================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------- -------- COMMISSION FILE NUMBER 1-7327 WMX TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 36-2660763 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3003 BUTTERFIELD ROAD, OAK BROOK, ILLINOIS 60521 (Address of principal executive office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 572-8800 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- SHARES OF REGISTRANT'S COMMON STOCK, $1 PAR VALUE, ISSUED AND OUTSTANDING AT JULY 31, 1996 -- 491,074,822 ================================================================================ WMX TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX ----- PAGE ---- PART I. Financial Information: Consolidated balance sheets as of December 31, 1995, and June 30, 1996................................................... 3 Consolidated statements of income for the three months and six months ended June 30, 1995 and 1996.................................... 5 Consolidated statements of stockholders' equity for the six months ended June 30, 1995 and 1996.................................... 6 Consolidated statements of cash flows for the six months ended June 30, 1995 and 1996.................................... 8 Notes to consolidated financial statements........................... 9 Management's discussion and analysis of results of operations and financial condition......................................... 14 PART II. Other Information.......................................... 23 ****** 2 PART I. FINANCIAL INFORMATION WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's omitted) ASSETS December 31, 1995 June 30, 1996 ----------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 189,031 $ 266,435 Short-term investments 36,243 25,878 Accounts receivable, less reserve of $66,840 in 1995 and $60,563 in 1996 1,880,934 1,937,398 Employee receivables 8,787 10,214 Parts and supplies 210,864 204,551 Costs and estimated earnings in excess of billings on uncompleted contracts 334,786 368,164 Prepaid expenses 360,404 376,485 ----------- ----------- Total Current Assets $ 3,021,049 $ 3,189,125 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land, primarily disposal sites $ 4,575,117 $ 4,816,183 Buildings 1,572,821 1,542,161 Vehicles and equipment 7,498,718 7,795,265 Leasehold improvements 87,986 91,105 ----------- ----------- $13,734,642 $14,244,714 Less - Accumulated depreciation and amortization (3,968,943) (4,315,809) ----------- ----------- Total Property and Equipment, Net $ 9,765,699 $ 9,928,905 ----------- ----------- OTHER ASSETS: Intangible assets relating to acquired businesses, net $ 4,205,031 $ 4,566,168 Sundry, including other investments 1,572,977 1,619,639 Net assets of discontinued operations 130,552 - ----------- ----------- Total Other Assets $ 5,908,560 $ 6,185,807 ----------- ----------- Total Assets $18,695,308 $19,303,837 =========== =========== The accompanying notes are an integral part of these balance sheets. 3 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's omitted except per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1995 June 30, 1996 ----------------- ------------- CURRENT LIABILITIES: Portion of long-term debt payable within one year $ 1,094,165 $ 901,510 Accounts payable 1,072,372 966,265 Accrued expenses 991,539 940,943 Unearned revenue 263,029 271,338 ----------- ----------- Total Current Liabilities $ 3,421,105 $ 3,080,056 ----------- ----------- DEFERRED ITEMS: Income taxes $ 956,525 $ 1,070,774 Environmental liabilities 622,952 590,403 Other 684,452 660,754 ----------- ----------- Total Deferred Items $ 2,263,929 $ 2,321,931 ----------- ----------- LONG-TERM DEBT, less portion payable within one year $ 6,420,610 $ 7,123,055 ----------- ----------- MINORITY INTEREST IN SUBSIDIARIES $ 1,385,366 $ 1,190,173 ----------- ----------- COMMITMENTS AND CONTINGENCIES $ $ ----------- ----------- PUT OPTIONS $ 261,959 $ 397,916 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $l par value (issuable in series); 50,000,000 shares authorized; none outstanding during the periods $ - $ - Common stock, $l par value; 1,500,000,000 shares authorized; 498,817,093 shares issued in 1995 and 507,097,590 in 1996 498,817 507,098 Additional paid-in capital 422,801 565,859 Cumulative translation adjustment (102,943) (108,530) Retained earnings 4,486,877 4,738,415 ----------- ----------- $ 5,305,552 $ 5,702,842 Less: Treasury stock; 4,357,693 shares, at cost - 145,879 1988 Employee Stock Ownership Plan 13,062 9,729 Employee Stock Benefit Trust (11,769,788 shares in 1995 and 10,886,361 shares in 1996, at market) 350,151 356,528 ----------- ----------- Total Stockholders' Equity $ 4,942,339 $ 5,190,706 ----------- ----------- Total Liabilities and Stockholders' Equity $18,695,308 $19,303,837 =========== =========== The accompanying notes are an integral part of these balance sheets. 4 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30 (Unaudited) (000's omitted except per share amounts) Three Months Six Months Ended June 30 Ended June 30 ----------------------- ----------------------- 1995 1996 1995 1996 ---------- ---------- ---------- ---------- REVENUE $2,635,665 $2,618,125 $5,080,850 $5,035,316 ---------- ---------- ---------- ---------- Operating expenses $1,817,192 $1,815,274 $3,501,142 $3,495,197 Special charges - - 140,600 - Goodwill amortization 29,544 32,806 59,054 64,370 Selling and administrative expenses 300,322 289,268 587,852 576,154 Interest expense 111,847 99,603 218,370 198,918 Interest income (14,463) (6,857) (23,349) (13,699) Minority interest 40,117 32,179 69,431 60,254 Sundry income, net (13,343) (21,409) (30,264) (38,768) ---------- ---------- ---------- ---------- Income from continuing operations before income taxes $ 364,449 $ 377,261 $ 558,014 $ 692,890 Provision for income taxes 151,987 154,219 244,260 284,670 ---------- ---------- ---------- ---------- Income from continuing operations $ 212,462 $ 223,042 $ 313,754 $ 408,220 Income from operations of discontinued businesses, less applicable income taxes and minority interest of $6,382 and $6,474 for the three months and six months ended June 30, 1995, respectively 6,665 - 6,618 - ---------- ---------- ---------- ---------- NET INCOME $ 219,127 $ 223,042 $ 320,372 $ 408,220 ========== ========== ========== ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 485,082 496,031 484,968 492,593 ========== ========== ========== ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Continuing operations $ 0.44 $ 0.45 $ 0.65 $ 0.83 Discontinued operations 0.01 - 0.01 - ---------- ---------- ---------- ---------- NET INCOME $ 0.45 $ 0.45 $ 0.66 $ 0.83 ========== ========== ========== ========== DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.16 $ 0.30 $ 0.31 ========== ========== ========== ========== The accompanying notes are an integral part of these statements. 