<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 JUNE 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 August 4, 2000 was 621,594,978 (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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 103,545 $ 181,357
Accounts receivable, net.................................. 1,658,558 1,907,287
Parts and supplies........................................ 116,468 107,222
Deferred income taxes..................................... 293,726 298,433
Prepaid expenses and other................................ 148,190 190,744
Operations held for sale.................................. 2,055,674 3,535,502
----------- -----------
Total current assets............................... 4,376,161 6,220,545
Property and equipment, net................................. 10,123,759 10,303,803
Excess of cost over net assets of acquired businesses,
net....................................................... 5,203,523 5,185,909
Other intangible assets, net................................ 163,708 170,768
Other assets................................................ 789,415 800,399
----------- -----------
Total assets....................................... $20,656,566 $22,681,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 940,591 $ 1,062,536
Accrued liabilities....................................... 1,375,905 1,512,873
Deferred revenues......................................... 387,987 407,084
Current maturities of long-term debt...................... 2,063,106 3,098,742
Operations held for sale.................................. 596,158 1,408,220
----------- -----------
Total current liabilities.......................... 5,363,747 7,489,455
Long-term debt, less current maturities..................... 8,054,610 8,399,346
Deferred income taxes....................................... 848,190 729,902
Environmental liabilities................................... 842,232 837,407
Other liabilities........................................... 808,516 815,028
----------- -----------
Total liabilities.................................. 15,917,295 18,271,138
----------- -----------
Minority interest in subsidiaries........................... 9,302 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; 629,108,090 and 627,283,618 shares issued,
respectively............................................ 6,291 6,273
Additional paid-in capital................................ 4,486,061 4,440,159
Retained earnings......................................... 718,064 662,746
Accumulated other comprehensive income (loss)............. (323,405) (563,086)
Restricted stock unearned compensation.................... (3,874) (3,936)
Treasury stock at cost, 121,859 and 73,709 shares,
respectively............................................ (3,208) (3,890)
Employee stock benefit trust at market, 7,892,612
shares.................................................. (149,960) (135,654)
----------- -----------
Total stockholders' equity......................... 4,729,969 4,402,612
----------- -----------
Total liabilities and stockholders' equity......... $20,656,566 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues............................. $3,265,711 $3,324,775 $6,483,020 $6,395,410
---------- ---------- ---------- ----------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below)................. 1,949,143 1,836,193 3,904,859 3,496,976
General and administrative................... 444,830 297,704 938,841 573,642
Depreciation and amortization................ 362,308 393,433 712,717 749,765
Merger and acquisition related costs......... -- 62,211 -- 79,695
Asset impairments and unusual items.......... 216,444 19,750 308,682 19,750
---------- ---------- ---------- ----------
2,972,725 2,609,291 5,865,099 4,919,828
---------- ---------- ---------- ----------
Income from operations......................... 292,986 715,484 617,921 1,475,582
---------- ---------- ---------- ----------
Other income (expense):
Interest expense............................. (199,598) (184,911) (409,807) (361,068)
Interest income.............................. 6,041 5,663 14,889 8,481
Minority interest............................ (6,597) (6,547) (12,569) (13,009)
Other income................................. 12,312 16,215 14,563 30,578
---------- ---------- ---------- ----------
(187,842) (169,580) (392,924) (335,018)
---------- ---------- ---------- ----------
Income before income taxes..................... 105,144 545,904 224,997 1,140,564
Provision for income taxes..................... 104,829 227,642 169,679 475,614
---------- ---------- ---------- ----------
Net income..................................... $ 315 $ 318,262 $ 55,318 $ 664,950
========== ========== ========== ==========
Basic earnings per common share................ $ -- $ 0.52 $ 0.09 $ 1.10
========== ========== ========== ==========
Diluted earnings per common share.............. $ -- $ 0.50 $ 0.09 $ 1.05
========== ========== ========== ==========
Weighted average number of common shares
outstanding.................................. 621,065 610,904 620,807 606,677
========== ========== ========== ==========
Weighted average number of common and dilutive
potential common shares outstanding.......... 622,860 646,716 621,998 644,719
========== ========== ========== ==========
</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
OTHER
ADDITIONAL COMPREHENSIVE RESTRICTED STOCK
PREFERRED COMMON PAID-IN RETAINED INCOME UNEARNED TREASURY
STOCK STOCK CAPITAL EARNINGS (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 income.......................... -- -- -- 55,318 -- -- --
Common stock issued upon exercise of
stock options and warrants and
grants of restricted stock
(including tax benefit)........... -- 2 782 -- -- (685) 1,847
Earned compensation related to
restricted stock.................. -- -- -- -- -- 747 --
Common stock issued (purchased) in
connection with litigation
settlements....................... -- 11 17,141 -- -- -- (1,165)
Adjustment of employee stock benefit
trust to market value............. -- -- 14,306 -- -- -- --
Adjustment for minimum pension
liability, net of taxes........... -- -- -- -- 56,450 -- --
Cumulative translation adjustment of
foreign currency statements
including effects of
divestitures...................... -- -- -- -- 183,231 -- --
Other............................... -- 5 13,673 -- -- -- --
------- ------ ---------- -------- --------- ------- -------
Balance, June 30, 2000............... $ -- $6,291 $4,486,061 $718,064 $(323,405) $(3,874) $(3,208)
======= ====== ========== ======== ========= ======= =======
<CAPTION>
EMPLOYEE
STOCK
BENEFIT TRUST
-------------
<S> <C>
Balance, December 31, 1999........... $(135,654)
Net income.......................... --
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...................... --
Other............................... --
---------
Balance, June 30, 2000............... $(149,960)
=========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 55,318 $ 664,950
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts................................ 28,411 19,316
Depreciation and amortization.......................... 712,717 749,765
Deferred income tax provision.......................... 79,790 247,007
Net gain on disposal of assets......................... (5,704) (17,532)
Minority interest in subsidiaries...................... 12,569 13,009
Effect of asset impairments and unusual items.......... 308,682 --
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable and other receivables............ 210,522 (324,920)
Prepaid expenses and other current assets............ (19,658) (18,567)
Other assets......................................... 7,042 32,335
Accounts payable and accrued liabilities............. (259,616) (351,124)
Deferred revenues and other liabilities.............. (25,681) (271,101)
Other, net........................................... (1,996) 9,177
----------- -----------
Net cash provided by operating activities................... 1,102,396 752,315
----------- -----------
Cash flows from investing activities:
Short-term investments.................................... 53,733 (6,273)
Acquisitions of businesses, net of cash acquired.......... (169,320) (644,515)
Capital expenditures...................................... (563,882) (614,085)
Proceeds from divestitures of businesses and other asset
sales.................................................. 1,082,931 546,694
Other, net................................................ (17,939) 11,649
----------- -----------
Net cash provided by (used in) investing activities......... 385,523 (706,530)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 73,570 1,814,647
Principal payments on long-term debt...................... (1,636,569) (2,033,281)
Proceeds from exercise of common stock options and
warrants............................................... 1,222 165,110
----------- -----------
Net cash used in financing activities....................... (1,561,777) (53,524)
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... (3,954) 1,865
----------- -----------
Decrease in cash and cash equivalents....................... (77,812) (5,874)
Cash and cash equivalents at beginning of period............ 181,357 86,873
----------- -----------
Cash and cash equivalents at end of period.................. $ 103,545 $ 80,999
=========== ===========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net income........................................ $ 315 $318,262 $ 55,318 $ 664,950
-------- -------- -------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment......... 262,578 (42,471) 183,231 (104,016)
Minimum pension liability adjustment, net of
taxes of $5,371 and $35,939 for the three and
six months ended June 30, 2000............... 8,437 -- 56,450 --
-------- -------- -------- ---------
Other comprehensive income (loss)................. 271,015 (42,471) 239,681 (104,016)
-------- -------- -------- ---------
Comprehensive income.............................. $271,330 $275,791 $294,999 $ 560,934
======== ======== ======== =========
</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
first and second quarters of 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 June 30, 2000 and for the three and six 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 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 CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Bank credit facilities..................................... $ 1,535,000 $ 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............................................. 6,554,640 6,749,785
4% Convertible subordinated notes due 2002................. 535,275 535,275
5.75% Convertible subordinated notes due 2005.............. 30,827 426,726
Tax-exempt and project bonds, principal payable in periodic
installments, maturing through 2021, fixed and variable
interest rates ranging from 4.85% to 9.25% at June 30,
2000..................................................... 1,198,634 1,234,668
Installment loans, notes payable, and other, interest to
14%, maturing through 2015............................... 263,340 279,735
----------- -----------
10,117,716 11,498,088
Less current maturities.................................... 2,063,106 3,098,742
----------- -----------
$ 8,054,610 $ 8,399,346
=========== ===========
</TABLE>
At June 30, 2000, the Company had a $2.6 billion syndicated loan facility
(the "Syndicated Facility") and a $1.8 billion senior revolving credit facility
(the "Credit Facility"). The Syndicated Facility requires annual renewal by the
lender and provides for a one-year term option at the Company's request in the
event of non-renewal. 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 bank
loans and letters of credit, to fund acquisitions, and for working capital
purposes.
