Exhibit 13.2
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
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,
1995 and 1996, and the related consolidated statements of income, cash flows,
and stockholders' equity for each of the three years in the period ended
December 31, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois,
February 3, 1997
16
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
- -------------------------------------------------------------------------------------------------------------------
For the three years ended December 31, 1996
(000's omitted except per share amounts)
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Revenue $8,482,718 $9,053,018 $9,186,970
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses $5,827,626 $6,220,859 $6,372,828
Special Charges -- 335,193 471,635
Selling and Administrative Expenses 997,180 1,004,888 979,209
Interest Expense 333,550 421,572 375,758
Interest Income (33,123) (36,883) (27,637)
Minority Interest 126,961 81,938 57,587
Sundry Income, Net (64,388) (76,462) (85,248)
- -------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations Before Income Taxes $1,294,912 $1,101,913 $1,042,838
Provision For Income Taxes 552,606 483,670 565,047
- -------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations $ 742,306 $ 618,243 $ 477,791
- -------------------------------------------------------------------------------------------------------------------
Discontinued Operations:
Income from operations, less applicable income taxes and
minority interest of $64,923 in 1994, $60,835 in 1995 and $13,466 in 1996 $ 42,075 $ 48,305 $ 15,502
Provision for loss on disposal, less applicable income tax benefit and
minority interest of $34,151 in 1995 and $58,792 in 1996 -- (62,649) (301,208)
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 784,381 $ 603,899 $ 192,085
===================================================================================================================
Average Common and Common Equivalent Shares Outstanding 484,144 485,972 490,263
===================================================================================================================
Earnings (Loss) per Common and Common Equivalent Share:
Continuing Operations $1.53 $1.27 $.97
Discontinued Operations--
Income from operations .09 .10 .03
Provision for loss -- (.13) (.61)
- -------------------------------------------------------------------------------------------------------------------
Net Income $1.62 $1.24 $.39
===================================================================================================================
The accompanying notes are an integral part of these statements.
17
WMX Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
As of December 31, 1995 and 1996
($000's omitted except per share amounts)
1995 1996
- -------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 169,541 $ 323,288
Short-term investments 34,156 341,338
Accounts receivable, less reserve of $61,927 in 1995 and $47,523 in 1996 1,655,533 1,681,817
Employee receivables 8,496 10,084
Parts and supplies 150,528 142,417
Costs and estimated earnings in excess of billings on uncompleted contracts 242,675 240,531
Prepaid expenses 347,156 353,749
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets $ 2,608,085 $ 3,093,224
- -------------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land, primarily disposal sites $ 4,553,717 $ 5,019,065
Buildings 1,532,305 1,495,252
Vehicles and equipment 7,164,767 7,520,902
Leasehold improvements 84,587 85,998
- -------------------------------------------------------------------------------------------------------------------
$13,335,376 $14,121,217
Less--Accumulated depreciation and amortization (3,829,658) (4,399,508)
- -------------------------------------------------------------------------------------------------------------------
Total Property and Equipment, Net $ 9,505,718 $ 9,721,709
- -------------------------------------------------------------------------------------------------------------------
Other Assets
Intangible assets relating to acquired businesses, net $ 3,823,323 $ 3,885,293
Sundry, including other investments 1,550,672 1,452,057
Net assets of discontinued operations 876,476 214,309
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets $ 6,250,471 $ 5,551,659
- -------------------------------------------------------------------------------------------------------------------
Total Assets $18,364,274 $18,366,592
===================================================================================================================
Current Liabilities
Portion of long-term debt payable within one year $ 1,088,033 $ 553,493
Accounts payable 994,164 948,350
Accrued expenses 906,121 1,324,324
Unearned revenue 204,166 212,541
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities $ 3,192,484 $ 3,038,708
- -------------------------------------------------------------------------------------------------------------------
Deferred Items
Income taxes $ 922,500 $ 1,011,593
Environmental liabilities 621,186 543,723
Other 648,464 641,918
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Items $ 2,192,150 $ 2,197,234
- -------------------------------------------------------------------------------------------------------------------
Long-Term Debt, less portion payable within one year $ 6,390,041 $ 6,971,607
- -------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiaries $ 1,385,301 $ 1,186,955
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies $ $
- -------------------------------------------------------------------------------------------------------------------
Put Options $ 261,959 $ 95,789
- -------------------------------------------------------------------------------------------------------------------
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;
498,817,093 shares issued in 1995 and 507,101,774 in 1996 498,817 507,102
Additional paid-in capital 422,801 864,730
Cumulative translation adjustment (102,943) (79,213)
Retained earnings 4,486,877 4,363,754
- -------------------------------------------------------------------------------------------------------------------
$ 5,305,552 $ 5,656,373
Less--Treasury stock; 12,782,864 shares, at cost -- 419,871
1988 Employee Stock Ownership Plan 13,062 6,396
Employee Stock Benefit Trust (11,769,788 shares in 1995
and 10,886,361 in 1996, at market) 350,151 353,807
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 4,942,339 $ 4,876,299
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $18,364,274 $18,366,592
===================================================================================================================
The accompanying notes are an integral part of these balance sheets.