5 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1995 (Unaudited) ($000's omitted except per share amounts) 1988 Employee Additional Cumulative Stock Employee Common Paid-In Translation Retained Treasury Ownership Stock Stock Capital Adjustment Earnings Stock Plan Benefit Trust -------- ---------- ------------ ----------- -------- --------- ------------- Balance, January 1, 1995 $496,387 $357,150 $(150,832) $4,181,606 $ - $19,729 $323,601 Net income for the period - - - 320,372 - - - Cash dividends ($.30 per share) - - - (145,376) - - - Dividends paid to Employee Stock Benefit Trust - 3,643 - (3,643) - - - Stock issued upon exercise of stock options 16 (1,959) - - (329) - (7,801) Treasury stock received in connection with exercise of stock options - - - - 329 - - Tax benefit of non-qualified stock options exercised - 895 - - - - Contribution to 1988 Employee Stock Ownership Plan - - - - - (3,334) - Common stock issued upon conversion of Liquid Yield Option Notes 120 1,929 - - - - - Common stock issued for acquisitions 378 10,206 - - - - - Temporary equity related to put options - 11,133 - - - - - Proceeds from sale of put options - 6,766 - - - - - Settlement of expired put options - (12,019) - - - - - Adjustment of Employee Stock Benefit Trust to market value - 27,389 - - - - 27,389 Transfer of equity interests among controlled subsidiaries - 598 - - - - - Cumulative translation adjust- ment of foreign currency statements - - 55,825 - - - - -------- -------- ----------- ---------- -------- ------- -------- Balance, June 30, 1995 $496,901 $405,731 $ (95,007) $4,352,959 $ - $16,395 $343,189 ======== ======== =========== ========== ======== ======= ======== The accompanying notes are an integral part of this statement. 6 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) ($000's omitted except per share amounts) 1988 Employee Additional Cumulative Stock Employee Common Paid-In Translation Retained Treasury Ownership Stock Stock Capital Adjustment Earnings Stock Plan Benefit Trust -------- ---------- ----------- -------- ---------- ----------- -------------- Balance, January 1, 1996 $498,817 $422,801 $(102,943) $4,486,877 $ - $13,062 $350,151 Net income for the period - - - 408,220 - - - Cash dividends ($.31 per share) - - - (153,222) - - - Dividends paid to Employee Stock Benefit Trust - 3,460 - (3,460) - - - Stock repurchase (5,000,000 shares) - - - - 168,305 - - Stock issued upon exercise of stock options 217 (7,332) - - (25,617) - (28,622) Treasury stock received in connection with exercise of stock options - - - - 791 - - Tax benefit of non-qualified stock options exercised - 4,999 - - - - - Contribution to 1988 Employee Stock Ownership Plan - - - - - (3,333) - Treasury stock received as settlement for claims - - - - 2,400 - - Common stock issued upon conversion of Liquid Yield Option Notes 107 1,893 - - - - - Common stock issued for acquisitions 7,957 226,222 - - - - - Temporary equity related to put options - (135,957) - - - - - Proceeds from sale of put options - 14,774 - - - - - Adjustment of Employee Stock Benefit Trust to market value - 34,999 - - - - 34,999 Cumulative translation adjust- ment of foreign currency statements - - (5,587) - - - - -------- -------- --------- ---------- -------- ------- -------- Balance, June 30, 1996 $507,098 $565,859 $(108,530) $4,738,415 $145,879 $ 9,729 $356,528 ======== ======== ========= ========== ======== ======= ======== The accompanying notes are an integral part of this statement. 7 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 Increase (Decrease) in Cash (Unaudited) ($000's omitted) 1995 1996 ------------- ------------ Cash flows from operating activities: Net income for the period $ 320,372 $ 408,220 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 433,624 462,170 Provision for deferred income taxes 113,418 116,725 Minority interest in subsidiaries 70,939 60,254 Interest on Liquid Yield Option Notes (LYONs) and WMX Subordinated Notes 17,365 5,737 Contribution to 1988 Employee Stock Ownership Plan 3,334 3,333 Special charge, net of tax 91,400 - Changes in assets and liabilities, excluding effects of acquired companies: Receivables, net (5,852) (30,391) Other current assets (59,401) (43,864) Sundry other assets 48,770 (16,939) Accounts payable (43,910) (114,635) Accrued expenses and unearned revenue (38,699) (68,449) Deferred items (33,227) (55,029) Other, net (10,498) 738 ---------- ---------- Net cash provided by operating activities $ 907,635 $ 727,870 ---------- ---------- Cash flows from investing activities: Short term investments $ (65,847) $ 10,371 Capital expenditures (584,988) (577,791) Proceeds from sale of assets and businesses 131,853 146,901 Cost of acquisitions, net of cash acquired (119,648) (57,911) Other investments (54,123) (45,232) Acquisition of minority interests (26,799) (329,653) ---------- ---------- Net cash used for investing activities $ (719,552) $ (853,315) ---------- ---------- Cash flows from financing activities: Cash dividends $ (145,376) $ (153,222) Proceeds from issuance of indebtedness 1,128,278 1,366,124 Repayments of indebtedness (1,140,402) (906,535) Proceeds from exercise of stock options, net 5,858 46,333 Contributions from minority interests 13,348 3,680 Stock repurchases - (168,305) Proceeds from sale of put options 6,766 14,774 Settlement of put options (12,019) - ---------- ---------- Net cash provided by (used for) financing activities $ (143,547) $ 202,849 ---------- ---------- Net increase in cash and cash equivalents $ 44,536 $ 77,404 Cash and cash equivalents at beginning of period 123,348 189,031 ---------- ---------- Cash and cash equivalents at end of period $ 167,884 $ 266,435 ========== ========== 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 disclosure of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 202,722 $ 193,181 Income taxes, net of refunds received $ 144,377 $ 147,372 Supplemental schedule of noncash investing and financing activities: LYONs converted into common stock of the Company $ 2,049 $ 2,000 Liabilities assumed in acquisitions of businesses $ 107,740 $ 97,952 Fair market value of Company stock issued for acquired businesses $ 10,584 $ 234,179 WMX Subordinated Notes issued for acquisition of CWM minority interest $ 436,830 $ - The accompanying notes are an integral part of these statements. 8 WMX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ($000's omitted in all tables) The financial statements included herein have been prepared by WMX Technologies, Inc. ("WMX" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial information included herein reflects, in the opinion of the Company, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. 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. Certain amounts in previously issued financial statements have been restated to conform to 1996 classifications. Income Taxes - The following table sets forth the provision for income taxes for continuing operations for the three months and six months ended June 30, 1995 and 1996: Three Months Six Months Ended June 30 Ended June 30 -------------------- -------------------- 1995 1996 1995 1996 --------- --------- --------- --------- Currently payable $ 69,859 $102,940 $129,880 $168,333 Deferred 82,399 51,473 114,922 116,725 Amortization of deferred investment credit (271) (194) (542) (388) -------- -------- -------- -------- $151,987 $154,219 $244,260 $284,670 ======== ======== ======== ======== Business Combinations - During 1995, the Company and its principal subsidiaries acquired 136 businesses 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. 