<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 3, 2000 was 621,633,487 (excluding treasury shares of
8,014,471).
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<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 144,797 $ 181,357
Receivables, net.......................................... 1,601,237 1,907,287
Parts and supplies........................................ 75,031 107,222
Deferred income taxes..................................... 267,349 298,433
Prepaid expenses and other................................ 155,632 190,744
Operations held-for-sale.................................. 860,178 3,535,502
----------- -----------
Total current assets............................... 3,104,224 6,220,545
Property and equipment, net................................. 10,036,218 10,303,803
Excess of cost over net assets of acquired businesses,
net....................................................... 5,091,741 5,185,909
Other intangible assets, net................................ 154,213 170,768
Other assets................................................ 789,297 800,399
----------- -----------
Total assets....................................... $19,175,693 $22,681,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 850,882 $ 1,062,536
Accrued liabilities....................................... 1,291,613 1,512,873
Deferred revenues......................................... 394,428 407,084
Current maturities of long-term debt...................... 1,016,550 3,098,742
Operations held-for-sale.................................. 383,964 1,408,220
----------- -----------
Total current liabilities.......................... 3,937,437 7,489,455
Long-term debt, less current maturities..................... 7,990,616 8,399,346
Deferred income taxes....................................... 967,276 729,902
Environmental liabilities................................... 825,357 837,407
Other liabilities........................................... 811,543 815,028
----------- -----------
Total liabilities.................................. 14,532,229 18,271,138
----------- -----------
Minority interest in subsidiaries........................... 14,573 7,674
----------- -----------
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; 629,633,649 and 627,283,618 shares issued,
respectively............................................ 6,296 6,273
Additional paid-in capital................................ 4,494,799 4,440,159
Retained earnings......................................... 521,001 662,746
Accumulated other comprehensive income (loss)............. (236,549) (563,086)
Restricted stock unearned compensation.................... (3,488) (3,936)
Treasury stock at cost, 8,014,471 and 73,709 shares,
respectively............................................ (153,168) (3,890)
Employee stock benefit trust at market, 7,892,612 shares
at December 31, 1999.................................... -- (135,654)
----------- -----------
Total stockholders' equity......................... 4,628,891 4,402,612
----------- -----------
Total liabilities and stockholders' equity......... $19,175,693 $22,681,424
=========== ===========
</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,
------------------------ -----------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues.......................... $3,124,649 $ 3,395,052 $9,607,669 $9,790,462
---------- ----------- ---------- ----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below).............. 1,871,048 2,578,341 5,775,907 6,075,317
General and administrative................ 411,185 771,187 1,350,026 1,344,829
Depreciation and amortization............. 366,615 452,970 1,079,332 1,202,735
Merger and acquisition related costs...... -- 31,568 -- 111,263
Asset impairments and unusual items....... 362,566 680,284 671,248 700,034
---------- ----------- ---------- ----------
3,011,414 4,514,350 8,876,513 9,434,178
---------- ----------- ---------- ----------
Income (loss) from operations............... 113,235 (1,119,298) 731,156 356,284
---------- ----------- ---------- ----------
Other income (expense):
Interest expense.......................... (178,453) (188,634) (588,260) (549,702)
Interest income........................... 8,323 20,341 23,212 28,822
Minority interest......................... (5,619) (4,697) (18,188) (17,706)
Other income.............................. 2,756 8,691 17,319 39,269
---------- ----------- ---------- ----------
(172,993) (164,299) (565,917) (499,317)
---------- ----------- ---------- ----------
Income (loss) before income taxes........... (59,758) (1,283,597) 165,239 (143,033)
Provision for (benefit from) income taxes... 131,084 (335,824) 300,763 139,790
---------- ----------- ---------- ----------
Net loss.................................... $ (190,842) $ (947,773) $ (135,524) $ (282,823)
========== =========== ========== ==========
Basic loss per common share................. $ (0.31) $ (1.53) $ (0.22) $ (0.46)
========== =========== ========== ==========
Diluted loss per common share............... $ (0.31) $ (1.53) $ (0.22) $ (0.46)
========== =========== ========== ==========
Weighted average number of common shares
outstanding............................... 621,505 619,105 621,042 610,857
========== =========== ========== ==========
Weighted average number of common and
dilutive potential common shares
outstanding............................... 621,505 619,105 621,042 610,857
========== =========== ========== ==========
</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 RESTRICTED STOCK
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED TREASURY
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) COMPENSATION STOCK
--------- ------ ---------- --------- -------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999......... $ -- $6,273 $4,440,159 $ 662,746 $(563,086) $(3,936) $ (3,890)
Net loss.......................... -- -- -- (135,524) -- -- --
Cash dividends declared........... -- -- -- (6,221) -- -- --
Common stock issued upon exercise
of stock options and warrants
and grants of restricted stock
(including tax benefit)......... -- 3 1,296 -- -- (685) 1,847
Earned compensation related to
restricted stock................ -- -- -- -- -- 1,133 --
Common stock issued (purchased) in
connection with litigation
settlements..................... -- 13 21,709 -- -- -- (1,165)
Adjustment of employee stock
benefit trust to market value... -- -- 14,306 -- -- -- --
Adjustment for minimum pension
liability, net of taxes......... -- -- -- -- 104,250 -- --
Cumulative translation adjustment
of foreign currency statements
including effects of
divestitures.................... -- -- -- -- 222,287 -- --
Termination of employee stock
benefit trust................... -- -- -- -- -- -- (149,960)
Other............................. -- 7 17,329 -- -- -- --
------ ------ ---------- --------- --------- ------- ---------
Balance, September 30, 2000........ $ -- $6,296 $4,494,799 $ 521,001 $(236,549) $(3,488) $(153,168)
====== ====== ========== ========= ========= ======= =========
<CAPTION>
EMPLOYEE
STOCK
BENEFIT TRUST
-------------
<S> <C>
Balance, December 31, 1999......... $(135,654)
Net loss.......................... --
Cash dividends declared........... --
Common stock issued upon exercise
of stock options and warrants
and grants of restricted stock
(including tax benefit)......... --
Earned compensation related to
restricted stock................ --
Common stock issued (purchased) in
connection with litigation
settlements..................... --
Adjustment of employee stock
benefit trust to market value... (14,306)
Adjustment for minimum pension
liability, net of taxes......... --
Cumulative translation adjustment
of foreign currency statements
including effects of
divestitures.................... --
Termination of employee stock
benefit trust................... 149,960
Other............................. --
---------
Balance, September 30, 2000........ $ --
=========
</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,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (135,524) $ (282,823)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for bad debts................................ 12,767 202,400
Depreciation and amortization.......................... 1,079,332 1,202,735
Deferred income tax provision.......................... 182,054 110,940
Net gain on disposal of assets......................... (6,794) (6,487)
Minority interest in subsidiaries...................... 18,188 17,706
Effect of asset impairments and unusual items.......... 671,248 602,684
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and other receivables............ 215,761 (209,122)
Prepaid expenses and other current assets............ (28,277) 97,329
Other assets......................................... 4,909 29,392
Accounts payable and accrued liabilities............. (365,282) (285,368)
Deferred revenues and other liabilities.............. 16,319 (264,820)
Other, net........................................... (1,996) 26,479
----------- -----------
Net cash provided by operating activities................... 1,662,705 1,241,045
----------- -----------
Cash flows from investing activities:
Short-term investments.................................... 53,735 11,039
Acquisitions of businesses, net of cash acquired.......... (217,548) (1,181,833)
Capital expenditures...................................... (913,076) (876,900)
Proceeds from divestitures of businesses, net of cash
divested, and other asset sales........................ 2,123,115 558,918
Other, net................................................ (12,351) (72,523)
----------- -----------
Net cash provided by (used in) investing activities......... 1,033,875 (1,561,299)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 73,570 3,767,636
Principal payments on long-term debt...................... (2,803,077) (3,485,591)
Proceeds from exercise of common stock options and
warrants............................................... 1,222 175,444
----------- -----------
Net cash provided by (used in) financing activities......... (2,728,285) 457,489
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... (4,855) (2,246)
----------- -----------
Increase (decrease) in cash and cash equivalents............ (36,560) 134,989
Cash and cash equivalents at beginning of period............ 181,357 86,873
----------- -----------
Cash and cash equivalents at end of period.................. $ 144,797 $ 221,862
=========== ===========
</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,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss....................................... $(190,842) $(947,773) $(135,524) $(282,823)
--------- --------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment...... 39,056 62,813 222,287 (41,203)
Minimum pension liability adjustment, net of
taxes of $30,432 and $66,371 for the three
and nine months ended September 30, 2000,
respectively, and net of taxes of $41,920
for the three and nine months ended
September 30, 1999........................ 47,800 (65,844) 104,250 (65,844)
--------- --------- --------- ---------
Other comprehensive income (loss).............. 86,856 (3,031) 326,537 (107,047)
--------- --------- --------- ---------
Comprehensive income (loss).................... $(103,986) $(950,804) $ 191,013 $(389,870)
========= ========= ========= =========
</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 (collectively referred to herein as the "Company", unless the
context indicates otherwise) presented herein are unaudited. In the opinion of
management, these financial statements include all adjustments necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results for interim periods are not
necessarily indicative of results for the entire year. The financial statements
presented herein should be read in connection with the financial statements
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
As previously reported in the Company's Form 10-Q for the quarter ended
September 30, 1999 and the Company's Form 10-K for the year ended December 31,
1999, the Company concluded that its internal controls for the preparation of
interim financial information during 1999 did not provide an adequate basis for
its independent public accountants to complete reviews of the 1999 quarterly
financial information in accordance with standards established by the American
Institute of Certified Public Accountants.
The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts have enabled
the Company to produce timely and reliable interim financial statements as of
September 30, 2000 and for the three and nine months then ended to allow its
independent accountants to complete their reviews of the interim financial
information for those periods. Management believes that its processes have
improved considerably and will continue to improve throughout the remainder of
2000, allowing it to further reduce its reliance on the use of external
resources as mitigating controls, although there can be no assurance that this
will be the case.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 during the reporting period. Specifically,
with regard to landfill accounting, the Company uses engineering and accounting
estimates when projecting future development and final closure and post-closure
costs, forecasting various engineering specifications (including the prediction
of waste settlement), and future operational plans and waste volumes. Actual
results could differ materially from those estimates. See "Management's
Discussion and Analysis" elsewhere herein.
Certain reclassifications have been made to previously reported amounts in
the financial statements in order to conform to the current period presentation.
6
<PAGE> 8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Bank credit facilities..................................... $ 397,000 $ 2,250,000
Commercial paper, average interest of 5.5% in 1999......... -- 21,899
Senior notes and debentures, interest of 6% to 8 3/4%
through 2029............................................. 6,555,580 6,749,785
4% Convertible subordinated notes due 2002................. 535,275 535,275
5.75% Convertible subordinated notes due 2005.............. 30,857 426,726
Tax-exempt and project bonds, principal payable in periodic
installments, maturing through 2028, fixed and variable
interest rates ranging from 5.5% to 9.25% at September
30, 2000................................................. 1,251,724 1,234,668
Installment loans, notes payable, and other, interest to
14%, maturing through 2015............................... 236,730 279,735
---------- -----------
9,007,166 11,498,088
Less current maturities.................................... 1,016,550 3,098,742
---------- -----------
$7,990,616 $ 8,399,346
========== ===========
</TABLE>
At September 30, 2000 the Company had a $1.6 billion syndicated loan
facility (the "Syndicated Facility") which expires July 10, 2001 with a one-year
extension option and a $1.5 billion senior revolving credit facility (the
"Credit Facility"), which matures in August 2002. The Syndicated Facility and
Credit Facility are available for borrowings, including letters of credit, and
for supporting the issuance of commercial paper. The covenant restrictions for
the Syndicated Facility and Credit Facility include, among others, interest
coverage and debt capitalization ratios, limitations on dividends, additional
indebtedness and liens. The Syndicated Facility and Credit Facility are used to
refinance existing debt and letters of credit, to fund acquisitions, and for
working capital purposes.
At September 30, 2000, the Company had borrowings of $397 million under the
Syndicated Facility at an average interest rate of 7.6%, and had no borrowings
under the Credit Facility. The facility fees were 0.20% and 0.25% per annum
under the Syndicated Facility and Credit Facility, respectively, at September
30, 2000. The Company had issued letters of credit of approximately $1.5 billion
in the aggregate under the Syndicated Facility and Credit Facility, leaving
unused and available aggregate credit capacity of approximately $1.2 billion at
September 30, 2000.
Under the terms of the Syndicated Facility and Credit Facility, the Company
is obligated to repay its indebtedness under such facilities with the cash
proceeds received from the divestitures pursuant to the Company's strategic
plan, including divestitures of its international operations outside North
America ("WM International"), domestic non-core operations and selected North
American solid waste ("NASW") operations. Specifically, the Company was required
to utilize the first $1.5 billion of net proceeds from the divestitures to repay
indebtedness, which it has done. Additionally, the Company is required to use
50% of the additional net proceeds up to $2.5 billion from divestitures to repay
the indebtedness under the Syndicated and Credit Facilities. Due to these terms,
at September 30, 2000, the Company is obligated to utilize approximately $200
million of net proceeds from the remaining scheduled divestitures to repay
indebtedness under such facilities. The Company intends to refinance this amount
through the use of the Credit Facility and Syndicated Facility and therefore,
has classified these borrowings as long-term.
The Company's 5.75% convertible subordinated notes due 2005 are
subordinated to all existing and future senior indebtedness of the Company. Each
note bears cash interest at the rate of two percent per annum of the $1,000
principal amount at maturity, payable semi-annually. The difference between the
principal amount at
7
<PAGE> 9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity of $1,000 and the $717.80 stated issue price of each note represents
the stated discount. At the option of the holder, each note was redeemable for
cash by the Company on March 15, 2000, at $843.03, plus accrued interest through
the date of redemption. The notes are callable by the Company for cash, plus
accrued stated discount and accrued interest. In addition, each $1,000 principal
amount note is convertible at any time prior to maturity into approximately 18.9
shares of the Company's common stock, subject to adjustment upon the occurrence
of certain events. Upon any such conversion, the Company has the option of
paying cash equal to the market value of the shares which would otherwise be
issuable. Through September 30, 2000, the Company repurchased, for cash,
approximately $397 million of these notes that were outstanding at December 31,
1999.
