the NPL. In the majority of
situations, the Company's connection with NPL sites relates to allegations that
its subsidiaries (or their predecessors) transported waste to the facilities in
question, often prior to the acquisition of such subsidiaries by the Company.
The Company routinely reviews and evaluates sites requiring remediation,
including NPL sites, giving consideration to the nature (e.g., owner, operator,
transporter, or generator), and the extent (e.g., amount and nature of waste
hauled to the location, number of years of site operation by the Company, or
other relevant factors) of the Company's alleged connection with the site, the
accuracy and strength of evidence connecting the Company to the location, the
number, connection and financial ability of other named and unnamed potentially
responsible parties ("PRPs"), and the nature and estimated cost of the likely
remedy. Cost estimates are based on management's judgment and experience in
remediating such sites for the Company as well as for unrelated parties,
information available from regulatory agencies as to costs of remediation, and
the number, financial resources and relative degree of responsibility of other
PRPs who are jointly and severably liable for remediation of a specific site, as
well as the typical allocation of costs among PRPs. These estimates are
sometimes a range of possible outcomes. In such cases, the Company provides for
the amount within the range which constitutes its best estimate. If no amount
within the range appears to be a better estimate than any other amount, then the
Company provides for the minimum amount within the range in accordance with FAS
No. 5. The Company believes that it is "reasonably possible," as that term is
defined in FAS 5 ("more than remote but less than likely"), that its potential
liability could be at the high end of such ranges, which would be approximately
$150 million higher in the aggregate than the estimate that has been recorded in
the financial statements as of December 31, 1995.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies or other factors could necessitate the
recording of additional liabilities which could be material. The impact of such
future events cannot be estimated at the current time.
Where the Company believes that both the amount of a particular environmental
liability and the timing of the payments are reliably determinable, the cost in
current dollars is inflated at 3% until expected time of payment and then
discounted to present value at 7%. Had the Company not discounted any portion of
its liability, the amount recorded would have been increased by approximately
$171 million at December 31, 1995.
The Company's active landfill sites have estimated remaining lives ranging
from one to over 100 years based upon current site plans and annual volumes of
waste. During this remaining site life, the Company will provide for an
additional $1.12 billion of closure and post-closure costs, including accretion
for the discount recognized to date.
As of December 31, the Company's liabilities for closure, post-closure
monitoring and environmental remediation costs were as follows:
1994 1995
- -----------------------------------------------------------
Current portion, included in
Accrued Expenses $ 108,750 $ 138,603
Non-current portion 704,015 622,952
---------- ----------
Total recorded $ 812,765 $ 761,555
Amount to be provided over
remaining life of active
sites, including discount
of $169 million in 1994 and
$171 million in 1995 1,149,617 1,118,739
---------- ----------
Expected aggregate undiscounted
environmental liabilities $1,962,382 $1,880,294
========== ==========
Anticipated payments of environmental liabilities at December 31, 1995, are as
follows:
1996 $ 138,603
1997 97,621
1998 49,416
1999 40,586
2000 32,115
Thereafter 1,521,953
----------
$1,880,294
==========
The change in the expected aggregate undiscounted amount results primarily
from changes in available airspace.
The Company and certain of its subsidiaries are named as defendants in
personal injury and property damage lawsuits, including purported class actions,
on the basis of a Company subsidiary's having owned, operated or transported
waste to a disposal facility which is alleged to have contaminated the
environment. While the Company believes it has meritorious defenses to these
lawsuits, their ultimate resolution is often substantially uncertain due to a
number of factors, and it is possible such matters could have a material adverse
impact on the Company's earnings for one or more quarters or years.
The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future remedial, defense and tort claim costs at a
number of sites. The carriers involved have denied coverage and are defending
these claims. No amounts have been recognized in the financial statements for
any future insurance recoveries.
36
- --------------------------------------------------------------------------------
NOTE 8 STOCK OPTIONS
The Company has two stock option plans currently in effect under which future
grants may be issued: the 1992 Stock Option Plan (the "1992 Plan") and the 1992
Stock Option Plan for Non-Employee Directors (the "Directors' Plan").
Options granted under the 1992 Plan are generally exercisable in equal
cumulative installments over a three- to five-year period beginning one year
after the date of grant. Options granted under the Directors' Plan become
exercisable in five equal annual installments beginning six months after the
date of grant.
Under the 1992 Plan, non-qualified stock options may be granted at a price
equal to 100% of the market value on the date of grant, for a term of not less
than five years nor more than ten years. Twelve million five hundred thousand
shares of the Company's common stock were initially reserved for issuance under
this plan.
Pursuant to the Directors' Plan, 150,000 shares of the Company's common stock
were initially reserved. Options for 15,000 shares are to be granted, at the
time of election to the Board, to each person who is not an officer or full-time
employee of the Company or any of its subsidiaries.
As part of the acquisitions of the CWM and Rust shares not previously owned by
the Company, as discussed in Note 4, outstanding CWM stock options were
converted into options to acquire approximately 2,873,000 Company shares at
prices of $21.97 to $63.33 per share and outstanding Rust stock options were
converted into options to acquire approximately 1,976,000 Company shares at
prices of $21.39 to $40.10 per share.