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, for $436.8 million of convertible subordinated notes. 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. 9 During the six months ended June 30,1996, the Company and its principal subsidiaries acquired 67 businesses for $57,911,000 in cash (net of cash acquired) and notes, $34,885,000 of debt assumed, and 7,956,606 shares of the Company's common stock. These acquisitions were accounted for as purchases. The pro forma effect of the acquisitions made during 1995 and 1996 is not material. Discontinued Operations - In the fourth quarter of 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 consulting businesses. During the second quarter of 1996, the sale of the industrial process engineering and construction business, based in Birmingham, Alabama, was completed. Rust is currently negotiating the sales of certain other businesses, the remaining assets of which are not material to the consolidated balance sheet. The results of these transactions, which are expected to be completed by the end of 1996, will not have a material impact on the consolidated statement of income. Revenue from the discontinued businesses (through the date of sale for units sold) was $67.0 million for the three months and $209.8 million for the six months ended June 30, 1996, compared with $220.4 million for the three-month and $380.1 million for the six-month periods in 1995. Results of operations for the three months and six months ended June 30, 1996, were not material and were included in the reserve for loss on disposition provided previously. Accounting Principles - Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The change did not have a material impact on the Company's financial statements. In October 1995, the Financial Accounting Standards Board 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 No. 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the financial statements. Derivative Financial Instruments - From time to time, the Company uses derivatives to manage interest rate, currency and commodity risk. Neither the amount of such instruments outstanding at any point in time nor gains or losses from their use has been material to the Company's financial statements. INTEREST RATE AGREEMENTS Certain of the Company's subsidiaries have entered into interest rate swap agreements to balance fixed and floating rate debt in accordance with management's criteria. 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 agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage. Differences paid or received are recognized as a part of interest expense on the underlying debt over the life of the agreements. 10 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. 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. 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 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 June 30, 1996, which is not material. Environmental 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. Such costs may increase in the future as a result of legislation or regulation; however, the Company believes that in general it benefits from increased government regulation, which increases the demand for its services, and that it has the resources and experience to manage environmental risk. As part of its ongoing operations, the Company provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. The Company has also established procedures to evaluate its potential remedial liabilities at closed sites which it owns or operated, or to which it transported waste, including 107 sites listed on the Superfund National Priority List ("NPL"). The majority of the situations involving NPL sites relate to allegations that subsidiaries of the Company (or their predecessors) transported waste to the facilities in question, often prior to the acquisition of such subsidiaries by the Company. Where the Company concludes that it is probable that a liability has been incurred, provision is made in the financial statements. 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. 11 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. Stockholders' Equity - The Boards of Directors of WMX and WTI have authorized their respective companies to repurchase shares of their own common stock (up to 25 million shares in the case of WMX and 20 million shares in the case of WTI) in the open market or in privately negotiated transactions. These programs extend into 1997. WTI has repurchased 19.2 million shares under its program, including 15.4 million in the second quarter and 18.4 million shares during the first six months of 1996. WMX has repurchased 5.0 million shares, all during the second quarter of 1996. In conjunction with its authorized repurchase program, WMX periodically sells put options on its common stock. The put options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. Proceeds from the sale of the options are credited to additional paid-in capital. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares in lieu of repurchasing the stock. At June 30, 1996, put options were outstanding for 12.5 million shares, 4.7 million of which subsequently expired unexercised as the price of the Company's stock was in excess of the strike price at maturity. The remaining options expire in October and November of 1996 with strike prices of $33.45 to $35.17 per share. Commitments and Contingencies - Waste Management International plc ("WM International") has received an assessment of approximately 417 million Krona (approximately $63 million) from the Swedish Tax Authority, relating to a transaction completed in 1990. WM International believes that all appropriate tax returns and disclosures were filed at the time of the transaction and intends to vigorously contest the assessment. A subsidiary of WMI has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). WMI is presently under an order of the Superior Court to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that the 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 this appeal or the nature and extent of any removal action that may ultimately be required. However, if the Superior Court order is not modified, the subsidiary could incur substantial costs, which could vary significantly depending upon the nature of any plan eventually approved by the applicable regulatory authorities, the actual volume of waste to be moved, and other factors, and which could have a material adverse effect on the Company's financial condition and results of operations in the near term. In July 1996, a Federal District Court permanently enjoined the State of New Jersey from enforcing its solid waste regulatory flow control system, which was held to be unconstitutional. Flow control typically involves a governmental authority specifying the disposal site for all solid waste generated within its borders. The New Jersey ruling is one of a number of similar court rulings since a 1994 U.S. Supreme Court decision that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Other subsequent court decisions have upheld nonregulatory means by which municipalities may effectively control the flow of solid waste. Federal legislation has been proposed, but not enacted, to essentially grandfather existing flow control mandates. 