On July 17, 1998, the Company issued $600 million of 6 1/8% mandatorily
tendered senior notes, due on July 15, 2011. This debt instrument is subject to
certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to use borrowings available under
the Syndicated Facility and/or the Credit Facility in the event it must purchase
the notes on July 15, 2001. Accordingly, these borrowings have been classified
as long-term at September 30, 2000.
2. DIVESTITURES
During the third quarter of 1999, the Company's Board of Directors adopted
a strategic plan, one element of which is to market for sale its WM
International operations, its domestic non-core operations and selected NASW
operations. Note 9 to these condensed consolidated financial statements
discusses remaining operations held-for-sale which the Company believes will be
divested prior to September 30, 2001.
In April 2000, the Company announced that its wholly-owned subsidiaries had
completed the previously announced transactions regarding the sales of waste
services operations in the Netherlands and Finland for approximately $330 and
$100 million, respectively, and the majority interest in Waste Management New
Zealand Limited for approximately $100 million. In May 2000, wholly-owned
subsidiaries of the Company sold waste services operations in Thailand and its
waste services operations in Italy for approximately $70 million. In June 2000,
the Company announced that its wholly-owned subsidiaries completed the sales of
its waste service operations in Australia for approximately $230 million, and
its waste services operations in Germany for approximately $80 million.
Additionally, one of the Company's wholly-owned subsidiaries sold substantially
all of its nuclear waste services operations located in the United States for
approximately $55 million at closing and an additional $10 million for meeting
certain post-closing conditions. On July 5, 2000, the Company announced that its
wholly-owned subsidiaries had sold operations in Denmark, Slovakia and the Czech
Republic for approximately $120 million.
On August 4, 2000, the Company completed the final transaction of its
previously announced sale of certain U.S. solid waste assets to Allied Waste
Industries, Inc.("Allied"). The sales to Allied, which began in February 2000,
consisted of, in the aggregate, 14 collection operations, ten landfill
operations, four transfer stations and a landfill operating contract for
approximately $191 million. On August 14, 2000, one of the Company's
wholly-owned subsidiaries completed the sale of its BioGro operations for
approximately $200 million in cash and assumed debt. On August 31, 2000, Waste
Management Environmental, LLC, one of the Company's wholly-owned subsidiaries,
completed the sale of its 49% interest in Advanced Environmental Services, LLC
("AES") to a subsidiary of Vivendi and the 51% owner in the AES joint venture,
for approximately $80 million. On September 22, 2000, one of the Company's
wholly-owned subsidiaries completed the sale of its waste services operations in
the United Kingdom for approximately $570 million. On September 28, 2000,
certain of the Company's wholly-owned subsidiaries completed the sales of
collection businesses, landfills and transfer stations located in Texas,
Oklahoma, Arkansas, Missouri, Kansas and Nebraska to Waste Corporation of
America ("WCA") for approximately $105 million, which includes cash,
8
<PAGE> 10
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes receivable and a long-term prepaid disposal agreement, and the assumption
by WCA of certain environmental liabilities.
On August 31, 2000, the Company announced that its wholly-owned
subsidiaries had entered into agreements to sell its waste services operations
in Hong Kong and its hazardous waste facility in Mexico to a subsidiary of
Vivendi for approximately $120 million and $48 million, respectively.
Additionally, on September 29, 2000, the Company announced that a wholly-owned
subsidiary entered into an agreement to sell its waste services operations in
Sweden to Miljoservice Sverige AB and Sydkraft AB for approximately $191
million.
All divestiture activity relates to operations classified as held-for-sale.
The following information summarizes the Company's divestiture activity through
September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED:
September 30, 2000
Proceeds(a)......................... $151,832 $ 652,848 $285,496 $1,090,176
Gain (loss) recorded during the
period(b)......................... 2,945 (104,648) 3,814 (97,889)
NINE MONTHS ENDED:
September 30, 2000
Proceeds(a)......................... $284,177 $1,605,417 $350,490 $2,240,084
Gain (loss) recorded during the
period(b)......................... 19,102 (252,140) 21,107 (211,931)
</TABLE>
---------------
(a) Proceeds includes cash, notes receivable, and assumed debt.
(b) Gain (loss) on sale of operations is included in asset impairments and
unusual items. The loss on the sale of certain WM International operations
includes amounts related to foreign currency translation, which were not
recognized until the divestiture of the respective international market was
completed. Additionally, the Company has recorded held-for-sale impairment
charges in the third quarter of 2000 and in periods prior to the third
quarter of 2000 for operations that were divested during 2000 or are
expected to be divested in future periods pursuant to its strategic plan.
For the three and nine months ended September 30, 2000, the Company has
recorded held-for-sale impairment charges of approximately $182.2 million
and $284.6 million, respectively. As discussed in the Company's Form 10-K
for the year ended December 31, 1999, the Company recorded $443 million in
1999 of held-for-sale impairments. Held-for-sale impairments are included
in asset impairments and unusual items.
3. INCOME TAXES
The difference between the federal income taxes computed at the federal
statutory rate and the reported provision for income taxes for the three and
nine months ended September 30, 2000 and 1999 is primarily due to state and
local income taxes, non-deductible costs related to acquired intangibles,
non-deductible held-for-sale impairment charges associated with certain
businesses, and non-deductible losses on the divestiture of assets that closed
during the respective periods.
4. EARNINGS PER SHARE AND CAPITAL STOCK
The following 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
9
<PAGE> 11
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common and dilutive potential common shares outstanding for the purposes of
calculating basic and diluted earnings per common share, respectively (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Number of common shares outstanding at end of
period....................................... 621,619 619,547 621,619 619,547
Effect of using weighted average common shares
outstanding.................................. (114) (442) (577) (8,690)
------- ------- ------- -------
Weighted average number of common and dilutive
potential common shares outstanding.......... 621,505 619,105 621,042 610,857
======= ======= ======= =======
</TABLE>
For the three and nine months ended September 30, 2000 and 1999, the effect
of the Company's convertible subordinated notes and debentures are excluded from
the diluted earnings per share calculation since the inclusion of such items
would be antidilutive.
At September 30, 2000, there were approximately 54.1 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 2000, the Company declared an annual cash dividend
of $0.01 per share, or approximately $6.2 million, to stockholders of record on
September 30, 2000, which was paid on October 16, 2000.
On July 1, 2000, Waste Management Holdings, Inc. ("WM Holdings") terminated
the Waste Management Benefits Stock Trust (the "Trust"). In 1994, the Trust,
which was created by WM Holdings, purchased, in exchange for a promissory note,
all of the outstanding treasury shares of WM Holdings to fund various company
benefit plans. Pursuant to the merger between the Company and WM Holdings in
July 1998 (the "WM Holdings Merger"), all of the shares held by the Trust were
converted into shares of the Company's common stock. In accordance with the
termination of the Trust, the shares previously owned by it were returned to the
Company as payment for the outstanding amount of the promissory note. The
7,892,612 shares returned to the Company are classified as treasury shares.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents the change in the Company's equity
from transactions and other events and circumstances from nonowner sources and
includes all changes in equity except those resulting from investments by owners
and distributions to owners. The components of accumulated other comprehensive
income (loss) are as follows for the periods indicated (in thousands):
<TABLE>
<CAPTION>
TOTAL
MINIMUM ACCUMULATED
FOREIGN PENSION OTHER
CURRENCY LIABILITY COMPREHENSIVE
TRANSLATION ADJUSTMENT INCOME
ADJUSTMENT (NET OF TAX) (LOSS)
----------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1999...................... $(430,080) $(133,006) $(563,086)
Year-to-date change........................... 222,287 104,250 326,537
--------- --------- ---------
Balance, September 30, 2000..................... $(207,793) $ (28,756) $(236,549)
========= ========= =========
</TABLE>
10
<PAGE> 12
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is continuing the process of settling its obligations under the
qualified defined benefit plan (the "Plan") for all eligible non-union domestic
employees of WM Holdings which was terminated as of October 31, 1999 in
connection with the WM Holdings Merger. 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
pension related charge is primarily due to the settlement by the Plan of
obligations to certain participants that occurred during 2000. The charge, which
is included in asset impairments and unusual items, was approximately $80
million and $170 million for the three and nine months ended September 30, 2000,
respectively. The settlements were funded by the Plan's trust and resulted in a
reduction in the minimum pension liability and a credit to other comprehensive
income for these periods. The Company expects to settle the remaining
obligations during the fourth quarter of 2000, at which time the final
settlement expense (currently estimated to be approximately $51 million) will be
recorded and adjustments to other comprehensive income will be made. In
conjunction with the termination of the Plan, the Company made payments of
approximately $124 million to the Plan's trust in September of 2000. The Company
expects an additional $61 million to be paid by December 31, 2000.
The Company adopted a strategic plan in August 1999, one element of which
is to pursue the divestiture of its WM International operations. Upon the
divestiture of the Company's WM International operations in each country, the
foreign currency translation losses that are included in accumulated other
comprehensive income (loss) are recognized in the Company's statement of
operations (decreasing any gain, or increasing any loss) with an offsetting
adjustment to the accumulated foreign currency translation. The accumulated
foreign currency translation loss for the Company's remaining WM International
operations which are held-for-sale was $82.8 million and $353.1 million as of
September 30, 2000 and December 31, 1999, respectively. See Notes 2 and 12 for
further discussion of the Company's divestiture activity.
6. ENVIRONMENTAL LIABILITIES
The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the
landfill and the capping of the final uncapped areas of a landfill or costs
required by regulation associated with existing operations at a hazardous waste
treatment, storage or disposal facility that are subject to the Toxic Substances
Control Act ("TSCA") or Subtitle C of the Resource Conservation and Recovery Act
("RCRA"), and post-closure maintenance of those facilities. 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. The estimates are based on the Company's interpretation of
current requirements and proposed regulatory changes. For landfills, the present
value of final closure and post-closure liabilities are accrued using the
calculated rate per ton and charged to expense as airspace is consumed such that
the present value of total estimated final closure and post-closure cost will be
accrued for each landfill at the time the site discontinues accepting waste and
is closed. In the United States, the final closure and post-closure requirements
are established under the standards of the United States Environmental
Protection Agency's ("EPA") Subtitle C and D regulations, as implemented and
applied on a state-by-state basis. Such costs may increase in the future as a
result of legislation or regulation. Final closure and post-closure accruals
consider estimates for the final cap and cover for the site, methane gas
control, leachate management and groundwater monitoring, and other operational,
and maintenance costs to be incurred after the site discontinues accepting
waste, which is generally expected to be for a period of up to thirty years
after final site closure. For purchased disposal sites, the Company assesses and
records a present value-based final closure and post-closure liability at the
time the Company assumes closure responsibility based upon the estimated final
closure and post-closure costs and the percentage of airspace utilized as of
such date. Thereafter, the difference between the final closure and post-closure
liability recorded at the time of acquisition and the present value of total
estimated final closure and post-closure costs to be incurred is accrued using
the calculated rate and charged to expense as airspace is consumed. Such costs
for
11
<PAGE> 13
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign landfills are estimated based on compliance with local laws, regulations
and customs. For other facilities, final closure and post-closure costs are
determined in consideration of regulatory requirements.
In March 1996, the EPA issued regulations that require large, municipal
solid waste landfills with significant emissions of nonmethane organic compounds
("NMOC") to install and monitor systems to collect and control landfill gas. The
regulations apply to landfills designed to accommodate 2.5 million cubic meters
or more of municipal solid waste that emit 50 megagrams or more of NMOC
emissions and that accepted waste for disposal after November 8, 1987,
regardless of whether the site is active or closed. The date by which each
affected landfill must have such a gas collection and control system depends on
whether the landfill began operations before or after May 30, 1991. In the
United States, landfills constructed, reconstructed, modified or first accepting
waste after May 30, 1991, generally were required to have systems in place by
late 1998 or within approximately 30 months of triggering the applicability
criteria. Older landfills are generally regulated by states and are required to
have landfill gas systems in place within approximately 30 months of EPA's
approval of the state program. Many state solid waste regulations already
require gas collection and control systems.
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 86 sites listed on the Superfund National
Priorities List ("NPL") as of September 30, 2000. The Company or its
subsidiaries are also the subject of claims made by state or local enforcement
agencies. The majority of claims involving NPL sites arise from allegations that
subsidiaries of the Company (or their predecessors) transported waste to the
facilities in question, often prior to the acquisition of such subsidiaries by
the Company. The Company routinely reviews and evaluates sites that require
remediation, including NPL sites, giving consideration to the nature (e.g.,
owner, operator, transporter, or generator), and the extent (e.g., amount and
nature of waste hauled to the location, number of years of site operation by the
Company, or other relevant factors) of the Company's alleged connection with the
site, the accuracy and strength of evidence connecting the Company to the
location, the number, connection and financial ability of other named and
unnamed potentially responsible third parties ("PRPs"), and the nature and
estimated cost of the likely remedy. Cost estimates are based on management's
judgment and experience in remediating such sites for the Company, information
available from regulatory agencies as to costs of remediation, and the number,
financial resources and relative degree of responsibility of other PRPs who may
be liable for remediation of a specific site, as well as the typical allocation
of costs among PRPs. These estimates are sometimes a range of possible outcomes.
In such cases, the Company provides for the amount within the range which
constitutes its best estimate. If no amount within the range appears to be a
better estimate than any other amount, then the Company provides for the minimum
amount within the range in accordance with the Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 5,
Accounting for Contingencies.
