<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarter Ended June 30, 1994 Commission File No. 1-9253
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
CHEMICAL WASTE MANAGEMENT, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2989152
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 Butterfield Road, Oak Brook, Illinois 60521
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 218-1500
------------------
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
--- ---
As of August 1, 1994, the registrant had issued and outstanding an aggregate of
209,135,093 shares of its common stock.
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
-----
PART I. Financial Information: PAGE
Consolidated balance sheets as of December 31, 1993
and June 30, 1994............................................... 3
Consolidated statements of income for the three-month and six-month
periods ended June 30, 1993 and 1994............................ 5
Consolidated statements of stockholders' equity for
the six-month periods ended June 30, 1993
and 1994........................................................ 6
Consolidated statements of cash flows for the
six-month periods ended June 30, 1993 and 1994.................. 7
Notes to consolidated financial statements........................... 8
Management's discussion and analysis of financial
condition and results of operations............................. 16
PART II. Other Information.......................................... 23
*****
2
<PAGE>
PART I. FINANCIAL INFORMATION
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(000's omitted)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,592 $ 1,748
Short-term investments 1,906 1,891
Accounts receivable, less reserve of
$14,040 in 1993 and $16,871 in 1994 512,986 543,746
Employee receivables 1,134 1,363
Costs and estimated earnings in excess of
billings on uncompleted contracts 185,867 199,872
Refundable income taxes 54,002 --
Prepaid expenses 78,905 71,623
---------- ----------
Total Current Assets $ 837,392 $ 820,243
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 402,954 $ 402,058
Buildings 234,837 238,301
Vehicles and equipment 898,262 912,824
Leasehold improvements 13,032 13,595
---------- ----------
$1,549,085 $1,566,778
Less-Accumulated depreciation
and amortization (382,157) (415,574)
---------- ----------
Total Property and Equipment, Net $1,166,928 $1,151,204
---------- ----------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net $ 708,473 $ 785,005
Investments 236,803 261,020
Sundry 133,069 134,655
Deferred income taxes 41,379 27,043
---------- ----------
Total Other Assets $1,119,724 $1,207,723
---------- ----------
Total Assets $3,124,044 $3,179,170
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(000's omitted except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Portion of long-term debt payable
within one year $ 186,086 $ 135,834
Accounts payable 173,155 152,194
Billings in excess of costs and estimated
earnings on uncompleted contracts 43,579 57,803
Accrued expenses 201,932 200,141
Accrued income taxes -- 5,845
---------- ----------
Total Current Liabilities $ 604,752 $ 551,817
---------- ----------
DEFERRED ITEMS $ 238,743 $ 212,625
---------- ----------
LONG-TERM DEBT:
Due to WMX Technologies, Inc. $1,134,596 $1,188,768
Other long-term debt, less portion
payable within one year 58,318 75,558
---------- ----------
Total Long-Term Debt $1,192,914 $1,264,326
---------- ----------
MINORITY INTEREST IN SUBSIDIARIES $ 392,716 $ 416,499
---------- ----------
COMMITMENTS AND CONTINGENCIES $ $
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 500,000,000 shares
authorized; 212,422,463 issued in 1993 and 1994 $ 2,124 $ 2,124
Additional paid-in capital 430,014 430,001
Cumulative translation adjustment (37,353) (29,984)
Retained earnings 336,930 368,516
---------- ----------
$ 731,715 $ 770,657
Less-Treasury stock, at cost; 3,291,170
shares in 1993 and 3,287,370 in 1994 (36,796) (36,754)
---------- ----------
Total Stockholders' Equity $ 694,919 $ 733,903
---------- ----------
Total Liabilities and
Stockholders' Equity $3,124,044 $3,179,170
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
1993 1994 1993 1994
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE $534,006 $583,428 $1,029,422 $1,106,835
-------- -------- ---------- ----------
COSTS AND EXPENSES:
Operating $424,815 $450,208 $ 815,016 $ 865,390
Selling and Administrative 70,313 73,605 137,922 146,904
Interest expense 8,342 15,019 15,024 28,068
Interest income (131) (659) (663) (1,627)
Equity in earnings of affiliate (3,545) (4,008) (6,670) (7,331)
Minority interest 9,868 7,093 19,376 14,236
Sundry expense (income), net (1,031) 724 (14,481) (1,110)
Gains on issuance of stock
by subsidiary (10,462) -- (10,462) --
-------- -------- ---------- ----------
Income Before Income Taxes $ 35,837 $ 41,446 $ 74,360 $ 62,305
Provision for Income Taxes 13,221 19,694 30,490 30,719
-------- -------- ---------- ----------
NET INCOME FOR THE PERIOD $ 22,616 $ 21,752 $ 43,870 $ 31,586
======== ======== ========== ==========
AVERAGE SHARES AND EQUIVALENT
SHARES OUTSTANDING DURING
THE PERIOD 211,348 209,274 211,968 209,242
======== ======== ========== ==========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.11 $ 0.10 $ 0.21 $ 0.15
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994
(unaudited)
(000's omitted)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED TREASURY
STOCK CAPITAL ADJUSTMENT EARNINGS STOCK
------ ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $2,123 $505,217 $(19,198) $658,439 $ --
Net income for the period -- -- -- 43,870 --
Cash dividends -- -- -- (21,193) --
Stock issued upon exercise
of stock options 1 1,465 -- -- --
Treasury stock received in