The status of the plans, including predecessor plans and replacement plans
(together "Prior Plans") under which options remain outstanding, during the
three years ended December 31, 1995, was as follows:
Shares Option Price
- -----------------------------------------------------------------------
JANUARY 1, 1993--
Outstanding 9,783 $ 3.46 -- $41.80
Available for future grant 14,822 --
------
1993--
Granted 2,957 $30.90 -- $38.45
Exercised 551 $ 3.46 -- $35.44
Cancelled--
Prior Plans 179 $18.84 -- $41.80
Current plans 328 $30.69 -- $41.80
------
December 31, 1993--
Outstanding 11,682 $ 4.33 -- $41.80
Available for future grant 12,193 --
------
1994--
Granted 3,729 $24.33 -- $29.03
Exercised 462 $ 4.33 -- $25.72
Cancelled--
Prior Plans 312 $14.72 -- $41.80
Current plans 826 $ 8.57 -- $41.80
Additional shares available for future grant 6,000 --
------
December 31, 1994--
Outstanding 13,811 $ 7.20 -- $41.80
Available for future grant 15,290 --
------
1995--
Granted 3,117 $23.21 -- $28.90
Exercised 721 $ 7.20 -- $30.69
Cancelled--
Prior Plans 1,111 $21.39 -- $63.33
Current plans 316 $26.48 -- $41.80
Converted CWM and Rust stock options 4,849 $21.39 -- $63.33
Shares no longer available for future grant 2,914 --
------
December 31, 1995--
Outstanding 19,629 $ 8.57 -- $63.33
Available for future grant 4,726 --
======
Options were exercisable with respect to 9,859,656 shares at December 31,
1995.
37
- --------------------------------------------------------------------------------
NOTE 9 CAPITAL STOCK
The Board of Directors has the authority to create and issue up to 50,000,000
shares of $1 par preferred stock at such time or times, in such series, with
such designations, preferences and relative participating, optional or other
special rights and qualifications, limitations or restrictions thereof as it may
determine. No shares of the preferred stock have been issued.
Pursuant to a plan adopted by the Company in January 1987, each share of the
Company's common stock carries the right (referred to herein as a "Right") to
purchase one four-hundredth (subject to adjustment) of a share of Series A
Preferred Stock, $1.00 par value ("Preferred Stock"), at a price of $68.75
(subject to adjustment). The Rights are tradeable only with the Company's common
stock until they become exercisable. The Rights become exercisable ten days
after the earlier of a public announcement that a person has acquired 20% or
more of the Company's outstanding voting stock or a person's commencement or
announcement of a tender or exchange offer that would result in his owning 30%
or more of the Company's outstanding voting stock. The Rights are subject to
redemption by the Company at a price of $.0125 per Right, subject to certain
limitations, and will expire on February 6, 1997. The Preferred Stock carries
certain preferential dividend and liquidation rights and certain voting and
other rights.
If the Company or its assets are acquired in certain merger or other
transactions after a person acquires Company voting stock or commences or
announces an offer as provided above, each holder of a Right may purchase at the
exercise price of the Right, shares of common stock of the acquiring company
having a market value of two times the exercise price of the Right. If the
Company is the survivor in certain merger transactions or in the event of
certain other "self-dealing" transactions, each holder of a Right may purchase
at the exercise price of the Right, shares of Preferred Stock having a market
value of twice the exercise price of the Right. Rights held by an acquiring
person become void upon the occurrence of such events.
On December 8, 1995, the Board of Directors of the Company authorized the
repurchase by the Company of up to 25 million shares of its comon stock from
time to time in the open market or in privately negotiated transactions over a
24-month period. On the same date, the Board of Directors of WTI authorized WTI
to repurchase up to 20 million shares of its common stock over a 24-month
period. Both authorizations replaced existing common stock repurchase programs.
- --------------------------------------------------------------------------------
NOTE 10 EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number of
common and common equivalent shares outstanding during each year. Common stock
equivalents relate primarily to the impact of options outstanding under the
Company's stock option plans.
The following table reconciles the number of common shares shown as
outstanding in the Consolidated Balance Sheets with the number of common shares
used in computing earnings per share:
1994 1995
- --------------------------------------------------------
Common shares issued, net of
Employee Stock Benefit Trust shares
per Consolidated Balance Sheets 484,000 487,047
Effect of shares issuable under
stock options after applying
the "treasury stock" method 396 627
Effect of using weighted average
common shares outstanding
during the year (252) (1,702)
------- -------
Common shares used in computing
earnings per share 484,144 485,972
======= =======
- --------------------------------------------------------
NOTE 11 COMMITMENTS AND CONTINGENCIES
The Company leases several of its operating and office facilities for various
terms. Rents charged to costs and expenses in the Consolidated Statements of
Income amounted to $178,039,000 in 1993, $197,969,000 in 1994 and $186,248,000
in 1995. These amounts include rents under long-term leases, short-term
cancellable leases and rents charged as a percentage of revenue, but are
exclusive of financing leases capitalized for accounting purposes.
