- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-7327
----------------
WASTE MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2660763
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3003 BUTTERFIELD ROAD, OAK BROOK, ILLINOIS 60523
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 572-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1.00 par
value New York Stock Exchange Zurich Stock Exchange
Chicago Stock Exchange Geneva Stock Exchange
London Stock Exchange Basle Stock Exchange
Frankfurt Stock Exchange
Liquid Yield Option Notes
due 2001 New York Stock Exchange
8 3/4% Debentures due 2018 New York Stock Exchange
Liquid Yield Option Notes
due 2012 New York Stock Exchange
Chemical Waste Management,
Inc.
Liquid Yield Option Notes
due 2010 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$10,657,397,087 AT FEBRUARY 1, 1998 (BASED ON THE CLOSING SALE PRICE ON THE NEW
YORK STOCK EXCHANGE COMPOSITE TAPE ON JANUARY 30, 1998, AS REPORTED BY THE WALL
STREET JOURNAL (MIDWEST EDITION)). AT MARCH 18, 1998, THE REGISTRANT HAD ISSUED
AND OUTSTANDING AN AGGREGATE OF 455,182,521 SHARES OF ITS COMMON STOCK OF RECORD
(EXCLUDING 10,886,361 SHARES HELD IN THE WASTE MANAGEMENT, INC. EMPLOYEE STOCK
BENEFIT TRUST).
DOCUMENTS INCORPORATED BY REFERENCE
None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
ITEM 1. BUSINESS.......................................................... 1
GENERAL.................................................................. 1
NORTH AMERICAN SOLID AND HAZARDOUS WASTE MANAGEMENT SERVICES............. 3
Solid Waste Management, Recycling and Related Services.................. 4
Hazardous Waste Management and Related Services......................... 7
INTERNATIONAL WASTE MANAGEMENT AND RELATED SERVICES...................... 9
Collection Services..................................................... 10
Treatment and Disposal Services......................................... 10
TRASH-TO-ENERGY AND RELATED SERVICES..................................... 12
REGULATION............................................................... 12
General................................................................. 12
Waste Management Services............................................... 14
Trash-to-Energy and Related Services.................................... 15
RCRA.................................................................... 17
Superfund............................................................... 18
International Waste Management and Related Services..................... 19
COMPETITION.............................................................. 19
INSURANCE................................................................ 21
EMPLOYEES................................................................ 21
ACQUISITIONS AND DISPOSITIONS............................................ 22
ITEM 2. PROPERTIES........................................................ 23
ITEM 3. LEGAL PROCEEDINGS................................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 26
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................................. 27
ITEM 6. SELECTED FINANCIAL DATA........................................... 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION...................................................... 30
RESULTS OF OPERATIONS.................................................... 30
FINANCIAL CONDITION...................................................... 44
OUTLOOK.................................................................. 48
FORWARD-LOOKING INFORMATION.............................................. 49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........ 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................... 97
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 98
DIRECTORS OF THE REGISTRANT.............................................. 98
EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 100
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................. 101
ITEM 11. EXECUTIVE COMPENSATION........................................... 102
STOCK OPTIONS............................................................ 104
LONG TERM INCENTIVE PLAN AWARDS.......................................... 106
PENSION AND RETIREMENT PLANS............................................. 107
i
PAGE
----
COMPENSATION OF DIRECTORS................................................. 108
OUTSIDE DIRECTORS' PLANS.................................................. 108
STOCK OPTION PLANS FOR NON-EMPLOYEE DIRECTORS............................. 108
DIRECTORS' CHARITABLE ENDOWMENT PROGRAM................................... 109
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION............... 109
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 110
SECURITY OWNERSHIP OF MANAGEMENT.......................................... 110
Ownership of Company Common Stock........................................ 110
Ownership of WTI Common Stock............................................ 112
Ownership of WM International Ordinary Shares............................ 113
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS........................... 115
MEETINGS AND COMMITTEES OF THE BOARD...................................... 115
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 117
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K.. 123
ii
PART I
ITEM 1. BUSINESS.
GENERAL
Waste Management, Inc. (formerly "WMX Technologies, Inc.") is a leading
international provider of waste management services. Unless the context
indicates to the contrary, as used in this report the terms "Company" and
"Waste Management" refer to Waste Management, Inc. and its subsidiaries.
The Company provides integrated solid waste management services in North
America through Waste Management of North America, Inc., a wholly owned
subsidiary of the Company (referred to herein, together with its subsidiaries
and certain affiliated companies providing waste management and related
services, as "WMNA"). The Company's solid waste management services are
provided to commercial, industrial, municipal and residential customers, as
well as to other waste management companies, and consist of solid waste
collection, transfer, resource recovery and disposal services. As part of
these services, the Company is engaged in providing, through its Recycle
America(R) and other programs, paper, glass, plastic and metal recycling
services to commercial and industrial operations and curbside collection of
such materials from residences and in removing methane gas from sanitary
landfill facilities for use in electricity generation. In addition, through
WMNA, the Company provides Port-O-Let(R) portable sanitation services to
municipalities and commercial and special event customers. WMNA also manages
the on-site industrial cleaning services businesses owned by the Company's
Rust International Inc. subsidiary. In June 1997, the Company completed the
sale of most of the Company's solid waste assets in Canada to a subsidiary of
USA Waste Services, Inc. ("USA Waste"). See Note 5 to Consolidated Financial
Statements set forth in Item 8 herein.
The Company also provides hazardous waste management services. The Company's
chemical waste treatment, storage, disposal and related services in North
America are provided through WMNA and Chemical Waste Management, Inc., a
wholly owned subsidiary of the Company (referred to herein, together with its
subsidiaries, as "CWM"), and are provided to commercial and industrial
customers, as well as to other waste management companies and to governmental
entities. Through Advanced Environmental Technical Services, L.L.C., a wholly
owned subsidiary of the Company (referred to herein, together with its
subsidiaries as "AETS"), the Company provides on-site integrated hazardous
waste management services, including hazardous waste identification,
packaging, removal and recycling services, to industrial, institutional and
governmental customers. Through its wholly owned Chem-Nuclear Systems, L.L.C.
subsidiary (referred to herein, together with its subsidiaries, as "Chem-
Nuclear"), the Company also furnishes radioactive waste management services,
primarily to electric utilities and governmental entities.
The Company provides comprehensive waste management and related services
outside North America through Waste Management International plc, a subsidiary
owned approximately 56% by the Company and 12% each by the Company's Rust
International Inc. and Wheelabrator Technologies Inc. subsidiaries (referred
to herein, together with its subsidiaries, as "WM International"). WM
International provides a wide range of solid and hazardous waste management
services in seven countries in Europe, seven countries in the Asia-Pacific
region and Argentina, Brazil, and Israel.
Wheelabrator Technologies Inc., an approximately 67%-owned subsidiary of the
Company (referred to herein, together with its subsidiaries, as "WTI"), is a
leading developer of facilities for, and provider of services to, the trash-
to-energy and waste-fuel powered independent power markets. WTI develops,
arranges financing for, operates and owns facilities that dispose of trash and
other waste materials in an environmentally acceptable manner by recycling
them into electrical or steam energy. WTI is also pursuing the development,
ownership and operation of power plants for industrial customers. In addition,
WTI is involved in the treatment and management of biosolids resulting from
the treatment of wastewater by converting them into useful fertilizers and the
recycling of organic wastes into compost material useable for horticultural
and agricultural purposes. WTI also designs and installs technologically
advanced air pollution control systems and equipment. In 1996, WTI sold its
water process, manufacturing and custom engineering business and in 1997 sold
its water-contract operations, outsourcing and privatization business. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" herein.
Printed on recycled
1 paper.
LOGO
In June 1997, the Company announced an offer to acquire, for $15 per share
in cash, all of the approximately 53 million outstanding shares of WTI it does
not already own. The price was increased to $16.50 per share pursuant to a
definitive merger agreement subsequently negotiated with a special committee
of independent WTI directors. The terms of the agreement have been approved by
the WTI special committee and by the Boards of Directors of the Company and
WTI, but the transaction remains subject to the approval of the holders of a
majority of WTI's outstanding shares, other than those held by the Company,
voting on it at a special meeting of WTI stockholders to be held March 30,
1998. Several lawsuits have been filed which seek, among other things, to
enjoin the proposed transaction. The Company believes that it has met the
legal standards applicable to transactions of this type and intends to
vigorously defend itself in these lawsuits.
Rust International Inc., a subsidiary owned approximately 60% by the Company
and 40% by WTI (referred to herein, together with its subsidiaries, as
"Rust"), is engaged in furnishing environmental and infrastructure consulting
and a variety of other on-site industrial and related services primarily to
clients in the public sector and petrochemical, chemical, energy, utility,
pulp and paper, environmental services and other industries. In early 1998,
Rust sold its approximately 37% interest in OHM Corporation, a publicly traded
provider of environmental remediation services ("OHM"), and received a
distribution from OHM of additional shares of NSC Corporation, a publicly
traded provider of asbestos abatement and other specialty contracting services
("NSC"). The distribution increased Rust's interest in NSC from approximately
40% to 54%.
The Company's strategic plans call for the Company to focus on the provision
of waste management services and to sell or discontinue various businesses
which do not fit within that focus. The Company has therefore reported its
continuing operations as being within a single industry segment, waste
management services. The Company's continuing consolidated revenues were
approximately $8.5 billion in 1994, $9.1 billion in 1995, $9.2 billion in 1996
and $9.2 billion in 1997. For information relating to the Company's operations
in different geographic groups, see Note 14 to the Company's Consolidated
Financial Statements set forth below in Item 8. For interim periods, the
revenues and net income of certain of the Company's operations may fluctuate
for a number of reasons, including there being for some businesses less
activity during the winter months.
On March 10, 1998, the Company entered into a definitive merger agreement
(the "Merger Agreement") with USA Waste Services, Inc. ("USA Waste") pursuant
to which the Company will be merged with a wholly-owned subsidiary of USA
Waste (the "Merger"). Pursuant to the Merger Agreement, the Company's
stockholders will receive .725 shares of common stock of USA Waste for each
share of common stock of the Company. The consummation of the Merger is
subject to a number of conditions, including the expiration or termination of
the applicable merger review waiting period under the Hart-Scott-Rodino Anti-
Trust Improvements Act of 1976, approval by the stockholders of each company
and other typical closing conditions. In addition, the Merger is contingent
upon the transaction qualifying for pooling-of-interests accounting treatment.
In order to qualify for pooling-of-interests accounting treatment, the Company
intends to sell a portion of its treasury shares pursuant to a registered
public offering prior to the closing of the Merger. A lawsuit by an alleged
Company stockholder purporting to represent a class of the Company's
stockholders has been filed (although the Company has not yet been served)
against the Company and members of its Board of Directors alleging breaches of
fiduciary duty by the defendants in connection with the Merger. The lawsuit
seeks, among other things, to have the transaction enjoined and to recover
unspecified damages. The Company believes the suit to be without merit and
intends to contest it vigorously.
Regulatory or technological developments relating to the environment may
require companies engaged in waste management services and related businesses,
including the Company, to modify, supplement or replace equipment and
facilities at costs which may be substantial. Because the continuing business
in which the Company is engaged is intrinsically connected with the protection
of the environment and the potential discharge of materials into the
environment, a material portion of the Company's capital expenditures is,
directly or indirectly, related to such items. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Financial
Condition" set forth below in Item 7 for a review of property and equipment
expenditures by the Company for the last four years. The Company believes
that, in general, it tends to benefit when environmental regulation increases,
which may increase the demand for its services, and that it has the resources
and experience to manage environmental risk.
2
Although the Company strives to conduct its operations in compliance with
applicable laws and regulations, the Company believes that in the existing
climate of heightened legal, political and citizen awareness and concerns,
companies in the waste management services industry, including the Company,
will be faced, in the normal course of operating their businesses, with fines
and penalties and the need to expend funds for remedial work and related
activities with respect to waste treatment, disposal and trash-to-energy
facilities. Where the Company concludes that it is probable that a liability
has been incurred, a provision is made in the Company's financial statements
for the Company's best estimate of the liability based on management's judgment
and experience, and information available from regulatory agencies. This
estimate is also based upon an analysis of the number, financial resources and
relative degree of responsibility of other potentially responsible parties who
are jointly and severally liable for remediation of a specific site, as well as
the typical allocation of costs among such parties. If a range of possible
outcomes is estimated and no amount within the range appears to be a better
estimate than any other, then the Company provides for the minimum amount
within the range, in accordance with generally accepted accounting principles.
Such estimates are subsequently revised, as necessary, as additional
information becomes available. While the Company does not anticipate that the
amount of any such revision will have a material adverse effect on the
Company's operations or financial condition, the measurement of environmental
liabilities is inherently difficult and the possibility remains that
technological, regulatory or enforcement developments, the results of
environmental studies, the existence and ability of other potentially
responsible third parties (including insurance carriers) to contribute to the
settlement of such liabilities or other factors could materially alter this
expectation at any time. Such matters could have a material adverse impact on
earnings for one or more fiscal quarters or years.
While in general the Company's business has benefited from increased
governmental regulation, the business itself is subject to extensive and
evolving regulation by federal, state, local and foreign authorities. Due to
the complexity of regulation of the industry and to public pressure,
implementation of existing and future laws, regulations or initiatives by
different levels of government may be inconsistent and difficult to foresee. In
addition, the demand for certain of the Company's services may be adversely
affected by the amendment or repeal, or reduction in enforcement of, federal,
state and foreign laws and regulations on which the Company's business is
dependent. Demand for certain of the Company's services may also be adversely
affected by delays or reductions in funding, or failure of legislative bodies
to fund, agencies or programs under such laws and regulations. Although it is
not always able to do so, the Company makes a continuing effort to anticipate
regulatory, political and legal developments that might affect its operations.
The Company cannot predict the extent to which any legislation or regulation
that may be enacted, amended, repealed or enforced, or any failure or delay in
enactment or enforcement of legislation or regulations or funding of agencies
or programs, in the future may affect its operations.
The Company was incorporated in Delaware in 1968 and subsequently succeeded
to certain businesses owned by its organizers and others. The Company's common
stock is listed on the New York Stock Exchange under the trading symbol "WMX"
and is also listed on the Frankfurt Stock Exchange, the London Stock Exchange,
the Chicago Stock Exchange and the Swiss Stock Exchanges in Basle, Zurich and
Geneva.
Unless the context indicates to the contrary, all statistical and financial
information under Item 1 and Item 2 of this report is given as of December 31,
1997. Also, unless the context indicates to the contrary, statistical and
financial data appearing under the caption "North American Solid and Hazardous
Waste Management Services" relate only to the Company's WMNA, CWM, AETS and
Chem-Nuclear groups of subsidiaries and do not include any data relating to
Rust, Rust's on-site industrial cleaning services business managed by WMNA, WTI
or WM International. For discussions of the data relating to WM International
and WTI, see "International Waste Management and Related Services" and "Trash-
to-Energy and Related Services."
NORTH AMERICAN SOLID AND HAZARDOUS WASTE MANAGEMENT SERVICES
The Company's North American solid waste management and recycling services
include residential, commercial and industrial collection, transfer and
disposal services and related services provided by WMNA.
3
The Company's North American hazardous waste management services include
chemical waste treatment, storage, disposal and related services provided by
WMNA and CWM, on-site integrated hazardous waste management services provided
by AETS and low-level radioactive waste disposal services provided by Chem-
Nuclear. Many of the Company's solid and hazardous waste services are marketed
on an integrated basis to the Company's national account customers and to other
large industrial customers.
For each of the four years in the period ended December 31, 1997, the North
American solid and hazardous waste revenue amounted to 67.3%, 67.5%, 68.2% and
68.0%, respectively, of the Company's total revenues. For each of the four
years in the period ended December 31, 1997, the following table shows the
percentages of the Company's total North American solid and hazardous waste
services revenue (excluding on-site industrial cleaning services revenue)
arising from the Company's principal solid and hazardous waste services:
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996 1997
----- ----- ----- -----
Solid Waste and Recycling Collection
Services:
Residential................................ 19.9% 20.1% 20.4% 20.8%
Commercial................................. 26.2 25.2 25.7 25.6
Roll-off and Industrial.................... 21.0 19.8 20.4 20.5
Solid Waste Disposal, Transfer and Related
Services.................................... 21.7 25.0 24.5 24.7
Hazardous Waste Services..................... 11.2 9.9 9.0 8.4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
SOLID WASTE MANAGEMENT, RECYCLING AND RELATED SERVICES
At December 31, 1997, WMNA conducted solid waste management, recycling and
related services operations in 47 states, the District of Columbia, Canada and
Mexico. During 1994, 1995, 1996 and 1997, operations in California, Florida and
Pennsylvania together accounted for approximately 31%, 29%, 26% and 29%,
respectively, of North American solid waste revenue. No customer accounted for
as much as 3% of such revenue in 1994, 1995, 1996 or 1997.
COLLECTION
WMNA provides solid waste collection services to approximately 1.1 million
commercial and industrial customers. Collection services are also provided to
approximately 11.8 million homes and apartment units. These services in many
cases include collection of recyclable commodities. See "Recycling and Energy
Recovery--Recycling" for a description of recycling services.
Commercial and Industrial
Many of WMNA's commercial and industrial customers utilize containers to
store solid waste, including "roll-offs," which are large containers that are
dropped off at construction or other sites for the deposit of waste and then
hoisted when full onto a truck for transport. These containers, ranging from 1
to 45 cubic yards in size, are usually provided to the customer as part of
WMNA's services. Stationary compactors, which compact the volume of the stored
waste prior to collection, are frequently installed on the premises of large
volume customers and are usually provided to these customers in conjunction
with WMNA's collection services. Containerization enables WMNA to service most
of its commercial and industrial customers with collection vehicles operated by
a single employee. Compaction serves to decrease the frequency of collection.
Commercial and industrial collection services (which include containerized
service to apartment buildings) are generally performed under one- to three-
year service agreements. Fees are determined by such considerations as market
factors, collection frequency, type of equipment furnished, length of service
agreement, type and volume or weight of the waste collected, distance to the
disposal facility and cost of disposal.
4
Residential
Most of WMNA's residential solid waste collection services are performed
under contracts with, or franchises granted by, municipalities giving WMNA
exclusive rights to service all or a portion of the homes in their respective
jurisdictions. Such contracts or franchises usually range in duration from one
to five years. The fees received by WMNA are based primarily on market factors,
frequency and type of service, the distance to processing or disposal
facilities and cost of processing or disposal. Residential collection fees are
either paid by the municipalities out of tax revenues or service charges or are
paid directly by the residents receiving the service.
TRANSFER
WMNA operates 164 solid waste transfer stations. A transfer station is a
facility where solid waste is received from collection vehicles and then
transferred to, and in some cases compacted in, large, specially constructed
trailers for transportation to disposal or resource recovery facilities. This
procedure reduces costs by improving utilization of collection personnel and
equipment and improving the efficiency of transporting waste to final disposal
facilities.
The services of these facilities are provided to municipalities or counties
and in most instances are also used by WMNA and by other collection companies.
Fees are generally based upon such considerations as competition, the type and
volume or weight of the waste transferred, the extent of processing of
recyclable materials, the transport distance involved and the cost of disposal.
RECYCLING AND ENERGY RECOVERY
Recycling
WMNA provides recycling services in the United States through its Recycle
America(R) and other programs. Recycling involves the removal of reusable
materials from the waste stream for processing and sale or other disposition
for use in various applications. Participating commercial and industrial
operations use containers to separate recyclable paper, glass, plastic and
metal wastes for collection, processing and sale by WMNA. Fees are determined
by such considerations as competition, frequency of collection, type and volume
or weight of the recyclable material, degree of processing required, distance
the recyclable material must be transported and value of the recyclable
material.
As part of its residential solid waste collection services, WMNA engages in
curbside collection of recyclable materials from residences in the United
States, also through its Recycle America(R) and other programs. Curbside
recycling services generally involve the collection of recyclable paper, glass,
plastic and metal waste materials, which may be separated by residents into
different waste containers or commingled with other recyclable materials. The
recyclable materials are then typically deposited at a local materials recovery
facility where they are sorted and processed for resale.
The prices received by the Company for recyclable materials fluctuate
substantially from quarter to quarter and year to year depending upon domestic
and foreign demand for such materials, the quality of such materials, prices
for new materials and other factors. In some instances, the Company enters into
agreements with customers or the local governments of municipalities in which
it provides recycling services whereby the customers or the governments share
in the gains and losses resulting from fluctuation in prices of recyclable
commodities. These agreements mitigate both the Company's gains and losses from
such fluctuations.
As of December 31, 1997, WMNA provided curbside recycling services to
approximately 7.9 million households in the United States. WMNA has
approximately 211,000 commercial and industrial recycling services customers.
WMNA operates 129 materials recovery facilities for the receipt and
processing of recyclable materials. Such processing consists of separating
recyclable materials according to type and baling or otherwise preparing the
separated materials for sale.
5
WMNA also participates in joint ventures with Stone Container Corporation
and American National Can Corporation to engage, respectively, in the
businesses of marketing paper fibre and aluminum, steel, and glass containers
for recycling. In each case WMNA sells to the joint venture, or has the joint
venture market, the paper fibre or containers collected by WMNA to Stone
Container, American National Can or other parties who will process them for
reuse. The joint venture with American National Can also owns and operates six
glass processing facilities. During 1997, the Stone Container joint venture
marketed approximately 2.1 million tons of paper fiber and the American
National Can joint venture processed approximately 466,000 tons of other
recyclable materials. WMNA also provides tire and demolition and construction
debris recycling services.
Energy Recovery
At 38 WMNA-owned or -operated sanitary landfill facilities, WMNA is engaged
in methane gas recovery operations. These operations involve the installation
of a gas collection system into a sanitary landfill facility. Through the gas
collection system, gas generated by decomposing solid waste is collected and
transported to a gas-processing facility at the landfill site. Through
physical processes methane gas is separated from contaminants. The processed
methane gas generally is then either sold directly to industrial users or to
an affiliate of the Company which uses it as a fuel to power electricity
generators. Electricity generated by these facilities is sold, usually to
public utilities under long-term sales contracts, often under terms or
conditions which are subject to approval by regulatory authorities.
The Company also engages in other resource recovery activities through WTI's
trash-to-energy and related operations and Waste Management International's
operations. See "Trash-to-Energy and Related Services" and "International
Waste Management and Related Services."
DISPOSAL
WMNA operates 130 solid waste sanitary landfill facilities. Of this number,
101 are owned by WMNA and the remainder are leased from, or operated under
contract with, other parties. Additional facilities are in various stages of
development. WMNA also provides yard-waste composting services, bioremediation
of petroleum-contaminated soils and solidification of difficult-to-treat
liquid wastes at a number of its disposal facilities. All of the sanitary
landfill facilities are subject to governmental regulation. See "Regulation--
Waste Management Services--Solid Waste."
A sanitary landfill site must have geological and hydrological properties
and design features which limit the possibility of water pollution, directly
or by leaching. Sanitary landfill operations, which include carefully planned
excavation, continuous spreading and compacting of solid waste and covering of
the waste, are designed to maintain sanitary conditions, insure optimum
utilization of the airspace and prepare the site for ultimate use for other
purposes. Landfill site operations are required to be conducted in accordance
with the terms of permits obtained from various regulatory authorities, which
typically incorporate the requirements of Subtitle D of the Resource
Conservation and Recovery Act of 1976 ("RCRA") or applicable state
requirements, whichever are stricter. These requirements address such matters
as daily volume limitations, placement of daily, interim and final site cover
materials on waste disposed at the site, construction and operation of methane
gas and leachate management systems, periodic groundwater monitoring activity
and final closure requirements and post-closure monitoring and maintenance
activities.
Suitable sanitary landfill facilities and permission to expand existing
facilities may be difficult to obtain in some areas because of land scarcity,
local resident opposition and governmental regulation. As its existing
facilities become filled in such areas, the solid waste disposal operations of
WMNA are and will continue to be materially dependent on its ability to
purchase, lease or otherwise obtain operating rights for additional sites or
expansion of existing sites and to obtain the necessary permits from
regulatory authorities to construct and operate them. In addition, there can
be no assurance that additional sites can be obtained or that existing
facilities can continue to be expanded or operated. However, management
believes that the facilities currently available to WMNA are sufficient to
meet the needs of its operations in most areas for the foreseeable future.
6
To develop a new facility, WMNA must expend significant time and capital
resources without any certainty that the necessary permits will ultimately be
issued for such facility or that the Company will be able to achieve and
maintain the desired disposal volume at such facility. If the inability to
obtain and retain necessary permits, the failure of a facility to achieve the
desired disposal volume or other factors cause WMNA to abandon development
efforts for a facility, the capitalized development expenses of the facility
are written off.
In varying degrees, WMNA utilizes its own sanitary landfill facilities to
accommodate its disposal requirements for collection and transfer operations.
In 1994, 1995, 1996 and 1997 approximately 55%, 57%, 60% and 61%,
respectively, of the solid waste collected by WMNA was disposed of in sanitary
landfill facilities operated by it. Usually these facilities are also used by
other companies and government agencies on a noncontract basis for fees
determined by such considerations as competition and the type and volume or
weight of the waste.
RELATED SERVICES
WMNA also provides or manages several types of services which are compatible
with its solid waste collection operations. Included in these operations are
on-site industrial cleaning services and portable sanitation services.
WMNA manages the business of Rust Industrial Services Inc., a subsidiary of
Rust ("RIS"), which provides on-site industrial services, including water
blasting, tank cleaning, explosives blasting, chemical cleaning, industrial
vacuuming, catalyst handling and separation technologies. RIS provides these
services primarily for clients in the petrochemical, chemical, and pulp and
paper industries, utilities and, to a lesser extent, the public sector. RIS
also assists clients in the nuclear and utility industries in solving
electrical, mechanical, engineering and related technical services problems.
Prior to selling the businesses in 1996 and early 1997, RIS also provided
scaffolding rental and erection services primarily to the chemical,
petrochemical and utilities industries and a variety of other on-site
services.
Waste Management Federal Services, Inc., a subsidiary of Rust, also provides
hazardous, radioactive and mixed waste program and facilities management
services, primarily to the United States Department of Energy and other
federal government agencies. Such services include waste treatment, storage,
characterization and disposal and privatization services.
WMNA also provides portable sanitation services to municipalities and
commercial customers. The portable sanitation services, which are marketed
under the Port-O-Let(R) trade name, are also used at numerous special events
and public gatherings.
HAZARDOUS WASTE MANAGEMENT AND RELATED SERVICES
CHEMICAL WASTE MANAGEMENT SERVICES
The Company operates chemical waste treatment, storage and disposal
facilities in 18 states and also owns a majority interest in a subsidiary
which operates a resource recovery and storage facility and a disposal
facility in Mexico. The chemical wastes handled by the Company include
industrial by-products and residues that have been identified as "hazardous"
pursuant to RCRA, as well as other materials contaminated with a wide variety
of chemical substances.
Chemical waste may be collected from customers and transported by WMNA or
CWM or contractors retained by them or delivered by customers to their
facilities. Chemical waste is transported primarily in specially constructed
tankers and semi-trailers, including stainless steel and rubber or epoxy-lined
tankers and vacuum trucks, or in containers or drums on trailers designed to
comply with applicable regulations and specifications of the U.S. Department
of Transportation ("DOT") relating to the transportation of hazardous
materials. WMNA and CWM also operate several facilities at which waste
collected from or delivered by customers may be analyzed and consolidated
prior to further shipment.
7
All of the Company's seven United States secure hazardous waste land disposal
facilities have been issued permits under RCRA. See "Regulation--RCRA." In
general, the Company's secure land disposal facilities have received the
necessary permits and approvals to accept chemical wastes, although some of
such sites may accept only certain chemical wastes. Only chemical wastes in a
stable, solid form which meet applicable regulatory requirements may be buried
in the Company's secure disposal cells. These land disposal facilities are
sited, constructed and operated in a manner designed to provide long-term
containment of such waste. Chemical wastes may be treated prior to disposal.
Physical treatment methods include distillation, evaporation and separation,
all of which effectively result in the separation or removal of solid materials
from liquids. Chemical treatment methods include chemical oxidation and
reduction, chemical precipitation of heavy metals, hydrolysis and
neutralization of acid and alkaline wastes and essentially involve the
transformation of wastes into inert materials through one or more chemical
reaction processes. At two of its locations, the Company isolates treated
chemical wastes in liquid form by injection into deep wells. Deep well
technology involves drilling wells in suitable rock formations far below the
base of fresh water and separated from it by other substantial geological
confining layers.
AETS provides on-site integrated hazardous waste management services,
including hazardous waste identification, packaging, removal and recycling
services in North America. These services include on-site hazardous waste data
management, education and training, inventory control and other administrative
services, lab pack services, drum identification services, household hazardous
waste programs, less-than-full load waste pickup and consolidation services,
and related services. AETS provides these services primarily to industrial,
institutional and public sector customers, including laboratories.
In the United States, most chemical wastes generated by industrial processes
are handled "on-site" at the generators' facilities. Since the mid-1970's,
public awareness of the harmful effects of unregulated disposal of chemical
wastes on the environment and health has led to extensive and evolving federal,
state and local regulation of chemical waste management activities. The major
federal statutes regulating the management of chemical wastes include RCRA, the
Toxic Substances Control Act ("TSCA") and the Comprehensive Environmental
Response, Compensation and Liabilities Act of 1980, as amended ("CERCLA" or
"Superfund"), all primarily administered by the United States Environmental
Protection Agency ("EPA"). The hazardous waste management business is heavily
dependent upon the extent to which regulations promulgated under these or
similar state statutes and their enforcement over time effectively require
wastes to be specially handled or managed and disposed of in facilities of the
type owned and operated by the Company. See "Regulation--Waste Management
Services--Hazardous Waste," "--RCRA" and "--Superfund." The chemical waste
services industry currently has substantial excess capacity caused by a number
of factors, including a decline in environmental remediation projects
generating hazardous waste for off-site treatment and disposal, continuing
efforts by hazardous waste generators to reduce volume and to manage the wastes
on-site, and the uncertain regulatory environment regarding hazardous waste
management and remediation requirements. These factors have led to reduced
demand and increased pressure on pricing for chemical waste management
services, conditions which the Company expects to continue for the foreseeable
future.
LOW-LEVEL AND OTHER RADIOACTIVE WASTE SERVICES
Radioactive wastes with varying degrees of radioactivity are generated by
nuclear reactors and by medical, industrial, research and governmental users of
radioactive material. Radioactive wastes are generally classified as either
high-level or low-level. High-level radioactive waste, such as spent nuclear
fuel and waste generated during the reprocessing of spent fuel from nuclear
reactors, contains substantial quantities of long-lived radionuclides and is
the ultimate responsibility of the federal government. Low-level radioactive
waste, which decays more quickly than high-level waste, largely consists of dry
compressible wastes (such as contaminated gloves, paper, tools and clothing),
resins and filters which have removed radioactive contaminants from nuclear
reactor cooling water, solidified wastes from power plants which have become
contaminated with radioactive substances and irradiated hardware.
Chem-Nuclear provides comprehensive low-level radioactive waste management
services in the United States consisting of disposal, processing and various
other special services. To a lesser extent, it provides services with respect
to radioactive waste that has become mixed with regulated chemical waste.
8
Chem-Nuclear's radioactive disposal operations involve primarily low-level
radioactive waste. Its Barnwell, South Carolina facility, which has been in
operation since 1971, is one of three licensed commercial low-level
radioactive waste disposal facilities in the United States. A trust has been
established and funded to pay the estimated cost of decommissioning the
Barnwell facility. A second fund, for the extended care of the facility, is
funded by a surcharge on each cubic foot of waste received. Chem-Nuclear may
be liable for additional costs if the extra charges collected to restore and
maintain the facility are insufficient to cover the cost of restoring or
maintaining the site after its closure. The Company does not expect this to
have a material adverse impact on future operating results.
Under state legislation enacted in 1995, the Barnwell site is authorized to
operate until its current permitted disposal capacity is fully utilized.
However, that legislation was attached to a state appropriations bill that
included a provision for a state tax of $235 to be imposed on every cubic foot
of waste disposed of at the Barnwell facility. As a result of decreased
disposal volume and a shortfall in anticipated tax revenue, in June 1997, the
State of South Carolina enacted new legislation requiring that Chem-Nuclear
guarantee certain portions of anticipated tax revenues from the facility. Such
reduced disposal volume and the requirement that Chem-Nuclear fund such tax
payments have caused Chem-Nuclear to review its alternatives with respect to
the Barnwell facility. If Chem-Nuclear determines to close the Barnwell site,
the Company's earnings for one or more fiscal quarters or years could be
adversely affected.
Chem-Nuclear also processes low-level radioactive waste at its customers'
plants to enable such waste to be shipped in dry rather than liquid form to
meet the requirements for receipt at disposal facilities and to reduce the
volume of waste that must be transported. Processing operations include
solidification, demineralization, dewatering and filtration. Other services
offered by Chem-Nuclear include providing electro-chemical, abrasive and
chemical removal of radioactive contamination, providing management services
for spent nuclear fuel storage pools and storing and incinerating liquid
radioactive organic wastes.
INTERNATIONAL WASTE MANAGEMENT AND RELATED SERVICES
The Company is a leading provider of waste management and related services
internationally, primarily through WM International, which conducts
essentially all of the waste management operations of the Company located
outside North America. International waste management and related services
comprised approximately 20.0%, 20.5%, 20.7% and 19.5% of the Company's total
revenue in each of the four years ended December 31, 1994, 1995, 1996 and
1997. WM International's business may broadly be characterized into two areas
of activity, collection services and treatment and disposal services. The
following table shows the derivation of WM International's revenue for the
years indicated and includes revenue from construction of treatment or
disposal facilities for third parties under "Treatment and Disposal Services":
YEAR ENDED DECEMBER 31
-------------------------
1994 1995 1996 1997
---- ---- ---- ----
Collection Services................................... 64% 64% 65% 63%
Treatment and Disposal Services....................... 36% 36% 35% 37%
While the Company has had international operations since the mid-1970's, the
bulk of the Company's international operations and revenues are derived from
the acquisition from 1990 to 1995 of numerous companies and interests in
Europe. However, with its acquisition goals largely completed, WM
International has engaged in only a few small acquisitions since 1995 and has
begun to dispose of certain operations which do not fit within its long-term
strategy.
In accordance with its objective of maintaining a local identity, WM
International, in certain cases, operates through companies or joint ventures
in which WM International and its affiliates own less than a 100% interest.
For example, WM International is a party to a joint venture with Wessex to
provide waste management and related services in the United Kingdom.
9
WM International's revenue mix by country varies from year to year.
Countries in which revenue exceeded 10% of WM International's consolidated
total were: Italy (26%) and Germany (12%) in 1994; Italy (23%), Germany (14%),
the Netherlands (11%) and the United Kingdom (11%) in 1995; Italy (25%), the
United Kingdom (12%), Germany (11%) and the Netherlands (11%) in 1996; and
Italy (25%), the United Kingdom (15%) and the Netherlands (11%) in 1997.
While WM International has considerable experience in mobilizing for and
managing foreign projects, its operations continue to be subject generally to
such risks as currency fluctuations and exchange controls, the need to recruit
and retain suitable local labor forces and to control and coordinate
operations in different jurisdictions, changes in foreign laws or governmental
policies or attitudes concerning their enforcement, political changes, local
economic conditions and international tensions. In addition, price adjustment
provisions based on certain formulae or indices may not accurately reflect the
actual impact of inflation on the cost of performance.
During 1997, the Company sold all of its operations in France and Spain and
certain other businesses in Germany and Austria. In addition, in January 1998
the Company sold its waste-to-energy facility located in Hamm, Germany. See
"--Treatment and Disposal Services" below.
COLLECTION SERVICES
Collection services include collection and transportation of solid,
hazardous and medical wastes and recyclable material from residential,
commercial and industrial customers. Street, industrial premises, office and
parking lot cleaning services are also performed by WM International, along
with portable sanitation/toilet services for occasions such as outdoor
concerts and special events. The residential solid waste collection process,
as well as the commercial and industrial solid and hazardous waste collection
process, is similar to that utilized by the Company in the United States.
Business is obtained through public bids or tenders, negotiated contracts,
and, in the case of commercial and industrial customers, direct contracts.
Residential solid waste collection is typically performed by WM
International pursuant to municipal contracts. At December 31, 1997, WM
International had approximately 1,540 municipal contracts, serving more than
4.8 million residential properties. The scope, specifications, services
provided and duration of such contracts vary substantially, with some
contracts encompassing landfill disposal of collected waste, street sweeping
and other related municipal services. The largest number of municipal
contracts held by WM International is in Italy where WM International services
approximately 1.7 million residential properties. Pricing for municipal
contracts is generally based on volume of waste, number and frequency of
collection pick-ups, and disposal arrangements. Longer-term contracts
typically have formulae for periodic price increases or adjustments. WM
International also provides curbside recycling services similar to those
provided by WMNA in North America.
WM International's commercial and industrial solid and hazardous waste
collection services are generally contracted for by individual establishments.
In addition to solid waste collection customers, WM International provides
services to small quantity waste generators, as well as larger petrochemical,
pharmaceutical and other industrial customers, including collection of
hazardous, chemical or medical wastes or residues. WM International has
approximately 293,000 commercial and industrial customers. Contract terms and
prices vary substantially among jurisdictions and types of customer. WM
International also provides commercial and industrial recycling services.
TREATMENT AND DISPOSAL SERVICES
Treatment and disposal services include processing of recyclable materials,
operation of both solid and hazardous waste landfills, operation of municipal
and hazardous waste incinerators, operation of water and wastewater treatment
facilities, operation of hazardous waste treatment facilities and construction
of treatment or disposal facilities for third parties. Treatment and disposal
services are provided under contracts which may be obtained through public bid
or tender or direct negotiation, and are also provided directly to other waste
service companies.
10
Once collected, solid wastes may be processed in a recyclables processing
facility for sale or other disposition for use in various applications.
Unprocessed solid wastes, or the portion of the waste stream remaining after
recovery of recyclable materials, require disposal, which may be accomplished
through incineration (in connection with which the energy value may be
recovered in a trash-to-energy facility) or through disposal in a solid waste
landfill. The relative use of landfills versus incinerators differs from
country to country and will depend on many factors, including the availability
of land, geological and hydrological conditions, the availability and cost of
technology and capital, and the regulatory environment. The main determinants
of the disposal method are the disposal costs at local landfills, as
incineration is generally more expensive, community preferences and regulatory
provisions.
At present, in most countries in which WM International operates,
landfilling is the predominant disposal method employed. WM International owns
or operates solid waste landfills in Argentina, Australia, Brazil, Denmark,
Germany, Hong Kong, Italy, New Zealand, Sweden and the United Kingdom.
Landfill disposal agreements may be separate contracts or an integrated
portion of collection or treatment contracts.
Demand for solid waste incineration is affected primarily by landfill
disposal costs, government regulations and, increasingly, public perception
issues. The incineration process for non-hazardous solid waste has also been
influenced by two significant factors in recent years: (i) increasingly strict
control over air emissions from incinerators; and (ii) increasing emphasis on
trash-to-energy incinerators, which utilize heat produced by incinerators to
generate electricity and other energy. Incineration generates approximately
30% residue (by weight), which is either landfilled or, if permitted, recycled
for use as a road base or in other construction uses.
Prior to January 1998, WM International operated a waste-to-energy
incinerator in Hamm, Germany. In light of the current overcapacity in the
German waste-to-energy market and the pending renegotiation of WM
International's disposal contracts with the local communities, WM
International entered into an agreement in April 1997 to sell the facility.
The transaction was completed in January 1998. Revenues from the Hamm facility
accounted for approximately 2% of WM International's 1997 consolidated
revenue. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Results of Operations."
In 1992, WM International entered into a contract with the County of
Gutersloh, Germany to design, construct, own and operate a trash-to-energy
facility. The facility is designed to convert 268,000 metric tons per year of
municipal waste and sewage sludge into energy. During 1995, WM International's
permit application to develop and operate the Gutersloh facility was denied.
WM International appealed the denial through the German administrative court
system. Throughout 1996 and 1997, WM International and the County of Gutersloh
engaged in discussions regarding the future viability of the proposed project
as well as the County of Gutersloh's right to terminate the 25-year operating
agreement and the lease agreement covering the site on which the plant is to
be constructed. In 1997, the County exercised its right to terminate the lease
agreement for the plant site, effectively terminating the permitting process
and the pending administrative court proceedings. The County has also
informally indicated its intention to terminate WM International's operating
agreement. As a result of the termination of the lease agreement and the
threatened termination of the operating agreement, WM International reserved
the full amount of its unamortized development cost in the project as a part
of the special charge recorded in the fourth quarter of 1997. WM International
is assessing its options to seek redress against the County of Gutersloh and
against state permitting authorities, but no assurances can be given that it
will be successful in obtaining damages in respect of the project.
WM International also operates five small, conventional municipal solid and
other waste incineration facilities. WM International and WTI have also formed
a joint venture to develop trash-to-energy projects outside Germany, Italy and
North America. See "Competition" below.
WM International owns or operates hazardous waste treatment facilities in
Brazil, Brunei, Finland, Germany, Hong Kong, Indonesia, Italy, the
Netherlands, Sweden and the United Kingdom.
11
TRASH-TO-ENERGY AND RELATED SERVICES
WTI, through its subsidiaries, is a leading developer, operator and owner of
trash-to-energy and waste fuel powered independent power facilities in the
United States. These facilities, either owned or operated, give WTI
approximately 920 megawatts per hour of electric generating capacity. WTI's
trash-to-energy projects utilize proven boiler and grate technology and are
capable of processing up to 23,750 tons of solid waste per day. The heat from
this combustion process is converted into high-pressure steam, which typically
is used to generate electricity for sale to public utility companies under
long-term contracts.
WTI's trash-to-energy development activities have historically involved a
number of contractual arrangements with a variety of private and public
entities, including municipalities (which supply trash for combustion),
utilities or other power users (which purchase the energy produced by the
facility), lenders, public debtholders, joint venture partners and equity
investors (which provide financing for the project) and the contractors or
subcontractors responsible for building the facility. In addition, WTI's
activities have often included identifying and acquiring sites for the
facility and for the disposal of residual ash produced by the facility and
obtaining necessary permits and licenses from local, state and federal
regulatory authorities.
WTI also develops, operates and, in some cases, owns independent power
projects, which either cogenerate electricity and thermal energy or generate
electricity alone for sale to customers, including utilities and private
industry. Cogeneration is a technology which allows the simultaneous
production of two or more useful forms of energy from a single primary fuel
source, thus providing a more efficient use of a fuel's total energy content.
These power systems use waste wood, waste tires, waste coal or natural gas as
fuel, and employ state-of-the-art technology, such as fluidized-bed
combustion, to ensure the efficient burning of fuel with reduced emission
levels.
In addition, WTI develops, operates and owns projects that compost organic
wastes and treat and manage biosolids. WTI provides a range of biosolids
management services, including land application, drying, pelletizing, alkaline
stabilization and composting, to more than 275 communities, typically pursuant
to multi-year contracts under which WTI is paid by the generator to make
beneficial use of the biosolids. Land application involves the application of
non-hazardous biosolids as a natural fertilizer on farmland pursuant to
rigorous site-specific permits issued by applicable state authorities.
Biosolids are also used in land reclamation projects such as strip mines.
Regulations issued by the EPA in December 1992 under the Clean Water Act
encourage the beneficial use of municipal sewage sludge by recognizing the
resource value of biosolids as a fertilizer and soil conditioner, and
establish requirements for land application designed to protect human health
and the environment.
WTI also develops and operates facilities at which biosolids are dried and
pelletized and has three facilities currently in operation, with one other
facility undergoing start-up activity. WTI has approximately 536 dry-tons-per-
day of biosolids drying capacity in operation. Biosolids which have been dried
are generally used as fertilizer by farmers, commercial landscapers and
nurseries and as a bulking agent by fertilizer manufacturers.
WTI subsidiaries also design and install advanced air pollution control
equipment and design, construct and maintain tall concrete chimneys and
storage silos. WTI's expertise in air pollution control technologies and
chimney design and construction is used in the design and construction of
WTI's trash-to-energy facilities, which WTI believes strengthens its
competitive position.
REGULATION
GENERAL
While, in general, the Company's waste management services business has
benefited from increased governmental regulation, the industry in which the
Company operates has become subject to extensive and evolving regulation by
federal, state, local and foreign authorities. In particular, the regulatory
process requires firms in the Company's industry to obtain and retain numerous
governmental permits to conduct various aspects
12
of their operations, any of which may be subject to revocation, modification
or denial. As a result of governmental policies and attitudes relating to the
industry, which are subject to reassessment and change, the Company believes
that its ability to obtain applicable permits from governmental authorities on
a timely basis, and to retain such permits, could become impaired. The Company
is not in a position at the present time to assess the extent of the impact of
such potential changes in governmental policies and attitudes on the
permitting processes, but it could be significant. In particular, adverse
decisions by governmental authorities on permit applications submitted by the
Company may result in abandonment of projects, premature closure of facilities
or restriction of operations, which could result in a loss of earnings from a
facility, a write-off of capitalized costs or both.
Federal, state, local and foreign governments have also from time to time
proposed or adopted other types of laws, regulations or initiatives with
respect to the waste management services industry. Included among them are
laws, regulations and initiatives to ban or restrict the international,
interstate or intrastate shipment of wastes, impose higher taxes on out-of-
state waste shipments than in-state shipments, reclassify certain categories
of hazardous wastes as non-hazardous and regulate disposal facilities as
public utilities. Certain state and local governments have promulgated "flow
control" regulations, which attempt to require that all waste generated within
the state or local jurisdiction must go to certain disposal sites. The United
States Congress has from time to time considered legislation that would enable
or facilitate such bans, restrictions, taxes and regulations. Due to the
complexity of regulation of the industry and to public pressure,
implementation of existing or future laws, regulations or initiatives by
different levels of government may be inconsistent and is difficult to
foresee. Many state and local governments have enacted mandatory or voluntary
recycling laws and bans on the disposal of yard-waste in landfills. An effect
of these and similar laws is to reduce the volume of wastes that would
otherwise be disposed in landfills. In addition, municipalities and other
governmental entities with whom the Company contracts to provide solid waste
collection or disposal services, or both, may require the Company as a
condition of securing the business to provide recycling services and operate
recycling and composting facilities, which may cause the Company to incur
substantial costs. The Company makes a continuing effort to anticipate
regulatory, political and legal developments that might affect its operations
but is not always able to do so. The Company cannot predict the extent to
which any legislation or regulation that may be enacted, amended, repealed or
enforced, or any failure or delay in enactment or enforcement of legislation
or regulations or funding of government agencies or programs, in the future
may affect its operations. Such matters could have a material adverse impact
on the Company's earnings for one or more fiscal quarters or years.
