<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 1999
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 1-12154
WASTE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1001 FANNIN
SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(713) 512-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, of the registrant
outstanding at November 9, 1999, was 619,629,770 (excluding 7,892,612 shares
held in the Waste Management, Inc. Employee Stock Benefit Trust and treasury
shares of 73,709).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 221,862 $ 86,873
Receivables, net.......................................... 1,934,598 2,385,911
Parts and supplies........................................ 90,065 128,254
Deferred income taxes..................................... 287,191 237,616
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 26,072 127,975
Prepaid expenses and other................................ 164,963 168,163
Net assets held for sale.................................. 2,072,527 746,605
----------- -----------
Total current assets.............................. 4,797,278 3,881,397
Property and equipment, net................................. 10,389,877 11,637,739
Excess of cost over net assets of acquired businesses,
net....................................................... 5,317,151 6,069,098
Other intangible assets, net................................ 188,211 181,226
Other assets................................................ 732,497 945,738
----------- -----------
Total assets...................................... $21,425,014 $22,715,198
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,097,881 $ 1,040,601
Accrued liabilities....................................... 1,697,708 2,287,543
Deferred revenues......................................... 398,015 381,780
Current maturities of long-term debt...................... 2,689,698 583,742
----------- -----------
Total current liabilities......................... 5,883,302 4,293,666
Long-term debt, less current maturities..................... 8,713,546 11,114,201
Deferred income taxes....................................... 463,882 470,107
Environmental liabilities................................... 830,090 971,507
Other liabilities........................................... 974,151 1,381,145
----------- -----------
Total liabilities................................. 16,864,971 18,230,626
----------- -----------
Minority interest in subsidiaries........................... 6,995 112,076
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 1,500,000,000 shares
authorized; 627,513,627 and 608,307,531 shares issued,
respectively........................................... 6,275 6,083
Additional paid-in capital................................ 4,452,962 4,091,525
Retained earnings......................................... 777,485 1,066,506
Accumulated other comprehensive income.................... (527,851) (420,804)
Treasury stock at cost, 73,709 and 63,950 shares,
respectively........................................... (3,890) (2,821)
Employee stock benefit trust at market, 7,892,612
shares................................................. (151,933) (367,993)
----------- -----------
Total stockholders' equity........................ 4,553,048 4,372,496
----------- -----------
Total liabilities and stockholders' equity........ $21,425,014 $22,715,198
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 3
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues......................... $ 3,395,052 $ 3,237,701 $9,790,462 $9,393,165
----------- ----------- ---------- ----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)............. 2,584,341 1,857,300 6,110,317 5,496,144
General and administrative............... 765,187 310,927 1,309,829 1,049,994
Depreciation and amortization............ 452,970 381,381 1,202,735 1,125,046
Merger and acquisition related costs..... 31,568 1,564,164 111,263 1,579,127
Asset impairments and unusual items...... 680,284 666,952 700,034 666,952
Loss from continuing operations held for
sale, net of minority interest........... -- 2,721 -- 151
----------- ----------- ---------- ----------
4,514,350 4,783,445 9,434,178 9,917,414
----------- ----------- ---------- ----------
Income (loss) from operations.............. (1,119,298) (1,545,744) 356,284 (524,249)
----------- ----------- ---------- ----------
Other income (expense):
Interest expense......................... (188,634) (174,262) (549,702) (503,347)
Interest income.......................... 20,341 7,256 28,823 21,760
Minority interest........................ (4,697) 23,868 (17,706) (14,298)
Other income............................. 8,691 12,528 39,268 122,960
----------- ----------- ---------- ----------
(164,299) (130,610) (499,317) (372,925)
----------- ----------- ---------- ----------
Loss before income taxes and extraordinary
item..................................... (1,283,597) (1,676,354) (143,033) (897,174)
Provision for (benefit from) income
taxes.................................... (335,824) (417,881) 139,790 (66,887)
----------- ----------- ---------- ----------
Loss before extraordinary item............. (947,773) (1,258,473) (282,823) (830,287)
Extraordinary loss on refinancing of debt,
net of tax benefit of $2,600............. -- -- -- (3,900)
----------- ----------- ---------- ----------
Net loss................................... $ (947,773) $(1,258,473) $ (282,823) $ (834,187)
=========== =========== ========== ==========
Basic earnings per common share:
Loss before extraordinary item........... $ (1.53) $ (2.11) $ (0.46) $ (1.44)
Extraordinary item....................... -- -- -- --
----------- ----------- ---------- ----------
Net loss................................. $ (1.53) $ (2.11) $ (0.46) $ (1.44)
=========== =========== ========== ==========
Diluted earnings per common share:
Loss before extraordinary item........... $ (1.53) $ (2.11) $ (0.46) $ (1.44)
Extraordinary item....................... -- -- -- --
----------- ----------- ---------- ----------
Net loss................................. $ (1.53) $ (2.11) $ (0.46) $ (1.44)
=========== =========== ========== ==========
Weighted average number of common shares
outstanding.............................. 619,105 595,506 610,857 579,272
=========== =========== ========== ==========
Weighted average number of common and
dilutive potential common shares
outstanding.............................. 619,105 595,506 610,857 579,272
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER EMPLOYEE
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK
STOCK CAPITAL EARNINGS INCOME STOCK BENEFIT TRUST
------ ---------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.... $6,083 $4,091,525 $1,066,506 $(420,804) $(2,821) $(367,993)
Common stock options and
warrants exercised,
including tax benefits... 89 255,495 -- -- -- --
Common stock issued for
acquisitions............. 5 21,268 -- -- -- --
Foreign currency translation
adjustment............... -- -- -- (41,203) -- --
Adjustment of employee stock
benefit trust to market
value.................... -- (216,060) -- -- -- 216,060
Adjustment for minimum
pension liability........ -- -- -- (65,844) -- --
Common stock issued for
conversion of
subordinated debt........ 90 260,588 -- -- -- --
Dividends................... -- -- (6,198) -- -- --
Other....................... 8 40,146 -- -- (1,069) --
Net loss.................... -- -- (282,823) -- -- --
------ ---------- ---------- --------- ------- ---------
Balance, September 30, 1999... $6,275 $4,452,962 $ 777,485 $(527,851) $(3,890) $(151,933)
====== ========== ========== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (282,823) $ (834,187)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,202,735 1,125,046
Provision for doubtful accounts........................ 171,438 27,822
Deferred income taxes.................................. 110,939 (500,277)
Minority interest in subsidiaries...................... 17,706 14,298
Gain on sale of assets................................. (6,486) (78,751)
Effect of merger and acquisition related costs, asset
impairments and unusual items......................... 602,684 1,443,800
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
Receivables.......................................... (121,924) (197,678)
Prepaid expenses and other........................... 97,329 (36,611)
Other assets......................................... 29,393 99,351
Accounts payable and accrued liabilities............. (285,945) 316,982
Deferred revenues and other liabilities.............. (264,819) 14,649
Other, net........................................... 22,203 (72,754)
----------- -----------
Net cash provided by operating activities................... 1,292,430 1,321,690
----------- -----------
Cash flows from investing activities:
Short-term investments.................................... (24,461) 58,323
Acquisitions of businesses, net of cash acquired.......... (1,181,832) (1,735,835)
Capital expenditures...................................... (876,900) (1,091,104)
Proceeds from sales of assets............................. 502,681 411,322
Acquisitions of minority interests........................ -- (887,849)
Other, net................................................ (37,022) 19,970
----------- -----------
Net cash used in investing activities....................... (1,617,534) (3,225,173)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 3,770,953 4,836,895
Principal payments on long-term debt...................... (3,488,331) (3,917,912)
Cash dividends............................................ -- (83,240)
Net proceeds from issuance of common stock................ -- 203,876
Proceeds from sale of treasury stock...................... -- 739,161
Proceeds from exercise of common stock options and
warrants and other employee benefit programs........... 175,444 134,776
Other, net................................................ -- (22,256)
----------- -----------
Net cash provided by financing activities................... 458,066 1,891,300
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,027 1,650
----------- -----------
Increase (decrease) in cash and cash equivalents............ 134,989 (10,533)
Cash and cash equivalents at beginning of period............ 86,873 189,942
----------- -----------
Cash and cash equivalents at end of period.................. $ 221,862 $ 179,409
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1999 1998 1999 1998
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net loss..................................... $(947,773) $(1,258,473) $(282,823) $(834,187)
Other comprehensive income (loss):
Foreign currency translation adjustment.... 62,813 (3,456) (41,203) (57,121)
Minimum pension liability adjustment, net
of taxes of $41,920..................... (65,844) -- (65,844) --
--------- ----------- --------- ---------
Comprehensive loss........................... $(950,804) $(1,261,929) $(389,870) $(891,308)
========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated financial statements of Waste Management, Inc.
and subsidiaries (the "Company") presented herein are unaudited. In the opinion
of management, these financial statements include all adjustments (which include
normal recurring and nonrecurring adjustments, as disclosed below) necessary for
a fair presentation of the financial position, results of operations, and cash
flows for the periods presented except as discussed in Note 1. The results for
interim periods are not necessarily indicative of results for the entire year.
The financial statements presented herein should be read in connection with the
financial statements included in the Company's Current Report on Form 8-K dated
September 17, 1999 and the information included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
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 contingent assets and liabilities at the date of the
financial statements and the reported amounts for certain revenues and expenses
during the reporting period. Future events could alter such estimates in the
near term and actual results could differ materially from those estimates. See
"Managements's Discussion and Analysis" herein.
Certain reclassifications have been made to prior periods in order to
conform to the current presentation.
1. THIRD QUARTER 1999 ACCOUNTING REVIEW CHARGES AND ADJUSTMENTS
During the third quarter of 1999, the Company initiated a comprehensive
internal review of its accounting records, systems, processes and controls at
the direction of its Board of Directors. As discussed below, the Company
experienced significant difficulty in the integration and conversion of
information and accounting systems subsequent to the WM Holdings Merger,
including certain financial systems and the billing systems. As a result of
these systems and process issues, and other issues raised during the third
quarter 1999 accounting review, certain charges and adjustments were recorded,
as discussed below. As a result of the review, the Company recorded certain
adjustments which had a material effect on its financial statements for the
three and nine months ended September 30, 1999. The following is a summary of
charges recorded during the third quarter of 1999 (in thousands):
<TABLE>
<S> <C>
Held for sale asset adjustments $ 414,275
Account reconciliations 347,668
Increase to allowance for doubtful accounts and other
accounts receivable adjustments 211,483
Asset impairments (excluding held for sale adjustments) 178,309
Insurance reserves and other insurance adjustments 147,868
Legal, severance and consulting accruals 141,999
Loss contract reserve adjustments 49,338
Increases in environmental reserves 48,983
Merger and acquisition related costs 31,568
Other 191,026
----------
Impact of charges before income tax benefit 1,762,517
Income tax benefit (536,756)
----------
After-tax charges $1,225,761
==========
</TABLE>
In August 1999, the Company's Board of Directors adopted a strategic plan
that includes the divestiture of its international operations and certain other
businesses. Based primarily on preliminary bids from interested parties, these
and certain other assets which were identified as held for sale during the third
quarter were written down to fair value less cost to sell in accordance with
SFAS No. 121, resulting in a pre-tax charge of approximately $414.3 million.
These assets were considered held for use for periods prior to the third
6
<PAGE> 8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarter of 1999 and did not meet the criteria for impairment recognition as a
held for use asset, and therefore, were not considered impaired for periods
prior to the third quarter. The assets which were identified as held for sale
and subject to adjustment include, among others, certain businesses that are
part of the Company's international operations, the Company's nuclear services
disposal site operations and certain solid waste operations that are not
essential parts of the Company's network. See Note 10 for further analysis of
net assets held for sale.
The Company's results for the third quarter reflect pre-tax charges of
approximately $347.7 million attributable to the reconciliation of previously
unreconciled intercompany accounts, cash, accounts receivable, fixed asset,
accounts payable and certain other accounts at the Company's operating districts
and other locations. The Company's third quarter accounting review included a
detailed review of substantially all of the districts' and other locations'
financial and accounting records. The review necessitated a number of
adjustments affecting transactions related to the current period and to periods
prior to the quarter ended September 30, 1999 involving many different accounts.
Although the third quarter charges of $347.7 million may relate to a number of
periods, the Company does not currently have sufficient information to identify
all specific charges attributable to individual prior periods. Furthermore,
producing the required information to perform such an identification of these
charges would be cost prohibitive and disruptive to operations. Based on its
quantitative and qualitative analysis of available information, the Company,
after consultation with its independent public accountants, has concluded that
it does not have, nor is it able to obtain, sufficient information to conclude
whether or not a material amount of these charges relate to any individual prior
year, although qualitative analysis indicates that these charges are principally
related to 1999.
The Company has recorded asset impairments of pre-tax charges of $178.3
million related to several landfill sites and certain other operating assets in
the third quarter of 1999. Included in the amount is $75.7 million relating to
abandonment or closure of facilities resulting from the Company's recent
business decisions regarding optimal operating strategies in specific markets in
which the Company operates, or consideration of other new facts and
circumstances. Also included in the amount is $40.4 million primarily the result
of permit denials and other regulatory problems in the current period, one of
many types of facts and circumstances that may from time to time trigger
impairments, and which may occasionally overlap with other triggering events or
result in abandonment or closure.
The Company performs a comprehensive, centrally coordinated review of its
North American landfills on an annual basis. During the third quarter of 1999,
that review included an evaluation of potential landfill expansion projects,
with a newly refined and more stringent set of criteria for evaluating the
probability of obtaining expansions to existing sites, which had the effect of
excluding certain expansions that met the Company's previous criteria. Effective
for the third quarter of 1999, the Company applied a newly defined, more
stringent set of criteria for evaluating the probability of obtaining expansion
to landfill airspace at existing sites are as follows:
- Personnel are actively working to obtain land use, local and state
approvals for an expansion of an existing landfill;
- At the time the expansion is added to the permitted site life, it is
probable that the approvals will be received within the normal
application and processing time periods for approvals in the jurisdiction
in which the landfill is located;
- The respective landfill owners or the Company has a legal right to use or
obtain land to be included in the expansion plan;
- There are no significant known community, business, or political
restrictions or issues that could impair the success of such expansion;
- Financial analysis has been completed, and the results demonstrate that
the expansion has a positive financial and operational impact; and
7
<PAGE> 9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Airspace and related costs have been estimated based on conceptual
design.
Additionally, to include airspace from an expansion effort, the expansion
permit application must generally be expected to be submitted within one year,
and the expansion permit must be expected to be received within two to five
years. Exceptions to any criteria must be obtained through a landfill specific
approval process that includes an approval from the Company's Chief Financial
Officer and final review by the Audit Committee of the Board of Directors.
The exclusion of these expansions due to the more stringent criteria and
related business judgments regarding probable success increased depreciation and
amortization and the provision for final closure and post-closure (included in
operating expense) by $14.0 million in the third quarter of 1999. Impairments
resulting from the application of these new stringent criteria and resulting
from other facts and circumstances make up the remaining $62.2 million
impairments included in the $178.3 million of impairments disclosed above.
Subsequent to the WM Holdings Merger, the Company experienced significant
difficulty in the conversion from the WM Holdings information systems to the
systems currently in use, resulting in delays and errors, particularly with
respect to the Company's billing systems. As a consequence, in connection with
the third quarter 1999 accounting review, the Company determined that certain of
its outstanding receivables may be uncollectable, and therefore, recorded an
increase in the allowance for doubtful accounts. The Company has, however,
increased resources for receivable collection efforts and continues to pursue
collection of all outstanding balances. In addition, the Company performed a
review of other receivable-related balances in connection with this review.
Taken together, the Company recorded receivable-related pre-tax charges of
$211.5 million in the third quarter of 1999.
In connection with this review, the Company evaluated the adequacy of its
self-insurance liabilities and changed the manner in which it estimates its
insurance-related liabilities for its ongoing property and casualty insurance
programs. Previously, the Company estimated its insurance-related liabilities
for its ongoing programs based on an analysis of insurance claims submitted for
reimbursement, plus an estimate for liabilities incurred as of the balance sheet
date, but not yet reported to the Company. In the third quarter of 1999, the
Company began estimating these liabilities based on actuarially determined
estimates of ultimate losses. This change in estimate resulted in an increased
pre-tax expense of $43.9 million in the third quarter of 1999. In addition, the
Company increased its insurance-related liabilities based on its assessment of
current and expected claims activities and unfavorable claims experience,
resulting in an additional pre-tax charge of $104.0 million in the third quarter
of 1999.
The Company recorded pre-tax charges related to legal, severance and
consulting costs incurred in the third quarter of 1999 including increases in
legal reserves and related charges of $96.3 million, principally related to
increases in legal reserves in response to developments in various legal
proceedings brought against WM Holdings by former shareholders of that company
in connection with its restatement of earnings in February 1998. These legal
developments caused the Company to evaluate the numerous shareholder cases filed
against WM Holdings and to reassess their range of exposure. Additionally, the
charges include $25.0 million related to severance costs, principally for
executives who left the Company in the third quarter of 1999 and $20.7 million
of consulting costs related primarily to the third quarter accounting review and
related matters.
As part of this review, the Company evaluated significant contracts under
which it provides services. As a result of that review, the Company recorded a
third quarter pre-tax provision of $49.3 million related to contracts which were
determined to be in a loss position, including revisions to reserves established
previously based on new facts and circumstances.
