================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ Commission file number 1-7327 WASTE MANAGEMENT, INC. (Exact name of Registrant as specified in its charter) Delaware 36-2660763 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3003 Butterfield Road, Oak Brook, Illinois 60523 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (630)572-8800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of Registrant's Common Stock, $1 par value, issued and outstanding, at July 31, 1997--454,593,714 (excluding 10,886,361 shares held in the Waste Management, Inc. Employee Stock Benefit Trust) ================================================================================ WASTE MANAGEMENT, INC. AND SUBSIDIARIES INDEX ----- PAGE ---- PART I. Financial Information: Consolidated balance sheets as of December 31, 1996, and June 30, 1997....................................................... 3 Consolidated statements of income for the three months and six months ended June 30, 1996 and 1997........................................ 5 Consolidated statements of stockholders' equity for the six months ended June 30, 1996 and 1997........................................ 6 Consolidated statements of cash flows for the six months ended June 30, 1996 and 1997........................................ 8 Notes to consolidated financial statements............................... 9 Management's discussion and analysis of results of operations and financial condition............................................. 16 PART II. Other Information.............................................. 22 ****** 2 PART I. FINANCIAL INFORMATION WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's omitted) ASSETS December 31, 1996 June 30, 1997 ------------------ -------------- CURRENT ASSETS: Cash and cash equivalents $ 323,288 $ 435,136 Short-term investments 341,338 167,009 Accounts receivable, less reserve of $47,523 in 1996 and $38,583 in 1997 1,681,817 1,594,656 Employee receivables 10,084 8,847 Parts and supplies 142,417 144,905 Costs and estimated earnings in excess of billings on uncompleted contracts 240,531 258,200 Prepaid expenses 353,749 374,914 ----------- ----------- Total Current Assets $ 3,093,224 $ 2,983,667 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land, primarily disposal sites $ 5,019,065 $ 5,055,448 Buildings 1,495,252 1,467,607 Vehicles and equipment 7,520,902 7,304,161 Leasehold improvements 85,998 86,785 ----------- ----------- $14,121,217 $13,914,001 Less - Accumulated depreciation and amortization (4,399,508) (4,516,788) ----------- ----------- Total Property and Equipment, Net $ 9,721,709 $ 9,397,213 ----------- ----------- OTHER ASSETS: Intangible assets relating to acquired businesses, net $ 3,885,293 $ 3,722,256 Sundry, including other investments 1,452,057 1,004,296 Net assets of discontinued operations 214,309 205,309 ----------- ----------- Total Other Assets $ 5,551,659 $ 4,931,861 ----------- ----------- Total Assets $18,366,592 $17,312,741 =========== =========== The accompanying notes are an integral part of these balance sheets. 3 WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's omitted except per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1996 June 30, 1997 ------------------ -------------- CURRENT LIABILITIES: Portion of long-term debt payable within one year $ 553,493 $ 802,243 Accounts payable 948,350 773,225 Accrued expenses 1,324,324 1,631,634 Unearned revenue 212,541 213,071 ----------- ----------- Total Current Liabilities $ 3,038,708 $ 3,420,173 ----------- ----------- DEFERRED ITEMS: Income taxes $ 1,011,593 $ 979,781 Environmental liabilities 543,723 495,338 Other 641,918 564,939 ----------- ----------- Total Deferred Items $ 2,197,234 $ 2,040,058 ----------- ----------- LONG-TERM DEBT, less portion payable within one year $ 6,971,607 $ 6,520,035 ----------- ----------- MINORITY INTEREST IN SUBSIDIARIES $ 1,186,955 $ 1,156,821 ----------- ----------- COMMITMENTS AND CONTINGENCIES $ $ ----------- ----------- PUT OPTIONS $ 95,789 $ - ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $l par value (issuable in series); 50,000,000 shares authorized; none outstanding during the periods $ - $ - Common stock, $l par value; 1,500,000,000 shares authorized; 507,101,774 shares issued in 1996 and 1997 507,102 507,102 Additional paid-in capital 864,730 953,772 Cumulative translation adjustment (79,213) (209,897) Retained earnings 4,363,754 4,563,814 ----------- ----------- $ 5,656,373 $ 5,814,791 Less: Treasury stock; 12,782,864 shares in 1996 and 41,668,633 in 1997, at cost 419,871 1,286,350 1988 Employee Stock Ownership Plan 6,396 3,063 Employee Stock Benefit Trust; 10,886,361 shares in 1996 and 1997, at market 353,807 349,724 ----------- ----------- Total Stockholders' Equity $ 4,876,299 $ 4,175,654 ----------- ----------- Total Liabilities and Stockholders' Equity $18,366,592 $17,312,741 =========== =========== The accompanying notes are an integral part of these balance sheets. 4 WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30 (Unaudited) (000's omitted except per share amounts) Three Months Six Months Ended June 30 Ended June 30 ----------------------- -------------------------- 1996 1997 1996 1997 ---------- ---------- ---------- ---------- REVENUE $2,330,994 $2,327,309 $4,475,473 $4,525,617 ---------- ---------- ---------- ---------- Operating expenses $1,619,255 $1,634,114 $3,114,104 $3,185,832 Selling and administrative expenses 246,688 242,800 492,551 484,329 Interest expense 94,291 99,936 188,097 198,285 Interest income (6,421) (9,786) (12,661) (21,878) Minority interest 31,397 28,314 58,601 56,076 Sundry (income) expense, net (21,379) 11,936 (38,714) (648) ---------- ---------- ---------- ---------- Income from continuing operations before income taxes $ 367,163 $ 319,995 $ 673,495 $ 623,621 Provision for income taxes 149,429 139,971 275,582 265,185 ---------- ---------- ---------- ---------- Income from continuing operations $ 217,734 $ 180,024 $ 397,913 $ 358,436 Income from operations of discontinued businesses, less applicable income taxes and minority interest of $5,572 and $10,741 for the three months and six months ended June 30, 1996, respectively 5,308 - 10,307 - ---------- ---------- ---------- ---------- NET INCOME $ 223,042 $ 180,024 $ 408,220 $ 358,436 ========== ========== ========== ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 496,031 466,276 492,593 475,498 ========== ========== ========== ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Continuing operations $ 0.44 $ 0.39 $ 0.81 $ 0.75 Discontinued operations 0.01 - 0.02 - ---------- ---------- ---------- ---------- NET INCOME $ 0.45 $ 0.39 $ 0.83 $ 0.75 ========== ========== ========== ========== DIVIDENDS DECLARED PER SHARE $ 0.16 $ 0.17 $ 0.31 $ 0.33 ========== ========== ========== ========== The accompanying notes are an integral part of these statements. 