18
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------
For the three years ended December 31, 1996
(000's omitted except per share amounts)
Additional Cumulative 1988
Common Paid-in Translation Retained Employee Stock Employee Stock
Stock Capital Adjustment Earnings Treasury Stock Ownership Plan Benefit Trust
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $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 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
Net income for the year $ -- $ -- $ -- $ 192,085 $ -- $ -- $ --
Cash dividends ($.63 per
share) -- -- -- (308,265) -- -- --
Dividends paid to Employee
Stock Benefit Trust -- 6,943 -- (6,943) -- -- --
Stock repurchase (14,390,000
shares) -- -- -- -- 473,560 -- --
Stock issued upon exercise
of stock options and grant
of restricted stock 217 (10,938) -- -- (53,323) -- (28,622)
Treasury stock received in
connection with exercise of
stock options -- -- -- -- 5,458 -- --
Tax benefit of non-qualified
stock options exercised -- 6,859 -- -- -- -- --
Contribution to 1988 ESOP
(307,041 shares) -- -- -- -- -- (6,666) --
Treasury stock received as
settlement for claims -- -- -- -- 2,513 -- --
Common stock issued upon
conversion of LYONs 111 1,905 -- -- (160) -- --
Stock issued for acquisitions 7,957 219,867 -- -- (8,177) -- --
Temporary equity related to
put options -- 166,170 -- -- -- -- --
Proceeds from sale of put
options -- 18,845 -- -- -- -- --
Adjustment of Employee Stock
Benefit Trust to market value -- 32,278 -- -- -- -- 32,278
Cumulative translation
adjustment of foreign
currency statements -- -- 23,730 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $507,102 $ 864,730 $ (79,213) $4,363,754 $ 419,871 $ 6,396 $353,807
==================================================================================================================================
The accompanying notes are an integral part of these statements.
19
WMX Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------
For the three years ended December 31, 1996
Increase (Decrease) in cash ($000's omitted)
1994 1995 1996
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income for the year $ 784,381 $ 603,899 $ 192,085
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 880,466 885,384 920,685
Provision for deferred income taxes 298,564 250,828 289,027
Minority interest in subsidiaries 149,703 138,162 121,169
Interest on Liquid Yield Option Notes (LYONs)
and WMX Subordinated Notes 33,551 23,021 11,157
Contribution to 1988 Employee Stock Ownership Plan (ESOP) 7,930 6,667 6,666
Special charges, net of tax and minority interest -- 202,492 379,415
Provision for loss on disposal of discontinued operations,
net of tax and minority interest -- 62,649 301,208
Changes in assets and liabilities,
excluding effects of acquired companies:
Receivables, net (133,506) 45,232 (845)
Other current assets (109,174) 28,724 (1,709)
Sundry other assets (42,195) (72,282) (122,777)
Accounts payable 155,254 39,669 (59,410)
Accrued expenses and unearned revenue 43,121 (227,700) 20,830
Deferred items (259,020) 61,557 (167,702)
Other, net (838) (13,044) 17,074
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,808,237 $ 2,035,258 $ 1,906,873
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Short-term investments $ 2,755 $ (4,196) $ 1,170
Capital expenditures (1,455,628) (1,386,932) (1,125,161)
Proceeds from sale of assets and businesses 276,822 141,774 712,359
Cost of acquisitions, net of cash acquired (197,201) (224,304) (104,778)
Other investments (74,446) (44,193) (192,808)
Acquisition of minority interests (57,865) (170,854) (342,034)
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities $(1,505,563) $(1,688,705) $(1,051,252)
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
20
1994 1995 1996
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends $ (290,266) $ (291,421) $ (308,265)
Proceeds from issuance of indebtedness 1,710,586 1,803,383 2,918,730
Repayments of indebtedness (1,752,552) (1,860,451) (2,933,632)
Proceeds from exercise of stock options, net 7,970 14,132 65,766
Contributions from minority interests 22,169 24,394 10,242
Stock repurchases -- -- (473,560)
Proceeds from sale of put options 29,965 21,622 18,845
Settlement of put options -- (12,019) --
- --------------------------------------------------------------------------------------------------------
Net cash used for financing activities $ (272,128) $ (300,360) $ (701,874)
- --------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents $ 30,546 $ 46,193 $ 153,747
Cash and cash equivalents at beginning of year 92,802 123,348 169,541
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 123,348 $ 169,541 $ 323,288
========================================================================================================
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 $ 307,257 $ 401,715 $ 364,601
Income taxes, net of refunds received $ 241,657 $ 283,165 $ 326,679
Supplemental schedule of noncash investing and
financing activities:
LYONs converted into common stock of the Company $ 1,594 $ 2,598 $ 2,176
Liabilities assumed in acquisitions of businesses $ 244,560 $ 245,918 $ 128,297
Fair market value of Company and subsidiary stock
issued for acquired businesses $ 4,773 $ 66,172 $ 236,001
WMX Subordinated Notes issued for acquisition
of CWM minority interest $ -- $ 436,830 $ --
21
WMX Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (000's omitted in all tables except
per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 BUSINESS AND FINANCIAL STATEMENTS
WMX Technologies, Inc. and its subsidiaries ("WMX" or the "Company") provide
waste management services to governmental, residential, commercial, and
industrial customers in the United States and in select international markets.
