- - Orr STATES COURTS S ERN OISTRICT OF TEXAS rr) UNITED STATES DISTRICT COURT FOR THRILiL 08 1999 TC SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION Art. eAl!O CUM OF COURT JANE S. PERKINS, SEYMOUR PERKINS ) C.A.o. li -9 9 - 2 1 8 3 and MORRIS GLENN WHITCOMB, JR., On ) Behalf of Themselves and All Others ) CLASS ACTION Similarly Situated, ) ) COMPLAINT FOR VIOLATION OF Plaintiffs, ) §§10(b) AND 20(a) OF THE ) SECURITIES EXCHANGE ACT OF vs. ) 1934 AND SEC RULE 10b-5 ) WASTE MANAGEMENT, INC., JOHN E. ) DRURY, EARL E. DeFRATES, RODNEY R. ) PROTO, MILLER J. MATTHEWS, JR., ) RONALD H. JONES, ROBERT S. MILLER, ) SUSAN J. PILLER, WILLIAM A. ) ROTHROCK, GREGORY T. SANGALIS, ) DOUGLAS G. SOBEY, DAVID SUTHERLAND- ) YOEST, CHARLES A. WILCOX, ) ) Plaintiffs Demand A Defendants. ) Trial By Jury INTRODUCTION AND OVERVIEW Summary 1. This is an action on behalf of purchasers of Waste Management, Inc. ("Waste Management," "MI " or the "Company") stock between 3/31/99 and 7/6/99 (the "Class Period"). Waste Management provides waste management services throughout North America. 2. To artificially inflate Waste Management stock during the Class Period, defendants made false and misleading statements about Waste Management's price adjustments, its competitive position, its cash flow from operations and the successful integration of USA Waste Services, operations with Waste Management's operations, which would result in Waste Management achieving strong earnings per share ("EPS") growth in 1999 and 2000 -- specifically, EPS of $3.00-$3.05 and $3.60+ in those years, respectively -- with 18 9 6 EPS growth going forward and with free cash flow of $900 million. - 23
Transcript
- - Orr STATES COURTSS ERN OISTRICT OF TEXAS
rr)
UNITED STATES DISTRICT COURT FOR THRILiL 08 1999 TCSOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISIONArt. eAl!O CUM OF COURT
JANE S. PERKINS, SEYMOUR PERKINS ) C.A.o.li -9 9 - 2 1 8 3and MORRIS GLENN WHITCOMB, JR., On )Behalf of Themselves and All Others ) CLASS ACTIONSimilarly Situated, )
) COMPLAINT FOR VIOLATION OFPlaintiffs, ) §§10(b) AND 20(a) OF THE
)WASTE MANAGEMENT, INC., JOHN E. )DRURY, EARL E. DeFRATES, RODNEY R. )PROTO, MILLER J. MATTHEWS, JR., )RONALD H. JONES, ROBERT S. MILLER, )SUSAN J. PILLER, WILLIAM A. )ROTHROCK, GREGORY T. SANGALIS, )DOUGLAS G. SOBEY, DAVID SUTHERLAND- )YOEST, CHARLES A. WILCOX, )
) Plaintiffs Demand ADefendants. ) Trial By Jury
INTRODUCTION AND OVERVIEW
Summary
1. This is an action on behalf of purchasers of Waste
Management, Inc. ("Waste Management," "MI " or the "Company") stock
between 3/31/99 and 7/6/99 (the "Class Period"). Waste Management
provides waste management services throughout North America.
2. To artificially inflate Waste Management stock during the
Class Period, defendants made false and misleading statements about
Waste Management's price adjustments, its competitive position, its
cash flow from operations and the successful integration of USA
Waste Services, operations with Waste Management's operations,
which would result in Waste Management achieving strong earnings
per share ("EPS") growth in 1999 and 2000 -- specifically, EPS of
$3.00-$3.05 and $3.60+ in those years, respectively -- with 18 96 EPS
growth going forward and with free cash flow of $900 million.