The long-term rental obligations as of December 31, 1995, are due as follows:
First year $ 170,311
Second year 152,711
Third year 140,162
Fourth year 132,892
Fifth year 126,872
Sixth through tenth years 545,675
Eleventh year and thereafter 329,046
----------
$1,597,669
==========
During 1994 and 1995, the Company sold put options on 31.6 million shares of
its common stock. The put options give the holders the right at maturity to
require the Company to repurchase shares of its common stock at specified
prices. Proceeds from the sale of put options were credited to additional paid-
in capital. The amount the Company would be obligated to pay to repurchase
shares of its common stock if all outstanding put options were exercised has
been reclassified to a temporary equity account. In the event the options are
exercised, the Company may elect to pay the holder in cash the difference
between the strike price and the market price of the Company's shares, in lieu
of repurchasing the stock.
Options on 17.9 million shares expired unexercised in 1994 and 1995, as the
price of the Company's stock was in excess of the strike price at maturity.
Options on 4.7 million shares were exercised in February 1995, and the Company
elected to settle them for cash at a total cost of $12,019,000. The remaining
9.0 million options expire at various dates in 1996, at strike prices ranging
from $27.34 to $31.45 per share.
The Company's insurance program includes coverage for pollution liability
resulting from "sudden and accidental" releases of contaminants and pollutants.
Management believes that the coverage terms, available limits of liability, and
costs currently offered by
38
- --------------------------------------------------------------------------------
the insurance market do not represent sufficient value to warrant the purchase
of "non-sudden and accidental" pollution liability insurance coverage. As such,
the Company has chosen not to purchase risk transfer "non-sudden and accidental"
pollution liability insurance coverage. To satisfy existing government
requirements, the Company has secured non-risk transfer pollution liability
insurance coverage in amounts believed to be in compliance with Federal and
State law requirements for "non-sudden and accidental" pollution. The Company
must reimburse the insurer for losses incurred and covered by this insurance
policy. In the event the Company continues not to purchase risk transfer "non-
sudden and accidental" pollution liability insurance coverage, the Company's net
income could be adversely affected in the future if "non-sudden and accidental"
pollution losses should occur.
The Company has issued or is a party to approximately 3,120 bank letters of
credit, performance bonds and other guarantees. Such financial instruments
(averaging approximately $639,000 each), including those provided for affiliates
and not otherwise recorded, are given in the ordinary course of business.
Because virtually no claims have been made against these financial instruments
in the past, management does not expect these instruments will have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
Since 1994, WTI has been involved in litigation involving permits for the
construction and operation of the Lisbon, Connecticut, trash-to-energy plant.
These matters were resolved during 1995 and the plant began commercial
operations in January 1996.
During the first quarter of 1995, Waste Management International plc ("WM
International") received an assessment of approximately 417 million Krona
(approximately $62 million) from the Swedish Tax Authority, relating to a
transaction completed in 1990. WM International believes that all appropriate
tax returns and disclosures were properly filed at the time of the transaction
and intends to vigorously contest the assessment.
A subsidiary of Waste Management, Inc. ("WMI") has been involved in litigation
challenging a municipal zoning ordinance which restricted the height of its New
Milford, Connecticut landfill to a level below that allowed by the permit
previously issued by the Connecticut Department of Environmental Protection
("DEP"). Although a lower court declared the zoning ordinance's height
limitation unconstitutional, the Connecticut Supreme Court reversed that ruling
and remanded the case for further proceedings in the Superior Court. In November
1995, the Superior Court ordered the WMI subsidiary to apply to the DEP for
permission to remove all waste above the height allowed by the zoning ordinance.
The Company believes that removal of such waste is an inappropriate remedy and
has appealed the Superior Court order to the state Supreme Court. The Company is
unable to predict the outcome of the appeal or the nature and extent of the
removal action that may ultimately be required following further appeals or as a
result of the permitting process. However, if the Superior Court order as to
removal of the waste is not modified, the subsidiary could incur substantial
costs, which could vary significantly depending upon the nature of any plan
which is eventually approved by applicable regulatory authorities for removing
the waste, the actual volume of waste to be moved and other currently
unforeseeable factors, and which could have a material adverse effect on the
Company's financial condition and results of operations in one or more future
periods.
In the ordinary course of conducting its business, the Company becomes
involved in lawsuits, administrative proceedings and governmental
investigations, including antitrust and environmental matters. Some of these
proceedings may result in fines, penalties or judgments being assessed against
the Company which, from time to time, may have an impact on earnings for a
particular quarter or year. The Company does not believe that these proceedings,
individually or in the aggregate, are material to its business or financial
condition.
- --------------------------------------------------------------------------------
NOTE 12 BENEFIT PLANS
The Company has a defined benefit pension plan for all eligible non-union
domestic employees of WMX, CWM and WMI. The benefits are based on the employee's
years of service and compensation during the highest five consecutive years out
of the last ten years of employment. The Company's funding policy is to
contribute annually the minimum required amount determined by its actuaries.