12 WTI's Gloucester County, New Jersey, trash-to-energy facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. The Federal District Court stayed its injunction for as long as its ruling is on appeal, plus an additional period of two years, to enable the State to devise an alternative nondiscriminatory approach. The Company believes that the State is considering an appeal of the District Court decision. To date, court decisions with regard to flow control have not had a material adverse effect on the Company's operations. However, given the surrounding uncertainty, it is not possible to predict what impact, if any, this matter may have in the future on the Company's disposal facilities, particularly WTI's trash-to-energy facilities. 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, will have a material adverse effect on its results of operations or financial condition. Debt - In May 1996, the Company issued $200,000,000 of 6.7% Notes due May 1, 2001, at a price of 99.828%. In June 1996, the Company issued $200,000,000 of 7 1/8% Notes due June 15, 2001, at a price of 99.875%. Neither of these issues is redeemable prior to maturity. In July 1996, the Company issued $450,000,000 of 7.1% Notes due August 1, 2026, at a price of 99.945%. These notes are not callable and include a put option on August 1, 2003. Legal Matters - See Part II of this Form 10-Q for a discussion of legal matters. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ($000's omitted in all tables) RESULTS OF OPERATIONS: CONSOLIDATED - - -------------- For the three months ended June 30, 1996, WMX Technologies, Inc. and its subsidiaries ("WMX" or the "Company") had net income from continuing operations of $223.0 million or $.45 per share, compared with $212.5 million or $.44 per share in the same period in 1995. Net income was $.45 per share for both quarters. Second quarter 1995 income from continuing operations and net income included a charge of approximately $.01 per share for the write-off of deferred costs related to debt securities previously issued by the Company and its Chemical Waste Management, Inc. ("CWM") subsidiary that were put to the Company by the debtholders prior to maturity. Revenue for the 1996 quarter was $2.62 billion versus $2.64 billion (restated to eliminate discontinued operations) in the year-earlier period. For the six months ended June 30, 1996, income from continuing operations was $408.2 million or $.83 per share, versus $313.8 million or $.65 per share for the corresponding period in 1995. The 1995 results included a CWM charge related to a revaluation of investments in certain hazardous waste treatment and processing technologies and facilities, which reduced consolidated earnings in the first quarter by $.19 per share. Excluding that charge and the charge related to debt securities discussed above, earnings per share from continuing operations for the six months ended June 30, 1995, were $.85. Net income was $.83 for the six months of 1996 compared with $.66 ($.86 excluding the charges discussed above) for the first six months of 1995. Revenue for the periods was $5.04 billion in 1996 and $5.08 billion in 1995. The Company provides environmental services internationally through five principal operating subsidiaries: Waste Management, Inc. ("WMI"), CWM, Wheelabrator Technologies Inc. ("WTI"), Waste Management International plc ("WM International") and Rust International Inc. ("Rust"). However, operations are managed on the basis of four global lines of business--waste services, clean energy, clean water, and environmental and infrastructure consulting. Revenue, operating expenses (excluding special charges), selling and administrative expenses, and operating margins for the continuing businesses are set forth by business line in the tables below: Waste Clean Clean Consoli- Services Energy Water Consulting Eliminations dated ---------- -------- -------- ---------- ------------ ---------- Three Months Ended June 30 ------------------------------------------------------------------------------ 1996 - - ------ Revenue $2,204,738 $215,583 $162,960 $123,233 $(88,389) $2,618,125 Operating expenses 1,571,011 137,094 128,980 99,384 (88,389) 1,848,080 Selling and admin. expenses 241,439 9,125 22,605 16,099 -- 289,268 ---------- -------- -------- -------- -------- ---------- Margin $ 392,288 $ 69,364 $ 11,375 $ 7,750 $ -- $ 480,777 ========== ======== ======== ======== ======== ========== 1995 - - ------ Revenue $2,217,204 $221,062 $164,213 $117,146 $(83,960) $2,635,665 Operating expenses 1,564,937 143,703 129,167 91,689 (82,760) 1,846,736 Selling and admin. expenses 248,476 10,933 22,811 18,102 -- 300,322 ---------- -------- -------- -------- -------- ---------- Margin $ 403,791 $ 66,426 $ 12,235 $ 7,355 $ (1,200) $ 488,607 ========== ======== ======== ======== ======== ========== 14 Waste Clean Clean Consoli- Services Energy Water Consulting Eliminations dated ---------- -------- -------- ---------- ------------ ---------- Six Months Ended June 30 ------------------------------------------------------------------------------ 1996 - - ------ Revenue $4,242,252 $418,845 $313,220 $233,337 $(172,338) $5,035,316 Operating expenses 3,024,995 269,663 247,878 189,369 (172,338) 3,559,567 Selling and admin. expenses 478,996 19,825 45,193 32,140 -- 576,154 ---------- -------- -------- -------- --------- ---------- Margin $ 738,261 $129,357 $ 20,149 $ 11,828 $ -- $ 899,595 ========== ======== ======== ======== ========= ========== 1995 - - ------ Revenue $4,249,829 $472,294 $301,248 $225,548 $(168,069) $5,080,850 Operating expenses 2,998,149 313,592 239,140 176,184 (166,869) 3,560,196 Selling and admin. expenses 485,811 21,970 44,393 35,678 -- 587,852 ---------- -------- -------- -------- --------- ---------- Margin $ 765,869 $136,732 $ 17,715 $ 13,686 $ (1,200) $ 932,802 ========== ======== ======== ======== ========= ========== Waste Services - - ---------------- Operating results for the three months and six months ended June 30 were as follows: Three Months Six Months ------------------------ ------------------------ 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Revenue $2,204,738 $2,217,204 $4,242,252 $4,249,829 Operating expenses 1,571,011 1,564,937 3,024,995 2,998,149 Selling and admin. expenses 241,439 248,476 478,996 485,811 ---------- ---------- ---------- ---------- Margin $ 392,288 $ 403,791 $ 738,261 $ 765,869 ========== ========== ========== ========== Revenue by source for the three months and six months ended June 30 is shown in the following table: Three Months Six Months ------------------------------------- ------------------------------------- Percentage Percentage 1996 1995 Incr/(Decr) 1996 1995 Incr/(Decr) ---------- ---------- ----------- ---------- ---------- ----------- North America Residential $ 319,418 $ 304,307 5.0% $ 631,835 $ 597,394 5.8% Commercial 419,188 408,089 2.7 824,232 802,400 2.7 Rolloff and industrial 360,002 343,299 4.9 675,849 648,382 4.2 Disposal, transfer and other* 528,008 549,194 (3.9) 984,665 988,957 (0.4) Industrial services 113,686 150,148 (24.3) 221,417 321,309 (31.1) International 464,436 462,167 0.5 904,254 891,387 1.4 ---------- ---------- ---------- ---------- Total $2,204,738 $2,217,204 (0.6)% $4,242,252 $4,249,829 (0.2)% ========== ========== ===== ========== ========== ===== *Includes hazardous waste revenue of $127,754 and $252,938, respectively, for the three month and six month periods of 1996 and $161,455 and $291,936 for the comparable 1995 periods. 