At June 30, 2000, the Company had borrowings of approximately $1.2 billion
under the Syndicated Facility at an average interest rate of 7.6%, and had
borrowings of $281.0 million under the Credit Facility at 7.8% interest. The
facility fees were 0.20% and 0.25% per annum under the Syndicated Facility and
Credit Facility, respectively, at June 30, 2000. The Company had issued letters
of credit of approximately $1.3 billion in aggregate under the Syndicated
Facility and Credit Facility leaving unused and available aggregate credit
capacity of approximately $1.6 billion at June 30, 2000.
The Company obtained amendments to the Syndicated Facility and Credit
Facility agreements for the quarter ended March 31, 2000. On July 10, 2000, the
Company renewed its Syndicated Facility in the amount of $2 billion for an
additional one-year period and renewed its Credit Facility in the amount of $1.7
billion with a maturity date of August 7, 2002. Certain financial covenants to
the Syndicated Facility and the Credit Facility were also amended. Terms and
conditions contained in the new and amended agreements are substantially the
same as prior agreements.
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 to be received from the divestitures of its international operations
outside North America ("WM International"), domestic non-core assets and up to
10% of its North America solid waste ("NASW") operations. Specifically, the
Company is required to utilize the first $1.5 billion of net proceeds from
divestitures to repay indebtedness and 50% of the net proceeds greater than $1.5
billion of proceeds but less than $2.5 billion to repay the indebtedness,
subject to certain requirements to repay the Company's Eurocurrency facilities
with proceeds from WM International divestitures. All net proceeds from the
divestiture of the Company's WM International operations were required to
7
<PAGE> 9
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first be used to repay indebtedness under the Company's Eurocurrency facilities,
all of which indebtedness has been repaid.
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 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 March 31, 2000, the Company
repurchased, for cash, $396.7 million of these notes that were outstanding at
December 31, 1999. The Company did not repurchase any of these notes during the
second quarter of 2000.
It is the Company's intention to refinance approximately $250 million of
outstanding short-term borrowings through the use of existing committed
long-term bank credit agreements in the event that alternative long-term
refinancing is not arranged. Accordingly, these borrowings have been classified
as long-term at June 30, 2000.
2. DIVESTITURES
On March 31, 2000, the Company completed the purchase of certain of the
Canadian solid waste assets of Allied Waste Industries, Inc. ("Allied"). Under
separate agreements, Allied contracted to purchase certain of the Company's
domestic solid waste operations, including a total of ten landfill operations,
14 collection operations, four transfer stations and a landfill operating
contract for approximately $191 million. On February 15, 2000, the Company
completed the sale to Allied of seven similar collection operations, a landfill
operation and a transfer station. On May 1, 2000, the Company completed the sale
to Allied of six collection operations, five landfill operations and three
transfer stations and on May 31, 2000 completed the sale to Allied of an
additional two landfill operations. The final transactions were completed in
August 2000. See Note 12.
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, and the majority interest in
Waste Management New Zealand Limited. In May 2000, a wholly-owned subsidiary of
the Company sold its waste services operations in Thailand to Modern Asia
Environmental, Ltd. and its waste services operations in Italy to Emas S.p.A.
and Italcogim S.p.A. In June 2000, the Company announced that its wholly-owned
subsidiaries completed the sales of its waste service operations in Australia to
SITA, the waste services sector of Suez Lyonnaise des Eaux ("SITA"), and its
waste services operations in Germany to Cleanaway Deutscheland Holdings GmbH.
Additionally, one of the Company's wholly-owned subsidiaries sold substantially
all of its nuclear waste services operations located in the United States to GTS
Duratek, Inc.
8
<PAGE> 10
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All divestiture activity relates to operations classified as held-for-sale.
The following information summarizes the Company's divestiture activity through
June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED:
March 31, 2000
---------------------------------------------
Proceeds..................................... $ 48,905 $ -- $ -- $ 48,905
Gain (loss) recorded during the period (a)... 11,115 -- -- 11,115
June 30, 2000
---------------------------------------------
Proceeds..................................... $ 83,440 $ 952,569 $64,994 $1,101,003
Gain (loss) recorded during the period (a)... 5,042 (147,492) 17,293 (125,157)
</TABLE>
---------------
(a) 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 of approximately $450 million in periods prior to the second quarter
of 2000 for operations that were divested during the second quarter of 2000
or are expected to be divested in future periods pursuant to its strategic
plan.
3. INCOME TAXES
The differences in federal income taxes computed at the federal statutory
rate and reported income taxes for the three and six months ended June 30, 2000
and 1999 are 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 foreign businesses, and non-deductible losses on the
divestiture of foreign assets that closed during the respective periods.
4. EARNINGS PER SHARE
The following reconciles the number of common shares outstanding at June 30
of each year indicated to the weighted average number of common shares
outstanding and the weighted average number of common and dilutive potential
common shares outstanding for the purposes of calculating basic and dilutive
earnings per common share, respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Number of common shares outstanding at end of
period........................................... 621,094 617,181 621,094 617,181
Effect of using weighted average common shares
outstanding...................................... (29) (6,277) (287) (10,504)
------- ------- ------- -------
Weighted average number of common shares
outstanding...................................... 621,065 610,904 620,807 606,677
Dilutive effect of common stock options and
warrants......................................... 1,795 9,847 1,191 9,906
Diluted effect of convertible subordinated notes
and debentures................................... -- 25,965 -- 28,136
------- ------- ------- -------
Weighted average number of common and dilutive
potential common shares outstanding.............. 622,860 646,716 621,998 644,719
======= ======= ======= =======
</TABLE>
9
<PAGE> 11
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the three and six months ended June 30, 1999, interest (net of taxes)
of $6.3 million and $13.5 million, respectively, was added to net income for the
diluted earnings per share calculation. For the three and six months ended June
30, 2000, the effects of the Company's convertible subordinated notes and
debentures are excluded from the dilutive earnings per share calculation since
the inclusion of such items would be antidilutive.
At June 30, 2000, there were approximately 55.5 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.
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>
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........................... 183,231 56,450 239,681
--------- --------- ---------
Balance, June 30, 2000.......................... $(246,849) $ (76,556) $(323,405)
========= ========= =========
</TABLE>
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 Waste Management Holdings, Inc. ("WM Holdings") which was
terminated as of October 31, 1999 in connection with the merger between the
Company and WM Holdings in July 1998 (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 the three and
six months ended June 30, 2000. The charge, which is included in asset
impairments and unusual items, was $13.8 million and $92.4 million for the three
and six months ended June 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 the period. The Company expects
to settle the remaining obligations during the third quarter of 2000, at which
time the final settlement expense (currently estimated to be approximately $130
million) will be recorded and adjustments to other comprehensive income will be
made. In conjunction with the termination of the Plan, the Company expects to
make payments of approximately $185 million to the Plan's trust in the third
quarter of 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 $138.4 million and $353.1 million as of
June 30, 2000 and December 31, 1999, respectively. See Notes 2 and 12 for
further discussion of the Company's divestiture activity.
10
<PAGE> 12
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 85 sites listed on the Superfund National
Priorities List ("NPL") as of June 30, 2000. 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. 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
11
<PAGE> 13
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as well as for unrelated parties, information available
from regulatory agencies as to costs of remediation, and the number, financial
resources and relative degree of responsibility of other PRPs who are jointly
and severally 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 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
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 capacity in light of changes to 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 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 (3.0% at June 30, 2000 and
2% at December 31, 1999) until expected time of payment and then discounted to
present value (6.5% at June 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.
12
<PAGE> 14
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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. In July 2000,
the Company resolved an action alleging breach of warranty and fraud, among
other things, arising out of a transaction worth in excess of $11 million at its
closing in 1995.
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 involving shares
worth, in aggregate, approximately $132 million as valued at the time of the
respective deals. 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 then valued at over $200 million 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 Company and
this seller group currently are litigating the question of whether their dispute
should be submitted to arbitration for resolution. The extent of damages in the
underlying action has not yet been determined.
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.
13
<PAGE> 15
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is engaged in discussions 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 and (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
March 31, 1999 and July 6, 1999 at prices allegedly known to be inflated by the
14
<PAGE> 16
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
alleged material misstatements and omissions. The plaintiffs in these actions
seek damages with interest, costs and such other relief as the court deems
proper. 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. The claims and putative class members in this case fall within
the scope of the consolidated class actions in Texas. 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 two arbitration actions
have 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 first of these actions, filed in state court in Oregon in November 1999, was
resolved in June 2000. The two arbitrations that have been initiated both relate
to the sale of businesses to Eastern. For reasons similar to those alleged in
the class actions described above, or for reasons related to their acquisition
by Eastern, these individuals allege that the stock they received was
overvalued. Two other lawsuits were filed in June 2000, one in state court in
California and another in state court in Virginia, both also relating to the
sales of businesses to the Company. With the exception of the Oregon case and
one of the arbitration cases, which have been resolved, 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
alleged common stock sales during the three months ended June 30, 1999 and/or
their oversight of the Company's affairs. The lawsuits name Waste Management,
Inc. as a nominal defendant and seek compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such other relief as the
respective courts deem proper. The defendants have not yet been required to
respond to the complaints.
