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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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)
DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1001 FANNIN STREET, SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 512-6200
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
4% Convertible Subordinated Debentures due 2002
Securities registered pursuant to Section 12(g) of the Act:
5.75% Convertible Subordinated Notes due 2005
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 8, 2001, was approximately $16,902,407,699. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)
The number of shares of Common Stock, $.01 par value, of the registrant
outstanding at March 8, 2001, was 624,244,514 (excluding treasury shares of
5,377,308).
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO
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Proxy Statement for the
2001 Annual Meeting of Stockholders Part III
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 29
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 79
Item 11. Executive Compensation...................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 80
Item 13. Certain Relationships and Related Transactions.............. 80
PART IV
Item 14. Financial Statement Schedules, Exhibits, and Reports on Form
8-K......................................................... 80
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PART I
ITEM 1. BUSINESS.
GENERAL
Waste Management, Inc. is one of the largest publicly-owned companies
providing integrated waste services in North America. Through our subsidiaries,
we provide collection, transfer, recycling and resource recovery, and disposal
services. We are also a leading developer, operator and owner of waste-to-energy
facilities in the United States. Our customers include commercial, industrial,
municipal and residential customers, other waste management companies,
governmental entities and independent power markets. During 2000, none of our
customers accounted for more than 5% of our operating revenue. We employed
approximately 57,000 people as of December 31, 2000.
The Company was incorporated in Oklahoma in 1987 under the name "USA Waste
Services, Inc." and was reincorporated as a Delaware company in 1995. In 1998,
we merged with Waste Management, Inc., who became our 100% owned subsidiary and
whose name we changed to Waste Management Holdings, Inc., or "WM Holdings." At
the same time, we changed our name to Waste Management, Inc. When the terms
"Waste Management," "WMI," the "Company," or "we" are used in this document,
those terms are being used to refer to Waste Management, Inc., its subsidiaries,
affiliates and predecessors, unless the context requires otherwise. The
Company's principal executive offices are located at 1001 Fannin Street, Suite
4000, Houston, Texas 77002. Our telephone number at that address is (713)
512-6200. Our stock is traded on the New York Stock Exchange under the symbol
"WMI."
In past years, the waste management industry went through a period of
significant consolidation. Through acquisitions, we grew from a regional
provider of solid waste collection, transfer and disposal services to a national
and international provider of solid waste services as well as recycling,
portable sanitation, industrial cleaning, hazardous waste management and
radioactive waste management services. We also became a leading developer of
facilities for, and a provider of services to, the waste-to-energy and
waste-fuel powered independent power markets. By year end 1998, we were
operating throughout the United States, in Canada, Mexico, throughout Europe,
the Pacific Rim, South America and in other select international markets.
In 1999, the Company announced a strategic plan focused on emphasizing
internal growth and focusing on our core business -- North American solid waste
management services. As part of the plan, beginning in 1999 and throughout 2000,
we sold the majority of our international operations and certain of our non-
integrated North American solid waste operations. We also have sold, or
announced agreements to sell, most of our non-solid waste operations, including
our: low-level and other radioactive waste operations; organic residuals
operations; industrial services and hazardous waste treatment operations; and
independent power plants. The proceeds from the sales were used to repay a
portion of our debt. More information about these sales and our debt repayments
can be found in Notes 4 and 7 to the consolidated financial statements.
Also as part of the plan, we began other initiatives in 1999 that continued
through 2000, including:
- Linking our information technology initiatives to our business strategy
and rolling out new software systems that give our employees better tools
to do their jobs;
- Developing standard policies and procedures, and increasing the flow of
communication in an effort to streamline our business and bring more
discipline and accountability, but at the same time maintain
decentralized operations, so that authority is still close to the
customer; and
- Restoring a capital expenditure policy that focuses on the internal
growth rather than the external growth of the Company.
We plan to continue focusing on internal growth and profits as opposed to
external growth, or growth through acquisitions. We believe that there remain
opportunities to expand our services through acquisitions of businesses and
operations that can be effectively integrated with our operations, and will
pursue those opportunities when available. However, our goal is to refocus on
our core business of North American solid
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waste management and build a stronger company by continuing to find new ways to
increase efficiency, improve productivity and achieve greater profitability.
OPERATIONS
General
The table below shows for each of the three years in the three-year period
ended December 31, 2000 the total revenues (in millions) contributed by our
principal lines of business. More information about the results of operations
for our principal lines of business is included in Note 15 to the consolidated
financial statements.
YEARS ENDED DECEMBER 31,
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2000 1999 1998
------- ------- -------
North American Solid Waste:
Collection............................................ $ 7,675 $ 7,553 $ 6,964
Disposal.............................................. 3,366 3,267 3,169
Transfer.............................................. 1,394 1,195 1,054
Recycling and other................................... 805 664 653
Intercompany.......................................... (2,022) (1,994) (1,696)
------- ------- -------
11,218 10,685 10,144
WM International........................................ 809 1,651 1,534
Non-solid waste......................................... 465 791 948
------- ------- -------
Operating revenues...................................... $12,492 $13,127 $12,626
======= ======= =======
North American Solid Waste
The Company's North American solid waste, or "NASW," operations are
comprised of six geographic operating Areas with similar economic
characteristics. The services provided by the NASW Areas include collection,
transfer, disposal (solid waste landfills, hazardous waste landfills and
waste-to-energy facilities), recycling and other services in the United States,
Canada and Mexico.
Collection. Collection involves picking up and transporting waste from
where it was generated to a transfer station or site of disposal. Depending on
the type of customer being served, we generally provide collection services
under one of two types of arrangements:
- For commercial and industrial collection services, there is generally a
one to three-year service agreement. The fees under the agreements are
determined by factors such as collection frequency, type of collection
equipment furnished by the Company, type and volume or weight of the
waste collected, the distance to the disposal facility, labor cost and
cost of disposal. As part of the service, we provide steel containers to
most of the commercial and industrial customers to store their solid
waste. The containers range in size from one to 45 cubic yards and are
designed so that they can be lifted mechanically and either emptied into
a truck's compaction hopper or directly into a disposal site. By using
containers, we can service most of our commercial and industrial
customers with trucks operated by only one employee.
- For most residential collection services, there is a contract with, or
franchise granted by, a municipality or regional authority that has
granted the Company the exclusive right to service all or a portion of
the homes in that jurisdiction. These contracts or franchises are
typically for one to five years, but can sometimes be much longer. The
fees for residential collection are either paid by the authorities from
their tax revenues or service charges, or are paid directly by the
residents receiving the service.
Transfer Stations. A transfer station is a facility located near
residential and commercial collection routes where solid waste is received from
trucks and then transferred to and compacted in large, specially constructed
containers for transportation to disposal sites. Fees at transfer stations are
usually based on the type and volume or weight of the waste transferred and the
transportation distance to the disposal site. At
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December 31, 2000, we operated approximately 300 transfer stations in North
America. There are two main reasons for using transfer stations:
- Their use reduces the costs associated with transporting waste to final
disposal sites. This is because consolidating and compacting the waste
increases the density of the waste, allowing more waste to be transported
in one trip. The consolidation of the waste therefore also improves the
use of collection personnel and equipment.
- The use of transfer stations can also help us internalize disposal costs.
Internalization means we are able to pay ourselves, rather than a third
party, the fees charged to dispose of waste we picked up. This is because
a greater percentage of the waste we collect can be efficiently disposed
of at one of our own disposal sites, rather than having to use one owned
by a third party.
Disposal. Landfills are the main depository for solid waste in North
America. Solid waste landfills are located on land with geological and
hydrological properties that limit the possibility of water pollution, and are
operated under prescribed procedures. Currently, solid waste landfills must be
designed, permitted, operated and closed in compliance with federal, state and
local regulations pursuant to Subtitle D of the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"). The operation of a solid waste
landfill includes excavation, construction of liners and final caps, continuous
spreading and compacting of waste, and covering of waste with earth or other
inert material at least once a day. These operations are carefully planned to
maintain sanitary conditions and to ensure the best possible use of the airspace
and prepare the site so it can ultimately be used for other purposes.
Access to a disposal facility, such as a solid waste landfill, is a
necessity for all solid waste management companies. While access can be obtained
to disposal facilities owned or operated by unaffiliated third parties, we
believe it is usually preferable for our collection operations to use disposal
facilities that we own or operate. That way, access can be assured on favorable
terms, and the Company achieves greater internalization, or pays itself instead
of a third party. The fees charged at disposal facilities, which are known as
"tipping fees," are based on market factors and the type and weight or volume of
solid waste deposited and the type and size of the vehicles used in the
transportation of the waste.
We also operate 5 secure hazardous waste landfills in the United States.
Under RCRA, all hazardous waste landfills must be permitted by the federal
government, and all of ours have obtained such permits. These landfills must
also comply with certain operating standards, and our hazardous waste landfills
have received the permits and approvals needed to accept hazardous waste,
although some of them can only accept certain kinds of hazardous waste. Only
hazardous waste in a stable, solid form which meets applicable regulatory
requirements can be deposited in our secure disposal cells. Additionally, our
hazardous waste landfills are sited, constructed and operated in a manner
designed to provide long-term containment of the waste.
Additionally, hazardous waste sometimes can be treated before disposal.
Generally, these treatments involve the separation or removal of solid materials
from liquids and chemical treatments that involve the transformation of wastes
into inert materials. The Company operates a hazardous waste facility at which
it isolates treated hazardous wastes in liquid form by injection into deep wells
that have been drilled in rock formations far below the base of fresh water to a
point that is separated by other substantial geological confining layers.
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We owned or operated 305 solid waste and hazardous landfills at December
31, 2000. The tonnage volume that we received in 2000 is shown below (in
thousands):
# OF SITES TOTAL TONS TONS PER DAY
---------- ---------- ------------
Solid waste......................................... 300 119,676 440
Hazardous........................................... 5 1,794 7
--- ------- ---
305 121,470 447
===
Closed during 2000.................................. 7 198
Sold during 2000.................................... 23 1,851
--- -------
335 123,519
=== =======
Based on remaining permitted capacity as of December 31, 2000 and projected
annual disposal volumes, the average remaining landfill life for these landfills
was approximately 18 years. When based on remaining permitted capacity and
probable expansion capacity, the average remaining landfill life for these
landfills was approximately 29 years. For the Company's operating landfills as
of December 31, 2000, the expected remaining airspace capacity in cubic yards
and the expected remaining landfill gate tons is shown below (in thousands):
PROBABLE
PERMITTED EXPANSION TOTAL
--------- --------- ---------
Remaining cubic yards............................... 3,068,114 1,835,985 4,904,099
Remaining tonnage................................... 2,446,683 1,477,775 3,924,458
The estimated operating lives, based on remaining permitted and probable
expansion capacity and projected annual disposal volume, in years, as of
December 31, 2000, is as follows:
0 TO 5 6 TO 10 11 TO 20 21 TO 40 41+ TOTAL
------ ------- -------- -------- --- -----
Owned/operated through lease.................... 33 29 48 73 76 259
Contracts, primarily with municipalities........ 19 4 7 10 6 46
-- -- -- -- -- ---
Total........................................... 52 33 55 83 82 305
In the ordinary course of business, we apply for and generally receive
landfill airspace expansions prior to reaching permitted capacities and we
generally receive operating contract renewals prior to the end of disposal site
operating agreements.
Recycling. The Company provides recycling services in the United States
and Canada through its Recycle America(R), Recycle Canada(R) and other programs.
Recycling involves the removal of reusable materials from the waste stream for
processing and sale or other disposition for use in various applications.
Participating commercial and industrial operations use containers to separate
recyclable paper, glass, plastic and metal wastes for collection, processing and
sale by the Company. Fees are determined by such considerations as competition,
frequency of collection, type and volume or weight of the recyclable material,
degree of processing required, distance the recyclable material must be
transported and value of the recyclable material.
As part of our residential solid waste collection services, we engage in
curbside collection of recyclable materials from residences in the United States
and Canada. Curbside recycling services generally involve the collection of
recyclable paper, glass, plastic and metal waste materials, which may be
separated by residents into different waste containers or commingled with other
recyclable materials. The recyclable materials are then typically deposited at a
local materials recovery facility ("MRF"), where they are sorted and processed
for sale. We operate over 190 MRFs for the receipt and processing of recyclable
materials. Our processing of recyclable materials includes separating recyclable
materials according to type and baling or otherwise preparing the separated
materials for sale.
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Other. We operate and own 16 waste-to-energy facilities in the United
States. Our waste-to-energy projects are capable of processing up to 23,750 tons
of solid waste per day. The heat from this combustion process is converted into
high-pressure steam, which typically is used to generate electricity for sale to
public utility companies under long-term contracts.
At 66 of our owned or operated solid waste landfill facilities, we are
engaged in methane gas recovery operations. These operations involve the
installation of a gas collection system into a solid waste landfill facility.
Through the gas collection system, gas generated by decomposing solid waste is
collected and transported to a gas-processing facility at the landfill site.
Through physical and chemical processes, methane gas is separated from
contaminants. The processed methane gas is then generally either sold directly
to industrial users or to an affiliate of the Company which uses it as a fuel to
power electricity generators. Electricity generated by these facilities is sold,
usually to public utilities or industrial customers under long-term sales
contracts, often under terms or conditions which are subject to approval by
regulatory authorities.
We rent and service portable restroom facilities to municipalities and
commercial customers under the name Port-o-let(R), and provide street and
parking lot sweeping services.
We also provide in-plant services, or "IPS," which is an outsourcing of our
employees to provide full service waste management to customers at their plants.
Because we have vertically integrated waste management operations, we are able
to provide customers with full management of their waste, including choosing the
right sized containers, finding recycling opportunities, minimizing their waste,
and transporting and disposing of their waste.
WM International
The Company's international, or "WM International," operations include all
of our operations outside of North America. The WM International operations
include the collection and transportation of solid, hazardous and medical wastes
and recyclable materials and the treatment and disposal of recyclable materials.
Also included are the operation of 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 the construction of treatment or disposal facilities for
third parties.
As discussed above, part of our 1999 strategic plan was to divest all of
our WM International operations. As of December 31, 2000, all of our WM
International operations had been divested except for certain operations in
Sweden and our operations in Argentina and Israel. These operations are expected
to be sold in 2001.
Non-Solid Waste Services
The Company's non-solid waste operations include all hazardous waste
management and other North American non-solid waste services (except for
hazardous waste landfills, which are included in NASW operations), including
low-level and other radioactive waste services, geosynthetic manufacturing and
installation services and independent power projects. Hazardous waste management
services include the collection, transfer and treatment of hazardous waste. The
Company's low-level and other radioactive waste services generally consist of
disposal, processing and various other special services related to these types
of waste. Additionally, the Company provides hazardous, radioactive and mixed
waste program and facilities management services. The geosynthetic manufacturing
and installation services generally involve the making and installing of
landfill liners. Finally, the services included in the Company's independent
power projects are the operation and, in some cases the ownership, of
independent power projects that either cogenerate electricity and thermal energy
or generate electricity alone for sale to customers, including public utilities
and industrial customers.
These operations are considered "non-core," since they are not part of our
NASW operations. Therefore, as discussed above, as part of the 1999 strategic
plan, we sold all of these operations other than the geosynthetic manufacturing
and installation services and independent power projects in 2000. However, we
expect to sell these operations in 2001.
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COMPETITION
The solid waste industry is very competitive. The competition we encounter
is from a number of publicly-held companies, locally-owned private solid waste
services companies, and large commercial and industrial companies handling their
own waste collection or disposal operations. We also have competition from
municipalities and other regional government authorities with respect to
residential and commercial solid waste collection and solid waste landfills. The
municipalities and other regional governmental authorities can sometimes offer
lower direct charges to the customer for the same service by subsidizing the
cost of services through the use of tax revenues and tax-exempt financing.
Operating costs, disposal costs, and collection fees vary widely throughout
the geographic areas in which we operate. The prices that we charge are
determined locally, and typically vary by the volume, type of waste collected,
treatment requirements, risks involved in the handling or disposing of waste,
frequency of collections, distance to final disposal sites, labor costs and
amount and type of equipment furnished to the customer. Intense competition is
encountered for both quality of service and pricing. From time to time,
competitors may reduce the price of their services and accept lower profit
margins in an effort to expand or maintain market share or to successfully
obtain competitively bid contracts.
EMPLOYEES
At December 31, 2000, the Company had approximately 57,000 full-time
employees, of which approximately 8,000 were employed in clerical,
administrative, and sales positions, 3,000 in management, and the balance in
collection, disposal, transfer station and other operations. Approximately
15,000 of our employees are covered by collective bargaining agreements. The
Company has not experienced a significant work stoppage, and management
considers its employee relations to be good.
INSURANCE AND FINANCIAL ASSURANCE OBLIGATIONS
We carry a broad range of insurance coverages, including general liability,
automobile liability, real and personal property, workers' compensation,
directors' and officers' liability, environmental impairment liability, and
other coverages we believe are customary to the industry. Except as discussed in
the "Legal Proceedings" section of this report, we do not expect the impact of
any known casualty, property, environmental insurance or other contingency to be
material to our financial condition, results of operations or cash flows.
Through December 31, 2000, we have not experienced any difficulty in
obtaining insurance. However, if we were unable to obtain adequate insurance in
the future, or decided to operate without insurance, any partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
could have a material adverse effect upon our financial condition, results of
operations or cash flows. Additionally, our continued access to casualty and
pollution legal liability insurance with sufficient limits at acceptable terms
is an important aspect of obtaining revenue-producing waste service contracts.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. We are also
required to provide financial assurance for the final closure and post-closure
obligations with respect to our landfills. We establish financial assurance in
different ways, depending on the jurisdiction, including escrow-type accounts
funded by revenues during the operational life of a facility, letters of credit
from third parties, surety bonds and traditional insurance. However, we also
establish financial assurance through "captive insurance" which is insurance
provided by our wholly-owned, but independent, regulated insurance company
subsidiary, National Guaranty Insurance Company ("NGIC"). NGIC is authorized to
write up to $925 million in insurance policies or surety bonds for our final
closure and post-closure requirements. When the use of NGIC is not acceptable,
we have other alternatives as mentioned above.
As of December 31, 2000, we had provided letters of credit of approximately
$1.7 billion, surety bonds of approximately $2.8 billion and insurance policies
of approximately $900 million to municipalities, customers and regulatory
authorities supporting tax-exempt bonds, performance of landfill final closure
and post-closure requirements, insurance contracts, municipal contracts and
financial guarantee obligations. We have not experienced difficulty in obtaining
financial assurance for our current operations. However, continued
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availability of surety bonds, letters of credit and insurance policies in
sufficient amounts at acceptable rates is an important aspect of obtaining
additional tax-exempt financing, municipal collection contracts and obtaining or
retaining disposal site or transfer station operating permits.
REGULATION
The Company's business is subject to extensive and evolving federal, state,
local and foreign environmental, health, safety, and transportation laws and
regulations. These regulations are administered by the EPA in the United States,
various other federal, state, and local environmental, zoning, transportation,
land use, health, and safety agencies in the United States and various other
agencies outside of the United States. Many of these agencies regularly examine
the Company's operations to monitor compliance with these laws and regulations.
Governmental authorities have the power to enforce compliance with these
laws and regulations and to obtain injunctions or impose civil or criminal
penalties in case of violations.
Because the major component of our business is the collection and disposal
of solid waste in an environmentally sound manner, a significant amount of our
capital expenditures are related, either directly or indirectly, to
environmental protection measures, including compliance with federal, state and
local provisions that have been enacted or adopted regulating the discharge of
materials into the environment. There are costs associated with siting, design,
operations, monitoring, site maintenance, corrective actions, financial
assurance, and facility closure and post-closure obligations. In connection with
our acquisition, development or expansion of a landfill or transfer station, we
must often spend considerable time, effort and money to obtain required permits
and approvals. There can not be any assurances that we will be able to obtain
governmental approvals needed. Once obtained, operating permits are subject to
modification and revocation by the issuing agency. Compliance with these and any
future regulatory requirements could require the Company to make significant
capital and operating expenditures. However, most of these expenditures are made
in the normal course of business and do not place us at any competitive
disadvantage.
The primary United States federal statutes affecting the Company's business
are summarized below:
- RCRA, regulates the handling, transportation and disposal of hazardous
and non-hazardous wastes and delegates authority to states to develop
programs to ensure the safe disposal of solid wastes. In 1991, the EPA
issued its final regulations under Subtitle D of RCRA, which set forth
minimum federal performance and design criteria for solid waste
landfills. These regulations must be implemented by the states, although
states can impose requirements that are more stringent than the Subtitle
D standards. The Company could incur costs in complying with these
standards; however, we do not believe that such costs would have a
material adverse effect on our operations. From time to time, the Company
may incur costs in complying with these standards in the ordinary course
of its operations; however all of the Company's planned landfill
expansions will be engineered to meet or exceed applicable Subtitle D
requirements.
- The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), provides for the cleanup of sites from
which there is a release or threatened release of a hazardous substance
into the environment. CERCLA's primary means for accomplishing
remediation of such problems is to impose liability for cleanup of
disposal sites on current owners and operators, former owners and
operators at the time of disposal as well as the generators of the waste
and the transporters who select the disposal site. Liability under CERCLA
is not dependent on the intentional disposal of hazardous wastes. It can
be based upon the release or threatened release even as a result of
lawful, unintentional and non-negligent action, of any one of the more
than 700 "hazardous substances" listed by the EPA, even in very small
quantities.
- The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"),
establishes rules for regulating the discharge of pollutants into
streams, rivers, groundwater, or other surface waters from a variety of
sources, including solid waste disposal sites. If run-off from the
Company's operations may be discharged into surface waters, the Clean
Water Act requires us to apply for and obtain discharge
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permits, conduct sampling and monitoring, and, under certain
circumstances, reduce the quantity of pollutants in those discharges. In
1990, the EPA issued additional rules under the Clean Water Act, which
establish standards for management of storm water runoff from landfills
and which require landfills to obtain storm water discharge permits. In
addition, if a landfill or a transfer station discharges wastewater
through a sewage system to a publicly owned treatment works, the facility
must comply with discharge limits imposed by the treatment works. Also,
if development of a landfill may alter or affect "wetlands," a permit may
have to be obtained before such development could commence. This
requirement is likely to affect the construction or expansion of many
landfill sites. The Clean Waster Act provides for civil, criminal and
administrative penalties for violations of its provisions.
- The Clean Air Act of 1970, as amended (the "Clean Air Act"), provides for
increased federal, state and local regulation of the emission of air
pollutants. The EPA has applied the Clean Air Act to certain of our
operations, including solid waste landfills and waste collection
vehicles. Additionally, in 1996, the EPA issued new emission guidelines
for solid waste landfills. These regulations impose limits on air
emissions from solid waste landfills. These guidelines, along with the
new permitting programs established under the recent Clean Air Act
amendments, will likely subject solid waste landfills to significant new
permitting requirements and, in some instances, require installation of
methane gas recovery systems to reduce emissions to allowable limits.
However, the costs of compliance with Clean Air Act permitting and
emission control requirements are not anticipated to have a material
adverse effect on the Company. At 66 of our facilities, methane gas is
recovered and used to power electricity production facilities.
- The Occupational Safety and Health Act of 1970, as amended ("OSHA"),
establishes certain employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious
injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various record keeping, disclosures and
procedural requirements. Various standards for notices of hazards, safety
in excavation and demolition work, and the handling of asbestos, may
apply to our operations.
There are also various state and local regulations that affect our
operations. Generally, states have their own laws and regulations that are
sometimes more strict than comparable federal laws and regulations governing
solid waste disposal, water and air pollution, releases and cleanup of hazardous
substances and liability for such matters. Additionally, our collection and
landfill operations could be affected by the trend toward requiring the
development of waste reduction and recycling programs. Legislative and
regulatory measures to either require or encourage waste reduction at the source
and waste recycling have also been considered by the United States Congress and
the EPA.
Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of solid waste generated outside the
state. While laws that overtly discriminate against out-of-state waste have been
found to be unconstitutional, some laws that are less overtly discriminatory
have been upheld in court. Additionally, certain state and local governments
have enacted "flow control" regulations, which attempt to require that all waste
generated within the state or local jurisdiction be deposited at specific sites.
In 1994, the United States Supreme Court ruled that a flow control ordinance was
unconstitutional. However, from time to time, the United States Congress has
considered legislation authorizing states to adopt regulations, restrictions, or
taxes on the importation of out-of-state or out-of-jurisdiction waste. These
congressional efforts have been unsuccessful. The United States Congress'
adoption of legislation allowing restrictions on interstate transportation of
out-of-state or out-of-jurisdiction waste or certain types of flow control, or
the adoption of legislation affecting interstate transportation of waste at the
state level, could adversely affect the Company's solid waste management
services.
Many states and local jurisdictions have enacted "fitness" laws that allow
the agencies that have jurisdiction over waste services contracts or permits to
deny or revoke these contracts or permits based on the applicant or permit
holder's compliance history. Some states and local jurisdictions go further and
consider the compliance history of the parent, subsidiaries or affiliated
companies, in addition to the applicant or permit
8
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holder. These laws authorize the agencies to make determinations of an applicant
or permit holder's fitness to be awarded a contract to operate and to deny or
revoke a contract or permit because of unfitness unless there is a showing that
the applicant or permit holder has been rehabilitated through the adoption of
various operating policies and procedures put in place to assure future
compliance with applicable laws and regulations.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
When we use words like "may," "believe," "expect," "anticipate," "should,"
"estimate," "project," "plan," their opposites and similar expressions, the
Company is making forward-looking statements. These expressions are most often
used in statements relating to business plans, strategies, anticipated benefits
or projections about the anticipated revenues, earnings or other aspects of our
operating results. We make these statements in an effort to keep stockholders
and the public informed about our business and have based these forward-looking
statements on our current expectations about future events. You should view such
statements with caution. These statements are not guarantees of future
performance or events. As noted elsewhere in this report, all phases of our
business are subject to uncertainties, risks and other influences, many of which
the Company has no control over. Additionally, any of these factors, either
alone or taken together, could have a material adverse effect on the Company and
could change whether any forward-looking statement ultimately turns out to be
true.
Outlined below are some of the risks that the Company faces and that could
affect our business and financial statements for 2001 and beyond. However, they
are not the only risks that the Company faces. There may be additional risks
that we do not presently know or that we currently believe are immaterial which
could also impair our business.
We Face Uncertainties Relating to Pending Litigation and Investigations
On three different occasions during July and August 1999, we lowered our
expected earnings per share for the three months ended June 30, 1999.
Additionally, in February 1998, Waste Management Holdings announced restatements
of its prior-period financial statements.
More than 30 lawsuits that claim to be based on our 1999 announcements have
been filed against us and some of our current and former officers and directors.
These lawsuits, which have been consolidated into one action, assert various
claims under the federal securities laws, including claims that (i) the
projections we made about our June 30, 1999 earnings were false and misleading,
(ii) we failed to disclose information about our earnings projections that would
have been important to purchasers of our stock, (iii) we made further
misrepresentations after July 29,1999 about our operations and finances,
resulting in the Company taking a pre-tax charge of $1.76 billion in the third
quarter of 1999, and (iv) we made false or misleading representations in the
registration statement and prospectus filed with the SEC in connection with our
July 1998 acquisition of WM Holdings. The plaintiffs also claim that certain of
our current and former officers and directors sold their common stock during
times when they knew the price was artificially inflated by the alleged
misstatements and omissions.
Additionally, individuals who sold their businesses to us, WM Holdings or
other companies we later acquired have filed lawsuits against us and WM Holdings
alleging various claims, including fraud, breach of contract, breach of
warranty, overvaluation of the stock they received and other claims similar to
those included in the class action described above.
Other lawsuits relating to the facts described above, including derivative
actions, have been filed against Waste Management Holdings and us. We recently
announced a proposed settlement, which is subject to court approval, with
respect to the derivative suit against WM Holdings relating to the February 1998
restatement of earnings, as well as claims by former officers of WM Holdings for
retirement and other benefits withheld by us.