5 WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) ($000's omitted except per share amounts) 1988 Employee Employee Additional Cumulative Stock Stock Common Paid-In Translation Retained Treasury Ownership Benefit Stock Capital Adjustment Earnings Stock Plan Trust --------- ---------- ----------- ----------- ---------- --------- -------- Balance, January 1, 1996 $498,817 $ 422,801 $(102,943) $ 4,486,877 $ - $13,062 $350,151 Net income for the period - - - 408,220 - - - Cash dividends ($.31 per share) - - - (153,222) - - - Dividends paid to Employee Stock Benefit Trust - 3,460 - (3,460) - - - Stock repurchase (5,000,000 shares) - - - - 168,305 - - Stock issued upon exercise of stock options 217 (7,332) - - (25,617) - (28,622) Treasury stock received in connection with exercise of stock options - - - - 791 - - Tax benefit of non-qualified stock options exercised - 4,999 - - - - - Contribution to 1988 Employee Stock Ownership Plan - - - - - (3,333) - Treasury stock received as settlement for claims - - - - 2,400 - - Common stock issued upon conversion of Liquid Yield Option Notes 107 1,893 - - - - - Common stock issued for acquisitions 7,957 226,222 - - - - - Temporary equity related to put options - (135,957) - - - - - Proceeds from sale of put options - 14,774 - - - - - Adjustment of Employee Stock Benefit Trust to market value - 34,999 - - - - 34,999 Cumulative translation adjust- ment of foreign currency statements - - (5,587) - - - - --------- --------- ----------- ---------- -------- -------- --------- Balance, June 30, 1996 $507,098 $ 565,859 $(108,530) $4,738,415 $145,879 $ 9,729 $356,528 ========= ========= =========== ========== ======== ======== ======== The accompanying notes are an integral part of this statement. 6 WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) ($000's omitted except per share amounts) 1988 Employee Employee Additional Cumulative Stock Stock Common Paid-In Translation Retained Treasury Ownership Benefit Stock Capital Adjustment Earnings Stock Plan Trust -------- ---------- ----------- ---------- ---------- --------- -------- Balance, January 1, 1997 $507,102 $864,730 $ (79,213) $4,363,754 $ 419,871 $ 6,396 $353,807 Net income for the period - - - 358,436 - - - Cash dividends ($.33 per share) - - - (154,784) - - - Dividends paid to Employee Stock Benefit Trust - 3,592 - (3,592) - - - Stock repurchase (30,000,000 shares) - - - - 902,629 - - Stock issued upon exercise of stock options and grant of restricted stock - (5,976) - - (35,951) - - Tax benefit of non-qualified stock options exercised - 1,950 - - - - - Contribution to 1988 Employee Stock Ownership Plan - - - - - (3,333) - Treasury stock received as settlement for claims - - - - 141 - - Common stock issued upon conversion of Liquid Yield Option Notes - (124) - - (340) - - Temporary equity related to put options - 95,789 - - - - - Settlement of put options - (1,605) - - - - - Adjustment of Employee Stock Benefit Trust to market value - (4,083) - - - - (4,083) Unrealized loss on securities to be sold - (501) - - - - - Cumulative translation adjustment of foreign currency statements - - (130,684) - - - - -------- -------- --------- ---------- ---------- ------- -------- Balance, June 30, 1997 $507,102 $953,772 $(209,897) $4,563,814 $1,286,350 $ 3,063 $349,724 ======== ======== ========= ========== ========== ======= ======== The accompanying notes are an integral part of this statement. 7 WASTE MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 Increase (Decrease) in Cash (Unaudited) ($000's omitted) 1996 1997 ---------- ----------- Cash flows from operating activities: Net income for the period $ 408,220 $ 358,436 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 462,170 425,709 Provision for deferred income taxes 116,725 (90,333) Minority interest in subsidiaries 60,254 56,076 Interest on Liquid Yield Option Notes (LYONs) and WMI Subordinated Notes 5,737 10,976 Contribution to 1988 Employee Stock Ownership Plan 3,333 3,333 Changes in assets and liabilities, excluding effects of acquired companies: Receivables, net (30,391) 18,552 Other current assets (43,864) (54,017) Sundry other assets (16,939) (65,544) Accounts payable (114,635) (152,753) Accrued expenses and unearned revenue (68,449) 238,992 Deferred items (55,029) (120,910) Other, net 738 (40,652) ---------- ----------- Net cash provided by operating activities $ 727,870 $ 587,865 ---------- ----------- Cash flows from investing activities: Short-term investments $ 10,371 $ (139,990) Capital expenditures (577,791) (368,217) Proceeds from asset monetization program 146,901 1,287,090 Cost of acquisitions, net of cash acquired (57,911) (34,800) Other investments (45,232) 24,810 Acquisition of minority interests (329,653) (67,625) ---------- ----------- Net cash provided by (used for) investing activities $ (853,315) $ 701,268 ---------- ----------- Cash flows from financing activities: Cash dividends $ (153,222) $ (154,784) Proceeds from issuance of indebtedness 1,366,124 529,450 Repayments of indebtedness (906,535) (677,692) Proceeds from exercise of stock options, net 46,333 29,975 Contributions from minority interests 3,680 - Stock repurchases (168,305) (902,629) Proceeds from sale of put options 14,774 - Settlement of put options - (1,605) ---------- ----------- Net cash provided by (used for) financing activities $ 202,849 $(1,177,285) ---------- ----------- Net increase in cash and cash equivalents $ 77,404 $ 111,848 Cash and cash equivalents at beginning of period 169,541 323,288 ---------- ----------- Cash and cash equivalents at end of period $ 246,945 $ 435,136 ========== =========== The Company considers cash and cash equivalents to include currency on hand, demand deposits with banks and short-term investments with maturities of less than three months when purchased. Supplemental disclosure of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 193,181 $ 187,309 Income taxes, net of refunds received $ 147,372 $ 210,984 Supplemental schedule of noncash investing and financing activities: LYONs converted into common stock of the Company $ 2,000 $ 216 Liabilities assumed in acquisitions of businesses $ 97,952 $ 17,572 Fair market value of Company stock issued for acquired businesses $ 234,179 $ - Marketable securities received from sale of discontinued operations $ - $ 63,967 The accompanying notes are an integral part of these statements. 8 WASTE MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ($000's omitted in all tables) The financial statements included herein have been prepared by Waste Management, Inc. ("WMI" or the "Company") (formerly WMX Technologies, Inc.) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial information included herein reflects, in the opinion of the Company, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income and expenses and disclosures of contingencies. Future events could alter such estimates in the near term. Certain amounts in previously issued financial statements have been restated to conform to 1997 classifications. Income Taxes - The following table sets forth the provision for income taxes for continuing operations for the three months and six months ended June 30, 1996 and 1997: Three Months Six Months Ended June 30 Ended June 30 ------------------------- -------------------- 1996 1997 1996 1997 ------------------------- -------------------- Currently payable $91,571 $ 265,456 $150,024 $355,906 Deferred 58,052 (125,290) 125,946 (90,333) Amortization of deferred investment credit (194) (195) (388) (388) ------- --------- -------- -------- $149,429 $ 139,971 $275,582 $265,185 ======== ========= ======== ======== The negative deferred tax provision for the three months and six months ended June 30, 1997, is primarily due to previously deferred taxes becoming payable as a result of the Company's asset monetization program. Business Combinations - During 1996, the Company and its principal subsidiaries acquired 83 businesses for $104,778,000 in cash (net of cash acquired) and notes, $39,446,000 of debt assumed, and 8,210,568 shares of the Company's common stock. These acquisitions were accounted for as purchases. During the six months ended June 30, 1997, the Company and its principal subsidiaries acquired 20 businesses for $34,800,000 in cash and notes. These acquisitions were accounted for as purchases. The pro forma effect of the acquisitions made during 1996 and 1997 is not material. 9 On June 20, 1997, the Company announced an offer to acquire, for $15 per share in cash, all of the outstanding shares of Wheelabrator Technologies Inc. ("WTI") it does not already own. The Company currently owns approximately 67% of the 156.6 million outstanding WTI shares. The offer is subject to approval by a committee of independent WTI directors and the holders of a majority of the outstanding WTI shares, other than those held by the Company, voting on it at a special meeting of WTI stockholders to be called for that purpose. Several lawsuits have also been filed which seek, among other things, to enjoin the proposed transaction. Divestitures - The Company divested nine North American solid waste businesses in the quarter for a price of $234,000,000. The largest of these transactions was the sale of most of its Canadian operations. In the first six months of this year, the Company has divested 17 solid waste operations in North America for a total price of $265,000,000. In Europe, the Company's Waste Management International plc subsidiary completed in June the sale of substantially all of its remaining operations in France for 67.5 million pounds, or approximately $112,000,000, and subsequent to June 30 sold its business in Spain. Discontinued Operations - In line with the Company's strategy to focus on waste management services, other industry segments, including the engineering, construction and consulting businesses and industrial scaffolding business of Rust International Inc. ("Rust") and the water businesses of WTI have been classified as discontinued operations. The discontinued businesses have been segregated from continuing operations in the accompanying balance sheets and statements of income. Revenue from these businesses prior to sale was $107.0 million for the three months and $241.4 million for the six months ended June 30, 1997, and $354.1 million and $769.6 million for the comparable periods in 1996, the decline relating primarily to businesses sold in the interim. Results of operations for the three months and six months ended June 30, 1997, were not material and were included in the reserve for loss on disposition provided previously. Restructuring - In the fourth quarter of 1996, the Company recorded a charge for reengineering and streamlining its finance and administrative functions. Approximately $20.0 million of the charge related to cash payments for employee severance. As of June 30, 1997, approximately half of this amount had been spent. The balance is expected to be paid by the end of 1997. In addition, reengineering costs of approximately $0.01 to $0.02 per share were charged to income in the second quarter and first six months of 1997. Accounting Principles - In February 1997, the Financial Accounting Standards Board ("FASB") issued FAS No. 128, "Earnings Per Share". This statement 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 for the period. In addition, Fully Diluted EPS is replaced with Diluted EPS, which gives effect to all common shares that would have been outstanding if all dilutive potential common shares (relating to such things as the exercise of stock options and convertible debt) had been issued. 10 FAS No. 128 is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted, but when the opinion becomes effective, all prior periods presented must be restated. EPS computed in accordance with FAS No. 128 for the three months and six months ended June 30, 1996 and 1997, would have been as follows: Three Months Six Months Ended June 30 Ended June 30 ---------------------- --------------------- 1996 1997 1996 1997 ---------------------- --------------------- Continuing Operations - Basic $0.44 $0.39 $0.81 $0.75 Diluted 0.43 0.38 0.79 0.74 Discontinued Operations - Basic $0.01 $ - $0.02 $ - Diluted 0.01 - 0.02 - In June 1997, the FASB 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. FAS 130 requires only a different format for presentation of information already included in the Company's financial statements. FAS 131 modifies 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 and cash flows. Derivative Financial Instruments - From time to time, the Company and certain of its subsidiaries use derivatives to manage interest rate, currency and commodity 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 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 marked to market. 11 Currency Agreements. From time to time, the Company and certain of its subsidiaries use foreign currency derivatives to seek to mitigate the impact of translation on foreign earnings and income from foreign investees. Typically these have taken the form of purchased put options or offsetting put and call options with different strike prices. The Company receives or pays, based on the notional amount of the option, the difference between the average exchange rate of the hedged currency against the base currency and the average (strike price) contained in the option. Complex instruments involving multipliers or leverage are not used. Although the purpose for using such derivatives is to mitigate currency risk, they do not qualify for hedge accounting under generally accepted accounting principles and accordingly, must be adjusted to market value at the end of each accounting period with gains or losses included in income. 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. Gains or losses on forward contracts pertaining to such transactions are deferred until the designated transaction is completed. The impact of the forward contract is then included with the results of the underlying transaction in the financial statements. 