connection with exercise
of stock options -- -- -- -- (3)
Tax benefit of non-qualified
stock options exercised -- 448 -- -- --
Cumulative translation
adjustment of foreign
currency statements -- -- (12,151) -- --
Investment in Rust
International, Inc. -- (77,066) -- -- --
Stock repurchases
(1,787,000 shares) -- -- -- -- (24,124)
------ -------- -------- -------- --------
Balance at June 30, 1993 $2,124 $430,064 $(31,349) $681,116 $(24,127)
====== ======== ======== ======== ========
Balance at January 1, 1994 $2,124 $430,014 $(37,353) $336,930 $(36,796)
Net income for the period -- -- -- 31,586 --
Stock issued upon exercise
of stock options -- (13) -- -- 42
Cumulative translation
adjustment of foreign
currency statements -- -- 7,369 -- --
------ -------- -------- -------- --------
Balance at June 30, 1994 $2,124 $430,001 $(29,984) $368,516 $(36,754)
====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994
(unaudited)
(000's omitted)
<TABLE>
<CAPTION>
1993 1994
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 43,870 $ 31,586
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 52,473 68,757
Interest on LYONs 6,086 5,455
Undistributed earnings of equity investments (7,312) (7,331)
Gain from stock transactions of subsidiary (10,462) --
Gain on sale of property and equipment and investments (13,291) (257)
Changes in assets and liabilities net of effects
of acquired companies:
Accounts receivable 3,760 (6,971)
Costs and estimated earnings in excess of
billings on uncompleted contracts 481 (442)
Prepaid expenses and refundable income taxes 11,212 62,304
Accounts payable (11,683) (28,165)
Accrued expenses (49,476) (53,405)
Accrued income taxes -- 4,327
Deferred other items (17,692) (37,181)
Sundry 4,990 (5,409)
Minority interest in subsidiaries 15,935 22,614
Deferred income taxes 16,316 22,300
--------- --------
Net Cash from Operating Activities $ 45,207 $ 78,182
--------- --------
INVESTING ACTIVITIES
- --------------------
Short-term investments $ -- $ 15
Purchases of property and equipment (108,003) (53,455)
Transfer of property and equipment with WMX, net 8,955 (161)
Purchases of companies, net of cash acquired (221,790) (53,395)
Proceeds from sale of property and equipment and investments 37,869 15,972
--------- --------
Net Cash used for Investing Activities $(282,969) $(91,024)
--------- --------
FINANCING ACTIVITIES
- --------------------
Increase in borrowings from WMX $ 321,052 $ 54,172
Proceeds from issuance of indebtedness -- 17,976
Payments on debt (37,507) (60,179)
Common stock repurchases (24,124) --
Preferred stock repurchase (5,000) --
Proceeds from exercise of stock options, net 1,911 29
Dividends paid (21,193) --
--------- --------
Net Cash from Financing Activities $ 235,139 $ 11,998
--------- --------
Net Decrease in Cash $ (2,623) $ (844)
Cash at beginning of period 3,552 2,592
--------- --------
Cash at End of Period $ 929 $ 1,748
========= ========
Additional disclosure:
Liabilities assumed in acquisitions of businesses $ 166,012 $ 71,566
========= ========
Interest paid, net of amounts capitalized $ 8,938 $ 22,365
========= ========
Income taxes paid (refunds received), net $ 8,412 $(56,430)
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(000's omitted in all tables except per share amounts)
Summary of Accounting Policies-
The financial statements included herein have been prepared by Chemical Waste
Management, Inc. ("CWM" or the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations. The financial information
included herein reflects, in the opinion of the Company, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position and results of operations for the periods presented. The
results for interim periods are not necessarily indicative of results for the
entire year.
Certain amounts in previously issued financial statements have been reclassified
to conform to 1994 classifications.
Income Taxes -
The following table sets forth the provision for income taxes for the three
months and six months ended June 30, 1993 and 1994:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1993 1994 1993 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Currently payable $ 7,236 $ 8,167 $12,735 $ 3,856
Deferred 6,098 11,595 17,981 26,999
Amortization of deferred investment credit (113) (68) (226) (136)
------- ------- ------- -------
$13,221 $19,694 $30,490 $30,719
======= ======= ======= =======
</TABLE>
Consolidating Financial Statements -
The following consolidating statements of income show the Company's core
business and its Rust International Inc. ("Rust") subsidiary for the three
months and six months ended June 30, 1993 and 1994.
8
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 1993*
(unaudited)
(000's omitted except per share amount)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $167,094 $382,189 $(15,277) $534,006
-------- -------- -------- --------
Costs and Expenses:
Operating $127,747 $312,345 $(15,277) $424,815
Selling and administrative 32,651 37,662 -- 70,313
Interest expense 6,275 2,067 -- 8,342
Interest income (73) (58) -- (131)
Equity in earnings of affiliate -- (3,545) -- (3,545)
Minority interest 61 666 9,141 9,868
Sundry expense
(income), net 110 (1,141) -- (1,031)
Gains on issuance of stock by subsidiary (10,462) -- -- (10,462)
-------- -------- -------- --------
Income Before Income Taxes $ 10,785 $ 34,193 $ (9,141) $ 35,837
Provision for Income Taxes 121 13,100 -- 13,221
-------- -------- -------- --------
Net Income $ 10,664 $ 21,093 $ (9,141) $ 22,616
======== ======== ======== ========
Average Shares and Equivalent Shares
Outstanding During the Period 211,348
========
Earnings Per Common and Common
Equivalent Share $ 0.11
========
</TABLE>
*Certain amounts have been restated to conform to 1994 classifications.