The SEC has commenced a formal investigation against WM Holdings with
respect to its previously filed financial statements for the years 1991 and
earlier through 1997, and the NYSE has notified us that it is reviewing
transactions in our common stock before our July 6, 1999 earnings announcement.
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We and our subsidiaries are also currently involved in other civil
litigation and governmental proceedings relating to the conduct of our business.
We do not believe it is feasible to predict or determine the outcome or
resolution of any of these proceedings or investigations. In addition, the
timing of the final resolutions to these matters is uncertain. The possible
outcomes or resolutions to these matters or any new litigation or governmental
proceedings could include judgments against us or settlements and could require
substantial payments by us. We believe that adverse outcomes or any other
resolution, such as settlements, could have a material adverse effect on our
financial condition, results of operations and cash flows.
We Could Be Liable For Environmental Damages Resulting From Our Operations
We could be liable if our operations cause environmental damage to our
properties or to nearby landowners, particularly as a result of the
contamination of drinking water sources or soil. Under current law, we could
even be held liable for damage caused by conditions that existed before we
acquired the assets or operations involved. Also, we could be liable if we
arrange for the transportation, disposal or treatment of hazardous substances
that cause environmental contamination, or if a predecessor owner made such
arrangements and under applicable law we are treated as a successor to the prior
owner. Any substantial liability for environmental damage could have a material
adverse effect on our financial condition, results of operations and cash flows.
In the ordinary course of our business, we have in the past, and may in the
future, become involved in a variety of legal and administrative proceedings
relating to land use and environmental laws and regulations. These include
proceedings in which:
- agencies of federal, state, local or foreign governments seek to impose
liability on us under applicable statutes, sometimes involving civil or
criminal penalties for violations, or to revoke or deny renewal of a
permit we need; and
- citizen groups, adjacent landowners or governmental agencies oppose the
issuance of a permit or approval we need, allege violations of the
permits under which we operate or laws or regulations to which we are
subject, or seek to impose liability on us for environmental damage.
The adverse outcome of one or more of these proceedings could have a
material adverse effect on our financial condition, results of operations and
cash flows.
From time to time, we have received citations or notices from governmental
authorities that our operations are not in compliance with our permits or
certain applicable environmental or land use laws and regulations. In the future
we may receive additional citations or notices. We generally seek to work with
the authorities to resolve the issues raised by such citations or notices.
However, we cannot guarantee that we will always be successful in this regard.
Where we are not successful, we may incur fines, penalties or other sanctions
that could have a material adverse effect on our financial condition, results of
operations and cash flows.
Our insurance for environmental liability meets or exceeds statutory
requirements. However, because we believe that the cost for such insurance is
high relative to the coverage it would provide, our coverages are generally
maintained at statutorily required levels. Due to the limited nature of our
insurance coverage for environmental liability, if we were to incur liability
for environmental damage, such liability could have a material adverse effect on
our financial condition, results of operations and cash flows.
Governmental Regulations May Restrict Our Operations Or Increase Our Costs Of
Operations
Stringent government regulations at the federal, state and local level in
the United States and in other countries in which we have operations have a
substantial impact on our business. A large number of complex laws, rules,
orders and interpretations govern environmental protection, health, safety, land
use, zoning,
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transportation and related matters. Among other things, they may restrict our
operations and adversely affect our financial condition, results of operations
and cash flows by imposing conditions such as:
- limitations on the siting and construction of new waste disposal,
transfer or processing facilities or the expansion of existing
facilities;
- limitations and regulations on collection and disposal prices, rates and
volumes;
- limitations or bans on disposal or transportation of out-of-state waste
or certain categories of waste; or
- mandates regarding the disposal of solid waste.
Regulations also affect the siting, design and closure of landfills and
could require us to undertake investigatory or remedial activities, curtail
operations or close a landfill temporarily or permanently. Future changes in
these regulations may require us to modify, supplement or replace equipment or
facilities. The costs of complying with these regulations could be substantial.
In order to develop, expand or operate a landfill or other waste management
facility, we must have various facility permits and other governmental
approvals, including those relating to zoning, environmental protection and land
use.
We Face Potential Difficulties In Continuing To Expand And Manage Our Growth
We have made a number of acquisitions, some of them substantial, and
continue to pursue operations that can be effectively integrated with our
existing operations. Our future financial results and prospects depend in part
on our ability to successfully manage and improve the operating efficiencies and
productivity of these acquired operations. In particular, whether the
anticipated benefits of acquired operations are ultimately achieved will depend
on a number of factors, including our ability to achieve administrative cost
savings, rationalization of collection routes, insurance and bonding cost
reductions, general economies of scale, and our ability, generally, to
capitalize on our asset base and strategic position. Moreover, our ability to
operate successfully will depend on a number of factors, including competition
from other waste management companies, availability of working capital, ability
to maintain margins on existing or acquired operations, and the management of
costs in a changing regulatory environment.
Our future and past acquisitions involve certain other potential risks,
including:
- our failure to accurately assess all of the pre-existing liabilities of
acquired companies;
- unexpected difficulties in successfully integrating the operations of
acquired companies with our existing operations;
- risks and uncertainties regarding government-forced divestitures;
- restraints imposed by federal and state agencies regarding market
concentration and competitor behavior;
- a lack of attractive acquisition opportunities;
- our inability to obtain the capital required to finance potential
acquisitions on satisfactory terms;
- the businesses we acquire not proving profitable; and
- our incurring additional indebtedness or issuing additional equity
securities as a result of future acquisitions.
Our Accounting Policies Concerning Unamortized Capitalized Expenditures Could
Result In A Material Charge Against Our Earnings
In accordance with generally accepted accounting principles, we capitalize
certain expenditures and advances relating to acquisitions, pending
acquisitions, and disposal site development and expansion projects. We expense
indirect acquisition costs, such as executive salaries, general corporate
overhead, public affairs
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and other corporate services, as incurred. Our policy is to charge against
earnings any unamortized capitalized expenditures and advances relating to any
facility or operation that is permanently shut down, any pending acquisition
that is not consummated, and any disposal site development or expansion project
that is not completed. The charge against earnings is reduced by any portion of
the capitalized expenditure and advances that we estimate will be recoverable,
through sale or otherwise. In future periods, we may be required to incur
charges against earnings in accordance with our policy. Depending on the
magnitude, any such charges could have a material adverse effect on our results
of operations.
The Development And Acceptance Of Alternatives To Landfill Disposal And
Waste-To-Energy Facilities Could Reduce Our Ability To Operate At Full
Capacity
Our customers are increasingly using alternatives to landfill disposal,
such as recycling and composting. In addition, state and local governments are
increasingly mandating recycling and waste reduction at the source and
prohibiting the disposal of certain types of wastes, such as yard wastes, at
landfills or waste-to-energy facilities. These developments could reduce the
volume of waste going to landfills and waste-to-energy facilities in certain
areas, which may affect our ability to operate our landfills and waste-to-energy
facilities at full capacity, as well as the prices that we can charge for
landfill disposal and waste-to-energy services.
Our Business Is Seasonal In Nature And Our Revenues And Results Vary From
Quarter To Quarter
Our operating revenues are usually lower in the winter months, primarily
because the volume of waste relating to construction and demolition activities
usually increases in the spring and summer months, and the volume of industrial
and residential waste in certain regions where we operate usually decreases
during the winter months. Our first and fourth quarter results of operations
typically reflect this seasonality. In addition, particularly harsh weather
conditions may result in the temporary suspension of certain of our operations.
Fluctuations In The Price Of Recyclable Materials Affect Our Operating
Revenues
Recyclable materials that we process for sale include paper, plastics,
aluminum and other commodities which are subject to significant price
fluctuations. These fluctuations will affect our future operating revenues and
income.
Intense Competition Could Reduce Our Profitability
We encounter intense competition from governmental, quasi-governmental and
private sources in all aspects of our operations. In North America, the industry
consists of several large national waste management companies, and local and
regional companies of varying sizes and financial resources. We compete with
numerous waste management companies as well as with counties and municipalities
that maintain their own waste collection and disposal operations. These counties
and municipalities may have financial competitive advantages because tax
revenues and tax-exempt financing are available to them. In addition,
competitors may reduce their prices to expand sales volume or to win
competitively bid municipal contracts.
We May Need Additional Capital If Our Cash Flow Is Less Than Expected
We currently expect to generate sufficient cash flow from our operations in
2001 to cover our anticipated cash needs for capital expenditures, acquisitions
and other cash expenditures. If our cash flow from operations during 2001 is
less than currently expected, or our capital requirements increase, either due
to strategic decisions or otherwise, we may elect to incur further indebtedness
or issue equity securities to cover any additional capital needs. However, we
cannot guarantee that we will be successful in obtaining additional capital on
acceptable terms.
Our credit facilities require us to comply with certain financial ratios.
If our cash flows are less than expected or our capital requirements are more
than expected, we may not be in compliance with the ratios. This would result in
a default under our credit agreements. If there were a default, we may not be
able to get waivers or amendments to our credit facilities, and the lenders
could choose to declare all outstanding borrowings due and payable. If that
happened, there can be no assurances that we could fully repay the
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amounts due. Since we are partially dependent on our credit facilities to fund
borrowing needs, any default would have a material adverse effect on our
consolidated financial condition and results of operation.
Efforts by Labor Unions to Organize our Employees Could Divert Management
Attention and Increase our Operating Expenses
In the past, labor unions have made attempts to organize our employees, and
these efforts may continue in the future. Certain groups of our employees have
chosen to be represented by unions, and we have negotiated collective bargaining
agreements with some of the groups. We cannot predict which, if any, groups of
employees may seek union representation in the future or the outcome of
collective bargaining. The negotiation of these agreements could divert
management attention and result in increased operating expenses and lower net
income. If we are unable to negotiate acceptable collective bargaining
agreements, we might have to wait through "cooling off" periods, which are often
followed by union-initiated work stoppages, including strikes. Depending on the
type and duration of such work stoppage, our operating expenses could increase
significantly.
Fluctuations in Fuel Costs Could Affect our Operating Expenses and Results
The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil & gas, actions by OPEC and other oil & gas producers, war and
unrest in oil producing countries, regional production patterns and
environmental concerns. Because fuel is needed to run our fleet of trucks, price
escalations or reductions in the supply of fuel could increase our operating
expenses and have a negative impact on net income. In the past, we have
implemented a fuel surcharge to off-set fuel increase costs. However, we are not
always able to pass through the increased fuel costs due to the terms of certain
customers' contracts.
We Face Risks Relating to General Economic Conditions
We face risks related to general economic and market conditions, including
the potential impact of any economic slowdown, recession, interest rate
fluctuation or other adverse external economic conditions. Negative general
economic conditions could materially adversely affect our financial condition,
results of operation and cash flows.
We May Encounter Difficulties Deploying Our Enterprise Software
We are currently in the process of deploying enterprise-wide software
systems that will replace our current financial, human resources and payroll
systems. These systems may initially contain errors or cause other problems that
could adversely affect, or even temporarily disrupt, all or a portion of our
operations or the stability of our accounting systems until resolved. We are
still in the preliminary stages of the financial system conversion, the
completion of which is expected to occur no earlier than the end of 2001.
ITEM 2. PROPERTIES.
Our principal executive offices are in Houston, Texas, where we lease
approximately 396,000 square feet under leasing arrangements expiring at various
times through 2010. We also have field-based administrative offices in
California, Illinois, Pennsylvania, New Hampshire, Georgia and Ontario, Canada.
Our principal property and equipment consist of land (primarily landfills,
transfer stations and bases for collection operations), buildings, waste
treatment or processing facilities (other than landfills) and vehicles and
equipment. We own or lease real property in most locations where we have
operations and we have operations in all states and the District of Columbia,
other than Montana and Wyoming.
At December 31, 2000, of the 305 Company operated landfills, we owned and
operated through lease agreements 259 active sites in North America. These sites
control approximately 121,000 acres of land, including approximately 30,000
permitted acres and approximately 7,000 acres we consider to be probable
expansion acreage for landfill use. Additionally, we operate 46 landfills
through contractual agreements,
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primarily with municipalities. At December 31, 2000, in North American we
operated approximately 300 transfer stations and over 190 MRFs. We also owned,
or operated through agreements, 16 waste-to-energy facilities in North America
as of December 31, 2000.
We believe that our vehicles, equipment, and operating properties are
adequately maintained and adequate for our current operations. However, we
expect to continue to make investments in additional equipment and property for
expansion, for replacement of assets, and in connection with future
acquisitions. For more information, see the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section in this
report.
ITEM 3. LEGAL PROCEEDINGS.
Information regarding our legal proceedings can be found under the
"Litigation" section in Note 19 to the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "WMI." The following table sets forth the range of the high and low
per share sales prices for our common stock as reported on the NYSE Composite
Tape.
HIGH LOW
------ ------
1999
First Quarter............................................. $53.50 $41.88
Second Quarter............................................ 60.00 44.75
Third Quarter............................................. 55.44 18.13
Fourth Quarter............................................ 19.75 14.00
2000
First Quarter............................................. $18.50 $13.00
Second Quarter............................................ 20.88 13.31
Third Quarter............................................. 21.88 17.12
Fourth Quarter............................................ 28.31 17.31
2001
First Quarter (through March 8, 2001)..................... $28.63 $22.52
On March 8, 2001, the closing sale price as reported on the NYSE was $27.15
per share. The number of holders of record of our common stock at March 8, 2001,
was 31,501.
As of December 31, 2000, due to current credit agreements, our ability to
pay dividends and repurchase capital stock was limited to $369 million, of which
no more than $25 million may be paid for dividends. We declared and paid cash
dividends of $0.01 per share, or approximately $6 million during each of 1999
and 2000. See Note 11 to the consolidated financial statements.
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ITEM 6. SELECTED FINANCIAL DATA.
The information below was derived from the audited consolidated financial
statements included in this report and in reports we have previously filed with
the SEC. This information should be read together with those financial
statements and the notes to the financial statements. For more information
regarding this financial data, see the "Management's Discussion and Analysis"
section also included in this report.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenues........................................ $12,492 $13,127 $12,626 $11,972 $10,999
------- ------- ------- ------- -------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below).......................................... 7,538 8,269 7,283 7,482 6,564
General and administrative.............................. 1,738 1,920 1,333 1,438 1,316
Depreciation and amortization........................... 1,429 1,614 1,499 1,392 1,264
Merger and acquisition related costs.................... -- 45 1,807 113 127
Asset impairments and unusual items..................... 749 739 864 1,771 530
Loss from continuing operations held for sale, net of
minority interest....................................... -- -- -- 10 --
------- ------- ------- ------- -------
11,454 12,587 12,786 12,206 9,801
------- ------- ------- ------- -------
Income (loss) from operations............................. 1,038 540 (160) (234) 1,198
------- ------- ------- ------- -------
Other income (expense):
Interest expense........................................ (748) (770) (682) (556) (525)
Interest income......................................... 31 38 27 45 34
Minority interest....................................... (23) (24) (24) (45) (41)
Other income, net....................................... 23 53 139 127 108
------- ------- ------- ------- -------
(717) (703) (540) (429) (424)
------- ------- ------- ------- -------
Income (loss) from continuing operations before income
taxes................................................... 321 (163) (700) (663) 774
Provision for income taxes................................ 418 232 67 363 487
------- ------- ------- ------- -------
Income (loss) from continuing operations.................. (97) (395) (767) (1,026) 287
Income (loss) from discontinued operations................ -- -- -- 96 (263)
Extraordinary item........................................ -- (3) (4) (7) --
Accounting change......................................... -- -- -- (2) --
------- ------- ------- ------- -------
Net income (loss)......................................... $ (97) $ (398) $ (771) $ (939) $ 24
======= ======= ======= ======= =======
Basic earnings (loss) per common share:
Continuing operations................................... $ (0.16) $ (0.64) $ (1.31) $ (1.84) $ 0.54
Discontinued operations................................. -- -- -- 0.17 (0.49)
Extraordinary item...................................... -- (0.01) (0.01) (0.01) --
Accounting change....................................... -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss)....................................... $ (0.16) $ (0.65) $ (1.32) $ (1.68) $ 0.05
======= ======= ======= ======= =======
Diluted earnings (loss) per common share:
Continuing operations................................... $ (0.16) $ (0.64) $ (1.31) $ (1.84) $ 0.53
Discontinued operations................................. -- -- -- 0.17 (0.49)
Extraordinary item...................................... -- (0.01) (0.01) (0.01) --
Accounting change....................................... -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss)....................................... $ (0.16) $ (0.65) $ (1.32) $ (1.68) $ 0.04
======= ======= ======= ======= =======
Cash dividends per common share........................... $ 0.01 $ 0.01 $ 0.16 $ 0.56 $ 0.57
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)................................. $ (480) $(1,269) $ (412) $(1,967) $ (258)
Intangible assets, net.................................... 5,193 5,356 6,250 4,848 4,681
Total assets.............................................. 18,565 22,681 22,882 20,156 20,728
Long-term debt, including current maturities.............. 8,485 11,498 11,732 9,480 9,065
Stockholders' equity...................................... 4,801 4,402 4,372 3,855 5,202
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Below is a discussion of our operations for the three years ended December
31, 2000. This discussion should be read together with the consolidated
financial statements and the notes to the consolidated financial statements.
When we use words like "may," "believes," "expects," "anticipates,"
"should," "estimate," "project," "plan," their opposites and similar
expressions, the Company is making forward-looking statements. These expressions
are most often used in statements relating to business plans, strategies,
anticipated benefits or projections about the anticipated revenues, earnings or
other aspects of our operating results. We make these statements in an effort to
keep stockholders and the public informed about our business, and have based
them on our current expectations about future events. You should view such
statements with caution. These statements are not guarantees of future
performance or events. As noted elsewhere in this report, all phases of our
business are subject to uncertainties, risks and other influences, many of which
the Company has no control over. Additionally, any of these factors, either
alone or taken together, could have a material adverse effect on the Company and
could change whether any forward-looking statement ultimately turns out to be
true.
Outlined below are some of the risks that the Company faces and that could
affect our business and financial statements for 2001 and beyond. However, they
are not the only risks that the Company faces. There may be additional risks
that we do not presently know or that we currently believe are immaterial which
could also impair our business. For more information, see the "Factors
Influencing Future Results and Accuracy of Forward Looking Statements" section
of this report.
- the outcome of litigation or investigations;
- possible changes in our estimates of site remediation requirements, final
closure and post-closure obligations, compliance and other audits and
regulatory developments;
- the possible impact of regulations on our business, including the cost to
comply with regulatory requirements and the potential liabilities
associated with disposal operations, as well as our ability to obtain and
maintain permits needed to operate our facilities;
- the effect of limitations or bans on disposal or transportation of
out-of-state waste or certain categories of waste;
- our ability to improve the productivity of acquired operations and use
our asset base and strategic position to operate more efficiently;
- our ability to accurately assess all of the pre-existing liabilities of
companies we have acquired and to successfully integrate the operations
of acquired companies with our existing operations;
- possible charges against earnings for certain shut down operations and
uncompleted acquisitions or development or expansion projects;
- the effects that trends toward requiring 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 effect the weather has on our quarter to quarter results, as well as
the effect of extremely harsh weather on our operations;
- the effect of price fluctuations of recyclable materials processed by the
Company;
- the effect competition in our industry could have on our ability to
maintain margins, including uncertainty relating to competition with
governmental sources that enjoy competitive advantages from tax-exempt
financing and tax revenue subsidies;
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- possible defaults under our credit agreements if cash flows are less than
we expect or capital expenditures are more than we expect, and the
possibility that we can not obtain additional capital on acceptable terms
if needed;
- possible diversions of management's attention and increases in operating
expenses due to efforts by labor unions to organize our employees;
- possible increases in operating expenses due to fuel price increases or
fuel supply shortages;
- the effects of general economic conditions; and
- our ability to successfully deploy our new enterprise-wide software
systems.
Strategic Plan
In 1999, the Company announced a strategic plan focused on emphasizing
internal growth and focusing on our core business -- North American solid waste
management services. As part of the plan, beginning in 1999 and throughout 2000,
we sold the majority of our international operations and certain of our non-
integrated North American solid waste operations. We also have sold, or
announced agreements to sell, almost all of our non-core operations, including
our: low-level and other radioactive waste operations; organic residuals
operations, industrial services, hazardous waste treatment operations and
independent power plants. The proceeds from the sales were used to repay a
portion of our debt.
Also as part of the plan, the Company began other initiatives in 1999 that
continued through 2000, including:
- Linking our information technology initiatives to our business strategy
and rolling out new software systems that give our employees better tools
to do their jobs;
- Developing standard policies and procedures, and increasing the flow of
communication in an effort to streamline our business and bring more
discipline and accountability, but at the same time maintain
decentralized operations, so that authority is still close to the
customer; and
- Restoring a capital expenditure policy that focuses on the internal
growth rather than the external growth of the Company.
1999 Accounting Charges and Adjustments
During 1999, the Company initiated a comprehensive internal review of its
accounting records, systems, processes and controls at the direction of its
Board of Directors. As discussed below, and in Note 2 to the consolidated
financial statements, the Company experienced significant difficulty in the
integration and conversion of information and accounting systems subsequent to
the Company, then known as USA Waste Services, Inc., completing its merger with
WM Holdings, which was accounted for as a pooling of interests (the "WM Holdings
Merger"). As a result of these systems and process issues, and other issues
raised during the 1999 accounting review, certain charges and adjustments were
recorded, as discussed below. The review was completed in time such that the
Company was able to record related adjustments in its financial statements for
the quarter ended September 30, 1999. The amounts recorded by the Company as a
result of the review had a material effect on its financial statements for the
year ended December 31, 1999. The
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following is a summary of charges attributable to this review which were
recorded for the quarter ended September 30, 1999 (in millions):
Held-for-sale adjustments................................... $ 414
Increase to allowance for doubtful accounts and other
accounts receivable adjustments........................... 212
Asset impairments (excluding held-for-sale adjustments)..... 178
Insurance reserves and other insurance adjustments.......... 148
Legal, severance and consulting accruals.................... 142
Merger and acquisition related costs........................ 32
Other charges and adjustments, including:
Account reconciliations................................... 348
Loss contract reserve adjustments......................... 49
Increase in environmental liabilities..................... 49
Other..................................................... 191 637
--- ------
Impact of charges before income tax benefit................. 1,763
Income tax benefit.......................................... (537)
------
After-tax charges........................................... $1,226
======
The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation, are reflected in the
Company's financial statements for the year ended December 31, 1999, as follows
(in millions):
ALLOWANCE
FOR
DOUBTFUL
ACCOUNTS INSURANCE LEGAL,
AND OTHER RESERVES SEVERANCE MERGER AND
HELD-FOR- ACCOUNTS AND OTHER AND ACQUISITION
SALE RECEIVABLE OTHER ASSET INSURANCE CONSULTING RELATED
ADJUSTMENTS ADJUSTMENTS IMPAIRMENTS ADJUSTMENTS ACCRUALS COSTS
----------- ------------ ----------- ----------- ---------- -----------
Operating revenues................. $ -- $ (44) $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- --------
Costs and expenses:
Operating (exclusive of
depreciation and amortization
shown below).................... -- -- -- 143 -- --
General and administrative........ -- 168 -- 5 58 --
Depreciation and amortization..... -- -- -- -- -- --
Merger and acquisition related
costs........................... -- -- -- -- -- 32
Asset impairments and unusual
items........................... 414 -- 178 -- 84 --
--------- --------- --------- --------- --------- --------
414 168 178 148 142 32
--------- --------- --------- --------- --------- --------
Loss from operations............... (414) (212) (178) (148) (142) (32)
--------- --------- --------- --------- --------- --------
Other income (expense)
Interest expense.................. -- -- -- -- -- --
Interest income................... -- -- -- -- -- --
Minority interest................. -- -- -- -- -- --
Other income (expense)............ -- -- -- -- -- --
--------- --------- --------- --------- --------- --------
-- -- -- -- -- --
--------- --------- --------- --------- --------- --------
Loss before income taxes and
extraordinary items............... $ (414) $ (212) $ (178) $ (148) $ (142) $ (32)
========= ========= ========= ========= ========= ========
Benefit from income taxes..........
Net loss...........................
TOTAL
OTHER (INCLUDES
CHARGES RECURRING AND
AND NON-RECURRING
ADJUSTMENTS ITEMS)
----------- -------------
Operating revenues................. $ 13 $ (31)
--------- -----------
Costs and expenses:
Operating (exclusive of
depreciation and amortization
shown below).................... 423 566
General and administrative........ 172 403
Depreciation and amortization..... 60 60
Merger and acquisition related
costs........................... -- 32
Asset impairments and unusual
items........................... 3 679
--------- -----------
658 1,740
--------- -----------
Loss from operations............... (645) (1,771)
--------- -----------
Other income (expense)
Interest expense.................. 1 1
Interest income................... 13 13
Minority interest................. -- --
Other income (expense)............ (6) (6)
--------- -----------
8 8
--------- -----------
Loss before income taxes and
extraordinary items............... $ (637) (1,763)
=========
Benefit from income taxes.......... 537
-----------
Net loss........................... $ (1,226)
===========
18
21
Subsequent to the completion of the accounting review, and in conjunction
with the process of preparing its monthly financial statements during the fourth
quarter of 1999 and its financial statements at December 31, 1999, additional
adjustments attributable to the reconciliation of intercompany accounts, cash,
accounts receivable, fixed assets, accounts payable and certain other accounts
were recorded.
The Company recorded significant adjustments in the third and fourth
quarters of 1999, certain of which affect periods prior to these quarters.
Accordingly, the Company, after consultation with its independent public
accountants, concluded that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its independent
public accountants to complete reviews of the quarterly financial data for the
quarters during 1999. The Company believes that certain charges that were
recorded in the third and fourth quarters of 1999 may relate to individual prior
periods; however, the Company does not have sufficient information to identify
all specific charges attributable to prior periods. If identification of all
specific charges attributable to individual prior periods was possible, the
Company believes that the reported results of operations presented in Note 21 to
the consolidated financial statements for the third and fourth quarters of 1999
would have been favorably impacted, and the reported results of operations for
the first and second quarters of 1999 would have been adversely impacted. The
Company concluded, based on its quantitative and qualitative analysis of
available information, after consultation with its independent public
accountants, that it did not have, nor was it able to obtain, sufficient
information to conclude what amount of the charges relate to any individual
prior year, although qualitative analysis indicates that these charges are
principally related to 1999. Accordingly, the Company has concluded that these
charges were appropriately reflected in the 1999 annual financial statements.
The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts have enabled
the Company to produce timely and reliable interim financial statements during
2000.
See Note 2 to the consolidated financial statements included elsewhere
herein for additional discussion.
19
22
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the period to
period change in dollars (in millions) and percentages for the various
statements of operations line items.