- 23
3. These representations artificially inflated Waste
Management's stock price to a Class Period high of $60 and allowed
Waste Management's officers and directors to sell off 1,036,547
shares of their Waste Management stock, pocketing $57.3 million, at
prices as high as $56.41 per share.
4. WMI ultimately admitted that revenues and earnings would
be much lower than previously represented. WMI's stock price
immediately collapsed falling to as low as $32 on volume of 70.3
million shares, the largest one day drop in the Company's history.
5. The positive statements and forecasts made by defendants
during the Class Period were false. The true facts were:
(a) Waste Management's integration efforts of its
acquisitions as well as the USA Waste Services/Waste Management
merger were extremely troubled. It had cost Waste Management
significantly more than anticipated to convert its systems to Waste
Management's format and took much longer to complete the conversion
process than had been anticipated;
(b) The price increases, particularly in the North
American landfill fees, were meeting with stiff resistance by
customers, and competitors were not matching the increases but
rather were rushing in to undercut WMI causing WMI's revenues to be
significantly below internally budgeted or forecasted levels;
(c) Because of the current condition of Waste
Management's business, its integration problems and the problems
with its acquisitions, Waste Management would not be able to make
as many acquisitions in the foreseeable future;
manzEGAT757u. rSDORING 7/8/99 2
(a) The accounting charges taken in 1998 would not
benefit 1999 margins as WMI's cost structure was still bloated and
inefficient; and
(e) As a result of the foregoing negative conditions
which were then adversely impacting Waste Management's business,
the quarterly 1999 and 2000 revenues and EPS being forecast by and
for Waste Management were known by defendants to be false when made
as those results would be impossible to achieve.
6. After Waste Management's insiders had completed their
insider sales, Waste Management's stock fell from $53-9/16 on
7/6/99, to close at $33-15/16 on 7/7/99, after Waste Management
issued a press release revealing that sales in the 6/99 quarter
would be $250 million below forecast and the growth in future
quarters would be much lower than previously forecast.
7. Public investors who purchased Waste Management stock
based on Waste Management's representations about the success of
its integration, its growth in sales, its market share and its
forecasts of substantial EPS growth in 1999-2000 and beyond, and
thus paid as high as $60 for Waste Management stock during the
Class Period, have suffered millions in damage. However, Waste
Management's insiders and controlling shareholders, who knew the
truth, did not fare nearly so poorly. Before the revelations of
7/6/99 occurred and Waste Management stock collapsed, the
defendants took advantage of and personally profited from Waste
deteriorating revenue and EPS prospects and problems with the USA
Waste integration/conversion. As a result, defendants knew that
Waste Management would not be able to achieve the 1999-2000 profit
margins and EPS growth being forecast. Thus, each Individual
Defendant actually knew or recklessly disregarded that the public
statements about Waste Management pleaded at 1123, 25-26 and 28-35
were false or misleading when made.
Motive/Opportunity
18. In addition to having actual knowledge of the falsity of
their statements, each of the Individual Defendants had the motive
FIRM \ 12_13G \ 147571 1SDOIUNG 7/8/99 9
and the opportunity to perpetrate the fraudulent scheme and course
of business described herein.
19. Each defendant had the opportunity to commit the fraud
alleged. As the top officers and/or directors of Waste Management,
they controlled the dissemination of, and could thereby falsify,
information about Waste Management's business and finances which
reached the investing public and affected the price of Waste
Management's stock. They controlled the content of Waste
Management's press releases, corporate reports and SEC filings,
which were created, reviewed and approved by each of these
defendants. Also, their insider positions gave them knowledge
about Waste Management's business that was not public -- creating
the opportunity for them to make false public statements,
artificially inflate Waste Management's stock price and take
advantage of their non-public information.