Beginning at year end 1999 the Company became involved in a series of
disputes with Louis D. Paolino, former President and Chief Executive Officer of
Eastern, and others in connection with the Eastern Merger. The Company alleged,
among other things, that the defendants usurped Eastern corporate opportunities
for personal gain and otherwise mismanaged certain affairs of Eastern. Mr.
Paolino and others alleged that the Company and unnamed others committed
security fraud alleging that the stock they were issued in connection with the
Eastern Merger was over-valued because the Company failed to disclose that it
was having problems integrating the operations of WM Holdings and the Company
after the WM Holdings Merger. The parties to these suits have withdrawn their
respective complaints and are engaging in discussions to resolve these issues.
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,
15
<PAGE> 17
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
negligent misrepresentation, and conspiracy. The case is in an early stage and
the extent of damages, if any, cannot yet be determined.
In addition, the SEC notified the Company of an informal inquiry into the
period ended June 30, 1999, as well as certain sales of the Company's common
stock that preceded the Company's July 6, 1999 earnings announcement. On June
21, 2000 the Company consented, without admitting or denying the findings, to
the SEC's entry of an administrative Cease and Desist Order, finding that the
Company had violated certain of the antifraud, books and records, and internal
control provisions of the federal securities laws in connection with the July 6,
1999 announcement. The Order did not impose any fines or monetary penalties. The
SEC noted in the Order that its inquiry was ongoing as to other parties.
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 Company is conducting a thorough investigation of each of the
allegations that have been made in connection with the Company's second quarter
1999 earnings communications and other matters alleged in the various
complaints. As part of this 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 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.
Roderick M. Hills, a former chairman of the SEC and the former chairman of the
Company's Audit Committee served as Chairman of the Special Committee I until he
retired from the Board of Directors in May 2000 in accordance with the
retirement provisions contained in the Company's Corporate Governance
Guidelines. John C. Pope, current Chairman of the Company's Audit Committee, has
succeeded Mr. Hills as Chairman of the Special Committee I.
The Company received a Civil Investigative Demand ("CID") from the
Antitrust Division of the United States Department of Justice in July 1999
inquiring into the Company's non-hazardous solid waste operations in the State
of Massachusetts. The CID purports to have been issued for the purpose of
determining whether the Company has engaged in monopolization, illegal contracts
in restraint of trade, or anticompetitive acquisitions of disposal and/or
hauling assets. The CID requires the Company to provide the United States
Department of Justice with certain documents to assist it in its inquiry with
which the Company is fully cooperating.
On July 16, 1999, a lawsuit was filed against the Company in the Circuit
Court for Sumter County in the State of Alabama. The plaintiff in the lawsuit
purported to allege on behalf of a class of similarly situated persons that the
Company has deprived the class of lump sum payments of pension plan benefits
allegedly promised to be paid in connection with termination of the Plan. On
behalf of the purported class, the plaintiff sought compensatory and punitive
damages, costs, restitution with interest, and such relief as the Court deemed
proper. On July 29, 1999, the Company announced that it had determined to
proceed with the termination of the Plan, liquidating the Plan's assets and
settling its obligations to participants. The plaintiff voluntarily dismissed
her case on September 13, 1999. However, that same day, attorneys filed a
lawsuit on behalf of a putative class of plan participants against the Company,
the Waste Management, Inc. Pension Plan, and various individual defendants,
alleging violations of the Employee Retirement Income Security Act of 1974
("ERISA") with respect to the termination of the Plan. Since the initial filing
of the case, the plaintiffs have voluntarily dismissed certain counts and the
Company has filed a Motion to Dismiss with respect to the remaining claims.
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
16
<PAGE> 18
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30, 2000, there were five
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"). The majority of
these proceedings are based on allegations that certain subsidiaries of the
Company (or their predecessors) transported hazardous substances to the sites in
question, often prior to acquisition of such subsidiaries by the Company. 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.
17
<PAGE> 19
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1999, sludge materials from trucks entering the Company's
Woodland Meadows Landfill in Michigan were seized by the FBI pursuant to an
investigation of the generator of the sludge materials, a company that provides
waste treatment services. Subsequently, the Company received two Grand Jury
subpoenas as well as 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 June 30, 2000, the Company or its subsidiaries had been notified that
they are potentially responsible parties in connection with 85 locations listed
on the NPL. Of the 85 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 68 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 litigation is currently in the
discovery phase, and the Company is preparing a rebuttal to plaintiff's expert
report on causation. The Company is vigorously defending itself in the
litigation.
In February 1999, a San Bernardino County, California grand jury returned
an amended felony indictment against the Company, certain of its subsidiaries
and their current or former employees, and a County employee. The proceeding is
based on events that allegedly occurred prior to the WM Holdings Merger in
connection with a WM Holdings landfill development project. The indictment
includes allegations that certain of the defendants engaged in conduct involving
fraud, wiretapping, theft of a trade secret and manipulation of computer data,
and that they engaged in a conspiracy to do so. If convicted, the most serious
of the available sanctions against the corporate defendants would include
substantial fines and forfeitures. The Company believes that meritorious
defenses exist to each of the allegations, and the defendants are vigorously
contesting them. The Company believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's financial statements.
The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. In this action, the Company is seeking a declaratory judgment that
environmental liabilities asserted against the Company or its subsidiaries, or
that may be asserted in the future, are covered by insurance policies purchased
by the Company or its subsidiaries. The Company is also seeking to recover
defense costs and other damages incurred as a result of the assertion of
environmental liabilities against the Company or its subsidiaries for events
occurring over at least the last 25 years at approximately 140 sites and the
defendant insurance carriers' denial of coverage of such liabilities. While the
Company has reached settlements with some of the carriers, the remaining
defendants have denied liability to the Company
18
<PAGE> 20
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and have asserted various defenses, including that environmental liabilities of
the type for which the Company is seeking relief are not risks covered by the
insurance policies in question. The remaining defendants are contesting these
claims vigorously. Discovery is complete as to the 12 sites in the first phase
of the case and discovery is expected to continue for several years as to the
remaining sites. Currently, trial dates have not been set. The Company is unable
at this time to predict the outcome of this proceeding. No amounts have been
recognized in the Company's 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.
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, South America and Israel. As discussed in Note 2, pursuant to the Company's
strategic initiative, 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, low-level and other radioactive waste
management services, the Company's independent power projects, and other
non-solid waste services to commercial, industrial and government customers, and
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 CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning the Company's reportable
segments as of June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID CORPORATE
SOLID WASTE INTERNATIONAL WASTE FUNCTIONS(A) TOTAL
-------------- ------------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
June 30, 2000
Net operating revenues(b)...... $2,911,743 $224,148 $129,820 $ -- $3,265,711
Earnings before interest and
taxes
(EBIT)(c),(d),(e),(f)....... 608,946 42,816 19,593 (161,925) 509,430
June 30, 1999
Net operating revenues(b)...... $2,686,852 $386,713 $251,210 $ -- $3,324,775
Earnings before interest and
taxes (EBIT)(c),(d),(f)..... 736,615 41,027 21,788 (1,985) 797,445
SIX MONTHS ENDED:
June 30, 2000
Net operating revenues(b)...... $5,621,699 $625,632 $235,689 $ -- $6,483,020
Earnings before interest and
taxes
(EBIT)(c),(d),(e),(f)....... 1,139,044 112,871 31,274 (356,586) 926,603
June 30, 1999
Net operating revenues(b)...... $5,198,168 $757,804 $439,438 $ -- $6,395,410
Earnings before interest and
taxes (EBIT)(c),(d),(f)..... 1,421,068 76,018 35,213 42,728 1,575,027
</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
$11.6 million and $15.8 million, for the three and six months ended June
30, 2000, respectively and $19.2 million and $32.5 million for the three
and six months ended June 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 been greater by $32.1 million and $83.1 million for the
three and six months ended June 30, 2000, respectively. The suspension of
depreciation related to the Company's WM International operations was $20.9
million and $58.3 million for the three and six months ended June 30, 2000,
respectively.
(f) EBIT is defined as income from operations excluding merger and acquisition
related costs and asset impairment and unusual items.