9
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 1994
(unaudited)
(000's omitted except per share amount)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $185,339 $411,678 $(13,589) $583,428
-------- -------- -------- --------
Costs and Expenses:
Operating $124,339 $339,458 $(13,589) $450,208
Selling and administrative 29,545 44,060 -- 73,605
Interest expense 9,427 5,592 -- 15,019
Interest income (244) (415) -- (659)
Equity in earnings of affiliate -- (4,008) -- (4,008)
Minority interest (145) (4) 7,242 7,093
Sundry expense
(income), net 1,015 (291) -- 724
-------- -------- -------- --------
Income Before Income Taxes $ 21,402 $ 27,286 $ (7,242) $ 41,446
Provision for Income Taxes 8,912 10,782 -- 19,694
-------- -------- -------- --------
Net Income $ 12,490 $ 16,504 $ (7,242) $ 21,752
======== ======== ======== ========
Average Shares and Equivalent Shares
Outstanding During the Period 209,274
========
Earnings Per Common and Common
Equivalent Share $ 0.10
========
</TABLE>
10
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 1993*
(unaudited)
(000's omitted except per share amount)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $325,860 $733,563 $(30,001) $1,029,422
-------- -------- -------- ----------
Costs and Expenses:
Operating $243,702 $601,315 $(30,001) $ 815,016
Selling and administrative 64,141 73,781 -- 137,922
Interest expense 12,253 2,771 -- 15,024
Interest income (160) (503) -- (663)
Equity in earnings of affiliate -- (6,670) -- (6,670)
Minority interest 43 3,278 16,055 19,376
Sundry income, net (12,920) (1,561) -- (14,481)
Gains on issuance of
stock by subsidiary (10,462) -- -- (10,462)
-------- -------- -------- ----------
Income Before Income Taxes $ 29,263 $ 61,152 $(16,055) $ 74,360
Provision for Income Taxes 7,050 23,440 -- 30,490
-------- -------- -------- ----------
Net Income $ 22,213 $ 37,712 $(16,055) $ 43,870
======== ======== ======== ==========
Average Shares and Equivalent Shares
Outstanding During the Period 211,968
========
Earnings Per Common and Common
Equivalent Share $ 0.21
========
</TABLE>
*Certain amounts have been restated to conform to 1994 classifications.
11
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 1994
(unaudited)
(000's omitted except per share amount)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $331,675 $797,818 $(22,658) $1,106,835
-------- -------- -------- ----------
Costs and Expenses:
Operating $229,869 $658,179 $(22,658) $ 865,390
Selling and administrative 59,271 87,633 -- 146,904
Interest expense 17,636 10,432 -- 28,068
Interest income (583) (1,044) -- (1,627)
Equity in earnings of affiliate -- (7,331) -- (7,331)
Minority interest 808 38 13,390 14,236
Sundry income, net (91) (1,019) -- (1,110)
-------- -------- -------- ----------
Income Before Income Taxes $ 24,765 $ 50,930 $(13,390) $ 62,305
Provision for Income Taxes 10,307 20,412 -- 30,719
-------- -------- -------- ----------
Net Income $ 14,458 $ 30,518 $(13,390) $ 31,586
======== ======== ======== ==========
Average Shares and Equivalent Shares
Outstanding During the Period 209,242
==========
Earnings Per Common and Common
Equivalent Share $ 0.15
==========
</TABLE>
12
<PAGE>
Business Combinations -
Excluding the formation of Rust in January 1993, all businesses acquired by the
Company have been accounted for as purchases and are included in the financial
statements from the date of acquisition.
During 1993, the Company acquired 17 businesses (including the minority interest
in The Brand Companies, Inc. ("Brand") as a result of the Rust-Brand merger) for
$301 million in cash and notes and approximately 3.1 million shares of common
stock of Rust. During 1994, the Company acquired six businesses for $53.4
million in cash and notes.
The following summarizes the effect of businesses acquired and accounted for as
purchases in 1993 and 1994 as if they had been acquired as of January 1, 1993.