The Company previously provided process engineering and construction, specialty
contracting, infrastructure and environmental engineering and consulting, and
industrial scaffolding services through its Rust International Inc. ("Rust")
subsidiary, water process systems, equipment manufacturing and water and
wastewater facility operations and privatization services through its
Wheelabrator Technologies Inc. ("WTI") subsidiary, and high organic waste fuels
blending services through its Chemical Waste Management, Inc. ("CWM")
subsidiary. As of December 31, 1996, the Company has sold or plans to exit all
of these businesses, and accordingly they have been classified as discontinued
operations in the accompanying financial statements. In the future, the Company
will operate only in the waste management services industry segment.
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 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 $3,321,000, $2,231,000 and $345,000 are included
in the Consolidated Statements of Income for 1994, 1995 and 1996, 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, have historically been carried at cost. Such
investments include tax-exempt securities, certificates of deposit and Euro-
dollar time deposits. At December 31, 1996, such investments include the shares
of Wessex Water Plc ("Wessex") (see Note 14) which are carried at market value.
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 103 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, 1995 and 1996, is as follows:
1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
Costs and estimated earnings
on uncompleted contracts $1,176,601 $1,192,215
Less: Billing on uncompleted contracts (952,818) (979,918)
---------- ----------
Total contracts in process $ 223,783 $ 212,297
========== ==========
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 $242,675 $240,531
Billings in excess of costs
and estimated earnings
on uncompleted contracts
(included in unearned revenue) (18,892) (28,234)
---------- ----------
Total contracts in process $223,783 $212,297
========== ==========
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, 1996, is $8,008,000, including $1,300,000 that is expected to be collected
after one year. At December 31, 1995, retainage was $12,846,000.
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, 1995 and
1996, was $187,689,000 and $190,276,000, respectively.
22
- -------------------------------------------------------------------------------
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 $539,849,000 and $659,226,000 as
of December 31, 1995 and 1996, 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.
Capitalized Interest Interest has been capitalized on significant landfills,
trash-to-energy plants and other projects under construction in accordance with
Statement of Financial Accounting Standards ("FAS") No. 34. Amounts capitalized
and netted against Interest Expense in the Consolidated Statements of Income
were $104,512,000 in 1994, $81,471,000 in 1995 and $73,347,000 in 1996.
Accounting Principles Effective January 1, 1996, the Company adopted 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.
Also in 1996, FAS No. 123, "Accounting for Stock-Based Compensation" became
effective. FAS 123 provides an optional new method of accounting for employee
stock options and expands required disclosure about stock options. If the
optional method of accounting is not adopted, disclosure is to be made, if
material, of pro forma net income and earnings per share as if it were. The
impact of the optional new accounting on net income and earnings per share was
immaterial and the Company elected not to adopt the optional accounting.
In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, "Environmental Remediation Liabilities." The SOP is effective for fiscal
years beginning after December 15, 1996, and provides that environmental
remediation liabilities should be accrued when the criteria of FAS 5,
"Accounting for Contingencies," are met. Included in the SOP are benchmarks to
aid in the determination of when such criteria are met and environmental
liabilities should be recognized. It also provides that the accrual for such
liabilities should include future costs of those employees expected to devote a
significant amount of time directly to the remediation effort. The Company does
not believe that the adoption of SOP 96-1 will have a material impact on its
financial statements.
Restatement Certain amounts in previously issued financial statements have
been restated to conform to 1996 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 1994
through 1996:
Income From Continuing Operations Before Income Taxes 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Domestic $1,133,281 $1,112,409 $1,037,191
International 161,631 (10,496) 5,647
---------- ---------- ----------
$1,294,912 $1,101,913 $1,042,838
========== ========== ==========
Income Tax Provision (Benefit)
- -------------------------------------------------------------------------------------------------------------------
Current tax expense
U.S. federal $ 206,247 $ 210,367 $ 265,067
State and local 47,573 46,511 63,161
Foreign 25,650 35,905 17,086
---------- ---------- ----------
Total current $ 279,470 $ 292,783 $ 345,314
---------- ---------- ----------
Deferred tax expense
U.S. federal $ 202,785 $ 175,688 $ 129,630
State and local 30,841 34,784 14,857
Foreign 42,105 (18,501) 76,025
---------- ---------- ----------
Total deferred $ 275,731 $ 191,971 $ 220,512
---------- ---------- ----------
U.S. federal benefit from amortization of deferred investment credit $ (2,595) $ (1,084) $ (779)
---------- ---------- ----------
Total provision $ 552,606 $ 483,670 $ 565,047
========== ========== ==========
23
- -------------------------------------------------------------------------------------------------------------------------
The federal statutory tax rate in 1994, 1995 and 1996 is
reconciled to the effective tax rate as follows:
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit 3.9 4.8 4.9
Amortization of deferred investment credit (0.2) (0.1) (0.1)
Amortization of intangible assets relating to acquired businesses 2.1 2.6 3.8
U.S. taxes on foreign income 1.2 -- 3.0
Write-down of investment in subsidiary -- -- 5.7
Federal tax credits (1.0) (1.3) (1.4)
Minority interest 3.8 3.0 2.8
Other, net (2.1) (0.1) 0.5
---- ---- ----
Effective tax rate 42.7% 43.9% 54.2%
==== ==== ====
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 1995 and 1996 deferred tax (assets) liabilities are
as follows:
1995 1996
- --------------------------------------------------------------------------------
Deferred tax assets
Reserves not deductible until paid $ (503,074) $ (495,940)
Deferred revenue (37,284) (16,158)
Net operating losses and tax
credit carryforwards (266,916) (233,008)
Other (78,474) (73,229)
---------- ----------
Subtotal $ (885,748) $ (818,335)
---------- ----------
Deferred tax liabilities
Depreciation and amortization $1,335,559 $1,384,164
Other 374,084 359,035
---------- ----------
Subtotal $1,709,643 $1,743,199
---------- ----------
Valuation allowance 98,605 86,729
---------- ----------
Net deferred tax liabilities $ 922,500 $1,011,593
========== ==========
The Company's subsidiaries have approximately $11.8 million of alternative
minimum tax credit carryforwards that may be used indefinitely and capital loss
carryforwards of approximately $13.7 million with an expiration date of 1998.
