<PAGE>
Registration No. 333-01327
Filed Pursuant to Rules 424(b)(3) and (c)
Prospectus Supplement dated November 20, 1997 to
Prospectus dated August 12, 1997
The attached Current Reports on Form 8-K dated October 29, 1997 and
November 4, 1997 and the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, all of Waste Management, Inc. (the "Company"), constitute
this Supplement to the Company's Prospectus dated August 12, 1997.
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
October 29, 1997
Date of Report (Date of earliest event reported)
------------
WASTE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-7327 36-2660763
(Commission File Number) (IRS Employer
Identification No.)
3003 BUTTERFIELD ROAD, OAK BROOK, ILLINOIS 60523
(Address of principal executive offices) (Zip code)
(630) 572-8800
(Registrant's telephone number, including area code)
================================================================================
<PAGE>
Item 5. Other Events.
------------
On October 29, 1997, the registrant's Board of Directors announced that it had
received and accepted the resignation of the registrant's Chairman and Chief
Executive Officer, Ronald T. LeMay, effective immediately. The Board also
announced that Robert S. (Steve) Miller, a director of the registrant, had been
named acting Chairman of the Board and Chief Executive Officer.
The registrant also announced that its Board of Directors is in the process of
appointing a search committee and will retain an executive recruiting firm to
help identify a new Chief Executive Officer. In addition, the registrant
announced that the Nominating Committee of its Board had engaged an executive
recruiting firm to identify two new independent directors to serve on the
registrant's Board.
Also on October 29, 1997, the registrant announced that its Senior Vice
President and Chief Financial Officer, John D. Sanford, had resigned to become
Chief Financial Officer of CDI Corporation. The registrant further indicated
that during the process of recruiting a new Chief Financial Officer, Donald
Chappel, 46, Vice President and Controller of the registrant's Waste Management
of North America, Inc. subsidiary, will serve as the registrant's acting Chief
Financial Officer.
The registrant also indicated that its former Executive Vice President, James E.
Koenig, had resigned.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
No financial statements or pro forma financial information are required to
be filed as a part of this report. There are no exhibits filed as part of this
report.
<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.
WASTE MANAGEMENT, INC.
By: /s/ Herbert A. Getz
-----------------------------
Herbert A. Getz
Senior Vice President
Dated: November 3, 1997
<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
November 4, 1997
Date of Report (Date of earliest event reported)
----------------
WASTE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-7327 36-2660763
(Commission File Number) (IRS Employer
Identification No.)
3003 BUTTERFIELD ROAD, OAK BROOK, ILLINOIS 60523
(Address of principal executive offices) (Zip code)
(630) 572-8800
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events.
------------
On November 4, 1997, the registrant announced that its Board of Directors had
elected two new directors. The registrant indicated that the two new directors
are Roderick M. Hills, 66, a former Chairman of the Securities and Exchange
Commission, President of Hills Enterprises Ltd. and current Vice Chairman of the
Board of Oak Industries, Inc. and John C. Pope, 48, Chairman of the Board of
MotivePower Industries, Inc. and formerly President and Chief Operating Officer
of UAL Corporation and United Airlines. The registrant further indicated the
Board had been expanded by one member with the election of Messrs. Hills and
Pope.
The registrant also announced that its Board had established a new Search
Committee, which will be chaired by its acting Chairman and Chief Executive
Officer, Robert S. Miller, to seek a new Chief Executive Officer to succeed
Ronald T. LeMay, who resigned last week. The registrant indicated that the
other Search Committee members include Professor Pastora San Juan Cafferty, Mr.
Pope, Steven G. Rothmeier and Peer Pedersen, and that the committee had engaged
an executive recruiting firm, Heidrick & Struggles, to assist its search.
The registrant further announced changes affecting three Board committees:
. The Audit Committee's membership is now composed of Messrs. Hills, who
serves as Chairman, Miller, Rothmeier, Pope and James Peterson. The
Audit Committee is overseeing the management review of the
registrant's North American operating assets and investments begun in
the third quarter. As previously announced, depending on the outcome
of this review, the registrant could record a charge to income in the
fourth quarter that could be material to its results of operations for
the year. While final decisions are not expected to be made on a
variety of accounting-related matters until late in the quarter or
early next year, these decisions could result in lower future reported
earnings. The possibility exists that as work on this project
progresses or new developments occur, the Audit Committee could
determine that a restatement of prior-period earnings is appropriate.
. The role of the Nominating Committee has been expanded to expressly
include Board practices and corporate governance issues. To reflect
its new role, the committee has been renamed the Nominating and
Governance Committee, with Alexander B. Trowbridge as its chair and
H. Jesse Arnelle, Mr. Miller and Paul M. Montrone as its members.
. The Executive Committee now comprises Messrs. Miller, Peterson and
Peer Pedersen, with Mr. Miller serving as the Committee's Chairman.
Former Chairman and CEO Dean L. Buntrock is no longer a member of this
committee.
The registrant also announced that its Board of Directors had elected Mark T.
Spears, 40, as Controller of the registrant, succeeding Thomas C. Hau, 62, who
had served in this position since 1990 and who plans to retire from the
registrant in early 1998. The registrant noted that Mr. Spears had been named
Vice President and Assistant Controller of the registrant in July 1997.
Except for historical data, the information in this report constitutes forward-
looking statements. Forward-looking statements are inherently uncertain and
subject to risks and the statements should be viewed with caution. Actual
results or experience could differ materially from the
<PAGE>
forward-looking statements as a result of many factors, including the ability of
the Company to meet anticipated price increase and new business sales goals,
fluctuation in recyclable commodity prices, adverse weather conditions, slowing
of the overall economy, increased interest costs arising from a change in the
Company's leverage, failure of the Company's plans to produce the cost savings
anticipated by the Company, the timing and magnitude of capital expenditures,
inability to obtain or retain permits necessary to operate disposal or other
facilities or otherwise complete project development activities, inability to
complete contemplated dispositions of Company businesses and assets at
anticipated prices and terms, and the timing and cost of the Company's stock
repurchases.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
No financial statements or pro forma financial information are required to be
filed as a part of this report. There are no exhibits filed as part of this
report.
<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.
WASTE MANAGEMENT, INC.
By: /s/ Herbert A. Getz
-------------------
Herbert A. Getz
Senior Vice President
Dated: November 5, 1997
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 1997
OR
[_] 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.