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1993 1994
---------- -----------
<S> <C> <C>
Revenue as reported $1,029,422 $1,106,835
Revenue of purchased businesses for
period prior to acquisition 168,802 3,270
---------- ----------
Pro forma revenue $1,198,224 $1,110,105
========== ==========
Net income as reported $ 43,870 $ 31,586
Net income of purchased businesses for
period prior to acquisition 3,283 106
Adjustment for interest and amortization
of cost in excess of market value of
net assets acquired (4,495) (61)
---------- ----------
Pro forma net income $ 42,658 $ 31,631
========== ==========
Earnings per share as reported $ .21 $ .15
Effect of purchased businesses for periods
prior to acquisition (.01) --
---------- ----------
Pro forma earnings per share $ .20 $ .15
========== ==========
</TABLE>
Equity Investment -
Rust holds a 12% beneficial interest in Waste Management International plc
("WM International"). WMX Technologies, Inc. ("WMX"), which is the majority
owner of CWM, owns 56% of WM International. Selected financial data for WM
International, stated in British Pounds Sterling and in accordance with U. S.
generally accepted accounting principles, is as follows (000's omitted):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------- --------------------------------
1993 1994 1993 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue (Pounds)234,877 (Pounds)286,914 (Pounds)455,732 (Pounds)542,923
Operating income 33,304 41,509 62,305 78,097
Pre-tax income 31,368 38,357 60,481 71,749
Minority interest 2,122 5,188 3,961 9,913
Net income 19,299 21,995 36,807 40,587
</TABLE>
13
<PAGE>
Debt -
On June 30, 1994, the Company repurchased for approximately $58 million Liquid
Yield Option Notes ("LYONs") due 2010 in an aggregate principal amount at
maturity of $150.8 million. The repurchase was funded by a $60 million increase
to $810 million in the Company's financing commitment from WMX. Holders of the
remaining LYONs ($334.9 million aggregate principal amount at maturity) may
require the Company to repurchase LYONs on each June 30 at a price equal to the
issue price plus accrued original issue discount to the repurchase date
(approximately $129.2 million as of June 30, 1994).
Derivatives -
From time to time, the Company uses foreign currency derivatives to mitigate the
impact of currency fluctuations on the earnings of its foreign subsidiaries and
on its equity income from WM International. Although the Company's purpose for
using such derivatives is to hedge currency risk, they do not qualify for hedge
accounting under generally accepted accounting principles and, accordingly, must
be marked to market at the end of each accounting period. Gains and losses on
currency derivatives to date have not been material.
As of June 30, 1994, the Company was a party to the following average rate
currency collars, structured as offsetting puts and calls with different strike
prices (all options settle at expiration of the option period):
<TABLE>
<CAPTION>
Notional
Currency Amount Duration
-------- ---------- -------------
<S> <C> <C>
Sterling 22,500,000 Feb - Dec '94
Deutschemark 5,300,000 Jan - Dec '94
</TABLE>
The notional amounts of the contracts are used to measure cash payments at
settlement and do not represent the amount of exposure to credit loss. In
addition, the counterparties are major financial institutions which are expected
to fully perform under the terms of the contract.
Restructuring -
In the third quarter of 1993, the Company completed a study of its businesses,
announced a strategic reconfiguration of its operations to meet then current
demand levels and recorded a special revaluation and restructuring charge of
$550 million related primarily to a revaluation of the Company's thermal
treatment business, including incinerators and fuels blending operations.
The special charge consisted of $381 million to write down assets, primarily
incinerators, and $169 million for the probable cash expenditures related to its
program to reduce costs, improve efficiency and structure the Company to meet
current market demand. Of the $169 million provided for probable cash
expenditures, the Company has spent $60.1 million through June 30, 1994,
including $16.8 million related to personnel actions. The Company expects the
balance, except for closure and post-closure costs, to be expended by the end of
1994. In both the second quarter and the first half of 1994, the estimated
annualized reduction of overhead, including depreciation and amortization, as a
result of the Company's actions was approximately $60 million.
Changes in Accounting Principles -
14
<PAGE>
The Financial Accounting Standards Board has issued Standard No. 112,
"Employers' Accounting for Postemployment Benefits" ("FAS 112") and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
Effective January 1, 1994, the Company adopted FAS 112, which did not have a
material impact on the financial statements as the Company's current accounting
was substantially in compliance with the new standard. The Company does not
have and does not contemplate acquiring significant investments of the type
covered in FAS 115.
Environmental Matters -
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As such, a significant
portion of the Company's operating costs and capital expenditures could be
characterized as costs of environmental protection. While the Company is faced,
in the normal course of its business, with the need to expend funds for
environmental protection and remediation, it does not expect such expenditures
to have a material adverse effect on its financial condition or results of
operations because its business is based on compliance with environmental laws
and regulations and its services are priced accordingly. Such costs may
increase in the future as a result of legislation or regulation; however, the
Company believes that it has the resources and experience to manage
environmental risk.
As a 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 23 sites listed on the Superfund National
Priority List ("NPL"). In the majority of situations, the Company's connection
with NPL sites relates to allegations that its subsidiaries (or their
predecessors) transported waste to the facilities in question, often prior to
the acquisition of such subsidiaries by the Company. Where the Company
concludes that it is probable that a liability has been incurred, provision is
made in the financial statements.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate costs 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 as a remediation services provider with a larger
number of sites, provides a reasonable basis for estimating its aggregate
liability. As additional information becomes available, estimates are adjusted
as necessary. While the Company does not anticipate that any such adjustment
would be material to its financial statements, it is reasonably possible that
technological, regulatory or enforcement developments, the results of
environmental studies or other factors could alter this expectation and
necessitate the recording of additional liabilities which could be material.
The impact of such future events cannot be estimated at the current time.