Estimates of the extent of the Company's share of the costs for remediation
of a particular site and the method and ultimate cost of remediation require a
number of assumptions and are inherently difficult, and the ultimate outcome may
differ from current estimates. However, the Company believes that its extensive
experience in the environmental services business, as well as its involvement
with a large number of sites, provides a reasonable basis for estimating its
aggregate liability. As additional information becomes available, estimates are
adjusted as necessary. While the Company does not anticipate that any such
adjustment would be material to its financial statements, it is reasonably
possible that technological, regulatory or enforcement developments, the results
of environmental studies, the non-existence or inability of other PRPs to
contribute to the settlements of such liabilities, or other factors could
necessitate the recording of additional liabilities which could be material.
As part of its ongoing 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 in light of changes to operational efficiencies.
Accordingly, revisions to
12
<PAGE> 14
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remediation reserve requirements may result in upward or downward adjustments to
income from operations in any given period. Adjustments for final closure and
post-closure estimates are accounted for prospectively over the remaining
capacity of the landfill.
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 (3% at September 30, 2000
and 2% at December 31, 1999) until expected time of payment and then discounted
to present value (6.5% at September 30, 2000 and 5.5% at December 31, 1999). The
accretion of the interest related to the discounted environmental liabilities is
included in the annual calculation of the landfill's final closure and
post-closure cost per ton and is charged to operating expense as landfill
airspace is consumed.
From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company subsidiary having allegedly owned,
operated or transported waste to a disposal facility which is alleged to have
contaminated the environment or, in certain cases, conducted environmental
remediation activities at such sites. While the Company believes it has
meritorious defenses to these lawsuits, their ultimate resolution is often
substantially uncertain due to a number of factors, and it is possible such
matters could have a material adverse impact on the Company's earnings for one
or more quarters or years.
The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future environmentally related remedial, defense and
tort claim costs at a number of sites. Carriers involved in these matters have
typically denied coverage and are defending against the Company's claims. While
the Company is vigorously pursuing such claims, it regularly considers
settlement opportunities when appropriate terms are offered.
7. COMMITMENTS AND CONTINGENCIES
Financial instruments -- Letters of credit, performance bonds and other
guarantees have been provided by the Company to support tax-exempt bonds,
performance of landfill final closure and post-closure requirements, insurance
contracts, and other contracts. The insurance policies are issued by a
wholly-owned insurance company subsidiary of the Company, the sole business of
which is to issue such policies to customers of the Company. In those instances
where the use of captive insurance is not acceptable, the Company has available
alternative bonding mechanisms. The Company has not experienced difficulty in
obtaining performance bonds or letters of credit for its current operations.
Because virtually no claims have been made against these financial instruments
in the past, management does not expect these instruments will have a material
adverse effect on the Company's consolidated financial statements.
Environmental matters -- The continuing business in which the Company is
engaged is intrinsically connected with the protection of the environment. As
such, a significant portion of the Company's operating costs and capital
expenditures could be characterized as costs of environmental protection. Such
costs may increase in the future as a result of legislation or regulation,
however, the Company believes that in general it tends to benefit when
environmental regulation increases, which may increase the demand for its
services, and that it has the resources and experience to manage environmental
risk. See Note 6 for further discussion.
Litigation -- In February 1998, WM Holdings announced a restatement of
prior-period earnings for 1991 and earlier as well as for 1992 through 1996 and
the first three quarters of 1997. Many actions were brought or claims made
against WM Holdings as a result of this restatement, as set forth in earlier
quarterly and year-end reports made by the Company. The Company has resolved
many of these actions and claims, as discussed in earlier filings.
13
<PAGE> 15
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following actions with respect to WM Holdings, however, are still
outstanding.
In July 1998, a business owner who received WM Holdings common stock in the
sale of his business to WM Holdings brought a purported class action against
that company alleging breach of warranty. In October 1999, the court 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. In March 2000, the court of appeals upheld this
certification order. Also in March 2000, the trial court granted summary
judgment on the claim of breach of warranty against WM Holdings and in favor of
all members of the class except for a discrete group of plaintiffs whose claims
may have expired under applicable statutes of limitations. The class as
currently constituted consists of twenty-six transactions. The extent of damages
in this class action has not yet been determined.
In March 2000, a group of companies that sold their assets to WM Holdings
in exchange for common stock in March 1996 pursuant to an asset purchase
agreement (and who otherwise would have been included in the above class, as
currently defined), brought a separate action against the Company for breach of
contract and fraud, among other things. The parties are engaged in efforts to
resolve the dispute. The extent of damages in the underlying dispute has not yet
been determined and will ultimately be set by arbitration if a resolution is not
reached by the parties.
In December 1999, a sole plaintiff brought an action against the Company,
five former officers of WM Holdings, and WM Holdings' auditors in Illinois state
court on behalf of a proposed class of individuals who purchased WM Holdings
common stock before November 3, 1994, and who held that stock through February
24, 1998, for alleged acts of common law fraud, negligence, and breach of
fiduciary duty. This action is in its early stages and the extent of possible
damages, if any, has not yet been determined.
A consolidated derivative action has also been filed in Delaware Chancery
Court, nominally on behalf of the Company, against certain former officers and
directors of WM Holdings and certain directors of the Company. The derivative
plaintiffs seek, among other things, those monies paid by the Company to resolve
those claims arising out of WM Holdings' restatement of earnings in February
1998 as well as a declaration that the Company does not have to pay retirement
benefits to certain former officers of WM Holdings.
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.
In March and April 1999, two former officers of WM Holdings sued the
Company for retirement and other benefits. Additionally, a third former officer
brought a similar action, which was subsequently dismissed without prejudice in
March 2000. The Company has reached agreements to settle the disputes between it
and each of these former officers.
In addition to the actions with respect to WM Holdings, the following
actions with respect to the Company or its other subsidiaries are pending.
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 and that its reported operating income for the
three months ended March 31, 1999 may have included certain unusual pretax
income items. More than 30 lawsuits that purport to be based on one or more of
these announcements were filed against the Company and certain of its current
and former 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
14
<PAGE> 16
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and certain of its current and former officers and directors in the United
States District Court for the Eastern District of Texas. Pursuant to a joint
motion, this case was transferred to the United States District Court for the
Southern District of Texas, to be consolidated with the consolidated action
pending there. On May 8, 2000, the United States District Court for the Southern
District of Texas entered an order appointing the Connecticut Retirement Plan
and Trust Funds as lead plaintiff in the consolidated cases and appointing the
law firm of Goodkind Labaton Rudoff & Suchrow LLP as lead plaintiff's counsel.
The lead plaintiff filed its Amended Consolidated Class Action Complaint
(the "Complaint") on July 14, 2000. The Complaint pleads claims on behalf of a
putative class consisting of all purchasers of Company securities (including
common stock, debentures and call options), and all sellers of put options, from
June 11, 1998 through November 9, 1999. The Complaint also pleads additional
claims on behalf of two putative subclasses: (i) the "Merger Subclass,"
consisting of all persons who exchanged WM Holdings shares for the Company's
stock when WM Holdings and the Company merged, and (ii) the "Eastern Merger
Subclass," consisting of all persons who exchanged Eastern Environmental
Services, Inc. ("Eastern") stock for the Company's stock when Eastern and the
Company merged on December 31, 1998 (the "Eastern Merger"). Among other things,
the plaintiffs allege that the Company and certain of its current and former
officers and directors (i) made misrepresentations in the registration statement
and prospectus filed with the SEC in connection with the WM Holdings Merger,
(ii) made knowingly false earnings projections for the three months ended June
30, 1999, (iii) 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 and (iv) made separate and distinct
misrepresentations about the Company's operations and finances on and after July
29, 1999, culminating in the Company's taking a pre-tax charge of $1.76 billion
in the third quarter of 1999. The plaintiffs also claim that certain of the
Company's current and former officers and directors sold common stock between
May 10, 1999 and June 9, 1999 at prices allegedly known to have been inflated by
the alleged material misstatements and omissions. The plaintiffs in these
actions seek damages with interest, costs and such other relief as the court
deems proper. Defendants filed a motion to dismiss on October 3, 2000. The case
is at an early stage and the extent of possible damages, if any, cannot yet be
determined.
On June 29, 2000, a putative class action was filed against the Company in
Delaware state court by a class of former shareholders of Eastern who exchanged
their Eastern shares for the Company's shares in the Eastern Merger. The
plaintiffs allege that the Company stock they received in exchange for their
Eastern shares was overvalued for the reasons alleged in the consolidated class
actions in Texas, described above. The claims and putative class members in this
case fall within the scope of the consolidated class actions in Texas. On August
4, 2000, the Company removed the case from the state court to the United States
District Court for the District of Delaware and moved to transfer the case to
the United States District Court for the Southern District of Texas, where the
consolidated Texas class actions are pending. On September 1, 2000, the
plaintiffs moved to remand the case to the Delaware state court and asked the
Delaware federal court to defer consideration of the Company's transfer motion
until it rules on the plaintiffs' remand motion. The Company has opposed the
remand motion. All motions currently are pending. The case is at an early stage,
and the extent of possible damages, if any, cannot yet be determined.
The Company has been sued in several lawsuits, and an arbitration action
has been initiated, by individuals who received common stock in the sales of
their businesses to the Company or to a company later acquired by the Company.
The arbitration action relates to the sale of a business to Eastern. For reasons
similar to those alleged in the class actions described above, or for reasons
related to the acquisition of the business by Eastern, the sellers of the
business allege that the stock received was overvalued. All of these matters are
in an early stage and the extent of possible damages, if any, cannot yet be
determined.
In addition, three of the Company's shareholders have filed purported
derivative lawsuits against certain current and former 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
15
<PAGE> 17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lawsuits were filed in the Delaware Court of Chancery 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 Delaware cases
have been consolidated and the plaintiffs have filed an amended consolidated
complaint. The amended complaint alleges claims relating to the Company's 1999
annual and quarterly earnings, sales of Company stock by certain of the
Company's current and former officers and directors, and alleged self-dealing by
certain of the Company's current and former officers. 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
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 defendants have not yet been required to
respond to the complaints.
As part of the Company's investigation, the Company's Board of Directors
authorized its Special Committee I to conduct a full investigation and
evaluation of all matters relating to: (i) the reporting of the Company's first
and second quarter 1999 operating results; (ii) the sales of the Company's stock
by certain current and former corporate officials; and (iii) the allegations
made in pending litigation respecting these and certain other matters and to
report its findings and recommendations to those members of the Board of
Directors it finds are sufficiently disinterested to act upon its findings and
recommendations. Following its review of the Special Committees'
recommendations, the Board of Directors passed a resolution on September 25,
2000 directing the Company's management and counsel to take appropriate action
consistent with the Board's conclusions with respect to the issues under review.
These actions included direction to the Company's management and counsel to seek
a dismissal of the shareholder derivative actions described above.
Several related shareholders have filed a lawsuit in state court in Texas
against the Company and three of its former officers. The petition alleges that
the plaintiffs are substantial shareholders of the Company's common stock who
intended to sell their stock in 1999, but that the individual defendants made
false and misleading statements regarding the Company's prospects that induced
the plaintiffs to retain their stock. Plaintiffs assert that the value of their
retained stock declined dramatically. Plaintiffs asserted claims for fraud,
negligent misrepresentation, and conspiracy. The case is in an early stage and
the extent of damages, if any, cannot yet be determined.
The New York Stock Exchange has notified the Company that its Market
Trading Analysis Department is reviewing transactions in the common stock of the
Company prior to the July 6, 1999 earnings forecast announcement.
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. As of September 30, 2000, there were three proceedings
involving Company subsidiaries where the sanctions involved could potentially
exceed $100,000. The Company believes that these matters will not have a
material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty,
16
<PAGE> 18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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"), or similar state
laws. The majority of these proceedings involve 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. CERCLA generally provides for joint and several
liability for those parties owning, operating, transporting to or disposing at
the sites. Such proceedings arising under Superfund typically involve numerous
waste generators and other waste transportation and disposal companies and seek
to allocate or recover costs associated with site investigation and cleanup,
which costs could be substantial and could have a material adverse effect on the
Company's financial statements.
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"), one of the Company's
wholly-owned subsidiaries, 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 financial statements.
In August 1999, sludge materials from trucks entering the Company's
Woodland Meadows Landfill in Michigan were seized by the Federal Bureau of
Investigation 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 requests 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'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 financial statements.
As of September 30, 2000, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 86 locations
listed on the NPL. Of the 86 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 developed by others as land
disposal facilities. At each of the
17
<PAGE> 19
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 69 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. Any of these matters could have a material
adverse effect on the Company's 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 the Company's BioGro business unit. The Company has divested of this business
unit, and has been indemnified for any liability as a result of the lawsuit by
the purchaser thereof.
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 was
based on events that allegedly occurred before the WM Holdings Merger in
connection with a WM Holdings landfill development project. The indictment
included 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. In October 2000, the Company
entered into a settlement with the County pursuant to which all criminal charges
filed against the Company and its subsidiaries will be dismissed. In connection
with the settlement, one of the Company's subsidiaries agreed to pay $4.95
million into the County's general fund for court and administrative costs
incurred by the County in connection with the proceedings and agreed to
reimburse the District Attorney and Sheriff's departments for their costs in the
investigation. Additionally, as part of the settlement, the County acknowledged
that the Company had been named as a defendant in error since the alleged events
the proceedings were based on occurred before the WM Holdings Merger and
therefore, the Company had no involvement in such events.
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 137 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.
The Company and the defendants filed motions for summary judgement with respect
to the 12 phase one sites. In August 2000, the court denied four of the
defendants' motions while granting one of the Company's motions. The court has
not yet ruled on the motions with respect to the remaining seven phase one
sites. Currently, no trial date has been set. The Company is unable at this time
to predict the outcome of this proceeding. No amounts have been recognized in
the Company's financial statements for potential recoveries.
18
<PAGE> 20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
It is not possible at this time to predict the impact that the above
lawsuits, proceedings, investigations 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, proceedings,
investigations 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. The outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty and these matters could have a
material adverse impact on the Company's financial statements.