X
YES NO
SHARES OF REGISTRANT'S COMMON STOCK, $1 PAR VALUE, ISSUED AND
OUTSTANDING, AT OCTOBER 31, 1997 -- 455,024,772
(EXCLUDING 10,886,361 SHARES HELD IN THE WASTE MANAGEMENT, INC. EMPLOYEE STOCK
BENEFIT TRUST)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information:
Consolidated balance sheets as of December 31, 1996 and September 30,
1997..................................................................... 4
Consolidated statements of income (as revised) for the three months and
nine months ended
September 30, 1996 and 1997.............................................. 6
Consolidated statements of stockholders' equity (as revised) for the nine
months ended September 30, 1996 and 1997................................. 7
Consolidated statements of cash flows (as revised) for the nine months
ended September 30, 1996 and 1997........................................ 9
Notes to consolidated financial statements................................ 10
Management's discussion and analysis of results of operations and
financial condition...................................................... 18
PART II. Other Information................................................ 26
</TABLE>
* * * * * *
3
<PAGE>
PART I. FINANCIAL INFORMATION
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000'S OMITTED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 1996 30, 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 323,288 $ 132,523
Short-term investments............................. 341,338 83,461
Accounts receivable, less reserve of $47,523 in
1996 and $39,285 in 1997.......................... 1,681,817 1,571,476
Employee receivables............................... 10,084 8,030
Parts and supplies................................. 142,417 137,476
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 240,531 181,828
Prepaid expenses................................... 353,749 350,045
----------- -----------
Total Current Assets............................. $ 3,093,224 $ 2,464,839
----------- -----------
Property and Equipment, at cost:
Land, primarily disposal sites..................... $ 5,019,065 $ 5,112,779
Buildings.......................................... 1,495,252 1,468,832
Vehicles and equipment............................. 7,520,902 7,357,606
Leasehold improvements............................. 85,998 83,159
----------- -----------
$14,121,217 $14,022,376
Less--Accumulated depreciation and amortization...... (4,399,508) (4,646,147)
----------- -----------
Total Property and Equipment, Net................ $ 9,721,709 $ 9,376,229
----------- -----------
Other Assets:
Intangible assets relating to acquired businesses,
net............................................... $ 3,885,293 $ 3,663,872
Sundry, including other investments................ 1,452,057 1,007,722
Net assets of discontinued operations.............. 214,309 180,058
----------- -----------
Total Other Assets............................... $ 5,551,659 $ 4,851,652
----------- -----------
Total Assets................................... $18,366,592 $16,692,720
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 1996 30, 1997
----------- -----------
<S> <C> <C>
Current Liabilities:
Portion of long-term debt payable within one year.. $ 553,493 $ 385,028
Accounts payable................................... 948,350 723,388
Accrued expenses................................... 1,324,324 1,544,248
Unearned revenue................................... 212,541 214,985
----------- -----------
Total Current Liabilities........................ $ 3,038,708 $ 2,867,649
----------- -----------
Deferred Items:
Income taxes....................................... $ 1,011,593 $ 881,670
Environmental liabilities.......................... 543,723 549,191
Other.............................................. 641,918 647,150
----------- -----------
Total Deferred Items............................. $ 2,197,234 $ 2,078,011
----------- -----------
Long-Term Debt, less portion payable within one year. $ 6,971,607 $ 6,405,304
----------- -----------
Minority Interest in Subsidiaries.................... $ 1,186,955 $ 1,157,590
----------- -----------
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......................... 864,730 987,111
Cumulative translation adjustment.................. (79,213) (210,206)
Retained earnings.................................. 4,363,754 4,543,700
----------- -----------
$ 5,656,373 $ 5,827,707
Less: Treasury stock; 12,782,864 shares in 1996 and
40,862,713 in 1997, at cost................... 419,871 1,261,803
1988 Employee Stock Ownership Plan............... 6,396 1,396
Employee Stock Benefit Trust; 10,886,361 shares
in 1996 and 1997, at market..................... 353,807 380,342
----------- -----------
Total Stockholders' Equity....................... $ 4,876,299 $ 4,184,166
----------- -----------
Total Liabilities and Stockholders' Equity..... $18,366,592 $16,692,720
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (AS REVISED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue........................ $2,372,746 $2,351,189 $6,848,219 $6,876,806
---------- ---------- ---------- ----------
Operating expenses........... $1,651,420 $1,839,212 $4,774,464 $5,096,228
Selling and administrative
expenses.................... 264,947 266,491 774,594 781,445
Interest expense............. 107,448 98,477 310,045 309,512
Interest income.............. (4,999) (6,201) (17,660) (28,079)
Minority interest............ 29,533 30,435 85,894 86,111
Sundry income, net........... (35,869) (8,122) (80,162) (174,554)
---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes....................... $ 360,266 $ 130,897 $1,001,044 $ 806,143
Provision for income taxes... 144,991 67,696 408,614 389,316
---------- ---------- ---------- ----------
Income from continuing
operations.................. $ 215,275 $ 63,201 $ 592,430 $ 416,827
Income from discontinued
businesses, less applicable
income taxes and minority
interest of $28,961 and
$63,245 for the three months
and nine months ended
September 30, 1996,
respectively, and $78,400
for the nine months ended
September 30, 1997.......... 26,377 -- 54,736 810
---------- ---------- ---------- ----------
Net Income..................... $ 241,652 $ 63,201 $ 647,166 $ 417,637
========== ========== ========== ==========
Average Common and Common
Equivalent Shares Outstanding. 490,693 455,945 491,712 468,980
========== ========== ========== ==========
Earnings Per Common and Common
Equivalent Share
Continuing operations.......... $ 0.44 $ 0.14 $ 1.21 $ 0.89
Discontinued operations........ 0.05 -- 0.11 --
---------- ---------- ---------- ----------
Net Income..................... $ 0.49 $ 0.14 $ 1.32 $ 0.89
========== ========== ========== ==========
Dividends Declared Per Share... $ 0.16 $ 0.17 $ 0.47 $ 0.50
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements. These state-
ments of income have been revised for certain reclassifications and adjust-
ments. See Note 1.
6
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (AS REVISED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1988
EMPLOYEE EMPLOYEE
ADDITIONAL CUMULATIVE STOCK STOCK
COMMON PAID-IN TRANSLATION RETAINED TREASURY OWNERSHIP BENEFIT
STOCK CAPITAL ADJUSTMENT EARNINGS STOCK PLAN TRUST
-------- ---------- ----------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $498,817 $422,801 $(102,943) $4,486,877 $ -- $13,062 $350,151
Net income for the
period................. -- -- -- 647,166 -- -- --
Cash dividends ($.47 per
share)................. -- -- -- (231,074) -- -- --
Dividends paid to
Employee Stock Benefit
Trust.................. -- 5,202 -- (5,202) -- -- --
Stock repurchase
(11,100,000 shares).... -- -- -- -- 359,172 -- --
Stock issued upon
exercise of stock
options................ 217 (8,323) -- -- (31,149) -- (28,622)
Treasury stock received
in connection with
exercise of stock
options................ -- -- -- -- 791 -- --
Tax benefit of non-
qualified stock options
exercised.............. -- 5,378 -- -- -- -- --
Contribution to 1988
Employee Stock
Ownership Plan......... -- -- -- -- -- (5,000) --
Treasury stock received
as settlement for
claims................. -- -- -- -- 2,450 -- --
Common stock issued upon
conversion of Liquid
Yield Option Notes..... 111 1,968 -- -- -- -- --
Stock issued for
acquisitions........... 7,957 221,820 -- -- (51) -- --
Temporary equity related
to put options......... -- (42,180) -- -- -- -- --
Proceeds from sale of
put options............ -- 16,362 -- -- -- -- --
Adjustment of Employee
Stock Benefit Trust to
market value........... -- 36,360 -- -- -- -- 36,360
Cumulative translation
adjustment of foreign
currency statements.... -- -- 2,598 -- -- -- --
-------- -------- --------- ---------- -------- ------- --------
Balance, September 30,
1996................... $507,102 $659,388 $(100,345) $4,897,767 $331,213 $ 8,062 $357,889
======== ======== ========= ========== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement. This statement
of stockholders' equity has been revised for certain reclassifications and
adjustments. See Note 1.