PERIOD TO PERIOD CHANGE
--------------------------------------------------
YEARS ENDED YEARS ENDED
DECEMBER 31, 2000 AND DECEMBER 31, 1999 AND
1999 1998
---------------------- ----------------------
STATEMENT OF OPERATIONS:
Operating revenues................................ $ (635) (4.8)% $ 501 4.0%
------- -------
Costs and expenses:
Operating (exclusive of depreciation and
amortization shown below).................... (731) (8.8) 986 13.5
General and administrative...................... (182) (9.5) 587 44.0
Depreciation and amortization................... (185) (11.5) 115 7.7
Merger and acquisition related costs............ (45) (100.0) (1,762) (97.5)
Asset impairments and unusual items............. 10 1.4 (125) (14.5)
------- -------
(1,133) (9.0) (199) (1.6)
------- -------
Income (loss) from operations..................... 498 92.2 700 437.5
------- -------
Other income (expense):
Interest expense................................ 22 2.9 (88) (12.9)
Interest and other income, net.................. (37) (40.7) (75) (45.2)
Minority interest............................... 1 4.2 -- 0.0
------- -------
(14) (2.0) (163) (30.2)
------- -------
Income (loss) before income taxes and
extraordinary item.............................. 484 296.9 537 76.7
Provision for income taxes........................ 186 80.2 165 246.3
------- -------
Loss before extraordinary item.................... 298 75.4 372 48.5
Extraordinary item................................ 3 100.0 1 25.0
------- -------
Net loss.......................................... $ 301 75.6% $ 373 48.4%
======= =======
See Management's Discussion and Analysis --
1999 Accounting Charges and Adjustments.
20
23
The following table presents, for the periods indicated, the percentage
relationship that the various statements of operations line items bear to
operating revenues:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
----- ------ -----
STATEMENT OF OPERATIONS:
Operating revenues........................................ 100.0% 100.0% 100.0%
----- ------ -----
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)......................................... 60.4 63.0 57.7
General and administrative.............................. 13.9 14.6 10.6
Depreciation and amortization........................... 11.4 12.3 11.9
Merger and acquisition related costs.................... -- 0.4 14.3
Asset impairments and unusual items..................... 6.0 5.6 6.8
----- ------ -----
91.7 95.9 101.3
----- ------ -----
Income (loss) from operations............................. 8.3 4.1 (1.3)
----- ------ -----
Other income (expense):
Interest expense........................................ (6.0) (5.8) (5.4)
Interest and other income, net.......................... 0.4 0.7 1.3
Minority interest....................................... (0.2) (0.2) (0.2)
----- ------ -----
(5.8) (5.3) (4.3)
----- ------ -----
Income (loss) before income taxes and extraordinary
item.................................................... 2.5 (1.2) (5.6)
Provision for income taxes................................ 3.3 1.8 0.5
----- ------ -----
Loss before extraordinary item............................ (0.8) (3.0) (6.1)
Extraordinary item........................................ -- -- --
----- ------ -----
Net loss.................................................. (0.8)% (3.0)% (6.1)%
===== ====== =====
See Management's Discussion and Analysis --
1999 Accounting Charges and Adjustments.
21
24
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
Operating Revenues
Operating revenues for 2000 were $12.5 billion, compared with $13.1 billion
in 1999 and $12.6 billion in 1998. The higher revenues in 1999 reflect
acquisitions of solid waste businesses in North America. The decrease in
revenues in 2000 is primarily due to the divestitures of WM International and
non-solid waste operations during the year.
Operating revenues by reportable segment (in millions):
OPERATING REVENUES
[PERFORMANCE GRAPH]
NASW operating revenue mix (in millions):
OPERATING REVENUES
[PERFORMANCE GRAPH]
NASW operating revenues increased in 2000 from 1999 primarily due to
internal growth of comparable operations of 1.4% (or $150 million) from pricing
increases and 2.5% (or $267 million) from volume increases. During the first
half of 2000, the pricing in the recyclable materials markets favorably impacted
22
25
overall pricing increases. However, during the second half of 2000 the
recyclable materials market experienced a significant downturn that offset the
improvements experienced earlier in the year. Additionally, the Company
implemented a fuel surcharge in March 2000 to mitigate the significant increase
in the cost of fuel. Excluding the impact of price increases in the commodity
markets for recyclable materials, and the fuel surcharge that was implemented,
there was a price increase of 0.6% in 2000 compared to 1999. Acquisitions of
NASW businesses during 2000 and the full year effect of acquisitions that were
completed in 1999 accounted for an increase in operating revenues of
approximately $286 million for 2000, as compared to 1999. The primary offset to
the increase in operating revenues was the divestiture of certain non-integrated
NASW operations. However, the foreign currency fluctuations with the Canadian
dollar also negatively impacted operating revenues during 2000.
NASW operating revenues in 1999 were lower than expected due to substantial
difficulties in the integration of operations after the mergers with WM Holdings
on July 16, 1998 and Eastern Environmental Services on December 31, 1998,
including the information systems (particularly the billing systems) and related
work flow. In 1999, the Company experienced significant difficulty in the
conversion from the WM Holdings' information systems to the systems currently in
use, resulting in delays and errors, particularly with the billing systems,
including delays in submitting bills to customers and errors in both computing
and delivering bills. Staffing levels were insufficient to address customer
complaints and disputes and did not support timely follow-up with customers.
Billing system issues initially became evident in the second quarter of 1999 as
receivable aging levels rose. At that time, management believed that the
increase in receivables was a short-term issue, receivables would return to
historical levels once the billing system conversions were complete and there
was not a significant collectability issue with its recorded receivables. In
connection with the 1999 accounting review, it was concluded that certain of
these accounts had deteriorated to the point that they may be uncollectable, and
therefore, a significant increase in the allowance for doubtful accounts was
recorded in the third quarter of 1999. These events also contributed a higher
than usual provision for uncollectable accounts in the fourth quarter of 1999.
Beginning in the third quarter of 1999, resources dedicated to receivable
collection efforts were increased on both a temporary and permanent basis and
the billing systems began to stabilize. In 2000, the Company was successful in
collecting certain accounts that were reserved for in 1999.
Acquisitions of NASW business during 1999 and the full year effect of
acquisitions which were completed in 1998 accounted for an increase in operating
revenues of approximately $616 million for 1999, as compared to 1998. NASW
operating revenues also increased from internal growth of comparable operations
of 2.6% for 1999, as compared to 1998. The Company believes that its internal
revenue growth in 1999 was detrimentally affected by certain inflexibilities in
its pricing strategy and the lack of responsiveness of that strategy to
localized competitive conditions, resulting in lost customers and volumes.
Offsetting the increase in operating revenues were divestitures of NASW
businesses with revenues of approximately $290 million, as well as other
business factors that comprised the remaining differences, including the foreign
currency fluctuations with the Canadian dollar.
The operating revenues from the WM International operations increased from
1998 to 1999 by approximately 7.6%. This increase was primarily due to
acquisitions of businesses, primarily in Denmark and Australia. However, in
2000, WM International operating revenue decreased as the Company began selling
its WM International operations on a country by country basis. As of December
31, 2000, the Company had certain operations in Sweden, and also operated
outside of North America in Argentina and Israel.
Operating revenues for the non-solid waste services decreased from 1998 to
2000 due to divestitures of several non-core businesses. Non-solid waste
operating revenues are expected to decrease in 2001 because the Company is
actively marketing for sale the remaining non-solid waste operations.
Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
Below)
Operating costs and expenses decreased $731 million or 8.8% for 2000, as
compared to 1999, and increased $986 million or 13.5% for 1999, as compared to
1998. As a percentage of operating revenues, operating costs and expenses
increased from 57.7% in 1998 to 63.0% in 1999 and were 60.4% in 2000.
23
26
From 1998 to 2000, operating costs and expenses as a percentage of
operating revenues fluctuated from period to period, primarily due to the
effects of the Company's integration plan adopted in connection with the WM
Holdings Merger in July 1998. See "Operating Revenues" above.
In 1998, soon after the merger with WM Holdings, the Company experienced
reductions, both in amount and as a percentage of operating revenues, in its
operating costs and expenses as a result of the reductions in employee headcount
and the elimination of excess operating assets that were either sold or
abandoned pursuant to the merger integration plan. The Company believes that the
reductions in employee headcount and the disposition of excess operating assets
resulted in short-term cost efficiencies in 1998.
In 1999, the Company continued the implementation of its merger integration
plan. However, due to the breadth and comprehensive nature of the changes the
Company attempted to implement in the first half of 1999, the Company was unable
to sustain the effectiveness of the plan. Operating costs and expenses increased
significantly as a percentage of revenues in second half of 1999 and throughout
2000 because the short-term cost reductions experienced in 1998 could not be
sustained in 1999 due to the operational difficulties encountered by the
Company. However, in the second half of 2000, the Company started reviewing its
procurement practices and started developing more standardized operating
procedures and expects operating costs and expenses as a percentage of operating
revenues to decrease in 2001.
As part of its ongoing operations, the Company reviews its liability
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 to operational efficiencies. Accordingly, revisions to remediation
liability 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 reductions of operating
costs and expenses as a percentage of revenues in the amount of 0.5% and 0.9% in
1999 and 1998, respectively.
General and Administrative Expenses
General and administrative expenses decreased $182 million or 9.5% from
1999 to 2000 and increased $587 million or 44.0% from 1998 to 1999. As a
percentage of operating revenues, the Company's general and administrative
expense was 13.9% for 2000, 14.6% for 1999 and 10.6% for 1998.
As discussed above, the Company believes it experienced short-term cost
reductions related to the elimination of duplicate corporate administrative
functions from the merger with WM Holdings in 1998 and the first half of 1999.
However, in the second half of 1999 and into early 2000, those cost reductions
were substantially offset by the effect of difficulties encountered by the
Company in integrating the operations of WM Holdings. A major component of the
increased costs was increased administrative costs in field operations to
perform billing, collection and other administrative functions.
In 2000, particularly the first half, the Company incurred significant
costs in professional accounting and process improvement consulting services
related to process improvement initiatives and accounting assistance that began
as part of the 1999 accounting review. By the second half of 2000, the Company
had stabilized its accounting systems and completed its process improvement
initiatives, significantly reducing the ongoing need for these consulting
services. Additionally, the Company incurred significant consulting costs in
2000 related to the future implementation of new enterprise information systems,
the need for which was identified as part of the Company's 1999 strategic plan
discussed above. In 2000, the Company incurred approximately $196 million
related to professional accounting and process improvement consulting services
and consulting services related to the future implementation of new enterprise
information systems. In 2000, the Company also incurred approximately $51
million related to its efforts to divest operations, to improve its billing
systems and verify its customer base, and for legal fees related to certain
shareholder litigation and other SEC matters. As discussed in "Operating
Revenues" above, the Company was successful in collecting certain accounts that
were reserved for in 1999. Collection of those accounts favorably impacted the
Company's provision for bad debt in 2000. The Company recorded provisions for
bad debts of $14 million and $268 million in 2000 and 1999, respectively. The
Company also experienced permanent staffing increases at the corporate office in
2000
24
27
particularly in the area of information systems and corporate accounting and
finance. The Company expects that advances in its information systems and
business processes will result in better information for making operational and
strategic decisions as well as permanent reductions in field administrative
costs in future periods.
General and administrative expenses for 1999 included $403 million in
adjustments resulting from the 1999 accounting review, some of which are
recurring in nature and should be expected in future periods. These significant
adjustments include an increase of $168 million relative to the allowance for
doubtful accounts and include $63 million in costs for insurance adjustments,
accounting, legal and other professional services. These costs are primarily
related to litigation and investigations conducted by the Company in 1999. See
discussion in "Operating Revenues" and "Operating Costs and Expenses" above, of
the Company's substantial difficulties in integrating the operations of WM
Holdings subsequent to the WM Holdings Merger.
Depreciation and Amortization
Depreciation and amortization expense decreased $185 million or 11.5% in
2000, and increased $115 million or 7.7% in 1999, as compared to 1998. As a
percentage of operating revenues, depreciation and amortization expense was
11.4% in 2000, 12.3% in 1999 and 11.9% in 1998.
The decrease in depreciation and amortization expense as a percentage of
operating revenues in 2000 compared to 1999 is primarily due to the suspension
of depreciation in 2000 on fixed assets related to certain operations which were
held-for-sale and the depreciation and amortization expense that was recorded in
1999 related to operations classified as held-for-sale in the fourth quarter of
1999 and divested in 2000. The depreciation suspension for 2000 for these
held-for-sale operations prior to those operations being sold was $99 million,
or 0.8% of operating revenues. The depreciation suspended in 1999 for operations
held-for-sale, which all occurred in the fourth quarter of 1999, was $46
million, or 0.3% of operating revenues. However, these decreases in depreciation
and amortization expense were partially offset by increased landfill airspace
amortization in 2000 due to an increase in disposal volumes at the Company's
landfills. Additionally, for 2000, the Company experienced higher airspace
amortization expense as compared to the prior years, due to higher airspace
amortization rates as a result of its more stringent set of criteria for
evaluating the probability of obtaining airspace expansions which was effective
as of the third quarter of 1999. The increase in depreciation and amortization
expense in 1999 as compared to 1998, after considering the suspension of
depreciation for held-for-sale operations in 1999, is primarily a result of the
Company's acquisition activity in 1999 and the full year impact of acquisitions
in 1998.
Merger and Acquisition Related Costs, Asset Impairments and Unusual Items
In 2000, 1999 and 1998, the Company had significant charges related to
merger and acquisition related costs and asset impairments and unusual items. In
1998, these charges primarily related to the Company's merger integration plans
and related business reviews associated with the mergers with WM Holdings and
Eastern Environmental Services. The merger integration plans included
significant employee severance costs, restructuring costs, transaction costs and
changes in certain employee benefit programs, as well as charges for businesses
to be sold and assets to be abandoned. The 1998 business review included charges
for losses on contractual commitments and changes in estimates on the ultimate
losses for certain legal and environmental issues and related costs. In 1999,
these charges were primarily identified in the 1999 accounting review or
resulted from the Company's strategic plan discussed above. In 2000, these costs
were primarily due to the sale of most of the Company's WM International
operations as part of the Company's strategic plan and the termination of the WM
Holding's defined benefit pension plan. See Notes 4, 13 and 16 to the
consolidated financial statements.
Interest Expense
The decrease in interest expense in 2000, as compared to 1999, is primarily
due to the net debt reduction in 2000 from proceeds related to the Company's
divestiture program and cash flows from operations. The increase in interest
expense in 1999, as compared to 1998, is due to higher average levels of
outstanding
25
28
indebtedness during the respective years and also a decline in the Company's
public credit rating, which began in the last six months of 1999 and caused the
Company to increase its use of more costly bank credit facilities instead of the
previously used commercial paper. Also contributing to period to period changes
in interest expense is the offsetting decrease in the amount of interest that
the Company has capitalized during these years. The Company capitalized interest
of $22 million, $34 million and $42 million for 2000, 1999 and 1998,
respectively.
Provision for Income Taxes
The Company recorded a provision for income taxes of $418 million, $232
million and $67 million for 2000, 1999 and 1998, respectively, resulting in an
effective income tax rate of 130.2%, 142.3% and 9.6% for each of the three
years, respectively. The difference in federal income taxes computed at the
federal statutory rate and reported income taxes for these years is primarily
due to state and local income taxes, non-deductible costs related to acquired
intangibles, non-deductible costs associated with the impairment and divestiture
of certain businesses and other 1999 charges and adjustments as discussed in
Note 2 to the consolidated financial statements, and the cost associated with
remitting the earnings of certain foreign subsidiaries, which are no longer
permanently reinvested. Excluding non-deductible held-for-sale impairment
charges associated with certain businesses, non-deductible losses on the
divestiture of assets that closed during the period and other unusual items, the
Company's tax provision would have been 40.9% of pre-tax income for 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements primarily stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
construction and expansion of its landfill sites, as well as new trucks and
equipment for its collection operations, (iii) refurbishments and improvements
at its waste-to-energy facilities and (iv) business acquisitions. The Company's
strategy is to meet these capital needs first from internally generated funds.
Historically, the Company has also obtained financing from various financing
sources available to the Company at the time, including the incurrence of debt
and the issuance of its common stock. In August 1999, the Company announced a
strategic plan that included the sale of its WM International operations, its
non-core operations and selected NASW operations. The proceeds from these
dispositions, which were primarily realized in 2000, were used for debt
repayment. At both December 31, 2000 and March 8, 2001, the Company has unused
and available credit capacity under its bank credit facilities of $1.3 billion.
The Company believes that these levels of credit capacity are sufficient to meet
its ongoing operating requirements.
The following is a summary of the Company's cash flows statements for the
years ended December 31, 2000, 1999 and 1998 (in millions):
2000 1999 1998
------- ------- -------
Operating activities.................................... $ 2,125 $ 1,689 $ 1,502
Investing activities.................................... 1,072 (2,017) (4,555)
Financing activities.................................... (3,279) 426 2,956
In 1999 and 1998, cash flows from operations were negatively impacted by
the implementation of Company's merger integration plans for the mergers with WM
Holdings and Eastern Environmental Services, and the subsequent operational and
administrative difficulties discussed above. In 1998, the Company spent
approximately $3.6 billion on the acquisition of businesses and outstanding
minority interest positions, as well as approximately $1.7 billion on capital
expenditures. These investing activities in 1998 were primarily funded by cash
flows from operations, net debt borrowings of approximately $2.0 billion,
proceeds from sales of assets of approximately $545 million and proceeds from
the sale of common and treasury stock of approximately $945 million. In 1999,
the Company spent approximately $1.3 billion on acquisitions of businesses and
approximately $1.3 billion on capital expenditures. These investing activities
were funded by cash flows from operations, net debt borrowings of approximately
$259 million and proceeds from the sale of assets of approximately $651 million.
26
29
In 2000, cash flows from operations were impacted by several factors that
the Company considers to be unusual, including costs for professional accounting
fees and consulting activities associated with stabilizing and improving the
accounting systems and developing new enterprise information systems discussed
above. The following summary of free cash flows has been prepared to highlight
and facilitate understanding of the primary cash flow elements. It is not
intended to replace the consolidated statement of cash flows for 2000, which was
prepared in accordance with generally accepted accounting principles. Adjusted
free cash flow in the table below, which is not a measure of financial
performance in accordance with generally accepted accounting principles, is
defined as cash flows from operations less capital expenditures and then
adjusted for certain cash flow activity that the Company considers as unusual
for the year (in millions).
EBITDA(a)................................................... $ 3,216
Interest paid............................................... (750)
Taxes paid.................................................. (135)
Change in assets and liabilities, net of effects of
acquisitions and divestitures, and other.................. (206)
-------
Net cash provided by operating activities................... 2,125
Capital expenditures........................................ (1,313)
-------
Free cash flow.............................................. 812
Adjustments:
Tax refund................................................ (199)
Payments for terminating the WM Holdings' defined benefit
pension plan........................................... 153
Accounting and consulting services........................ 196
Litigation settlements.................................... 61
Reimbursement for late allocation of employee stock
purchase plan shares................................... 8
Other..................................................... 52
-------
Adjusted free cash flow..................................... $ 1,083
=======
- ---------------
(a) EBITDA is defined as income from operations excluding depreciation and
amortization, merger and acquisition related costs and asset impairments
and unusual items. EBITDA, which is not a measure of financial performance
under generally accepted accounting principles, is provided because the
Company understands that such information is used by certain investors when
analyzing the financial position and performance of the Company.
Consistent with the strategic initiative discussed above, in 2000 the
Company had a net debt reduction of approximately $3.3 billion funded through
its divestiture program and cash flows from operations.
Under the terms of the Company's $1.5 billion syndicated loan facility (the
"Syndicated Facility") and its $1.4 billion senior revolving credit facility
(the "Credit Facility"), the Company is obligated to repay the borrowings under
the facilities with the cash proceeds received from the strategic plan
divestitures. The Company was required to use all of the first $1.5 billion of
net proceeds from the divestitures to repay indebtedness, which it has done.
Additionally, the Company is required to use 50% of the additional cash proceeds
greater than $1.5 billion and up to $2.5 billion from divestitures to repay the
indebtedness under the Syndicated and Credit Facilities. As of December 31,
2000, the Company had received cash proceeds of approximately $2.5 billion from
its divestitures, approximately $175 million of which was used to repay the
Company's Eurocurrency facilities in the second quarter of 2000, approximately
$100 million was used for repayment of divestiture subsidiary debts and the
remainder of which has been used to repay indebtedness under the bank credit
facilities.
On July 17, 1998, the Company issued $600 million of 6 1/8% mandatorily
tendered senior notes, due July 15, 2011. This debt instrument is subject to
certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to either refinance these notes or
use borrowings available under the Syndicated Facility and/or the Credit
Facility in the event it must purchase the notes on July 15, 2001. Accordingly,
these borrowings have been classified as long-term at December 31, 2000.
27
30
In February of 2001 the Company issued $600 million of 7 3/8% senior
unsecured notes due August 1, 2010. Interest is payable semi-annually on
February 1 and August 1. The net proceeds from the sale of the notes are
approximately $593 million, after deducting discounts to the underwriters and
estimated expenses of the offering. The Company intends to use the net proceeds,
together with cash on hand, to repay in full the $200 million principal amount
outstanding under the 6% Senior Notes due May 15, 2001, the $200 million
principal amount outstanding under the 6.70% Senior Notes due May 1, 2001, and
the $200 million principal amount outstanding under the 7 1/8% Senior Notes due
June 15, 2001. Pending application of the proceeds as described, the proceeds
will be invested temporarily in short-term investments or be used to reduce
short-term borrowings.
RECENT DEVELOPMENTS
The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of Waste
Management Holdings and seeks, among other things, reimbursement of those monies
expended by Waste Management Holdings and the Company in resolving all claims
brought against WM Holdings arising out of its February 1998 restatement of
earnings. The terms of the settlement include a payment to the Company of $15
million by certain of WM Holdings' insurance carriers and the complete
resolution of all pending claims for retirement benefits between certain former
officers of WM Holdings and the Company. The resolution of the actions for
retirement benefits involves the release by the former executives who brought
claims against the company for certain amounts otherwise owing under the
retirement plans. The total benefits to the Company from the settlement of the
derivative case is approximately $23 million.
ENVIRONMENTAL MATTERS
The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the
landfills and the capping of the final uncapped areas of the landfills, and for
post-closure of the landfills it operates or for which it is otherwise
responsible. The final closure and post-closure liabilities are charged to
expense as airspace is consumed such that the present value of total estimated
final closure and post-closure cost will be accrued for each landfill at the
time each site discontinues accepting waste and is closed. The Company has also
established procedures to evaluate its potential remedial liabilities at closed
sites which it owns or operated, or to which it transported waste, including 79
sites listed on the EPA's National Priority List ("NPL"). The majority of
situations involving NPL sites relate to allegations that subsidiaries of the
Company (or their predecessors) transported waste to the facilities in question,
often prior to the acquisition of such subsidiaries by the Company. 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 nonexistence 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.
While the precise amount of these future costs cannot be determined with
certainty, the Company has estimated that the aggregate cost of environmental
liabilities as of December 31, 2000 is approximately $2.8 billion. As of
December 31, 2000 and 1999, the Company had recorded liabilities of $613 million
and $600 million, respectively, for the present value of final closure and
post-closure costs of disposal facilities. The
28
31
difference between the final closure and post-closure costs accrued at December
31, 2000, and the total present value of estimated costs represents final
closure and post-closure costs that will be accrued and charged to expense as
airspace is consumed such that the total present value of estimated final
closure and post-closure costs to be incurred will be fully accrued for each
landfill at the time each site discontinues accepting waste and is closed. The
average landfill final closure and post-closure expense, on a per ton basis, for
the 305 landfills operating at December 31, 2000 was $0.30 per ton. As of
December 31, 2000 and 1999, the Company had recorded liabilities of $349 million
and $377 million, respectively, for the present value of remediation costs of
disposal facilities. For fiscal 2001, we expect to spend approximately $153
million for our final closure, post-closure and remediation expenditures.
As of December 31, 2000, the Company also expects to incur approximately
$6.9 billion related to future construction activities during the remaining
operating lives of the disposal sites, which are capitalized as incurred and
expensed over the useful lives of the disposal sites as airspace is consumed.
The average landfill airspace amortization cost per ton for the 305 landfills
operating at December 31, 2000 was $3.84 per ton.
SEASONALITY AND INFLATION
The Company's operating revenues tend to be somewhat lower in the winter
months, which corresponds with the Company's first and fourth quarters. This is
primarily attributable to the facts 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 industrial and residential waste in certain
regions where the Company operates tends to decrease during the winter months.
The Company believes that inflation has not had, and is not expected to
have, any material adverse effect on the results of operations in the near
future.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," and SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No.
133," which deferred the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000, is effective for the Company as of January 1, 2001. SFAS
No. 133, as amended, establishes accounting and reporting standards requiring
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded as either assets or liabilities
measured at fair value. SFAS 133, as amended, requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. The Company adopted SFAS 133 on January 1, 2001. As of January 1,
2001, the cumulative effect of such change in accounting for derivative
instruments to fair value is expected to result in a gain, net of taxes of
approximately $2 million in the first quarter of 2001.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements and was required to be adopted by the Company in the fourth quarter
of 2000. Since our policies were already compliant with SAB No. 101, no material
changes to revenue recognition occurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In the normal course of business, the Company is exposed to market risk,
including changes in interest rates, currency exchange rates, certain commodity
prices and certain equity prices. From time to time, the Company and certain of
its subsidiaries use derivatives to manage some portion of these risks. The
derivatives used are simple agreements that provide for payments based on the
notional amount, with no multipliers or leverage. All derivatives are related to
actual or anticipated exposures of transactions of the Company. While
29
32
the Company is exposed to credit risk in the event of non-performance by
counterparties to derivatives, in all cases such counterparties are highly rated
financial institutions and the Company does not anticipate non-performance. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company monitors its derivative positions by regularly evaluating
the positions at market and by performing sensitivity analyses.
The Company has performed sensitivity analyses to determine how market rate
changes will affect the fair value of the Company's market risk sensitive
derivatives and related positions. Such an analysis is inherently limited in
that it represents a singular, hypothetical set of assumptions. Actual market
movements may vary significantly from the Company's assumptions. The effects of
such market movements may also directly or indirectly affect the Company's
assumptions and its rights and obligations not covered by sensitivity analysis.
Fair value sensitivity is not necessarily indicative of the ultimate cash flow
or earnings effect on the Company from the assumed market rate movements.
Interest Rate Exposure. The Company's exposure to market risk for changes
in interest rates relates primarily to the Company's debt obligations, which are
mainly denominated in U.S. dollars. In addition, interest rate swaps are
generally used to either lock-in or limit the variability in the interest
expense of certain floating rate debt obligations or to manage the mix of fixed
and floating rate debt obligations. An instantaneous, one percentage point
increase in interest rates across all maturities and applicable yield curves
would increase the fair value of the Company's combined debt and interest rate
swap positions at December 31, 2000 and 1999 by approximately $403 million and
$443 million, respectively. This analysis does not reflect the effect that
declining interest rates would have on other items such as pension liabilities,
nor the favorable impact they would have on interest expense and cash payments
for interest. Since a significant portion of the Company's debt is at fixed
rates, changes in market interest rates would not significantly impact operating
results until and unless such debt would need to be refinanced at maturity.
Currency Rate Exposure. The Company incurred exchange rate risk from
borrowings denominated in foreign currencies at December 31, 1999. An
instantaneous, ten percent increase in foreign exchange rates would have
decreased the fair value of the Company's foreign currency borrowings by
approximately $43 million. The Company had no foreign currency borrowings at
December 31, 2000.
Commodities Price Exposure. The Company markets recycled paper products
such as old newspaper ("ONP") and old corrugated containers ("OCC"). The Company
started entering into financial swaps in 1999 in an effort to mitigate the risk
of recyclable paper price fluctuations. Under its financial swap agreements, the
Company transfers a floating market price for a fixed price for a fixed period
of time. The two parties agree to use a market index as an indicator of the
market price during the term of the swap. An instantaneous ten percent increase
in this commodity at December 31, 2000 and 1999 creates an exposure risk of
approximately $7 million and $50,000, respectively. The increase in exposure
risk from 1999 to 2000 is attributable to the greater number of financial swap
agreements that were outstanding at the end of the respective periods. All of
the Company's waste paper hedges are cash settled on a monthly basis with the
counterparty.
Equity Price Exposure. The Company is also subject to equity price
exposure from Company debt issues that are convertible into the Company's common
stock. These debt issues had an aggregate carrying value of $566 million and
$962 million as of December 2000 and 1999, respectively. An instantaneous, ten
percent decrease in the Company's stock price on December 31, 2000 and 1999,
would increase the fair value of the Company's convertible debt by approximately
$11 million and $12 million, respectively.