Various subsidiaries have U.S. federal and foreign operating loss carryforwards
of approximately $545 million and state operating loss carryforwards of
approximately $482 million. Foreign operating losses of $286 million may be
carried forward indefinitely; the remaining loss carryforwards have expiration
dates through the year 2011. 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. During
1994 and 1995, the valuation allowance increased primarily for the uncertainty
of foreign operating loss carryforwards. The valuation allowance decreased in
1996 by approximately $11.9 million due primarily to the realization of capital
loss carryforwards and adjustments for certain operating loss carryforwards
determined to be unrealizable.
The Company has concluded that 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.
- --------------------------------------------------------------------------------
NOTE 4 BUSINESS COMBINATIONS
During 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197,201,000 in cash 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.
During 1995, 136 businesses were acquired for $224,304,000 in cash and notes,
$77,689,000 of debt assumed, and 2,236,354 shares of the Company's common stock.
Three of the 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.
Eighty-three businesses were acquired in 1996 for $104,778,000 in cash and
notes, $39,446,000 of debt assumed, and 8,210,568 shares of the Company's common
stock. These acquisitions were accounted for as purchases.
The pro forma effect of the acquisitions made during 1994, 1995 and 1996 is not
material.
In January 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of CWM that it did not already own for $436.8 million of
convertible subordinated notes. See Note 5 for additional information. In July
1995, the Company acquired all of the approximately 3.1 million shares of Rust
held by the public, for $16.35 per share in cash.
24
- --------------------------------------------------------------------------------
NOTE 5 DEBT
The details relating to debt (including capitalized leases, which are not
material) as of December 31, 1995 and 1996, are as follows:
1995 1996
- --------------------------------------------------------------------------------
Commercial Paper, weighted average interest
5.7% in 1995 and 5.8% in 1996 $1,119,356 $ 645,869
Tailored Rate ESOP Notes, weighted average
interest 4.74% in 1995 and 4.58% in 1996 20,000 20,000
Debentures, interest 8 3/4%, due 2018 249,085 249,085
Notes, interest 6% to 8 1/4%, due 1997-2026 3,334,170 3,834,170
Solid waste disposal revenue bonds, interest
4.63% to 7.15%, due 1998-2013 251,085 239,980
Installment loans and notes payable,
interest 5.34% to 10.6%, due 1997-2020 1,197,848 1,137,130
Project Debt, interest 3.95% to 10.64%,
due 1997-2016 735,646 833,740
Other long-term borrowings 31,532 30,187
Liquid Yield Option Notes, zero coupon -
subordinated, interest 9%, due 2001 8,945 7,439
Liquid Yield Option Notes, zero coupon -
subordinated, interest 6%, due 2012
("Exchangeable LYONs") 53,996 53,457
Liquid Yield Option Notes, zero coupon -
subordinated, interest 6%, due 2010
("CWM LYONs") 36,840 29,307
WMX Subordinated Notes, interest 5.75%,
due 2005 439,571 444,736
---------- ----------
Total debt $7,478,074 $7,525,100
Less - current portion 1,088,033 553,493
---------- ----------
Long-term portion $6,390,041 $6,971,607
========== ==========
The long-term debt as of December 31, 1996, is due as follows:
Second year $1,088,836
Third year 1,371,779
Fourth year 1,116,061
Fifth year 556,750
Sixth year and thereafter 2,838,181
----------
$6,971,607
==========
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 $989,238,000 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 18.75 basis points and commitment fees of
5 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 the Company's acquisition of the outstanding CWM shares it did not already
own, the CWM public stockholders received 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 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. 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. 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 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,
1996, there were 549,538 such notes outstanding with a maturity value amounting
to $549,538,000.
In connection with the transaction, CWM LYONs and Exchangeable LYONs which had
been convertible into or exchangeable for CWM shares 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.