The demand for certain of the services provided by the Company, particularly
its hazardous waste management services, is dependent in part on the existence
and enforcement of federal, state and foreign laws and regulations which
govern the discharge of hazardous substances into the environment and on the
funding of agencies and programs under such laws and regulations. Such
businesses will be adversely affected to the extent that such laws or
regulations are amended or repealed, with the effect of reducing the
regulation of, or liability for, such activity, that the enforcement of such
laws and regulations is lessened or that funding of agencies and programs
under such laws and regulations is delayed or reduced. In particular, the EPA
continues to consider proposals under RCRA to redefine the term "hazardous
waste" for regulatory purposes. Under some such proposals, wastes containing
minimal concentrations of hazardous substances would no longer be subject to
the stringent record-keeping, handling, treatment and disposal rules applied
to hazardous wastes under RCRA. Other EPA proposals would cause certain wastes
which presently must be managed in TSCA-approved facilities to be eligible for
disposal in facilities not approved under TSCA. These proposals would, if
adopted, reduce the volume of wastes for which the Company's hazardous waste
management services are needed.
In addition to environmental laws and regulations, federal government
contractors, including the Company, are subject to extensive regulation under
the Federal Acquisition Regulation and numerous statutes which deal with the
accuracy of cost and pricing information furnished to the government, the
allowability of costs charged to the government, the conditions under which
contracts may be modified or terminated, and other similar matters. Various
aspects of the Company's operations are subject to audit by agencies of the
federal government in connection with its performance of work under such
contracts as well as its submission of bids or proposals to
13
the government. Failure to comply with contract provisions or other applicable
requirements may result in termination of the contract, the imposition of
civil and criminal penalties against the Company, or the suspension or
debarment of all or a part of the Company from federal government work, which
could have a material adverse impact upon the Company's financial condition or
earnings for one or more fiscal quarters or years. Among the reasons for
debarment are violations of various statutes, including those related to
employment practices, the protection of the environment, the accuracy of
records and the recording of costs. Some state and local governments have
similar suspension and debarment laws or regulations.
Because of the high level of public awareness of environmental issues,
companies in the waste management services business, including the Company,
may in the normal course of their business be expected periodically to become
subject to judicial and administrative proceedings. Governmental agencies may
seek to impose fines on the Company or revoke, deny renewal of, or modify the
Company's operating permits or licenses. The Company is also subject to
actions brought by private parties or special interest groups in connection
with the permitting or licensing of its operations, alleging violations of
such permits and licenses, or other matters. In addition, increasing
governmental scrutiny of the environmental compliance records of the Company,
CWM, WTI, Rust, WM International or their affiliates could cause a private or
public entity seeking waste management services to disqualify the Company from
competing for one or more projects, on the grounds that these records display
inadequate attention to environmental compliance.
WASTE MANAGEMENT SERVICES
SOLID WASTE
Operating permits are generally required at the state and local level for
landfills, transfer stations and collection vehicles. Operating permits need
to be renewed periodically and may be subject to revocation, modification,
denial or non-renewal for various reasons, including failure of the Company to
satisfy regulatory concerns. With respect to solid waste collection,
regulation takes such forms as licensing of collection vehicles, truck safety
requirements, vehicular weight limitations and, in certain localities,
limitations on rates, area, time and frequency of collection. With respect to
solid waste disposal, regulation covers various matters, including landfill
location and design, groundwater monitoring, gas control, liquid runoff and
rodent, pest, litter and traffic control. Zoning and land use requirements and
limitations are encountered in the solid waste collection, transfer, recycling
and energy recovery and disposal phases of the Company's business. In almost
all cases the Company is required to obtain conditional use permits or zoning
law changes in order to develop transfer station, resource recovery or
disposal facilities. In addition, the Company's disposal facilities are
subject to water and air pollution laws and regulations. Noise pollution laws
and regulations may also affect the Company's operations. Governmental
authorities have the power to enforce compliance with these various laws and
regulations and violators are subject to injunctions, fines and revocation of
permits. Private individuals may also have the right to sue to enforce
compliance. Safety standards under the Occupational Safety and Health Act
("OSHA") are also applicable to the Company's solid waste and related services
operations.
The EPA and various states acting pursuant to EPA-delegated authority have
promulgated rules pursuant to RCRA which serve as minimum requirements for
land disposal of municipal wastes. The rules establish more stringent
requirements than previously applied to the siting, construction, operations,
closure and post-closure monitoring and maintenance of all but the smallest
municipal waste landfill facilities. In certain cases, the failure of some
states to adopt the federal requirements may increase costs to meet
inconsistent federal and state laws applicable to the same facility. The
Company does not believe that continued compliance with the more stringent
minimum requirements will have a material adverse effect on the Company's
operations. See also "RCRA" and "Superfund" below for additional regulatory
information.
In March 1996, the EPA issued regulations that require large, municipal
solid waste landfills to install and monitor systems to collect and control
landfill gas. The regulations apply to landfills that are designed to
accommodate 2.5 million cubic meters or more of municipal solid waste and that
accepted waste for disposal after November 8, 1987, regardless of whether the
site is active or closed. The date by which each affected
14
landfill must have such a gas collection and control system depends on whether
the landfill began operation before or after May 30, 1991. Landfills
constructed, reconstructed, modified or first accepting waste after May 30,
1991 generally must have systems in place by late 1998. Older landfills
generally will be regulated by the states and will be required to have landfill
gas systems in place within approximately 30 months of EPA's approval of the
state program. Many state solid waste regulations already require collection
and control systems. Compliance with the new regulations is not expected to
have a material adverse effect on the Company.
HAZARDOUS WASTE
WMNA and CWM are required to obtain federal, state, local and foreign
governmental permits for their chemical waste treatment, storage and disposal
facilities. Such permits are difficult to obtain, and in most instances
extensive geological studies, tests and public hearings are required before
permits may be issued. WMNA's and CWM's chemical waste treatment, storage and
disposal facilities are also subject to siting, zoning and land use
restrictions, as well as to regulations (including certain requirements
pursuant to federal statutes) which may govern operating procedures and water
and air pollution, among other matters. In particular, WMNA's and CWM's
operations in the United States are subject to the Safe Drinking Water Act
(which regulates deep well injection), TSCA (pursuant to which the EPA has
promulgated regulations concerning the disposal of PCBs), the Clean Water Act
(which regulates the discharge of pollutants into surface waters and sewers by
municipal, industrial and other sources) and the Clean Air Act (which regulates
emissions into the air of certain potentially harmful substances). In their
transportation operations, WMNA and CWM are subject to the jurisdiction of the
Interstate Commerce Commission and regulated by the DOT and by regulatory
agencies in each state. Employee safety and health standards under OSHA are
also applicable.
All of WMNA's and CWM's chemical waste treatment or disposal facilities in
the United States have been issued permits under RCRA. The regulations
governing issuance of permits contain detailed standards for hazardous waste
facilities on matters such as construction, waste analysis, security,
inspections, training, preparedness and prevention, emergency procedures,
reporting and recordkeeping, closure and post-closure monitoring and
maintenance. Once issued, a final permit has a maximum fixed term of 10 years,
and such permits for land disposal facilities are required to be reviewed five
years from the date of issuance. The issuing agency (either the EPA or an
authorized state) may review or modify a permit at any time during its term.
The Company believes that WMNA and CWM maintain each of their operating
treatment, storage or disposal facilities in substantial compliance with the
applicable requirements promulgated pursuant to RCRA. It is possible, however,
that the issuance or renewal of a permit could be made conditional upon the
initiation or completion of modifications or corrective actions at facilities,
which might involve substantial additional capital expenditures on the part of
WMNA or CWM. Although the Company is informed that WMNA and CWM anticipate the
reauthorization of each permit at the end of its term if the facility's
operations are in compliance with applicable requirements, there can be no
assurance that such will be the case.
The radioactive waste services of Chem-Nuclear are also subject to extensive
governmental regulation. Due to the extensive geological and hydrological
testing and environmental data required, and the complex political environment,
it is difficult to obtain permits for radioactive waste disposal facilities.
Various phases of Chem-Nuclear's low-level radioactive waste management
services are regulated by various state agencies, the United States Nuclear
Regulatory Commission (the "NRC") and the DOT. Regulations applicable to Chem-
Nuclear's operations include those dealing with packaging, handling, labeling
and routing of radioactive materials, and prescribe detailed safety and
equipment standards and requirements for training, quality control and
insurance, among other matters. Employee safety and health standards under OSHA
are also applicable.
See also "RCRA" and "Superfund" below for additional regulatory information.
TRASH-TO-ENERGY AND RELATED SERVICES
WTI's business activities are subject to environmental regulation under
federal, state and local laws and regulations, including the Clean Air Act, the
Clean Water Act and RCRA. The Company believes that WTI's
15
business is conducted in an environmentally responsible manner in material
compliance with applicable laws and regulations. The Company does not
anticipate that WTI's maintaining compliance with current requirements will
result in any material decrease in earnings. There can be no assurance,
however, that such requirements will not change so as to require significant
additional expenditures. In particular, within the next several years, the air
pollution control systems at certain trash-to-energy facilities owned or
leased by WTI most likely will be required to be modified to comply with more
stringent air pollution control standards adopted by the EPA in December 1995
for municipal waste combusters. The compliance dates will vary by facility,
but all affected facilities most likely will be required to be in compliance
with the standards by the end of the year 2000. Currently available
technologies are adequate to meet the new standards. Although the total
expenditures required for such modifications are estimated to be $180 million
to $220 million, they are not expected to have a material adverse effect on
the Company's liquidity or results of operations because provisions in the
impacted facilities' long-term waste supply agreements generally allow WTI to
recover from customers the majority of incremental capital and operating
costs. Customer shares of capital and financing costs are typically recovered
over the remaining life of the waste supply agreements, and pro rata operating
costs are recovered in the period incurred. There can be no assurance,
however, that in such event WTI would be able to recover, for each project,
all such increased costs from its customers. Moreover, it is possible that
future developments, such as increasingly strict requirements of environmental
laws, and enforcement policies thereunder, could affect the manner in which
WTI operates its projects and conducts its business, including the handling,
processing or disposal of the wastes, by-products and residues generated
thereby.
Also, in May 1994, the U.S. Supreme Court ruled that state and local
governments may not constitutionally restrict the free movement of trash in
interstate commerce through the use of flow control laws. Such laws typically
involve a local government specifying a jurisdictional 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. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can
be no assurance that such alternatives to regulatory flow control will in
every case be found lawful or that such legislation will be enacted into law.
WTI's Gloucester County, New Jersey facility has historically relied on a
disposal franchise for substantially all of its supply of municipal solid
waste. On May 1, 1997, the Third Circuit Court of Appeals (the "Third
Circuit") permanently enjoined the State of New Jersey from enforcing its
franchise system as a form of unconstitutional solid waste flow control, but
stayed the injunction for so long as any appeals were pending. On November 10,
1997, the United States Supreme Court announced its decision not to review the
Third Circuit decision, thereby ending the stay and, effectively, the
facility's disposal franchise. The State had continued to enforce flow control
during the stay period. In response, the Gloucester facility has lowered its
prices and solicited new customers.
Under the reimbursement agreement between the project company that owns the
Gloucester facility and the bank that provides credit support to the project,
the termination of the waste franchise constitutes an event of default. WTI
and the credit support bank are presently discussing the consequences of these
developments.
The New Jersey legislature has been considering various legislative
solutions, including a bill that provides for the payment and recovery of
bonded indebtedness incurred by counties, public authorities and certain
qualified private vendors in reliance on the state's franchise system. The
Company currently believes that, through either legislative action or a
project recapitalization, the Gloucester project can be restructured to
operate profitably, albeit at reduced levels, in the absence of regulatory
flow control.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse effect on any of WTI's trash-to-energy operations.
Federal legislation has been proposed, but not yet enacted, to effectively
grandfather existing flow control mandates. In the event that such legislation
is not adopted, WTI believes that affected municipalities will endeavor to
implement alternative lawful means to continue controlling
16
the flow of waste. In view of the uncertain state of the law at this time,
however, WTI is unable to predict whether such efforts would be successful or
what impact, if any, this matter might have on WTI's trash-to-energy
facilities.
WTI's energy facilities are also subject to the provisions of various energy-
related laws and regulations, including the Public Utility Regulatory Policies
Act of 1978 ("PURPA"). The ability of WTI's trash-to-energy and small power
production facilities to sell power to electric utilities on advantageous terms
and conditions and to avoid burdensome public utility regulation has
historically depended, in part, upon the applicability of certain provisions of
PURPA, which generally exempts WTI from state and federal regulatory control
over electricity prices charged by, and the finances of, WTI and its energy-
producing subsidiaries. As state legislatures and the United States Congress
have accelerated their consideration of the manner in which economic
efficiencies can be gained by deregulating the electric generation industry,
utilities and others have taken the position that power sales agreements
entered into pursuant to PURPA which provide for rates in excess of current
market rates should be voidable as "stranded assets." WTI's power production
facilities are qualifying facilities under PURPA and depend on the sanctity of
their power sales agreements for their economic viability. Although a repeal or
modification of PURPA is possible within the next two years, WTI believes that
federal law offers strong protection to the PURPA contracts and recent state
and federal agency and court decisions have unanimously upheld the inviolate
nature of these contracts. In addition, state legislative actions to date have
not attempted to abrogate these contracts. While there is some risk that future
utility restructurings, court decisions and/or legislative or administrative
action in this area could have an adverse effect on the business of WTI, in
light of recent developments, WTI currently believes such risk is remote. The
operations of WTI's existing trash-to-energy and other small power production
facilities business are not currently expected to be materially and adversely
affected if the various benefits of PURPA are repealed or substantially reduced
on a prospective basis.
Finally, the passage of the Energy Policy Act of 1992 created an alternative
ownership mechanism by which WTI's future independent power projects would be
able to participate in the electricity generation industry without the burdens
of traditional public utility regulation. However, WTI can give no assurances
that future utility restructurings, court decisions or legislative or
administrative action in this area will not have a material adverse impact on
WTI's financial position or results of operations.
RCRA
Pursuant to RCRA, the EPA has established and administers a comprehensive,
"cradle-to-grave" system for the management of a wide range of industrial by-
products and residues identified as "hazardous" wastes. States that have
adopted hazardous waste management programs with standards at least as
stringent as those promulgated by the EPA may be authorized by the EPA to
administer their programs in lieu of RCRA.
Under RCRA and federal transportation laws, a transporter must deliver
hazardous waste in accordance with a manifest prepared by the generator of the
waste and only to a treatment, storage or disposal facility having a RCRA
permit or interim status under RCRA. Every facility that treats or disposes of
hazardous wastes must obtain a RCRA permit from the EPA or an authorized state
and must comply with certain operating standards. The RCRA permitting process
involves applying for interim status and also for a final permit. Under RCRA
and the implementing regulations, facilities which have obtained interim status
are allowed to continue operating by complying with certain minimum standards
pending issuance of a permit.
RCRA also imposes restrictions on land disposal of certain hazardous wastes
and prescribes standards for hazardous waste land disposal facilities. Under
RCRA, land disposal of certain types of untreated hazardous wastes has been
banned except where the EPA has determined that land disposal of such wastes
and treatment residuals should be permitted. The disposal of liquids in
hazardous waste land disposal facilities is also prohibited.
The EPA from time to time considers fundamental changes to its regulations
under RCRA that could facilitate exemptions from hazardous waste management
requirements, including policies and regulations that
17
could implement the following changes: redefine the criteria for determining
whether wastes are hazardous; prescribe treatment levels which, if achieved,
could render wastes non-hazardous; encourage further recycling and waste
minimization; reduce treatment requirements for certain wastes to encourage
alternatives to incineration; establish new operating standards for combustion
technologies; and indirectly encourage on-site remediation. To the extent such
changes are adopted, they can be expected to adversely affect the demand for
the Company's chemical waste management services. In this regard, the EPA has
recently proposed regulations which would have the effect of reducing the
volume of waste classified as hazardous for RCRA regulatory purposes. See
"Regulation--General--Waste Management Services--Hazardous Waste."
In addition to the foregoing provisions, RCRA regulations require the
Company to demonstrate financial responsibility for possible bodily injury and
property damage to third parties caused by both sudden and nonsudden
accidental occurrences. See "Insurance." Also, RCRA regulations require the
Company to provide financial assurance that funds will be available when
needed for closure and post-closure care at its waste treatment, storage and
disposal facilities, the costs of which could be substantial. Such regulations
allow the financial assurance requirements to be satisfied by various means,
including letters of credit, surety bonds, trust funds, a financial (net
worth) test and a guarantee by a parent corporation. Under RCRA regulations, a
company must pay the closure costs for a waste treatment, storage or disposal
facility owned by it upon the closure of the facility and thereafter pay post-
closure care costs. If such a facility is closed prior to its originally
anticipated time, it is unlikely that sufficient funds or reserves will have
been accrued over the life of the facility to provide for such costs, and the
owner of the facility could suffer a material adverse impact as a result.
Consequently, it may be difficult to close such facilities to reduce operating
costs at times when, as is currently the case in the hazardous waste services
industry, excess treatment, storage or disposal capacity exists.
SUPERFUND
Superfund provides for EPA-coordinated response and removal actions to
releases of hazardous substances into the environment, and authorizes the
federal government either to clean up facilities at which hazardous substances
have created actual or potential environmental hazards or to order persons
responsible for the situation to do so. Superfund assigns liability for these
response and other related costs to parties involved in the generation,
transfer and disposal of such hazardous substances. Superfund has been
interpreted as creating strict, joint and several liability for costs of
removal and remediation, other necessary response costs and damage to natural
resources. Liability extends to owners and operators of waste disposal
facilities (and waste transportation vehicles) from which a release occurs,
persons who owned or operated such facilities at the time the hazardous
substances were disposed, persons who arranged for disposal or treatment of a
hazardous substance at or transportation of a hazardous substance to such a
facility, and waste transporters who selected such facilities for treatment or
disposal of hazardous substances. Liability may be trebled if the responsible
party fails to perform a removal or remedial action ordered under the law. For
additional information concerning potential Superfund liability, see "Legal
Proceedings."
Superfund created a revolving fund to be used by the federal government to
pay for the cleanup efforts. For the federal government's 1997 fiscal year, a
maximum of approximately $1.4 billion of Superfund spending was authorized.
The federal government has also approved approximately the same amount of 1998
Superfund spending authorization.
The U. S. Congress is expected to consider reauthorization and revision of
the Superfund statute in 1998. In addition to possible changes in the
statute's funding mechanisms and provisions for allocating cleanup
responsibility, it is possible that Congress also will fundamentally alter the
statute's provisions governing the selection of appropriate site cleanup
remedies. For example, Congress may consider whether to continue Superfund's
current reliance on stringent technology standards issued under other statutes
(such as RCRA) to govern removal and treatment of remediation wastes or to
adopt new approaches such as national or site-specific risk based standards.
This and other potential policy changes could significantly affect the
stringency and extent of site remediation, the types of remediation techniques
that will be employed, and the degree to which permitted
18
hazardous waste management facilities will be used for remediation wastes. In
addition, Congress may consider revision of the liability imposed by the
Superfund law for remediation of contamination caused prior to a party's
acquisition of a contaminated site, which could reduce the remediation
obligations of the Company and others who currently are jointly and severally
liable for remediation obligations under Superfund.
INTERNATIONAL WASTE MANAGEMENT AND RELATED SERVICES
WM International's operations are subject to the general business, liability,
land-use planning and other environmental laws and regulations of the countries
where the services are performed and, in Europe, to European Union ("EU")
regulations and directives. The degree of local enforcement of applicable laws
and regulations varies substantially between, and even within, the various
countries in which WM International operates. In addition to the statutes and
regulations imposed by national, state or provincial, and municipal or other
local authorities, many of the countries in which WM International operates are
members of the EU. The EU has issued and continues to issue environmental
directives and regulations covering a broad range of environmental matters and
has created a European Environmental Agency responsible for monitoring and
collating member state environmental data. The Single European Act, passed in
1987, established three fundamental principles to guide the development of
future EU environmental law: (i) the need for preventative action; (ii) the
correction of environmental problems at the source; and (iii) the polluter's
liability for environmental damage.
The Treaty on European Union, signed in December 1991, came into force in
November 1993. Revised in Amsterdam in June 1997, the Treaty now regards
"sustainable development" as a key component of EU policy-making and requires
that environmental protection be integrated into the definition and application
of all EU laws.
The impact of current and future EU legislation will vary from country to
country according to the degree to which existing national requirements already
meet or fall short of the new EU standards and, in some jurisdictions, may
require extensive public and private sector investment and the development and
provision of the necessary technology, expertise, administrative procedures and
regulatory structures. These extensive laws and regulations are continually
evolving in response to technological advances and heightened public and
political concern.
Outside Europe, continuing industrialization, population expansion and
urbanization have caused increased levels of pollution with all of the
resultant social and economic implications. The desire to sustain economic
growth and address historical pollution problems is being accompanied by
investments in environmental infrastructure, particularly in Southeast Asia,
and the introduction of regulatory standards to further control industrial
activities.
The Company believes that WM International's business is conducted in
material compliance with applicable laws and regulations and does not
anticipate that maintaining such compliance will adversely affect the Company's
financial position. There can be no assurance, however, that such requirements
will not change so as to require significant additional expenditures or
operating costs.
COMPETITION
WMNA encounters intense competition, primarily in the pricing and rendering
of services, from various sources in all phases of its waste management and
related operations. In the solid waste collection phase, competition is
encountered, for the most part, from national, regional and local collection
companies as well as from municipalities and counties (which, through use of
tax revenues, may be able to provide such services at lower direct charges to
the customer than can WMNA) and some large commercial and industrial companies
which handle their own waste collection. In the solid waste transfer, resource
recovery and disposal phases of its operations, competition is encountered
primarily from municipalities, counties, local governmental agencies, other
national or regional waste management companies and certain large corporations
not primarily involved in
19
the solid waste management services business. The Company also encounters
intense competition in pricing and rendering of services in its portable
sanitation service business, and the on-site industrial cleaning services
business of Rust managed by WMNA, from numerous large and small competitors. In
addition, Rust's program and facilities management business encounters intense
competition, primarily in pricing, quality and reliability of services, from
various sources in all aspects of its business.
In its hazardous waste management operations, the Company encounters
competition from a number of sources, including several national or regional
firms specializing primarily in chemical waste management, local waste
management concerns and, to a much greater extent, generators of chemical
wastes which seek to reduce the volume of or otherwise process and dispose of
such wastes themselves. The basis of competition is primarily technical
expertise and the price, quality and reliability of service.
WM International encounters intense competition from local companies and
governmental entities in particular countries, as well as from major
international companies. Pricing, quality of service and type of equipment
utilized are the primary methods of competition for collection services, and
proximity of suitable treatment or disposal facilities, technical expertise,
price, quality and reliability of services are the primary methods of
competition for treatment and disposal services.
WTI experiences substantial competition in all aspects of its business. It
competes with a large number of firms, both nationally and internationally,
some of which may have substantially greater financial and technical resources
than WTI. The principal competitive factors with respect to its project
development activities include technological performance, service, technical
know-how, price and performance guarantees. Competing for selection as a
project developer may require commitment of substantial resources over a long
period of time, without any certainty of being ultimately selected. Competition
for attractive development opportunities is intense, as there are a number of
competitors in the industry interested in such opportunities.
Pursuant to the First Amended and Restated International Business
Opportunities Agreement, dated January 1, 1993, by and among CWM, WTI, Waste
Management International, Inc., WM International, Rust and the Company (as
amended, the "IBOA"), each of CWM, WTI, Rust and the Company has agreed that,
until the later of July 1, 2000 or the date on which the Company ceases to
beneficially own a majority of the outstanding voting equity interests of such
subsidiary or ceases to beneficially own a majority of the outstanding voting
equity interests of WM International, and in each case no longer has an option
to obtain such ownership, such subsidiary or the Company will not engage
(except through WM International) in waste management services; design,
development, construction and operation of trash-to-energy facilities in Italy
or Germany; collection, storage, processing, treatment or disposal of hazardous
wastes (including hazardous substance remediation services); or design,
engineering and construction (where the customer is seeking third-party
operation), operation and maintenance of water, wastewater and sewage treatment
facilities (including facilities for treating hazardous waste streams whether
or not the customer is seeking third-party operation) outside North America
(i.e., the United States, its territories and possessions, Canada and Mexico)
(the "WM International Allocated Activities"), except with respect to licensing
of technology and minor interests of CWM, WTI or Rust in publicly held
entities. WTI may engage outside North America in the design, engineering,
construction, operation and maintenance of chimneys and air pollution control
facilities (the "WTI Allocated Activities"). Rust may engage outside North
America in activities relating to industrial facility and power plant
maintenance services (the "Rust Allocated Activities"). Sales by the Company of
recyclables, licensing of technology and minor investments by the Company in
publicly held entities are also permitted activities of the Company outside
North America. WM International has agreed that for the same time periods as
are applicable to CWM, WTI, Rust and the Company above in this paragraph, it
will not engage in North America in the type of activities included within the
WM International Allocated Activities outside North America and will not engage
in the WTI Allocated Activities or the Rust Allocated Activities. Businesses or
assets acquired by a party to the IBOA which are in the domain of another party
thereto (according to the allocations described above) must be offered for sale
to the other party at fair market value.
In addition, WTI and WM International have entered into an agreement whereby
WTI will have primary responsibility for the early-stage development of trash-
to-energy projects outside North America (except in Italy
20
and Germany) and WM International will have the right to acquire up to 49% of
all equity of any such project available to WM International, WTI and their
affiliates, with WTI or other investors owning the balance. This arrangement
is non-cancelable by WTI or WM International without the other's consent prior
to 2000. If the arrangement is canceled, the right to develop trash-to-energy
projects reverts to being part of the WM International Allocated Activities.
By agreement among the parties, the Company is responsible for determining
business allocations among CWM, WTI, Rust, the Company and WM International
which are not controlled by the allocations set forth in the preceding two
paragraphs. In this connection CWM, WTI, Rust, the Company and WM
International have agreed that in order to minimize the potential for
conflicts of interest among various subsidiaries under the common control of
the Company and for so long as the Company shall have beneficial ownership of
a majority of the outstanding voting equity interests of such subsidiary (or
an option to obtain such ownership), the Company has the right to direct
future business opportunities to the Company or the Company-controlled
subsidiary which, in the Company's reasonable and good faith judgment, has the
most experience and expertise in that line of business, provided that the
Company may not allocate a business opportunity to a particular subsidiary if
such business opportunity would involve the subsidiary in a breach of its
agreement not to compete as described in the immediately preceding paragraphs.
Opportunities outside North America relating to the provision of future waste
management services are generally to be allocated to WM International, except
that opportunities outside North America relating to the WTI Allocated
Activities and the Rust Allocated Activities are generally to be allocated to
WTI and Rust, as the case may be. No party is liable for consequential
damages, except for lost profits, for any breach of the IBOA.
In addition, in connection with the transfer by Rust of its hazardous and
radioactive substance remediation business in 1995 and its scaffolding rental
and erection business in 1996, the Company and Rust agreed with the respective
purchasers not to engage in providing those services in North America prior to
2002 (in the case of the remediation business) and 2001 (in the case of the
scaffolding business). In connection with WTI's sale of its water process,
manufacturing and custom engineering business, the Company and WTI agreed with
the purchaser not to engage in such business in the United States or any other
country in which WTI conducted such business at the time of sale until 2001.
INSURANCE
While the Company believes it operates professionally and prudently, its
business exposes it to various risks, including, for example, the potential
for harmful substances escaping into the environment and causing damage or
injuries, the cost of which could be substantial. The Company currently
maintains liability insurance coverage for occurrences under various
environmental impairment, primary casualty and excess liability insurance
policies.
The Company's insurance program includes coverage for pollution liability
resulting from "sudden and accidental" releases of contaminants and
pollutants. The Company 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.
EMPLOYEES
The Company and its subsidiaries employ a total of approximately 58,900
persons in their worldwide continuing operations. Of this number, the Company
employs approximately 37,200 persons in its North
21
American solid and hazardous waste management services operations (excluding
employees of the Rust on-site industrial cleaning services business operated
by WMNA). Of this total, approximately 27,600 persons are employed in solid
and hazardous waste collection, transfer, resource recovery and disposal
activities, and approximately 9,600 in managerial, executive, sales, clerical,
data processing and other solid waste and related activities.
As of December 31, 1997, WM International employed approximately 14,600
persons. Of this number, approximately 10,400 persons were employed in its
collection services operations, 2,300 in its treatment and disposal services
operations and 1,900 in administrative functions.
As of December 31, 1997, WTI had approximately 1,900 full-time employees in
its continuing operations.
Rust employed approximately 5,200 persons at December 31, 1997 in the on-
site industrial cleaning services business managed by WMNA and Rust's program
and facilities management services business.
ACQUISITIONS AND DISPOSITIONS
Since August 1971, the Company has acquired a number of companies, and
certain assets of other companies, engaged in various phases of the
environmental services industry. See Note 5 to the Company's Consolidated
Financial Statements set forth below in Item 8. The amounts and types of
consideration generally have been determined by direct negotiations with the
owners of the businesses acquired. In most instances, the owners of the
acquired businesses were few in number, and often certain key former owners
have continued to operate the businesses following acquisition by the Company.
During 1997, the Company continued to acquire additional operations in the
waste management services industry, purchasing 45 businesses for an aggregate
of $51.4 million in cash and notes, assumed debt of $17.6 million, and
approximately 122,000 shares of the Company's common stock.
Acquisitions have historically contributed significantly to the Company's
growth. However, in recent years the Company's acquisition activity relative
to the size of its revenue base has significantly decreased, and the Company
has disposed of significant amounts of non-waste management services
businesses and assets, as well as underperforming or poorly positioned waste
management services businesses. As it focuses on its core waste management
services business, the Company intends to continue engaging in such
dispositions. The Company's growth prospects may be affected by the decision
to engage in such dispositions and by the availability of additional business
acquisitions at reasonable prices and the Company's ability to finance such
acquisitions. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth below in Item 7 for a discussion
of capital expenditures by the Company, including acquisitions. Other well-
capitalized companies also compete intensely for businesses available to be
acquired.
The acquisition of businesses entails certain inherent risks. Although the
Company reviews businesses to be acquired, because of the nature of the
liabilities involved in these businesses, there can be liabilities which will
not become known until after the transactions are consummated. The Company
seeks to minimize the impact of these liabilities and expenditures by
attempting to obtain indemnities and warranties from the seller which may be
supported by deferring payment of a portion of the purchase price. These
indemnities and warranties, if obtained, may not, however, fully cover the
liabilities due to their limited scope, amount, or duration, the financial
limitations of the indemnitor or warrantor, or other reasons. Businesses
purchased may require expenditures to make up for deferred maintenance and to
improve the quality or quantity of assets acquired. In certain cases, the
Company establishes reserves in respect of the anticipated costs of
remediation for acquired sites.
In June 1996, the Company announced plans to divest $1.0 billion of non-core
assets and non-integrated businesses by the end of 1998. In February 1997, the
Company announced plans to divest an additional $1.5 billion of such
investments by the end of 1999. As a result of these divestiture programs, the
Company and its subsidiaries have sold the following businesses and
investments: Rust sold its North American engineering and
22
construction business and its industrial scaffolding businesses in 1996; WTI
sold its water process, manufacturing and custom-engineered systems businesses
in 1996; WM International entered into an agreement in 1996 to sell its
investment in Wessex Water Plc (which transaction closed in 1997); the Company
sold its approximately 20% interest in ServiceMaster L.P. ("ServiceMaster") to
ServiceMaster for approximately $626 million in 1997; WTI sold its remaining
water services business to U.S. Filter for 2.3 million registered shares of
U.S. Filter, valued at approximately $64 million, in 1997; WM International
sold substantially all of its operations in France and Spain in 1997 and
entered into an agreement to sell its Hamm, Germany waste-to-energy facility
in 1997 (which transaction closed in 1998); and the Company sold certain of
its North American solid waste operations. The Company's plans also include
the sale by Rust of its remaining domestic and international engineering and
consulting business and the sale or joint venturing of the WM International
business in Austria.
In connection with the Merger Agreement with USA Waste, the Company may be
required to dispose of certain of its waste management businesses and assets.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Financial Condition" set forth below in Item 7.
For a more detailed discussion of the Company's recent acquisitions and
dispositions, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Results of Operations" set forth below in
Item 7, and Note 5 to the Company's Consolidated Financial Statements which
are set forth below in Item 8.
ITEM 2. PROPERTIES.
The principal property and equipment of the Company consists of land
(primarily disposal sites), buildings and waste treatment or processing
facilities (other than disposal sites), and vehicles and equipment, which as
of December 31, 1997 represented approximately 14%, 7% and 33%, respectively,
of the Company's total consolidated assets. The Company believes that its
vehicles, equipment and operating properties are well maintained and suitable
for its current operations. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" set forth below in Item 7 for a
discussion of property and equipment expenditures by the Company for the last
four years and the capital budget for 1998. The Company's subsidiaries lease
numerous office and operating facilities throughout the world. For the year
ended December 31, 1997, aggregate annual rental payments on real estate
leased by the Company and its subsidiaries approximated $111.4 million.
The principal fixed assets of WMNA consist of vehicles and equipment (which
include, among other items, approximately 19,900 collection and transfer
vehicles, 1.5 million containers and 24,600 stationary compactors in the
United States and Canada). WMNA owns or leases real property in most states in
which it is doing business. At December 31, 1997, 101 solid waste disposal
facilities, aggregating approximately 65,440 total acres, including
approximately 16,170 permitted acres, were owned by WMNA in the United States
and Canada and 29 facilities, aggregating approximately 13,560 total acres,
including approximately 6,035 permitted acres, were leased from parties not
affiliated with WMNA under leases expiring from 1998 to 2085. At December 31,
1997, the Company owned or leased in the United States a total of seven
treatment, storage or disposal facilities. At such date, the Company's seven
United States chemical waste facilities with secure land disposal sites
aggregated approximately 7,870 acres, including approximately 1,475 permitted
acres.
The principal property and equipment of WM International consist of land
(primarily disposal sites) and vehicles and equipment, which as of December
31, 1997 represented approximately 9.3% and 20.4%, respectively, of WM
International's assets. The principal fixed assets utilized in WM
International's collection services operations at December 31, 1997, consisted
of vehicles and equipment (which included, among other items, approximately
6,700 collection, transportation, and other route vehicles and approximately
260 pieces of landfill and other heavy equipment), and approximately 310,000
containers, including approximately 3,300 stationary compactors. In addition,
WM International owns approximately 730 pieces of hazardous waste equipment,
consisting predominately of containers and collection vehicles.
WTI currently owns, operates or leases 16 trash-to-energy facilities (which
facilities are capable of processing up to 23,750 tons of solid waste per
day), eight cogeneration and small power production facilities,
23
two coal handling facilities, biosolids drying, pelletizing and composting
facilities, and various other office and warehouse facilities. Facilities
leased or operated (but not owned) by WTI are under leases or agreements
having terms expiring from the years 1998 to 2020, subject to renewal options
in certain cases.
ITEM 3. LEGAL PROCEEDINGS.
The continuing business in which the Company is engaged is 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 facilities. Subject to the discussion set
forth below concerning the New Milford, Connecticut landfill, which is owned
and operated by a wholly owned subsidiary of the Company, the Company believes
that these matters will not have a material adverse effect on its results of
operations 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.
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under Superfund. The majority of these proceedings are based on
allegations that certain subsidiaries of the Company (or their predecessors)
transported hazardous substances to the sites in question, often prior to
acquisition of such subsidiaries by the Company. Such proceedings arising
under Superfund typically involve numerous waste generators and other waste
transportation and disposal companies and seek to allocate or recover costs
associated with site investigation and cleanup, which costs could be
substantial.
As of December 31, 1997, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 89 locations
listed on the Superfund National Priority List ("NPL"). Of the 89 NPL sites at
which claims have been made against the Company, 17 are sites which the
Company has come to own over time. All of the NPL sites owned by the Company
were initially sited by others as land disposal facilities. At each of the 17
owned facilities, the Company is working in conjunction with the government to
characterize or to remediate identified site problems. In addition, at these
17 facilities the Company has either agreed with other legally liable parties
on an arrangement for sharing the costs of remediation or is pursuing
resolution of an allocation formula. The 72 NPL sites at which claims have
been made against the Company and which are not owned by the Company are at
different procedural stages under Superfund. At some of these sites, the
Company's liability is well defined as a consequence of a governmental
decision as to the appropriate remedy and an agreement among liable parties as
to the share each will pay for implementing that remedy. At others, where no
remedy has been selected or the liable parties have been unable to agree on an
appropriate allocation, the Company's future costs are uncertain.
The Company periodically reviews its role, if any, with respect to each such
site, giving consideration to the nature of the Company's alleged connection
to the location (e.g., owner, operator, transporter or generator), the extent
of the Company's alleged connection to the location (e.g., amount and nature
of waste hauled to the location, number of years of site operation by the
Company or other relevant factors), 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 at the
location, and the nature and estimated cost of the likely
24
remedy. Where the Company concludes that it is probable that a liability has
been incurred, a provision is made in the Company's financial statements for
the Company's best estimate of the liability based on management's judgment and
experience, information available from regulatory agencies and the number,
financial resources and relative degree of responsibility of other potentially
responsible parties who are jointly and severally liable for remediation of a
specific site, as well as the typical allocation of costs among such parties.
If a range of possible outcomes is estimated and no amount within the range
appears to be a better estimate than any other, then the Company provides for
the minimum amount within the range, in accordance with generally accepted
accounting principles. Amounts recorded are discounted where appropriate. Sites
subject to state action under state laws similar to the federal Superfund
statute are treated by the Company in the same way as NPL sites.
The Company's estimates are subsequently revised, as deemed necessary, as
additional information becomes available. While the Company does not anticipate
that the amount of any such revisions will have a material adverse effect on
the Company's operations or financial condition, the measurement of
environmental liabilities is inherently difficult 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. Such matters could have a material adverse impact on earnings for
one or more fiscal quarters or years.
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 sites. Some of such lawsuits may seek to have the Company or its
subsidiaries pay the costs 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 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 factors. Accordingly, it is possible such matters could
have a material adverse impact on the Company's earnings for one or more fiscal
quarters or years.
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 for all governmental permits
needed to remove all waste above the height allowed by the zoning ordinance,
and the Connecticut Supreme Court has upheld that ruling. The Company is
complying with the order of the Superior Court while also seeking an
alternative resolution to this matter. The Company is unable to predict the
outcome of this matter at this time. 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 results of operations in one or more future periods.
The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. In this action the Company is seeking a declaratory judgment that
environmental liabilities asserted against the Company or its subsidiaries, or
that may be asserted in the future, are covered by insurance policies purchased
by the Company or its subsidiaries. The Company is also seeking to recover
defense costs and other damages incurred as a result of the assertion of
environmental liabilities against the Company or its subsidiaries for events
occurring over at least the last 25 years at approximately 140 sites and the
defendant insurance carriers' denial of coverage of such liabilities. While the
Company has reached settlements with some
25
of the carriers, the remaining defendants have denied liability to the Company
and have asserted various defenses, including that environmental liabilities
of the type for which the Company is seeking relief are not risks covered by
the insurance policies in question. The remaining defendants are contesting
these claims vigorously. Discovery is nearly complete as to the 12 sites in
the first phase of the case and discovery is expected to continue for several
years as to the remaining sites. Currently, trial dates have not been set. The
Company is unable at this time to predict the outcome of this proceeding. No
amounts have been recognized in the Company's financial statements for
potential recoveries.
Several purported class action lawsuits and one purported derivative lawsuit
seeking injunctive relief and unspecified money damages were filed in the
Chancery Court in and for New Castle County, Delaware against the Company,
WTI, and individual directors of WTI in connection with the June 20, 1997
proposal by the Company to acquire all of the shares of WTI common stock which
the Company does not own. The Company has agreed to a merger in which WTI's
stockholders would receive $16.50 in cash per share of WTI's common stock. See
"Business--General" above. The lawsuits allege, among other things, that the
defendants have breached fiduciary duties to WTI's minority stockholders
because the merger consideration contemplated by the proposal was inadequate
and unfair. In addition, the purported derivative lawsuit alleges that the
proposal was part of a plan to misappropriate WTI's corporate opportunity to
repurchase its own shares. The Company believes that its actions and those of
WTI and its Board of Directors in connection with the proposal have been in
accordance with Delaware law. Accordingly, the Company intends to contest
these lawsuits vigorously.
In November and December 1997, several alleged purchasers of the Company's
stock brought purported class action lawsuits against the Company and several
of its current and former officers in the United States District Court for the
Northern District of Illinois. Each of the lawsuits asserts that the
defendants violated the federal securities laws by issuing allegedly false and
misleading statements in 1996 and 1997 about the Company's financial
condition. Among other things, the plaintiffs allege that the Company employed
accounting practices that were improper and that caused its publicly filed
financial statements to be materially false and misleading. The lawsuits
demand, among other relief, unspecified monetary damages, attorneys' fees and
the costs of conducting the litigation. The Company intends to defend itself
vigorously in this litigation. In January 1998, the 14 purported class actions
were consolidated before one judge in the Northern District of Illinois.
Plaintiffs have until May 1998 to file a consolidated amended complaint. It is
not possible at this time to predict the impact this litigation may have on
the Company, although it is reasonably possible that the outcome may have a
materially adverse impact on its financial condition or results of operations
in one or more future periods.
The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the Company's previously
filed financial statements and related accounting policies, procedures and
system of internal controls. The Company intends to cooperate with such
investigation. The Company is unable to predict the outcome or impact of this
investigation at this time.
A lawsuit by an alleged Company stockholder purporting to represent a class
of the Company's stockholders has been filed in the Chancery Court in and for
New Castle County, Delaware (although the Company has not yet been served)
against the Company and members of its Board of Directors alleging breaches of
fiduciary duty by the defendants in connection with the Merger with USA Waste.
The lawsuit seeks, among other things, to have the Merger enjoined and to
recover unspecified damages. The Company believes the suit to be without merit
and intends to contest it vigorously.
The Company and certain of its subsidiaries are also currently involved in
other civil litigation and governmental proceedings relating to the conduct of
their business. While the outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty, the Company believes that
these matters will not have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's security holders during the
fourth quarter of 1997.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange under the symbol "WMX." The following table sets forth
by quarter for the last two years the high and low sale prices of the
Company's common stock on the New York Stock Exchange Composite Tape as
reported by the Dow Jones News Retrieval Service, and the dividends declared
by the Board of Directors of the Company on its common stock.
1996
QUARTERLY CASH
SUMMARY DIVIDENDS
------------ DECLARED
HIGH LOW PER SHARE
---- ---- ---------
First......................................... $32 1/8 $27 3/4 $.15
Second........................................ 36 1/8 31 5/8 .16
Third......................................... 33 1/4 28 5/8 .16
Fourth........................................ 36 5/8 32 1/8 .16
1997
QUARTERLY CASH
SUMMARY DIVIDENDS
------------ DECLARED
HIGH LOW PER SHARE
---- ---- ---------
First......................................... $37 1/2 $30 1/8 $.16
Second........................................ 34 1/4 28 .17
Third......................................... 35 3/8 29 1/4 .17
Fourth........................................ 35 21 15/16 .17
At March 1, 1998, the Company had approximately 45,000 stockholders of
record.
Due in part to the high level of public awareness of the business in which
the Company is engaged, regulatory enforcement proceedings or other
unfavorable developments involving the Company's operations or facilities,
including those in the ordinary course of business, may be expected to
engender substantial publicity which could from time to time have an adverse
impact upon the market price for the Company's common stock.
In February 1997, the Company's Board of Directors approved a new repurchase
program to replace the program approved in December 1995. Under the new
program, the Company is authorized to purchase during 1997 and 1998 up to 50
million shares of its common stock in the open market, in privately negotiated
transactions or through issuer tender offers. The Company repurchased 30
million shares through a "Dutch auction" tender offer in the second quarter of
1997 but did not repurchase any other shares that year. The Company does not
expect to conduct any repurchases in 1998.
During 1994, 1995, 1996 and 1997, the Company sold put options on 42.3
million shares of its common stock in conjunction with the repurchase program.
The put options gave the holders the right at maturity to require the Company
to repurchase its shares at specified prices. In the event the options were
exercised, the Company could 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. For information concerning the exercise or
expiration of these put options and related information, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Financial Condition" set forth below in Item 7.
The Company's ability to pay dividends is restricted under a credit
agreement; however, so long as no event of default has occurred and is
continuing, the Company is permitted to pay regularly scheduled dividends in
amounts not to exceed $100 million in any calendar quarter. However, the
Merger Agreement with USA Waste limits the Company to current dividends of
$0.17 per share, or approximately $77.35 million per quarter.
27
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information for each of the
six years in the period ended December 31, 1997 is derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, whose report is included herein. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition" set forth below
in Item 7 and the Company's Consolidated Financial Statements, and the related
Notes, and the other financial information set forth below in Item 8.