See Notes 3 and 10 to the consolidated financial statements for further
discussion of the use of and accounting for derivative instruments.
30
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... 32
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 33
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 35
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. 36
Notes to Consolidated Financial Statements.................. 37
31
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waste Management, Inc.:
We have audited the accompanying consolidated balance sheets of Waste
Management, Inc. and subsidiaries (the "Company"), a Delaware corporation, as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The selected quarterly financial data included in Note 21 contains
information that we did not audit, and, accordingly, we do not express an
opinion on that data. We attempted, but were unable, to review the quarterly
financial data for the interim periods within 1999 in accordance with standards
established by the American Institute of Certified Public Accountants because we
believe that the Company's internal controls for the preparation of interim
financial information did not provide an adequate basis to enable us to complete
such a review.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Management, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 2001
32
35
WASTE MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
DECEMBER 31,
-----------------
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 94 $ 181
Accounts receivable, net of allowance for doubtful
accounts of $128 and $289, respectively................ 1,401 1,541
Notes and other receivables............................... 174 367
Parts and supplies........................................ 75 107
Deferred income taxes..................................... 312 298
Prepaid expenses and other................................ 112 191
Operations held-for-sale.................................. 289 3,536
------- -------
Total current assets.............................. 2,457 6,221
Property and equipment, net................................. 10,126 10,304
Goodwill, net............................................... 5,046 5,186
Other intangible assets, net................................ 147 170
Other assets................................................ 789 800
------- -------
Total assets...................................... $18,565 $22,681
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 865 $ 1,063
Accrued liabilities....................................... 1,419 1,513
Deferred revenues......................................... 389 407
Current maturities of long-term debt...................... 113 3,099
Operations held-for-sale.................................. 151 1,408
------- -------
Total current liabilities......................... 2,937 7,490
Long-term debt, less current maturities..................... 8,372 8,399
Deferred income taxes....................................... 879 730
Environmental liabilities................................... 809 837
Other liabilities........................................... 752 815
------- -------
Total liabilities................................. 13,749 18,271
------- -------
Minority interest in subsidiaries........................... 15 8
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 1,500,000,000 shares
authorized; 629,621,821 and 627,283,618 shares issued,
respectively........................................... 6 6
Additional paid-in capital................................ 4,497 4,440
Retained earnings......................................... 560 663
Accumulated other comprehensive income (loss)............. (126) (563)
Restricted stock unearned compensation.................... (3) (4)
Treasury stock at cost, 6,971,560 and 73,709 shares,
respectively........................................... (133) (4)
Employee stock benefit trust at market, 0 and 7,892,612
shares, respectively................................... -- (136)
------- -------
Total stockholders' equity........................ 4,801 4,402
------- -------
Total liabilities and stockholders' equity........ $18,565 $22,681
======= =======
See notes to consolidated financial statements.
33
36
WASTE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues.......................................... $12,492 $13,127 $12,626
------- ------- -------
Costs and expenses:
Operating (exclusive of depreciation and amortization
shown below)........................................... 7,538 8,269 7,283
General and administrative................................ 1,738 1,920 1,333
Depreciation and amortization............................. 1,429 1,614 1,499
Merger and acquisition related costs...................... -- 45 1,807
Asset impairments and unusual items....................... 749 739 864
------- ------- -------
11,454 12,587 12,786
------- ------- -------
Income (loss) from operations............................... 1,038 540 (160)
------- ------- -------
Other income (expense):
Interest expense.......................................... (748) (770) (682)
Interest income........................................... 31 38 27
Minority interest......................................... (23) (24) (24)
Other income, net......................................... 23 53 139
------- ------- -------
(717) (703) (540)
------- ------- -------
Income (loss) before income taxes and extraordinary item.... 321 (163) (700)
Provision for income taxes.................................. 418 232 67
------- ------- -------
Loss before extraordinary item.............................. (97) (395) (767)
Extraordinary loss on refinancing or retirement of debt, net
of income tax of $2 in 1999 and $3 in 1998................ -- (3) (4)
------- ------- -------
Net loss.................................................... $ (97) $ (398) $ (771)
======= ======= =======
Basic loss per common share:
Loss before extraordinary item............................ $ (0.16) $ (0.64) $ (1.31)
Extraordinary item........................................ -- (0.01) (0.01)
------- ------- -------
Net loss.................................................. $ (0.16) $ (0.65) $ (1.32)
======= ======= =======
Diluted loss per common share:
Loss before extraordinary item............................ $ (0.16) $ (0.64) $ (1.31)
Extraordinary item........................................ -- (0.01) (0.01)
------- ------- -------
Net loss.................................................. $ (0.16) $ (0.65) $ (1.32)
======= ======= =======
See notes to consolidated financial statements.
34
37
WASTE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net loss.................................................. $ (97) $ (398) $ (771)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for bad debts................................. 14 268 71
Depreciation and amortization........................... 1,429 1,614 1,499
Deferred income tax provision (benefit)................. 65 318 (450)
Minority interest in subsidiaries....................... 23 24 24
Net gain on disposal of assets.......................... (4) (19) (83)
Effect of merger costs, asset impairments and unusual
items.................................................. 749 575 1,555
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
Receivables............................................. 283 (169) (257)
Prepaid expenses and other current assets............... 21 184 (11)
Other assets............................................ 5 61 132
Accounts payable and accrued liabilities................ (301) (492) (141)
Deferred revenues and other liabilities................. (60) (295) 1
Other, net.............................................. (2) 18 (67)
------- ------- -------
Net cash provided by operating activities................... 2,125 1,689 1,502
------- ------- -------
Cash flows from investing activities:
Short-term investments.................................... 54 (41) 57
Acquisitions of businesses, net of cash acquired.......... (231) (1,289) (1,946)
Capital expenditures...................................... (1,313) (1,327) (1,651)
Proceeds from divestitures of businesses, net of cash
divested, and other sales of assets..................... 2,552 651 545
Other investments......................................... 39 10 76
Acquisition of minority interests......................... -- -- (1,673)
Other..................................................... (29) (21) 37
------- ------- -------
Net cash provided by (used in) investing activities......... 1,072 (2,017) (4,555)
------- ------- -------
Cash flows from financing activities:
New borrowings............................................ 304 4,246 6,402
Debt repayments........................................... (3,597) (3,987) (4,407)
Cash dividends............................................ (6) (6) (94)
Common stock issued....................................... -- -- 206
Sale of treasury stock.................................... -- -- 739
Exercise of common stock options and warrants............. 20 176 133
Other..................................................... -- (3) (23)
------- ------- -------
Net cash provided by (used in) financing activities......... (3,279) 426 2,956
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (5) (4) (6)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (87) 94 (103)
Cash and cash equivalents at beginning of year.............. 181 87 190
------- ------- -------
Cash and cash equivalents at end of year.................... $ 94 $ 181 $ 87
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest................................................ $ 750 $ 740 $ 610
Income taxes............................................ 135 276 254
Non-cash investing and financing activities:
Note receivable from sale of assets..................... 23 -- 29
Conversion of subordinated debt to common stock......... -- 263 10
Acquisitions of businesses and development projects:
Liabilities incurred or assumed....................... -- 357 432
Common stock issued................................... 3 33 180
See notes to consolidated financial statements.
35
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WASTE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARES IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE RESTRICTED STOCK
PAID-IN RETAINED INCOME UNEARNED
COMMON STOCK CAPITAL EARNINGS (LOSS) COMPENSATION
---------------- ---------- -------- ------------- ----------------
SHARES AMOUNT
------- ------
BALANCE, JANUARY 1, 1998........... 598,678 $ 6 $3,874 $1,938 $(283) $(11)
Net loss........................... -- -- -- (771) -- --
Cash dividends..................... -- -- -- (94) -- --
Dividends paid to employee stock
benefit trust..................... -- -- 2 (2) -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... 4,410 -- 95 -- -- --
Earned compensation related to
restricted stock, net of reversals
on forfeited shares............... -- -- -- -- -- 1
Reversals of unearned compensation
upon cancellation of restricted
stock............................. -- -- -- -- -- 1
Accelerated vesting of restricted
stock due to WM Holdings Merger... -- -- -- -- -- 9
Common stock issued for
acquisitions...................... 7,611 -- 180 (5) -- --
Common stock issued in public
offerings......................... 5,204 -- 206 -- -- --
Put rights on WM Holdings employee
stock options, net of taxes....... -- 70 -- -- --
Adjustment of employee stock
benefit trust to market value..... -- -- 69 -- -- --
Minimum pension liability
adjustment, net of taxes of $47... -- -- -- -- (60) --
Cumulative translation adjustment
of foreign currency statements.... -- -- -- -- (78) --
Sale of treasury stock............. -- -- 4 -- -- --
Cancellation of treasury stock..... (13,300) -- (566) -- -- --
Change in Eastern fiscal year...... 3,900 -- 91 1 -- --
Conversion of WTI stock options.... -- -- 20 -- -- --
Other.............................. 1,805 -- 47 -- -- --
------- --- ------ ------ ----- ----
BALANCE, DECEMBER 31, 1998......... 608,308 $ 6 $4,092 $1,067 $(421) $ --
------- --- ------ ------ ----- ----
Net loss........................... -- -- -- (398) -- --
Cash dividends..................... -- -- -- (6) -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... 8,431 -- 242 -- -- --
Unearned compensation related to
issuance of restricted stock to
employees......................... 265 -- 4 -- -- (4)
Common stock issued for
acquisitions...................... 458 -- 33 -- -- --
Common stock issued for conversion
of subordinated debt.............. 8,984 -- 261 -- -- --
Adjustment of employee stock
benefit trust to market value..... -- -- (232) -- -- --
Minimum pension liability
adjustment, net of taxes of $37... -- -- -- -- (66) --
Cumulative translation adjustment
of foreign currency statements.... -- -- -- -- (76) --
Other.............................. 838 -- 40 -- -- --
------- --- ------ ------ ----- ----
BALANCE, DECEMBER 31, 1999......... 627,284 $ 6 $4,440 $ 663 $(563) $ (4)
------- --- ------ ------ ----- ----
Net loss........................... -- -- -- (97) -- --
Cash dividends..................... -- -- -- (6) -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... 166 -- 4 -- -- (1)
Earned compensation related to
restricted stock.................. -- -- -- -- -- 2
Common stock issued (purchased) in
connection with litigation
settlements....................... 1,364 -- 22 -- -- --
Adjustment of employee stock
benefit trust to market value..... -- -- 14 -- -- --
Minimum pension liability
adjustment, net of taxes of $92... -- -- -- -- 130 --
Cumulative translation adjustment
of foreign currency statements
including effects of
divestitures...................... -- -- -- -- 307 --
Termination of employee stock
benefit trust..................... -- -- -- -- -- --
Other.............................. 808 -- 17 -- -- --
------- --- ------ ------ ----- ----
BALANCE, DECEMBER 31, 2000......... 629,622 $ 6 $4,497 $ 560 $(126) $ (3)
======= === ====== ====== ===== ====
EMPLOYEE COMPREHENSIVE
STOCK INCOME
TREASURY STOCK BENEFIT TRUST (LOSS)
----------------- ------------- -------------
SHARES AMOUNT
------- -------
BALANCE, JANUARY 1, 1998........... 34,239 $(1,369) $(299)
Net loss........................... -- -- -- $ (771)
Cash dividends..................... -- -- --
Dividends paid to employee stock
benefit trust..................... -- -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... (1,695) 75 --
Earned compensation related to
restricted stock, net of reversals
on forfeited shares............... -- -- --
Reversals of unearned compensation
upon cancellation of restricted
stock............................. -- -- --
Accelerated vesting of restricted
stock due to WM Holdings Merger... -- -- --
Common stock issued for
acquisitions...................... -- -- --
Common stock issued in public
offerings......................... -- -- --
Put rights on WM Holdings employee
stock options, net of taxes....... -- -- --
Adjustment of employee stock
benefit trust to market value..... -- -- (69)
Minimum pension liability
adjustment, net of taxes of $47... -- -- -- (60)
Cumulative translation adjustment
of foreign currency statements.... -- -- -- (78)
Sale of treasury stock............. (19,180) 725 --
Cancellation of treasury stock..... (13,300) 566 --
Change in Eastern fiscal year...... -- -- --
Conversion of WTI stock options.... -- -- --
Other.............................. -- -- --
------- ------- ----- ------
BALANCE, DECEMBER 31, 1998......... 64 $ (3) $(368) $ (909)
------- ------- ----- ======
Net loss........................... -- -- -- $ (398)
Cash dividends..................... -- -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... -- -- --
Unearned compensation related to
issuance of restricted stock to
employees......................... -- -- --
Common stock issued for
acquisitions...................... -- -- --
Common stock issued for conversion
of subordinated debt.............. -- -- --
Adjustment of employee stock
benefit trust to market value..... -- -- 232
Minimum pension liability
adjustment, net of taxes of $37... -- -- -- (66)
Cumulative translation adjustment
of foreign currency statements.... -- -- -- (76)
Other.............................. 10 (1) --
------- ------- ----- ------
BALANCE, DECEMBER 31, 1999......... 74 $ (4) $(136) $ (540)
------- ------- ----- ======
Net loss........................... -- -- -- $ (97)
Cash dividends..................... -- -- --
Common stock issued upon exercise
of stock options and warrants, and
grants of restricted stock
(including tax benefit)........... (1,078) 22 --
Earned compensation related to
restricted stock.................. -- -- --
Common stock issued (purchased) in
connection with litigation
settlements....................... 83 (1) --
Adjustment of employee stock
benefit trust to market value..... -- -- (14)
Minimum pension liability
adjustment, net of taxes of $92... -- -- -- 130
Cumulative translation adjustment
of foreign currency statements
including effects of
divestitures...................... -- -- -- 307
Termination of employee stock
benefit trust..................... 7,893 (150) 150
Other.............................. -- -- --
------- ------- ----- ------
BALANCE, DECEMBER 31, 2000......... 6,972 $ (133) $ -- $ 340
======= ======= ===== ======
See notes to consolidated financial statements.
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
1. BUSINESS
Business -- Waste Management, Inc. and Subsidiaries ("Waste Management" or
the "Company") is one of the largest publicly-owned companies providing
integrated waste services in North America. Through its subsidiaries, the
Company provides collection, transfer, recycling and resource recovery, and
disposal services. The Company is also a leading developer, operator and owner
of waste-to-energy facilities in the United States. The Company also had similar
operations internationally ("WM International"). As discussed in Notes 4 and 20,
pursuant to the Company's strategic plan, the Company has divested most of its
WM International operations at December 31, 2000 and is actively marketing to
sell its remaining WM International operations, which are considered to be
held-for-sale. The Company's other reportable segment consists of non-solid
waste management services, which are aggregated as a single segment for this
reporting presentation. The non-solid waste management segment includes
hazardous waste services (other than hazardous waste landfills) such as chemical
waste management services, the Company's independent power projects, and other
non-solid waste services that are provided to commercial, industrial and
government customers. As discussed in Notes 4 and 20, the Company's non-solid
waste management segment includes business lines that have been divested or are
being actively marketed and are considered to be held-for-sale.
WM Holdings Merger -- On July 16, 1998, the Company, then known as USA
Waste Services, Inc., completed a merger with Waste Management Holdings, Inc.
("WM Holdings"), which was accounted for as a pooling of interests (the "WM
Holdings Merger"). WM Holdings was previously the largest publicly traded solid
waste company in the United States, providing integrated solid waste management
and hazardous waste management services in North America and comprehensive waste
management and related services, including solid and hazardous waste management
services, internationally. At the effective time of the WM Holdings Merger, the
Company changed its name to "Waste Management, Inc."
Eastern Merger -- On December 31, 1998, the Company completed a merger with
Eastern Environmental Services, Inc. ("Eastern"), which was accounted for as a
pooling of interests (the "Eastern Merger").
37
40
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. 1999 ACCOUNTING CHARGES AND ADJUSTMENTS
During 1999, the Company initiated a comprehensive internal review of its
accounting records, systems, processes and controls at the direction of its
Board of Directors. As discussed below, the Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the WM Holdings Merger, including certain financial
systems and its billing systems. As a result of these systems and process
issues, and other issues raised during the 1999 accounting review, certain
charges and adjustments were recorded, as discussed below. The review was
completed in time such that the Company was able to record related adjustments
in its financial statements for the quarter ended September 30, 1999. The
amounts recorded by the Company as a result of the review had a material effect
on its financial statements for the year ended December 31, 1999. The following
is a summary of charges attributable to this review which were recorded for the
quarter ended September 30, 1999:
Held-for-sale adjustments................................... $ 414
Increase to allowance for doubtful accounts and other
accounts receivable adjustments........................... 212
Asset impairments (excluding held-for-sale adjustments)..... 178
Insurance reserves and other insurance adjustments.......... 148
Legal, severance and consulting accruals.................... 142
Merger and acquisition related costs........................ 32
Other charges and adjustments, including:
Account reconciliations................................... 348
Loss contract reserve adjustments......................... 49
Increases in environmental liabilities.................... 49
Other..................................................... 191 637
--- ------
Impact of charges before income tax benefit................. 1,763
Income tax benefit.......................................... (537)
------
After-tax charges........................................... $1,226
======
In August 1999, the Company's Board of Directors adopted a strategic plan
that includes the divestiture of its WM International operations and certain
other businesses. (See Note 15, "Segment and Related Information" and Note 20,
"Operations Held-for-Sale" for further discussion of the Company's WM
International operations). Based primarily on preliminary bids from interested
parties, these and certain other assets which were identified as held-for-sale
during the third quarter of 1999 were written down to fair value less cost to
sell in accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, resulting in a pre-tax charge of approximately $414 at
September 30, 1999. These assets were considered to be held-for-use for periods
prior to the third quarter of 1999 and did not meet the criteria for impairment
recognition as a "held-for-use" asset, and therefore, were not considered
impaired for periods prior to the third quarter of 1999. The assets which were
identified as held-for-sale and subject to adjustment include, among others, the
Company's WM International operations, the Company's nuclear services disposal
site operations and certain North American solid waste, or "NASW," operations
that were not essential parts of the Company's network. Revisions to the third
quarter estimates were required due to revisions in estimated proceeds and
certain changes in business plans during the fourth quarter of 1999, as further
discussed in Note 16, "Asset Impairments and Unusual Items". See Note 4 for
discussion on operations that have been divested in the year 2000 or announced
to be divested in the near future.
In 1999, subsequent to the WM Holdings Merger, the Company experienced
significant difficulty in the conversion from the WM Holdings' information
systems to the systems currently in use, resulting in delays and errors,
particularly with respect to the Company's billing systems, including delays in
submitting bills to
38
41
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers and errors in both computing and delivering bills. Staffing levels
were insufficient to address customer complaints and disputes and did not
support timely follow-up with customers. Billing system issues initially became
evident in the second quarter of 1999 as receivable aging levels continued to
rise. At that time, management believed that the increase in receivables was a
short-term issue, receivables would return to historical levels once the billing
system conversions were complete and there was not a significant collectability
issue with its recorded receivables. In connection with the 1999 accounting
review, the Company concluded that certain of these accounts had deteriorated to
the point that they may be uncollectable, and therefore, recorded an increase in
the allowance for doubtful accounts in the third quarter of 1999. Beginning in
the third quarter of 1999, the Company increased its resources dedicated to
receivable collection efforts. In addition, the Company performed a review of
notes and other receivable-related balances in connection with this review.
Taken together, the Company recorded receivable-related pre-tax charges of $212
in the third quarter of 1999.
During the review, the Company recorded asset impairments of $178 related
to several landfill sites and certain other operating assets in the third
quarter of 1999. Included in the amount is $76 relating to the abandonment or
closure of facilities resulting from the Company's recent business decisions
regarding optimal operating strategies in specific markets in which the Company
operates, or consideration of other new facts and circumstances during the
review. Also included in the amount is $40, which is primarily the result of
permit denials and other regulatory problems in the third quarter of 1999, which
is one of the many types of facts and circumstances that may from time to time
trigger impairments, and which may occasionally overlap with other triggering
events or result in abandonment or closure. The Company performs a
comprehensive, centrally coordinated review of its North American landfills on
an annual basis. During the third quarter of 1999, that review included an
evaluation of potential landfill expansion projects, with a newly refined and
more stringent set of criteria for evaluating the probability of obtaining
expansions to existing sites, which had the effect of excluding certain
expansions that met the Company's previous criteria. For further discussion on
this criteria, refer to Note 3.
The exclusion of these expansions due to the more stringent criteria and
related business judgements regarding probable success of obtaining expansions,
increased depreciation and amortization and the provision for final closure and
post-closure costs (included in operating expense). Impairments resulting from
the application of these new stringent criteria and resulting from other facts
and circumstances comprise the remaining $62 of impairments included in the $178
of impairments disclosed above.
The Company historically estimated its insurance-related liabilities for
its ongoing programs based on an analysis of insurance claims submitted for
reimbursement, plus an estimate for liabilities incurred as of the balance sheet
date, but not yet reported to the Company. This is the estimation method that
had been used by WM Holdings prior to the WM Holdings Merger, and was continued
by the Company for that pool of pre-merger WM Holdings' claims. In connection
with this review, the Company evaluated the adequacy of its self-insurance
liabilities and changed the manner in which it estimates its insurance-related
liabilities for its ongoing property and casualty insurance programs. Both of
these approaches result in acceptable estimates, but during the review the
Company noted that the actuarially determined estimates using a fully-developed
method provided a better estimate of the ultimate costs of the claims than a
claims made plus incurred but not reported method. Accordingly, in the third
quarter of 1999, the Company began estimating all insurance-related liabilities
based on actuarially determined estimates of ultimate losses. This change in
estimate resulted in an increased pre-tax expense of $44 for the third quarter
of 1999. In addition, the Company increased its insurance-related liabilities
based on its assessment of current and expected claims activities and
unfavorable claims experience, resulting in an additional pre-tax charge of $104
in the third quarter of 1999.
The Company recorded pre-tax charges related to legal, severance and
consulting costs incurred in the third quarter of 1999, including increases in
legal reserves and related charges of $96, principally related to increases in
legal reserves in response to developments in various legal proceedings brought
against
39
42
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WM Holdings by former shareholders of that company in connection with its
restatement of earnings in February 1998. These legal developments caused the
Company to evaluate the numerous shareholder cases filed against WM Holdings and
to reassess their range of exposure. Additionally, the charges included $25
related to severance costs, principally for executives who left the Company in
the third quarter of 1999, and $21 of consulting costs related primarily to the
accounting review and related matters.
The Company recorded $32 of merger and acquisition related costs during the
third quarter of 1999, which consisted of $13 related to a third quarter
purchase business combination and $19 related to the costs incurred by the
Company related to the WM Holdings and the Eastern Mergers which are required to
be expensed as incurred.
The Company's results of operations for 1999 reflect pre-tax charges of
approximately $348 recorded in the third quarter 1999 attributable to the
reconciliation of intercompany accounts, cash, accounts receivable, fixed asset,
accounts payable and certain other accounts at the Company's operating districts
and other locations resulting from the 1999 accounting review. The Company's
third quarter accounting review included a detailed review of substantially all
of the districts' and other locations' financial and accounting records. That
work necessitated a number of adjustments affecting transactions related to the
current period and to periods prior to the quarter ended September 30, 1999
involving many different accounts. Although some portion of the charges of $348
may relate to a number of periods, the Company does not have sufficient
information to identify all specific charges attributable to individual prior
periods. Furthermore, producing the required information to perform such an
identification of these charges would be cost prohibitive and disruptive to
operations. In connection with the preparation of its third quarter of 1999
financial statements, the Company concluded that, based on its quantitative and
qualitative analysis of available information, and after consultation with its
independent public accountants, it did not have, nor was it able to obtain,
sufficient information to conclude what amount of charges relate to any
individual prior year, although qualitative analysis indicated that these
charges were principally related to 1999. Accordingly, the Company concluded
that these charges are appropriately reflected in the 1999 annual financial
statements.
The Company evaluated significant contracts under which it provides
services. As a result of that review, the Company recorded a pre-tax provision
of $49 related to contracts which were determined to be in a loss position,
including revisions to previously established reserves based on new facts and
circumstances.
The Company increased its estimate by $33 of the ultimate costs required
for final closure and post-closure obligations at certain landfills which were
either closed or near final closure. That increase, and provisions related to
various other environmental matters, totaled $49 as a result of the 1999
accounting review.
In addition to the charges described above, the Company recorded additional
pre-tax charges of $191 as a result of the 1999 accounting review. These
additional charges involved many different issues at all levels of the Company,
including, for example, adjustments to reserves for specific business disputes,
adjustments of over- or under- accruals not described elsewhere herein, and
numerous other items.
40
43
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation, are reflected in the
Company's financial statements for the year ended December 31, 1999, as follows:
ALLOWANCE
FOR DOUBTFUL
ACCOUNTS INSURANCE MERGER
AND OTHER RESERVES LEGAL, AND OTHER
HELD-FOR- ACCOUNTS OTHER AND OTHER SEVERANCE AND ACQUISITION CHARGES
SALE RECEIVABLE ASSET INSURANCE CONSULTING RELATED AND
ADJUSTMENTS ADJUSTMENTS IMPAIRMENTS ADJUSTMENTS ACCRUALS COSTS ADJUSTMENTS
----------- ------------ ----------- ----------- ------------- ----------- -----------
Operating revenues............. $ -- $ (44) $ -- $ -- $ -- $ -- $ 13
----- ----- ----- ----- ----- ----- -----
Costs and expenses:
Operating (exclusive of
depreciation and
amortization shown below)... -- -- -- 143 -- -- 423
General and administrative.... -- 168 -- 5 58 -- 172
Depreciation and
amortization................ -- -- -- -- -- -- 60
Merger and acquisition related
costs....................... -- -- -- -- -- 32 --
Asset impairments and unusual
items....................... 414 -- 178 -- 84 -- 3
----- ----- ----- ----- ----- ----- -----
414 168 178 148 142 32 658
----- ----- ----- ----- ----- ----- -----
Loss from operations........... (414) (212) (178) (148) (142) (32) (645)
----- ----- ----- ----- ----- ----- -----
Other income (expense)
Interest expense.............. -- -- -- -- -- -- 1
Interest income............... -- -- -- -- -- -- 13
Minority interest............. -- -- -- -- -- -- --
Other income (expense)........ -- -- -- -- -- -- (6)
----- ----- ----- ----- ----- ----- -----
-- -- -- -- -- -- 8
----- ----- ----- ----- ----- ----- -----
Loss before income taxes and
extraordinary items........... $(414) $(212) $(178) $(148) $(142) $ (32) $(637)
===== ===== ===== ===== ===== ===== =====
Benefit from income taxes......
Net loss.......................
TOTAL
(INCLUDES
RECURRING AND
NON-RECURRING
ITEMS)
-------------
Operating revenues............. $ (31)
-------
Costs and expenses:
Operating (exclusive of
depreciation and
amortization shown below)... 566
General and administrative.... 403
Depreciation and
amortization................ 60
Merger and acquisition related
costs....................... 32
Asset impairments and unusual
items....................... 679
-------
1,740
-------
Loss from operations........... (1,771)
-------
Other income (expense)
Interest expense.............. 1
Interest income............... 13
Minority interest............. --
Other income (expense)........ (6)
-------
8
-------
Loss before income taxes and
extraordinary items........... (1,763)
Benefit from income taxes...... 537
-------
Net loss....................... $(1,226)
=======
Subsequent to the completion of the accounting review, and in conjunction
with the process of preparing its monthly financial statements during the fourth
quarter of 1999 and its financial statements at December 31, 1999, additional
adjustments attributable to the reconciliation of intercompany accounts, cash,
accounts receivable, fixed assets, accounts payable and certain other accounts
were recorded.
The Company recorded significant adjustments in the third and fourth
quarters of 1999, certain of which affected periods prior to these quarters.