8. SEGMENT AND RELATED INFORMATION
NASW operations is the Company's 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 facilities), recycling, and other miscellaneous services to
commercial, industrial, municipal and residential customers in North America,
including the United States, Puerto Rico, Mexico and Canada. Similar operations
in international markets outside of North America are disclosed as a separate
segment under WM International, which includes operations in Europe, the Pacific
Rim, and South America. As discussed in Note 2, pursuant to the Company's
strategic plan, the Company has divested or is actively marketing to sell its WM
International operations.
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, the Company's independent power projects, and other
non-solid waste services to commercial, industrial and government customers. As
discussed in Notes 2 and 12, the Company's non-solid waste management includes
business lines that have been divested or are being actively marketed and
considered to be held-for-sale.
19
<PAGE> 21
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning the Company's reportable
segments as of September 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN NON-SOLID CORPORATE
SOLID WASTE WM INTERNATIONAL WASTE FUNCTIONS(a) TOTAL
-------------- ---------------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
September 30, 2000
Net operating
revenues(b)............. $2,874,334 $ 131,093 $119,222 $ -- $3,124,649
Earnings before interest
and taxes (EBIT)(c),
(d), (e), (f)........... 580,845 27,121 11,357 (143,522) 475,801
September 30, 1999
Net operating
revenues(b)............. $2,758,295 $ 442,912 $193,845 $ -- $3,395,052
Earnings (loss) before
interest and taxes
(EBIT)(c), (d), (f)..... (40,023) 45,562 (10,965) (402,020) (407,446)
NINE MONTHS ENDED:
September 30, 2000
Net operating
revenues(b)............. $8,496,033 $ 756,725 $354,911 $ -- $9,607,669
Earnings before interest and
taxes (EBIT)(c), (d), (e),
(f)....................... 1,719,889 139,992 42,631 (500,108) 1,402,404
September 30, 1999
Net operating
revenues(b)............. $7,956,463 $1,200,716 $633,283 $ -- $9,790,462
Earnings (loss) before
interest and taxes
(EBIT)(c), (d), (f)..... 1,381,045 121,580 24,248 (359,292) 1,167,581
</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,
management of closed landfill and related insurance recovery functions,
other typical administrative functions and certain inter-segment
transactions.
(b) Non-solid waste revenues are net of inter-segment revenue with NASW of
$13.0 million and $28.8 million, for the three and nine months ended
September 30, 2000, respectively, and $8.2 million and $40.7 million for
the three and nine months ended September 30, 1999, 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 in the
Company's Form 10-K for the year ended December 31, 1999.
(d) There are no material asymmetrical allocations of EBIT versus assets
between segments or corporate. Certain asset impairments and unusual items
reported in the reconciliation of EBIT to reported net income below,
however, have resulted in adjustments to assets ultimately reflected on
segment balance sheets.
(e) As discussed in Note 9, the Company has classified certain operations as
held-for-sale. For operations classified as held-for-sale at the beginning
of each quarter, the Company suspends depreciation on fixed assets. Had the
Company not classified any operations as held-for-sale, depreciation
expense would have
20
<PAGE> 22
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been greater by $10.3 million and $93.3 million for the three and nine
months ended September 30, 2000, respectively.
(f) EBIT is defined as income from operations excluding merger and acquisition
related costs and asset impairment and unusual items.
The reconciliation of total EBIT reported above to net loss is as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
EBIT, as reported above(a).......... $ 475,801 $ (407,446) $1,402,404 $1,167,581
Less:
Merger and acquisition related
costs.......................... -- 31,568 -- 111,263
Asset impairments and unusual
items.......................... 362,566 680,284 671,248 700,034
--------- ----------- ---------- ----------
Income (loss) from operations....... 113,235 (1,119,298) 731,156 356,284
Interest expense.................... (178,453) (188,634) (588,260) (549,702)
Interest income..................... 8,323 20,341 23,212 28,822
Minority interest................... (5,619) (4,697) (18,188) (17,706)
Other income, net................... 2,756 8,691 17,319 39,269
--------- ----------- ---------- ----------
Income (loss) before income taxes... (59,758) (1,283,597) 165,239 (143,033)
Provision for (benefit from) income
taxes............................. 131,084 (335,824) 300,763 139,790
--------- ----------- ---------- ----------
Net loss............................ $(190,842) $ (947,773) $ (135,524) $ (282,823)
========= =========== ========== ==========
</TABLE>
---------------
(a) EBIT is defined as income from operations excluding merger and acquisition
related costs and asset impairments and unusual items.
9. OPERATIONS HELD-FOR-SALE
During the third quarter of 1999, the Company's Board of Directors adopted
a strategic plan, one element of which is for the Company to market for sale its
WM International operations, its domestic non-core operations and selected NASW
operations. Note 2 to these condensed consolidated financial statements
discusses operations that have been divested in the year 2000 or announced to be
divested in the near future. Note 12 to these condensed consolidated financial
statements discusses recent developments with respect to certain operations
which have been included within assets held-for-sale as of September 30, 2000.
As discussed in Note 2 to the financial statements in the Company's Form
10-K for the year ended December 31, 1999, the Company has recorded charges to
write down certain of these assets. Additionally, the Company recorded a charge
for the three months ended September 30, 2000 to asset impairments and unusual
items of approximately $182.2 million related primarily to the third quarter
2000 inclusion within assets held-for-sale of the Company's geosynthetic lining
manufacturing and installation service operation and the Company's waste-fuel
powered independent power plants. The Company has recorded a charge for the nine
months ended September 30, 2000 to asset impairments and unusual items of
approximately $284.6 million related primarily to the Company's WM International
operations, its geosynthetic lining manufacturing and installation service
operation and waste-fuel powered independent power plants. These operations had
carrying values in excess of management's best estimates of anticipated
proceeds. As of September 30, 2000, the primary components remaining within
assets held-for-sale consisted of the Company's WM International operations in
Hong Kong, Indonesia, Brazil, Argentina, Israel and Sweden; the Company's
waste-fuel powered
21
<PAGE> 23
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
independent power facilities; the Company's geosynthetic lining manufacturing
and installation service operation; and certain other non-core and NASW
operations. For operations classified as held-for-sale at the beginning of each
quarter, the Company suspends depreciation and amortization on the underlying
assets. Had the Company not classified any operations as held-for-sale,
depreciation expense would have been greater by $10.3 million and $93.3 million
for the three and nine months ended September 30, 2000, respectively. These
businesses' results of operations are included in revenues and expenses in the
accompanying statements of operations.
Operational information included in the statements of operations regarding
the businesses classified as operations held-for-sale at September 30, 2000, 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, 2000
Operating revenues........................ $ 4,075 $ 131,093 $118,681 $ 253,849
Earnings before interest and taxes
(EBIT)(a)............................... (713) 27,121 947 27,355
September 30, 1999
Operating revenues........................ $ 4,499 $ 442,912 $116,342 $ 563,753
Earnings before interest and taxes
(EBIT)(a)............................... (1,279) 45,562 4,773 49,056
NINE MONTHS ENDED:
September 30, 2000
Operating revenues........................ $12,435 $ 756,725 $297,935 $1,067,095
Earnings before interest and taxes
(EBIT)(a)............................... (1,640) 139,992 6,420 144,772
September 30, 1999
Operating revenues........................ $12,642 $1,200,716 $250,966 $1,464,324
Earnings before interest and taxes
(EBIT)(a)............................... (3,502) 121,580 11,726 129,804
</TABLE>
---------------
(a) EBIT is defined as income from operations excluding merger and acquisition
related costs and asset impairments and unusual items.
In its condensed consolidated balance sheets, the Company has classified as
current operations held-for-sale its remaining WM International operations, its
remaining non-core operations and select NASW operations, which management
believes will be divested prior to September 30, 2001. The Company has
classified as non-current operations held-for-sale its surplus real estate
portfolio.
<TABLE>
<CAPTION>
NORTH AMERICAN NON-SOLID
SOLID WASTE WM INTERNATIONAL WASTE TOTAL
-------------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
As of September 30, 2000:
Accounts receivable, net.............. $ -- $ 59,958 $ 95,285 $ 155,243
Other current assets.................. 14 109,278 58,124 167,416
Property and equipment and other non-
current assets..................... 91,990 340,635 155,701 588,326
Current maturities of long-term
debt............................... -- (1,919) (3,164) (5,083)
Other current liabilities............. -- (148,333) (61,607) (209,940)
Long-term debt, less current
maturities......................... -- (1,731) (519) (2,250)
Other noncurrent liabilities.......... (8,126) (73,175) (45,410) (126,711)
Minority interest..................... -- (36,866) (3,114) (39,980)
-------- --------- --------- ---------
Net operations
held-for-sale............... $ 83,878 $ 247,847 $ 195,296 $ 527,021
======== ========= ========= =========
</TABLE>
22
<PAGE> 24
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NORTH AMERICAN NON-SOLID
SOLID WASTE WM INTERNATIONAL WASTE TOTAL
-------------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
Current assets:
Operations held-for-sale.............. $ 41,197 $ 509,871 $ 309,110 $ 860,178
Long-term assets:
Operations held-for-sale (included in
other assets)...................... 50,807 -- -- 50,807
Current liabilities:
Operations held-for-sale.............. (8,126) (262,024) (113,814) (383,964)
-------- --------- --------- ---------
Net operations
held-for-sale............... $ 83,878 $ 247,847 $ 195,296 $ 527,021
======== ========= ========= =========
</TABLE>
At December 31, 1999, the Company classified as current operations
held-for-sale its WM International operations and certain domestic operations.
The Company classified as non-current operations held-for-sale certain NASW
operations, which the Company had committed to sell to Allied, as well as the
Company's surplus real estate portfolio.
<TABLE>
<CAPTION>
NORTH AMERICAN NON-SOLID
SOLID WASTE WM INTERNATIONAL WASTE TOTAL
-------------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Receivables, net..................... $ 36,506 $ 364,552 $ 32,550 $ 433,608
Other current assets................. 14,311 208,842 14,990 238,143
Property and equipment and other non-
current assets.................... 737,072 2,271,611 108,400 3,117,083
Current maturities of long-term
debt.............................. (2,339) (51,817) -- (54,156)
Other current liabilities............ (23,854) (481,617) (62,267) (567,738)
Long-term debt, less current
maturities........................ (57,871) (212,629) -- (270,500)
Other noncurrent liabilities......... (37,814) (347,264) (13,166) (398,244)
Minority interest.................... -- (117,676) (3,705) (121,381)
--------- ----------- -------- -----------
Net operations
held-for-sale.............. $ 666,011 $ 1,634,002 $ 76,802 $ 2,376,815
========= =========== ======== ===========
Current assets:
Operations held-for-sale............. $ 534,557 $ 2,845,005 $155,940 $ 3,535,502
Long-term assets:
Operations held-for-sale (included in
other assets)..................... 253,331 -- -- 253,331
Current liabilities:
Operations held-for-sale............. (118,079) (1,211,003) (79,138) (1,408,220)
Long-term liabilities:
Operations held-for-sale (included in
other liabilities)................ (3,798) -- -- (3,798)
--------- ----------- -------- -----------
Net operations
held-for-sale.............. $ 666,011 $ 1,634,002 $ 76,802 $ 2,376,815
========= =========== ======== ===========
</TABLE>
10. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires
23
<PAGE> 25
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. In June 1999, the FASB issued SFAS
No. 137, which deferred the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which
amended certain guidance within SFAS No. 133.
The Company is presently in the process of reviewing its contracts for
purposes of assessing the impact of the adoption of SFAS No. 133, as amended,
including identifying derivative instruments, determining fair market values of
derivatives, designating and documenting hedge relationships, and evaluating the
effectiveness of those hedging relationships. As a result of this review, the
Company has preliminarily determined that SFAS No. 133 will primarily be
applicable to the Company's accounting for commodity swap agreements and
interest rate swap agreements. The Company expects that, upon adoption of SFAS
No. 133, as amended, the majority of its commodity swap agreements will be
designated as cash flow hedges and the majority of its interest rate swap
agreements will be designated as fair value hedges. Such treatment will result
in the difference between the derivatives' previous carrying amounts and the
related fair values being reported in the Company's statement of comprehensive
income or included as a component of net income, reflected as a cumulative
effect of change in accounting principle, net of income taxes.
The efforts of the Company to date and during the fourth quarter of 2000
will enable the Company to adopt SFAS No. 133, as amended, on January 1, 2001.
The efforts of the Company completed to date respecting SFAS No. 133, as
amended, have led management to presently conclude the accounting prescribed by
SFAS No. 133, as amended, will likely not have a material effect on its
statement of financial position or results of operations. However, the actual
financial statement impact attributable to the adoption of SFAS No. 133, as
amended, may be different than currently anticipated as a consequence of changes
in:
(1) certain factors which may directly impact the quantification of fair
values of identified derivatives, which include, but are not limited
to, changes in interest rates and commodity prices, and
(2) the Company's assessment of its portfolio of derivative instruments
resulting from (i) the execution of additional contracts during the
fourth quarter of 2000 and (ii) the completion of certain of the
Company's efforts respecting the adoption of SFAS No. 133, as amended,
during the fourth quarter of 2000.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements, and it is required to be adopted by the Company in the fourth
quarter of 2000. Management does not expect that the adoption of SAB No. 101
will have a material effect on its consolidated financial statements.
11. 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 sheet as of September 30, 2000 and the condensed
consolidated balance sheet as of December 31, 1999, the unaudited condensed
consolidated statements of operations for the three and nine months ended
September 30, 2000 and 1999, along with the related unaudited statements of cash
flows for the nine months ended September 30, 2000 and 1999, have been provided
below (in thousands).