Subsequent Event -
On July 28, 1994, WMX made a proposal to acquire all of the outstanding shares
of the Company which it does not already own. Under the proposal, each holder
of the Company's shares (other than WMX) would receive .27 WMX shares for each
share of Company common stock held. The transaction is subject to the approval
of both a committee of the Company's independent directors and the holders of a
majority of the Company's outstanding shares (other than shares held by WMX)
voting at a stockholders' meeting.
15
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company's consolidated revenue for the six months ended June 30, 1994, was
$1,106,835,000 compared to $1,029,422,000 for the six months ended June 30,
1993. Net income amounted to $31,586,000 for the six months ended June 30,
1994, compared to $43,870,000 (which included an approximate $8,000,000 net of
tax gain from the sale of stock held for investment and a $10,462,000 non-
taxable gain related to the merger of The Brand Companies, Inc ("Brand") into a
wholly-owned subsidiary of Rust International Inc. ("Rust")) for the first half
of 1993. Earnings per share were $.15 in the first half of 1994 compared to
$.21 (which included approximately $.09 attributable to the gain from the stock
sale and the Rust-Brand merger) for the same six month period a year earlier.
Consolidated revenue for the three months ended June 30, 1994, was
$583,428,000 compared to $534,006,000 reported in the second quarter of 1993.
Net income for the second quarter of 1994 totalled $21,752,000 whereas net
income was $22,616,000 in the second quarter of 1993. The year earlier quarter
included the $10,462,000 non-taxable gain related to the Rust-Brand merger.
In the 1994 second quarter, the Company's core business (that is, excluding
Rust) benefitted significantly from the acceleration of low-level radioactive
waste volumes received at the Company's disposal facility in Barnwell, South
Carolina in anticipation of a state deadline which denies access to the Barnwell
facility to customers outside an eight-state region in the southeastern United
States (the "Southeast Compact") after June 30, 1994. South Carolina has
previously adopted legislation which allows the Barnwell site to continue
operating until December 31, 1995, to serve customers located within this
region. However, the Company's Barnwell disposal operations are not expected to
contribute significantly to the Company's future operating results. In December
1993, the North Carolina Low Level Radioactive Waste Management Authority voted
to select a site in that state for development by the Company as a replacement
regional disposal facility for the Southeast Compact. The Company is unable to
predict when, if ever, its efforts to develop a replacement site will be
successful.
The remainder of the Company's core business experienced declining revenues
and a shift to lower margin services in the second quarter of 1994 as compared
to the second quarter of 1993. Changes which have affected the hazardous waste
industry, including the decline in off-site waste volumes from environmental
cleanup projects, the lack of regulatory "drivers", the shift of special wastes
to subtitle D facilities, waste minimization and recycling, and overcapacity in
the incineration markets continue to have a negative impact on the Company's
revenue mix. Additionally, pricing in the business continues to be very
competitive. Assuming a continuation of these trends, the Company expects 1994
earnings per share from its core business operations to be near $.15 per share
(excluding the Company's share of Rust's net income).
16
<PAGE>
REVENUE
The Company provides hazardous waste transportation, treatment, resource
recovery and disposal services as part of its core business. Through Rust, its
56% owned subsidiary, the Company also provides engineering, construction and
environmental and infrastructure consulting services, and environmental
remediation and other on-site industrial services. Rust also operated an
asbestos abatement business through the first four months of 1993. This
business was transferred to NSC Corporation ("NSC") on May 3,1993, in exchange
for a 41% equity interest in NSC and NSC's interest in two industrial service
businesses. Revenue for the three month and six month periods ended June 30,
1993 and 1994 is as follows (000's omitted):
<TABLE>
<CAPTION>
Three Months Six Months
------------------- -----------------------
1993 1994 1993 1994
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Core business $167,094 $185,339 $ 325,860 $ 331,675
Engineering, construction
and consulting services 192,674 241,436 367,659 446,786
Remediation and industrial
services 179,966 170,242 334,139 351,032
Asbestos abatement 9,549 -- 31,765 --
Intercompany revenue (15,277) (13,589) (30,001) (22,658)
-------- -------- ---------- ----------
$534,006 $583,428 $1,029,422 $1,106,835
======== ======== ========== ==========
</TABLE>
Core business revenue in the three months ended June 30, 1994, increased $18.2
million or 10.9% over the same three months of 1993. The principal cause was
the above-described increase in low-level radioactive waste volumes received at
the Barnwell facility, which more than offset the continuing decline in revenue
in the remainder of the core business. These factors and the severe weather in
the northeastern United States in the first quarter of 1994 limited the increase
in core business revenue to $5.8 million or 1.8% in the first half of 1994
compared to the first half of 1993. Event business (generally large, non-
recurring projects) revenue declined 25.0% in the second quarter of 1994
compared to the year earlier quarter, primarily as a result of the general
decline in off-site disposal from environmental cleanups. Event business was
8.7% of core business revenue in the 1994 second quarter, compared to 12.9% in
the same quarter a year earlier. In the first six months of 1994, event
business was 8.5% of core business revenue compared to 11.2% for the first six
months of 1993. The following table analyzes core business revenue changes for
the three and six month periods ended June 30, 1994, compared to 1993:
<TABLE>
<CAPTION>
Three Six
Months Months
------ ------
<S> <C> <C>
Price (2.8)% (3.2)%
Volume 11.7 2.0
Purchased Business 2.0 3.0
---- ----
10.9% 1.8%
==== ====
</TABLE>
17
<PAGE>
The increase in revenue from engineering, construction and consulting services
was the result of acquisitions completed in the latter part of 1993 and the
beginning of 1994. This was offset by volume declines of $18 million, primarily
related to severe weather in parts of the United States during the first quarter
of 1994, and customer delays on numerous projects. Volume in the second quarter
was relatively flat in 1994 compared to 1993. Backlog in this business line was
$1,057 million at June 30, 1994.