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 committed fuel purchases or anticipated usage and accordingly, gains and losses in the hedge positions are deferred and recognized in operating expenses as fuel is purchased. Environmental Liabilities - The continuing business in which the Company is engaged is intrinsically connected with the protection of the environment. As such, a significant portion of the Company's operating costs and capital expenditures could be characterized as costs of environmental protection. While the Company is faced, in the normal course of business, with the need to expend funds for environmental protection and remediation, it does not expect such expenditures to have a material adverse effect on its financial condition or results of operations because its business is based upon compliance with environmental laws and regulations and its services are priced accordingly. Such costs may increase in the future as a result of legislation or regulation; however, the Company believes that in general it tends to benefit when government 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 life of disposal sites as airspace is consumed. The Company has also established procedures to evaluate its potential remedial liabilities at closed sites which it owns or operated, or to which it transported waste, including 94 sites listed on the Superfund National Priority List ("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. Where the Company concludes that it is probable that a liability has been incurred, provision is made in the financial statements. Estimates of the extent of the Company's degree of responsibility for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions and are inherently difficult, and the ultimate outcome may differ from current estimates. However, the Company believes that its extensive experience in the environmental services business, as well as its involvement with a large number of sites, provides a reasonable basis for estimating its aggregate liability. As additional information becomes available, estimates are adjusted as necessary. While the Company does not anticipate that any such adjustment would be material to its financial statements, it is reasonably possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could necessitate the recording of additional liabilities which could be material. 12 Stockholders' Equity - The Boards of Directors of WMI and WTI have authorized their respective companies to repurchase shares of their own common stock (up to 50 million shares in the case of WMI and 30 million shares in the case of WTI) in the open market, in privately negotiated transactions, or through issuer tender offers. These programs extend into 1998. During the 1997 second quarter, WMI purchased 30 million of its shares with its "Dutch Auction" tender offer; it has not repurchased any other shares during 1997. WTI repurchased 5.1 million of its shares in open market transactions during the first six months of 1997; however, in light of the WMI offer to acquire its remaining public shares, WTI has suspended its repurchase activity. WMI periodically sells put options on its common stock. The put options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. Proceeds from the sale of the options are credited to additional paid-in capital. In the event the options are exercised, the Company may elect to pay the holder in cash the difference between the strike price and the market price of the Company's shares in lieu of repurchasing the stock. In February 1997, options on 1.9 million shares were exercised, and the Company elected to settle them for $1.6 million in cash. One million options expired unexercised as the price of the Company's stock was in excess of the strike price at maturity. At June 30, 1997, no put options were outstanding, although the Company may sell such options in the future. Commitments and Contingencies - During the first quarter of 1995, Waste Management International plc ("WM International") received an assessment from the Swedish Tax Authority of approximately 417 million Krona (approximately $60 million) plus interest from the date of the assessment, relating to a transaction completed in 1990. WM International believes that all appropriate tax returns and disclosures were filed at the time of the transaction and intends to vigorously contest the assessment. A Company subsidiary has been involved in litigation challenging a municipal zoning ordinance which restricted the height of its New Milford, Connecticut landfill to a level below that allowed by the permit previously issued by the Connecticut Department of Environmental Protection ("DEP"). Although a lower court had declared the zoning ordinance's height limitation unconstitutional, during 1995 the Connecticut Supreme Court reversed this ruling and remanded the case for further proceedings in the Superior Court. In November 1995, the Superior Court ordered the subsidiary to apply to the DEP for permission to remove all waste above the height allowed by the zoning ordinance, and the Connecticut Supreme Court has upheld that ruling. The Company believes that the removal of such waste is an inappropriate remedy and is seeking an alternative resolution to the issue, but is unable to predict the outcome. Depending upon the nature of any plan eventually approved by applicable regulatory authorities for removing the waste, the actual volume of waste to be moved, and other currently unforseeable factors, the subsidiary could incur costs which would have a material adverse impact on the Company's financial condition and results of operations in one or more future periods. In May 1994, the U.S. Supreme Court ruled that state and local governments may not constitutionally restrict the free movement of trash in interstate commerce through the use of flow control laws. Such laws typically involve a municipality specifying the disposal site for all solid waste generated within its borders. Since the ruling, several decisions of state or federal courts have invalidated regulatory flow control schemes in a number of jurisdictions. Other judicial decisions have upheld nonregulatory means by which municipalities may effectively control the flow of municipal solid waste. 13 WTI's Gloucester County, New Jersey, facility relies on a disposal franchise for substantially all of its supply of municipal solid waste. In July 1996, a Federal District Court permanently enjoined the State of New Jersey from enforcing its solid waste regulatory flow control system, which was held to be unconstitutional, but stayed the injunction for as long as its ruling is on appeal plus an additional period of two years to enable the State to devise an alternative nondiscriminatory approach. On May 1, 1997, the Third Circuit Court of Appeals affirmed the District Court's ruling that the New Jersey flow control system was unconstitutional, but vacated the two year "post appeal" stay. However, the Appeals Court granted a continued stay for so long as any appeals are pending. The State has indicated that it will continue to enforce flow control during the appeal process. The New Jersey legislature is now considering a bill to authorize counties and authorities, including the Gloucester County Improvement Authority, which administers WTI's franchise there, to implement a constitutionally permissible system of "economic flow control" designed to recover waste disposal costs incurred in reliance on the State's franchise system. The Supreme Court's 1994 ruling and subsequent court decisions have not to date had a material adverse effect on any of the Company's 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, the Company believes that affected municipalities will