24
<PAGE> 26
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 55,955 $ 9,106 $ 79,736 $ -- $ 144,797
Other current assets........ -- 36,604 2,922,823 -- 2,959,427
---------- ---------- ------------ ----------- -----------
55,955 45,710 3,002,559 -- 3,104,224
Property and equipment, net... -- -- 10,036,218 -- 10,036,218
Intercompany and investment in
subsidiaries................ 9,032,230 5,533,063 (10,512,340) (4,052,953) --
Other assets.................. 7,674 7,924 6,019,653 -- 6,035,251
---------- ---------- ------------ ----------- -----------
Total assets........ $9,095,859 $5,586,697 $ 8,546,090 $(4,052,953) $19,175,693
========== ========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt........... $ 200,000 $ 650,000 $ 166,550 $ -- $ 1,016,550
Accounts payable and other
accrued liabilities...... 113,597 343,919 2,463,371 -- 2,920,887
---------- ---------- ------------ ----------- -----------
313,597 993,919 2,629,921 -- 3,937,437
Long-term debt, less current
maturities............... 4,153,371 2,515,340 1,321,905 -- 7,990,616
Other liabilities........... -- -- 2,604,176 -- 2,604,176
---------- ---------- ------------ ----------- -----------
Total liabilities... 4,466,968 3,509,259 6,556,002 -- 14,532,229
Minority interest in
subsidiaries............. -- -- 14,573 -- 14,573
Stockholders' equity........ 4,628,891 2,077,438 1,975,515 (4,052,953) 4,628,891
---------- ---------- ------------ ----------- -----------
Total liabilities
and stockholders'
equity............ $9,095,859 $5,586,697 $ 8,546,090 $(4,052,953) $19,175,693
========== ========== ============ =========== ===========
</TABLE>
25
<PAGE> 27
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 33,690 $ 4,496 $ 143,171 $ -- $ 181,357
Other current assets........ -- 36,604 6,002,584 -- 6,039,188
----------- ---------- ------------ ----------- -----------
33,690 41,100 6,145,755 -- 6,220,545
Property and equipment, net... -- -- 10,303,803 -- 10,303,803
Intercompany and investment in
subsidiaries................ 10,668,727 5,939,729 (13,139,748) (3,468,708) --
Other assets.................. 27,004 9,795 6,120,277 -- 6,157,076
----------- ---------- ------------ ----------- -----------
Total assets........ $10,729,421 $5,990,624 $ 9,430,087 $(3,468,708) $22,681,424
=========== ========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt........... $ 2,271,899 $ 250,000 $ 576,843 $ -- $ 3,098,742
Accounts payable and other
accrued liabilities...... 100,978 325,644 3,964,091 -- 4,390,713
----------- ---------- ------------ ----------- -----------
2,372,877 575,644 4,540,934 -- 7,489,455
Long-term debt, less current
maturities............... 3,953,932 3,507,853 937,561 -- 8,399,346
Other liabilities........... -- -- 2,382,337 -- 2,382,337
----------- ---------- ------------ ----------- -----------
Total liabilities... 6,326,809 4,083,497 7,860,832 -- 18,271,138
Minority interest in
subsidiaries............. -- -- 7,674 -- 7,674
Stockholders' equity........ 4,402,612 1,907,127 1,561,581 (3,468,708) 4,402,612
----------- ---------- ------------ ----------- -----------
Total liabilities
and stockholders'
equity............ $10,729,421 $5,990,624 $ 9,430,087 $(3,468,708) $22,681,424
=========== ========== ============ =========== ===========
</TABLE>
26
<PAGE> 28
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues.............. $ -- $ -- $3,124,649 $ -- $3,124,649
Costs and expenses.............. -- -- 3,011,414 -- 3,011,414
--------- --------- ---------- -------- ----------
Income from operations.......... -- -- 113,235 -- 113,235
--------- --------- ---------- -------- ----------
Other income (expense):
Interest income (expense),
net........................ (99,615) (57,571) (12,944) -- (170,130)
Equity in subsidiaries, net of
taxes...................... (128,583) (92,601) -- 221,184 --
Minority interest............. -- -- (5,619) -- (5,619)
Other, net.................... -- -- 2,756 -- 2,756
--------- --------- ---------- -------- ----------
(228,198) (150,172) 97,428 221,184 (59,758)
Provision for (benefit from)
income taxes.................. (37,356) (21,589) 190,029 -- 131,084
--------- --------- ---------- -------- ----------
Net loss........................ $(190,842) $(128,583) $ (92,601) $221,184 $ (190,842)
========= ========= ========== ======== ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<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) (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
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues.............. $ -- $ -- $9,607,669 $ -- $9,607,669
Costs and expenses.............. -- -- 8,876,513 -- 8,876,513
--------- --------- ---------- --------- ----------
Income from operations.......... -- -- 731,156 -- 731,156
--------- --------- ---------- --------- ----------
Other income (expense):
Interest income (expense),
net........................ (345,425) (178,047) (41,576) -- (565,048)
Equity in subsidiaries, net of
taxes...................... 80,367 191,647 -- (272,014) --
Minority interest............. -- -- (18,188) -- (18,188)
Other, net.................... -- -- 17,319 -- 17,319
--------- --------- ---------- --------- ----------
(265,058) 13,600 688,711 (272,014) 165,239
Provision for (benefit from)
income taxes.................. (129,534) (66,767) 497,064 -- 300,763
--------- --------- ---------- --------- ----------
Net income (loss)............... $(135,524) $ 80,367 $ 191,647 $(272,014) $ (135,524)
========= ========= ========== ========= ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<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) (45,587) -- (520,880)
Equity in subsidiaries, net of
taxes...................... (114,091) 14,235 -- 99,856 --
Minority interest............. -- -- (17,706) -- (17,706)
Other, net.................... -- -- 39,269 -- 39,269
--------- --------- ---------- ------- ----------
(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>
28
<PAGE> 30
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........... $ (135,524) $ 80,367 $ 191,647 $(272,014) $ (135,524)
Equity in earnings of
subsidiaries, net of
taxes.................... (80,367) (191,647) -- 272,014 --
Other adjustments and
charges.................. 38,053 22,481 1,737,695 -- 1,798,229
----------- --------- ----------- --------- -----------
Net cash provided by (used in)
operating activities........ (177,838) (88,799) 1,929,342 -- 1,662,705
----------- --------- ----------- --------- -----------
Cash flows from investing
activities:
Short-term investments...... -- -- 53,735 -- 53,735
Acquisitions of businesses,
net of cash acquired..... -- -- (217,548) -- (217,548)
Capital expenditures........ -- -- (913,076) -- (913,076)
Proceeds from divestitures
of businesses, net of
cash divested, and other
asset sales.............. -- -- 2,123,115 -- 2,123,115
Other, net.................. -- -- (12,351) -- (12,351)
----------- --------- ----------- --------- -----------
Net cash provided by investing
activities.................. -- -- 1,033,875 -- 1,033,875
----------- --------- ----------- --------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
long-term debt........... 40,000 -- 33,570 -- 73,570
Principal payments on long-
term debt................ (1,914,899) (594,081) (294,097) -- (2,803,077)
Proceeds from exercise of
common stock options and
warrants................. 1,222 -- -- -- 1,222
(Increase) decrease in
intercompany and
investments, net......... 2,073,780 687,490 (2,761,270) -- --
----------- --------- ----------- --------- -----------
Net cash provided by (used in)
financing activities........ 200,103 93,409 (3,021,797) -- (2,728,285)
----------- --------- ----------- --------- -----------
Effect of exchange rate
changes on cash and cash
equivalents................. -- -- (4,855) -- (4,855)
----------- --------- ----------- --------- -----------
Increase (decrease) in cash
and cash equivalents........ 22,265 4,610 (63,435) -- (36,560)
Cash and cash equivalents at
beginning of period......... 33,690 4,496 143,171 -- 181,357
----------- --------- ----------- --------- -----------
Cash and cash equivalents at
end of period............... $ 55,955 $ 9,106 $ 79,736 $ -- $ 144,797
=========== ========= =========== ========= ===========
</TABLE>
29
<PAGE> 31
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<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, net of
taxes.................... 114,091 (14,235) -- (99,856) --
Other adjustments and
changes.................. 13,600 29,392 1,480,876 -- 1,523,868
----------- --------- ----------- -------- -----------
Net cash provided by (used in)
operating activities........ (155,132) (98,934) 1,495,111 -- 1,241,045
----------- --------- ----------- -------- -----------
Cash flows from investing
activities:
Short-term investments...... -- -- 11,039 -- 11,039
Acquisitions of businesses,
net of cash acquired..... -- -- (1,181,833) -- (1,181,833)
Capital expenditures........ -- -- (876,900) -- (876,900)
Proceeds from divestitures
of businesses, net of
cash divested, and other
asset
sales.................... -- -- 558,918 -- 558,918
Other, net.................. -- -- (72,523) -- (72,523)
----------- --------- ----------- -------- -----------
Net cash used in investing
activities.................. -- -- (1,561,299) -- (1,561,299)
----------- --------- ----------- -------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
long-term debt........... 3,606,510 -- 161,126 -- 3,767,636
Principal payments on long-
term debt................ (2,942,577) (148,427) (394,587) -- (3,485,591)
Proceeds from exercise of
common stock options and
warrants................. 175,444 -- -- -- 175,444
(Increase) decrease in
amounts due to and from
subsidiaries, net........ (644,258) 298,388 345,870 -- --
----------- --------- ----------- -------- -----------
Net cash provided by
financing activities..... 195,119 149,961 112,409 -- 457,489
----------- --------- ----------- -------- -----------
Effect of exchange rate
changes on cash and cash
equivalents.............. -- -- (2,246) -- (2,246)
----------- --------- ----------- -------- -----------
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>
30
<PAGE> 32
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
In October 2000, the Company retired approximately $250 million of senior
notes at an interest rate of 6.25% with proceeds from the Syndicated Facility.
On October 31, 2000, one of the Company's wholly-owned subsidiaries
completed the sale of its waste services operations in Indonesia for
approximately $10 million.
In November 2000, the Company announced that its wholly-owned subsidiary,
Wheelabrator Environmental Systems, Inc., has reached agreement to sell eight
independent power plants in the United States to Duke Solutions, a wholly-owned
subsidiary of Duke Energy, for approximately $81 million. The Company expects
the sale to be completed in the fourth quarter of 2000. The Company also
announced in November 2000, that its wholly-owned subsidiary had sold its coal
services business to The Savage Group for approximately $55 million.
31
<PAGE> 33
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 Exchange Act. 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 operations. The words "may," "could,"
"should," "expect," "believe," "anticipate," "project," "estimate," "plan," 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 impact of pending or threatened litigation and/or governmental
inquiries and investigation involving the Company.
- the Company's ability to stabilize its accounting systems and procedures
and maintain stability.
- the uncertainties to the Company's proposed strategic initiative,
including the willingness of prospective purchasers to purchase the
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.
- 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 pre-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 final 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 Company's ability to generate sufficient cash flows from operations
to cover its cash needs, the Company's ability to obtain additional
capital if needed and the possible default under credit facilities if
cash flows are lower than expected or capital expenditures are greater
than expected.
32
<PAGE> 34
- the potential changes in estimates from ongoing analysis of site
remediation requirements, final 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 effect of price fluctuations of recyclable materials processed by the
Company.
- certain risks that are inherent in operating in foreign countries that
are beyond the control of the Company, including but not limited to
political, social, and economic instability and government regulations.
- the potential impairment charges against earnings related to long-lived
assets which may result from possible future business events.
- the effect that recent trends regarding mandating recycling, waste
reduction at the source and prohibiting the disposal of certain types of
wastes could have on volumes of waste going to landfills and
waste-to-energy facilities.
- the potential impact of government regulation on the Company's ability to
obtain and maintain necessary permits and approvals required for
operations.
INTRODUCTION
Strategic Plan
In August 1999, the Company's Board of Directors adopted a strategic plan
that is intended to enhance value for its shareholders, customers, and
employees. The plan's major elements are to:
- Dispose of the Company's non-strategic and under-performing assets,
including the Company's international operations outside North America
("WM International"), its non-core operations and selected North American
solid waste ("NASW") operations.
- Maintain or improve the Company's long-term investment grade
characteristics while using disposition proceeds for debt repayment,
repurchases of shares and selected tuck-in acquisitions.
- Bring more discipline and accountability to the enterprise while
continuing the Company's decentralized business model, which puts
authority close to the customer.
- Restore a disciplined capital allocation philosophy that focuses on
profits as opposed to growth.
- Give employees the tools they need to do their jobs, including updated
and more efficient information systems.
General
Waste Management is one of the largest publicly-owned companies providing
integrated waste management services in North America. The Company provides
solid waste management services throughout the United States and Puerto Rico, as
well as in Canada and Mexico, including collection, transfer, recycling and
resource recovery services, and disposal services. In addition, the Company is a
leading developer, operator and owner of waste-to-energy facilities in the
United States. The Company has also engaged in hazardous waste management
services throughout North America, as well as low-level and other radioactive
waste services and other non-solid waste operations. However, these operations
have been divested prior to September 30, 2000 or are being marketed for sale
pursuant to the Company's strategic plan.
Internationally, the Company has operated throughout Europe, the Pacific
Rim, South America and other select markets. Included in the Company's WM
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 has operated solid and
hazardous waste landfills, municipal and hazardous waste incinerators, water and
waste water treatment facilities, hazardous waste treatment facilities,
33
<PAGE> 35
waste-fuel powered independent power facilities, and constructs treatment or
disposal facilities for third parties internationally. As discussed above, the
Company is in the process of divesting its WM International operations and as of
September 30, 2000 had operations remaining only in Indonesia, Hong Kong,
Argentina, Brazil, Israel, and Sweden. However, agreements for the sale of
certain of these operations have been entered into or completed since the end of
the third quarter 2000. See Notes 2 and 12 to the condensed consolidated
financial statements contained elsewhere herein.
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
primarily 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 of waste being disposed of at the Company's disposal facilities. Fees are
charged at transfer stations based on the volume 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 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, accruals for future landfill final closure and post-closure costs,
and certain operational related insurance 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 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 environmentally related 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 certain related insurance costs as well as costs related
to the Company's marketing and sales force.