20
<PAGE> 22
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of total EBIT reported above to net income is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
EBIT, as reported above(a)............ $ 509,430 $ 797,445 $ 926,603 $1,575,027
Less:
Merger and acquisition related
costs............................ -- 62,211 -- 79,695
Asset impairments and unusual
items............................ 216,444 19,750 308,682 19,750
--------- --------- --------- ----------
Income from operations................ 292,986 715,484 617,921 1,475,582
Interest expense...................... (199,598) (184,911) (409,807) (361,068)
Interest income....................... 6,041 5,663 14,889 8,481
Minority interest..................... (6,597) (6,547) (12,569) (13,009)
Other income, net..................... 12,312 16,215 14,563 30,578
--------- --------- --------- ----------
Income before income taxes............ 105,144 545,904 224,997 1,140,564
Provision for income taxes............ 104,829 227,642 169,679 475,614
--------- --------- --------- ----------
Net income............................ $ 315 $ 318,262 $ 55,318 $ 664,950
========= ========= ========= ==========
</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, significant portions of its domestic non-core
businesses and selected NASW operations. Note 2 to these condensed consolidated
financial statements contained elsewhere herein discusses operations which have
been divested in the year 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 and six months ended
June 30, 2000 to asset impairments and unusual items of approximately $77.6
million and $102.4 million, respectively, related primarily to the Company's WM
International operations, which are held-for-sale, that have a carrying value
greater than management's best estimate of anticipated proceeds as of June 30,
2000. In determining fair value, the Company considered, among other things, the
range of preliminary purchase prices being discussed with potential buyers.
These businesses' results of operations are included in revenues and expenses in
the accompanying statement of operations.
21
<PAGE> 23
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operational information included in the statements of operations regarding
the businesses classified as operations held-for-sale at June 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:
June 30, 2000
Operating revenues......................... $116,545 $224,148 $30,258 $ 370,951
Earnings before interest and
taxes(a),(b)............................ 9,751 42,816 5,803 58,370
June 30, 1999
Operating revenues......................... $111,114 $386,713 $26,817 $ 524,644
Earnings before interest and taxes(a)...... 5,968 41,027 6,593 53,588
SIX MONTHS ENDED:
June 30, 2000
Operating revenues......................... $226,471 $625,632 $57,438 $ 909,541
Earnings before interest and
taxes(a),(b)............................ 18,525 112,871 10,077 141,473
June 30, 1999
Operating revenues......................... $212,975 $757,804 $49,712 $1,020,491
Earnings before interest and taxes(a)...... 9,077 76,018 10,802 95,897
</TABLE>
---------------
(a) EBIT is defined as income from operations excluding merger and acquisition
related costs and asset impairments and unusual items.
(b) 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 been greater by $32.1 million and $83.1 million for the three and six
months ended June 30, 2000, respectively. The suspension of depreciation
related to the Company's WM International operations was $20.9 million and
$58.3 million for the three and six months ended June 30, 2000,
respectively.
22
<PAGE> 24
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In its condensed consolidated balance sheets, the Company has classified as
current operations held-for-sale its WM International operations and certain
domestic operations, which management believes will be divested prior to June
30, 2001. The Company has classified as non-current operations held-for-sale its
surplus real estate portfolio.
<TABLE>
<CAPTION>
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
As of June 30, 2000:
Accounts receivable, net.................... $ 44,399 $ 178,939 $ 15,102 $ 238,440
Other current assets........................ 7,847 99,075 3,512 110,434
Property and equipment and other non-current
assets.................................... 559,398 1,141,175 51,054 1,751,627
Current maturities of long-term debt........ (2,348) (6,869) -- (9,217)
Other current liabilities................... (23,916) (282,369) (7,720) (314,005)
Long-term debt, less current maturities..... (50,577) (12,928) -- (63,505)
Other noncurrent liabilities................ (15,905) (129,909) (901) (146,715)
Minority interest........................... -- (57,016) (5,700) (62,716)
-------- ---------- -------- ----------
Net operations held for sale...... $518,898 $ 930,098 $ 55,347 $1,504,343
======== ========== ======== ==========
Current assets:
Operations held for sale.................. $566,817 $1,419,189 $ 69,668 $2,055,674
Long-term assets:
Operations held for sale (included in
other assets).......................... 44,827 -- -- 44,827
Current liabilities:
Operations held for sale.................. (92,746) (489,091) (14,321) (596,158)
-------- ---------- -------- ----------
Net operations held for sale...... $518,898 $ 930,098 $ 55,347 $1,504,343
======== ========== ======== ==========
</TABLE>
23
<PAGE> 25
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 WM NON-SOLID
SOLID WASTE 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 June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and derivatives used for
hedging purposes. SFAS No. 133 requires that entities recognize all derivative
financial instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is effective for the Company in its
first fiscal quarter of 2001. Management is currently assessing the impact that
the adoption of these standards will have on the Company's consolidated
financial statements.
24
<PAGE> 26
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30, 2000 and the condensed
consolidated balance sheet as of December 31, 1999, the unaudited condensed
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999, along with the related unaudited statements of cash flows for
the six months ended June 30, 2000 and 1999, have been provided below (in
thousands).
25
<PAGE> 27
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 58,109 $ (2,715) $ 48,151 $ -- $ 103,545
Other current assets.... -- 36,604 4,236,012 -- 4,272,616
----------- ---------- ----------- ------------ -----------
58,109 33,889 4,284,163 -- 4,376,161
Property and equipment,
net..................... -- -- 10,123,759 -- 10,123,759
Intercompany and
investment in
subsidiaries............ 10,723,697 5,601,481 (11,663,093) (4,662,085) --
Other assets.............. 11,195 8,727 6,136,724 -- 6,156,646
----------- ---------- ----------- ------------ -----------
Total assets.... $10,793,001 $5,644,097 $ 8,881,553 $ (4,662,085) $20,656,566
=========== ========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt....... $ 1,238,893 $ 650,000 $ 174,213 $ -- $ 2,063,106
Accounts payable and
other accrued
liabilities.......... 99,109 319,973 2,881,559 -- 3,300,641
----------- ---------- ----------- ------------ -----------
1,338,002 969,973 3,055,772 -- 5,363,747
Long-term debt, less
current maturities...... 4,251,665 2,515,183 1,287,762 -- 8,054,610
Other liabilities......... -- -- 2,498,938 -- 2,498,938
----------- ---------- ----------- ------------ -----------
Total
liabilities... 5,589,667 3,485,156 6,842,472 -- 15,917,295
Minority interest in
subsidiaries............ -- -- 9,302 -- 9,302
Stockholders' equity...... 5,203,334 2,158,941 2,029,779 (4,662,085) 4,729,969
----------- ---------- ----------- ------------ -----------
Total
liabilities
and
stockholders'
equity........ $10,793,001 $5,644,097 $ 8,881,553 $ (4,662,085) $20,656,566
=========== ========== =========== ============ ===========
</TABLE>
26
<PAGE> 28
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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.................. 11,367,467 5,939,729 (13,139,748) (4,167,448) --
Other assets.................... 27,004 9,795 6,120,277 -- 6,157,076
----------- ---------- ------------ ----------- -----------
Total assets.......... $11,428,161 $5,990,624 $ 9,430,087 $(4,167,448) $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............ 5,101,352 1,907,127 1,561,581 (4,167,448) 4,402,612
----------- ---------- ------------ ----------- -----------
Total liabilities and
stockholders'
equity.............. $11,428,161 $5,990,624 $ 9,430,087 $(4,167,448) $22,681,424
=========== ========== ============ =========== ===========
</TABLE>
27
<PAGE> 29
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............... $ -- $ -- $3,265,711 $ -- $3,265,711
Costs and expenses............... -- -- 2,972,725 -- 2,972,725
--------- -------- ---------- --------- ----------
Income from operations........... -- -- 292,986 -- 292,986
--------- -------- ---------- --------- ----------
Other income (expense):
Interest income (expense),
net......................... (120,492) (58,596) (14,469) -- (193,557)
Equity in subsidiaries, net of
taxes....................... 75,622 112,244 -- (187,866) --
Minority interest.............. -- -- (6,597) -- (6,597)
Other, net..................... -- -- 12,312 -- 12,312
--------- -------- ---------- --------- ----------
(44,870) 53,648 284,232 (187,866) 105,144
Provision for (benefit from)
income taxes................... (45,185) (21,974) 171,988 -- 104,829
--------- -------- ---------- --------- ----------
Net income....................... $ 315 $ 75,622 $ 112,244 $(187,866) $ 315
========= ======== ========== ========= ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