15 North American solid waste revenue grew 3.8% for the second quarter of 1996 compared to the second quarter of 1995, and 4.3% for the 1996 six months compared to the same period in 1995. Revenue growth was inhibited by a substantial decline in prices for recyclable commodities in 1996; average pricing over the first six months of 1996 was less than 45% of 1995 levels and for the second quarter declined from $160 per ton in 1995 to $54 per ton in 1996. The Company has responded by reducing its processing of lower grades of paper, adjusting the capacity of its recycling operations, and continually striving to reduce processing costs and improve the marketing of commodities. Despite these efforts, the Company has been unable to replace the profits associated with the stronger commodity market in 1995. Price increases in solid waste collection and disposal provided North American revenue growth of approximately 2% for the quarter, but this was offset by reduced commodity prices that negatively impacted revenue by 2 to 2.5%. Volume caused revenue growth of 2 to 2.5% in the quarter and acquisitions 1.5 to 2%. For the six months, revenue growth was driven by volume (2 to 2.5%) and acquisitions (1.5 to 2%). Pricing was essentially flat as recyclable commodity price declines offset price increases in collection and disposal. Industrial services revenue in 1995 included the Rust environmental remediation business, which was exchanged in May 1995, for an approximately 37% equity interest in OHM Corporation. The remediation business had 1995 revenue of $22.0 million in the second quarter and $62.2 million for the year-ago period through the date of its sale. International waste services revenue increased 0.5% in the second quarter of 1996 and 1.4% for the six months compared with the same periods in 1995. Revenue growth in approximately equal proportions from price increases and acquisitions was largely offset by volume declines slightly in excess of 3%, primarily in France, Germany, Italy, the Netherlands and Hong Kong. International operations were also negatively impacted by lower commodity prices, although to a lesser extent than in North America because of higher disposal fees and taxes in Europe. The impact of currency translation was relatively insignificant for both the quarter and the six months. Operating expenses were 71.3% of revenue for the 1996 quarter compared with 70.6% for the second quarter of 1995, and 71.4% for the first quarter of 1996. Depressed commodity prices, higher fuel costs, low margin construction revenue on the West Kowloon transfer station in Hong Kong, and volume declines in Europe more than offset the benefits of continued productivity improvements and caused the increase in the 1996 second quarter compared to the same 1995 period. Sequentially, operating expenses declined slightly, primarily a result of improved weather. Selling and administrative expenses declined from 11.2% of revenue in the second quarter of 1995 and 11.6% in the first quarter of 1996 to 11.0% in the quarter ended June 30, 1996. The improvement resulted from a streamlining of the international organization and continuing productivity enhancements on a global basis. Clean Energy - - -------------- Operating results for the three months and six months ended June 30 were as follows: Three Months Six Months ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Revenue $215,583 $221,062 $418,845 $472,294 Operating expenses 137,094 143,703 269,663 313,592 Selling and admin. expenses 9,125 10,933 19,825 21,970 -------- -------- -------- -------- Margin $ 69,364 $ 66,426 $129,357 $136,732 ======== ======== ======== ======== 16 Revenue declined to $215.6 million in the second quarter of 1996, from $221.1 million in the second quarter of 1995. Revenue growth from the Lisbon, Connecticut, waste-to-energy plant, which began commercial operations in January 1996, an industrial cogeneration facility acquired in Martell, California, and increased electric purchases by the utility customer of the Company's California independent power facilities was more than offset by the absence of construction revenue from the Lisbon facility, which contributed $8.6 million in the second quarter of 1995, and a continuing revenue decline in the clean air business, which is included in this segment. Air business revenue declined 19% compared with the second quarter of 1995, reflecting continuing industry-wide weakness in the face of regulatory uncertainties. For the six months, segment revenue declined $53.5 million to $418.8 million, due to the foregoing factors as well as lower spot pricing for trash disposal in the first quarter of 1996 in areas of Florida. Operating expenses were 63.6% of revenue for the three months ended June 30, 1996, compared with 65.0% of revenue during the June 30, 1995 quarter. This improvement resulted primarily from the absence of construction revenue on the Lisbon facility, which had no associated margin. Selling and administrative expenses declined to 4.2% of 1996 second quarter revenue from 5.0% of revenue in the comparable quarter of 1995. Improved air business results and lower energy development expense were responsible for the improvement. For the six months ended June 30, operating expenses were 64.4% of revenue in 1996 and 66.4% of revenue in 1995, while selling and administrative expenses were 4.7% of revenue in 1996 compared with 4.6% in 1995. The lower operating expense percentage was again largely the result of the absence of no-margin Lisbon construction revenue. Clean Water - - ------------- Operating results for the three months and six months ended June 30 were as follows: Three Months Six Months ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Revenue $162,960 $164,213 $313,220 $301,248 Operating expenses 128,980 129,167 247,878 239,140 Selling and admin. expenses 22,605 22,811 45,193 44,393 -------- -------- -------- -------- Margin $ 11,375 $ 12,235 $ 20,149 $ 17,715 ======== ======== ======== ======== Second quarter 1996 revenue of $163.0 million was down slightly from the $164.2 million in the second quarter of 1995, as lower revenue from North American and European water process businesses more than offset growth from acquisitions made during the past twelve months. Water process business revenues were negatively impacted by a large project being completed in 1995 and the timing of contract execution on orders booked late in 1995 and early in 1996. In addition, European revenue was negatively impacted by a weak German economy and a stronger dollar. First half segment revenue grew $12.0 million to $313.2 million in 1996 from $301.2 million in 1995. Acquisitions accounted for approximately $9.0 million of the growth with the balance coming from strong biosolids and contract operations and the Asian market, partially offset by the lower water process revenue in Europe and North America. Operating expenses were virtually unchanged in the second quarter of 1996 compared with the same period of 1995, but increased as a percentage of revenue to 79.1% from 78.7% in the previous year. Selling and administrative expenses were constant between years in both dollars and as a percentage of revenue. For the first six months of 1996, both operating expenses and selling and administrative expenses increased slightly in dollars but declined slightly as a percentage of revenue. The increase in selling and administrative costs was due largely to the growth of Asian operations. 