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
FOR THE SIX YEARS ENDED DECEMBER 31, 1997
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
RESTATED
---------------------------------------------------------------
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- ------------
Revenue................. $ 8,661,027 $ 7,827,280 $ 8,537,883 $ 9,100,225 $ 9,225,636 $ 9,188,582
----------- ----------- ----------- ----------- ----------- ------------
Costs and expense....... $ 7,216,101 $ 6,560,716 $ 7,090,342 $ 7,606,679 $ 7,756,225 $ 8,324,613
Asset impairment loss... 20,437 29,009 33,970 53,772 64,729 1,480,262
Special charges......... 219,900 524,767 -- 335,587 370,735 145,990
Gains from stock
transactions of
subsidiaries and
exchange of
Exchangeable LYONs..... (374,755) (15,109) -- -- -- --
Other expenses, net..... 322,542 175,729 299,423 232,540 373,480 291,390
----------- ----------- ----------- ----------- ----------- ------------
Income (loss) from
continuing operations
before income taxes.... $ 1,256,802 $ 552,168 $ 1,114,148 $ 871,647 $ 660,467 $ (1,053,673)
Provision for income
taxes.................. 455,377 283,347 512,683 451,741 436,473 215,667
----------- ----------- ----------- ----------- ----------- ------------
Income (loss) from
continuing operations.. $ 801,425 $ 268,821 $ 601,465 $ 419,906 $ 223,994 $ (1,269,340)
Income (loss) from
discontinued
operations............. -- 19,886 27,324 4,863 (263,301) 95,688
Extraordinary items..... -- -- -- -- -- (516)
Accounting changes...... (61,739) -- (1,281) (84,672) -- (1,936)
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss)....... $ 739,686 $ 288,707 $ 627,508 $ 340,097 $ (39,307) $ (1,176,104)
=========== =========== =========== =========== =========== ============
Average common shares
outstanding............ 492,534 484,885 483,748 485,346 489,171 466,601
=========== =========== =========== =========== =========== ============
Basic earnings (loss)
per share:
Continuing operations.. $ 1.62 $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued
operations............ -- 0.05 0.06 0.01 (0.54) 0.20
Extraordinary item..... -- -- -- -- -- --
Accounting changes..... (0.12) -- -- (0.17) -- --
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss).... $ 1.50 $ 0.60 $ 1.30 $ 0.70 $ (0.08) $ (2.52)
=========== =========== =========== =========== =========== ============
Diluted earnings (loss)
per share:
Continuing operations.. $ 1.62 $ 0.55 $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued
operations............ -- 0.04 0.06 0.01 (0.54) 0.20
Extraordinary item..... -- -- -- -- -- --
Accounting changes..... (0.12) -- -- (0.17) -- --
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss).... $ 1.50 $ 0.59 $ 1.30 $ 0.70 $ (0.08) $ (2.52)
=========== =========== =========== =========== =========== ============
Dividends per share..... $ 0.50 $ 0.58 $ 0.60 $ 0.60 $ 0.63 $ 0.67
=========== =========== =========== =========== =========== ============
Ratio of earnings to
fixed charges.......... 4.67 to 1 2.11 to 1 3.13 to 1 2.61 to 1 2.15 to 1 N/A
=========== =========== =========== =========== =========== ============
December 31,
Property and
equipment, net........ $ 7,510,836 $ 8,180,905 $ 8,559,526 $ 8,815,839 $ 8,798,400 $ 7,254,149
=========== =========== =========== =========== =========== ============
Total assets........... $13,944,385 $15,716,369 $16,444,947 $17,457,159 $17,083,577 $ 13,589,098
=========== =========== =========== =========== =========== ============
Long-term debt......... $ 4,312,511 $ 6,143,685 $ 6,024,478 $ 6,390,041 $ 6,971,607 $ 5,078,557
=========== =========== =========== =========== =========== ============
Stockholders' equity... $ 4,014,490 $ 3,682,143 $ 3,907,150 $ 4,042,646 $ 3,741,761 $ 1,345,652
=========== =========== =========== =========== =========== ============
28
- --------
Notes:
(1) As a result of a comprehensive review begun in the third quarter of 1997,
the Company determined that certain items of expense were incorrectly
reported in previously issued financial statements. The Company has
accordingly restated its financial results for the years 1992 through
1996. Stockholders' equity, at December 31, 1991, was restated from
$4,133.1 million to $3,934.5 million. (See Note 2 to Consolidated
Financial Statements).
(2) The Company recorded an asset impairment loss in 1997, and restated prior
year financial statements to retroactively recognize impairment losses in
earlier years. See Note 16 to Consolidated Financial Statements.
(3) The results for 1992 include a non-taxable gain of $351.1 million (before
minority interest) resulting from the initial public offering of Waste
Management International plc ("WM International"), less $80.6 million of
related exit costs, primarily to write down international assets not
included in WM International, as well as special charges of $219.9
million (before tax and minority interest) primarily related to
writedowns of the Company's medical waste business, Chemical Waste
Management Inc. ("CWM") incinerators in Chicago, Illinois, and Tijuana,
Mexico, a former subsidiary's investment in its asbestos abatement
business, and certain costs incurred by the former subsidiary and CWM
related to the formation of Rust International Inc. ("Rust").
(4) The results for 1993 include a non-taxable gain of $15.1 million (before
minority interest), relating to the issuance of shares by Rust, as well
as a special asset revaluation and restructuring charge of $524.8 million
(before tax and minority interest) recorded by CWM related primarily to a
revaluation of its thermal treatment business, and a provision of
approximately $14 million to adjust deferred income taxes resulting from
the 1993 tax law change.
(5) The results for 1995 include a special charge of $140.6 million (before
tax) recorded by CWM, primarily to write off its investment in facilities
and technologies that it abandoned because they do not meet customer
service or performance objectives, and a special charge of $194.6 million
(before tax and minority interest) recorded by WM International relating
to 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.
(6) In 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 1996, the sale of the
industrial process engineering and construction business, based in
Birmingham, Alabama, was completed. In 1996, Wheelabrator Technologies
Inc. ("WTI") sold its water process systems and equipment manufacturing
businesses, and Rust sold its industrial scaffolding business. WTI
entered into an agreement to sell its water and wastewater facility
operations and privatization business and Rust began implementing plans
to exit its remaining domestic and international engineering and
consulting business. These businesses were classified as discontinued
operations in the financial statements. The Rust disposition was not
completed within one year, and accordingly in 1997 this business has been
reclassified back into continuing operations, as operations held for
sale, in accordance with generally accepted accounting principles. The
unused portion ($87.0 million) of the previously recorded provision for
loss on disposal was reversed in discontinued operations, and an
impairment loss provision of $122.2 million was recognized in continuing
operations.
(7) The results for 1996 include special charges of $47.1 million (before tax
and minority interest) related to WM International's sale of its
investment in Wessex Water Plc and a charge of $169.5 million (before tax
and minority interest) to revalue its investments in France, Austria and
Spain in contemplation of exiting these markets and to write off an
investment in a hazardous waste disposal facility. Also in 1996, Waste
Management of North America, Inc. ("WMNA") and CWM recorded special
charges of $154.1 million (before tax) for reengineering their finance
and administration functions and increasing reserves for certain
litigation.
(8) In 1997, the Company recorded a special charge of $41.6 million (pretax)
for severance related to WMNA, and WM International recorded a charge of
$104.4 million (before tax and minority interest) to reflect costs of
demobilization following the loss of the contract renewal for Buenos
Aires, Argentina, divestiture or closure of underperforming businesses,
and the writeoff of projects it decided to no longer pursue.
(9) In 1992, the Company changed its accounting for income taxes and post-
retirement benefits other than pensions as a result of new standards
issued by the Financial Accounting Standards Board. In 1995, the Company
changed its accounting for capitalized interest on landfill cell
construction. See Note 3 to Consolidated Financial Statements.
(10) Earnings were inadequate to cover fixed charges in 1997. Earnings would
have to increase by $1,026.1 million to cover fixed charges and bring the
ratio of earnings to fixed charges to one-to-one.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
(TABLES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
As more fully described in the Notes to Consolidated Financial Statements,
certain financial information in this Report has been restated to correct
previously issued financial statements.
On March 10, 1998, the Company entered into a definitive merger agreement
(the "Merger Agreement") with USA Waste Services, Inc. ("USA Waste") pursuant
to which the Company will be merged with a wholly-owned subsidiary of USA
Waste (the "Merger"). Pursuant to the Merger Agreement, the Company's
stockholders will receive .725 shares of common stock of USA Waste for each
share of common stock of the Company. The consummation of the Merger is
subject to a number of conditions, including the expiration or termination of
the applicable merger review waiting period under the Hart-Scott-Rodino Anti-
Trust Improvements Act of 1976, approval by the stockholders of each company
and other typical closing conditions. In addition, the Merger is contingent
upon the transaction qualifying for pooling-of-interests accounting treatment.
In order to qualify for pooling-of-interests accounting treatment, the Company
intends to sell a portion of its treasury shares pursuant to a registered
public offering prior to the closing of the Merger. A lawsuit by an alleged
Company stockholder purporting to represent a class of the Company's
stockholders has been filed (although the Company has not yet been served)
against the Company and the members of its Board of Directors alleging
breaches of fiduciary duty by the defendants in connection with the Merger.
The lawsuit seeks, among other things, to have the transaction enjoined and to
recover unspecified damages. The Company believes the suit to be without merit
and intends to contest it vigorously.
Upon the consummation of the Merger, certain long-term debt of Waste
Management International plc ("WM International") may be accelerated and
become payable with three months notice. At December 31, 1997, this debt
totalled approximately $209 million, but by March 17, 1998 had been reduced to
$71 million. In addition, Wessex Water Plc ("Wessex") has an option to acquire
WM International's ownership in its United Kingdom business at fair market
value that may become exercisable upon the consummation of the Merger. In
1997, this business had revenues of approximately $276 million and operating
income (before minority interest) of approximately $25 million. WM
International had a net investment of approximately $315 million in the
business at December 31, 1997.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated 1997 (loss) from continuing operations of Waste Management,
Inc. (formerly WMX Technologies, Inc.) and its subsidiaries ("Waste
Management" or the "Company") was $(1,269.3) million or $(2.72) per share
compared with income of $224.0 million or $0.46 per share in 1996, $419.9
million or $0.86 per share in 1995, and $601.5 million or $1.24 per share in
1994. Net (loss) was $(1,176.1) million or $(2.52) per share in 1997, $(39.3)
million or $(0.08) per share in 1996, with net income of $340.1 million or
$0.70 per share in 1995 and $627.5 million or $1.30 per share in 1994. Per
share amounts referred to in this paragraph and throughout Management's
Discussion and Analysis are Basic Earnings Per Share as defined by Statement
of Financial Accounting Standards ("FAS") No. 128. (See Note 11 to
Consolidated Financial Statements).
Consolidated 1997 revenue from continuing operations was $9.19 billion
compared with $9.23 billion in 1996, $9.10 billion in 1995 and $8.54 billion
in 1994.
Results for all periods were impacted by special charges, asset impairments,
other adjustments, changes in estimates, and for 1995 and 1997, by changes in
accounting principles.
The Company has undertaken a number of initiatives in response to changing
conditions in its markets and in the environmental services industry. In
January 1997, the Board of Directors approved a package of strategic
30
initiatives designed to enhance stockholder value, the cornerstone of which is
a focus solely on waste management services in domestic and selected
international markets where the Company can be first or second in market
share. In support of this, the Company divested non-core and non-integrated
businesses and assets valued at approximately $1.4 billion in 1997 with an
additional $400 million targeted for disposition by the end of 1998. A
significant portion of the proceeds from the 1997 asset sales was utilized to
repurchase 30 million shares of the Company's common stock in a Dutch Auction
tender offer which was concluded in the second quarter of the year. In
November 1997, the Board of Directors approved a major organizational
restructuring and cost-control program to substantially reduce overhead in its
North American waste services operations. As a result of the restructuring,
approximately 1,200 operating manager and managerial support staff positions
were eliminated, or about 20% of that employee group. It also reduced the
number of profit centers from 250 to 31, and established a regional based
operating structure which is focused on specific customer segments, including
commercial, industrial, residential and governmental accounts. The program
additionally includes new computer systems and purchasing and fleet management
initiatives designed to further reduce the Company's operating costs over the
next three years.
As a result of the strategy to focus on waste management services, late in
1996 and early 1997, the Company sold its domestic water operations as well as
its minority interest in Wessex. The environmental and infrastructure
engineering and consulting services lines of business have been classified as
continuing operations held for sale in the accompanying financial statements.
The Company had expected to complete the sale of these businesses in 1997, and
at this time is pursuing such sales. See "Discontinued Operations and Other
Asset Dispositions" below for further discussion.
The Company has agreed to acquire all of the approximately 53 million shares
of Wheelabrator Technologies Inc. ("WTI") which it does not already own at a
price of $16.50 per share. A special meeting of stockholders of WTI is
scheduled for March 30, 1998 to vote on the proposal, and the transaction is
expected to close as soon as practicable thereafter if the transaction is
approved.
1995 OPERATIONS COMPARED WITH 1994
Revenue. Consolidated revenue growth from 1994 to 1995 is shown in the table
which follows:
PERCENT
1994 1995 CHANGE
-------- -------- -------
North America (excluding trash-to-energy).... $5,936.8 $6,311.6 6.3%
North American trash-to-energy............... 926.9 956.1 3.2
WM International............................. 1,710.9 1,865.1 9.0
Intercompany revenue......................... (36.7) (32.6)
-------- --------
Total...................................... $8,537.9 $9,100.2 6.6%
======== ======== ===
The solid waste services portion of North American revenue was $5.53 billion
in 1995 compared with $5.10 billion in 1994, an increase of 8.4%. Solid waste
services revenue growth in 1995 by line of business is shown in the following
table:
PERCENT
CHANGE
-------
Residential....................................................... 8.1%
Commercial........................................................ 2.8
Rolloff and industrial............................................ 0.6
Disposal, transfer and other...................................... 23.2
Revenue growth due to acquisitions was 1.0%, with 7.4% growth resulting from
price and volume increases. A significant portion of this internal growth,
2.0%, was the result of higher average recyclable commodity prices in 1995 vs.
1994. Actual commodity sales were approximately $100 million higher due to
this higher average rate. Additionally, commodity volumes were higher in 1995
due to the Company's marketing efforts and the
31
acquisition of additional material recovery facilities, adding an additional
$135 million of revenue, and thus accounting for approximately 2.6% of the
North American solid waste revenue growth. The remaining 2.8% was a
combination of price and volume in the other lines of business.
North American hazardous waste revenue continued to decline in 1995 as waste
minimization, recycling, over-capacity and shifting governmental regulation
and enforcement continued to adversely affect the industry. Total 1995
hazardous waste revenue was $611.4 million compared with $643.1 million in
1994. Pricing and volume were both negative, only partially offset by the 1995
acquisition of a 60% interest in Advanced Environmental Technical Services,
L.L.C. In addition, unusually high revenue in the second quarter of 1994 at
the Company's Barnwell, South Carolina, low-level radioactive waste disposal
facility adversely affected 1995 comparisons.
North American (WTI) trash-to-energy revenue was essentially flat from 1994
to 1995 as higher revenue from operating plants was largely offset by lower
construction revenue on the Lisbon, Connecticut, facility (which commenced
operations January 1, 1996). Approximately 78% of the growth in revenue from
operating plants was accounted for by the Falls Township and Ridge Generating
Station facilities, which began operations in 1994. Contractual price
escalation on long-term trash disposal and energy sales contracts, partly
offset by curtailment of electrical purchases by certain utility customers,
accounted for the balance of the operating plant revenue growth. Spot pricing
on the whole was stable, although there were increases in certain markets
offset by declines in others.
WM International revenue, in U.S. dollars, increased $154.2 million or 9.0%
in 1995 compared with 1994. Components of the revenue change are as follows:
PERCENT
CHANGE
-------
Price............................................................. 1.8%
Volume (including start-ups)...................................... (3.2)
Purchased businesses.............................................. 4.5
Foreign currency translation...................................... 5.9
----
Total........................................................... 9.0%
====
The major cause of the 1995 volume decline was less construction revenues as
a result of the completion of the construction phase of the SENT Landfill in
Hong Kong, which opened during the year. A new pricing mechanism introduced by
the Hong Kong government in March 1995, which required generators to absorb a
portion of the disposal cost for waste brought to WM International's Hong Kong
incinerator, resulted in volume declines in certain waste streams, but the
impact was offset with other volumes. Pricing in Europe was negatively
impacted in 1995 by relatively low inflation, highly competitive conditions in
the solid waste market in France, softness in segments of the hazardous waste
market, and a continuation of lower prices on rebids of municipal contracts in
Italy. Acquisition activity continued to be below WM International's
historical levels and focused particularly on "tuck-in" acquisitions which can
complement or expand existing operations in a given market. WM International
also increased its acquisition and construction of material recovery
facilities to take advantage of an emphasis on recycling as an alternative to
land disposal.
Operating Expenses. Operating expenses increased $487.0 million or 8.1% in
1995 over 1994. Remediation expenses, net of insurance recoveries increased
$29.5 million. The Company recorded additional loss reserves of $14.2 million
related to long-term contracts of its Chem-Nuclear subsidiary. In addition,
approximately $73.6 million of software development costs, certain landfill
development and expansion projects and other deferred costs which the Company
determined were not realizable were expensed in 1995.
Excluding the above, operating expenses were relatively constant as a
percentage of revenue for 1995 as compared to 1994 overall. North American
solid waste operating expenses declined as a percentage of revenue
32
primarily as a result of higher recyclable commodity prices. In addition,
milder winter weather in many parts of North America, increased
internalization of recyclables processing, and continuing route productivity
enhancements positively impacted operating expenses. Hazardous waste operating
expenses increased, however, as a percentage of revenue in 1995 due to
continued downward pressure on prices, a lower revenue base and a shift in
revenue mix toward lower margin services offsetting the benefit of headcount
reductions. Operating expenses at WM International increased as a result of
higher labor costs in Italy and widespread strikes and industrial actions
against the government in France in the fourth quarter of 1995.
Selling and administrative expenses. Selling and administrative expenses
increased $29.4 million or 2.8% in 1995 over 1994. While there was an increase
in absolute dollars, as a percentage of revenue, selling and administrative
expenses declined from 12.4% in 1994 to 12.0% in 1995. The decline as a
percentage of revenue crossed all operating groups as productivity
enhancements were instituted throughout the Company allowing selling and
administrative costs to be spread over a larger revenue base. The increase in
absolute dollars resulted primarily from acquisitions and pay-for-performance
compensation plans.
Special Charges. In the first quarter of 1995, in response to the continuing
deterioration of the chemical waste services market, the Company's Chemical
Waste Management, Inc. ("CWM") subsidiary 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-cancelable 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-cancelable 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 abandoned leased
facilities continue into the future.
1996 OPERATIONS COMPARED WITH 1995
Revenue. The following table sets forth changes in consolidated revenue from
1995 to 1996:
PERCENT
1995 1996 CHANGE
-------- -------- -------
North America (excluding trash-to-energy).... $6,311.6 $6,406.1 1.5%
North American trash-to-energy............... 956.1 952.3 (0.4)
WM International............................. 1,865.1 1,913.8 2.6
Intercompany revenue......................... (32.6) (46.6)
-------- --------
Total...................................... $9,100.2 $9,225.6 1.4%
======== ======== ====
The solid waste services portion of North American revenue grew 3.5% to
$5.73 billion in 1996. Solid waste services revenue growth in 1996 by line of
business is shown in the following table:
PERCENT
CHANGE
-------
Residential....................................................... 4.2%
Commercial........................................................ 4.1
Rolloff and industrial............................................ 5.7
Disposal, transfer and other...................................... 0.7
33
Although the Company pursued price increases in 1996, the impact on North
American solid waste services revenue growth was minimal as a year-long
decline in recyclable commodity prices largely offset the benefit of increases
in the commercial and industrial markets. Volume growth added approximately
2.0% to such revenue. Acquisitions, net of dispositions, accounted for
approximately 1.5%. Recycling revenue declined 16.0% from 1995 to 1996 due to
the substantial price decline in recyclable commodities. The Company 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. However, despite these efforts, it
was unable to replace the profits associated with the stronger 1995 recyclable
commodities market. North American hazardous waste revenue declined 7.7% from
1995 as the industry problems continued.
The North American trash-to-energy revenue comparison is adversely affected
by the loss of the Lisbon construction revenue in 1996. Excluding this factor,
1996 revenue grew $33.8 million, or 3.7%, to $952.3 million. The commercial
operations of the Lisbon facility, which began in January 1996, contributed
$18.4 million of the increase. WTI acquired two industrial cogeneration plants
(so-called "inside-the-fence" facilities) during the year as part of its
strategy to leverage its energy plant operating capabilities and project
finance expertise by owning and/or operating power plants for industrial
customers. Together these acquisitions contributed $7.3 million to 1996
revenue growth. Contractual price escalation at existing facilities,
additional processing at several trash-to-energy plants, and lower energy
purchase curtailment accounted for most of the remaining revenue growth.
Overall spot pricing remained stable during the year.
Expressed in U.S. dollars, WM International revenue increased $48.7 million
or 2.6% in 1996 compared with 1995. Components of the revenue change are as
follows:
PERCENT
CHANGE
-------
Price............................................................. 1.4%
Volume............................................................ (0.6)
Purchased businesses.............................................. 1.2
Foreign currency translation...................................... 0.6
----
Total........................................................... 2.6%
====
Although WM International was able to implement price increases on its
services despite weak economies in many of its markets, the impact of such
increases was adversely affected by recyclable commodities prices falling
substantially from their highs in 1995. Difficult economic conditions in
Germany, France and Italy, as well as the closure of a landfill in France,
resulted in a volume decline, partially offset by hazardous waste volume
growth in The Netherlands and solid waste volume growth in the United Kingdom.
In addition, the Company was awarded contracts to design, build and operate
for fifteen years two transfer stations in Hong Kong. Construction revenue on
one of these projects contributed to revenue growth in 1996. International
acquisition activity was insignificant.
Operating expenses. Operating expenses increased $145.8 million or 2.2% in
1996 over 1995. This increase was greater than the revenue increase due to
several reasons. Self-insurance expense increased $57.0 million in 1996 over
1995. This increase consisted of $31.0 million related to growth of prior
years claims, $18.0 million related to implementation of new claims reporting
processes for the Company's North American solid waste operations and $8.0
million related to higher 1996 claims and claims cost growth. In addition, the
Company accrued provisions for certain loss-making recycling contracts in 1996
totaling $12.4 million. During 1996 certain route optimization software along
with other software projects became obsolete, resulting in $7.4 million being
charged to operating expenses. Remediation expenses, net of insurance
settlement recoveries declined by $13.4 million in 1996 from 1995, primarily
as a result of additional settlements with insurance companies.
Excluding the above, operating expenses for 1996 compared to 1995 increased.
A large part of the increase was due to reduced recyclable commodity prices in
1996 as compared to 1995. Major declines in recyclable
34
commodity pricing resulted in actual disposal cost being incurred in some
cases to physically dispose of certain commodities which could not be sold. In
addition, operating expenses were impacted by severe weather during the year,
particularly in comparison to a mild 1995 winter in North America, and higher
fuel costs. Operating expenses as a percentage of revenue for WM International
was impacted by lower margin Hong Kong construction revenues and volume
declines in Europe that more than offset productivity improvements from
streamlining of its operations. Operating expenses in the trash-to-energy
business declined in both real terms and as a percentage of revenue as the
result of the absence of the Lisbon construction revenue, which carried no
margin.
Selling and administrative expenses. Selling and administrative expenses
increased only $3.7 million in 1996 from 1995. As a percentage of revenue such
expenses declined from 12.0% to 11.9%. In 1996 the Company had two large
receivables totaling $10.6 million charged to bad debt expense as a result of
disputes with one customer and insolvency of another. In addition, $8.0
million was expensed primarily to write-off obsolete sales/customer oriented
software program costs. These expenses were offset by productivity
improvements in administrative processes throughout the organization.
Special Charges. In the fourth quarter of 1996, WM International recorded 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, primarily of
a non-cash nature, reduced the Company's income by $213.6 million after tax.
Also, in the fourth quarter of 1996, Waste Management and CWM recorded
pretax charges of $154.1 million ($100.2 million after tax) for reengineering
their finance and administrative functions 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 $100.3 million in
damages to the former owners of the Emelle site. CWM is appealing the
decision. Any settlement of the Emelle litigation would be a cash payment, but
the timing of such payment is uncertain. The balance of the charge is
primarily non-cash, with $13.4 million of cash-related items paid largely in
1997.
1997 OPERATIONS COMPARED WITH 1996
Revenue. The following table sets forth changes in consolidated revenue from
1996 to 1997:
PERCENT
1996 1997 CHANGE
-------- -------- -------
North America (excluding trash-to-energy)... $6,406.1 $6,451.3 0.7 %
North American trash-to-energy.............. 952.3 998.5 4.9
WM International............................ 1,913.8 1,790.0 (6.5)
Intercompany revenue........................ (46.6) (51.2)
-------- --------
Total..................................... $9,225.6 $9,188.6 (0.4)%
======== ======== ====
The solid waste services portion of North American revenue fell by 0.2% to
$5.72 billion in 1997, primarily due to divestiture of virtually all of the
Canadian business mid-year, as well as the sale of other various
underperforming North America locations. North American solid waste services
revenue growth by line of business is shown in the following table:
PERCENTAGE
CHANGE
----------
Residential.................................................... 1.2%
Commercial..................................................... (1.2)
Rolloff and industrial......................................... (0.3)
Disposal, transfer and other................................... 0.0
35
Overall North American solid waste services revenue for the year decreased
0.2% primarily as a result of the effect of divestitures net of acquisitions
which accounted for a 1.5% decrease. Excluding such net divestitures, overall
revenue increased 1.3% as a result of a combination of higher prices and
increased volumes. The 1997 revenue growth started out slightly negative in
the first quarter as a result of lost customers in late 1996 following a price
increase earlier in 1996. Revenue growth generally strengthened throughout the
year, finishing with fourth quarter revenue in excess of three percent over
the prior year sales, after considering divestitures. Pricing was fairly weak
throughout the year, particularly during the first two quarters. Approximately
one-third of the internal growth for the year came from pricing and the other
two-thirds from volume. The hazardous waste segment revenue continued to
decline slightly, falling about 6.8% from 1996.
The increase in the North American trash-to-energy revenues of $46.2 million
is largely attributed to $60.2 million of construction revenue for facilities
that are being built and operated by WTI but owned by customers. Excluding
this construction activity, 1997 revenue decreased $14.2 million or 1.5% from
1996 levels. Divestiture of certain biosolids landspreading contracts and
lower air pollution control engineering revenues were primarily responsible.
Spot waste disposal pricing remained stable on an overall basis compared to
1996, with slight strengthening in New England being offset by continued
downward pressure in the South Florida markets.
Expressed in U.S. dollars, WM International revenue decreased $123.8 million
or 6.5% in 1997 compared with 1996. Components of the revenue change are as
follows:
PERCENT
CHANGE
-------
Price............................................................ 4.4 %
Volume........................................................... (1.4)
Purchased businesses, net of divestitures........................ (2.5)
Foreign currency translation..................................... (7.0)
----
Total.......................................................... (6.5)%
====
Increased landfill disposal taxes, which are passed through in disposal
rates, accounted for 2.5% out of the 4.4% revenue growth from price. Volume in
1997 was lower than 1996 in three key markets. In Italy, landfill volumes were
reduced as the result of permitting delays on landfill expansions and new
landfill projects. The impact of this reduced capacity is expected to continue
into 1998. Revenue declined in Latin America from abnormally high levels in
1996 from cleaning activities for Buenos Aires during the 1996 mayoral
election, and in Germany as a result of general economic and competitive
conditions. Partially offsetting these items were improved volumes in the
Netherlands. Divestitures impacting 1997 revenue include the sale of various
operations within France, Spain, Austria, and Germany. The sale of these
operations reduced 1997 revenue by approximately 3.5% or $67 million from 1996
levels. In addition, the weakness of the various currencies in which WM
International earns its revenues created a negative translation impact on
total reported revenue for the year. Foreign currency movement has had, and
can be expected to continue to have, an impact on reported revenue, expenses
and net income. See "Derivatives and Market Risks" for further detail.
Operating Expenses. Operating expenses increased $534.6 million or 8.0% in
1997 over 1996. This increase occurred despite a slight revenue decline due to
several reasons. Remediation expenses, net of insurance recoveries increased
$96.8 million in 1997 from 1996. In 1997, insurance recoveries were $33.9
million higher than in 1996, and were more than offset by remediation cost
increases of $130.7 million. The increased remediation costs reflect $49.9
million of expense resulting from implemention of SOP 96-1 (see "Accounting
Principles" below), $14.8 million of expense related to a change in the
discount rate from 7% to 6% in the fourth quarter of 1997 and the balance
primarily related to changes in remediation cost estimates at several disposal
sites. Self-insurance expenses increased $95.0 million in 1997 from 1996. This
increase included $56.0 million related to changes in estimating techniques
with the balance coming from growth of prior years' claims. The Company
incurred losses in 1997 and accrued provisions in 1997 for loss-making
contracts totaling $136.2 million. These were primarily several large
contracts with respect to which the Company determined in 1997
36
that such losses would continue for the contracts' duration. A large portion
of this loss provision relates to multi-year recyclables processing contracts.
The Company also recorded $13.6 million of additional reserves related to
long-term contracts of its Chem-Nuclear subsidiary as a result of changes in
estimated contract results. Other major items affecting operating expense in
1997 were accruals of $20.3 million primarily related to excess lease
obligations, and other asset disposals or write-downs totaling $28.9 million
primarily related to hazardous waste projects, obsolete inventory, scrapped
equipment including recycling assets and obsolete/unused software.
Effective October 1, 1997, the Board of Directors approved a management
recommendation to revise the Company's North American collection fleet
management policy. Front-end loaders will be replaced after 8 years, and rear-
end loaders and rolloff trucks after 10 years. The previous policy was to not
replace front-end loaders before they were a minimum of 10 years old and other
heavy collection vehicles before they were a minimum of 12 years old. As a
result of this decision, the Company recognized an impairment writedown of
$70.9 million in the fourth quarter of 1997 for those vehicles scheduled for
replacement in the next two years under the new policy. Depreciable lives were
adjusted commencing in the fourth quarter of 1997 to reflect the new policy.
Also effective October 1, 1997, the Company reduced depreciable lives on
containers from 15 and 20 years to 12 years, and ceased assigning salvage
value in computing depreciation on North American collection vehicles and
containers. These changes in estimates increased depreciation expense by $33.7
million in the fourth quarter of 1997.
Also effective October 1, 1997, the Company changed its process for
estimating landfill lives. The Company now amortizes landfill costs over
estimated landfill capacity which includes permitted landfill airspace plus
expansions which are probable of being obtained in the next five years. The
Company's prior practice was to consider likely expansions in the amortization
calculations, whether or not the permits were expected to be obtained within
the next five years. Factors in determining probable expansions on a site-by-
site basis include secured rights to required land, status of legal,
environmental, regulatory and political issues, and the extent to which the
permit application process has proceeded. This change in estimate increased
depreciation and amortization by $12.7 million and the provision for closure
and post-closure by $3.1 million in the fourth quarter of 1997, and resulted
in estimated landfill capacity declining from 2.9 billion cubic yards to 1.8
billion cubic yards.
After considering the above, operating expenses as a percentage of revenue
for 1997 compared to 1996 increased. Hazardous waste operating expenses
increased as a percentage of revenue due to continued pressure on prices,
lower volumes and a shift in revenue mix toward lower margin services. Trash-
to-energy operating costs increased as a percentage of revenue primarily due
to the impact of increased construction revenue, which has a lower associated
margin. WM International operating expenses increased largely as a result of
lower margins for the operations in Italy.
Selling and Administrative Expenses. Selling and administrative expenses
increased $33.8 million or 3.1% in 1997 over 1996. As a percentage of revenue,
selling and administrative expenses increased from 11.9% in 1996 to 12.3% in
1997. Included in selling and administrative expenses in 1997 were $39.0
million in additional legal expense reflecting changes in estimates of
litigation-related liabilities. In addition, 1997 bad debt expense included
$8.7 million related to two large accounts receivable disputes settled in
1997, $6.7 million of accounts receivable in the New York City area that in
part were compromised as a result of agreements made with the New York City
licensing authorities, and $3.2 million for certain partner/venture
receivables. The Company also wrote off $4.0 million in various sales-related
assets which included prepaid advertising credits that were expected to expire
before their use. The Company reduced other administrative expenses as a
result of divestitures and is continuing to make productivity improvements in
many administrative areas.
Special Charges. In 1997, the Company recorded a special charge of $41.6
million (primarily in the fourth quarter) for severance. Employees terminated
were primarily field operating management and related support personnel.
Approximately $5.9 million of the severance had been paid by December 31,
1997, with the balance to be paid in 1998 and thereafter.
37
WM International also recorded a special charge in 1997 ($104.4 million
before tax and minority interest) to reflect the costs of demobilization in
Argentina following loss of the contract renewal for the City of Buenos Aires,
divestiture or closure of underperforming businesses, primarily in Italy and
Germany and the writeoff of costs of projects, primarily in Germany, which it
decided to no longer pursue. The charge included $14.8 million of severance,
primarily related to operating personnel in Buenos Aires and with closed or
divested businesses in Italy and Germany. These terminations are expected to
occur and the severance paid in 1998.
OTHER ITEMS
Asset Impairment Loss. As a result of the comprehensive review of operating
assets and investments discussed in Notes 2, 3 and 16 to Consolidated
Financial Statements, the Company recorded an impairment loss of $1.48 billion
in 1997. Prior period financial statements were restated to recognize
impairment losses in earlier periods. Asset impairment loss was $34.0 million
in 1994, $53.8 million in 1995, and $64.7 million in 1996.
The 1994 impairment losses included $22.4 million related to unsuccessful or
abandoned landfill development or expansion projects. In addition, the Company
abandoned certain vehicle-related systems development projects totalling $7.3
million. Several properties identified as surplus were written down to fair
value, resulting in $4.3 million in such charges.
The 1995 impairment losses included $48.2 million for several unsuccessful
landfill development or expansion projects. This included one site with an
impairment loss of $29.9 million, which was recognized as a result of the
passage of legislation prohibiting a previously planned expansion.
The 1996 impairment losses were primarily related to recycling investments.
Of the $47.8 million impairment loss related to these investments, $35.7
million represented goodwill, primarily related to two acquisitions made in
1995. These impairment losses were the result of major price declines in the
recyclable paper market caused by an industry wide-pricing collapse in the
pulp and paper market. In addition, impairment losses of $13.4 million were
recognized with respect to landfill facilities, primarily as a result of one
landfill site having its volumes curtailed and a planned expansion becoming
remote.
In 1997 impairment losses were primarily due to revaluation of numerous
treatment and disposal facilities of the Company and associated goodwill.
Revaluation of investments in the North American hazardous waste services
business accounted for $776.2 million of the impairment loss. This impairment
was a result of continuing pricing and volume declines in the hazardous waste
services markets, which currently have excess capacity. Changes in
environmental regulations are also allowing certain hazardous waste streams to
be managed by others with less expensive treatment and disposal alternatives.
In addition, $344.8 million of the 1997 impairment losses related to solid
waste landfills. This included $163.9 million related to the Company's
abandonment of several landfill development or expansion projects. The balance
of this impairment loss was primarily the result of substantial pricing or
volume declines at certain landfills and a shortening of estimated life of 10
landfills (See Note 3 to Consolidated Financial Statements). As a result of
the Company's adoption of a new fleet replacement policy in 1997, certain
older collection vehicles became impaired and a loss was recorded totaling
$70.9 million (See Note 3 to Consolidated Financial Statements). Other 1997
impairment losses included $122.2 million related to the revaluation of Rust
International Inc. ("Rust") domestic engineering and consulting business,
discussed below under "Discontinued Operations and Other Major Asset
Dispositions". Impairment losses of $38.2 million were also recorded for
surplus real estate being held for sale. WTI recorded a 1997 impairment loss
of $57.2 million. This included $47.1 million related to revaluation of a wood
waste burning independent power production facility.
Interest. The following table sets forth the components of consolidated
interest expense, net:
1994 1995 1996 1997
------- ------ ------ ------
Interest expense......................... $ 456.1 $507.8 $498.0 $472.9
Interest income.......................... (42.8) (34.9) (27.9) (37.6)
Capitalized interest..................... (105.9) (43.9) (35.6) (26.0)
------- ------ ------ ------
Interest expense, net.................... $ 307.4 $429.0 $434.5 $409.3
======= ====== ====== ======
38
Gross interest expense increased from 1994 to 1995 as a result of an earlier
management decision to increase the leverage of the Company. Debt levels
increased in 1995, primarily a result of the acquisition of the public
ownership of CWM and Rust. The large decline in capitalized interest in 1995
is due to a change in accounting methods effective January 1, 1995.
Capitalized interest declined further in 1996 and 1997 as significant capital
projects were completed and the Company reduced capital spending. See
"Financial Condition--Capital Structure" and Note 3 to Consolidated Financial
Statements. Although the Company repurchased a substantial number of its
shares in 1996 and 1997, debt levels were reduced in 1997 resulting in lower
interest expense.
Minority Interest. Minority interest declined from 1994 to 1995 as a result
of the 1995 purchases by the Company of the publicly-owned shares of CWM and
Rust and lower earnings by certain subsidiaries, as well as the minority
interest share (approximately $41.3 million) in the WM International special
charge. Minority interest declined from 1995 to 1996 as a result of higher
earnings by certain subsidiaries and the minority interest share
(approximately $63.8 million) in the WM International special charges.
Minority interest in 1997 was comparable to 1996, and was impacted by $27.9
million related to the WM International 1997 special charge and $15.9 million
by the 1997 WTI asset impairment loss.
Sundry Income, Net. Below is a summary of major components in sundry income,
net.
1994 1995 1996 1997
------ ------ ------ ------
Gain on sale of investments/businesses...... $ 25.1 $168.9 $ 30.1 $180.3
Writedown of investments.................... -- -- -- (25.7)
Equity income............................... 60.2 77.0 61.4 (6.9)
Other....................................... 24.6 6.8 10.5 25.6
------ ------ ------ ------
Sundry income, net.......................... $109.9 $252.7 $102.0 $173.3
====== ====== ====== ======
Equity income in 1994, 1995 and 1996 included income from ServiceMaster L.P.
("ServiceMaster") and Wessex investments of $60.2 million, $77.0 million and
$59.4 million, respectively. These investments were sold in the second quarter
of 1997 with no equity income recorded for Wessex or ServiceMaster. Equity
income in the second quarter of 1997 was also reduced by $10.4 million related
to a special charge recorded by OHM Corporation ("OHM"), an environmental
remediation services business approximately 37% owned by Rust. Gains/(loss) on
sale of investments/businesses are primarily related to the following items
(1) $25.1 million gain on sale of the Company's Modulaire mobile office
services business in 1994; (2) $160 million gain the fourth quarter of 1995
recorded as a result of the exchange of an interest in ServiceMaster Consumer
Services L.P. for an interest in ServiceMaster and an option to purchase 1.25
million ServiceMaster limited partnership shares; (3) $30.1 million in 1996
and $43.4 million in 1997 of gains on sales of North American solid waste
businesses, (including $32.6 million on sale of Canadian operations); and (4)
$129 million gain in the first quarter of 1997 from the sale of the Company's
investment in ServiceMaster. Writedown of investments includes $19.5 million
related to the OHM investment and $6.2 million in other investments, all of
which were recorded in the fourth quarter of 1997.
Income Taxes. The consolidated income tax rate varies between years as a
result of shifts in the source of taxable income. The inability to realize tax
benefits on a portion of the 1994, 1995, 1996 and 1997 special charges and
asset impairment loss resulted in an increased tax provision in those years,
primarily attributable to non-deductible goodwill and the writedown of
investments in subsidiaries. In addition, the Company increased deferred tax
valuation allowances and other tax reserves. See Note 4 to Consolidated
Financial Statements.
Discontinued Operations and Other Major Asset Dispositions. During the
fourth quarter of 1995, the Company announced that Rust would sell or
discontinue its process engineering, construction, specialty contracting and
similar lines of business. Further, as the Company refined its business
strategy to focus on waste management services, other business units were
identified in 1996 and 1997 as units to be either sold or discontinued.
In 1996, Rust sold its engineering and construction business as well as its
industrial scaffolding business for $295.1 million, and WTI sold its water
process, manufacturing and custom engineered systems business for
39
$369.6 million in cash. In 1997, Rust disposed of certain of its international
engineering and consulting businesses and WTI sold its remaining water
services business for 2.3 million registered shares of U.S. Filter stock,
valued at approximately $64 million. The Rust engineering and scaffolding
businesses and its international engineering and consulting businesses,
together with the WTI water businesses, have all been classified as
discontinued operations in the accompanying financial statements.
Because Rust did not sell its remaining domestic engineering and consulting
businesses prior to December 31, 1997, these businesses have been reclassified
as continuing operations held for sale in the accompanying financial
statements for all periods. The original provision, established in 1996, for
loss on the sale (approximately $87 million) of these discontinued businesses
has been reversed as income in "income (loss) on disposal" in discontinued
operations, and a new provision for loss on sale (approximately $122 million)
was provided as an asset impairment loss in the Consolidated Statements of
Income, all in the fourth quarter of 1997. While the Company intends to sell
these businesses, it is unable to estimate when a buyer will be found and a
sale can be consummated.
In 1997, Waste Management sold its investment in ServiceMaster for $626
million, and sold various non-integrated waste services businesses in North
America for $288.9 million. Additionally in 1997, WM International sold
businesses in France, Spain, Austria and Germany for $128.3 million and its
approximately 20% interest in Wessex for approximately $300 million.
In early 1998, WM International sold its Hamm, Germany waste-to-energy
facility for $137 million. Also in early 1998, Rust's 37% ownership of OHM was
sold for cash totaling $111.2 million. This sale occurred in connection with
the merger of OHM with International Technology Corporation. As part of this
transaction, Rust received a distribution of shares of NSC Corporation, a
leading U.S. asbestos abatement contractor, increasing its ownership of NSC
Corporation to 54.3%.
ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." The change reduced 1994 net income by
$1.3 million.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cell construction. See Note 3 to Consolidated Financial
Statements. The change reduced 1995 net income by $84.7 million.
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 effect of adoption was not material. Impairments recorded prior to
1996 followed a methodology consistent with FAS No. 121.
FAS No. 123, "Accounting for Stock-Based Compensation" also became effective
in 1996. However, FAS No. 123 permitted compensation to continue to be
accounted for under Accounting Principles Board Opinion No. 25, and the
Company elected to follow this alternative. See Note 9 to Consolidated
Financial Statements.
Effective January 1, 1997, the Company adopted American Institute of
Certified Public Accountants Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 provides that environmental
remediation liabilities should be accrued when the criteria of FAS No. 5,
"Accounting for Contingencies," are met. It also provides that the accrual for
such liabilities should include future costs for those employees expected to
devote a significant amount of time directly to the remediation effort. The
adoption of SOP 96-1 reduced 1997 pretax income from continuing operations by
$49.9 million.
In the fourth quarter of 1997, the Company began expensing process
reengineering costs (including $3.0 million previously capitalized) in
accordance with Emerging Issues Task Force consensus 97-13, reducing 1997 net
income by $1.9 million.
Also in 1997, the Company began presenting earnings per share in accordance
with FAS No. 128. See Note 11 to Consolidated Financial Statements for further
discussion.
40
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income," and FAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." Both statements are effective for
fiscal years beginning after December 15, 1997, although FAS No. 131 does not
apply to the Company's interim financial statements until 1999. FAS No. 130
requires only a different format for presentation of information already
included in the Company's financial statements. FAS No. 131 modifies the basis
for determining segments and expands required disclosure, but does not affect
accounting principles and, accordingly, will not require any change to
reported financial position, results of operations or cash flows. The Company
is currently evaluating the impact of FAS No. 131 on its segment reporting.
DERIVATIVES AND MARKET RISKS
In the normal course of business, the Company is exposed to market risk,
including changes in interest rates, currency exchange rates, certain
commodity prices and certain equity prices. From time to time, the Company and
certain of its subsidiaries use derivatives to manage some portion of these
risks. The derivatives used are simple agreements which provide for payments
based on the notional amount, with no multipliers or leverage. All derivatives
are related to actual or anticipated exposures or transactions of the Company.
While the Company is exposed to credit risk in the event of non-performance by
counterparties to derivatives, in all cases such counterparties are highly
rated financial institutions and the Company does not anticipate non-
performance. The Company does not hold or issue derivative financial
instruments for trading purposes. The Company monitors its derivative
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
The Company has performed sensitivity analyses to determine how market rate
changes will affect the fair value of the Company's market risk sensitive
derivatives and related positions. Such an analysis is inherently limited in
that it represents a singular, hypothetical set of assumptions. Actual market
movements may vary significantly from the Company's assumptions. The effects
of such market movements may also directly or indirectly affect Company rights
and obligations not covered by the sensitivity analysis. Fair value
sensitivity is further not necessarily indicative of the ultimate cash flow or
earnings effect on the Company from the assumed market rate movements.
Interest Rate Exposure. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's debt obligations, which are
mainly denominated in U.S. dollars. In addition, interest rate swaps are used
to lock-in or limit the variability in the interest expense of certain
floating rate debt obligations. An instantaneous, one percentage point decline
in interest rates across all maturities and applicable yield curves would
adversely affect the fair value of the Company's combined debt and interest
rate swap position by approximately $250 million. This analysis does not
reflect the effect that declining interest rates would have on other items
such as pension liabilities, nor the favorable impact they would have on
interest expense and cash payments for interest.
Currency Rate Exposure. From time to time, the Company and certain of its
subsidiaries have used foreign currency derivatives to seek to mitigate the
impact of translation on foreign earnings and income from foreign investees.
Typically these derivatives have taken the form of purchased put options or
collars. There were no currency derivatives outstanding at December 31, 1997,
that relate to hedging the translation of foreign earnings.
The Company occasionally incurs currency risk from cross border
transactions. When such transactions are anticipated or committed to, the
Company may enter into forward contracts or purchase options to reduce or
eliminate the related foreign exchange risk. The Company also incurs exchange
rate risk from borrowings denominated in foreign currencies. An instantaneous,
10 percent adverse movement in foreign exchange rates would affect the fair
value of the Company's foreign currency borrowings and foreign exchange hedges
at December 31, 1997, by approximately $30 million. The total effect on the
Company from movements in exchange rates will also be influenced by other
factors. For example, an increase in the fair value of foreign currency
denominated debt caused by exchange rate movements may be more than offset by
an increase in the value of the Company's net investment in foreign countries.
41
Commodities Price Exposure. The Company operates a large fleet of vehicles
that require the purchase of a significant amount of diesel fuel. The Company
uses crude oil collars and swaps as a proxy to seek to mitigate the risk of
fluctuations in diesel fuel prices. The Company's fuel collars consist of a
call option or "cap" and a corresponding put option at a lower price or
"floor." The cap limits the Company's potential increased operating cost from
higher fuel prices whereas the floor limits the Company's potential cost
savings from a decline in fuel prices. Under its fuel swap agreements, the
Company collects payments from the swap counterparty when fuel prices average
above a certain reference price. When prices average below said reference
prices, the Company makes payments to the counterparty. All of the Company's
fuel hedges are cash settled. Quantities hedged do not exceed committed fuel
purchases or anticipated usage in any period. An instantaneous, 10 percent
decrease in the applicable reference price for hedges in place at December 31,
1997, would cause a fair value loss to the Company of approximately $6
million. The Company expects that these losses would be offset by savings from
buying fuel at prices below December 31, 1997, market prices.