Accordingly, the Company, after consultation with its independent public
accountants, concluded that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its independent
public accountants to complete reviews of the quarterly financial data for the
quarters during 1999. The Company believes that certain charges that were
recorded in the third and fourth quarters of 1999 may relate to individual prior
periods; however, the Company does not have sufficient information to identify
all specific charges attributable to prior periods. If identification of all
specific charges attributable to individual prior periods was possible, the
Company believes that the reported results of operations presented in Note 21 to
the financial statements for the third and fourth quarters of 1999 would have
been favorably impacted, and the reported results of operations for the first
and second quarters of 1999 would have been adversely impacted. In connection
with the preparation of its third quarter financial statements, the Company
concluded, based on its quantitative and qualitative analysis of available
information, after consultation with its independent public accountants, that it
did not have, nor was it able to obtain, sufficient information to conclude what
amount of the charges relate to any individual prior year, although
41
44
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
qualitative analysis indicates that these charges were principally related to
1999. Accordingly, the Company concluded that these charges were appropriately
reflected in the 1999 annual financial statements.
The Company believes that the processes it used for the preparation of its
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 enabled the Company to produce
timely and reliable interim financial statements for quarters during 2000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company has a
controlling interest are consolidated for financial reporting purposes.
Investments in affiliated entities in which the Company does not have a
controlling interest are accounted for under either the equity method or cost
method of accounting, as appropriate.
Use of estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts for
certain revenues and expenses during the reporting period. 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.
Reclassifications -- Certain reclassifications have been made to prior year
amounts in the financial statements in order to conform to the current year
presentation.
Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.
Concentrations of credit risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers comprise the Company's customer base, thus
spreading the trade credit risk. At December 31, 2000 and 1999, no single group
or customer represents greater than 10% of total accounts receivable. The
Company controls credit risk through credit evaluations, credit limits, and
monitoring procedures. The Company performs credit evaluations for commercial
and industrial customers and performs ongoing credit evaluations of its
customers, but generally does not require collateral to support accounts
receivable.
Operations held-for-sale -- It is the Company's policy to classify the
businesses that the Company is marketing for sale and the portfolio of real
estate that the Company considers surplus and is marketing for sale, as
operations held-for-sale. The carrying values of these assets are written down
to fair value, less costs to sell. These charges are based on estimates and
certain contingencies that could materially differ from the actual results and
resolution of any such contingencies. The Company discontinues depreciation on
fixed assets for businesses that are classified as held-for-sale.
Property and equipment -- Property and equipment are recorded at cost.
Except for the Company's waste-to-energy and independent power facilities,
expenditures for major additions and improvements are
42
45
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized, while minor replacements, maintenance and repairs are charged to
expense as incurred. At the Company's waste-to-energy and independent power
facilities, the Company accrues for major maintenance expenditures. Such
accruals are based upon planned maintenance expenditures and are classified as
current or non-current liabilities based on the expected timing of the
expenditures.
When property and equipment are retired, sold, or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations as increases or
offsets to operating expense for the respective period. Depreciation is provided
over the estimated useful lives of the related assets using the straight-line
method. The Company assumes no salvage value for its depreciable North American
fixed assets. The estimated useful lives for significant property and equipment
categories are as follows (in years):
USEFUL LIVES
------------
Vehicles.................................................... 3 to 10
Machinery and equipment..................................... 3 to 20
Commercial and roll-off containers.......................... 8 to 12
Buildings and improvements.................................. 10 to 40
Waste-to-energy facilities.................................. 50
Landfill accounting -- Capitalizable landfill site costs are recorded at
cost. Recorded costs, net of recorded amortization, are added to estimated
projected costs to determine the amount to be amortized over the remaining
estimated useful life of a site. Amortization is recorded on a units of
consumption basis, typically applying cost as a rate per ton. Landfill site
costs are amortized to expected net realizable value upon final closure of a
landfill.
The difference between the present value of a landfill's estimated total
final closure and post-closure costs and amounts accrued to date is accrued
prospectively on a units of consumption basis, typically by applying a rate per
ton over the remaining capacity of the landfill. The present value of final
closure and post-closure costs are fully accrued for each landfill once the site
discontinues accepting waste.
The remaining capacity of a landfill is determined by the unutilized
permitted airspace and expansion airspace when the success of obtaining such
expansion permit is considered probable.
Effective as of the third quarter of 1999, the Company applied a more
stringent set of criteria for evaluating the probability of obtaining an
expansion permit to landfill airspace at existing sites, which is as follows:
- Personnel are actively working to obtain land use and 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 have 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;
43
46
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Financial analysis has been completed, and the results demonstrate that
the expansion has a positive financial and operational impact; and
- Airspace and related costs, including additional final closure and
post-closure costs, have been estimated based on conceptual design.
Additionally, to include airspace from an expansion effort, the expansion
permit application must generally be expected to be submitted within one year,
and the expansion permit must be expected to be received within two to five
years. Exceptions to these criteria must be approved through a landfill-specific
approval process that includes an approval from the Company's Chief Financial
Officer and review by the Audit Committee of the Board of Directors. Of the 94
landfill sites with expansions at December 31, 2000, 25 landfill locations
required the Company's Chief Financial Officer to approve the exception to the
criteria. These exceptions were generally due to opposition to expansion efforts
that could impede the expansion project and due to permit application processes
beyond the one-year limit, which in most cases were due to state-specific
permitting procedures. Generally, the Company has been successful in receiving
approvals for 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 between fiscal quarters due to change in volumes of
waste disposal at the Company's landfills. Airspace amortization is also
affected by changes in engineering costs and estimates.
Business combinations -- For those business combinations accounted for
under the pooling of interests method, the financial statements are combined
with those of the Company at their historical amounts, and, if material, all
periods presented are restated as if the combination occurred on the first day
of the earliest year presented. For those acquisitions accounted for using the
purchase method of accounting, the Company allocates the cost of the acquired
business to the assets acquired and the liabilities assumed based on estimates
of fair values thereof. These estimates are revised during the allocation period
as necessary if, and when, information regarding contingencies becomes available
to define and quantify assets acquired and liabilities assumed. The allocation
period generally does not exceed one year. To the extent contingencies such as
preacquisition environmental matters, litigation and related legal fees are
resolved or settled during the allocation period, such items are included in the
revised allocation of the purchase price. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods in which the adjustments are determined. The Company does not
believe potential differences between its fair value estimates and actual fair
values are material.
In certain business combinations, the Company agrees to pay additional
amounts to sellers contingent upon achievement by the acquired businesses of
certain negotiated goals, such as targeted revenue levels, targeted disposal
volumes or the issuance of permits for expanded landfill airspace. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment.
Goodwill and other intangible assets -- Goodwill is the excess of cost over
net assets of acquired businesses. Goodwill is amortized on a straight-line
basis over a period not greater than 40 years commencing on the dates of the
respective acquisitions. Other intangible assets consist primarily of customer
lists, covenants not-to-compete, licenses and permits. Other intangible assets
are recorded at cost and amortized on a straight-line basis. Customer lists are
generally amortized over five to seven years. Covenants not-to-compete are
amortized over the term of the agreement, which is generally three to five
years. Licenses, permits and contracts are amortized over the shorter of the
definitive terms of the related agreements or 40 years.
44
47
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted funds held by trustees -- Restricted funds held by trustees of
$275 and $167 at December 31, 2000 and 1999, respectively, are included in other
non-current assets and consist principally of funds deposited in connection with
landfill final closure and post-closure obligations, insurance escrow deposits,
and amounts held for landfill and other construction arising from industrial
revenue financings. These amounts are principally invested in fixed income
securities of federal, state and local governmental entities and financial
institutions.
Long-lived assets -- Long-lived assets consist primarily of property and
equipment, goodwill and other intangible assets. The recoverability of
long-lived assets is evaluated periodically at the operating unit level by an
analysis of operating results and consideration of other significant events or
changes in the business environment. If an operating unit has indications of
possible impairment, such as current operating losses, the Company will evaluate
whether impairment exists on the basis of undiscounted expected future cash
flows from operations for the remaining amortization period. If an impairment
loss exists, the carrying amount of the related long-lived assets is reduced to
its estimated fair value.
Income taxes -- Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred income tax provision represents the change during the
reporting period in the deferred tax assets and deferred tax liabilities, net of
the effect of acquisitions and dispositions. Deferred tax assets include tax
loss and credit carryforwards and are reduced by a valuation allowance if, based
on available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Foreign currency -- The functional currency of the majority of the
Company's foreign operations is the local currency of the country in which the
Company operates. Adjustments resulting from the translation of financial
information are included in comprehensive income.
Revenue recognition -- The Company recognizes revenues on service contracts
as services are provided. Amounts billed and collected prior to services being
performed are included in deferred revenues. Results from long-term contracts
involving a substantial construction component are recorded on the
percentage-of-completion basis. Changes in project performance and conditions,
estimated profitability and final contract settlements may result in future
revisions to long-term construction contract costs and income.
Loss contracts -- The Company reviews its revenue producing contracts in
the ordinary course of business to determine if the direct costs, exclusive of
any non-variable costs, to service the contractual arrangements exceed the
revenues to be produced by the contract. Any resulting net loss over the life of
the contract is expensed at the time of such determination.
Derivative financial instruments -- From time to time, the Company uses
derivatives to manage interest rate risk. The Company's policy is to use
derivatives for risk management purposes only, which includes maintaining the
ratio between the Company's fixed and floating rate debt obligations that
management deems appropriate, and prohibits entering into such contracts for
trading purposes. The Company enters into derivatives only with counterparties
(primarily financial institutions) which have substantial financial wherewithal
to minimize credit risk. The amount of gains or losses from the use of
derivative financial instruments has not been and is not expected to be material
to the Company's financial statements.
At December 31, 2000 and 1999, the Company engaged in hedging of recyclable
paper price risk. Instruments accounted for as hedges must be effective at
managing risk associated with the exposure being hedged and must be designated
as a hedge at the inception of the contract. Accordingly, changes in market
values or cash flows of hedge instruments must have a high degree of inverse
correlation with changes in market values or cash flows of the underlying hedged
items. Derivatives that meet the hedge criteria are accounted for under the
deferral or accrual method.
45
48
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized interest -- Interest is capitalized on certain projects under
development including landfill projects and probable landfill expansion
projects, and on certain assets under construction, including operating
landfills and waste-to-energy facilities. The capitalization of interest for
operating landfills is based on the costs incurred on discrete cell construction
projects, plus an allocated portion of the common site costs. The common site
costs include the development costs of a landfill project or the purchase price
of an operating landfill, and the ongoing infrastructure costs benefiting the
lifecycle of the landfill. Cell construction costs include the construction of
cell liners and final capping during the operating life of the site. During
2000, 1999 and 1998, total interest costs were $770, $804 and $724,
respectively, of which $22, $34 and $42 were capitalized as landfill costs in
property and equipment, respectively.
4. BUSINESS COMBINATIONS AND DIVESTITURES
Purchase Acquisitions
During 2000 and 1999, the Company consummated over 70 and 240 acquisitions,
respectively, that were accounted for under the purchase method of accounting.
The total cost of acquisitions was approximately $234 and $1,372 for 2000 and
1999, respectively, which included cash paid, common stock issued and debt
assumed.
Pooling of Interests Transactions
Under the terms of the 1998 Eastern Merger, the Company issued 0.6406 of a
share of its common stock (approximately 24.5 million shares in total) for each
share of Eastern's outstanding common stock. Under the terms of the 1998 WM
Holdings Merger, the Company issued 0.725 of a share of its common stock
(approximately 354.0 million shares in total) for each share of WM Holdings
outstanding common stock.
In 2000, no merger costs were recorded. In 1999, the Company incurred $45
in merger costs primarily related to the WM Holdings Merger and the Eastern
Merger. The table below reflects merger cost charges in 1998 related to the WM
Holdings Merger and the Eastern Merger.
WM HOLDINGS EASTERN
----------- -------
Transaction or deal costs, primarily professional fees and
filing fees............................................... $ 124 $ 14
Employee severance, separation and transitional costs....... 324 26
Restructuring charges relating to the consolidation and
relocation of operations, and the transition and
implementation of information systems..................... 167 21
Estimated loss on the sale of:
Assets to comply with governmental orders................. 255 32
Duplicate facilities and related leasehold improvements... 189 29
Duplicate revenue producing assets........................ 26 32
Provision for the abandonment of:
Revenue producing assets.................................. 127 3
Non-revenue producing assets, consisting of landfill
projects and leasehold improvements which were
determined to be duplicative assets from the related
merger................................................. 263 7
Other assets, consisting primarily of computer hardware
and software costs which have no future value.......... 150 1
------ ----
Total............................................. $1,625 $165
====== ====
Merger and acquisition related costs include estimates for anticipated
losses from the sales of assets pursuant to governmental orders and other asset
divestiture plans. These anticipated losses were estimated
46
49
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on the Company's assessment of relevant facts and circumstances, including
consideration of the various provisions of asset sale agreements. During the
second quarter of 1999, the Company resolved an outstanding contingency
regarding its governmentally-ordered sale of assets to Republic Services, Inc.,
which reduced the previously reported loss on that sale by approximately $80.
Offsetting this amount in the same quarter, the Company (i) consummated its sale
of 51% of its non-land disposal hazardous waste operations and on-site
industrial cleaning services to Vivendi S.A. which resulted in losses of
approximately $79 greater than previously estimated; (ii) increased its
anticipated losses by approximately $14 related to the assets required to be
sold pursuant to the Eastern Merger; and (iii) decreased other anticipated
losses by approximately $13.
Furthermore, the Company recorded certain unusual charges of $864 in 1998
that were primarily, yet indirectly, related to the WM Holdings Merger. See Note
16.
Divestitures
The Company's 1999 strategic plan included marketing for sale its WM
International operations, its domestic non-solid waste operations and selected
NASW operations. Note 20 discusses the remaining operations held-for-sale which
the Company believes will be divested prior to December 31, 2001.
The following is a summary of the significant divestitures the Company has
completed as of December 31, 2000 by segment:
SEGMENT APPROXIMATE SALE PRICE
- ------- ----------------------
WM International............................................ $1,910(a)
Non-solid waste............................................. $ 439(a)
NASW........................................................ $ 310(b)
- ---------------
(a) Approximate sales price includes cash proceeds and assumed debt.
(b) Approximate sales price includes cash proceeds, notes receivables and a
long-term prepaid disposal agreement.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, consisted of the following:
2000 1999
------- -------
Land........................................................ $ 729 $ 704
Landfills................................................... 7,548 7,305
Vehicles.................................................... 3,019 2,762
Machinery and equipment..................................... 2,118 2,254
Containers.................................................. 2,043 1,871
Buildings and improvements.................................. 1,337 1,383
Furniture and fixtures...................................... 191 190
------- -------
16,985 16,469
Less accumulated landfill airspace amortization............. (2,698) (2,239)
Less accumulated depreciation on other property and
equipment................................................. (4,161) (3,926)
------- -------
$10,126 $10,304
======= =======
Depreciation and amortization expense for property and equipment for 2000,
1999 and 1998 was $1,210, $1,344 and $1,337, respectively.
The exclusion of certain landfill expansions from the airspace amortization
estimates due to more stringent criteria (see Note 3) and related business
judgements regarding probable success increased depreciation and amortization
expense and the provision for final closure and post-closure (included in
47
50
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating expenses) in the second half of 1999 and in 2000. The exclusions of
these expansions also resulted in the Company recognizing $33 in landfill
impairments in the third quarter of 1999 (see Note 2).
Rental expense for leased properties was $186, $189 and $195 during 2000,
1999 and 1998, respectively. These amounts primarily include rents under
long-term leases and rents charged as a percentage of revenue, but are exclusive
of financing leases which are capitalized for accounting purposes. Payments due
during the next five years and thereafter on long-term rental obligations are as
follows:
2001 2002 2003 2004 2005 THEREAFTER
---- ---- ---- ---- ---- ----------
$124 $115 $104 $106 $106 $317
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 31, consisted of the following:
2000 1999
------ ------
Goodwill.................................................... $5,795 $5,813
Less accumulated amortization............................... (749) (627)
------ ------
$5,046 $5,186
====== ======
Other intangible assets..................................... $ 273 $ 306
Less accumulated amortization............................... (126) (136)
------ ------
$ 147 $ 170
====== ======
Amortization expense for goodwill and other intangible assets was $219,
$270 and $162 for 2000, 1999 and 1998, respectively.
7. LONG-TERM DEBT
Long-term debt at December 31, consisted of the following:
2000 1999
------ -------
Bank credit facilities...................................... $ 120 $ 2,250
Commercial paper, average interest of 5.5% in 1999.......... -- 22
Senior notes and debentures, interest of 6% to 8 3/4%
through 2029.............................................. 6,307 6,750
4% Convertible subordinated notes due 2002.................. 535 535
5.75% Convertible subordinated notes due 2005............... 31 427
Tax-exempt and project bonds, principal payable in periodic
installments, maturing through 2029, fixed and variable
interest rates ranging from 4.38% to 9.38% at December 31,
2000...................................................... 1,260 1,235
Installment loans, notes payable, and other, interest to
14.25%, maturing through 2015............................. 232 279
------ -------
$8,485 $11,498
====== =======
Maturities of long-term debt for the next five years are as follows:
2001 2002 2003 2004 2005
---- ------ ---- ---- ----
$113 $2,289 $592 $730 $221
The Company has a $1,500 syndicated loan facility (the "Syndicated
Facility") which expires July 10, 2001 with a one-year extension option and a
$1,400 senior revolving credit facility (the "Credit Facility"),
48
51
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which matures August 2002. 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 debt and letters of credit, to fund acquisitions, and for working
capital purposes.
At December 31, 2000, the Company had borrowings of $120, which are
classified as long-term, under the Syndicated Facility at an average interest
rate of 7.74%. No borrowings were outstanding under the Credit Facility at
December 31, 2000. The facility fees were 0.20% and 0.25% per annum under the
Syndicated Facility and Credit Facility, respectively, at December 31, 2000. The
Company had issued letters of credit of approximately $1,500 in the aggregate
under the Syndicated Facility and Credit Facility, leaving unused and available
aggregate credit capacity of approximately $1,300 at December 31, 2000.
Under the terms of the Syndicated Facility and the Credit Facility, the
Company is obligated to repay the borrowings under the facilities with the cash
proceeds received from the strategic plan divestitures. The Company was required
to use all of the first $1,500 of net proceeds from the divestitures to repay
indebtedness, which it has done. Additionally, the Company is required to use
50% of the additional cash proceeds greater than $1,500 and up to $2,500 from
divestitures to repay the indebtedness under the Syndicated and Credit
Facilities. As of December 31, 2000, the Company had received cash proceeds of
approximately $2,500 from its divestitures, approximately $175 of which was used
to repay the Company's Eurocurrency facilities in the second quarter of 2000,
approximately $100 was used for repayment of divestiture subsidiary debts and
the remainder has been used to repay indebtedness under the bank credit
facilities.
On May 21, 1999, the Company completed a private placement of $1,150 of its
senior notes. The Company issued $200 of 6% senior notes, due 2001; $200 of
6 1/2% senior notes due 2004; $500 of 6 7/8% senior notes due 2009; and $250 of
7 3/8% senior notes due 2029. The senior notes constitute senior and unsecured
obligations of the Company ranking equal in right of payment with all other
senior and unsecured obligations of the Company, as defined in the indenture.
The 6% senior notes are not redeemable by the Company. The 6 1/2% senior notes,
the 6 7/8% senior notes, and 7 3/8% senior notes are redeemable, in whole or in
part, at the option of the Company at any time, or from time to time, at a
redemption price defined in the indenture. Interest is payable semi-annually on
May 15 and November 15. All proceeds from the private placement notes were used
to repay outstanding debt under the Credit Facility and to reduce the amount of
commercial paper outstanding.
On July 17, 1998, the Company issued $600 of 7% senior notes, due on July
15, 2028 (the "7% Notes") and $600 of 6 1/8% mandatorily tendered senior notes,
due on July 15, 2011 (the "6 1/8% Notes"). The 7% Notes are redeemable, in whole
or in part, at the option of the Company at any time and from time to time at
the redemption price, as defined in the indenture. The 6 1/8% Notes are subject
to certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to either refinance these notes or
use borrowings available under the Syndicated Facility and/or the Credit
Facility in the event it must purchase the notes on July 15, 2001. Accordingly,
these borrowings have been classified as long-term at December 31, 2000. The
proceeds from the 7% Notes and 6 1/8% Notes were used to repay outstanding
indebtedness under the Company's credit facilities. Interest on the 7% Notes and
6 1/8% Notes is payable semi-annually on January 15 and July 15.
The Company's 4% convertible subordinated notes, due on February 1, 2002
have interest which is payable semi-annually in February and August. The notes
are convertible by the holders into shares of the Company's common stock at any
time at a conversion price of forty-three dollars and fifty-six cents per share.
The notes are subordinated in right of payment to all existing and future senior
indebtedness, as defined in the
49
52
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indenture. The notes have been redeemable since February 1, 2000 at the option
of the Company at 101.6% of the principal amount, and decline to 100.8% of the
principal amount on February 1, 2001 and thereafter until maturity, at which
time the notes will be redeemed at par, plus accrued interest.
The 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 one thousand dollar
principal amount at maturity, payable semi-annually. The stated discount is two
hundred eighty-two dollars and twenty cents. At the option of the holder, each
note was redeemable for cash by the Company on March 15, 2000, at eight hundred
forty-three dollars and three cents along with the related accrued unpaid
interest. The notes have been callable by the Company since March 15, 2000, for
cash, at the stated issue price plus accrued stated discount and accrued but
unpaid interest through the date of redemption. In addition, each 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 will have the option of paying
cash equal to the market value of the shares which would otherwise be issuable.
In December of 1999, the Company began repurchasing its 5.75% convertible notes.
During 2000, the Company had repurchased approximately $397 of the remaining
outstanding notes.
The Company had a public debt offering during the first quarter of 2001.
The net proceeds from the offering of the notes will be utilized to repay $600
of senior notes which have been classified as long-term at December 31, 2000.
See Note 24 for further discussion.
8. ENVIRONMENTAL LIABILITIES
The Company has material financial commitments for the costs associated
with its future obligations for final closure and post-closure obligations with
respect to the landfills it owns or operates. 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 is accrued using the calculated rate per
ton and charged to expense as airspace is consumed. The present value of total
estimated final closure and post-closure cost will be fully accrued for each
landfill at the time the site discontinues accepting waste and is closed. 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.
This liability is based on the estimated final closure and post-closure costs
and the percentage of airspace used as of the date the Company has assumed the
closure responsibility. 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.
In the United States, the final closure and post-closure requirements are
established by the EPA's Subtitles C and D regulation, as implemented and
applied on a state-by-state basis. The costs to comply with these requirements
could increase in the future as a result of legislation or regulation.
The Company routinely reviews and evaluates sites that require remediation,
including sites listed on the EPA's National Priority List ("NPL sites"). The
Company considers whether the Company was an owner, operator, transporter, or
generator at the site, the amount and type of waste hauled to the site, the
number of years the Company was connected with the site, as well as reviewing
the same information with respect to other named and unnamed potentially
responsible parties ("PRPs"). The Company then reviews the estimated cost for
the likely remedy, which is based on management's judgment and experience in
50
53
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 may be liable for remediation of a specific site, as well as the
typical allocation of costs among PRPs. These estimates are sometimes a range of
possible outcomes. In those 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, the Company provides for
the minimum amount within the range in accordance with SFAS No. 5, Accounting
for Contingencies. The Company believes that it is "reasonably possible," as
that term is defined in SFAS No. 5 ("more than remote but less than likely"),
that its potential liability, at the high end of such ranges, would be
approximately $249 higher on a discounted basis in the aggregate than the
estimate that has been recorded in the consolidated financial statements as of
December 31, 2000.
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 (at 2.5% and 2% at
December 31, 2000 and 1999, respectively) until expected time of payment and
then discounted to present value (at 6.0% and 5.5% at December 31, 2000 and
1999, respectively). 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. The portion of the Company's
recorded environmental liabilities that has never been subject to inflation or
discounting was approximately $136 and $140 at December 31, 2000 and 1999,
respectively. Had the Company not discounted any portion of its liability, the
amount recorded would have been increased by approximately $415 at December 31,
2000.
51
54
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liabilities for final closure, post-closure and environmental remediation
costs at December 31, consisted of the following:
2000 1999
------ ----
Current portion, included in accrued liabilities:
Closure/Post-closure...................................... $ 54 $ 44
Remediation............................................... 99 96
------ ----
153 140
------ ----
Non-current portion:
Closure/Post-closure...................................... 559 556
Remediation............................................... 250 281
------ ----
809 837
------ ----
Total recorded.............................................. 962 $977
====
Amount to be provided including discount of $415 related to
recorded amounts.......................................... 1,850
------
Expected aggregate environmental liabilities based on
current cost.............................................. $2,812
======
Anticipated payments (based on current costs) of currently identified
environmental liabilities for the next five years are as follows:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
$153 $66 $73 $50 $40
In addition to the amounts above, the Company has perpetual care
obligations at a site of approximately $2 per year.
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. Settlements, which
were $2 in 2000, $7 in 1999 and $47 in 1998, have been included in operating
costs and expenses as an offset to environmental expenses.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of the Company's financial instruments
have been determined by the Company using available market information and
commonly accepted valuation methodologies. However, considerable judgement is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company or holders of the instruments could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair values. The fair
value estimates presented herein are based on information available to
management as of December 31, 2000 and 1999. Such amounts have not been revalued
since those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.
The carrying values of cash and cash equivalents, short-term investments,
trade accounts receivable, trade accounts payable, financial instruments
included in notes and other receivables and financial instruments included in
other assets or other liabilities are estimated to approximate their fair values
principally because of the short-term maturities of these instruments. As of
December 31, 2000 and 1999, the carrying amount of
52
55
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt was $8,485 and $11,498, respectively, and the fair value of debt was
estimated at $8,281 and $10,777, respectively.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate agreements -- The Company has entered into interest rate swap
agreements to balance fixed and floating rate debt interest risk in accordance
with management's criteria (see Note 3). The agreements are contracts to
exchange fixed and floating interest rate payments periodically over a specified
term without the exchange of the underlying notional amounts. The agreements
provide only for the exchange of interest on the notional amounts at the stated
rates, with no multipliers or leverage. Differences paid or received over the
life of the agreements are recorded in the consolidated financial statements as
a part of interest expense on the underlying debt, and the swap is not recorded
on the balance sheet. As of December 31, 2000, interest rate agreements in
notional amounts and with terms as set forth in the following table were
outstanding:
NOTIONAL
AMOUNT
CURRENCY (IN U.S. DOLLARS) RECEIVE PAY MATURITY DATE
- -------- ----------------- -------- -------- -------------------------
U.S. Dollar............ $ 21 Floating Fixed Through December 31, 2012
U.S. Dollar............ $1,052 Fixed Floating Through April 1, 2010
Commodity agreements -- The Company has entered into recycled paper swap
agreements to help mitigate the price volatility of recycled paper. The
agreements are contracts to exchange fixed and floating commodity prices over a
fixed period of time. All of the Company's recyclable paper hedges are
cash-settled on a monthly basis with the counterparty and are recorded as a
component of operating expense. At December 31, 2000 the Company had recycled
paper swap agreements for a total notional amount of 48,722 tons per month
expiring at various dates through November 2007. These swap agreements are not
recorded on the balance sheet.
Fair values -- The fair values of the interest rate swaps and recycled
paper swaps represent the amounts at which the agreements could be settled based
on estimated market rates. At December 31, 2000, the Company would have had to
pay approximately $5 and would receive $11 to settle the interest rate swap
agreements and recycled paper swap agreements, respectively.