Revenue from remediation and industrial services increased due to acquisitions
completed in the second half of 1993. This was offset by volume declines of
$5.2 million due to weather related work delays in the first quarter of 1994 and
volume declines of $37.8 million in the second quarter primarily due to
scaffolding and industrial services customers' delay of scheduled plant
maintenance. In addition, the expected award of several large federal
remediation contracts has been delayed. Backlog in this business line was $570
million at June 30, 1994.
The backlog in the two business lines above includes approximately $340
million of Department of Defense Total Environmental Restoration Contracts
("TERCS") awarded to Rust by the U.S. Army Corp of Engineers in 1993. There can
be no assurance that specific projects identified and performed by Rust pursuant
to such TERCS will result in aggregate revenue of $340 million over the term of
such contracts.
The percentage of Rust's revenue from affiliates declined to 13.6% in the
first half of 1994 from 15.3% in the first half of 1993.
OPERATING EXPENSES
Operating expenses declined as a percentage of consolidated revenue for both
the second quarter and the first six months of 1994 compared to the same periods
a year earlier, largely as a result of the increased revenue attributable to the
Company's low-level radioactive waste disposal operations and the engineering,
construction and consulting services of Rust discussed above. Both the second
quarter and the first half of 1994 also benefitted somewhat from costs savings
achieved in the core business from the restructuring begun in the third quarter
of 1993. The percentage for the first half of 1994, however, was negatively
impacted by the effects of severe weather, which delayed projects and hampered
operations in both the core business and in the Rust lines of business during
the first quarter. In view of the adverse revenue trends affecting the core
business, the Company is continuing to identify and implement measures which are
intended to further reduce its cost structure.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of revenue for both the
core business and Rust in the second quarter and the first half of 1994
benefitted from the increased revenue discussed above. For the core business,
selling and administrative expenses decreased to 15.9% from 19.5% in the second
quarter and to 17.9% from 19.7% in the six months ended June 30, 1994 compared
to the same period in 1993. For Rust, however, such expenses increased to 11.0%
from 10.1% in the first six months compared to the same period a year ago. The
Rust increase is
18
<PAGE>
attributable to the volume declines and the increased acquisition activity in
1993 and 1994. The level of selling and administrative expenses of acquired
businesses was higher than that of existing operations. The selling and
administrative cost percentages associated with acquisitions are initially high,
but then generally decline as the acquired businesses are integrated into
existing operations.
Offsetting the effect of increased core business revenue on the percentage of
selling and administrative expense was the reimbursement of an additional $3.6
million of Rust's development expenses in the second quarter of 1994. A total
of $5.3 million of development expenses has been reimbursed in the first half of
1994. Pursuant to an agreement entered into in connection with the formation of
Rust in January 1993, the Company agreed to reimburse Rust for certain business
development expenses in an amount not to exceed $10 million in each of 1993 and
1994. Rust has the right to defer the Company's obligation to reimburse such
expenses from year to year until December 31, 1997. Such reimbursement for 1993
was deferred. The Company is not in a position to estimate the timing or the
amount of such development expenses which may be charged to the Company in any
future quarters.
INTEREST
Consolidated interest expense increased to 2.5% of consolidated revenue for
the six months ended June 30, 1994, compared to 1.5% for the six months ended
June 30, 1993. Higher interest rates and debt levels in the latter part of 1993
and the beginning of 1994 for both the core business and Rust were the cause.
EQUITY IN EARNINGS OF AFFILIATES
Waste Management International plc ("WM International"), in which Rust holds a
12% equity interest, is a leading international provider of waste management and
related services and includes essentially all of the waste management operations
of WMX Technologies, Inc. ("WMX") outside of North America. It currently has
operations in Europe, the Pacific Rim and South America. WMX and Wheelabrator
Technologies Inc. own 56% and 12%, respectively, of WM International. Selected
financial information for WM International for the three and six month periods
ended June 30, 1993 and 1994, stated in British Pounds Sterling and in
accordance with United States generally accepted accounting principles, is set
forth in the Notes to Consolidated Financial Statements.
MINORITY INTEREST
The decline in minority interest is principally due to Rust's acquisition of
the minority interest in Brand during the quarter ended June 30, 1993. However,
as of January 1, 1994, as part of its core business, the Company acquired a
majority interest in a Mexican hazardous waste management services company
resulting in an increase in minority interest.