Depreciation and amortization includes (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 50 years; and (iv) amortization of landfill costs
on a units-of-consumption method as landfill airspace is consumed over the
estimated remaining capacity of a site. The remaining capacity of a site is
determined by the unutilized permitted airspace and expansion airspace when the
success of obtaining such an expansion is considered probable. Effective as of
the third quarter of 1999, the Company applied a newly defined, more stringent
set of criteria for evaluating the probability of obtaining an expansion to
landfill airspace at existing sites, which 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;
34
<PAGE> 36
- There are no significant known technical, legal, 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
- Airspace and related costs, including additional final closure and
post-closure 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 these criteria must be approved through a landfill specific
approval process that includes an approval from the Company's Chief Financial
Officer and review by the Audit Committee of the Board of Directors. Such
exceptions at 30 landfill locations at September 30, 2000 were generally due to
opposition to expansion efforts that could impede the expansion project and due
to permit application processes beyond the one-year limit, which in most cases
were due to state-specific permitting procedures. Generally, the Company has
been successful in obtaining landfill expansions pursued; however, there can be
no assurance that the Company will be successful in obtaining landfill
expansions in the future.
As disposal volumes are affected by seasonality and competitive factors,
airspace amortization varies from period to period due to changes in volumes of
waste disposed at the Company's landfills. Airspace amortization is also
affected by changes in engineering and cost estimates.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
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.
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERIOD TO PERIOD
CHANGE FOR THE CHANGE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 AND 1999 2000 AND 1999
-------------------- ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Operating revenues................................ $ (270,403) (8.0)% $(182,793) (1.9)%
----------- ------ --------- ------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below).................... (707,293) (27.4) (299,410) (4.9)
General and administrative...................... (360,002) (46.7) 5,197 0.4
Depreciation and amortization................... (86,355) (19.1) (123,403) (10.3)
Merger and acquisition related costs............ (31,568) (100.0) (111,263) (100.0)
Asset impairments and unusual items............. (317,718) (46.7) (28,786) (4.1)
----------- ------ --------- ------
(1,502,936) (33.3) (557,665) (5.9)
----------- ------ --------- ------
Income (loss) from operations..................... 1,232,533 110.1 374,872 105.2
----------- ------ --------- ------
Other income (expense):
Interest expense................................ 10,181 5.4 (38,558) (7.0)
Minority interest............................... (922) (19.6) (482) (2.7)
Interest and other income, net.................. (17,953) (61.8) (27,560) (40.5)
----------- ------ --------- ------
(8,694) (5.3) (66,600) (13.3)
----------- ------ --------- ------
Income (loss) before income taxes................. 1,223,839 95.3 308,272 215.5
Provision for (benefit from) income taxes......... 466,908 139.0 160,973 115.2
----------- ------ --------- ------
Net loss.......................................... $ 756,931 79.9% $ 147,299 52.1%
=========== ====== ========= ======
</TABLE>
35
<PAGE> 37
The following table presents, for the periods indicated, the percentage
relationship that the various condensed consolidated statements of operations
line items bear to operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<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)...................... 59.9 76.0 60.1 62.1
General and administrative........................ 13.2 22.7 14.1 13.7
Depreciation and amortization..................... 11.7 13.3 11.2 12.3
Merger and acquisition related costs.............. -- 0.9 -- 1.1
Asset impairments and unusual items............... 11.6 20.1 7.0 7.2
----- ----- ----- -----
96.4 133.0 92.4 96.4
----- ----- ----- -----
Income (loss) from operations....................... 3.6 (33.0) 7.6 3.6
----- ----- ----- -----
Other income (expense):
Interest expense.................................. (5.7) (5.6) (6.1) (5.6)
Minority interest................................. (0.2) (0.1) (0.2) (0.2)
Interest and other income, net.................... 0.4 0.9 0.4 0.7
----- ----- ----- -----
(5.5) (4.8) (5.9) (5.1)
----- ----- ----- -----
Income (loss) before income taxes................... (1.9) (37.8) 1.7 (1.5)
Provision for (benefit from) income taxes........... 4.2 (9.9) 3.1 1.4
----- ----- ----- -----
Net loss............................................ (6.1)% (27.9)% (1.4)% (2.9)%
===== ===== ===== =====
</TABLE>
As previously reported in the Company's Form 10-Q for the quarter ended
September 30, 1999 and the Company's Form 10-K for the year ended December 31,
1999, the Company concluded that its internal controls for the preparation of
interim financial information during 1999 did not provide an adequate basis for
its independent public accountants to complete reviews of the 1999 quarterly
financial information in accordance with standards established by the American
Institute of Certified Public Accountants.
The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts have enabled
the Company to produce timely and reliable interim financial statements as of
September 30, 2000 and for the three and nine months then ended to allow its
independent public accountants to complete their reviews of the interim
financial information for those periods. Management believes that its processes
have improved considerably and will continue to improve throughout 2000,
allowing it to further reduce its reliance on the use of external resources as
mitigating controls, although there can be no assurance that this will be the
case.
The Company's principal business is its NASW operations, 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
through its WM International operations. As previously discussed, the Company's
Board of Directors adopted a plan in 1999 to divest its WM International
operations and as of September 30, 2000, had completed the divestiture of all WM
International operations, except those in Indonesia, Hong Kong, Brazil,
Argentina, Israel, and Sweden.
Additionally, the Company has performed certain non-solid waste services,
primarily in North America, such as low-level and other radioactive waste
management, waste-fuel powered independent power facilities and a geosynthetic
lining manufacturing and installation service operation. However, on June 9,
2000 one of
36
<PAGE> 38
the Company's subsidiaries completed the sale of substantially all of its
low-level and other radioactive waste service operations and the remaining
operations were sold on August 31, 2000. Additionally, the Company recently
announced that one of its wholly-owned subsidiaries has reached an agreement to
sell its independent power plants. Furthermore, in the third quarter of 2000,
the Company classified its geosynthetic manufacturing and installation service
operation as held-for-sale and has begun to actively market this operation.
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 located in North America. However, the Company sold a 51% interest in
these operations to Vivendi on June 30, 1999 and sold the remaining 49% interest
to a subsidiary of Vivendi on August 31, 2000. The Company's retained interest
of 49% was accounted for using the equity method of accounting prior to its sale
in August 2000.
Operating Revenues
For the three months ended September 30, 2000, the Company's operating
revenues decreased $270.4 million or 8.0% and for the nine months ended
September 30, 2000, decreased $182.8 million or 1.9% as compared to the
respective corresponding 1999 periods. The following table presents the
operating revenues by reportable segment for the respective quarters (dollars in
millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW..................... $2,874.3 92.0% $2,758.3 81.2% $8,496.0 88.4% $7,956.5 81.3%
WM International......... 131.1 4.2 442.9 13.1 756.8 7.9 1,200.7 12.3
Non-solid waste.......... 119.2 3.8 193.9 5.7 354.9 3.7 633.3 6.4
-------- ----- -------- ----- -------- ----- -------- -----
Operating revenues..... $3,124.6 100.0% $3,395.1 100.0% $9,607.7 100.0% $9,790.5 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The decrease in the Company's operating revenues for the three and nine
months ended September 30, 2000 as compared to the corresponding 1999 periods is
primarily due to divestitures of WM International and non-solid waste
operations, which occurred in 2000. 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,
----------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW:
Collection........... $1,959.4 57.6% $1,946.0 59.8% $ 5,784.8 57.6% $ 5,630.9 59.8%
Disposal............. 887.8 26.1 837.5 25.7 2,562.1 25.5 2,437.7 25.9
Transfer............. 362.5 10.7 309.0 9.4 1,055.3 10.5 889.4 9.4
Recycling and
other.............. 190.0 5.6 166.4 5.1 642.6 6.4 462.8 4.9
-------- ----- -------- ----- --------- ----- --------- -----
3,399.7 100.0% 3,258.9 100.0% 10,044.8 100.0% 9,420.8 100.0%
===== ===== ===== =====
Intercompany........... (525.4) (500.6) (1,548.8) (1,464.3)
-------- -------- --------- ---------
Operating revenues..... $2,874.3 $2,758.3 $ 8,496.0 $ 7,956.5
======== ======== ========= =========
</TABLE>
The increase in operating revenues for the three and nine months ended
September 30, 2000 for NASW as compared to the prior year periods is primarily
attributable to internal growth of comparable operations. The increase in
operating revenues due to internal growth of NASW operations was $82.5 million
and $370.1 million, or 3.0% and 4.7%, for the three and nine months ended
September 30, 2000, respectively. Internal growth for the three and nine months
ended September 30, 2000, respectively, was comprised of 1.3% and 1.5% for
pricing increases and 1.7% and 3.2% for volume increases. The improvements in
pricing were favorably impacted by the improvements in the commodities markets
for recyclable materials as well as a fuel surcharge that was implemented in
certain operations during March 2000. Excluding the impact of price increases in
the commodity markets for recyclable materials, and the fuel surcharge
implemented by the Company, the Company experienced a base price change of 0.6%
in the three months ended September 30, 2000, as compared to the prior year
period. Additionally, the Company's NASW operating revenues increased
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<PAGE> 39
$65.9 million and $242.1 million for the three and nine months ended September
30, 2000, respectively, due to acquisitions primarily of collection operations.
However, the increase in operating revenues was partially offset by a decline in
operating revenues of $32.8 million and $76.1 for the three and nine months
ended September 30, 2000, associated with divestitures of NASW businesses.
The operating revenues from the Company's WM International operations
decreased $311.8 million, or 70.4%, for the three months ended September 30,
2000, and $443.9 million, or 36.9%, for the nine months ended September 30,
2000, as compared to the prior year periods. Operating revenues decreased $303.8
million and $477.1 million for the three and nine months ended September 30,
2000, respectively, due to divestitures of certain WM International operations.
Operating revenues from the Company's WM International operations were also
negatively impacted by fluctuations in foreign currency of $12.3 million and
$66.6 million for the three and nine months ended September 30, 2000,
respectively. Offsetting these decreases in operating revenues in the Company's
WM International operations was internal growth of comparable operations of 1.4%
and 2.0% for the three and nine months ended September 30, 2000, respectively.
Operating revenues for non-solid waste services decreased for the three and
nine months ended September 30, 2000 as compared to the prior year periods due
to divestitures of operations. The Company expects decreasing operating revenues
from its non-solid waste operations in future periods as the Company has sold or
is actively marketing for sale its remaining non-solid waste operations.
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses decreased $707.3 million or 27.4% and $299.4
million or 4.9% for the three and nine months ended September 30, 2000,
respectively, as compared to the prior year periods. As a percentage of
operating revenues, operating costs and expenses were 59.9% and 76.0% for the
three months ended September 30, 2000 and 1999, respectively, and 60.1% and
62.1% for the nine months ended September 30, 2000 and 1999, respectively. The
Company realized certain short-term cost reductions through the first half of
1999 from its integration plan that was adopted in connection with the Company's
merger with Waste Management Holdings, Inc. ("WM Holdings") which was completed
in July 1998 (the "WM Holdings Merger"). The integration plan included
significant employee headcount reductions (particularly supervisory operating
personnel), the elimination of excess operating capacity through the sale or
abandonment of certain assets and operations, and the reconfiguration of
operations within certain domestic markets in which the Company operates.
However, due to the breadth and comprehensive nature of the changes the Company
attempted to implement in 1999, the Company was unable to sustain the
effectiveness of its integration plan. As a result, operating costs and expenses
increased significantly as a percentage of revenues in the second half of 1999
and early 2000. Additionally, as discussed in the Company's Form 10-K for the
year ended December 31, 1999, the Company recorded significant adjustments in
the quarter ended September 30, 1999. The Company believes that certain of the
charges that were recorded in the third quarter of 1999 may relate to individual
prior quarters. If identification of all specific charges attributable to
individual periods prior to the third quarter of 1999 were possible, the Company
believes that the reported operating costs and expenses for the third quarter of
1999 would have been favorably impacted, and the reported operating costs and
expenses for the first and second quarters of 1999 would have been adversely
impacted.
As part of its ongoing 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,
site-specific environmental issues and remaining airspace capacity in light of
changes in operational efficiencies. Accordingly, revisions to remediation
reserve requirements may result in upward or downward adjustments to income from
operations in any given period. Adjustments for final closure and post-closure
estimates are accounted for prospectively over the remaining capacity of the
operating landfill. The impact of revisions to remedial, environmental and other
similar liabilities resulted in a reduction of operating costs and expenses as a
percentage of revenues of 0.8% for the nine months ended September 30, 1999.
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<PAGE> 40
General and Administrative
General and administrative expenses decreased $360.0 million or 46.7%
during the three months ended September 30, 2000, as compared to the prior year
period and increased $5.2 million or 0.4% during the nine months ended September
30, 2000 as compared to the prior year period. As a percentage of operating
revenues, the Company's general and administrative expenses were 13.2% and
14.1%, and 22.7% and 13.7% for the three and nine months ended September 30,
2000 and 1999, respectively. As discussed above, the Company believes it
experienced short-term cost reductions related to the elimination of duplicate
corporate administrative functions from the WM Holdings Merger through the
second quarter of 1999. Such cost reductions were substantially offset in the
second half of 1999 and the first half of 2000 by the effect of difficulties
encountered by the Company in integrating the operations of WM Holdings,
including increased administrative costs in field operations attributable to
increased costs to perform billing, collections and other administrative
functions. Additionally, as discussed in the Company's Form 10-K for the year
ended December 31, 1999, the Company recorded significant adjustments in the
quarter ended September 30, 1999. The Company believes that certain of the
charges that were recorded in the third quarter of 1999 may relate to individual
prior quarters. If identification of all specific charges attributable to
individual periods prior to the third quarter of 1999 were possible, the Company
believes that the reported general and administrative expenses for the third
quarter of 1999 would have been favorably impacted, and the reported general and
administrative expenses for the first and second quarters of 1999 would have
been adversely impacted.