7
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (AS REVISED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
($000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1988
EMPLOYEE EMPLOYEE
ADDITIONAL CUMULATIVE STOCK STOCK
COMMON PAID-IN TRANSLATION RETAINED TREASURY OWNERSHIP BENEFIT
STOCK CAPITAL ADJUSTMENT EARNINGS STOCK PLAN TRUST
-------- ---------- ----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... $507,102 $864,730 $ (79,213) $4,363,754 $ 419,871 $ 6,396 $353,807
Net income for the
period................. -- -- -- 417,637 -- -- --
Cash dividends ($.50 per
share)................. -- -- -- (232,248) -- -- --
Dividends paid to
Employee Stock Benefit
Trust.................. -- 5,443 -- (5,443) -- -- --
Stock repurchase
(30,000,000 shares).... -- -- -- -- 902,961 -- --
Stock issued upon
exercise of stock
options and grant of
restricted stock....... -- (5,040) -- -- (56,640) -- --
Tax benefit of non-
qualified stock options
exercised.............. -- 2,578 -- -- -- -- --
Contribution to 1988
Employee Stock
Ownership Plan......... -- -- -- -- -- (5,000) --
Treasury stock received
as settlement for
claims................. -- -- -- -- 141 -- --
Common stock issued upon
conversion of Liquid
Yield Option Notes..... -- (262) -- -- (778) -- --
Stock issued for
acquisitions........... -- (1,057) -- -- (3,752) -- --
Temporary equity related
to put options......... -- 95,789 -- -- -- -- --
Settlement of put
options................ -- (1,605) -- -- -- -- --
Adjustment of Employee
Stock Benefit Trust to
market value........... -- 26,535 -- -- -- -- 26,535
Cumulative translation
adjustment of foreign
currency statements.... -- -- (130,993) -- -- -- --
-------- -------- --------- ---------- ---------- ------- --------
Balance, September 30,
1997................... $507,102 $987,111 $(210,206) $4,543,700 $1,261,803 $ 1,396 $380,342
======== ======== ========= ========== ========== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
This statement of stockholders' equity has been revised for certain
reclassifications and adjustments. See Note 1.
8
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS REVISED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($000'S OMITTED)
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income for the period........................... $ 647,166 $ 417,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 700,952 649,172
Provision for deferred income taxes............... 208,465 (134,530)
Minority interest in subsidiaries................. 92,874 86,511
Interest on Liquid Yield Option Notes (LYONs) and
WMI Subordinated Notes........................... 8,422 13,069
Gain on disposition of assets and businesses...... (86,588) (182,766)
Contribution to 1988 Employee Stock Ownership
Plan............................................. 5,000 5,000
Changes in assets and liabilities, excluding
effects of acquired companies:
Receivables, net.................................. (60,980) 28,218
Other current assets.............................. (13,205) 22,224
Sundry other assets............................... (16,699) 35,057
Accounts payable.................................. (205,074) (201,365)
Accrued expenses and unearned revenue............. 91,620 358,910
Deferred items.................................... (198,348) (34,810)
Other, net........................................ 15,682 (709)
---------- -----------
Net cash provided by operating activities............ $1,189,287 $ 1,061,618
---------- -----------
Cash flows from investing activities:
Short-term investments.............................. $ 12,046 $ (57,011)
Capital expenditures................................ (855,109) (616,824)
Proceeds from asset monetization program............ 389,867 1,369,296
Cost of acquisitions, net of cash acquired.......... (64,561) (42,252)
Other investments................................... (144,070) (45,628)
Acquisition of minority interests................... (336,431) (67,605)
---------- -----------
Net cash provided by (used for) investing activities. $ (998,258) $ 539,976
---------- -----------
Cash flows from financing activities:
Cash dividends...................................... $ (231,074) $ (232,248)
Proceeds from issuance of indebtedness.............. 2,151,705 947,249
Repayments of indebtedness.......................... (1,732,553) (1,625,677)
Proceeds from exercise of stock options, net........ 50,874 51,600
Contributions from minority interests............... 3,700 --
Other distributions to minority shareholders by
affiliated companies............................... (9,066) (28,717)
Stock repurchases................................... (359,172) (902,961)
Proceeds from sale of put options................... 16,362 --
Settlement of put options........................... -- (1,605)
---------- -----------
Net cash used for financing activities............... $ (109,224) $(1,792,359)
---------- -----------
Net increase (decrease) in cash and cash equivalents. $ 81,805 $ (190,765)
Cash and cash equivalents at beginning of period..... 169,541 323,288
---------- -----------
Cash and cash equivalents at end of period........... $ 251,346 $ 132,523
========== ===========
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.............. $ 285,383 $ 289,188
Income taxes, net of refunds received............. $ 250,420 $ 391,818
Supplemental schedule of noncash investing and
financing activities:
LYONs converted into common stock of the Company.... $ 2,079 $ 516
Liabilities assumed in acquisitions of businesses... $ 102,982 $ 28,268
Fair market value of Company stock issued for
acquired businesses................................ $ 229,828 $ 2,695
Marketable securities received from sale of
discontinued operations and disposition of certain
businesses......................................... $ -- $ 152,170
</TABLE>
The accompanying notes are an integral part of these statements. These
statements of cash flows have been revised for certain reclassifications and
adjustments. See Note 1.
9
<PAGE>
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, subject to the discussion
below under the caption "Revisions," include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows 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. See "Management's Discussion and Analysis--
Outlook" herein.
NOTE 1--REVISIONS
The Company has reclassified or adjusted certain items included in its
previously reported 1997 and 1996 financial statements. These changes have
been made in connection with studies initiated by management in the third
quarter of 1997. Results from the first phase of this work were reviewed by
the Audit Committee of the Board of Directors in November 1997. This work is
ongoing under the active oversight of the Audit Committee. For further
information see "Management's Discussion and Analysis--Outlook" herein. The
Consolidated Statements of Cash Flows (As Revised) for the fourth quarter of
1996 will include reclassifications similar to those in the nine month period
ended September 30, 1996. A comparison of the previously reported and revised
Consolidated Statements of Income for the three and nine month periods ended
September 30, 1996 and 1997 follows. See Note 14 for revised financial data by
quarter. Except as otherwise expressly stated in these Notes, all financial
information in this Report is presented inclusive of such changes.