17 Environmental and Infrastructure Consulting - - ---------------------------------------------- Operating results for the three months and six months ended June 30 were as follows: Three Months Six Months ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Revenue $123,233 $117,146 $233,337 $225,548 Operating expenses 99,384 91,689 189,369 176,184 Selling and admin. expenses 16,099 18,102 32,140 35,678 -------- -------- -------- -------- Margin $ 7,750 $ 7,355 $ 11,828 $ 13,686 ======== ======== ======== ======== Revenue grew to $123.2 million in the second quarter of 1996 compared with $117.1 million for the same period in 1995. However, labor-based revenues were $3.7 million less in 1996 than in 1995, with the shortfall offset by an increase in subcontract and other pass-through revenues that have little or no markup. As a result, operating expenses increased from 78.3% of revenue in 1995 to 80.6% of revenue in the 1996 quarter. Selling and administrative expenses declined in both dollars and as a percentage of revenue during the 1996 second quarter when compared with the same period in 1995 as the Company realized benefits from cost control programs and the consolidation of certain operating units. For the six months ended June 30, 1996, revenue was $233.3 million compared with $225.5 million in 1995, but again, the labor-based revenue was $10.0 million less in the 1996 period than in 1995, resulting in operating expenses increasing as a percentage of revenue. In addition, severe winter weather delayed client projects and reduced productivity in the first quarter of 1996. Selling and administrative expenses declined for the first six months of 1996 compared with the same period in 1995, and as a percentage of revenue were 13.8% compared with 15.8% in the prior year, a result of the factors discussed above. Discontinued Operations - - ------------------------- In the fourth quarter of 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 consulting businesses. During the second quarter of 1996, the sale of the industrial process engineering and construction business, based in Birmingham, Alabama, was completed. Rust is currently negotiating the sales of certain other businesses, the remaining assets of which are not material to the consolidated balance sheet. The results of these transactions, which are expected to be completed by the end of 1996, will not have a material impact on the consolidated statement of income. Revenue from the discontinued businesses (through the date of sale for units sold) was $67.0 million for the three months and $209.8 million for the six months ended June 30, 1996, compared with $220.4 million for the three-month and $380.1 million for the six-month periods in 1995. Results of operations for the three months and six months ended June 30, 1996, were not material and were included in the reserve for loss on disposition provided previously. 18 Interest - - ----------- The following table sets forth the components of consolidated interest, net, for the three months and six months ended June 30, 1996 and 1995: Three Months Six Months ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Interest expense $117,100 $131,146 $233,589 $257,405 Interest income (6,857) (14,463) (13,699) (23,349) Capitalized interest (17,497) (19,299) (34,671) (39,035) -------- -------- -------- -------- Interest expense, net $ 92,746 $ 97,384 $185,219 $195,021 ======== ======== ======== ======== The lower net interest expense in 1996 is a function of lower rates, including the benefit of refinancing certain debt, offsetting a reduction in capitalized interest and the impact of debt incurred to buy back the public ownership of CWM and Rust during 1995. Capitalized interest has declined as a result of continuing management effort to reduce capital expenditures. In the second quarter of 1996, WMX repurchased 5.0 million shares of its common stock and WTI repurchased 15.4 million of its shares (see "Financial Condition- Capital Structure" below). The debt incurred to fund these purchases will increase interest expense during the last half of 1996. Minority Interest - - -------------------- Minority interest declined in the second quarter and first six months of 1996 compared with the same periods in 1995 as a result of the purchase of the public shares of CWM and Rust in 1995, and stock repurchases by WTI, which have increased the WMX ownership of WTI to approximately 65% at June 30, 1996. Accounting Principles - - ------------------------ Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 121 - Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. The adoption of this standard did not have a material impact on the financial statements. The Financial Accounting Standards Board has also issued FAS No. 123 - Accounting for Stock-Based Compensation - which the Company must adopt in 1996. This statement provides an optional new method of accounting for employee stock options and expands required disclosure about stock options. If the new method of accounting is not adopted, the Company will be required to disclose pro forma net income and earnings per share as if it were. The Company is studying FAS No. 123 and is gathering data necessary to calculate compensation in accordance with its provisions, but has not decided whether to adopt the new method or quantified its impact on the financial statements. Derivatives - - -------------- From time to time, the Company and certain of its subsidiaries use derivatives to manage currency, interest rate, and commodity (fuel) risk. Derivatives used are simple agreements which provide for payments based on the notional amount, with no multipliers or leverage. The Company's use of derivatives has not been and is not expected to be material with respect to financial condition or results of operations. 