The Company increased its evaluation by $32.5 million of the ultimate costs
required for final closure and post-closure obligations at certain landfills
which are either closed or near final closure. That increase, and provisions
related to various other environmental issues, totaled $49.0 million in the
third quarter of 1999.
8
<PAGE> 10
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded $31.6 million of merger and acquisition related costs
during the third quarter, which consisted of $12.5 million related to a third
quarter purchase business combination and $19.1 million related to the costs
incurred by the Company related to the WM Holdings Merger and the Eastern Merger
which are required to be expensed as incurred.
The significant components of the asset impairments and unusual items
included in the accompanying Condensed Consolidated Statements of Operations
include $414.3 million related to held for sale adjustments, $178.3 million
related to other asset impairments and $84.4 million related to increases in
legal reserves.
In addition to the charges described above, the Company recorded additional
pre-tax charges of $191.0 million. These additional charges involved many
different issues at all levels of the Company, including, for example,
adjustments to reserves for specific business disputes, adjustments of over- or
under-accruals not described elsewhere herein, and numerous other items.
The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation for convenience, were
reflected in the Company's financial statements for the three months and the
nine months ended September 30, 1999, as follows (in thousands):
<TABLE>
<CAPTION>
INCLUDES
RECURRING &
NONRECURRING
ITEMS
-------------
<S> <C>
Operating revenues.......................................... $ (30,928)
-----------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 566,417
General and administrative................................ 401,729
Depreciation and amortization............................. 59,628
Merger and acquisition related costs...................... 31,568
Asset impairments and unusual items....................... 680,284
Loss from continuing operations held for sale, net of
minority interest......................................... --
-----------
1,739,626
-----------
Loss from operations........................................ (1,770,554)
-----------
Other income(expense):
Interest expense.......................................... 702
Interest income........................................... 13,359
Minority interest......................................... (288)
Other income (expense).................................... (5,736)
-----------
8,037
-----------
Loss before income taxes and extraordinary items............ (1,762,517)
Benefit from income taxes................................... 536,756
-----------
Net loss.................................................... $(1,225,761)
===========
</TABLE>
As discussed above, the Company recorded significant adjustments in the
quarter ended September 30, 1999, certain of which affect account balances
applicable to periods prior to the quarter ended September 30, 1999.
Accordingly, the Company, after consultation with its independent public
accountants, has concluded that its internal controls for the preparation of
interim financial information did not provide an adequate basis for its
independent public accountants to complete reviews of the quarterly data for the
quarters in the nine-month period ended September 30, 1999. As discussed above,
the Company believes that certain charges that were recorded in the quarter
ended September 30, 1999 may relate to individual prior periods; however, the
Company does not have sufficient information to identify all specific charges
attributable to prior periods. If identification of all specific charges
attributable to individual prior periods was possible, the Company believes that
the reported results of operations for the quarter ended September 30, 1999
would have been higher than presented in these financial statements. Based on
its quantitative and qualitative analysis of available
9
<PAGE> 11
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information, the Company, after consultation with its independent public
accountants, has concluded that it does not have, nor is it able to obtain,
sufficient information to conclude whether or not a material amount of these
charges relate to any individual prior year, although qualitative analysis
indicates that these charges are principally related to 1999. The Company has
been advised by its independent public accountants that their report on the
Company's December 31, 1999 financial statements will specifically refer to the
matters discussed above regarding the interim periods within 1999.
2. BUSINESS COMBINATIONS
On July 16, 1998, the Company, then known as USA Waste Services, Inc.,
completed a merger accounted for as a pooling of interests with Waste
Management, Inc., which was subsequently renamed Waste Management Holdings, Inc.
("WM Holdings") (the "WM Holdings Merger"). At the effective time of the WM
Holdings Merger, the Company changed its name to Waste Management, Inc. On
December 31, 1998, the Company consummated a merger with Eastern Environmental
Services, Inc. ("Eastern") (the "Eastern Merger") accounted for using the
pooling of interests method of accounting.
In connection with the WM Holdings Merger and the Eastern Merger, the
Company incurred significant merger costs and acquisition related asset
impairments and unusual items in the third and fourth quarters of 1998 as
described in the Company's Current Report on Form 8-K dated September 17, 1999.
Additionally, the Company, as noted in Note 1, has recorded $19.1 million and
$98.8 million of merger costs for the three and nine months ended September 30,
1999, respectively, related to the WM Holdings Merger and the Eastern Merger.
Additionally, in the third quarter of 1999, the Company recorded approximately
$12.5 million related to the purchase of a business that when integrated into
the Company's operations resulted in the closure of certain Company-owned
facilities and relocation of certain of the Company's administrative functions
of these businesses.
Cash payments of $122.8 million and $418.7 million were made by the Company
during the three and nine months ended September 30, 1999, respectively, related
to merger and acquisition related costs recorded in 1998 and 1999 for the WM
Holdings Merger and the Eastern Merger.
Additionally, the Company is in the process of settling its obligations
under the WM Holdings defined benefit pension plan (the "Plan") which was
terminated as of October 31, 1999 (although benefit accruals were ceased as of
December 31, 1998) and currently intends to liquidate the Plan's assets and
settle its obligations to participants. The Company contributed approximately
$43.4 million to the benefit plan trust during the third quarter of 1999 and
expects payments of approximately $185 million to be made through 2000 relating
to the termination of the Plan. The actual charge to expense of settling the
Plan will be recorded as settlements occur.
Certain WM Holdings' employee stock option plans included change of control
provisions that were activated as a result of the WM Holdings Merger whereby the
option holder received certain put rights that required charges to earnings
through the put periods. To the extent the market value of the Company's common
stock exceeded $54.34 per share at the end of a quarter (the "measurement
date"), the Company was required to record additional charges to earnings
through July 16, 1999, at which time all put rights expired. The expense related
to these stock option put rights would have had no net impact on stockholders'
equity, as the offset was a direct increase to additional paid in capital, since
these put rights were to be satisfied by the issuance of common stock. As the
market value of the Company's common stock was less than $54.34 per share as of
the date the put rights expired, there were no charges to earnings in the
current quarter related to the put rights. Because they have now expired, there
will be no charges to earnings in future periods related to the put rights.
Merger and acquisition related costs include estimates for anticipated
losses related to the sales of assets pursuant to governmental orders and other
asset divestiture plans. These anticipated losses have been
10
<PAGE> 12
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated based on the Company's assessment of relevant facts and circumstances,
including consideration of the various provisions of asset sale agreements. In
certain instances, the asset sale agreements contain contingencies, the
resolution of which are uncertain and may materially change the proceeds which
the Company will ultimately receive. Accordingly, dependent upon actual future
experience and the resolution of certain contingencies, the amount of losses
ultimately recorded by the Company could materially differ from amounts that
have been recorded by the Company. During the second quarter of 1999, the
Company resolved an outstanding contingency regarding its sale of assets to
Republic Services, Inc., which reduced the previously reported loss on that sale
by approximately $80 million. Offsetting this amount in the same quarter, the
Company (i) consummated its sale of 51% of its non-land disposal hazardous waste
operations and on-site industrial cleaning services which resulted in losses of
approximately $5 million greater than previously estimated; (ii) increased its
anticipated losses by approximately $14 million related to the assets required
to be sold pursuant to the Eastern Merger; (iii) identified other non-core
operations for disposition that have a book value of approximately $36 million
greater than the estimated proceeds; and (iv) identified other merger related
items comprising the remainder of the balance.
During the nine months ended September 30, 1999, the Company consummated
over 220 acquisitions that were accounted for under the purchase method of
accounting. The total cost of acquisitions was approximately $1.3 billion, which
included cash paid, common stock issued and debt assumed.
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Bank credit facilities...................................... $ 1,800,000 $ 1,903,100
Commercial paper, average interest of 5.3% in 1999 and 5.7%
in 1998................................................... 109,280 840,108
Senior notes and debentures, interest 6% to 8 3/4%, due
through 2029.............................................. 6,948,841 5,959,884
4% Convertible subordinated notes due 2002.................. 535,275 535,275
4 1/2% Convertible subordinated notes due 2001.............. -- 148,370
5% Convertible subordinated debentures due 2006............. -- 114,445
5.75% Convertible subordinated notes due 2005............... 458,093 453,680
Tax-exempt and project bonds, principal payable in periodic
installments, maturing through 2021, fixed and variable
interest rates ranging from 3.85% to 9.25% at September
30, 1999.................................................. 1,251,163 1,220,634
Installment loans, notes payable and other, interest to 14%,
maturing through 2017..................................... 300,592 522,447
----------- -----------
11,403,244 11,697,943
Less current maturities..................................... 2,689,698 583,742
----------- -----------
$ 8,713,546 $11,114,201
=========== ===========
</TABLE>
As a result of the charges and adjustments recorded in the third quarter of
1999 (see Note 1), the Company would not have been in compliance as of September
30, 1999 with certain financial covenants as required by its four bank credit
facilities. The Company received waivers from each of its four bank groups for
the period ended September 30, enabling the Company to be in full compliance
with and have full access to its existing bank credit facilities.
Waivers for the two domestic bank facilities extend through December 30,
1999. Additionally, the Company is in discussions with its banks regarding
permanent amendments to these credit facilities to amend certain financial
covenants and allow for the divestiture of certain assets as announced by the
Company on
11
<PAGE> 13
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
August 16, 1999 as part of its strategic plan. Management believes that the
permanent amendments will be in place by December 30, 1999. The waivers for the
two Euro facilities extend to the maturity of the respective facilities, which
is November 25, 1999. Extensions of these two facilities are currently being
pursued. Should the Company be unsuccessful in obtaining amendments from its
banks prior to expiration of the waivers on December 30, 1999, then all
borrowings and letters of credit outstanding would be considered current
obligations, due upon demand by the banks. In addition, the Company would not
have access to the unused portions of such lines which could impair its ability
to meet ongoing working capital and other liquidity requirements. There can be
no assurance that the Company will be successful in completing the amendments
prior to December 31, 1999 or would be able to arrange alternate sources of
liquidity to meet its obligations.
Because the bank facility waivers expire before a one year period, the
Company's outstanding bank borrowings and commercial paper associated with those
facilities are classified as current maturities of long-term debt in the
September 30, 1999 financial statements pending amendments of the credit
agreements. The Company has a scheduled maturity of $200 million of senior notes
on November 15, 1999. Additionally, based on the current market price of the
Company's common stock, the Company expects the holders of its 5.75% convertible
subordinated notes due 2005 to exercise a redemption option that becomes
available March 15, 2000. The repayment of the senior notes and expected
repayment of the convertible subordinated notes are anticipated to be funded
with proceeds available from the Company's bank facilities. These amounts are
classified as current maturities of long-term debt in the September 30, 1999
financial statements.
At September 30, 1999, the Company had borrowings of $1.05 billion under
the Company's $3.0 billion syndicated loan facility (the "Syndicated Facility")
at 5.8% interest, and had borrowings of $750.0 million under the Company's $2.0
billion senior revolving credit facility (the "Credit Facility") at 5.7%
interest, both amounts representing new net borrowings as well as refinancing of
maturing commercial paper during the quarter ended September 30, 1999. The
facility fees were .125% and .150% per annum under the Syndicated Facility and
Credit Facility, respectively, at September 30, 1999. The Company had issued
letters of credit of $1.2 billion in aggregate under the Syndicated Facility and
Credit Facility leaving unused and available credit capacity of $1.9 billion at
September 30, 1999.
The Company's two multi-currency credit facilities, which are included in
the December 31, 1998 long-term debt balances, are classified at September 30,
1999 in current assets as net assets held for sale and are thus excluded from
long-term debt as these credit facilities relate to WM International, which is
to be sold pursuant to the Company's strategic plan. The two multi-currency
credit facilities had an outstanding balance as of September 30, 1999 totaling
Euro 245.1 million (equivalent to approximately $262.0 million). The interest
rates on the two outstanding loans under the multi-currency credit facilities at
September 30, 1999, were 5.6% and 3.0%.
On March 4, 1996, the Company issued $115.0 million of 5% convertible
subordinated debentures, due on March 1, 2006. In March 1999, these debentures
were called for redemption by the Company and subsequently converted into equity
by the debenture holders. Approximately 4.0 million shares of the Company's
common stock were issued upon such conversions.
On June 5, 1996, the Company issued $150.0 million of 4 1/2% convertible
subordinated notes, due June 1, 2001. In June 1999, these debentures were called
for redemption by the Company and subsequently converted into equity by the
debenture holders. Approximately 4.9 million shares of the Company's common
stock were issued upon such conversions.
On May 21, 1999, the Company completed a private placement of $1.15 billion
of its senior notes. The Company issued $200.0 million of 6% senior notes, due
2001; $200.0 million of 6 1/2% senior notes due 2004; $500.0 million of 6 7/8%
senior notes due 2009; and $250.0 million of 7 3/8% senior notes due 2029. The
senior notes constitute senior and unsecured obligations of the Company ranking
equal in right of payment with all other senior and unsecured obligations of the
Company, as defined in the indenture. The 6% senior notes are
12
<PAGE> 14
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not redeemable by the Company. The 6 1/2% senior notes, the 6 7/8% senior notes,
and 7 3/8% senior notes are redeemable, in whole or in part, at the option of
the Company at any time, or from time to time, at a redemption price defined in
the indenture. Interest is payable semi-annually on May 15 and November 15. All
proceeds from the private placement notes were used to repay outstanding debt
under the Credit Facility and to reduce the amount of commercial paper
outstanding.
4. INCOME TAXES
The differences in income taxes computed at the federal statutory income
tax rate and reported income taxes for the three and nine months ended September
30, 1999 and 1998, respectively, are primarily due to state and local income
taxes, non-deductible costs related to acquired intangibles, and for the periods
ended September 30, 1999, the non-deductible costs associated with the
impairment of certain foreign businesses and other third quarter 1999 charges
and adjustments described in Note 1 and the cost associated with remitting the
earnings of foreign subsidiaries, which are no longer considered permanently
reinvested.
5. EARNINGS PER SHARE
The following table reconciles the number of common shares outstanding at
September 30 of each year indicated to the weighted average number of common
shares outstanding and the weighted average number of common and dilutive
potential common shares outstanding for the respective three and nine month
periods for the purposes of calculating basic and dilutive earnings per common
share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Number of common shares outstanding.................... 619,547 597,304 619,547 597,304
Effect of using weighted average common shares
outstanding.......................................... (442) (1,798) (8,690) (18,032)
------- ------- ------- -------
Weighted average number of common shares outstanding... 619,105 595,506 610,857 579,272
======= ======= ======= =======
</TABLE>
For all periods presented, respectively, the effect of the Company's common
stock options and warrants and the effect of the Company's convertible
subordinated notes and debentures are excluded from the dilutive earnings per
share calculation since inclusion of such items would be antidilutive.
At September 30, 1999, there were approximately 57.9 million shares of
common stock potentially issuable with respect to stock options, warrants and
convertible debt, which could dilute basic earnings per share in the future.
In the third quarter of 1999, the Company declared an annual cash dividend
of $0.01 per share or $6.2 million to stockholders of record on September 30,
1999, which was paid October 19, 1999.
6. COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of an enterprise from
transactions and other events and circumstances from nonowner sources and
includes all changes in equity except those resulting
13
<PAGE> 15
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from investments by owners and distributions to owners. The components of
accumulated other comprehensive income are as follows for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
FOREIGN MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME
----------- ---------- -------------
<S> <C> <C> <C>
Balance, December 31, 1998.............................. $(353,642) $ (67,162) $(420,804)
Year-to-date change................................... (41,203) (65,844) (107,047)
--------- --------- ---------
Balance, September 30, 1999............................. $(394,845) $(133,006) $(527,851)
========= ========= =========
</TABLE>
The Company is continuing the process of settling its obligations under the
Plan, and the change in minimum pension liability adjustment relates to the
Plan. The change results from updated actuarial calculations of the Plan's
accumulated benefit obligation and resultant future settlement expense, due to
the availability of updated census data. To the extent that the termination
benefit has not yet been charged to expense, additional minimum pension
liability has been recorded as a charge to other comprehensive income. The
Company expects to settle the obligations at various dates in 2000, at which
time settlement expense will be recorded and adjustments to other comprehensive
income will be made.
7. ENVIRONMENTAL LIABILITIES
The Company performs a comprehensive, centrally coordinated review of its
North American landfills on an annual basis. This review has resulted in asset
impairments and increased airspace amortization and operating expenses in the
third quarter of 1999.
The Company has material financial commitments for the costs associated
with its future obligations for final closure for all of its North American
landfills, which is the closure of the final cell of a landfill, and the
regulatory required costs associated with existing operations at a hazardous
waste treatment, storage or disposal facility which are subject to the Toxic
Substances Control Act ("TSCA") or the Resource Conservation and Recovery Act
("RCRA"), and also, the post-closure of such facilities. For landfills,
estimates for final closure and post-closure costs are developed using input
from the Company's engineers and accountants and are reviewed by management,
typically at least once per year. Where the Company believes that both the
amount of a particular environmental liability and the timing of the payments
are reliably determinable, the cost in current dollars is inflated at 2% until
expected time of payment and then discounted to present value at 5.5%. The
estimated final closure and post-closure liabilities are accrued using the
calculated rate and charged to expense as airspace is consumed. At the time the
site discontinues accepting waste and is closed, the total estimated final
closure costs and the post-closure costs are accrued to the required present
value of such estimates.