25
- --------------------------------------------------------------------------------
NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company uses derivatives to manage interest rate,
currency and commodity risk. The amount of such instruments outstanding at any
one point in time and gains or losses from their use have not been and are not
expected to be 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. At
December 31, 1996, Waste Management International plc ("WM International") had
outstanding interest rate swaps, all of which entitle it to receive floating
rate and pay fixed rate, in the following notional amounts: Hong Kong dollars --
600 million; Italian Lire -- 122 billion; and German Marks -- 100 million.
Currency Agreements From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek 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. There were no currency derivatives outstanding at
December 31, 1996.
Commodity Agreements The Company utilizes collars, calls and swaps to seek 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 position in crude oil derivatives
as of December 31, 1996.
Type Quantity Expiration
- --------------------------------------------------------------------------------
Swaps 750 bbls 1997
Collars 700 bbls 1998
Swaps 2,000 bbls 1998
Collars 2,100 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, 1996, which is not material.
- --------------------------------------------------------------------------------
NOTE 7 ENVIRONMENTAL COSTS AND LIABILITIES
The continuing business in which the Company is engaged is 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 tends to benefit when governmental regulation increases, which may
increase 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. 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.
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 103 sites listed on the NPL. The majority of
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. The Company
routinely reviews and evaluates sites requiring remediation, including NPL
sites, giving consideration to the nature
26
(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 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 $180 million higher in the aggregate than the estimate that has
been recorded in the financial statements as of December 31, 1996.
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.
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
$160 million at December 31, 1996.
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 $1.03 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:
1995 1996
- --------------------------------------------------------------------------------
Current portion, included in
Accrued Expenses $ 138,533 $ 122,209
Non-current portion 621,186 543,723
---------- ----------
Total recorded $ 759,719 $ 665,932
Amount to be provided over
remaining life of active sites,
including discount of $171 million
in 1995 and $160 million in 1996 1,118,739 1,028,437
---------- ----------
Expected aggregate undiscounted
environmental liabilities $1,878,458 $1,694,369
========== ==========
Anticipated payments of environmental liabilities at December 31, 1996, are as
follows:
1997 $ 122,209
1998 56,000
1999 47,450
2000 33,571
2001 38,429
Thereafter 1,396,710
----------
$1,694,369
==========
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's 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. 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
potential future insurance recoveries.
27
- --------------------------------------------------------------------------------
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 a total of 15,000 shares are to be granted,
in five equal annual installments commencing with 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 a
weighted-average price of $34.90 per share and outstanding Rust stock options
were converted into options to acquire approximately 1,976,000 Company shares at
a weighted-average price of $30.26 per share.
The status of the plans, including predecessor plans, replacement plans and
similar plans for employees generally (together "Prior Plans") under which
options remain outstanding, during the three years ended December 31, 1996, was
as follows:
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 11,682 $ 33.63 13,811 $32.24 19,629 $32.04
Granted 3,729 26.49 3,117 27.29 4,106 31.90
Exercised 462 17.77 721 20.47 2,614 25.96
Cancelled:
Prior plans 312 36.74 1,111 33.22 1,042 34.76
Current plans 826 32.33 316 31.14 424 30.84
Additional shares available
for future grant 6,000 -- -- -- 515 --
Converted CWM, Rust and
other stock options -- -- 4,849 33.01 515 18.07
Shares no longer available
for future grant -- -- 2,914 -- -- --
Outstanding at end of year 13,811 32.24 19,629 32.04 20,170 32.33
Options exercisable at end of year 7,210 33.77 9,860 33.57 12,577 33.87
Options available for future grant 15,290 -- 4,726 -- 1,044 --
The following table summarizes information about stock options outstanding as
of December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
$ 8.57-$17.16 133 5.9 years $15.16 119 $15.09
21.39- 29.87 6,930 6.9 years 26.68 3,539 26.52
30.64- 39.27 10,850 6.4 years 33.37 6,682 34.14
40.10- 61.03 2,257 4.0 years 45.68 2,237 45.66
------ ------
20,170 6.3 years $32.33 12,577 $33.87
====== ======
28
- --------------------------------------------------------------------------------
The Company accounts for these plans under Accounting Principles Board
Opinion 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined based on the fair value at the
grant date under the optional method in FAS 123, the impact on the Company's net
income and earnings per share would have been immaterial. Based on current and
anticipated use of stock options, it is not expected that the impact of the
accounting provisions of FAS 123 will be material in future years.
- --------------------------------------------------------------------------------
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.
The Boards of Directors of WMX and WTI have authorized their respective
companies to repurchase shares of their own common stock (up to 50 million
shares in the case of WMX and 30 million shares in the case of WTI) in the open
market, in privately negotiated transactions, or through issuer tender offers.
These programs extend into 1998. Both authorizations replaced existing common
stock repurchase programs.
During 1994, 1995 and 1996, the Company sold put options on 42.3 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 31.6 million shares expired unexercised, as the price of the
Company's stock was in excess of the strike price at maturity. Options on 4.7
million shares were settled for cash at a total cost of $12,019,000. The Company
repurchased 3.1 million shares of stock at a cost of $107.5 million, and 2.9
million options expire in February 1997, at strike prices ranging from $32.04 to
$34.13 per share.