CONSOLIDATED STATEMENTS OF INCOME (AS REVISED)
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1996
---------------------- ----------------------
PREVIOUSLY PREVIOUSLY
REPORTED AS REVISED REPORTED AS REVISED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue........................ $2,372,746 $2,372,746 $6,848,219 $6,848,219
---------- ---------- ---------- ----------
Operating expenses............. $1,630,518 $1,651,420 $4,744,622 $4,774,464
Selling and administrative
expenses...................... 240,383 264,947 732,934 774,594
Interest expense............... 89,948 107,448 278,045 310,045
Interest income................ (4,999) (4,999) (17,660) (17,660)
Minority interest.............. 32,155 29,533 90,756 85,894
Sundry income, net............. (23,540) (35,869) (62,254) (80,162)
---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes......................... $ 408,281 $ 360,266 $1,081,776 $1,001,044
Provision for income taxes..... 168,117 144,991 443,699 408,614
---------- ---------- ---------- ----------
Income from continuing
operations.................... $ 240,164 $ 215,275 $ 638,077 $ 592,430
Income from discontinued
operations.................... 5,042 26,377 15,349 54,736
---------- ---------- ---------- ----------
Net income..................... $ 245,206 $ 241,652 $ 653,426 $ 647,166
========== ========== ========== ==========
Average common and common
equivalent shares outstanding. 490,693 490,693 491,712 491,712
========== ========== ========== ==========
Earnings Per Common and Common
Equivalent Share
Continuing operations.......... $ 0.49 $ 0.44 $ 1.30 $ 1.21
Discontinued operations........ 0.01 0.05 0.03 0.11
---------- ---------- ---------- ----------
Net Income..................... $ 0.50 $ 0.49 $ 1.33 $ 1.32
========== ========== ========== ==========
</TABLE>
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (AS REVISED)
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1997
---------------------- ----------------------
PREVIOUSLY PREVIOUSLY
REPORTED AS REVISED REPORTED AS REVISED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue........................ $2,351,189 $2,351,189 $6,876,806 $6,876,806
---------- ---------- ---------- ----------
Operating expenses............. $1,674,910 $1,839,212 $4,860,742 $5,096,228
Selling and administrative
expenses...................... 256,291 266,491 740,620 781,445
Interest expense............... 98,477 98,477 296,762 309,512
Interest income................ (6,201) (6,201) (28,079) (28,079)
Minority interest.............. 30,435 30,435 86,511 86,111
Sundry income, net............. (6,920) (8,122) (7,568) (174,554)
---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes......................... $ 304,197 $ 130,897 $ 927,818 $ 806,143
Provision for income taxes..... 132,096 67,696 397,281 389,316
---------- ---------- ---------- ----------
Income from continuing
operations.................... $ 172,101 $ 63,201 $ 530,537 $ 416,827
Income from discontinued
operations.................... -- -- -- 810
---------- ---------- ---------- ----------
Net income..................... $ 172,101 $ 63,201 $ 530,537 $ 417,637
========== ========== ========== ==========
Average common and common
equivalent shares outstanding. 455,945 455,945 468,980 468,980
========== ========== ========== ==========
Earnings Per Common and Common
Equivalent Share
Continuing operations.......... $ 0.38 $ 0.14 $ 1.13 $ 0.89
Discontinued operations........ -- -- -- --
---------- ---------- ---------- ----------
Net Income..................... $ 0.38 $ 0.14 $ 1.13 $ 0.89
========== ========== ========== ==========
</TABLE>
NOTE 2--INCOME TAXES
The following table sets forth the provision for income taxes for continuing
operations for the three months and nine months ended September 30, 1996 and
1997:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER NINE MONTHS ENDED
30 SEPTEMBER 30
------------------ -------------------
1996 1997 1996 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Currently payable.................. $ 60,936 $ 94,883 $200,731 $ 524,428
Deferred........................... 84,249 (26,994) 208,465 (134,530)
Amortization of deferred investment
credit............................ (194) (193) (582) (582)
-------- -------- -------- ---------
$144,991 $ 67,696 $408,614 $ 389,316
======== ======== ======== =========
</TABLE>
The negative deferred tax provision for the three months and nine months
ended September 30, 1997, is primarily due to previously deferred taxes
becoming payable as a result of the Company's asset monetization program.
NOTE 3--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 nine months ended September 30, 1997, the Company and its
principal subsidiaries acquired 27 businesses for $42,252,000 in cash (net of
cash acquired) and notes, $15,756,000 of debt assumed, and 121,551 shares of
the Company's common stock. These acquisitions were accounted for as
purchases. The pro forma effect of the acquisitions made during 1996 and 1997
is not material.
11
<PAGE>
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.
NOTE 4--BUSINESS DIVESTITURES
In the first nine months of this year, the Company has divested 17 solid
waste operations in North America for a total price of $284.1 million. The
largest of these transactions was the sale of most of its Canadian operations.
In June, the Company's Waste Management International plc ("WM International")
subsidiary completed the sale of substantially all of its remaining operations
in France for 67.5 million pounds, or approximately $112 million, and in July
sold its business in Spain for 9.9 million pounds, or approximately $16.3
million.
NOTE 5--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 the
discontinued businesses was $122.3 million for the three months and $363.7
million for the nine months ended September 30, 1997, and $317.9 million and
$1,087.5 million for the comparable periods in 1996. The decline relates
primarily to businesses sold in the interim. Net income from the discontinued
operations for the three months and nine months ended September 30, 1997, was
not material and was included in the reserve for loss on disposition provided
previously. Results of operations for the three months and nine months ended
September 30, 1996 included $22.1 million and $46.1 million of after tax gains
on sales of discontinued operations. The 1997 results included $0.8 million of
after tax gains on sales of discontinued operations of a WTI water business.
As of September 30, 1997, the principal remaining businesses to be disposed
of are Rust Environment and Infrastructure Inc. and Matrix Engineering Inc. If
not disposed of by December 31, 1997, generally accepted accounting principles
would require the financial statements to be restated to reflect such
businesses as a continuing operation unless sufficient evidence indicates such
disposition would be accomplished in early 1998. Revenues for the nine months
ended September 30, 1996 and 1997 were $236.0 million and $241.6 million,
respectively.
NOTE 6--ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 128, "Earnings Per Share" ("EPS").
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 conversion of 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
12
<PAGE>
computed in accordance with FAS No. 128 for the three months and nine months
ended September 30, 1996 and 1997, would have been as follows:
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER
30 30
----------- -----------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Continuing Operations--
Basic.............................................. $0.44 $0.14 $1.21 $0.89
Diluted............................................ $0.43 $0.14 $1.18 $0.88
Discontinued Operations--
Basic.............................................. $0.05 $ -- $0.11 $ --
Diluted............................................ $0.05 $ -- $0.11 $ --
</TABLE>
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 or cash flows, although additional segment
disclosure will likely be required in both interim and annual financial
statements.
NOTE 7--DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company and certain of its subsidiaries use
derivatives to manage interest rate, currency and commodity (fuel) 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.
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)
13
<PAGE>
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.
NOTE 8--ENVIRONMENTAL REMEDIATION LIABILITIES
The Company has established procedures to evaluate its potential
environmental remediation liabilities at sites which it owns or operates, or to
which it transported waste. While the Company believes that it has adequately
provided for all of its material existing environmental remediation
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 Note 13 and "Management's Discussion and
Analysis--Outlook" herein.
NOTE 9--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 in a "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.
In connection with its authorized repurchase program, 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
September 30, 1997, no put options were outstanding, although the Company may
sell such options in the future.