INCOME TAXES
The consolidated provision for income taxes rose to 49.3% of income before
taxes in the first six months of 1994 from 41.0% in the first six months of 1993
for several reasons. The 1994 provision reflects the impact of the Omnibus
19
<PAGE>
Budget Reconciliation Act of 1993. Also, increased amortization of intangibles
which for the most part is not tax deductible resulted in a higher effective tax
rate. The increase in amortization of intangibles was due primarily to
acquisitions completed by Rust during the latter part of 1993 and the beginning
of 1994, and the purchase of the minority interest in Brand. The recognition of
a $10,462,000 non-taxable gain related to the Rust-Brand merger during the
second quarter of 1993 had the effect of reducing the effective tax provision
for the first half of 1993.
RESTRUCTURING
In the third quarter of 1993, the Company completed a study of its business,
announced a strategic reconfiguration of its operations to meet then current
demand levels and recorded a special revaluation and restructuring charge of
$550 million ($363 million after tax).
The special charge consisted of $381 million to write down assets, primarily
incinerators, and $169 million for the probable cash expenditures related to its
program to reduce costs, improve efficiency and structure the Company to meet
current market demand. Of the $169 million provided for probable cash
expenditures, the Company has spent $60.1 million through June 30, 1994,
including $16.8 million related to personnel actions. The Company expects the
balance, except for closure and post-closure costs, to be expended by the end of
1994. In both the second quarter and the first half of 1994, the estimated
annualized reduction in overhead, including depreciation and amortization, as a
result of the Company's actions was approximately $60 million.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company is in a service industry and has neither significant inventory nor
seasonal variations in receivables. Cash flow from operating activities is used
primarily for capital expenditures and acquisitions of businesses.
In 1993 and throughout 1994, the Company financed its business primarily with
cash flow from operating activities and by borrowing from WMX.
At June 30, 1994, the Company had working capital of $268.4 million compared
to working capital at December 31, 1993, of $232.6 million. The Company
believes that it has adequate liquidity and expects sufficient cash flow from
future operations to meet its capital needs. The Company filed its 1993 federal
income tax return in early April 1994, and as a result of a reported tax loss,
received in May a refund in excess of $37 million for prior years' federal
income taxes.
ACQUISITIONS AND CAPITAL EXPENDITURES
Capital expenditures, excluding acquired businesses, were $53.5 million for
the six months ended June 30, 1994, and $108.0 million for the comparable period
in 1993.
20
<PAGE>
During the first six months of 1994, the Company acquired six businesses for
$53.4 million in cash and notes. During the first six months of 1993, the
Company acquired the minority interest of Brand as a result of the Rust-Brand
merger, plus ten businesses, for 3.1 million shares of Rust common stock and
$221.8 million in cash and notes. See Notes to Consolidated Financial
Statements for a schedule showing the pro forma effect of businesses acquired in
1993 and 1994, as if they had been acquired as of January 1, 1993.
DERIVATIVES
From time to time, the Company uses foreign currency derivatives to mitigate
the impact of currency fluctuations on the earnings of its foreign subsidiaries
and on its equity income from WM International. Although the Company's purpose
for using such derivatives is to hedge currency risk, they do not qualify for
hedge accounting under generally accepted accounting principles and,
accordingly, must be marked to market at the end of each accounting period.
Gains and losses on currency derivatives to date have not been material. See
Notes to Consolidated Financial Statements for further discussion of the use of
and accounting for such instruments and the portfolio as of June 30, 1994.
CAPITAL STRUCTURE
The Company and Rust each has an agreement with WMX under which WMX provides a
financing commitment up to $810 million for the Company and up to $350 million
for Rust. Any indebtedness of the Company or Rust may be converted, at the
option of the borrower, to a term loan with either a fixed or floating interest
rate. The interest rates and terms of such loans will generally be WMX's costs
of funds for loans of similar maturity. Borrowings under these agreements are
classified as long-term debt. Interest on other indebtedness is charged at a
rate equal to WMX's effective 30-day commercial paper rate plus a number of
basis points sufficient to reimburse WMX for its cost of obtaining funds. On
December 31, 1993, Rust converted $50 million of its borrowings from WMX to a
5.75% term loan due December 31, 1998. In addition to the above financing
commitments, in August 1993, WMX increased the amount of the credit facility for
Rust by an additional $100 million which has been converted to a five-year term
loan providing for a lump-sum repayment on December 31, 1998 with interest at
the rate of 6% per annum.
On June 30, 1994, the Company repurchased for approximately $58 million
certain of its Liquid Yield Option Notes ("LYONs") due 2010 in an aggregate
principal amount at maturity of $150.8 million. The repurchase was funded by a
$60 million increase to $810 million in the Company's financing commitment from
WMX. Holders of the remaining LYONs ($334.9 million aggregate principal amount
at maturity) may require the Company to repurchase LYONs on each June 30 at a
price equal to the issue price plus accrued original issue discount to the
repurchase date (approximately $129.2 million as of June 30, 1994).
The Board of Directors of the Company has authorized the repurchase of up to
10 million shares of its common stock over a 48-month period ending in November
1994. The Company did not repurchase any shares during either the first or
second quarters of 1994.
21
<PAGE>
In August 1993, the Board of Directors suspended indefinitely the payment of
quarterly cash dividends on the Company's common stock.
Debt was 54.9% of total capital at June 30, 1994 compared to 55.9% at December
31, 1993. This ratio includes minority interest in subsidiaries as part of
total capital. The Company expects to reduce this ratio during the remainder of
1994 through reduced capital expenditures and cash flow from operations.