-------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues................ $ -- $ -- $3,324,775 $ -- $3,324,775
Costs and expenses................ -- -- 2,609,291 -- 2,609,291
-------- -------- ---------- --------- ----------
Income from operations............ -- -- 715,484 -- 715,484
-------- -------- ---------- --------- ----------
Other income (expense):
Interest income (expense),
net.......................... (89,061) (67,031) (23,156) -- (179,248)
Equity in subsidiaries, net of
taxes........................ 373,925 415,819 -- (789,744) --
Minority interest............... -- -- (6,547) -- (6,547)
Other, net...................... -- -- 16,215 -- 16,215
-------- -------- ---------- --------- ----------
284,864 348,788 701,996 (789,744) 545,904
Provision for (benefit from)
income taxes.................... (33,398) (25,137) 286,177 -- 227,642
-------- -------- ---------- --------- ----------
Net income........................ $318,262 $373,925 $ 415,819 $(789,744) $ 318,262
======== ======== ========== ========= ==========
</TABLE>
28
<PAGE> 30
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $ -- $ -- $6,483,020 $ -- $6,483,020
Costs and expenses............. -- -- 5,865,099 -- 5,865,099
--------- --------- ---------- ----------- ----------
Income from operations......... -- -- 617,921 -- 617,921
--------- --------- ---------- ----------- ----------
Other income (expense):
Interest income (expense),
net....................... (246,963) (120,475) (27,480) -- (394,918)
Equity in subsidiaries, net
of taxes.................. 209,670 284,967 -- (494,637) --
Minority interest............ -- -- (12,569) -- (12,569)
Other, net................... -- -- 14,563 -- 14,563
--------- --------- ---------- ----------- ----------
(37,293) 164,492 592,435 (494,637) 224,997
Provision for (benefit from)
income taxes................. (92,611) (45,178) 307,468 -- 169,679
--------- --------- ---------- ----------- ----------
Net income..................... $ 55,318 $ 209,670 $ 284,967 $ (494,637) $ 55,318
========= ========= ========== =========== ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $ -- $ -- $6,395,410 $ -- $6,395,410
Costs and expenses............. -- -- 4,919,828 -- 4,919,828
--------- --------- ---------- ----------- ----------
Income from operations......... -- -- 1,475,582 -- 1,475,582
--------- --------- ---------- ----------- ----------
Other income (expense):
Interest income (expense),
net....................... (174,144) (139,194) (39,249) -- (352,587)
Equity in subsidiaries, net
of taxes.................. 773,790 860,786 -- (1,634,576) --
Minority interest............ -- -- (13,009) -- (13,009)
Other, net................... -- -- 30,578 -- 30,578
--------- --------- ---------- ----------- ----------
599,646 721,592 1,453,902 (1,634,576) 1,140,564
Provision for (benefit from)
income taxes................. (65,304) (52,198) 593,116 -- 475,614
--------- --------- ---------- ----------- ----------
Net income..................... $ 664,950 $ 773,790 $ 860,786 $(1,634,576) $ 664,950
========= ========= ========== =========== ==========
</TABLE>
29
<PAGE> 31
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 55,318 $ 209,670 $ 284,967 $(494,637) $ 55,318
Equity in earnings of subsidiaries,
net of taxes....................... (209,670) (284,967) -- 494,637 --
Other adjustments and charges........ 30,542 (3,150) 1,019,686 -- 1,047,078
--------- --------- ----------- --------- -----------
Net cash provided by (used in)
operating activities................. (123,810) (78,447) 1,304,653 -- 1,102,396
--------- --------- ----------- --------- -----------
Cash flows from investing activities:
Short-term investments............... -- -- 53,733 -- 53,733
Acquisitions of businesses, net of
cash acquired...................... -- -- (169,320) -- (169,320)
Capital expenditures................. -- -- (563,882) -- (563,882)
Proceeds from sale of assets......... -- -- 1,082,931 -- 1,082,931
Other, net........................... -- -- (17,939) -- (17,939)
--------- --------- ----------- --------- -----------
Net cash provided by investing
activities........................... -- -- 385,523 -- 385,523
--------- --------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt............................... 40,000 -- 33,570 -- 73,570
Principal payments on long-term
debt............................... (776,899) (593,710) (265,960) -- (1,636,569)
Proceeds from exercise of common
stock options and warrants......... 1,222 -- -- -- 1,222
(Increase) decrease in intercompany
and investments, net............... 883,906 664,946 (1,548,852) -- --
--------- --------- ----------- --------- -----------
Net cash provided by (used in)
financing activities................. 148,229 71,236 (1,781,242) -- (1,561,777)
--------- --------- ----------- --------- -----------
Effect of exchange rate changes on cash
and cash equivalents................. -- -- (3,954) -- (3,954)
--------- --------- ----------- --------- -----------
Increase (decrease) in cash and cash
equivalents.......................... 24,419 (7,211) (95,020) -- (77,812)
Cash and cash equivalents at beginning
of period............................ 33,690 4,496 143,171 -- 181,357
--------- --------- ----------- --------- -----------
Cash and cash equivalents at end of
period............................... $ 58,109 $ (2,715) $ 48,151 $ -- $ 103,545
========= ========= =========== ========= ===========
</TABLE>
30
<PAGE> 32
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 664,950 $ 773,790 $ 860,786 $(1,634,576) $ 664,950
Equity in earnings of subsidiaries,
net of taxes..................... (773,790) (860,786) -- 1,634,576 --
Other adjustments and changes...... 5,761 7,768 73,836 -- 87,365
----------- --------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities............... (103,079) (79,228) 934,622 -- 752,315
----------- --------- ---------- ----------- -----------
Cash flows from investing activities:
Short-term investments............. -- -- (6,273) -- (6,273)
Acquisitions of businesses, net of
cash acquired.................... -- -- (644,515) -- (644,515)
Capital expenditures............... -- -- (614,085) -- (614,085)
Proceeds from sale of assets....... -- -- 546,694 -- 546,694
Other, net......................... -- -- 11,649 -- 11,649
----------- --------- ---------- ----------- -----------
Net cash used in investing
activities......................... -- -- (706,530) -- (706,530)
----------- --------- ---------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt............................. 1,806,510 -- 8,137 -- 1,814,647
Principal payments on long-term
debt............................. (1,544,532) (148,427) (340,322) -- (2,033,281)
Proceeds from exercise of common
stock options and warrants....... 165,110 -- -- -- 165,110
(Increase) decrease in amounts due
to and from subsidiaries, net.... (333,896) 274,517 59,379 -- --
----------- --------- ---------- ----------- -----------
Net cash provided by (used in)
financing activities............. 93,192 126,090 (272,806) -- (53,524)
----------- --------- ---------- ----------- -----------
Effect of exchange rate changes on
cash and cash equivalents........ -- -- 1,865 -- 1,865
----------- --------- ---------- ----------- -----------
Increase (decrease) in cash and
cash equivalents................. (9,887) 46,862 (42,849) -- (5,874)
Cash and cash equivalents at
beginning of period.............. 27,726 (48,578) 107,725 -- 86,873
----------- --------- ---------- ----------- -----------
Cash and cash equivalents at end of
period........................... $ 17,839 $ (1,716) $ 64,876 $ -- $ 80,999
=========== ========= ========== =========== ===========
</TABLE>
31
<PAGE> 33
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
Effective July 1, 2000, 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 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 have been returned to the Company
as payment for the outstanding amount of the promissory note. The 7,892,612
shares returned to the Company will be classified as treasury shares.
In July 2000, the Company announced that its wholly-owned subsidiary had
signed and closed on an agreement to sell its waste services operations in
Denmark, Slovakia and the Czech Republic to Marius Pedersen Holding A/S, a
subsidiary of the Marius Pedersen Foundation, for approximately U.S. $120
million.
On August 4, 2000, the Company announced that it completed the final
transaction of previously announced sales of certain of its U.S. solid waste
assets to Allied for aggregate proceeds of approximately $191 million. The
sales, some of which occurred in the first and second quarters of 2000, included
14 hauling companies, four transfer stations and ten landfills.
32
<PAGE> 34
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," 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.
- 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.
33
<PAGE> 35
- 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 assets and up to 10% of its North
American solid waste ("NASW") assets.
- 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. However, certain of these operations have been divested prior to
June 30, 2000 or are actively 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,
waste-fuel powered independent power facilities, and constructs treatment or
disposal facilities for third parties internationally. However, as discussed
above, the Company is in the process of divesting its international operations
and as of June 30, 2000 has operations remaining only in the Pacific Rim, South
America, Israel,
34
<PAGE> 36
Denmark, Slovakia, the Czech Republic, Sweden and the United Kingdom.
Additionally, agreements for the sales of certain of these operations have been
reached subsequent to June 30, 2000. See Note 12 to the accompanying condensed
consolidated financial statements.