Equity Price Exposure. The Company occasionally obtains stock that it needs
to hold for a certain period of time. The Company sometimes seeks to mitigate
its market exposure to such holdings by entering into equity collars. Such a
collar consists of a "cap" that limits the Company's potential for gain from
appreciation in the stock price as well as a "floor" that limits the Company's
loss potential from a decline in the stock price. An instantaneous, 10 percent
decline in the price of the shares held by the Company at December 31, 1997,
would adversely affect the combined fair value of the stock and collar
positions by approximately $2 million.
The Company is also further subject to equity price exposure from Company
debt issues that are convertible into the Company's common stock. These debt
issues had an aggregate carrying value of $494.5 million as of December 31,
1997. An instantaneous, 10 percent increase in the Company's stock price on
December 31, 1997, would increase the fair value of the Company's convertible
debt by approximately $23 million.
See Note 7 to Consolidated Financial Statements for further discussion of
the use and accounting for derivative instruments. Also see "Financial
Condition--Capital Structure" for a discussion of the Company's sale of put
options in connection with its stock repurchase program.
ENVIRONMENTAL MATTERS
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. 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 environmental 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 air space 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 89 sites listed on the
Superfund National Priority List ("NPL") as of December 31, 1997. Where the
Company concludes that it is probable that a liability has been incurred,
provision is made in the financial statements. See Note 8 to Consolidated
Financial Statements for additional information regarding the Company's
environmental liabilities.
Estimates of the extent of the Company's degree of responsibility for 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 industry, 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 such adjustments would be material to its financial
42
statements, it is reasonably possible that technological, regulatory or
enforcement developments, the results of environmental studies, the existence
and ability of other potentially responsible third parties to contribute to
the settlements of such liabilities, or other factors could alter this
expectation and necessitate the recording of additional liabilities which
could be material.
The Company spent, net of recoveries from other potentially responsible
parties, $71.5 million, $38.5 million, $69.8 million and $14.7 million on
remedial activities at closed sites in 1994, 1995, 1996, and 1997
respectively, and anticipates such net expenditures of approximately $57.3
million in 1998.
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. Carriers involved in these matters have typically denied
coverage and are defending against the Company's claims. While the Company is
vigorously pursuing such claims, it regularly considers settlement
opportunities when appropriate terms are offered. Settlements received to date
($50.1 million in 1994, $38.2 million in 1995, $60.3 million in 1996, and
$94.3 million in 1997) have been included in operating expenses as an offset
to environmental expenses.
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 disposal facilities which are alleged to have
contaminated the environment or, in certain cases, conducted environmental
remediation activities at such sites.
YEAR 2000 ISSUES
Waste Management, like many other companies, expects to incur expenditures
to address the so-called "Year 2000" problem. The Year 2000 problem exists
because many computer systems and applications currently use two-digit data
fields to designate a year. As the century date change occurs, date-sensitive
systems will recognize the year 2000 as 1900, or not at all. This inability to
properly recognize or handle the year 2000 may cause systems to process
critical financial and operational information incorrectly, or to fail
completely.
The reengineering of the finance and administrative processes, which the
Company began in 1996, includes new computer software which will be Year 2000
compliant, and will resolve the issue for many of the financial and
administrative systems. The Company's principal customer billing and customer
service systems are currently being remediated to comply with Year 2000
issues. To varying degrees, the Company has assessed and continues to assess
the impact of the Year 2000 issue on other systems, including those used by
its customer billing and customer service functions. The Company has not
completely identified its exposure to the Year 2000 issue, or formulated its
plans for addressing and resolving this issue in other systems, but expects to
be able to do so or to effectively work around unresolved problems in a timely
manner. The Company has established a Year 2000 program management office to
coordinate the efforts of its own staff of information technology
professionals and outside consultants engaged to reprogram, replace or test
software and related assets affected by the Year 2000 issue.
The Company spent approximately $6.0 million in 1997 for Year 2000
modification of computer systems and estimates it will spend an additional $45
million in 1998 and 1999, excluding the cost of new hardware and software
which will be principally capitalized and is included in the capital budget.
The Company believes its contemplated actions will effectively address the
Year 2000 issue, but should that not be the case, a material disruption of its
business could result. Specific factors that might cause the Company not to be
able to address the Year 2000 issue effectively and that could influence the
amount and timing of future costs include, but are not limited to, the
availability and cost of personnel trained in this specialized area, the
nature and amount of programming required to upgrade and replace the affected
software, the ability to locate and correct all relevant computer codes, the
success of the Company's principal suppliers in addressing the Year 2000 issue
and similar uncertainties.
43
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital deficits of $1,047.1 million, $280.9
million, and $2,046.9 million as of December 31, 1995, 1996, and 1997
respectively. The Company operates in a capital intensive service industry
with neither significant inventory nor seasonal variation in receivables, and
generates substantial cash from operating activities. As a result, emphasis is
placed on minimizing working capital requirements. The increase in working
capital between 1995 and 1996 is a result of lower current debt maturities,
strong cash flow, including the proceeds from the sale of a portion of the WTI
water business late in 1996, and the reclassification to current of the
investment in Wessex to be sold, partially offset by increased accruals for
losses on the sale of certain investments. The increase in working capital
deficit between 1996 and 1997 results primarily from lower levels of cash and
short-term investments ($451 million), higher levels of long-term debt payable
within one year ($995 million) and higher accrued expenses ($290 million)
related to loss contract provision reserves, increased self insurance reserves
and other reserves recorded as a result of the comprehensive review performed
by management. See Note 2 to Consolidated Financial Statements.
Cash flow from operating activities, less capital expenditures (other than
acquisitions) and dividends, which the Company defines as "owners' cash flow,"
is available to meet current obligations, make acquisitions, reduce debt, or
repurchase common stock. Management has adopted a cash-driven financial
strategy including reduced capital spending and divestiture of non-core assets
and non-integrated businesses. Owners' cash flow was approximately $0.3
billion, $0.5 billion, $1.0 billion, and $1.8 billion in 1994 through 1997
respectively. The Company expects to generate approximately $400 million
during 1998 from the divestiture of certain non-core investments and non-
integrated businesses subject to constraints necessitated to meet pooling-of-
interests accounting treatment as required in the Merger with USA Waste. The
Company believes that it has adequate liquidity and resources to meet its
needs for replacement capital and finance anticipated growth. See "Capital
Structure."
In February 1998, the credit ratings on the Company's senior unsecured long-
term debt were lowered to BBB by Standard & Poor's Rating Services and Baa3 by
Moody's Investors Service. Previously, the Company's debt was rated A- and
Baa1 by Standard & Poor's and Moody's, respectively. The lower credit ratings,
which are still investment grades, are not expected to have a material effect
on the Company's availability of long-term debt funding. These ratings are
independently issued by the rating agencies and are subject to change at any
time. On December 29, 1997 the Company put in place bank credit facilities
totalling $800 million for general corporate purposes including standby
liquidity for its commercial paper program. The facilities consist of a $550
million standby trade receivables sale agreement and a $250 million revolving
credit agreement, both of which expire June 30, 1998.
The Company historically has met its short-term funding requirements through
the issuance of commercial paper in the public markets, with bank credit
facilities available as standby liquidity. In February 1998, Moody's lowered
its rating of the Company's commercial paper from Prime-2 ("P2") to Prime-3
("P3"), and there may be times when the Company is unable to issue sufficient
commercial paper to meet its needs. The market for A2/P3-rated commercial
paper is somewhat smaller than for higher-rated commercial paper. At such
times, the Company will fund its requirements using the bank credit facilities
which are in place and sufficient to meet such needs.
In connection with the planned purchase of the remaining publicly held WTI
shares, the Company has entered into a commitment with the Chase Manhattan Bank
("Chase") whereby Chase, along with other financial institutions, has committed,
subject to the satisfaction of certain conditions, to provide new credit
facilities in the amount of $1.1 billion. The new credit facilities, which will
have a termination date of December 31, 1998 (subject to earlier termination in
the event of a change-in-control, including the Merger with USA Waste), will
provide the funding needed to complete the WTI transaction and replace the
Company's existing $250 million revolving credit facility. Additionally, the
termination date of the Company's $550 million standby trade receivables sale
agreement will be extended from June 30, 1998 to December 31, 1998.
44
ACQUISITIONS AND CAPITAL EXPENDITURES
Capital expenditures, including $56.8 million, $154.1 million, $91.8 million
and $19.3 million for property and equipment of purchased businesses in 1994,
1995, 1996 and 1997, respectively, are shown in the following table:
DECEMBER 31
---------------------------------
1994 1995 1996 1997
-------- -------- -------- ------
Land (primarily disposal sites)......... $ 566.9 $ 470.5 $ 406.2 $359.9
Buildings and leasehold improvements.... 141.2 148.8 109.3 76.4
Vehicles................................ 226.0 345.8 204.9 160.9
Containers.............................. 167.9 181.2 115.8 112.1
Other equipment......................... 395.0 348.1 319.2 189.5
-------- -------- -------- ------
Total................................. $1,497.0 $1,494.4 $1,155.4 $898.8
======== ======== ======== ======
In 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197.2 million in cash and notes, $17.3 million of debt assumed, 73,809
shares of Company common stock and 156,124 shares of WTI common stock. During
1995, 136 businesses were acquired for $224.3 million in cash and notes, $77.7
million of debt assumed, and 2.2 million shares of the Company's common stock.
In 1996, 83 businesses were acquired for $104.8 million in cash and notes,
$39.4 million of debt assumed, and approximately 8.2 million shares of the
Company's common stock. During 1997, 45 businesses were acquired for $51.4
million in cash and notes, $17.6 million of debt assumed, and 121,551 shares
of the Company's common stock.
The Board of Directors has approved a capital expenditure budget of $1,300.0
million for 1998, excluding acquisitions, although the Merger Agreement with
USA Waste limits the Company's 1998 capital expenditures, excluding
acquisitions, to $1.2 billion. The increase in the 1998 capital expenditure
budget primarily reflects increased spending for vehicles resulting from the
adoption of a new fleet management strategy in the fourth quarter of 1997, as
well as an anticipated increase in spending for new information systems and
landfill cell construction. The Company currently expects to finance capital
expenditures through cash flow from operations and believes that it has
adequate resources to finance attractive acquisitions that become available.
CAPITAL STRUCTURE
Although the Company has placed increasing emphasis on generating owners'
cash flow during 1994-1997, a substantial portion of such cash has been
returned to stockholders through stock repurchases. Debt to total capital
ratios were adversely impacted by the issuance of the subordinated notes
discussed below which were used to repurchase the publicly held shares of CWM
in 1995 and by the substantial reduction in stockholders' equity as a result
of common stock repurchases and losses sustained in 1996 and 1997. The
following table sets forth certain of the Company's leverage ratios:
DECEMBER 31
----------------------
1994 1995 1996 1997
---- ---- ---- ----
Long-term debt as a percent of total capital..... 51.5% 52.9% 58.2% 67.4%
Short-term and long-term debt as a percent of
short-term debt and total capital............... 54.9% 56.8% 60.0% 73.0%
The above ratios include minority interest in subsidiaries and put options
as part of total capital.
In January 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of CWM that it did not already own, in return for
convertible subordinated debt. In July 1995, Waste Management acquired the
approximately 3.1 million Rust shares held by the public for $16.35 per share
in cash. In June 1997, the Company announced an offer to acquire, for $15 per
share in cash, all of the approximately 53 million
45
outstanding shares of WTI it does not already own. The price was increased to
$16.50 per share pursuant to a definitive agreement subsequently negotiated
with a special committee of independent WTI directors. The terms of the
agreement have been approved by the WTI special committee and by the Boards of
Directors of the Company and WTI, but the transaction remains subject to the
approval of the holders of a majority of WTI's outstanding shares, other than
those held by the Company, voting on it at a special meeting of WTI
stockholders to be held March 30, 1998. In addition, this transaction is the
subject of several lawsuits which seek, among other things, to enjoin the
proposed transaction. The Company believes that it has met the legal standards
applicable to transactions of this type and intends to vigorously defend
itself in the lawsuits.
The Boards of Directors of Waste Management and WTI had authorized their
respective companies to repurchase shares of their own common stock. Waste
Management repurchased 30 million shares through a "Dutch auction" tender
offer in the second quarter of 1997 but did not repurchase any other shares
that year. The Company does not at this time expect to repurchase any
additional shares of its own common stock. WTI repurchased 5.1 million shares
in the first six months of 1997 but terminated its repurchase activity
following the Waste Management offer to acquire the remaining publicly held
shares.
During 1994 through 1996, in conjunction with its previously authorized
repurchase program, Waste Management 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 its shares at specified prices. Proceeds
from the sale of put options were credited to additional paid-in capital. See
Note 10 to Consolidated Financial Statements for further information. There
were no put options outstanding at December 31, 1997, and the Company does not
at this time expect to sell additional options in the future.
In 1994, the Company formed 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 composed of Company officers, the Trust will use the
shares or proceeds from the sale of the 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.
RISKS AND UNCERTAINTIES
During the first quarter of 1995, WM International received an assessment
from the Swedish Tax Authority of approximately 417 million Krona
(approximately $53 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 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 for all governmental permits
needed to remove all waste above the height allowed by the zoning ordinance,
and the Connecticut Supreme Court has upheld that ruling. The Company is
complying with the order of the Superior Court while also seeking an
alternative resolution to this matter. The Company is unable to predict the
outcome of this matter at this time. 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 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 waste in interstate
commerce through the use of regulatory flow control laws. Such
46
laws typically involve a local government specifying a jurisdictional 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. In addition, federal legislation has been
proposed, but not yet enacted, to effectively grandfather existing flow
control mandates. There can be no assurance that such alternatives to
regulatory flow control will in every case be found to be lawful or that such
legislation will be enacted into law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse affect on any of the Company's operations. In the
event that legislation to effectively grandfather existing flow control
mandates 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.
WTI's Gloucester County, New Jersey, facility relies on a disposal franchise
for substantially all of its supply of municipal solid waste. On May 1, 1997,
the Third Circuit Court of Appeals ("Third Circuit") permanently enjoined the
State of New Jersey from enforcing its franchise system as a form of
unconstitutional solid waste flow control, but stayed the injunction for so
long as any appeals were pending. On November 10, 1997, the U.S. Supreme Court
announced its decision not to review the Third Circuit decision, thereby
ending the stay and, arguably, the facility's disposal franchise. The State
had continued to enforce flow control during the stay period. In light of the
current circumstances, the facility has lowered its prices and solicited new
customers. Under the reimbursement agreement between the project company that
owns the Gloucester facility and the bank that provides credit support to the
project, the termination of the waste franchise constitutes an event of
default. WTI and the credit support bank are presently disputing the
consequences of these developments.
The New Jersey legislature has been considering various alternative
solutions, including a bill that provides for the payment and recovery of
bonded indebtedness incurred by counties, public authorities and certain
qualified private vendors in reliance on the State's franchise system. WTI
currently believes that, through either legislative action or a project
recapitalization, the Gloucester project can be restructured to operate, in
the absence of regulatory flow control, at a level of profitability which will
not result in a material adverse impact on consolidated results.
Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by WTI will be required to be
modified to comply with more stringent air pollution control standards adopted
by the United States Environmental Protection Agency in December 1995 for
municipal waste combusters. The compliance dates will vary by facility, but
all affected facilities will be required to be in compliance with the new
rules by the end of the year 2000. Currently available technologies will be
adequate to meet the new standards. The total capital expenditures required
for such modifications are estimated to be in the $180-$220 million range. The
impacted facilities long-term waste supply agreements generally require that
customers pay, based on tonnage delivered, their proportionate share of
incremental capital, financing, and operating costs resulting from changes in
environmental regulations. Customer shares of capital and financing costs are
typically recovered over the remaining life of the waste supply agreements.
Pro rata operating costs are recovered in the period incurred. The Company
currently expects to recover approximately two-thirds of the incremental
expenditures incurred to comply with these stricter air emission standards.
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 power production
facilities are qualifying facilities under PURPA and depend on the sanctity of
their power sales agreements for their economic viability. WTI believes that
federal law offers strong protections to its PURPA contracts, and recent state
and federal agency and court
47
decisions have unanimously upheld the inviolate nature of these contracts.
While there is a risk that future utility restructurings, court decisions or
legislative or administrative action in this area could have an adverse effect
on its business, the Company currently believes such risk is remote.
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.
In November and December 1997, several alleged purchasers of the Company's
stock brought purported class action lawsuits against the Company and several
of its current and former officers in the United States District Court for the
Northern District of Illinois. Each of the lawsuits asserts that the
defendants violated the federal securities laws by issuing allegedly false and
misleading statements in 1996 and 1997 about the Company's financial condition
and results of operations. Among other things, the plaintiffs allege that the
Company employed accounting practices that were improper and that caused its
publicly-filed financial statements to be materially false and misleading. The
lawsuits demand, among other relief, unspecified monetary damages, attorneys'
fees, and the costs of conducting the litigation. The Company intends to
defend itself vigorously in this litigation. In January 1998, the fourteen
purported class actions were consolidated before one judge in the Northern
District of Illinois. Plaintiffs have until May 1998 to file a consolidated
amended complaint. It is not possible at this time to predict the impact this
litigation may have on the Company, although it is reasonably possible that
the outcome may have a materially adverse impact on its financial condition or
results of operations in one or more future periods.
The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the Company's previously
filed financial statements and related accounting policies, procedures and
system of internal controls. The Company intends to cooperate with such
investigation. The Company is unable to predict the outcome or impact of this
investigation at this time.
A lawsuit by an alleged Company stockholder purporting to represent a class
of the Company's stockholders has been filed in the Chancery Court in and for
New Castle County, Delaware (although the Company has not yet been served)
against the Company and the members of its Board of Directors alleging
breaches of fiduciary duty by the defendants in connection with the Merger.
The lawsuit seeks, among other things, to have the transaction enjoined and to
recover unspecified damages. The Company believes the suit to be without merit
and intends to contest it vigorously.
WM International operates facilities in Hong Kong which are owned by the
Hong Kong government. The Hong Kong economy has been impacted by the economic
uncertainty associated with many of the countries in the region. High and
volatile interest rates have resulted from speculation regarding its currency.
In addition to Hong Kong, WM International has operations in Indonesia and
Thailand. These countries have experienced illiquidity, volatile currency
exchange rates and interest rates, and reduced economic activity. WM
International, and therefore the Company, will be affected for the foreseeable
future by economic conditions in this region, although it is not possible to
determine the extent of such impact. At December 31, 1997, WM International
had a net investment of $107.5 million in these countries. Pretax income from
Hong Kong was $25.7 million in 1997. Income from Indonesia and Thailand has
not been significant to date.
OUTLOOK
The Company believes that its current strategy and the actions it has taken
during 1997 and and thus far in 1998 position it for long-term growth and
improved profitability in a rapidly changing waste services market. However, a
number of challenges remain. Continued moderate economic growth is expected to
result in
48
relatively modest levels of solid waste volume growth and increasing
competition limits pricing opportunities somewhat. WTI has no new trash-to-
energy plants expected to come on-stream in the near future, and two of its
facilities will be negatively impacted by the renewal of existing contracts at
lower prices in 1998. The North American hazardous waste industry remains
depressed. Divestiture of discontinued and non-core businesses and
monetization of other assets must be completed, thereby allowing capital to be
redeployed.
The Company is responding to these challenges with increased management
focus on its core waste management services business, improved productivity
through improved management practices and the use of technology, and greater
emphasis on generating cash and controlling capital expenditures. Management
has also adopted economic value added ("EVA(R)") as a key performance
measurement to guide its operations management to improve returns on invested
capital.
The Company expects during 1998 that moderate revenue growth in the solid
waste business will be more than offset by divestitures, declines in hazardous
waste revenues and reduced pricing on two of WTI's long-term contracts. Cost
reduction efforts will be more than offset by increases in depreciation and
amortization expense, costs to implement key initiatives such as strategic
sourcing, fleet management and information systems, and costs associated with
the completion of the accounting review and related matters.
For 1998, the Company expects its capital expenditures, exclusive of
acquisitions to increase to $1.2 billion as it accelerates the purchasing of
new collection vehicles in connection with its new fleet management strategy
and as it invests in new information systems to improve its financial,
administrative, marketing, sales and customer service processes. While the
decision to change its fleet management strategy will increase expenditures
for new collection vehicles by approximately $150 million in 1998 and $200
million in 1999, the Company anticipates maintenance and operating savings in
1999 and beyond of $20 million to $40 million per year.
The Company will continue to seek to improve returns by leveraging its
network of assets and will also seek to enhance its position in current
markets with acquisitions that complement existing operations and resources.
At the same time, the Company will continue to dispose of non-core and non-
integrated businesses where returns are not satisfactory.
FORWARD-LOOKING INFORMATION.
Except for historical data, the information herein constitutes forward-
looking statements. Forward-looking statements are inherently uncertain and
subject to risks. Such statements should be viewed with caution. Actual
results or experience could differ materially from the forward-looking
statements as a result of many factors, including failure of the Company to
complete the Merger with USA Waste, failure to achieve timely the cost savings
anticipated by the parties as a result of the Merger, changes in the price of
recyclable commodities, severe weather conditions, slowing of the overall
economy, higher interest rates, market risk associated with derivatives,
failure of the Company's restructuring plans to produce the cost savings
anticipated, the inability to complete the divestiture of discontinued
businesses or the monetization of other assets at appropriate prices and
terms. The Company makes no commitment to disclose any revisions to forward-
looking statements, or any facts, events or circumstances after the date
hereof, that may bear upon forward-looking statements.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For an analysis of the Company's market risk, see "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Results of
Operations" set forth above in Item 7.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
1.Consolidated Financial Statements
Report of Independent Public Accountants................................ 53
Consolidated Balance Sheets as of December 31, 1995, 1996 and 1997...... 54
Consolidated Statements of Income for each of the four years ended
December 31, 1997...................................................... 56
Consolidated Statements of Cash Flows for each of the four years ended
December 31, 1997...................................................... 57
Consolidated Statements of Stockholders' Equity for each of the four
years ended December 31, 1997.......................................... 58
Notes to Consolidated Financial Statements.............................. 62
2.Schedule
Schedule II--Valuation and Qualifying Accounts (as Restated).............. 127
51
[THIS PAGE INTENTIONALLY LEFT BLANK]
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Waste Management, Inc.:
We have audited the accompanying consolidated balance sheets of Waste
Management, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997, 1996 and 1995, and the related consolidated statements of income, cash
flows and stockholders' equity for each of the four years in the period ended
December 31, 1997 (1996 and prior as restated--See Note 2). 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 Waste Management, Inc. and
subsidiaries as of December 31, 1997, 1996 and 1995, and the results of their
operations and their cash flows for each of the four years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for capitalized
interest on landfill cell construction and effective January 1, 1997, the
Company changed its method of accounting for environmental remediation
liabilities.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II (1996 and prior as
restated) listed in the index of financial statements is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 24, 1998 (except with respect to the matters discussed in Note 19, as
to which the date is March 17, 1998).
53
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995, 1996 AND 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
RESTATED
------------------------
1995 1996 1997
----------- ----------- -----------
CURRENT ASSETS
Cash and cash equivalents............. $ 169,541 $ 323,288 $ 132,811
Short-term investments................ 12,156 319,338 59,296
Accounts receivable, less reserve of
$67,927 in 1995, $52,847 in 1996 and
$51,805 in 1997...................... 1,623,563 1,650,719 1,539,413
Employee receivables.................. 8,496 10,084 7,817
Parts and supplies.................... 143,527 135,417 119,039
Costs and estimated earnings in excess
of billings on uncompleted contracts. 242,675 240,531 158,610
Prepaid expenses...................... 120,344 119,273 128,520
----------- ----------- -----------
Total Current Assets................ $ 2,320,302 $ 2,798,650 $ 2,145,506
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost
Land, primarily disposal sites........ $ 4,202,829 $ 4,583,699 $ 3,811,887
Buildings............................. 1,532,475 1,485,045 1,327,179
Vehicles and equipment................ 7,115,078 7,454,460 6,572,424
Leasehold improvements................ 84,854 85,431 77,202
----------- ----------- -----------
$12,935,236 $13,608,635 $11,788,692
Less-Accumulated depreciation and
amortization......................... (4,119,397) (4,810,235) (4,534,543)
----------- ----------- -----------
Total Property and Equipment, Net... $ 8,815,839 $ 8,798,400 $ 7,254,149
----------- ----------- -----------
OTHER ASSETS
Intangible assets relating to acquired
businesses, net...................... $ 3,892,355 $ 3,871,919 $ 3,198,374
Net assets of continuing businesses
and surplus real estate held for
sale................................. 235,354 227,351 154,384
Sundry, including other investments... 1,575,337 1,387,257 836,685
Net assets of discontinued operations. 617,972 -- --
----------- ----------- -----------
Total Other Assets.................. $ 6,321,018 $ 5,486,527 $ 4,189,443
----------- ----------- -----------
Total Assets...................... $17,457,159 $17,083,577 $13,589,098
=========== =========== ===========
54
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
RESTATED
------------------------
1995 1996 1997
----------- ----------- -----------
CURRENT LIABILITIES
Portion of long-term debt payable
within one year...................... $ 1,088,033 $ 553,493 $ 1,548,465
Accounts payable...................... 999,164 951,491 758,047
Accrued expenses...................... 1,076,017 1,362,048 1,652,314
Unearned revenue...................... 204,166 212,541 233,579
----------- ----------- -----------
Total Current Liabilities........... $ 3,367,380 $ 3,079,573 $ 4,192,405
----------- ----------- -----------
DEFERRED ITEMS
Income taxes.......................... $ 549,682 $ 562,906 $ 212,869
Environmental liabilities............. 750,703 673,492 840,378
Other................................. 714,252 723,112 808,556
----------- ----------- -----------
Total Deferred Items................ $ 2,014,637 $ 1,959,510 $ 1,861,803
----------- ----------- -----------
LONG-TERM DEBT, less portion payable
within one year........................ $ 6,390,041 $ 6,971,607 $ 5,078,557
----------- ----------- -----------
NET LIABILITIES OF DISCONTINUED OPERA-
TIONS.................................. $ -- $ 57,874 $ --
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARIES....... $ 1,380,496 $ 1,177,463 $ 1,110,681
----------- ----------- -----------
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 and 1997......... 498,817 507,102 507,102
Additional paid-in capital............ 438,816 887,026 932,253
Cumulative translation adjustment..... (102,943) (79,213) (239,319)
Retained earnings..................... 3,582,861 3,228,346 1,735,371
----------- ----------- -----------
$ 4,417,551 $ 4,543,261 $ 2,935,407
Less-Treasury stock; 12,782,864 shares
in 1996 and 41,177,630 in 1997, at
cost................................. -- 419,871 1,271,885
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 and 1997, at
market)............................ 350,151 353,807 299,375
Minimum pension liability........... 11,692 18,885 7,393
Restricted stock unearned
compensation....................... -- 2,541 11,102
----------- ----------- -----------
Total Stockholders' Equity.......... $ 4,042,646 $ 3,741,761 $ 1,345,652
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity............. $17,457,159 $17,083,577 $13,589,098
=========== =========== ===========
The accompanying notes are an integral part of these balance sheets.
55
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
RESTATED
----------------------------------
1994 1995 1996 1997
---------- ---------- ---------- -----------
REVENUE....................... $8,537,883 $9,100,225 $9,225,636 $ 9,188,582
---------- ---------- ---------- -----------
Operating expenses.......... $6,027,979 $6,514,932 $6,660,766 $ 7,195,376
Special charges............. -- 335,587 370,735 145,990
Asset impairment loss....... 33,970 53,772 64,729 1,480,262
Selling and administrative
expenses................... 1,062,363 1,091,747 1,095,459 1,129,237
Interest expense............ 350,220 463,861 462,424 446,888
Interest income............. (42,793) (34,883) (27,904) (37,580)
Minority interest........... 126,042 81,367 41,289 45,442
(Income) loss from
continuing operations held
for sale, net of minority
interest................... (24,143) (25,110) (315) 9,930
Sundry income, net.......... (109,903) (252,695) (102,014) (173,290)
---------- ---------- ---------- -----------
Income (loss) from
continuing operations
before income taxes........ $1,114,148 $ 871,647 $ 660,467 $(1,053,673)
Provision for income taxes.. 512,683 451,741 436,473 215,667
---------- ---------- ---------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS................... $ 601,465 $ 419,906 $ 223,994 $(1,269,340)
---------- ---------- ---------- -----------
Discontinued Operations:
Income from operations, less
applicable income taxes and
minority interest of
$45,031 in 1994, $9,125 in
1995 and $17,490 in 1996... $ 27,324 $ 38,686 $ 22,620 $ --
Income (loss) on disposal or
from reserve adjustment,
net of applicable income
taxes and minority interest
of ($3,005) in 1995,
($18,640) in 1996 and
$100,842 in 1997........... -- (33,823) (285,921) 95,688
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAOR-
DINARY ITEM AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNT-
ING PRINCIPLES............... $ 628,789 $ 424,769 $ (39,307) $(1,173,652)
---------- ---------- ---------- -----------
Extraordinary loss on
refinancing of debt, net of
tax benefit and minority
interest of $767............. $ -- $ -- $ -- $ (516)
Cumulative effect of changes
in accounting principles, net
of tax
benefit of $819 in 1994,
$48,147 in 1995 and $1,100 in
1997......................... (1,281) (84,672) -- (1,936)
---------- ---------- ---------- -----------
NET INCOME (LOSS)............. $ 627,508 $ 340,097 $ (39,307) $(1,176,104)
========== ========== ========== ===========
AVERAGE COMMON SHARES OUT-
STANDING..................... 483,748 485,346 489,171 466,601
========== ========== ========== ===========
EARNINGS (LOSS) PER SHARE:
Basic--
Continuing operations....... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued operations..... 0.06 0.01 (0.54) 0.20
Extraordinary item.......... -- -- -- --
Cumulative effect of changes
in accounting principles... -- (0.17) -- --
---------- ---------- ---------- -----------
NET INCOME (LOSS)......... $ 1.30 $ 0.70 $ (0.08) $ (2.52)
========== ========== ========== ===========
Diluted--
Continuing operations....... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
Discontinued operations..... 0.06 0.01 (0.54) 0.20
Extraordinary item.......... -- -- -- --
Cumulative effect of changes
in accounting principles... -- (0.17) -- --
---------- ---------- ---------- -----------
NET INCOME (LOSS)......... $ 1.30 $ 0.70 $ (0.08) $ (2.52)
========== ========== ========== ===========
The accompanying notes are an integral part of these statements.
56
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
(000'S OMITTED)
RESTATED
-------------------------------------
1994 1995 1996 1997
----------- ----------- ----------- -----------
Cash flows from operating
activities:
Net income (loss) for the
year..................... $ 627,508 $ 340,097 $ (39,307) $(1,176,104)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization............. 996,407 1,035,018 1,065,683 1,080,105
Provision for deferred
income taxes............. 204,400 114,000 196,500 (405,100)
Undistributed earnings of
equity investees......... (48,200) 1,500 (34,200) 8,000
Minority interest in
subsidiaries............. 148,783 81,789 42,111 44,687
Interest on Liquid Yield
Option Notes and
Subordinated Notes....... 33,551 23,021 22,343 20,682
Contribution to 1988
Employee Stock Ownership
Plan..................... 7,930 6,667 6,666 6,396
Special charges........... -- 335,587 370,735 145,990
Asset impairment loss..... 33,970 53,772 64,729 1,480,262
Extraordinary item........ -- -- -- 516
Cumulative effect of
changes in accounting
principles............... 1,281 84,672 -- 1,936
Loss (income) on disposal
of discontinued
operations or reserve
adjustments, net of tax
and minority interest.... -- 33,823 285,921 (95,688)
(Gain) on disposition of
business and assets...... (25,100) (168,875) (30,086) (180,293)
Changes in assets and
liabilities, excluding
effects of acquired or
divested companies:
Receivables, net.......... (119,785) 60,817 (1,718) 57,922
Other current assets...... (57,509) 23,412 5,747 62,602
Sundry other assets....... (43,116) (71,766) (132,311) 127,125
Accounts payable.......... 182,874 39,669 (61,268) (165,829)
Accrued expenses and
unearned revenue......... 32,363 (76,398) 11,923 529,763
Deferred items............ (298,097) 84,301 (185,532) 11,587
Other, net................ 57,163 (52,535) 52,092 48,446
----------- ----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES...... $ 1,734,423 $ 1,948,571 $ 1,640,028 $ 1,603,005
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Short-term investments.... $ 2,755 $ 17,804 $ 1,170 $ (53,569)
Capital expenditures...... (1,440,238) (1,340,261) (1,063,552) (879,545)
Proceeds from asset
monetization program..... 287,046 165,716 752,345 1,375,206
Cost of acquisitions, net
of cash acquired......... (197,201) (224,304) (104,778) (51,360)
Other investments......... (26,246) (50,119) (16,372) (8,877)
Acquisition of minority
interests................ (57,865) (170,854) (342,034) (104,165)
----------- ----------- ----------- -----------
NET CASH OBTAINED FROM
(USED FOR) INVESTING
ACTIVITIES................ $(1,431,749) $(1,602,018) $ (773,221) $ 277,690
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Cash dividends............ $ (290,266) $ (291,421) $ (308,265) $ (309,577)
Proceeds from issuance of
indebtedness............. 1,710,586 1,803,383 2,907,544 1,105,427
Repayments of
indebtedness............. (1,752,552) (1,860,451) (2,933,632) (1,967,048)
Proceeds from exercise of
stock options, net....... 7,970 14,132 65,766 41,220
Contributions from
minority interests....... 22,169 24,394 10,242 --
Other distributions to
minority stockholders by
affiliated companies..... -- -- -- (36,341)
Stock repurchases......... -- -- (473,560) (903,248)
Proceeds from sales of put
options.................. 29,965 21,622 18,845 --
Settlement of put options. -- (12,019) -- (1,605)
----------- ----------- ----------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES................ $ (272,128) $ (300,360) $ (713,060) $(2,071,172)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents. $ 30,546 $ 46,193 $ 153,747 $ (190,477)
Cash and cash equivalents
at beginning of year...... 92,802 123,348 169,541 323,288
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of year............ $ 123,348 $ 169,541 $ 323,288 $ 132,811
=========== =========== =========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for:
Interest, net of amounts
capitalized.............. $ 307,257 $ 439,323 $ 402,321 $ 428,531
Income taxes, net of
refunds received......... 241,657 283,165 326,679 344,188
Supplemental schedule of
noncash investing and
financing activities:
LYONs converted into
common stock of the
Company.................. 1,594 2,598 2,176 659
Liabilities assumed in
acquisitions of
businesses............... 225,723 219,285 114,897 23,356
Fair market value of
Company and subsidiary
stock issued for acquired
businesses............... 4,773 66,172 236,001 2,696
Exchange of interest in
ServiceMaster Consumer
Services L.P............. -- 467,000 -- --
Subordinated Notes issued
for acquisition of CWM
minority interest........ $ -- $ 436,830 $ -- $ --
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
57
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
Balance, January 1, 1994, as previously
reported...................................... $496,217 $668,470 $(245,587)
Cumulative effect of prior period adjustments.. -- 14,117 --
-------- -------- ---------
Balance, January 1, 1994, as restated.......... $496,217 $682,587 $(245,587)
-------- -------- ---------
Net income for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.60 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 5,617 --
Common stock issued upon exercise of stock
options...................................... -- (5,948) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 1,527 --
Contribution of 1988 ESOP (375,312 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 96 1,442 --
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) --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 16,064 --
Adjustment for minimum pension liability...... -- -- --
Transfer of equity interests among controlled
subsidiaries................................. -- (2,803) --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 94,755
-------- -------- ---------
Balance, December 31, 1994, as restated........ $496,387 $371,267 $(150,832)
-------- -------- ---------
Net income for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.60 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 7,207 --
Common stock issued upon exercise of stock
options...................................... 44 (4,405) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 2,049 --
Contribution of 1988 ESOP (322,508 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 150 2,448 --
Common stock issued for acquisitions.......... 2,236 15,768 --
Temporary equity related to put options....... -- (9,631) --
Proceeds from sale of put options............. -- 21,622 --
Settlement of put options..................... -- (12,019) --
Common stock purchased through nonqualified
deferred compensation plan................... -- 38 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 43,943 --
Adjustment for minimum pension liability...... -- -- --
Transfer of equity interests among controlled
subsidiaries................................. -- 529 --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 47,889
-------- -------- ---------
Balance, December 31, 1995, as restated........ $498,817 $438,816 $(102,943)
-------- -------- ---------
58
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ---------- -------- -------------- ------------- --------- ----------------
$3,693,108 $425,097 $27,659 $ -- $ -- $--
(483,341) -- -- -- 8,085 --
- ---------- -------- ------- -------- ------- ---
$3,209,767 $425,097 $27,659 $ -- $ 8,085 $--
- ---------- -------- ------- -------- ------- ---
$ 627,508 $ -- $ -- $ -- $ -- $--
(290,266) -- -- -- -- --
(5,617) -- -- -- -- --
-- (8,250) -- (5,928) -- --
-- 260 -- -- -- --
-- -- -- -- -- --
-- -- (7,930) -- -- --
-- 2,741 -- -- -- --
-- (56) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- (419,792) -- 313,465 -- --
-- -- -- 16,064 -- --
-- -- -- -- (350) --
-- -- -- -- -- --
-- -- -- -- -- --
- ---------- -------- ------- -------- ------- ---
$3,541,392 $ -- $19,729 $323,601 $ 7,735 $--
- ---------- -------- ------- -------- ------- ---
$ 340,097 $ -- $ -- $ -- $ -- $--
(291,421) -- -- -- -- --
(7,207) -- -- -- -- --
-- (1,763) -- (17,393) -- --
-- 663 -- -- -- --
-- -- -- -- -- --
-- -- (6,667) -- -- --
-- 1,100 -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- 43,943 -- --
-- -- -- -- 3,957 --
-- -- -- -- -- --
-- -- -- -- -- --
- ---------- -------- ------- -------- ------- ---
$3,582,861 $ -- $13,062 $350,151 $11,692 $--
- ---------- -------- ------- -------- ------- ---
The accompanying notes are an integral part of these statements.
59
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION
STOCK CAPITAL ADJUSTMENT
-------- ---------- -----------
Balance, January 1, 1996, as restated.......... $498,817 $438,816 $(102,943)
-------- -------- ---------
Net (loss) for the year (restated)............ $ -- $ -- $ --
Cash dividends ($.63 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 6,943 --
Common stock repurchase (14,390,000 shares)... -- -- --
Common stock issued upon exercise of stock
options and grants of restricted stock....... 217 (10,938) --
Treasury stock received in connection with
exercise of stock options.................... -- -- --
Tax benefit of non-qualified stock options
exercised.................................... -- 6,859 --
Unearned compensation related to issuance of
restricted stock to employees................ -- -- --
Earned compensation related to restricted
stock (net of reversals on forfeited shares). -- -- --
Contribution to 1988 ESOP (307,041 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. 111 1,905 --
Common stock issued for acquisitions.......... 7,957 219,867 --
Temporary equity related to put options....... -- 166,170 --
Proceeds from sale of put options............. -- 18,845 --
Common stock purchased through nonqualified
deferred compensation plan................... -- 6,281 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- 32,278 --
Adjustment for minimum pension liability...... -- -- --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- 23,730
-------- -------- ---------
Balance, December 31, 1996, as restated........ $507,102 $887,026 $ (79,213)
-------- -------- ---------
Net (loss) for the year....................... $ -- $ -- $ --
Cash dividends ($.67 per share)............... -- -- --
Dividends paid to Employee Stock Benefit
Trust........................................ -- 7,294 --
Common stock repurchase (30,000,000 shares)... -- -- --
Common stock issued upon exercise of stock
options and grants of restricted stock....... -- (6,051) --
Compensation paid with stock options.......... -- 701 --
Tax benefit of non-qualified stock options
exercised.................................... -- 2,741 --
Unearned compensation related to issuance of
restricted stock to employees................ -- -- --
Earned compensation related to restricted
stock (net of reversals on forfeited shares). -- -- --
Reversal of unearned compensation upon
cancellation of restricted stock............. -- -- --
Contribution to 1988 ESOP (295,089 shares).... -- -- --
Treasury stock received as settlement for
claims....................................... -- -- --
Common stock issued upon conversion of LYONs.. -- (324) --
Common stock issued for acquisitions.......... -- (1,057) --
Temporary equity related to put options....... -- 95,789 --
Settlement of put options..................... -- (1,605) --
Common stock purchased through nonqualified
deferred compensation plan................... -- 2,171 --
Adjustment of Employee Stock Benefit Trust to
market value................................. -- (54,432) --
Adjustment for minimum pension liability...... -- -- --
Cumulative translation adjustment of foreign
currency statements.......................... -- -- (160,106)
-------- -------- ---------
Balance, December 31, 1997..................... $507,102 $932,253 $(239,319)
-------- -------- ---------
60
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE FOUR YEARS ENDED DECEMBER 31, 1997
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
1988 EMPLOYEE EMPLOYEE MINIMUM RESTRICTED STOCK
RETAINED TREASURY STOCK STOCK PENSION UNEARNED
EARNINGS STOCK OWNERSHIP PLAN BENEFIT TRUST LIABILITY COMPENSATION
- ----------- ---------- -------------- ------------- --------- ----------------
$3,582,861 $ -- $13,062 $350,151 $11,692 $ --
- ----------- ---------- ------- -------- ------- -------
$ (39,307) $ -- $ -- $ -- $ -- $ --
(308,265) -- -- -- -- --
(6,943) -- -- -- -- --
-- 473,560 -- -- -- --
-- (53,323) -- (28,622) -- --
-- 5,458 -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 2,640
-- -- -- -- -- (99)
-- -- (6,666) -- -- --
-- 2,513 -- -- -- --
-- (160) -- -- -- --
-- (8,177) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- 32,278 -- --
-- -- -- -- 7,193 --
-- -- -- -- -- --
- ----------- ---------- ------- -------- ------- -------
$ 3,228,346 $ 419,871 $ 6,396 $353,807 $18,885 $ 2,541
- ----------- ---------- ------- -------- ------- -------
$(1,176,104) $ -- $ -- $ -- $ -- $ --
(309,577) -- -- -- -- --
(7,294) -- -- -- -- --
-- 903,248 -- -- -- --
-- (47,271) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 23,444
-- -- -- -- -- (2,357)
-- -- -- -- -- (12,526)
-- -- (6,396) -- -- --
-- 773 -- -- -- --
-- (983) -- -- -- --
-- (3,753) -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- (54,432) -- --
-- -- -- -- (11,492) --
-- -- -- -- -- --
- ----------- ---------- ------- -------- ------- -------
$1,735,371 $1,271,885 $ -- $299,375 $ 7,393 $11,102
- ----------- ---------- ------- -------- ------- -------
The accompanying notes are an integral part of these statements.
61
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN MILLIONS EXCEPT PER SHARE AMOUNTS UNLESS OTHERWISE NOTED)
NOTE 1. BUSINESS AND FINANCIAL STATEMENTS
Waste Management, Inc. (formerly WMX Technologies, Inc.) and its
subsidiaries ("Waste Management" or the "Company") provide waste management
and related 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 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. As of December 31,
1997, WTI and Rust had sold all of these businesses, and accordingly they are
classified as discontinued operations in the accompanying financial
statements. The Company now operates in only the waste management services
industry. See Note 14 for details of certain financial information by
geographic area.
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. Certain of the
Company's subsidiaries are restricted as to payment of dividends to the
Company. However, the Company has access to the net assets of such
subsidiaries through intercompany loans and advances.
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. RESTATEMENT AND RECLASSIFICATION
The Company has restated and reclassified its financial statements for each
of the three years ended December 31, 1996. The cumulative after-tax effect
for periods prior to January 1, 1994, has been reflected as a charge to
beginning retained earnings in the Consolidated Statements of Stockholders'
Equity. Unaudited quarterly financial data for the years 1995 and 1996 and the
first three quarters of 1997, as shown in Note 20, has also been restated and
reclassified. Except as otherwise stated herein, all information presented in
the Consolidated Financial Statements and related notes includes all such
restatements and reclassifications.
As a result of a comprehensive review begun in the third quarter of 1997,
the Company determined that certain items of expense were incorrectly reported
in previously issued financial statements. These principally relate to
vehicle, equipment and container depreciation expense, capitalized interest
and income taxes. With respect to depreciation, the Company determined that
incorrect vehicle and container salvage values had been used, and errors had
been made in the expense calculations. The Company also concluded that
capitalized interest relating to landfill construction projects had been
misstated. On January 1, 1995, the Company changed its accounting for
capitalized interest (see "Capitalized Interest"), but the cumulative "catch-
up" charge was not properly recorded in the 1995 financial statements, and
errors were made in applying the new method in subsequent years. Capitalized
interest for 1995, 1996 and the first three quarters of 1997 has accordingly
been restated.
The prior period restatements also include earlier recognition of certain
asset value impairments (primarily related to land, landfill and recycling
investments) and of environmental liabilities (primarily related to
remediation and landfill closure and post-closure expense accruals including
restatement of purchase accounting). The reduction of the special charge in
1996 is due primarily to the reversal of software impairment charges which
were recorded prematurely.
62
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the restatements by category is as follows:
CUMULATIVE RESTATEMENTS
THROUGH DECEMBER 31,
1996
-----------------------
(IN MILLIONS)
Vehicle, equipment and container depreciation
expense......................................... $ 509
Capitalized interest............................. 192
Environmental and closure/post-closure costs and
reserves........................................ 173
Purchase accounting related to remediation
reserves........................................ 128
Asset impairment losses.......................... 214
Software impairment charges...................... (85)
Other, including minority interest............... 301
------
Total pretax................................... $1,432
Tax effects on above items including income tax
reserve adjustments............................. (297)
------
$1,135
======
In the fourth quarter of 1997, the Company reclassified the results of
certain Rust business units to continuing operations held for sale. These
businesses had previously been reported as discontinued operations. Accounting
standards require such reclassification because divestiture did not occur
within one year from the date the businesses were initially reported as
discontinued operations.