The Company has also established procedures to evaluate its potential
remedial liabilities at closed sites which it owns or operates, or to which it
transported waste, including 84 sites listed on the Superfund National
Priorities List ("NPL") as of September 30, 1999. The majority of situations
involving NPL sites relate to allegations that subsidiaries of the Company (or
their predecessors) transported waste to the facilities in question, often prior
to the acquisition of such subsidiaries by the Company. Where the Company
concludes that it is probable that a liability has been incurred and quantified
a provision is made in its consolidated financial statements.
Estimates of final closure and post-closure liabilities at the Company's
landfills, and of the extent of the Company's responsibility for remediation of
particular closed sites and the method and ultimate cost of remediation require
a number of assumptions and are inherently difficult. As such, the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provide a reasonable basis for
14
<PAGE> 16
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its consolidated financial statements,
it is reasonably possible that technological, regulatory or enforcement
developments, the results of environmental studies, the existence and ability of
other potentially responsible parties to contribute to the settlement of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could be material.
The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future remedial, defense and tort claim costs at a
number of sites. Carriers involved in these matters have typically denied
coverage and are defending against the Company's claims. While the Company is
vigorously pursuing these claims, it regularly considers settlement
opportunities when appropriate terms are offered. Settlements of $7.1 million in
the nine months ended September 30, 1999, and $42.0 million for the nine months
ended September 30, 1998, have been included in operating costs and expenses as
an offset to environmental expenses. No settlements were recorded in the third
quarter of 1999 or 1998.
8. COMMITMENTS AND CONTINGENCIES
Financial Instruments -- Letters of credit, performance bonds and other
guarantees have been provided by the Company supporting tax exempt-bonds,
performance of final closure and post-closure requirements, insurance policies,
and other contracts. These financial instruments are not reflected in the
condensed consolidated balance sheets. The insurance policies are issued by a
wholly-owned insurance subsidiary of the Company, the sole business of which is
to issue such policies to customers of the Company. Management does not expect
these financial instruments to have a material effect on the Company's
consolidated financial statements as virtually no claims have been made in the
past against these financial instruments.
Environmental matters -- The Company's operations are intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. Such costs may increase in the future as a
result of legislation or regulation. However, the Company believes that, in
general, it tends to benefit when environmental regulation increases, which may
increase the demand for its services, and that it has the resources and
experience to manage environmental risk. See Note 7 for further discussion.
Litigation -- In November and December 1997, several alleged purchasers of
WM Holdings securities (including but not limited to common stock), who
allegedly bought their securities during 1996 and 1997, brought fourteen
purported class action lawsuits against WM Holdings and several of its current
and former officers and directors in the United States District Court for the
Northern District of Illinois. Each of these lawsuits asserted that the
defendants violated the federal securities laws by issuing allegedly false and
misleading statements in 1996 and 1997 about WM Holdings' financial condition
and results of operations. The lawsuits demanded, among other relief,
unspecified compensatory damages, pre- and post-judgement interest, attorneys'
fees and the costs of conducting the litigation. In January 1998, the fourteen
putative class actions were consolidated before one judge. In May 1998, the
plaintiffs filed a consolidated amended complaint against WM Holdings and four
of its former officers, which was amended in July 1998 to add WM Holdings'
outside auditor and another former officer as additional defendants. The amended
complaint seeks recovery on behalf of a proposed class of all purchasers of WM
Holdings' securities between May 29, 1995, and October 30, 1997. The amended
complaint alleges, among other things, that WM Holdings filed false and
misleading financial statements beginning in 1991 and continuing through October
1997 and seeks recovery for alleged violations of the federal securities laws
between May 1995 and October 1997.
In December 1998, the Company announced an agreement to settle the
consolidated action against all defendants and the establishment of a settlement
fund of $220 million for the class of open market purchasers of WM Holdings
securities between November 3, 1994, and February 24, 1998. On September 17,
1999, the United States District Court for the Northern District of Illinois
gave final approval to the settlement after a
15
<PAGE> 17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hearing. After the Court had approved the settlement and ordered the case
dismissed, a solitary, putative class member sought to intervene in the action
and to object, not to the settlement, but to the size of the fee award to
plaintiffs' class counsel. The Court denied the motion and the putative class
member has filed a notice of appeal from this denial.
Two alleged purchasers of WM Holdings' securities are pursuing an action
arising out of the same set of facts in Illinois state court alleging violations
of Illinois state law. One of these purchasers, together with two other alleged
purchasers, has initiated another action based on the same set of facts in
federal court in Florida alleging violations of the federal securities laws.
Additionally, there are several other actions and claims that arise out of
the same set of facts that have been brought by business owners who received WM
Holdings common stock in the sales of their businesses to WM Holdings. These
actions and claims allege, among other things, breach of warranty or breach of
contract based on WM Holdings' restatement of earnings in February 1998. In
April 1999, courts having jurisdiction over two such actions granted summary
judgement against WM Holdings and in favor of the individual plaintiffs who
brought the respective claims on the issue of breach of contract. Additionally,
in October 1999, the court in one of these actions certified a class consisting
of all sellers of business assets to WM Holdings between January 1, 1990 and
February 24, 1998 whose purchase agreements with WM Holdings contained express
warranties regarding the accuracy of WM Holdings' financial statements. The
extent of damages, if any, in these actions has not yet been determined.
Purported derivative actions have also been filed in Delaware Chancery
Court by alleged former shareholders of WM Holdings against certain former
officers and directors of WM Holdings and nominally against WM Holdings to
recover damages caused to WM Holdings as a result of the consolidated federal
securities class action pending in federal court in the Northern District of
Illinois. These actions have been consolidated and plaintiffs have filed a
consolidated amended complaint. The plaintiffs seek to recover from the former
officers and directors, on behalf of WM Holdings, the amounts paid in the
federal class action as well as additional amounts based on alleged harms not at
issue in the federal class action.
The Company is also aware that the United States Securities and Exchange
Commission ("SEC") has commenced a formal investigation with respect to WM
Holdings' previously filed financial statements (which were subsequently
restated) and related accounting policies, procedures and system of internal
controls. The Company intends to cooperate with such investigation. The Company
is unable to predict the outcome or impact of this investigation at this time.
On July 6, 1999, the Company announced that it had lowered its expected
earnings per share for the three months ended June 30, 1999. On July 29, 1999,
the Company announced a further reduction in its expected earnings for that
period. On August 3, 1999, the Company announced a further reduction in its
expected earnings for that period. On August 3, 1999, the Company announced that
its reported operating income for the three months ended March 31, 1999 may have
included certain unusual pretax income items. Between July 8, 1999 and September
3, 1999, numerous lawsuits that purport to be based on one or more of these
announcements have been filed against the Company and certain of its officers
and directors in the United States District Court for the Southern District of
Texas. These actions have been consolidated into a single action. On September
7, 1999, a lawsuit was filed against the Company and certain of its officers and
directors in the United States District Court for the Eastern District of Texas.
The parties have filed a joint motion to transfer this case to the United States
District Court for the Southern District of Texas, to be consolidated with the
consolidated action pending there. Taken together, the plaintiffs in these
lawsuits purport to assert claims on behalf of a class of purchasers of the
Company's common stock between June 10, 1998 and August 2, 1999. Among other
things, the plaintiffs allege that the Company and certain of its officers and
directors (i) made knowingly false earnings projections for the three months
ended June 30, 1999 and (ii) failed to adequately disclose facts relating to its
earnings projections that the plaintiffs allege would have been material to
purchasers of the Company's common stock. The plaintiffs also claim that certain
of the
16
<PAGE> 18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's officers and directors sold common stock between March 31, 1999 and
July 6, 1999 at prices known to be inflated by the alleged material
misstatements and omissions. The plaintiffs in these actions seek damages with
interest, costs and such other relief as the respective courts deem proper.
In addition, three of the Company's shareholders have filed lawsuits
against certain officers and directors of the Company in connection with the
events surrounding the Company's second quarter 1999 earnings projections and
July 6, 1999 earnings announcement. Two of these lawsuits were filed in the
Court of Chancery of the State of Delaware on July 16, 1999 and August 18, 1999,
respectively, and one was filed in the United States District Court for the
Southern District of Texas on July 27, 1999. The plaintiffs in these actions
purport to allege derivative claims on behalf of the Company against these
individuals for alleged breaches of fiduciary duty resulting from their alleged
common stock sales during the three months ended June 30, 1999 and/or their
oversight of the Company's affairs. The lawsuits name Waste Management, Inc. as
a nominal defendant and seek compensatory and punitive damages with interest,
equitable and/or injunctive relief, costs and such other relief as the
respective courts deem proper.
The Company has also received a letter from participants in the Company's
Employee Stock Purchase Plan (the "ESPP") who purchased the Company's common
stock on June 30, 1999. The letter demands that the Administrative Committee of
the ESPP bring an action against the Company and certain selling officers and
directors for losses allegedly sustained by the participants in their stock
purchases. These ESPP participants have indicated in the letter that, absent
action by the ESPP, they intend to sue the Company and the directors and
officers on behalf of the ESPP and its participants. The administrative
committee of the ESPP has advised these participants that it cannot file suit,
as requested, because the committee is neither a representative of the plan nor
a Waste Management shareholder. The Company has not received any further
communication from these participants. However, the Company does not believe
that this claim, if pursued, would have a material adverse effect on the
Company's consolidated financial statements.
In addition, the SEC has notified the Company of an informal inquiry into
the period ended June 30, 1999, as well as certain sales of the Company's common
stock that preceded the Company's July 6, 1999 earnings announcement.
The New York Stock Exchange has notified the Company that its Market
Trading Analysis Department is reviewing transactions in the stock of the
Company prior to the July 6, 1999 earnings forecast announcement.
The Company is conducting a thorough investigation of each of the
allegations that have been made in connection with the Company's second quarter
1999 earnings communications. As part of this investigation, the Company's Board
of Directors has authorized a review of the allegations that have been made
against certain of the Company's officers and directors. Roderick M. Hills, a
former chairman of the SEC and chairman of the Company's audit committee, is
directing the review.
The Company has received a Civil Investigative Demand ("CID") from the
Antitrust Division of the United States Department of Justice inquiring into the
Company's non-hazardous solid waste operations in the State of Massachusetts.
The CID purports to have been issued for the purpose of determining whether the
Company has engaged in monopolization, illegal contracts in restraint of trade,
or anticompetitive acquisitions of disposal and/or hauling assets. The CID
requires the Company to provide the United States Department of Justice with
certain documents to assist it in its inquiry.
On July 16, 1999, a lawsuit was filed against the Company in the Circuit
Court for Sumter County in the State of Alabama. The plaintiff in the lawsuit
purported to allege on behalf of a class of similarly situated persons that the
Company has deprived the class of lump sum payments of pension plan benefits
allegedly promised to be paid in connection with termination of the Plan. On
behalf of the purported class, the plaintiff sought compensatory and punitive
damages, costs, restitution with interest, and such relief as the Court deemed
proper. On July 29, 1999, the Company announced that it had determined to
proceed with the
17
<PAGE> 19
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination of the Plan, liquidating the Plan's assets and settling its
obligations to participants. The plaintiff voluntarily dismissed her case on
September 13, 1999. However, that same day, the same attorneys filed another
Plan-related putative class action against the Company and various individual
defendants in the United States District Court for the Middle District of
Alabama, Northern Division. This case, brought by a different putative class
representative, alleges that the defendants violated the federal Employee
Retirement Income Security Act ("ERISA") by failing to terminate the Plan in
accordance with its terms, by failing to manage Plan assets prudently and in the
interests of Plan participants, and by delaying the plan's termination date and
the expected distribution of lump-sum pension benefits. On behalf of the
purported class, the plaintiff seeks declaratory and injunctive relief,
restitution of all losses and expenses allegedly incurred by the Plan, payment
of all benefits allegedly owed to Plan participants, attorney's fees and costs,
and other "appropriate" relief under the Internal Revenue Code, ERISA and the
Plan. Defendants' time to move, answer or otherwise respond to the complaint has
been extended, and no proceedings have yet occurred.
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment and the potential for the
unintended or unpermitted discharge of materials into the environment. In the
ordinary course of conducting its business activities, the Company becomes
involved in judicial and administrative proceedings involving governmental
authorities at the foreign, 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 related 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
applicable requirements. From time to time, the Company pays fines or penalties
in environmental proceedings relating primarily to waste treatment, storage or
disposal facilities. The Company believes that these matters will not have a
material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty, and the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could materially alter this expectation at any time.
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's subsidiary having owned, operated or
transported waste to a disposal facility which is alleged to have contaminated
the environment or, in certain cases, conducted environmental remediation
activities at sites. Some of such lawsuits may seek to have the Company or its
subsidiaries pay the costs of groundwater monitoring and health care
examinations of allegedly affected persons for a substantial period of time even
where no actual damage is proven. While the Company believes it has meritorious
defenses to these lawsuits, their ultimate resolution is often substantially
uncertain due to the difficulty of determining the cause, extent and impact of
alleged contamination (which may have occurred over a long period of time), the
potential for successive groups of complainants to emerge, the diversity of the
individual plaintiffs' circumstances, and the potential contribution or
indemnification obligations of co-defendants or other third parties, among other
factors. Accordingly, it is possible such matters could have a material adverse
impact on the Company's consolidated financial statements.
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("CERCLA" or "Superfund"). The majority of
these proceedings are based on allegations that certain subsidiaries of the
Company (or their predecessors) transported hazardous substances to the sites in
question, often prior to acquisition of such subsidiaries by the Company. Such
proceedings arising under Superfund typically involve numerous waste generators
and other waste transportation and disposal companies
18
<PAGE> 20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and seek to allocate or recover costs associated with site investigation and
cleanup, which costs could be substantial.
In June 1999, the Company was notified that the EPA is conducting a civil
investigation of alleged chlorofluorocarbons ("CFC") disposal violations by
Waste Management of Massachusetts, Inc. ("WMMA") to determine whether further
enforcement measures are warranted. The activities giving rise to the
allegations of CFC disposal violations appear to have occurred prior to July 30,
1998. On July 29, 1998, the EPA inspected WMMA's operations, notified the
Company of the alleged violations and issued an Administrative Order in January
1999 requiring WMMA to comply with the CFC regulations. WMMA is cooperating with
the investigation and the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's consolidated
financial statements.
In August 1999, sludge materials from trucks entering the Company's
Woodland Meadows Landfill in Michigan were seized by the FBI pursuant to an
investigation of the generator of the sludge materials, a company that provides
waste treatment services. Subsequently, the Company received two Grand Jury
subpoenas, as well as a request for information from the Michigan Department of
Environmental Quality, seeking information related to the landfill's waste
acceptance practices and the Company's business relationship with the generator.
According to affidavits attached to the subpoena, the generator is alleged to
have failed to properly treat sludges prior to disposal. The generator's
treatment plant was sold by the Company to the generator in May 1998. The
Company is cooperating with the pending investigation and believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial statements.
As of September 30, 1999, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 84 locations
listed on the NPL. Of the 84 NPL sites at which claims have been made against
the Company, 17 are sites which the Company has come to own over time. All of
the NPL sites owned by the Company were initially sited by others as land
disposal facilities. At each of the 17 owned facilities, the Company is working
in conjunction with the government to characterize or remediate identified site
problems. In addition, at these 17 facilities, the Company has either agreed
with other legally liable parties on an arrangement for sharing the costs of
remediation or is pursuing resolution of an allocation formula. The 67 NPL sites
at which claims have been made against the Company and which are not owned by
the Company are at different procedural stages under Superfund. At some of these
sites, the Company's liability is well defined as a consequence of a
governmental decision as to the appropriate remedy and an agreement among liable
parties as to the share each will pay for implementing that remedy. At others
where no remedy has been selected or the liable parties have been unable to
agree on an appropriate allocation, the Company's future costs are uncertain.
In November 1998, the Company was sued by the estate of Shayne Conner, who
died on November 24, 1995 in Greenland, New Hampshire. Plaintiffs allege that
Mr. Conner's death was caused by biosolids that were applied to a nearby field
by Wheelabrator's BioGro business unit. The litigation is currently in the
discovery phase, and the Company is waiting for plaintiff's production of a
court-ordered expert on causation. The Company is vigorously defending itself
and believes that it will prevail in the litigation.
The Company has been advised by the United States Department of Justice
that Laurel Ridge Landfill, Inc., a wholly owned subsidiary of the Company as a
result of the Company's acquisition of United Waste Systems, Inc. ("United") in
August 1997, allegedly committed certain violations of the Clean Water Act at
the Laurel Ridge Landfill in Kentucky. The alleged activities occurred during a
period prior to the Company's acquisition of United. In May 1999, the Company
pleaded guilty to a criminal misdemeanor and, subject to court approval, agreed
to pay a fine and perform in kind services. The Company believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial statements.
19
<PAGE> 21
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, a San Bernardino County, California grand jury returned
an amended felony indictment against the Company, certain of its subsidiaries
and their current or former employees, and a County employee. The proceeding is
based on events that allegedly occurred prior to the WM Holdings Merger in
connection with a WM Holdings landfill development project. The indictment
includes allegations that certain of the defendants engaged in conduct involving
fraud, wiretapping, theft of a trade secret and manipulation of computer data,
and that they engaged in a conspiracy to do so. If convicted, the most serious
of the available sanctions against the corporate defendants would include
substantial fines and forfeitures. The Company believes that meritorious
defenses exist to each of the allegations, and the defendants are vigorously
contesting them. The Company believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's consolidated financial
statements.