- --------------------------------------------------------------------------------
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:
1995 1996
- --------------------------------------------------------------------------------
Common shares issued, net of
Treasury Stock and Employee
Stock Benefit Trust shares per
Consolidated Balance Sheets 487,047 483,433
Effect of shares issuable under
stock options after applying
the "treasury stock" method 627 1,260
Effect of using weighted-average
common shares outstanding
during the year (1,702) 5,570
------- -------
Common shares used in
computing earnings per share 485,972 490,263
======= =======
29
- --------------------------------------------------------------------------------
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 $177,182,000 in 1994, $170,274,000 in 1995 and $164,539,000
in 1996. 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, 1996, are due as follows:
First year $ 154,102
Second year 139,030
Third year 128,832
Fourth year 120,918
Fifth year 110,792
Sixth through tenth years 487,927
Eleventh year and thereafter 225,757
----------
$1,367,358
==========
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 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 3,690 bank letters of
credit, performance bonds and other guarantees. Such financial instruments
(averaging approximately $565,000 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.
During the first quarter of 1995, WM International received an assessment from
the Swedish Tax Authority of approximately 417 million Krona (approximately $60
million) plus interest from the date of the assessment, 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 Company subsidiary 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,
during 1995 the Connecticut Supreme Court reversed this ruling and remanded the
case for further proceedings in the Superior Court. In November 1995, the
Superior Court ordered the subsidiary to apply to the DEP for permission to
remove all waste above the height allowed by the zoning ordinance, and the
Connecticut Supreme Court has upheld that ruling. The Company believes that the
removal of such waste is an inappropriate remedy and is seeking an alternative
resolution to the issue, but is unable to predict the outcome. Depending upon
the nature of any plan eventually approved by applicable regulatory authorities
for removing the waste, the actual volume of waste to be moved, and other
currently unforseeable factors, the subsidiary could incur costs which would
have a material adverse impact on the Company's financial condition and results
of operations in one or more future periods.
In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a municipality
specifying the disposal site for all solid waste generated within its borders.
Since the ruling, several decisions of state or federal courts have invalidated
regulatory flow control schemes in a number of jurisdictions. Other judicial
decisions have upheld non-regulatory means by which municipalities may
effectively control the flow of municipal solid waste.
WTI's Gloucester County, New Jersey, facility relies on a disposal franchise
for substantially all of its supply of municipal solid waste. 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, but stayed the 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 State has indicated that it will
continue to enforce flow control during the two-year transition period and has
filed an appeal of the Federal District Court's ruling.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse effect on any of the Company's trash-to-energy
operations. Federal and state legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. In the event
that such legislation is not adopted, the Company believes that affected
municipalities will endeavor to implement alternative lawful means to continue
controlling the flow of waste. However, given the uncertainty surrounding the
matter, it is not possible to predict what impact, if any, it may have in the
future on the Company's disposal facilities, particularly WTI's trash-to-energy
facilities.
30
- --------------------------------------------------------------------------------
As the states and the U.S. Congress have accelerated their consideration of
ways in which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." WTI's 25 power production
facilities are qualifying facilities under PURPA and depend on the sanctity of
their power sales agreements for their economic viability. Recent state and
federal agency and court decisions have unanimously upheld the inviolate nature
of these contracts. While WTI believes that federal law offers strong
protections to its PURPA contracts, there is a risk that future court decisions
and/or legislative initiatives in this area will have a material adverse effect
on its business.
In the ordinary course of conducting its business, the Company becomes
involved in lawsuits, administrative proceedings and governmental
investigations, including antitrust and environmental matters and commercial
disputes. 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 believes it has
adequately provided for such matters in its financial statements and does not
believe that their outcome, individually or in the aggregate, will have a
material adverse impact on 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 Waste Management, Inc. ("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 1994, 1995 and 1996, based on discount rates
of 8.5%, 8.5% and 7.75%, respectively, included the following components:
1994 1995 1996
- ------------------------------------------------------------------
Service cost -- benefits earned
during the year $ 11,075 $ 11,752 $ 14,047
Interest cost on projected
benefit obligation 11,532 13,228 14,390
Expected return on plan assets (12,335) (13,237) (13,818)
Net amortization and deferral (1,310) 33 1,751
-------- -------- --------
Net periodic pension expense $ 8,962 $ 11,776 $ 16,370
======== ======== ========
Assumptions used to determine the plan's funded status as of December 31 are
as follows:
1995 1996
- ---------------------------------------------------------------
Discount rate 7.75% 7.75%
Rate of increase in compensation levels 4.0% 3.5%
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, 1995 and
1996, for its pension plan:
1995 1996
- -----------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
including vested benefits
of $152,031 and $182,482 at
December 31, 1995 and 1996,
respectively $(167,287) $(199,561)
========= =========
Projected benefit obligation $(191,059) $(223,729)
Plan assets at fair value,
primarily common stocks,
bonds and real estate 167,068 199,722
--------- ---------
Plan assets less than
projected benefit obligation $ (23,991) $ (24,007)
Unrecognized net loss 29,801 46,618
Unrecognized overfunding at
date of adoption (January 1, 1985)
of FAS No. 87, net of amortization,
being recognized over 15 years (6,422) (4,855)
--------- ---------
Pension cost included in
prepaid (accrued) expenses $ (612) $ 17,756
========= =========
31
- --------------------------------------------------------------------------------
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 1994, 1995 and 1996 for
this plan was $3,418,000, $4,202,000 and $4,247,000, 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 $16,129,000, $18,308,000 and $16,519,000 for
subsidiaries' defined benefit plans were made and charged to income in 1994,
1995 and 1996, 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, 1995 and 1996:
1995 1996
- -------------------------------------------------------
Accumulated Postretirement
Benefit Obligations:
Retirees $52,255 $46,453
Other fully eligible participants 9,682 10,459
Other active participants 10,695 17,114
------- -------
$72,632 $74,026
Unrecognized:
Prior service cost 566 239
Gain 7,911 8,496
------- -------
$81,109 $82,761
======= =======
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1997; the rate was assumed to
decrease by 0.5% per year to 6.0% in 2000 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, 1996 by approximately $6,812,000, and the aggregate of the service
and interest cost components of net postretirement health care cost for 1996 by
approximately $401,000. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.75% in 1995 and 1996.