63
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also reclassified certain items of income and expense in
previously issued financial statements. The primary effect of such
reclassification is to increase various expense categories by amounts which
had been offset against gains in sundry income. Such reclassifications, which
did not change net income, affected various line items within the Consolidated
Statements of Income.
The effect of such reclassifications, and the restatements discussed above,
on the income statement line items, is shown in the following table:
AS PREVIOUSLY AS
REPORTED RECLASSIFICATIONS RESTATEMENTS RESTATED
------------- ----------------- ------------ --------
1994
Revenue................. $8,482.7 $ 55.2 $ -- $8,537.9
-------- ------ ------- --------
Operating expenses...... $5,827.6 $ 42.2 $ 158.2 $6,028.0
Asset impairment loss... -- -- 34.0 34.0
Selling and administra-
tive expenses.......... 997.2 51.6 13.5 1,062.3
Interest, net........... 300.3 1.4 5.7 307.4
Minority interest....... 127.0 6.5 (7.5) 126.0
(Income) loss from con-
tinuing operations held
for sale............... -- (24.1) -- (24.1)
Sundry income, net...... (64.4) (51.0) 5.5 (109.9)
Provision for income
taxes.................. 552.6 13.9 (53.8) 512.7
(Income) loss from dis-
continued operations... (42.0) 14.7 -- (27.3)
Cumulative effect of
changes in accounting
principles............. -- -- 1.3 1.3
-------- ------ ------- --------
Net Income.......... $ 784.4 $ -- $(156.9) $ 627.5
======== ====== ======= ========
1995
Revenue................. $9,053.0 $ 47.2 $ -- $9,100.2
-------- ------ ------- --------
Operating expenses...... $6,220.9 $162.1 $ 131.9 $6,514.9
Special charge.......... 335.2 -- 0.4 335.6
Asset impairment loss... -- -- 53.8 53.8
Selling and administra-
tive expenses.......... 1,004.9 102.9 (16.1) 1,091.7
Interest, net........... 384.7 13.2 31.1 429.0
Minority interest....... 81.9 (4.3) 3.8 81.4
(Income) loss from con-
tinuing operations held
for sale............... -- (25.1) -- (25.1)
Sundry income, net...... (76.5) (172.5) (3.7) (252.7)
Provision for income
taxes.................. 483.7 8.9 (40.9) 451.7
(Income) loss from dis-
continued operations... 14.3 (38.0) 18.8 (4.9)
Cumulative effect of
changes in accounting
principles............. -- -- 84.7 84.7
-------- ------ ------- --------
Net Income.......... $ 603.9 $ -- $(263.8) $ 340.1
======== ====== ======= ========
1996
Revenue................. $9,187.0 $ 38.6 $ -- $9,225.6
-------- ------ ------- --------
Operating expenses...... $6,372.8 $ 7.8 $ 280.2 $6,660.8
Special charge.......... 471.6 -- (100.9) 370.7
Asset impairment loss... -- -- 64.7 64.7
Selling and administra-
tive expenses.......... 979.2 45.9 70.4 1,095.5
Interest, net........... 348.1 51.0 35.4 434.5
Minority interest....... 57.6 0.9 (17.2) 41.3
(Income) loss from con-
tinuing operations held
for sale............... -- (0.3) -- (0.3)
Sundry income, net...... (85.2) (56.0) 39.1 (102.1)
Provision for income
taxes.................. 565.1 (9.9) (118.7) 436.5
(Income) loss from dis-
continued operations... 285.7 (0.8) (21.6) 263.3
-------- ------ ------- --------
Net Income (loss)... $ 192.1 $ -- $(231.4) $ (39.3)
======== ====== ======= ========
64
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These restatements increased (decreased) previously reported results and
earnings per share as shown in the following table:
YEAR ENDED DECEMBER 31
-------------------------
1994 1995 1996
------- ------- -------
Income from continuing operations before income tax-
es................................................. $(180.8) $(230.3) $(382.4)
Provision for income taxes.......................... 39.9 32.0 128.6
------- ------- -------
Income from continuing operations................... $(140.9) $(198.3) $(253.8)
Discontinued operations............................. ( 14.7) 19.2 22.4
Cumulative effect of accounting change.............. (1.3) (84.7) --
------- ------- -------
Net income.......................................... $(156.9) $(263.8) $(231.4)
======= ======= =======
Earnings per share--
Basic--
Continuing operations............................. $ (0.29) $ (0.41) $ (0.52)
Discontinued operations........................... (0.03) 0.04 0.04
Accounting change................................. -- (0.17) --
------- ------- -------
Net income...................................... $ (0.32) $ (0.54) $ (0.48)
======= ======= =======
Diluted--
Continuing operations............................. $ (0.29) $ (0.39) $ (0.51)
Discontinued operations........................... (0.03) 0.04 0.03
Accounting change................................. -- (0.17) --
------- ------- -------
Net income...................................... $ (0.32) $ (0.52) $ (0.48)
======= ======= =======
65
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. SUMMARY OF ACCOUNTING POLICIES
Revenue Recognition. The Company is primarily in a service business and
recognizes revenue when services are performed. Results from long-term
contracts are recorded 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 long-term contract costs and income.
Foreign Currency. The functional currency of the majority of the Company's
foreign subsidiaries is the local currency of the country in which the
subsidiary operates. Accordingly, such 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 difference is charged or credited
directly to stockholders' equity, as revenues, expenses and cash flows of the
subsidiaries are primarily in their local currencies. Foreign exchange
transaction losses (income) (net of related income taxes and minority
interest) of $3.3 million, $2.2 million, $ 0.3 million and ($0.9) million are
included in the Consolidated Statements of Income for 1994, 1995, 1996, and
1997, respectively.
Cash Equivalents. All highly liquid investments with maturities of three
months or less at date of purchase are considered to be cash equivalents.
Short-Term Investments. As part of its cash management program, the Company
from time-to-time maintains a portfolio of marketable investment securities
($12.2 million, $11.0 million and $3.0 million at December 31, 1995, 1996 and
1997, respectively). The securities have an investment grade of not less than
A and a term to earliest maturity generally of less than one year, and include
tax exempt securities, certificates of deposit and Euro-dollar time deposits.
These securities are carried at cost.
Short-term investments also include investments classified as "trading,"
which are carried at market price with unrealized gains and losses included in
Sundry Income. At December 31, 1996, this category included the shares of
Wessex Water Plc ("Wessex") (see Note 15). At December 31, 1997, this category
included certain other equity securities classified as "trading" as well as a
price collar related to such investment. These securities were delivered in
1998 in exchange for the cap price of the collar. See Note 7.
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 89 sites listed on the Superfund
National Priority List ("NPL"). When 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 8 for additional information.
Contracts in Process. Information with respect to contracts in process
(which relate primarily to contracts involving a substantial construction
component) at December 31, 1995, 1996 and 1997, is as follows:
1995 1996 1997
-------- -------- --------
Costs and estimated earnings on uncompleted
contracts....................................... $1,176.6 $1,192.2 $1,511.7
Less: Billing on uncompleted contracts........... (952.8) (979.9) (1,374.1)
-------- -------- --------
Total contracts in process..................... $ 223.8 $ 212.3 $ 137.6
======== ======== ========
66
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contracts in process are included in the Consolidated Balance Sheets under
the following captions:
1995 1996 1997
------ ------ ------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $242.7 $240.5 $158.6
Billings in excess of costs and estimated earnings on
uncompleted contracts (included in unearned revenue).. (18.9) (28.2) (21.0)
------ ------ ------
Total contracts in process........................... $223.8 $212.3 $137.6
====== ====== ======
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, 1997, is $5.3 million, including $1.1 million that is expected to
be collected after one year. Retainage was $8.0 million at December 31, 1996,
and $12.8 million at December 31, 1995.
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 the land component 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
land improvements. Cell costs are 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.
Depreciation and Amortization. The cost, less estimated salvage value for
certain types of assets, of property and equipment had been depreciated over
the following estimated useful lives on the straight-line method: buildings,
10 - 40 years; heavy collection vehicles, 10 - 12 years; other vehicles, 3 - 6
years; rolloff containers, 20 years; other containers, 15 years; machinery and
equipment, 3 - 20 years; leasehold improvements, over the life of the
applicable lease.
Effective October 1, 1997, the Board of Directors approved a management
recommendation to revise the Company's North American collection fleet
management policy. Front-end loaders will be replaced after 8 years, and rear-
end loaders and rolloff trucks after 10 years. The previous policy was to not
replace front-end loaders before they were a minimum of 10 years old and other
heavy collection vehicles before they were a minimum of 12 years old. As a
result of this decision, the Company recognized an impairment writedown of
$70.9 million in the fourth quarter of 1997 for those vehicles scheduled for
replacement in the next two years under the new policy (see Note 16).
Depreciable lives have been adjusted commencing in the fourth quarter of 1997
to reflect the new policy. Also effective October 1, 1997, the Company reduced
depreciable lives on containers from 15 and 20 years to 12 years, and ceased
assigning salvage value in computing depreciation on North American collection
vehicles or containers. These changes in estimates increased depreciation
expense by $33.7 million in the fourth quarter of 1997.
Also effective October 1, 1997, the Company changed its process for
estimating landfill lives. The Company now amortizes landfill costs over
estimated landfill capacity which includes permitted landfill airspace plus
expansions which are probable of being obtained in the next five years. The
Company's prior practice was to consider likely future expansions in the
amortization calculations, whether or not the permits were expected to be
obtained within the next five years. Factors in determining probable
expansions on a site-by-site basis include secured rights to required land,
status of legal, environmental, regulatory and political issues, and the
extent to which the permit application process has proceeded. This change in
estimate increased depreciation and amortization by $12.7 million and the
provision for closure and post-closure by $3.1 million in the fourth quarter
of 1997, and resulted in estimated landfill capacity declining from 2.9
billion cubic yards to 1.8 billion cubic yards.
67
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 amortized on a straight-line
basis over a period of not more than forty years. The accumulated amortization
of intangible assets amounted to $582.9 million, $685.8 million and $670.7
million as of December 31, 1995, 1996 and 1997, respectively.
On an ongoing basis, the Company measures realizability of goodwill by the
ability of acquired businesses to generate current and expected future after-
tax 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.
Amounts capitalized and netted against Interest Expense in the Consolidated
Statements of Income were $105.9 million in 1994, $43.9 million in 1995, $35.6
million in 1996, and $26.0 million in 1997.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cells. Previously, interest was capitalized using a
method that allocated construction costs incurred to airspace on a total
landfill basis. The new method uses as a base for interest capitalization the
discrete construction activities related to each cell and results in less
interest being capitalized. In a landfill disposal services market
characterized by substantial price competition and minimal anticipated volume
growth, the new method reduces the risk of an asset impairment in the future.
The change reduced 1995 net income from continuing operations by $20.0 million
or approximately $0.04 per share. The unaudited proforma effect of this change
to a preferable method, on 1994 and 1995 had the change been made as of
January 1, 1994, and excluding the cumulative effect of the accounting change,
is shown in the following table:
ACTUAL PRO FORMA
------------- -------------
1994 1995 1994 1995
------ ------ ------ ------
Income from continuing operations.................. $601.5 $419.9 $581.5 $419.9
Net Income......................................... 627.5 340.1 607.5 424.8
Earnings per share--
Basic
Income from continuing operations................ $ 1.24 $ 0.86 $ 1.20 $ 0.86
Net income....................................... 1.30 0.70 1.26 0.87
Diluted
Income from continuing operations................ $ 1.24 $ 0.86 $ 1.20 $ 0.86
Net Income....................................... 1.30 0.70 1.26 0.87
Self-Insurance. The Company self-insures for auto, general liability and
workers' compensation claims up to $5 million per claim. Provision is made in
each accounting period for estimated losses, including losses incurred but not
reported, and related reserves are adjusted as additional claim information
becomes available. Claim reserves are discounted at 6%, 7% and 6% at December
31, 1995, 1996 and 1997, respectively, based on historical payment patterns.
The self-insurance reserve included in the accompanying balance sheet was
$151.7 million, $188.0 million and $226.7 million at December 31, 1995, 1996
and 1997, respectively.
In the fourth quarter of 1997, the Company modified its self-insurance
reserve determination technique. The revised loss projection process improves
the estimation of future growth in claims. This change in estimate resulted in
a $56 million pre-tax charge.
Derivative Financial Instruments. In the normal course of business, the
Company enters into a variety of derivative financial instruments to manage
currency, interest rate, commodity (fuel) and equity price risk. See Note 7 to
Consolidated Financial Statements for a description of these financial
instruments and the methods of accounting for them.
68
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Principles. Effective January 1, 1994, the Company adopted FAS
No. 112, "Employers' Accounting for Postemployment Benefits." The change
reduced 1994 net income by $1.3 million.
Effective January 1, 1995, the Company changed its method of capitalizing
interest on landfill cell construction. See "Capitalized Interest." The
cumulative effect of this change reduced 1995 net income by $84.7 million.
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." Impairments recorded prior to 1996 followed a methodology consistent with
FAS No. 121, and accordingly the adoption of this statement did not have a
material impact on the financial statements.
FAS No. 123, "Accounting for Stock-Based Compensation," also became
effective in 1996. However, FAS No. 123 permitted compensation to continue to
be accounted for under Accounting Principles Board Opinion No. 25, and the
Company elected to follow this alternative. See Note 9.
Effective January 1, 1997, the Company adopted American Institute of
Certified Public Accountants Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 provides that environmental
remediation liabilities should be accrued when the criteria of FAS No. 5,
"Accounting for Contingencies," are met. It also provides that the accrual for
such liabilities should include future costs for those employees expected to
devote a significant amount of time directly to the management of remediation
liabilities. The adoption of SOP 96-1 reduced 1997 pretax income by $49.9
million.
In the fourth quarter of 1997, the Company began expensing process
reengineering costs (including $3.0 million previously capitalized) in
accordance with Emerging Issues Task Force consensus 97-13, reducing 1997 net
income by $1.9 million.
Also in 1997, the Company began presenting earnings per share in accordance
with FAS No. 128. See Note 11 for further discussion.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income," and FAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." Both statements are effective for
fiscal years beginning after December 15, 1997, although FAS No. 131 does not
apply to the Company's interim financial statements until 1999. FAS No. 130
requires only a different format for presentation of information already
included in the Company's financial statements. FAS No. 131 modifies the basis
for determining segments and expands required segment disclosure, but does not
affect accounting principles and, accordingly, will not require any change to
reported financial position, results of operations or cash flows. The Company
is currently evaluating the impact of FAS No. 131 on its segment reporting.
69
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. 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 1997.
Income (Loss) From Continuing Operations Before Income Taxes
1994 1995 1996 1997
-------- ------ ------ ---------
Domestic..................................... $ 952.5 $882.1 $654.9 $(1,153.3)
International................................ 161.6 (10.5) 5.6 99.6
-------- ------ ------ ---------
$1,114.1 $871.6 $660.5 $(1,053.7)
======== ====== ====== =========
Income Tax Provision (Benefit)
Current tax expense
U.S. federal............................... $ 230.1 $248.2 $172.3 $ 476.7
State and local............................ 52.6 54.2 50.2 67.1
Foreign.................................... 25.6 35.3 17.5 77.0
-------- ------ ------ ---------
Total current............................ $ 308.3 $337.7 $240.0 $ 620.8
-------- ------ ------ ---------
Deferred tax expense
U.S. federal............................... $ 145.4 $112.6 $ 96.8 $ (371.5)
State and local............................ 16.9 19.9 23.7 (26.4)
Foreign.................................... 42.1 (18.5) 76.0 (7.2)
-------- ------ ------ ---------
Total deferred........................... $ 204.4 $114.0 $196.5 $ (405.1)
-------- ------ ------ ---------
Total provision.......................... $ 512.7 $451.7 $436.5 $ 215.7
======== ====== ====== =========
The federal statutory tax rate is reconciled to the effective tax rate as
follows:
1994 1995 1996 1997
----- ----- ----- ------
Tax provision (benefit) at U.S. statutory rate... 35.00% 35.00% 35.00% (35.00)%
U.S. state and local taxes, net of federal
benefit......................................... 4.05 5.53 7.27 2.50
Non-deductible goodwill.......................... 2.66 4.09 8.50 18.15
Writedown of investments in subsidiary........... 0.25 -- 8.98 4.04
Minority interests............................... 4.68 4.42 3.89 0.91
Deferred tax valuation and other tax reserves.... (0.40) 3.82 0.89 25.25
Gain on sale of foreign subsidiary............... -- -- 2.65 --
Other............................................ (0.22) (1.03) (1.09) 4.62
----- ----- ----- ------
46.02% 51.83% 66.09% 20.47%
===== ===== ===== ======
The increased impact of non-deductible goodwill on the 1997 consolidated tax
provision is attributable to the asset impairment losses discussed in Note 16.
As a result of the 1997 comprehensive review, the Company increased deferred
tax valuation allowances and other tax reserves.
70
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes result from the recognition in different periods of
revenue and expense for tax and financial statement purposes. The primary
deferred tax (assets) liabilities are as follows:
DECEMBER 31
------------------------------
1995 1996 1997
--------- -------- ---------
Deferred tax assets
Reserves not deductible until paid........... $ (651.9) $ (599.7) $ (708.2)
Deferred revenue............................. (28.5) (20.3) (14.0)
Net operating losses and tax credit
carryforwards............................... (266.9) (233.0) (193.7)
Basis difference due to land writedowns...... (24.4) (26.4) (99.1)
Other........................................ (79.9) (85.3) (113.7)
--------- -------- ---------
Subtotal..................................... $(1,051.6) $ (964.7) $(1,128.7)
--------- -------- ---------
Deferred tax liabilities
Depreciation and amortization................ $ 1,076.3 $1,036.9 $ 850.9
Other........................................ 398.9 384.6 281.9
--------- -------- ---------
Subtotal................................... $ 1,475.2 $1,421.5 $ 1,132.8
--------- -------- ---------
Valuation allowance............................ $ 126.1 $ 106.1 $ 208.8
--------- -------- ---------
Net deferred tax liabilities................... $ 549.7 $ 562.9 $ 212.9
========= ======== =========
The Company's subsidiaries have approximately $13.0 million of alternative
minimum tax credit carryforwards that may be used indefinitely and capital
loss carryforwards of approximately $52.7 million with expiration dates
through 2002. Various subsidiaries have U.S. federal and foreign operating
loss carryforwards of approximately $514 million and state operating loss
carryforwards of approximately $601 million. Foreign operating losses of $481
million may be carried forward indefinitely; the remaining loss carryforwards
have expiration dates through the year 2012. Valuation allowances have been
established for uncertainties in realizing the benefits of tax loss and credit
carryforwards. 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 1995, the valuation
allowance increased, primarily for the uncertainty of realizing foreign
operating loss carryforwards. The valuation allowance decreased in 1996 by
approximately $20 million due primarily to the realization of capital loss
carryforwards and adjustments for certain operating loss carryforwards
previously estimated to be unrealizable. In 1997, the valuation allowance
increased approximately $102.7 million, composed of increases to allowances
due to the uncertainty of realizing alternative minimum tax credits, tax
benefits from certain asset impairment writedowns (primarily land), foreign
tax credits, and net operating loss carryforwards, partially offset by
reductions in allowances attributable primarily to foreign net operating loss
carryforwards.
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 5. BUSINESS ACQUISITIONS AND DIVESTITURES
In 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197.2 million in cash and notes, $17.3 million of debt assumed, 73,809
shares of Company common stock and 156,124 shares of WTI common stock.
During 1995, 136 businesses were acquired for $224.3 million in cash and
notes, $77.7 million of debt assumed, and 2.2 million shares of the Company's
common stock.
In 1996, 83 businesses were acquired for $104.8 million in cash and notes,
$39.4 million of debt assumed, and 8.2 million shares of the Company's common
stock.
71
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, 45 businesses were acquired for $51.4 million in cash and
notes, assumed debt of $17.6 million, and 121,551 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. The pro forma effect of the acquisitions made
during the four years was 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 6 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.
During 1997, the Company divested 24 solid waste operations in North America
for a total price of $288.9 million. The largest of these transactions was the
sale of most of its Canadian operations. Its Waste Management International
plc ("WM International") subsidiary sold substantially all of its remaining
operations in France for approximately $112 million, and its business in Spain
for approximately $16.3 million, and entered into an agreement for the sale
(completed in January 1998) of its Hamm, Germany waste-to-energy plant for
approximately $137.0 million.
In June 1997, the Company announced an offer to acquire, for $15 per share
in cash, all of the approximately 53 million outstanding shares of WTI it does
not already own. The price was increased to $16.50 per share pursuant to a
definitive merger agreement subsequently negotiated with a special committee
of independent WTI directors. The terms of the agreement have been approved by
the WTI special committee and by the Boards of Directors of the Company and
WTI, but the transaction remains subject to the approval of the holders of a
majority of WTI's outstanding shares, other than those held by the Company,
voting on it at a special meeting of WTI stockholders to be held March 30,
1998. Several lawsuits have been filed which seek, among other things, to
enjoin the proposed transaction. The Company believes that it has met the
legal standards applicable to transactions of this type and intends to
vigorously defend itself in these lawsuits.
72
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. DEBT
The details relating to debt (including capitalized leases, which are not
material) as of December 31, 1995, 1996 and 1997, are as follows:
1995 1996 1997
-------- -------- --------
Commercial Paper weighted average interest 5.7% in
1995, 5.8% in 1996 and 6.1% in 1997................ $1,119.4 $ 645.9 $ 356.3
Tailored Rate ESOP Notes, weighted average interest
4.74% in 1995 and 4.58% in 1996.................... 20.0 20.0 --
Notes and debentures, interest 6% to 8.75%, due
1998-2026.......................................... 3,583.3 4,083.3 4,133.3
Solid waste disposal revenue bonds, interest 4.15%
to 7.15%, due 1998-2013............................ 251.1 240.0 274.6
Installment loans and notes payable, interest 5.34%
to 10.6%, due 1998-2020............................ 1,197.8 1,137.1 518.9
Project debt, interest 3.95% to 10.64%, due 1998-
2018............................................... 735.6 833.8 829.0
Other long-term borrowings.......................... 31.5 30.2 20.5
Liquid Yield Option Notes, zero coupon-subordinated,
interest 9%, due 2001 ("LYONS").................... 8.9 7.4 7.4
Liquid Yield Option Notes, zero coupon-subordinated,
interest 6%, due 2012 ("Exchangeable LYONs")....... 54.0 53.4 9.5
Liquid Yield Option Notes, zero coupon-subordinated,
interest 6%, due 2010 ("CWM LYONs")................ 36.8 29.3 27.4
Subordinated Notes, interest 5.75%, due 2005
("Subordinated Notes")............................. 439.6 444.7 450.2
-------- -------- --------
Total debt.......................................... $7,478.0 $7,525.1 $6,627.1
Less--current portion............................... 1,088.0 553.5 1,548.5
-------- -------- --------
Long-term portion................................... $6,390.0 $6,971.6 $5,078.6
======== ======== ========
The long-term debt as of December 31, 1997, is due as follows:
Second year..................................................... $ 434.7
Third year...................................................... 743.2
Fourth year..................................................... 511.3
Fifth year...................................................... 644.4
Sixth year and thereafter....................................... 2,745.0
--------
$5,078.6
========
The LYONs, Exchangeable LYONs and CWM LYONs are redeemable at the option of
the holders on each June 30 until maturity, and the Exchangeable LYONs and the
CWM LYONs at the option of the Company at any time, at the issue price plus
accrued original issue discount to the date of redemption ($764.31, $429.86
and $474.09 per security, respectively, at December 31, 1997). Each LYON is
convertible into 34.88 shares of the Company's common stock at any time. The
Exchangeable LYONs and CWM LYONs are convertible as discussed below.
In the Company's acquisition in 1995 of the outstanding CWM shares it did
not already own, the CWM public stockholders received a Subordinated Note,
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 Waste
Management. 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 Waste Management on
March 15,
73
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
callable by Waste Management 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 Waste Management common
stock, subject to adjustment upon the occurrence of certain events. Upon any
such conversion, Waste Management will have the option of paying cash equal to
the market value of the Waste Management shares which would otherwise be
issuable. As of December 31, 1997, there were 549,404 such notes outstanding
with a maturity value amounting to $549.4 million.
In connection with the Company's 1995 acquisition of the publicly held CWM
shares, 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. As of December 31, 1997, the CWM LYONs and Exchangeable LYONs
were convertible or exchangeable into 8,332 and 4,695 Subordinated Notes,
respectively. Such Subordinated Notes in turn would be convertible into a
total of 339,718 shares of the Company's common stock.
The securities described above and certain of the Company's other debt
instruments are redeemable at the option of the holders prior to maturity and,
accordingly, those which may be redeemed in 1998 are classified as current in
the accompanying financial statements at December 31, 1997. In prior years,
such borrowings were classified as long-term because the Company had committed
credit facilities in place to refinance them.
The Company has in place committed standby trade receivables sale and
revolving credit facilities totaling $800 million with a group of six banks
led by Chase Manhattan Bank (the "Lenders") for general corporate purposes and
to support the Company's commercial paper program. The Lenders are committed
to fund up to $550 million, if requested by the Company, by purchasing
eligible receivables. Additionally, the Company has a $250 million unsecured
revolving credit agreement with the Lenders. Both facilities were put in place
in December 1997 and expire June 30, 1998. The facilities provide for
commitment fees ranging from 18.75 to 37.5 basis points per annum and interest
rates tied to prime or LIBOR plus a margin. Under the terms of the revolving
credit agreement as amended, the Company is required to maintain net worth of
$1.0 billion and consolidated debt (as defined in the agreement) not to exceed
3.5 times earnings (as defined in the agreement) before interest, taxes,
depreciation and amortization for the preceding four calendar quarters. As of
December 31, 1997, the Company was in compliance with such restrictions. The
Company had not obtained any funds under either facility as of February 24,
1998.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company and certain of its subsidiaries use
derivatives to manage interest rate, currency, commodity (fuel) and equity
price risk. The Company's policy is to use derivatives for risk management
purposes only, and it does not enter into such contracts for trading purposes.
The Company enters into derivatives only with counterparties which are
financial institutions having credit ratings of at least A- or A3, to minimize
credit risk. The amount of derivatives 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.
Instruments used as hedges must be effective at managing risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedge
instruments must have a high degree of inverse correlation with changes in
market values or cash flows of underlying hedged items. Derivatives that meet
the hedge criteria are accounted for under the deferral or accrual method,
except for currency agreements as discussed below. If a derivative does not
meet or ceases to meet the aforementioned criteria, or if the designated
hedged item ceases to exist, then the Company subsequently uses
74
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fair value accounting for the derivative, with gains or losses included in
sundry income. If a derivative is terminated early, any gain or loss,
including amounts previously deferred, is deferred and amortized over the
remaining life of the terminated contract or until the anticipated transaction
occurs.
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 a
specified 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 accrued in the financial statements as a part of interest expense
on the underlying debt over the life of the agreements and the swap is not
recorded on the balance sheet or marked to market. As of December 31, 1997,
interest rate agreements in notional amounts and with terms as set forth in
the following table were outstanding:
NOTIONAL DURATION OF
CURRENCY AMOUNT RECEIVE PAY AGREEMENTS
-------- ----------- -------- ----- ---------------
Hong Kong Dollar..................... 100 million Floating Fixed Jan '96-Jul '98
Italian Lira......................... 98 billion Floating Fixed Mar '96-Mar '99
German Deutschemark.................. 150 million Floating Fixed Mar '96-Jan '00
Dutch Guilder........................ 115 million Floating Fixed Nov '96-Jan '00
U. S. Dollar......................... 24 million Floating Fixed Apr '97-Dec '12
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 collars. 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 with gains or losses included in sundry income. There
were no currency derivatives of this type outstanding at December 31, 1997.
The Company sometimes also uses foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and
there is a high probability that the transaction will occur. At December 31,
1997, a subsidiary had sold Italian Lira forward for delivery in 1998 to hedge
foreign exchange exposure on a specific transaction. The amount was not
material to the consolidated financial statements, and any gain or loss will
be included in the measurement of the identified transaction.
Commodity Agreements. The Company utilizes derivatives to seek to mitigate
the impact of fluctuations in the price of fuel used by its vehicles.
Quantities hedged do not exceed anticipated fuel purchases in any period.
Gains or losses are recognized in operating expenses, as cost of fuel
purchases, when paid or received. The primary instruments used are collars,
swaps and swaptions. Collars consist of the purchase of call options along
with a corresponding sale of put options at a lower price, with the effect of
establishing a "cap" and a "floor" with respect to the price of specified
quantities of fuel. A swap is an agreement with a counterparty whereby the
Company pays a fixed price and receives a floating price for specified
quantities during a given period. In a swaption, the Company is paid a premium
by the counterparty for the right, but not the obligation, at the end of the
option period (usually 90 to 180 days) to enter into a swap with respect to a
specified quantity in a given period in the future. The following table
summarizes the Company's position in crude oil derivatives at December 31,
1997:
CONTRACT
TYPE QUANTITY PERIOD
---- ---------------- --------
Collars......................................... 1.2 million bbls 1998
Collars......................................... 2.0 million bbls 1999
Collars......................................... 1.0 million bbls 2000
Swaps........................................... 0.5 million bbls 2000
Swaptions (exercisable in 1998)................. 0.5 million bbls 2000
75
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equity Investments. The Company occasionally acquires common stock that it
needs to hold for a period of time. To mitigate its exposure to fluctuations
in the market price of such investments during the holding period, the Company
sometimes enters into hedging arrangements consisting of put options or
collars. Changes in the intrinsic value of such instruments are recorded in
stockholders' equity if the underlying stock is classified as "available for
sale" and in sundry income if it is classified as "trading." The offsetting
change in the value of the derivative is included in short term investments on
the balance sheet. At December 31, 1997, the Company had outstanding a collar,
which expired in 1998, on an investment in a publicly traded equity security.
The market price of the security was in excess of the cap value of the collar
at both December 31 and upon expiration, and accordingly, the Company
delivered the shares in exchange for the cap price, with no gain or loss
recognized in 1998.
See Note 10 for a discussion of the Company's sale of put options in
connection with its authorized stock repurchase program.
NOTE 8. 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. 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 environmental 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 estimated 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. Such costs for foreign landfills are estimated based
on compliance with local laws, regulations and customs.
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 89 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 (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 severally liable for
remediation of a specific site, as well as the typical allocation of costs
among PRPs. These estimates are sometimes a range of possible outcomes. In
such cases, the Company provides for the amount within the range which
constitutes its best estimate. If no amount within the range appears to be a
better estimate than any other amount, then the Company provides for the
minimum amount within the range in accordance with FAS No. 5. The Company
believes that it is "reasonably possible," as that term is defined in FAS No.
5 ("more than remote but less than likely"), that its potential liability, at
the high end of such ranges, would be approximately $201.9 million higher
76
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on a discounted basis in the aggregate than the estimate that has been
recorded in the financial statements as of December 31, 1997.
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, the existence
and ability of other potentially responsible third parties to contribute to
the settlements of such liabilities, 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 6% (7% at December 31,
1995 and 1996). The portion of the Company's recorded environmental
liabilities that is not inflated or discounted was $440.9 million, $358.5
million and $344.7 million at December 31, 1995, 1996 and 1997, respectively.
Had the Company not discounted any portion of its liability, the amount
recorded would have been increased by approximately $368 million at December
31, 1997.
As of December 31, the Company's liabilities for closure, post-closure
monitoring and environmental remediation costs were as follows:
1995 1996 1997
-------- -------- --------
Current portion, included in accrued expenses....... $ 140.3 $ 123.9 $ 127.2
Non-current portion................................. 750.7 673.5 840.4
-------- -------- --------
Total recorded.................................... $ 891.0 $ 797.4 $ 967.6
Amount to be provided over remaining life of active
sites, including discount of $332 million in 1995,
$305 million in 1996 and $368 million in 1997
related to recorded amounts........................ 2,817.2 2,666.4 1,919.9
-------- -------- --------
Expected aggregate undiscounted environmental
liabilities........................................ $3,708.2 $3,463.8 $2,887.5
======== ======== ========
The decline between 1996 and 1997 in the expected aggregate undiscounted
amount is primarily due to a reduction in estimated airspace (see Note 3),
which correspondingly reduces closure and post-closure costs.
Anticipated payments of environmental liabilities at December 31, 1997, are
as follows:
1998............................................................. $ 127.2
1999............................................................. 153.5
2000............................................................. 121.7
2001............................................................. 115.0
2002............................................................. 91.3
Thereafter....................................................... 2,278.8
--------
Total.......................................................... $2,887.5
========
77
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the amounts above, at certain sites the Company has perpetual
care obligations aggregating $657,000 per year beginning in 2027.
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. Carriers involved in these matters have typically denied
coverage and are defending against the Company's claims. While the Company is
vigorously pursuing such claims, it regularly considers settlement
opportunities when appropriate terms are offered. Settlements to date ($50.1
million in 1994, $38.2 million in 1995, $60.3 million in 1996, and $94.3
million in 1997) have been included in operating expenses as an offset to
environmental expenses.
NOTE 9. STOCK OPTIONS
The Company has two stock option plans currently in effect under which
future grants may be issued: the 1997 Waste Management, Inc. Equity Incentive
Plan (the "1997 Plan") and the 1992 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). The plans provide for accelerated vesting
upon a "change in control" of the Company as defined in the plans.
Options granted under the 1997 Plan are generally exercisable in three equal
cumulative installments 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 1997 Plan, non-qualified stock options may be granted at a price
not less than 100% of the market value on the date of grant, for a term of not
more than ten years. Twenty-three million 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 5, 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.
78
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 four years ended December 31, 1997, was
as follows (shares in thousands):
1994 1995 1996 1997
---------------- ---------------- ---------------- ----------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ --------- ------ ---------
Outstanding at beginning
of year................ 11,682 $33.63 13,811 $32.24 19,629 $32.04 20,170 $32.33
Granted................. 3,729 26.49 3,117 27.29 4,106 31.90 6,203 31.19
Exercised............... 462 17.77 721 20.47 2,614 25.96 1,138 26.61
Canceled:
Prior plans............ 1,138 33.54 1,427 32.76 1,466 33.63 1,176 36.88
Current plans.......... -- -- -- -- -- -- 2,061 33.01
Additional shares
available for future
grant.................. 6,000 -- -- -- 515 -- 23,000 --
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 21,998 31.99
Options exercisable at
end of year............ 7,210 33.77 9,860 33.57 12,577 33.87 15,055 32.78
Options available for
future grant........... 15,290 -- 4,726 -- 1,044 -- 18,789 --
Weighted average fair
value of options
granted (disclosure not
applicable for 1994) .. -- N/A -- $ 9.60 -- $10.53 -- $10.23
The following table summarizes information about stock options outstanding
as of December 31, 1997 (shares in thousands):
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
---------------------------- ----------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ ------ ----------- --------- ------ ---------
$15.71-$17.16.................... 78 5.2 years $16.18 75 $16.19
21.39- 29.87.................... 5,990 6.0 years 26.74 4,940 26.65
30.05- 39.27.................... 13,950 6.6 years 32.51 8,061 33.72
$40.10-$61.03.................... 1,980 3.2 years 44.90 1,979 44.89
------ ------
21,998 6.1 years $31.99 15,055 $32.78
====== ======
As permitted by FAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to account for its employee stock option plans
under Accounting Principles Board Opinion No. 25. Accordingly, no compensation
cost has been recognized for grants of stock options. Had compensation cost
been determined under FAS No. 123, the Company's net income and income per
share would have been as follows:
1995 1996 1997
------ ------ ---------
Net income (loss)-
As reported........................................ $340.1 $(39.3) $(1,176.1)
Proforma........................................... 336.1 (50.4) (1,194.3)
Basic income (loss) per share-
As reported........................................ $ 0.70 $(0.08) $ (2.52)
Proforma........................................... 0.69 (0.10) (2.57)
Diluted income (loss) per share-
As reported........................................ $ 0.70 $(0.08) $ (2.52)
Proforma........................................... 0.69 (0.10) (2.57)
79
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because FAS No. 123 has not been applied to options granted prior to January
1, 1995, this proforma disclosure may not be indicative of future results.
The fair value of options granted is estimated at the date of grant using an
option pricing model substantially equivalent to the Black-Scholes model with
the following assumptions:
1995 1996 1997
----- ----- -----
Risk-free interest rate.................................... 7.19% 6.25% 6.71%
Dividend yield............................................. 2% 2% 2%
Expected volatility........................................ 25.17% 25.17% 25.17%
Expected life in years..................................... 7 7 7
Commencing in 1996, the Company also made grants of restricted stock.
Compensation expense for grants of restricted shares is recognized ratably
over the vesting period (generally five to ten years) and amounted to $0.1
million and $2.4 million in 1996 and 1997, respectively. Unamortized
compensation expense related to grants of restricted stock was $11.1 million
at December 31, 1997.
NOTE 10. CAPITAL STOCK
The Board of Directors has the authority to create and issue up to 50
million 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 Waste Management and WTI have authorized their
respective companies to repurchase shares of their own common stock (up to 50
million shares in the case of Waste Management and 30 million shares in the
case WTI) in the open market, in privately negotiated transactions, or through
issuer tender offers. Both authorizations replaced prior common stock
repurchase authorizations. Waste Management repurchased 30 million shares
through a "Dutch auction" tender offer in the second quarter but has not
repurchased any other shares in 1997 and does not expect to conduct any
repurchases in 1998. WTI repurchased 5.1 million shares in the first six
months of 1997 but suspended its repurchase activity following the Waste
Management offer to acquire its remaining public shares.
During 1994 through 1996, the Company sold put options on 42.3 million
shares of its common stock. The put options gave 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 was reclassified to a temporary equity account. In the event the
options were exercised, the Company had the right 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 32.5 million shares expired unexercised, as the price of the
Company's stock was in excess of the strike price at maturity. The Company
repurchased 3.1 million shares of stock at a cost of $107.5 million, and 6.7
million options were settled for cash of $13.6 million. There were no put
options outstanding at December 31, 1997.
80
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. EARNINGS PER SHARE
In February 1997, the FASB issued FAS No. 128, "Earnings Per Share" ("EPS"),
which supersedes Accounting Principles Board Opinion No. 15. Primary EPS is
replaced by Basic EPS, which is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Fully diluted EPS is replaced by Diluted EPS
which gives effect to all dilutive potential common shares. The Company was
required to adopt FAS No. 128 in the fourth quarter of 1997. All prior periods
presented have been restated.
Basic and Diluted (1997 diluted computations not shown as all potentially
issuable common shares are antidilutive) EPS from continuing operations are
computed as follows:
1994 1995 1996 1997
------ ------ ------ ---------
Basic EPS
Income from continuing operations as
reported.................................... $601.5 $419.9 $224.0 $(1,269.3)
Average common shares outstanding............ 483.7 485.3 489.2 466.6
------ ------ ------ ---------
Basic EPS from continuing operations......... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
====== ====== ====== =========
Diluted EPS
Income from continuing operations as
reported.................................... $601.5 $419.9 $224.0
After tax interest on Subordinated Notes and
LYONs....................................... 0.6 9.1 --
------ ------ ------
Adjusted income from continuing operations... $602.1 $429.0 $224.0
------ ------ ------
Average common shares outstanding.............. 483.7 485.3 489.2
Add effect of dilutive securities-
Stock options, unvested restricted stock and
put options................................. 0.4 0.6 0.8
Subordinated Notes........................... -- 14.4 --
LYONs........................................ 0.7 -- --
------ ------ ------
Adjusted average shares.................... 484.8 500.3 490.0
------ ------ ------
Diluted EPS from continuing operations......... $ 1.24 $ 0.86 $ 0.46 $ (2.72)
====== ====== ====== =========
Common shares potentially issuable upon conversion of CWM LYONs and
Exchangeable LYONs and exercise of stock options with exercise prices greater
than the average price of the Company's stock were not included in the
calculation of Diluted EPS in any year, nor were shares potentially issuable
with respect to Subordinated Notes or LYONs in 1996, because their effect is
antidilutive. In 1997 the Company had a loss from continuing operations and,
accordingly, no adjustment is made to Basic EPS because all potentially
issuable common shares would be antidilutive. At December 31, 1997, there were
37.4 million common shares potentially issuable with respect to stock options,
restricted shares and convertible debt, which could dilute Basic EPS in the
future. During 1997, the Company issued 1.2 million shares upon exercise of
stock options and conversion of debt.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases many of its operating and office facilities for various
terms. Rents charged to costs and expenses in the Consolidated Statements of
Income amounted to $177.2 million in 1994, $170.3 million in 1995, $164.5
million in 1996 and $159.7 million in 1997. These amounts include rents under
long-term leases, short-term cancelable leases and rents charged as a
percentage of revenue, but are exclusive of financing leases capitalized for
accounting purposes.
81
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The long-term rental obligations as of December 31, 1997, are due as
follows:
First year...................................................... $ 140.4
Second year..................................................... 130.1
Third year...................................................... 121.8
Fourth year..................................................... 111.3
Fifth year...................................................... 100.5
Sixth through tenth years....................................... 438.5
Eleventh year and thereafter.................................... 125.7
--------
$1,168.3
========
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, 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 3,370 bank letters of
credit, performance bonds and other guarantees. Such financial instruments
(averaging approximately $669,000 each), including those provided for
affiliates and not otherwise recorded, are given in the ordinary course of
business. A substantial portion of these performance bonds are issued by a
wholly-owned insurance company subsidiary, the sole business of which is to
issue such bonds to customers of the Company and its subsidiaries.
Approximately $277.7 million (at fair market value) of Company assets have
been contributed to this subsidiary to meet regulatory minimum capital
requirements. 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 $53 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 for all governmental permits
needed to remove all waste above the height allowed by the zoning ordinance,
and the Connecticut Supreme Court has upheld that ruling. The Company is
complying with the order of the Superior Court while also seeking an
alternative resolution to this matter. The Company is unable to predict the
outcome of this matter at this time. 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 results of operations in one or more
future periods.
82
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 regulatory flow control laws. Such laws typically
involve a local government specifying a jurisdictional 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. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can
be no assurance that such alternatives to regulatory flow control will in
every case be found to be lawful or that such legislation will be enacted into
law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse affect on any of the Company's operations. In the
event that legislation to effectively grandfather existing flow control
mandates 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.
WTI's Gloucester County, New Jersey, facility has historically relied on a
disposal franchise for substantially all of its supply of municipal solid
waste. On May 1, 1997, the Third Circuit Court of Appeals ("Third Circuit")
permanently enjoined the State of New Jersey from enforcing its franchise
system as a form of unconstitutional solid waste flow control, but stayed the
injunction for so long as any appeals were pending. On November 10, 1997, the
U.S. Supreme Court announced its decision not to review the Third Circuit
decision, thereby ending the stay and, arguably, the facility's disposal
franchise. The State had continued to enforce flow control during the stay
period. In light of the current circumstances, the facility has lowered its
prices and solicited new customers. Under the reimbursement agreement between
the project company that owns the Gloucester facility and the bank that
provides credit support to the project, the termination of the waste franchise
constitutes an event of default. WTI and the credit support bank are presently
disputing the consequences of these developments.
The New Jersey legislature has been considering various alternative
solutions, including a bill that provides for the payment and recovery of
bonded indebtedness incurred by counties, public authorities and certain
qualified private vendors in reliance on the State's franchise system. WTI
currently believes that, through either legislative action or a project
recapitalization, the Gloucester project can be restructured to operate, in
the absence of regulatory flow control, at a level of profitability which will
not result in a material adverse impact on consolidated results.
Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by WTI will be required to be
modified to comply with more stringent air pollution control standards adopted
by the United States Environmental Protection Agency in December 1995 for
municipal waste combusters. The compliance dates will vary by facility, but
all affected facilities will be required to be in compliance with the new
rules by the end of the year 2000. Currently available technologies will be
adequate to meet the new standards. The total capital expenditures required
for such modifications are estimated to be in the $180-$220 million range. The
impacted facilities long-term waste supply agreements generally require that
customers pay, based on tonnage delivered, their proportionate share of
incremental capital, financing, and operating costs resulting from changes in
environmental regulations. Customer shares of capital and financing costs are
typically recovered over the remaining life of the waste supply agreements.
Pro rata operating costs are recovered in the period incurred. The Company
currently expects to recover approximately two-thirds of the incremental
expenditures incurred to comply with these stricter air emission standards.
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
83
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
power sales agreements entered into pursuant to the Public Utilities
Regulatory Policies Act of 1978 ("PURPA") should be voidable as "stranded
assets." WTI's power production facilities are qualifying facilities under
PURPA and depend on the sanctity of their power sales agreements for their
economic viability. WTI believes that federal law offers strong protections to
its PURPA contracts, and recent state and federal agency and court decisions
have unanimously upheld the inviolate nature of these contracts. While there
is a risk that future utility restructurings, court decisions or legislative
or administrative action in this area could have an adverse effect on its
business, the Company currently believes such risk is remote.
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 financial condition or
results of operations.
Several purported class action lawsuits and one purported derivative lawsuit
seeking injunctive relief and unspecified money damages were filed in the
Chancery Court in and for New Castle County, Delaware against the Company,
WTI, and individual directors of WTI in connection with the June 20, 1997
proposal by the Company to acquire all of the shares of WTI common stock which
the Company does not own. The Company has agreed to a merger in whch WTI's
stockholders would receive $16.50 in cash per share of WTI's common stock. The
lawsuits allege, among other things, that the defendants have breached
fiduciary duties to WTI's minority stockholders because the merger
consideration contemplated by the proposal was inadequate and unfair. In
addition, the purported derivative lawsuit alleges that the proposal was part
of a plan to misappropriate WTI's corporate opportunity to repurchase its own
shares. The Company believes that its actions and those of WTI and its Board
of Directors in connection with the proposal have been in accordance with
Delaware law. Accordingly, the Company intends to contest these lawsuits
vigorously.
In November and December 1997, several alleged purchasers of the Company's
stock brought purported class action lawsuits against the Company and several
of its current and former officers in the United States District Court for the
Northern District of Illinois. Each of the lawsuits asserts that the
defendants violated the federal securities laws by issuing allegedly false and
misleading statements in 1996 and 1997 about the Company's financial condition
and results of operations. Among other things, the plaintiffs allege that the
Company employed accounting practices that were improper and that caused its
publicly-filed financial statements to be materially false and misleading. The
lawsuits demand, among other relief, unspecified monetary damages, attorneys'
fees, and the costs of conducting the litigation. The Company intends to
defend itself vigorously in this litigation. In January 1998, the fourteen
purported class actions were consolidated before one judge in the Northern
District of Illinois. Plaintiffs have until May 1998 to file a consolidated
amended complaint. It is not possible at this time to predict the impact this
litigation may have on the Company, although it is reasonably possible that
the outcome may have a materially adverse impact on its financial condition or
results of operations in one or more future periods. No provision has been
made in the Consolidated Financial Statements for future costs or liabilities,
if any, associated with this litigation.