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, and accruals for future landfill final closure and post-closure
costs. Certain direct development expenditures are capitalized and amortized
over the estimated useful life of a site as capacity is consumed, and include
acquisition, engineering, upgrading, construction, capitalized interest and
permitting costs. All indirect 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 40 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;
- There are no significant known technical, legal, community, business, or
political restrictions or issues that could impair the success of such
expansion;
35
<PAGE> 37
- 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 prompt review by the Audit Committee of the Board of Directors. Such
exceptions at 31 landfill locations at June 30, 2000 were generally 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 SIX MONTHS ENDED JUNE 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 AND 1999 2000 AND 1999
------------------ -------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Operating revenues................................. $ (59,064) (1.8)% $ 87,610 1.4%
--------- ------ --------- -------
Costs and expenses:
Operating (exclusive of depreciation and
amortization
shown below).................................. 112,950 6.2 407,883 11.7
General and administrative....................... 147,126 49.4 365,199 63.7
Depreciation and amortization.................... (31,125) (7.9) (37,048) (4.9)
Merger and acquisition related costs............. (62,211) (100.0) (79,695) (100.0)
Asset impairments and unusual items.............. 196,694 995.9 288,932 1,462.9
--------- ------ --------- -------
363,434 13.9 945,271 19.2
--------- ------ --------- -------
Income from operations............................. (422,498) (59.1) (857,661) (58.1)
--------- ------ --------- -------
Other income (expense):
Interest expense................................. (14,687) (7.9) (48,739) (13.5)
Minority interest................................ (50) (0.8) 440 3.4
Interest and other income, net................... (3,525) (16.1) (9,607) (24.6)
--------- ------ --------- -------
Income before income taxes......................... (440,760) (80.7) (915,567) (80.3)
--------- ------ --------- -------
Provision for income taxes......................... (122,813) (53.9) (305,935) (64.3)
--------- ------ --------- -------
Net income......................................... $(317,947) (99.9)% $(609,632) (91.7)%
========= ====== ========= =======
</TABLE>
36
<PAGE> 38
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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 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)..................................... 59.7 55.2 60.2 54.7
General and administrative.......................... 13.6 9.0 14.5 9.0
Depreciation and amortization....................... 11.1 11.8 11.0 11.7
Merger and acquisition related costs................ -- 1.9 -- 1.2
Asset impairments and unusual items................. 6.6 0.6 4.8 0.3
----- ----- ----- -----
91.0 78.5 90.5 76.9
----- ----- ----- -----
Income from operations................................ 9.0 21.5 9.5 23.1
----- ----- ----- -----
Other income (expense):
Interest expense.................................... (6.1) (5.6) (6.3) (5.7)
Minority interest................................... (0.2) (0.2) (0.2) (0.2)
Interest and other income, net...................... 0.5 0.7 0.5 0.6
----- ----- ----- -----
(5.8) (5.1) (6.0) (5.3)
----- ----- ----- -----
Income before income taxes............................ 3.2 16.4 3.5 17.8
Provision for income taxes............................ 3.2 6.8 2.6 7.4
----- ----- ----- -----
Net income............................................ --% 9.6% 0.9% 10.4%
===== ===== ===== =====
</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
first and second quarters of 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 June 30, 2000 and for the three and six 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 June 30, 2000, had completed the divestiture of all
international operations except those in the Pacific Rim, South America, Israel,
Denmark, Slovakia, the Czech Republic, Sweden and the United Kingdom.
Additionally, the Company performs certain non-solid waste services, primarily
in North America, such as low-level and other radioactive waste management, and
operates waste-fuel powered independent power facilities. The Company announced
on June 9, 2000 that, in accordance with its strategic plan, one of its
subsidiaries completed the sale of substantially all of its low-level and other
radioactive waste service operations. Through June 30, 1999, the Company's
non-solid waste services also
37
<PAGE> 39
included non-land disposal hazardous waste operations and on-site industrial
cleaning services located in North America. However, on June 30, 1999, the
Company sold a 51% interest in these operations to Vivendi S.A. ("Vivendi"). The
Company's retained interest of 49% is being accounted for using the equity
method of accounting.
Operating Revenues
For the three months ended June 30, 2000, the Company's operating revenues
decreased $59.1 million or 1.8% and for the six months ended June 30, 2000,
increased $87.6 million or 1.4% 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW................... $2,911.7 89.1% $2,686.9 80.8% $5,621.6 86.7% $5,198.2 81.3%
WM International....... 224.2 6.9 386.7 11.6 625.7 9.7 757.8 11.8
Non-solid waste........ 129.8 4.0 251.2 7.6 235.7 3.6 439.4 6.9
-------- ----- -------- ----- -------- ----- -------- -----
Operating revenues... $3,265.7 100.0% $3,324.8 100.0% $6,483.0 100.0% $6,395.4 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The decrease in the Company's operating revenues for the three months ended
June 30, 2000 as compared to the 1999 period is primarily due to decreases in
operating revenues from its WM International and non-solid waste operations as a
result of divestitures pursuant to the Company's strategic plan. The increase in
the Company's operating revenues for the six months ended June 30, 2000 as
compared to the 1999 period is primarily due to NASW operations, but was also
offset in part as a result of divestiture activity. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASW:
Collection........... $1,963.8 56.9% $1,895.6 59.1% $3,825.4 57.6% $3,684.9 59.8%
Disposal............. 870.5 25.2 841.6 26.3 1,674.3 25.2 1,600.2 26.0
Transfer............. 370.4 10.7 314.8 9.8 692.8 10.4 580.4 9.4
Recycling and
other............. 248.0 7.2 153.4 4.8 452.5 6.8 296.4 4.8
-------- ----- -------- ----- -------- ----- -------- -----
3,452.7 100.0% 3,205.4 100.0% 6,645.0 100.0% 6,161.9 100.0%
===== ===== ===== =====
Intercompany........... (541.0) (518.5) (1,023.4) (963.7)
-------- -------- -------- --------
Operating revenues... $2,911.7 $2,686.9 $5,621.6 $5,198.2
======== ======== ======== ========
</TABLE>
The increase in operating revenues for the three and six months ended June
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 $153.2 million
and $287.6 million, or 5.7% and 5.6% for the three and six months ended June 30,
2000. Internal growth for the three and six months ended June 30, 2000 was
comprised of 1.7% and 1.6% for pricing increases and 4.0% and 4.0% 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 negative base price change of 0.9% in the three months ended June
30, 2000, as compared to the prior year period. The negative base price change
in the second quarter of 2000 was due in part to the fact that the Company
implemented large price increases in the second quarter of 1999 that were
effectively reduced in the second half of 1999 to their previous levels.
Additionally, the Company's NASW operating revenues increased $96.4 million and
$176.1 million for the three and six months ended June 30, 2000, respectively,
due to acquisitions primarily of collection operations. Offsetting the increase
in operating revenues was a decline in
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operating revenues of $24.8 million and $43.3 for the three and six months ended
June 30, 2000, associated with divestitures of NASW businesses.
The operating revenues from the Company's WM International operations
decreased $162.5 million, or 42.0%, and $132.1 million, or 17.4%, for the three
and six months ended June 30, 2000, as compared to the prior year. This decrease
in operating revenues is principally due to divestitures of certain WM
International operations with operating revenues of approximately $172.2 million
and $173.3 million for the three and six months ended June 30, 2000,
respectively. Operating revenues from the Company's WM International operations
were also negatively impacted by fluctuations in foreign currency of $17.0
million and $54.3 million for the three and six months ended June 30, 2000,
respectively, as compared to the prior year periods. Offsetting these decreases
in operating revenues in the Company's WM International operations was internal
growth of comparable operations of 4.4% and 2.2% for the three and six months
ended June 30, 2000, respectively.
Operating revenues for non-solid waste services decreased for the three and
six months ended June 30, 2000 as compared to the prior year period due to the
June 1999 sale of a 51% interest in certain non-solid waste operations to
Vivendi, as previously discussed herein. This decrease was partially offset by
the increase in operating revenues associated with a geosynthetic manufacturing
and installation service company acquired July 1999. The Company expects
decreasing operating revenues from its non-solid waste operations in future
periods as the Company has sold or has entered into agreements for the sale of
its non-solid waste operations pursuant to its strategic plan. Exclusive of
acquisitions and divestitures, the Company's non-solid waste operating revenues
for the three and six months ended June 30, 2000 are substantially consistent
with the corresponding prior year periods.
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses increased $113.0 million or 6.2% and $407.9
million or 11.7% for the three and six months ended June 30, 2000, as compared
to the prior year periods. As a percentage of operating revenues, operating
costs and expenses were 59.7% and 60.2% and 55.2% and 54.7% for the three and
six months ended June 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 in 2000
because the short-term cost reductions experienced in the first half of 1999
were not sustained in these subsequent periods.
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 1.7% and 1.0% for the three and six months ended June
30, 1999. There were no such adjustments in the first six months of 2000.
General and Administrative
General and administrative expenses increased $147.1 million or 49.4% and
$365.2 million or 63.7% for the three and six months ended June 30, 2000 as
compared to the prior year periods. As a percentage of
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operating revenues, the Company's general and administrative expenses were 13.6%
and 14.5% and 9.0% and 9.0% for the three and six months ended June 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,
the Company experienced significant cost increases in its corporate
administrative functions for items such as additional personnel and professional
accounting and consulting services in the first half of 2000 that became
necessary as a result of the ineffectiveness of the WM Holdings Merger
integration plan.
Depreciation and Amortization
Depreciation and amortization expense decreased $31.1 million or 7.9% and
$37.0 million or 4.9% for the three and six months ended June 30, 2000 as
compared to prior year periods. As a percentage of operating revenues,
depreciation and amortization expense was 11.1% and 11.0% and 11.8% and 11.7%
for the three and six months ended June 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 as of December 31, 1999.
The depreciation suspension for the three and six months ended June 30, 2000 for
these held-for-sale operations was $32.1 million and $83.1 million, or 1.0% and
1.3% of operating revenues, respectively. As compared to the prior year periods,
depreciation and amortization expense for the three and six months ended June
30, 2000 was also reduced by divestitures of operations during the second
quarter of 2000 pursuant to its strategic plan. However, these decreases in
depreciation and amortization expense were offset partially by increased
landfill airspace amortization in the three and six months ended June 30, 2000
from an increase in disposal volumes at its landfills. Additionally, the Company
experienced higher airspace amortization rates in the current year periods, as
compared to the prior year periods, due to the more stringent set of criteria
for evaluating the probability of obtaining an expansion to landfill airspace,
as discussed above, which was effective as of the third quarter of 1999.