BACKGROUND TO CLASS PERIOD
20. In July 1998, USA Waste Services, Inc. completed a merger
with Waste Management, Inc. at which time the combined company
changed its name to Waste Management, Inc. Prior to the merger,
the former Waste Management, Inc. company had admitted to issuing
false financial statements from 1991 through 1997. This culminated
in the company being sued for securities law violations and in
10/98, settling the suits for some $220 million. For the year
ended 12/31/98, Waste Management had revenues of $12.7 billion, but
also reported a net loss of $770.1 million.
21. During the mid-1990's, the number of landfills in the
United States had increased dramatically causing a glut of
landfills, leading to depressed revenues for waste management
FIRM\R_BG\147571_1SDORPNG 7/8/99 10 ,/
companies. Waste Management's strategy was to consolidate and gain
enough marketshare so as to be able to increase prices and thereby
increase revenues and margins. Thus, between 11/3/98 and 12/31/98,
the Company consummated three mergers, including the acquisition of
Waste Management International PLC for $443 million, the
acquisition of Wessex Water PLC for approximately $342 million and
the acquisition of Eastern Environmental Science Services, Inc. for
24.46 million shares of Waste Management stock. Notwithstanding
these acquisitions and its increased marketshare, the stock of
Waste Management remained in the $50 to $53 range in early 1999 and
dropped to as low as $42 by the end of 3/99 as concerns in the
industry about the Company's ability to generate cash flow, its
ability to maintain revenue growth in the face of its attempted
price increases and the health of its CEO worried the market. In
order to maintain its stock price and cause its stock to trade at
the inflated levels it had in the past, the Company made false
statements about its projected cash flows, the impact of its price
increases and its future earnings.
22. In late 3/99, Waste Management spoke to analysts telling
them that the Company was on track to achieve $900 million in free
cash flow for the year. At the beginning of the Class Period, it
was important that the Company portray itself as successfully
increasing prices without losing marketshare and successfully
integrating operations of various acquisitions.
FALSE AND MISLEADING CLASS PERIOD STATEMENTS
23. On 3/31/99, WMI issued its Annual Report to Shareholders.
The report included a letter from Proto which stated in part:
While measuring productivity is an important part of thesales management process, measuring internal revenue
FIRM\RI3G\147571_1SDORING 7/ g/99 11
growth at the local level is an industry concept westrongly believe in. Our goal for 1999 is to achieveinternal growth of 5% to 7% over the entire revenue base.
* * *
A hallmark of our 1998 results and our 1999expectations is our national accounts effort. Addressingthe complex needs of large national and regionalcompanies with multiple locations, we are marketing thefull line of solid waste, hazardous waste, recycling andasset recovery services, along with customizedadministrative services, to more than 650 national andregional customers in approximately 70,000 servicelocations. One unique feature of our capabilities is ourin-plant services group, which manages all aspects of acustomer's waste stream, including responsibility tocollect, separate and minimize waste on premises.
* * *
In 1999 our focus will be on refining theintegration of our assets to achieve peak performancethrough such measures as improved waste internalizationand operating efficiencies, using a system of thoroughroute audits and cost analysis. Although our efforts in1998 were very successful, they were constrained by theissues of parallel payroll, financial and operatingsystems. By the end of the second quarter in 1999, theprocess of system consolidation will be complete.
* * *
We have made much progress this year toward ourgoals. As we continue to make the refinements needed toenhance our performance as a low-cost operator, weanticipate results that will demonstrate our continuingcommitment to growth and profitability.
24. After filing its Annual Report on 3/31/99, WMI management
(including Drury) spoke to analysts and investors concerning the
Company's business, first quarter cash flow and prospects.
25. On 4/5/99, Credit Suisse First Boston issued a report on
WM' by Michael Hoffman which was based on and repeated information
provided by WMI management, including Drury. The report forecast
1999 and 2000 EPS of $3.05 and $3.70, a 10%-12% five-year EPS
growth rate and the following quarterly 1999 EPS for WMI:
FIRM\RBG\147571_1SDORING 74/99 12
:3 2
1999
Q1 $ .61
Q2 $ .80
Q3 $ .84
Q4 S .79
Year $3.05
It also stated:
WMI on track to meet its March quarter earningsguidance of $0.60 to $0.62 per share.