The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the Company's previously
filed financial statements and related accounting policies, procedures and
system of internal controls. The Company intends to cooperate with such
investigation. The Company is unable to predict the outcome or impact of this
investigation at this time.
A lawsuit by an alleged Company stockholder purporting to represent a class
of the Company's stockholders has been filed in the Chancery Court in and for
New Castle County, Delaware (although the Company has not yet been served)
against the Company and the members of its Board of Directors alleging
breaches of fiduciary duty by the defendants in connection with the Merger.
The lawsuit seeks, among other things, to have the
84
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
transaction enjoined and to recover unspecified damages. The Company believes
the suit to be without merit and intends to contest it vigorously.
NOTE 13. BENEFIT PLANS
The Company has a qualified defined benefit pension plan for all eligible
non-union domestic employees of Waste Management, CWM and Waste Management of
North America, Inc. ("WMNA"). 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 an amount determined in consultation with its actuaries,
approximately equal to pension expense, except as may be limited by the
requirements of the Employee Retirement Income Security Act. An actuarial
valuation report is prepared for the plan as of September 30 each year and
used, as permitted by FAS No. 87, for the year-end disclosures.
Net periodic pension expense for 1994 through 1997, based on discount rates
of 8.5%, 8.5%, 7.75% and 7.75%, respectively, included the following
components:
1994 1995 1996 1997
------ ------ ------ ------
Service cost-benefits earned during the year.... $ 11.1 $ 11.8 $ 14.0 $ 15.0
Interest cost on projected benefit obligation... 11.5 13.2 14.4 17.1
Expected return on plan assets.................. (12.3) (13.2) (13.8) (17.1)
Net amortization and deferral................... (1.3) -- 1.8 2.8
------ ------ ------ ------
Net periodic pension expense.................. $ 9.0 $ 11.8 $ 16.4 $ 17.8
====== ====== ====== ======
Assumptions used to determine the plan's funded status and pension expense
for the following year were as follows:
1995 1996 1997
---- ---- ----
Discount rate................................................. 7.75% 7.75% 7.25%
Rate of increase in compensation.............................. 4.0% 3.5% 3.5%
Long-term rate of return on plan assets....................... 9.0% 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,
1996 and 1997, for its pension plan:
1995 1996 1997
------- ------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $152.0 million, $182.5 million and
$231.0 million at December 31, 1995, 1996 and
1997, respectively............................... $(167.3) $(199.5) $(248.9)
======= ======= =======
Projected benefit obligations..................... $(191.1) $(223.7) $(284.8)
Plan assets at fair value, primarily common stocks,
bonds and real estate.............................. 149.1 193.7 264.9
------- ------- -------
Plan assets less than projected benefit obligation.. $ (42.0) $ (30.0) $ (19.9)
Unrecognized net loss............................... 47.8 52.6 55.2
Unrecognized overfunding at date of adoption
(January 1, 1985) of FAS No. 87, net of
amortization, being recognized over 15 years....... (6.4) (4.9) (3.3)
Adjustment to recognize minimum liability........... (17.6) (23.5) --
------- ------- -------
Prepaid pension cost (pension liability) included in
the Consolidated Balance Sheets.................... $ (18.2) $ (5.8) $ 32.0
======= ======= =======
The Company also has a non-qualified Supplemental Executive Retirement Plan
for certain officers of Waste Management, CWM and WMNA, and an ERISA Excess
Plan for non-officer managers of those companies who's eligible compensation
exceeds the ERISA limit (collectively, the "SERP"). The SERP, which is
unfunded, provides eligible executives with defined pension benefits outside
the qualified Waste Management, Inc. Retirement Plan, based on average
earnings and years of service. The SERP is valued each year (at
85
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
September 30) by the Company's independent actuaries, using the same
assumptions as used for the qualified plan. The following table sets forth
information relating to the SERP:
1995 1996 1997
------ ------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested
benefits of $24.5 million, $27.7 million and $36.3
million at December 31, 1995, 1996 and 1997,
respectively........................................ $(24.5) $(33.2) $(41.0)
------ ------ ------
Projected benefit obligation......................... $(29.5) $(37.1) $(44.1)
Plan assets at fair value, primarily contributions made
after the measurement date............................ 0.1 0.1 --
------ ------ ------
Plan assets less than projected benefit obligation..... $(29.4) $(37.0) $(44.1)
Unrecognized net loss.................................. 6.5 11.2 11.8
Unrecognized underfunding at date of adoption of FAS
No. 87, net of amortization, being recognized over 15
years................................................. 2.5 1.7 1.4
Adjustment to recognize minimum liability.............. (4.0) (9.0) (10.1)
------ ------ ------
Liability recorded (in Other Deferred Items)........... $(24.4) $(33.1) $(41.0)
====== ====== ======
SERP expense for 1994, 1995, 1996 and 1997 included the following
components:
1994 1995 1996 1997
---- ---- ---- ----
Service cost - benefits earned during the year....... $1.0 $1.1 $1.3 $1.0
Interest............................................. 1.7 2.2 2.2 2.8
Net amortization and deferral........................ 0.8 1.1 1.0 1.1
---- ---- ---- ----
Total expense...................................... $3.5 $4.4 $4.5 $4.9
==== ==== ==== ====
WM International participates in both defined benefit and defined
contribution retirement plans for its employees in various countries. The
projected benefit obligation, plan assets and unfunded liability 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 $16.1 million, $18.3 million, $16.5 million and $18.6 million
for subsidiaries' defined benefit plans were made and charged to income in
1994, 1995, 1996 and 1997, respectively.
Waste Management, WMNA and CWM provide postretirement health care benefits
to eligible employees, and WTI provides certain postretirement benefits other
than pensions to a limited number of former employees of a manufacturing
business it has sold. The following table analyzes the obligation for
postretirement benefits other than pensions (primarily health care costs),
measured as of December 31 of each year, which is included in other deferred
items on the Consolidated Balance Sheets.
1995 1996 1997
----- ----- -----
Accumulated Postretirement Benefit Obligations:
Retirees............................................. $42.4 $42.2 $43.1
Other fully eligible participants.................... 5.5 6.7 1.5
Other active participants............................ 9.8 10.1 19.9
----- ----- -----
$57.7 $59.0 $64.5
Unrecognized:
Prior service (cost) credit.......................... 0.6 0.3 (3.9)
Gain................................................. 7.9 8.5 8.7
----- ----- -----
$66.2 $67.8 $69.3
===== ===== =====
86
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1998; the rate was assumed
to decrease by 0.5% per year to 6.0% in 2001 and remain at that level
thereafter. Increasing the assumed health care cost trend by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by approximately $4.0 million and the
aggregate of the service and interest cost components of net postretirement
health care cost for 1997 by approximately $0.3 million. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75% in 1995 and 1996 and 7.0% in 1997.
The expense for postretirement health care benefits was as follows:
1994 1995 1996 1997
---- ---- ---- ----
Service cost.......................................... $1.1 $1.1 $0.7 $1.8
Interest.............................................. 3.6 4.3 3.5 4.6
---- ---- ---- ----
Total expense....................................... $4.7 $5.4 $4.2 $6.4
==== ==== ==== ====
The Company had an Employee Stock Ownership Plan ("1988 ESOP") for all
eligible non-union United States and Canadian employees of Waste Management,
CWM and WMNA. 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. This plan terminated December 31,
1997.
Information concerning the 1988 ESOP is as follows:
1994 1995 1996 1997
---- ---- ---- ----
Expense recorded (contribution)............................ $7.9 $6.7 $6.7 $6.4
==== ==== ==== ====
Interest expense on 1988 ESOP debt......................... $2.0 $1.1 $1.0 $1.0
==== ==== ==== ====
Dividends on unallocated 1998 ESOP shares used by the 1988
ESOP...................................................... $0.8 $0.6 $0.4 $0.2
==== ==== ==== ====
The Company has a Profit Sharing and Savings Plan ("PSSP") available to
certain employees of Waste Management, Inc., CWM and WMNA. 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 $27.3 million in 1994, $24.9 million in 1995, $16.0 million in 1996 and
$17.9 million in 1997. Effective January 1, 1998, the plan was renamed the
"Retirement Savings Plan", the matching contribution formula was increased,
and the discretionary annual contribution was discontinued.
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 $12.1 million, $13.6 million, $12.4
million and $19.1 million during 1994, 1995, 1996 and 1997, 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. Changes in the market value
of these shares are charged or credited to Additional Paid-In Capital.
87
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
As discussed in Note 1, the Company believes that all of its material
operations are part of the waste management services industry, and it
currently reports as a single industry segment. Foreign operations in 1997
were conducted in ten countries in Europe, seven countries in the Asia Pacific
region, and Canada, Mexico, Brazil, Israel and Argentina. However, during the
year, WMNA sold most of its Canadian operations, and WM International sold
substantially all of its operations in France, Spain and Austria. WM
International also learned in late September that its joint venture company's
bid to continue to provide waste collection and cleaning services to the City
of Buenos Aires, which represented a substantial portion of its business in
Argentina, was not successful.
Information relating to the Company's continuing operations is set forth in
the following table (operating income is defined as revenue less operating
expenses, special charges, asset impairment loss and selling and
administrative expenses):
UNITED OTHER
STATES EUROPE FOREIGN CONSOLIDATED
--------- -------- ------- ------------
1994
Revenue............................... $ 6,654.6 $1,322.7 $560.6 $ 8,537.9
========= ======== ====== =========
Operating income...................... $ 1,166.2 $ 184.2 $ 63.2 $ 1,413.6
========= ======== ====== =========
Identifiable assets................... $11,587.0 $3,471.0 $748.3 $15,806.3
========= ======== ====== =========
1995
Revenue............................... $ 7,060.2 $1,527.3 $512.7 $ 9,100.2
========= ======== ====== =========
Operating income...................... $ 1,069.0 $ 2.4 $ 32.8 $ 1,104.2
========= ======== ====== =========
Identifiable assets................... $12,384.1 $3,682.4 $772.7 $16,839.2
========= ======== ====== =========
1996
Revenue............................... $ 7,103.1 $1,539.2 $583.3 $ 9,225.6
========= ======== ====== =========
Operating income...................... $ 972.2 $ (12.8) $ 74.5 $ 1,033.9
========= ======== ====== =========
Identifiable assets................... $12,752.4 $3,503.0 $828.2 $17,083.6
========= ======== ====== =========
1997
Revenue............................... $ 7,222.4 $1,411.8 $554.4 $ 9,188.6
========= ======== ====== =========
Operating income...................... $ (855.1) $ 27.3 $ 65.5 $ (762.3)
========= ======== ====== =========
Identifiable assets................... $10,438.0 $2,613.7 $537.4 $13,589.1
========= ======== ====== =========
No single customer accounted for as much as 3% of consolidated revenue in
1994, 1995, 1996 or 1997.
WM International operates facilities in Hong Kong which are owned by the
Hong Kong government. The Hong Kong economy has been impacted by the economic
uncertainty associated with many of the countries in the region. High and
volatile interest rates have resulted from speculation regarding its currency.
In addition to Hong Kong, WM International has operations in Indonesia and
Thailand. These countries have experienced illiquidity, volatile currency
exchange rates and interest rates, and reduced economic activity. WM
International, and therefore the Company, will be affected for the foreseeable
future by economic conditions in this region, although it is not possible to
determine the extent of such impact. At December 31, 1997, WM International
had a net investment of $107.5 million in these countries (including Hong
Kong). Pretax income from Hong Kong was $25.7 million in 1997. Income from
Indonesia and Thailand has not been significant to date.
88
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. 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-cancelable 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-cancelable 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-cancelable 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 abandoned leased
facilities continue into the future.
In the fourth quarter of 1996, WM International recorded 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, primarily of
a non-cash nature, reduced the Company's income by $213.6 million after tax.
Also, in the fourth quarter of 1996, Waste Management and CWM recorded
pretax charges of $154.1 million ($100.2 million after tax) for reengineering
their finance and administrative functions 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 $100.3 million in
damages to the former owners of the Emelle site. CWM is appealing the
decision. Any settlement of the Emelle litigation would be a cash payment, but
the timing is not currently estimable. The balance of the charge is primarily
non-cash, with $13.4 million of cash-related items paid mostly in 1997.
In 1997, the Company recorded a special charge of $41.6 million (primarily
in the fourth quarter) for severance. Employees terminated were primarily
field operating management and related support personnel. Approximately $5.9
million of the severance had been paid by December 31, 1997, with the balance
being paid in 1998 and thereafter.
WM International also recorded a special charge in 1997 ($104.4 million
before tax and minority interest) to reflect the costs of demobilization in
Argentina following loss of the contract renewal for the City of Buenos Aires,
divestiture or closure of underperforming businesses, primarily in Italy and
Germany and the writeoff of costs of projects, primarily in Germany, which it
decided to no longer pursue. The charge included $14.8 million of severance,
primarily related to operating personnel in Buenos Aires and with closed or
divested businesses in Italy and Germany. These terminations are expected to
occur and the severance paid in 1998.
89
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. ASSET IMPAIRMENT LOSS
As a result of the comprehensive review of operating assets and investments
discussed in Note 2, the Company recorded an impairment loss of $1,401.2
million in the fourth quarter of 1997, and restated prior financial statements
to retroactively recognize impairment losses in earlier periods. Fair values
were determined for landfills, hazardous waste facilities, recycling
investments and other facilities, primarily based on future cashflow
projections discounted back using discount rates appropriate for the risks
involved with the specific assets. For surplus real estate, market opinions
and appraisals were used. In determining fair values for abandoned projects
and vehicles to be sold, recoverable salvage values were determined using
market estimates. The losses related to the following asset categories:
IMPAIRMENT
LOSS
----------
1994--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 22.4
Abandonment of other projects, primarily vehicle on board computer
systems projects................................................. 7.3
Surplus real estate............................................... 4.3
--------
Total........................................................... $ 34.0
========
1995--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 48.2
Hazardous waste facility costs, resulting from continuing market
deterioration, increased competition, excess capacity and
changing regulation.............................................. 2.2
Other, primarily abandoned computer systems project costs......... 1.9
Surplus real estate............................................... 1.5
--------
Total........................................................... $ 53.8
========
1996--
Landfills, related primarily to management decisions to abandon
expansion projects due to political or competitive factors, which
will result in closure earlier than previously expected.......... $ 13.4
Recycling investments, related primarily to pricing, overcapacity
and competitive factors.......................................... 47.8
Other, primarily equipment to be scrapped......................... 2.0
Surplus real estate............................................... 1.5
--------
Total........................................................... $ 64.7
========
1997--
Landfills, related primarily to management decisions to abandon
expansions and development projects due to political or
competitive factors, which will result in closure earlier than
previously expected (includes $233.8 million for hazardous waste
sites)........................................................... $ 578.6
Hazardous waste facilities, resulting from continuing market
deterioration, increased competition, excess capacity and
changing regulation.............................................. 131.4
Goodwill, primarily related to landfills and hazardous waste
facilities impaired (includes $411 million related to hazardous
waste business).................................................. 433.4
Write-down of WTI long-lived assets, including $47.1 million
related to a wood waste burning independent power production
facility......................................................... 57.2
Recycling investments, related primarily to continued pricing,
overcapacity and competitive factors............................. 21.5
Write-down to estimated net realizable value of trucks to be sold
as a result of new fleet management policy (Note 2).............. 70.9
Write-down to estimated net sales proceeds of business to be sold
(Note 17)........................................................ 122.2
Abandoned equipment and facilities................................ 26.9
Surplus real estate............................................... 38.2
--------
Total........................................................... $1,480.3
========
90
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impaired assets to be sold are primarily businesses to be sold (see Note 17)
and surplus real estate. The carrying amount of such real estate was $73.3
million at December 31, 1997. The Company is currently marketing these
properties; however, since the disposal date cannot be accurately estimated,
these assets are classified as long-term assets in the accompanying balance
sheet at December 31, 1997.
NOTE 17. 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 had also entered into an agreement to
sell its water and wastewater facility operations and privatization business,
which was sold in 1997. As of September 30, 1996, Rust sold its industrial
scaffolding business and began implementing plans to exit its remaining
international engineering and consulting business. Waste Management 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, and
others subsequently reclassified to continuing operations (see discussion
below).
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
$1,186.5 million in 1994, $1,511.0 million in 1995, $734.5 million for 1996
and $84.8 million in 1997. The decreases in revenue during the periods
primarily reflect the sales of certain of the discontinued businesses. Results
of their operations in 1997 were not material and were included in the reserve
for loss on disposition provided previously.
The following table summarizes the assets and liabilities as of December 31,
1995 and 1996, which are reflected on the consolidated balance sheet as net
assets of discontinued operations. The Company had no operations classified as
discontinued as of December 31, 1997.
1995 1996
------- -------
Current assets.......................................... $ 445.1 $ 74.7
Property and equipment and other noncurrent assets...... 570.4 173.8
Current liabilities..................................... (306.7) (47.5)
Noncurrent liabilities.................................. (90.8) (258.9)
------- -------
Net assets (liabilities) of discontinued operations... $ 618.0 $ (57.9)
======= =======
At December 31, 1996, management also classified as discontinued and planned
to sell Rust's domestic environmental and infrastructure engineering and
consulting business and CWM's high organic waste fuel blending services
business. In 1997, management reclassified the CWM business back into
continuing operations, and classified certain of its sites as operations held
for sale. The Rust disposition was not completed within one year, and
accordingly this business has been reclassified back into continuing
operations, as operations held for sale, at December 31, 1997, in accordance
with generally accepted accounting principles, although management is
continuing its efforts to market its investment in this business. As these
businesses were reclassified to continuing operations, the remaining provision
for loss on disposal ($95 million after tax--$87 million related to Rust and
$8 million related to CWM) was reversed in discontinued operations and an
impairment loss for Rust
91
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of $122.2 million was recorded in continuing operations. Prior year financial
statements have been restated. Information regarding the businesses
reclassified as continuing operations held for sale is as follows:
1994 1995 1996 1997
------ ------ ------ -------
Results of operations--
Revenue...................................... $373.0 $368.2 $361.5 $ 350.4
Income (loss) before tax after minority
interest.................................... 24.1 25.1 0.3 (9.9)
Net income (loss)............................ $ 12.1 $ 13.9 $ 0.1 $ (6.7)
------ ------ ------ -------
Condensed balance sheet--
Current assets...................................... $125.3 $147.5 $ 118.6
Property and equipment and other noncurrent assets.. 163.7 162.0 164.7
Current liabilities................................. (39.0) (44.2) (41.0)
Noncurrent liabilities.............................. (14.6) (37.9) (161.2)
------ ------ -------
Net assets........................................ $235.4 $227.4 $ 81.1
====== ====== =======
The net assets are included in Net Assets of Continuing Businesses Held for
Sale in the accompanying balance sheet. At December 31, 1997, this caption
also includes $73.3 million of surplus real estate which the Company is
actively marketing.
NOTE 18. 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, 1996, and 1997. 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 DECEMBER 31, 1997
------------------- ------------------ ------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- --------- -------- ---------
Nonderivatives--
Assets--
Cash and cash
equivalents.......... $ 169.5 $ 169.5 $ 323.3 $ 323.3 $ 132.8 $ 132.8
Receivables........... 1,632.1 1,632.1 1,660.8 1,660.8 1,547.2 1,547.2
Short-term
investments.......... 12.2 12.2 319.3 319.3 59.3 59.3
Liabilities--
Commercial paper...... 1,119.4 1,120.2 645.9 646.2 356.3 356.5
Project debt.......... 735.6 880.6 833.8 896.7 829.0 885.2
Liquid Yield Option
Notes and
Subordinated Notes... 539.3 576.0 534.8 602.7 494.5 512.1
Other borrowings...... 5,083.8 5,284.5 5,510.6 5,610.0 4,947.3 5,063.4
Derivatives relating to
debt................... -- (0.1) -- (4.8) -- (3.3)
Other derivatives--
Assets................ -- -- -- 2.8 -- --
Liabilities........... (0.1) (16.6) -- (0.1) -- (0.3)
Letters of credit,
performance bonds and
guarantees............. -- -- -- -- -- --
92
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash, Receivables and Investment. 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. Unrealized 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 consolidated balance sheets. Such
financial instruments are to be valued based on the amount of exposure under
the instrument and the likelihood of performance being required. In the
Company's experience, virtually no claims have been made against these
financial instruments. Management does not expect any material losses to
result from these off-balance-sheet instruments and, therefore, is of the
opinion that the fair value of these instruments is zero.
NOTE 19. SUBSEQUENT EVENTS
On March 10, 1998, the Company entered into a definitive merger agreement
(the "Merger Agreement") with USA Waste Services, Inc. ("USA Waste") pursuant
to which the Company will be merged with a wholly-owned subsidiary of USA
Waste (the "Merger"). Pursuant to the Merger Agreement, the Company's
stockholders will receive .725 shares of common stock of USA Waste for each
share of common stock of the Company. The consummation of the Merger is
subject to a number of conditions, including the expiration or termination of
the applicable merger review waiting period under the Hart-Scott-Rodino Anti-
Trust Improvements Act of 1976, approval by the stockholders of each company
and other closing conditions. In addition, the Merger is contingent upon the
transaction qualifying for pooling-of-interests accounting treatment. In order
to qualify for pooling-of-interests accounting treatment, the Company intends
to sell a portion of its treasury shares pursuant to a registered public
offering prior to the closing of the Merger. A lawsuit by an alleged Company
stockholder purporting to represent a class of the Company's stockholders has
been filed (although the Company has not yet been served) against the Company
and the members of its Board of Directors alleging breaches of fiduciary duty
by the defendants in connection with the Merger. The lawsuit seeks, among
other things, to have the transaction enjoined and to recover unspecified
damages. The Company believes the suit to be without merit and intends to
contest it vigorously.
Upon the consummation of the Merger, certain long-term debt of WM
International may be accelerated and become payable with three months notice.
At December 31, 1997, this debt totalled approximately $209 million, however,
by March 17, 1998 it had been reduced to $71 million. In addition, Wessex has
an option to acquire WM International's ownership in its United Kingdom
business at fair market value that may become exercisable upon the
consummation of the Merger. In 1997, this business had revenues of
approximately $276 million and operating income (before minority interest) of
approximately $25 million. WM International had a net investment of
approximately $315 million in the business at December 31, 1997.
The Company may have other "change of control" provisions in customer and
employee contracts or agreements, governmental franchises or facility permits
that may be triggered by the closing of the proposed Merger. The Company is
currently in the process of reviewing these contracts, franchises and permits,
but does not expect at this time that the effect of these provisions, in the
event they are triggered by the Merger, will have a material adverse effect on
future results of operations.
93
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 15, 1998, approximately $2.5 million face amount of Subordinated
Notes (see Note 6) were submitted for redemption by the holders in accordance
with their terms. The next optional redemption date is March 15, 2000, and
accordingly the remaining outstanding Subordinated Notes will be classified as
long-term as of March 31, 1998.
In connection with the planned purchase of the remaining publicly held WTI
shares, the Company has entered into a commitment with the Chase Manhattan
Bank ("Chase") whereby Chase, along with other financial institutions, has
committed, subject to the satisfaction of certain conditions, to provide new
credit facilities in the amount of $1.1 billion. The new credit facilities,
which will have a termination date of December 31, 1998 (subject to earlier
termination in the event of a change-in-control, including the Merger with USA
Waste), will provide the funding needed to complete the WTI transaction and
replace the Company's existing $250 million revolving credit facility.
Additionally, the termination date of the Company's $550 million standby trade
receivables sale agreement will be extended from June 30, 1998 to December 31,
1998.
NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is an analysis of certain items in the Consolidated Statements
Income, as restated and reclassified (see Note 2), by quarter for 1995, 1996,
and 1997. Sum of per share amounts for the quarters does not always equal the
full year amount due to rounding and, in the case of Diluted EPS, the method
of calculation prescribed by FAS No. 128. See Note 15 for a discussion of
special charges, Note 16 for a discussion of the asset impairment losses, and
Note 17 for a discussion of operations discontinued during 1995 and 1996.
1995
----------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- ------------------- -------------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
Revenue................. $2,151.8 $2,164.3 $2,326.3 $2,339.2 $2,322.3 $2,334.2 $2,252.6 $2,262.5
Operating expenses...... 1,485.3 1,542.4 1,603.4 1,671.2 1,589.9 1,645.9 1,542.3 1,655.4
Asset impairment loss... -- 33.7 -- 3.5 -- 3.8 -- 12.8
Special charges......... 140.6 141.0 -- -- -- -- 194.6 194.6
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit......... $ 525.9 $ 447.2 $ 722.9 $ 664.5 $ 732.4 $ 684.5 $ 515.7 $ 399.7
Selling and
administrative
expenses............... 245.2 250.5 256.3 275.1 251.8 270.6 251.6 295.6
Interest, net........... 97.7 108.5 97.4 113.7 96.2 111.3 93.4 95.5
Minority interest....... 26.1 26.0 37.0 37.0 34.7 34.7 (15.9) (16.4)
Sundry income........... (16.9) (22.1) (14.1) (29.2) (23.4) (39.0) (22.1) (187.5)
Provision for income
tax.................... 82.6 64.4 143.2 126.8 152.3 132.2 105.6 128.3
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 91.2 $ 19.9 $ 203.1 $ 141.1 $ 220.8 $ 174.7 $ 103.1 $ 84.2
Discontinued operations. 10.0 7.0 16.0 7.9 13.1 7.6 (53.4) (17.6)
Accounting changes...... -- (84.7) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ 101.2 $ (57.8) $ 219.1 $ 149.0 $ 233.9 $ 182.3 $ 49.7 $ 66.6
======== ======== ======== ======== ======== ======== ======== ========
Basic income (loss) per
share-
Continuing operations.. $ 0.19 $ 0.04 $ 0.42 $ 0.29 $ 0.45 $ 0.36 $ 0.21 $ 0.17
Discontinued
operations............ 0.02 0.01 0.03 0.02 0.03 0.02 (0.11) (0.03)
Accounting changes..... -- (0.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.21 $ (0.12) $ 0.45 $ 0.31 $ 0.48 $ 0.38 $ 0.10 $ 0.14
======== ======== ======== ======== ======== ======== ======== ========
Diluted income (loss)
per share-
Continuing operations.. $ 0.19 $ 0.04 $ 0.41 $ 0.29 $ 0.44 $ 0.35 $ 0.21 $ 0.17
Discontinued
operations............ 0.02 0.01 0.03 0.01 0.03 0.02 (0.11) (0.03)
Accounting changes..... -- (0.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.21 $ (0.12) $ 0.44 $ 0.30 $ 0.47 $ 0.37 $ 0.10 $ 0.14
======== ======== ======== ======== ======== ======== ======== ========
94
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996
----------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- ------------------- -------------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
Revenue................. $2,144.5 $2,144.5 $2,331.0 $2,331.0 $2,372.7 $2,372.7 $2,338.8 $2,377.4
Operating expenses...... 1,494.8 1,532.7 1,619.3 1,701.4 1,630.5 1,716.8 1,628.2 1,709.9
Asset impairment loss... -- 0.1 -- 11.7 -- 1.7 -- 51.2
Special charges......... -- -- -- -- -- -- 471.6 370.7
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit......... $ 649.7 $ 611.7 $ 711.7 $ 617.9 $ 742.2 $ 654.2 $ 239.0 $ 245.6
Selling and
administrative
expenses............... 245.9 261.8 246.7 259.6 240.4 264.7 246.2 309.4
Interest, net........... 87.5 102.5 87.9 105.3 84.9 111.4 87.8 115.3
Minority interest....... 27.2 26.5 31.4 29.5 32.1 28.3 (33.1) (43.0)
Sundry income........... (17.3) (23.9) (21.4) (21.4) (23.5) (37.7) (23.0) (19.4)
Provision for income
tax.................... 126.2 111.2 149.4 130.8 168.1 132.2 121.4 62.3
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 180.2 $ 133.6 $ 217.7 $ 114.1 $ 240.2 $ 155.3 $ (160.3) $ (179.0)
Discontinued operations. 5.0 4.8 5.3 20.5 5.0 (72.8) (301.0) (215.8)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 185.2 $ 138.4 $ 223.0 $ 134.6 $ 245.2 $ 82.5 $ (461.3) $ (394.8)
======== ======== ======== ======== ======== ======== ======== ========
Basic income (loss) per
share-
Continuing operations.. $ 0.37 $ 0.27 $ 0.44 $ 0.23 $ 0.49 $ 0.32 $ (0.33) $ (0.37)
Discontinued
operations............ 0.01 0.01 0.01 0.04 0.01 (0.15) (0.62) (0.44)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.38 $ 0.28 $ 0.45 $ 0.27 $ 0.50 $ 0.17 $ (0.95) $ (0.81)
======== ======== ======== ======== ======== ======== ======== ========
Diluted income (loss)
per share-
Continuing operations.. $ 0.36 $ 0.27 $ 0.43 $ 0.23 $ 0.48 $ 0.31 $ (0.33) $ (0.37)
Discontinued
operations............ 0.01 0.01 0.01 0.04 0.01 (0.14) (0.62) (0.44)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.37 $ 0.28 $ 0.44 $ 0.27 $ 0.49 $ 0.17 $ (0.95) $ (0.81)
======== ======== ======== ======== ======== ======== ======== ========
95
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997
------------------------------------------------------------------------
FOURTH
FIRST QUARTER SECOND QUARTER THIRD QUARTER QUARTER
------------------- ------------------- ------------------- ---------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
Revenue................. $2,198.3 $2,205.0 $2,327.3 $2,333.3 $2,351.2 $2,351.2 $ 2,299.1
Operating expenses...... 1,617.8 1,697.5 1,639.2 1,715.5 1,839.2 1,819.5 1,962.9
Asset impairment loss... -- 5.9 -- 46.9 -- 26.2 1,401.2
Special charges......... -- 15.9 -- 0.9 -- 0.9 128.3
-------- -------- -------- -------- -------- -------- ---------
Gross profit........ $ 580.5 $ 485.7 $ 688.1 $ 570.0 $ 512.0 $ 504.6 $(1,193.3)
Selling and
administrative
expenses............... 261.2 249.8 253.8 257.1 266.5 292.2 330.1
Interest, net........... 95.5 102.7 93.6 101.1 92.3 99.7 105.8
Minority interest....... 27.8 27.1 27.9 27.9 30.4 29.4 (39.0)
Sundry income........... (133.9) (135.5) (32.5) (28.1) (8.1) (8.1) 8.4
Provision for income
tax.................... 151.5 127.2 170.1 127.9 67.7 61.6 (101.0)
-------- -------- -------- -------- -------- -------- ---------
Income from continuing
operations............. $ 178.4 $ 114.4 $ 175.2 $ 84.1 $ 63.2 $ 29.8 $(1,497.6)
Discontinued operations. -- 0.6 0.8 7.6 -- 0.2 87.3
Accounting changes...... -- -- -- -- -- -- (2.0)
Extraordinary item...... -- -- -- -- -- -- (0.5)
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)....... $ 178.4 $ 115.0 $ 176.0 $ 91.7 $ 63.2 $ 30.0 $(1,412.8)
======== ======== ======== ======== ======== ======== =========
Basic income (loss) per
share-
Continuing operations. $ 0.37 $ 0.24 $ 0.37 $ 0.18 $ 0.14 $ 0.07 $ (3.29)
Discontinued
operations........... -- -- -- 0.01 -- -- 0.19
Accounting changes.... -- -- -- -- -- -- --
Extraordinary item.... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)..... $ 0.37 $ 0.24 $ 0.37 $ 0.19 $ 0.14 $ 0.07 $ (3.10)
======== ======== ======== ======== ======== ======== =========
Diluted income (loss)
per share-
Continuing operations. $ 0.36 $ 0.23 $ 0.37 $ 0.18 $ 0.14 $ 0.07 $ (3.29)
Discontinued
operations........... -- -- -- 0.01 -- -- 0.19
Accounting changes.... -- -- -- -- -- -- --
Extraordinary item.... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)..... $ 0.36 $ 0.23 $ 0.37 $ 0.19 $ 0.14 $ 0.07 $ (3.10)
======== ======== ======== ======== ======== ======== =========
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
97
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF THE REGISTRANT
Set forth below are the names and ages of each of the members of the
Company's Board of Directors, the positions they hold with the Company and
summaries of their business experience. Unless otherwise indicated, all
information is as of February 1, 1998.
H. JESSE ARNELLE, age 64, has been a director of the Company since 1992. In
October 1997, he became counsel to Womble, Carlyle, Sandridge and Rice, a law
firm in Winston-Salem, North Carolina. For more than ten years prior thereto,
Mr. Arnelle was a senior partner of Arnelle, Hastie, McGee, Willis and Greene,
a San Francisco-based law firm. From 1993 to 1998, he served as Vice Chairman
and the Chairman of the Pennsylvania State University Board of Trustees. Mr.
Arnelle is also a director of Florida Power & Light (FPL Group), Eastman
Chemical Co., Textron Corporation, Wells Fargo & Company and Wells Fargo Bank
N.A., Armstrong World Industries and Union Pacific Resources, Inc.
DR. PASTORA SAN JUAN CAFFERTY, age 57, has served as a director of the
Company since July 1994. She has been a Professor since 1985 at the University
of Chicago, where she has been a member of the faculty since 1971. Dr.
Cafferty also serves as a director of Kimberly-Clark Corporation, Harris
Bankcorp and its subsidiary, Harris Trust and Savings Bank, and People's
Energy Corporation and on the Boards of the Rush-Presbyterian-St. Luke's
Medical Center and the Lyric Opera Association, both in Chicago.
JERRY E. DEMPSEY, age 65, has served as a director of the Company since
1984. From September 1993 until July 1997, he was Chairman and Chief Executive
Officer of PPG Industries, Inc., a glass, coatings and chemicals company, and
thereafter its Chairman until he retired on November 1, 1997. From April 1984
to May 1988, Mr. Dempsey served as Vice Chairman of the Board of the Company.
From May 1988 to June 1993, Mr. Dempsey was Senior Vice President of the
Company. From September 1991 to May 1993, Mr. Dempsey served as Chairman of
the Board of CWM. Mr. Dempsey is also a director of Navistar International
Corp. and Eastman Chemical Co.
DR. JAMES B. EDWARDS, age 70, has served as a director of the Company since
1995 and has been President of the Medical University of South Carolina since
November 1982. From January 1981 to November 1982, he served as the United
States Secretary of Energy, and previously as Governor of the State of South
Carolina. Dr. Edwards is also a director of Phillips Petroleum Company, SCANA
Corporation, Imo Industries Inc. and National Data Corporation.
DONALD F. FLYNN, age 58, has served as a director of the Company since 1981
and as Chairman of the Board and President of Flynn Enterprises, Inc., a
financial advisory and venture capital firm, since February 1988. He has also
been since February 1997 the Vice Chairman of Blue Chip Casino, Inc., an owner
and operator of a riverboat gaming vessel in Michigan City, Indiana. He also
served as Chairman of the Board and Chief Executive Officer of Discovery Zone,
Inc. ("Discovery Zone"), an operator of indoor fun and fitness centers for
children, from July 1992 until February 1996 and May 1995, respectively.
Discovery Zone, which in March 1996 announced that it filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code, emerged from bankruptcy
with a Plan of Reorganization that was approved by the bankruptcy court in
July 1997. Mr. Flynn was a Senior Vice President of the Company from May 1975
to January 1991. He also served as the Company's Chief Financial Officer from
March 1972 to December 1989 and the Company's Treasurer from May 1979 to
December 1986. Mr. Flynn is also a director of Extended Stay America, Inc.,
Psychemedics Corporation, WTI and WM International.
RODERICK M. HILLS, age 67, has served as a director of the Company since
November 1997, President of Hills Enterprises, Ltd. (formerly The Manchester
Group Ltd.), a consulting firm, since 1987 and as a Partner in Hills & Hills,
a law firm, since 1994. Mr. Hills has also served as Vice Chairman of Oak
Industries, Inc., a manufacturing firm, since 1989. Mr. Hills served from
September to November 1996 as Chairman of Federal-Mogul Corporation, an
automotive parts manufacturing firm. Mr. Hills served as Chairman of the
Securities and
98
Exchange Commission from 1975 to 1977 and as counsel to the President of the
United States in 1975. Mr. Hills is also a Director of Federal-Mogul
Corporation and Oak Industries, Inc.
ROBERT S. MILLER, age 56, has served as a director since May 1997. He was
elected Chairman of the Board and named Acting Chief Executive Officer of the
Company in October 1997. On March 10, 1998, Mr. Miller was named Chief
Executive Officer of the Company. Mr. Miller is also serving as Vice Chairman
of Morrison Knudsen Corporation, an engineering and construction firm. He
served as Chief Executive Officer of Federal Mogul Corporation, an automotive
parts manufacturing firm, from September until November 1996 and as Chairman
of Morrison Knudsen Corporation from April 1995 until September 1996. In
addition, since 1993 he has served as Vice President and Treasurer of Moore
Mill and Lumber, a privately-held forest products firm, and from 1992 to 1993,
he served as Senior Partner of James D. Wolfensohn, Inc., an investment
banking firm. From 1979 to 1992, Mr. Miller worked at Chrysler Corporation, an
automobile and truck manufacturing firm, rising to become Vice Chairman of the
Board after serving as the Company's Chief Financial Officer. Mr. Miller is a
director of Federal Mogul Corporation, Fluke Corporation, Morrison Knudsen
Corporation, Pope & Talbot, Inc., and Symantec Corporation.
PAUL M. MONTRONE, age 56, has served as a director of the Company since
January 1997. Mr. Montrone has been Chairman of the Board since January 1998
and President, Chief Executive Officer and a director since December 1991, of
Fisher Scientific International, Inc., a distributor of laboratory equipment
and supplies. Since May 1995, Mr. Montrone has served as Chairman of the
General Chemical Group, Inc., a manufacturer and distributor of chemicals
("General Chemical") and from prior to 1992 to May 1995 as President and a
director of General Chemical. He also served as Vice Chairman of the Board of
Abex, Inc., a designer and manufacturer of engineered components for
aerospace, defense, industrial and commercial markets, or its predecessors,
from 1992 to 1995. Mr. Montrone was a director of WTI or a predecessor thereof
from prior to 1989 until January 1997.
PEER PEDERSEN, age 73, has been a director of the Company since 1979 and
Chairman of the Board and Managing Partner of the law firm of Pedersen &
Houpt, P.C. for more than the past five years. Mr. Pedersen is also a director
of Aon Corporation, Boston Chicken, Inc., Latin American Growth Fund, Tennis
Corporation of America and Extended Stay America, Inc.
JAMES R. PETERSON, age 70, has been a director of the Company since 1980 and
was a director and President and Chief Executive Officer of The Parker Pen
Company from January 1982 to January 1985. The Parker Pen Company was
principally involved in the manufacture and distribution of writing
instruments and in providing temporary help services. Mr. Peterson is also a
director of The Dun & Bradstreet Corporation and Cognizant Corporation.
JOHN C. POPE, age 48, has served as a director of the Company since November
1997. Since January 1996, he has been Chairman of the Board of MotivePower
Industries, Inc., a manufacturer and remanufacturer of locomotives and
locomotive components. Mr. Pope served as President and Chief Operating
Officer of United Airlines and its parent corporation, UAL Corporation, from
April 1992 to July 1994. Prior thereto he served as Vice Chairman of both
companies beginning in November 1990, and as Executive Vice President,
Marketing and Finance beginning in October 1990, as Executive Vice President,
Marketing and Planning from May 1989 to September 1990 and as Chief Financial
Officer beginning in January 1988. Mr. Pope is also a director of Federal-
Mogul Corporation, Wallace Computer Services, Inc., Medaphis Corporation,
MotivePower Industries, Inc., Lamalie Associates, Inc. and Dollar Thrifty
Automotive Group, Inc.
STEVEN G. ROTHMEIER, age 51, has served as a director of the Company since
March 1997 and has been Chairman and Chief Executive Officer of Great Northern
Capital, a private investment management, consulting and merchant banking
firm, since March 1993. From November 1989 until March 1993, he was President
of IAI Capital Group, a venture capital and merchant banking firm. For more
than ten years prior thereto, he served Northwest Airlines, Inc. or its parent
corporation, NWA, Inc., in various executive capacities, including Chairman
and Chief Executive Officer from 1986 to 1989. Mr. Rothmeier is also a
director of Honeywell, Inc., Department 56, Inc., EW Blanch Holdings, Inc. and
Precision Castparts Corp.
99
ALEXANDER B. TROWBRIDGE, age 68, has served as a director of the Company
since 1985 and President of Trowbridge Partners, Inc., a consulting services
firm, since January 1990. He was President of the National Association of
Manufacturers, Washington, D.C., from January 1980 to January 1990. Mr.
Trowbridge also served as U.S. Secretary of Commerce in 1967 and 1968 and as
Vice Chairman of Allied Chemical Corp. from 1976 to 1980. He also serves as a
director of New England Life Insurance Co., The Rouse Co., Harris Corp., Sun
Co. Inc., the Gillette Co., Warburg-Pincus Counsellors Funds and Icos Corp.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the Company's executive officers
(as defined by regulations of the Securities and Exchange Commission), the
positions they hold with the Company and summaries of their business
experience. Executive officers are elected by the Board of Directors and serve
at the pleasure of the Board. All information is as of February 1, 1998.
JERRY W. CAUDLE, age 55, has been Senior Vice President of the Company since
December 1997. He served as a Group President of WMNA beginning in 1992,
having previously been Vice President--West Region since October 1990. Mr.
Caudle has been employed by the Company since 1974.
DONALD R. CHAPPEL, age 46, who was named Acting Chief Financial Officer of
the Company in October 1997, has served as its Vice President--Financial
Services since November 1996 and Vice President and Controller (North American
operations) since August 1995. From 1991 to July 1995, Mr. Chappel was Vice
President and Controller--West and Mountain Areas of WMNA, and from July to
August 1995 Vice President and Controller of CWM. Prior thereto he had served
as Vice President and Controller--WMI Urban Services, beginning in June 1987
when he joined the Company.
MICHAEL J. COLE, age 50, was elected a Senior Vice President of the Company
in December 1997. From September 1996 to November 1997, Mr. Cole served as
Group President of WMNA. Mr. Cole served as a Vice President of the Company
from May to September 1996, and as its Group President--Technology Services
from March to September 1996. He was previously President and Chief Executive
Officer of CWM from March 1995 to March 1996, and President of Chem-Nuclear
from June 1991 to March 1995. Mr. Cole has been employed by the Company since
1976.
L. MICHAEL COLLIER, age 50, was elected a Senior Vice President of the
Company in December 1997. From June 1996 until December 1997, he was a Group
President of WMNA. From November 1995 to May 1996, Mr. Collier served as
Executive Vice President of WMNA, and from September 1990 to October 1995 as
Vice President and Chief Operating Officer of WM International. Mr. Collier
has been employed by the Company since 1973.
HERBERT A. GETZ, age 42, has been a Senior Vice President of the Company
since May 1995, a Vice President of the Company since May 1990 and General
Counsel since August 1992. He has also been Secretary of the Company since
January 1988. He also served as Assistant General Counsel of the Company from
December 1985 until August 1992. Mr. Getz has also held the offices of Vice
President, General Counsel and Secretary of WMNA from April 1989 until
December 1993, and Vice President and Secretary of Rust from January 1993 to
May 1994. He has also served as Secretary of WTI from July 1995 to January
1997, a position he previously held, as well as being the General Counsel of
WTI, from November 1990 until May 1993. Mr. Getz commenced employment with the
Company in 1983. He is a director of NSC Corporation and OHM Corporation.
JOSEPH M. HOLSTEN, age 45, has been Executive Vice President and Chief
Operating Officer of the Company since February 1997. He was Chief Executive
Officer of WM International from July 1995 to March 1997. From October 1993 to
July 1995, he was Executive Vice President and Chief Financial Officer of
WMNA. Mr. Holsten was Vice President of Acquisitions and Project Development
for WM International from April 1992 to August 1993 and Vice President, Chief
Financial Officer and Treasurer of Rust from September to October 1993. Mr.
Holsten has been employed by the Company since 1981.
100
ROBERT S. MILLER, age 56, has served as a director of the Company since May
1997. He was elected Chairman of the Board and named Acting Chief Executive
Officer in October 1997. For a discussion of Mr. Miller's business experience
and positions with other companies, see "Directors of the Registrant."
JAMES E. O'CONNOR, age 48, has been a Senior Vice President of the Company
since December 1997. Since 1993 he has served as Group President of WMNA. Mr.
O'Connor began his employment with the Company in 1972.
D. P. PAYNE, age 55, has been a Senior Vice President of the Company since
April 1995, a position he previously held from 1990 to 1993. He also served as
President and Chief Executive Officer and a director of CWM from September
1991 to March 1995. Mr. Payne has been employed by the Company since 1990.
MARK T. SPEARS, age 40, was appointed Vice President and Controller of the
Company in November 1997. Prior to this position, Mr. Spears served as Vice
President and Assistant Controller from July 1997. Between 1995 and 1997, he
served as Vice President and Controller of WM International. From 1993 to
1995, he was Vice President and Controller of Rust after holding increasingly
responsible financial positions with WM International between 1989 and 1993.
Mr. Spears joined the Company in 1988.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In 1997 Dr. Cafferty and Mr. Montrone made late filings of reports required
by Section 16(a) relating to purchases of the Company's common stock. Such
reports were due on July 10, 1997 and September 8, 1997 and were filed on July
26, 1997 and September 13, 1997, respectively.