11. CAPITAL STOCK
The Board of Directors is authorized to issue preferred stock in series,
and with respect to each series, to fix its designation, relative rights
(including voting, dividend, conversion, sinking fund, and redemption rights),
preferences (including dividends and liquidation), and limitations. The Company
has ten million shares of authorized $.01 par value preferred stock, none of
which is currently outstanding.
The Company declared cash dividends of approximately $6 during both 2000
and 1999 and $94 during 1998. Based on the Company's weighted average common
shares outstanding, the cash dividends per common share were $0.01, $0.01 and
$0.16 for 2000, 1999 and 1998, respectively. As of December 31, 2000, due to
current credit agreements, the Company's ability to pay dividends and repurchase
capital stock was limited to $369, of which no more than $25 may be paid for
dividends.
12. COMMON STOCK OPTIONS AND WARRANTS
The Company accounts for its stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as amended, under which no
compensation cost for stock options is recognized when granted with an exercise
price at least equal to fair market value. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting which are shown below.
53
56
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Company's 1993 Stock Option Incentive Plan and the Company's 2000
Stock Option Incentive Plan, options to purchase 26.5 million and 29.0 million
shares, respectively, of the Company's common stock may be granted to officers,
directors, and key employees. Options are granted under these plans at exercise
prices at least equal to the fair market value on the date of grant. The option
plans have various vesting periods, and expire up to ten years from the date of
grant. The Company also has a 2000 Broad-Based Employee Plan under which options
to purchase 3 million shares can be granted to any non-officer employees. The
exercise prices for options under the Broad-Based Plan are at least equal to the
fair market value on the date of grant, may vest over various periods, and
expire up to ten years from the date of grant.
Under the 1996 Stock Option Plan for Non-Employee Directors, the Company's
outside directors receive an annual grant of 10,000 options on each January 1.
In accordance with the plan, options to purchase up to 2,400,000 shares of the
Company's common stock may be granted, with one-year vesting periods and
expiration dates ten years from the date of grant. The options are granted at
exercise prices equal to the fair market value of the common stock on the date
of grant.
Stock options granted by the Company in 2000, 1999 and 1998 generally have
ten year terms and vest over four or five years. Stock options granted by WM
Holdings prior to March 10, 1998, became fully vested upon consummation of the
WM Holdings Merger. WM Holdings' options granted after March 10, 1998 generally
continue to vest in accordance with their original vesting schedule of 3 years.
Generally, all other stock options granted by merged entities continue to vest
under varying vesting periods ranging from immediate vesting to five years
following the date of the grant.
The Company also has outstanding options and warrants related to various
predecessor plans acquired through merger and acquisition activity.
The following table summarizes common stock option and warrant transactions
under the aforementioned plans and various predecessor plans for 2000, 1999 and
1998 (shares in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------ --------
Outstanding at beginning of year... 36,733 $34.53 40,810 $32.72 37,631 $30.46
Granted............................ 8,069 15.46 8,206 33.86 10,645 43.92
Assumed in acquisitions............ -- -- -- -- 1,986 36.77
Exercised.......................... (1,288) 18.95 (11,685) 26.88 (8,593) 34.17
Canceled or expired................ (4,331) 41.36 (598) 51.54 (859) 45.33
------ ------- ------
Outstanding at end of year......... 39,183 $30.36 36,733 $34.53 40,810 $32.72
====== ======= ======
Exercisable at end of year......... 23,523 $33.43 22,055 $33.93 23,994 $29.25
====== ======= ======
In addition to the amounts in the table above, at December 31, 2000 and
1999, the Company had approximately 1.0 million warrants outstanding at a
weighted average exercise price of $20.96 per share. The warrants were issued by
a previously acquired company to non-employees in connection with services
provided to that company.
54
57
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Outstanding and exercisable stock options and warrants at December 31,
2000, were as follows (shares in thousands):
OUTSTANDING EXERCISABLE
-------------------------------------------- -------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE REMAINING YEARS SHARES EXERCISE PRICE
- --------------- ------ ---------------- ---------------- ------ ----------------
$2.25 to $10.00....... 111 $ 7.21 3.37 111 $ 7.21
$10.01 to $20.00...... 13,111 14.78 7.73 4,081 13.45
$20.01 to $30.00...... 7,992 24.23 5.97 6,188 24.79
$30.01 to $40.00...... 6,676 35.53 6.30 5,058 35.64
$40.01 to $50.00...... 5,172 45.47 5.09 4,747 45.35
$50.01 to $140.16..... 6,121 53.72 6.66 3,338 54.39
------ ------
39,183 30.36 6.60 23,523 33.43
====== ======
The weighted average fair value per share of common stock options and
warrants granted during 2000, 1999 and 1998 were $6.78, $16.17 and $18.61,
respectively. The fair value of each common stock option or warrant granted to
employees or directors during 2000, 1999 and 1998 is estimated utilizing the
Black-Scholes option-pricing model. The following weighted average assumptions
were used: dividend yield of 0% to 2%, risk-free interest rates which vary for
each grant and range from 4.63% to 7.67%, expected life of three to seven years
for all grants, and stock price volatility primarily ranging from 23.74% to
50.04% for all three to seven year grants.
If the Company applied the recognition provisions of SFAS No. 123, the
Company's net loss and loss per common share for 2000, 1999 and 1998 would
approximate the pro forma amounts shown below:
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------- ------ ------
Net loss:
As reported.............................................. $ (97) $(398) $(771)
Pro forma................................................ (172) (479) (833)
Basic loss per common share:
As reported.............................................. (0.16) (0.65) (1.32)
Pro forma................................................ (0.28) (0.78) (1.43)
Diluted loss per common share:
As reported.............................................. (0.16) (0.65) (1.32)
Pro forma................................................ (0.28) (0.78) (1.43)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future results or performance.
In November 1999, the Company's President, CEO and Chairman of the Board
was granted 650,000 stock options upon joining the Company. The options, which
are included in the above tables, vest according to certain performance goals in
lieu of the normal vesting schedules. Notwithstanding these performance goals,
all of these options will vest no later than five years from the date of grant.
13. EMPLOYEE BENEFIT PLANS
Effective January 1, 1999, the Waste Management Retirement Savings Plan and
the Wheelabrator-Rust Savings and Retirement Plan were merged into the USA Waste
Services, Inc. Employee Savings Plan, which was then renamed the Waste
Management Retirement Savings Plan ("Savings Plan"). The Savings Plan covers
employees (except those working subject to collective bargaining agreements
which do not provide for
55
58
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coverage under such plans) following a 90 day waiting period after hire, and
allows eligible employees to contribute up to 15% of their annual compensation,
as limited by IRS regulations. Under the Savings Plan, the Company matches
employee contributions up to 3% of their eligible compensation and matches 50%
of employee contributions in excess of 3% but no more than 6% of eligible
compensation. Both employee and Company contributions vest immediately. Charges
to operations for the Company's defined contribution plans were $38, $49 and
$70, during 2000, 1999 and 1998, respectively.
During 2000, the Company sold its foreign subsidiaries that participated in
both defined benefit and defined contribution retirement plans. The annual
activity of these plans is not included in the tables below primarily due to
their insignificance and sale of the related operating companies in 2000. In
addition to the pension plan for certain employees under collective bargaining
agreements established in 1998 (see below), other Company subsidiaries
participate in various multi-employer pension plans and in two instances, site
or contract specific plans, covering certain employees not covered under the
Company's pension plans. These multi-employer plans are generally defined
benefit plans; however, in many cases, specific benefit levels are not
negotiated with or known by the employer contributors. The projected benefit
obligation, plan assets and unfunded liability of the site or contract specific
plans are not material and are not included in the tables below. Contributions
of $28, $31 and $26 for subsidiaries' defined benefit plans were charged to
operations in 2000, 1999 and 1998, respectively.
The Company had a qualified defined benefit pension plan (the "Plan") for
all eligible non-union domestic employees of WM Holdings which, as discussed
below, was terminated as of October 31, 1999 in connection with the WM Holdings
Merger. Throughout the life of the Plan, benefits were based on the employee's
years of service and compensation during the highest five consecutive years out
of the last ten years of employment. The Company's funding policy was to
contribute annually an amount determined in consultation with its actuaries,
approximately equal to pension expense, except as may be limited by the
requirements of the Employee Retirement Income Security Act ("ERISA"). An
actuarial valuation report was prepared for the Plan as of September 30 each
year and used for the year-end disclosures.
In connection with the WM Holdings Merger, the Company ceased benefit
accruals for the Plan as of December 31, 1998. The Company planned to liquidate
the Plan's assets and settle its obligations to participants, except as related
to certain employees participating under collective bargaining agreements, whose
benefits were transferred to a newly created plan effective October 1, 1998.
This decision resulted in a curtailment expense charge in asset impairments and
unusual items of $35 in 1998. The Plan was officially terminated as of October
31, 1999. The Company contributed approximately $145 to the Plan's trusts during
2000 and expects contributions of approximately $20 to be made in early 2001
relating to the final liquidation of the Plan. The expense recorded for this
Plan during 2000 was approximately $197. During the fourth quarter of 2000, the
Company adjusted accumulated other comprehensive income to reflect the final
anticipated settlement expense of $3, net of taxes of $2, which will be expensed
as the final settlements occur in 2001.
Also in conjunction with the WM Holdings Merger, the Company has terminated
certain non-qualified supplemental benefit plans for certain officers and
non-officer managers, the most significant plan being the WM Holdings'
Supplemental Executive Retirement Plan ("SERP") (collectively the "Supplemental
Plans"). The curtailment and settlement loss related to these plans of $62 was
recorded in asset impairments and unusual items in 1998. The Company has a
pension liability as of December 31, 2000 equal to the expected payment amounts.
The Plan and Supplemental Plans are combined under the caption "Pension
Benefits" in the tables that follow.
WM Holdings and certain of its subsidiaries provided post-retirement health
care and other benefits to eligible employees. In conjunction with the WM
Holdings Merger, the Company limited participation in these plans to
participating retired employees as of December 31, 1998. The remaining benefits
under the Supplemental Plans are expected to be paid in 2001. The Company has a
pension liability as of December 31,
56
59
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 equal to the expected payment amounts. These plans are combined under the
caption "Other Benefits" in the tables that follow.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of plan assets over the two-year period
ending December 31, 2000, and a statement of the funded status for both years:
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
2000 1999 2000 1999
------- ------- ------ ------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 561 $ 472 $ 55 $ 54
Service cost................................................ 1 1 -- --
Interest cost............................................... 21 23 4 3
Actuarial (gain)/loss....................................... (21) 73 (4) 2
Benefits paid............................................... (10) (8) (4) (4)
Curtailments................................................ 1 -- -- --
Settlements................................................. (478) -- -- --
----- ----- ---- ----
Benefit obligation at end of year........................... $ 75 $ 561 $ 51 $ 55
===== ===== ==== ====
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 336 $ 319 $ -- $ --
Actual return on plan assets................................ 19 (18) -- --
Employer contributions...................................... 149 43 4 4
Benefits paid............................................... (10) (8) (4) (4)
Settlements................................................. (478) -- -- --
----- ----- ---- ----
Fair value of plan assets at end of year.................... $ 16 $ 336 $ -- $ --
===== ===== ==== ====
FUNDED STATUS:
Funded status at December 31................................ $ (59) $(225) $(51) $(55)
Unrecognized (gain)/loss.................................... 5 223 (1) 2
Unrecognized prior service cost............................. -- -- (18) (19)
----- ----- ---- ----
Net amount recognized....................................... $ (54) $ (2) $(70) $(72)
===== ===== ==== ====
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31 of both years:
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
2000 1999 2000 1999
------- ------- ------ ------
Prepaid benefit cost........................................ $ -- $ 37 $ -- $ --
Accrued benefit liability................................... (54) (39) (70) (72)
Minimum pension liability................................... (5) (222) -- --
Accumulated other comprehensive income before tax benefit... 5 222 -- --
----- ----- ---- ----
Net amount recognized....................................... $ (54) $ (2) $(70) $(72)
===== ===== ==== ====
57
60
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic benefit cost
for 2000, 1999 and 1998:
PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Components of net periodic benefit cost:
Service cost....................................... $ 1 $ 1 $ 18 $-- $-- $ 2
Interest cost...................................... 21 23 24 4 3 4
Expected return on plan assets..................... (11) (17) (21) -- -- --
Recognized (asset)/obligation...................... -- (1) (1) -- -- --
Amortization of prior service cost................. -- -- -- (2) (1) --
Recognized (gain)/loss............................. 13 9 8 -- -- --
---- ---- ---- --- --- ---
Net periodic benefit cost.......................... 24 15 28 2 2 6
Curtailment loss (included in asset impairments and
unusual items).................................. 1 -- 53 -- -- --
Settlement loss (included in asset impairments and
unusual items).................................. 174 -- 44 -- -- --
---- ---- ---- --- --- ---
Net periodic benefit cost after curtailments and
settlements..................................... $199 $ 15 $125 $ 2 $ 2 $ 6
==== ==== ==== === === ===
The assumptions used in the measurement of the Company's benefit
obligations are shown in the following table (weighted average assumptions as of
December 31):
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
Discount rate.......................................... 5.53% 5.83% 7.50% 7.50%
Expected return on plan assets......................... 6.30% 6.11% n/a n/a
Rate of compensation................................... 3.50% 3.50% n/a n/a
The assumptions used for discount rate and expected long-term rate of
return on assets in the 2000 disclosure reflect the weighted average assumptions
for the terminated and ongoing plans. Since the Plan and Supplemental Plans
being terminated are larger than the ongoing union plan, the assumptions
applicable to those plans are the main factors in these weighted average
assumptions. The assumptions for the Plan and the Supplemental Plans reflect the
assumptions used in settling these plan obligations (lump sum interest rates and
annuity purchase rates) and the return on the immunized assets for the plan. A
discount rate of 7.5% and an expected long-term rate of return of 9.0% are used
for the ongoing union plan.
The principal element of the "other benefits" referred to above is the
post-retirement health care plan. Participants in the WM Holdings
post-retirement plan (one of two plans that comprise the "other benefits"
information) contribute to the cost of the benefit, and for retirees since
January 1, 1992, the Company's contribution is capped at between $0 and $600 per
month per retiree, based on years of service. For measurement purposes, a 9.0%
annual rate of increase in the per capita cost of covered health care claims was
assumed for 2000 (being an average of the rate used by all plans); the rate was
assumed to decrease to 6.0% in 2004 and remain at that level thereafter.
A 1% change in assumed health care cost trend rates would have the
following effects:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost components of net
periodic post-retirement health care costs................ $-- $--
Effect on accumulated post-retirement benefit obligation.... $ 4 $(3)
58
61
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On 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 of its 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 were returned to the Company as payment for
the outstanding amount of the promissory note. The 7,892,612 shares returned to
the Company were recorded as treasury shares.
14. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes and
extraordinary item, showing domestic and international sources, was as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Domestic.................................................... $ 491 $ (42) $(897)
International............................................... (170) (121) 197
----- ----- -----
Income (loss) before income taxes and extraordinary item.... $ 321 $(163) $(700)
===== ===== =====
The provision for income taxes before extraordinary item consisted of the
following:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------- -------
Current:
Federal................................................... $238 $(150) $ 356
State..................................................... 74 (19) 88
Foreign................................................... 41 83 73
---- ----- -----
353 (86) 517
---- ----- -----
Deferred:
Federal................................................... 50 270 (463)
State..................................................... 6 40 (52)
Foreign................................................... 9 8 65
---- ----- -----
65 318 (450)
---- ----- -----
Provision for income taxes........................ $418 $ 232 $ 67
==== ===== =====
59
62
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The federal statutory rate is reconciled to the effective rate as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Income tax expense (benefit) at federal statutory rate..... 35.00% (35.00)% (35.00)%
State and local income taxes, net of federal income tax
benefit.................................................. 16.17 19.31 3.23
Nondeductible costs relating to acquired intangibles....... 48.40 22.01 16.85
Nondeductible merger costs................................. -- -- 8.22
Writedown of investments in subsidiaries................... 12.81 74.85 --
Minority interest.......................................... 2.54 5.20 0.82
Sale of foreign subsidiaries............................... 23.53 -- --
Deferred tax valuation and other tax reserves.............. 1.21 25.24 8.79
Federal tax on foreign income, net of U.S. benefit......... 3.13 30.30 4.35
Nonconventional fuel tax credit............................ (8.30) -- (3.61)
Other...................................................... (4.27) 0.42 5.92
------ ------ ------
Provision for income taxes....................... 130.22% 142.33% 9.57%
====== ====== ======
The components of the net deferred tax assets (liabilities) at December 31
are as follows:
2000 1999
------- -------
Deferred tax assets:
Net operating loss, capital loss and tax credit
carryforwards.......................................... $ 334 $ 244
Environmental and other reserves.......................... 1,032 1,021
Reserves not deductible until paid........................ 138 205
------- -------
Subtotal.......................................... 1,504 1,470
------- -------
Deferred tax liabilities:
Property, equipment, intangible assets, and other......... (1,627) (1,574)
Valuation allowance......................................... (444) (328)
------- -------
Net deferred tax liabilities...................... $ (567) $ (432)
======= =======
At December 31, 2000 the Company's subsidiaries have approximately $64 of
federal net operating loss ("NOL") carryforwards, $3,700 of state NOL
carryforwards, and $116 of foreign NOL carryforwards. The NOL carryforwards have
expiration dates through the year 2019. The Company's subsidiaries have $2 of
alternative minimum tax credit carryforwards that may be used indefinitely;
state tax credit carryforwards of $11; and foreign tax credit carryforwards of
$33.
Valuation allowances have been established for uncertainties in realizing
the benefit of tax loss and credit carryforwards. While the Company expects to
realize the deferred tax assets, net of the valuation allowances, changes in
estimates of future taxable income or in tax laws may alter this expectation.
The valuation allowance increased approximately $116 and $121 in 2000 and 1999,
respectively, primarily due to the uncertainty of realizing foreign and state
NOL carryforwards and the expiration of foreign tax credits.
Prior to the Company's August 1999 decision to divest its WM International
operations, the Company did not provide for United States income taxes on
unremitted earnings of foreign subsidiaries as it was the intention of
management to reinvest the unremitted earnings in its foreign operations. Since
the adoption of the strategic plan in August 1999, the Company has provided for
United States income taxes on unremitted foreign earnings on its international
operations other than in Canada. The amount of United States income tax provided
for the repatriation of the Company's international operations other than in
Canada was approximately $13 for 1999. For 2000, with respect to its Canadian
operations, the Company provided $9 for the
60
63
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repatriation of $58 of capital. Unremitted earnings in Canada were approximately
$62 at December 31, 2000, which the Company intends to reinvest. It is not
practicable to determine the amount of United States based income taxes that
would be payable upon remittance of the assets that represent those earnings.
15. SEGMENT AND RELATED INFORMATION
The Company's North American solid waste management operations is the
Company's principal reportable segment and is comprised of six geographical
operating Areas with similar economic characteristics. 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 and Puerto Rico, Mexico and Canada. Similar operations in
international markets outside of North America are disclosed as a separate
segment under WM International. As discussed in Notes 4 and 20, pursuant to the
Company's strategic plan, the Company has divested or is actively marketing to
sell its remaining WM International operations and considers them to be
held-for-sale. The remaining operations outside of North America included
certain operations in Sweden and operations in Argentina and Israel. The
Company's other reportable segment consists of non-solid waste management
services, aggregated as a single segment for this reporting presentation. The
non-solid waste management segment includes other hazardous waste services such
as chemical waste management services, the Company's independent power projects,
and other non-solid waste management services to commercial, industrial and
government customers. As discussed in Notes 4 and 20, the Company's non-solid
waste management segment includes business lines that have been divested or are
being actively marketed and considered to be held-for-sale.
Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31, is shown in the following
table. Prior period information has been restated to conform to the segments
described above, which are based on the structure and internal organization of
the Company as of December 31, 2000.
NORTH AMERICAN WM NON-SOLID CORPORATE
SOLID WASTE INTERNATIONAL WASTE FUNCTIONS(A) TOTAL
-------------- ------------- --------- ------------ -------
2000
Net operating revenues(b).......... $11,218 $ 809 $ 465 $ -- $12,492
Earnings before interest and taxes
(EBIT)(c),(d).................... 2,166 151 77 (607) 1,787
Depreciation and amortization...... 1,352 20 16 41 1,429
Capital expenditures............... 1,163 74 6 70 1,313
Total assets(d).................... 16,587 80 97 1,801 18,565
1999
Net operating revenues(b).......... $10,685 $1,651 $ 791 $ -- $13,127
Earnings before interest and taxes
(EBIT)(c),(d).................... 1,633 212 38 (559) 1,324
Depreciation and amortization...... 1,364 148 23 79 1,614
Capital expenditures............... 1,086 206 17 18 1,327
Total assets(d).................... 17,178 2,915 971 1,617 22,681
1998
Net operating revenues(b).......... $10,144 $1,534 $ 948 $ -- $12,626
Earnings before interest and taxes
(EBIT)(c),(d).................... 2,509 134 112 (244) 2,511
Depreciation and amortization...... 1,215 168 44 72 1,499
Capital expenditures............... 1,438 166 35 12 1,651
Total assets(d).................... 17,005 2,956 1,000 1,921 22,882
61
64
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Corporate functions include the corporate treasury function (except for
limited amounts of locally negotiated and managed project debt), legal
function, information technology function, administration of corporate tax
function, the corporate insurance function and management of closed
landfill and related insurance recovery functions, along with other
typical administrative functions.
(b) Non-solid waste revenues are net of inter-segment revenue with North
American solid waste of $37, $46 and $122 in 2000, 1999 and 1998,
respectively. There are no other significant sales between segments.
(c) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies.
(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 loss below,
however, have resulted in adjustments to assets ultimately reflected on
segment balance sheets. Assets are net of inter-segment receivables and
investments.
The reconciliation of total EBIT reported above to net loss is as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
EBIT, as reported above.................................... $1,787 $1,324 $2,511
(Plus) less:
Merger and acquisition related costs.................. -- 45 1,807
Asset impairments and unusual items................... 749 739 864
------ ------ ------
Income (loss) from operations.............................. 1,038 540 (160)
Interest expense........................................... (748) (770) (682)
Interest income............................................ 31 38 27
Minority interest.......................................... (23) (24) (24)
Other income, net.......................................... 23 53 139
------ ------ ------
Income (loss) before income taxes and extraordinary item... 321 (163) (700)
Provision for income taxes................................. 418 232 67
------ ------ ------
Loss before extraordinary item............................. (97) (395) (767)
Extraordinary loss......................................... -- (3) (4)
------ ------ ------
Net loss......................................... $ (97) $ (398) $ (771)
====== ====== ======
The table below shows the total revenues contributed by the Company's
principal lines of business within the NASW segment.
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
North American Solid Waste:
Collection................................................ $ 7,675 $ 7,553 $ 6,964
Disposal.................................................. 3,366 3,267 3,169
Transfer.................................................. 1,394 1,195 1,054
Recycling and other....................................... 805 664 653
Intercompany.............................................. (2,022) (1,994) (1,696)
------- ------- -------
Operating revenues................................ $11,218 $10,685 $10,144
======= ======= =======
62
65
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues decreased from 1999 to 2000 due to the Company selling its WM
International operations on a country by country basis throughout 2000. As of
December 31, 2000, the Company's operations outside of North America included
certain operations in Sweden, and operations in Argentina and Israel. The
Company's WM International operations, as well as certain of the Company's
operations in Mexico (which is considered NASW), had their property and
equipment reflected in current operations held-for-sale at December 31, 2000 and
1999. Operating revenues and property and equipment (net) relating to operations
in the United States and Puerto Rico, Europe, Canada and all other geographic
areas ("other foreign") are as follows.
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues:
United States and Puerto Rico......................... $11,134 $11,015 $10,604
Europe................................................ 600 1,355 1,264
Canada................................................ 493 409 426
Other foreign......................................... 265 348 332
------- ------- -------
Total......................................... $12,492 $13,127 $12,626
======= ======= =======
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Property and equipment, net:
United States and Puerto Rico......................... $ 9,295 $ 9,468 $ 9,774
Europe................................................ -- -- 841
Canada................................................ 831 836 841
Other foreign......................................... -- -- 170
------- ------- -------
Total......................................... $10,126 $10,304 $11,626
======= ======= =======
16. ASSET IMPAIRMENTS AND UNUSUAL ITEMS
In 2000, 1999 and 1998, the Company recorded certain charges for asset
impairments and unusual items as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Losses on businesses sold and held-for-sale adjustments for
businesses to be sold..................................... $543 $443 $195
Asset impairments (excluding held-for-sale adjustments)..... -- 194 --
Changes in estimates on the ultimate losses for certain
legal and environmental issues and related costs.......... 17 92 332
Pension related costs for the WM Holdings' defined benefit
plan...................................................... 197 13 35
Provision or adjustment to provision for losses on
contractual commitments................................... -- (3) 115
Compensation charges for the liquidation of WM Holdings'
SERP (Note 13) and other supplemental plans............... 4 -- 72
Put provisions of certain WM Holdings' stock options as a
result of change in control provisions.................... -- -- 115
Other....................................................... (12) -- --
---- ---- ----
$749 $739 $864
==== ==== ====
63
66
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loss on businesses sold and held-for-sale adjustments for businesses to
be sold of $543 incurred in 2000 consisted of (i) a net gain of $127 on
divestitures of international operations, (ii) losses of $524 resulting from the
recognition of currency translation adjustment upon the divestitures of
international operations, and (iii) a net loss of $146 on the impairment of
domestic operations, offset by certain domestic gains and other items.
Fair values for asset impairment losses were determined for landfills,
hazardous waste facilities, recycling investments and other facilities,
primarily based on discounted future cash flow projections or offers from
interested third parties. For surplus real estate, third party bids, market
opinions and appraisals were used to determine fair value. In determining fair
values for abandoned projects and vehicles to be sold, recoverable salvage
values were determined using market estimates. The Company provides for losses
in connection with long-term waste service contracts where an obligation exists
to perform services and when it becomes evident the projected direct and
incremental contract costs will exceed the related contract revenues. In 1998,
the Company recorded loss contract provisions that were identified through
reviews related to the WM Holdings and Eastern Mergers as asset impairments and
unusual items. In general, these losses relate to contracts with remaining
average duration of five years. Loss contract provisions identified through
routine business reviews in 1999 and 2000 were recorded as a component of costs
of operations.
Based primarily on preliminary bids from interested parties, the Company's
WM International operations and certain other assets that were identified as
"held-for-sale" during the third quarter of 1999 were written down to fair value
less cost to sell, resulting in a pre-tax charge of approximately $414 at
September 30, 1999. These assets were considered to be held for use for periods
prior to the third quarter of 1999 and did not meet the criteria for impairment
recognition as a held for use asset, and therefore, were not considered impaired
for periods prior to the third quarter of 1999. The assets that were identified
as held for sale for September 30, 1999 and subject to adjustment include, among
others, the Company's WM International operations, the Company's nuclear
services disposal site operations and certain NASW operations that are not
essential parts of the Company's network. Revisions to the third quarter
estimates were required due to revisions in estimated proceeds and certain
changes in business plans during the fourth quarter. These revisions resulted in
a net increase to the charge of $19. That amount includes a reduction of $30
relating to assets in a single market that have been reclassified from
held-for-sale assets to operating assets, based on new facts and business
judgements, that have developed through February 2000. Based on these new facts
and business judgements the Company has decided not to divest those assets, and
those assets are not impaired as operating assets. Accordingly, the impairment
recorded in the third quarter of 1999 was reversed, with no net effect for 1999.
The remaining $10 of held-for-sale adjustments primarily resulted from revisions
of estimated proceeds related to surplus real estate. See Note 20 for further
analysis of operations held-for-sale.