* * *
The rebound in the solid waste industry fundamentalsis undisputed. Pricing leverage is back in commercialcollection and disposal. WMI has taken a clearleadership role in pushing prices up again.
* * *
At recent investor meetings John Drury confirmedthat WMI could produce 3-5% productivity improvementsannually for the foreseeable future. He related severalanecdotes about old WMX operations including OaklandCalifornia to solidify his stance.
* * *
WMI is no longer a growth story producing excesscash, rather it is a cash flow story that should producesustainable growth of 15%. NMI has set a 1999 target of$900 million of excess free cash.
Obviously, the $900 million goal is only attainableif the market believes the business is seasonal,additional cost savings are captured and therefore itbelieves earnings will be $3.05 and $3.70 in 1999 and2000.
We see upside to this goal. WMI intends to shortendays sales outstanding by 4 days and lengthen payables,improving working capital by $250 million, which is notincluded in our model. Additionally, WMI had intended touse a $668 million deferred tax benefit in 1998. WMI wasunable to realize this benefit in 1998, but shouldrealize $400 million in 1999, providing upside to thecash tax benefit in our model.
26. On 4/6/99, Bloomberg reported that WMI had paid Drury
more than $3.07 million in 1998, more than double his 1997
compensation. The article also stated:
FIRA4TEG\1475711SDORING 7/8/99 13
Drury also received stock options that would beworth $119 million if Waste Management stock rises 10percent a year over the next 10 years, according to anannual proxy statement filed with the U.S. Securities andExchange Commission.
27. As a result of defendants' false statements, by the end
of 4/99, Waste Management stock had rebounded to $56-1/2 per share.
28. On 5/6/99, Waste Management issued a release reporting
its first quarter 1999 results entitled, "Waste Management Reports
79% Increase In Diluted Earnings Per Share (As Adjusted)." The
release stated:
Waste Management, Inc. (NYSE: WMI) announced todayfinancial results for its first quarter, ended March 31,1999. Adjusted net income increased 93% to $383.6million from $199.1 million in the comparable 1998period. Diluted earnings per share (as adjusted) rose79% to $0.61 from $0.34 in the year-ago quarter. TheCompany reported first quarter 1999 revenues of $3.07billion as compared to $2.97 billion in the first quarterof 1998. Income from operations (as adjusted) increased78% to $820.8 million from $462.3 million. These resultsexclude the net income effects of charges for mergercosts and loss from continuing operations held for saleof $19.3 million for the 1999 first quarter and $17.7million for the 1998 first quarter. These chargesdecreased diluted earnings per share by $0.03 for thefirst quarter of each 1998 and 1999.
John E. Drury, Chief Executive Officer of WasteManagement, stated, "Thus far in 1999 we continue to seevery healthy industry fundamentals, as evidenced by twoindicators in the first quarter results. Internal growthon the entirety of our North American solid wasterevenues was 5.1%, with 2.6% contribution from pricing,and tuck-in acquisitions with gross revenues of $212million were completed. The Company's performance thisquarter is noteworthy in light of a larger than expectedseasonal dip in our core operations along with strongseasonal declines in certain non-core businesses."
The Company also noted that disposal internalizationrose to 63.2 during the period, and that operatingEBITDA was solid at $1.17 billion. Rodney R. Proto,President and Chief Operating Officer of the Company,remarked, "I am pleased with the ongoing transitionprocesses related to the mergers we completed last year.We remain on track with our systems conversions, and theintegration of the Eastern Environmental assetsprogressed well during the quarter."