endeavor to implement alternative lawful means to continue controlling the flow of waste. In view of the uncertain state of the law at this time, however, the Company is unable to predict whether such efforts would be successful or what impact, if any, this matter might have on the Company's disposal facilities, particularly WTI's trash-to-energy facilities. As the states and U.S. Congress have accelerated their consideration of ways in which economic efficiencies can be gained by deregulating the electric generation industry, some have argued that over-market power sales agreements entered into pursuant to the Public Utilities Regulatory Policies Act of 1978 ("PURPA") should be voidable as "stranded assets." WTI's 25 power production facilities are qualifying facilities under PURPA and depend on the sanctity of their power sales agreements for their economic viability. Recent state and federal agency and court decisions have unanimously upheld the inviolate nature of these contracts. WTI believes that federal law offers strong protections to its PURPA contracts. However, there is a risk that future utility restructurings, court decisions or legislative or administrative action in this area will have a material adverse effect on its business. WM International operates facilities in Hong Kong which are owned by the Hong Kong government. On July 1, 1997, control of the Hong Kong government transferred to the People's Republic of China. WM International is unable to predict what impact, if any, this change will have on its operations in Hong Kong. At June 30, 1997, WM International had identifiable assets of $269.3 million related to its Hong Kong operations which generated pretax income of approximately $15.3 million in calendar 1996 and $13.4 million in the first six months of 1997. 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. Some of these lawsuits may seek to have the Company or its subsidiaries pay the cost of groundwater monitoring and health care examinations of allegedly affected persons for a substantial period of time, even where no actual damage is proven. While the Company believes that it has meritorious defenses to these lawsuits, their ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs' circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other things. Accordingly, it is reasonably possible that such matters could have a material adverse impact on the Company's earnings for one or more fiscal quarters or years. 14 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. Legal Matters - See Part II of this Form 10-Q for a discussion of legal matters. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Tables in millions) RESULTS OF OPERATIONS: Summary - - ---------- For the three months ended June 30, 1997, Waste Management, Inc. (formerly WMX Technologies, Inc.) and its subsidiaries ("WMI" or the "Company") had net income from continuing operations of $180.0 million, or $0.39 per share, versus $217.7 million, or $0.44 per share in the comparable quarter in 1996. Revenue from continuing operations was $2.33 billion in both the current-year and the year- earlier quarters. Net income was $0.39 per share for the three months ended June 30, 1997, compared with $0.45 for the same three months in 1996. Six-month 1997 net income from continuing operations was $358.4 million, or $0.75 per share, on revenue of $4.53 billion. For the first six months of 1996, income from continuing operations was $397.9 million, or $0.81 per share, on revenue of $4.48 billion. Net income was $0.75 for the first six months of 1997, compared with $0.83 for the first six months of 1996. Results for the three-month and six-month periods ended June 30, 1997, include the Company's share ($10.4 million after tax and minority interest, or $0.02 per share) of a special charge recorded by OHM Corporation, in which the Company's Rust International Inc. ("Rust") subsidiary has an approximately 37% equity interest. In February 1997, the Company articulated a comprehensive set of strategic initiatives, including returning its focus to waste management services in domestic and selected international markets where the Company holds or can develop a strong competitive position, and a financial strategy focused on generating cash and using that cash for the benefit of shareholders. The increased cash flow is to come from the divestiture of non-core or non- integrated assets, reduction of capital expenditures, control of costs, and improved return on the asset base. During the first six months of 1997, the Company and its subsidiaries monetized $1.3 billion of non-core and non- integrated assets, including the investments in Wessex Water Plc ("Wessex") and ServiceMaster Limited Partnership ("ServiceMaster"). Its Wheelabrator Technologies Inc. ("WTI") subsidiary sold its water and wastewater facility operations and privatization business to United States Filter Corporation ("U.S. Filter") for 2.3 million shares of U.S. Filter stock. Waste Management of North America, Inc. ("WMNA") divested 17 solid waste operations in North America, including the sale of most of its Canadian operations, for a total price of $265 million. In Europe, the Company's Waste Management International plc ("WM International") subsidiary completed in June the sale of substantially all of its operations in France, for approximately $112 million, and subsequent to June 30 sold its business in Spain. During the first quarter of 1997, the Company announced a Dutch Auction tender offer which culminated in May with its repurchasing 30 million of its outstanding shares for $30 a share. On May 9, the Board of Directors approved an increase in the quarterly dividend from $0.16 to $0.17 per share. The Company has five primary operating subsidiaries. WMNA provides integrated solid waste management services in North America and manages the industrial cleaning services business owned by Rust. Chemical Waste Management, Inc. ("CWM") provides chemical waste treatment, storage, disposal and related services and furnishes low-level radioactive waste management and disposal services in North America. WTI is engaged in the ownership and operation of trash-to-energy, waste-fuel powered independent power, and biosolids pelletizer facilities as well as providing biosolids land application services. WM International provides comprehensive waste management and related services outside North America, with operations in eight countries in Europe, five countries in Asia, and Argentina, Australia, Brazil, Israel and New Zealand. The Company considers its operations to 16 be part of a single industry segment - waste management services - and reports accordingly. The other services formerly provided by the Company have been classified as discontinued operations in the accompanying financial statements and have been or are in process of being sold. The discussion which follows relates to the Company's continuing operations. Revenue - - ---------- Consolidated revenue for the three months and six months ended June 30, 1997, compared with the same periods in 1996, is shown in the table which follows: Three Months Ended June 30 Six Months Ended June 30 ------------------------------ -------------------------------- Percentage Percentage Incr./ Incr./ 1997 1996 (Decr.) 1997 1996 (Decr.) -------- -------- ---------- --------- --------- ---------- North America - WMNA - Residential $ 327.3 $ 319.4 2.5% $ 640.3 $ 631.8 1.3% Commercial 400.1 419.2 (4.5) 805.7 824.2 (2.2) Rolloff and industrial 327.0 360.0 (9.2) 637.0 675.8 (5.7) Disposal, transfer & other 403.5 400.3 0.8 750.1 731.8 2.5 -------- -------- -------- -------- Total WMNA $1,457.9 $1,498.9 (2.7) $2,833.1 $2,863.6 (1.1) CWM 115.3 127.8 (9.7) 224.6 252.9 (11.2) Rust 80.4 71.3 12.8 152.3 136.6 11.5 WTI 256.1 244.4 4.8 504.2 463.9 8.7 WM International 463.6 477.0 (2.8) 920.8 930.8 (1.1) Eliminations (46.0) (88.4) (109.4) (172.3) -------- -------- -------- -------- Total $2,327.3 $2,331.0 (0.2)% $4,525.6 $4,475.5 1.1% ======== ======== ==== ======== ======== ===== Total revenue for the quarter ended June 30, 1997, was essentially flat compared with the second quarter a year ago. The overall revenue impact of dispositions, net of acquisitions, was a reduction of approximately $45 million in the quarter. WMNA revenue was down approximately $41 million in the second quarter of 1997 compared with 1996. The decline is about equal to the revenue which it lost on dispositions, as it had little internal growth between years. While WMNA is making improvement in its lost customer rate, it continued to suffer from the consequences of aggressive price increases in 1996. WM International, a U.K. corporation which maintains its accounts in pounds sterling, has been adversely impacted by the strength of the pound against other world currencies. Year over year revenue growth, in U.S. dollars excluding currency translation, of 3.1% in the second quarter and 3.7% for the six months ended June 30, 1997, was more than offset by foreign currency translation losses of 5.9% in the quarter and 4.8% for the six months. WTI 1997 revenue included $18.3 million in the second quarter and $34.2 million for the six months of construction revenue related to the retrofit of its Pinellas County, Florida, trash-to-energy facility and construction of a biosolids compost facility for Burlington County, New Jersey. No similar construction revenue was earned during the first half of 1996. Revenue growth of $3.8 million for the second quarter and $10.2 million for the first six months of 1997, compared with 1996, related to new industrial cogeneration plants (so- called "inside-the-fence" facilities) acquired in 1996. WTI is attempting to leverage its energy plant operating capabilities and project financing expertise by owning and/or operating inside-the-fence power plants for industrial customers. WTI's other revenue decreased during the quarter and six-month periods of 1997 compared with 1996, due 17 to divestitures of biosolids land spreading operations and a slight decline in revenue from trash deliveries offsetting contractual price escalation. The decline in revenue from trash deliveries resulted from dry weather in the Mid- Atlantic and New England states which decreased the weight of trash delivered to WTI's plants. Operating Expenses - - --------------------- Operating expenses as a percentage of revenue were 70.2% in the second quarter of 1997 compared with 69.5% in the comparable quarter of 1996, and for the six months ended June 30, were 70.4% in 1997 compared with 69.6% in 1996. The higher operating expenses reflect lower margins at WTI due to the impact of the construction revenue, and sharply lower margins in hazardous waste, as well as the lack of revenue growth in WMNA. Selling and Administrative Expenses - - ------------------------------------- Selling and administrative expenses declined in actual dollars in the quarter ended June 30, 1997 compared with the same quarter in 1996, and were 10.4% of revenue in the current year versus 10.6% in the year-ago quarter. For the six months ended June 30, selling and administrative expenses were 10.7% of revenue in 1997 compared with 11.0% in 1996, and declined approximately $8.2 million in absolute terms. The improvements reflect the ongoing focus on streamlining administrative activities and controlling costs throughout the Company. Interest, net - - --------------- The following table sets forth the components of consolidated interest, net, for the three months and six months ended June 30, 1997 and 1996: Three Months Six Months ---------------- ---------------- 1997 1996 1997 1996 ------ ------ ------ ------ Interest expense $114.9 $111.8 $228.2 $222.8 Interest income (9.8) (6.4) (21.9) (12.7) Capitalized interest (15.0) (17.5) (29.9) (34.7) ------ ------ ------ ------ Interest expense, net $ 90.1 $ 87.9 $176.4 $175.4 ====== ====== ====== ====== Net interest expense was relatively unchanged between years for both the three- month and six-month periods ended June 30. Although net debt declined slightly from December 31, 1996 to June 30, 1997, it increased in the interim due to cash required to complete the Dutch Auction. Interest rates have also increased slightly in 1997, and net interest expense is adversely impacted by the mix of debt between the domestic entities and WM International. Sundry (Income) Expense, net - - ------------------------------ Second quarter 1997 sundry expense reflects the Company's 37% share of the special charge recorded by OHM. Both the three-month and six-month periods in 1997 reflect the loss of income from the Company's previous investments in Wessex and ServiceMaster, which have been sold, partially offset in the six- month period by a gain recognized on the disposition of the ServiceMaster shares. The Company does not expect sundry income, net, to be significant during the remainder of 1997. 18 Discontinued Operations - - -------------------------- In line with the Company's strategy to focus on waste management services, other industry segments, including the engineering, construction and consulting businesses and industrial scaffolding business of Rust and the water businesses of WTI, have been classified as discontinued operations. Results of operations for the three months and six months ended June 30, 1997, for those businesses not yet sold were not material and were included in the reserve for loss on disposition provided previously. Revenues of discontinued operations were $107.0 million for the three months and $241.4 million for the six months ended June 30, 1997, versus $354.1 million and $769.6 million for the comparable periods in 1996, the decline relating primarily to businesses sold in the interim. Restructuring - - ---------------- In the fourth quarter of 1996, the Company recorded a charge for reengineering and streamlining its finance and administrative functions. Approximately $20.0 million of the charge related to cash payments for employee severance. As of June 30, 1997, approximately half of this amount had been spent. The balance is expected to be paid by the end of 1997. In addition, the Company expects that the reengineering will result in costs of $0.05 to $0.06 per share which will be charged to income in 1997, including approximately $0.01 to $0.02 in the second quarter and for the six