The Company recorded asset impairments of $194 during 1999 (see Note 2
"1999 Accounting Charges and Adjustments") related to several landfill sites and
certain other operating assets. Included in this amount is $76 related to the
abandonment or closure of facilities resulting from the Company's recent
business decisions regarding optimal operating strategies in specific markets in
which the Company operates, or consideration of new facts or circumstances
during 1999. Also included in the amount is $40, which is primarily the result
of permit denials and other regulatory problems during the third quarter of
1999, which is one of the many types of facts and circumstances that may from
time to time trigger impairments and which may occasionally overlap with other
triggering events or result in abandonment or closure.
In 1999, the Company recorded $92 related to the reassessment of ultimate
losses for certain legal issues related to the WM Holdings Merger, which
primarily included increases to its legal reserves in response to developments
in connection with WM Holdings' restatement of earnings in February 1998. These
legal developments caused the Company to evaluate the numerous shareholder cases
filed against WM Holdings and to reassess the range of exposure.
64
67
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company increased its reserves for certain legal and
environmental remediation issues as a result of management's emphasis to resolve
and settle certain issues relating primarily to WM Holdings, including the class
action securities litigation against WM Holdings related to its February 1998
earnings restatement.
The Company is in the process of settling its obligations under the WM
Holdings' defined benefit plan which was terminated as of October 31, 1999 (see
Note 13).
Certain WM Holdings' employee stock option plans included change of control
provisions that were activated as a result of the WM Holdings Merger whereby the
option holder received certain put rights. The charge to pre-tax earnings as a
result of these put rights was $115 in the third quarter of 1998.
17. EARNING PER SHARE
The following reconciles the number of common shares outstanding at
December 31 of each year to the weighted average number of common shares
outstanding for the purposes of calculating basic and dilutive earnings per
common share(shares in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Common shares outstanding at year-end................... 622,650 619,317 600,351
Effect of using weighted average common shares
outstanding........................................... (1,393) (6,385) (16,050)
------- ------- -------
Basic and diluted common shares outstanding............. 621,257 612,932 584,301
======= ======= =======
For all periods presented, the effect of the Company's common stock options
and warrants and the effect of the Company's convertible subordinated notes and
debentures are excluded from the dilutive earnings per share calculation since
inclusion of such items would be antidilutive.
At December 31, 2000, there were approximately 53 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.
18. 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) were as follows:
DECEMBER 31,
---------------------
2000 1999 1998
----- ----- -----
Foreign currency translation adjustment..................... $(123) $(430) $(354)
Minimum pension liability adjustment (net of tax)........... (3) (133) (67)
----- ----- -----
$(126) $(563) $(421)
===== ===== =====
The change in minimum pension liability adjustment relates to the Company's
efforts to settle its obligations under the Plan. The Company expects to
complete this effort in early 2001.
Of the $123 of foreign currency translation adjustment within accumulated
other comprehensive income (loss) at December 31, 2000, approximately $5 relates
to the Company's WM International operations. Upon the divestiture of the
Company's remaining WM International operations, the foreign currency
translation losses that are included in accumulated other comprehensive income
(loss) will be recognized in the
65
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's statement of operations as a component of such operations (decreasing
any gain, or increasing any loss).
19. COMMITMENTS AND CONTINGENCIES
Financial instruments -- Letters of credit, performance bonds and insurance
policies have been provided by the Company to support tax-exempt bonds,
contracts, performance of landfill final closure and post-closure requirements,
insurance contracts, and other obligations. Total letters of credit, performance
bonds and insurance policies at December 31, 2000 aggregated approximately
$5,400. 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 and its subsidiaries. Approximately $87 (at fair market value at
December 31, 2000) of the Company's assets have been contributed to this
subsidiary to meet regulatory minimum capital requirements. 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.
As part of its ongoing operations, the Company provides for the present
value of estimated final closure and post-closure monitoring costs over the
estimated operating life of disposal sites as airspace is consumed. The Company
has also established procedures to evaluate potential remedial liabilities at
closed sites which it owns or operated, or to which it transported waste,
including 79 sites listed on the EPA's National Priority List ("NPL") as of
December 31, 2000. Where the Company concludes that it is probable that a
liability has been incurred, provision is made in the financial statements.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services industry, 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 nonexistence 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 be material.
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("CERCLA" or "Superfund"), or similar state
laws. The majority of these proceedings involve allegations that certain
subsidiaries of the Company (or their predecessors) transported hazardous
substances to the sites in question, often prior to acquisition of such
subsidiaries by the Company. CERCLA generally provides for 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
66
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and cleanup, which costs could be substantial and could have a material adverse
effect on the Company's financial statements.
As of December 31, 2000, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 79 locations
listed on the NPL. Of the 79 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 62 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.
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 the 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.
For more information regarding commitments and contingencies with respect
to environmental matters, see Note 8.
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. As a result, many claims were made against WM
Holdings, several of which have been resolved, as set forth in earlier quarterly
and year-end reports made by the Company.
The following actions with respect to WM Holdings, however, are still
outstanding.
In July 1998, a seller of a business to WM Holdings in exchange for WM
Holdings common stock filed a class action 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
agreements contained express warranties regarding the accuracy of WM Holdings'
financial statements. In March 2000, the certification order was upheld by the
court of appeals and the trial court granted summary judgment on the breach of
warranty claim in favor of all but certain members of the class whose claims may
have expired under applicable statutes of limitations. The extent of damages in
this class action has not yet been determined.
In March 2000, a group of companies that sold assets to WM Holdings in
exchange for common stock in March 1996 brought a separate action against the
Company for breach of contract and fraud, among other things. The plaintiffs
dismissed their suit without prejudice pending a decision of whether their
claims must be
67
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
submitted to arbitration. A court determined that plaintiffs must arbitrate
their claims and plaintiffs have appealed that decision. The extent of damages
in the underlying dispute has not yet been determined.
In December 1999, an individual 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. The defendants have filed motions to dismiss this case. This
action is in its early stages and the extent of possible damages, if any, has
not yet been determined.
The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of WM Holdings
and seeks, among other things, reimbursement of those monies expended by WM
Holdings and the Company in resolving all claims brought against WM Holdings
arising out of its February 1998 restatement of earnings. The terms of the
settlement include a payment to the Company of $15 by certain of WM Holdings'
insurance carriers and the complete resolution of all pending claims for
retirement benefits between certain former officers of WM Holdings and the
Company. The resolution of the actions for retirement benefits involves the
release by the former executives who brought claims against the Company for
certain amounts otherwise owing under the retirement plans. The total benefits
to the Company from the settlement of the derivative case is approximately $23.
The Company is also aware that the 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 addition to the actions with respect to WM Holdings, the following
actions with respect to the Company or its other subsidiaries have also been
brought.
On July 6 and July 29, 1999, the Company announced that it had lowered its
expected earnings per share for the three months ended June 30, 1999. On August
3, 1999, the Company announced another reduction in its expected earnings for
that period and that its reported operating income for the three months ended
March 31, 1999, might have included certain unusual pretax income items. More
than 30 lawsuits 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, another
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, which was transferred and consolidated with the consolidated
action pending in the Southern District of Texas. On May 8, 2000, the court
entered an order appointing the Connecticut Retirement Plan and Trust Funds as
lead plaintiff 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 WM Holdings stockholders who received Company common stock
pursuant to the WM Holdings Merger, and (ii) the "Eastern Merger Subclass,"
consisting of all Eastern stockholders who received Company common stock
pursuant to the Eastern Merger.
Among other things, the plaintiff alleges 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
68
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended June 30, 1999, (iii) failed to adequately disclose facts relating
to its earnings projections that the plaintiff claims 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 pre-tax charge of $1,763 in the third
quarter of 1999. The plaintiff also alleges that certain of the Company's
current and former officers and directors sold common stock between May 10, 1999
and June 9, 1999 at prices known to have been inflated by material misstatements
and omissions. The plaintiff in this action seeks damages with interest, costs
and such other relief as the court deems proper. Defendants filed a motion to
dismiss on October 3, 2000, which is pending. 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 Eastern stockholders falling within
the scope of the Eastern Merger Subclass described above. The plaintiffs allege
that the Company stock they received in exchange for their Eastern shares was
overvalued for the same reasons alleged in the consolidated class actions in
Texas. On August 4, 2000, the Company removed the case from the state court to
federal court and asked to have the case transferred to the Texas federal court
where the consolidated Texas class action is pending. On September 1, 2000, the
plaintiffs asked to remand the case to the Delaware state court, which the
Company opposed. The plaintiffs also asked the Delaware federal court not to
consider the Company's motion to transfer the case to Texas until it rules on
the motion to remand. All motions currently are pending. The case is at an early
stage, and the extent of possible damages, if any, cannot yet be determined.
The Company has been sued in several lawsuits by individuals who received
common stock in the sales of their businesses to the Company or to a company
later acquired by the Company. For reasons similar to those alleged in the class
actions described above, the sellers of the businesses allege that the stock
they received was overvalued. All of these matters are at early stages and the
extent of possible damages, if any, cannot yet be determined.
In addition, three derivative lawsuits have been filed against certain
current and former officers and directors of the Company alleging derivative
claims on behalf of the Company against these individuals for breaches of
fiduciary duty resulting from their common stock sales during the three months
ended June 30, 1999 and/or their oversight of the Company's affairs. Two of the
lawsuits, filed in the Delaware Court of Chancery on July 16, 1999 and August
18, 1999, were consolidated into a single action. The third suit was filed in
the United States District Court for the Southern District of Texas on July 27,
1999. Both of 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 courts deem proper. On
December 1, 2000, the Company moved to dismiss the consolidated derivative suit
in Delaware. The same day, the Company asked the court in Texas to stay the
Texas derivative suit until the Delaware court acts on the motion to dismiss.
The Company is now in preliminary settlement discussions with the plaintiffs in
both cases. The Company is unable to predict the outcome of these discussions at
this time, nor can it predict the outcome of the litigation if the discussions
are unsuccessful.
Several related shareholders have filed a lawsuit in state court in Texas
against the Company and three of its former officers. The petition alleges that
the plaintiffs are substantial shareholders of the Company's common stock who
intended to sell their stock in 1999, but that the individual defendants made
false and misleading statements regarding the Company's prospects that induced
the plaintiffs to retain their stock. Plaintiffs assert that the value of their
retained stock declined dramatically. Plaintiffs asserted claims for fraud,
negligent misrepresentation, and conspiracy. The case is in an early stage and
the extent of damages, if any, cannot yet be determined.
The New York Stock Exchange has notified the Company that its Market
Trading Analysis Department is reviewing transactions in the common stock of the
Company prior to the July 6, 1999 earnings forecast announcement.
69
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. From time
to time, the Company pays fines or penalties in environmental proceedings
relating primarily to waste treatment, storage or disposal facilities. As of
December 31, 2000, there were four proceedings involving Company subsidiaries
where the sanctions involved could potentially exceed one hundred thousand
dollars. The matters involve allegations that subsidiaries (i) operated a
hazardous waste incinerator in such a way that its air emissions exceeded permit
limits, (ii) engaged in the importation and disposal of hazardous waste in
contravention of applicable federal regulations, (iii) failed to comply with
certain provisions of an administrative order directing the remediation of a
non-operating waste disposal site, and (iv) disposed of waste outside of the
disposal area designated by the applicable permit.
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.
On July 29, 1998, the EPA inspected one of the Company's 100% owned
subsidiaries' operations, and notified the Company of alleged violations
relating to the disposal of chlorofluorocarbons ("CFCs"). In January 1999, the
EPA issued an Administrative Order requiring the Company's subsidiary to comply
with the CFC regulations. In June 1999, the Company was notified that the EPA is
conducting a civil investigation relating to the alleged CFC disposal violations
to determine whether further enforcement measures are warranted. The Company and
its subsidiary are 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.
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. The Company is seeking (i) a declaratory judgment that past and future
environmental liabilities asserted against the Company or its subsidiaries are
covered by its insurance policies and (ii) to recover defense costs and other
damages incurred as a result of the defendant insurance carriers' denial of
coverage of environmental liabilities over the last 25 years. The Company has
reached settlements with some of the carriers. However, the remaining defendants
have denied liability to the Company, asserting various defenses, and are
contesting the claims vigorously. Discovery has been completed as to 12 of the
contested sites, but the remaining discovery in this case is expected to
continue for several years. Summary judgment motions were filed by both parties
with respect to the 12 sites where discovery is complete and in August 2000, the
court denied four of the defendants' motions, granted one of defendants' motions
and granted the Company's motions with respect to the seven other sites. 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 the Company, nor
is it possible to predict whether any other suits or claims may arise out of
these matters in the future. The Company and each of its subsidiaries intend to
defend themselves vigorously in all the above matters. 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 certain of its subsidiaries are also currently involved in
other routine 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.
70
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance -- The Company carries a broad range of insurance coverages for
protection of its assets and operations from certain risks including pollution
legal liability insurance for certain of its disposal sites, transfer stations,
recycling and other facilities. Through the date of the WM Holdings Merger,
certain of WM Holdings' auto, general liability, environmental impairment
liability and workers' compensation risks were self-insured up to $5 per
accident. For such programs, a provision was made in each accounting period for
estimated losses, including losses incurred but not reported, and the related
reserves are adjusted as additional claims information becomes available. The
Company's ongoing programs carry self-insurance exposures of up to two hundred
and fifty thousand dollars and twenty thousand dollars per incident with regards
to workers' compensation and auto, respectively. Claims reserves related to WM
Holdings were discounted at 5.5% at December 31, 2000 and 1999. The
insurance-related liability for the ongoing program and the WM Holdings'
self-insurance runoff program included in the accompanying balance sheet in
other long-term liabilities approximates $350 and $362 at December 31, 2000 and
1999, respectively.
20. OPERATIONS HELD-FOR-SALE
As discussed in Note 16, the Company has recorded charges to write down
certain of the operations the Company has marketed for sale pursuant to its
strategic plan. These charges reflect the excess of the Company's carrying
amounts of the assets over their fair market value. 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 were included in revenues and expenses through the date of
disposition in the accompanying statement of operations. Note 4 discusses
operations that were divested in 2000.
As of December 31, 2000, the primary components remaining within operations
held-for-sale consisted of the Company's remaining WM International operations,
which included certain operations in Sweden and operations in Argentina and
Israel, certain other non-core and NASW operations and the Company's surplus
real estate portfolio. For operations classified as held-for-sale, the Company
suspends depreciation and amortization on the underlying assets. Depreciation
suspension for 2000 and 1999 for held-for-sale operations was $99 and $46,
respectively.
Operational information included in the statements of operations regarding
the businesses classified as operations held-for-sale at December 31, 2000, is
as follows:
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- -----
YEAR ENDED:
December 31, 2000
Operating revenues......................... $ 1 $24 $316 $341
Earnings before interest and taxes
EBIT(a)................................. -- 3 20 23
December 31, 1999
Operating revenues......................... $ 1 $ 6 $255 $262
Earnings before interest and taxes
EBIT(a)................................. (2) 1 (24) (25)
December 31, 1998
Operating revenues......................... $ 3 $-- $228 $231
Earnings before interest and taxes
EBIT(a)................................. -- -- (20) (20)
- ---------------
(a) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies. (See Note 3.)
EBIT is defined as income (loss) from operations excluding merger and
acquisition related costs, asset impairments and unusual items.
71
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In its consolidated balance sheets, the Company has classified as current
operations held-for-sale its remaining WM International operations, its
remaining non-core operations and select NASW operations, which management
believes will be divested prior to December 31, 2001. The Company has classified
its surplus real estate portfolio as non-current operations held-for-sale.
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- -----
AS OF DECEMBER 31, 2000:
Accounts receivable, net......................... $-- $ 10 $ 74 $ 84
Other current assets............................. -- 2 69 71
Property and equipment and other non-current
assets......................................... 53 46 77 176
Other current liabilities........................ -- (45) (55) (100)
Other noncurrent liabilities..................... (3) (6) (44) (53)
Minority interest................................ -- (1) 3 2
--- ---- ---- -----
Net operations held-for-sale........... $50 $ 6 $124 $ 180
=== ==== ==== =====
Current assets:
Operations held-for-sale....................... $11 $ 58 $220 $ 289
Long-term assets:
Operations held-for-sale (included in other
assets)..................................... 42 -- -- 42
Current liabilities:
Operations held-for-sale....................... (3) (52) (96) (151)
--- ---- ---- -----
Net operations held-for-sale........... $50 $ 6 $124 $ 180
=== ==== ==== =====
Operational information included in the statement of operations regarding
the businesses classified as operations held-for-sale at December 31, 1999, is
as follows:
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- ------
YEAR ENDED:
December 31, 1999
Operating revenues............................ $541 $1,651 $288 $2,480
Earnings before interest and taxes(a)......... (22) 212 52 242
December 31, 1998
Operating revenues............................ $522 $1,534 $305 $2,361
Earnings before interest and taxes(a)......... 21 133 48 202
- ---------------
(a) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies. (See Note 3.)
EBIT is defined as income (loss) from operations excluding merger and
acquisition related costs, asset impairments and unusual items.
72
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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, which
management believed would be divested prior to December 31, 2000. The Company
classified as non-current operations held-for-sale certain NASW operations which
the Company had committed to sell to Allied Waste Industries, Inc. ("Allied") in
connection with the Company's purchase of certain of Allied's operations, as
well as the Company's surplus real estate portfolio.
NORTH AMERICAN WM NON-SOLID
SOLID WASTE INTERNATIONAL WASTE TOTAL
-------------- ------------- --------- -------
AS OF DECEMBER 31, 1999:
Receivables, net.................................... $ 37 $ 364 $ 33 $ 434
Other current assets................................ 14 209 15 238
Property and equipment and other non-current
assets............................................ 737 2,272 108 3,117
Current maturities of long-term debt................ (2) (52) -- (54)
Other current liabilities........................... (24) (482) (62) (568)
Long-term debt, less current maturities............. (58) (213) -- (271)
Other noncurrent liabilities........................ (38) (347) (13) (398)
Minority interest................................... -- (117) (4) (121)
----- ------- ---- -------
Net operations held-for-sale.............. $ 666 $ 1,634 $ 77 $ 2,377
===== ======= ==== =======
Current assets:
Operations held-for-sale.......................... $ 535 $ 2,845 $156 $ 3,536
Long-term assets:
Operations held-for-sale (included in other
assets)........................................ 253 -- -- 253
Current liabilities:
Operations held-for-sale.......................... (118) (1,211) (79) (1,408)
Long-term liabilities:
Operations held-for-sale (included in other
liabilities)................................... (4) -- -- (4)
----- ------- ---- -------
Net operations held-for-sale.............. $ 666 $ 1,634 $ 77 $ 2,377
===== ======= ==== =======
At December 31, 1998, the Company planned to dispose of certain assets to
comply with governmental orders related to the WM Holdings Merger and Eastern
Merger and certain other assets as a result of implementing the business
strategy related to the WM Holdings Merger and thus, classified these assets as
current assets held-for-sale. These businesses' results of operations are fully
included in revenues and expenses in the 1998 statement of operations and
generated third-party operating revenues of approximately $373 and earnings
before interest and taxes of approximately $21 in 1998. As discussed in Notes 4
and 16, the Company recorded charges to write these assets down to fair value,
less costs to sell.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The independent public accountants' report on these financial statements
indicates that in 1999 they did not believe that the Company's internal controls
for the preparation of interim financial information were sufficient to provide
them an adequate basis to complete a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
selected 1999 quarterly financial data, set forth below. See Note 2.
The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts enabled the
Company to produce timely and reliable interim financial statements for quarters
during 2000.
73
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited quarterly results of
operations for 2000 and 1999:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2000
Operating revenues................................. $3,217 $3,266 $3,125 $2,884
Income from operations............................. 325 293 113 307
Net income (loss).................................. 55 -- (191) 39
Income (loss) per common share:
Basic............................................ 0.09 0.00 (0.31) 0.06
Diluted.......................................... 0.09 0.00 (0.31) 0.06
1999
Operating revenues................................. $3,071 $3,325 $3,395 $3,336
Income (loss) from operations...................... 760 715 (1,119) 184
Income (loss) before extraordinary item............ 347 318 (948) (112)
Net income (loss).................................. 347 318 (948) (115)
Income (loss) before extraordinary item per common
share:
Basic............................................ 0.57 0.52 (1.53) (0.18)
Diluted.......................................... 0.55 0.50 (1.53) (0.18)
Net income (loss) per common share:
Basic............................................ 0.57 0.52 (1.53) (0.19)
Diluted.......................................... 0.55 0.50 (1.53) (0.19)
Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts. For certain periods presented, the effect of
the Company's common stock options and warrants and the effect of the Company's
convertible subordinated notes and debentures are excluded from the diluted
earnings per share calculations since inclusion of such items would be
antidilutive for that period.
22. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
WM Holdings ("Guarantor"), which is 100% owned by 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 condensed
consolidating balance sheets as of December 31, 2000 and 1999 and the related
condensed consolidating statements of operations for 2000, 1999 and 1998, along
with the related statements of cash flows, have been provided below.
74
77
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2000
ASSETS
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
------ --------- ------------- ------------ -------------
Current assets:
Cash and cash equivalents.................... $ 72 $ 14 $ 8 $ -- $ 94
Other current assets......................... -- -- 2,363 -- 2,363
------ ------ ------ ------- -------
72 14 2,371 -- 2,457
Property and equipment, net.................... -- -- 10,126 -- 10,126
Intercompany and investment in subsidiaries.... 8,893 5,210 (9,716) (4,387) --
Other assets................................... 6 7 5,969 -- 5,982
------ ------ ------ ------- -------
Total assets.......................... $8,971 $5,231 $8,750 $(4,387) $18,565
====== ====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ -- $ -- $ 113 $ -- $ 113
Accounts payable and other accrued
liabilities................................ 93 114 2,617 -- 2,824
------ ------ ------ ------- -------
93 114 2,730 -- 2,937
Long-term debt, less current maturities........ 4,077 2,916 1,379 -- 8,372
Other liabilities.............................. -- -- 2,440 -- 2,440
------ ------ ------ ------- -------
Total liabilities..................... 4,170 3,030 6,549 -- 13,749
Minority interest in subsidiaries.............. -- -- 15 -- 15
Stockholders' equity........................... 4,801 2,201 2,186 (4,387) 4,801
------ ------ ------ ------- -------
Total liabilities and stockholders'
equity.............................. $8,971 $5,231 $8,750 $(4,387) $18,565
====== ====== ====== ======= =======
DECEMBER 31, 1999
ASSETS
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
------- --------- ------------- ------------ -------------
Current assets:
Cash and cash equivalents................... $ 34 $ 4 $ 143 $ -- $ 181
Other current assets........................ -- 37 6,003 -- 6,040
------- ------ -------- ------- -------
34 41 6,146 -- 6,221
Property and equipment, net................... -- -- 10,304 -- 10,304
Intercompany and investment in subsidiaries... 10,668 5,940 (13,140) (3,468) --
Other assets.................................. 27 9 6,120 -- 6,156
------- ------ -------- ------- -------
Total assets......................... $10,729 $5,990 $ 9,430 $(3,468) $22,681
======= ====== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 2,272 $ 250 $ 577 $ -- $ 3,099
Accounts payable and other accrued
liabilities............................... 101 326 3,964 -- 4,391
------- ------ -------- ------- -------
2,373 576 4,541 -- 7,490
Long-term debt, less current maturities....... 3,954 3,508 937 -- 8,399
Other liabilities............................. -- -- 2,382 -- 2,382
------- ------ -------- ------- -------
Total liabilities.................... 6,327 4,084 7,860 -- 18,271
Minority interest in subsidiaries............. -- -- 8 -- 8
Stockholders' equity.......................... 4,402 1,906 1,562 (3,468) 4,402
------- ------ -------- ------- -------
Total liabilities and stockholders'
equity............................. $10,729 $5,990 $ 9,430 $(3,468) $22,681
======= ====== ======== ======= =======
75
78
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
------ --------- ------------- ------------ -------------
YEAR ENDED DECEMBER 31, 2000
Operating revenues.................................... $ -- $ -- $12,492 $ -- $12,492
Costs and expenses.................................... -- -- 11,454 -- 11,454
----- ----- ------- ----- -------
Income from operations................................ -- -- 1,038 -- 1,038
----- ----- ------- ----- -------
Other income (expense):
Interest income (expense), net...................... (430) (232) (55) -- (717)
Equity in subsidiaries, net of taxes................ 172 317 -- (489) --
Minority interest................................... -- -- (23) -- (23)
Other, net.......................................... -- -- 23 -- 23
----- ----- ------- ----- -------
(258) 85 (55) (489) (717)
----- ----- ------- ----- -------
Income (loss) before income taxes..................... (258) 85 983 (489) 321
Provision for (benefit from) income taxes............. (161) (87) 666 -- 418
----- ----- ------- ----- -------
Net income (loss)..................................... $ (97) $ 172 $ 317 $(489) $ (97)
===== ===== ======= ===== =======
YEAR ENDED DECEMBER 31, 1999
Operating revenues.................................... $ -- $ -- $13,127 $ -- $13,127
Costs and expenses.................................... -- -- 12,587 -- 12,587
----- ----- ------- ---- -------
Income from operations................................ -- -- 540 -- 540
----- ----- ------- ---- -------
Other income (expense):
Interest income (expense), net...................... (417) (269) (46) -- (732)
Equity in subsidiaries, net of taxes................ (137) 31 -- 106 --
Minority interest................................... -- -- (24) -- (24)
Other, net.......................................... -- -- 53 -- 53
----- ----- ------- ---- -------
(554) (238) (17) 106 (703)
----- ----- ------- ---- -------
Income (loss) before income taxes and extraordinary
item................................................ (554) (238) 523 106 (163)
Provision for (benefit from) income taxes............. (156) (101) 489 -- 232
----- ----- ------- ---- -------
Income (loss) before extraordinary item............... (398) (137) 34 106 (395)
Extraordinary item.................................... -- -- (3) -- (3)
----- ----- ------- ---- -------
Net income (loss)..................................... $(398) $(137) $ 31 $106 $ (398)
===== ===== ======= ==== =======
YEAR ENDED DECEMBER 31, 1998
Operating revenues.................................... $ -- $ -- $12,626 $ -- $12,626
Costs and expenses.................................... -- -- 12,786 -- 12,786
----- ----- ------- ------ -------
Loss from operations.................................. -- -- (160) -- (160)
----- ----- ------- ------ -------
Other income (expense):
Interest income (expense), net...................... (231) (308) (116) -- (655)
Equity in subsidiaries, net of taxes................ (626) (434) -- 1,060 --
Minority interest................................... -- -- (24) -- (24)
Other, net.......................................... -- -- 139 -- 139
----- ----- ------- ------ -------
(857) (742) (1) 1,060 (540)
----- ----- ------- ------ -------
Loss before income taxes and extraordinary item....... (857) (742) (161) 1,060 (700)
Provision for (benefit from) income taxes............. (86) (116) 269 -- 67
----- ----- ------- ------ -------
Loss before extraordinary item........................ (771) (626) (430) 1,060 (767)
Extraordinary item.................................... -- -- (4) -- (4)
----- ----- ------- ------ -------
Net loss.............................................. $(771) $(626) $ (434) $1,060 $ (771)
===== ===== ======= ====== =======
76
79
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATION
------ --------- ------------- ------------ -------------
YEAR ENDED DECEMBER 31, 2000
Cash flows from operating activities:
Net income (loss).......................................... $ (97) $ 172 $ 317 $ (489) $ (97)
Equity in earnings of subsidiaries......................... (172) (317) -- 489 --
Other adjustments and changes.............................. 32 5 2,185 -- 2,222
------ ------ ------ ------- -------
Net cash provided by (used in) operations................... (237) (140) 2,502 -- 2,125
------ ------ ------ ------- -------
Cash flows from investing activities:
Short-term investments..................................... -- -- 54 -- 54
Acquisitions of businesses, net of cash acquired........... -- -- (231) -- (231)
Capital expenditures....................................... -- -- (1,313) -- (1,313)
Proceeds from divestitures of businesses, net of cash
divested, and other sales of assets...................... -- -- 2,552 -- 2,552
Other, net................................................. -- -- 10 -- 10
------ ------ ------ ------- -------
Net cash provided by investing activities................... -- -- 1,072 -- 1,072
------ ------ ------ ------- -------
Cash flows from financing activities:
New borrowings............................................. 270 -- 34 -- 304
Debt repayments............................................ (2,422) (844) (331) -- (3,597)
Exercise of common stock options and warrants.............. 20 -- -- -- 20
Cash dividends............................................. (6) -- -- -- (6)
(Increase) decrease in intercompany and intercompany
investments, net......................................... 2,413 994 (3,407) -- --
------ ------ ------ ------- -------
Net cash provided by (used in) financing activities........ 275 150 (3,704) -- (3,279)
------ ------ ------ ------- -------
Effect of exchange rate changes on cash and cash
equivalents.............................................. -- -- (5) -- (5)
------ ------ ------ ------- -------
Increase (decrease) in cash and cash equivalents........... 38 10 (135) -- (87)
Cash and cash equivalents at beginning of period........... 34 4 143 -- 181
------ ------ ------ ------- -------
Cash and cash equivalents at end of period................. $ 72 $ 14 $ 8 $ -- $ 94
====== ====== ====== ======= =======
YEAR ENDED DECEMBER 31, 1999
Cash flows from operating activities:
Net income (loss).......................................... $(398) $ (137) $ 31 $ 106 $ (398)
Equity in earnings of subsidiaries......................... 137 (31) -- (106) --
Other adjustments and changes.............................. 69 (10) 2,028 -- 2,087
------ ------ ------ ------- -------
Net cash provided by (used in) operations................... (192) (178) 2,059 -- 1,689
------ ------ ------ ------- -------
Cash flows from investing activities:
Short-term investments..................................... -- -- (41) -- (41)
Acquisitions of businesses, net of cash acquired........... -- -- (1,289) -- (1,289)
Capital expenditures....................................... -- -- (1,327) -- (1,327)
Proceeds from divestitures of businesses, net of cash
divested, and other sales of assets...................... -- -- 651 -- 651
Other, net................................................. -- -- (11) -- (11)
------ ------ ------ ------- -------
Net cash used in investing activities....................... -- -- (2,017) -- (2,017)
------ ------ ------ ------- -------
Cash flows from financing activities:
New borrowings............................................. 4,057 -- 189 -- 4,246
Debt repayments............................................ (3,030) (381) (576) -- (3,987)
Exercise of common stock options and warrants.............. 176 -- -- -- 176
Cash dividends............................................. (6) -- -- -- (6)
Other...................................................... -- -- (3) -- (3)
(Increase) decrease in intercompany and intercompany
investments, net......................................... (999) 612 387 -- --
------ ------ ------ ------- -------
Net cash provided by (used in) financing activities........ 198 231 (3) -- 426
------ ------ ------ ------- -------
Effect of exchange rate changes on cash and cash
equivalents.............................................. -- -- (4) -- (4)
------ ------ ------ ------- -------
Increase in cash and cash equivalents...................... 6 53 35 -- 94
Cash and cash equivalents at beginning of period........... 28 (49) 108 -- 87
------ ------ ------ ------- -------
Cash and cash equivalents at end of period................. $ 34 $ 4 $ 143 $ -- $ 181
====== ====== ====== ======= =======
YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities:
Net loss................................................... $(771) $ (626) $ (434) $ 1,060 $ (771)
Equity in earnings of subsidiaries......................... 626 434 -- (1,060) --
Other adjustments and changes.............................. 36 (19) 2,256 -- 2,273
------ ------ ------ ------- -------
Net cash provided by (used in) operations................... (109) (211) 1,822 -- 1,502
------ ------ ------ ------- -------
Cash flows from investing activities:
Short-term investments..................................... -- -- 57 -- 57
Acquisitions of businesses, net of cash acquired........... -- -- (1,946) -- (1,946)
Capital expenditures....................................... -- -- (1,651) -- (1,651)
Proceeds from divestitures of businesses, net of cash
divested, and other sales of assets...................... -- -- 621 -- 621
Acquisition of minority interests.......................... -- -- (1,673) -- (1,673)
Other, net................................................. -- -- 37 -- 37
------ ------ ------ ------- -------
Net cash used in investing activities....................... -- -- (4,555) -- (4,555)
------ ------ ------ ------- -------
Cash flows from financing activities:
New borrowings............................................. 5,547 -- 855 -- 6,402
Debt repayments............................................ (2,395) (786) (1,226) -- (4,407)
Issuance of common stock................................... 206 -- -- -- 206
Sale of treasury stock..................................... -- 739 -- -- 739
Exercise of common stock options and warrants.............. 133 -- -- -- 133
Cash dividends............................................. (12) (82) -- -- (94)
(Increase) decrease in intercompany and intercompany
investments, net......................................... (3,357) 249 3,108 -- --
Other, net................................................. -- -- (23) -- (23)
------ ------ ------ ------- -------
Net cash provided by financing activities................... 122 120 2,714 -- 2,956
------ ------ ------ ------- -------
Effect of exchange rate changes on cash and cash
equivalents................................................ -- -- (6) -- (6)
------ ------ ------ ------- -------
Increase (decrease) in cash and cash equivalents............ 13 (91) (25) -- (103)
Cash and cash equivalents at beginning of period............ 15 42 133 -- 190
------ ------ ------ ------- -------
Cash and cash equivalents at end of period.................. $ 28 $ (49) $ 108 $ -- $ 87
====== ====== ====== ======= =======
77
80
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," and SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No.