NOTE 10--COMMITMENTS AND CONTINGENCIES
During the first quarter of 1995, WM International received an assessment
from the Swedish Tax Authority of approximately 417 million Krona
(approximately $55 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
14
<PAGE>
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
unforeseeable 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 regulatory flow control laws. Such laws typically
involve a local government specifying a jurisdictional disposal site for all
solid waste generated within its borders. Since the ruling, several decisions
of state or federal courts have invalidated regulatory flow control schemes in
a number of jurisdictions. Other judicial decisions have upheld nonregulatory
means by which municipalities may effectively control the flow of municipal
solid waste. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can
be no assurance that such alternatives to regulatory flow control will in every
case be found to be lawful or that such legislation will be enacted into law.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse 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 local governmental bodies may
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 will be attempted and, if
attempted, 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.
WTI's Gloucester County, New Jersey, facility relies on a disposal franchise
for substantially all of its supply of municipal solid waste. On May 1, 1997,
the Third Circuit Court of Appeals ("Third Circuit") permanently enjoined the
State of New Jersey from enforcing its franchise system as a form of
unconstitutional solid waste flow control, but stayed the injunction for so
long as any appeals were pending. On November 10, 1997, the United States
Supreme Court announced its decision not to review the Third Circuit decision,
thereby ending the stay. The State had continued to enforce flow control during
the stay period. Under the reimbursement agreement between the project company
that owns the Gloucester facility and the bank that provides credit support to
the project, the termination of the waste franchise constitutes an event of
default. WTI and the credit support bank are presently discussing the
consequences of these developments.
The New Jersey legislature has been considering various legislative
solutions, including a bill to authorize counties and county authorities to
implement a constitutionally permissible system of "economic flow control"
designed to recover waste disposal costs previously incurred in reliance on the
State's franchise system. WTI currently believes that, through either
legislative action or a project recapitalization, the Gloucester project can be
restructured to operate profitably in the absence of regulatory flow control.
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
15
<PAGE>
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 September 30, 1997, WM International had identifiable assets of $191.3
million related to its Hong Kong operations which generated pretax income of
approximately $15.3 million in calendar 1996 and $19.1 million in the first
nine 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.
In the ordinary course of conducting its business, the Company becomes
involved in lawsuits, administrative proceedings and governmental
investigations, including antitrust and environmental matters and commercial
disputes. Some of these proceedings may result in fines, penalties or judgments
being assessed against the Company which, from time to time, may have an impact
on earnings for a particular quarter or year. The Company believes it has
adequately provided for such matters in its financial statements and does not
believe that their outcome, individually or in the aggregate, will have a
material adverse impact on its business or financial condition.
In November 1997, the Company and several of its current and former officers
were named defendants in several purported class action lawsuits in the United
States District Court for the Northern District of Illinois. The lawsuits have
been brought under federal securities laws by alleged purchasers of Company
securities and allege that the Company made material misstatements and failed
to state information necessary to make statements made not misleading and
engaged in improper accounting practices with respect to the Company's
reporting of its results of operations during 1996 and 1997 and the value of
its property and assets. The lawsuits seek, among other relief, compensatory
damages and attorney fees and other costs of conducting the lawsuits. The
Company is reviewing these complaints.
NOTE 11--DEBT
In July 1997, the Company issued $300,000,000 of 6 5/8% Notes due July 15,
2002, at a price of 99.882%. The Notes are not redeemable prior to maturity.
NOTE 12--LEGAL MATTERS
See Part II of this Form 10-Q for a discussion of legal matters.
16
<PAGE>
NOTE 13--THIRD QUARTER 1997 CHARGE
The third quarter of 1997 includes a $173.3 million pretax charge to
operating expenses ($108.9 million after tax) recorded in connection with the
first phase of the Company's comprehensive study of its waste management
services operations (see "Management's Discussion and Analysis--Outlook"). This
charge includes $72.3 million related to increasing self insurance reserves
primarily necessitated by management decisions which have accelerated or will
accelerate the claims reporting and payment process and reduced the discount
rate used to calculate the reserve. The remaining $101 million relates to
increased remediation reserves of $45 million related to specific sites, $26
million for the expected cost of certain legal matters, and $30 million for
assets written off. The near term cash impact of these items, net of
anticipated proceeds from asset sales, is not expected to be significant.
NOTE 14--UNAUDITED QUARTERLY COMPARATIVE FINANCIAL DATA (AS REVISED)
The following sets forth comparative financial data as revised for each of
the quarters in the year ended December 31, 1996 and in the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
1996 1997
---------------------------------------------------------- ----------------------------------------------
YEAR TO
Q1 Q2 Q3 Q4 FULL YEAR Q1 Q2 Q3 DATE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Revenue............ $2,144,479 $2,330,994 $2,372,746 $2,338,751 $9,186,970 $2,198,308 $2,327,309 $2,351,189 $6,876,806
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses. $1,487,149 $1,635,895 $1,651,420 $1,608,252 $6,382,716 $1,617,803 $1,639,213 $1,839,212 $5,096,228
Special charge..... -- -- -- 471,635 471,635 -- -- -- --
Selling & admin.
expenses.......... 258,563 251,084 264,947 281,915 1,056,509 261,204 253,750 266,491 781,445
Interest expense... 99,806 102,791 107,448 116,713 426,758 107,599 103,436 98,477 309,512
Interest income.... (6,240) (6,421) (4,999) (9,977) (27,637) (12,092) (9,786) (6,201) (28,079)
Minority interest.. 26,454 29,907 29,533 (42,367) 43,527 27,762 27,914 30,435 86,111
Sundry income, net. (22,835) (21,458) (35,869) (33,578) (113,740) (133,894) (32,538) (8,122) (174,554)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from
continuing
operations before
income taxes..... $ 301,582 $ 339,196 $ 360,266 $ (53,842) $ 947,202 $ 329,926 $ 345,320 $ 130,897 $ 806,143
Provision for
income taxes...... 124,008 139,615 144,991 107,042 515,656 151,514 170,106 67,696 389,316
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from
continuing
operations ...... $ 177,574 $ 199,581 $ 215,275 $ (160,884) $ 431,546 $ 178,412 $ 175,214 $ 63,201 $ 416,827
Discontinued
operations, net of
tax & minority
interest.......... 5,469 22,890 26,377 7,011 61,747 -- 810 -- 810
Provision for loss
on disposal, net
of tax & minority
interest.......... -- -- -- (301,208) (301,208) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........ $ 183,043 $ 222,471 $ 241,652 $ (455,081) $ 192,085 $ 178,412 $ 176,024 $ 63,201 $ 417,637
========== ========== ========== ========== ========== ========== ========== ========== ==========
Shares outstanding. 489,913 496,031 490,693 485,895 490,263 484,719 466,276 455,945 468,980
========== ========== ========== ========== ========== ========== ========== ========== ==========
EARNINGS PER SHARE,
AS REVISED
Continuing
operations........ $ 0.36 $ 0.40 $ 0.44 $ (0.33) $ 0.88 $ 0.37 $ 0.38 $ 0.14 $ 0.89
Discontinued
operations
Income from
operations....... 0.01 0.05 0.05 0.01 0.12 -- -- -- --
Provision for
loss............. -- -- -- (0.62) (0.61) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............. $ 0.37 $ 0.45 $ 0.49 $ (0.94) $ 0.39 $ 0.37 $ 0.38 $ 0.14 $ 0.89
========== ========== ========== ========== ========== ========== ========== ========== ==========
EARNINGS PER SHARE,
AS PREVIOUSLY
REPORTED
Continuing
operations........ $ 0.37 $ 0.44 $ 0.49 $ (0.33) $ 0.97 $ 0.37 $ 0.39 $ 0.38 $ 1.13
Discontinued
operations
Income from
operations....... 0.01 0.01 0.01 -- 0.03 -- -- -- --
Provision for
loss............. -- -- -- (0.62) (0.61) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............. $ 0.38 $ 0.45 $ 0.50 $ (0.95) $ 0.39 $ 0.37 $ 0.39 $ 0.38 $ 1.13
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: (TABLES IN MILLIONS)
Summary
Waste Management, Inc. (formerly WMX Technologies, Inc., referred to herein
together with its subsidiaries as "WMI" or the "Company") has reclassified or
adjusted certain items of income and expense included in its previously
reported 1997 and 1996 financial statements. These changes have been made in
connection with studies initiated by Company management in the third quarter
of 1997. Results from the first phase of this work were reviewed by the Audit
Committee of the Board of Directors in November 1997, resulting in a $108.9
million after-tax charge in the 1997 third quarter. For further information,
see the Notes to Consolidated Financial Statements and "Outlook" herein.