Net periodic pension expense for 1993, 1994 and 1995, based on discount rates
of 8.50% for all three years, included the following components:
1993 1994 1995
- --------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 10,785 $ 11,075 $ 11,752
Interest cost on projected benefit obligation 9,507 11,532 13,228
Expected return on plan assets (11,055) (12,335) (13,237)
Net amortization and deferral (1,451) (1,310) 33
-------- -------- --------
Net periodic pension expense $ 7,786 $ 8,962 $ 11,776
======== ======== ========
Assumptions, used to determine the plan's funded status as of December 31, are
as follows:
1994 1995
- ----------------------------------------------------------------------------------
Discount rate 8.5% 7.75%
Rate of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return on assets 9.0% 9.0%
The following table sets forth the plan's funded status and the amount
recognized in the Company's Consolidated Balance Sheets at December 31, 1994 and
1995 for its pension plan:
1994 1995
- ----------------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
including vested benefits
of $120,881 and $152,031 at
December 31, 1994 and 1995,
respectively $(136,713) $(167,287)
========= =========
Projected benefit obligation $(156,609) $(191,059)
Plan assets at fair value,
primarily common stocks,
bonds and real estate 136,740 167,068
--------- ---------
Plan assets less than
projected benefit obligation $ (19,869) $ (23,991)
Unrecognized net loss 39,304 29,801
Unrecognized overfunding at
date of adoption (January 1, 1985)
of FAS No. 87, net of amortization,
being recognized over 15 years (8,727) (6,422)
--------- ---------
Pension cost included in
prepaid (accrued) expenses $ 10,708 $ (612)
========= =========
39
- --------------------------------------------------------------------------------
The Company also has a non-qualified defined benefit plan for officers of WMX,
CWM and WMI who have served in such capacities for at least 10 years at the time
of retirement. The benefits are based on the officer's years of service and
compensation during the highest three consecutive years out of the last ten
years of employment. The benefits are reduced by such officer's benefits under
the pension plan. This plan is not funded. Expense for 1993, 1994 and 1995 for
this plan was $2,551,000, $3,418,000 and $4,202,000, respectively.
WM International participates in both defined benefit and defined contribution
retirement plans for its employees in various countries. The projected benefit
obligation and the plan assets of the WM International defined benefit plans are
not material. Other subsidiaries participate in various multi-employer pension
plans covering certain employees not covered under the Company's pension plan,
pursuant to agreements with collective bargaining units who are members of such
plans. These plans are generally defined benefit plans; however, in many cases,
specific benefit levels are not negotiated with or known by the employer-
contributors. Contributions of $15,242,000, $16,194,000 and $18,369,000 for
subsidiaries' defined contribution plans were made and charged to income in
1993, 1994 and 1995, respectively.
The following table analyzes the obligation for postretirement benefits other
than pensions (primarily health care costs), which is included in other deferred
items on the Consolidated Balance Sheets, as of December 31, 1994 and 1995:
1994 1995
- -------------------------------------------------------
Accumulated Postretirement
Benefit Obligations:
Retirees $57,216 $52,255
Other fully eligible participants 10,960 9,682
Other active participants 9,478 10,695
------- -------
$77,654 $72,632
Unrecognized:
Prior service cost 627 566
Gain 9,501 7,911
------- -------
$87,782 $81,109
======= =======
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1996; the rate was assumed to
decrease by 0.5% per year to 6.0% in 2001 and remain at that level thereafter.
Increasing the assumed health care cost trend by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by approximately $4,341,000, and the aggregate of the service
and interest cost components of net postretirement health care cost for 1995 by
approximately $403,000. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 8.5% in 1994 and 7.75% in
1995.
The expense for postretirement health care benefits was $7,300,000 in 1993,
$4,668,000 in 1994 and $5,359,000 in 1995. The service and interest components
of the expense were $3,000,000 and $4,300,000, respectively, in 1993, $1,049,000
and $3,619,000, respectively, in 1994, and $1,094,000 and $4,265,000,
respectively, in 1995.
The Company has an Employee Stock Ownership Plan ("1988 ESOP") for all
eligible non-union United States and Canadian employees of WMX, CWM and WMI. The
benefits are based on the employee's years of service and compensation. The
Company contributes each year an amount, if any, determined by the Board of
Directors of the Company.
Information concerning the 1988 ESOP is as follows:
1993 1994 1995
- ------------------------------------------------------------
Expense recorded (contribution) $7,329 $7,930 $6,667
====== ====== ======
Interest expense on 1988 ESOP debt $1,510 $1,965 $1,147
====== ====== ======
Dividends on unallocated
1988 ESOP shares used
by the 1988 ESOP $ 964 $ 780 $ 555
====== ====== ======
The Company has a Profit Sharing and Savings Plan ("PSSP") available to
certain employees of WMX, CWM and WMI. The terms of the PSSP allow for annual
contributions by the Company as determined by the Board of Directors as well as
a match of employee contributions up to $500 per employee ($750 effective
January 1, 1996). Charges to operations for the PSSP were $11,589,000 in 1993,
$27,334,000 in 1994 and $24,882,000 in 1995. Rust, WTI and WM International also
sponsor non-contributory and contributory defined contribution plans covering
both salaried and hourly employees. Employer contributions are generally based
upon fixed amounts of eligible compensation and amounted to $18,614,000,
$23,431,000 and $23,017,000 during 1993, 1994 and 1995, respectively.