The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. In this action the Company is seeking a declaratory judgment that
environmental liabilities asserted against the Company or its subsidiaries, or
that may be asserted in the future, are covered by insurance policies purchased
by the Company or its subsidiaries. The Company is also seeking to recover
defense costs and other damages incurred as a result of the assertion of
environmental liabilities against the Company or its subsidiaries for events
occurring over at least the last 25 years at approximately 140 sites and the
defendant insurance carriers' denial of coverage of such liabilities. While the
Company has reached settlements with some of the carriers, the remaining
defendants have denied liability to the Company and have asserted various
defenses, including that environmental liabilities of the type for which the
Company is seeking relief are not risks covered by the insurance policies in
question. The remaining defendants are contesting these claims vigorously.
Discovery is complete as to the 12 sites in the first phase of the case and
discovery is expected to continue for several years as to the remaining sites.
Currently, trial dates have not been set. The Company is unable at this time to
predict the outcome of this proceeding. No amounts have been recognized in the
Company's condensed consolidated financial statements for potential recoveries.
It is not possible at this time to predict the impact that the above
lawsuits and inquiries may have on WM Holdings or the Company, nor is it
possible to predict whether any other suits or claims may arise out of these
matters in the future. However, it is reasonably possible that the outcome of
any present or future litigation or inquiries may have a material adverse impact
on their respective financial conditions or results of operations in one or more
future periods. The Company and WM Holdings intend to defend themselves
vigorously in all the above matters.
The Company and certain of its subsidiaries are also currently involved in
other civil litigation and governmental proceedings relating to the conduct of
their business. While the outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty, the Company believes that
these matters will not have a material adverse effect on its consolidated
financial statements.
9. SEGMENT AND RELATED INFORMATION
The Company's North American solid waste management operations are its
principal reportable segment. This segment provides integrated waste management
services consisting of collection, transfer, disposal (solid waste landfill,
hazardous waste landfill and waste-to-energy), recycling, and other services
provided to commercial, industrial, municipal and residential customers. Similar
operations in markets outside of North America are disclosed as a separate
segment. The Company's other reportable segment consists of non-solid waste
services, aggregated as a single segment for this reporting presentation. The
non-solid waste segment includes other hazardous waste services such as chemical
waste management services and low-level and other radioactive waste services,
the Company's independent power projects, and other non-solid waste services to
commercial, industrial and government customers. Through June 30, 1999, the
Company's non-solid waste services also included non-land disposal hazardous
waste operations and on-site industrial cleaning services.
20
<PAGE> 22
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
However, on June 30, 1999, the Company sold a 51% interest in these operations
to Vivendi SA, at which time the Company began accounting for its remaining 49%
interest on the equity method of accounting.
Summarized financial information concerning the Company's reportable
segments is shown in the following table, reflecting the charges related to the
third quarter accounting review adjustments, which include both recurring and
nonrecurring items (see Note 1)(in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID CORPORATE
SOLID WASTE INTERNATIONAL WASTE FUNCTIONS(A) TOTAL
-------------- ------------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Three Months Ended:
September 30, 1999
Net operating revenues(b)........... $2,758,134 $ 442,912 $194,006 $ -- $3,395,052
Earnings before interest and
taxes(c).......................... $ (1,878) $ 45,563 $(18,795) $(432,336) $ (407,446)
September 30, 1998
Net operating revenues(b)........... $2,595,545 $ 388,490 $253,666 $ -- $3,237,701
Earnings before interest and
taxes(c).......................... $ 698,231 $ 30,216 $ 27,921 $ (68,275) $ 688,093
Nine Months Ended:
September 30, 1999
Net operating revenues(b)........... $7,961,014 $1,200,716 $628,732 $ -- $9,790,462
Earnings before interest and
taxes(c).......................... $1,482,257 $ 115,317 $ 30,504 $(460,497) $1,167,581
September 30, 1998
Net operating revenues(b)........... $7,554,474 $1,133,288 $705,403 $ -- $9,393,165
Earnings before interest and
taxes(c).......................... $1,850,955 $ 89,062 $ 75,625 $(293,661) $1,721,981
</TABLE>
- ---------------
(a) Corporate functions include the corporate treasury function (except for
limited amounts of locally negotiated and managed project debt),
administration of corporate tax function, the corporate insurance function,
and management of closed landfills and related insurance recovery
functions, administration of certain international remediation liabilities
along with other typical administrative functions.
(b) Non-Solid Waste revenues are net of inter-segment revenue with North
American Solid Waste of $24.4 and $77.2 for the three and nine months ended
September 30, 1999, respectively, and $36.8 million and $90.8 million for
the three and nine months ended September 30, 1998, respectively. There are
no other significant sales between segments.
(c) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies included in the
Company's Current Report on Form 8-K dated September 17, 1999. EBIT is
income (loss) from operations excluding merger and acquisition related
costs, asset impairments and unusual items, and loss from continuing
operations held for sale, net of minority interest.
21
<PAGE> 23
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of total EBIT reported above to net income is as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
EBIT, as reported above................... $ (407,446) $ 688,093 $1,167,581 $1,721,981
(Plus) less:
Merger and acquisition related costs.... 31,568 1,564,164 111,263 1,579,127
Asset impairments and unusual items..... 680,284 666,952 700,034 666,952
Loss from continuing operations held for
sale, net............................ -- 2,721 -- 151
Interest expense........................ 188,634 174,262 549,702 503,347
Interest income......................... (20,341) (7,256) (28,823) (21,760)
Minority interest....................... 4,697 (23,868) 17,706 14,298
Other income............................ (8,691) (12,528) (39,268) (122,960)
----------- ----------- ---------- ----------
Loss before income taxes and extraordinary
item.................................... (1,283,597) (1,676,354) (143,033) (897,174)
Provision for (benefit from) income
taxes................................... (335,824) (417,881) 139,790 (66,887)
----------- ----------- ---------- ----------
Loss before extraordinary item............ (947,773) (1,258,473) (282,823) (830,287)
Extraordinary item, net of taxes.......... -- -- -- (3,900)
----------- ----------- ---------- ----------
Net loss.................................. $ (947,773) $(1,258,473) $ (282,823) $ (834,187)
=========== =========== ========== ==========
</TABLE>
10. NET ASSETS HELD FOR SALE
During the third quarter of 1999 the Company's Board of Directors adopted a
strategic plan which includes the divestiture of its international operations,
significant portions of its non-core businesses and selected North American
solid waste operations. As discussed in Note 1, the Company has recorded charges
to write down certain of these assets. In determining fair value, the Company
considered, among other things, the range of preliminary purchase prices being
discussed with potential buyers. Information regarding the businesses classified
as net assets held for sale for the three and nine months ended September 30,
1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Three Months Ended:
September 30, 1999
- ------------------
Operating revenues........................... $ 62,262 $ 442,912 $101,655 $ 606,829
Earnings before interest and taxes(a)........ (2,905) 45,563 4,014 46,672
September 30, 1998
- ------------------
Operating revenues........................... $ 62,450 $ 388,490 $ 93,788 $ 544,728
Earnings before interest and taxes(a)........ 7,425 30,216 4,305 41,946
Nine Months Ended:
September 30, 1999
- ------------------
Operating revenues........................... $175,501 $1,200,716 $273,735 $1,649,952
Earnings before interest and taxes(a)........ 21,267 115,317 21,570 158,154
September 30, 1998
- ------------------
Operating revenues........................... $202,706 $1,133,288 $264,799 $1,600,793
Earnings before interest and taxes(a)........ 45,020 89,062 21,323 155,405
</TABLE>
22
<PAGE> 24
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies included in the
Company's Current Report on Form 8-K dated September 17, 1999. EBIT is
income (loss) from operations excluding merger and acquisition related
costs, asset impairments and unusual items, and loss from continuing
operations held for sale, net of minority interest.
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
As of September 30, 1999:
- ------------------------
Receivables, net............................. $ 35,006 $ 405,795 $ 30,307 $ 471,108
Other current assets......................... 12,228 217,916 35,017 265,161
Property and equipment and other noncurrent
assets..................................... 510,041 2,371,127 56,406 2,937,574
Current maturities of long-term debt......... (2,257) (91,893) -- (94,150)
Other current liabilities.................... (45,919) (512,742) (88,699) (647,360)
Long-term debt, less current maturities...... (60,235) (280,034) -- (340,269)
Other noncurrent liabilities................. (24,824) (363,441) (9,091) (397,356)
Minority interest............................ -- (121,592) (589) (122,181)
-------- ---------- -------- ----------
Net assets held for sale..................... $424,040 $1,625,136 $ 23,351 $2,072,527
======== ========== ======== ==========
</TABLE>
11. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and derivatives used for hedging
purposes. SFAS No. 133 requires that entities recognize all derivative financial
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 137, is effective for the Company in its first fiscal quarter in
2001. Management is currently assessing the impact the adoption of SFAS No. 133
will have on the Company's consolidated financial statements.
12. SUBSEQUENT EVENTS
In the second quarter of 1999, the Company entered into an agreement to
purchase all of the Canadian solid waste assets of Allied Waste Industries, Inc.
("Allied") that Allied acquired upon its acquisition of Browning-Ferris
Industries, Inc. The purchase price of these assets was to be approximately $501
million in cash. On November 8, 1999, the Company and Allied entered into
revised agreements, which replace the original agreement.
Under the terms of the revised agreements, Allied has agreed to sell to the
Company all of the shares of Browning-Ferris Industries Limited ("BFIL"), which
owns the solid waste operations of Browning-Ferris in Canada, including
collection operations, transfer stations, landfill operations and recycling
facilities. Annual revenues generated from these operations are estimated to be
approximately US $176 million. Allied will continue to operate certain of the
Canadian operations with total revenues estimated to be approximately US $53
million that the Company is being required to divest by the Competition Bureau
of Canada and market those operations for sale, on behalf of BFIL, after the
closing. The sale of the BFIL shares is subject to final approval pursuant to
the Competition Act and the Investment Canada Act. Additionally, the Company has
agreed to sell to Allied certain U.S. solid waste services assets with combined
reported historical revenue of approximately $132 million, including nine
landfill operations, 19 collection operations, five transfer stations
23
<PAGE> 25
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and a landfill operating contract. The sale of such assets is subject to final
approval pursuant to the Hart-Scott Rodino Act. The Company expects to receive
net cash proceeds as a result of the revised transactions.
On December 15 and 16, 1999, the Company permanently amended its two
domestic credit facilities and its two Euro facilities, respectively. The
amendments permanently amend the financial covenants for which waivers were
sought in the third quarter, and also allow certain actions that are part of the
Company's previously announced strategic plan.
13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
WM Holdings ("Guarantor"), a wholly-owned subsidiary of Waste Management,
Inc. ("Parent"), has fully and unconditionally guaranteed all of the senior
indebtedness of the Parent, as well as the Parent's 4% convertible subordinated
notes due 2002. The Parent has fully and unconditionally guaranteed all of the
senior indebtedness of WM Holdings, as well as WM Holdings' 5.75% convertible
subordinated debentures due 2005. However, none of the Company's nor WM
Holdings' debt is guaranteed by any of the Parent's indirect subsidiaries or WM
Holdings' subsidiaries ("Non-Guarantor"). Accordingly, the following unaudited
condensed consolidating balance sheets as of September 30, 1999 and December 31,
1998, and the related unaudited condensed consolidating statements of operations
for the three and nine months ended September 30, 1999 and 1998, along with the
related unaudited statement of cash flows, have been provided below (in
thousands).
24
<PAGE> 26
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
September 30, 1999
ASSETS
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 67,713 $ 2,449 $ 151,700 $ -- $ 221,862
Other current assets........ -- -- 4,575,416 -- 4,575,416
----------- ---------- ------------ ----------- -----------
67,713 2,449 4,727,116 -- 4,797,278
Property and equipment, net... -- -- 10,389,877 -- 10,389,877
Intercompany and investment in
subsidiaries................ 11,103,845 6,244,104 (13,174,823) (4,173,126) --
Other assets.................. 16,272 10,495 6,211,092 -- 6,237,859
----------- ---------- ------------ ----------- -----------
Total assets........ $11,187,830 $6,257,048 $ 8,153,262 $(4,173,126) $21,425,014
=========== ========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt........... $ 1,909,280 $ 200,000 $ 580,418 $ -- $ 2,689,698
Accounts payable and other
accrued liabilities...... 92,598 354,361 2,746,645 -- 3,193,604
----------- ---------- ------------ ----------- -----------
2,001,878 554,361 3,327,063 -- 5,883,302
Long-term debt, less current
maturities.................. 3,953,119 3,789,089 971,338 -- 8,713,546
Other liabilities............. -- -- 2,268,123 -- 2,268,123
----------- ---------- ------------ ----------- -----------
Total liabilities... 5,954,997 4,343,450 6,566,524 -- 16,864,971
Minority interest in
subsidiaries................ -- -- 6,995 -- 6,995
Stockholders' equity.......... 5,232,833 1,913,598 1,579,743 (4,173,126) 4,553,048
----------- ---------- ------------ ----------- -----------
Total liabilities
and stockholders'
equity............ $11,187,830 $6,257,048 $ 8,153,262 $(4,173,126) $21,425,014
=========== ========== ============ =========== ===========
</TABLE>
25
<PAGE> 27
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
December 31, 1998
ASSETS
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 27,726 $ (48,578) $ 107,725 $ -- $ 86,873
Other current assets...... -- 8,220 3,786,304 -- 3,794,524
----------- ---------- ------------ ----------- -----------
27,726 (40,358) 3,894,029 -- 3,881,397
Property and equipment,
net....................... -- -- 11,637,739 -- 11,637,739
Intercompany and investment
in subsidiaries........... 10,373,056 6,271,497 (12,371,573) (4,272,980) --
Other assets................ 21,071 14,797 7,160,194 -- 7,196,062
----------- ---------- ------------ ----------- -----------
Total assets...... $10,421,853 $6,245,936 $ 10,320,389 $(4,272,980) $22,715,198
=========== ========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt......... $ -- $ 350,000 $ 233,742 $ -- $ 583,742
Accounts payable and other
accrued liabilities.... 63,547 231,529 3,414,848 -- 3,709,924
----------- ---------- ------------ ----------- -----------
63,547 581,529 3,648,590 -- 4,293,666
Long-term debt, less current
maturities................ 5,197,013 3,786,935 2,130,253 -- 11,114,201
Other liabilities........... -- -- 2,822,759 -- 2,822,759
----------- ---------- ------------ ----------- -----------
Total
liabilities..... 5,260,560 4,368,464 8,601,602 -- 18,230,626
Minority interest in
subsidiaries.............. -- -- 112,076 -- 112,076
Stockholders' equity........ 5,161,293 1,877,472 1,606,711 (4,272,980) 4,372,496
----------- ---------- ------------ ----------- -----------
Total liabilities
and
stockholders'
equity.......... $10,421,853 $6,245,936 $ 10,320,389 $(4,272,980) $22,715,198
=========== ========== ============ =========== ===========
</TABLE>
26
<PAGE> 28
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $ -- $ -- $ 9,790,462 $ -- $ 9,790,462
Costs and expenses............. -- -- (9,434,178) -- (9,434,178)
--------- --------- ----------- ---------- -----------
Income from operations......... -- -- 356,284 -- 356,284
--------- --------- ----------- ---------- -----------
Other income (expense):
Interest income (expense),
net....................... (269,972) (205,321) (45,586) -- (520,879)
Equity in subsidiaries, net
of taxes.................. (114,091) 14,235 -- 99,856 --
Minority interest............ -- -- (17,706) -- (17,706)
Other, net................... -- -- 39,268 -- 39,268
--------- --------- ----------- ---------- -----------
(384,063) (191,086) (24,024) 99,856 (499,317)
--------- --------- ----------- ---------- -----------
Income (loss) from continuing
operations before income
taxes........................ (384,063) (191,086) 332,260 99,856 (143,033)
Provision for (benefit from)
income taxes................. (101,240) (76,995) 318,025 -- 139,790
--------- --------- ----------- ---------- -----------
Net income (loss).............. $(282,823) $(114,091) $ 14,235 $ 99,856 $ (282,823)
========= ========= =========== ========== ===========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $ -- $ -- $ 3,395,052 $ -- $ 3,395,052
Costs and expenses............. -- -- (4,514,350) -- (4,514,350)
--------- --------- ----------- ---------- -----------
Loss from operations........... -- -- (1,119,298) -- (1,119,298)
--------- --------- ----------- ---------- -----------
Other income (expense):
Interest income (expense),
net....................... (95,805) (66,097) (6,391) -- (168,293)
Equity in subsidiaries, net
of taxes.................. (887,895) (846,584) -- 1,734,479 --
Minority interest............ -- -- (4,697) -- (4,697)
Other, net................... -- -- 8,691 -- 8,691
--------- --------- ----------- ---------- -----------
(983,700) (912,681) (2,397) 1,734,479 (164,299)
--------- --------- ----------- ---------- -----------
Loss from continuing operations
before income taxes.......... (983,700) (912,681) (1,121,695) 1,734,479 (1,283,597)
Benefit from income taxes...... (35,927) (24,786) (275,111) -- (335,824)
--------- --------- ----------- ---------- -----------
Net loss....................... $(947,773) $(887,895) $ (846,584) $1,734,479 $ (947,773)
========= ========= =========== ========== ===========
</TABLE>
27
<PAGE> 29
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues.............. $ -- $ -- $9,393,165 $ -- $9,393,165
Costs and expenses.............. -- -- (9,917,414) -- (9,917,414)
--------- --------- ---------- ---------- ----------
Loss from operations............ -- -- (524,249) -- (524,249)
--------- --------- ---------- ---------- ----------
Other income (expense):
Interest income (expense),
net........................ (155,612) (237,501) (88,474) -- (481,587)
Equity in subsidiaries, net of