Except as otherwise stated herein, all financial information in this Report is
presented inclusive of such changes.
For the three months ended September 30, 1997, the Company had income from
continuing operations of $63.2 million, or $0.14 per share, versus $215.3
million, or $0.44 per share, in the comparable quarter of 1996. Revenue from
continuing operations was $2.35 billion in the 1997 quarter compared with
$2.37 billion in the year-earlier quarter. Net income was $0.14 per share for
the three months ended September 30, 1997, compared with $0.49 for the same
three months in 1996.
Nine-month 1997 income from continuing operations was $416.8 million, or
$0.89 per share, on revenue of $6.88 billion. For the first nine months of
1996, income from continuing operations was $592.4 million, or $1.21 per
share, on revenue of $6.85 billion. Net income was $0.89 per share for the
first nine months of 1997, compared with $1.32 per share for the first nine
months of 1996.
Results for the nine months ended September 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.
During the first nine months of 1997, as part of a strategic initiative
outlined earlier in the year, the Company monetized $1.4 billion through the
sale of non-core and non-integrated assets, including $41.7 million during the
third quarter. The Company sold its investment in ServiceMaster Limited
Partnership ("ServiceMaster") and its Waste Management International plc ("WM
International") subsidiary sold its investment in Wessex Water plc ("Wessex").
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
(which it subsequently sold--see "Sundry Income, Net"). 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 approximately $284.1 million. In Europe, WM International sold
substantially all of its operations in France and Spain for approximately
$131.0 million.
In accordance with its strategic plan, the Company in May of 1997 completed
a Dutch Auction tender offer by repurchasing 30 million of its outstanding
shares for $30 a share. Also in May 1997, the Board of Directors approved an
increase in the Company's 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 seven countries
in Europe, five countries in Asia, and Argentina (see "Outlook" herein),
Australia, Brazil, Israel and New Zealand. The Company considers its
operations to be part of a single industry segment--waste management
services--and reports accordingly.
18
<PAGE>
The other services formerly provided by the Company have been classified as
discontinued operations in the accompanying financial statements. The
discussion and analysis relates to the Company's continuing operations.
Revenue
Consolidated revenue for the three months and nine months ended September 30,
1997, compared with the same periods in 1996, is shown in the table which
follows. Revenue data set forth below has been adjusted to reflect
reclassifications among revenue classifications. Consolidated revenue amounts
have not changed.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER
30 30
----------------------------- -----------------------------
PERCENTAGE PERCENTAGE
1996 1997 INCR/(DECR) 1996 1997 INCR/(DECR)
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
WMNA
Residential........... $ 323.2 $ 326.0 .9% $ 962.0 $ 972.3 1.1%
Commercial............ 409.4 397.5 (2.9) 1,208.6 1,197.2 (0.9)
Rolloff and
industrial........... 337.6 332.8 (1.4) 969.5 958.8 (1.1)
Disposal, transfer and
other................ 425.7 433.8 1.9 1,149.5 1,154.9 0.5
-------- -------- -------- --------
Total WMNA.......... $1,495.9 $1,490.1 (0.4) $4,289.6 $4,283.2 (0.1)
WM International........ 482.3 432.4 (10.3) 1,413.0 1,353.2 (4.2)
WTI..................... 242.7 249.9 3.0 706.6 754.1 6.7
All other, including
eliminations........... 151.8 178.8 439.0 486.3
-------- -------- -------- --------
Total............... $2,372.7 $2,351.2 (0.9)% $6,848.2 $6,876.8 0.4%
======== ======== ===== ======== ======== ====
</TABLE>
Excluding the impact of divestitures, net of acquisitions, consolidated
revenue grew 2.7% in the third quarter and 2.4% in the first nine months of
1997 compared with the same periods in 1996. Revenue from WM International in
1997 has been negatively impacted by currency translation, as discussed below.
WMNA had year-over-year third quarter revenue growth of 0.7% from price and
2.1% from volume in 1997. These increases were more than offset by
divestitures, net of acquisitions, which had a negative 3.2% impact. Results in
the third quarter were aided slightly by improvement in recycled commodity
prices, which had been declining in the first six months of the year, although
the total volume of recycled material declined, due primarily to the second
quarter divestiture of the Canadian operations.
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. Excluding the impact of translation, WM International
revenue declined 1% in the third quarter and increased 2.2% for the first nine
months of 1997 compared with the same periods in 1996. The third quarter of
1997 was adversely impacted by reduced landfill volumes in Italy, resulting
from delays in obtaining expected permit extensions, and the absence of
construction revenue on the West Kowloon transfer station in Hong Kong, which
was completed in the second quarter of 1997.
WTI's 1997 revenue included $12.8 million in the third quarter and $47.0
million for the nine months of construction revenue related to the retrofit of
the 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 in 1996. New industrial co-generation
facilities acquired in 1996 contributed revenue growth of $4.1 million for the
third quarter and $14.3 million for the first nine months of 1997. WTI is
attempting to leverage its energy plant operating capabilities and project
financing expertise by owning and/or operating power plants for industrial
customers. WTI's other revenue decreased during the quarter and nine-month
periods of 1997
19
<PAGE>
compared with 1996, as divestitures of biosolids land spreading operations and
lower air business revenue offset revenue growth at existing energy plants and
revenue from a second pelletizer facility in Baltimore, Maryland, which began
commercial operations during the third quarter.