Effective January 1, 1994, the Company and its principal subsidiaries adopted
FAS No. 112, "Employers' Accounting for Postemployment Benefits." This new
statement established accounting standards for employers who provide benefits to
former or inactive employees after employment but before retirement. The
adoption of FAS 112 did not have a significant effect on earnings, because the
Company's accounting prior to adoption was substantially in compliance with the
new standard.
During 1994, the Company established an Employee Stock Benefit Trust and sold
12.6 million shares of treasury stock to the Trust in return for a 30-year,
7.33% note with interest payable quarterly and principal due at maturity. The
Company has agreed to contribute to the Trust each quarter funds sufficient,
when added to dividends on the shares held by the Trust, to pay interest on the
note as well as principal outstanding at maturity. At the direction of an
administrative committee comprised of Company officers, the trustee will use the
shares or proceeds from the sale of shares to pay employee benefits, and to the
extent of such payments by the Trust, the Company will forgive principal and
interest on the note. The shares of common stock issued to the Trust are not
considered to be outstanding in the computation of earnings per share until the
shares are utilized to fund obligations for which the trust was established.
40
- --------------------------------------------------------------------------------
NOTE 13 COMPANY'S OPERATIONS IN DIFFERENT INDUSTRIES AND GEOGRAPHICAL AREAS
The analysis of operations by industry segment which follows reflects the
Company's traditional management structure of five principal subsidiaries, each
of which has operated in a relatively discrete portion of the environmental
services industry or geographic area. WMI has provided integrated solid waste
services and CWM has provided hazardous waste collection, transportation,
treatment and disposal services in North America. WM International has provided
these services, as well as trash-to-energy services, outside North America. WTI
has been involved in trash-to-energy and independent power projects, water and
wastewater treatment (including biosolids management) and air quality control,
primarily in North America. Rust has served the environmental and infrastructure
engineering and consulting, and on-site industrial and related services markets
in the United States and a number of foreign countries.
Whereas solid waste, hazardous waste and trash-to-energy operations have been
performed by three distinct organizations in North America, these services have
been provided internationally by a single management organization. Because of
the different business environment for international operations, the Company has
managed these as a discrete segment. Following is an analysis of the Company's
continuing operations by these historical segments.
Trash-To-Energy, International
Engineering, Water Treatment, Waste Corporate
Solid Hazardous Industrial and Air Quality and Management and
Waste Waste Related Services Related Services Services Eliminations(1) Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
1993
Revenue $4,702,166 $ 661,860 $1,035,004 $1,142,219 $1,411,211 $(316,344) $ 8,636,116
Operating expenses
including goodwill
amortization 3,193,183 506,264 808,694 792,719 1,009,145 (309,914) 6,000,091
Special charge -- 550,000 -- -- -- -- 550,000
Selling and
administrative expenses 547,413 128,058 131,575 107,276 198,969 (9,267) 1,104,024
---------- ---------- ---------- ---------- ---------- --------- -----------
Income from operations $ 961,570 $ (522,462) $ 94,735 $ 242,224 $ 203,097 $ 2,837 $ 982,001
========== ========== ========== ========== ========== ========= ===========
Identifiable assets $6,912,271 $1,498,631 $1,360,703 $3,081,709 $3,315,621 $(169,169) $15,999,766
========== ========== ========== ========== ========== ========= ===========
Depreciation and
amortization expense $ 461,963 $ 63,971 $ 43,971 $ 75,323 $ 121,050 $ 22,084 $ 788,362
========== ========== ========== ========== ========== ========= ===========
Capital expenditures(2) $1,139,004 $ 157,786 $ 124,754 $ 303,905 $ 403,326 $ 26,009 $ 2,154,784
========== ========== ========== ========== ========== ========= ===========
1994
Revenue $5,117,871 $ 649,581 $1,140,294 $1,324,567 $1,710,862 $(388,470) $ 9,554,705
Operating expenses
including goodwill
amortization 3,502,445 454,765 915,129 915,237 1,244,597 (380,393) 6,651,780
Selling and
administrative expenses 549,608 105,736 153,230 119,380 230,014 1,532 1,159,500
---------- ---------- ---------- ---------- ---------- --------- -----------
Income from operations $1,065,818 $ 89,080 $ 71,935 $ 289,950 $ 236,251 $ (9,609) $ 1,743,425
========== ========== ========== ========== ========== ========= ===========
Identifiable assets $7,388,766 $1,375,341 $1,472,263 $3,276,611 $4,037,922 $(311,381) $17,239,522
========== ========== ========== ========== ========== ========= ===========
Depreciation and
amortization expense $ 479,333 $ 59,381 $ 57,542 $ 95,254 $ 154,575 $ 24,514 $ 870,599
========== ========== ========== ========== ========== ========= ===========
Capital expenditures(2) $ 950,383 $ 57,983 $ 57,242 $ 115,082 $ 304,999 $ 20,397 $ 1,506,086
========== ========== ========== ========== ========== ========= ===========
1995
Revenue $5,642,857 $ 613,883 $1,027,430 $1,451,675 $1,865,081 $(353,309) $10,247,617
Operating expenses
including goodwill
amortization 3,806,798 463,984 816,528 1,015,269 1,410,282 (350,309) 7,162,552
Special charges -- 140,600 -- -- 194,593 -- 335,193
Selling and
administrative expenses 578,290 94,551 135,012 130,976 235,807 -- 1,174,636
---------- ---------- ---------- ---------- ---------- --------- -----------
Income from operations $1,257,769 $ (85,252) $ 75,890 $ 305,430 $ 24,399 $ (3,000) $ 1,575,236
========== ========== ========== ========== ========== ========= ===========
Identifiable assets $8,506,954 $1,159,467 $1,387,565 $3,220,193 $4,235,589 $ 54,988 $18,564,756
========== ========== ========== ========== ========== ========= ===========
Depreciation and
amortization expense $ 457,820 $ 48,860 $ 49,796 $ 107,814 $ 181,341 $ 32,041 $ 877,672
========== ========== ========== ========== ========== ========= ===========
Capital expenditures(2) $1,101,312 $ 65,080 $ 34,606 $ 45,101 $ 263,352 $ 31,624 $ 1,541,075
========== ========== ========== ========== ========== ========= ===========
(1) Includes corporate office and elimination of intercompany transactions.