taxes...................... (736,930) (588,491) -- 1,325,421 --
Minority interest............. -- -- (14,298) -- (14,298)
Other, net.................... -- -- 122,960 -- 122,960
--------- --------- ---------- ---------- ----------
(892,542) (825,992) 20,188 1,325,421 (372,925)
--------- --------- ---------- ---------- ----------
Loss from continuing operations
before income taxes........... (892,542) (825,992) (504,061) 1,325,421 (897,174)
Provision for (benefit from)
income taxes.................. (58,355) (89,062) 80,530 -- (66,887)
--------- --------- ---------- ---------- ----------
Loss from continuing
operations.................... (834,187) (736,930) (584,591) 1,325,421 (830,287)
Extraordinary item.............. -- -- (3,900) -- (3,900)
--------- --------- ---------- ---------- ----------
Net loss........................ $(834,187) $(736,930) $ (588,491) $1,325,421 $ (834,187)
========= ========= ========== ========== ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues.......... $ -- $ -- $ 3,237,701 $ -- $ 3,237,701
Costs and expenses.......... -- -- (4,783,445) -- (4,783,445)
----------- ----------- ----------- ---------- -----------
Loss from operations........ -- -- (1,545,744) -- (1,545,744)
----------- ----------- ----------- ---------- -----------
Other income (expense):
Interest income (expense),
net.................... (62,749) (71,986) (32,271) -- (167,006)
Equity in subsidiaries,
net of taxes........... (1,219,255) (1,174,264) -- 2,393,519 --
Minority interest......... -- -- 23,868 -- 23,868
Other, net................ -- -- 12,528 -- 12,528
----------- ----------- ----------- ---------- -----------
(1,282,004) (1,246,250) 4,125 2,393,519 (130,610)
----------- ----------- ----------- ---------- -----------
Loss from continuing
operations before income
taxes..................... (1,282,004) (1,246,250) (1,541,619) 2,393,519 (1,676,354)
Benefit from income taxes... (23,531) (26,995) (367,355) -- (417,881)
----------- ----------- ----------- ---------- -----------
Loss from continuing
operations................ (1,258,473) (1,219,255) (1,174,264) 2,393,519 (1,258,473)
Extraordinary item.......... -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Net loss.................... $(1,258,473) $(1,219,255) $(1,174,264) $2,393,519 $(1,258,473)
=========== =========== =========== ========== ===========
</TABLE>
28
<PAGE> 30
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss).............. $ (282,823) $(114,091) $ 14,235 $ 99,856 $ (282,823)
Equity in earnings of
subsidiaries................ 114,091 (14,235) -- (99,856) --
Other adjustments and
changes..................... 13,600 29,392 1,532,261 -- 1,575,253
----------- --------- ----------- ----------- -----------
Net cash provided by (used in)
operations..................... (155,132) (98,934) 1,546,496 -- 1,292,430
----------- --------- ----------- ----------- -----------
Cash flows from investing
activities
Short-term investments......... -- -- (24,461) -- (24,461)
Acquisitions of businesses, net
of cash acquired............ -- -- (1,181,832) -- (1,181,832)
Capital expenditures........... -- -- (876,900) -- (876,900)
Proceeds from sale of assets... -- -- 502,681 -- 502,681
Other, net..................... -- -- (37,022) -- (37,022)
----------- --------- ----------- ----------- -----------
Net cash used in investing
activities..................... -- -- (1,617,534) -- (1,617,534)
----------- --------- ----------- ----------- -----------
Cash flows from financing
activities
Proceeds from issuance of long-
term debt................... 3,606,510 -- 164,443 -- 3,770,953
Principal payments on long-term
debt........................ (2,942,577) (148,427) (397,327) -- (3,488,331)
Proceeds from exercise of
common stock options and
warrants.................... 175,444 -- -- -- 175,444
(Increase) decrease in
intercompany and
investments, net............ (644,258) 298,388 345,870 -- --
----------- --------- ----------- ----------- -----------
Net cash provided by financing
activities..................... 195,119 149,961 112,986 -- 458,066
----------- --------- ----------- ----------- -----------
Effect of exchange rate changes
on cash and cash equivalents... -- -- 2,027 -- 2,027
----------- --------- ----------- ----------- -----------
Increase in cash and cash
equivalents.................... 39,987 51,027 43,975 -- 134,989
Cash and cash equivalents at
beginning of period............ 27,726 (48,578) 107,725 -- 86,873
----------- --------- ----------- ----------- -----------
Cash and cash equivalents at end
of period...................... $ 67,713 $ 2,449 $ 151,700 $ -- $ 221,862
=========== ========= =========== =========== ===========
</TABLE>
29
<PAGE> 31
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $ (834,187) $(736,930) $ (588,491) $ 1,325,421 $ (834,187)
Equity in earnings of
subsidiaries................ 736,930 588,491 -- (1,325,421) --
Other adjustments and
charges..................... 27,275 (14,842) 2,143,444 -- 2,155,877
----------- --------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........... (69,982) (163,281) 1,554,953 -- 1,321,690
----------- --------- ----------- ----------- -----------
Cash flows from investing
activities:
Short-term investments......... -- -- 58,323 -- 58,323
Acquisitions of businesses, net
of cash acquired............ -- -- (1,735,835) -- (1,735,835)
Capital expenditures........... -- -- (1,091,104) -- (1,091,104)
Proceeds from sale of assets... -- -- 411,322 -- 411,322
Acquisition of minority
interests................... -- -- (887,849) -- (887,849)
Other, net..................... -- -- 19,970 -- 19,970
----------- --------- ----------- ----------- -----------
Net cash used in investing
activities..................... -- -- (3,225,173) -- (3,225,173)
----------- --------- ----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from issuance of long-
term debt................... 4,002,318 -- 834,577 -- 4,836,895
Principal payments on long-term
debt........................ (2,105,000) (586,425) (1,226,487) -- (3,917,912)
Cash dividends................. (1,180) (82,060) -- -- (83,240)
Net proceeds from issuance of
common stock................ 203,876 -- -- -- 203,876
Proceeds from sale of treasury
stock....................... -- 739,161 -- -- 739,161
Proceeds from exercise of
common stock options and
warrants.................... 134,776 -- -- -- 134,776
(Increase) decrease in
intercompany and
investments, net............ (2,156,579) 15,533 2,141,046 -- --
Other, net..................... -- -- (22,256) -- (22,256)
----------- --------- ----------- ----------- -----------
Net cash provided by financing
activities..................... 78,211 86,209 1,726,880 -- 1,891,300
----------- --------- ----------- ----------- -----------
Effect of exchange rate changes
on cash and cash equivalents... -- -- 1,650 -- 1,650
----------- --------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents............... 8,229 (77,072) 58,310 -- (10,533)
Cash and cash equivalents at
beginning of period............ 14,630 42,630 132,682 -- 189,942
----------- --------- ----------- ----------- -----------
Cash and cash equivalents at end
of period...................... $ 22,859 $ (34,442) $ 190,992 $ -- $ 179,409
=========== ========= =========== =========== ===========
</TABLE>
30
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion below and elsewhere in this Form 10-Q includes statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These include statements that describe anticipated revenues, capital
expenditures and other financial items, statements that describe the Company's
business plans and objectives, and statements that describe the expected impact
of competition, government regulation, litigation, and other factors on the
Company's future financial condition and results of operation. The words "may,"
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. Such risks and
uncertainties, any one of which may cause actual results to differ materially
from those described in the forward-looking statements, include or relate to,
among other things:
- the Company's ability to stabilize its accounting systems and procedures.
- the Company's ability to successfully close its accounting records and
report 1999 annual results in accordance with year end audit procedures.
- the Company's ability to successfully integrate the operations of
acquired companies with its existing operations, including risks and
uncertainties relating to its ability to achieve projected earnings
estimates, achieve administrative and operating cost savings and
anticipated synergies, rationalize collection routes, and generally
capitalize on its asset base and strategic position through its strategy
of decentralized decision making; and the risks and uncertainties
regarding government-forced divestitures.
- the Company's ability to continue its expansion through the acquisition
of other companies, including, without limitation, risks and
uncertainties concerning the availability of desirable acquisition
candidates, the availability of debt and equity capital to the Company to
finance acquisitions, the ability of the Company to accurately assess the
prior existing liabilities and assets of acquisition candidates and the
restraints imposed by federal and state statutes and agencies respecting
market concentration and competitive behavior.
- the effect of competition on the Company's ability to maintain margins on
existing or acquired operations, including uncertainties relating to
competition with government owned and operated landfills which enjoy
certain competitive advantages from tax-exempt financing and tax revenue
subsidies.
- the potential impact of environmental and other regulation on the
Company's business, including risks and uncertainties concerning the
ultimate cost to the Company of complying with closure requirements and
post-closure liabilities associated with its landfills and other
environmental liabilities associated with disposal at third party
landfills and the ability to obtain and maintain permits necessary to
operate its facilities, which may impact the life, operating capacity and
profitability of its landfills and other facilities.
- the impact of pending or threatened litigation and/or governmental
inquires involving the Company, including any potential governmental
review or litigation relating to the special charges and adjustments to
expenses recorded by the Company for the period ending September 30,
1999.
- the quantification and accounting treatment of costs relating to the
Company's determination to terminate as of October 31, 1999 the WM
Holdings defined pension benefit plan.
- the potential changes in estimates from ongoing analysis of site
remediation requirements, closure and post-closure issues, compliance and
other audits and regulatory developments.
- the effectiveness of changes in management and the ability of the Company
to retain qualified individuals to serve in senior management positions.
- the uncertainties relating to the Company's proposed strategic
initiative, including the Company's ability to obtain permanent
amendments to its bank credit facilities to allow for a revision of
financial covenants and the divestiture of assets, and the willingness of
prospective purchasers to purchase the
31
<PAGE> 33
assets the Company identifies as divestiture candidates on terms the
Company finds acceptable, the timing and terms on which such assets may
be sold, uncertainties relating to regulatory approvals and other factors
affecting the ability of prospective purchasers to consummate such
transactions, including the availability of financing and uncertainties
relating to the impact of the proposed strategic initiative on the
Company's credit ratings and consequently the availability and cost of
debt and equity financing to the Company.
Additional information regarding these and/or other factors that could
materially affect future results and the accuracy of the forward-looking
statements contained herein may be found in Part I, Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
INTRODUCTION
STRATEGIC PLAN
During the third quarter, the Company's Board of Directors adopted a
strategic plan that is intended to enhance value for its shareholders,
customers, and employees. Key elements of the plan are:
- A refocus on operating excellence within its North American solid waste
business.
- Divestiture of non-strategic or under-performing assets, including its
international assets, substantially all of its non-core assets and up to
10 percent of the Company's solid waste assets.
- More disciplined capital allocation, focusing on reduction of debt,
selected tuck-in acquisitions, and possible repurchase of shares.
- An objective of obtaining and sustaining investment grade
characteristics.
Consistent with this highly focused strategy, the Company has actively
marketed the sale of its international operations and expects the sale of these
assets to be completed in the first half of 2000. Likewise, the Company has
received strong interest for several of its non-core and under-performing North
American Solid Waste Management ("NASW") businesses.
The Company continues to focus on bringing more discipline and
accountability to its operations, including carefully managing expenses within
its decentralized business model. This strategy incorporates a commitment to
serve customers by providing employees the tools necessary to perform their
jobs, including updated and more efficient information systems. The Company is
also implementing a capital allocation program that emphasizes operational
efficiencies that will lead to improved profitability.
GENERAL
The Company is a global leader in providing integrated waste management
services. In North America, the Company provides solid waste management services
throughout the United States, as well as in Canada, Mexico and Puerto Rico,
including collection, transfer, recycling and resource recovery services, and
disposal services, including the landfill disposal of hazardous wastes. In
addition, the Company is a leading developer, operator and owner of
waste-to-energy facilities in the United States. The Company also engages in
other hazardous waste management services throughout North America, as well as
low-level and other radioactive waste services. Internationally, the Company
operates throughout Europe, the Pacific Rim, South America and other select
international markets. Included in the Company's international operations is the
collection and transportation of solid, hazardous and medical wastes and
recyclable materials and the treatment and disposal of recyclable materials. The
Company also operates solid and hazardous waste landfills, municipal and
hazardous waste incinerators, water and waste water treatment facilities,
hazardous waste treatment facilities, waste-fuel powered independent power
facilities, and constructs treatment or disposal facilities for third parties
internationally. The Company's diversified customer base includes commercial,
industrial, municipal and residential customers, other waste management
companies, governmental entities and independent power markets. As discussed
above, however, as part of its recently announced strategic plan, the
32
<PAGE> 34
Company is proceeding to divest its international assets, substantially all of
its non-core assets and up to ten percent of Company's North American solid
waste assets.
The Company's operating revenues from waste management operations consist
primarily of fees charged for its collection and disposal services. Operating
revenues for collection services include fees from residential, commercial,
industrial, and municipal collection customers. A portion of these fees are
billed in advance; a liability for future service is recorded upon receipt of
payment and operating revenues are recognized as services are actually provided.
Fees for residential and municipal collection services are normally based on the
type and frequency of service. Fees for commercial and industrial services are
normally based on the type and frequency of service and the volume of waste
collected. The Company's operating revenues from its disposal operations consist
of disposal fees (known as tipping fees) charged to third parties and are
normally billed monthly or semi-monthly. Tipping fees are based on the volume or
weight of waste being disposed of at the Company's disposal facilities. Fees are
charged at transfer stations based on the volume or weight of waste deposited,
taking into account the Company's cost of loading, transporting, and disposing
of the solid waste at a disposal site. Intercompany revenues between the
Company's operations have been eliminated in the condensed consolidated
financial statements presented elsewhere herein.
Operating expenses from waste management operations include direct and
indirect labor and the related taxes and benefits, fuel, maintenance and repairs
of equipment and facilities, tipping fees paid to third party disposal
facilities, property taxes, and accruals for future landfill final closure and
post-closure costs. Certain direct development expenditures are capitalized and
amortized over the estimated useful life of a site as capacity is consumed, and
include acquisition, engineering, upgrading, construction, capitalized interest,
and permitting costs. All indirect development expenses, such as administrative
salaries and general corporate overhead, are expensed in the period incurred. At
times, the Company receives reimbursements from insurance carriers relating to
past and future remedial, defense and tort claim costs at a number of the
Company's sites. Such recoveries are included in operating costs and expenses as
an offset to environmental expenses.
General and administrative costs include management salaries, clerical and
administrative costs, professional services, facility rentals, provision for
doubtful accounts, and related insurance costs, as well as costs related to the
Company's marketing and sales force.
Depreciation and amortization include (i) amortization of the excess of
cost over net assets of acquired businesses on a straight-line basis over a
period not greater than 40 years commencing on the dates of the respective
acquisitions; (ii) amortization of other intangible assets on a straight-line
basis from 3 to 40 years; (iii) depreciation of property and equipment on a
straight-line basis from 3 to 40 years; and (iv) amortization of landfill
airspace on a units-of-production method as landfill airspace is consumed over
the estimated useful life of a site. The useful life of a site is determined by
the permitted airspace and expansion airspace when the success of obtaining such
expansion is considered probable. Effective for the third quarter of 1999, the
Company applied a newly defined, more stringent set of criteria for evaluating
the probability of obtaining expansion to landfill airspace at existing sites
are as follows:
- Personnel are actively working to obtain land use, local and state
approvals for an expansion of an existing landfill;
- At the time the expansion is added to the permitted site life, it is
probable that the approvals will be received within the normal
application and processing time periods for approvals in the jurisdiction
in which the landfill is located;
- The respective landfill owners or the Company has a legal right to use or
obtain land to be included in the expansion plan;
- There are no significant known community, business, or political
restrictions or issues that could impair the success of such expansion;
- Financial analysis has been completed, and the results demonstrate that
the expansion has a positive financial and operational impact; and
33
<PAGE> 35
- Airspace and related costs have been estimated based on conceptual
design.
Additionally, to include airspace from an expansion effort, the expansion
permit application must generally be expected to be submitted within one year,
and the expansion permit must be expected to be received within two to five
years. Exceptions to any criteria must be obtained through a landfill specific
approval process that includes an approval from the Company's Chief Financial
Officer and final review by the Audit Committee of the Board of Directors.
As disposal volumes are affected by seasonality and competitive factors,
airspace amortization varies from period to period due to the changes in volumes
of waste disposed at the Company's landfills.