FIRMTBG\147571_1SDORING 7/8/99 14 . ;
29. On 5/6/99, subsequent to the release of its first quarter
1999 results, WMI held a conference call for analysts, money and
portfolio managers, institutional investors and large Waste
Management shareholders to discuss WMI's first quarter results, its
business and its prospects. During the call -- and in follow-up
conversations with analysts -- Drury and Proto stated:
• WMI's strong first quarter results were due to solidfundamentals, healthy price increases, productivity gains andstrong sales momentum.
• Although North American sales growth was slightly down,this was due to seasonality and was unrelated to anyfundamental problems with WMI's business.
• The integration between Waste Management and USA Waste,and other acquisitions, was going well and systems conversionwould be complete by 5/29/99.
• Waste Management expected its EPS growth to accelerate inthe final three quarters of 1999.
• As a result of the foregoing, Waste Management wasforecasting very strong EPS growth in 1999 and 2000 to $3.05+and $3.50+ per share, respectively.
30. On 5/6/99, DLJ Securities issued a report on Waste
Management written by Marc Sulam based on the conference call and
discussions with Drury and Proto. The report forecast 1999 and
2000 EPS of $3.05 and $3.60, respectively, and stated:
Prior to management's conference call, the shares ofWMI were down 10% following the release of first quarterresults from operations of $0.61 per share, that were in-line with expectations of $0.61-$0.62 (our estimate was$0.62). Despite being in-line with management's previousguidance, given the recent strength in the shares, somehad anticipated an "upside" surprise, which we felt wasunlikely. As well, there were three principal issuesfrom the release that raised questions, that have beensubsequently answered during management's call. Theseissues related to:
• Organic growth, particularly North American volumegrowth of 2.5%, down sequentially from 3.5% in the secondhalf of 1998. The principal culprit was seasonality,relative to mild conditions a year ago, which managementestimated to have had a 1.0% impact. As well, about half
FERmasm1475711SDORING 7/8/99 15
of the sequential revenue decline was related to itsinternational operations (about 12% of first quarterrevenue) and non-solid waste operations (6% of totalrevenues), including Nature Seal and the industrialservices business which are in the process of beingdivested. On a positive note, reported price increase of2.6%, which included a negative impact of (0.9%) fromrecycling, represented a sequential improvement from thefourth quarter level of 2.2% (with recycling)/3.1%(without recycling). More importantly, managementexpects additional sequential improvements to the 3%(with recycling)/4% (without recycling) levels given theongoing price increases that are being implemented.
* * *
We view the confusion regarding the quarter as anexcellent buying opportunity. We rate the shares Buy.
31. On 5/6/99, Morgan Stanley/Dean Witter issued a report on
Waste Management written by Bradley Galko based on the conference
call and discussions with Drury and Proto. It forecasted 1999 and
2000 EPS of $3.04 and $3.60 for Waste Management and stated:
While volume growth was a less-than-expected +2.5%in the quarter, landfill volume reports through lateApril are tracking to plan for a return to +3.5% growthin 2Q99. This combined with the strong marginimprovement witnessed in 1Q99 makes management "verycomfortable" with 2Q99 guidance for EPS in the high70s/low 80s (cents per share).
We are confident that the dip in volume growth(versus recent quarters) is NOT a reflection on WMI'srecent price increases. Price increases are sticking atan 85-90% rate (roughly 5 points higher than hit ratesexperienced historically with attempted price increases),and should push price comparisons to around +3% in 2Q99,from +2.6% in 1Q99.
Management says other industry players are followingits price increases. This is supported by the fact thatother companies' 1Q99 results have shown a similarpattern in internal growth, i.a., more pricing, lessvolume than historically. This consistency supports theseasonality case, and rebutts [sic] any loss of marketshare concerns.