19 Environmental 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. As part of its ongoing operations, the Company provides for estimated closure and post-closure monitoring costs over the operating life of disposal sites as airspace is consumed. The Company has also established procedures to evaluate its potential remedial liability at closed sites which it owned or operated or to which it transported waste. While the Company believes it has adequately provided for its environmental liabilities, 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. From time to time, the Company and certain of its subsidiaries are named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of a Company subsidiary having owned, operated or transported waste to a disposal facility which is alleged to have contaminated the environment or, in certain cases, conducted environmental remediation activities at such sites. Some of such lawsuits may seek to have the Company or its subsidiaries pay the cost of groundwater monitoring and health care examinations of allegedly affected persons for a substantial period of time, even where no actual damage is proven. While the Company believes that it has meritorious defenses to these lawsuits, their ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs' circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other things. Accordingly, it is reasonably possible that such matters could have a material adverse impact on the Company's earnings for one or more fiscal quarters or years. FINANCIAL CONDITION: Liquidity and Capital Resources - - ---------------------------------- The Company operates in a service industry with neither significant inventory nor seasonal variation in receivables. Its primary source of liquidity is cash flow from operations, and accordingly, minimizing working capital typically does not adversely affect operations. The Company had working capital of $109.1 million at June 30, 1996, compared with a deficit of $400.1 million at December 31, 1995. Cash and cash equivalents increased $77.4 million and net accounts receivable increased $56.5 million during the first six months of 1996. Other current assets were largely unchanged during the period. Accounts payable and accrued expenses decreased $156.7 million, while current debt declined as a result of refinancing, on a long-term basis, debt maturing during 1996 and commercial paper. The Company has adopted a strategy of raising the level of "owners' cash flow", which it defines as cash flow from operating activities less net capital expenditures (other than acquisitions) and dividends. Such amounts are available to make acquisitions, reduce debt, or repurchase common stock. For 1996, owners' cash flow is expected to exceed $700 million. In the second quarter of 1996, management also established a goal of converting approximately $1 billion of non-core or underperforming assets into cash by mid-1998. 20 Acquisitions and Capital Expenditures - - ---------------------------------------- Capital expenditures, excluding property and equipment of purchased businesses, were $577.8 million for the six months ended June 30, 1996, and $585.0 million for the comparable period in 1995. In addition, the Company and its principal subsidiaries acquired 67 businesses for $92.8 million in cash and debt (including debt assumed) and 8.0 million shares of WMX common stock during the first six months of 1996. For the first half of 1995, 59 businesses were acquired for $119.6 million in cash and debt (including debt assumed) and 0.4 million shares of WMX common stock. The pro forma effect of acquisitions made during 1995 and 1996 is not material. Capital Structure - - ------------------- The Boards of Directors of WMX and WTI have authorized their respective companies to repurchase shares of their own common stock (up to 25 million shares in the case of WMX and 20 million shares in the case of WTI) in the open market or in privately negotiated transactions. These programs extend into 1997. WTI repurchased 19.2 million shares under its program, including 15.4 million in the second quarter and 18.4 million during the first six months of 1996. WMX had repurchased 5.0 million shares through June 30, 1996, all during the second quarter of the current year. In conjunction with its authorized repurchase program, WMX periodically sells put options on its own common stock. The put options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. Proceeds from the sale of the options are credited to additional paid-in capital. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares in lieu of repurchasing the stock. At June 30, 1996, put options were outstanding on 12.5 million shares, 4.7 million of which subsequently expired unexercised as the price of the Company's stock was in excess of the strike price at maturity. The remaining options expire in October and November of 1996 with strike prices of $33.45 to $35.17 per share. Excluding debt of acquired companies and the impact of currency translation, net debt increased $172.2 million in the second quarter and $436.2 million during the first six months of 1996. The increase was primarily a result of the share repurchases by the Company and WTI. Contingencies - - --------------- WM International has received an assessment of approximately 417 million Krona (approximately $63 million) from the Swedish Tax Authority, relating to a transaction completed in 1990. WM International believes that all appropriate tax returns and disclosures were filed at the time of the transaction and intends to vigorously contest the assessment. There have been no significant developments in regard to this matter during the first six months of 1996. A subsidiary of WMI has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut, landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). The WMI subsidiary is presently under an order of the Superior Court to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that the removal of such waste is an inappropriate remedy and has appealed the Superior Court order to the Connecticut Supreme Court. The Company is unable to predict the outcome of this appeal or the nature and extent of any removal action that might ultimately be required. However, if the Superior Court order is not modified, the subsidiary could incur substantial costs, which could vary significantly depending upon the nature of any plan eventually approved by the applicable regulatory authorities, the actual volume of waste to be moved, and other factors, and which could have a material adverse effect on the Company's financial condition and results of operations in the near term. 21 In July 1996, a Federal District Court permanently enjoined the State of New Jersey from enforcing its solid waste regulatory flow control system, which was held to be unconstitutional. Flow control typically involves a governmental authority specifying the disposal site for all solid waste generated within its borders. The New Jersey ruling is one of a number of similar court rulings since a 1994 U.S. Supreme Court decision that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Other subsequent court decisions have upheld nonregulatory means by which municipalities may effectively control the flow of solid waste. Federal legislation has been proposed, but not enacted, to essentially grandfather existing flow control mandates. WTI's Gloucester County, New Jersey, trash-to-energy facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. The Federal District Court stayed its injunction for as long as its ruling is on appeal, plus an additional period of two years, to enable the State to devise an alternative nondiscriminatory approach. The Company believes that the State is considering an appeal of the District Court decision. To date, court decisions with regard to flow control have not had a material adverse effect on the Company's operations. However, given the surrounding uncertainty, it is not possible to predict what impact, if any, this matter may have in the future on the Company's disposal facilities, particularly WTI's trash-to-energy facilities. In the ordinary course of conducting it 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, will have a material adverse effect on its results of operations or financial condition. 