THIRD QUARTER 1999 ACCOUNTING REVIEW CHARGES AND ADJUSTMENTS
During the third quarter of 1999, the Company initiated a comprehensive
internal review of its accounting records, systems, processes and controls at
the direction of its Board of Directors. As discussed below, the Company
experienced significant difficulty in the integration and conversion of
information and accounting systems subsequent to the WM Holdings Merger,
including certain financial systems and the billing systems. As a result of
these systems and process issues, and other issues raised during the third
quarter 1999 accounting review, certain charges and adjustments were recorded,
as discussed below. As a result of the review, the Company recorded certain
adjustments which had a material effect on its financial statements for the
three and nine months ended September 30, 1999. The following is a summary of
charges recorded during the third quarter of 1999 (in thousands):
<TABLE>
<S> <C>
Held for sale asset adjustments $ 414,275
Account reconciliations 347,668
Increase to allowance for doubtful accounts and other
accounts receivable adjustments 211,483
Asset impairments (excluding held for sale adjustments) 178,309
Insurance reserves and other insurance adjustments 147,868
Legal, severance and consulting accruals 141,999
Loss contract reserve adjustments 49,338
Increases in environmental reserves 48,983
Merger and acquisition related costs 31,568
Other 191,026
----------
Impact of charges before income tax benefit 1,762,517
Income tax benefit (536,756)
----------
After-tax charges $1,225,761
==========
</TABLE>
34
<PAGE> 36
The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation for convenience, were
reflected in the Company's financial statements for the three months and the
nine months ended September 30, 1999, as follows (in thousands):
<TABLE>
<CAPTION>
INCLUDES
RECURRING &
NONRECURRING
ITEMS
-------------
<S> <C>
Operating revenues.......................................... $ (30,928)
-----------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 566,417
General and administrative................................ 401,729
Depreciation and amortization............................. 59,628
Merger and acquisition related costs...................... 31,568
Asset impairments and unusual items....................... 680,284
Loss from continuing operations held for sale, net of
minority interest......................................... --
-----------
1,739,626
-----------
Loss from operations........................................ (1,770,554)
-----------
Other income(expense):
Interest expense.......................................... 702
Interest income........................................... 13,359
Minority interest......................................... (288)
Other income (expense).................................... (5,736)
-----------
8,037
-----------
Loss before income taxes and extraordinary items............ (1,762,517)
Benefit from income taxes................................... 536,756
-----------
Net loss.................................................... $(1,225,761)
===========
</TABLE>
The Company recorded significant adjustments in the quarter ended September
30, 1999, certain of which affect account balances applicable to periods prior
to the quarter ended September 30, 1999. Accordingly, the Company, after
consultation with its independent public accountants, has concluded that its
internal controls for the preparation of interim financial information did not
provide an adequate basis for its independent public accountants to complete
reviews of the quarterly data for the quarters in the nine-month period ended
September 30, 1999. As discussed above, the Company believes that certain
charges that were recorded in the quarter ended September 30, 1999 may relate to
individual prior periods; however, the Company does not have sufficient
information to identify all specific charges attributable to prior periods. If
identification of all specific charges attributable to individual prior periods
was possible, the Company believes that the reported results of operations for
the quarter ended September 30, 1999 would have been higher than presented in
these financial statements. Based on its quantitative and qualitative analysis
of available information, the Company, after consultation with its independent
public accountants, has concluded that it does not have, nor is it able to
obtain, sufficient information to conclude whether or not a material amount of
these charges relate to any individual prior year, although qualitative analysis
indicates that these charges are principally related to 1999. The Company has
been advised by its independent public accountants that their report on the
Company's December 31, 1999 financial statements will specifically refer to the
matters discussed above regarding the interim periods within 1999.
See Note 1 to the condensed consolidated financial statements included
elsewhere herein for additional discussion.
35
<PAGE> 37
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percentages for the various
condensed consolidated statements of operations line items and for certain
supplementary data.
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERIOD TO PERIOD
CHANGE FOR THE CHANGE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 AND 1998 1999 AND 1998
------------------ -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Operating revenues........................ $ 157,351 4.9% $ 397,297 4.2%
----------- -----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)............ 727,041 39.1 614,173 11.2
General and administrative.............. 454,260 146.1 259,835 24.7
Depreciation and amortization........... 71,589 18.8 77,689 6.9
Merger and acquisition related costs.... (1,532,596) (98.0) (1,467,864) (93.0)
Asset impairments and unusual items..... 13,332 2.0 33,082 5.0
Income from continuing operations held for
sale, net of minority interest.......... (2,721) (100.0) (151) (100.0)
----------- -----------
(269,095) (5.6) (483,236) (4.9)
----------- -----------
Income (loss) from operations............. 426,446 27.6 880,533 168.0
----------- -----------
Other income (expense):
Interest expense........................ (14,372) (8.2) (46,355) (9.2)
Interest income......................... 13,085 180.3 7,063 32.5
Minority interest....................... (28,565) (119.7) (3,408) (23.8)
Other income............................ (3,837) (30.6) (83,692) (68.1)
----------- -----------
(33,689) (25.8) (126,392) (33.9)
----------- -----------
Loss before income taxes and extraordinary
item.................................... 392,757 23.4 754,141 84.1
Provision for (benefit from) income
taxes................................... 82,057 19.6 206,677 309.0
----------- -----------
Loss before extraordinary item............ 310,700 24.7 547,464 65.9
Extraordinary item, net of taxes.......... -- -- 3,900 100.0
----------- -----------
Net loss.................................. $ 310,700 24.7% $ 551,364 66.1%
=========== ===========
SUPPLEMENTARY DATA:
EBITDA(1)................................. $ 498,035 42.8% $ 958,222 159.5%
</TABLE>
- ---------------
(1) EBITDA represents income from operations plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance under
generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when
analyzing the financial position and performance of the Company.
See Management's Discussion and Analysis - Introduction - Third Quarter 1999
Accounting Review Charges and Adjustments.
36
<PAGE> 38
The following table presents, for the periods indicated, the percentage
relationship that the various condensed consolidated statements of operations
line items and certain supplementary data bear to operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Operating revenues.......................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 76.1 57.3 62.4 58.5
General and administrative................................ 22.6 9.6 13.4 11.2
Depreciation and amortization............................. 13.3 11.8 12.3 12.0
Merger and acquisition related costs...................... 0.9 48.3 1.1 16.8
Asset impairments and unusual items....................... 20.1 20.6 7.2 7.1
Income from continuing operations held for sale, net of
minority interest......................................... -- 0.1 -- --
----- ----- ----- -----
133.0 147.7 96.4 105.6
----- ----- ----- -----
Income (loss) from operations............................... (33.0) (47.7) 3.6 (5.6)
----- ----- ----- -----
Other income (expense):
Interest expense.......................................... (5.6) (5.4) (5.6) (5.4)
Interest income........................................... 0.6 0.2 0.3 0.2
Minority interest......................................... (0.1) 0.7 (0.2) (0.1)
Other income.............................................. 0.3 0.4 0.4 1.3
----- ----- ----- -----
(4.8) (4.1) (5.1) (4.0)
----- ----- ----- -----
Loss before income taxes and extraordinary item............. (37.8) (51.8) (1.5) (9.6)
Provision for (benefit from) income taxes................... (9.9) (12.9) 1.4 (0.7)
----- ----- ----- -----
Loss before extraordinary item.............................. (27.9) (38.9) (2.9) (8.9)
Extraordinary item, net of taxes............................ -- -- -- --
----- ----- ----- -----
Net loss.................................................... (27.9)% (38.9)% (2.9)% (8.9)%
===== ===== ===== =====
SUPPLEMENTARY DATA:
EBITDA(1)................................................... (19.7)% (35.9)% 15.9% 6.4%
</TABLE>
- ---------------
(1) EBITDA represents income from operations plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance under
generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when
analyzing the financial position and performance of the Company.
See Management's Discussion and Analysis - Introduction - Third Quarter 1999
Accounting Review Charges and Adjustments.
37
<PAGE> 39
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
Operating Revenues
The Company's principal operations are NASW, which include all solid waste
activities, such as collection, transfer operations, recycling and disposal. The
NASW disposal operations encompass solid waste and hazardous waste landfills, as
well as waste-to-energy facilities. In addition, the Company operates outside of
North America in activities similar to its NASW operations ("WM International").
As discussed above, the Company's Board of Directors has adopted a plan to
divest WM International. Furthermore, the Company performs certain non-solid
waste services primarily in North America such as hazardous waste management,
low-level and other radioactive waste management, and waste-fuel powered
independent power facilities. A substantial portion of these assets are also
being divested in accordance with the Company's recently adopted strategic plan.
Through June 30, 1999, the Company's non-solid waste services also included
non-land disposal hazardous waste operations and on-site industrial cleaning
services. However, on June 30, 1999, the Company sold a 51% interest in these
operations to the French conglomerate Vivendi SA. The retained interest of 49%
is being accounted for using the equity method of accounting.
For the three and nine months ended September 30, 1999, the Company's
operating revenues increased $157.4 million or 4.9% and $397.3 million or 4.2%,
respectively, as compared to the corresponding 1998 periods. The following table
presents the operating revenues by reportable segment for the respective periods
(dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW................. $2,758.2 81.2% $2,595.5 80.2% $7,961.1 81.3% $7,554.5 80.4%
WM International..... 442.9 13.1 388.5 12.0 1,200.7 12.3 1,133.3 12.1
Non-solid waste...... 194.0 5.7 253.7 7.8 628.7 6.4 705.4 7.5
-------- ----- -------- ----- -------- ----- -------- -----
Operating
revenues........ $3,395.1 100.0% $3,237.7 100.0% $9,790.5 100.0% $9,393.2 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The increase in the Company's operating revenues for the three and nine
months ended September 30, 1999, as compared to the 1998 periods, is primarily
due to NASW operations. The following table presents the Company's mix of
operating revenues from NASW for the respective periods (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ --------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW:
Collection......... $1,946.0 59.8% $1,785.1 58.5% $ 5,631.0 59.7% $ 5,158.9 58.7%
Disposal........... 837.5 25.7 850.4 27.9 2,437.6 25.9 2,348.0 26.7
Transfer........... 309.0 9.4 258.5 8.5 889.4 9.4 779.0 8.9
Recycling and
other........... 166.3 5.1 155.4 5.1 467.4 5.0 503.0 5.7
-------- ----- -------- ----- --------- ----- --------- -----
3,258.8 100.0% 3,049.4 100.0% 9,425.4 100.0% 8,788.9 100.0%
===== ===== ===== =====
Intercompany......... (500.6) (453.9) (1,464.3) (1,234.4)
-------- -------- --------- ---------
Operating revenues... $2,758.2 $2,595.5 $ 7,961.1 $ 7,554.5
======== ======== ========= =========
</TABLE>
The increase in operating revenues for the three and nine months ended
September 30, 1999 for NASW operations, as compared to the respective prior year
periods, is primarily attributable to the acquisition of solid waste businesses,
partially offset by the divestiture of certain solid waste operations.
Acquisitions of NASW businesses during 1999 and the full year effect of such
acquisitions completed during 1998 accounted for an increase in operating
revenues of approximately $155.4 million for the three months ended September
30, 1999 and $476.6 million for the nine months ended September 30, 1999 as
compared to the prior year periods. NASW operating revenues also increased from
internal growth of comparable operations of 2.9% and 2.8% for the three and nine
months ended September 30, 1999, respectively, as compared to the prior year
periods. For
38
<PAGE> 40
the three and nine months ended September 30, 1999, NASW operating revenues
decreased as a result of the divestiture of solid waste operations with
operating revenues of $68.1 million and $235.5 million in the respective prior
year periods. NASW comparable operating revenues for the three and nine months
ended September 30, 1999, were also reduced by approximately $34.1 million, due
to the renewal of a biosolids management contract, which now excludes a capital
cost recovery element. Included in the internal revenue growth of NASW operating
revenues for the three and nine months ended September 30, 1999, are revenue
reductions of $30.9 million related to the third quarter 1999 accounting review
discussed above.
NASW operating revenues in the three and nine months ended September 30,
1999 have been detrimentally affected by volumes that were under expectations
and difficulties in integration of the operations of the Company after the WM
Holdings Merger and Eastern Merger, including the Company's information systems
and work flow related thereto. Certain billings were incorrect and/or delayed
contributing to an increase in uncollected receivables in the third quarter of
1999, and an increase in the allowance for doubtful accounts. The Company has
added resources to address the collection of its receivables. In addition, the
Company believes that its internal growth may have been detrimentally affected
by certain inflexibilities in its pricing strategy and lack of responsiveness of
that strategy to localized competitive conditions, resulting in lost volumes.
The Company intends to continue to review its pricing strategy to enhance its
competitiveness in future periods.
WM International's operating revenues for the three and nine months ended
September 30, 1999 increased as a result of internal growth of 0.4% and 2.2%,
respectively, and from acquisitions of solid waste operations with revenues of
$70.8 million and $99.1 million, respectively, as compared to the corresponding
prior year periods. Additionally, the WM International operating revenues
increased by $4.6 million for the nine months ended September 30, 1999 as
compared to the prior year period as a result of increased landfill disposal
taxes in certain countries, which are passed through in disposal rates. These
increases were offset by the disposition of operations with operating revenues
of $5.1 million and $40.7 million in the three and nine months ended September
30, 1998, respectively. Furthermore, foreign currency fluctuations of $12.7
million and $19.1 million decreased operating revenues for the three and nine
months ended September 30, 1999 respectively, as compared to the respective 1998
periods.
Operating revenues for non-solid waste operations has increased in the
three months ended September 30, 1999, as compared to the prior year period due
to internal growth and the acquisition of a geosynthetics manufacturing and
installation service company after considering the impact of the sale of a 51%
interest in certain non-solid waste operations as previously discussed herein.
The Company expects decreasing operating revenues from its non-solid waste
operations in future periods, as the Company has sold its industrial services
and hazardous business units as discussed above and is actively marketing other
non-solid waste operations pursuant to the strategic plan previously discussed.
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses increased $727.0 million or 39.1% and $614.2
million or 11.2% for the three and nine months ended September 30, 1999,
respectively, as compared to the corresponding periods of 1998. As a percentage
of operating revenues, operating costs and expenses increased from 57.3% to
76.1% for the three months ended September 30, 1998 and 1999, respectively, and
increased from 58.5% to 62.4% for the nine months ended September 30, 1998 and
1999, respectively. The increase in operating costs and expenses in the current
year periods includes significant adjustments related to the third quarter 1999
accounting review discussed above, some of which are recurring in nature and
should be expected in future periods. These accounting review adjustments
consisted of increases in insurance reserves, environmental reserves, loss
contract provisions and adjustments resulting from completing account
reconciliations and from other items. The remaining changes in operating costs
and expenses resulted in increases of $160.6 million and $47.8 million for the
three and nine months ended September 30, 1999, respectively, as compared to the
prior year periods. Operating costs and expenses were favorably impacted by
$22.0 million in the third quarter of 1998 due to the settlement of a royalty
dispute in excess of the accrued amount, the downward revision of environmental
related liabilities of $8.0 million and the reduction of other liabilities of
approximately $12.0 million. After consideration of these items, operating costs
and expenses increased by $118.6 million for the three months ended September
30, 1999, as compared to 1998, due to the costs related to the increase in
39
<PAGE> 41
revenues attributable to acquisitions and internal growth, net of divestitures,
as discussed above. In addition, the Company realized certain reductions in
costs and improvements in operating efficiencies from its acquisition program,
including the WM Holdings Merger. Additionally, the Company realized improvement
in NASW operating costs and expenses due to the increased utilization of
internal disposal capacity, which is measured as a percentage of total disposal
costs.
Operating costs and expenses have decreased $36.9 million for the nine
months ended September 30, 1999 as compared to 1998 due to the net impact of
reductions in certain environmental and other liabilities during the respective
periods. For the nine months ended September 30, 1999, operating costs and
expenses were favorably impacted by $58.0 million of downward revisions in
environmental liabilities relating to certain of the Company's landfill
operations, consisting of $35.0 million in WM International and $23.0 million in
NASW. Additionally during the nine month 1999 period, the Company revised other
liabilities downward by $19.8 million resulting in a reduction of operating
costs and expenses. Similarly, operating costs and expenses were favorably
impacted for the nine months ended September 30, 1998 by $40.9 million largely
attributable to the reduction of environmental, royalty settlement and
non-environmental liabilities referred to in the preceding paragraph. In
addition, operating costs and expenses were favorably impacted by $34.9 million
for the nine months ended September 30, 1998, as compared to the respective 1999
period, attributable to the recovery of settlements from various insurance
carriers related to environmental claims. The remaining increase in operating
costs and expenses of $49.8 million for the nine months ended September 30,
1999, as compared to the prior year period, is attributable to the costs
associated with the change in operating revenues from acquisitions, internal
growth and divestitures, as discussed above, as well as the impact of certain
cost reductions and efficiencies from the WM Holdings Merger and other
acquisitions and the increased utilization of internal disposal capacity.
As part of its on-going operations, the Company reviews its reserve
requirements for remediation and other environmental matters based on an
analysis of, among other things, the regulatory context surrounding landfills
and remaining airspace capacity in light of changes to operational efficiencies.
Accordingly, revisions to reserve requirements may result in upward or downward
adjustments to income from operations in any given period.