Depreciation and Amortization
Depreciation and amortization expense decreased $86.4 million or 19.1% and
$123.4 million or 10.3% for the three and nine months ended September 30, 2000
respectively, as compared to corresponding prior year periods. As a percentage
of operating revenues, depreciation and amortization expense was 11.7% and 13.3%
for the three months ended September 30, 2000 and 1999, respectively, and 11.2%
and 12.3% for the nine months ended September 30, 2000 and 1999, respectively.
The decrease in depreciation and amortization expense as a percentage of
operating revenues is primarily due to the suspension of depreciation on fixed
assets related to certain operations which were held-for-sale. The depreciation
suspension for the three and nine months ended September 30, 2000 for these
held-for-sale operations was $10.3 million and $93.3 million, or 0.3% and 1.0%
of operating revenues, respectively. As compared to the prior year periods,
depreciation and amortization expense for the three and nine months ended
September 30, 2000 was also reduced by divestitures of operations throughout
2000. However, these decreases in depreciation and amortization expense were
partially offset by increased landfill airspace amortization in the three and
nine months ended September 30, 2000 due to an increase in disposal volumes at
the Company's landfills. Additionally, for the nine months ended September 30,
2000, the Company experienced higher airspace amortization rates as compared to
the prior year period, due to its more stringent set of criteria for evaluating
the probability of obtaining landfill airspace expansions which was effective as
of the third quarter of 1999. Furthermore, as discussed in the Company's Form
10-K for the year ended December 31, 1999, the Company recorded significant
adjustments in the quarter ended September 30, 1999. The Company believes that
certain of the charges that were recorded in the third quarter of 1999 may
relate to individual prior quarters. If identification of all specific charges
attributable to individual periods prior to the third quarter of 1999 were
possible, the Company believes that the reported depreciation and amortization
for the third quarter of 1999 would have been favorably impacted, and the
reported depreciation and amortization for the first and second quarters of 1999
would have been adversely impacted.
Merger and Acquisition Related Costs, Asset Impairments and Unusual Items
The Company is continuing the process of settling its obligations under WM
Holdings' qualified defined benefit plan (the "Plan"). The Plan was terminated
as of October 31, 1999 in connection with the WM Holdings Merger. Termination
benefits that were paid to certain plan participants in the nine months ended
September 30, 2000 from the trust fund assets of the Plan as well as other
customary Plan period costs resulted in a non-cash charge to asset impairments
and unusual items of approximately $80.0 million and $170.0 million for the
three and nine months ended September 30, 2000, respectively.
39
<PAGE> 41
Additionally, the Company recorded a charge to asset impairments and
unusual items of approximately $97.9 million and $211.9 million for the three
and nine months ended September 30, 2000, respectively, related to net gains and
losses on operations divested during the respective periods. Furthermore, the
Company recorded charges of approximately $182.2 million and $284.6 million for
the three and nine months ended September 30, 2000, respectively, for operations
held-for-sale that have a carrying value greater than management's best current
estimate of anticipated proceeds. The Company monitors operations held-for-sale
on an ongoing basis to identify potential further impairments as they arise.
In connection with merger transactions that the Company completed in 1998,
the Company incurred $31.6 million and $111.3 million for the three and nine
months ended September 30, 1999. Such costs included transitional wages and
other reorganizational costs. Offsetting these costs for the nine months ended
September 30, 1999 was a cumulative adjustment of $15.6 million primarily to
conform accounting methods of the Company's ash monofil landfills to that of its
solid waste landfills.
Income (Loss) from Operations
Income from operations was $113.2 million and $731.2 million for the three
and nine months ended September 30, 2000, respectively, as compared to a loss of
$1.1 billion and income of $356.3 million for the corresponding periods of 1999.
Other Income and Expenses
Other income and expenses consists of interest expense, interest income,
other income and minority interest. The most significant of these is interest
expense. The increase in interest expense for the nine months ended September
30, 2000, as compared to the prior year nine month period, is primarily due to
the decline in the Company's public credit ratings during the last half of 1999.
This decline caused the Company to increase the use of its bank credit
facilities instead of the previously used commercial paper program, which
resulted in increased borrowing rates. The increase was also due to a general
market increase in interest rates since the third quarter of 1999. The decline
in interest expense during the three months ended September 30, 2000 as compared
to the prior year third quarter is due primarily to the Company's overall debt
reduction in 2000. Additionally contributing to period to period changes in
interest expense is the amount of interest that the Company has capitalized
during these periods. The Company capitalized interest of $6.4 million and $29.7
million in the three and nine months ended September 30, 1999, respectively as
compared to $5.9 million and $15.2 million during three and nine months ended
September 30, 2000, respectively.
Provision for (Benefit From) Income Taxes
The Company recorded a provision for income taxes of $131.1 million and
$300.8 million for the three and nine months ended September 30, 2000,
respectively. The Company recorded a benefit of $335.8 million and a provision
of $139.8 million for the three and nine months ended September 30, 1999,
respectively. The difference between the federal income taxes computed at the
federal statutory rate and the reported provision for income taxes for the three
and nine months ended September 30, 2000 is primarily due to state and local
income taxes, non-deductible costs related to acquired intangibles,
non-deductible held-for-sale impairment charges associated with certain
businesses, and non-deductible losses on the divestiture of assets that closed
during the respective periods. Excluding non-deductible held-for-sale impairment
charges associated with certain businesses, non-deductible losses on the
divestiture of assets that closed during the respective periods, and other
unusual items, the Company recorded a tax provision of 40.1% and 41.1% of
pre-tax income for the three and nine months ended September 30, 2000,
respectively.
Net Loss
For the three and nine months ended September 30, 2000, net loss was $190.8
million and $135.5 million, respectively, as compared to losses of $947.8
million and $282.8 million for the respective prior periods.
40
<PAGE> 42
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
construction and expansion of its landfill sites, as well as new trucks and
equipment for its collection operations, (iii) refurbishments and improvements
at its waste-to-energy facilities and (iv) business acquisitions. The Company's
strategy is to meet these capital needs first from internally generated funds.
Historically, the Company has also obtained financing from various financing
sources available to the Company at the time, including the incurrence of debt
and the issuance of its common stock. In August 1999, the Company announced a
strategic plan that included the sale of its WM International operations, its
non-core operations and selected NASW operations. The proceeds from these
dispositions, which are primarily expected to be realized in 2000 and the first
part of 2001, have been and are expected to continue to be utilized for debt
repayment, repurchase of shares or selected tuck-in acquisitions. Although the
Company has unused and available credit capacity under its domestic bank
facilities of $1.2 billion at September 30, 2000 and $1.0 billion at November 3,
2000, the Company expects reductions in bank line availability as debt levels
are decreased in connection with the strategic plan. In connection with its
strategic plan, the Company's acquisition activity has decreased as compared to
prior years and the divestiture activity has increased. As such, the Company's
level of capital expenditures is expected to decline along with its needs for
large amounts of credit capacity.
Under the terms of the Company's $1.6 billion syndicated loan facility (the
"Syndicated Facility") and its $1.5 billion senior revolving credit facility
(the "Credit Facility"), the Company is obligated to repay its indebtedness
under such facilities with the cash proceeds to be received from divestitures
pursuant to the Company's strategic plan, including divestitures of its WM
International operations, domestic non-core operations and selected NASW
operations. Specifically, the Company was required to utilize the first $1.5
billion of net proceeds from the divestitures to repay indebtedness, which it
has done. Additionally, the Company is required to use 50% of the additional net
proceeds greater than $1.5 billion and up to $2.5 billion from divestitures to
repay the indebtedness under the Syndicated and Credit Facilities. As of
September 30, 2000, the Company had received proceeds of approximately $2.1
billion from its divestitures, approximately $175 million of which was used to
repay the Company's Eurocurrency facilities in the second quarter of 2000,
approximately $100 million was used for repayment of divestiture subsidiary
debts and approximately $1.9 billion of which has been used to repay
indebtedness under the domestic facilities. Due to these terms, at September 30,
2000, the Company is obligated to utilize approximately $200 million of net
proceeds from the remaining scheduled divestitures to repay indebtedness under
such facilities. The Company intends to refinance this amount through the use of
the Credit Facility and Syndicated Facility and therefore, has classified these
borrowings as long-term.
As of September 30, 2000, the Company had a working capital deficit of
$833.2 million (a ratio of current assets to current liabilities of 0.79:1) and
a cash balance of $144.8 million, which compares to a working capital deficit of
$1.3 billion (a ratio of current assets to current liabilities of 0.83:1) and a
cash balance of $181.4 million at December 31, 1999. For the nine months ended
September 30, 2000, cash used to acquire businesses of $217.5 million, capital
expenditures of $913.1 million and net debt reductions of approximately $2.7
billion were primarily financed with cash flows from operating activities of
$1.7 billion and proceeds from the sale of assets of $2.1 billion. Favorably
impacting cash flows from operations for the nine months ended September 30,
2000 was a tax refund of approximately $200 million and improvements in the
Company's accounts receivable average days sales outstanding. For the nine
months ended September 30, 1999, cash used to acquire businesses of $1.2 billion
and capital expenditures of $876.9 were primarily financed with cash flows from
operating activities of $1.2 billion, proceeds from the sale of assets of $558.9
million, and net debt proceeds of $282.0 million.
Through September 30, 2000, the Company repurchased, for cash,
approximately $397 million of its 5.75% convertible subordinated notes due 2005
that were outstanding at December 31, 1999 with funds available from internally
generated cash flows and its domestic credit facilities. In October 2000, the
Company retired approximately $250 million of senior notes at an interest rate
of 6.25% with proceeds from the Syndicated Facility.
41
<PAGE> 43
On July 17, 1998, the Company issued $600 million of 6 1/8% mandatorily
tendered senior notes, due on July 15, 2011. This debt instrument is subject to
certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to use borrowings available under
the Syndicated Facility and/or the Credit Facility in the event it must purchase
the notes on July 15, 2001. Accordingly, these borrowings have been classified
as long-term at September 30, 2000.
As described in Note 5 to the consolidated financial statements contained
elsewhere herein, the Company funded approximately $124.0 million to the trust
of WM Holdings' qualified defined benefit plan in September of 2000. The Company
expects to settle its remaining obligations in conjunction with the termination
of the plan during the fourth quarter of 2000 at which time the Company expects
to make payments of approximately $61.0 million to the plan's trust.
As a result of financial difficulties experienced during the second quarter
of 2000 by one of the Company's surety bond providers, it became necessary for
the Company to obtain replacement bonding for this surety's financial assurance
bonds. Arrangements for replacement financial assurance have been completed and
the Company has available sufficient surety capacity to meet its ongoing
operating requirements.
The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the
landfills and the capping of the final uncapped areas of the landfills, and for
post-closure of the landfills it operates or for which it is otherwise
responsible. The final closure and post-closure liabilities are charged to
expense as airspace is consumed such that the present value of total estimated
final closure and post-closure cost will be accrued for each landfill at the
time each site discontinues accepting waste and is closed. The Company has also
established procedures to evaluate its potential remedial liabilities at closed
sites which it owns or operated, or to which it transported waste, including 86
sites listed on the NPL. The majority of situations involving NPL sites relate
to allegations that subsidiaries of the Company (or their predecessors)
transported waste to the facilities in question, often prior to the acquisition
of such subsidiaries by the Company. In instances in which the Company has
concluded that it is probable that a liability has been incurred, an accrual has
been recorded in the financial statements.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the non-existence or inability of other
potentially responsible third parties to contribute to the settlements of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could have a material adverse impact on the Company's
financial statements.
RECENT DEVELOPMENTS
In August 2000, the Company announced its agreement with Reliant Energy to
develop 12 landfill gas-to-energy projects in Texas. Pursuant to the agreement,
the Company will gather, transport and deliver landfill gas to Reliant Energy at
each electric generation facility, which are being built at the Company's
landfill sites. The 12 "Green Power" projects are expected to produce a total of
44 megawatts of electricity, enough to power approximately 13,000 homes.
Additionally, in September 2000, the Company announced an agreement to sell 2.5
megawatts of electricity from the Monroe Livingston Power Production Plant in
Scottsville, N.Y. to Energy Cooperative of New York, Inc. The "Green Power"
source is landfill gas from the Company's Monroe Livingston landfill, which is
used to fuel engines, which, in turn, generate electricity.
In September 2000, two of the Company's wholly-owned subsidiaries entered
into a Final Project Agreement with the U.S. Environmental Protection Agency and
the Virginia Department of Environmental Quality for waste treatment projects at
two landfills in Virginia. The projects are part of the EPA's Project XL
42
<PAGE> 44
program, a national pilot program that allows state and local governments,
businesses and federal facilities to work with the EPA in developing innovative
strategies to test better or more cost-effective ways of achieving environmental
and public health protection.
On September 28, 2000, the Company announced that one of its wholly-owned
subsidiaries has entered into an agreement to sell its operations in Sweden to
Miljoservice Svergige AB, a subsidiary of SITA, and Sydkraft AB, for
approximately $191 million. The sale, which is expected to close in the fourth
quarter of 2000, is subject to the approval of regulatory authorities and
customary conditions.
In October 2000, the Company announced that it and Sony Electronics were
launching an electronics recycling program in the State of Minnesota. The "Sony
Only" program is a five-year agreement in which residential and commercial
customers are encouraged to bring their old Sony electronic items to designated
drop-off points for recycling at no cost. Also in October 2000, the Company
announced that it has signed an agreement with the U.S. Environmental Protection
Agency to research and develop landfill bioreactor and biocover projects. Phase
I of the five-year agreement begins with projects at the Company's Outer Loop
Recycling and Disposal Facility in Louisville, Kentucky.
On October 31, 2000, one of the Company's wholly-owned subsidiaries sold
its waste services operations in Indonesia for approximately $10 million.