(2) Includes property and equipment of purchased businesses.
41
- --------------------------------------------------------------------------------
As a result of a strategic review begun in 1994, management and operations of
the Company have been realigned on the basis of four principal global lines of
business -- waste services, clean energy, clean water, and environmental and
infrastructure engineering and consulting. The following table analyzes
continuing operations on a line-of-business basis.
Environmental and
Infrastructure
Waste Clean Clean Engineering and Corporate and
Services Energy Water Consulting Eliminations(2) Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
1993
Revenue $ 7,457,371 $ 804,016 $392,194 $298,879 $(316,344) $ 8,636,116
Operating expenses including
goodwill amortization 5,259,571 532,619 294,525 223,290 (309,914) 6,000,091
Special charge 550,000 -- -- -- -- 550,000
Selling and administrative expenses 956,588 46,899 63,937 45,867 (9,267) 1,104,024
----------- ---------- -------- -------- --------- -----------
Income from operations $ 691,212 $ 224,498 $ 33,732 $ 29,722 $ 2,837 $ 982,001
=========== ========== ======== ======== ========= ===========
Identifiable assets $12,356,320 $2,196,145 $485,349 $297,258 $ 664,694 $15,999,766
=========== ========== ======== ======== ========= ===========
Depreciation and
amortization expense $ 693,819 $ 62,777 $ 21,446 $ 10,320 $ -- $ 788,362
=========== ========== ======== ======== ========= ===========
Capital expenditures(1) $ 1,802,781 $ 209,091 $112,965 $ 26,718 $ 3,229 $ 2,154,784
=========== ========== ======== ======== ========= ===========
1994
Revenue $ 8,140,785 $ 888,037 $489,295 $425,058 $(388,470) $ 9,554,705
Operating expenses including
goodwill amortization 5,738,990 589,610 369,592 333,981 (380,393) 6,651,780
Selling and administrative expenses 971,075 44,032 78,615 64,246 1,532 1,159,500
----------- ---------- -------- -------- --------- -----------
Income from operations $ 1,430,720 $ 254,395 $ 41,088 $ 26,831 $ (9,609) $ 1,743,425
=========== ========== ======== ======== ========= ===========
Identifiable assets $13,470,901 $2,152,458 $587,480 $402,053 $ 626,630 $17,239,522
=========== ========== ======== ======== ========= ===========
Depreciation and
amortization expense $ 751,251 $ 62,460 $ 40,813 $ 16,075 $ -- $ 870,599
=========== ========== ======== ======== ========= ===========
Capital expenditures(1) $ 1,374,893 $ 76,392 $ 35,725 $ 14,576 $ 4,500 $ 1,506,086
=========== ========== ======== ======== ========= ===========
1995
Revenue $ 8,634,836 $ 893,513 $618,472 $454,105 $(353,309) $10,247,617
Operating expenses including
goodwill amortization 6,099,597 574,865 477,842 360,557 (350,309) 7,162,552
Special charges 325,336 9,857 -- -- -- 335,193
Selling and administrative expenses 972,018 44,751 89,922 67,945 -- 1,174,636
----------- ---------- -------- -------- --------- -----------
Income from operations $ 1,237,885 $ 264,040 $ 50,708 $ 25,603 $ (3,000) $ 1,575,236
=========== ========== ======== ======== ========= ===========
Identifiable assets $14,535,905 $2,025,491 $612,824 $392,486 $ 998,050 $18,564,756
=========== ========== ======== ======== ========= ===========
Depreciation and
amortization expense $ 742,148 $ 73,098 $ 44,744 $ 17,682 $ -- $ 877,672
=========== ========== ======== ======== ========= ===========
Capital expenditures(1) $ 1,485,958 $ 12,404 $ 33,415 $ 9,288 $ 10 $ 1,541,075
=========== ========== ======== ======== ========= ===========
(1) Includes property and equipment of purchased businesses.