* * *
COO Rod Proto believes that the company can reduceits days sales outstanding by 4 days over the next twoquarters. If our math is right, that would work out to
FIRM\RBG\ 147571_1SDORING 7/8/99 16 . - Io
about $150 million. Combined with reversals mentionedabove, working capital shouldn't be a material drag oncash flow during the next couple of quarters. We have"zeroed out" working capital investment for 2Q99, andhave just $100 million in investment in 2H99 to beconservative.
32. On 5/7/99, Deutsche Bank Securities issued a report
written by Bari/Shim on Waste Management, based on management's
statements in the conference call and in follow-up conversations,
which forecasted 1999 and 2000 EPS of $3.05 and $3.60 for Waste
Management and stated:
* We were initially surprised that 1Q99 free cash flow(after merger charges and divestiture proceeds) was somuch lower than our estimate, at $108 MM vs. ourprojection of $237 MM.
* However, management indicated there was as much as$200 MM of negative one-time and seasonal impacts to 1QFCF. Management is still confident in $900 MM of FCFavailable for debt reduction for 1999.
33. On 6/7/99, Waste Management executives Proto and DeFrates
appeared at the Waste Expo Conference in Dallas. In a formal
presentation and in break-out sessions, they told the assembled
analysts, money and portfolio managers, institutional investors,
brokers and stock traders that:
• The June quarter was on track with expectations togenerate EPS of $0.79.
• WMI's cash flow story -- i.e., free cash flow of $900million in 1999 and growing in future years -- was in linewith expectations which would allow for EPS growth of 1496through 2005.
• Volumes were positive and tracking on plan for the secondquarter which would lend strong revenue.
• April had started slow but revenue and volume had pickedup since then.
• WMI was on track to report EPS of $3.05+ and $3.60 in1999 and 2000, respectively.
FIRKRBG\147571 1SDORING 7/8/99 17
34. Analysts repeated WMI management's statements to the
market in analyst reports issued shortly after the conference. The
reports rated WMI as follows and forecast the following earnings
Deutsche BankAlex. Brown Bari/Shim Buy $.79 $3.05 $3.60 06/08/99
PaineWebber Ford Buy $.79 $3.05 $3.60 06/11/99
Morgan Stanley/Dean Witter Galko Strong Buy $.79 $3.04 $3.60 06/11/99
The analyst reports also stated:
• Deutsche Banc Alex Brown:
We met with mgmt. of Waste Mgmt.CNYSE-WMI-$5515/16-STRONG BUY) yesterday at the Waste Expo in Dallas,TX. Based on our discussions we remain confident in thelong-term cash flow story (which should allow WMI to growEPS 14% through year 2005 - see our in-depth WMI reportin our 1Q99 Environmental Quarterly of 5/24 for details).We are reiterating our Strong BUY on WMI; we believe thestock is cheap at current levels. Our 12-18 month pricetarget is $72, based on 20x our year 2000 EPS estimate of$3.60. June quarter EPS should be in line with our (andthe Street's) expectation of $0.79 vs. $0.41.
• Morgan Stanley\Dean Witter:
-Based on recent conversations with management, webelieve second-quarter results remain firmly on track.We continue to recommend WMI with a Strong Buy rating.
-Volumes, an issue in the first quarter, are continuingto track on plan for the second quarter.
-The pricing outlook continues to remain positive. Weexpect pricing growth to accelerate in the second half.
-We have modeled approximately $500 million in operatingfree cash flow in 2Q99, which should be augmented byasset sales.
• PainWebber:
We came away with a generally positive impressionfrom our conversations with WMI management though wewould note that our conversations with senior managementwere fairly short with the majority of our time spend
FIRM\RBG\147571_1SDORING 7/8/99 18
among lower management ranks gaining greater "nuts andbolts" insight into the company. While our overalldiscussions with senior management were positive, littlenew incremental information came out. We are maintainingour current 2Q, full year 1999 and 2000 BPS expectationsof $0.79, $3.05 and $3.60, respectively. Our recent,albeit short, conversations with management gave usincreased confidence in WMI achieving these expectations.We are maintaining our BUY rating and $72 price target(based on 10x our 1999 EBITDA estimate and 20x our 2000EPS estimate).