Merger and Acquisition Related Costs, Asset Impairments and Unusual Items
The Company is in the process of settling its obligations under the
Company's 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 first half of 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 $13.8 million and $92.4 million for the three and six months ended
June 30, 2000.
Additionally, the Company recorded a charge to asset impairments and
unusual items of approximately $125.1 million and $114.0 million for the three
and six months ended June 30, 2000 related to net gains and losses on operations
divested during the respective periods. Furthermore, the Company recorded
charges of approximately $77.6 million and $102.4 million for the three and six
months ended June 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 $62.2 million and $79.7 million for the three and six
months ended June 30, 1999. Such costs included transitional wages and other
reorganizational costs. Offsetting these costs 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.
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Income from Operations
Income from operations was $293.0 million and $617.9 million for the three
and six months ended June 30, 2000, respectively, as compared to $715.5 million
and $1.5 billion 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 is primarily due to the decline in the
Company's public credit ratings during the last six months of 1999, as well as a
general market increase in interest rates since the second quarter of 1999.
Furthermore, the Company has experienced a decrease in the amount of interest it
has capitalized from $11.3 million and $23.3 million in the three and six months
ended June 30, 1999, to $5.3 million and $9.3 million during three and six
months ended June 30, 2000.
Provision for Income Taxes
The Company recorded a provision for income taxes of $104.8 million and
$169.7 million for the three and six months ended June 30, 2000, respectively,
and $227.6 million and $475.6 million for the corresponding periods of 1999. The
difference between the federal income taxes at the federal statutory rate and
the provision for income taxes for the three and six months ended June 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 foreign businesses, and non-deductible losses on the
divestiture of foreign assets that closed during the respective periods.
Excluding non-deductible held-for-sale impairment charges associated with
certain foreign businesses, and non-deductible losses on the divestiture of
foreign assets that closed during the respective periods, the Company recorded a
tax provision of 41.7% of pre-tax income for the three and six months ended June
30, 2000.
Net Income
For the three and six months ended June 30, 2000, net income was $0.3
million and $55.3 million, respectively, as compared to $318.3 million and
$665.0 million for the respective prior periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements primarily stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
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 certain assets included in its WM
International operations, its non-core assets and up to 10% of its NASW
operations. The proceeds from these dispositions, which are primarily expected
to be realized through 2000, will be utilized for debt repayment, repurchase of
shares and selected tuck-in acquisitions. Although the Company has unused and
available credit capacity under its domestic bank facilities of $1.6 billion at
June 30, 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. Therefore, the
Company's level of capital expenditures is expected to decline along with its
needs for large amounts of credit capacity.
In December 1999, the Company received unanimous approval for amendments to
its syndicated loan facility (the "Syndicated Facility"), senior revolving
credit facility (the "Credit Facility"), and Eurocurrency bank credit
facilities. The approvals provided permanent amendments to the waivers
previously granted to the
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Company related to its operating results for the third quarter of 1999.
Additionally, the amended terms and conditions of the facilities contain the
necessary provisions for the Company to proceed with divestitures pursuant to
its strategic plan. Through July 20, 2000, the Company has sold or announced
agreements for sales of assets pursuant to its strategic plan from its WM
International, non-solid waste and NASW operations with proceeds totaling
approximately $2.0 billion.
The Company obtained amendments to the Syndicated Facility and Credit
Facility agreements for the quarter ended March 31, 2000. On July 10, 2000, the
Company renewed its Syndicated Facility in the amount of $2 billion for an
additional one-year period and renewed its Credit Facility in the amount of $1.7
billion with a maturity date of August 7, 2002. Certain financial covenants to
the Syndicated Facility and the Credit Facility were also amended. Terms and
conditions contained in the new and amended agreements are substantially the
same as prior agreements.
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 to be received from the divestitures of its WM International, domestic
non-core assets and up to 10% of its NASW operations. Specifically, the Company
is required to utilize the first $1.5 billion of net proceeds from divestitures
to repay indebtedness and 50% of the net proceeds greater than $1.5 billion but
less than $2.5 billion to repay the indebtedness, subject to certain
requirements to repay the Company's Eurocurrency facilities with proceeds from
WM International divestitures. All net proceeds from the divestiture of the
Company's WM International operations were required to first be used to repay
indebtedness under the Company's Eurocurrency facilities, all of which
indebtedness has been repaid.
As of June 30, 2000, the Company had a working capital deficit of $987.6
million (a ratio of current assets to current liabilities of 0.82:1) and a cash
balance of $103.5 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 six months ended June
30, 2000, cash used to acquire businesses of $169.3 million, capital
expenditures of $563.9 million and net debt reductions of approximately $1.6
billion were primarily financed with cash flows from operating activities of
$1.1 billion and proceeds from the sale of assets of $1.1 billion. Favorably
impacting cash flows from operations for the six months ended June 30, 2000 was
a tax refund of approximately $200 million and improvements in the Company's
accounts receivable average days sales outstanding. For the six months ended
June 30, 1999, cash used to acquire businesses of $644.5 million, capital
expenditures of $614.1 million and net debt reductions of approximately $218.6
million were primarily financed with cash flows from operating activities of
$752.3 million and proceeds from the sale of assets of $546.7 million.
From December 15, 1999 through March 16, 2000, the Company repurchased
$429.0 million of its 5.75% convertible subordinated notes due 2005 with funds
available from internally generated cash flows and its domestic credit
facilities. It is the Company's intention to refinance approximately $250
million of outstanding short-term borrowings through the use of existing
committed long-term bank credit agreements in the event that alternative
long-term refinancing is not arranged. Accordingly, these borrowings have been
classified as long-term at June 30, 2000.
The Company expects to settle its remaining obligations in conjunction with
the termination of the Plan during the third quarter of 2000 at which time the
Company expects to make payments of approximately $185 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 substantially
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
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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 85 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.
DIVESTITURES
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, and the majority interest in
Waste Management New Zealand Limited. During May and June 2000, the Company
announced that its wholly-owned subsidiaries had completed previously announced
transactions to sell waste services operations in Italy, Australia and Germany,
as well as substantially all of its nuclear waste services operations in the
United States. In May 2000, one of the Company's wholly-owned subsidiaries sold
its waste services operations in Thailand to Modern Asia Environmental Ltd. In
June 2000, the Company also announced that one of its wholly-owned subsidiaries
had reached an agreement to sell its waste services operations in the United
Kingdom to Severn Trent Plc for approximately U.S. $570 million. The sale, which
is subject to the approval of regulatory authorities and other customary
conditions, is expected to be completed in the third quarter of 2000. In July
2000, the Company announced that a wholly-owned subsidiary had signed and closed
on an agreement to sell its waste services operations in Denmark, Slovakia and
the Czech Republic to Marius Pedersen Holding A/S, a subsidiary of the Marius
Pedersen Foundation, for approximately U.S. $120 million. On August 4, 2000, the
Company announced that it completed the final transaction of previously
announced sales of certain of its U.S. solid waste assets to Allied for
aggregate proceeds of approximately $191 million. The sales, some of which
occurred in the first and second quarters of 2000, included 14 hauling
companies, four transfer stations and ten landfills.
RECENT DEVELOPMENTS
On June 21, 2000, the Company announced that it agreed to a settlement with
the United States Securities and Exchange Commission (the "SEC") related to the
Company's disclosures of information about expected earnings and revenues for
the second quarter of 1999. In the settlement, the Company consented, without
admitting or denying the SEC findings, to the SEC's entry of an administrative
order that it cease and desist from committing or causing violations of certain
of the antifraud, books and records, and internal controls provisions of the
federal securities laws. Specifically, the SEC's Order found that, at least by
June 9, 1999, the Company was aware of sufficient adverse information about its
second quarter performance to make its continued support of public forecasts
unreasonable. On July 6, 1999, the Company announced that both its second
quarter revenues and earnings per share would be lower than previously
anticipated. The SEC order assessed no monetary penalty or fine against the
Company. As previously disclosed, the Company cooperated fully with the SEC in
its inquiry.
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Effective July 1, 2000, 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 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 have been returned to the Company
as payment for the outstanding amount of the promissory note. The 7,892,612
shares returned to the Company will be classified as treasury shares.
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 PRONOUNCEMENT
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities was issued in 1998. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
derivatives used for hedging purposes. SFAS No. 133 requires that entities
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective
for the Company in its first fiscal quarter of 2001. Management is currently
assessing the impact that the adoption of these standards will have on the
Company's financial statements.
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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. In July 2000, the Company
resolved an action alleging breach of warranty and fraud, among other things,
arising out of a transaction worth in excess of $11 million at its closing in
1995.
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 involving shares
worth, in aggregate, approximately $132 million as valued at the time of the
respective deals. 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 then valued at over $200 million 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 Company and
this seller group currently are litigating the question of whether their dispute
should be submitted to arbitration for resolution. The extent of damages in the
underlying action has not yet been determined.