months. Accounting Principles - - ----------------------- In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share." This statement 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 for the period. In addition, Fully Diluted EPS is replaced with Diluted EPS, which gives effect to all common shares that would have been outstanding if all dilutive potential common shares (relating to such things as the exercise of stock options and convertible debt) had been issued. FAS No. 128 is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted, but when the opinion becomes effective all prior periods presented must be restated. EPS computed in accordance with FAS No. 128 for the quarter and six months ended June 30, 1997 and 1996 would have been as follows: Quarter Ended June 30 Six Months Ended June 30 --------------------- ------------------------ 1997 1996 1997 1996 ------ ------ ------ ------ Continuing Operations- Basic $ 0.39 $ 0.44 $ 0.75 $ 0.81 Diluted 0.38 0.43 0.74 0.79 Discontinued Operations- Basic $ - $ 0.01 $ - $ 0.02 Diluted - 0.01 - 0.02 In June 1997, the FASB 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. FAS 130 requires only a different format for presentation of information already included in the Company's financial statements. FAS 131 modifies 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 and cash flows. 19 Derivatives - - ------------- From time to time, the Company and certain of its subsidiaries use derivatives to manage currency, interest rate, and commodity (fuel) risk. Derivatives used are simple agreements which provide for payments based on the notional amount, with no multipliers or leverage. The Company's use of derivatives has not been and is not expected to be material with respect to financial condition or results of operations. For further discussion on the Company's use of and accounting for derivatives, see "Derivative Financial Instruments" in the Notes to Consolidated Financial Statements. Environmental 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. As part of its ongoing operations, the Company provides for estimated closure and post-closure monitoring costs over the life of disposal sites as airspace is consumed. The Company has also established procedures to evaluate its potential remedial liabilities at closed sites which it owns or operated, or to which it transported waste. While the Company believes that it has adequately provided for its environmental liabilities, it is reasonably possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could necessitate the recording of additional liabilities which could be material. For further discussion, see "Environmental Liabilities" in the Notes to Consolidated Financial Statements. FINANCIAL CONDITION: Liquidity and Capital Resources - - ---------------------------------- The Company had a working capital deficit of $436.5 million at June 30, 1997, compared with working capital of $54.5 million at December 31, 1996. In connection with its strategy to maximize cash flow, the Company has placed emphasis on minimizing working capital, because it operates in a service industry with neither significant inventory nor seasonal variation in receivables, and thus reducing working capital typically does not adversely affect operations. In conjunction with its strategic focus, the Company generated $1,352.0 million of "owners' cash flow" (which it defines as cash flow from operating activities, less capital expenditures and dividends, plus proceeds from asset monetization) during the six months ended June 30, 1997. Included in this total is $1,287.1 million of proceeds from asset monetization. Through the Dutch Auction, $900 million of this owners' cash flow was returned to shareholders during 1997. Acquisitions and Capital Expenditures - - --------------------------------------- Capital expenditures, excluding property and equipment of purchased businesses, were $368.2 million for the six months ended June 30, 1997, and $577.8 million for the comparable period in 1996. In addition, the Company and its principal subsidiaries spent $34.8 million on acquisitions in 1997 compared with $92.8 million in cash and debt (including debt assumed) and 8.0 million shares of WMI common stock during the first six months of 1996. Capital Structure - - ------------------- Although the Company has placed increasing emphasis on generating owners' cash flow during the past two years, a substantial portion of such cash has been returned to stockholders through stock repurchases. However, during the first six months of 1997, total debt declined $202.8 million from December 31, 1996. Cash and marketable securities decreased $62.5 million in the first six months of 1997 to $602.1 million as a result of the Dutch Auction. 20 On June 20, 1997, the Company announced an offer to acquire, for $15 per share in cash, all of the outstanding shares of WTI that it does not already own. The Company currently owns approximately 67% of the 156.6 million outstanding WTI shares. The offer is subject to the approval by a committee of independent WTI directors and the holders of a majority of the outstanding WTI shares, other than those held by the Company, voting on it at a special meeting of WTI stockholders to be called for that purpose. Several lawsuits have also been filed which seek, among other things, to enjoin the proposed transaction. The Boards of Directors of WMI and WTI have authorized their respective companies to repurchase shares of their own common stock (up to 50 million shares in the case of WMI and 30 million shares in the case of WTI) in the open market, in privately negotiated transactions, or through issuer tender offers. These programs extend into 1998. During the 1997 second quarter, WMI purchased 30 million of its shares through the Dutch Auction; it has not repurchased any other shares during 1997. WTI repurchased 5.1 million of its shares in open market transactions during the first six months of 1997; however, in light of the WMI offer to acquire its remaining public shares, WTI has suspended its repurchase activity. In conjunction with its authorized repurchase program, WMI periodically sells put options on its common stock. These options give the holders the right at maturity to require the Company to repurchase its shares at specified prices. There were no put options outstanding at June 30, 1997, although the Company may sell such options in the future. Risks and Uncertainties - - ------------------------- See "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for a description of certain contingent liabilities relating to the Company and its subsidiaries. There has been no significant change in the status of these matters since December 31, 1996. Outlook - - --------- While the Company expected revenue and earnings to be flat in 1997 compared with 1996, second quarter results were below management's expectations. WMNA continues to experience a very difficult pricing environment. While it is having success obtaining and renewing residential contracts, renewals are in many cases at lower prices. Disposal pricing is very competitive for both special and solid wastes. Hazardous waste landfill