35. On 6/24/97, Credit Suisse First Boston issued a report on
WMI by Hoffman, which was based on and repeated information
provided Hoffman in conversations with Proto or DeFrates. The
report forecast 1999 and 2000 EPS of $3.05 and $3.70, a 1096-12%.
five-year BPS growth rate and the following quarterly 1999 EPS for
WMI:
1999 Q1 $0.61Q2 $0.7943 $0.83Q4 $0.80 Year $3.05
It also stated:
WMI reconfirmed its earning guidance for the Junequarter of $0.78 to $0.80 per share on about $3.45billion of revenue.
Revenue and volume have rebounded seasonally asexpected. April started show but lifted nicely throughMay. The flash reports for June are positive too.
Free cash flow before any acquisitions should beabout $475 million. We were forecasting $525 million.Capital spending is targeted at $350 million with nochange in the full year budget of $1.2 billion.
36. Each of the statements made during the Class Period were
false or misleading when issued. The true but concealed facts
were:
(a) Waste Management's integration efforts of its
acquisitions as well as the USA Waste/Waste Management merger were
FIRM1R130147571_1SDORING 7/8/99 19
extremely troubled. It had cost Waste Management significantly
more than anticipated to convert its systems to Waste Management's
format and took much longer to complete the conversion process than
had been anticipated;
(b) The price increases, particularly in the North
American landfill fees, were meeting with stiff resistance by
customers, and competitors were not matching the increases but
rather were rushing in to undercut WMI causing WMI's revenues to be
significantly below internally budgeted or forecasted levels;
(c) Because of the current condition of Waste
Management's business, its integration problems and the problems
with its acquisitions, Waste Management would not be able to make
as many acquisitions in the foreseeable future;
(d) The accounting charges taken in 1998 would not
benefit 1999 margins as WMI's cost structure was still bloated and
inefficient; and
(e) As a result of the foregoing negative conditions
which were then adversely impacting Waste Management's business,
the quarterly 1999 and 2000 revenues and EPS being forecast by and
for Waste Management were known by defendants to be false when made
as those results would be impossible to achieve.
37. As a result of defendants' false statements, on 7/6/99,
WMI stock closed at $53-9/16 per share.
38. On 7/6/99, after the markets closed, Waste Management
revealed horrible second quarter earnings expectations with
revenues expected to be $250 million lower than previous
expectations and EPS of $.67-$.70. The release stated:
Waste Management Inc. (NYSE:WMI) stated today that it haslowered its earnings expectations for the quarter ended
FIRM\RBG\147571_ISDORING 7/8/99 20 `.
June 30, 1999 and for the full year, primarily due tolower than anticipated North America solid wasterevenues. Excluding the earnings impact of merger-related costs, the Company said that diluted earnings areexpected to be in the range of $0.67 - $0.70 per sharefor the second quarter, and approximately $2.65 - $2.70per share for the full year, as compared to $0.41 and$1.82 for the same periods in 1998.
"While our operating margins continue to improve,the revenues in our core solid waste operations are nowexpected to be approximately $250 million less in thesecond quarter than we had previously projected,"President and Chief Operating Officer Rodney R. Protostated. "Revenues weakened toward the end of the quartercompared to our expectations. At this early stage ofanalysis, it appears that the shortfall of revenueexperienced in the second quarter will similarly impactfuture quarters. We are further analyzing data now tomore fully understand the root causes of this shortfall,and we will have more details available when we formallyreport earnings on August 3rd." He added, "Although weare disappointed with the revised projections, we remainproud of our accomplishments over the past twelve monthsand the fact that the new full year 1999 earningsexpectation still represents a minimum of 46% improvementover comparable 1998 results."