101
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information with respect to
compensation for services in all capacities paid by the Company and its
subsidiaries for the past three years, to or on behalf of each person who
served as Chief Executive Officer during 1997, the four other most highly
compensated executive officers of the Company as of December 31, 1997, and two
additional individuals who were not serving as executive officers at December
31, 1997, but for whom disclosure is required under Securities and Exchange
Commission rules:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------- -----------------------------------------------
BONUS(1) AWARDS PAYOUTS
-------------------- ----------- ---------
OTHER SECURITIES LONG- ALL OTHER
ANNUAL RESTRICTED UNDERLYING TERM INCENTIVE
NAME AND PRINCIPAL STOCK- COMPEN- STOCK OPTIONS INCENTIVE COMPEN-
POSITION(5) YEAR SALARY CASH BASED SATION(2) AWARDS(5) (SHARES)(6) PAYOUTS SATION(7)
------------------ ---- --------- ------- --------- --------- ---------- ----------- --------- ---------
Robert S. Miller 1997 $ 92,308 $ 0 0 $ -- $ 12,500 78,000 0 $ 0
Acting Chairman of the
Board and Chief
Executive Officer
Dean L. Buntrock 1997 0 0 0 243,447(3) 0 283,111 0 0
Former Chairman of the 1996 1,250,000 0 0 88,516(3) 0 176,656 0 750
Board and Chief 1995 1,400,000 0 1,792,000(1) 437,980(1)(3) 0 205,505 0 10,500
Executive Officer(8)
Ronald T. LeMay 1997 450,000 0 0 -- 11,684,300 2,000,000 0 0
Former Chairman of the
Board, President and
Chief Executive
Officer(8)
Phillip B. Rooney 1997 2,500,000 0 0 57,934 0 0 0 750
Former President and 1996 1,250,000 0 435,247(1) 124,880(1) 0 476,183 0 750
Chief Executive
Officer(8) 1995 1,000,000 0 1,141,000(1) 261,280(1) 0 146,789 0 10,500
Joseph M. Holsten 1997 650,000 300,000 0 -- 1,794,375 166,556 0 750
Executive Vice 1996 440,000 252,058 0 225,280(4) 0 173,253 0 0
President and Chief 1995 400,000 246,750 0 96,957(4) 0 175,780 0 10,500
Operating Officer
James E. Koenig 1997 600,000 0 0 -- 0 79,867 0 750
Former Executive Vice 1996 600,000 355,000 0 -- 1,485,000 186,514 0 750
President(8) 1995 517,000 420,000 0 -- 0 62,615 0 10,500
Jerry W. Caudle 1997 325,000 225,223(1) 0 -- 770,775 27,038 0 750
Senior Vice 1996 310,000 97,534 97,534(1) -- 0 22,003 0 750
President 1995 300,000 0 182,400(1) -- 0 24,771 0 8,803
Herbert A. Getz 1997 450,000 0 0 -- 0 59,900 0 750
Senior Vice President, 1996 450,000 112,500 0 -- 1,155,000 146,136 0 750
General Counsel 1995 365,000 300,000 0 -- 0 44,725 0 10,500
and Secretary
William P. Hulligan 1997 475,000 0 0 -- 0 51,373 0 750
Executive Vice 1996 475,000 0 95,000(1) -- 0 48,699 0 750
President, 1995 445,000 0 365,790(1) 74,748(1) 0 36,743 0 10,500
Waste Management of
North America, Inc.
D. P. Payne 1997 420,000 0 0 -- 1,054,575 55,907 0 750
Senior Vice President 1996 420,000 0 105,000(1) -- 0 43,060 0 750
1995 400,000 0 322,250(1) 74,879(1) 0 47,706 0 750
- -------
(1) All of the amounts shown under "Bonus--Stock-Based" were deferred and are
deemed to be invested in shares of the Company's common stock, and thus
fully "at risk" until after retirement or other termination of employment.
The deferring officers received a 20% Company match of the bonus deferred,
included under "Other Annual Compensation," which vests over a four-year
period and is also deemed invested and "at risk" in the same manner as the
deferred bonus. See Note 1 to the table in "Security of Ownership of
Certain Beneficial Owners and Management--Securities Ownership of
Management" set forth below in Item 12. Of the total amount of Mr.
Caudle's bonus, $31,362 was subject to mandatory "banking" under the
Company's Corporate Incentive Bonus Plan and remains "at risk" during
1998.
102
(2) Excludes perquisites and other benefits, unless the aggregate amount of
such compensation is at least the lesser of either $50,000 or 10 percent
of the total annual salary and bonus reported for the named executive
officer.
(3) Includes financial planning expenses of $68,000 paid by the Company on
behalf of the named executive officer in 1995 and 1996 and $60,000 in
1997, and personal use of Company aircraft in 1997 valued at $174,749.
(4) Includes foreign service premium ($96,000 in 1996 and $40,000 in 1995) and
housing allowance ($96,000 in 1996 and $40,000 in 1995).
(5) The value shown is as of the date of issuance. Dividends are paid or
accrued on restricted stock awards at the same rate as paid to all
stockholders. For a description of the restrictions on such stock, see
"Certain Transactions." Mr. LeMay's restricted stock award was forfeited
upon his resignation.
(6) The numbers shown in the table above represent options for the purchase of
shares of the Company's common stock granted to the named persons under
the Employee Plans. For Mr. Holsten, such numbers include the following
numbers of shares underlying options to acquire common stock of WM
International: 160,000 in 1996 and 140,000 in 1995. Mr. LeMay's options
terminated upon his resignation.
(7) Amounts of All Other Compensation are amounts contributed by the Company
for fiscal years 1995, 1996 and 1997 under the Company's Profit Sharing
and Savings Plan and for fiscal year 1995 under the Company's Profit
Sharing and Savings Plus Plan for the persons named above.
(8) Robert S. Miller served in such capacity from October 29, 1997. Dean L.
Buntrock served in such capacity from February 17, 1997 until July 13,
1997. Ronald T. LeMay served in such capacity from July 13, 1997 until
October 29, 1997. Phillip B. Rooney served in such capacity from January
1, 1997 to February 17, 1997. James E. Koenig served in such capacity
until October 31, 1997. William P. Hulligan served in such capacity until
November 30, 1997.
103
STOCK OPTIONS
The following tables set forth certain information with respect to stock
options granted to the persons named in the Summary Compensation Table during
the year ended December 31, 1997. No options were granted to the persons named
in the Summary Compensation Table during the year ended December 31, 1997 by
WTI or WM International.
COMPANY OPTION GRANTS IN 1997
INDIVIDUAL GRANTS
PERCENTAGE POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
OF COMPANY ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(8)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------------------
NAME GRANTED(1) IN 1997 (PER SHARE) DATE(7) 0% 5% 10%
- ---- ---------- ---------- ----------- ---------- --- -------------- ---------------
Robert S. Miller........ 3,000(2) .05 $30.05 5/09/07 $ 0 $ 56,695 $ 143,676
75,000(3) 1.21 23.375 11/04/07 0 1,102,531 2,794,030
Dean L. Buntrock........ 150,000(4) 2.42 33.00 3/04/07 0 3,113,028 7,889,025
133,111(5) 2.15 30.05 5/09/07 0 2,515,569 6,374,947
Ronald T. LeMay......... 2,000,000 32.24 33.10 7/13/07 0 41,632,824 105,505,751
Phillip B. Rooney....... -- -- -- -- -- -- --
Jerry W. Caudle......... 27,038(5) .44 30.05 5/09/07 0 510,972 1,294,903
Herbert A. Getz......... 59,900(5) .97 30.05 5/09/07 0 1,132,007 2,868,728
James E. Koenig......... 79,867(5) 1.29 30.05 5/09/07 0 1,509,349 3,824,987
William P. Hulligan..... 51,373(5) .83 30.05 5/09/07 0 970,862 2,460,354
Joseph M. Holsten....... 66,556(5) 1.07 30.05 5/09/07 0 1,257,794 3,187,497
100,000(6) 1.61 33.85 6/20/07 0 2,128,808 5,394,818
D. P. Payne............. 55,907(5) .90 30.05 5/09/07 0 1,056,546 2,677,496
All stockholders as a
group(9)............... -- -- $30.05 5/09/07 $ 0 $8,585,108,686 $21,756,350,814
- --------
(1) The option holder has the right to pay the exercise price by delivering
previously acquired shares of the Company's common stock, and to have
shares withheld to satisfy tax withholding requirements in connection with
the exercise of options. Such options become immediately exercisable upon
a Change in Control of the Company, as defined in the option plan. Options
are non-transferable other than by will or the laws of descent and
distribution.
(2) Options become exercisable May 9, 1998.
(3) Options become exercisable upon termination of service.
(4) Options become exercisable in three equal cumulative annual installments
commencing March 4, 1998.
(5) Options become exercisable in three equal cumulative annual installments
commencing May 9, 1998.
(6) Options become exercisable in three equal cumulative installments
commencing June 20, 1998.
(7) Options have a term of ten years, subject to earlier termination in
certain events related to termination of employment. Mr. LeMay's options
terminated upon his resignation. Mr. Koenig's options terminate on October
31, 2000.
(8) The amounts under the columns labeled "5%" and "10%" are included by the
Company pursuant to certain rules promulgated by the Securities and
Exchange Commission and are not intended to forecast future appreciation,
if any, in the price of the Company's stock. Such amounts are based on the
assumption that the named persons hold the options granted for their full
term. The actual value of the options will vary
104
in accordance with the market price of the Company's common stock. The
column headed "0%" is included to demonstrate that the options were granted
at fair market value and optionees will not recognize any gain without an
increase in the stock price, which increase benefits all stockholders
commensurately.
(9) Based upon the price of the Company's stock and the total shares
outstanding as of the date of grant, if the price of the Company's common
stock increased at the 5% or 10% rates shown in the table above,
stockholders as a group would realize aggregate gains (excluding
dividends) in the amounts shown above during the period from grant date to
the May 9, 2007 option expiration date.
The following table sets forth certain information as to each exercise of
stock options during the year ended December 31, 1997 by the persons named in
the Summary Compensation Table and the fiscal year-end value of unexercised
options:
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUE
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED IN-
LYING UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED VALUE ------------------------------ -------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- -------------- -------------- ----------- -------------
Robert S. Miller
Company Options........ 0 $ 0 0 78,000 $ 0 $309,375
Dean L. Buntrock
Company Options........ 0 0 1,217,704 0 88,451 0
WM International
Options............... 0 0 200,000 0 0 0
Ronald T. LeMay
Company Options........ 0 0 0 0 0 0
Phillip B. Rooney
Company Options........ 0 0 1,323,408 0 152,844 0
WM International
Options............... 0 0 200,000 0 0 0
Jerry W. Caudle
Company Options........ 0 0 112,957 49,963 29,391 2,064
Herbert A. Getz
Company Options........ 0 0 167,383 172,231 32,280 3,727
WTI Options............ 240,000 1,515,744 0 0 0 0
WM International
Options............... 0 0 40,000 0 0 0
James E. Koenig
Company Options........ 0 0 455,318 0 59,209 0
WTI Options............ 120,000 757,872 0 0 0 0
WM International
Options............... 0 0 200,000 0 0 0
William P. Hulligan
Company Options........ 0 0 202,376 96,086 43,145 3,061
Joseph M. Holsten
Company Options........ 0 0 63,506 187,317 18,158 2,981
WM International
Options............... 0 0 306,666 153,334 0 0
D. P. Payne
Company Options........ 0 0 284,814 100,515 285,228 3,975
- --------
(1) Market value less exercise price, before payment of applicable income
taxes.
105
LONG TERM INCENTIVE PLAN AWARDS
The following table sets forth certain information as to awards under the
Company's Long Term Incentive Plan (the "LTIP") with respect to the year ended
December 31, 1997 to the persons named in the Summary Compensation Table:
NUMBER OF PERFORMANCE ESTIMATED FUTURE PAYOUTS
SHARES, OR OTHER UNDER NON-STOCK
UNITS OR PERIOD UNTIL PRICE BASED PLANS(3)
OTHER MATURATION -----------------------------
NAME RIGHTS(1) OR PAYOUT(2) THRESHOLD TARGET MAXIMUM
- ---- --------- ------------ --------- -------- ----------
Robert S. Miller........... -- -- -- -- --
Dean L. Buntrock........... -- -- -- -- --
Ronald T. LeMay............ -- -- -- -- --
Phillip B. Rooney.......... -- -- -- -- --
Jerry W. Caudle............ -- 3 years $130,000 $130,000 $ 812,500
Herbert A. Getz............ -- 3 years 180,000 180,000 1,125,000
James E. Koenig............ -- 3 years 240,000 240,000 1,500,000
Joseph M. Holsten.......... -- 3 years 260,000 260,000 1,625,000
William P. Hulligan........ -- -- -- -- --
D. P. Payne................ -- 3 years 168,000 168,000 1,050,000
- --------
(1) Awards consist of the designation of target percentages of annual salary
at the end of the performance period to be paid if the Company achieves
certain performance objectives. No payout occurs unless the Company
achieves certain threshold performance objectives. Above the threshold,
payouts may be greater than the target percentage to the extent that the
Company's performance exceeds or fails to meet the target objectives
specified in the plan. Payouts under the LTIP are based on the rank of the
Company's total stockholder return (stock price appreciation plus
reinvested dividends) among the total stockholder returns of the companies
that comprise the Dow Jones Industrial Average over the performance
period.
(2) The performance period includes calendar years 1997, 1998 and 1999.
(3) Provided that the participant is an officer of the Company or one of its
subsidiaries at the end of the performance period, an amount equal to 50%
of the performance award, if any, is to be paid in cash, and the remaining
50% is to be deemed to be invested in common stock of the Company. The
participant is entitled to receive the value of such deemed investment on
the date three years after the end of the performance period. Estimated
future payouts were calculated using 1997 salaries, assume that a
performance award will be earned at the levels shown, and do not reflect
any possible subsequent increase or decrease in the value of the portion
of the award which would be required to be deferred under the terms of the
plan.
106
PENSION AND RETIREMENT PLANS
The following table sets forth estimated annual benefits payable upon
retirement under the Company's Pension Plan and its Supplemental Executive
Retirement Plan ("SERP") to employees of the Company in specified remuneration
and years of service classifications. For purposes of the following table, it
is assumed that the five executive officers named in the cash compensation
table are eligible for the SERP benefits and that each such officer's
annualized Final Average Compensation (as defined below) will be equal to his
average annual compensation for the three years ended December 31, 1997.
PENSION PLAN TABLE
YEARS OF SERVICE(2)(3)
---------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35 40
- --------------- -------- -------- -------- -------- ---------- ----------
$ 400,000........... $ 90,000 $120,000 $150,000 $180,000 $ 210,000 $ 240,000
500,000........... 112,500 150,000 187,500 225,000 262,500 300,000
600,000........... 135,000 180,000 225,000 270,000 315,000 360,000
700,000........... 157,500 210,000 262,500 315,000 367,500 420,000
800,000........... 180,000 240,000 300,000 360,000 420,000 480,000
900,000........... 202,500 270,000 337,500 405,000 472,500 540,000
1,000,000........... 225,000 300,000 375,000 450,000 525,000 600,000
1,100,000........... 247,500 330,000 412,500 495,000 577,500 660,000
1,200,000........... 270,000 360,000 450,000 540,000 630,000 720,000
1,300,000........... 292,500 390,000 487,500 585,000 682,500 780,000
1,400,000........... 315,000 420,000 525,000 630,000 735,000 840,000
1,500,000........... 337,500 450,000 562,500 675,000 787,500 900,000
1,600,000........... 360,000 480,000 600,000 720,000 840,000 960,000
1,700,000........... 382,500 510,000 637,500 765,000 892,500 1,020,000
1,800,000........... 405,000 540,000 675,000 810,000 945,000 1,080,000
1,900,000........... 427,500 570,000 712,500 855,000 997,500 1,140,000
2,000,000........... 450,000 600,000 750,000 900,000 1,050,000 1,200,000
- --------
(1) Upon normal retirement at age 65 or after completing five years of
participation in the Company's Pension Plan, whichever is later, a
participant is entitled to a pension based on the average of the
participant's eligible compensation for the highest five consecutive years
out of his or her last 10 years of service. For this purpose, a
participant's eligible compensation generally includes all of his or her
cash compensation, subject, in 1997, to the statutory maximum of $160,000.
The annual lifetime benefit is equal to (i) 1% of average eligible
compensation, multiplied by (ii) the number of his or her years of
service, and, for a participant retiring at age 65 with 10 years of
service, may not be less than $100 per month. Under the SERP, eligible
participants who retire following age 60, or retire with at least 30 years
of service, are entitled to a monthly benefit equal to (i) 1.5% of the
participant's Final Average Compensation per year of service (Final
Average Compensation is the monthly average compensation of such
participant for the highest three consecutive calendar years out of his or
her last 10 calendar years of service), reduced by (ii) the amount of such
participant's monthly benefit under the Pension Plan. Compensation used
for calculating benefits under the SERP includes only the participant's
salary and annual incentive bonus. Eligible participants are those
officers who have served in such capacities for at least 10 years at the
time of retirement. Payment of benefits under the SERP is made on the same
basis as payments under the Pension Plan, and both plans provide for
reduced payouts in the event of early retirement.
(2) At December 31, 1997, the credited years of service for current and former
executive officers were as follows: Mr. Miller--0; Mr. Buntrock--41; Mr.
LeMay--0; Mr. Rooney--28; Mr. Caudle--22; Mr. Getz--14; Mr. Koenig--20;
Mr. Hulligan--19; Mr. Holsten--15; Mr. Payne--7.
107
(3) Benefits shown are computed on a straight-life annuity basis at normal
retirement age. Provision is made for payment of pensions in joint and
survivor form and in various other forms and at other times, on an
actuarially equivalent basis. Benefits are not subject to reduction for
social security benefits.
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company who is not an employee
of the Company is paid an annual retainer of $50,000, 50% of which is paid in
shares of restricted common stock of the Company. Such directors also receive
$1,000 for each day on which they perform substantial work on behalf of a
Committee of the Board, which includes attendance at meetings of Committees of
which such directors are members. Each director is expected to accumulate,
over a five year period, an equity interest in the Company equivalent to 300%
of the annual retainer for Board service. Directors may elect to receive 100%
of their retainer in the form of restricted common stock of the Company.
Directors who have met or exceeded the Board's minimum stock ownership goal
may elect to receive up to 100% of their annual retainer in cash. The Company
maintains a major medical expense insurance policy which is available to all
directors of the Company. The policy covers the medical and dental expenses of
the directors in excess of the coverage provided by the director's primary
health insurance program.
OUTSIDE DIRECTORS' PLANS
The Company has two unfunded deferred compensation plans for non-employee
members of its Board of Directors. Under the Deferred Directors' Fee Plan, as
amended, such directors may make an irrevocable election annually to defer
receipt of all or a portion of the directors' fees payable to them until
termination of their membership on the Board of Directors. Such amounts
deferred prior to January 1, 1998 are deemed to be invested in the Company's
common stock or, at the election of the director, in the common stock of any
of the Company's majority-owned public subsidiaries, and during the period of
deferral, such deferred amounts are credited with the dividends or stock
splits that would be received had such investment actually been made. Upon
termination of the director's service, the common stock deemed reflected by
his or her deferred account is deemed to be sold, and the deemed proceeds of
such sale (or an amount equal to the amount originally deferred, if greater)
will be distributed to the director in cash, in a lump sum or installments.
Accounts deferred after December 31, 1997 will be credited with interest from
time to time at a rate equal to the weekly average rate on the ten year U.S.
Treasury Note. Upon termination of the director's service, the value of the
account on the books of the Company will be distributed to the director in
cash, in a lump sum or installments.
Under the Directors' Phantom Stock Plan, certain non-employee directors
received a one-time grant of 5,000 Phantom Shares at the time of adoption of
such plan or at the time they first became directors. Each of such Phantom
Shares was initially deemed to be equal in value to one share of the Company's
common stock at the time of award. Phantom Shares are credited to a
bookkeeping account which is adjusted to reflect stock (but not cash)
dividends or stock splits which would be received with respect to an
equivalent number of shares of the Company's common stock. Upon termination of
the director's service, the director is paid an amount in cash, in a lump sum
or installments, for each Phantom Share then credited to his or her account,
equal to the then difference between the market price of the Company's common
stock at the time of award and the average closing prices of one share of the
Company's common stock on the New York Stock Exchange Composite Tape for the
most recent 10 consecutive trading days immediately preceding such
termination. In 1991, the Company's Board of Directors terminated its
authority to make additional grants under the Directors' Phantom Stock Plan.
STOCK OPTION PLANS FOR NON-EMPLOYEE DIRECTORS
The 1992 Stock Option Plan for Non-Employee Directors (the "Directors Plan")
of the Company provides for the awards of options covering an aggregate of
150,000 shares of the Company's common stock. Each director of the Company
first elected in 1997 or thereafter who is neither an officer nor full-time
employee of the Company or any of its subsidiaries, upon election or
appointment to the Board of Directors, is granted an option to purchase 3,000
shares of the Company's common stock on the date of election and on the next
four
108
anniversaries if re-elected. Each such director elected before 1997 received
an option to purchase a total of 15,000 shares of the Company's common stock
on the date of his or her election. All options under the Directors Plan are
granted at the fair market value of the stock at the time of grant and are for
a term of 10 years from the date of grant. Options granted in 1997 or
thereafter become exercisable after one year following the grant date. Options
granted prior to 1997 become exercisable with respect to 20% of the total
number of shares subject to the option six months after the date of grant and
with respect to an additional 20% at the end of each 12-month period
thereafter on a cumulative basis during the succeeding four years.
Under the Directors Plan, in the event that the Company's shares of common
stock are changed by a stock dividend, split or combination of shares, or a
merger, consolidation or reorganization with another company in which holders
of the Company's common stock receive other securities, or any other relevant
change in the capitalization of the Company, a proportionate or equitable
adjustment will be made in the number or kind of shares subject to unexercised
options or available for options and in the purchase price for shares. If an
option expires or is terminated or cancelled unexercised as to any shares,
such released shares may again be optioned (including a grant in substitution
for a cancelled option). Shares subject to options may be made available from
unissued or reacquired shares of common stock.
Options are not transferable by the optionee otherwise than by will or the
laws of descent and distribution, provided that the Board of Directors may
grant options that are transferable, without payment of consideration, to
immediate family members of the optionee or to trusts or partnerships for such
family members or to charitable organizations (each an "Option Transferee"),
subject to the Company's procedures for administration, and may amend
outstanding options to provide for such transferability. Options terminate if
the optionee ceases to be a director of the Company for any reason other than
death, permanent disability, resignation or retirement. If the optionee ceases
to be a director because of death or permanent disability, the optionee or the
optionee's heirs, legatees, legal representative or the Option Transferee may
exercise the option in full at any time during its term within three months
after the date of termination. In the event of resignation or retirement, an
option may be exercised by the optionee (or if the optionee dies within three
months after such termination, by the optionee's heirs, legatees or legal
representative) or the Option Transferee at any time during its specified term
prior to three months after the date of such resignation or retirement, but
only to the extent it was exercisable at the date of such resignation or
retirement.
Prior to January 1, 1992, upon election to the Board of Directors non-
employee directors received options for 10,000 shares under the Company's 1981
Stock Option Plan for Non-Employee Directors (the "1981 Plan"), the terms of
which are substantially similar to the Directors Plan. No person who is the
holder of an option granted under the 1981 Plan or the Employee Plans or who
has purchased shares upon the exercise of such an option is eligible for a
grant of options under the Directors Plan.
DIRECTORS' CHARITABLE ENDOWMENT PROGRAM
The Company maintains a Directors' Charitable Endowment Program pursuant to
which the Company has purchased life insurance policies on members of the
Board of Directors. Under the program, death benefits will be paid to the
Company, and the Company in turn will donate such death benefits (up to
$100,000 for each year of service on the Company's Board of Directors, subject
to a $1,000,000 limit) to one or more charitable organizations recommended by
the director. Directors derive no financial benefit from this program because
all charitable deductions accrue solely to the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option Committee of the Company's Board of
Directors consisted during 1997 of Messrs. Pedersen (Chairman), Arnelle,
Edwards, Montrone and Peterson and Dr. Cafferty. There are no interlocks
requiring disclosure or insider members of this committee.
109
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information as of February 1, 1998 as
to the beneficial ownership of common stock of the Company by the directors
and, each person who served as Chief Executive Officer during 1997, the four
other most highly compensated executive officers of the Company as of December
31, 1997, two additional individuals who were not serving as executive
officers at December 31, 1997, but for whom disclosure is required pursuant to
the rules of the Securities and Exchange Commission (the "SEC"), and all
directors and persons serving as executive officers of the Company as a group:
NUMBER OF SHARES PERCENT OF
SHARES OF COMMON STOCK COMMON
OTHER THAN OF THE COMPANY STOCK
EXERCISABLE EXERCISABLE BENEFICIALLY OF THE
OPTIONS OPTIONS OWNED(2) COMPANY
----------- ----------- ---------------- ----------
Directors
(Other than Executive
Officers)
H. Jesse Arnelle......... 1,338 15,000 16,338(3) *
Pastora San Juan
Cafferty................ 5,000 12,000 17,000 *
Jerry E. Dempsey......... 395,020 0 395,020 *
James B. Edwards......... 2,277 9,000 11,277 *
Donald F. Flynn.......... 508,234 0 508,234 *
Roderick M. Hills........ 1,021 0 1,021 *
Paul M. Montrone......... 4,500 3,000 7,500 *
Peer Pedersen............ 232,258 0 232,258(3) *
James R. Peterson........ 84,068 0 84,068(3) *
John C. Pope............. 4,621 0 4,621 *
Steven G. Rothmeier...... 1,511 3,000 4,511 *
Alexander B. Trowbridge.. 2,400 0 2,400(3) *
Current and Former
Executive Officers(1)
Robert S. Miller......... 1,511 0 1,511(3)
Dean L. Buntrock......... 2,133,305 1,172,645 3,305,950 *
Jerry W. Caudle.......... 44,387 120,291 164,678 *
Herbert A. Getz.......... 82,564 182,762 265,326 *
Joseph M. Holsten........ 63,193 67,924 131,117 *
William P. Hulligan...... 42,634 218,609 261,243 *
James E. Koenig.......... 100,883 450,894 551,777 *
Ronald T. LeMay.......... 0 0 0 *
D. P. Payne.............. 51,543 299,167 350,710 *
Phillip B. Rooney........ 73,951 1,258,537 1,332,488 *
All directors and executive
officers as a group
including persons named
above (27 persons)........ 3,948,118 4,070,494 8,018,612 1.8%
- --------
*Less than 1 percent.
(1) Pursuant to the Company's Non-Qualified Profit Sharing and Savings Plus
Plan, Messrs. Buntrock, Caudle, Getz, Holsten, Hulligan, Payne, Rooney and
all executive officers as a group acquired beneficial ownership of the
equivalent of an additional 77,943, 11,791, 368, 311, 25,737, 17,937,
66,086 and 209,868 shares, respectively, of common stock of the Company in
connection with their voluntary deferral of incentive awards pursuant to
the terms of the Company's Corporate Incentive Bonus Plan.
(2) Directors and executive officers included in the group have sole voting
power and sole investment power over shares listed, except (i) shares
covered by options granted under the Company's stock option plans which
were exercisable within 60 days of February 1, 1998; (ii) shares held
pursuant to the Company's
110
Profit Sharing and Savings Plan; (iii) Messrs. Edwards, Pedersen and
Peterson, whose shares listed above include 312, 12,856 and 1,668 shares
issuable upon conversion of the convertible subordinated notes due 2005 of
the Company ("Company Notes"), respectively; and (iv) Messrs. Buntrock,
Dempsey, Getz, Koenig, Miller and Pedersen, and all executive officers and
directors as a group (including such individuals), who have shared voting
and investment power over 146,833, 394,020, 42,032, 52,631, 1,000, 19,402
and 657,918 shares, respectively. Such shares shown for Messrs. Buntrock,
Dempsey, and Pedersen are held in trusts or foundations over which such
individuals share voting and investment power with other co-trustees or
directors of such trusts and foundations. Such shares shown for Messrs.
Getz, Koenig and Miller are held jointly with their spouses. Ownership of
shares shown for Messrs. Buntrock, Dempsey, Edwards, Getz, Koenig and Pope,
and for all executive officers and directors as a group, includes shares of
common stock of the Company not held directly by them but held by or for the
benefit of (i) their spouses or (ii) their minor children and other children
residing with them, as to which they have neither investment power nor
voting power. Shares were held by or for the benefit of such spouses or
children of the following persons and the executive officers and directors
as a group at February 1, 1998, in the amounts indicated: Mr. Buntrock--
41,373 (held by spouse); Mr. Dempsey--1,000 (held by spouse); Dr. Edwards--
254 (held by spouse with 104 such shares issuable upon conversion of Company
Notes), Mr. Getz--240 (held by spouse), Mr. Koenig--30 (held by spouse), Mr.
Pope--600 (held in trust for children); and all executive officers and
directors as a group (including such individuals)--43,604. Additionally,
ownership of shares shown for Mr. Koenig includes 1,200 shares held by him
as trustee of a family trust in which Mr. Koenig has no pecuniary interest.
Each of the above named persons and the members of such group disclaim any
beneficial ownership of such shares.
(3) Pursuant to the Company's Deferred Directors' Fee Plan, described below
under "Outside Directors' Plans," Messrs. Arnelle, Miller, Pedersen, and
Peterson have also acquired beneficial ownership of the equivalent of
1,239, 1,158, 30,541 and 4,950 shares, respectively, of the Company's
common stock through their voluntary deferral of all or a portion of their
directors' fees. Pursuant to the Company's Directors' Phantom Stock Plan,
described below under "Outside Directors' Plans," Messrs. Pedersen,
Peterson and Trowbridge each have also acquired beneficial ownership of the
equivalent of 40,000 shares of the Company's common stock.
111
OWNERSHIP OF WTI COMMON STOCK
The following table sets forth certain information as of February 1, 1998 as
to the beneficial ownership of WTI common stock by the directors, each person
who served as Chief Executive Officer during 1997, the four other most highly
compensated executive officers of the Company as of December 31, 1997, two
additional individuals who were not serving as executive officers at December
31, 1997, but for whom disclosure is required under SEC rules, and all
directors and persons serving as executive officers of the Company as a group:
NUMBER OF
SHARES OF WTI
COMMON STOCK PERCENT OF
BENEFICIALLY WTI COMMON
NAME OWNED(1)(2)(3) STOCK(2)(3)
- ---- -------------- -----------
Directors (Other than Executive Officers)
H. Jesse Arnelle.................................. 0 *
Pastora San Juan Cafferty......................... 0 *
Jerry E. Dempsey.................................. 34,336 *
James B. Edwards.................................. 0 *
Donald F. Flynn................................... 45,245 *
Roderick M. Hills................................. 0 *
Paul M. Montrone.................................. 256,000 *
Peer Pedersen..................................... 0 *
James R. Peterson................................. 0 *
John C. Pope...................................... 0 *
Steven G. Rothmeier............................... 0 *
Alexander B. Trowbridge........................... 0 *
Executive Officers
Robert S. Miller................................. 0 *
Dean L. Buntrock.................................. 116,377 *
Jerry W. Caudle................................... 0 *
Herbert A. Getz................................... 73,414 *
Joseph M. Holsten................................. 0 *
William P. Hulligan............................... 0 *
James E. Koenig................................... 1,500 *
Ronald T. LeMay................................... 0 *
D. P. Payne....................................... 0 *
Phillip B. Rooney................................. 10,000 *
All directors and executive officers as a group
including persons named above
(27 persons)....................................... 536,872 *
- --------
*Less than 1 percent.
(1) Directors and executive officers included in the group have sole voting
power and sole investment power over WTI shares listed, except (i) WTI
shares covered by options exercisable within 60 days of February 1, 1998;
(ii) 10,000 WTI shares deemed to be beneficially owned by each of Messrs.
Buntrock, Flynn and Rooney as a result of restricted units granted
pursuant to WTI's Restricted Unit Plan for Non-Employee Directors, (iii)
1,000 shares held by Mr. Dempsey's spouse and (iv) Messrs. Getz and
Koenig, and all executive officers and directors as a group, who have
shared voting and investment power over 73,414, 1,500 and 74,914 WTI
shares, respectively. Such shares shown for Messrs. Getz and Koenig are
held jointly with their spouses. Such persons disclaim any beneficial
ownership of the WTI shares subject to such restricted units.
(2) Excludes an aggregate of 104,621,810 WTI shares beneficially owned by the
Company that may be deemed beneficially owned by Mr. Miller because he may
be deemed to be an affiliate of the Company. Mr. Miller disclaims any
beneficial ownership of such WTI shares.
112
(3) The numbers and percentages of WTI shares shown in the table above are
based on the assumption that currently outstanding stock options covering
WTI shares which were exercisable within 60 days of February 1, 1998 had
been exercised as follows: Mr. Montrone--256,000; and all executive
officers and directors as a group (including such individuals)--256,000.
Such persons and the members of such group disclaim any beneficial
ownership of the shares subject to such options.
OWNERSHIP OF WM INTERNATIONAL ORDINARY SHARES
The following table sets forth certain information as of February 1, 1998 as
to the beneficial ownership of WM International ordinary shares (including
ordinary shares represented by American Depositary Shares) by the directors,
each person who served as Chief Executive Officer during 1997, the four other
most highly compensated executive officers of the Company as of December 31,
1997, two additional individuals who were not serving as executive officers at
December 31, 1997 but for whom disclosure is required under SEC rules, and all
directors and persons serving as executive officers of the Company as a group:
NUMBER OF
SHARES OF WM
INTERNATIONAL
ORDINARY PERCENT OF WM
SHARES INTERNATIONAL
BENEFICIALLY ORDINARY
NAME OWNED(1)(2)(3) SHARES(2)(3)
- ---- -------------- -------------
Directors (Other than Executive Officers)
H. Jesse Arnelle................................ 0 *
Pastora San Juan Cafferty....................... 0 *
Jerry E. Dempsey................................ 5,000 *
James B. Edwards................................ 2,000 *
Donald F. Flynn................................. 250,000 *
Roderick M. Hills............................... 0 *
Peer Pedersen................................... 5,000 *
James R. Peterson............................... 0 *
John C. Pope.................................... 0 *
Steven G. Rothmeier............................. 0 *
Alexander B. Trowbridge......................... 300 *
Current and Former Executive Officers
Robert S. Miller................................ 0 *
Dean L. Buntrock................................ 211,600 *
Jerry W. Caudle................................. 0 *
Herbert A. Getz................................. 40,000 *
Joseph M. Holsten............................... 307,666 *
William P. Hulligan............................. 50,000 *
James E. Koenig................................. 202,500 *
Ronald T. LeMay................................. 0 *
D. P. Payne..................................... 200 *
Phillip B. Rooney............................... 210,000 *
All directors and executive officers as agroup
including persons named above (27 persons)...... 1,708,099 *
- --------
*Less than 1 percent.
(1) Directors and executive officers included in the group have sole voting
power and sole investment power over WM International shares listed,
except (i) WM International shares covered by options exercisable within
60 days of February 1, 1998; and (ii) Messrs. Koenig, Payne, and
Trowbridge, and all executive officers and directors as a group (including
such individuals), who have shared voting and investment power
113
over 2,500, 200, 300 and 3,000 WM International shares, respectively. Such
WM International shares shown for Messrs. Koenig, Payne and Trowbridge are
held jointly with their respective spouses. Ownership of shares shown for
Messrs. Buntrock and Dempsey includes WM International shares not held
directly by them but held by or for the benefit of their spouses as to
which they have neither investment power nor voting power. WM International
shares were held by or for the benefit of such spouses of the following
persons at February 1, 1998 in the amounts indicated: Mr. Buntrock--1,500;
Mr. Dempsey--5,000. Each of the above named persons disclaims any
beneficial ownership of such shares.
(2) Excludes an aggregate of 300,000,000 WM International shares beneficially
owned by the Company that may be deemed beneficially owned by Messrs.
Miller and Holsten because each such person may be deemed to be an
affiliate of the Company. Excludes an aggregate of 45,000,000 WM
International shares beneficially owned by WTI that may be deemed
beneficially owned by Mr. Miller because he may be deemed to be an
affiliate of WTI. Each such person disclaims any beneficial ownership of
such WM International shares.
(3) The numbers and percentages of WM International shares shown in the table
above are based on the assumption that currently outstanding stock options
covering WM International shares which were exercisable within 60 days of
February 1, 1998 had been exercised as follows: Messrs. Buntrock, Flynn,
Getz, Koenig, Holsten and Rooney 200,000, 200,000, 40,000, 200,000,
306,666 and 200,000, respectively; and all executive officers and
directors as a group (including such individuals)--1,569,999. Such persons
and members of such group disclaim any beneficial ownership of the shares
subject to such options.
114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company does not know of any person who, as of February 1, 1998,
directly owned more than five percent of the Company's outstanding common
stock. The Company, however, received a copy of a Schedule 13D filed by a
group consisting of George Soros, Soros Fund Management LLC, Quantum
Industrial Partners LDC, QIH Management Investor, L.P., QIH Management, Inc.,
Stanley F. Druckenmiller, and Duquesne Capital Management, L.L.C. The Schedule
13D filed by such persons indicate that such persons may be deemed to be a
group within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended. The Company also received a Schedule 13G for the year ended
December 31, 1997 from Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHMS").
Pursuant to the aggregation and attribution rules relating to the beneficial
ownership of securities promulgated under the Securities Exchange Act of 1934,
as amended, BHMS is deemed to be the beneficial owner of such shares shown
because BHMS is an investment management company which exercises discretionary
investment management over accounts holding such shares. No managed account
alone owns five percent or more of the Company's common stock. The information
presented in the following table is taken from the above-referenced Schedules
13D and 13G:
TITLE AMOUNT AND NATURE
OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF
CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
------ ----------------------------------------- ----------------- ----------
Common Barrow, Hanley, Mewhinney & Strauss, Inc. 22,684,500 5.0
Stock One McKinney Plaza
3232 McKinney Avenue
Dallas, Texas 75204-2429
Common George Soros 25,225,600 5.5
Stock Soros Fund Management LLC
QIH Management Investor, L.P.
QIH Management, Inc.
Stanley F. Druckenmiller
888 Seventh Avenue, 33rd Floor
New York, New York 10106
Quantum Industrial Partners LDC
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Duquesne Capital Management, LLC
2579 Washington Road, Suite 322
Pittsburgh, Pennsylvania 15241-2591
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors has designated several committees of the Board,
including a Compensation and Stock Option Committee, an Audit Committee and a
Nominating and Governance Committee. The Board of Directors held an aggregate
of 17 regular and special meetings in 1997.
The Compensation and Stock Option Committee is responsible for making
recommendations to the Board of Directors regarding salaries and incentive
awards to be paid to executive officers of the Company, and for the
administration of and the grant of equity-based incentives under the Company's
1997 Equity Incentive Plan (the "1997 Company Plan"), and the administration
of the Company's 1982 Stock Option Plan, as amended (the "1982 Company Plan")
and 1992 Stock Option Plan (the "1992 Company Plan" and together with the 1982
Company Plan and the 1997 Company Plan, the "Employee Plans"). The Audit
Committee's functions include making recommendations to the Board of Directors
on the selection of the Company's independent auditors, reviewing the
arrangements for and scope of the independent auditors' examination, reviewing
the results of the annual audit, meeting with the independent auditors, the
Board of Directors and certain officers of the Company
115
to review the adequacy of internal controls and reporting, reviewing
compliance with the Company's policies on business ethics and environmental,
health and safety compliance and performing any other duties or functions
deemed appropriate by the Board. The Nominating and Governance Committee's
principal function is to identify and propose to the full Board qualified
nominees to fill vacancies on the Board as they occur, and to review and
report to the Board on director compensation, monitor and make recommendations
to the Board as to corporate governance matters and review and make
recommendations to the Board concerning the organization and functioning of
the Board and its committees.
The Compensation and Stock Option Committee currently consists of Messrs.
Pedersen (Chairman), Arnelle, Edwards, Montrone, Peterson and Dr. Cafferty;
the Audit Committee currently consists of Messrs. Hills (Chairman), Pope and
Rothmeier; and the Nominating and Governance Committee currently consists of
Messrs. Trowbridge (Chairman), Arnelle, Miller and Montrone.
During 1997, the Compensation and Stock Option Committee met eleven times,
the Audit Committee met eight times and the Nominating and Governance
Committee met five times. In 1997, during the time each director served in
such capacity, nine directors attended 100% of the aggregate of the regular
and special meetings of the Board of Directors and applicable committee
meetings, six other directors attended at least 85% of the aggregate of all
meetings of the Board of Directors and applicable committee meetings, and Dr.
Edwards attended 70% of the aggregate of all meetings of the Board of
Directors and applicable committee meetings.
116
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
When an option is exercised by an optionee under the Employee Plans or WTI's
stock option plans at a time when the fair market value of the underlying
stock exceeds the option exercise price, the difference is treated as ordinary
income to the optionee for income tax purposes and the company which issued
the options is entitled to a deduction equal to such amount. To facilitate an
optionee's purchase of stock upon exercise of such options, the Company and
WTI each had a policy prior to April 1998 of making available interest-free
loans, in an amount up to the equivalent of all applicable tax withholding
requirements, to optionees whose exercise of options results in ordinary
income to them in excess of $10,000. All such loans normally are required to
be repaid not later than April 15 in the year following the year in which such
loans were made, unless otherwise extended. There were no such loans from the
Company and WTI in excess of $60,000 made pursuant to such policy in 1997.
The Company and WTI also each makes available to optionees interest-free
loans for a period not to exceed 15 days to facilitate the exercise of options
and the sale of the underlying stock. The largest aggregate amounts of such
loans from the Company and WTI in excess of $60,000 which were outstanding to
the directors and executive officers of the Company since January 1, 1997 were
as follows: Mr. Koenig--$1,416,800. Such loan was repaid within the 15-day
period. The Company also extended Mr. Getz a loan in the amount of $2,136,744
to facilitate the exercise of WTI options during an 18-day period in which he
was precluded by Company policy from selling the underlying shares. Such loan
was repaid at the end of such period and did not remain outstanding at March
15, 1998. Mr. Getz was indemnified by the Company against approximately $5,800
of interest on such loan and the income tax consequences of such
indemnification.
In connection with his transfer in 1995 from CWM, where he was President, to
the Company, the Company entered into an employment agreement with D. P. Payne
under which Mr. Payne will be paid a minimum annual salary of $400,000. Mr.
Payne also is eligible to receive annual bonuses and all benefits generally
available to executives of the Company. The term of Mr. Payne's employment
under the agreement continues through December 31, 1999. Upon the death or
permanent disability of Mr. Payne, the Company will pay his then current
salary (including bonuses accrued as of the date of termination) for the
balance of the calendar year in which such death or disability occurs but in
no event for less than 180 days. If the Company terminates Mr. Payne's
employment, it will continue to pay him an amount equal to his base salary
until the end of the term of the agreement plus any unpaid but fully accrued
annual bonus for the prior calendar year payable under the Annual Plan, unless
the termination was for cause, in which case its obligations under the
agreement cease. During the term of the agreement and for two years after the
termination of the agreement, Mr. Payne has agreed not to compete with the
Company or its subsidiaries. In March 1997, the Compensation Committee
approved granting to Mr. Payne 34,500 restricted shares of common stock under
the Company's 1997 Equity Incentive Plan (the "1997 Equity Plan"). In June
1997, Mr. Payne's employment agreement was amended to provide that in the
event he should be terminated without cause during the term of the agreement
or at any time thereafter, he would be provided with a minimum of ten years'
service credit under the SERP. In February 1998, Mr. Payne entered into a new
employment security agreement with the Company which superseded his prior
agreement and which contains terms that are substantially similar to the
agreements discussed below that were extended to certain other senior officers
in March 1997. The terms of Mr. Payne's March 1997 restricted stock award
agreement are also substantially similar to those awarded to such other
officers at such time (see discussion below).
In June 1996, in connection with his election as the Company's Chief
Executive Officer, the Company entered into an amended and restated employment
agreement with Phillip B. Rooney. The agreement replaced an agreement
originally entered into between the Company and Mr. Rooney in 1986. Under the
agreement Mr. Rooney would be paid a minimum annual salary of $1,250,000 as
President and Chief Executive Officer of the Company. Mr. Rooney also was
eligible to receive annual bonuses and all benefits generally available to
executives of the Company. The Company also agreed to provide Mr. Rooney with
a split-dollar life insurance arrangement with a death benefit of
approximately $10 million. The term of Mr. Rooney's employment under the
agreement was to continue through June 6, 2001 and would have been
automatically extended on each anniversary date for a period of five years
from such anniversary date unless either party gave written notice of
termination prior to the anniversary date. Upon the death or permanent
disability of Mr. Rooney, the Company
117
would have paid annually $2,500,000 for the balance of the term of the
agreement. If the Company breached or terminated the agreement or reduced the
nature and scope of Mr. Rooney's authority and duties, it would have continued
to pay him for five years unless the termination was for cause, in which case
its obligations under the agreement would have ceased. In the event of a
change in control of the Company, Mr. Rooney was entitled to elect to
terminate the agreement and receive a lump sum payment of three times his
average annual compensation (including bonuses) over the immediately preceding
five years, which amount would be increased should an excise tax be imposed on
him because of the payment. Were a change in control of the Company to have
occurred on December 31, 1997 and if Mr. Rooney's employment with the Company
were terminated as provided in the employment agreement, it is estimated that
Mr. Rooney would have been eligible to receive approximately $5,457,620
(assuming no increase for any excise tax). During the term of the agreement
and for a period of three years thereafter, Mr. Rooney agreed not to compete
with the Company or its subsidiaries. In connection with Mr. Rooney's
resignation as President and Chief Executive Officer on February 17, 1997, the
Company gave notice of its decision to terminate such agreement. As a result
of such notice, the agreement will terminate on February 17, 2002, unless
earlier terminated pursuant to the agreement. During 1997, Mr. Rooney began to
receive cash compensation under the agreement at an annual rate of $2,500,000
in lieu of all salary, bonuses, incentive or other performance-based
compensation and the Compensation Committee accelerated the vesting of all
unvested stock options held by Mr. Rooney.
In August 1996, the Company entered into employment agreements with James E.
Koenig, former Executive Vice President of the Company, and Herbert A. Getz,
Senior Vice President and General Counsel of the Company (the "Executives").
The agreements provide that Mr. Koenig would be paid a minimum annual salary
of $600,000 and Mr. Getz would be paid a minimum annual salary of $450,000.