General and Administrative
General and administrative expenses increased $454.3 million or 146.1% and
$259.8 million or 24.7% for the three and nine months ended September 30, 1999,
respectively, as compared to the corresponding periods of 1998. As a percentage
of operating revenues, the Company's general and administrative expense
increased from 9.6% to 22.6% for the three months ended September 30, 1998 and
1999, respectively, and increased from 11.2% to 13.4% for the nine months ended
September 30, 1998 and 1999, respectively.
As discussed above, general and administrative expenses during the three
and nine months ended September 30, 1999, include adjustments related to the
third quarter 1999 accounting review, some of which are recurring in nature and
should be expected in future periods. These significant adjustments include the
increase in the allowance for doubtful accounts, provision for certain
consulting and severance costs, corrections due to the account reconciliation
process and other adjustments.
For the three months ended September 30, 1999, general and administrative
costs include an increase in the provision for doubtful accounts of $12.8
million in addition to the amount adjusted as part of the third quarter
accounting review. The remaining increase of $39.8 million is attributable to
the costs related to the increased administration from acquisitions and internal
growth net of divestitures, similar to the impact discussed in operating costs
and expenses discussed in operating revenues above.
General and administrative costs have increased related to acquisitions and
internal growth, net of divestitures, as discussed in operating revenues above.
However, the Company experienced significant cost reductions related to the
elimination of duplicate corporate administrative functions from the WM Holdings
Merger primarily related to the first six months of 1999. Such cost reductions
were offset by increased administrative costs in field operations, particularly
in the third quarter of 1999, attributable to increased costs to perform
billing, collection and other administrative functions.
40
<PAGE> 42
Depreciation and Amortization
Depreciation and amortization expense increased $71.6 million or 18.8% and
$77.7 million or 6.9% for the three and nine months ended September 30, 1999,
respectively, as compared to the respective periods in 1998. As a percentage of
operating revenues, depreciation and amortization expense increased from 11.8%
to 13.3% for the three months ended September 30, 1998 and 1999, respectively,
and increased from 12.0% to 12.3% for the nine months ended September 30, 1998
and 1999, respectively. As discussed above, depreciation and amortization
expense during the three and nine months ended September 30, 1999, include
adjustments related to the third quarter 1999 accounting review, some of which
are recurring in nature and should be expected in future periods. These
significant adjustments are due to the account reconciliation process and other
adjustments, including adjustments to increase landfill amortization expense as
a result of the comprehensive review of the NASW landfills to evaluate potential
landfill expansion projects. The increase in landfill amortization as a result
of this review was $11.7 million in the third quarter of 1999.
For the three months ended September 30, 1999, depreciation and
amortization includes $0.6 million of amortization primarily related to the
acquisition of the minority interest of WM International. Excluding the effect
of increases in landfill amortization rates as a result of the third quarter
1999 accounting review discussed above, landfill amortization for the three
months ended September 30, 1999, was $12.1 million less than in the same period
in 1998 as a result of net reductions in landfill amortization rates applied in
1999, compared to 1998. Such rate reductions were the result of the evaluation
of various facts and circumstances throughout the intervening quarters. The
remaining increase of $23.5 million is attributable to the depreciation and
amortization related to the acquisitions, internal growth and divestitures, as
discussed in operating revenues above.
For the nine months ended September 30, 1999, depreciation and amortization
includes $6.4 million of amortization primarily related to the 1998 acquisitions
of the minority interests of Wheelabrator Technologies, Inc. and Waste
Management International plc. Excluding the effect of increases in landfill
amortization rates as a result of the third quarter 1999 accounting review
discussed above, landfill amortization for the nine months ended September 30,
1999, was $32.8 million less than in the same period in 1998 as a result of net
reductions in landfill amortization rates applied in 1999, compared to 1998.
Such rate reductions were the result of the evaluation of various facts and
circumstances throughout the intervening quarters and included approximately
$19.5 million attributable to the impact of accelerated biodegradation at
certain of the Company's landfills. At certain of the Company's landfills that
operate in geological locations conducive to accelerated biodegradation,
landfill amortization had been adjusted to reflect longer estimated useful
lives. As part of the third quarter accounting review, a more conservative
evaluation has been made regarding implementation of bioreactors at its
landfills, resulting in an increase in landfill amortization expense in the
third quarter of 1999 which is not material to the consolidated financial
statements. The remaining increase of $44.5 million is attributable to
acquisitions of NASW businesses, internal growth and divestitures, as discussed
in operating revenues above.
Merger and Acquisition Related Costs, Asset Impairments and Unusual Items
In connection with the WM Holdings Merger and the Eastern Merger, the
Company incurred significant merger costs and unusual items in the third and
fourth quarters of 1998 as described in the Company's Current Report on Form 8-K
dated September 17, 1999. Furthermore, the Company recorded $19.1 million and
$98.8 million of merger costs for the three and nine months ended September 30,
1999, respectively, of costs that are transitional in nature related to these
mergers. The Company incurred $12.5 million in the three and nine months ended
September 30, 1999 related to the purchase of a business that when integrated
into the Company's operations resulted in the closure of certain Company owned
facilities and relocation of certain of the Company's administrative functions.
The merger cost amount for the nine months ended September 30, 1999 also
includes cumulative offsetting adjustments totaling $15.6 million primarily to
conform accounting methods of the Company's ash monofil landfills to that of the
Company's solid waste landfills.
The Company is in the process of settling its obligations under the WM
Holdings defined benefit plan which was terminated as of October 31, 1999
(although benefit accruals were ceased as of December 31,
41
<PAGE> 43
1998) and currently intends to liquidate the plan's assets and settle it
obligations to participants. The actual charge to expense of settling the Plan
will be recorded as settlements occur. However, the Company has included $9.8
million in asset impairments and unusual items for the nine months ended
September 30, 1999 related to the current year recognition of past service costs
of this plan and will incur similar charges in future periods until all
participants have been paid the termination benefits. Additionally, the Company
has recorded $84.4 million in the third quarter of 1999 related to the
reassessment of ultimate losses for certain legal issues related to the WM
Holdings Merger. In particular, the Company increased its legal reserves in
response to developments in various legal proceedings brought against WM
Holdings by former shareholders of that company in connection with its
restatement of earnings in February 1998. These legal developments caused the
Company to evaluate the numerous shareholder cases filed against WM Holdings and
to reassess their range of exposure. The remainder of the asset impairments and
unusual items relates to the third quarter 1999 accounting review discussed
above.
Certain WM Holdings' employee stock option plans included change of control
provisions that were activated as a result of the WM Holdings Merger whereby the
option holder received certain put rights that require charges to earnings
through the put periods. To the extent the market value of the Company's common
stock exceeded $54.34 per share, the Company was required to record additional
charges to earnings until July 16, 1999, at which time all put rights expired.
The expense related to these stock option put rights would have had no impact on
stockholders' equity, as the offset was a direct increase to additional paid in
capital, since these put rights were satisfied by the issuance of common stock.
As the market value of the Company's common stock was less than $54.34 per share
as of the date the put rights expired, there were no charges to earnings in the
third quarter of 1999 related to the put rights.
Merger costs and acquisition related costs for the WM Holdings Merger and
the Eastern Merger include estimates for anticipated losses related to the sales
of assets pursuant to governmental orders. These anticipated losses have been
estimated based on the Company's assessment of relevant facts and circumstances,
including consideration of the various provisions of asset sale agreements. In
certain instances, the asset sale agreements contain contingencies, the
resolution of which are uncertain and may materially change the proceeds which
the Company will ultimately receive. Accordingly, dependent upon actual future
experience and the resolution of certain contingencies, the amount of losses
ultimately recorded by the Company could materially differ from the amounts
recorded by the Company. The Company is unable to determine the earnings impact
of the Eastern Merger or any synergies that may ultimately be achieved. During
the second quarter of 1999, the Company resolved an outstanding contingency
regarding its sale of assets to Republic Services, Inc. which reduced the loss
on that sale by approximately $80 million. Offsetting this amount, the Company
(i) consummated its sale of 51% of its non-land disposal hazardous waste
operations and on-site industrial cleaning services which resulted in losses of
approximately $5 million greater than previously estimated; (ii) increased its
anticipated losses by approximately $14 million related to the assets required
to be sold pursuant to the Eastern Merger; (iii) identified other non-core
operations for disposition that have a book value of approximately $36 million
greater than the estimated proceeds; and (iv) identified other merger related
items comprising the remainder of the balance.
For the three and nine months ended September 30, 1998, respectively, the
Company recorded $1,564.2 million and $1,579.1 million of merger and acquisition
related costs primarily related to WM Holdings Merger.
Income from Continuing Operations Held for Sale (Net of Minority Interest)
In 1998, the Company had operations that were previously classified as
discontinued operations for accounting and financial reporting purposes that
were subsequently reclassified to continuing operations as of December 31, 1997,
as the dispositions were not completed within one year. The Company had divested
of substantially all of such operations as of September 30, 1998.
42
<PAGE> 44
Loss from Operations
Loss from operations was $1.1 billion for the three months ended September
30, 1999 and income from operations was $356.3 million for the nine months ended
September 30, 1999 as compared to a loss of $1.5 billion and $524.2 million for
the corresponding periods of 1998.
Other Income and Expenses
Other income and expenses consists of interest expense, interest income,
other income and minority interest. Although the Company has experienced lower
borrowing rates as compared to prior years, interest costs, which includes
amounts capitalized, increased from 1998 to 1999 due to increases in the
Company's outstanding indebtedness for each period. As a result of the expected
charges in the Company's primary bank credit facilities (see Note 3), it is
likely that the borrowing rates in the foreseeable future will be higher than
the rates previously experienced by the Company. Capitalized interest was $6.5
million and $29.7 million for the three and nine months ended September 30,
1999, respectively, and $10.9 million and $29.5 million for the corresponding
periods of 1998. Included as other income for the nine months ended September
30, 1998 is a gain of approximately $38.0 million from the sale of a
waste-to-energy facility in Hamm, Germany in January 1998.
During 1998, the Company acquired the outstanding minority interest in
Wheelabrator Technologies, Inc., Waste Management International plc, and the
operations in the United Kingdom which were 49% owned by Wessex Water Plc. As a
result, the minority interest expense is lower in 1999 than the amount
recognized in 1998.
Income Taxes
The Company recorded a benefit from income taxes of $335.8 million and a
provision for income taxes of $139.8 million for the three and nine months ended
September 30, 1999, respectively, and a benefit from income taxes of $417.9
million and $66.9 million for the corresponding periods of 1998. The difference
in federal income taxes computed at the federal statutory rate and reported
income taxes for the nine months ended September 30, 1999 is primarily due to
state and local income taxes, non-deductible costs related to acquired
intangibles, non-deductible costs associated with the impairment of certain
foreign businesses and other third quarter 1999 charges and adjustments as
disclosed in Note 1, and the cost associated with remitting the earnings of
foreign subsidiaries, which are no longer considered permanently reinvested.
Net Loss
For the three and nine months ended September 30, 1999, net loss was $947.8
million and $282.8 million or $1.53 and $0.46 per share on a diluted basis,
respectively, as compared to a net loss of $1,258.5 million and $834.2 million
or $2.11 and $1.44 per share on a diluted basis for the respective prior year
periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements primarily stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
cell construction and expansion of its disposal sites, as well as for new trucks
and equipment for its collection operations, and (iii) business acquisitions.
The Company's strategy is to meet these capital needs first from internally
generated funds and secondly from various financing sources available to the
Company, including the incurrence of debt and in the past through the issuance
of its common stock. It is further part of the Company's strategy to minimize
working capital while maintaining available commitments under bank credit
agreements to fund any capital needs in excess of internally generated cash
flow. The Company had unused and available credit capacity under its domestic
bank facilities of $1.9 billion at September 30, 1999.
On May 21, 1999, the Company completed a private placement of $1.15 billion
of its senior notes, including $200 million principal amount of 6% senior notes
due 2001 at an issue price of 99.966, $500 million
43
<PAGE> 45
principal amount of 6 7/8% senior notes due 2009 for an issue price of 99.674,
$250 million principal amount of 7 3/8% senior notes due 2029 for an issue price
of 99.595 and an additional $200 million principal amount of 6 1/2% senior notes
due 2004 for an issue price of 99.721.
The Company has a scheduled maturity of $200 million of senior notes on
November 15, 1999. The Company is expecting to repay these senior notes with
funds available from its $3 billion syndicated loan facility. Additionally,
based on the current market price of the Company's common stock, the Company
expects the holders of the 5.75% convertible subordinated notes due 2005 to
exercise a redemption option that becomes available March 15, 2000. The total
amount expected to be repaid related to these notes will be approximately $461
million at March 31, 2000, and is expected to be repaid with funds available
from the Company's $3 billion syndicated loan facility.
As of September 30, 1999, the Company had a working capital deficit of $1.1
billion (a ratio of current assets to current liabilities of 0.82:1) and a cash
balance of $221.9 million which compares to a working capital deficit of $412.3
million (a current ratio of 0.90:1) and a cash balance of $86.9 million as of
December 31, 1998. For the nine months ended September 30, 1999 and 1998,
respectively, net cash provided by operating activities was $1.3 billion for
both periods and net cash provided by financing activities was $458.1 million in
1999, as compared to $1.9 billion in 1998. In the nine months ended September
30, 1999, cash used to acquire businesses for $1.2 billion and capital
expenditures of $876.9 million were primarily financed by cash from operating
activities, proceeds from sale of assets of $502.7 million and net increased
borrowings of $282.6 million. In the nine months ended September 30, 1998,
capital expenditures of $1.1 billion and acquisitions of businesses and
outstanding minority interests of $2.6 billion were primarily financed through
net cash from operations, proceeds from sale of assets of $411.3 million and net
cash from financing activities. The Company has initiated a thorough review of
its fleet of vehicles to ensure that the fleet will operate at maximum
efficiency in the near future and expects capital expenditures in future periods
could exceed amounts incurred through the first nine months of 1999. However,
the Company expects to decrease its spending related to acquisitions in the year
2000 in accordance with its recently announced strategic plan.
From the time of the WM Holdings Merger, which was consummated in July
1998, the Company adopted a decentralized billing system for the merged entity
(as opposed to the centralized system employed by WM Holdings prior to the WM
Holdings Merger). The billing system conversion has now been completed. However,
as a result of this system conversion, coupled with the significant merger
integration problems, the Company's accounts receivable level increased
significantly and its days sales outstanding ("DSOs") increased from 66 days at
September 30, 1998 to a height of 73 days at January 31, 1999. However, by
September 30, 1999, the DSOs improved to 68 days, excluding the impact of the
receivables related adjustments included in the third quarter 1999 charge
discussed above.
During the first nine months of 1999 the Company paid approximately $419
million for costs directly or indirectly related to the WM Holdings Merger and
Eastern Merger, the majority of which were accrued as liabilities as of December
31, 1998. Consequently, the Company's net cash provided by operating activities
for the first nine months of 1999 was significantly impacted by these, and to a
lesser extent, other working capital issues. The Company contributed
approximately $43.4 million during the three months ended September 30, 1999,
which is included in the above amounts, and expects payments of approximately
$185 million to be paid through 2000 relating to the termination of the WM
Holdings defined benefit plan. Furthermore, the Company expects to fund
additional merger and legal obligations of approximately $470 million primarily
over the next 15 months, including the settlement of the WM Holdings securities
matter, which is expected to occur in the fourth quarter of 1999.
In the second quarter of 1999, the Company entered into an agreement to
purchase all of the Canadian solid waste assets of Allied Waste Industries, Inc.
("Allied") that Allied acquired upon its acquisition of Browning-Ferris
Industries, Inc. The purchase price of these assets was to be approximately $501
million in cash. On November 8, 1999, the Company and Allied entered into
revised agreements, which replace the original agreement.
Under the terms of the revised agreements, Allied has agreed to sell to the
Company all of the shares of Browning-Ferris Industries Limited ("BFIL"), which
owns the solid waste operations of Browning-Ferris in
44
<PAGE> 46
Canada, including collection operations, transfer stations, landfill operations
and recycling facilities. Annual revenues generated from these operations are
estimated to be approximately US $176 million. Allied will continue to operate
certain of the Canadian operations with total revenues estimated to be
approximately US $53 million that the Company is being required to divest by the
Competition Bureau of Canada and market those operations for sale, on behalf of
BFIL, after the closing. The sale of the BFIL shares is subject to final
approval pursuant to the Competition Act and the Investment Canada Act.
Additionally, the Company has agreed to sell to Allied certain U.S. solid waste
services assets with combined reported historical revenue of approximately $132
million, including nine landfill operations, 19 collection operations, five
transfer stations and a landfill operating contract. The sale of such assets is
subject to final approval pursuant to the Hart-Scott Rodino Act. The Company
expects to receive net cash proceeds as a result of the revised transactions.
During the third quarter, the Company experienced a decline in its public
credit ratings which curtailed its access to the commercial paper market. As a
result, commercial paper maturing during the third quarter was refinanced
through borrowing under the Company's Syndicated Facility and Credit Facility.
The Company does not expect that it will be in a position to reissue commercial
paper in the foreseeable future, and remaining balances of commercial paper will
be refunded through internal cash flow or with additional borrowings under
existing bank facilities.