The expense for postretirement health care benefits was $4,668,000 in 1994,
$5,359,000 in 1995 and $4,174,000 in 1996. The service and interest components
of the expense were $1,049,000 and $3,619,000, respectively, in 1994, $1,094,000
and $4,265,000, respectively, in 1995, and $723,000 and $3,451,000,
respectively, in 1996.
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:
1994 1995 1996
- --------------------------------------------------
Expense recorded
(contribution) $7,930 $6,667 $6,666
====== ====== ======
Interest expense on
1988 ESOP debt $1,965 $1,147 $ 981
====== ====== ======
Dividends on unallocated
1988 ESOP shares used
by the 1988 ESOP $ 780 $ 555 $ 379
====== ====== ======
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 $750 per employee ($500 prior to January
1, 1996). Charges to operations for the PSSP were $27,334,000 in 1994,
$24,882,000 in 1995 and $16,030,000 in 1996. 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 $12,050,000,
$13,603,000 and $12,362,000 during 1994, 1995 and 1996, respectively.
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.
32
NOTE 13 COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHICAL AREAS
Through the third quarter of 1996, management and operations of the Company were
based on four principal global lines of business--waste services, clean energy,
clean water, and environmental and infrastructure consulting. In the fourth
quarter of 1996, Rust began implementing plans to exit its remaining engineering
and consulting businesses. In addition, WTI sold its water process,
manufacturing and custom engineered systems businesses and has entered into an
agreement to sell its water and wastewater facility operations and privatization
services. These businesses have been classified as discontinued operations and,
as a result, the Company now operates in only the waste management services line
of business.
Foreign operations in 1996 were conducted in 10 countries in Europe, seven
countries in the Asia Pacific region, and Canada, Mexico, Brazil, Israel, and
Argentina. The information relating to the Company's continuing foreign
operations is set forth in the following tables:
United Other
States Europe Foreign Consolidated
- --------------------------------------------------------------------------------
1994
Revenue $ 6,599,478 $1,322,670 $560,570 $ 8,482,718
=========== ========== ======== ===========
Income from operations $ 1,410,477 $ 184,230 $ 63,205 $ 1,657,912
=========== ========== ======== ===========
Identifiable assets $12,030,261 $3,471,012 $748,270 $16,249,543
=========== ========== ======== ===========
1995
Revenue $ 7,012,982 $1,527,291 $512,745 $ 9,053,018
=========== ========== ======== ===========
Income from operations $ 1,456,895 $ 2,415 $ 32,768 $ 1,492,078
=========== ========== ======== ===========
Identifiable assets $13,032,695 $3,682,432 $772,671 $17,487,798
=========== ========== ======== ===========
1996
Revenue $ 7,064,516 $1,539,183 $583,271 $ 9,186,970
=========== ========== ======== ===========
Income from operations $ 1,301,579 $ (12,800) $ 74,519 $ 1,363,298
=========== ========== ======== ===========
Identifiable assets $13,821,086 $3,503,014 $828,183 $18,152,283
=========== ========== ======== ===========
No single customer accounted for as much as 3% of consolidated revenue in
1994, 1995 and 1996.
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 the People's Republic of China. WM International is unable to predict what
impact, if any, this change will have on its operations in Hong Kong. At
December 31, 1996, WM International had identifiable assets of $245.2 million
related to its Hong Kong operations, which generated 1996 pretax income of
approximately $15.3 million.
33
NOTE 14 SPECIAL CHARGES
In the first quarter of 1995, in response to the continuing deterioration of the
chemical waste services market, CWM realigned its organization, and in
connection therewith, recorded a special charge of $140.6 million before tax
($91.4 million after tax). The charge related primarily to a write-off of the
investment in facilities and technologies that CWM abandoned because they did
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 a special charge of
$194.6 million ($152.4 million after tax) primarily related to the actions it
had decided to take 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 in 1995. The majority of the balance was paid in 1996,
although certain rent payments on leased facilities will continue into the
future.