(2) Includes corporate office and elimination of intersegment transactions.
42
- --------------------------------------------------------------------------------
Foreign operations in 1995 were conducted in 10 countries in Europe, eight
countries in the Asia Pacific region, and Canada, Brazil, Mexico, Israel, and
Argentina. The information relating to the Company's foreign operations is set
forth in the following tables:
United Other
States Europe Foreign Consolidated
- --------------------------------------------------------------------------------
1993
Revenue $ 6,994,757 $1,241,811 $399,548 $ 8,636,116
=========== ========== ======== ===========
Income from operations $ 754,502 $ 184,412 $ 43,087 $ 982,001
=========== ========== ======== ===========
Identifiable assets $12,444,968 $2,955,078 $599,720 $15,999,766
=========== ========== ======== ===========
1994
Revenue $ 7,427,611 $1,504,154 $622,940 $ 9,554,705
=========== ========== ======== ===========
Income from operations $ 1,476,067 $ 198,251 $ 69,107 $ 1,743,425
=========== ========== ======== ===========
Identifiable assets $12,628,264 $3,725,393 $885,865 $17,239,522
=========== ========== ======== ===========
1995
Revenue $ 7,837,050 $1,800,768 $609,799 $10,247,617
=========== ========== ======== ===========
Income from operations $ 1,515,729 $ 17,951 $ 41,556 $ 1,575,236
=========== ========== ======== ===========
Identifiable assets $13,769,141 $3,920,962 $874,653 $18,564,756
=========== ========== ======== ===========
No single customer accounted for as much as 3% of consolidated revenue in
1993, 1994 and 1995.
WM International operates facilities in Hong Kong which are owned by the Hong
Kong government. On July 1, 1997, control of the Hong Kong government transfers
to mainland China. WM International is unable to predict what impact, if any,
this change will have on its operations in Hong Kong. At December 31, 1995, WM
International had identifiable assets of $242.5 million related to its Hong Kong
operations, which generated 1995 pretax income of approximately $16.5 million.
- --------------------------------------------------------------------------------
NOTE 14 SPECIAL GAINS AND CHARGES
During the third quarter of 1993, the Company recorded a special charge of
$550.0 million (before tax and minority interest) as a result of CWM recording a
special asset revaluation and restructuring charge. The charge consisted of
$381.0 million to write down assets, primarily incinerators, and $169.0 million
for cash expenditures. Substantially all of the cash expenditures were made as
of December 31, 1994. As a result of this program, overhead, including
depreciation and amortization, was reduced in 1994 by approximately $60 million
on an annualized basis.
Results for 1993 include a non-taxable gain of $15.1 million (before minority
interest) relating to the second quarter issuance of shares by Rust in
connection with the acquisition of the minority interest in a subsidiary.
In 1994, Rust recorded a charge of $9.2 million (before tax and minority
interest) for the writeoff of assets and the recognition of one-time costs
incurred during the fourth quarter in connection with the discontinuance of its
marine construction and dredging operations, and the closing of offices in a
consolidation of its other operations. This charge is included in Operating
Expenses ($6.6 million) and Selling and Administrative Expenses ($2.6 million)
in the Consolidated Statement of Income.
In the first quarter of 1995, in response to the continuing deterioration of
the chemical waste services market, CWM took additional steps to realign its
organization, and in connection therewith, recorded a special charge of $140.6
million before tax ($91.4 million after tax or $.19 per WMX share). The charge
related primarily to a write-off of the investment in facilities and
technologies that CWM abandoned because they do not meet customer service or
performance objectives, but also includes $22.0 million of future cash payments
for rents under non-cancellable leases, guaranteed bank obligations of a joint
venture, and employee severance. The majority of the cash expenditures were paid
in 1995, although certain of the non-cancellable leases extend through the year
2002.
In the fourth quarter of 1995, WM International recorded an exceptional charge
of $194.6 million ($152.4 million after tax) primarily related to the actions it
is taking to sell or otherwise dispose of non-core businesses and investments,
as well as core businesses and investments in low potential markets, abandon
certain hazardous waste treatment and processing technologies, and streamline
its country management organization. The charge reduced the Company's income by
approximately $153.3 million before tax ($111.0 million after tax). The charge
included $34.3 million of cash payments for employee severance and rents under
non-cancellable leases. Approximately $11.2 million of the cash costs were paid
prior to December 31, 1995. The majority of the balance will be paid in early
1996, although certain rent payments on leased facilities will continue into the
future. WM International expects that upon completion of these actions, overhead
will be reduced by approximately $20 million annually, which management plans to
invest in new marketing initiatives and operational productivity enhancements.
43
- --------------------------------------------------------------------------------
NOTE 15 DISCONTINUED OPERATIONS
In December 1995, the Rust Board of Directors approved a plan to sell or
otherwise discontinue Rust's process engineering, construction, specialty
contracting and similar lines of business and have Rust focus on its
environmental and infrastructure engineering and consulting businesses. The
discontinued businesses have been segregated and the accompanying consolidated
balance sheets, statements of income and related footnote information have been
restated.