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 is engaged in discussions 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.
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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 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 and (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 March 31, 1999 and July 6, 1999
at prices allegedly known to be inflated by the alleged material misstatements
and omissions. The plaintiffs in these actions seek damages with interest, costs
and such other relief as the court deems proper. 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. The claims and putative class members in this case fall within
the scope of the consolidated class actions in Texas. 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 two arbitration actions
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
first of these actions, filed in state court in Oregon in November 1999, was
resolved in June 2000. The two arbitrations that have been initiated both relate
to the sale of businesses to Eastern. For reasons similar to those alleged in
the class actions described above, or for reasons related to their acquisition
by Eastern, these individuals allege that the stock they received was
overvalued. Two other lawsuits were filed in June 2000, one in state court in
California and another in state court in Virginia, both also relating to the
sales of businesses to the Company. With the exception of the Oregon case and
one of the arbitration cases, which have been resolved, all of these matters are
in an early stage and the extent of possible damages, if any, cannot yet be
determined.
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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
alleged common stock sales during the three months ended June 30, 1999 and/or
their oversight of the Company's affairs. The lawsuits name Waste Management,
Inc. as a nominal defendant and seek compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such other relief as the
respective courts deem proper. The defendants have not yet been required to
respond to the complaints.
Beginning at year end 1999 the Company became involved in a series of
disputes with Louis D. Paolino, former President and Chief Executive Officer of
Eastern, and others in connection with the Eastern Merger. The Company alleged,
among other things, that the defendants usurped Eastern corporate opportunities
for personal gain and otherwise mismanaged certain affairs of Eastern. Mr.
Paolino and others alleged that the Company and unnamed others committed
security fraud alleging that the stock they were issued in connection with the
Eastern Merger was over-valued because the Company failed to disclose that it
was having problems integrating the operations of WM Holdings and the Company
after the WM Holdings Merger. The parties to these suits have withdrawn their
respective complaints and are engaging in discussions to resolve these issues.
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.
In addition, the SEC notified the Company of an informal inquiry into the
period ended June 30, 1999, as well as certain sales of the Company's common
stock that preceded the Company's July 6, 1999 earnings announcement. On June
21, 2000 the Company consented, without admitting or denying the findings, to
the SEC's entry of an administrative Cease and Desist Order, finding that the
Company had violated certain of the antifraud, books and records, and internal
control provisions of the federal securities laws in connection with the July 6,
1999 announcement. The Order did not impose any fines or monetary penalties. The
SEC noted in the Order that its inquiry was ongoing as to other parties.
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 Company is conducting a thorough investigation of each of the
allegations that have been made in connection with the Company's second quarter
1999 earnings communications and other matters alleged in the various
complaints. As part of this 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 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.
Roderick M. Hills, a former chairman of the SEC and the former chairman of the
Company's Audit Committee, served as Chairman of the Special Committees I until
he retired from the Board of Directors in May 2000 in accordance with the
retirement
47
<PAGE> 49
provisions contained in the Company's Corporate Governance Guidelines. John C.
Pope, current Chairman of the Company's Audit Committee, has succeeded Mr. Hills
as Chairman of the Special Committee I.
The Company received a Civil Investigative Demand ("CID") from the
Antitrust Division of the United States Department of Justice in July 1999
inquiring into the Company's non-hazardous solid waste operations in the State
of Massachusetts. The CID purports to have been issued for the purpose of
determining whether the Company has engaged in monopolization, illegal contracts
in restraint of trade, or anticompetitive acquisitions of disposal and/or
hauling assets. The CID requires the Company to provide the United States
Department of Justice with certain documents to assist it in its inquiry with
which the Company is fully cooperating.
On July 16, 1999, a lawsuit was filed against the Company in the Circuit
Court for Sumter County in the State of Alabama. The plaintiff in the lawsuit
purported to allege on behalf of a class of similarly situated persons that the
Company has deprived the class of lump sum payments of pension plan benefits
allegedly promised to be paid in connection with termination of the Plan. On
behalf of the purported class, the plaintiff sought compensatory and punitive
damages, costs, restitution with interest, and such relief as the Court deemed
proper. On July 29, 1999, the Company announced that it had determined to
proceed with the termination of the Plan, liquidating the Plan's assets and
settling its obligations to participants. The plaintiff voluntarily dismissed
her case on September 13, 1999. However, that same day, attorneys filed a
lawsuit on behalf of a putative class of plan participants against the Company,
the Waste Management, Inc. Pension Plan, and various individual defendants,
alleging violations of the Employee Retirement Income Security Act of 1974
("ERISA") with respect to the termination of the Plan. Since the initial filing
of the case, the plaintiffs have voluntarily dismissed certain counts and the
Company has filed a Motion to Dismiss with respect to the remaining claims.
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 June 30, 2000, there were five 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.
48
<PAGE> 50
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("CERCLA" or "Superfund"). The majority of
these proceedings are based on allegations that certain subsidiaries of the
Company (or their predecessors) transported hazardous substances to the sites in
question, often prior to acquisition of such subsidiaries by the Company. 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 FBI pursuant to an
investigation of the generator of the sludge materials, a company that provides
waste treatment services. Subsequently, the Company received two Grand Jury
subpoenas as well as 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 June 30, 2000, the Company or its subsidiaries had been notified that
they are potentially responsible parties in connection with 85 locations listed
on the NPL. Of the 85 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 68 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 litigation is currently in the
discovery phase, and the Company is preparing a rebuttal to plaintiff's expert
report on causation. The Company is vigorously defending itself in the
litigation.
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
49
<PAGE> 51
County employee. The proceeding is based on events that allegedly occurred prior
to the WM Holdings Merger in connection with a WM Holdings landfill development
project. The indictment includes allegations that certain of the defendants
engaged in conduct involving fraud, wiretapping, theft of a trade secret and
manipulation of computer data, and that they engaged in a conspiracy to do so.
If convicted, the most serious of the available sanctions against the corporate
defendants would include substantial fines and forfeitures. The Company believes
that meritorious defenses exist to each of the allegations, and the defendants
are vigorously contesting them. The Company believes that the ultimate outcome
of this matter will not have a material adverse effect on the Company's
financial statements.
The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. In this action, the Company is seeking a declaratory judgment that
environmental liabilities asserted against the Company or its subsidiaries, or
that may be asserted in the future, are covered by insurance policies purchased
by the Company or its subsidiaries. The Company is also seeking to recover
defense costs and other damages incurred as a result of the assertion of
environmental liabilities against the Company or its subsidiaries for events
occurring over at least the last 25 years at approximately 140 sites and the
defendant insurance carriers' denial of coverage of such liabilities. While the
Company has reached settlements with some of the carriers, the remaining
defendants have denied liability to the Company and have asserted various
defenses, including that environmental liabilities of the type for which the
Company is seeking relief are not risks covered by the insurance policies in
question. The remaining defendants are contesting these claims vigorously.
Discovery is complete as to the 12 sites in the first phase of the case and
discovery is expected to continue for several years as to the remaining sites.
Currently, trial dates have not been set. The Company is unable at this time to
predict the outcome of this proceeding. No amounts have been recognized in the
Company's 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.
At the Company's Annual Meeting of Stockholders held on May 16, 2000, a
proposal to elect the nominees listed in the following table as directors of the
Company was submitted to a vote of the Company's stockholders. The following
table also shows the results of voting as to each nominee:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- ----------- --------------
<S> <C> <C>
Robert S. Miller.................................. 489,302,603 63,280,277
Paul M. Montrone.................................. 544,093,613 8,489,267
A. Maurice Myers.................................. 545,260,749 7,322,131
</TABLE>
50
<PAGE> 52
At the same meeting, the following proposals were also adopted by the
Company's stockholders. The voting was as follows:
<TABLE>
<CAPTION>
VOTES
VOTES FOR AGAINST ABSTENTIONS
----------- ---------- -----------
<S> <C> <C> <C>
Approve 1,000,000 share increase in shares
available for grant under the Company's 1996
Stock Option Plan for Non-Employee Directors... 514,946,529 34,510,030 3,126,320
Approve adoption of Company's 2000 Stock
Incentive Plan................................. 474,461,424 75,102,940 3,018,516
Approve 1,250,000 share increase in shares
reserved for purchase and issuance under the
Company's Employee Stock Purchase Plan......... 536,756,251 13,060,591 2,766,038
Approve appointment of Arthur Andersen LLP as the
Company's independent auditors for the fiscal
year ending December 31, 2000.................. 547,988,813 2,769,039 1,825,028
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
3 -- Restated Bylaws.
10 -- Employment Agreement between the Company and Robert E.
Dees, Jr., dated May 10, 2000.
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.
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By: /s/ WILLIAM L. TRUBECK
----------------------------------
William L. Trubeck
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ BRUCE E. SNYDER
----------------------------------
Bruce E. Snyder
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Date: August 11, 2000
52
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
3 -- Restated Bylaws.
10 -- Employment Agreement between the Company and Robert E.
Dees, Jr., dated May 10, 2000.
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.