In the fourth quarter of 1996, WM International recognized a provision of
$77.0 million after tax related to the sale of its investment in Wessex and a
charge of $169.5 million after tax to revalue its investments in France, Austria
and Spain in contemplation of exiting all or part of these markets or forming
joint ventures. The charge also included the write-off of an investment in a
hazardous waste disposal facility in Germany because regulatory changes
adversely affected its volumes. These charges reduced the Company's income by
$213.6 million after tax.
Also, in the fourth quarter of 1996, WMI and CWM recorded pretax charges of
$255.0 million ($166.4 million after tax) for reengineering their finance and
administrative functions (primarily related to a reduction in the carrying value
of software) and increasing reserves for certain litigation, including a dispute
involving the computation of royalties on the Emelle, Alabama hazardous waste
landfill. In December 1996, a federal court in Memphis, Tennessee, held CWM
liable for approximately $91.5 million in damages to the former owners of the
Emelle site. CWM is appealing the decision.
- --------------------------------------------------------------------------------
NOTE 15 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. During the second quarter
of 1996, the sale of the industrial process engineering and construction
businesses, based in Birmingham, Alabama, was completed.
During the fourth quarter of 1996, WTI sold its water process systems and
equipment manufacturing businesses. WTI has also entered into an agreement to
sell its water and wastewater facility operations and privatization business. As
of September 30, 1996, Rust sold its industrial scaffolding business.
In the fourth quarter of 1996, Rust began implementing plans to exit its
remaining domestic and international engineering and consulting business. CWM is
discontinuing its high organic waste fuel blending services. WMX recorded a
fourth quarter provision for loss of $360.0 million before tax and minority
interest in connection with the planned divestiture of these businesses.
The discontinued businesses have been segregated and the accompanying
consolidated balance sheets, statements of income and related footnote
information have been restated. Revenues from the discontinued businesses were
$1,614,600,000 in 1994, $1,926,330,000 in 1995 and $1,134,666,000 for 1996.
Following is a summary of the assets and liabilities as of December 31, 1995 and
1996, which are reflected on the consolidated balance sheets as net assets of
discontinued operations:
1995 1996
- -------------------------------------------------------------------------------
Current assets $576,627 $228,109
Property and equipment
and other noncurrent assets 758,244 358,116
Current liabilities (351,150) (287,852)
Noncurrent liabilities (107,245) (84,064)
-------- --------
Net assets of
discontinued operations $876,476 $214,309
======== ========
The Company expects to complete by the end of 1997 the sale of those
businesses not previously sold.
34
- --------------------------------------------------------------------------------
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, 1995, and December 31, 1996. 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, 1995 December 31, 1996
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Nonderivatives--
Assets--
Cash and cash equivalents $ 169,541 $ 169,541 $ 323,288 $ 323,288
Receivables 1,664,029 1,664,029 1,691,901 1,691,901
Short-term investments 34,156 34,156 341,338 341,338
Liabilities--
Commercial paper 1,119,356 1,120,209 645,869 646,179
Project debt 735,646 880,619 833,740 896,711
Liquid Yield Option Notes
and WMX Subordinated Notes 539,352 576,024 534,939 602,746
Other borrowings 5,083,720 5,284,472 5,510,552 5,609,979
Derivatives relating to debt -- (74) -- (4,761)
Other derivatives carried as--
Assets (in Sundry Assets) -- -- -- 2,768
Liabilities (in Accrued
Expenses) (65) (16,647) -- (82)
Letters of credit, performance
bonds and guarantees -- -- -- --
Cash, Receivables and 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.
35
- ---------------------------------------------------------------------------------------------------------
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is an analysis of certain items in the Consolidated
Statements of Income by quarter for 1995 and 1996.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------
1995
Revenue $2,151,774 $2,326,334 $2,322,330 $2,252,580 $9,053,018
Gross profit 525,936 722,871 732,424 515,735 2,496,966
Income from continuing operations 91,191 203,090 220,816 103,146 618,243
Net income 101,245 219,127 233,848 49,679 603,899
Income from continuing operations
per common and common equivalent
share .19 .42 .45 .21 1.27
Net income per common
and common equivalent share .21 .45 .48 .10 1.24
1996
Revenue $2,144,479 $2,330,994 $2,372,746 $2,338,751 $9,186,970
Gross profit 649,630 711,739 742,228 238,910 2,342,507
Income (loss) from continuing
operations 180,179 217,734 240,164 (160,286) 477,791
Net income (loss) 185,178 223,042 245,206 (461,341) 192,085
Income (loss) from continuing
operations per common and common
equivalent share .37 .44 .49 (.33) .97
Net income (loss) per common
and common equivalent share /(1)/ .38 .45 .50 (.95) .39
(1) Sum of quarters does not equal total for year.
See Note 14 to Consolidated Financial Statements for a discussion of the
special charges affecting the 1995 and 1996 quarters and full year results.
See Note 15 to Consolidated Financial Statements for a discussion of the
decisions to discontinue certain operations announced during 1995 and 1996.
36