Rust has engaged investment bankers to assist it in valuing and identifying
potential buyers for the major business units to be sold, and expects to
complete the sales in 1996. Provision has been made for estimated loss on
disposal of the discontinued operations, net of related tax benefits and
minority interest, and is included in the 1995 consolidated statement of income.
The provision for loss includes management's best estimate of the amounts to be
realized on the sale of businesses and assets. The amounts Rust will ultimately
realize could differ materially in the near term from these estimates.
Revenues of the discontinued businesses were $499,461,000 in 1993,
$542,613,000 in 1994, and $731,731,000 in 1995. Following is a summary of the
assets and liabilities as of December 31, 1994 and 1995, which are reflected on
the consolidated balance sheets as net assets of discontinued operations:
1994 1995
- --------------------------------------------------------------------------------
Current assets $ 136,466 $ 163,662
Property and equipment
and other noncurrent assets 162,926 94,251
Current liabilities (111,718) (122,529)
Noncurrent liabilities (4,023) (4,832)
--------- ---------
Net assets of
discontinued operations $ 183,651 $ 130,552
========= =========
- --------------------------------------------------------------------------------
NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of FAS No. 107, "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and commonly
accepted valuation methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company or holders of the instruments could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value estimates presented herein are based on information available to
management as of December 31, 1994, and December 31, 1995. Such amounts have not
been revalued since those dates, and current estimates of fair value may differ
significantly from the amounts presented herein.
December 31, 1994 December 31, 1995
- --------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------
Nonderivatives--
Assets--
Cash and cash equivalents $ 123,348 $ 123,348 $ 189,031 $ 189,031
Receivables 1,887,923 1,887,923 1,889,721 1,889,721
Short-term investments 19,704 19,704 36,243 36,243
Liabilities--
Commercial paper 946,702 944,837 1,119,356 1,120,209
Project debt 764,859 828,320 735,646 880,619
Liquid Yield Option Notes and
WMX Subordinated Notes 505,140 500,410 539,352 576,024
Other borrowings 4,718,396 4,586,522 5,120,421 5,319,414
Derivatives relating to debt -- 1,653 -- (74)
Other derivatives carried as--
Assets (in Other Assets) 307 307 -- --
Liabilities (in Accrued Expenses) (1,105) (16,245) (65) (16,647)
Letters of credit, performance bonds
and guarantees -- -- -- --
44
- --------------------------------------------------------------------------------
CASH, RECEIVABLES AND SHORT-TERM INVESTMENTS The carrying amounts of these
items are a reasonable estimate of their fair value.
LIABILITIES For debt issues that are publicly traded, fair values are based on
quoted market prices or dealer quotes. Due to the short-term nature of the ESOP
notes, their carrying value approximates fair value. Interest rates that are
currently available to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for debt issues that are
not quoted on an exchange.
DERIVATIVES The fair value of derivatives generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at
December 31, thereby taking into account unrealized gains and losses. Dealer
quotes are available for most of the Company's derivatives. Deferred gains and
losses are shown as assets and liabilities, as offsetting such amounts against
the related nonderivative instrument is permitted only pursuant to a right of
setoff or master netting agreement.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the normal course of business, the
Company is a party to financial instruments with off-balance-sheet risk, such as
bank letters of credit, performance bonds and other guarantees, which are not
reflected in the accompanying balance sheets. Such financial instruments are to
be valued based on the amount of exposure under the instrument and the
likelihood of performance being required. In the Company's experience, virtually
no claims have been made against these financial instruments. Management does
not expect any material losses to result from these off-balance-sheet
instruments and, therefore, is of the opinion that the fair value of these
instruments is zero.
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is an analysis of certain items in the Consolidated Statements of Income by quarter for 1994 and 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
1994
Revenue $2,170,661 $2,420,106 $2,459,336 $2,504,602 $ 9,554,705
Gross profit 649,818 747,041 749,669 756,397 2,902,925
Income from continuing operations 161,777 202,155 207,093 205,466 776,491
Net income 162,612 203,117 212,885 205,767 784,381
Income from continuing operations
per common and common equivalent share .33 .42 .43 .42 1.60
Net income per common
and common equivalent share .34 .42 .44 .42 1.62
1995
Revenue $2,445,185 $2,635,665 $2,619,227 $2,547,540 $10,247,617
Gross profit 591,125 788,929 794,941 574,877 2,749,872
Income from continuing operations 101,292 212,462 230,801 110,035 654,590
Net income 101,245 219,127 233,848 49,679 603,899
Income from continuing operations
per common and common equivalent share .21 .44 .47 .23 1.35
Net income per common
and common equivalent share .21 .45 .48 .10 1.24
See Note 14 to Consolidated Financial Statements for a discussion of the
special charges affecting the 1994 fourth quarter and full year results and the
1995 first quarter, fourth quarter and full year results.
See Note 15 to Consolidated Financial Statements for a discussion of the
decision to discontinue certain operations, announced during the fourth quarter
of 1995.
45