prices continue to be flat to weaker. WM International is being adversely affected by the strength of the British pound against the currencies in the other countries where it operates. In light of these and other factors and results to date, the Company expects 1997 earnings to be approximately $1.65 per share, excluding the effect of the OHM charge but including a $0.05 to $0.06 per share cost for reengineering. Forward-Looking Information - - ----------------------------- Except for historical data, the information contained 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 the ability of the Company to meet price increase and new business sales goals, changes in the price of recyclable commodities, weather conditions, slowing of the overall economy, higher interest rates, failure of the Company's restructuring and reengineering plans to produce the anticipated cost savings, the inability to complete the divestiture of discontinued businesses or the monetization of other assets at appropriate prices and terms, and the cost and timing of stock repurchase programs. 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. 21 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. ----------------- The continuing business in which the Company is engaged is intrinsically connected with the protection of the environment, and the potential exists 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 above under "Commitments and Contingencies" in the Notes to Consolidated Financial Statements concerning a Company subsidiary's New Milford, Connecticut landfill, the Company believes that these matters will not have a material adverse effect on its results of operation or financial condition. However, the outcome of any particular proceeding cannot be predicted with certainty, and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter this expectation at any time. 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 proposal contemplates a merger in which WTI's stockholders would receive $15.00 in cash per share of WTI's common stock, subject to the approval of both a special committee consisting of independent directors of WTI and the holders of a majority of WTI's outstanding shares (other than shares held by the Company) voting at a stockholders' meeting. 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 is asserted to be inadequate and unfair. In addition, the purported derivative lawsuit alleges that the proposal is 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. ITEM 4. Submission of Matters to Vote of Security Holders. ------------------------------------------------- At the Company's annual meeting of stockholders on May 9, 1997, a proposal to elect the nominees listed in the following table as directors of the Company was submitted to a vote of the Company's stockholders. The following table also shows the results of voting as to each nominee: Nominee Votes For Votes Withheld - --------------------- ----------- -------------- Dean L. Buntrock 365,287,789 53,134,773 Robert S. Miller 413,471,882 4,950,680 Paul M. Montrone 395,847,591 22,574,971 Peer Pedersen 391,160,263 27,262,299 22 At the same meeting, proposals concerning (i) ratifying the appointment of Arthur Andersen LLP as independent auditors for 1997, (ii) an amendment to the Company's Restated Certificate of Incorporation, as amended (the "Certificate"), to change the Company's name to "Waste Management, Inc.," (iii) an amendment to the Certificate to provide for annual election of directors, (iv) approval of the Company's 1997 Equity Incentive Plan, and (v) amendment of the Company's By- Laws to provide that the Board of Directors shall consist of a majority of independent directors, as defined in the proposal, were considered by the stockholders. The proposals concerning the appointment of auditors, the change of the Company's name and the Company's 1997 Equity Incentive Plan were approved, while the proposals concerning annual election of directors and independence of a majority of the Board of Directors were defeated. The results are detailed as follows: Proposal Votes For Votes Against Abstentions Broker Non-Votes -------- --------- ------------- ----------- ---------------- Ratification of Auditors 391,047,996 26,310,575 1,063,991 -0- Change of Company Name 414,758,709 1,200,128 2,463,721 4 1997 Equity Incentive Plan 392,622,449 23,582,486 2,216,823 804 Annual Election of Directors* 360,098,060 13,087,350 1,758,350 43,478,802 Director Independence 60,862,140 275,263,981 38,815,332 43,481,109 * This Proposal was not approved because under the Company's Certificate the proposal needed the affirmative vote of at least 80% of the Company's outstanding shares, which was not obtained. 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. During the period covered by this Quarterly Report on Form 10-Q, the Company filed reports on Form 8-K as follows: (i) A report dated April 1, 1997 concerning the Company's offer to purchase from its stockholders up to 30,000,000 shares of its common stock, $1.00 par value, at a price not in excess of $35.00 nor less than $30.00 per share, as specified by stockholders tendering their shares (the "Dutch Auction Tender Offer") and the commencement of a lawsuit against the Company and its Board of Directors seeking to enjoin the Company from completing the Dutch Auction Tender Offer. (ii) A report dated April 15, 1997 concerning a shareholder lawsuit related principally to an adverse court judgment in a commercial dispute involving royalties to the former owners of the Company's Chemical Waste Management, Inc. subsidiary's Emelle, Alabama hazardous waste facility. (iii) A report dated April 22, 1997 concerning the refusal by the Court of Chancery in and for New Castle County, Delaware to grant a preliminary injunction against the completion of the Company's Dutch Auction Tender Offer. 23 (iv) A report dated April 28, 1997 concerning the intention of a director of the Company to tender a portion of his shares of the Company's common stock in the Company's Dutch Auction Tender Offer and the preliminary results of the Company's Dutch Auction Tender Offer. (v) A report dated May 9, 1997 concerning the change of the Company's name to "Waste Management, Inc." and the results of voting on various matters by the Company's stockholders at the May 9, 1997 annual meeting of the Company's stockholders. (vi) A report dated June 20, 1997 concerning the approval by the Company's Board of Directors of an offer to acquire all of the outstanding publicly held shares of the Company's Wheelabrator Technologies Inc. subsidiary. 24 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WASTE MANAGEMENT, INC. /s/ JOHN D. SANFORD --------------------------------------- John D. Sanford, Senior Vice President, Chief Financial Officer and Treasurer August 8, 1997 25 WASTE MANAGEMENT, INC. EXHIBIT INDEX Number and Description of Exhibit* --------------------------------- 2 None 3 None 4 None 10 None 11 None 12 Computation of Ratios of Earnings to Fixed Charges 15 None 18 None 19 None 22 None 23 None 24 None 27 Financial Data Schedule 99 None - ----------------- * Exhibits not listed are inapplicable. 26