Each of the Executives also would be eligible to receive annual bonuses and
all benefits generally available to executives of the Company. The term of the
Executive's employment under each of the agreements continues until August 14,
1999 and is automatically extended on each anniversary date for a period of
three years from such anniversary date unless the Company gives notice of
termination, in which case the term is automatically extended and expires
three years from the date of such notice. Upon the death or permanent
disability of the Executive, the Company will pay annually the Executive's
then current base salary for thirty-six months. If the Company terminates the
agreement or reduces the nature and scope of the Executive's duties or
relocates the primary employment location of the Executive, it will continue
to pay him his then current base salary and his prorated annual bonus and long
term bonus for three years unless the termination was for cause, in which case
its obligations under the agreement cease. In the event of a change of control
of the Company, the Executive may elect to terminate the agreement and receive
a lump sum payment of three times his average annual compensation (including
bonuses) over the immediately preceding five years, which amount will be
increased should an excise tax be imposed on him because of the payment. Were
a change in control to have occurred on December 31, 1997 and if each
Executive's employment with the Company were terminated as provided in the
employment agreements, it is estimated that Messrs. Koenig and Getz would have
been eligible to receive approximately $2,113,081 and $1,479,101, respectively
(assuming no increase for any excise tax). During the term of the agreements,
and for a period of one year thereafter, each Executive has agreed not to
compete with the Company or its subsidiaries. Concurrently with the execution
of the employment agreements, the Company granted to Mr. Koenig 45,000 shares
of its common stock and to Mr. Getz 35,000 shares of its common stock, subject
in each case to a restricted stock agreement. Under the terms of the
restricted stock agreements, the Executive cannot sell, assign, pledge or
otherwise transfer such shares until the expiration of the period of the
covenant not to compete contained in the employment agreement or his death or
permanent disability. Except as provided below, if the Executive voluntarily
terminates his employment prior to the tenth anniversary of the grant of such
shares, all shares shall be forfeited. If such termination occurs after such
tenth anniversary, such shares shall be vested, but remain subject to such
restrictions. Vesting accelerates upon termination by the Company of the
Executive's employment other than for cause, upon his retirement on or after
reaching age 60, if the Company reduces the nature or scope of his authority
and duties or his compensation or changes the location of his employment, or
upon his death or permanent disability. Dividends upon such shares are deemed
to be reinvested in additional shares and subject to the same restrictions. In
connection with Mr. Koenig's resignation as Executive Vice President on
October 31, 1997, the Company gave notice of its decision to terminate Mr.
Koenig's employment
118
agreement. As a result of such notice, the agreement will terminate on October
31, 2000, unless earlier terminated pursuant to the agreement. During 1997,
Mr. Koenig began to receive cash compensation at an annual rate of $600,000.
On March 10, 1998, the Company's Board of Directors approved an amendment to
Mr. Getz's employment agreement to fix the amounts payable thereunder in the
event the Company terminates Mr. Getz's employment without cause or he is
constructively discharged at $900,000 per year. This amount represents his
current base salary plus his target annual and long-term incentive levels. In
consideration thereof, the Company obtained a commitment from Mr. Getz to
remain with the Company through the Merger with USA Waste and for a reasonable
transition time thereafter, which will be until at least June 30, 1999 unless
terminated earlier by the Company.
In March 1997, the Company's Board of Directors approved an employment
security agreement with John D. Sanford, the Company's Senior Vice President
and Chief Financial Officer. Mr. Sanford voluntarily resigned on October 29,
1997. The term of the agreement was to continue until March 11, 1999, and was
to be automatically extended on each anniversary date for a period of two
years from such anniversary date unless a party were to give 30 days' prior
written notice of termination. If the Company were to have terminated Mr.
Sanford's employment, or reduced the nature and scope of Mr. Sanford's duties
or relocated his primary employment location, it would have continued to pay
him his then current base salary for two years and his prorated annual bonus
for the year of such termination, reduction or relocation, unless the
termination was for cause, in which case its obligations under the agreement
would cease. In addition, the Company was required to request the Compensation
Committee to accelerate all of Mr. Sanford's unvested stock options. During
the term of the agreement and for a period of one year thereafter, Mr. Sanford
agreed not to compete with the Company or its subsidiaries. The Compensation
Committee also granted to Mr. Sanford 28,800 restricted shares of its common
stock under the 1997 Equity Plan. Upon Mr. Sanford's voluntary termination of
his employment, all shares were forfeited.
In March 1997, the Company's Board of Directors approved employment security
agreements with Jerry W. Caudle, James E. O'Connor, Michael J. Cole and L.
Michael Collier, each a Senior Vice President of the Company, and Donald R.
Chappel, Vice President and Acting Chief Financial Officer of the Company, the
terms of which are substantially similar to Mr. Sanford's employment security
agreement. The Compensation Committee also granted shares of restricted common
stock under the Company's 1997 Equity Plan to such officers in the following
amounts: Mr. Caudle--23,900; Mr. O'Connor--23,600; Mr. Cole--23,200; Mr.
Collier--23,900; and Mr. Chappel--17,700. Under the terms of the restricted
stock award agreement entered into in connection with this grant, and except
as provided below, the officer will not be able to sell, assign, pledge or
otherwise transfer such shares prior to ten years from the date of the grant.
If the officer voluntarily terminates his employment before the tenth
anniversary of the date of the grant, or if he should be terminated by the
Company for cause, all shares will be forfeited. Vesting of all such shares
will accelerate upon a change in control of the Company, the officer's
retirement after age 62, or his death or disability. If the officer's
employment is terminated without cause, the vesting of such shares will be
accelerated at 2.5% of the grant for every three months of completed service
after the date of the grant. Release of vested shares will occur upon
satisfaction of the obligation not to compete under the officer's employment
security agreement. Dividends upon such shares will be deemed to be reinvested
in additional shares and subject to the same restrictions. The Company also
entered into a similar agreement with Mark T. Spears, Vice President and
Controller of the Company, in July 1997, but without making a grant of
restricted shares.
In June 1997, the Company's Board of Directors approved an employment
security agreement with Joseph M. Holsten, the Company's Executive Vice
President and Chief Operating Officer. The term of the agreement continues
until June 20, 2000, provided that unless a party gives 30 days' prior written
notice on June 20, 1998 and on each successive June 20, the term of the
agreement shall be renewed for a period ending on the earlier of the date
three years from such June 20 or the date of his sixty-second birthday unless
earlier terminated pursuant to the terms of the agreement. The agreement
provides for Mr. Holsten's salary to be increased to $650,000 as of June 20,
1997, and for him to be paid a cash bonus of $300,000 for 1997. If the Company
terminates Mr. Holsten's employment, or reduces the nature and scope of Mr.
Holsten's duties or relocates his primary employment location, it will
continue to pay him his then current base salary for three years and his
prorated
119
annual and long term incentive plan compensation with respect to any
participation rights in the Company's annual or long term incentive plans
which have been awarded prior to the date of the notice of termination, unless
the termination was for cause, in which case all of the Company's obligations
under the agreement will cease. In addition, under such circumstances the
Company will request the Compensation Committee to accelerate all of Mr.
Holsten's unvested stock options. During the term of the agreement and for a
period of one year thereafter or during the three-year period after
termination, if longer, Mr. Holsten has agreed not to compete with the Company
or its subsidiaries. The Compensation Committee also granted to Mr. Holsten
55,000 shares of restricted common stock under the 1997 Equity Plan. The terms
of Mr. Holsten's restricted stock award agreement are substantially similar to
those extended to certain other senior officers in March 1997. The
Compensation Committee also approved granting to Mr. Holsten options to
acquire 100,000 shares of the Company's common stock under the 1997 Equity
Plan. In connection with the agreement, the Company has agreed to loan Mr.
Holsten $1,000,000 to purchase shares of the Company's common stock at an
annual rate equal to the three month London Interbank Offered Rate for the
first London business day of each quarter that the loan is outstanding.
In June 1997, the Company entered into a Supplemental Retirement Benefit
Agreement with Thomas C. Hau, then the Company's Vice President, Controller
and Principal Accounting Officer, which provides that, if Mr. Hau remains
employed by the Company until at least April 1, 1998, or such earlier date as
his employment is terminated as a result of death, disability or involuntary
termination other than for cause, the monthly SERP benefit payable to Mr. Hau
shall be equal to three percent of Mr. Hau's Final Average Compensation per
year of service, and that Mr. Hau's benefits under the Company's Non-Qualified
Profit Sharing and Savings Plus Plan will be vested.
Effective July 13, 1997, the Company entered into an employment agreement
with Ronald T. LeMay, in connection with his election as Chairman of the
Board, President and Chief Executive Officer of the Company. Mr. LeMay
voluntarily resigned on October 29, 1997. The term of Mr. LeMay's employment
under the agreement was to continue until July 13, 2002, and was to be
automatically extended for additional one-year periods after such date unless
either party were to give at least 12 months prior written notice electing not
to extend the term of employment. The employment agreement provided that Mr.
LeMay would be paid an annual base salary of $1,500,000, subject to increase
in the discretion of the Board of Directors, and would participate in the
Company's Corporate Incentive Bonus Plan with a target bonus opportunity equal
to 80% of his base salary and with his 1997 incentive award to be not less
than $1 million. The agreement also provided that Mr. LeMay would participate
in the LTIP, with guaranteed minimum payouts of $350,000 and $250,000 for the
performance periods ending in 1998 and 1999, respectively. The agreement
further provided that Mr. LeMay would be awarded options to acquire 500,000
shares of the Company's common stock in each of four years beginning in April
1998 at an exercise price not less than the closing sale price of the common
stock on the date of grant. Each such future option grant would have vested
nine and one-half years after the date of grant, provided that if the price of
a share of the Company's common stock were at least 1.6105 times the exercise
price for at least 30 trading days within a consecutive period of 45 trading
days between the fourth and fifth anniversaries of the date of grant, that
grant would become exercisable on the fifth anniversary of the date of the
grant.
Pursuant to the employment agreement, Mr. LeMay was granted under the 1997
Equity Plan (a) 353,000 restricted shares of the Company's common stock with
terms substantially similar to those of Mr. Caudle's restricted stock award
described above, except that the restrictions were to lapse with respect to
20% of the restricted shares on each of the first five anniversaries of the
award date, and (b) options to purchase a total of two million shares of the
Company's common stock at an exercise price of $33.10 per share. Under the
employment agreement, Mr. LeMay was also granted stock appreciation rights
with respect to 500,000 shares of Sprint Corporation common stock at an
exercise price of $47.9375 per share, which were to become exercisable on June
9, 2002 and expire on June 8, 2007. Mr. LeMay was granted stock appreciation
rights with respect to an additional 500,000 shares of Sprint Corporation
common stock at the same exercise price, which were to become exercisable on
the fifth anniversary of the grant date only if the fair market value of
Sprint Corporation common stock were at least $95.875 per share on any 30
trading days within a consecutive period of 45 trading days between the fourth
and fifth anniversaries of the grant date, or alternatively, if such condition
were not met, on
120
the last day of such a 45-day period between the fourth and sixth
anniversaries of the grant date but only if the fair market value of Sprint
Corporation common stock were at least $95.875 on any 30 trading days during
such period. Under the employment agreement, Mr. LeMay also received credit
for 12 years of benefit and eligibility service under the SERP upon
commencement of employment (with his SERP benefits to vest at the rate of 20%
on each of the first five anniversaries of the effective date of the
employment agreement and to be offset by any other pension benefit he may have
received from the Company or Sprint Corporation), and was also entitled to a
survivor benefit in the form of 10 annual payments each equal to 25% of his
highest annual salary during the five-year period immediately preceding his
death if he were to die before retirement (or if he were to die after retiring
or becoming permanently disabled, a benefit equal to 300% of his highest
annual salary during the five-year period immediately prior to the time of his
retirement or disability, payable either in a lump sum or in installments). At
least 13 months before retirement, Mr. LeMay was permitted to elect a
supplemental retirement benefit in lieu of all or a portion of such survivor
benefit.
In the event Mr. LeMay's employment were terminated due to his death, the
Company would have been required to pay his base salary through the end of the
month in which the death occured, he would have received pro rata payouts of
any annual incentive and LTIP awards, his outstanding stock options would have
been exercisable until the earlier of the first anniversary of the date of
death or the tenth anniversary of the date of grant, the restrictions on his
restricted stock would have lapsed, and the Sprint Corporation stock
appreciation rights would have been exercisable in accordance with their
terms. In the event of his termination due to disability, Mr. LeMay would have
been entitled to receive substantially the same benefits. In the event Mr.
LeMay's employment were terminated without cause or constructively terminated
without cause, the Company would have been obligated to pay his base incentive
and LTIP awards plus an annual incentive award based on his target bonus
opportunity for 24 months following the date of termination, his outstanding
stock options would have been exercisable until the earlier of the third
anniversary of the date of termination or the tenth anniversary of the date of
grant, the restrictions on his restricted stock would have lapsed, and the
Sprint Corporation stock appreciation rights would have been exercisable in
accordance with their terms. In the event of termination without cause or
constructive termination without cause after a change in control of the
Company, Mr. LeMay would have received the same benefits, except that in lieu
of the salary and annual incentive benefits described above, Mr. LeMay would
have received his base salary and annual incentive awards for 36 months
following termination, which amount would have been increased should an excise
tax be imposed on him because of the payments. During the term of his
employment and for a period of three years thereafter, Mr. LeMay agreed not to
compete with the Company or its subsidiaries. As a result of his voluntary
resignation on October 29, 1997, Mr. LeMay forfeited all benefits under his
employment agreement other than salary through the date of resignation.
Effective October 29, 1997, the Company entered into an employment agreement
with Robert S. Miller, Acting Chairman of the Board and Chief Executive
Officer of the Company. The term of Mr. Miller's employment under the
agreement continues until the earlier of (a) approval by the Board of
Directors of the Company of the hiring of a successor as Chairman of the Board
and Chief Executive Officer, (b) Mr. Miller's death or disability, or (c)
termination of his service upon written notice given either by Mr. Miller or
the Board at least seven days prior to the effective date of such termination.
The agreement provides that Mr. Miller will be paid a salary at the annual
rate of $600,000 for so long as he serves as Acting Chairman of the Board and
Chief Executive Officer. Pursuant to the agreement, Mr. Miller was granted an
option under the 1997 Company Plan to purchase 75,000 shares of common stock
at an exercise price of $23.375, exercisable upon the earlier of (a) the
Board's approval of the hiring of Mr. Miller's successor as Chairman of the
Board and Chief Executive Officer, (b) Mr. Miller's death or disability, or
(c) the termination of Mr. Miller's employment by the Board. Upon becoming
exercisable, the option will remain exercisable through the earlier of
November 3, 2007 or the ninetieth day after Mr. Miller ceases to serve as a
member of the Board. The salary and option described above were Mr. Miller's
exclusive compensation for his service as Acting Chairman of the Board and
Chief Executive Officer of the Company. On March 10, 1998, the Board appointed
Robert S. Miller as Chief Executive Officer, approved an increase in his
annual salary to $900,000, named him as a participant in the Annual Plan and
established his 1998 annual incentive target level at 80% of his salary, and
granted him an option for 235,000
121
shares of the Company's common stock at an exercise price of $24.3875 on the
same terms as his November 4, 1997 stock option grant. The options expire ten
years after their grant or, if earlier, 90 days following Mr. Miller's
retirement from the Board.
On February 5, 1998, the Company sold an aircraft with a net book value of
$11,491,835 to Dean L. Buntrock, former Chairman of the Board and Chief
Executive Officer of the Company, for $14,058,886 in cash. The price was
determined after the Company obtained four independent appraisals ranging from
$13,772,998 to $14,500,000, with an average of $14,165,124, which was then
reduced by half of the estimated amount of an avoided broker's commission. The
Company also entered into an agreement pursuant to which the Company may lease
the aircraft on a non-exclusive basis. The lease has a one year term, subject
to termination by either party at any time upon thirty days' notice. The
Company also entered into a sublease of hangar space for the aircraft for a
term of one year, renewing annually thereafter, pursuant to which the Company
will recoup approximately 25% of the Company's charges for rent, taxes,
utilities, common area maintenance and other support costs at the Company's
hangar. The Company also entered into a management services agreement pursuant
to which the Company will provide flight crews, maintenance, recordkeeping and
scheduling services for the aircraft. The Company is to be paid a management
fee of $60,000 per year, two pilots' salaries and benefits, one mechanic's
salary and benefits, and 100% of the necessary recurring training costs for
two pilots and one mechanic. In addition, Mr. Buntrock will pay separately all
direct expenses connected with the operation and maintenance of the aircraft.
The Management Services Agreement will have a term of one year. If this
agreement is terminated, the hangar sublease will terminate as well. The terms
of these agreements with Mr. Buntrock were reviewed and approved by the Audit
Committee and the Board of Directors as being fair to the Company and in its
best interests.
On March 10, 1998, the Board approved an employment security agreement with
Paul G. George as the Company's new Senior Vice President--Human Resources.
The term of the agreement continues until March 10, 1999 and automatically
extends on each March 10 for a period of two years from such anniversary date
unless a party were to give 30 days' prior written notice of termination. If
the Company were to terminate Mr. George's employment, or reduce his salary,
benefits or the nature and scope of Mr. George's duties or relocate his
primary employment location, it would continue to pay him his then current
base salary for two years, his prorated annual bonus for the year of such
termination, reduction or relocation and all of Mr. George's unvested stock
options will automatically accelerate, unless the termination was for cause,
in which case its obligations under the agreement would cease. The agreement
also gives Mr. George protection in the form of a tax gross-up payment in the
event an excise tax under Internal Revenue Code Section 4999 is triggered as a
result of the payments under the agreement. During the term of the agreement
and for a period of one year thereafter, Mr. George has agreed not to compete
with the Company or its subsidiaries.
122
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K.
(a) Financial Statements included in Item 8.
(i) Consolidated Statements of Income for the four years ended December
31, 1997;
(ii) Consolidated Balance Sheets--December 31, 1995, 1996 and 1997;
(iii) Consolidated Statements of Stockholders' Equity for the four years
ended December 31, 1997;
(iv) Consolidated Statements of Cash Flows for the four years ended
December 31, 1997;
(v) Notes to Consolidated Financial Statements; and
(vi) Report of Independent Public Accountants.
(b) Schedule.
Schedule II--Valuation and Qualifying Accounts.
All other schedules have been omitted because the required information is
not significant or is included in the financial statements or the notes
thereto, or is not applicable.
(c) Exhibits.
The exhibits to this report are listed in the Exhibit Index elsewhere
herein. Included in the exhibits listed therein are the following exhibits
which constitute management contracts or compensatory plans or arrangements:
(i) Waste Management, Inc. 1982 Stock Option Plan, as amended to March
11, 1988 (Exhibit 10.3 to registrant's 1988 annual report on Form 10-K);
(ii) Deferred Director's Fee Plan, as amended (Exhibit 10.3 to
registrant's 1990 annual report on Form 10-K);
(iii) Director's Phantom Stock Plan (Exhibit 10.9 to registrant's 1984
annual report on Form 10-K);
(iv) Amended and Restated Employment Agreement, dated as of June 17,
1996, by and between the registrant and Phillip B. Rooney (Exhibit 10.1 to
registrant's report on Form 10-Q for the quarter ended September 30, 1996);
(v) Waste Management, Inc. Corporate Incentive Bonus Plan (Exhibit B to
registrant's Proxy Statement for its 1995 Annual Meeting of Stockholders);
(vi) Waste Management, Inc. Supplemental Executive Retirement Plan, as
amended and restated as of November 11, 1997 (filed with this report);
(vii) Chemical Waste Management, Inc. 1992 Stock Option Plan (Exhibit
10.19 to Chemical Waste Management, Inc.'s 1991 annual report on Form 10-
K);
(viii) Employment Security Agreement dated July 28, 1997 between the
registrant and Mark T. Spears (filed with this report);
(ix) Chemical Waste Management, Inc. 1986 Stock Option Plan, as amended
(Exhibit 10.1 to Chemical Waste Management, Inc.'s 1989 annual report on
Form 10-K);
(x) Waste Management, Inc. Non-Qualified Profit Sharing and Savings Plus
Plan (Exhibit 10.11 to registrant's 1995 annual report on Form 10-K);
123
(xi) Amendment No. 1 to Waste Management, Inc. Non-Qualified Profit
Sharing and Savings Plus Plan (Exhibit 10.12 to registrant's 1996 annual
report on Form 10-K);
(xii) Amendment No. 2 to Waste Management, Inc. Non-Qualified Profit
Sharing and Savings Plan (filed with this report);
(xiii) Waste Management, Inc. Director's Charitable Endowment Plan
(Exhibit 10.20 to registrant's 1989 annual report on Form 10-K);
(xiv) Supplemental Retirement Benefit Agreement dated as of January 1,
1991 by and between registrant and Donald F. Flynn (Exhibit 10.17 to
registrant's 1990 annual report on Form 10-K);
(xv) Restricted Unit Plan for Non-Employee Directors of Wheelabrator
Technologies Inc. as amended through June 10, 1991 (Exhibit 19.03 to the
report on Form 10-Q of Wheelabrator Technologies Inc. for the quarter ended
June 30, 1991);
(xvi) 1988 Stock Plan for Executive Employees of Wheelabrator
Technologies Inc. and its subsidiaries (the "WTI 1988 Stock Plan") (Exhibit
28.1 to Amendment No. 1 to the registration statement of Wheelabrator
Technologies Inc. on Form S-8, Registration No. 33-31523);
(xvii) Amendments dated as of September 7, 1990 to the WTI 1988 Stock
Plan (Exhibit 19.02 to the 1990 annual report on Form 10-K of Wheelabrator
Technologies Inc.);
(xviii) Amendment dated as of November 1, 1990 to the WTI 1988 Stock Plan
(Exhibit 19.04 to the 1990 annual report on Form 10-K of Wheelabrator
Technologies Inc.);
(xix) 1986 Stock Plan for Executive Employees of Wheelabrator
Technologies Inc. and its subsidiaries (the "WTI 1986 Stock Plan") (Exhibit
28.2 to Amendment No. 1 to the registration statement of Wheelabrator
Technologies Inc. on Form S-8, Registration No. 33-31523);
(xx) Amendment dated as of November 1, 1990 to the WTI 1986 Stock Plan
(Exhibit 19.03 to the 1990 annual report on Form 10-K of Wheelabrator
Technologies Inc.);
(xxi) Amended and Restated Employment Agreement dated as of June 20, 1997
between the registrant and D. P. Payne (Exhibit 10.21 to Post-Effective
Amendment No. 2 to registrant's registration statement on Form S-1,
Registration No. 333-01327);
(xxii) Waste Management, Inc. 1992 Stock Option Plan (Exhibit 10.31 to
registrant's registration statement on Form S-1, Registration No. 33-
44849);
(xxiii) Waste Management, Inc. Amended and Restated 1992 Stock Option
Plan for Non-Employee Directors (Exhibit 10.23 to registrant's 1996 annual
report on Form 10-K);
(xxiv) Deferred Director's Fee Plan of Wheelabrator Technologies Inc.
adopted June 10, 1991 (Exhibit 19.02 to the quarterly report on Form 10-Q
of Wheelabrator Technologies Inc. for the quarter ended June 30, 1991);
(xxv) Waste Management International plc Share Option Plan (Exhibit 10.1
to the registration statement on Form F-1 of Waste Management International
plc, Registration No. 33-46511);
(xxvi) Amendment dated as of December 6, 1991 to the WTI 1986 Stock Plan
(Exhibit 19.01 to the 1991 annual report on Form 10-K of Wheelabrator
Technologies Inc.);
(xxvii) Amendment dated as of December 6, 1991 to the WTI 1988 Stock Plan
(Exhibit 19.02 to the 1991 annual report on Form 10-K of Wheelabrator
Technologies Inc.);
(xxviii) Amendment dated as of December 6, 1991 to the Restricted Unit
Plan for Non-Employee Directors of Wheelabrator Technologies Inc. (Exhibit
19.05 to the 1991 annual report on Form 10-K of Wheelabrator Technologies
Inc.);
(xxix) Waste Management, Inc. Long Term Incentive Plan (as amended and
restated as of January 27, 1994) (Exhibit A to registrant's Proxy Statement
for its 1995 Annual Meeting of Stockholders);
124
(xxx) Employment Agreement dated as of August 15, 1996 between the
registrant and James E. Koenig (Exhibit 10.2 to registrant's report on Form
10-Q for the quarter ended September 30, 1996);
(xxxi) Employment Agreement dated as of August 15, 1996 between the
registrant and Herbert A. Getz (Exhibit 10.3 to registrant's report on Form
10-Q for the quarter ended September 30, 1996);
(xxxii) Restricted Stock Agreement dated as of August 15, 1996 between
the registrant and James E. Koenig (Exhibit 10.4 to registrant's report on
Form 10-Q for the quarter ended September 30, 1996);
(xxxiii) Restricted Stock Agreement dated as of August 15, 1996 between
the registrant and Herbert A. Getz (Exhibit 10.5 to registrant's report on
Form 10-Q for the quarter ended September 30, 1996);
(xxxiv) Letter Agreement dated as of February 17, 1997 between the
registrant and Phillip B. Rooney (Exhibit 10.38 to registrant's 1996 annual
report on Form 10-K);
(xxxv) Waste Management, Inc. 1997 Equity Incentive Plan (Exhibit A to
registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders);
(xxxvi) Employment Security Agreement dated as of March 11, 1997 between
the registrant and Jerry W. Caudle (filed with this report);
(xxxvii) Employment Security Agreement dated as of June 20, 1997 between
the registrant and Joseph M. Holsten (incorporated by reference to Exhibit
10.40 to Post-Effective Amendment No. 2 to registrant's registration
statement on Form S-1, Registration No. 333-01327);
(xxxviii) Employment Agreement dated as of July 13, 1997 between the
registrant and Ronald T. LeMay (Exhibit 10.1 to registrant's report on Form
8-K dated August 8, 1997);
(xxxix) Letter Agreement dated as of November 4, 1997 between the
registrant and Robert S. Miller (filed with this report);
(xl) Form of restricted stock agreement between registrant and certain
Directors of the registrant (filed with this report);
(xli) Amendment to Employment Agreement dated as of March 10, 1998
between the registrant and Herbert A. Getz (filed with this report);
(xlii) Loan and Indemnification Agreement dated as of November 25, 1997
between the registrant and Herbert A. Getz (filed with this report);
(xliii) Employment Security Agreement dated as of February 9, 1998
between the registrant and Paul G. George (filed with this report);
(xliv) Employment Security Agreement dated as of March 11, 1997 between
the registrant and James E. O'Connor (filed with this report);
(xlv) Employment Security Agreement dated as of March 11, 1997 between
the registrant and Luther Michael Collier (filed with this report);
(xlvi) Employment Security Agreement dated as of March 11, 1997 between
the registrant and Michael J. Cole (filed with this report);
(xlvii) Employment Security Agreement dated as of March 11, 1997 between
the registrant and Donald R. Chappel (filed with this report);
(xlviii) Form of Restricted Stock Award Agreement under the Waste
Management, Inc. 1997 Equity Incentive Plan (Exhibit 10.40 to Post-
Effective Amendment No. 2 to registrant's registration statement on Form S-
1, Registration No. 333-01327); and
(xlix) Restricted Stock Award Certificate dated as of June 20, 1997
between the registrant and Joseph M. Holsten (Exhibit 10.40 to Post-
Effective Amendment No. 2 to registrant's registration statement on Form S-
1 Registration No. 333-01327).
125
(d) Reports on Form 8-K.
During the fourth quarter of 1997, the Company filed reports on Form 8-K as
follows:
(i) a report dated October 10, 1997 reporting under Item 5 that on
October 10, 1997 the registrant issued a new release announcing its results
from continuing operations for the quarter ended September 30, 1997 would
be below analysts' expectations and announcing the registrant might record
a charge to income that could be material to its results of operations for
the year.
(ii) a report dated October 29, 1997 reporting under Item 5 that the
registrant's Board of Directors had received and accepted the resignation
of the registrant's Chairman and Chief Executive Officer, Ronald T. LeMay,
and that the Board had named Robert S. Miller, a director of the
registrant, as the Chairman of the Board and Acting Chief Executive
Officer. The report also reported under Item 5 that Senior Vice President
and Chief Financial Officer, John D. Sanford, had resigned from the
registrant, and Donald R. Chappel would serve as the registrant's acting
Chief Financial Officer. The report also announced that former Executive
Vice President, James E. Koenig, had resigned.
(iii) a report dated November 4, 1997 reporting under Item 5 that the
registrant's Board of Directors had elected two new directors, Roderick M.
Hills and John C. Pope, and that the Board had been expanded by one member
with the elections. In addition, the report announced the formation of a
Search Committee to seek a new Chief Executive Officer and certain changes
affecting three Board committees. The report also announced that the Board
had elected Mark T. Spears as Controller of the registrant, succeeding
Thomas C. Hau.
(iv) a report dated December 8, 1997 reporting under Item 5 that the
registrant had announced it had signed a definitive merger agreement with
its approximately 67% owned subsidiary, Wheelabrator Technologies Inc.,
under which the registrant will acquire approximately 53 million shares of
the subsidiary at a cash purchase price of $16.50 per share.
126
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
($000'S OMITTED)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AS RESTATED)
EFFECT OF
BALANCE CHARGED ACCOUNTS FOREIGN BALANCE
BEGINNING TO WRITTEN CURRENCY END OF
OF YEAR INCOME OFF OTHER(A) TRANSLATION YEAR
--------- ------- -------- -------- ----------- -------
1994--Reserve for doubt-
ful accounts (B)(C).... $57,279 $35,720 $(38,621) $5,072 $ 1,760 $61,210
1995--Reserve for doubt-
ful accounts (C)....... $61,210 $48,914 $(45,224) $1,814 $ 1,213 $67,927
1996--Reserve for doubt-
ful accounts (B)(C).... $67,927 $52,766 $(69,799) $4,374 $ (245) $55,023
1997--Reserve for doubt-
ful accounts (B) (C)... $55,023 $51,691 $(51,406) $ 641 $(2,605) $53,344
======= ======= ======== ====== ======= =======
- --------
(A) Reserves of companies accounted for as purchases.
(B) Includes reserves for doubtful long-term notes receivable.
(C) Excludes discontinued operations.
127
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN OAK BROOK,
ILLINOIS ON THE 30TH DAY OF MARCH 1998.
Waste Management, Inc.
/s/ Robert S. Miller
By___________________________________
Robert S. Miller
Chairman of the Board
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert S. Miller Director, Chairman of the
____________________________________ Board and Chief Executive
Robert S. Miller Officer
/s/ Jerry E. Dempsey Director
____________________________________
Jerry E. Dempsey
/s/ Donald F. Flynn Director
____________________________________
Donald F. Flynn
/s/ Peer Pedersen Director
____________________________________
Peer Pedersen
/s/ James R. Peterson Director
____________________________________
James R. Peterson
/s/ John C. Pope Director
____________________________________
John C. Pope
/s/ Alexander B. Trowbridge Director
____________________________________
Alexander B. Trowbridge
/s/ H. Jesse Arnelle Director March 30, 1998
____________________________________
H. Jesse Arnelle
/s/ Pastora San Juan Cafferty Director
____________________________________
Pastora San Juan Cafferty
/s/ James B. Edwards Director
____________________________________
James B. Edwards
/s/ Paul M. Montrone Director
____________________________________
Paul M. Montrone
/s/ Steven G. Rothmeier Director
____________________________________
Steven G. Rothmeier
/s/ Roderick M. Hills Director
____________________________________
Roderick M. Hills
/s/ Mark T. Spears Vice President, Controller
____________________________________ and Principal Accounting
Mark T. Spears Officer
/s/ Donald R. Chappel Vice President, Acting Chief
____________________________________ Financial Officer, Treasurer
Donald R. Chappel and Principal Financial
Officer
128
WASTE MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT*
1. Inapplicable
2. Inapplicable
3.1(a) Restated Certificate of Incorporation of registrant, as amended as of
May 24, 1985 (incorporated by reference to Exhibit 4.1 to registrant's
report on Form 10-Q for the quarter ended June 30, 1985)
3.1(b) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, recorded May 23, 1986 (incorporated by reference to Exhibit
4(c) to registrant's registration statement on Form S-8, Registration
No. 33-6265)
3.1(c) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, recorded May 15, 1987 (incorporated by reference to Exhibit
4.5(d) to registrant's registration statement on Form S-4, Registration
No. 33-15518)
3.1(d) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, filed May 19, 1989 (incorporated by reference to Exhibit
3(e) to registrant's registration statement on Form S-3, Registration
No. 33-30190)
3.1(e) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, filed May 18, 1990 (incorporated by reference to Exhibit
4(h) to registrant's registration statement on Form S-8, Registration
No. 33-35936)
3.1(f) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, filed May 14, 1993 (incorporated by reference to Exhibit
4(a) to registrant's report on Form 8-K dated May 14, 1993)
3.1(g) Certificate of Amendment of Restated Certificate of Incorporation of
registrant, filed May 9, 1997 (incorporated by reference to Exhibit
3(a) to registrant's report on Form 8-K dated May 9, 1997)
3.1(h) Conformed copy of Restated Certificate of Incorporation of registrant,
as amended (incorporated by reference to Exhibit 3(b) to registrant's
report on Form 8-K dated May 9, 1997)
3.2 By-laws of registrant, as amended and restated as of November 4, 1997
(incorporated by reference to Exhibit 3 to registrant's report on Form
10-Q for the quarter ended September 30, 1997)
4.1(a) Trust Indenture dated as of August 1, 1989 (incorporated by reference
to Exhibit 4.3(a) to registrant's 1990 annual report on Form 10-K)
4.1(b) First Supplemental Indenture dated as of December 1, 1990 (incorporated
by reference to Exhibit 4.3(b) to registrant's 1990 annual report on
Form 10-K)
4.2 Trust Indenture dated as of June 1, 1993 (incorporated by reference to
Exhibit 4 to the registrant's current report on Form 8-K dated July 15,
1993)
4.3 Credit Agreement (as amended and restated), dated as of December 29,
1997, among Waste Management, Inc., The Chase Manhattan Bank, as
administrative agent, and the lenders named therein, as amended
5. Inapplicable
6. Inapplicable
7. Inapplicable
- --------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that
Act is 1-7327, Chemical Waste Management, Inc.'s file number under that Act
was 1-9253 and Wheelabrator Technologies Inc.'s file number under that Act
is 0-14246.
EX-1
NUMBER AND DESCRIPTION OF EXHIBIT*
8. Inapplicable
9. None
10.1 Waste Management, Inc. 1982 Stock Option Plan, as amended to March 11,
1988 (incorporated by reference to Exhibit 10.3 to registrant's 1988
annual report on Form 10-K)
10.2 Deferred Director's Fee Plan, as amended (incorporated by reference to
Exhibit 10.3 to registrant's 1990 annual report on Form 10-K)
10.3 Director's Phantom Stock Plan (incorporated by reference to Exhibit 10.9
to registrant's 1984 annual report on Form 10-K)
10.4 Amended and Restated Employment Agreement, dated as of June 17, 1996, by
and between the registrant and Phillip B. Rooney (incorporated by
reference to Exhibit 10.1 to registrant's report on Form 10-Q for the
quarter ended September 30, 1996)
10.5 Waste Management, Inc. Corporate Incentive Bonus Plan (incorporated by
reference to Exhibit B to the registrant's Proxy Statement for its 1995
Annual Meeting of Stockholders)
10.6 Waste Management, Inc. Supplemental Executive Retirement Plan, as
amended and restated as of November 11, 1997
10.7 Waste Management, Inc. Long Term Incentive Plan, as amended and restated
as of January 27, 1994 (incorporated by reference to Exhibit A to the
registrant's Proxy Statement for its 1995 Annual Meeting of
Stockholders)
10.8 Employment Security Agreement dated as of July 28, 1997 between the
registrant and Mark T. Spears
10.9 Chemical Waste Management, Inc. 1986 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.1 to Chemical Waste Management,
Inc.'s 1989 annual report on Form 10-K)
10.10 Waste Management, Inc. Non-Qualified Profit Sharing and Savings Plus
Plan (incorporated by reference to Exhibit 10.11 to registrant's 1995
Annual Report on Form 10-K)
10.11 Amendment No. 2 to Waste Management, Inc. Non-Qualified Profit Sharing
and Savings Plus Plan
10.12 Amendment No. 1 to the Waste Management, Inc. Non-Qualified Profit
Sharing and Savings Plus Plan (incorporated by reference to Exhibit
10.12 to registrant's 1996 annual report on Form 10-K)
10.13 Waste Management, Inc. Director's Charitable Endowment Plan
(incorporated by reference to Exhibit 10.20 to registrant's 1989 annual
report on Form 10-K)
10.14 Supplemental Retirement Benefit Agreement dated as of January 1, 1991 by
and between registrant and Donald F. Flynn (incorporated by reference to
Exhibit 10.17 to registrant's 1990 annual report on Form 10-K)
10.15 Restricted Unit Plan for Non-Employee Directors of Wheelabrator
Technologies Inc. as amended through June 10, 1991 (incorporated by
reference to Exhibit 19.03 to the report on Form 10-Q of Wheelabrator
Technologies Inc. for the quarter ended June 30, 1991)
10.16 1988 Stock Plan for Executive Employees of Wheelabrator Technologies
Inc. and its subsidiaries (the "WTI 1988 Stock Plan") (incorporated by
reference to Exhibit 28.1 to Amendment No. 1 to the registration
statement of Wheelabrator Technologies Inc. on Form S-8, Registration
No. 33-31523)
10.17 Amendments dated as of September 7, 1990 to the WTI 1988 Stock Plan
(incorporated by reference to Exhibit 19.02 to the 1990 annual report on
Form 10-K of Wheelabrator Technologies Inc.)
- --------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that
Act is 1-7327, Chemical Waste Management, Inc.'s file number under that Act
was 1-9253 and Wheelabrator Technologies Inc.'s file number under that Act
is 0-14246.
EX-2
NUMBER AND DESCRIPTION OF EXHIBIT*
10.18 Amendment dated as of November 1, 1990 to the WTI 1988 Stock Plan
(incorporated by reference to Exhibit 19.04 to the 1990 annual report on
Form 10-K of Wheelabrator Technologies Inc.)
10.19 1986 Stock Plan for Executive Employees of Wheelabrator Technologies
Inc. and its subsidiaries (the "WTI 1986 Stock Plan") (incorporated by
reference to Exhibit 28.2 to Amendment No. 1 to the registration
statement of Wheelabrator Technologies Inc. on Form S-8, Registration
No. 33-31523)
10.20 Amendment dated as of November 1, 1990 to the WTI 1986 Stock Plan
(incorporated by reference to Exhibit 19.03 to the 1990 annual report on
Form 10-K of Wheelabrator Technologies Inc.)
10.21 Amended and Restated Employment Agreement dated as of June 20, 1997
between the registrant and D. P. Payne (incorporated by reference to
Exhibit 10.21 to Post-Effective Amendment No. 2 to registrant's
registration statement on Form S-1, Registration No. 333-01327)
10.22 Waste Management, Inc. 1992 Stock Option Plan (incorporated by reference
to Exhibit 10.31 to registrant's registration statement on Form S-1,
Registration No. 33-44849)
10.23 Waste Management, Inc. Amended and Restated 1992 Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit 10.23 to
registrant's 1996 annual report on Form 10-K)
10.24 Deferred Director's Fee Plan of Wheelabrator Technologies Inc. adopted
June 10, 1991 (incorporated by reference to Exhibit 19.02 to the
quarterly report on Form 10-Q of Wheelabrator Technologies Inc. for the
quarter ended June 30, 1991)
10.25 Waste Management International plc Share Option Plan (incorporated by
reference to Exhibit 10.1 to the registration statement on Form F-1 of
Waste Management International plc, Registration No. 33-46511)
10.26 Amendment dated as of December 6, 1991 to the WTI 1986 Stock Plan
(incorporated by reference to Exhibit 19.01 to the 1991 annual report on
Form 10-K of Wheelabrator Technologies Inc.)
10.27 Amendment dated as of December 6, 1991 to the WTI 1988 Stock Plan
(incorporated by reference to Exhibit 19.02 to the 1991 annual report on
Form 10-K of Wheelabrator Technologies Inc.)
10.28 Amendment dated as of December 6, 1991 to the Restricted Unit Plan for
Non-Employee Directors of Wheelabrator Technologies Inc. (incorporated
by reference to Exhibit 19.05 to the 1991 annual report on Form 10-K of
Wheelabrator Technologies Inc.)
10.29 First Amended and Restated International Business Opportunities
Agreement by and among registrant, Chemical Waste Management, Inc.,
Wheelabrator Technologies Inc., Waste Management International, Inc.,
Waste Management International plc and Rust International Inc., dated as
of January 1, 1993 (incorporated by reference to Exhibit 28 to the
registration statement on Form S-3 of Wheelabrator Technologies Inc.,
Registration No. 33-59606)
10.30 Amendment dated as of January 28, 1994 relating to the International
Business Opportunities Agreement (incorporated by reference to Exhibit
10.19 to the 1993 annual report on Form 10-K of Chemical Waste
Management, Inc.)
10.31 Chemical Waste Management, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.19 to the 1991 annual report on Form 10-K of
Chemical Waste Management, Inc.)
10.32 Amendment dated as of July 10, 1995 to the International Business
Opportunities Agreement (incorporated by reference to Exhibit 10 to the
quarterly report on Form 10-Q of Wheelabrator Technologies Inc. for the
quarter ended September 30, 1995)
10.33 Employment Agreement dated as of August 15, 1996 between the registrant
and James E. Koenig (incorporated by reference to Exhibit 10.2 to
registrant's report on Form 10-Q for the quarter ended September 30,
1996)
- --------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that
Act is 1-7327, Chemical Waste Management, Inc.'s file number under that Act
was 1-9253 and Wheelabrator Technologies Inc.'s file number under that Act
is 0-14246.
EX-3
NUMBER AND DESCRIPTION OF EXHIBIT*
10.34 Employment Agreement dated as of August 15, 1996 between the registrant
and Herbert A. Getz (incorporated by reference to Exhibit 10.3 to
registrant's report on Form 10-Q for the quarter ended September 30,
1996)
10.35 Restricted Stock Agreement dated as of August 15, 1996 between the
registrant and James E. Koenig (incorporated by reference to Exhibit
10.4 to registrant's report on Form 10-Q for the quarter ended September
30, 1996)
10.36 Restricted Stock Agreement dated as of August 15, 1996 between the
registrant and Herbert A. Getz (incorporated by reference to Exhibit
10.5 to registrant's report on Form 10-Q for the quarter ended September
30, 1996)
10.37 Letter Agreement dated as of February 17, 1997 between the registrant
and Phillip B. Rooney (incorporated by reference to Exhibit 10.38 to
registrant's 1996 Annual Report on Form 10-K)
10.38 Waste Management, Inc. 1997 Equity Incentive Plan (incorporated by
reference to Exhibit A to the registrant's Proxy Statement for its 1997
Annual Meeting of Stockholders)
10.39 Form of Restricted Stock Award Agreement under the Waste Management,
Inc. 1997 Equity Incentive Plan (incorporated by reference to Exhibit
10.40 to Post-Effective Amendment No. 2 to registrant's registration
statement on Form S-1, Registration No. 333-01327)
10.40 Employment Security Agreement dated as of June 20, 1997 between the
registrant and Joseph M. Holsten (incorporated by reference to Exhibit
10.40 to Post-Effective Amendment No. 2 to registrant's registration
statement on Form S-1, Registration No. 333-01327)
10.41 Restricted Stock Award Certificate dated as of June 20, 1997 between the
registrant and Joseph M. Holsten (incorporated by reference to Exhibit
10.40 to Post-Effective Amendment No. 2 to registrant's registration
statement on Form S-1, Registration No. 333-01327)
10.42 Employment Security Agreement dated as of March 11, 1997 between the
registrant and Jerry W. Caudle
10.43 Agreement and Plan of Merger dated as of March 10, 1998 among USA Waste
Services, Inc. ("USA Waste") Dome Merger Sub, Inc., and the registrant
(incorporated by reference to Exhibit 99.1 to the current report on Form
8-K dated March 10, 1998 of USA Waste)
10.44 Employment Security Agreement dated as of July 13, 1997 between the
registrant and Ronald T. LeMay (incorporated by reference to Exhibit
10.1 to registrant's report on Form 8-K dated August 8, 1997)
10.45 Letter Agreement dated as of November 4, 1997 between the registrant and
Robert S. Miller
10.46 Form of restricted stock agreement between the registrant and certain
directors of the registrant
10.47 Receivables Sale Agreement, dated as of December 29, 1997, among Waste
Management, Inc., Waste Management Financing Corporation, and the
Sellers named therein
10.48 Receivables Transfer and Servicing Agreement, dated as of December 29,
1997, among Waste Management, Inc., Waste Management Financing
Corporation, The Chase Manhattan Bank, as administrative agent, and the
participants named therein
10.49 Amendment to Employment Agreement dated as of March 10, 1998 between the
registrant and Herbert A. Getz.
10.50 Loan and Indemnification Agreement dated as of November 25, 1997 between
the registrant and Herbert A. Getz.
- --------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that
Act is 1-7327, Chemical Waste Management, Inc.'s file number under that Act
was 1-9253, Wheelabrator Technologies Inc.'s file number under that Act is
0-14246, and USA Waste Services, Inc.'s file number is 1-12154.
EX-4
NUMBER AND DESCRIPTION OF EXHIBIT*
10.51 Employment Security Agreement dated as of February 9, 1998 between the
registrant and Paul G. George.
10.52 Agreement and Plan of Merger dated as of December 8, 1997 by and among
the registrant, WMI Merger Sub, Inc., and WTI (incorporated by reference
to Appendix A to WTI's proxy statement for the special meeting of
stockholders to be held on March 30, 1998)
10.53 Employment Security Agreement dated as of March 11, 1997 between the
registrant and James E. O'Connor
10.54 Employment Security Agreement dated as of March 11, 1997 between the
registrant and Luther Michael Collier
10.55 Employment Security Agreement dated as of March 11, 1997 between the
registrant and Michael J. Cole
10.56 Employment Security Agreement dated as of March 11, 1997 between the
registrant and Donald R. Chappel
11. None
12. Computation of ratio of earnings to fixed charges
13. None
14. Inapplicable
15. Inapplicable
16. None
17. Inapplicable
18. None
19. Inapplicable
20. Inapplicable
21. List of subsidiaries of registrant
22. Inapplicable
23. Consent of Independent Public Accountants
24. None
25. Inapplicable
26. Inapplicable
27. Financial Data Schedule
28. None
- --------
*In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, Wheelabrator Technologies, Inc.'s file
number under that Act is 0-14246.
EX-5