133," which deferred the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000, is effective for the Company as of January 1, 2001. SFAS
No. 133, as amended, establishes accounting and reporting standards requiring
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded as either assets or liabilities
measured at fair value. SFAS 133, as amended, requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. The Company adopted SFAS 133 on January 1, 2001. As of January 1,
2001, the cumulative effect of such change in accounting for derivative
instruments to fair value is expected to result in a gain, net of taxes of
approximately $2 million in the first quarter of 2001.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements and was required to be adopted by the Company in the fourth quarter
of 2000. Since the Company's policies were already compliant with SAB No. 101,
no material changes to revenue recognition occurred.
24. SUBSEQUENT EVENTS
The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of WM Holdings
and seeks, among other things, reimbursement of those monies expended by WM
Holdings and the Company in resolving all claims brought against WM Holdings
arising out of its February 1998 restatement of earnings. The terms of the
settlement include a payment to the Company of $15 by certain of WM Holdings'
insurance carriers and the complete resolution of all pending claims for
retirement benefits between certain former officers of WM Holdings and the
Company. The resolution of the actions for retirement benefits involves the
release by the former executives who brought claims against the Company for
certain amounts otherwise owing under the retirement plans. The total benefits
to the Company from the settlement of the derivative case is approximately $23.
In February of 2001, the Company made a public offering of $600 of 7 3/8%
senior unsecured notes due August 1, 2010. Interest is payable semi-annually on
February 1 and August 1. The net proceeds from the offering of the notes are
approximately $593, after deducting discounts to the underwriters and estimated
expenses of the offering. The Company intends to use the net proceeds, together
with cash on hand, to repay in full the $200 principal amount outstanding under
the 6% Senior Notes due May 15, 2001, the $200 principal amount outstanding
under the 6.70% Senior Notes due May 1, 2001, and the $200 principal amount
outstanding under the 7 1/8% Senior Notes due June 15, 2001. Pending application
of the proceeds as described, the proceeds will be invested temporarily in
short-term investments or be used to reduce short-term borrowings.
78
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item concerning directors of the Company
is set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Below are the names and ages, as of December 31, 2000, of the Company's
executive officers and summaries of their business experience for the past 5
years.
NAME AGE POSITIONS HELD AND BUSINESS EXPERIENCE FOR PAST FIVE YEARS
- ---- --- ----------------------------------------------------------
A. Maurice Myers............ 60 - Chairman of the Board, President and CEO since November
1999.
- Chairman of the Board, President and CEO of Yellow
Corporation April 1996 -- November 1999.
Robert P. Damico............ 52 - Senior Vice President -- Midwest Area since July 1998.
- District Manager, Division Manager and then Region Manager
of the Mountain Region for WM Holdings from 1980 -- July
1998.
Robert E. Dees, Jr.......... 50 - Senior Vice President -- People since May 2000.
- Senior Vice President -- Human Resources of AutoNation,
Inc. 1997 -- 2000.
- Senior Vice President -- Human Resources of TRIARC, Inc.
1994 -- 1996.
Richard T. Felago........... 53 - President of Wheelabrator Technologies Inc. since May
1999.
- Vice President -- Marketing and Business Development of
Wheelabrator 1996 -- May 1999.
Jeff M. Harris.............. 46 - President of Canadian Waste Services, Inc. since November
1999.
- Division Vice President -- NYC of the Company August
1999 -- October 1999
- Market Area Vice President of Browning-Ferris Industries
1996 -- August 1999.
David R. Hopkins............ 57 - Senior Vice President -- Southern Area since March 2000.
- Senior Vice President -- International Operations of the
Company and CEO of Waste Management International, Inc.
November 1998 -- March 2000.
- Vice President, Controller and Chief Accounting Officer of
Browning-Ferris Industries, Inc. 1987 -- November 1998.
Ronald H. Jones............. 50 - Vice President and Treasurer since 1995.
Lawrence O'Donnell, III..... 43 - Senior Vice President, General Counsel and Secretary since
February 2000.
- Vice President and General Counsel of Baker Hughes
Incorporated 1995 -- February 2000.
Thomas L. Smith............. 61 - Senior Vice President -- Information Systems since
November 1999.
- Vice President of Information Systems of Yellow Services,
Inc. February 1997 -- November 1999.
- Vice President of Information Systems of America West
Airlines November 1989 -- February 1997.
Bruce E. Snyder............. 45 - Vice President and Chief Accounting Officer since July
1992.
Douglas G. Sobey............ 49 - Senior Vice President -- Western Area since July 1998.
- Region Vice President -- Northwest Region of the Company
1996 -- July 1998.
James E. Trevathan.......... 47 - Senior Vice President -- Sales and Marketing since June
2000.
- Vice President -- Sales of the Company July 1998 -- June
2000.
- Regional Vice President -- Industrial of WM Holdings
1997 -- July 1998.
- Southern Area Sales Vice President of WM Holdings
1994 -- 1997.
William L. Trubeck.......... 54 - Senior Vice President and CFO since March 2000.
- Senior Vice President -- Finance and CFO of International
Multifoods, Inc. 1997 -- March 2000.
- President, Latin American Operation of International
Multifoods, Inc. 1998 -- March 2000.
- Senior Vice President -- Finance and CFO of SPX
Corporation 1994-1997.
Charles A. Wilcox........... 48 - Senior Vice President -- Eastern Area since July 1998.
- Region Vice President -- Central Region of the Company
August 1996 -- July 1998.
- Executive Vice President of the Company December
1994 -- August 1996.
Charles E. Williams......... 51 - Senior Vice President -- Operations since June 2000.
- Vice President Environmental Compliance/Engineering of the
Company 1996 -- June 2000.
79
82
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth under the caption
"Executive Compensation" in the 2001 Proxy Statement and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth under the caption
"Director and Officer Stock Ownership" in the 2001 Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth under the caption
"Related Party Transactions" in the 2001 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is
not significant or is included in the financial statements or notes thereto, or
is not applicable.
(a)(3) Exhibits:
EXHIBIT NO.* DESCRIPTION
------------ -----------
2.1 -- Agreement and Plan of Merger, dated March 10, 1998, by
and among the Registrant, Dome Merger Subsidiary, Inc. and
Waste Management, Inc. [Incorporated by reference to
Exhibit 99.1 to Form 8-K dated March 10, 1998].
2.2 -- Agreement and Plan of Merger, dated as of August 16,
1998, by and among the Registrant, Ocho Acquisition
Corporation and Eastern Environmental Services, Inc.
[Incorporated by reference to Annex A to Form S-4, File
No. 333-64239].
3.1 -- Restated Certificate of Incorporation, as amended
[Incorporated by reference to Exhibit 3.2 to Form 8-K
dated July 16, 1998].
3.2 -- Bylaws [Incorporated by reference to Exhibit 3 to Form
10-Q for the quarter ended June 30, 2000].
4.1 -- Specimen Stock Certificate [Incorporated by reference to
Exhibit 4.1 to Form 10-K for the year ended December 31,
1998].
4.2 -- Indenture for Subordinated Debt Securities dated February
1, 1997, among the Registrant and Texas Commerce Bank
National Association, as trustee [Incorporated by
reference to Exhibit 4.1 to Form 8-K dated February 7,
1997] .
4.3 -- Indenture for Senior Debt Securities dated September 10,
1997, among the Registrant and Texas Commerce Bank
National Association, as trustee [Incorporated by
reference to Exhibit 4.1 to Form 8-K dated September 10,
1997].
10.1 -- 1993 Stock Incentive Plan [Incorporated by reference to
Exhibit 10.2 to Form 10-K for the year ended December 31,
1998].
10.2 -- 1996 Stock Option Plan for Non-Employee Directors
[Incorporated by reference to Appendix A to the Proxy
Statement for the 2000 Annual Meeting of Stockholders].
10.3 -- 1997 Employee Stock Purchase Plan [Incorporated by
reference to Appendix C to the Proxy Statement for the
2000 Annual Meeting of Stockholders].
80
83
EXHIBIT NO.* DESCRIPTION
------------ -----------
10.4 -- 401(k) Restoration Plan [Incorporated by reference to
Exhibit 10.11 to Form 10-K for the year ended December 31,
1997].
10.5 -- Third Amended and Restated Revolving Credit Agreement,
dated as of December 15, 1999 among the Registrant, the
Guarantors, Bank of America, N.A., Morgan Guaranty Trust
Company of New York and other financial institutions
[Incorporated by reference to Exhibit 10.32 to Form S-4,
Reg. No. 333-87319].
10.6 -- Amended and Restated Loan Agreement dated as of December
15, 1999, among the Registrant, the Guarantors, Bank
Boston, N.A. Bank of America National Trust and Savings
Association, Chase Bank of Texas, N.A., Deutsche Bank AG,
New York Branch, Morgan Guaranty Trust Company of New York
and other financial institutions [Incorporated by
reference to Exhibit 10.33 to Form S-4, Reg. No.
333-87319].
10.7 -- 1998 Waste Management, Inc. Directors' Deferred
Compensation Plan [Incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended March 31, 1999].
10.8 -- 1999 Waste Management, Inc. Directors Deferred
Compensation Plan [Incorporated by reference to Exhibit
10.2 to Form 10-Q for the quarter ended March 31, 1999].
10.9 -- Employment Agreement between the Company and A. Maurice
Myers, dated November 8, 1999 [Incorporated by reference
to Exhibit 10.35 to Form 10-K for the year ended December
31, 1999].
10.10 -- Employment Agreement between the Company and Lawrence
O'Donnell III, dated January 21, 2000 [Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter
ended June 30, 2000].
10.11 -- Employment Agreement between the Company and William L.
Trubeck, dated February 16, 2000 [Incorporated by
reference to Exhibit 10.37 to Form 10-K for the year ended
December 31, 1999].
10.12 -- Employment Agreement between the Company and Thomas L.
Smith, dated November 18, 1999 [Incorporated by reference
to Exhibit 10.3 to Form 10-Q for the quarter ended June
30, 2000].
10.13 -- Employment Agreement between the Company and Robert A.
Damico, dated December 17, 1998 [Incorporated by reference
to Exhibit 10.39 to Form 10-K for the year ended December
31, 1999].
10.14 -- Employment Agreement between the Company and Charles A.
Wilcox, dated February 3, 1998 [Incorporated by reference
to Exhibit 10.40 to Form 10-K for the year ended December
31, 1999].
10.15 -- Employment Agreement between the Company and Douglas G.
Sobey, dated May 7, 1997 [Incorporated by reference to
Exhibit 10.41 to Form 10-K for the year ended December 31,
1999].
10.16 -- Employment Agreement between the Company and David R.
Hopkins, dated March 30, 2000 [Incorporated by reference
to Exhibit 10.2 to Form 10-Q for the quarter ended March
31, 2000].
10.17 -- Employment Agreement between the Company and Ronald H.
Jones, dated as of August 27, 1997 and December 7, 1997
[Incorporated by reference to Exhibits 10.22 and 10.25 to
Form 10-K for the year ended December 31, 1997].
10.18 -- Employment Agreement and Amendment to Employment
Agreement between the Company and Bruce E. Snyder, dated
as of June 1, 1997 and December 1, 1997 [Incorporated by
reference to Exhibits 10.26 and 10.27 to Form 10-K for the
year ended December 31, 1997].
10.19 -- Employment Agreement between the Company and Robert E.
Dees, Jr., dated as of May 10, 2000 [Incorporated by
reference to Exhibit 10.4 to the Form 10-Q for the quarter
ended March 31, 2000].
10.20 -- Employment Agreement between the Company and James E.
Trevathan dated as of June 1, 2000.
10.21 -- Employment Agreement between the Company and Charles E.
Williams dated as of June 1, 2000.
10.22 -- Employment Agreement between Wheelabrator Technologies,
Inc. an Richard T. Felago dated as of May 25, 1999.
10.23 -- Employment Agreement between Canadian Waste Services,
Inc. and Jeff M. Harris dated as of November 3, 1999.
10.24 -- 2000 Broad-Based Employee Plan [Incorporated by reference
to Exhibit 10.49 to Form 10-K for the year ended December
31, 1999].
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Company's file number under that Act is
1-12154.
(b) Reports on Form 8-K:
None.
81
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WASTE MANAGEMENT, INC.
By: /s/ A. MAURICE MYERS
----------------------------------
A. Maurice Myers
President, Chief Executive Officer
and
Chairman of the Board
Date: March 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ A. MAURICE MYERS President, Chief Executive March 13, 2001
- ----------------------------------------------------- Officer, Chairman of the
A. Maurice Myers Board, and Director
(Principal Executive
Officer)
/s/ WILLIAM L. TRUBECK Senior Vice President and March 13, 2001
- ----------------------------------------------------- Chief Financial Officer
William L. Trubeck (Principal Financial
Officer)
/s/ BRUCE E. SNYDER Vice President and Chief March 13, 2001
- ----------------------------------------------------- Accounting Officer
Bruce E. Snyder (Principal Accounting
Officer)
/s/ H. JESSE ARNELLE Director March 13, 2001
- -----------------------------------------------------
H. Jesse Arnelle
/s/ PASTORA SAN JUAN CAFFERTY Director March 13, 2001
- -----------------------------------------------------
Pastora San Juan Cafferty
/s/ RALPH F. COX Director March 13, 2001
- -----------------------------------------------------
Ralph F. Cox
/s/ ROBERT S. MILLER Director March 13, 2001
- -----------------------------------------------------
Robert S. Miller
/s/ PAUL M. MONTRONE Director March 13, 2001
- -----------------------------------------------------
Paul M. Montrone
/s/ JOHN C. POPE Director March 13, 2001
- -----------------------------------------------------
John C. Pope
/s/ STEVEN G. ROTHMEIER Director March 13, 2001
- -----------------------------------------------------
Steven G. Rothmeier
/s/ RALPH V. WHITWORTH Director March 13, 2001
- -----------------------------------------------------
Ralph V. Whitworth
82
85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waste Management, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Waste Management, Inc.
and subsidiaries included in this Annual Report on Form 10-K, and have issued
our report thereon dated March 7, 2001, in which we expressed an unqualified
opinion based upon our audits. Our report contained an explanatory paragraph
indicating that we attempted, but were unable, to review the quarterly financial
data for the interim periods within 1999 included in Note 21 to the Company's
consolidated financial statements. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. Schedule II has been subjected to
the auditing procedures applied in the audits of the basic financial statements,
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 2001
S-1
86
WASTE MANAGEMENT, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
ACCOUNTS EFFECT OF
BALANCE CHARGED WRITTEN FOREIGN BALANCE
BEGINNING (CREDITED) OFF/USE OF CURRENCY END OF
OF YEAR TO INCOME RESERVE OTHER(A) TRANSLATION YEAR
--------- ---------- ---------- -------- ----------- -------
1998 -- Reserve for doubtful
accounts(B).................... $ 94 $ 71 $ (51) $ 4 $ 1 $119
1999 -- Reserve for doubtful
accounts(B).................... $119 $268 $ (96) $ 7 $(3) $295
2000 -- Reserve for doubtful
accounts(B).................... $295 $ 14 $(170) $ 12 $-- $151
1998 -- Merger and restructuring
accruals(C).................... $121 $675 $(536) $ -- $ 1 $261
1999 -- Merger and restructuring
accruals(C).................... $261 $ (8) $(141) $ -- $(3) $109
2000 -- Merger and restructuring
accruals(C).................... $109 $ -- $ (27) $(53) $-- $ 29
1998 -- Reserve for major
maintenance expenditures(D).... $ 65 $ 4 $ (10) $ -- $-- $ 59
1999 -- Reserve for major
maintenance expenditures(D).... $ 59 $ 9 $ (15) $ -- $-- $ 53
2000 -- Reserve for major
maintenance expenditures(D).... $ 53 $ 9 $ (14) $ -- $-- $ 48
- ---------------
(A) Reserves for doubtful accounts relative to purchase of business
combinations, reserves associated with dispositions of businesses, reserves
reclassified to operations held for sale, and reclass among reserve
accounts.
(B) Includes reserves for doubtful long-term notes receivable.
(C) Accruals are included in accrued liabilities and other liabilities. These
accruals represent transaction or deal costs, employee severance,
separation, and transitional costs and restructuring charges.
(D) For major maintenance expenditures at the Company's waste-to-energy and
independent power facilities.
S-2
87
INDEX TO EXHIBITS
EXHIBIT NO.* DESCRIPTION
------------ -----------
2.1 -- Agreement and Plan of Merger, dated March 10, 1998, by
and among the Registrant, Dome Merger Subsidiary, Inc. and
Waste Management, Inc. [Incorporated by reference to
Exhibit 99.1 to Form 8-K dated March 10, 1998].
2.2 -- Agreement and Plan of Merger, dated as of August 16,
1998, by and among the Registrant, Ocho Acquisition
Corporation and Eastern Environmental Services, Inc.
[Incorporated by reference to Annex A to Form S-4, File
No. 333-64239].
3.1 -- Restated Certificate of Incorporation, as amended
[Incorporated by reference to Exhibit 3.2 to Form 8-K
dated July 16, 1998].
3.2 -- Bylaws [Incorporated by reference to Exhibit 3 to Form
10-Q for the quarter ended June 30, 2000].
4.1 -- Specimen Stock Certificate [Incorporated by reference to
Exhibit 4.1 to Form 10-K for the year ended December 31,
1998].
4.2 -- Indenture for Subordinated Debt Securities dated February
1, 1997, among the Registrant and Texas Commerce Bank
National Association, as trustee [Incorporated by
reference to Exhibit 4.1 to Form 8-K dated February 7,
1997] .
4.3 -- Indenture for Senior Debt Securities dated September 10,
1997, among the Registrant and Texas Commerce Bank
National Association, as trustee [Incorporated by
reference to Exhibit 4.1 to Form 8-K dated September 10,
1997].
10.1 -- 1993 Stock Incentive Plan [Incorporated by reference to
Exhibit 10.2 to Form 10-K for the year ended December 31,
1998].
10.2 -- 1996 Stock Option Plan for Non-Employee Directors
[Incorporated by reference to Appendix A to the Proxy
Statement for the 2000 Annual Meeting of Stockholders].
10.3 -- 1997 Employee Stock Purchase Plan [Incorporated by
reference to Appendix C to the Proxy Statement for the
2000 Annual Meeting of Stockholders].
10.4 -- 401(k) Restoration Plan [Incorporated by reference to
Exhibit 10.11 to Form 10-K for the year ended December 31,
1997].
10.5 -- Third Amended and Restated Revolving Credit Agreement,
dated as of December 15, 1999 among the Registrant, the
Guarantors, Bank of America, N.A., Morgan Guaranty Trust
Company of New York and other financial institutions
[Incorporated by reference to Exhibit 10.32 to Form S-4,
Reg. No. 333-87319].
10.6 -- Amended and Restated Loan Agreement dated as of December
15, 1999, among the Registrant, the Guarantors, Bank
Boston, N.A. Bank of America National Trust and Savings
Association, Chase Bank of Texas, N.A., Deutsche Bank AG,
New York Branch, Morgan Guaranty Trust Company of New York
and other financial institutions [Incorporated by
reference to Exhibit 10.33 to Form S-4, Reg. No.
333-87319].
10.7 -- 1998 Waste Management, Inc. Directors' Deferred
Compensation Plan [Incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended March 31, 1999].
10.8 -- 1999 Waste Management, Inc. Directors Deferred
Compensation Plan [Incorporated by reference to Exhibit
10.2 to Form 10-Q for the quarter ended March 31, 1999].
10.9 -- Employment Agreement between the Company and A. Maurice
Myers, dated November 8, 1999 [Incorporated by reference
to Exhibit 10.35 to Form 10-K for the year ended December
31, 1999].
10.10 -- Employment Agreement between the Company and Lawrence
O'Donnell III, dated January 21, 2000 [Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter
ended June 30, 2000].
10.11 -- Employment Agreement between the Company and William L.
Trubeck, dated February 16, 2000 [Incorporated by
reference to Exhibit 10.37 to Form 10-K for the year ended
December 31, 1999].
10.12 -- Employment Agreement between the Company and Thomas L.
Smith, dated November 18, 1999 [Incorporated by reference
to Exhibit 10.3 to Form 10-Q for the quarter ended June
30, 2000].
10.13 -- Employment Agreement between the Company and Robert A.
Damico, dated December 17, 1998 [Incorporated by reference
to Exhibit 10.39 to Form 10-K for the year ended December
31, 1999].
10.14 -- Employment Agreement between the Company and Charles A.
Wilcox, dated February 3, 1998 [Incorporated by reference
to Exhibit 10.40 to Form 10-K for the year ended December
31, 1999].
10.15 -- Employment Agreement between the Company and Douglas G.
Sobey, dated May 7, 1997 [Incorporated by reference to
Exhibit 10.41 to Form 10-K for the year ended December 31,
1999].
10.16 -- Employment Agreement between the Company and David R.
Hopkins, dated March 30, 2000 [Incorporated by reference
to Exhibit 10.2 to Form 10-Q for the quarter ended March
31, 2000].
10.17 -- Employment Agreement between the Company and Ronald H.
Jones, dated as of August 27, 1997 and December 7, 1997
[Incorporated by reference to Exhibits 10.22 and 10.25 to
Form 10-K for the year ended December 31, 1997].
10.18 -- Employment Agreement and Amendment to Employment
Agreement between the Company and Bruce E. Snyder, dated
as of June 1, 1997 and December 1, 1997 [Incorporated by
reference to Exhibits 10.26 and 10.27 to Form 10-K for the
year ended December 31, 1997].
10.19 -- Employment Agreement between the Company and Robert E.
Dees, Jr., dated as of May 10, 2000 [Incorporated by
reference to Exhibit 10.4 to the Form 10-Q for the quarter
ended March 31, 2000].
10.20 -- Employment Agreement between the Company and James E.
Trevathan dated as of June 1, 2000.
10.21 -- Employment Agreement between the Company and Charles E.
Williams dated as of June 1, 2000.
10.22 -- Employment Agreement between Wheelabrator Technologies,
Inc. an Richard T. Felago dated as of May 25, 1999.
88
EXHIBIT NO.* DESCRIPTION
------------ -----------
10.23 -- Employment Agreement between Canadian Waste Services,
Inc. and Jeff M. Harris dated as of November 3, 1999.
10.24 -- 2000 Broad-Based Employee Plan [Incorporated by reference
to Exhibit 10.49 to Form 10-K for the year ended December
31, 1999].
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule.
- ---------------
* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Company's file number under that Act is
1-12154.