As a result of the charges and adjustments recorded in the third quarter of
1999, as discussed above, the Company would not have been in compliance as of
September 30, 1999 with certain financial covenants as required by the Company's
bank credit facilities. However, waivers were received on each of the Company's
four bank agreements which enabled the Company to be in full compliance with,
and have full access to its existing bank credit facilities. These waivers
extend to November 25, 1999 with respect to the Euro facilities and to December
30, 1999 with respect to the Credit Facility and Syndicated Facility. The
Company has entered into discussions with its banks regarding permanent
amendments which will adjust the financial covenants, as well as amend other
terms and conditions. Management believes that the permanent amendments will be
in place by December 30, 1999. Should the Company be unsuccessful in obtaining
these amendments from the banks prior to expiration of the waivers on December
30, 1999, then all borrowings and letters of credit outstanding would be
considered current obligations, due upon demand by the banks. In addition, the
Company would not have access to the unused portions of such lines which could
impair its ability to meet ongoing working capital and other liquidity
requirements. There can be no assurance that the Company will be successful in
completing the amendments prior to December 31, 1999 or would be able to arrange
alternate sources of liquidity to meet its obligations.
RECENT DEVELOPMENTS
As described in the Company's Current Report on Form 8-K dated October 20,
1999, John E. Drury, Richard J. Heckmann and Richard D. Kinder resigned as
members of the Board of Directors.
On November 10, 1999 the Company announced the selection, effective
November 10, 1999, of A. Maurice Myers as Chairman of the Board, Chief Executive
Officer and President of the Company. Mr. Myers, 59, joins Waste Management from
Yellow Corporation, where he has been Chairman, CEO and President since April
1996. Yellow Corporation is the parent company of Yellow Freight, one of the
nation's oldest and largest trucking companies. Under Mr. Myers' leadership,
Yellow Corporation returned to profitability in just one year, after three years
of negative earnings. Mr. Myers also implemented a productivity initiative and a
restructuring of the company's largest subsidiary, Yellow Freight, dividing that
company into five regionally-based business units and reducing operating costs,
while significantly increasing the company's ability to meet changing customer
needs. Mr. Myers is a recognized leader in integrating information technology
with business operations. He directed the re-engineering of Yellow Corporation's
information systems, providing the company with greater financial accountability
and a distinct competitive advantage over other freight haulers. In 1999, Yellow
Corporation was named one of the nation's top 100 Information Technology
companies, the only freight transportation company to be so recognized. Prior to
joining Yellow Corporation in 1996, Mr. Myers served as President and Chief
Operating Officer of America West Airlines and is credited in part for that
company's financial turnaround. Mr. Myers also served as President and CEO of
Aloha Airlines, and held a senior management position with Continental Airlines.
45
<PAGE> 47
Additionally, during the third quarter of 1999, the Board of Directors
formed an Executive Committee which, subject to certain limitations, may perform
all duties of the Board of Directors between the Board's regularly scheduled
meetings. The Executive Committee consists of Roderick M. Hills, Ralph V.
Whitworth, Robert S. Miller and Jerome P. York. Effective November 10, 1999, A.
Maurice Myers was added to the Executive Committee.
On December 15 and 16, 1999, the Company permanently amended its two
domestic credit facilities and its two Euro credit facilities, respectively. The
amendments permanently amend the financial covenants for which waivers were
sought in the third quarter, and also allow certain actions that are part of the
Company's previously announced strategic plan.
SEASONALITY AND INFLATION
The Company's operating revenues tend to be somewhat lower in the winter
months. This is generally reflected in the Company's first quarter and fourth
quarter operating results. This is primarily attributable to the fact that (i)
the volume of waste relating to construction and demolition activities tends to
increase in the spring and summer months and (ii) the volume of residential
waste in certain regions where the Company operates tends to decrease during the
winter months.
The Company believes that inflation and changing prices have not had, and
are not expected to have, any material adverse effect on the results of
operations in the near future.
YEAR 2000 DATE CONVERSION
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive data by the Company's computerized
information systems. In 1997, the Company began to modify its North American
computer information systems to ensure proper processing of transactions
relating to the Year 2000 and beyond and completed the majority of the required
modifications to its critical business systems in use in North America during
1998 and 1999, and all of such modifications were completed during the third
quarter of 1999. The Company is presently undertaking a review of all
assessments and remediations performed to date to ensure the Company's Year 2000
readiness. For WM International, systems supplied by an outside vendor are used
for critical operations. That vendor has supplied the Company with Year 2000
compliant versions, deployment of which is completed. The Company believes that
the systems used by WM International are currently Year 2000 ready. The amounts
charged to expense during the first three quarters of 1999 related to the Year
2000 readiness modifications have not been material and any additional charges
in 1999 and beyond are not expected to be material to the Company's financial
position, results of operations or cash flows.
In addition to its critical business systems, the Company began addressing
the issue of the Year 2000 impact on certain of its embedded technologies in
1997. For example, incinerators and monitoring wells which are used in the
Company's operations both have computer chips embedded within them, and the
Company is upgrading those chips to avoid any malfunctioning of the chips as a
result of the Year 2000. Additionally, the Company has undertaken to assess and
remediate where necessary, the embedded technologies in the Company's facilities
and business equipment. The Company expects such upgrades, assessments and
remediations to be complete by the end of 1999. The Company has taken, and
continues to take steps to resolve Year 2000 readiness issues that may be
created by customers, suppliers and financial institutions with whom the Company
does business. However, there can be no guarantee that other entities will be
Year 2000 ready.
The Company is in the process of establishing a worst case scenario and
written contingency plan to address issues that could arise should the Company
or if any of its suppliers or customers not be prepared to accommodate Year 2000
issues timely. Additionally, the Company will maintain a control room to be in
use during the first weeks of January 2000 to assist the Company's facilities in
any problems that may arise. The Company believes that in an emergency it could
revert to the use of manual procedures that do not rely on computers or embedded
technologies and could perform the minimum functions required to maintain
satisfactory control of the business. However, there can be no assurances that
satisfactory control can be
46
<PAGE> 48
maintained and any failure to do so could have a material adverse impact on the
business. Should the Company have to utilize manual procedures for any extended
length of time, it is uncertain that it could maintain the same level of
operations, and this could have a material adverse impact on the business. The
Company intends to maintain constant supervision on this situation and will
develop such additional contingency plans as are required by the changing
environment.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives used for hedging purposes. SFAS No. 133
requires that entities recognize all derivative financial instruments as either
assets or liabilities in the statement of financial position and measure these
instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for the Company in its first fiscal quarter in 2001. Management is
currently assessing the impact the adoption of SFAS No. 133 will have on the
Company's consolidated financial statements.
47
<PAGE> 49
PART II.
ITEM 1. LEGAL PROCEEDINGS.
In November and December 1997, several alleged purchasers of WM Holdings
securities (including but not limited to common stock), who allegedly bought
their securities during 1996 and 1997, brought fourteen purported class action
lawsuits against WM Holdings and several of its current and former officers and
directors in the United States District Court for the Northern District of
Illinois. Each of these lawsuits asserted that the defendants violated the
federal securities laws by issuing allegedly false and misleading statements in
1996 and 1997 about WM Holdings' financial condition and results of operations.
The lawsuits demanded, among other relief, unspecified compensatory damages,
pre- and post-judgement interest, attorneys' fees and the costs of conducting
the litigation. In January 1998, the fourteen putative class actions were
consolidated before one judge. In May 1998, the plaintiffs filed a consolidated
amended complaint against WM Holdings and four of its former officers, which was
amended in July 1998 to add WM Holdings' outside auditor and another former
officer as additional defendants. The amended complaint seeks recovery on behalf
of a proposed class of all purchasers of WM Holdings' securities between May 29,
1995, and October 30, 1997. The amended complaint alleges, among other things,
that WM Holdings filed false and misleading financial statements beginning in
1991 and continuing through October 1997 and seeks recovery for alleged
violations of the federal securities laws between May 1995 and October 1997.
In December 1998, the Company announced an agreement to settle the
consolidated action against all defendants and the establishment of a settlement
fund of $220 million for the class of open market purchasers of WM Holdings
securities between November 3, 1994, and February 24, 1998. On September 17,
1999, the United States District Court for the Northern District of Illinois
gave final approval to the settlement after hearing. After the Court had
approved the settlement and ordered the case dismissed, a solitary, putative
class member sought to intervene in the action and to object, not to the
settlement, but to the size of the fee award to plaintiffs' class counsel. The
Court denied the motion and the putative class member has filed a notice of
appeal from this denial.
Additionally, there are several other actions and claims that arise out of
the same set of facts as those giving rise to the purported securities class
actions concerning statements made in 1996 and 1997 about WM Holdings financial
condition and results of operations. Such actions and claims have been brought
by business owners who received WM Holdings common stock in the sales of their
businesses to WM Holdings. These actions and claims allege, among other things,
breach of warranty or breach of contract based on WM Holdings' restatement of
earnings in February 1998. In April 1999, courts having jurisdiction over two
such actions, granted summary judgement against WM Holdings and in favor of the
individual plaintiffs who brought the respective claims on the issue of breach
of contract. Additionally, in October 1999, the court in one of these actions
certified as a class consisting of all sellers of business assets to WM Holdings
between January 1, 1990 and February 24, 1998 whose purchase agreements with WM
Holdings contained express warranties regarding the accuracy of WM Holdings'
financial statements. The extent of damages, if any, in these actions has not
yet been determined.
On July 6, 1999, the Company announced that it had lowered its expected
earnings per share for the three-month period ended June 30, 1999. On July 29,
1999, the Company announced a further reduction in its expected earnings for
that period. On August 3, 1999, the Company announced that its reported
operating income for the three months ended March 31, 1999 may have included
certain unusual pretax income items. Between July 8, 1999 and September 3, 1999,
numerous lawsuits that purport to be based on one or more of these announcements
have been filed against the Company and certain of its officers and directors in
the United States District Court for the Southern District of Texas. These
actions have been consolidated into a single action. On September 7, 1999, a
lawsuit was filed against the Company and certain of its officers and directors
in the United States District Court for the Eastern District of Texas. The
parties have filed a joint motion to transfer this case to the United States
District Court for the Southern District of Texas, to be consolidated with the
consolidated action pending there. Taken together, the plaintiffs in these
lawsuits purport to assert claims on behalf of a class of purchasers of the
Company's common stock between June 10,
48
<PAGE> 50
1998 and August 2, 1999. Among other things, the plaintiffs allege that the
Company and certain of its officers and directors (i) made knowingly false
earnings projections for the three months ended June 30, 1999 and (ii) failed
adequately to disclose facts relating to its earnings projections that the
plaintiffs allege would have been material to purchasers of the Company's common
stock. The plaintiffs also claim that certain of the Company's officers and
directors sold common stock at prices known to be inflated by the alleged
material misstatements and omissions. The plaintiffs in these actions seek
damages with interest, costs and such other relief as the respective courts deem
proper.
In addition, three of the Company's shareholders have filed lawsuits
against certain officers and directors of the Company in connection with the
events surrounding the Company's second quarter 1999 earnings projections and
July 6, 1999 earnings announcement. Two of these lawsuits were filed in the
Court of Chancery of the State of Delaware on July 16, 1999 and August 18, 1999,
respectively, and one was filed in the United States Districts Court for the
Southern District of Texas on July 27, 1999. The plaintiffs in these actions
purport to allege derivative claims on behalf of the Company against these
individuals for alleged breaches of fiduciary duty resulting from their alleged
stock sales during the three month period ended June 30, 1999 and/or their
oversight of the Company's affairs. The lawsuits name Waste Management, Inc. as
a nominal defendant and seek compensatory and punitive damages with interest,
equitable and/or injunctive relief, costs and such other relief as the
respective courts deem proper.
The Company has also received a letter from participants in the Company's
Employee Stock Purchase Plan (the "ESPP") who purchased the Company's common
stock on June 30, 1999. The letter demands that the Administrative Committee of
the ESPP bring an action against the Company and certain selling officers and
directors for losses allegedly sustained by the participants in their stock
purchases. These ESPP participants have indicated in the letter that, absent
action by the ESPP, they intend to sue the Company and the directors and
officers on behalf of the ESPP and its participants. The administrative
committee of the ESPP has advised these participants that it cannot file suit,
as requested, because the committee is neither a representative of the plan nor
a Waste Management shareholder. The Company has not received any further
communication from these participants. However, management does not believe that
this claim, if pursued, would have a material adverse effect on the Company's
consolidated financial statements.
On July 16, 1999, a lawsuit was filed against the Company in the Circuit
Court for Sumter County in the State of Alabama. The plaintiff in the lawsuit
purported to allege on behalf of a class of similarly situated persons that the
Company has deprived the class of lump sum payments of pension plan benefits
allegedly promised to be paid in connection with termination of the WM Holdings
defined benefit pension plan. On behalf of the purported class, the plaintiff
sought compensatory and punitive damages, costs, restitution with interest, and
such other relief as the Court deemed proper. On July 29, 1999, the Company
announced that it had determined to proceed with the termination of the plan,
liquidating the plan's assets and settling its obligations to participants. The
plaintiff voluntarily dismissed her case on September 13, 1999. However, that
same day, the same attorneys filed another Plan-related putative class action
against the Company and various individual defendants in the United States
District Court for the Middle District of Alabama, Northern Division. This case,
brought by a different putative class representative, alleges that the
defendants violated the federal Employee Retirement Income Security Act
("ERISA") by failing to terminate the Plan in accordance with its terms, by
failing to manage Plan assets prudently and in the interests of Plan
participants, and by delaying the plan's termination date and the expected
distribution of lump-sum pension benefits. On behalf of the purported class, the
plaintiff seeks declaratory and injunctive relief, restitution of all losses and
expenses allegedly incurred by the Plan, payment of all benefits allegedly owed
to Plan participants, attorneys's fees and costs, and other "appropriate" relief
under the Internal Revenue Code, ERISA and the Plan. Defendants' time to move,
answer or otherwise respond to the complaint has been extended, and no
proceedings have yet occurred.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial and administrative proceedings involving
governmental authorities at the foreign, 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
49
<PAGE> 51
are commenced by governmental authorities, the matters involved related 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
applicable requirements. From time to time, the Company pays fines or penalties
in environmental proceedings relating primarily to waste treatment, storage or
disposal facilities. As of September 30, 1999, there were four proceedings
involving Company subsidiaries where the sanctions involved could potentially
exceed $100,000. The Company believes that any such fines or penalties will not
have a material adverse effect on its results of operations or financial
condition. However, the outcome of any particular proceeding cannot be predicted
with certainty, and the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could materially alter this expectation at any time.
In August 1999, sludge materials from trucks entering the Company's
Woodland Meadows Landfill in Michigan were seized by the FBI pursuant to an
investigation of the generator of the sludge materials, a company that provides
waste treatment services. Subsequently, the Company received two Grand Jury
subpoenas, as well as a request for information from the Michigan Department of
Environmental Quality, seeking information related to the landfill's waste
acceptance practices and the Company's business relationship with the generator.
According to affidavits attached to the subpoena, the generator is alleged to
have failed to properly treat sludges prior to disposal. The generator's
treatment plant was sold by the Company to the generator in May 1998. The
Company is cooperating with the pending investigation and believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial statements.
In November 1998, the Company was sued by the estate of Shayne Conner, who
died on November 24, 1995 in Greenland, New Hampshire. Plaintiffs allege that
Mr. Conner's death was caused by biosolids that were applied to a nearby field
by Wheelabrator's BioGro business unit. The litigation is currently in the
discovery phase, and the Company is waiting for plaintiff's production of a
court-ordered expert on causation. The Company is vigorously defending itself
and believes that it will prevail in the litigation.
It is not possible at this time to predict the impact that the above
lawsuits and inquiries may have on WM Holdings or the Company, nor is it
possible to predict whether any other suits or claims may arise out of these
matters in the future. However, it is reasonably possible that the outcome of
any present or future litigation may have a material adverse impact on their
respective financial conditions or results of operations in one or more future
periods. WM Holdings and the Company intend to defend themselves vigorously in
all the above matters.
The Company and certain of its subsidiaries are also currently involved in
other civil litigation and governmental proceedings relating to the conduct of
their business, some of which are addressed elsewhere in this report or in the
Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 1999 and June 30, 1999, and Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission. While
the outcome of any particular lawsuit or governmental investigation cannot be
predicted with certainty, the Company believes that these matters will not have
a material adverse effect on its consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
50
<PAGE> 52
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
12+ -- Computation of Ratio of Earnings to Fixed Charges.
27+ -- Financial Data Schedule.
</TABLE>
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities and Exchange Act of 1934, the Registrant's file number under that
Act is 1-12154.
+ Previously filed.
(b) Reports on Form 8-K:
During the third quarter of 1999, the Company filed a Current Report on
Form 8-K dated September 17, 1999, reporting additional information in its notes
to consolidated financial statements for the 1998 10-K. This information
consisted of condensed consolidating financial statements and was provided as a
result of full and unconditional guarantees of certain senior indebtedness of
the Waste Management, Inc. by WM Holdings and the assumption or guarantee of
certain indebtedness of WM Holdings by the Waste Management, Inc.
51
<PAGE> 53
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.
By: /s/ DONALD R. CHAPPEL
----------------------------------
Donald R. Chappel
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ BRUCE E. SNYDER
----------------------------------
Bruce E. Snyder
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Date: December 20, 1999
52
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
+12 -- Computation of Ratio of Earnings to Fixed Charges.
+27 -- Financial Data Schedule.
</TABLE>
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities and Exchange Act of 1934, the Registrant's file number under that
Act is 1-12154.
+ Previously filed.