In November 2000, the Company announced that its wholly-owned subsidiary,
Wheelabrator Environmental Systems Inc., has reached agreement to sell eight
independent power plants in the United States to Duke Solutions, a wholly-owned
subsidiary of Duke Energy, for approximately $81 million. The Company expects
the sale to be completed in the fourth quarter. The Company also announced in
November 2000 that its wholly-owned subsidiary had sold its coal services
business to The Savage Companies for approximately $55 million. Finally, in
November 2000, the Company announced that its wholly-owned subsidiary, Container
Recycling Alliance, L.P., will open a glass recycling facility for Gallo Glass
Company by February 2001 to meet Gallo's specifications of zero-tolerance for
non-glass materials.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, which amended certain guidance within
SFAS No. 133.
The Company is presently in the process of reviewing its contracts for
purposes of assessing the impact of the adoption of SFAS No. 133, as amended,
including identifying derivative instruments, determining fair market values of
derivatives, designating and documenting hedge relationships, and evaluating the
effectiveness of those hedging relationships. As a result of this review, the
Company has preliminarily determined that
43
<PAGE> 45
SFAS No. 133 will primarily be applicable to the Company's accounting for
commodity swap agreements and interest rate swap agreements. The Company expects
that, upon adoption of SFAS No. 133, as amended, the majority of its commodity
swap agreements will be designated as cash flow hedges and the majority of its
interest rate swap agreements will be designated as fair value hedges. Such
treatment will result in the difference between the derivatives' previous
carrying amounts and the related fair values being reported in the Company's
statement of comprehensive income or included as a component of net income,
reflected as a cumulative effect of change in accounting principle, net of
income taxes.
The efforts of the Company to date and during the fourth quarter of 2000
will enable the Company to adopt SFAS No. 133, as amended, on January 1, 2001.
The efforts of the Company completed to date respecting SFAS No. 133, as
amended, have led management to presently conclude the accounting prescribed by
SFAS No. 133, as amended, will likely not have a material effect on its
statement of financial position or results of operations. However, the actual
financial statement impact attributable to the adoption of SFAS No. 133, as
amended, may be different than currently anticipated as a consequence of changes
in:
(1) certain factors which may directly impact the quantification of fair
values of identified derivatives, which include, but are not limited
to, changes in interest rates and commodity prices, and
(2) the Company's assessment of its portfolio of derivative instruments
resulting from (i) the execution of additional contracts during the
fourth quarter of 2000 and (ii) the completion of certain of the
Company's efforts respecting the adoption of SFAS No. 133, as amended,
during the fourth quarter of 2000.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements, and it is required to be adopted by the Company in the fourth
quarter of 2000. Management does not expect that the adoption of SAB No. 101
will have a material effect on its consolidated financial statements.
PART II.
ITEM 1. LEGAL PROCEEDINGS.
In February 1998, WM Holdings announced a restatement of prior-period
earnings for 1991 and earlier as well as for 1992 through 1996 and the first
three quarters of 1997. Many actions were brought or claims made against WM
Holdings as a result of this restatement, as set forth in earlier quarterly and
year-end reports made by the Company. The Company has resolved many of these
actions and claims, as discussed in earlier filings.
The following actions with respect to WM Holdings, however, are still
outstanding.
In July 1998, a business owner who received WM Holdings common stock in the
sale of his business to WM Holdings brought a purported class action against
that company alleging breach of warranty. In October 1999, the court 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. In March 2000, the court of appeals upheld this
certification order. Also in March 2000, the trial court granted summary
judgment on the claim of breach of warranty against WM Holdings and in favor of
all members of the class except for a discrete group of plaintiffs whose claims
may have expired under applicable statutes of limitations. The class as
currently constituted consists of twenty-six transactions. The extent of damages
in this class action has not yet been determined.
In March 2000, a group of companies that sold their assets to WM Holdings
in exchange for common stock in March 1996 pursuant to an asset purchase
agreement (and who otherwise would have been included in the above class, as
currently defined), brought a separate action against the Company for breach of
contract and fraud, among other things. The parties are engaged in efforts to
resolve the dispute. The extent of damages
44
<PAGE> 46
in the underlying dispute has not yet been determined and will ultimately be set
by arbitration if a resolution is not reached by the parties.
In December 1999, a sole plaintiff brought an action against the Company,
five former officers of WM Holdings, and WM Holdings' auditors in Illinois state
court on behalf of a proposed class of individuals who purchased WM Holdings
common stock before November 3, 1994, and who held that stock through February
24, 1998, for alleged acts of common law fraud, negligence, and breach of
fiduciary duty. This action is in its early stages and the extent of possible
damages, if any, has not yet been determined.
A consolidated derivative action has also been filed in Delaware Chancery
Court, nominally on behalf of the Company, against certain former officers and
directors of WM Holdings and certain directors of the Company. The derivative
plaintiffs seek, among other things, those monies paid by the Company to resolve
those claims arising out of WM Holdings' restatement of earnings in February
1998 as well as a declaration that the Company does not have to pay retirement
benefits to certain former officers of WM Holdings.
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.
In March and April 1999, two former officers of WM Holdings sued the
Company for retirement and other benefits. Additionally, a third former officer
brought a similar action, which was subsequently dismissed without prejudice in
March 2000. The Company has reached agreements to settle the disputes between it
and each of these former officers.
In addition to the actions with respect to WM Holdings, the following
actions with respect to the Company or its other subsidiaries are pending.
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 and that its reported operating income for the
three months ended March 31, 1999 may have included certain unusual pretax
income items. More than 30 lawsuits that purport to be based on one or more of
these announcements were filed against the Company and certain of its current
and former 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 current and former officers and directors in the United States
District Court for the Eastern District of Texas. Pursuant to a joint motion,
this case was transferred to the United States District Court for the Southern
District of Texas, to be consolidated with the consolidated action pending
there. On May 8, 2000, the United States District Court for the Southern
District of Texas entered an order appointing the Connecticut Retirement Plan
and Trust Funds as lead plaintiff in the consolidated cases and appointing the
law firm of Goodkind Labaton Rudoff & Suchrow LLP as lead plaintiff's counsel.
The lead plaintiff filed its Amended Consolidated Class Action Complaint
(the "Complaint") on July 14, 2000. The Complaint pleads claims on behalf of a
putative class consisting of all purchasers of Company securities (including
common stock, debentures and call options), and all sellers of put options, from
June 11, 1998 through November 9, 1999. The Complaint also pleads additional
claims on behalf of two putative subclasses: (i) the "Merger Subclass,"
consisting of all persons who exchanged WM Holdings shares for the Company's
stock when WM Holdings and the Company merged, and (ii) the "Eastern Merger
Subclass," consisting of all persons who exchanged Eastern Environmental
Services, Inc. ("Eastern") stock for the Company's stock when Eastern and the
Company merged on December 31, 1998 (the "Eastern Merger"). Among other things,
the plaintiffs allege that the Company and certain of its current and former
officers and directors (i) made misrepresentations in the registration statement
and prospectus filed with the SEC in connection with the WM Holdings Merger,
(ii) made knowingly false earnings projections for the three months ended June
30, 1999, (iii) failed to adequately disclose facts relating to its earnings
projections that
45
<PAGE> 47
the plaintiffs allege would have been material to purchasers of the Company's
common stock and (iv) made separate and distinct misrepresentations about the
Company's operations and finances on and after July 29, 1999, culminating in the
Company's taking a pre-tax charge of $1.76 billion in the third quarter of 1999.
The plaintiffs also claim that certain of the Company's current and former
officers and directors sold common stock between May 10, 1999 and June 9, 1999
at prices allegedly known to have been inflated by the alleged material
misstatements and omissions. The plaintiffs in these actions seek damages with
interest, costs and such other relief as the court deems proper. Defendants
filed a motion to dismiss on October 3, 2000. The case is at an early stage and
the extent of possible damages, if any, cannot yet be determined.
On June 29, 2000, a putative class action was filed against the Company in
Delaware state court by a class of former shareholders of Eastern who exchanged
their Eastern shares for the Company's shares in the Eastern Merger. The
plaintiffs allege that the Company stock they received in exchange for their
Eastern shares was overvalued for the reasons alleged in the consolidated class
actions in Texas, described above. The claims and putative class members in this
case fall within the scope of the consolidated class actions in Texas. On August
4, 2000, the Company removed the case from the state court to the United States
District Court for the District of Delaware and moved to transfer the case to
the United States District Court for the Southern District of Texas, where the
consolidated Texas class actions are pending. On September 1, 2000, the
plaintiffs moved to remand the case to the Delaware state court and asked the
Delaware federal court to defer consideration of the Company's transfer motion
until it rules on the plaintiffs' remand motion. The Company has opposed the
remand motion. All motions currently are pending. The case is at an early stage,
and the extent of possible damages, if any, cannot yet be determined.
The Company has been sued in several lawsuits, and an arbitration action
has been initiated, by individuals who received common stock in the sales of
their businesses to the Company or to a company later acquired by the Company.
The arbitration action relates to the sale of a business to Eastern. For reasons
similar to those alleged in the class actions described above, or for reasons
related to the acquisition by the business by Eastern, the sellers of the
business allege that the stock received was overvalued. All of these matters are
in an early stage and the extent of possible damages, if any, cannot yet be
determined.
In addition, three of the Company's shareholders have filed purported
derivative lawsuits against certain current and former 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 Delaware Court of Chancery 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 Delaware cases
have been consolidated and the plaintiffs have filed an amended consolidated
complaint. The amended complaint alleges claims relating to the Company's 1999
annual and quarterly earnings, sales of Company stock by certain of the
Company's current and former officers and directors, and alleged self-dealing by
certain of the Company's current and former officers. 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
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 defendants have not yet been required to
respond to the complaints.
As part of the Company's investigation, the Company's Board of Directors
authorized its Special Committee I to conduct a full investigation and
evaluation of all matters relating to: (i) the reporting of the Company's first
and second quarter 1999 operating results; (ii) the sales of the Company's stock
by certain current and former corporate officials; and (iii) the allegations
made in pending litigation respecting these and certain other matters and to
report its findings and recommendations to those members of the Board of
Directors it finds are sufficiently disinterested to act upon its findings and
recommendations. Following its review of the Special Committees'
recommendations, the Board of Directors passed a resolution on September 25,
2000 directing the Company's management and counsel to take appropriate action
consistent with the Board's conclusions with respect to the issues under review.
These actions included direction to the Company's management and counsel to seek
a dismissal of the shareholder derivative actions described above.
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<PAGE> 48
Several related shareholders have filed a lawsuit in state court in Texas
against the Company and three of its former officers. The petition alleges that
the plaintiffs are substantial shareholders of the Company's common stock who
intended to sell their stock in 1999, but that the individual defendants made
false and misleading statements regarding the Company's prospects that induced
the plaintiffs to retain their stock. Plaintiffs assert that the value of their
retained stock declined dramatically. Plaintiffs asserted claims for fraud,
negligent misrepresentation, and conspiracy. The case is in an early stage and
the extent of damages, if any, cannot yet be determined.
The New York Stock Exchange has notified the Company that its Market
Trading Analysis Department is reviewing transactions in the common stock of the
Company prior to the July 6, 1999 earnings forecast announcement.
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. As of September 30, 2000, there were three proceedings
involving Company subsidiaries where the sanctions involved could potentially
exceed $100,000. The Company believes that these matters will not have a
material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty, and the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could materially alter this expectation at any time.
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 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"), or similar state
laws. The majority of these proceedings involve 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. CERCLA generally provides for joint and several
liability for those parties owning, operating, transporting to or disposing at
the sites. Such proceedings arising under Superfund typically involve numerous
waste generators and other waste transportation and disposal companies and seek
to allocate or recover costs associated with site investigation and cleanup,
which costs could be substantial and could have a material adverse effect on the
Company's financial statements.
47
<PAGE> 49
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"), one of the Company's
wholly-owned subsidiaries, 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 financial statements.
In August 1999, sludge materials from trucks entering the Company's
Woodland Meadows Landfill in Michigan were seized by the Federal Bureau of
Investigation 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 requests 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'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 financial statements.
As of September 30, 2000, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 86 locations
listed on the NPL. Of the 86 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 developed 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 69 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.
Any of these matters could have a material adverse effect on the Company's
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 the Company's BioGro business unit. The Company has divested of this business
unit, and has been indemnified for any liability as a result of the lawsuit by
the purchaser thereof.
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 was
based on events that allegedly occurred before the WM Holdings Merger in
connection with a WM Holdings landfill development project. The indictment
included 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. In October 2000, the Company
entered into a settlement with the County pursuant to which all criminal charges
filed against the Company and its subsidiaries will be dismissed. In connection
with the settlement, one of the Company's subsidiaries agreed to pay $4.95
million into the County's general fund for court and administrative costs
incurred by the County in connection with the proceedings and agreed to
reimburse the District Attorney and Sheriff's departments for their costs in the
investigation. Additionally, as part of the settlement, the County acknowledged
that the Company had been named as a defendant in error since the alleged events
the proceedings were based on occurred before the WM Holdings Merger and
therefore, the Company had no involvement in such events.
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<PAGE> 50
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 137 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.
The Company and the defendants filed motions for summary judgement with respect
to the 12 phase one sites. In August 2000, the court denied four of the
defendants' motions while granting one of the Company's motions. The court has
not yet ruled on the motions with respect to the remaining seven phase one
sites. Currently, no trial date has been set. The Company is unable at this time
to predict the outcome of this proceeding. No amounts have been recognized in
the Company's financial statements for potential recoveries.
It is not possible at this time to predict the impact that the above
lawsuits, proceedings, investigations 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, proceedings,
investigations 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. The outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty and these matters could have a
material adverse impact on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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.
(b) Reports on Form 8-K:
None.
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WASTE MANAGEMENT, INC.
By: /s/ WILLIAM L. TRUBECK
----------------------------------
William L. Trubeck
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
WASTE MANAGEMENT, INC.
By: /s/ BRUCE E. SNYDER
----------------------------------
Bruce E. Snyder
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Date: November 8, 2000
50
<PAGE> 52
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.