22 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. ----------------- The majority of the businesses in which the Company is engaged are intrinsically connected with the protection of the environment and the potential for the unintended or unpermitted discharge of materials into the environment. In the ordinary course of conducting its business activities, the Company becomes involved in judicial and administrative proceedings involving governmental authorities at the federal, state and local level, including, in certain instances, proceedings instituted by citizens or local governmental authorities seeking to overturn governmental action where governmental officials or agencies are named as defendants together with the Company or one or more of its subsidiaries, or both. In the majority of the situations where proceedings are commenced by governmental authorities, the matters involved relate to alleged technical violations of licenses or permits pursuant to which the Company operates or is seeking to operate or laws or regulations to which its operations are subject, or are the result of different interpretations of the applicable requirements. From time to time the Company pays fines or penalties in environmental proceedings relating primarily to waste treatment, storage or disposal or trash-to-energy facilities. As of June 30, 1996, neither the Company nor any of its subsidiaries was involved in any such proceeding where it is believed that sanctions involved may exceed $100,000. Subject to the discussion below concerning the Company's New Milford, Connecticut landfill, the Company believes that these matters will not have a material adverse effect on its results of operation or financial condition. However, the outcome of any particular proceeding cannot be predicted with certainty, and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter this expectation at any time. In May 1996, a Company subsidiary paid a civil penalty of $203,000 to settle an administrative proceeding brought by the United States Environmental Protection Agency involving alleged failure by the subsidiary in 1985 to test incoming loads of polychlorinated biphenyl wastes at the subsidiary's Model City, New York facility. In settling this matter, the subsidiary did not admit any violation of law. A subsidiary of the Company has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). Although a lower court had declared the zoning ordinance's height limitation unconstitutional, the Connecticut Supreme Court reversed that ruling and remanded the case for further proceedings in the Superior Court in the judicial district of Litchfield. On November 8, 1995, the Superior Court ordered the Company's subsidiary to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance. The Company believes that removal of such waste is an inappropriate remedy and its subsidiary has appealed the Superior Court order to the Connecticut Supreme Court. The Company is unable to predict the outcome of the appeal or any removal action that may ultimately be required following further appeals or as a result of the permitting process. However, if the lower court order as to removal of the waste is not modified, the subsidiary could incur substantial costs, which could vary significantly depending upon the nature of any plan which is eventually approved by applicable regulatory authorities for removing the waste, the actual volume of waste to be moved and other currently unforeseeable factors and which could have a material adverse effect on the Company's financial condition and results of operations in one or more future periods. ITEM 4. Submission of Matters to Vote of Security Holders. ------------------------------------------------- 23 At the Company's annual meeting of stockholders on May 10, 1996, a proposal to elect the nominees listed in the following table as directors of the Company was submitted to a vote of the Company's stockholders. The following table also shows the results of voting as to each nominee: Nominee Votes For Votes Withheld ------- --------- -------------- Pastora San Juan Cafferty 414,927,357 7,058,941 Donald F. Flynn 414,188,389 7,797,909 James R. Peterson 414,849,973 7,136,325 Phillip B. Rooney 414,785,295 7,201,003 At the same meeting, a proposal to ratify the appointment of Arthur Andersen LLP as independent auditors for 1996 and stockholder proposals urging that the Board of Directors of the Company (i) establish a policy that members of the Board are to refrain from accepting consulting or other fees from the Company while they serve on the Board and (ii) take the necessary steps to elect all Company directors annually, were submitted to the Company's stockholders. The ratification of the appointment of auditors was approved, while both stockholder proposals were defeated. Votes Broker Proposal Votes For Against Abstentions Non-Votes -------- --------- ------- ----------- -------------- Ratification of Auditors 420,162,786 1,162,636 660,474 402 Stockholder Proposals (i) Policy on fees 110,889,499 250,760,609 8,818,674 51,517,516 (ii) Annual director election 166,947,330 199,101,882 4,413,573 51,523,513 ITEM 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits. The exhibits to this report are listed in the Exhibit Index elsewhere herein. (b) Reports on Form 8-K. The Company filed a report on Form 8-K dated June 10, 1996 reporting the issuance of a news release stating that due to continuing weakness in prices for recyclable paper fiber and an expectation that recycling markets will not improve in the near term, (i) the Company's Waste Management, Inc. subsidiary was adjusting the capacity of its North American recycling operations to respond to the nation's weak recycling economy and (ii) the Company's second quarter earnings were expected to fall in the range of $.45 to $.47 per share and the year was expected to be in the range of $1.85 to $1.90 per share. 24 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WMX TECHNOLOGIES, INC. /s/ JAMES E. KOENIG --------------------------------------- James E. Koenig - Senior Vice President and Chief Financial Officer August 12, 1996 25 WMX TECHNOLOGIES, INC. EXHIBIT INDEX Number and Description of Exhibit/*/ --------------------------------- 2 None 3 None 4 None 10 None 11 None 12 Computation of Ratios of Earnings to Fixed Charges 15 None 18 None 19 None 22 None 23 None 24 None 27 Financial Data Schedule 99 None - -------------------------- /*/ Exhibits not listed are inapplicable.