Operating Expenses
Operating expenses as a percentage of revenue were 78.2% in the third
quarter and 74.1% for the first nine months of 1997, compared with 69.6% and
69.7% in the same periods of 1996. Below is an analysis indicating amounts
affecting comparability between periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER NINE MONTHS ENDED
30 SEPTEMBER 30
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating expenses..................... $1,651.4 $1,839.2 $4,774.5 $5,096.2
Environmental reserve adjustments net
of insurance claim settlements........ 15.0 -- 50.0 29.5
Reserve reversals in the second quarter
of 1996............................... -- -- 7.8 --
Asset write-offs and reserves
established related to the industrial
services business in the third quarter
of 1996............................... (17.3) -- (17.3) --
Asset write-offs and reserves
established related to the WMNA
business in the first quarter of 1997. -- -- -- (70.2)
Asset write-offs and reserves
established in the third quarter of
1997.................................. -- (173.3) -- (173.3)
-------- -------- -------- --------
Operating expenses excluding items
affecting comparability............... $1,649.1 $1,665.9 $4,815.0 $4,882.2
======== ======== ======== ========
</TABLE>
The third quarter 1997 write-offs and reserve increases of $173.3 million
include $72.3 million related to increasing self insurance reserves primarily
necessitated by management decisions which have accelerated or will accelerate
the claims reporting and payment process and reduced the discount rate used to
calculate the reserves. The remaining $101.0 million relates to increased
remediation reserves of $45 million related to specific sites, $26 million for
the expected cost of certain legal matters, and $30 million for assets written
off. The near term cash impact of these items, net of anticipated proceeds
from asset sales, is not expected to be significant.
Excluding the amounts affecting comparability of expense amounts discussed
above, the resulting operating expenses as a percentage of revenue would have
been 70.9% in the third quarter and 71.0% for the nine months of 1997,
compared with 69.5% and 70.3% in the same periods of 1996.
This increase in 1997 operating expenses as a percent of revenue is
primarily due to the decline in hazardous waste disposal margins, related to
reduced industry volumes and disposal pricing, offset by divestitures of lower
margin operations and productivity improvements throughout the WMNA collection
operations.
WTI's operating expenses increased as a percentage of revenue primarily due
to the impact of construction revenue, which has low associated margin. WM
International's operating expense increases resulted from higher waste taxes,
lower volumes in Italy due to landfill permit delays, and continued economic
weakness in Germany.
20
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses for the three months ended September 30
were 11.3% of revenue in 1997 compared with 11.2% in 1996, and for the nine-
month periods were 11.4% in 1997 and 11.3% in 1996. Below is an analysis
indicating amounts affecting comparability between periods:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- -------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Selling and administrative expenses......... $264.9 $266.5 $774.6 $781.4
Reserve reversals in the second quarter of
1996....................................... -- -- 8.5 --
Asset write-offs and reserves established
related to the WMNA business in the first
quarter of 1997............................ -- -- -- (15.5)
------ ------ ------ ------
Selling and administrative expenses,
excluding items affecting comparability.... $264.9 $266.5 $783.1 $765.9
====== ====== ====== ======
</TABLE>
Excluding the amounts affecting comparability of expense amounts discussed
above, the resulting selling and administrative expenses as a percentage of
revenue would have been 11.3% in the third quarter and 11.1% for the first
nine months of 1997, compared with 11.2% and 11.4% in the same periods of
1996. Selling and administrative expenses at WTI and WM International declined
as a percentage of revenue for both the third quarter and the nine months of
1997 compared with the same periods in 1996.
Interest Expense
The following table sets forth the components of interest expense for the
three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------- --------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest expense incurred................. $126.0 $112.9 $363.3 $353.8
Capitalized interest...................... (18.5) (14.4) (53.3) (44.3)
------ ------ ------ ------
Interest expense.......................... $107.5 $ 98.5 $310.0 $309.5
====== ====== ====== ======
</TABLE>
Interest expense decreased for both the three-month and nine-month periods
ended September 30, 1997, compared with the prior year, as a result of lower
average debt levels in 1997. Short- and long-term debt totaled $6.8 billion at
September 30, 1997 compared with $7.5 billion at year-end 1996. The debt
reduction, primarily at WM International, was funded by cash flow from
operations and proceeds from the asset monetization program. Interest rates
have increased slightly in the current year, and capitalized interest is lower
in 1997 than in the prior year due to lower capital spending.
Sundry Income, Net
Below is a summary of major components in sundry income, net:
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
---------- ------------
1996 1997 1996 1997
----- ---- ----- ------
<S> <C> <C> <C> <C>
Gain on sale of investments/businesses........... $20.6 $5.7 $23.1 $175.2
Equity income.................................... 13.7 1.3 49.2 (6.3)
Other various.................................... 1.6 1.1 7.9 5.7
----- ---- ----- ------
Sundry income, net............................... $35.9 $8.1 $80.2 $174.6
===== ==== ===== ======
</TABLE>
Third quarter and nine-month 1996 amounts include equity income from
ServiceMaster and Wessex, both of which were sold in 1997, and gains on the
sale of investments that did not recur in 1997. The third quarter of
21
<PAGE>
1997 includes a $4.5 million pretax gain recognized by WTI on the disposition
of U.S. Filter stock received in connection with the sale of its water and
wastewater facilities and operations and privatization businesses. Nine-month
1997 amounts reflect a gain of $129 million recognized on the disposition of
the ServiceMaster shares during the first quarter of 1997 partially offset by
the Company's 37% share of the special charge recorded by OHM Corporation
which was approximately $10.4 million. In addition, the nine-month 1997 period
includes a $32.6 million pretax gain relating to the sale of the majority of
the Company's Canadian operations. The Company does not expect sundry income,
net, to be significant during the remainder of 1997.
Income Taxes
The Company's effective tax rate (provision for income taxes divided by
pretax income before minority interest) for the third quarter was 42.0% in
1997 and 37.2% in 1996, and for the nine months was 43.6% in 1997 and 37.6% in
1996. WM International's tax rate is adversely impacted by the loss of the
equity income from Wessex, which carried little, if any, additional tax, and
will fluctuate with the mix of earnings among countries. U.S. taxes have
increased as a result of an increase in permanent differences (expenses not
deductible for income tax purposes). The large tax rate increase in the first
nine months of 1997 is primarily a result of taxes on the gains on sales of
the ServiceMaster shares and the Canadian operations.
Discontinued Operations
In line with the Company's strategy to focus on waste management services,
the other services formerly provided have been classified as discontinued
operations in the accompanying financial statements. Revenues of discontinued
operations were $122.3 million for the three months and $363.7 million for the
nine months ended September 30, 1997, versus $317.9 million and $1,087.5
million for the comparable periods in 1996, with the decline relating
primarily to businesses sold in the interim. Net income from the discontinued
operations for the three months and nine months ended September 30, 1997, for
those businesses not yet sold was not material and was included in the reserve
for loss on disposition provided previously. Results of operations for the
three months and nine months ended September 30, 1996 included $22.1 million
and $46.1 million of after tax gains on sales of discontinued operations. The
1997 results included $0.8 million of after-tax gains on sales of discontinued
operations of a WTI water business.
As of September 30, 1997, the principal remaining businesses to be disposed
of are Rust Environment and Infrastructure Inc. and Matrix Engineering Inc. If
not disposed of by December 31, 1997, generally accepted accounting principles
would require the financial statements to be restated to reflect such
businesses as a continuing operation unless sufficient evidence indicates such
dispositions would be accomplished in early 1998. Revenues for the nine months
ended September 30, 1996 and 1997 were $236.0 million and $241.6 million,
respectively.
Accounting Principles
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share" ("EPS"). 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 conversion of 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 Statement becomes effective all prior periods presented must be restated.
EPS computed in accordance with FAS No. 128 for the quarter and nine months
ended September 30, 1997 and 1996, is presented in Note 6 to the Consolidated
Financial Statements.