SUBSEQUENT EVENT
On July 28, 1994, WMX made a proposal to acquire all of the outstanding shares
of the Company which it does not already own. Under the proposal, each holder
of the Company's shares (other than WMX) would receive .27 WMX shares for each
share of Company common stock held. The transaction is subject to the approval
of both a committee of the Company's independent directors and the holders of a
majority of the Company's outstanding shares (other than shares held by WMX)
voting at a stockholders' meeting.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Some of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment and the potential for the
unintended or unpermitted discharge of materials into the environment. In the
ordinary course of conducting its business activities, the Company becomes
involved in judicial and administrative proceedings involving governmental
authorities at the federal, state and local level including, in certain
instances, proceedings instituted by citizens or local governmental authorities
seeking to overturn governmental action where governmental officials or agencies
are named as defendants together with the Company or one or more of its
subsidiaries, or both. In the majority of the situations where proceedings are
commenced by governmental authorities, the matters involved relate to alleged
technical violations of licenses or permits pursuant to which the Company
operates or is seeking to operate or laws or regulations to which its operations
are subject or are the result of different interpretations of the applicable
requirements. From time to time the Company pays fines or penalties in
environmental proceedings relating primarily to waste treatment, storage or
disposal facilities. As of June 30, 1994, the Company was involved in four such
proceedings relating to operations of the Company or one of its subsidiaries
where it is believed that sanctions involved in each instance may exceed
$100,000. 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.
After the end of the quarter, several purported class action lawsuits seeking
injunctive relief and unspecified money damages were filed in the Chancery Court
for New Castle County, Delaware against the Company, WMX Technologies, Inc.
("WMX") and the individual directors of the Company in connection with a July
28, 1994 proposal by WMX, the Company's majority stockholder, to acquire all of
the shares of the Company's common stock which WMX does not own (the "WMX
Proposal"). The WMX Proposal contemplates a merger in which the Company's
stockholders (other than WMX) would receive .27 of a WMX share for each Company
share held, subject to the approval of both a committee consisting of the
Company's independent directors and the holders of a majority of the Company's
outstanding shares (other than shares held by WMX) voting at a stockholders'
meeting. The lawsuits allege, among other things, that the defendants have
breached their fiduciary duties to the Company's minority stockholders because
the merger consideration contemplated by the WMX Proposal is inadequate and
unfair and no adequate means exists to ensure that the interests of such
stockholders will be protected in respect of the WMX Proposal. The Company
believes that its actions and those of its Board of Directors in connection with
the WMX Proposal have been in accordance with Delaware law. Accordingly, the
Company intends to contest these lawsuits vigorously.
Item 4. Submission of Matter to Vote of Security Holders.
------------------------------------------------
At the Company's annual meeting of stockholders on May 5, 1994, a proposal to
elect the nominees listed in the following table as directors of the Company was
submitted to the vote of the Company's stockholders. The following table also
shows the results of voting as to each nominee:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- ----------- --------------
<S> <C> <C>
Donald F. Flynn 189,527,419 295,663
Peter H. Huizenga 189,526,322 296,760
Peer Pedersen 189,522,578 300,504
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
The exhibits to this report are listed in the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K.
None.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Jerome D. Girsch
------------------------------------
Jerome D. Girsch,
Executive Vice President,
Treasurer and Controller
Dated: August 12, 1994
24
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC.
EXHIBIT INDEX
Number and Description of Exhibit*
- ---------------------------------
2 None
4 None
10 Amendment No. 1 to Second Amended and Restated Corporate and Administrative
Services Agreement dated as of May 17, 1993 between registrant and WMX
Technologies, Inc.
11 None
15 None
18 None
19 None
22 None
23 None
24 None
99 None
- ---------------
* Exhibits not listed are inapplicable.
25
<PAGE>
Exhibit 10
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
CORPORATE AND ADMINISTRATIVE SERVICES AGREEMENT
This Amendment No. 1 (the "Amendment") to that certain Second Amended and
Restated Corporate and Administrative Services Agreement (the "Services
Agreement") dated as of May 17, 1993 by and between WMX Technologies, Inc., a
Delaware corporation ("WMX"), and Chemical Waste Management, Inc., a Delaware
corporation ("CWM") is made as of June 1, 1994 by and between WMX and CWM.
RECITALS
WHEREAS, WMX and CWM desire to amend the Services Agreement to increase the
maximum aggregate amount of Indebtedness from CWM to WMX which may be
outstanding at any time as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereby agree as follows (any terms
capitalized herein to have the meanings specified herein or in the Services
Agreement).
AGREEMENTS
1. Modification of Services Agreement. Section 5(a) of the Services
Agreement is hereby amended by replacing "$750,000,000" in the fifth line
thereof with "$810,000,000".
2. Other Provisions. Except as expressly set forth in this Amendment,
all provisions of the Services Agreement in effect immediately prior to the
execution and delivery of this Amendment shall remain in full force and effect
in accordance with their terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date set forth above.
WMX TECHNOLOGIES, INC.
By: /s/ James E. Koenig
------------------------------------
Senior Vice President
CHEMICAL WASTE MANAGEMENT, INC.
By: /s/ Jerome D. Girsch
------------------------------------
Executive Vice President