39. Analysts were shocked and questioned management's
credibility. Selected analysts' comments are set forth below:
• We are most disturbed about yesterday'sannouncement by the fact that the company was notable to offer much explanation as to what wentwrong in the quarter. It seems they are at a bitof a loss. We are very confused, as the industryis experiencing strong fundamentals, the economycouldn't be better, and WMI certainly, has had thebenefit of the large accounting charges taken.
• We are cutting our 1999 and 2000 cash andearnings forecast and lowering our recommendationon the shares of WMI to a Hold. A revenueshortfall alone does not account for the missedexpectation, margins are coming up 200 to 300 basispoints short too.
What could be at the root of this problem.Certainly, the company is experiencing integrationproblems it has not seen or known to this point.Our best guess is that the shortfall is acombination of:
Less internal growth, both price and volume
F IRMI113G \ 147571_1
SDORING 7/8/99 21le".
Less market share gains linked to tuckins
An increase in customer attrition
Sadly this gaff wipes out any regainedcredibility the new WMI had fostered.
• As might be expected, we are a bit skeptical of thecompanies comments regarding prospects. In aneconomic environment that is about as good as itcan get with WMI leading the charge with priceincreases over the last six months, we suspect thatthe revenue shortfall is NOT an industry problem,but very specific to WMI. We caution investors tobeware of other shoes to drop and warn that thisbeast may not be a biped. In fact, it may be morelike a centipede when all is said and done.
We are lowering our EPS estimates to levelsbelow company guidance based on our belief that theproblems at WMI run deep and require longer termfixes.
• Well, I think the negative reaction you see todayis partly due to several reasons. One, this is abolt out of the blue with regards to the earningsshortfall. Waste Management, the presentmanagement of the, what we consider the new WasteManagement, disappointed up until first quarterthis year even though most of the analysts outthere had said that the first quarter was Al withexpectations, well the point of the matter was thatthey were still a point shy of what the streetconsensus estimate had bid and right there it mayhave been a warning bell but management came outand basically reinforced the growth prospects forthe second, third and fourth quarter for '99 andthey got the analysts comfortable with the futureprojections. It's a big leap of faith to take itfrom 61 cents up to the 78 cents which was aconsensus estimate and one of the ways that thecompany had planned to do that was through pricingwhich they did put through in the first quarter butwhat I think you're seeing here is a backlash,somewhat in the pricing increases that went throughand the term $50 million dollar shortfall revenuesthat this company talks about is largely part duein my estimation to shortfalls as far as volumes atthe landfills.
40. The impact of these disclosures was enormous. Bloomberg
reported:
Waste Management Inc. shares fell 37 percent, theirbiggest one-day drop ever, after the largest U.S. trash
Finnu301475711SDORiNG 7/8/99 22 - _
hauler warned that second-quarter and full-year profitwill miss forecasts.
The shares fell 19 9/16 to 34 in trading of 70.3million, making the stock the most active in U.S. marketsand the eighth-most active ever on the New York StockExchange. The swoon slashed almost $12 billion off thecompany's market value.
INSIDER SELLING
41. While Waste Management's top insiders were issuing
favorable and false statements about Waste Management, the
Individual Defendants sold over 1 million shares of Waste
Management stock for more than $57 million profiting from the arti-
ficial inflation in Waste Management's stock price.
Notwithstanding their access to material non-public information and
their duty to disclose the same before trading in Waste Management
stock, they sold significant amounts of their Waste Management
stock at artificially inflated prices. Defendants' stock sales
during the Class Period are detailed below:
Name Date Shares Price Proceeds
Jones, Ronald H. 05/10/99 36,126 $55.01 $ 1,987,291
Mathews, Miller J. 05/17/99 85,717 $55.09 $ 4,722,15005/17/99 20,000 $55.09 $ 1,101,800
105,717 $ 5,823,950
Miller, Robert S. 05/10/99 41,375 $55.36 $ 2,290,520
Piller, Susan J. 05/10/99 30,000 $55.00 $ 1,650,000