22
<PAGE>
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 No. 130 requires only a different format for
presentation of information already included in the Company's financial
statements. FAS No. 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 or cash flows,
although additional segment disclosure will likely be required in both interim
and annual financial statements.
Derivatives
From time to time, the Company and certain of its subsidiaries use
derivatives to manage currency, interest rate, and commodity (fuel) risk.
Derivatives used are simple agreements which provide for payments based on the
notional amount with no multipliers or leverage. The Company's use of
derivatives has not been and is not expected to be material with respect to
financial condition or results of operations. For further discussion of the
Company's use of and accounting for derivatives, see Note 7 to Consolidated
Financial Statements.
Environmental Remediation Liabilities
The Company has established procedures to evaluate its potential
environmental remediation liabilities at sites which it owns or operated, or
to which it transported waste. While the Company believes that it has
adequately provided for all of its material existing environmental remediation
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 Note 13 to Consolidated Financial
Statements and "Outlook" herein.
FINANCIAL CONDITION:
Liquidity and Capital Resources
The Company had a working capital deficit of $402.8 million at September 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 is typically not adversely affected by reducing working
capital. Cash and marketable securities declined $448.6 million, as the year-
end 1996 amounts included the investment in Wessex sold during the first
quarter of 1997 and higher-than-normal cash balances held in anticipation of
the Dutch Auction issuer tender offer. Accounts receivable declined $110.3
million from increased emphasis on collection, particularly in WM
International. Current debt has decreased $168.5 million as the Company
reduced its outstanding commercial paper balance.
In conjunction with its strategic focus, the Company generated $1,581.8
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 nine months ended September 30, 1997. Included in
this total is $1,369.3 million (before tax) of proceeds from asset
monetization. Through the Dutch Auction, $900.0 million of this owners' cash
flow was returned to shareholders.
Acquisitions and Capital Expenditures
Capital expenditures, excluding property and equipment of purchased
businesses, were $616.8 million for the nine months ended September 30, 1997,
and $855.1 million for the comparable period in 1996. In addition, the Company
and its principal subsidiaries spent $58.0 million in cash and debt (including
debt assumed) and 121,551 shares of WMI common stock on acquisitions in 1997,
compared with $102.7 million and 8.0 million shares of WMI common stock during
the first nine months of 1996.
23
<PAGE>
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 nine months of 1997, total debt declined $734.8 million from December
31, 1996. Cash and marketable securities decreased $448.6 million during the
period, as discussed above.
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 approval by a committee of
independent WTI directors and by 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 1997; however, in light of the WMI
offer to acquire its remaining public shares, WTI has suspended its repurchase
activity and did not repurchase any shares in the third quarter.
In connection with its authorized repurchase program, WMI periodically sells
put options on its common stock. These options give the holder the right at
maturity to require the Company to repurchase its shares at specified prices.
There were no put options outstanding at September 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.
OUTLOOK:
The Company continues to experience a very competitive pricing environment,
although WMNA did achieve volume growth in the third quarter of 1997 and its
net new customer percentage increased each month in the quarter. WM
International learned in late September that its joint venture company's bid
to continue to provide waste collection and cleaning services to the City of
Buenos Aires, Argentina, was unsuccessful. WM International's results also
continue to be adversely affected by the strength of the British pound against
the currencies of the other countries in which it operates. WTI expects a
decline in profitability in 1998 at its Shasta, California facility, where it
will begin to receive significantly lower, avoided cost-based electric rates,
and New York Organic Fertilizer Company, where it has been awarded a 15-year
contract renewal at lower anticipated revenue.
A comprehensive study of the Company's North American operations was
initiated by Company management during the third quarter 1997 and includes a
review of the Company's operating assets, investments and liabilities to
determine whether their carrying values and stated amounts are appropriate in
light of the Company's changing operational strategies and changing industry
conditions. The Audit Committee is actively overseeing the financial and
accounting implications of this review, which may result in a modification of
certain of the Company's accounting policies and practices to reflect these
strategies and industry conditions. Results from the first phase of this work
were reviewed by the Audit Committee in November 1997, resulting in a $108.9
million after-tax charge in the 1997 third quarter. For further information,
see Note 13 to Consolidated Financial Statements herein. These reviews are to
be completed during the fourth quarter of 1997. The Company expects
24
<PAGE>
that the results of these reviews will require a fourth quarter charge which
will be material to its results of operations and stockholders' equity. It is
also possible that the reviews could result in a change to previously reported
results. In view of these factors, the Company is unable to provide guidance
on expectations for 1997 results.
On November 11, 1997, as part of the ongoing study, the Board of Directors
approved plans to eliminate a total of approximately 1,200 operations
management and support positions as part of an organizational restructuring
and cost control program in the Company's North American waste services
operations. This workforce reduction is expected to reduce annual costs by
approximately $100 million. It is anticipated that this reduction in force
will require a charge to earnings in the fourth quarter estimated at $30
million to $50 million. The Board also approved plans to centralize most of
the Company's North American purchasing activity at its corporate headquarters
and to adopt a new fleet management strategy.
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 goals, fluctuation in recyclable
commodity prices, weather conditions, slowing of the overall economy,
increased interest costs arising from a change in the Company's leverage,
failure of the Company's plans to produce the cost savings anticipated by the
Company, the timing and magnitude of capital expenditures, inability to obtain
or retain permits necessary to operate disposal or other facilities or
otherwise complete project development activities, inability to complete
contemplated dispositions of Company businesses and assets at anticipated
prices and terms, the cost and timing of stock repurchase programs, and the
results of the ongoing review of North American operating assets, investments
and liabilities and the Company's accounting policies and practices in light
of operational changes. 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.
25
<PAGE>
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.
In November 1997, the Company and several of its current and former officers
were named defendants in several purported class action lawsuits in the United
States District Court for the Northern District of Illinois. The lawsuits have
been brought under federal securities laws by alleged purchasers of Company
securities and allege that the Company made material misstatements and failed
to state information necessary to make statements made not misleading and
engaged in improper accounting practices with respect to the Company's
reporting of its results of operations during 1996 and 1997 and the value of
its property and assets. The lawsuits seek, among other relief, compensatory
damages and attorney fees and other costs of conducting the lawsuits. The
Company is reviewing these complaints.
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 July 13, 1997 concerning the appointment of Ronald T.
LeMay as the Company's Chairman, President and Chief Executive Officer in
place of Dean L. Buntrock and the election of Mr. LeMay to the Company's
Board of Directors.
(ii) A report dated July 22, 1997 concerning the Company's results of
operations for the three and six months ended June 30, 1997.
(iii) A report dated August 8, 1997 concerning the Company's signing a
five-year employment agreement with Ronald T. LeMay as its Chairman and
Chief Executive Officer and certain related agreements.
26
<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.
Waste Management, Inc.
/s/ Donald R. Chappel
-------------------------------------
Donald R. Chappel
Vice President and Acting Chief
Financial Officer
November 14, 1997
27
<PAGE>
WASTE MANAGEMENT, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
2 None
3 By-Laws of the registrant, as amended and restated as of No-
vember 4, 1997
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
</TABLE>
- --------
*Exhibits not listed are inapplicable.
28
